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One of the things that has plagued tax compliance for many years is people flooding the IRS and courts with frivolous arguments. People who do this sort of thing often resent being called tax protesters. I refer to them as “not conventionally tax compliant” (NCTC) to distinguish them from people like myself who pretty much follow the instructions and pay whatever the bottom line is. I call the people who inspire them like the late Irwin Schiff, Peter Hendrickson and the less well-known Brian Swanson “alternative tax thinkers” (ATT) to signal my respectful disagreement.
I’ve been working on a new to me ATT, which has inspired me to review the bidding on the validity of the federal income tax and I hate to say it, but I have found a significant IRS position that I think has been fueling the movement. In The Truth About Frivolous Tax Arguments, the IRS discusses the contention that the Sixteenth Amendment does not authorize a direct non-apportioned federal income tax on United States citizens. Notice 2010-33 lists this as one of the positions that can incur a $5,000 frivolity penalty. Here is what the IRS position is:
“The constitutionality of the Sixteenth Amendment has invariably been upheld when challenged. Numerous courts have both implicitly and explicitly recognized that the Sixteenth Amendment authorizes a non-apportioned direct income tax on United States citizens and that the federal tax laws are valid as applied.”
The Sixteenth Amendment did not authorize a non-apportioned direct income tax. To explain this we should review the bidding so to speak going back to the beginning.
The Constitution And The Supreme Court
The Constitution does not have a lot about taxes in it. Here is all of it.
Article 1
Section 2
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.
Section 8
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
Sixteenth Amendment
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
There was an income tax enacted during The Late Unpleasantness, but it lapsed. From what I can gather, it was considered to be an excise tax falling in the indirect category. Years later, the income tax made a comeback and the Supreme Court took a look at it. The opinion in Pollock v. Farmers’ Loan and Trust Company held that a tax on the income from property was equivalent to taxing the property which made it a direct tax which would have to be apportioned. Apportioning an income tax would be sort of absurd, since there would have to be different rates in each state depending on the relation between aggregate taxable income and population. That was in 1895.
One way of dealing with a problematic Supreme Court decision is to get a new Supreme Court. There is another way. That would be amending the Constitution. Thus came the 16th Amendment in 1913, which provides that Congress can lay and collect tax on incomes, from whatever source derived without apportionment.
Another challenge went up to the Supreme Court,and we got Brushaber v Union Pacific Railroad Company.
I tried to hunt down the first case in which a court said that the 16th Amendment provided for a direct tax on income. I believe it was Parker v Commissioner of Internal Revenue decided in 1984. Parker is an appeal of a Tax Court decision. Alton M. Parker was a pilot for Putz Aerial Services Inc. (I did not make that name up, honest.) Parker argued that the government was mistaken in interpreting the sixteenth amendment to allow a direct tax without apportionment. The opinion addresses that as follows:
“As we observed in Lonsdale v. CIR, 661 F.2d 71 (5th Cir.1981), the sixteenth amendment was enacted for the express purpose of providing for a direct income tax. The thirty words of this amendment are explicit: “The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” The Supreme Court promptly determined in Brushaber v. Union Pacific Ry. Co., 240 U.S. 1, 36 S.Ct. 236, 60 L.Ed. 493 (1916), that the sixteenth amendment provided the needed constitutional basis for the imposition of a direct non-apportioned income tax.”
Now actually, the wording in Lonsdale is significantly different and, as I see it, unobjectionable.
“Appellants next seem to argue, in reliance on Pollock v. Farmers Loan & Trust Co., 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759 (1895), and other authority, that, so understood, the income tax is a direct one that must be apportioned among the several states. U.S.Const. art. I, sec. 2. This requirement was eliminated by the sixteenth amendment.”
The statement about Brushaber is badly wrong, though.
Brushaber Does Not Call The Income Tax Direct
I may have spoken with Irwin Schiff in the nineties when I was dealing with a difficult situation with a former client who was the beneficiary of a trust that I was the trustee of. I don’t remember the details of that conversation. I do remember communicating with both of his sons around the time of his passing. The thing I remember clearly was that they both believed that their father was correct in his legal theories but thought it was unwise for people to follow his example. Peter Schiff in particular encouraged me to study Brushaber if I really wanted to get it.
It is ironic that Brushaber is used by both the ATTs and the IRS and the courts to support opposite views. To tell you the truth, it does provide a lot of support for the IRS view. Most notably, it states that Congress did not need the 16th Amendment to pass an income tax.
“That the authority conferred upon Congress by § 8 of Article I “to lay and collect taxes, duties, imposts and excises” is exhaustive and embraces every conceivable power of taxation has never been questioned, or, if it has, has been so often authoritatively declared as to render it necessary only to state the doctrine. And it has also never been questioned from the foundation, without stopping presently to determine under which of the separate headings the power was properly to be classed, that there was authority given, as the part was included in the whole, to lay and collect income taxes.”
The problem that the 16th Amendment was addressing was in which of the two great classes direct taxes or excise, impost and duties the income tax fell.
