Why do those in the THM believe that "income" cannot be derived from personal earnings?

Once those in the Tax Honesty Movement have determined that there is no law imposing liability for the income tax on the typical working American, then it would seem that any further inquiry would be purely academic, and it would be.  But the question that looms large is "Why?"   And that question leads them to explore more deeply into the Code and its history.

Why hasn't Congress simply enacted a section declaring that everyone is liable for the income tax?  After all, doesn't the Sixteenth Amendment give Congress the power to tax any and all incomes whatsoever?  If they have that power, then why don't they use it?  So although exploration into other areas and issues may appear to be academic, these are nonetheless questions so compelling that further investigation is irresistible. 

Beginning at the beginning, according to Section 1 the income tax is imposed on "taxable income".  Obviously, then, it is not imposed on "income" that is not "taxable", nor would it be imposed on any taxable activity that did not produce "income", so the meanings of those two words are of paramount importance.

After examining the law, consisting of the Code and Supreme Court authorities, the THM has concluded that not only is the typical working American not liable for the tax, his wages and salaries received in exchange for his labor are not "income" neither within the meaning of the Constitution and the 16th Amendment, nor, therefore, within the meaning of the IRC.  What has led the THM to this conclusion?  Is it a baseless or "frivolous" argument?

"Income" is everything that "comes in" . . . isn't it?

Initially, anyone pursuing a legal meaning of the term "income" is shocked to find that the IRC does not contain a definition of the term.  "Gross income" is defined by Section 61, as meaning "all income, from whatever source derived", and the section goes on to list those sources from which income may (or may not) be derived.  It does not, however, tell us how income is derived from those sources.  Nor does it define "income" because a definition that includes the defined word, "gross income means all income", does not define the word. 

"Taxable income" is also defined in Section 63 as, essentially, gross income minus deductions, but, again, defining income as income is no help. 

Section 64 defines "ordinary income" as “gain” from the sale or exchange of property:

"For purposes of this subtitle, the term "ordinary income" includes any gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b) [sale of property used in trade or business or involuntary conversion due to fire, shipwreck, theft or other casualty]. Any gain from the sale or exchange of property which is treated or considered, under other provisions of this subtitle, as "ordinary income" shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b)."       (emphasis and [bracketed material] added)

So, the closest thing we have to a statutory definition, at least one that does more than say that "income" is "income", is Section 64, which defines ordinary income as gain derived from the sale or exchange of property.  But neither Section 61, which tells us that income may be derived from the sources listed, nor Section 64, which tells us that "income" is gain, tells us how gain is derived from those sources.

Looking further to the Code for guidance we find Subchapter O, "Gain or Loss From Disposition of Property" and its Part 1, "Determination of Amount and Recognition of Gain or Loss" where Section 1001 tells us that:

"The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized."  (emphasis added)

Now we know that according to the Code income is "gain" and that we determine gain by comparing the amount received to something called "basis".  If the amount received exceeds the "basis", then the excess is income.  Section 1001 refers us, however, to Section 1011 for determining basis.  In looking at Section 1011 and the sections that follow we find the rules for determining basis.  In each case the basis is either the cost of the property sold or exchanged or its value

The remaining uncertainty to the typical working American, however, is in the fact that he does not make his living by buying or inheriting and selling goods or real estate, etc.  He sells his time and labor, at the expense of both time out of his unknown but finite life and work spans and his physical energy, skills and knowledge of his craft.  The IRS says that the basis for labor is "zero", but none of the sections on basis allow for a "zero" basis, every instance calling for the use of either cost or value as the basis.  Surely the IRS does not truly believe that one's labor is without either cost or value.

One of the THM's principal objections to the IRS's application of the federal income tax to personal earnings is the THM's contention that there is no legal basis for the IRS's "zero basis" rule, by which the IRS treats wages and salaries paid in exchange for one's labor as 100% profit, received for nothing.  An examination of the IRS's official list of frivolous arguments, however, reveals that the IRS does not consider that argument frivolous.  The IRS's omission of the "zero basis for zero basis" objection from its official list of frivolous arguments, its "The Truth About Frivolous Tax Arguments" publication, in effect concedes that there is no legal basis for that rule.  Is it possible that once again the Secretary is attempting "to change the language of the revenue statutes because he thinks Congress may have overlooked something."?  Water Quality Ass'n v. United States, 795 F.2d 1303 (7th Cir. 1986)  See also, U. S. v. Calamaro, 354 U.S. 351 (1957).

