Adjusted Gross Income


T

Taxgiven

Congress has the power to levy a generic (16th Amendment) excise tax upon
"gross income"[1], and by the operation of Article 1, Section 8, they have
the ability to levy a specifically defined excise tax measured by gross
receipts. However, in order to levy a "gross income" [2] tax, under the 16th
Amendment Statute [3], they would be required to rewrite the existing Tax
Code and eliminate the "above the line" [4] exclusion of "reasonable and
necessary expenses" allowed by sections 62 (a) (1) and 63 (a). Such "above
the line" exclusions, provided for by the Statute, define the excise tax as
operating upon "net-income", or profit, not gross income or receipts [5].
They did not, and have not, "changed the character of the taxation" by
combining the commercial net-income provisions found in Subtitle A, with the
allowed itemized deductions and personal exemptions, then calling the result
"taxable income". The "income" tax today remains a "net-income" tax
(Commissioner v. Tellier, 383 U.S. 687 (1966)). So what is the meaning of
"adjusted gross income" and what "liability" does that section purport to
create in the "commercial net-income" statute?

The term "income", under the 16th Amendment, means gain, not receipts or
"all that comes in" (see Lukhard v. Reed, 481 U.S. 368, 374-76 (1987) for
the two general meanings of the word "income"). Why? Because the Supreme
Court in the "Pollock Cases" [158 U.S.601, 625] established the meaning of a
"direct income tax" to be a tax upon "one's whole income", or the annual
receipts produced by "one's whole property" [a tax upon "all that comes in"
whether produced by capital or labor]. After the passage of the 16th
Amendment the court defined the term "income", under the excise tax imposed
through the statute, as being "the gain derived from," capital and or labor,
not their annual receipts. Therefore, Congress has no authority or power
to determine the meaning of "gain", that is, they cannot by Statute declare
something to be gain [6]. Why? Because to do so would destroy the
distinction between what is "property" (capital and labor), and the gain
derived from it. Gain is a concept determined by accounting methods, it is
the difference between what is received and the cost incurred in receiving
it [7]. Section 61(a) is a list of items, from which "gain" might be
derived. That section cannot and does not declare those items to be
"taxable gain" [8].

The term "source", as it relates to the 16th Amendment, includes only
capital, and or, labor. Why? Because in a personal tax upon one's gain
(income) the word "source" has nothing to do with who paid for it or the
circumstances to which it was used. The word "source" is defined as: "That
from which anything comes forth, regarded as its cause or origin, the first
cause," ["Federal Tax Procedures and Appeals" by James Conlon, citing
Webster's New International Dictionary]. The first cause or origin of
receipts, in any business transaction, is capital and or labor; how it is
used, why it is sold, or who received it, is secondary.

The 16th Amendment then must be defined as a generic excise tax based upon
the gross amount of gain "derived from" either of the sources capital and or
labor, unless Congress specifies a lesser amount such as "net-income". In
any case it can not be defined as a tax upon "all that comes in", as that
would be in conflict with the definition of "gain" [9] and be a "direct tax"
in the constitutional sense.

The question then is; at what point does Congress have control over
establishing "taxable gain" under the Statute? They cannot declare
something to be "gain," simply for the purpose of taxing it as "gain". So,
is the starting point the gross income shown on Schedule C, E, or F, before
excluding the "reasonable and necessary expenses" of producing income
(gain)? No, that would make the excise tax operate on gross income in
violation of the statutory purpose expressed in the original 1913 Revenue
Act (The court's holding in Tellier). Is the starting point line 22 of the
1040 Tax Return (net-income) like Senator Cummins stated in 1913? Yes, as
that fulfills the requirement of taxing "net-income", i.e., gross income
less "above the line" expenses of producing "gain" (income). Or does that
starting point begin on line 39 "Taxable Income", after all the expenses and
allowed deductions and exemptions are taken? Of course not, Congress can
only "allow" deductions from "taxable income", they have no power to "allow"
deductions from receipts for the purpose of creating "taxable income"[net
income is a well defined term in accounting, as well as, federal excise
taxation]. The subject, or character, of the Federal income tax did not
change by renumbering and rewording the Statute in 1954, it was then, and it
is now, a generic excise tax based upon "commercial net income", i.e.
"business" activities.

The income tax is an excise, that is, the tax operates upon some other
principle not directly connected with people, or the ownership of property
[Brushaber 240 US 1]. Congress, under Article 1, Section 8, was given the
power and authority to levy excises taxes for the collection of revenue.
The 16th Amendment merely clarified that that pre-existing power included
the taxation of "gains and profits" derived from capital, so long as the tax
operates as an excise, not a "direct" tax. Therefore, excise taxes apply to
the "use", sale, transfer, consumption, or exercise of privilege involved
with capital and or labor, i.e., business activities or transactions.. As
such, Congress is free to measure the amount of tax they intend to collect
in any reasonable manner, so long as it fairly relates to the subject of the
excise. The human being is not the proper subject of an excise, but what
the human being does, or uses, may be.

