I enjoy commentary on my blog posts, especially when those who are adding to the discussion have something to say – you know, actually adding to the conversation. I also don’t mind being corrected when I’m wrong. I don’t claim to be the sole expert on all things tax (though that does have a nice ring to it, doesn’t it?).
Apparently, I mischaracterized some of what went on in Murphy v. IRS – and the attorney for Ms. Murphy is not happy. He is even more unhappy because some of my colleagues are referring to my piece in their posts.
With that in mind, I am posting a clarification of my prior post. I take issue with some of Mr. Colapinto’s comments about the inaccuracy of my piece. I stand by the facts. I referred to a number of sources when writing that piece, not the least of which were several articles about the case from newspapers and other tax professionals and I read both opinions (again, it’s been on my radar since last year).
As we no doubt know now, Marrita Murphy was represented by prolific commenter of tax blogs, David K. Colapinto. He also handled the appeal.
As previously reported, Murphy was the recipient of an award in a whistle-blower suit. The total award was $70,000 for emotional distress and loss of professional reputation (if you read the opinion, the initial argument included the ‘it ruined my life, made my marriage difficult and gave me panic attacks’ variety of arguments – for which she was not compensated). As a result, she received a tax bill from the IRS for $20,665.
Murphy filed suit against IRS, claiming that the award should be exempt from taxation. The court first ruled that the damages were not to compensate for “personal physical injuries” and were not exempt from taxation. The court then surprisingly accepted Murphy’s argument that the award was to make her “emotionally and reputationally ‘whole’ and not to compensate her for lost wages or taxable earnings of any kind” and then declared that to be not subject to taxation, which sent a collective “whaaaa?” around the tax world.
This year, the court reversed its own decision. The court agreed with its prior decision that the damages were solely for non-physical injuries stating conclusively that “Murphy’s damages were not ‘awarded by reason of, or because of, …[physical] personal injuries.'” Additionally, the court declared that compensatory damages for non-physical injuries are not exempt from taxation.
Mr. Colapinto’s main argument with my analysis seems to be that I characterized Ms. Murphy’s award as a windfall to her, and therefore clearly taxable. I suggested that these kinds of awards are really a punishment to the defendant, rather than compensation to the plaintiff – an argument that the award was more to make a point than to make her whole. I’m not the only one. The government actually argued that Murphy “undeniably had economic gain because she was better off financially after receiving the damages award than she was prior to receiving it” – and not just that she was being made whole – exactly the point that I was making. This is an important point because the court had already ruled that there were no physical injuries to Ms. Murphy. So, she had no physical injuries as a result of her distress and was better off financially after the ruling.
The court did not say, in its opinion, that this “accession to wealth” argument was not correct, as Mr. Colapinto implies in his comments, rather it skirted the issued by stating “rather than ask whether Murphy’s award was an accession to her wealth, we go to the heart of the matter, which is whether her award is properly included within the definition of gross income in § 61(a), to wit, ‘all income from whatever source derived.'” The court then ruled that gross income includes awards for nonphysical damages.
To the extent that my characterization that this was punitive rather than compensatory was incorrect, I apologize. However, I think you see where I was going.
All of that said, I can’t let Colapinto’s claim that “[t]he court ruled that all awards for personal injury are now taxable” go unanswered. The court did not make that ruling. I re-read the opinion today and stand by that claim.
Where do you get the idea that I am a “prolific commentor of tax blogs”? Today is the first time I have ever posted to a so-called “tax blog”, and I did so only because your report was so fundamentally inaccurate and false, and other blogs were reprinting your false statements.
In your original post you did not simply suggest that these kinds of awards are really a punishment to the defendant, rather than compensation to the plaintiff. Instead, you stated as a matter of fact that awards in these kinds of whistleblower cases are meant to punish the defendant. You then went on to state: “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.”
