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Date: Sat, 05 Jul 1997 18:41:48 -0700
To: fwolist@sportsmen.net
From: Paul Andrew Mitchell [address in tool bar]
Subject: SLS: "Amendment 16 Post Mortem"

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    "The Federal Zone: Cracking the Code of Internal Revenue"

                           Chapter 13:

                    Amendment 16 Post Mortem

     The documented  failure of the 16th Amendment to be ratified
is a  cause for  motivating all  of us  to  isolate  the  precise
effects of  this failed  ratification.   In previous  chapters, a
careful analysis  of the relevant case law revealed two competing
groups of decisions.  One group puts income taxes in the category
of direct  taxes.   Another group  puts them  in the  category of
indirect taxes.   One  group argues  that the  16th Amendment did
amend the  Constitution by  authorizing an  unapportioned  direct
tax, but  only on  income, leaving  the apportionment rule intact
for all  other direct  taxes.  Another group argues that the 16th
Amendment did  not really  amend the  Constitution;    it  merely
clarified  the  taxing  power  of  Congress  by  overturning  the
"principle" on which the Pollock case was decided.  By distilling
the cores of these two competing groups, we are thereby justified
in deciding  that a  ratified 16th Amendment produced one or both
of the following two effects:

     1.   Inside the  50 States,  it  removed  the  apportionment
          restriction from taxes laid on income, but it left this
          restriction in place for all other direct taxes.

     2.   It overturned  the principle  advanced in  the  Pollock
          case which  held that  a tax  on income  is,  in  legal
          effect, a tax on the source of that income.

     Federal courts did not hesitate to identify the effects of a
ratified 16th  Amendment.   Now that  the  evidence  against  its
ratification is so overwhelming and incontrovertible, the federal
courts are  evidently unwilling  to identify  the effects  of the
failed ratification.   These  courts have  opted  to  call  it  a
"political"  question,   even  though  it  wasn't  a  "political"
question in years immediately after Philander C. Knox declared it
ratified.  It is difficult to believe that the federal courts are
now incapable  of exercising  the logic  required to  isolate the
legal effects  of the  failed ratification.   Quite  simply, if a
ratified 16th  Amendment had effect X, then a failed ratification
proves that  X did  not happen.   What  is X?   Their "political"
unwillingness to  exercise basic  logic means  that  the  federal
courts have abdicated their main responsibility  -- to uphold and
defend the  Constitution --  and that  we must now do it for them
instead (see  Appendix W concerning "Direct Taxation and the 1990
Census").  At a minimum, the value of X is one or both of the two
effects itemized above.

     Some people  continue to  argue, even  now,  that  the  16th
Amendment doesn't  even matter  at all.   Soon  after The Federal
Zone began  to circulate  among readers  throughout America,  the
flow of complimentary letters grew to become a steady phenomenon.

                        Page 13 - 1 of 8

                                                The Federal Zone:

As of  this writing, no substantive criticisms have been received
of its two major theses, i.e., territorial heterogeneity and void
for vagueness.  Occasional criticisms did occur, but most of them
were minor,  lacking in  substance, or  lacking authority in law.
The  following   is  exemplary  of  the  most  serious  of  these

     I fail to understand the harping on the invalid ratification
     of the 16th Amendment.  It really doesn't matter whether the
     amendment was  ratified or  not  --  Brushaber ruled "no new
     powers, no  new subjects",  and further  went on  to tell us
     that Congress  always had  the power  to tax  what the  16th
     Amendment said could be taxed.

                            [private communication, June 1, 1992]

     It does  matter whether  the amendment  was ratified or not,
for several  reasons.   One obvious  reason is  that the  Federal
Register contains  at least  one official statement that the 16th
Amendment is  the federal  government's general  authority to tax
the incomes  of individuals  and corporations  (see Chapter 1 and
Appendix J).   If  the amendment  failed, then  it cannot  be the
government's general  authority to tax the incomes of individuals
and corporations.   There  may be  some other authority, but that
authority is  definitely not  the 16th  Amendment.   The official
statement in  the Federal  Register is  further evidence of fraud
and misrepresentation, even if its author was totally innocent.

     Another  reason   is  that,  contrary  to  Brushaber,  other
decisions of  the Supreme Court, as well as lower federal courts,
have ruled  that taxes  on incomes are direct taxes, and the 16th
Amendment authorized  an unapportioned  direct  tax  on  incomes.
Author  Jeffrey  Dickstein  has  done  a  very  thorough  job  of
demonstrating how  the Brushaber  ruling stands in stark contrast
to the  Pollock case  before it, and to the Eisner case after it.
The Brushaber  decision is  an anomaly  for this  reason, and for
this reason  alone.   It ruled  that income  taxes  are  indirect
excise taxes (which necessarily must be uniform across the States
of the  Union).   However, the  Brushaber court  failed  even  to
mention "The  Insular Cases"  and  the  doctrine  of  territorial
heterogeneity that issued therefrom (see Appendix W).

