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Chapter 13:
Amendment 16 Post Mortem
The documented failure of the 16th Amendment to be ratified
is a cause for motivating all of us to isolate the precise
effects of this failed ratification. In previous chapters, a
careful analysis of the relevant case law revealed two competing
groups of decisions. One group puts income taxes in the category
of direct taxes. Another group puts them in the category of
indirect taxes. One group argues that the 16th Amendment did
amend the Constitution by authorizing an unapportioned direct
tax, but only on income, leaving the apportionment rule intact
for all other direct taxes. Another group argues that the 16th
Amendment did not really amend the Constitution; it merely
clarified the taxing power of Congress by overturning the
"principle" on which the Pollock case was decided. By distilling
the cores of these two competing groups, we are thereby justified
in deciding that a ratified 16th Amendment produced one or both
of the following two effects:
1. Inside the 50 States, it removed the apportionment
restriction from taxes laid on income, but it left this
restriction in place for all other direct taxes.
2. It overturned the principle advanced in the Pollock
case which held that a tax on income is, in legal
effect, a tax on the source of the income.
Federal courts did not hesitate to identify the effects of a
ratified 16th Amendment. Now that the evidence against its
ratification is so overwhelming and incontrovertible, the federal
courts are evidently unwilling to identify the effects of the
failed ratification. These courts have opted to call it a
"political" question, even though it wasn't a "political"
question in years immediately after Philander C. Knox declared it
ratified. It is difficult to believe that the federal courts are
now incapable of exercising the logic required to isolate the
legal effects of the failed ratification. Quite simply, if a
ratified 16th Amendment had effect X, then a failed ratification
proves that X did not happen. What is X? Their "political"
unwillingness to exercise basic logic means that the federal
courts have abdicated their main responsibility -- to uphold and
defend the Constitution -- and that we must now do it for them
instead (see Appendix W concerning "Direct Taxation and the 1990
Census"). At a minimum, the value of X is one or both of the two
effects itemized above.
Some people continue to argue, even now, that the 16th
Amendment doesn't even matter at all. Soon after The Federal
Zone began to circulate among readers throughout America, the
flow of complimentary letters grew to become a steady phenomenon.
Page 13 - 1 of 8
The Federal Zone:
As of this writing, no substantive criticisms have been received
of its two major theses, i.e., territorial heterogeneity and void
for vagueness. Occasional criticisms did occur, but most of them
were minor, lacking in substance, or lacking authority in law.
The following is exemplary of the most serious of these
criticisms:
I fail to understand the harping on the invalid ratification
of the 16th Amendment. It really doesn't matter whether the
amendment was ratified or not -- Brushaber ruled "no new
powers, no new subjects", and further went on to tell us
that Congress always had the power to tax what the 16th
Amendment said could be taxed.
[private communication, June 1, 1992]
It does matter whether the amendment was ratified or not,
for several reasons. One obvious reason is that the Federal
Register contains at least one official statement that the 16th
Amendment is the federal government's general authority to tax
the incomes of individuals and corporations (see Chapter 1 and
Appendix J). If the amendment failed, then it cannot be the
government's general authority to tax the incomes of individuals
and corporations. There may be some other authority, but that
authority is definitely not the 16th Amendment. The official
statement in the Federal Register is further evidence of fraud
and misrepresentation, even if its author was totally innocent.
Another reason is that, contrary to Brushaber, other
decisions of the Supreme Court, as well as lower federal courts,
have ruled that taxes on incomes are direct taxes, and the 16th
Amendment authorized an unapportioned direct tax on incomes.
Author Jeffrey Dickstein has done a very thorough job of
demonstrating how the Brushaber ruling stands in stark contrast
to the Pollock case before it, and to the Eisner case after it.
The Brushaber decision is an anomaly for this reason, and for
this reason alone. It ruled that income taxes are indirect
excise taxes (which necessarily must be uniform across the States
of the Union). However, the Brushaber court failed even to
mention "The Insular Cases" and the doctrine of territorial
heterogeneity that issued therefrom (see Appendix W).
