The following is not meant to be legal advice.
On August 22, 2006, the United States Court of Appeals for the District of Columbia Circuit, in Marrita Murphy and Daniel J. Leveille v. Internal Revenue Service and United States of America, 460 F.3d 79 (2006), held that Section 104(a)(2) of the Internal Revenue Code was unconstitutional.
The taxpayer filed a complaint with the Department of Labor alleging that her former employer, the New York Air National Guard, violated whistleblower statutes, provided unfavorable references to potential employers, after she complained to the state about environmental hazards on an airbase. The taxpayer was awarded compensatory damages emotional distress and injury to professional reputation. She received no award for lost wages.
The Court stated that an award for a personal injury that was unrelated to lost wages or earnings was not income within the intent of the Sixteenth Amendment of the United States Constitution. The award was not an amount that Congress was empowered to tax.
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