Petition for Writ of Certiorari — Murphy v. IRS, 128 S. Ct. 2050 (2008) (No. 07-802)

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No.

Sn The

Supreme Court of the Anited States

MARRITA MURPHY,

Petitioner,

INTERNAL REVENUE SERVICE

and UNITED STATES OF AMERICA,

Respondents.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The District Of Columbia Circuit

PETITION FOR A WRIT OF CERTIORARI

DAVID K. COLAPINTO*

STEPHEN M. KOHN

KOHN, KOHN & COLAPINTO, LLP

3233 P Street, N.W.

Washington, D.C. 20007

(202) 342-6980

“Counsel of Record

Supreme Court, U.8.

P FIL YS

07-802 DFC13 2007

OFFICE OF THE CLERK

COCKLE LAW BRIEF PRINTING CO (300; 225 6964

OR CALL COLLECT (402) 342-2831

(1)

(2)

(3)

QUESTIONS PRESENTED

Can Congress tax “make whole” personal injury

or sickness damage awards that are solely in-

tended as compensation for a loss (or restoration

of human capital), as opposed to income or any

accession to wealth, in accordance with this

Court’s holdings in Comm’r. v. Glenshaw Glass

Co., 348 U.S. 426 (1955) and O’Gilvie v. United

States, 519 U.S. 79 (1996)?

Is the tax on Ms. Murphy’s compensatory dam-

ages permitted by the Sixteenth Amendment to

the Constitution, by 26 U.S.C. § 61(a), or by any

other section of the tax code?

Should compensatory damages awarded to Ms.

Murphy based on evidence, including, among

other physical injuries, permanent damage to her

teeth and physical manifestations of stress re-

sulting from the violation of her legally cogniza-

ble federal statutory rights, be excluded from

gross income based on Internal Revenue Code

(“IRC”), 26 U.S.C. § 104(a)(2)?

PARTIES TO THE PROCEEDINGS

The following is a list of all parties who have

appeared before the D.C. Circuit:

Petitioner

Marrita Murphy and Daniel J. Leveille, Plaintiff-

Appellants.

Respondents

Internal Revenue Service and United States of

America, Defendants-Appellees.

Amici Curiae

The following amici curiae parties were admitted:

No Fear Coalition, The National Employment Law-

yers Association, Andrew Jackson Society, National

Taxpayers Union, Liberty Coalition, and Innocence

Project.

il}

TABLE OF CONTENTS

QUESTIONS PRESENTED ....000...... eee cceeceeseseeeeeees

PARTIES TO THE PROCEEDINGB..................04

Ce Oe COE deciisnccischsnnsnsanisernnnsenicrnncmnsnicsnnan

SF ia viierearleiidesiniainesiaisconanninnieanienin

CONSTITUTIONAL, STATUTORY, AND REGU-

LATORY PROVISIONS INVOLVED..................

STATEMENT OF THE CASE ....................scsessseeeees

REASONS FOR GRANTING THE WRIT..............

I. WHETHER PERSONAL INJURY DAM-

AGES AWARDED SOLELY TO COMPEN-

SATE FOR A LOSS (OR RESTORE

HUMAN CAPITAL) ARE TAXABLE AS

GROSS INCOME IS AN IMPORTANT

QUESTION OF FEDERAL LAW THAT IS

EITHER NOT SETTLED BUT SHOULD

BE RESOLVED BY THIS COURT, OR

HAS BEEN DECIDED BY THE D.C.

CIRCUIT IN A WAY THAT CONFLICTS

WITH RELEVANT DECISIONS OF THIS

COURT AND OTHER CIRCUITS...............

A. Whether Damages Awarded Solely to

Compensate for Personal Injury Losses

(and Not for Wages or Liquidated or

Punitive Damages), Are Taxable In-

come Needs to be Resolved ....................

TABLE OF CONTENTS — Continued

Page

B. The D.C. Circuit Failed to Follow Glen-

I i

C. Implying A Tax Conflicts With Su-

preme Court and Circuit Precedent......

D. Congress Did Not Enact An “Excise

Tax” on Compensatory Damages and

the D.C. Circuit’s Interpretation of the

Catchall Phrase of Section 61(a) To

Imply Such A Tax Conflicts with Cases

of Other Circuits and of the Supreme

ST sks pace dunauenctuastiuieans cakhackenblonndinaaiiaies 26

E. The D.C. Circuit’s Decision Conflicts with

the Supreme Court's test in Schleier........ 31

Il. THE QUESTIONS PRESENTED ARE

IMPORTANT AND THERE IS NO REA-

SON TO DEFER REVIEW .......................... 33

SRT UIE oe aa rane he eeseecks se scuscnacdeeanaaied 36

APPENDIX

CIRCUIT COURT OPINION (07/03/2007) ...... App. 1

CIRCUIT COURT OPINION (08/22/2006) ...... App. 39

CIRCUIT COURT ORDER (12/22/2006).......... App. 68

CIRCUIT COURT ORDER (12/22/2006).......... App. 70

DISTRICT COURT MEM. OPINION

I Naicrnnicactecsnitlachdesaciasncnadeinignnaiaashias App. 72

DISTRICT COURT ORDER (03/22/2005)........ App. 93

CIRCUIT COURT ORDER (09/14/2007).......... App. 95

TABLE OF AUTHORITIES

Page

CASES

America Online, Inc. v. United States, 64 Fed.

SE ci cccnnssncnssncnnsecasnusassescdcasseancoass 23

American Bank and Trust Co. v. Dallas County,

NE ccs ccsneaphesencusanciwsaresctcncnssaasncss 24

Ark Las Vegas Rest. Corp. v. NLRB, 334 F.3d 99

ssa enincstccccnnsannashesdadcaneancacens 9

BedRoc Ltd., LLC v. United States, 541 U.S.

ss cis dinksnsnadannsensccnsecasaacassesies 32

Bhd. of R.R. Trainmen v. Balt. & Ohio R.R.

TM OM BOD Pca sssaccsesssscensevssseccensassacsees 25

Bowers v. Kerbaugh-Empire, 271 U.S. 170

ial sachekasnvbsadcnansaacsaneanccnecensoie 20

Bromley v. McCaughn, 280 U.S. 124 (1929).............. 29

Brown v. United States, 890 F.2d 1329 (5th Cir.

Maina isdn aaidnsecbandnesdavsacescadsvancense 31

Burk-Waggoner Oil v. Hopkins, 269 U.S. 110

es Lay acashunandnssniondccsneasuenincs 16, 17

Christensen v. Harris County, 529 U.S. 576

Nees arsecedannidnnbaccindnkcknnsatvases 19

Commissioner of Internal Rev. v. Brown, 380

Nie cos cksnacdandoswecannubaddannedsuasanns 30

Commissioner of Internal Revenue v. Schleier,

RE Mladic CHUN GAWD ccicnssecncsssssncrssseascenes 11, 31, 32, 33

Commissioner v. Banks, 543 U.S. 426 (2005)............ 12

TABLE OF AUTHORITIES — Continued

Page

Commissioner v. Glenshaw Glass, 348 U.S. 426

el eal tetril adh ahdtiaieincacetiinmiicbictasedscenteccons passim

Davis v. United States, 495 U.S. 472 (1990) ............. 19

District of Columbia v. Air Florida, Inc., 750

I ET ss, ac ccscensucenanssasccsacesenees 9

Dotson v. U.S., 87 F.3d 682 (5th Cir. 1996)... 16, 19, 20

Doyle v. Mitchell Bros.,

Be We GO Cees CAE. 2OIG) ....0c.ccccceccccccvccecese 15, 17, 18

a s cnnsebeseabonens 18

Eisner v. Macomber, 252 U.S. 189 (1920) ..... 17, 18, 20

Ellis v. U.S., 416 F.2d 894 (6th Cir. 1969)........... 23, 30

Fabry v. CIR, 223 F.3d 1261 (11th Cir. 2000)............ 31

Francisco v. United States, 267 F.3d 303 (3rd

ENS TESS ETE a 21

Galvan v. Hess Oil Virgin Is. Corp., 549 F.2d

a cchubadippdaonassecens 24

Gellman v. United States, 235 F.2d 87 (8th Cir.

Re sunensedieateassededsananecse 23

Gilbertz v. United States, 808 F.2d 1374 (10th

a ccichssuadbaoaecenananenaune 21

Gould v. Gould, 245 U.S. 151 (1917)............. 22, 23, 26

Hawkins v. Commissioner, 6 B.T.A. 1023 (U.S.

NN i acnisiccnccnsasiensneccenctasnsatecsccesece 16, 21

Knowlton v. Moore, 178 U.S. 41 (1900) ............... 29, 30

Lamie v. United States Tr., 540 U.S. 526 (2004)....... 32

TABLE OF AUTHORITIES — Continued

Page

Lynch vu. Turrish, 247 U.S. 211 (1918).............0cccceeees 20

Magoun v. Illinois Trust & Sav. Bank, 170 U.S.

ERR NL REPROD Eee aR APE RR REC 29

McFeely v. Commissioner of Internal Revenue,

Be Re BEE CIE achat cacnethcrteatcbedudcuntilonpsensadorensddaas 23

Merchants’ L. & T: Co. v. Smietanka, 255 U.S.

es oe ehecckaeuencesledia 18

Morton v. Mancari, 417 U.S. 535 (1974) ..00... eee. 24

Murphy v. Internal Revenue Serv.,

362 F.Supp.2d 206 (D.D.C. 2005)............... cece. 1,8

460 F.3d 49 (D.C. Cir. 2006) ....................0s.000 passim

Re ee BP gs PED cncnccciscincccssnencnccdnnddians passim

Nicol v. Ames, 173 U.S. 509 (1899).......00.00000.ccce eee. 29

NLBB v. Catholic Bishop of Chicago, 440 U.S.

PE eee aE aE a SPIT ease eA ae 24

O’Gilvie v. United States, 519 U.S. 79 (1996).... passim

Ocean Drilling & Exploration Co. v. United

States, 988 F.2d 1135 (Fed. Cir. 1993) ......0..0000000... 23

Patel v. Quality Inn South, 846 F.2d 700 (1ith

| eee scdisa dus baatsanéaieiaiedaduchadanaeeiaacenaiteassal 24

Penn Mut. Indemnity. Co. v. Comm’r., 277 F.2d

Se I aa deal iss cpanmdacainekabaois 27, 29

Pollock v. Farmers’ Loan & Trust Co.,

I I sia acniss so chsiedinidacedean tundasdeanianadasiaainatheen 30

re I I lias pcssass oitchaeepiaenasoenieneiannihans 30

Princess Cruises, Inc. v. United States, 397 F.3d

SE, ID shoes chceedseaminapeanenionpane 23

Vill

TABLE OF AUTHORITIES — Continued

Page

Raytheon Prod. Corp. v. Commissioner, 144

PBs BRO Chak Cie. FD scciccccsdieisicieieciotain 21

Reinecke v. Gardner, 277 U.S. 239 (1928)................. 23

Simmons v. United States, 308 F.2d 160 (4th

CT, RI iv ccesincintincicsknsduncnipia agen cuban 29

Skidmore v. Swift & Co., 323 U.S. 134 (1944) .......... 19

Smientanka v. First Trust & Savings Bank, 257

UT Zo, BE CRED eisetessiintisnccenctentanmaaneetetaia ise 23

Southern Pacific Co. v. Lowe, 247 U.S. 330

CRED) scsctcrsinsiistsinsiracittisanndiaicassasanenasacntnenitmamannennta alas 15

St. Martin Evangelical Lutheran Church, 451

Coe Fee CRIP cutsexcccscnceiuhaennsiadactaiceiaianeeneaiae 24, 25

Starrels v. Commissioner, 304 F.2d 574 (9th

Cit, TIO viscensscsnssst'ssrscncnisaiapidecdcheaseasun meena 18

Steward Mach. Co. v. Davis, 301 U.S. 548

(RODE csricaissntinshisntdaachiunpesnadoagiiagn cman rn 29

Stratton’s Independence v. Howbert, 231 US.

DOD CA caccsisicsisisdcrsssnnicontentacsbcenaiae ee 18, 20

Thomas v. U.S., 192 U.S. 363 (1904)... eee ceeee 29

Tribune Publishing Co. v. United States, 836

2d 1276 (ORs Cle, BGP cssensiscivinccet eee 21

Tyler v. United States, 281 U.S. 497 (1930)............... 29

Union Elec. Co. v. United States, 363 F.3d 1292

CH: CO, IED asisicsiinesecretcsssalsiiacdddiaieanseni 30

United Dominion Indus., Inc. v. United States,

SOS UES. GE COED ovcviencéneidssvcrennieiasaaee 23

TABLE OF AUTHORITIES — Continued

Page

United States v. Burke, 504 U.S. 229 (1992)............. 11

U.S. uv. Kaiser, 363 U.S. 299 (1960) ................0::00eeeee 16

United States v. Welden, 377 U.S. 95 (1964)............. 23

U.S. ex rel. Totten v. Bombadier Corp., 380 F.3d

ale Sey SITET nnisisseniinvcesnnscaminehehiosaibiasciiuetoentoad 9, 32

Walters v. Mintec/International, 758 F.2d 73

EE TIEE UuIIEI ED Ucaiciicdddedeshincedsditacvesniabanteenensanasnsasniaiiel 33

Whately v. District of Columbia, 447 F.3d 814

SIE, CAEL MID bin kdhdesiesicnsbetiacsodeusensncecedsensacubamsuanienelall 9

White v. Aronson, 302 U.S. 16 (1937).....................004 23

STATUTES

DEP Rei W Wii poccccscoccssscnscconcescensessongoobosssansoestes passim

2B U.S.C. § 104O)....ccccccccccccccccccccccccesess 5, 14, 32, 34, 36

26 U.S.C. § 104 (a2) coon ccc ccccccccccceceeeeeeeeeeeee passim

BF eae: MNUIED siiinesiesenccncenssnscecnsensinscssendnpenspessononseusel 28

SVEPUMIIEL, WS MUIIG. soncsensdspssteseseneabbseesenbonsanaessecnennbeonnnaiaes 29

TEE da IPE A Pasesedssvoncessscccececsscansneuenssssssssasaianeasgal 2

Be te 0 Re csnncnnccteinecenosessisiecbincssshdtsannetiananmeanienneel 7

Revenue Act of 1913, § IICB), 38 Stat. 167 0.000000... 22

Section 207 of the Internal Revenue Code of

BUIIEIE wasnaseavesenanenyaenswesesaneneeseagneqaqneneasonessonsubsanensmebenien 27

Small Business Job Protection Act of 1996

Pub. L. 104-188, Title I, § 1605(a) to (c), 110

Stat. 1838....... saeueysabseusseenennseussensusuansesassounnbesuehousteans 25

TABLE OF AUTHORITIES — Continued

Page

LEGISLATIVE MATERIALS

H.R. Rep. No. 104-586, 1996-3 C.B. 331, 481-82 ...... 25

H.R. Rep. No. 767, 65th Cong., 2d Sess. 9-10

SITU chica disiestceoieechdaiceedtcesatbticnaiikeblaicelala hci ak as 19

H.Rep. No. 1337, 83d Cong., 2d Sess. A 18 ............... 17

S.Rep. No. 1622, 83d Cong., 2d Sess. 168 ................. 17

REGULATIONS

SO Cae. S 1. BG He) CAG wcnccnrseccccocercecsses 5, 6, 14, 34

CONSTITUTIONAL PROVISIONS

TS __, EIEIREN San eT RT passim

65 Bs 6 6 lL 2,31

4s Bs PO SL Sl ee ncma rea eNOnmTE nS 3

uae ee: CG. Be Oi, © oc cccccschsconecntosteannsadeencete 3, 31

OTHER AUTHORITIES

ADMINISTRATIVE RULINGS:

Rev. Rul. 74-77, 1974-1 C.B. 33, 1974 WL

ED etitacticanigintmadinrndannaiiniaieiiimiatelant 12, 18

SE Go, RAC SIO, FI CEA icccesccccsccsesesescccscnssinse 12, 20

Sol. Op. 132, 1-1 C.B. 92, 03 (1922)....12, 18, 19, 20, 21

oP EE, TOD. GI Ci cicecsectesiescmsinntssoinntndeemaninne 12

pe GAR sdcceisaini abpeisanicerialiaaeiaeinanieaieisbadiniaan 12, 20

TABLE OF AUTHORITIES -— Continued

PERIODICALS AND TREATISES

Black’s Law Dictionary (8th Edition, 2004)..........

132 BNA Daily Tax Report, “Tax Decisions and

Rulings,” p. K-1 (July 11, 2007) ........................

“Case Commentaries,” 8 Transactions: Tenn. J.

Ble Sg et GG Po icctniccnascsisnssnesncsncensscecennsas

Dodge, Joseph M., “The Constitutionality of

Federal Taxes and Federal Tax Provisions,”

(November 12, 2006), Florida State

University College of Law, Public Law

IE BIT FOG. IIE sncctancnctcecsenniahadssneccanens

Fatino, John F., “The Tax Treatment of Verdicts

and Settlements Following the Adoption of

the Jobs Creation Act of 2004: Paradise

Found for the Employment Lawyer?”

ae ee is te ks Ge CI ataccntntcninsnentccnsnnncens

Germain, Gregory L., “Taxing Emotional Injury

Recoveries: A Critical Analysis of Murphy v.

Internal Revenue Service,” 60 Ark. L. Rev.

BE TE Panhciiicnstckitinieasasibeihansabianndesinnialittsaasnns

Hudson, Jr., David L., “D.C. Circuit Strikes

Down Tax On Emotional Damages,” 35

A.B.A.J. E-Report 1 (Sept. 1, 2006)..................

O’Hara, Steven T., “Thinking Outside the

Code,” Vol. 116, No. 6, Tax Notes (Aug. 20,

TABLE OF AUTHORITIES —- Continued

Page

Restatement (Second) of Torts,

bs Ts SRR SE Seana ORD 2 PO Se Rat Co Pn ee Ree me Fe 33

a ls ae 33

RARER ehetgeretona ome omnes Rs Pee eno aE 33

Romond, Russell F., “Note: Income, Taxes and

the Constitution: Why the D.C. Circuit Court

of Appeals Got It Right In Murphy [I/,” 12

Fordham J. of Corp. & Fin. Law, 587, 593

(st BRR PAR etn 9 Reso PSUR RR MN a EEN 34, 35

Rose, Elizabeth, “Murphy’s Mistakes: How the

Circuit Court Should Analyze Section 104(a)

(2) Upon Rehearing,” 60 Tax Law 533 (2007)........ 35

Webster’s New International Dictionary,

Second Edition (unabridged) (1935) .............. ee 19

Wood, Robert W., “Top Ten Reasons Why

‘Murphy’ Is My Favorite Tax Case,” Vol. 190,

No. 1, Daily Tax Report (BNA Oct. 2, 2006) .......... 35

Wood, Robert W., “Waiting to Exhale: Murphy

Part Deux and Taxing Damage Awards,” Vol.

116, No. 4, Tax Notes, 265 (July 23, 2007)............. 35

PETITION FORA WRIT OF CERTIORARI

Petitioner respectfully petitions for a writ of

certiorari to review the judgment of the United States

Court of Appeals for the District of Columbia Circuit

in this case.

OPINIONS BELOW

The opinion of the Court of Appeals for the D.C.

