D.C. Circuit Reverses Itself in Murphy

[Famspear]

You could argue that there's no discrepancy, as follows. Purchased business goodwill is a property right, not a personal right, while the reputation of an individual is a personal right.

Purchased goodwill in an arms-length transaction is essentially the excess of cost over the sum of each of the fair market values of each of the individually identifiable net assets acquired. Purchased goodwill arises only in connection with an asset acquisition, a property acquisition (indeed, even if all the assets acquired were "intangibles").

If it's truly a fair market value acquisition - a transaction between a willing buyer and a willing seller, neither being under the compulsion to buy or sell, and both having reasonable knowledge of relevant facts - then the "excess" paid for the assets must somehow be an additional intangible property right (goodwill) that is peculiar to the particular business being purchased.

By contrast, an individual's right to his or her good name is not usually thought of as a "property" right. Reputation does not generally arise as a result of a "purchase" of any property (tangible or otherwise).

In other words, maybe the difference is not merely that a capitalizable cost was incurred the former but not the latter, but also that in the latter there was no acquisition of property at all.

That might not be a completely satisfactory explanation, however, and LPC's points are well taken.

--Famspear

[Duke2Earl]

Actually, an individual can have personal goodwill. See a case named Martin Ice Cream.

[natty]

By law, a worker has no "basis" in his or her own labor. All the cash disbursements for food, etc., that went into building the muscles or brainpower or whatever he or she used to perform the labor were expenses - and worse, they were non-deductible (sec. 262).

Similarly the cash disbursements (whatever they were) that went into "building" one's emotional well-being over the years, were non-deductible personal expenses, not "additions to basis." For emotional distress, there is no "basis bank" if you will, that a taxpayer can go to in order to find a deduction to offset against the amount realized on the settlement.

Again, this is apples and oranges. A worker does not realize a loss in his human capital just because he works. (That is the fallacy of the argument of the TPs.) All of the non-deductible living expenses merely maintain, and in some cases improve his capital value as a worker.

But what if that worker loses a leg while working, then through an insurance settlement, is compensated for the loss of his leg. Is the compensation income? Does he get to deduct the loss of his leg just because Congress grants him the deduction? Doesn't the compensation merely replace the human capital that was lost?

I disagree. There is a "basis bank" that is intangible and priceless. It is everything that went into making you who you are. It is your education, your health, your well being, your reputation. All of the non-deductible living expenses that went into building your "capital".

If you want a tangible analogy, it is no different than owning a house that burns to the ground. You agree to an insurance settlement that allows you to build a new house that replaces the house that was lost. Would you argue that this compensation was taxable income or that you could not offset the compensation by the lost house? But that is exactly what the Murphy decision has held. The insurance settlement is gross income, not because you realized a gain; but because the insurance settlement was a transaction that was fully taxable.

[natty]

My point (which is the same point made by Famspear, Caligari, et al.) is that saying that there is a loss for which a court award is compensation does not answer the question of whether there is gain or income from the court award. In calculating gain, the question is ALWAYS whether the compensation for the thing lost is more or less than the COST (i.e., basis) of the thing, not the value of the thing.

Perhaps the difficulty with accepting the "human capital" argument is that 1) the costs are often intangible (how much did you pay for your education? what living expenses built your human capital?, etc.) and 2) it is almost impossible to calculate the loss of human capital separate and apart without considering the loss of potential earning capacity.

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

The Murphy court on rehearing evaded the "human capital" argument, then I suppose, left it up to Congress to determine whether or not to allow any deductions. Congress can now tax the whole compensation amount simply because it was a "transaction".

[Quixote]

Would you argue that this compensation was taxable income or that you could not offset the compensation by the lost house?

It is income to the extent the insurance proceeds exceed the owner's basis in the house.

But that is exactly what the Murphy decision has held. The insurance settlement is gross income, not because you realized a gain; but because the insurance settlement was a transaction that was fully taxable.

I don't think that's what Murphy said at all. The Murphy court did not hold that all transactions are taxable. Only transactions that give rise to income, in its usual sense, or as defined in the IRC, result in gross income.

[Imalawman]

My point (which is the same point made by Famspear, Caligari, et al.) is that saying that there is a loss for which a court award is compensation does not answer the question of whether there is gain or income from the court award. In calculating gain, the question is ALWAYS whether the compensation for the thing lost is more or less than the COST (i.e., basis) of the thing, not the value of the thing.

Perhaps the difficulty with accepting the "human capital" argument is that 1) the costs are often intangible (how much did you pay for your education? what living expenses built your human capital?, etc.) and 2) it is almost impossible to calculate the loss of human capital separate and apart without considering the loss of potential earning capacity.

