Wednesday, March 26, 2008

Background on Taxes

*This is for your information only. Before you act on this, seek COMPETENT legal advice. This of course means that the attorney would actually need to read the cases mentioned here and not merely assume based on what someone else said.*

The Supreme Court ruled in 1916 that "[B]y the previous ruling [Brushaber v Union Pacific Railroad] it was settled that the 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 [of our national government under the Constitution] from being taken out of the category of indirect taxation to which it inherently belonged...." Stanton v. Baltic Mining Co., 240 U.S. 103, 112 (1916)

Despite "common knowledge" to the contrary, the income of most Americans is not subject to the United States federal income tax. The strict limits on federal power imposed by the Constitution prohibited Congress from imposing a tax on the income of United States citizens who live and work exclusively within the 50 states, and the federal statutes and regulations demonstrate that Congress did not impose such a tax. This was not due to an oversight, or to some technical imperfection in the legislative process. Congress never even attempted to impose such a tax. Instead, a limited income tax was imposed, and was worded in such a way to give the impression that it was applicable to the income of most Americans. However, a more in-depth study of the federal statutes and regulations reveals that the tax is far more limited in scope than the public has been led to believe.

Just to be clear, there is no tax "on" income. "The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by reference to the income, which they produce. The income is not the subject of the tax: it is the basis for determining the amount of the tax." - Congressional Record, 3-27-43, page 2580

The Supreme Court of Tennessee agrees.

"Privileges are special rights, belonging to the individual or class, and not to the mass; properly, an exemption from some general burden, obligation or duty; a right peculiar to some individual or body. Lonas v. State, 50 Tenn. 287, 307.

Since the right to receive income or earnings is a right belonging to every person, this right cannot be taxed as privilege."
Cole v. MacFarland, 337 S.W. 2d 453(Tenn. 1960)

See also Foster & Creighton Co. v. Edgar J. Graham, 285 S.W. 570(1926), Madison Suburban Utility Dist. of Davidson County v. Carson et al., 232 S.W.2d 277(1950), and Memphis Retail Liquors Dealers' Association, Inc, v. City of Memphis, 547 S.W.2d 244(1977).

The United States Supreme Court furthered elaborated on this: "A tax laid upon the happening of an event as distinguished from its tangible fruits, is an indirect tax."
Tyler v. U.S., 281 U.S. 497, page 502 (1930)

Who wrote the Sixteenth Amendment? Senator Nelson Aldrich of Rhode Island. To help put things into perspective, here is some background on the 16th Amendment.

The main argument is that it wasn't properly ratified. Therefore the so-called "income" tax is improper. A tax court sums up the situation quite nicely:

"In dealing with the scope of the taxing power, the question has sometimes been framed in terms of whether something can be taxed as income under the Sixteenth Amendment. This is an inaccurate formulation of the question and has led to much loose thinking on the subject. The source of the taxing power is not the Sixteenth Amendment; it is Article I, section 8 of the Constitution. It is important that these provisions be clearly understood; what is required is an understanding of fundamental principles. The familiar statement that at this time we need education in the obvious more than investigation into the obscure (Holmes, Collective Legal Papers, pp. 292-293), although made in a different context, is peculiarly applicable here."
Penn Mutual Indemnity Co. v. Commissioner of Internal Revenue, 32 T.C. 653 at 5659 (1959)

What does Article 1, Section 8 say? With regard to the taxing power, it says in Clause 1:

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

The court explains what duties and imposts and excises are: "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." Flint v. Stone Tracy Co., 220 U.S. 107 (1911)

The other taxing clauses are as follows:

Article 1, Section 2, Clause 3: Representatives and direct taxes shall be apportioned among the several states which may be included within this union, according to their respective numbers, which shall be determined by adding to the whole number of free persons, including those bound to service for a term of years, (and excluding Indians not taxed, three fifths of all other Persons-changed by Sec 2 of 14th amendment).

Article 1, 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.

Article 1, Section 9, Clause 5: No Tax or Duty shall be laid on Articles exported from any State.

Did the Supreme Court actually rule on whether the "income" tax was a direct or indirect tax BEFORE it was authorized by the 16th amendment? Yes, in Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601 (1895), the court ruled that:

First. We adhere to the opinion already announced, that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes.

Second. We are of opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes.

Third. The tax imposed by sections 27 to 37, inclusive, of the act of 1894, so far as it falls on the income of real estate, and of personal property, being a direct tax, within the meaning of the constitution, and therefore unconstitutional and void, because not apportioned according to representation, all those sections, constituting one entire scheme of taxation, are necessarily invalid.

Since these sections of the act levied a direct tax without regard to apportionment, the court threw out the whole act and all the revenue collected under the act had to be refunded. This is what brought about the 16th amendment, which stated that Congress could collect taxes on incomes without apportionment. The Sixteenth Amendment did not define the taxes on income as direct or indirect. So it appeared that the constitution was in conflict with itself. It allowed for a tax on income, but the clause requiring direct taxes to be apportioned was not repealed. The United States Supreme Court in Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916) settled the issue when it said "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 [240 U.S. 1, 17] 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..."

The Sixteenth Amendment reads as follows: 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.

It is the without apportionment language and without regard to census or enumeration that restricts taxation on incomes to the class of excises. Did the 16th amendment authorize a new kind of tax called the "income" tax? No it did not. "This result, instead of simplifying the situation and making clear the limitations on the taxing power, which obviously the Amendment must have been intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion." The court went on to say "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,..." [240 U.S. 1, 18]

The 3rd Circuit Court of Appeals clarifies: "It did not take a constitutional amendment to entitle the United States to impose an income tax. Pollock v. Farmers' Loan & Trust Co.(citations omitted) only held that a tax on the income derived from real or personal property was so close to a tax on that property that it could not be imposed without apportionment. The Sixteenth Amendment removed that barrier. Indeed, the requirement for apportionment is pretty strictly limited to taxes on real and personal property and capitation taxes." Penn Mutual Indemnity Co. v. C.I.R., 277 F.2d 16 (1960)

The court also said "It is not necessary to uphold the validity of the tax imposed by the United States that the tax itself bear an accurate label." Congress is free to name the tax whatever it desires. The question still remains: Is it a direct tax? Capitation? Or is it a duty, impost, or excise?

The barrier refers to the consideration of the source of income. The United States Supreme Court in the Brushaber case said "Indeed, from another point of view, the Amendment demonstrates that no such purpose was intended, and on the contrary shows that it was drawn with the object of maintaining the limitations of the Constitution and harmonizing their operation." What was the problem? Was an amendment really necessary to make clear the taxing power that Congress always had?

There are three things to look for: The Rule, the Ruling and the Principle. The Rule applied relates to the rule of apportionment to all direct taxes before and after the Sixteenth Amendment.

The Ruling relates to the court's decision in Pollock that taxes on real estate and personal property and the rents and incomes derived from real and personal property are direct taxes.

In my copy of "Frequently Asked Questions Concerning the Federal Income Tax" updated May 7, 2001, John R. Luckey, Legislative Attorney for the American Law Division writes on page four that "[T]he Court found that the Sixteenth Amendment sought to restrain the Court from viewing an income tax, because of its close effect on the underlying property as a direct tax."

It is true that various personnel in the Office of the Commissioner of Internal Revenue claim that the Sixteenth Amendment gave Congress some new power of taxation. But the courts have settled the issue as to what the Sixteenth Amendment did and didn't do. The problem is not the Sixteenth Amendment; it is the disinformation regarding it.

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