The Federal Income Tax Is A Tax Upon Income (investments), Not Upon Capital (employments).
The Federal Income Tax is a riddle wrapped in abstraction. It’s intentionally difficult to understand and its writers intended it to be so. It was not so complicated when it first began in 1861. But, the passage of time combined with economic ignorance, the true nature of the tax – what is taxed, how and why – has been forgotten.
Structure of the Tax Code
The Tax Code is shown below. It is called Title 26 and the Title is divided into smaller Subtitles. Each Subtitle is divided into chapters. The legal code is an abstraction, similar to a computer code. What are called variables in a computer code are called legal terms in the legal code, but they act similarly. The terms must be defined before they can be used and they are only used in the specific chapter for which they are defined. A term defined in one chapter cannot be used in a different chapter without a specific authorization. The income tax is one of the many taxes in Title 26.
(All snapshots of the Tax Code come from the Cornell University website: https://www.law.cornell.edu/uscode/text/26)
The income tax is determined in Subtitle A, chapter 1. When calculating your income tax, do not leave chapter 1 and do not use any terms and definitions outside of chapter 1. The Social Security Tax and withholding are determined in Subtitle C, chapters 21 and 24 respectively.
The definitions for “wages” are found in Subtitle C. Each chapter that uses “wages” has its own definition that only applies to the chapter in which it is defined. Subtitle C is organized as follows.
Chapter 21 is where Social Security and other federal insurance is determined and chapter 24 is where your withholding is determined. Each chapter has its own definition of “wages” and there is even a definition of “wages” in chapter 23. Chapter 23 isn’t important to this discussion other than to show that each chapter that uses “wages” has its very own definition of “wages” that applies to the chapter. For instance, in chapter 21, § 3121(a), the definition of “wages” reads:
For the purposes of this chapter is a caveat that cannot be ignored. This definition of “wages” only applies in chapter 21 to calculate Social Security tax and cannot be used in chapter 1 to calculate “gross income” or your income tax. Find § 3101(a) and you will see that the Social Security tax is a simple calculation of 6.2 percent of “wages.”
You can see that “wages” are explicitly defined and then used by name to calculate a tax. This does not happen in chapter 1 when calculating an income tax. The definitions of “wages” for chapters 23 and 24 are similar and they all contain the same caveat and cannot be used outside of these chapters. For Chapter 23, Sec. 3306(b) reads:
For chapter 24, Sec. 3401(a) reads:
The definition of “wages” in chapter 24 is used to determine the amount of withholding tax, and is considered an employment tax, which is separate from the income tax. Although the withholding tax is used as a credit to one’s income tax liability in Subtitle A § 31, it is a tax separate from the income tax. In a bizarre twist of logic, withholding in chapter 24 is an employment tax, but it is used to offset the income tax in chapter 1. This is like comparing apples and oranges: Withholding is based on apples, but the income tax liability is based on oranges? Who wrote this?? Gross income is not calculated in chapters 21, 23 or 24 and these definitions of “wages” from Subtitle C cannot be used in Subtitle A to calculate gross income.
Your W2
A W2 is called an information return and it displays useful information. Look at your W2 and what do you see there? The requirements for an information return, like a W2, are defined in 26 U.S.C. § 6051. What you should notice is that every statutory reference to a required piece of information like “wages” comes from Subtitle C. None of this information is used in Subtitle A to calculate gross income or an income tax liability. A W2 is a summary of a taxpayer’s compliance with Subtitle C and is evidence of an employment tax liability, but it is useless in calculating gross income in Subtitle A.
All of the statutes shown above come from Subtitle C and are not used in Subtitle A.
Chapter 1
Subtitle A, chapter 1 is where income tax is calculated. Only the terms and definitions found in chapter 1 can be used to calculate income tax. Subtitle A is shown below followed by a breakdown of chapter 1, which is our primary focus for income taxes.
Chapter 1 is subdivided into Subchapters as shown below and most people are only concerned with Subchapters A and B.
In Subchapter A, § 1 tells us that the tax is imposed on “taxable income.”
In Subchapter B, § 63 states that “taxable income” is “gross income” minus deductions.
