First, A Pleasant Report

Although 'Cracking the Code-...' contains several warnings that those who stand up and act in accordance with the real requirements and limitations of the law can expect to meet with strenuous and nearly lawless resistance from the government, I have been pleasantly surprised in this regard.  Shortly after the book first went to print, I became the first American in history to secure a refund of Social Security and Medicare ‘contributions’ (along with everything else withheld), when my own federal refund claim for 2002 was properly honored.  Since then, tens of thousands of CtC readers from across America have risen to uphold the law, and the vast majority have also enjoyed law-abiding responses from both the federal and many state governments.  The amounts recovered have ranged from as little as 78 cents to over $134,000.00 in one refund.

Nonetheless, I do not intend to revoke-- or even modify-- that warning.  Some readers have been targeted by obnoxious tax agency efforts to confuse and discourage claimants.  Happily, the number subjected to these efforts is small (and even among this small group it often turns out that the real focus or pretext for the agency attention is some pre-CtC bad practice that resists being undone, or has residual consequences).  This tax agency behavior has remained within the law, but it demonstrates a deliberate, if increasingly frantic, government policy of resistance to the inconvenient truth.

In a few cases these efforts have taken the form of the misapplication of the “frivolous return” statute as discussed in ‘About 1040s And Claiming Refunds’.  A few other readers have been treated to a variety of other, more inventive (if utterly corrupt) efforts to discourage their claims.  For instance, some have received a notice declaring an “appealable disallowance of claim” because, “you based your claim on your [erroneous] view that wages and salaries do not constitute taxable income”.  Of course, nothing could be further from the truth-- readers of 'Cracking the Code-...' are perfectly aware that “wages” are “income”, and would never suggest otherwise.

What these claimants have actually asserted, of course, is that their earnings are not “wages”-- quite a different thing altogether.  Unable to challenge or dispute such assertions, but unwilling to admit defeat, the government is falling back on the childish pretense that it misunderstands what is being said.  In fact, this pretense of misunderstanding and mischaracterization is the foundation for all tax agency efforts to discourage or thwart CtC-educated Americans.

Needless to say, the government’s finding it necessary to mischaracterize the claim it wishes to thwart serves to underscore the accuracy of the knowledge upon which that claim is based.  It is highly significant, and should be lost on no one, that the government’s response is not to simply declare the claimant’s earnings to be “wages”, or to declare those earnings to be “income” (or simply to declare them taxable, regardless of labels), which it certainly would do if these things were true (or would declare regardless of the truth, if possessed of the power to do so).  Although these mischaracterizations are accompanied by a fair bit of bluster, they are devoid of legal substance.  (See this page for extended discussion of this subject.)

Indeed, the nature of these government efforts to prop up the scheme in the face of an informed American public simply validates the aptness of my ‘Alice In Wonderland’ motif.  However corrupt the motivation which informs them, these efforts are those of the paper-thin pack of cards which, in the end, Alice disdainfully recognized her tormentors to be.

Still, and again, the most typical governmental response to the filings of those who have studied CtC is a scrupulously proper capitulation to the requirements of the law.  The concrete manifestations of these pleasing responses can be enjoyed here.

Shedding A Little Light On The Meaning Of "State" And "Person" In Some Areas Of Tax Law

Start with this, reading it twice and really letting the words sink in:

"It is unnecessary to lay special stress on the title to the soil in which the channels were dug [Boston, Massachusetts], but it may be noticed that it was not in the United States."

United States Supreme Court, Ellis v. United States, 206 U.S. 246; 27 S.Ct. 600 (1907).

Now continue with the following:

"...the following propositions may be considered as established:

...

3. That the District of Columbia and the territories are states as that word is used in [tax] treaties with foreign powers, with respect to the ownership, disposition, and inheritance of property;"  United States Supreme Court, Downes v. Bidwell, 182 U.S. 244, (1901).

Revised Statutes, Title XXXV- Internal Revenue, Section 3140 (currently represented by 26 USC 7701(a)(1) and (10), and 26 USC 7651):

“The word “State” when used in this title shall be construed to include the Territories and the District of Columbia, where such construction is necessary to carry out its provisions.

(This usage extends throughout federal law.  42 USC 303, relating to payments to States of old-age assistance grants, serves as a good example:

(a) Computation of amounts

From the sums appropriated therefor, the Secretary of the Treasury shall pay to each State which has a plan approved under this subchapter, for each quarter, beginning with the quarter commencing October 1, 1960—

(1) Repealed. Pub. L. 97–35, title XXI, § 2184(a)(4)(A), Aug. 13, 1981, 95 Stat. 816.

(2) in the case of Puerto Rico, the Virgin Islands, and Guam, an amount equal to one-half of the total of the sums expended during such quarter as old-age assistance under the State plan, not counting so much of any expenditure with respect to any month as exceeds $37.50 multiplied by the total number of recipients of old-age assistance for such month; plus

...)

***

OK, now, continuing with R. S. 3140 and its "person" definition:

"And where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, the word “person”, as used in this title, shall be construed to mean and include a partnership, association, company, or corporation, as well as a natural person.”

