Larken Debunks Hendrickson

[LPC]

Subtitle should be "King Kong v. Godzilla."

I just found some older emails in which Larken Rose refutes the "wages aren't income" arguments, specifically mentioning Pete Hendrickson's "Cracking the Code." What is weird is that, when it comes to reading court cases on wages, Larken actually gets it right. (In several places, he looks like he's cribbing from my Tax Protester FAQ.)

----- Forwarded message from 861-list-owner@mail-list.com -----
Date: Mon, 26 Mar 2007 16:59:02 -0400
From: 861-list-owner@mail-list.com
Reply-To: 861-list-owner@mail-list.com
Subject: The Meaning of Income (Part 1 of 2)

Dear Subscriber,

Within the "tax honesty" movement, there have been many incarnations of the claim that the word "income" does not include payments received as compensation for services (a.k.a. wages). While the claims vary regarding what exactly DOES constitute "income" (e.g., corporate profit, pay from government employment, etc.), the common theme is that payment for work done by the average person does not constitute "income." This conclusion, however, is the result of misreading certain court decisions and outright ignoring of other rulings, as well as decades of federal tax statutes and regulations.

A recent version of this claim comes from the book "Cracking the Code," by Peter Hendrickson. The title is a bit of a misnomer, since the book barely addresses the tax code at all, instead focusing on (and misunderstands) various court rulings having to do with the meaning of "income."

Those arguing that wages are not "income" often harp on the fact that the current law does not specifically define the term "income." That is quite true, but by itself proves nothing. There is no requirement that the law define every term used in the law--which in reality would be impossible, as every definition would simply use other words that would in turn need defining. If a law DOES specifically define a term, then the common usage of that term becomes irrelevant. However, if a term is NOT defined in the law itself, then the word is presumed to have the meaning it has in common usage (at the time the law was passed).

Obviously one's salary or paycheck constitutes "income" in the
common, everyday usage of the term. So what reason is there to
believe that the term "income" in the tax laws would exclude such
payments? The lack of a definition in the law itself is a reason to
defer to the common usage, not a reason to ignore the common usage.

Compare the way various cases are characterized by the "wages
aren't income" advocates (abbreviated below as "WAIA") and what
those cases actually said:

1) Merchants' Loan & Trust v. Smietanka, 255 U.S. 509 (1921)

This case is cited by the WAIA as being important because it said
that the term "income" in the 1913 income tax act had the same
meaning as it did in the 1909 corporate income tax act. That is
quite true, but the WAIA then erroneously conclude that the term
"income" itself refers only to corporate profits, which is simply
bad logic.

The 1909 tax gave a broad definition of the term "income" and then
taxed only income from corporate activity. The definition of
"income" itself, however, was NOT limited to corporate profits. On
the contrary, as the Supreme Court explained, while the 1909
corporate excise tax "was not an income tax law, a definition of
the word 'income' was so necessary in its administration that in an
early case it was formulated as 'A gain derived from capital, from
labor, or from both combined.'" Obviously the term "income," in and
of itself, was not confined to corporate profits, though only
income from corporate profits was subject to the 1909 tax.

The case had nothing to do with whether wages are "income." The
case was brought by the trustee of an estate concerning inherited
stocks, whose value increased between the time they were received
by the trustee and the time they were sold. The argument was that
the increase in value of the capital assets of the estate was not
"income." The Court ruled that it was, since the stocks had been
sold for a price higher than the market price of the stocks when
inherited.

A similar question has come up in other cases: is an increase in
the value of something always "income"? As a simple example,
suppose you own a house which is appraised at a value of $100,000
one year, and a few years later it is appraised at $150,000. Did
you receive $50,000 of income? Both logic and the courts give an
answer of "no." If you SELL something after its value has
increased, your "income" is what you received for it minus what you
paid for it (or its market value when you received it), but before
you sell it, its increased value does not constitute "income."

In its ruling on the case, the Court did not even hint that
"income" might have some unusual or artificially limited meaning
for tax purposes, but said just the opposite: "In determining the
definition of the word 'income' thus arrived at, this Court has
consistently refused to enter into the refinements of
lexicographers or economists, and has approved, in the definitions
quoted, what it believed to be the COMMONLY UNDERSTOOD MEANING OF
THE TERM which must have been in the minds of the people when they
adopted the Sixteenth Amendment to the Constitution."

