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Abstract:
A recent case, Murphy v. Internal Revenue Service, 460 F.3d 79 (Aug. 22, 2006), has stimulated interest in the constitutionality of federal taxes and provisions thereof. In Murphy, the panel of the Federal Court of Appeals for the District of Columbia held that section 102(a)(2) of the Internal Revenue Code was unconstitutional by failing to exclude from gross income damages for emotional distress and injury to professional reputation that, according to Murphy, are not income under the Sixteenth Amendment to the U.S. Constitution. This essay is not a systematic comment of the Murphy case, but various aspects of Murphy will be considered in passing in the process of looking at the general problem of the constitutionality of federal tax laws.

Among the conclusions reached herein are the following: (1) in general, a federal tax provision is constitutional if it either entails income under the Sixteenth Amendment or results in an indirect tax; (2) Murphy is not a proper case for reaching the indirect tax issue; (3) the Sixteenth Amendment only refers to gross income, and gross income means gross receipts; (4) although there is no constitutional requirement of capital recovery, capital is now limited to basis; (5) there is no basis in human capital or the capacity to enjoy life; (6) emotional suffering does not result from a realized loss of any portion of any asset; (7) a cash receipt cannot be excluded on the theory that it is a substitute for an untaxed psychic state; (8) direct tax is limited to head taxes, mandatory requisitions (taxes on states), and taxes on real estate, all because of their existence; (9) Congress can disallow basis; and (10) Congress can impose personal consumption taxes and personal wealth taxes.

Abstract:
This essay considers the benefit, partnership, and ability to pay principles of tax justice with respect to their foundations and how they bear (if at all) on such issues as the role and size of government, the choice of the tax base, and the structure of rates and exemptions. The method of examination is primarily by way of critique of what I call the new benefit principle, or NBP, which has recently been invoked by some commentators. The broad thesis of this essay is that the NBP - as well as its sibling, the partnership theory of (income) taxation - is little more than a rhetorical counter to street Libertarian talk that assumes one's entitlement to market outcomes. The NBP and the partnership theory do not withstand analysis at the level of entitlement theory, and they do not prescribe a politically liberal taxing and spending role for government. Specifically, the NBP and, to a lesser extent, the partnership theory, tell us very little about what the tax system should look like, and they certainly do not favor a Schanz-Haig-Simons income tax base, or, for that matter, any personal tax base with progressive features. Neither can be implemented as a substantive tax fairness principle. In contrast, an objective ability-to-pay principle is compatible with leading social justice theories and clearly favors a realization income tax base. I also argue, contrary to Murphy & Nagel and Kaplow & Shavell, that the ability-to-pay principle, as a norm of tax fairness, has a legitimate (if not pre-emptive) role in tax theory.

Abstract:
Tax basis is one of the most important, yet least studied, aspects of the income tax. This analysis calls attention to its importance and argues that taxpayers have the motivation, opportunity, and means to inflate the tax basis they have in their assets. We discuss the likely effect of basis overstatements in terms of revenue loss and suggest potential reforms. The institution of these reforms, if adopted, bodes well for rejuvenating the overall health of the income tax system.

Abstract:
Two distinguished legal academics have recently advanced a revised, and therefore new, or expanded, version of the benefit principle of tax fairness (hereinafter abbreviated EBP). One of them has invoked the EBP to justify an income tax over a consumption tax, and the other to justify double taxation of corporations and shareholders. Among the points I wish to make below are the following: (1) the EBP has no firm basis in ethics; (2) it is really an argument against those who are opposed to all taxes, but it is basically illiberal (in the political sense); (3) it cannot be implemented as a substantive tax fairness principle; (4) it tell us very little about what the tax system should look like, much less unequivocally favoring an income tax base or any personal tax base with progressive features; (5) its sibling, the partnership theory of income taxation, raises more issues than it answers and suffers from the same problems as the EBP; and, (6) it doesn't sufficiently justify double corporate-shareholder taxation in its classical form.

