Tax protester constitutional arguments

From Wikipedia, the free encyclopedia

Tax protesters

History Arguments Constitutional Statutory Conspiracy Notable tax protesters Robert Clarkson - Vivien Kellems Mitch Modeleski - Irwin Schiff Richard Michael Simkanin William J. Benson Wayne C. Bentson Related topics The Law That Never Was Cheek v. United States Titles of Nobility Amendment Tax avoidance and tax evasion Tax resistance Christian Patriot Posse Comitatus

This box: view • talk • edit

Tax protester constitutional arguments are arguments raised by tax protesters that assert that the imposition of the income tax in the United States violates the United States Constitution. Such arguments include contentions that the Sixteenth Amendment to the United States Constitution was never properly ratified or provides no power to tax income; that the income tax violates some other provision of the Constitution; or that some other provision that would prevent the assessment of the income tax was ratified but wrongfully excluded from the Constitution.

These kinds of arguments are distinguished from related statutory arguments and general conspiracy arguments, which presuppose the constitutionality of the income tax. However, supporters of such arguments may also be inclined to contend that statutory and conspiracy arguments apply as well.

Contents 1 Sixteenth Amendment ratification arguments 2 Sixteenth Amendment effectiveness arguments 2.1 Repeal clause arguments 2.2 Stanton v. Baltic Mining Co. 3 Arguments using other constitutional amendments 3.1 First Amendment arguments 3.2 Fifth Amendment arguments 3.2.1 "Self incrimination" arguments 3.2.2 "Takings" argument 3.3 Thirteenth Amendment "involuntary servitude" arguments 3.4 Fourteenth Amendment/citizenship arguments 3.5 "TONA" argument 4 Federal government authority arguments 4.1 "Sovereign individual" & similar arguments 4.2 The "federal zone" argument 5 Definition of "income" arguments 5.1 Stratton's Independence, Limited v. Howbert 5.2 Doyle v. Mitchell Bros. Co. 5.3 The corporate profits argument 6 Taxing labor or income from labor 6.1 Coppage v. Kansas 6.2 Truax v. Corrigan 6.3 Butchers' Union Co. v. Crescent City Co. 6.4 The Murdock case 6.5 Lucas v. Earl 6.6 Redfield v. Fisher 6.7 Conner v. United States 6.8 Eisner v. Macomber 6.9 Cases where wages or labor ruled taxable 7 The Murphy case 8 Arguments about constitutionality in criminal cases 9 Constitutional status of the 1986 Internal Revenue Code in case law 10 Notes

[edit] Sixteenth Amendment ratification arguments

One argument that has been raised several times (and always ruled meritless) suggests that the Sixteenth Amendment was not properly ratified. This argument is based on the fact that the legislatures of various states passed ratifying resolutions in which the quoted text of the Amendment differed from the text proposed by Congress in terms of capitalization, spelling of words, or punctuation marks (e.g. semi-colons instead of commas).

The earliest reported court case where this argument was raised appears to be United States v. House,^[1] about seventy-two years after the ratification. The best-known proponent of the non-ratification claim is William J. Benson, co-author of the book The Law That Never Was (1985), who testified in the House case to no avail. The Benson contention was comprehensively addressed by the Seventh Circuit Court of Appeals in United States v. Thomas:^[2]

Thomas is a tax protester, and one of his arguments is that he did not need to file tax returns because the sixteenth amendment is not part of the constitution. It was not properly ratified, Thomas insists, repeating the argument of W. Benson & M. Beckman, The Law That Never Was (1985). Benson and Beckman review the documents concerning the states' ratification of the sixteenth amendment and conclude that only four states ratified the sixteenth amendment; they insist that the official promulgation of that amendment by Secretary of State Knox in 1913 is therefore void.

Benson and Beckman did not discover anything; they rediscovered something that Secretary Knox considered in 1913. Thirty-eight states ratified the sixteenth amendment, and thirty-seven sent formal instruments of ratification to the Secretary of State. (Minnesota notified the Secretary orally, and additional states ratified later; we consider only those Secretary Knox considered.^[3]) Only four instruments repeat the language of the sixteenth amendment exactly as Congress approved it. The others contain errors of diction, capitalization, punctuation, and spelling. The text Congress transmitted to the states was: "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." Many of the instruments neglected to capitalize "States," and some capitalized other words instead. The instrument from Illinois had "remuneration" in place of "enumeration"; the instrument from Missouri substituted "levy" for "lay"; the instrument from Washington had "income" not "incomes"; others made similar blunders.

Thomas insists that because the states did not approve exactly the same text, the amendment did not go into effect. Secretary Knox considered this argument. The Solicitor of the Department of State drew up a list of the errors in the instruments and — taking into account both the triviality of the deviations and the treatment of earlier amendments that had experienced more substantial problems — advised the Secretary that he was authorized to declare the amendment adopted. The Secretary did so.

