THE INCOME TAX LAW DOES NOT
"PLAINLY AND CLEARLY LAY" ANY TAX
UPON THE CITIZEN’S REVENUE
The Internal Revenue Code does not "Plainly and Clearly Lay" any liability for an income tax on a citizen.
The Internal Revenue Code does not "Plainly and Clearly Lay" any statutory liability for the payment of an income tax on a citizen of the United States of America, regarding his own earnings.
The Income Tax Law, Subtitle A of Title 26, United States Code, imposes a tax on the taxable income of certain individuals in § 1:
26 U.S.C. § 1. Tax Imposed.
(a) Married individuals filing joint returns and surviving spouses
There is hereby imposed on the taxable income of —
(1) every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013, and
(2) every surviving spouse (as defined in section 2(a)),
a tax determined in accordance with the following table:
. . .
(b) Heads of households
There is hereby imposed on the taxable income of every head of a household (as defined in section 2(b)) a tax determined in accordance with the following table:
. . .
(c) Unmarried individuals (other than surviving spouses and heads
of households) There is hereby imposed on the taxable income of every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 7703) a tax determined in accordance with the following table:
. . .
(d) Married individuals filing separate returns
There is hereby imposed on the taxable income of every married individual (as defined in section 7703) who does not make a single return jointly with his spouse under section 6013, a tax determined in accordance with the following table: . . ."
However, this section does not designate anyone as liable for the payment of the tax imposed. Nor does this section state how the tax is to be collected and paid, or who it is specifically that is required to pay the tax, and when. While this section imposes a rate of tax, it is important to realize that it does not specify any person liable for the payment of the tax in any manner at all, either directly or indirectly, nor does it even begin to state, “lay out”, or explain, how the tax is to be collected and paid.
It should be noted at this point that titles and headings, such as "Married individuals and surviving spouses filing joint returns" and "Heads of households" are not part of the law and have absolutely no legal force or effect. 26 U.S.C. § 7806. Therefore, the actual statute commences with "There is hereby imposed . . .". The imposition of the tax is on “taxable income” only, and is not imposed on any individual, any person, or even any property. In contrast, see 26 U.S.C. § 884, discussed more fully infra, which does impose a tax on an entity.
While Section 1, may not state how the tax is to be collected and paid, or who is liable for the payment of the income tax, the Supreme Court does identify for us and tell us these things in its Brushaber v Union Pacific Railroad Co., 240 U.S. 1 (1916) decision. Here, the court clearly states how the tax is to be collected under the legislation being tested:
“2. The act provides for collecting the tax at the source; that is, makes it the duty of corporations, etc., to retain and pay the sum of the tax on interest due on bonds and mortgages unless the owner … gives a notice that he claims an exemption” Brushaber, supra, at 21 (emphasis added)
The court recognized that the legislation being tested in the Brushaber case, in creating a “duty of corporations, etc., to retain and pay the sum of the tax”, created a federal tax collector, defined in the law as a “Withholding Agent”, with the legal duty to collect tax from subject persons.
The “person” defined in the law, with this legislatively mandated duty to deduct and withhold income tax from other “persons” under Chapter 3 of the code, is the “Withholding Agent”, defined in law at 26 U.S.C. § 7701(a)(16).
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof-
(1). Person - The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation
(16). Withholding Agent. - The term "Withholding Agent" means any person required to deduct and withhold any tax under the provisions of sections 1441, 1442, 1443, or 1461.”
With each of those referenced defining code sections providing:
§ 1441. Withholding of Tax on Nonresident Aliens
(a) General rule. Except as otherwise provided in subsection (c) all persons, in whatever capacity acting having the control, receipt, custody, disposal or payment of any of the items of income specified in subsection (b) (to the extent that any of such items constitutes gross income from sources within the United States), of any nonresident alien individual, or of any foreign partnership shall deduct and withhold from such items a tax equal to 30 percent thereof, except that in the case of any items of income specified in the second sentence of subsection (b), the tax shall be equal to 14 percent of such item. (emphasis added)
(b) Income items. The items of income referred to in subsection (a) are interest (other than original issue discount as defined in section 1273), dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income,...
§ 1442 Withholding of Tax on Foreign Corporations
(a) General rule. In the case of foreign corporations subject to taxation under this subtitle, there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in Section 1441 a tax equal to 30% thereof. ....
