27 December 2006

Tax Blogs Triumph Over Murphy

A U.S. Court of Appeals Circuit decision called Murphy, which held part of the tax code to be unconstitutional, has been vacated by the appellate court panel that made the decision in the wake of near universal criticism of the decision in tax blogs.

While many suspect that the panel has decided that it was wrong in making its decision on the merits, it is also possible that the criticism of the form of the opinion is the real issue.

The original decision declared that a provision of the tax law which excluded some, but not all, emotional distress damages from taxation was unconstitutional. But, the tax is due under the general definition of income, to which this particular exclusion does not apply, and not because this exclusion imposes a tax.

They could have held that Section 61, which provides that all income is taxed, simply does not apply to this kind of income, when interpreted within the constitutional boundaries of income.

Thus, rather than declaring an Internal Revenue Code section unconstitutional, it could simply interpret Section 61 in an implausible way, in order to preserve its constitutionality.

This would still be a decision that is wrong on the merits, but the underlying opinion would be far more logical and indicate that the appellate judges had a clue about how the tax code is designed to work.

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