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IRS REQUESTS RE-HEARING ON MURPHY

October 06, 2006

The government yesterday asked the Court of Appeals for the Federal Circuit to have the full panel of judges re-hear the Murphy case. Murphy, in holding that "whistleblower" damages weren't "income" under the constitution, threatens to undermine much of the federal income tax.

The government's brief addresses the constitutional issues directly, raising many of the same points discussed here. The brief explains the source and broad scope of Congress's taxing power, and how the 16th Amemdment only removed the requirement that income taxes treated as "direct" taxes be apportioned among the states by population.

The brief also attacks the Murphy holding that the damages aren't taxable because they aren't properly considered "income":

The panel compounded its error by concluding that damages for nonphysical personal injuries were not considered income at the time the Sixteenth Amendment was ratified. That analysis is incorrect, but in any event focuses on the wrong question. The critical question is whether § 104(a)(2), or more accurately § 61, involves any direct tax that would have been subject to the apportionment requirement, but for the Sixteenth Amendment. If the answer to that question is no -- and it is -- then there is no need to reach the question whether a tax on damages for nonphysical injuries is a tax "on incomes, from whatever source derived," within the meaning of the Sixteenth Amendment. 6

In any event, the historical materials belie any consensus at the time of the framing of the Sixteenth Amendment that damages for nonphysical injuries are not income. Especially in light of the breadth of the Sixteenth Amendment -- which excludes "taxes on income, from whatever source derived" from the apportionment requirement on direct taxes -- and the capacious construction the Supreme Court has given to "income" in the Sixteenth Amendment and statutory contexts, the panel erred in concluding that damages for nonphysical injuries do not constitute income.7

(emphasis added)

Footnote 7 refers to the Tax Stories essay we discussed here.

The brief also attacks Murphy's "return of human capital" argument, noting that the taxpayer had no basis in her "human capital" for measuring gain or loss.

The brief, while of course an advocacy piece, is a nice short course on the constitutional basis for the income tax. You can read the whole brief here.

Of course, the TaxProf has more.

Orin Kerr at The Volokh Conspiracy comments:

I don't know much about tax law and know next to nothing about the Sixteenth Amendment, but I just read the government's petition for rehearing in the Murphy v. IRS case I blogged about awhile back: The brief sure seems pretty devastating to me.

I'm no lawyer, but I remain baffled how the original 3-judge panel could have reached the conclusion they did in Murphy.

Link:

Complete Tax Update Murphy Coverage

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