What is Income?

by Scott Hall

We all know that the government's definition of income is "all that comes in." It is the purpose of this work to show that such a definition is erroneous. The federal taxing authority for income is specified in the 16th Amd. of the Constitution. It states that: "Congress has the power to lay and collect a tax on income from what ever source derived, without apportionment among the states..." The first thing that I would like to point out is that the 16th Amd. did not give Congress any authority for taxing the source of income! This is not just my opinion, it is the ruling of the United States Supreme Court. Let's examine what the Supreme Court had to say about income and source.

In Eisner v. Macomber, 252 US 189, 40 Sct 189 (1920), the case presents a question whether, by virtue of the 16th Amd., Congress has the power to tax, as income of the stockholder and without apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the corporation since March 1st, 1913. In Pollick v. Farmer's Loan & Trust Co., 158 US 601, 15 Sct 912 (1894), it was held that taxes upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the property from which such income arose, imposed by reason of ownership; and that Congress could not impose such taxes without apportioning them among the states according to population, as required by Art 1, Section 2, clause 3, and Section 9, clause 4 of the original Constitution. It was this ruling that led Congress to remove the apportionment restriction, for income only, by proposing the 16th Amd.

Coming back to Eisner, it was stated that: "As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income." Bushaber v. Union Pacific R. Co., 240 US 1, 36 Sct 236 (1917); Stanton v. Baltic Mining Co. 240 US 103, 36 Sct 278 (1917); and Peck & Co. v. Lowe, 247 US 165, 38 Sct 432 expanded on this ruling: "A proper regard for its genesis, as well as its very clear language, requires also that this amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limitation still has an appropriate and important function, and is not to be overridden by Congress or disregarded by the courts. In order, therefore, that the clauses cited from Article 1 of the Constitution may have a proper force and effect, save only as modified by the 16th Amd., and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not 'income' as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress 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 with whose limitations alone that power can be lawfully exercised."

The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose, we require only a clear definition of the term "income" as used in common speech, in order to determine its meaning in the 16th Amd., and having formed also a correct judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue. There is little one could add to the succinct definition adopted in two cases arising under the Corporation Tax Act of 1909 (Stratton's Independence v. Howbert, 231 US 399, 34 Sct 136; Doyle v. Mitchell Bros. Co., 247 US 179, 38 Sct 467): "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.

This definition indicates the characteristics and distinguishing attributes 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 on the word "gain", which was extended to include a variety of meanings; while the significance of the next three words was either ignored or misinterpreted. That is "gain", as as opposed to "gain derived from capital..." Herein lies the critical difference: Not a gain accruing to capital, not a growth or increment of value in the investment, but a gain, 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 (taxpayer) for his separate use, benefit, and disposal. That is income derived from property; nothing else matches the description.

This fundamental concept is clearly set forth in the 16th Amd., "Incomes from whatever source derived... the essential thought being expressed with a conscience and lucidity entirely in harmony with the form and style of the Constitution." Can a stock dividend, considering its essential character, be brought within this definition? The Supreme Court elaborately considered the question and answered in the negative. Thus, from every point of view, we are brought irresistibly to the conclusion that neither under the 16th Amd. nor otherwise has Congress the power to tax, without apportionment, a true stock dividend made lawfully and in good faith, or the accumulated profits behind it, as income of the stockholder. The Revenue Act of 1916, insofar as it imposed a tax upon the stockholder because of such dividend, contravenes the provisions of Art 1, Section 2, clause 3, invalid notwithstanding the 16th Amd.

It is well established that in all business enterprises, there is no income unless a profit or gain is made. All costs, expenses, allowable writeoffs, and etc. are first deducted from the gross revenue to determine the gain or profit. So it is in business worldwide, and such is also in accordance with the IRS rules. However, for the wage earner, the rules change. One must list everything coming in and pay taxes on those wages without the benefit of the "usual business deductions." This is unconstitutional! It gives businesses an unfair advantage over individual citizens. Business income and citizen's income (wages) are not taxed equally. This violates the "Equal protection clause" of the 14th Amd.

The 1040 forms are not set up to provide for the proper method of taxation as determined by the Supreme Court in the above cases. If they were, then one would simply list all revenues, separate the income from the source, subtract all lawful deductions from the income (which gives you the "taxable income"), then calculate the tax owed based on your rightful "income tax bracket" (based on net income, not gross wages). Wages never have been income, are not now income, and can never be income according to the definition of income provided by the Supreme Court and our great Constitution. Wages can only be rightly designated as the source of income, not as income. And it can only become a source for income if it is invested or put to use in a manner that causes a profit or gain to accrue. Wages earned and spent can never be assigned as income and taxed; it just doesn't fit the strict definition of income. Income can be derived from labor, but not all labor is income. For example, GMC makes a profit from its employee's labor, but the employees at GMC do not make a profit from this labor simply because they work at GMC. Employment Agencies and Temporary Services are another example of a company making a profit from labor.



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