Although Thomas urges us to take the view of several state courts that only agreement on the literal text may make a legal document effective, the Supreme Court follows the "enrolled bill rule." If a legislative document is authenticated in regular form by the appropriate officials, the court treats that document as properly adopted. Field v. Clark, 143 U.S. 649, 36 L.Ed. 294, 12 S.Ct. 495 (1892). The principle is equally applicable to constitutional amendments. See Leser v. Garnett, 258 U.S. 130, 66 L.Ed. 505, 42 S.Ct. 217 (1922), which treats as conclusive the declaration of the Secretary of State that the nineteenth amendment had been adopted. In United States v. Foster, 789 F.2d. 457, 462-463, n.6 (7th Cir. 1986), we relied on Leser, as well as the inconsequential nature of the objections in the face of the 73-year acceptance of the effectiveness of the sixteenth amendment, to reject a claim similar to Thomas's. See also Coleman v. Miller, 307 U.S. 433, 83 L. Ed. 1385, 59 S. Ct. 972 (1939) (questions about ratification of amendments may be nonjusticiable). Secretary Knox declared that enough states had ratified the sixteenth amendment. The Secretary's decision is not transparently defective. We need not decide when, if ever, such a decision may be reviewed in order to know that Secretary Knox's decision is now beyond review.

This decision did not satisfy tax protesters, who contended that the Courts, in order to set a precedent supporting ratification, deliberately chose to hear cases in which the litigants presented no evidence. Appeals courts (including the Supreme Court) decide questions of law, not questions of fact. Under the U.S. legal system, "evidence" cannot be "admitted" at the appeals court level, as all evidence must be presented at the trial court, where factual (evidentiary) issues are determined. In other words, the appellate court could determine whether a particular item of evidence should or should not have been admitted at the trial court level, and could refer to evidence that was admitted (or refused) by the trial court to determine whether the trial court's decision was correct, but the appellate court does not itself hear "testimony" or other "evidence." Further, the question of whether a particular amendment is a valid part of the Constitution would be a question of law, not a question of "evidence" or "fact."

Similar "Sixteenth Amendment arguments" have been uniformly rejected by the courts in other cases including Ficalora v. Commissioner;^[4] Sisk v. Commissioner;^[5] United States v. Sitka;^[6] and United States v. Stahl.^[7] The non-ratification argument has been specifically deemed legally frivolous in Brown v. Commissioner;^[8] Lysiak v. Commissioner;^[9] and Miller v. United States.^[10]

William J. Benson, the co-author of the book mentioned in the Thomas case above, was unsuccessful with his Sixteenth Amendment argument when he had his own legal problems. He was prosecuted for tax evasion and willful failure to file tax returns. The court rejected his Sixteenth Amendment "non-ratification" argument in United States v. Benson.^[11] William J. Benson was convicted of tax evasion and willful failure to file tax returns in connection with over $100,000 of unreported income, and his conviction was upheld on appeal. He was sentenced to four years in prison and five years of probation. See United States v. Benson.^[12]

Another argument made by some tax protesters is that because Congress did not pass an official proclamation recognizing Ohio's year 1803 admission to statehood until 1953 (see Ohio Constitution), Ohio was not a state until 1953 and therefore the Sixteenth Amendment was not properly ratified. The earliest reported court case where this argument was raised appears to be Ivey v. United States,^[13] some sixty-three years after the ratification. This argument also has been uniformly rejected by the courts. See, for example, Knoblauch v. Commissioner.^[14]

[edit] Sixteenth Amendment effectiveness arguments

[edit] Repeal clause arguments

Some protesters have argued that because the Sixteenth Amendment does not contain the words "repeal" or "repealed," the Amendment is ineffective to change the law forming the basis of cases decided prior to the ratification of the amendment. This argument has never succeeded in the courts, in part for the simple reason that under the American legal system there is no requirement that an amendment include the words "repeal" or "repealed" to be Constitutionally valid. Instead, U.S. constitutional law with respect to constitutional amendments includes a form of the legal doctrine known as the "doctrine of implied repeal". See also Constitutional amendment. The vast majority of U.S. Constitutional amendments do not contain the words "repeal" or "repealed." Section One of the Twenty-first Amendment contains a notable exception.

[edit] Stanton v. Baltic Mining Co.

Some tax protesters challenge the levying of tax upon individual income, based on language in the U.S. Supreme Court decision in Stanton v. Baltic Mining Co.,^[15] to the effect that the Sixteenth Amendment "conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged [ . . . . ]" The protesters argue that in light of this language, the income tax is unconstitutional in that it is a direct tax and constitutionally should be apportioned (divided equally amongst the population of the various states).^[16]

The above quoted language in Stanton v. Baltic Mining Co. is not a holding of law in the case. (Compare Ratio decidendi, Precedent, Stare decisis and Obiter dictum for a fuller explanation.) As explained below, the Court's ruling in the case contradicts the tax protesters' argument.

The quoted language regarding the "complete and plenary power of income taxation possessed by Congress from the beginning" is a reference to the power granted to Congress by the original text of Article I of the U.S. Constitution. The reference to "being taken out of the category of indirect taxation to which it [the income tax] belonged" is a reference to the effect of the 1895 Court decision in Pollock v. Farmers' Loan & Trust Co.,^[17] where taxes on income from property (such as interest income and dividend income) -- which like taxes on income from labor had always been considered indirect taxes (and therefore not subject to the apportionment rule) -- were, beginning in 1895, treated as direct taxes. The Sixteenth Amendment overruled the effect of Pollock, making the source of the income irrelevant with respect to the apportionment rule, and thereby placing taxes on income from property back into the category of indirect taxes such as income from labor (the Sixteenth Amendment expressly stating that Congress has power to impose income taxes regardless of the source of the income, without apportionment among the states, and without regard to any census or enumeration).

