Why does the THM believe that the income tax applies only to income derived from a very narrowly defined set of privileged activities that the Supreme Court says are "taxable" by the federal government and which does not include their laboring for a living?

Many of those in the THM have explored well beyond the question of who, exactly, is identified by the IRC as being liable for the income tax and upon whom the IRC imposes a duty to file an income tax return.  As acknowledged elsewhere, if there is no liability clearly and plainly laid by statute imposing liability on the typical working American and, accordingly, no concomitant requirement to keep records, render statements or to file an income tax return, then all other questions and issues are merely academic. 

Just as you might wonder why Congress failed to include any statute imposing liability and its accompanying duty to file an income tax return on the typical working American, their curiosity has been aroused, as well, and that curiosity, that desire to understand not only who the law does and does not make liable for the income tax, but "WHY?" is so overwhelming that exploring those other issues, such as what is and is not "income" and what is and is not "taxable" becomes irresistible.

As in other issues raised by those comprising the THM, in order to understand their conclusions we have to follow their path as they conducted an expedition into the wilderness of the IRC in search of an explanation.  So, let's begin once again at the beginning.  Section 1 imposes a tax on "taxable" "income", so the subject of the tax must be both "income" and "taxable", but what income is "taxable"?  If all income is "taxable" there would be no need to say "taxable income", so there must be some instances where income is NOT "taxable".

It is obvious that the federal government would not have the power to tax someone for making and selling tortillas in Mexico City.  It is also obvious that the States, independent and separate sovereignties, are as distinct from each other and the federal government as Mexico.  So somewhere between Washington, DC, and Mexico City there is a line beyond which the federal government's taxing power cannot reach.  Those in the THM believe they have found that line and the only way we can evaluate their discovery is to retrace their expeditionary travels.

As in the case of "income", it does not take long to realize that the IRC has no definition for the term.  We know from the investigation of the meaning of "income", however, that the Supreme Court, in Eisner v. Macomber, 252 U.S. 189 (1920), held that Congress cannot define Constitutional terms, such as "income", since if it could redefine the words of the Constitution it could redefine its own limitations.  The same concept would surely apply where the term itself, "taxable", would be one that would delineate between what is within Congress' taxing authority and what is beyond that reach.  So the absence of such a definition should come as no surprise to us.

The Supreme Court has held that Congress' intent in its imposition of the income tax was to tax to the "fullest extent of its authority".  See, for example, Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955).  So, the initial step of our inquiry is to conduct an inventory, or survey, of the scope of Congress' taxing authority.

What is the "fullest extent" of the federal government's taxing power?

A. What are the Constitutional limits on HOW Congress can tax?

Unlike the States, the federal government is a limited sovereignty with authority to exercise only those powers enumerated in its Constitution.  It does not have a Constitution because it exists—it exists because it has a Constitution.  It can, therefore, have no existence beyond the four corners of that document.

While just about any premise is open for debate, few would argue with the common understanding that the States formed the federal government for the purpose of addressing mutual needs of the States and to exercise authority over those matters that required some degree of uniformity across the States.  Examples of the former would, of course, be the need for a singular voice in matters of foreign policy, a unified national defense and the maintaining of military forces to meet that need.  Another example would be the establishment and operation of a postal system, which would understandably include the building of post roads.  Examples of the latter would be the authority to enact laws governing bankruptcy, to coin money and to issue and enforce patents and copyrights.

But what does the Constitution have to say about the power to tax?  Several Articles pertain to taxation and a quick review would include the following:

Article I, § 2, cl. 3:

"Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers... ."

Article I, § 8, cl. 1:

"The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States... ."

Article I, § 9, cl. 4:

"No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken…"

To these provisions the Sixteenth Amendment has been added:

Amendment XVI - Status of Income Tax Clarified.

"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."

Thus, one limitation on Congress' taxing authority is that, depending upon whether the tax is direct or indirect, all federal taxes are subjected to one of two rules.  All indirect taxes, which would include duties, imposts and excises, are subject to the rule of uniformity, which has been held to mean that they must be uniform, including any graduated tax structure, from State to State.  Direct taxes, such as per capita taxes, are subject to the rule of apportionment and must be apportioned among the States by population according to the census.

Since the rule that applies depends on which class of taxes each tax belongs to, it is important, then, to be able to distinguish between the two.  One of the best sources for a thorough explanation (several thorough explanations, in fact, since at that time all nine justices rendered separate opinions) is in one of the first tax cases the Supreme Court heard, Hylton v. United States, 3 U.S. 171 (1796), where at issue was a tax imposed on the use of carriages for the conveyance of persons.  Another good source for a comprehensive understanding of the distinction between direct and indirect taxes is Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895).  Be forewarned that Pollock is a long and difficult read.  The report includes both a very lengthy decision and a summary of the arguments of the parties, but for anyone wanting a complete briefing of the law of taxation relative to the two classes of taxes it is worth the time and effort.

A fair summary of those cases, Hylton, Pollock and the cases discussed in Pollock is that direct taxes are mandatory taxes on either person or property.  By mandatory is meant that they are incurred and owed by virtue of their imposition alone, with no action or election on the part of the taxpayer.  By requiring that all direct taxes be apportioned among the States the founders prohibited Congress' imposition of a mandatory tax directly on citizens of the States.  This is consistent with the theme that threads its way throughout the Constitution whereby the founders sought to preclude the federal government from exercising any control over the people themselves.  Taxation is not only a means of raising funds, it is a means of governing conduct, and the founding fathers were well aware of that fact and guarded against the new federal government's exercising any control over their (the States') citizens.

Indirect taxes, on the other hand, are voluntary taxes on privileged activities and, in most instances, avoidable.  Indirect taxes are voluntary in the sense that imposition alone does not create a tax liability.  No tax liability is incurred unless and until the prospective taxpayer decides (exercises his own volition, hence, "voluntary") to avail himself of the privilege of engaging in the taxed activity, such as manufacturing or the exercise of corporate privileges. 

Indirect taxes are usually avoidable in that more often than not they can be passed on to those who benefit from the taxpayer's engaging in the privileged activity.  The manufacturer either tacks the tax on to his prices, as in the case of the tire manufacturing tax listed on your receipt for your purchase of tires ("FET", meaning Federal Excise Tax), or simply includes the tax in the price, as in the case of alcohol or tobacco products, thereby passing the tax burden on to those who end up using the manufactured product or those ultimately benefiting from the privileged activity.

Thus, Congress can impose an indirect tax on a certain privileged activity, but no tax is incurred, due or owing unless and until the citizen elects to subject himself to the tax by engaging in the taxed activity or consuming the product whose price includes a tax.  The price of almost every product purchased and sold in this country includes some form of indirect tax, whether manufacturing excise tax, or imposts and duties on imports, all of which are, ultimately, "avoided" by the taxpayer by passing that burden on to the end user/beneficiary of the taxed privileged activity. 

