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Historical Perspectives on the Federal Income Tax


Congressional Record Vol. 44, Part 2, page 1568 of April 28, 1909:

SJR 25: To amend the Constitution relative to income and inheritances.

"The Congress shall have power to lay and collect taxes on incomes and inheritances."

(Congress already possessed that authority, as stated in the Pollock decisions, as well as those court decisions that came before and after.)

Con. Rec. Vol. 44, Part 3, page 3377 of June 17, 1909:

SJR 39: To amend the Constitution relative to incomes.

"The Congress shall have power to lay and collect direct taxes on incomes without apportionment among the several States according to population."

(If this proposed Amendment had been adopted it would explain our current federal income tax system, except; Direct taxes, regardless of what they are imposed on, must be apportioned according to the population. This has never changed, because the Articles of the Constitution requiring apportionment of Direct taxes have never been repealed or modified.)

Con. Rec. Vol. 44, part 3, page 3900 of June 28, 1909:

SJR 40: To amend the Constitution relative to incomes.

"Article XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States and without regard to any census or enumeration."

(So what did this Amendment actually accomplish? The Supreme Court has always acknowledge Congressís authority to levy and collect income taxes, provided such taxes comply with the Constitutional restraints placed upon their method of collection. The Brushaber decision removed any doubt about the character of the federal income tax under the 16th Amendment, it simply could not be a Direct tax, without destroying the Constitution. Therefore, the only purpose served by the Amendment was to clarify to the court that the federal income tax was, in fact, an indirect excise tax and was to be enforced as such. Thus, the Supreme Court, for purposes of the 16th Amendment defined income as being the gain derived from, not the receipts (whole income) produced by, capital, labor or both combined.)





Congressional Record Vol. 44 Part 3, page 3344 of June 16, 1909:

The Presidentís message to Congress: "the tax on net income is preferable to one proportionate to a percentage of the gross receipts, because it is a tax upon success and not failure."

Con. Rec. Vol. 50, page 505 of April 26, 1913, Congressman Hull:

"In any event, the proposed tax is measured by net income or gains and is not imposed upon gross income nor capital nor other property. If a citizen has not been successful in his efforts to accumulate profits he is not required to pay the tax, but if he has prospered he is required to contribute to his Government, not the scriptural tithe, but a small percentage of his net profits.

Page 506: "The proposed law should be construed as similar laws have been construed by the courts with respect to the application of the tax, and that is that the income in question shall be the measure of the tax and not the specific fund out of which the tax is necessarily payable: the bill takes as the measure of the tax the net income of the preceding year. Paragraph B defines the net income of a taxable individual or person. Income as thus defined does not embrace capital or principal, but only such gains or profits as may be realized from rent, interest, salaries, trade, commerce, or sales of any kind of property, and so forth, or profits or gains derived from any other source."

Page 510: "As I stated in the beginning, it will be, of course, utterly impossible to take up the thousands of business conditions of this country and offhand apply the most expeditious method of dealing with them and apply this law to them, but, like any other tax law, the Regulations of the Treasury Department will be prepared so as, without injustice, to meet and apply the law to the business conditions as they exist in such innumerable forms."

Page 3844: "Why, Mr. President, should Congress attempt to do more that is declared in the first section of the proposed bill? It is right; it is comprehensible; it embraces everythingóno, I will withdraw that; it does not embrace the full power of Congress, because Congress can levy a tax upon gross incomes if it likes; it may diminish the extent of its taxing power or not exercise it at all; it may exclude certain things from the taxing power that it might include; but it can not change the character of the taxation; and when it is declared in the first lines of this bill that a tax is levied upon the entire net income of all the citizens of the country, we have exercised all the power we have."

Page 3849, Senator Williams:

"Mr. President, the object if this bill is to tax a manís net income; that is to say, what he has at the end of the year after deducting from his receipts his expenditures or losses. Ö but the tax is framed for the purpose of making he man pay upon his net income, his actual profit during the year."

Page 3843, Senator Cummins:

"Our authority is to levy a tax upon income. I take it that every lawyer here will agree with me in the conclusion that we can not levy under this amendment a tax upon anything but an income. I assume that every lawyer will agree with me that we can not legislatively interpret the meaning of the word "income." That is purely a judicial matter. We can not enlarge the meaning of the word "income." We need not levy out tax upon the entire income. We made levy it upon part of an income, but we can not levy it upon anything but an income; and what is an income must be determined by the courts of the country when the question is submitted to them."