§ 1443 Foreign Tax Exempt Organizations (title only shown)
So we see that the Chapter of the title, while holding no actual force of law, does accurately capture the spirit of the provisions of the Chapter. The Withholding Agent, under the provision of the defining statute at 7701(a)(16), is made a federal the tax collector, who is made liable in Section 1461 for the tax he collects, by withholding money as tax, from payments made to those foreign persons identified under Sections 1441, 1442 and 1443,
Foreign corporations are specifically designated as the party liable for payment of the "Branch profits tax" imposed by 26 U.S.C. § 884, which, does in fact impose the tax on "any foreign corporation", and 26 U.S.C. § 701 designates the partners as liable for the taxes on income of a partnership, but only in their "individual" capacities, not for the income of the partnership, while certain (other) partnerships are declared liable for excess recapture of credits under 26 U.S.C. 704.
The only other party that is identified in the income tax laws as liable for the payment of any income tax is revealed in 26 U.S.C. § 1461:
Sec. 1461. Liability for withheld tax
Every person required to deduct and withhold any tax under this chapter is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this chapter."
The "this chapter", referenced in the statute, is "Chapter 3 - Withholding Tax on Nonresident Aliens and Foreign Corporations". Thus, the liable party, clearly and plainly identified in the Subtitle A statutes as liable for the payment of the income tax, is any person who has collected tax by deducting and withholding money as tax from some other person, who from the provisions of the defining statutes, we now see are all foreign persons.
Section 1461, then, is the only code section in existence in Subtitle A that makes any individual “person” liable for the payment of the income tax. There are no other references in Subtitle A (the income tax law) to anyone being liable for the tax imposed by § 1 other than those: partners in their "individual" capacities; certain large partnerships in certain excess credit situations; foreign corporations; and those persons, American citizens and domestic corporations, who have withheld taxes from payments made to nonresident aliens and foreign corporations.
There is only one other party that is identified as being liable for the income tax, but to find that party we have to journey outside the realm of the income tax law to "Subtitle C – Employment Taxes", where we find:
Sec. 3403. Liability for tax
The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter ["Subtitle C – Employment Taxes; Chapter 24 – Collection of Income Tax at Source on Wages"], and shall not be liable to any person for the amount of any such payment.
(emphasis and [bracketed material] added)
Thus, the only persons being assigned any liability for the income tax imposed by § 1 are those five instances — partners, certain large partnerships, foreign corporations, and the federal tax collectors in the form of Withholding Agents, who withhold taxes from nonresident aliens and foreign corporations, and employers who withhold tax under the provisions of Chapter 24 of Subtitle C from their employees. What we find here, consistently provided for in the provisions of both of the Subtitles, A and C, is the implementation of an indirect tax in the form of a tariff, that is collected and paid indirectly by third party federal tax collectors who shift the burden of the tax they collect and pay by withholding tax from payments made to subject foreign persons. Just as it was stated in Pollock v. Farmers' Loan and T. Co., 157 U.S. 429 (1895), at pg. 558:
“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;”
While Section 1 does impose a rate of tax on different groups of “individuals”, that tax cannot be legitimately assumed to be imposed as a direct tax on all “persons”. The income tax is rather, shown to be inherently indirect, being collected and actually paid, under the actual provisions of the statutes, by a tax collector with a defined “duty” under the law to collect and pay the income tax as a tax collector, not a subject taxpayer, just as the sales tax is collected and paid indirectly by the stores in the fifty States, in implementing and enforcing the State’s sales tax.
