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The American Income Tax

Chapter 11

Nonresident Aliens and Citizens — The Camel Sneezes

Written by Darrell Anderson.

A little neglect may breed great mischief.

Benjamin Franklin

The 1916 Supreme Court decisions seemed to have abruptly modified understanding of the nature of the income tax and the 16th Amendment. Only two months after the Brushaber opinion, the Secretary of the Treasury published Treasury Decision 2313. Later that same year, legislators enacted the 1916 revenue act,[1] which introduced some subtle differences from the 1913 revenue act. Both events lead to much speculation about the nature of the income tax. Treasury Decision 2313 states in part:

Under the decision of the Supreme Court of the United States in the case of Brushaber v. Union Pacific Railway Co., decided January 24, 1916, it is hereby held that income accruing to nonresident aliens in the form of interest from the bonds and dividends on the stock of domestic corporations is subject to the income tax imposed by the act of October 3, 1913.
Nonresident aliens are not entitled to the specific exemption designated in paragraph C of the income-tax law, but are liable for the normal and additional tax upon the entire net income “from all property owned, and of every business, trade, or profession carried on in the United States,” computed upon the basis prescribed in the law.
The normal tax shall be withheld at the source from income accrued to nonresident aliens from corporate obligations and shall be returned and paid to the Government by debtor corporations and withholding agents as in the case of citizens and resident aliens, but without benefit of the specific exemption designated in paragraph C of the law.

What happened? One common theory is that Frank Brushaber, the appellant in the 1916 Supreme Court decision, in his original petition had declared himself a citizen of New York and a resident of Brooklyn. Brushaber had sued to recover taxes paid on stock dividends. Somehow the Secretary had interpreted the Brushaber ruling to mean that citizens of a state were, for the purposes of the income tax of 1913, nonresident aliens with respect to the United States. After the ruling that the income tax was not a direct tax no longer subject to apportionment but an indirect tax in the nature of an excise, the Secretary seemed to have decided that this new interpretation of the 16th Amendment meant that nonresident aliens should be included as being subject to the income tax laws of 1913. This Treasury Decision seems to imply that the general thinking of the day was that congressional legislators were limited in their taxing jurisdiction with respect to direct taxation, despite the 16th Amendment. Prior to the 16th Amendment most people agreed that the jurisdiction for direct taxes was indeed limited. The 16th Amendment was thought to have created a new method of taxing the specific property of income by removing the rule of apportionment. But the tax remained a direct tax and citizens of the states were considered nonresident aliens with respect to direct taxation in the United States. Income received by state citizens were untouchable under the 1913 income tax laws. Declaring the tax an indirect tax in the nature of an excise removed that restraint.

The great confusion about this Treasury Decision is that the topic of nonresident aliens was never argued in the case. The entire issue at bar was only constitutional questions of implementing the 16th Amendment. Further, such an historical interpretation would conflict with the Supreme Court justices decision five years earlier in Flint v. Stone Tracy Co.:[2]

We must remember, too, that the revenues of the United States must be obtained in the same territory, from the same people, and excise taxes must be collected from the same activities, as are also reached by the states in order to support their local government.

Another popular argument is that Frank Brushaber was a withholding agent for a group of foreigners. Brushaber was protesting the tax on behalf of the people he represented. Those people were indeed nonresident aliens. Brushaber was told he had to pay the tax on behalf of those he represented. Yet nowhere in the Court documentation is this alleged fact raised or argued.

There is a straightforward answer that satisfies Occam’s Razor. Recall that Frank Brushaber was suing to enjoin the Union Pacific Railway Co. from paying an income tax on stock dividends. Union Pacific was a nonresident alien with respect to the political boundaries of the United States. Union Pacific was a state incorporation, not national. Because the Brushaber case decided that Union Pacific owed the tax, an obvious conclusion then is that nonresident aliens are not exempt to the income tax.

