WHERE DOES INCOME COME FROM ?
In addressing the issue of precisely what the 16th Amendment authorized, and what the federal “income tax “ legislation, that was enacted and tested and upheld by the Court in 1916, actually taxed, the Court states in Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926), on page 174:
“The Sixteenth Amendment
declares that Congress shall have power to levy and collect taxes on income,
'from whatever
source derived' without apportionment among the several states, and without
regard to any census or enumeration. It
was not the purpose or effect of that amendment to bring any new subject within
the taxing power. Congress already had power to tax all incomes. But
taxes on incomes from some sources had been held to be 'direct taxes' within
the meaning of the constitutional requirement as to apportionment. Art. 1, 2,
cl. 3, 9, cl. 4; Pollock v. Farmers' Loan
& Trust Co., 158
The statement that “Congress already had power to tax all incomes” would seem to be contradicted by the fact that the Supreme Court declared a personal federal income tax on the income of individuals to be unconstitutional in 1895, as is noted by the court, in the Pollock v. Farmer’s Loan & Trust Co. 157 U.S. 429 (1895). So, why did the court declare this?
The key to understanding the court’s statement, of course, is provided in the next sentence of the decision, where it is clearly stated that: “ ‘Income’ has been taken to mean the same thing as used in the Corporation Excise Tax Act of 1909,”.
So
let’s examine the Corporate Tax Act of 1909 (36 Stat. 11, 112). It states:
“That every corporation, joint stock
company or association, organized for profit and having a capital stock
represented by shares ... now or hereafter organized under the laws of the
United State or of any State ... shall be subject to pay annually a special
excise tax with respect to carrying on or doing business by such corporation
... equivalent to one per centum on the entire net income over and above five
thousand dollars received by it from all sources during such year....”
The Corporate Tax Act of 1909 (36
Stat. 11, 112) imposed an indirect
excise tax on corporations, imposed on the privilege of doing business in corporate form, and to be measured by
the amount of corporate income (gains and profits) earned in the taxable period
(year) by the corporation. Black's
Law Dictionary defines an excise as:
Excise taxes
are taxes "laid upon the
manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations,
and upon corporate privileges." Flint
v. Stone Tracy Co., 220
(emphasis added)
The
Supreme Court case specifically referenced by Black's, has provided a clear and
definite scope of the excise taxing authority.
In Flint v. Stone Tracy Co.,
220 U.S. 107 (1911)[1], the
Supreme Court held that:
"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 ... the
requirement to pay such taxes involves the exercise of the privilege and if
business is not done in the manner described no tax is payable...it is the
privilege which is the subject of the tax and not the mere buying, selling
or handling of goods. " Cooley, Const. Lim., 7th ed., 680."
(emphasis added)
The Corporate Tax Act of 1909 provided that the excise tax laid on the corporate business, was to be measured by the corporate income. The 1909 act defined the corporate tax as an excise tax and therefore it is an "indirect" tax under Article I, Section 8, Clause 1, granting Congress the power to “…lay and collect taxes, duties, imposts and excises,…”. Indirect taxes such as an excise are not subject to the rule of apportionment that direct taxes are subject to.
However,
no citizen is subject to any excise tax
on their private activity that is measured by income, because citizens, under
the Flint v. Stone Tracy Co decision
are not subject to any excise tax unless they hold some license, or engage in
the manufacture, consumption or sale of commodities, or operate as a corporation
rather than as an individual.
As
the court noted in U.S. v. Ballard
535 F.2d 400 at page 404, the word "income" is not actually defined
in the Internal Revenue Code. However, the
Supreme Court has consistently defined it in a number of cases. In Stratton's Independence v. Howbert, 231
U.S. 399 (1913), the court wrote:
"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 has decided in the Pollock Case that the income tax 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, . . ."
The
Supreme Court identifies that the constitutional justification for the
corporate "income tax", is as an indirect excise tax "imposed
with respect to the doing of business in corporate form", just as it has been defined under
“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
The
above case applied to a corporation and its corporate income, so if you are not
a corporation, then the Corporation
Excise tax on income does not apply to you. The important thing here is the clarification that the income tax is upheld
as a constitutional indirect excise tax, imposed upon the doing of business in
corporate form. It is not upheld as a
direct tax on all earnings, or even on all income of the citizens.
And
he Supreme Court tells us again in Eisner vs. Macomber, 252
U.S. 189 (1920), on page 205, that:
“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 & Trust Co., 158
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. Brushaber v. Union Pacific R. R. Co., 240
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 , 34 S. Sup.
