Balkinization  

Tuesday, August 22, 2006

Is a Federal Tax on Damages for Emotional Distress Unconstitutional?

Marty Lederman

The U.S. Court of Appeals for the District of Columbia Circuit today held that a federal statute, which imposes a tax on awards of compensatory damages for emotional distress and loss of reputation, is unconstitutional because such awards are not "income" within the meaning of the Sixteenth Amendment.

I know very, very little about tax, and not much more than that about the Sixteenth Amendment, so please excuse me if the following question is obviously ridiculous for one reason or another:

Assuming the court is correct that such an award is not "income" for purposes of the Sixteenth Amendment -- which I will assume because I don't know enough about the meaning of "income" in that Amendment -- why does it follow that the tax is unconstitutional?

[I have edited this post to elaborate on certain points.] To say, as the court of appeals does, that "[t]he Sixteenth Amendment simply does not authorize the Congress to tax as 'incomes' every sort of revenue a taxpayer may receive," is not to explain why Congress is prohibited from doing so. The Sixteenth Amendment is not a limitation on congressional powers -- it's an authorization, or, more precisely, a clarification. Thus, even if the court of appeals were correct that an award for emotional distress is not "income" in a constitutional sense, the next question should be "SO WHAT?" After all, the federal government taxes plenty of things other than income, and those taxes are not all unconstitutional.

Congress has the power under Article I, section 8 to lay and collect Taxes. This, in and of itself, is presumably sufficient authority for the tax in the Murphy case, for "[t]he subject-matter of taxation open to the power of the Congress is as comprehensive as that open to the power of the states, though the method of apportionment may at times be different." Charles C. Steward Machine Co., 301 U.S. at 581. Indeed, the tax in that case was on a damage award provided by a federal agency (the Department of Labor), pursuant to a federal law, and therefore Congress could impose a tax on that federally-authorized award under the Necessary and Proper Clause, too (i.e., Congress obviously was not required to provide a mechnaism by which Ms. Murphy could recover damages in the first instance, and thus it can decide that it will not provide full compensation for injuries to emotion and reputation, but will instead direct that some of the "compensation" be remanded to the federal government itself).

So where does the Sixteenth Amendment come into play? It was ratified in order to clarify that income taxes may be assessed whether or not they are direct taxes. The constitutional restriction on Congress's power appears, not in the Sixteenth Amendment, but in Article I, section 9, which provides that "direct" taxes must be proportional to census results. The Sixteenth Amendment was ratified in order to effectively overturn the Supreme Court's 1895 decision in Pollock v. Farmers' Loan and Trust Co. -- a mistaken, outlier decision -- that a personal income tax was "direct" and therefore had to be apportioned by state census figures.

[Next three paragraphs updated.] Prior to Pollock, the Court had regularly held, beginning in the 1796 case of Hylton v. United States, that numerous taxes were not "direct," and thus did not have to be apportioned by census. So, for example, the Court held that federal taxes on corporate capital (Pacific Insurance v. Soule), estates (Scholey v. Rew), and even personal income (Springer), were not "direct." The general consensus during this century had been that the term "direct taxes" as used in Article I referred only to taxes on real estate and poll or capitation taxes.

Pollock, a 5-4 decision, took a sharp turn away from this long line of cases: The Court held that a tax on property-based income was a "direct" tax, prohibited by Article I, section 9 because it was not apportioned by state population. Pollock was widely criticised and reviled. President Taft would later say that "[n]othing has ever injured the prestige of the Supreme Court more."

The Court heard the criticism. After Pollock, the Court in effect returned to the Hylton line of cases. Between 1899 and 1911, it held that a trade tax on the Chicago Board of Trade (Nicol v. Ames), a graduated estate tax (Knowlton v. Moore), and a tax on a corporation's gross receipts (Spreckels Sugar Refining), were all not direct taxes, and thus permissible even if not apportioned. (Thanks to Calvin Johnson's 2004 article Fixing the Constitutional Absurdity of the Apportionment of Direct Tax for some of these historical details.) Finally, in 1911 the Court more or less relegated Pollock to its facts, by holding in Flint v. Stone Tracy Co. that a tax on corporate income was not a "direct tax."

In other words, even before ratification of the Sixteenth Amendment in 1913, virtually no federal taxes other than the personal income tax were deemed "direct." In 1913, the Sixteenth Amendment put the final nail in Pollock's coffin, by declaring that Congress could tax income without regard to census figures, i.e., whether or not it was a "direct" tax.