Abstract:
In this article, Dodge examines the tax treatment of borrowing under the income tax. The current income tax treatment is contrasted with a cash-method treatment, which is inclusion of borrowed funds coupled with the deduction of the principal and (where appropriate) the interest. (An alternative would be exclusion of the borrowing coupled with disallowance of both principal and interest.) The current approach is appropriate in the case of debt-financed investments (capital expenditures) that produce fully-taxed income, but the cash-method approach is right for debt financed-expenses (and lightly-taxed investments). Dodge discusses the accrual method of accounting for liabilities to pay future expenses, and concludes that cash-method treatment is theoretically correct in most circumstances.

Abstract:
Under the U.S. Constitution as amended by the Sixteenth Amendment, any federal tax that is a "direct tax" (which is not an "income tax") must be apportioned among the states in accordance with the respective populations of the various states. The purpose of this Article to solve the riddle of what is a "direct tax" that is subject to the apportionment requirement. Since the apportionment requirement can only apply inequitably across the nation, the correct labeling of any federal tax (other than an income tax) as a "direct tax" amounts to the proverbial "kiss of death," as no such tax will be enacted.

Recent commentary has staked out positions on this issue that I consider to be incorrect. Bruce Ackerman argues that that the Thirteenth Amendment (abolishing slavery) effectively repealed the apportionment-of-direct-tax clauses. Calvin Johnson argues that "direct tax" means only a tax capable (without effort) of being fairly apportioned among the states in accordance with population, namely, a capitation tax or a tax on the states (a requisition). At the other end of the spectrum, Erik Jensen argues that "direct tax" means any personal tax other than an income tax. I argue, on the basis of constitutional text, the formation of the constitution, post-ratification history, function, historical evolution, and judicial doctrine that "direct tax" encompasses only (1) capitation (head) taxes, (2) requisitions, and (3) taxes on real estate. The apportionment requirement made "political" sense in the Framing period by linking the representation of states with the taxation of states, and also appeared to serve some narrow instrumental concerns. However, the theory is skewed, mainly because states are not really taxed as states, and states (as states) are only tenuously represented in Congress. Also, although apportionment dealt with some instrumental concerns, it aggravated others. I conclude that (apart from requisitions and head taxes), apportionment makes sense only with respect to real estate taxes, which is the nearest tax to a state tax. I also conclude that a real estate tax cannot be bootstrapped into validity as an "income tax." Nevertheless, federal taxes on personal property and imputed income from real estate are constitutional, if endowment taxes are not.

Abstract:
A recent case, Murphy v. Internal Revenue Service, 460 F.3d 79 (Aug. 22, 2006), has stimulated interest in the constitutionality of federal taxes and provisions thereof. In Murphy, the panel of the Federal Court of Appeals for the District of Columbia held that section 102(a)(2) of the Internal Revenue Code was unconstitutional by failing to exclude from gross income damages for emotional distress and injury to professional reputation that, according to Murphy, are not income under the Sixteenth Amendment to the U.S. Constitution. The Murphy decision has caused an uproar, and the D.C. Circuit panel has taken the unusual step of vacating its own judgment and setting the case for re-argument.

This essay is an extended analysis of the Murphy case in the context of federal taxing power. Among the conclusions reached herein are the following: (1) in general, a federal tax provision is constitutional if it either reaches income under the Sixteenth Amendment or results in an indirect tax; (2) Murphy is not a proper case for reaching the indirect tax issue (but, if it is, the tax is an indirect tax); (3) the Sixteenth Amendment only refers to gross income, and gross income means gross receipts; (4) although there is no constitutional requirement of capital recovery, capital is now limited to basis; (5) there is no basis in human capital or the capacity to enjoy life; (6) emotional suffering does not entail any (offsetting) loss of human capital; (7) a cash receipt cannot be excluded on the theory that it is a substitute for an untaxed psychic state.