How does that translate into "wages are not income"? Logically, it
doesn't at all. Quite the opposite.

2) Eisner v. Macomber, 252 US 189 (1920)

This is another case often cited, and often misunderstood, by the
WAIA ("Wages Aren't Income" Advocates). Again, the case was not
about wages at all, but about whether a stock dividend constituted
"income." The Court stated, and rightly so, that Congress cannot by
legislation change the meaning of "income" as used in the Sixteenth
Amendment, and then set out "to distinguish between what is and
what is not 'income.'"

So, did the Court come up with some new definition, which excludes
wages? No, the case wasn't about wages at all; it was about capital
versus income derived from capital. The Court explained the concept
as follows:

"The fundamental relation of 'capital' to 'income' has been much
discussed by economists, the former being likened to the tree or
the land, the latter to the fruit or the crop; the former depicted
as a reservoir supplied from springs, the latter as the outlet
stream, to be measured by its flow during a period of time."

Then the Court said this:

"For the present purpose we require only a clear definition of the
term 'income,' AS USED IN COMMON SPEECH, in order to determine its
meaning in the amendment."

The court then said that it could "find little to add to the
succinct definition" of "income" used in prior cases: "the gain
derived from capital, from labor, or from both combined." So how
does this case support the idea that getting paid for doing labor
is NOT "income"? It doesn't. It was about the difference between
the value of one's CAPITAL going up, and separate income coming
FROM capital. So the Court concluded, concerning the dividends in
question: "The essential and controlling fact is that the
stockholder has received nothing out of the company's assets for
his separate use and benefit ... Having regard to the very truth of
the matter, to substance and not to form, he has received nothing
that answers the definition of income within the meaning of the
Sixteenth Amendment."

If he were to SELL the dividends, however, the proceeds would
constitute "income." So you can see, in THAT context, why the Court
emphasized the concept of "gain" when determining what constitutes
"income." The entire discussion had NO bearing on whether "getting
paid for doing work" is income, and the same holds true of most of
the cases cited by the WAIA: they deal with a certain KIND of
income, and in THAT context seek to distinguish between increase in
value of capital versus actual income separated from the capital--
an issue which doesn't come into play at all when someone gets a
paycheck for performing services.

3) Lucas v. Earl, 281 US 111 (1930)

This case, the ruling in which is extremely short, involved the
question of whether an attorney should be taxed on ALL of his
salary, or only half, because by contract he had to give half to
his wife (and so he claimed that half to be HER income, not his).
The court ruled that one could not, "by anticipatory arrangements
and contracts," make the payments not constitute income to the
attorney, even if he afterwards had to give half to his wife.

Frankly, I'm not entirely sure why the WAIA cite this case at all,
since it is talking about SALARIES being taxed, so there's not much
more to say about that one. Apparently someone fabricated a
"quote," which does not appear in the actual ruling, to the effect
that salaries and wages are not necessarily taxable, or not
necessarily "income." But the court said nothing of the sort.

4) South Pacific v. Lowe, 247 US 330 (1918)

Once again, this is a case which involved the taxability as income
of "certain dividends upon stock." The Court rejected the idea that
"all receipts--everything that comes in--are income within the
proper definition of the term 'gross income.'" And that, not
surprisingly, is the part the WAIA quote. However, here is the
court's statement in context:

"We must reject in this case, as we have rejected in cases arising
under the Corporation Excise Tax Act of 1909 [citations omitted],
the broad contention submitted in behalf of the government that all
receipts--everything that comes in--are income within the proper
definition of the term 'gross income,' and that the entire proceeds
of a conversion of capital assets, in whatever form and under
whatever circumstances accomplished, should be treated as gross
income."

Again, the question had nothing to do with wages; it was about
capital versus gain from capital (income), and in that case, the
Court decided that it was "bound to consider accumulations that
accrued to a corporation prior to January 1, 1913, as being
capital, not income, for the purposes of the act." (The Court also
said that "the term 'income' has no broader meaning in the 1913 act
than in that of 1909," which again does NOT mean that "income"
means only corporate profit, even though the 1909 tax taxed only
income FROM corporate profits.)

