Chapter 2:
Status and Jurisdiction
Understanding
the status of the parties to the Brushaber case is essential to
understanding both the outcome, and the Treasury Decision which followed soon
after the U.S. Supreme Court's landmark ruling in the case. Frank R. Brushaber filed his original Bill
of Complaint on March 13, 1914, within a year after Philander C. Knox declared
the 16th Amendment to be the supreme Law of the Land. Addressing the judges of the District Court of the United States
("DCUS") for the Southern District of New York, Brushaber began his
complaint as follows:
Frank R. Brushaber, a citizen of the State of New York and a resident of the Borough of
Brooklyn, in the City of New York, brings this his bill against Union
Pacific Railroad Company, a corporation and citizen of the State of Utah,
having its executive office and a place of business in the Borough of
Manhattan, in the City of New York, and the Southern District of New York, in
his own behalf and on behalf of any and all of the stockholders of the
defendant Union Pacific Railroad Company who may join in the prosecution and
contribute to the expenses of this suit.
[emphasis added]
Right from
the beginning, Frank Brushaber made an important statement of fact which
remained unchallenged at every level in the federal courts. He identified himself as a citizen of the
State of New York and a resident of the Borough of Brooklyn, in the City of New
York. He did not identify himself as a
"citizen of the United States**", as a "United States**
citizen" or as a "resident of the United States**". He indicated that he lived and worked in New
York State, outside the District of Columbia and outside any territory,
possession or enclave governed by the Congress of the United States**. "Enclaves" are areas within the 50
States which are "ceded" to Congress by the acts of State
Legislatures (e.g. military bases).
The federal
government concluded that Brushaber, under the law, was a "nonresident
alien". He was
"nonresident" because he lived and worked outside the areas of land over which the Congress has exclusive
jurisdiction. The authority to have
exclusive jurisdiction over this land was granted to Congress by the
authorities at Article 1, Section 8, Clause 17 ("1:8:17"), and
Article 4, Section 3, Clause 2 ("4:3:2"), in the U.S.
Constitution. In this book, we will
often refer to these areas of land as "the federal zone".
Brushaber was an "alien"
because his statement of citizenship was taken as proof that he was not a
citizen of the federal zone. He was not
a "citizen of the United States**" nor a "United States**
citizen", either through birth or naturalization, because the term
"United States**" in this context means only the federal zone.
Therefore, he was alien with
respect to the District of Columbia and the federal enclaves, territories
and possessions over which the Congress has exclusive legislative
jurisdiction. This may sound strange to
the casual reader, but the Code is not referring to creatures from outer
space. The Code is referring to the
creation of well paid lawyers.
Right from
the beginning, Frank Brushaber also made an important error which contributed
to his ultimate downfall in the case.
He identified his opposition as a corporation chartered by the State of
Utah:
Your orator further shows that the
defendant Union Pacific Railroad Company is, and at all the times hereinafter
mentioned was, a corporation duly organized and existing under and by virtue of
the laws of the State of Utah, and a citizen of the State of Utah ....
[from original Bill of Complaint, filed March 13,
1914]
This was incorrect. The Union Pacific Railroad Company was
originally created in the year 1862 by an Act of Congress. The stated purpose of the corporation was to
aid in the construction of a railroad and telegraph line from the Missouri
River to the Pacific Ocean (from the "Union" to the
"Pacific"). This Act was
passed on July 1, 1862, by the Thirty-Seventh Congress, Second Session, as
recorded in the Statutes at Large, (December 5, 1859, to March 3, 1863, at
Chapter CXX, page 489). At that time,
Utah had not yet been admitted as a State of the Union. It was still a territory, i.e., a "federal state", over
which the Congress had exclusive legislative jurisdiction.
Being a
creation of Congress, the Union Pacific Railroad Company was found to be a
"domestic" corporation under the law. This is another term which is very confusing to the casual
reader. In common, everyday language,
the term "domestic" is often used to mean "inside the
country". For example, airports
are divided into different areas for domestic and foreign flights, in order to
allow Customs agents to inspect the baggage and passports of passengers
arriving on flights from foreign countries.
However, under federal tax law, the term "domestic" does not
mean "inside the country"; it
means "inside the federal zone" which is an area that is much smaller
than the whole country. Accordingly, a
"foreign" corporation is a corporation chartered by a government that
is "outside the federal zone".
The federal zone consists of the
enclaves, territories and possessions over which the Congress of the United
States** has exclusive legislative jurisdiction. California is outside of the federal zone, for example, and
corporations which are chartered in the State of California are foreign
corporations with respect to the
federal zone. Similarly, corporations
chartered in France are likewise foreign corporations with respect to the federal zone.
