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Date: Fri, 14 Nov 1997 06:08:53 -0800
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From: Paul Andrew Mitchell [address in tool bar]
Subject: SLS: Income - 2 (fwd)
<snip>
>
> INCOME IN A CONSTITUTIONAL SENSE
>
> Part 2
>
> by Tony Bator
>
>
> The Concept of Intergovernmental Tax Immunity
>
>The Supreme Court decisions that are involved with the development of the
>Concept of Intergovernmental Tax Immunity are listed below for the reader
>who wishes to study this material in depth.
>
> McCulloch v. The State of Maryland, 4 Wheat 316.
> Dobbins v. Erie County, 16 Pet 435.
> Buffington v. Day, 11 Wall 113.
> Helvering v. Gerhardt, 304 US 405.
> Graves v. New York, 306 US 405.
> The Public Salary Tax Act of 1939.
>
>The first three cases shown provided the basis for the Concept of
>Intergovernmental Tax Immunity. The Helvering case narrowed the immunity
>with respect to the salaries of State Officers. It is important to point
>out that the Court took the effort to explain that their decision was based
>on the statutes and, therefore, no constitutional questions were involved.
>
>In the Graves case, the immunity with respect to the salaries of government
>officials as developed by the Concept of Intergovernmental Tax Immunity was
>overruled in so far as the immunity results from implied Constitutional
>limitations.
>
>It is important to understand that the Supreme Court has certain rules
>pertaining to the manner in which it performs its duty. These rules can be
>found in Ashwander v. Tennessee Valley Authority, 297 US 288. As an
>example, the Court stated:
>
> The court has frequently called attention to the `great gravity and
> delicacy' of its function in passing upon the validity of an act of
> Congress; and has restricted exercise of this function by rigid
> insistence that the jurisdiction of federal courts is limited to actual
> cases of controversy: and that they have no power to give advisory
> opinions. On this ground it has in recent years ordered the dismissal
> of several suits challenging the constitutionality of important acts of
> Congress.
>
>There are seven other rules, and they, in effect, advise a person on how to
>prepare a case from its outset if you expect to get that case before the
>Supreme Court for an answer.
>
>In 1939, President Roosevelt sent a message to Congress asking them to pass
>legislation that would tax the means and instrumentalities of the States.
>In preparing this legislation Congress, for reasons best known to them,
>prepared the legislation as two separate packages. The first dealt with
>taxing the officers and employees of State Governments and, in turn,
>permitted the State to tax the Officers and employees of the National
>Government. As you might have guessed, the legislation proposed that taxed
>the people passed while the legislation that would have taxed the
>instrumentalities (bonds) of both governments did not.
>
>The record of the debate that took place in the House is the Congressional
>Record of 1939, pages 1293 through 1333. It makes interesting reading.
>
>It is the judgement of this writer that the authority Congress used in
>enacting this legislation was the General Power of Concurrent Taxation,
>which might be applicable on the basis that the States have subjected their
>officers and employees to State Personal Income Taxes which are excise
>taxes. During the debate it was pointed out that 31 States of the then 48
>had passed Personal Income Tax legislation.
>
>Since the General Power of Concurrent Taxation is applicable only when
>excise taxes are involved, this is what I believe was the power that
>Congress used to support what would otherwise be a totally unconstitutional
>act. They completely ignored the fact that in 1895 the Supreme Court had
>determined that to tax the real or personal property or the income they
>produce, representation and the rule of apportionment were required to
>Constitutionally tax the citizens of the States. Remember: the officers and
>employees of State are citizens of that State. So here we see a statute
>enacted by Congress in apparent conflict with the Constitution of the United
>States.
>
>The specific sections of Title 1 of the Public Salary Tax Act are listed
>below.
>
> Section 1. Section 22(a) of the Internal Revenue Code (relating to the
> definition of gross income) is amended by inserting after the words
> "compensation for personal service" the following : (including personal
> service as an officer or employee of a State, or any political
> subdivision thereof, or any agency or instrumentality of any one or
> more of the foregoing.)
