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Texas exonerees aren't free from income taxes on compensation
07:03 AM CST on Monday, February 22, 2010
By DIANE JENNINGS / The Dallas Morning News
John Michael Harvey traveled, bought a house, wrote a book and invested money – much of it from more than $600,000 Texas gave him because he spent a dozen years in prison for the sexual assault of a 3-year-old girl – a crime he didn't commit.
The Internal Revenue Service told him the money would be tax-free, he said.
And then came the letter in which the agency told him he might need to pay taxes on the money after all. "They want, like, a third of it back," said an incredulous Harvey.
He said he's upset because, while Texas is trying to make financial amends for destroying a quarter of his life, the federal government is trying to seize a chunk of it.
"It's like the one hand gives and the other takes away," he said.
Harvey is among a number of former inmates who have had to battle the IRS over taxes on their wrongful-incarceration compensation, attorneys say. Some have won; others have simply paid. But many observers say the only way to resolve the issue is through congressional action.
Harvey, a 45-year-old former high-tech worker, says an IRS employee had told him not to report the lump sum on his tax return because he received it for enduring "pain and suffering" while in prison –akin to an insurance settlement.
Then an IRS staffer explained that the money may be considered "lost wages" and therefore is taxable.
Back to court
A Tarrant County jury sent Harvey to prison in 1992 for 40 years. He maintained his innocence and was exonerated in 2004 after his victim recanted and evidence surfaced that showed he did not match the description of her attacker.
Now Harvey is planning to go to court again if he must to handle his tax claim – a claim that is cropping up repeatedly as the number of exonerees rises.
Texas lawmakers' hands are tied: The state government pays the money, but the federal government levies income taxes.
Legislators who championed the state compensation package say they never intended for the money to be taxed.
"We want them to get the maximum recovery that's possible for being wrongfully imprisoned," said Rep. Rafael Anchia, D-Dallas. "Just as a practical matter and a moral one, a moral basis, I don't think they should be taxed."
State Sen. Rodney Ellis, D-Houston, said his intent "was to treat it however it ought to be described so that they don't pay taxes on it. That would just be ridiculous."
But Calvin Johnson, a professor of tax law at the University of Texas, said IRS employees are simply "the loyal servants of Congress" and the law is clear: A lump sum awarded for anything other than physical pain and suffering is taxable. Whistle-blowers, for instance, must pay taxes on their awards.
"It isn't that it's lost wages," he said. "It is instead that it's an improvement to your net worth in cash form."
Congress passed the law specifying that only physical pain and suffering awards are exempt in 1996, after hearing about fraud and abuse for claims of emotional pain and suffering. "You've got to show some blood or [have] broken something," Johnson said.
If an exoneree can prove physical pain as a result of wrongful incarceration – such as being beaten while in prison, as opposed to just serving time – he may not have to pay taxes, or may have to pay only on a portion of the award. But if there is no evidence of physical suffering, the award is taxable, Johnson said.
Seeking exemption
Kristopher Moore, a Lubbock attorney whose firm represents a dozen exonerees, said he would argue that the awards should be tax exempt because studies show that incarceration, wrongful or deserved, shortens a person's life.
But rather than seek case-by-case rulings, he's lobbying Congress to carve out an exemption to the physical pain requirement for exonerees.
A bill to do that was introduced a couple of years ago but didn't get far. Moore said he is working with legislators in both parties to reintroduce the legislation.
"The problem to this point has been the unwillingness of the Senate to take up this bill when they were focusing so much on health care," he said. "What we were told is, as soon as they have resolved health care, they'll introduce this bill and work on getting it passed."
Moore is optimistic that the exemption will pass, but Johnson is dubious. "It's got about a snowball's chance," he said.
"Everybody will make a lot of noise, but the real thing is we're sitting with this $1.6 trillion deficit overhang and they're going to have to find a lot of ways to make a lot of revenue."
He doesn't think the payments should be exempt. "The baseline for taxes isn't a moral code," Johnson said. "It is an attempt to describe what your standard of living is" and be taxed accordingly. "That hits me as quite normal.
"If Texas wants to give them more money [to pay the taxes], then Texas can give them more money."
Ellis said raising payments to cover taxes is a possibility, but he's hopeful Congress will make that unnecessary. Taxing people who spent years in prison for crimes they didn't commit is the ultimate in "regressive taxation," he said. "This would be at the top of everybody's list – Democrat, Republican or Tea Party."
Harvey said he's optimistic the federal government will eventually "do the right thing" and exempt the awards.
But even if it does, he said, no amount of money will make up for the fact that he missed his parents' funerals while he was in prison, suffered a stress-related heart attack and broke his hand defending himself in prison fights.
And nothing changes the fact that he was imprisoned while innocent for 12 years.
"You're really not reimbursed – there's no way to reimburse anybody for what we were put through," he said. "But you can certainly try."
