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Date: Fri, 14 Nov 1997 06:08:53 -0800
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From: Paul Andrew Mitchell [address in tool bar]
Subject: SLS: Income - 2 (fwd)

>                             Part 2
>                          by Tony Bator
>          The Concept of Intergovernmental Tax Immunity
>The Supreme Court decisions that are involved with the development of the 
>Concept of Intergovernmental Tax Immunity are listed below for the reader 
>who wishes to study this material in depth.
>     McCulloch v. The State of Maryland, 4 Wheat 316.
>     Dobbins v. Erie County, 16 Pet 435.
>     Buffington v. Day, 11 Wall 113.
>     Helvering v. Gerhardt, 304 US 405.
>     Graves v. New York, 306 US 405.
>     The Public Salary Tax Act of 1939.
>The first three cases shown provided the basis for the Concept of 
>Intergovernmental Tax Immunity.  The Helvering case narrowed the immunity 
>with respect to the salaries of State Officers.  It is important to point 
>out that the Court took the effort to explain that their decision was based 
>on the statutes and, therefore, no constitutional questions were involved.
>In the Graves case, the immunity with respect to the salaries of government 
>officials as developed by the Concept of Intergovernmental Tax Immunity was 
>overruled in so far as the immunity results from implied Constitutional 
>It is important to understand that the Supreme Court has certain rules 
>pertaining to the manner in which it performs its duty.  These rules can be 
>found in Ashwander v. Tennessee Valley Authority, 297 US 288.  As an 
>example, the Court stated:
>     The court has frequently called attention to the `great gravity and 
>     delicacy' of its function in passing upon the validity of an act of 
>     Congress; and has restricted exercise of this function by rigid 
>     insistence that the jurisdiction of federal courts is limited to actual 
>     cases of controversy: and that they have no power to give advisory 
>     opinions.  On this ground it has in recent years ordered the dismissal 
>     of several suits challenging the constitutionality of important acts of 
>     Congress.
>There are seven other rules, and they, in effect, advise a person on how to 
>prepare a case from its outset if you expect to get that case before the 
>Supreme Court for an answer.
>In 1939, President Roosevelt sent a message to Congress asking them to pass 
>legislation that would tax the means and instrumentalities of the States.  
>In preparing this legislation Congress, for reasons best known to them, 
>prepared the legislation as two separate packages.  The first dealt with 
>taxing the officers and employees of State Governments and, in turn, 
>permitted the State to tax the Officers and employees of the National 
>Government.  As you might have guessed, the legislation proposed that taxed 
>the people passed while the legislation that would have taxed the 
>instrumentalities (bonds) of both governments did not.
>The record of the debate that took place in the House is the Congressional 
>Record of 1939, pages 1293 through 1333.  It makes interesting reading.
>It is the judgement of this writer that the authority Congress used in 
>enacting this legislation was the General Power of Concurrent Taxation, 
>which might be applicable on the basis that the States have subjected their 
>officers and employees to State Personal Income Taxes which are excise 
>taxes.  During the debate it was pointed out that 31 States of the then 48 
>had passed Personal Income Tax legislation.
>Since the General Power of Concurrent Taxation is applicable only when 
>excise taxes are involved, this is what I believe was the power that 
>Congress used to support what would otherwise be a totally unconstitutional 
>act.  They completely ignored the fact that in 1895 the Supreme Court had 
>determined that to tax the real or personal property or the income they 
>produce, representation and the rule of apportionment were required to 
>Constitutionally tax the citizens of the States.  Remember: the officers and 
>employees of State are citizens of that State.  So here we see a statute 
>enacted by Congress in apparent conflict with the Constitution of the United 
>The specific sections of Title 1 of the Public Salary Tax Act are listed 
>     Section 1.  Section 22(a) of the Internal Revenue Code (relating to the 
>     definition of gross income) is amended by inserting after the words 
>     "compensation for personal service" the following : (including personal 
>     service as an officer or employee of a State, or any political 
>     subdivision thereof, or any agency or instrumentality of any one or 
>     more of the foregoing.)
>     Section 2.  Section 116(b) of the Internal Revenue Code (exempting 
>     compensation of teachers in Alaska and Hawaii from income tax) is 
>     repealed.