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

The Murphy court on rehearing evaded the "human capital" argument, then I suppose, left it up to Congress to determine whether or not to allow any deductions. Congress can now tax the whole compensation amount simply because it was a "transaction".

You can argue that point until you're blue in the face, but it won't change the fact that unless you able to show a direct, capitalized input into your asset, it is not included in basis - for tax purposes. You might argue that you've expended cash for education, but that was an expense, not a capitalized cost of acquiring "human capital" - whatever that nebulous term means. You were paying to attend college. You might have had many personal reasons for doing so, but you can't reasonably argue that you were capitalizing those cost in order to acquire a greater degree of human capital. Would you argue that you could amortize the capitalized costs of your human capital as you aged? The whole concept is rather absurd and far too vague to support a tax basis in yourself. IMHO

[Famspear]

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

Sorry, but I am "denying" that. The phrase "thus forming a basis" is a non sequitur. The mere fact that you incurred costs in building something called "human capital" (assuming that there is such a thing) does not mean that you somehow also have tax "basis" in that "human capital." There is simply no statute or case law that clearly says you have "basis" in "human capital."

Human capital is not a "property" concept. Basis, on the other hand, is a "property" concept and, in particular, it is a tax law concept describing a way to account for the capitalized amount of "property."

Again, under current law, virtually all the expenditures that you would incur to create this nebulous "human capital" would be "expenses" (not "capital expenditures"). They would be what the tax law calls personal, living and family expenses under section 262.

In order to be included in "basis" under current tax law, an expenditure generally has to be a capital expenditure, not an "expense."

Under current law, you just do not have "basis" in "human capital."

--Famspear

[Nikki]

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

Sorry, but I am "denying" that. The phrase "thus forming a basis" is a non sequitur. The mere fact that you incurred costs in building something called "human capital" (assuming that there is such a thing) does not mean that you somehow also have tax "basis" in that "human capital." There is simply no statute or case law that clearly says you have "basis" in "human capital."

Human capital is not a "property" concept. Basis, on the other hand, is a "property" concept and, in particular, it is a tax law concept describing a way to account for the capitalized amount of "property."

Again, under current law, virtually all the expenditures that you would incur to create this nebulous "human capital" would be "expenses" (not "capital expenditures"). They would be what the tax law calls personal, living and family expenses under section 262.

In order to be included in "basis" under current tax law, an expenditure generally has to be a capital expenditure, not an "expense."

Under current law, you just do not have "basis" in "human capital."

--Famspear

UNLESS -- you have purchased a business for more than its book value and attributed some of the excess to the "human calipal" assets consisting of the intact experienced work force. Just like Good Will.

[Famspear]

you have purchased a business for more than its book value and attributed some of the excess to the "human calipal" assets consisting of the intact experienced work force. Just like Good Will

I think we may be talking about separate concepts, though. Purchased goodwill is one thing. If you want to call the goodwill in your example an investment in "human capital" in the sense you've described above, that makes sense.

By contrast, I'm responding to what I understand is, in substance, an argument that personal living expenses of an individual, a living person, could somehow be capitalized - by that person - as part of "basis" in "human capital" of that person.

[Nikki]

I know exactly what you meant.

I was just being pedantic, precise, and

[natty]

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

Sorry, but I am "denying" that. The phrase "thus forming a basis" is a non sequitur. The mere fact that you incurred costs in building something called "human capital" (assuming that there is such a thing) does not mean that you somehow also have tax "basis" in that "human capital." There is simply no statute or case law that clearly says you have "basis" in "human capital."

What are you denying, and what is the non sequitur?
If there are costs, don't those costs establish a basis?

You buy a plot of land. You build a house on that land. Doesn't every board, every nail, every cost become the basis for that house. Don't you realize income if the house is sold for more than its basis? Of course.
Then why can't everything you invest in your well being, every cost also form the basis of your human capital? The only difference being is that you are never sold thus realizing any income.

Under current law, you just do not have "basis" in "human capital."

--Famspear

That is why I am arguing that the law is an ass. You just have been incapable of showing how my reasoning and logic is flawed.

[Nikki]

Investing in human capital ended with the emancipation proclaimation.

If your theory were to hold any water (which would immediately place in admiralty jurisdiction) you would only be able to capitalize the costs to develop the human body to its adult size -- all other costs after that would be expensed maintenance items.

