D.C. Circuit Reverses Itself in Murphy

[Dr. Caligari]

http://pacer.cadc.uscourts.gov/docs/com ... -5139b.pdf

The D.C. Circuit, on panel rehearing, reverses its earlier decision, and finds that Murphy's award of emotional distress damages is "gross income" under section 61, and that the tax on such income is not a "direct tax."

[jg]

http://www.audiosparx.com/sa/play/port_ ... _iid.14910

[wserra]

I don't have the time right now to read this opinion thoroughly, but does this passage make sense to anyone?

In the present opinion, we affirm the judgment of the district court based upon the newly argued ground that Murphy’s award, even if it is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution.

Why is it not "income"? If it is not "income", why is it subject to an "income" tax (even were it subject to Congress' power to enact a "something other than income" tax)?

Is the DC Circuit simply wiping egg off its face?

[Famspear]

Well, it's not much of a surprise - certainly not as much of a surprise as the original ruling last year.

But, let's read this opinion, and see how they explain this one.

[Kimokeo]

Why is there this need to determine if it is a direct or indirect tax. If it's income - who cares?

[LPC]

A very curious opinion, reaching the right result for what is (for me) the wrong reason.

The court first balked at considering whether Murphy's damage award was "income," observing that "although the 'Congress cannot make a thing income which is not so in fact,' [citation omitted], it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9."

Having made the 16th Amendment argument irrelevant to the question of statutory interpretation, the court then went on to consider whether the damage award was "gross income" as defined by section 61(a), which is “all income from whatever source derived.”

Confronted again with the issue of whether the damages were "income," this time within the meaning of section 61(a) instead of the 16th Amendment, the court expressed doubt that the damage award should be considered gross income, based solely on the language of section 61(a) and continuing in its obstinate refusal to consider whether the damage award is economic or constitutional income. But "reading § 61 in combination with § 104(a)(2) of the Internal Revenue Code presents a very different picture — a picture so clear that we have no occasion to apply the canon favoring the interpretation of ambiguous revenue-raising statutes in favor of the taxpayer." The court then concludes that Congress would not have amended section 104 unless damage awards were otherwise included in gross income, so therefore they are.

The court then spends the last two-thirds of the opinion reviewing the meaning of "direct tax" in order to conclude that a tax on awards for personal injuries is not a tax on persons or property but upon a particular type of transaction. So it's an excise.

A most circuitous route, and totally unnecessary.

[LPC]

Is the DC Circuit simply wiping egg off its face?

I think it's refusing to admit that the egg is there.

[Imalawman]

Is the DC Circuit simply wiping egg off its face?

I think it's refusing to admit that the egg is there.

I concur and I felt the same way reading the opinion. It is very circumloquacious and it seems as though Ginsburg is deliberately trying to prevent further critique of this case. I think the decision reached could have been reached in about half the paper used. But in the end, it puts an end to the human capital argument, corrects the tax basis error (sort of) and reaches the correct result. I can't be too hard on the opinion. At the very least I don't think I'll be seeing this case cited by my TP cases.

As a side note, when I was last in DC I was talking with a supreme court clerk who clerked for Ginsburg and thought the decision would resolve this way. So I'm not surprised, but I'd hoped for a little more clarity.

[wserra]

Is the DC Circuit simply wiping egg off its face?

I think it's refusing to admit that the egg is there.

That's what I meant. There are times when "oops" is the most appropriate response, for courts as well as everyone else.

[Quixote]

I don't have the time right now to read this opinion thoroughly, but does this passage make sense to anyone?

In the present opinion, we affirm the judgment of the district court based upon the newly argued ground that Murphy’s award, even if it is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution.

Why is it not "income"? If it is not "income", why is it subject to an "income" tax (even were it subject to Congress' power to enact a "something other than income" tax)?

Is the DC Circuit simply wiping egg off its face?

Worse. The Court said that anything Congress calls income is income. Further, the Court said when Congress repeals a provision excluding something from gross income, it has effectively called that something "income".

Edited to add "oops, LPC covered it."

[LPC]

But in the end, it puts an end to the human capital argument, corrects the tax basis error (sort of) and reaches the correct result. I can't be too hard on the opinion. At the very least I don't think I'll be seeing this case cited by my TP cases.

Dreamer.

Although the court vacated it's earlier opinion, the opinion will continue to appear in the Federal Reporter, so it can still be cited.

And the court never repudiated the "human capital" argument in the second opinion, so that dicta/rationale is arguably still there.

And since when did TPs stop making arguments just because the case law didn't support them?

And this opinion is likely to be the last word on the subject, at least in the DC Circuit. The court is not going to grant en banc rehearing, and consider the case a third time, just to reach the same result for a different reason, and the Supreme Court is not likely to grant cert for similar reasons.

[Famspear]

I agree with the commentary by Dan and others above.