It is simple, once you understand the proper legal definitions of the
terms "foreign" and "domestic" in the federal tax Code.
The status of
the two parties in the Brushaber case can, therefore, be summarized as
follows:
1. State Citizen Frank R. Brushaber was
identified by evidence in his court documents as a nonresident alien, as that term is now defined in the Internal
Revenue Code.
2. The Union Pacific Railroad Company was
identified by court documents as a domestic
corporation, as that term is now defined in the Internal Revenue Code.
Government
Propaganda
The federal
government has tried to confuse the implications of Frank Brushaber's status by
asserting that he was a French immigrant.
This is government propaganda, pure and simple. This propaganda is designed to make us believe that Brushaber was found to be an alien because he was born
in France, not because he declared
himself to be a "citizen of the State of New York". Accordingly, the federal officials
responsible for this propaganda are trying in vain to convince everyone that
the 50 States are inside the federal zone, because they want us to conclude
that Frank Brushaber would have been a "U.S.** resident" if he
resided in New York, or a "U.S.** citizen" if he had been born in New
York. It is fairly easy (and fun) to
defeat this propaganda, because it is only make
believe.
First of all,
Frank Brushaber declared himself to be a "resident of the Borough of
Brooklyn, in the City of New York".
If New York State were inside the federal zone, and if Frank Brushaber
had been born in France, he most certainly would have been an
"alien", but a "resident" alien according to the
government's own immigration rules.
After the U.S. Supreme Court's decision, the Treasury Department
published a crucial Treasury Decision (T.D. 2313) which clearly identified
Frank Brushaber as a nonresident alien (see page 2-4 below, and also Appendix C).
Secondly,
regardless of whether federal officials place New York State inside or outside
the federal zone, their French immigrant theory would place Frank Brushaber in
the category of an alien who was lawfully admitted for permanent
"residence". Congress does
have legislative jurisdiction over immigration and naturalization. Being lawfully admitted for permanent
residence is also called the "green card test" (see next chapter).
Again, the government's own rules and regulations would have designated
Frank Brushaber as a "resident" alien. As we know, the Treasury Department identified him as a nonresident
alien. A native of France would be a
nonresident alien if he resided in France;
he would be a resident alien if he lawfully immigrated to America
under rules established by Congress.
But, no "green card" was in evidence to prove that Brushaber
was an immigrant, and current "green cards" exhibit the words RESIDENT
ALIEN in bold letters.
Thirdly, if
Frank Brushaber had been a French immigrant who applied for, and was granted
U.S.** citizenship, quite obviously he would have become a naturalized U.S.**
citizen, no longer an alien. Again,
Congress does have jurisdiction over immigration and naturalization. The government's own rules and regulations
would have designated Frank Brushaber as a U.S.** citizen.
Finally, Frank
Brushaber identified himself as a "citizen of the State of New
York". Although a native of France
would also be an "alien" with respect to the federal zone, this is not
how Frank Brushaber identified himself to the federal courts. He identified himself as a "citizen of
the State of New York". On the
basis of this status as presented to the federal courts, the U.S.
Treasury Department thereafter concluded that he was a nonresident alien,
not a U.S.** citizen and not a U.S.** resident. To argue that he was a
French immigrant is to assume facts that were not in evidence. The government arrived at their conclusion
on the basis of facts that were in
evidence. Author and scholar Lori
Jacques addresses the French immigrant theory as follows:
... [I]t appears that a state citizen was identified as a nonresident alien and taxed upon
his unearned income deriving from a domestic corporation. This conclusion is possible because there
would be no question that a person who, for example, was born and domiciled in
France and who owned shares in Union Pacific Railway [sic] Co. would be taxed as a nonresident alien. Only Mr. Brushaber, citizen of New York
State and stockholder, was considered in the case decided by the Supreme Court,
thus there was no basis for the
Secretary extending the decision to those not parties to the action.
[A Ticket to Liberty, November 1990 edition, page
40]
[emphasis added]
In the final
analysis, it doesn't really matter whether Frank Brushaber was a French
immigrant or not. The U.S. Treasury
Department agreed that any person claiming
to be citizen and resident of New York was a nonresident alien with respect to the federal zone. This is all we need to know about the
plaintiff's status. It is essential to understand that it was federal
government officials who determined Frank Brushaber was a nonresident alien
for purposes of imposing a federal tax on his dividends. Brushaber did not come into federal
court claiming that he was a nonresident alien; he did come into court claiming that he was a New York
State Citizen and a resident of Brooklyn.
