[This web page is aimed at people who do not necessarily know tax law, and who might therefore be misled by Larken Rose's arguments. If you are an expert in tax law, and you see that I misstated something, please let me know, and I'll try to fix it.]Some people -- most of them following the reasoning of just one person, Larken Rose -- claim that the Internal Revenue Service is fraudulently collecting income tax which the tax law does not impose. In this essay I will show that Larken Rose is wrong.
The most critical issue to look for is the definitions of the words. "Whoever writes the dictionary wins the debate." Larken Rose redefines some critical terms. If you insist he stay with the definitions used by the lawmaker, his argument falls apart.
Another trap to watch for is quotation out of context. Larken
Rose throws a lot of quotations at you. Don't take his word for it, go
read the documents themselves. Read the whole thing, not just the sentence
he cited. Especially, you should try to read the introductory paragraphs
and the conclusions, and not just the words Rose boldface-italicized
in his quotation excerpts. The cited authors will tell you what they meant
to say in their own introductions and conclusions. In many cases Rose picks
up a sentence or two and bolds up a few words so it appears to mean the
exact opposite of what the original author intended.
According to Larken Rose, Section 861 proves the domestic income of American citizens is not taxable.Here is an exact quote of his argument, from the "history" page on his website [his emphasis]:
In order for there to be taxable domestic income, all of the following must occur:As part of his argument, Larken Rose also leans heavily on carefully selected quotations from older versions of the tax code, which are no longer the law of the land, and more importantly, are not generally available for inspection in their entirety to determine if he has quoted out of context.
1. One must receive a taxable"item" of income such as compensation, interest, rents, etc. (per 26 USC 61 and following).
2. The "source rules" must categorize the income as domestic income (per 26 USC 861(a) and 26 CFR 1.861-2 through 1.861-7).
3. The income must derive from a "specific source or activity" which is taxable (per 26 USC 861(b) and 26 CFR 1.861-8 and following).
A less important (as near as I can tell) point made by Larken Rose is that the tax code's supposed refusal to tax domestic income is consistent with the Constitution's prohibition on the same. I consider this a less important issue based on the smaller amount of repetitive web space he devotes to it, and the fact that the 861 argument stands (or falls) on its own, without reference to the Constitution. On the other hand, if his 861 argument should fail, the Constitutional argument still might offer some backup protection against the income tax.
The basic points of the refutation:
1. Tax Code 26 USC 61 defines "gross income" and gives some examples of it. It specifically states that Part II of Subtitle B (Section 61 is in Part I) contains inclusions, that is, what counts as "gross income" and Part III (Sections 101 through 139) in the same Subtitle contains exclusions. By identifying these sections specifically, it excludes other sections of the code from defining what counts as "gross income". This is important. Read it yourself, it's quite short. Then go read the list of exclusions, the list is not very long. Notice that Section 861 is not in the list of sections defining inclusions nor exclusions; it's in a completely different Subtitle, dealing with a completely different topic. We'll come back to that.
Next you should notice that the Section Head of Section 61 tells you what its purpose is: It's a definition. It uses the English word "defined" to let the reader know that this is a definition. In the first sentence it uses another English word that characterizes a definition: It says that "gross income means all income from whatever source derived..." [my emphasis]. Every precise document (legal documents especially, but not exclusively) carefully defines the words it uses in some specialized sense, and it leaves to the common understanding (otherwise known as a dictionary) those words whose meaning is perfectly clear in that context. Every definition always uses the verb "define" or the verb "mean" to define a word for use in that document, or else collects several definitions into a section clearly labelled by one or both verbs. There are no exceptions to this rule, especially not in laws. The tax code follows this rule rigidly. Watch for it.
Then, you should notice those "items" of income that Rose refers to. He says that to be taxable income it "must" be one of the taxable items listed. However, Section 61 does not use the word "must" in connection with its list of items. Rather it says much more inclusively, "all income from whatever source derived, including (but not limited to) the following items" [my emphasis]. The list of items there is exemplary, not exclusive; ALL income counts as gross income for tax purposes (except of course the exclusions in Sections 101 through 139).
