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Date: Fri, 14 Nov 1997 06:06:25 -0800
To: (Recipient list suppressed)
From: Paul Andrew Mitchell [address in tool bar]
Subject: SLS: Income (fwd)

>                 Income, Gain.  What Is It?
>                  by Jeffrey A. Dickstein
>The law regarding the federal personal income tax is contained in Subtitle A 
>of the Internal Revenue Code entitled "Income Taxes".  Excise taxes are 
>contained in subtitles D and E of the Internal Revenue Code, and some excise 
>taxes are also found in Subtitle C for "employers".  It is my opinion that 
>Congress dod not see fit, in subtitle A, to impose an excise tax on 
>businesses, professions or vocations, but like in the income tax act of
>chose to impose an income tax on businesses, professions, vocations, and any 
>other source of income.  Income taxes are direct taxes which are relieved 
>from the requirements of apportionment by virtue of the 16th Amendment.
>There is no question but that the taxes imposed by subtitle A are not 
>apportioned, so if the 16th Amendment has not been properly ratified, the 
>taxes imposed by subtitle A are Unconstitutional under the Pollock
>One would not be a taxpayer as to the income tax if the 16th Amendment was 
>never ratified.
>Assuming the 16th Amendment has been properly ratified, there are three ways 
>to which one may become "subject" to subtitle A, and be a taxpayer.  One way 
>is to have sufficient "gross income" to require the filing of a return 
>pursuant to Section 6012 of the Internal Revenue Code.  Another way is to 
>have sufficient "taxable income" or "tax table income" under Sections 1 
>and/or 3 of the Internal Revenue Code to be liable for the ttx under
>6001 and 6011.  The third way is to have sufficient "self-employment
>All require a finding of "gross income"; the meaning of the term is 
>essential.  It is defined in Section 61(a) of the Internal Revenue Code [26 
>U.S.C. Section61(a)(1)(3)]:
>     Except as otherwise provided in this subtitle [Subtitle A], gross
>     means all income from whatever source derived, including (but not 
>     limited to) the following items:
>     (1) Compensation for services, including fees, commissions, fringe 
>     benefits, and similar items;
>     (2) Gains derived from dealings in property;
>The meaning of a statute is to be determined from the intention of Congress 
>in enacting it.  For Section 61(a) of the Internal Revenue Code, the 
>intention of Congress is set forth in both the Senate and House Reports
>accompanied the Internal Revenue Code of 1954:
>Section 61(a) provides that gross income includes "all income from whatever 
>source derived."  This definition is based upon the 16th Amendment and the 
>word "income" is used in its constitutional sense.
>House REport No. 1337; Senate Report No. 1622; `U.S.Code Cong. and Admin 
>News', 83rd Congress, 2nd session, p.4155 and 4802 respectively, 1954.
>The United States Supreme Court has provided us with the constitutional 
>definition of income based upon the 16th Amendment:
>     Income may be defined as the gain derived from capital, from labor or 
>     from both combined, provided it include profit gained through a sale or 
>     conversion of capital assets.  Stratton's Indep. v. Howbert, 231 U.S. 
>     399; Towne v. Eisner, 245 U.S. 418; Doyle v. Mitchell, 247 U.S. 179;
>     Pacific v. Lowe, 247 U.S.330; Eisner v. Macomber, 252 U.S. 189; 
>     Merchant's Loan v. Smeitanka, 255 U.S. 509.
>In order for money received for labor, wages, salaries, compensation for 
>services, etc. to constitute income, there must be a gain derived from the 
>labor which produces the money.  The procedure to determine whether there is 
>or is not a gain also has its foundation in decisions of the United States 
>Supreme Court:
>     It has been well said that, "The property which every man has in his
>     labor, as it is the original foundation of all other property, so it is 
>     the most sacred and inviolable.  Butchers' Union Co. v. Crescent City 
>     Co., 111 U.S. 746, 757 (concurring opinion of Justice Fields) (1883).
>Not only does one's labor constitute property, but the employment contract 
>also constitutes property:
>     The principle is fundamental and vital.  Included in the right of 
>     personal liberty and the right of private property -- partaking of the 
>     nature of each -- is the right to make contracts for the acquisition of 
>     property.  Chief among such such contracts is that of personal 
>     employment, by which labor and other services are exchanged for money
>     other forms of property.  Coppage v. Kansas, 236 U.S. 1, 14 (1914).
>Thus, a contract for labor is a contract for the sale of property:
>     In our opinion that section, in the particular mentioned, is an
>     of the personal liberty, as well as of the right to property,
>     by that Amendment [5th Amendment].  Such liberty and right embraces the 
>     right to make contracts for the purchase of the labor of others and 
>     equally the right to make contracts for the sale of one's own labor;..  
>     Adair v. United States, 208 U.S. 161, 172 (1908).