>     Section 3.  Section 22(a) of the Internal Revenue Code is amended by 
>     adding at the end thereof a new sentence to read as follows: "In the 
>     case of judges of the courts of the United States who took office on or 
>     before June 6, 1932, the compensation received as such shall be 
>     included in gross income"
>     Section 4.  The United States hereby consents to the taxation of 
>     compensation received after December 31, 1938 for personal service as 
>     an officer or employee of the United States, any territory or 
>     possession or political subdivision thereof, the District of Columbia 
>     or any agency or instrumentality of any one or more of the foregoing, 
>     by any duly constituted taxing authority having jurisdiction to tax 
>     such compensation, if such taxation does not discriminate against such 
>     officer or employee because of the source of such compensation.
>Regarding Section 1: These are citizens of States and the Constitution and 
>the Supreme Court says that if they are to be taxed on their real or 
>personal property or the income from both, they must be taxed by 
>representation and the rule of apportionment or the tax is invalid.
>Regarding Section 2: This shows that in order to get qualified teachers to 
>go to the territories and teach; it was necessary for the Congress to enact 
>legislation that would permit them to be exempt from the taxation they would 
>be subjected to as a result if the local legislative power of Congress that 
>has been previously described.
>Regarding Section 3: It has already been stated several times that the 
>Constitution prohibits the salary of a Federal judge to be diminished, and 
>this includes by taxation as determined by the Supreme Court in the 
>following case:
>     Evan v Gore, 253 US 245, 264.
>     Here the Constitution expressly forbids diminution of the judges 
>     compensation, meaning as we have shown diminution by taxation as well 
>     as otherwise ... We conclude that the tax was imposed contrary to the 
>     Constitutional prohibition and so must be adjudged invalid.
>Regarding Section 4.  Here is a perfect example of the areas involved with 
>the local legislative power of Congress.  It defines perfectly the local 
>political jurisdiction of Congress.  Additionally, the Supreme Court, in 
>previous decisions, has responded to this matter as shown by the following:
>     McCulloch v. The State of Maryland, 4 Wheat. 316, 430.
>     We find then, on just theory, a total failure of this original right to 
>     tax the means employed by the government of the Union, for the 
>     execution of its powers.  The right never existed, and the question 
>     whether it has been surrendered cannot arise.
>     McCulloch v. The State of Maryland, 4 Wheat. 316, 432.
>     If States may tax one instrument, employed by the government in the 
>     executions of its powers, they may tax any and every other instrument.  
>     They may tax the mails, they may tax the mint, they may tax patent 
>     rights; they may tax the papers of the custom house; they may tax all 
>     the means employed by the government.  This was not intended by the 
>     American people, they did not design to make their government dependent 
>     upon the States.
>This concept of Intergovernmental Tax Immunity still exists today even 
>though the Public Salary Tax Act has somewhat narrowed it.  (A person 
>employed by State government who is directly affected by it should properly 
>prepare a case to challenge this Act.) The bonds issued by a State and the 
>income derived therefrom cannot be taxed by the National Government nor can 
>the States tax the bonds or income derived from them as issued by the 
>Government of the United States.  Go into any post office in a state that 
>has a sales tax and purchase envelopes or other packaging material and you 
>will not be charged a sales tax.  Many items that contain federal excise 
>taxes, when purchased by a State the excise tax is removed from the purchase 
>There is an additional area that must be understood with respect to this 
>Intergovernmental Tax Immunity.  About 1924, the Supreme Court developed 
>what they referred to as their Essential / Non-Essential Test.  This test 
>was brought about because the States were organizing State run corporations 
>that were essentially performing operations that were private in nature -- 
>performing functions that were not essential to the functioning of 
>As a result, the federal treasury started to lose considerable amounts of 
>revenue because of the concept of Intergovernmental Tax Immunity.  The Test 
>was therefore developed to determine if a State-run corporation was 
>performing essentially government functions.  If not, then it was considered 
>non-essential and therefore, as a corporation, taxable.
>It might be appropriate to insert here a speech by Senator Bohah, a noted 
>authority on the Constitution, that was made on the floor of the Senate 
>during the debates concerning the 16th Amendment.
