A Reality Check for this August Group

[LPC]

the wrongdoer is required to report the receipt of the extorted or embezzled money as INCOME for federal income tax purposes, even though the money is not his, and even though he is required to return it to its rightful owner.

But can s/he deduct (or file an amended return based on) the amount returned?

Yes. See, for example, Rev. Rul. 82-74, 1982-1 C.B. 110, discussing the income tax consequence for a taxpayer who committed arson, fraudulently collected the insurance proceeds, and then repaid the insurance in a later year, for which the taxpayer was allowed a loss deduction under section 165 (and not a "claim of right" deduction under 1341).

The problem is that the deduction usually comes in a year that is different from the year in which the income was first realized, which may make the deduction of lesser value (if not valueless).

The taxpayer in Rev. Rul. 82-74 tried to avoid that result through a series of arguments that are imaginative even if they are not persuasive, and I found it amusing to read the IRS responses to each one. For example, the IRS held the taxpayer was not allowed a business deduction for the amount paid to the actual arsonist, that the receipt of the insurance proceeds was ordinary income and not long-term capital gain even though received for the destruction of a capital asset, that the taxpayer was not entitled to a casualty loss for the destruction of the building because the destruction was intentional, that the destruction was not an "involuntary conversion," and that he was not allowed an increase in his basis for the property for the amount paid to the arsonist.

Who ever said that tax law can't be fun?

[Famspear]

SubVet wrote:

Please provide me a USSC decision that overrides Brushaber!

SubVet, you do not want to be citing Brushaber.

When you read a court decision, you have to distinguish between what is called the "holding" (or holdings) in that case and the words that are called obiter dicta (or just "dicta") -- essentially, "words said in passing."

A holding is essentially a summary statement of what the court actual ruled about what the parties actually fought about.

By contrast, any words that sort of seem to be statements about "what the law is" but that do not constitute an actual court decision on something that the parties actually fought about in that particular case are dicta, and are non-binding with respect to that case. Yes, they may be accurate statements of the law, and it's OK to quote those words (legal analysts do it all the time) - as long as you don't try to use those dicta to argue that those dicta somehow mean something else -- "something else" that the courts have already ruled (in either that case or in some other case) to be without merit.

The Brushaber case deals with United States Supreme Court rulings on the Revenue Act of 1913, which was enacted after the ratification of the Sixteenth Amendment. The United States Supreme Court in the Brushaber case rendered three basic holdings, summarized as follows:

1. Federal income taxes are not required to be apportioned among the states by population (Frank Brushaber had argued that the unapportioned income tax was required to be apportioned and was therefore unconstitutional for that reason -- and the Supreme Court ruled against him ON THAT VERY POINT.)

2. The federal income tax statute does not violate the Fifth Amendment's prohibition against the government taking property without due process of law. (Frank Brushaber had argued that the tax violated the Fifth Amendment prohibition, and the Court ruled against him ON THAT VERY POINT.)

3. The federal income tax statute does not violate the uniformity clause of Article I, section 8 of the U.S. Constitution. (Frank Brushaber had argued that the tax violated the uniformity clause, and the Court ruled against him ON THAT VERY POINT.)

No federal income tax has ever been apportioned among the states according to population.

The only federal income tax ever ruled to be unconstitutional BECAUSE it was not apportioned was the 1894 tax on interest, dividends, and rent income (Pollock decision, 1895). Even in Pollock, the U.S. Supreme Court made clear that the 1894 taxes imposed on income from employments, occupations, etc., were not required to be apportioned. And in 1913, the Sixteenth Amendment effectively overruled the Pollock decision that had required that income taxes on interest, dividends, and rent income be apportioned. The only federal income taxes that have ever been required to be apportioned among the states by population were taxes on interest, dividends, and rent -- and that requirement was effective only from about 1894-1895 to early 1913.

Getting back to Brushaber and your comment: We regulars here at Quatloos don't need to look for rulings in which the Supreme Court overruled its holdings in Brushaber. And there are no such rulings. Furthermore, we like Brushaber. Brushaber is our friend. Brushaber is snuggly and warm. Brushaber rocks.

