What Is Constitutional Taxable Income ?

 

            We have already discussed two examples of Constitutional exemption from taxation acknowledged by the Treasury Department, those activities that are beyond the federal government's jurisdiction, and those fundamental rights that are endowed by a superior sovereignty, but what about the regulations acknowledging that some revenues "do not constitute income within the meaning of the Sixteenth Amendment to the Constitution"?

 

            Clearly "wages, salaries and fees personally earned" in the exercise of an occupation of common right, are exempt, not only because the right to earn a living is exempt as a fundamental right, but because "'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. . . .' Adam Smith's Wealth of Nations, Bk. I. Chap. 10." Butchers' Union, supra.

 

            In addition to Webster and Black's above, the Supreme Court weighed in on the definition of "income", the same year the word was used in both the Sixteenth Amendment and the first version of the current imposition of a tax on income. In Stratton's Independence v. Howbert, 231 U.S. 399, 400; 34 S.Ct. 136 (1913) the Supreme Court stated:

 

"Income may be defined as the gain derived from capital, from labor, or from both combined."

 

 

and

 

" . . . And, however the operation shall be described, the transaction is indubitably 'business' within the fair meaning of the act of 1909; and the gains derived from it are properly and strictly the income from that business; for "income" may be defined as the gains derived from capital, from labor, or from both combined, combined operations and here we have of capital and labor." Id at p. 415

                                                                                    (emphasis added)

 

            Five years later, the Supreme Court in Doyle v. Mitchell Brothers Co., 247 U.S. 179, 38 S.Ct. 467 (1918), states:

 

"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.'" Id at 184-5

 

                                                                                        (emphasis added)

 

            As was pointed out, supra, the Court in Brushaber indicated that in the event that receipts that, if taxed, would have the effect of taxing person or property, the Sixteenth Amendment would not prevent it from applying the rule of apportionment, and one such occasion was presented in Towne v. Eisner, 245 U.S. 418, 38 S.Ct. 158 (1918). The district court had ruled that the stock dividend was included in the government's definition of income subjected to the tax. Justice Holmes, writing for the Court:

 

"But it is not necessarily true that income means the same thing in the Constitution and the act. A word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used. . . .The plaintiff says that the statute as it is construed and administered is unconstitutional. He is not to be defeated by the reply that the Government does not adhere to the construction by virtue of which alone it has taken and keeps the plaintiff's money, if this court should think that the construction would make the act unconstitutional. Id at 425

                                                                                           (emphasis added)

 

            The Supreme Court did think that construction would make the act unconstitutional. The Court went on to hold that the stock dividend was a conversion of capital from one form to another, and, therefore, was not income, regardless of whether the Government's definition included such conversions in its definition.

 

            In another stock dividend case, Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189 (1920), the Supreme Court ruled the Revenue Act of 1916 (successor of the 1913 income tax) unconstitutional insofar as it applied to stock dividends. The Court held that:

 

". . . 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 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 a gain, 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." Id at 207

                                    (italics the Court's, bold emphasis added)

 

            The only addition or supplement to the Supreme Court's definition of "income" "within the meaning of the Sixteenth Amendment" is in Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 75 S.Ct. 473 (1955).[1]   In that case, the Court determined that where treble damages had been awarded in a fraud claim and was paid and received, the exemplary damages, those in excess of the compensatory damages, were income and subject to taxation.

 

            The Court in Glenshaw Glass distinguished Eisner v. Macomber, stating that the additional damages were "accessions to wealth."  In fact, however, the reasoning behind Eisner v. Macomber was actually no different from that in Glenshaw, in that the reason stock dividends were found not to be income is that they were not accessions to wealth, i.e., that the corporation was no worse off for the dividend nor was the stockholder any better off for the dividend.

 

            The applicability of the Eisner definition of income to Glenshaw's exemplary damages was apparently misunderstood because the compensatory damages were never at issue and were not regarded in the analysis. Had the Court done so, it would have realized that in order to recover three hundred percent, the plaintiff must have first incurred one hundred percent. In other words, the income was three hundred less one hundred, the one hundred being the basis, the capital, that produced a gain, profit or "accession to wealth" of two hundred. Glenshaw Glass received three hundred, but its wealth was only enhanced by two hundred. Macomber received additional shares, but his wealth was not enhanced. Whether Eisner v. Macomber or Glenshaw Glass, the measure of income is in the GAIN realized.