Also, you would not have any basis in the value of your body until the time came that you were supporting yourself. The costs sunk into your body through childhood and adolescence were borne by your parents (or upbringers) and were gifted to you. You didn't lay out a cent so you have no basis in the property other than what you invested between emancipation and adulthood.

[natty]

But that is exactly what the Murphy decision has held. The insurance settlement is gross income, not because you realized a gain; but because the insurance settlement was a transaction that was fully taxable.

I don't think that's what Murphy said at all. The Murphy court did not hold that all transactions are taxable. Only transactions that give rise to income, in its usual sense, or as defined in the IRC, result in gross income.

I was using an analogy. The Murphy panel held that Congress may LABEL anything income whether or not it is in fact income relying on the Penn Mutual case.

This tells me, that a lot of people have wasted a lot of time arguing about the meaning of 'income'. All that needs to be shown is that there was a transaction, therefore, the tax does not require apportionment if Congress chooses to tax that transaction. (In Murphy's case, Congress chose to tax her damage award by implication.)

[Famspear]

Natty wrote:

If there are costs, don't those costs establish a basis?

The answer is no. Merely incurring a cost, merely paying out money does not mean you have "basis." You are trying to take two concepts and combine them into one. LOTS of "costs" don't give you "basis."

Let's try again, with a different example. I pay my monthly electric bill. In return, I receive electricity - but only for one month. From an accounting standpoint, that's an expense, not a capital expenditure. Why? At the end of the month, I've used all the electricity. It's gone. I now need "more" electricity if I am to CONTINUE to operate my lights, etc., for another month. In accounting parlance, I have an "expired cost" - or, more precisely, the benefit I received (a lighted house) has expired. I need to pay another bill to keep receiving more benefit. You cannot have "basis" in an expensed item. That's just a RULE.

But, if I BUY a house, that house continues to exist, even after I have bought it. Its cost has not "expired" - or, again, more precisely the BENEFIT I purchased has not expired at the end of one month. It still has a roof and walls, etc., and I can continue to use it from month to month. I've already bought it. That purchase, that cash outlay, is therefore a capitalizable cost (not an expired cost).

ONLY CAPITALIZABLE COSTS can be included in "basis" -- because that's what basis means. That's a RULE. It's a basic rule of financial accounting, and it's a basic rule of Federal income tax accounting.

Yes, when you buy a plot of land and build a house on that land, every board, every nail, every cost become the basis for that house. "Don't you realize income if the house is sold for more than its basis?", you ask. Of course.

A house is PROPERTY. It's an asset.

Your body, however, is not property in the LEGAL sense or the ECONOMIC sense. In accounting, in economics, and in law, your physical body is not generally considered "property." You don't "own" it in the same sense that you own your house. Yes, it's "your" body, but it's not "property."

The concept of basis relates to an investment in PROPERTY, not to an investment in your physical body. That's just a RULE. If that doesn't make sense to you, or you can't accept that, there's probably nothing I can do about it.

That's why the money (and everything else) you invest in your well being -- cannot form the "basis" of your so-called "human capital." Human capital is not an asset or property in the legal sense (and we're talking about law here).

You are arguing that "the law is an ass" for this reason. I'm not disagreeing with you -- I'm just telling you what the law is.

You keep saying things like "You just have been incapable of showing how my reasoning and logic is flawed." The point is that it doesn't matter whether your logic is "perfect" (it's not, anyway) - you are making the fundamental conceptual error of trying to use that reasoning to come to a conclusion about what the law is. You are trying to say that because your logic is perfect (which it isn't anyway, as I have already illustrated), that this means that the law ACTUALLY IS what you want the law to be.

"Law" (i.e., secular law, man-made law) is not something inside you, the essence of which you can somehow "discover" by using your own reasoning or logic -- even if that reasoning or logic is "correct." To understand law, you must learn to use the rules of legal analysis, not the rules of logic you learn in a college philosophy or logic class.

--Famspear

[Famspear]

Now, various law professors weigh in on the Murphy decision:

http://taxprof.typepad.com:80/taxprof_b ... disse.html

[Famspear]

Brian Camp, law professor at Texas Tech University, wrote:

I read the opinion as a HUGE CYA and nothing more.[ . . . ] So the opinion just skips over the question of whether the damages from emotional distress are income within the meaning of the constitution. Presumably, this is so Ginsburg can just avoid saying "Yep, our prior opinion blew it big time."
[ . . . ] If I'm reading this right, it is not a satisfactory opinion at all, with all its dodging and weaving and sanctimonous crapola about the government raising a "new" argument. You logically do not get to the Article I issue until you've gone through the 16th Amend. issue. By dodging the issue of whether an economic increase in wealth is the touchstone of the legal definition of income, Ginsburg creates confusion in the law, fuels doubt, and sows needless seeds of litigation.

http://taxprof.typepad.com/taxprof_blog ... disse.html

I think this might be the first time I've heard a law professor refer to a court opinion as "sanctimonious crapola."