In particular you should notice -- Larken Rose neglects to mention this -- that the phrase "from whatever source derived" is a direct quote of the exact words in a key clause in the 16th Amendment. Unless specifically stated otherwise in the immediate context, whenever there is a direct quote of a significant and distinctive part of another document -- especially when it is the enabling law -- the quotation is there to remind the reader that these words are intended to be used in exactly the same way as in the document quoted. There is more to say on the 16th Amendment below.
Finally, you should observe that Section 61 does not define "taxable income" at all; that is left to 26 USC 63, where again the key verbs "defined" and "means" are used. According to this definition, "taxable income" consists of all of the gross income (defined in Sect.61 and nowhere else), less the deductions. As Mr.Rose does not dispute the deductions, I need not dwell further on them, except that we will come back to them when we get to Section 861.
2. Now the argument gets weird. Larken Rose puts a lot of weight on trying to redefine "source" so that the phrase which Section 61 quotes directly from the Constitution comes out meaning something totally other. Search the entire tax code: nowhere does the word "source" appear in a definition. Search the entire Constitution and all its Amendments (a somewhat easier task than searching the Code), still no definition of the word "source". What's going on here? The Constitution and the tax code both use the words "from whatever source derived" to mean "anywhere it came from," and no amount of verbal legerdemain by Larken Rose can change that.
Rose makes reference to Section 861(a) as if that is somehow relevant to determining which "items" of income count as taxable income. At this point I strongly recommend you stop and read 26 USC 861, at least part (a). Notice that the word "define" is not used in this section at all. There are four uses of the verb "mean" for some local definitions, one of them imported with modifications from another section.
Here is what Section 861 of the tax code actually says [my emphasis added]:
Rose is careful to point out that Section 861 "defines" sources of income from sources within the United States (other sections "define" sources outside the USA). The Section header does indeed say that's what the section is about, but the introduction does not tell us why the distinction is made between sources inside or outside the USA. As you read the body of the Section, however, it becomes more clear that this part of the code is making separate rules to deal with special cases where there is some of each.
861. Income from sources within the United States(a) Gross income from sources within United States
The following items of gross income shall be treated as income from sources within the United States:
Interest from the United States or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of noncorporate residents or domestic corporations not including --
(A) interest from a resident alien individual or domestic corporation, if such individual or corporation meets the 80-percent foreign business requirements of subsection (c)(1), and
(B) interest --
(i) on deposits with a foreign branch of a domestic corporation or a domestic partnership if such branch is engaged in the commercial banking business, and
(ii) on amounts satisfying the requirements of subparagraph (B) of section 871 (i)(3) which are paid by a foreign branch of a domestic corporation or a domestic partnership.
(2) Dividends [similar text omitted]
(3) Personal services
Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if --
(A) the labor or services are performed by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year,
(B) such compensation does not exceed $3,000 in the aggregate, and
(C) the compensation is for labor or services performed as an employee of or under a contract with --
(i) a nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or
(ii) an individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation.
In addition, compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States.
(4) Rentals and royalties [and so on...]
This is where Larken Rose jumps into the regulations. Do not be distracted by the regulations; the code is the law, and the regulations cannot change the meaning of the code, only amplify and provide details where the code has been left vague and general. The code is not vague here.
Section 861(a) lists 8 categories of income identified as income from sources within the United States. The first is ordinary interest received from bank accounts and personal debts, but not including certain classes of foreign interest income. In other words, domestic interest income counts as income from sources within the United States. The code is quite clear.
Skip down to item (3) Personal services. Notice again that all kinds of domestic income for an ordinary citizen working for wages count as income from sources within the United States. What is excluded is income earned by certain foreign nationals temporarily here for a short time, such as a crew member of a foreign ship in an American harbor doing his duty on shipboard.
When you read Rose's explanation, he makes it seem like the only taxable income items listed in Section 861(a) are exactly those items that the section specifically excludes. This is not a problem of "legalese" as Rose tries to claim, this is plain English being misrepresented to say exactly the opposite of what the words there in the code say. It's like he simply ignores the words I emphasized in red. Those words are in the tax code (just not in red).
Read the regulations Rose cites, if you wish. They are long and tedious -- and do not contradict what the code says clearly.
