JUDICIAL TYRANNY
and
YOUR INCOME TAX
by
JEFFREY A. DICKSTEIN
Attorney at Law
CUSTOM PRINTS
P.O. Box 9337
Missoula, MT 59807
First Printing 1990
Second Printing 2010
Copyright © 2010 Jeffrey A. Dickstein
All rights reserved. No part of this book may be reproduced or used
in any form or by any means—graphic, electronic or mechanical,
including photocopying, recording, taping or information storage
and retrieval systems—without written permission of the author.
PRINTED IN THE UNITED STATES OF AMERICA
Library of Congress Catalog Card Number: 90-80744
ISBN 0-9626379-0-4
Cover art by Art Fisher
Cover Design Copyright © 2010 Jeffrey A. Dickstein
To Peggy Christensen, who
has kept the flame of freedom
burning, often when there
wasn’t even a candle.
SPECIAL ACKNOWLEDGMENTS
This work is the result of the team effort of many. It would not have
been possible without the gracious assistance I received from the
following people: Vern Holland for giving me the motivation to start
the book and ideas for publishing. Joni Arashiro for giving me the
motivation to finish. Claude Heiland for his assistance in
researching and pulling cases. Steve Johnson for technical
assistance with the computer. Sue Johnson for assistance with
materials, production and advertising. Renee Aldrich for assistance
with typing. Bill Benson for support, encouragement and publishing
assistance. Davis Mauldin for input on printing and production.
John Sackett for prepublication art. Art Fisher for cover design and
art. Peggy Christensen for making the entire thing possible; there
would be no book if not for her. Larry Becraft for Chapter One, who
graciously allowed me to use his research and writings. James Hall
and Carl Beery who allowed me to represent them. A special lady,
whose name must for political reasons be protected, for editing and
proof reading. Judy Huston and the Correspondent for publicity.
And Rob Aldrich, my special friend, for editing, proof reading,
research, writing, styling, computer assistance, and for staying up
with me during the many nights we worked on the book. There
aren’t words enough to express my thanks.
TABLE OF CONTENTS
INTRODUCTION
9
CHAPTER I
21
Prior Federal Income Tax Legislation
CHAPTER II
43
Direct or Indirect Tax
CHAPTER III
71
Income and the Internal Revenue Code
CHAPTER IV
93
The Law and the Courts
1910-1919
CHAPTER V
137
The Law and the Courts
1920-1929
CHAPTER VI
149
The Law and the Courts
1930-1939
CHAPTER VII
155
The Law and the Courts
1940-1949
CHAPTER VIII
159
The Law and the Courts
1950-1959
CHAPTER IX
163
The Law and the Courts
1960-1969
CHAPTER X
173
The Law and the Courts
1970-1979
CHAPTER XI
183
The Law and the Courts
1980-1989
CONCLUSION
277
APPENDIX A
281
Cross Examination of
Special Agent Knutson
APPENDIX B
307
Cross Examination of
Special Agent Shaffner
TABLE OF CASES ANALYZED
355
INTRODUCTION
9
INTRODUCTION
When people began to live in groups to take advantage of the
mutual benefits such associations provide, they determined the use
of “self-help” to protect their lives and property was not in their best
interest, and they voluntarily instituted governments and laws. The
philosophy behind government is that certain functions necessary
for the protection of the life, liberty and property of the people can
be best handled by a centralized organization (government) which
is given sufficient power (lawful right to pass laws and to enforce
them) to accomplish those functions. Numerous types of
governments have emerged under this concept, such as democracy,
socialism, fascism, nazism, communism, and one experimental
form of government known as a “Federal Republic,” now
commencing its third centennial. Some degree of power (force) is
essential to the ability of any government to operate successfully; it
is the manner in which a government obtains the power and how it
uses that power that separates people who are free from those who
are not.
The first government known to each of us is the government
ordained under the Laws of Nature, the parental government under
which we are born. We are thrust into this relationship without any
say whatsoever, and the power exerted over us—which we are
helpless to protest or abridge—is total and absolute. Our only
protection from the abuse of this potentially deadly power is the
divinely inspired parental instinct to protect and nourish (love) the
newborn, which creates the environment for us to live and prosper.
It can thus be clearly seen that this power does not originate with
our parents; but is granted to them from Nature’s God, is made
known to them through God’s will (instinct), is essential for life to
exist, and is held in trust by our parents solely for our benefit and
protection.
Nature’s God creates each of us equally and endows us with certain
inalienable rights, chief of which are life, liberty and the pursuit of
10
JUDICIAL TYRANNY AND YOUR INCOME TAX
happiness. The gift of equality, ironically, is one of inequality; we
are each distinct and have different built-in potential than any other
human being. God’s gift to us is the capacity to develop and exert
our own uniqueness in the world for the purpose of maintaining our
life and liberty and being happy; our respective duty is to develop to
our full potential, thereby giving the benefit of our uniqueness to
the world. This input into the universe results in a division of labor,
and creates the basic foundation of all economics. As we are
basically a society oriented species, a sound economic basis is thus
created, for it is also our nature to improve and modify our
environment in order to improve the quality of our lives. By
exchanging unique services or products with others for their unique
services or products, trade flourishes, the quality of life improves,
we acquire more wealth, prosperity and happiness, and society
blossoms. Under the Laws of Nature, our prosperity is also an
inalienable right.
It is a fundamental principle of our uniqueness that only we can
know it fully among our peers. Our duty to God to achieve
maximum development of our potential necessarily prevents other
people from interfering with the development and free exercise of
our potential. It also creates a corresponding duty on us to resist
any attempt by others to destroy the freedom of our will with
respect to our uniqueness. This concept is embodied within the
single word “Liberty.”
The presence of other members in the family, however, adds yet
another aspect to the parental form of government; the rightful
exercise of the power to place such restraints on our conduct so as
to best conserve the right of each of us to the greatest amount of
personal liberty, taking into account the coequal and coextensive
rights of each of the other family members. This rightful exercise
imposes the corresponding obligation to be so restrained for the
benefit of the rights of all. In order for the power to restrain to be
lawful, it must be exercised so as not to destroy the very liberty it
attempts to protect. The power, delegated in trust and tempered by
love, secures our liberty, as the governed, in the familial society.
INTRODUCTION
11
There can be no escape from the conclusion that under the Laws of
Nature, government and society were created to benefit us; we were
not created to benefit government and society. The purpose of the
family (society) is to preserve our lives and our liberty; the purpose
of parental power (government) is to preserve the family (society).
When a parent transcends the limitation on the exercise of his or
her delegated power and invades the domain of individual freedom
(gets drunk and beats the kids), the parent usurps an authority
never vested in him or her, and violates the very rights the
protection of which was the only purpose for which the power was
delegated. When a government transcends its limitation, the
usurpation of authority is known as tyranny.
As we mature we learn to infuse our unique mental, moral and
physical endowments with objects existing in Nature’s universe,
and we are thus able to create unique ideas and objects. These
creations contain elements of our very essence, and from the
beginning of time such creations have been referred to as personal
property. The only limitation upon us in this process of acquiring
personal property through our labor is the coexistent and coequal
right of every other person in society to the same process. The
taking of our property, without our consent, is a badge of mastery
over us indicative of slavery, for it is a taking of a cherished
inalienable right, a right essential to our very ability to survive.
When the taking is in the name of the government, either through
direct confiscation or through indirect means, it is a violation of
duty and a usurpation of power akin to the beating of a child by a
drunken parent.1 Self-defense of our life, liberty, property and
happiness from the usurpation of power—revolution if you dare—is
an inalienable right pursuant to the Laws of Nature, and the
exercise of this right formed the basis of our Federal Republic:
We hold these truths to be self-evident, that all men
are created equal, that they are endowed by their
Creator with certain unalienable Rights, that among
these are Life, Liberty and pursuit of Happiness. That
to secure these rights, Governments are instituted
12
JUDICIAL TYRANNY AND YOUR INCOME TAX
among Men, deriving their just powers from the
consent of the governed. That whenever any Form of
Government becomes destructive of these ends, it is
the Right of the People to alter or to abolish it, and to
institute new Government, laying its foundation on
such principles and organizing its powers in such
form, as to them shall seem most likely to effect their
Safety and Happiness.2
With the signing of the Declaration of Independence, the subjects of
the Monarch, King George, declared themselves to be a free and
independent people. To the extent they, as a society (political body)
were operating under governments already in existence within the
territory claimed by the thirteen colonies, an additional result of the
signing of the document was the emergence of thirteen sovereign
nations. Both under the common law and/or the laws passed by
these new nations, inhabitants who were born in the colonies
became citizens thereof, and those who were not so born, could
either choose allegiance to the King or allegiance to the new
political body. If they chose allegiance to the new political body,
they were also considered “citizens.” These thirteen colonies came
to be known as “states,” and as a result of the Articles of
Confederation, came to be known in the community of nations as
the United States of America. The Articles of Confederation soon
proved to be ineffectual, and were replaced with the Constitution of
the United States of America.
The Constitution created a form of government which expressly
recognized the people (us) as sovereign, and limited the power of
the federal government to that expressly delegated to it in the
Constitution. The Constitution also limited the locations where the
federal government could exercise its power.3 This concept is
known as federal territorial and/or exclusive legislative jurisdiction.
The principle is that while Mr. Jones may have parental power over
his children, he cannot exercise that power over Mr. Smith’s
children in Mr. Smith’s house; Mr. Smith’s house is outside the
territorial jurisdiction of Mr. Jones’ parental power. Any attempt by
INTRODUCTION
13
Mr. Jones to exercise his power over Mr. Smith’s children in Mr.
Smith’s house is illegal, null and void. Of course the power may
nevertheless be exerted, albeit illegally, and various legal remedies
exist to return the status quo and to compensate for any injury
sustained.
The power of the new federal government to tax was a power
expressly delegated to the Legislative Branch of the federal
government in Article I, Section 8, Clause 1 of the Constitution. This
power to tax has been held by the United States Supreme Court to
be all inclusive, subject to only two requirements: direct taxes must
be apportioned per Article I, Section 2, Clause 3 and Article I,
Section 9, Clause 4, and indirect taxes must be uniform, per Article
I, Section 8, Clause 1.
Commencing with the earliest tax laws enacted by Congress, great
debates have revolved around the issue of whether the enacted tax
was a direct tax or an indirect tax. This is an important legal issue,
for if Congress does not provide for apportionment of the tax and
the tax is declared by the judiciary to be a direct tax, then a whole
class of intended “taxpayers” would not be “taxpayers” as a result of
the unconstitutionality of the tax for lack of apportionment. A law
that is contrary to the Constitution, of course, is no law at all.4
The first income taxes legislated by Congress were enacted during
the Civil War era. The constitutionality of those acts was not
challenged in court. The next income tax was enacted in 1894
during a time of peace, and its constitutionality was challenged in
the Supreme Court. The majority opinion of the Court declared the
income tax to be a direct tax with no provisions for apportionment,
and struck it down as unconstitutional. This court decision is
known as the “Pollock” decision [Pollock v. Farmers’ Loan & Trust
Co., 157 U.S. 429, aff. reh., 158 U.S. 601 (1895)]. The decision of the
Supreme Court was by no means unanimous; a strong dissent was
raised by a minority of Supreme Court justices that the tax was an
indirect tax that did not require apportionment. One of these
“dissenting” justices was Associate Justice White.
14
JUDICIAL TYRANNY AND YOUR INCOME TAX
The Pollock opinion told Congress that if it did not like the result
reached by the Court, the Constitution could be amended to change
the result.5 In 1909, Congress took steps to amend the Constitution
by proposing the Sixteenth Amendment in the following form:
Sixteenth Amendment:
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.
This Amendment was certified as ratified6 in 1913, and Congress
passed an income tax act which was virtually identical to the one
held unconstitutional in Pollock. This law was also challenged as
unconstitutional, and ultimately went to the Supreme Court where
Justice White was now sitting as the Chief Justice. The resulting
decision, known as the “Brushaber” decision [Brushaber v. Union
Pacific Railroad Co., 240 U.S. 1 (1916)], was written by Chief
Justice White himself, and not surprisingly, the tax was classified as
an indirect tax.7
The income tax was of such a nature that its presence was generally
unknown to the majority of the people from its inception until
World War II. At that time, Congress, claiming the need for
additional revenue, passed the Victory Tax Act, an unapportioned
direct tax on the personal property of United States citizens
residing at home. The Victory Tax, which was collected with the
income tax, was collected through withholding from wages. This
started the erroneous association of the term “wages” with the term
“income.” In law, especially at the time of the proffer of the
Sixteenth Amendment by Congress, the terms were not
synonymous. Income for purposes of federal income taxation has
been defined by the Supreme Court as “the gain derived from
capital, from labor or from both combined, provided it include
profit gained through a sale or conversion of capital assets.” Labor,
the contract to exchange labor for wages or other compensation,
INTRODUCTION
15
and the wages or other compensation itself, have all been declared
by the United States Supreme Court to constitute sacred, inviolable,
personal property. The Sixteenth Amendment only addressed
“income,” and was thus limited to the gain derived from labor or
capital; neither the Sixteenth Amendment nor the federal personal
income tax law provides any authority for the taxation of labor or
the property for which the labor may be exchanged, most frequently
wages, absent apportionment.
As a result of the Brushaber decision, numerous courts have held
that wages constitute income and a tax on wages does not have to
be apportioned. There is no question but that the Brushaber
decision, holding the income tax to be an indirect tax, is in
irreconcilable conflict with the decision of the Supreme Court in
Pollock holding that the income tax is a direct tax.
In Chapter I of this book I have provided an analysis of prior federal
income tax legislation. A study of this legislation is fundamental to
an understanding of today’s Internal Revenue Code and exactly who
and what is taxed under the law.
In Chapter II of this book I have provided an in-depth analysis of
the Pollock and Brushaber decisions provided for the purpose of
establishing the true purpose behind the Sixteenth Amendment and
the exact power given to Congress by it.
In Chapter III of this book I have provided a statutory analysis of
the Internal Revenue Code as it applies to the personal income tax,
and an explanation of what is and, more importantly, what is not
income.
In Chapters IV through XI of this book I have provided an in depth,
case-by-case analysis of each and every federal court case that holds
wages constitute income, in an effort to show the ignorance or
intentional, treasonous actions of our federal judiciary in subverting
our Constitution and the laws enacted by Congress. The simple fact
is that no decision of the Supreme Court of the United States has
16
JUDICIAL TYRANNY AND YOUR INCOME TAX
specifically held that wages constitute income, and as a matter of
law, they do not.
With over a hundred cases purportedly holding that wages
constitute income, at first impression one might believe that I
disagree with the law. I do not. I do believe, however, that the law,
for political and financial motives, has been subverted. I have
attempted in this book, by providing a history of the income tax and
an analysis of the Internal Revenue Code, to establish exactly what
the law is, and to show how it has been undermined by our federal
judiciary.
In Appendix A, I have provided a partial transcript from a federal
criminal trial in the United States District Court for the District of
Alaska, in the case of the United States v. Carl Beery, case No. A87-
43CR. The transcript contains my cross-examination of I.R.S.
Revenue Agent Knutson. The subject matter of the cross-
examination was Mr. Beery’s liability for the income tax and
whether wages constitute income. The transcript fully discloses the
Court’s hostility to this line of questioning, but more importantly,
points out the failure of the Internal Revenue Service to calculate
“gain” in determining income.
In Appendix B, I have provided a partial transcript from another
federal criminal trial in the United States District Court for the
Southern District of Indiana, Evansville Division, in the case of the
United States v. James I. Hall, case No. EV 87-20 CR. The
transcript contains my cross- examination of I.R.S. Special Agent
Shaffner. My cross-examination established through Ms. Shaffner,
who was qualified as an expert witness, that no statute in the
Internal Revenue Code made Mr. Hall liable for the income tax.
Although not contained in the portion of the transcript reproduced
in Appendix B, Federal District Court Judge Gene E. Brooks
threatened to hit me with his gavel when I attempted to repeat Ms.
Shaffner’s testimony to the jury, and instructed the jury, contrary to
the evidence and the law, that Mr. Hall was a taxpayer liable for the
tax.
INTRODUCTION
17
It was not my intention in writing this book to advise people not to
pay income taxes. In fact, in the conclusion, I caution against taking
steps that will most certainly subject you to tremendous
governmental abuse. On the other hand, the truth is the truth, and
armed with the truth, and fueled with the desire to maintain the
cherished, divinely inspired principles of freedom and liberty, the
people of the United States of America, by joining together and
raising their voices in protest, can once again restore our country to
a government of laws as opposed to a government of men. With this
thought in mind, I have written this book for your consideration.
18
JUDICIAL TYRANNY AND YOUR INCOME TAX
ENDNOTES
1.
“It is none the less robbery, because it is done under the forms
of law, and is called taxation” Loan Association v. Topeka, 87
U.S. 655, 664 (1879).
2.
Declaration of Independence.
3.
United States Constitution, Article I, Section 8, Clause 17.
4.
“The particular phraseology of the Constitution of the United
States confirms and strengthens the principle, supposed to be
essential to all written constitutions, that a law repugnant to the
constitution is void, and that courts, as well as other
departments, are bound by that instrument.” Marbury v.
Madison, 5 U.S. 137, 180 (1803).
5.
Pollock v. Farmers’ Loan & Trust, 158 U.S. 601, 634- 635 (1895).
6.
Bill Benson, The Law That Never Was—The Fraud of the 16th
Amendment and Personal Income Tax, (Constitutional
Research Assoc., Box 550, South Holland, IL 60473, 1985). Mr.
Benson documents with certified state archive documents from
each state then in the Union that the Sixteenth Amendment was
never properly ratified as part of the United States Constitution.
Mr. Benson also documents with certified U.S. archive
documents that the non-ratification was specifically noted by
the Solicitor General in his written report to the Secretary of
State, Philander Knox, who nonetheless certified the Sixteenth
Amendment as having been properly ratified. While several of
the federal courts have been made aware of this fraud, they have
refused to remedy the fraud by classifying the ratification
process a “political question” non-reviewable by the Courts.
7.
Even today the debate continues as some of the Federal Courts
of Appeal take the position that the income tax is a direct tax
INTRODUCTION
19
and some take the position that the income tax in an indirect
tax. Compare, Ficalora v. C.I.R., 751 F.2d 85 (2nd Cir. 1984)
[holding the income tax is an indirect excise tax] with Lonsdale
v. C.I.R., 661 F.2d 71 (5th Cir. 1981) [holding the income tax is a
direct tax].
20
JUDICIAL TYRANNY AND YOUR INCOME TAX
PRIOR FEDERAL INCOME TAX LEGISLATION
21
CHAPTER I
PRIOR FEDERAL INCOME TAX LEGISLATION
Before the adoption of the U.S. Constitution, the original thirteen
States were leagued together under the Articles of Confederation,
the Congress of which had no power of taxation. The States, under
the Articles of Confederation, possessed all powers of taxation and
had surrendered none to the Articles’ Congress, the revenue of
which was derived solely through requisitions for money made by
that Congress on the States. This system proved itself to be highly
inefficient.
When the Philadelphia Constitutional Convention met in 1787, it
was quickly determined that Congress should have a power of
taxation, one which was not broad and general but one somewhat
restrictive. At that time, the States imposed two types of taxes,
those which were direct in their operation, and those which were
indirect. The great question in reference to taxation before the
Constitutional Convention was whether power would be given to
Congress to impose only one or both types of taxes, and it was
eventually decided to give Congress authority to impose both of
these classes of taxes, under certain restrictions. The States felt that
Congress should rely primarily upon indirect taxes for its revenue
and that they would reserve for themselves direct taxes for their
revenue. To insure this scheme, Congress was permitted to impose
indirect taxes, known as duties, imposts and excises, by the rule of
uniformity, a rule which Congress could easily meet. But, to protect
the revenue of the States, Congress was required to impose all
direct taxes by the regulation of apportionment, a very rigorous
standard.
The agreement of the Convention manifests itself in the body of the
Constitution. In Article I, Section 8, Clause 1, a power of taxation is
granted to Congress in this manner:
22
JUDICIAL TYRANNY AND YOUR INCOME TAX
Article I, Section 8, Clause 1:
The Congress shall have power to lay and collect
taxes, duties, imposts and excise ...; but all duties,
imposts and excises shall be uniform throughout the
United States.
This clause clearly shows the rule of uniformity for indirect taxes.
The regulation of apportionment for direct taxes is found in the
Constitution at Article I, Section 2, Clause 3 and Article I, Section 9,
Clause 4:
Article I, Section 2, Clause 3:
Representatives and direct taxes shall be apportioned
among the several states.
Article I, Section 9, Clause 4:
No capitation, or other direct, tax shall be laid, unless
in proportion to the census or enumeration herein
before directed to be taken.
Few direct tax acts were intentionally imposed by Congress; one
was laid in 1798,8 two were laid during the War of 1812 in 18139 and
1815,10 and several were laid during and immediately following the
Civil War.11 To further finance the Civil War, Congress passed three
income tax acts. The constitutionality of these acts was never
challenged in court, no doubt because they were wartime measures.
The next income tax was not passed by Congress until 1894, and
was passed in a time of peace. The constitutionality of this tax was
challenged in court; in the case of Pollock v. Farmers’ Loan & Trust
Co., 157 U.S. 429, 15 S.Ct. 673, aff. reh., 158 U.S. 601, 15 S.Ct. 912
(1895), the United States Supreme Court struck down the entire tax
because the tax was found to be a direct, but unapportioned, tax. A
review of these former taxes is important to obtain a clear
understanding of the income taxes imposed by law today.
PRIOR FEDERAL INCOME TAX LEGISLATION
23
In 1861, Congress adopted an act which imposed both a direct tax
and an income tax.12 This income tax act was repealed the following
year and replaced by another in “An Act to provide Internal
Revenue to support the Government and to pay Interest on the
Public Debt,” approved July 1, 1862, 12 Stat. 432, ch. 119. Section
86 of this Act, 12 Stat. 472, imposed a salary tax upon people in the
employment or service of the United States. Section 90 of this Act,
12 Stat. 473, imposed an “income duty” as follows:
That there shall be levied, collected and paid annually,
upon the annual gains, profits or income of every
person residing in the United States ... a duty of three
per centum ... ; and upon the annual gains, profits, or
income ... by any citizen of the United States residing
abroad ... there shall be levied, collected and paid a
duty of five per centum.
These Acts taxed the salary of people working for the United States
government, every “person” residing in the United States, and
“citizens” of the United States residing abroad. This Act was
replaced by another Act in 1864, 13 Stat. 223, ch. 173, which was
amended in 1865 by an Act at 13 Stat. 469, ch. 78, and amended
again in 1866 by an Act at 14 Stat. 137, ch. 184. This 1864 Act, as
amended through the 1866 Act, read as follows:
Sec. 116. And be it further enacted, That there shall be
levied, collected, and paid annually upon the annual
gains, profits and income of every person residing in
the United States, or of any citizen of the United
States residing abroad ... a duty of five per centum ...
And a like tax shall be levied, collected, and paid
annually upon the gains, profits, and income of every
business, trade or profession carried on in the United
States by persons residing without the United States
not citizens thereof.
24
JUDICIAL TYRANNY AND YOUR INCOME TAX
This Act, as amended, taxed every “person” residing in the United
States, United States “citizens” residing abroad, nonresident non-
citizens on income derived from business, trades or professions
carried on in the United States, and in Sec. 123, the salary of people
employed by the United States government.
The 1894 income tax act, “An Act to reduce taxation, to provide
revenue for the Government, and for other purposes,” approved
August 27, 1894, 28 Stat. 509, ch. 349, at Section 27 [28 Stat. 553]
read as follows:
That ... there shall be assessed, levied, collected, and
paid annually upon the gains, profits, and income
received in the preceding calendar year by every
citizen of the United States, whether residing at home
or abroad, and every person residing therein ... a tax
of two per centum ... and a like tax shall be levied,
collected and paid annually upon the gains, profits,
and income from all property owned and of every
business, trade, or profession carried on in the United
States by persons residing without the United States.
This Act taxed every United States “citizen” whether residing at
home or abroad, every “person” residing in the United States, and
non-residents on income derived from business, trades or
professions carried on in the United States.
It becomes clear that a distinction was made between the terms
“citizens” and “persons” in these early income tax acts. The Act of
1894 specifically taxed “citizens of the United States” residing at
home [in the United States] or abroad and persons” residing in the
United States; there could be no reason for the statute to separately
mention citizens and persons if they were in fact the same. The fact
is, they are different. A “person” “residing in the United States”
“who is not a citizen” would be either a resident alien (in the United
States on a visa) or a resident National (an immigrant).
PRIOR FEDERAL INCOME TAX LEGISLATION
25
Mr. Pollock, identified by the Supreme Court as “a citizen of the
State of Massachusetts,”13 was a shareholder of a corporation. He
sought an injunction against the corporation from paying the
corporate income tax14 on the grounds that as to the tax on the real
estate held and owned by the corporation, the tax was a direct tax
by virtue of it being imposed upon the rents, issues, and profits of
the real estate, that the tax was a direct tax as to personal property
held by the corporation, and the taxes not being apportioned, the
tax was unconstitutional. Similar claims were made with respect to
the taxes imposed upon Mr. Pollock’s income, and income derived
from the stocks and bonds of the States of the United States which
he held. The Pollock decisions held that a tax on the whole income
of property was a direct tax in the constitutional sense. In speaking
of the purpose of the Pollock Court in defining what a “direct tax”
was, the Supreme Court said in Brushaber:
Concluding that the classification of direct was
adopted for the purpose of rendering it impossible to
burden by taxation accumulations of property, real or
personal, except subject to the regulation of
apportionment, it was held the duty existed to fix
what was a direct tax in the constitutional sense so as
to accomplish this purpose contemplated by the
Constitution.” (157 U.S. 581.)
Brushaber, 240 U.S. at 15.
The Pollock Court, in its first decision, defined “direct taxes” as
follows:
Ordinarily, all taxes paid primarily by persons who
can shift the burden upon someone else, or who are
under no legal compulsion to pay them, are
considered indirect taxes; but a tax upon property
holders in respect of their estates, whether real or
personal, or of the income yielded by such
26
JUDICIAL TYRANNY AND YOUR INCOME TAX
estates, and the payment of which cannot be
avoided, are direct taxes. [Emphasis added.]
Pollock, 157 U.S. at 558.
This definition, however, was applied only in consideration of the
validity of the tax on the income from real estate and income from
invested personal property, as the issue before the Supreme Court
in the first Pollock decision was quite limited. The decision of the
Court rendered after rehearing, however, was more extensive:
We are now permitted to broaden the field of inquiry,
and to determine to which of the two great classes a
tax upon a person’s entire income, whether derived
from rents, or products, or otherwise, of real estate, or
from bonds, stocks, or other forms of personal
property, belongs; and we are unable to conclude
that the enforced subtraction from the yield of
all the owner’s real or personal property, in
the manner prescribed, is so different from a
tax upon the property itself, that it is not
direct, but an indirect tax, in the meaning of
the Constitution. [Emphasis added.]
Pollock, 158 U.S. at 618.
The Pollock Court found there was no substantial difference
between a tax on property, which was a direct tax, and a tax on the
income derived from the property. The Pollock Court overturned
the income tax act of 1894 by concluding that income taxes were
direct taxes, direct taxes were required by the Constitution to be
apportioned; the tax Congress imposed at 28 Stat. 509, c. 349,
Section 27, p. 553, was not apportioned, and hence contrary to
Article I, Section 2, Clause 3, and Article I, Section 9, Clause 4, of
the United States Constitution. That statute read:
PRIOR FEDERAL INCOME TAX LEGISLATION
27
Sec. 27. That from and after the first day of January,
eighteen hundred and ninety-five, and until the first
day of January, nineteen hundred, there shall be
assessed, levied, collected, and paid annually upon the
gains, profits, and income received in the preceding
calendar year by every citizen of the United States,
whether residing at home or abroad, and every person
residing therein, whether said gains, profits, or
income be derived from any kind of property rents,
interest, dividends, or salaries, or from any
profession, trade, employment, or vocation carried on
in the United States or elsewhere, or from any other
source whatever, a tax of two per centum on the
amount so derived over and above four thousand
dollars, and a like tax shall be levied, collected, and
paid annually upon the gains, profits, and income
from all property owned and of every business, trade,
or profession carried on in the United States. And the
tax herein provided for shall be assessed, by the
Commissioner of Internal Revenue and collected, and
paid upon the gains, profits and income for the year
ending the thirty-first day of December next
preceding the time for levying, collecting, and paying
said Tax.”
In rendering this decision, the Pollock Court also stated that:
We do not mean to say that an act laying by
apportionment a direct tax on all real estate and
personal property, or the income thereof, might not
also lay excise taxes on business, privileges,
employments, and vocations. But this is not such
an act; and the scheme must be considered as
a whole.15 [Emphasis added.]
Pollock, 158 U.S. at 637.
28
JUDICIAL TYRANNY AND YOUR INCOME TAX
The Pollock Court clearly found that a tax on the entire income of a
United States citizen was a direct tax that required apportionment
to withstand constitutional validity.
To overcome the opinion of the Pollock Court that an income tax
was a direct tax which must be apportioned, Congress proposed the
Sixteenth Amendment.
After the adoption of the Sixteenth Amendment in 1913, Congress
passed an income tax act; see “An Act to reduce tariff duties and to
provide revenue for the Government, and for other purposes,”
approved October 3, 1913, 38 Stat. 114, ch. 16. Section II of this act,
38 Stat. 166, imposed the following tax:
A. Subdivision 1. That there shall be levied, assessed,
collected and paid annually upon the entire net
income arising or accruing from all sources in the
preceding calendar year to every citizen of the United
States, whether residing at home or abroad, and to
every person residing in the United States, though not
a citizen thereof, a tax of 1 per centum ... and a like tax
shall be assessed, levied, collected, and paid annually
upon the entire net income from all property owned
and of every business, trade, or profession carried on
in the United States by persons residing elsewhere.
The Act also taxed the income from corporations at the rate of 1 per
centum, and it was the tax on the corporations16 that was
challenged as unconstitutional in Brushaber.
Suit was instituted by Mr. Brushaber who was a stockholder of
Union Pacific Railroad. The Supreme Court in Brushaber was of the
opinion that the Pollock Court was wrong in classifying income
taxes as direct taxes, and ruled as erroneous Mr. Brushaber’s
contention that the Sixteenth Amendment authorized only a
particular character of direct tax without apportionment. The Court
stated:
PRIOR FEDERAL INCOME TAX LEGISLATION
29
Indeed in the light of the history which we have given
and of the decision in the Pollock case and the ground
upon which the ruling in that case was based, there is
no escape from the conclusion that the Amendment
was drawn for the purpose of doing away for the
future with the principle upon which the Pollock case
was decided, that is, of determining whether a tax on
income was direct not by a consideration of the
burden placed on the taxed income upon which it
directly operated, but by taking into view the burden
which resulted on the property from which the income
was derived, since in express terms the Amendment
provides that income taxes, from whatever source the
income may be derived, shall not be subject to the
regulation of apportionment. From this in substance
it indisputably arises, first, that all the contentions
which we have previously noticed concerning the
assumed limitations to be implied from the language
of the Amendment as to the nature and character of
the income taxes which it authorizes find no support
in the text and are in irreconcilable conflict with the
very purpose which the Amendment was adopted to
accomplish. Second, that the contention that the
Amendment treats a tax on income as a direct tax
although it is relieved from apportionment and is
necessarily therefore not subject to the rule of
uniformity as such rule only applies to taxes which are
not
direct,
thus
destroying
the
two
great
classifications which have been recognized and
enforced from the beginning, is also wholly without
foundation since the command of the Amendment
that all income taxes shall not be subject to
apportionment by a consideration of the sources from
which the taxed income may be derived forbids the
application to such taxes of the rule applied in the
Pollock case by which alone such taxes were removed
30
JUDICIAL TYRANNY AND YOUR INCOME TAX
from the great class of excises, duties and imposts
subject to the rule of uniformity and were placed
under the other or direct class.
Brushaber, 240 U.S. at 18-19.
This position was reiterated in the opinion in Stanton v. Baltic
Mining Co., 240 U.S. 103 (1916), which was also written by Justice
White at the same time he wrote the opinion in the Brushaber case:
[T]he Sixteenth Amendment conferred no new power
of taxation but simply prohibited the previous
complete and plenary power of income taxation
possessed by Congress from the beginning from being
taken out of the category of indirect taxation to which
it inherently belonged.
Stanton, 240 U.S. at 112.
The Brushaber case also stated:
Moreover in addition the conclusion reached in the
Pollock case did not in any degree involve holding that
income taxes generically and necessarily came within
the class of direct taxes on property, but on the
contrary recognized the fact that taxation on income
was in its nature an excise entitled to be enforced as
such unless and until it was concluded that to enforce
it would amount to accomplishing the result which the
requirement as to apportionment of direct taxation
was adopted to prevent, in which case the duty would
arise to disregard form and consider substance alone
and hence subject the tax to the regulation as to
apportionment which otherwise as an excise would
not apply to it. Nothing could serve to make this
clearer than to recall that in the Pollock case in so far
as the law taxed incomes from other classes of
PRIOR FEDERAL INCOME TAX LEGISLATION
31
property than real estate and invested personal
property, that is, income from “professions, trades,
employments, or vocations” (158 U.S. 637), its validity
was recognized; indeed it was expressly declared that
no dispute was made upon that subject and attention
was called to the fact that taxes on such income had
been sustained as excise taxes in the past. Id., p. 635.
Brushaber, 240 U.S. at 16-17.
Justice White’s opinion in Brushaber upheld the constitutional
validity of the 1913 Act, and without expressly overruling the
Pollock decision, held, contrary to Pollock, that the income tax was
an indirect tax. The conflict between the Pollock Court and the
Brushaber Court is the subject of the next chapter and is fully
addressed therein.
The Brushaber Court was thus of the opinion that in order for the
tax imposed by Congress to withstand constitutional scrutiny, the
tax could not be administered as a direct tax within the States;17
such a tax would continue to require apportionment even under the
Sixteenth Amendment.18
On September 8, 1916, Congress adopted another federal income
tax.19 The income tax in this act was imposed by Section l(a), which
read as follows:
That there shall be levied, assessed, collected, and
paid annually upon the entire net income received in
the preceding calendar year from all sources by every
individual, a citizen or resident of the United States, a
tax of two per centum upon such income
The 1916 Act, in Section 24, 39 Stat. 776, repealed the 1913 income
tax act. On October 3, 1917, Congress passed an Act which amended
the 1916 income tax act primarily by increasing the graduated rates
of the additional tax.20
32
JUDICIAL TYRANNY AND YOUR INCOME TAX
On February 24, 1919, the Revenue Act of 1918 was adopted by
Congress.21 This Act was different from both the 1913 and 1916 Acts
in that it imposed a “lieu” tax, or a tax merely in substitution of one
previously imposed. This is demonstrated by the plain language of
Section 210, 40 Stat. 1062, which read as follows:
That, in lieu of the taxes imposed by subdivision (a) of
Section 1 of the Revenue Act of 1916 and by Section 1
of the Revenue Act of 1917, there shall be levied,
collected and paid for each taxable year upon the net
income of every individual a normal tax at the
following rates ....
The Revenue Act of 1918 did contain provisions to repeal prior acts.
In Section 1400 of this Act, the income tax title of the 1916 revenue
act was repealed, subject to certain limitations. At Section 1400 (b),
40 Stat. 1150, the last sentence in this Section read as follows:
In the case of any tax imposed by any part of an Act
herein repealed, if there is a tax imposed by this Act in
lieu thereof, the provision imposing such tax shall
remain in force until the corresponding tax under this
Act takes effect under the provisions of this Act.
There can be but one construction given to this provision which can
sustain the tax. If the entire income tax provisions in the 1916 Act
were entirely repealed, then no tax under the 1916 Act would be
imposed, and thus nothing would be imposed by the 1918 Act, the
tax being simply “in lieu of” the 1916 tax. To sustain the tax itself,
Section 210 of the 1916 Act must have continued in effect, only
amended or modified by the 1918 Act.
The Revenue Act of 1921 was adopted by Congress on November 23,
1921.22 This Act closely followed the Revenue Act of 1918 in that it
also imposed a “lieu” tax. In Section 210 of this Act, 42 Stat. 233,
the section imposing the tax read as follows:
PRIOR FEDERAL INCOME TAX LEGISLATION
33
That, in lieu of the tax imposed by Section 210 of the
Revenue Act of 1918, there shall be levied, collected,
and paid for each taxable year upon the net income of
every individual a normal tax ....
Thus, the 1921 Act was in lieu of the 1918 tax, which was in lieu of
the 1916 tax. Like the similar repeal provision in the 1918 Act, the
1921 act had a Section 1400 which repealed the 1918 income tax act
conditioned as follows at 42 Stat. 321:
In the case of any tax imposed by any part of the
Revenue Act of 1918 repealed by this Act, if there is a
tax imposed by this Act in lieu thereof, the provision
imposing such tax shall remain in force until the
corresponding tax under this Act takes effect under
the provisions of this Act.
The Revenue Act of 1924 was adopted by Congress on June 2,
1924.23 Like its predecessors, this Act imposed a tax in Section 210,
43 Stat. 264, which read as follows:
In lieu of the tax imposed by Section 210 of the
Revenue Act of 1921, there shall be levied, collected,
and paid for each taxable year upon the net income of
every individual (except as provided in subdivision (b)
of this Section) a normal tax ....
Thus, this Act imposed a tax in lieu of the 1921 tax, which was in
lieu of the 1918 tax, which was in lieu of the 1916 tax. Like the prior
acts, the repeal provisions in Section 1100, 43 Stat. 352, repealed
the 1921 income tax provisions subject to this condition:
In the case of any tax imposed by any part of the
Revenue Act of 1921 repealed by this Act, if there is a
tax imposed by this Act in lieu thereof, the provision
imposing such tax shall remain in force until the
34
JUDICIAL TYRANNY AND YOUR INCOME TAX
corresponding tax under this Act takes effect under
the provisions of this Act.
Some two years later, Congress enacted the Revenue Act of 1926.24
Section 210 of this Act read almost identically with former acts
imposing the tax:
In lieu of the tax imposed by Section 210 of the
Revenue Act of 1924, there shall be levied, collected
and paid for each taxable year upon the net income of
every individual (except as provided in subdivision (b)
of this section) a normal tax ...
Thus, this Act imposed a tax in lieu of the 1924 tax, which was in
lieu of the 1921 tax, which was in lieu of the 1918 tax, which was in
lieu of the 1916 tax. The repeal provisions in this Act were found in
Section 1200, 44 Stat. 125, which repealed the 1924 income tax act,
subject to this limitation:
In the case of any tax imposed by any part of the
Revenue Act of 1924 repealed by this Act, if there is a
tax imposed by this Act in lieu thereof, the provision
imposing such tax shall remain in force until the
corresponding tax under this Act takes effect under
the provisions of this Act.
Again, two years later, Congress enacted another act called the
Revenue Act of 1928.25 By this time, Congress had been enacting
similar legislation for about fifteen years, and it obviously chose to
change the format of the income tax acts as an attempt at
improvement. The format of this Act was decidedly different from
the previous acts, and this format was ultimately used for the 1939
Internal Revenue Code. In this new style, the tax became imposed
under Section 11:
PRIOR FEDERAL INCOME TAX LEGISLATION
35
Normal Tax on Individuals. There shall be levied,
collected, and paid for each taxable year upon the net
income of every individual a normal tax ....
It must be noted that, whereas previously the “in lieu of” feature of
the tax appeared directly in the section imposing the tax, this
Section 11 made no reference to the same, although the act itself
did. Congress took the “in lieu of” feature out of the section
imposing the tax and placed it in Section 63 of the Act:
Taxes in Lieu of Taxes Under 1926 Act. The taxes
imposed by this title shall be in lieu of the
corresponding taxes imposed by Title II of the
Revenue Act of 1926, in accordance with the following
table:
Taxes under this Title
Taxes under 1926 Act
Secs. 11 and 211
in lieu of
sec. 210
Sec. 12
in lieu of
sec. 211
Thus, this Act imposed an income tax in lieu of the 1926 tax, which
was in lieu of the 1924 tax, which was in lieu of the 1921 tax, which
was in lieu of the 1918 tax, which was in lieu of the 1916 tax.
The repeal provision in this Act was somewhat different from the
previous ones in that there was no section which specifically
defined what was repealed. Instead, Section 714 of this Act, 45 Stat.
882, stated:
The parts of the Revenue Act of 1926 which are
repealed by this Act shall remain in force for the
assessment and collection of all taxes imposed
thereby, and for the assessment, imposition, and
collection of all interest, penalties, or forfeitures
which have accrued or may accrue in relation to any
such taxes.
36
JUDICIAL TYRANNY AND YOUR INCOME TAX
Due to the fact that this Act made the 1926 Act temporary and of no
effect for tax years 1928 and afterward, the repeal provision meant
little.
Congress did not enact after 1928 another major tax law for four
years; on June 6, 1932, it did enact, however, the Revenue Act of
1932.26 This Act was patterned upon its predecessor, the 1928 Act,
and it thus had a Section 11 which imposed the tax, and a Section 63
providing the “in lieu of” feature:
Sec. 11. Normal Tax on Individuals. There shall be
levied, collected, and paid for each taxable year upon
the entire net income of every individual a normal tax
....
Sec. 63. Taxes In Lieu of Taxes Under 1928 Act. The
taxes imposed by this title shall be in lieu of the
corresponding taxes imposed by the sections of the
Revenue Act of 1928 bearing the same numbers.
Since this Act was applicable for tax years 1932 and those
subsequent, the prior acts were thus made temporary, and there
was no need for repeal provisions, which this Act did not contain.
Two years later, Congress enacted the Revenue Act of 1934.27 Like
the 1928 and 1932 Acts, this Act contained a Section 11 and a
Section 63 which read as follows:
Sec. 11. Normal Tax on Individuals. There shall be
levied, collected, and paid for each taxable year upon
the net income of every individual a normal tax ....
Sec. 63. Taxes In Lieu of Taxes Under 1932 Act. The
taxes imposed by this title shall be in lieu of the
corresponding taxes imposed by the Revenue Act of
1932.
PRIOR FEDERAL INCOME TAX LEGISLATION
37
Since this Act was applicable for tax years after December 31, 1933,
the 1932 Act was thus made temporary and this Act contained no
repeal provisions.
The next major income tax act of Congress was the Revenue Act of
1936.28 Here, Congress continued the same scheme first established
in 1928, with Sections 11 and 63:
Sec. 11. Normal Tax on Individuals. There shall be
levied, collected, and paid for each taxable year upon
the net income of every individual a normal tax ....
Sec. 63. Taxes In Lieu of Taxes Under 1934 Act. The
taxes imposed by this title and Title IA shall be in lieu
of the taxes imposed by Titles I and IA of the Revenue
Act of 1934, as amended.
This Act made the 1934 Act, as amended in 1935, temporary, and
thus there were no repeal provisions.
Finally, on May 28, 1938, Congress enacted the Revenue Act of
1938.29 This Act followed the format of the similar income tax Acts
adopted in 1928, 1932, 1934, and 1936, and this Act established
most of the format of the 1939 Internal Revenue Code. Here again,
there was a Section 11 and a Section 63 which read as follows:
Sec. 11. Normal Tax on Individuals. There shall be
levied, collected, and paid for each taxable year upon
the net income of every individual a normal tax ....
Sec. 63. Taxes In Lieu of Taxes Under 1936 Act. The
taxes imposed by this title and Title IA shall be in lieu
of the taxes imposed by Titles I and IA of the Revenue
Act of 1936, as amended.
38
JUDICIAL TYRANNY AND YOUR INCOME TAX
Since this Act became effective for years after December 31, 1937,
the 1936 Act became temporary and this Act contained no repeal
provisions.
On December 31, 1938, there was in existence a federal income tax
which was imposed by the Revenue Act of 1938. But this Act simply
imposed a tax which was in lieu of the 1936 tax, which was in lieu of
the 1934 tax, which was in lieu of the 1932 tax, which was in lieu of
the 1928 tax, which was in lieu of the 1926 tax, which was in lieu of
the 1924 tax, which was in lieu of the 1921 tax, which was in lieu of
the 1918 tax, which was in lieu of the 1916 tax.
At the same time, many other taxes were scattered throughout
various Congressional tax acts, and there appeared to Congress a
need to consolidate these laws all into one book or act. Hence the
effort to enact the 1939 Internal Revenue Code.
On February 10, 1939, the 1939 Internal Revenue Code was
approved and became a law.30 In essence, those various internal
revenue laws then valid, existing and in force on January 2, 1939,
were placed into this one Act which created the Code. Section 4 of
the enacting clause of this Code provided that any prior law codified
in this act was thereby repealed; but, Section 4 did not operate to
repeal any law not so codified. Most of the income tax provisions in
the 1939 Code were from the 1938 Revenue Act, and Section 11 of
the 1938 Act became Section 11 in the 1939 Code. But, while
Sections 1 through 62 of the 1938 Act were placed into the Code,
Section 63, which provided for the lieu tax feature, was not
incorporated into that Code, and therefore was not repealed. Thus,
the 1939 Code was nothing more than an incorporation of the 1938
Act into its provisions, and the unrepealed Section 63 in the 1938
Act operated to make the 1939 Code’s income tax laws an act which
was in lieu of the 1936 tax.