     If the 16th Amendment authorized an unapportioned direct tax
on incomes, per Eisner, Peck, Shaffer and Richardson, then such a
tax  is  not  required  to  be  either  uniform  or  apportioned.
Therefore,  this  group  of  decisions  did  interpret  the  16th
Amendment differently  from Brushaber;  they conclude that it did
amend the  Constitution and  that it  did  create  a  new  power,
namely,  the   power  to  impose  an  unapportioned  direct  tax.
Contrary to  the private communication quoted above, Congress has
not always had the power to impose an unapportioned direct tax on
the States  of the  Union.   In view  of the  evidence which  now

                        Page 13 - 2 of 8

                                         Amendment 16 Post Mortem

proves that  the 16th Amendment was never ratified, it is correct
to say  that Congress  has never  had  the  power  to  impose  an
unapportioned direct tax on the States of the Union.  The Pollock
decision now  becomes a major hurdle standing in the government's
way, because  the Pollock  Court clearly  found that all taxes on
income are  direct taxes,  and all direct taxes levied inside the
50 States  must be  apportioned.   The Pollock  decision is  most
relevant to  any direct tax which Congress might levy against the
incomes and property of State Citizens, as distinct from citizens
of the United States**.  (Each has citizens of its own.)

     Put in  the simplest  of language, a ratified 16th Amendment
either changed  the  Constitution,  or  it  did  not  change  the
Constitution.   If it  changed the  Constitution, one change that
did occur  was to  authorize an  unapportioned direct  tax on the
incomes  of   State  Citizens.     If   it  did  not  change  the
Constitution,  the  apportionment  restriction  has  always  been
operative within the 50 States, even now.  Either way, the failed
ratification proves that Congress must still apportion all direct
taxes which  it levies  upon the incomes and property of Citizens
of the 50 States.

     Corporations, on  the other  hand, are  statutory creations,
whether they  are domestic  or foreign.   As such, they enjoy the
privilege of  limited liability.   Congress is free to levy taxes
on the  exercise of  this privilege  and to  call  them  indirect
excises.   Within the  50 States,  such an excise must be uniform
for it  to be  constitutional;   within the federal zone, such an
excise need  not  be  uniform.    In  the  context  of  statutory
privileges, the  apportionment  rule  is  completely  irrelevant.
Therefore, the  status of  "United States**  citizens" is  also a
statutory privilege  the exercise  of which  can  be  taxed  with
indirect excises,  regardless of  where that  privilege might  be
exercised.  The subject of such indirect taxes is the exercise of
a statutory  privilege;   the measure of such taxes is the amount
of income derived from exercising that privilege.

     Justice White  did all of us a great disservice by writing a
ruling that  is tortuously  convoluted, in  grammar and in logic.
If he had taken The Insular Cases explicitly into account, and if
he had  distinguished Frank  Brushaber's situs  from the situs of
Brushaber's defendant, the principle of territorial heterogeneity
would have  clarified the  decision  enormously.    Specifically,
according to  the doctrine  established by  Downes v.  Bidwell in
1901, Congress  is not  required to apportion direct taxes within
the federal zone, nor is Congress required to levy uniform excise
taxes within  the federal zone.  However, within the 50 States of
the Union,  all direct  taxes must  still be apportioned, and all
indirect excise  taxes must  still be  uniform.  Now that we know
the 16th  Amendment never  became law,  these restrictions  still
apply to  any tax  which Congress  levies inside  the 50  States.
Quite naturally,  a problem  arises when  one party is inside the
federal zone,  and the  other party  is outside the federal zone.
That was the case in Brushaber.

                        Page 13 - 3 of 8

                                                The Federal Zone:

     The Downes  doctrine defined  the "exclusive"  authority  of
1:8:17 in  the Constitution to mean that Congress was not subject
to the  uniformity restriction  on excise taxes levied inside the
federal zone.   By necessary implication, Congress is not subject
to the  apportionment restriction  on direct  taxes levied inside
the federal  zone.   It is  important to  realize that  the Union
Pacific Railroad Company was a domestic corporation, incorporated
by  Congress,  inside  the  federal  zone.    A  tax  on  such  a
corporation was  a tax  levied within the federal zone, where the
apportionment and uniformity restrictions simply did not exist.