The Supreme Court itself, in Stanton v. Baltic Mining Co., 240 U.S. 103 (1916), clearly states that the income tax legislation being tested in that (and the Brushaber) case is recognized as implementing an inherently indirect tax:
". . . The provisions of 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 from being taken out of the category of indirect taxation to which it inherently belonged . . ." Stanton, at pg. 112-113
The absence of a statutory provision specifying exactly and precisely who is liable for a tax imposed, IS NOT CUSTOMARY, nor is it legitimate to assume into existence a liability for tax that is not specified in the statutes, when there very clearly are statutes that do specify liability for the payment of the tax (see § 1461), as was noted by the Court in its Opinion in Reinecke v. Gardner, 277 U.S. 239:
"The extension of tax by implication is not favored"
26 U.S.C. §§ 2032A and 2056A specifically state who is liable for the Estate Tax; 26 U.S.C. § 3102(b) specifically states who is liable for the FICA tax;: 26 U.S.C. § 3202 specifically states who is liable for the Railroad Retirement Tax; 26 U.S.C. § 3505 specifically imposes liability for Employment Taxes; 26 U.S.C. §§ 4002 and 4003 specify not only who is primarily liable, but who is secondarily liable for the Luxury Passenger Automobile Excise Tax. See also: 26 U.S.C. §§ 4051 and 4052 (Heavy Trucks and Trailers Excise Tax); 26 U.S.C. § 4071 (Tire Manufacture Excise Tax); 26 U.S.C. § 4219 (Manufacturers Excise Tax); 26 U.S.C. § 4401 (Tax on Wagers); 26 U.S.C. § 4411 (Wagering Occupational Tax); 26 U.S.C. § 4483 (Vehicle Use Tax); 26 U.S.C. § 4611 (Tax on Petroleum); 26 U.S.C. § 4662 (Tax on Chemicals); 26 U.S.C. § 4972 (Tax on Contributions to Qualified Employer Pension Plans); 26 U.S.C. § 4980B (Excise Tax on Failure to Satisfy Continuation Coverage Requirements of Group Health Plans); 26 U.S.C. § 4980D (Excise Tax on Failure to Meet Certain Group Health Plan Requirements); 26 U.S.C. § 4980F (Excise Tax on Failure of Applicable Plans Reducing Benefit Accruals to Satisfy Notice Requirements); 26 U.S.C. § 5005 (Gallonage Tax on Distilled Spirits); 26 U.S.C. § 5043 (Gallonage Tax on Wines); 26 U.S.C. § 5232 (Storage Tax on Imported Distilled Spirits); 26 U.S.C. § 5364 (Tax on Wine Imported in Bulk); 26 U.S.C. § 5418 (Tax on Beer Imported in Bulk); 26 U.S.C. § 5703 (Excise Tax on Manufacture of Tobacco Products); and 26 U.S.C. § 5751 (Tax on Purchase, Receipt, Possession or Sale of Tobacco Products), to name a few.
Considering the "standard in the drafting of taxation laws industry", particularly in view of the requirement of strict construction, the limitation of liability to those five instances cannot be assumed to have been an oversight. In this instance the only ones liable are those specifically named as liable (under Section 1461), just as in any other tax provision.
In United States v.
Although the "pick-up man", Calamaro, was the
person who actually received the money from the players, handed out the betting
slips to the players and was acting on behalf of the "banker", the
Supreme Court held that the he was not one who "engaged in receiving
wagers" because "receiving wagers" meant accepting or entering
into the wager, not receiving the money for the wager. See also Griffin v. United States, 588 F.2d 521
(5th Cir. 1979); Fine v.
In Calamaro, the government cited a parallel regulation that more clearly included the "pick-up" man as one who "engaged in receiving wagers", which the Supreme Court effortlessly dismissed:
"Finally, the Government points to the fact that
the Treasury Regulations relating to the statute purport to include the pick-up
man among those subject to the § 3290 tax, and argues (a) that this constitutes
an administrative interpretation to which we should give weight in construing
the statute, particularly because (b) section 3290 was carried over in haec verba into § 4411 of the
Internal Revenue Code of 1954. We find neither argument persuasive. In light of
the above discussion, we cannot but regard this Treasury Regulation as no more
than an attempted addition to the statute of something which is not there.
As such the regulation can furnish no sustenance to the statute. Koshland v. Helvering,
See also, Water Quality Ass'n v. United States, 795 F.2d 1303 (7th Cir. 1986), where, citing and quoting Calamaro, the court added at p. 1309:
"It is a basic principle of statutory construction that courts have no right first to determine the legislative intent of a statute and then, under the guise of its interpretation, proceed to either add words to or eliminate other words from the statute's language. DeSoto Securities Co. v. Commissioner, 235 F.2d 409, 411 (7th Cir. 1956); see also 2A Sutherland Statutory Construction § 47.38 (4th ed. 1984). Similarly, the Secretary has no power to change the language of the revenue statutes because he thinks Congress may have overlooked something."
