Home Page
Income Tax Page
Personal Page

Income Tax Myths

"Lots of cases support tax protestor theories."

Every court that has ever ruled on a tax protestor argument has rejected it, so it's pretty amazing to see tax protestors claiming that court decisions support them.

Some tax protestors claim that there are actually cases holding that income tax is voluntary or that wages are not income or adopting some other tax protestor theory.

In fact, ever since the passage of the Sixteenth Amendment nearly a hundred years ago, no cases, from the Supreme Court or from any other federal court, have ruled favorably on any tax protestors theories, while hundreds of cases have specifically considered and rejected them. Judicial decisions are 100% against tax protestor theories—not 90%, not 99%, but 100%.

So how can tax protestors possibly think that the cases support them? Are they blind?

The answer is that when a tax protestor says that there are cases adopting tax protestor theories, one of three things is going on:

Misconstruing Stray Sentences

By far the most common explanation is this: when a tax protestor says that a case upholds a tax protestor theory, in fact the case has nothing to do with that theory, but there is a stray sentence in the case that, if plucked out of context and misinterpreted, can be imagined to provide support for it.

For example, in claiming that wages are not income, tax protestors sometimes rely on this quotation: "Congress has taxed income, not compensation." That's from Connor v. United States, 303 F.Supp. 1187, 1191 (S.D. Tex. 1969), aff'd in part, rev'd in part, 439 F.2d 974 (5th Cir. 1971).

Well, that is what the court said, but what was the context? In fact, the case had nothing to do with the taxability of wages. The taxpayers in the case had suffered a loss when their home was destroyed by fire. They received compensation from their fire insurance company. The case was about the taxability of these insurance proceeds, not about wages.

Another quote protestors like to use to prove that wages are not income is this:

There is a clear distinction between 'profit' and 'wages' or compensation for labor. Compensation for labor can not be regarded as profit within the meaning of the law. The word 'profit', as ordinarily used, means the gain made upon any business or investment - a different thing altogether from mere compensation for labor.

Oliver v. Halstead, 196 Va. 992 (1955).

Again, the quotation looks relevant until you know the context. This time the case had nothing to do with income taxes at all. It was about whether a director of a farm cooperative association could be employed by the association even though the by-laws of the association prohibited the association from entering into a "contract for profit" with one of its directors. The question was whether working for a salary constituted a "contract for profit" within the meaning of this by-law, not whether a salary is income for tax purposes. The case had nothing to do with income tax!

One more example: to show that wages are not income, protestors may quote this sentence: "one does not 'derive income' by rendering services and charging for them." Edwards v. Keith, 231 F. 110 (2d Cir. 1916).

Once again, the quotation is accurate, but taken completely out of context. The case involved the government's attempt to tax commissions earned by a life insurance agent. The commissions had been duly earned but had not yet been paid in the tax year in question. The case was about accounting methods -- whether income should be considered income in the year in which it is earned, or the year in which it is received. (Today, this debate would be referred to as the choice between the "cash" and "accrual" methods of accounting.) The court ruled that the taxpayer was right to count the commissions as income only when they were actually received and did not have to pay tax on commissions earned but not yet received. It was in this context that the court said that one does not derive income merely "by rendering services and charging for them." The context makes clear that the court was only discussing when the commissions would be considered income, not whether the commissions would be considered income. Big difference.

Tax protestors like to imagine that a stray sentence from any case about anything somehow proves that courts accept their theories. But that's not how the law works. Context is very important.

In interpreting case law, it's always important to ask what a particular case was actually about. There are literally hundreds of cases that are specifically about tax protestor theories. For example, courts have specifically considered the question of whether wages are income hundreds of times and have held that the answer is yes every time.*

Those are the cases that matter. The whole case is about the exact point at issue. A stray sentence from a case about something else is different. It's easily misunderstood if taken out of context. For example, when a court says that "Congress has taxed income, not compensation," but it's talking about money from fire insurance, it means that insurance proceeds that provide compensation for a monetary loss are not income. That's different from the term "compensation" as used to refer to wages or salary.

A stray sentence from a case that isn't even about a tax protestor theory doesn't mean that a court has ruled in favor of a tax protestor theory. This is particularly true given that every time a court actually considers a tax protestor theory in a case directly, in a case that is really about that theory, the court rules against it.

Misunderstanding Criminal Cases

Another frequent protestor mistake is misunderstanding the result of criminal cases. Tax protestors will point out that, on rare occasions, protestors prosecuted for income tax crimes are acquitted. (Tommy Cryer is a recent example.) Protestors cite these cases as though they prove the defendants' tax protestor theories were correct.

Of course such cases prove nothing of the kind. First of all, the fact that one particular person gets acquitted in a criminal case doesn't prove that there's no law to be enforced. O.J. Simpson was acquitted of murder. That doesn't mean there's no law against murder. It just means that the government failed to prove that particular case to the jury's satisfaction.

Moreover, as explained in detail here, a special rule applies to criminal tax cases: the government must prove, not only that the defendant owed taxes and failed to pay, but that the defendant knew he or she was breaking the tax laws. Therefore, if the defendant truly believed that he or she didn't owe any taxes, the defendant is not guilty of the crime charged, even if the basis of the defendant's belief was a crazy tax protestor theory. This doesn't prove that the protestor theory is correct, but only that the defendant believed it. (Or rather, that the government failed to prove beyond a reasonable doubt that the defendant didn't believe it.)

Finally, an acquittal in a criminal case doesn't change whether the defendant owes the taxes. The government can still collect them in a civil case. For example, after Tommy Cryer was acquitted in his criminal case, the government prevailed against him civilly for the taxes owed, plus penalties. So again, the fact that someone escapes conviction in a criminal tax case doesn't prove that there's no law requiring payment of taxes.