Now you see why the French immigrant theory is really just
propaganda. Treasury Decision 2313 is
the proof. In later chapters, the motive
for this propaganda will become crystal clear.
Treasury
Decision 2313
Soon after
the Brushaber decision, and as a direct result of that decision, the
Office of the Commissioner of Internal Revenue published Treasury Decision
("T.D.") 2313 to clarify the meaning and consequences of the Supreme
Court's ruling. Volume 18 of the
Treasury Decisions was published for the period of January to December of 1916
by Secretary of the Treasury W. G. McAdoo.
Treasury Decision 2313 was written to clarify the "... taxability
of interest from bonds and dividends on stock of domestic corporations owned by
nonresident aliens, and the liabilities of nonresident aliens under section 2
of the act of October 3, 1913."
Frank
Brushaber had purchased stock in the Union Pacific Railroad Company. He was then paid a dividend on this
stock. The Union Pacific Railroad
Company acted as a "withholding agent" and withheld a portion of his
dividend to pay the federal income tax that was owed on that dividend. The term "withholding agent" still
has the same meaning in the current Internal Revenue Code. Although he was legally a nonresident alien,
Frank Brushaber received income from a source that was inside, or
"within" the federal zone.
The "source" of his income was a "domestic"
corporation, because that corporation had been chartered by Congress and not by
the State of Utah.
The net
result of his defeat in the Supreme Court was to render as taxable the income
from bond interest and stock dividends issued by domestic corporations to
nonresident aliens like Frank Brushaber.
A key paragraph from Treasury Decision 2313 is the following:
Under the decision of the Supreme Court of
the United States in the case of Brushaber v. Union Pacific Railway Co. [sic], decided January 24, 1916, it is
hereby held that income accruing to nonresident
aliens in the form of interest from the bonds and dividends on the stock of
domestic corporations is subject to the income tax imposed by the act of
October 3, 1913.
[emphasis added]
Because Brushaber's income originated
from a source "inside" or "within" the United States**,
where "United States**" means the federal zone, the income was
taxable. The "source" was the
Union Pacific Railroad Company, the issuer of the stock and the payor of
dividends. (The T.D. failed to spell
the corporation's name correctly.) The
federal tax law then, as now, designates such a dividend payor as the
"withholding agent":
The
normal tax shall be withheld at the source from income accrued to
nonresident aliens from corporate obligations and shall be returned and paid to
the Government by debtor corporations
and withholding agents as in the case of citizens and resident aliens ....
[emphasis added]
This "withholding agent"
must withhold a certain amount from the dividend, to cover the federal tax
liability of the recipient. The amount
withheld is paid to the federal government.
T.D. 2313 then went on to explain the use of Form 1040 in this
situation:
The
liability, under the provisions of the law, to render personal returns ...
of annual net income accrued to them from sources within the United States**
during the preceding calendar year, attaches
to nonresident aliens as in the case of returns required from citizens and
resident aliens. Therefore, a
return on Form 1040, revised, is required except in cases where the total tax
liability has been or is to be satisfied at the source by withholding or has
been or is to be satisfied by personal return on Form 1040, revised, rendered
in their behalf.
[emphasis added]
For those of you who are interested, the
complete text of Treasury Decision 2313 can be found in Appendix
C of this book.
Summary
The dual
issues of status and jurisdiction are closely intertwined. The federal government has a limited area
over which it exercises exclusive legislative jurisdiction, an area we have
called "the federal zone".
Congress is not limited by the constitutional restrictions on direct and
indirect taxation within the federal zone.
The birth and residency status of natural persons situate them either
inside or outside that jurisdiction.
Citizens who were naturalized by federal courts are situated inside that
jurisdiction, regardless of where they reside.
Both citizens and residents
of the federal zone are liable for federal taxes on their worldwide income, no
matter where the source of that income.
If you are not a citizen, then you are
an alien. If you are not a resident,
then you are a nonresident. Nonresident
aliens pay taxes only on income which is derived from sources that are inside the federal zone. If you work for the federal government, your
pay comes from a source that is inside
the federal zone.
Likewise,
artificial "persons" like corporations are either foreign or
domestic. (It may appear strange at
first, but a corporation is also a "person" as that term is defined
in the Internal Revenue Code.) A
corporation that is chartered by Congress is domestic with respect to the federal zone.
A corporation that is chartered by one of the 50 States of the Union is
foreign with respect to the federal
zone. A corporation that is chartered
by a foreign country like France is likewise foreign with respect to the federal zone.
Imagine what a difference it would
make if all individuals and
corporations knew and asserted their correct status with respect to the exclusive legislative jurisdiction of the federal zone!
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Reader’s Notes: