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Historical Perspectives on the Federal Income Tax











 
 

Statement of Position

The “broadening of the taxpayer base” in the implementation of the 1940, 1942 and 1944 Revenue Acts, by the reduction in the allowed exemption and the change from “net income” to “gross income” as the basis of the Tax, circumvents the mandates of the 16th Amendment and levies the Income Tax in violation of the requirements of the United States Constitution, Article 1, Section 8 and Article 1, Section 9, clause 4.  This broadening was a direct result of the implementation of the Social Security Act of 1935, the Public Salary Tax Act of 1939 and the transfer of the withholding provisions under Section 801 of Title 8 of the Social Security Act (42 U.S.C.S.) into the Internal Revenue Code of 1939.

The “additional income tax”, levied under Section 801, was levied upon the gross receipts (wages) earned by “labor for hire” (employees under the master- servant relationship).   Under this program of  “enforced savings”, in which the employee could expect to receive a return, the “Tax” was more a reduction of pay than a payment of an Income Tax.  However, this opened the door to the Withholding Tax program implemented under the Revenue Bill of 1942, and became the basis for the Victory Tax levied upon “Gross Income”.

The “Public Salary Tax Act of 1939” was implemented by Congress in order to facilitate the collection of Income Taxes.   This legislation removed the contention that such taxation would be an infringement upon the State’s or the Federal Government’s sovereignty.  The legal interpretations, cited by Congress as the basis for this act, did not deal with whether or not the “employees” were taxable under the income tax laws.  The only question presented to the court was whether or not such personal income taxes were, in effect, an encroachment upon government sovereignty.  The practical effect however, was that every State, Federal and private employee eventually became liable for the gross income tax levied by the Federal Government.

In order to adapt the “Net Income Tax” system established under the Sixteenth Amendment, to these new groups of taxpayers, major changes were necessary.  The Revenue Bill of 1940 changed the basis for filing Income Tax returns from net income to gross income, so as to include in gross income the wages of employees made taxable by the Public Salaries Tax Act.  The Tax itself remained a Net Income Tax, however.  In 1942, Congress levied a war measure tax based upon gross income exceeding $624 per year.   The Victory Tax, as it was called, was a separate revenue measure designed to remove the excess spending power from the lower end income producers, who were not subject to the normal Net Income Tax.

In conjunction with the Net Income Tax and the Victory-Tax of 1942, Congress also implemented what they called “Collection of Tax at the Source on Wages” (the Withholding Tax).   The purpose of the Victory-Tax and the Withholding Tax was to control inflation by removing excess spending from the economy.  By collecting the tax during the year, Congress could save money by not having to pay interest on borrowed funds, and by collecting the tax at the source they also would not have to worry about the people paying their taxes.  These Taxes then would be credited against the taxpayer’s obligation, when they filed their tax returns.   However, in 1944 the “Individual Income Tax Bill of 1944” repealed the Victory Tax and then moved the “Withholding Tax” provisions into the Net Income Tax system.   Thus, Congress included within the meaning of net income, under the 16th Amendment and the Internal Revenue Code of 1944, the “gross receipts” of wages earned by “labor for hire”.  It is the inclusion of these gross receipts, in Taxable Net Income, that becomes the basis of our grievance; in that it has allowed uncontrolled spending and the corresponding increase in the National Debt, contrary to the welfare of the American People.

The inclusion of the generic term “wages” within the specific term “compensation for services”, under 26 U.S.C.A. 61 (a), does not infer that all wages earned by labor are taxable income under the 16th Amendment.  The term wages (or compensation for services) must be construed in light of the definition of the term “income”, otherwise, there cannot be any distinction made between labor and income as there is between capital and income.  The only definition codified by the Internal Revenue Code (1939) and adhered to by the Courts, is:  “The Gain Derived From Capital, From Labor or From Both Combined”.  Later Courts have clarified this by adding the words: “Accessions to wealth clearly realized”.  In either case the meaning is that you have acquired something more than you possessed before, not that you have merely recovery of the cost of acquiring it.  There is no argument that “capital” can not be taxed by an Income Tax, for the capital is excluded by the term “the gain derive from”.   Likewise, “labor” cannot be taxed by an Income Tax, because it too is excluded by the same term “the gain derived from”.  The question then becomes; because capital cannot be included in taxable income, can the laborer be included, without violating the same principle of the Constitution?

The mere assumption that “labor” cannot be defined in value, and therefore has “no cost basis”, places the laborer in a class subservient to capital and negates the entire principle of the fundamental law.  The Constitution was adopted to protect the people from its government not to protect capital from taxation.  The basis of the fundamental law is found in the Declaration of Independence and the “inalienable” right to Life, Liberty and the Pursuit of Happiness.  Many cases, stemming from the foundation of our Country, have enforced the principle that the right to own property includes the right to labor; for how else is one to acquire property except through labor?   The 16th Amendment was not adopted to change or repeal the guarantees placed within the Constitution to protect these “inalienable rights” but, to clarify that a tax levied upon income was a valid excise tax upon the privilege of receiving “gain or profit”, from whatever source derived.  The exclusion of “Personal, living and family expenses” under Section 262, Part IX, Subchapter B of Chapter 1, Subtitle A, Title 26, U.S.C.A. is in recognition of that principle.  The acquisition of “gains and profits” (net income) does not include personal, living and family expenses, because, such expenses are not involved in the operation of acquiring “gains and profits”.  In the Net Income Tax system, the gains and profits (net income) derived from the operation of business are transferred to the owner of that business through “compensation for services”, “wages” and or the accumulation of “gains or losses” (I.R.C. 1040 C and D).   This net income then is taxable to the “individual”, after the allowance for the exemption and other permitted deductions (taxable net income).  The exemption* is specifically for the purpose of returning to the individual the “Personal, living and family expenses” excluded under Section 262.  When the exemption is less than the personal, living and family expenses incurred by the “Taxpayer” it becomes a tax upon that Taxpayer, not upon income.

This grievance then is two fold.

First:   The Income Tax levied upon the labor compensation of individuals, by reason of the reduction in the personal exemption amount under the 1940, 1942 and 1944 Revenue Acts, is levied en masse upon all who labor, with the specific intention of extracting tribute from every person. Therefore, it is levied with the intention of being a “capitation or other direct, tax” and is invalid for lack of apportionment and or uniformity.

Second:   The taxes collected under the “Employment tax” provisions of the Social Security Act, The Railroad Retirement Act, and other Health and Retirement Acts of Congress, are “enforced savings” programs constituting “Trust Accounts”.   These Trust Account are the medium whereby the people’s money is collected, held and disburse for the payment of accrued benefits and the accumulation of reserves.  These reserves were to grow through that accumulation and the receipt of interest, thereby providing a base from which to pay the benefits incurred.   As such, these balances were to be held in a form which would be redeemable upon demand.  However, these Trust Accounts now only contain “Special Obligation Bonds” issued by the Department of the Treasury and the programs have been changes to a “pay-as-you-go” basis.   In order to redeem these bonds, tax revenues must be raised from the same people paying into and receiving the benefits disbursed by the “Trust Accounts”.   This becomes an added burden upon the taxpayers and negates the entire principle upon which the programs are founded.
 
 



Petition to Congress


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