 

            There is no doubt that had the government contended that all of the treble damage award in Glenshaw was income, the Court would have rejected such a position. Likewise, if the government were to contend that a widget shop owner could only deduct his shop expenses, but not his cost of goods, from his gross revenue, the Court would not stand for that, either, because that would not only be a tax on the income (gain or profit), but on the capital, as well.

 

            Gain or profit is, without question, that portion of monies received that is above and beyond what was given up, either in property or expense, in order to receive those funds. Gross revenue less cost and overhead equals profit or gain—income. Neither the Court nor the government gave a thought to whether the compensatory damages were income, having backed those compensated damages out of the equation to begin with. Given the understanding, then, that in order to be income there must first be a gain, or profit, we are prepared to examine whether wages, salaries and fees personally earned (hereinafter referred to collectively as "wages" in the interest of brevity), are income within the meaning of the Constitution.

 

            The Code defines gross income as "income from . . . compensation for services". Since income is gain, profit, then that definition is actually "that portion of compensation for services that is gain or profit." The government's contention is that the gain or profit is everything received for compensation for services, thus with respect to wages the government contends that gross revenue and gross income are the same. Wages are the only revenue that the government treats as equivalent to income.

 

            A tax on gross revenue as opposed to net gain is not an income tax, but a tax on both capital and income. State Tax on R. Gross Receipts, 15 Wall. 284, 21 L. Ed. 164; Philadelphia & S. Mail S. S. Co. v. Pennsylvania, 122 U.S. 326, 30 L. Ed. 1200; Maine v. Grand Trunk R. Co., 142 U.S. 217, 35 L. Ed. 994; and since a tax on gross revenue is taxing both income and capital, insofar as the tax on capital is concerned it is not indirect nor is it 'exempt' from the requirement of apportionment.

 

            The problem with wages is that, unlike every other form of "income" described in the code, the government does not permit the wage-earner to back out what he has given up in order to receive those wages. It has been established that a man's labor is his property, the capital. Thus wages are the purchase price for that property. Any other exchange of property for money must generate a profit before it is considered income, so on what basis does the government contend that all of the money exchanged for his property must be and is profit or gain?

 

            While many have contended that wages are not income because they are a fair and equal exchange of value for money and, therefore, a break-even transaction, that position would be difficult to maintain. The sale of a widget is, presumably, an equal exchange of value for money but such a transaction could generate income (or loss) to the seller.

 

            To contend, however, that there is no value contributed by the seller of labor for wages, and that, therefore 100% of all wages are profit, i.e., income, is not only equally untenable, but is offensive to the senses of reason and justice.

 

            Some may be paid far more than the true value of their effort, exertion and proficiency.  Others may be paid only a fraction of the value of their labor and skill. It is impossible to determine what portion of wages is basis and what part is gain.

 

            It is equally impossible, however, to seriously contend that all wages are received in exchange for nothing. As absurd as such a proposition sounds, that is what the government is saying when it states that the cost basis for wages is zero.  If, however, the wage-earner must give up something in order to receive his wages, then the wages he receives are not free.  If the wages are not free, then they are not 100% profit. Employing a Glenshaw approach, if he must first sacrifice a loss to another in order to receive the wages, then only the "exemplary" portion of his wages is income.

 

            The remainder is capital. What the court termed “human capital” in Murphy v. I.R.S., 460 F.3d 79 (D.C. Cir. 2006).

 

            Assuming that any of the wage is above and beyond the amount of expenditure on the wage-earner's part, a tax on the entire wage would have to be considered a tax on both the capital, the expenditure, and the profit, and would, therefore be a tax on the capital, or property, portion of the wage. This is exactly what Chief Justice White was describing when he stated that should the application of the income tax have the effect of taxing property or person, rather than profits and gains, alone, then "duty would arise to disregard form and consider substance alone and hence subject the tax to the regulation as to apportionment." Brushaber, supra.

 

            If any portion of wages represents what the wage-earner had to give in exchange for the wages, then that portion, however minute or great, is not income, is not a gain or an accession to wealth, and, therefore, that portion is not "income within the meaning of the Sixteenth Amendment" and would be in conflict with the Constitution to the same and identical extent as in Towne and Eisner, supra. It is a tax on gross receipts, which includes the basis or capital, and, therefore, not an income tax. Gross Receipts, Philadelphia Steamship, Grand Trunk and Brushaber, supra.

 

            The distinction here is not one of mere form or technicality. It is a distinction of substance.

