Would it come as a surprise to be reminded that Tax Law is Constitutional Law? It did to me years ago to see this pointed out. What could seem further from Con Law than Tax Law.
Until you stop to think about it, of course. All of our law must conform to the Constitution, giving rise to the notion I claim to have devised that Con-law is our operating system and all other legal subject areas are the applications programs.
Congress imposed an income tax to help fund the Civil War, as I recall. But the Supreme Court held the income tax unconstitutional in a case called Pollack v. Farmer's Loan & Trust Co. (1895).
It wasn't until the 16th Amendment, proposed in 1909 and ratified in 1913, that the power of the federal government to tax personal income was made constitutional.
A friend called from out of state recently to say he'd been talking to an acquaintance of his who claimed that one didn't have to pay taxes, taxation was illegal, and was this true.
Describe your friend, I replied.
A militia type guy, he said.
Probably a survivalist, too, when he isn't attending Klan meetings, I thought.
Have nothing more to do with him, I suggested, for he will get you in a lot of trouble, and you are beyond the getting in trouble because of the people you rub elbows with stage..
We have a federal tax code, regulations, operating instructions, and advice letters imposing an income tax and its applications, with the help of an army of tax lawyers, CPAs, and bookkeepers, not to mention the IRS, designed to collect what's collectible and forego the rest. Do you think we would have these if the income tax were illegal, I asked.
My caller experienced something called "the light going on," and thanked me for imparting such wisdom when all he had to do was to call from Washington State, where I guess they have these people running around loose.
What brought this to mind was a decision of the D.C. Circuit issued today which held in a case called Murphy v. IRS that a portion of the tax code was unconstitutional. Murphy was defamed by her employer, the Air National Guard in New York, after she blew the whistle on how it behaved. She sued and won a judgment for emotional distress and harm to her reputation, because, she claimed, it blacklisted her for being a whistle-blower and gave her bad references for future employment. Damage to reputation is what defamation (libel or slander depending whether in writing or orally) is.
Did Ms. Murphy have to pay taxes on the money she recovered under the judgment? The IRS claimed it was income. The U.S. Circuit Court for the District of Columbia ruled that the money recovered for personal injury was to make her whole in her reputation and for harm to her reputation. This is not money she earned or was given. It was a transfer in the way of making repairs. In reaching the decision, the appellate panel found a section of the Internal Revenue Code unconstitutional as applied to personal injury recoveries. The case is discussed on the Tax Prof Blog, and is the subject of comment on other blogs linked there.
So if you settle a personal injury case and your client asks whether the money received by the client is taxable, you can start your research with the Murphy case, after it finally concludes, as one new appellate opinion does not final law make. IRC 104 (a) (2) required the payment of taxes on personal injury awards. Murphy holds IRC 104(a)(2) unconstitutional.
Conlawprof Marty Lederman, at Balkinization offers a theory as to why the Murphy decision is wrong, suggesting a different route to upholding constitutionality than the one struck down today. Expect the IRS to seek a U.S. Supreme Court ruling as P.I. awards generate a lot of tax revenue, now threatened.
The part that the attorney receives as fees, is, of course, taxable to the attorney.
Disclaimer: I'm no tax attorney. If you have a tax law question consult the tax law expert of your choice. I have considerable experience in criminal law, however, and know that, as I told my friend, one must pay taxes on income. What income is may, as in the Murphy case, be open to dispute, or even constitutional challenge. Better to get a revenue ruling in advance than to risk prosecution for failure to pay, or worse, to report.
Does it seem strange to you that after all the personal injury awards, some quite large, collected in this country, only now has a constitutional challenge succeeded on the statute imposing a tax on them? No one sat down and thought this through before this?
What am I missing?
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