Appendix — Saladino v. United States (No. 06-461)

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“06-461 AUG 29 2006

No: OFFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

UNITED STATE OF AMERICA,

Respondent,

Vs.

JOSEPH O. SALADINO,

Petitioner,

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Ninth

Circuit

APPENDIX

TO THE

PETITION FOR A WRIT OF CERTIORARI

JOSEPH O. SALADINO .

Pro se Litigant

9637 W. LITTLEWOOD DR.

BOISE, IDAHO 83709

208-562-1089

August 28. 2006

TABLE OF CONTENTS

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ORDERS FROM THE NINTH CIRCUIT COURT OF APPEALS 1

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MISCELLANEOUS CASES CITED IN SUPPORT OF THE IRC §

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2. MacNaughton v. C.I.R., 888 F.2d 418, 421 (CA6

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APPENDIX A

Orders from the Ninth Circuit Court of Appeals

1. Order of March 29, 2006

NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

FILED

MAR 29 2006

aaa CATHY A. CATTERSON, CLERK

UNITED STATES U.S. COURT OF APPEALS

OF AMERICA,

Plaintiff-Appellee | Case No. 05-55226

D.C. No. CV-04-

JOSEPH O. SALA- 02100-FMC

DINO, individually

doing business as MEMORANDUM

Freedom and Privacy

Committee,

Defendant-Appellant

Appeal from the United States District Court

For the Central District of California

Florence Marie Cooper, District Judge, Presiding

Submitted March 8, 2006

Before: CANBY, BEEZER, and KOZINSKI, Circuit

Judges

Joseph O. Saladino, individually and dba Freedom &

Privacy Committee, appeals pro se from the district

court’s summary judgment in favor of the United States

in its action brought under 26 U.S.C. §§ 7402 and 7408 to

enjoin Saladino and his organization from promoting, sell-

ing, and otherwise furthering, certain corporation sole

and claim-of-right tax avoidance plans. We have jurisdic-

tion pursuant to 28 U.S.C. § 1291. We review for abuse of

discretion the grant of an injunction, United States v. Es-

tate Pres. Serus., 202 F3d 1093, 1098 (9% Cir. 2000). We

affirm. |

Summary judgment was proper because Saladino

failed to raise a genuine issue of material fact as to

whether the tax avoidance plans he sold on his website

constituted conduct subject to penalty under 26 U.S.C. §§

6700 or 6700. Saladino’s affidavit established that he was

solely responsible for the website that sold the plans, and

the Court of Federal Claims has ruled these plans and

arguments in support of them meritless. See Sumter v.

United States, 61 Fed. Cl. 517, 523 (2004); Saladino v.

United States, 63 Fed. Cl. 754, 757-58 (2005) (sanctioning

Saladino for advancing the same meritless arguments he

presents here). This court has rejected similar arguments

as well. See, e.g., Olson v. United States, 760 F.2d 1003,

1005 (9t» Cir. 1985) (per curiam) (rejecting as frivolous

taxpayer's contention that wages are not income); Church

of Scientology v. Comm ’r, 823 F.2d 1310, 1316-17 (9t Cir.

1987) (noting that churches are eligible for tax exempt

status only if no part of their net earnings inures to the

benefit of private individuals).

Accordingly, the district did not abuse its discretion in

granting injunctive relief to the United States. See United

States v. Estate Pres. Servs., 202 F.3d at 1089 (concluding

that an injunction should be granted if statutory require-

ments are met).

AFFIRMED.

No Signature

2. Order of May 31, 2006

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES

OF AMERICA,

Plaintiff-Appellee

JOSEPH O. SALA-

DINO, individually

doing business as

Freedom and Privacy

Committee,

Defendant-Appellant

FILED

MAY 31, 2006

CATHY A. CATTERSON, CLERK

U.S. COURT OF APPEALS

Case No. 05-55226

D.C. No. CV-04-

02100-FMC Central

District of California,

Los Angeles

ORDER

Before: CANBY, BEEZER, and KOZINSKI, Circuit

Judges

Judge Kozinski has voted to deny the petition for re-

hearing en banc, and Judges Canby and Beezer so rec-

ommended.

The full court has been advised of the petition for re-

hearing en banc and no judge has requested a vote on

whether to rehear the matter en banc. See Fed. R. App.

P. 35.

The Petition for rehearing in banc is denied.

No further filings will be accepted in this closed appeal.

Not Signed

APPENDIX B

Miscellaneous Statutes and Regulations

1. 26 USC § 1402(b)

.An individual who is not a citizen of the United

States but who is a resident of the Commonwealth of

Puerto Rico, the Virgin Islands, Guam, or American

Samoa shall not, for the purposes of this chapter

be considered to be a nonresident alien individ-

ual.

2. 26 USC § 3121(e)

An individual who is a citizen of the Commonwealth

of Puerto Rico (but not otherwise a citizen of the

United States) shall be considered...as a citizen of

the United States.

3. 26 USC § 3401(c)

For purposes of this chapter, the term “employee” in-

cludes an officer, employee, or elected official of the

United States, a State, or any political subdivision

thereof, or the District of Columbia, or any agency or

instrumentality of any one or more of the foregoing.

The term “employee” also includes an officer of a corpo-

race.

4. 26 USC § 61(a)

(a) General definition

Except as otherwise provided in this subtitle,

gross income means all income from whatever source

derived, including (but not hmited to) the following

items:

(1) Compensation for services, including fees, commis-

sions, fringe benefits, and similar items;

26 USC § 7621

Internal Revenue Districts

(a) Establishment and alteration

The President shall establish convenient internal reve-

nue districts for the purpose of administering the in-

ternal revenue laws. The President may from time to

time alter such districts.

(b) Boundaries

For the purpose mentioned in subsection (a), the Presi-

dent may subdivide any State, or the District of Co-

lumbia, or may unite into one district two or more

States.

26 USC § 83(a)

§ 83. Property transferred in connection with perform-

ance of services

(a) General rule

If, in connection with the performance of services

[labor], property [compensation] is transferred to

any person [employee] other than the person for whom

such services are performed [employer], the excess of—

(1) the fair market value of such property [compen-

sation] (determined without regard to any restriction

other than a restriction which by its terms will never

lapse) at the first time the rights of the person having

the beneficial interest tn such property are transferable

or are not subject to a substantial risk of forfeiture,

whichever occurs earlier, over

(2) the amount (if any) paid [labor] for such prop-

erty [compensation], shall be included in the gross

income of the person [employee] who performed

such services [labor] in the first taxable year in which

the rights of the person having the beneficial interest in

_such property are transferable or are not subject to a

substantial risk of forfeiture; whichever is applicable.

The preceding sentence shall not apply if such person

sells or otherwise disposes of such property in an arm’s

length transaction before his rights in such property be-

come transferable or not subject to a substantial risk of

forfeiture. (Emphasis added)

4 USC § 72

“All offices attached to the seat of government shall be

exercised in the District of Columbia, and not else-

where, except as otherwise expressly provided by law.”

42 USC § 411(b)(2)

The net earnings from self-employment, if such net

earnings for the taxable year are less than $400. An

individual who is not a citizen of the United

States but who is a resident of the Commonwealth of

Puerto Rico, the Virgin Islands, Guam, or American

Samoa shall not, for the purpose of this subsection, be

considered to be a nonresident alien individual.

In the case of church employee income, the special

rules of subsection (i)(2) of this. section shall apply for

purposes of paragraph (2).

48 USC § 1612.

Jurisdiction of District Court

(a) Jurisdiction

The District Court of the Virgin Islands shall have the

jurisdiction of a District Court of the United States, in-

cluding, but not limited to, the diversity jurisdiction

provided for in section 1332 of title 28 and that of a

bankruptcy court of the United States. The District

Court of the Virgin Islands shall have exclusive juris-

diction over all criminal and civil proceedings in the

Virgin Islands with respect to the income tax laws ap-

plicable to the Virgin Islands, regardless of the degree

of the offense or of the amount involved, except the an-

cillary laws relating to the income tax enacted by the

legislature of the Virgin Islands. Any act or failure to

act with respect to the income tax laws applicable to

the Virgin Islands which would constitute a criminal

offense described in chapter 75 of subtitle F of title 26

shall constitute an offense against the government of

the Virgin Islands and may be prosecuted in the name

of the government of the Virgin Islands by the appro-

priate officers thereof in the District Court of the Vir-

gin Islands without the request or the consent of the

United States attorney for the Virgin Islands, notwith-

standing the provisions of section 1617 of this title.