The ‘code’ representation of the definition of “person”, which is a consolidation of 10 statutes, leaves out the phrase ‘natural person’.  The draftsmen relied on the term ‘individual’ to express the same meaning.  Nonetheless, the actual language of R.S. 3140 remains the law.  Unfortunately, some theorists-- whose ‘research’ began and ended with nothing more than the code-- have erroneously concluded that “person” in the law only means some kind of artificial entity.  This has led, as might be imagined, to all manner of wild flights of fancy regarding the nature of the “income” tax structure.

Person. In general usage, a human being (i.e. natural person), though by statute term may include a firm, labor organization, partnerships, associations, corporations, legal representatives, trustees, trustees in bankruptcy, or receivers.  Black's Law Dictionary, 5th edition.

 

Individual. As a noun, this term denotes a single person as distinguished from a group or class, and also, very commonly, a private or natural person as distinguished from a partnership, corporation, or association; but it is said that this restrictive signification is not necessarily inherent in the word, and that it may, in proper cases, include artificial persons.  Black's Law Dictionary, 2nd Edition

(There ARE places in the law where "person" has a more limited meaning.  Such places will furnish a custom definition of the term, and the exclusive range of its application, as in, "For purposes of this subchapter..." )

A Bit More On The Subject Of 'Includes' For Those With Older Editions Of CtC

(The complete in-depth discussion of this subject in current editions of CtC can be downloaded here)

"It [is argued that] the word "including" means "moreover", or "as well as"; but if this was the meaning of the legislature, it was a very embarrassing mode of expressing the idea."  Chief Justice Marshall of the United States Supreme Court, United States v. The Schooner Betsey and Charlotte, 8 U.S. 443 (1808)

The IRS likes to suggest that when the term "includes" is used in a definition in the tax law, it should not be understood as 'limiting'-- citing, of course, 26 USC 7701(c):

“The terms ''includes'' and ''including'' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.”  

However, were "not limiting" what was really intended to be conveyed by this provision (and if "not limiting" were Constitutionally possible, in this context), Congress would have constructed 26 USC 7701(c) identically to 28 USC 3003:

“Section 3003, Rules of Construction

(a) For purposes of this chapter

(1) the terms “includes” and “including” are not limiting;”

or as in 11 USC 102:

"Section 102, Rules of Construction

In this title-

(3) "includes” and “including” are not limiting;”

But it did not...

Nonetheless, there is a little color to the IRS's representations, even if it is used to deceive...

As is discussed in detail in 'The Law Means What It Says' in CtC, the word "includes" is normally entirely restrictive when used in a statute.  When deployed in the internal revenue law though, the term is actually one of "limited expansion", due to the modification of that normal construction provided by its custom definition.  That modification means that the enumerated list provided in any definition which deploys the term "includes" functions to establish a class in which other things not listed but which share the characteristics of those which are can be legally presumed to be also part of the list.

To briefly review this lesson:

The definition of "includes" which specifies this function of the term is found at 26 USC 7701(c):

“Includes and including: The terms ''includes'' and ''including'' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.”

The rather tangled language of this statute has been helpfully rendered in related regulations as:

"Meaning of Terms: The terms “includes and including” do not exclude things not enumerated which are in the same general class."  Title 27, at 27 CFR 72.11;

and partakes of the doctrines expressed by the United States Supreme Court as:

“[w]here general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words”  Circuit City Stores v. Adams, 532 US 105, 114-115 (2001)

 “Under the principle of ejusdem generis, when a general term follows a specific one, the general term should be understood as a reference to subjects akin to the one with specific enumeration.”  Norfolk & Western R. Co. v. Train Dispatchers, 499 US 117 (1991)

"…a word is known by the company it keeps (the doctrine of noscitura sociis).  This rule we rely upon to avoid ascribing to one word a meaning so broad that it is inconsistent with its accompanying words, thus giving “unintended breadth to the Acts of Congress.”  Jarecki v. G. D. Searle & Co., 367 US 303, 307 (1961)”  Gustafson v. Alloyd Co. (93-404), 513 US 561 (1995)

 

"[I]t is a commonplace of statutory construction that the specific governs the general..."  Morales v. TWA, 504 US 374 (1992)

Applying these principles of statutory construction, we see that the language of 26 USC 7701(c) providing for the inclusion of "other things otherwise within the meaning of the term defined" means, under the doctrine of noscitura sociis-- and simple logic-- "the inclusion of other things otherwise within the meaning of the term as defined by the things listed". The unstated things that can be imagined as also included are, here, "general terms" which must conform to the character of those expressly listed.

For instance, consider the definition of "employee" at 26 USC 3401(c):

26 USC 3401(c) Employee

For purposes of this chapter, the term ''employee'' includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term ''employee'' also includes an officer of a corporation. [That is to say, a “United States Corporation”, which is defined in Sec. 207 of the Public Salary Tax Act as, “a corporate agency or instrumentality, is one (a) a majority of the stock of which is owned by or on behalf of the United States, or (b) the power to appoint or select a majority of the board of directors of which is exercisable by or on behalf of the United States…”.  However, we are instructed by the IRS in Pub. 15A that even officers of U.S. corporations are only to be considered “employees” if they are paid as a consequence of their positions.]

It is clear that the common characteristic of those things in the enumerated list of "employees" in this special definition (which exists in order to define, in turn, the term "wages" found in the same chapter) is being paid by the federal government or an entity created and controlled by the federal government for services rendered.

