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Rehearing in Murphy tax case
December 26, 2006 by Ross Runkel at LawMemo
How often does a court hold that the Internal Revenue Code is unconstitutional?
The District of Columbia Circuit did. Scores of experts criticized and ridiculed the decision. Now the court has announced a rehearing in the case.
Facts: Murphy recovered damages from her employer on her claim that the employer violated various whistleblower statutes and retaliated against her. The damages were awarded in a Department of Labor administrative action. The administrative law judge specified that part of the award was for "emotional distress or mental anguish," and part was for "injury to professional reputation."
District of Columbia Circuit's first decision: Murphy v. Internal Revenue Service (08/22/2006). [This decision has been vacated due to the rehearing.]
The DC Circuit held that Section 104, as applied to Murphy, is unconstitutional. This was for two reasons. (1) Under the 16th amendment, Congress has the power to tax only "gain[s]" or "accessions to wealth." Commissioner v. Glenshaw Glass, 348 US 426 (1955). "[T]he damages were awarded to make Murphy emotionally and reputationally 'whole' and not to compensate her for lost wages or taxable earnings of any kind. The emotional well-being and good reputation she enjoyed before they were diminished by her former employer were not taxable as income. Under this analysis, therefore, the compensation she received in lieu of what she lost cannot be considered income ...." (2) The "original understanding" of the framers of the 16th amendment was that they "would not have understood compensation for a personal injury - including a nonphysical injury - to be income."
District of Columbia Circuit's order for rehearing (12/22/2006) announced new oral arguments to be held on April 23, 2007.
My view: Never underestimate the governments' power to tax. I expect that if the panel does not change its position, then the whole court will sit en banc and hold that the tax passes constitutional muster. [My previous comments on this case]
Thanks to Tax Prof Blog: D.C. Circuit Panel Agrees to Rehear Murphy, where you can get tons more details about this controversial question.
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Editor: Ross Runkel, Professor of Law Emeritus. email Ross@LawMemo.Com, Phone 503-399-8028. Copyright LawMemo, Inc.
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