But in any event, in the case of indirect taxes, whether the taxpayer, such as the manufacturer, or the tax payer (two words), such as the ultimate purchaser, the citizen has the last word on whether he will incur the tax.  This restriction on Congress' ability to unilaterally impose a mandatory tax liability directly on a citizen, who always has the final decision on whether he will avail himself of the privilege and incur the tax, or abstain and pay no tax, is also consistent with the founders' restricting federal government activities where the citizen, not the government, initiates contact, such as postal services, bankruptcies, patents and trademarks. 

In all of those instances the federal government offers a service, but no contact is made with the public that is not initiated by the citizen and at the citizen's option.  For example, the government can offer postal services or patents, but it cannot direct a citizen to mail a letter or parcel or to invent and patent something.  Thus, an indirect tax could be reasonably compared to a kissing booth at the fair.  The customer can decide to incur the expense of getting a kiss, but the government cannot grab a passerby, plant one on him and then present him with the bill any more than it can require him to manufacture or consume tobacco products.

Another analogy demonstrating the distinction between direct and indirect taxes would be to compare taxation to fishing, in which case the direct tax would be a spear gun or trawl, the indirect tax a hook baited with a privileged activity.

So, what kind of tax is the income tax?  Direct?  Or indirect?

If we simply apply what we now know about direct and indirect taxes to the income tax it would seem that the tax, particularly as it has been applied, is a direct tax, wouldn't it?  After all, income is not an activity, much less a privileged activity, but is, rather, property.  A tax on person or property is clearly a direct tax, isn't it?  But the Supreme Court has held that it is an indirect tax and, therefore, subject to the rule of uniformity, not the rule of apportionment.  In order to understand how and why a tax that appears to be on a thing, like "income", can be indirect we have to delve into some history.

The first income tax was imposed during the Civil War and was short-lived.  In 1894, however, Congress enacted another income tax that was challenged as an unconstitutional, unapportioned direct tax in Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895), noted above for its extensive review of tax classification.

The 1894 income tax was enacted due to political pressure from working Americans who were bearing the brunt of the tax burden through higher prices for goods caused by protective tariffs and duties.  The tax structure protected and served the interests of big businesses and extremely wealthy tycoons emerging from the industrialization of America, but imposed the entire burden of paying for those benefits on the American consumer. 

The public was clamoring for a shift of that burden that would require big businesses like railroad, steel, manufacturing and the like to bear a share of the load, particularly since they were the primary beneficiaries of government activities relating to foreign commerce and relations.  They wanted a tax imposed on the huge profits of these big businesses and tycoons and a commensurate reduction in the price elevating tariffs and duties borne by the entire public for the benefit of the few.  An excellent source for understanding the political and economic conditions leading to demands for an income tax on big businesses and tycoons can be found in Idaho Senator Phil Hart's well-researched and well-written book, Constitutional Income:  Do You Have Any? 

The Pollock Court, after a lengthy and very comprehensive discussion of the previous law and cases concerning the classification of taxes as direct or indirect, concluded that the 1894 income tax was a direct tax and that, being unapportioned among the States, the tax was unconstitutional. 

What was unusual about Pollock is that it represented a departure from traditional considerations.  In all previous analyses of classification of taxes the courts had considered mandatory versus voluntary, person or property versus privileged activity, and in some cases whether the tax could be "passed on" to the indirect, or ultimate, beneficiaries of the taxed activity, i.e., "avoidable". 

But the Supreme Court in Pollock did not make its decision on those considerations alone.  The Pollock court's decision was based primarily on the source of the income and, finding that where the source of the income was property that the burden of the tax was imposed on the ownership of property.  That approach, which was embraced by only five of the justices, introduced a totally new aspect in the direct vs. indirect issue, the source or burden analysis:  If the SOURCE of the income is property, then the BURDEN of the tax is imposed on the ownership of property and, as such, it is a direct tax requiring apportionment.

With the arrival of the Twentieth Century, no change having been effected by the 1894 Income Tax Act, the economic and political environment did not allow the public's demand for taxing the profits of big business to blow over.  The super rich were becoming the ultra wealthy, the working man still bearing the weight of protective tariffs.  While working America was straining to pay high prices caused by the protective tariff based tax structure, a new "royalty", an aristocracy consisting of big money, big banking and big industry "barons", who lived in palatial luxury, was growing and prospering.  That led to Congress' enactment of the 1909 Corporate Excise Tax and, in the same year, its proposal of the Sixteenth Amendment, the purpose of which was to overrule Pollock so that a tax could be imposed on the profits of big business and its owners, allowing tariffs and duties to be reduced, thereby shifting some of the tax burden off the working American consumer and onto the new aristocracy.

Thus, while some controversy exists regarding whether its ratification process was flawed, the Sixteenth Amendment was proclaimed by the Secretary of State, Philander Knox, to have been agreed to and appended to the Constitution in 1913:

Amendment XVI - Status of Income Tax Clarified.

"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."

If read out of its legal, historic and economic context, this amendment would seem to grant Congress a new power, creating a hybrid tax that is immune from the rule of apportionment without regard to whether it is direct or indirect.  But the context and circumstances leading to its adoption were not lost on the Supreme Court.  Immediately after Knox's controversial proclamation Congress enacted another income tax, the 1913 act, which mirrored the 1894 attempt.

Once again, the income tax was challenged, this time in Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916).  Justice White, who was among the four dissenters in the Pollock case, was now Chief Justice White and wrote for what was now a unanimous, not divided, Supreme Court.  Given today's common misperception of the Sixteenth Amendment it would probably be surprising to most to learn that the Sixteenth Amendment did not amend the Constitution, but merely clarified the manner in which the Supreme Court determined whether an income tax is direct or indirect, but that is exactly what the Supreme Court held in Brushaber.

The Pollock Court had introduced the "source, or burden, analysis" in classifying an income tax as direct, requiring apportionment among the States, but the Supreme Court held in Brushaber that the sole purpose and effect of the Sixteenth Amendment was to take that new test, source, away from the Supreme Court, prohibiting the Supreme Court from considering the source of income ("from whatever source derived") in determining the class of taxes into which an income tax falls and that decision's ultimate determination of whether the tax was subject to the rule of uniformity or the rule of apportionment.  Thus, once one reads the Brushaber decision he has to be stunned to realize that the Sixteenth Amendment applies only to nine people in the world, the nine justices of the Supreme Court!

But Brushaber told us much, much more than that shocking revelation.  The government argued that the Sixteenth Amendment had granted Congress a new, immense, taxing authority, the power to tax incomes from any source whatsoever and to tax that income directly, i.e., as a mandatory and unavoidable direct tax, a special direct tax that would enjoy immunity from the Constitutional mandate of apportionment among the States.  If so, such a power would have made an incalculable change in the relationship between the federal government and the citizens of the several States because it would for the first time provide Congress with direct access to the public without having to go through the States. 

But the Supreme Court rejected that argument entirely, calling it erroneous, and went on to hold that the Sixteenth Amendment:

1. Did not amend the Constitution, but merely clarified the means by which the Supreme Court could classify an income tax as direct or indirect;

 2. Did not grant Congress any new taxing powers;

and went on to add

3. That the income tax is an indirect tax, in the "nature of an excise";

 and to warn Congress that

4. If it were to apply the income tax in a manner in which it had the effect of a direct tax (i.e., mandatory or on person or property), it would subject the tax to the rule of apportionment.

