Thursday, October 30, 2008

Oral argument before the 7th Circuit Court of Appeals 16th Amendment

This audio of the oral argument in the Bill Benson (26 USC 6700) case is aproximatley 40 minutes long. Jeff Dickstein had the first 20 minutes and the attorney for the United States had the last 20 minutes. No decision was rendered at this hearing. In time (maybe within the next 6 months) this three judge panel will issue a formal written opinion. Bill informs me that there were 50 people at the oral argument at the federal building in downtown Chicago.

The 7th Circuit is one of 14 federal circuits and it addresses federal appeals in Indiana, Illinois and Wisconsin.

By clicking on the this link, you can hear the oral argument before the 7th Circuit Court of Appeals in the Bill Benson case.

does not “provide for any unknown power of taxation”…Power to “relieve all income taxes when imposed from apportionment from a consideration of the source…“The confusion is not inherent, but rather arises from the conclusion that the 16th Amendment provides for a hitherto unknown power of taxation; that is a power to levy an income tax which, although direct, should not be subject to the regulation of apportionment applicable to all other direct taxes... and the far reaching effect of this erroneous assumption…”” “…concluding that the classification of direct was adopted for the purposes of rendering it impossible to burden by taxation accumulations of property, real or personal, except subject to the regulation of apportionment.”

[48] The various propositions are so intermingled as to cause it to be difficult to classify them. We are of opinion, however,

[ 240 U.S. Page 11]

that the confusion is not inherent, but rather arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation, that is, a power to levy an income tax which although direct should not be subject to the regulation of apportionment applicable to all other direct taxes. And the far-reaching effect of this erroneous assumption will be made clear by generalizing the many contentions advanced in argument to support it, as follows:

(a) The Amendment authorizes only a particular character of direct tax without apportionment, and therefore if a tax is levied under its assumed authority which does not partake of the characteristics exacted by the Amendment, it is outside of the Amendment and is void as a direct tax in the general constitutional sense because not apportioned

(b) As the Amendment authorizes a tax only upon incomes "from whatever source derived," the exclusion from taxation of some income of designated persons and classes is not authorized and hence the constitutionality of the law must be tested by the general provisions of the Constitution as to taxation, and thus again the tax is void for want of apportionment.

(c) As the right to tax "incomes from whatever source derived" for which the Amendment provides must be considered as exacting intrinsic uniformity, therefore no tax comes under the authority of the Amendment not conforming to such standard, and hence all the provisions of the assailed statute must once more be tested solely under the general and pre-existing provisions of the Constitution, causing the statute again to be void in the absence of apportionment.

(d) As the power conferred by the Amendment is new and prospective, the attempt in the statute to make its provisions retroactively apply is void because so far as the retroactive period is concerned, it is governed by the pre-existing constitutional requirement as to apportionment.

[49] But it clearly results that the proposition and the contentions

[ 240 U.S. Page 12]

under it, if acceded to, would cause one provision of the Constitution to destroy another; that is, they would result in bringing the provisions of the Amendment exempting a direct tax from apportionment into irreconcilable conflict with the general requirement that all direct taxes be apportioned. Moreover, the tax authorized by the Amendment, being direct, would not come under the rule of uniformity applicable under the Constitution to other than direct taxes, and thus it would come to pass that the result of the Amendment would be to authorize a particular direct tax not subject eigher to apportionment or to the rule of geographical uniformity, thus giving power to impose a different tax in one State or States than was levied in another State or States. This result instead of simplifying the situation and making clear the limitations on the taxing power, which obviously the Amendment must have been intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion.


But aside from the obvious error of the proposition intrinsically considered, it manifestly disregards the fact that by the previous ruling it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed

[ 240 U.S. Page 113]

in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived,

It moreover rests upon the wholly fallacious

[ 240 U.S. Page 114]

assumption that looked at from the point of view of substance a tax on the product of a mine is necessarily in its essence and nature in every case a direct tax on property because of its ownership unless adequate allowance be made for the exhaustion of the ore body to result from working the mine. We say wholly fallacious assumption because independently of the effect of the operation of the Sixteenth Amendment it was settled in Stratton's Independence v. Howbert, 231 U.S. 399, that such a tax is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations (pp. 413 et seq.)

Therefore, the reference to "from whatever source derived" is not an indication that Congress may tax any income from any source, but is only an indication that an income tax (and a tax only on income) is not to be classified as a direct tax, subject to the requirement of apportionment, by virtue of the source of the income. This is not to say that the tax is to be applied and charged against all income without regard to its source.

The 16th Amendment did not expand the scope of Congress' power to tax (Brushaber, Stanton, Tyee, supra et al.), thus although the source of income is no longer a factor in determining whether the tax is direct or indirect, neither the jurisdiction of the federal government nor its taxing authority was enlarged to include authority to tax activities and privileges that it could not have taxed before the 16th Amendment. Source of income, then, is still a factor in determining the scope of the taxing authority of the federal government. (See discussions of Bailey v. Drexel Furniture Co., 259 U.S. 20, 36 S.Ct. 236 (1916); McCulloch v. Maryland, 17 U.S. 316 (1819); and others,) Those factors were also taken into consideration in the determination of taxable income in the Code and regulations.

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