>
> Section 2. Section 116(b) of the Internal Revenue Code (exempting
> compensation of teachers in Alaska and Hawaii from income tax) is
> repealed.
>
> Section 3. Section 22(a) of the Internal Revenue Code is amended by
> adding at the end thereof a new sentence to read as follows: "In the
> case of judges of the courts of the United States who took office on or
> before June 6, 1932, the compensation received as such shall be
> included in gross income"
>
> Section 4. The United States hereby consents to the taxation of
> compensation received after December 31, 1938 for personal service as
> an officer or employee of the United States, any territory or
> possession or political subdivision thereof, the District of Columbia
> or any agency or instrumentality of any one or more of the foregoing,
> by any duly constituted taxing authority having jurisdiction to tax
> such compensation, if such taxation does not discriminate against such
> officer or employee because of the source of such compensation.
>
>Regarding Section 1: These are citizens of States and the Constitution and
>the Supreme Court says that if they are to be taxed on their real or
>personal property or the income from both, they must be taxed by
>representation and the rule of apportionment or the tax is invalid.
>
>Regarding Section 2: This shows that in order to get qualified teachers to
>go to the territories and teach; it was necessary for the Congress to enact
>legislation that would permit them to be exempt from the taxation they would
>be subjected to as a result if the local legislative power of Congress that
>has been previously described.
>
>Regarding Section 3: It has already been stated several times that the
>Constitution prohibits the salary of a Federal judge to be diminished, and
>this includes by taxation as determined by the Supreme Court in the
>following case:
>
> Evan v Gore, 253 US 245, 264.
>
> Here the Constitution expressly forbids diminution of the judges
> compensation, meaning as we have shown diminution by taxation as well
> as otherwise ... We conclude that the tax was imposed contrary to the
> Constitutional prohibition and so must be adjudged invalid.
>
>Regarding Section 4. Here is a perfect example of the areas involved with
>the local legislative power of Congress. It defines perfectly the local
>political jurisdiction of Congress. Additionally, the Supreme Court, in
>previous decisions, has responded to this matter as shown by the following:
>
> McCulloch v. The State of Maryland, 4 Wheat. 316, 430.
>
> We find then, on just theory, a total failure of this original right to
> tax the means employed by the government of the Union, for the
> execution of its powers. The right never existed, and the question
> whether it has been surrendered cannot arise.
>
> McCulloch v. The State of Maryland, 4 Wheat. 316, 432.
>
> If States may tax one instrument, employed by the government in the
> executions of its powers, they may tax any and every other instrument.
> They may tax the mails, they may tax the mint, they may tax patent
> rights; they may tax the papers of the custom house; they may tax all
> the means employed by the government. This was not intended by the
> American people, they did not design to make their government dependent
> upon the States.
>
>This concept of Intergovernmental Tax Immunity still exists today even
>though the Public Salary Tax Act has somewhat narrowed it. (A person
>employed by State government who is directly affected by it should properly
>prepare a case to challenge this Act.) The bonds issued by a State and the
>income derived therefrom cannot be taxed by the National Government nor can
>the States tax the bonds or income derived from them as issued by the
>Government of the United States. Go into any post office in a state that
>has a sales tax and purchase envelopes or other packaging material and you
>will not be charged a sales tax. Many items that contain federal excise
>taxes, when purchased by a State the excise tax is removed from the purchase
>price.
>
>There is an additional area that must be understood with respect to this
>Intergovernmental Tax Immunity. About 1924, the Supreme Court developed
>what they referred to as their Essential / Non-Essential Test. This test
>was brought about because the States were organizing State run corporations
>that were essentially performing operations that were private in nature --
>performing functions that were not essential to the functioning of
>government.
>
>As a result, the federal treasury started to lose considerable amounts of
>revenue because of the concept of Intergovernmental Tax Immunity. The Test
>was therefore developed to determine if a State-run corporation was
>performing essentially government functions. If not, then it was considered
>non-essential and therefore, as a corporation, taxable.
