More on Murphy

• National Review:  What Can the Government Tax? The Answer, Never Set in Stone, May be Changing, by Bruce Bartlett:

Last week, a federal appeals court in Washington handed down an important decision relating to the definition of income for tax purposes. What is important about the decision is that it is the first in decades to say the Constitution itself limits what the government may tax. If upheld by the Supreme Court, it could significantly alter tax policy and possibly open the door to radical reform....

Tax experts immediately recognized the far-reaching implications of this decision for other areas of tax law. Tax protesters have long argued that the 16th Amendment does not grant the federal government the power to tax every single receipt that it deems to be income. Yet, in practice, that is what the IRS does. The problem is that the very concept of income has never been defined in the tax law. It is pretty much whatever the IRS says it is. Tax analysts generally use a definition devised by two economists, Robert Haig and Henry Simons, which says that income consists of consumption plus the change in net worth between two points in time. But the Haig-Simons definition goes far beyond that of the tax law....

Given the logic of the Murphy decision, it is quite possible that the risk-free, inflation-adjusted rate of interest could also be excluded from taxation on constitutional grounds. Following through on this logic consistently would revolutionize taxation and eventually lead to a pure consumption tax, which most modern economists favor. I’m not predicting the Supreme Court will follow this logic. But for tax analysts, it does represent the opening of an interesting possibility.

• New York Sun Editorial:  Pleading the 16th:

No man, it has often been said, is above the law. Now, thanks to three judges on the federal appeals bench in Washington, no tax is above the law either. The judges have ruled that compensatory damages awarded in a lawsuit don't count as "income" even under the expansive language of the 16th Amendment. As a result, the government's attempts to tax such monies are unconstitutional. The success of what was once considered a quixotic case is likely to spur other litigation trying to whittle away at other nooks and crannies of the tax code. All of which is to the good....

The ruling does, however, set a precedent because the judges have shown that the tax code isn't a creature unto itself. As much as Congress might prefer otherwise, taxation is subject to some constitutional limitations. One wonders from the reaction to this ruling whether some people have been in denial on this point. One former commissioner of internal revenue, Donald C. Alexander, told Bloomberg News that "Tax protesters will love it because it's what they've been arguing for years. They will claim this destroys the income tax. A case like this does serious damage to the system even though it involves one provision."

Our guess is that tax protesters are going to have a hard time using this ruling against the income tax, as the people spoke, for better or worse, when, in the 16th amendment, they delegated to Congress the "power to lay and collect taxes on incomes, from whatever source derived." But the ruling underscores that the delegation is not unlimited; the Constitution still imposes limits on Congress's power to tax. This isn't a conservative issue, it's a constitutional issue. A judge appointed by President Clinton, after all, joined colleagues appointed by Presidents Reagan and George W.Bush on this ruling.

• Wall Street Journal:  Court Ruling in Damages Case Deals Big Setback to the IRS, by Tom Herman:

Some lawyers, including Donald Alexander, a former IRS commissioner, think the decision will be overturned. Meanwhile, the subject remains murky. "If Einstein was confused before Murphy, he'd be a whole lot more confused now," says Ms. Hevener of Baker & McKenzie.

• Wall Street Journal's Law Blog:  Tax Fun for Plaintiffs, by Ashby Jones:

The decision, while binding only on IRS cases involving taxpayers in D.C., is likely to have “immense implications” for many others around the nation who expect to receive damages for “nonphysical personal injuries” — or who have received damages in recent years, says Todd Kraft, a tax lawyer in Dallas at Meadows, Owens, Collier, Reed, Cousins & Blau.

• Begging the Question:  Murphy's Law, by Milbarge:

Like a lot of the commentators, I am curious to see what tax protesters do with this opinion, especially the restoration-of-human-capital idea.....I think they're likely to be buoyed by a couple of lines in the opinion. I expect to see these quotes taken out of context in scores of protester filings in the near future: (1) "[W]e reject the Government's breathtakingly expansive claim of congressional power under the Sixteenth Amendment....The Sixteenth Amendment simply does not authorize the Congress to tax as 'incomes' every sort of revenue a taxpayer may receive." (page 15 of the pdf) (alterations mine) (2) "Broad though the power granted in the Sixteenth Amendment is, the Supreme Court, as Murphy points out, has long recognized 'the principle that a restoration of capital [i]s not income; hence it [falls] outside the definition of "income" upon which the law impose[s] a tax.'" (page 10 of the pdf) (alterations in the opinion) I expect these quotes, and other similar lines from the panel opinion, to join the pantheon of misapplied legal statements, such as the famous line in Flora v. United States that "[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint." 362 U.S. 145, 176 (1960) (Warren, C.J.).