“the contention that the Amendment treats a tax on income as a direct tax although it is relieved from apportionment and is necessarily therefore not subject to the rule of uniformity as such rule only applies to taxes which are not direct, thus destroying the two great classifications which have been recognized and enforced from the beginning, is also wholly without foundation since the command of the Amendment that all income taxes shall not be subject to apportionment by a consideration of the sources from which the taxed income may be derived, forbids the application to such taxes of the rule applied in the Pollock Case by which alone such taxes were removed from the great class of excises, duties and imposts subject to the rule of uniformity and were placed under the other or direct class.”
What the Sixteenth Amendment did, according to Brushaber, was to prevent looking through income from property to the property itself, which is what made the income tax a direct tax in the Pollock view.
“a condition which clearly demonstrates that the purpose was not to change the existing interpretation except to the extent necessary to accomplish the result intended, that is, the prevention of the resort to the sources from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself and thereby to take an income tax out of the class of excises, duties and imposts and place it in the class of direct taxes.”
So What?
Alternative tax thinker Peter Hendrickson takes the ruling in Brushaber that the income tax falls into the class of indirect taxes as an excise and argues that as an excise it cannot be a tax on all that comes in. I remain unconvinced. He explains it all in The Legal Nature of The Income Tax.
Nonetheless, the fact that the IRS and numerous decisions since Parker misconstrue Brushaber has bolstered Hendrickson’s arguments.
“These false statements of the Brushaber ruling – which are not, it should be noted, mere “misconstructions” or even disagreements with what the court says, but rather are false ascriptions to the Brushaber court of declarations which are not only the exact opposite of what Brushaber says but are what the court expressly says is not true – have been used to justify applying or enforcing the income tax on unprivileged earnings (or the activities which produced them).”
Some Moore On The Income Tax As Not Direct
The dispute over the Mandatory Repatriation Tax (MRT), which required US shareholders to pay a one-time tax on the accumulated earnings of foreign corporations they had an ownership interest in prompted the Supreme Court to take another look at the fundamentals of the income tax, The opinion in Charles G. Moore, et ux., v, United States came out in 2024 and was intensely covered. I am just going to give you what is relevant to this discusson.
The majority opinion that affirmed the MRT had:
“Therefore, the Sixteenth Amendment expressly confirmed what had been the understanding of the Constitution before Pollock: Taxes on income—including taxes on income from property—are indirect taxes that need not be apportioned.”
In the dissenting opinion we have:
The Sixteenth Amendment thus facilitated an income tax by creating a new constitutional distinction between “income” and its “source.” Under the Amendment, “from whatever source” income is “derived,” a tax on it is indirect and therefore not subject to the rule of apportionment.
Peter Hendrickson was positively ecstatic about Moore. In the October 14, 2024 Lost Horizons newsletter, he wrote.
FOUR MONTHS AGO, the United States Supreme Court issued the most significant statement about the income tax it has made in 108 years. This statement revealed– and slapped down– false declarations about the nature of the income tax made for decades now by lower courts, government lawyers and the IRS. Those false declarations assert that the tax is a capitation (a type of direct tax) which has been relieved of the apportionment requirement imposed on such taxes by Article 1, sec. 2, cl. 3 and sec. 9, cl. 4.
This false doctrine about the tax, which has been the basis for countless misapplications of both the tax directly and of penalties associated with the income tax, was supported by– indeed, rested entirely on– a contrived misreading of the landmark, unanimous ruling on the meaning and effect of the Sixteenth Amendment by the Supreme Court in Brushaber v. Union Pacific RR. Co. 240 US 1 (1916). That contrived misreading holds that the ruling says exactly the opposite of what it actually does.
LET ME SAY THIS AGAIN: For the last 80 years or so, federal and state tax agencies, tax courts, district courts and appellate courts have systematically misapplied (and misenforced) the income tax based on a completely false reading of tax law, which the US Supreme Court just corrected– unanimously and unambiguously– this past June in its ruling in Moore v. United States. Is this clear enough?
Champagne corks should have popped all across the nation.
Moore has been taken note of in the courts, but the response is underwhelming. Paul Kenneth Cromar was appealing his tax evasion conviction and met with this statement when he pointed it out.
“We reject this argument for the same reasons we explained in Cromar’s civil tax case when we declined his invitation to “delve into the difficult question of the distinction between direct and indirect taxes.” Cromar, 807 F. App’x at 824 (internal quotation marks omitted). To reiterate what we said then, since ratification of the Sixteenth Amendment, whether an income tax is a direct tax or indirect tax is immaterial. It is beyond dispute that “Congress has the power to tax the income of individuals.”
Conclusion
Moore does reiterate that the income tax does not fall into the class of direct taxes thanks to the Sixteenth Amendment. Arguably, the misreading of Brushaber reflected in Parker and IRS Notice 2010-33 does not really have much in the way of practical impact as the Cromar opinion seems to indicate. Still the IRS really needs to fix its website when it comes to statements that the income tax is a direct tax.
You can find my most practical advice along with a lot of other great stuff at Think Outside The Tax Box.
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