## Facts

- Marrita Murphy (with her then-husband Daniel J. Leveille for joint-filing purposes) received a $70,000 administrative compensatory-damages award in a whistleblower retaliation matter against her former employer.
- The award was allocated as $45,000 for emotional distress and $25,000 for injury to professional reputation; it did not award damages for physical injury or physical sickness.
- Murphy included the $70,000 on her federal return, paid income tax, and then filed an amended return seeking a refund.
- She claimed the award was excludable from gross income under 26 U.S.C. § 104(a)(2) or, alternatively, could not constitutionally be taxed as “income” under the Sixteenth Amendment and would be an unapportioned direct tax.
- The district court rejected the refund claim.
- A prior panel opinion initially ruled for Murphy but was vacated; on rehearing the panel issued the controlling decision affirming the district court.

## Issues

1. Whether compensatory damages for emotional distress and injury to reputation are excludable from gross income under 26 U.S.C. § 104(a)(2) as damages received “on account of personal physical injuries or physical sickness.”
2. Whether, if not excluded by § 104(a)(2), such damages fall within “gross income” under 26 U.S.C. § 61.
3. Whether taxing such damages is an unconstitutional unapportioned direct tax under Article I, § 9, or otherwise outside Congress’s taxing power under the Sixteenth Amendment.

## Decision

- The D.C. Circuit affirmed judgment for the government and denied Murphy’s refund claim.
- The court held the damages were not received on account of personal physical injuries or physical sickness and thus were not excludable under § 104(a)(2).
- The court held compensatory damages for nonphysical injuries are included in gross income under § 61.
- The court held taxing the receipt of such damages is within Congress’s taxing power and does not require apportionment as a direct tax.

## Legal Principles

- After the 1996 amendment to § 104(a)(2), damages for emotional distress are generally not treated as damages for “physical injury or physical sickness,” except amounts attributable to medical care for emotional distress.
- Physical symptoms associated with emotional distress do not, without more, convert an emotional-distress recovery into damages received on account of “personal physical injuries” for § 104(a)(2) purposes.
- Section 61 broadly reaches realized accessions to wealth over which the taxpayer has dominion, including compensatory damages for nonphysical harms unless a specific exclusion applies.
- A tax on the receipt of a damages award may be sustained as an indirect tax (excise-type tax on an event or transaction) within Congress’s Article I taxing power and therefore need not be apportioned as a direct tax.

## Conclusion

Compensatory damages awarded for emotional distress and injury to reputation, unconnected to physical injury or physical sickness, are taxable: they are not excluded by § 104(a)(2), are included in gross income under § 61, and may be taxed consistent with Congress’s constitutional taxing authority without apportionment.


Murphy v. I.R.S., 493 F.3d 170 (D.C. Cir. 2007)