CADC: § 104 unconstitutional as applied to emotional distress and loss of reputation

It is pretty rare to see a tax provision struck down on constitutional grounds.  Even rarer to see one which goes to the theoretical question of income.  Today, the DC Circuit holds that 26 U.S.C. § 104(a)(2) is unconstitutional as applied to “emotional distress and loss of reputation” hence, “insofar as § 104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional.”  Murphy v. United States, No. 03cv02414 (D.C. Cir. 9/22/06).  Tnx TaxProfBlog.

The court holds:

That emotional distress and loss of reputation were both actionable in tort when the Sixteenth Amendment was adopted supports the view that compensation for these nonphysical injuries was not regarded differently than was compensation for physical injuries and, therefore, was not considered income by the framers of the Amendment and the state legislatures that ratified it. By 1913, in at least 39 of the then-48 states and in the District of Columbia, the law made compensatory damages for "mental suffering" recoverable in the same matter as compensatory damages for physical harms; indeed, in 34 of those states, there are reported cases involving defamation and other reputational injuries -- the very sort of injury Murphy suffered -- and at least five more states allowed an action for alienation of affections, also a nonphysical injury. As a result, we see no meaningful distinction between Murphy's award and the kinds of damages recoverable for personal injury when the Sixteenth Amendment was adopted. Because, as we have seen, the term "incomes," as understood in 1913, clearly did not include damages received in compensation for a physical personal injury, we infer that it likewise did not include damages received for a nonphysical injury and unrelated to lost wages or earning capacity. [Very long and well-researched footnote omitted.]

And so the misguided fires of tax protesters are stoked once again.