The U.S. Court of Appeals for the District of Columbia Circuit issued an important tax decision last August, but I haven't seen it discussed on any of the tax-denial websites. Tax-deniers routinely take parts of judges' opinions out of context to make their case that the courts have held that wages are not income and hence non-taxable. And the opinion in Murphy and Leveille v. IRS (pdf) has a few choices lines just begging to be taken out of context, such as:
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."Yeah, the deniers could have a field day with that, assured that most people won't read the full case. But some of us will--and have.
A bit of background. Marrita Murphy worked for the New York Air National Guard. She complained to the U.S. Department of Labor that, in violation of "whistle-blower" rules, she was blacklisted by her employer after she informed state authorities about environmental problems at air national guard base. Her complaint succeeded, and her case went to an administrative law judge for determination of compensatory damages. She was awarded $70,000 -- $45,000 for "emotional distress or mental anguish" and $25,000 for "injury to professional reputation."
On her 2000 tax return, she included the $70,000 as gross income and as a result paid an additional $20,665 in taxes. She then sought a refund of that money (plus interest; you go, girl!) on the grounds that § 104(a)(2) of the Internal Revenue Code states, "gross income does not include . . . damages. . . received . . . on account of personal physical injuries or physical sickness."
The IRS told her to take a hike.
Instead, Murphy filed suit. The U.S. district court backed the IRS.
To cut to the chase, the court of appeals sided with Murphy, holding that although her compensatory damages were not for physical injury (which the IRS concedes would be excluded from gross income), the IRS's refusal to exclude compensation for nonphysical injuries is unconstitutional "because compensation for a non-physical personal injury is not income under the Sixteenth Amendment if, as here, it is unrelated to lost wages or earnings."
If that's not clear enough, the judges went on to say:
Murphy’s compensatory award [for nonphysical injuries] in particular was not received 'in lieu of' something normally taxed as income; nor is it within the meaning of the term 'incomes' as used in the Sixteenth Amendment. Therefore, insofar as § 104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional. [Emphasis added.]Thus implying that taxing compensation that is releated to lost wages, and hence the wages themselves, is indeed constitutional.
Addendum, Jan. 7, 2:25 p.m. CST
In the comments Thomas Bell helpfully refers to an update I missed. Thanks! Here's the skinny from Wikipedia:
The Department of Justice asked for a rehearing en banc (i.e., a hearing before all the members of the Court, rather than before only the panel of three judges who made the original decision).
The original three judges then agreed to rehear the case themselves, and also vacated the August 2006 judgment. The matter has been set for a hearing (before the three judge panel) for April 23, 2007, at which time the appellant (the government) "must raise all issues and arguments in the opening brief."
The August 2006 Murphy decision was mandatory precedent only in the District of Columbia. If significant components of the vacated 2006 decision are reinstated after the April 2007 rehearing, this could have a significant effect on litigants in employment, tort, and defamation suits, and in related areas of law where emotional distress and loss of reputation claims are possible.
This is interesting, but apparently not quite accurate. I've read elsewhere that the original three-judge panel will rehear the case, not the full compliment of the circuit's appellate judges. This seems to be unusual, indicating that the judges may be acknowledging they overlooked something. If the judges reverse themselves, it will be a win for the IRS.
Bear in mind, however, that what is not at issue is whether wages are taxable income. That was never the issue in the case. All that is in dispute is whether compensatory damages that do not replace lost wages are taxable. So a loss for the IRS does nothing to help the tax-denial movement.