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'MURPHY' GOES OUT WITH A WHIMPER

July 03, 2007

The "National Whistleblower Center" reports that the Federal appellate panel that issued the spectacular Murphy decision -- the one ruling the taxation of personal injury damages unconstitutional -- has changed its mind. The panel from the U.S. Federal Circuit Court of Appeals, which withdrew its much-criticised decision in late December, today issued a new decision holding that such damages are taxable.

I haven't yet found the actual updated decision; I will link it as soon as I do. The original decision seemed likely to unleash a wave of litigation on the scope of the term "income" under the constitution, as it implied that only items considered "income" in 1913 could be subject to the income tax.

Practitioners and academics mostly were appalled by the original decision. The three-judge panel withdrew its original decision after the full circuit had signaled that it would likely reconsider the decision.

Link:

Today's decision

Full Tax Update Murphy Coverage

UPDATE:

How Appealing has a post on this:

Today's ruling may strike many as unremarkable, and indeed it would be if this same three-judge panel, in August 2006, had not issued a decision in this very case holding that "insofar as §104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional."

The Wall Street Journal Law Blog also has coverage:

"Why are you bothering us with a tax case just hours before the Fourth of July!?" you’re surely asking. “Go home Law Blog!”

Well we care for a couple of reasons. First, it's rare for a three-member appeals court panel to agree to rehear a case and then reverse itself. Last August, the same three judges ruled that the award didn’t represent "income" as defined by the 16th Amendment — and thus wasn’t taxable. The court had also called “unconstitutional” a 1996 provision in the tax code that permitted taxation of damage awards for mental distress and loss of reputation. In December, the panel vacated its judgment and said it would rehear the case. (The more common scenario would have been for the entire D.C. Circuit to review the decision — i.e., en banc,)

Second, the ruling is a significant win for the IRS. The original ruling last year had set off a firestorm, causing tax lawyers and professors their own emotional distress, with most lambasting the decision. "Let 1000 lawsuits bloom," wrote UCLA law professor Stephen Bainbridge on his blog. Yale law professor Michael Graetz said the case would "launch a thousand [other] constitutionality arguments that people would have thought laughable before."

One thing this case teaches us: the Courts are hip to the public relations technique of issuing embarrassing news at holiday times, when it is least likely to attract attention. The panel withdrew its original decision on December 22, the Friday before Christmas; maybe there's another explanation for the issuance of the new decision today, but the cynical explanation does fit the data.

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