In Subchapter B, Gross income is defined in § 61(a) as shown below. The caveat, Except as otherwise provided in this subtitle cannot be ignored. It reminds the reader that terms and definitions outside of Subtitle A cannot be used here. The definitions of “wages” used in Subtitle C for employment taxes and found on a W2 are inapplicable to the calculation of income taxes in Subtitle A.
Read the definition of “gross income” and do not add words that are not there. “Gross income” is calculated using “compensation for services.” Is the word “wages” anywhere to be found? In fact, search all of chapter 1 and you will not find a definition of “wages” because it does not exist. Going back to the computer program analogy, if you try to use “wages” in chapter 1 you will get a compiler error, “variable not defined.” Wages is not defined in chapter 1 and is not used to calculate “gross income.” Does the description of “compensation for services” include “wages?” If Congress meant to include wages it would read “Compensation for services including wages, salaries, fees, commissions, fringe benefits and similar items.” As it is written, a wage is not similar to a fringe benefit. A wage is earned, while a fringe benefit is a type of gratuity, and thus, wages cannot be read into the description when it is not there. In fact, the Supreme Court said that expanding the meaning of taxing statutes by using words that are not in the statute is prohibited.
Gould v. Gould 245 U.S. 151 (1917)
“Wages” cannot be implied by the words “fees, commissions, fringe benefits and similar items,” and cannot be included by interpretation. The Court also said that if Congress uses language in one part of an act but not in another part, that it does so with INTENT:
Russello v. United States, 464 U.S. 16 (1983)
Thus, when Congress includes “wages” in Subtitle C, but omits “wages” in Subtitle A, we must presume that Congress acts INTENTIONALLY in the disparate inclusion and exclusion of “wages.” “Wages” are not to be used in Subtitle A when calculating income taxes.
The implementing regulation 26 C.F.R. §1.61-1 provides more guidance on Section 61(a) and reads as follows:
“Compensation for services” is a specific item of income and if there exists another statute that provides specific treatment for “compensation for services,” then that statute must be used to calculate “gross income.” The reader should not be surprised to learn that 26 U.S.C. § 83 provides specific treatment for “compensation for services” and that most taxpayers have never heard of it because the IRS pretends that it does not exist. The statute reads:
There is no other statute that instructs a taxpayer what “shall be included in the gross income” other than § 83. This is it. While Subtitle C explains that exactly 6.2 percent of “wages” is taxed for Social Security, Subtitle A does not say how much “wages” is taxed for purposes of the income tax or how much “wages” must be reported as “gross income.” This is because there is no use of “wages” in Subtitle A. Gross income is determined by “compensation for services” and § 83 explains exactly how much compensation must be reported as “gross income.”
It is generally agreed that income is a gain. But in order to determine a gain, the baseline against which the gain is measured must be established. When selling property, the gain is measured against the cost basis, meaning the cost of the property. Any proceeds over and above the cost of the property is a gain and must be reported as income.
However, there is no cost basis when dealing with a person’s labor because there is no cost for one’s own labor. When dealing with labor, the baseline against which the gain is measured is called fair market value. Any payments that exceed the fair market value for the labor must be reported as gross income. What is fair market value? Most people have never heard of it and fewer have used it to calculate an income tax liability. According to the Supreme Court, fair market value is determined using the willing buyer-willing seller test:
United States v. Cartwright, 411 U.S. 546 (1973)
The willing buyer-willing seller test is supposedly as old as the income tax itself and is found in Treas. Reg §20.2031-1(b), but how many have ever used it? When both the employer and the employee willingly agree upon a salary that figure becomes the fair market value for the labor. According to § 83 any payments that are in excess of the fair market value must be reported as gross income. What kind of payments qualify? Just read the law and it tells you. § 61(a) reads, “compensation for services including fees, commissions, fringe benefits and similar items.” The answer is hiding in plain sight. Any payment that is over and above the agreed upon salary or wage must be reported as gross income, such as: bonuses, housing allowances, food stipends… etc. The fair market value establishes the baseline to measure a gain in one’s labor:
All of these statutes and regulations are in chapter 1 of the Tax Code:§ 1, § 63, § 61(a), § 83 and 26 C.F.R. § 1.61-1. Nothing from Subtitle C was used to calculate gross income as described above. Those who report “wages” as defined in Subtitle C and as shown on a W2 are paying way too much tax. For most people, their excess of the fair market value is ZERO unless they received some kind of fringe benefit or extra payment like a Christmas bonus.
