Hendrickson Explains the 16th Amendment

[Cpt Banjo]

And the counter-argument would be that the activity of maintaining the plan is not precisely what is being taxed -- under either section 4971 or section 4980B. What is being taxed (under the counter-argument) is the specified inactivity - the failure to do some specific thing with respect to the plan.

The counter-counter argument would be that what's being taxed is the maintenance of a plan that fails to meet the requirements specified by the Code for qualified plans. Put another way, what's being taxed is the maintenance of an unqualified plan. Yes, it's an omission that causes the disqualification, but there has to be a plan in place before the tax is triggered.

An analogy: if the income tax is properly viewed as an excise on the receipt of income, how can it reach imputed income? For example, Section 7872 imputes income on below-market loans. Now it's perfectly clear that in such a case the lender hasn't received income at all, but he's treated as if he had. Is this taxing inactivity -- i.e., the failure to charge interest? I don't think so, because it can be viewed as an excise on the making of a below-market loan.

But as Famspear has correctly pointed out, these kinds of taxes are qualitatively different from the tax for failing to have health insurance, because there is no preexisting event in the latter case.

[Paul]

Sections 4971 or 4980B are imposed on an employer who fails to comply with benefits standards. They're no more a tax on doing nothing than a fine for not paying minimum wage. And the notion that the mandate isn't a capitation because "Capitations are taxes paid by every person, 'without regard to property, profession, or any other circumstance'” is the equivalent of saying a tax of $100 per year tax on everyone isn't a capitation if it applies only to those 18 years old and older, because it isn't applied without regard to circumstance.

[Famspear]

Sections 4971 or 4980B are imposed on an employer who fails to comply with benefits standards. They're no more a tax on doing nothing than a fine for not paying minimum wage.

A counter would be that the section 5000A penalty (the Obamacare individual mandate) is imposed on a person who fails to comply with an Obamacare law standard - specifically, the requirement to buy a certain amount of health insurance coverage. The argument would be that the 5000A penalty is no more a tax on doing nothing than is a fine for not paying minimum wage.

A response to that could be that the individual who fails to buy insurance is not really purposefully engaging in an activity, whereas the employer who pays employees for work is purposefully engaged in an activity.

And the notion that the mandate isn't a capitation because "Capitations are taxes paid by every person, 'without regard to property, profession, or any other circumstance'” is the equivalent of saying a tax of $100 per year tax on everyone isn't a capitation if it applies only to those 18 years old and older, because it isn't applied without regard to circumstance.

A counter would be: The notion that the penalty for willful failure to timely file a tax return isn't a capitation is the equivalent of saying that the late filing penalty isn't a capitation if it applies only to those who fail to timely file returns, because it isn't applied without regard to circumstance.

If the late filing penalty is not a capitation (because it applies only to a limited group of people), why would a tax of $100 per year on everyone aged 18 or over be considered a capitation (even though it applies only to a limited group of people)?

And so on......

[JamesVincent]

One of the reasons I kinda feel sorry for some of the TPs is that, on this board, there are several people who are extremely educated in tax law. We have have accountants, attorneys, ex- IRS employees, auditors, you name it. And there are times where even you guys can't agree on why something is or why something isn't. I mean, I have seen discussions on here about different applications of IRC and where the statute is and which one, very good discussions. But a layman couldn't understand a word you said. A lot of times I actually go through and look up the codes you guys are talking about so I have an idea WHAT you are talking about and there's times I walk away from the computer with a dazed look on my face, and I'm used to complex things. A normal person (hehe) would go nuts trying to read and understand whats going on. So to expect a normal person, who might be slightly off-center to start with, to understand it goes beyond... well... chances are they can't.

[Burnaby49]

One of the reasons I kinda feel sorry for some of the TPs is that, on this board, there are several people who are extremely educated in tax law. We have have accountants, attorneys, ex- IRS employees, auditors, you name it. And there are times where even you guys can't agree on why something is or why something isn't. I mean, I have seen discussions on here about different applications of IRC and where the statute is and which one, very good discussions. But a layman couldn't understand a word you said. A lot of times I actually go through and look up the codes you guys are talking about so I have an idea WHAT you are talking about and there's times I walk away from the computer with a dazed look on my face, and I'm used to complex things. A normal person (hehe) would go nuts trying to read and understand whats going on. So to expect a normal person, who might be slightly off-center to start with, to understand it goes beyond... well... chances are they can't.

Agreed. I spent my entire working life in tax (admittedly Canadian) and this discussion about capitation and whether a tax is on an activity or non-activity is beyond me. It's starting to turn into a discussion on whether or not a non-activity is really, at heart, an activity. You could earn a philosophy PHD writing a thesis on that one. If Famspear et al. don't know with any certainty then there is no reliable answer.

