Kohn, Kohn & Colapinto - Murphy Tax Case

Murphy Tax Case

One of the firm's clients was defeated after a preliminary victory in the tax refund case of Murphy v. IRS, in which the Court of Appeals for the District of Columbia originally held 26 U.S.C. § 104(a)(2) unconstitutional to the extent the statute purports to tax emotional distress awards unrelated to lost wages. On December 22, 2006, the Court vacated its own judgment in that case.

According to the Web site Tax Analysts, Murphy v. IRS "is not only one of the most significant tax decisions in decades, it is one of the most important constitutional cases in decades as well". The now-voided ruling had shaken up the tax community as it is rare for a federal court to hold that a tax law is unconstitutional. The case was argued for the appellants by Colapinto, who was assisted on the briefs by S. Kohn.

On July 3, 2007, the Court ruled against Ms. Murphy. The court held (1) that the taxpayer's compensation was received on account of a non-physical injury or sickness; (2) that gross income under section 61 of the Internal Revenue Code does include compensatory damages for non-physical injuries, even if the award is not an "accession to wealth," (3) that the income tax imposed on an award for non-physical injuries is an indirect tax, regardless of whether the recovery is restoration of "human capital," and therefore the tax does not violate the constitutional requirement of Article I, section 9, that capitations or other direct taxes must be laid among the states only in proportion to the population; (4) that the income tax imposed on an award for non-physical injuries does not violate the constitutional requirement of Article I, section 8, that all duties, imposts and excises be uniform throughout the United States; (5) that under the doctrine of sovereign immunity, the Internal Revenue Service may not be sued in its own name. The Court stated: "lthough the 'Congress cannot make a thing income which is not so in fact,' it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9." The court ruled that the personal injury award Ms. Murphy received was "within the reach of the congressional power to tax under Article I, Section 8 of the Constitution"—even if the award was "not income within the meaning of the Sixteenth Amendment". Ms. Murphy's tax refund claim was denied.

An appeal subsequently filed for a rehearing en banc was denied on September 14, 2007. The decision was upheld when the U.S. Supreme Court denied review on April 21, 2008.