The Statutory Basis of the Income Tax
THE STATUTORY BASIS OF THE INCOME TAX
(Editors note: Emphasis has been added to statutes where appropriate. Tom Scambos http://www.tax-freedom.com wrote this excellent preface for one of his own articles.)
PREFACE: Because of the dispersed placement of code sections defining common, everyday words that are used as legal terms in the Internal Revenue Code, most people who read the Code without thorough study are unaware of the unique code definitions of these terms. These definitions limit the applications of the tax laws so that they do not conflict with the Fifth or Thirteenth Amendment or with the constitutional prohibition against unapportioned direct taxes in the fifty states.
The highly paid and well-trained attorneys who write the tax bills which are given to Congress for enactment are not dummies - they know very well the necessity of drafting these statutes in conformity with these constitutional limitations forbidding direct taxation of the people within the fifty states. But, through careful framing of statutes and the use of confusing and misleading words, terms and definitions, they make the Code almost impossible to understand without deep study. Such actions perpetuate the intentionally created false popular belief that the Federal government has the constitutional authority to tax us directly in these 50 united States. Fortunately, once these code sections are carefully analyzed, one is able to clearly see the truth that no section of the Code directly taxes the earnings of a citizen of the fifty states.
The first thing you need to know about the Internal Revenue Code (hereafter called the Code) is that it only pertains to "taxpayers," and not "nontaxpayers." The United States Court of Claims in Economy Plumbing and Heating v. United States, 470 F.2d 585, at 589 (Ct.Cl. 1972) stated:
"The revenue laws are a code or system in regulation of tax assessment and collection. They relate to taxpayers, and not to nontaxpayers. The latter are without their scope. No procedure is prescribed for nontaxpayers, and no attempt is made to annul any of their rights and remedies in due course of law. With them Congress does not assume to deal, and they are neither of the subject nor of the object of the revenue laws."
Wow! So now the $64,000 question is ... Are you a taxpayer? It is important to understand that definitions in the law, especially the Code, are not the same as what you might find in Webster's Dictionary. The Code defines for us the term at Section 7701(a)(14) Taxpayer. "The term 'taxpayer' means any person subject to any internal revenue tax." If you are subject to an internal revenue tax you are a taxpayer, but if you are not subject to any internal revenue tax, then you are a nontaxpayer. Notice that this definition doesn?t tell you if you are subject to an income tax or any other internal revenue tax for that matter.
The next thing you need to understand is that before one can be required to file a return and pay a tax, a liability for that particular tax must be established. Liability is defined as a legal obligation or requirement. The following examples illustrate this point.
Section 4401. Imposition of Tax. (c) Persons liable for tax. Each person who is engaged in the business of accepting wagers shall be liable for and shall pay the tax under this subchapter on all wagers placed with him. Each person who conducts any wagering pool or lottery shall be liable for and shall pay the tax under this subchapter on all wagers placed in such pool or lottery.
Section 4403. Record Requirements. Each person liable for tax under this subchapter shall keep a daily record showing the gross amount of all wagers on which he is so liable, in addition to all other records required pursuant to section 6001(a).
Section 5043. Collection of taxes on wines. (a) Persons liable for payment. The taxes on wine provided for in this subpart shall be paid - (1) Bonded wine cellars. In the case of wines removed from any bonded wine cellar, by the proprietor of such bonded wine cellar; except that - ... (2) Foreign wine. In the case of foreign wines, by the importer thereof.
Section 5061. Method of collecting tax. (a) Collection by return. The taxes on distilled spirits, wines, and beer shall be collected on the basis of a return. The Secretary shall, by regulation, prescribe the period or event for which such return shall be filed, the time for filing such return, and the time for payment of such tax.
Section 5703. Liability for tax and method of payment. (a) Liability for tax. (1) Original liability. The manufacturer or importer of tobacco products and cigarette papers and tubes shall be liable for the taxes imposed thereon by section 5701. (b) Method of payment. (1) In general. The taxes imposed by section 5701 shall be determined at the time of removal of the tobacco products and cigarette papers and tubes. Such taxes shall be paid on the basis of a return.
Section 5722. Reports. Every manufacturer of tobacco products or cigarette papers and tubes, and every export warehouse proprietor, shall make reports containing such information, in such form, at such times, and for such periods as the Secretary shall by regulation prescribe.
Section 5741. Records to be maintained. Every manufacturer of tobacco products or cigarette papers and tubes, every importer, and every export warehouse proprietor shall keep such records in such manner as the Secretary by regulation prescribe. The records required under this section shall be available for inspection by any internal revenue officer during business hours.
