"Taxnapping": How Murphy v. IRS Steals the Tax Reform Debate

[jg]

"Taxnapping": How Murphy v. IRS Used Direct Taxation to Steal the Tax Reform Debate
by Jason A. Derr, Federal Reserve Board

Abstract
Suppose someone asks you, “You know, I’m fed up with the tax policy of United States, what can do I change it?” Although some may respond with ideas of protest, one of the most common responses will likely be, “Call your Congressperson.” However, after the D.C. Circuit’s decision in Murphy v. IRS, a new response is called for: “If you want to change tax policy, call the judge’s chambers.”
In Murphy v. IRS, the D.C. Circuit considered whether the taxation of emotional injury damages violated the “direct tax clauses” of the United States Constitution. The direct clauses are a mysterious pair of clauses that were never defined at the Founding, made even more complex by early Supreme Court case law, and have since been ignored by the Court for over 70 years. It was 1934 when the Supreme Court last addressed the issue of direct taxation, and, since that date, there is still no clear answer to the question, “What is a ‘direct tax?’”
Murphy’s direct tax analysis was a complicated mess of precedent. The court’s application of stare decisis is internally inconsistent. Additionally, the court’s analysis contradicts Supreme Court case law and some of the major originalist interpretations of the direct tax clauses.
By confusing the law on direct taxation, the D.C. Circuit has put fundamental income tax reform in jeopardy. Any shift from the current federal income tax to a “flat tax” or a “FairTax” may raise the constitutional issue of whether such a tax is a “direct tax.” Since Murphy leaves the law open-ended, anyone who objects to such tax reform can use the federal courts to stop the Congress from reforming the income tax. When a judicial decision steals the tax policy debate away from the legislature, they have committed “taxnapping,” a term defined for the first time in this Note. In short, “taxnapping” is wrong, and this Note shows how to define it and how the Supreme Court can stop it.
Suggested Citation
Jason A. Derr. 2009. ""Taxnapping": How Murphy v. IRS Used Direct Taxation to Steal the Tax Reform Debate" ExpressO
Available at: http://works.bepress.com/jason_derr/1

[Noah]

The Federal Reserve has spoken. Full article here

http://works.bepress.com/cgi/viewconten ... jason_derr

[Quixote]

Murphy’s direct tax analysis was a complicated mess of precedent. The court’s application of stare decisis is internally inconsistent. Additionally, the court’s analysis contradicts Supreme Court case law and some of the major originalist interpretations of the direct tax clauses.

Which is why Murphy has no legs. I can't see any other circuit adopting the reasoning in Murphy. The DC Circuit had painted itself into a corner and went into contortions getting itself out of it.

[notorial dissent]

I may be mis-remembering a great deal here, but as I recall, for all the incredibly poor writing and contortionist logic expelled in the first opinion, that it was primarily about whether or not the IRS could tax payment for “emotional injury damages”, with the IRS positing that they could and the court choosing to read a particular statute in a contrary fashion.

All of it becoming moot as the court shortly thereafter did an abrupt about face saying that the statute did allow for damages of those type to be considered as income rather than non-income based on the statutory language. I do not remember that there were any constitutional issues raised at all, and that the whole thing rested on a (mis)-interpretation. All of which was mooted when the court eventually had some sense slapped in to it by higher authority and completely reversed itself on the issue.

So all I can say here is HUH!!!!!

[Arthur Rubin]

I may be mis-remembering a great deal here, but as I recall, for all the incredibly poor writing and contortionist logic expelled in the first opinion, that it was primarily about whether or not the IRS could tax payment for “emotional injury damages”, with the IRS positing that they could and the court choosing to read a particular statute in a contrary fashion.

That's my recollection, as well, although I think the court may also have referred to some Constitution provisions, but not the "direct tax" argument.

[jg]

From the conclusion of the decision on 8/22/2006 by the United States Court of Appeals for the District of Columbia Circuit :

Albert Einstein may have been correct that “[t]he hardest thing in the world to understand is the income tax,”The Macmillan Book of Business and Economic Quotations 195 (Michael Jackman ed., 1984), but it is not hard to understand that not all receipts of money are income. Murphy's compensatory award in particular was not received “in lieu of” something normally taxed as income; nor is it within the meaning of the term “incomes” as used in the Sixteenth Amendment. Therefore, insofar as § 104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional. Accordingly, we remand this case to the district court to enter an order and judgment instructing the Government to refund the taxes Murphy paid on her award plus applicable interest.

See http://www.jacksonlewis.com/legalupdate ... yVsIRS.pdf for a copy of the decision.

From the conclusion of the en banc rehearing decided on July 3, 2007 :

For the foregoing reasons, we conclude (1) Murphy’s
compensatory award was not received on account of personal
physical injuries, and therefore is not exempt from taxation
pursuant to § 104(a)(2) of the IRC; (2) the award is part of her
“gross income,” as defined by § 61 of the IRC; and (3) the tax
upon the award is an excise and not a direct tax subject to the
apportionment requirement of Article I, Section 9 of the
Constitution. The tax is uniform throughout the United States and therefore passes constitutional muster. The judgment of the
district court is accordingly Affirmed.

See http://pacer.cadc.uscourts.gov/docs/com ... -5139b.pdf for the decision.

[notorial dissent]

Thank you jg, as I thought I remembered, it was about the IRS reading a particular statute one way and the DC reading it another and then coming up with a way out in left field explanation of why they believed it was so, and then promptly reversing themselves, and there were in fact NO real constitutional issued involved, I'm still not sure where that all came from. I’m really not sure what camp to blame this on other than the can’t actually read and comprehend group.