If the 16th Amendment authorized an unapportioned direct tax
on incomes, per Eisner, Peck, Shaffer and Richardson, then such a
tax is not required to be either uniform or apportioned.
Therefore, this group of decisions did interpret the 16th
Amendment differently from Brushaber; they conclude that it did
amend the Constitution and that it did create a new power,
namely, the power to impose an unapportioned direct tax.
Contrary to the private communication quoted above, Congress has
not always had the power to impose an unapportioned direct tax on
the States of the Union. In view of the evidence which now
Page 13 - 2 of 8
Amendment Post Mortem
proves that the 16th Amendment was never ratified, it is correct
to say that Congress has never had the power to impose an
unapportioned direct tax on the States of the Union. The Pollock
decision now becomes a major hurdle standing in the government's
way, because the Pollock Court clearly found that all taxes on
income are direct taxes, and all direct taxes levied inside the
50 States must be apportioned. The Pollock decision is most
relevant to any direct tax which Congress might levy against the
incomes and property of State Citizens, as distinct from citizens
of the United States**. (Each has citizens of its own.)
Put in the simplest of language, a ratified 16th Amendment
either changed the Constitution, or it did not change the
Constitution. If it changed the Constitution, one change that
did occur was to authorize an unapportioned direct tax on the
incomes of State Citizens. If it did not change the
Constitution, the apportionment restriction has always been
operative within the 50 States, even now. Either way, the failed
ratification proves that Congress must still apportion all direct
taxes which it levies upon the incomes and property of Citizens
of the 50 States.
Corporations, on the other hand, are statutory creations,
whether they are domestic or foreign. As such, they enjoy the
privilege of limited liability. Congress is free to levy taxes
on the exercise of this privilege and to call them indirect
excises. Within the 50 States, such an excise must be uniform
for it to be constitutional; within the federal zone, such an
excise need not be uniform. In the context of statutory
privileges, the apportionment rule is completely irrelevant.
Therefore, the status of "United States** citizens" is also a
statutory privilege the exercise of which can be taxed with
indirect excises, regardless of where that privilege might be
exercised. The subject of such indirect taxes is the exercise of
a statutory privilege; the measure of such taxes is the amount
of income derived from exercising that privilege.
Justice White did all of us a great disservice by writing a
ruling that is tortuously convoluted, in grammar and in logic.
If he had taken The Insular Cases explicitly into account, and if
he had distinguished Frank Brushaber's situs from the situs of
Brushaber's defendant, the principle of territorial heterogeneity
would have clarified the decision enormously. Specifically,
according to the doctrine established by Downes vs Bidwell in
1901, Congress is not required to apportion direct taxes within
the federal zone, nor is Congress required to levy uniform excise
taxes within the federal zone. However, within the 50 States of
the Union, all direct taxes must still be apportioned, and all
indirect excise taxes must still be uniform. Now that we know
the 16th Amendment never became law, these restrictions still
apply to any tax which Congress levies inside the 50 States.
Quite naturally, a problem arises when one party is inside the
federal zone, and the other party is outside the federal zone.
That was the case in Brushaber.
Page 13 - 3 of 8
The Federal Zone:
The Downes doctrine defined the "exclusive" authority of
1:8:17 in the Constitution to mean that Congress was not subject
to the uniformity restriction on excise taxes levied inside the
federal zone. By necessary implication, Congress is not subject
to the apportionment restriction on direct taxes levied inside
the federal zone. It is important to realize that the Union
Pacific Railroad Company was a domestic corporation, incorporated
by Congress, inside the federal zone. A tax on such a
corporation was a tax levied within the federal zone, where the
apportionment and uniformity restrictions simply did not exist.
