Environmental whistleblower Marrita Murphy has asked the U.S. Supreme Court to hear her civil rights tax appeal after another appeals court reversed its own original ruling.
Murphy had won an environmental whistleblower case before the Department of Labor and was awarded compensatory damages for emotional distress and loss of reputation under six federal whistleblower statutes. However, the IRS then demanded that she pay taxes on the "make-whole" award as if it were income. She filed suit, had her case initially dismissed and then filed an appeal.
In Murphy v. IRS, the appeals court initially held that her award was not income and that taxing her damages violated the Constitution. But the judges later decided to rehear the case. In Murphy II, the D.C. Circuit reversed its prior decision and declared that non-physical compensatory damages are taxable as gross income.
Attorney David Colapinto of the National Whistleblower Center in Washington now hopes to bring the case before the Supreme Court. "The main argument, which is the one that the D.C. Circuit went to great pains to avoid in its second decision, is that these kinds of compensatory damages are not income," he said. "Therefore it is wrong to subject damages for personal injury to the income tax. The money that Ms. Murphy received was solely to restore her losses for personal injury, not for wages. It wasn't liquidated damage or punitive damage. This was simply money to make her whole for a personal injury loss."
Murphy was initially awarded a total of $70,000 in her whistleblower case. Colapinto said his client is asking for a tax refund of about $20,000.
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