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This ain't advice.
Dale Eastman:
Admin editorial comment added January 11, 2012:
This subject has been addressed on the main website and in better detail.
http://www.synapticsparks.info/tax/
I'm not Dear Abby. I'm not a CPA (certified public accountant). I'm not an EA (enrolled agent). I'm not an "income tax preparer". I'm not a lawyer. So when you ask me questions, my replies are legally worthless. My replies are not tax advice, financial advice, nor legal advice. When I answer questions, you are getting a layman's answer.
With the legal stuff out of the way, I have immunized myself from entrapment. At this point in my own studies, I have become very wary of the immoral, unholy cretins that infest the IRS... No offense meant to the few that are not immoral, unholy cretins. With that said, your post, but not your identity is being made public. My purpose in doing this is to further the process of education regarding the issues.
Good morning.
A random internet search brought me to some posts of yours touching on the income tax. I've dabbled in and out of the subject for a decade now and I like to dip my toe back into the water on occasion.
Currently this is my situational awareness:
I'm familiar with most of the major "arguments" against the income tax; 861, Schiff, "Show me the Law", Cryer, etc. I have had several discussions with Tommy Cryer who helped formulate my current understanding of the matter. However, he is still pursuing what I feel to be a self-evident fallacy, focusing on the missing "liability" statute in Congress' laws, which I feel burdens the majority of the movement. It's my position that the liability stems from constitutional imposition as well as Supreme Court rulings, as such power to define the scope of taxation is superior to Congress' power, and thus will never be seen in the statutes.
Still, however, I am convinced that the income tax is being foisted upon us fraudulently. In my limited resourced way, I'm trying to nail down the absolute definition of the term "Income" that Congress is bound by. We have the Constitutional imposition of the excise; the Supreme Court's ruling that income is indeed an excise, as well as Eisner's and Brushaber's definitions.
What I take away from all that is this: Income is gain derived from the employment of capital. It's a privileged accession of wealth and fully taxable as such. It is not part of, nor equated to the original capital or its value-equivalent.
Where I'd like to go with that, and you may have already derived or at least come across the arguments, is separating what is taxable as income from what is non-taxable property compensation. That is, when one trades one's labor/intellect/time for market-rate compensation, that is an exactly-even trade with no room for profit, thus precluding common employment from being subject to the income tax for lack of income.
Can you then help me eliminate the distractions and get right to the heart of the definition, and thus scope of the term income?
Specifically:
What is the definition of income, and has it been obfuscated/expanded to include labor compensation in any form?
What is the criteria for being subject to the W-4 by both employer and employee?
Does being an employee subject someone to falling under the scope of the employer's privileged activity of running a business?
Where does the Supreme Court equate labor with property; i.e.- how do we equate labor/intellect/time with valued capital expended and thus compensated?
How do we argue away "You started with zero dollars and ended with $XXX, so you clearly profited $XXX. (Clearly the test for income does not hinge on the possession of dollars).
These are the questions I need to lock down, and I don't feel I have the right to claim the answers just off of my own internet searches.
Thanks!
Dale Eastman:
Can you then help me eliminate the distractions and get right to the heart of the definition, and thus scope of the term income?
Uh, No. I can't help you.
What I can do is examine the topics you have brought to my attention. Your last question is a topic that has been rattling around in the back of my head for awhile, so I'll address it here as a form of thinking out loud in preparation to eventually putting it on the main web site. In addressing that question, I'll be addressing most of your others.
Specifically:
What is the definition of income, and has it been obfuscated/expanded to include labor compensation in any form?
What is the criteria for being subject to the W-4 by both employer and employee?
Does being an employee subject someone to falling under the scope of the employer's privileged activity of running a business?
Where does the Supreme Court equate labor with property; i.e.- how do we equate labor/intellect/time with valued capital expended and thus compensated?
How do we argue away "You started with zero dollars and ended with $XXX, so you clearly profited $XXX. (Clearly the test for income does not hinge on the possession of dollars).
Dale Eastman:
Definition of income - Early History.
In August of 1909, Congress imposed a "special excise tax" known as The Corporate Tax Act of 1909. The tax was on the doing of business in the corporate form. The measure of the tax was the income produced by the corporation's activity. See FLINT v. STONE TRACY CO., 220 U.S. 107 (1911); STRATTON'S INDEPENDENCE, LTD. v. HOWBERT, 231 U.S. 399 (1913); DOYLE v. MITCHELL BROS. CO. , 247 U.S. 179 (1918)
As a result of the 1909 tax act, the Supreme Court was presented with this question: "Are the proceeds of ores mined by a corporation from its own premises income within the meaning of the aforementioned act of Congress?"
In answering the question, the Court stated:
[H]owever the [mining] 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 gain derived from capital, from labor, or from both combined, and here we have combined operations of capital and labor.
Furthermore, the Court re-iterated the definition of income used in the tax act. The tax was to be calculated on the "net income". The "net income" is the corporation's gross income minus the deductions listed. The corporation's gross income was gross receipts from from all sources, be it corporate business transacted or the return on invested capital excluding gross income that was already taxed.