>     It was not therefore, because of the fact that the taxing clause of the 
>     Constitution had any limitations either express or implied in its 
>     language, it was not because the language failed to convey all the 
>     power of the National Government to tax, but because of the universal 
>     rule that every component part of the constitution must be construed in 
>     the light of every other part of it; and that it must be construed as a 
>     whole in the light of the designs and purposes and object to be 
>     accomplished when the instrument was written.  Those designs and 
>     purposes were to create a National Government in its own sphere, 
>     independent and separate and distinct from the State governments, and 
>     to create the State sovereignties, which in their reserved powers are 
>     separate, distinct, and independent of the National Government.
>                     as a Result of the 16th Amendment
>There is presently certified documentation that the National Government 
>never received the appropriate number of States to ratify the 16th Amendment 
>to the Constitution of the United States.  This matter is presently winding 
>its way through the federal courts and I assume must be answered in due 
>time.  We will proceed, however, on the basis that it continues as a 
>properly ratified amendment.
>                                ARTICLE XVI
>     The Congress shall have power to lay and collect taxes on incomes, from 
>     whatever source derived, without apportionment among the several 
>     States, and without regard to any census or enumeration.
>Before proceeding with any Supreme Court decisions, it might be appropriate 
>to lay some groundwork as to what were the circumstances involved that 
>caused Congress and President Taft to introduce both The Corporation Excise 
>Tax Act of 1909 and the language of the 16th Amendment simultaneously onto 
>the floor of the Senate.  The Corporation Excise Tax Act of 1909 was 
>immediately enacted into legislation and the final language of the 16th 
>Amendment was sent out to the States for ratification.  Ratification of the 
>16th Amendment allegedly occurred in 1913 upon the votes of the appropriate 
>number of States.
>It was established from the inception of the National Government that the 
>chartered institutions of the States could be taxed by Congress.  This is 
>shown in the following cases:
>     McCulloch v. The State of Maryland, 4 Wheat. 316, 435.
>     The people of all the States, and the States themselves, are 
>     represented for Congress, and by their representatives, exercise this 
>     power.  When they tax the chartered institutions of the States, they 
>     tax their constituents; and these taxes must be uniform.
>So, that until 1895, the National Government could tax the chartered 
>institutions of the States.  Along came the Pollock cases and the resulting 
>Supreme Court decision declaring the Income Tax of 1894 unconstitutional 
>with the specific reason as to why it had declared that act 
>unconstitutional.  The revenues that were intended to be collected by the 
>Act of 1894 were now no longer to be expected and, therefore, the National 
>Government was experiencing some difficulty from a revenue point of view as 
>taxes were being challenged in courts all over the land and the plaintiffs, 
>mostly corporations, attempted to prove the income was always traceable to 
>real estate.
>In 1903, the Spreckles Sugar Refining Company brought suit to recover a tax 
>exacted under the war revenue act of June 13, 1898 (30 Stat. at L. 448, 464, 
>chap. 448 U.S. Comp. Stat. 1901 p.2297) and paid under protest.  The Supreme 
>Court ruled as follows:
>     Spreckles Sugar Refining Co. v. McClain, 192 US 496.
>     The `special excise tax' imposed on sugar refining by the war revenue 
>     act of June 13, 1898 ... section 27 to be measured by gross annual 
>     receipts in excess of a named sum, is not a direct tax, which under the 
>     Federal Constitution, must be apportioned among the several states 
>     according to population, but is an excise imposed by Congress under its 
>     power to lay and collect excises which shall be uniform throughout the 
>     United States.
>Mr. Taft, who had been elected President in 1908, had as a major part of his 
>campaign the promise to push for an income tax that would tax the wealthy.  
>This would be done by taxing the instrument of their wealth -- the 
>corporations -- because now we could legislate in a manner that would not be 
>determined to be unconstitutional by the Supreme Court.
>President Taft, upon taking office, immediately had introduced into Congress 
>The Corporation Excise Tax Act of 1909 and, simultaneously, because of 
>growing political pressure from the opposition, to push for a Constitutional 
>Amendment to tax the incomes of the wealthy.
