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By Phil Hart
July 12, 2008

If the courts want to be respected, they need to be respectable. And if the courts are not respectable, the people will view them with contempt. The case of Murphy v. The IRS, 460 F.3d 79 (D.C. Cir. 2006) rehearing 493 F.3d 170 (D.C. Cir. 2007) allows us to feel first respect, and later, contempt for the court.

It has been a year since the Appellate Court for the District of Columbia overturned their brilliant opinion in the Murphy Case, and gave us in its place a mediocre one at best. Since then, Murphy’s attorneys appealed to the Supreme Court, but the Supreme Court did not take up the appeal.

Why the Appellate Court issued their mediocre opinion on July 3, 2007, the day before Independence Day, I don’t know. Maybe it served as a warning that we are indeed in trouble; for what was going on in the colonies in 1776 is going on in America today. When you compare the first opinion of the court given to us on August 22, 2006 with that of the replacement ruling issued on July 3, 2007, it is clear that the court was protecting the government on an unlevel playing field. It is also clear that we have today in America the same “mock trials” that Thomas Jefferson complained about in the Declaration of Independence.

So on this anniversary of the issuance of that mediocre ruling; let’s take another look at the Murphy Case. And for those of you who have not read my September 13, 2006 article, we will review the facts of the Murphy Case.

What is the “Murphy Court” and who is Murphy?

Marrita Murphy is a whistleblower who, in 1995, reported some environmental problems at a New York Air National Guard base. Her whistleblower actions got her fired and “blacklisted.” The entire ordeal was stressful for Ms. Murphy and she sued her former employer. Lawyers from the National Whistleblower Center (NWC) successfully prosecuted the case. On Dec. 11, 1995 an administrative law judge awarded Ms. Murphy $70,000--$45,000 for “emotional distress or mental anguish” and $25,000 for “injury to professional reputation”. Murphy received her award Oct. 25, 1999.

Reluctantly, Murphy reported the $70,000 compensatory award on her 2000 income tax forms and paid tax on that “income.” She then filed for a refund. The IRS had determined that Murphy’s award was subject to being taxed as income even though her court-ordered award was intended to make her, as a damaged party, “whole” again. No additional punitive damages were awarded.

When Murphy appealed the IRS decision to tax the $70,000 award, the IRS did not respond. So, on Jan. 16, 2003, Murphy sued the IRS in federal district court claiming that the award of $70,000 she received for compensatory damages was not taxable as “income.” The district court ruled against Murphy who appealed to the United States Court of Appeals for the District of Columbia. On August 22, 2006, the “Murphy Court” reversed the District Court by ruling that it is unconstitutional for the IRS to tax "compensation for damages" as income. The Murphy Court remanded the case back to the District Court with instructions that “…the Government refund the taxes Murphy paid on her award plus applicable interest.”

Several months later, the Appellate Court did something very strange. On Dec. 22, 2006, the court vacated (voided) the August 22, 2006 decision and reheard the case on April 23, 2007. The reconvined Murphy Court subsequently ruled on July 3, 2007, that compensation for damages is taxable as income.

Hence the importance of Murphy: For the first time in decades, a federal court took a serious look at the definition of the word “income” as it was used in the Sixteenth Amendment and ruled in favor of appellant Murphy based upon an honest and correct analysis of the facts and history. Then, several months later, a highly unusual maneuver was invoked to reconvene the Murphy Court and, with no new evidence, the court invented a variety of reasons why Murphy’s $70k award could have an excise tax imposed on it, none of which are identified in any statute passed by Congress.

A Perfect Storm

The landmark nature of Murphy is truly the result of a “perfect storm.” Murphy retained her whistleblower lawyers to litigate the tax case against the IRS even though they had no experience in tax litigation. The National Whistleblower Center (NWC) lawyers’ lack of experience in tax litigation worked in their favor. Rather than being legally biased on the income tax issue, they instead took a fresh look at it. Murphy’s lawyers questioned everything-- including the meaning of the word “income” as it was used in the Sixteenth Amendment. They argued their case before a panel of three appellate judges who normally don’t hear tax cases and were likely more open minded when hearing income-tax related arguments compared to courts that have already ruled on tax cases.

“Income” and the Murphy Court

To determine what the word “income” means as it is used in the Sixteenth Amendment, the Murphy Court’s first published decision started at the beginning by determining what the framers of the Sixteenth Amendment intended the word “income” to mean. The Murphy Court quoted the U.S. Supreme Court: “…in defining ‘incomes,’ we should rely upon ‘the commonly understood meaning of the term which must have been in the minds of the people when they adopted the Sixteenth Amendment. ~Merchants’ Loan and Trust, Co. v. Smietanka, 255 U.S. 509, 519 (1921).”

