Compensatory Damage Awards for Nonphysical Personal Injuries: The Murphy Pendulum Available to Purchase

The Murphy case involves the question of whether compensatory damage awards received for nonphysical personal injury are subject to the federal income tax. Such awards had been excluded from a taxpayer's gross income since 1918, but in 1996, Congress amended I.R.C. Sec. 104(a)(2) with the intention of taxing these awards. The taxpayer (Murphy) received an award for nonphysical personal injuries after the 1996 amendment and has argued in three judicial proceedings that, despite the amendment, her award is not taxable. This paper traces the path of the Murphy case through the IRS and the courts, discusses the income tax issues raised in the various forums, and makes recommendations to clarify and improve the federal income tax treatment of compensatory damages for nonphysical personal injury.