Taxing Emotional Injury Recoveries: A Critical Analysis of Murphy v. Internal Revenue Service


Does Congress have the power under the United States Constitution to tax compensatory personal injury awards? Several months ago, the D.C. Circuit Court of Appeals said "no" in Murphy v. Internal Revenue Service. The court theorized that Ms. Murphy’s compensatory damages award did not constitute “income,” as understood by the enactors of the 16th Amendment, because the award merely made Ms. Murphy whole rather than increasing her wealth.

This paper disputes virtually every aspect of the Murphy decision. The court made errors from the beginning in analyzing the statutory issues. While the court ultimately reached the correct preliminary conclusion – that Ms. Murphy’s award was statutorily subject to taxation – the court’s flawed analysis led it to consider the constitutionality of, and ultimately to hold unconstitutional, the wrong statute.

While the court’s flawed statutory analysis may have been harmless, its flawed constitutional analysis was not harmless. The court of appeals ignored the Constitution’s original Article I grant to Congress of the power to impose taxes, as well as the first 100 years of judicial rulings recognizing Congress’s plenary power under Article I to tax both property transactions and income from human capital, such as wages. A proper review of the pre-16th Amendment law shows that Congress could tax Ms. Murphy’s award under its original Article I powers even if the award was not “income” under the 16th Amendment.

Moreover, there was no legitimate support in Murphy for the court’s conclusion that the enactors of the 16th Amendment in 1913 did not intend for compensatory damages awards to be subject to taxation as “income.” Instead of citing contemporaneous evidence of intent, the court relied on two 1918 administrative rulings that did not even purport to consider the meaning of the 16th Amendment, and the court ignored earlier administrative positions, closer in time to the 16th amendment, treating such awards as taxable.

Viewed in context, the 1918 administrative rulings were an attempt to comprehend then-recent Supreme Court decisions interpreting the meaning of the early taxing acts – interpretations that have long since been undermined by Supreme Court judicial opinions. The court of appeals took these administrative rulings out of their historical and factual context in an attempt to attribute to the enactors of the 16th amendment the conclusion it sought to reach – that Congress does not have the constitutional power to tax compensatory damages awards.

The enactors of the 16th Amendment had a limited objective: to overturn the Supreme Court’s 1895 decisions in Pollock v. Farmers Loan & Trust, which held that Congress lacked the power to impose taxes on income generated by real and personal property without apportionment. It is folly to suggest that the enactors of the 16th Amendment had a clear opinion about whether non-physical emotional distress damages would constitute “income.” The enactors of the 16th Amendment left it to the courts to determine the meaning of “income,” and it took decades after the enactment of the 16th Amendment for the courts to develop a coherent definition of income.

Modern courts recognize that any realized accession to one’s financial wealth constitutes income. By retroactively attributing early judicial determinations to the enactors of the 16th Amendment, the court of appeals in Murphy seeks to return the law to the state that existed at the beginning of the century, when tax jurisprudence and the meaning of income were in their early development. The court of appeal’s approach threatens the integrity of the income tax system, which is the lifeblood of the American government. If not promptly overturned, the court of appeal’s decision in Murphy will add fuel to the existing tax protestor firestorm.


Legal History | Taxation-Federal | Tax Law | Torts

Date of this Version

November 2006