SubVet, you are a tax protester. You do not want to be citing cases like Brushaber. Brushaber is not your friend.

In fact, SubVet, you don't want to be citing court cases at all. Court cases are not your friends. Court cases are not snuggly and warm for you. This is your sad plight.

[Quixote]

SubVet, you are a tax protester. You do not want to be citing cases like Brushaber. Brushaber is not your friend.

Which he might know if he had ever read Brushaber. Apparently SubVet doesn't even read the passages he cuts and pastes. Otherwise he wouldn't post silly statements such as,

It is clear that congress has the authority to tax income both directly and indirectly ...

Earlier in this thread he pasted, but apparently did not read, the following:

[The Pollock Court] recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such ...

It appears that the Supreme Court disagrees with SubVet's assertion that a tax on income could be a direct tax. I wonder who's right.

[Dr. Caligari]

If taxing as an excise, it must be related to a taxable event or activity - it must have a nexus to the federal government.

You keep saying that, but based on what? What case defines the word "excise" in that way?

Didn't the Supreme Court uphold excises on inheritances and gifts? What nexus to the federal government was there in those cases?

[Famspear]

If taxing as an excise, it must be related to a taxable event or activity - it must have a nexus to the federal government.

You keep saying that, but based on what? What case defines the word "excise" in that way?

Didn't the Supreme Court uphold excises on inheritances and gifts? What nexus to the federal government was there in those cases?

I just wish I could get Submarine Veteran to give us his theory as to why he would think that criminal acts such as extortion (the Rutkin case - Supreme Court rules that federal income tax applies to receipt of extorted funds) and embezzlement (the James case - Supreme Court rules that federal income tax applies to receipt of embezzled funds) involve the exercise of a "privilege", or that such criminal acts involve some sort of "nexus" with the "federal government".

But then, SubVet is a tax protester - the kind of guy who cites Brushaber as an argument AGAINST the validity of the federal income tax -- when the Supreme Court ruled in that very case that the federal income tax was constitutional even though the tax was not apportioned.

[Duke2Earl]

For close on to 30 years now I have been paid to predict what a court will do when presented with a specific question. And I have made a pretty good living at it. No, I am not always right. If I was that good at predicting the future, I wouldn't have to work for a living. But I have been right a lot more often than not. And the people who ask me to do this are people with real money at stake. These people do not care one eenie little bit about footnotes in Supreme Court cases, old dictionaries, the Federalist Papers, what "includes" means, or direct v. indirect, or any other useless trivia. What they care about is how the courts will rule if they find themselves in the tender clutches of the judicial system. Because that is what really matters... not what could be, or should be, or ought to be.... what they are interested in is "what is."

On the particular question of whether individual taxpayers owe income taxes?... well, that one is a slam dunk. I can predict with damn close to 100% certainty that no matter what argument you make that wages aren't income subject to the income tax.... you are going down. How do I know this? Well, there is a history going back a long way that shows that despite hundreds, if not thousands of opportunties, no taxpayer in the history of the Republic has prevailed in any court, anywhere. Q.E.D. So I don't care what you want to argue... be it CTC, or 861, or Schiff, or fringed flags, or whatever. If you are concluding your argument with the conclusion that you don't owe income taxes on your wages... you have a dead loser and if you end up in court you will lose no matter how you argue it, or what motions you file, or whether you are pro se or not, or whether you use capital letters in your name, or whatever flavor of nonsense is your preference.

Well, protester of the month, might ask... is that right or just? The short answer is it doesn't matter. Nobody ever guaranteed that life was going to be fair. It may not be fair, it may not be right...it just IS!

There is one and only one way to change the result and going to court is not it. The only way is to elect a new Congress who will vote to repeal the income tax. Good luck on that one.

[Quixote]

The first federal excises were the taxes on manufacturing and selling liquor. Privilege? Federal nexus? I don't see it.

Are SubVet and Diller72 not aware of the excises on electricity and gasoline? And what is the federal nexus of fishing poles?

