Monday, February 12, 2007
On Thursday, I blogged the taxpayer's filing of its brief in the D.C. Circuit in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 8/22/06). The panel, which held that § 104(a)(2) is unconstitutional under the 16th Amendment as applied to a recovery for a non-physical personal injury unrelated to lost wages or earnings, vacated its judgment and agreed to rehear the case, with oral argument scheduled for April 23, 2007.
Gregory L. Germain (Syracuse), author of the excellent article, Taxing Emotional Injury Recoveries: A Critical Analysis of Murphy v. IRS, critiques the taxpayer's brief:
The taxpayer makes the argument that Congress § 104(a)(2) but did not amend § 61. Unfortunately, the taxpayer ignores the issue, debated here at some length, about whether the interpretation of § 61 should be governed by the intent of the Congress that made the § 104(a)(2) amendment. This is a crucial issue if the court is going to reach the constitutional question (as it did previously).
The taxpayer ignores the government’s arguments about basis that were so flippantly rejected in the panel’s original opinion. As a result, the arguments about whether something is “compensatory” miss the point.
Finally, the taxpayer did a very poor job addressing whether the tax could be upheld under Article I if it did not constitute a tax on “income” under the 16th Amendment. The government argued the Article I point in its petition for en banc review, and the taxpayer objected that the argument had not been made earlier (the taxpayer was wrong about that because the Court has an independent duty before holding a statute unconstitutional to consider all potential grounds for upholding the statute, even if not argued by a party). In vacating its award and granting a new hearing, the panel made a special point of saying: “Appellant must raise all issues and arguments in the opening brief. The court ordinarily will not consider issues and arguments raised for the first time in the reply brief.” I suspect that the panel was embarrassed by its absurd statement that Congress’s power to tax income derives from the 16th Amendment, and blames the parties for failing to raise the Article I powers issue earlier.
The taxpayer addresses the Article I issue by saying “A tax on personal injuries is a direct tax because it is a tax on personal property or a tax on the individual. See U.S. Const. art. 1, § 9, cl. 4, U.S. Const. amend. XVI. See also Pollock v. Farmer’s Loan & Trust Co., 158 U.S. 601 (1895). A direct tax is assessed directly on the person and cannot be shifted to someone else.”
Under this theory, a tax on wages – a tax imposed on an individual that cannot be shifted to someone else – would be a direct tax under Pollock. That, of course, is directly contrary to the Pollock court’s holding, and would prove all those tax protestors right after all. There is no discussion of the pre-Pollock cases, the Pollock holding, or the post-Pollock cases, nor any discussion of how a tax on wages could be indirect (as Pollock specifically stated) while a tax on emotion distress recoveries could be direct.