There is no dispute, nor does the government otherwise contend, that Defendant is a partner in any partnership, or a large partnership, or a foreign corporation. Defendant is not required to withhold any taxes from any nonresident alien or from any foreign corporation as a Withholding Agent, nor is he required by Chapter 24 of Subtitle C to withhold taxes as an “employer”. Accordingly, the only way the income tax law could be interpreted as imposing any liability for income tax upon Defendant is by inference or implication.
"But in statutes levying taxes the literal meaning of the words employed is most important, for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the Government and in favor of the taxpayer." Merriam, supra.
If the provisions of the Internal Revenue Code, even considering
those outside the Income Tax Law (Subtitle A) fail to "plainly and
clearly" lay liability for the tax upon Defendant, then they cannot
legitimately be given that effect through strained interpretations, implication
or inferences made or taken by the court. Nevertheless, the government claims
that Defendant owes income taxes "though none had been clearly laid
thereon by statute. Shades of Pym and
John Hampden, of the
It is, therefore, respectfully submitted that there is no statute that renders Defendant liable for an income tax, and, therefore, he is not so liable. Absent a lawful liability for taxes, the essential elements, liability for tax, to be established before a deficiency for a tax can be issued, is lacking in this case as a matter of law, and, accordingly, it is respectfully submitted that both counts of the indictment should be dismissed, with prejudice.
The Internal Revenue Code does not "Plainly and Clearly Lay"
a tax on any of the citizen’s revenues.
The same rigid rule of strict construction laid down by the Supreme Court in Billings, Merriam, Gould and Calamaro, supra, applies to the question of what is taxed as well as who is made liable for the tax.
Our second foray into the labyrinth begins as the first, with § 1, which imposes a tax "on taxable income." The first order of business is to determine the definition of the terms in order to define the scope of the tax. However, the first observation is stunning. Although the first 1,564 sections of the Internal Revenue Code are devoted to the Income Tax, the term "income", the very subject of the tax, is not defined. Nor is the term defined in any of the related regulations promulgated by the Treasury Department. Nor is the term "taxable" defined in the Code or regulations.
The closest thing we have to definitions of "income" and "taxable" are all qualified, "hybrid", definitions, income linked with another term. Thus when a body of statutory law fails to provide a definition of a term, we must use its customary meaning. Turning to dictionaries, we find:
Income. "A gain or recurrent benefit usually measured in money that derives from capital or labor"
Black's Law Dictionary:
Income. "The return in money from one's business, labor or capital invested; gains, profits or private revenue."
and, since federal law provides no statutory definition, we look to other laws for guidance:
Art. 551. Kinds of fruits
Fruits are things that are produced by or derived from another thing without diminution of its substance.
There are two kinds of fruits; natural fruits and civil fruits.
Natural fruits are products of the earth or of animals.
Civil fruits are revenues derived from a thing by operation of law or by reason of a juridical act, such as rentals, interest, and certain corporate distributions."
In the federal IR (Internal Revenue) Code we find hybrid definitions for "ordinary income" and "gross income":
26 U.S.C. § 64. Ordinary Income Defined.
For purposes of this subtitle, the term "ordinary income" includes any gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this subtitle, as "ordinary income" shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b).
26 U.S.C. § 61. Gross Income Defined.
General Definition — Except as otherwise provided in this subtitle, gross income means all income [income means 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; . . .
(emphasis and [bracketed material] added)
While the significance or import of the phrase "from whatever source derived" will be more fully discussed below, it is important at this point to at least note that the phrase "from whatever source derived" is taken directly from the Sixteenth Amendment, which it was decided, could not provide an income tax that could be classified as a direct tax, Brushaber v. Union Pac. R.R., 240 U.S. 1, 36 S.Ct. 236 (1916); Tyee Realty Co. v. Anderson, 240 U.S. 115, 36 S.Ct. 281 (1916); Stanton v. Baltic Mining Co., 240 U.S. 103, 36 S.Ct. 278 (1916). This Amendment was adopted in an attempt to overrule Pollock v. Farmers' Loan and T. Co., 157 U.S. 537, 15 S.Ct. 673 (1895), which held that a tax on income derived from property burdened the property and was, therefore, a direct property tax subject to the requirement of apportionment. Therefore, the reference to "from whatever source derived" is not an indication that Congress may tax any income from any source, but is only an indication that an income tax (and a tax only on income) is not to be classified as a direct tax, subject to the requirement of apportionment, by virtue of the source of the income. This is not to say that the tax is to be applied and charged against all income of all persons without regard to its source, as though it were a direct tax.
