Steve, here is how a U.S. Court of Appeals, in discussing a taxpayer's "human capital" theory, recently dealt with Gallatin, etc., arguments about direct taxes, "capitations," Pollock, the difference between a direct tax and an event tax, and so on (and by the way, the taxpayer, Ms. Murphy, lost the case):
Over the years, courts have considered numerous claims that one or another nonapportioned tax is a direct tax and therefore unconstitutional. Although these cases have not definitively marked the boundary between taxes that must be apportioned and taxes that need not be, see Bromley v. McCaughn, 280 U.S. 124, 136 (1929); Spreckels Sugar Ref. Co. v. McClain, 192 U.S. 397, 413 (1904) (dividing line between "taxes that are direct and those which are to be regarded simply as excises" is "often very difficult to be expressed in words"), some characteristics of each may be discerned.
Only three taxes are definitely known to be direct: (1) a capitation, U.S. CONST. art. I, §9, (2) a tax upon real property, and (3) a tax upon personal property. See Fernandez v. Wiener, 326 U.S. 340, 352 (1945) ("Congress may tax real estate or chattels if the tax is apportioned"); Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601, 637 (1895) ( Pollock II). ** Such direct taxes are laid upon one's "general ownership of property," Bromley, 280 U.S. at 136; see also Flint v. Stone Tracy Co., 220 U.S. 107, 149 (1911), as contrasted with excise taxes laid "upon a particular use or enjoyment of property or the shifting from one to another of any power or privilege incidental to the ownership or enjoyment of property." Fernandez, 326 U.S. at 352; see also Thomas v. United States, 192 U.S. 363, 370 (1904) (excises cover "duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like"). More specifically, excise taxes include, in addition to taxes upon consumable items, see Patton v. Brady, 184 U.S. 608, 617-18 (1902), taxes upon the sale of grain on an exchange, Nicol v. Ames, 173 U.S. 509, 519 (1899), the sale of corporate stock, Thomas, 192 U.S. at 371, doing business in corporate form, Flint, 220 U.S. at 151, gross receipts from the "business of refining sugar," Spreckels, 192 U.S. at 411, the transfer of property at death, Knowlton v. Moore, 178 U.S. 41, 81-82 (1900), gifts, Bromley, 280 U.S. at 138, and income from employment, see Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 579 (1895) ( Pollock I) (citing Springer v. United States, 102 U.S. 586 (1881)).
Murphy and the amici supporting her argue the dividing line between direct and indirect taxes is based upon the ultimate incidence of the tax; if the tax cannot be shifted to someone else, as a capitation cannot, then it is a direct tax; but if the burden can be passed along through a higher price, as a sales tax upon a consumable good can be, then the tax is indirect. This, she argues, was the distinction drawn when the Constitution was ratified. See Albert Gallatin, A Sketch of the Finances of the United States (1796), reprinted in 3 THE WRITINGS OF ALBERT GALLATIN 74-75 (Henry Adams ed., Philadelphia, J.P. Lippincott & Co. 1879) ("The most generally received opinion ... is, that by direct taxes ... those are meant which are raised on the capital or revenue of the people; by indirect, such as are raised on their expense"); THE FEDERALIST NO. 36, at 225 (Alexander Hamilton) (Jacob E. Cooke ed., 1961) ("internal taxes[] may be subdivided into those of the direct and those of the indirect kind ... by which must be understood duties and excises on articles of consumption"). But see Gallatin, supra, at 74 ("[Direct tax] is used, by different writers, and even by the same writers, in different parts of their writings, in a variety of senses, according to that view of the subject they were taking"); EDWIN R.A. SELIGMAN, THE INCOME TAX 540 (photo. reprint 1970) (2d ed. 1914) ("there are almost as many classifications of direct and indirect taxes are there are authors"). Moreover, the amici argue, this understanding of the distinction explains the different restrictions imposed respectively upon the power of the Congress to tax directly (apportionment) and via excise (uniformity). Duties, imposts, and excise taxes, which were expected to constitute the bulk of the new federal government's revenue, see Erik M. Jensen, The Apportionment of "Direct Taxes": Are Consumption Taxes Constitutional?, 97 COLUM. L. REV. 2334, 2382 (1997), have a built-in safeguard against oppressively high rates: Higher taxes result in higher prices and therefore fewer sales and ultimately lower tax revenues. See THE FEDERALIST NO. 21, supra, at 134-35 (Alexander Hamilton). Taxes that cannot be shifted, in contrast, lack this self-regulating feature, and were therefore constrained by the more stringent requirement of apportionment. See id. at 135 ("In a branch of taxation where no limits to the discretion of the government are to be found in the nature of things, the establishment of a fixed rule ... may be attended with fewer inconveniences than to leave that discretion altogether at large"); see also Jensen, supra, at 2382-84.