The Murphy Court also said, “The Sixteenth Amendment simply does not authorize the Congress to tax as ‘incomes’ every sort of revenue a taxpayer may receive. As the Supreme Court noted long ago, the ‘Congress cannot make a thing income which is not so in fact." ~Burk-Waggoner Oil Ass’n v. Hopkins, 269 U.S. 110, 114 (1925).”

The Murphy Court was correct on all fronts. Congress derives its powers from the Constitution, as authorized by We the People. If Congress could change the meaning of words in the Constitution, then the whole principle of “limited government” would fly out the window. The Murphy Court also got it right when it opined, “The Government of the United States is a government of limited powers: Every law enacted by Congress must be based on one or more powers enumerated in the Constitution.” ~United States v. Morrison, 529 U.S. 598, 607 (2000).”

Of the definition of the word “income,” the Supreme Court said long ago, “Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate and within whose limitations alone that power can be lawfully exercised.” ~Eisner v. Macomber, 252 U.S. 189, 206 (1919).

In keeping with the previous cases, the Murphy Court said, “ would not be consistent with our constitutional government, and the sanctity of property in our system, merely to rely upon the legislature to decide what constitutes income.”

The Murphy Court responded appropriately to the arguments presented by Murphy’s lawyers, who also starting at the beginning. They discovered that back in the 1913 period, when the Sixteenth Amendment was purportedly ratified, awards for personal injury type damages were considered a “return of capital” and an attempt to make the injured party “whole.” In making the injured party “whole,” such an award was considered as restoring or returning something that had been damaged or stolen.

The analogy was made that the injury depleted Murphy’s “human capital” just as fire damage or negligence would diminish the value of a home. The cost of bringing the home back up to its condition before the “injury” occurred would be restoring the home’s capital in the same way as Murphy’s award was restoring her human capital. The Murphy Court agreed.

The odd man out was the government. This is not surprising when one realizes that the main source of all the confusion over the Sixteenth Amendment is the government and its thousands of pages of confusing and often subjective taxing statutes. The “follow the money” principle is firmly in place here.

Direct v. Indirect Taxation

In an 1895 decision that angered the American People, the U.S. Supreme Court called an income tax on the net income from investment a direct tax in the Pollock Case. The genesis of the Sixteenth Amendment was to nullify the theory upon which the Pollock Court declared the income tax to be a direct tax; that being the idea that an income tax on net income was the same as a tax on the underlying source of the income. In other words, it was a tax on the underlying asset; it was a tax on the source--so said the Pollock Court. With the ratification of the Sixteenth Amendment, the Pollock Theory died.

With the Pollock Theory gone, the Sixteenth Amendment returned us to the criteria for determining what constitutes a direct tax and an indirect tax as laid down by the man who gave us those terms, Adam Smith.


Smith’s book Wealth of Nations was the economic bible in the hands of every one of the framers of the Constitution. The meaning of these terms can be found in a 1909 quote from Senator (and future U.S. Supreme Court Justice) George Sutherland (R-Utah) as he debated the Sixteenth Amendment. “The most generally received opinion, however, is that by direct taxes in the Constitution are those meant which are raised on the capital or revenue of the people; by indirect, such as are raised on their expense... it will not be improper to corroborate it by quoting the author from whom the idea seems to have been borrowed. (Naming Doctor Smith’s Wealth of Nations)” ~44 Congressional Record 2094 (1909).

Today the Sixteenth Amendment prohibits the Pollock Theory from being used to categorize an income tax. Consequently, an income tax that meets Smith’s criteria for a direct tax (i.e. taxes on wages, salaries, and human capital) is a direct tax. An income tax that meets Smith’s criteria for an indirect tax (i.e. taxes on business profits, investment profits, or privileges) is an indirect tax.

Murphy’s attorneys argued that her award constituted only monies that “made her whole.” The award was a return of her “human capital.” Murphy’s attorney, David K. Colapinto, who successfully argued the case, said of the government’s position, “The government had the audacity to argue that non-wage compensatory damages for emotional distress and loss of reputation can be taxed as income because the economic value of human life is zero. The taxing of non-wage damages is highly destructive and punishes whistleblowers and other civil rights plaintiffs for prevailing in their cases.” See,

Colapinto's position is further buttressed by what some of the leading supporters of the Sixteenth Amendment had to say. In 1909, while the income tax was being debated, Senator Joseph Bailey (D-Texas) said, “I believe that in earning an income by personal service every man consumes a part of his principal, and that fact ought always to be taken in to consideration. The man who has his fortune invested in securities may find in a hundred years, if he spent his income, that fortune still intact, but the lawyer or the physician or the man engaged in other personal employment is spending his principal in earning his income. That fact ought under every just system of income taxation to be recognized and provided against.” ~44 Congressional Record, 4007 (1909).

