Bill Brown <brownwp[at]longwood.edu> wrote:

- quote -

Thanks for that. The court originally came up with what I,
personally, think was the "right" result, but not the legal
one. A statute makes those kinds of payments taxable
non-personal injuries. The trial judge's constitutional
ruling was creative, but didn't quite pass the laugh-test.

Stu

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ------------------------------------------------------- >

**BEGIN QUOTE**
July 3, 2007, 4:25 pm

D.C. Circuit Reverses Itself in Tax Ruling_

Posted by Peter Lattman

A D.C. Circuit court panel reversed itself in holding that
the federal government can tax money individuals receive
from their employers for "nonphysical personal injuries." At
issue: Whether a $70,000 payment that a woman received from
her former employer for "emotional distress" and "loss of
reputation" was taxable.

"Why are you bothering us with a tax case just hours before
the Fourth of July!?" you're surely asking. "Go home Law
Blog!"

Well we care for a couple of reasons. First, it's rare for a
three- member appeals court panel to agree to rehear a case
and then reverse itself. Last August, the same three judges
ruled that the award didn't represent "income" as defined by
the 16th Amendment - and thus wasn't taxable. The court had
also called "unconstitutional" a 1996 provision in the tax
code that permitted taxation of damage awards for mental
distress and loss of reputation. In December, the panel
vacated its judgment and said it would rehear the case. (The
more common scenario would have been for the entire D.C.
Circuit to review the decision - i.e., en banc,)

Second, the ruling is a significant win for the IRS. The
original ruling last year had set off a firestorm, causing
tax lawyers and professors their own emotional distress,
with most lambasting the decision. "Let 1000 lawsuits
bloom," wrote UCLA law professor Stephen Bainbridge on his
blog. Yale law professor Michael Graetz said the case would
"launch a thousand [other] constitutionality arguments that
people would have thought laughable before." The WSJ
reported that after the decision, lawyers urged taxpayers to
challenge the taxation of similar awards in the past few
years and consider seeking refunds.

Today, the court concluded her award was not exempt from tax
and could be considered part of her "gross income." The
court took up a new argument from the government 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. "Murphy's award, even
if it is not income within the meaning of the 16th
Amendment, is within the reach of the congressional power to
tax under Article I, Section 8 of the Constitution," wrote
the court.

Donald Alexander, a former IRS commissioner and now a lawyer
at Akin Gump, just emailed Law Blog colleague and WSJ tax
reporter Tom Herman: "Finally, the right result. Our tax
system is safe again."

**END QUOTE**
[Source: Law Blog http://blogs.wsj.com/law/2007/07/03/...n-tax-ruling/]

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ------------------------------------------------------- >