In the 1985 case United States v. James et al., the U.S. Supreme Court ruled that workers' compensation benefits received under the Longshoremen's and Harbor Workers' Compensation Act (LHWCA) are not subject to federal income tax. The court held that these payments were equivalent to personal injury damages, which are also exempt from taxation. This decision overturned a previous ruling by the Fifth Circuit Court of Appeals, which had determined that LHWCA benefits were taxable as income because they replaced lost wages rather than compensating for physical injuries or sickness directly.

In the dissenting opinion for United States v. James et al., Justice Brennan, joined by Justices Marshall and Blackmun, argued that Congress did not intend to exclude from federal taxation monies received as compensation for personal injuries when it enacted the Federal Employees' Compensation Act (FECA). The majority's interpretation of FECA was seen as a departure from established principles of statutory construction. They pointed out that there is no explicit provision in FECA excluding such payments from gross income; therefore, they should be considered taxable under the Internal Revenue Code unless specifically exempted. Furthermore, they noted that other statutes providing federal benefits explicitly state whether those benefits are excluded from gross income or not - but FECA does not have such language. Therefore, according to them, it cannot be assumed that Congress intended to make these payments tax-free without clear evidence supporting this view.