The point that you miss is that Ms. Murphy was only awarded “make whole” tort-type damages. FYI, compensatory damages awarded under the federal environmental whistleblower statutes, the laws under which Ms. Murphy prevailed, can only be a “make whole” remedy as a matter of law.
I do stand corrected on my earlier comment on the court’s ruling as follows: I meant to state in my comment that the court ruled that all non-physical personal injury awards are taxable. I apologize for omitting the word “non-physical.” Thank you for pointing out that error.
It is unfortunate that you won’t correct the false and inaccurate statements reported as fact in your July 7th blog on this topic.
You obviously don’t take criticism well and are not interested in fair reporting given your determination to ignore the facts and call both Ms. Murphy and her attorney names in response to my original comment. In the future, please spare us your snide personal remarks.
Mr. Colapinto –
Clearly you don’t take tongue-in-cheek very well, as that’s exactly what the term “prolific commenter of tax blogs” was meant to be. It was a joke and hardly meant to be inflammatory.
I stand by the facts of this case as reported (which you have not in your numerous trips to the comment bar offered any specific information disputing).
I don’t claim to know the details of federal whistle-blowing statutes. You have stated that the remedies in whistle-blowing cases are limited to “make whole” remedies, so fine. However, the government did argue that this was an “accession to wealth” and the court did not disagree.
I didn’t call Ms. Murphy names (!) and my comment about you was clearly, as stated above, a joke.
And as to your comment about my sparing you my snide personal remarks, it’s my blog and I’ll snark if I want to. You can always read something else.
I just don’t understand the dispute here. The trial court in Murphy was clearly wrong in its initial holding of nontaxability, and that error has been corrected. There was no injury on account of personal physical injury, and therefore the damages are taxable. Nobody ever said the tax laws were fair, and if people have a problem with the taxability of such damages, they should call their congressman.
Mr. Colapinto should stop wasting his valuable time responding to tax blogs, no matter how erroneously they might report on Ms. Murphy’s case. The “Tax Girl,” stuck in oldies heaven as she is, enjoys the right to misstate facts and draw erroneous conclusions. Many of us anti-income taxers were hoping that Ms. Murphy’s case would bring about the demise of the absurd income tax. But now that the views of profiteering “Tax Profs” such as “Tax Girl” and Paul Caron have again prevailed, it is high time for Mr. Colapinto to again mount his steed and to draw fresh blood from the income tax dragon with the sharp sword of a petition for rehearing en banc.
Mr. Colapinto should stop wasting his valuable time responding to tax blogs, no matter how erroneously they might report on Ms. Murphy’s case. The “Tax Girl,” stuck in oldies heaven as she is, enjoys the right to misstate facts and draw erroneous conclusions. Many of us anti-income taxers were hoping that Ms. Murphy’s case would bring about the demise of the absurd income tax. But now that the views of “Tax Prof(iteer)s” such as “Tax Girl” and Paul Caron have again prevailed, it is high time for Mr. Colapinto to again mount his steed and to draw fresh blood from the income tax dragon with the sharp sword of a petition for rehearing en banc.
As I have been searching for supporting documentation for my own fight with the IRS, I have been reading this blog with great interest. Unfortunately for me, I wish I had an attorney willing to fight this battle without wanting to cost me an arm and a leg. I received a fairly large settlement in 2004, with advice from both the attorney at the time and my tax preparer did not report the income and have now found myself in an IRS audit which wants to end with taking most of the money away. The implication that “an award is meant only to punish the bad guy thus the injured party should not receive any gain (without punishment also) is preposterous. Perhaps when some on that side of the camp experience the incredible cost this type of action takes from the victim, the responses within a blog will be different.
The fact that you were given bad tax advice from professionals should be a mitigating factor in your tax issue now. I would advise you to find good legal counsel (your local bar association should be able to help) for your audit.
And to be clear, I don’t think that an award should be a windfall to a plaintiff – that isn’t the same as no gain. And as someone who has been intimately involved in costs and awards associated with bad behaviors by defendants, I still believe that to be true.