When we incorporate the provisions of 7701(c) (and leave out the clarifying note about federal corporations for purposes of brevity), we get:

26 USC 3401(c) Employee

For purposes of this chapter, the term ''employee'' includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term ''employee'' also includes an officer of a corporation. The term "employee" also includes "things not enumerated which are in this same general class" (or, "other things otherwise within the meaning of the term as defined").

It is easy to see how and why the provision of 26 USC 7701(c) represents nothing more than the "general words" which can and do "embrace only objects similar in nature to those objects enumerated by the preceding specific words" specified by the court in the Circuit City ruling whenever it is invoked by the use of "includes" in another definition.  That is, the provision of 7701(c) does not allow the term defined to embrace objects NOT similar in nature to (or of the same general class as) those enumerated.

(A helpful emphasis of the fact that it is the enumerated objects themselves that establish the class from which the scope of the defined term can exclusively be expanded is found in the language of 7701(c) itself.  That language reads, "...OTHER things otherwise within the meaning of the term defined."  This construction makes clear that the things listed are to be understood as being within-- and thus expository of-- the meaning intended by the definition, and only other things of the same character can be construed as suitable for presumptive inclusion within the term's meaning.)

By the way, statutorily-defined terms such as those we're discussing here are known as "Words of Art".  This is because using terms which are spelled like common words, and which possess definitional characteristics similar to the meaning of those common words (as in the custom-defined term "employee"-- which still means 'workers', just like the common word 'employee', but only a certain class of 'workers') is an artful mechanism which demands a sophisticated grasp of the subject in which they are deployed by those encountering them.  It is easy for the careless or poorly-educated reader, when encountering such "words of art", to lose sight of the most basic maxim of statutory construction: The common meaning of any word converted to a legal term by virtue of a statutorily-provided definition is automatically stripped away thereby.  The Supreme Court has expressed this very concisely:

"When a statute includes an explicit definition, we must follow that definition, even if it varies from that term's ordinary meaning."  Stenberg v. Carhart, 530 U.S. 914 (2000)

 

"It is axiomatic that the statutory definition of the term excludes unstated meanings of that term."  Meese v. Keene, 481 U.S. 465 (1987).

 

"Of course, statutory definitions of terms used therein prevail over colloquial meanings. Fox v. Standard Oil Co., 294 U.S. 87, 95, 55 S.Ct. 333, 336."  Western Union Telegraph Co. v. Lenroot, 323 U.S. 490 (1945)

The simple fact is, Congress doesn't provide statutory definitions for mere words meant to remain mere words and retain their common meanings.  That's why when a definition is provided it is the sole definition that applies; when a definition is provided, the meaning of the thing defined is specialized; and if the thing defined mimics a common word, its meaning will be different from that of the common word.  If, for instance, Congress meant for "employee" as used in 3401 to actually mean the common word with its dictionary definition, and meant that those within that dictionary definition are to be subject to a protocol to which others NOT within that same common-meaning-definition are also subject, a new term embracing both--  such as "affected persons"-- would have been created for that purpose.

(It need hardly be pointed out that the consequence of statutorily defining a term-- that is, its having the common meaning of the mimicked word stripped away thereby-- is not undone by deploying yet another custom-defined term-- such as "includes"-- within the statutory definition.  If the term were meant to be the word, and to not have its meaning restricted, specialized and uncommon, it wouldn't be defined within the statute at all.)

Indeed, the IRS has long exploited the difficulty suffered by those poorly-trained in the law in dealing with the legal nuances of "words of art".  The agency has floated the myth that the list of "included" parties in the definition of "employee" at 3401(c) was provided in order to ADD them to the routine, common meaning of 'employee'.  This story suggests that at first, the related withholding provisions applied simply to 'employees'-- a word, not a term; undefined, and therefore to be taken as having it's common-word meaning.  Then, goes the tale, because questions arose as to whether federal personnel were also subject to those provisions, the enumerated definition was added.

First, it is a simple and easily-demonstrated lie-- the definition at 26 USC 3401(c) has never changed.  The statute creating that section, 'The Current Tax Payment Act Of 1943', contained that definition from day one-- word for word (see the 'Companion CD' for scans of the original enactment, and the section below for a nice illustration of this fact).

Second, this sly falsehood offers some nice cognitive blowback by inviting the obvious question of why "federal employees" would be among the enumerated objects "added" to the meaning, if this little story were true?  That is, if "employee" meant all 'employees' to begin with, why would federal "employees" need to be added to it by use of that descriptor and construction?  IF providing a statutory definition DIDN'T strip away the common meaning of the word mimicked by the term created and "employee" WAS intended to have that common meaning, and the "includes..." language WERE intended to represent a purely expansive clarification as this story proposes and the unsophisticated reader might imagine, the clarifying language would say something like: "The term "employee" includes those holding any appointed or elected office of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing."  (Since the rules specified in relevant IRS regulations only provide for "officers of a corporation" to be considered covered by the "employee" definition to the extent that they are actually working in paid positions-- which obviously makes them "employees" within the common-meaning of the word-- the language, "The term ''employee'' also includes an officer of a corporation" which is found in the statute as actually written, would also have been left out.)

Further, see a discussion of the "Includes, but is not limited to..." language in the tax law here.

Finally,

"In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen. United States v. Wigglesworth, 2 Story, 369, Fed. Cas. No. 16,690; American Net & Twine Co. v. Worthington, 141 U.S. 468, 474 , 12 S. Sup. Ct. 55; Benziger v. United States, 192 U.S. 38, 55 , 24 S. Sup. Ct. 189"

Gould v. Gould, 245 US 151 (1917)

Regarding References In The Law To "Professions, Trades, Employments, Vocations, Etc..."
 