>
>It might be appropriate to insert here a speech by Senator Bohah, a noted
>authority on the Constitution, that was made on the floor of the Senate
>during the debates concerning the 16th Amendment.
>
> It was not therefore, because of the fact that the taxing clause of the
> Constitution had any limitations either express or implied in its
> language, it was not because the language failed to convey all the
> power of the National Government to tax, but because of the universal
> rule that every component part of the constitution must be construed in
> the light of every other part of it; and that it must be construed as a
> whole in the light of the designs and purposes and object to be
> accomplished when the instrument was written. Those designs and
> purposes were to create a National Government in its own sphere,
> independent and separate and distinct from the State governments, and
> to create the State sovereignties, which in their reserved powers are
> separate, distinct, and independent of the National Government.
>
>
>
> INCOME IN A CONSTITUTIONAL SENSE
> as a Result of the 16th Amendment
>
>There is presently certified documentation that the National Government
>never received the appropriate number of States to ratify the 16th Amendment
>to the Constitution of the United States. This matter is presently winding
>its way through the federal courts and I assume must be answered in due
>time. We will proceed, however, on the basis that it continues as a
>properly ratified amendment.
>
> ARTICLE XVI
>
> 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.
>
>Before proceeding with any Supreme Court decisions, it might be appropriate
>to lay some groundwork as to what were the circumstances involved that
>caused Congress and President Taft to introduce both The Corporation Excise
>Tax Act of 1909 and the language of the 16th Amendment simultaneously onto
>the floor of the Senate. The Corporation Excise Tax Act of 1909 was
>immediately enacted into legislation and the final language of the 16th
>Amendment was sent out to the States for ratification. Ratification of the
>16th Amendment allegedly occurred in 1913 upon the votes of the appropriate
>number of States.
>
>It was established from the inception of the National Government that the
>chartered institutions of the States could be taxed by Congress. This is
>shown in the following cases:
>
> McCulloch v. The State of Maryland, 4 Wheat. 316, 435.
>
> The people of all the States, and the States themselves, are
> represented for Congress, and by their representatives, exercise this
> power. When they tax the chartered institutions of the States, they
> tax their constituents; and these taxes must be uniform.
>
>So, that until 1895, the National Government could tax the chartered
>institutions of the States. Along came the Pollock cases and the resulting
>Supreme Court decision declaring the Income Tax of 1894 unconstitutional
>with the specific reason as to why it had declared that act
>unconstitutional. The revenues that were intended to be collected by the
>Act of 1894 were now no longer to be expected and, therefore, the National
>Government was experiencing some difficulty from a revenue point of view as
>taxes were being challenged in courts all over the land and the plaintiffs,
>mostly corporations, attempted to prove the income was always traceable to
>real estate.
>
>In 1903, the Spreckles Sugar Refining Company brought suit to recover a tax
>exacted under the war revenue act of June 13, 1898 (30 Stat. at L. 448, 464,
>chap. 448 U.S. Comp. Stat. 1901 p.2297) and paid under protest. The Supreme
>Court ruled as follows:
>
> Spreckles Sugar Refining Co. v. McClain, 192 US 496.
>
> The `special excise tax' imposed on sugar refining by the war revenue
> act of June 13, 1898 ... section 27 to be measured by gross annual
> receipts in excess of a named sum, is not a direct tax, which under the
> Federal Constitution, must be apportioned among the several states
> according to population, but is an excise imposed by Congress under its
> power to lay and collect excises which shall be uniform throughout the
> United States.
>
>Mr. Taft, who had been elected President in 1908, had as a major part of his
>campaign the promise to push for an income tax that would tax the wealthy.
>This would be done by taxing the instrument of their wealth -- the
>corporations -- because now we could legislate in a manner that would not be
>determined to be unconstitutional by the Supreme Court.