All Payments Are A Form Of Property
In chapter 1, all payments that a person receives for their services are interpreted as property and some of that property must be reported as gross income. A payment in the form of stocks is property as surely as a payment in the form of money is property. Since “wages” is not defined in chapter 1, a wage must be interpreted as property that is transferred in connection with the performance of services according to the statutes found in chapter 1. In the previous pages, it also has been shown that “money” and “dollars” are property. Federal Regulations also admit that money, and many other financial instruments, are property. For example, 31 C.F.R. 536.310 (515.311 and 595.310 read similarly):
§ 536.310 Property; property interest.
terms property and property interest include, but are not limited to, money, checks, drafts, bullion, bank deposits, savings accounts, debts, indebtedness, obligations, notes, guarantees, debentures, stocks, bonds, coupons, any other financial instruments, bankers acceptances, mortgages, pledges, liens or other rights in the nature of security, warehouse receipts, bills of lading, trust receipts, bills of sale, any other evidences of title, ownership or indebtedness, letters of credit and any documents relating to any rights or obligations thereunder, powers of attorney, goods, wares, merchandise, chattels, stocks on hand, ships, goods on ships, real estate mortgages, deeds of trust, vendors sales agreements, land contracts, leaseholds, ground rents, real estate and any other interest therein, options, negotiable instruments, trade acceptances, royalties, book accounts, accounts payable, judgments, patents, trademarks or copyrights, insurance policies, safe deposit boxes and their contents, annuities, pooling agreements, services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future or contingent.
When the government wants to seize your “property,” as in the regulation above, property is interpreted using liberal and expansive language. The important thing here is that the first item on the list is “money.” Money is property and a wage paid in money is property. The Tax Code also acknowledges that money is property.
MONEY is PROPERTY. This is a legal axiom. Using different words to describe payments is a meaningless word game. Wages paid in money are property subject to Sec. 83 of the Tax Code just as surely as payments in stocks, checks and bullion are property, and are subject to Sec. 83. Only the excess of the fair market value of the property is required to be reported as gross income.
You Are Paid In Property
In chapter 1, a person is not compensated for services in wages or salaries. A person is compensated in a form of property that is transferred in connection with performance of services. Taxpayers must follow the rules for reporting any of this property as gross income.
In chapter 1, the methodology for determining “gross income” is as follows: I received compensation for services in the form of a wage or a salary; the wage was paid in money; money is property; property is included in gross income according to § 83 of the Tax Code; the excess of the fair market value of the property must be included in gross income. It must be re-stated, there is no other statute in chapter 1 that explains precisely how much compensation must be included in gross income besides § 83. Since “wages” is not defined in chapter 1 and is not used by name in any calculation, a wage paid in money must be interpreted as property that is transferred in connection with performance of services. A wage only becomes gross income if it can satisfy the requirements of § 83, which isn’t likely. This is because the income tax is imposed primarily on income (investments) and not capital (employments) and much of the capital is excluded from the tax by using word games and trickery.