Circuit on panel rehearing is reported at 493 F.3d 170

(hereinafter, “Murphy II’) and is reprinted in the

appendix hereto at App. 1-38, infra.

The initial opinion of the Court of Appeals for the

D.C. Circuit that was vacated on rehearing is re-

ported at 460 F.3d 49 (hereinafter, “Murphy I”) and is

reprinted in the appendix hereto at App. 39-67, infra.

The order of the Court of Appeals for the D.C.

Circuit granting panel rehearing has not been re-

ported and it is reprinted in the appendix hereto at

App. 68-69, infra.

The order of the Court of Appeals for the D.C.

Circuit denying the respondents’ petition for rehear-

ing en banc as moot has not been reported and it is

reprinted in the appendix hereto at App. 70-71, infra.

The memorandum decision and order of the

United States District Court for the District of Co-

lumbia (Lamberth, D.J.) is reported at 362 F.Supp.2d

206 and is reprinted in the appendix hereto at App.

72-94, infra.

The order of the Court of Appeals for the D.C.

Circuit denying the petitioner’s petition for rehearing

en banc has not been reported and it is reprinted in

the appendix hereto at App. 95-96, infra.

JURISDICTION

The Court of Appeals entered its opinion on July

3, 2007, and petition for rehearing en banc was timely

sought. On September 14, 2007, the Court of Appeals

for the D.C. Circuit denied the petition for rehearing

en banc. The jurisdiction of this Court to review the

judgment of the D.C. Circuit is invoked under 28

U.S.C. § 1254(1).

CONSTITUTIONAL, STATUTORY AND

REGULATORY PROVISIONS INVOLVED

A. U.S. Constitution.

Amendment XVI: Congress shall have power to

lay and collect taxes on incomes, from whatever

source derived, without apportionment among the

several states, and without regard to any census or

enumeration.

U.S. Const. art. 1, § 2, cl. 3: Representatives and

direct Taxes shall be apportioned among the several

States which may be included within this Union,

according to their respective Numbers, which shall be

determined by adding to the whole Number of free

Persons, including those bound to Service for a Term

of Years, and excluding Indians not taxed, three fifths

of all other Persons.’

U.S. Const. art. 1, § 8, cl. 1: The Congress shall

have Power To lay and collect Taxes, Duties, Imposts

and Excises, to pay the Debts and provide for the

common Defence and Welfare of the United States;

but all Duties, Imposts and Excises shall be uniform

throughout the United States.

U.S. Const. art. 1, § 9, cl. 4: No Capitation, or

other direct, Tax shall be laid, unless in Proportion to

the Census or Enumeration herein before directed to

be taken.

B. Statutes.

Section 61(a) of the tax code, entitled, “Gross

Income Defined,” is applicable:

(a) General definition

Except as otherwise provided in this subtitle,

gross income means all income from what-

ever source derived, including (but not lim-

ited to) the following items:

' Changed by section 2 of the Fourteenth Amendment.

(1) Compensation for services, including

fees, commissions, fringe benefits, and simi-

lar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Alimony and separate maintenance pay-

ments;

(9) Annuities;

(10) Income from life insurance and en-

dowment contracts;

(11) Pensions;

(12) Income from discharge of indebted-

ness;

(13) Distributive share of partnership gross

income;

(14) Income in respect of a decedent; and

(15) Income from an interest in an estate or

trust.

(b) Cross references

For items specifically included in gross in-

come, see part II (sec. 71 and following). For

items specifically excluded from gross in-

come, see part III (sec. 101 and following).

See 26 U.S.C. § 61 (emphasis added).

The following parts of Section 104(a) of the tax

code, entitled, “Compensation for injuries or sick-

ness,” are applicable:

... gross income does not include — ... (2)

the amount of any damages (other than pu-

nitive damages) received (whether by suit or

agreement and whether as lump sums or as

periodic payments) on account of personal

physical injuries or physical sickness.

* * .

For purposes of paragraph (2), emotional dis-

tress shall not be treated as a physical injury

or physical sickness.

26 U.S.C. § 104(a), as amended in 1996.

C. Regulations.

The following parts of Treasury Regulation,

§ 1.104-1, are applicable:

sonal injuries or sickness. Section 104(a)(2)

excludes from gross income the amount of any

damages received (whether by suit or agree-

ment) on account of personal injuries or sick-

ness. The term “damages received (whether

by suit or agreement)” means an amount re-

ceived (other than workmen’s compensation)

through prosecution of a legal suit or action

based upon tort or tort type rights, or

through a settlement agreement entered into

in lieu of such prosecution.

26 C.F.R. § 1.104-1(c) (2005) (emphasis added).

STATEMENT OF THE CASE

The two decisions of the D.C. Circuit in this case

struggle with an issue that has been avoided since

the modern tax code was enacted in 1918, namely,

whether damages received on account of personal

injury and solely to restore a personal injury loss are

taxable as income. This important federal question

needs to be resolved now because the 1996 amend-

ments to the statutory exemption for taxing personal

injury damages have created doubt and widespread

uncertainty as to the tax treatment of personal injury

damages.

In this case, Petitioner Marrita Murphy success-

fully obtained an award of compensatory damages in

the amount of $70,000 to compensate her solely for

personal injuries in the form of damage to her reputa-

tion, emotional distress and physical problems result-

ing from the mental distress. App. 3-4; App. 71-75. As

the case comes to this Court, it is undisputed that none

of the compensatory damages awarded to Ms. Murphy

were for lost wages, back pay or front pay. Additionally,

none of these damages awarded to Ms. Murphy

represented punitive damages, liquidated damages or

attorneys fees. It is also undisputed that the sole

purpose of the compensatory damages award at issue

in this tax refund case was to make Ms. Murphy

“whole” for suffering personal injuries resulting from

illegal retaliation committed by her former employer,

the New York Air National Guard (“NYANG”). App. 3-

4; App. 73-75.

Petitioner commenced an action in the district

court seeking a tax refund from the United States for

the wrongful assessment of a tax on the “make whole”

compensatory damages awarded to her for injuries

and sickness that she sustained as a result of illegal

retaliation by her former employer. App. 4-5; App. 75.

The basis for federal jurisdiction in the district court

is 28 U.S.C. § 1346, which provides for jurisdiction

over Petitioner’s tax refund claim. App. 76.

As part of the summary judgment record, Ms.

Murphy submitted the affidavits of two doctors who

testified that the injuries for which she was awarded

compensatory damages included bruxism, permanent

damage to her teeth, and other physical injuries. App.

74. These affidavits and summary judgment record

showing that Ms. Murphy’s “bruxism” and permanent

damage to her teeth is the result of NYANQ’s illegal

acts was not disputed by Respondents. Jd. The dis-

trict court granted Respondents’ motion for summary

judgment despite finding that Ms. Murphy sustained

permanent physical injuries in the form of bruxism

and permanent teeth damage, and that she “suffered

from other ‘physical manifestations of stress.’” The

district court concluded that Ms. Murphy’s damages

fell outside the scope of the personal injury exemption

because they were “attributable to” emotional distress

and not physical injury. App. 84-85. Additionally, the

district court erred by concluding that Ms. Murphy’s

damages were gross income pursuant to 26 U.S.C.

§ 61(a) and under the Sixteenth Amendment. /d.

This tax refund case is now in a unique posture.

For the first time the issue of whether compensatory

damages for non-physical injuries is squarely before

this Court. This is a major issue impacting not only

the employment bar, but all cases in which any

person obtains any compensatory damages for a

mental illness.

After full briefing and oral argument, the D.C.

Circuit initially reversed the district court and held

that the tax on Murphy’s award of non-physical

“make whole” compensatory damages to vindicate her

rights under six federal environmental whistleblower

statutes did not fall within the co-extensive meaning

of income set forth in the Sixteenth Amendment to

the U.S. Constitution and 26 U.S.C. § 61(a). App. 39-

67. In Murphy I, the D.C. Circuit correctly held that

the personal injury damages received by Ms. Murphy

were not taxable as gross income. In reaching this

decision the D.C. Circuit correctly applied the reason-

ing in a long line of Supreme Court cases and de-

partmental rulings, and held that Ms. Murphy’s

personal injury damages were analogous to a “resto-

ration of capital” and “received ‘in lieu of’ something

‘normally untaxed,” and, therefore, “is not income

under the Sixteenth Amendment,” and “is neither a

‘gain’ nor an ‘accession[] to wealth.’” App. 58, citing

O’Gilvie v. United States, 519 U.S. 79, 86 (1996);

Commissioner v. Glenshaw Glass, 348 U.S. 426, 430-

31 (1955).

Respondents filed a petition for rehearing en

banc, arguing for the first time that the tax at issue

was constitutional under Article I of the Constitu-

tion.’ After panel rehearing, the D.C. Circuit issued

Murphy II, deciding sua sponte matters that were not

raised by the parties and considering the issue belat-

edly raised for the first time by Respondents in their

petition for rehearing. App. 1-38.

Notably, the D.C. Circuit in Murphy IT does not

overrule or disagree with the essential holding of

Murphy I, that Murphy’s damages are not “income.”

Instead, the D.C. Circuit went through a number of

contortions and considered several issues not raised by

the parties to avoid the very issue that needs to be

addressed, whether “make whole” damages for personal

* On appeal, initially, Respondents deliberately chose not to

argue that the tax at issue was an indirect excise tax under

Article I, and as such it was waived. U.S. ex rel. Totten v.

Bombadier Corp., 380 F.3d 488, 497 (D.C. Cir. 2004); Ark Las

Vegas Rest. Corp. v. NLRB, 334 F.3d 99, 108 n. 4 (D.C. Cir. 2003);

Whately v. District of Columbia, 447 F.3d 814, 821 (D.C. Cir.

2006); District of Columbia v. Air Florida, Inc., 750 F.2d 1077,

1084 (D.C. Cir. 1984). Additionally, in the district court, Respon-

dents argued that Murphy’s damages “constitute ‘income’ under

the Sixteenth Amendment.” Murphy v. IRS, No. 03-cv-02414,

Doc. No. 21, Def. Opp. To Pitf. Mtn. for Partial Summary

Judgment, p. 5 (Oct. 25, 2004) (emphasis added), citing Glen-

shaw Glass, 348 U.S. at 431-432 & n. 11.

injury awarded solely to restore a personal injury loss

is taxable as income. The D.C. Circuit’s holding that

Murphy’s damages are taxable conflicts with the legal

standards adopted by this Court and in other circuits,

and departs from the text of the amended statute at

issue. Ms. Murphy prevailed under the legal stan-

dards applied in other circuits and this Court, and

review should be granted to resolve this important

federal question and the conflicts between the D.C.

Circuit’s decision and the relevant decisions of this

Court and of other circuits.

This Court should grant review to resolve

whether an income tax on personal injury damages

received to make the victim “whole” for loss of reputa-

tion or emotional and physical injuries violates the

Sixteenth Amendment or is within the scope of 26

U.S.C. § 61(a), the gross income statute. Tl.is Court

should also grant review to resolve important ques-

tions about the interpretation of the 1996 amend-

ments to Section 104(a)(2) under the Supreme Court’s

Schleier test.

REASONS FOR GRANTING THE WRIT

I. WHETHER PERSONAL INJURY D/ MAGES

AWARDED SOLELY TO COMPENSATE

FOR A LOSS (OR RESTORE HUMAN

CAPITAL) ARE TAXABLE AS GROSS IN-

COME IS AN IMPORTANT QUESTION OF

FEDERAL LAW THAT IS EITHER NOT

SETTLED BUT SHOULD BE RESOLVED

BY THIS COURT, OR HAS BEEN DECIDED

BY THE D.C. CIRCUIT IN A WAY THAT

CONFLICTS WITH RELEVANT DECI-

SIONS OF THIS COURT AND OTHER CIR-

CUITS.

A. Whether Damages Awarded Solely to

Compensate for Personal Injury Losses

(and Not for Wages or Liquidated or

Punitive Damages), Are Taxable Income

Needs to be Resolved.

The questions presented here follow a series of

cases deciding the tax treatment of damages under

the personal injury exemption, 26 U.S.C. § 104(a){2).

In recent years, this Court has granted review to

determine whether certain damages received by

plaintiffs fell within the scope of the statutory exemp-

tion from gross income for personal injury damages.

United States v. Burke, 504 U.S. 229 (1992) (whether

back pay damages awarded under Title VII of the

Civil Rights Act of 1964, which at the time did not

provide for an award of compensatory damages, were

exempt under Section 104); Commissioner of Internal

Revenue v. Schleier, 515 U.S. 323 (1995) (whether

liquidated damages awarded under the Age Discrimi-

nation in Employment Act were exempt); O’Gilvie v.

United States, 519 U.S. 79 (1996) (whether punitive

damages fell within the scope of the personal injury

exemption); Commissioner v. Banks, 543 U.S. 426

(2005) (whether the portion of a damages recovery

paid to a litigant’s attorney under a contingent fee

agreement is taxable).

As this Court recognized in O’Gilvie, the question

of whether compensatory damage awards can be

taxed as income dates back to 1918 when the modern

tax code was enacted. In O’Gilvie, this Court reviewed

this history and noted that the courts have held a

number of times after the Sixteenth Amendment was

enacted that “a restoration of capital was not income;

hence it fell outside the definition of ‘income’... ”

O’Gilvie, 519 U.S. at 84. The O’Gilvie court went on to

recount the analysis of the Treasury Department,

Attorney General and the courts following the enact-

ment of the Sixteenth Amendment and the modern

income tax code, concerning whether compensatory

damages for personal injury are taxable as income

under the “return of human capital” analogy.

O’Gilvie, 519 U.S. at 84-87. The “return of human

capital” analogy was expressly adopted by the IRS in

1918, in 1922, and in 1974, and was acknowledged by

the Supreme Court in Glenshaw Glass and O’Gilvie.

See Glenshaw Glass, 348 U.S. at 433 n. 8; O’Gilvie,

519 U.S. at 84-87; 31 Op. Att’y Gen. 304 (1918); T.D.

2747, 20 Treas. Dec. 457 (1918); Sol. Op. 132, 1-1 C.B.

92, 03 (1922). Also see Rev. Rul. 74-77, 1974-1 C.B. 33,

1974 WL 34538 (IRS RRU) (adopting Sol. Op. 132 and

agreeing that such non-physical personal injury

damages “are not income”).

However, because O’Gilvie concerned the taxing

of punitive damages, this Court has not had the

occasion to consider directly whether “make whole”

compensatory damages for personal injury are in-

come.

What was discussed in dictum in Glenshaw Glass

and O’Gilvie, regarding the “return of human capital”

analogy and whether compensatory damages to

restore “human capital” is taxable as income is

squarely presented in this case. The record of this

case does not concern punitive damages, wages,

liquidated damages or attorneys fees. Rather, this

Court should now grant review to decide whether

compensatory damages for loss of reputation, emo-

tional distress and physical problems resulting from

illegal conduct are income within the meaning of the

gross income statute, 26 U.S.C. §6l(a), and the

Sixteenth Amendment. In addition, review should be

granted to determine the scope of the personal injury

exemption when a plaintiff suffers personal injuries

that include physical injury or physical problems and

also suffers emotional distress.

For more than a decade, since the personal injury

exemption was amended in 1996, taxpayers, employ-

ers and employees, have struggled with the taxability

of compensatory damages for emotional distress,

physical injuries related to emotional distress, and

loss of reputation. Even though Section 104(aX2) was

amended in 1996, Congress did not include or further

define the scope of gross income under the tax levying

statute, 26 U.S.C. §61(a), and the IRS regulations

implementing Section 104, 26 C.F.R. §1.104-1(c)

(2005), do not require physical injury or physical

sickness to qualify for the personal injury exemption,

thus causing widespread confusion, uncertainty and

litigation.

When the D.C. Circuit was confronted with the

questions presented here, the Court of Appeals issued

two decisions that conflict with each other, causing

further confusion and uncertainty, and generating

considerable public debate and commentary. See Pet.

Section II, pp. 33-35, infra. Although a second opinion

was issued by the D.C. Circuit, the Court of Appeals

never directly repudiated or overruled its prior deci-

sion holding that Murphy’s compensatory damages

are not income. Instead, in Murphy II the D.C. Cir-

cuit went to great pains to sidestep the entire issue of

whether the kind of compensatory damages for per-

sonal injury at issue are income, and simply arrived

at a different result based on issues not raised by the

Respondents and designed to avoid the very issue

that this Court identified but did not directly decide

in Glenshaw Glass and O’Gilvie: whether compensa-

tory damages for personal injury are income. Despite

the machinations in the Court of Appeals, the issues

raised in this case are straightforward and strike at

the very core of whether compensatory damages to

restore “human capital” is taxable as income. Further

percolation promises only to increase confusion and

uncertainty.

B. The D.C. Circuit Failed to Follow Gien-

shaw Glass.

The D.C. Circuit’s decision conflicts with control-

ling Supreme Court case law requiring that a tax on

gross income under Section 61(a) satisfy the “acces-

sion to wealth” test. Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 430 (1955). Despite that both the

Government and Murphy agreed that Glenshaw

Glass was the controlling test, and after ruling in

Murphy I that Murphy’s damages were not an “acces-

sion to wealth” and therefore not “income,” the D.C.

Circuit made a fundamental error in Murphy II by

concluding, “it is unnecessary to determine if there

was an accession to wealth” in order to tax her dam-

ages under Section 61(a). App. 19-20.

Ms. Murphy’s “make whole” personal injury

damages are not taxable as “income” under either

Section 61(a), or the Sixteenth Amendment. In a long

line of cases, the Supreme Court and circuit courts

have drawn a sharp distinction between monetary

awards which constitute an “accession to wealth” and

awards that make a person “whole” for restoring a

personal! loss. See, e.g., Doyle v. Mitchell Bros., 235 F.

686, 688 (6th Cir. 1916) (monies paid to compensate

for losses in a fire are not income); Southern Pacific

Co. v. Lowe, 247 U.S. 330, 335 (1918) (return of

capital not income under the tax code or Sixteenth

Amendment); Burk-Waggoner Oil v. Hopkins, 269

U.S. 110, 114 (1925) (Brandeis, J.) (neither Congress

nor the Courts are permitted to “make a thing income

which is not so in fact”); Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 432, n. 8 (1955) (personal

injury recoveries are “by definition compensatory

only” and nontaxable as contrasted with punitive

damages); U.S. v. Kaiser, 363 U.S. 299, 311 (1960)

(Frankfurter, J., concurring) (Strike benefits not

income and stating, “The principle at work here is

that payment which compensates for a loss of some-

thing which would not itself have been an item of

gross income is not a taxable payment”); O’Gilvie v.

United States, 519 U.S. 79, 84-86 (1996) (“a restora-

tion of capital [is] not income; hence it [falls] outside

the definition of ‘income’ upon which the law im-

pose[s] a tax”); Hawkins v. Commissioner, 6 B.T.A.

1023, 1024-1025 (U.S. Bd. Tax. App. 1927) (“compen-

sation for injury to [plaintiff’s] personal reputation”

was not income because it was “an attempt to make

the plaintiff whole as before the injury.”); Dotson v.

U.S., 87 F.3d 682, 685 (5th Cir. 1996) (personal inju-

ries for physical or emotional well-being nontaxable

as a “return of human capital”).