The 16th Amendment did not expand the scope of Congress' power to tax (Brushaber, Stanton, Tyee, supra et al.), thus although the source of income is no longer a factor in determining whether the tax is direct or indirect, neither the jurisdiction of the federal government nor its taxing authority was enlarged to include authority to tax activities and privileges that it could not have taxed before the adoption of the 16th Amendment. Source of income, then, is still a factor in determining the scope of the taxing authority of the federal government. (See discussions of Bailey v. Drexel Furniture Co., 259 U.S. 20, 36 S.Ct. 236 (1916); McCulloch v. Maryland, 17 U.S. 316 (1819); and others, infra) As we will see, those factors were also taken into consideration in the determination of taxable income in the Code and regulations.
The obvious common usage for the term "taxable", although not readily found in Websters, is "able to be taxed", i.e., within the authority of a government to tax. And finally, we have the hybrid definition of "taxable income":
26 U.S.C. § 63. Taxable Income Defined.
(a) In general
Except as provided in subsection (b), for purposes of this subtitle, the term "taxable income" means gross income minus the deductions allowed by this chapter (other than the standard deduction).
Thus, when we combine the definitions of our terms, we have:
Income = gains, profits, from capital, labor or both;
Taxable = within the authority of the government to tax;
Thus, "taxable income" would be all gain [from activities that are within the authority of the federal government to tax] derived from capital, from labor, or from both combined from whatever source [that is within the authority of the federal government to tax] derived, and including certain enumerated items such as gains, or profits, from compensation for services, minus the deductions allowed by this chapter (other than the standard deduction).
While the Subtitle A legislation identifies that the income tax is collected at the source, indirectly, from foreign, non-resident persons, by Withholding Agents, to what extent do the statutes indicate and record that the income tax applies to the earnings of the American citizens themselves, since it is apparently not collected under the statutes indirectly at the source from them, by withholding, as it is collected from the foreign persons, as it is impossible to identify any statute in Subtitle A authorizing the withholding of income tax from any American citizen.
In the 16th Amendment, the term "Whatever" does not identify those sources that are within the authority of the federal government to tax, but in checking the Index for the United States Code Annotated, under "Income Tax", we find "sources" and we also find "within the U.S." In order to determine what income is taxable to the American citizens, the index of the Code designates the starting point as 26 U.S.C. § 861:
U.S.C. § 861. Income from Sources within the
(a) Gross income from sources within
The following items of gross income shall be treated
as income from sources within the
[This section goes on to list items of gross income, but does not define source nor does it specify any sources. Following the statutory text, however, we are referred to the Code of Federal Regulations:]
"CODE OF FEDERAL REGULATIONS”
"General regulations, see 26 CFR Sec. 1.861-1.
". . . .
"Computation of taxable income from sources within
(emphasis and [bracketed material] added)
So, now our journey into the labyrinth of Code of Federal Regulations, as pertaining to the application of the income tax to the income of the American citizen, continues :
C.F.R. § 1.861-1 Income from sources within the
(a) Categories of income.
Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax. These sections explicitly allocate certain important sources of income to the United States or to areas outside the United States, as the case may be; and, with respect to the remaining income (particularly that derived partly from sources within and partly from sources without the United States), authorize the Secretary or his delegate to determine the income derived from sources within the United States, either by rules of separate allocation or by processes or formulas of general apportionment. The statute provides for the following three categories of income:
"(1) Within the
There are two distinct provisions contained in this regulation that warrant our attention. First, the section informs us that §§ 861 et seq. are to be used to determine taxable income, but, equally significant, is, second, that besides the deductions of expenses, losses and other deductions referred to in 26 U.S.C. § 63 (taxable income = gross income less deductions), we are now made aware that there are either items or sources of income that CANNOT be (as opposed to "are not") included in gross income to begin with. The inescapable conclusion from this revelation is that not all income of the American citizen is includable in gross income, reaffirming our previous discussion of "from whatever source derived" as being reflective of the 16th Amendment's prohibition of considering the source in classifying the income tax as anything other than an indirect tax (tariff or corporate excise), rather than defining the scope of the tax to presumptively include "each and every" source, of every American citizen.