Instead of making this important territorial distinction,
Justice White launched into an exercise of questionable logic,
attributing statements to the Pollock court which the Pollock
court did not make, adding words to the 16th Amendment that were
not there, hoping his logic would persuade the rest of us that
the Pollock principle was now overturned. According to White,
the principle established in Pollock was that a tax on income was
a tax on the source of that income. In this context, White is
distinguishing income from source, in the same way that interest
is distinguished from principal. This same distinction was made
by a federal Circuit court in the Richardson case as late as the
year 1961. In light of the overriding importance of the Downes
doctrine, it is difficult and unnecessary to elevate the
importance of this distinction any higher; it is also important
to keep it in proper perspective. Within the federal zone,
Congress can tax interest and principal (income and source)
without any regard for apportionment or uniformity. Therefore,
within the federal zone, the distinction is academic.
Whatever the merits of this distinction between income and
source, White was wrong to ignore the key Pollock holding that
income taxes are direct taxes. The Pollock decision investigated
the relevant history of direct taxes in depth. White was also
wrong to ignore the clear legislative history of the 16th
Amendment, the stated purpose of which was to eliminate the
apportionment restriction which caused the Pollock court to
overturn an income tax Act in the first place. That Act was
found to be unconstitutional precisely because it levied a direct
tax on incomes without apportionment. Finally, White was wrong
to launch into his lengthy discussion of the 16th Amendment
without even mentioning The Insular Cases, when these cases were
recent authority for the proposition that Congress did not need
an amendment to impose taxes without apportionment or uniformity
inside the federal zone. This may be hindsight, but hindsight is
always 20/20.
The relevance of the 16th Amendment to the tax on Frank
Brushaber's dividend is another matter. Two schools of thought
have emerged, with opposing views of that relevance. One school
relies heavily on the key precedents established by Pollock.
Specifically, the original investment is the "source" of
Brushaber's income. A tax on the source is a direct tax.
Pollock found that a tax on income is a tax on the source.
Page 13 - 4 of 8
Amendment Post Mortem
Therefore, a tax on income is a direct tax. Without a ratified
16th Amendment, such a tax must be apportioned whenever it is
levied inside the 50 States. With a ratified 16th Amendment,
such a tax need not be apportioned whenever it is levied inside
the 50 States. This school argues that Brushaber's dividend was
taxable because the 16th Amendment removed the apportionment
requirement on such a tax. But, is the tax really levied "inside
the 50 States", if the activity which produced the income was
actually inside the federal zone? The importance of the Pollock
principle now comes to the fore.
The competing school argues that a ratified 16th Amendment
was not strictly necessary for Congress to impose a direct tax on
Brushaber's dividend without apportionment. Granted, he was a
State Citizen who lived and worked within one of the States of
the Union. For this reason, the government found that he was a
"nonresident alien" under their own rules. If White's ruling did
anything else, it held that Brushaber's dividend was also taxable
without apportionment and without uniformity because its "source"
was inside the federal zone, and that "source" was a taxable
activity (profit generation by a domestic corporation). In this
context, it does make sense to jettison the Pollock "principle"
and to distinguish interest from principal, dividend from
original stock investment. Having done so, Justice White could
argue that the "source" of Brushaber's dividend was domestic
corporate activity and not Brushaber's original investment.
Unfortunately for all of us, however, Brushaber did not challenge
the constitutionality of the income tax as applied to his
dividend, so this question was not properly before the Supreme
Court; Brushaber did challenge the constitutionality of the
income tax as applied to his defendant.
Unfortunately for Mr. Brushaber, he thought that the
defendant was a foreign corporation. The government was correct
to point out that the defendant was actually a domestic
corporation, chartered by Congress. As such, this corporation's
profits could be taxed by Congress without apportionment or
uniformity, and without an amendment authorizing such a tax. For
the same reasons, Brushaber's share of those same profits could
also be taxed without constitutional restrictions, and without an
amendment authorizing such a tax, even though he was outside the
federal zone and inside a State of the Union. In this context,
it is revealing that the Internal Revenue Code imposes a uniform
"flat tax" when such income is received by nonresident aliens,
giving it the appearance of a uniform indirect tax. However,
this "uniformity" is not the consequence of a constitutional
requirement; it is the consequence of decisions by Congress
acting in its capacity as a majority-ruled legislative democracy.