The Court noted that the case "was commenced by the appellant [John R. Stanton] as a stockholder of the Baltic Mining Company, the appellee, to enjoin [i.e., prevent] the voluntary payment by the corporation and its officers of the tax assessed against it under the income tax section of the tariff act of October 3, 1913." On a direct appeal from the trial court, the U.S. Supreme Court affirmed the lower court's decision, which had dismissed Stanton's motion (i.e., had rejected Stanton's request) for a court order to prevent Baltic Mining Company from paying the income tax.

Stanton argued that the tax law was unconstitutional and void under the Fifth Amendment to the United States Constitution in that the law denied "to mining companies and their stockholders equal protection of the laws and deprive[d] them of their property without due process of law." The Court rejected that argument.

Stanton also argued that the Sixteenth Amendment "authorizes only an exceptional direct income tax without apportionment, to which the tax in question does not conform" and that therefore the income tax was "not within the authority of that Amendment." The Court also rejected this argument.

Stanton v. Baltic Mining Co. is a leading case where the Court's ruling contradicts the tax protesters' argument that the income tax is unconstitutional. In this case, the U.S. Supreme Court upheld the constitutionality of the income tax under the 1913 Act under both the Fifth Amendment and the Sixteenth Amendment.

[edit] Arguments using other constitutional amendments

[edit] First Amendment arguments

Some protesters argue that imposition of income taxes violates the First Amendment freedom of speech because it requires the subject of the tax to write information on a tax return; or violates freedom of religion if the subject of the tax claims some religious objection to the payment of taxes, particularly if the subject styles himself or herself as a Reverend, Minister, or other religious office-holder. However, while the Internal Revenue Code makes an exemption for churches and other religious institutions, it makes no such exception for religious professionals. The United States Supreme Court held in 1878 Reynolds v. United States,^[18] that a religious belief, however strongly held, does not exempt the believer from adhering to general laws.

[edit] Fifth Amendment arguments

[edit] "Self incrimination" arguments

Other protesters argue that the Fifth Amendment right against self-incrimination allows an individual to refuse to file an income tax return calling for information that could lead to a conviction for criminal acts from which the income was derived, or for the crime of not paying the tax itself. In response, the courts generally refer to the case of United States v. Sullivan, 274 U.S. 259, 263-64 (1927), where Justice Oliver Wendell Holmes wrote: If the form of return provided called for answers that the defendant was privileged from making he could have raised the objection in the return, but could not on that account refuse to make any return at all.... It would be an extreme if not an extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime. But if the defendant desired to test that or any other point he should have tested it in the return so that it could be passed upon. He could not draw a conjurer's circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.

[edit] "Takings" argument

Some protesters have argued that the income tax is a prohibited "taking" under the Fifth Amendment's Takings Clause, and can not be imposed unless the taxpayer receives adequate compensation. The United States Supreme Court rejected this argument in Brushaber v. Union Pacific Railroad.

[edit] Thirteenth Amendment "involuntary servitude" arguments

An early protester, Arthur J. Porth, argued that the Sixteenth Amendment to the U.S. Constitution should itself be declared unconstitutional. His theory was that the income taxes under the Internal Revenue Code of 1939 imposed "involuntary servitude" in violation of the Thirteenth Amendment. That argument was ruled to be without merit in Porth v. Brodrick, United States Collector of Internal Revenue for the State of Kansas.^[19]

[edit] Fourteenth Amendment/citizenship arguments

Some tax protesters argue that all Americans are citizens of individual states as opposed to citizens of the "United States," and the United States therefore has no power to tax citizens outside of Washington D.C. However, the first sentence of Section 1 of the Fourteenth Amendment states:

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.

Notably, some tax protesters contend that the Fourteenth Amendment itself was never properly ratified, under the theory that the governments of southern states that supported the post-Civil War amendments were not representative of the people.

[edit] "TONA" argument

Another tax protester argument is that a 'missing' Thirteenth Amendment to the Constitution known as the Titles of Nobility amendment or "TONA" precedes the current Thirteenth Amendment; the missing amendment purportedly would have divested the citizenship of any person receiving a title of nobility. Therefore, actions taken by lawyers and judges, who use the title 'Esquire' (which some protesters claim is a title of nobility), are monarchical, and therefore unconstitutional. This contention, rarely raised before courts, was most recently addressed in Campion v. Towns, No.CV-04-1516PHX-ROS, *2 n.1 (D. Ariz. 2005) as a defense to a charge of tax evasion. The court replied:

Additionally, the Court will correct any misunderstanding Plaintiff has concerning the text of the Thirteenth Amendment to the United States Constitution. In his Complaint, Plaintiff includes a certified copy of the Thirteenth Amendment from the Colorado State Archives which was published in 1861. As included in that compilation, the Thirteenth Amendment would strip an individual of United States citizenship if they accept any title of nobility or honor. However, this is not the Thirteenth Amendment. The correct Thirteenth Amendment prohibits slavery. Although some people claim that state publication of the erroneous Thirteenth Amendment makes it valid, Article V of the Constitution does not so provide.