That ought to give you something to chew on for now. We will
continue this discussion in my next message.

(To be continued.)

Sincerely,

Larken Rose
http://www.larkenrose.com

[LPC]

Part II of King Kong v. Godzilla. Predictably, the delusions win.

----- Forwarded message from 861-list-owner@mail-list.com -----
Date: Tue, 27 Mar 2007 16:49:00 -0400
From: 861-list-owner@mail-list.com
Reply-To: 861-list-owner@mail-list.com
Subject: The Meaning of Income (Part 2 of 2)

Dear Subscriber,

In my prior message I cited the cases most frequently cited by the
"Wages Aren't Income" Advocates (WAIA), even though none of them
actually support such a notion, and all of them directly contradict
it. Many lower court rulings are also cited by the WAIA, and also
misunderstood. One popular one states that "One does not derive
income by rendering services and charging for them" (Edwards v.
Keith). Sounds compelling, until you read the case and learn that
the person BILLED for work one year, but didn't receive PAYMENT
that year. The court said it was not income (for that year)
because, though the person had done work and billed for it, he had
not been PAID. (I don't know why exactly it required a court ruling
to state the bleeding obvious.) Once again, the case, read in
context, contradicts rather than supports the claims of the WAIA.

Another case says that "Congress has taxed income, not
compensation" (Connor v. United States), which again sounds
interesting until you see the context: the case was about whether
compensation for harm done (not for performing services) was
"income," or was just repairing a loss (breaking even).

Other "quotations" I've seen were just plain made up; the cases
contained nothing even close to what they were "quoted" to have
said (like Lucas v. Earl, mentioned in my earlier message). On the
other hand, countless lower courts have stated, as plainly as it
could be stated, that "wages are income." The point is, on closer
inspection, all the supposed support for the claim that wages are
not "income" evaporates. There's nothing there, except a series of
misunderstandings.

(I find it very telling that when I QUOTE some of the things above,
showing how cases are being misrepresented and misunderstood, I get
two very distinct types of reactions: 1) Some look into it, confirm
what I said, and rethink matters; 2) Others act as if I never
showed it to them. I find that more people in the "movement" do the
latter, which is not exactly encouraging.)

Much of the arguments from the WAIA (including those found in
"Cracking the Code") consists of arguments about "gain," and
whether trading labor for payment constitutes "gain." But again,
the courts' discussions about "gain" were NOT in the context of
earning a paycheck, but in dealings with capital.

There are scenarios in which getting money is NOT "income." If you
loan me $10 for lunch, and I pay it back, neither transaction was
"income" for either of us. If you borrow my car, and then bring it
back, neither of us "gained" a car. On the other hand, the
situation for the wage-earner is pretty simple: You didn't have the
money, then you did. That's called a gain. And you got the money
because you performed a service. That's a gain derived from labor,
which is part of the definition of "income" the Supreme Court has
consistently used for about a century.

Various logical problems do arise with a tax on any and all
"income" (which in reality is NOT what the income tax is). If
someone trades currency for a chair, for example, the currency is
considered "income" and the chair isn't. Why? What if people trade
two things, and no currency is involved? Is there any income? Some
argue that exchanging labor for currency is an equal "trade," with
no "gain" involved, and therefore no "income." Trouble is, ALL
trade could fit that description. If you buy a $100 radio for $100,
the value of what you gave and of what you got could be called an
equal trade. Is that not "income" to the store, nonetheless?

(To be fair, there is also something fundamentally bogus about
allowing corporations to deduct as expenses everything that goes
into making the business run, while not allowing the wage-earner to
deduct all the expenses that go into making him able to work (food,
clothing, shelter, travel, etc.), but that's just about the
fairness of the allowable deductions, not the meaning of "income.")

Regardless of such nitpicking, in common usage--which is what the
Supreme Court said it defers to--who do you know who has a regular
job, gets a regular paycheck, but says he has no "income"? Unless
we're trying to make a legal argument, EVERYONE calls that
"income." We don't say "I had no income, I just traded my labor for
money."

More importantly, if we're trying to "Crack the Code" (meaning the
tax code), we ought to be paying more attention to what it actually
says. Does it address "getting paid for doing work," or not? Over
the years, the tax statutes and regulations have used just about
every wording for that concept that I can think of, when listing
the common types of income.

