December 1997: A Defense Against Arbitrary Taxation

Before World War I, in the United States, government at all levels combined was satisfied with less than nine percent of the national income. Today it is fifty percent. If taxation reached one hundred percent, would we still be free? Is there any relationship between taxation and freedom?
    The American Revolution was supposedly fought against "taxation without representation." Does that mean that once elected, our representatives can tax without limit? Is there any legal limit to taxes? If you do the unthinkable--stop filing federal income tax returns--will the law come to your aid?
    Otto Skinner, author of The Biggest "Tax Loophole" of All, invites you to let the United States government take you to court. His theme is more high-minded than the title suggests; for a "loophole" suggests an oversight, whereas Skinner's persuasive argument is that not only the letter but also the spirit of the law are on your side.
    The long and the short of his argument is that there simply is no statute in the U.S. Tax Code that imposes a tax on the income-producing activities of the ordinary American! How can that be? Does the Code not say something like, "There shall be assessed, levied, collected, and paid annually upon the gains, profits, and income received in the preceding calendar year by every citizen of the United States . . . from any profession, trade, employment, or vocation carried on in the United States or elsewhere, or from any other source whatsoever, a tax" (Revenue Act of 1894, quoted in Pollock v. Farmers' Loan and Trust, 157 U.S. 434-35 [1895])? In fact, it doesn't.
    What it does do is define a taxpayer as "any person subject to a tax under the applicable revenue law" (26 U.S.C. 1313b). So where is the applicable revenue law? Section 1 reads, "There is hereby imposed on the taxable income of [every individual] a tax." But taxable income is defined in terms of "adjusted gross income" (sec. 63), and adjusted gross income is defined in terms of a "taxpayer" (sec. 62a), and we are back where we started. Let's try again. Section 6012a reads, "Returns with respect to income taxes under subtitle A shall by made by . . . every individual having for the taxable year gross income," etc. But taxable year is likewise defined in terms of a "taxpayer" (sec. 441b). In short, in place of a declaration of a tax, the lawyer-crafted Code gives us circular definitions.
    Skinner proposes a defense so simple it is profound: simply make the government prove its case. To do so, it must say what law you violated.
    At first glance, this may indeed look like a "loophole." One might imagine that if many people succeeded in slipping through it, Congress would close it up by drafting a sentence like that we have quoted from the Revenue Act of 1894. But Skinner believes that what lies behind this "loophole" is really the law protecting you. And in fact, the income tax of 1894 was declared unconstitutional in a famous court case (Pollock v. Farmers' Loan and Trust).
    There are only two kinds of tax: a direct, apportioned tax on persons or property and an indirect, uniform tax on an activity (impost, duty, or excise). Apportioned means each state is assessed so much for its share. Uniform means the tax is applied the same everywhere (Skinner, pp. 9-11).
    The Pollock court declared that a tax on income from property, though in form an excise tax (i.e., a tax on manufacture, sales, consumption, licenses, or privileges), was in substance a tax on property, making it subject to the constitutional rule of apportionment. As the 1894 tax was not so apportioned, it was declared unconstitutional (Brushaber v. Union Pacific Railroad, 240 U.S. 17 [1916]); Flint v. Stone Tracy, 220 U.S. 151 [1911]).
    Since the tax on "any profession, trade, employment, or vocation carried on" was voided as part of the whole 1894 income tax, it never received a constitutional test. Skinner plainly believes that such a declaration of a general income tax would not be found constitutional. "The individual, unlike the corporation, cannot be taxed for the mere privilege of existing. . . . The individual's rights to live and own property are natural rights for the enjoyment of which an excise cannot be imposed." Likewise, "realizing and receiving income on earnings is not a privilege that can be taxed. . . . Since the right to receive income or earnings is a right belonging to every person, this right cannot be taxed as a privilege" (Redfield v. Fisher, 292 P 819 [Oreg. 1930]; Cole v. MacFarland, 337 S.W. 2d 456 [Tenn. 1960]). Here we begin to see the letter and spirit of the law influencing the way the Code is written.
    So what sort of activity can the government tax? The use of a privilege. For example, the government can tax a corporation for the privilege of existing, because the corporation is "an artificial entity which owes its existence and charter powers to the state." It can declare an excise on "the particular privilege of doing business in a corporate capacity." It can tax "special rights, belonging to the individual or class, and not to the mass, . . . an exemption from some general burden, obligation or duty" (Redfield, 819; Flint, 151; Cole, 456).