In order to determine which sources can be considered in determining taxable income and, conversely, which sources of a citizen cannot be included in gross income to begin with, § 1.861-1(a)(1) directs us to § 1.861-8:
C.F.R. § 1.861-8 Computation of taxable income from sources within the
(a)In general — (1) Scope.
Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the
"Sections 862(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from
sources without the
(emphasis and [bracketed material] added)
So, what does paragraph (f)(1) of this section identify as those specific sources and activities that determine whether income is taxable to the American citizen ?
"(f) Miscellaneous matters —
"(1) Operative sections. The operative sections of the Code which require the determination of taxable income of the taxpayer from specific sources or activities and which give rise to statutory groupings to which this section is applicable include the sections described below.
"(i) Overall limitation to the foreign tax credit.
"(iii) DISC and FSC taxable income.
"(iv) Effectively connected
taxable income. Nonresident alien
individuals and foreign corporations engaged in trade or business within the
"(v) Foreign base company income.
"(vi) Other operative sections. The rules provided in this section also apply in determining - -
"(A) The amount of foreign source items of tax preference under section 58(g) determined for purposes of the minimum tax;
"(B) The amount of foreign mineral income under section 901(e);
"(D) The amount of foreign oil and gas extraction income and the amount of foreign oil related income under section 907;
"(E) [Reserved] [The tax base for citizens entitled to the benefits of
§ 931 and the § 936 tax credit of a domestic corporation which has an election in effect under §936 - - deleted by amendment]
"(F) [Reserved] [The exclusion for income from
"(G) The limitation
under section 934 on the maximum reduction in income tax liability incurred to
"(H) [Reserved] [Income derived from
"(I) The special deduction
"(J) The amount of certain
"(K) The amount of income from the insurance of
"(L) The international boycott factor and the specifically attributable taxes and income under section 999; and
"(M) The taxable income attributable to the operation of an agreement vessel under section 607 of the Merchant Marine Act of 1936, as amended, and the Capital Construction Fund Regulations thereunder (26 CFR, part 3). See 26 CFR 3.2(b)(3)."
(emphasis and [bracketed material] added)
These sources, then, are what remains after deducting those items that "cannot" "be allocated to some item or class of gross income". 26 CFR § 1.861-1
Whence came this acknowledgement that not all income, "from whatever source derived", is to be included in gross income?
Prior to 1954, the income tax was levied upon "net income". Gross income was, pursuant to the preceding act, the 1939 Code, determined in accordance with the 1940 regulations, of which § 19.22(b)-1 provided:
"(b) Exclusions from gross income — The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
"Sec. 19.22(b)-1. Exemptions—Exclusions from gross income—Certain items of income specified in section 22(b) are exempt from tax and may be excluded from gross income. These items, however, are exempt only to the extent and in the amount specified. No other items are exempt from gross income except (1) those items of income which are, under the Constitution, not taxable by the Federal Government; (2) those items of income which are exempt from tax on income under the provisions of any Act of Congress still in effect: and (3) the income exempted under the provisions of section 116. Since the tax is imposed on net income, the exemption referred to above is not to be confused with the deductions allowed by section 23 and other provisions of the Internal Revenue Code to be made from gross income in computing net income. As to other items not to be included in gross income, see sections 112 and 119 [the predecessor of the current 1.861-1 et seq.] . . . "
(emphasis and [bracketed material] added)
The previous regulations for the income tax laws contained similar, if not identical, acknowledgements that not all income is Constitutionally taxable by the federal government (early versions referred to exempt income being that which is not taxable by the federal government "under fundamental law").
The admission made in these regulations is nothing less than shocking. Gross income is defined in the 1939 Code § 22(a) as virtually everything. Code § 22(b) lists some exemptions, like tax free interest and life insurance. But then the government admits, mumbling up its sleeve, that some of those things listed in § 22(a) are also exempt because they are, "under the Constitution, not taxable by the federal government." If some of those items are not taxable, then why include them in gross income in the first place?
Not to make light of the gravity of the matter before the Court, but the best way to illustrate the import of this revelation is to imagine a new game show: Welcome to another exciting episode of "What's My Tax" with your host, Manny Hauls. Our contestant today is John Q. Public! Are you up there John? Well, COME ON DOWN! Now, as you can see, Johnny, we have an array of doors here, salaries, compensation for services, rents, dividends, interest, and … well, there are too many for us to read them all off, but you can see them.