The Deception
By changing one word, on one line of the Form 1040, the IRS is able to rip off the American public in a way that is difficult to detect. The IRS performs the old bait-and-switch and asks for “wages” on the Form 1040 instead of “compensation for services.” By putting “wages” on the Form 1040, the taxpayer is misdirected to Subtitle C and wrongly reports as gross income “wages,” as defined in Subtitle C, meaning “all remuneration for employment.” If the Form 1040 properly requested “compensation for services” then the taxpayer would be directed to Subtitle A, chapter 1 and would be forced to resolve the meaning of “compensation for services” by searching through the correct statutes. Taxpayers should be reporting “compensation for services” meaning the “excess of the fair market value” in accordance with the statutes in chapter 1. The IRS sends the taxpayer to the wrong statues in Subtitle C and as a result, the taxpayer pays too much tax. The Form 1040 should be asking for “compensation for services” from Subtitle A:
An economist or accountant may claim that these terms are economic synonyms and may be used interchangeably. However, these are legal terms and may not be used interchangeably, in the same way that variables in a computer program may not be used interchangeably. “Compensation for services” and “wages” are both legal terms that have a dollar value, but “wages” is always the bigger number because it is “all remuneration for employment” while “compensation for services” is only the “excess of the fair market value.” Therefore, the IRS asks for “wages” from Subtitle C on a Form 1040 to inflate your tax bill:
The IRS knows that employment taxes are not equivalent to income taxes, but the public does not. They are as different as X and Y. People do no realize that they bypass Subtitle A and miscalculate their tax liability when they report “wages” on a Form 1040. The IRS tricks most taxpayers into paying too much tax because the IRS forms miscalculate the income tax by confusing the terms “wages” (X) and “compensation for services” (Y). The Tax Code deploys the two different terms to PREVENT confusing the two different taxes. But, the IRS intentionally confuses the two taxes to collect more tax than the law allows. “Wages” are used to collect employment taxes in Subtitle C, while “compensation for services” is used to collect income taxes in Subtitle A. Don’t confuse the two different terms when calculating your taxes. Would you expect to use information from alcohol taxes in Subtitle E to calculate income taxes, then why use information from Subtitle C? Whether this is an intentional deception or an error caused by the unnecessary complexity of the Tax Code is up for debate. Or is it?
The old Form 1040s used to ask for “wages,” but the new Forms ask for “Total amount form Form(s) W2” to make the deception even more overt. All the information on a W2 comes from Subtitle C and there is no statutory justification for using a W2 to calculate gross income.
The IRS asks taxpayers to violate the law by using terms and definitions outside of Subtitle A to calculate gross income and then to sign the 1040 under penalty of perjury and swear that their illegal calculation is true and correct. There are three reasons that taxpayers are legally prohibited from using “wages,” from a W2, to calculate gross income:
1. “Except as otherwise provided in this Subtitle,” limits the meaning of gross income to only the statutes and definitions in Subtitle A. Nothing from Subtitle C applies here, including the information found on a W2.
2. In Subtitle A, compensation for services includes “fees, commissions, fringe benefits and similar items,” not “wages” from a W2.
3. “Wages” apply “for the purposes of this chapter,” which means only the chapter in which they are defined, and “wages” are not defined in chapter 1.
The Tax Code, as written, legally avoids taxing capital (employment earnings), but it is so cryptic that the IRS persuades taxpayers to pay a tax on their capital anyway. Taxpayers should study the law for themselves and consider following the law explicitly as written and only report what the law tells them to report (and not what the IRS tells them what to report) on line 1 of the Form 1040 if they decide that it satisfies their legal obligation.
Ask your tax lawyer or CPA: If I’m supposed to report “wages” to calculate gross income, where is the statutory definition of “wages” in chapter 1 and which statute tells me how much “wages” to report?
Therefore the fair market value of one’s labor is excluded by law in accordance with 26 C.F.R. §1.61-1:
Since the fair market value is not required to be included in gross income, it is legally excluded from gross income. It seems reasonable to conclude from reading the statutes in chapter 1 that, the fair market value of one’s compensation for service is excluded by law from gross income. However, taxpayers are not taught to calculate gross income using chapter 1, they are taught to use Subtitle C, because the IRS wants to collect more tax than is authorized by law.
The IRS’ deception in its calculation of gross income is very subtle, very difficult to detect and very damaging to the average American’s personal finances.
The Consequence of the Deception
Remember that part of the confusion comes from the difference between economic theories and constitutional or legal theories. When applying taxes, we are dealing with capital and income as defined in legal procedure, not economics. An economist or an accountant will look at all revenue coming in as “income.” Whereas in the Constitution it is necessary to separate earnings based on whether they are property (labor/capital) or a gain derived from the property (income/investments) because they are taxed differently.
Income, “within the meaning of the Sixteenth Amendment” means that we are dealing with legal distinctions, not economic distinctions:
Helvering v. Edison Bros. Stores, 133 F.2d 575 (8th Circuit 1943)
Taxing Capital (employment earnings) Is A Source Of Revenue Reserved to the States
If Congress does not exercise the apportionment option, then all revenue derived from direct taxes is reserved to the States. This money is specifically set aside for the State Governments as their principal remaining resource.