The objection to a general income tax is that it is general.
    Income is "a gain, a profit, something of exchangeable value . . . received and drawn by the recipient for his separate use, benefit and disposal," in other words, a kind of property. And in the case of an income tax, the tax is "laid upon the happening of an event [the use of a privilege], as distinguished from its tangible fruits [the income]." In such a case, "the tax is imposed upon the doing of business of the character described, and the measure of the tax is to be the income" (Eisner v. Macomber, 252 U.S. 206-7 [1920]; Tyler v. United States, 281; Flint, 146).
    An income tax is not a tax "on" income in the same sense in which a property tax is a tax "on" property. With a property tax, property is actually the thing got at by the tax (what Skinner calls its subject); whereas with an income tax, income is just the proximate object or measure by which something else is got at, namely, the use of a privilege.
    The Pollock court had declared that a tax on income derived from property was in substance a tax on property, making it subject to the rule of apportionment. The Sixteenth Amendment to the Constitution then (1913) declared that a tax on income "from whatever source derived" need not be apportioned.
    Frank Brushaber's contention that the Sixteenth Amendment authorized a "hitherto unknown power of taxation" in the form of a direct, unapportioned tax, if accepted, "would cause one provision of the Constitution to destroy another" and create an unchecked power of taxation (Brushaber, 11-12).
    "The Amendment was drawn for the purpose of doing away for the future with the principle on which the Pollock Case was decided, that is, of determining whether a tax on income was direct . . . by taking into view the burden which resulted on the property from which the income was derived. . . . The result intended [was] the prevention of the resort to the sources from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself and thereby to take an income tax out of the class of excises, duties and imposts and place it in the class of direct taxes" (ibid., 18-19).
    In other words, the Pollock court took a tax that fell directly merely on the income ["direct tax on the income"] and, by resorting to the source (property), removed it from one class (indirect) and placed it in another (direct). But the Sixteenth Amendment says that henceforth an income tax will always be construed as an indirect tax, that is, a tax on the use of a privilege. "The distinction lies between the attempt to tax the property as such and to measure a legitimate tax upon privileges involved in the use of such property" (Flint, 163-64).
    And so it appears that the letter of the law and the spirit of the law have conspired to prevent Congress from writing a general income tax. If the Code is nevertheless being promulgated and enforced as a general income tax, it is being promulgated falsely and enforced illegally. So what is the federal income tax? It is not apportioned, so it must be an indirect tax. If it not a just a collection of meaningless words, it must be a tax on a privileged activity.

How To Win

If you know an income tax is an indirect tax, you now also know the first element the government has to prove in its case against you. It has to show a statute taxing some activity in which you are engaged, some privilege whose use you enjoy.
    Skinner not only shows you that the law is on your side, he tells you how to make it count in court. Wayne Litchford of California, arguing along these lines, was found not guilty in 1992 on five felony counts of willfully attempting to evade the state income tax.
    Of course, the best case, from the point of view of the defendant, is the one that never goes to trial. In his 1989 book, If You Are the Defendant, Skinner chronicles the 1981 case of Gail Sanocki of California. She was charged with willfully attempting to evade income taxes and willfully failing to file tax returns. As the indictment alleged no revenue-taxable activity in which she had been engaged, she went before the grand jury with a motion to dismiss, contending that the indictment failed to state facts charging an offense. The grand jury dismissed her case on December 29, 1981.
    Finally, Skinner mentions that he himself discontinued filing tax returns in 1981. Although he has certainly "thrown down the gauntlet" by publishing three books on the subject (as well as a newsletter following current cases), he is still in business and has apparently been left alone.
    The most important key to your defense is resolutely to keep the burden of the proof where it belongs. Skinner chronicles the sad failures of people who went to court eager to prove something (usually the wrong thing). And keeping the burden of the proof where it belongs begins right now, with a letter to the Secretary of the Treasury revoking your signature from income tax returns and employees' withholding allowance certificates (W-4s) that you have signed in the past. These provide prima facie ("first showing") evidence that you have voluntarily placed yourself within the purview of the tax code. "Our system of taxation is based upon voluntary assessment and payment, not upon distraint" (Flora v. United States, 362 U.S. 176 [1960]). You were falsely led to believe that you were required by law to sign these documents.