[Famspear]

User "Kensei" at losthorizons writes:

[ . . . ] They [IRS personnel] also thinly quote the Brushaber decision to say that it confirmed the constitutionality of the 'income tax.' It did - but only upon 'incomes' derived from privileged activity, and only when there is net 'gains, profits, and income.' It is still, as always, an excise tax upon optional activity.

http://www.losthorizons.com/phpBB/viewtopic.php?t=574

That is a blatant lie.

The Court in the Brushaber decision did not limit its confirmation of the constitutionality of the federal income tax to taxes on incomes derived from a "privileged activity." The concept of limiting income taxes to taxes on privileged activity is not even discussed, much less ruled on. The text never even mentions the words "privileged activity". The text never even mentions the phrase "gains, profits, and income" either.

EDIT: Where do people like Kensei come from? I see this all the time with tax protesters. I wonder to what extent many of these people run the rest of their lives at this level of "intellectual rigor" - literally making things up (or, more often, regurgitating stuff other people have made up).

[The Operative]

User "Kensei" at losthorizons writes:

[ . . . ] They [IRS personnel] also thinly quote the Brushaber decision to say that it confirmed the constitutionality of the 'income tax.' It did - but only upon 'incomes' derived from privileged activity, and only when there is net 'gains, profits, and income.' It is still, as always, an excise tax upon optional activity.

http://www.losthorizons.com/phpBB/viewtopic.php?t=574

That is a blatant lie.

Since when did they ever let reality get in the way of their delusions?

[Cpt Banjo]

The first federal excises were the taxes on manufacturing and selling liquor. Privilege? Federal nexus? I don't see it.

Don't forget the tax on Mr. Hylton's carriages -- absolutely no federal, state, or any other kind of privilege, yet the constitutionality of the tax was upheld in 1790 by the Supreme Court, 3 of the 4 justices of which had been members of the constitutional convention.

The LH'ers not only have no grasp of tax law, they are woefully ignorant of history.

[Famspear]

The argument that an individual is not subject to federal income tax because the individual has "neither requested, obtained, nor exercised an privilege from an agency of government" was ruled frivolous by the United States Court of Appeals for the First Circuit in Sullivan v. United States, 788 F.2d 813, 86-1 U.S. Tax Cas. (CCH) paragr. 9343 (1st Cir. 1986), and again in Kelly v. United States, 789 F.2d 94, 86-1 U.S. Tax Cas. (CCH) paragr. 9388 (1st Cir. 1986).

The argument that an individual is not subject to federal income tax unless the tax is imposed in connection with "government granted privileges" was ruled frivolous by the United States Court of Appeals for the Seventh Circuit in Coleman v. Commissioner, 791 F.2d 68, 86-1 U.S. Tax Cas. (CCH) paragr. 9401 (7th Cir. 1986).

In Lovell v. United States the Seventh Circuit Court of appeals stated:

Plaintiffs argue first that they are exempt from federal taxation because they are "natural individuals" who have not "requested, obtained or exercised any, privilege from an agency of government." This is not a basis for an exemption from federal income tax. [ . . . ] All individuals, natural or unnatural, must pay federal income tax on their wages, regardless of whether they received any "privileges" from the government.

--755 F.2d 517, 85-1 U.S. Tax Cas. (CCH) paragr. 9208 (7th Cir. 1984).

The argument that an individual is not subject to federal income tax unless the taxpayer enjoys a "grant of privilege or franchise" was ruled frivolous by the United States Court of Appeals for the Eighth Circuit in May v. Commissioner, 752 F.2d 1301, 85-1 U.S. Tax Cas. (CCH) paragr. 9156 (8th Cir. 1985).

The argument that an individual is not subject to federal income tax unless the taxpayer has obtained a "privilege from a governmental agency" was ruled frivolous by the United States Court of Appeals for the Ninth Circuit in Olson v. United States, 760 F.2d 1003, 85-1 U.S. Tax Cas. (CCH) paragr. 9401 (9th Cir. 1985).

