Blogosphere Response to Murphy Tax Decision

I have been a little surprised at the lack of coverage in the mainstream media of what appears to me to be an important decision in the employment law arena. Virtually none of the major newspapers' legal writers have picked up the story. I am sure they will come around once they read all the blog activity on the subject.

Tax Professor Blog has a great summary of articles from various blogs regarding the D.C. Circuit's recent decision holding that mental anguish damages in employment-related cases are not taxable. (See our previous coverage here.) Of the blog entries cited by Tax Professor, I was interested to see the reaction in the Roth CPA blog:

With a night to sleep on it, I am more convinced that yesterday's D.C. Circuit decision in Murphy is unlikely to stand. I think there are two major flaws in the decision....

The first flaw is the decisions conclusion that the "framers" of the 16th amendment authorizing the modern income tax would have not considered damages for emotional distress "income." Joseph M. Dodge, in his essay in Tax Stories, notes that there were at least two competing conceptions of income at the time. One concept was based on the "principal and income" concepts of trust law. One was the "Haig-Simons" concept, which is more or less covers most of what we think of as income now. Murphy ignores this debate entirely and concludes on the thin evidence of an Attorney General opinion and a House committee report that "income" was a settled concept....

Once the Murphy court decided that damages for personal injuries weren't "income," they concluded that the tax on them was unconstitutional without further analysis. This appears to be the weakest part of their analysis. The federal government has broad taxing powers. The courts struck down the pre-1913 income tax as a violation of the constitutional requirement that "direct" taxes be apportioned among the states based on population. Many non-income taxes are recognized as constitutional, including gift, estate and excise taxes....

My point? Even if it's not income, compensatory damages are still subject to Congress's power to tax unless they are a "direct" tax, which they probably aren't.

Obviously, we will be keeping an eye on this bombshell case as it makes its way up the appeal track.