The author of the Sixteenth Amendment, Senator Norris Brown (D-Nebraska), had this to say about the object of the income tax: “It is the theory of the friends of the income-tax proposition that [income from] property should be taxed and not individuals.” ~44 Congressional Record 1570 (1909).

In the first modern tax case to be litigated after the Sixteenth Amendment was purportedly ratified, the Supreme Court ruled in Brushaber v. Union Pacific Railroad Co., 240 U.S. 1 (1916) that the income tax was an excise tax (an indirect tax) even though both the government and Brushaber argued that it was a direct tax exempted from apportionment.

“In Brushaber v. Union Pacific Railroad Co., Mr. Chief Justice White, upholding the income tax imposed by the Tariff Act of 1913, construed the Amendment as a declaration that an income tax is indirect, rather than as making an exception to the rule that direct taxes must be apportioned.” ~The Income Tax and the Sixteenth Amendment, 29 Harvard Law Review 536 (1915-6).

Cornell Law Quarterly also weighed in on the Brushaber Case: “The amendment, the court said, judged by the purpose for which it was passed, does not treat income taxes as direct taxes but simply removed the ground which led to their being considered as such in the Pollock case, namely, the source of the income. Therefore, they are again to be classified in the class of indirect taxes to which they by nature belong.” ~Ramon Siaca, The Federal Income Tax Law of 1913: Construction of the Sixteenth Amendment, 1 Cornell Law Quarterly 298, 299 and 301 (1916).

Substance over Form

The legal doctrine of “substance over form” is based on the notion that it is the “economic substance of a transaction that matters where the economic substance varies from its legal form.” And the substance of the Murphy Case is that Ms. Murphy was being compensated “on account of personal physical injuries or physical sickness.” There was no punitive component to Ms. Murphy’s award; it was only to restore to her what had been previously lost.

Eyewitnesses to the April 23, 2007 Appellate Court rehearing reported that the oral argument went off similar to how it had a year earlier. There were no new arguments. In fact, Chief Judge Douglas Ginsburg chastised government attorneys for claiming they needed a new hearing to present new arguments when, in fact, none were offered. And even though no new arguments or evidence were offered by government attorneys, the court somehow reversed and ruled in the government’s favor.

The theory upon which the court based its reversal was that the “transaction” was taxable as income. In other words, it was the passage of the award money to Murphy that was being taxed, and the underlying purpose of the transaction was irrelevant. The court also stated that rights could be taxed and inferred that Murphy’s use of the court facilities in obtaining her original $70,000 award was an activity upon which an excise tax could be imposed. We might rephrase all of this and say, “the substance is irrelevant, it is the form that matters.”

From Respectable to Contemptible

The Murphy Court was “respectable” when it ruled, based upon the historical and evidentiary record, that Murphy’s award was not taxable because such taxation would have been an unapportioned direct tax not allowed by our Constitution. However, when the Murphy Court suddenly vacated its “respectable” ruling and reversed itself on July 3, 2007, while that published decision is voluminous, it contains nothing worthy of our respect.

What we can conclude from the theories government used to justify reversing Murphy v. The IRS is that our government functions under the presumption that, “human capital has a zero-cost basis.” Translated, the IRS, the U.S. Department of Justice, and now our judicial branch of government believes that ‘human life has no value.’

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Teddy Roosevelt said “The People are the makers of their own Constitution.” President Roosevelt was right. We can be both the makers and the keepers of our Constitution when enough of us who care about the Constitution put our selves in positions where we can defend it. If you are one of those, then go to law school and become an judge, run for office, run for precinct officer for your local political party’s county committee, volunteer to help worthy candidates, donate to incumbents who are today defending the Constitution…. Your country needs you now.

2008 Phil Hart - All Rights Reserved

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Phil received a bachelor's degree in Civil Engineering from the University of Utah and a master's degree in Business Administration from the Wharton School at the University of Pennsylvania.

In 2004, Phil Hart was elected by the Citizens of North Idaho to represent District 3 in the Idaho Legislature. District 3 encompasses the northern part of Kootenai County. Phil Hart is actively seeking re-election for the 2008 legislative term.

Phil has dedicated a significant amount of personal time for the past ten years in trying to resolve the constitutionality Income Tax. His efforts have resulted in the publication of his book Constitutional Income, which is in its third edition. His book has been steadily covering ground across the United States. He also litigated the issue with the IRS and petitioned the Supreme Court.










Marrita Murphy is a whistleblower who, in 1995, reported some environmental problems at a New York Air National Guard base. Her whistleblower actions got her fired and “blacklisted.”