Apparently the Court of Appeals for the D.C. Circuit has decided that emotional damages are not taxable by the federal government. Up till now, the IRS has treated monetary awards for emotional damages as income and not as compensation for loss of a personal attribute (i.e. physical injury). When I learned this back in my income tax class in law school, it never made sense to me how a person who has suffered an injury, gone to court, made the other side pay for the wrong that they were put through, should have the money taxed as normal income. Thanks to Marrita Murphy, that may no longer be the case.
Of course, the IRS could always appeal to the U.S. Supreme, but that decision has not been officially made yet.
On the other side of the coin, there are those who are warning that this decision could be disastrous. I'm not sure that I agree with those arguments, but some are mentioned at the article over at Bloomberg.com.