Certainly, this is not the current public's conception of the effect of the Sixteenth Amendment, but this is, with equal certainty, the law of the land.  Brushaber is frequently cited as controlling, extant Constitutional law, having been cited as such in well over 400 cases since and as recently as October, 2010, only two months previous to this writing.   Thus, the public's conception of the effect of the Sixteenth Amendment is a misconception, one fostered and nurtured by the IRS in many of its publications.

What the Court in Brushaber failed to do, however, was to clearly explain why a tax on a thing, on property, such as "income" would surely be, could be regarded as indirect, a tax on a privileged activity.  The clarification was not long in coming.  Only a few weeks later the Supreme Court handed down its decision in Stanton v. Baltic Mining Co., 240 U.S. 103 (1916).  Chief Justice White, again writing for a unanimous court (8-0), reiterated the holding in Brushaber:

"The provisions of 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 and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived . . ."
(emphasis added)

See also Peck & Co. v. Lowe, 247 U.S. 165, 172-3 (1918); and Southern Pacific v. Lowe, 247 U.S. 330 (1918)

But that does not explain how a tax on "income", which is an object, property, not a privileged activity, can "inherently belong" in "the category of indirect taxation".  If one is not already at the limits of his threshold for cognitive dissonance on learning that the Sixteenth Amendment conferred no additional power of taxation to Congress, he would certainly be at the verge of that threshold to learn that the income tax is not a tax on income!  Well, that is exactly what the Supreme Court held in Stanton v. Baltic Mining Co.:

". . . independently of the effect of the operation of the Sixteenth Amendment it was settled in Stratton's Independence v. Howbert, 231 U.S. 399, that such a tax is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations . . ."

What the devil does that mean?  The decision in Stanton v. Baltic Mining Co. was very abrupt.  It stated the problem, that the profits of the Baltic Mining Co. reflected not only gains, but part of Baltic's capital, the ore body that was being depleted every day, but without discussion or explanation simply cited Stratton's Independence v. Howbert, 231 U.S. 399 (1913).  Baltic Mining Co. addressed the same issue as that raised in Stratton's and stated that the income tax is a "true excise levied on the results of the business of carrying on mining operations", the activity, not the income. 

Both Baltic Mining and Stratton's Independence operated mines, producing and selling the product of their mines.  Both received profits from their ventures, and in both cases the unknown relative value of the depletion of their undefined but definitely finite ore body had not been deducted in arriving at the corporate profits.  Both contended that the taxation of profits that include both gain and capital would be a property tax requiring apportionment.

In Stratton's the tax was the Corporate Excise Tax of 1909.  As such, the tax was being imposed on both gains and capital, since capital in the form of the company's diminished ore reserves was included in the gross profits.  In Stratton's the court agreed that if the profits themselves were being taxed, then both gain and capital being included in those profits, the tax would be a prohibited unapportioned direct tax.  But it went on to hold that the tax is not a tax on profits, but rather a tax on the exercise of a taxable privileged activity, i.e., the manufacture of mining products and the exercise of corporate privileges.  So here is what the Court was talking about in Baltic Mining's abrupt conclusion—Stratton's Independence at 416-417:

"Congress in exercising the right to tax a legitimate subject of taxation as a franchise or privilege, was not debarred by the Constitution from measuring the taxation by the total income, although derived in part from property which, considered by itself, was not taxable."

Now, we have a tax on an activity, the exercise of "a franchise or privilege", as the subject of the tax.  In the case of Stratton's Independence the Corporate Excise Tax was involved and the tax, although measured by the income derived from exercising corporate privileges, was not on the profits, which in that case admittedly represented both gain and capital, but rather on the exercise of corporate privileges and the manufacture of mining products.  See Flint v. Stone Tracy, 220 U.S. 107 (1911).

But in Baltic Mining the issue was not a corporate excise tax.  It was the 1913 Income Tax, which is, or certainly appears to be, imposed on income—a thing—property.  So what the court does in Baltic Mining is to adopt the Stratton's approach, i.e., that the income tax is not really imposed on income, a thing, but rather the engaging in privileged or franchised activities.  The income, or profit, is merely the means for determining how much that tax will be. 

Ergo, the income tax is genuinely an indirect tax, in the "nature of an excise", because it is not imposed on income itself—a thing—but rather the exercise of a privilege—an activity.  The exercise of a privileged activity is by any analysis an indirect tax, since there is no tax owed or due simply by its imposition.  In order for the tax to be owed by a taxpayer or due the government the citizen must decide, voluntarily, to incur the tax by engaging in the taxed activity—by accepting and exercising the privilege.  Thus it is a tax on a privileged activity that is voluntary and, since the business can and certainly will include the tax in its pricing, it is even avoidable.  Income is not the subject of the tax, but merely the measure of the amount of the tax.

Conclusion:

So now we know the rules governing and limiting HOW Congress can impose taxes.  It is not permitted to impose a direct, mandatory tax directly on a citizen.  Any indirect tax must be uniform from State to State and any direct tax must be apportioned among the States.

We also know what class of tax the income tax falls into—it is an indirect tax on taxable privileged activities, and we know that the income tax is not a tax imposed on income, but merely imposed on those privileged activities within the federal taxing authority ("taxable") and measured by the income derived from the exercise of those taxable privileges and franchises.

The IRS's Response

Again, it is not only fair, but revealing, to air out the IRS's position and see how it stacks up against the law.  In its "Truth About Frivolous Tax Arguments" publication the IRS identifies one of those "frivolous arguments" as:

6. Contention: The Sixteenth Amendment does not authorize a direct non-apportioned federal income tax on United States citizens.

"Some assert that the Sixteenth Amendment does not authorize a direct non‑apportioned income tax and thus, U.S. citizens and residents are not subject to federal income tax laws.

"The Law: The constitutionality of the Sixteenth Amendment has invariably been upheld when challenged. And numerous courts have both implicitly and explicitly recognized that the Sixteenth Amendment authorizes a non‑apportioned direct income tax on United States citizens and that the federal tax laws as applied are valid. In United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990), cert. denied, 500 U.S. 920 (1991), the court cited to Brushaber v. Union Pac. R.R., 240 U.S. 1, 12-19 (1916), and noted that the U.S. Supreme Court has recognized that the 'sixteenth amendment authorizes a direct nonapportioned tax upon United States citizens throughout the nation.'”  (emphasis added)

What? 

The constitutionality of the Sixteenth Amendment?  The constitutionality of part of the Constitution?  That issue has never been before the courts, much less "invariably upheld when challenged".  There is still brewing a controversy over whether the Sixteenth Amendment was ratified by the requisite number of States, but that is a totally different issue and the courts have consistently refused to entertain the issue, calling it a "political" issue rather than a legal issue. 