The unrepealed Section 63 in the 1938 Act operated to make that
Code nothing more than a substitute for the 1938 Act. And of
course, the 1954 Internal Revenue Code simply replaced the 1939
PRIOR FEDERAL INCOME TAX LEGISLATION
39
Internal Revenue Code. Today, the 1986 Code is merely a
replacement or substitute for the 1954 Code.
40
JUDICIAL TYRANNY AND YOUR INCOME TAX
ENDNOTES
8.
Act of July 14, 1798, 1 Stat. 597, ch. 75.
9.
Act of Aug. 2, 1813, 3 Stat. 63, ch. 37.
10.
Act of Jan. 9, 1815, 3 Stat. 164, ch. 21.
11.
Act of August 6, 1861; Act of July 1, 1862; Act of March 3, 1863;
Act of June 30, 1864; Act of March 3, 1865; Act of March 10,
1866; Act of July 13, 1866, Act of March 2, 1867; and Act of July
14, 1870.
12.
See Act of Aug. 5, 1861, 12 Stat. 292, 309, ch. 45.
13.
Pollock, 157 U.S. at 674.
14.
A tax of two percent was imposed upon the net profits of
corporations, companies or associations in the 1894 act at
Section 32.
15.
So, too, the income tax contained in Subtitle A is not such an
act; one need only compare the wording of Section 27 of the
1894 Act with the wording of Section 61 (a) of the 1954 Act to
ascertain that the tax imposed in Subtitle A is not an excise tax
on business, trades or professions.
16.
Brushaber, 240 U.S. at 9.
17.
Attorney General W. M. Evarts concluded as follows in 1871:
“We are of the opinion that a tax on the gross income of an
individual is embraced by the words “capitation, or other direct
tax,” in the Constitution, and should be assessed and collected
on the principle of apportionment and not of uniformity, and
that the several sections of the Internal Revenue act imposing
such tax are therefore unconstitutional. We are further of
opinion that no decision of the Supreme Court of the United
PRIOR FEDERAL INCOME TAX LEGISLATION
41
States precludes this view or discourages the expectation that it
will receive the sanction of the court. On the contrary, there are
dicta and suggestions in the only decisions bearing upon the
subject which tend to confirm the opinion we have expressed.”
13 Internal Revenue Record 76.
18.
Relying upon this proposition, Attorney Lowell Becraft of
Huntsville, Alabama, has made a powerful territorial/legislative
jurisdictional argument that under the Supreme Court’s holding
in Brushaber, the income tax cannot be imposed anywhere
except within those limited areas within the states in which the
Federal government has exclusive legislative authority under
Article I, Section 8, Clause 17, of the United States Constitution,
such as on military bases, national forests, etc., and within
United States territories, such as Puerto Rico, etc. Indeed,
Treasury Department delegation orders and the language of
Treasury Regulation 26 C.F.R. Section 1.1-l(c) fully supports Mr.
Becraft’s scholarly analysis. Thus, whether one relies upon the
Supreme Court’s opinion in Pollock or its opinion in Brushaber,
a tax upon a States citizen’s wages (personal property) falls
without constitutional authority.
19.
See “An Act To Increase The Revenue, And For Other Purposes,”
39 Stat. 756, ch. 463.
20.
See “An Act To Provide Revenue To Defray War Expenses, And
For Other Purposes”, 40 Stat. 300, ch. 63.
21.
See “An Act To Provide Revenue, And For Other Purposes”, 40
Stat. 1057, ch. 18.
22.
See “An Act To Reduce And Equalize Taxation, To Provide
Revenue, And For Other Purposes,” 42 Stat. 227, ch. 136.
23.
See “An Act To Reduce And Equalize Taxation, To Provide
Revenue, And For Other Purposes,” 43 Stat. 253, ch. 234.
42
JUDICIAL TYRANNY AND YOUR INCOME TAX
24.
See “An Act To Reduce And Equalize Taxation, To Provide
Revenue, And For Other Purposes,” 44 Stat. 9, ch. 27.
25.
See “An Act To Reduce And Equalize Taxation, Provide
Revenue, And For Other Purposes,” 45 Stat. 791, ch. 852.
26.
See “An Act To Provide Revenue, Equalize Taxation, And For
Other Purposes,” 47 Stat. 169, ch. 209.
27.
See “An Act To Provide Revenue, Equalize Taxation, And For
Other Purposes,” 48 Stat. 680, ch. 227.
28.
See “An Act To Provide Revenue, Equalize Taxation, And For
Other Purposes,” 49 Stat. 1648, ch. 690.
29.
See “An Act To Provide Revenue, Equalize Taxation, And For
Other Purposes,” 52 Stat. 447, ch. 289.
30.
See 53 Stat., part 1.
DIRECT OR INDIRECT TAX
43
CHAPTER II
DIRECT OR INDIRECT TAX
The distinction between direct and indirect taxation is fundamental
to the federal government’s constitutional power to lay and collect
taxes from the citizens of the several states which comprise the
United States of America. However, some 200 years after the
ratification of the United States Constitution, it remains unsettled
whether the federal income tax is a direct or an indirect tax.
The Pollock case is the leading decision from the United States
Supreme Court which supports the proposition that the federal
income tax is a direct tax. The Brushaber case is the leading
decision from the Supreme Court which supports the proposition
that the federal income tax is an indirect tax.
By virtue of the legislative history regarding the proffer of the
Sixteenth Amendment, it cannot be denied that Congress intended
to tax incomes. The question thus becomes, is the income tax a
direct tax that is relieved from the requirement of apportionment by
ratification of the Sixteenth Amendment or did the Amendment
serve to define a tax on income as an indirect, excise tax? This
analysis answers that question.
In 1894, Congress passed an income tax, and its constitutional
validity was challenged. In Pollock, the United States Supreme
Court held the income tax, as enacted and administered, was an
unapportioned direct tax, and struck it down as repugnant to
Article I, Section 2, Clause 3, and Article I, Section 9, Clause 4, of
the Constitution.
In 1909, during a special session of Congress called by President
Taft, the Sixteenth Amendment was proposed and sent to the
States for ratification; it was certified as ratified in 1913.
44
JUDICIAL TYRANNY AND YOUR INCOME TAX
Congress then enacted the Tariff Act of October 3, 1913, which
contained income tax provisions, and those provisions were
challenged as unconstitutional. In Brushaber, the United States
Supreme Court upheld the income tax provisions as
constitutional. In the process, however, it held the income tax to
be an indirect tax by virtue of the operation of the Sixteenth
Amendment.
The Pollock Court used the following language in defining a
direct tax:
Ordinarily, all taxes paid primarily by persons who
can shift the burden upon someone else, or who are
under no legal compulsion to pay them, are
considered indirect taxes; but a tax upon property
holders in respect of their estates, whether real or
personal, or of the income yielded by such
estates, and the payment of which cannot be
avoided, are direct taxes. [Emphasis added.]
Pollock, 157 U.S. at 558.
On rehearing, however, the Supreme Court enlarged the definition
of a direct tax:
We are now permitted to broaden the field of inquiry,
and to determine to which of the two great classes a
tax upon a person’s entire income, whether derived
from rents, or products, or otherwise, of real estate, or
from bonds, stocks, or other forms of personal
property, belongs; and we are unable to conclude
that the enforced subtraction from the yield of
all the owner’s real or personal property, in
the manner prescribed, is so different from a
tax upon the property itself, that it is not
direct, but an indirect tax, in the meaning of
the Constitution. [Emphasis added.]
DIRECT OR INDIRECT TAX
45
Pollock, 158 U.S. at 618.
In direct contravention to the Pollock opinion that income taxes are
direct within the meaning of the Constitution, the Brushaber Court
said:
(T)he conclusion reached in the Pollock case did not
in any degree involve holding that income taxes
generically and necessarily came within the class of
direct taxes on property ....
Brushaber, 240 U.S. at 16-17.
It is interesting to note that this alleged conclusion of the Pollock
Court is not in quotes, nor is there a page reference to the Pollock
decision. The absence of such a page reference is because the
Pollock Court never stated such a conclusion.
The Brushaber Court was of the opinion that Mr. Brushaber was
raising the issue that the Sixteenth Amendment provided for a
power to tax not previously in existence:
We are of the opinion, however, that the confusion is
not inherent, but rather arises from the conclusion
that the Sixteenth Amendment provides for a hitherto
unknown power of taxation, that is, a power to levy an
income tax which although direct should not be
subject to the regulation of apportionment applicable
to all other direct taxes.
Brushaber, 240 U.S. at 10-11.
The Court then listed the several contentions made by Mr.
Brushaber, and said:
But it clearly results that the proposition and the
contentions under it, if acceded to, would cause one
provision of the Constitution to destroy another; that
46
JUDICIAL TYRANNY AND YOUR INCOME TAX
is, they would result in bringing the provisions of the
Amendment
exempting
a
direct
tax
from
apportionment into irreconcilable conflict with the
general requirement that all direct taxes be
apportioned. Moreover, the tax authorized by the
Amendment, being direct, would not come under the
rule of uniformity applicable under the Constitution
to other than direct taxes, and thus it would come ‘ to
pass that the result of the Amendment would be to
authorize a particular direct tax not subject either to
apportionment or to the rule of geographical
uniformity, thus giving power to impose a different
tax in one State or States than was levied in another
State or States.
Brushaber, 240 U.S. at 11-12.
The Court was, however, aware of the fact that the requirement as
to apportionment of a direct tax was regulatory:
In fact the two great subdivisions embracing the
complete and perfect delegation of the power to tax
and the two correlated limitations as to such power
were thus aptly stated by Mr. Chief Justice Fuller in
Pollock v. Farmers’ Loan & Trust Company, supra, at
page 557: “In the matter of taxation, the Constitution
recognizes the two great classes of direct and indirect
taxation, and lays down two rules by which their
imposition must be governed, namely: The rule of
apportionment as to direct taxes, and the rule of
uniformity as to duties, imposts and excises.” It is to
be observed, however, as long ago pointed out in
Veazie Bank v. Fenno, 8 Wall 533, 541, that the
requirement of apportionment as to one of the great
classes and of uniformity as to the other class were
not so much a limitation upon the complete and all
embracing authority to tax, but in their essence
DIRECT OR INDIRECT TAX
47
were simply regulations concerning the mode
in which the plenary power was to be exerted.
[Emphasis added.]
Brushaber, 240 U.S. at 13.
Recognizing that the two requirements were but regulations
prescribed in the Constitution, nothing prevented Congress from
amending the Constitution to change one or both of the regulations.
In fact, this is exactly what the Pollock Court specifically suggested
as the proper course for Congress to take if it did not like the result
of the Pollock decision:
In these cases our province is to determine whether
this income tax on the revenue from property does or
does not belong to the class of direct taxes. If it does,
it is, being unapportioned, in violation of the
Constitution, and we must so declare.
Differences have often occurred in this court—
differences exist now—but there has never been a time
in its history when there has been a difference of
opinion as to its duty to announce its deliberate
conclusions
unaffected
by
considerations
not
pertaining to the case in hand.
If it be true that the Constitution should have
been so framed that a tax of this kind [a direct
income tax] could be laid [without apportionment],
the instrument defines the way for its
amendment. [Emphasis added.]
Pollock, 158 U.S. at 634-635.
At pages 14 and 15 of its opinion, the Brushaber Court discussed the
case of Hylton v. United States, 2 U.S. 171 (1796), wherein the
Supreme Court found that the carriage tax was valid because it was
48
JUDICIAL TYRANNY AND YOUR INCOME TAX
an excise tax. The two Pollock decisions discussed this case in great
detail. Some interesting and extremely important points are
relevant:
It will be perceived that each of the justices, while
suggesting doubt whether anything but a capitation or
a land tax was a direct tax within the meaning of the
constitution, distinctly avoided expressing an opinion
upon that question or laying down a comprehensive
definition, but confined his opinion to the case before
the court.
The general line of observation was obviously
influenced by Mr. Hamilton’s brief for the
government, in which he said: “The following are
presumed to be the only direct taxes: Capitation or
poll taxes, taxes on lands and buildings, general
assessments, whether on the whole property of
individuals, or on their whole real or personal estate.
All else must, of necessity, be considered as indirect
taxes.” 7 Hamilton’s Works (Lodge’s Ed.) 332.
Mr. Hamilton also argued: “If the meaning of the
word “excise” is to be sought in a British statute, it will
be found to include the duty on carriages, which is
there considered as an “excise”. * * * An argument
results from this, though not perhaps a conclusive
one, yet, where so important a distinction in the
constitution is to be realized, it is fair to seek the
meaning of terms in the statutory language of that
country from which our jurisprudence is derived.” 7
Hamilton’s Works (Lodge’s Ed.) 333.
If the question had related to an income tax, the
reference would have been fatal, as such taxes have
been always classed by the law of Great Britain as
direct taxes.
DIRECT OR INDIRECT TAX
49
Pollock, 157 U.S. at 571-572.
After discussing the direct tax acts of Congress (Act of July 9, 1798;
Act of July 14, 1798; Act of July 22, 1813; Act of August 2, 1813; Act
of January 9, 1815) attributable to the War of 1812, and the direct
tax acts of Congress (Act of August 6, 1861; Act of July 1, 1862; Act
of March 3, 1863; Act of June 30, 1864; Act of March 3, 1865; Act of
March 10, 1866; Act of July 13, 1866, Act of March 2, 1867; Act of
July 14, 1870) attributable to the Civil War, the Court said:
The differences between the latter acts and that of
August 15, 1894, call for no remark of this connection.
These acts grew out of the war of the Rebellion, and
were, to use the language of Mr. Justice Miller, “part
of the system of taxing incomes, earnings, and profits
adopted during the late war, and abandoned as soon
after that war was ended as it could be done safely.”
Railroad Co. v. Collector, 100 U.S. 595, 598.
Pollock, 157 U.S. at 573.
The Court then went on to say:
From the foregoing it is apparent (1) that the
distinction between the direct and indirect taxation
was well understood by the framers of the constitution
and those who adopted it; (2) that, under the state
systems of taxation, all taxes on real estate or personal
property or the rents or income thereof were regarded
as direct taxes; (3) that the rules of apportionment
and of uniformity were adopted in view of that
distinction and those systems; (4) that whether the
tax on carriages was direct or indirect was disputed,
but the tax was sustained as a tax on the use and as an
excise; (5) that the original expectation was that the
power of direct taxation would be exercised only in
extraordinary exigencies; and down to August 15,
50
JUDICIAL TYRANNY AND YOUR INCOME TAX
1894, this expectation has been realized. The act of
that date was passed in a time of profound peace, and
if we assume that no special exigency called for
unusual legislation, and that resort to this mode of
taxation is to become an ordinary and usual means of
supply, that fact furnishes an additional reason for
circumspection and care in disposing of the case.
Pollock, 157 U.S. at 573-574.
On rehearing, the Pollock Court had this to say regarding Hylton:
In this connection it may be useful, though at the risk
of repetition, to refer to the views of Hamilton and
Madison as thrown into relief in the pages of the
Federalist, and in respect of the enactment of the
carriage tax act, and again to briefly consider the
Hylton case, 3 Dall. 171, so much dwelt on in
argument.
The Act of June 5, 1794, c. 45, 1 Stat. 373, laying
duties upon carriages for the conveyance of persons,
was enacted in a time of threatened war.
The bill passed the House on the twenty-ninth of May,
apparently after a very short debate. Mr. Madison and
Mr. Ames are the only speakers on that day reported
in the Annals. “Mr. Madison objected to this tax on
carriages as an unconstitutional tax; and, as an
unconstitutional measure, he would vote against it.”
Mr. Ames said: “It was not to be wondered at if he,
coming from so different a part of the country, should
have a different idea of this tax from the gentleman
who spoke last. In Massachusetts, this tax had been
long known; and there it was called an excise. It was
difficult to define whether a tax is direct or not. He
DIRECT OR INDIRECT TAX
51
had satisfied himself that this was not so.” Annals, 3d
Cong. 730.
On the first of June, 1794, Mr. Madison wrote to Mr.
Jefferson: “The carriage tax, which only struck at the
Constitution,
has
passed
the
House
of
Representatives.” 3 Madison’s Writings, 18. The bill
then went to the Senate, where, on the third day of
June, it “was considered and adopted,” Annals, 3d
Cong. 119, and on the following day it received the
signature of President Washington...
It appears then that Mr. Madison regarded the
carriage tax bill as unconstitutional, and accordingly
gave his vote against it, although it was to a large
extent, if not altogether, a war measure.
Where did Mr. Hamilton stand? At that time he was
Secretary of the Treasury, and it may therefore be
assumed, without proof, that he favored the
legislation. But upon what ground? He must, of
course, have come to the conclusion that it was not a
direct tax. Did he agree with Fisher Ames, his
personal and political friend, that the tax was an
excise? The evidence is overwhelming that he did.
In the thirtieth number of the Federalist, after
depicting the helpless and hopeless condition of the
country growing out of the inability of the
confederation to obtain from the States the moneys
assigned to its expenses, he says: “The more
intelligent adversaries of the new Constitution admit
the force of this reasoning; but they qualify their
admission, by a distinction between what they call
internal and external taxation. The former they
would reserve to the state governments; the latter,
which they explain into commercial imposts, or rather
52
JUDICIAL TYRANNY AND YOUR INCOME TAX
duties on imported articles, they declare themselves
willing to concede to the Federal Head.” In the thirty-
sixth number, while still adopting the division of his
opponents, he says: “The taxes intended to be
comprised under the general denomination of internal
taxes, may be subdivided into those of the direct and
those of the indirect kind. ... As to the latter, by
which must be understood duties and excises
on articles of consumption, one is at a loss to
conceive, what can be the nature of the difficulties
apprehended.” Thus we find Mr. Hamilton, while
writing to induce the adoption of the Constitution,
first, dividing the power of taxation into external and
internal, putting into the former the power of
imposing duties on imported articles and into the
latter all remaining powers; and, second dividing the
latter into direct and indirect, putting into the
latter, duties and excises on articles of consumption. “
It seems to us to inevitably follow that in Mr.
Hamilton’s judgment at that time all internal taxes,
except duties and excises on articles of consumption,
fell into the category of direct taxes.
Did he, in supporting the carriage tax bill, change his
views in this respect? His argument in the Hylton case
in support of the law enables us to answer this
question. It was not reported by Dallas, but was
published in 1851 by his son in the edition of all
Hamilton’s writings except the Federalist. After saying
that we shall seek in vain for any legal meaning of the
respective terms “direct and indirect taxes,” and after
forcibly stating the impossibility of collecting the tax if
it is to be considered a direct tax, he says, doubtingly:
“The following are presumed to be the only direct
taxes. Capitation or poll taxes. Taxes on lands and
buildings. General assessments, whether on the whole
DIRECT OR INDIRECT TAX
53
property of individuals, or on their whole real or
personal estate; all else must of necessity be
considered as indirect taxes.” “Duties, imposts and
excises appear to be contradistinguished from
taxes.” “If the meaning of the word excise is to be
sought in the British statutes, it will be found to
include the duty on carriages, which is there
considered as an excise.” “Where so important a
distinction in the Constitution is to be realized, it is
fair to seek the meaning of terms in the statutory
language
of
that
country
from
which
our
jurisprudence is derived.” 7 Hamilton’s Works, 848.
Mr. Hamilton therefore clearly supported the law
which Mr. Madison opposed, for the same reason that
his friend Fisher Ames did, because it was an excise,
and as such was specifically comprehended by the
Constitution. Any loose expressions in definition of
the word “direct,” so far as conflicting with his well-
considered views in the Federalist, must be regarded
as the liberty which the advocate usually thinks
himself entitled to take with his subject.31 He gives,
however, it appears to us, a definition which covers
the question before us. A tax upon one’s whole income
is a tax upon the annual receipts from his whole
property, and as such falls within the same class as a
tax upon that property, and is a direct tax, in the
meaning of the Constitution. And Mr. Hamilton in his
report on the public credit, in referring to contracts
with citizens of a foreign country, said: “This
principle, which seems critically correct, would
exempt as well the income as the capital of the
property. It protects the use, as effectually as the
thing. What, in fact, is property, but a fiction, without
the beneficial use of it? In many cases, indeed, the
income or annuity is the property itself.” 3
Hamilton’s Works, 34.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
We think there is nothing in the Hylton case in
conflict with the foregoing. The case is badly reported.
[Emphasis in original.]
Pollock, 158 U.S. at 623-626.
Commencing on page 15, the Brushaber Court discussed the tax
acts passed from 1861 and continuing through the Civil War period,
and erroneously stated that these were excise taxes. As quoted
above, the Pollock Court considered these taxes in detail, found
there was no substantial difference between these taxes and the
income tax of 1894, held that because an income tax was now
attempted to be levied in times of profound peace the issue had to
be examined carefully, and held the tax to be an unapportioned
direct tax and therefore unconstitutional.
The Brushaber Court then stated that the act of 1894 was
assumed32 to come within the classification of excises, duties and
imposts which were subject to the rule of uniformity but not to the
rule of apportionment; that the constitutional validity of the law
was challenged as levying a tax that was direct in the constitutional
sense, and the Pollock Court was obliged to determine whether the
tax was direct or indirect. The Brushaber Court stated:
Coming to consider the validity of the tax from this
point of view, while not questioning at all that in
common understanding IT WAS DIRECT
merely on income and only indirect on
property, it was held that considering the substance
of things, it was direct on property in the
constitutional sense since to burden an income by a
tax was from the point of substance to burden the
property from which the income was derived and thus
accomplished the very thing which the provision as to
apportionment of direct taxes was adopted to prevent.
[Emphasis added.]
DIRECT OR INDIRECT TAX
55
Brushaber, 240 U.S. at 16.
This quote shows that the Brushaber Court completely ignored the
reasoning behind Pollock. Pollock held that there was no distinction
between a tax on property and a tax on the income yielded
therefrom; the tax on property was a direct tax, and the tax on
income was a direct tax. The question of “source” was raised by the
parties to the Pollock case in their legal briefs, and disposed of by
the Court as follows:
But if, as contended, the interest when received has
become merely money in the recipient’s pocket, and
taxable as such without reference to the source from
which it came, the question is immaterial whether it
could have been originally taxed at all or not. This was
admitted by the Attorney General with characteristic
candor; and it follows that, if the revenue derived
from municipal bonds cannot be taxed because the
source cannot be, the same rule applies to revenue
from any other source not subject to the tax; and the
lack of power to levy any but an apportioned tax on
real and personal property equally exists as to the
revenue therefrom.
Admitting that this act taxes the income of
property irrespective of its source still we
cannot doubt that such a tax is necessarily a direct tax
in the meaning of the Constitution.
In England, we do not understand that an income tax
has ever been regarded as other than a direct tax. In
Dowell’s History of Taxation and Taxes in England,
admitted to be the leading authority, the evolution of
taxation in that country is given, and an income tax is
invariably classified as a direct tax. 3 Dowell, (1884),
103, 126. The author refers to the grant of a fifteenth
and tenth and a graduated income tax in 1435, and to
56
JUDICIAL TYRANNY AND YOUR INCOME TAX
many subsequent comparatively ancient statutes as
income tax laws. 1 Dowell, 121. It is objected that the
taxes imposed by these acts were not, scientifically
speaking, income taxes at all, and that although there
was a partial income tax in 1758, there was no general
income tax until Pitt’s of 1799. Nevertheless, the
income taxes levied by these modern acts, Pitt’s,
Addington’s, Petty’s, Peel’s and by existing laws, are
all classified as direct taxes; and, so far as the income
tax we are considering is concerned, that view is
concurred in by the cyclopaedists, the lexicographers,
and the political economists, and generally by the
classification of European governments wherever an
income tax obtains. [Emphasis added.]
Pollock, 158 U.S. at 630-631.
In addition, Justice White accidentally admitted the falsity of his
position that an income tax is an excise when he said that the
income tax of 1894 was indirect on property, but “direct on
income,” thereby admitting an income tax is a direct tax.
The Brushaber Court continued:
As this conclusion but enforced a regulation as to the
mode
of
exercising
power
under
particular
circumstances, it did not in any way dispute the all
embracing taxing authority possessed by Congress,
including necessarily therein the power to impose
income taxes if only they conformed to the
constitutional regulations which were applicable to
them.
Brushaber, 240 U.S. at 16.
DIRECT OR INDIRECT TAX
57
Here the Brushaber Court recognized that income taxes must be
apportioned, a result that requires the conclusion that income taxes
are direct taxes.
The Brushaber Court then made another erroneous finding about
what the Pollock Court held:
Moreover in addition the conclusion reached in the
Pollock case did not in any degree involve holding that
income taxes generically and necessarily came within
the class of direct taxes on property but on the
contrary recognized the fact that taxation on income
was in its nature an excise entitled to be enforced as
such unless and until it was concluded that to enforce
it would amount to accomplishing the result which the
requirement as to apportionment of direct taxation
was adopted to prevent, in which case the duty would
arise to disregard form and consider substance alone
and hence subject the tax to the regulation as to
apportionment which otherwise as an excise would
not apply to it. Nothing could serve to make this
clearer than to recall that in the Pollock case in so far
as the law taxed income from other classes of property
than real estate and invested personal property, that
is, income from “professions, trades, employments, or
vocations” (158 U.S. 637), its validity was recognized;
indeed it was expressly declared that no dispute was
made upon that subject and attention was called to
the fact that taxes on such income had been sustained
as excise taxes in the past. Id., p. 635
Brushaber, 240 U.S., at 16-17.
This statement by the Brushaber Court attributed to the Pollock
Court is false. What the Pollock Court actually stated at page 635
was:
58
JUDICIAL TYRANNY AND YOUR INCOME TAX
We have considered the act only in respect of the tax
on income derived from real estate, and from invested
personal property, and have not commented on so
much of it as bears on gains or profits from business,
privileges, or employments, in view of the instances in
which
taxation
on
business,
privileges,
or
employments has assumed the guise33 of an excise tax
and been sustained as such. [Emphasis added.]
Pollock, 158 U.S. at 635.
The Pollock Court was acutely aware that the facts before it did not
allow the Court to decide the issue of whether the statute, as it
applied to the taxation of income from professions, trades,
employments or vocations was constitutional,34 and avoided
making a finding. But the Court had to consider whether it should
declare the entire law unconstitutional or leave those sections not in
issue in the case to stand:
[I]t is evident that the income from realty formed a
vital part of the scheme for taxation embodied
therein. If that be stricken out, and also the income
from all invested personal property, bonds, stocks,
investments of all kinds, it is obvious that by far the
largest part of the anticipated revenue would be
eliminated, and this would leave the burden of the tax
to be borne by professions, trades, employments, or
vocations; and in that way what was intended as a tax
on capital would remain in substance as a tax on
occupations and labors. We cannot believe that such
was the intention of Congress. We do not mean to say
that an act laying by apportionment a direct tax on all
real estate and personal property, or the income
thereof, might not also lay excise taxes on business,
privileges, employments, and vocations. But this is
not such an act; and the scheme must be
considered as a whole. [Emphasis added.]
DIRECT OR INDIRECT TAX
59
Pollock, 158 U.S. at 636-637.
This quote raises an interesting point. No more tax would be
collected from those engaged in business, vocations, occupations or
employments than if the other provisions were not struck down in
that the amount of revenue that could be collected from business,
privileges, employments and vocations was specifically set by the
statute. The government would only collect less revenue. Thus the
Pollock Court must have had an ulterior motive in making its
statement, and I submit it did not want to see occupations and labor
burdened with a tax disguised as an excise when it knew full well
that such taxes were direct, and would be levied without
apportionment. The Pollock Court was precluded from coming right
out and saying the statute imposing such taxes was unconstitutional
because the case did not involve that issue, so it said instead that
such taxes had been sustained in the past having assumed the
guise of an excise tax, and ruled the entire law unconstitutional,
thus prohibiting the levying and collection of the tax on business,
privileges, employments and vocations due to its inherent
unconstitutionality. I submit the language “assumed the guise” of
an excise tax does not support the conclusion attributable to it by
Brushaber that a tax on the income derived from business, trades
and professions is to be legally classified as an excise tax.
The Brushaber Court, after quoting the Sixteenth Amendment,
stated:
It is clear on the face of this text that it does not
purport to confer power to levy income taxes in a
generic sense—an authority already possessed and
never questioned—or to limit and distinguish between
one kind of income taxes and another, but that the
whole purpose of the Amendment was to relieve all
income taxes when imposed from apportionment
from a consideration of the source whence the income
was derived. [Emphasis added.]
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JUDICIAL TYRANNY AND YOUR INCOME TAX
Brushaber, 240 U.S. at 17-18.
The Brushaber Court stated that the Sixteenth Amendment
required all income to be treated alike without any distinction to be
made between one kind of income tax and another. The Brushaber
Court recognized income taxes as direct taxes, but held that if the
source is not considered, which it could no longer be because of the
Sixteenth Amendment, then the income tax would once again be
considered an indirect tax which would not have to be apportioned.
The Court continued:
Indeed, in the light of the history which we have given
and of the decision in the Pollock case and the ground
upon which the ruling in that case was based, there is
no escape from the conclusion that the Amendment
was drawn for the purpose of doing away for the
future with the principle upon which the Pollock case
was decided, that is, of determining whether a tax on
income was direct not by a consideration of a burden
placed on the taxed income upon which it directly
operated, but by taking into view of the burden which
resulted on the property from which the income was
derived, since in express terms the Amendment
provides that income taxes, from whatever source the
income may be derived, shall not be subject to the
regulation of apportionment.
Brushaber, 240 U.S. at 18.
This sentence needs careful analysis. It states the purpose of the
Amendment was to do away with a principle allegedly laid down in
the Pollock decision by Chief Justice Fuller in determining if the tax
on income was a direct tax, thereby precluding the resort to that
principle in the future. The next part of the sentence identifies the
principle in two parts:
DIRECT OR INDIRECT TAX
61
1. NOT CONSIDERING the burden placed on the
taxed income, but;
2. CONSIDERING the burden which resulted on
the property from which the income was derived.
In other words, the purpose of the amendment was to direct the
Supreme and lower courts to only consider the burden on the
income itself in determining if a subsequent income tax act imposed
a direct or an indirect tax. Having determined this to be the purpose
of the Sixteenth Amendment, the Court reached its ultimate
conclusion that the income tax is not a direct tax which is relieved
from the requirement of apportionment:
From this in substance it indisputably arises ... that
the contention that the Amendment treats a tax on
income as a direct tax although it is relieved from
apportionment and is necessarily therefore not
subject to the rule of uniformity as such rule only
applies to taxes which are not direct, thus destroying
the two great classifications which have been
recognized and enforced from the beginning, is also
wholly without foundation since the command of the
Amendment that all income taxes shall not be subject
to apportionment by a consideration of the sources
from which the taxed income may be derived, forbids
the application to such taxes on the rule applied in the
Pollock case by which alone such taxes were removed
from the great class of excises, duties and imposts
subject to the rule of uniformity and were placed
under the other or direct class.
Brushaber, 240 U.S. at 18-19.
Thus the Brushaber Court thought that in holding income taxes to
be direct taxes, the Pollock Court used the principle of “considering
the source from which the taxed income was derived” as the key in
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JUDICIAL TYRANNY AND YOUR INCOME TAX
its analysis, and that by removing this key, the income tax would be
classified as an indirect tax. However, in using the language pattern
“not by... but by...,” it suggested that the determination be made by
considering the burden imposed on the income, and that is exactly
the principle upon which the Pollock case was determined. The
Pollock Court did not resort to a consideration of the source to
reach its conclusion, but found that from the earliest enactment of
income taxes in England and other European Countries, and in
enactments imposing state income taxes prior to the adoption of
the Constitution, such taxes were always deemed to be direct taxes.
Pollock also relied upon the definition of direct taxes given by
Hamilton in the Federalist Papers, the fact that incomes are
personal property of general distribution, the candid admission of
the Attorney General, and the views of cyclopaedists,
lexicographers, and political economists. In stating that it was
unable to conclude that the enforced subtraction from the yield of
all the owner’s real or personal property, in the manner prescribed,
was not any different than a tax on real or personal property, the
Pollock Court was merely stating that any tax on real or personal
property, including income, was considered by the framers of the
Constitution to be a direct tax and subject to the rule of
apportionment.
The Brushaber Court then reiterated the reason for its opinion:
We say this because it is to be observed that although
from the date of the Hylton case because of
statements made in the opinions in that case it had
come to be accepted that direct taxes in the
constitutional sense were confined to taxes levied
directly on real estate because of its ownership, the
Amendment
contains
nothing
repudiating
or
challenging the ruling in the Pollock case that the
word direct had a broader significance since it
embraced also taxes levied directly on personal
property because of its ownership, and therefore the
Amendment at least impliedly makes such wider
DIRECT OR INDIRECT TAX
63
significance a part of the Constitution—a condition
which clearly demonstrates that the purpose was not
to change the existing interpretation except to the
extent necessary to accomplish the result intended,
that is, the prevention of the resort to the sources
from which a taxed income was derived in order to
cause a direct tax on the income to be a direct tax on
the source itself and thereby to take an income tax out
of the class of excises, duties and imposts and place it
in the class of direct taxes.
Brushaber, 240 U.S. at 19.
The Brushaber Court first stated that the Sixteenth Amendment
impliedly recognized the broader classification of direct taxes
propounded in Pollock, which classification encompassed all
personal and real property. The Brushaber Court next stated
the purpose of the Sixteenth Amendment was limited to changing
existing interpretations [a clear reference to Pollock] to the extent
necessary to accomplish the result necessary, and identified what it
believed the intended result was to be:
[T]he prevention of the resort to the sources from
which a taxed income was derived in order to cause a
direct tax on the income to be a direct tax on the
source itself and thereby to take an income tax out of
the class of excises, duties and imposts and place it in
the class of direct taxes. [Emphasis added.]
Brushaber, id.
After stating the income tax is a direct tax, how could Justice White
contend it belonged in the class of excises, duties and imposts? Only
by claiming the purpose of the Sixteenth Amendment was to change
an admittedly direct tax into an indirect tax. He tells us this can be
done because the only way it became a direct tax in the first place
was by the Pollock Court’s consideration of the source. However,
64
JUDICIAL TYRANNY AND YOUR INCOME TAX
the Pollock Court never once said that an income tax was anything
but a direct tax, clearly showing that the Pollock Court did not take
the income tax out of the class of indirect taxes as claimed by the
Brushaber Court. According to Pollock, income taxes had always
been considered to be direct taxes in their own right because they
operated directly on the ownership of personal property [including
income], a result reached when considering the burden on the
income itself. Since the Pollock Court used the correct principle, the
position expressed by the Brushaber Court as to the purpose of the
Amendment is clearly incorrect.
The absurd result of the Brushaber Court’s reasoning as to the
application of the alleged Pollock principle is shown as follows: 1)
the Brushaber Court stated the tax is direct on income but indirect
on the source, 2) by considering the burden on the income, the
burden on the source is changed from indirect to direct, 3) this
process somehow “causes” the direct tax on income to become an
indirect tax. (Brushaber, 240 U.S. at 19.)
Now compare what the Supreme Court in Eisner v. Macomber, 252
U.S. 189 (1920), stated was the intended result of the Sixteenth
Amendment:
The Sixteenth Amendment must be construed in
connection with the taxing clauses of the original
Constitution and the effect attributed to them before
the Amendment was adopted. In Pollock v. Farmers’
Loan and Trust Co., 158 U.S. 601, under the Act of
August 27, 1894, c. 349, Section 27, 28 Stat. 509, 553,
it was held that taxes upon rents and profits of real
property were in effect direct taxes upon the property
from which such income arose,35 imposed by reason
of ownership; and that Congress could not impose
such taxes without apportioning them among the
States according to population, as required by Art. I,
section 2, cl. 3, and section 9, cl. 4, of the original
Constitution.
DIRECT OR INDIRECT TAX
65
Afterwards, and evidently in recognition of the
limitation upon the taxing power of Congress thus
determined, the Sixteenth Amendment was adopted,
in words lucidly expressing the object to be
accomplished: “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.” As repeatedly held, this did not
extend the taxing power to new subjects, but
merely removed the necessity which otherwise
might exist for an apportionment among the
States of taxes laid on income. [Citing
Brushaber, 240 U.S. at 17-19, and other cases.]
A proper regard for its genesis, as well as its very clear
language, requires also that this Amendment shall not
be extended by loose construction, so as to repeal or
modify, except as applied to income, those provisions
of the Constitution that require an apportionment
according to population for direct taxes upon
property, real and personal. This limitation still has
an appropriate and important function, and is not to
be over ridden by Congress or disregarded by the
courts.
In order, therefore, that the clauses cited from Article
I of the Constitution may have proper force and effect,
save only as modified by the Amendment, and that the
latter also may have proper effect, it becomes essential
to distinguish between what is and what is not
“income” as the term is there used; and to apply the
distinction, as cases arise, according to truth and
substance, without regard to form. Congress cannot
by any definition it may adopt conclude the matter,
since it cannot by legislation alter the Constitution,
66
JUDICIAL TYRANNY AND YOUR INCOME TAX
from which alone it derives its power to legislate, and
within whose limitations alone that power can be
lawfully exercised. [Emphasis added.]
Eisner, 252 U.S. at 205-206.
It is legally significant to note that in stating the purpose of the
Sixteenth Amendment the Eisner Court found no necessity to add
additional words, but the Brushaber Court did, in clear
contravention to established legal principles:
The words of the Constitution are to be taken in their
obvious sense, and to have a reasonable construction.
In Gibbons v. Ogden, Mr. Chief Justice Marshall, with
his usual felicity, said: “As men, whose intentions
require no concealment, generally employ the words
which most directly and aptly express the ideas they
intend to convey, the enlightened patriots who framed
our Constitution, and the people who adopted it must
be understood to have employed words in their
natural sense, and to have intended what they have
said.” 9 Wheat. 1, 188.
Pollock, 158 U.S. at 619.
I submit that the Brushaber Court had to use extra words in stating
the purpose of the Sixteenth Amendment because Brushaber
misstates the intent of Congress in proposing the Sixteenth
Amendment. To support the Brushaber decision, it would have to
be shown that Congress wanted to overturn the Pollock decision
that income taxes are direct taxes. This follows because it is clear
that the Brushaber Court believed the Sixteenth Amendment
prevented income taxes from being classed as direct taxes by
reference to the source, thereby placing them in the only other
possible class, indirect taxes. Yet the Brushaber Court proves the
invalidity of its decision when it stated in its opinion that Congress
obviously did not challenge or repudiate the holding of the Pollock
DIRECT OR INDIRECT TAX
67
Court that a tax on real and personal property, imposed by reason
of its ownership, was a direct tax in the constitutional sense. The
Sixteenth Amendment was not proposed in the form: Income taxes
are indirect taxes and do not require apportionment! It was
proposed that Congress shall have the power to lay and collect taxes
on incomes without apportionment. If income taxes were not direct
taxes, why did the Sixteenth Amendment remove the need to
apportion them, when even Brushaber recognized that indirect
taxes do not have to be apportioned? I submit the Brushaber
decision fails to recognize that Pollock did consider the burden
imposed on the income itself, and reached the conclusion that
income taxes were direct taxes in the constitutional sense.
No other case in the history of income taxation went into such
depth on the issue of what is and is not a direct tax as did Pollock.
This issue was extensively researched and briefed by the parties
involved in the case and by the Supreme Court. Justice White, being
unable to refute this fact of law neither overruled the Pollock
holding nor disputed it; instead Justice White held that the purpose
of the Sixteenth Amendment was to prevent the use of the “Pollock
principle.” It is my opinion that Justice White’s indirect attempt to
overturn Pollock is wholly unpersuasive; he clearly failed to state a
historical, factual or legal basis for his conclusion that a tax on
income is an indirect, excise tax.
It is clear that Mr. Brushaber and his attorneys correctly stated the
proposition to the Supreme Court that the Sixteenth Amendment
relieved the income tax, which was a direct tax, from the
requirement of apportionment, and that the Brushaber Court failed
miserably in attempting to refute Mr. Brushaber’s legal position.
A tax imposed on all of a person’s annual gross receipts is a direct
tax on personal property that must be apportioned. A tax imposed
on the “income” derived from those gross receipts is also a direct
tax on property, but as a result of the Sixteenth Amendment,
Congress no longer has to enact legislation calling for the
apportionment of a tax on that income. As stated in Eisner, the
68
JUDICIAL TYRANNY AND YOUR INCOME TAX
issue does indeed become, “What is and what is not income?” That
question is answered in the next chapter.
DIRECT OR INDIRECT TAX
69
ENDNOTES
31.
It appears that Mr. Hamilton was a forerunner of today’s typical
politician, saying one thing to be elected and doing the complete
opposite once in office.
32.
Who made this assumption is not stated in the Brushaber
opinion.
33.
The word “guise” is defined in Webster’s Third New
International Dictionary as: “A superficial seeming: an artful or
simulated appearance (as of propriety or worth)<that such
misconduct should take the guise of religious ritual is shameful>
<tricked the widow in the guise of a friend of her late husband>“
34.
See, Pollock, 157 U.S. at 687, quoting from the case of Cohens v.
Virginia, 6 Wheat. 264, 399: “It is a maxim not to be
disregarded that general expressions, in every opinion, are to be
taken in connection with the case in which those expressions are
used. If they go beyond the case, they may be respected, but
ought not to control the judgment in a subsequent suit when the
very point is presented for decision. The reason of the maxim is
obvious. The question actually before the court is investigated
with care, and considered in its full extent. Other principles
which may serve to illustrate it are considered in their relation
to the case decided, but their possible bearing on all other cases
is seldom completely investigated.”
35.
This is not what Pollock held, but unlike Brushaber which held
the income tax was an excise tax, Eisner correctly found the
purpose of the Sixteenth Amendment was to remove the
requirement for apportionment from the income tax, which
Pollock did hold was direct in the constitutional sense.
70
JUDICIAL TYRANNY AND YOUR INCOME TAX
INCOME AND THE INTERNAL REVENUE CODE
71
CHAPTER III
INCOME AND THE INTERNAL REVENUE CODE
Any analysis of the federal tax laws requires a basic understanding
of the arrangement of the Internal Revenue Code. Although not yet
officially codified within the United States Code due to
“inconsistent, redundant and obsolete provisions,”36 the Internal
Revenue Code of 1986, as amended, is nonetheless often referred to
as “Title 26” of the United States Code. The “title” is broken down
into subtitles, which are further broken down into chapters,
subchapters, parts, subparts and sections. Sections can be further
divided
into
lettered
paragraphs,
sub-paragraphs,
sub-
subparagraphs and sub-sub-subparagraphs. The primary Subtitles
are:
Subtitle A
-
Income Taxes
Subtitle B
-
Estate and Gift Taxes
Subtitle C
-
Employment Taxes and Collection of
Income Tax at Source
Subtitle D
-
Miscellaneous Excise Taxes
Subtitle E
-
Alcohol, Tobacco and Certain Other
Excise Taxes
Subtitle F
-
Procedure and Administration
Subtitle G
-
The Joint Committee on Taxation
Subtitle H
-
Financing of Presidential Election
Campaign
72
JUDICIAL TYRANNY AND YOUR INCOME TAX
The Internal Revenue Code (1988 edition) defines the term
“taxpayer” as used in Title 26 as follows:
The term “taxpayer” means any person subject to any
internal revenue tax.
26 U.S.C. Section 7701(a)(14).
The term “internal revenue tax” is not defined in the Internal
Revenue Code, but I submit the Internal Revenue Code contains the
only federal “internal revenue taxes.” Thus if one is subject to any
particular tax imposed in the Internal Revenue Code, one is a
taxpayer. A person may be a taxpayer with respect to more than one
tax at a time, but may not therefore necessarily be a taxpayer with
respect to a different tax. Whether or not one is a taxpayer is a
mixed question of law and fact.
In the case of Long v. Rasmussen, 281 F. 236 (1922), the collector
of Internal Revenue assessed certain excise taxes against Mr. Wise,
and sought to collect the tax through seizure of certain property.
Mr. Long brought a suit against the collector to prevent the sale of
the property—claiming ownership of it—and to recover its
possession. The collector argued that the anti-injunction statute,
Section 3224 of the Internal Revenue Code, prevented Mr. Long
from suing to challenge the collection of the tax. In refusing to
dismiss the suit under the provisions of the anti-injunction statute,
the Court held that as to the taxes assessed against Mr. Wise, Mr.
Long was not the taxpayer of that tax, and therefore, Section 3224
did not apply to him:
The instant suit is not to restrain assessment or
collection of taxes of Wise, but is to enjoin trespass
upon property of plaintiff, and against whom no
assessment has been made, and of whom no collection
is sought. Note, too, the taxes are not assessed against
the property. This presents a widely different case
than wherein the person assessed, or whose property
INCOME AND THE INTERNAL REVENUE CODE
73
is assessed, seeks to restrain assessment or collection
on the theory that he or it is exempt from taxation, or
that for any reason the tax is illegal.
The distinction between persons and things within the
scope of the revenue laws and those without them is
vital. See DeLima v. Bidwell, 182 U.S. 176, 179, 21
Sup.Ct. 743, 45 L.Ed 1041. To the former only does
section 3224 apply (see cases cited in Violette v.
Walsh, (D.C.) 272 Fed. 1016), and the well-
understood exigencies of government and its revenues
and their collection do not serve to extend it to the
latter. It is a shield for official action, not a sword for
private aggression.