In distributing the power of taxation, the Constitution retained to the State the absolute power of direct taxation, but granted to the Federal government the power of the same taxation upon condition that, in its exercise, such taxes should be apportioned among the several States according to number, and this was done in order to protect to the States, who were surrendering to the Federal government so many sources of income, the power of direct taxation, which was their principal remaining resource.
U.S Supreme Court, Pollock v. Farmer’s Loan and Trust (1895)
A tax on labor is a tax on capital and is a direct tax because labor is property. A tax on property is a source of revenue the Constitution reserves to the States. Revenue from all the collective labor in the State is supposed to remain in the State unless Congress goes through the rule of apportionment. However, when Americans do their taxes incorrectly, and misreport their capital as income, two errors occur. First, the taxpayer pays a tax that isn’t owed. Second, The taxpayer undermines the Constitution and our entire federal system of government by enabling the Federal Government to tax capital without apportionment and steal from the State Governments their constitutionally protected source of revenue. The IRS persuades taxpayers to use their federal tax forms as the vehicle to evade the apportionment requirement for collecting a direct tax on capital by asking them to conceal their capital in the return (because they don’t know it’s capital) and transfer the money into the federal treasury in an ostensibly legitimate transaction. When Americans voluntarily comply, an illegal non-apportioned direct tax upon much of the nation’s financial capital operates undetected and vast sums of the State Governments’ protected financial assets are diverted into the federal treasury in violation of the Constitution. The IRS uses the individual taxpayer as the middle man to steal the State Government’s money. The Federal Government acquires, what is supposed to be, the State’s principal remaining resource by fraud.
The IRS uses Georgia taxpayers to defraud the State of Georgia.
The IRS uses Texas taxpayers to defraud the State of Texas.
The IRS uses Kansas taxpayers to defraud the State of Kansas.
The IRS uses North Dakota’s taxpayers to defraud the State of North Dakota.
The IRS uses Florida taxpayers to defraud the State of Florida … etc.
The Commissioner of Internal Revenue is committing the greatest tax fraud in American history by defrauding each and every State Government and by cheating the individual citizen simultaneously.
Only the State can tax the capital (principal, employment earnings, property) that is created within the State, unless the Federal Government goes through the rule of apportionment. The political and economic independence of the States is threatened by this clandestine theft because the States would never need federal funds if the IRS and D.C. swamp creatures were not stealing their money.
Word Games
The IRS plays word games to confuse people. First, the IRS attempts to obliterate the distinction between income (investments) and principal (employments) and second, it confuses “wages” in Subtitle C, with “compensation for services” in Subtitle A and uses the wrong statutes to calculate gross income.
It has been shown that all money is either income or principal. All financial gains fall into one of these two categories. The Sixteenth Amendment applies to income, which is an investment gain, it does not apply to capital, which is a financial gain that comes from one’s labor.
When money makes money in any investment, that financial gain is called income. When labor makes money in any trade, profession or occupation whatsoever, that is not a financial gain, but a conversion of capital from labor into money.
However, the IRS refers to these streams of revenue as “unearned income” and “earned income” in an effort to obliterate all the distinction between income and principal. It hopes to trick the public into paying The Federal Income Tax on their capital, when the law doesn’t require it. The Sixteenth Amendment applies to income — and it’s ALL INCOME, can’t you see?
The Sixteenth Amendment applies to income only, but the IRS wants to tax all financial gains without apportionment. To tax all financial gains without apportionment, the IRS must make an argument that all financial gains are income of one kind or another.
All financial gains are NOT income. If investment earnings are income and employment earnings are also income, then there is no capital in personal finance. This would be financially and constitutionally absurd. How can there be no capital in a capitalist society? Referring to capital as “earned income” does not legally transform capital into income but, it may trick an ignorant public into paying an income tax on their capital.