Business, or the doing of business, has always been regarded as the
"subject" upon which an excise could be levied in relation to the human
being. The excise is not levied upon the labor, or the ability to labor, as
that would make the tax "direct" upon "property". The tax then is levied
upon the "privilege" of doing business, or the privilege of receiving "gain"
from business activities. The term "business" most generally is associated
with dealing directly with the public in the pursuit of profits or gain, not
working for an employer in exchange for "wages" [10]. Once determined as
being a valid "excise" however, Congress has full control and authority to
establish both the measurement and the amount of tax levied (Pittsburgh v.
Alco Parking Corp., 417 U.S. 369 (1974)). It therefore follows that
Congress has the full authority to measure the excise by the gross gain
(income) of the "business", without allowing any deduction for the expenses
incurred. Congress, from the beginning, has chosen not to do that.
Instead, they chose "net-income", or "profit" as the basis for taxation. In
addition, they allowed a "personal exemption" from the taxable amount of
income, which was adequate, at least for that time, to cover "personal
living and family expenses. The 16th Amendment "income tax" is no
different. It is a tax levied upon "net-income" [Subtitle A of the
Statute], i.e., "the gain, profit, or income (gain)[11], derived from"
capital and or labor [Stratton's: Eisner: Merchants: Glenshaw Glass, and all
the rest defining "income" under the 16th Amendment]. This definition is
the constitutional definition, because Congress chose to make it that way.
This brings up the question of whether or not the common law employee's
"wages" fall within the definition of "commercial net-income" under Subtitle
A of the Statute. Congress chose to limit their power to "commercial
net-income," and they do not have the power to declare something to be
"commercial net-income" in order to tax it. They therefore, cannot allow
deductions from something that is not "commercial net-income", in order to
make it "taxable income (gain)". How did the common law employee's "wages"
become "commercial net income" for purposes of the Statute?

What is the meaning of "Adjusted Gross Income (gain)"? And, what purpose
does it serve in a "commercial net-income" tax system? Answer: If it's not
gain, Congress has no power to tax it [12], except by apportionment. How
did they make the employee's wages fit within the definition of "commercial
net-income," in compliance with the statutory provisions of Subtitle A
(Treasury Regulation 118)? Answer. By creating the "new concept" of
adjusted gross income [13].

In 1953, and before, the definition of "gross income" was: "Gross income"
includes gains, profits and income "derived from" salaries, wages, or
compensation for personal services." Notice that by its definition "GAIN"
(income) was to be "derived from" salaries, wages, or compensation for
personal service. The statute did not say, "GAIN" (income) includes
salaries, wages, or compensation for personal services, as Section 61(a)
appears to say now. The common law employee's wages were not "derived from"
their wages, nor were they "derived from" business receipts. Employee
"wages" represented their entire income (all that comes in, or annual
receipts) and therefore did not fall within the existing definition of
"gross income", or gross gain, in compliance with the 16th Amendment [14].
Congress needed a new category of "income" in order to include the common
law employee's annual receipts within the Statute. They could not change
the existing Statute to a "gross income" tax, without removing the "above
the line" exclusion of "reasonable and necessary expenses". Nor could they
include the employee's gross wages [annual receipts] in statutory "gross
income (gain)", because such "wages" were not "derived from" their receipts,
they, in fact, are their receipts (all that comes in).

This "new concept" allowed Congress to imply that the common law employee
was "in business" and therefore their "wages" represented the gross gain
derived from business activities [receipts less reimbursed expenses and
expenses of travel away from home] (excise), rather than receipts earned
from labor (capitation). They accomplished this by "allowing" the employee
to deduct travel and lodging expenses, as well as, reimbursed expenses
incurred for their employer, "above the line", in the same manner as all
other "businesses" deduct their expenses of producing income "gain" from
their receipts. They also provided for the deduction of "employee business
expenses" as itemized deductions "below the line." What about the millions
of employees who did not have "above the line " expenses, or even "below the
line expenses", their entire gross wage became "commercial net income" by
operation of the statutory provisions. At the same time the "withholding"
provisions took effect and the only way to recover the taxes withheld was to
file a Tax Return. The "withholding provisions" caused the employee to list
their gross annual wages as "commercial net-income," in the same way as all
other "businesses" reported their taxable net income. By doing so, Congress
created the "presumption of fact" relied upon by the courts in holding that
everyone was "in the business" of earning their living [15]. That
"presumption of fact" has never been challenged [16].