Applying the consistent and unbroken line of

cases interpreting the meaning of “income,” the

history surrounding the passage of the Sixteenth

Amendment and the tax code, and the commonly

understood meaning of “income” under the tax codes

enacted under the Sixteenth Amendment, requires a

finding that Murphy’s compensatory damages award

for an actual loss of reputation and to restore her

emotional or physical well being is not income.

Congress based its definition of income in Section

61(a), as “all income from whatever source derived,”

directly upon the Sixteenth Amendment. Glenshaw

Glass Co., 348 U.S. at 431-432 and n. 11, citing

H.Rep. No. 1337, 83d Cong., 2d Sess. A 18; S.Rep. No.

1622, 83d Cong., 2d Sess. 168 (The word “income” in

26 U.S.C. § 61(a) is based on the Sixteenth Amend-

ment and “is used in its constitutional sense.”).

The Supreme Court has defined the meaning of

the term “income” as it is used in the Sixteenth

Amendment and the tax codes enacted thereunder.

Doyle, 235 F. at 688 (monies paid to compensate for

losses in a fire are not income). The Doyle precedent

has not been questioned, and this Court has previously

stated that Doyle and other cases set forth what was

“believed to be the commonly understood meaning of

* Shortly after Doyle, the Supreme Court defined “income”

as a “gain derived from capital, from labor, or from both com-

bined.” Eisner v. Macomber, 252 U.S. 189, 207 (1920). Justice

Brandeis dissented out of concern that the definition of income

did not include various means for which persons could obtain

income which were not directly related to a gain from capital or

labor. Eisner, 252 U.S. at 226 (Brandeis, J., dissenting). How-

ever, Justice Brandeis did not dispute the Doyle holding or that

compensating a person for a loss was not income. Justice

Brandeis’ opinion in Burk-Waggoner Oil, that the term “income”

limited Congress’ taxing authority as Congress “cannot make a

thing income which is not so in fact,” is also notable because he

firmly acknowledged the limiting authority of the term “income”

as set forth in the Sixteenth Amendment.

the term [income] which must have been in the minds

of the people when they adopted the Sixteenth

Amendment ... ’” Merchants’ L. & T: Co. v. Smi-

etanka, 255 U.S. 519 (1921), citing Doyle v. Mitchell

Bros. Co., 247 U.S. 179, 185 (1918). Undoubtedly, “the

term ‘income’ as commonly understood” at the time of

adoption of the Sixteenth Amendment would not

include Murphy’s “make whole” compensatory dam-

ages. Id.

The D.C. Circuit’s holding is also at odds with a

long line of cases and Departmental rulings issued

both before and after Glenshaw Glass. In 1922, the

Treasury Department stated that money received for

alienation for affection or for lost reputation “does not

constitute income within the meaning of the sixteenth

amendment and the statutes enacted thereunder.” Sol.

Op. 132, 1-1 C.B. 92, 03 (1922) (emphasis added); Rev.

Rul. 74-77, 1974-1 C.B. 33, 1974 WL 34538 (IRS

RRU) (restating Sol. Op. 132 and finding amounts

received for alienation of affections “are not income.”)

(emphasis added). That ruling was based on Supreme

Court decisions interpreting the definition of income

under the Sixteenth Amendment and remained in full

force after Glenshaw Glass was decided. Sol. Op. 132,

supra., citing Stratton’s Independence v. Howbert, 231

U.S. 399; Eisner, 252 U.S. at 207. Also see, Doyle,

supra.; Hawkins, supra.; Starrels v. Commissioner,

304 F.2d 574, 576 (9th Cir. 1962) (damages “for per-

sonal injuries ... make the taxpayer whole from a

previous loss of personal rights — because, in effect,

they restore a loss to capital.”).

The questions presented were settled by the

Treasury Department in 1922 when it held that

“make whole” non-physical personal injury damages

are not income within the meaning of the Sixteenth

Amendment or any of the tax laws enacted there-

under. Sol. Op. 132, supra. (“the question is really

more fundamental, namely, whether such damages

are within the legal definition of income.”).*

Notably, the D.C. Circuit’s decision in this case

ignores decisions of this Court and the Fifth Circuit

noting that damages for personal injuries are non-

taxable as a “return of human capital.” Dotson v.

U.S., 87 F.3d 682, 685 (5th Cir. 1996) (“Congress first

enacted the personal injury compensation exemption

in 1918 at a time when such payments were consid-

ered the return of human capital, and thus not

constitutionally taxable “income” under the Sixteenth

Amendment. H.R. Rep. No. 767, 65th Cong., 2d Sess.

9-10 (1918).”); Glenshaw Glass, 348 U.S. at 433 n. 8;

O’Gilvie, 519 U.S. at 84-86.

“Accessions,” aS commonly understood, requires

an addition to wealth or property. See Webster’s

New International Dictionary, Second Edition (un-

abridged), p. 14 (1935); Black’s Law Dictionary (8th

Edition, 2004) (“A property owner’s right to all that is

* The D.C. Circuit’s failure to accord deference to Sol. Op.

132 and Rev. Rul. 74-77 also conflicts with Supreme Court

precedent. Davis v. United States, 495 U.S. 472, 484 (1990);

Christensen v. Harris County, 529 U.S. 576, 587 (2000);

Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).

added to the property, naturally or by labor... .”)

(emphasis added). It is not an all-encompassing term

which would include monetary payments for restora-

tion of a loss — be that a loss to a house or a hand.

Indeed, the Supreme Court did not disturb the “long

history of departmental rulings holding personal

injury recoveries nontaxable on the theory that they

roughly correspond to a return of capital... .” Glen-

shaw Glass, 348 U.S. at 433 n. 8.

It has long been held that not everything that is

paid to an individual is income. Simply because

Murphy received $70,000 as her “make whole” award

does not mean that she realized an accession to

wealth. Sol. Op. 132, supra. (“the Supreme court has

repeatedly held that gross income does not include

everything that comes in.”), citing Lynch v. Turrish,

247 U.S. 211 (1918); Eisner, supra.; Stratton’s Inde-

pendence, supra. Also see, Bowers v. Kerbaugh-

Empire, 271 U.S. 170 (1926). Murphy’s losses were

valued in her whistleblower case by the U.S. Depart-

ment of Labor, which determined Murphy’s wealth

was diminished as a result of her personal injuries by

$70,000. A straightforward application of Glenshaw

Glass shows that Murphy’s “accession to wealth” was

zero.

Murphy’s “make whole” damages for personal

injury are not income under Glenshaw Glass, because

they are not an “accession to wealth” in light of the

“long history” of authorities. See Dotson, 87 F.3d at

685; Glenshaw Glass, 348 U.S. at 433 n. 8; O’Gilvie,

519 U.S. at 84-87; 31 Op. Att’y Gen. 304 (1918); T.D.

2747, 20 Treas. Dec. 457 (1918); Sol. Op. 132, supra.;

Rev. Rul. 74-77, supra. Also see, Hawkins, 6 B.T.:A. at

1025 (“Such compensation as general damages adds

nothing to the individual, for the very concept which

sanctions it prohibits that it shall include a profit. It

is an attempt to make the plaintiff whole as before

the injury.”).

Initially determining that Murphy’s damages are

not income, the D.C. Circuit correctly followed the

Supreme Court in asking whether damages are “a

substitute for [a] normally untaxed personal ...

quality, good, or ‘asset.’” App. 58, quoting O’Gilvie,

519 U.S. at 86. Additionally, the D.C. Circuit in

Murphy I joined the other circuits by asking: “In lieu

of what were the damages awarded?” App. 58, citing

Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110,

113 (lst Cir. 1944); Francisco v. United States, 267

F.3d 303, 319 (3rd Cir. 2001); Tribune Publishing Co.

v. United States, 836 F.2d 1176, 1178 (9th Cir. 1988);

Gilbertz v. United States, 808 F.2d 1374, 1378 (10th

Cir. 1987). The D.C. Circuit correctly applied these

tests to reach the conclusion that Murphy’s award

was received “in lieu of” something “normally un-

taxed,” and as such was not income under either the

Sixteenth Amendment or the gross income statute

because compensatory damages awards for personal

injury losses are not a “gain” or “accession[] to

wealth.” App. 58-59, quoting, O’Gilvie, 519 U.S. at 86

and Glenshaw Glass, 348 U.S. at 430-31.

Having recognized the obvious, the D.C. Circuit

was thus obliged to apply the “in lieu of what?” test

and determine whether Murphy’s damages were in

fact income. In Murphy II, however, the D.C. Circuit

did not address these necessary questions at all. This

glaring omission by the D.C. Circuit in Murphy II

conflicts with the Supreme Court’s decisions in Glen-

shaw Glass and O’Gilvie, which require the courts to

determine whether the damages at issue are income

in the first instance. Since Section 61(a) only taxes

gross income, and that is the only tax-levying statute

at issue in this case, there was no basis for the D.C.

Circuit to depart from the Supreme Court’s well-

established method of applying the income test under

Glenshaw Glass and O’Gilvie, as well as the under

the “in lieu of what?” test.

C. Implying A Tax Conflicts With Supreme

Court and Circuit Precedent.

Murphy’s damages simply do not fall within the

definition of income used in the catchall phrase of

Section 61(a), or within the meaning of income in the

Sixteenth Amendment upon which Section 61(a) is

based. See Gould v. Gould, 245 U.S. 151, 153 (1917).

In Gould, the Supreme Court held that alimony could

not be taxed under the Revenue Act of 1913 because

it did not fall within the statutory definition of in-

come, including the catchall provision of the prede-

cessor to Section 61(a), the gross income statute. Cf.

Revenue Act of 1913, § II(B), 38 Stat. 167 (defining

gross income as “income derived from any source

whatever.”); 26 U.S.C. § 61(a).

In reaching the Article I issue, the D.C. Circuit

violated the holding in a number of Supreme Court

cases, and cases of other circuits, that a tax levying

statute may not be extended by implication, and

where there is doubt as to the validity of the tax, all

doubt must be construed most strongly in favor of the

taxpayer and against the Government. See Gould,

245 U.S. at 153; Smientanka v. First Trust & Savings

Bank, 257 U.S. 602 (1921); Reinecke v. Gardner, 277

U.S. 239, 244 (1928); McFeely v. Commissioner of

Internal Revenue, 296 U.S. 102, 111 (1935); White v.

Aronson, 302 U.S. 16 (1937); Gellman v. United

States, 235 F.2d 87, 93 (8th Cir. 1956); Ellis v. U.S.,

416 F.2d 894 (6th Cir. 1969); Princess Cruises, Inc. v.

United States, 397 F.3d 1358, 1362 (Fed. Cir. 2005);

Ocean Drilling & Exploration Co. v. United States,

988 F.2d 1135, 1156 (Fed. Cir. 1993); America Online,

Inc. v. United States, 64 Fed. Cl. 571, 576 (Ct.Cl.

2005). Accord., United Dominion Indus., Inc. v.

United States, 532 U.S. 822, 839 (2001) (Thomas, J.,

concurring); id., 532 U.S. at 839 n. 1 (Stevens, J.,

dissenting). There is no valid justification to depart

from this cardinal rule of construction of tax levying

statutes.

Additionally, the D.C. Circuit held sua sponte

there was an amendment by implication to Section

61(a), but that holding conflicts with precedent from

the Supreme Court and other Circuits. It is “well-

settled” that amendments by implication “are disfa-

vored,” United States v. Welden, 377 U.S. 95, 103

n. 12 (1964), and will not be upheld in doubtful cases

nor when they raise constitutional questions. St.

Martin Lutheran Church v. South Dakota, 451 U.S.

772, 786-788 (1981); Patel v. Quality Inn South, 846

F.2d 700, 704 (1lth Cir. 1988); Galvan v. Hess Oil

Virgin Is. Corp., 549 F.2d 281, 288 (3rd Cir. 1977).

Also see NLRB v. Catholic Bishop of Chicago, 440

U.S. 490 (1979).

Murphy II also conflicts with the “long-

established canon of construction” that in the absence

of “clear and manifest” Congressional intent to amend

a statute by implication, “the only permissible justifi-

cation for a repeal [or amendment] by implication is

when the earlier and later statutes are irreconcil-

able.” St. Martin Evangelical Lutheran Church, 451

U.S. at 788; Morton v. Mancari, 417 U.S. 535, 550-51

(1974) (“‘courts are not at liberty to pick and choose

among congressional enactments, and when two

statutes are capable of coexistence, it is the duty of

the courts, absent a clearly expressed congressional

intention to the contrary, to regard each as effec-

tive.’”); American Bank and Trust Co. v. Dallas

County, 463 U.S. 855, 868 (1983). Section 104(a)(2),

as amended in 1996, is simply not “irreconcilable

with” the earlier enacted Section 61l(a). Under

amended Section 104, any damages received on

account of personal “physical” injuries and “physical”

sickness are in fact excluded even if Section 61(a) is

not amended, and the two statutes are clearly “capa-

ble of coexistence.” Morton, 417 U.S. at 551.

There was no “clear and manifest” intent by

Congress to amend Section 61(a) by implication when

it amended Section 104(aX(2) in 1996. The only “evi-

dence” of such legislative intent cited by the D.C.

Circuit is the heading of a section of the House Report

in support of the 1996 amendment to Section

104(aX2). App. 22. Notably, the text of Section 104, as

amended, was silent on whether Congress intended

any change or extension of Section 6l(a), and the

actual text of the House Report was also silent. See

Pub.L. 104-188, Title I, § 1605(a) to (c), 110 Stat.

1838; H.R. Rep. No. 104-586, at 143-44, reprinted in

1996-3 C.B. 331, 481-82. Headings contained in

statutes do not evidence legislative intent. Bhd. of

R.R. Trainmen v. Balt. & Ohio R.R. Co., 331 U.S. 519,

528-29 (1947). Certainly, headings alone contained in

legislative reports are deserving of even less weight

than headings in statutes. Moreover, headings are by

their very nature general statements and nothing

more. Jd., 331 U.S. at 528-29. It is well-settled that

general statements contained in legislative reports

“are simply too general and too ambiguous to bear the

weight [the panel] would assign to them.” St. Martin

Evangelical Lutheran Church, 451 U.S. at 786. Under

such circumstances, the legislative history cited by

the D.C. Circuit “does not reveal any clear intent” to

amend Section 61(a), “or to alter its meaning.” /d.,

451 U.S. at 787-88. Such “indefinite congressional

expressions ... cannot work a repeal or amendment

by implication.” Jd.

D. Congress Did Not Enact An “Excise Tax”

on Compensatory Damages and the D.C.

Circuit’s Interpretation of the Catchall

Phrase of Section 61(a) To Imply Such A

Tax Conflicts with Cases of Other Cir-

cuits and of the Supreme Court.

The D.C. Circuit’s decision on the Article I issue

conflicts with cases of the Supreme Court and cases of

other circuits. Because Murphy’s damages are not

income under either Section 61(a) or the Sixteenth

Amendment, whether such damages could be taxable

under Article I if Congress actually enacted a sepa-

rate tax on damages is purely a hypothetical ques-

tion. As stated above, Murphy’s damages are not

income under the catchall provision of Section 61 or

the Sixteenth Amendment (see, e.g., Glenshaw Glass,

supra.), and Congress never enacted a separate tax

on these types of damages. Cf. Gould, supra. Con-

gress has not actually passed a tax on compensatory

damages so there is no case or controversy as to

whether such a tax could be constitutionally imposed

under Article I. Moreover, in this case, there is simply

no nexus between Article I and a statute to levy a tax

on Murphy’s damages because Congress failed to

enact a statute to levy a tax on compensatory dam-

ages. The catchall provision of Section 61(a) cannot be

* Dodge, Joseph M., “The Constitutionality of Federal Taxes

and Federal Tax Provisions,” pp. 8-9 (November 12, 2006),

Florida State University College of Law, Public Law Research

Paper No. 226, available at http://ssrn.com/abstract=943014

(“Nevertheless, the Murphy |J) panel appears correct in stating

that the catch-all clause of section 61 is limited by the meaning

(Continued on following page)

relied on to tax compensatory damages because the

catchall clause was not invoked by Congress in 1996

and it reaches only “accessions to wealth” as “income,”

and does not create an “excise tax.” The only way the

D.C. Circuit in Murphy II arrives at the Article I ques-

tion is by finding an amendment to Section 61(a) by

implication; however, the implied tax is not valid. See

Section I.C., supra.

of the term ‘income’ as used in the [Sixteenth] Amendment...

[T]he issue of the statutory includibility of such damages falls

within the catch-all clause, which states that the item is includ-

ible (only) if it is ‘income.’ If it is not ‘income,’ it is not taxed

under the statute. If Congress, in the catch-all clause, has there

exercised the full measure of taxing power, that power (as to

that clause) must derive from the Sixteenth Amendment and be

coextensive with it. The fact that other clauses might derive

their power (in whole or in part) from the power to impose

indirect taxes is beside the point with regard to the Murphy

facts ... {I]f an item is potentially taxable only under the catch-

all clause of section 61(a), then it must pass the income test, and

it cannot be bootstrapped into validity as being potentially the

subject of a hypothetical (but non-existent) provision that would

be valid as an indirect tax ... If no Code provision specifically

includes the item in income (or otherwise requires it to be

taxed), its inclusion rests on whether the item is ‘income’ within

the catch-all clause of section 61, with the latter (in turn) being

limited by the 16th Amendment meaning of ‘income.’”) (Empha-

sis in original).

* The D.C. Circuit’s reliance on Penn Mut. Indemnity Co. v.

Comm’r., 277 F.2d 16, 20 (3rd Cir. 1960), is misplaced because

Congress actually passed a tax levying statute, Section 207 of

the Internal Revenue Code of 1939, which imposed a tax of one

percent tax on mutual insurance companies. Moreover, Penn

Mut. Indemnity does not concern the interpretation of the

catchall provision of Section 61(a) or the extension of a tax

levying statute by implication

The D.C. Circuit’s “forced” sale formulation (App.

34), raised sua sponte, directly conflicts with the

concept of “make whole” compensatory relief to rem-

edy whistleblower retaliation under federal law,’ and

impermissibly confers a right on the wrongdoer. This

holding overlooks the long-standing principle that a

person cannot be forced to sell one’s health, which is

not a saleable commodity. The D.C. Circuit analogizes

the “forced” sale of Murphy’s mental health to the

involuntary conversion of projmrty into cash under 26

U.S.C. § 1033. App. 34. But this is not a § 1033 case

at all. That provision applies only to the sale of “prop-

erty” and conflicts with the D.C. Circuit’s conclusion

that the tax at issue in Murphy is not a tax on owner-

ship of property. App. 33-36.

The D.C. Circuit’s holding is even more troubling

because such a “forced sale” of human health would

be void and could not be enforced by the courts as a

matter of law and public policy. An employer that

violates an employee’s federal statutory rights and

caused injuries to the employee cannot utilize the

courts to enforce an involuntary sale of the em-

ployee’s health as envisioned by Murphy II. That

would confer a benefit on the wrongdoer and diminish

the employee’s statutory damages and access to the

legal system to vindicate federal statutory nights.

" Each of the six federal environmental statutes upon which

Murphy’s whistleblower complaint was based specifically

provide for an award of tort-type “make whole” compensatory

damages. App. 83.