See STRATTON'S INDEPENDENCE, LTD. v. HOWBERT, 231 U.S. 399 (1913)
Then in another case in regard to the Corporate Tax Act of 1909, the Supreme Court said this:
Selling for profit is too familiar a business transaction to permit us to suppose that it was intended to be omitted from consideration in an act for taxing the doing of business in corporate form upon the basis of the income received 'from all sources.' [...] 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: 'Income may be defined as the gain derived from capital, from labor, or from both combined.' See DOYLE v. MITCHELL BROS. CO. , 247 U.S. 179 (1918)
The court has pointed out that "income" is "something entirely distinct from principal or capital"
After the 16th Amendment was allegedly ratified, The Supreme Court examined whether an issue of a stock certificate qualified as "income" and was taxable as such under the 16th. Amendment. The Court said a stock certificate is not "income". See TOWNE v. EISNER , 245 U.S. 418 (1918); EISNER v. MACOMBER , 252 U.S. 189 (1920)
In the Macomber case, the court examined the 16th. Amendment and said this:
A proper regard for its genesis, as well as its very clear language, requires also that this amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limitation still has an appropriate and important function, and is not to be overridden by Congress or disregarded by the courts.
In order, therefore, that the clauses cited from article 1 of the Constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not 'income,' as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised.
What the Court has said here is important. Congress can not change the meaning of "income" at whim, because that meaning is now, by the 16th Amendment, part of the Constitution.
The court goes on to examine what the meaning is.
The fundamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose we require only a clear definition of the term 'income,' as used in common speech, in order to determine its meaning in the amendment, and, having formed also a correct judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue.
After examining dictionaries in common use (Bouv. L. D.; Standard Dict.; Webster's Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act of 1909 (Stratton's Independence v. Howbert; Doyle v. Mitchell Bros. Co., '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.
After the above look at previous rulings as to the definition of "income", the court then examines the definition.
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.
See EISNER v. MACOMBER , 252 U.S. 189 (1920)
In one final case, the Supreme Court, after reviewing all the above, plus a few more, said this:
[T]here would seem to be no room to doubt that 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, and that what that meaning is has now become definitely settled by decisions of this Court.
See MERCHANTS' LOAN & TRUST CO. v. SMIETANKA, 255 U.S. 509 (1921)
http://www.synapticsparks.info/tax/VerifyLegalCitations.shtml has links so that you may research the court citations for yourself.
"Income" is "something entirely distinct from principal or capital."
"Income" is gain derived and severed from the capital, however that capital is invested.
Dale Eastman:
Taxation that is direct - Taxation that isn't.
If we examine what a "day" is, we know what a "night" is not. Likewise, if we examine what a "direct" tax is, we know what all the other taxes are not. We know that an "excise" tax is not a direct tax, so an examination of a direct tax will tell us what an excise tax is not.
The Supreme Court in its voluminous words has basically stated a direct tax is any tax on property that can not be legally avoided. See POLLOCK v. FARMERS' LOAN & TRUST CO., 157 U.S. 429 (1895); POLLOCK v. FARMERS' LOAN & TRUST CO., 158 U.S. 601 (1895). Warning, both are a long read.
I have noticed that a common characteristic of any direct tax on property is that the property is diminished by the tax because the tax can not be legally avoided.
Examples:
a. If the only property you own is $100 in cash, and a 10% tax is laid upon all cash held by the citizens, you would be required to hand over $10, leaving you with $90. Your original capital has been diminished by the tax.
b. If the only property you own is 10 acres of land, valued at $100 per acre, and a $10 per acre tax is laid, you will be required to sell one acre of your land in order to pay the total tax of $100, leaving you with 9 acres. Your original capital has been diminished by the tax.
c. If the only property you own is yourself, and a $100 head tax is laid, you would be required to sell your time/labor in order to get the money to pay the tax. The time you spent laboring to pay the tax is time you can not use for yourself. You no longer have your original capital - time, energy, and life force - for your own use. Your capital has been diminished by the tax. Additionally, the case could be made that this is slavery. You are forced to work for somebody else with no compensation.
Direct taxes must be apportioned.
This rule is in the Constitution twice.
Representatives and direct Taxes shall be apportioned among the several States [...] Article 1, Section 2.
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.[...] Article 1, Section 9.
The Supreme Court tells us:
Nothing can be clearer than that what the constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any state through a majority made up from the other states.
It is true that the effect of requiring direct taxes to be apportioned among the states in proportion to their population is necessarily that the amount of taxes on the individual taxpayer in a state having the taxable subject-matter to a larger extent in proportion to its population than another state has, would be less than in such other state; but this inequality must be held to have been contemplated, and was manifestly designed to operate to restrain the exercise of the power of direct taxation to extraordinary emergencies, and to prevent an attack upon accumulated property by mere force of numbers. See POLLOCK v. FARMERS' LOAN & TRUST CO., 157 U.S. 429 (1895).