Among the list of items of income in the current statute is
"Compensation for services, including fees, commissions, fringe
benefits, and similar items" (26 USC 61(a)(1)). The related
(current) regulations expand on the definition, saying that "WAGES,
salaries, commissions paid salesmen, compensation for services on
the basis of a percentage of profits, commissions on insurance
premiums, tips, bonuses (including Christmas bonuses)... are INCOME
to the recipients unless excluded by law" (26 CFR 1.61-2).

Older statutes and regulations talked about income from "trades"
and "vocations," using terms like "compensation," "salaries,"
"fees," "commissions," and yes, "WAGES." Older regulations defined
"income" to mean "all wealth which flows in, except as a mere
return of capital" (e.g., 26 CFR 39.21-1 (1956)). Frankly, I'm
wondering what other language they could possibly have used to make
it any more clear that "getting paid for doing work" constitutes
"income."

Mind you, whether something is "income," and whether it is TAXABLE
income, are not the same question. The determination of one's
TAXABLE income is what the 861 evidence is all about, but the claim
that what most of us get paid isn't even "income" is just plain
wrong, regardless of its current popularity, and regardless of
which route one followed to arrive at that incorrect conclusion.

(Oddly, one of the few things "Cracking the Code" DOES quote from
the regulations contradicts its own conclusion. The book cites the
older regulations talking about some income being excluded by
"fundamental law" (the Constitution), because such income is,
"under the Constitution, not taxable by the federal government." (I
often cite that myself.) However, the entire premise of the WAIA is
that the meaning of "income" ITSELF is severely limited in order to
keep the tax Constitutional. If that were the case, why would any
"INCOME" be non-taxable due to the Constitution, as the quoted
regulations clearly state? Wouldn't they instead say that some
money received is exempt from being "income"?)

Now comes the belief-versus-understanding test: However attached
you are to the "wages aren't income" claim, can you cite any actual
EVIDENCE now supporting the claim that the wages of the average
working dude are not "income"? Do you see, for example, ANY
reference in the income tax statutes or regulations even hinting
that only federal payments constitute "income"? I don't. (As an
aside, Subtitle C employment taxes and Subtitle A income taxes are
NOT the same thing, and the definitions of "wages," "employee,"
etc., found in Subtitle C do NOT apply to Subtitle A, which is why
they all start with "For purposes of this chapter...") I don't care
about assertions, credentials, or how many people believe
something; I care what the EVIDENCE shows. And when you strip away
the misunderstandings and other mistakes of the WAIA, what evidence
is left to support their claim? I see none.

There are many points the WAIA make which I agree with. For
example, an all-encompassing tax on everyone's income WOULD be a
"direct" tax, and would be unconstitutional if not apportioned. In
addition, "earning a living" is not, per se, the proper subject of
an excise tax. (That makes as much sense as imposing an "excise"
tax on breathing air, and pretending it's not a direct tax.)

But we don't HAVE an all-encompassing tax on everyone's income, and
receiving income is NOT the subject of the "income tax." And it is
the LAW which demonstrates that. To oversimplify a bit, the so-
called federal "income tax" is an indirect excise tax upon engaging
in "commerce with foreign nations"--something the feds have
Constitutional power to regulate AND tax. It is perfectly
Constitutional, and matches many DECADES of statutes, regulations,
and Supreme Court rulings.

Before you complain about what the law "can't" do, make sure you
know what it does. Curiously, some of the "wages aren't income"
crowd are trying to dissuade others from doing exactly that, by
trying to scare them away from looking at the part of the law where
the truth can be found. In an upcoming message I'll respond to
Peter Hendrickson's supposed rebuttal of the 861 evidence.

Sincerely,

Larken Rose
http://www.larkenrose.com

[Randall]

Outside of spelling "idiots" as WAIA, this is the sanest thing that Larken has ever written.

[wserra]

Subtitle should be "King Kong v. Godzilla."

Actually, more like Wile E. ("Got Gravity?") Coyote v. Boris ("Swami Ben Boris") Badenov.

[Imalawman]

This is a Will Ferrell "logical thinking" moment as in the Old School movie debate. Predictably, it didn't last very long.

[Doktor Avalanche]

You know things have really jumped the tracks when your fellow TP's are saying you're more full of sh*t than they are.