(b) General jurisdiction; limitations

In addition to the jurisdiction described in subsection

(a) the District Court of the Virgin Islands shall have

general original jurisdiction in all causes in the Virgin

Islands the jurisdiction over which is not then vested

by local law in the local courts of the Virgin Islands:

Provided, That the jurisdiction of the District Court of

the Virgin Islands under this subsection shall not ex-

tend to civil actions wherein the matter in controversy

does not exceed the sum or value of $500, exclusive of

interest and costs; to criminal cases wherein the

maximum punishment which may be imposed does not

exceed a fine of $100 or imprisonment for six months,

or both; and to violations of local police and executive

regulations. The courts established by local law shall

have jurisdiction over the civil actions, criminal cases,

and violations set forth in the preceding proviso. In

causes brought in the district court solely on the basis

of this subsection, the district court shall be considered

a court established by local law for the purposes of de-

termining the availability of indictment by grand jury

or trial by jury.

with local courts

The District Court of the Virgin Islands shall have con-

current jurisdiction with the courts of the Virgin Is-

lands established by local law over those offenses

against the criminal laws of the Virgin Islands,

whether felonies or misdemeanors or both, which are of

the same or similar character or part of, or based on,

the same act or transaction or two or more acts or

transactions connected together or constituting part of

a common scheme or plan, if such act or transaction or

acts or transactions also constitutes or constitute an of-

fense or offenses against one or more of the statutes

over which the District Court of the Virgin Islands has

jurisdiction pursuant to subsections (a) and (b) of this

section.

10. 26 CFR § 1.1-1(a)(1) and (c)

(a) General rule. (1) Section 1 of the Code imposes an

income tax on the income of every individual who is a

citizen or resident of the United States and, to the ex-

tent provided by section 871(b) or 877

the United States and subject to its jurisdiction is a

citizen. For other rules governing the acquisition of

citizenship, see chapters 1 and 2 of title III of the Im-

migration and Nationality Act (8 U.S.C. 1401—1459).

For rules governing loss of citizenship, see sections 349

to 257, inclusive, of such Act (8 U.S.C. 1481-1489),

Schneider v. Rusk, (1964) 377 U.S. 163, and Rev. Rul.

70-506, C.B. 1970-2, 1. For rules pertaining to persons

who are nationals but not citizens at birth, e.g., a per-

son born in American Samoa, see section 308 of such

Act (8 U.S.C. 1408). For special rules applicable to cer-

tain expatriates who have lost citizenship with a prin-

cipal purpose of avoiding certain taxes, see section 877.

A foreigner who has filed his declaration of intention of

becoming a citizen but who has not yet been admitted

to citizenship by a final order of a naturalization court

is an alien.

11. 26 CFR § 1.1001-1

Computation of gain or loss.

(a) Genera! rule. Except as otherwise provided in subti-

tle A of the Code, the gain or loss realized from the

conversion of property into cash, or from the exchange

of property for other property differing materially ei-

ther in kind or in extent, is treated as income or as loss

sustained. The amount realized from a sale or other

disposition of property is the sum of any money re-

ceived plus the fair market value of any property (other

than money) received. The fair market value of prop-

erty is a question of fact, but only in rare and extraor-

dinary cases will property be considered to have no fair

market value. The general method of computing such

gain or loss is prescribed by section 1001 (a) through

(d) which contemplates that from the amount realized

upon the sale or exchange there shall be withdrawn a

sum sufficient to restore the adjusted basis prescribed

by section 1011 and the regulations thereunder (i.e.,

the cost or other basis adjusted for receipts, expendi-

tures, losses, allowances, and other items chargeable

against and applicable to such cost or other basis). The

amount which remains after the adjusted basis has

been restored to the taxpayer constitutes the realized

gain. If the amount realized upon the sale or exchange

is insufficient to restore to the taxpayer the adjusted

basis of the property, a loss is sustained to the extent of

the difference between such adjusted basis and the

amount realized. The basis may be different depending

upon whether gain or loss is being computed. For ex-

ample, see section 1015(a) and the regulations there-

under. Section 1001(e) and paragraph (f) of this section

prescribe the method of computing gain or loss upon

the sale or other disposition of a term interest in prop-

erty the adjusted basis (or a portion) of which is deter-

mined pursuant, or by reference, to section 1014 (relat-

ing to the basis of property acquired from a decedent)

or section 1015 (relating to the basis of property ac-

quired by gift or by a transfer in trust).

12. 26 CFR 1.1402(b)-1(d)

Nonresident aliens.

A nonresident alien individual never has _self-

employment income. While a nonresident alien in-

dividual who derives income from a trade or business

carried on within the United States, Puerto Rico, the

Virgin Islands, Guam, or American Samoa... may be

subject to the applicable income tax provisions on

such income, such nonresident alien individual will

not be subject to the tax on self-employment in-

come, since any net earnings which he may have...do

not constitute self-employment income. For the pur-

poses of the tax on self-employment income, an

individual who is not a citizen of the United

States but who is a resident of the Commonwealth

of Puerto Rico, the Virgin Islands, or...of Guam or

American Samoa is not considered to be a non-

resident alien individual.

13. 26 CFR 1.61-1(b).

(b) Cross references. Cross references to other provi-

sions of the Code are to be found throughout the regu-

lations under section 61. The purpose of these cross

references is to direct attention to the more common

items which are included in or excluded from gross in-

come entirely, or treated in some special manner. To

the extent that another section of the Code or of the

regulations thereunder, provides specific treatment for

any item of income, such other provision shall apply

notwithstanding section 61 and the regulations there-

under. The cross references do not cover all possible

items.

—s

14. 26 CFR § 1.83-3(e).

(e) Property. For purposes of section 83 and the regula-

tions thereunder, the term “property” includes real and

personal property other than either money or an un-

funded and unsecured promise to pay money or prop-

erty in the future. The term also includes a beneficial

interest in assets (including money) which are trans-

ferred or set aside from the claims of creditors of the

transferor, for example, in a trust or escrow account.

See, however, §1.83-—8(a) with respect to employee

trusts and annuity plans subject to section 402(b) and

section 403(c). In the case of a transfer of a life insur-

ance contract, retirement income contract, endowment

contract, or other contract providing life insurance pro-

tection, or any undivided interest therein, the policy

cash value and all other rights under such contract (in-

cluding any supplemental agreements thereto and

whether or not guaranteed), other than current life in-

surance protection, are treated as property for pur-

poses of this section. However, in the case of the trans-

fer of a life insurance contract, retirement income con-

tract, endowment contract, or other contract providing

life insurance protection, which was part of a split-

dollar arrangement (as defined in §1.61—22(b)) entered

into (as defined in §1.61—22(j)) on or before September

17, 2003, and which is not materially modified (as de-

fined in §1.61—22(j)(2)) after September 17, 2003, only

the cash surrender value of the contract is considered

to be property. Where rights in a contract providing life

insurance protection are substantially nonvested, see

§1.83-1(a)(2) for rules relating to taxation of the cost of

life insurance protection.

15. 26 CFR § 1.83-3(g)

Meaning of certain terms:

(g) Amount paid. For purposes of section 83 and the

regulations thereunder, the term “amount paid” refers

to the value of any money or property paid for the

transfer of property to which section 83 applies, and

does not refer to any amount paid for the right to use

such property or to receive the income therefrom. Such

value does not include any stated or unstated interest

payments. For rules regarding the calculation of the

amount of unstated interest payments, see §1.483~-1(c).

When section 83 applies to the transfer of property

pursuant to the exercise of an option, the term “amount

paid” refers to any amount paid for the grant of the op-

tion plus any amount paid as the exercise price of the

option. For rules regarding the forgiveness of indebted-

ness treated as an amount paid, see §1.83—4(c).

16. 26 CFR 31.0-2(a)(1

The terms defined in the provisions of law contained in

the regulations in this part shall have the meaning so

assigned to them.

17. 26 CFR 31.3121(e)-1(b)

The term “citizen of the United States” includes a citi-

zen of the Commonwealth of Puerto Rico or the Virgin

Islands, and, effective January 1, 1961, a citizen of

Guam or American Samoa.

APPENDIX C

Hughes v. United States, 953 F.2d 531, 535-36 (9th

Cir. 1992) [Excerpt]

LEXSEE 953 F.2D 531,AT 535

Richard C. Hughes; Joan C. Hughes, Plaintiffs-

Appellants, v. United States of America; Commissioner of

Internal Revenue, Defendants-Appellees. Richard C.

Hughes; Joan C. Hughes, Plaintiffs-Appellants, v. Com-

missioner of IRS; United States of America; Steven R.

High; Lena High; United Savings Bank, Defendants-

Appellees.

No. 90-56150, No. 91-55195

UNITED STATES COURT OF APPEALS FOR THE

NINTH CIRCUIT

953 F.2d 531; 1992 U.S. App. LEXTS 103; 92-1 U.S. Tax

Cas. (CCH) P50,086; 69 A.F.T.R.2d (RIA) 472; 34 Fed. R.

Evid. Serv. (Callaghan) 1318; 92 Cal. Daily Op. Service

300; 92 Daily Journal DAR 396

December 2, 1991 *, Submitted, Pasadena, California

January 9, 1992, Filed

[HN25] 4 U.S.C.S. § 72 does not foreclose the exercise of

authority by the Internal Revenue Service outside the

District of Columbia. The President is authorized to es-

tablish internal revenue districts [26 USC § 7621] for the

purpose of administering the internal revenue laws, and

these districts can be created outside of Washington, D.C.

(Emphasis added).

APPENDIX D

Miscellaneous cases cited in support of the IRC §

83(a) deduction.

1. Montelepre Systemed, Inc. v. C.I.R., 956 F.2d 496,

498 at [1] (CA5 1992)

“Section 83(a) explains how property received in

exchange for services is taxed.”

