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Historical Perspectives on the Federal Income Tax










1954: Internal Revenue Code

Taxable Income

The Internal Revenue Code of 1954 consolidated and clarified the existing provisions of the 1939 to 1953 Tax Codes. In doing so, the existing Code sections were revised and renumbered to provide for an easier operation, and less confusing, application of the tax provisions. In reality, the revisions were for the purpose of conforming the wording of the Internal Revenue Code to the actual application of the sections, as they were interpreted in actual practice.

There is not a lot of discussion, regarding the specific provisions of the new Tax Code, contained in the Congressional Record. However, the Committee Reports of the House and Senate provide an adequate explanation on their own. The House Report (No. 1337) contains a "Detailed discussion of the technical provisions of the bill" section, and beginning on page A9 of that section the following information is provided [The Senate Report (No. 1635) provides basically the same information, with, in some cases, a more accurate description.]. Pay close attention to the separate provision, as those provisions are relocated and renumbered, for in reality nothing changed, except the wording and the section number. In other words, the 1954 Code continues both the net-income provisions from sections 11 and 12, and the "gross income" provisions from Supplement T under section 400 to 404. I wonder at this point if the "separability clause" has something to do with these sections, and why they were not merged into section 1 along with section 11 and 12?

"Subtitle A-Income Taxes-Chapter 1-Normal Taxes and Surtaxes-Subchapter A-Determination of Tax Liability-Part 1-Tax on Individuals

Section 1. Tax Imposed

Section 1 of the bill, derived from sections 11 and 12 of the Internal Revenue Code of 1939, imposes a tax upon taxable income through a rate schedule which combines the normal and surtax on individuals … . Therefore, the distinction between normal tax net income and surtax net income has been eliminated, and the tax imposed upon ‘taxable income’ as defined in section 63 of the bill.

NOTE: What happened to the "optional Tax" levied upon gross income under sections 400 to 404 of the 1944 Code? Those sections were not made a part of section 1 of the 1954 Code under "taxable income"; are they are still "optional"? Yes, the provisions of sections 400 to 404 of the 1953 Code are contained in sections 3 and 4 of the 1954 Code, according to the information on page A11. The tax is still levied, at the taxpayer’s choice, upon their "adjusted gross income" in lieu of the net income provisions. Under the 1950 Statute, section 102 amended section 400 of the IRC to read:

"In lieu of the taxes imposed by sections 11 and 12, there shall be levied, collected, and paid for each taxable year upon the net income of each individual whose adjusted gross income for such year is less than $5,000, and who has elected to pay the tax imposed by this supplement for such year, a tax as follows:"

Section 3 of the 1954 Code reads:

"In lieu of the tax imposed by section 1, there is hereby imposed for each taxable year, on the taxable income of each individual whose adjusted gross income for such year is less than $5,000 and who has elected for such year to pay the tax imposed by this section, the tax shown on the following table:"

Subchapter B-Computation of Taxable Income-Part 1-Definitions

Section 61. Gross income defined

This section corresponds to section 22(a) of the 1939 Code. While the language in existing 22(a) has been simplified, the all-inclusive nature of statutory gross income has not been affected thereby. Section 61(a) is as broad in scope as section 22(a).

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. Therefore, although the section 22(a) phrase ‘in whatever form paid’ has been eliminated, statutory gross income will continue to include income realized in any form. …

NOTE: Here is the "terminology" that appeared to change, yet Congress admits that it did not. The term "income" is used in its "Constitutional" sense and therefore means "net-income", not gross income, or "all that comes in", as it did in the original Revenue Act of 1913. The same is true for the term "gross income", in that it retains its meaning in the "statutory" sense, i.e. the "gain or profit derived from" each individual source. In any case, the terminology used to describe "income" has not, as far as the actual law is concerned, changed, it is still talking about net-income, not gross income, as the subject of the Federal Income Tax under the 16th Amendment. However, the option still remains, providing the opportunity to pay a tax based upon gross income or annual receipts. That "option" is continued through sections 3, 4, 62 and 63 of the 1954 Code.