Now, Johnny, as you can see, we've already marked some of those doors for you, like "life insurance" over there, "tax-free interest" back here, just to get you started, but here's the good news: Some of these other doors are actually Constitutionally EXEMPT! That's right, Johnny, EXEMPT! So here's the deal: You pick one of the doors, and if that door is correct, you get an EXEMPTION!! and you get to keep the money we aren't allowed to take. How's that for a prize? (audience cheers)
But here's the catch: If you choose the wrong door, Beulah the chimp will blow her horn and you get the booby prize: INTEREST and PENALTIES!! (audience goes "Aawwww") This would be funny if it were not true.
Similarly, in the 1939 Code itself, there is a clear indication that not all income is constitutionally taxable income, notwithstanding the 16th Amendment and its "from whatever source derived" phrase. § 115(f)(1) and (h)(2) of the 1939 Code provide:
"(f) (1) GENERAL RULE—A distribution made by a corporation to its shareholders in its stock or a right to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.
. . .
"(h) EFFECT ON EARNINGS AND PROFITS OF DISTRIBUTION OF STOCKS—The distribution (whether before January 1, 1939, or on or after such date) to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities of another corporation, or of property or money, shall not be considered a distribution of earnings or profits of any corporation . . .
"(2) if the distribution was not subject to tax in the hands of such distributee because it did not constitute income to him within the meaning of the Sixteenth Amendment to the Constitution or because exempt to him under section 115(f) of the Revenue Act of 1934, 48 Stat. 712, or a corresponding provision of a prior Revenue Act."
Thus, prior to 1954 the tax was imposed on "net income" and although the Code and the regulations did not disclose what income is beyond the ability of the federal government to tax, nor did they disclose what income is not included within the meaning of "income" in the 16th Amendment, at least it did disclose that some items or sources of income are exempt from taxation.
While the citizen seeking to understand what was expected of him would have to conduct a great deal of legal research to identify the limits of the federal taxing authority and to determine what income is and is not included within the meaning of the 16th Amendment, at least he was, to some extent, "on notice" to look for those exemptions.
The 1954 Code and the regulations promulgated thereunder, which was not considered to have made any significant substantive changes in the income tax law (and which, certainly, did not enlarge the Constitutional scope of federal taxation authority nor the Constitutional definition of "income"), primarily reordered and renumbered the old Code and regulations. The new Code, however, made two very significant "adjustments".
First, the tax was now imposed on "taxable" income. While the term is defined in its hybrid form, "taxable income", in § 63 (drawing our attention from the separate meanings of the words), when placed in context with the second major "adjustment", the term "taxable" income becomes monumentally significant.
Second, except for 26 CFR 1.312-6, each and every reference to the Constitution, to fundamental law, to limitations on the federal taxing authority and to the Sixteenth Amendment's meaning of "income" was purged, erased, banished from both the Code and the regulations.
The previous disclosures of Constitutional exemptions, exemptions under fundamental law, Constitutional limitations of federal taxing authority and the qualified scope of the word "income" within the meaning of the Sixteenth Amendment, were no longer deemed necessary. Since the imposition of the tax itself was limited by changing "net income" to "taxable" income, imposing the tax only on that income the federal government was Constitutionally entitled, able, to tax, tax-able, thereby, technically, excluding all Constitutionally exempt or excluded income from the effects of the tax. By excluding exempt and excluded income in the imposition itself, there was apparently no longer any need perceived by the government to disclose that not all income is "taxable" income.
Thus, § 861 of the Code and its parallel regulations, 26 CFR 1.861-1 et seq. are vestigial disclosures, what is left of the previous § 22(b) exemptions and § 115 qualifications of the meaning of "income". There is, however, another vestigial remnant of those disclosures. Conducting a search of the regulations for "exempt", we are, not surprisingly, led back to § 861, more particularly, 26 CFR 1.861-8T(d)(2)(ii) and (iii):
"(ii) Exempt income and exempt asset defined — (A) In general. For purposes of this section, the term exempt income means any income that is, in whole or in part, exempt, excluded, or eliminated for federal income tax purposes. The term exempt asset means any asset the income from which is, in whole or in part, exempt, excluded, or eliminated for federal tax purposes.
