Will the Supreme Court Change Fundamental Tax Policy?

WILL THE SUPREME COURT CHANGE FUNDEMENTAL TAX POLICY? 

 Is There a Disaster in the Making?

The “base” of our federal tax system is “income.” That is, the scheme seeks to capture the amount of “income” an individual or business earns over the course of a year, then subtract various deductions, credits and exemptions from that income, and finally, to apply the applicable rate of tax to the remaining income in order to assess the correct income tax liability.

The concept might seem simple enough except for at least three factors that make the system massively complex. The first is that the federal tax code consists of more than 4 million words seeking to define and apply the various deductions, credits and exemptions, etc., expressed in the law; second (and worse), the code has been changed more than 6,000 times just since 2001 alone. Finally, the third, seemingly even more bizarre factor, is the fact that within those more than 4 million words, there is no comprehensive definition of the word “income.”

The touchstone of the modern income tax is the 16^th Amendment, ratified in 1913. It provides no definition of the word. Rather, it merely authorizes Congress to “lay and collect taxes on incomes, from whatever source derived, . . .” The Internal Revenue Code does contain section 61, which purports to be a definition of the term “income” but on careful review, we find that it’s merely a tail-chasing exercise which, in the end, provides but a list of possible sources from which “income” may be derived.

Section 61 begins with the following phrase:
“…gross income means all income from whatever source derived, including (but not limited to) the following items: * * *”

The law proceeds to list fourteen difference “sources” from which “income” may be derived. We learned in grammar school that you never attempt to define a word using the very word sought to be defined. Yet that is exactly what Congress did when it wrote that “income” means “income.” Thus, we are no closer to understanding what “income” is for purposes of the tax law.

This lack of clarity has resulted in non-stop litigation between taxpayers and the federal government from the very start of the income tax code in 1913. Early decisions of the U.S. Supreme Court that addressed the issue defined the term using court authority growing from the Corporation Tax Act of 1909. That law imposed an excise tax, measured by income, on the business of carrying on corporate activity. In Doyle v. Mitchell Bros. Co., 247 U.S. 179 (1918), the Supreme Court said that the purpose of the act was “not to tax property as such, nor the mere conversion of property.” Rather, the Court said,

The act employs the term “income” in its natural and obvious sense, as importing something distinct from principal or capital, and conveying the idea of gain or increase arising from corporate activities. Doyle, supra, at 179. 

In 1920, the Supreme Court, in the case of Eisner v. Macomber, 252 U.S. 189 (1920), addressed the issue again, this time directly in the context of the 16^th Amendment…

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… The Moore case is before the Supreme Court right now, and a ruling is expected in June. If the Court agrees with the Ninth Circuit, this will open the door to a wide range of potentially new taxes, including perhaps—and most notably—a wealth tax, imposed on unrealized capital gains from an endless list of assets, such as has been promoted by radical Leftists over the past several years.

If the Supreme Court adopts the Ninth Circuit’s opinion, there will simply be no limit to the reach of the federal government’s tax assessment arm.

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