Tuesday, September 5, 2006
This week's Tax Notes observes that "tax and constitutional law professors are having a field day with [Murphy v. United States, No. 03cv02414 (D.C. Cir. 8/22/06). The TaxProfBlog has been tracking media coverage of the case and keeping a running commentary for anyone who cares to share an opinion." Indeed, Tax Notes quotes several Tax Profs (many from commentary on this blog) in three articles on the case:
Tax Profs on Murphy:
- Basis is one of the toughest ideas to teach first-year tax students, said Bryan Camp, a professor at Texas Tech University School of Law. Apparently, the three circuit court judges missed that particular lesson, he said. While the opinion recites the government's argument about basis, there is little discussion of it, much less any rational discussion, and that is proof enough that they just did not understand it, Camp said. Camp said the opinion's essential logic is that Murphy's emotional well-being and reputation were not taxable items in and of themselves, both were diminished by the tort, and, therefore, the money paid to Murphy to make her emotional state and reputation "whole" should not be taxed because it was "in lieu of" the diminution of a capital asset. Assuming the vitality of the opinion's "human capital" concept, Murphy's damages are excluded from income only if Murphy's basis in her reputation and emotional well-being was equal to or greater than the damages awarded, Camp said. But until this opinion, it has been widely accepted that taxpayers have no basis in their labor -- their "human capital," Camp said. That lack of basis is why taxpayers cannot take a deduction under section 170 for a donation of services, Camp said.
- "It is impossible to overstate the potential damage caused by this decision -- in my 15-plus years in this business, this decision takes the cake for judicial mischief," said Paul Caron, a professor at the University of Cincinnati College of Law who runs the popular TaxProf Blog. "It undoes much of the work over the past 20 years by Congress, courts, IRS, and [Justice Department] in stamping out the tax protester movement."...Caron said that unless the decision is reversed, it will generate a similar chorus of "I told you so" from the antitax crowd. He speculated that Murphy will spawn a new generation of protesters who will tie up vast government resources as they wage war in the courts.
- The Murphy court may have been wrong on the law, but right on the tax policy issue, said Stephen Cohen, a tax professor at Georgetown University Law Center. While there may be doubtful authority to declare, as the circuit court did, an income tax provision unconstitutional on policy grounds, he believes that there is a strong argument that the type of damages involved in Murphy should not constitute income.
- It strikes Michael Graetz, a professor at Yale Law School, as "odd that judges who claim to be conservative, and supposedly want to defer to the legislative branch, can be so ready to strike down this kind of statute," which Congress enacted only after a great deal of confusion and after many decisions by the Supreme Court on the treatment of damages....Graetz said Murphy is highly unusual -- he is aware of only two other cases since the enactment of the Sixteenth Amendment that strike down an income tax provision. And the court did it without asking whether there was power for Congress to tax the recovery apart from the Sixteenth Amendment under its general taxing power, he said. The opinion never discusses why that would be a "direct" tax, which presumably would be the grounds for it being unconstitutional, he said.
- It is a horrible decision for a more fundamental reason than what the tax people are worried about, said Martin S. Lederman, a visiting constitutional law professor at Georgetown University Law Center. The appeals court's opinion is woefully incomplete, he said, because it failed to perform a full constitutional analysis....The focus on whether damages are income or not is beside the point, Lederman said, because congressional power is not limited to taxing income. Congress has the power under Article I, section 8 to lay and collect taxes, he said. "This, in and of itself, is presumably sufficient authority for the tax in the Murphy case."...To invalidate the tax in Murphy, it is not enough to hold that the award is not "income," Lederman said. Moreover, it would be necessary to hold that the tax is a direct one, prohibited by Article I, and to explain why it is not otherwise authorized by the Necessary and Proper Clause, he said....The opinion's inexplicable failure to address the power to tax is especially conspicuous considering that the district court judge in the case specifically noted that the possible constitutional limitation derived from the apportionment requirement of Article I and indicated that the tax was permissible if it was assessed on income or if it was not direct, Lederman said. The circuit court simply ignores half of the equation -- and without that, the decision provided no reason to invalidate the federal statute, he said.
- "They see [ Murphy ] as opening the doors to holding a good chunk of the income tax as unconstitutional," said James Maule, a professor at Villanova University School of Law.
- Martin McMahon, a professor at the University of Florida College of Law, said that exclusions from an exclusion provision fall back into section 61. To reach their decision and properly apply the statute, McMahon wrote on the TaxProfBlog, the circuit court judges should have held that section 61, as applied to the damages in question, as a result of the 1996 amendments to section 104(a)(2), was unconstitutional.
- Some protesters "are firmly convinced that wages aren't income because it's an even exchange," argued George Mundstock, a professor at the University of Miami School of Law.
Tax professors are bewitched by comprehensive tax base theory in a way that sometimes makes it hard to predict how arguments based on other theories will appeal to nontax judges, said Theodore Seto, a professor at Loyola Law School in Los Angeles. Not an "originalist," Seto said he parts ways with the D.C. Circuit in its mode of constitutional interpretation. But one need not be an originalist to conclude that purely compensatory damages not in lieu of income are not themselves income, he said. If something is not income, we must eventually ask whether its inclusion in the income tax base is authorized by the Sixteenth Amendment, Seto said....Predicting what the Supreme Court will do in a particular case is a risky business, Seto said, but he doubts that a majority would adopt the circuit court's originalist approach. Beyond that, Seto is less certain. "Unlike many of my colleagues, I believe that non-tax lawyers (there are nine of them on the Supreme Court) might well conclude that the damages in question are not 'income' and that this raises potential 16th Amendment problems," he said. The ruling is startling, misguided, and wrong, said Bernard Wolfman, a professor at Harvard Law School....Wolfman believes that if the government were to lose after rehearing and then seek certiorari, the Supreme Court would grant it without waiting for a circuit conflict to develop, and that it would reverse.
- The decision is an embarrassment to the D.C. Circuit, said George Yin, the former head of the Joint Committee on Taxation, now a professor at the University of Virginia School of Law...."We law professors must not be doing our jobs right if three federal judges and their clerks can reach a conclusion like this one," Yin said....Yin also took exception to the court's analysis of what the taxpayer was receiving recovery for as means of determining whether it was taxable. The theory is that the recovery is taxable if it is made in lieu of something that would otherwise be taxable, Yin said. When taken to its logical conclusion, that analysis would result in not treating wages as income, he said, because people work for pay in lieu of having leisure time....Further, the court holds unconstitutional section 104(a)(2), which provides that some recoveries are not income. In striking down an exclusionary provision, it does not follow that there is no income, Yin said....If the case had not been decided on constitutional grounds, Congress would reverse it right away (and thereby pick up some unexpected revenue), Yin said. "As it is, we will have to await an en banc or Supreme Court reversal and suffer an increase in frivolous arguments no matter what happens," he said.