Long v. Rasmussen, 281 F. at 238.
First National Bank of Emlenton, Pa. v. United States, 161 F.Supp.
844 (1958), also discusses this issue in dicta,37 the suit having been
dismissed because the United States was named as a party as
opposed to the District Director. The purchaser of certain tools
obtained a loan from the First National Bank, and as security for
the loan gave the bank a chattel mortgage on the tools. The I.R.S.
issued a lien for non-payment of employment taxes under Subtitle
C of the Internal Revenue Code, and then seized the tools. The bank
brought suit claiming an ownership interest in the tools as a result
of its chattel mortgage. While the case was dismissed for lack of
jurisdiction, the Court nonetheless discussed whether the bank was
a nontaxpayer as to the tax assessed against the purchaser of the
tools, and found that it was.
Stuart v. Chinese Chamber of Commerce of Phoenix, 168 F.2d 709
(1948), is similar to the above cases. Mr. Thet was arrested for
narcotics violations and a search uncovered $32,000 in a safe. The
money was taken by the Narcotics Bureau and then it was seized by
the I.R.S. for payment of Thet’s tax liability. Suit was brought by the
Chinese Chamber of Commerce alleging the $32,000 was theirs,
74
JUDICIAL TYRANNY AND YOUR INCOME TAX
and that Thet was just holding the money for them in his safe. The
Court found that the Chinese Chamber of Commerce was not a
taxpayer in the strict sense of the word; i.e., they had no obligation
as to Thet’s taxes, which were the only taxes in question. The Court
ordered the money to be returned to the Chinese Chamber of
Commerce, and denied a motion by the I.R.S. for dismissal on the
grounds the Chinese Chamber of Commerce did not follow the steps
outlined in the Internal Revenue Code to recover their property.
The Court specifically found that Section 3772 was not applicable to
nontaxpayer third parties to the tax.
The Economy Plumbing & Heating Co., Inc. v. U.S. case, [470 F.2d
585 (1972)], was limited to the issue of whether or not the plaintiffs
were entitled to interest (Economy, 470 F.2d at 587), and the
comments about nontaxpayers are dicta. As a nontaxpayer
Economy Plumbing & Heating would not receive interest on the
money illegally seized by the I.R.S., so it was their attempt to be
declared taxpayers. The Court stated:
We agree with the defendant that the plaintiffs are not
taxpayers in this case with respect to these funds
within the meaning of the revenue laws. Lieb was the
taxpayer and it is not a party to this action. While it is
true that there was a misapplication of plaintiffs’
funds to the payment of Lieb’s taxes, this wrongful act
did not result in plaintiffs becoming taxpayers to the
extent of misapplied funds. Neither was there any
over payment of plaintiffs’ taxes.
Economy, 470 F.2d at 588.
These cases lead to the conclusion that whether or not one is a
taxpayer is dependent upon the particular tax in question. The
Internal Revenue Service specifically recognizes that not everyone
must file a federal income tax return. On page 4 of the instruction
booklet for preparing the 1989 Form 1040, under the hearing “Who
INCOME AND THE INTERNAL REVENUE CODE
75
Must File,” the I.R.S. tells us: “Use Chart A below to see if you must
file a return.”
Congress has enacted two laws, the Privacy Act, 5 U.S.C. Section
552a(e)(3), and the Paperwork Reduction Act, 44 U.S.C. Section
3504(c)(3)(C), which directs the government to advise you if you
are required to file a federal income tax return.
The Privacy Act states that an agency [the Internal Revenue Service
is such an agency]38 requesting information from a citizen must:
(3) inform each individual whom it asks to supply
information, on the form which it uses to collect the
information or on a separate form that can be
retained by the individual—
(A)
the authority which authorizes the
solicitation of the information and
whether
disclosure
of
such
information
is
mandatory
or
voluntary;
(B)
the principal purpose or purposes for
which the information is intended to
be used;
(C)
the routine uses which may be made
of the information, as published
pursuant to paragraph (4)(D) of this
subsection; and
(D)
the effects on him, if any, of not
providing all or any part of the
requested information ...
76
JUDICIAL TYRANNY AND YOUR INCOME TAX
The Paperwork Reduction Act states that the Director of the Office
of Management and Budget must include with his information
request:
[A] statement to inform the person receiving the
request why the information is being collected, how it
is to be used, and whether responses to the request
are voluntary, required to obtain a benefit, or
mandatory ...
The Privacy Act and Paperwork Reduction Act statements which the
Internal Revenue Service currently uses with respect to the federal
income tax state:
Our legal right to ask for information is Internal
Revenue Code Sections 6001, 6011, 6012(a) and their
regulations. They say that you must file a return or
statement with us for any tax you are liable for. Your
response is mandatory under these sections.
Sections 6001 and 6011 are set forth for your information:
Section 6001:
Every person liable for any tax imposed by this title,
or for the collection thereof, shall keep such records,
render such statements, make such returns, and
comply with such rules and regulations as the
Secretary may from time to time prescribe. Whenever
in the judgment of the Secretary it is necessary, he
may require any person, by notice served upon such
person or by regulations, to make such returns, render
such statements, or keep such records as the Secretary
deems sufficient to show whether or not such person
is liable for tax under this title. The only records
which an employer shall be required to keep under
this section in connection with charged tips shall be
INCOME AND THE INTERNAL REVENUE CODE
77
charge receipts, records necessary to comply with
Section 6053(c) and copies of statements furnished by
employees under Section 6053(a).
Section 6011:
(a) General Rule. When required by regulations
prescribed by the Secretary any person made liable for
any tax imposed by this title, or for the collection
thereof, shall make a return or statement according to
the forms and regulations prescribed by the Secretary.
Every person required to make a return or statement
shall include therein the information required by such
forms or regulations.
* * *
(f) Income, estate, and gift taxes. For requirement that
returns of income, estate, and gift taxes be made
whether or not there is tax liability, see subparts B
and C.
As to Sections 6001 and 6011 it is important at this point to make
the observation that in several places in the Internal Revenue Code
Congress was quite specific in identifying those made liable for a tax
and the fact that a return was required. For example, in Subtitle E
pertaining to alcohol, tobacco and other excise taxes are found
these provisions:
Section 5005:
(a) The distiller or importer of distilled spirits shall be
liable for the taxes imposed thereon by section
5001(a)(l).
78
JUDICIAL TYRANNY AND YOUR INCOME TAX
Section 5061:
(a) The taxes on distilled spirits, wines, and beer
shall be collected on the basis of a return.
Section 5703:
(a)(l) The manufacturer or importer of tobacco
products and cigarette papers and tubes shall be
liable for the taxes imposed therein by section 5701.
(b)(l) ... Such taxes shall be paid on the basis of
return.
In Subtitle D, pertaining to miscellaneous excise taxes, we find
Section 4374:
The tax imposed by this chapter shall be paid, on
the basis of a return, by any person who makes,
signs, issues, or sells any of the documents and
instruments subject to the tax, or for whose use or
benefit the same are made, signed, issued, or sold.
There is, however, no section in Subtitle A pertaining to Income
Taxes stating that one is liable for the income tax,39 that one is
required to make a return or that one must pay the income tax,
nor are there any cross references to any of the provisions in
Subtitle F where Sections 6001 or 6011 are found. The only
exception to this is found in Section 1461 which pertains to the
withholding of taxes on nonresident aliens. Under the legal doctrine
“expressio unius est exclusio alterius,”40 it appears that Congress
could have, but specifically chose not to create an automatic,
statutory liability for Subtitle A Income Taxes.
Liability for income taxes is established through an administrative
action known as an assessment:
INCOME AND THE INTERNAL REVENUE CODE
79
The statute prescribes the rule of taxation. Some
machinery must be provided for applying the rule to
the facts in each taxpayer’s case, in order to ascertain
the amount due. The chosen instrumentality for the
purpose is an administrative agency whose action is
called an assessment. The assessment may be a
valuation of property subject to taxation which
valuation is to be multiplied by the statutory rate to
ascertain the amount of tax. Or it may include the
calculation and fix the amount of tax payable, and
assessments of federal estate and income taxes are of
this type.
Bull v. United States, 295 U.S. 247, 259
(1935).
The assessment procedure for taxes shown on returns is contained
in Sections 6201, 6203 and 6303 of the Internal Revenue Code:
Section 6201:
(a)(l) The Secretary is authorized and required to
make the inquiries, determinations, and assessments
of all taxes (including interest, additional amounts,
additions to the tax and assessable penalties) imposed
by this title, or accruing under any former internal
revenue law, which have not been duly paid by stamp
at the time and in the manner provided by law. Such
authority shall extend to and include the following:
The Secretary shall assess all taxes determined by the
taxpayer or by the Secretary as to which returns or
lists are made under this title.
Section 6203:
The assessment shall be made by recording the
liability of the taxpayer in the office of the Secretary in
80
JUDICIAL TYRANNY AND YOUR INCOME TAX
accordance with rules or regulations prescribed by the
Secretary. Upon request of the taxpayer, the Secretary
shall furnish the taxpayer a copy of the record of the
assessment.
Section 6303:
Where it is not otherwise provided by this title, the
Secretary shall, as soon as practicable, and within 60
days, after the making of an assessment of a tax
pursuant to Section 6203, give notice to each person
liable for the unpaid tax, stating the amount and
demanding payment thereof.
Sections 6001 and 6011 clearly apply to those taxpayers specifically
made liable by statutes such as Sections 5005, 5061, 5703 and 4374,
or to those who have been assessed. With respect to the personal
federal income tax, and absent an assessment having been made,
only the withholding agents described in Section 1441 fall within the
requirement to file returns under Sections 6001 and 6011.
Section 6011(f) makes reference to subparts B and C.41 Subpart C
involves estate and gift taxes.42 Subpart B involves federal income
taxes and consists of Sections 6012 through 6017A.43 Section 6013
pertains to the election to file a joint return if married; Section 6014
pertains to the election to have the government compute the tax;
Section 6017A requires those required to file returns to provide
information with respect to residence. Only Sections 6012 and 6017
are relevant to the determination of a statutory requirement to file;
they are discussed below.
Section 6012(a):
(a) General rule. Returns with respect to income taxes
under subtitle A shall be made by the following:
INCOME AND THE INTERNAL REVENUE CODE
81
(1)(A) Every individual44 having for the
taxable year gross income which equals
or exceeds the exemption amount or
more, ...45
Section 6017:
Every individual (other than a nonresident alien
individual) having net earnings from self-employment
of $400 or more for the taxable year shall make a
return with respect to the self-employment tax
imposed by chapter 2.
The self-employment tax mentioned in Section 6017 is the “Tax on
Self-Employment Income” as contained in Chapter 2 of Subtitle A,
Sections 1401 through 1403. The definition of the term “net
earnings from self-employment” is found at Section 1402(a) which
states in pertinent part:
Section 1402:
(a) The term “net earnings from self-employment”
means the gross income derived by an individual from
any trade or business carried on by such individual, ...
Both Sections 6012 and 6017 require the understanding of the term
“gross income.” It is defined in the Internal Revenue Code:
Section 61:
Except as otherwise provided in this subtitle, gross
income means all income from whatever source
derived, including (but not limited to) the following
items:
(1)
Compensation for services, including
fees, commissions, fringe benefits,
and similar items;
82
JUDICIAL TYRANNY AND YOUR INCOME TAX
(2)
Gross income derived from business;
(3)
Gains derived from dealings in
property;
(4)
Interest;
(5)
Rents;
(6)
Royalties;
(7)
Dividends;
(8)
Alimony and separate maintenance
payments;
(9)
Annuities;
(10)
Income from life insurance and
endowment contracts;
(11)
Pensions;
(12)
Income
from
discharge
of
indebtedness;
(13)
Distributive share of partnership
gross
income;
(14)
Income in respect of a decedent; and
(15)
Income from an interest in an estate
or trust.
Congress is unable to define the word “income” due to its inclusion
in the Sixteenth Amendment,46 and Congress acknowledges that the
word “income” as contained in the Internal Revenue Code is to have
INCOME AND THE INTERNAL REVENUE CODE
83
the meaning attributable to it in the Sixteenth Amendment.47 While
Section 61 states that “gross” income means “all” income,
Congress did not define the term “income” in the Internal
Revenue Code.48
As was pointed out in Chapter II, the decision of the United States
Supreme Court in Brushaber is in irreconcilable conflict with the
decisions of the United States Supreme Court in Pollock and Eisner.
The Brushaber Court took the position that the purpose of the
Sixteenth Amendment was to cause the income tax to be considered
an indirect, excise tax, while the Eisner Court took the position that
the purpose of the Sixteenth Amendment was to amend the United
States Constitution to relieve the direct income tax from the
requirement of apportionment. As a result of these conflicting
Supreme Court opinions there is a conflict between the United
States Courts of Appeal; the Second Circuit takes the position that
the income tax is an excise tax and the remaining circuits take the
position that the income tax is a direct tax.
“Income Taxes” are contained in Subtitle A of the Internal Revenue
Code. Excise taxes are contained in Subtitles D and E of the Internal
Revenue Code, with excise taxes on “employers” being contained in
Subtitle C. One could conclude, therefore, that Congress chose not
to impose in Subtitle A an [indirect] excise tax on business,
professions or vocations, but instead chose to impose an income tax
on all income regardless of the source of the income, just as it had
imposed under the 1894 Act. The conflict between the Circuit
Courts of Appeal together with the irreconcilable conflict between
the Pollock, Brushaber and Eisner cases will have to be determined
by the United States Supreme Court in an appropriate case.
There is no question but that the taxes imposed by Subtitle A are
not apportioned, so if the Sixteenth Amendment has not been
properly ratified,49 the taxes imposed by Subtitle A are not
constitutional under the Pollock decisions. One would not be a
taxpayer as to the income tax if the Sixteenth Amendment was
never ratified.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
Assuming, for further analysis, that the Sixteenth Amendment has
been properly ratified, for purposes of Section 6012 of the Internal
Revenue Code, one would be required to file a personal federal
income tax return (Form 1040) only if one were an “individual”50 as
that term is used in Section 6012(a)(l), and one had more than the
threshold amount of “gross income.”
Inasmuch as the term “income” is not defined in the Internal
Revenue Code but is used in Section 61 (a), one must resort to the
intent of Congress in enacting Section 61 in order to determine the
meaning of the term “gross income.” The intent of Congress is set
forth in both the Senate and House Reports which accompanied the
Internal Revenue Code of 195451 as follows:
Section 61 (a) provides that gross income includes “all
income from whatever source derived.” This
definition is based upon the 16th Amendment and the
word “income” is used in its constitutional sense.
House Report No. 1337; Senate Report
No. 1622; U.S. Code Cong, and Admin.
News, 83rd Congress, 2nd Session,
pages 4155 and 4802 respectively, 1954.
The United States Supreme Court has provided us with the
constitutional definition of income based upon the Sixteenth
Amendment:
Income may be defined as the gain derived from
capital, from labor or from both combined, provided it
include profit gained through a sale or conversion of
capital assets.
Stratton’s Indep. v. Howbert, 231 U.S.
399 (1913); Doyle v. Mitchell, 247 U.S.
179 (1920); So. Pacific v. Lowe, 247 U.S.
330 (1918); Eisner v. Macomber, 252
INCOME AND THE INTERNAL REVENUE CODE
85
U.S. 189 (1920); Merchant’s Loan v.
Smietanka, 255 U.S. 509 (1921).
and in order for wages, salaries, compensation for services, etc.
received for labor to constitute income, there must be a gain derived
from that labor. The procedure to determine whether there is or is
not a gain also has its foundation in decisions of the United States
Supreme Court:
It has been well said that, “The property which every
man has in his own labor, as it is the original
foundation of all other property, so it is the most
sacred and inviolable.”
Butchers’ Union Co. v. Crescent City
Co., 111 U.S. 746, 757 (1883) (concurring
opinion of Justice Fields).
Not only does one’s labor constitute property, but the employment
contract also constitutes property:
The principle is fundamental and vital. Included in
the right of personal liberty and the right of private
property—partaking of the nature of each—is the right
to make contracts for the acquisition of property.
Chief among such contracts is that of personal
employment, by which labor and other services are
exchanged for money or other forms of property.
Coppage v. Kansas, 236 U.S. 1, 14
(1914).
Thus a contract for labor is a contract for the sale of property:
In our opinion that section, in the particular
mentioned, is an invasion of the personal liberty, as
well as of the right of property, guaranteed by that
86
JUDICIAL TYRANNY AND YOUR INCOME TAX
Amendment (Fifth Amendment). Such liberty and
right embraces the right to make contracts for the
purchase of the labor of others and equally the right to
make contracts for the sale of one’s own labor; ...
Adair v. United States, 208 U.S. 161, 172
(1908).
Internal Revenue Code Sections 1001, 1011 and 1012, and their
regulations, 26 C.F.R. Sections l.1001-l(a) 1.1011-1 and 1.1012-l(a),
provide the method for determining the gain derived from the sale
of property:
Section 1001(a):
The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom
over the adjusted basis provided in section 1011 for
determining gain, ...
Section 1001(b):
The amount realized from the sale or other
disposition of property shall be the sum of any money
received plus the fair market value of the property
(other than money) received.
Section 1011:
The adjusted basis for determining the gain or loss
from the sale or other disposition of property,
whenever acquired, shall be the basis (determined
under section 1012...), adjusted as provided in section
1016.
INCOME AND THE INTERNAL REVENUE CODE
87
Section 1012:
The basis of property shall be the cost of such
property ...
The cost of property purchased under contract is its fair market
value as evidenced by the contract itself, provided neither the buyer
nor seller were acting under compulsion in entering into the
contract, and both were fully aware of all of the facts regarding the
contract. Terrance Development Co. v. C.I.R.52 345 F.2d 933
(1965); Bankers Trust Co. v. U.S., 518 F.2d 1210 (1975); Bar L
Ranch, Inc. v. Phinney, 426 F.2d 995 (1970); Jack Daniel Distillery
v. U.S., 379 F.2d 569 (1967); In re Williams’ Estate, 256 F.2d 217
(1958). In other words, if an employer and employee agree that the
employee will exchange one hour of his time in return for a certain
amount of money, the cost, or basis under Section 1012, of the
employee’s labor is the pay agreed upon. By the same token, if an
attorney, doctor or other independent contractor agrees to perform
a certain service for an agreed upon amount of compensation, the
value of the service to be performed is the amount agreed upon as
payment for the service.
In the case of the sale of labor, none of the provisions of Section
1016 are applicable, and the adjusted basis of the labor under
Section 1011 is the amount paid. Therefore, when the employer pays
the employee the amount agreed upon, or the professional is paid
for his or her services, there is no excess amount realized over the
adjusted basis, and there is no gain under Section 1001. There being
no gain, there is no “income” in the constitutional sense, and no
“gross income” under Section 61 (a).
If one has no gain, one would not have sufficient “gross income” to
require the filing of a federal personal income tax return under
Section 6012. Likewise, without gain, there can be no “self-
employment income,” and one who is self-employed would not be
required to file a federal personal income tax return under Section
6017.
88
JUDICIAL TYRANNY AND YOUR INCOME TAX
If one has no income, one would also not be subject to many of the
provisions of Subtitle C dealing with employment taxes, nor would
one be required to file a Form W-4:
a) The Federal Insurance Contributions Act (FICA) tax
contained in Subtitle C, Subchapter A of Chapter 21 at Section 3101
is imposed on the “individual’s” income; if there is no income, there
can be no tax.
b) The corresponding FICA tax on employers contained in
Subtitle C, Subchapter B of Chapter 21 at Section 3111 is clearly
identified as a separate excise tax on employers.
c) The Railroad Retirement Tax on employees contained in
Subtitle C, Subchapter A of Chapter 22 at Section 3201 is also a tax
on the employee’s income; with no income there is no tax.
d) The corresponding Railroad Retirement Tax on
employers contained in Subtitle C, Subchapter C of Chapter 22 at
Section 3221 is a separate excise tax on employers.
e) The Federal Unemployment Tax contained in Subtitle C,
Chapter 23 at Section 3301 is another excise tax on employers.
f) The Railroad Unemployment Repayment Tax contained
in Subtitle C, Chapter 23A at Section 3321 is also a separate excise
tax on employers.
g) The provisions for withholding of wages at the source
under Chapter 24 of Subtitle C is also an income tax, but the
amount of tax withheld is computed upon the amount of wages
received.53 Section 3402(m) makes it clear that if one anticipates a
lower year-end income tax liability, one is entitled to additional
withholding allowances. Each withholding allowance serves the
function of lowering the amount of wages upon which the
withholding is computed. And if one had no income tax liability for
the preceding year and expects to have no income tax liability for
INCOME AND THE INTERNAL REVENUE CODE
89
the current year, Section 3402(n) authorizes filing a W-4 claiming
exempt.54
The history of the federal income tax, decisions of the United States
Supreme Court, and the Internal Revenue Code itself, all lead to the
conclusion that wages do not constitute income. Notwithstanding
the legal correctness of this proposition, many Federal Courts of
Appeal have ruled that wages do constitute income. The next
several chapters analyze these cases in detail, and, in my opinion,
conclusively establish the erroneous and unconstitutional nature of
those cases.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
ENDNOTES
36.
Preface to United States Code, 1982 edition, p. xv, contained in
volume 26 U.S.C.A. Sections 1-100 (May 1988 supplement).
37.
“Opinions of a judge which do not embody the resolution or
determination of the court. Expressions in court’s opinion which
go beyond the facts before court and therefore are individual
views of author of opinion and not binding in subsequent cases.”
Black’s Law Dictionary, p. 408 (5th Ed. 1988).
38.
See 5 U.S.C. Section 551.
39.
See Appendix B in which this was confirmed by the testimony of
an I.R.S. expert witness during a criminal trial.
40.
“The express mention of one thing means the implied exclusion
of another.”
41.
26 U.S.C., Subtitle F, Chapter 61, Part II, Subparts B and C.
42.
This subpart will not be analyzed in that estate and gift taxes
have nothing to do with the federal income tax.
43.
Sections 6015 and 6016 have been repealed.
44.
Section 6012 also applies to corporations [6012(a)(2)J, estates
[6012(a)(3)],
trusts
[6012(a)(4)],
political
organizations
[6012(a)(6)] and homeowners’ associations [6012(a)(7)].
45.
Section 6151(a) of the Internal Revenue Code provides that if a
tax return is required, the amount of taxes shown on the return,
if any, should be paid with the return when it is filed, and
irrespective of any assessment, notice or demand.
46.
Eisner v. Macomber, 252 U.S. 189, 206 (1920), [“In order,
therefore, that the clauses cited from Article I of the
INCOME AND THE INTERNAL REVENUE CODE
91
Constitution may have proper force and effect save only as
modified by the Amendment, and that the latter also may have
proper effect, it becomes essential to distinguish between what
is and what is not “income,” as the term is there used; and to
apply the distinction, as cases arise, according to truth and
substance, without regard to form. Congress 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.”].
47.
50 Cong. Rec., 63rd Cong., 1st Session, p. 3844.
48.
The term “ordinary income” is defined in Section 64 as the gain
from the sale or exchange of property.
49.
See note 6.
50.
The term “individual” which is used not only in Section
6012(a)(l) but also in Section 1 as the subject upon whose
income the tax is imposed, is not defined in the Internal
Revenue Code. It is, however, defined in the treasury regulations
accompanying Section 1. The regulations make a distinction
between “citizens” and “residents” of the United States, and
define a “citizen” as every person born or naturalized in the
United States and subject to its jurisdiction [see 26 C.F.R.
Section l.l-l(a)-(c)]. An extremely strong argument can be made
that the federal income tax as passed by Congress and as
implemented by the Treasury Department was only meant to
apply to individuals within the “territorial or exclusive
legislative jurisdiction of the United States,” as those individuals
would be subject to the “jurisdiction of the United States.” These
exclusive areas, per Article I, Section 8, Clause 17, of the United
States Constitution, are Washington, D.C., federal enclaves and
United States possessions and territories. Outside of these
exclusive areas, state law controls, not federal law. Thus a State
citizen, residing in a State, would not meet the two part test for
being an “individual” upon whose income the tax is imposed in
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JUDICIAL TYRANNY AND YOUR INCOME TAX
Section 1 of the Internal Revenue Code, and would not have the
“status” of a “taxpayer.” It is the official policy of the I.R.S.
[Policy P-(11)-23] to issue, upon written request, rulings and
determination letters regarding status for tax purposes prior to
the filing of a return. On August 29, 1988, I requested such a
“status determination” from the I.R.S. on behalf of one of my
clients. The I.R.S. responded that the argument was “frivolous.”
51.
No change was made in the 1986 Tax Reform Act, PL 99-514,
with respect to the intent of Congress. See 2 U.S. Code, Cong.
and Admin. News, 99th Congress, 2nd Session, 1986.
52.
“C.I.R.” is the abbreviation for Commissioner of Internal
Revenue.
53.
This may account for the common misconception of today’s
citizens that the terms “wages” and “income” have the same
meaning.
54.
Of course, one who does not have the status of a taxpayer would
not be subject to Subtitle C taxes at all, and would have no
requirement of filing a Form W-4. Thus one must determine if
he is a taxpayer, and if so, the amount of his anticipated income
tax liability. The filing of a Form W-4 could be considered as an
admission of status as a taxpayer of the Subtitle A income tax, in
which case one would probably be subject to additional income
taxes under Subtitle C and subject to wage withholding. The
I.R.S. imposes severe penalties for filing documents the contents
of which are disagreeable to them, such as admitting status as a
taxpayer and then claiming exempt. I suggest consultation with
a competent professional any time you are asked to fill out any
government form associated with your employment.
THE LAW AND THE COURTS 1910-1919
93
CHAPTER IV
THE LAW AND THE COURTS
1910-1919
A court decision is one or more judges’ interpretation of the law
written by Congress. The theory behind “case law” is that once a
specific issue or statute has been litigated and decided upon, it
should be considered finally settled unless in error. Thus litigants in
an action often cite in their arguments prior case law in which the
issue was previously determined. This concept is known as stare
decisis. If there is no case law previously determining the issue,
then the litigants look for cases that tend to support their position,
and analogize those cases to the specific issue to be decided in order
to persuade the Court that their position is legally correct. A court
decision will usually state a principle of law and cite to prior cases
which it has relied upon in deciding in favor of one litigant over the
other.
In my analysis of the case law which holds that wages constitute
income, I have analyzed not only those cases regarding that specific
issue, but every case cited in the Court’s written decision. I have
arranged all of these cases by date in an attempt to provide an
historical analysis of the subject.
Stratton’s Independence, Ltd. v. Howbert, 231 U.S. 399
(1913):
Stratton’s Independence, Ltd., was a British corporation carrying
on mining operations in the State of Colorado upon mining lands
owned by itself. Suit was brought by the corporation to recover
taxes paid under protest. The issue presented in the trial court was
whether the value of the ore in place that was extracted from the
94
JUDICIAL TYRANNY AND YOUR INCOME TAX
mining property was properly allowable as depreciation in
estimating the amount of net income of the corporation which was
subject to taxation under the Corporation Tax Act of August 5,
1909.55 Three questions were certified by the Court of Appeals to the
United States Supreme Court:
I.
Does Section 3856 of the Act of Congress, entitled “An Act to
provide revenue, equalize duties, and encourage the industries of
the United States, and for other purposes,” approved August 5,
1909 (36 Stat., p. 11), apply to mining corporations?
II. Are the proceeds of ores mined by a corporation from its own
premises income within the meaning of the aforementioned Act of
Congress?
III. If the proceeds from ore sales are to be treated as income, is
such a corporation entitled to deduct the value of such ore in place
and before it is mined as depreciation within the meaning of
Section 38 of said Act of Congress?
As pertinent to the issue of what is and is not income, the
corporation argued that the proceeds of its mining operation
resulted only from the conversion of the capital represented by real
estate into capital represented by cash; the corporation thus argued
that it had no income but a mere change in the form of its capital
assets, and hence argued that it was not actually engaged in
business as that term was used in the 1909 Act.
The Supreme Court distinguished between the mere selling of the
land with the ore not extracted, calling this a conversion of capital
from one form to another, and the selling of the ore which had been
extracted from the land through a mining operation,57 and called
this engaging in business for a profit:
The very process of mining is, in a sense, equivalent in
its results to a manufacturing process. And, however
the operation shall be described, the transaction is
THE LAW AND THE COURTS 1910-1919
95
indubitably “business” within the fair meaning of the
act of 1909; and the gains derived from it are property
and strictly the income from that business; for
“income” may be defined as the gain derived from
capital, from labor, or from both combined, and here
we have combined operations of capital and labor.
Stratton’s, 231 U.S. at 414-415.
The Court went on to say:
As to the alleged inequality of operation between
mining corporations and others, it is of course true
that the revenues derived from the working of mines
result to some extent in the exhaustion of the capital.
But the same is true of the earnings of the human
brain and hand when unaided by capital, yet such
earnings are commonly dealt with in legislation as
income.
Stratton’s, id.
It is too bad that the Supreme Court failed to specifically identify
the legislation to which it was referring. To the extent the Court is
referring to the prior income tax acts passed by Congress, it must be
remembered that these first acts each included a separate provision
for the taxation of the salary of persons employed by the United
States Government; others were taxed in these acts upon the profit
and gain derived from business, vocations and professions, an
altogether different tax than a direct tax on a civilian’s salary. Also,
at the time of the passage of the 1909 Corporation Excise Tax Act,
no income tax act was in effect, so the gratuitous comments about
earnings from the human brain were not made with respect to any
then existing income tax legislation.58
Also, in discussing income, the Court distinguished between the
type of income by which the corporation excise tax was measured
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JUDICIAL TYRANNY AND YOUR INCOME TAX
and the type of income that can be taxed under the Sixteenth
Amendment:
As to what should be deemed “income” within the
meaning of Section 38, it of course need not be such
an income as would have been taxable as such, for at
that time (the Sixteenth Amendment not having been
as yet ratified), income was not taxable as such by
Congress without apportionment according to
population, and this tax was not so apportioned.
Evidently Congress adopted the income as the
measure of the tax to be imposed with respect to the
doing of business in corporate form because it desired
that the excise should be imposed, approximately at
least, with regard to the amount of benefit presumably
derived by such corporations from the current
operations of the Government. In Flint v. Stone Tracy
Co., 220 U.S. 107, 165, it was held that Congress in
exercising the right to tax a legitimate subject of
taxation as a franchise or privilege, was not debarred
by the Constitution from measuring the taxation by
the total income, although derived in part from
property which, considered by itself, was not taxable.
It was reasonable that Congress should fix upon gross
income, without distinction as to source, as a
convenient and sufficiently accurate index of the
importance of the business transacted. And from this
point of view, it makes little difference that the
income may arise from a business that theoretically or
practically involves a wasting of capital.
Strattons, 231 U.S. at 416-417.
Finally, the Court recognized that the wasting of capital assets had
to somehow figure into the computation of income:
THE LAW AND THE COURTS 1910-1919
97
Congress
no
doubt
contemplated
that
such
corporations, amongst others, were doing business
with a wasting capital, and for such wastage they
made due provision in declaring that from the gross
income there should be deducted (inter alia) “all
losses actually sustained within the year,” including “a
reasonable allowance for depreciation of property, if
any,” etc.
Stratton’s, 231 U.S. at 417-418.
The Supreme Court, based upon this analysis, answered the first
two questions certified to it in the affirmative, and then turned its
attention to the third question.
The Stratton’s case had come to the Supreme Court upon an agreed
statement of facts, one of which was that the gross proceeds of the
sale of the ores during the year were diminished by the moneys
expended in extracting, mining, and marketing the ores, and the
precise difference was taken to be the “value of the ores when in
place in the mine.” The Supreme Court concluded that the
definition of the “value of the ore in place” was intentionally
adopted to exclude all allowance of profit upon the process of
mining, and to attribute the entire profit upon the mining
operations to the mine itself. Thus, the amount of profit, if any,
would be reduced to zero through depreciating the value of the
mine dollar for dollar. Of course, the Court concluded that this
would serve to exempt mining companies from the corporate excise
tax, and the Court, earlier in its opinion, had specifically decided
that Congress had intended to tax them.
Accordingly, the Court had to answer the third question certified to
it in the negative. The Court then declared that it was powerless to
change the definition of “value of the ore in place” which definition
was included within the third question certified for answering, and
therefore the Court was precluded from adjudicating exactly how
much depreciation should be deducted from the gross receipts to
98
JUDICIAL TYRANNY AND YOUR INCOME TAX
compensate for the wasting of the capital asset—the original value
of the ore [and to continue the analogy of the Court, the earnings of
the human brain] in place.
The Stratton’s Independence, Ltd., decision thus stands for the
proposition that “income” for purposes of measuring an excise tax
is different than the “income” that can be taxed under the Sixteenth
Amendment; gives us a broad definition of “income,” and for the
decision of the case, adjudicates that the definition of “net income”
in the Corporate Excise Tax Act of 1909 is gross receipts [called
gross income by the Court] less the actual expenses of producing
the gross receipts [this would result in determining the profit or
gain except for the consideration of the wasting capital] less some
unsettled amount as depreciation for the reduction of capital59 [thus
determining net income], such depreciation not to exceed the total
amount of the gross receipts less the actual expenses of producing
the gross receipts, where the ore is sold for many times more than
its original cost/market value.
One can easily conclude from this that if the property is sold at a
cost which approximates its intrinsic value, then a deduction of that
amount from the gross receipts [or as called by the Court, from the
gross income] is required prior to the calculation of the amount of
the tax. Applying this same principle to wages, they would not
constitute income.
Stanton v. Baltic Mining Co., 240 U.S. 103 (1916):
A stockholder of the Baltic Mining Company instituted a lawsuit to
enjoin the corporation and its officers from voluntarily paying the
tax assessed against it under the Income Tax Section of the 1913
Tariff Act, c. 16, Section 2, 28 Stat. 166, 181 applying to
corporations. This particular statute contained a provision allowing
the mining company to deduct, as a depreciation for the depletion
of its ore deposits, up to 5% of the gross value at the mine of the
output during the year. Mr. Stanton contended that “the 5 per cent
deduction permitted by the statute was inadequate to allow for the
THE LAW AND THE COURTS 1910-1919
99
depletion of the ore body and therefore the law to a large extent
taxed not the mere profit arising from the operation of the mine,
but taxed as income the yearly product which represented to a large
extent the yearly depletion or exhaustion of the ore body from
which during the year ore was taken.” Stanton, 240 U.S. at 109-110.
This argument was phrased by the Supreme Court that Mr. Stanton
was contending the statute under which the corporation was being
taxed deprived the stockholders of equal protection and due process
“[b]ecause [among other reasons] by reason of the differences in
the allowances which the statute permitted, the tax levied was
virtually a net income tax on other corporations and individuals and
a gross income tax on mining corporations.”60 Stanton, 240 U.S. at
111. The Court referred back to its opinion in the Brushaber case for
the resolution of this issue.
A review of the Brushaber decision, however, shows that the
specific issue raised in the Stanton case was not raised in the
Brushaber case, although Mr. Brushaber did claim that several
other aspects of the taxing act were violative of the due process
clause. The Court disposed of these issues as follows:
So far as the due process clause of the Fifth
Amendment is relied upon, it suffices to say that there
is no basis for such reliance since it is equally well
settled that such clause is not a limitation upon the
taxing power conferred upon Congress by the
Constitution; in other words, that the Constitution
does not conflict with itself by conferring upon the
one hand a taxing power and taking the same power
away on the other by the limitations of the due
process clause.
Brushaber, 240 U.S. at 25.
The Brushaber opinion cites the following cases to support this
proposition: Treat v. White, 181 U.S. 264 (1901); Patton v. Brady,
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JUDICIAL TYRANNY AND YOUR INCOME TAX
184 U.S. 608 (1902); McCray v. United States, 195 U.S. 27 (1904);
Flint v. Stone Tracy Company, 220 U.S. 107 (1911); and Billings v.
United States, 232 U.S. 261 (1914).
Inasmuch as the history of the United States Constitution discloses
that the first ten amendments were added after the original
Constitution had been ratified, and because the people demanded
that the protection enunciated in the Bill of Rights be set forth, it is
absurd for the Court to take the position that the people did not
intend the government to impose and collect taxes (provisions for
which were contained in the original Constitution) in accordance
with due process. A review of the cases cited by the Court in
Brushaber clearly shows the unconstitutional position of the Court:
Treat v. White:
Section 25 of Schedule “A” of the War Revenue Act of June 13,
1898, 30 Stat. 448, provided for a stamp tax of two cents on each
hundred dollars of face value on the sale, agreement to sell,
memoranda of sale, delivery or transfer of shares or certificates of
stock. Mr. White was a stock broker who sold “calls” for 30,200
shares of stock, upon which calls a tax was imposed and paid under
protest. The issue decided by the Court was whether or not a “call”
was an “agreement to sell” under the statute; Mr. White’s argument
was that if Congress intended the tax to apply to “calls,” it would
have specified the same in the statute. The Court discussed the
several rules of statutory construction which Mr. White believed
were controlling, decided against applying them, and then stated:
The power of Congress in this direction is unlimited.
It does not come within the province of this court to
consider why agreements to sell shall be subject to
stamp duty and agreements to buy not. It is enough
that Congress in this legislation has imposed a stamp
duty upon the one and not upon the other.
THE LAW AND THE COURTS 1910-1919
101
In conclusion, we may say that the language of the
statute seems to us clear. It imposes a stamp duty on
agreements to sell. “Calls” are agreements to sell. We
see nothing in the surroundings which justifies us in
limiting the power of Congress or denying to its
language its ordinary meaning.
Treat, 181 U.S. at 269.
No due process challenge was made to the fact that Congress chose
to tax agreements to sell (“calls”) and did not choose to tax
agreements to buy (“puts”), nor was any other constitutional
challenge made to the validity of this tax. Thus any reliance upon
this case for the proposition that Congress can violate the Bill of
Rights at will in legislating taxes is wholly without foundation.
Patton v. Brady:
In May of 1898, Mr. Patton purchased over 100,000 pounds of
tobacco on the open market and paid all the taxes which to that
point in time were due. In June of 1898 Congress passed a taxing
act which imposed an additional tax on the tobacco. Mr. Patton
refused to pay the tax, was threatened by seizure by the Collector,
and paid the tax under protest. Mr. Patton contended the act passed
by Congress was repugnant to the Constitution. The Court stated
that
Mr.
Patton’s
right
of
recovery
rested
upon
the
unconstitutionality of the act, Patton, 184 U.S. at 611, and found:
It is true other counsel in their brief have advanced a
very elaborate and ingenious argument to show that
this is a direct tax upon property which must be
apportioned according to population within the rule
laid down in the Income Tax Cases, but, as we have
seen, it is not a tax upon property as such but upon
certain kinds of property, having reference to their
origin and their intended use. It may be, as Dr.
Johnson
said,
“a
hateful
tax
levied
upon
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JUDICIAL TYRANNY AND YOUR INCOME TAX
commodities”; an opinion evidently shared by Black
stone, who says, after mentioning a number of articles
that had been added to the list of those excised, “a list
which no friend to his country would wish to see
further
increased.”
But
these
are
simply
considerations of policy and to be determined by the
legislative branch, and not of power, to be determined
by the judiciary. We conclude, therefore, that the tax
which is levied by this act is an excise, properly so
called, and we proceed to consider the further
propositions presented by counsel.
Patton, 184 U.S. at 618-619.
Thus far, the Court is stating that Congress has the power to
determine the articles, the consumption ,or manufacture of which
will be subject to an excise tax; the Court does not state that
Congress can ignore the provisions of the Fifth Amendment in
imposing the tax.
Mr. Patton next challenged the right of Congress to pass a tax which
levied an excise tax on articles which had once before been
subjected to an excise tax. This issue was disposed of by the Court
under the doctrine that Congress passed the legislation under
wartime exigencies and it was not the Court’s function to interpose
its policy opinions over the policy opinions of the Legislature. But in
direct opposition to the position elaborated in the Brushaber
opinion [that the due process clause of the Constitution does not
apply to taxation], quoting Mr. Justice Cooley in his work on
Taxation at page 34, the Patton Court stated:
But so long as the legislation is not colorable merely,
but is confined to the enactment of what is in its
nature strictly a tax law, and so long as none of the
constitutional rights of the citizen are violated in the
directions prescribed for enforcing the tax, the
legislation is of supreme authority.61
THE LAW AND THE COURTS 1910-1919
103
Patton, 184 U.S. at 621.
It was also contended by Mr. Patton that the power granted to
Congress to impose excises was an arbitrary, unrestrained power.
The Court responded:
[B]ut the Constitution, art. 1, sec. 8, provides that “all
duties, imposts and excises shall be uniform
throughout the United States.” The exercise of the
power is, therefore, limited by the rule of uniformity.
The framers of the Constitution, the people who
adopted it, thought that limitation sufficient, and
courts may not add thereto.
Patton, 184 U.S. at 622.
Here Patton clearly states the Court cannot change the Constitution
by expanding on specific limitations which are contained in it. In
the Brushaber quote above, the Court contends it has authority to
remove the limitations of due process in the imposition and
collection of federal taxes. No court has the power to destroy the
Constitution or any part thereof.
McCray v. United States:
Mr. McCray, a licensed retail dealer in oleomargarine, bought fifty
pounds of oleomargarine which was yellow colored because of the
use of yellow coloring in butter, and butter was an included
ingredient of the oleomargarine. Congress had imposed an excise
tax on oleomargarine manufactured to look like butter at a higher
rate than the excise tax imposed on oleomargarine manufactured
not to look like butter. The government sought to collect from Mr.
McCray the excise tax at the higher rate because of the yellow
appearance of the oleomargarine he had purchased for resale under
his license. Mr. McCray objected, alleging that despite the fact that
the oleomargarine he had purchased looked like butter, it was not
manufactured to look like butter by the introduction of artificial
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coloring during the manufacturing of the oleomargarine. Therefore,
he argued that the higher rate did not apply to the oleomargarine he
had purchased, and having paid the excise tax at the lower rate, he
argued that he had fully complied with the law. McCray, 195 U.S. at
27-28.
Mr. McCray also argued that if the proper construction of the law
required him to pay the higher tax, then the law was repugnant to
the Constitution because; 1) requiring the payment of the higher
rate of tax would drive the price of oleomargarine up to the point
where it could no longer compete with butter, and would thus
destroy the oleomargarine industry, and deprive him of his
property without due process of law; 2) the levy of such a burden (of
the higher tax) was beyond the constitutional power of Congress; 3)
the act was an unwarranted interference by Congress with the
police powers reserved to the several States and to the people of the
United States by the Tenth Amendment; 4) the act was
unconstitutional because the statute left the determination of what
constituted artificial coloration of oleomargarine with an executive
officer thereby investing him with judicial authority;62 and 5) the
tax discriminated against oleomargarine in favor of butter, which
would result in a government-caused destruction of the
oleomargarine industry in favor of the butter industry, violating
fundamental principles of equality and justice which are inherent in
the Constitution of the United States. McCray, 195 U.S. at 29-30.
This case was decided by Mr. Justice White63 who first summarized
the statutes in question. The first section defined butter as
including or not including “additional coloring matter.” The second
section defined oleomargarine as including that manufactured
partially from butter. Mr. Justice White then recognized that the
law had been amended in 1902,64 and that the title of the act was:
An act to make oleomargarine and other imitation
dairy products subject to the laws of any State or
Territory or the District of Columbia in which they are
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transported, and to change the tax on oleomargarine
...
McCray, 195 U.S. at 44.
The first section of the amended act provided that immediately
upon importation into a State, Washington D.C., or a Territory, the
product was to be subject to their respective laws as if produced
within the jurisdiction itself, and this was so regardless of the
oleomargarine having been introduced into the jurisdiction in its
original packages.65 The third section amended section eight of the
original act, and provided that “[w]hen oleomargarine is free from
artificial coloration that causes it to look like butter of any shade of
yellow, said tax shall be one-fourth of one cent per pound.” The tax
on colored oleomargarine was ten cents per pound under the
amended act. McCray, 195 U.S. at 44-45.
The Court first found that Congress clearly intended to tax
oleomargarine that was colored to look like butter at a higher rate,
that Mr. McCray admitted the product was oleomargarine which
contained a coloring to make the product yellow like butter, and
therefore concluded the product fell within the statute. The Court
was not impressed with the argument that the yellow coloring was
used to make the butter look like butter66 and was not used to make
the oleomargarine look like butter. McCray, 195 U.S. at 47-50.
The Court next determined the issue of whether Congress exerted a
power not granted to it in the Constitution when it passed this tax
on oleomargarine. The Court concluded that the tax was a valid
excise tax, and found invalid the following more detailed arguments
raised by Mr. McCray:
(a)
That the purpose of the tax was not to raise revenue,
but to suppress the manufacture of the taxed article.
(b)
That the power to regulate oleomargarine belonged in
the States and not with the federal government.
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(c)
That the tax was so high [thereby suppressing the
oleomargarine industry] that it was not a legitimate tax authorized
by law.
(d)
That the tax was discriminatory [on artificially colored
oleomargarine] and thus acted to suppress the industry.
