What you should know about Federal Income Tax. The Constitution describes two main categories of taxation: 1) “direct” taxes, which must be “apportioned” (i.e. divided up among the states according to populations), and; 2) “indirect” taxes, which must be geographically uniform throughout the states (e.g. they cannot apply differently in Texas than they do in Ohio). In general, a “direct” tax is a tax on property ownership, while an “indirect” tax is a tax on certain activities or privileges. In 1861 (prior to the 16th Amendment), the federal government imposed the first federal income tax, which the courts correctly held to be an “indirect” tax, which therefore did not require apportionment (but did have to be geographically “uniform throughout the states). Then, in the 1890’s, the Supreme Court, in the famous “Pollock” decision (158 U.S. 601 (1895)) ruled that a tax on income derived from property ownership was a tax on property ownership itself, which would be a “direct” tax, requiring “apportionment” Thus they ruled that the income tax, as it applied to income from property ownership, was an unconstitutional, unapportioned “direct” tax, and they threw the tax out. The Court went out of their way to say that their reasoning did not extend to income from doing business, which would still be an “indirect” excise tax, but that they were not at liberty to throw out part of the tax, and leave the rest, thus altering Congress’ overall intended plan for the tax. So they threw out the entire income tax. There was no federal income tax again until 1913. In 1913, the 16th Amendment was (supposedly) ratified, and Congress enacted the 1913 Income Tax Act. Many still believe that the 16th Amendment granted Congress a new taxing power, i.e. the power to impose a “direct” income tax, without having to “apportion” it among the states. While this is incorrect, it is an easy mistake to make, since the 16th Amendment states that “Congress shall have the power to lay and collect taxes on income, from whatever source derived,” without having to apportion such a tax. At first glance, it certainly looks like Congress had been granted a new power. However, shortly after the amendment was (supposedly) ratified, both the Supreme Court and the Secretary of the Treasury admitted that the 16th Amendment did not give Congress any new taxing powers. In Treasury Decision 2303, the Secretary of the Treasury directly quoted the Supreme Court (Stanton v. Baltic Mining Co. (240 U.S. 103) in saying that “The provisions of the sixteenth amendment conferred no new power of taxation,” but instead simply prohibited Congress original power to tax incomes “from being taken out of the category of indirect taxation. II Possession Rules Explained Back in 1921, a section of the income tax statues gave a “benefit” to US citizens and domestic corporations who received 80% or more of their income from within federal possessions. The “benefit” is that they were not taxed on the possessions income but at the same time, they were taxed on their income from within the 50 states. (Other than nonresident aliens and foreign corporations, these were the only ones taxed on their income from within the 50 states.) Here is the progression, in chronological order, of what happened to that section. 1921 – Section 262 of the Revenue Act of 1921 gave a “benefit” to US citizens and domestic corporation who received 80% or more of their income from within federal possessions. The “benefit” was they were not taxed on the possessions income but at the same time, they were taxed on there income from within the 50 states. 1939 – The old Section 262 became Section 251, but otherwise remained the same. Meanwhile, the regulation under Section 119, said those “entitled to the benefit of Section 251” were taxed on their income from within the states. 1954 – When the Code was rearranged, Section 251 then became Section 931, but remained essentially unchanged. 1960 – Regulations under Section 931 were written (26 CFR § 1.931-1), which still appear in the Code of Federal Regulations (CFR). Those regulations state that citizens and domestic corporations with a certain level of possessions income can have the “benefit” of only being taxed on their income from within the 50 states, while not being taxed on the possessions income (the same as previously). 1976 – Section 931 of the statues was, in effect, split into two sections. Section 931 stopped mentioning domestic corporations, meaning that it then only applied to individual citizens. At the same time, Section 936 appeared which created the same “benefit” for domestic corporations. In other words, nothing much changed except for the section splitting into two sections (931 for citizens, 936 for domestic corporations). 1978 – The current 26 CFR § 1.861-8 was written. Among the “specific sources” listed was this: “The tax based for citizens entitled to the benefits of section 931 and the section 936 tax credit of a domestic corporation which has an election in effect under section 936” (26 CFR § 1.861-8(f) (1)(vi)(E)). So, the benefit still existed for both. 1986 – Section 931 was effectively repealed. The old Section 931 was not removed, but was replaced by a new Section 931 that had nothing to do with this “benefit” anymore, and had nothing to do with anyone having taxable income from within the states. Section 936 remained, which gives the “benefit” to domestic corporations, but there is no longer any such “benefit” in the Code for individual citizens. 1988 – The newer, temporary regulations under Section 861 were written, and in the list of types of income which are not exempt, this appears: “the gross income of a possessions corporation for which a credit is allowed under section 936(a)” (26 CFR §1.861-8t(d)(2)(iii)(C). But the regulations do not mention any equivalent for citizens (because it no longer exists in the statues). Incidentally, this also renders obsolete the regulations in 26 CFR § 1.1-1, which state that “all citizens of the United States… are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States.” The section was written in 1960, when the “benefit” of Section 931 still made it so it was still possible for individual citizens to have taxable income “from sources within the United States,” if they also received most of their income from within federal possessions. But like § 1.861-8(f)(1)(vi)(E), and § 1.931-1, it’s now obsolete. Now there is no situation in which a citizen is taxed on his “income from sources within the UNITED States.” And there hasn’t been since 1986. But obsolete regulations remain on the books.) Sorry for taking up your space here sista. I will not invade your space like this again.
Posted on: Tue, 27 Jan 2015 23:48:11 +0000
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