December 17, 2007
Germain on Murphy's Cert. Petition
On Friday, I blogged the cert. petition filed by Marrita Murphy seeking the Supreme Court's review of Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 7/3/07). Gregory Germain (Syracuse), author of Taxing Emotional Injury Recoveries: A Critical Analysis of Murphy v. IRS, 60 Ark. L. Rev. 185 (2007), offers a detailed analysis of the cert. petition:
The academic tax community was stunned by the D.C. Circuit Court of Appeals’ decision in Murphy I, holding that Congress could not tax compensatory personal injury awards under the 16th Amendment. The same community was placated, however, by Murphy II, in which the same panel reversed course by holding that Congress could tax personal injury awards under its original Article I powers, and had in fact imposed a tax on the petitioner’s emotional and reputation damages award.
The academic tax community was placated by Murphy II, but not overjoyed. Many hoped the Court would repudiate the theory of Murphy I by attributing to the word “income” in the 16th Amendment an unlimited scope. Others had the even more ambitious goal of both settling the meaning of the direct taxing clause in the original constitution, and overturning hundred-year-old judicial precedents that long ago lost their relevance. Rather than resolve the disputes between the modern day federalists and anti-federalists, between the blue and the grey, and between the populists and industrialists of the late 19th century, the Murphy II panel chose a more direct route of resolving the controversy before it. The panel did so by recognizing that Congress had the power to tax personal injury awards without apportionment under Article I, and had exercised that power when it eliminated the statutory exclusion for non-physical injury awards. The panel did not settle all of the old scores, but in my view it properly and efficiently resolved the case before it. Statutory questions remain under the poorly-worded exclusion for personal physical injury awards (§ 104(a)(2)), but the fundamental power of Congress to decide whether to tax personal injury awards was affirmed.
Petitioner Marietta Murphy, and those who differ with Congress’s policy decision to tax non-physical injury awards, were of course not placated. They have now petitioned the Supreme Court to review the case in the hope of placing personal injury awards beyond the reach of Congress’s taxing power. Will the Supreme Court take the case? I think not.
Ms. Murphy attacks the Court of Appeals decision on a number of fronts. First, she reasserts the same tired arguments that brought her a fleeting victory in Murphy I – that both the statutory and constitutional meaning of the word “income” should forever be fixed by certain selected judicial and administrative statements made in the first years after the adoption of the 16th Amendment. This argument is doomed to failure. No one has suggested that the enactors of the 16th Amendment actually considered or discussed whether personal injury awards would be “income.” The Supreme Court’s attempts to define income in the early years following the enactment of the 16th Amendment caused great confusion, and were ultimately rejected in favor of a broad practical test in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Glenshaw Glass has been the accepted standard for more than half a century. Surely the Supreme Court does not desire a return to those early days of confusion and uncertainty.
While Ms. Murphy tries to place her argument within the language of Glenshaw Glass, she fails to recognize that the Glenshaw Glass concept of an accession to wealth operates in a realization system designed to avoid taxing the same income to the same taxpayer twice. Income has never been measured by the increase in the value of the property received in an exchange over the value of the property transferred. If that was the test, exchanges would almost always be non-taxable. Our system taxes the value of the property received in excess of the taxpayer’s previous after-tax investment in the property transferred (an investment of income that had been previously taxed or was permanently exempted). The basis system avoids double-taxation (or the taxation of permanently exempted income); it does not preclude the taxation of previous years’ untaxed gains. Ms. Murphy’s brief says over and over that make whole damages should not be considered “income.” But because her “human capital” was never previously taxed, she is not suffering a double tax.
In support of her flawed attempt to fit within the language of Glenshaw Glass, Ms. Murphy cites a string of cases involving old questions of statutory interpretation. Ms. Murphy never focuses on the real question – whether Congress has the power to define, within its broad bounds, what is income. It is difficult to imagine the Supreme Court diving into this empty pool after so many articles and commentaries have debunked Ms. Murphy’s analysis.