(e)
That the tax was repugnant to the Fifth Amendment
because the amount of the tax was so out of proportion to the value
of the property taxed as to destroy that property, and thus
amounted to a taking thereof without due process of law; and that
the tax was repugnant to the Tenth Amendment because the
necessary operation and effect of the acts would be to cause the
destruction of the oleomargarine industry and thus exert a power
not delegated to Congress, but reserved to the several States.67
(f)
That notwithstanding that the congressional power to
tax was unlimited except as otherwise expressed in the
Constitution, the tax was so onerous and so unjust as to be
confiscatory, and therefore it amounted to a violation of those
fundamental rights which was the duty of every free government to
protect. McCray, 195 U.S. at 50-53.
The Court contended that all of the propositions raised by Mr.
McCray rested only on inferences and deductions as to the motives
and purposes of Congress, and disposed of the case by looking into
the constitutional power of the Court to inquire into the purposes or
motives of Congress in considering the power of that body to enact
the laws in question. McCray, 195 U.S. at 53. Mr. McCray asked the
Court to examine whether the tax fell within or without the
mandates of constitutional limitations, and the Court decided to
address the issue of whether or not Congress can impose an excise
tax, two entirely different issues.
Mr. Justice White also had this to say:
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107
Whilst, as a result of our written constitution, it is
axiomatic that the judicial department of the
government is charged with the solemn duty of
enforcing the Constitution, and therefore in cases
properly presented, of determining whether a given
manifestation of authority has exceeded the power
conferred by that instrument, no instance is afforded
from the foundation of the government where an act,
which was within a power conferred, was declared to
be repugnant to the Constitution, because it appeared
to the judicial mind that the particular exertion of
constitutional power was either unwise or unjust. To
announce such a principle would amount to declaring
that in our constitutional system the judiciary was not
only charged with the duty of upholding the
Constitution but also with the responsibility of
correcting every possible abuse arising from the
exercise by the other departments of their conceded
authority. So to hold would be to overthrow the entire
distinction between the legislative, judicial and
executive departments of the government, upon which
our system is founded, and would be a mere act of
judicial usurpation. [Emphasis added.]
McCray, 195 U.S. at 53-54.
With this thought in mind, Justice White, relying upon other cases
for authority, further stated:
As quite recently pointed out by this court in
Knowlton v. Moore, 178 U.S. 41, 60, the often quoted
statement of Chief Justice Marshall in McCulloch v.
Maryland, that the power to tax is the power to
destroy, affords no support whatever to the
proposition that where there is a lawful power to
impose a tax its imposition may be treated as without
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the power because of the destructive effect of the
exertion of the authority.
McCray, 195 U.S. at 56.
Justice White was very adept at quoting the Constitution and
subverting it at the same time. The very purpose of our system of
government was to prevent abuse, the idea being if one department
became abusive, the other two would prevent the abuse from
harming the people:
To what expedient, then, shall we finally resort, for
maintaining in practice the necessary partition of
power among the several departments as laid down in
the Constitution. The only answer that can be given is
that as all these exterior provisions are found to be
inadequate the defect must be supplied, by so
contriving the interior structure of the government as
that its several constituent parts may, by their mutual
relations, be the means of keeping each other in their
proper places.
* * *
But the great security against a gradual concentration
of the several powers in the same department consists
in giving to those who administer each department
the necessary constitutional means and personal
motives to resist encroachments of the others. The
provision for defense must in this, as in all other
cases, be made commensurate to the danger of the
attack. Ambition must be made to counteract
ambition. The interest of the man must be connected
with the constitutional rights of the place. It may be a
reflection on human nature that such devices should
be necessary to control the abuses of government.
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109
But what is government itself but the greatest of all
reflections on human nature? [Emphasis added.]
James Madison, The Federalist Papers,
No. 51.
When the Constitution was proposed to the American people as the
foundation of a form of government designed to 1) promote the
maximum liberty for the people and 2) provide the maximum
protection from government encroachment, Founding Father
James Madison stated it was a mandated duty for members of one
branch of government to examine the motives of those in the other
branches of government and to stop abuses of government when
found. Just a little over one hundred years later, Supreme Court
Justice White declared it to be a mandated duty for members of the
other branches of government not to stop abuse, especially when
the abuse is founded under the guise of lawful constitutional
authority.
All of the cases cited by Justice White support the position that the
other branches of government cannot interfere with a legitimate
exercise of the taxing power by Congress. With that principle there
is no argument. However, when the taxation becomes destructive,
as Justice White readily admits it can, then the power exerted by
Congress is not legitimate. The power to tax under the Constitution
doesn’t change, but the exercise of the power can be either lawful or
not. And when the power is exercised unlawfully, the other two
branches of government are obligated to stop the abuse.
Justice White concluded here in the opinion that neither the motive
nor the purpose of Congress in enacting the oleomargarine statutes
could be inquired into,68 and then proceeded to analyze whether
Congress had exceeded its powers within the framework of its
totally unfettered power. In this context, Justice White easily found
that Congress had not exceeded its powers:
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1. Undoubtedly, in determining whether a particular
act is within a granted power, its scope and effect are
to be considered. Applying this rule to the acts
assailed, it is self-evident that on their face they levy
an excise tax. That being their necessary scope and
operation, it follows that the acts are within the grant
of power. The argument to the contrary rests on the
proposition that, although the tax be within the
power, as enforcing it will destroy or restrict the
manufacture of artificially colored oleomargarine,
therefore the power to levy the tax did not obtain.
This, however, is but to say that the question of power
depends, not upon the authority conferred by the
Constitution, but upon what may be the consequence
arising from the exercise of the lawful authority.69
McCray, 195 U.S. at 59.
The other contentions of Mr. McCray were also swiftly disposed of,
leaving only the last argument that: “the taxing laws are void,
because they violate those fundamental rights which it is the duty of
every free government to safeguard, and which, therefore, should be
held to be embraced by implied though none the less potential
guaranties, or in any event to be within the protection of the due
process clause of the Fifth Amendment.” McCray, 195 U.S. at 62-
63. Justice White believed this principle did not apply in Mr.
McCray’s case. Justice White reasoned that the Supreme Court had
found oleomargarine could be mistaken for butter and hence the
opportunity for deception existed. Thus, the Court had found that a
State could, under its police powers, completely prohibit the
manufacture of oleomargarine within its jurisdiction, and
specifically found that such state legislation did not violate “the due
process clause of the Fourteenth Amendment.” The conclusion of
the Court was that Congress could impose a federal tax that is
destructive of the manufacture of oleomargarine70 [McCray, id.], a
position contrary to the very principle that the Constitution is the
Supreme Law of the Land and must be adhered to by the courts in
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111
determining if a law passed by Congress is in conflict with its
express provisions:
The question whether an act, repugnant to the
constitution, can become the law of the land, is a
question deeply interesting to the United States; but
happily, not of an intricacy proportioned to its
interest. It seems only necessary to recognize certain
principles, supposed to have been long and well
established, to decide it.
That the people have an original right to establish, for
their future government, such principles, as, in their
opinion, shall most conduce to their own happiness is
the basis on which the whole American fabric has
been erected. The exercise of this original right is a
very great exertion; nor can it, nor ought it, to be
frequently repeated. The principles, therefore, so
established, are deemed fundamental. And as the
authority from which they proceed is supreme, and
can seldom act, they are designed to be permanent.
The original and supreme will organized the
government, and assigns to different departments
their respective powers. It may either stop here, or
establish certain limits not to be transcended by those
departments.
The government of the United States is of the latter
description. The powers of the legislature are defined
and limited, and that those limits may not be
mistaken, or forgotten, the constitution is written. To
what purpose are powers limited, and to what purpose
is that limitation committed to writing, if these limits
may, at any time, be passed by those intended to be
restrained? The distinction between a government
with limited and unlimited powers is abolished, if
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those limits do not confine the persons on whom they
are imposed, and if acts prohibited and acts allowed,
are of equal obligation. It is a proposition too plain to
be contested, that the constitution controls any
legislative act repugnant to it; or, that the legislature
may alter the constitution by an ordinary act.
Between these alternatives there is no middle ground.
The constitution is either a superior paramount law,
unchangeable by ordinary means, or it is on a level
with ordinary legislative acts, and, like other acts, is
alterable when the legislature shall please to alter it.
If the former part of the alternative be true, then a
legislative act contrary to the constitution is not law; if
the latter part be true, then written constitutions are
absurd attempts, on the part of the people, to limit a
power in its own nature illimitable.
Certainly all those who have framed written
constitutions contemplate them as forming the
fundamental and paramount law of the nation, and,
consequently, the theory of every such government
must be, that an act of the legislature, repugnant to
the constitution, is void.
This theory is essentially attached to a written
constitution, and, is consequently, to be considered,
by this court, as one of the fundamental principles of
our society. It is not therefore to be lost sight of in the
further consideration of this subject.
If an act of the legislature, repugnant to the
constitution, is void, does it, notwithstanding its
invalidity, bind the courts, and oblige them to give it
effect? Or, in other words, though it be not law, does it
constitute a rule as operative as if it was a law? This
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113
would be to overthrow in fact what was established in
theory, and would seem, at first view, an absurdity too
gross to be insisted on. It shall, however, receive a
more attentive consideration.
It is emphatically the province and duty of the judicial
department to say what the law is. Those who apply
the rule to particular cases, must of necessity expound
and interpret that rule. If two laws conflict with each
other, the courts must decide on the operation of
each.
So if a law be in opposition to the constitution; if both
the law and constitution apply to a particular case, so
that the court must either decide the case conformably
to the law, disregarding the constitution, or
conformably to the constitution, disregarding the law,
the court must determine which of these conflicting
rules governs the case. This is of the very essence of
judicial duty.
If, then, the courts are to regard the constitution, and
the constitution is superior to any ordinary act of the
legislature, the constitution, and not such ordinary
act, must govern the case to which they both apply.
Those, then, who controvert the principle that the
constitution is to be considered, in court, as a
paramount law, are reduced to the necessity of
maintaining that courts must close their eyes on the
constitution, and see only the law.
This doctrine would subvert the very foundation of all
written constitutions. It would declare that an act
which, according to the principles and theory of our
government, is entirely void, is yet, in practice,
completely obligatory. It would declare that if the
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legislature shall do what is expressly forbidden, such
act, notwithstanding the express prohibition, is in
reality effectual. It would be given to the legislature a
practical and real omnipotence, with the same breath
which professes to restrict their powers within narrow
limits. It is prescribing limits, and declaring that those
limits may be passed at pleasure.
That it thus reduced to nothing what we have deemed
the greatest improvement on political institutions, a
written constitution, would of itself be sufficient, in
America, where written constitutions have been
viewed with so much reverence, for rejecting the
construction. But the peculiar expressions of the
constitution of the United States furnish additional
arguments in favour of its rejection.
The judicial power of the United States is extended to
all cases arising under the constitution.
Could it be the intention of those who gave this power,
to say that in using it the constitution should not be
looked into? That a case arising under the constitution
should be decided without examining the instrument
under which is arises?
This is too extravagant to be maintained.
In some cases, then, the constitution must be looked
into by the judges. And if they can open it at all, what
part of it are they forbidden to read or to obey?
There are many other parts of the constitution which
serve to illustrate this subject.
It is declared that “no tax or duty shall be laid on
articles exported from any states.” Suppose a duty on
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115
the export of cotton, of tobacco, or of flour, and a suit
instituted to recover it. Ought judgment to be
rendered in such a case? Ought the judges to close
their eyes on the constitution and see only the law?
The constitution declares “that no bill of attainder or
ex post facto law shall be passed.”
If, however, such a bill should be passed, and a person
would be prosecuted under it, must the court
condemn to death those victims whom the
constitution endeavors to preserve?
“No person,” says the constitution, “shall be convicted
of treason unless on the testimony of two witnesses to
the same overt act, or on confession in open court.”
Here the language of the constitution is addressed
especially to the courts. It prescribes, directly for
them, a rule of evidence not to be departed from. If
the legislature should change that rule, and declare
one witness, or a confession out of court, sufficient for
conviction, must the constitutional principle yield to
the legislative act?
From these, and many other selections which might
be made, it is apparent, that the framers of the
constitution contemplated that instrument as a rule
for the government of courts, as well as of the
legislature.
Why otherwise does it direct the judges to take an
oath to support it? This oath certainly applies in an
especial manner, to their conduct, in their official
character. How immoral to impose it on them, if they
were to be used as the instruments, and the knowing
instruments, for violating what they swear to support!
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The oath of office, too, imposed by the legislature, is
completely demonstrative of the legislative opinion on
this subject. It is in these words: “I do solemnly swear
that I will administer justice without respect to
persons, and do equal right to the poor and to the
rich; and that I will faithfully and impartially
discharge all the duties incumbent on me as
, according to the best of my abilities and
understanding agreeably to the constitution and laws
of the United States.”
Why does a judge swear to discharge his duties
agreeable to the constitution of the United States, if
that constitution forms no rule for his government? If
it is closed upon him, and cannot be inspected by
him?
If such be the real state of things, this is worse than
solemn mockery. To prescribe, or to take this oath,
becomes equally a crime.
It is also not entirely unworthy of observation, that in
declaring what shall be the supreme law of the land,
the constitution itself is first mentioned, and not the
laws of the United States generally, but those only
which shall be made in pursuance of the constitution,
have that rank.
Thus, the particular phraseology of the constitution of
the United States confirms and strengthens the
principle, supposed to be essential to all written
constitutions, that a law repugnant to the constitution
is void; and that courts, as well as other departments,
are bound by that instrument.
Marbury v. Madison, 5 U.S. 137, 176-
180 (1803).
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117
Flint v. Stone Tracy Company:
On August 5, 1909, Congress approved “The Corporation Tax” law,
36 Stat. c. 6, 11. Section 38 of the act provided:
That every corporation, joint stock company or
association organized for profit and having a capital
stock represented by shares, and every insurance
company now or hereafter organized under the laws
of the United States or of any State or Territory of the
United States or under the acts of Congress applicable
to Alaska or the District of Columbia, or now or
hereafter organized under the laws of any foreign
country and engaged in business in any State or
Territory of the United States or in Alaska or in the
District of Columbia, shall be subject to pay annually a
special excise tax with respect to the carrying on or
doing business by such corporation, joint stock
company or association or insurance company
equivalent to one per centum upon the entire net
income over and above five thousand dollars received
by it from all sources during such year, exclusive of
amounts received by it as dividends upon stock of
other corporations, joint stock companies or
associations or insurance companies subject to the tax
hereby imposed; or if organized under the laws of any
foreign country, upon the amount of net income over
and above five thousand dollars received by it from
business transacted and capital invested within the
United States and its Territories, Alaska and the
District of Columbia, during such year, exclusive of
amounts so received by it as dividends upon stock of
other corporations, joint stock companies or
associations or insurance companies subject to the tax
hereby imposed.
Flint, 220 U.S. at 143-144.
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Several companies brought suit to have Section 38 declared
unconstitutional on several grounds, and the Flint case was a
consolidation of those various suits. One of those grounds was that
the act was void as lacking in due process of law. Flint, 220 U.S. at
167. The Court disposed of this issue by referencing what it had said
as to the power of Congress to lay the excise tax in question.
The Supreme Court first analyzed Section 38 and stated that it was
the intent of Congress to impose a special excise tax with respect to
the carrying on or doing business by corporations, joint stock
companies or associations, or insurance companies; that the tax
was not imposed upon the franchises of the corporation irrespective
of their use in business, nor upon the property of the corporation,
but upon the doing of corporate or insurance business and with
respect to the carrying on thereof, in a sum equivalent to one per
centum upon the entire net income over and above $5,000 received
from all sources during the year. Flint, 220 U.S. at 145-146.
In other words, the tax is imposed upon the doing of
business of the character described, and the measure
of the tax is to be the income, with the deduction
stated, received not only from property used in
business, but from every source.
Flint, 220 U.S. at 146. The Court stated
that:
This interpretation of the act, as resting upon the
doing of business, is sustained by the reasoning in
Spreckles Sugar Refining Co. v. McClain, 192 U.S.
397, in which a special tax measured by the gross
receipts of the business of refining oil and sugar was
sustained as an excise in respect to the carrying on or
doing of such business.
Flint, 220 U.S. at 147.
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119
Another allegation of those seeking a declaration that Section 38
was unconstitutional was so far as the tax was measured by the
income of bonds non-taxable under Federal statutes, and of
municipal and state bonds beyond the Federal power of taxation,
and so far as the tax was measured by the income from real and
personal estates, Section 38 must fall under the holding of Pollock.
Flint, id. In disposing of this contention, the Court stated:
The act now under consideration does not impose
direct taxation upon property solely because of its
ownership, but the tax is within the class which
Congress is authorized to lay and collect under Art. I,
section 8, cl. 1, of the Constitution, and described
generally as taxes, duties, imposts and excises, upon
which the limitation is that they shall be uniform
throughout the United States.
Within the category of indirect taxation, as we shall
have further occasion to show, is embraced a tax upon
business done in a corporate capacity, which is the
subject-matter of the tax imposed in the act under
consideration. The Pollock case construed the tax
there levied as direct, because it was imposed upon
property simply because of its ownership. In the
present case the tax is not payable unless there be a
carrying on or doing of business in the designated
capacity, and this is made the occasion for the tax,
measured by the standard prescribed. The difference
between the acts is not merely nominal, but rests
upon substantial differences between the mere
ownership of property and the actual doing of
business in a certain way.
Flint, 220 U.S. at 150.
The Court next cited to Thomas v. United States, 192 U.S. 363,
regarding the terms “duties, imposts and excises,” and said:
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We think that they were used comprehensively to
cover customs and excise duties imposed on
importation, consumption, manufacture and sale of
certain commodities, privileges, particular business
transactions, vocations, occupations and the like.
Duties and imposts are terms commonly applied to
levies made by governments on the importation or
exportation of commodities. Excises are “taxes laid
upon the manufacture, sale or consumption of
commodities within the country, upon licenses to
pursue certain occupations, and upon corporate
privileges.” Cooley, Const. Lim., 7th ed., 680.
The tax under consideration, as we have construed the
statute, may be described as an excise upon the
particular privilege of doing business in a corporate
capacity, i.e., with the advantages which arise from
corporate or quasi-corporate organization; or, when
applied to insurance companies, for doing the
business of such companies. As was said in the
Thomas case, 192 U.S. 363 supra, the requirement to
pay such taxes involves the exercise of privileges, and
the element of absolute and unavoidable demand is
lacking. If business is not done in the manner
described in the statute, no tax is payable.
Flint, 220 U.S. at 151-152.
Another contention made by some of the insurance companies was
that they had large investments in municipal bonds and other non-
taxable securities, and in real estate and personal property not used
in the business, and therefore the selection of the measure of the
income from all sources is void, because it reaches property which
is not the subject of taxation. The insurance companies relied upon
the Pollock decision. Flint, 220 U.S. at 162. The Court stated:
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121
But this argument confuses the measure of the tax
upon the privilege, with direct taxation of the estate or
thing taxed. In the Pollock case, as we have seen, the
tax was held unconstitutional, because it was in effect
a direct tax on the property solely because of its
ownership.
* * *
There is nothing in these cases contrary, as we shall
have occasion to see, to the former rulings of this
court which hold that where a tax is lawfully imposed
upon the exercise of privileges within the taxing
power of the State or Nation, the measure of such tax
may be the income from the property of the
corporation, although a part of such income is derived
from property in itself non-taxable. The distinction
lies between the attempt to tax the property as such
and to measure a legitimate tax upon the privileges
involved in the use of such property.
* * *
It is therefore well settled by the decisions of this
court that when the sovereign authority has exercised
the right to tax a legitimate subject of taxation as an
exercise of a franchise or privilege, it is no objection
that the measure of taxation is found in the income
produced in part from property which of itself
considered is non-taxable. Applying that doctrine to
this case, the measure of taxation being the income of
the corporation from all sources, as that is but the
measure of a privilege tax within the lawful authority
of Congress to impose, it is no valid objection that this
measure includes, in part at least, property which as
such could not be directly taxed.
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Flint, 220 U.S. at 162-165.
With respect to due process, the Court further stated:
It is urged that this power can be so exercised by
Congress as to practically destroy the right of the
States to create corporations, and for that reason it
ought not to be sustained, and reference is made to
the declaration of Chief Justice Marshall in McCulloch
v. Maryland that the power to tax involves the power
to destroy. This argument has not been infrequently
addressed to this court with respect to the exercise of
the powers of Congress. Of such contention this court
said in Knowlton v. Moore, supra:
This principle is pertinent only when there is no
power to tax a particular subject, and has no relation
to a case where such right exists. In other words, the
power to destroy which may be the consequence of
taxation is a reason why the right to tax should be
conditioned to subjects which may be lawfully
embraced therein, even although it happens that in
some particular instance no great harm may be
caused by the exercise of the taxing authority as to a
subject which is beyond its scope. But this reasoning
has no application to a lawful tax, for if it had there
would be an end of all taxation; that is to say, if a
lawful tax can be defeated because the power which is
manifested by its imposition may when further
exercised be destructive, it would follow that every
lawful tax would become unlawful, and therefore no
taxation whatever could be levied.
In Veazie Bank v. Fenno, 8 Wall. 533, supra, speaking
for the court, the Chief Justice said:
THE LAW AND THE COURTS 1910-1919
123
It is insisted, however, that the tax in the case before
us is excessive, and so excessive as to indicate a
purpose on the part of Congress to destroy the
franchise of the bank, and is, therefore, beyond the
constitutional power of Congress.
The first answer to this is that the judicial cannot
prescribe to the legislative department of the
government limitations upon the exercise of its
acknowledged powers. The power to tax may be
exercised oppressively upon persons, but the
responsibility of the legislature is not to the courts,
but to the people by whom its members are elected. So
if a particular tax bears heavily upon a corporation, or
a class of corporations, it cannot, for that reason only,
be pronounced contrary to the Constitution.
Flint, 220 U.S. at 168-169.
The Flint Court next cited to the McCray case which was analyzed
hereinabove. In deciding the due process question in the Flint case,
there can be little question but that the justices departed from the
principle enunciated in Marbury v. Madison.
Billings v. United States:
Section 37 of the Tariff Act of August 5, 1909, c.6, 36 Stat. 11, 112,
levied a tonnage tax of seven dollars per gross ton upon the use of
every foreign-built yacht, not used for trade, owned or chartered for
more than six months by any citizen or citizens of the United States.
Section 37 went into effect on August 6, 1909, and the collector of
the port of New York made a demand upon Mr. Billings, as the
owner of a foreign-built yacht weighing 1,091.71 tons, for payment
of $7,644.00. Mr. Billings failed to pay the tax, the United States
brought suit and Mr. Billings raised three defenses:
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1) That the vessel was not enrolled, registered, or documented
as a vessel of the United States and enjoyed no privileges from the
United States. Also that the yacht had only been used outside of the
waters and territorial limits or jurisdiction of the United States;
2) That the tax imposed by the statute was intended by
Congress to be “an annual tax, that it should be prospective and
operate only upon the future use of any such foreign-built yacht,
and that said annual tax had not yet accrued and could not be duly
levied and collected prior to the first day of September in the year
1910.”; and
3) After averring that there were within the United States many
pleasure yachts not foreign-built which were virtually identical to
Mr. Billings’ yacht, charged that the law imposing the burden
sought to be enforced was void because repugnant to the due
process clause of the Fifth Amendment. Billings, 232 U.S. at 278.
The lower court found the sum claimed was due by Mr. Billings as
an excise or duty upon the use of his yacht and that the act
imposing the tax was not repugnant to the Constitution, but found
the government was not entitled to recover interest.
In order “to avoid if it may be the necessity of determining the
constitutional question” (Billings, 232 U.S. at 279), the Court
assumed the Tariff Act in question was adopted by Congress in the
light of the ruling in Pollock v. Farmers Loan & Trust Company,
stated it was certain that Congress intended Section 37 to be an
excise tax, and stated that this was not seriously disputed in
argument, with the controversy turning first upon the period when
the tax provided for was to take effect and the nature and character
of the use which was taxed. Billings, 232 U.S. at 279. The Court also
stated the two issues were so interwoven that they would be
considered and disposed of together.
The Court found that the word “annually” was used not for the
purpose of postponing the time of payment, but rather as provision
THE LAW AND THE COURTS 1910-1919
125
for continuity, and found the tax could be imposed in September of
1909. The Court next addressed the issue of upon what the tax was
assessed.
The Court stated the issue of upon what the tax was assessed was
clearly addressed in the statute:
[T]he recurrence of the tax is annual and depends
upon two elements, ownership or charter rights, as
specified in the act, and the use for any time during
the year. It is to be observed that the provision deals
with ownership and distinguishes between ownership
and use, since it bases the tax not upon the former but
upon the latter.
Billings, 232 U.S. at 280.
The Court, in sophisticated double-talk, then attempted to point out
that even though ownership necessarily entails and contemplates
“use,” as used in the statute, some other type of “use” was intended
than the mere privilege of using which the owner enjoys:
Let it be conceded that the ownership of property
includes the right to use, plainly we think, as use and
ownership are distinguished one from the other in the
provision, the word “use” as there employed means
more than the mere privilege of using which the
owner enjoys, and relates to its primary signification,
as defined by Webster; “The act of employing
anything or of applying it to one’s service; the state of
being so employed or applied.” If the use which arises
from the fact of ownership without more was what the
statute proposed, then it is inconceivable why the
difference between use and ownership was marked in
the provision and made the basis of the tax which it
imposed. While this construction in this case leads to
the same conclusion as does that which the court
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JUDICIAL TYRANNY AND YOUR INCOME TAX
below affixed to the statute, that is, that it taxed the
privilege of use, or, in other words the potentiality of
using involved in ownership, inherently there is this
fundamental difference between the interpretation we
give and that which the lower court adopted, since the
privilege of use is purely passive (or subjective), a
right which necessarily pertains to ownership and
must exist where there is ownership, as one may not
obtain ownership without acquiring the privileges of
use which ownership gives. The other, on the
contrary, that is, use in the statutory sense, although it
arises from ownership, is active (objective), that is, it
is the outward and distinct exercise of a right which
ownership confers but which would not necessarily be
exerted by the mere fact of ownership. The contention
that inequality must be the result of making the tax
depend upon mere use without reference to the extent
of its duration, addresses itself not to the question of
power, and is therefore beyond the scope of judicial
cognizance.
Billings, 232 U.S. at 281.
The author of this opinion is none other than Justice White! On
page 279 the Justice tells us he is going to do his best to avoid
answering the constitutional questions. To do this, first he assumes
Congress knows the distinction between a direct tax and an indirect
tax,71 and then without examining the nature and effect of the tax in
operation, found it to be an excise tax. And to conclusively establish
that the tax was an excise, Justice White merely distinguished the
“use” derived from ownership from the “use” derived from
ownership, the former being “passive (or subjective)” and the latter
being “active (objective).”
With respect to the due process issue of inequality of operation
between citizens who own American-made yachts and citizens who
own foreign-made yachts, Justice White disposed of it by stating,
THE LAW AND THE COURTS 1910-1919
127
without quoting any authority for the proposition, that the issue
was “beyond the scope of judicial cognizance, and besides, the
“excise” tax is levied uniformly among all of those it taxes, and thus
is not violative of Article I, Section 8, Clause 1 nor the due process
clause of the Fifth Amendment.” Billings, 232 U.S. at 282-284.
Finding the tax to be valid in all respects, Justice White ruled that
the government was entitled to interest even though there was no
provision for the collection of interest applicable to Section 37 taxes
in the Tariff Act in question.
The above analysis of Treat, Patton, McCray, Flint and Billings
shows that those cases cannot support the proposition of Justice
White as stated in the Brushaber case that the due process
provisions of the United States Constitution have no applicability to
the levying and collection of federal taxes. And, notwithstanding
Justice White’s closing his eyes to the Constitution, the Stanton
case cannot be cited as authority for the proposition that wages
constitute income.
Edwards v. Keith, 231 F. 110 (2nd Cir. 1916):
Mr. Edwards was an insurance salesman who received commissions
when he first sold an insurance policy, and again whenever the
policy was renewed. Mr. Edwards paid his income tax under protest
and sued the collector, Mr. Keith, for its recovery. Mr. Keith filed a
demurrer to the complaint which the lower court sustained and the
Court then dismissed the case on its merits. This appeal followed on
the single question of:
[W]hether or not the commissions payable to
complainant under the contracts with the Assurance
Society annexed to the complaint, upon renewal
premiums paid on policies obtained through the
instrumentality of appellant prior to March 1, 1913,
but which commissions were not actually paid to and
received by complainant until after March 1, 1913, and
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between that date and December 31, 1913, constitute a
part of the “entire net income” of complainant “arising
or accruing from all sources” between those dates.
Edwards, 231 F. at 111.
The issue presented to the Court was not whether the commissions
constituted income; that question was not raised by the parties. The
Court was asked to consider the commissions as income, and
determine in what year they were to be taxed:
[B]ut the question seems to us a very simple one and
one absolutely determined by the provision in all the
contracts that “commissions shall accrue only as the
premiums are paid in cash.”
Edwards, 231 F. at 112.
One can only speculate as to how this Court would rule if the
question as to what is and is not income were presented to it, for the
Court stated in the last lines of the opinion:
[T]he statute and the statute alone determines what is
income to be taxed. It taxes only income “derived”
from many different specified sources; one does not
“derive income” by rendering services and charging
for them.
Edwards, 231 F. at 113.
Doyle v. Mitchell Brothers Co., 247 U.S. 179 (1918):
Mr. Doyle, the Collector of Internal Revenue, assessed additional
taxes against Mitchell Brothers Company under the Corporation
Excise Tax Act of August 5, 1909, c. 6, 36 Stat. 11, 112, Section 38.
Mitchell Brothers paid the tax under protest and sued for its
recovery. It won in both the District Court and Court of Appeals.
Doyle, 247 U.S. at 180.
THE LAW AND THE COURTS 1910-1919
129
Mitchell Brothers was a lumber manufacturing corporation. In 1903
it purchased land with timber on it for $20.00 per acre. In 1908 the
land was valued at $40.00 per acre. When the corporation filed
returns under the 1909 tax act, it deducted from gross receipts the
market value of the land from which trees were cut at the $40.00
per acre value. The I.R.S. thought the land should have been valued
at $20.00, and sought the difference. Doyle, 247 U.S. at 181-182. As
stated by the Court:
[T]he question is whether this difference (made the
basis of the additional taxes) was income for the years
in which it was converted into money, within the
meaning of the act.
Doyle, 247 U.S. at 182.
The Court stated the position of the Collector as follows:
Starting from this point, the learned Solicitor General
has submitted an elaborate argument in behalf of the
Government, based in part upon theoretical
definitions of “capital,” “income,” “profits,” etc., and
in part upon expressions quoted from our opinions in
Flint v. Stone Tracy Co., 220 U.S. 107, 147, and
Anderson v. Forty-two Broadway Co., 239 U.S., 69,
72, with the object of showing that a conversion of
capital into money always produces income, and that
for the purposes of the present case the words “gross
income” are equivalent to “gross receipts”; the
insistence being that the entire proceeds of a
conversion of capital assets should be treated as gross
income, and that by deducting the mere cost of such
assets we arrive at net income.
Doyle, 247 U.S. at 183-184.
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While the only issue before the Court was whether the $20 or $40
valuation should be used, based upon the government’s argument,
the Court felt compelled to respond:
Yet it is plain, we think, that by the true intent and
meaning of the act the entire proceeds of a mere
conversion of capital assets were not to be treated as
income.
Whatever difficulty there may be about a precise and
scientific definition of “income,” it imports, as used
here, something entirely distinct from principal or
capital either as a subject of taxation or as a measure
of the tax; conveying rather the idea of gain or
increase arising from corporate activities. As was said
in Stratton’s Independence v. Howbert, 231 U.S. 399,
415: “Income may be defined as the gain derived from
capital, from labor, or from both combined.”
Understanding the term in this natural and obvious
sense, it cannot be said that a conversion of capital
assets invariably produces income. If sold at less than
cost, it produces rather loss or outgo. Nevertheless, in
many if not in most cases there results a gain that
properly may be accounted as a part of the “gross
income” received “from all sources”; and by applying
to this the authorized deductions we arrive at “net
income.” In order to determine whether there has
been gain or loss, and the amount of the gain, if any,
we must withdraw from the gross proceeds an amount
sufficient to restore the capital value that existed at
the
commencement
of
the
period
under
consideration.
Doyle, 247 U.S. at 184-185.
THE LAW AND THE COURTS 1910-1919
131
The Court determined that the $40 per acre was the correct amount
to restore the capital value of the land for the cutting of the timber,
and sustained the judgment of the Court of Appeals. Applying the
same principle to labor, and deducting the cost of the labor from the
wages received in exchange therefore, wages would not constitute
income.
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ENDNOTES
55.
“As has been repeatedly remarked, the Corporation Tax Act of
1909 was not intended to be and is not in any proper sense an
income tax law. This court had decided in the Pollock case that
the income tax law of 1894 amounted in effect to a direct tax
upon property, and was invalid because not apportioned
according to population as prescribed by the Constitution. The
act of 1909 avoided this difficulty by imposing not an income
tax, but an excise tax upon the conduct of business in a
corporate capacity, measuring, however, the amount of tax by
the income of the corporation, with certain qualifications
prescribed by the Act itself.” Stratton’s, 231 U.S. at 414.
56.
Sec. 38 imposed a tax on every corporation, joint stock company
or association, organized for profit and having a capital stock
represented by shares, and every insurance company, organized
under the laws of the United States or of any State or Territory
of the United States, or organized under the laws of any foreign
country and engaged in business in any State or Territory of the
United States or in Alaska or in the District of Columbia.
57.
“[E]mploying capital and labor in transmuting a part of the
realty into personalty, and putting it into marketable form.”
Stratton’s, 231 U.S. at 415.
58.
There was no income tax between the years 1895 when Pollock
held the Act of 1894 unconstitutional, and 1913, when Congress
enacted an income tax law after the alleged ratification of the
Sixteenth Amendment.
59.
“It was of course contemplated that the income might be derived
from the employment of property in business, and that this
property might become more or less exhausted in the process;
and because of this, a reasonable allowance was to be made for
depreciation of it, if any. But plainly, we think, the valuation of
THE LAW AND THE COURTS 1910-1919
133
the property and the amount of the depreciation were to be
determined not upon the basis of latent and occult intrinsic
values, but upon considerations that affect market value and
have their influence upon men of affairs charged with the
management of the business and accounting of corporations
that are organized for profit and are engaged in business for
purposes of profit.” Stratton’s, 231 U.S. at p. 421.
60.
It is interesting to note that the gross receipts of the corporation
was called gross income by the Court. In Doyle v. Mitchell, 247
U.S. 179 (1918), the Supreme Court specifically held that the
government’s contention that gross receipts were the same as
gross income was erroneous (see p. 128).
61.
The clear distinction between this quote upholding the
fundamental principles of a federal republic and the Brushaber
quote declaring that citizens have no constitutionally protected
rights is indicative of our government today.
62.
This argument was not contained in the “assignment of errors,”
and was thus not considered by the Supreme Court. McCray,
195 U.S. at 46.
63.
Thus Mr. Justice White cites himself in the Brushaber decision
for his legal authority to excise the Fifth Amendment from the
Constitution with respect to income taxation.
64.
32 Stat. 193.
65.
It is clear that Congress here specifically ceded jurisdiction to
the States and the governments of Washington D.C. and of the
United States Territories to tax and otherwise regulate the
oleomargarine industry within their respective jurisdictions.
66.
Mr. McCray advised the Court that depending upon the season
of the year, the color of natural butter went from pale yellow to
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dark yellow, and that consumers preferred the darker yellow
color.
67.
The argument was worded such that it appears it is being argued
that under the Tenth Amendment, the States have the power to
destroy an industry. An interpretation of the Tenth Amendment
as a grant from the people to the States to destroy industries
defies reality.
68.
Thereby eliminating from consideration whether the motive of
Congress in enacting the legislation was merely the return of a
political favor to the dairy lobby. If it was, then any legislation
passed would be null and void as contrary to constitutional
principles, and the Court would be without jurisdiction due to
the lack of a statute imposing the tax.
69.
Justice White again refused to recognize that the lawfulness of
the authority ceases when the power becomes abusive. This
includes not only the abuse arising at the time of enacting the
statute, but each and every time an American is injured by the
abuse. The injury resulting from an unlawful exertion of power
includes having one’s due process violated. It is clear, then, that
Justice White used the McCray case to lay the foundation for
the policy he announced in Brushaber, the complete eradication
of the Fifth Amendment from proceedings involving taxation.
70.
See note 68. This may explain why Congress gave concur rent
jurisdiction to the States to tax oleomargarine when it amended
the 1886 Act. Rather than challenging this nebulous quantum
leap of jurisdiction, Justice White treacherously used it to avoid
the one fundamental limitation on the exercise of governmental
power over the American people—the lack of jurisdiction of the
federal government in the States. The very fact that Justice
White recognized the principle in light of a complaint of injury
resulting from the violation of that principle shows that his
destruction of the separation of powers doctrine was deliberate.
THE LAW AND THE COURTS 1910-1919
135
71.
A highly suspect assumption in light of the fact the Supreme
Court in Pollock had less than ten years before struck down a tax
that Congress thought to be an indirect excise tax, but was in
actuality a direct tax.
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THE LAW AND THE COURTS 1920-1929
137
CHAPTER V
THE LAW AND THE COURTS
1920-1929
Eisner v. Macomber, 252 U.S. 189 (1920):
Justice Pitney, the author of the Court’s majority opinion, stated
that the question presented in the case was “whether, by virtue of
the Sixteenth Amendment, Congress had the power to tax, as
income of the stockholder and without apportionment, a stock
dividend made lawful and in good faith against profits accumulated
by the corporation since March 1, 1913.” Eisner, 252 U.S. at 199.
Justice Pitney stated the statute in question was the Revenue Act of
September 8, 1916, c. 463, 39 Stat. 756 et seq., Sec. 2(a), which
statute provided that the net income of a taxable person72 shall
include, among other things, dividends. The statute also defined a
dividend as any distribution made by a corporation out of its
earnings or profits accrued since March 1, 1913, and payable to its
shareholders, whether in cash or in stock of the corporation, said
stock to be considered income to the amount of its cash value.
Eisner, 252 U.S. at 199-200.
The facts were that on January 1, 1916, the Standard Oil Company
of California had approximately $50,000,000 worth of $100 par
value shares of stock outstanding. It also had surplus and undivided
profits invested into the corporation worth approximately
$45,000,000, of which about $20,000,000 had been earned prior
to March 1, 1913. In January, 1916, in order to readjust the
capitalization, it was decided to issue additional shares sufficient to
constitute a stock dividend of fifty per cent of the outstanding stock,
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JUDICIAL TYRANNY AND YOUR INCOME TAX
and to transfer from surplus account to capital stock account an
amount equivalent to such issue. Eisner, 252 U.S. at 200.
Ms. Macomber had been the owner of 2,200 shares of the old stock,
and received certificates for 1,100 additional shares, of which 18.07
percent, or 198.77 shares, par value $19,877, were treated as
representing surplus earned between March 1, 1913, and January 1,
1916. Eisner, 252 U.S. at 200-201.
Ms. Macomber paid, under protest, a tax under Section 2(a) of the
1916 Act on the $19,877, filed an administrative appeal, and then
brought suit against the Collector to recover the tax. She contended
that the 1916 tax act was in violation of Article I, Section 2, Clause 3,
and Article I, Section 9, Clause 4, requiring direct taxes to be
apportioned according to population, and that the stock dividend
was not income within the meaning of the Sixteenth Amendment.
Eisner, 252 U.S. at 201.
The Defendant, Mr. Eisner, filed a general demurrer to the
complaint which was overruled, and he did not file any pleadings
thereafter. Judgment was issued in favor of Ms. Macomber, and the
case came to the United States Supreme Court on a writ of error.
Eisner, id. In a split decision, the Court held that neither under the
Sixteenth Amendment nor otherwise did Congress have power to
tax without apportionment a true stock dividend made lawfully and
in good faith, or the accumulated profits behind it, as income of the
stockholder. The Court held the Revenue Act of 1916 contrary to
Article I, Section 2, Clause 3, and Article I, Section 9, Clause 4, with
respect to the tax imposed on such true stock dividends. Eisner, 252
U.S. at 219.
The Court relied upon the decision in Towne v. Eisner, 245 U.S. 418
(1918), where the question was whether a stock dividend made in
1914 against surplus earned prior to January 1, 1913, was taxable
against the stockholder under the Act of October 3, 1913, c. 16, 38
Stat. 114, 166, which provided that net income should include
“dividends,” and also “gains or profits and income derived from any
THE LAW AND THE COURTS 1920-1929
139
source whatever.” In Towne the Supreme Court relied upon the
definition of a stock dividend given in Gibbons v. Mahon, 136 U.S.
549 (1890), to find that a stock dividend made against surplus did
not constitute income as that word was used in the October 3, 1913,
tax act. Eisner, 252 U.S. at 252. This was so because “[a] stock
dividend takes nothing from the property of the corporation, and
adds nothing to the interest of the shareholders. Its property is not
diminished, and their interests are not increased... . The
proportional interest of each shareholder remains the same. The
only change is in the evidence which represents that interest, the
new shares and the original shares together representing the same
proportional interest that the original shares represented before the
issue of the new ones.” Gibbons, 136 U.S. at 559-560. The Court
went on to distinguish between the types of dividends represented
by this issuance of stock, and the types of dividends represented by
a distribution in specie of a portion of the assets of the corporation.
Eisner, 252 U.S. at 204.
The Court, however, was not content to rely upon the mere holding
that the stock dividend did not constitute income because Congress
had stated that a “stock dividend shall be considered income, to the
amount of its cash value.” Eisner, 252 U.S. at 205. The Court then
went into an analysis of the Sixteenth Amendment, defined the very
“income” which is discussed in the Sixteenth Amendment,
discussed the nature of corporations and stock, and held that a
stock dividend did not constitute income under the Sixteenth
Amendment. With respect to the definition of “income,” the Court
stated:
The Sixteenth Amendment must be construed in
connection with the taxing clauses of the original
Constitution and the effect attributed to them before
the Amendment was adopted. In Pollock v. Farmers’
Loan and Trust Co., 158 U.S. 601, under the Act of
August 27, 1894, c. 349, section 27, 28 Stat. 509, 553,
it was held that taxes upon rents and profits of real
property were in effect direct taxes upon the property
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JUDICIAL TYRANNY AND YOUR INCOME TAX
from which such income arose, imposed by reason of
ownership; and that Congress could not impose such
taxes without apportioning them among the States
according to population, as required by Art. I, section
2, cl.3, and section 9, cl.4, of the original Constitution.
Afterwards, and evidently in recognition of the
limitation upon the taxing power of Congress thus
determined, the Sixteenth Amendment was adopted,
in words lucidly expressing the object to be
accomplished: “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.” As repeatedly held, this did not extend
the taxing power to new subjects, but merely removed
the necessity which otherwise might exist for an
apportionment among the States of taxes laid on
income. [Citing Brushaber, 240 U.S. at 17-19, and
other cases.]
A proper regard for its genesis, as well as its very clear
language, requires also that this Amendment shall not
be extended by loose construction, so as to repeal or
modify, except as applied to income, those provisions
of the Constitution that require an apportionment
according to population for direct taxes upon
property, real and personal.73 This limitation still has
an appropriate and important function, and is not to
be overridden by Congress or disregarded by the
courts.
In order, therefore, that the clauses cited from Article
I of the Constitution may have proper force and effect,
save only as modified by the Amendment, and that the
latter also may have proper effect, it becomes essential
to distinguish between what is and what is not
THE LAW AND THE COURTS 1920-1929
141
“income” as the term is there used; and to apply the
distinction, as cases arise, according to truth and
substance, without regard to form. 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.
The fundamental relation of “capital” to “income” has
been much discussed by economists, the former being
likened to the tree or the land, the latter to the fruit or
the crop; the former depicted as a reservoir supplied
from springs, the latter as the outlet stream, to be
measured by its flow during a period of time. For the
present purpose we require only a clear definition of
the term “income,” as used in common speech, in
order to determine its meaning in the Amendment;
and, having formed also a correct judgment as to the
nature of a stock dividend, we shall find it easy to
decide the matter at issue.
After examining dictionaries in common use (Bouv.
L.D.; Standard Dict.; Webster’s Internat. Dict.;
Century Dict.), we find little to add to the succinct
definition adopted in two cases arising under the
Corporation Tax Act of 1909 (Stratton’s Independence
v. Howbert, 231 U.S. 399, 415; Doyle v. Mitchell Bros.
Co., 247 U.S. 179, 185)—”Income may be defined as
the gain derived from capital, from labor, or from
both combined,” provided it be understood to include
profit gained through a sale or conversion of capital
assets, to which it was applied in the Doyle case (pp.
183, 185).
Brief as it is, it indicates the characteristic and
distinguishing attribute of income essential for a
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correct solution of the present controversy. The
Government, although basing its argument upon the
definition as quoted, placed chief emphasis upon the
word “gain,” which was extended to include a variety
of meanings; while the significance of the next three
words was either overlooked or misconceived.
“Derived — from — capital;” — “the gain —
derived — from — capital,” etc. Here we have the
essential matter: not a gain accruing to capital,
not a growth or increment of value in the
investment; but again, a profit, something of
exchangeable value proceeding from the property,
severed from the capital however invested or
employed, and coming in, being “derived,” that
is, received, or drawn by the recipient (the
taxpayer) for his separate use, benefit and
disposal;—that is income derived from property.