With all these unexplained aspects of income and how it relates to the typical working American, particularly how one derives gain from the sale of his labor, we have to look beyond the Code.  We have to look elsewhere, so where else do we look?  According to the IRS, inferior court cases, those from Tax Court, District Courts and Appeals Courts are not binding other than between the parties and, even then, only as to the tax years ruled upon.  Supreme Court cases, however, are treated by the IRS as the law of the land and are regarded as "equivalent to the Code."

Looking to the Supreme Court we find a fairly short, but continuously refining, line of cases that provides us with the principles that we need in order to determine whether gain (income) can be derived from monies received in exchange for one's labor.  The first of those cases is Stratton's Independence v. Howbert, 231 U.S. 399 (1913).  In that case the Supreme Court held that "'income' may be defined as the gains derived from capital, from labor, or from both combined."  Id, at 415. 

This very basic definition of income is consistent with Section 64, that income is "gains derived".  The Court's including gains derived "from labor", however gives some indication that there is at least somewhere a way to learn how those gains are "derived from" labor, the stock in trade of the typical working American.

The next Supreme Court case dealing with the meaning of income was Doyle v. Mitchell Bros., 247 U.S. 179 (1918), in which the Supreme Court held that money received in exchange for property is not income and that only the gain realized from the sale or exchange is income.  The Supreme Court stated that what "comes in" is not "income", but rather "gross proceeds", and that before any income can be said to have been received one must first determine whether the transaction produced a gain.  The Court explained that before any gain can be identified we must first withdraw from gross proceeds a sufficient amount to restore the capital that was given in order to receive those proceeds.  Once the recipient has made himself whole again if there are funds remaining, there is a gain.  If the gross proceeds are not sufficient to make the recipient whole, to put him back where he was before the transaction, then there is a loss.

From these authorities the THM concludes that:

No, Virginia, what "comes in" is not "income".  What "comes in" is called gross receipts and only the profit or gain, if any, is gross "income".

The question that the THM takes from this important Supreme Court case is how does the typical working American restore his capital when that capital is his labor and when that capital is also a day, week or month out of his finite, albeit unknown, lifetime?  If the gross proceeds from the sale of that labor and time are unable to put him back even, then how can any gain be realized?  What basis is to be deducted according to Sections 1011, et seq.?  If one cannot determine how much, if any, of his gross proceeds is gain, then how can he determine whether he has received any "income"?

The IRS contends that the basis for labor and lifetime is "zero", but it also admits by omission from its list of frivolous arguments that it has no legal basis for that contention.  The basis sections do not mention a basis for labor or time out of one's life and work spans nor do they provide for a blanket assignment of "zero" in any instance, even where the property was received as a gift or legacy, at no cost. 

At this point we have determined a number of things about the term "income":

1. The term "income" is not defined in the IRC;

2. Section 64 defines "ordinary income" as "gain" derived from the sale of property;

3. Section 1001 informs us that gain derived from the sale or other disposition of property is the amount by which the amount realized from the sale exceeds the "basis" for the property sold;

4. Sections 1011, et seq. tell us that the basis is either the cost of the property or, where cost is not involved as in a gift, legacy or inheritance, its value;

5. In Stratton's Independence v. Howbert, the Supreme Court defined "income" as "gains derived from capital, from labor, or from both combined";

6. In Doyle v. Mitchell Bros., the Supreme Court made two things clear,

a. What "comes in" is not "income", but rather gross proceeds; and

b. In order to determine whether a conversion of property or capital produced a gain one must first restore the capital from the gross proceeds, anything remaining thereafter being "gain", or "income".

From this summary it would appear, then, that the Code provisions are in total agreement and harmony with the Supreme Court's definition of income as profit or gain, including the deduction of basis, or restoration of capital, in order to determine what part, if any, of a transaction is profit or gain—income. 

For one engaging in manufacturing or resale of goods or any purchase and resale of property, real or personal, this information would probably be sufficient to permit him to determine whether he had realized profit or gain, i.e., "income", from those transactions.  But those in the THM are concerned with the typical working American.  How does he determine whether any of the monies he has received in exchange for his labor and time out of his life and work spans are profit or gain? 

What part of his gross proceeds would it take to "restore his capital"?  Half?  All? 