Are they wanting the reader to see that as the constitutionality of the income tax has been invariably upheld when challenged?  Because it has not been "invariably upheld".  See Eisner v. Macomber and Town v. Eisner, for example. 

And how does the IRS contend that Brushaber held that the Sixteenth Amendment "authorizes a direct nonapportioned tax upon United States citizens throughout the nation"?

We just looked at the Brushaber decision and we know that the Supreme Court categorically rejected the government's argument that the Sixteenth Amendment authorized a "direct non-apportioned tax" and clearly held that the Sixteenth Amendment conferred on Congress no new taxing authority, much less that it authorized direct taxation of "United States citizens throughout the nation." 

We also know that Brushaber has not been overturned and that it is still in full force and effect, having been cited as the law of the land in well over 400 cases since and as recently as October, 2010, only two months previous to this writing.  So how can the IRS possibly have misread the case?  In Brushaber the Court stated:

   "The various propositions are so intermingled as to cause it to be difficult to classify them. We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation, that is, a power to levy an income tax which although direct should not be subject to the regulation of apportionment applicable to all other direct taxes. And the far-reaching effect of this erroneous assumption will be made clear by generalizing the many contentions advanced in argument to support it . . ."    (emphasis added)

In fact, the Brushaber Court not only rejected that premise, but also the government's argument that the amendment authorized Congress to tax any incomes from whatever source, holding that the Sixteenth Amendment granted Congress no new taxing authority whatsoever.  See also Stanton v. Baltic Mining Co., 240 U.S. 103 (1916); Peck & Co. v. Lowe, 247 U.S. 165 (1918); and Southern Pacific v. Lowe, 247 U.S. 330 (1918)

But let's take a closer look at what the IRS is contending.  While we are attempting to understand how the THM had drawn its conclusions and why the THM holds its beliefs, it is only fair to be equally interested in understanding how and why the IRS has drawn its conflicting conclusions from reading the same law. 

The IRS is not citing Brushaber as holding that the Sixteenth Amendment "authorizes a direct nonapportioned tax upon United States citizens throughout the nation", but rather Collins, an inferior court case, as holding that Brushaber so held!!  Even a first year law student would know better than to cite an inferior court's rendition of a Supreme Court case as authority for contending that the Supreme Court held thus and so. 

Brushaber can and does speak for itself and is as plain as day.  Thus it would be impossible for the IRS to simply say it had discovered and relied solely on Collins, but neither looked at nor bothered to read the actual holding in Brushaber.

There is only one explanation for citing Collins as holding that Brushaber held etc., and that is that the IRS knows that it could not cite Brushaber as having held that the Sixteenth Amendment authorized a non-apportioned direct tax because the IRS knows that the Supreme Court in Brushaber held exactly the opposite from what Collins represented it to have held, not only with respect to the authorization of a non-apportioned direct tax, but the expansion of the taxing authority to include "citizens throughout the nation".  The IRS must know that because otherwise it would have simply cited Brushaber itself. 

Its position also exposes a second very disturbing fact, that the IRS is keenly aware that the IRC is Constitutionally limited to income that is "taxable", within its authority, and liability for it limited to nonresident aliens and foreign corporations, whose activities in doing business in the U.S. are clearly within that authority.  The misrepresentation of Brushaber in this instance clearly proves that the IRS is knowingly misapplying the income tax as though it were a Constitutionally prohibited direct, unapportioned tax, something the Brushaber Court indicated would not be tolerated and something the Supreme Court slapped down in Eisner v. Macomber and Towne v. Eisner, supra.

There can be no better example of the repeated and numerous attempts by the IRS to mischaracterize and misrepresent what it clearly knows is the law, and, therefore, the IRS's rebuttal to the THM's conclusion that the income tax is an indirect tax imposed on privileged activities within the federal government's taxing authority and measured by income derived from exercising the taxed privilege, not only fails to bear weight with anyone who has bothered to read Brushaber, but utterly destroys the IRS's credibility in any exchange, exposing the IRS as willing to lie, exaggerate and proffer its own strained interpretations and known erroneous holdings by others as controlling law in an attempt to justify what it knows is a misapplication of the income tax.

Conclusion:

The IRS's argument that Collins' holding that Brushaber held the exact opposite of what it actually held alters or takes precedence over the actual Supreme Court holding in Brushaber clearly demonstrates the willingness of the IRS to stoop to any contrivance, trickery and deceit in order to justify what it apparently knows is a misapplication of the income tax to working Americans.

When those comprising the THM see the IRS resorting to such deception and flagrant and frivolous concoctions and fabrications, it can hardly be any surprise that the IRS's rebuttal of the THM's conclusions fails to alter their beliefs.  The THM's belief that the income tax is an indirect tax imposed on privileged activities within the federal government's taxing authority and merely measured by the amount of profit or gain, i.e., "income", derived from the exercise of such privileges, is supported and confirmed by nothing less than the United States Supreme Court itself and the only way the IRS can disagree with, much less impeach, that belief is to lie about and misrepresent the holdings of the Supreme Court.

B.  What are the Constitutional limits on WHAT Congress can tax?

The Federal Government's General Taxing Authority

Now that we know that the income tax is an indirect tax and we know that the subject of the tax is privileged activities and the amount of the tax is measured by the amount of income derived from engaging in the privileged activity, the only task remaining is to define the limits of Congress' taxing power relative to indirect taxation—what privileged activities does Congress have the power to tax?

Since common sense tells us that since Congress cannot define its own Constitutional limitations,  the only way to know how far the federal government's taxing arm can reach is to look to the Supreme Court.  Fortunately, the Supreme Court has given us very clear and straightforward tests that make it relatively simple to determine whether any activity is within that taxing authority, i.e., "taxable", or without that taxing authority, i.e., not "taxable"—what the Supreme Court calls "exempt".

It has long been the position of the THM that most Americans are not engaging in any privileged activity that is within reach of the federal government's taxing arm.  We believe that an examination of the Supreme Court authorities defining the extent of that reach will explain why they believe that so strongly.

The principal case on any sovereign's authority to tax is the famous case of McCulloch v. Maryland, 17 U.S. 316 (1819).  Chief Justice John Marshall wrote for the Court which was tasked with determining whether Maryland could tax the Bank of the United States.  At that time the States were regarded as what they were (and are today, whether they are regarded as such or not), freestanding, independent sovereignties, creators, not creatures, of the federal government.  In order to determine that question the Court had to determine the extent of a sovereign's authority to tax and the Court held:

It may be objected to this definition, that the power of taxation is not confined to the people and property of a state.3 It may be exercised upon every object brought within its jurisdiction. This is true, But to what source do we trace this right? It is obvious, that it is an incident of sovereignty, and is co-extensive with that to which it is an incident. All subjects over which the sovereign power of a state extends, are objects of taxation; but those over which it does not extend, are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident.

The sovereignty of a state extends to everything which exists by its own authority, or is introduced by its permission . . .

and, the Court adds:

That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance in conferring on one government a power to control the constitutional measures of another, which other, with respect to those very measures, is declared to be supreme over that which exerts the control, are propositions not to be denied.