 

            So, what does a wage-earner give up in order to receive his wages? It has been said that "When man is born his days are numbered and filled with trouble."  So, too are his work days numbered and filled with toil and exertion. The term "expending" energy is no different than "expend"iture of money or goods. The wage-earner has made an expenditure and received a wage in return.

 

            This and every other court has on innumerable occasions suffered through the monotony of an expert witness recounting statistical and actuarial data in evaluating the remainder of a disabled plaintiff's work life. While those witnesses usually disagree, having used different assumptions and/or data pools, the one thing upon which every one of them does agree is that the work life of any person is not infinite. We are all mortal. These experts will also agree that work life and life expectancy are rarely the same, but in both instances they are not infinite.

 

            When a wage-earner finishes his year of labor and receives his W-2, it reflects his gross revenue, what he received, not his gross income, what he gained. It does not reflect what he gave up in exchange. He has over the year received the total shown on the W-2, and during the same year he had expended a great deal of energy and labor, he has given a year out of his work life a year out of his life expectancy to another in exchange for his wages. And, yet, the government contends that those wages were all profit, all gain, and that the basis for his earnings was $0.00. He contributed nothing to the exchange and was paid for nothing.

 

            The obvious conflict in the government's assessment of wages as having been paid for nothing is that if that is the case, then the wages are gratuities, gifts, not "income". The government cannot have it both ways, to state that the wage-earner on the one hand realized earnings, or income, but on the other hand received something for nothing, a purely gratuitous gift, is nonsense.

 

            If we attempt to imagine the most "worthless" employment possible, one that required the absolute least amount of expenditure of effort and no knowledge or skill, we would still have to admit that no matter how much or how little such an employment paid, the employee is not paid for nothing. A night watchman, whose only requirement is that he remain in the premises overnight, is still giving up something for his wages. He is not being paid for nothing in exchange.

 

            In Bailey v. Drexel Furniture Co., supra, Chief Justice Taft stated "All others can see and understand this. How can we properly shut our minds to it?" Id at 37.

 

            A few examples should demonstrate that this distinction between wages, salaries and fees personally earned is one of substance:

 

Example 1: Gains on Capital

 

            Joe places $100,000 in a certificate of deposit earning 6% per annum. Joe gave up his $100,000 for a year and at the end of the year he received $106,000 of which only $6,000 would be income as defined by the act. Joe still has his original $100,000 and can 'rent' it out again for another year, but he pays taxes only on the $6,000 gain.

 

Example 2: Gains on Sales

 

            Tom buys a widget for $1 and sells it for $2. Tom gave up $1 in order to receive $2, but only the additional $1 is considered income. Tom still has his dollar back and can purchase another widget to sell, but he pays taxes only on the $1 gain

 

 

Example 3: Gains on Labor

 

            Bob pays Bill $50 to unplug Mrs. Haversham's drain for which Bob charges Mrs. Haversham $75. Bob gave up $50 in order to receive $75, but only $25 is considered income, his realized gain of $25 on Bill's labor. Bob still has his original $50 that he can use to purchase more labor that he can sell for profit, but he pays taxes only on the $25 gain.

 

            But what about Bill's $50?  What has Bill given up? Nothing?  Bill gave up a day out of his life, he expended his effort and skill, employed the use of his working tools. Bill no longer has his day or his labor, both are spent. He cannot, even with every penny of his $50, buy another day or recover the effort he expended, yet according to the government, his $50, every bit of it, is profit, gain, accession to wealth and was received in exchange for nothing. What Bill gave up to receive his $50 was not "nothing", it was "'The property which every man has in his own labor, [and] as it is the original foundation of all other property, so it is the most sacred and inviolable. . . .' Adam Smith's Wealth of Nations, Bk. I. Chap. 10." Butchers' Union, supra.

 

            Joe recovered his $100,000, and paid no tax on it; Tom recovered his $1 and paid no tax on it; Bob recovered his $50 and paid no tax on it; but Bill can never recover his day, energy or labor, but pays tax on his gross revenue, including the value of his day, energy and labor and even if the value of that day, energy and labor exceeds the gross revenue!

 

            We can all agree that a person's labor is not only his property, his capital, but that it is depleted in its employment and, eventually, is exhausted and totally spent. We have two major, landmark Supreme Court decisions, still controlling law, dealing specifically with that issue, and the decisions of the Supreme Court in those two cases makes a conclusion that an income tax on wages is not an income tax, but a tax on gross receipts, taxing both income and capital, and, therefore, unconstitutional.