[edit] Federal government authority arguments

[edit] "Sovereign individual" & similar arguments

Some tax protesters argue that they should be immune from Federal income taxation because they are sovereign individuals or "natural individuals," or on the ground that they have not requested a privilege or benefit from the government. These kinds of arguments have been ruled without merit. For example, in the case of Lovell v. United States the United States Court of Appeals for the Seventh Circuit stated:

Plaintiffs argue first that they are exempt from federal taxation because they are "natural individuals" who have not "requested, obtained or exercised any, privilege from an agency of government." This is not a basis for an exemption from federal income tax. [citation omitted] All individuals, natural or unnatural, must pay federal income tax on their wages, regardless of whether they received any "privileges" from the government. Plaintiffs also contend that the Constitution prohibits imposition of a direct tax without apportionment. They are wrong; it does not. U. S. Const. amend. XVI [ . . . . ]^[20]

The Court of Appeals in Lovell affirmed a U.S. District Court order assessing a frivolous return penalty under 26 U.S.C. § 6702(a). See also United States v. Sloan,^[21] (taxpayer's contention -- that he is "not a citizen of the United States, but rather, that he is a freeborn, natural individual, a citizen of the State of Indiana, and a 'master'--not 'servant'--of his government" -- was ruled to be not a legal ground for the taxpayer's argument that he was not subject to the Federal tax laws; conviction for tax evasion upheld by the United States Court of Appeals for the Seventh Circuit).

[edit] The "federal zone" argument

Some tax protesters argue that under article I, section 8, clause 17 of the U.S. Constitution, Federal income taxes can be imposed only inside an area called the "Federal zone" -- limited to the District of Columbia and various Federal enclaves such as military bases.^[22] Clause 17 provides that Congress shall have the power:

[ . . . ] To exercise exclusive legislation in all cases whatsoever, over such District (not exceeding ten miles square) as may, by cession of particular states, and the acceptance of Congress, become the seat of the government of the United States, and to exercise like authority over all places purchased by the consent of the legislature of the state in which the same shall be, for the erection of forts, magazines, arsenals, dockyards, and other needful buildings [ . . . . ]

This argument is based in part on the U.S. Supreme Court decision in the case of United States v. Bevans.^[23] In Bevans, the parties argued over whether a Federal court in Massachusetts had jurisdiction over the case of a U.S. Marine charged with a murder that occurred on a ship in Boston Harbor. No issues regarding Federal income taxation or the Internal Revenue Code were presented to or decided by the Court in the Bevans case. The Internal Revenue Code and the Internal Revenue Service did not yet exist in 1818, when the Bevans murder case was decided.

Some tax protesters contend that the U.S. Supreme Court decision in Caha v. United States^[24] restricts the jurisdiction of the Federal government to impose income taxes inside the "states", based on the following language from the Court’s opinion:

This statute is one of universal application within the territorial limits of the United States, and is not limited to those portions which are within the exclusive jurisdiction of the national government, such as the District of Columbia. Generally speaking, within any state of this Union the preservation of the peace and the protection of person and property are the functions of the state government, and are no part of the primary duty, at least, of the nation. The laws of congress in respect to those matters do not extend into the territorial limits of the states, but have force only in the District of Columbia, and other places that are within the exclusive jurisdiction of the national gover[n]ment.

Some tax protesters contend that the Court's reference to "those matters" restricted the Federal government's jurisdiction over matters of taxation. Caha is not a tax case. The reference to "this statute" was a reference to a perjury statute. The Caha case involved a perjury conviction where the defendant unsuccessfully argued that the Federal court had no jurisdiction over a prosecution for the crime of perjury committed in a proceeding in a land office at Kingfisher, Oklahoma regarding ownership of real estate.

The reference in Caha to the "laws of congress in respect to those matters" was a reference to the matters of preservation of the peace and the protection of person and property. The Court in Caha rejected the argument that the Federal courts had no jurisdiction to hear a case under the perjury statute, and the defendant's conviction was affirmed. No issues involving the power to impose and enforce Federal taxes in the fifty states were presented to or decided by the court in Caha.

The courts have uniformly rejected the "Federal zone" argument that Congressional authority to impose an income tax is limited to the District of Columbia, forts, magazines, arsenals, or dockyards, etc. See, for example, United States v. Mundt;^[25] Nelsen v. Commissioner;^[26] Abbs v. Imhoff.^[27]

[edit] Definition of "income" arguments

[edit] Stratton's Independence, Limited v. Howbert

Some tax protesters have cited the U.S. Supreme Court case of Stratton's Independence, Limited v. Howbert, 231 U.S. 399 (1913), for the argument that an income tax on an individual's income is unconstitutional.

In Stratton a mining corporation argued that the 1909 corporation tax act did not apply to that corporation. The U.S. Supreme Court ruled that the 1909 corporation tax act did apply to mining corporations, and that the proceeds of ores mined by the corporation from its own premises were income within the meaning of the 1909 tax act. The Court also ruled that the corporation was not entitled to deduct "the value of such ore in place and before it is mined" as depreciation within the meaning of the 1909 Act.

The Stratton case involved income taxation of a corporation, not of individuals. The Court in the Stratton case did not rule any corporate or individual income tax unconstitutional.

[edit] Doyle v. Mitchell Bros. Co.

Some tax protesters have cited Doyle v. Mitchell Bros. Co., 247 U.S. 179 (1918), for the proposition that income of individuals cannot be taxed. The following language is sometimes cited by protesters:

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.

The above verbiage is immediately followed in the text of the case by this sentence:

As was said in Stratton's Independence v. Howbert, 231 U.S. 399, 415 , 34 S. Sup. Ct. 136: 'Income may be defined as the gain derived from capital, from labor, or from both combined.'