The "tax protest" movement has never challenged the Statute, opting instead
to challenge the meaning of words; the application of court cases which have
no relationship to the common law employee; Code sections which clearly do
not apply to the underlying issues of "due process", and a thousand other
issues the court is not going to listen to. Why should they answer their
questions, when they have broken the law by not following its simple
instructions:
Pay the tax in question; file for refund according to the statutory
procedures, and if denied file suit and let the judge do his job.

Follow the "legislative history" of the federal "net-income" tax system, it
has existed for over 200 years, yet it was not untill 1942 that Congress
even attempted to include the employee's "wages" within the "commercial net
income" provisions of the Statute. Define the Statute for what it is and
you automatically settle the question of whether or not the employee's
"wages" ARE within themselves "taxable net income", or that they must be
included in a report (tax return) of "commercial net income" for purposes of
the 16th Amendment "Income Tax". Congress has the power to include "income"
excluded by the "fundamental Law" in a report of "gross income", but they do
not have the power to tax that "income" by itself, without apportionment.
[Pacific Co. v. Johnson, 285 U.S. 480 (1932)]

Thanks, ggiven (www.taxhistory.com)

FOOTNOTES

[1] Congressional Record of August 28, 1913, page 3844, statement of Senator
Cummins:
"Why, Mr. President, should Congress attempt to do more than is declared in
the first section of the proposed bill? It is right; it is comprehensible;
it embraces everything-no, I will withdraw that; it does not embrace the
full power of Congress, because Congress can levy a tax upon gross income if
it likes; it may diminish the extent of its taxing power or not exercise it
at all; it may exclude certain things from the taxing power that it might
include; but it can not change the character of the taxation; and when it is
declared in the first lines of this bill that a tax is levied upon the
entire net-income of all the citizens of this country, we have exercised all
the power we have."

[2] Congressional Record, October 9, 1942, page 7987. Statement of the
Chairman of the Senate Finance Committee, Mr. George:
"If we are going to depart during this war, as an emergency matter, from
the concept which has run through our tax system, that is to say, imposing a
tax on net-income, there would seem to me to be little or no purpose to the
pending proposal if no one would be reached who was not subject to the
net-income tax provisions of the bill as passed by the House and as reported
to the Senate. In other words, if it would not bring in additional
taxpayers; if it would not reach the vast number of income producers who
will not pay taxes on net income, there would seem to be very little reason
in departing from the net-income system and going to the gross-income system
in collecting a tax."

[3] CRS Report for Congress 92-303A, "Frequently Asked Questions Concerning
the Federal Income Tax", John R. Luckey, Legislative Attorney, American Law
Division, Library of Congress, March 13, 1992. Question 3; "What does the
court mean when it states that the income tax is in the nature of an excise
tax" page CRS 5:
"When the court refers to an income tax as being in the nature of an
excise, it is merely stating that the tax is not on the property itself, but
rather, it is a fee for the privilege of receiving gain from the property."

[4] "Study of the Overall State of the Federal Tax System and
Recommendations for Simplification, Pursuant to Section 8022 (3) (B) of the
Internal Revenue Code of 1986." Document JCS-3-01, Volume II. April 2001
Section II (6) Above the line deductions and itemized deductions, page 30
"Present law does not reflect a coherent theory for treating some
deductions as above the line and some deductions as itemized deductions.
Although above the line deductions are frequently thought of as deductions
related to the production of income and itemized deductions are frequently
thought of as reflecting ability to pay or encourage certain behavior, not
all deductions can be accounted for under these principles. . Similarly, not
all expenses that are related to the production of income are above the line
deductions. For example, employee business expenses are allowable only as
an itemized deduction (subject to the two-percent floor on itemized
deductions)
(See also: Alexander v. I.R.S., No. 95-1451)

[5] Internal Revenue Code of 1954, H.R. 8300, House Report 1337, page A20.
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. It eliminates the necessity for credits
against net income and exemptions which become deductions in arriving at
"taxable income" for both corporations and individuals."

[6] 47A C.J.S. (1996), Internal Revenue, section 12: Power to tax and nature
of tax, page 62:
"There remains the question as to whether what is being taxed is, indeed,
"income", and Congress is not constitutionally free to define income in any
way it chooses." Citing Simpson v. U.S. D.C. Iowa 1976. 423 F. Supp. 720
and Prescott v. C.I.R. 561 F2d 1287

[7] Treasury Regulation 45 (1918) [Amended April 17, 1919] Article 21, page
17-18, "Meaning of net income": "Statutory "net income" is, subject to
these modifications, commercial "net income". This appears from the fact
that ordinarily it is to be computed in accordance with the method of
accounting regularly employed in keeping the books of the taxpayer." [See
also "Income Tax Regulations" Regulations 118 (IRC 1939) Taxable years
beginning after 12/31/51. Section 39.21-1 (b)

[8] Internal Revenue Code of 1954, House Report 1337 {H.R. 8300}, page A18
Subchapter B-Computation of Taxable Income, Part I-Definitions, Section 61,
Gross Income defined:
"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."