 

            Stratton's Independence v. Howbert, 231 U.S. 399, 400; 34 S.Ct. 136 (1913) and Stanton v. Baltic Mining Co., 240 U.S. 103, 36 S.Ct. 278 (1916) both dealt with challenges to a tax on profits of mining companies. The first dealt with the Corporation Tax Law of 1909 and the latter with the Income Tax Law of 1913.

 

            The mining companies were contending with an identical issue as we have here with wages, salaries and fees personally earned. They were engaged in a business that required them to deplete their ore deposits in order to conduct that business. They not only incurred costs of operations, overhead and cost of sales, etc., they incurred the depletion of a finite, albeit of unknown quantity, capital asset. At the end of the mine's life, all of the ore would be gone, just as at the end of our work lives, our ability to earn will be gone. Our human capital will have been exhausted, “sold out”.

 

            The wage issue is exactly the same. Not only does one personally earning a wage, salary or fees incurring costs for tools, work clothes and other expenses, he is depleting his working life along with a goodly portion of his life itself, a finite, albeit of unknown duration, capital asset, his "most sacred and inviolable" asset.

 

            The Supreme Court in both mining cases resolved the problem by determining that the tax, insofar as Baltic was concerned, was not an income tax at all, but a tax on the exercise of corporate privileges and the privilege of conducting mining operations that was "measured in income."

 

            In Stratton's Independence, that was the case. The law in question was not an income tax, per se, but an excise on the exercise of corporate privileges, the Corporation Tax Law of 1909. The Court in Stratton's Independence pointed out that Stratton's was a corporation and that it was engaging in business activities that generated mining products, two of the proper objects of an excise. On that basis the Court held that the tax was not on the income of the mining operation, but rather an excise on the conducting of the business of a mining operation that was measured in income.

 

            But in Baltic Mining, the Court was dealing with the Income Tax Law of 1913, the same law it dealt with in Brushaber and the direct statutory ancestor of our present income tax law. The tax was not a corporation or mining operations tax, it was an income tax and identified itself as such.

 

            The Court had only two options: 1) Find that the income tax was taxing both the income and the capital and, therefore, unconstitutional, or 2) find that the income tax was taxing something else. It went with the something else. After stating the case and respective positions, the Court briefly and simply stated:

 

". . . independently of the effect of the operation of the Sixteenth Amendment it was settled in Stratton's Independence v. Howbert, 231 U.S. 399, that such a tax is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations." Id at 114

                                                                                    (emphasis added)

 

            The clear and unmistakable message here is that the only tax that could tax more than income, gross receipts without allowance of deduction for the depletion of the ore body, was a corporate or manufacture of commodities based excise tax. If the income tax could constitutionally tax income of a mining operation, which would include taxing the depletion of its ore body, then the Court would have simply said so. It did not because it could not.

 

            In the case of wages, salaries and fees personally earned in an occupation of common right, there are no corporate privileges being exercised. The wage-earner is not (at least not for himself, See Calamaro, supra) manufacturing a commodity or conducting mining operations. All he is exercising, and exhausting in the process, is his body, mind and his God-given right to earn a living with both, all at the expense of the loss, or cession, of a good portion of his lifetime here to another in exchange for a wage.

 

            There is no alternate subject of excise. No "something else", as in Baltic Mining, and the only conclusion we can reach, based upon the sound, ample and still controlling principles set out in all of the Supreme Court cases referred to herein, is that any tax that taxes 100% of wages personally earned has to be taxing not only the gain the wage-earner realized, if any, but also the asset that the wage-earner gives up in exchange for those wages, salaries and fees.

 

            It is, therefore, respectfully submitted that insofar as the government purports to apply the income tax law as imposing a tax on wages, salaries and fees personally earned by an individual engaged in an occupation of common right, it is in conflict with Article I, § 9, cl. 4, of the Constitution, and is, as so applied, unconstitutional and not entitled to enforcement.

 

            Based upon recent cases involving claims that wages are not income there is an apparently common misconception, an erroneous understanding or belief, that the issue of whether wages, salaries and fees personally earned are "income" within the meaning of the income tax law and, particularly, "within the meaning of the Sixteenth Amendment", has been settled. It has not.

            One government official contends that wages are constitutionally taxable income because the Supreme Court has not found them to be otherwise.[2]   The same reasoning could be employed to conclude that since the Supreme Court has not found wages, salaries and fees personally earned to be lawfully and constitutionally taxable by the federal government, they are not.

