Murphy - or are lawyers natural contortionists?

[Cpt Banjo]

Taxes are all about extracting as much as possible from as many people as possible and doing so in a revenue maximizing manner.

Or as an 18th century French maxim put it, taxation is the art of so plucking the goose as to procure the most feathers with the least possible amount of hissing.

[Famspear]

Natty wrote:

Taxation is all about fairness. There is no other criteria [sic]

Ah, if only!

Imagine going into court and arguing that your income is not taxable, and then hearing the government lawyer point out IRC section 61. You then announce to the court that section 61 cannot be considered, and the only criterion for judging taxability is "fairness."

Imagine going into court and arguing that your personal living expenses are deductible. The government lawyer cites section 262. You then announce to the court that 262 cannot be considered, and that the only criterion for judging deductibility of personal living expenses is "fairness."

Oh yeah.

[Famspear]

Yes. They are 'gressive, progressive and possibly aggressive

For Federal income tax: "progressive" as to the way the rates progress upward as my income goes upward; "regressive" as to the effects on the balance of my bank account; "aggressive" as in "the power to tax is the power to destroy".

[Famspear]

Not that I'm complaining, mind you.

[natty]

If you really believe that taxation is "all about fairness" then I have a bridge in San Francisco I want to sell to you.

--Famspear

Do you even read my posts, mr. lawyer? Or, are you on autopilot and just assume you are dealing with a TP when anyone challenges tax law? You contort every post of mine to mean something I did not say. You have not yet responded intelligently to any of my posts.

[Famspear]

Natty wrote:

Do you even read my posts, mr. lawyer? Or, are you on autopilot and just assume you are dealing with a TP when anyone challenges tax law? You contort every post of mine to mean something I did not say. You have not yet responded intelligently to any of my posts.

Dear Natty: I definitely do not assume that you are a tax protester. And I don't mean to "contort" anything you say. And I'm sorry you don't consider my responses to be "intelligent." Aahh'm jus' a good ole Texas country boy.

What I have been saying, in response to your posts, is what the tax protesters are always saying:

"Show me the law."

[Imalawman]

Perhaps this will clarify the situation Natty:

Are you discussing what the law should be or what the law is? I think Famspear thinks you're arguing over how the court should rule now under the current law. But perhaps you're simply trying to point out that the current law is flawed and you're offering what you think to be the logical approach?

[natty]

What I have been saying, in response to your posts, is what the tax protesters are always saying:

"Show me the law."

Since the Murphy panel failed to decide whether or not Murphy's award was income, the "human capital" argument is still alive. LPC challenged me to prove it. That's what this thread is about.

[Dr. Caligari]

While I agree that the Penn Mutual decision is a model of clarity in thinking about these things ... in Penn Mutual, they were also dealing with provisions of the tax code which defined the income of insurance companies in a certain manner (the provisions under consideration there defined the gross income of insurance companies in such a way that you could LOSE money, but still be taxed - which is what happened in Penn Mutual ... a deduction was not allowed which meant that a loss on the books was not a loss under the income tax). In Penn, the "income tax" was more akin to a gross receipts tax, and not really an income tax ... and as the court noted, that doesn't matter ... and they were right.

My tax prof in law school (Bernard Wolfman) was a big fan of Penn Mutual; he gave out a xerox of that opinion and had us read it as the very first decision we studied in the class, before we even opened the casebook. I remember being outraged by the result and arguing against it in class, but getting shot down. My penalty for daring to disagree with Penn Mutual was that, later in the semester, he called on me to recite the facts of Crane v. Comm'r, perhaps the most confusing case in the history of tax law, and kept me on the hot seat for the whole hour we were discussing that case.

[Cpt Banjo]

My penalty for daring to disagree with Penn Mutual was that, later in the semester, he called on me to recite the facts of Crane v. Comm'r, perhaps the most confusing case in the history of tax law, and kept me on the hot seat for the whole hour we were discussing that case.

How long did you spend on the [in]famous footnote 37?

[Famspear]

And when did you get to Tufts?

[Famspear]

Natty wrote:

Since the Murphy panel failed to decide whether or not Murphy's award was income, the "human capital" argument is still alive. LPC challenged me to prove it. That's what this thread is about.

