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Murphy Rehearing:

The U.S. Court of Appeals for the D.C. Circuit has granted the petition for rehearing in Murphy v. IRS. In Murphy, a unanimous three-judge panel held unconstitutional a provision of the Internal Revenue Code that taxed as income, compensation for personal injuries unrelated to lost wages or earnings. Note, this is not an En banc rehearing. Rather, the original three-judge panel will rehear the case. Paul Caron has details here. (LvHB)

UPDATE: In my initial post I neglected to note that Orin blogged on the Murphy case here and here.

Richard Riley (mail):
Thanks for this link. Murphy is a very interesting case for us tax types. As I have commented on the VC before, I would be VERY surprised if the panel decision from August stands. Either the panel itself, the D.C. Circuit en banc, or the Supreme Court will reverse it. The main problem with the panel decision is its assumption (not very clearly stated, but definitely part of the reasoning) that people have some sort of cost basis or investment in their labor, or in their ability to earn income, however you want to describe it, which it is beyond the power of Congress to tax. But that goes against many decades of interpretation of the federal income tax. The government's petition for rehearing lays it out pretty persuasively. So as I say, I am fairly convinced the panel decision will be overturned one way or another.

The most interesting question to me is what the 3-judge panel that originally decided the case will say on rehearing. Do they plan to retreat quietly, or are they going to try to find a way to strengthen their conclusion? These three judges are not shrinking violets, so they may be planning an in-your-face affirmance of their original conclusion.
12.26.2006 2:11pm
Glenn W. Bowen (mail):

people have some sort of cost basis or investment in their labor, or in their ability to earn income, however you want to describe it, which it is beyond the power of Congress to tax. But that goes against many decades of interpretation of the federal income tax.


several years ago, the IRS attempted to tax an individual on the potential income he would have in the future- there was a large sum of money involved, perhaps an inheritance.

same deal as above?
12.26.2006 2:19pm
Richard Riley (mail):
Not sure of the case Glenn W. Bowen is describing, but ordinarily the government cannot tax income until it is received in cash (for a cash-method taxpayer like an individual person) or accrued on the books (for an accrual-method taxpayer like most businesses).

But note that the Murphy case does not involve that at all. Ms. Murphy had received her damages from her former employer - she had the cash in hand already. The question was whether the the Constitution prohibited the federal government from imposing an income tax on the money she had received. The D.C. Circuit panel said yes, basically for the reason I have very briefly summarized - i.e., that the cash wasn't income, but rather was some sort of return of her personal capital that had been impaired as a result of the non-physical injury (damage to reputation) she had suffered at her former employer's hands.
12.26.2006 3:05pm
andy (mail) (www):
"
The most interesting question to me is what the 3-judge panel that originally decided the case will say on rehearing. Do they plan to retreat quietly, or are they going to try to find a way to strengthen their conclusion?"

Yeah, that's what's strange to me...it would have been much easier to have gone the en banc route and then join the votes of their colleagues. But now one of them will have to write an opinion explaining exactly why they were wrong.
12.26.2006 3:50pm
The NJ Annuitant (mail):
The MURPHY opinion did not address whether a tax on tort recoveries for emotional injuries would be a direct tax , if such recoveries did not constitute income within the meaning of the 16th amendment. If ,on rehearing ,they determine that these recoveries are not income within the meaning of the 16 amendment, then I would hope the Court would shed some light on what they veiw as direct taxes.
12.26.2006 4:40pm
PJH (mail) (www):
How common is this? The order vacating the judgement doesn't direct the briefing to any particular issues. If rehearing was "necessary to secure or maintain uniformity of the court's decisions" or "the proceeding involve[d] a question of exceptional importance" (FRAP 35(a), why wasn't rehearing en banc granted? Just a do over?
12.26.2006 11:06pm
anonVCfan:
The panel seems to be under the impression that it missed something. Where the panel is willing to give the case a second look and seems capable of doing so, there isn't any need for en banc rehearing. As much as an en banc rehearing might save face on some level, this is much more honest and more consistent with how these things are supposed to operate in practice.
12.27.2006 8:39am
Bill Dyer (mail) (www):
I can't quite figure out the Volokh Conspiracy's trackback procedure, but I've posted on my own blog something entitled "Federal appellate panel rehearing vs. rehearing en banc."
12.28.2006 12:24am
Hugh59 (mail) (www):
Sigh....this takes me back to 1986 when I wrote my LL.M. thesis at the University of Florida on "Defamation damages and the personal injury exclusion of Sec. 104(a)(2)"

Too bad I can't remember WHAT I wrote!
12.29.2006 9:36am