Labor is at the expense of time out of and eventual depletion of one's life and work spans, at the expense of one's personal exertion, whether physical or intellectual, all expended for the benefit of the recipient, but those expenditures, that investment of his human capital, are not readily expressed in terms of money.  So if the cost of the exchange cannot be expressed in dollars and cents, what then is the basis value?  If a cost basis cannot be determined, all that remains is a value based basis.  What is the value if not the amount a willing purchaser/employer is willing to pay and a willing seller/employee is willing to accept?  If that is the case the wage or salary itself would be the value, basis and amount received, neither remuneration nor basis exceeding the other.

Even if one assumes for the sake of argument that there is a gain in the transaction, that an employee is paid in excess of his expenditure of labor and time out of his life or their value, what if the amount of that gain cannot be determined with any semblance of certainty?  Then what? 

Well, along comes the case of Eisner v. Macomber, 252 U.S. 189 (1920).  One of the first things this case does is to clear up the mystery regarding why the IRC does not contain a definition of "income".  The Court held that where the question of the definition of "income" is concerned "Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised."  The Court reasoned that since "income" is a Constitutional term, and by redefining the terms of the Constitution Congress could change the Constitution, Congress cannot define "income".

But, more importantly, the Supreme Court in Eisner v. Macomber cleared up the effect of not being able to clearly and with certainty identify and carve out that portion of gross proceeds that may be gain, profit—"income ".  It starts with the general definition set out in Stratton's and Doyle, but then clears up our remaining question:

"After examining dictionaries in common use (Bouv. L.D.; Standard Dict.; Webster's Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act of 1909 (Stratton's Independence v. Howbert, 231 U.S. 399, 415; Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185) — ""Income may be defined as the gain derived from capital, from labor, or from both combined," provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle Case (pp. 183, 185).

"Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. The Government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word "gain,"  which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. "Derived — from —capital;" — "the gain — derived — from — capital," etc.  Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but again, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived," that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; that is income derived from property. Nothing else answers the description." 1 (emphasis the Court's)

Stratton's told us that income is gain, and Doyle told us that gain is the excess over what is required to return the recipient to his prior state, restoring his capital investment.  Now, however, we realize from Eisner v. Macomber's holding that having a gain alone is not income unless and until that gain can be "derived from" the transaction.  Not gain alone, as in the case of appreciation in value or reproduction in kind, such as an increasing herd of cattle, but gain "derived—from—capital".  In order to be derived it must be separate—severed—from the capital, that portion of receipts needed to restore the capital investment.  The THM sees this case as saying that unless and until a sum can be separated from the capital it cannot be considered as "income".  Until the two can be distinguished, one amount identified as the basis or capital and the remainder the gain, and severed from each other there can be no income.

What basis can be assigned to one's labor, skills, knowledge and talents?  It is impossible to express the cost, expenditure, on the part of the working American in pecuniary terms and there is no way to value that labor other than what a willing employer is willing to pay for it.  But even where one is paid an amount in excess of that expenditure of time, energy and skills, and in excess of their value, if the amount of that excess cannot be identified as gain and severed from the whole of the gross receipts, earnings, available for separate use, benefit and disposal, then it cannot be said to have been "derived from" those earnings.

Any new revelations from the Supreme Court since 1920's Eisner v. Macomber?  The only other significant discussion of "income" from the Supreme Court since Eisner is Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).  That case did not involve labor, but rather punitive damages that Glenshaw had received as the result of settling an action for fraud and antitrust violations.  The issue was not whether the compensatory damages paid were income, which Glenshaw had apparently conceded, but whether the exemplary damages paid in excess of losses incurred were "income". 

The Glenshaw court applied the same test as in Eisner, but used different terms.  In Eisner the term was "gain", but the Glenshaw Court preferred "accessions to wealth" and in Eisner the term was "derived from" and "available for separate use" while in Glenshaw it became "realized and available for separate use".  Can one have a gain without experiencing an accession to wealth—an accession to wealth without any gain?  If the Eisner Court's terms had been employed, would the Court have determined that the exemplary damages Glenshaw received in excess of damages incurred were identifiable gains derived from, received and available for separate use?

Given the arguments advanced by Glenshaw Glass, it appears that the Glenshaw Court's difficulty was due primarily to the absence of what it recognized as "capital" and the absence of a transfer of property, per se.  But Glenshaw Glass was receiving something in consideration of capital, the losses it had suffered, and there was an exchange of property, the relinquishment of its claim as a result of the settlement.  But in either event and regardless of why the Glenshaw Court chose to use different terms, the result would be the same.

