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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, February 12, 2007

Germain Critiques Taxpayer's Brief in Murphy

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.

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"whether the interpretation of § 61 should be governed by the intent of the Congress that made the section 104(a)(2) amendment."

Hmmmm...a statute's meaning is necessarily affected by subsequent acts of the legislature. The "classic judicial task of reconciling many laws enacted over time, and getting them to 'make sense' in combination, necessarily assumes that the implications of a statute may be altered by the implications of a later statute." U.S. v. Fausto 484 U.S. 439, 453 (1988). Though the meaning of the statute, when it was enacted, is the natural starting point for analysis, "it is well established that a court can, and should, interpret the text of one statute in the light of text of
surrounding statutes, even those subsequently enacted." Vermont Agency of Natural Resources v. U.S. ex rel. Stevens 529 U.S. 765, 786 n.17 (2000).

A later Congress can obviously repeal a prior Congress' enactments, so I don't think it is surprising that a later Congress can narrow (or expand) the range of permissible meanings of a prior statute.

Posted by: andy | Feb 12, 2007 7:41:35 AM

I am happy to observe that both of the cases I mentioned in my comment above -- U.S. v. Fausto and Nebraska ex rel Stevens -- were in fact cited by the D.C. Circuit for the proposition that section 104 can effect the scope of section 61, notwithstanding the fact that 104 was enacted many years after 61. See Murphy v. IRS, July 3, 2007, slip opinion at 18-19.

"Although it is unclear whether § 61 covered such an award before 1996, we need not address that question here; even if the provision did not do so prior to 1996, the presumption indicates the Congress implicitly amended § 61 to cover such an award when it amended § 104(a).
We realize, of course, that amendments by implication, like repeals by implication, are disfavored. . . [but] [t]he Supreme Court has
also noted, however, that the “classic judicial task of reconciling many laws enacted over time, and getting them to ‘make sense’ in combination, necessarily assumes that the implications of a
statute may be altered by the implications of a later statute.” United States v. Fausto, 484 U.S. 439, 453 (1988).

"This “classic judicial task” is before us now. For the 1996 amendment of § 104(a) to “make sense,” gross income in § 61(a) must, and we therefore hold it does, include an award for
nonphysical damages such as Murphy received, regardless whether the award is an accession to wealth. Cf. Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 786 & n.17 (2000)."

I might have framed the analysis a little bit differently from the D.C. Circuit, but I'm glad that the court observed that the meaning of section 61 isn't frozen in time by the understandings of the Congress that enacted it.

Posted by: andy | Jul 4, 2007 8:24:08 AM