Clearly, in the above examples, a liability for the tax has been established, record requirements are spelled out, and a method of payment is stated. Now we shall examine subtitle A and see if there are any similar provisions. SUBTITLE A - INCOME TAXES. Chapter 1, Normal Taxes and Surtaxes, Subchapter A. - Determination of Tax Liability.
Section 1. Tax imposed. (a) Married individuals filing joint returns and surviving spouses. There is hereby imposed on the taxable income of - (1) every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013, and (2) every surviving spouse (as defined in section 2(a)), a tax determined in accordance with the following table:
There follow numerous tax tables. If you read it in its entirety, you will notice that nowhere in Subtitle A is any American citizen made liable for any tax, required to keep any records, or file a return of any kind. This is in direct contrast to Subtitles D and E where certain individuals were made liable for a certain tax, were required to keep records, file a return, and pay a tax.
Turning to Subtitle F, - PROCEDURE AND ADMINISTRATION, we see the following:
Section 6001. Notice of regulations requiring records, statements, and special returns. Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.
Section 6011. General requirement of return, statement, or list. (a) General rule. When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.
Section 6012. Persons required to make returns of income. Returns with respect to income taxes under subtitle A shall be made by the following: (1) (A) Every individual having for the taxable year gross income which equals or exceeds the exemption amount, except that a return shall not be required of an individual -
Administrative sections 6001 and 6011 simply state that any person made liable for any tax imposed by this title must keep records and make a return. However, nowhere does it state who that person is. Are you required to keep records and file a return? How do you know? Section 6012 appears to get us closer to the answer. It states that every individual having for the taxable year gross income which equals or exceeds some exemption amount must make a return.
Notice that you must have gross income in order to be required to make a return. Do you have this thing called gross income? Return to Section 1. Tax Imposed. for a moment. Notice that the tax is imposed on the taxable income of everyone named in that section. Do you have this thing called taxable income? Fortunately the Code defines these terms for us.
Section 63. Taxable income defined. (a) In general. Except as provided in subsection (b), for purposes of this subtitle, the term "taxable income" means gross income minus the deductions allowed by this chapter (other than the standard deduction).
So we see that the term taxable income means gross income minus the deductions allowed by this chapter. We now know what taxable income is, let?s find out what gross income is.
Section 61. Gross income defined. (a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(8) Alimony and separate maintenance payments;
(10) Income from life insurance and endowment contracts;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.
Gross income is all income derived from a source. You need to know whether or not you have a source of income that is taxable. Items are not sources, but if any of the fifteen items are listed as a source, then it is includable as gross income and hence becomes taxable income. Now you?re probably asking if there is such a list. There certainly is! Subchapter N -- Tax based on income from sources within or without the United States.
Section 861. Income from sources within the United States. (a) Gross income from sources within United States. The following items of gross income shall be treated as income from sources within the United States: ...
While it is not necessary to read the following regulatory sections word for word, notice that these regulatory sections make no mention of any of the fifteen "items" listed under the definition of gross income from Section 61.
26 CFR Section 1.861-8(f)(1).
i. Overall limitation to the foreign tax credit.
iii. DISC and FSC taxable income.
iv. Effectively connected taxable income. Nonresident alien individuals and foreign corporations engaged in trade or business within the
v. Foreign base company income.
vi. Other operative sections.
(A) ...foreign source items of tax...
(B) ...foreign mineral income...
(D) "...foreign oil and gas extraction income..."
(E) "...citizens entitled to the benefits of section 931 and the section 936 tax credit..."
(F) "...residents of Puerto Rico..."
(G) "...income tax liability incurred to the Virgin Islands..."
(H) "...income derived from Guam..."
(I) "...China Trade Act corporations..."
(J) "...income of a controlled foreign corporation..."
(K) "...income from the insurance of U.S. risks..."
(L) "...international boycott factor...attributable taxes and income under section 999..."
(M) "...income attributable to the operation of a agreement vessel under section 607 of the Merchant Marine Act of 1936..."
Notice this list contains only foreign sources of income. A little further down, we find this section under the same regulation for Section 861.
26 CFR Section 1.861-8T(d)(2)(iii)
(iii) Income that is not considered tax exempt. The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:
(A) In the case of a foreign taxpayer (including a foreign sales corporation (FSC)) computing its effectively connected income, gross income (whether domestic or foreign source) which is not effectively connected to the conduct of a United States trade or business;
(B) In computing the combined taxable income of a DISC or FSC and its related supplier, the gross income of a DISC or a FSC;
(C) For all purposes under subchapter N of the Code, including the computation of combined taxable income of a possessions corporation and its affiliates under section 936(h), the gross income of a possessions corporation for which a credit is allowed under section 936(a); and
(D) Foreign earned income as defined in section 911 and the regulations thereunder (however, the rules of section 1.911-6 do not require the allocation and apportionment of certain deductions, including home mortgage interest, to foreign earned income for purposes of determining the deductions disallowed under section 911(d)(6)).