We know the IRS has no basis for its "zero basis" rule relative to personal earnings, but now we know why.  If any basis were permitted at all it would be impossible to determine, whether by cost or value, making it impossible to identify that which is in excess of basis—profit, gain . . . income.  If it is impossible to determine and separate the capital from the profit, then it is equally impossible for any income, whether there is an overpayment or not, to be "derived from" gross proceeds received in exchange for labor or, for that matter, any "accession to wealth" to be "realized and available for separate use and enjoyment".

So, if the THM concludes that income cannot be derived from wages, salaries or other payments received in exchange for the working American's labor, can we say that it is without a basis (no pun intended) in law?  That it is a "frivolous argument"?

Casting a critical eye to the THM's observations and conclusions, there is but one missing link in the chain of logic or, perhaps better stated, one unanswered question raised by its reasoning.  All of the authorities, beginning with Section 64 defining ordinary income as gain derived from the sale of property and on to Sections 1001, et seq. setting out the rules for determining what, if any, gain, or income, and amount in excess of the property's basis, and what basis should be applied to the property sold or otherwise disposed of, are pertaining to propertyStratton's (mining products, ore), Doyle (lumber) and Eisner (stock dividend) are all dealing with a conversion of property.  So the remaining question:  Are personal earnings, monies received in exchange for one's labor, received for "property"?  Is our labor our property, and, if not, what is it?

We all know that property can be real or personal, corporeal or incorporeal, but labor is definitely not a commodity or artifact, something manufactured, and it is not realty, so what is it?  A chattel?  An incorporeal chattel?  Is one's labor property?  Again, the Supreme Court has addressed this issue.  In Butcher's Union v. Crescent City Co., 111 U.S. 746 (1884), dealt with the right to labor at one's chosen occupation or trade, but that case is more often remembered and cited for Justice Field's further explanation of that right and its underlying asset, our labor.   Justice Field, concurring and joined by three other justices:

   "It has been well said that, "The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of the poor man lies in the strength and dexterity of his own hands, and to hinder his employing this strength and dexterity in what manner he thinks proper, without injury to his neighbor, is a plain violation of this most sacred property . . . Adam Smith's Wealth of Nations, Bk. I. Chap. 10." 2 (emphasis added)

 So, one's labor is not only his property, it is his "most sacred and inviolable" property.  Thus, is it frivolous for the THM to conclude that those Code sections pertaining to the sale of property apply?  The IRS seems to agree, since it applies a basis, albeit "zero", to labor, something it would not do if labor is not property.

Applying the Code's provisions to the sale of their labor, then, we have the following progression:

1.Section 61 indicates that gross income means all income, including income derived from "compensation for services" (which may or may not be the same as "compensation for labor"), but how do we "derive" income from compensation for services, or, for that matter, compensation for labor?

2. Butcher's Union and progeny and the IRS, by assigning a basis to labor, make it clear that one's labor is his property, so how does one "derive" income from the sale of property?

3. Section 64 informs us that the income from the sale of property (which would include the sale of one's labor) is only the gain derived from the sale or transfer, so we know that the income derived is not the total price, gross receipts, but only the gain.

4. Stratton's Independence and Doyle v. Mitchell Bros. agree, saying that income is the gain derived from the conversion of capital, labor or both, and that gross proceeds must first be applied to restore what was given for them in order to determine whether there is any gain, so how do we determine what part of gross proceeds received for one's labor is gain?

5. Section 1001 tells us that the gain is that part of the price that is in "excess of the amount realized therefrom over the adjusted basis", and directs us to Section 1011, so what is the "basis" for our labor?

6. The IRS contends that the basis for one's labor is "zero", but not only does it admit by omission of that THM objection from its official list of frivolous arguments and by its silence that it has no legal authority for that contention, the failure to deduct a basis for the transfer of property in order to determine—derive— gain, or income, is in direct conflict with Sections 61, 64 and 1001 of the IRC, so, again, what is the basis for one's labor (really . . . not based on an imaginary, concocted "zero basis" rule)?

7. Sections 1011, et seq. provide that the basis for the sale of property is either the cost of the property or, in cases such as a gift or legacy where there is no cost, the value of the property, so what is the cost of one's labor?