Occasionally, a provision of law or a judicial ruling will make a reference to "professions, trades, employments, vocations, etc." in connection with the "income" tax, leading the non-CtC-educated to imagine (or contend) that the tax applies to anyone engaging in any profession, trade, occupation, and so forth.  This misunderstanding appears to result from a general ignorance of the detailed specifications in the law, and a related failure to take context into account:

"Words having universal scope, such as 'every contract in restraint of trade,' 'every person who shall monopolize,' etc., will be taken, as a matter of course, to mean only everyone subject to such legislation, not all that the legislator subsequently may be able to catch.”  United States Supreme Court, American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909).

It is also supported by widespread ignorance of the fact that the federal government is well- and thoroughly-stocked with workers in every imaginable "profession, trade, employment, or vocation" (all of whose federally-connected earnings are, of course, subject to the tax, and are, of course, those being considered in the relevant references discussed above).  Visit this page to see what I mean.

***

BTW, to address another misunderstanding that can arise in regard to this subject: The reference in the Pollock and Brushaber rulings (the latter quoting the former) to Congress not intending that the burden of the income tax be borne by professions, trades, employments, or vacations:

"The whole law was, however, declared unconstitutional on the ground that to permit it to thus operate would relieve real estate and invested personal property from taxation, and "would leave the burden of the tax to be borne by professions, trades, employments, or vacations, and in that way what was intended as a tax on capital would remain, in substance, a tax on occupations and labor" (id., p. 158 U. S. 637) -- a result which, it was held, could not have been contemplated by Congress."

... is not a declaration that privileged work activities, such as those discussed above, were not meant to be taxed.

Such privileged work activities are explicitly subject to the tax in the law and always have been.  Indeed, the Pollock court observes that the tax thus applied has always been upheld in the past by the court as a proper excise.

What is being said by the courts with the reference to who is intended to bear the burden of the tax is simply that the tax is not meant to be entirely and only borne by those engaged in these particular taxable activities. Rather, it is also meant to be borne by those engaged in taxable activities involving rent and dividends, as well.

(Things I Like To Keep In Mind When) Dealing With The Beast

Before any judicial body can take more than preliminary cognizance of a dispute, the issue must have been meaningfully put into controversy.  That is to say, competing allegations must be in the record.  If an allegation is made and no competing allegation (such as a denial or rebuttal) is on record, there is no dispute, and the unchallenged allegation will be presumed true and sufficient.  The decision-making body will still act, but only to validate the claim of the party whose allegation is before it.

For instance, if a claimant (plaintiff) petitions a court, and presents an allegation of a duty owed-- which might take the form of no more than an assertion stating a claim and a reason or two purported to validate it, the court will give notice to the affected party of an established period during which established procedures must be followed in order to dispute that allegation.  If that disputation is not presented-- in conformity to the specifications of acceptable form, and within the time period provided-- a default judgment will be granted to the plaintiff.

Various rules govern the forms and procedures sufficient and appropriate for various controversies or forums, but one thing is consistent in all of them: the initiating claim need not possess objective legitimacy.  In other words, just because a claim would seem (in the eyes of the defendant) to have no credible basis in law or nature doesn’t mean that it doesn’t have to be defended against.  A defense might require no more than moving the decision-making body to dismiss the complaint, but action must still be taken.

Administrative agencies, and particularly their decision-making bodies, work on the same principles as regular judicial courts; furthermore, a judicial court which ultimately rules on issues involving administrative procedures may well consider or treat those procedures to have been effectively a part of its own procedural and temporal protocol.  Thus, it is best to think of any controversy with an administrative agency as being a trial, calling for the same competition between bodies of evidence as would a judicial proceeding involving the same matter.

Indeed, the process at work in any dealings with an administrative agency are precisely those of a trial.  Such dealings arise because someone presents allegations to an administrative agency that some other particular person is within its (or its principal’s) jurisdiction/authority, and owes a duty.  If that person disagrees, it is incumbent upon him or her to present evidence challenging one or more of these allegations-- just as in a judicial contest.  Failing to do so is to surrender the contest.

*****

Make no assumptions, and always put the burden of proof on the other guy.  For instance, if one is being treated by one’s adversary as if subject to a protocol which is undesirable, questionable, or unfit, one should never assume or endorse that protocol as proper or applicable.  Response is appropriate, but it should be a response such as to oblige the other party to make all of the assertions as to that propriety or applicability.  As an example, consider the following language from a response to an IRS ‘Final Notice Of Intent To Levy And Notice Of Your Right To A Due Process Hearing’ (concerning an alleged 'civil penalty' liability): 

We request and demand any and all due process to which we are entitled or which is in any way appropriate and/or available to us under any provision or practice of common, statutory, and/or administrative law or protocol-- including, but not limited to, that to which your notice refers; and incorporate by reference into this request and demand all relevant information included on or in that notice, a copy of which is attached.  Be advised that it is our intention to audio-record any and all proceedings for which such an option is lawfully available to us.  We declare that we make no admissions as to our status, the legitimacy of your implicit or explicit assertions, or the fitness of any particular legal or administrative protocol by responding to your notice or by requesting and demanding the due process referenced above.  Prior to any due process hearing, whether formal or informal, we expect and require meaningful clarification as to the nature of-- and reason for-- the alleged assessment, the process by which any and all relevant determinations reflected in and by your notice were arrived at, and anything else pertinent to the matter.