3. Section 861(b) is somewhat shorter than 861(a), and a little more clear about what is going on -- but you wouldn't know it by reading Larken Rose. Where Part (a) identifies sources of gross income from within the United States, Part (b) tells how to take that ordinary interest and wage income from domestic sources and figure its component of taxable income.
(b) Taxable income from sources within United StatesWhat it comes down to is this: If you earned some income inside the USA and some elsewhere, then the expenses incurred and documented as supporting the USA income should be deducted from the USA income, while the expenses that can be documented as supporting the foreign income should be deducted from the foreign income. If there are expenses for which you cannot account exactly which source of income they are for, you "apportion" them proportionately between the two sources of gross income. Although it does not say so here, there are apparently differential tax rates for domestic and foreign sources of income, and the law seeks to make sure the tax burden does not fall unfairly on some taxpayers because others have shifted all their deductions to the source of income with the higher tax rate. Part (b) is not that long, you should read it yourself and see if that's what it says. There are some technical words like "apportion" and "ratable" which you can find in any dictionary. These words really do mean what the dictionary says they mean.
From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.
Now it's time to look at some regulations. 26 CFR 1.861-8 has a nice introductory explanation of what it's all about. Read paragraph (1) Scope. Notice a key sentence, about halfway through the paragraph:
The rules contained in this section apply in determining taxable income of the taxpayer from specific sources and activities under other sections of the Code, referred to in this section as operative sections. See paragraph (f)(1) of this section for a list and description of operative sections.Skip down to paragraph (f)(1) and read the list of operative sections. Notice that Sections 61 and 63 are not in the list. That is significant. The only time you are to apply the rules in Regulation 1.861.8 is when you have mixed income as described in one of the operative sections, and for those cases only, you allocate and apportion the deductions by the rules given. Unless you are an international trading company doing business both inside and outside the USA, this doesn't apply to you. Larken Rose is right to that extent. The rest of us calculate our taxable income by the much simpler rule in 26 USC 63. Is that too hard to understand? Larken Rose wants you to think so.
The Second Circuit Court of Appeals, addressing exactly this issue in deciding the case of Bowater v. IRS, supported its finding for the IRS saying "we believe the Commissioner's interpretation is supported by the plain language of the Regulation" [my emphasis]. Did you get that? The regulation is in plain language. The court repeated the phrase four times in their decision. Don't let Larken Rose or anybody else tell you how complicated the regulations and the tax code are, they are in "plain language." The court said so.
4. Laws change. Sometimes the circumstances controlling an older law no longer apply. When automobiles first came out, they scared the horses, so many communities passed laws controlling how to pass a horse on the street. Now there are no more horse carriages on the streets and the cars are not nearly so noisy, so those laws are gone. Sometimes the older law was just a mistake, as in the 18th Amendment, which was repealed by the 21st. More often there are little changes to fix little mistakes or address incremental social changes. The first tax code was passed in a hurry the same year the 16th Amendment was ratified. The tax code is a big law, and there are bound to be mistakes and parts that are unclear or too easily twisted by reluctant taxpayers, so from time to time Congress amends the code to make it more clearly express the intent of Congress.
The key point to understand is that the Constitution gives Congress broad powers to tax, and as they think of more ways to spend tax money, they need more taxes to spend -- and the taxpayers get more inventive seeking ways to evade or dodge those taxes. Like a game of cops and robbers, as the evaders get more clever in twisting the law to their own benefit, Congress must more carefully define what is taxable so that the original intent of the law can be properly and fairly enforced.
Larken Rose has observed some of these changes in the tax code. He prefers to attribute the changes to malice and fraud, but he fails to identify any good reason to obfuscate the law. If Congress intended to leave domestic income untaxed, all they need to do is say so, and taxpayers all over the country would rejoice with exceeding great joy. If Congress originally intended to tax domestic income and still has that intent, but evaders argued otherwise, then Congress might be inclined to change the law to close the loopholes. Larken Rose admits that the changes in the law over the last 80 years make it harder to argue his case from the present wording of the law. That sounds to me like Congress did what they wanted to do, which is to make it harder to misinterpret the law.