Thus, in order to invalidate the tax in the Murphy case, it is not enough to hold that the award is not "income." It would be necessary further to hold that the tax is a "direct" one, prohibited by Article I -- and to explain why it is not otherwise authorized by the Necessary and Proper Clause. The court of appeals did not peform these analyses, and thus its opinion is woefully incomplete. My rough sense is that the tax on the award in Murphy is authorized by Article I, section 8, and by the Necessary and Proper Clause, and, more importantly, is not a prohibited "direct" tax under Article I, section 9, just as with estate taxes (see Manufacturers National Bank, 363 U.S. 194) and gift taxes (see Bromley v. McCaughn, 280 U.S. 124). (In addition to the Johnson article cited above, see Bruce Ackerman's 1999 article Taxation and the Constitution.) Indeed, even the Court in Pollock acknowledged that taxes on "gains or profits from business, privileges, or employments" are not direct, and thus can be assessed without apportionment. 158 U.S. at 635. The award of damages in the Murphy case is a "privilege" created by federal law, and thus a tax on such damages would not appear to run afoul of any apportionment limitation in Article I.

If I'm correct about this, then the tax on the award of damages therefore is constitutional, wholly without regard to whether it is a tax on "income" -- although, again, I caution that I'm out of my league on this question, and would appreciate further information or clarification in the comments.

In any event, even if I'm wrong and the direct/indirect question is closer than that, the court's opinion today does not so much as mention Article I, or the direct/indirect distinction. Indeed, the court does not even acknowledge Congress's broad taxing power under Article I, section 8, nor does it identify where in the Constitution any restriction on such taxing power might appear, or describe the nature of that constitutional limitation. Thus, even if the judgment is correct because this is a "direct" tax and the award is not "income," the court's reasoning leaves a great deal to be desired. And this inexplicable failure in the opinion is especially conspicuous in light of the fact that the district court judge in the case, Judge Lamberth, specifically noted that the possible constitutional limitation derived from the apportionment requirement of Article I, and indicated that the tax was permissible either if it was assessed on "income" or if it was not "direct." 362 F. Supp. 2d at 217. Judge Ginsburg simply ignores one half of the equation -- and without that, he's provided no reason to invalidate the federal statute. [UPDATE: Surprisingly, the court of appeals judges are not the only ones who skipped right over the central question. In her brief, appellant Murphy stated, in a footnote and without any authority, that "[t]he taxation of damages received on account of personal injuries or personal sickness is a direct tax." But DOJ does not appear to have contested that assertion in its brief, which appears to (implictly) suggest that the constitutionality of the statute turns entirely on whether the award was "income." It's safe to predict, I think, that DOJ won't repeat that mistake in its petition for rehearing.]

If I'm right about all this -- and again, that remains to be seen -- it'll be interesting to see if Judge Ginsburg comes in for the same blogospheric slam-down that greeted Judge Taylor's craftwork in her recent opinion on the NSA surveillance question.

UPDATE: A commentor correctly notes that, in addition to section 9, section Section 2, clause 3 of Article I also provides that "direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers." This reminds me that, if I recall correctly, the census-based requirement for direct taxes in Article I was crafted as a protection against congressional discrimination against particular states. If this is correct, then it would be very odd to impose such a restriction, not simply on property held pursuant to state law, but on an award issued by a federal agency pursuant to federal law. That is to say, the rationale of the proportionality requirement of the direct-tax provisions of Article I appears at first glance to be especially ill-adapted to taxes on federally prescribed awards of money.

Comments:

Section 9 is not the only part of the original text that restricts the tax power. Section 2 of Article I states ". . . direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers . . . ."

Your reading of the 16th Amendment as a clarification of the taxing power, and not restricted to income, is inconsistent with Supreme Court precedent on the issue. As the DC circuit states, the courts have interpreted the term "income" in the 16th Amendment, as explained in Eisner and Glenshaw Glass.

The critical distinction is that compensatory awards are not income, but instead an asset which the plaintiff already has. In contrast, noncompensatory awards, such as punitive damages are not the plaintiff's unless and until they are awarded. A tranfer of an asset may be taxed, but possession of the asset may not.
 

I was under the impression that prior to the Sixteenth, it was understood that the federal government did not have the power to levy income taxes at all. In that case the amendment would be giving the government an enumerated power. If I'm right it's a lot easier to rationalize the DC court's ruling.
 