In Doyle the taxpayer was a corporation engaged in the manufacture of lumber. In 1903, the taxpayer purchased certain timber land at a cost of about $20 per acre. As of December 31, 1908, the value of the land had increased to about $40 per acre.

The Corporation Excise Tax Act of 1909 was enacted on August 5, 1909, and was effective retroactively to January 1, 1909.

For the years 1909 through 1912, the taxpayer filed tax returns under the 1909 Act, showing gross receipts from the sale of manufactured lumber and, in arriving at the amount of net income subject to tax under the 1909 Act, deducted an amount based on the $40 per acre value, rather than the actual cost of about $20 per acre.

The Commissioner of Internal Revenue argued that the taxpayer should be able to deduct only an amount based on the taxpayer’s historical cost basis of $20, rather than the $40 fair market value at the time the 1909 Act became effective. (Essentially, if the taxpayer were allowed to use the $40 per acre value as its basis rather than the actual $20 historical cost basis, a portion of the taxpayer’s gain -- the increase in value from 1903 to December 31, 1908 -- would go untaxed.)

The U.S. Supreme Court ruled that under the 1909 Act – which had become effective January 1, 1909 -- the taxpayer should be taxed only on the increase in value after 1908. Increases in value prior to the effective date of the statute were not to be taxed under the terms of that statute. Thus, the taxpayer was entitled to deduct, from its gross receipts from the sale of finished lumber, a basis amount computed with reference to the $40 per acre value as of December 31, 1908.

Doyle is a case involving statutory, not constitutional interpretation. In this case, the Court was interpreting the 1909 statute. Although some tax protesters cite this case for an argument about the constitutional definition of income as excluding income of individuals, no issues involving the constitutional definition of income, or of income under any other tax statutes, were presented to or decided by the Court.

The case is also notable for the fact that it involved a retroactively imposed tax. The taxpayer did not argue -- and the Court did not rule -- that as a general proposition taxes could not be imposed retroactively. Indeed, the tax in this case was imposed retroactively; the statute was enacted in August of 1909 but was made effective retroactively to January 1, 1909.

[edit] The corporate profits argument

One argument repeatedly made by tax protesters is that the income of individuals is not taxable because income should mean only "corporate profits" or "corporate gain." This is the so-called Merchants' Loan argument, named after the case of Merchants’ Loan & Trust Company, as Trustee of the Estate of Arthur Ryerson, Deceased, Plaintiff in Error v. Julius F. Smietanka, formerly United States Collector of Internal Revenue for the First District of the State of Illinois.^[28]

The protesters' Merchants' Loan argument is essentially that "income" for Federal income tax purposes means only the income of a "corporation" -- not the income of a non-corporate taxpayer -- because the United States Supreme Court in that case, in discussing the meaning of "income," mentioned a statute enacted in 1909 that taxed the income of corporations.

The Court in Merchants' Loan was specifically interpreting a 1916 statute imposing income taxes on individuals and estates (among other kinds of entities), and not the 1909 corporate tax statute. The taxpayer in Merchants' Loan was not a corporation but was the "Estate of Arthur Ryerson, Deceased." The Court was not presented with (and did not decide) any issue involving the taxability of "corporate profits" or "corporate gains" or any other kind of income except the gain on the sale of the stock by the "Estate of Arthur Ryerson, Deceased." The terms "corporate profit" and "corporate gain" are not found in the text of the Court’s decision in Merchants’ Loan.

In Merchants' Loan the Supreme Court ruled that under the Sixteenth Amendment to the United States Constitution and the 1916 tax statute applicable at the time, a gain on a sale of stock by the estate of a deceased person is included in the income of that estate, and is therefore taxable to that estate for Federal income tax purposes.

The Merchants' Loan argument has been litigated by tax protesters several times, and the courts have uniformly rejected the argument that income consists only of corporate profits. See, for example:

Cameron v. Internal Revenue Serv.;^[29]

Stoewer v. Commissioner;^[30]

Reinhart v. United States;^[31]

Fink v. Commissioner;^[32]

Flathers v. Commissioner;^[33]

Schroeder v. Commissioner;^[34]

Sherwood v. Commissioner;^[35]

Ho v. Commissioner.^[36]

Tax protesters -- who have lost every case using Merchants' Loan for the theory that only "corporate profits" could be taxable -- are citing a case where the U.S. Supreme Court ruled that the income of a non-corporate taxpayer is taxable. Neither the United States Supreme Court nor any other Federal court has ever ruled that under the Internal Revenue Code the term "income" means only the income of a corporation for Federal income tax purposes.

Some tax protesters have cited the Supreme Court case of Flint v. Stone Tracy Co.^[37] for the argument that only corporate profits or income can be taxed, using the following quote:

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 privileges, and the element of absolute and unavoidable demand is lacking...Conceding the power of Congress to tax the business activities of private corporations.. the tax must be measured by some standard...It is therefore well settled by the decisions of this court that when the sovereign authority has exercised the right to tax a legitimate subject of taxation as an exercise of a franchise or privilege, it is no objection that the measure of taxation is found in the income produced in part from property which of itself considered is nontaxable.