[notorial dissent]

And that Burnaby49 is the biggest point. I think the definitions were hazy at best to begin with, and I definitely think the judicial interpretation has always been problematic at best, and has changed over time. I personally think that if the two great tax cases were litigated today they would have produced an entirely different result, and the 16th wouldn't have happened, but that's just me, and INAL. To me it is a philosophical argument that even the judiciary isn't clear on. The SCT's decision resolved the matter, but I think it will continue to be argued as long as there are taxes, or everyone really gets bored with it and moves on to something else.

[Famspear]

......You could earn a philosophy PHD writing a thesis on that one. If Famspear et al. don't know with any certainty then there is no reliable answer.

From the 1981 film Absence of Malice; screenplay by Kurt Luedtke and (uncredited) David Rayfiel; directed by Sydney Pollack:

Davidek [the lawyer]: Let's suppose that your story proves to be false on its face.

Megan Carter [the reporter]: This story is true.

Davidek: Madam, If newspapers printed nothing but the truth, they need never employ attorneys, and I should be out of work -- which I am not.

Megan: I read the file.

Davidek: I'm not a whit interested in the facts; I'm concerned with the law. The question is not whether your story is true. The only question is: What protection do we have if it proves to be false? Mr. Gallagher is not a public official. Nor is he likely to become one...... Pity........ [Davidek contemplates, pensively, to himself.....] ......Is he a public figure?

Megan: He's not going to sue, for God's sake! What does it take to make him a public figure?

Davidek: If I knew that, I should be a judge. They never tell us till it's too late.

Seriously, though, our discussion above was a tad theoretical. In the Obamacare case, I believe the issue was probably briefed. The matter was actually decided by the Court. The Supreme Court concluded that the section 5000A penalty is not a capitation, and that it is not any kind of direct tax.

Our problem is not that the Court left us hanging or unsure of the answer; our problem is that we feel the Court didn't go into enough detail about that particular decision, or that we feel the underpinning for the decision lacks a certain logic.

[Cpt Banjo]

And the notion that the mandate isn't a capitation because "Capitations are taxes paid by every person, 'without regard to property, profession, or any other circumstance'” is the equivalent of saying a tax of $100 per year tax on everyone isn't a capitation if it applies only to those 18 years old and older, because it isn't applied without regard to circumstance.

Professor Eric Jensen, writing before the National Federation of Businesses decision, gave the following critique of the "other circumstances" test. I really like his footnote 174.

Let us test the persuasiveness of the "other circumstances" argument. Suppose Congress enacted a taxing regime under which all citizens and resident aliens with annual incomes exceeding $ 50,000 were required to pay a tax of $ 1,000, but the liability for those with incomes of $ 50,000 or less would be $ 2,000. 174 (Let us assume for purposes of this hypothetical that we can agree on a conception of "incomes" that is consistent with the meaning in the 16th Amendment.) I take it that the "universal" understanding is that this would not be a capitation tax because, even though it reaches everyone, the amount of the levy would depend on other circumstances -- in this case, income levels. Couple that conclusion with the general academic and judicial understanding that the apportionment rule applies only to capitation taxes (we just concluded this would not be one) and taxes on property (which this tax clearly would not be). Voila?! We have an indirect tax that, because it would be uniform in its application (the same rules in all states), would be constitutional.

That is crazy. Of course this would be a direct tax! This hypothetical tax would not be avoidable or shiftable in any easy way. [footnote omitted] And I also think that with everyone obligated to pay it, this is a capitation tax, as universal understanding should have it. (Application to everyone should not be necessary for a tax to be a capitation, as I argued above, but it makes a levy look a lot more like what people "universally" think of as a capitation.) This is a tax on existence, on being, but with the measure of the tax varying from person to person.

n174 Yes, this is a law professor's hypothetical, dealing with something that could not possibly happen in the real world. But for what it is worth, if a law professor had hypothesized the individual mandate 25 or so years ago, he would have been viewed as out of his mind.

Jensen, The Individual Mandate and the Taxing Power, Tax Notes, January 2, 2012, page 97, 114-115.

[The Observer]

Our problem is not that the Court left us hanging or unsure of the answer; our problem is that we feel the Court didn't go into enough detail about that particular decision, or that we feel the underpinning for the decision lacks a certain logic.

And this is the difference between tax protestors and the rest of the world. While the reasonable person may be unhappy with the decision because it wasn't adequately or logically explained to their satisfaction, they still recogonize that a legal authority made a decision and there is nothing else to be done. The tax protestor, unahppy with the result, will continue to try to overturn the decision by rationalization, argumentative behavior and illegal actions.

