“We Made a Slight Mistake…”

When I see that phrase, I just know that a whopper of an error is about to be seen. Well, those words weren’t used, but the DC Circuit realized that they did just that–made a whopper of a mistake. On Tuesday, they reversed themselves in the Murphy case.

If you remember the Murphy decision, the DC circuit ruled (in September 2006), “that ยง104(a)(2) of the Internal Revenue Code (Title 26, U.S.C.) is ‘…unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.'” The same panel of judges reheard the case earlier this year, and the decision came out on Tuesday—probably, as Joe Kristan of Roth Tax Updates said, “…Courts are hip to the public relations technique of issuing embarrassing news at holiday times, when it is least likely to attract attention.”

The ruling itself is very ordinary, which tells you how off-base the original Murphy decision was. The Court now notes that even if “[Murphy’s award] is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution.”

Other Coverage:
AP
New York Times/Bloomberg
Roth Tax Updates
The TaxProf Blog

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