In Flint v. Stone Tracy Co., the U.S. Supreme Court ruled that the corporation tax act of 1909 did not violate the constitutional requirement that revenue measures originate in the U.S. House of Representatives. The Court did not rule that excise taxes consisted only of taxes on corporations and corporate privileges, to the exclusion of taxes on individuals (natural persons). The issue of the validity of an income tax imposed on individuals was neither presented to the Court nor decided by the Court.

[edit] Taxing labor or income from labor

Several tax protester argument is that the Congress has no constitutional power to tax labor or income from labor, citing a variety of court cases. These arguments include claims that the word "income" as used in the Sixteenth Amendment cannot be interpreted as applying to wages; that wages are not income because labor is exchanged for them; that taxing wages violates individuals' right to property; and several others. The rest of this section explains these arguments in more detail.

[edit] Coppage v. Kansas

One case frequently cited for this argument is Coppage v. Kansas^[38] with respect to the following quote:

Included in the right of personal liberty and the right of private property-partaking of the nature of each- is the right to make contracts for the acquisition of property. Chief among such contracts is that of personal employment, by which labor and other services are exchanged for money or other forms of property.

Coppage was a criminal case involving a defendant convicted, under a Kansas statute, of firing an employee for refusing to resign as a member of a labor union. No issues of taxation were presented to or decided by the Court, and the word "tax" is not found in the text of the Court's decision.

[edit] Truax v. Corrigan

Tax protesters also quote from Truax v. Corrigan^[39] for the argument that an income tax should not be imposed on labor and at least arguably relating "labor" to a right of "property":

That the right to conduct a lawful business, and thereby acquire pecuniary profits, is property, is indisputable.

The Truax case involved a Mr. William Truax who owned a restaurant called "English Kitchen," in Bisbee, Arizona. A Mr. Michael Corrigan and others were former cooks and waiters at the restaurant. Corrigan and others allegedly instituted a boycott of the restaurant, after a dispute arose over the terms and conditions of employment. A strike was allegedly ordered by a local union with respect to certain union members employed at the restaurant. The restaurant’s business was allegedly harmed, and Mr. Truax sued various parties on a variety of grounds. The lawsuit was thrown out by the trial court before the case could be heard, on the theory that Mr. Truax was incorrect as a matter of law. Mr. Truax appealed and the case eventually ended up in the U.S. Supreme Court. The U.S. Supreme Court ruled that the trial court should not have thrown out the lawsuit, but should have heard Mr. Truax’s case. The case was sent back to the trial court so that a trial could take place. Truax was not a tax case. No issues involving taxation were presented to or decided by the Court.

[edit] Butchers' Union Co. v. Crescent City Co.

Tax protesters also quote from the U.S. Supreme Court case of Butcher's Union Co. v. Crescent City Co.^[40] for the argument that an income tax should not be imposed on labor:

A monopoly is defined 'to be an institution or allowance from the sovereign power of the state, by grant, commission, or otherwise, to any person or corporation, for the sole buying, selling, making, working, or using of anything whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty they had before or hindered in their lawful trade,' All grants of this kind are void at common law, because they destroy the freedom of trade, discourage labor and industry, restrain persons from getting an honest livelihood, and put it in the power of the grantees to enhance the price of commodities. They are void because they interfere with the liberty of the individual to pursue a lawful trade or employment.

Butchers' Union Co. was a case involving interpretation of the Louisiana Constitution and certain ordinances of the city of New Orleans. The Court ruled that the Louisiana Constitution and the New Orleans ordinances did not impermissibly impair a pre-existing obligation under a contract when those laws effectively ended a slaughter-house business monopoly by the Crescent City Company. No issues regarding the power to tax incomes from businesses, vocations, or labor were presented to or decided by the Court, and the word "tax" does not appear in the text of the decision.

[edit] The Murdock case

Tax protesters also quote the following verbiage from Murdock v. Pennsylvania (also known as Jones v. City of Opelika):^[41]

A state may not impose a charge for the enjoyment of a right granted by the federal constitution.

Murdock (or Jones v. City of Opelika) was a case involving the validity of a city ordinance (in Jeannette, Pennsylvania) worded as follows:

That all persons canvassing for or soliciting within said Borough, orders for goods, paintings, pictures, wares, or merchandise of any kind, or persons delivering such articles under orders so obtained or solicited, shall be required to procure from the Burgess a license to transact said business and shall pay to the Treasurer of said Borough therefore the following sums according to the time for which said license shall be granted.

'For one day $1.50, for one week seven dollars ($7.00), for two weeks twelve dollars ($12.00), for three weeks twenty dollars ($20.00), provided that the provisions of this ordinance shall not apply to persons selling by sample to manufacturers or licensed merchants or dealers doing business in said Borough of Jeannette.

A group of people who were Jehovah's Witnesses went from door to door distributing literature in the town. They failed to obtain the license under the ordinance. The case ended up in court, and went all the way to the U.S. Supreme Court, which stated:

There was evidence that it was their [the Jehovah’s Witnesses’] practice in making these solicitations to request a 'contribution' of twenty-five cents each for the books and five cents each for the pamphlets but to accept lesser sums or even to donate the volumes in case an interested person was without funds. [ . . . ] The First Amendment, which the Fourteenth makes applicable to the states, declares that 'Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press ....' [ . . . ] It could hardly be denied that a tax laid specifically on the exercise of those freedoms would be unconstitutional.

