Historical Perspectives on the Federal Income Tax
“The need for enactment into absolute law of a codification of internal-revenue laws has long been recognized. The last such enactment was in 1874, when the Revised Statues was adopted. If the need for enactment into law of a codification was recognized in 1874, when only 17 volumes of the Statutes at Large had been published and our internal revenue was derived almost entirely from taxes on liquor and tobacco, that need must be much greater today, when 34 additional volumes have been published and our internal revenue is derived from more than a hundred separate sources…(page 3)… In only a few instances has any provision been taken from any title of the United States Code other than the internal-revenue title, and then only for the reason that such provision relates exclusively to internal revenue…(page 4)…Subtitle B contains the miscellaneous taxes, such as the employment taxes arising under the Social Security Act and the Carriers Taxing Act of 1937,… (76th Congress 1st Session, House of Representatives Report No. 6 (H.R. 2762), January 20, 1939)
Chapter 1—Income Tax, Subchapter B—General Provisions, Part 1—Rates
Section 11. Normal Tax on Individuals
There shall be levied, collected and paid for each taxable year upon the net income of every individual a normal tax of 4 per centum….
Part II—Computation of Net Income
Section 21. Net Income
(a) Definition.—“Net income” means the gross income computed under section 22, less the deductions allowed by section 23.
Section 22. Gross Income
(a) General Definition.—“Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, business, commerce, or sales, or dealings in property, whether real or personal,…
Section 23. Deductions From Gross Income
(1) In General.—All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered;
Section 24. Items Not Deductible
(a) General Rule.—In computing net income no deduction shall in any case be allowed in respect of—
(1) Personal, living or family expenses;
Section 25. Credits of Individual Against Net Income
(a) Credits for Norman Tax Only.—There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income:
(3) Earned Income Credit.—10 per centum of the amount of the earned net income, but not in excess of 10 per centum of the amount of the net income.
(4) Earned Income Definitions.—For the purpose of this section—
(A) “Earned income’ means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include any amount not included in gross income, nor that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for personal services actually rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income.
(b) Credits for Both Normal and Surtax--There shall be allowed for the purposes of the normal tax and the surtax the following credits against net-income.
(1) Personal Exemption
(2) Credit for Dependents
Changes Made By Congress through the Revenue Bills of 1939, 1940, 1942 and 1944
Gross income definition changed by the enactment of the Public Salary
Tax Act of 1939, (H.R. 3790, April 12, 1939 Public, No. 32), to include
the salaries and wages of “officer or employee of a State”
Title 1. 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 following”).”
The Social Security Act Amendments of 1939, 53 Stat. 1360, moved the tax provisions incorporated in Title VIII and IX of the Social Security Act of 1935 into Chapter 9 of the Internal Revenue Code. Social Security became FICA under Subchapter A, section 1400 and unemployment became FUTA under Subchapter C, section 1600.
“The Revenue Bill of 1940” changed the requirement for filing income tax returns, under Section 51, from the basis of “net income” to that of “gross income”. But, it did not change the Internal Revenue Code section (Section 22) definition of “Gross Income” nor Section 11, Normal Tax On Individuals (tax on net income). The main purpose of this bill was to reduce the exemption and expand the definition of “compensation for services” so as to include the salaries of elected and appointed government employees in “gross income”.
“The Revenue Bill of 1942” (H.R. 7378) added a new section:
Section 172. Temporary income tax on individuals
(a) The Internal Revenue Code is amended by inserting at the end of chapter 1 the following new subchapter:
Subchapter D—Victory Tax on Individuals/ Part 1—Rate and Computation of Tax
Section 450. Imposition of Tax
“There shall be levied, collected. And paid for each taxable year beginning after December 31, 1942, a Victory Tax of 5 percent upon the Victory tax net income of every individual.
Section 451. Victory Tax net income.
(a) Definition: The term “Victory Tax net income” in the case of any taxable year means (except as provided in subsection (c)) the gross income (other than gains from the sale or exchange of capital assets as defined in sec. 117 and other than interest allowed as a credit against net income under sec. 25 (a) (1) and (2) for such year minus the sum of the following deductions:
(1) Expenses (2) Interest (3) Taxes (4) Losses (Trade and business expenses)
Section 452. Specific exemption.
“In the case of every individual there shall be allowed as a credit against the Victory tax net income a specific exemption of $624.
Section 455. Returns
(a) Individual Returns: Every individual having a gross income in excess of $624 for the taxable year, shall make, under regulations prescribed by the Commissioner…
Part II—Collection of Tax at Source on Wages
Section 465 Definitions
(b) Wages (all remuneration for services performed by an employee…)
Section 466. Tax Collected at Source
(a) Requirement of withholding: There shall be withheld, collected, and paid upon all wages of every person, to the extent that such wages are includible in gross, a tax equal to 5 percent of the excess of each payment of such wages over the withholding deduction allowable under this part…
The “Individual Income Tax Bill” of 1944 repealed the Victory Tax and the Earned Income Credit. The Withholding provisions were merged into the “normal tax” and relocated to Chapter 9, sections 1621-32. The “Earned Income Credit” was replaced with the “Standard Deduction” added to the end of section 23 and a new section (n) was added to Section 22, called “Adjusted Gross Income”. This new term (Adjusted Gross Income) is defined by Senator George, the Chairman of the Senate Finance Committee, as:
"In general, adjusted gross income is gross income less business deductions, and for the average wage earner represents his total wages." (Congressional Record of May 19, 1944, page 4703)
In other words, the employee's wage became net-income by the stroke of a pen.
Revisions made in 1954, relocated and or renumbered almost every section of the Tax Code. In doing so it removed all reference to Net Income and replaced the definition of Gross Income with the term: “Gross income is all income from whatever source derived”. This revision also removed all reference to the terms “gains and profits” thereby, suggesting that “Income” means “all that comes in”.
Code of Federal Regulation, 1939-1953, Subsection 39.21-1, Meaning of
(a) The tax imposed by chapter 1 is upon net income. Neither income exempt by statute or fundamental law, nor expenses incurred in connection therewith, other than interest, enter into the computation of net income as defined by section 21.
(1) Income (in the broad sense) meaning all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits…
Subsection 39.22 (a)-1 “What included in gross income”
(a). Gross income includes in general compensation for personal and professional services, business income, profits from sales, rents, interest and dividends…In general, income is the gain derived from capital, from labor, or from both combined.
These C.F.R. sections are now missing from the Tax Code, either by mistake
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