Abstract:
Under the U.S. Constitution as amended by the Sixteenth Amendment, any federal tax that is a "direct tax" (which is not an "income tax") must be apportioned among the states in accordance with the respective populations of the various states. The purpose of this Article to solve the riddle of what is a "direct tax" that is subject to the apportionment requirement. Since the apportionment requirement can only apply inequitably across the nation, the correct labeling of any federal tax (other than an income tax) as a "direct tax" amounts to the proverbial "kiss of death," as no such tax will be enacted.

Recent commentary has staked out positions on this issue that I consider to be incorrect. Bruce Ackerman argues that that the Thirteenth Amendment (abolishing slavery) effectively repealed the apportionment-of-direct-tax clauses. Calvin Johnson argues that "direct tax" means only a tax capable (without effort) of being fairly apportioned among the states in accordance with population, namely, a capitation tax or a tax on the states (a requisition). At the other end of the spectrum, Erik Jensen argues that "direct tax" means any personal tax other than an income tax. I argue, on the basis of constitutional text, the formation of the constitution, post-ratification history, function, historical evolution, and judicial doctrine that "direct tax" encompasses only (1) capitation (head) taxes, (2) requisitions, and (3) taxes on tangible property (real and personal). The apportionment requirement made "political" sense in the framing period by linking the representation of states with the taxation of states, and also appeared to serve some narrow instrumental concerns. However, the theory is skewed, mainly because states are not really taxed as states, and states (as states) are only tenuously represented in Congress. Also, apportionment didn't really effectively deal with any instrumental concern (with the possible exception of a slave tax). I conclude that (apart from requisitions and head taxes), apportionment makes sense only with respect to taxes on tangible property, which is the only subject that can be allocated among the states by reason of geographical location. This limitation of "direct tax" also happens to be compatible with a mild federalism position. I also conclude that property taxes cannot be bootstrapped into validity as an "income tax." Finally, it is doubtful that the federal government can lay unapportioned taxes on imputed income from property and on human-capital endowments.

Abstract:
The principal thesis is that, under the federal income tax, costs of obtaining specific sums of money should be capitalized (as opposed to being treated as expenses), just as costs of obtaining property should be so capitalized. Since this article deals with costs of obtaining or receiving specific 'cash amounts', it propounds what can be referred to as a netting or offset rule, principle, or thesis. The netting thesis is a straightforward application of the capitalization principle that would operate (notwithstanding perceived current tax accounting conventions) without regard to the arbitrary confines of the taxable year.

The netting thesis is opposed by the IRS, most conspicuously in the case of legal fees incurred by successful litigation plaintiffs (typically under contingency-fee arrangements) in obtaining non-excludible damages and settlement awards. The Service claims that such litigation costs are deductible under section 212(1) as expenses for the production or collection of income, but it turns out that such expenses are strongly disfavored as miscellaneous itemized deductions. The 2005 case of 'Commissioner v. Banks', which rejected an assignment-of-income theory for excluding from a plaintiff's income amounts paid to attorneys, declined to entertain the netting thesis on the ground that the issue wasn't ripe. Plaintiffs in certain situations have obtained tax relief under section 62(a)(20), enacted in late 2004.

This article argues that the netting thesis should be adopted by the courts and/or Treasury. After laying out the deep theory of capitalization, various doctrinal strands (pro and con) are examined. It is concluded that adoption of the netting thesis can be done within existing doctrine and without rendering section 212(1) without relevance. It is also argued that there is no difference in 'constitutional' status between basis recovery and expenses, with the consequence that Congress has the power to disallow them equally.

