Monday, March 12, 2007
On Friday, I blogged the Government'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 Government's brief:
In the last go-round, the taxpayers convinced the Court of Appeals that the government could not constitutionally tax Ms. Murphy’s compensatory emotional distress damages award. The constitutional issues thus took center stage in the government’s brief, but not in the way I would have expected.
I was surprised by the government’s strong challenge to the continuing validity of the direct taxing clause in the Constitution. The government made Professor Calvin Johnson’s position – that the direct taxing clause became a dead letter with the ending of slavery, and at best should today be limited to real property taxes – the centerpiece of its constitutional argument.
I think the government erred by putting so much emphasis on this historical argument. The direct taxing clause was, after all, not removed from the Constitution at the end of slavery. Moreover, the Supreme Court continued to recognize the validity of the direct taxing clause in the Civil War tax cases (some of which were decided after the 13th amendment eliminated slavery), and of course in the famous Pollock cases, 157 U.S. 429 (1895) and 158 U.S. 607 (1895), in which the Court held that Congress lacked the power to tax income from real and personal property. The government contended in its brief that Pollock is no longer good law, but it overstated its case when it said that “every aspect of [Pollock’s] reasoning has been eroded.” It is certainly true that Pollock’s “source rule” – the notion that a tax on the income from property was a tax on the property itself – has been thoroughly repudiated. South Carolina v. Baker, 485 U.S. 505 (1988). However, the Supreme Court has not rejected or questioned the underlying holding in Pollock that taxes on the mere ownership of real or personal property – such as a traditional municipal property tax, for example – would have to be apportioned. The government’s argument that the repeal of slavery marked the effective repeal of the direct taxing clause runs headlong into the presumption against repeals by implication. See Morton v. Mancari, 417 U.S. 535 (1974).
Rather than taking a broad swing at the continuing validity of the direct taxing clause – an swing that will likely miss the ball because the Court of Appeals will likely not hold the direct taxing clause invalid – the government should have pointed out the substantial body of Supreme Court authority, issued after Pollock, upholding (as indirect excises requiring no apportionment) taxes on property transactions. See e.g. Thomas, 192 U.S. 363 (1904); Spreckles Sugar, 192 U.S. 397 (1904); Flint, 220 U.S. 107 (1911). Although the government did a good job arguing that taxes on emotional distress damages awards are not property taxes, it could have done more to emphasize that the tax would have been a valid excise, not requiring apportionment, even if damages for emotional distress were to be treated like property damages.
The government next failed to explain how its taxing power under Article I could be used to uphold the tax at issue if it did not constitute a tax on income under IRC Section 61. Having the power to tax, and actually imposing a tax, are two different things. If Congress did not tax the award, its power to do so under Article I would be irrelevant. The government made no effort to connect its Article I taxing power to the operative taxing statute. This was a serious fault, because the Court of Appeals is likely to focus at the rehearing on whether IRC section 61 effectively reached Ms. Murphy’s damages award.
I believe that the government should have connected its constitutional taxing power with the statutory language by pointing out that Congress manifested an interpretation of the ambiguous word “income” in section 61 when it amended section 104(a)(2) to eliminate the exclusion for non-physical injuries. Statutory interpretation scholars recognize that the Supreme Court uses a holistic approach to statutory interpretation, under which later-enacted statutes can define the meaning of earlier-enacted ambiguous statutory terms. See William N. Eskridge, Jr., Philip P. Frickey and Elizabeth Garrett, Legislation and Statutory Interpretation, p. 268 (Foundation Press 2000); Franklin v. Gwinnett County Public Schools, 503 U.S. 60 (1992). The meaning of “income” in IRC Section 61 may therefore not be entirely synonymous with the 1913 definition of the word in the 16th Amendment. This would allow the government to press its Article I taxing powers if the Court of Appeals retains its previous holding that emotional distress damages were not “income” within the understanding of the enactors of the 16th Amendment.
Instead of showing how its Article I powers bear on the statutory question, the government foolishly conceded that the enactors of the 16th Amendment had a narrower view of the word “income” than we have today. The Government stated that “income now includes many items that likely were not thought of as income when the 16th Amendment was ratified in 1913.” There was no reason for the government to make this concession. There is scant historical evidence to suggest that the enactors of the 16th Amendment held any uniform definition of the word “income.” The better argument was that the enactors of the 16th Amendment had a single intent - to permit Congress to impose broad-based income taxes – and they intentionally made no attempt to define the word “income.” Rather, they intentionally gave Congress the power to define its meaning when enacting tax legislation. The government played into the taxpayer’s hand by conceding that the enactors held a more narrow view of “income” than we have today, opening the door for the taxpayer’s argument that the enactors would not have thought compensatory emotional distress damages to be “income” when the 16th Amendment was adopted. The government’s argument is vulnerable to attack by those who do not believe in evolving constitutional meaning (including, I think, the majority of the current Supreme Court, and certainly the three judges on the hearing panel who previously ruled that the meaning of the word “income” in the 16th Amendment was fixed at enactment in 1913).
In other respects, the government did a fine job. It made a valiant argument that the Department of Labor did not award damages on account of the taxpayer’s physical manifestations of emotional distress. However, I remain unconvinced. The administrative law judge considered those manifestations in setting the amount of the award, and the ALJ’s award was ultimately adopted in toto by the Department of Labor. Wisely, the government also pointed out that both the statutory language and legislative history of section 104(a)(2) manifested a clear intent that physical manifestations of emotional distress not be excluded from income.
The government also did a fine job refuting the Court of Appeals’ previous conclusion that early administrative rulings recognized that the enactors of the 16th Amendment did not intend for compensatory injury awards to be taxable as income. In fact, as pointed out by the government, the earliest rulings treated damages awards as income – it was only after the Supreme Court’s narrow statutory interpretations that the government raised questions about its ability to tax damages awards.
I found the government’s brief far more convincing, and certainly more honest and straight-forward, than the taxpayer’s brief. Yet, I believe the government’s strategic mistakes could pave the way for a taxpayer victory on statutory grounds.