Section 62. Adjusted Gross Income

This section corresponds to section 22(n) of the 1939 Code. Paragraph (1) corresponds to paragraph (1) of section 22(n) of the Code of 1939. No substantive change is made.

Paragraph (2) sets out those deductions relating to certain trade or business expenses which are allowed employees in computing their adjusted gross income. Subparagraph (2) (A) (reimbursed expenses) corresponds to paragraph (3) of section 22(n) of the Code of 1939 and subparagraph (2) (B) (expenses for travel away from home) corresponds to paragraph (2) of section 22(n) of the 1939 Code except for the change in the title. No substantive changes are made in either of these subparagraphs. Two new deductions for employees have been added in paragraph (2); transportation expenses (added by subparagraph (C), and outside salesman’s expenses (added by subparagraph (D)).

NOTE: Why are employees allowed to deduct reimbursed expenses? Because, the allowance for the deduction of such expenses make their "wages" comparable to the net-income of business and professional persons, as explained in the 1944 Act. Does that mean that the employee is in "business", if so, what "business" are they in? If they are "in business", why are they not allowed to deduct their expenses prior to line 7 of the 1040 tax return, when other "businesses" deduct their expenses on separate schedules, before listing their "income" on the 1040 tax return?

Notice that section 62 is derived from section 22(n) of the 1939 Code, and that section 61 is derived from section 22(a). Given the history of both sections, before and after the revision, can it be concluded that the gross annual wages of the common laborer (employee) are not addressed by section 61(a), given that section deals strictly with "gains and profits"?

Section 63. Taxable income defined

This section is derived generally from section 21 of the 1939 Code. Taxable income is defined in subsection (a) as "gross income" minus the deductions allowed by this chapter, other than the standard deduction. Subsection (b) provides that in the case of individuals electing the standard deduction "taxable income" means "adjusted gross income" minus the standard deduction and the deduction for personal exemption.

This change of the term "net-income" as used in section 21 of the 1939 Code to "taxable income" creates a new concept. It eliminates terms such as "normal tax net income," "surtax net income," in the case of individuals, and "adjusted net income," "normal tax net income" and "Corporation surtax net income" in the case of corporations and "net-income" for both individuals and corporations. The language change clarifies the tax base. It eliminates the necessity for credits against net income and the exemptions, which become deductions in arriving at "taxable income" for both corporations and individuals.

NOTE: Section 21 of the 1939 Code provided the definition for the term "net-income", upon which the entire tax structure was based; it too provided that "net-income" was determined by deducting allowed "expenses" from "gross income". In other words, nothing changed except the words used, the end result is the same.

What did Congress mean by a "new concept"? Isn’t "net-income" still "net-income", in that it is defined by the same terms in both Tax Codes. What is the difference between allowing a credit against "net-income", for the personal exemption and other allowed deductions, in order to determine the amount of " net-income" subject to the tax. And the tax being levied upon the "taxable income", after the personal exemption and other allowed deductions are taken from the "adjusted gross income"? Except for the inclusion of employee gross wages, the terms "net-income" and "adjusted gross income" mean the same thing.

 

Congressional Record Volume 100:

Part 13, INDEX H.R: House Bills 8281-8322, H.R. 8300

Part 13, INDEX: "Income Tax", "Internal Revenue Code", "Taxation"

Part 3, pgs. 2957, 3417-18, 3420, 3516, 3564, 3687

Part 7, pgs. 8557, 8595, 8978, 8993, 9058, 9063, 9138, 9150, 9267, 9271, 9273, 9279, 9322, 9434, 9439, 9458, 9460, 9470, 9476, 9588, 9590, 9602, 9605, 9619, 9966

Part 9, pgs. 12399, 12436, 12525

Part 11, pgs. 14100, 14177, 14312

House Report Number 1337, Serial Set 11746

Senate Report Number 1635, Serial Set 11735

Public Law 591-Chapter 736, August 16, 1954, I.R.C. of 1954

 


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