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MURPHY DEAD TO THE TAX COURT

September 28, 2007

The Federal Appeals Court for the DC Circuit buried it's controversial Murphy decision over the summer. Before the DC court changed its mind, Murphy said emotional damages -- and potentially many other items now subject to income tax -- were tax exempt because they weren't "income" when the income tax was enacted in 1913.

Yesterday the Tax Court danced on Murphy's grave. Paul Ballmer received a $337,000 emotional damages award in 2001 and failed to pay any income taxes on it. The IRS caught up with him, assessing tax and penalties. Mr. Ballmer cited the defunct original Murphy decision in trying to convince the Tax Court not to assess tax, or at least penalties.

The Tax Court seems to believe that Mr. Ballmer had no intention of paying tax on his award from the start, and his reliance on Murphy was a last-minute improvisation:

On cross-examination, petitioner admitted that he had not reviewed the flush language of section 104(a), which provides "emotional distress shall not be treated as a physical injury or physical sickness" for purposes of excluding damages received from gross income under section 104(a)(2). Petitioner further admitted that he had not sought the advice of a tax professional in regard to his conclusions that no provision of the Code required him to file a return or that the damages he received were not income.

Petitioner's attempt to cloak his argument of reasonable cause in the initial Murphy decision is also unpersuasive. First, as discussed above, the Court of Appeals for the D.C. Circuit vacated its initial decision and has since determined that damages for emotional distress are gross income. Further, there is no evidence before the Court that petitioner performed an analysis similar to that of the D.C. Circuit, nor that he received any advice from a competent tax professional, at the time he chose not to file a return for 2001.

Mr. Ballmer may have fallen for tax protest arguments:

Petitioner further testified that he had reviewed the Internal Revenue Code for several years and could find no provision that required him to file a return

The "years of study" line is a standard tax protestor catchphrase (see here, for example). It's amazing that you can spend so much time with the Code without coming across Section 6012.

Cite: Ballmer, T.C. Memo 2007-295.

Link: Tax Update Murphy coverage

UPDATE: The TaxProf has more.

Tags: misdirected study.Murphy.tax protestors.

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