[Cpt Banjo]

In the Obamacare case, I believe the issue was probably briefed.

According to the dissenters, the briefing was extremely brief.

Finally, we must observe that rewriting §5000A as a tax in order to sustain its constitutionality would force us to confront a difficult constitutional question: whether this is a direct tax that must be apportioned among the States according to their population. Art. I, §9, cl. 4. Perhaps it is not (we have no need to address the point); but the meaning of the Direct Tax Clause is famously unclear, and its application here is a question of first impression that deserves more thoughtful consideration than the lick-and-a-promise accorded by the Government and its supporters. The Government’s opening brief did not even address the question—perhaps because, until today, no federal court has accepted the implausible argument that §5000A is an exercise of the tax power. And once respondents raised the issue, the Government devoted a mere 21 lines of its reply brief to the issue. Petitioners’ Minimum Coverage Reply Brief 25. At oral argument, the most prolonged statement about the issue was just over 50 words. Tr. of Oral Arg. 79 (Mar. 27, 2012). One would expect this Court to demand more than fly-by-night briefing and argument before deciding a difficult constitutional question of first impression.

Our problem is not that the Court left us hanging or unsure of the answer; our problem is that we feel the Court didn't go into enough detail about that particular decision, or that we feel the underpinning for the decision lacks a certain logic.

Amen.

[LPC]

On whether the §5000A penalty should be considered a "direct tax," there is an aspect of the opinions in Hylton v. United States, 3 U.S. 171 (1796), that should be considered.

Two of the justices who decided the case thought that a tax should not be considered to be "direct" if it cannot be apportioned.

A tax on carriages, if apportioned, would be oppressive and pernicious. How would it work? In some states there are many carriages, and in others but few. Shall the whole sum fall on one or two individuals in a state, who may happen to own and possess carriages? The thing would be absurd, and inequitable.

Similarly,

That this tax cannot be apportioned is evident. Suppose $10 contemplated as a tax on each chariot, or post chaise, in the United States, and the number of both in all the United States be computed at 105, the number of Representatives in Congress.

This would produce in the whole $1,050.

The share of Virginia being 19/105 parts, would be $190.

The share of Connecticut being 7/105 parts, would be $70.

Then suppose Virginia had 50 carriages, Connecticut 2.

The share of Virginia being $190, this must of course be collected from the owners of carriages, and there would therefore be collected from each carriage $3.80.

The share of Connecticut being $70, each carriage would pay $35.

If any state had no carriages, there could be no apportionment at all. This mode is too manifestly absurd to be supported, and has not even been attempted in debate.

There are similar problems with the apportionment of the §5000A penalty. For example, I have read that the percentage of the population of Massachusetts that are uninsured is quite low, while the percentage in other states is quite high. So the uninsured in Massachusetts pay a higher penalty than the people in other states?

That doesn't make any sense.

[Paul]

A counter would be that the section 5000A penalty (the Obamacare individual mandate) is imposed on a person who fails to comply with an Obamacare law standard - specifically, the requirement to buy a certain amount of health insurance coverage.

True, but the trouble is that Congress does not have the authority to mandate mandate compliance. That is why Obamacare is constitutional only if it is a tax. Since the tax cannot be predicated on failure to do something Congress cannot make you do, it is a tax on doing nothing.

[Cpt Banjo]

On whether the §5000A penalty should be considered a "direct tax," there is an aspect of the opinions in Hylton v. United States, 3 U.S. 171 (1796), that should be considered.

Two of the justices who decided the case thought that a tax should not be considered to be "direct" if it cannot be apportioned.

Dan's correct. But the idea that a tax isn't direct unless it can be practically and equitably apportioned seems to be inconsistent with the notion (expressed by three of the Hylton Justices) that a tax on land is a direct tax. A national land tax would inevitably lead to the same kind of inequitable results as Paterson illustrated, owing to the variation of land acreage, land values, and population among the States.

A tax on carriages, if apportioned, would be oppressive and pernicious. How would it work? In some states there are many carriages, and in others but few. Shall the whole sum fall on one or two individuals in a state, who may happen to own and possess carriages? The thing would be absurd, and inequitable.

Similarly,

That this tax cannot be apportioned is evident. Suppose $10 contemplated as a tax on each chariot, or post chaise, in the United States, and the number of both in all the United States be computed at 105, the number of Representatives in Congress.

This would produce in the whole $1,050.

The share of Virginia being 19/105 parts, would be $190.