2. MacNaughton v. C.1.R., 888 F.2d 418, 421 (CA6

1989)

“The Alves court stated that the plain language of sec-

tion 83 belied this argument because the “statute ap-

plied to all property transferred in connection

with the performance of services” and hecause no

reference is made to the term “compensation.” Jd. The

court further concluded in Alves that “if Congress had

intended section 83(a) to apply solely to restricted

stock used to compensate employees, it could have

used much narrower language.” Jd. at 481-82. Upon

consideration, we agree with the interpretation

advanced by the Alves court and, therefore, join

the Ninth Circuit in holding that section 83 is

not limited to stock transfers which are compensa-

tory in nature.” ;

3. Pledger v. C.I.R., 641 F.2d 287, 293 (CA5 1981)

“The taxing scheme imposed by Congress more accu-

rately reflects what taxpayer received as com-

pensation than a scheme that taxes the taxpayer on

merely a portion of the compensation.”

4. Alves v. C.I.R., 734 F.2d 478, 481 (CA9 1984)

“The plain language of section 83(a) belies Alve’s ar-

gument. Section 83(a) applies to all property

transferred in connection with the performance

of services. No reference is made to the term “com-

pensation.” Nor is there any statutory requirement

that property have a fair market value in excess of the

amount paid at the time of transfer. Indeed, if Con-

gress had intended section 83(a) to apply solely

to restricted stock used to compensate its employ-

ees, it could have used much narrower language.

Indeed, Congress made section 83(a) applicable to all

restricted “property,” not just stock; to property trans-

ferred to “any person,” not just to employees; and to

property transferred “in connection with... ser-

vices,” not just compensation for employment. See

Cohn v. Commissioner, 73 USTC 443, 446-47 (1979).”

. Klingler Electric Co. v. C.1L.R., 776 F.Supp. 1158,

1164 at [1] (S.D.Miss. 1991)

“Section 83(a) applies to all property transferred

in connection with the performance of services.”

. Robinson v. C.I.R., 82 USTC 444, 459 (1984)

The legislative history of section 83 does not require

the conclusion that the statute should be applied to

tax-avoidance techniques only. To the contrary, the

House and Senate reports specifically delineate trans-

actions and transfers to which section 83 was not to

apply and do not exclude from its purview con-

tractual provisions that were not tax motivated.”

Cohn v, C.LR., 73 USTC 443, 446 (1979)

“Petitioners rest their entire case on the proposition

that Elovich and Cohn and/or Mega were “independ-

ent contractors” and not employees of the Integrated

and that, therefore, section 83 does not apply to the

acquisition of the shares from Integrated. They rely on

the legislative history surrounding the statute to sup-

port their proposition that section 83 was intended to

apply only to restricted stock transferred to employ-

ees. Respondent contends that the words “any

person” in section 83(a) encompass independent

contractors as well as employees. We agree with

Respondent...We reject petitioner's argument. While

restricted stock plans involving employers and em-

ployees may have been the primary impetus behind

the enactment of section 83, the language of the

section covers the transfer of any property trans-

ferred in connection with the performance of ser-

vices “to any person other than the person for whom

the services are performed.” (Emphasis added.) The

legislative history makes clear that Congress was

aware that the statute’s coverage extended beyond

restricted stock plans for employees. H.Rept. 91-

413 (Part 1) (1969), 1969-3 C.B. 200, 255: S.Rept. 91-

552 (1969), 1969-3 C.B. 423, 501. The regulations

state that that section 83 applies to employees and in-

dGependent contractors (sec. 1.83-1(a), Income Tax

Regs.). There is no question but that, under the fore-

going circumstances, these regulations are not

“unreasonably and plainly inconsistent with the

revenue statutes.” Consequently, they are sus-

tained. (cites omitted)”

APPENDIX E

Evidence related to IRS not being an Agency of the

United States Government

The Act of Congress, March 8, 1868

“...who shall be charged with such duties in the bu-

reau of internal revenue as may be prescribed by the

Secretary of the Treasury, or as may be required by

law, and who shall act as Commissioner of internal

revenue in the absence of that officer, and exercise the

privilege of FRANKING all letters and documents

pertaining to the office of internal revenue.”

. Diversified Metal Products v. T--Dow Company

Trust, Internal Revenue Service, and Steve Mor-

gan; USDC District of Idaho, Case No. 93-405-E-

EJL

Note: Filed on or about November 18 or 19, 1993. File

stamp is difficult to read.

BETTY H. RICHARDSON

United States Attorney

United States Attorney’s Office

Box 32

Boise, Idano 83707

Telephone: (208) 334-1211

RICHARD R. WARD

Trial Attorney, Tax Division

U.S. Department of Justice

P.O. Box 683

Ben Franklin Station

Washington, D.C. 20044-0683

Attorneys for the United States of America

IN THE UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF IDAHO

DIVERSIFIED

METAL PRODUCTS,

Inc., p Case No. 93-405-E-EJL

Plaintiff

UNITED STATES’

ANSWER AND CLAIM

Vv.

T-DOW COMPANY

TRUST, INTERNAL

REVENUE SERVICE

and STEVE MOR-

GAN,

ee ee ee ee ee ee ee

Defendant )

The United States of America, through undersigned

counsel hereby responds to the numbered paragraphs of

plaintiffs complaint as follows:

4. Denies that the Internal Revenue Service is an

agency of the United States Government...

Respectfully submitted this 18 day of November,

1993.

BETTY H. RICHARDSON

United States Attorney

s/ Richard R. Ward

RICHARD R. WARD

Trial Attorney, Tax Division

U.S. Department of Justice

P.O. Box 683

Ben Franklin Station

Washington, D.C. 20044-0683

Telephone (202) 307-5867

3. Index to 31 USC § 301 et. Seq.

Title 31, SUBCHAPTER I—ORGANIZATION

§ 301. Department of the Treasury

§ 302. Treasury of the United States

§ 303. Bureau of Engraving and Printing

§ 304. United States Mint

§ 305. Federal Financing Bank

§ 306. Fiscal Service

§ 307. Office of the Comptroller of the Currency

§ 308. United States Customs Service

§ 309. Office of Thrift Supervision

§ 310. Financial Crimes Enforcement Network

§ 311. Office of Intelligence and Analysis

§ 312. Continuing in office

31 USC § 306. Fiscal Service

(a) The Fiscal Service is a service in the Depart-

ment of the Treasury.

(b) The head of the Fiscal Service is the Fiscal Assis-

tant Secretary appointed under section 301 (d) of this

title.

(1) Bureau of Government Financial Operations, hav-

ing as its head a Commissioner of Government Finan-

cial Operations; and

(2) Bureau of the Public Debt, having as its head a

Commissioner of the Public Debt.

(d) The Secretary of the Treasury may designate an-

other officer of the Department to act as the Fiscal As-

sistant Secretary when the Fiscal Assistant Secretary

is absent or unable to serve or when the office of Fiscal

Assistant Secretary is vacant.

31 USC § 1301. Application

(a) Appropriations shall be applied only to the objects

for which the appropriations were made except as oth-

erwise provided by law.

(b) The reappropriation and diversion of the -unex-

pended balance of an appropriation for a purpose

other than that for which the appropriation originally

was made shall be construed and accounted for as a

new appropriation. The unexpended balance shall be

reduced by the amount to be diverted.

tion law may be construed to be permanent or avail-

able continuously only if the appropriation—

(1) is for rivers and harbors, lighthouses, public build-

ings, or the pay of the Navy and Marine Corps; or

(2) expressly provides that it is available after the fis-

cal year covered by the law in which it appears.

(d) A law may be construed to make an appropriation

out of the Treasury or to authorize making a contract

for the payment of money in excess of an appropria-

tion only if the law specifically states that an appro-

priation is made or that such a contract may be made.

NOTES:

Transfers From Appropriation Accounts; Sala-

ries of Temporarily Reassigned Employees

Pub. L. 105-277, div. A, § 101(f) [title V, § 510], Oct.

21, 1998, 112 Stat. 2681-337, 2681-385, as amended

by Pub. L. 106—31, title V, § 5005(1), May 21, 1999, 113

Stat. 111, provided that: “Notwithstanding any other

provision of law, hereafter—

“(1) no amount may be transferred from an appropria-

tion account for the Departments of Labor, Health and

Human Services, and Education except as authorized

in this or any subsequent appropriation Act, or in the

Act establishing the program or activity for which

funds are contained in this Act {see Tables for classifi-

cation];

“(2) no department, agency, or other entity, other than

the one responsible for administering the program or

activity for which an appropriation is made in this

Act, may exercise authority for the timing of the obli-

gation and expenditure of such appropriation, or for

the purpose for which it is obligated and expended, ex-

cept to the extent and in the manner otherwise pro-

vided in sections 1512 and 1513 of title 31, United

States Code; and

“(3) no funds provided under this Act or subsequent

Departments of Labor, Health and Human Services,

Education, and Related Agencies Appropriations Acts

shall be available for the salary (or any part thereof)

of an employee who is reassigned on a temporary de-

tail basis to another position in the employing agency

or department or in any other agency or department,

unless the detail is independently approved by the

head of the employing department or agency.”

APPENDIX F

Talmage v. C.I.R., S.Ct. #97-5299 [Excerpt]

LEXSEE T.C. MEMO 1996-114

STEPHEN V. TALMAGE, Petitioner v. COMMISSIONER

OF INTERNAL REVENUE, Respondent

Docket No. 339-95.

