Too Good to Be True - D.C. Circuit to Rehear Controversial Tax Case

For those in the employment law world who were heartened by the D.C. Circuit's decision that the taxation of compensatory damages recovered in a suit against an employer was unconstitutional — that relief may turn out to be temporary. In August of this year, when the court decided Murphy v. IRS (8/22/06) [pdf], there was hope that settlement of employment law cases would be cheaper, at least in the D.C. Circuit — since no money would be owed for taxes, a lower settlement amount would put the same net dollars into the plaintiff's pocket.

But that prospect is now on hold as the panel has on its own motion vacated its earlier opinion, issued a new briefing schedule, and ordered it to be re-argued on April 23rd. Ross Runkel at Ross' Employment Law Blog has this prediction:

Never underestimate the governments' power to tax. I expect that if the panel does not change its position, then the whole court will sit en banc and hold that the tax passes constitutional muster.

He also notes that much more detail and background can be found at the The Tax Prof Blog's post, D.C. Circuit Panel Agrees to Rehear Murphy.