Abstract:
This article proposes replacing the federal estate and gift tax system with an accessions tax. An accessions tax is a tax, at progressive rates, on the aggregate lifetime gratuitous receipts of an individual in excess of a specified exemption. The main thesis of this article is that an accessions tax is not simply a reverse image of the current estate tax system, but is significantly different both in purpose and effect. An accessions tax should be an easier pill to swallow than the estate tax, because it is a tax on the unearned income (accessions to wealth) of individuals. In operation, the accessions tax can avoid many of the loopholes in the estate tax, because the accession can occur after the transferor's death. Accessions would be taxed only when realized in cash or assets that are not hard to value. Thus, only trust distributions (as opposed to the acquisition of trust interests) would be taxed. Accordingly, actuarial tables would be irrelevant, and general powers of appointment would be ignored. Taxation of qualified hard-to-value property (such as interests in a closely-held business) would be deferred to conversion to cash (or other event whereby qualification lapses). Accessions by charities and by the spouse of the transferor would be excluded, as would transactions (such as one person purchasing the consumption of another) that do not involve true wealth transfers. Elaborate qualification rules for the spousal and charitable exclusions would not be necessary.

Abstract:
This 1995 article, co-authored with Joseph M. Dodge, explores why the decision in Simon v. Commissioner, 103 T.C. 247 (1994), was wrong, effectively allowing premature deduction of a capital expenditure and, thus, consumption taxation (as opposed to income taxation).

depreciation, antiques, musical instruments, income taxation, consumption taxation

Abstract:
In this article, Dodge and Soled explain why inflated tax basis reporting is pervasive, estimating that this problem will cost the federal government $250 billion over the next 10 years and that the real figure could easily be much higher. And, unlike corporate tax shelters, this type of tax fraud is available to all taxpayers who engage in property transactions.

Furthermore, the underlying problem of tax basis identifications will be dramatically exacerbated if the new Congress moves quickly (as seems likely) to permanently repeal the estate tax, in which case a carryover tax basis regime of section 1022 will supplant the current basis-equals-fair-market-value-at-death rule. The authors question, however, how estate fiduciaries could possibly calculate the tax basis that decedents had in their investments, if the taxpayers themselves, while alive, did not know that basis. A carryover basis regime failed so badly in 1976 that it was retroactively repealed. In light if this failure, there is no reason to suspect that the carryover basis regime scheduled to take in effect in 2010 will fare any better, unless Congress and the IRS institute safeguards along the lines that the authors propose.

In a conversation with Mikhail Gorbachev, Ronald Reagan once said, Trust, but verify. In making that remark, Reagan made an important observation about how perhaps we should conduct diplomacy and, the authors suspect, our affairs in general. Tax basis identifications require the same vigilance on the part of Congress and the IRS.

Abstract:
Those opposing permanent repeal of the federal estate and generation-skipping taxes have fallen back to the position of advocating a "reformed" version of these taxes featuring a very large per taxpayer exemption somewhere in the $2-10 million range. Alternatives to a reformed estate and gift tax system are a federal inheritance tax, an accessions tax, and a repeal of the income tax rule that excludes gratuitous receipts from gross income. The merits of taxing vs. not taxing wealth transfers will not be taken up in this contribution, nor will the issue of whether getting rid of free stepped-up basis at death would be superior to any wealth transfer tax system. Instead, the principal purpose is to compare a reformed version of the present system, an inheritance tax, an accessions tax, and an income-inclusion system. One thesis is that the basic features of the existing transfer taxes (large exemptions, unlimited marital deduction) should not simply be carried over intact to any of the alternative systems, each of which should be true to own nature. A second thesis is that a generation-skipping tax (or its equivalent) is not a necessary feature of any system, and is not justifiable on equity grounds or as a means of rendering the system into a proxy wealth tax. The article examines such basic structural features as the appropriate rate and exemption structures, the marital deduction or exemption, exclusions for inter vivos gifts, timing issues, and valuation issues. Among the conclusions reached are that: (1) an unlimited marital exclusion is contrary to the purpose of an accessions tax; (2) an accessions tax and an income-inclusion system offer considerable justification and simplification advantages over an estate tax or an inheritance tax; (3) an exclusion for consumption-type (as opposed to wealth) transfers is justified under any system; (4) an income-inclusion system is doctrinally the simplest, and can be readily integrated into the system of taxing income from trusts; and, (5) the accessions tax and income-inclusion approaches are sufficiently close as to suggest the possibility of a hybrid system that would combine the most appealing features of each.