Earlier, in another thread, Natty wrote:

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".

viewtopic.php?t=961&start=75

Natty later wrote:

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.

Dear Natty: In your example of the worker losing a leg, the compensation through insurance is excludible from gross income by virtue of 104(a)(2). But 104(a)(2) is not a rule that a personal physical injury recovery is not income under the Sixteenth Amendment. And 104(a)(2) is not a rule that a personal physical injury recovery is not true economic income. Section 104(a)(2) is just a statutory exclusion for what is income that, under 61, would be includible in "gross income" if 104(a)(2) did not exist.

The compensation received by the worker in your example is excluded from gross income -- but that's because Congress has enacted a statute on that point, not because of some independent economic theory that the recovery is a recovery of "human capital" -- and not because of some constitutional law theory that the recovery is not really income. If Congress ever repeals 104(a)(2), a personal injury recovery for a leg lost after the effective date of repeal would be taxable. In that case, you probably would have no winning ground for non-taxability treatment, under either a "human capital" argument or a "hey guys this is not really economic income" argument.

Here, summarized, are some of my arguments, most of which are legal as opposed to economic:

Argument 1 (economic): A recovery in connection with a personal injury (physical or non-physical) is true economic income, regardless of what the court in Murphy said about the LAW in August of 2006 or July of 2007.

Argument 2 (legal): Under current U.S. constitutional law, the Congress has the power to tax personal injury recoveries of any kind by statute if Congress so desires, and such a tax is (or would be) an indirect tax (an excise) that is (from a Constitutional law standpoint) subject only to the rule of geographical uniformity. However, Congress has chosen, by enacting section 104(a)(2), NOT to tax recoveries on account of personal physical injuries or personal physical sickness. Congress can change that rule at any time. Yes, compensation that replaces human capital CAN be non-taxable, but only if Congress wants it to be so. On this particular issue, what Congress giveth, Congress may take away -- without running afoul of the Constitution.

Argument 3 (legal): Except (maybe) in the District of Columbia, a recovery on account of a personal injury or sickness (either physical or non-physical) -- a recovery on account of a loss of "human capital" -- is "income" within the meaning of the Sixteenth Amendment. Further, whether a particular recovery is properly TAXABLE AS INCOME (in D.C. or anywhere else) depends on how it is classified under 104(a)(2), even if it's not considered "income" (e.g., in the D.C. Circuit) as that term is used in the Sixteenth Amendment.

Argument 4 (legal): Under current law, the costs incurred by an individual in building his or her own "human capital" generally are not capitalizable, do not represent an investment in "property," and do NOT go into anything that the Internal Revenue Code currently recognizes as "basis." Under the current Code, unless those costs are deductible under 162 (trade or business) or 212 (for production of income, etc.) or some similar provision, those costs are treated as section 262 personal living expenses, and are non-deductible. There is no statutory "basis bank" for "human capital," whether "intangible and priceless" or otherwise.

If, as Imalawman is asking, you are just making a tax policy argument using the human capital theory, and that Congress should change the statute to provide that ALL personal injuries, whether physical or non-physical, should be non-taxable, then I would not necessarily disagree.

--Yours, Famspear

[LPC]

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.

A capital investment is not deductible. Personal living expenses are not deductible. Therefore, all personal living expenses are capital investments?

You invented a syllogism that I never said.

Actually, you did. You just can't recognize it as such.

If you want a syllogism, it is this: All after tax dollars become capital. Personal living expenses are paid with after tax dollars. Therefore, personal living expenses are paid with capital.

Well, there you go, you said it again. A capital investment is not deductible. Personal living expenses are not deductible. Therefore, all personal living expenses are capital investments.

You don't seem to understand that saying "an expense is paid with after-tax dollars" is the same as saying "the expense is not deductible.

And the major premise of your syllogism is wrong. The word "capital" can have a number of different meanings in economics, accounting, and finance, but "all after tax dollars" is not one of those meanings.

You had implied by your question that personal living expenses were not capital investments.

That's because they're not.

My proposition is that all personal living expenses over and above food necessary for subsistence is a capital expenditure forming "human capital".

Originally, you said that "all personal living expenses go into building one's human capital." Now you've qualified that by referring to personal living expenses "over and above food necessary for subsistence." That would mean that money spent on cable television, vacations, alcohol, gambling, and prostitutes are "capital expenditures," but that's ridiculous.