Additionally, the implied “excise tax” is un-

founded because, unlike the cases relied on by the

D.C. Circuit, Congress did not actually enact an

applicable “excise tax” in this case. Notably, that

portion of Knowlton v. Moore, cited by the D.C. Cir-

cuit, did not concern a federal “excise tax” on a “ “crea-

ture of law’” at all, but rather state inheritance taxes

imposed under state constitutions. Cf, App. 36;

Knowlton v. Moore, 178 U.S. 41, 55 (1900), quoting

Magoun v. Illinois Trust & Sav. Bank, 170 U.S. 283,

287 (1898). The D.C. Circuit’s reliance on Steward

Mach. Co. v. Davis, 301 U.S. 548, 580-81 (1937), is

also misplaced as the tax at issue there was a tax on

conducting business.

None of the cases support the novel creation by

the D.C. Circuit of an implied “excise tax” on plain-

tiffs for using the legal system to vindicate individual

rights. In each of the cases cited by the D.C. Circuit

(App. 33-36), Congress enacted separate statutes

expressly imposing the excise taxes at issue. See,

Simmons v. United States, 308 F.2d 160 (4th Cir.

1962) (26 U.S.C. § 74, prizes); Penn Mut. Indemnity

Co., supra. (26 U.S.C. § 207, I.R.C. 1939); Thomas v.

U.S., 192 U.S. 363 (1904) (stamp tax of 1898 on sale

of stock); Bromley v. McCaughn, 280 U.S. 124 (1929)

(26 U.S.C. § 1131, gift tax); Tyler v. United States, 281

U.S. 497 (1930) (tax upon the transfer of the net

estate imposed by Section 201 of the Revenue Acts of

1916); Nicol v. Ames, 173 U.S. 509 (1899) (Internal

Revenue Act of 1898, taxing sales at exchanges,

boards of trade, etc.); Knowlton, supra. (tax on lega-

cies and distributive shares passing at death). How-

ever, Section 61(a), at issue here, is a gross income

statute and by its very terms does not impose an

excise tax on compensatory damages.

Certainly, had Congress intended to enact an

excise tax on damages for the “privilege” of using the

legal system to vindicate statutory rights that intent

would have been expressly stated. Such an excise tax

also raises other important questions, such as what is

the tax rate for such an implied “excise”? Also, does

this judicially-implied “excise tax” apply equally to all

damages recovered through the legal system, or only

to the kind of damages obtained by Murphy? Does the

“excise” fall on defendants, or only on _ successful

plaintiffs? Murphy II creates a separation of powers

issue, because under Article I taxes must be imposed

by Congress, and not by the courts, particularly on

matters as controversial as taxing civil rights plain-

tiffs for the “privilege” of utilizing the legal system.

Ellis, 416 F.2d at 897. Also see, Commissioner of

Internal Rev. v. Brown, 380 U.S. 563, 579 (1965).

Murphy II also renders the Sixteenth Amend-

ment meaningless, and conflicts with precedents

supporting that a tax on Murphy’s damages is an

invalid direct tax. The Supreme Court invalidated the

entire income tax in 1895 when it was deemed to be a

direct tax. Pollock v. Farmers’ Loan & Trust Co., 157

U.S. 429 (1895), vacated on rehearing 158 U.S. 601

(1895); Union Elec. Co. v. United States, 363 F.3d

1292 (Fed. Cir. 2004), cert. denied, 543 U.S. 821

(2004). The D.C. Circuit’s holding conflicts with these

cases and violates the direct tax/apportionment

clauses. Constitution, Article I, § 9, clause 4, and

Article I, § 2. Taxing damages awarded for personal

injuries to restore health or reputation is a direct tax

on the person, because the money is intended to make

a person whole for a human capital loss. “Make

whole” remedies to restore a personal injury or hu-

man capital loss are analogous to a return of capital,

and a tax on a return of capital is a direct tax. Taxing

the money paid to return the capital is a tax on the

capital itself.

E. The D.C. Circuit’s Decision Conflicts with

the Supreme Court’s test in Schleier.

The D.C. Circu't’s ruling also conflicts with the

Supreme Court's test applying Section 104(a}2),

because in this case Ms. Murphy received damages on

account of physical injuries and physical sickness

within the meaning of the exclusion. See Comm’r. of

Internal Revenue v. Schleier, 515 U.S. 323, 336-37

(1995). The labeling of the award as emotional dis-

tress damages is not dispositive. See, e.g., Fabry v.

CIR, 223 F.3d 1261, 1269-1271 (11th Cir. 2000);

Brown v. United States, 890 F.2d 1329, 1342 (5th Cir.

1989). This is particularly true where, as here, the

record supporting that award expressly cited evidence

of Murphy’s physical problems, and where the physi-

cal problems were considered to be intertwined with

and resulting from the emotional distress. Indeed, the

district court found, based on the summary judgment

record in this case, that Murphy suffered physical

injuries and physical manifestations resulting from

the emotional distress caused by NYANQ’s illegal

acts. App. 74, 85.

The plain meaning of the statute excludes from

gross income any damages received on account of

“physical injuries or physical sickness” regardless of

what caused the injury or sickness. Nothing in the

statute remotely suggests that an injury must be

caused by physical stimuli for the exclusion to apply.

See 26 U.S.C. § 104(aX2). While the amended statute

now states that “emotional distress shall not be treated

as a physical injury or physical sickness,” 26 U.S.C.

§ 104(a), the uncontested factual record establishes that

Ms. Murphy suffered physical injuries, including per-

manent injury to her teeth, and, under the Schleier

test, she received damages on account of those injuries.

To be sure, section 104(a), as amended, distin-

guishes between “physical injuries or physical sick-

ness” and “emotional distress.” But if the amended

statute is to have any meaningful purpose, there

must be a distinction between “physical injuries or

physical sickness” and “emotional distress” and use of

the term “physical symptoms” as used in the legisla-

tive history to define “emotional distress.” See BedRoc

Ltd., LLC v. United States, 541 U.S. 176 (2004);

Lamie v. United States Tr., 540 U.S. 526 (2004); U.S.

ex rel. Totten, 380 F.3d at 494. The D.C. Circuit’s

decision conflicts with cases adopting the approach

under the Restatement (Second) of Torts, which draws

a “line between mere emotional disturbance and

physical harm which results from emotional distress.”

“ =

See, e.g., Walters v. Mintec/International, 758 F.2d 73,

77-78 (3rd Cir. 1985), citing Restatement (Second) of

Torts, §§ 7, 402A, and 436A. There is a difference

between “transitory” symptoms such as “dizziness” or

nausea, and other “long continued” physical problems

that “may amount to a physical illness” and which, in

themselves, constitute “bodily harm.” Restatement

(Second) of Torts, § 436A. In this case, the D.C. Cir-

cuit ignored altogether that Murphy did suffer a

physical injury or physical sickness for which she was

awarded damages, and thus decided this case in a

way that conflicts with Schleier.

Il. THE QUESTIONS PRESENTED ARE

IMPORTANT AND THERE IS NO REASON

TO DEFER REVIEW.

Unquestionably, the questions presented are

important as the D.C. Circuit held this case meets the

standard of “exceptional circumstances” and “affects

the broad public interest.” App. 6. Also, the D.C.

Circuit’s holding has widespread ramifications and 4a

broad impact on taxpayers, employers and employees

in a wide range of cases, including but not limited to

discrimination, civil rights, whistleblower and tort

cases. The conflicting D.C. Circuit opinions in this

case are the subject of much commentary due to the

exceptional importance of taxing “make whole” com-

pensatory damages, such as for emotional distress

and loss of reputation in a broad range of cases.

For over 78 years, the IRS and the courts did not

consider non-physical “make whole” awards for emo-

tional distress and loss of reputation to be income,

because such damages are akin to a restoration of

capital, and they restore a loss.

Indeed, the IRS regulations implementing Sec-

tion 104(a) have not been revised since the 1996

amendments, and specifically state that “Section

104(a)(2) excludes from gross income the amount of

any damages received (whether by suit or agreement)

on account of personal injuries or sickness.” 26 C.F.R.

§ 1.104-1(c) (2005) (emphasis added). Thus, the IRS’s

own regulations actually inform taxpayers that “any”

personal injury or sickness damages are exempt from

gross income. Id.

Unquestionably, these issues are of paramount

interest to both sides of the employment bar and to

the employees who receive, and the businesses that

pay, these kinds of damages in civil rights and whis-

tleblower cases. David L. Hudson, Jr., “D.C. Circuit

Strikes Down Tax On Emotional Damages,” 35

A.B.A.J. E-Report 1 (Sept. 1, 2006) (noting Murphy I

is “positive” for employers and employees and will

promote settlement). Although some members of the

tax bar and academia impulsively criticized Murphy

I, claiming it would encourage tax protesters, at least

one commentator concedes that reaction was over-

blown. 132 BNA Daily Tax Report, “Tax Decisions and

Rulings,” p. K-1 (July 11, 2007) (noting one commen-

tator’s observation that “criticism of the initial Mur-

phy ruling may have been a little too enthusiastic,

especially the claim that it would encourage tax

protestors” because tax protesters will make their

own arguments anyway). Also see Romond, Russell F.,

“Note: Income, Taxes and the Constitution: Why the

D.C. Circuit Court of Appeals Got It Right In Murphy

(," 12 Fordham J. of Corp. & Fin. Law, 587, 593

(2007) (Noting initial criticism by tax professors and

others “to denounce” Murphy I as “flawed,” “odd,”

“bizarre,” and “horrible.”).

However, after Murphy II there remains “confu-

sion and ambiguity,” and because the D.C. Circuit

really did not repudiate anything in Murphy I, the

unresolved issues will “fuel tax cases for years to

come.” Robert W. Wood, “Waiting to Exhale: Murphy

Part Deux and Taxing Damage Awards,” Vol. 116, No.

4, Tax Notes, 265 (July 23, 2007). Notably, other

commentators have published articles pointing out

that the D.C. Circuit was correct in Murph, I, while

other commentators have published articles taking

the opposite view. See, e.g., Wood, supra., Vol. 116,

No. 4, Tax Notes at 265; Romond, supra., 12 Fordham

J. of Corp. & Fin. Law, at 593; Steven T. O’Hara,

“Thinking Outside the Code,” Vol. 116, No. 6, Tax

Notes (Aug. 20, 2007); “Case Commentaries,” 8

Transactions: Tenn. J. Bus. L. 445, 474 (2007); Rose,

Elizabeth, “Murphy’s Mistakes: How the Circuit

Court Should Analyze Section 104(a)(2) Upon Rehear-

ing,” 60 Tax Law 533 (2007); Germain, Gregory L.,

“Taxing Emotional Injury Recoveries: A Critical

Analysis of Murphy v. Internal Revenue Service,” 60

Ark. L. Rev. 185 (2007); Fatino, John F., “The Tax

Treatment of Verdicts and Settlements Following the

Adoption of the Jobs Creation Act of 2004: Paradise

Found for the Employment Lawyer?” 27 N. Ill. U. L.

Rev. 1 (2006); Robert W. Wood, “Top Ten Reasons Why

‘Murphy’ Is My Favorite Tax Case,” Vol. 190, No. 1,

Daily Tax Report (BNA Oct. 2, 2006) (Murphy Is

“teachings may help generations of taxpayers.”).

Regardless, the widespread attention and commen-

tary that the Murphy case has generated indicates

the importance of the case and underscores why, more

than a decade after Section 104(a) was amended in

1996, there is no reason to delay review of the ques-

tions presented.

The Writ should be granted to resolve uncertain-

ties about whether personal injury damages are

taxable and decide, consistent with nearly 80 years of

case law, that the “make whole” personal injury

damages are not “income,” and thus are not taxable.

CONCLUSION

For the foregoing reasons, this Petition for a Writ

of Certiorari should be granted.

Respectfully submitted,

DavID K. COLAPINTO*

STEPHEN M. KOHN

KOHN, KOHN & COLAPINTO, LLP

3233 P Street, N.W.

Washington, D.C. 20007

(202) 342-6980

*Counsel of Record

App. 1

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 23, 2007 Decided July 3, 2007

No. 05-5139

MARRITA MURPHY AND

DANIEL J. LEVEILLE,

APPELLANTS

Vv.

INTERNAL REVENUE SERVICE AND

UNITED STATES OF AMERICA,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 038cv02414)

On Rehearing

David K. Colapinto argued the cause for appel-

lants. With him on the briefs were Stephen M. Kohn

and Michael D. Kohn.

Richard R. Renner was on the brief for amici curiae

No FEAR Coalition, et al. in support of appellants.

Gilbert S. Rothenberg, Attorney, U.S. Depart-

ment of Justice, argued the cause for appellees. With

him on the brief were Jeffrey A. Taylor, U.S. Attorney,

App. 2

Richard T. Morrison, Deputy Assistant Attorney

General, and Kenneth L. Greene and Francesca U.

Tamami, Attorneys. Bridget M. Rowan, Attorney,

entered an appearance.

Before: GINSBURG, Chief Judge, and ROGERS and

BrowWN, Circuit Judges.

Opinion for the Court filed by Chief Judge GINs-

BURG.

GINSBURG, Chief Judge: Marrita Murphy brought

this suit to recover income taxes she paid on the

compensatory damages for emotional distress and

loss of reputation she was awarded in an administra-

tive action she brought against her former employer.

Murphy contends that under § 104(a)(2) of the Inter-

nal Revenue Code (IRC), 26 U.S.C. § 104(aX2), her

award should have been excluded from her gross

income because it was compensation received “on

account of personal physical injuries or physical

sickness.” She also maintains that, in any event, her

award is not part of her gross income as defined by

§ 61 of the IRC, 26 U.S.C. §61. Finally, she argues

that taxing her award subjects her to an unappor-

tioned direct tax in violation of Article I, Section 9 of

the Constitution of the United States.

We reject Murphy’s argument in all aspects. We

hold, first, that Murphy’s compensation was not

“received ... on account of personal physical injuries”

excludable from gross income under § 104(a)(2).

Second, we conclude gross income as defined by § 61

includes compensatory damages for non-physical

App. 3

injuries. Third, we hold that a tax upon such damages

is within the Congress’s power to tax.

I. Background

In 1994 Marrita Leveille (now Murphy) filed a

complaint with the Department of Labor alleging that

her former employer, the New York Air National

Guard (NYANG), in violation of various whistle-

blower statutes, had “blacklisted” her and provided

unfavorable references to potential employers after

she had complained to state authorities of environ-

mental hazards on a NYANG airbase. The Secretary

of Labor determined the NYANG had unlawfully

discriminated and retaliated against Murphy, ordered

that any adverse references to the taxpayer in the

files of the Office of Personnel Management be with-

drawn, and remanded her case to an Administrative

Law Judge “for findings on compensatory damages.”

On remand Murphy submitted evidence that she

had suffered both mental and physical injuries as a

result of the NYANG’s blacklisting her. A psychologist

testified that Murphy had sustained both “somatic”

and “emotional” injuries, basing his conclusion in

part upon medical and dental records showing Mur-

phy had “bruxism,” or teeth grinding often associated

with stress, which may cause permanent tooth dam-

age. Noting that Murphy also suffered from other

“physical manifestations of stress” including “anxiety

attacks, shortness of breath, and dizziness,” and that

Murphy testified she “could not concentrate, stopped

App. 4

talking to friends, and no longer enjoyed ‘anything in

life,’” the ALJ recommended compensatory damages

totaling $70,000, of which $45,000 was for “past and

future emotional distress,” and $25,000 was for

“injury to [Murphy’s] vocational reputation” from

having been blacklisted. None of the award was for

lost wages or diminished earning capacity.

In 1999 the Department of Labor Administrative

Review Board affirmed the ALJ’s findings and rec-

ommendations. See Leveille v. N.Y. Air Nat'l Guard,

1999 WL 966951, at *2-*4 (Oct. 25, 1999). On her tax

return for 2000, Murphy included the $70,000 award

in her “gross income” pursuant to § 61 of the IRC. See

26 U.S.C. § 61(a) (“[G]ross income means all income

from whatever source derived”). As a result, she paid

$20,665 in taxes on the award.

Murphy later filed an amended return in which

she sought a refund of the $20,665 based upon

§ 104(aX2) of the IRC, which provides that “gross

income does not include ... damages ... received...

on account of personal physical injuries or physical

sickness.” In support of her amended return, Murphy

submitted copies of her dental and medical records.

Upon deciding Murphy had failed to demonstrate the

compensatory damages were attributable to “physical

injury” or “physical sickness,” the Internal Revenue

Service denied her request for a refund. Murphy

thereafter sued the IRS and the United States in the

district court.

App. 5

In her complaint Murphy sought a refund of the

$20,665, plus applicable interest, pursuant to the

Sixteenth Amendment to the Constitution of the

United States, along with declaratory and injunctive

relief against the IRS pursuant to the Administrative

Procedure Act and the Due Process Clause of the

Fifth Amendment. She argued her compensatory

award was in fact for “physical personal injuries” and

therefore excluded from gross income under

§ 104(a)(2). In the alternative Murphy asserted

taxing her award was unconstitutional because the

award was not “income” within the meaning of the

Sixteenth Amendment. The Government moved to

dismiss Murphy’s suit as to the IRS, contending the ©

Service was not a proper defendant, and for summary

judgment on all claims.

The district court denied the Government’s

motion to dismiss, holding that Murphy had the right

to bring an “action[ ] for declaratory judgments or...

[a] mandatory injunction” against an “agency by its

official title,” pursuant to § 703 of the APA, 5 U.S.C.

§ 703. Murphy v. IRS, 362 F. Supp. 2d 206, 211-12,

218 (2005). The court then rejected all of Murphy’s

claims on the merits and granted summary judgment

for the Government and the IRS. Jd.

Murphy appealed the judgment of the district

court with respect to her claims under § 104(a)(2) and

the Sixteenth Amendment. In Murphy v. IRS, 460

F.3d 79 (2006), we concluded Murphy’s award was not

exempt from taxation pursuant to § 104(a\(2), id. at

84, but also was not “income” within the meaning of

App. 6

the Sixteenth Amendment, id. at 92, and therefore

reversed the decision of the district court. The Gov-

ernment petitioned for rehearing en banc, arguing for

the first time that, even if Murphy’s award is not

income, there is no constitutional impediment to

taxing it because a tax on the award is not a direct

tax and is imposed uniformly. In view of the importance

of the issue thus belatedly raised, the panel sua sponte

vacated its judgment and reheard the case. See Con-

sumers Union of U.S., Inc. v. Fed. Power Comm’n, 510

F.2d 656, 662 (D.C. Cir. 1975) (“[Rlegarding the con-

tents of briefs on appeal, we may also consider points

not raised in the briefs or in oral argument. Our

willingness to do so rests on a balancing of considera-

tions of judicial orderliness and efficiency against the

need for the greatest possible accuracy in judicial

decisionmaking. The latter factor is of particular

weight when the decision affects the broad public

interest.”) (footnotes omitted); see also Eli Lilly & Co.

v. Home Ins. Co., 794 F:2d 710, 717 (D.C. Cir. 1986)

(“The rule in this circuit is that litigants must raise

their claims on their initial appeal and not in subse-

quent hearings following a remand. This is a specific

application of the general waiver rule, which bends

only in ‘exceptional circumstances, where injustice

might otherwise result.’”) (quoting Dist. of Columbia

v. Air Florida, Inc., 750 F.2d 1077, 1085 (D.C. Cir.