Making Stuff Up

Finally, some quotations that appear to favor tax protestor theories are complete fabrications. You can, for example, see this quotation on the Internet:

Income within the meaning of the Sixteenth Amendment and the Revenue Act, means 'gain' . . . and in such connection 'gain' means profit . . .proceeding from property, severed from capital, however invested or employed, and coming in, received, or drawn by the taxpayer, for his separate use, benefit and disposal . . . . Income is not a wage or compensation for any type of labor.

Staples v. U.S., 21 F.Supp. 737 (D. Pa. 1937) (often miscited as "Stapler v. U.S."). This quotation, particularly the last sentence, seems very persuasive. The problem is that the last sentence is completely made up. It's not from the Staples case or from any other federal case. If you look at the actual case in a real case reporter (not some fabricated Internet version), you will see that the last sentence doesn't exist.

Of course, once you start making stuff up, all bets are off. You can provide support for anything if you allow yourself to make up the support. Here's a tip: if someone supports their arguments with fabricated quotations, don't believe anything they say.

* Sidebar: What Do Courts Really Say?

Let's take a look at what courts really say in cases presenting the question of whether wages are income. These are not cases (like those discussed above) where courts made a stray remark in a case about something else. They are cases in which someone actually claimed that wages are not income for federal income tax purposes, and the court addressed that exact question.

In such cases, what the courts say, every time, is that wages are income. Here are just a few out of literally hundreds of possible examples (bolding added):

Jones v. Commissioner, 338 F.3d 463 (5th Cir. 2003)
"Income tax laws apply to income earned by individuals. See, e.g., United States v. Burton, 737 F.2d 439, 441 (5th Cir.1984) (“Beyond dispute, wages are income.”)."
Ledford v. United States, 297 F.3d 1378 (Fed. Cir. 2002)
"Mr. Ledford bases his entitlement to . . . relief on his view that the federal tax code does not tax compensation received for personal labor. Mr. Ledford's view of the tax law is mistaken, as the tax code quite plainly defines income to include amounts received in compensation for services rendered. 26 U.S.C. § 61(a) (2000) (“[G]ross income means all income from whatever source derived including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items....”). Indeed, every court that has considered the matter has found this argument to be wholly without merit—so much so that merely raising it is considered sanctionable."
Grimes v. Commissioner, 806 F.2d 1451 (9th Cir. 1986)
"There can be no doubt that the tax on income is constitutional and that, for the purpose of the Sixteenth Amendment, income includes “gain derived from capital, from labor, or from both combined.” Eisner v. Macomber, 252 U.S. 189, 207, 40 S.Ct. 189, 193, 64 L.Ed. 521 (1920). Sections 1 and 61 of the Internal Revenue Code impose a tax on income, and wages are income."
United States v. Connor, 898 F.2d 942 (3d. Cir. 1990)
"Congress exercised its power to tax income by defining income as, inter alia, “compensation for services, including fees, commissions, fringe benefits and similar items.” 26 U.S.C. § 61(a)(1) (Supp. II 1984). Every court which has ever considered the issue has unequivocally rejected the argument that wages are not income."
Coleman v. Commissioner, 791 F.2d 68 (7th Cir. 1986)
"Some people believe with great fervor preposterous things that just happen to coincide with their self-interest. “Tax protesters” have convinced themselves that wages are not income, that only gold is money, that the Sixteenth Amendment is unconstitutional, and so on. These beliefs all lead—so tax protesters think—to the elimination of their obligation to pay taxes. The government may not prohibit the holding of these beliefs, but it may penalize people who act on them.

It is an important function of the legal system to induce compliance with rules that a minority firmly believes are misguided. Legal penalties change the balance of self-interest; those who believe taxes wicked or unauthorized must nonetheless pay. When the legal system depends on honest compliance as much as the income tax system does—and when disobedience is potentially rewarding to those affected by the rule—it is often necessary to impose steep penalties on those who refuse to comply. . . .

The billingsgate in appellants' briefs is customary in cases of this nature. Coleman says that wages may not be taxed because they come from his person, a depreciating asset. The personal depreciation offsets the wage, leaving no net income. Coleman thinks that only net income may be taxed under the Sixteenth Amendment—net income as Coleman defines it, rather than as Congress does. Holder, who styles himself a “private citizen,” insists that wages may not be taxed because the Sixteenth Amendment authorizes only excise taxes, and in Holder's world excises may be imposed only on “government granted privileges.” Because Holder believes that he is exercising no special privileges, he thinks he may not be taxed. These are tired arguments. The code imposes a tax on all income. See 26 U.S.C. § 61. Wages are income, and the tax on wages is constitutional. See, among hundreds of other cases, United States v. Thomas, 788 F.2d 1250, 1253 (7th Cir.1986); Lovell v. United States, 755 F.2d 517 (7th Cir.1984); Granzow v. CIR, 739 F.2d 265, 267 (7th Cir.1984); United States v. Koliboski, 732 F.2d 1328, 1329 & n. 1 (7th Cir.1984). See also Brushaber v. Union Pacific R.R., 240 U.S. 1, 12, 24–25, 36 S.Ct. 236, 239, 244–45, 60 L.Ed. 493 (1916)."

I could go on and on, but what's the point? There are hundreds of cases that have addressed the exact question of whether wages are income for federal income tax purposes. Every single one of these cases has said yes. As the above examples show, the claim that wages are not income is not just wrong, it is "preposterous," "wholly without merit," "beyond dispute," and "unequivocally rejected."

The bottom line is clear: you can sometimes find a stray sentence, in a case about something else, which might be misconstrued as bearing on the question of whether wages are income for federal income tax purposes, but when that exact question goes to court, the courts say that wages are income 100% of the time.