[9] Pedone v. United States, 151 F. Supp 288 (1957), page 291
"It is not the intent of the 16th Amendment to authorize the Federal
Government to lay an income tax upon everything of value that came into the
ownership of the potential taxpayer. The common understanding of the word
income is the amount which one has gained by his transaction or activity.
His gains, not his gross receipts, are his constitutionally taxable income."

[10] United States v. Gilmore, 372 U.S. 39, 44 (1963):
"For income tax purposes Congress has seen fit to regard an individual as
having two personalities: "one is {as} a seeker after profit who can deduct
the expenses incurred in that search; the other is {as] a creature
satisfying his needs as a human being and those of his family but who cannot
deduct such consumption and related expenditures"

[11] Jarecki v. G. D. Searle & Co., 367 U.S. 303, 307 (1961)
"The maxim noscitur a sociis, that a word is known by the company it keeps,
while not an inescapable rule, is often applied where a word is capable of
many meanings in order to avoid the giving of unintentional breadth to the
Acts of Congress."
Gains, profits, and "income" are synonymous terms.

[12] Conner v. United States, 303 F. Supp. 1187, 1191 (1969)
"[2] Whatever may constitute income, therefore, must have the essential
feature of gain to the recipient. This was true when the sixteenth
amendment became effective, it was true at the time of the decision in
Eisner v. McComber, supra, it was true under section 22 (a) of the Internal
Revenue Code of 1939, and it is likewise true under section 61 (a) of the
Internal Revenue Code of 1954. If there is no gain, there is no income."

[13] Senate Report #885, H.R. 4646, Individual Income Tax Bill of 1944, page
3.
Eleventh, the bill introduces a new concept, adjusted gross income. It is
defined to mean gross income less business deductions, deductions
attributable to rents and royalties, and losses treated as losses from the
exchange or sale of property. In the case of an employee, adjusted gross
income consists of gross wages or salary less expenses of travel or lodging
in connection with employment while away from home, and any reimbursed
expenses in connection with his employment. It will be seen, therefore,
that in general adjusted gross income means gross income less business
deductions."

[14] Treasury Regulation 118 (1951), Subsection 39.21-1 Meaning of net
income
(a) The tax imposed by chapter 1 is upon income. Neither income exempted
by statute or fundamental law, nor expenses incurred in connection thereof,
other than interest, enter into the computation of net income as defined by
section 21."

[15] Noland v. C.I.R., 269 F2d 108 (1959) Footnote [2-3] page 111.
"We start with the assumption that every person who works for compensation
is engaged in the business of earning his pay. [See number 10 above]

[16] Stebbins v. Riley, 268 U.S.137,142 (1925)
"The taxing statute may therefore make a classification for purposes of
fixing the amount or incidence of the tax, provided only that all persons
subjected to such legislation within the classification are treated with
equality and provided further that the classification itself be rested upon
some ground of difference having a fair and substantial relation to the
object of the legislation."

Mobile, J.& K. C. R. Co. v. Turnipseed, 219 U.S. 35, 44 (1910)
"That a legislative presumption of one fact from evidence of another may
not constitute a denial of due process of law or a denial of the equal
protection of the law, it is only essential that there shall be some
rational connection between the fact proved and the ultimate fact presumed,
and that the inference of one fact from proof of another shall not be so
unreasonable as to be a purely arbitrary mandate."

Heiner v. Donnan, 285 U.S. 312, 329 (1932)
'that a constitutional prohibition cannot be transgressed indirectly by the
creation of a statutory presumption any more that it can be violated by
direct enactment. The power to create presumptions is not a means of escape
from constitutional restrictions."

Commissioner v. Groetzinger, 480 U.S. 23, 27, (1987)
"The phrase "trade or business" has been in 162 (a) and in that section's
predecessors for many years. Indeed, the phrase is common in the Code, for
it appears in over 50 sections and 800 subsections and in hundreds of places
in proposed and final income tax regulations. The slightly longer phrases,
"carrying on a trade or business" and "engaging in a trade or business,"
themselves are used no less than 60 times in the Code. The concept thus has
a well-known and almost constant presence on our tax-law terrain. Despite
this, the Code has never contained a definition of the words "trade or
business" for general application, and no regulation has been issued
expounding its meaning for all purposes. Neither has a broadly applicable
authoritative judicial definition emerged. Our task in this case is to
ascertain the meaning of the phrase as it appears in the sections of the
Code with which we are here concerned."
 
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