Ms. Murphy next argues, supported by long-string cites but without analysis, that the Murphy II panel violated rules prohibiting taxation by implication, or statutory amendments by implication. These arguments are without merit. Section 61 had not previously been held to preclude the taxation of emotional distress damages. Congress avoided the question by enacting § 104(a)(2) to exclude the taxation of personal injury awards. When Congress amended § 104(a)(2) in 1996, they eliminated the exclusion for non-physical injury awards. They did not amend the operative taxing statute, § 61, which imposes a tax on all income from whatever source derived, because they thought that non-physical injury awards would fall within the statute’s broad scope without a specific exclusion. At best, § 61 is ambiguous. The rule against repeals by implication does not apply to the interpretation of ambiguous provisions clarified by later enactments to the statutory scheme. These arguments also do not create any conflict among the circuits because no other court has adopted Ms. Murphy’s arguments.
Ms. Murphy next correctly points out that the D.C. Circuit did not do a very good job of justifying its interpretation of § 104(a)(2). The panel’s argument would indeed have been stronger if they had cited to the legislative history, which eliminates all doubt about the intent of the amendment. This surely will not convince the Supreme Court to take the case.
Ms. Murphy next attacks the Murphy II panel for imposing an excise tax that had not been adopted by Congress. This argument also misses the mark. The Murphy II panel did not impose an excise tax, they recognized that Congress had the power to tax Ms. Murphy’s award under Article I without apportionment as an excise. Since they had the power to tax as an excise, they had the power to tax it under their definition of “income.” If Congress has the Constitutional power to impose the tax, it doesn’t matter what they call it.
Finally, Ms. Murphy makes the statutory argument that her award was, in fact, on account of physical injuries. I have criticized the Court of Appeals in Murphy II for failing to review the legislative history to determine what Congress intended by the physical injury requirement. The Murphy II panel, as they had in Murphy I, focused on the language of the heading of the award to conclude that the award did not compensate for Ms. Murphy’s physical manifestations. This conclusion was flawed. The amount of the award was based in part on the evidence of Ms. Murphy’s physical manifestations. However, the legislative history makes it clear that Congress intended physical manifestations of emotional distress to be taxable, and only physical impact injuries to be excludible. The Court should have cited the legislative history, which has been adopted and followed in a long series of cases by the Tax Court, rather than relying on the language of a heading. While I believe the Court of Appeals in Murphy II erred by not looking at and following the legislative history, this is not the kind of conflict the Supreme Court is likely to take on. Ultimately, the Court of Appeals in Murphy II made the right ruling under the law.
In sum, I would be very surprised if the Supreme Court granted this petition. Most of Ms. Murphy’s arguments are flawed and easily refuted. They have identified no real conflict among the circuits. Certainly, no other court has adopted the roundly rejected theories expressed in Murphy I, which form the core of the petition. Yes, the Court of Appeals in Murphy II did a poor job with the statutory issues, but ultimately they reached the right ruling. No circuit has taken the position that physical manifestations of emotional distress are excludible under § 104(a)(2), or that awards for emotional distress damages are beyond the reach of Congress’s taxing power.
I therefore expect the petition to be denied, much to the chagrin of those who desire to force their policy views on Congress, and those who seek victory in ancient political battles.
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Tracked on Dec 17, 2007 9:37:37 AM
Nice comment by Prof. Germain, particularly the observation that a taxpayer's gross income from a sale or exchange should be measured by comparing the amount realized to "the taxpayer’s previous after-tax investment in the property transferred (an investment of income that had been previously taxed or was permanently exempted)." Of all the extensive scholarly commentary on Murphy I, this "basis" point was the most well taken. Unfortunately, in Murphy II the DC Circuit panel again ignored the basis issue. Murphy, in her cert petition, likewise fails to come to grips with the basis issue.
In the semester just concluded, how many TaxProfs gave their students an exam question based on the Murphy case? Bonus points to any TaxProf who challenged their students to explain why Murphy I was irreconcilable with Tufts and Crane. (A puffball to any experienced tax practitioner, but ample fodder for law students.)
Posted by: Jake | Dec 17, 2007 10:06:11 PM