The Constitutionality of Federal Taxes and Federal Tax Provisions

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.