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Petition for Rehearing in Murphy:
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. Stay tuned for Murphy's brief in opposition.

  Thanks to Paul Caron for the link.
PersonFromPorlock:
The opinion cited by the court in your original post:

"Congress cannot make a thing income which is not so in fact." Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 114 (1925)

...is almost laughable in the face of modern governmental arrogance. Not wrong, mind you, but laughable.
10.6.2006 8:34am
W.E. Howard (mail):
We don't need no stinking 16th amendment.
10.6.2006 11:06am
PJH (mail) (www):
An excellently written brief, but actually quite shallow. Let me offer one example. It quotes Bittken &Lokken for the proposition

Taxing a recovery for personal injury or deprivation may be a harsh response to the taxpayer's misfortune, but it is not significantly different from taxing wages and salares without allowing an offsetting deduction for the exhaustion of the tapayer's physical prowess and mental agilty durng his working life.
But to dismiss this difference is to misapprehend the basis of tort law. Plaintiffs aren't awarded damages for the normal wear and tear of life, they get damages because they suffered an injury that deprived them of something they possessed.

I too await the response and hope you will post it when available.
10.6.2006 11:42am
XON:
The most depressing part of this is the re-assertion (apparently made frequently by the government) that we as individuals have no basis in our persons.

So much for for liberty and enumerated powers. . .
10.6.2006 11:48am
Mary Katherine Day-Petrano (mail):
"An excellently written brief, but actually quite shallow. Let me offer one example. It quotes Bittken &Lokken for the proposition

Taxing a recovery for personal injury or deprivation may be a harsh response to the taxpayer's misfortune, but it is not significantly different from taxing wages and salares without allowing an offsetting deduction for the exhaustion of the tapayer's physical prowess and mental agilty durng his working life.

But to dismiss this difference is to misapprehend the basis of tort law. Plaintiffs aren't awarded damages for the normal wear and tear of life, they get damages because they suffered an injury that deprived them of something they possessed.

I too await the response and hope you will post it when available."

Actually, I find the DOJ brief rather poorly written. THe difference you point out is not only the basis of tort law, but of federal anti-discrimination law. The DOJ Tax Division's brief is blatantly violative of federal disability anti-discrimination laws, which have an "other federal laws" preemption or repeal provision prohibiting favorable treatment for physical personal injury recoveries but not nonphysical personal injury recoveries. A damage award for mental injury or injury to a reputation a mentally disabled person builds through enormous monetary expenditure to bring that person equality of opportunity in the economic mainstream of America is exactly the same restoration of loss (not income) as an award for physical loss. To differentiate the two puts DOJ (the agency that is supposed to enforce the Nation's disability anit-discrimination laws) into the business of blatant disability discrimination and bigotry.

Without the award restoring the mental injury or reputational injury to a mentally disabled person, that person will realistically never hold another job with a National unemployment rate for the disabled at appx. 72%. To advocate the award restoring the mental/reputational injury loss should be taxable is to continue 100 years oppressin of this protected classification.
10.6.2006 12:59pm
R. G. Newbury (mail):
The heart of the question is the definition of 'income'. If 'income' is a concept related to the concept of 'work' or 'salary' or 'business', then damages in tort are NOT income. Damages in contract in lieu of salary (wrongful dismissal etc.) are income. Damages in tort are to make the plaintiff whole for the tort suffered. Damages in contract generally? It depends upon the characterization of the reason for which the award was made (or agreed upon in settlement).

Both Canadian and English tax law have long recognized the distinction. From Principles of Canadian Income Tax Law, Peter Hogg (Professor Emeritus and Dean, Osgoode Hall Law School)

"damages for personal injuries are not taxable for income tax purposes because they are not from a productive source. ...Justice Mahoney stated in the case of a personal injury victim, the source of the right to damages is a persons right not to be injured by the tort of another. That is not a source of income within the contemplation of paragraph 3 (a) of the Income Tax Act (R. v. Schwartz [1994] 2 C.T.C. 99, 94 D.T.C. 6249 Fed. C.A.), Para 17."

The opposite situation, the deductibility of damages or fines paid, is also subject in Canadian tax law to a consideration of whether the actions which resulted in the imposition, were taken 'for the purpose of gaining or producing income' and whether the action was intentionally illegal. Generally, payment of a wrongful dismissal claim (in contract) would be deductible to the employer and taxable to the employee. A damage award in tort for injuries sustained by a visitor could be deductible to the employer, if it occurred in a work-related environment, but not taxable to the injured party.
So (generalization) an award of damages for either physical or emotional harm is not taxable income in Canada, nor is an award of punitive damages.

On the same basis, insurance payouts or physical damage losses are not taxable. Where the asset is used for business purposes, the payout itself is not taxable, but represents the proceeds of disposition of a capital asset, which may trigger recapture of depreciation in the asset class but is not 'income' per se, but an amount in recompense for the loss of or damage to an asset. From here in Canada I'm surprised that anyone would consider such a payment taxable. But then again, I only read about the rapaciousness of the IRS. Myself, I suffer from the stupidity and ignorance of the CCRA, which, like the universe, is beyond comprehension.

There is no good reason why SCOTUS need diverge from Burk-Waggoner. There are 2 arguments: if it is not 'income' as defined by the IRC then, like the Canada Tax Act it is not taxable under the Code (lazy use of the word 'permits' notwithstanding); and secondly, if it is not 'income' any attempt to so include it is unconstitutional as outside the powers of the IRS under the Amendment *even if the Code says otherwise*.
The Haig-Simmons argument (reductio) is that 'everything is income'. But clearly under the 16th Amendment, not all things are income: cf Burk-Waggoner. Therefore Haig-Simmons cannot be a proper constitutional construction. And if not 'everything-is-income', then what *is* income is the only thing that the IRS can actually tax.

My bet would be that the decision to exclude the damages from income will be upheld. The purported 'impact' on the tax code, would actually only be an impact on the tax-catchers, not the tax-payers. I hope that counsel for Murphy will do some international tax law research as that might help convince the (how can I say this....?) 'less-strictly-constructionist' side of the Court that denying the IRS' appeal would accord with 'international standards' as well as common sense and decency.
Geoff




And there are good reasons why income should not be equated with cash receipts. The argument that this will "greatly" affect
10.6.2006 1:42pm
Realist Liberal (mail):
I agree with R.G. Newburry that the question is ultimately one of "what is income?" However, (and this is coming from someone with ZERO understanding of the 16th Amendment) is that the same as asking whether the tax is unconstitutional? If the amendment granted Congress the power to define tax then it is within Congress' purview to say that tort damages are taxable. Is there something I'm missing? Hopefully someone with knowledge of tax law can shed some light.
10.6.2006 4:03pm