[Dezcad]

You know things have really jumped the tracks when your fellow TP's are saying you're more full of sh*t than they are.

Since most of the self-proclaimed TP gurus are completely egotistical, they each believe that they have the "magic" secret figured out and can't stand the idea that someone else may be right.

They are classic cases of Narcissistic personality disorder.

1. has a grandiose sense of self-importance
2. is preoccupied with fantasies of unlimited success, power, brilliance, beauty, or ideal love
3. believes that he or she is "special" and unique and can only be understood by other special people
4. requires excessive admiration
5. strong sense of entitlement
6. takes advantage of others to achieve his or her own ends
7. lacks empathy
8. is often envious or believes others are envious of him or her
9. arrogant affect

[Investor]

Larken says that Hendrickson is wrong? Hmm, that makes me think maybe Hendrickson is onto something here...no, he's still a mail bombing lunatic who can't read.

[Quixote]

Larken says that Hendrickson is wrong? Hmm, that makes me think maybe Hendrickson is onto something here...no, he's still a mail bombing lunatic who can't read.

As you can see from Larken's last paragraph, PH thinks Larken is wrong, too.

[LPC]

In an upcoming message I'll respond to
Peter Hendrickson's supposed rebuttal of the 861 evidence.

I've searched the messages Rose has sent since that message, and have been unable to find any response to any rebuttal of Hendrickson's.

I did find the following earlier message:

Subject: Belief vs Understanding
Date: Sat, 24 Mar 2007 20:06:29 -0400
From: 861-list-owner@mail-list.com

Dear Subscriber,

My biggest frustration regarding the income tax issue is that the
beliefs of most people are based on faith, rather than knowledge.
For example, my jury understood nothing about the law. The chance
that any of them had ever even briefly browsed the tax laws before
my trial is slim to none. They chose to BELIEVE, based on no actual
evidence at all, that I was required to file. The judge said so,
the DOJ said so, the IRS said so, and the jury chose to believe
them (and chose not to believe me, even though I showed where the
law ITSELF supports my position--something the government never
did).

Most people take most of what they "know" on blind faith. They
don't bother investigating or questioning anything. They pick
someone to believe (usually the majority or someone with
credentials) and skip those inconvenient things like study and
thought. Well, I'm sorry to say, most of those in the "tax honesty
movement" seem to do the same thing. They want a fad to follow, a
"leader" to adhere to, a claim to believe in, but they don't want
to put in the effort to find out for themselves what is true and
what is not.

The "movement" has been one long series of theory after theory,
from claims which are at least debatable to completely daffy
fabrications. It's been going on since before I was born, and it
shows no sign of slowing. Most people prance from one "argument" to
another, understanding little or nothing for themselves, hoping
that some magic words will save them from the big, bad IRS.

And please, don't bother e-mailing me to tell me that you really DO
know the magic words. As most of you know, I investigated a lot of
those theories BEFORE I ever heard of 861 (which I did NOT
"discover"). I didn't want a pipe dream or cheap salvation; I
wanted the TRUTH, whether it was pleasant or not. And most of the
time, the truth was nowhere to be found in what the "movement" was
spreading. And when I would question those making various claims,
it very quickly became apparent that I was usually dealing with
"true believers," not thinkers. They couldn't rationally discuss
the issue or even cite any evidence supporting their conclusions;
when challenged, they would resort to insults--exactly what the
status quo "tax professionals" do.

For those among us who choose to think and understand, very little
sways our opinions. Only evidence and logic have any business
impacting what a rational being thinks. The sun didn't start going
around the earth after Galileo was imprisoned. The evidence didn't
change; reality didn't change. The earth didn't become flat because
a bunch of "learned" men said it was flat. The evidence didn't
change; reality didn't change.

Likewise, what the law itself actually says does NOT depend on
whether someone got a refund, whether someone has an injunction
against them, or whether someone went to prison, nor does it depend
upon what most people think or what credentials people have. The
evidence is all that matters, and the evidence doesn't change;
reality doesn't change.