     Instead of  making this  important territorial  distinction,
Justice White  launched into  an exercise  of questionable logic,
attributing statements  to the  Pollock court  which the  Pollock
court did  not make, adding words to the 16th Amendment that were
not there,  hoping his  logic would  persuade the rest of us that
the Pollock  principle was  now overturned.   According to White,
the principle established in Pollock was that a tax on income was
a tax  on the  source of  that income.  In this context, White is
distinguishing income  from source, in the same way that interest
is distinguished  from principal.  This same distinction was made
by a  federal Circuit court in the Richardson case as late as the
year 1961.   In  light of the overriding importance of the Downes
doctrine,  it   is  difficult  and  unnecessary  to  elevate  the
importance of  this distinction any higher;  it is also important
to keep  it in  proper perspective.   Within  the  federal  zone,
Congress can  tax interest  and  principal  (income  and  source)
without any  regard for  apportionment or uniformity.  Therefore,
within the federal zone, the distinction is academic.

     Whatever the  merits of  this distinction between income and
source, White  was wrong  to ignore  the key Pollock holding that
income taxes are direct taxes.  The Pollock decision investigated
the relevant  history of  direct taxes  in depth.  White was also
wrong to  ignore  the  clear  legislative  history  of  the  16th
Amendment, the  stated purpose  of which  was  to  eliminate  the
apportionment restriction  which  caused  the  Pollock  court  to
overturn an  income tax  Act in  the first  place.   That Act was
found to be unconstitutional precisely because it levied a direct
tax on  incomes without  apportionment.  Finally, White was wrong
to launch  into his  lengthy discussion  of  the  16th  Amendment
without even mentioning The Insular Cases, when  these cases were
recent authority  for the  proposition that Congress did not need
an amendment  to impose taxes without apportionment or uniformity
inside the federal zone.  This may be hindsight, but hindsight is
always 20/20.

     The relevance  of the  16th Amendment  to the  tax on  Frank
Brushaber's dividend  is another  matter.  Two schools of thought
have emerged,  with opposing views of that relevance.  One school
relies heavily  on the  key precedents  established  by  Pollock.
Specifically,  the   original  investment   is  the  "source"  of
Brushaber's income.   A  tax on  the  source  is  a  direct  tax.
Pollock found  that a  tax on  income is  a tax  on  the  source.

                        Page 13 - 4 of 8

                                         Amendment 16 Post Mortem

Therefore, a  tax on  income is a direct tax.  Without a ratified
16th Amendment,  such a  tax must  be apportioned  whenever it is
levied inside  the 50  States.   With a  ratified 16th Amendment,
such a  tax need  not be apportioned whenever it is levied inside
the 50  States.  This school argues that Brushaber's dividend was
taxable because  the 16th  Amendment  removed  the  apportionment
requirement on such a tax.  But, is the tax really levied "inside
the 50  States", if  the activity  which produced  the income was
actually inside  the federal zone?  The importance of the Pollock
principle now comes to the fore.

     The competing  school argues  that a ratified 16th Amendment
was not strictly necessary for Congress to impose a direct tax on
Brushaber's dividend  without apportionment.   Granted,  he was a
State Citizen  who lived  and worked  within one of the States of
the Union.   For  this reason, the government found that he was a
"nonresident alien" under their own rules.  If White's ruling did
anything else, it held that Brushaber's dividend was also taxable
without apportionment and without uniformity because its "source"
was inside  the federal  zone, and  that "source"  was a  taxable
activity (profit  generation by a domestic corporation).  In this
context, it  does make  sense to jettison the Pollock "principle"
and  to   distinguish  interest  from  principal,  dividend  from
original stock  investment.   Having done so, Justice White could
argue that  the "source"  of Brushaber's  dividend  was  domestic
corporate  activity  and  not  Brushaber's  original  investment.
Unfortunately for all of us, however, Brushaber did not challenge
the constitutionality  of  the  income  tax  as  applied  to  his
dividend, so  this question  was not  properly before the Supreme
Court;   Brushaber did  challenge the  constitutionality  of  the
income tax as applied to his defendant.

     Unfortunately  for   Mr.  Brushaber,  he  thought  that  the
defendant was  a foreign corporation.  The government was correct
to  point   out  that  the  defendant  was  actually  a  domestic
corporation, chartered  by Congress.  As such, this corporation's
profits could  be taxed  by  Congress  without  apportionment  or
uniformity, and without an amendment authorizing such a tax.  For
the same  reasons, Brushaber's  share of those same profits could
also be taxed without constitutional restrictions, and without an
amendment authorizing  such a tax, even though he was outside the
federal zone  and inside  a State of the Union.  In this context,
it is  revealing that the Internal Revenue Code imposes a uniform
"flat tax"  when such  income is  received by nonresident aliens,
giving it  the appearance  of a  uniform indirect  tax.  However,
this "uniformity"  is not  the consequence  of  a  constitutional
requirement;   it is  the consequence  of decisions  by  Congress
acting in its capacity as a majority-ruled legislative democracy.

