Tax Research Project
TAX RESEARCH PROJECT 5
Murray,who is a working citizen in the United States, informed theEnvironmental Protection Agency (EPA) about his employer beingillegally involved in dumping chemicals into a river. When the agencyreviewed the matter, it turned out that Murray’s employer wasdumping chemicals into a river and the employer was penalized for theact. When Murray’s employer received the news concerning thepenalty, the employer dismissed Murray from the organization.Besides, the employer also made efforts so as to ensure that Murraydoes not become hired by another employer. Murray sued theorganization and became compensated for his mental suffering anddamage to his personal and professional reputation. Murray definesthe compensation made as a recovery for his human capital and not asection of his adjusted gross income. Because of his definition ofthe compensation made, Murray is concerned by the question whetherthe federal government has the authority of taxing the award hereceived. According to him, the federal government does not have theauthority of taxing his award because recovery of capital is notincome.
Fromthe Murrays case, there are different issues that emerge. One of theissues that emerge is to whether Murray, who became dismissed by hisemployer because of retaliation of him informing the environmentalprotection agency of illegal chemical dumping, and later becamecompensated for damages due to his professional and personalreputation and for mental suffering, should pay taxes for thecompensation he received. Another issue that emerges from the case iswhether Murray can avoid reporting the award he received as adjustedgross income. In addition, another issue that also comes from theMurray’s case entails how the award received by Murray needs to betaxed, in case it is taxable.
Fromthe case presented, the ruling should come from what constitutesgross income and how to categorize the compensation received byMurray is it capital or income? Based on the facts of the case, theruling is that the award given to Murray is taxable and the federalgovernment has the power of taxing the award received by Murray. Theruling is based on the definition of gross income as defined by theInternal Revenue Code Sec. 61 (a) gross income involves all incomefrom any source that the income is derived (Gershonet al, 2007).
Accordingto the provisions of Internal Revenue Code Sec. 61 (a), compensationreceived should be included to gross income because it is one of theitems that constitute gross income. This implies that the amountreceived by Murray should be seen as income and taxed accordingly.Resulting from being dismissed from work, Murray could have sufferedmental damages. This is why Murray is compensated for the damage.Learning from Youngvs. MNR(86 DTC 1567) case, mental damages that arise because of dismissalfrom work should be taxed. Besides, Murray is presenting his case andargues that the amount he received was a recovery for his humancapital. This is true because Murray was compensated in order torecover his human capital status. However, the compensation becamereceived due to non-physical sickness or injury and gross incomeunder Sec. 61 of the Internal Revenue Code recognizes compensationfor damages from non-physical injuries, despite the award notconstituting an accession to wealth (Gershonet al, 2007). The income tax that should be imposed on the award thatMurray received constitutes an indirect tax, which is within theprovisions of the constitution as provided by Article 1, Sec. 9(Infanti &Crawford,2009). As noted in the court’s decision in MurphyV. IRS,although compensation received due to non-physical injuries may beperceived as capital because of its nature of restoring the humancapital in a working state, it is taxable because it will becategorized as income under the definition of gross income providedin Sec. 61 of the Internal Revenue Code. This implies that the awardreceived by Murray is taxable and the federal government will havethe authority of taxing the award. Murray should not avoid reportingthe award received as adjusted gross income. On the other hand,mental damages arising from loss of employment or dismissal fromemployment are usually taxed like a retiring allowance (Weilet al, 2012). Therefore, the award received by Murray would be taxedas a retiring allowance.
AlthoughMurray may perceives the award received as a recovery of his humancapital rather than income, Sec. 61 of the Internal Revenue Codeprovides the definition of gross income and provides thatcompensation for non-physical damages should be included in grossincome. This implies that the award that he received for reputationdamage and mental damage is taxable. Since the award received byMurray is taxable, he should not avoid reporting it as adjusted grossincome and the federal government has the authority of taxing him forthe award since it is constitutional. The award received by Murrayshould be taxed like a retiring allowance.
Gershon,R., Maine, J. A., & Gershon, R. (2007). Astudent`s guide to the Internal Revenue Code.Newark, NJ: LexisNexis Matthew Bender.
Infanti,A. C., & Crawford, B. J. (2009). Criticaltax theory: An introduction.Cambridge [U.K.: Cambridge University Press.
Weil,R. L., Lentz, D. G., & Hoffman, D. P. (2012). Litigationservices handbook: The role of the financial expert.Hoboken, N.J: Wiley.