The share of Connecticut being 7/105 parts, would be $70.

Then suppose Virginia had 50 carriages, Connecticut 2.

The share of Virginia being $190, this must of course be collected from the owners of carriages, and there would therefore be collected from each carriage $3.80.

The share of Connecticut being $70, each carriage would pay $35.

If any state had no carriages, there could be no apportionment at all. This mode is too manifestly absurd to be supported, and has not even been attempted in debate.

There are similar problems with the apportionment of the §5000A penalty. For example, I have read that the percentage of the population of Massachusetts that are uninsured is quite low, while the percentage in other states is quite high. So the uninsured in Massachusetts pay a higher penalty than the people in other states?

That doesn't make any sense.[/quote]

[LPC]

A counter would be that the section 5000A penalty (the Obamacare individual mandate) is imposed on a person who fails to comply with an Obamacare law standard - specifically, the requirement to buy a certain amount of health insurance coverage.

True, but the trouble is that Congress does not have the authority to mandate mandate compliance.

That's a conclusion, not an argument.

[LPC]

On whether the §5000A penalty should be considered a "direct tax," there is an aspect of the opinions in Hylton v. United States, 3 U.S. 171 (1796), that should be considered.

Two of the justices who decided the case thought that a tax should not be considered to be "direct" if it cannot be apportioned.

Dan's correct. But the idea that a tax isn't direct unless it can be practically and equitably apportioned seems to be inconsistent with the notion (expressed by three of the Hylton Justices) that a tax on land is a direct tax. A national land tax would inevitably lead to the same kind of inequitable results as Paterson illustrated, owing to the variation of land acreage, land values, and population among the States.

It might seem to be inequitable to you or me, but it wasn't to the framers of the Constitution.

One of the contexts in which the Constitution (and apportionment) must be seen is that, under the Articles of Confederation, requisitions by Congress to the states were to be apportioned among the states according to the value of the lands within the state.

So apportioning taxes according to the value of land was already an accepted norm. The Constitutional convention was trying to shift gears and apportion capitations (and taxes on land) according to population, which seemed to be more equitable, but they still had the historical context of apportionment according to the value of land, so the idea that a state with more valuable land and fewer citizens (but more slaves), such as Virginia, would pay more in taxes per person (or per acre) than a state with less valuable land and fewer citizens (and fewer slaves), such as Vermont, would seem like a reasonable political compromise.

[bobhurt]

No. This is an old, old tax protester misconception – that the reference to "apportioned among the states" means "apportioned among the state GOVERNMENTS", and that somehow the state governments are the entities liable for the tax. Totally false.

I'd like to see some proof of that assertion. A state might have a different way of raising the tax other than taking an equal share from each person. And indigent person has no share to give. Would the state throw him in jail and pay for his support because he didn't pay the tax? I doubt it. More likely the state would raise the money through an additional property tax or sales tax, on the assumption that those who own land or can buy things have the money to contribute to the tax.

"Apportionment among the states" seems to put the state governments in control of raising their share of the dough. But of course which states would tolerate such a tax when they no longer have a say in the federal government?

As to whether the income tax is direct, I think I remember a supreme court ruling putting in the class of an excise, so any "modern" court calling it a direct tax is plain wrong. IF it is a direct tax, it MUST be apportioned, unless you don't believe 1.2.3 or 1.9.4. Since it is an excise, it MUST excise its "pound of flesh" from a flow of money consequential upon some event, happening, activity, or occurrence, and receiving income does not constitute one of those.

Sure, a court might have a different opinion. But panel courts have proven USDC and TAX COURT rulings wrong MANY TIMES, and the Supreme Court has overruled lower panel courts MANY TIMES because (obviously) those judges didn't know the law. So don't get too hard on tax protesters. They might know the law better than those judges. Let's also remember that panel courts have overruled themselves.

Ultimately, unrighteous or abusive taxation can lead to violent rebellion, as US history clearly shows. Bear that in mind while you bear the standard for courts endorsing abusive taxation practices.

Take note. Abusive direct collection of taxes from the people constitutes the main reason for the founders TWICE saying direct taxes must be apportioned among the states. That is so important that the Congress would specifically surely have overturned apportionment if it meant the 16th Amendment to have that effect. That's one of the reasons (in addition to common sense) I believe income tax is not and cannot be a direct tax.

[Paul]

That's a conclusion, not an argument.

No, the point is that the Supreme Court held that the mandate was not valid as an exercise of any authority possessed by Congress except the authority to tax. Upholding it as a tax on the failure to comply with the requirement to have insurance is switching your premises in the middle of the argument.

