On August 22, 2006, in Marrita Murphy and Daniel J. Leveille v. Internal Revenue Service and United States of America, the United States Court of Appeals for the District of Columbia Circuit held that Internal Revenue Code (IRC) Section 104(a)(2) was unconstitutional in permitting the taxation of compensation for a non-physical personal injury that was not related to lost wages.
For instance, emotional distress with no physical issues was not considered a physical injury. An individual receiving damages for emotional distress would not be required to include the damages in taxable gross income unless there was medical care for the injuries.
The court ruled that the government must refund the taxes the taxpayer paid on the personal injury award plus interest. The Murphy case is binding only in the District of Columbia Circuit.
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