Abstract:
This paper presents the story of Glenshaw Glass Company v. Commissioner, 348 U.S. 426 (1955), the leading case on gross income under the income tax. The paper examines prior doctrine (mainly, the attenuated legacy of Eisner v. Macomber), briefs, newspaper records, contemporaneous commentary, and current recollections of participants to illuminate how this case reached the Supreme Court, what strategies were pursued by counsel (for better or worse), and what choices the Supreme Court made in its resolution of this case. The Supreme Court's opinion in Glenshaw Glass is shown to be both sweeping and restrained. The doctrinal outcome is related to intellectual currents in play from the early days of the income tax to the present day in an effort to show why Glenshaw Glass, which was barely noticed at the time decided, has achieved its current high status. The doctrinal and institutional implications of Glenshaw Glass for current law and theory are also examined, giving due note to issues that were left unresolved. The basic thesis is that Glenshaw Glass completed the process of liberating income tax theory and doctrine from constraints imposed not only by other disciplines but also by traditional legal thinking, ushering in the "modern era" of an autonomous income tax.

Abstract:
This paper presents the story of Glenshaw Glass Company v. Commissioner, 348 U.S. 426 (1955), the leading case on gross income under the income tax. The paper examines prior doctrine (mainly, the attenuated legacy of Eisner v. Macomber), briefs, newspaper records, contemporaneous commentary, and current recollections of participants to illuminate how this case reached the Supreme Court, what strategies were pursued by counsel (for better or worse), and what choices the Supreme Court made in its resolution of this case. The Supreme Court's opinion in Glenshaw Glass is shown to be both sweeping and restrained. The doctrinal outcome is related to intellectual currents in play from the early days of the income tax to the present day in an effort to show why Glenshaw Glass, which was barely noticed at the time decided, has achieved its current high status. The doctrinal and institutional implications of Glenshaw Glass for current law and theory are also examined, giving due note to issues that were left unresolved. The basic thesis is that Glenshaw Glass completed the process of liberating income tax theory and doctrine from constraints imposed not only by other disciplines but also by traditional legal thinking, ushering in the "modern era" of an autonomous income tax.

The paper will be published as a chapter in a book to be entitled Tax Stories: An In-Depth Look at Ten Leading Federal Income Tax Cases (Foundation Press). Additional financial support for the project has been provided by the American Tax Policy Institute.

Abstract:
This article examines the carrryover basis provisions of H.R. 8, the Death Tax Elimination Act of 2001. If the estate tax is repealed, the income taxation of gratuitous transfers needs to be examined. Under current law, the combination of sections 102 (excluding gratuitous receipts) and 1014 (giving stepped-up basis to bequests) causes unrealized gains at death to permanently avoid income tax. H.R. 8 purports to repeal stepped-up basis and replace it with a carryover basis rule for bequests. However, H.R. 8 would allow additional basis of up to $1.3 million per estate (augmented by unrealized business and investment losses and unused loss carryovers), plus up to $3 million for qualified marital transfers, to be added to carryover basis. These additional basis rules would permanently wash most unrealized gain of descendants out of the income tax. Additional free basis is not justified in income tax theory or policy. Estate tax features should not be carried over to the income tax. Moreover, a permanent exemption for marital transfers goes far beyond the deferral scheme of the estate tax, but would (in QTIP trusts) mostly benefit the remaindermen. The additional free basis rules would operate in a regressive manner. H.R. 8, says Dodge, is flawed in various other ways, including the fact that it discriminates in favor of life insurance and against pension and annuity rights. Finally, carryover basis is the wrong solution to the section 1014 problem, because (inter alia): (1) it cannot benefit charitable bequests, (2) it would tax gains and losses to the wrong person, (3) it would creates inequities among legatees (and would raise problems for fiduciaries), and (4) (especially the H.R. 8 version) would aggravate the lock-in effect. A better solution, he concludes, would be to treat gains and losses (including loss carryovers) as being realized by the decedent at death.