Page 3845, Senator Sterling:

"If in the definition of the word "income" as given in a standard dictionary the words "gains and profits" are also given as synonymous with the term "income" would there be anything wrong in the use of those words in the section to which the Senator refers?

Mr. Cummins. I do not think there would be, although they would be wholly unnecessary." Ö

Mr. Chilton. Well so far as the Senator has gone. Let me offer this suggestion; on page 167, beginning in line 3, it is provided that the 'Ďincome derived from salaries, wages,í and so forth shall be included. It has to income before it can be taxed, no matter how it is derived. We could say that only income from salaries or income from property or income from interest should be taxed. We have simply mentioned certain things: but they must be income before they can be taxed."

Page 5679, October 16, 1913, Synopsis of the 1913 Tax Bill by Congressman (Judge) Hull, its author:

"The Treasury Regulations soon to be prepared will make clear to every taxpayer the requirements of the law and its application to income derived from the various kinds of business." Ö

"The statutory exemption of $3,000 is allowed for personal living or family expenses."

These statements leave no question as to the purpose and intent of Congress. The federal income tax is an indirect excise tax imposed upon commercial activities (the doing of business in its many forms), measured by the net income derived from those receipts (income). Its application is unrestrained as to who, what, where, or when, if it is gains and profits (income), its taxable under the Statute. There is but one income tax and that income tax applies equally to all corporations, partnerships, associations, trusts, or other multi-owner entities, as well as, all single owner entities called "individuals". (Note; the 16th Amendment would permit the tax to operate upon the gross income, IF Congress chose to do so. But they didnít, instead they chose net income as the basis for the Statute, thereby making doubly sure the court did not misinterpret the Law as they did in the Pollock Cases. Congress, to this day, has not changed the Statute, it is still a tax imposed upon commercial net income, not gross receipts (income).






Con. Rec. Vol. 44 page 3969 of June 30, 1909, Senator Cummins

"It places the burdens where they belong; it discards unproductive property and unprofitable labor, and exacts but a small percentage of gains and profits and earnings actually received. It is impossible to conceive of any injustice in taking a little part of a surplus in hand over and above a most liberal allowance for the maintenance of a family. It exacts not a penny that is in fact needed for either the necessities, the comforts, or the luxuries of life."

Page 3975,: "My desire is to relieve the incomes of men to the extent necessary to maintain their families, to support and educate their children, because I believe they owe a higher duty to their families than they owe to their Government."

Page 4436 of July 12, 1909, Congressman Cline:

"I believe in an income tax because it taxes what a man really has. It taxes wealth, not want; accumulated possessions, instead of consumption."

Page 1246 of May 6, 1913, Congressman Copley:

"No man can seriously question that any tax paid under the graduated schedule proposed in this amendment would come out of a surplus income after allowing its recipient a sufficient amount to provide for his family and himself in a dignified manner."

Page 1250, Congressman Palmer:

"The second reason that appeals to me is this, that in levying this direct tax upon incomes we ought to rise above the point where the consumption taxes now bear out of all proportion to the incomes, and we ought to leave free and untaxed as a part of the incomes of every American citizen a sufficient amount to rear and support his family according to the American standard and educate his children in the best manner which the educational system of the country affords. I think it safe to say that no man with the average American family of five children can support that family according to the proper American standard and send his children through the high schools and colleges of the land who does not have a gross income of $4,000 per annum. Out of that sum must be paid living expenses, interest on debts and other obligations, improvements to the home, education of children through colleges and universities, many comforts and some luxuries which American demand."

Page 1252, Congressman Murray:

"They forget the principle upon which this tax is founded, and that is that every man who is making no more than a living should not be taxed upon living earnings, but should be taxed upon the surplus that he makes over and above that amount necessary for good living."

Page 3841 of August 28, 1913, Senator Bora:

"After a man pays the tax which he must pay on consumption, then give him a chance to clothe and educate his family and meet the obligations of citizenship and preparation of those dependent upon him for citizenship before you add any additional tax. That is the basis of this exemption, and it is fair and just to all and toward all."


Treasury Regulation 33/ October 1913

Treasury Regulation 45/ Revenue Act of 1918/ Amended April 17, 1919:

[Compare Reg. 45, pre 1944 "Net Income basis" with Reg. 118 (1939 IRC), post 1944 "Net Income" basis.]

