D.C. Circuit Reverses Itself in Murphy

[Famspear]

As an extremely rough parallel, consider that Congress has deemed certain forms of forgiveness-of-debt to be taxable income. Also, Social Security payments, which CLEARLY were income, didn't used to be but now they are.

I would argue that both of those items are true economic income -- and that they are "income" under the Sixteenth Amendment, as Glenshaw Glass "accessions to wealth."

--Famspear

[Nikki]

As an extremely rough parallel, consider that Congress has deemed certain forms of forgiveness-of-debt to be taxable income. Also, Social Security payments, which CLEARLY were income, didn't used to be but now they are.

I would argue that both of those items are true economic income -- and that they are "income" under the Sixteenth Amendment, as Glenshaw Glass "accessions to wealth."

--Famspear

You may argue that, but, remember, the SS payments weren't but now are.

There's logic, and then there's law.

[Famspear]

You may argue that, but, remember, the SS payments weren't but now are.

Well, I disagree, if you're talking about social security benefits. Social security benefits received by an individual have always been considered "income," both under the Constitution and under sections 61 and 86.

Indeed, section 86 provides only a partial exclusion for those benefits -- and that's a statutory exclusion, not a constitutional one. In other words, the reason "most" social security benefits are non-taxable has nothing to do with whether they're "income" under the Constitution.

The Murphy ruling has no effect on the taxation of Social Security benefits. You still apply the rules of section 86. If section 86 had never been enacted, then under section 61 those benefits would have been 100% taxable all along.

--Yours, Famspear

[Famspear]

Dear Nikki:

Think of it this way. Even prior to Murphy, some Social Security benefits have always been taxable -- if for no other reason than because of the rules in section 86 of the Code. In the absence of a case like Murphy holding that Congress could tax, as "income," something that is not in fact "income," then even partial taxation under section 86 would have been unconstitutional. (However, I would argue that social security benefits are really section 61 income, and that section 86 simply provides a statutory partial exclusion.)

I don't know off the top of my head whether any tax protester has ever tried to ARGUE that Social Security benefits were not "income" under the Constitution. I think I can, however, safely guess that if any tax protester has made such an argument, no court has ever bought it.

--Famspear

[Famspear]

Here's a protester case, Cowan v. Commissioner. In Cowan, the U.S. Tax Court stated:

-----"With respect to the Social Security benefits, section 86(a) provides that gross income includes Social Security benefits in the amount equal to the lesser of: (1) One-half of the Social Security benefits received during the year, or (2) one-half of the excess over certain base amounts. The base amount for a taxpayer using married filing separately status is zero if the taxpayer lived with his spouse at any time during the year. Sec. 86(c)(3).

-----"Petitioner [Cowan, the taxpayer] failed to present any evidence contrary to respondent's [IRS Commissioner's] position that one-half of petitioner's Social Security benefits were taxable. [ . . . ] Accordingly, we hold that one-half of petitioner's Social Security benefits in the amount of $2,442 is taxable."

--Cowan v. Commissioner, 71 T.C.M. (CCH) 2649, T.C. Memo 1996-161, CCH Dec. 51,269(M) (1996).

--Famspear

[Famspear]

In the absence of a case like Murphy holding that Congress could tax, as "income," something that is not in fact "income," then even partial taxation under section 86 would have been unconstitutional

What I was trying to say here is that in the absence of a case like Murphy holding that Congress could tax, as "income," something that is not in fact "income," then even partial taxation under section 86 would have been unconstitutional if Social Security benefits were not "income." Social Security benefits are income, and have always been income, under Article I, under the 16th Amendment, under section 61. They're also income under section 86 -- except to the extent that they are effectively excluded from income by the language of section 86.

--Famspear

[Judge Roy Bean]

Without further analysis, I am more than a little prone to say there are some stretches in the ruling. But most should realize by now, half the fun of this kind of thing is surfing the wake in terms of what can be billed to clients who simply can't fathom what the he** it means to their circumstances.

[Famspear]

Of course, if I were a tax protester, I'd be delusional anyway, and I would just argue that the Murphy court said the opposite of whatever the court really said, just like tax protesters do in lots of other cases.

And I should have added that if I were tax protester John J. Bulten, I guess I would argue that the court in Murphy just wasn't specific enough in its wording, because the court didn't actually come out and SAY that the law applied in Oklahoma (or wherever Bulten lives) did it? And it would have been SOOOO EASY for the court to do that! Why, that just proves that the rule doesn't really apply. BIZARRO BULTEN WORLD, home of BIZARRO BULTEN BELIEFS.

[LPC]

Social Security benefits are income, and have always been income, under Article I, under the 16th Amendment, under section 61.

Isn't there an argument that Social Security recipients have a basis in the payment they are receiving because of FICA taxes withheld?

I'm not saying it's a great argument, but it's better than the Murphy "human capital" crap.

[Famspear]

LPC wrote:

Isn't there an argument that Social Security recipients have a basis in the payment they are receiving because of FICA taxes withheld?