By this response, the issuer of the notice is obliged to determine-- and is responsible for asserting-- the propriety or applicability of both the initial  procedure, and any which follow.  If an invitation to participate in a ‘Collections Due Process Hearing’ were to result from this response, it would be because the notice-issuer decided that such a procedure applied, rather than because the respondent endorsed the proposition that he or she is subject to the jurisdiction or protocol within which such hearings occur or apply-- an endorsement which could compromise an effective challenge to the underlying allegations.

Should the matter proceed to a hearing, the statutory structure of the ‘civil penalties’ referenced in this example (which arise in connection with allegations of filing a ‘frivolous return’), explicitly requires the notice-issuing agency to bear the burden of proof therein (or, if denying the applicability of the following provision, to acknowledge the limited meaning and effect of "includes", due to the specifications of Sec. 6671 -Rules for application of assessable penalties [including "frivolous" return]: (b) Person defined- The term “person”, as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs):

Sec. 6703. - Rules applicable to penalties under sections … 6702 [frivolous return]

(a) Burden of proof

In any proceeding involving the issue of whether or not any person is liable for a penalty under section 6700, 6701, or 6702, the burden of proof with respect to such issue shall be on the Secretary.

Sec. 7491. - Burden of proof  [applicable to the 'failure to file' civil penalty]

 (c) Penalties

Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title

(‘Burden of production’ means that the Secretary must present a prima facie case establishing the liability being alleged, the elements of which are subject to challenge and rebuttal.)

* By the way, ‘The Collection Due Process Handbook’, (Notice CC-2003-016) by the IRS Office of Chief Counsel-- which, among many other things, explains how to demand a hearing without the use of the IRS-preferred, but assumption-laden, Form 12153-- has now been added to the ‘Cracking the Code Companion CD’.

*****

A Few Words About "Deficiencies"

When someone submits information returns to the Internal Revenue Service asserting the payment of “income”, such as W-2s or 1099s, the law requires that person to also send copies to the "payee".  The reason for that requirement is to afford the payee notice-- so that he can affirm, dispute, and/or correct, such assertions.  If the payee does not do one of these things, the IRS will act according to the unchallenged assertions (since they are the only evidence on the record), treat them as correct, and send the payee a prospective bill for what it calculates the proper resulting tax to be.

There are at least two mechanisms by which this "billing" can happen in practice: One involves the ‘service’ creating and signing a return pursuant to 26 USC 6020(b), based on the assertion that a required return is false or fraudulent if one was filed, or that a required return was not filed (which could be based on the assertion that even though a return really WAS filed, it met the statutory definition of "frivolous", and thus can be treated as "unfiled").  However, such service-created returns are only prima facie good and sufficient-- meaning that they can be rebutted.  In addition (and more significantly), only a limited list of return types can be created this way under the current regulatory regime, and 1040s are not among them.  (Furthermore, no one in the ‘service’ is equipped with the personal knowledge needed for executing such a return about a private-sector individual, even if 1040s could be created in this way.)

The other way is the creation of a "shadow return"-- unsigned, with no independent legal standing; just a form, or ‘module’ on which the assertions made on the information returns can be entered (that is, amounts of “income” received and amounts withheld).  Such a module is CALLED a "Substitute For Return", or "SFR", and its use is also predicated on the failure of the targeted individual having filed a real return (or the pretense that no real return has been filed), or an allegation of a math error in calculating the self-assessment on a filed return, or an improper claim of a deduction or other such option affecting the "tax due" calculation.

Once created, the module is then used as the basis for calculating a prospective “deficiency”-- that is, the difference between the correct amount of tax that would be due if the "income" assertions on the module are taken as correct, and the amount shown on the module as having been paid-in by the person for whom liability is being alleged.  The “deficiency” is then “billed” by way of a scary-sounding ‘Notice of Deficiency’.  Legally, such “billings” may be shots in the dark, hoping to spook the target into surrender; pretexts for a government counter-claim against a claim-for-refund lawsuit (pursuant to 26 USC 7422(e)); or an effort to confuse the situation enough to hope for an eventual judgment against a victim who persists in failing to answer the original evidentiary documents (the information returns).

In any event, the key to dealing with a "deficiency" allegation is in understanding that in the face of an actual filed return, the "deficiency" authority is limited to two things and two things only: the accuracy of how the correct rate of tax has been applied to the amount of "income" reported by the filer on his or her own real, signed return; and the accuracy with which deductions, credits and other statutorily-permitted adjustments to the amount of "income" reported on a real return are claimed, applied and calculated (if any are at all).

See pp. 182 - 184 in CtC for more on this, and this page for a great deal more.  Also see the FAQ pages for some related information.  Read them through completely, as several different aspects of what is discussed above are touched on in several different places and ways throughout those pages.

The case concerning FICA collection earmarks (or, more accurately, the lack thereof) at the end of 'Withholding The Truth' began as Davis v. Boston I. M. R. Co., 89 F2nd 368, eventually being addressed by the Supreme Court as Helvering v. Davis, 301 U.S. 619 (1937). 