>Internal Revenue Code Sections 1001, 1011 and 1012, and their regulations,
>C.F.R. Section 1.1001-1 and 1.1012-1(a) provide the method for determining 
>the gain derived from the sale of property:
>     The gain from the sale or other disposition of property shall be the 
>     excess of the amount realized therefrom over the adjusted basis
>     in section 1101 for determining gain,.. The amount realized from the 
>     sale or other disposition of property shall be the sum of any money 
>     received plus the fair market value of the property (other than money) 
>     received.  26 U.S.C. Section 1001(a)(b).
>     The adjusted basis for determining the gain or loss from the sale or 
>     other disposition of property, whenever acquired, shall be the basis 
>     (determined under section 1012 ... ), adjusted as provided in section 
>     1016.  26 U.S.C. Section 1011.
>     The basis of property shall be the cost of such property ...  26 U.S.C. 
>     Section 1012.
>The cost of property purchased under contract is its fair market value as 
>evidenced by the contract itself, provided neither the buyer nor seller were 
>acting under compulsion in entering into the contract, and they were both 
>fully aware of all the facts regarding the contract.  (Terrence Development 
>Co. v. C.I.R., 345 F.2d 933 (1965); Bankers Trust Co. v. U.S., 518 F.2d 1210 
>(1975); Bar L Ranch, Inc. v. Phinney, 426 F.2d 995 (1970); Jack Daniel 
>Distillery v. U.S., 379 U.S. 569 (1967); In re Williams' Estate, 256 F.2d
>(1958)).  In other words, if an employer and employee agree that the
>will give one hour of his time in return for a certain amount of money, the 
>cost, or basis under Section 1012 of the employee's labor is the pay agreed 
>upon.  By the same token, if an attorney or doctor agrees to perform a 
>certain service for an agreed upon amount of compensation, the value of the 
>service to be performed is the amount the patient or client has agreed to 
>In the case of the sale of labor, none of the provisions of Section 1016 are 
>applicable, and the adjusted basis of the labor under Section 1011 is the 
>amount paid.  Therefore, when the employer pays the employee the amount 
>agreed upon, or the professional is paid for his services, there is no
>amount realized over the adjusted basis, and there is no gain under Section 
>1001.  There being no gain, there is no "income" in the constitutional
>and no gross income under Section 61(a).
>If one has no gain, one would not have sufficient "gross income" to require 
>the filing of a federal personal income tax return, and one would not be a 
>taxpayer as to that tax, nor subject to the provisions of Subtitle A.  
>Likewise, without gain there can be no "taxable income", "tax table income" 
>or "self-employment income", and would not have a tax liability.  Again,
>person would not be a taxpayer nor subject to the provisions of Subtitle A.
>If one has no income, one is also not subject to any of the provisions of 
>Subtitle C dealing with employment taxes, nor would there be any requirement 
>to file Form W-4s.
>The tax on employees for FICA (Federal Insurance Contributions Act)
>in Subchapter A of Chapter 21 at Section 3101 is imposed on an individual's 
>income.  The tax on employers found in Subchapter B of Chapter 21 at Section 
>3111 is clearly identified as an excise tax.  The Railroad Retirement Act on 
>employees found in Subchapter A of Chapter 22 at Sections 3201 and 3211 is 
>also imposed on the individual's income.  As to the employer, Subchapter C
>Chapter 22 at Section 3221 is again, an excise tax.  The tax on the employer 
>in Chapter 23, Federal Unemployment Taxes, at Section 3301 is another excise 
>tax.  The employer tax found in Chapter 23A at Section 3321 is also an
>The provision for withholding of wages at the source under chapter 24 is 
>computed upon the amount of wages received, but is nonetheless a tax on
>income.  Section 3402(m) makes it clear that if one anticipates a low amount 
>of gross income, one is entitled to withholding allowances.  Each
>allowance serves the function of lowering the amount of wages upon which the 
>withholding is computed and if there is no expected income tax liabaility
>gross income and no "taxable income" or "tax table income"), Section 3402(n) 
>authorizes filing a W-4 claiming exempt.
>Without income, one would not be subject to any of the employee taxes on 
>income contained in Subtitle C.  One could nonetheless file form W-4s for
>purpose of putting the employer on notice that there is a limited amount of 
>gross income expected, or none at all, such that the employer does not 
>withhold too much money.
>Finally, Chapter 2 in Subtitle A contains a tax on self-employment income at 
>Section 1401 of the Internal Revenue Code.  One who has no gain, however, 
>would not have any self-employment income as defined in Sections 1402(a) and 
>(b).  One who has self-employment income is subject to the tax and a 
>taxpayer; one who does not have self-employment income is not subject to the 
>tax and is not a taxpayer.
>It is incumbent upon each individual to analyze whether or not he or she has 
>any "income" (gain) derived from any source.  If so, that person may be a 
>taxpayer of the federal personal income tax.  If there is no income (gain) 
>derived from any source, one is not a taxpayer of the federal personal
>[Reprinted from `American Information Network Newsletter', Oct/Nov. 1987]

Paul Andrew Mitchell, Sui Juris      : Counselor at Law, federal witness 01
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