Finally, the amici contend their understanding of a direct tax was confirmed in Pollock II, where the Supreme Court noted that "the words 'duties, imposts, and excises' are put in antithesis to direct taxes," 158 U.S. at 622, for which it cited THE FEDERALIST NO. 36 (Hamilton). Pollock II, 158 U.S. at 624-25. As it is clear that Murphy cannot shift her tax burden to anyone else, per Murphy and the amici, it must [according to the contentions of Murphy and the amici] be a direct tax.
The Government, unsurprisingly, backs a different approach; by its lights, only "taxes that are capable of apportionment in the first instance, specifically, capitation taxes and taxes on land," are direct taxes. The Government maintains that this is how the term was generally understood at the time. See Calvin H. Johnson, Fixing the Constitutional Absurdity of the Apportionment of Direct Tax, 21 CONST. COMM. 295, 314 (2004). Moreover, it suggests, this understanding is more in line with the underlying purpose of the tax and the apportionment clauses, which were drafted in the intense light of experience under the Articles of Confederation.
The Articles [of Confederation] did not grant the Continental Congress the power to raise revenue directly; it could only requisition funds from the States. See ARTICLES OF CONFEDERATION art. VIII (1781); Bruce Ackerman, Taxation and the Constitution, 99 COLUM. L. REV. 1, 6-7 (1999). This led to problems when the States, as they often did, refused to remit funds. See Calvin H. Johnson, The Constitutional Meaning of "Apportionment of Direct Taxes, " 80 TAX NOTES 591, 593-94 (1998). The Constitution redressed this problem by giving the new national government plenary taxing power. See Ackerman, supra, at 7. In the Government's view, it therefore makes no sense to treat "direct taxes" as encompassing taxes for which apportionment is effectively impossible, because "the Framers could not have intended to give Congress plenary taxing power, on the one hand, and then so limit that power by requiring apportionment for a broad category of taxes, on the other." This view is, according to the Government, buttressed by evidence that the purpose of the apportionment clauses was not in fact to constrain the power to tax, but rather to placate opponents of the compromise over representation of the slave states in the House, as embodied in the Three-fifths Clause. * See Ackerman, supra, at 10-11. See generally SELIGMAN, supra, at 548-55. As the Government interprets the historical record, the apportionment limitation was "more symbolic than anything else: it appeased the anti-slavery sentiment of the North and offered a practical advantage to the South as long as the scope of direct taxes was limited." See Ackerman, supra, at 10. But see Erik M. Jensen, Taxation and the Constitution: How to Read the Direct Tax Clauses, 15 J.L. & POL. 687, 704 (1999) ("One of the reasons [the direct tax restriction] worked as a compromise was that it had teeth --it made direct taxes difficult to impose --and it had teeth however slaves were counted").
The Government's view of the clauses is further supported by the near contemporaneous decision of the Supreme Court in Hylton v. United States, 3 U.S. (3 Dall.) 171 (1796), holding that a national tax upon carriages was not a direct tax, and thus not subject to apportionment. Justices Chase and Iredell opined that a "direct tax" was one that, unlike the carriage tax, as a practical matter could be apportioned among the States, id. at 174 (Chase, J.); id. at 181 (Iredell, J.), while Justice Paterson, noting the connection between apportionment and slavery, condemned apportionment as "radically wrong" and "not to be extended by construction," id. at 177-78. * As for Murphy's reliance upon Pollock II, the Government contends that although it has never been overruled, "every aspect of its reasoning has been eroded," see, e.g., Stanton v. Baltic Mining Co., 240 U.S. 103, 112-13 (1916), and notes that in Pollock II itself the Court acknowledged that "taxation on business, privileges, or employments has assumed the guise of an excise tax," 158 U.S. at 635. Pollock II, in the Government's view, is therefore too weak a reed to support Murphy's broad definition of "direct tax" and certainly does not make "a tax on the conversion of human capital into money ... problematic."
