In what is certainly disappointing news for us libertarian types, as well as plaintiffs seeking relief from taxes in emotional distress cases, the Federal Appeals court yesterday reversed their prior ruling from 11 months ago and found instead that taxable damages in emotional distress cases are in fact taxable.
Essentially the 3 court panel got a "do over" on this decision with some enormous pressure from the tax community, the IRS and legal scholars who felt that if Murphy vs IRS was upheld and allowed to stand that it would open the door for a floodgate of tax protest cases on constitutional grounds.
While I regret that this decision didn't become law due to the insane inequity in how taxable and non-taxable damages are handled under the current 1996 law, it probably allows for what is hopefully a more reasoned attempt to modify the current situation where in the government doesn't allow for deduction of legal fees on taxable damage cases, and with the AMT can almost put a person in a position of zero net recovery for bringing a whistleblower case, for wrongful imprisonment, emotional distress and other situations that don't involve personal physical injury.
As someone who has several Qui Tam/Whistleblower cases going on at the moment I was hopeful we could get a positive resolution to this situation, but at least now we have certainty and know to look for a legislative solution where this inequity is addressed. Part of the reason the appeals court gave the ruling they did in the first case, according to many commentators, was due to the lack of technical amendments and clarification of the 1996 law and I hope that this reversal doesn't put our congressmen and senators back to sleep on this.
I'll be having our newest full time commentator Attorney Robert Wood on the Settlement Channel podcast this coming Monday July 9th, 2007 to discuss this situation, so if you have specific questions for him or myself please contact me and let me know.