I'm not saying it's a great argument, but it's better than the Murphy "human capital" crap.

Eeewwww. What a choice.

You know, I'm thinking that Ginsburg et alia's saving grace is that tax law is so relatively obscure in a world where the really important legal stories (you know - Paris Hilton) get 24 hour multi-channel media coverage. I mean, look at it: almost nobody outside of a relatively small circle of tax geeks (of which we are of course prime examples) even knows that "Ginsburg and crew" screwed up last year. It takes chutzpah or something much like it to cite Glenshaw Glass as support in an opinion that holds (as I believe the August 2006 opinion did) that a personal injury recovery is not "income" -- at least in my opinion.

--Famspear

[Brian Rookard]

I don't have the time right now to read this opinion thoroughly, but does this passage make sense to anyone?

In the present opinion, we affirm the judgment of the district court based upon the newly argued ground that Murphy’s award, even if it is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution.

Why is it not "income"? If it is not "income", why is it subject to an "income" tax (even were it subject to Congress' power to enact a "something other than income" tax)?

Is the DC Circuit simply wiping egg off its face?

No, they realized the correct argument comes from Penn Mutual Indemnity Co. v. CIR, 277 F2d 16 ... a case which is 100% correct in noting that it doesn't matter what you call a tax ... you simply look at the substance of the tax and ask "is it a direct tax or indirect tax" ... you don't worry about whether Congress labeled the tax an "income tax" and whether or not what they actually taxed is "income" ... you look at what they actually taxed (whether technically "income" or not) and just ask whether they can tax it in this manner (uniformity v. apportionment).

Since an award on damages is not a tax on real property and it is not a capitation tax ... then it is not a direct tax ... period ... and it does not have to be apportioned. You don't worry about whether it's "income" or not.

When I saw what you posted ... I knew which case they cited for what you were saying (without even reading the opinion) ... because that is the case I have been citing for a long time now as being one of those cases which should be read if you want to really know why all this talk about "income" and "income taxes" and "what is or is not income" is just a big waste of time.

The Penn case is a dead-nuts on decision which clears away all the fog and meaningless drivel.

If tax protestors ever took the time to read Penn they'd realize the whole "wages aren't income" is a totally irrelevant argument. Wages aren't income? Fine! Let's assume they're "gross receipts." Can Congress tax gross receipts as an indirect tax whether or not they're income? Yep. Case closed.

[Famspear]

Brian Rookard wrote:

No, they realized the correct argument comes from Penn Mutual Indemnity Co. v. CIR, 277 F2d 16 ... a case which is 100% correct in noting that it doesn't matter what you call a tax ... you simply look at the substance of the tax and ask "is it a direct tax or indirect tax" ... you don't worry about whether Congress labeled the tax an "income tax" and whether or not what they actually taxed is "income" ... you look at what they actually taxed (whether technically "income" or not) and just ask whether they can tax it in this manner (uniformity v. apportionment).

Yes, and July 3, 2007 could go down as a bad day for tax protesters. Ironically, the original August 2006 Murphy decision, which a tax protester might have argued offered him or her a small bone with which to work, has been replaced by a July 2007 decision that is a very large bone -- stuck uncomfortably in the protester's throat.

Other courts in other circuits can say, hey, a personal injury recovery IS an "accession to wealth" and IS Sixteenth Amendment income -- we don't care what the DC circuit judges say. At the same time, those other circuits can also say, hey, but the DC Circuit IS correct on its Penn Mutual argument (so even if the recovery were not an accession to wealth, it would still be properly taxable as "income").

So, the law catches the tax protesters, no matter which way they turn.

--Famspear

[natty]

but it's better than the Murphy "human capital" crap.

Here's the problem. Murphy was COMPENSATED for a NON-economical loss, therefore, she realized no gain. Now the court, in its new opinion, says Congress can tax this compensation without apportionment whether or not it is indeed "income" because Congress can tax the transaction itself as an excise.

Fine, but any non-economical compensation is offsetting an actual loss. So isn't whether or not the compensation is income a crucial question so Murphy could at least deduct the loss? Hence, she owes no tax at all?

[Quixote]

No, they realized the correct argument comes from Penn Mutual Indemnity Co. v. CIR, 277 F2d 16 ... a case which is 100% correct in noting that it doesn't matter what you call a tax ... you simply look at the substance of the tax and ask "is it a direct tax or indirect tax" ... you don't worry about whether Congress labeled the tax an "income tax" and whether or not what they actually taxed is "income" ... you look at what they actually taxed (whether technically "income" or not) and just ask whether they can tax it in this manner (uniformity v. apportionment).

That argument might work if Congress had taxed compensatory damages for non-economic loss. But they did not and have not. The DC Circuit's argument, that Congress made it income by implication when the express exclusion of it from gross income was repealed, is weak.

[SteveSy]

Social Security benefits are income, and have always been income, under Article I, under the 16th Amendment, under section 61.

Isn't there an argument that Social Security recipients have a basis in the payment they are receiving because of FICA taxes withheld?

