Awards on Non-Physical Injuries are Taxable

Marrita Murphy and Daniel J. Leveille, appellants v. Internal Revenue Service and the United States of America, Appellees

On July 3, 2007 a federal appeals court ruled that awards for non-physical “injuries” could be subject to taxation. The U.S. Court of Appeals for the District of Columbia Circuit ruled that taxing such awards did not violate the constitution. In this case Marietta Murphy was awarded $70,000 in her lawsuit against the Air National Guard in which she alleged that the Guard had “blacklisted” her and would not provide positive job references for her due to her complaining about environmental conditions. Based upon a 1996 federal law, awards in personal injury cases are typically not subject to taxes. Plaintiffs in some employment-related actions have sought to have their cases treated similarly from a tax perspective. Such plaintiffs may allege emotional injury or damages to their reputation. This case makes it more difficult now to avoid having to pay taxes on any such awards.