Nothing else answers the description.
The same fundamental conception is clearly set forth
in the Sixteenth Amendment—“incomes, from
whatever source derived”—the essential thought
being expressed with a conciseness and lucidity
entirely in harmony with the form and style of the
Constitution. [Emphasis added.]
Eisner, 252 U.S. at 205-206.
After defining the word income, the Court made it very clear that
the Sixteenth “Amendment applies to income only.” Eisner, 252
U.S. at 219.
Merchants’ Loan & Trust Co. v. Smietanka, 255 U.S. 509
(1921):
Merchants’ Loan & Trust Co. was the trustee under the will of
Arthur Ryerson who died in 1912. Under the trust, the net income of
THE LAW AND THE COURTS 1920-1929
143
the property was to be paid to his widow during her life and used
for the benefit of the children after her death until the age of
twenty-five, at which age each child would receive his or her share
of the trust fund. Under the terms of the trust the trustee could
decide what “net income” was, except that stock dividends and
accretions of selling values were not to be considered income.
Smietanka, 255 U.S. at 514-515.
In 1917 Ryerson’s widow and four children were alive. Smietanka,
255 U.S. at 515.
Among other assets, the trust received 9,522 shares of capital stock
of Joseph T. Ryerson & Son, a corporation. On March 1, 1913, the
stock was valued at $561,798. On February 2, 1917, the stock was
sold for $1,280,996.64. The Commissioner of Internal Revenue
treated the difference as income for the year 1917, and assessed a
tax under the Income Tax Act of Congress approved September 8,
1916, c. 463, 39 Stat. 756, as amended by the Act approved October
3, 1917, c. 63, 40 Stat. 300. The tax was paid under protest and an
action was filed in the Federal District Court to recover its payment.
Smietanka, 255 U.S. at 514-515.
In the lower court, the Collector, Mr. Smietanka, filed a demurrer to
the complaint which was sustained. The case then came to the
Supreme Court under a writ of error, in which the trustee
contended that the sum charged as “income” represented
appreciation in the value of the capital assets of the estate which
was not “income” within the meaning of the Sixteenth Amendment
and therefore could not, constitutionally, be taxed without
apportionment. Smietanka, id.
The Court first addressed the language of the statute and found that
the trustee was a taxable person, and if the sum charged as
“income” was indeed income within the meaning of the Sixteenth
Amendment, it was taxable under the statute. Whether or not the
over $700,000 gain was such income, the Court felt, was a question
of definition, the answer to which could be found in recent
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JUDICIAL TYRANNY AND YOUR INCOME TAX
decisions of the Court itself. Smietanka, 255 U.S. at 516-517. The
Court stated that while the Corporation Excise Tax Act of August 5,
1909 was not an income tax law, a definition of the word “income”
was essential in its early administration, and an early case defined
the word as “the gain derived from capital, from labor, or from both
combined,” and cited to Stratton’s Independence v. Howbert, 231
U.S. 399, 415. The Court then referenced its “latest income tax
decision,” Eisner, and gave the latest definition of the word income:
“Income may be defined as the gain derived from capital, from
labor, or from both combined, provided it be understood to include
profit gained through a sale or conversion of capital assets.”
Smietanka, 255 U.S. at 517-518.
The Court then reviewed two cases under the Corporation Excise
Tax Act wherein it was held that the profit made on the sale of stock
of another corporation was income to the selling corporation under
the above definition, and thought it was obvious that these two
decisions in principle ruled the case under consideration if the word
“income” had the same meaning in the Income Tax Act of 1913 that
it had in the Corporation Excise Tax Act of 1909. It then cited to
Southern Pacific Co. v. Lowe, 247 U.S. 330, 335 (1918), where it
was assumed for the purposes of decision in that case that there was
no difference. The Court then unequivocally stated:
There can be no doubt that the word must be given
the same meaning and content in the Income Tax Acts
of 1916 and 1917 that it had in the Act of 1913. When
to this we add that in Eisner v. Macomber, supra, a
case arising under the same Income Tax Act of 1916
which is here involved, the definition of “income”
which was applied was adopted from Stratton’s
Independence v. Howbert, supra, arising under the
Corporation Excise Tax Act of 1909, with the addition
that it should include “profit gained through a sale or
conversion of capital assets,” there would seem to be
no room to doubt that the word must be given the
same meaning in all of the Income Tax Acts of
THE LAW AND THE COURTS 1920-1929
145
Congress that was given to it in the Corporation
Excise Tax Act and that what that meaning is has now
become definitely settled by decisions of this court.
In determining the definition of the word “income”
thus arrived at, this court has consistently refused to
enter into the refinements of lexicographers or
economists and has approved, in the definitions
quoted, what it believed to be the commonly
understood meaning of the term which must have
been in the minds of the people when they adopted
the Sixteenth Amendment to the Constitution. Doyle
v. Mitchell Brothers Co., 247 U.S. 179, 185; Eisner v.
Macomber, 252 U.S. 189, 206-207. Notwithstanding
the full argument heard in this case and in the series
of cases now under consideration we continue entirely
satisfied with that definition, and, since the fund here
taxed was the amount realized from the sale of the
stock in 1917, less the capital investment as
determined by the trustee as of March 1, 1913, it is
palpable that it was a “gain or profit” “produced by” or
“derived from” that investment, and that it
“proceeded,” and was “severed” or rendered
severable, from, by the sale for cash, and thereby
became that “realized gain” which has been repeatedly
declared to be taxable income within the meaning of
the constitutional amendment and the acts of
Congress. Doyle v. Mitchell Brothers Co., and Eisner
v. Macomber, supra.
Smietanka, 255 U.S. at 519-520.
Finding that the amount received on the sale of the
stock over the basis, the gain or profit, fell within the
definition of the word “income” as used in the
Sixteenth Amendment, the Court affirmed the
146
JUDICIAL TYRANNY AND YOUR INCOME TAX
decision of the lower court. Smietanka, 255 U.S. at
519.
THE LAW AND THE COURTS 1920-1929
147
ENDNOTES
72.
Section 2(a) was contained in Part I [pertaining to the income
tax on “individuals”] of Title I [pertaining to the Income Tax].
73.
This is the exact argument which was raised by Mr. Brushaber
[Brushaber, 240 U.S. at 11] and rejected by the Brushaber Court
[240 U.S. at 12]. There is an irreconcilable conflict between the
Brushaber case, which holds the income tax is an indirect tax
not requiring apportionment, and the Eisner case, which holds
the income tax is a direct tax relieved from apportionment.
148
JUDICIAL TYRANNY AND YOUR INCOME TAX
THE LAW AND THE COURTS 1930-1939
149
CHAPTER VI
THE LAW AND THE COURTS
1930-1939
Lucas v. Earl, 281 U.S. 111 (1930):
In 1901 Mr. Earl entered into a contract with his wife in which it
was agreed that any. property either of them then had or might later
acquire, including salaries or fees, would be held in joint tenancy
with each other.74 Thereafter, Mr. Earl filed an income tax return in
which he claimed one-half of his salary as gross income. Mr. Lucas,
the Commissioner of Internal Revenue, caused a tax to be imposed
upon the whole of Mr. Earl’s salary, and the Board of Tax Appeals
sustained this action. The Circuit Court of Appeals, however,
reversed, and the case came to the Supreme Court by a writ of
certiorari. Lucas, 281 U.S. at 113-114.
The Supreme Court cited Section 213(a) of the Revenue Act of 1918
approved February 24, 1919, c. 18, 40 Stat. 1065, which, it stated,
imposed a tax upon the net income of every individual including
“income derived from salaries, wages, or compensation for personal
service ... of whatever kind and in whatever form paid.” Lucas, 281
U.S. at 114.
The Court next stated that Mr. Lucas made a very strong argument
that by virtue of the contract with his wife, the salary and fees
became the joint property of himself and his wife immediately upon
receipt. To escape this effect under California law which should be
controlling, the Court said that the case was to be determined upon
the import and reasonable construction of the taxing act. Lucas, 281
U.S. at 114-115. The Court then said that:
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JUDICIAL TYRANNY AND YOUR INCOME TAX
There is no doubt that the statute could tax salaries to
those who earned them and provide that the tax could
not be escaped by anticipatory arrangements and
contracts however skillfully devised to prevent the
salary when paid from vesting even for a second in the
man who earned it.
Lucas, id.
The Court then, without any legal reasoning, stated that what
Congress could have done, but did not do, was the “import” of the
statute Congress did pass and reversed the Court of Appeals.
It is of critical significance to note that unlike Ms. Macomber who
challenged the constitutionality of the tax on the stock dividend
notwithstanding the clear language of the statute imposing the tax
on that stock dividend, Mr. Lucas failed to object to the tax being
imposed directly on his salary and fees as opposed to being imposed
on the “income derived from [his] salaries, wages, or compensation
for personal service ... of whatever kind and in whatever form paid.”
The issue of whether or not salaries, wages or compensation for
personal service constitutes income taxable under the Sixteenth
Amendment was not litigated nor discussed by the Court, and the
Lucas case is not authority for that proposition.75
Bass v. Hawley, 62 F.2d 721 (5th Cir. 1933):
Mr. Bass, the Collector of Internal Revenue, appealed a judgment
against him and in favor of Mr. Hawley who sought a recovery of an
income tax he paid in 1925. The question was whether $16,250
received by Hawley was a gift or additional compensation for
services. Bass, 62 F.2d at 721-722.
Mr. Hawley had for twenty-two years worked for the El Paso &
Southwestern Railroad Company. During a corporate buy-out of the
stock of that company, in order to “recognize the long and faithful
service of the officers and employees,” the directors authorized the
THE LAW AND THE COURTS 1930-1939
151
payment of “additional compensation.” Mr. Hawley received the
$16,250, and based upon certain lower court cases, argued that
since the payments were “over and above the wages and salaries
due” and there was no obligation on the part of the railroad to pay
the additional money, that the money was a gift. Bass, 62 F.2d at
722.
The Court cited to cases holding to the contrary,76 and then stated
that “whether a payment in a given case shall be deemed taxable
compensation or a gift exempt from tax depends on the intention of
the parties and particularly that of the payer, to be determined from
the attending facts and circumstances.” Bass, 62 F.2d at 722-723.
In order to distinguish a gift from taxable income, the Court
correctly cited to the holding in Eisner that “[i]ncome that may be
taxed includes gain derived from labor.” Bass, 62 F.2d at 723. The
Court went on to say:
One who in the peace and under the protection of the
United States gainfully exercises his faculties of mind
or body may be called on to share the gain with the
public treasury. Section 213 of the Revenue Act of
1926 (26 USCA Section 954) here applicable includes
in gross income to be taxed “gains, profits and income
derived from salaries, wages, or compensation for
personal service * * * of whatever kind and in
whatever form paid.”
Bass, 62 F.2d at 723.
The Court cites no authority for its first sentence quoted above, so
the reader is left to guess at what is meant. It appears the Court is
saying that working in a situation where the government provides
certain safeguards is a privilege and the tax is an excise on that
privilege.77 That would explain the reference to “receiving the
protection of the United States,” but would exclude workers not
receiving such protection; that is, the privilege of working under
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JUDICIAL TYRANNY AND YOUR INCOME TAX
this protection would only exist where the United States has lawful
authority to give such protection, and that is in Washington D.C.,
the United States territories and other federal enclaves.78 The Court
went on to say:
It [the statute] excludes property acquired by “gift,
bequest, devise or inheritance.” The intent is that all
receipts in whatever form that come because of labor
and service, whether payment could be compelled or
not, shall be taxed as arising from labor.
Bass, 62 F.2d at 723.
The Bass Court, in choosing the language quoted above, appears to
be stating that a conversion of labor into money always produces
income. In Doyle, the government contended that a conversion of
“capital” into money always produces income, and the Supreme
Court held this was not necessarily so; it had to be determined
based upon the facts, after deducting from gross receipts an amount
sufficient to restore the capital value, whether there was a gain or
loss (see p. 128). Since “income” is defined as “the gain derived
from capital, from labor, or from both combined,” then by merely
substituting the word “labor” for the word “capital” in the Doyle
case one can easily see that the Bass Court’s wording, if taken
literally, would be contrary to the theory of law as expressed by the
United States Supreme Court.
In that the $16,250 was over and above the employment contract
price Mr. Hawley was charging the railroad for his services, the
bonus payment was indeed a “profit or gain derived from his labor,”
and as “income,” was taxable under the Sixteenth Amendment.
Thus the Bass Court reached the proper conclusion in the case
before it, obviously had a correct understanding of the applicable
law, and it would appear clear that it did not intend to hold that an
unapportioned direct tax on labor was authorized under the
Sixteenth Amendment.
THE LAW AND THE COURTS 1930-1939
153
ENDNOTES
74.
A joint tenant holds an undivided interest in the whole property
subject to an identical interest of each of the other joint tenants.
The Court recognized the validity of the contract under
California community property laws, Lucas, 281 U.S. at 114, thus
again confirming that salaries and fees constitute property.
75.
It is the policy of the Supreme Court of the United States not to
address an opinion upon an issue not before it unless its
determination is necessarily involved in the adjudication of the
case. Sullivan v. Iron Silver Mining Co., 109 U.S. 550, 553
(1883).
76.
On page 722 the Court admits that the Board of Tax Appeals and
the Court of Claims had reached opposite conclusions as to the
taxability of this type of payment.
77.
The Brushaber Court found the tax to be an indirect excise tax,
while Pollock and Eisner found the income tax to be a direct tax.
78.
See United States Constitution, Article I, Section 8, Clause 17.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
THE LAW AND THE COURTS 1940-1949
155
CHAPTER VII
THE LAW AND THE COURTS
1940-1949
Ward v. C.I.R., 159 F.2d 502 (2nd Cir. 1947):
Ward is another case in which “additional compensation” was
litigated. On a tax return filed in 1941, the Commissioner
determined a deficiency and issued a notice therefor. Mr. Ward
petitioned the Tax Court, lost the case, and filed an appeal. Ward,
159 F.2d at 502.
Mr. Ward was the president of Fairchild Engine and Airplane
Corporation. In 1941 a deferred refund annuity policy was
purchased and delivered to Mr. Ward as additional compensation
for services. Prior to purchasing the annuity, an attorney advised
Fairchild that if the annuity was non-assignable, Mr. Ward would
not be taxed until he started to receive payments under it. In other
words, the value of the annuity given to Mr. Ward as additional
compensation would not constitute income. Ward, 159 F.2d at 503-
504.
Unfortunately, the annuity policy was not made nonassignable until
1945 when the parties learned the Commissioner claimed the value
of the annuity policy was taxable as again derived from
compensation for services. At that time it was “reformed” to
conform to the original arrangement anticipated at the time of the
purchase of the annuity policy. Ward, 159 F.2d at 503-504. The
Court clearly defined the issue of the case to be one of law as
follows:
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JUDICIAL TYRANNY AND YOUR INCOME TAX
On these facts the decisive issue presented on review
is one of law. It is whether the policy which was not in
1941 in terms restricted as to assignability was
nevertheless non-assignable by the taxpayer from the
date of delivery because his employer had an
enforceable interest in it which would have enabled
Fairchild to prevent any attempt by the taxpayer to
“realize” its assignable value in the taxable year of the
policy’s receipt by him.79
Ward,159 F.2d at 504.
The Court pointed out that Mr. Ward had made no agreement to
continue to work for Fairchild after receipt of the policy, and that
the terms of his employment contract were unaffected by the terms
of the annuity policy. Ward, id.
The Court concluded that since the annuity policy was assignable,
Mr. Ward could do with it as he liked, and the value of the policy
was taxable to Mr. Ward when he received it. Ward, id.
This case in essence confirms that a receipt of something worth
value over and above payment as compensation for services as set
forth in an employment contract is a gain derived from
compensation for services, and is taxable as income. Whether or not
the compensation for services can be taxed or only the gain derived
from the compensation for services can be taxed was not in issue
and was not litigated.
THE LAW AND THE COURTS 1940-1949
157
ENDNOTES
79.
With Fairchild as the owner of an assignable policy, it could
have asked Ward to return it and the policy could have been
given to someone else. Because of this option, Fairchild still had
an interest in the policy which precluded Ward from “realizing”
the policy for his own separate use.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
THE LAW AND THE COURTS 1950-1959
159
CHAPTER VIII
THE LAW AND THE COURTS
1950-1959
C.I.R. v. Glenshaw Glass Co., 348 U.S. 426 (1955):
The issue involved in the Glenshaw Glass case was whether money
received as exemplary damages for fraud or as the punitive two-
thirds portion of a treble-damage antitrust recovery had to be
reported by a taxpayer as gross income under Section 22(a) of the
Internal Revenue Code of 1939. Glenshaw Glass, 348 U.S. at 427.
The Glenshaw Glass Company did not raise any constitutional
objections to the imposition of a tax on punitive damages, so the
question before the Supreme Court was one of statutory
construction: Did the punitive damages that the Glenshaw Glass
Company received after suing the Hartford-Empire Company fall
within the definition of gross income as defined in Section 22(a)?
Glenshaw Glass, 348 U.S. at 426.
The Court quoted Section 22(a), and emphasized the following
bold-faced words: “Gross income includes ... gains or profits and
income80 derived from any source whatever .... The Court stated
that this language was used by Congress to exert “the full measure
of its taxing power,” and stated that the Court had given a liberal
construction to this broad phraseology in recognition of the
intention of Congress to tax all gains except those specifically
exempted. The Court found that the punitive damage payments
were noncompensatory in nature, they constituted an undeniable
accession to wealth, clearly realized, and were such that the
taxpayer had complete dominion over them. Finding such
payments to thus constitute a “gain,” the Court held that the gain
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JUDICIAL TYRANNY AND YOUR INCOME TAX
fell within the provisions of Section 22(a) above bold-faced.
Glenshaw Glass, id.
The Glenshaw Glass case does not stand for the proposition that
wages constitute income—the case did not involve wages; the case
stands for the direct proposition that punitive damages constitute a
gain which falls within the definition of gross income, and for the
indirect proposition that Congress intended to tax all receipts
constitutionally taxable. With respect to the Sixteenth Amendment,
those taxable receipts are those which represent a profit or a gain,
not an equal exchange.
THE LAW AND THE COURTS 1950-1959
161
ENDNOTES
80.
It is interesting to note that under the Internal Revenue Code of
1939, the definition of gross income used the words “gains or
profits and income.” When the 1954 Internal Revenue Code was
enacted, the words “gains or profits” were omitted from the
definition of gross income as being unnecessary.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
THE LAW AND THE COURTS 1960-1969
163
CHAPTER IX
THE LAW AND THE COURTS
1960-1969
Penn Mutual Indemnity Company v. C.I.R., 277 F.2d 16
(3rd Cir. 1960):
This case involved an insurance company which had filled out a
Form 1120M reporting an income tax due of $12,566.76. Attached
to the form was a letter from an attorney advising the I.R.S. that the
company was taking the position that the imposition of an income
tax against it was invalid and unconstitutional. Penn Mutual, 277
F.2d at 17. The tax was imposed by Section 207(a)(2) of the Internal
Revenue Code of 1939, and the relevant portion of that section was
one which imposed a one percent tax upon the taxpayer’s “gross
amount of income from interest, dividends, rents, and net
premiums,” minus dividends to policyholders and tax-exempt
interest; “net premiums” were defined as the total premiums
written or received less return premiums. Penn Mutual, 277 F.2d at
18.
Penn Mutual, for the year in question, did not make a profit. In fact,
it had underwriting losses of $206,198.12 in excess of its “gross
amount of income from interest, dividends, rents, and net
premiums.” It argued, therefore, that there being no profit or gain,
there could be no “income tax” due. Accordingly, it did not pay the
tax shown as due on the Form 1120M. Penn Mutual, 277 F.2d at 17-
19.
In support of this argument Penn Mutual contended that since the
tax-imposing provisions relied on [Section 207(a)(2)] occurred in
the middle of an income tax statute and were labeled by Congress as
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JUDICIAL TYRANNY AND YOUR INCOME TAX
“income tax” provisions, the sole test of their validity was whether
the provisions of the statute taxed “income” within the meaning of
the Sixteenth Amendment.
With respect to this argument the Court stated:
We think petitioner’s argument imposes tighter
restrictions on the federal taxing power than a century
and a half of court decisions warrant.
Perm Mutual, 277 F.2d at 19.
The Court did not identify the “court decisions” it contended
allowed for an income tax on something other than income.
Instead, the Court first stated that the taxing power of Congress
granted by Article I of the Constitution was exhaustive and
embraced every conceivable power of taxation subject only to the
requirement of apportionment for direct taxes, uniformity for
indirect taxes and the prohibition of placing export duties on
articles exported from the States, citing Brushaber and the United
States Constitution as authority for these statements. The Court
then stated that it did not take a constitutional amendment to allow
Congress to impose an income tax citing to Pollock, and then stated
that the Sixteenth Amendment removed the requirement for
apportionment of the income tax, citing to the Sixteenth
Amendment. Finally, the Court stated that the requirement for
apportionment was pretty well strictly limited to taxes on real and
personal property and capitation taxes, citing to Hylton v. United
States, 3 U.S. 171 (1796); Springer v. United States, 102 U.S. 586
(1880); and Pollock. Penn Mutual, 277 F.2d at 19.
All of these contentions are correct, but do not add up to the
proposition that Congress can tax as income something that is not a
profit or gain. The United States Supreme Court made it abundantly
clear in Smietanka, 255 U.S. at 519-520, that the word “income”
was to have the same meaning in all of the income tax acts passed
by Congress as it had in the Act of 1909. As previously set forth
THE LAW AND THE COURTS 1960-1969
165
hereinabove (see p. 144), that definition of income is a profit or
gain.
The failure of the Court in Penn Mutual to abide by the Supreme
Court’s decisions defining income renders its decision fatally
defective as contrary to established law. In any event, the case did
not involve wages and hence, does not stand for the proposition
that wages constitute income.
C.I.R. v. Daehler, 281 F.2d 823 (5th Cir. 1960):
The issue before the Court in Daehler was whether a real estate
salesman’s commission on the sale of a house that the salesman
bought for himself constituted taxable income under Section 22(a)
of the Internal Revenue Code of 1939. Daehler, id. Mr. Daehler
made an offer to purchase certain real estate for himself. After the
sale was consummated, the brokers for the seller and the buyer (the
real estate broker for whom Mr. Daehler worked) split a ten percent
commission, and Mr. Daehler’s employer paid Mr. Daehler his
proportionate share which he did not include in his tax return as
income. The Tax Court held that since Mr. Daehler bought the
house for himself, he was not acting as a salesman, and the amount
that he received was a reduction in the purchase price as opposed to
a commission. Daehler, 281 F.2d at 824.
The Court of Appeals reversed holding that the amount Mr. Daehler
received from his employer was compensation for the actions he
performed growing out of the employer-employee relationship, and
that compensation for such services is taxable income81 of whatever
kind and in whatever form it is received. Daehler, 281 F.2d at 824-
825.
Mr. Daehler did not contest whether such commissions constituted
income from the perspective of gain or profit, and the case did not
involve the issue of whether wages constitute income. The issue not
being raised in the case, Daehler does not constitute precedent for
the issue of whether wages constitute income.
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C.I.R. v. Mendel, 351 F.2d 580 (4th Cir. 1965):
Dr. Mendel was a physician who, at the request of his employer,
moved from Newark, New Jersey, to Richmond, Virginia. He had
been employed in New Jersey for four years prior to the move. He
incurred moving expenses in the amount of $558.99 for which he
was reimbursed $316.00 by his employer. Dr. Mendel “deducted”
the difference from his gross income, and the deduction was not
allowed by the Commissioner. The issue was taken to the Tax Court
where it was held the deduction was permissible under Rev. Ruling
54-429, 1954-2 Cum.Bull. 53. Mendel, 351 F.2d at 581-582.
The Court of Appeals held that the Tax Court had proceeded upon
an erroneous basis. The Tax Court had interpreted the Revenue
Ruling as meaning that reasonable expenses incurred in relocating
were business expenses, and could be deducted from total gross
income. The Court of Appeals felt Revenue Ruling 54-429 did not
stand for the proposition that moving expenses were a business
expense, but stood for the proposition that reimbursed moving
expenses did not constitute gross income. Under this analysis, the
$361.00 would not be taxed as gross income, but no deduction
would be allowed for the difference between the amount
reimbursed and the total cost of the move. Mendel, 351 F.2d at 582.
As the basis for its ruling, the Court of Appeals first cited to the
theory expressed in United States v. Woodall, 255 F.2d 370 (10th
Cir. 1958), that:
[A]ny economic or financial benefit conferred on an
employee as compensation is gross income, and that
there may be deducted from gross income only those
expenditures expressly made deductible by statute.
Ordinarily, reimbursement for moving expense to an
existing employee would constitute gross income
under the comprehensive definition in Section 61 (a)
of the Revenue Code of 1954 that, “* * * gross income
means all income from whatever source derived,
THE LAW AND THE COURTS 1960-1969
167
including (but not limited to) * * * Compensation for
services, including fees, commissions, and similar
items * * *.”
Mendel, 351 F.2d at 582
and then indicated its belief that:
Rev.Ruling 54-429, supra, sought to alleviate the
rigors of the application of the statutory definition of
gross income to reimbursement for moving expenses
to an existing employee. An examination of the ruling
discloses that its rationale is that reimbursement for
moving expenses does not constitute gross income,
not, as the Tax Court determined, that expenses of
relocation are per se deductions for the employee.
Mendel, 351 F.2d at 582.
That Section 61 (a) does not include compensation for services in
gross income, only the profit or gain derived from compensation for
services has been established above. Thus Revenue Ruling 54-429
was not for the purpose of alleviating the rigors of the application of
the statutory definition of gross income as contended by the Court,
but for the purpose of bringing the administration of the law into
conformity with the statutory definition. This is the only possible
conclusion based not only upon the law, but from the long-standing
Constitutional principle that the I.R.S. cannot change legislation by
revenue rulings.82
United States v. Rochelle, 384 F.2d 748 (5th Cir. 1967):
Mr. Addison was a promoter. He and his associates obtained
“loans” to finance various enterprises from people based upon the
assurance that the loaners would get their money back together
with a part interest in the enterprise which would produce a profit.
No such enterprises existed, and an involuntary petition in
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JUDICIAL TYRANNY AND YOUR INCOME TAX
bankruptcy was filed by the creditors who had loaned the money.
The I.R.S. asserted that the money loaned constituted income, and
filed a claim against the bankruptcy estate for income taxes.
Rochelle, 384 F.2d at 749-750. The issue before the Court was
stated as follows:
When an individual secures money from many third
parties by false representations, and when such funds
constitute his sole source of support for several years,
do these sums constitute taxable income, under
section
61
of
the
Internal
Revenue
Code,
notwithstanding the fact that the transactions are in
the form of loans.
Rochelle, 384 F.2d at 751.
The Court stated:
The proper labeling for tax purposes of various kinds
of ill-gotten gains has long been a vexing question for
the federal courts. In dealing with it, we keep in mind
the admonition that in enacting what is now section
61 of the tax code, Congress meant “to use the full
measure of its taxing power” under the Sixteenth
Amendment. Helvering v. Clifford, 309 U.S. 331, 334.
The Supreme Court, after many years of hesitation,
has now firmly concluded that the economic benefit
accruing to the taxpayer is the controlling factor in
determining whether a gain in “income.” Rutkin v.
United States, 343 U.S. 130 [1952]; Commissioner v.
Glenshaw Glass Co., 248 U.S. 426; James v. United
States, 366 U.S. 213. A loan does not in itself
constitute income to the borrower, because whatever
temporary economic benefit he derives from the use
of the funds is offset by the corresponding obligation
to repay them. See, James v. United States, 266 U.S.
at 219. Where the loans are obtained by fraud, and
THE LAW AND THE COURTS 1960-1969
169
where it is apparent that the recipient recognizes no
obligation to repay, the transaction becomes a
“wrongful appropriation” [and comes] within the
broad sweep of “gross income.” [Emphasis in
original.]
Rochelle, 384 F.2d at 751.
The “economic benefit” mentioned in Glenshaw Glass was the
punitive damages awarded to the Glenshaw Glass Company, which
the Court concluded were a “gain” (see p. 159). The issue before the
Supreme Court in Rutkin, was whether money obtained by
extortion is income taxable to the extortioner under Section 22(a) of
the Internal Revenue Code. Rutkin, 343 U.S. at 131. The Supreme
Court found that extorted funds do constitute a gain and are
includible within the statutory definition of gross income. Rutkin,
343 U.S. at 137. The issue before the Supreme Court in James was
whether embezzled funds were to be included in the gross income
of the embezzler in the year in which the funds were
misappropriated under Section 22(a) of the 1939 Internal Revenue
Code and Section 61(a) of the 1954 Internal Revenue Code. James,
266 U.S. at 213-214. The Supreme Court, relying upon Rutkin,
found that embezzled funds were a gain, and hence taxable. James,
266 U.S. at 218-219.
These cases may be cited for the proposition that unlawful gains are
as taxable as lawful gains, but in that none of them addressed the
issue as to whether wages constitute income, Rochelle does not
constitute legal precedent for that issue.
Marks v. United States, 391 F.2d 210 (9th Cir. 1968):
Mr. Marks was convicted of federal income tax evasion for the year
1961; his tax return showed no taxable income while the
government contended the return should have shown a taxable
income. Mr. Marks contended that four specific items were not
gross income but rather loans. The Court recognized that the
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defendant presented evidence that showed on its face that the four
transactions were loans, but also found that the jury had evidence
in front of it to conclude the transactions were not loans. The
government contended that the amounts received were either
compensation for services or money obtained by Marks under false
pretenses. Marks, 391 F.2d at 210-211.
With respect to the government’s contentions, the Court stated that:
“[e]ither is taxable” and footnoted to 26 U.S.C. Section 61 and
Rochelle. Marks, 391 F.2d at 211. It has already been shown that
compensation for services does not constitute gross income under
Section 61; rather, the profit or gain derived from compensation for
services constitutes gross income under Section 61. And as shown
above, the Rochelle case did not involve the issue of whether wages
constitute income. Thus, the Marks case does not support the
conclusion that wages constitute income.
Wilson v. United States, 412 F.2d 694 (1st Cir. 1969):
Mr. Wilson, a police officer, ate one meal per day, during his work
period, in a restaurant away from home. He was reimbursed the
cost of these meals by his employer. Mr. Wilson contended these
amounts were excluded from gross income by virtue of Section 119
which excluded from gross income the value of any meals furnished
by an employee by the employer for the convenience of the
employer if the meals are furnished on the business premises of the
employer. Wilson, 412 F.2d at 695.
The entire case turned around the wording of Section 119 and the
legislative intent of Congress in enacting it. However, the Court
made one statement, wholly unsupported by any citation to case
law or statute, that:
We start with the proposition that all remuneration
received for services is gross income unless it falls
within a specific exclusion.
THE LAW AND THE COURTS 1960-1969
171
Wilson, 412 F.2d at 695.
This is the exact contention that the Supreme Court found
untenable in Doyle, 247 U.S. at 183-184 (see p. 128). Remuneration
for services can only constitute gross income if there is a profit or
gain derived from that remuneration. The Wilson case stands for
the principle that reimbursement for meals off the premises of the
employer is not deductible as a business expense, not for the
principle that remuneration for services constitutes income. The
dicta of the Wilson Court is not supported by case law and is
contrary to the Doyle decision by the United States Supreme Court.
The Wilson case does not support the proposition that wages
constitute income.
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ENDNOTES
81.
The use of the term “taxable income” by the Court of Appeals
was technically incorrect. Taxable income is adjusted gross
income less certain statutory deductions, and adjusted gross
income is gross income less certain statutory deductions.
82.
See Morrill v. Jones, 106 U.S. 466, 467 (1882); U.S. v.
200 Barrels of Whiskey, 95 U.S. 571, 576 (1887).
THE LAW AND THE COURTS 1970-1979
173
CHAPTER X
THE LAW AND THE COURTS
1970-1979
United States v. Silkman, 543 F.2d 1218 (8th Cir. 1976):
Mr. Silkman, representing himself, appealed an order of the District
Court directing his compliance with an I.R.S. summons seeking
certain records with respect to the 1973 and 1974 tax years. One of
his contentions in seeking not to comply with the summons was
that he was not an individual required to pay taxes because he was
engaged in the common law occupations of farming and ranching.
In rejecting this contention, the Court stated:
Finally, we find no merit in the taxpayer’s contention
that he is not an individual required to pay taxes
because he is engaged in the common law occupations
of farming and ranching. The Sixteenth Amendment
broadly grants Congress the power to collect an
income tax regardless of the source of the taxpayer’s
income.
Silkman, 543 F.2d at 1220.
The basis for Mr. Silkman’s legal argument, if he made any, was not
set forth in the opinion, nor did the Court cite to any case law or
give any hint as to the basis of the Court’s legal analysis of Mr.
Silkman’s argument. In any event, the case does not stand for the
proposition that wages constitute income, as “wages” are not even
mentioned in the case. As to the Court’s statement that the
Sixteenth Amendment broadly grants Congress the power to collect
an income tax regardless of the source of the taxpayer’s income,
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there is no argument. A tax on one’s labor, however, as has been
shown herein, is not a tax on income!
Reading v. C.I.R., 70 T.C. 730 (1978):
Mr. Reading, representing himself and his wife in Tax Court, argued
that Congress, by denying deductions for personal, living, and
family expenses in the computation of taxable income, had
exceeded its authority under the Sixteenth Amendment to the
Constitution to lay and collect taxes on “incomes.” Citing the
definition of income in Eisner, he argued that the “gain” from labor
could not be determined until their “cost of doing labor,” i.e., their
expenditures at issue, had been subtracted from the amount
received from the sale of labor. He attempted to support this
contention by making an analogy between the “living expenses” of
one who depends upon the sale of his services for his livelihood
with the “cost of goods sold” concept in certain business contexts.
Reading, 70 T.C. at 732. The Court stated:
Nevertheless, accepting the conclusion that some kind
of “gain” must be realized for there to be income, the
flaw in petitioners’ analogy of what they call the “cost
of doing labor” to the “cost of goods sold” concept—
essentially its failure to acknowledge the difference
between people and property—may be shown. The
“cost of goods sold” concept embraces expenditures
necessary to acquire, construct or extract a physical
product which is to be sold; the seller can have no
gain until he recovers the economic investment that
he has made directly in the actual item sold.
[Citations.] Labor, on the other hand, is, in the
current context, behavior performed by human beings
in exchange for compensation. One’s living expenses
simply cannot be his “cost” directly in the very item
sold, i.e., his labor, no matter how much money he
spends to satisfy his human needs and those of his
family. Of course we recognize the necessity for
THE LAW AND THE COURTS 1970-1979
175
expenditures for such items as food, shelter, clothing,
and proper health maintenance. They provide both
the mental and physical nourishment essential to
maintain the body at a level of effectiveness that will
permit its labor to be productive. We do not even deny
that a certain similarity exists between the “cost of
doing labor” and the “cost of goods sold” concept. But
the sale of one’s labor is not the same creature as the
sale of property, and whether the distinction comports
with petitioners’ philosophical rationalization for their
argument, it is recognized for Federal income tax
purposes. See Hahn v. Commissioner, 30 T.C. 195
(1958), affd. per curiam 271 F.2d 739 (5th Cir. 1959).
One’s gain, ergo his “income,” from the sale of his
labor is the entire amount received therefor without
any reduction for what he spends to satisfy his human
needs. [Emphasis in original.]
Reading, 70 T.C. at 733-734.
In Hahn, the sole issue before the Tax Court was whether Mr. Hahn
could claim his parents as dependents in 1952. Hahn, 30 T.C. at
195. Mr. Hahn claimed a $600 deduction for each of his parents on
his income tax return, having paid more than half of their support
during the year. The deduction was only permissible if each of his
parent’s gross income was under $600. The I.R.S. reviewed his
parents tax return, where at Schedule C, it was shown that the
senior Mr. Hahn was a blacksmith, and that he had deducted a
certain amount for costs of goods sold. The I.R.S. contended that
inasmuch as the senior Mr. Hahn was a blacksmith he had no
merchandise to sell; therefore, the expenses would not be deducted
from gross receipts in computing gross income, but would be
deducted from gross income in the computation of adjusted gross
income. The I.R.S. disallowed the deductions as “cost of goods sold,
such that each of the parents had more than $600 of gross income
under the Texas community property laws. Hahn, 30 T.C. at 197.
The Tax Court found that the senior Mr. Hahn was not engaged in
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manufacturing but in providing services, and agreed with the I.R.S.
that the expenses were deductible as business expenses from gross
income.
The Hahn case did not involve the issue of whether wages
constitute income. While the Court did distinguish between those
expenses which are deducted from gross receipts to obtain gross
income when manufacturing is involved from those business
expenses deducted from gross income to arrive at adjusted gross
income, the conclusion of the Reading Court that everything that
comes in to a wage earner constitutes income does not necessarily
follow. This conclusion was rejected by the Supreme Court in Doyle
(see p. 128).
The Reading Court then quoted from the Supreme Court as follows:
For income tax purposes Congress has seen fit to
regard an individual as having two personalities: “one
is [as] a seeker after profit who can deduct the
expenses incurred in that search; the other is [as] a
creature satisfying his needs as a human and those of
his family but who cannot deduct such consumption
and related expenditures.”
United States v. Gilmore, 372 U.S. 39,
44 (1963).
In Gilmore, the question before the Court involved the deductibility
for federal income tax purposes of that part of the husband’s legal
expense incurred in such proceedings as was attributable to his
successful resistance of his wife’s claims to certain of his assets
asserted by her to be community property under California law.
Gilmore, 372 U.S. at 40.
The bulk of Mr. Gilmore’s property consisted of controlling stock
interests in three corporations, each of which was a franchised
General Motors automobile dealer. Mr. Gilmore was president and
THE LAW AND THE COURTS 1970-1979
177
principal managing officer of the three corporations. His overriding
concern in the divorce litigation was the protection of those assets
against the claims of his wife because he believed that if he lost
controlling interest by transferring one-half of the shares to his
wife, he might lose his corporate position which was the main
source of his livelihood. Gilmore, 372 U.S. at 41-42.
Mr. Gilmore won the divorce action. He claimed his legal fees as a
deduction on his income tax return as an expense “incurred ... for
the ... conservation ... of property held for the production of
income” under Section 23(a)(2) of the 1939 Internal Revenue Code.
Gilmore, 372 U.S. at 43. The government contended that the test
under Section 23(a)(2) as to whether the expenses were personal or
for the conservation of income-producing property turned not upon
the consequences of Mr. Gilmore’s failure to defeat his wife’s
community property claims, but upon the origin and nature of
the claims themselves. The government contended that the expense
of defeating his wife’s claim against the stock must be deemed
nondeductible “personal” or “family” expense under Section
24(a)(l) of the Code, not deductible expense under Section 23(a)(2)
of the Code. Gilmore, 372 U.S. at 43-44.
It was in this context that the Gilmore Court made the statement
quoted by the Reading Court. In resolving the issue against Mr.
Gilmore, the Supreme Court stated:
A basic restriction upon the availability of a Section
23(a)(l) deduction is that the expense item involved
must be one that has a business origin. That
restriction not only inheres in the language of Section
23(a)(l) itself, confining such deductions to “expenses
... incurred ... in carrying on any trade or business,”
but also follows from Section 24(a)(l), expressly
rendering nondeductible “in any case ... [p]ersonal,
living, or family expenses.”
Gilmore, 372 U.S. at 46.
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The Court also said:
[T]he characterization, as “business” or “personal,” of
the litigation costs of resisting a claim depends on
whether or not the claim arises in connection with
the taxpayer’s profit-seeking activities. It does not
depend on the consequences that might result to a
taxpayer’s income-producing property from a failure
to defeat the claim, ... [Emphasis in original.]
Gilmore, 372 U.S. at 48.
The Gilmore case did not adjudicate the issue of whether or not
wages constitute income.
Mr. Reading attempted to deduct personal expenses from his gross
receipts to arrive at his gross income, and the decision of the
Reading Court was that such deductions from gross receipts were
not permissible. The issue of whether wages constitute income was
not before the Court, and its unsupported statement that gross
receipts is the same as income was dicta. The Reading Court also
stated that the sale of one’s labor is not the same creature as the
sale of property. It is interesting to note that in the case of Adkins v.
Children’s Hospital, 261 U.S. 525 (1922), involving the
constitutionality of a law providing for the fixing of minimum wages
for women and children in the District of Columbia, the Supreme
Court stated, although not in discussing income taxes:
In principle, there can be no difference between the
case of selling labor and the case of selling goods.
Adkins, 261 U.S. at 558.
Perhaps as to the deductibility of personal expenses being on the
same footing as the deductibility of cost of goods sold, the Court is
correct. But the Supreme Court has specifically stated that the sale
of one’s labor constitutes personal property (see p. 85). And while
THE LAW AND THE COURTS 1970-1979
179
personal expenses may not be deductible from gross income, the
Internal Revenue Code specifically provides that only the amount
received in excess of the fair market value of personal property
upon its sale constitutes gain. (See 26 U.S.C. Sections 1001 et seq.)
And even the Reading Court recognized that only gain constitutes
income.
United States v. Russell, 585 F.2d 368 (8th Cir. 1978):
Mr. Russell, representing himself, appealed his conviction on two
counts of failing to file federal income tax returns. As part of his
appeal, he challenged the constitutionality of the entire tax law; the
Court used the following language in stating Mr. Russell’s
contention:
In addition, Russell’s constitutional challenge of the
entire tax law, i.e., earnings from the exercise of his
“common law right to work” cannot be taxed under
the Sixteenth Amendment, also fails, because “[t]he
Sixteenth Amendment broadly grants Congress the
power to collect an income tax regardless of the
source of the taxpayer’s income.” United States v.
Silkman, supra, 543 F.2d at 1220.
Russell, 585 F.2d at 370.
The Russell case relies entirely upon the Silkman case, which as
shown immediately above, does not stand for the legal proposition
that wages constitute income. Both Russell and Silkman, to the
extent they warrant consideration as binding opinions, only stand
for the proposition that income can be taxed even if the income is
derived from certain occupations that were recognized in the
common law. The cases do not stand for the proposition that the
source of the income can be taxed.
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Adams v. United States, 585 F.2d 1060 (Ct. Cls. 1978):
The Adams case involved a tax refund suit in which the issue was
whether the fair rental value of a Japanese residence furnished to
Mr. Adams by his employer was excludable from Mr. Adams’ gross
income. Adams, 585 F.2d at 1061. Mr. Adams was the president of a
corporation located in Japan, which corporation was wholly owned
by his employer, Mobil Oil Corporation. In order to maintain
prestige in the Japanese business community, Mobil thought it
important that Mr. Adams live in an appropriate house. Therefore,
the corporation of which Mr. Adams was the president purchased a
house in Japan and required that Mr. Adams live in it. The house
was also designed so that it could accommodate the business
activities of Mr. Adams, and he frequently conducted business
there. The policy of Mobil, in order to attract qualified employees
for foreign service and to maintain an equitable relationship
between its domestic and American foreign-based employees, was
to calculate a “U.S. Housing Element” for each American foreign-
based employee, and to subtract that amount from the employee’s
salary. If Mobil provided housing to the employee, the employee
would include in his gross income for federal tax purposes the U.S.
Housing Element amount. Adams, 585 F.2d at 1062.
Mr. Adams included in his gross income for federal tax purposes, as
the value of the housing furnished him by his employer, the U.S.
Housing Element amounts which had been subtracted from his
gross salary, totaling $4,439 for 1970 and $4,824 for 1971.
However, because the cost of housing in Tokyo those years was
considerably higher than that in the United States, the fair rental
value of the residence furnished to Mr. Adams, it was agreed
between the parties, was $20,000 in 1970 and $20,599.09 in 1971.
The I.R.S., after auditing Mr. Adams for 1970 and 1971, increased
his gross income by the difference in the amounts between the U.S.
Housing Element and the fair market value of the house, and
assessed an additional $914.24 plus interest. Mr. Adams paid the
tax and sought a refund. Adams, 585 F.2d at 1062-1063.
THE LAW AND THE COURTS 1970-1979
181
Mr. Adams did not contest whether the difference between the U.S.
Housing Element and the fair market value of the residence
constituted income to him, but contended that since the house was
furnished to him by his employer for the convenience of the
employer, the amount was specifically excluded from gross income
under Section 119 of the Internal Revenue Code of 1954, and the
Court of Claims agreed. Adams, 585 F.2d at 1063.
While the Court of Claims cited Section 61(a)(l) of the Internal
Revenue Code and Section 1.61-2(d)(l) of the Treasury Regulation
for the proposition that “[i]f services are paid for other than in
money, the fair market value of the property or services taken in
payment must be included in income,” the statement of the Court
was dicta. The issue as to whether wages constitute income was not
before the Court; and because that issue was not litigated, the
Adams case is not binding precedent for the contention that wages
constitute income.