UNITED STATES TAX COURT

T.C. Memo 1996-114; 1996 Tax Ct. Memo LEXIS 109; 71

‘T.C.M. (CCH) 2370

March 11, 1996, Filed

DISPOSITION: [*1}] An appropriate order and decision

will be entered for respondent.

Because the issues are purely legal, this case is ripe for

summary judgment. Tax protester arguments like the

claim that wages are not taxable income also suffice (as

an alternative to dismissal, and in the absence of better

argument) to justify summary judgment for respondent.

Coleman v. Commissioner, 791 F.2d 68 (7th Cir. 1986)

(wages not income), affg. an Order of this Court; Beard v.

Commissioner, 82 T.C. 766, 772-774 (1984) (wages not

income), affd. per curiam 793 F.2d 139 (6th Cir. 1986);

Cornell v. Commissioner, T.C. Memo. 1983-370 (wages

not income). Even if wages are, in effect, an exchange of

equal value for value, they are nevertheless taxable in-

come. Rowlee v. Commissioner, 80 T.C. 1111, 1121-1122

(1983); [*18] Rice v. Commissioner, T.C. Memo. 1982-129.

And even if we apply section 1001 to determine peti-

tioner's gain, his basis is defined under sections 1011 and

1012 as his cost, not fair market value. Since he paid

nothing for his labor, his cost and thus his basis are zero.

Rice v. Commissioner, supra. Consequently, even under

section 1001, his taxable income from his labor is his total

gain reduced by nothing, i.e., his wages.

- 23

Petitioner's primary argument n3 is that section 83,

Property Transferred in Connection with Performance of

Se vices, has the effect of exempting his wages from in-

come tax because it requires us to apply section 1012,

which specifies that cost should be used to determine the

basis of property (unless the Code provides otherwise) to

determine the extent to which wages constitute taxable

income. Petitioner asserts that he "paid" for his wages

with his labor and that section 83 allows the value of his

labor as a cost to be offset against his wages, thereby ex-

empting them from tax. Section 83 provides that property

received for services is taxable to the recipient of the

property to the extent of its [*19] fair market value mi-

nus the amount (if any) paid for the property. In attempt-

ing to equate his wages with property for which he has a

tax cost, petitioner's argument is nothing more than a

variation of the wages-are-not-income claim frequently

advanced by tax protesters, and it is completely without

merit. Gammon v. Commissioner, T.C. Memo. 1996-4;

Santangelo v. Commissioner, T.C. Memo. 1995-468. Cf.

Crow v. Commissioner, T.C. Memo. 1995-584. Petitioner's

argument fails for the same reason that other protesters’

arguments fail; the worker's cost for his services--and

thus his basis--is zero, not their fair market value.

APPENDIX G

U.S. v. Monsanto, 491 U.S. 600, 607-611 and (sylla-

bus) (1989) [Excerpts]

LEXSEE 491 U.S. 600,AT 609

UNITED STATES v. MONSANTO

No. 88-454

SUPREME COURT OF THE

UNITED STATES

491 U.S. 600; 109 S. Ct. 2657;

105 L. Ed. 2d 512; 1989 U.S.

LEXIS 3132; 57 U.S.L.W. 4826

March 21, 1989, Argued

June 22, 1989, Decided

“Section 853’s language is plain and unambiguous.

Congress could not have chosen stronger words to

express its intent that forfeiture be mandatory than §

853(a)’s language that upon conviction a person “shall

forfeit..any property” and that the sentencing court

“shall order” a forfeiture. Likewise, the statute pro-

vides a broad definition of property which does

not even hint at the idea that assets used for at-

torney’s fees are not included. Every Court of Ap-

peals that has finally passed on this argument has

agreed with this view. Neither the Act’s legislative

history nor legislators’ post-enactment statements

support respondent’s argument that an exception

should be created because the statute does not ex-

ressly include property to u or attorney’s

fees, or because Congress simply did not consider

the prospect that forfeiture [491 U.S. 601] would

reach such property...Moreover, respondent’s ad-

monition that courts should construe statutes to

avoid decision as to their constitutionality is not

license for the judiciary to rewrite statutory lan-

guage. Pp. 606-611.” !

“In determining the scope of a statute, we look first to

its language.” United States v. Turkette, 452 U.S. 576,

580 (1981). In the case before us, the language of §

853 is plain and unambiguous: all assets falling

within its scope are to be forfeited upon convic-

tion, with no exception existing for the assets used

to pay attorney’s fees — or anything else, for that

matter.

As observed above, § 853(a) provides that a person

convicted of the offenses charged in respondent’s in-

dictment “shall forfeit ... any property’ that was

derived from the commission of these offenses. After

setting out this rule, § 853(a) repeats later in its text

that upon conviction a sentencing court “shall order”

forfeiture of all property described in § 853(a). Con-

gress could not have chosen stronger words to ex-

press its intent that forfeiture be mandatory in cases

where the statute applied, or broader words to define

the scope of what was to be forfeited. Likewise, the

statute provides a broad definition of “property”

when describing what types of assets are within

the section’s scope: “real property... tangible and

intangible personal property, including rights,

privileges, interests, claims, and securities.” 21

U.S.C. § 853(b) (1982 ed., Supp.V). Nothing in this

all-inclusive listing even hints at the idea that as-

. sets to be used to pay an attorney are not “prop-

erty” within the statute’s meaning.

Nor are we alone in concluding that_the stat-

ute is unambiguous in failing to exclude assets

that could be used to pay an attorney from its

definition of forfeitable property. This argument,

advanced by respondent here, see Brief for Respon-

' See U.S. v. Monsante, 491 U.S. 600 (syllabus) (1989).

dent 12-19, has been unanimously rejected by every

Court of Appeals that has finally passed on it, as

it was by the Second Circuit panel below, see 836 F.2d

at 78-80; id. at 85-86 (Oakes, J., dissenting); even the

judges who concurred on statutory grounds in the en

banc decision did not accept this position, see 852

F.2d at 1405-1410 (Winter, J., concurring). We note

also that the Brief for American Bar Association as

Amicus Curiae 6, frankly admits that the statute

“on fits] face, broadly cover[s] all property de-

rived from alleged criminal activity and con-

tain[s] no speci xemption for property used to

pay bona fide attorneys’ fees.”

‘ Respondent urges us, nonetheless, to interpret

the statute to exclude such property for several

reasons. Principally, respondent contends that we

should create such an exemption because the

statute does not expressly include property to be

used for attorneys’ fees . . . In support, respondent

observes that the legislative history is “silent” on this

question, and that the House and Senate debates fail to

discuss this prospect. But this proves nothing[.] The

fact that the forfeiture provision reaches assets

that could be used to pay attorney’s fees, even

though it contains no express provisions to this ef-

fect, “does not demonstrate ambiguity” in the

statute: “It demonstrates breadth.” Sedima,

S.P.R.L. v. Imrex Co., 473 U.S. 479, 499 (1985) (quoting

Haroco, Inc. v. American Nat. Bank & Trust Co. of Chi-

cago, 747 F.2d 384, 398 (CA7 1984)). The statutory

provision at issue here is_broad and unambigu-

ous, and Congress’ failure to supplement § 853(a)’s

comprehensive phrase — “any property” — with an

exclamatory “and we even mean assets to be used

to pay an attorney” does no. lessen the force of the

statute’s plain language.” *

2 See Monsanto, Id., at 607-09.

“As we have noted before, such post-enactinent views

“form a hazardous basis for inferring the intent” behind

a statute, United States v. Price, 361 U.S. 304, 313

(1960); instead, Congress’ intent is “best determined

by [looking to] the statutory language that it

chooses,” Sedima, S.P.R.L., supra, at 495, n.13....

Finally, respondent urges us, see Brief for Re-

spondent 2029, to invoke a variety of general can-

ons of statutory construction, as well as several

prudential doctrines of this Court, to create the statu-

tory exemption he advances; among these doctrines is

our admonition that courts should construe statutes to

avoid decision as to their constitutionality. See, e.g.,

Edward J. DeBartolo Corp. v. Florida Gulf Coast

Building & Constr. Trades Council, 485 U.S. 568, 575

(1988); NLRB. v. Catholic Bishop of Chicago, 440 U.S.

490, 500 (1979). We respect these canons, and they

are quite often useful in close cases, or when

statutory language is ambiguous. But we have ob-

served before that such “interpretative canon[s

are] not a license for the judiciary to rewrite lan-

guage enacted by the legislature.” United States v.

Albertini, 472 U.S. 675, 680 (1985). Here, the lan-

guage is clear and the statute comprehensive: §

853 does not exempt assets to be used for attor-

ney’s fees from its forfeiture provisions. *

3 See Monsanto, Id., at 610-11.

APPENDIX H

Department of Housing and Urban Renewal v.

Rucker, 535 U.S. 125, 130-31 (2002) [Excerpts]

LEXSEE 535 U.S. 125,AT 130

DEPARTMENT OF HOUSING AND URBAN DEVEL-

OPMENT, PETITIONER v. PEARLIE RUCKER ET AL.,

OAKLAND HOUSING AUTHORITY, ET AL., PETI-

TIONERS v. PEARLIE RUCKER ET AL.

