Chapter 4 of the TRUTH!
In the last chapter we learned the truth about income tax. In this chapter we will learn the truth about the real definition of income itself! Nowhere in the Internal Revenue Code (IRC) is income defined.
So the big question becomes, what IS income? And did you have any that was taxable?
The word "income" is not defined in the Internal Revenue Code, as the court stated in U.S. v. Ballard 535 F.2d 400 at 404, but the Supreme Court has defined it for us in numerous cases.
Stratton's Independence v. Howbert 231 U.S. 399 (1913) "As has been repeatedly remarked, the corporation tax act of 1909 was not intended to be and is not, in any proper sense, an income tax law. This court has decided in the Pollock Case that the income tax of 1894 amounted in effect to a direct tax upon property, and was invalid because not apportioned according to population, as prescribed by the Constitution. The act of 1909 avoided this difficulty by imposing not an income tax, but an excise tax upon the conduct of business in a corporate capacity, measuring, however, the amount of tax by the income of the corporation, . . ."
"As to what should be deemed "income" within the meaning of Sec. 38, it of course need not be such an income as would have been taxable as such, for at that time (the 16th amendment not having been as yet ratified) income was not taxable as such by Congress without apportionment according to population, and this tax was not apportioned. Evidently Congress adopted the income as the measure of the tax to be imposed with the respect to the doing of business in corporate form because it desired that the excise should be imposed, approximately at least, with regard to the amount of benefit presumably derived by such corporations from the current operations of the government."
The Supreme Court defines "income tax", as an excise tax "imposed with respect to the doing of business in corporate form". If you are not engaged in any corporate activities then you are not liable for an "excise income tax." This Supreme Court decision also states that Congress cannot tax an individual's income directly. All direct taxes must be imposed on the states with apportionment. U.S. Constitution Art. 1 Sect 2. Cl. 3 and Sect 9 Cl. 4.
The above case applies to corporations, so if you are not a corporation, then the Corporation Excise tax does not apply to you. The important thing here is the clarification that the income tax is an excise tax, imposed upon the doing of business in corporate form. An the tax is determined by how much income is received. But WHAT is income? The Supreme Court again tells us:
Eisner vs. Macomber 252 U.S. 189 pg 205 (1920) The Sixteenth Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the Amendment was adopted. In Pollock v. Farmers' Loan and Trust 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 the 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 Sect. 2 Cl. 3 and Sect. 9 Cl. 4 of the original Constitution.
Afterwards, and evidently in recognition of the limitations upon the taxing power of Congress thus determined, the Sixteenth Amendment was adopted: . . . As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which might otherwise exist for an apportionment among the states of taxes laid on income. . . . it becomes essential to distinguish between what is and what is not "income', as the term is there used;
After examining dictionaries in common use we find little to add to the succinct definition adopted in two cases arising under the Corporation (Excise) Tax Act of 1909 (Stratton's Independence v. Howbert 231 US 399, 415; Doyle v. Mitchell Bros. Co. 247 US 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.
"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 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 (the Taxpayer) for his separate use, benefit and disposal; -- that is income derived from property. Nothing else answers the description.
That Congress has power to tax stockholders upon their property interests in the stock of corporations is beyond question; and that such interests might be valued in view of the condition of the company, including its accumulated and undivided profits, is equally clear. But this would be taxation of property because of ownership, and hence would require apportionment under the provisions of the Constitution, is settled beyond peradventure by previous decisions of this court.