 

            Although numerous cases have been cited as supporting that misconception, a review of the cases commonly cited as such reveals that they fail to support that conclusion. The Supreme Court has never considered the issues here presented, and until it does the latest enunciations from that Court are the law of the land. The position here advanced is not only supported, but mandated, by the current and controlling pronouncements of the principles involved by that body, and no District or Circuit Court can override or negate, much less overturn those controlling Supreme Court pronouncements.

 

            The Court is urged to scrutinize any cases cited to the contrary, and it is suggested that a careful review of those cases mistakenly cited will, it is hoped, clarify that the issue is still in urgent need of resolution and that in the cases generally relied upon to the contrary either the court involved has not actually dealt with the issues here presented, did not have the issue before it, stated no reasoning on any dictum to that effect or is totally without weight.

 

            The income tax is a tariff, imposed on all earnings of the foreign “persons” identified in the law (see sections 26 USC § 1441, 1442) as being made subject to the withholding of money as tax from their payments by the federal tax collector, in the form of a Withholding Agent (see sections 26 USC § 1441, 1442), who is made liable for the payment of the income tax that he collects from those foreign persons, just as the store is made liable for the payment of the sales tax that it collects from its customers for the State. 

 

            However, while all of a foreign person’s economic activity and earnings may be taxed and taken by the federal government in this indirect manner under a tariff (see Art. 1, § 8, Cl. 1), a citizen’s earnings may not, because citizens are not subject to the payment of a tariff on their domestic activity.  To assume and conclude that all of an American citizen’s earnings are taxable as “income”, like the foreigner’s, violates both the Constitution and the history of the courts in recognizing the right of the citizens to enjoy the fruits of their own labor, without government taking from the mouth of labor the bread it has earned.

 


A Direct tax, or an indirect tax, but never both

 

            It has long been held, as recognized by Justice Fields in his supporting opinion in the Pollock v. Farmer’s Loan & Trust Co., 157 U.S. 429 (1895), decision, at pg. 599, that under the Constitution:

 

“There is no such thing in the theory of our national government as unlimited power of taxation in congress. There are limitations, as he justly observes, of its powers arising out of the essential nature of all free governments; there are reservations of individual rights, without which society could not exist, and which are respected by every government. The right of taxation is subject to these limitations. Citizens' Savings Loan Ass'n v. Topeka, 20 Wall. 655, and Parkersburg v. Brown, 106 U.S. 487, 1 Sup. Ct. 442.”  

 

“The inherent and fundamental nature and character of a tax is that of a contribution to the support of the government, levied upon the principle of equal and uniform apportionment among the persons taxed, and any other exaction does not come within the legal definition of a 'tax.'

 

Hamilton says in one of his papers (the Continentalist): 'The genius of liberty reprobates everything arbitrary or discretionary in taxation. It exacts that every man, by a definite and general rule, should know what proportion of his property the state demands; whatever liberty we may boast of in theory, it cannot exist in fact while [arbitrary] assessments continue.'” 1 Hamilton's Works (Ed. 1885) 270.   Pollock, supra, at 596

                                                                                                (emphasis added)

 

            The opinion of the court itself in the Pollock decision also recognizes this limitation on the federal power to tax, where Justice Fuller writes at pg. 557 of the decision:

 

 

“Although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words 'duties, imposts, and excises,' such a tax for more than one hundred years of national existence has as yet remained undiscovered, notwithstanding the stress of particular circumstances has invited thorough investigation into sources of revenue.”

                                                                                                (emphasis added)

 

            The Justices, here in the Pollock case, are simply making note of the well known and long-established fact that the income tax, like any other tax under the Constitution, must be either a uniform indirect tax, or an apportioned direct tax.   It cannot be both.  Under the Constitution, no tax can be both a direct tax – where it is apportioned to the State governments for collection, and an indirect tax – where it is uniformly collected from subject parties involved in activities subject to indirect taxes laid as duties, imposts and excises.   The income tax must, and can only, be one or the other, never both.  

 

            It has been identified and demonstrated very clearly and succinctly from the specific provisions of the statutes, that there is very definitely an indirect implementation for the collection at the source of the income tax implemented in the law, through the legislatively created duty of the Withholding Agents to act as tax collectors for the federal government and “to retain” by withholding, “and pay” to the Treasury, “the sum of the (income) taxthat the Withholding Agents are made liable for the payment of under Section 1461, precisely as identified by the Supreme Court in its controlling Brushaber and Stanton decisions taken in 1913.