>In 1909, Congress had for consideration as taxing legislation, The 
>Corporation Tax Act of 1909, the language of the 16th Amendment as submitted 
>by President Taft, and the Bailey-Cummins Income Tax Act, which was a 
>complete replica of the Income Tax Act of 1894 which had already been 
>declared unconstitutional.  Congress enacted the Corporation Excise Tax Act, 
>rejected the Bailey-Cummins Income Tax Act, and modified the language of the 
>proposed amendment and sent it to the States for ratification.
>It is obvious that the objectives to be achieved by the Corporation Excise 
>Tax Act and the 16th Amendment was to tax the incomes of corporations, which 
>the National Government had from the beginning, and additionally, as a 
>result of the required reporting by these corporations, have the necessary 
>information to be able to tax this income without any individual being 
>required to forego his Constitutional rights.
>The reporting of Taxable Income on Forms 1099 and W-2 is totally 
>misunderstood.  Proper understanding of income in a Constitutional sense 
>will stop this misuse of these forms.
>First, please remember that the current taxing statute is the Internal 
>Revenue Code of 1954.  Under Subtitle A, two categories of taxes are 
>specified: Normal Taxes and Surtaxes.  We have previously dealt with the 
>Normal Taxes and now must determine what Surtaxes are and what and who are 
>subject to this category of tax.  The following decisions make clear what is 
>subject to a surtax:
>     Southern Pacific Co. v. Lowe, 247 US 330, 336.
>     The act of 1913 contains no similar language, but on the contrary, 
>     deals with dividends as a particular item of income leaving them free 
>     from the normal tax imposed upon individuals, subjecting them to 
>     graduated surtaxes only when received as dividends.
>     Lynch v. Hornsby, 247 US 339, 344.
>     Hence we construe the provisions of the act that the `net income of a 
>     taxable person shall include gains, profits and income derived from 
>     interest, rent, dividends, ... or gains or profits and income derived 
>     from any source whatever' as including (for the purpose of the 
>     additional tax) all dividends declared and paid in the ordinary course 
>     of business by a corporation to its stockholders after the taking of 
>     the act.
>Please note that income collected by a corporation (rents, dividends, 
>interest gains or profits from whatever source) is taxable income to the 
>corporation or when paid out as dividends to its shareholders.
>     Lynch v. Hornsby, 247 US 339.
>     Under the income tax act of 1913, dividends declared and paid in the 
>     ordinary course by a corporation to its shareholders after March 1, 
>     1913 whether from current earning or from a surplus accumulated before 
>     that date were taxable to the individual stockholders as income under 
>     the surtax provision.  Lynch v. Turrish, ante 221 and Southern Pacific 
>     v. Lowe ante 330 Distinguished.
>So it becomes necessary to determine the definition of "income" so that we 
>may properly determine whether it comes within the scope of the 16th 
>Amendment.  The Fourth Circuit Court of Appeals has stated:
>     Simmons v. United States, 308 F2d 160, 166.
>     Therefore, the taxpayer can establish his contention that the tax 
>     imposed is invalid under the Constitution only by showing, first, that 
>     the tax is direct and therefore requires apportionment, and second, 
>     that the tax does not fall within the scope of the Sixteenth Amendment 
>     which lifts the apportionment requirement from such categories of taxes 
>     on incomes as are deemed direct taxes.
>In the above cases it is shown that there is a character of "income" that 
>comes within the scope of the 16th Amendment and is subject to taxation by a 
>graduated surtax.  Who determines what "income" is and what is its 
>definition? This is shown by the following Supreme Court decisions:
>     Eisner v. Macomber, 252 US 189, 206.
>     In order, therefore, that the clauses cited from Article I of the 
>     Constitution may have proper force and effect save only as modified by 
>     the Amendment, and that the latter also may have proper effect, it is 
>     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 by 
>     any definition it may adopt cannot conclude the matter, since it cannot 
>     by legislation alter the Constitution, from which it derives its power 
>     to legislate, and within whose limitations alone that power can be 
>     lawfully exercised.
