Murphy and the Sixteenth Amendment in Relation to the Taxation of Non-Excludable Personal Injury Awards

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.

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