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WASHINGTON � Arguing their case presents issues of “exceptional importance” for whistleblowers, employees and other civil rights plaintiffs, lawyers for whistleblower Marrita Murphy have asked the full U.S. Circuit Court of Appeals for the District of Columbia to review a panel decision holding that her non-physical, personal injury damages are taxable. Review should be granted, they said, “to resolve uncertainties about whether personal injury damages are taxable and decide, consistent with over 80 years of case law, that the ‘make-whole’ personal injury damages awarded to Murphy are not ‘income,’ and thus are not taxable.” Murphy v. Internal Revenue Service, No. 05-5139. The “uncertainties” undoubtedly were increased by the somewhat unusual sequence of decisions in the Murphy case itself. A three-judge panel, reversing a district court, ruled last year that Murphy’s damages were not taxable, but the same panel agreed to reconsider its decision and ruled last month that the damages are taxable. The Murphy case stems from a wrongful termination action she filed with the U.S. Department of Labor. The department found that her former employer, the New York Air National Guard, acting in violation of various whistleblower laws, had blacklisted her and had given bad references to potential employers after she reported environmental hazards at a Guard airbase to state authorities. A department administrative law judge subsequently found that Murphy had suffered physical manifestations of stress, including anxiety attacks, teeth grinding, dizziness and shortness of breath, and recommended damages totaling $70,000, of which $45,000 was for “emotional distress or mental anguish,” and $25,000 was for “injury to professional reputation” from having been blacklisted. None of the award was for lost wages or diminished earning capacity. Murphy reported the award as gross income on her tax return, according to Section 61 of the Internal Revenue Code (“[G]ross income means all income from whatever source derived”) and later unsuccessfully sought a refund of $20,665 � taxes paid on the award. Until 1996, damages for personal injuries � physical and non-physical � were not taxable, but in that year, Congress enacted a rider to a bill that excluded from taxation only compensation for physical injuries. It was that provision � Section 104(a)(2) of the Code � that the D.C. Circuit panel in August 2006 found unconstitutional to the extent it permits taxation of a non-physical personal injury award unrelated to lost wages or earnings. The panel � Chief Judge Douglas H. Ginsburg and Judges Judith W. Rogers and Janice Rogers Brown � found that compensation for loss of a personal attribute, such as loss of reputation, is not received in lieu of income. And, it said, the framers of the 16th Amendment � which in 1913 authorized the federal income tax � would not have understood compensation for a personal injury, including a nonphysical injury, to be income. But at the behest of the Internal Revenue Service, the same panel agreed to rehear the case and on July 3, held that Murphy’s award, even if it is not “income” within the meaning of the 16th amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution. The panel said that for the 1996 amendment of 104(a) to make sense, gross income must include an award for nonphysical damages, regardless whether the award is an accession to wealth. Congress thus “implicitly” included those damages in gross income when it acted in 1996. “This case marks the first time that a court has interpreted the gross ‘income’ statute, 26 U.S.C. � 61(a), to be amended ‘by implication’ to create a tax not expressly enacted by Congress,” said Murphy’s counsel, David K. Colapinto of the National Whistleblower Center. That is contrary to Supreme Court and other courts’ precedents which say a tax levying statute cannot be extended by implication, he said, and if there is doubt about the validity of a tax, all doubt is to be construed strongly in favor of the taxpayer and against the government. The government has not yet replied to the request for en banc review.

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