Apparently eager for some new "get out of oppression free" card,
lots of people have flocked to an older mistake from the
"movement," but with a new paint job. I'm speaking of the claim,
advanced by Pete Hendrickson in "Cracking the Code," that what you
get paid for doing work isn't "income." Lots of people have told me
I should look into it. I did, as soon as it came out, which was
quite a while ago. It was wrong then, and it's wrong now. I know
people don't want to hear that; they want us all to join against a
"common enemy" (the IRS). But my allegiance is to the truth, and my
enemy is falsity (whether intentional or inadvertent). I have no
interest in aligning myself with one falsity in order to combat
another falsity.

A lot of you aren't going to like this, but it's time for me to
(once again) point out the flaws in the fad du jour. (I'll also
respond to Mr. Hendrickson's supposed refutation of the 861
evidence.) If you just want someone to BELIEVE, then by all means,
ignore the next couple of messages. If you're one of those people
who want to UNDERSTAND, instead of taking things on faith, then you
won't be scared of a little discussion and a little quoting of the
evidence.

Sincerely,


Larken Rose
http://www.larkenrose.com

And the following message that was sent out between the two messages that started this thread:

Subject: Halftime Show
Date: Mon, 26 Mar 2007 23:29:45 -0400
From: 861-list-owner@mail-list.com

Dear Subscriber,

I feel compelled to throw in a few quick notes before sending the
second half of my "The Meaning of Income" message, because of some
responses I've received to the first part.

I've gotten a number of e-mails complaining about my refutation of
Mr. Hendrickson's claims, some more caustic than others. Of note,
so far none of them cited anything from the law, or mentioned
anything about the cases I cited. Be advised that assertions--
whether correct or not--by themselves do not impress me. If you
want me to think I've made an error, quote the evidence
demonstrating it.

Some people complained that I was relating Mr. Hendrickson's claims
to the "wages aren't income" argument. But while Mr. Hendrickson
claims to disagree with the claim that "wages aren't income," he
goes on to say the following on the front page of his web site:
"What is called "income" in the internal revenue laws (that is,
what is taxed under those laws) is NOT 'money' or 'receipts' or
'earnings', etc.. It is the exercise of federal privilege, which
is measured, for purposes of determining the tax, by the receipts
brought in by that exercise."

Plainly, he thinks that, unless you work for the government, YOUR
wages are not "income." His site also gives "A Concise Summary Of
The Meaning of 'Income'," which (according to him) consists
entirely of payments made by the federal government and payments
from federal "corporations or instrumentalities." In other words,
he is arguing that private wages are not "income"--an error refuted
by the preceded and following citations just as much as the other
versions of "wages aren't income." The fact that he follows a
somewhat different route to arrive at the same incorrect conclusion
is irrelevant.

I would also note that, amongst all the THEORIZING about what
"income" is, what the subject of the tax is, and so on, he quotes
NOTHING from the law, or from any court ruling, suggesting that
only federal payments constitute "income," for purposes of the
income tax. Again, he has not "Cracked the Code"; he has ignored
the code entirely, preferring instead to theorize about the
meanings of words used in the code, while ignoring what the law
(and the courts) say about the meanings of those terms.

Lastly, please do not read into my comments things I haven't said
(especially before reading the second half). As you'll see, I agree
that the tax is an "excise" tax, that "income" per se is NOT (and
could not be) the subject of the tax, and that most Americans do
not engage in the activities which are the actual subject of the
tax. But rather than just free-style theorizing about it myself, I
quote where the LAW demonstrates all of that.

Sincerely,

Larken Rose
http://www.larkenrose.com

[Quixote]

Hendrickson's comments on 861 are found at http://www.losthorizons.com/tax/Misunde ... gs/861.htm.

It's amazing to me that either can refute the other's position so well without once noticing the flaws in his own position.

[Famspear]

Quixote wrote:

It's amazing to me that either can refute the other's position so well without once noticing the flaws in his own position.

Yes, it takes a particular kind of, uh, talent (?) to do that.

Maybe talent is not the right word. What word am I looking for here?

[Famspear]

Psychopathology.

That's the word.

[webhick]

Yes, it takes a particular kind of, uh, talent (?) to do that.

Maybe talent is not the right word. What word am I looking for here?

Arachibutyrophobia? (fear of peanut butter sticking to roof of mouth)
Pteronophobia? (fear of being tickled by feathers)
Kakorrhaphiophobia? (fear of failure - I had to stick a serious one in there somewhere.)