Marrita Murphy and Daniel J. Leveille, Appellants v. Internal Revenue Service and United States of America, Appellees (commonly known as Murphy v. IRS),[1] is a tax case in which the United States Court of Appeals for the District of Columbia Circuit originally held that the taxation of emotional distress awards by the federal government is unconstitutional.

In a prior administrative proceeding, Murphy had been awarded compensatory damages of $70,000, of which $45,000 was for "emotional distress or mental anguish" and $25,000 was for "injury to professional reputation."

Circuit next analyzed whether Section 104(a)(2) is "constitutional," relying upon language from Commissioner v. Glenshaw Glass Co.[7] to the effect that, under the Sixteenth Amendment, Congress may "tax all gains" or "accessions to wealth.

"[8] Murphy argued that her award was neither a gain nor an accession to wealth because it compensated her for nonphysical injuries, and was thus effectively a restoration of "human capital.

Circuit also explained that a 1918 opinion of the Attorney General stating that proceeds from an accident insurance policy were not taxable income and a 1922 IRS ruling that damages based on loss of reputation were not taxable income, both issued relatively near the Sixteenth Amendment's ratification in 1913, support its ruling.

The Department of Justice asked for a rehearing en banc (i.e., a hearing before all the members of the Court, rather than before only the panel of three judges who made the original decision).

The parties presented oral arguments in a rehearing on April 23, 2007,[13] On July 3, 2007, the Court ruled (1) that the taxpayer's compensation was received on account of a non-physical injury or sickness; (2) that gross income under section 61 of the Internal Revenue Code[14] does include compensatory damages for non-physical injuries, even if the award is not an "accession to wealth," (3) that the income tax imposed on an award for non-physical injuries is an indirect tax, regardless of whether the recovery is restoration of "human capital," and therefore the tax does not violate the constitutional requirement of Article I, section 9, that capitations or other direct taxes must be laid among the states only in proportion to the population; (4) that the income tax imposed on an award for non-physical injuries does not violate the constitutional requirement of Article I, section 8, that all duties, imposts and excises be uniform throughout the United States; (5) that under the doctrine of sovereign immunity, the Internal Revenue Service may not be sued in its own name.

it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9.

"[3] Citing Commissioner v. Banks, the court noted that "the power of the Congress to tax income 'extends broadly to all economic gains.