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Monday, August 28, 2006

Seto: Bank of America As an Alternative to Originalism in Murphy

Seto_2Theodore P. Seto (Loyola-L.A.) offers his views on Murphy v. United States, No. 03cv02414 (D.C. Cir. 8/22/06):

The single most problematic aspect of constitutionalizing the definition of income is that doing so threatens to deprive Congress of the flexibility needed to make a tax system work. Originalism, of Ginsburg's or any other stripe, can't provide that kind of flexibility. See, e.g., Seto, Originalism vs. Precedent: An Evolutionary Perspective, 38 Loy. L.A. L. Rev. 2001 (2005). An originalist approach to the Sixteenth Amendment would ultimately undermine the purposes of the amendment itself -- which may be Ginsburg's purpose in Murphy.

An alternative and perhaps workable approach is suggested by the body of rules that define "income tax" for foreign tax credit purposes. Under the Bank of America doctrine, "A direct tax is creditable [as an income tax], even though imposed on gross income, if it is very highly likely, or was reasonably intended, always to reach some net gain in the normal circumstances in which it applies." Bank of America v. United States, 459 F.2d 513 (Ct. Cl. 1972), incorporated in Treas. Reg. ยง 1.910-2(a)(3)(i). For a long time now, we have used the Bank of America doctrine to determine whether a foreign tax should be treated as an "income tax" for foreign tax credit purposes, and it seems to work moderately well in that context -- drawing an enforceable line while permitting foreign governments lots of flexibility in defining their "income tax" bases.

Bank of America, in turn, was intended to implement the Supreme Court's dictum in Biddle: "'Income taxes paid,' as used in our own revenue laws, has for most practical purposes a well understood meaning to be derived from an examination of the statutes which provide for the laying and collection of income taxes. It is that meaning which must be attributed to it." Biddle v. Commissioner, 302 U.S. 573 (1938). It would not be too great a stretch to conclude that "income" taxation, for Sixteenth Amendment purposes, similarly has a "well understood meaning" and to view Bank of America as a standard articulation of that meaning.

The Bank of America doctrine is normally applied to a foreign tax system as a whole, but it would also not be too great a stretch to apply the same test to specific components for Sixteenth Amendment purposes. Doing so, one might well conclude that Sec. 104(a)(2), as amended by the Small Business Job Protection Act of 1996, was never "very highly likely, or ... reasonably intended, always to reach some net gain in the normal circumstances in which it applies." By contrast, many of the other provisions of the Code that members of this listserve have speculated might fall to Murphy might well pass constitutional muster under such a test. Congress would retain the flexibility it needs to make the system work, but would not be permitted to tax, as "income," items which fall outside the "well understood meaning" of income incorporated in the Sixteenth Amendment.

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