Paul L. Caron

Friday, March 30, 2007

Germain Critiques Taxpayer's Reply Brief in Murphy

On Wednesday, I blogged the Taxpayer's Reply Brief, filed in advance of the April 23 oral argument in the D.C. Circuit panel's rehearing in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 8/22/06). Gregory L. Germain (Syracuse) critiques the brief:

In a prior post, I criticized the government’s opposition brief for conceding that the word “income” in section 61 of the Internal Revenue Code – the provision that operates to impose a tax on “all income from whatever source derived” – has the same meaning as the term “income” in the 16th Amendment. There is no doubt, of course, that the language of the two provisions is similar, and that section 61 was derived from the 16th Amendment. But many people (possibly including a majority of the current Supreme Court, as well as the Chief Judge of the panel hearing the appeal) believe that constitutional terms like “income,” which do not inherently reflect evolving societal standards, had a meaning fixed at enactment. Indeed, the Murphy appellate panel previously held – on the basis of questionable historical evidence – that the enactors of the 16th Amendment did not think that compensatory personal injury awards were “income.” If that historical meaning applies to the word “income” used in the taxing statute, then Congress simply did not tax Ms. Murphy’s award. There would be no need to debate the niceties of Congress’s taxing power if Congress simply failed to exercise its power in a statutory enactment. By conceding that the word “income” has the same meaning in both the 16th Amendment and IRC section 61, the government has opened the door for the Court to hold that Congress failed to exercise its full constitutional power.

The government thus handed Murphy the club that she has effectively used in her reply brief to bludgeon the government’s head. The main argument in Murphy’s reply brief is that the government simply did not impose a tax on Ms. Murphy’s damages award in IRC section 61, because the award would not have been “income” in the minds of the enactors of the 16th Amendment in 1913, and thus would also not be “income” under Congress’s statutory enactment.

To support her argument that “make-whole” awards are not “income,” Murphy cites early interpretations of “income” adopted during the Macomber era (in which the Supreme Court had defined “income” as a gain from only capital or labor), and lower court opinions rationalizing Congress’s earlier decision to provide a broad exception for personal injury awards. Other than the narrow definition of “income” first used in pre-16th Amendment cases and adopted in Macomber, which definition the Supreme Court later in Glenshaw Glass rejected as a touchstone, there is no factual basis for the speculations about the 16th Amendment enactors’ intent. However, by focusing on the silent 1913 enactors’ imagined understandings of “income,” the parties have allowed the Court to paint on a blank canvas.

The taxpayer quotes at length from Professor Joseph Dodge’s recent law review article, available at SSRN, to support her argument that the direct/indirect Article I power issues are irrelevant. If, as the government conceded, the catch-all language in section 61 has the same fixed meaning as the catch-all language in the 16th Amendment, then Congress’s power under Article I has no relevance. According to Professor Dodge: “[I]f an item is potentially taxable only under the catch-all clause of section 61(a), then it must pass the income test [under the Sixteenth Amendment], and it cannot be bootstrapped into validity as being potentially the subject of a hypothetical (but nonexistent) provision that would be valid as an indirect tax.” See Joseph M. Dodge, The Constitutionality of Federal Taxes and Federal Tax Provisions, pp. 8-9 (Nov. 12, 2006).

The problem is the government’s concession that the 1913 meaning of “income” establishes the meaning of the word in the post-1996 statute. No one reading the Congress’s 1996 amendment to IRC section 104(a)(2) can doubt that Congress intended to make non-physical injury awards taxable as “income” under section 61. There is no other explanation for the amendment to the statute. Either the amendment is meaningless, or Congress intended to tax non-physical injury awards. By failing to argue that the meaning of the word “income” in IRC section 61 may have evolved as a result of the congressional intent manifested by the 1996 amendment to IRC Section 104(a)(2), if the word “income” had a more limited meaning in 1913, the government has made all of its Article I powers arguments irrelevant. After the government’s concession, the only thing that matters is the identical meaning of the word “income” in the 16th Amendment and IRC section 61. If “income” in 1913 included emotional injury awards, then the award was taxed in section 61 and was within Congress’s power under the 16th Amendment. If not, then Congress did not statutorily tax the award. There is simply no reason to consider whether Congress could have taxed the award as an indirect tax under its Article I powers. If, after the government’s concession, the Murphy panel wishes to continue to speculate that make-whole damages awards would not have been considered “income” by the silent 1913 enactors of the 16th Amendment, then the government will lose the case on statutory grounds.

The government should have argued that the meaning of “income” in section 61 is not fixed by the 16th Amendment. The 1996 amendment to IRC section 104(a)(2) manifests a clear intent by Congress to tax non-physical injury awards. The only reason Congress did not amend section 61 at the same time it amended section 104(a)(2) is because it thought that the word “income” was broad enough to cover emotional injury awards. Congress may have been wrong about the historical meaning of “income” in section 61, as Murphy argues, but, because Congress had the power to amend section 61, Congress’s intended meaning reflected in its amendment of the companion provision should apply prospectively. Otherwise, the congressional intent behind the amendment to section 104(a)(2) would be thwarted.