 

            And, in recognition of the apparently forgotten constitutional limitations on the federal power to tax, Justice Fields continues from his opinion in Pollock:

 

There is no safety in allowing the limitation to be adjusted except in strict compliance with the mandates of the constitution, which require its taxation, if imposed by direct taxes, to be apportioned among the states according to their representation, and, if imposed by indirect taxes, to be uniform in operation and, so far as practicable, in proportion to their property, equal upon all citizens. Unless the rule of the constitution governs, a majority may fix the limitation at such rate as will not include any of their own number.”  Pollock v. Farmer’s Loan & Trust Co., 157 U.S. 429, at pg. 607 (1895)

 

 

            The Federal Regulations governing I.R.S. conduct acknowledge these limits on the federal taxing power, and preserve the Fifth Amendment protections of the individuals.  At 26 CFR § 601.106(f)(1) it clearly specifically and states:

 

(1) Rule 1.  An exaction by the U.S. Government, which is not based upon law, statutory or otherwise, is a taking of property without due process of law, in violation of the Fifth Amendment to the U.S. Constitution. Accordingly, an Appeals representative in his or her conclusions of fact or application of the law, shall hew to the law and the recognized standards of legal construction.  It shall be his or her duty to determine the correct amount of the tax, with strict impartiality as between the taxpayer and the Government, and without favoritism or discrimination as between taxpayers.

                                                                                     (emphasis added)

 

 

            In Botta v. Scanlon, 228 F. 2nd 304 (1961), the court recognizes in its decision the very real limits of the statutory powers of the federal employees to make arbitrary determinations of liability for federal income tax, without relying upon statutory provisions to serve as the legal foundation for the determination, invoking both a recognition of the limits of power of the federal employees to create liability for tax through their own actions, and to provide fundamental due process in the form of judicial review.

 

“The reasonable construction of the taxing statutes does not include vesting any tax official with absolute power of assessment against individuals not specified in the statutes as persons liable for the tax without an opportunity for judicial review of this status before the appellation of “taxpayer” is bestowed upon them and their property seized.”

                                                                                           (emphasis added)

 

 

            Where officers, agents and employees of the Internal Revenue Service are concerned, there can be no plea of ignorance concerning the necessity of due process.  Regarding what constitutes "due process", the courts have established in Ideal Farm, Inc. v. Benson, D.C. N.J. 1960, 181 F Supp 62, affirmed 288 F2d 608, Certiorari denied 83 S.Ct 1087, 327 US 965, 10 L.Ed.2d 128, that

 

“Administrative due process requires:

           

(1) opportunity to be heard, 

(2) due notice of hearing ,

(3) fair conduct of hearing, 

(4) support in record for decision,

(5) submission of proposed findings and tentative report, and 

(6) opportunity to file and

(7) to be heard upon exceptions to the report."  

 

 

Black's Law Dictionary 500 (6th ed. 1990), cites U.S. Department of Agriculture v. Murry, 413 U.S. 508 [93 S.Ct. 2832, 37 L.Ed.2d 767] (1973); and Stanley v. Illinois, 405 U.S. 645 [92 S.Ct. 1208, 31 L.Ed.2d 551] (1972)];  stating: 

 

"Due process of law implies the right of the person affected thereby to be present before the tribunal which pronounces judgment upon the question of life, liberty, or property, in its most comprehensive sense; to be heard, by testimony or otherwise, and to have the right of controverting, by proof, every material fact which bears on the question of right in the matter involved.  If any question of fact or liability be conclusively presumed against him, this is not due process of law." 

                                                                                           (emphasis added)

 

In Jeffries v. Olsen, D.C. Cal 1954, 121 F.Supp 163, the court states:

 

"The fair hearing essential to meet minimal requirements of due process includes not only rudimentary fairness in conduct of hearing when and where held, but also reasonable fair opportunity to be present at time and place fixed to cross-examine any opposing witnesses, to offer evidence, and to be heard at least briefly in defense."

                                                                                           (emphasis added)

 

 

 



[1] Cited and followed in Murphy v. I.R.S., 460 F.3d 79 (D.C. Cir. 2006)

 

[2] See "Some Constitutional Questions Regarding the Federal Income Tax Laws", by Howard Zaritsky, Legislative Attorney, updated by John R. Luckey, research assistant, Congressional Research Service, Library of Congress, May 25, 1979, updated September 26, 1984, p. 8