A three-judge panel of the court, the United States Court of Appeals for the District of Columbia Circuit, said taxing awards for nonphysical compensatory damages did not violate the Constitution. A 1996 federal law exempts from taxes compensation for physical injuries.

The panel upheld the decision by the Internal Revenue Service to impose $20,665 in taxes on Marrita Murphy, who had been awarded $70,000 in a lawsuit against the New York Air National Guard. Ms. Murphy claimed that the Guard ''blacklisted'' her and gave her bad job references after she complained to the Labor Department about environmental conditions.

''We reject Murphy's argument in all aspects,'' Chief Judge Douglas H. Ginsburg wrote for the court, overturning its own ruling of last August. ''We hold that a tax upon such damages is within the Congress's power to tax.''

The unusual reversal was prompted by new arguments made by the government after last year's decision.

Legal experts had said the original ruling was a significant threat to the ability of the I.R.S. to collect taxes and would have opened the door for constitutional challenges to other parts of the tax code.

Ms. Murphy's lawyers criticized the decision Tuesday, saying it could dissuade whistle-blowers from coming forward.

''The decision makes a mockery of make-whole remedies under civil rights law,'' said David K. Colapinto, one of her lawyers. ''So don't get hurt, because you're never going to be made whole. Uncle Sam will take a tax cut.''

Copyright 2007 The New York Times Company