A federal appeals court ruled this week that awards for nonphysical injuries (emotional distress, for example) are taxable as income under the Constitution.
That makes sense, right?
It would – except that the same court ruled exactly the opposite about a year ago. Damages for personal injuries have been tax exempt for purposes of federal income tax since 1996. However, money received for emotional distress and other intangible injuries has been taxable until the ruling last year. At the time, I thought the ruling was a bit maverick, predicting that, if the ruling stood it would make it all of the way to the Supreme Court.
It didn’t stand. The court has now ruled that taxing awards for nonphysical damages does not violate the Constitution. The ruling came about in response to a claim by the IRS that Marrita Murphy owed $20,665 in taxes as a result of her $70,000 award in a whistle-blower suit. The award was for nonphysical injuries, and the court agreed last year that it was exempt from taxation. After arguments from the government, the court reversed itself.
Such reversals are unusual. This one was criticized by – you guessed it – Mrs. Murphy and her lawyers.
While I feel for Ms. Murphy (I don’t even want to think what her legal bills are like), I believe that this is the correct ruling. Awards in these kinds of cases (in this instance, it was a whistle-blower matter) are meant to punish the defendant – not give the plaintiff a windfall. In contrast, awards for personal injury are not (in theory) meant to punish the defendant but make the plaintiff whole. Those are different results and should be taxed differently.
Everyone should pay their fair share, right?