To properly lodge a charge of fraud, one needs to identify a perpetrator, who has means, motive, and opportunity to commit that fraud. Who is the perpetrator? The IRS is merely enforcing the law that Congress passed. If Congress did not intend to tax domestic income, why do they and their staff pay taxes on their own domestic income? Surely they know their own intent! Congress has no credible motive whatsoever to put out a law that is intentionally going to be misunderstood. Whatever they pass (subject to court review) is the law; they have no reason to hide anything. Even if they intended otherwise in the original tax code, the present tax code clearly intends to tax domestic income, and members of Congress all confirm that intent by paying taxes on their own domestic income.
The history of the present tax code might be helpful in explaining some obscure part of the code, but to the extent that the code is different, the present code is the law, and the prior versions are irrelevant. Furthermore, because Larken Rose is known to misuse and misinterpret sections of the law to which we do have access for verification, we should be very reluctant to take his word on obsolete sections of the law which cannot be verified in full.
5. The Constitutional argument is, like the rest, somewhat serpentine. It really should be quite simple. Amendment XVI to the U.S.Constitution reads in its entirety:
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.In addition to his other confusion of arguments, Larken Rose also tries to argue that the Constitution forbids the taxation of ordinary domestic income of American citizens. This is again mostly based on the misunderstanding of word meanings. I need not get into the murky details of his argument; it is sufficient to realize that there are three possible readings of the Constitutional basis for income tax, all of them accounted for in the 16th Amendment:
A. If you reasonably understand the income tax to be a "direct" capitation tax as the Supreme Court at one time did, then the 16th Amemdment specifically nullifies paragraph 4 of Article I Section 9 of the Constitution, which forbids it. The Supreme Court, in Brushaber v. Union Pacific, held this to be the case.
B. If you understand the income tax to be indirect and therefore not governed by the prohibition in Article I Section 9, but you confuse the meanings of "income" and "commerce" (look them up in any dictionary, they are not the same, not now, and not in 1787 when the Constitution was drafted), you might misread some other part of Article I Section 9 to forbid taxation derived from intra-State commerce (Rose apparently makes this error), but even so, the 16th Amendment clearly nullifies any such prohibition by authorizing Congress to tax incomes from any source (including income derived from domestic commerce). The Supreme Court in Peck v. Lowe decided against the taxpayer, who tried to argue that imposing a tax on income derived from export amounted to a forbidden tax on the export -- just as Rose argues that a tax on income derived on domestic commerce is a forbidden tax on that commerce -- but the Court held that
...it is both nominally and actually a general tax. It is not laid on income from exportation because of its source, or in a discriminative way, but just as it is laid on other income. The words of the act are 'net income arising or accruing from all sources.' There is no discrimination.C. If you correctly distinguish the activities constituting sources of income (some of which may not be taxable) from the power to tax income itself, then the first and last paragraphs of Article I Section 8 of the Constitution already authorize Congress to tax domestic incomes, and the 16th Amendment does not change that, as some modern legal experts claim. Rose, obviously misunderstanding their point, even cites them in his own arguments. The Supreme Court in Stanton v. Baltic made this argument, while affirming the "complete and plenary power of income taxation possessed by Congress from the beginning."
In each of these three decisions, the Supreme Court implicitly or explicitly upheld the right of Congress to impose taxes on domestic income.
Any way you read it, the Constitution does authorize Congress to levy tax on incomes from any source, including domestic income. You can only escape this conclusion by redefining the word "source" to mean something other than the lawmakers intended. The Supreme Court has the right to redefine those words -- and they did, to a very limited degree, in Evans v. Gore where the Court in a divided opinion ruled that Article III Section 1 prohibits a judge's salary from being diminished by taxation, while making a clear distinction between the judge's salary and all other [domestic] income, including that earned by the judge from other sources. Holmes and Brandeis in their dissent argued, as I do above, that the "from whatever source derived" clause overruled any previous limitation. The salary of a Federal judge is the only exception ever cited by the Court to the sweeping and universal nature of the income tax.
Although he is understandably reluctant to point out the unique nature of the judicial salary exception in the Evans decision, I must thank Larken Rose for directing me to the other Supreme Court cases, some of which cite it in their references.
2005 May 17
Larken Rose had his day in court, and as I predicted, he lost. Here
is a summary of the case against him from another perspective.