26 USC 104 Ruled Unconstitutional

26 USC 104 Ruled Unconstitituonal if applied to damages awards

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The attached case is a recent decision from the DC circuit; it is important.
It holds that section 104 of the IRC is unconstitutional as an attempt to tax
human capital. Please read.

Larry - becraft@hiwaay.net
Here is an article on the case:

August 24, 2006

Ruling May Open Tax Law to More Challenges

By BLOOMBERG NEWS

A federal appeals court decision that barred the government from taxing some
types of damage awards may encourage challenges to other sections of the tax
law, legal experts say.

The United States Court of Appeals for the District of Columbia Circuit
ruled Tuesday that the government could not collect taxes on awards to
compensate for nonphysical damages like emotional distress or injury to
reputation. The court struck down as unconstitutional a provision of a 1996
law allowing taxation of such awards.

Tax law experts said the ruling would encourage legal challenges to other
parts of the tax code defining what income could be taxed. They also said
the government would probably appeal the decision to the Supreme Court.

“It’s certainly going to launch a thousand constitutionality arguments that
people would have thought laughable before,” said Michael Graetz, a Yale
University law school professor and a tax official in President George H. W.
Bush’s administration.

An I.R.S. spokesman, Bruce Friedland, referred calls to the Justice
Department. A Justice Department spokesman, Charles Miller, said the
department was reviewing the decision and had not decided whether it would
appeal.

Tax experts predict challenges to the taxation of other money, including
some insurance proceeds, gambling winnings and windfalls like found money.

Mr. Graetz said tax lawyers would have fewer concerns that their
constitutionality claims would be deemed frivolous because most thought the
issue decided in the case was frivolous before the ruling.

”Now it’s hard to know what’s frivolous and what’s serious,” he said.

The ruling concerned a $70,000 award to Marrita Murphy, who filed an
administrative complaint with the Labor Department in 1994 saying that the
New York Air National Guard ”blacklisted” her and gave her bad references
after she complained about environmental hazards at an air base. She was
awarded $45,000 for emotional distress and $25,000 for injury to her
reputation.

Under a 1996 law, legal compensation for physical injuries is tax-free while
those for mental anguish and injury to reputation are not. Ms. Murphy sued
for return of $20,665 in taxes she paid on the damage award.

The District of Columbia Circuit ruled for her, deciding the award was not
taxable income under the Constitution’s 16th Amendment because it did not
compensate for lost wages or earnings. Punitive damages are taxable, the
Supreme Court ruled in 1955.

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The IRS bases the entire income tax fraud on the general definition of
'gross income' which is generally defined as 'all income from whatever
source derived.'

Yet, the Supreme Court has said....

“'From whatever source derived,' as it is written in the Sixteenth
Amendment, does not mean from whatever source derived.” US Supreme Court,
Wright v. United States, 302 U.S. 583, 607 (1938)
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Ruling May Open Tax Law to More Challenges - New York Times
A federal appeals court decision that barred the government from taxing some types of damage awards may encourage challenges to other sections of the tax ...
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