The Supreme Court also said this:
Concluding that the classification of direct was adopted for the purpose of rendering it impossible to burden by taxation accumulations of property, real or personal, except subject to the regulation of apportionment, it was held that the duty existed to fix what was a direct tax in the constitutional sense so as to accomplish this purpose contemplated by the Constitution. See BRUSHABER v. UNION PACIFIC R. CO., 240 U.S. 1 (1916).
Apportionment, meant to restrain attack and burden of property, has a backlash force multiplier built in.
For purpose of example, consider a union of two states. State C has a population of 100, state CM has a population of 900. A direct tax is laid on cattle to raise $40,000. State C, being rural, has 1,400 cattle, state CM being urban, only has 600 cattle. That tax amounts to $20 per head of cattle. Applying the rule of apportionment, based upon population, state CM would be required to pay $36,000 on 600 cattle or, $60 per head of cattle. State C would be required to pay $4,000 on 1,400 cattle, or $2.86 per head of cattle.
A tax on property is a direct tax.
When the Supreme Court revisited the Pollock case, it said this:
Our conclusions may therefore be summed up as follows: First. We adhere to the opinion already announced,-that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes. Second. We are of opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes. See POLLOCK v. FARMERS' LOAN & TRUST CO., 158 U.S. 601 (1895).
Taxes on property, be it real estate or personal property (realty and personalty) are direct taxes.
The Supreme Court re-affirmed this when they said:
We say this because it is to be observed that although from the date of the Hylton Case, because of statements made in the opinions in that case, it had come to be accepted that direct taxes in the constitutional sense were confined to taxes levied directly on real estate because of its ownership, the [16th] Amendment contains nothing repudiation or challenging the ruling in the Pollock Case that the word 'direct' had a broader significance, since it embraced also taxes levied directly on personal property because of its ownership, and therefore the [16th] Amendment at least impliedly makes such wider significance a part of the Constitution,-a condition which clearly demonstrates that the purpose [of the 16th Amendment] was not to change the existing interpretation except to the extent necessary to accomplish the result intended; that is, the prevention of the resort to the sources from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself, and thereby to take an income tax out of the class of excises, duties, and imposts, and place it in the class of direct taxes. See BRUSHABER v. UNION PACIFIC R. CO., 240 U.S. 1 (1916).
Taxation of property is a direct tax. A direct tax must be laid according to the rules of apportionment.
Dale Eastman:
How an excise tax becomes unconstitutional.
The Supreme Court said:
Moreover, in addition, the conclusion reached in the Pollock Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but, on the contrary, recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it. See BRUSHABER v. UNION PACIFIC R. CO., 240 U.S. 1 (1916).
Examples of what the Supreme Court said now follow.
Example 1:
Capital of $100 is invested in an interest bearing instrument like a CD for a time period that gives an ROI (return on investment) of 10%. The gain or profit is $10. A tax of 20% on the income is due. $2.00 in tax is deducted. The capital is undiminished and ready to be re-invested. The rule of apportionment does not apply, the tax is not unconstitutional as enforced.
$110 gross receipts
-$100 less capital deposited
$10 net receipts
x 20% tax rate
$2 tax due $110 gross receipts
- $2 minus tax
$108 receipts after tax
-$100 less capital actually invested
$8 income to be spent.
Example 2:
Capital of $100 is likewise invested for a time period that gives an ROI (return on investment) of 10%. The gain or profit is $10. A tax of 240% on the income is due. $24.00 in tax is deducted. The capital is diminished and can not be re-invested. The rule of apportionment does apply, the tax is unconstitutional as enforced.
$110 gross receipts
-$100 less capital deposited
$10 net receipts
x 240% tax rate
$24 tax due $110 gross receipts
- $24 minus tax
$86 receipts after tax
-$100 less capital actually invested
-$14 capital diminished
Example 3:
Capital of $100 is invested (expended) in material and labor. The product created by labor working the material is sold for $110. The rest of this example is exactly the same as example 1. Likewise, whether this scenario is constitutional or not, is based upon the tax rate applied in the same manner as in example 2.
$110 gross receipts
-$100 less material & labor deductions
$10 net receipts
x 20% tax rate
$2 tax due $110 gross receipts
- $2 minus tax
$108 receipts after tax
-$100 less capital actually invested
$8 income to be spent.
Example 4:
The example is exactly like example 3, but the expenditure of the capital is not allowed to be deducted.
$110 gross receipts
-$0 less material & labor deductions
$110 net receipts
x 20% tax rate
$24 tax due $110 gross receipts
- $24 minus tax
$86 receipts after tax
-$100 less capital actually invested
-$14 capital diminished
Longer term capital assets such as things like buildings, machines, and tools would have to be "depreciated" over the life expectancy of the capital asset in the same way as the deduction for the capital expenditure for labor and material in example 3. And likewise, if this loss of the value (depreciation) of the capital asset is not deducted from the receipts, the capital itself ends up being taxed, just like in examples 2 and 4.
Note how the same results happen in examples 2 and 4, arrived at by two different methods of enforcing the tax. When this happens, as the Supreme Court has said, "the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it."
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