    Any time a representative of the I.R.S. contacts you with a letter or summons, you must respond promptly and vigorously in writing, politely insisting that he say on what ground he has determined that you are subject to the tax in question and to furnish you with proof of his authority to make such determination. All this establishes a record of your good faith belief--vital evidence the jury will consider in the event of a trial.
    If charged, you will most likely be charged with willfully attempting to evade a tax or willfully failing to file a return, or both. Case law establishes three specific elements of the offense for each charge. For willful evasion, the government must prove (1) a tax deficiency, (2) an affirmative act of evasion, and (3) willfulness. For willful failure to file, the government must prove (1) a requirement to file, (2) failure to file, and (3) willfulness. In addition, the application to you of each and every term in the statutes relied on by the government (e.g., taxpayer, taxable income, adjusted gross income, taxable year) becomes an essential element of the offense (Skinner, pp. 81, 86, 92-93).
    If you keep the burden of the proof where it belongs, the government will not be able to prove you "deficient" in a tax that no law makes you subject to; nor, of course, can it prove you affirmatively "evaded" a tax you are not required to pay. It will not be able to prove you were required to file, because there is no such law; and it cannot prove you "failed" to file if you were not required to in the first place.
    Your resolutely keeping the burden of the proof on the government in respect to the first two elements of the charge will stand you in good stead when the jury comes to consider the third element, your good faith belief. The judge will instruct the jury what the law is. It is the jury's job to decide whether you had a deficiency and whether you were required to file. You are not allowed to argue law with the judge, but you are allowed to object if the judge allows the jury to assume your obligation to file and pay, thereby relieving the prosecution of proving every element of the charge. You are allowed to cross-examine government witnesses to expose their lack of authority to determine that you in particular are subject to federal income tax and the lack of foundation of the charges.
    You are also allowed to present evidence of what you believed (and believe) the law to be. And the more reasonable the jury finds your belief, the more likely they are to be persuaded of it themselves and to find that the government has failed to meet its burden of proof of the first two elements--and also, the more likely they are to believe that you believed it and to acquit you on the element of willfulness.
    In order to establish your good faith belief with the jury, Skinner urges you, in the strongest possible terms, to demand the assistance of court-appointed counsel (your right under the law) but to undertake your own defense. "The right to defend is given directly to the accused; for it is he who suffers the consequences if the defense fails. The counsel provision [of the Sixth Amendment] supplements this design. It speaks of the 'assistance' of counsel, and an assistant, however expert, is still an assistant" (Faretta v. California, 422 U.S. 819-20 [1975]). You need the assistance of counsel to guide you through court procedure as you conduct your defense. Your request for court-appointed counsel is independent of your financial status, about which you should refuse to give information without the benefit of counsel.
    Skinner's stoutly bound, large-format, inch-thick paperback book covers such other topics as social security tax (susceptible to the same defense), state income tax (ditto), how to claim your whole paycheck from your employer, how to refuse an I.R.S. hearing and demand due process in a federal district court, how to answer a summons for books and records, how to challenge an indictment, some bad arguments and why they fail, getting good jury instructions, and sample letters and motions.
    Although Skinner's expertise is with U.S. law, we suspect that his reasoning will be found to apply to a kindred legal systems, such as those of Australia, Canada, and the United Kingdom.
    Our colleague in Alberta, Mr. Gostick, recently published an article quoting the British North America Act (the constitution of Canada) as limiting "direct taxation" to the provincial governments. Income tax being "the most common method of direct taxation," the author concludes federal income tax law to be of no force and effect (Murray Gauvreau, "Our Constitution," Canadian Intelligence Service 47 [1997]: 116). What if, instead of the more radical conclusion, he were to accept the law as an indirect tax and demand to know what privileged activity it taxes?
    Skinner's plan of action just may be the most effective sanction citizens could exercise against arbitrary power. Of course, Christian men and women will not suppose that victory is to be won without sacrifices.

The Biggest "Tax Loophole" of All is available from Otto Skinner, P.O. Box 6609, San Pedro, CA 90734, for $44.95 shipped. It is well worth the price.