8. One's labor is conferred for the benefit of another at the expense of personal physical or mental exertion and at the expense of time out of one's life span and work life span, expenditures that cannot be restored for any amount of the gross proceeds.  Likewise, the working American's investment of personal exertion and expending/depleting life time, what can be considered his "human capital", do not readily lend themselves to expression in pecuniary terms.  So if the basis is the cost it would be impossible to determine what part of the remuneration received for one's labor is basis and what part is in excess of the basis.  If not its cost representing one's human capital investment, then, what would the basis be?

9. If the cost cannot be determined, we are left only with "value" as a basis, so how does one determine the value of his labor?  Is it an average of amounts paid and received by willing buyers/willing sellers on the open market for a particular skill or trade?  Or is value too personal for such a process, since one laborer, electrician, butcher, baker or candlestick maker may possess more expertise or skill than the next, may perform more efficiently or more productively than the next?  It would, then, seem impossible to establish a basis according to value.

10. The Supreme Court advises us in Eisner v. Macomber that unless a specific amount of any transfer or transaction can be designated as profit or income and severed from the capital (basis) for separate use and enjoyment, then no income has been derived from the transaction, and

11. In Commissioner v. Glenshaw Glass the same principle applies, albeit in terms of "accessions to wealth" instead of "gain" and "realized and available for separate use" instead of "derived from and available for separate use", and while personal earnings may add to one column of one's "balance sheet", the loss of his property, labor, being the expenditure of personal exertion and depletion of his remaining time to work and to live, his human capital investment, have diminished his total patrimony, so it would be impossible to say what part of those earnings represent an "accession to wealth" and designate that amount as realized and available for separate use".

12. It is, therefore, impossible to assign a specific amount as the basis, whether by virtue of cost or value (and that would include the impossibility of arbitrarily assigning the specific number "zero", to one's labor, his "most sacred and inviolable" property) and, likewise, it is therefore impossible to determine what, if any, of the remuneration received for one's property in the form of labor exceeds an indeterminable basis.

13. Thus, according to Sections 61, 64, 1001 and 1011, et seq., and according to the Supreme Court, it is equally impossible for income to be derived from compensation for one's own labor.

Is this reasoning unreasonable?  Is this reasoning and its conclusion frivolous?  Or is it based upon a rational and objective reading of the letter of the law and the pronouncements of its application by the highest court of the land?  Whether one agrees or not, it cannot be seriously contended that the conclusions of the THM relative to the derivation of income from personal earnings are without foundation in law.

The IRS's Response

The IRS's response, that one's labor has a basis of zero, i.e., that his labor is without any expenditure on his part and without any value to either the seller/laborer or the purchaser/employer, has been incorporated into the general discussion of the THM's findings and conclusions above, but in order to be as thorough in attention to both sides of this argument, we must also mention the IRS's other claims made in its "The Truth About Frivolous Tax Arguments" publication wherein it contends that any claim that wages or other personal earnings are not 100% profit is a frivolous argument.

In that publication the IRS contends:

"For federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services. I.R.C. § 61."

The IRS's description of Section 61 is false and deceptive, making the IRS's position in this regard not only frivolous, but fraudulent. 

Straining to bend the law beyond its breaking point in order to arrive at the conclusion that the Code makes wages and salaries, etc., "income", the IRS has had to distort and misstate the substance of Section 61 by the substitution of "and includes" for the true language of the section, "including".  While this may appear to be a minor change, its effect is to totally misstate the substance of the section. 

The IRS's misrepresentation of Section 61 states that "gross income" a) means all income from whatever source derived, AND b) includes compensation for services.  But here is what Section 61 actually says:

   "(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; . . . "  (emphasis added)

Section 61 does not say that gross income includes compensation for services.  On the contrary, it says only that gross income means income (which does not define "income") derived from whatever SOURCE.  The section goes on to identify those SOURCES as "including", NOT "and includes", compensation for services.  Thus compensation for services is not gross income, but merely one of the sources from which income may (or may not) be derived.

Section 61 does not define "income" nor does it tell us how income is derived from the various sources listed, but to demonstrate the true meaning it is helpful to restate the section using terms that are known to everyone:

Fruit juice means all juice from whatever fruit derived, including oranges, apples, peaches, pears, etc.

Does that statement mean that the term "fruit juice" includes oranges and apples?  Or does it say that oranges and apples are fruits from which fruit juice may be derived?  Of course, it means the latter. 