- Nos. 00-1770 and 00-1781.

SUPREME COURT OF THE UNITED STATES

535 U.S. 125; 122 S. Ct. 1230; 152 L. Ed. 2d 258; 2002

U.S. LEXIS 2144; 70 U.S.L.W. 4206

February 19, 2002, Argued

March 26, 2002, Decided *

“That this is so seems evident from the plain lan-

guage of the statute. It provides that -

each public housing authority shall utilize leases

which .. . provide that... any drug-related crimi-

nal activity on or off such premises, engaged in by

a public housing tenant, any member of the ten-

ant’s household, or any guest or other person un-

der the tenant’s control, shall be cause for termi-

nation of tenancy.

42 U.S.C. § 1437d(1)(6) (1994 Ed., Supp.V). The en banc

Court of Appeals thought the statute did not address

“the level of personal knowledge or fault that is re-

quired for eviction.” 237 F.3d at 1120. Yet Congress’

decision not to impose any qualification in the

statute, combined with its use of the term “any” to

modify “drug-related criminal activity,” pre-

cludes any knowledge requirement. See United

States v. Monsanto, 491 U.S. 606, 609 (1989). As we

have explained, “the word ‘any’ has an expansive

meaning, that is, ‘one or some indiscriminately of

whatever kind.” United States v. Gonzales, 520 U.S.

1, 5 (1997). Thus, any drug-related activity engaged in

by the specified persons is grounds for termination, not

just drug-related activity that the tenant knew or

should have known about.”

APPENDIX I

U.S. v. Gonzales, 520 U.S. 1, 4-6 (1997) [Excerpts]

LEXSEE 520 U.S. 1,AT 6

UNITED STATES, PETITIONER v. MIGUEL GONZA-

LES, ORLENIS HERNANDEZ-DIAZ AND MARIO

PEREZ

No. 95-1605

SUPREME COURT OF THE UNITED STATES

520 U.S. 1; 117 S. Ct. 1032; 137 L. Ed. 2d 132; 1997 U.S.

LEXIS 1489; 65 U.S.L.W. 4157; 97 Cal. Daily Op. Service —

1545; 97 Daily Journal DAR 2243; 10 Fla. L. Weekly Fed.

S 326

December 11, 1996, Argued

March 3, 1997, Decided

“Our analysis begins, as always, with the statutory

text. Section 924(c)(1) provides:

Whoever, during and in relation to any...drug

trafficking crime...for which he may be prosecuted

in a court of the United States, uses or carries a

firearm, shall, in addition to the punishment

provided for such crime..., be sentenced to

imprisonment for five years... Notwithstanding

any other provision of law, the court shall not

place on probation or suspend the sentence of any

person convicted of a violation of this subsection,

nor shall the term of imprisonment imposed under

this subsection run concurrently with any other

term of imprisonment including that imposed for

the... drug trafficking crime in which the firearm

was used or carried.

18 U.S.C. § 924(c)(1) (emphasis added). The question

we face is whether the phrase “any other term of impris-

onment” “means what it says, or whether it should be lim-

ited to some subset” of prison sentences, Maine v. Thibou-

tot, 448 U.S. 1, 4 (1980) -- namely, only federal sentences.

Read naturally, the word “any” has an expansive

meaning, that is, “one or some indiscriminately of

whatever kind.” Webster’s Third New International

Dictionary 97 (1976). Congress did not add any lan-

guage limiting the breadth of that word, and so we

must read § 924(c) as referring to all “term[s] of im-

prisonment,” including those imposed by state

courts. Cf. United States v. Alvarez-Sanchez, 511 U.S.

350, 358 (1994) (noting that statute referring to “any law

enforcement officer” includes “federal, state, or local” offi-

- cers); Collector v. Hubbard, 12 Wall. 1, 15 (1871) (stating

“it is quite clear” that a statute prohibiting the fil-

ing of suit “in any court” “includes the State courts

as well as the Federal courts,” because “there is not

a word in the [statute] tending to show that the

words ‘in any court’ are not used in their ordinary

sense’). There is no basis in the text for limiting § 924(c)

to federal sentences.

In his dissenting opinion, JUSTICE STEVENS sug-

gests that the word “any” as used in the first sentence

of § 924(c) “unquestionably has the meaning ‘any fed-

eral.” Post at 14. In that first sentence, however, Con-

gress explicitly limited the scope of the phrase “any

crime of violence or drug trafficking crime” to those “for

which [a defendant] may be prosecuted in a court of the

United States.” Given that Congress expressly limited

the phrase “any crime” to only federal crimes, we find

it significant that no similar restriction modifies the

phrase “any other term of imprisonment,” which ap-

pears only two sentences later and is at issue in this

case. See Russello v. United States, 464 U.S. 16, 23

(1983) (“Where Congress includes particular lan-

guage in one section of a statute but omits it in

another section of the same Act, it is generally

presumed that Congress acts intentionally and

purposely in the disparate inclusion or exclu-

sion”).

The Court of Appeals also found ambiguity in

Congress’ decision, in drafting § 924(c), to prohibit

concurrent sentences instead of simply mandating

consecutive sentences. 65 F.3d at 820. Unlike the

lower court, however, we see nothing remarkable

(much less ambiguous) about Congress’ choice of

words. Because consecutive and concurrent sen-

tences are exact opposites, Congress implicitly re-

quired one when it prohibited the other. This “ambi-

guity” is, in any event, beside the point, because this

phraseology has no bearing on whether Congress

meant § 924(c) sentences to run consecutively only

to other federal terms of imprisonment.

Given the straightforward statutory com-

mand, there is no reason to resort to legislative

history. Connecticut Nat. Bank v. Germain, 503

U.S. 249, 254 (1992). Indeed, far from clarifying the

statute, the legislative history only muddies the wa-

ters. The excerpt from the Senate Report accompa-

nying the 1984 amendment to § 924(c), relied upon

by the Court of Appeals, reads:

[T]he Committee intends that the mandatory

sentence under the revised subsection 924(c) be

served prior to the start of the sentence for the

underlying or any other offense.

S.Rep. at 3138-314. This snippet of legislative history

injects into § 924(c) an entirely new idea -- that a de-

fendant must serve the five-year-prison term for his

firearms conviction before any other sentences. This

added requirement, however, is “in no way an-

chored in the text of the statute.” Shannon v.

United States, 512 U.S. 573, 583 (1994).

APPENDIX J

United States v. Alvarez-Sanchez, 511 U.S. 350, 357

(1994) [Excerpt]

LEXSEE 511 U.S. 350,AT 357

UNITED STATES, PETITIONER v. PEDRO ALVAREZ-

SANCHEZ

No. 92-1812

SUPREME COURT OF THE UNITED STATES

511 U.S. 350; 114 S. Ct. 1599; 128 L. Ed. 2d 319; 1994

U.S. LEXIS 3300; 62 U.S.L.W. 4289; 94 Cal. Daily Op.

Service 3059; 94 Daily Journal DAR 5866; 8 Fla. L.

Weekly Fed. S 83

March 1, 1994, Argued

May 2, 1994, Decided

“Respondent contends that he was under “arrest or

other detention” for purposes of § 3501(c) during the in-

terview at the Sheriffs Department, and that his state-

ment to the Secret Service agents constituted a confession

governed by this subsection. In respondent’s view, it is

irrelevant that he was in the custody of the local au-

thorities, rather than that of the federal agents,

when he made the statement. Because the statute

applies to persons in the custody of “any” law en-

forcement officer or law enforcement agency, re-

spondent suggests that the § 3501(c) 6-hour time pe-

riod begins to run whenever a person is arrested by

local, state, or federal officers.

We believe respondent errs in placing dispositive

weight on the broad statutory reference to “any” law

enforcement officer or agency without considering

the rest of the statute.”

APPENDIX K

Black’s Law Dictionary, 6 Ed., “Expressly”

“In an express manner; in direct and unmistakable _

terms; explicitly; definitely; directly. St. Louis Union

Trust Co. v. Hill, 336 Mo. 17, 76 S.W.2d. 685, 689. The

opposite of impliedly. Bolles v. Toledo Trust Co., 144

Ohio St. 195, 58 N.E.2d. 381, 396.” (emphasis added)

APPENDIX L

Murphy v. IRS

MARRITA MURPHY AND DANIEL J. LEVEILLE, AP-

PELLANTS v. INTERNAL REVENUE SERVICE AND

UNITED STATES OF AMERICA, APPELLEES

No. 05-5139

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

2006 U.S. App. LEXIS 21401

February 24, 2006, Argued

August 22, 2006, Decided

C. The Sixteenth Amendment

The Government of the United States is a government

of limited powers: "Every law enacted by Congress must

be based on one or more of its powers enumerated in the

Constitution." United States v. Morrison, 529 U.S. 598,

607, 120 S. Ct. 1740, 146 L. Ed. 2d 658 (2000). The consti-

tutional power of the Congress to tax income is provided

in the Sixteenth Amendment, ratified in 1913:

The Congress shall have power to lay and collect

taxes on incomes, from whatever source derived,

without apportionment among the several

States, and without regard to any census or

enumeration.

The Supreme Court has held the word "incomes" in the

Amendment and the phrase "gross income" in § 61(a) of

the IRC are coextensive. See Helvering v. Clifford, 309

U.S. 331, 334, 60 S. Ct. 554, 84 L. Ed. 788, 1940-1 C.B.