[Famspear]

No. This is an old, old tax protester misconception – that the reference to "apportioned among the states" means "apportioned among the state GOVERNMENTS", and that somehow the state governments are the entities liable for the tax. Totally false.

I'd like to see some proof of that assertion.

Other people don't need to give you "proof" of that assertion. If you assert that the phrase "apportioned among the states" means "apportioned among the state governments," it's up to YOU to find support for that in the text of the Constitution or in a court ruling. It's not up to others to "prove" to you that your assertion is incorrect.

"Apportionment among the states" seems to put the state governments in control of raising their share of the dough.

No, it doesn't "seem" to do that.

As to whether the income tax is direct, I think I remember a supreme court ruling putting in the class of an excise, so any "modern" court calling it a direct tax is plain wrong.

Completely incorrect.

IF it is a direct tax, it MUST be apportioned, unless you don't believe 1.2.3 or 1.9.4.

Wrong. Read the Sixteenth Amendment. If it's an INCOME tax, it's not required to be apportioned. Nowhere in the Amendment does it say "this Amendment does not apply to a income tax if it's a direct tax."

Sure, a court might have a different opinion. But panel courts have proven USDC and TAX COURT rulings wrong MANY TIMES, and the Supreme Court has overruled lower panel courts MANY TIMES because (obviously) those judges didn't know the law. So don't get too hard on tax protesters. They might know the law better than those judges.

No, tax protesters never know the law better than "those judges." Tax protesters are still batting absolute zero, after literally hundreds, perhaps thousands of court cases since 1975, when the the term "tax protester" started popping up in Federal court decisions.

Ultimately, unrighteous or abusive taxation can lead to violent rebellion, as US history clearly shows.

Ultimately, engaging in tax protester activities to the extent of filing tax returns using tax protester theories can -- and should -- and does -- lead to jail time.

Take note. Abusive direct collection of taxes from the people constitutes the main reason for the founders TWICE saying direct taxes must be apportioned among the states. That is so important that the Congress would specifically surely have overturned apportionment if it meant the 16th Amendment to have that effect. That's one of the reasons (in addition to common sense) I believe income tax is not and cannot be a direct tax.

The Congress proposed -- and 42 states ratified -- the amendment precisely because they INTENDED the Sixteenth Amendment to remove the apportionment requirement for any federal income tax -- REGARDLESS of whether that tax was considered to be "direct" or not. That's the whole purpose of the language in the Amendment: to refer to the SOURCE problem that cropped up in the Pollock case.

[Famspear]

Ultimately, unrighteous or abusive taxation can lead to violent rebellion, as US history clearly shows. Bear that in mind while you bear the standard for courts endorsing abusive taxation practices.

Take note. Abusive direct collection of taxes from the people constitutes the main reason for the founders TWICE saying direct taxes must be apportioned among the states.

Bob, the activities of you and other tax protesters have nothing to do with "unrighteous or abusive taxation" or "abusive direct collection of taxes."

For a variety of reasons, some of which have nothing to do with taxation, tax protesters simply don't like the federal income tax (which is fine), and they construct (or copy and paste) invalid arguments to oppose that tax -- which is not fine when such activity crosses the line and becomes criminal, as when tax protesters willfully refuse to pay the tax, willfully refuse to file returns, or willfully file false tax returns.

[LPC]

No. This is an old, old tax protester misconception – that the reference to "apportioned among the states" means "apportioned among the state GOVERNMENTS", and that somehow the state governments are the entities liable for the tax. Totally false.

I'd like to see some proof of that assertion.

I'm going to try to address that question without using the phrase "you freaking moron."

Historical recapitulation: Under the Articles of Confederation, the Congress of the United States had the "power" to raise money through "requisitions" to the states. This turned out to be totally unworkable, and one of the principal purposes of the new "constitution" is that the new government would have the power to raise money through "direct taxes" (which were substitutions for requisitions) and through imposts, duties, and excises.

This is clear from a reading of the Federalist Papers. It is also clear from reading the opinion of Justice Paterson (who was a principal author of the Constitution) in Hylton v. United States (1796):

The counsel on the part of the plaintiff in error have further urged that an equal participation of the expense or burden by the several states in the Union was the primary object which the framers of the Constitution had in view, and that this object will be effected by the principle of apportionment, which is an operation upon states, and not on individuals, for each state will be debited for the amount of its quota of the tax and credited for its payments. This brings it to the old system of requisitions. An equal rule is doubtless the best. But how is this to be applied to states or to individuals? The latter are the objects of taxation, without reference to states, except in the case of direct taxes. The fiscal power is exerted certainly, equally, and effectually on individuals; it cannot be exerted on states.