[Note the absence of reference to "fundamental law", "under the Constitution, not taxable by the federal government", or "not income within the meaning of the Sixteenth Amendment"]
"(iii) Income that is not considered tax exempt.
"The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:
"(A) In the case of a foreign taxpayer
(including a foreign sales corporation (FSC))
computing its effectively connected income, gross income (whether domestic or
foreign source) which is not effectively connected to the conduct of a
"(B) In computing the combined taxable income of a DISC or FSC [international or foreign sales corporation] and its related supplier, the gross income of a DISC or a FSC;
"(C) For all purposes under subchapter N of the Code, including the computation of combined taxable income of a possessions corporation and its affiliates under section 936(h), the gross income of a possessions corporation for which a credit is allowed under section 936(a); and
"(D) Foreign earned income as defined in section 911 and the regulations thereunder (however, the rules of Sec. 1.911-6 do not require the allocation and apportionment of certain deductions, including home mortgage interest, to foreign earned income for purposes of determining the deductions disallowed under section 911(d)(6))."
(emphasis and [bracketed material] added)
Although this provision defines exempt income, it, again and still, does not identify or refer us to what those exemptions are or upon what they are based. Instead, it tells us what is NOT exempt, leading to the reasonable supposition that any income other than that which is not exempt is, or at least may very well be, "exempt, excluded or eliminated" from federal income tax.
Congress and the Treasury Department have statutorily and through regulations, respectively, acknowledged that there are limitations upon Congress' power to tax and that there are items and sources of income that are Constitutionally exempt from taxation by the federal government. 1939 Code, and 1940 regulations, supra. The present Code and regulations acknowledge that some income CANNOT be attributed to gross income; that some income is exempt from taxation; that the current Code and regulations specify those sources that CAN be included in gross income for determination of taxable income (§ 1.861-8(f)(1)) and specify those items that are not exempt (§ 1.861-8T(d)(2)(iii)).
All of these foreign sources of the American citizens are of course, properly subjected, as foreign sources, to the payment of a tariff imposed on foreign activity, which takes us back to the what the Supreme Court identifies and tells us in the first sentence of the controlling Brushaber v Union Pacific Railroad Co., 240 U.S. 1 (1916) decision:
stockholder of the Union Pacific Railroad Company, the appellant filed his bill
to enjoin the corporation from complying with the income tax provisions of the TARIFF ACT of
Remembering that tax laws must be strictly construed and that any ambiguity must be resolved against imposition of the tax, it can, therefore, only be concluded that sources of income other than those enumerated cannot be included in the gross income of an American citizen and that items of income other than those items of income specified as not exempt, are exempt from the federal income tax, in regards to the citizens, as opposed to the non-resident persons from whom the tax is collected at the source through withholding. With the sole exception of those sources specifically identified as taxable and those items specifically identified as not exempt, it cannot be said that the tax has "been plainly and clearly laid" on any other sources or items of income of the Defendant citizen. Billings, Merriam, Gould, Tandy Leather, supra.
There is no dispute, nor does the government otherwise contend, that Defendant has received no income, gains, from any of the taxable sources enumerated, nor has he received any non-exempt items of income specified, and therefore, that no tax has been clearly laid on the earnings or income of the Defendant.
It is a virtual certainty that the government will argue that there is another, more direct, and therefore unconstitutional, interpretation of the IR Code and its regulatory provisions detailed hereinabove, "But in statutes levying taxes the literal meaning of the words employed is most important, for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the Government and in favor of the taxpayer." Merriam, supra.
If the provisions of the Internal Revenue Code, even
considering those outside the Income Tax Law (Subtitle A) fail to "plainly
and clearly" lay a tax upon Defendant’s revenues, then they cannot be
given that effect through strained interpretations, implication or inference.
Nevertheless, the government claims that Defendant owes income taxes on those
revenues "though none had been clearly laid thereon by statute. Shades of
Pym and John Hampden, of the
It is, therefore, respectfully submitted that the Internal Revenue Code and regulations do not plainly and clearly impose a tax on Defendant's revenues, and, therefore, there can be no federal income tax owed thereon. Without "plain and clear" imposition of taxes there can be no liability or tax deficiency of taxes owed, and that essential element, liability for a tax deficiency, is lacking in this case as a matter of law. Accordingly, it is respectfully submitted that both counts of the indictment should be dismissed, with prejudice.