>
>President Taft, upon taking office, immediately had introduced into Congress
>The Corporation Excise Tax Act of 1909 and, simultaneously, because of
>growing political pressure from the opposition, to push for a Constitutional
>Amendment to tax the incomes of the wealthy.
>
>In 1909, Congress had for consideration as taxing legislation, The
>Corporation Tax Act of 1909, the language of the 16th Amendment as submitted
>by President Taft, and the Bailey-Cummins Income Tax Act, which was a
>complete replica of the Income Tax Act of 1894 which had already been
>declared unconstitutional. Congress enacted the Corporation Excise Tax Act,
>rejected the Bailey-Cummins Income Tax Act, and modified the language of the
>proposed amendment and sent it to the States for ratification.
>
>It is obvious that the objectives to be achieved by the Corporation Excise
>Tax Act and the 16th Amendment was to tax the incomes of corporations, which
>the National Government had from the beginning, and additionally, as a
>result of the required reporting by these corporations, have the necessary
>information to be able to tax this income without any individual being
>required to forego his Constitutional rights.
>
>The reporting of Taxable Income on Forms 1099 and W-2 is totally
>misunderstood. Proper understanding of income in a Constitutional sense
>will stop this misuse of these forms.
>
>First, please remember that the current taxing statute is the Internal
>Revenue Code of 1954. Under Subtitle A, two categories of taxes are
>specified: Normal Taxes and Surtaxes. We have previously dealt with the
>Normal Taxes and now must determine what Surtaxes are and what and who are
>subject to this category of tax. The following decisions make clear what is
>subject to a surtax:
>
> Southern Pacific Co. v. Lowe, 247 US 330, 336.
>
> The act of 1913 contains no similar language, but on the contrary,
> deals with dividends as a particular item of income leaving them free
> from the normal tax imposed upon individuals, subjecting them to
> graduated surtaxes only when received as dividends.
>
> Lynch v. Hornsby, 247 US 339, 344.
>
> Hence we construe the provisions of the act that the `net income of a
> taxable person shall include gains, profits and income derived from
> interest, rent, dividends, ... or gains or profits and income derived
> from any source whatever' as including (for the purpose of the
> additional tax) all dividends declared and paid in the ordinary course
> of business by a corporation to its stockholders after the taking of
> the act.
>
>Please note that income collected by a corporation (rents, dividends,
>interest gains or profits from whatever source) is taxable income to the
>corporation or when paid out as dividends to its shareholders.
>
> Lynch v. Hornsby, 247 US 339.
>
> Under the income tax act of 1913, dividends declared and paid in the
> ordinary course by a corporation to its shareholders after March 1,
> 1913 whether from current earning or from a surplus accumulated before
> that date were taxable to the individual stockholders as income under
> the surtax provision. Lynch v. Turrish, ante 221 and Southern Pacific
> v. Lowe ante 330 Distinguished.
>
>So it becomes necessary to determine the definition of "income" so that we
>may properly determine whether it comes within the scope of the 16th
>Amendment. The Fourth Circuit Court of Appeals has stated:
>
> Simmons v. United States, 308 F2d 160, 166.
>
> Therefore, the taxpayer can establish his contention that the tax
> imposed is invalid under the Constitution only by showing, first, that
> the tax is direct and therefore requires apportionment, and second,
> that the tax does not fall within the scope of the Sixteenth Amendment
> which lifts the apportionment requirement from such categories of taxes
> on incomes as are deemed direct taxes.
>
>In the above cases it is shown that there is a character of "income" that
>comes within the scope of the 16th Amendment and is subject to taxation by a
>graduated surtax. Who determines what "income" is and what is its
>definition? This is shown by the following Supreme Court decisions:
>
> Eisner v. Macomber, 252 US 189, 206.
>
> In order, therefore, that the clauses cited from Article I 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 is
> 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 by
> any definition it may adopt cannot conclude the matter, since it cannot
> by legislation alter the Constitution, from which it derives its power
> to legislate, and within whose limitations alone that power can be
> lawfully exercised.