Moreover, under the authority of the Downes doctrine,
Congress is empowered to define domestic corporate profits as
"profits before dividends are paid", and to penalize all domestic
corporations which attempt to avoid federal taxes by defining
their profits as "profits after dividends are paid." Within the
Page 13 - 5 of 8
The Federal Zone:
federal zone, Congress has the power to assert a superior claim
to all profits of domestic corporations, and to define those
profits any way it chooses. By "superior claim" I mean that
Congress comes before stockholders inside the federal zone, even
if the stockholders are outside the federal zone, and even if the
money they used to purchase their stock came from a source that
was outside the federal zone. A ratified 16th Amendment would
have had no effect whatsoever on the power of Congress to levy a
tax without any restrictions on any of the assets of domestic
corporations. A ratified 16th Amendment would have empowered
Congress to tax, without apportionment, dividends paid to State
Citizens by foreign corporations when both were inside the 50
States, but a ratified 16th Amendment was not strictly necessary
for Congress to tax dividends paid to them by domestic
corporations. Neither was a ratified 16th Amendment necessary
for Congress to tax dividends paid by either type of corporation
to citizens of other nations like France, since the latter
citizens enjoy none of the protections guaranteed by the
Constitution for the United States of America. In this context,
it is important to make a careful distinction between dividends
and corporate profits.
It is clear that the second of these two competing schools
of thought has now prevailed. Even though there are serious
logical and obvious grammatical problems with Justice White's
ruling, in retrospect he was right to question the Pollock
principle. The situs principle is easier to understand, if only
because it dovetails so squarely with the overriding principles
of territorial jurisdiction and territorial heterogeneity.
Moreover, it is entirely possible for the Pollock principle to
yield to the situs principle, even though the 16th Amendment was
never actually ratified. Remember that Justice White ruled in
Brushaber that the only effect of the 16th Amendment was to
overturn the Pollock principle. If the amendment failed, it
could thereby be argued that the Pollock principle has never been
overturned. Nevertheless, subsequent case law has confirmed the
superiority of the situs principle: the source of income is the
situs of the income-producing activity. Sources are either
inside or outside the federal zone.
Finally, like "income", the term "source" is not in the
Constitution either, because the amendment failed to be ratified.
Recall the Eisner prohibition, whereby Congress was told it did
not have the power to define "income" by any definition it might
adopt (see Appendix J). That prohibition was predicated on a
ratified 16th Amendment, the text of which introduced the term
"income" to the Constitution for the first time. Although the
issue did not arise as such and there is no court precedent per
se, the exact same logic applies to the term "source". The
failed ratification means that Congress is now free to legislate
any definition it might adopt for the terms "income" and
"source", as long as the statutes containing those terms do not
otherwise violate the Constitution as lawfully amended. The
source of income is the situs of the income-producing activity.
Page 13 - 6 of 8
Amendment Post Mortem
The explicit recognition of territorial jurisdiction, and of
the status of the parties with respect to that territorial
jurisdiction, provides much additional clarification to the
Brushaber ruling. Such a clarification was definitely needed
because the almost incomprehensible grammar of the Brushaber
ruling is actually responsible for much of the confusion and
controversy that continue to persist in this field, even today.
As Alan Stang puts it, Justice White turned himself into a
pretzel, and lots of other people got twisted up in the process.
A clear understanding of status and jurisdiction, and a proper
application of the principle of territorial heterogeneity,
together provide an elegant and sophisticated means to eliminate
much, if not all, of that confusion and controversy.
# # #
Page 13 - 7 of 8
The Federal Zone:
Reader's Notes:
Page 13 - 8 of 8