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Verdict of The Week
Today in 1895: Federal income tax ruled unconstitutional
April 8, 2010
Death and taxes and childbirth! There’s never a
convenient time for any of them! – Margaret Mitchell
As tax day fast approaches, it’s easy to forget that for most of our nation’s history, there was no federal income tax at all.
It wasn’t until 1894 that Congress gave us the first peacetime income tax as a popular way to fund the growing nation’s infrastructure needs. The law called for a flat 2% tax on all incomes above $4,000. The new tax affected less than 10 percent of the population, which probably explains its popularity.
But while the tax itself was relatively small, its political impact was huge. Thanks to the industrial revolution, wealth and power had become concentrated in the hands of a few individuals and corporations, and taxing the rich became a rallying cry for social activists and the growing Populist movement.
Of course, the folks with the money and power weren’t about to roll over, and in Pollock v. Farmers’ Loan and Trust Co., they argued that taxing real estate rental income was effectively a “direct tax” on property. This, the plaintiffs argued, violated a Constitutional provision that all direct taxes be apportioned among the states according to population. The case was quickly taken up on appeal by the U.S. Supreme Court.
On April 8, 1895, the Supreme Court declared that the federal income tax was unconstitutional, and the wealthy were off the hook…At least for a while. The Supreme Court’s unpopular decision eventually led to the ratification of the Sixteenth Amendment in 1913, which in no uncertain terms gave Uncle Sam the power to tax incomes “from whatever source derived.”
The quote from Margaret Mitchell (author of “Gone with the Wind”) can be found in Uncle Anthony’s Unabridged Analogies: Quotes & Proverbs for Lawyers and Lecturers, which is available at a 10% discount to Westlaw Insider readers. Check it out!
The Supreme Court is bound by the Constitution. In Article I, Section 8, the Constitution grants jurisdiction to the federal government to regulate three areas of commerce: “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes” – in other words, foreign commerce, interstate commerce, and Indian commerce.
The 16th Amendment, the income tax, has been the subject of many Supreme Court decisions. The IRS always cites to the Brushaber v. Union Pacific R.R. Co., 240 U.S. 1 (1916), to inform the public that the 16th Amendment was held to be constitutional by the Supreme Court. What the IRS doesn’t inform the public about Mr. Frank Brushaber, the central character in the Supreme Court case, is that he was a withholding agent for several foreign investors in the Union Pacific Railroad, acting as their fiduciary.
The Supreme Court, obviously being aware of all of the pertinent details, ruled in the Brushaber case that the federal government always had the power to tax income as an excise tax and, therefore, the 16th Amendment is constitutional.
The Supreme Court then ruled in the very next case it decided, Stanton v. Baltic Mining, 240 US 103 (1916), the following: “… that by the previous ruling it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived…”. The ”previous ruling” cited in the Stanton decision was referring to the Brushaber decision.
A few years later the Supreme Court again ruled upon the 16th Amendment’s effect on the federal government’s power of taxation. In Peck & Co. v. Lowe, 247 US 165 (1918), the Supreme Court stated, in part: “The Sixteenth Amendment … does not extend the taxing power to new or excepted subjects …”.
The Supreme Court decisions above all inform everyone that no new power of taxation was granted to the federal government by the 16th Amendment. These decisions all inform everyone that the federal government always had the power to tax income from the beginning. Since no new power of taxation was granted to the federal government by the 16th Amendment and the federal government was held to always have had the power to tax income, then the revenue that’s being derived by the federal government from an income tax must come from one of the regulated commerce jurisdictions granted to the federal government by the Constitution – therefore, this revenue must come from foreign commerce, interstate commerce, or Indian commerce. After all, generating income is a commercial activity.
The Supreme Court ruled exactly that in Eisner v. Macomber, 252 U.S. 189 (1920), where the Court stated the following: “The 16th Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the Amendment was adopted.”.
By realizing that Mr. Frank Brushaber was a fiduciary for foreign investors in the Union Pacific Railroad, it becomes obvious that the revenue being derived by the federal government from the income tax must come from foreign commerce.
After the Brushaber and Stanton Supreme Court decisions were rendered, the Treasury Department issued its own decision, Treasury Decision 2313 (TD 2313). TD 2313 was issued to “collectors of internal revenue” and it stated that the Internal Revenue Form 1040 is to be used only by the fiduciary of a nonresident alien who has received interest from bonds and dividends on the stock of domestic (US) corporations on behalf of that nonresident alien. This Treasury Decision, which was based upon the Supreme Court decisions, confirms the foreign commerce nature of the income tax.
The statutes that make up the Internal Revenue Code must, therefore, be read in mind with the above Supreme Court decisions as well as the following Supreme Court decision:
“It is elementary law that every statute is to be read in the light of the Constitution. However broad and general its language, it cannot be interpreted as extending beyond those matters which it was within the constitutional power of the legislature to reach.” – McCullough v. Com of Virginia, 172 U.S. 102 (1898).
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the IRS has repeatedly tried to sieze money from me over the yrs with out ever filing a federal tax lien against me to my knowledge, just recently they sent two agents out to my parents house looking for me, can i sue them?