Now this tells us that the following items of income are not considered exempt, eliminated, or excluded. So if your income is not on this list, then it is considered exempt, eliminated, or excluded. We are also told in 26 CFR Section 1.861-8T(d)(2)(ii)(A). "In general. For purposes of this section, the term exempt income means any income that is in whole or in part, exempt, excluded, or eliminated for federal income tax purposes." Next we need to look at Section 911 and see if we have foreign earned income.
Section 911. Citizens or residents of the United States living abroad. (a) Exclusion from gross income. At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year--
(1) the foreign earned income of such individual, and
(2) the housing cost amount of such individual.
(b) Foreign earned income
For purposes of this section--
(A) In general. The term "foreign earned income" with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.
(B) Certain amounts not included in foreign earned income
The foreign earned income for an individual shall not include amounts--
(i) received as a pension or annuity,
(ii) paid by the United States or an agency thereof to an employee of the United States or an agency thereof,
(iii) included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or
(iv) received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.
(2) Limitation on foreign earned income
(A) In general. The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate of $70,000.
(B) Attribution to year in which services are performed.
For purposes of applying subparagraph (A), amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed.
If you are still awake after reading the preceding sections, then you should be able to determine if what you earn falls under the definition of gross income or foreign earned income as defined in Section 911. If what you earn does not fall under this section, you do not have taxable income for income tax purposes. Interestingly, the only tax form required to be filed by citizens of the United States pursuant to 26 U.S.C. 1 is the Form 2555 entitled Foreign Earned Income, which interestingly instructs the filer to attach the Form 1040 worksheet. The Form 1040 is not to be used as a tax return. This is why you will find no requirement anywhere for a citizen to file such a form.
Dan Meador from Ponca City, Oklahoma describes another way of looking at this situation. Consider that gross income lists or itemizes what Congress can tax, but does not determine what Congress has taxed. There is a separate section in the Internal Revenue Code that lists "taxable income," and there are no general application regulations for that section. The defect here is easily demonstrated by referring to the Parallel Table of Authorities and Rules to find that "taxable income," at 26 U.S.C. 63, does not appear and therefore has no general application regulations. This proves that only foreign-earned income is taxable generally. A tax known as income tax is a privilege tax, therefore excise rather than direct tax, and it has never been mandatory for anyone other than government officers and employees, as defined at 26 U.S.C. 3401(c). There are no implementing regulations for "taxable income" that are applicable to the several States party to the Constitution and the population at large. Since there are no regulations to tell us what taxable income is, we must rely on notice from a district director of an internal revenue district of the United States as required by 26 CFR Parts 1.6001-1(d) & 31.6001-6, or in the alternative, a list of taxable items you might own in an internal revenue district established under authority of 26 U.S.C. 7621 and E.O. #10289, as required by 26 CFR Part 301.6021-1. It follows that if there are no regulations for taxable income, the definition of gross income is irrelevant so far as the several States and people within the several States are concerned. The Internal Revenue Code taxes taxable income, articles and activity, not gross income.
Importantly, always remember the questions of upon what is the so-called "income" tax imposed, people, property, or activities; and what statute, if any, imposes a tax on people, property, or activities. That takes care of a federal income tax liability, but what about a state income tax liability?
Our state income taxes are predicated on Buck Act authority (4 U.S.C. Sections 105-111). Key legislation was enacted in 1934, and was expanded and particularized until about the early 1950s. However, the Buck Act, along with most other Federal legislation, was applicable solely to territories and insular possessions subject to sovereignty of the United States under the territorial clause. The grant of authority does not apply to the Union of several States. Verify this in definitions of "State" and "United States" in the sections cited above. The Uniform Division of Income for Tax Purposes Act of 1957, on which nearly all state income taxes are based, was designed for enactment in those states which levy taxes on or measured by net income. The "person liable" for state income tax, as is the case for Federal "normal tax", is the withholding agent for state and local government units. State income tax codes rely on liability prescribed by the Federal Internal Revenue Code. If you aren't required to keep books and records and file returns under Internal Revenue Code taxing authority, you aren't required to file state tax returns.
Once a citizen has decided they are not liable to pay income taxes or file returns, the next problem is usually trying to get their employer to stop withholding. The next section will deal with the solution to that problem.