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Tax Scam Artist's Lie: Wages, tips, and other compensation received
for personal services are not income.
This argument asserts that wages, tips, and other compensation
received for personal services are not income, because there is
allegedly no taxable gain when a person "exchanges"
labor for money. Under this theory, wages are not taxable income
because people have basis in their labor equal to the fair market
value of the wages they receive; thus, there is no gain to be
Some take a different approach and argue that the Sixteenth Amendment
to the United States Constitution did not authorize a tax on wages
and salaries, but only on gain or profit.
For federal income tax purposes, "gross income" means
all income from whatever source derived and includes compensation
for services. I.R.C. § 61. Any income, from whatever source,
is presumed to be income under section 61, unless the taxpayer
can establish that it is specifically exempted or excluded. In
Reese v. United States, 24 F.3d 228, 231 (Fed. Cir. 1994), the
court stated, "an abiding principle of federal tax law is
that, absent an enumerated exception, gross income means all income
from whatever source derived.
The Sixteenth Amendment provides that Congress shall have the
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. U.S. Const. amend. XVI. Furthermore,
the U.S. Supreme Court upheld the constitutionality of the income
tax laws enacted subsequent to ratification of the Sixteenth Amendment
in Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916). Since that
time, the courts have consistently upheld the constitutionality
of the federal income tax. For a further discussion of the constitutionality
of the federal income tax laws, see section IV. of this outline.
All compensation for personal services, no matter what the form
of payment, must be included in gross income. This includes salary
or wages paid in cash, as well as the value of property and other
economic benefits received because of services performed, or to
be performed in the future.
Furthermore, criminal and civil penalties have been imposed against
individuals relying upon this frivolous argument.
Relevant Case Law:
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30
(1955) - referring to the statute's words "income derived
from any source whatever,.
the Supreme Court stated, "this language was used by Congress
to exert in this field 'the full measure of its taxing power.'
. . . And the Court has given a liberal construction to this broad
phraseology in recognition of the intention of Congress to tax
all gains except those specifically exempted.
Commissioner v. Kowalski, 434 U.S. 77 (1977) - the Supreme
Court found that payments are considered income where the payments
are undeniably accessions to wealth, clearly realized, and over
which a taxpayer has complete dominion.
United States v. Connor, 898 F.2d 942, 943-44 (3d Cir.),
cert. denied, 497 U.S. 1029 (1990) - the court stated that "[e]very
court which has ever considered the issue has unequivocally rejected
the argument that wages are not income.
Lonsdale v. Commissioner, 661 F.2d 71, 72 (5 th Cir. 1981)
- the court rejected as "meritless" the taxpayer's contention
that the "exchange of services for money is a zero-sum transaction
. . . .
McCoy v. United States, 88 A.F.T.R.2d (RIA) 7116, 2001
U.S. Dist. LEXIS 18986 (N.D. Tex. Nov. 16, 2001) - the court rejected
the taxpayer's argument that wages received were not income and
described this position as meritless.
Cheek v. United States, 498 U.S. 192 (1991) - the Supreme
Court reversed and remanded Cheek's conviction of willfully failing
to file federal income tax returns and willfully attempting to
evade income taxes solely on the basis of erroneous jury instructions.
The Court noted, however, that Cheek's argument, that he should
be acquitted because he believed in good faith that the income
tax law is unconstitutional, "is unsound, not because Cheek's
constitutional arguments are not objectively reasonable or frivolous,
which they surely are, but because the [law regarding willfulness
in criminal cases] does not support such a position." Id.
(emphasis added). On remand, Cheek was convicted on all counts
and sentenced to jail for a year and a day. Cheek v. United States,
3 F.3d 1057 (7 th Cir. 1993), cert. denied, 510 U.S. 1112 (1994).
Reading v. Commissioner, 70 T.C. 730 (1978), aff'd, 614
F.2d 159 (8 th Cir. 1980) - the court said the entire amount received
from the sale of one's services constitutes income within the
meaning of the Sixteenth Amendment.
United States v. Richards, 723 F.2d 646, 648 (8 th Cir.
1983) - the court upheld conviction and fines imposed for willfully
failing to file tax returns, stating that the taxpayer's contention
that wages and salaries are not income within the meaning of the
Sixteenth Amendment is "totally lacking in merit.
United States v. Romero, 640 F.2d 1014, 1016 (9 th Cir.
1981) - the court affirmed Romero's conviction for willfully failing
to file tax returns, finding, in part, that "[t]he trial
judge properly instructed the jury on the meaning of ['income'
and 'person']. Romero's proclaimed belief that he was not a 'person'
and that the wages he earned as a carpenter were not 'income'
is fatuous as well as obviously incorrect.
Abrams v. Commissioner, 82 T.C. 403, 413 (1984) - the
court rejected the argument that wages are not income, sustained
the failure to file penalty, and awarded damages of $5,000 for
pursuing a position that was "frivolous and groundless .
. . and maintained primarily for delay.
Cullinane v. Commissioner, T.C. Memo. 1999-2, 77 T.C.M.
(CCH) 1192, 1193 (1999) - noting that "[c]ourts have consistently
held that compensation for services rendered constitutes taxable
income and that taxpayers have no tax basis in their labor,"
the court found Cullinane liable for the failure to file penalty,
stating that "[his] argument that he is not required to pay
tax on compensation for services does not constitute reasonable
The Tax Scam Artist's Lie: Only foreign-source
income is taxable.