The craft behind the attempt is marked, among other things, by its failure to actually specify any flaw in the practices referenced, even while gratuitously describing it as a 'scam'.  Further, the entry pointedly addresses a '"taxpayer" engaging in the practices described, in what is likely a subtle attempt to legitimize the entry's intended implication.  The use of that term permits the explanation that since someone subject to the internal revenue laws (the statutory definition of a "taxpayer"-- see 26 USC 7701(a)(14)) is so due to the receipt of "income" above the current individual exemption amount, such a person could, indeed, not properly indicate "zero or little wages or other income" in his or her filing.  Additionally, there is the statement at the end regarding "a Zero Return", described as,

4. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on the return. They often also do this with amended returns in the hope the IRS will disregard the original return in which they reported wages and other income.

No CtC-educated filer simply "enters all zeros" on anything.  Certainly, it often happens that -0- is the correct entry here and there in a filing, however much the tax agencies dislike that number on the "income" portions of the forms.  But such entries are not made by anyone knowledgeable about the law simply as a matter of policy-- they are made as a matter of accuracy, each being individually determined by the proper application of all relevant provisions of law.  The fact is, to the degree that it is not simply an escape hatch from the inappropriateness of the entry in which it is placed, this reference to "Zero Returns" is nothing more than a cheap effort to smear the inconvenient filings which the IRS so desperately wishes to discourage, by suggesting that they are of a kind with returns filed in years past by adherents of various misunderstandings who did indeed fill in 1040s as described above.  (The "nunc pro tunc" thing is a new one to me, by the way.  I have no idea if what is described in that regard actually typifies any variety of "zero return"; or, if so, why it would be imagined that this procedure would serve any useful purpose.)

As noted earlier, one of the the purposes of this "Dirty Dozen" listing is the intimidation and discouragement of the increasingly large number of Americans becoming educated as to the truth about the "income" tax.  In particular (judging by the details this listing includes), it is intended to suggest to those folks that, somehow, they actually do not have the right to introduce their own testimony into the record, and controvert the testimony introduced by information return preparers (which, if left uncontroverted, just happens to entitle the tax agencies to keep the filer's money...).  Thus, a few random thoughts on that subject:

"...a statute which imposes a tax upon an assumption of fact which the [presumed] taxpayer is forbidden to controvert is so arbitrary and unreasonable that it cannot stand under the Fourteenth Amendment."  United States Supreme Court, Heiner v. Donnan 285 U.S. 312 (1932)

 

"...irrebuttable presumptions have long been disfavored under the Due Process Clauses of the Fifth and Fourteenth Amendments." United States Supreme Court, Vlandis v. Kline, 412 U.S. 441 (1973)

"A fundamental requirement of due process is "the opportunity to be heard." Grannis v. Ordean, 234 U.S. 385, 394 . It is an opportunity which must be granted at a meaningful time and in a meaningful manner."  United States Supreme Court, Armstrong v. Manzo, 380 U.S. 545 (1965)

The exchange of evidence by way of returns (information returns and 1040s, etc..) IS the "meaningful time and manner" involved in the "income" tax, so much so that a concrete penalty-- a $500 fine-- can be imposed on one about whom an information return is created should that person fail to file their own evidence in response.  Further, the government proceeds to impose all manner of onerous, burdensome, and often expensive legal infirmities and harassments upon those who do not introduce evidence by means of a return-- the object of which is the severance of the target's rights to his or her own property.  Consequently, it is worth remembering that,

"The right to be heard before being condemned to suffer grievous loss of any kind, even though it may not involve the stigma and hardships of a criminal conviction, is a principle basic to our society." United States Supreme Court, Joint Anti-Fascist Comm. v. McGrath, 341 U.S. 123, 168 (1951)

Continuing this pattern, in 2009 the dis-informational listing was moved to #10.  The "listing" got a bit more elaborate:

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

Click here for a comprehensive history of government efforts to suppress CtC.

New Lipstick On An Old Pig

The IRS has issued a new, revamped Form W-9 recently (which can be viewed here).  Although the content of the form has been shuffled around, and expanded a bit, nothing has changed in regard to its limited applicability.  As continues to be clearly and properly acknowledged right on the instrument's face,

Purpose of Form

A person who is required to file an information return with the IRS, must obtain your correct taxpayer identification number (TIN) to report [payments made for various reasons]...

Thus, anyone bright enough to actually read legal instruments before signing them is properly put on notice that the form is only to be submitted to "A person who is required to file an information return with the IRS" (and who therefore "must obtain your correct taxpayer identification number).

That said, it IS a shame that the overall construction of the paragraph in which this language is found continues to risk misleading even the careful reader into imagining that the list of payment types which follows this language-- including rents, royalties, goods, payments to a non-employee for services, etc.-- -- serves to define the class of "persons required to file an information return (inadvertently, I'm sure).  That is, there is a danger that it will be imagined that anyone making "payments to a non-employee for services", for example, BECOMES a "person required", and one to whom the submission of a W-9 is legally appropriate, simply by virtue of making that sort of payment.  There is a similar danger that those making payments of the sort listed will be misled into imagining themselves to be "persons required" to demand the execution of the form, and, in the face of refusal, to short-pay their creditors and divert the balance owed to the voracious gullet of Uncle Sam.  (The real nature of 'payments of the sort listed' is itself a matter of some legal nuance, but delving into that is not necessary for the purpose of this discussion.)

