Murphy v. Internal Revenue Service

493 F.3d 170

Marrita MURPHY and Daniel J. Leveille, Appellants v. INTERNAL REVENUE SERVICE and United States of America, Appellees.

No. 05-5139.

United States Court of Appeals, District of Columbia Circuit.

Argued April 23, 2007.

Decided July 3, 2007.

Appeal from the United States District Court for the District of Columbia (No. 03cv02414).

David K. Colapinto argued the cause for appellants. With him on the briefs were Stephen M. Kohn and Michael D. Kohn.

Richard R. Renner was on the brief for amici curiae No FEAR Coalition, et al. in support of appellants.

Gilbert S. Rothenberg, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief were Jeffrey A. Taylor, U.S. Attorney, Richard T. Morrison, Deputy Assistant Attorney General, and Kenneth L. Greene and Francesca U. Tamami, Attorneys. Bridget M. Rowan, Attorney, entered an appearance.

Before: GINSBURG, Chief Judge, and ROGERS and BROWN, Circuit Judges.

Opinion for the Court filed by Chief Judge GINSBURG.

On Rehearing

GINSBURG, Chief Judge:

Marrita Murphy brought this suit to recover income taxes she paid on the compensatory damages for emotional distress and loss of reputation she was awarded in an administrative action she brought against her former employer. Murphy contends that under § 104(a)(2) of the Internal Revenue Code (IRC), 26 U.S.C. § 104(a)(2), her award should have been excluded from her gross income because it was compensation received "on account of personal physical injuries or physical sickness." She also maintains that, in any event, her award is not part of her gross income as defined by § 61 of the IRC, 26 U.S.C. § 61. Finally, she argues that taxing her award subjects her to an unapportioned direct tax in violation of Article I, Section 9 of the Constitution of the United States.

We reject Murphy's argument in all aspects. We hold, first, that Murphy's compensation was not "received ... on account of personal physical injuries" excludable from gross income under § 104(a)(2). Second, we conclude gross income as defined by § 61 includes compensatory damages for non-physical injuries. Third, we hold that a tax upon such damages is within the Congress's power to tax.

I. Background

In 1994 Marrita Leveille (now Murphy) filed a complaint with the Department of Labor alleging that her former employer the New York Air National Guard (NYANG), in violation of various whistle-blower statutes, had "blacklisted" her and provided unfavorable references to potential employers after she had complained to state authorities of environmental hazards on a NYANG airbase. The Secretary of Labor determined the NYANG had unlawfully discriminated and retaliated against Murphy, ordered that any adverse references to the taxpayer in the files of the Office of Personnel Management be withdrawn, and remanded her case to an Administrative Law Judge "for findings on compensatory damages."

On remand Murphy submitted evidence that she had suffered both mental and physical injuries as a result of the NYANG's blacklisting her. A psychologist testified that Murphy had sustained both "somatic" and "emotional" injuries, basing his conclusion in part upon medical and dental records showing Murphy had "bruxism," or teeth grinding often associated with stress, which may cause permanent tooth damage. Noting that Murphy also suffered from other "physical manifestations of stress" including "anxiety attacks, shortness of breath, and dizziness," and that Murphy testified she "could not concentrate, stopped talking to friends, and no longer enjoyed `anything in life,'" the ALJ recommended compensatory damages totaling $70,000, of which $45,000 was for "past and future emotional distress," and $25,000 was for "injury to [Murphy's] vocational reputation" from having been blacklisted. None of the award was for lost wages or diminished earning capacity.

In 1999 the Department of Labor Administrative Review Board affirmed the ALJ's findings and recommendations. See Leveille v. N.Y. Air Nat'l Guard, 1999 WL 966951, at *2-*4 (Oct. 25, 1999). On her tax return for 2000, Murphy included the $70,000 award in her "gross income" pursuant to § 61 of the IRC. See 26 U.S.C. § 61(a) ("[G]ross income means all income from whatever source derived"). As a result, she paid $20,665 in taxes on the award.

Murphy later filed an amended return in which she sought a refund of the $20,665 based upon § 104(a)(2) of the IRC, which provides that "gross income does not include . . . damages . . . received . . . on account of personal physical injuries or physical sickness." In support of her amended return, Murphy submitted copies of her dental and medical records. Upon deciding Murphy had failed to demonstrate the compensatory damages were attributable to "physical injury" or "physical sickness," the Internal Revenue Service denied her request for a refund. Murphy thereafter sued the IRS and the United States in the district court.

