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Sixteenth Amendment to the United States Constitution
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 the case of Pollock v. Farmers' Loan & Trust Co. 157 U.S. 429 )(1895), rehearing 158 U.S. 601 (1895), the Supreme Court declared the 1894 Act to be an unconstitutional "direct tax" (because it taxed the rents from land and the dividends from stocks, and the Court said that such taxes "burden" the property). Some background: All taxes are either direct or indirect. A tax on property is direct. A tax on the happening of an event is indirect. Direct taxes are forbidden by Article I of the Constitution unless apportioned by population. Such apportioned direct taxes were imposed for the years 1861 and 1862. Indirect taxes must be geographically uniform (Const. 1:8:1).
In response to this development, and a growing concern among many elements of society that the wealthiest Americans had consolidated too much economic power, this amendment was passed by Congress and sent to the states. In 1913, Secretary of State Philander Knox proclaimed that the amendment had been ratified by the necessary three-quarters of the states in 1913 (a few additional states ratified the amendment later), making federal income taxes constitutional.
The Supreme Court's interpretation of the Sixteenth Amendment has evolved and adapted considerably over time. Many disputes about the applicability of the amendment to specific types of income spring from reliance on the language of out-dated interpretations and overturned decisions.
In Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916), the Supreme Court ruled that the amendment prevented the Court from "lifting" the income tax out of the class of indirect taxes "in which it inherently belonged" and putting it in the category of direct taxes, as was done in Pollock. All direct taxes must still be apportioned under Article I. It also ruled that the Amendment was not retroactive, and observed that taxes on personal property were still direct. Some more background: A tax on the income from "source" property could be considered either as direct (it's a property tax) or as indirect (it's a tax on the event of severing gain from capital, or the doing of business in a limited-liability capacity).
- It was not the purpose or the effect of that amendment to bring any new subject within the taxing power. Congress already had the power to tax all incomes. But taxes on incomes from some sources had been held to be "direct taxes" within the meaning of the constitutional requirement as to apportionment. [cites omitted] The Amendment relieved from that requirement and obliterated the distinction in that respect between taxes on income that are direct taxes and those that are not, and so put on the same basis all incomes "from whatever source derived". [cites omitted] "Income" has been taken to mean the same thing as used in the Corporation Excise Tax of 1909 (36 Stat. 112), in the Sixteenth Amendment, and in the various revenue acts subsequently passed. [cites omitted] After full consideration, this court declared that income may be defined as gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital.
In Commissioner v. Glenshaw Glass Co. , 348 U.S. 426 (1955), the Supreme Court laid out what has become the modern understanding of what constitutes 'income' to which the Sixteenth Amendment applies, declaring that income taxes could be levied on "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Under this definition, any increase in wealth - whether through wages, benefits, bonuses, sale of stock or other property at a profit, bets won, lucky finds, awards of treble damages in a lawsuit, qui tam actions - are all within the definition of income, unless Congress makes a specific exemption (as it has for things like gifts, bequests , scholarships, and alimony).
Some lower courts have ruled that the Amendment authorized unapportioned direct taxes on income. However, the Supreme Court has always said that all income taxes are indirect.
Some Americans who object to income taxes claim that the Sixteenth Amendment was never properly ratified. These people are commonly referred to as tax protesters. Claims calling into question the ratification of the Sixteenth Amendment cite factors such as differences in capitalization, spelling of words, and use of punctuation among the bills ratified by the various states. Another frequently asserted argument is that Ohio was not actually a state in 1913 because a Congressional proclamation recognizing the statehood of Ohio was not issued until 1953 - although Ohio had been sending representatives to Congress and participating in presidential elections since 1803.
The best-known proponent of the non-ratification claim is Bill Benson , co-author of the book The Law That Never Was . Tax protestors contend that when the ratification of the amendment was challenged, the Courts deliberately chose to hear cases in which the litigants presented no evidence, in order to set a precedent supporting ratification. In one of these cases, U.S. v. Thomas, 788 F.2d 1250, 1252 (7th Cir. 1986), cert. den. 107 S.Ct. 187 (1986), the Seventh Circuit Court of Appeals wrote:
- Thirty-eight states ratified the sixteenth amendment, and thirty-seven sent formal instruments of ratification to the Secretary of State. (Minnesota notified the Secretary orally, and additional states ratified later; we consider only those Secretary Knox considered.) Only four instruments repeat the language of the sixteenth amendment exactly as Congress approved it. The others contain errors of diction, capitalization, punctuation, and spelling. The text Congress transmitted to the states was: "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." Many of the instruments neglected to capitalize "States," and some capitalized other words instead. The instrument from Illinois had "remuneration" in place of "enumeration"; the instrument from Missouri substituted "levy" for "lay"; the instrument from Washington had "income" not "incomes"; others made similar blunders.
- "Thomas insists that because the states did not approve exactly the same text, the amendment did not go into effect. Secretary Knox considered this argument. The Solicitor of the Department of State drew up a list of the errors in the instruments and--taking into account both the triviality of the deviations and the treatment of earlier amendments that had experienced more substantial problems--advised the Secretary that he was authorized to declare the amendment adopted. The Secretary did so. ... Secretary Knox declared that enough states had ratified the sixteenth amendment. The Secretary's decision is not transparently defective. We need not decide when, if ever, such a decision may be reviewed in order to know that Secretary Knox's decision is now beyond review."
Federal courts have rejected appeals based on claims of non-ratification, and some now consider them "frivolous" suits that are subject to sanction. In Knoblauch v Commissioner, 749 F.2d 200, 201 (5th Cir. 1984), the court held, "Every court that has considered this argument has rejected it." when that court was presented with an argument that there were defects in the ratification of the Sixteenth Amendment by the states.
A strong libertarian viewpoint proposes the existence of a natural right to "enjoy all the fruits of one's own labor" (previously protected, they claim, by the Ninth Amendment). Taxation is argued to be an infringement on that right, and this amendment is criticized as a major expansion of the taxing power of the federal government.
- National Archives: 16th Amendment
- "The Law That Never Was" — Bill Benson's website disputing its ratification
- Frauds and Scams site describing failure of Benson-inspired arguments in court
- Brushaber Decision Supreme Court opinion on the apportionment clause of the Constitution.
- Stanton Decision no new power of taxation
- What Is Taxable Income? from whatever source derived
- Tax Protester FAQ Daniel Evans' extensive FAQ refuting tax protestor arguments
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