I'm not saying it's a great argument, but it's better than the Murphy "human capital" crap.

No, because the SC has made it clear FICA taxes have nothing to do with Social Security. They are just like any other income taxes and go to a general fund not allocated to any particular appropriation. FICA is simply a meaningless title. It’s just like having appropriations bills labeled “X” that really fund A-K.

The Murphy Decision is just one step closer to giving congress total and complete control over anything and everything. No limits, no judicial review because whatever congress does is constitutional this the constitution is meaningless. It provides little or no limits. Any limits that may exist are simply a matter of legislative grace.

While you may not like the “Human Capital” argument there is something immoral and unjust in taxing as gain or profit the overall trivial amount obtained from personal damages due to injury. The jury awarded "damages" that means it's to replenish something considered lost. It was not a trial to provide the receipient with gain or profit.

What’s next taxing your kid’s birthday or Christmas presents due and owing by their legal guardian? At least that would make more sense. Personally I think its petty and pathetic…..

[Famspear]

SteveSy wrote:

While you may not like the “Human Capital” argument there is something immoral and unjust in taxing as gain or profit the overall trivial amount obtained from personal damages due to injury. The jury awarded "damages" that means it's to replenish something considered lost. It was not a trial to provide the receipient with gain or profit.

Hmmm. Never mind about the logic behind SteveSy's comments. Ms. Murphy's award was $70,000. I think I'm gonna write my Congressman and recommend introduction of a bill to change the tax law -- to exempt the first $70,000 of EVERYONE'S income (of any kind, not just non-physical personal injury recoveries) as being a "trivial amount." I mean, if $70,000 is a "trivial" amount as a non-physical personal injury recovery, then the first $70,000 of my HARD-EARNED COMPENSATION should be non-taxable as well.

Thanks, Steve. And I'll mention your name in my letter to my Congressman.

Then, I'll hold my breath waiting for a change in the law.

--Famspear

[SteveSy]

SteveSy wrote:

While you may not like the “Human Capital” argument there is something immoral and unjust in taxing as gain or profit the overall trivial amount obtained from personal damages due to injury. The jury awarded "damages" that means it's to replenish something considered lost. It was not a trial to provide the receipient with gain or profit.

Hmmm. Never mind about the logic behind SteveSy's comments. Ms. Murphy's award was $70,000. I think I'm gonna write my Congressman and recommend introduction of a bill to change the tax law -- to exempt the first $70,000 of EVERYONE'S income (of any kind, not just non-physical personal injury recoveries) as being a "trivial amount." I mean, if $70,000 is a "trivial" amount as a non-physical personal injury recovery, then the first $70,000 of my HARD-EARNED COMPENSATION should be non-taxable as well.

Thanks, Steve. And I'll mention your name in my letter to my Congressman.

Then, I'll hold my breath waiting for a change in the law.

--Famspear

Thanks for your comments.

The trivial amount of 70k is nothing compared to what is really profit or gain taxed in the overall picture. Letting "damages" go untaxed would not even make a noticeable mark in income tax receivables.

btw, not everything should be based on what the "law" says as congress defines it. We have a judiciary that was created in part to help limit government intrusion. That limit is now for the most part in the hands of congress. There's very little, if any at all, left to all the cases that held congress created an unconstitutional law or acted unconstitutionally. Strange how modern courts can always understand the constitution better than those who were closer to the time when it was created. Also it’s no surprise how it always gives government more power when they do arrive at these more modern decisions.

Try thinking like you are a citizen included in "We the people", "A government of the people for the people" rather than a lawyer indoctirnated in the "law" is my bible, therefore who makes the law is my "God".

[Cpt Banjo]

The Murphy Decision is just one step closer to giving congress total and complete control over anything and everything. No limits, no judicial review because whatever congress does is constitutional this the constitution is meaningless. It provides little or no limits. Any limits that may exist are simply a matter of legislative grace.

It's precisely because the Constitution doesn't specify any limits on how far Congress can tax that it's a matter of legislative grace.

[SteveSy]

The Murphy Decision is just one step closer to giving congress total and complete control over anything and everything. No limits, no judicial review because whatever congress does is constitutional this the constitution is meaningless. It provides little or no limits. Any limits that may exist are simply a matter of legislative grace.

It's precisely because the Constitution doesn't specify any limits on how far Congress can tax that it's a matter of legislative grace.

It does provide limits.....however you've been indoctrinated to believe they are words that really have no meaning.

Everything is now an indirect tax including taxing property. Everything is "uniform" no matter how specific the tax is laid. You’ve accepted totally illogical contradictory arguments as the basis for your beliefs…in short you have accepted that the moon is made of green cheese and it has always been that way.

[Quixote]

Try thinking like you are a citizen included in "We the people", "A government of the people for the people" rather than a lawyer indoctirnated in the "law" is my bible, therefore who makes the law is my "God".

Try reading the thread. Overall, the comments are critical of the decision. It was the right result, but the reasoning is questionable. I don't know why the DC Circuit wants to keep shooting itself in the foot, but I doubt any other circuit will join in.