Murphy replies that the Government's historical analysis does not respond to the contemporaneous sources she and the amici identified showing that taxes imposed upon individuals are direct taxes. As for Hylton, Murphy argues nothing in that decision precludes her position; the Justices viewed the carriage tax there at issue as a tax upon an expense, see 3 U.S. (3 Dall.) at 175 (Chase, J.); see also id. at 180-81 (Paterson, J.), which she agrees is not a direct tax. See Pollock II, 158 U.S. at 626-27. To the extent Hylton is inconsistent with her position, however, Murphy contends [that] her references to the Federalist are more authoritative evidence of the Framers' understanding of the term.
How convenient for Ms. Murphy! She discounts the court case and tries to rely on the Secondary Authority that she likes! Are you paying attention, Steve?
Now, the Court continues:
Murphy makes no attempt to reconcile her definition with the long line of cases identifying various taxes as excise taxes, although several of them seem to refute her position directly. In particular, we do not see how a known excise, such as the estate tax, see, e.g., New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921); Knowlton, 178 U.S. at 81-83, or a tax upon income from employment, see Pollock II, 158 U.S. at 635; Pollock I, 157 U.S. at 579; cf. Steward Mach. Co. v. Davis, 301 U.S. 548, 580-81 (1937) (tax upon employers based upon wages paid to employees is an excise), can be shifted to another person, absent which they seem to be in irreconcilable conflict with her position that a tax that cannot be shifted to someone else is a direct tax. Though it could be argued that the incidence of an estate tax is inevitably shifted to the beneficiaries, we see at work none of the restraint upon excessive taxation that Murphy claims such shifting is supposed to provide; the tax is triggered by an event, death, that cannot be shifted or avoided. In any event, Knowlton addressed the argument that Pollock I and II made ability to shift the hallmark of a direct tax, and rejected it. 178 U.S. at 81-82. Regardless what the original understanding may have been, therefore, we are bound to follow the Supreme Court, which has strongly intimated that Murphy's position is not the law.
That said, neither need we adopt the Government's position that direct taxes are only those capable of satisfying the constraint of apportionment. In the abstract, such a constraint is no constraint at all; virtually any tax may be apportioned by establishing different rates in different states. See Pollock II, 158 U.S. at 632-33. If the Government's position is instead that by "capable of apportionment" it means "capable of apportionment in a manner that does not unfairly tax some individuals more than others," then it is difficult to see how a land tax, which is widely understood to be a direct tax, could be apportioned by population without similarly imposing significantly non-uniform rates. See Hylton, 3 U.S. (3 Dall.) at 178-79 (Paterson, J.); Johnson, Constitutional Absurdity, supra, at 328. But see, e.g., Hylton, 3 U.S. (3 Dall.) at 183 (Iredell, J.) (contending land tax is capable of apportionment).
Now, Steve, read the next sentence, where the Court states:
We find it more appropriate to analyze this case based upon the precedents and therefore to ask whether the tax laid upon Murphy's award is more akin, on the one hand, to a capitation or a tax upon one's ownership of property, or, on the other hand, more like a tax upon a use of property, a privilege, an activity, or a transaction, see Thomas, 192 U.S. at 370. Even if we assume one's human capital should be treated as personal property, it does not appear that this tax is upon ownership; rather, as the Government points out, Murphy is taxed only after she receives a compensatory award, which makes the tax seem to be laid upon a transaction. See Tyler v. United States, 281 U.S. 497, 502 (1930) ("A tax laid upon the happening of an event, as distinguished from its tangible fruits, is an indirect tax which Congress, in respect of some events ... undoubtedly may impose"); Simmons v. United States, 308 F.2d 160, 166 (4th Cir. 1962) (tax upon receipt of money is not a direct tax); cf. Penn Mut., 277 F.2d at 20. Murphy's situation seems akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages. Cf. 26 U.S.C. §1033 (property involuntarily converted into money is taxed to extent of gain recognized).