105 (1940) ( § 61 represents the "full measure of [the

Congress's] taxing power"). When it first construed those

terms in Eisner v. Macomber, 252 U.S. 189, 207, 40 S. Ct.

189, 64 L. Ed. 521, 1920-3 C.B. 25, T.D. 3010 (1920), the

Supreme Court held the taxing power extended to any

"gain derived from capital, from labor, or from both com-

bined." Later, after explaining that [*15] Eisner was not

"meant to provide a touchstone to all future gross income

questions,” the Court added that under the IRC -- and, by

implication, under the Sixteenth Amendment -- the Con-

gress may "tax all gains" or "accessions to wealth." Com-

missioner v. Glenshaw Glass Co., 348 U.S. 426, 430-31, 75

S. Ct. 473, 99 L. Ed. 483, 1955-1 C.B. 207 (1955).

Murphy argues that, being neither a gain nor an acces-

sion to wealth, her award is not income and § 104(a)(2) is

therefore unconstitutional insofar as it would make the

award taxable as income. Broad though the power

granted in the Sixteenth Amendment is, the Supreme

Court, as Murphy points out, has long recognized "the

principle that a restoration of capital [i]s not income;

hence it [falls] outside the definition of 'income' upon

which the law impose[s] a tax." O'Gilvie, 519 U.S. at 84;

see, e.g., Doyle v. Mitchell Bros. Co., 247 U.S. 179, 187-88,

38 S. Ct. 467, 62 L. Ed. 1054, TD. 2723 (1918); S. Pac. Co.

uv. Lowe, 247 U.S. 330, 335, 38 S. Ct. 540, 62 L. Ed. 1142,

T.D. 2730 (1918) (return of capital not income under IRC

or Sixteenth Amendment). By analogy, Murphy contends a

damage award for personal injuries --including nonphysi-

cal injuries [*16] --is not income but simply a return of

capital -- "human capital,” as it were. See Gary S. Becker,

Human Capital (1st ed. 1964); Gary S. Becker, "The Eco-

nomic Way of Looking at Life," 43-45 (Nobel Lecture, Dec.

9, 1992).

According to Murphy, the Supreme Court read the con-

cept of "human capital" into the IRC in Glenshaw Glass.

There, in holding that punitive damages for personal in-

jury were "gross income" under the predecessor to § 61,

the Court stated:

The long history of ... holding personal injury re-

coveries nontaxable on the theory that they

roughly correspond to a return of capital cannot

support exemption of punitive damages following

injury to property ... Damages for personal injury

are by definition compensatory only. Punitive

damages, on the other hand, cannot be consid-

ered a restoration of capital for taxation pur-

poses.

348 U.S. at 432 n.8. In Murphy's view, the Court thereby

made clear that the recovery of compensatory damages for

a "personal injury" --of whatever type --is analogous to a

"return of capital" and therefore is not income under the

IRC or the Sixteenth Amendment.

In support of her reading of the caselaw, Murphy con-

tends [*17] the IRC, as drafted shortly after-"passage of

the [Sixteenth] Amendment demonstrates that compensa-

tory damages designed to make a person whole are ex-

cluded from the definition of income." She focuses upon

the three sources the Supreme Court quoted in O'’Gilvie,

519 U.S. 84-87, 136 L. Ed. 2d 454, to wit, an Opinion of

the Attorney General, a Decision of the Department of the

Treasury, and a Report issued by the Ways and Means

Committee of the House of Representatives --each of

- which predates the first version of § 104(a)(2), namely, §

213(b)(6) of the Revenue Act of 1918. See 40 Stat. 1057,

1066 (1919). -

In an opinion rendered to the Secretary of the Treasury

on the question whether proceeds from an accident insur-

ance policy were income under the IRC as it stood prior to

the 1918 Act, the Attorney General stated:

Without affirming that the human body is in a

technical sense the "capital" invested in an acci-

dent policy, in a broad, natural sense the pro-

ceeds of the policy do but substitute, so far as

they go, capital which is the source of future pe-

riodical income. They merely take the place of

capital in human ability which was destroyed by

the accident. [*18] They are therefore "capital"

as distinguished from "income" receipts.

31 Op. Att'y. Gen. 304, 308 (1918). In a revenue ruling,

the Department of the Treasury then reasoned that

upon similar principles ... an amount received by

an individual as the result of a suit or compro-

mise for personal injuries sustained ... through

accident is not income[that is] taxable.

T.D. 2747, 20 Treas. Dec. Int. Rev. 457 (1918).

As for the House Report on the bill that became the

Revenue Act of 1918, it states:

Under the present law it is doubtful whether

amounts received through accident or health in-

surance, or under workmen's compensation acts,

as compensation for personal injury or sickness,

and damages received on account of such injuries

or sickness, are required to be included in gross

income.

H.R. Rep. No. 65-767, at 9-10 (1918). Thereafter, the

Congress passed the Act, § 213(b)(6) of which excluded

from gross income "{a]mounts received, through accident

or health insurance or under workman's compensation

acts, as compensation for personal injuries or sickness,

plus the amount of any damages received whether by suit

or agreement [*19] on account of such injuries or sick-

ness." 40 Stat. 1057, 1066 (1919).

‘Because the 1918 Act followed soon after ratification

of the Sixteenth Amendment, Murphy contends that the

statute reflects the meaning of the Amendment as it

would have been understood by those who framed,

adopted, and ratified it. She observes that in Dotson v.

United States, 87 F.3d 682 (5th Cir. 1996), the court con-

cluded upon the basis of the House Report that the "Con-

gress first enacted the personal injury compensation ex-

clusion ... when such payments were considered the re-

turn of human capital, and thus not constitutionally tax-

able 'income’ under the 16th amendment." Id. at 685.

The Government attacks Murphy's constitutional ar-

gument on all fronts. First, invoking the presumption that

the Congress enacts laws within its constitutional limits,

see Rust v. Sullivan, 500 U.S. 173, 191, 111 S. Ct. 1759,

114 L. Ed. 2d 233 (1991), the Government asserts at the

outset that § 104(a)(2) is constitutional even if, as

amended in 1996, it does permit the taxation of compen-

satory damages. Indeed, the Government goes further,

contending the Congress could, consistent with the Srx-

teenth [*20] Amendment, repeal § 104(a)(2) altogether

and tax compensation even for physical injuries.

Noting that the power of the Congress to tax income

"extends broadly to all economic gains," Comm 'r v. Banks,

543 U.S. 426, 433, 125 S. Ct. 826, 160 L. Ed. 2d 859

(2005), the Government next maintains that compensa-

tory damages "plainly constitute economic gain, for the

taxpayer unquestionably has more money after receiving

the damages than she had prior to receipt of the award."

On that basis, the Government contends Murphy's reli-

ance upon footnote eight of Glenshaw Glass is misplaced;

merely because the Congress "has historically excluded

personal injury recoveries from gross income, based on

the make-whole or restoration-of-human-capital theory,

does not mean that such an exclusion is mandated by the

_ Sixteenth Amendment." Because the Supreme Court in

Glenshaw Glass was construing "gross income" with ref-

erence only to the IRC, the Government argues footnote

eight addresses only a now abandoned congressional pol-

icy, not the outer limit of the Sixteenth Amendment.

According to the Government, the same is true of the

1918 Act and the interpretive rulings that preceded it.

Although the Government [*21] acknowledges that the

dictum in Dotson, 87 F.3d at 685, accords with Murphy's

position, the Government notes the court there relied

solely upon the House Report. Because the House Report

merely states "it is doubtful whether ... compensation for

personal injury or sickness ... [is] required to be included

in gross income," H.R. Rep. No. 65-767. at 9-10 (1918), the

Government observes that the "report simply does not es-

tablish that Congress believed taxing compensatory per-

sonal injury damages would be unconstitutional."

In addition, the Government challenges the coherence

of Murphy's analogy between a return of "human capital

or well-being" and a return of "financial capital," the lat-

ter of which it acknowledges does not constitute income

under the Sixteenth Amendment. See Doyle, 247 U.S. at

187: S. Pac. Co., 247 U.S. at 335. The Government first

observes that financial capital, like all property, has a

"basis," defined by the IRC as "the cost of such property,"

26 U.S.C. § 1012, adjusted "for expenditures, receipts,

losses, or other items, properly chargeable to [a] capital

account," id. § 1016(a)(1); [*22] thus, when a taxpayer

sells property, his income is "the excess of the amount re-

alized therefrom over the adjusted basis." Id. § 1001(a).

The Government then observes that "[b]lecause people do

not pay cash or its equivalent to acquire their well-being,

they have no basis in it for purposes of measuring a gain

(or loss) upon the realization of compensatory damages."

Nor is thefe any corresponding theory of "human depre-

ciation," which would permit "an offsetting deduction for

the exhaustion of the taxpayer's physical prowess and

mental agility." Boris I. Bittker & Lawrence Lokken, Fed-

eral Taxation of Income, Estates, and Gifts P 5.6 (2003).