1984)) (citation omitted). In the present opinion, we

affirm the judgment of the district court based upon the

newly argued ground that Murphy’s award, even if it is

not income within the meaning of the Sixteenth

Amendment, is within the reach of the congressional

App. 7

power to tax under Article I, Section 8 of the Consti-

tution.

II. Analysis

We review the district court’s grant of summary

judgment de novo, Flynn v. R.C. Tile, 353 F.3d 953,

957 (D.C. Cir. 2004), bearing in mind that summary

judgment is appropriate only “if there is no genuine

issue as to any material fact and if the moving party

is entitled to judgment as a matter of law,” Anderson

vu. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).

Before addressing Murphy’s claims on their merits,

however, we must determine whether the district

court erred in holding the IRS was a proper defen-

dant.

A. The IRS as a Defendant

The Government contends the courts lack juris-

diction over Murphy’s claims against the IRS because

the Congress has not waived that agency’s immunity

from declaratory and injunctive actions pursuant to

28 U.S.C. § 2201(a) (courts may grant declaratory

relief “except with respect to Federal taxes”) and 26

U.S.C. § 7421(a) (“no suit for the purpose of restrain-

ing the assessment or collection of any tax shall be

maintained in any court by any person”); and insofar

as the Congress in 28 U.S.C. § 1346(aX1) has waived

immunity from civil actions seeking tax refunds, that

provision on its face applies to “civil action[s] against

the United States,” not against the IRS. In reply

App. 8

Murphy argues only that the Government forfeited

the issue of sovereign immunity because it did not

cross-appeal the district court’s denial of its motion to

dismiss. See FED. R. App. P. 4(a)(3). Notwithstanding

the Government’s failure to cross-appeal, however,

the court must address a question concerning its

jurisdiction. See Occidental Petroleum Corp. v. SEC,

873 F.2d 325, 328 (D.C. Cir. 1989) (“As a preliminary

matter ... we must address the question of our

jurisdiction to hear this appeal”).

Murphy and the district court are correct that

§ 703 of the APA does create a right of action for

equitable relief against a federal agency but, as the

Government correctly points out, the Congress has

preserved the immunity of the United States from

declaratory and injunctive relief with respect to all

tax controversies except those pertaining to the

classification of organizations under § 501(c) of the

IRC. See 28 U.S.C. § 2201(a); 26 U.S.C. § 7421(a). As

an agency of the Government, of course, the IRS

shares that immunity. See Settles v. U.S. Parole

Comm'n, 429 F.3d 1098, 1106 (D.C. Cir. 2005) (agency

“retains the immunity it is due as an arm of the

federal sovereign”). Insofar as the Congress in 28

U.S.C. § 1346(a)(1) has waived sovereign immunity

with respect to suits for tax refunds, that provision

specifically contemplates only actions against the

“United States.” Therefore, we hold the IRS, unlike

the United States, may not be sued eo nomine in this

case.

App. 9

B. Section 104(a)(2) of the IRC

Section 104(a) (“Compensation for injuries or

sickness”) provides that “gross income [under § 61 of

the IRC] does not include the amount of any damages

(other than punitive damages) received ... on ac-

count of personal physical injuries or physical sick-

ness.” 26 U.S.C. § 104(a)(2). Since 1996 it has further

provided that, for purposes of this exclusion, “emo-

tional distress shall not be treated as a physical

injury or physical sickness.” Id. § 104(a). The version

of § 104(aX2) in effect prior to 1996 had excluded

from gross income monies received in compensation

for “personal injuries or sickness,” which included

both physical and nonphysical injuries such as emo-

tional distress. Id. § 104(aX2) (1995); see United

States v. Burke, 504 U.S. 229, 235 n.6 (1992) (“[sec-

tion] 104(a)(2) in fact encompasses a broad range of

physical and nonphysical injuries to personal inter-

ests”). In Commissioner v. Schleier, 515 U.S. 323

(1995), the Supreme Court held that before a tax-

payer may exclude compensatory damages from gross

income pursuant to § 104(a)2), he must first demon-

strate that “the underlying cause of action giving rise

to the recovery [was] ‘based upon tort or tort type

rights.’” Jd. at 337. The taxpayer has the same bur-

den under the statute as amended. See, e.g., Cham-

berlain v. United States, 401 F.3d 335, 341 (5th Cir.

2005).

Murphy contends § 104(a)(2), even as amended,

excludes her particular award from gross income.

First, she asserts her award was “based upon .. . tort

App. 10

type rights” in the whistle-blower statutes the

NYANG violated - a position the Government does

not challenge. Second, she claims she was compen-

sated for “physical” injuries, which claim the Gov-

ernment does dispute.

Murphy points both to her psychologist’s testi-

mony that she had experienced “somatic” and “body”

injuries “as a result of NYANG’s blacklisting {her],”

and to the American Heritage Dictionary, which

defines “somatic” as “relating to, or affecting the body,

especially as distinguished from a body part, the

mind, or the environment.” Murphy further argues

the dental records she submitted to the IRS proved

she has suffered permanent damage to her teeth.

Citing Walters v. Mintec/International, 758 F.2d 73, 78

(3d Cir. 1985), and Payne v. Gen. Motors Corp., 731

F. Supp. 1465, 1474-75 (D. Kan. 1990), Murphy con-

tends that “substantial physical problems caused by

emotional distress are considered physical injuries or

physical sickness.”

Murphy further contends that neither § 104 of

the IRC nor the regulation issued thereunder “limits

the physical disability exclusion to a physical stimu-

lus.” In fact, as Murphy points out, the applicable

regulation, which provides that § 104(a)(2)”excludes

from gross income the amount of any damages re-

ceived (whether by suit or agreement) on account of

personal injuries or sickness,” 26 C.F.R. § 1.104-1(c),

does not distinguish between physical injuries stem-

ming from physical stimuli and those arising from

emotional trauma; rather, it tracks the pre-1996 text

App. 11

of § 104(a)(2), which the IRS agrees excluded from

gross income compensation both for physical and for

nonphysical injuries.

For its part, the Government argues Murphy’s

focus upon the word “physical” in § 104(aX(2) is mis-

placed; more important is the phrase “on account

of.” In O’Gilvie v. United States, 519 U.S. 79 (1996),

the Supreme Court read that phrase to require

a “strong[] causal connection,” thereby making

§ 104(a\(2)” applicable only to those personal injury

lawsuit damages that were awarded by reason of, or

because of, the personal injuries.” Jd. at 83. The

Court specifically rejected a “but-for” formulation in

favor of a “stronger causal connection.” Jd. at 82-83.

The Government therefore concludes Murphy must

demonstrate she was awarded damages “because of”

her physical injuries, which the Government claims

she has failed to do.

Indeed, as the Government points out, the ALJ

expressly recommended, and the Board expressly

awarded, compensatory damages “because of” Mur-

phy’s nonphysical injuries. The Board analyzed the

ALJ’s recommendation under the headings “Compen-

satory damage for emotional distress or mental

anguish” and “Compensatory damage award for

injury to professional reputation,” and noted such

damages compensate “not only for direct pecuniary

loss, but also for such harms as impairment of repu-

tation, personal humiliation, and mental anguish and

suffering.” Leveille, 1999 WL 966951 at *2. In describ-

ing the ALJ’s proposed award as “reasonable,” the

App. 12

Board stated Murphy was to receive “$45,000 for

mental pain and anguish” and “$25,000 for injury to

professional reputation.” Although Murphy may have

suffered from bruxism or other physical symptoms of

stress, the Board focused upon Murphy’s testimony

that she experienced “severe anxiety attacks, inabil-

ity to concentrate, a feeling that she no longer en-

joyed ‘anything in life,’ and marital conflict” and upon

her psychologist’s testimony about the “substantial

effect the negative references had on [Murphy].” /d.

at *3. The Board made no reference to her bruxism,

and acknowledged that “[a]Jny attempt to set a mone-

tary value on intangible damages such as mental

pain and anguish involves a subjective judgment,” id.

at *4, before concluding the ALJ’s recommendation

was reasonable. The Government therefore argues

“there was no direct causal link between the damages

award at issue and [Murphy’s] bruxism.”

Murphy responds that it is undisputed she

suffered both “somatic” and “emotional” injuries, and

the ALJ and Board expressly cited to the portion of

her psychologist’s testimony establishing that fact.

She contends the Board therefore relied upon her

physical injuries in determining her damages, mak-

ing those injuries a direct cause of her award in spite

of the Board’s labeling the award as one for emotional

distress.

Although the pre-1996 version of § 104(a)(2) was

at issue in O’Gilvie, the Court’s analysis of the phrase

“on account of,” which phrase was unchanged by the

1996 Amendments, remains controlling here. Murphy

App. 13

no doubt suffered from certain physical manifesta-

tions of emotional distress, but the record clearly

indicates the Board awarded her compensation only

“for mental pain and anguish” and “for injury to

professional reputation.” 7d. at *5. Although the

Board cited her psychologist, who had mentioned her

physical aliments, in support of Murphy’s “description

of her mental anguish,” we cannot say the Board,

notwithstanding its clear statements to the contrary,

actually awarded damages because of Murphy’s

bruxism and other physical manifestations of stress.

Id. at *3. At best — and this is doubtful — at best the

Board and the ALJ may have considered her physical

injuries indicative of the severity of the emotional

distress for which the damages were awarded, but

her physical injuries themselves were not the reason

for the award. The Board thus having left no room for

doubt about the grounds for her award, we conclude

Murphy’s damages were not “awarded by reason of, or

because of, ... [physical] personal injuries,” O’Gilvie,

519 U.S. at 83. Therefore, § 104(a)(2) does not permit

Murphy to exclude her award from gross income.*

* Insofar as compensation for nonphysical personal! injuries

appears to be excludable from gross income under 26 C.F.R.

§ 1.104-1, the regulation conflicts with the plain text of

§ 104(aX2); in these circumstances the statute clearly controls.

See Brown v. Gardner, 513 US. 115, 122 (1994) (finding “no

antidote to [a regulation’s] clear inconsistency with a statute”).

App. 14

C. Section 61 of the IRC

Murphy and the Government agree that for

Murphy’s award to be taxable, it must be part of her

“gross income” as defined by § 61(a) of the IRC, which

states in relevant part: “gross income means all

income from whatever source derived.” The Supreme

Court has interpreted the section broadly to extend to

“all economic gains not otherwise exempted.” Comm’r

v. Banks, 543 U.S. 426, 433 (2005); see also, e.g.,

James v. United States, 366 U.S. 213, 219 (1961)

(Section 61 encompasses “all accessions to wealth”)

(internal quotation mark omitted); Comm’r v. Glen-

shaw Glass Co., 348 U.S. 426, 430 (“the Court has

given a liberal construction to [“gross income”] in

recognition of the intention of Congress to tax all

gains except those specifically exempted”). “Gross

income” in § 61(a) is at least as broad as the meaning

of “incomes” in the Sixteenth Amendment.* See

Glenshaw Glass, 348 U.S. at 429, 432 n.11 (quoting

H.R.Rep. No. 83-1337, at A18 (1954), reprinted in

1954 U.S.C.C.A.N. 4017, 4155); Helvering v. Bruun,

309 U.S. 461, 468 (1940).

Murphy argues her award is not a gain or an

accession to wealth and therefore not part of gross

income. Noting the Supreme Court has long recog-

nized “the principle that a restoration of capital [ils

* The Sixteenth Amendment provides: “The Congress shall

have power to lay and collect taxes on incomes, from whatever

source derived, without apportionment among the several

States, and without regard to any census or enumeration.”

App. 15

not income; hence it [falls] outside the definition of

‘income’ upon which the law impose[s] a_ tax,”

O’Gilvie, 519 U.S. at 84; see, e.g., Doyle v. Mitchell

Bros. Co., 247 U.S. 179, 187-88 (1918); S. Pac. Co. v.

Lowe, 247 U.S. 330, 335 (1918), Murphy contends a

damage award for personal injuries — including

nonphysical injuries — should be viewed as a return of

a particular form of capital — “human capital,” as it

were. See Gary S. Becker, HUMAN CAPITAL (lst ed.

1964); Gary S. Becker, The Economic Way of Looking

at Life, Nobel Lecture (Dec. 9, 1992), in NOBEL LEC-

TURES IN ECONOMIC SCIENCES 1991-1995, at 43-45

(Torsten Persson ed., 1997). In her view, the Supreme

Court in Glenshaw Glass acknowledged the relevance

of the human capital concept for tax purposes. There,

in holding that punitive damages for personal injury

were “gross income” under the predecessor to § 61,

the Court stated:

The long history of ... holding personal in-

jury recoveries nontaxable on the theory that

they roughly correspond to a return of capi-

tal cannot support exemption of punitive

damages following injury to property....

Damages for personal injury are by defini-

tion compensatory only. Punitive damages,

on the other hand, cannot be considered a

restoration of capital for taxation purposes.

348 U.S. at 432 n.8. By implication, Murphy argues,

damages for personal injury are a “restoration of

capital.”

App. 16

As further support, Murphy cites various admin-

istrative rulings issued shortly after passage of the

Sixteenth Amendment that concluded recoveries from

personal injuries were not income, such as this 1918

Opinion of the Attorney General:

Without affirming that the human body is in

a technical sense the “capital” invested in an

accident policy, in a broad, natural sense the

proceeds of the policy do but substitute, so

far as they go, capital which is the source of

future periodical income. They merely take

the place of capital in human ability which

was destroyed by the accident. They are

therefore “capital” as distinguished from “in-

come” receipts.

31 Op. Att’y Gen. 304, 308; see T.D. 2747, 20 Treas.

Dec. Int. Rev. 457 (1918); Sol. Op. 132, I-1 C.B. 92, 93-

94 (1922) (“[M]oney received ... on account of ...

defamation of personal character ... does not consti-

tute income within the meaning of the sixteenth

amendment and the statutes enacted thereunder”).

She also cites a House Report on the bill that became

the Revenue Act of 1918. H.R.Rep. No. 65-767, at 9-10

(1918) (“Under the present law it is doubtful whether

amounts received ... as compensation for personal

injury ... are required to be included in gross in-

come”); see also Dotson v. United States, 87 F.3d 682,

685 (5th Cir. 1996) (concluding on basis of House

Report that the “Congress first enacted the personal

injury compensation exclusion ... when such pay-

ments were considered the return of human capital,

App. 17

and thus not constitutionally taxable ‘income’ under

the 16th amendment”).

Finally, Murphy argues her interpretation of § 61

is reflected in the common law of tort and the provi-

sions in various environmental statutes and Title VII

of the Civil Rights Act of 1964, all of which provide for

“make whole” relief. See, e.g., 42 U.S.C. §198la; 15

U.S.C. § 2622. If a recovery of damages designed to

“make whole” the plaintiff is taxable, she reasons,

then one who receives the award has not been made

whole after tax. Section 61 should not be read to

create a conflict between the tax code and the “make

whole” purpose of the various statutes.

The Government disputes Murphy’s interpreta-

tion on all fronts. First, noting “the definition [of

gross income in the IRC] extends broadly to all eco-

nomic gains,” Banks, 543 U.S. at 433, the Govern-

ment asserts Murphy “undeniably had economic gain

because she was better off financially after receiving

the damages award than she was prior to receiving

it.” Second, the Government argues that the case law

Murphy cites does not support the proposition that

the Congress lacks the power to tax as income recov-

eries for personal injuries. In its view, to the extent

the Supreme Court has addressed at all the taxability

of compensatory damages, see, e.g., O’Gilvie, 519 U.S.

at 86; Glenshaw Glass, 348 U.S. at 432 n.8, it was

merely articulating the Congress’s rationale at the

time for not taxing such damages, not the Court’s own

view whether such damages could constitutionally be

taxed.

App. 18

Third, the Government challenges the relevance

of the administrative rulings Murphy cites from

around the time the Sixteenth Amendment was

ratified; Treasury decisions dating from even closer to

the time of ratification treated damages received on

account of personal injury as income. See T.D. 2135,

17 Treas. Dec. Int. Rev. 39, 42 (1915); T.D. 2690, Reg.

No. 33 (Rev.), art. 4, 20 Treas. Dec. Int. Rev. 126, 130

(1918). Furthermore, administrative rulings from the

time suggest that, even if recoveries for physical

personal injuries were not considered part of income,

recoveries for nonphysical personal injuries were. See

Sol. Mem. 957, 1 C.B. 65 (1919) (damages for libel

subject to income tax); Sol. Mem. 1384, 2 C.B. 71

(1920) (recovery of damages from alienation of wife’s

affections not regarded as return of capital, hence

taxable). Although the Treasury changed its position

in 1922, see Sol. Op. 132, I-1 C.B. at 93-94, it did so

only after the Supreme Court’s decision in Eisner v.

Macomber, 252 U.S. 189 (1920), which the Court later

viewed as having established a definition of income

that “served a useful purpose [but] was not meant to

provide a touchstone to all future gross income ques-

tions.” Glenshaw Glass, 348 U.S. at 430-31. As for

Murphy’s contention that reading § 61 to include her

damages would be in tension with the common law

and various statutes providing for “make whole”

relief, the Government denies there is any tension

and suggests Murphy is trying to turn a disagree-

ment over tax policy into a constitutional issue.

App. 19

Finally, the Government argues that even if the

concept of human capital is built into § 61, Murphy’s

award is nonetheless taxable because Murphy has no

tax basis in her human capital. Under the IRC, a

taxpayer’s gain upon the disposition of property is the

difference between the “amount realized” from the

disposition and his basis in the property, 26 U.S.C.

§ 1001, defined as “the cost of such property,” id.

§ 1012, adjusted “for expenditures, receipts, losses, or

other items, properly chargeable to [a] capital ac-

count,” id. §1016(aX1). The Government asserts,

“The Code does not allow individuals to claim a basis

in their human capital”; accordingly, Murphy’s gain is

the full value of the award. See Roemer v. Comm’r,

716 F.2d 693, 696 n.2 (9th Cir. 1983) (“Since there is

no tax basis in a person’s health and other personal

interests, money received as compensation for an

injury to those interests might be considered a real-

ized accession to wealth”) (dictum).

Although Murphy and the Government focus

primarily upon whether Murphy’s award falls within

the definition of income first used in Glenshaw

Glass,* coming within that definition is not the only

* Murphy also suggests further insight into whether her

award is income can be gleaned from application of the “in heu of”

test. See Raytheon Prod. Corp. v. Comm’r, 144 F.2d 110, 113 (1st

Cir. 1944). As she acknowledges, however, we would still be

required to determine whether her award was compensatory or an

accession to wealth, which is the same analysis Glenshaw Glass

and its progeny demand. As discussed below, it is unnecessary to

(Continued on following page)

App. 20

way in which § 61(a) could be held to encompass her

award. Principles of statutory interpretation could

show § 61(a) includes Murphy’s award in her gross

income regardless whether it was an “accession to

wealth,” as Glenshaw Glass requires. For example, if

§ 61(a) were amended specifically to include in gross

income “$100,000 in addition to all other gross in-

come,” then that additional sum would be a part of

gross income under § 61 even though no actual gain

was associated with it. In other words, although the

“Congress cannot make a thing income which is not

so in fact,” Burk-Waggoner Oil Ass’n v. Hopkins, 269

U.S. 110, 114 (1925), it can label a thing income and

tax it, so long as it acts within its constitutional

authority, which includes not only the Sixteenth

Amendment but also Article I, Sections 8 and 9. See

Penn Mut. Indem. Co. v. Comm’r, 277 F.2d 16, 20 (3d

Cir. 1960) (“Congress has the power to impose taxes

generally, and if the particular imposition does not

run afoul of any constitutional restrictions then the

tax is lawful, call it what you will”) (footnote omitted).