Also noteworthy, is that in defining the extent of the taxing authority of a sovereignty as co-extensive with its jurisdiction, and, particularly, in defining all without that jurisdiction to be exempt from that authority, we are not hearing this from one who is unsympathetic to the powers of government.  Marshall was a staunch Hamiltonian Federalist. McCulloch is best known and remembered for its expansion of federal authority and his maximal views of federal authority are best evidenced in this ruling, where he holds that the Tenth Amendment's "not delegated" does not mean "not delegated" because it does not say "not expressly delegated" and that Article I, Section 8, Clause 18's "necessary" does not mean "necessary" because it does not say "absolutely necessary".

From this landmark case, which is still regularly relied upon, we can establish the following premises:

  1. The taxing authority is an incident of sovereignty (and that would include the federal government despite its limited sovereignty status);
  2. The taxing authority is coextensive with that to which it is an incident;
  3. The power to tax therefore extends to all subjects over which the sovereign's power extends; and
  4. All subjects over which that power does not extend are "exempt" from taxation by the sovereignty.

So, now we have a standard with which to determine what is "taxable" and what is "non-taxable" or what Marshall terms "exempt".  If the subject is within the sovereign power of a government then it is taxable, but, if not, it is exempt from taxation by that government.

But the McCulloch Court did not stop there.  It also gave us a very simple test to apply in order to determine whether something is within a sovereignty's power and authority to tax, taxable, or without, exempt.  Sovereignty extends to two very simply defined sets of proposed subjects of a tax:

1. Those things that exist by its own authority; and

2. Those things that are introduced by its permission.

An alternate test provided by the Supreme Court in McCulloch would be:

3. Those things that the federal government has the power to destroy (prohibit).

It cannot be any simpler or easier than that.  If something exists because the sovereign said so, by virtue of its authority to create it or to recognize its existence, or if something occurs only because the government permits it to occur, then it is "taxable".  If a person, object or activity falls into either category then it is within the sovereignty of the government and also within the government's co-extensive taxing authority.  On the other hand, however, if the person, object or activity proposed as the subject of a tax does not fall into one of those two categories, then it is "exempt".

If, then, we were to examine the limits of the federal government's authority we also would be establishing the limits of its coextensive taxing authority.  Let's review the enumerated powers Section of the Constitution, Article I, Section 8, and see if we can apply this principle to find some examples of each set.


Section 8 - Powers of Congress

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;  (This clause is the general taxing authority clause, equipping the new federal government with the authority to tax.  With the exception of the word "excise", however, which will be the subject of further discussion, the extent of that taxing authority is not defined.)

To borrow money on the credit of the United States; (Receiving interest on government bonds would seem to actually fit both tests, since the government bonds would exist by its authority and the payment of interest would require an agreement to do so, i.e., permission.)

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;  (Since the federal government can regulate it can also prohibit—destroy—and require or establish conditions for its permission, so foreign trade, interstate commerce and trade with the tribes would be activities falling within the federal taxing authority.)

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;  (One could reasonably include becoming a citizen or availing one's self of bankruptcy protection would be federally taxable, although it seems it would be in poor taste to do so.)

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;  (This does not seem to include any activity on the part of anyone other than the government so would not seem to provide any additional subjects of taxation.)

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;  (Certainly, the power to prohibit, i.e., destroy, would make counterfeiting a taxable activity and, since Congress has given the Federal Reserve Bank its permission to counterfeit money, a "privilege or franchise" of the highest order, Congress would also be able to tax the Federal Reserve for that activity.)

To establish Post Offices and Post Roads;  (Postal charges and tolls on federal highways, which are forms of taxation, would seem to be within the federal sovereignty and, hence, its coextensive taxing authority.)

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;  (Privileges or franchises flowing from patents and copyrights would certainly fall within those privileged activities that exist by the federal government's authority, so the exercise of such privileges would be within the federal taxing authority.)

To constitute Tribunals inferior to the supreme Court;  (Accessing federal courts to address legal disputes would definitely be an activity that would not exist but for the federal government's authority to create those courts.  Thus, the filing fees and court costs assessed, another form of taxation, would be within the federal government's taxing authority.)

To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;  (Pirate taxes would be a bit unusual, but apparently within the taxing authority although enforcement of those taxes could present an interesting challenge.)

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;  (Letters of Marque would be a way to, perhaps, enforce the piracy taxes authorized by the previous clause, much like the power to impose a counterfeiting tax on the Federal Reserve Bank.)

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;  (Participation in the military, whether as a soldier, civil service employee, vendor or contractor, would certainly be within the federal taxing authority since the activity exists by the federal government's authority and one's participation would require the federal government's permission.)

To provide and maintain a Navy;  (The same can be said regarding those participating in the Navy, whether as seamen, employees, vendors or contractors.)

To make Rules for the Government and Regulation of the land and naval Forces;  (Same as the two previous clauses.)

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;  (Those participating in any activity relating to the deployment of the Militia for federal purposes would be exercising privileges that would meet both the existence by authority test and the permission test, thus would fall within the federal government's sovereignty and its coextensive taxing authority.)

To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;  (Same as for the previous clause.)

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, dock-Yards, and other needful Buildings; And  (It would seem that this provision giving exclusive legislative authority in the District of Columbia and federal enclaves would extend federal sovereignty/taxing authority over any privileged activity within that geographic description.)

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.  (This clause applies only where the previously enumerated powers are concerned, so would not be an expansion of additional powers or subjects of taxation.)

We also have:

Article IV, Section 3, Clause 2

The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States; . . .  (This would extend sovereignty/taxing authority to any privileged activity within the territories or other property of the U.S.)

The enabling clauses for Amendments 13 (abolition of slavery), 14 (citizenship rights), 15 (race no bar for voting), 19 (women's suffrage) and 23 (presidential vote for DC), do not seem to expand the domain of the federal government's sovereignty other than to include enforcement of rights, rather than privileges.  Those rights neither exist by the government's authority nor require the government's permission, so it would appear that the coextensive taxing authority of the federal government is not enlarged, either.

So, those items that meet the McCulloch test for being "taxable" activities would seem to be the only activities that the federal government can tax, all other privileged activities being, as Marshall termed it, "exempt".  Under this analysis would one's working for a living within a State in any fashion other than those activities described above be a taxable activity?  Or would that activity be outside that scope—"exempt" from federal taxation?

At this stage of our survey of federal taxing authority would it be reasonable for a working American, earning a living by any activity other than those listed above, to conclude that thus far his doing so would fall into the category of activities exempt from federal taxation?

In McCulloch, the decision of the Court was that the sovereignty/taxing authority of one government excludes the sovereignty/taxing authority of another, since it considered the notion that any sovereignty would have the power to destroy/tax that which another sovereignty had the right to create to be "repugnant" and insupportable. 