At oral argument Murphy resisted this formulation on the ground that the receipt of an award in lieu of lost mental health or reputation is not a transaction. This view is tenable, however, only if one decouples Murphy's injury (emotional distress and lost reputation) from her monetary award, but that is not beneficial to Murphy's cause, for then Murphy has nothing to offset the obvious accession to her wealth, which is taxable as income. Murphy also suggested at oral argument that there was no transaction because she did not profit. Whether she profited is irrelevant, however, to whether a tax upon an award of damages is a direct tax requiring apportionment; profit is relevant only to whether, if it is a direct tax, it nevertheless need not be apportioned because the object of the tax is income within the meaning of the Sixteenth Amendment. Cf. Spreckels, 192 U.S. at 412-13 (tax upon gross receipts associated with business of refining sugar not a direct tax); Penn Mut., 277 F.2d at 20 (tax upon gross receipts deemed valid indirect tax despite taxpayer's net loss).
So we return to the question: Is a tax upon this particular kind of transaction equivalent to a tax upon a person or his property? Cf. Bromley, 280 U.S. at 138 (assuming without deciding that a tax "levied upon all the uses to which property may be put, or upon the exercise of a single power indispensable to the enjoyment of all others over it, would be in effect a tax upon property"). Murphy did not receive her damages pursuant to a business activity, cf. Flint, 220 U.S. at 151; Spreckels, 192 U.S. at 411, and we therefore do not view this tax as an excise under that theory. See Stratton's Independence, Ltd. v. Howbert, 231 U.S. 399, 414-15 (1913) ("The sale outright of a mining property might be fairly described as a mere conversion of the capital from land into money"). On the other hand, as noted above, the Supreme Court several times has held a tax not related to business activity is nonetheless an excise. And the tax at issue here is similar to those.
Bromley, in which a gift tax was deemed an excise, is particularly instructive: The Court noted it was "a tax laid only upon the exercise of a single one of those powers incident to ownership," 280 U.S. at 136, which distinguished it from "a tax which falls upon the owner merely because he is owner, regardless of the use or disposition made of his property," id. at 137. A gift is the functional equivalent of a below-market sale; it therefore stands to reason that if, as Bromley holds, a gift tax, or a tax upon a below-market sale, is a tax laid not upon ownership but upon the exercise of a power "incident to ownership," then a tax upon the sale of property at fair market value is similarly laid upon an incidental power and not upon ownership, and hence is an excise. Therefore, even if we were to accept Murphy's argument that the human capital concept is reflected in the Sixteenth Amendment, a tax upon the involuntary conversion of that capital would still be an excise and not subject to the requirement of apportionment. But see Nicol, 173 U.S. at 521 (indicating pre- Bromley that tax upon "every sale made in any place ... is really and practically upon property").
In any event, even if a tax upon the sale of property is a direct tax upon the property itself, we do not believe Murphy's situation involves a tax "upon the sale itself, considered separate and apart from the place and the circumstances of the sale." Id. at 520. Instead, as in Nicol, this tax is more akin to "a duty upon the facilities made use of and actually employed in the transaction." Id. at 519. To be sure, the facility used in Nicol was a commodities exchange whereas the facility used by Murphy was the legal system, but that hardly seems a significant distinction. The tax may be laid upon the proceeds received when one vindicates a statutory right, but the right is nonetheless a "creature of law," which Knowlton identifies as a "privilege" taxable by excise. 178 U.S. at 55 (right to take property by inheritance is granted by law and therefore taxable as upon a privilege); * cf. Steward, 301 U.S. at 580-81 ("[N]atural rights, so called, are as much subject to taxation as rights of less importance. An excise is not limited to vocations or activities that may be prohibited altogether. ... It extends to vocations or activities pursued as of common right.") (footnote omitted).
--from Murphy v. Internal Revenue Serv., 493 F.3d 170, 2007-2 U.S. Tax Cas. (CCH) ¶ 50,531 (D.C. Cir. 2007) (bolding added).
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