I was under the impression that prior to the Sixteenth, it was understood that the federal government did not have the power to levy income taxes at all. In that case the amendment would be giving the government an enumerated power.

Congress has always had the power to levy taxes, including income taxes. Art. I, Sec. 8 specifically enumerates a general power to tax. The issue resolved by the 16A was that income taxes could be levied without apportionment as might otherwise be required under Art. I, Sec. 9.
 

Compensation for a tortious wrong is not income. If it were taxed, then you would not be made whole. Let's say someone negligently chops off your arm and then pays you a settlement that perfectly compensates you for the loss of your arm. There is no income. There is no gain. The money is just compensation for the loss of your arm. That money = your arm. Because the government cannot take a random piece of your arm, the government cannot tax your compensatory judgment. No level of American government has the right to just hack off a little piece of your arm.
 

Because the government cannot take a random piece of your arm, the government cannot tax your compensatory judgment.

The power to tax is plenary. Congress can tax anything it wants. The tax may be unwise, it may be subject to the direct/indirect restrictions, but the subjects of potential taxation are unlimited.
 

The power to tax is plenary. Congress can tax anything it wants. The tax may be unwise, it may be subject to the direct/indirect restrictions, but the subjects of potential taxation are unlimited.


Ummm, no. There are restrictions to the taxing power.

1)Article I, sections 2 and 9. As they stood at the beginning of the Constitution, any direct tax (and yes an income tax is a direct tax--see the definitions given by the IRS, see http://www.irs.gov/app/understandingTaxes/jsp/tools_glossary.jsp) could only be a poll tax. The 16th Amendment altered this status to allow income taxes. It does not allow any other direct taxes. To say that the taxing power is plenary renders either of these clauses a nullity.

2) Fifth Amendment Due Process and Takings Clause. A tax on possessions, rather than income, can and should be considered a taking. The estate and gift taxes are not contrary to this rule because there is no one from whom there is a taking. In the case of the estate tax, the taking can't be from the decedent, since he's dead and therefore has no rights. Further, there is no taking from an heir, because the tax is assessed prior to the heir's receiving any inheritance.
 

CO:

1. Congress can still enact any and all direct taxes. It's only the way it does so which is restricted.

2. Every tax is a "taking".
 

Sorry, that last post responded to Zathras, not CO.
 

Mark,

Your view contradicts 86 years of Supreme Court precedent.

Eisner: the taxing power extends to any gain derived from capital or labor. 252 U.S. 189 (1920).

Burk-Waggoner: Congress cannot make a thing income which it is not so in fact. 269 U.S. 110 (1925)

Do you have any support for your "breathtakingly expansive" (the DC Circuit Court's term) interpretation?

Again, is there an argument that does not render the 2 clauses of Article I (not to mention the 16th Amendment) nugatory?
 

As they stood at the beginning of the Constitution, any direct tax (and yes an income tax is a direct tax--see the definitions given by the IRS, see http://www.irs.gov/app/understandingTaxes/jsp/tools_glossary.jsp) could only be a poll tax. The 16th Amendment altered this status to allow income taxes. It does not allow any other direct taxes. To say that the taxing power is plenary renders either of these clauses a nullity.

The definition on the IRS website is wrong. A federal income tax on personal earnings has never been held to be a direct tax by any court in the history of the country. To the contrary, the Supreme Court in the 1880 Springer case upheld the validity of the Civil War era income tax by rejecting the argument that it was a direct tax and characterizing it instead as in the nature of an excise or a duty.
 

It is true that taxation of wages is generally not a direct tax. However, while taxation on some forms of income is not direct, to tax any and all forms of income, such as appreciation of capital, necessarily involves a direct tax.

In Murphy, the tax being levied is certainly a direct tax, since it taxes an amount which Murphy owned before the Court's judgment (which recognized an existing right rather than created a right). A direct tax can only be levied on income, and since the award was not income, but instead to make someone whole, it is unconstitutional.
 

A direct tax can only be levied on income, and since the award was not income, but instead to make someone whole, it is unconstitutional.

No, you're still confusing two different issues. A direct tax can be levied on ANYthing. When Congress does levy one, however, it has to do so within the restrictions of Art. I, Sec. 9.

The 16A modifies Sec. 9, not Sec. 8. It does not allow a new tax, it allows an old tax to be levied in a different way.

Burk-Waggoner: Congress cannot make a thing income which it is not so in fact. 269 U.S. 110 (1925)

This, again, has to do with the difference between Sec. 8 and Sec. 9, NOT the power of Congress to tax.