In that case the Court also said that was especially true where the laws of one were considered to be supreme to the conflicting laws of the other.  Since in McCulloch the question was whether a State could tax a creature of the federal government, what about the opposite scenario, where the federal government might propose to tax a creature of a State?  What about taxing a privileged activity that exists by the State's authority or is introduced only with the permission of the State?  Are both sovereignties, federal and state, mutually exclusive or is the concept of exclusive sovereignty enjoyed only by the federal government?

The Supreme Court has answered that question, clearly recognizing that where the State is sovereign its law is supreme and the federal law cannot intrude, either by legislative regulation or under the guise of taxation.  In Farrington v. Tennessee, 95 U.S. 679, 685 (1877), the Supreme Court held that in those areas where the State has dominion it is "as though the Union were not", i.e., did not even exist.  Surely, then, respecting anything within that State's realm the law of the State would be the supreme authority, would it not?

Thus, just as the State's power of taxation may not be exercised over those items within its borders where federal jurisdiction is supreme, the federal government's authority to tax may not be exercised over those items or activities over which the jurisdiction of the State government is supreme.  The principle is further reinforced by the Supreme Court again, in Bailey v. Drexel Furniture Company (Child Labor Case), 259 U.S. 20(1922), in which case the Supreme Court struck down a federal tax on the employment of children.  Chief Justice Taft, wrote:

"It is the high duty and function of this court in cases regularly brought to its bar to decline to recognize or enforce seeming laws of Congress, dealing with subjects not entrusted to Congress but left or committed by the supreme law of the land to the control of the States. We can not avoid the duty even though it require us to refuse to give effect to legislation designed to promote the highest good. The good sought in unconstitutional legislation is an insidious feature because it leads citizens and legislators of good purpose to promote it without thought of the serious breach it will make in the ark of our covenant or the harm which will come from breaking down recognized standards. In the maintenance of local self government, on the one hand, and the national power, on the other, our country has been able to endure and prosper for near a century and a half.

"Out of a proper respect for the acts of a coordinate branch of the Government, this court has gone far to sustain taxing acts as such, even though there has been ground for suspecting from the weight of the tax it was intended to destroy its subject. But, in the act before us, the presumption of validity cannot prevail, because the proof of the contrary is found on the very face of its provisions. Grant the validity of this law, and all that Congress would need to do, hereafter, in seeking to take over to its control any one of the great number of subjects of public interest, jurisdiction of which the States have never parted with, and which are reserved to them by the Tenth Amendment, would be to enact a detailed measure of complete regulation of the subject and enforce it by a so-called tax upon departures from it. To give such magic to the word "tax" would be to break down all constitutional limitation of the powers of Congress and completely wipe out the sovereignty of the States."
(emphasis added)

And in Hill v. Wallace, 259 U.S. 44 (1922), wherein the Court struck down a federal tax on grain contracts. Chief Justice Taft, again, wrote:

"Our decision, just announced, in the Child Labor Tax Case, ante, 20, involving the constitutional validity of the Child Labor Tax Law, completely covers this case. We there distinguish between cases like Veazie Bank v. Fenno, 8 Wall. 533, and McCray v. United States, 195 U.S. 27, in which it was held that this court could not limit the discretion of Congress in the exercise of its constitutional powers to levy excise taxes because the court might deem the incidence of the tax oppressive or even destructive. It was pointed out that in none of those cases did the law objected to show on its face, as did the Child Labor Tax Law, detailed regulation of a concern or business wholly within the police power of the State, with a heavy exaction to promote the efficacy of such regulation." (emphasis added)

Justice Sutherland, dissenting in Burnes Nat'l Bank v. Duncan, 265 U.S. 17 (1924), a case involving a national bank's right to appointment as executor of an estate, reminded us of this important principle:

"It is fundamental, under our dual system of government, that the Nation and the State are supreme and independent, each within its own sphere of action; and that each is exempt from the interference or control of the other in respect of its governmental powers, and the means employed in their exercise. Bank of Commerce v. New York City, 2 Black, 620, 634; South Carolina v. United States, 199 U.S. 437, 452, et seq.; Farrington v. Tennessee, 95 U.S. 679, 685. "How their respective laws shall be enacted; how they shall be carried into execution; and in what tribunals, or by what officers; and how much discretion, or whether any at all shall be vested in their officers, are matters subject to their own control, and in the regulation of which neither can interfere with the other." Tarble's Case, 13 Wall. 397, 407-8. Except as otherwise provided by the Constitution, the sovereignty of the States "can be no more invaded by the action of the general government, than the action of the state governments can arrest or obstruct the course of the national power. Worcester v. Georgia, 6 Pet. 515, 570." (emphasis added)

Thus, the taxing authority of the federal government ends where the regulatory authority—sovereignty—of the States begin and are, therefore, limited to those areas of activities over which the States granted the federal government authority and those lands the States granted permission to the federal government to acquire for specific purposes.  The concept of mutually exclusive taxing authorities applied to State taxation of federal creatures also applies equally to debar federal taxation of creatures of the States and privileged activities within the State's realm, where its law, not that of the federal government, is supreme.

The Federal Government's "Excise" Taxing Authority—A "Cut" Above

All of those taxable activities are based upon the general taxing authority enjoyed by any sovereignty over those activities over which its sovereignty extends.  What about specific taxing authority grants?  Reference was made to the use of the word "excise" in Art. I, § 8, Cl. 1, above.  That word alone has been interpreted as creating a specific taxing authority that goes beyond the scope of the sovereignty of the federal government, which McCulloch held was also the limits of its taxing authority.

In 1909 Congress enacted the Corporate Excise Tax, imposing a tax on the exercise of corporate privileges.  Among those privileges is the very existence of the corporation, its ability to own property, to conduct business and to exist in perpetuity.  The tax was imposed as a percentage of profits of the corporation.  But how does that measure up with the general taxing authority as defined by the Supreme Court in McCulloch? 

Business corporations are typically creatures of the State, not the federal government.  The privileges of existence, property ownership, etc., do not exist by the authority of the federal government, but rather that of the State, nor does the creation of a corporation require the permission of the federal government.  We know from McCulloch, Farrington, Bailey and Hill, above, that the federal government's proposed taxation of those subjects within the State's sovereignty exceeds the reach of the federal taxing arm.  It would seem obvious, then, that such a tax would never stand Constitutional challenge.

The Corporate Excise Tax was challenged on that very issue in Flint v. Stone Tracy, 220 U.S. 107 (1911), but it was upheld.  Did Flint overturn all those cases?  No, it did not.  McCulloch and other cases following all dealt with the general taxing authority, but in Flint the Court was looking at what it considered a specific grant of taxing authority apart from the general taxing power enjoyed by all sovereignties. 

Article I, Section 8, Clause 1 grants Congress the power to lay and collect taxes, imposts, duties and excises.  The Flint Court interpreted the use of the word "excises" as being a special grant of taxing authority to lay and collect "excise" taxes.  It then went on to conclude that the power to impose "excise" taxes included the power to tax those privileged activities generally taxed by "excise" taxes.  In doing so, Flint created a new "taxable island" of activities that are beyond the federal government's sovereignty and within the States' sovereignty, making certain activities taxable by the federal government that are, in fact, otherwise beyond the sovereignty and the coextensive taxing authority of the federal government.