In order to have Section 61 say what the IRS wants it to say, it has substituted "and includes" for "including", completely altering the meaning of the language, lying about what the section actually says.  What that false statement does is to convert our fruit juice definition to "Fruit juice means all juices from whatever fruit derived 'and includes' oranges and apples." 

Is an orange or an apple fruit juice?  Well, neither is compensation for services 100% profit or gain, i.e., "income".  Gross income is only the income (profit or gain) that can be derived from compensation for services, just as fruit juice is only the juice that can be derived from oranges and apples. 

We all know how to squeeze juice from an orange, but how do we squeeze profit or gain from a financial exchange?  In other words, how does one "derive income" from any transaction?  Sections 1001, et seq. set out the rules for determining what part, if any, of an exchange of property for money is "profit" or "gain"—income.  In every instance the law provides that before any profit can be "derived" from a transaction the "basis" must be deducted from the price paid.  Basis in every instance described in those sections of the code is either the cost or the value of the property.

As demonstrated above, one's labor is not rendered for another without cost nor is it without value.  Laboring for a living is always at the expense of time out of one's life span and working life span, eventually depleting that time entirely.  It is at the expense of one's exertion, energy, knowledge, skill and talents, all expended for the benefit of another.  Nor can one's labor be without value, since if that were the case who would pay for it?  As a practical matter, one's labor must be worth more than he receives for it because if it were not the employer could not resell that labor for a profit.

The IRS knows that one's labor is not only his property, but his most "sacred and inviolable property".  Butcher's Union v. Crescent City Co., supra.  Yet it contends without any lawful basis whatsoever that money received in exchange for that property is 100% profit.  None of the basis sections provides for a "zero basis" for any transaction, nor do any of those sections authorize assigning any single, arbitrary number, whether zero or otherwise, to every transfer of any particular kind of property. 

So where does the IRS get the notion that moneys received in exchange for labor have a "zero basis"—having neither cost nor value?  It has dreamed it up, fabricated the "zero basis" rule for wages and salaries received for one's property, his most "sacred and inviolable" of property, at that.  Its omission of the THM's "zero basis for zero basis" objection from its official list of frivolous arguments admits that it has no legal authority for assigning "zero" as a basis for labor or for any other property for that matter.

Since it is impossible to assign a specific value for our labor, it is also impossible to determine what part, if any, is profit and the Supreme Court has made it very clear to the IRS that where a profit cannot be clearly and distinctly identified and separated from the capital (basis for the property conveyed) no income can be derived from that transaction.  Eisner v. Macomber, supra.  And that is why the THM has concluded, and the IRS is unable to refute, that  the only way one can derive (identify and separate) profit or gain—"income"—from labor is by selling the labor of another.  That is the only way the THM can find to generate a known, identifiable, severable—DERIVED—profit from labor. 

So not only has the IRS had to lie about what Section 61 says, it has also had to lie about what Sections 1011, et seq., say and ignore the holdings of the Supreme court regarding how to determine how much, if any, of funds received in exchange for our labor is profit or gain—"Income".

The IRS goes on to contend that:

"All compensation for personal services, no matter what the form of payment, must be included in gross income. This includes salary or wages paid in cash, as well as the value of property and other economic benefits received because of services performed, or to be performed in the future." (emphasis added)

Again, this statement, made in absolute and unqualified terms, misstates the law.  To say that all compensation for services must be included in gross income is, again, to say that oranges and apples are all juice.  Note, however, to the IRS's credit this time they have not purported that its statement is supported by any law.  Is such a declaration, without any legal authorities cited in support of it, a cogent, authoritative legal argument?  Or is it a baseless, frivolous claim?

Even the IRS, itself, does not believe that statement because it does not view gross receipts for compensation for services rendered by another as "gross income".  Those buying and selling labor at a profit do not include the entire amount received as compensation for services as "gross income", nor does the IRS expect them to do so.  Employers include only their profit in "gross income", so why is the IRS pretending otherwise in attempting to respond to the THM's claim that income cannot be derived from personal earnings?

Reviewing Section 61, above, it is interesting to note that wages and salaries are not listed among the examples of "compensation for services" provided in Section 61.  And when did "compensation for services" become "compensation for personal services"?  Where do we find services "to be performed in the future" in Section 61?  Why does the IRS constantly rephrase and misrepresent the law when it states its positions?  Could it be that the law as it is actually written does not support its arguments?  Is the THM's interpreting the IRS's pattern of misrepresentation and exaggeration of Code provisions as an admission of lack of lawful authority an unreasonable assessment on the part of those in the THM?

