Paul L. Caron

Thursday, August 24, 2006

Lederman on Murphy: Are All Non-Income Based Taxes Unconstitutional?

In the comments to our discussion of Murphy v. United States, No. 03cv02414 (D.C. Cir. 8/22/06), Marty Lederman (Georgetown) notes that whether or not the award is "income" cannot possibly determine the constitutional question, as the court assumes: there are plenty of federal taxes on things other than income, and they're not all unconstitutional:

I'd really appreciate some feedback from the tax profs out there: Am I simply missing an obvious reason why this tax, unlike numerous other federal taxes, is "direct" -- a reason so obvious that it was not even worth arguing about in the briefs or discussing in the opinion of the court? Or is this opinion, as I have argued, shockingly inadequate in that it fails *even to mention* the issue on which the constitutionality of the tax should turn -- and if so, why aren't tax profs and practitioners everywhere saying so?

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What-if Congress is wrong to tax the status of one's mental-health via the existing IRC 61? If it is Congress's intent to tax the mental, but not the physical in injury-awards damages, at what cost do we retain our sanity without being taxed on it? If not Congress and the Courts, who is to intervene?

Posted by: Agavalis | Aug 28, 2006 12:46:48 PM

Thanks, Marty. I missed the footnote.

Posted by: Jake | Aug 25, 2006 5:05:58 AM

Well, the tax is not imposed on tort recoveries, section 1 imposes the tax on income. A detailed analysis of the constitutionality of the income tax would be fuel for the tax protestor fires. And also dicta, for the reason described below.

I read the opinion as holding that the tort recovery is outside the scope of the 16th amendment, and conversely, sections 1 and 61. Since the recovery is excludable, there is no tax. See page 10 where the court cites Clifford for the co-extensivity of Section 61 and the 16th Amendment. While the Court concluded that the tax was unconstitutional, it might just as well have stated that the recovery wasn't income, and not subject to tax under section 1.

Posted by: Barton Thomas | Aug 25, 2006 2:25:47 AM

Thanks, Jake. I'm fairly sure now that you are (and I am) right on the merits of the "direct tax" question. But Murphy did raise the issue in her appellate brief, however fleetingly. Her lawyers identified the "direct tax" issue as being at the core of the constitutional objection, and, in a footnote, and without citing any authority, wrote that "[t]he taxation of damages received on account of personal injuries or personal sickness is a direct tax." Remarkably, DOJ does not appear to have contested that assertion in its brief, which appears to (implictly) suggest that the constitutionality of the statute turns entirely on whether the award was "income." It's safe to predict, I think, that DOJ won't repeat that mistake in its petition for rehearing.

Posted by: Marty Lederman | Aug 24, 2006 5:38:09 PM

I'm not sure what the fuss is about. The fact that the nonphysical injury was not income was determinative because it was an INCOME tax provision that imposed the tax. Congress cannot impose income tax on a gift. Likewise it cannot impose gift tax on income. Why is it so strange that the DC Circuit would hold that Congress cannot impose income tax on something that is not income?

Granted, I would have felt just as uncomfortable as the rest of you if someone outside the tax field suggested the argument to me before this case. With 20/20 hindsight, however, the holding appears to make sense.

Posted by: Allen | Aug 24, 2006 3:29:47 PM

Maybe the reason the Justice Department didn't raise the "direct" tax issue on brief is that Murphy, the plaintiff, did not raise the issue, either in the district court or in her DC Circuit briefs. As to whether tort damages are "incomes" under the Sixteenth Amendment, that issue alone should have led to an easy win for the government in a refund suit that most tax lawyers would view as frivolous. The notion that the court needed to reach whether a tax on tort damages is a "direct" tax presupposes that a tribunal could miss the mark -- by light years -- on the income definition question.

In any event, a tax on tort damages is not a "direct" tax for the reasons stated in Pollack (particularly the dissents, which are more persuasive). And it was only the tax on incomes from real and personal property that the Pollack Court struck down as a "direct" but unapportioned tax. To the extent the 1894 income tax applied to income from wages, trades, and professions, the Pollock Court struck it down on severability grounds, not constitutional grounds. Brushaber v. Union Pacific RR makes this clear.

Posted by: Jake | Aug 24, 2006 1:45:24 PM

I thought it was rather obvious. Call it a tax on human capital and if it's not income, it must be a direct tax that does not meet the requirements of the taxing clause. I rarely pay attention to the foundational questions so I don't recall how narrow direct taxes are, but I don't recall Justice raising this aspect in their brief.

Posted by: Brian | Aug 24, 2006 1:25:53 PM

Surely, a Federal levy on tort recoveries of all kinds would be valid in the absence of apportionment among the States by population, as not a direct tax. If POLLOCK is viewed as wrong ( and I think it is) then the only direct taxes are capitations and taxes on land, as suggested in 1796 in HYLTON.

Posted by: The NJ Annuitant | Aug 24, 2006 12:52:52 PM

Thinking it through a little more. Are there even any federal property or sales taxes? Are there any federal taxes other than on income?

Note the 16 amendment only states what congress can do (and if we believe the D.C. circuit can’t do.) It doesn't seem to limit states' ability to tax things other than income.

So this issue has federalism vs. states' rights elements too! Perhaps the supreme court will say that the federal government can only tax income, within the limits of Macomber, Glenshaw and now Murphy, where as states can tax whatever they want.

Posted by: Tax reformer | Aug 24, 2006 12:50:45 PM

"There are plenty of federal taxes on things other than income, and they're not all unconstitutional"

Has the Supreme Court affirmed that these taxes (like sales tax and property tax) aren't unconstitutional?

Maybe it's just a matter of these issues not having been brought to the court's attention.

Posted by: Tax reformer | Aug 24, 2006 12:09:39 PM

Calvin Johnson would argue that the Court has interpreted the meaning of "direct" so narrowly that it is a null-set. Assuming that's correct, then yes, the opinion is shockingly inadequate, with the possible excuse that the Justice department didn't raise it as an issue on brief (which it sounds like from Marty's post that it did not); in which case it is Justice that is shockingly inadequate.

Posted by: Ugh | Aug 24, 2006 11:34:39 AM