Accordingly, rather than ask whether Murphy’s

award was an accession to her wealth, we go to the

heart of the matter, which is whether her award is

properly included within the definition of gross in-

come in § 6l(a), to wit, “all income from whatever

source derived.”

determine if there was an accession to wealth in this case; § 61

encompasses Murphy’s award regardless.

App. 21

Looking at § 61(a) by itself, one sees no indication

that it covers Murphy’s award unless the award is

“income” as defined by Glenshaw Glass and later

cases. Damages received for emotional distress are

not listed among the examples of income in § 61 and,

as Murphy points out, an ambiguity in the meaning

of a revenue-raising statute should be resolved in

favor of the taxpayer. See, e.g., Hassett v. Welch, 303

U.S. 303, 314 (1938); Gould v. Gould, 245 U.S. 151,

153 (1917); see also United Dominion Indus., Inc. v.

United States, 532 U.S. 822, 839 (2001) (Thomas, J.,

concurring); id. at 839 n.1 (Stevens, J., dissenting);

3A NORMAN J. SINGER, SUTHERLAND STATUTES &

STATUTORY CONSTRUCTION § 66:1 (6th ed. 2003). A

statute is to be read as a whole, however, see, e.g.,

Alaska Dep't of Envtl. Conservation v. EPA, 540 U.S.

461, 489 n.13 (2004), and reading § 61 in combination

with § 104(a)(2) of the Internal Revenue Code pre-

sents a very different picture — a picture so clear that

we have no occasion to apply the canon favoring the

interpretation of ambiguous revenue-raising statutes

in favor of the taxpayer.

As noted above, in 1996 the Congress amended

§ 104(a) to narrow the exclusion to amounts received

on account of “personal physical injuries or physical

sickness” from “personal injuries or sickness,” and

explicitly to provide that “emotional distress shall not

be treated as a physical injury or physical sickness,”

thus making clear that an award received on account

of emotional distress is not excluded from gross income

under § 104(aX2). Small Business Job Protection Act of

App. 22

1996, Pub. L. 104-188, § 1605, 110 Stat. 1755, 1838.

As this amendment, which narrows the exclusion,

would have no effect whatsoever if such damages

were not included within the ambit of § 61, and as we

must presume that “[w]hen Congress acts to amend a

statute, ...it intends its amendment to have real and

substantial effect,” Stone v. INS, 514 U.S. 386, 397

(1995), the 1996 amendment of §104(a) strongly

suggests § 61 should be read to include an award for

damages from nonphysical harms.* Although it is

unclear whether § 61 covered such an award before

1996, we need not address that question here; even if

the provision did not do so prior to 1996, the pre-

sumption indicates the Congress implicitly amended

§ 61 to cover such an award when it amended

§ 104(a).

We realize, of course, that amendments by impli-

cation, like repeals by implication, are disfavored.

United States v. Welden, 377 U.S. 95, 103 n.12 (1964);

Cheney R.R. Co. v. R.R. Ret. Bd., 50 F.3d 1071, 1078

(D.C. Cir. 1995). The Supreme Court has also noted,

however, that the “classic judicial task of reconciling

many laws enacted over time, and getting them to

‘make sense’ in combination, necessarily assumes

* As evidence the presumption is well-founded in this case,

we note the House Report accompanying the 1996 amendment

to § 104 explicitly presumes recoveries for nonphysical injuries

would be included in gross income: Part of the section explaining

the effect of the amendment is entitled “Include in income

damage recoveries for nonphysical injuries.” H.R. Rep. No. 104-

586, at 143-44 (1996), reprinted in 1996-3 C.B. 331, 481-82.

App. 23

that the implications of a statute may be altered by

the implications of a later statute.” United States uv.

Fausto, 484 U.S. 439, 453 (1988); see also FDA uv.

Brown & Williamson Tobacco Corp., 529 U.S. 120,

133 (2000) (“[T]he meaning of one statute may be

affected by other Acts, particularly where Congress

has spoken subsequently and more specifically to the

topic at hand”); Almendarez-Torres v. United States,

523 U.S. 224, 2387 (1998) (suggesting later enacted

laws “depend[ing] for their effectiveness upon clarifi-

cation, or a change in the meaning of an earlier

statute” provide a “forward looking legislative man-

date, guidance, or direct suggestion about how courts

should interpret the earlier provisions”); cf. Franklin

v. Gwinnett County Pub. Sch., 503 U.S. 60, 72-73

(1992) (amendment of Title IX abrogating States’

Eleventh Amendment immunity validated Court’s

prior holding that Title IX created implied right of

action); id. at 78 (Scalia, J., concurring in judgment)

(amendment to Title [IX was an “implicit acknowl-

edgment that damages are available”).

This “classic judicial task” is before us now. For

the 1996 amendment of § 104(a) to “make sense,”

gross income in § 61(a) must, and we therefore hold it

does, include an award for nonphysical damages such

as Murphy received, regardless whether the award is

an accession to wealth. Cf. Vermont Agency of Natural

Res. v. United States ex rel. Stevens, 529 U.S. 765, 786

& n.17 (2000) (determining meaning of “person” in

False Claims Act, which was originally enacted in

1863, based in part upon definition of “person” in

App. 24

Program Fraud Civil Remedies Act of 1986, which

was “designed to operate in tandem with the [earlier

Act]”).

D. The Congress’s Power to Tax

The taxing power of the Congress is established

by Article I, Section 8 of the Constitution: “The Con-

gress shall have power to lay and collect taxes, duties,

imposts and excises.” There are two limitations on

this power. First, as the same section goes on to

provide, “all duties, imposts and excises shall be

uniform throughout the United States.” Second, as

provided in Section 9 of that same Article, “No capita-

tion, or other direct, tax shall be laid, unless in pro-

portion to the census or enumeration herein before

directed to be taken.” See also U.S. CONST. art. I, § 2,

cl. 3 (“direct taxes shall be apportioned among the

several states which may be included within this

union, according to their respective numbers”).* We

now consider whether the tax laid upon Murphy’s

award violates either of these two constraints.

1. A Direct Tax?

Over the years, courts have considered numerous

claims that one or another nonapportioned tax is a

* Though it is unclear whether an income tax is a direct

tax, the Sixteenth Amendment definitively establishes that a tax

upon income is not required to be apportioned. See Stanton uv.

Baltic Mining Co., 240 U.S. 103, 112-13 (1916).

App. 25

direct tax and therefore unconstitutional. Although

these cases have not definitively marked the bound-

ary between taxes that must be apportioned and

taxes that need not be, see Bromley v. McCaughn, 280

U.S. 124, 136 (1929); Spreckels Sugar Ref. Co. uv.

McClain, 192 U.S. 397, 413 (1904) (dividing line

between “taxes that are direct and those which are to

be regarded simply as excises” is “often very difficult

to be expressed in words”), some characteristics of

each may be discerned.

Only three taxes are definitely known to be

direct: (1) a capitation, U.S. Const. art. I, § 9, (2) a

tax upon real property, and (3) a tax upon personal

property. See Fernandez v. Wiener, 326 U.S. 340, 352

(1945) (“Congress may tax real estate or chattels if

the tax is apportioned”); Pollock v. Farmers’ Loan &

Trust Co., 158 U.S. 601, 637 (1895) (Pollock ID.**

Such direct taxes are laid upon one’s “general owner-

ship of property,” Bromley, 280 U.S. at 136; see also

Flint v. Stone Tracy Co., 220 U.S. 107, 149 (1911), as

contrasted with excise taxes laid “upon a particular

use or enjoyment of property or the shifting from one

to another of any power or privilege incidental to the

ownership or enjoyment of property.” Fernandez, 326

U.S. at 352; see also Thomas v. United States, 192

U.S. 363, 370 (1904) (excises cover “duties imposed on

** Pollock II also held that a tax upon the income of real or

personal property is a direct tax. 158 U.S. at 637. Whether that

portion of Pollock remains good law is unclear. See Graves uv.

New York ex rel. O’Keefe, 306 U.S. 466, 480 (1939).

App. 26

importation, consumption, manufacture and sale of

certain commodities, privileges, particular business

transactions, vocations, occupations and the like”).

More specifically, excise taxes include, in addition to

taxes upon consumable items, see Patton v. Brady,

184 U.S. 608, 617-18 (1902), taxes upon the sale of

grain on an exchange, Nicol v. Ames, 173 U.S. 509,

519 (1899), the sale of corporate stock, Thomas, 192

U.S. at 371, doing business in corporate form, Flint,

220 U.S. at 151, gross receipts from the “business of

refining sugar,” Spreckels, 192 U.S. at 411, the trans-

fer of property at death, Knowlton v. Moore, 178 U.S.

41, 81-82 (1900), gifts, Bromley, 280 U.S. at 138, and

income from employment, see Pollock v. Farmers’

Loan & Trust Co., 157 U.S. 429, 579 (1895) (Pollock I

(citing Springer v. United States, 102 U.S. 586

(1881)).

Murphy and the amici supporting her argue the

dividing line between direct and indirect taxes is

based upon the ultimate incidence of the tax; if the

tax cannot be shifted to someone else, as a capitation

cannot, then it is a direct tax; but if the burden can be

passed along through a higher price, as a sales tax

upon a consumable good can be, then the ‘ax is

indirect. This, she argues, was the distinction drawn

when the Constitution was ratified. See Albert

Gallatin, A Sketch of the Finances of the United

States (1796), reprinted in 3 THE WRITINGS OF ALBERT

GALLATIN 74-75 (Henry Adams ed., Philadelphia, J.P.

Lippincott & Co. 1879) (“The most generally received

opinion ... is, that by direct taxes ... those are

App. 27

meant which are raised on the capital or revenue of

the people; by indirect, such as are raised on their

expense”); THE FEDERALIST No. 36, at 225 (Alexander

Hamilton) (Jacob E. Cooke ed., 1961) (“internal

taxes[ ] may be subdivided into those of the direct

and those of the indirect kind ... by which must be

understood duties and excises on articles of consump-

tion”). But see Gallatin, supra, at 74 (“(Direct tax] is

used, by different writers, and even by the same

writers, in different parts of their writings, in a

variety of senses, according to that view of the subject

they were taking”); EDWIN R.A. SELIGMAN, THE IN-

COME TAX 540 (photo. reprint 1970) (2d ed. 1914)

(“there are almost as many classifications of direct

and indirect taxes are there are authors”). Moreover,

the amici argue, this understanding of the distinction

explains the different restrictions imposed respec-

tively upon the power of the Congress to tax directly

(apportionment) and via excise (uniformity). Duties,

imposts, and excise taxes, which were expected to

constitute the bulk of the new federal government’s

revenue, see Erik M. Jensen, The Apportionment of

“Direct Taxes”: Are Consumption Taxes Constitu-

tional?, 97 CoLum. L. REv. 2334, 2382 (1997), have a

built-in safeguard against oppressively high rates:

Higher taxes result in higher prices and therefore

fewer sales and ultimately lower tax revenues. See

THE FEDERALIST No. 21, supra, at 134-35 (Alexander

Hamilton). Taxes that cannot be shifted, in contrast,

lack this self-regulating feature, and were therefore

constrained by the more stringent requirement of

apportionment. See id. at 135 (“In a branch of taxation

App. 28

where no limits to the discretion of the government

are to be found in the nature of things, the establish-

ment of a fixed rule ... may be attended with fewer

inconveniences than to leave that discretion alto-

gether at large”); see also Jensen, supra, at 2382-84.

Finally, the amici contend their understanding of

a direct tax was confirmed in Pollock IT, where the

Supreme Court noted that “the words ‘duties, im-

posts, and excises’ are put in antithesis to direct

taxes,” 158 U.S. at 622, for which it cited THE FEDER-

ALIST No. 36 (Hamilton). Pollock II, 158 U.S. at 624-

25. As it is clear that Murphy cannot shift her tax

burden to anyone else, per Murphy and the amici, it

must be a direct tax.

The Government, unsurprisingly, backs a differ-

ent approach; by its lights, only “taxes that are capa-

ble of apportionment in the first instance, specifically,

capitation taxes and taxes on land,” are direct taxes.

The Government maintains that this is how the term

was generally understood at the time. See Calvin H.

Johnson, Fixing the Constitutional Absurdity of the

Apportionment of Direct Tax, 21 CoNsT. Comm. 295,

314 (2004). Moreover, it suggests, this understanding

is more in line with the underlying purpose of the tax

and the apportionment clauses, which were drafted in

the intense light of experience under the Articles of

Confederation.

The Articles did not grant the Continental Con-

gress the power to raise revenue directly; it could only

requisition funds from the States. See ARTICLES OF

App. 29

CONFEDERATION art. VIII (1781); Bruce Ackerman,

Taxation and the Constitution, 99 CoL_um. L. REv. 1,

6-7 (1999). This led to problems when the States, as

they often did, refused to remit funds. See Calvin H.

Johnson, The Constitutional Meaning of “Apportion-

ment of Direct Taxes,” 80 Tax NoTEs 591, 593-94

(1998). The Constitution redressed this problem by

giving the new national government plenary taxing

power. See Ackerman, supra, at 7. In the Govern-

ment’s view, it therefore makes no sense to treat

“direct taxes” as encompassing taxes for which appor-

tionment is effectively impossible, because “the

Framers could not have intended to give Congress

plenary taxing power, on the one hand, and then so

limit that power by requiring apportionment for a

broad category of taxes, on the other.” This view is,

according to the Government, buttressed by evidence

that the purpose of the apportionment clauses was not

in fact to constrain the power to tax, but rather to

placate opponents of the compromise over representa-

tion of the slave states in the House, as embodied

in the Three-fifths Clause.* See Ackerman, supra, at

* Many Northern delegates were opposed to the three-fifths

compromise on the ground that if slaves were property, then

they should not count for the purpose of representation. Appor-

tionment effectively meant that if the slaveholding states were

to receive representation in the House for their slaves, then

because apportioned taxes must be allocated across states based

upon their representation, the slaveholding states would pay

more in taxes to the national government than they would have

if slaves were not counted at all in determining representation.

See Ackerman, supra, at 9. Apportionment was then limited to

(Continued on following page)

App. 30

10-11. See generally SELIGMAN, supra, at 548-55. As

the Government interprets the historical record, the

apportionment limitation was “more symbolic than

anything else: it appeased the anti-slavery sentiment

of the North and offered a practical advantage to the

South as long as the scope of direct taxes was lim-

ited.” See Ackerman, supra, at 10. But see Erik M.

Jensen, Taxation and the Constitution: How to Read

the Direct Tax Clauses, 15 J.L. & POL. 687, 704 (1999)

(“One of the reasons [the direct tax restriction]

worked as a compromise was that it had teeth — it

made direct taxes difficult to impose — and it had

teeth however slaves were counted”).

The Government’s view of the clauses is further

supported by the near contemporaneous decision of

the Supreme Court in Hylton v. United States, 3 U.S.

(3 Dall.) 171 (1796), holding that a national tax upon

carriages was not a direct tax, and thus not subject to

apportionment. Justices Chase and Iredell opined

that a “direct tax” was one that, unlike the carriage

tax, aS a practical matter could be apportioned among

the States, id. at 174 (Chase, J.); id. at 181 (Iredell,

J.), while Justice Paterson, noting the connection

between apportionment and slavery, condemned

apportionment as “radically wrong” and “not to be

extended by construction,” id. at 177-78.* As for

direct taxes lest it drive the Congress back to reliance upon

requisitions from the States. See id. at 9-10.

* The other Justice to hear the case, Wilson, J., had previ-

ously determined while sitting on the Circuit Court of Virginia,

(Continued on following page)

App. 31

Murphy’s reliance upon Pollock II, the Government

contends that although it has never been overruled,

“every aspect of its reasoning has been eroded,” see,

e.g., Stanton v. Baltic Mining Co., 240 U.S. 103, 112-

13 (1916), and notes that in Pollock II itself the Court

acknowledged that “taxation on business, privileges,

or employments has assumed the guise of an excise

tax,” 158 U.S. at 635. Pollock II, in the Government’s

view, is therefore too weak a reed to support Mur-

phy’s broad definition of “direct tax” and certainly

does not make “a tax on the conversion of human

capital into money . . . problematic.”

Murphy replies that the Government’s historical

analysis does not respond to the contemporaneous

sources she and the amici identified showing that

taxes imposed upon individuals are direct taxes. As

for Hylton, Murphy argues nothing in that decision

precludes her position; the Justices viewed the car-

riage tax there at issue as a tax upon an expense, see

3 U.S. (3 Dall.) at 175 (Chase, J.); see also id. at 180-

81 (Paterson, J.), which she agrees is not a direct tax.

See Pollock II, 158 U.S. at 626-27. To the extent

Hylton is inconsistent with her position, however,

Murphy contends her references to the Federalist are

more authoritative evidence of the Framers’ under-

standing of the term.

that the tax was not direct and so he did not write a full opinion.

Id. at 183-84.

App. 32

Murphy makes no attempt to reconcile her defi-

nition with the long line of cases identifying various

taxes as excise taxes, although several of them seem

to refute her position directly. In particular, we do not

see how a known excise, such as the estate tax, see,

e.g., New York Trust Co. v. Eisner, 256 U.S. 345, 349,

(1921); Knowlton, 178 U.S. at 81-83, or a tax upon

income from employment, see Pollock II, 158 U.S. at

635; Pollock I, 157 U.S. at 579; cf. Steward Mach. Co.

v. Davis, 301 U.S. 548, 580-81 (1937) (tax upon em-

ployers based upon wages paid to employees is an

excise), can be shifted to another person, absent

which they seem to be in irreconcilable conflict with

her position that a tax that cannot be shifted to

someone else is a direct tax. Though it could be

argued that the incidence of an estate tax is inevita-

bly shifted to the beneficiaries, we see at work none of

the restraint upon excessive taxation that Murphy

claims such shifting is supposed to provide; the tax is

triggered by an event, death, that cannot be shifted or

avoided. In any event, Knowlton addressed the argu-

ment that Pollock I and II made ability to shift the

hallmark of a direct tax, and rejected it. 178 U.S. at

81-82. Regardless what the original understanding

may have been, therefore, we are bound to follow the

Supreme Court, which has strongly intimated that

Murphy’. position is not the law.

That said, neither need we adopt the Govern-

ment’s position that direct taxes are only those capa-

ble of satisfying the constraint of apportionment. In

the abstract, such a constraint is no constraint at all;

App. 33

virtually any tax may be apportioned by establishing

different rates in different states. See Pollock II, 158

U.S. at 632-33. If the Government’s position is in-

stead that by “capable of apportionment” it means

“capable of apportionment in a manner that does not

unfairly tax some individuals more than others,” then

it is difficult to see how a land tax, which is widely

understood to be a direct tax, could be apportioned by

population without similarly imposing significantly

non-uniform rates. See Hylton, 3 U.S. (3 Dall.) at 178-

79 (Paterson, J.); Johnson, Constitutional Absurdity,

supra, at 328. But see, e.g., Hylton, 3 U.S. (3 Dall.) at

183 (Iredell, J.) (contending land tax is capable of

apportionment).