Flint identified those activities on "Excise Island" as:

"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." Cooley, Const. Lim., 7th ed., 680.         (emphasis added)

Accordingly, there are two distinct areas of limited taxing power afforded the federal government.  First, it has its general taxing power, which extends to all subjects of taxation within the sovereignty of the federal government, i.e., "those subjects that exist by its authority or are introduced by its permission".  And, second, what we can call "Excise Island", a specific set of privileged activities that are outside that sovereignty, but shared with the federal government by the Constitution's including the word "excises" in Article I, Section 8, Clause 1.

Thus, Excise Island, surrounded by an exempt sea of all other State controlled activities, would be "inhabited" by the following privileged activities:

  1. Manufacture, sale or consumption of commodities;
  2. Upon licenses to pursue certain occupations; and
  3. The exercise of corporate privileges.

Anything else would be outside the taxing authority and, to use Marshall's word for it, "exempt" from federal taxation.  Not exempt by legislative grace, but fundamentally exempt, by virtue of being outside the Constitutional empowerment of Congress.

Putting It All Together—The Completed Survey of Federal Taxing Authority

Now that we have completed our inventory, or survey, of the taxing authority of the federal government we can compile the survey into a list of privileged activities that are "taxable".  Those that are "taxable" and produce profits ("income") would, then, be producing "taxable" "income", the subject of the tax imposed by Section 1.

We have established that there are, essentially, two spheres of federal taxing authority consisting of the general taxing authority enjoyed by any sovereignty as delineated by the Supreme Court in McCulloch, and what we have dubbed Excise Island, those activities that can be taxed under the authority to lay and collect excises as delineated by the Supreme Court in Flint.  Since we are talking about an indirect tax, "in the nature of an excise", we need only concern ourselves with taxable activities.

General Taxing Authority—McCulloch v. Maryland

Coextensive with the federal government's sovereignty, which includes

1. Those activities that "exist by its authority"; and

2. Those activities that are "introduced by its permission".

An alternate test that might be applied would be

3. Those activities that the federal government has the "power to destroy" (prohibit).

A listing of those activities that fall within the general taxing authority would include:

    1. Receiving interest on government bonds—Art. I, § 8, Cl. 2
    2. Engaging in foreign trade, interstate commerce and trade with the tribes—Art. I, § 8, Cl. 3
    3. Becoming a naturalized citizen or availing one's self of bankruptcy protection—Art. I, § 8, Cl. 4
    4. Counterfeiting—Art. I, § 8, Cl. 6
    5. Sending letters or parcels through the U.S. Postal system (stamp tax) and using federal post roads (highways, taxes on carriers)—Art. I, § 8, Cl. 7
    6. Exercising privileges flowing from a patent or copyright—Art. I, § 8, Cl. 8
    7. Accessing federal courts to address legal disputes—Art. I, § 8, Cl. 9
    8. Engaging in piracy on the high seas or offenses against the law of nations—Art. I, § 8, Cl. 10
    9. Exercising privileges flowing from Letters of Marque and Reprisal—Art. I, § 8, Cl. 11
    10. Participation in the U.S. military, whether as a soldier, civil service employee, vendor or contractor—Art. I, § 8, Cl. 12
    11. Participation in the U.S. Navy, whether as a seaman, civil service employee, vendor or contractor—Art. I, § 8, Cl. 13
    12. Engaging in any activity relating to the deployment of the Militia for federal government purposes—Art. I, § 8, Cl. 15
    13. Engaging in any privileged activity within the District of Columbia or the federal enclaves—Art. I, § 8, Cl. 17
    14. Engaging in any privileged activity within the territories or possessions—Art. IV, § 3, Cl. 2.

"Excising Authority"—Flint v. Stone Tracy

Those activities, albeit within State sovereignty, that are customarily subject to excise taxes:

    1. Manufacture, sale or consumption of commodities;
    2. Upon licenses for certain occupations; and
    3. Exercise of corporate privileges.

That is a total listing of every activity that the Supreme Court has recognized as within the taxing authority of the federal government.  Have we found engaging in laboring for a living?  Have we been able to include within either the general taxing authority, McCulloch's coextensive with sovereignty, or the specific taxing authority, Flint's excising authority, any activity engaged in by the typical working American? 

Thus, it would seem entirely reasonable for those in the THM to conclude and believe that their working for a living is not within the federal taxing authority and, therefore, to use Marshall's term, "exempt" from federal taxation, wouldn't it?

The IRS's Response

In general, the IRS avoids the issue of "taxable" by presuming that there is nothing that is not taxable.  Since 1954 it has often taken the position that the only exemptions are statutory exemptions, although throughout the history of the income tax treasury regulations (the Secretary's interpretation) have repeatedly instructed "taxpayers" to exclude from gross income any income that is "exempt by statute or by fundamental law" or "not taxable by the federal government under the Constitution" or "Constitutionally exempt". See Examples of Regulations acknowledging Constitutional exemption.

Those references, however, disappeared from the regs when the 1954 Act and Code were adopted.  Was the Constitution amended?  Was McCulloch or Flint overturned?  No and no.  The 1954 Code was represented to Congress as making no substantive changes in the 1939 Code.  Only the order and some terminology were to have been altered, but without any substantive effect.  One major change in terminology, however, was the very subject of the tax.  In all previous income tax acts, from 1916 through 1939, the tax was imposed on "net income".  The code and the regs were very clear in informing the "taxpayer" that he should exclude, in fact not even mention, income that is "Constitutionally exempt", "exempt . . . by fundamental law", or "not taxable by the federal government under the Constitution".

In 1954, however, the subject of the tax was changed to "taxable income".  Since the subject itself excluded non-taxable income, then the only explanation we can find is that the Secretary no longer deemed it necessary to inform the taxpayer that exempt income should be excluded when the imposition of the tax itself was confined to "taxable" income.

There is one vestigial remnant of those references to Constitutional exemptions.  26 CFR § 1.861-8T informs the "taxpayer" that any income that is either in whole or in part exempt from taxation should be excluded from gross income.  It then goes on to provide four examples.  None of those, however, are examples of what IS exempt as one would expect to see, but rather examples of what is NOT exempt.  Oddly, none of those examples of non-exempt income involve any activity or source of income within the United States, all having only to do with foreign or territorial trade, which would, of course, be within the federal sovereignty (Art. I, § 8, Cl. 3 and Art. IV, § 3, Cl. 2, respectively) and, as such, taxable by the federal government under the Constitution. 

Given the fact that the sole liability provision that clearly makes anyone liable for Subtitle A taxes applies only to withholding agents for non-resident aliens and foreign corporations and that working for a living does not appear to be within either the general or excise authority of the federal government, is it unreasonable for the THM to consider that oddity to be an admission that the income tax does not extend to working Americans within the country?  After all, if the income tax were to apply to all activities within the country, at least one of those examples would have involved domestic activity.