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THE LAW AND THE COURTS 1980-1989
183
CHAPTER XI
THE LAW AND THE COURTS
1980-1989
United States v. Francisco, 614 F.2d 617 (1980):
Mr. Francisco was charged with three counts of failure to file
income tax returns and was convicted. On appeal, his first
contention was that the government failed to prove the receipt of
gross income sufficient to require the filing of a return under
Section 6012.83 The Court found this argument to be without merit
in that Mr. Francisco had stipulated to receiving “gross
compensation on sales” for each year in question, which figures
were calculated by subtracting the cost of goods sold from total
sales. Citing United States v. Ballard, 535 F.2d 400, 404-405 (8th
Cir. 1976), the Court stated that gross income for merchants is the
amount representing gross receipts less the cost of goods sold.
Francisco, 614 F.2d at 618.
Mr. Francisco also raised a constitutional challenge to his
conviction based upon two theories: 1) the income tax was an
indirect tax; and (2) income received in exchange for labor or
services was not income within the meaning of the Sixteenth
Amendment. Francisco, 614 F.2d at 619. As to the first argument,
the Court stated:
The cases cited by Francisco clearly establish that the
income tax is a direct tax, thus refuting the argument
based upon his first theory. See, Brushaber v. Union
Pacific Railroad Co., 240 U.S. 1, 19 (1916) (the
purpose of the Sixteenth Amendment was to take the
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income tax “out of the class of excises, duties and
imposts and place it in the class of direct taxes.”)
Francisco, 614 F.2d at 619.
The Court, unfortunately, did not elucidate in its opinion what
theory Mr. Francisco raised. However, the Court’s statement as to
the purpose of the Sixteenth Amendment is exactly the opposite of
what the Brushaber Court stated was the purpose of the Sixteenth
Amendment:
Second, that the contention that the Amendment
treats a tax on income as a direct tax although it is
relieved from apportionment and is necessarily
therefore not subject to the rule of uniformity as such
rule only applies to taxes which are not direct, thus
destroying the two great classifications which have
been recognized and enforced from the beginning, is
also wholly without foundation since the command of
the Amendment that all income taxes shall not be
subject to apportionment by a consideration of the
sources from which the taxed income may be derived,
forbids the application to such taxes of the rule
applied in the Pollock case by which alone such
taxes were removed from the great class of
excises, duties and imposts subject to the rule
of uniformity and were placed under the other
or direct class. [Emphasis added.]
Brushaber, 240 U.S. at 18-19.
It is thus beyond peradventure that the Francisco case can carry
any credibility whatsoever when the Court of Appeals so completely
disregarded the holding of the United States Supreme Court in the
Brushaber case.
THE LAW AND THE COURTS 1980-1989
185
The Court of Appeals next held that Mr. Francisco’s argument
based upon his challenge that income received from labor or
services was not income that was taxable under the Sixteenth
Amendment was inappropriate because Mr. Francisco stipulated to
receiving “gross compensation on sales.” The Court also stated that
Mr. Francisco’s argument was invalid because Congress intended to
tax income from whatever source derived. Francisco, 614 F.2d at
619. The Court of Appeals was correct in its assertion that Congress
did intend to tax income from whatever source derived, including
labor or personal services, but that is not the same as saying money
received in exchange for labor or services is income. To constitute
income, there must be a profit or gain.
Hayward v. Day, 619 F.2d 717 (8th Cir. 1980):
Mr. Hayward was convicted by a jury of four counts of failure to file
income tax returns. The Eighth Circuit Court of Appeals affirmed
that conviction in an unpublished opinion. Thereafter, and
representing himself, he sought post-conviction relief through a
petition under 28 U.S.C. Section 2255. That petition was dismissed
without a hearing, and he filed this appeal from that denial. Mr.
Hayward represented himself. Hayward, 619 F.2d at 717.
On appeal, he contended that an income tax on wages was illegal as
a direct tax on the source of income. The Court of Appeals, citing
Brushaber and Francisco, held the appeal to be frivolous because:
Congress clearly intended to tax income regardless of
the Source.
Hayward, 619 F.2d at 717.
Mr. Hayward, in contending that an income tax on wages was
illegal as a direct tax on the source of income, never contested the
fact that Congress did clearly intend to tax income regardless of the
source. But that does not automatically change gross receipts into
gross income, as recognized by the Supreme Court in Doyle (see p.
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128). The Hayward case cannot constitute legal precedent for the
conclusion that “wages” are income because not only did the Court
not address that issue, but it relied upon the flawed opinion
rendered by the Francisco Court.
Broughton v. United States, 632 F.2d 707 (8th Cir. 1980):
Michael A. Broughton filed a lawsuit in Federal District Court
seeking a refund of income taxes paid in 1976 and 1977. The basis of
his claim for refund in the District Court was identical to the single
issue he raised on appeal:
He is not a person required to pay taxes because the
wages he received as compensation for services in
1976 and 1977 are not subject to tax, and taxing those
wages would be unconstitutional as a direct tax that is
not apportioned among the states.
Broughton, 632 F.2d at 707.
The District Court had granted the government’s motion to dismiss
Mr. Broughton’s complaint such that no trial on the merits would
take place, and Mr. Broughton filed an appeal to challenge the
validity of the dismissal of his complaint. In upholding the District
Court’s dismissal, the Court of Appeals, citing Brushaber, stated
that the Sixteenth Amendment authorizes the imposition of an
income tax without apportionment among the States. Broughton,
id. As pointed out in detail above, Brushaber stated the income tax
was an excise tax that did not require apportionment. However,
Eisner stated the Sixteenth Amendment authorized the imposition
of an income tax without apportionment among the States; the
statement of the Broughton Court, although wrongly cited, is
correct.
The Court then went on to say:
THE LAW AND THE COURTS 1980-1989
187
Income includes wages or compensation received for
services performed, and taxpayer’s contention is
frivolous and totally devoid of merit.
Broughton, 632 F.2d at 707.
To support this conclusion, the Court cited to Hayward and to
Francisco. As has been demonstrated above at pages 185 and 183
respectively, those cases do not constitute valid legal authority for
the proposition that wages or compensation for services constitute
income. Section 61(a)(l) of the Internal Revenue Code clearly
includes the income [profit or gain] “derived from” compensation
for services in “gross income,” but equally as clearly, does not
discuss wages or include compensation for services itself in gross
income. Having relied entirely on unsupported case law as binding
legal precedent, the Broughton opinion cannot constitute legal
precedent.
United States v. Buras, 633 F.2d 1356 (9th Cir. 1980):
Mr. Buras was convicted on four counts of willful failure to file
income tax returns under 26 U.S.C. Section 7203. For eight years
preceding 1974, he filed income tax returns in which he listed his
wages as income. During this period of time he also had income
taxes withheld from his wages. After concluding that he was not
obligated under the tax laws to report his wages as income, Mr.
Buras did not file tax returns for the years 1974 through 1978, and
filed withholding exemption certificates (Form W-4E) such that no
taxes would be withheld from his wages. Buras, 633 F.2d at 1358.
Prior to trial, Mr. Buras filed a pretrial motion asking for a judicial
hearing to determine whether wages were income. The motion was
denied. Mr. Buras then stipulated that during the period in question
he had earned wages in excess of the amount of gross income which
would obligate an individual to file a return, and further stipulated
that he did not file any returns. Buras, id.
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The Court considered these stipulations to be an admission of proof
that two out of the three elements of the offense of failure to file84
were conceded:
Thus, the only disputed element under I.R.C. Section
7203 was whether Buras’ failure to file was willful.
Buras, id.
On appeal Mr. Buras argued, among other things, that it was error
for the Court to instruct the jury that wages constitute income.
Representing himself, he argued that only gain or profit can
constitute income. He also argued that the income tax was an excise
tax, and as a wage earner, he was not engaged in any privileged
activity, such as employment by a government agency, subject to an
excise tax. Mr. Buras also argued that Treasury Regulation Section
1.61-2(a)(l), which includes wages within the definition of income,
was invalid for being inconsistent with the constitutional definition
of income. Buras, 633 F.2d at 1361. As stated by the Court:
According to Buras, income must be derived from
some source. Wages cannot be taxed because the wage
earner enjoys no gain from that source. Since the
wage earner exchanges his labor and personal time for
its equivalent in money, he derives no gain and
therefore cannot be taxed.
Appellant’s argument is refuted by one of the cases he
cites. In Stratton’s Independence, Ltd. v. Howbert,
231 U.S. 399, 415, 34 S.Ct. 136, 140, 58 L.Ed. 285
(1913), the Court did define income as gain derived
from labor. The Court went on to explain, however,
that “the earnings of the human brain and hand when
unaided by capital” are commonly treated as income.
Id.
Buras, 633 F.2d at 1361.
THE LAW AND THE COURTS 1980-1989
189
Stratton’s Independence was fully briefed herein. As pointed out at
page 95, the Supreme Court did not say that earnings from the
human brain and hand when unaided by capital are commonly
treated as income, but stated that such earnings are commonly
dealt with in legislation as income. The only federal legislation
treating such earnings as income was legislation for the taxation of
the salary of persons employed by the United States government,
the exact privilege mentioned by Mr. Buras.85
The Stratton’s Independence case was sent to the United States
Supreme Court on three specific issues which had been certified to
it, none of which involved the issue of whether wages constitute
income (see p. 93), and thus the case cannot be cited as controlling
for that principle.86
The Court of Appeals also stated:
As for Buras’ argument that he may not be taxed
because he is a wage earner, the Sixteenth
Amendment is broad enough to grant Congress the
power to collect an income tax regardless of the
source of the taxpayer’s income.
Buras, 633 F.2d at 1361.
There is no quarrel with this legal position. Congress can tax
income regardless of the source. Wages, however, are not income,
so they are not reached by the Sixteenth Amendment. Having relied
on a prior Supreme Court case to support its position, which case
did not even address the issue, the Court of Appeal’s decision in
Buras lacks legal credibility.
United States v. Romero, 640 F.2d 1014 (9th Cir. 1981):
Mr. Romero, representing himself, was convicted on five counts of
willful failure to file income tax returns. Among other issues on
appeal, Mr. Romero alleged bias and error on the part of the trial
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judge based upon the judge’s comments and instructions
concerning the legal meaning of the terms “income” and “person” in
26 U.S.C. Sections 61 and 7203. Romero, 640 F.2d at 1016. Neither
the basis of Mr. Romero’s argument nor the trial court’s
instructions are set forth in the Court of Appeal’s opinion, thus legal
analysis of the case is impossible and it has no precedential value.
The Court of Appeals stated:
Romero’s proclaimed belief that he was not a “person”
and that the wages he earned as a carpenter were not
“income” is fatuous as well as obviously incorrect.
Romero, 640 F.2d at 1016.
To support this contention, the Court of Appeals cited to Lucas v.
Earl, 281 U.S. at 114-115, and to Roberts v. C.I.R., 176 F.2d 221, 225
(9th Cir. 1949). The Lucas case was analyzed previously, and as set
forth at page 149, the issue of whether wages constitute income was
not litigated in that case. In Roberts, the question before the Court
was whether tips received by a taxicab driver constituted income. In
deciding that tips did constitute income, the Court first went to the
definition of income contained in Section 22 of the Internal
Revenue Code of 1939, and found that Congress included in gross
income gains, profits, and income derived from salaries, wages or
compensation for personal service. The Court next went to Treasury
Regulation 111 which included tips within the term “compensation
for services.” The Court, ignoring the use of the words “derived
from,”87 determined tips, being compensation for services, were
income:
The essential question for determination is whether
tips are income. The Regulation just cited declares
them such.
Roberts, 176 F.2d at 223.
THE LAW AND THE COURTS 1980-1989
191
The Regulation does nothing more than include tips within the
term “compensation for services.” According to the Supreme Court
and the intent of Congress, there is no income unless there is a
profit or gain derived from those tips. Whether or not Mr. Roberts
profited from his tips was not litigated, however, because he argued
that tips were a gift that fell without the income tax provisions of
the law. The Roberts case also stated on page 225 that “[a]ny
monies which come to the taxpayer as the fruits of his labor are
‘income.’” It must be pointed out that no case authority is cited for
this conclusion.
The Romero Court next went on to say that:
Compensation for labor or services, paid in the form
of wages or salary, has been universally held by the
courts of this republic to be income, subject to the
income tax laws currently applicable.
Romero, 640 F.2d at 1016.
This gratuitous statement on the part of the Ninth Circuit ignores
the fact that the issue has never been directly ruled upon by the
Supreme Court. As pointed out herein, those lower courts that have
ruled on the matter have ignored the express language of the
applicable statutes and/or the intent of Congress, or have cited to
cases for propositions that are not supported by an analysis of those
cases. Certainly the Romero case does not even attempt to give a
legal analysis of the issue, but merely cites to other cases. As shown,
those cases do not stand for the proposition that wages constitute
income.
Amon v. United States, 514 F.Supp. 1293 (D.C. Col., 1981):
Mr. Amon paid federal personal income tax for the years 1977, 1978
and 1979, and then sought to recover those taxes. As grounds for
the recovery, Mr. Amon, representing himself, raised the following
three legal arguments: (1) that the compensation for services which
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constituted his wages could not be subject to income taxation by the
Internal Revenue Service because wages only represented an even
exchange for labor, and consequently there was no gain or profit
which was taxable income, (2) that with regard to the first
assertion, the Sixteenth Amendment of the Constitution of the
United States was not intended as a direct tax on compensation for
labor, and therefore, the Internal Revenue Service collected taxes in
contravention of the Constitution of the United States and (3) that
the taxes he paid were, in reality, illegally imposed excise taxes
because he did not occupy a status which would ordinarily incur tax
liability. According to the Court’s opinion, Mr. Amon equated an
excise tax with an income tax. Amon, 514 F.Supp. at 1294.
The government argued that (1) the Internal Revenue Service had
the constitutional and statutory power to tax Mr. Amon’s gross
income which was derived from compensation for services and (2)
that Mr. Amon was properly taxed. Amon, id.
The Court pointed out that the government’s brief addressed “the
issue of whether Amon’s income, as derived from compensation for
services, and constituting wages, was properly taxable as income
tax,” while Mr. Amon addressed “only the issue of whether he was
the proper subject for the imposition of an excise tax, which he
asserted the government was collecting from his income derived
from his wages.” Amon, id.
In addressing Mr. Amon’s contention that his compensation for
services was only an even exchange for his labor which did not
constitute a gain or profit from his labor,88 the Court first quoted
from United States v. Safety Car Heating & Lighting Co., 297 U.S.
88, 99 (1936), as follows:
Income within the meaning of the Sixteenth
Amendment is the fruit that is born of capital, not the
potency of fruition. With few exceptions, if any, it is
income as the word is known in the common speech
THE LAW AND THE COURTS 1980-1989
193
of men •*. * * when it is that, it may be taxed, though
it was in the making long before.
Amon, 514 F.Supp. at 1295.
This is a correct statement of the law to the extent it addresses
capital. In the Safety Car case, the issue was the taxability of the
“profit” derived from a patent:
There is no denial that profits owing to a patentee by
the infringer of a patent are income within the
meaning of the statute, unless withdrawn from that
category by the date of the infringement.
Safety Car, 297 U.S. at 93.
The case nowhere indicates that wages constitute a profit derived
from labor.
The Court next cited to Glenshaw Glass, indicating that exemplary
damages for fraud fell within the definition of Section 22, the
predecessor to the present day Section 61 of 26 U.S.C. As already
analyzed, exemplary damages constitute a profit or gain, and hence
are to be included within gross income. Again, however, there is no
reference to wages constituting a profit or gain in the Glenshaw
Glass case. The Court then cited to Helvering v. Clifford, 309 U.S.
331 (1940), for the proposition that Congress has the power to
impose an income tax on gross income. That is a true statement of
the law. The Clifford case, however, involved the situation of a
husband who declared himself trustee of certain securities he
owned, the net income therefrom to be held for the exclusive
benefit of the wife. The income was distributed to the wife, but the
I.R.S., contending that the income was taxable to the husband,
issued a deficiency notice. The issue before the Supreme Court was:
[W]hether the grantor after the trust has been
established may still be treated, under this statutory
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scheme [referencing Section 22 defining gross
income], as the owner of the corpus.
Clifford, 309 U.S. at 334.
Again, no mention whatsoever that wages constitute income.
The Court went on to cite C.I.R. v. Jacobson, 336 U.S. 28 (1949),
stating that in that case, the Supreme Court reiterated the purpose
of the income tax laws as follows:
The income taxed is described in sweeping terms and
should be broadly construed in accordance with an
obvious purpose to tax income comprehensively.
Amon, 514 F.Supp. at 1295.
Once again, the Supreme Court correctly states the law, and once
again the Amon Court cited to a case that has nothing whatsoever to
do with whether or not wages constitute income. According to the
Supreme Court:
This decision applies the federal income tax to gains
derived by a debtor from his purchase of his own
obligations at a discount and his consequent control
over their discharge. It presents the specific question
whether a solvent natural person, in straitened
financial circumstances, must include in his gross
income for federal income tax purposes the difference
between (1) the face amount of his personal
indebtedness as the maker of secured bonds,
originally issued by him at face value for cash, and (2)
a lesser amount paid by him for their purchase.
Jacobson, 336 U.S. at 29-30.
The issue of whether or not wages constitute income was clearly not
addressed in the Jacobson case.
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195
The Court then cited to United States v. Swallow, 511 F.2d 514
(10th Cir. 1975), as follows:
[T]he Tenth Circuit Court of Appeals commented on
the
comprehensive
nature
of
taxation
on
compensation for services stating “[w]hen earnings
are acquired, lawfully or unlawfully, without
consensual recognition of an obligation to repay or
restriction on their disposition, there is income.”
Amon, 514 F.Supp. at 1295.
A review of the Swallow case, however, shows that the Tenth
Circuit was not speaking about compensation for services, but was
speaking about loans:
The principal government theory of a substantial tax
deficiency argued to the jury was that the loans were
not good faith loans to Swallow, and that there was no
effort, nor any evidence to indicate any intent by
Swallow, to repay the loans. The trial court instructed
on this theory. When earnings are acquired, lawfully
or unlawfully, without consensual recognition of an
obligation to repay or restriction on their disposition,
there is income. James v. United States, 366 U.S. 213,
219-220, 81 S.Ct. 1052, 6 L.Ed.2d 246. And this
principle applies to loans obtained in bad faith and
without an intent to repay them, as well as to money
illegally obtained by embezzlement as in the James
case.
Swallow, 511 F.2d at 519.
The Swallow case nowhere discusses compensation for services and
certainly did not involve the issue of wages.
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That the Court was ignorant of federal tax law is clear from the
following quote:
The current statutory guidelines for income tax
assessment are Sections 61 and 63 of the Internal
Revenue Code.
Amon, 514 F.Supp. at 1296.
Section 61 of the Internal Revenue Code, found in Subtitle A,
merely defines “gross income,” and Section 63 defines “taxable
income.” The statutory guidelines regarding income tax
assessments are found in Subtitle F at Sections 6201, 6203 and
6303.
At page 1296 the Court then quoted from Section 61, and ignoring
the
words—income
derived
from—erroneously
equated
compensation for services with income. To support this erroneous
equation, the Court cited to Robertson v. United States, 343 U.S.
711, 713-714 (1952). The Robertson case, however, involved the
issue of whether a cash prize received by the winner of a contest in
musical composition constituted gross income under Section 22 of
the Internal Revenue Code. Once again, the Court cited to a case in
which there was no mention whatsoever regarding wages
constituting income.
The Court next cited to C.I.R. v. Smith, 324 U.S. 177 (1945),
contending that the Supreme Court held that property which was
transferred to an employee was compensation for services even
though the transfer took the form of an exchange. In the Smith case,
Mr. Smith’s employer gave to him, as compensation for his services,
an option to purchase from the employer certain shares of stock of
another corporation at a price not less than the then current market
value of the stock. Two tax years later, when the market value of the
stock was greater than the option price, Mr. Smith exercised the
option. The question before the Supreme Court for decision was
whether the difference between the market value and the option
THE LAW AND THE COURTS 1980-1989
197
price of the stock was compensation for personal services of the
employee, taxable as income in the years when he received the
stock, under Section 22(a) of the Internal Revenue Code. Smith,
324 U.S. at 177-178.
The Supreme Court found factually that the stock option was “in
consideration of services rendered,” and that the stock option had
no value at the time it was given to Mr. Smith. The Court thus
concluded that at the time of the exercise of the option, the
difference between the market value and the option price of the
stock, which was zero, constituted profit that was derived from the
compensation for services. This reasoning was in full accord with
the applicable statute and regulations; and after quoting them, the
Supreme Court was led to say:
Section 22(a) of the Revenue Act is broad enough to
include in taxable income any economic or financial
benefit conferred on the employee as compensation,
whatever the form or mode by which it is effected. See
Old Colony Trust Co. v. Commissioner, 279 U.S. 716,
729. The regulation specifically includes in income,
property “transferred ... by an employer to an
employee, for an amount substantially less than its
fair market value,” even though the transfer takes the
form of a sale or exchange, to the extent that the
employee receives compensation.
Smith, 324 U.S. at 181.
If applied to wages, however, the analysis of the Supreme Court in
Smith would not result in taxable income because the property
transferred by the employer to the employee would be equal to the
fair market value of the employee’s labor, not substantially less than
the fair market value as the stock was under the facts of the Smith
case. This is borne out by the last paragraph of the Smith decision:
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The Tax Court thus found that the option was given to
respondent as compensation for services, and
implicitly that the compensation referred to was the
excess in value of the shares of stock over the option
price whenever the option was exercised. From these
facts it concluded that the compensation was taxable
as such by the provisions of the applicable Revenue
Acts and regulations. We find no basis for disturbing
its findings, and we conclude it correctly applied the
law to the facts found.
Smith, 324 U.S. at 182.
The Supreme Court, as well as the Tax Court, recognized there was
an excess over the basis of the stock, and that this excess
constituted a profit (income) derived from compensation for
services. As a profit, “the compensation was taxable as such by the
provisions of the applicable Revenue Acts and regulations.” It
logically and legally follows that compensation for services that
does not constitute income (a profit or gain) is not taxable under
the provisions of the applicable Revenue Acts and regulations. Thus
the Smith case, cited by the Amon Court for the proposition that
wages constitute income, actually supported the opposite
proposition, that wages do not constitute income unless the
employee receives an amount over and above the fair market value
of his labor.
The Amon Court next cited to Wilson, 412 F.2d at 695, for the
proposition that “all remuneration received for services is gross
income unless it falls within a specific exclusion.” The Wilson case,
as shown above at page 170, involved the interpretation of the terms
“business premises” and “in kind” with regard to the question of the
alleged non-taxability under Section 119 of the 1954 Internal
Revenue Code, as income, of the reimbursement by the state
employer to a state police office while on duty, of the cost of a meal
in a restaurant.
THE LAW AND THE COURTS 1980-1989
199
Mr. Wilson never contended the reimbursement was not income, he
merely contended the amount received was specifically excludable
from gross income by statute.
The Court also cited to Neville v. Brodrick, 235 F.2d 263 (10th Cir.
1956), contending that “the Tenth Circuit recognized that
compensation for services rendered or to be rendered is taxable.”
Amon, 514 F.Supp. at 1296. In Neville, the two issues before the
Court were: 1) whether stock given to an employee and his family
represented gifts or additional compensation for services rendered;
and 2) what was the fair market value of the stock. After discussion
of Section 22(a) defining “gross income” as including “gains,
profits, and income derived from ... compensation for personal
service” and Section 22(b)(3) exempting from taxation the value of
property received as a gift, the Court said:
While sometimes difficult of application, the statute
draws a clear distinction between compensation for
services rendered or to be rendered and gifts, the
former being taxable and the latter exempt.89
Neville, 235 F.2d at 265.
After citing these non-supporting cases, the Amon Court concluded
that:
Notwithstanding the fact that Amon asserts he did not
receive any gain from his labor, and that the
compensation for services was only a mere exchange,
in view of the above authorities, his position is
untenable. Compensation for services is taxable
income and the government properly taxed Amon’s
income for the years in question.
Amon, 514 F.Supp. at 1296.
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In view of the above authorities, it is clear that a profit or gain
derived from compensation for services is taxable income, but that
the government improperly taxed Mr. Amon’s gross receipts as
opposed to his taxable income.
Lonsdale v. C.I.R., 661 F.2d 71 (5th Cir. 1981):
Mr. Lonsdale, representing himself, appealed from an adverse
determination of the United States Tax Court. In its written
opinion, the Court of Appeals openly admitted that the arguments
of Mr. Lonsdale were extremely broad, consisted of interwoven
legal and theological arguments, and that the Court’s decision was
not based upon any consideration of the underlying facts. Lonsdale,
661 F.2d at 72.
The Court believed the argument of Mr. Lonsdale to be that the
United States Constitution forbids taxation of compensation
received for personal services because: 1) the exchange of services
for money is a zero-sum transaction, the value of the wages being
exactly that of the labor exchanged for them and hence containing
no element of profit; and 2) that under Pollock v. Farmers Loan &
Trust, 157 U.S. 429 (1895), the income tax is a direct tax that must
be apportioned among the several states. Lonsdale, 661 F.2d at 72.
As to the first of Mr. Lonsdale’s arguments, the Court stated:
The Constitution grants Congress power to tax
“incomes, from whatever source derived ... .” U.S.
Const, amend. XVI. Exercising this power, Congress
has defined income as including compensation for
services. 26 U.S.C. Section 61(a)(l). Broadly speaking,
that definition covers all “accessions to wealth.” See
Commissioner v. Glenshaw Glass Co., 348 U.S. 426,
431 (1955). This definition is clearly within the power
to tax “incomes” granted by the sixteenth amendment.
Lonsdale, 661 F.2d at 72.
THE LAW AND THE COURTS 1980-1989
201
The fallacy of the Court’s reasoning is immediately apparent in that
at Section 61(a)(l) Congress did not define “income,” but merely
defined “gross income.” Congress clearly defined “gross income” as
including “income derived from compensation for services,” but
that is not the same thing as defining “income.” The Lonsdale Court
actually ignored the legislative history accompanying the passage of
Section 61 of the 1954 Internal Revenue Code which specifically
states:
Section 61 (a) provides that gross income includes “all
income from whatever source derived.” This
definition is based upon the 16th Amendment and the
word “income” is used in its constitutional sense.
House Report No. 1337; Senate Report
No. 1622; U.S. Code Cong. and Admin.
News, 83rd Congress, 2nd Session,
pages 4155 and 4802 respectively, 1954.
The United States Supreme Court has provided us with the
constitutional definition of income based upon the Sixteenth
Amendment:
Income may be defined as the gain derived from
capital, from labor or from both combined, provided it
include profit gained through a sale or conversion of
capital assets.
Stratton’s Indep. v. Howbert, 231 U.S.
399 (1913); Doyle v. Mitchell, 247 U.S.
179 (1920); So. Pacific v. Lowe, 247 U.S.
330 (1918); Eisner v. Macomher, 252
U.S. 189 (1920); Merchant’s Loan v.
Smietanka, 255 U.S. 509 (1921).
The Congressional legislative history, together with the Supreme
Court cases defining “income” and the analysis by the Supreme
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Court in the Glenshaw Glass case, all show that the Court in
Lonsdale was in error for not looking to the facts to ascertain if Mr.
Lonsdale had a profit derived from his compensation for services.
The Lonsdale Court responded to Mr. Lonsdale’s second argument
by correctly stating that the Sixteenth Amendment did remove the
requirement of apportionment from the direct income tax.
Lonsdale, id. Thus if the “income” derived from “compensation for
services” is taxed, the tax need not be apportioned. However, if the
tax is applied directly to “compensation for services,” it must still be
apportioned pursuant to Article I, Section 2, Clause 3, and Article I,
Section 9, Clause 4, of the United States Constitution. The failure of
the Court to distinguish between “income derived from
compensation for services” and “compensation for services” renders
the Court’s opinion unreliable as precedent for the proposition that
wages constitute income.
Rice, T.C. Memo 1982-129, para. 82,129 P-H Memo TC
(1982):
Mr. Rice, representing himself in Tax Court, argued that Congress
intended to tax wages as compensation for services in Section
61(a)(l) of the Internal Revenue Code, but claimed that the statute
was an unconstitutional attempt to tax, without apportionment,
something which was not income within the meaning of the
Sixteenth Amendment. He argued that wages were not income
because they were not “gain derived from capital, from labor, or
from both combined.” Instead, Mr. Rice contended that wages arose
from an equal exchange of labor or services for property, a
transaction in which no gain was derived. Rice, id.
The Tax Court first stated:
The Supreme Court early established the principle
that the word “income,” as it is used in the Sixteenth
Amendment, is to be construed according to its
common, everyday meaning. In Lynch v. Hornby, 247
THE LAW AND THE COURTS 1980-1989
203
U.S. 339, 344 (1918), the Court stated, “* * * Congress
was at liberty under the [Sixteenth] Amendment to
tax as income, without apportionment, everything
that became income, in the ordinary sense of the word
* * *.” Under this principle, the ordinary, and perhaps
most common, meaning of “income” has been wages.
Thus, when a coal company argued before the
Supreme Court that the proceeds from its sale of ore,
which it had dug from its properties, were the return
of depleted capital, not income, the Court dismissed
the argument, observing “the same is true of the
earnings of the human brain and hand when unaided
by capital, yet such earnings are commonly dealt with
in legislation as income.” Stratton’s Independence v.
Howbert, supra note 6, at 415. This quote illustrates
that whether or not wages can be characterized as the
product of an exchange, they are still income within
the Constitutional embrace.
Rice, id.
In Lynch v. Hornby, the specific issue before the Court was whether
that portion of a stock dividend representing the conversion of
property into money constituted net income under the Income Tax
Act of 1913. Lynch v. Hornby, 247 U.S. at 341-342. The case did not
involve wages. With respect to the quote that “Congress was at
liberty under the Sixteenth Amendment to tax as income, without
apportionment, everything that became income, in the ordinary
sense of the word,” it was shown at page 144 in the Smietanka case
that the term “income” pertained to what was in the minds of the
people at the time of their ratification of the Sixteenth Amendment.
(See also the legislative history regarding the enactment of Section
61 of the Internal Revenue Code of 1954 at page 84.) The Supreme
Court has held that the term income was meant to be a profit or
gain derived from labor, not the equal amount received in exchange
for labor.
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The quote attributed to the Supreme Court in Stratton’s
Independence has been shown at page 95 not to have been made
with respect to any then existing income tax legislation. In addition,
none of the three issues before the Court in Stratton’s
Independence involved wages, and the statement of the Court was
dicta. It was also shown in the Stratton’s Independence analysis
that the Court recognized the principle of gain by stating that the
wasting of capital assets had to somehow figure into the
computation of income in order to arrive at the gain derived from
the mining process and the sale of the ore (see p. 96).
The Rice Court next stated:
Mr. Rice misconstrues the oft-cited phrase that
income is “gain derived from capital, from labor, or
from both combined” to mean that wages are not
income. Wages are “derived” from labor or services in
the sense that they cannot be gained without such
labor. Although the wages received by Mr. Rice may
represent no more than the time-value of his work,
they are nonetheless the fruit of his labor, and
therefore represent gain derived from labor which
may be taxed as income.
Rice, id.
Here the Court recognized the concept of basis; i.e., that the wages
Mr. Rice received might represent no more than the value of his
labor. The Court then stated:
Even if we were to agree with Mr. Rice’s contention
that wages are, in effect, an exchange of equal value
for value, he would still be taxable upon the wages he
and Mrs. Rice received in 1978. The general doctrine
that receipts representing a return of capital are not
taxed does not apply when a taxpayer has a zero basis
in the property he exchanged for the receipts. See
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205
Wilson v. Commissioner, 27 T.C. 976 (1957), affd. per
curiam 255 F.2d 702 [1 AFTR2d 1851] (5th Cir. 1958);
Bryan v. Commissioner, 16 T.C. 972 (1951); Rains v.
Commissioner, 38 B.T.A. 1189 (1938). Mr. Rice did
not establish that he had a basis in the services he
rendered to Matanuska, nor did he establish that Mrs.
Rice had a basis in the services she rendered to Alaska
Teamsters. Thus, each had taxable gain upon receipt
of wages from their respective companies. Section
1001.
Rice, id.
In Wilson v. Commissioner, the issue before the Court was whether
the cancellation of a debt should be considered a long-term capital
gain or ordinary dividend income. Whether wages constitute
income, or the value of one’s labor established by the employment
contract constitutes the basis of that labor, was not an issue before
the Court.
In the Bryan case, the Court stated the issue before it as follows:
The issue to be decided is whether certain shares of
stock, which were sold by the petitioner in 1944, were
a gift to petitioner or whether they had been received
by him for adequate consideration. If they were not a
gift, a further issue is presented with respect to the
basis of the stock for computing gain or loss thereon.
Bryan, 16 T.C. at 972.
This case also did not address the issue as to the basis of one’s
labor, but clearly recognized the concept that determination of basis
is an essential part of the computation of gain.
In the Rains case the Court stated the issue before it as follows:
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The issues are, first, whether respondent erred in
determining that an option granted to petitioner’s
husband in 1929, to purchase stock of the Columbia
Steel Corporation, was community property of
petitioner and her husband, and in including in her
gross income for the taxable year one-half of the
income realized in respect of the option; and, second,
whether petitioner realized gain or loss in the
exchange, in the taxable year, of certain of her
separate property for an interest in the option.
Rains, 38 B.T.A. at 1190.
As in Wilson and Bryan, this case did not involve the issue as to the
basis of one’s labor.
In ruling adversely to Mr. Rice, the Tax Court relied upon case law
that did not address the specific issues before it, and failed to
acknowledge the Supreme Court’s holding that labor and the
employment contract to sell one’s labor constitutes personal
property. The Court specifically recognized the issue raised by the
Rices that the wages they received were in direct exchange for the
time-value of their labor, but then chose, contrary to law, not to
recognize the fair market value of the labor as the basis of that
labor. Having ignored the law directly on point, the Rice case is
erroneous, and cannot constitute legal authority for the proposition
that wages constitute income.
United States v. Lawson, 670 F.2d 923 (10th Cir. 1982):
Mr. Lawson appealed his convictions for failing to file federal
income tax returns and for supplying a false and fraudulent
withholding certificate to his employer. One of the grounds raised
on appeal was whether the trial court committed error in denying a
pretrial motion to dismiss the case because his wages were not
income within the meaning of the Internal Revenue Code and the
Constitution. Lawson, 670 F.2d at 925.
THE LAW AND THE COURTS 1980-1989
207
With respect to the contention that Mr. Lawson’s wages were not
income within the meaning of the Internal Revenue Code, the Court
cited Section 61(a)(l) as follows:
“[G]ross income means all income from whatever
source derived, including (but not limited to) the
following items: (1) Compensation for services,
including fees, commissions, and similar items “
Lawson, id.
The Court then stated:
We must broadly interpret the definition to include all
gains not specifically exempted. Commissioner v.
Kowalski, 434 U.S. 77, 82-3 (1977).
Lawson, 670 F.2d at 925.
Thus, while recognizing that the definition of gross income applies
to “gains,” including gains derived from compensation for services,
it failed to apply the law as stated to the case before it:
Notwithstanding Lawson’s belief that his wages are
not gains or profits but merely what he has received in
an equal exchange for his services, the Internal
Revenue Code clearly included compensation of this
nature within reportable gross income.
Lawson, id.
The Court failed to cite any case authority for this statement.
With respect to the contention that Mr. Lawson’s wages were not
income within the meaning of the Constitution, the Court did not
set forth Mr. Lawson’s contentions in the opinion, and disposed of
the issue by stating:
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Lawson’s constitutional argument is specious. See
United States v. Russell, 585 F.2d 368, 370 (8th Cir.
1978); Kasey v. Commissioner, 457 F.2d 369, 370
(9th Cir. 1972), cert. denied, 409 U.S. 869 (1972);
Porth v. Brodrick, 214 F.2d 925, 926 (10th Cir. 1954).
Lawson, 670 F.2d at 925.
The Russell case has been previously analyzed herein at page 179.
The Kasey case was an appeal from a decision of the Tax Court
which upheld the Commissioner’s denial of certain deductions
claimed by the Kaseys for various litigation-related expenses.
Kasey, 457 F.2d at 370. The case did not involve the issue of
whether wages constitute income. The constitutional argument
raised by the Kaseys as to the constitutional validity of the tax was
dealt with by the Court in one sentence:
In arguing that the only proper tax would be
something like a sales tax, the taxpayers seem to have
overlooked the Sixteenth Amendment to the
Constitution, which gives Congress “power to lay and
collect taxes on incomes.”
Kasey, 457 F.2d at 370.
The Porth case was an action brought by Mr. Porth to recover the
sum of $135 which he alleged was erroneously and illegally paid on
his declaration of estimated income tax for the year 1951. The trial
court dismissed the action upon the government’s motion on the
grounds that Porth’s petition failed to state a claim upon which
relief could be granted, and thereafter, Mr. Porth appealed. Porth,
214 F.2d at 925.
Mr. Porth raised two contentions: first, that the Sixteenth
Amendment was unconstitutional because the taxpayer was placed
in a position of involuntary servitude contrary to the Thirteenth
Amendment; and second, that the Federal Tax legislation enacted
THE LAW AND THE COURTS 1980-1989
209
after the ratification of the Sixteenth Amendment had given rise to
such a mass of ambiguous, contradictory, inequitable and unjust
rules, regulations and methods of procedure, that he was compelled
to assume unreasonable duties, obligations and burdens in order to
make a just accounting of his income and pay the tax thereon. In
disposing of the case, the Court stated:
The allegations of the petition are very broad and it is
difficult, if not impossible, to determine therefrom
just what the complaint is except that there exists a
strong dislike for the taxing procedure. Apparently the
taxpayer, while recognizing the taxing power of the
United States, attacks both the legality of the
Sixteenth Amendment and the constitutionality of the
Federal tax laws, rules and regulations enacted
pursuant thereto. It is admitted that a federal income
tax may be levied under the Sixteenth Amendment
and no law, rule or regulation is referred to which
impinges upon or destroys any right guaranteed the
taxpayer by the Constitution. The claim is clearly
unsubstantial and without merit.
Porth, 214 F.2d at 926.
The Kasey and Porth cases cited by the Lawson Court
in response to Mr. Lawson’s unspecified challenge to
the constitutionality of a tax upon his wages do not
address the issue of whether or not wages constitute
income. The Russell case cannot stand for the
proposition that wages constitute income for the
reasons previously set forth.
Funk v. Commissioner, 687 F.2d 264 (8th Cir. 1982):
Mr. Funk, representing himself, appealed from a decision entered
by the United States Tax Court and argued, among other things,
that the wages received by him in 1976 and 1977 were not subject to
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federal income tax. Mr. Funk argued that compensation for labor
was not constitutionally subject to the federal income tax, that an
individual’s labor was capital in which he possessed a property
right, that an individual had the right to exchange that property for
other property, i.e., money, and that such a transaction was an
equal exchange which did not give rise to any profit. Funk, 687 F.2d
at 265.
The Funk Court stated it rejected Mr. Funk’s Sixteenth Amendment
claim because the constitutionality of the Sixteenth Amendment
had been upheld by the Supreme Court in Brushaber, and also cited
to Eisner v. Macomber. Funk, 687 F.2d at 265.
The Court then stated that there was no constitutional impediment
to levying an income tax on compensation for a taxpayer’s labors,
and cited to two Tax Court decisions as authority for its statement:
Hanson v. Commissioner, para. 80,197 T.C.M. (P-H) at 900
(1980)90 and Brooks v. Commissioner, para. 80,206 T.C.M. (P-H)
at 940 (1980).91
In Tax Court, Mr. Hanson, who was representing himself, argued
that wages derived from a God-given, inalienable right to work were
not constitutionally subject to the federal income tax, that a wage,
salary, fee, first-time commission, or compensation for any kind of
labor was not a gain, and that a tax on compensation for labor was a
direct tax required to be apportioned under the Constitution. He
also argued that wages and other compensation for labor were not a
gain from capital or labor, because the gain from labor
contemplated by the Supreme Court referred to gain derived by
labor contractors who contracted to provide the services of
employees. Hanson, at 900.
The Tax Court stated in its opinion that Mr. Hanson’s arguments
were without merit, because soon after the promulgation of the
Sixteenth Amendment to the Constitution, numerous challenges to
the income tax laws were raised on constitutional grounds. Citing to
Brushaber and to Tyee Realty Co. v. Anderson, 240 U.S. 115 (1916),
THE LAW AND THE COURTS 1980-1989
211
the Tax Court stated that in the face of these challenges, the
Supreme Court upheld the income tax law enacted in 1913, which
law levied taxes on salaries and wages received by individuals as
well as on other income items of both corporations and individuals.
Hanson, at 900.
Neither of the cases cited by the Tax Court, however, involved a
challenge to the constitutionality of a tax on wages, so that issue
was not decided by the Supreme Court.92 Mr. Brushaber, as a
stockholder of the Union Pacific Railroad Company, sought to
enjoin the corporation from complying with the Income Tax
provisions of the 1913 tax act pertaining to corporations.
Brushaber, 240 U.S. at 9. The Tyee Realty case involved two cases,
the Tyee Realty case involving a corporation and the Thome v.
Anderson case involving an individual. Tyee Realty was decided
less than a month after Brushaber; and the decision was written by
Justice White, the author of the Brushaber decision, who stated:
Every contention relied upon for reversal in the two
cases is embraced within the following propositions:
(a) that the tax imposed by the statute was not
sanctioned by the Sixteenth Amendment because the
statute exceeded the exceptional and limited power of
direct income taxation for the first time conferred
upon Congress by that Amendment and, being outside
of the Amendment and governed solely therefore by
the general taxing authority conferred upon Congress
by the Constitution, the tax was void as an attempt to
levy a direct tax without apportionment under the rule
established by Pollock v. Farmers’ Loan & Trust Co.,
157 U.S. 429; 158 U.S. 601. (b) That the statute is
moreover repugnant to the Constitution because of
the provision therein contained for its retroactive
operation for a designated time and because of the
illegal discriminations and inequalities which it
creates, including the provision for a progressive tax
on the income of individuals93 and the method
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provided in the statute for computing the taxable
income of corporations.
But we need not now enter into an original
consideration of the merits of these contentions
because each and all of them were considered and
adversely disposed of in Brushaber v. Union Pacific
R.R., ante, p.l. That case, therefore, is here absolutely
controlling and decisive. It follows that for the reasons
stated in the opinion in the Brushaher case the
judgments in these cases must be and they are
affirmed.
Tyee Realty, 240 U.S. at 117-118.
While both cases stand for the proposition that the Sixteenth
Amendment is constitutional and that as a result of the amendment
a tax levied on an individual’s income need not be apportioned,
neither Brushaber nor Tyee Realty addressed the issue as to
whether wages constitute income. It must be remembered here that
the statute defining gross income does not itself violate the
Constitution. The interpretation of that statute by the lower courts
to the extent the interpretation allows the I.R.S. to collect a tax on
something other than “income” is what violates the Constitution. All
of the Supreme Court cases that have defined what is meant by the
word “income” have correctly stated that it must be a profit or a
gain derived from labor.
The Hanson Court then cited to Autenrieth v. Cullen, 418 F.2d 586
(9th Cir. 1969). In Autenrieth, one hundred and twenty-four
plaintiffs sought refunds of a percentage of the federal income taxes
paid by each of them on the grounds that the Viet Nam War was
illegal, each was a conscientious objector to the war, and each had a
First Amendment religious right not to pay for the war, claiming a
constitutional exemption from paying the percentage of the tax
necessary to finance the war. The lower court dismissed the
complaints on the grounds that they did not state a valid claim for
THE LAW AND THE COURTS 1980-1989
213
relief. Autenrieth, 418 F.2d at 587-588. On appeal, the Ninth Circuit
stated:
[W]e hold that nothing in the Constitution prohibits
the Congress from levying a tax upon all persons,
regardless of religion, for support of the general
government. The fact that some persons may object,
on religious grounds, to some of the things that the
government does is not a basis upon which they can
claim a constitutional right not to pay a part of the
tax.
Autenrieth, 418 F.2d at 588.
Notwithstanding the fact that the issue as to whether wages
constitute income was not a part of the Autenrieth case, the Hanson
Court said:
It is clear from the facts in Autenrieth v. Cullen,
supra, that the income being taxed was the salaries
and wages of the taxpayers in that case. We therefore
hold that there is no constitutional impediment
against levying an income tax on compensation for
petitioner’s labor.
Hanson, at 900.
One can only presume that the author of the Hanson opinion,
Administrative Law Judge Fay, chose to ignore the legal principle of
stare decisis and the holdings of the Supreme Court in Cohens v.
Virginia, 6 Wheat 264, 399 (1821); Carroll v. Lessee, 16 How. 275,
287 (1953); Louisville R.R. Co. v. Letson, 2 How 497 (1844); Ex
Parte Christy, 3 How. 292 (1845); and Woodruff v. Parham, 8 Wall
123 (1868). These cases make it clear that the doctrine of stare
decisis is a salutary one and to be adhered to on all proper
occasions, but it only arises in respect of decisions directly upon the
point in issue. In that the Autenrieth case did not directly involve
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the issue of whether wages constitute income, the Autenrieth case
cannot, legally, stand for the proposition asserted by Judge Fay.
The Hanson Court then set forth the definition of “gross income”
contained in Section 61 (a) and said:
This broad definition of income has been uniformly
held by the courts to include amounts received by an
individual for personal services. Contrary to
petitioner’s contention, payment for personal services
has in a number of cases been referred to as “gain.”
Hanson, at 900.