--Famspear

[Famspear]

Errata:

Apologies; my spelling on Professor Camp's name appears incorrect. Should be "Bryan Camp," not "Brian Camp."

Here's his bio at the Texas Tech University Law School web site:

http://www.law.ttu.edu/lawWeb/faculty/bios/Camp.shtm

--Famspear

[LPC]

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

Murphy received $70,000, of which $45,000 was for “past and
future emotional distress,” and $25,000 was for injury to
her "vocational reputation.”

Please explain what COSTS went into her emotional well-being and her vocational reputation. I would like to hear an example of *ONE* cost that should be considered a capital investment and not a personal living expense.

For example, "vocation reputation" usually arises from the quality of your work. You've admitted that workers have no basis in the labor, so the work Murphy put into her vocational reputation also has zero basis.

I also cannot imagine any out-of-pocket payment that could be considered a capital investment in emotional well-being.

You seem to be taking the position that, because the cost basis of emotional well-being and reputation cannot be calculated, we should assume that they are enormous and will always exceed any damage award. It is equally logical to assume to assume that the costs are non-existent and should be ignored.

[natty]

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

Murphy received $70,000, of which $45,000 was for “past and
future emotional distress,” and $25,000 was for injury to
her "vocational reputation.”

Please explain what COSTS went into her emotional well-being and her vocational reputation. I would like to hear an example of *ONE* cost that should be considered a capital investment and not a personal living expense.

First of all, 'a capital investment' is composed of after tax dollars. 'A personal living expense', since it is not deductible from gross income and has nothing to do with the production of the gross income itself, is paid out of capital (after tax dollars). Therefore, all personal living expenses go into building one's human capital. After all, you could survive on bean burritos and live under a bridge, but most people choose to live better than that.

For example, "vocation reputation" usually arises from the quality of your work. You've admitted that workers have no basis in the labor, so the work Murphy put into her vocational reputation also has zero basis.

Second, workers have no basis in their labor because their own labor cost them nothing. And living expenses have no correlation to the production of income, otherwise they would be deductible as the cost of doing business. After all, you could survive on bean burritos and live under a bridge, but most people choose to live better than that. (TPs argue in error that when a person labors, he some how suffers a loss; and any compensation replaces that loss.)

I also cannot imagine any out-of-pocket payment that could be considered a capital investment in emotional well-being.

What about that seminar/retreat she attended to relieve her anxiety? (hypothetically, of course)

You seem to be taking the position that, because the cost basis of emotional well-being and reputation cannot be calculated, we should assume that they are enormous and will always exceed any damage award. It is equally logical to assume to assume that the costs are non-existent and should be ignored.

I take the position that the cost basis of emotional well-being and reputation are DIFFICULT to calculate.
You seem to take the position that since you can't quantify the cost basis to the penny, or since there is no statute or previous case law, cost basis does not exist.
Well, the jury found as a FACT that Murphy suffered a loss and quantified that loss. However arbitrary that award may seem, it stands as a fact. And as I showed above, that loss came out of her CAPITAL. The job for the court was to determine if that fact finding was income. They evaded that question.

Now your job, if you choose to engage this discussion further, Mr. LPC, is to show how Murphy's loss came out of pre-taxed dollars and not her capital.

[Famspear]

Now your job, if you choose to engage this discussion further, Mr. LPC, is to show how Murphy's loss came out of pre-taxed dollars and not her capital.

Uh, no, that's not LPC's job. LPC and others have explained the law to you. I have also explained that you are making a fundamental error by trying to "reason" all this through with your own idiosyncratic version of "logic." You are quite wrong.

You continue to confuse and conflate. The jury found that Ms. Murphy incurred a "loss" in the form of emotional distress. The jury did not "find" that Ms. Murphy had any "tax basis" in that loss.

Now you have proceeded down the rabbit trail of pre- and post-tax dollars.

As has been explained to you over and over, whatever money you spend to build up your concept of "human capital" is probably going to be a non-deductible personal living & family, expense, etc., under section 262. That's the law. There is no amount of argument you can make that will change that. Section 262 expenses cannot create or increase "basis" in anything. There's nothing you can do about that. And "basis" is a concept relating to property, not "human capital." There is nothing you can do about that.

--Famspear