Some maintain that there is no federal statute imposing a tax
on income derived from sources within the United States by citizens
or residents of the United States. They argue instead that federal
income taxes are excise taxes imposed only on nonresident aliens
and foreign corporations for the privilege of receiving income
from sources within the United States. The premise for this argument
is a misreading of sections 861, et seq., and 911, et seq., as
well as the regulations under those sections.
As stated above, for federal income tax purposes, "gross
income" means all income from whatever source derived and
includes compensation for services. I.R.C. § 61. Further,
Treasury Regulation § 1.1- 1(b) provides, "[i]n general,
all citizens of the United States, wherever resident, and all
resident alien individuals are liable to the income taxes imposed
by the Code whether the income is received from sources within
or without the United States." I.R.C. sections 861 and 911
define the sources of income (U.S. versus non-U.S. source income)
for such purposes as the prevention of double taxation of income
that is subject to tax by more than one country. These sections
neither specify whether income is taxable, nor do they determine
or define gross income. Further, these frivolous assertions are
clearly contrary to well-established legal precedent.
Relevant Case Law:
Great-West Life Assur. Co. v. United States, 678 F.2d
180, 183 (Ct. Cl 1982) - the court stated that "[t]he determination
of where income is derived or 'sourced' is generally of no moment
to either United States citizens or United States corporations,
for such persons are subject to tax under I.R.C. § 1 and
I.R.C. § 11, respectively, on their worldwide income.
Williams v. Commissioner, 114 T.C. 136, 138 (2000) - the
court rejected the taxpayer's argument that his income was not
from any of the sources listed in Treas. Reg. § 1.861-8(a),
characterizing it as "reminiscent of tax-protester rhetoric
that has been universally rejected by this and other courts.
Corcoran v. Commissioner, T.C. Memo. 2002-18, 83 T.C.M.
(CCH) 1108, 1110 (2002) - the court rejected the taxpayers' argument
that his income was not from any of the sources in Treas. Reg.
§ 1.861-8(f), stating that the "source rules [of sections
861 through 865] do not exclude from U.S. taxation income earned
by U.S. citizens from sources within the United States."
The court further required the taxpayers to pay a $2,000 penalty
under section 6673(a)(1) because "they . . . wasted limited
judicial and administrative resources.
Aiello v. Commissioner, T.C. Memo. 1995-40, 69 T.C.M.
(CCH) 1765 (1995) - the court rejected the taxpayer's argument
that the only sources of income for purposes of section 61 are
listed in section 861.
Madge v. Commissioner, T.C. Memo. 2000-370, 80 T.C.M.
(CCH) 804 (2000) - the court labeled as "frivolous"
the position that only foreign income is taxable.
Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M.
(CCH) 1201, 1202 (1993) - the court rejected the taxpayer's argument
that his income was exempt from tax by operation of sections 861
and 911, noting that he had no foreign income and that section
861 provides that "compensation for labor or personal services
performed in the United States . . . are items of gross income.
The Tax Scam Artist's Lie: Federal Reserve
Notes are not income.
Some assert that Federal Reserve Notes currently used in the
United States are not valid currency and cannot be taxed, because
Federal Reserve Notes are not gold or silver and may not be exchanged
for gold or silver. This argument misinterprets Article I, Section
10 of the United States Constitution.
Congress is empowered "[t]o coin Money, regulate the value
thereof, and of foreign coin, and fix the Standard of weights
U.S. Const. Art. I, § 8, cl. 5. Article I, Section 10 of
the Constitution prohibits the states from declaring as legal
tender anything other than gold or silver, but does not limit
Congress' power to declare the form of legal tender. See 31 U.S.C.
§ 5103; 12 U.S.C. § 411. In United States v. Rifen,
577 F.2d 1111 (8 th Cir. 1978), the court affirmed a conviction
for willfully failing to file a return, rejecting the argument
that Federal Reserve Notes are not subject to taxation. "Congress
has declared federal reserve notes legal tender . . . and federal
reserve notes are taxable dollars." Id. at 1112. The courts
have rejected this argument on numerous occasions.
Relevant Case Law:
United States v. Rickman, 638 F.2d 182, 184 (10 th Cir.
1980) - the court affirmed the conviction for willfully failing
to file a return and rejected the taxpayer's argument that "the
Federal Reserve Notes in which he was paid were not lawful money
within the meaning of Art. 1, § 8, United States Constitution.
United States v. Condo, 741 F.2d 238, 239 (9 th Cir. 1984)
- the court upheld the taxpayer's criminal conviction, rejecting
as "frivolous" the argument that Federal Reserve Notes
are not valid currency, cannot be taxed, and are merely "debts.
United States v. Daly, 481 F.2d 28, 30 (8 th Cir.), cert.
denied, 414 U.S. 1064 (1973) - the court rejected as "clearly
frivolous" the assertion "that the only 'Legal Tender
Dollars' are those which contain a mixture of gold and silver
and that only those dollars may be constitutionally taxed"
and affirmed Daly's conviction for willfully failing to file a
Jones v. Commissioner, 688 F.2d 17 (6 th Cir. 1982) -
the court found the taxpayer's claim that his wages were paid
in "depreciated bank notes" as clearly without merit
and affirmed the Tax Court's imposition of an addition to tax
for negligence or intentional disregard of rules and regulations.