Do you have any support for your "breathtakingly expansive" (the DC Circuit Court's term) interpretation?

Federalist 34. Note this passage in particular:

"Constitutions of civil government are not to be framed upon a calculation of existing exigencies, but upon a combination of these with the probable exigencies of ages, according to the natural and tried course of human affairs. Nothing, therefore, can be more fallacious than to infer the extent of any power, proper to be lodged in the national government, from an estimate of its immediate necessities. There ought to be a CAPACITY to provide for future contingencies as they may happen; and as these are illimitable in their nature, it is impossible safely to limit that capacity. It is true, perhaps, that a computation might be made with sufficient accuracy to answer the purpose of the quantity of revenue requisite to discharge the subsisting engagements of the Union, and to maintain those establishments which, for some time to come, would suffice in time of peace. But would it be wise, or would it not rather be the extreme of folly, to stop at this point, and to leave the government intrusted with the care of the national defense in a state of absolute incapacity to provide for the protection of the community against future invasions of the public peace, by foreign war or domestic convulsions? If, on the contrary, we ought to exceed this point, where can we stop, short of an indefinite power of providing for emergencies as they may arise?"

Eisner: the taxing power extends to any gain derived from capital or labor. 252 U.S. 189 (1920).

That's a description, not a limit. Yes, it does include those things. It also includes other things. Property taxes, for example, or poll taxes. The power is plenary.
 

There are people who view our government as totally a creature of the Constitution, with such attributes, and only such attributes, as the Constitution grants it. Judging by that pesky "ink blot", the 10th amendment, the founders of this nation belonged to that school of thought.

Then there are those who have floating in the backs of their heads the vision of a Platonic ideal government, where all real world governments are only really "governments" in proportion as they approach that ideal. To such people, the fact that the Constitution may not have mentioned some power or attribute of government that their ideal possesses, is merely evidence that the Constitution is an incomplete description of our government.

The Platonic ideal government possesses plenary taxing power, in case you hadn't figured it out.
 

I hate to go all textualist on someone like Brett, especially since I'm not one in real life and I don't play one on TV, but here's the relevant text of Art. I, Sec. 8:

"The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States..."

If there's a limit on the kind of taxes Congress can levy, I don't think even Scalia's eyes can see it.
 

It does not allow a new tax, it allows an old tax to be levied in a different way.

So in what way are you claiming that such taxes could be levied before the 16th Amendment, and what new ways did the 16th Amendment allow?
 

And then we get to Article one, Section nine.

"No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

Oh, gee, I guess the power to tax wasn't plenary after all.
 

So in what way are you claiming that such taxes could be levied before the 16th Amendment, and what new ways did the 16th Amendment allow?

Before the 16A they had to be levied "in proportion to the Census" as required by Art. I, Sec. 9. After the 16A, that restriction no longer applied.

The point is, the Constitution is silent on the kind of tax which can be levied. It only restricted the manner in which it could be done.

Oh, gee, I guess the power to tax wasn't plenary after all.

The point I was making was that the power to tax is plenary with respect to the kind of taxes Congress can levy. I agree that it's not plenary with respect to the manner of levy. I thought that was clear from the context. If not, my bad.
 

The problem might have been that the government does not seem to have brought this up in their brief. I'm at least of the impression that courts don't generally take up arguments that were not brought up by at least one party.

There is also the question of whether this would be a direct tax or an indirect tax. I can see this as being seen as analogous to rent collected on property, which is considered to be a direct tax.
 

Before the 16A they had to be levied "in proportion to the Census" as required by Art. I, Sec. 9.

This however puts severe restrictions on how an income tax may be collected. Consider Justice Chase's illustrative example:

It appears to me that a tax on carriages cannot be laid by the rule of apportionment without very great inequality and injustice. For example, suppose two States equal in census to pay eighty thousand dollars each by a tax on carriages of eight dollars on every carriage; and in one State there are one hundred carriages, and in the other one thousand. The owners of carriages in one State would pay ten times the tax of owners in the other. A., in one State, would pay for his carriage eight dollars; but B., in the other State, would pay for his carriage eighty dollars.
Hylton v. U.S., 3 U.S. 171 (1796)

Now consider two states with equal population but unequal income. It is apparent that the two states could not have the same percentage of income taxed (to say nothing of the difficulties arising in determining which part of the tax is direct and which is indirect. This would look nothing like any income tax I know.

