Even The Taxman Has Limits
So Says the DC Circuit
By Dan McLaughlin Posted in Law — Comments (6) / Email this page » / Leave a comment »
In a decision handed down today by the DC Circuit and authored by onetime Reagan Supreme Court nominee Douglas Ginsburg (and joined, FWIW, by Judges Janice Rogers Brown and Judith Rogers), the court in Murphy v. IRS concluded that taxation of an award of compensatory damages for emotional distress and loss of reputation is unconstitutional because such restitution, unlike compensation for lost wages (which replaces taxable income), is not "income" within the meaning of the Sixteenth Amendment and thus is beyond the federal government's enumerated power to tax. (H/T Bashman).
The Sixteenth Amendment, adopted in 1913 after 19th century Supreme Court decisions striking down the income tax, provides:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The Murphy decision is somewhat limited in scope, given the broad definitions of "income" previously adopted by the Supreme Court in defining the scope of the Sixteenth Amendment:
When it first construed [the term "incomes" in the Sixteenth Amendment] in Eisner v. Macomber, 252 U.S. 189, 207 (1920), the Supreme Court held the taxing power extended to any "gain derived from capital, from labor, or from both combined." Later, after explaining that Eisner was not "meant to provide a touchstone to all future gross income questions," the Court added that under the [Tax Code] -- and, by implication, under the Sixteenth Amendment -- the Congress may "tax all gains" or "accessions to wealth." Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430-31 (1955).
Slip op. at 10. As the court notes, the exception to that rule is where gains constitute "a restoration of capital." Id. This decision is, to some extent, merely an application of the exception, although the court does spend a good deal of effort examining the 1913-era understanding of "income" and compensatory damages by examining contemporaneous legislation and court decisions. Slip op. at 18-23. Nonetheless, it is heartening to see a court take seriously the principle of enumerated powers with regard to federal legislation:
At the outset, we reject the Government's breathtakingly expansive claim of congressional power under the Sixteenth Amendment -- upon which it founds the more far-reaching arguments it advances here. The Sixteenth Amendment simply does not authorize the Congress to tax as "incomes" every sort of revenue a taxpayer may receive. As the Supreme Court noted long ago, the "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). Indeed, because the "the power to tax involves the power to destroy," McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 431 (1819), it would not be consistent with our constitutional government, and the sanctity of property in our system, merely to rely upon the legislature to decide what constitutes income.