Nothing could be further from the truth, of course.  The "persons required" are explicitly defined in the law; and the paragraph explaining the purpose of the Form W-9 is properly read as explaining that it is when such persons are making payments of the types listed that they are to request the execution of the form, or withhold in its absence.

However, as is the curious custom of tax bureaucrats, those responsible for designing the Form W-9 place the information regarding where the reader will find the relevant list of "persons required" in the furthest possible place from the opening paragraph in which the requirements laid upon those persons are presented.  Thus, it is not until the very last paragraph of the four page form-and-instructions instrument (and a paragraph unhelpfully formatted as though it is a footnote) that the reader learns that a W-9 is only appropriate pursuant to the provisions of 26 USC 6109, in which, further investigation will reveal, the brief list of "persons required" is spelled out.

"Section 6109 of the Internal Revenue Code requires you to provide your correct TIN ("Taxpayer Identification Number") to persons who must file information returns with the IRS to report [payments of various kinds]."

It would be nice if this awkward and confusing construction were rectified during one of the periodic revisions of the W-9.  It wouldn't be hard-- indeed, it would go a long way to accomplishing this just to alter the opening paragraph of the instruction portion of the form to the effect of,

Purpose of Form

A person who is among those required to file an information return with the IRS under the provisions of section 6109 of the IRC, must obtain your correct taxpayer identification number (TIN) if making payments to you of...

Maybe next time...

(Detailed discussion of 26 USC 6109, and related areas of the law, will be found in 'W-9s And Other Alien Notions' in CtC.)

P.S. Interestingly, since CtC appeared in 2003, LOTS of new versions of hoary old IRS forms have been appearing.  Some are being revised yearly, and all of the revisions feature changes intended to make them more confusing and/or more vague... Coincidence?

P. P. S. Warrior Brian Harriss has created an instrument meant for use in response to improper demands for the submission of a W-9 which some might find to be of interest. Find it here.

A Bit More About ‘Liability’ 

Here are a couple of additional examples of the form in which legal liability for an internal revenue tax is established.  (Remember, as noted in ‘W-9’s And Other Alien Notions’, the only person specifically identified as 'made liable' by statute in regard to the “income” tax is a “withholding agent”):

Sec. 5005. - Persons liable for tax

 

(a) General

The distiller or importer of distilled spirits shall be liable for the taxes imposed thereon by section 5001(a)(1).

 

(b) Domestic distilled spirits

(1) Liability of persons interested in distilling

Every proprietor or possessor of, and every person in any manner interested in the use of, any still, distilling apparatus, or distillery, shall be jointly and severally liable for the taxes imposed by law on the distilled spirits produced therefrom. 

*****

Sec. 5703. - Liability for tax and method of payment

 

(a) Liability for tax

(1) Original liability

The manufacturer or importer of tobacco products and cigarette papers and tubes shall be liable for the taxes imposed thereon by section 5701.

 

(2) Transfer of liability

When tobacco products and cigarette papers and tubes are transferred, without payment of tax, pursuant to section 5704, the liability for tax shall be transferred in accordance with the provisions of this paragraph. 

...

However, there IS a structure within the law by which persons NOT made specifically liable by statute can become personally liable for "income" taxes.  Click here to learn how this works.

About Interest Received From National Banks

While the identification of national banks as 'federal instrumentalities' presented at the beginning of 'W-9's And Other Alien Notions'-- along with the routine inclusion of 'interest' in the list of "income" forms to be included in gross "income" under the federal revenue laws-- might suffice to make adequately clear to a reader that interest from a national bank is "income", enough questions on the subject have come to me that I feel obliged to re-iterate this more plainly:  Interest (or investment gains of any other kind) paid by any federal (or federal possession) instrumentality-- including national banks-- is "income".

Regarding The Discussion Of Money

The treatment of the subject of paper money in 'The Supreme Court And The Meaning Of "Income"' leaves a good deal unsaid regarding inflation and other infirmities and peculiarities, both innocent and venal, which are natural to the use of scrip (unredeemable paper money) and central banking.  The purpose of that portion of the book is solely to illustrate the meaning of ‘profit’ within the provided context, not to analyze another subject which is, in some respects, similar in dimensions to that of the “income” tax.

I hope that readers knowledgeable of that subject will be untroubled by the degree to which those peculiarities are glossed over, but I make no apologies.  To have properly addressed money beyond what was required for purposes of the context in which the subject arises here would have doubled the size of this book while really adding nothing pertinent to its larger focus.

Regardless of the true nature of the pieces of paper treated as legal tender in America today, this remains true: As long as they are accepted by your grocer and your realtor, how many of them YOU have matters for its own sake.  In that practical respect, the significance of the “income” tax scheme, particularly as it affects any given individual, is independent of the inherent character of the medium by which such purchasing power is represented.

(I have addressed the subject of government scrip in more detail elsewhere, though.  I recommend the attention of those interested in this subject to the essay 'Fiat Money, And The Formless Fed' in my book 'Upholding the Law And Other Observations'.)

Regarding "Income Exempt From Taxation By The Fundamental Law"

Statutory and regulatory references to "income exempt from taxation by the fundamental law", cited on p.21 in pre-eighth-edition copies of CtC, were almost certainly meant by Congress solely to address the Constitutional prohibition on the diminishment of the pay of federal judges and the president during their tenure in office.  A Supreme Court decision in the 1930's declared that the tax did not have that effect (legally speaking), but jurisprudence before that decision had held otherwise, making the acknowledgement of the exclusion in the law necessary to keep it from being struck down.  It was probably preserved even after that decision as a backstop in case another such controversy was entertained by the court.