Art. 21 Meaning of net income:

"The tax imposed by the statute is upon income. In the computation of the tax various classes of income must be considered: (a) Income (in the broad sense), means all wealth which flows in to the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as "gains and profits," including gains derived from the sales or other disposition of capital assets. It is not limited to cash alone, for the statute recognizes as income-determining factors other items, among which are inventories, accounts receivable, property exhaustion and accounts payable for expenses incurred. See sections 202(a), 213 (a) and 214 (a) of the statute. (b) Gross income, meaning income (in the broad sense) less income which is by statutory provisions or otherwise exempt from tax imposed by the statute. See section 213. (c) Net income, meaning gross income less statutory deductions. The statutory deductions are in general, though not exclusively, expenditures, other than capital expenditures, connected with the production of income. See sections 214 and 215. (d) Net income less credits. See section 216 and articles 301-305. The surtax is imposed upon net income; the normal tax upon net income less credits. Thought taxable net income is wholly a statutory conception it follows, subject to certain modifications as to exemptions and as to some deductions, the lines of commercial usage. Statutory "net income" is, subject to those modifications, commercial "net income". This appears from the fact that ordinarily it is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. For instances in which net income is not to be computed in accordance with the taxpayerís method of accounting see articles 22 and 23. As to net income of corporations see sections 232-236 of the statute.

Art. 71. "What is excluded from gross income."

"Gross income excludes the items of income specifically exempted by the statute and also certain other kinds of income by statute or fundamental law free from tax.


Treasury Regulation 103 (1940)/111 (1941)/118 (1951): Internal Revenue Code of 1939 /1954:

(TR118, Taxable years beginning after December 31,1951) [U.S. Code & Congressional News 1956 Edition, Fed. Tax Reg. 1956.]

Section 39.21-1 Meaning of net income.

"(a) The tax imposed by Chapter 1 is upon income. Neither income exempt by statute or fundamental law, nor expenses incurred in connection therewith, other than interest, enter into the computation of net income as defined by section 21. (See section 24 (a) (5).) In the computation of the tax various classes of income must be considered.

  1. Income (in the broad sense) meaning all wealth which flows in to the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Ö
  2. Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by chapter 1. (See section 22.)
  3. Net income, meaning gross income less statutory deductions. The statutory deductions are in general, though not exclusively, expenditures, other than capital expenditures, connected with the production of income.
  4. Net income less certain credits. (See sections 25, 26, 27, and 28.)

(b) The normal taxes and surtaxes imposed on individuals and on corporations are computed upon net income less certain credits. Although taxable net income is a statutory conception, it follows, subject to certain modifications as to exemptions and as to deductions for partial losses in some cases, the lines of commercial usage. Subject to these modifications, statutory net income is commercial net income. This appears from the fact that ordinarily it is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. (See section 41.)


The intentions of Congress can always change, often times it does for the worse. However, in the application of an indirect excise tax imposed upon the gains and profits (income) derived from business and other commercial activities entered into for profit, how does the imposition of the tax remain indirect upon the ownerís income when the tax is paid by them? In other words, in the case of the "individual," i.e., the single owner business entity, the gain, or profit, i.e., the income of the business passes to the owner before the tax is assessed and paid. If Congress chose, they could, with the courtís blessing, take the entire gain or profit (income) of the business transacted, thereby leaving nothing for the owner. The tax would still be indirect upon the business transaction for two reasons. First, because it is levied in consequence of doing something you have a choice of doing or not doing (an excise tax). Second, because all of the capital (cost basis) has been recovered and or all of the incurred expenses of producing the gain or profit (income) have been deducted from the receipts (income), in effect leaving the business entity whole (an income tax).

Now, what about the owner, the human being behind the "individual" business entity. How is the effect of the excise tax upon the conduct of business (acquisition of gains and profits) prevented from operating directly upon the owner as a capitation tax? In other words, how does the owner recover the capital (human labor) and expenses (sustaining life) incurred by them in owning and operating the business, so that the excise tax remains on the business entity, without becoming a direct tax upon the owner? If the owner were allowed to deduct their "salary, wage, or compensation for service" from the gains and profits (income) of the business, there would be nothing left to tax. Likewise, if the owner was allowed to deduct all of his or hers personal, living, and family expenses from the business income, no one would ever pay an income tax.

The solution was to establish a uniform "personal exemption" allowance that adequately compensated the owner for their personal, living and family expenses, thereby removing the capital (labor) from the effects of the income tax. This system worked well up until 1942, when Congress chose to lower the "personal exemption" amount to below the average (uniform) cost of living, thereby, including the capital (labor) of the human being within the effects of the income tax. This problem has perpetuated itself and today the laborer is taxed on the basis of his or hers annual gross receipts (wage income), while the corporation (entity person) is taxed only upon their net profits.

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