>Because the word "incomes" is contained in the Constitution, it is the 
>Supreme Court of the United States who determines the meaning of the word as 
>there used in the 16th Amendment.  This is the only income which the 
>citizens of the States can be taxed upon without the rule of apportionment 
>being required.  The following cases completely define the word "income" 
>that comes within the scope of the 16th Amendment:
>     Doyle v. Mitchell Bros, 247 US 179, 185.
>     Whatever difficulty there may be about a precise and scientific 
>     definition of `income' it imports as used here, something entirely 
>     distinct from the principle or capital as a subset of taxation or as a 
>     measure of the tax; conveying rather the idea of gain or increases 
>     arising from corporate activities.
>     Merchants Loan & Trust v. Smietanka, 255 US 509.
>     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 
>     October 3, 1913 (38 Stat. at L. 166, Chap. 16, 4 Fed Stat. Anno. Ed 
>     p.236) 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 v. Lowe, 247 US 330, 335, 62 L.Ed. 1142, 1147, 38 Sup.Ct.Rep. 
>     540 where it was assumed for the purpose 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 Act 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 involved, the same definition of `income' which was applied 
>     was adopted from Stratton's Independence v Howbert, supra, arising 
>     under the Corporation Excise Tax Act of 1909, with the addition that it 
>     should include `profit gained through the 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 of 1909, and that what 
>     that meaning is has now been definitely settled by the decisions of 
>     this court.
>     In determining the definition of the word `income' thus arrived at, 
>     this court has consistently refused to enter into the refinement of 
>     lexicographers or economists, and has approved, in the definition 
>     quoted what is believed to be the commonly understood meaning of the 
>     term which must have been in the minds of the people when they adopted 
>     the 16th Amendment to the Constitution.  Doyle v. Mitchell Bros. 247 US 
>     179, 185, 62 L.Ed. 1054, 1059, 38 Sup.Ct.Rep. 467; Eisner v. Macomber 
>     252 US 189, 206, 207, 4 L.Ed. 521, 528, 529, A.L.R. 1570, Sup.Ct.Rep. 
>     189.
>     Bowers v. Kerbaugh-Empire Co., 271 US 174.
>     `Income' has been taken to mean the same thing as used in the 
>     Corporation Excise Tax Act (August 5) 1909 (36 Stat. at L. 11, Chap. 6) 
>     in the 16th Amendment and in the various revenue acts subsequently 
>     passed.
>Examination of section 38 of the Corporation Excise Tax Act of 1909 
>discloses that there was imposed a special excise tax on the privilege of 
>doing business in a corporate capacity.  The measure of the tax was on the 
>net income of the corporation from whatever source.
>Additionally, it might be of some interest to note that it was President 
>Taft who had the Corporation Excise Tax Act of 1909 and the 16th Amendment 
>introduced into Congress and subsequently signed the Corporation Excise Tax 
>into law.  Ex-president Taft, in 1925, was the Chief Justice of the United 
>States Supreme Court when the Bowers v. Kerbaugh-Empire case above was 
>It should be obvious from what has been shown that there is a character of 
>"income" that comes within the scope of the 16th Amendment and that "income" 
>is subject to the surtaxes specified in the Internal Revenue Code of 1954 
>and is the same character of "income" since the passage of the Income Tax 
>Act of 1913.
>This type of "income" which is reported to the Internal Revenue Service on 
>form 1099, is a legal requirement placed upon the corporation in which you 
>may be a shareholder.  It is the most amazing thing in our country today 
>that no withholding occurs on this type of "income" which can be legally 
>taxed, while tremendous intimidating pressure is brought to bear on 
>individuals who have occupations of common right, or income that is only 
>taxable by the rule of apportionment.
>[Reprinted from `Freedom League Newsletter', June & July 1986.]

Paul Andrew Mitchell, Sui Juris      : Counselor at Law, federal witness 01
B.A.: Political Science, UCLA;   M.S.: Public Administration, U.C.Irvine 02
tel:     (520) 320-1514: machine; fax: (520) 320-1256: 24-hour/day-night 03
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_____________________________________: Law is authority in written words 09
As agents of the Most High, we came here to establish justice.  We shall 10
not leave, until our mission is accomplished and justice reigns eternal. 11
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