A previous commentator brought up Springer v. U.S. Here is a quote for you from Springer: "The power to levy the tax is a limited one, and if the limits prescribed by law are transcended, the levy is void." Also: "Was the tax here in question a direct tax? If it was, not having been laid according to the requirements of the Constitution, it must be admitted that the laws imposing it, and the proceedings taken under them by the assessor and collector for its imposition and collection, were all void."
 

After the 16A, that restriction no longer applied.

After the 16th Amendment, that restriction no longer applied to taxes on income. The restriction is still present for direct taxes on anything other than income.
 

After the 16th Amendment, that restriction no longer applied to taxes on income. The restriction is still present for direct taxes on anything other than income.

True, but then the issue would be whether the tax was a direct tax. Recall that in Springer and in one of the opinions in Hylton, it was stated that the only direct taxes under the Constitution were capitation taxes and taxes on land. The Pollock case expanded this to include taxes on the income from property, but the Pollock result was overturned by the 16th Amendment. So it's not necessarily the case that a tax on something other than income would be a direct tax.
 

The concept of whether a tax is direct or indirect certainly underwent some evolution. By the time of the 16th Amendment, the conception of a direct tax was broader than in Springer. But even at the time of Springer was a bit broader than what you state. A direct tax was not just a tax on land, but a tax on any income arising from land. This specifically included rents received. A tax on rents is certainly considered an income tax, but it was always considered a direct tax. I agree that not all income taxes are direct--such as a tax on wages, as was at issue in Springer.

I was thinking earlier that the uproar over Murphy reminded me a lot of the uproar over Lopez 11 years ago. In both cases an act thought to be within a plenary power of Congress was held to exceed that power. In both cases there have been apocolyptic predictions that this could be the first stage in a mass overturning of legislation. However, this did not follow from Lopez, although there were certainly many attempts to do so. I suspect that the same will be true after Murphy.
 

This however puts severe restrictions on how an income tax may be collected. Consider Justice Chase's illustrative example

Agreed -- if income taxes are direct, then there are real problems with trying to collect it. Ironically, Chase gave that example as a reason why the carriage tax should not be considered direct. His position was that the absurdity of the apportionment process was the very reason why it should not be considered a direct tax. The same reasoning could have been applied to the income tax, but Pollock disagreed.

After the 16th Amendment, that restriction no longer applied to taxes on income. The restriction is still present for direct taxes on anything other than income.

Agreed.
 

The government can't tax you by chopping off your arm and collecting the limb.
 

As the Supreme Court noted long ago, the "Congress cannot make a thing income which is not so in fact."...the term "incomes," as understood in 1913, clearly did not include damages received in compensation for a physical personal injury...

I agree! On both counts -- so let's make capital gains exempt from income tax too.

1) They aren't income in fact -- look at the national accounts, such as at www.bea.gov, and you will see capital gains are not included in income.

2) The Court in 1913, and the framers of the 16th, clearly did not consider capital gains to be income. In fact, the Court had held them not to be at least four times. E.g, in 1918 we have Lynch V. Turrish, 247 U.S. 221 striking down income tax on a capital gain realized on a corporate liquidation, approvingly quoting Gray v. Darlington in 1865...

'The mere fact that property has advanced in value between the date of its acquisition and sale does not authorize the imposition of a tax on the amount of the advance. Mere advance in value in no sense constitutes the gains, profits, or income specified by the statute. It constitutes and can be treated merely as increase of capital.'

I'm heading down to that District and filing for a tax refund right away.
 

What-if Congress is wrong to tax the status of one's mental-health via the existing IRC 61? If it is Congress's intent to tax the mental, but not the physical in injury-awards damages, at what cost do we retain our sanity without being taxed on it? If not Congress and the Courts, who is to intervene?
 

You need us if you have any of these tax problems: Back
Taxes
, Unfiled Returns, Missing Records, Threat of Levy, or, if you need an Installment Agreement or an Offer in Compromise A tax levy or garnishment or attachment are all the same thing. The terms may be used interchangeably. A wage garnishment or levy may be against any asset. In the enforcement of tax collections. We prepare all Federal and State Unfiled tax Returns The Fair Tax Act (HR
25/S 1025) is a bill in the United States Congress for changing Tax Solutions laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax), Past due tax returns, Past due tax returns, Past due returns, Past due taxes, Unpaid tax, Tax negotiation, Wage levy, Robert M. Adams, Bob Adams, Try to Be Happy, Search Engine Optimization
 

Post a Comment

Older Posts
Newer Posts
Home