The argument that an individual is not subject to federal income tax unless the taxpayer has obtained a "privilege from a governmental agency" was ruled frivolous by the United States Court of Appeals for the Tenth Circuit in Prout v. United States, 31 Fed Appx. 624, 2002-1 U.S. Tax Cas. (CCH) paragr. 50,304 (10th Cir. 2002) (not for public.).

[Famspear]

Earlier in this thread, I wrote:

No, if the tax is an excise, there is no requirement that the event or activity being taxed have any nexus to the federal government. No requirement at all. None. Zero. Zilch. Now, go look for a federal court decision where an individual argued your argument, and the court ruled that the individual was correct. Hint: There are no such cases.

[ . . . ]

The compensation you receive for working to feed and clothe your family is not tied to any privileged activity, but is nevertheless taxable -- and the tax is an excise in the form of the current federal income tax under the Internal Revenue Code of 1986 as amended. Now, go look for a court case where the individual argued your side, and the court ruled in that person's favor. Hint: There are no such cases.

There is no requirement in the U.S. Constitution, or anywhere else, that any federal income tax of any kind whatsoever be tied to any privileged activity (federal-related or otherwise). Now, look for a court case where the court ruled in favor of your argument. There are none.

For example, extorting or embezzling money is not a privileged activity; it's a crime. Yet the wrongdoer is required to report the receipt of the extorted or embezzled money as INCOME for federal income tax purposes, even though the money is not his, and even though he is required to return it to its rightful owner.

OK, SubVet, I have cited several federal court decisions where the courts ruled FRIVOLOUS the argument that the W-2 wages are not taxable unless connected to some government privilege. I and others have also cited two United States Supreme Court decisions where receipts in the form of money extorted or embezzled (i.e., money obtained in a crime) were taxable as income to the wrongdoer, even though the wrongdoer is required to return the money to its rightful owner. Illegal income is not income realized in connection with a government privilege or a privileged activity.

We have cited case after case where the courts SPECIFICALLY ruled the way we say the courts ruled. And by the way, per the actual texts, the following cases SPECIFICALLY and expressly involved "Form W-2 wages or other compensation":

Sullivan
Kelly
Coleman
May
Olson

(full citations listed earlier in the thread).

You, SubVet, created and titled this thread "A Reality Check for this August Group."

Yes, it's a reality check all right.

You, SubVet, have found not one single federal court case where the text shows that an individual went into court and specifically argued that BECAUSE he was not engaged in some sort of privileged activity or was not enjoying some government privilege (in whatever variations of language you want to use) his W-2 wages were not taxable - AND the court ruled in his favor. The reason you have not found one single such case (even assuming you have tried to look) is that THERE ARE NO SUCH CASES. NOT ONE. NONE. ZILCH. NICHT.

Winners talk; losers walk.

[LPC]

Don't forget the tax on Mr. Hylton's carriages -- absolutely no federal, state, or any other kind of privilege, yet the constitutionality of the tax was upheld in 1790 by the Supreme Court, 3 of the 4 justices of which had been members of the constitutional convention.

I was going to mention that myself, but I was afraid of sounding like a broken record.

Incidentally, I've never been sure of that "3 of the 4 justices" were members of the constitutional convention claim.

Hylton was decided by Justices Samuel Chase, William Paterson, James Iredell, and James Wilson. William Paterson went to the Constitutional Convention of 1787 as a representative of New Jersey, and James Wilson went from Pennsylvania. Who's the third?

James Iredell did not attend the convention in Philadelphia in 1787, but he had a lead role in the North Carolina ratifying convention, and maybe that's what makes him the third justice to have been involved with the ratification (but not drafting) of the constitution.

[Cpt Banjo]

You're right, Dan, I wasn't quite accurate. Iredell was the leader of the Federalists in the first North Carolina ratifying convention in 1788 who unsuccessfully argued for ratification. He achieved success when NC ratified it at its second convention in 1789 after the Bill of Rights had been proposed.