Unless your definition of "capital" is "anything not deductible," in which case your reasoning is essentially circular because your definition of capital assumes your conclusion.

I originally thought your problem was that you did not understand the meaning of "income," but it's becoming increasing clear that you don't understand the meaning of "capital."

[LPC]

Taxation is all about fairness. There is no other criteria.

Nonsense.

Others have already ridiculed your statement, but I want to provide some examples (off the top of my head) of additional (and competing) tax policies that have nothing to do with fairness.

1. Revenue. First and foremost, taxes must raise the desired amount of revenue.

2. Efficiency. Taxes should be as simple as possible (and therefore inexpensive) to assess and collect.

3. Economic growth. Taxes should not discourage economic investments.

4. Avoidance. Taxes should be difficult to avoid legally, which means that there should not be obvious loopholes.

5. Non-tax policies. Taxes are often enacted or modified to carry out non-tax policies, such as encouraging individual home ownership, or providing lower interest rates to states and municipalities borrowing money.

Compared to those policies, "fairness" (which is almost completely subjective, by the way) would come in sixth.

[LPC]

Earlier, in another thread, Natty wrote:

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.

(Emphasis added by LPC.)

In this thread, natty has written that only personal living expenses "over and above food necessary for subsistence" go into "human capital."

But isn't the "food necessary for subsistence" also necessary for good health and well being? Natty seems to be inconsistent (again) in asserting that good health and well being are part of "human capital" but the costs of creating that good health and well being are not part of "human capital."

[LPC]

Earlier, in another thread, Natty wrote:

There is a "basis bank" that is intangible and priceless.

This also suggests that natty doesn't understand the difference between value and basis.

[Famspear]

Earlier, I wrote:

Aahh'm jus' a good ole Texas country boy.

Actually, I lived out in the country only for the first couple of months after I was born. I've been a city boy pretty much ever since. And I wasn't born in Texas. I moved to Texas as an adult.

I tend to overcompensate sometimes.

Yeee-hah.

[Dr. Caligari]

And when did you get to Tufts?

I'm dating myself, I know, but Tufts was not yet decided when I graduated law school. So all we had was Crane and, without Tufts to explain it, it was totally incomprehensible to me-- not that that stopped the good professor from grilling me on it, Kingsfield style, for a full hour.

[Florida]

Natty wrote:

Taxation is all about fairness. There is no other criteria. That includes whether or not the law is fair.

It wasn't long ago that the Clinton administration was arguing that people who owned their homes free and clear had an unfair advantage over people who rented or paid a high mortgage. They claimed that the value not paid on rent or mortgages should be imputted as income. Murphy leads credence to such a claim. -Slippery slope...

Dear Natty: Regarding imputed income based on the value not paid on rent or mortgages, there is no law that currently taxes that "imputed income," regardless of what someone in the Clinton administration did or did not argue. The sources of law include the Constitution, statutes, case law, regs, treaties, etc., but do not include something somebody in the Clinton administration supposedly argued somewhere, per se.

If you really believe that taxation is "all about fairness" then I have a bridge in San Francisco I want to sell to you.

--Famspear

Imputed income in general, however, is not of only theoretical interest. It has arisen in a number of actual cases, which is why, I assume, you narrowed your statement to rent or mortgages.

Some tax geek* said:

Over the years the IRS has made attempted to tax imputed income - with some success. Although the IRS failed in early efforts to compel a farmer to include in income the value of the farm products consumed by the farmer and his family, and to compel the owner of a tavern to include in income the value of liquor he had consumed, the IRS has succeeded notably in a line of commission cases. Commissions paid to an insurance agent for selling himself insurance, a real estate salesman for selling himself real estate, and a stockbroker for selling himself stock have all be included in income.

The lack of a strong conceptual basis for distinguishing the commission cases from other examples of imputed income gives pause in this area.

*Danny Posin

[Famspear]

Florida wrote:

Imputed income in general, however, is not of only theoretical interest. It has arisen in a number of actual cases, which is why, I assume, you narrowed your statement to rent or mortgages.

Yeah, but what I was thinking about with respect to "imputed income" when I wrote that response was something that was discussed in a tax class in law school, and I still can't remember what the specific topic was.