>
>Because the word "incomes" is contained in the Constitution, it is the
>Supreme Court of the United States who determines the meaning of the word as
>there used in the 16th Amendment. This is the only income which the
>citizens of the States can be taxed upon without the rule of apportionment
>being required. The following cases completely define the word "income"
>that comes within the scope of the 16th Amendment:
>
> Doyle v. Mitchell Bros, 247 US 179, 185.
>
> Whatever difficulty there may be about a precise and scientific
> definition of `income' it imports as used here, something entirely
> distinct from the principle or capital as a subset of taxation or as a
> measure of the tax; conveying rather the idea of gain or increases
> arising from corporate activities.
>
> Merchants Loan & Trust v. Smietanka, 255 US 509.
>
> 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
> October 3, 1913 (38 Stat. at L. 166, Chap. 16, 4 Fed Stat. Anno. Ed
> p.236) 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 v. Lowe, 247 US 330, 335, 62 L.Ed. 1142, 1147, 38 Sup.Ct.Rep.
> 540 where it was assumed for the purpose 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 Act 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 involved, the same definition of `income' which was applied
> was adopted from Stratton's Independence v Howbert, supra, arising
> under the Corporation Excise Tax Act of 1909, with the addition that it
> should include `profit gained through the 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 of 1909, and that what
> that meaning is has now been definitely settled by the decisions of
> this court.
>
> In determining the definition of the word `income' thus arrived at,
> this court has consistently refused to enter into the refinement of
> lexicographers or economists, and has approved, in the definition
> quoted what is believed to be the commonly understood meaning of the
> term which must have been in the minds of the people when they adopted
> the 16th Amendment to the Constitution. Doyle v. Mitchell Bros. 247 US
> 179, 185, 62 L.Ed. 1054, 1059, 38 Sup.Ct.Rep. 467; Eisner v. Macomber
> 252 US 189, 206, 207, 4 L.Ed. 521, 528, 529, A.L.R. 1570, Sup.Ct.Rep.
> 189.
>
> Bowers v. Kerbaugh-Empire Co., 271 US 174.
>
> `Income' has been taken to mean the same thing as used in the
> Corporation Excise Tax Act (August 5) 1909 (36 Stat. at L. 11, Chap. 6)
> in the 16th Amendment and in the various revenue acts subsequently
> passed.
>
>Examination of section 38 of the Corporation Excise Tax Act of 1909
>discloses that there was imposed a special excise tax on the privilege of
>doing business in a corporate capacity. The measure of the tax was on the
>net income of the corporation from whatever source.
>
>Additionally, it might be of some interest to note that it was President
>Taft who had the Corporation Excise Tax Act of 1909 and the 16th Amendment
>introduced into Congress and subsequently signed the Corporation Excise Tax
>into law. Ex-president Taft, in 1925, was the Chief Justice of the United
>States Supreme Court when the Bowers v. Kerbaugh-Empire case above was
>decided.
>
>It should be obvious from what has been shown that there is a character of
>"income" that comes within the scope of the 16th Amendment and that "income"
>is subject to the surtaxes specified in the Internal Revenue Code of 1954
>and is the same character of "income" since the passage of the Income Tax
>Act of 1913.
>
>This type of "income" which is reported to the Internal Revenue Service on
>form 1099, is a legal requirement placed upon the corporation in which you
>may be a shareholder. It is the most amazing thing in our country today
>that no withholding occurs on this type of "income" which can be legally
>taxed, while tremendous intimidating pressure is brought to bear on
>individuals who have occupations of common right, or income that is only
>taxable by the rule of apportionment.
>
>
>[Reprinted from `Freedom League Newsletter', June & July 1986.]
>
<snip>
===========================================================================
Paul Andrew Mitchell, Sui Juris : Counselor at Law, federal witness 01
B.A.: Political Science, UCLA; M.S.: Public Administration, U.C.Irvine 02
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_____________________________________: Law is authority in written words 09
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