In her complaint Murphy sought a refund of the $20,665, plus applicable interest, pursuant to the Sixteenth Amendment to the Constitution of the United States, along with declaratory and injunctive relief against the IRS pursuant to the Administrative Procedure Act and the Due Process Clause of the Fifth Amendment. She argued her compensatory award was in fact for "physical personal injuries" and therefore excluded from gross income under § 104(a)(2). In the alternative Murphy asserted taxing her award was unconstitutional because the award was not "income" within the meaning of the Sixteenth Amendment. The Government moved to dismiss Murphy's suit as to the IRS, contending the Service was not a proper defendant, and for summary judgment on all claims.

The district court denied the Government's motion to dismiss, holding that Murphy had the right to bring an "action[] for declaratory judgments or . . . [a] mandatory injunction" against an "agency by its official title," pursuant to § 703 of the APA, 5 U.S.C. § 703. Murphy v. IRS, 362 F.Supp.2d 206, 211-12, 218 (2005). The court then rejected all of Murphy's claims on the merits and granted summary judgment for the Government and the IRS. Id.

Murphy appealed the judgment of the district court with respect to her claims under § 104(a)(2) and the Sixteenth Amendment. In Murphy v. IRS, 460 F.3d 79 (2006), we concluded Murphy's award was not exempt from taxation pursuant to § 104(a)(2), id. at 84, but also was not "income" within the meaning of the Sixteenth Amendment, id. at 92, and therefore reversed the decision of the district court. The Government petitioned for rehearing en banc, arguing for the first time that, even if Murphy's award is not income, there is no constitutional impediment to taxing it because a tax on the award is not a direct tax and is imposed uniformly. In view of the importance of the issue thus belatedly raised, the panel sua sponte vacated its judgment and reheard the case. See Consumers Union of U.S., Inc. v. Fed. Power Comm'n, 510 F.2d 656, 662 (D.C.Cir.1975) ("[R]egarding the contents of briefs on appeal, we may also consider points not raised in the briefs or in oral argument. Our willingness to do so rests on a balancing of considerations of judicial orderliness and efficiency against the need for the greatest possible accuracy in judicial decisionmaking. The latter factor is of particular weight when the decision affects the broad public interest.") (footnotes omitted); see also Eli Lilly & Co. v. Home Ins. Co., 794 F.2d 710, 717 (D.C.Cir.1986) ("The rule in this circuit is that litigants must raise their claims on their initial appeal and not in subsequent hearings following a remand. This is a specific application of the general waiver rule, which bends only in `exceptional circumstances, where injustice might otherwise result.'") (quoting Dist. of Columbia v. Air Florida, Inc., 750 F.2d 1077, 1085 (D.C.Cir.1984)) (citation omitted). In the present opinion, we affirm the judgment of the district court based upon the newly argued ground that Murphy's award, even if it 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.

II. Analysis

We review the district court's grant of summary judgment de novo, Flynn v. R.C. Tile, 353 F.3d 953, 957 (D.C.Cir.2004), bearing in mind that summary judgment is appropriate only "if there is no genuine issue as to any material fact and if the moving party is entitled to judgment as a matter of law," Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Before addressing Murphy's claims on their merits, however, we must determine whether the district court erred in holding the IRS was a proper defendant.

A. The IRS as a Defendant

The Government contends the courts lack jurisdiction over Murphy's claims against the IRS because the Congress has not waived that agency's immunity from declaratory and injunctive actions pursuant to 28 U.S.C. § 2201(a) (courts may grant declaratory relief "except with respect to Federal taxes") and 26 U.S.C. § 7421(a) ("no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person"); and insofar as the Congress in 28 U.S.C. § 1346(a)(1) has waived immunity from civil actions seeking tax refunds, that provision on its face applies to "civil action[s] against the United States," not against the IRS. In reply Murphy argues only that the Government forfeited the issue of sovereign immunity because it did not cross-appeal the district court's denial of its motion to dismiss. See FED. R.APP. P. 4(a)(3). Notwithstanding the Government's failure to cross-appeal, however, the court must address a question concerning its jurisdiction. See Occidental Petroleum Corp. v. SEC, 873 F.2d 325, 328 (D.C.Cir.1989) ("As a preliminary matter . . . we must address the question of our jurisdiction to...