The protester argument appears to be that the Federal government should not be able to tax income from labor because it would be a tax on an exercise of the freedoms mentioned in the quotation. The "tax" in this case was, in effect, a license fee imposed on door to door sales people under a city ordinance. The city was trying to exact the fee from Jehovah’s Witness members who were going door to door. Questions about the validity of Federal income taxes were neither presented to nor decided by the Court.

[edit] Lucas v. Earl

For the argument that wages are not taxable, some tax protesters—including convicted tax offender Irwin Schiff—incorrectly attribute to the U.S. Supreme Court the following language in connection with the leading tax case of Lucas v. Earl:

The claim that salaries, wages, and compensation for personal services are to be taxed as an entirety and therefore must be returned [i.e., reported on an income tax return] by the individual who has performed the services which produce the gain is without support, either in the language of the Act or in the decisions of the courts construing it. Not only this, but it is directly opposed to provisions of the Act and to regulations of the U.S. Treasury Department, which either prescribed or permits that compensations for personal services not be taxed as a entirety and not be returned by the individual performing the services. It is to be noted that, by the language of the Act, it is not salaries, wages, or compensation for personal services that are to be included in gains, profits, and income derived from salaries, wages, or compensation for personal services.

This language is not from the Court’s opinion in Lucas v. Earl.^[42] Instead, it is an almost direct quote from page 17 of the taxpayer's brief filed in the case. Guy C. Earl was the taxpayer, and the brief was written by Earl’s attorneys: Warren Olney, Jr., J.M. Mannon, Jr., and Henry D. Costigan. In some printed versions of the case, this statement and other quotes and paraphrases from pages 8, 10, 14, 15, 17, and 18 of the taxpayer's brief are re-printed as a headnote or syllabus above the opinion of the Court. ^[43] In the case reprints that include this headnote (and many of them do not even show it), these excerpts are not clearly identified as being from the taxpayer's brief. A person not trained in analysis of legal materials would not necessarily know that this verbiage, like any headnote or syllabus, is not part of the Court’s opinion, perhaps leading to the confusion about the source of the quote. As explained below, the Supreme Court rejected the arguments in the quote, and the taxpayer lost the case.

Lucas v. Earl is a leading case in the area of U.S. income taxation, and stands for the Anticipatory Assignment of Income Doctrine. In the case, Mr. Earl was arguing that because he and his wife, in the year 1901, had made a legally valid assignment agreement (for state law purposes) to have his then-current and after-acquired income (which was earned solely by him) be treated as the income of both him and his wife as joint tenants with right of survivorship, the assignment agreement should also determine the Federal income tax effect of the income he earned (i.e., only half the income should be taxed to him).

The U.S. Supreme Court rejected that argument, essentially ruling that under Federal income tax law all the future income earned by Mr. Earl was taxable to him at the time he earned the income, even though he had already assigned part of the income to his wife, and regardless of the validity of the assignment agreement under state law. The Court in Lucas v. Earl did not rule that wages are not taxable.

[edit] Redfield v. Fisher

Some tax protesters quote from Redfield v. Fisher:^[44]

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 individual's rights to live and own property are natural rights for the enjoyment of which an excise cannot be imposed.

The argument seems to be that because "the individual's rights to live and own property" are arguably rights against which "an excise cannot be imposed," the Federal income tax on income from labor should therefore be unconstitutional. However, Redfield v. Fisher is an Oregon Supreme Court case, not a Federal case. No issues involving the validity of Federal income tax laws were decided by the court.

[edit] Conner v. United States

Some tax protesters cite a case called Conner v. United States,^[45] with a quote that "Congress has taxed INCOME, not compensation" for the argument that wages are not taxable. The Conner case involved the taxability of compensation paid by an insurance company to a policy holder whose house had burned down. The insurance company was reimbursing the homeowner for the costs of renting a place to stay after the home burned down -- under the terms of the insurance policy. The insurance company was not paying "wages." The court was not presented with, and did not decide, any issue involving the taxability of wages.

[edit] Eisner v. Macomber

Some tax protesters have cited the U.S. Supreme Court decision in the case of Eisner v. Macomber^[46] for the theory that wages are not taxable. The case dealt with a stock dividend on stock that was essentially equivalent to a stock split, as opposed to a cash dividend on stock. In the case of this kind of "dividend" the stockholder does not receive anything or realize any additional value. For example, if a stockholder owns 100 shares of stock having a value of $4 per share, the total value is $400. If the corporation declares, say, a "two for one" stock dividend that is essentially similar to a stock split (and the corporation distributes no money or other property), the stockholder now has 200 shares with a value of $2 each, which is still $400 in value - i.e., no increase in value and no income. The pie is still the same size -- but it's sliced into more pieces, each piece being proportionately smaller.

More directly to the point, there has been no "sale or other disposition" of the stock. The taxpayer still owns the same asset (i.e., the same interest in the corporation) he owned prior to the stock dividend. So, even if his basis amount (generally, the amount he originally paid for the stock) is less than the $400 value (i.e., even if he has an unrealized or potential gain), he still has not yet "realized" the gain. The Court ruled that this kind of stock dividend is not treated as "income" to a shareholder.

The Court in this case did not rule on any issue involving the taxability of labor or income from labor, or wages, salary or ordinary "cash" dividends -- where the stockholder actually receives a check from the company, etc. Indeed, the terms "wage" and "salary" do not appear in the text of the decision in Eisner v. Macomber.