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.” Eisner vs. Macomber, 252
But these decisions all are addressing the
income of a corporation, which, under
Clearly,
while the definition of income may mean a “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”, it also has inherent
within it the understanding that the gain or profit has been created through
and realized from a specific activity or subject made taxable to the federal
government under Article 1, Section 8, Clause 1, of the Constitution, subject
to imposts, duties or excises.
But
how would this same definition of “income” be made applicable to the individual
citizen who is not deriving earnings from any excise taxable activity that is
made subject to any indirect tax, but is merely exercising his or her right to
an occupation of common law right, without government license or incorporation
being involved?
In Merchants' Loan & Trust Co. v. Smietanka, 255
"It is obvious that these decisions in principle rule the case at
bar if the word "income" has the same meaning in the Income Tax Act
of 1913 that it had in the Corporation Excise Tax Act of 1909, and that it has
the same scope of meaning was in effect decided in Southern Pacific Co. v. Lowe 247 U.S. 330, 335, where it was
assumed for the purposes of decision that there was no difference in its meaning as used in the act of 1909 and in
the Income Tax Act of 1913. 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 Strattons' Independence v. Howbert, arising under the Corporation Excise Tax Act
of 1909, with the addition that it should include "profit gained through
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 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."
In Southern Pac Co. V. Lowe , 247 U.S. 330
(1918), the court noted:
We must reject in this
case, as we have rejected in cases arising under the Corporation Excise Tax Act
of 1909 (Doyle, Collector, v. Mitchell
Brothers Co., 247
The
word "income" has the same meaning in ALL the income tax acts of
Congress. That meaning being a realized gain or profit (on or from
capital, labor or assets) EARNED BY A TAXABLE
SUBJECT of the federal government.
Corporations, trusts and foreign “persons”
(both non-resident alien individuals and foreign corporations), are all legitimate taxable subjects of the
federal government.
American Citizens are not the taxable
subjects of the federal government as it is well known that the power to tax is
the power to destroy, and under a dejure application of all of the
provisions of the United States Constitution, the federal government does not
legitimately possess a lawful power to destroy the Sovereign American People,
whom it is tasked with the duty of representing, and over whom it is never
given the power to destroy, as it would be obviously ridiculous for the
representative to be empowered to destroy those whom it represents.
The Supreme Court has also ruled in Eisner vs. Macomber,
252 U.S. 189 pg 205 (1920):
" 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 & Trust Co.,
158
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. Brushaber v. Union Pacific R. R.
Co., 240
The Supreme Court has
plainly stated that an individual's earnings cannot be taxed directly: but an
individual's income CAN be taxed if it was derived from an activity that is
taxable to the federal government in an indirect manner through the enacted imposition
of legislation imposing either a duty, an impost or an excise.
In Stratton's Independence v. Howbert, 231 U.S. 399 (1913), the court stated:
" 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 populations, 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.
This
meaning of income, as used in the 16th Amendment and in all of the taxing
statutes in title 26, is confirmed by a number of Supreme Court decisions,
which have never been reversed or repealed.
The 1921 Supreme Court decision of Merchant’s Loan & Trust Co v. Smietanka, 255
U.S. 509, could not have not said it more clearly when it held on pages
518-519:
“The word (income) 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 (of 1909) and that what that meaning is has now become
definitely settled by decisions of this court.”
Therefore the meaning of “income” in
our revenue laws means a corporate profit as is
clearly
stated in the above decision and as confirmed in the following five other
Supreme Court decisions.
“Certainly the term “income” has no broader meaning
in the 1913 Act than in that of 1909 (See Stratton’s Independence v. Howbert, 231 U.S. 399, 416, 417), and for the present
purpose we assume there is no difference in its meaning as used in the two
acts. Southern Pacific v. Lowe, 247
(Emphasis added)
And before the 1921 Act this Court has indicated (see
Eisner v. Macomber, 252 U.S. 189, 207), what
it later held, that “income,” as used in the revenue acts taxing income,
adopted since the Sixteenth Amendment, has
the same meaning
that it had in
the Act of 1909. Merchant’s Loan &Y Trust Co. v. Smientanka,
255 U.S 509, 519; see Southern Pacific Co. v. Lowe, 247 U.S. 330,
335 Burnet v. Harmel, 287 U.S.103, (1932)
“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
(Emphasis
& capitalization added)
Therefore, there can be no doubt
that “income” within the meaning of these decisions means gain or profit “arising from corporate activities.” Therefore, “corporate profit” and “income” in
the “constitutional sense” both represent the same thing, and only mean income
on earnings derived from the federal jurisdiction to tax indirectly, as
authorized under Article I, Section 8, Clause 1.