As seen above, the IRS has assumed the untenable position that the Sixteenth Amendment authorized Congress to impose a non-apportioned direct tax on incomes from any and every source whatsoever.  However, we know from Brushaber, Stanton v. Baltic Mining, Peck and Southern Pacific that the Sixteenth Amendment did nothing of the sort. 

The Supreme Court categorically and without qualification rejected the government's argument that the Sixteenth Amendment created a unique class of taxes, a direct tax that would be immune from the apportionment requirement of Article I, Section 2, Clause 3 and Article I, Section 9, Clause 4, and even warned Congress that if an income tax were applied in a way that it had the effect of a direct tax it would not hesitate to strike it down unless it is apportioned.

And the Supreme Court has repeatedly, categorically and without qualification rejected the government's argument that the Sixteenth Amendment granted Congress authority to tax all incomes, regardless of the sources from which they are derived, holding time and again that the Sixteenth Amendment granted Congress absolutely no new or additional taxing authority. 

Thus, if an activity was outside the federal government's taxing authority before the Sixteenth Amendment then it is still outside that authority, i.e., Constitutionally exempt from federal taxation.

The limits and narrow scope of the income tax law, are clearly and expressly stated in the IRC, that the tax is imposed only on "taxable" income, and that enunciated by the Supreme Court, that the income tax is an indirect tax the subject of which is not an object or property (the income itself), but rather privileged "taxable" activities from which profit or gain ("income"), merely the measure of the tax, is derived.  The Supreme Court has also made it painfully clear that the Sixteenth Amendment did not enlarge Congress' taxing authority, which is still confined to those activities over which it holds sovereignty and those activities within the power to lay and collect excises as defined in McCulloch and Flint.

But the IRS has assumed the position that the income tax is a direct tax, both mandatory and applicable to property, "income" whether profit or gain or not, which would relieve it of identifying which taxable activities to which it would apply.  That position is in direct conflict with the totally contrary letter of the Code and enunciations of the Supreme Court.  In order to do that the IRS has had to misrepresent the Brushaber holding by relying, instead, on a misstatement of that holding by an inferior court in Collins, not only in spite of Brushaber, but fully aware that it is propounding a falsified version of the true holdings in Brushaber and its progeny.

In addition to attempting to classify the income tax as a "non-apportioned direct tax", knowing that to be false, it has also misrepresented the holding in Brushaber and cases following, claiming that the Sixteenth Amendment granted Congress the additional authority to impose that direct tax on any and all incomes, even future incomes, on "citizens throughout the nation", and has treated gross receipts as "income" despite numerous Supreme Court holdings declaring that a tax on gross receipts is not an income tax, but a direct tax on capital.

Can anyone fault those in the THM from rejecting the IRS's warped and tortured account of the law? 

What is (And Is Not) "Taxable"? Conclusion

We've now seen that there are Constitutional limitations on not only what, but how, the federal government can lay and collect taxes.  Direct taxes, which are mandatory, i.e., due and owed by virtue of their imposition alone, and imposed on person or property, must be apportioned among the States and, thus, the federal government is prohibited from imposing a mandatory tax directly on citizens.  Indirect taxes, taxes imposed on privileged activities, are voluntary because they are owed and due only if the citizen elects to become a "taxpayer" by engaging in the privileged activity subjected to the tax.  All indirect taxes are subject to the rule of uniformity.

We have also seen that the Sixteenth Amendment did not grant Congress any new powers of taxation and that it did not create a "hitherto unknown" class of direct taxes that are immune from the Constitutional apportionment requirement.  In fact, the sole effect of the Sixteenth Amendment is to prohibit the Supreme Court from applying the Pollock "source" or "burden" analysis in determining whether an income tax is direct or indirect.  The Supreme Court has also instructed us that the income tax is an indirect tax and, therefore, voluntary, imposed not on the income itself, which is merely the measure of the tax, but rather imposed on federally taxable privileged activities.

Through the holdings in McCulloch and its progeny and Flint v. Stone Tracy, we've been able to compile a complete inventory, or survey, of all activities that are within the taxing reach of the federal government, and none of those include laboring for a living. 

So would it be unreasonable for those comprising the THM to conclude and believe that the income tax, even if it were to be amended to impose liability on them, still would not have any application to their working for a living or to the income, if any could be derived from that activity, realized from their personal labor?  All of the THM's conclusions in this regard,

That the income tax is an indirect tax imposed on taxable privileged activities and merely measured by income derived from the exercise of the privilege taxed;

That the Sixteenth Amendment did not authorize a non-apportioned direct tax on any and all income no matter where or how realized nor did it grant to Congress any new taxing authority; and

That any privileged activity that does not exist by the federal government's authority or requires the federal government's permission, per McCulloch and cases following, or is included within the scope of the excise taxing authority, per Flint, is Constitutionally exempt and therefore can produce no "taxable" income;

whether correct or incorrect, can be supported by compelling and clearly stated Constitutional, statutory and jurisprudential authority.

On the other hand, all of the positions and arguments adopted and propounded by the IRS in this regard are not only not supported by such authorities, but fly into the teeth of both statutory and Supreme Court authorities, forcing it to make contrived and irrational claims in order to defend its positions and having to cite misstatements of Supreme Court holdings because the actual holdings are in direct contradiction to the IRS's claims.

So, can anyone fault the THM for disregarding the official, clearly false positions and declarations of the IRS that it is entitled to exact a portion of the gross receipts received by them in exchange for their personal labors?  Is the THM's belief to the contrary unreasonable? 

Is the THM turning a "willfully blind" eye to the law?  Or is the IRS doing so, ignoring the clear-cut holdings in Brushaber, Stanton v. Baltic Mining, Peck v. Lowe, SoPac v. Lowe, McCulloch, Farrington, The Child Labor Cases (Bailey v. Drexel Furniture et al.), Hill v. Wallace and Flint v. Stone Tracy?  Is the IRS being reasonable in totally disregarding all those Supreme Court cases and relying solely on an inferior court's (Collins) misstatement of the Brushaber holding?

Is it so difficult, then, to understand that after learning that there is no law making them liable for the income tax those comprising the THM would, out of an irresistible desire to understand why, go on to examine the Constitutional meaning of "taxable" and the actual effect of the Sixteenth Amendment, concluding that they are not engaging in any taxable privileged activity, the actual subject of the income tax, that could produce "taxable" income? 

The people comprising the THM genuinely believe the law, they believe the Constitution, the Code and the Supreme Court of the United States.  Is that an unreasonable reliance?  In holding these beliefs, based upon those authorities shown above, are they willfully, i.e., with the intent to knowingly violate the law, violating a known legal duty—a crime? 

We, the authors of this document, are convinced that the beliefs of the THM are genuinely and honestly held and that in resisting the IRS's attempts to exact payment from them they are not knowingly and willfully violating the law.  Given the reasonable basis for those beliefs we also believe these people are entitled to the benefit of a doubt, your presumption that they are innocent and, as such, entitled to our protection from prosecution.


3 It is important to note here that the reference to "state" is state with a lower case "s", not State, as in Maryland or Virginia, but state, as in any government or sovereign body.