The court seems to have concluded:

(1) that the taxpayer's compensation was received on account of a non-physical injury or sickness;

(2) that gross income under section 61 of the Internal Revenue Code does include compensatory damages for non-physical injuries, even if the award is not an "accession to wealth,"

(3) that the income tax imposed on an award for non-physical injuries is an indirect tax, regardless of whether the recovery is restoration of "human capital," and therefore the tax does not violate the constitutional requirement of Article I, section 9, that capitations or other direct taxes must be laid among the states only in proportion to the population;

(4) that the income tax imposed on an award for non-physical injuries does not violate the constitutional requirement of Article I, section 8, that all duties, imposts and excises be uniform throughout the United States;

(5) that under the doctrine of sovereign immunity, the Internal Revenue Service may not be sued in its own name.

I read it very fast, but it seems odd that the court seemed imply that, in the absence of 104(a)(2), section 61 would have somehow been "ambiguous" about whether a personal injury recovery is covered by section 61. See also the statement on p18 that "it is unclear whether section 61 covered such an award before 1996 (before the insertion of the word "physical", etc.). The court still seems to be dancing around a bit. I can recall no other court ever hinting that section 61 is ambiguous in any way about the all-encompassing nature of section 61 income. Forget about 104(a)(2) or any changes in wording to 104(a)(2).

Anyway, the court seemed to say that by reading 104(a)(2) and 61 TOGETHER, there is no ambiguity.

They wiggled their way out of this one, but I think Ginsburg, Rogers and Brown still need to take some tax refresher courses or something.

--Famspear

[Famspear]

The court ruled that the personal injury award Ms. Murphy received was "within the reach of the congressional power to tax under Article I, Section 8 of the Constitution" -- even if the award was "not income within the meaning of the Sixteenth Amendment." see pages 5 and 6.

I'm still reading parts of this thing in fits and starts, between real world work. It seems that the court was giving itself the "out" of saying that although the Congress cannot "make" something income that is not "in fact" income, the Congress CAN constitutionally LABEL something as "income" (even if it's not income), and CAN TAX IT AS THOUGH IT WERE INCOME under Article I, regardless of whether or not it's really "income" under the 16th Amendment. See page 16. And the court indicated that such a tax is still an excise (an indirect tax), so the apportionment rule does not apply.

If I'm a tax protester, I'm not happy.

--Famspear

[Famspear]

If I'm a tax protester, I'm not happy.

Of course, if I were a tax protester, I'd be delusional anyway, and I would just argue that the Murphy court said the opposite of whatever the court really said, just like tax protesters do in lots of other cases.

--Famspear

[Imalawman]

If I'm a tax protester, I'm not happy.

Well, that goes without saying. You wouldn't really be a TP if you were happy now would you?

Being disgruntled is the sine qua non of a Tax Protester.

[Famspear]

Well, that goes without saying. You wouldn't really be a TP if you were happy now would you?

Being disgruntled is the sine qua non of a Tax Protester.

Agreed. Right now, tax protesters should be disgruntled, disgusted, and disturbed.

Since I am not a tax protester, I am simply gruntled, gusted, and turbed.

I think.

--Famspear

[notorial dissent]

And they just couldn't have come out and said that as the law is written the loss compensation had to be considered as income for tax purposes, and then just shut up, and not killed all those trees with furhter drivel that is going to come back to haunt them at some future date?

[Famspear]

And they just couldn't have come out and said that as the law is written the loss compensation had to be considered as income for tax purposes, and then just shut up, and not killed all those trees with furhter drivel that is going to come back to haunt them at some future date?

Yeah, but maybe we have to concede that at least Ginsburg et al. did a pretty creative job of wiggling, unsticking, and backing themselves butt first out of a rabbit hole in which they were pretty tightly stuck all the way to the ankles. Give 'em credit for that, maybe. The editorial commentary about the original Murphy opinion was pretty scathing. One commentator, a professor I think, had said something along the lines of "well maybe we in the law schools just aren't doing our job" if three Federal appeals court judges could come up with something like they did on the first Murphy decision.

--Famspear

[Famspear]

You know, I'm noticing that a lot of my commentary about this Murphy decision is just repeating what LPC had already said. Obviously I'm a slow reader. I should just have read his commentary.

--Famspear

[Nikki]

The court ruled that the personal injury award Ms. Murphy received was "within the reach of the congressional power to tax under Article I, Section 8 of the Constitution" -- even if the award was "not income within the meaning of the Sixteenth Amendment." see pages 5 and 6.

I'm still reading parts of this thing in fits and starts, between real world work. It seems that the court was giving itself the "out" of saying that although the Congress cannot "make" something income that is not "in fact" income, the Congress CAN constitutionally LABEL something as "income" (even if it's not income), and CAN TAX IT AS THOUGH IT WERE INCOME under Article I, regardless of whether or not it's really "income" under the 16th Amendment. See page 16. And the court indicated that such a tax is still an excise (an indirect tax), so the apportionment rule does not apply.

If I'm a tax protester, I'm not happy.

--Famspear

As an extremely rough parallel, consider that Congress has deemed certain forms of forgiveness-of-debt to be taxable income. Also, Social Security payments, which CLEARLY were income, didn't used to be but now they are.