TaxProf Blog

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

Monday, March 5, 2007

NLJ: D.C. Circuit Has Second Thoughts in Murphy

Interesting article in this week's National Law Journal:  Court Has Second Thoughts in Tax Case; Ruling on Taxation of Emotional Distress Awards Gets Second Look, by Pamela A. MacLean:

A federal court declaring any portion of the tax code unconstitutional is enough to throw the Internal Revenue Service into paroxysms of anxiety. But last August's ruling from the U.S. Circuit Court of Appeals for the District of Columbia that taxing awards for emotional distress is unconstitutional shocked not only the agency but also the insurance industry. Now it appears the three-judge panel in Murphy v. IRS, 460 F.3d 79 (2006), has had second thoughts. In a highly unusual move, the same unanimous panel recently voted to reconsider its earlier decision and set new arguments for April 23. ...

Lurking in the background is also the IRS fear that a constitutional reversal in one area of the tax code will unleash broader attacks on its taxing authority. "The opinion will give substantial credence to all the nut cakes out there that taxes are unconstitutional," said former IRS Commissioner Donald Alexander, a partner in the Washington office of Akin Gump Strauss Hauer & Feld. Meanwhile, "the whole damages industry is watching the case with great attention," said [Paul] Caron, tax law professor at the University of Cincinnati College of Law. It could affect all pending settlement talks and would reopen all settlements in the last three years if people think tax consequences must be reconsidered, he said. ...

Michael Graetz, a Yale Law School professor, thinks the court got it flat wrong. The Justice Department's original brief did not take the constitutional argument seriously because it was unthinkable the court would adopt it, Graetz said. But in seeking reconsideration, the IRS pointed out that the taxing power of Congress is not limited to taxes on income, he said.

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