Your Money is Your Responsibility
Everyone must do their own due diligence in their personal finances. Everyone is responsible for their own actions. It is your responsibility to know what YOUR money is. It is YOUR responsibility to educate YOURSELF. You can’t believe everything you read on the internet – you must research and test the knowledge for yourself. It is not the responsibility of the IRS or the government to teach you basic economics or how your own system of government operates. Many Americans wrongly report their capital as income because they do not understand basic economics, or federal system of taxation or the terms that are used in the law. This isn’t the government’s fault. Term confusion and rhetorical trickery is how the establishment, the bureaucrats, and the administrators take advantage of an ignorant public. If you get conned, it’s your fault. Most people and most business owners have never read a single section of the Internal Revenue Code. They are encouraged not to read it and instead are persuaded to simply trust the experts. They do this at their own financial peril. The Ninth Circuit Court of Appeals warns:
Persons dealing with the government are charged with knowing government statutes and regulations, and they assume the risk that government agents may exceed their authority and provide misinformation.
Ninth Circuit Court of Appeals, Lavin v. Marsh (1981)
And the Supreme Court has issued the same warning:
Whatever the form in which the Government functions, anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority. The scope of this authority may be explicitly defined by Congress or be limited by delegated legislation, properly exercised through the rulemaking power. And this is so even though, as here, the agent himself may have been unaware of the limitations upon his authority.
U.S. Supreme Court, Federal Crop Ins. Corp. v. Merrill, (1947)
When doing our taxes we are all dealing with the government. It is our responsibility to know the statues so when revenue agents or government officials try to screw us over provide misinformation we can protect ourselves with the law. The courts will have little sympathy for taxpayers who complain that some government agent tricked them into paying more tax than they owe but then confess that they never read the law to understand their duties and responsibilities under the law. Or, that they were simply doing their taxes the way daddy, grandpa, their tax attorney or CPA instructed them. If we pay more tax than we owe out of ignorance, laziness or stupidity, it is our own fault.
The Federal Income Tax is a puzzle and the pieces are scattered between the Constitution, the Internal Revenue Code, Supreme Court rulings, and basic economics. The Internal Revenue Service has been successful in hiding key pieces from the public so that the idea of capital in personal finance has been almost forgotten. In the IRS universe, there is no capital; all money that a person acquires is some form of “income” that can be taxed by the Federal Income Tax. There is no capital in our capitalist society. If employment earnings are income and investment earnings are also income, then how does one acquire capital? Where does capital come from? Does an individual only acquire capital by borrowing from a venture capitalist? Is capital only a business term related to running a business? It only takes a moment of thought to realize that all money cannot be income, and annihilating the idea of individual capital has been a propaganda success for the IRS.
It is only through the misapplication of the Internal Revenue Code that capital is being taxed as income. Confusion of terms and economic ignorance allow this misapplication of the law to continue. There is no government agent standing over taxpayers with a gun pointed to their head when they do their taxes each year. Taxpayers willingly do their taxes wrong and voluntarily assess the tax on themselves. They legally pay a tax they don’t owe. But, if Americans woke up tomorrow and began doing their taxes correctly by differentiating between their capital and their income, and between “wages” and “compensation for services” the whole system would immediately self-correct. Stop reporting “all remuneration for employment” and start reporting the “excess of the fair market value,” which includes things like fees commissions, fringe benefits and similar items.
The Federal Income Tax does not impose a direct tax on capital, and the IRS knows it. The IRS will return all erroneously withheld property to those Americans who correctly differentiate between their capital and their “income” when calculating their “gross income” on their form 1040; the law requires it. Americans who report their “wages,” as defined in Subtitle C, are paying way too much Federal Income Tax.
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Summary
- The federal income tax is calculated in Subtitle A, chapter 1.
- Gross income is not calculated in Subtitle C and no statutes or definitions in Subtitle C are used to calculate gross income. A W2 summarizes a taxpayer’s compliance with Subtitle C and is useless in calculating gross income.
- The IRS deception, that tricks Americans into paying too much income tax, occurs on line 1 of the Form 1040, when “wages” from Subtitle C is substituted for “compensation for services” in Subtitle A.
- Only the “excess” of the fair market value for your compensation for service must be reported on a form 1040.
- When the IRS tricks Americans into paying too much tax, it steals from the State Governments their constitutionally protected source of revenue by taxing capital as if it were income.