We find it more appropriate to analyze this case

based upon the precedents and therefore to ask

whether the tax laid upon Murphy’s award is more

akin, on the one hand, to a capitation or a tax upon

one’s ownership of property, or, on the other hand,

more like a tax upon a use of property, a privilege, an

activity, or a transaction, see Thomas, 192 U.S. at

370. Even if we assume one’s human capital should

be treated as personal property, it does not appear

that this tax is upon ownership; rather, as the Gov-

ernment points out, Murphy is taxed only after she

receives a compensatory award, which makes the tax

seem to be laid upon a transaction. See Tyler v.

United States, 281 U.S. 497, 502 (1930) (“A tax laid

upon the happening of an event, as distinguished

from its tangible fruits, is an indirect tax which

Congress, in respect of some events ... undoubtedly

App. 34

may impose”); Simmons v. United States, 308 F.2d

160, 166 (4th Cir. 1962) (tax upon receipt of money is

not a direct tax); cf: Penn Mut., 277 F.2d at 20. Mur-

phy’s situation seems akin to an involuntary conver-

sion of assets; she was forced to surrender some part

of her mental health and reputation in return for

monetary damages. Cf. 26 U.S.C. § 1033 (property

involuntarily converted into money is taxed to extent

of gain recognized).

At oral argument Murphy resisted this formula-

tion on the ground that the receipt of an award in lieu

of lost mental health or reputation is not a transac-

tion. This view is tenable, however, only if one de-

couples Murphy’s injury (emotional distress and lost

reputation) from her monetary award, but that is not

beneficial to Murphy’s cause, for then Murphy has

nothing to offset the obvious accession to her wealth,

which is taxable as income. Murphy also suggested at

oral argument that there was no transaction because

she did not profit. Whether she profited is irrelevant,

however, to whether a tax upon an award of damages

is a direct tax requiring apportionment; profit is

relevant only to whether, if it is a direct tax, it never-

theless need not be apportioned because the object of

the tax is income within the meaning of the Sixteenth

Amendment. Cf. Spreckels, 192 U.S. at 412-13 (tax

upon gross receipts associated with business of refin-

ing sugar not a direct tax); Penn Mut., 277 F.2d at 20

(tax upon gross receipts deemed valid indirect tax

despite taxpayer’s net loss).

App. 35

So we return to the question: Is a tax upon this

particular kind of transaction equivalent to a tax

upon a person or his property? Cf. Bromley, 280 U.S.

at 138 (assuming without deciding that a tax “levied

upon all the uses to which property may be put, or

upon the exercise of a single power indispensable to

the enjoyment of all others over it, would be in effect

a tax upon property”). Murphy did not receive her

damages pursuant to a business activity, cf. Flint, 220

U.S. at 151; Spreckels, 192 U.S. at 411, and we there-

fore do not view this tax as an excise under that

theory. See Stratton’s Independence, Ltd. v. Howbert,

231 U.S. 399, 414-15 (1913) (“The sale outright of a

mining property might be fairly described as a mere

conversion of the capital from land into money”). On

the other hand, as noted above, the Supreme Court

several times has held a tax not related to business

activity is nonetheless an excise. And the tax at issue

here is similar to those.

Bromley, in which a gift tax was deemed an

excise, is particularly instructive: The Court noted it

was “a tax laid only upon the exercise of a single one

of those powers incident to ownership,” 280 U.S. at

136, which distinguished it from “a tax which falls

upon the owner merely because he is owner, regard-

less of the use or disposition made of his property,” id.

at 137. A gift is the functional equivalent of a below-

market sale; it therefore stands to reason that if, as

Bromley holds, a gift tax, or a tax upon a below-

market sale, is a tax laid not upon ownership but

upon the exercise of a power “incident to ownership,”

App. 36

then a tax upon the sale of property at fair market

value is similarly laid upon an incidental power and

not upon ownership, and hence is an excise. There-

fore, even if we were to accept Murphy’s argument

that the human capital concept is reflected in the

Sixteenth Amendment, a tax upon the involuntary

conversion of that capital would still be an excise and

not subject to the requirement of apportionment. But

see Nicol, 173 U.S. at 521 (indicating pre-Bromley

that tax upon “every sale made in any place ... is

really and practically upon property”).

In any event, even if a tax upon the sale of prop-

erty is a direct tax upon the property itself, we do not

believe Murphy’s situation involves a tax “upon the

sale itself, considered separate and apart from the

place and the circumstances of the sale.” Jd. at 520.

Instead, as in Nicol, this tax is more akin to “a duty

upon the facilities made use of and actually employed

in the transaction.” Jd. at 519. To be sure, the facility

used in Nicol was a commodities exchange whereas

the facility used by Murphy was the legal system, but

that hardly seems a significant distinction. The tax

may be laid upon the proceeds received when one

vindicates a statutory right, but the right is nonethe-

less a “creature of law,” which Knowlton identifies as

a “privilege” taxable by excise. 178 U.S. at 55 (right to

take property by inheritance is granted by law and

therefore taxable as upon a privilege);* cf. Steward,

* For the same reason, we infer from Knowlton that a tax

laid upon an amount received in settlement of a suit for a

(Continued on following page)

App. 37

301 U.S. at 580-81 (“[N]atural rights, so called, are as

much subject to taxation as rights of less importance.

An excise is not limited to vocations or activities that

may be prohibited altogether. ... It extends to voca-

tions or activities pursued as of common right.”)

(footnote omitted).

2. Uniformity

The Congress may not implement an excise tax

that is not “uniform throughout the United States.”

U.S. Const. art. I, § 8, cl. 1. A “tax is uniform when it

operates with the same force and effect in every place

where the subject of it is found.” United States uv.

Ptasynski, 462 U.S. 74, 82 (1983) (internal quotation

marks omitted); see also Knowlton, 178 U.S. at 84-86.

The tax laid upon an award of damages for a non-

physical personal injury operates with “the same

force and effect” throughout the United States and

therefore satisfies the requirement of uniformity.

III. Conclusion

For the foregoing reasons, we conclude (1) Mur-

phy’s compensatory award was not received on ac-

count of personal physical injuries, and therefore is

not exempt from taxation pursuant to § 104(aX(2) of

the IRC; (2) the award is part of her “gross income,”

personal nonphysical injury would also be an excise. See 178

U.S. at 55.

App. 38

as defined by § 61 of the IRC; and (3) the tax upon the

award is an excise and not a direct tax subject to the

apportionment requirement of Article I, Section 9 of

the Constitution. The tax is uniform throughout the

United States and therefore passes constitutional

muster. The judgment of the district court is accord-

ingly

Affirmed.

App. 39

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 24, 2006 Decided August 22, 2006

No. 05-5139

MARRITA MURPHY AND

DANIEL J. LEVEILLE,

APPELLANTS

INTERNAL REVENUE SERVICE AND

UNITED STATES OF AMERICA,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 03cv02414)

David K. Colapinto argued the cause for appel-

lants. With him on the briefs was Stephen M. Kohn.

Colin M. Dunham was on the brief for amicus

curiae No Fear Coalition in support of appellant.

John A. Nolet, Attorney, U.S. Department of

Justice, argued the cause for appellees. With him on

the brief were Kenneth L. Wainstein, U.S. Attorney,

and Kenneth L. Greene, Attorney. Bridget M. Rowan,

Attorney, entered an appearance.

App. 40

Before: GINSBURG, Chief Judge, and ROGERS and

Brown, Circuit Judges.

Opinion for the Court filed by Chief Judge GINs-

BURG.

GINSBURG, Chief Judge. Marrita Murphy brought

this suit to recover income taxes she paid on the

compensatory damages for emotional distress and

loss of reputation she was awarded in an administra-

tive action she brought against her former employer.

Murphy contends that under § 104(a)(2) of the Inter-

nal Revenue Code (IRC), 26 U.S.C. § 104(a)(2), her

award should have been excluded from her gross

income because it was compensation received “on

account of personal physical injuries or physical

sickness.” In the alternative, she maintains § 104(a\2)

is unconstitutional insofar as it fails to exclude from

gross income revenue that is not “income” within the

meaning of the Sixteenth Amendment to the Consti-

tution of the United States.

We hold, first, that Murphy’s compensation was

not “received ... on account of personal physical inju-

ries” excludable from gross income under § 104(a)(2).

We agree with the taxpayer, however, that § 104(a)(2)

is unconstitutional as applied to her award because

compensation for a non-physical personal injury is

not income under the Sixteenth Amendment if, as

here, it is unrelated to lost wages or earnings.

App. 41

I. Background

In 1994 Marrita Leveille (now Murphy) filed a

complaint with the Department of Labor alleging that

her former emplover, the New York Air National

Guard (NYANG), in violation of various whistle-

blower statutes, had “blacklisted” her and provided

unfavorable references to potential employers after

she had complained to state authorities of environ-

mental hazards on a NYANG airbase. The Secretary

of Labor determined the NYANG had unlawfully

discriminated and retaliated against Murphy, ordered

that any adverse employment references to the

taxpayer in Office of Personnel Management files be

withdrawn, and remanded her case to an Administra-

tive Law Judge “for findings on compensatory dam-

ages.”

On remand Murphy submitted evidence that she

had suffered both mental and physical injuries as a

result of the NYANG’s blacklisting her. A physician

testified Murphy had sustained “somatic” and “emo-

tional” injuries. One such injury was “bruxism,” or

teeth grinding often associated with stress, which

may cause permanent tooth damage. Upon finding

Murphy had also suffered from other “physical mani-

festations of stress” including “anxiety attacks, short-

ness of breath, and dizziness,” the ALJ recommended

compensatory damages totaling $70,000, of which

$45,000 was for “emotional distress or mental an-

guish,” and $25,000 was for “injury to professional

reputation” from having been blacklisted. None of the

App. 42

award was for lost wages or diminished earning

capacity.

In 1999 the Department of Labor Administrative

Review Board affirmed the ALJ’s findings and rec-

ommendations. See Leveille v. N.Y. Air Natl Guard,

1999 WL 966951, at *2-*4 (Oct. 25, 1999). On her tax

return for 2000, Murphy included the $70,000 award

in her “gross income” pursuant to § 61 of the IRC. See

26 U.S.C. § 61(a) (“[G]ross income means all income

from whatever source derived”). As a result, she paid

$20,665 in taxes on the award.

Murphy later filed an amended return in which

she sought a refund of the $20,665 based upon

§ 104(a)(2) of the IRC, which provides that “gross

income does not include... damages ... received...

on account of personal physical injuries or physical

sickness.” In support of her amended return, Murphy

submitted copies of her dental and medical records.

Upon deciding Murphy had failed to demonstrate the

compensatory damages were attributable to “physical

injury” or “physical sickness,” the Internal Revenue

Service denied her request for a refund. Murphy

thereafter sued the IRS and the United States in the

district court.

In her complaint Murphy sought a refund of the

$20,665, plus applicable interest, pursuant to the

Sixteenth Amendment, along with declaratory and

injunctive relief against the IRS pursuant to the

Administrative Procedure Act and the Due Process

Clause of the Fifth Amendment to the Constitution of

App. 43

the United States. She argued her compensatory

award was in fact for “physical personal injuries” and

therefore excluded from gross income under

§ 104(a)(2). In the alternative Murphy asserted

§ 104(a)(2) as applied to her award was unconstitu-

tional because the award was not “income” within the

meaning of the Sixteenth Amendment. The Govern-

ment moved to dismiss Murphy’s suit as to the IRS,

contending the Service was not a proper defendant,

and for summary judgment on all claims.

The district court denied the Government’s

motion to dismiss, holding that Murphy had the right

to bring an “action[] for declaratory judgments or...

[a] mandatory injunction” against an “agency by its

official title,” pursuant to § 703 of the APA, 5 U.S.C.

§ 703. Murphy v. IRS, 362 F.Supp. 2d 206, 211-12,

218 (2005). The court then rejected all Murphy’s

claims on the merits and granted summary judgment

for the Government and the IRS. Jd. at 218. Murphy

now appeals the judgment of the district court with

respect to her claims under § 104(a\(2) and the Six-

teenth Amendment.

II. Analysis

We review the district court’s grant of summary

judgment de novo, Flynn v. R.C. Tile, 353 F.3d 953,

957 (2004), bearing in mind that summary judgment

is appropriate only “if there is no genuine issue as to

any material fact and if the moving party is entitled

to judgment as a matter of law,” Anderson v. Liberty

App. 44

Lobby, Inc., 477 U.S. 242, 250 (1986). Before address-

ing Murphy’s claims on their merits, however, we

must determine whether the district court erred in

holding the IRS was a proper defendant.

A. The IRS as a Defendant

The Government contends the courts lack juris-

diction over Murphy’s claims against the IRS because

the Congress has not waived that agency’s immunity

from declaratory and injunction actions pursuant to

28 U.S.C. § 2201(a) (Courts may grant declaratory

relief “except with respect to Federal taxes”) and 26

U.S.C. § 7421(a) (“no suit for the purpose of restrain-

ing the assessment or collection of any tax shall be

maintained in any court by any person”); and insofar

as the Government has waived immunity for civil

actions seeking tax refunds under 28 U.S.C

§ 1346(a)(1), that provision on its face applies to “civil

action(s] against the United States,” not against the

IRS. In reply Murphy argues only that the Govern-

ment forfeited the issue of sovereign immunity be-

cause it did not cross-appeal the district court’s denial

of its motion to dismiss. See Fed. R. App. P. 4(a)(3).

Notwithstanding the Government’s failure to cross-

appeal, however, the court must address a question

concerning its jurisdiction. See Occidental Petroleum

Corp. v. SEC, 873 F.2d 325, 328 (D.C. Cir. 1989) (“As

a preliminary matter ... we must address the ques-

tion of our jurisdiction to hear this appeal”).

App. 45

Murphy and the district court are correct that

§ 703 of the APA does create a right of action for

equitable relief against a federal agency but, as the

Government correctly points out, the Congress has

preserved the immunity of the United States from

declaratory and injunctive relief with respect to all

tax controversies except those pertaining to the

classification of organizations under § 501(c) of the

IRC. See 28 U.S.C. § 2201(a); 26 U.S.C. § 7421(a). As

an agency of the Government, of course, the IRS

shares in that immunity. See Settles v. U.S. Parole

Comm'n, 429 F.3d 1098, 1106 (D.C. Cir. 2005) (agency

“retains the immunity it is due as an arm of the

federal sovereign”). Insofar as the Congress has

waived sovereign immunity with respect to suits for

tax refunds under 28 U.S.C. § 1346(aX(1), that provi-

sion specifically contemplates only actions against the

“United States.” Therefore, we hold the IRS, unlike

the United States, may not be sued eo nomine in this

case.

B. Section 104(a)(2) of the IRC

Section 104(a) (“Compensation for injuries or

sickness”) provides that “gross income [under § 61 of

the IRC] does not include the amount of any damages

(other than punitive damages) received ... on ac-

count of personal physical injuries or physical sick-

ness.” 26 U.S.C. § 104(a)(2). Since 1996 it has further

provided that, for purposes of this exclusion, “emo-

tional distress shall not be treated as a physical

injury or physical sickness.” Jd. § 104(a). The version

App. 46

of § 104(a\(2) in effect prior to 1996 had excluded

from gross income monies received in compensation

for “personal injuries or sickness,” which included

both physical and nonphysical injuries such as emo-

tional distress. Id. § 104(a)(2) (1995); see United States

v. Burke, 504 U.S. 229, 235 n.6 (1992) (“§ 104(a)(2) in

fact encompasses a broad range of physical and

nonphysical injuries to personal interests”). In Com-

missioner v. Schleier, 515 U.S. 323 (1995), the Su-

preme Court held that before a taxpayer may exclude

compensatory damages from gross income pursuant

to § 104(aX(2), he must first demonstrate that “the

underlying cause of action giving rise to the recovery

[was] ‘based upon tort or tort type rights.’” Jd. at 337.

The taxpayer has the same burden under the statute

as amended. See, e.g., Chamberlain v. United States,

401 F.3d 335, 341 (5th Cir. 2005).

Murphy contends § 104(aX2), even as amended,

excludes her particular award from gross income.

First, she asserts her award was “based upon ... tort

type rights” in the whistle-blower statutes the

NYANG violated — a position the Government does

not challenge. Second, she claims she was compen-

sated for “physical” injuries, which claim the Gov-

ernment does dispute.

Murphy points both to her physician’s testimony

that she had experienced “somatic” and “body” inju-

ries “as a result of NYANGQ’s blacklisting fher],” and

to the American Heritage Dictionary, which defines

“somatic” as “relating to, or affecting the body, espe-

cially as distinguished from a body part, the mind, or

App. 47

the environment.” Murphy further argues the dental

records she submitted to the IRS proved she has

suffered permanent damage to her teeth. Citing

Walters v. Mintec/International, 758 F.2d 73, 78 (3d

Cir. 1985), and Payne v. General Motors Corp., 731

F.Supp. 1465, 1474-75 (D. Kan. 1990), Murphy

contends that “substantial physical problems caused

by emotional distress are considered physical injuries

or physical sickness.”

Murphy further contends that neither § 104 of

the IRC nor the regulation issued thereunder “limits

the physical disability exclusion to a physical stimu-

lus.” In fact, as Murphy points out, the applicable

regulation, which provides that § 104(a)(2) “excludes

from gross income the amount of any damages re-

ceived (whether by suit or agreement) on account of

personal injuries or sickness,” 26 C.F.R. § 1.104-1(c),

does not distinguish between physical injuries stem-

ming from physical stimuli and those arising from

emotional trauma; rather, it tracks the pre-1996 text

of § 104(a)(2), which the IRS agrees excluded from

gross income compensation both for physical and for

nonphysical injuries.

For its part, the Government argues Murphy’s

exclusive focus upon the word “physical” in § 104(aX2)

is misplaced; more important is the phrase “on ac-

count of.” In O’Gilvie v. United States, 519 U.S. 79

(1996), the Supreme Court read that phrase to re-

quire a “strong [] causal connection,” thereby making

§ 104(aX2) “applicable only to those personal injury

lawsuit damages that were awarded by reason of, or

App. 48

because of, the personal injuries.” Jd. at 83. The

Court specifically rejected a “but-for” formulation in

favor of a “stronger causal connection.” Jd. at 82-83.

The Government therefore concludes Murphy must

demonstrate she was awarded damages “because of”

her physical injuries, which the Government claims

she has failed to do.

Indeed, as the Government points out, the ALJ

expressly recommended, and the Board expressly

awarded, compensatory damages “because of” Mur-

phy’s nonphysical injuries. The Board analyzed the

ALJ’s recommendation under the headings “Compen-

satory damage for emotional distress or mental

anguish” and “Compensatory damage award for

injury to professional reputation.” In describing the

ALJ’s proposed award as “reasonable,” the Board

stated Murphy was to receive “$45,000 for mental

pain and anguish” and “$25,000 for injury to profes-

sional reputation.” That Murphy suffered from brux-

ism or other physical symptoms of stress is of no

moment, the Government argues, because “the Board

awarded her damages, not to compensate [her for

that] particular injurly], but explicitly with respect to

nonphysical injuries.”