"Fees, commissions, fringe benefits and similar items" are not the same as "wages and salaries", but if "compensation for services" was intended to mean "wages and salaries", wouldn't one reasonably expect that those would top the list?  Why are "wages and salaries" not included in that listing?  Why doesn't Section 61 list "compensation for labor"?  Why do the Code and the Secretary's regulations consistently refer to money received for labor as "remuneration" rather than "compensation"?  Good questions, all, and for which the IRS has no answers.

The IRS also, however, relies heavily on several Supreme Court cases, contending that they support its position that wages and other personal earnings are 100% profit, i.e., "income".  To begin with, it states in its "The Truth About Frivolous Tax Arguments", that:

"The Sixteenth Amendment provides that Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration. U.S. Const. amend. XVI. Furthermore, the U.S. Supreme Court upheld the constitutionality of the income tax laws enacted subsequent to ratification of the Sixteenth Amendment in Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916)."

The Supreme Court in the Brushaber case did find that the income tax is Constitutional, but not because the 16th Amendment authorized Congress to impose such a tax.  Brushaber held that the income tax was Constitutional because it is an indirect tax, a tax imposed on taxable privileged activities and measured by the amount of profit (income) derived from engaging in a taxable activity (See Stanton v. Baltic Mining, 240 U.S. 103 (1916)) and, therefore, was not subject to the requirement of apportionment among the States (Art. I, Section 9, Cl. 4). 

In fact, Brushaber held that the 16th Amendment did not grant Congress any additional taxing authority, its only effect being to preclude the Supreme Court from considering the source of income in deciding whether the tax is direct, requiring apportionment, or indirect, not requiring apportionment.  The Court warned Congress, though, that if the income tax were to be applied in such a way as to make it a direct tax (mandatory or imposed on person or property), it would strike it down for failure to comply with the rule of apportionment applicable to direct taxes per Constitution Article I, Section 9, Cl. 4.

But in this instance Brushaber is not cited in support of the holding in that case, but rather as supporting the IRS's claim that wages and personal earnings are 100% income and subject to the income tax although Brushaber did not deal with the IRS's application of the income tax to wages and personal earnings, nor has the Supreme Court done so to date.

Thus, the IRS is misrepresenting the holding in Brushaber.  Why?  Could it be that because based upon Brushaber and Stanton, supra, if the application of the income tax to the capital portion of one's remuneration for labor were to come up for Supreme Court consideration, Brushaber, Stanton and many other cases would necessitate its finding that the income tax, applied to wages, with which there is no privileged activity involved, would be a direct tax on property, and, hence, subject to the requirement of apportionment, and would, as it promised in Brushaber and as it did in Eisner v. Macomber, supra, and Towne v. Eisner, 245 U.S. 418 (1918), declare such an application to be unconstitutional?

The IRS goes on to list two other Supreme Court cases which it says support its contention that wages and personal earnings are 100% profit and subject to the income tax in their entirety:

"Commissioner v. Kowalski, 434 U.S. 77 (1977) – the Supreme Court found that payments are considered income where the payments are undeniably accessions to wealth, clearly realized, and over which a taxpayer has complete dominion.

"Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955) – referring to the statute’s words “income derived from any source whatever,” the Supreme Court stated, “this language was used by Congress to exert in this field ‘the full measure of its taxing power.’ . . . And the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted.”

These cases, Kowalski and Glenshaw Glass, are both cited as relevant to the IRS's position that receipts in compensation for one's own labor are 100% profit—100% "gross income".  The amazing thing about the IRS's citation of these cases is that neither case had anything to do with wages or salaries or any other kind of compensation for labor!

Still another misrepresentation!

Kowalski had absolutely nothing to do with remuneration for labor (nor with compensation for services).  The controversy in Kowalski was whether a meal allowance for police officers, which was paid without regard to whether the officer was on or off duty, whether the officer purchased or ate a meal, or whether the officer was on vacation or sick leave, was gain . . . income.  The meal allowance was paid above and beyond what the officers were paid for their time and effort . . . a gain that is distinct and apart from the exchange of money for labor.  The citation of this case is totally erroneous, so much so that it can be said to be an active misrepresentation of the case.