The Court, however, failed to cite to any of those alleged cases.
The Hanson Court then stated that Mr. Hanson’s second contention
was that a tax on wages was a direct tax and could not be levied
without apportionment. Hanson, id. The Court’s treatment of this
contention was based upon its unsupported analysis of Mr.
Hanson’s first contention, and the Court failed to address the
precise issue raised by Mr. Hanson:
However, even without considering whether the tax is
a direct tax, petitioner’s argument must fail with our
determination that “income” subject to tax does
include petitioner’s wages. It is clear under the terms
of the 16th Amendment that no apportionment of the
tax is required.
Hanson, at 900-901.
Mr. Brooks also represented himself in Tax Court. He filed Forms
1040 which contained only his name, address, the amount of
federal income tax withheld by his employers, and his signature. To
the remainder of the information asked for on the forms, he
claimed Fifth Amendment protection. In Tax Court, Mr. Brooks
THE LAW AND THE COURTS 1980-1989
215
argued that property is not federally taxable; an individual’s labor is
personal property; an individual has the right to exchange his
property (i.e., labor) for other property (money); and concluded
that his wages could not constitutionally be taxable since he
received money in exchange for something of equal value, i.e., his
labor— “property.” Mr. Brooks called his argument “The Basis
Theory.” Brooks, at 940.
The Tax Court, citing to Brushaber and Tyee Realty, stated:
It cannot be doubted after all these years since the
ratification of the Sixteenth Amendment that any
receipt of wages in exchange for services rendered is
taxable income.
Brooks, at 940.
The Tax Court next quoted the correct definition of income from
Eisner, and then, citing to Glenshaw Glass stated:
There is also no doubt that sec. 61 encompasses all
realized accessions to wealth. We reject as frivolous
the argument that sec. 61(a)(l) does not withstand
constitutional scrutiny.
Brooks, id.
The Glenshaw Glass case, it should be remembered (see p. 159),
involved the issue of whether punitive damages constituted an
element of “gross income.” These damages, which are over and
above the amount of damages necessary to replace that which was
lost, were truly an “accession to wealth.” Wages, on the other hand,
are payments for the selling of one’s labor which the Supreme Court
has held is property.94 One only realizes an accession to wealth
upon the sale of property if one receives in excess of the fair market
value of that property. 26 U.S.C. Sections 64 and 1001 et seq.
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In ruling adversely to Mr. Brooks, the Tax Court misapplied
Glenshaw Glass, and ignored three rulings of the United States
Supreme Court and several provisions of the Internal Revenue
Code.
The Funk Court next stated that Mr. Funk’s argument that wages
received for services were not taxable as income was frivolous,
citing to Broughton, Hayward and Francisco. As analyzed herein
at pages 186, 185 and 183 respectively, none of those cases are valid
legal precedent for the proposition that wages constitute income.
Jones v. United States, 551 F.Supp. 578 (N.D.N.Y. 1982):
Mr. and Mrs. Jones, representing themselves, commenced an
action to recover income taxes that they had paid for the years 1977
through 1980. The government moved to dismiss the action on the
grounds that it failed to state a valid claim. The Joneses argued that
compensation for services or wages was not income within the
meaning of the Internal Revenue Code because: 1) wages had not
specifically been designated as income in the Internal Revenue
Code; and 2) the taxation of wages violated the prohibition against
direct taxation without apportionment among the several States.
Jones, 551 F.Supp. at 579.
In dismissing the case, the trial court cited to Glenshaw Glass;
Russell; Silkman; Lawson; Buras; Broughton; United States v.
Moore, 627 F.2d 830 (7th Cir, 1980); Francisco; United States v.
Edelson, 604 F.2d 232 (3rd Cir. 1979); United States v. Daly, 481
F.2d 28 (8th Cir. 1973); and United States v. Porth, 426 F.2d 519
(10th Cir. 1970) as its authority enabling it to dispose of the Jones’
claim that wages do not constitute income. Glenshaw Glass (see p.
159), Russell (see p. 179), Silkman (see p. 173), Lawson (see p. 206),
Buras (see p. 187), Broughton (see p. 186) and Francisco (see p.
183) have been analyzed hereinabove and shown to be legally
insufficient to sustain the proposition that wages do constitute
income.
THE LAW AND THE COURTS 1980-1989
217
The issues raised in Daly were: 1) whether Defendant’s filing of
returns containing no information relating to income or expenses
was sufficient to comply with the Section 7203 requirement that he
“make a return”; 2) whether the Fifth Amendment excuses
defendant from answering all questions on the return relating to
income and expenses; 3) whether a subpoena directed against the
I.R.S. was erroneously quashed; 4) whether the District Court
erroneously refused to instruct the jury on the definition of a dollar;
and 5) whether defendant’s criminal prosecution was illegal
because it should have been preceded by some form of
administrative action. Daly, 481 F.2d at 29.
The issues addressed in Edelson were: 1) the validity of his claim of
privilege under the Fifth Amendment on his tax returns; 2) the
correctness of his interpretation of “constitutional dollars”; and 3)
whether he was entitled to have the question of his subjective “good
faith” exercise of the Fifth Amendment privilege put to the jury.
Edelson, 604 F.2d at 233-234.
The issues raised in Moore were: 1) whether the District Court
allowed the introduction of irrelevant and prejudicial evidence; 2)
whether the District Court judge participated excessively in the
trial, particularly in questioning the defendant while he was
testifying; 3) whether the jury instructions adequately informed the
jury of the defendant’s good faith defense; and 4) whether the
District Court usurped the jury’s function in deciding the issue of
whether or not a return had been filed. Moore, 627 F.2d at 832.
The issues raised in Porth were: 1) whether his prosecution was
barred by the statute of limitations; 2) whether there was a fatal
variance between the allegations of the indictment and the proof on
counts I and II of the indictment; 3) whether the return he did file
constituted a valid return under the Fifth Amendment; and 4)
whether he should be granted a new trial because of alleged bias
and prejudice of one of the jurors. Porth, 426 F.2d at 521-523.
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Neither Daly, Edelson, Moore nor Porth involved the issue of
whether wages constitute income.
Donovan v. Maisel, 559 F.Supp. 171 (D.Del. 1982):
Five plaintiffs, each representing himself, filed substantially
identical complaints, each seeking an injunction against the I.R.S.
to prevent it from enforcing levies against the plaintiffs’ wages for
alleged past due income taxes. The issue before the Court was
whether or not the government was entitled to a dismissal of the
suit under the anti-injunction statute, 26 U.S.C. Section 7421 (a),
which prohibits lawsuits for the purpose of restraining the
assessment or collection of any tax. Donovan, 559 F.Supp. at 172-
173.
The Court recognized that there was an exception to the anti-
injunction statute where the government had made no disclosure as
to whether the assessment had a basis in fact, citing to
Commissioner v. Shapiro, 424 U.S. 614 (1976). The Court held that
Shapiro was not applicable in the plaintiffs’ case because the facts
in the case showed that the plaintiffs were earning income and that
the I.R.S. was not required to accept the taxpayers’ unsubstantiated
allegations that they were exempt from taxes on their wages.
Donovan, 559 F.Supp. at 174.
The Donovan Court did not address whether wages constitute
income, but merely held that the plaintiffs failed to provide
evidence that they were exempt from income on their wages. The
plaintiffs’ argument on this issue was not set forth in the opinion
and was not addressed by the Court. Therefore, the case cannot,
and does not, stand for the proposition that wages constitute
income.
Knighten v. C.I.R., 702 F.2d 59 (5th Cir. 1983):
Mr. Knighten, representing himself, appealed from the Tax Court’s
grant of summary judgment in favor of the I.R.S. The Court of
THE LAW AND THE COURTS 1980-1989
219
Appeals stated it was difficult to determine precisely what points
Mr. Knighten was attempting to raise on appeal, Knighten, 702
F.2d at 60, and further stated:
The Tax Court understood one of Knighten’s
arguments to be that his wages were not income. On
appeal, he avers that the Tax Court misunderstood the
issue: the argument was that only “gain” is taxable,
and the Commissioner’s deficiency assessment did not
accurately reflect Knighten’s “gain.” The problem with
this argument is that the burden of proving any
inaccuracy in the Commissioner’s assessment was on
Knighten. [Citations.] Knighten has not even
attempted to carry that burden: he has failed to allege
any fact or legal theory that would tend to show that
the computation was incorrect. His unsupported
claim of error was not enough to withstand a motion
for summary judgment.
Knighten, id.
The Knighten Court did not rule that wages do not constitute
income, and hence the case cannot be cited for the proposition that
they do.
Lively v. Commissioner, 705 F.2d 1017 (8th Cir. 1983):
In 1977, Mr. & Mrs. Lively filed a Form 1040 together with Wage
and Tax Statements showing the receipt of a little more than
$30,000 in wages. Rather than putting this amount on their Form
1040, it was put on a Schedule C95 as a “receipt,” from which was
subtracted approximately $23,000 for personal expenses, said
calculations being made on a separate sheet of attached paper. The
difference, $7,918, was shown on the Schedule C as “net profit,” and
tax was paid on that amount. The Commissioner sent a notice of
deficiency disallowing the “deductions” for personal expenses, and
the Tax Court upheld the Commissioner. On appeal from that
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decision, the Livelys claimed error because they did not claim the
amount subtracted from wages as deductions, and further argued
that the income tax was unconstitutional because it was a direct tax
which was not apportioned, that there was no law imposing an
income tax on them for 1977, that 26 U.S.C. Sections 3101, 3102 and
3402 were unconstitutional, that income could not be defined or
measured, and that an individual’s “gross receipts” could not be
taxed. Lively, 705 F.2d at 1018.
The Court of Appeals stated that the Lively’s arguments were
without merit and that the appeal was frivolous, but failed to either
set forth the details of the Lively’s arguments or to respond to them.
No case law was cited by the Court of Appeals, rendering the Lively
case valueless as legal precedent for the issue of whether wages
constitute income.
United States v. Stillhammer, 706 F.2d 1072 (10th Cir.
1983):
Mr. and Mrs. Stillhammer were each convicted on four counts of
failure to file income tax returns and one count of filing a false
withholding exemption certificate, Form W-4. Their tax returns,
other than containing their names, address and social security
numbers, contained no other information; they had claimed Fifth
Amendment protection as to the other requested information on
the Forms 1040. Their Forms W-4 claimed they had no tax liability.
Stillhammer, 706 F.2d at 1073-1074.
On appeal, among other issues, the Stillhammers argued that the
income tax statutes could not be construed to apply to them
because Congress intended the Sixteenth Amendment to authorize
taxation of the income of business enterprises only. Stillhammer,
706 F.2d at 1077.
The Court first stated that such a limited purpose of taxing only
such business organizations was not apparent from the language of
the Sixteenth Amendment. The Court noted that following the
THE LAW AND THE COURTS 1980-1989
221
ratification of the Sixteenth Amendment, the Supreme Court
observed that the Amendment granted no new power to Congress,
but merely freed it to exercise the taxing power granted in Article I,
Section 8 to tax income without the restriction of apportionment,
citing to Brushaber, 240 U.S. at 17-19. Stillhammer, 706 F.2d at
1077.
The Court next observed that prior to the ratification of the
Sixteenth Amendment, an income tax act had been held partially
invalid because of the Article I conditions of apportionment for
direct taxes, and the finding by the Pollock Court that the tax was a
direct tax as applied to income, such as rents, derived from real
property.96 Stillhammer, 706 F.2d at 1077. The Court then stated:
It is unnecessary to delve into the difficult question of
the distinction between direct and indirect taxes
because even a cursory study of these early cases
teaches that the power of Congress to impose an
income tax on salaries and wages has never been
seriously doubted. In Pollock the Court stated:
[T]he power of Congress to tax is a very
extensive power. It is given in the
Constitution, with only one exception
and only two qualifications. Congress
cannot tax exports, and it must impose
direct
taxes
by
the
rule
of
apportionment, and indirect taxes by the
rule of uniformity. Thus limited, and
thus only, it reaches every subject, and
may be exercised at discretion.
157 U.S. at 557, 15 S.Ct. at 680 (quoting The License
Tax Cases, 72 U.S. (5 Wall.) 462, 471, 18 L Ed. 497
(1866). Thus, prior to ratification of the Sixteenth
Amendment Congress could tax the earnings of
individuals. The Amendment was passed to overrule
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Pollock (see Brushaber, 240 U.S. at 18, 36 S.Ct. at
241-242) and to remove the apportionment limitation
with respect to the laying and collection of taxes on
income.
Stillhammer, 706 F.2d at 1077.
There is no question but that Congress could tax the “earnings” of
individuals prior to the adoption of the Sixteenth Amendment; the
tax merely needed to be apportioned. And there is no question but
that after the adoption of the Sixteenth Amendment, “income of an
individual” could be taxed without apportionment. But unless
“earnings” of the individual constitute “income,” the “earnings” of
an individual must still be taxed by apportionment, because the
Sixteenth Amendment only applies to “income.” Thus the question
becomes whether “earnings” constitute “income.” It is clear from
the above quote that the Stillhammer Court equated “earnings”
with “income,” but it is equally as clear that only the profit or gain
derived from those “earnings” (labor) constitute “income.” The
Stillhammer Court quoted the definition of income contained in
Eisner and Doyle in its written opinion (Stillhammer, 706 F.2d at
1077-1078), but then ignored the precise prohibition contained in
Doyle of equating “gross receipts” with “gross income.”97
The precise holding of the Stillhammer Court was:
We feel it is clearly implicit in these decisions that
Congress has the power to tax the income of
individuals.
Stillhammer, 706 F.2d at 1078.
That is a correct statement of the law. However, to the extent the
case purports to hold that wages constitute income, the case is at
odds with various decisions of the United States Supreme Court,
and is therefore legally defective.
THE LAW AND THE COURTS 1980-1989
223
United States v. Venator, 568 F.Supp. 832 (N.D.N.Y.
1983):
Mr. Venator was charged with five counts of failing to file income
tax returns for the years 1976, 1977, 1978, 1979 and 1980. He filed
pretrial motions, among others, to dismiss the charges against him
on constitutional grounds. Venator, 568 F.Supp. at 833. He argued
that compensation for services or “wages” was not income and that
the current income tax on wages was contrary to the Sixteenth
Amendment. Venator, 568 F.Supp. at 835. The District Court relied
entirely on the Jones case in denying the motion to dismiss. Jones
was fully analyzed herein at page 216 and shown to be unreliable
precedent.
Rowlee v. Commissioner, 80 T.C. 1111 (1983):
Mr. Rowlee, for the years 1977, 1978 and 1979, filed Forms W-4
with his employers in which he claimed he was exempt from income
taxation, and did not file income tax returns for those years. The
I.R.S. issued letters of deficiency to Mr. Rowlee, and representing
himself, he petitioned the United States Tax Court claiming he was
not required to file any federal income tax returns because he was a
“natural unfranchised individual and freeman”; that the Sixteenth
Amendment only permitted a tax on income rather than on the
source of income; that the tax laws set forth in the Internal Revenue
Code were unconstitutional because they taxed the source rather
than the income; that gain was a prerequisite to income; and that
he had received no gain or profit because his labor was capital and
the compensation received for his services was equal to the value of
his labor. Rowlee, 80 T.C. at 1111-1113.
In ruling against Mr. Rowlee, the Court stated that:
In Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601
(1985), the U.S. Supreme Court held unconstitutional
a tax on incomes derived from property. It conceded
at that same time, however, that taxes on income from
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“professions, trades, employments or vocations” were
valid. The entire statute was voided on the ground
that Congress did not intend to permit the entire
“burden of the tax to be borne by professions, trades,
employments, or vocations.” 158 U.S. at 637.
Rowlee, 80 T.C. at 1119.
This first part of this statement is patently false; the Pollock Court
actually said:
We do not mean to say that an act laying by
apportionment a direct tax on all real estate and
personal property, or the income thereof, might not
also lay excise taxes on business, privileges,
employments, and vocations. But this is not such an
act; and the scheme must be considered as a whole.
Pollock, 158 U.S. at 637; (see pp. 27,
224).
Thus the Pollock Court clearly distinguished between an income tax
on business, privileges, employments, and vocations and an excise
tax on business, privileges, employments, and vocations.
The Rowlee Court next commented that the Sixteenth Amendment
had been adopted in 1913, and that the Brushaber Court held the
income tax law to be Constitutional. The Rowlee Court stated:
The propriety of taxing incomes from professions,
trades, employments, or vocations was reaffirmed, the
[Brushaber] Court stating that in the Pollock case “its
validity was recognized; indeed, it was expressly
declared that no dispute was made upon that subject
and attention was called to the fact that taxes on such
income had been sustained as excise taxes in the
past.” 240 U.S. at 17.
THE LAW AND THE COURTS 1980-1989
225
Rowlee, 80 T.C. at 1119.
It was previously pointed out at page 58 that the Pollock Court,
understanding the principle that the Supreme Court could only
address issues actually before it, did not specifically address the
issue of whether or not an income tax on business, privileges,
employments, and vocations would be constitutional absent
apportionment. The Pollock Court did state, however, that Section
27 of the 1984 Tax Act did not impose an excise tax on business,
privileges, employments or vocations, and that previous courts had
sustained a tax on business, privileges, employments and vocations
under the “guise”98 that such taxes were excise taxes. Thus Pollock
does not stand for the principle that an income tax on business,
privileges, employments or vocations is constitutional in the
absence of apportionment, and Brushaber only holds that such
taxes are excise taxes. It has been pointed out at page 83 that
Congress did not impose an excise tax on business, privileges,
employments or vocations in Subtitle A of the Internal Revenue
Code, but imposed an income tax in Subtitle A.
The Rowlee Court next cited to Eisner stating the issue before that
Court was the taxability of stock dividends, and that in dicta the
Court referred to income as “gain derived from capital, from labor,
or from both combined.” Rowlee, 80 T.C. at 1119. Since the
definition of income was essential to the determination as to
whether stock dividends constituted income under the law, it is not
clear that Eisner’s definition of income was merely dicta.
The Rowlee Court next discussed Section 61 (a) of the Internal
Revenue Code of 1954, and stated:
Petitioner has admitted that he exchanged his labor
for the amounts paid to him by his employers during
the taxable year. He argues that taxation of the
amounts paid to him in exchange for his labor is a tax
on the “source” of income and not on the income
itself. This “taxation on source” argument is spurious;
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JUDICIAL TYRANNY AND YOUR INCOME TAX
the tax is imposed on the money he receives for his
services, not on the performance of those services... .
Finally, petitioner claims that he did not have any
taxable income or “gain” because the value of his labor
was the same as (or more than) the payment he
received for it.
Rowlee, 80 T.C. at 1119-1120.
The Rowlee Court ignored the fact that in Section 61 (a) Congress
defined gross income as the gain derived from compensation for
services. To support its position, the Rowlee Court relied upon
Reading (p. 174), Lonsdale (p. 200), Buras (p. 187) and Rice (p.
202). Those cases have been previously shown not to be legal
precedent for the contention that wages constitute income.
Contrary to the statement in Rowlee that the tax is imposed on the
money received for services, that tax is imposed at Section 1 of the
Internal Revenue Code upon taxable income. Taxable income is the
profit or gain derived from compensation for services less the
deductions authorized by Sections 62 and 63 of the Internal
Revenue Code. In ruling against Mr. Rowlee, the Tax Court ignored
the applicable decisions of the United States Supreme Court, the
legislative history of the enactment of Section 61, and the law with
respect to “basis” set forth in Section 1001 et seq. of the Internal
Revenue Code. Therefore, Rowlee is not credible authority for the
proposition that wages constitute income.
United States v. Richards, 723 F.2d 646 (8th Cir. 1983):
Mr. Richards was convicted of failing to file income tax returns for
the years 1979, 1980 and 1981, and representing himself, appealed
those convictions. Richards, 723 F.2d at 647. Among other issues,
he contended that wages and salaries were not income within the
meaning of the Sixteenth Amendment, and therefore he had no
duty to file income tax returns. Richards, 723 F.2d at 648. The
Court stated:
THE LAW AND THE COURTS 1980-1989
227
Although the sixteenth amendment, giving Congress
the power to tax income, does not define “income,”
the courts have interpreted the term in its every day
usage to mean gain derived from capital, from labor,
or from both combined. See United States v. Safety
Car Heating & Lighting Co., 297 U.S. 88, 89, 56 S.Ct.
353, 358, 80 L.Ed. 500 (1936); Helvering v. Edison
Bros. Stores, Inc., 133 F.2d 575, 579 (8th Cir. 1943),
cert. denied, 319 U.S. 752, 63 S.Ct. 1166, 87 L.Ed. 1706
(1943). Clearly wages and salaries fall within this
definition and are therefore constitutionally taxable.
Richards, 723 F.2d at 648.
As pointed out at page 193, the issue before the Court in the Safety
Car Heating & Lighting Co. case was the taxability of the “profit”
derived from a patent, and not whether wages constitute income. In
Edison Bros. Stores, according to that Court:
The questions presented on these petitions to review a
decision of the United States Board of Tax Appeals are
whether the taxpayer realized taxable income in either
or in both of the years 1935 and 1937 from sales to its
employees of shares of its capital stock, previously
acquired for that purpose, and whether, where the
taxpayer discharged a debt owing to its general
counsel for services rendered, by transfer to him of
shares of its capital stock, it was entitled to deduct as
a business expense the cost of the stock to the
taxpayer at the time of its acquisition, or the fair
market value of the stock at the time of its transfer to
the general counsel, the gain to the taxpayer in the
transaction not having been reported as income.
Edison Bros. Stores, 133 F.2d at 577.
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It is clear that neither of these cases concerned the issue of whether
wages constitute income. It is equally clear that the Richards Court
ignored the holding of the Supreme Court in Eisner (see p. 137)
regarding the words “gain derived from labor” in holding that wages
and salaries fall within the definition of income. The Richards case
being contrary to the applicable decisions of the Supreme Court, it
does not constitute legal precedent for the contention that wages
constitute income.
Parker v. Commissioner, 724 F.2d 469 (5th Cir. 1984):
Mr. Parker filed an income tax return for 1977 in which he failed to
provide financial data, but instead claimed Fifth Amendment
protection. This case was an appeal from an adverse determination
of the United States Tax Court. Parker, 724 F.2d at 470.
On appeal, representing himself, Mr. Parker maintained that “the
I.R.S. and the government in general, including the judiciary,
mistakenly interpret the Sixteenth Amendment as allowing a direct
tax on property (wages, salaries, commissions, etc.) without
apportionment. Parker, 724 F.2d at 471.
The Court of Appeals cited to Lonsdale for the proposition that the
Sixteenth Amendment was enacted for the express purpose of
providing for a direct income tax, and then cited to Brushaber for
the proposition that the Sixteenth Amendment provided the needed
constitutional basis for the imposition of a direct, non-apportioned
tax. Parker, 724 F.2d at 471.
Mr. Parker cited to Flint in support of his contention that the
income tax was an excise tax applicable only against special
privileges, such as the privilege of conducting a business, and was
not assessable against income in general. The Court correctly
pointed out that Flint did not address the personal income tax, but
rather addressed the Corporate Excise Tax Act of 1909, and Flint
was pre-Sixteenth Amendment. Parker, 724 F.2d at 471-472. 99
Relying upon Lonsdale, the Court did not bother to address the
THE LAW AND THE COURTS 1980-1989
229
issue of whether or not wages constitute income. The Lonsdale case
has been shown above (see p. 200) to be insufficient precedent for
the determination of that issue.
Pascoe v. I.R.S., 580 F.Supp. 649 (E.D.Mich.S.D. 1984):
Mr. Pascoe, representing himself, had filed a Form W-4 claiming he
was exempt from taxation. The I.R.S. notified his employer to
withhold the income tax from his wages, and Mr. Pascoe sought to
stop the withholding by filing a court action seeking a preliminary
injunction. Pascoe, 580 F.Supp. at 650-651. One of the grounds
asserted by Mr. Pascoe was that the wages that he received from his
employer did not constitute “income” as that term was used in
Section 61 of the Internal Revenue Code. Pascoe, 580 F.Supp. at
652. The District Court stated:
Although Section 61 does not by its terms define
income, the courts have repeatedly stated that the
term is broad enough to include as compensation any
economic or financial benefit from any source,
conferred in any form on any employee, see e.g. Ritter
v. United States, 393 F.2d 823 (Ct.Cls. 1968), cert.
denied 393 U.S. 844, 89 S.Ct. 127, 21 L.Ed.2d 115
(1968). Such a broad definition of “income” certainly
would encompass the primary and perhaps only
source of compensation that plaintiff receives from his
employer, his wages.
Pascoe, 580 F.Supp. at 652.
In the Ritter case, Mr. Ritter filed an action to recover federal
income taxes and interest thereon attributable to certain payments
made to him by his employer in 1958. The issue before the Court
was whether those payments, which were occasioned by a transfer
of Mr. Ritter’s place of employment . for the convenience of his
employer, constituted ordinary income to Mr. Ritter and, if so,
whether Mr. Ritter could deduct as expenses the items for which
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JUDICIAL TYRANNY AND YOUR INCOME TAX
payments were made. Ritter, 393 F.2d at 824. More specifically,
Mr. Ritter claimed that the reimbursements from his employer were
not income as defined by Section 61 of the Internal Revenue Code.
Ritter, 393 F.2d at 826.
In ruling against Mr. Ritter, the Court, citing to Glenshaw Glass,
stated:
The Supreme Court has consistently given the term
“gross income” as defined by the Revenue Code a
broad construction in order “to tax all gains except
those specifically exempted.” [Emphasis added.]
Ritter, 393 F.2d at 827.
The Court next cited to several cases in which the Supreme Court
held that payments to an employee from an employer constituted
income. The Court first cited to C.I.R. v. Smith. That case was
analyzed herein at page 196, where it was shown that what was
taxed in that case was the gain recognized when a stock option,
which had no market value at the time of the option, was exercised,
at which time the stock had a positive market value.
The Court next cited to C.I.R. v. LoBue, 351 U.S. 243 (1956),
another stock option case. In LoBue, as a result of the exercise of
the stock option, Mr. LoBue obtained $9,930 worth of stock for
$1,700, realizing a gain in the amount of $8,230, which Mr. LoBue
did not report on his tax return. The issue in Tax Court was whether
the stock option constituted additional compensation for personal
services, in which case the gain would be taxable, or whether the
options were intended to provide Mr. LoBue with “a proprietary
interest in the business, in which case the gain would not constitute
gross income. LoBue, 351 U.S. at 245.
Mr. LoBue won in both Tax Court and in the Court of Appeals, and
the Supreme Court granted certiorari to consider whether those
tribunals had given Section 22(a) of the 1939 Internal Revenue
THE LAW AND THE COURTS 1980-1989
231
Code too narrow an interpretation. The Court held that in enacting
Section 22(a) Congress intended to “tax all gains except those
specifically exempted,” citing to Glenshaw Glass. The Supreme
Court next held that unless the stock option was a gift, it was
taxable. Finally, the Supreme Court stated that there was not the
slightest indication of the kind of detached and disinterested
generosity which might evidence a gift, finding from the Tax Court
record that the stock option plan was designed to achieve more
profitable operations by providing the employees “with an incentive
to promote the growth of the company by permitting them to
participate in its success.” LoBue, 351 U.S. at 246. The Court also
said:
When assets are transferred by an employer to an
employee to secure better services they are plainly
compensation. It makes no difference that the
compensation is paid in stock rather than in money.
Section
22(a)
taxes
income
derived
from
compensation “in whatever form paid.”100 And in
another stock option case we said that Section 22(a)
“is broad enough to include in taxable income any
economic or financial benefit conferred on the
employee as compensation, whatever the form or
mode by which it is effected.” Commissioner v. Smith,
324 U.S. 188, 188. LoBue received a very substantial
economic and financial benefit from his employer
prompted by the employer’s desire to get better work
from him. This is “compensation for personal service”
within the meaning of Section 22(a).
LoBue, 351 U.S. at 247.
In both the Smith case and the LoBue case, only the difference
between the option price and the market value of the stock at the
time the option was exercised was subject to inclusion within “gross
income.” Thus what was included was the gain derived from
compensation for services.
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Wages are clearly paid as compensation for services, but only the
gain derived therefrom is includible within the statutory definition
of gross income. This was confirmed by the Supreme Court in
LoBue as follows:
It is true that our taxing system has ordinarily treated
an arm’s length purchase of property even at a bargain
price as giving rise to no taxable gain in the year of
purchase. See Palmer v. Commissioner, 302 U.S. 63,
69. But that is not to say that when a transfer which is
in reality compensation is given the form of a
purchase the Government cannot tax the gain under
Section 22(a). [Emphasis added.]
LoBue, 351 U.S. at 248.
In ruling against Mr. Ritter, and after citing the Supreme Court
cases of Glenshaw Glass, Smith and LoBue, the Court, relying upon
a Court of Appeals case, United States v. Woodall, 255 F.2d 370
(10th Cir. 1958), stated:
Economic gain does not necessarily require profit in
its usual sense.
Ritter, 393 F.2d at 832.
This statement is contrary to the precise holdings of Glenshaw
Glass, Smith and LoBue based upon the facts in those cases wherein
a profit was indeed realized by each of the taxpayers.
The Woodall case involved the issues of 1) whether an amount
received by an employee as reimbursement for the costs of
relocating himself and his family at the place of his new
employment was gross income for income tax purposes; and 2)
whether such costs were deductible business expenses. Woodall,
255 F.2d at 371. In ruling in favor of the government, the Court
THE LAW AND THE COURTS 1980-1989
233
basically relied upon Glenshaw Glass, Smith and LoBue. Woodall,
255 F.2d at 372.
Since the Ritter Court failed to adhere to the law as set forth by the
Supreme Court, and since the issue before the Woodall and Ritter
Courts were not whether wages constitute income, the Pascoe case
is not legal precedent for the proposition that wages do constitute
income.
Simanonok v. C.I.R., 731 F.2d 743 (11th Cir. 1984):
Mr. Simanonok filed suit in Tax Court seeking a redetermination of
his tax liability, claiming, among other things, that he had not
received income because his paychecks were received in exchange
for his costs and disbursements of labor. The Tax Court ruled in
favor of the Commissioner’s determination of tax, and Mr.
Simanonok, representing himself, appealed. Simanonok, 731 F.2d
at 744.
Mr. Simanonok’s legal arguments raised on the appeal were not set
forth in the Court’s opinion. Without citing any case law or other
authority, the Court stated:
The tax court correctly determined that Simanonok’s
contentions are completely without merit; we
therefore affirm the tax court’s decision as to these
issues.
Simanonok, id.
Having failed to set forth the Court’s reasoning or any legal
authority therefor, the case is of no value as legal precedent.
Lovell v. United States, 579 F.Supp. 1047 (W.D.Wis. 1984):
Mr. and Mrs. Lovell filed Forms 1040 in which they claimed no
income from wages, salaries or tips. During a deposition taken in
the case, Mr. Lovell stated that he did not receive any wages, but
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JUDICIAL TYRANNY AND YOUR INCOME TAX
instead received compensation in equal exchange for his labor or a
commodity. Lovell, 579 F.Supp. at 1047-1048. While the nature of
the lawsuit brought by the Lovells, representing themselves, was
not stated in the opinion, it was apparently a suit for refund of
income taxes withheld by their employers through withholding.
In ruling against the Lovells, the Court stated, citing Kowalski and
Glenshaw Glass that:
It is well settled, and beyond dispute, that
compensation for labor or service is taxable income,
and no deduction is allowed for the value of labor
expended.
Lovell, 579 F.Supp. at 1048.
As previously set forth at pages 202 and 153 respectively, Kowalski
and Glenshaw Glass stand for the proposition that gain constitutes
income, not that wages constitute income.
United States v. Koliboski, 732 F.2d 1328 (7th Cir. 1984):
Mr. Koliboski was convicted of two counts of willful failure to file
income tax returns for the years 1980 and 1981, and filing four false
W-4 statements in 1980, 1981 and 1982. On Appeal, Mr. Koliboski,
representing himself, raised several issues, none of which involved
the issue of whether wages constitute income. Koliboski, id.
Notwithstanding this fact, the Court stated in a footnote:
Although not raised in his brief on appeal, the
defendant’s entire case at trial rested on his claim that
he in good faith believed that wages are not income
for taxation purposes. Whatever his mental state, he,
of course, was wrong, as all of us already are aware.
Nonetheless, the defendant still insists that no case
holds that wages are income. Let us now put that to
rest: WAGES ARE INCOME. Any reading of tax cases
THE LAW AND THE COURTS 1980-1989
235
by would-be tax protesters now should preclude a
claim of good-faith belief that wages—or salaries—are
not taxable. [Emphasis in original.]
Koliboski, 732 F.2d at 1329, n.l.
The Court cites no case law to support this gratuitous statement,
and provides no analysis for consideration. The statement
constitutes pure dicta, and thus the case cannot constitute legal
precedent for the proposition stated.
Karpowycz v. United States, 586 F.Supp. 48 (N.D.I11.E.D.
1984):
Mr. Karpowycz was assessed a $500 penalty for filing a frivolous
income tax return and, representing himself, brought suit for a
refund. Karpowycz, 586 F.Supp. at 49-50. He argued that a
substantial portion of his wages earned while employed by Sun
Electric Corporation was non-taxable, since he earned the wages
while he was a “nominee-agent” for Professional and Technical
Services, a purported trust created by an entity known as American
Dynamics Corporation. He claimed that by virtue of owning a
property interest in his own labor, he could convey his “personal
services property assets” to the trust in accordance with a personal
service contract executed between himself and the trust.
Karpowycz, 586 F.Supp. at 51.
The trial court, in granting the government’s motion for summary
judgment, relied upon the principle that income must be taxed to
the one who earns it, and pointed out that Mr. Karpowycz had failed
to show the existence of a contract or other agreement between the
trust and his employer, and did not claim that the trust had the
right to direct or control his activities as an engineer. Karpowycz,
id.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
It does not appear from the Court’s opinion that Mr. Karpowycz
claimed that wages do not constitute income. Nonetheless, the
Court stated:
It is well settled that gross income includes
compensation for services. 26 U.S.C. Section 61. In
addition, the Supreme Court has held that
compensation for labor or services paid in the form of
wages or salaries is income taxable under federal
income tax laws. See e.g., Commissioner v. Kowalski,
434 U.S. 77 (1977).
Karpowycz, 586 F.Supp. at 51.
In Kowalski, the issue before the Supreme Court was whether cash
payments to state police troopers, designated as meal allowances,
were included in the definition of gross income under Section 61 (a)
of the Internal Revenue Code of 1954, and, if so, were otherwise
excludable under Section 119 of the Code. Kowalski, 434 U.S. at 78.
Contrary to the above quote from Karpowycz, the issue of whether
compensation for labor or services paid in the form of wages or
salaries constituted income taxable under federal income tax laws
was not addressed by the Kowalski Court.
The Supreme Court stated:
The starting point in the determination of the scope of
“gross income” is the cardinal principle that Congress
in creating the income tax intended “to use the full
measure of its taxing power.” Helvering v. Clifford,101
309 U.S. 331, 334 (1940); accord, Helvering v.
Midland Mutual Life Ins. Co.,102 300 U.S. 216, 223
(1937); Douglas v. Willcuts, 296 U.S. 1, 9 (1935);
Irwin v. Gavit,103 268 U.S. 161, 166 (1925). In
applying this principle to the construction of Section
22(a) of the Internal Revenue Code of 1939 this Court
stated that “Congress applied no limitations as to the
THE LAW AND THE COURTS 1980-1989
237
source of taxable receipts, nor restrictive labels as to
their nature [, but intended] to tax all gains except
those specifically exempted.” Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955),
citing Commissioner v. Jacobson,104 336 U.S. 28, 49
(1949) and Helvering v. Stockholms Enskilda
Bank,105 293 U.S. 84, 87-91 (1934). Although
Congress simplified the definition of gross income in
Section 61 of the 1954 Code, it did not intend thereby
to narrow the scope of that concept. See
Commissioner v. Glenshaw Glass Co., supra, at 432,
and n.11; H.R. Rep.No. 1337, 83rd Cong., 2d Sess.,
A18 (1954); S. Rep.No. 1622, 83rd Cong., 2d Sess., 168
(1954). In the absence of a specific exemption,
therefore, respondent’s meal-allowance payments are
income within the meaning of Section 61 since, like
the payments involved in Glenshaw Glass Co., the
payments are “undeniabl[y] accessions to wealth,
clearly realized, and over which the [respondent has]
complete dominion.” Commissioner v. Glenshaw
Glass Co., supra at 431. See also Commissioner v.
LoBue, 351 U.S. 243, 247 (1956); Van Rosen v.
Commissioner, 17 T.C. 834, 838 (1951).
Kowalski, 434 U.S. at 82-83.
Commissioner v. LoBue, analyzed herein at page 230, involved a
stock option case, and involved the taxation of a gain. The Van
Rosen case involved the question of whether the receipt by Mr. Van
Rosen of cash payments by his employer in lieu of subsistence and
quarters was to be included in his gross income. Van Rosen, 17 T.C.
at 834. Mr. Van Rosen did not challenge whether money or other
consideration, to the extent of the value thereof received by an
employee as consideration for the services rendered by him, was
income taxable to the employee. Van Rosen, 17 T.C. at 836. The Tax
Court, despite quoting Section 22(a) of the Internal Revenue Code
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JUDICIAL TYRANNY AND YOUR INCOME TAX
of 1939 which included in gross income “gains, profits and income
derived from salaries”, stated:
We find it difficult to conclude that, for the purpose of
reporting income and paying the tax thereon, this
petitioner should be regarded in a light more
favorable, tax-wise, than any other civilian employee
whose employment is such as to permit him to live at
home while performing the duties of his employment.
In both instances, there is de facto receipt under the
employment contract of x dollars, whether the
consideration be denominated salary only, or salary
and allowances, or base pay plus an allowance of
subsistence and quarters, which dollars the employee,
in each instance, has as his own and without any
restriction on their use or expenditure.
Van Rosen, id.
Under Section 22(a) of the 1939 Internal Revenue Code it was not
the receipt of dollars that was includible in gross income, it was the
receipt of a profit, gain and income derived from labor
(employment) that was includible in gross income.
Thus contrary to the erroneous assertion in Karpowycz that the
Supreme Court has held that compensation for labor or services
paid in the form of wages or salaries is income taxable under federal
income tax laws, the Supreme Court in Kowalski specifically held
that a gain from any source constitutes income includible in gross
income. The Supreme Court even referenced the case of Jones v.
United States, 60 Ct. Cls. 552 (1925) and stated:
The Court of Claims, in addition, rejected the
argument that money paid in commutation of
quarters [provided to military officers] was income on
the ground that it was not “gain derived ... from labor”
THE LAW AND THE COURTS 1980-1989
239
within the meaning of Eisner v. Macomber, 252 U.S.
189 (1920) ....
Kowalski, 434 U.S. at 87.
The Karpowycz Court’s contentions that wages constitute income is
not supported by the authorities cited, and is thus erroneous as a
matter of law.
Gattuso v. Pecorella, 733 F.2d 709 (9th Cir. 1984):
Mr. Gattuso, representing himself, filed an action in District Court
to abate the finding of the I.R.S. that he and his wife owed taxes for
the years 1980, 1981 and 1982. He claimed that their wages were
not income within the meaning of the Internal Revenue Code.
Gattuso, 733 F.2d at 709. The Ninth Circuit asserted that this claim
was frivolous citing to Romero, Buras and Funk. Those cases have
been shown herein at pages 184, 181 and 205 respectively to be
deficient precedent for the proposition that wages do constitute
income.
United States v. Burton, 737 F.2d 439 (5th Cir. 1984):
Mr. Burton appealed his convictions for failing to file income tax
returns and for filing false withholding allowance certificates. His
contentions on appeal were: 1) that the District Court effectively
withheld the essential element of willfulness from the jury by
instructing them that his alleged good faith belief that wages were
not taxable income was not a defense; 2) that the district judge
should have allowed a defense expert to testify concerning the legal
uncertainty over whether wages are income; and 3) that it was error
for the judge to appoint a jury foreman. The Court found in favor of
Mr. Burton’s first argument and reversed his conviction. Burton,
737 F.2d at 440.
The Court, citing to Lonsdale, stated:
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JUDICIAL TYRANNY AND YOUR INCOME TAX
Beyond dispute, wages are income.
Burton, 737 U.S. at 441.
As shown above at page 200, the Lonsdale Court ignored the
precise holdings of the Supreme Court which defined “income,”
failed to ascertain if Mr. Lonsdale had a profit derived from his
compensation for services, and failed to distinguish between
“income
derived
from
compensation
for
services”
and
“compensation for services.” Thus the contention in Burton that
wages constitute income, to the extent it relies wholly on the
erroneous holding of the Lonsdale case, is equally erroneous.
Granzow v. C.I.R., 739 F.2d 265 (7th Cir. 1984):106
Mr. Granzow appealed an adverse determination of the United
States Tax Court which rejected his contention that wages do not
constitute income. The Seventh Circuit Court of Appeals stated that:
It is well settled that wages received by taxpayers
constitute gross income within the meaning of section
61(a) of the Internal Revenue Code ... and that such
gross income is subject to taxation.
Granzow, 739 F.2d at 267.
In support of this proposition, the Court cited to the following cases
which have been previously analyzed herein: Koliboski (see p. 234),
Lonsdale (see p. 200), Knighten (see p. 218), Reading (see p. 174),
Hayward (see p. 185), Broughton (see p. 186), Funk (see p. 209),
Lively (see p. 219), Buras (see p. 187) and Romero (see p. 189).
Having relied entirely on cases that do not support the proposition,
the Granzow case does not provide precedent for the proposition
that wages constitute income.
THE LAW AND THE COURTS 1980-1989
241
Davis v. United States Government, 742 F.2d 171 (5th Cir.
1984):
Mr. and Mrs. Davis filed a Form 1040 for the year 1982 in which
they reported no income from “wages, salaries, [or] tips,” nor any
other “gross income,” even though four Forms W-2 from their
employers in 1982 attached to their return indicated they had
received in excess of $60,000 in wages or other compensation for
that year. Instead, they claimed a business loss of $3,551 by
deducting from their gross receipts the “cost of labor” which
equaled the amount shown on their Forms W-2, and other
deductions for “materials and supplies,” “car and truck expenses”
and “laundry and cleaning.” Davis, 742 F.2d at 172.
The I.R.S. assessed a “frivolous return” penalty of $500. The
Davises paid fifteen percent of the penalty, and after their claim for
refund was denied by the I.R.S., filed a suit for refund, additionally
seeking a refund for taxes paid by them from 1979 through 1982
and $50,000,000 in damages for mental and physical suffering.
The lower court dismissed the complaint, and representing
themselves, Mr. and Mrs. Davis filed an appeal, contending: 1) the
income tax is an excise tax applicable only against special privileges
and not assessable against income in general; and 2) an individual
receives no taxable gain from the exchange of labor for money
because the wages received are offset by an equal amount of “costs
of labor.”
As to the first contention, the Court merely quoted from Parker,
724 F.2d at 471 as follows:
At this late date, it seems incredible that we would
again be required to hold that the Constitution, as
amended, empowers the Congress to levy an income
tax against any source of income, without the need ...
to classify it as an excise tax applicable to specific
categories of activities.
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Davis, 742 F.2d at 172.
As to the second contention, the Court stated:
We held this contention meritless in Lonsdale v.
C.I.P., 661 F.2d 71, 72 (5th Cir. 1981).
Davis, 742 F.2d at 172.
Having relied entirely upon Parker and Lonsdale, which as shown
above at pages 228 and 200 respectively were decided contrary to
the applicable decisions of the United States Supreme Court, Davis
cannot support the legal proposition that wages constitute income.
Crain v. C.I.R., 737 F.2d 1417 (5th Cir. 1984):
Mr. Crain, representing himself, appealed the dismissal of his Tax
Court petition in which he, according to the Court, defied the
jurisdiction of the Internal Revenue Service to levy taxes on his
income. Crain, 737 F.2d at 1417. The Court failed to set forth Mr.
Crain’s arguments and cited no case law in its opinion. Accordingly,
the case cannot constitute legal precedent for the contention that
wages constitute income.
Hansen v. United States, 744 F.2d 658 (8th Cir. 1984):
In Hansen, nineteen people brought an appeal from the dismissal
by the lower court of their action against the United States. The
nineteen people did not report their wages on their respective
income tax returns. After the I.R.S. obtained Tax Court judgments
against them, it started to seize their property, and the nineteen
sought to enjoin the I.R.S. from these seizures. The nineteen argued
on appeal that wages were not income under the Sixteenth
Amendment. Hansen, 744 F.2d at 659.
The Court of Appeals relied upon Richards in holding against the
nineteen on their argument that wages did not constitute income,
and relied upon Rowlee in holding against the nineteen on their
THE LAW AND THE COURTS 1980-1989
243
argument that labor was a property right given in exchange for
wages, therefore no gain was recognized. Hansen, 744 F.2d at 660.
As shown on pages 223 and 219 respectively, neither Richards nor
Rowlee is valid legal precedent for the positions for which they were
relied upon by the Hansen Court.