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07:03 AM CST on Monday, February 22, 2010
By DIANE JENNINGS / The Dallas Morning News
John Michael Harvey traveled, bought a house, wrote a book and invested money – much of it from more than $600,000 Texas gave him because he spent a dozen years in prison for the sexual assault of a 3-year-old girl – a crime he didn't commit.
The Internal Revenue Service told him the money would be tax-free, he said.
And then came the letter in which the agency told him he might need to pay taxes on the money after all. "They want, like, a third of it back," said an incredulous Harvey.
He said he's upset because, while Texas is trying to make financial amends for destroying a quarter of his life, the federal government is trying to seize a chunk of it.
"It's like the one hand gives and the other takes away," he said.
Harvey is among a number of former inmates who have had to battle the IRS over taxes on their wrongful-incarceration compensation, attorneys say. Some have won; others have simply paid. But many observers say the only way to resolve the issue is through congressional action.
Harvey, a 45-year-old former high-tech worker, says an IRS employee had told him not to report the lump sum on his tax return because he received it for enduring "pain and suffering" while in prison –akin to an insurance settlement.
Then an IRS staffer explained that the money may be considered "lost wages" and therefore is taxable.
Back to court
A Tarrant County jury sent Harvey to prison in 1992 for 40 years. He maintained his innocence and was exonerated in 2004 after his victim recanted and evidence surfaced that showed he did not match the description of her attacker.
Now Harvey is planning to go to court again if he must to handle his tax claim – a claim that is cropping up repeatedly as the number of exonerees rises.
Texas lawmakers' hands are tied: The state government pays the money, but the federal government levies income taxes.
Legislators who championed the state compensation package say they never intended for the money to be taxed.
"We want them to get the maximum recovery that's possible for being wrongfully imprisoned," said Rep. Rafael Anchia, D-Dallas. "Just as a practical matter and a moral one, a moral basis, I don't think they should be taxed."
State Sen. Rodney Ellis, D-Houston, said his intent "was to treat it however it ought to be described so that they don't pay taxes on it. That would just be ridiculous."
But Calvin Johnson, a professor of tax law at the University of Texas, said IRS employees are simply "the loyal servants of Congress" and the law is clear: A lump sum awarded for anything other than physical pain and suffering is taxable. Whistle-blowers, for instance, must pay taxes on their awards.
"It isn't that it's lost wages," he said. "It is instead that it's an improvement to your net worth in cash form."
Congress passed the law specifying that only physical pain and suffering awards are exempt in 1996, after hearing about fraud and abuse for claims of emotional pain and suffering. "You've got to show some blood or [have] broken something," Johnson said.
If an exoneree can prove physical pain as a result of wrongful incarceration – such as being beaten while in prison, as opposed to just serving time – he may not have to pay taxes, or may have to pay only on a portion of the award. But if there is no evidence of physical suffering, the award is taxable, Johnson said.
Seeking exemption
Kristopher Moore, a Lubbock attorney whose firm represents a dozen exonerees, said he would argue that the awards should be tax exempt because studies show that incarceration, wrongful or deserved, shortens a person's life.
But rather than seek case-by-case rulings, he's lobbying Congress to carve out an exemption to the physical pain requirement for exonerees.
A bill to do that was introduced a couple of years ago but didn't get far. Moore said he is working with legislators in both parties to reintroduce the legislation.
"The problem to this point has been the unwillingness of the Senate to take up this bill when they were focusing so much on health care," he said. "What we were told is, as soon as they have resolved health care, they'll introduce this bill and work on getting it passed."
Moore is optimistic that the exemption will pass, but Johnson is dubious. "It's got about a snowball's chance," he said.
"Everybody will make a lot of noise, but the real thing is we're sitting with this $1.6 trillion deficit overhang and they're going to have to find a lot of ways to make a lot of revenue."
He doesn't think the payments should be exempt. "The baseline for taxes isn't a moral code," Johnson said. "It is an attempt to describe what your standard of living is" and be taxed accordingly. "That hits me as quite normal.
"If Texas wants to give them more money [to pay the taxes], then Texas can give them more money."
Ellis said raising payments to cover taxes is a possibility, but he's hopeful Congress will make that unnecessary. Taxing people who spent years in prison for crimes they didn't commit is the ultimate in "regressive taxation," he said. "This would be at the top of everybody's list – Democrat, Republican or Tea Party."
Harvey said he's optimistic the federal government will eventually "do the right thing" and exempt the awards.
But even if it does, he said, no amount of money will make up for the fact that he missed his parents' funerals while he was in prison, suffered a stress-related heart attack and broke his hand defending himself in prison fights.
And nothing changes the fact that he was imprisoned while innocent for 12 years.
"You're really not reimbursed – there's no way to reimburse anybody for what we were put through," he said. "But you can certainly try."
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