     Moreover,  under  the  authority  of  the  Downes  doctrine,
Congress is  empowered to  define domestic  corporate profits  as
"profits before dividends are paid", and to penalize all domestic
corporations which  attempt to  avoid federal  taxes by  defining
their profits  as "profits after dividends are paid."  Within the

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                                                The Federal Zone:

federal zone,  Congress has  the power to assert a superior claim
to all  profits of  domestic corporations,  and to  define  those
profits any  way it  chooses.   By "superior  claim" I  mean that
Congress comes  before stockholders inside the federal zone, even
if the stockholders are outside the federal zone, and even if the
money they  used to  purchase their stock came from a source that
was outside  the federal  zone.   A ratified 16th Amendment would
have had  no effect whatsoever on the power of Congress to levy a
tax without  any restrictions  on any  of the  assets of domestic
corporations.   A ratified  16th Amendment  would have  empowered
Congress to  tax, without  apportionment, dividends paid to State
Citizens by  foreign corporations  when both  were inside  the 50
States, but  a ratified 16th Amendment was not strictly necessary
for  Congress   to  tax   dividends  paid  to  them  by  domestic
corporations.   Neither was  a ratified  16th Amendment necessary
for Congress  to tax dividends paid by either type of corporation
to citizens  of other  nations  like  France,  since  the  latter
citizens  enjoy   none  of  the  protections  guaranteed  by  the
Constitution for  the United States of America.  In this context,
it is  important to  make a careful distinction between dividends
and corporate profits.

     It is  clear that  the second of these two competing schools
of thought  has now  prevailed.   Even though  there are  serious
logical and  obvious grammatical  problems with  Justice  White's
ruling, in  retrospect he  was  right  to  question  the  Pollock
principle.   The situs principle is easier to understand, if only
because it  dovetails so  squarely with the overriding principles
of  territorial   jurisdiction  and   territorial  heterogeneity.
Moreover, it  is entirely  possible for  the Pollock principle to
yield to  the situs principle, even though the 16th Amendment was
never actually  ratified.   Remember that  Justice White ruled in
Brushaber that  the only  effect of  the 16th  Amendment  was  to
overturn the  Pollock principle.   If  the amendment  failed,  it
could thereby be argued that the Pollock principle has never been
overturned.   Nevertheless, subsequent case law has confirmed the
superiority of  the situs principle:  the source of income is the
situs of  the income-producing  activity.    Sources  are  either
inside or outside the federal zone.

     Finally, like  "income", the  term "source"  is not  in  the
Constitution either, because the amendment failed to be ratified.
Recall the  Eisner prohibition,  whereby Congress was told it did
not have  the power to define "income" by any definition it might
adopt (see  Appendix J).   That  prohibition was  predicated on a
ratified 16th  Amendment, the  text of  which introduced the term
"income" to  the Constitution  for the  first time.  Although the
issue did  not arise  as such and there is no court precedent per
se, the  exact same  logic applies  to the  term "source".    The
failed ratification  means that Congress is now free to legislate
any  definition  it  might  adopt  for  the  terms  "income"  and
"source", as  long as  the statutes containing those terms do not
otherwise violate  the Constitution  as lawfully  amended.    The
source of income is the situs of the income-producing activity.

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                                         Amendment 16 Post Mortem

     The explicit recognition of territorial jurisdiction, and of
the status  of the  parties  with  respect  to  that  territorial
jurisdiction,  provides  much  additional  clarification  to  the
Brushaber ruling.   Such  a clarification  was definitely  needed
because the  almost incomprehensible  grammar  of  the  Brushaber
ruling is  actually responsible  for much  of the  confusion  and
controversy that  continue to  persist in this field, even today.
As Alan  Stang puts  it, Justice  White  turned  himself  into  a
pretzel, and  lots of other people got twisted up in the process.
A clear  understanding of  status and  jurisdiction, and a proper
application  of   the  principle  of  territorial  heterogeneity,
together provide  an elegant and sophisticated means to eliminate
much, if not all, of that confusion and controversy.

                             #  #  #

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                                                The Federal Zone:

Reader's Notes:

                        Page 13 - 8 of 8

                             #  #  #

Paul Andrew Mitchell                 : Counselor at Law, federal witness
B.A., Political Science, UCLA;  M.S., Public Administration, U.C. Irvine

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