Cameron v. I.R.S., 593 F.Supp. 1540 (N.D.Ind. Fort Wayne
Div. 1984):
In an action in District Court for an injunction against the Internal
Revenue Service, Mr. Cameron, representing himself, raised,
among other issues, that wages did not fall under the statutory
provisions for income because they were part of an equal exchange
of wages for services rendered, and thus had no element of profit or
gain. Cameron, 593 F.Supp. at 1544. Mr. Cameron cited to several
Supreme Court cases,107 which the Court classified as “old,” for the
proposition that income means profit or gain. The Court stated:
However, none of these decisions were intended to be
definitive definitions of the concept; all deal with
specific questions under specific statutory provisions.
The Supreme Court rejected an argument, based on
Eisner, that the Code’s definition of income is limited
to gain in Commissioner v. Glenshaw Glass Co., 348
U.S. 426 (1955). The Court specifically stated that the
“income as gain” definition of Eisner “was not meant
to provide a touchstone to all future gross income
questions.” Id. at 431.
Cameron, 593 F.Supp. at 1552.
As to the statement by the Cameron Court that none of these
decisions were intended to be definitive definitions of the concept,
said statement is contrary to the express holding of the Supreme
Court’s opinion in Smietanka that:
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[T]here would seem to be no room to doubt that the
word must be given the same meaning in all of the
Income Tax Acts of Congress that was given to it in
the Corporation Excise Tax Act and that what that
meaning is has now become definitely settled by
decisions of this court.
Smietanka, 255 U.S. at 519 (see p. 144).
As to the statement by the Cameron Court that the definition of
income as set forth in Eisner was not meant to provide a touchstone
to all future gross income questions, that sentence was taken out of
context. The complete quote was:
Such decisions demonstrate that we cannot but
ascribe content to the catchall provision of Section
22(a), “gains or profits and income derived from any
source whatever.” The importance of that phrase has
been too frequently recognized since its first
appearance in the Revenue Act of 1913 to say now that
it adds nothing to the meaning of “gross income.”
Nor can we accept respondents’ contention that a
narrower reading of Section 22(a) is required by the
Court’s characterization of income in Eisner v.
Macomber, 252 U.S. 189, 207, as “the gain derived
from capital, from labor, or from both combined.” The
Court was there endeavoring to determine whether
the distribution of a corporate stock dividend
constituted a realized gain to the shareholder, or
changed “only the form, not the essence,” of his
capital investment. Id., at 210. It was held that the
taxpayer had “received nothing out of the company’s
assets for his separate use and benefit.” Id., at 211. The
distribution, therefore, was held not a taxable event.
In that context—distinguishing gain from capital—the
definition served a useful purpose. But it was not
THE LAW AND THE COURTS 1980-1989
245
meant to provide a touchstone to all future gross
income questions. [Citations omitted.]
Here we have instances of undeniable accessions to
wealth, clearly realized, and over which the taxpayers
have complete dominion.
Glenshaw Glass, 348 U.S. at 430-431.
The Court in Glenshaw Glass was merely distinguishing that
income may be derived from any source, not only from labor or
capital, and did not hold that income was something other than a
gain. The Sixteenth Amendment authorized an unapportioned tax
on income “from whatever source derived,” and the language of
Section 22(a) of the Internal Revenue Code of 1939 and of Section
61(a) of the Internal Revenue Code of 1954 shows Congress’ intent
to tax income “from whatever source derived.”
Remembering that the issue in Glenshaw Glass was the taxability of
punitive damages, the holding in Glenshaw Glass that punitive
damages falls within the definition of statutory gross income is in
full accord with that part of the definition of gross income as stated
in Eisner and the other “old” cases cited by Mr. Cameron that
“income” must be a “profit or gain.”
The Cameron Court next stated that:
More recently the Court rejected the assumption that
the current statutory definition of income (in 26
U.S.C. Section 61) incorporated the income as gain
definition of Eisner, See Commissioner v. Kowalski,
434 U.S. 77, 94 (1977).
Cameron, 593 F.Supp. at 1552.
In Kowalski, the Supreme Court said:
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Jones also rests on Eisner v. Macomber, 252 U.S. 189
(1920), but Congress had no reason to read Eisner’s
definition of income into Section 61 and, indeed, any
assumption that Congress did is squarely at odds with
Commissioner v. Glenshaw Glass Co., 348 U.S. 426
(1955).
Kowalski, 434 U.S. at 94.
As shown immediately above, the Supreme Court in Glenshaw
Glass was merely indicating that income could be derived from
sources other than from labor or from capital. In addition, the
legislative history of the enactment of Section 61 clearly discloses
that the word “income” was to have the same meaning as it had in
the Sixteenth Amendment, which has never been interpreted by the
Supreme Court to include anything other than a profit or gain (see
p. 84). Also, the Supreme Court in Kowalski explicitly stated, citing
Glenshaw Glass as its authority, that:
Congress applied no limitations as to the source of
taxable receipts, nor restrictive labels as to their
nature [, but intended] to tax all gains except those
specifically exempted.” [Emphasis added.]
Kowalski, 434 U.S. at 82-83.
Certainly, then, the language of the Supreme Court in Kowalski at
page 94 referred only to the source element of the definition of
Eisner, and not to the profit or gain element of the Eisner
definition.
The Cameron Court next cited to Koliboski, Granzow, Knighten and
Romero and stated:
It is therefore unmistakably clear that plaintiff is
wrong in concluding that his wages are not taxable
income. The initial assumption behind the argument
THE LAW AND THE COURTS 1980-1989
247
(that income is gain or profit) is incorrect because it is
not exclusive.
Cameron, 593 F.Supp. at 1552.
The case law of the United States Supreme Court, including
Glenshaw Glass and Kowalski, makes it clear that the gain or profit
part of the definition of income is exclusive; only the sources from
which the income may be derived definition of Eisner is not
exclusive.
Having ignored Supreme Court decisions on point, the Cameron
case cannot stand as legal authority for the proposition that wages
constitute income.
Hallowell v. C.I.R., 744 F.2d 406 (5th Cir. 1984):
In appealing an adverse determination of the United States Tax
Court against them, Mr. and Mrs. Hallowell, representing
themselves, argued that the Sixteenth Amendment did not
contemplate wages to be includible in the definition of income.
Hallowell, 744 F.2d at 408. The Court disposed of this issue in a
footnote, stating:
We perceive no need to refute these arguments with
somber reasoning and copious citation of precedent;
to do so might suggest that these arguments have
some colorable merit.
Hallowell, 744 F.2d at 408, n.2.
Having failed to address the issue, the case does not constitute legal
precedent.
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Snyder v. I.R.S., 596 F.Supp. 240 (N.D.Ind. Fort Wayne
Div. 1984):
Mr. Snyder, representing himself, attempted to sue the I.R.S. and
one of its agents. He claimed that his wages did not constitute
income. Snyder, 596 F.Supp. at 243. The case was before the same
judge, Judge Lee, who decided the Cameron case. In disposing of
Mr. Snyder’s claim, Judge Lee’s opinion was almost word for word
identical to his opinion in Cameron. For that reason, reference is
made to the Cameron analysis hereinabove at page 243.
Perkins v. C.I.R., 746 F.2d 1187 (6th Cir. 1984):
Mr. Perkins, representing himself, appealed from an adverse
decision of the United States Tax Court. He argued that wages paid
for his labor were non-taxable receipts and that the Sixteenth
Amendment did not permit an imposition of tax on wages. Perkins,
746 F.2d at 1188.
The Court stated, citing to Brushaber, Glenshaw Glass and Funk:
First, gross income means all income from whatever
source derived including compensation for services.
Second, 26 U.S.C. 61 (a) is in full accordance with
Congressional
authority
under
the
Sixteenth
Amendment to the Constitution to impose taxes on
income without apportionment among the states.
Perkins, 746 F.2d at 1188.
Neither Brushaber nor Glenshaw Glass involved the issue as to
whether wages constitute income. Funk has been shown above at
page 209 to be unreliable precedent. There is no question but that
Section 61 (a) is in full accordance with Congressional authority
under the Sixteenth Amendment, but the statute defines gross
income as income derived from compensation for services. The
interpretation of that statute to allow an unapportioned tax directly
THE LAW AND THE COURTS 1980-1989
249
on compensation for services violates the Sixteenth Amendment, as
only a tax on the income derived from that compensation is
embraced within its terms.
Hill v. United States, 599 F.Supp. 118 (M.D.Tenn.
Nashville Div. 1984):
Mr. Hill, representing himself, filed an action for a judicial review of
a penalty assessment imposed against him by the I.R.S. for filing a
frivolous income tax return. His argument was that wages did not
constitute income. Hill, 599 F.Supp. at 119-120.
Quoting from the unsupported footnote in Koliboski (see p. 234),
the Court stated:
[I]f anything in our tax law is clear, it is that:
“ * * * WAGES ARE INCOME. * * *”
Hill, 599 F.Supp. at 120.
The Court next stated that:
The Supreme Court of the United States upheld in
1926 the application of the federal income tax to “* * *
items of income [which] were received by the
taxpayers as compensation for their services as
consulting engineers * * *,” Metcalf & Eddy v.
Mitchell, 269 U.S. 514, 519 (1926), and no Court of the
land has ever held or suggested that the Congress
could not tax constitutionally wages as income.
Hill, 599 F.Supp. at 120-121.
In Metcalf & Eddy it was not contended that wages do not
constitute income. Metcalf & Eddy were consulting engineers who,
either individually or as co-partners, were professionally employed
to advise States or subdivisions of States with reference to proposed
water supply and sewage disposal systems. During 1917 the fees
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received by them for these services were paid over to the firm and
became, according to the Court, a part of its gross income. In
seeking a refund of the taxes paid by the partnership, they
contended they were exempt from the tax by a provision of the War
Revenue Act of 1917 (Act of October 3, 1917, c. 63, Section 209, 40
Stat. 300, 307),108 and that Congress had no power under the
Constitution to tax the income in question. Metcalf & Eddy, 269
U.S. at 518. As to the first question, the Court stated:
The War Revenue Act provided for the assessment of
a tax on net income; but Section 201(a) (40 Stat. at
303) contains a provision for exemption from the tax
as follows:
“This title shall apply to all trades or businesses of
whatever description, whether continuously carried
on or not, except—
“(a) In the case of officers and employees under the
United States, or any State, Territory, or the District
of Columbia, or any local subdivision thereof, the
compensation or fees received by them as such
officers or employees.”
Metcalf & Eddy, 269 U.S. at 519.
In resolving this question against Metcalf & Eddy, the Court found
that they had failed to sustain their burden of establishing that they
were officers of a State or a subdivision of a State within the
exception of Section 201 (a), and that the facts stated in their bill of
exceptions did not establish that they were employees, but rather
established they were independent contractors. Metcalf & Eddy,
269 U.S. at 520.
The second issue before the Court was the power of Congress to
impose a tax on the instrumentalities of a State government.
THE LAW AND THE COURTS 1980-1989
251
Messrs. Metcalf and Eddy never raised the issue of whether wages
constitute income, and this issue was not before the United States
Supreme Court in the case.
The Hill Court’s gratuitous comment that no court of the land has
ever held or suggested that Congress could not tax constitutionally
wages as income is extremely disingenuous. By the same token, The
Hill Court certainly did not cite to any Supreme Court cases in
which the highest court of the land, when presented with the issue,
has stated that Congress could tax wages as income. As has been
repeatedly shown herein, those lower court cases in which it has
been stated that wages constitute income either have ignored the
Supreme Court’s statement that income must be a profit or gain,
have ignored the existence of the words “income derived from any
source whatsoever” in both Sections 22(a) and 61 (a) of the Internal
Revenue Codes of 1939 and 1954 respectively, have ignored the
legislative history accompanying the passage of Section 61 (a) by
Congress, or have ignored the Supreme Court’s holdings that one’s
labor is personal property and the corresponding provisions of the
Internal Revenue Code, Sections 64 and 1001, et seq., providing the
law with respect to how to compute gain on the sale of personal
property.
The Hill Court next cited to Perkins (see p. 248), Romero (see p.
189), Davis (see p. 241), Funk (see p. 209), Moore (see p. 216),
Lawson (see p. 206), Lonsdale (see p. 200), Buras (see p. 187),
Broughton (see p. 186), Hayward (see p. 185), Francisco (see p.
183), Adams (see p. 180), Russell (see p. 179), Wilson (see p. 170),
Marks (see p. 169), Daehler (see p. 165), Lucas v. Earl (see p. 149)
and Stratton’s Independence (see p. 93) for the proposition that
wages constitute income. All of these cases has been analyzed
herein and shown not to be valid legal precedent for that
proposition.
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Ficalora v. C.I.R., 751 F.2d 85 (2nd Cir. 1984):
Mr. Ficalora appealed a determination of the Tax Court regarding
his tax liability for the year 1980. He argued in Tax Court, among
other issues, that wages do not constitute income. Ficalora, 751
F.2d at 86.
The Court first addressed Mr. Ficalora’s contention that neither the
United States Congress nor the United States Tax Court possessed
the constitutional authority to impose on him an income tax for the
year 1980. Mr. Ficalora, relying on Pollock, argued on appeal that
an income tax was a “direct” tax, and that Congress lacked the
constitutional authority to impose such a tax in the absence of
apportionment. Ficalora, 751 F.2d at 87. The Court stated:
In making his argument that Congress lacks
constitutional authority to impose a tax on wages
without apportionment among the States, the
appellant has chosen to ignore the precise holding of
the Court in Pollock, as well as the development of
constitutional law in this area over the last ninety
years. While ruling that a tax upon income from real
and personal property is invalid in the absence of
apportionment, the Supreme Court explicitly stated
that taxes on income from one’s employment are not
direct taxes and are not subject to the necessity of
apportionment. Pollock v. Farmers’s Loan and Trust
Co., 158 U.S. at 635.
Ficalora, 751 F.2d at 87.
It has previously been shown at pages 50 and 219 in connection
with the analysis of the Rowlee case that the Pollock Court did not
hold that taxes on income from one’s employment are not direct
taxes.
The Ficalora Court continued:
THE LAW AND THE COURTS 1980-1989
253
Finally, in the case of New York ex rel. Cohn v.
Graves, 300 U.S. 308, 57 S.Ct. 466, 81 L.Ed. 666
(1937), the Supreme Court in effect overruled Pollock,
and in so doing rendered the Sixteenth Amendment
unnecessary, when it sustained New York’s income
tax on income derived from real property in New
Jersey. Id. at 314-15, 57 S.Ct. at 468-469. Hence, there
is no question but that Congress has the constitutional
authority to impose an income tax upon the appellant.
Ficalora, 751 F.2d at 87.
In New York ex rel Cohn v. Graves, the issue before the Court was
stated as follows:
This case presents the question whether a state may
constitutionally tax a resident upon income received
from rents of land located without the state and from
interest on bonds physically without the state and
secured by mortgages upon lands similarly situated.
New York ex rel Cohn, 300 U.S. at 310.
It thus becomes immediately clear that the case involved the State
of New York’s income tax, and not the federal income tax. The
Supreme Court also stated:
We accordingly limit our review to the question
considered and decided by the state court, whether
there is anything in the Fourteenth Amendment
which precludes the State of New York from taxing
the income merely because it is derived from sources,
which, to the extent indicated, are located outside the
State.
New York ex rel Cohn, 300 U.S. at 312.
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This statement makes it abundantly clear that the Supreme Court
did not even address the Sixteenth Amendment in its opinion. And
finally, with respect to the alleged overruling of Pollock, what the
Supreme Court actually stated was:
Nothing which was said or decided in Pollock v.
Farmers Loan & Trust Co., 157 U.S. 429, calls for a
different conclusion. There the question for decision
was whether a federal tax on income derived from
rents of land is a direct tax requiring apportionment
under Art. I, Section 2, Cl. 3 of the Constitution. In
holding that the tax was “direct,” the Court did not
rest its decision upon the ground that the tax was a
tax on the land, or that it was subject to every
limitation which the Constitution imposes on property
taxes. It determined only that for purposes of
apportionment there were similarities in the
operation of the two kinds of tax which made it
appropriate to classify both as direct, and within the
constitutional command.
New York ex rel Cohn, 300 U.S. at 315.
Rather than overruling Pollock, the Supreme Court in effect
reaffirmed the Pollock decision. No Court, including the Brushaber
Court, has ever taken the position that the Sixteenth Amendment is
unnecessary to allow an unapportioned tax on income!
With respect to Mr. Ficalora’s contention that the term “income,” as
used in the taxing statutes, has no defined meaning and is
unconstitutionally vague and indefinite, the Court stated:
As discussed above, Section 61 of the Code defines
gross income as “all income from whatever source
derived.” Even if we were to assume, arguendo, that
this phrase is somehow vague or indefinite, Section 61
of the Code specifically cites “compensation for
THE LAW AND THE COURTS 1980-1989
255
services ...” as a concrete example of what is meant by
the term income. The wages which the appellant
received for his services rendered to New York
Telephone in taxable year 1980, fall squarely within
the definition of income contained in Section 61(a)(l)
of the Code. The appellant’s argument that the term
“income,” as used in the Code, is unconstitutionally
vague and indefinite, is totally without merit.
Ficalora, 751 F.2d at 88.
It has been previously set forth that Section 61 defines gross income
as the profit or gain derived from, among other sources,
“compensation for services,” and that a tax on the actual
“compensation for services” is a direct tax that does in fact, under
the law, require apportionment. The Ficalora decision, especially to
the extent it states that Pollock was overruled and the Sixteenth
Amendment is not necessary to empower the Congress to pass
legislation imposing a tax upon income without apportionment, is a
disgrace to the American people.
The case does not constitute valid legal precedent for the contention
that wages constitute income.
Schiff v. Commissioner, 751 F.2d 116 (2nd Cir. 1984):
Mr. Irwin Schiff appealed from an order of the United States Tax
Court which dismissed his petition for redetermination of income
tax deficiencies for the years 1974 and 1975. Among other issues,
Mr. Schiff argued that a tax on wage income is unconstitutional.
Schiff, 751 F.2d at 116-117.
The Court ruled against Mr. Schiff without addressing any of his
arguments and without citing any case law. Accordingly, the case
has no legal precedent for the proposition that wages constitute
income.
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Lovell v. United States, 755 F.2d 517 (7th Cir. 1984):
Mr. & Mrs. Lovell, representing themselves, were assessed a $500
frivolous return penalty by the I.R.S. The lower court granted
summary judgment in favor of the United States, and the Lovells
appealed. Lovell, 755 F.2d at 518-519. They first argued that they
were exempt from federal taxation because they were “natural
individuals” who have not “requested, obtained or exercised any
privilege from an agency of government.” Lovell, 755 F.2d at 519.
With respect to this argument the Court stated:
This is not a basis for an exemption from federal
income taxes. See Holker v. United States. All
individuals, natural or unnatural, must pay federal
income tax on their wages, regardless of whether they
received any “privileges” from the government.
Lovell, 755 F.2d at 519.
No case law is cited here by the Court for the proposition that wages
are subject to the federal income tax.
The Lovells next argued that the Constitution prohibits imposition
of a direct tax without apportionment. The Court stated the Lovells
were wrong citing to the Sixteenth Amendment. Lovell, id.
The Lovells next argued that money received in compensation for
labor is not taxable. The Court cited to Davis, Simanonok and
Koliboski, stating that these Courts had rejected the same
arguments as raised by the Lovells. Those cases have been analyzed
herein at pages 241, 233 and 234 respectively and shown not to be
legal precedent for the proposition that money received in
compensation for labor constitutes income. Only gain received in
compensation for labor constitutes income.
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257
Knies v. Richardson, 600 F.Supp. 763 (E.D.Wis. 1985):
Mr. and Mrs. Knies, representing themselves, filed suit against
numerous State officials in connection with assessment of state
income taxes against them. One of the issues they raised was
whether the Wisconsin Department of Revenue unconstitutionally
considered their wages as income. Knies, 600 F.Supp. at 764. The
Court stated:
Wages are properly considered taxable under both
state and federal law. Kile v. C.I.R., 739 F.2d 265 (7th
Cir. 1984); 21 [sic] U.S.C. Section 61(a);
Knies, 600 F.Supp. at 765.
As shown above at page 240, The Kile/Granzow Court relied
entirely upon case law which lacks legal validity for the proposition
that wages constitute income.
United States v. Latham, 754 F.2d 747 (7th Cir. 1985):
On appeal from conviction on two counts of failing to file income
tax returns and four counts of filing false withholding allowance
certificates, Latham, 754 F.2d at 749, among other issues, Mr.
Latham contended that the District Court improperly refused his
requested jury instruction defining “income” as distinct from “gross
income.”
The Seventh Circuit stated:
As we stated in Koliboski, a claim of this nature is
without merit. Id. at 1329 n. 1. Latham’s wages were
and are income; thus, his proposed jury instruction
was a misstatement of the law and the district court
properly refused to adopt the same in the instructions.
[Emphasis in original.]
Latham, 754 F.2d at 750.
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Having relied entirely upon Koliboski, the Latham decision does
not constitute legal precedent for the proposition that wages are
income.
Peth V. Breitzmann, 611 F.Supp. 50 (E.D.Wis. 1985):
Mr. Peth, representing himself, filed a civil rights lawsuit under the
provisions of 42 U.S.C. Section 1983 against several I.R.S.
employees alleging the defendants conspired to deprive him of his
property without due process of law. Among other arguments, Mr.
Peth alleged that he was not a person liable to pay taxes under 26
U.S.C. Section 6001 because the tax imposed by Title 26 was not
apportioned, and further alleged that he had earned no income
because he received a paycheck for his labor equal to the fair market
value of his labor, hence there was no taxable gain. Peth, 611
F.Supp. at 52-53.
The Court ruled against Mr. Peth as to both of his arguments; the
first by citing to Brushaber, and the second by citing to Granzow.
As discussed at page 240, the Granzow case does not support the
proposition that wages constitute income.
Harris v. United States, 758 F.2d 456 (9th Cir. 1985):
Mr. Harris, representing himself, moved to quash I.R.S.
administrative summonses on various grounds, one of which was
that wages do not constitute income. He appealed the denial of his
motion by the District Court. Harris, 758 F.2d at 457.
The Court cited to Gattuso (see p. 239), Romero (see p. 189) and
Buras (see p. 187) to dispose of this issue. Those cases have been
shown to not support the lower court’s contention that wages do
constitute income.
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259
United States v. Overton, 617 F.Supp. 5 (W.D.Mich. 1985):
Mr. Overton was charged in an indictment with failure to file
income tax returns and with income tax evasion. Representing
himself, he moved to dismiss the indictment on several grounds,
one of which was that he had incurred no gain from his labor which
may properly be accounted as income. Overton, 617 F.Supp. at 6.
The Court denied Mr. Overton’s motion citing to Burton, Richards,
Stillhammer, Lovell, 579 F.Supp., Koliboski and Glenshaw Glass.
As previously shown at pages 237, 223, 216, 231, 231 and 153
respectively, those cases do not support the Court’s conclusion that
wages constitute income.
Olson v. United States, 760 F.2d 1003 (9th Cir. 1985):
Mr. Olson filed an unsigned Form 1040 for 1982 on which he listed
his wages as zero and cautioned that it was not a return. Attached to
the Form 1040 was a W-2 Form showing payment of wages, on
which he wrote “incorrect.” He also attached a Schedule C profit or
loss statement in which he offset the wages he received by a greater
amount of “cost of labor” and other deductions incurred in earning
his wages. He also attached a letter stating he had studied the tax
laws and determined that he owed no taxes because he had not
obtained any privilege from a governmental agency. He stated he
filed the Form 1040 only to obtain a refund and not with the intent
to file a return. Olson, 760 F.2d at 1004.
The I.R.S. attempted to have Mr. Olson sign the return, which he
refused to do. Thereafter, the I.R.S. assessed a $500 frivolous
return penalty under Section 6702 of Title 26. Mr. Olson paid the
required fifteen percent of the penalty and then filed a claim for
refund. When the I.R.S. denied the claim for refund, he brought suit
to recover the fifteen percent and to have the $500 penalty abated.
The District Court dismissed the suit, and Mr. Olson, representing
himself, appealed. Olson, 760 F.2d at 1004-1005.
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With respect to Mr. Olson’s attempt to deduct his wages as the “cost
of labor,” the Court stated that the Court had repeatedly rejected
the argument that wages were not income, citing to Gattuso,
Romero and Buras. Those cases, analyzed at pages 239, 189 and
187 respectively, have been shown not to constitute legal precedent
for the proposition that wages do constitute income.
Stelly v. C.I.R., 761 F.2d 1113 (5th Cir. 1985):
Upon receipt of a notice of deficiency from the I.R.S., the Stellys
petitioned the United States Tax Court. The Tax Court dismissed
their petition, and representing themselves, they appealed to the
Fifth Circuit Court of Appeals. On appeal they argued that the
Sixteenth Amendment only authorized taxes on “gain,” not
income,109 asserting that compensation for labor was not gain
because it was an even exchange. Stelly, 761 F.2d at 1114-1115.
In ruling that the income tax on wages was constitutional, the Court
cited to numerous cases, all of which have been previously
analyzed. See Glenshaw Glass (p. 159), Eisner (p. 137), Brushaber
(see Chapters I and II), Perkins (p. 248), Granzow (p. 240), Crain
(p. 242), Funk (p. 209), Lonsdale (p. 200), Romero (p. 189),
Broughton (p. 186), Francisco (p. 183), Russell (p. 179) and Porth
(p. 208). In addition, the Court cited to Acker v. C.I.R., 258 F.2d
568 (6th Cir. 1958). That case challenged the constitutionality of the
Internal Revenue Code on the grounds that:
(1) the rates are so high as to make the levy not a tax
but a confiscation of property contrary to the Fifth
Amendment to the Constitution, (2) the progressive
rates are unconstitutional, and (3) the “income tax law
considered as a whole in its excessive rates and
arbitrary provisions is openly subversive of the
fundamental philosophy of the Constitution of the
United States and repugnant to its continued
existence.”
THE LAW AND THE COURTS 1980-1989
261
Acker, 258 F.2d at 574.
As none of these cases support the proposition that wages
constitute income, so too, the Stelly case is not legal precedent for
that proposition.
Hyslep v. United States, 765 F.2d 1083 (11th Cir. 1985):
Mr. Hyslep filed a 1982 Form 1040 on which he listed wages, and
deducted, as an adjustment to income, the full amount of the wages
received, claiming that he was a “source-exchanger,” and that
therefore his wages were “non-taxable.” The I.R.S. assessed a $500
frivolous return penalty, and Mr. Hyslep, representing himself,
brought a civil suit to recover the penalty.
In ruling against Mr. Hyslep, the Court stated that Congress had
defined income as including compensation for services in Section
61(a)(l), citing to Lonsdale and to Simanonok. As stated above, in
Section 61(a)(l) Congress defined gross income as the gain derived
from compensation for services, and neither the Lonsdale case (see
p. 200) nor the Simanonok case (see p. 233) supports the legal
proposition that wages constitute income.
Wheeler v. United States, 768 F.2d 1333 (D.C. Cir. 1985):
The Wheeler case was a consolidated case brought by Mr. and Mrs.
Wheeler and Mr. and Mrs. McLaughlin who appealed an adverse
decision of the Court of Claims for a refund of income taxes. Mr.
Wheeler and Mr. McLaughlin were employees of the South Bend
Tribune Corporation who entered into a college educational benefit
plan agreement with Educo, Inc., which provided funds for the
college expenses of the children of certain key employees. South
Bend made the arrangement “for the purposes of retaining such
present employees, of attracting future employees, and generally to
increase employee loyalty to Employer.” Under the plan, annual
payments were made to the children toward their college education.
Wheeler, 768 F.2d at 1334.
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The payments to the children were not included within the
Wheeler’s or the McLaughlin’s respective tax returns, and the I.R.S.
issued notices of deficiencies. The deficiencies were paid, and a suit
for refund was filed. The Court of Claims dismissed the suit, and
this appeal was brought. The Court of Appeals held that despite the
fact that the payments were made to the children, the payments
constituted income earned by the parents. Wheeler, 768 F.2d at
1334-1335. The Court stated:
Section 61 (a) of the Internal Revenue Code of 1954
defines gross income to include “compensation for
services.” This covers any economic or financial
benefit conferred in any form on the employee unless
it is specifically exempted by another section of the
Code.
Wheeler, 768 F.2d at 1335.
As pointed out numerous times, Section 61(a) defines gross income
as income derived from compensation for services. In any event, the
case did not involve wages, and the case does not constitute legal
precedent for the principle that wages are income.
Biermann v. C.I.R., 769 F.2d 707 (11th Cir. 1985):
Mr. Biermann, representing himself, appealed an adverse decision
of the United States Tax Court. He argued, among other issues, that
the monies he received should not be considered income because
the Internal Revenue Code does not define “income,” and that his
wages were not income. Biermann, 769 F.2d at 708.
The Court ruled against Mr. Biermann on these issues without
providing any legal analysis or citing to any case law. Accordingly,
the Biermann case does not constitute legal precedent for the
proposition that wages constitute income.
THE LAW AND THE COURTS 1980-1989
263
Connor v. C.I.R., 770 F.2d 17 (2nd Cir. 1985):
Mr. Connor appealed an adverse determination of the United States
Tax Court, and representing himself, argued among other issues,
that wages were not income but an exchange of property. He argued
that since money was property and labor was property, his work for
wages was a non-taxable exchange of property. Mr. Connor also
argued that because wages were property, a tax on them was a
property tax that had to be apportioned. Connor, 770 F.2d at 20.
The Court of Appeals ruled against these argument citing to Schiff,
which, as shown at page 255, totally failed to provide any legal
analysis of those issues. Neither Schiff nor Connor qualifies as legal
precedent for the contention that wages constitute income.
Cameron v. I.R.S., 773 F.2d 126 (7th Cir. 1985):
Mr. Cameron, representing himself in both the District Court and
the Court of Appeals, brought an action against the Internal
Revenue Service seeking injunctive relief and damages for alleged
bad faith of the I.R.S. in handling his case. Among other issues, he
argued that wages were compensation for services rendered and
hence not profits in the sense of windfalls. Cameron, 773 F.2d at
127.
As to this argument the Court stated:
This is true; wages—most wages anyway—are
compensation, rather than windfalls; but the income
tax is a tax on income in general, not just on windfall
income.
Cameron, id.
Wages are compensation for services rendered, but the general tax
on income taxes the gain derived from compensation for services,
not the compensation nor the wages themselves, as has been
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repeatedly shown. The Court did not cite any case law or other
authority on this issue in its opinion, and therefore, Cameron does
not suffice as legal authority for the proposition that wages
constitute income.
Carter v. C.I.R., 784 F.2d 1006 (9th Cir. 1986):
Mr. and Mrs. Carter did not file income tax returns for the years
1980 and 1981. The I.R.S. issued notices of deficiency, and the
Carters petitioned the United States Tax Court. Their petition was
dismissed and they appealed. Mrs. Carter did not sign the notice of
appeal, and her appeal was dismissed for lack of jurisdiction.
Carter, 784 F.2d at 1007-1008. Mr. Carter, representing himself,
argued that proceeds received for personal services could not be
given a “zero-basis for the purpose of the assessment of taxation.”
Carter, 784 F.2d at 1009.
The Ninth Circuit held that this argument was but a variation of the
“wages are not income theme,” and ruled against Mr. Carter citing
to Olson, Gattuso and Romero. Carter, id. As shown herein, neither
Olson (see p. 259), Gattuso (see p. 239) nor Romero (see p. 189)
constitutes valid legal precedent that wages constitute income. The
Carter case totally failed to address the issue of the existence of
Sections 1001 et seq. in attributing a zero-basis to labor, which the
United States Supreme Court has held to constitute property.
Motes v. United States, 785 F.2d 928 (11th Cir. 1986):
Mr. Motes and several others sued for a refund of income taxes
under the Tucker Act, 28 U.S.C. Section 1346, raising, among other
issues, that their wages were not income subject to tax, that a tax on
wages was a tax on their property (labor), and that they should be
allowed to exclude from the amount of the wages they received the
cost of maintaining their well-being. Motes, id.
The Court of Appeals rejected these arguments, without legal
analysis, citing to U.S. v. Goetz, 746 F.2d 705 (11th Cir. 1984);
THE LAW AND THE COURTS 1980-1989
265
Simanonok, U.S. v. Vance, 730 F.2d 736, 738 (11th Cir. 1984); and
Melton v. Kurtz, 575 F.2d at 547 (5th Cir. 1978). Simanonok has
been shown at page 233 not to provide legal authority that wages
constitute income.
In the Goetz case, two defendants were convicted of failing to file
income tax returns. Both defendants had filed tax returns in which,
rather than reporting an amount of income on the return, they
claimed protection under the Fifth Amendment. Goetz, 746 F.2d at
707. The trial court instructed the jury that returns without
financial information upon them were not returns and therefore the
returns filed by the two defendants were not returns as a matter of
law. Goetz, 746 F.2d at 708. In addition, the trial court refused to
allow the defendants the opportunity to present to the jury the
defense that they had claimed Fifth Amendment protection in good
faith. Goetz, 746 F.2d at 710. The Court of Appeals held that the
trial court committed error with respect to these two issues, and
reversed the convictions. No issue as to whether wages constitute
income was present in the Goetz case, and therefore the case does
not support the contention that wages constitute income.
In the Vance case, Mr. Vance was convicted of failing to file income
tax returns for the years 1977, 1978 and 1979, and appealed. On
appeal he contended that the District Court committed error in
refusing to conduct a pretrial in camera hearing on his claim of
Fifth Amendment privilege, in improperly admitting certain
evidence, and in improperly instructing the jury, and that his
conviction should be reversed because he was the subject of
selective or vindictive prosecution. Vance, 730 F.2d at 737. Only the
second of these issues involved income, and that indirectly.
The Court stated:
Vance next contends that the district judge
improperly admitted evidence showing that Vance
earned a substantial amount of income for the years
in question and thus was required to file tax returns.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
Vance contends that this evidence was inadmissible
under Rule 404 of the Federal Rules of Evidence. The
evidence was clearly admissible in this case. First, the
evidence was relevant to show that Vance had a duty
to file tax returns for the years in question; thus, the
evidence cannot be characterized as evidence of bad
character or bad acts to prove that Vance acted “in
conformity therewith on a particular occasion.”
Fed.R.Evid. 404. In addition, the evidence was clearly
admissible to show that Vance, because he had
incurred a substantial tax liability, had a motive to file
the inadequate returns and did not act in good faith
under Booher, 641 F.2d at 220. See Fed.R.Evid.
404(b).
Vance, 730 F.2d at 738.
The Vance case did not address what the specific evidence of
income was, and did not involve the issue of whether wages
constitute income. Accordingly, it is not precedent for the
contention that wages do constitute income.
The Melton case was a civil lawsuit against numerous employees of
the Internal Revenue Service in which Mr. Melton sought a
declaration that certain federal tax statutes were unconstitutional
and an injunction to prevent the Commissioner from assessing and
collecting taxes from him. Melton, 575 F.2d at 548. The contentions
raised by Mr. Melton were that: (1) the graduated or progressive
income tax is unconstitutional because it denies taxpayers equal
protection, Melton, id.; (2) the statutes establishing the Tax Court
of the United States are unconstitutional, Melton, id.; and (3) he
need not fill in the blanks on his federal income tax return because
to do so would violate his Fifth Amendment rights, Mel ton, 575
F.2d at 549.
The Melton case, like Goetz and Vance, did not address the issue of
whether or not wages constitute income.
THE LAW AND THE COURTS 1980-1989
267
Coleman v. C.I.R., 791 F.2d 68 (7th Cir. 1986):
The Coleman case was a consolidation of two appeals, one brought
by Mr. Coleman, and one brought by Mr. Holder. Mr. Coleman
petitioned the United States Tax Court and argued that wages do
not constitute income. Coleman, 791 F.2d at 70. Mr. Holder was
charged a $500 frivolous return penalty, paid fifteen percent, and
brought suit in District Court for a refund of the payment, also
arguing that wages were not taxable. Coleman, id.
In ruling against Mr. Coleman and Mr. Holder as to these
arguments, the Court cited to United States v. Thomas, 788 F.2d
1250 (7th Cir. 1986); Lovell, 755 F.2d; Granzow; Koliboski; and
Brushaber. Lovell (see p. 256), Granzow (see p. 240), Koliboski (p.
234) and Brushaber (see Chapters I and II) have been shown not to
legally support the contention that wages constitute income.
The Thomas case was an appeal from a conviction for failure to file
returns and filing false withholding allowance certificates. The only
issue with respect to wages not constituting income came about as
follows:
Thomas testified before the grand jury that returned
the superseding indictment. He presented his
explanations for not paying taxes, including his belief
that wages are not income and an assertion that “all
individual income tax revenues are gone before one
nickel is spent on the services which taxpayers expect
from their government.” In response to questions
asked by the prosecutor, Thomas conceded that he
had received technical training paid for by the Navy,
payment funded by taxes. Thomas maintains that the
indictment should be dismissed because of these
questions, which he says are improper; because the
prosecutor failed to present the grand jury with
exculpatory evidence (other than Thomas’s own
testimony); and because the prosecutor advised the
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grand jurors that Thomas’s legal theories are
incorrect.
Thomas, 788 F.2d at 1254.
The Court did not adjudicate the question of whether wages
constitute income, and therefore the Thomas case does not provide
legal precedent for that proposition.
Stubbs v. C.I.R., 797 F.2d 936 (11th Cir. 1986):
Mr.
Stubbs,
representing
himself,
appealed
an
adverse
determination of the United States Tax Court. One of the issues Mr.
Stubbs raised was the contention that wages do not constitute
income. Stubbs, 797 F.2d at 938.
The Court of Appeals ruled against Mr. Stubbs on this issue citing to
Biermann. As discussed above at page 262, the Biermann case is
not legal precedent for the contention that wages do constitute
income.
Colson v. United States, 67 B.R. 30 (1986):
Mr. Colson, representing himself, filed a petition to have his taxes
discharged in bankruptcy. He filed an adversary complaint in which
he argued, among other things, that wages do not constitute
income. Colson, 67 B.R. at 32. The Court rejected this argument
citing to Stubbs, which, as shown immediately above, does not
support the contention that wages do constitute income.
Casper v. C.I.R., 805 F.2d 902 (10th Cir. 1986):
Mr.
Casper,
representing
himself,
appealed
an
adverse
determination of the United States Tax Court in which he argued
that wages do not constitute income. Casper, 805 F.2d at 904-905.
The Tenth Circuit sustained the Tax Court’s determination that
wages do constitute income citing to Lawson, Rowlee, Connor,
THE LAW AND THE COURTS 1980-1989
269
Lovell, 755 F.2d., Perkins, Simanonok, Funk, Lonsdale, Romero,
Wilson, Mendel, Woodall and Stelly. Those cases have been shown
at pages 206, 223, 263, 256, 248, 233, 209, 200, 189, 170, 166, 166
and 260 respectively not to be legal precedent for the contention
that wages do constitute income.
Grimes v. C.I.R., 806 F.2d 1451 (9th Cir. 1986):
Mr. Grimes, representing himself, appealed the dismissal of his Tax
Court petition. Mr. Grimes acknowledged the receipt of wages,
which he referred to as “gross receipts,” but argued that he was
constitutionally entitled to an exemption for expenditures to
provide his family with the “American Standard of good living.” He
contended that, applying this purported exemption, he owed no
taxes as his “gross receipts” were “entirely consumed” in providing
for his family. Grimes, 806 F.2d at 1452-1453.
The Court stated:
There can be no doubt that the tax on income is
constitutional and that, for the purpose of the
Sixteenth Amendment, income includes “gain derived
from capital, from labor, or from both combined.”
Eisner v. Macomber, 252 U.S. 189, 207 (1920).
Sections 1 and 61 of the Internal Revenue Code
impose a tax on income, and wages are income. See
Gattuso v. Pecorella, 733 F.2d 709, 710 (9th Cir.
1984).
Grimes, 806 F.2d at 1453.
The Grimes Court correctly set forth that Section 61 of the Internal
Revenue Code is constitutional and correctly defined income as a
“gain derived from labor.” Section 61 does not, however, impose a
tax; the tax is imposed in Section 1 on “taxable income.” The
Gattuso case, (see p. 239) does not legally support the contention
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JUDICIAL TYRANNY AND YOUR INCOME TAX
that wages constitute income. Here again, an appellate court has
ignored the very definition it cited.
McLaughlin v. C.I.R., 832 F.2d 986 (7th Cir. 1987):
Mr. McLaughlin appealed an adverse determination of the United
States Tax Court. On appeal, and representing himself, he posed
three arguments: (1) that his liability for federal income tax was
contractual in nature and he had rescinded that contract; (2) that
his religious scruples prevented him from “entering into contracts
with the inhabitants of the land”; and (3) that he received no
benefits from the state and therefore owed nothing to the state.
McLaughlin, 832 F.2d at 987.
Mr. McLaughlin did not argue that wages do not constitute income;
nonetheless, the Court stated:
Furthermore, case law in this circuit is well-settled
that individuals must pay federal income tax on their
wages regardless of whether they avail themselves of
governmental benefits or privileges.
McLaughlin, id.
The Court cited to Coleman (see p. 267) and to Lovell (see p. 256)
to support this contention. Those cases have been shown above not
to constitute legal precedent for the contention that wages
constitute income.
Wilcox v. C.I.R., 848 F.2d 1007 (9th Cir. 1988):
Mr.
Wilcox,
representing
himself,
appealed
an
adverse
determination of the United States Tax Court. Among other issues,
he contended that wages do not constitute income. Wilcox, 848
F.2d at 1008.
The Ninth Circuit stated that “wages are income” and cited to
Carter as legal authority for its statement. The Carter case has been
THE LAW AND THE COURTS 1980-1989
271
shown above at page 264 to have not addressed the issue presented
before the Court with respect to the proper method of determining
gain/income. Having relied upon case law that does not constitute
valid legal authority for the proposition that wages do constitute
income, the Carter case is also not valid legal authority for that
proposition.
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ENDNOTES
83.
26 U.S.C. Section 6012 imposes a filing requirement on
“individuals” who receive more than a certain amount of “gross
income” per tax year.
84.
The three elements of willful failure to file a tax return under
Section 7203 are: (1) the defendant had a legal duty to file a tax
return; (2) he failed to do so; and (3) he acted willfully. United
States v. Foster, 789 F.2d 457, 460 (7th Cir. 1986).
85.
See, “An Act to provide Internal Revenue to support the
Government and to pay Interest on the Public Debt,” approved
July 1, 1862, 12 Stat. 432, Ch. 119, Section 86 at 12 Stat. 472.
86.
See Cohens v. Virginia, 6 Wheat. 264, 399; and Pollock v.
Farmer’s Loan & Trust Co., 157 U.S. at 574, for the principle
that a case cannot be cited as controlling on a legal issue unless
the legal issues in both cases are the same.
87.
The Court also ignored the holding of the Supreme Court in
Eisner that the three words—income derived from—must be
given meaning in determining what is, and what is not, income
(see p. 141).
88.
The Court having stated that Mr. Amon did not brief this issue,
it is unclear exactly what was or was not briefed.
89.
The Court found that the stock constituted a gift and was not
taxable. Thus, the mere presence of the employer-employee
relationship does not mean that all things of value which pass
between them constitute income.
90.
The case actually commences on page 899, not on page 900.
91.
The case actually commences on page 939, not on page 940.
THE LAW AND THE COURTS 1980-1989
273
92.
See note 75.
93.
It is interesting to note that a progressive tax upon individuals is
the second plank of the Communist Manifesto.
94.
Butchers’ Union Co. v. Crescent City Co., 111 U.S. 746,757
(concurring opinion of Justice Fields) (1883); Coppage v.
Kansas, 236 U.S. 1, 14 (1914); Adair v. United States, 208 U.S.
161, 172 (1908).
95.
A Schedule C is used to report Profit or (Loss) from Business or
Profession (Sole Proprietorship).
96.
This statement by the Court was only partially correct. On
rehearing, the Supreme Court in Pollock determined a tax on
income from all of an owner’s real or personal property was a
direct tax within the meaning of the Constitution. Pollock, 158
U.S. at 618.
97.
See p. 130.
98.
See the definition of “guise” at note 34.
99.
It is interesting to note that the Court of Appeals read
Brushaber as removing the requirement of apportionment from
the “direct” income tax when Brushaber stated the purpose of
the Sixteenth Amendment was to do away with the Pollock rule
which caused the indirect income tax from being classified as a
direct tax by considering the source of the income. Mr. Parker
apparently correctly read Brushaber, and relied upon Flint for
its definition of an excise tax to show that he was not engaged in
any activity taxable as an excise.
100.
The Supreme Court took some liberality with this sentence in
that Section 22(a) merely defined “gross income”; it did not
impose the tax in that section.
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JUDICIAL TYRANNY AND YOUR INCOME TAX
101.
The issue before the Court in Clifford was whether the grantor,
after a trust had been established, may still be treated under
Section 22 as the owner of the corpus (see p. 193).
102.
The issue before the Court in the Midland Mutual case was
whether an amount of accrued interest was to be considered as
gross income where a life insurance company, at a foreclosure
sale, bid the principal of its mortgage loan plus accrued interest
and took over the property in satisfaction of the whole debt
without payment and repayment of any cash. Midland Mutual,
300 U.S. at 220.
103.
The issue before the Court in the Irwin case was whether sums
received by a beneficiary under a will which created a trust were
taxable to the beneficiary. Irwin,&n