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Ruling May Open Tax Law To More Challenges By Bloomberg News
The United States Court of Appeals for the District of Columbia Circuit ruled Tuesday that the government could not collect taxes on awards to compensate for nonphysical damages like emotional distress or injury to reputation. The court struck down as unconstitutional a provision of a 1996 law allowing taxation of such awards. Tax law experts said the ruling would encourage legal challenges to other parts of the tax code defining what income could be taxed. They also said the government would probably appeal the decision to the Supreme Court.''It's certainly going to launch a thousand constitutionality arguments that people would have thought laughable before,'' said Michael Graetz, a Yale University law school professor and a tax official in President George H. W. Bush's administration. An I.R.S. spokesman, Bruce Friedland, referred calls to the Justice Department. A Justice Department spokesman, Charles Miller, said the department was reviewing the decision and had not decided whether it would appeal. Tax experts predict challenges to the taxation of other money, including some insurance proceeds, gambling winnings and windfalls like found money. Mr. Graetz said tax lawyers would have fewer concerns that their constitutionality claims would be deemed frivolous because most thought the issue decided in the case was frivolous before the ruling. ''Now it's hard to know what's frivolous and what's serious,'' he said. The ruling concerned a $70,000 award to Marrita Murphy, who filed an administrative complaint with the Labor Department in 1994 saying that the New York Air National Guard ''blacklisted'' her and gave her bad references after she complained about environmental hazards at an air base. She was awarded $45,000 for emotional distress and $25,000 for injury to her reputation. Under a 1996 law, legal compensation for physical injuries is tax-free while those for mental anguish and injury to reputation are not. Ms. Murphy sued for return of $20,665 in taxes she paid on the damage award. The District of Columbia Circuit ruled for her, deciding the award was not taxable income under the Constitution's 16th Amendment because it did not compensate for lost wages or earnings. Punitive damages are taxable, the Supreme Court ruled in 1955.
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A Feast
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