Clearly, the definition of corporate income means a gain or profit received from an excise taxed activity. But does this same definition apply to individual income tax? To the Supreme Court again:
Merchants' Loan & Trust Co. v. Smietanka 255 U.S. 509 (1921) "It is obvious that these decisions in principle rule the case at bar if the word "income" has the same meaning in the Income Tax Act of 1913 that it had in the Corporation Excise Tax Act of 1909, and that it has the same scope of meaning was in effect decided in Southern Pacific Co. v. Lowe 247 U.S. 330, 335, where it was assumed for the purposes of decision that there was no difference in its meaning as used in the act of 1909 and in the Income Tax Act of 1913. There can be no doubt that the word must be given the same meaning and content in the Income Tax Acts of 1916 and 1917 that it had in the act of 1913. When to this we add that in Eisner v. Macomber, supra, a case arising under the same Income Tax Act of 1916 which is here involved, the definition of "income" which was applied was adopted from Strattons' Independence v. Howbert, arising under the Corporation Excise Tax Act of 1909, with the addition that it should include "profit gained through sale or conversion of capital assets," there would seem to be no room to doubt that the word must be given the same meaning in all the Income Tax Acts of Congress that was given to it in the Corporation Excise Tax Act, and that what that meaning is has now become definitely settled by decisions of this Court."
The word "income" has the same meaning in ALL the income tax acts of Congress. That meaning has been declared to be corporate profits and gains and has been definitely settled by the Supreme Court. So, did you have income that is taxable? Did you have a gain or profit from a corporate activity? Remember that the income tax is an excise tax on the doing of business in a corporate capacity. That is the ONLY way that you can receive taxable income, as legally defined by the Supreme Court.
If you relied on these never overturned Supreme Court rulings in your beliefs, does your reliance on these plain rulings constitute a frivolous position? The IRS says it does!
So, if you had NO corporate income tax liability for this year, you had zero "income" as legally defined by the U.S. Supreme Court. A corporation is NOT taxed on ALL its income, from whatever source. It is only taxed on it's profit. If that is the case then why are YOU taxed on ALL your income from whatever source? You are also allowed to deduct SOME expenses. Does that mean that if you work for a corporation and you exchange 40 hours of your labor for $600, that you had $600 of profit, minus deductions? If a corporation exchanges $600 for 40 hours of your labor, did they also have a profit? NO! They can claim ALL your labor as a deductible operating expense. So why is it that why you exchange one property (your labor) for another property ($600) that in that exchange, you had a profit and the corporation had a deduction? Why is it a profit for you but not for the corporation? The answer is that it is not a profit for EITHER of you! And therefore it is not taxable income, as defined by the Supreme Court.
The Supreme Court has ruled:
Eisner vs. Macomber 252 U.S. 189 pg 205 (1920): " The Sixteenth Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the Amendment was adopted. . . .taxes upon rents and profits of real estate and upon returns from investments of personal property (labor) were in effect direct taxes upon the property from which the income arose, . . . that Congress could not impose such taxes without apportioning them among the states"
The Supreme Court has plainly stated that an individual's income cannot be taxed directly: But an individual's income CAN be taxed with an excise tax, IF it was received in a corporate activity. More on this later.
Stratton's Independence v. Howbert 231 U.S. 399 (1913) "As has been repeatedly remarked, the corporation tax act of 1909 was not intended to be and is not, in any proper sense, an income tax law.
Corporate "income" (profits and gains) CAN be taxed with an excise tax, but the income itself is not taxed because it is property. Therefore income tax is not on income, it is on profits. It is not an income tax law, it is a profits tax law. Are you engaged in, or did you receive income in connection with, any corporate activities? Receipts received from labor or private investments are not corporate "income" and therefore do not fall within the legal definition of "income" as defined by the Supreme Court.
"Income" is legally defined as a corporate gain of profit in the Internal Revenue Code. Nowhere is there any different definition.
The definition of income used in the Corporate Excise Tax Act of 1909 is the same definition used in ALL the income tax statutes.
"Gross income" would then be the total income of a corporation, from all sources.
"Taxable income" would therefore be corporate gross income, minus allowable deductions. Also known as profit. If a corporation had no profit, then it had no taxable income. If you are an officer of a corporation, then you had individual income that is taxable.
Anytime the Internal Revenue Code mentions the word "income" it is talking about corporate income.
More info on this is in the chapter on the 16th Amendment.
Table of Contents / Go to Chapter 5