Finally, the Government points to the Ninth Circuit's dic-

tum in Roemer v. Commissioner, 716 F.2d 693 (1983),

suggesting that "[s]ince there is no tax basis in a person's

health and other personal interests, money received as

compensation for an injury to those interests might be

considered a realized accession to wealth.” Jd. al 696 n.2.

At the outset, we reject the Government's breathtak-

ingly expansive claim of congressional power under the

Sixteenth Amendment --upon which it founds the more

far-reaching [*23] arguments it advances here. The Six-

teenth Amendment simply does not authorize the Con-

gress 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 Otl Ass'n v. Hopkins, 269 U.S. 110,

114, 46 S. Ct. 48, 70 L. Ed. 183, 1926-1 C.B. 147, T.D.

3790 (1925). Indeed, because the "the power to tax in-

volves the power to destroy," McCulloch v. Maryland, 17

U.S. (4 Wheat.) 316, 431, 4 L. Ed. 579 (1819), it 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.

Fortunately, we need not rely solely upon the wisdom

and beneficence of the Congress for, when the Sixteenth

Amendment was drafted, the word "incomes" had well un-

derstood limits. To be sure, the Supreme Court has

broadly construed the phrase "gross income" in the IRC

and, by implication, the word "incomes" in the Sixteenth

“Amendment, but it also has made plain that the power to

tax income extends only to "gain[s]" or "accessions to

wealth." Glenshaw Glass, 348 U.S. at 430-31. That is

[*24] why, as noted above, the Supreme Court has held a

"return of capital" is not income. Doyle, 247 U.S. at 187;

S. Pac. Co., 247 U.S. at 335. The question in this case is

not, however, about a return of capital -- except insofar as

Murphy analogizes human capital to physical or financial

capital; the question is whether the compensation she re-

ceived for her injuries is income. *

* In any event, the Government's quarrel with Mur-

phy's analogy, based upon Glenshaw Glass, of "human

capital" to financial or physical capital is not persua-

sive. To be sure, the analogy is incomplete; personal

- injuries do not entail an adjustment to any basis, nor

are human resources, such as reputation, depreciable

for tax purposes. But nothing in Murphy's argument

implies a need to account for the basis in or to depre-

ciate anything. Her point, rather, is that as with com-

pensation for a harm to one's financial or physical

capital, the payment of compensation for the diminu-

tion of a personal attribute, such as reputation, is but

a restoration of the status quo ante, analogous to a

"restoration of capital," Glenshaw Glass, 348 U.S. at

432 n.8; in neither context does the payment result in

a "gain" or "accession{] to wealth," id. at 430-31.

[*25]

To determine whether Murphy's compensation is in-

come under the Sixteenth Amendment, we are instructed

by the Supreme Court first to consider whether the tax-

payer's award of compensatory damages is "a substitute

for [a] normally untaxed personal ... quality, good, or 'as-

set." O'Gilvie, 519 U.S. at 86. Accordingly, we join our

sister circuits by asking: "In lieu of what were the dam-

ages awarded"? Raytheon Prod. Corp. v. Commissioner,

144 F.2d 110, 113 (1st Cir. 1944); see Francisco v. United

States, 267 F.3d 303, 319 (3d Cir. 2001) (treating Ray-

theon's "in lieu of” test as authoritative); Tribune Publ'g

Co. v. United States, 836 F.2d 1176, 1178 (9th Cir. 1988)

(applying "in lieu of" test to determine whether settle-

ment proceeds were income); Gilbertz v. United States,

808 F.2d 1374, 1378 (10th Cir. 1987) (adopting "in lieu of"

test to determine whether compensatory damages were

income). Here, if the $ 70,000 Murphy received was "in

lieu of" something "normally untaxed," O’Gilvie, 519 U.S.

at 86, then her compensation is not income under the Six-

teenth Amendment; it is [*26] neither a "gain" nor an "ac-

cession[] to wealth." Glenshaw Glass, 348 U.S. at 430-31.

As we have seen, it is clear from the record that the

damages were awarded to make Murphy emotionally and

reputationally "whole" and not to compensate her for lost

wages or taxable earnings of any kind. The émotional

well-being and good reputation she enjoyed before they

were diminished by her former e.. »loyer were not taxable

as income. Under this analysis, therefore, the compensa-

tion she received in lieu of what she lost cannot be consid-

ered_income and, hence, it would appear the Sixteenth

Amendment does not empower the Congress to tax her

award.

Our conclusion at this point is tentative because the

Supreme Court has also instructed that, in defining "in-

comes,” 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 Amend-

ment." Merchants’ Loan & Trust Co. v. Smietanka, 255

U.S. 509, 519, 41 S. Ct. 386, 65 L. Ed. 751, T.D. 3173

(1921). And, to discern the original understanding of a

provision of the Constitution, we must examine any con-

temporaneous implementing legislation. See Myers uv.

United States, 272 U.S. 52, 175, 47 S. Ct. 21, 71 L. Ed.

160 (1926) [*27] ("This court has repeatedly laid down

the principle that a contemporaneous legislative exposi-

tion of the Constitution ..., acquiesced in for a long term of

years, fixes the construction to be given its provisions");

see Macomber, 252 U.S. at 202 (district judge correctly

treated "construction of the [Revenue Act of 1913] as in-

separable from the interpretation of the Sixteenth

Amendment"). Therefore, we must inquire whether "the

people when they adopted the Sixteenth Amendment," or

the Congress when it implemented the Amendment,

would have understood compensatory damages for a non-

physical injury to be "income."

In the years immediately following ratification of the

Sixteenth Amendment, the Congress created and then

thrice revised the IRC. See Revenue Act of 1913, ch. 16,

38 Stat. 114 (1913); Revenue Act of 1916, ch. 463, 39 Stat.

756 (1916); Revenue Act of 1917, ch. 63, 40 Stat. 300

(1917); Revenue Act of 1918, ch. 18, 40 Stat. 1057 (1919).

Of the four enactments, that of 1918 was the first to ad-

dress the tax treatment of compensatory damages for per-

sonal injuries, and it did so without distinguishing be-

tween physical and nonphysical injuries. We agree with

the [*28] Government that the House Report on the 1918

Act is ambiguous and therefore unhelpful on the question

before us. We concur in Murphy's view, however, that the

Attorney General's 1918 opinion and the Treasury De-

partment’s ruling of the same year strongly suggest that

the term "incomes" as used in the Sixteenth Amendment

does not extend to monies received solely in compensation

for a personal injury and unrelated to lost wages or earn-

ings.

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, there-

fore, 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 Dis-

trict 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 defama-

tion and * other reputational injuries -- the very sort of

injury Murphy suffered --and at least five [*29] 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 Six-

teenth 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.

* See, e.g., Garrison v. Sun Printing & Publ'g Ass'n,

207 N.Y. 1, 6, 100 N.E. 430, 431, 3 Bradb. 267, 1 N.Y.

L. Cas. 131 (1912) (plaintiffs are "entitled to recover

compensatory damages for mental distress resulting

from the publication of defamatory words actionable in

themselves"); Guisti v. Galveston Tribune, 105 Tex.

497, 504-05 150 S.W. 874, 877 (1912) (holding statute

afforded "right to maintain an action for a publication

not libelous per se [without having] to allege or prove

special damages ... for mental anguish"); Fileds v.

damages in defamation actions "include injury to the

feelings, and mental suffering endured in conse-

quence"); Comer v. Advertiser Co., 172 Ala. 613, 55 So.

195, 198 (1911) (in libel actions "damages for mental

pain and suffering ... must in all cases be fixed by the

jury, in view of all the facts and circumstances sur-

rounding any particular case"); Miller v. Dorsey, 149

Mo. App. 24, 129 S.W. 66, 69 (1910) (upholding jury

award of darmages in action for slander "to compensate

[plaintiff] for the mortification and shame he might

have suffered, and the disgrace and dishonor at-

tempted to be cast upon him, and all damages done to

his reputation"); Jozsa v. Moroney, 125 La. 813, 821, 51

So. 908, 911 (1910) (in libel action "damages for mental

suffering alone can be recovered, although the party

may have suffered no other loss"); Moore v. Maxey, 152

Ill. App. 647, 1910 WL 1686, at *2 (1910) ("Where

words spoken are actionable per se ... there need be no

direct evidence of mental suffering to enable the jury to

consider it in their estimate of damages"); Davis v.

Mohn, 145 Iowa 417, 124 N.W. 206, 207 (1910) (holding

mental "pain and suffering may be considered by the

jury in determining the amount of damages in cases

where the words spoken are actionable [as slander] per

se"); Henry v. Cherry & Webb, 30 R.I. 13, 73 A. 97, 102

(1909) (noting that "mental suffering alone [will] sus-

tain a right of action" if "the words spoken or pictures

published are of such a nature that the court can con-

clude, as a matter of law, that they will tend to degrade

the person, or hold him up to public hatred, contempt,

or ridicule, or cause him to be shunned and avoided");

Neafie v. Hoboken Printing & Publ'g Co., 75 N.J.L.

564, 566, 68 A. 146, 147 (1907) (rejecting view that

"mental anguish cannot be considered in estimating

compensatory damages in an action of libel");

McArthur v. Sault News Printing Co., 148 Mich. 556,

558, 112 N.W. 126, 127 (1907) ("A woman might have a

bad reputation and a bad character, neither of which

would be changed by such a [libelous] publication, and

yet be entitled to substantial damages for injuries to

her feelings resulting from the publication"); Todd v.

