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Full Court May Weigh Taxation of Damages

By Marcia Coyle

A federal appeals court is weighing whether to review a controversial tax decision in which a unanimous three-judge panel struck down as unconstitutional the federal income tax on nonphysical, compensatory damages awards. (See 'Court Tosses Federal Tax Statute Covering Emotional Damages,' Medical Malpractice Law & Strategy, Nov. 2006). Claiming the case is one of 'exceptional importance' to the execution of the nation's tax laws, the Bush administration recently asked the full U.S. Circuit Court of Appeals for the District of Columbia to rehear Murphy v. U.S., No. 05-5139. In October, the court, on its own motion, ordered lawyers for Marrita Murphy to respond to the government's rehearing petition, a signal that the court is interested, according to some circuit watchers.

The Murphy decision, stemming from a whistleblower lawsuit, ignited debate and criticism among tax, employment and constitutional scho-lars and litigators whose descriptions of the decision ranged from 'silly' and 'reckless' to 'momentous' and 'epochal.' The panel decision was written by Chief Judge Douglas H. Ginsburg, who was joined in full by judges Judith W. Rogers and Janice Rogers Brown ' an unusual union of a moderately conservative judge, a liberal judge and a very conservative judge, respectively.

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