In an earlier posting, I commented on the government's petition for rehearing in the D.C. Circuit's decision in Murphy that held section 104(a)(2)'s treatment of damages for nonphysical personal injuries as unconstitutional. I hoped then that the court would hear the case en banc and "put the Murphy opinion out of its misery."
Well, the court didn't have to take the case en banc, because (as Paul Caron announced on Tax Prof) the D.C. Circuit panel that heard the appeal has vacated its opinion and agreed to rehear the case. See these posts on Tax Prof: Order Vacating Judgment and Agreeing to Rehearing , Rehearing announced and Bashman WSJ Law Blog discussion excerpted. The Tax Prof posts provide numerous additional sources and links to other materials.
Without doubt, this is one of the "Ten Most" tax cases to be noted for 2006, however it comes out in the April 2007 rehearing. For just a few of the discussions available, see Joseph Dodge's comprehensive article on "The Constitutionality of Federal Taxes and Federal Tax Provisions, available on SSRN here; Sheryl Stratton's article on expert reaction to the August decision, here; and even a wikipedia entry, here. Murphy's response to the government's petition for rehearing is here, and you can access most of the other legal filings connected with the case at the defense attorneys' site, here.
Was the tax blogosphere at all influential in the court's decision to vacate and rehear the case? It may be that the ability of bloggers (and op-ed writers) to sketch out objections quickly can have influence when there are opinions like Murphy that so clearly appear to misunderstand the issues and the stakes involved. If so, that is an appropriate impact of expert commentary.
Yet when one reads some of the comments in the blogosphere, such as these comments to the Volokh Conspiracy posting announcing the petition for rehearing or these on NewsWithViews by Phil Hart, it seems clear that the mix of tort and federal statutory preemption arguments, along with a good bit of bias towards tax practitioners, could create more confusion than clarity about the tax and constitutional arguments. Particularly lacking from those comments is an understanding of the way basis works in the tax system or the nuances of the constitutional arguments explained by Joe Dodge (see above). Here's one example, from Hart, who essentially equates human capital with tax basis.
The entire case turned on whether or not Murphy's award represented a return of diminished capital, or an economic gain? The entire Murphy Case was about setting the boundary line between direct taxes and indirect taxes. Direct taxes are taxes on capital, indirect taxes are taxes on gains. This lack of experience of Murphy’s lawyers and the three-judge panel allowed them to do their legal research and analysis with an open mind. And these open minds, aided by their legal training, caused them to arrive at the correct interpretation of the intent of the Sixteenth Amendment as it relates to this narrow issue. NewsWithViews by Phil Hart.
Perhaps even more worrisome is the view (as evidenced in the quoted comment from Hart's blog) that judges and lawyers do better at this kind of analysis when they don't understand tax law. I have argued throughout my career about the fundamental importance of interpreting the tax law from a position that seeks to find structural coherence. The approach supported by the Murphy case is one of looking at one item almost in isolation and certainly without understanding how that provision fits into the other obviously related ones (section 61, for example) or how the concept of basis carries throughout the code to track after-tax investments in property.
What will be the outcome of the rehearing? One suspects the judges took the case because they've already had a chance to reconsider the wisdom of finding unconstitutional a provision that treats monetary damages as income. Although they could reconfirm their original views, it is likely that they expect to reach a different decision. The parties have another chance to file complete briefs. Maybe they, too, will take advantage of the abundance of commentary in print and elsewhere to refine the arguments made in the orginal trial.