’ Every Evening Printing Co., 22 Del. 233, 6 Penne. 233,

66 A. 97, 99 (1907) ("amount to be awarded to the

plaintiff should be such as would reasonably compen-

sate him for any. wrong done to his reputation, good

name, or fame, and for any mental suffering caused

thereby as shown by the evidence"); Gendron v. St. Pi-

erre, 73 N.H. 419, 62 A. 966, 969 (1905) ("amount of the

damages" in slander action "depends in part upon the

effect of the malice upon the plaintiff's mind"); Ott v.

Press Pub. Co., 40 Wash. 308, 310, 82 P. 403, 404

(1905) ("upon a proper showing damages for mental

pain and suffering may be recovered” in libel action);

Wash. Times Co. v. Downey, 26 App. D.C. 258, 1905 WL

17653, at *4 (1905) (holding "plaintiff is ... entitled to

recover as general damages for injury to her feelings

and the mental suffering which she endured as a natu-

ral result of the [libelous] publication"); Hanson v. Kre-

hbiel, 68 Kan. 670, 75 P. 1041, 1042 (1904) (noting that

general damages for libel and siander actions are "de-

signed to compensate for that large and substantial

class of injuries arising from injured feelings, mental

suffering and anguish, and personal and public hu-

miliation"); Finger v. Pollack, 188 Mass. 208, 209, 74

N.E. 317, 318 (1905) ("In an action for slander one of

the elements of damage is mental suffering"); Davis v.

Starrett, 97 Me. 568, 55 A. 516, 519 (1903) ("plaintiff is

entitled to recover compensation [for] slander, such as

injury to the feelings and injury to the reputation");

Bedtkey v. Bedtkey, 15 S.D. 310, 89 N.W. 479, 480

(1902) (holding "evidence of injury to feelings having

been admitted without objection, damages therefore

are recoverable"); Kidder v. Bacon, 74 Vt. 263, 52 A.

322, 324 (1902) ("It is well settled that when the words

spoken are actionable the jury have a right to consider

the mental suffering which may have been occasioned

to a party by the publication of the slanderous words,

and to allow damages therefor"); Hacker v. Heiney, 111

Wis. 313, 87 N.W. 249, 251 (1901) (rejecting contention

that "no recovery can be had for injury to feelings" in

action for slander); McCarty v. Kinsey, 154 Ind. 447, 57

N.E. 108, 108 (1900) (holding it was "proper for the

jury to consider" slanderous words used in course of an

assault and battery "with all the circumstances in evi-

dence, and the humiliation, degradation, shame, and

loss of honor, and mental anguish, if any, caused

thereby, in determining the amount of damages"); Gray

v. Times Newspaper Co., 78 Minn. 323, 324, 81 N.W. 7,

7 (1899) (plaintiff "was entitled to some damages for in-

jury to his feelings, shame, and loss of the good opinion

of his fellows, and injury to his standing in the com-

munity"); Louisville Press Co. v. Tennelly, 105 Ky. 365,

49 S.W. 15, 17, 20 Ky. L. Rptr. 1231 (1899) ("the rule is

well settled that the publication of a libel exposes the

publisher, not only to compensatory damages for the

loss of business, but also to a judgment for the mental

suffering that the libel or slander inflicts upon the

plaintiff"); Cole v. Atlanta & W.P.R. Co., 102 Ga. 474,

_ 31 S.E. 107, 108 (1897) (permitting action by plaintiff

passenger against railroad for its employee's slander,

which caused plaintiff "to undergo the pain and morti-

fication of being publicly denounced"); Fry v. McCord,

95 Tenn. 678, 33 S.W. 568, 571 (1895) (damages for

slander per se may include "pain, mental anxiety, or

general loss of reputation"); Taylor v. Hearst, 170 Cal.

262, 270, 40 P. 392, 393-94 (1895) ("actual damages

embraces recovery for loss of reputation, shame, morti-

fication, injury to feelings, etc.; and while special dam-

ages must be alleged and proven, general damages for

outrage to feelings and loss of reputation need not be

alleged in detail"); Taylor v. Dominick, 36 S.C. 368, 15

S.E. 591, 593-94 (1892) ("the elements of damages in

the action for malicious prosecution are the injury to

the reputation or character, feelings, health, mind, and

person, as well as expenses incurred in defending the

prosecution"); Stallings vu. Whittaker, 55 Ark. 494, 18

S.W. 829, 831 (1892) (damages in slander action may

compensate for "mental suffering and mortification");

Republican Pub. Co. v. Mosman, 15 Colo. 399, 410, 24

P. 1051, 1055 (1890) ("in cases of written slander

where the defamatory matter is libelous per se, the

mental suffering of the plaintiff, occasioned by the false

publication, may be taken into consideration, in award-

ing general compensatory damages"); Commercial Ga-

zette Co. v. Grooms, 10 Ohio Dec. Reprint 489, 1889 WL

346, at *4 (1889) ("The most natural result from an in-

jury to reputation is mental suffering and it is a proper

element to be considered in estimating damages in a

libel suit"); Boldt v. Budwig, 19 Neb. 739, 28 N.W. 280,

283 (1886) ("jury should consider the damage to her

character, as well as her mental suffering caused [by

the slander]"); Riddle v. McGinnis, 22 W.Va. 253, 1883

WL 3242, at *15 (1883) ("in ... actions for wilful and

wanton tnjuries done to the person and reputation ...

the plaintiff is entitled to recover damages ... for his

mental anguish"); Swift v. Dickerman, 31 Conn. 285,

1863 WL 763, at *7 (1863) (holding "anxiety and suffer-

ing [due to slander] were proper subjects for compensa-

tion to the plaintiff, and ought to be atoned for by the

defendant"); Beehler v. Steever, 1 Miles 146, 1837 WL

3209, at *6 (1837) (noting in syllabus that "[o]utrage to

the plaintiffs feelings and peace of mind may be con-

sidered" by the jury in awarding damages for slander).

[*30]

* See, e.g., Greuneich v. Greuneich, 23 N.D. 368, 137

N.W. 415 (N.D. 1912); Hillers v. Taylor, 116 Md. 165,

81 A. 286 (Md. 1911); Seed v. Jennings, 47 Or. 464, 83

P. 872 (Or. 1905); Tucker v. Tucker, 74 Miss. 93, 19 So.

955 (Miss. 1896); Samuel v. Marshall, 30 Va. 567,

1832 WL 1822 (Va. 1832). An action for "alienation of

affection" enabled the plaintiff to recover damages for

mental suffering and reputational damage arising

from the defendant's interference in the relationship

between the plaintiff and his or her spouse. See gener-

ally RESTATEMENT (SECOND) OF TORTS § 683

cmt. f (1977) ("It is unnecessary for recovery that the

acts of the defendant cause any financial loss to the

injured spouse").

The IRS itself reached the same conclusion when it

first addressed the question, expressly affirming that per-

sonal injuries included nonphysical personal injuries:

[T]here is no gain, and therefore no income,

derived from the receipt of damages for alien-

ation of [*31] affections or defamation of per-

sonal character ... If an individual is pos-

sessed of a personal right that is not assign-

able and not susceptible of any appraisal in

relation to market values, and thereafter re-

ceives either damages or payment in compro-

mise for an invasion of that right, it can not

be held that he thereby derives any gain or

profit.

Sol. Op. 132, I-1 C.B. 82, 93 (1922); see also 4awkins v.

Commissioner, 6 B.T.A. 1023, 1024-25 (U.S. Bd. of Tax

App. 1927) (holding "compensation for injury to [plain-

tiffs] personal reputation for integrity and fair dealing"

was not income because it was "an attempt to make the

plaintiff whole as before the injury"). Note that the Ser-

vice regarded such compensation not merely as excludable

under the IRC, but more fundamentally as not being in-

come at all.

In sum, every indication is that damages received

solely in compensation for a personal injury are not in-

come within the meaning of that term in the Sixteenth

Amendment. First, as compensation for the loss of a per-

sonal attribute, such as well-being or a good reputation,

the damages are not received in lieu of income. Second,

the framers of the Sixteenth Amendment [*32] would not

have understood compensation for a personal injury --

including a nonphysical injury -- to be income. Therefore,

we hold § 104(a)(2) unconstitutional insofar as it permits

the taxation of an award of damages for mental distress

and loss of reputation.

III. Conclusion

Albert Einstein may have been correct that "[t]he

hardest thing in the world to understand is the income

tax," The Macmillan Book of Business and Economic Quo-

tations 195 (Michael Jackman ed., 1984), but it is not

hard to understand that not all receipts of money are in-

come. Murphy's compensatory award in particular was

not received "in lieu of" something normally taxed as in-

come; nor is it within the meaning of the term "incomes"

as used in the Sixteenth Amendment. Therefore, 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. Ac-

cordingly, we remand this case to the district court to en-

ter an order and judgment instructing the Government to

refund the taxes Murphy paid on her award plus applica-

ble [*33] interest.

dS]

APPENDIX M

16k Amendment to the Constitution

The Congress shall have power to lay and collect taxes on

incomes, from whatever source derived, without appor-

tionment among the several Stz.es, and without regard to

any census or enumeration.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.