[Gregg]

sorry, somoeone else said it better than me and I leave his answer un-cluttered by mine

[Gregg]

EDIT: Where do people like Kensei come from? I see this all the time with tax protesters. I wonder to what extent many of these people run the rest of their lives at this level of "intellectual rigor" - literally making things up (or, more often, regurgitating stuff other people have made up).

I believe he is a physician, which on one hand may explain it (my own theory is a lot of docs have a mini god complex and think they know better than everyone about everything, also why I think as a group they have a reputation as being bad investors, whether that reputation is deserved or not)

At the same time, it does kind of scare me, makes me wonder if someone with such defective reasoning skills can really be allowed to see patients.


Now honestly, I would not presume for a minute to try to tell a surgeon that what he was doing was fundementally wrong, expeccially if it was more or less in line with what 99% of other doctors were doing for similar circumstances. But as one who has a doctorate in my chosen field, Ito also puzzles me when someone with a little internet research in MY field tries to tell me that me and most of my collegues are dead wrong.

[Colonel_Buck]

That one sentence Amendment gave Congress the ability to dig deep into every person's and every business' pocketbook, as it can tax incomes from whatever source derived, including the activities of businesses.

Do you think it was a good idea to give Congress that much power?

[LPC]

That one sentence Amendment gave Congress the ability to dig deep into every person's and every business' pocketbook, as it can tax incomes from whatever source derived, including the activities of businesses.

Do you think it was a good idea to give Congress that much power?

With all due respect to CKB (and as we often have to remind tax deniers), Congress already had the power to tax incomes even before the ratification of the 16th Amendment. The amendment only clarified that taxes on incomes did not need to be apportioned.

As far as the Congressional power to tax is concerned, it was debated intensely during the ratification of the Constitution. The anti-Federalists said that the power to tax was unlimited and would be abused. The Federalists agreed that the power to tax was unlimited but argued that it would be difficult to abuse because of politics and economics.

The Federalists won the argument and the Constitution was ratified.

Was it a good idea to give Congress that much power? Thomas Jefferson thought so, and I am inclined to agree.

[Famspear]

On 29 May 2008, “Submarine Veteran” over at losthorizons issued a challenge to us here at Quatloos. Among his assertions (earlier in this thread):

If taxing as an excise, it [the excise] must be related to a taxable event or activity – it must have a nexus to the federal government.

[ . . . ]

Working to feed and clothe my family is not tied to any privileged activity and is therefore not taxable as an excise.

see
viewtopic.php?f=8&t=2503&st=0&sk=t&sd=a

(bolding added).

On May 29 and 30th, various Quatloos regulars responded with citations to numerous cases where the courts ruled that there is no requirement that a federal income tax have a nexus to the federal government, or to the exercise of a “privilege” or a “privileged activity.”

It has now been 89 days since May 30th, and “Submarine Veteran” has not only not come up with any court cases to support his argument (there are none), he has not even responded.

SubVet blew in here, appearing brash and confident – demanding that others prove him wrong, essentially. But when the law was immediately thrown in his face, he quickly folded and slipped away, without so much as a “fare-thee-well.”

That’s a pretty flaccid performance, SubVet – even for one of Blowhard Hendrickson’s Crackheads. You obviously realized very quickly that you don’t have the Keimdrüsen to play this game.

[Arthur Rubin]

(Sorry, getting back into this forum after an extended absense.)

the wrongdoer is required to report the receipt of the extorted or embezzled money as INCOME for federal income tax purposes, even though the money is not his, and even though he is required to return it to its rightful owner.

But can s/he deduct (or file an amended return based on) the amount returned?

Sometimes. Somehow, I don't think the "claim of right" clause applies. (If it did, the taxpayer could amend his return for the later year of return to get a credit for the tax due (due to the illegal income, to the extent of the amount returned) of the year of embezzlement. I think maybe LPC had it correct in a later message in this thread; it's a deductible business expense.

However, fines and "penalties" assessed by a court are not deductible, and I seem to recall that illegal expenses of producing illegal income are sometimes not deductible.