"Taxnapping": How Murphy v. IRS Used Direct Taxation to Steal the Tax Reform Debate

Jason A. Derr, Federal Reserve Board

Abstract

Suppose someone asks you, “You know, I’m fed up with the tax policy of United States, what can do I change it?” Although some may respond with ideas of protest, one of the most common responses will likely be, “Call your Congressperson.” However, after the D.C. Circuit’s decision in Murphy v. IRS, a new response is called for: “If you want to change tax policy, call the judge’s chambers.”

In Murphy v. IRS, the D.C. Circuit considered whether the taxation of emotional injury damages violated the “direct tax clauses” of the United States Constitution. The direct clauses are a mysterious pair of clauses that were never defined at the Founding, made even more complex by early Supreme Court case law, and have since been ignored by the Court for over 70 years. It was 1934 when the Supreme Court last addressed the issue of direct taxation, and, since that date, there is still no clear answer to the question, “What is a ‘direct tax?’”

Murphy’s direct tax analysis was a complicated mess of precedent. The court’s application of stare decisis is internally inconsistent. Additionally, the court’s analysis contradicts Supreme Court case law and some of the major originalist interpretations of the direct tax clauses.

By confusing the law on direct taxation, the D.C. Circuit has put fundamental income tax reform in jeopardy. Any shift from the current federal income tax to a “flat tax” or a “FairTax” may raise the constitutional issue of whether such a tax is a “direct tax.” Since Murphy leaves the law open-ended, anyone who objects to such tax reform can use the federal courts to stop the Congress from reforming the income tax. When a judicial decision steals the tax policy debate away from the legislature, they have committed “taxnapping,” a term defined for the first time in this Note. In short, “taxnapping” is wrong, and this Note shows how to define it and how the Supreme Court can stop it.