In reply Murphy merely reiterates that she

suffered “physical” injuries. She does not address the

Government's point that she received her award “on

account of” her mental distress and reputational loss,

not her bruxism or other physical symptoms.

App. 49

Murphy’s failure to address the Government’s

position is telling. Although the pre-1996 version of

§ 104(a)(2) was at issue in O’Gilvie, the Court’s analy-

sis of the phrase “on account of,” which phrase was

unchanged by the 1996 Amendments, remains con-

trolling here. Murphy no doubt suffered from certain

physical manifestations of emotional distress, but the

record clearly indicates the Board awarded her com-

pensation only “for mental pain and anguish” and “for

injury to professional reputation.” Leveille, 1999 WL

966951, at *5. The Board thus having left no room for

doubt about the grounds for her award, we conclude

Murphy’s damages were not “awarded by reason of, or

because of, ... [physical] personal injuries,” O’Gilvie,

519 U.S. at 83. Therefore, § 104(a)(2) does not permit

Murphy to exclude her award from gross income.*

But is that constitutional?

C. The Sixteenth Amendment

The Government of the United States is a gov-

ernment of limited powers: “Every law enacted by

Congress must be based on one or more of its powers

enumerated in the Constitution.” United States v.

Morrison, 529 U.S. 598, 607 (2000). The constitutional

* Insofar as compensation for nonphysical personal injuries

appears to be excludable from gross income under 26 C.F.R.

§ 1.104-1, the regulation conflicts with the plain text of § 104(aX2);

in these circumstances the statute clearly controls. See Brown v.

Gardner, 513 U.S. 115, 122 (1994) (finding “no antidote to [a

regulaticn’s} clear inconsistency with a statute”).

App. 50

power of the Congress to tax income is provided in

the Sixteenth Amendment, ratified in 1913:

The Congress shall have power to lay and

collect taxes on incomes, from whatever

source derived, without apportionment among

the several States, and without regard to any

census or enumeration.

The Supreme Court has held the word “incomes” in

the Amendment and the phrase “gross income” in

§ 6l(a) of the IRC are coextensive. See Helvering v.

Clifford, 309 U.S. 331, 334 (1940) (§ 61 represents the

“full measure of [the Congress’s] taxing power”).

When it first construed those terms in Lisner v.

Macomber, 252 U.S. 189, 207 (1920), the Supreme

Court held the taxing power extended to any “gain

derived from capital, from labor, or from both com-

bined.” Later, after explaining that Hisner was not

“meant to provide a touchstone to all future gross

income questions,” the Court added that under the

IRC — and, by implication, under the Sixteenth

Amendment — the Congress may “tax all gains” or

“accessions to wealth.” Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 430-31 (1955).

Murphy argues that,- being neither a gain nor an

accession to wealth, her award is not income and

§ 104(a)(2) is therefore unconstitutional insofar as it

would make the award taxable as income. Broad

though the power granted in the Sixteenth Amend-

ment is, the Supreme Court, as Murphy points out,

has long recognized “the principle that a restoration

of capital [i]s not income; hence it [falls] outside the

App. 51

definition of ‘income’ upon which the law impose[s] a

tax.” O’Gilvie, 519 U.S. at 84; see, e.g., Doyle v.

Mitchell Bros. Co., 247 U.S. 179, 187-88 (1918); S.

Pac. Co. v. Lowe, 247 U.S. 330, 335 (1918) (return of

capital not income under IRC or Sixteenth Amend-

ment). By analogy, Murphy contends a damage award

for personal injuries — including nonphysical injuries

— is not income but simply a return of capital — “hu-

man capital,” as it were. See Gary S. Becker, Human

Capital (1st ed.1964); Gary S. Becker, “The Economic

Way of Looking at Life,” 43-45 (Nobel Lecture, Dec. 9,

1992).

According to Murphy, the Supreme Court read

the concept of “human capital” into the IRC in Glen-

shaw Glass. There, in holding that punitive damages

for personal injury were “gross income” under the

predecessor to § 61, the Court stated:

The long history of ... holding personal in-

jury recoveries nontaxable on the theory that

they roughly correspond to a return of capi-

tal cannot support exemption of punitive

damages following injury to property....

Damages for personal injury are by defini-

tion compensatory only. Punitive damages,

on the other hand, cannot be considered a

restoration of capital for taxation purposes.

348 U.S. at 432 n.8. In Murphy’s view, the Court

thereby made clear that the recovery of compensatory

damages for a “personal injury” — of whatever type —

is analogous to a “return of capital” and therefore is

App. 52

not income under the IRC or the Sixteenth Amend-

ment.

In support of her reading of the caselaw, Murphy

contends the IRC, as drafted shortly after “passage of

the [Sixteenth] Amendment demonstrates that com-

pensatory damages designed to make a person whole

are excluded from the definition of ‘income.’” She

focuses upon the-three sources the Supreme Court

quoted in O’Gilvie, 519 U.S. at 84-87, to wit, an

Opinion of the Attorney General, a Decision of the

Department of the Treasury, and a Report issued by

the Ways and Means Committee of the House of

Representatives — each of which predates the first

version of § 104(aX(2), namely, § 213(b\6) of the

Revenue Act of 1918. See 40 Stat. 1057, 1066 (1919).

In an opinion rendered to the Secretary of the

Treasury on the question whether proceeds from an

accident insurance policy were income under the IRC

as it stood prior to the 1918 Act, the Attorney General

stated:

Without affirming that the human body is in

a technical sense the “capital” invested in an

accident policy, in a broad, natural sense the

proceeds of the policy do but substitute, so

far as they go, capital which is the source of

future periodical income. They merely take

the place of capital in human ability which

was destroyed by the accident. They are

therefore “capital” as distinguished from “in-

come” receipts.

App. 53

31 Op. Att’y. Gen. 304, 308 (1918). In a revenue

ruling, the Department of the Treasury then reasoned

that

upon similar principles ... an amount re-

ceived by an individual as the result of a suit

or compromise for personal injuries sus-

tained ... through accident is not income

[that is] taxable.

T.D. 2747, 20 Treas. Dec. Int. Rev. 457 (1918).

As for the House Report on the bill that became

the Revenue Act of 1918, it states:

Under the present law it is doubtful whether

amounts received through accident or health

insurance, or under workmen’s compensation

acts, as compensation for personal injury or

sickness, and damages received on account of

such injuries or sickness, are required to be

included in gross income.

H.R.Rep. No. 65-767, at 9-10 (1918). Thereafter, the

Congress passed the Act, § 213(b)(6) of which ex-

cluded from gross income “[almounts_ received,

through accident or health insurance or under work-

man’s compensation acts, as compensation for per-

sonal injuries or sickness, plus the amount of any

damages received whether by suit or agreement on

account of such injuries or sickness.” 40 Stat. 1057,

1066 (1919).

Because the 1918 Act followed soon after ratification

of the Sixteenth Amendment, Murphy contends that

the statute reflects the meaning of the Amendment as

App. 54

it would have been understood by those who framed,

adopted, and ratified it. She observes that in Dotson

v. United States, 87 F.3d 682 (5th Cir. 1996), the court

concluded upon the basis of the House Report that

the “Congress first enacted the personal injury com-

pensation exclusion ... when such payments were

considered the return of human capital, and thus not

constitutionally taxable ‘income’ under the 16th

amendment.” Id. at 685.

The Government attacks Murphy’s constitutional

argument on all fronts. First, invoking the presump-

tion that the Congress enacts laws within its consti-

tutional limits, see Rust v. Sullivan, 500 U.S. 173, 191

(1991), the Government asserts at the outset that

§ 104(a)(2) is constitutional even if, as amended in

1996, it does permit the taxation of compensatory

damages. Indeed, the Government goes further,

contending the Congress could, consistent with the

Sixteenth Amendment, repeal § 104(a)(2) altogether

and tax compensation even for physical injuries.

Noting that the power of the Congress to tax

income “extends broadly to all economic gains,”

Commissioner v. Banks, 543 U.S. 426, 433 (2005), the

Government next maintains that compensatory

damages “plainly constitute economic gain, for the

taxpayer unquestionably has more money after

receiving the damages than she had prior to receipt of

the award.” On that basis, the Government contends

Murphy’s reliance upon footnote eight of Glenshaw

Glass is misplaced; merely because the Congress “has

historically excluded personal injury recoveries from

App. 55

gross income, based on the make-whole or restora-

tion-of-human-capital theory, does not mean that

such an exclusion is mandated by the Sixteenth

Amendment.” Because the Supreme Court in Glen-

shaw Glass was construing “gross income” with

reference only to the IRC, the Government argues

footnote eight addresses only a now abandoned

congressional policy, not the outer limit of the Six-

teenth Amendment.

According to the Government, the same is true of

the 1918 Act and the interpretive rulings that pre-

ceded it. Although the Government acknowledges

that the dictum in Dotson, 87 F.3d at 685, accords

with Murphy’s position, the Government notes the

court there relied solely upon the House Report.

Because the House Report merely states “it is doubt-

ful whether ... compensation for personal injury or

sickness ... [is] required to be included in gross

income,” H.R. Rep. No. 65-767, at 9-10 (1918), the

Government observes that the “report simply does not

establish that Congress believed taxing compensatory

personal injury damages would be unconstitutional.”

In addition, the Government challenges the

coherence of Murphy’s analogy between a return of

“human capital or well-being” and a return of “finan-

cial capital,” the latter of which it acknowledges does

not constitute income under the Sixteenth Amend-

ment. See Doyle, 247 U.S. at 187; S. Pac. Co., 247

U.S. at 335. The Government first observes that

financial capital, like all property, has a “basis,”

defined by the IRC as “the cost of such property,” 26

App. 56

U.S.C. § 1012, adjusted “for expenditures, receipts,

losses, or other items, properly chargeable to [a]

capital account,” id. § 1016(aX1); thus, when a tax-

payer sells property, his income is “the excess of the

amount realized therefrom over the adjusted basis.”

Id. § 1001(a). The Government then observes that

“(blecause people do not pay cash or its equivalent to

acquire their well-being, they have no basis in it for

purposes of measuring a gain (or loss) upon the

realization of compensatory damages.” Nor is there

any corresponding theory of “human depreciation,”

which would permit “an offsetting deduction for the

exhaustion of the taxpayer’s physical prowess and

mental agility.” Boris I. Bittker & Lawrence Lokken,

Federal Taxation of Income, Estates, and Gifts {| 5.6

(2003). Finally, the Government points to the Ninth

Circuit’s dictum in Roemer v. Commissioner, 716 F.2d

693 (1983), suggesting that “[slince there is no tax

basis in a person’s health and other personal inter-

ests, money received as compensation for an injury to

those interests might be considered a realized acces-

sion to wealth.” Jd. at 696 n.2.

At the outset, we reject the Government’s breath-

takingly expansive claim of congressional power

under the Sixteenth Amendment — upon which it

founds the more far-reaching arguments it advances

here. The Sixteenth Amendment simply does not

authorize the Congress to tax as “incomes” every sort

of revenue a taxpayer may receive. As the Supreme

Court noted long ago, the “Congress cannot make a

thing income which is not so in fact.” Burk-Waggoner

App. 57

Oil Ass’n v. Hopkins, 269 U.S. 110, 114 (1925). In-

deed, because the “the power to tax involves the

power to destroy,” McCulloch v. Maryland, 17 U.S. (4

Wheat.) 316, 431 (1819), it would not be consistent

with our constitutional government, and the sanctity

of property in our system, merely to rely upon the

legislature to decide what constitutes income.

Fortunately, we need not rely solely upon the

wisdom and beneficence of the Congress for, when the

Sixteenth Amendment was drafted, the word “in-

comes” had well understood limits. To be sure, the

Supreme Court has broadly construed the phrase

“gross income” in the IRC and, by implication, the

word “incomes” in the Sixteenth Amendment, but it

also has made plain that the power to tax income

extends only to “gain[s]” or “accessions to wealth.”

Glenshaw Glass, 348 U.S. at 430-31. That is why, as

noted above, the Supreme Court has held a “return of

capital” is not income. Doyle, 247 U.S. at 187; S. Pac.

Co., 247 U.S. at 335. The question in this case is not,

however, about a return of capital — except insofar as

Murphy analogizes human capital to physical or

financial capital; the question is whether the compen-

sation she received for her injuries is income.*

* In any event, the Government’s quarrel with Murphy’s

analogy, based upon Glenshaw Glass, of “human capital” to

financial or physical capita] is not persuasive. To be sure, the

analogy is incomplete; persona! injuries do not entail an adjust-

ment to any basis, nor are human resources, such as reputation,

depreciable for tax purposes. But nothing in Murphy’s argument

(Continued on following page)

App. 58

To determine whether Murphy’s compensation is

income under the Sixteenth Amendment, we are

instructed by the Supreme Court first to consider

whether the taxpayer’s award of compensatory dam-

ages is “a substitute for [a] normally untaxed per-

sonal ... quality, good, or ‘asset.’” O’Gilvie, 519 U.S.

at 86. Accordingly, we join our sister circuits by

asking: “In lieu of what were the damages awarded”?

Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110,

113 (1st Cir. 1944); see Francisco v. United States, 267

F.3d 303, 319 (3d Cir. 2001) (treating Raytheon’s “in

lieu of” test as authoritative); Tribune Publ’g Co. v.

United States, 836 F.2d 1176, 1178 (9th Cir. 1988)

(applying “in leu of” test to determine whether

settlement proceeds were income); Gilbertz v. United

States, 808 F.2d 1374, 1378 (10th Cir. 1987) (adopting

“in lieu of” test to determine whether compensatory

damages were income). Here, if the $70,000 Murphy

received was “in lieu of” something “normally un-

taxed,” O’Gilvie, 519 U.S. at 86, then her compensa-

tion is not income under the Sixteenth Amendment; it

is neither a “gain” nor an “accession[] to wealth.”

Glenshaw Glass, 348 U.S. at 430-31.

implies a need to account for the basis in or to depreciate

anything. Her point, rather, is that as with compensation for a

harm to one’s financial or physical capital, the payment of

compensation for the diminution of a personal attribute, such as

reputation, is but a restoration of the status quo ante, analogous

to a “restoration of capital,” Glenshaw Glass, 348 U.S. at 432

n.8; in neither context does the payment result in a “gain” or

“accession| } to wealth,” id. at 430-31.

App. 59

As we have seen, it is clear from the record that

the damages were awarded to make Murphy emo-

tionally and reputationally “whole” and not to com-

pensate her for lost wages or taxable earnings of any

kind. The emotional well-being and good reputation

she enjoyed before they were diminished by her

former employer were not taxable as income. Under

this analysis, therefore, the compensation she re-

ceived in lieu of what she lost cannot be considered

income and, hence, it would appear the Sixteenth

Amendment does not empower the Congress to tax

her award.

Our conclusion at this point is tentative because

the Supreme Court has also instructed that, in defin-

ing “incomes,” we should rely upon “the commonly

understood meaning of the term which must have

been in the minds of the people when they adopted

the Sixteenth Amendment.” Merchants’ Loan & Trust

Co. v. Smietanka, 255 U.S. 509, 519 (1921). And, to

discern the original understanding of a provision of

the Constitution, we must examine any contempora-

neous implementing legislation. See Myers v. United

States, 272 U.S. 52, 175 (1926) (“This court has

repeatedly laid down the principle that a contempo-

raneous legislative exposition of the Constitution ...,

acquiesced in for a long term of years, fixes the con-

struction to be given its provisions”); see Macomber,

252 U.S. at 202 (district judge correctly treated

“construction of the [Revenue Act of 1913] as insepa-

rable from the interpretation of the Sixteenth

Amendment”). Therefore, we must inquire whether

App. 60

“the people when they adopted the Sixteenth

Amendment,” or the Congress when it implemented

the Amendment, would have understood compensa-

tory damages for a nonphysical injury to be “income.”

In the years immediately following ratification of

the Sixteenth Amendment, the Congress created and

then thrice revised the IRC. See Revenue Act of 1913,

ch. 16, 38 Stat. 114 (1913); Revenue Act of 1916, ch.

463, 39 Stat. 756 (1916); Revenue Act of 1917, ch. 63,

40 Stat. 300 (1917); Revenue Act of 1918, ch. 18, 40

Stat. 1057 (1919). Of the four enactments, that of

1918 was the first to address the tax treatment of

compensatory damages for personal injuries, and it

did so without distinguishing between physical and

nonphysical injuries. We agree with the Government

that the House Repert on the 1918 Act is ambiguous

and therefore unhelpful on the question before us. We

concur in Murphy’s view, however, that the Attorney

General’s 1918 opinion and the Treasury Depart-

ment’s ruling of the same year strongly suggest that

the term “incomes” as used in the Sixteenth Amend-

ment does not extend to monies received solely in

compensation for a personal injury and unrelated to

lost wages or earnings.

That emotional distress and loss of reputation

were both actionable in tort when the Sixteenth

Amendment was adopted supports the view that

compensation for these nonphysical injuries was not

regarded differently than was compensation for

physical injuries and, therefore, was not considered

income by the framers of the Amendment and the

App. 61

state legislatures that ratified it. By 1913, in at least

39 of the then-48 states and in the District of Colum-

bia, the law made compensatory damages for “mental

suffering” recoverable in the same matter as compen-

satory damages for physical harms; indeed, in 34 of

those states, there are reported cases involving

defamation and other reputational injuries* — the

* See, e.g., Garrison v. Sun Printing & Publ’g Ass’n, 207

N.Y. 1, 6, 100 N.E. 430, 431 (1912) (plaintiffs are “entitled to

recover compensatory damages for mental distress resulting

from the publication of defamatory words actionable in them-

selves”); Guisti v. Galveston Tribune, 105 Tex. 497, 504-05 150

S.W. 874, 877 (1912) (holding statute afforded “right to maintain

an action for a publication not libelous’ per se [without having] to

allege or prove special damages .. . for mental anguish”); Fields

v. Bynum, 72 S.E. 449, 451 (1911) (general damages in defama-

tion actions “include injury to the feelings, and mental suffering

endured in consequence”); Comer v. Advertiser Co., 172 Ala. 613,

55 So. 195, 198 (1911) (in libel actions “damages for mental pain

and suffering . . . must in all cases be fixed by the jury, in view of

all the facts and circumstances surrounding any particular

case”); Miller v. Dorsey, 149 Mo. App. 24, 129 S.W. 66, 69 (1910)

(upholding jury award of damages in action for slander “to

compensate [plaintiff] for the mortification and shame he might

have suffered, and the disgrace and dishonor attempted to be

cast upon him, and all damages done to his reputation”); Jozsa

uv. Moroney, 125 La. 813, 821, 51 So. 908, 911 (1910) (in libel

action “damages for mental suffering alone can be recovered,

although the party may have suffered no other loss”); Moore v.

Maxey, 152 Ill. App. 647, 1910 WL 1686, at *2 (1910) (“Where

words spoken are actionable per se ... there need be no direct

evidence of mental suffering to enable the jury to consider it in

their estimate of damages”); Davis v. Mohn, 145 Iowa 417, 124

N.W. 206, 207 (1910) (holding mental “pain and suffering may be

considered by the jury in determining the amount of damages in

cases where the words spoken are actionable [as slander] per

se”); Henry v. Cherry & Webb, 30 RI. 13, 73 A. 97, 102 (1909)

(Continued on following page)

App

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