Glenshaw Glass is even more remote from the issue of whether wages or salaries are 100% profit.  This case dealt with a company that had received compensatory and punitive damages in its settlement of a lawsuit against another company.  The court held that the punitive damages were above and beyond the company's losses (damages) and were GAIN . . . income.  Glenshaw Glass had absolutely nothing to do with whether wages are 100% profit or gain . . . income, yet we find it here misrepresented as such by the IRS.  The IRS also conveniently fails to point out that the "statute's words" were not those of Section 61, but rather Section 22(a) of the 1939 Code, which dealt with "net income", not "taxable income", a distinction we will defer exploring for another time.

When we, the authors of this discussion, in explaining the THM's reasoning, referred to Glenshaw Glass as a case dealing with the definition and determination of income we pointed out that it did not deal with wages or personal earnings.  Why, then, does the IRS omit that point in its presentation?  Why cannot the IRS afford the "luxury" of being equally objective and forthcoming?

The IRS is also fond of citing inferior court "holdings" as authority for its claim that "wages 'are too' income", but there are two serious problems with the IRS misplaced reliance on those inferior court "holdings".  First, as the IRS admits, lower court cases are not binding on anyone other than the parties and, even then, only for the tax years adjudicated, and although we know that lower courts can and often do ignore Supreme Court holdings, we also know that their doing so cannot overturn the Supreme Court. 

But a much more serious problem with the IRS's reliance on those inferior court holdings arises when we examine the holdings a little more closely.  None of those cases cited by the IRS as "holding" that "wages 'are too' income" had that issue before them!!  While the court may have made some kind of declaration to that effect all such declarations have been pure dictum, neither the holding by the court because the issue was not before it nor was the issue of whether wages could produce income, much less are income, a conclusion necessary in deciding the issues that were before those inferior courts.  For examples see Synopsis of "Are Too" Cases.

If the IRS's position is true and correct and is supported by law then why does it find it necessary to lie, both about what Section 61 provides and what the basis sections, Sections 1001, et seq. provide, about the holding in Brushaber, and, now, about what these two cases hold and about the actual holdings in numerous inferior court decisions?  Is the THM being unreasonable—frivolous—in concluding that such misrepresentations and exaggerations are indicative that the IRS's position enjoys no truthful legal support?

What Is Income? Conclusion

The law, Section 61, does not support the IRS's argument that "gross income includes compensation for services" making that contention by the IRS frivolous, without a basis in law.  In order to arrive at its frivolous conclusion the IRS has had to lie about the language of Section 61, changing it to something entirely different from what it actually states.  Lying about Section 61, however, was not enough to arrive at the IRS's desired conclusion that one's labor is without either cost or value, that everyone's labor is worth an identical amount, $0.00, making everyone's wages or salaries 100% profit, so it also has had to lie about the basis sections, Sections 1001, et seq. 

Compounding the IRS's misrepresentation of the Code is its misrepresentation of the holdings in Brushaber, Kowalski and Glenshaw Glass.  The IRS's repeated misrepresentations of both the actual language of statutes and the holdings of court cases constitute not only a frivolous position advanced by the IRS, they rise to the level of fraud.

Accordingly, it can hardly be seriously suggested that the IRS has given the THM any cause to question its conclusions based upon the actual (not modified) statutes and the actual (not misrepresented) holdings of the Supreme Court.  We, the authors of this discussion, have no hesitation in suggesting, however, that the beliefs of the THM, whether correct or incorrect, whether others may or may not reach the same conclusions from the statutory and jurisprudential authorities, are founded in sound reasoning and are supported by a reasonable interpretation of the law.

1 None of the authors of this discussion can recall any other case in which the Supreme Court seems to be actually shouting at Congress, repeating itself and using dashes to "speak" slowly as though to a foreigner having difficulty understanding English.

2 This famous declaration by Justice Fields has been recounted by the courts repeatedly and recently.  See for example, Doe v. Roe, 958 F.2d 763 (7th Cir. 1992); Hume v. Moore-McCormack Lines, 121 F.2d 336 (2nd Cir. 1941); Holden v. Hardy, 169 U.S. 366 (1898).  Note also that the Butcher's Union case was the seminal case from which the Yick Wo progeny of scores of cases recognizing the right to labor for a living as a fundamental, Constitutionally protected right, pursuant to the right to pursue happiness.  Butcher's Union has been cited as authoritative over 200 times and as recently as July, 2010, and Yick Wo over 2,000 times!