[edit] Cases where wages or labor ruled taxable

The provisions of the U.S. Constitution authorizing Congress to impose taxes, duties, imposts and excises contain no express exceptions for taxes on wages or labor, or for taxes on income from labor. The courts have consistently rejected arguments that "wages" or "labor" (whether denominated as "labor property" or not) cannot be taxed under the Internal Revenue Code. For example, see:

• United States v. Connor^[47] (tax evasion conviction under 26 U.S.C. § 7201 affirmed by the United States Court of Appeals for the Third Circuit; taxpayer’s argument -- that because of the Sixteenth Amendment, wages were not taxable -- was rejected by the Court; taxpayer’s argument that an income tax on wages is required to be apportioned by population also rejected);
• Perkins v. Commissioner^[48] (26 U.S.C. § 61 ruled by the United States Court of Appeals for the Sixth Circuit to be “in full accordance with Congressional authority under the Sixteenth Amendment to the Constitution to impose taxes on income without apportionment among the states”; taxpayer’s argument that wages paid for labor are non-taxable was rejected by the Court, and ruled frivolous);
• White v. United States^[49] (taxpayer’s argument that wages are not taxable was ruled frivolous by the United States Court of Appeals for the Sixth Circuit; penalty -- imposed under 26 U.S.C. § 6702 for filing tax return with frivolous position -- was therefore proper);
• Granzow v. Commissioner^[50] (taxpayer’s argument that wages are not taxable was rejected by the United States Court of Appeals for the Seventh Circuit, and ruled frivolous);
• Waters v. Commissioner^[51] (taxpayer’s argument that income taxation of wages is unconstitutional was rejected by the United States Court of Appeals for the Eleventh Circuit; taxpayer required to pay damages for filing frivolous suit).

Another tax protester argument is that income from labor should not be taxable because any amount the worker receives in exchange for his or her labor is received in an exchange of "equal value," although an exchange in any true "arm's length" fair market value transaction is, essentially by definition, an exchange of equal value. See, for example, the decision of the United States Court of Appeals for the Ninth Circuit in United States v. Buras,^[52] in which the taxpayer's theory -- that wages were not taxable because (1) "only profit or gain, such as that from the sale of a capital asset, constituted income subject to federal tax" and (2) "[w]ages could not constitute gain or profit because wages merely represent an equivalent exchange for one's labor" -- was rejected. See also the decision of the United States Tax Court in Link v. Commissioner,^[53] where the taxpayer's argument -- that pension income is "labor property" and that when taxpayer receives his pension income from his former employer for whom he once performed services (or labor), any amount he receives in exchange for his labor is a nontaxable exchange of equal value -- was rejected.

Further, under the U.S. Federal tax laws, even if labor were considered "property" the gain or income from "labor property" would be defined as the excess of the amount realized (for example, the money received) by the taxpayer over the amount of the taxpayer's "adjusted basis" in the "property" (see 26 U.S.C. § 1001). Since the taxpayer can have only a zero "basis" amount in his or her own labor -- the personal living expenses incurred to generate labor being both non-capitalizable and, under 26 U.S.C. § 262, non-deductible -- the "gain" would thus be equal to the amount of compensation received by the taxpayer. Compare Carter v. Commissioner,^[54] where the United States Court of Appeals for the Ninth Circuit stated: "The assertion that proceeds received for personal services cannot be given a 'zero-basis for the purpose of the assessment of taxation,' is frivolous. This is a variation of the 'wages are not income' theme, which has been rejected repeatedly by this court."

[edit] The Murphy case

On August 22, 2006 the United States Court of Appeals for the District of Columbia Circuit, in Murphy v. Internal Revenue Service and United States (Murphy v. United States) ruled that 26 U.S.C. § 104(a)(2) is unconstitutional under the Sixteenth Amendment to the extent that section 104(a)(2) purports to tax, as income, a recovery for a non-physical personal injury for mental distress and loss of reputation not received in lieu of taxable income such as lost wages or earnings.

No tax protester arguments were raised in Murphy, and the Court did not rule the Federal income tax itself unconstitutional. The Court of Appeals stated:

In sum, every indication is that damages received solely in compensation for a personal injury are not income within the meaning of that term in the Sixteenth Amendment. First, as compensation for the loss of a personal attribute, such as wellbeing or a good reputation, the damages are not received in lieu of income. Second, the framers of the Sixteenth Amendment would not have understood compensation for a personal injury --including a nonphysical injury --to be income. Therefore, we hold § 104(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.^[55]

The Murphy ruling on non-taxability of a personal injury recovery is mandatory precedent only in the District of Columbia.

[edit] Arguments about constitutionality in criminal cases

Under the United States Supreme Court ruling in Cheek v. United States,^[56] a defendant in a tax evasion prosecution who has made arguments that the Federal income tax laws are unconstitutional may have the arguments turned against him (or her). Such arguments, even if based on honestly held beliefs, may constitute evidence that helps the prosecutor prove willfulness, one of the elements of tax evasion. See Tax avoidance and tax evasion.

[edit] Constitutional status of the 1986 Internal Revenue Code in case law

Neither the U.S. Supreme Court nor any other Federal court has ever ruled that any Federal income tax^[57] imposed under the Internal Revenue Code of 1986 is unconstitutional.

[edit] Notes