I did not clarify this in early editions of CtC because my confidence in this being the complete explanation was less high than it has become.  I was also mindful of the fact that the Supreme Court did not explicitly declare "income" to be Constitutional term outside the power of Congress to define until the Eisner ruling-- well after the passage of the 1913 revenue act; thus the term might possibly have been being used more broadly early on, if only in non-authoritative expressions.   Nonetheless, and despite that ambiguity, such statutory and regulatory references still serve to usefully illustrate and emphasize the important point that, within the context of the tax law, "income" does not mean "all that comes in", and never has.

Some Notes Regarding The Meaning of "Trade or Business"

It will be observed that section 1402, the ‘Definitions’ section of Subtitle A, Chapter 2- Tax on Self-Employment Income, contains a somewhat customized definition of “trade or business” for application when the term is “...used with reference to self-employment income or net earnings from self-employment...”  I do not discuss this distinction in ‘Crafting A Trade Or Business Plan: A Guide For The Self-Employed’ because it is one without a meaningful difference from the broader, code-wide definition at 7701(a)(26).  The version at 1402(c) still confines its meaning to “the performance of the functions of a public office”-- it simply restricts the application of provisions incorporating the term, within the specified context, to certain and particular public offices, and certain performers.  This restriction serves primarily to differentiate between ‘staffers’, meant to be treated as “employees” under the law, and ‘contractors’, meant to be treated as “self-employed”.  It does not introduce any expansion of the term to embrace purely private-sector persons.

On the other hand, it is important to note that the term “trade or business” DOES have an historical meaning beyond “the performance of the functions of a public office”, although only in a highly specialized context.  The term made its first appearance in federal revenue law in reference to federally licensed activities, of which there were many in the early days of the “income” tax-- dozens and dozens, in fact.  Today, the list of such activities is now confined to only a few, chiefly involving alcohol, tobacco and firearms.  (It is worth noting that the statutes concerning these original "trade or business" activities freely used the terms “avocations”, “employment”, and “professions” as references to those with whom they were concerned, a usage which contributes to a further understanding of the context within which these and similar terms are used elsewhere in the internal revenue laws.)

The code representation of the current version of these laws is compiled into Subtitle E.  This is where the code-wide definition of “trade or business” as “the performance of the functions of a public office” might arguably be described as “manifestly incompatible with the intent thereof”, and the meaning of the term for purposes of procedural requirements etc. be expanded to included those involved in the licensed activities.  Those holding such licenses should keep this specialized distinction in mind.

That said, the phrase “trade or business” IS explicitly defined as solely “the performance of the functions of a public office” in the Revenue Act of 1938.  It is this statute to which the relevant section of the IRC derivation tables exclusively points.

Errata

The .pdf files below are formatted to fit your book. Read the appropriate file as is, or, if you wish, print it out, crop to 8.5" high by 5.4" wide (centering the text appropriately), and slip it into the back of your book for convenience.

First Printing Errata

Second Printing Errata

Third Printing Errata

Fourth Printing Errata

Fifth Printing Errata

Sixth Printing Errata

Subsequent printings: No Errata

(While every print run from the first edition on has enjoyed upgrading with the addition of more authorities in support of the text, and thus has changed in that manner, no errors have needed correcting since the sixth.)

Which Printing Do I Have?

First printing copies show 'First Printing July 2003' on the copyright page (obverse of the title page).  There are no 'Reader's Comments' on the second page (immediately before the title page).

Second printing copies show 'First Printing July 2003' on the copyright page (obverse of the title page); have 'Reader's Comments' on the second page (immediately before the title page); and have my handsome mug on the last page.

Third printing copies show 'First Printing July 2003', 'Second Printing April 2004', 'Third Printing December 2004' on the copyright page (obverse of the title page); have 'Reader's Comments' on the second page (immediately before the title page); and have my handsome mug on the last page.

Fourth printing copies show 'First Printing July 2003', 'Second Printing April 2004', 'Third Printing December 2004', Fourth Printing March 2005 on the copyright page (obverse of the title page); have 'Reader's Comments' on the second page (immediately before the title page); and have my handsome mug on the last page.

Fifth printing copies show 'First Printing July 2003', 'Second Printing April 2004', 'Third Printing December 2004', Fourth Printing March 2005, Fifth Printing July 2005 on the copyright page (obverse of the title page); have 'Reader's Comments' on the second page (immediately before the title page); and have my handsome mug on the last page.

Sixth printing copies show 'First Printing July 2003', 'Second Printing April 2004', 'Third Printing December 2004', Fourth Printing March 2005, Fifth Printing July 2005, Sixth Printing December 2005 on the copyright page (obverse of the title page); have 'Reader's Comments' on the second page (immediately before the title page); and have my handsome mug on the last page.

NOTE: Every printing incorporates updates to a greater or lesser degree. Some involve additional legal citations, some involve a re-wording of a given portion of the book for greater clarity, some involve expanding the content slightly. Generally speaking, the substance of these updates will be found posted as part of this appendix page, or among the Q & A's on the FAQ pages. But the best source is a fresh copy of the most current CtC.