Maule on Role of Congress and Courts in Tax Legislation

Friday, September 10, 2004

A follow-up on two recent TaxProf Blog posts:

• Reimels v. Commissioner, 123 T.C. No. 12: Social security disability insurance benefits received on account of lung cancer, developed as a result of the taxpayer’s exposure to Agent Orange while serving in Vietnam, are includible in income under § 86 and not excludable under § 104 (see here).
• Pending Supreme Court consolidated cases on whether litigation proceeds paid to an attorney under a contingent fee agreement are income to the client. Commissioner v. Banks (No. 03-892) & Commissioner v. Banaitis (03-907) (see here and here).

Jim Maule (Villanova) offered his views of what these cases can teach us about the relationship of Congress and the courts with respect to tax legislation on the TaxProf Discussion Group and has allowed me to share them with the broader tax community here:

Many people surely consider the result in Reimels to be absurd. Perhaps it is. All sorts of arguments can be and were made to support a conclusion of exclusion, but those arguments were rejected, in part because the issue had been decided in a previous case. The taxpayer’s argument that the previous case should be over-ruled was met with a response that is consistent with the idea that Congress can react if it doesn’t like the result that its statutes require. The Congress put social security disability insurance benefits into section 86. Absurd? Maybe. But that’s what it says, even if the Monday morning quarterbacks would have drafted it differently. Congress, said the court, has had many opportunities to change the statute to undo the result in the previous case, but it didn’t do so.

It’s no surprise that disability benefits are paid under Social Security laws. It’s obvious that such benefits (at least in this sort of situation) are paid on account of physical injury or illness. Congress COULD (and perhaps SHOULD) have carved these out of section 86 and put them in section 104. It didn’t. So, says the court, we’re stuck with what Congress did. (The Tax Court, though, does not seem to suggest that the result is absurd, and makes it appear sensible and reasonable).

It’s no surprise that some damage payments are not excluded under section 104. It’s obvious that plaintiffs pay attorney fees to get those payments. Congress COULD (and perhaps SHOULD) have carved the portion going to the attorny out of gross income. It didn’t. Congress could have made the attorney fees a section 62 deduction. It didn’t. Congress could have provided an AMT deduction for the attorney fees. It didn’t. So, will say the Supreme Court, we’re stuck with what Congress did, just as we’re stuck with no AMT deduction for personal and dependency exemptions, etc. and we know that, too, generates absurd results.

And Congress didn’t index the AMT thresshold for inflation. It indexes other stuff. Must be a mistake. Ambiguity. Interpretation. Whatever. Let’s get the Supremes to rewrite the whole thing while they’re at it. Just as one gets what one pays for, one gets what one votes for.