However,
as explained in the Stratton’s decision, the 1909 tax on corporate
income was imposed as an “excise” tax on the granted “privilege” of operating
as a corporation. The individual
however, not enjoying any federal privilege (like incorporation) is not subject,
or subjected to, any excise tax imposed on his earnings in a direct manner, or
removed from federal subjectivity under Article I, Section 8, Clause 1.
"The
individual may stand upon his constitutional rights as a citizen. He is
entitled to carry on his private business in his own way. His power to contract
is unlimited. He owes no duty to the state or to his neighbors to divulge his
business, or to open his doors to an investigation, so far as it may tend to
incriminate him. He owes no such duty to the state, since he receives nothing
therefrom, beyond the protection of his life and property. His rights are such
as existed by the law of the land long antecedent to the organization of the
state, and can only be taken from him by due process of law, and in accordance
with the Constitution. Among his rights are a refusal to incriminate himself,
and the immunity of himself and his property from arrest or seizure except
under a warrant of the law. He owes nothing to the public so long as he does
not trespass upon their rights." Hale
v. Henkel, 201
A person’s possessions obviously include
the money and assets in his possession, as well as the fruits of one’s own
labor. The court has also ruled that a man’s labor is
inviolable and is a guaranteed right.
"The common business and callings of
life, the ordinary trades and pursuits, which are innocuous in themselves, and
have been followed in all communities from time immemorial, must therefore be
free in this country to all alike upon the same conditions. The right to pursue
them, without let or hindrance, except that which is applied to all persons of
the same age, sex, and condition, is a distinguishing privilege of Citizens of
the
"That the
right to conduct a lawful business, and thereby acquire pecuniary profits, is
property, is indisputable." Truax v. Corrigan,
257
"A state
may not impose a charge for the enjoyment of a right granted by the Federal
Constitution." Murdock V.
"A
"privilege" is whatever business, pursuit, occupation, or vocation effecting
the public, the legislature chooses to declare and tax as such." Corn v. Fort, 95 S.W. 2d, 620.
"…but
legislature cannot name something to be a taxable privilege unless it is first
a privilege." "Right to receive income or earnings is right belonging
to every person, and realization and receipt of income is therefore not a
"privilege" that can be taxed." Jack Cole Company v. MacFarland, 337 S.W.
2d 453.
"[9] The
individual, unlike the corporation, cannot be taxed for the mere privilege of
existing. The corporation is an artificial entity which owes its existence and charter
powers to the state; but the individuals’ rights to live and own property are
natural rights for the enjoyment of which an excise cannot be imposed." Redfield v. Fisher. 292 P. 819.
"Right to
earn a living is an inalienable right guaranteed by the Bill of Rights of the
constitution." City of Louisville et
al. v. Sebree, 214 S.W. 2d 248.
"Evidently
Congress adopted the income tax 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
There is no longer any
doubt that personal property, including a citizen’s labor and wages, have never been legitimately considered
constitutionally taxable to the federal government, nor has it ever been
declared such by the Supreme Court of the
Again,
here is what the Court said in Stratton’s
Independence, Ltd. V. Howbert, supra :
"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 populations, 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."
The important and key phrase to take note of is "upon the conduct of business in a corporate capacity". The court is clearly consistently saying in all of these cases that (1) corporate income taxes are not really taxes upon the corporation’s income, but are an excise tax that is measured by the size of the corporation’s income derived from earnings.
But citizens are not subject to the
payment of any excise taxes on earnings derived from an exercise of
their right to work at a common law occupation.
So, the only places that federally taxable “income” can come from, are from within the true, constitutionally
provided, federal jurisdictions, both territorial and subject matter as
authorized under Article 1 Section 8, Clause 1, to tax indirectly in the form
of imposts, duties and excises. No earnings derived outside of these federal
jurisdictions is taxable income to the federal government, as “the 16th Amendment conferred no
new power of taxation” (see Stanton v. Baltic Mining Co., 240
US 103, 112 (1916)), and “It was not the
purpose or effect of that amendment to bring any new subject within the taxing
power” (see Bowers v. Kerbaugh-Empire
Co, supra), and citizens were
not taxable subject of the federal government before the adoption of the 16th
Amendment, and therefore THEY ARE NOT
NOW.
[1] Again, Flint v. Stone Tracy Co. is controlling and Constitutional law, having been cited and followed over 600 times by virtually every court as the authoritative definition of the scope of excise taxing power.