The entire Supreme Court, including the three strict constructionists (Justices Scalia, Thomas and Rehnquist), have recognized both the primacy of congressional intent, and that Congress’s intent would be thwarted if the meaning of ambiguous terms in a statute were fixed at enactment. In Franklin v. Gwinnett County Public Schools, 503 U.S. 60 (1992), the Court recognized that Congress’s intended meaning for an ambiguous term in one statute, as manifested by an amendment to another statute, should be applied prospectively. The question in Franklin was whether private parties could pursue a damages remedy for violation of Title IX. In 1979, the Supreme Court held that an implied a private right of action for Title IX violations existed. In 1986, Congress amended Title IX to abrogate the sovereign immunity of state governments for private suits “to the same extent . . . [as] any public or private entity other than a State.” Congress’s 1986 amendments implicitly validated the Supreme Court’s earlier ruling that a private right of action existed under Title IX. The majority opinion thus recognized that the 1986 Congress’s intent regarding the meaning of an earlier 1972 statute, as evidenced by statutory amendments made in 1986 to other related statutory provisions, was effective to define the meaning of the ambiguous 1972 statute.

Of most interest is the concurrence in Franklin written by Justice Scalia (joined by Justices Rehnquist and Thomas). Even though the trio of strict constructionists strongly disagreed both with the Court’s earlier 1979 decision inferring a private right of action under Title IX, they nevertheless concurred in the result because they recognized that Congress, in the 1986 amendments to Title IX, had ratified the Court’s earlier 1979 decision inferring a private right of action. As Justice Scalia stated: “The Rehabilitation Act Amendments of 1986 . . . must be read, in my view, not only ‘as a validation of Cannon's holding,’ but also as an implicit acknowledgment that damages are available.” All of the justices thus recognized the primacy of congressional intent, as manifested in later statutory enactments, in prospectively interpreting the meaning of other earlier statutory provisions.

The 1996 amendment to IRC section 104(a)(2) manifests Congress’s unequivocal intent for non-physical injury damages to be taxed as “income.” If the meaning of the post-1996 statute is broader than the 16th Amendment, the Court should properly consider whether Congress had the authority under Article I of the Constitution to tax the award.

The remaining arguments in Murphy’s reply brief were perfunctory. Murphy argued that her physical manifestations of emotional distress constitute a separate “personal physical injury” meeting the requirements for exclusion in IRC section 104(a)(2), but she did not address the compelling contrary legislative history or the numerous contrary decisions of other courts.

Similarly, Murphy’s concluding attempt to address the constitutional Article I issue was both short and weak. Murphy asserted that the only constitutional question concerns the scope of the 16th Amendment, because Congress only sought to tax the award under the 16th Amendment. This argument ignores the clear rule of constitutional law that requires the Court to “search the Constitution to ascertain whether or not the power is conferred,” regardless of the stated basis for enactment. United States v. Harris, 106 U.S. 629, 636 (1883), overruled on other grounds, Chimel v. California, 395 U.S. 752 (1969), but cited with approval in United States v. Morrison, 529 U.S. 598, 607 (2000). See also Madden v. Kentucky, 309 U.S. 83, 87-88 (1940), quoted with approval in Regan v. Taxation with Representation, 461 U.S. 540, 547 (1983) (“The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it."). If the taxing statute was beyond the power conferred in the 16th Amendment but within the power conferred under Article I, the statute would be valid.

Murphy finally argues that ALL income taxes are direct taxes requiring apportionment (absent 16th Amendment authorization) because they are taxes imposed on people. Without taking sides in the debate between Professor Erik Jensen and Professor Calvin Johnson regarding the original intent of the enactors, this argument ignores the entire history of federal income taxation prior to the 16th Amendment, including importantly Pollock itself and the post-Pollock cases upholding the War Revenue Act of 1898 and the Corporate Income Tax Act of 1909.

I am confident that the Court of Appeals, previously chastened by the controversy over its earlier vacated decision in Murphy, will adopt neither Murphy’s argument that all “taxes on people” are direct taxes requiring apportionment, nor the government’s argument that the direct taxing clause was implicitly repealed by the abolition of slavery.

On balance, I think Murphy was smart not to engage the government’s battle over the scope of Congress’s Article I powers. After all, Murphy’s arguments are very weak. Instead, Murphy smartly accepted the government’s concession that the statute has the same meaning as the 16th Amendment, and focused her argument on an imagined understanding of the silent 16th Amendment enactors’ intent. Because of the way the government framed the statutory issue, Murphy has a good chance of winning.

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