Legislators seemed to have responded similarly to the 1916 Supreme Court decisions. The Pollock rule had closed the door on taxing income directly without the rule of apportionment. The initial interpretation and understanding by many people of the 16th Amendment was to bypass Pollock rule and allow direct taxation without apportionment with respect to the specific property of incomes. In the 1913 revenue act, legislators wrote:[3]

That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar year to every citizen of the United States, whether residing at home or abroad, and to every person residing in the United States, though not a citizen thereof, a tax of 1 per centum per annum upon such income . . . . [emphasis added]

Notice with the 1913 act that legislators taxed citizens regardless of geographical location and resident non citizens.

After the 1916 Supreme Court decisions legislators modified the income tax laws:[4]

That there shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the United States, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the United States by every individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise. [emphasis added]

Was this revenue act a direct result of the 1916 court decisions? Yes, but not as deeply conspiratorial as many people would think or hope. Legislators merely added the term nonresident alien to the statutes to ensure that such people were sucked into the income tax system. Legislators simply were closing a loophole. Notice in the 1913 act that citizens at home or abroad, and non citizens residing in the United States, were subject to the tax. Legislators had to add the nonresident alien, the person who received income within the United States but was not residing there and was not a citizen. Fundamentally, Brushaber was a case addressing the taxation of income received by foreigners residing outside the boundaries of the United States. This was the actual issue at bar.

There probably is another reason for these two changes in tax collection policy with respect to the nonresident alien — World War I. Politicians were edging to get Americans involved in that war. A policy of explicitly taxing people who soon might be declared enemies was hardly a strange idea.

All of this seems so simple, but an important point about Treasury Decision 2313 and the 1916 revenue act is that income tax proponents, especially IRS employees, doggedly refer to the Brushaber case as the pivotal case that justifies the income tax, including the “indirect” taxation of wages and salaries. These people cite the Brushaber decision as the fundamental case in which the nature of the 16th Amendment was affirmed. Such an effort is potentially constructive fraud, but more likely is another example of ignorance and incompetence. Most people read only the final Supreme Court opinion and do not to read the legal briefs and lower court records. This case did address some major constitutional questions but did not answer any questions of errors of the lower court decisions. There were no such errors raised. As previously noted, Frank Brushaber’s case had been dismissed for failing to state a cause of action for which the court could grant relief. Yes, the Supreme Court justices blew a lot of hot air to emphasize the nature of the 16th Amendment, but when placed in perspective with respect to those foreigners holding stock and being taxed on the dividends received, the importance of Brushaber seems to fizzle. To promote Brushaber as the cornerstone case is questionable because the effort to use this case seems to be little more than a dog and pony show.

Some people might argue that Brushaber establishes that only nonresident aliens are subject to the income tax, but such an argument requires much twistification and ignoring much of the political and social atmosphere of the early 20th century. To argue as much merely introduces a different dog and pony show.

Treasury Regulation 1.1–1

Many students of the income tax have noticed that Treasury Regulation 1.1–1 (26 CFR 1.1–1) corresponds to no counterpart in section 1 of the Internal Revenue Code. Some people have declared that the regulation is therefore void and impotent. The regulation states in part:

Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a non-resident alien individual.

Paragraph (b) of regulation 1.1–1 explains who is liable for the income tax and reads in part:

(b) Citizens or residents of the United States liable to tax. In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States . . . As to tax on nonresident alien individuals, see sections 871 and 877.

Some people then believe the investigation gets muddier when reading paragraph (c):

(c) Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citizen.

An obvious question then becomes the element of jurisdiction. People who have pushed their theories about Treasury Decision 2313 and the subsequent 1916 legislation, especially people who embrace the concept that state citizens are exempt from the income tax, argue passionately about the question of jurisdiction. With respect to taxation, however, the Flint v. Stone Tracy Co. decision seems to quash any questions about jurisdiction.

Some people have realized, however, that the original statute from which regulation 1.1–1 is derived was never properly transcribed into the Internal Revenue Code. The original statute is found in section 1 of the 1916 income tax act:[5]

That there shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the United States, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the United States by every individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise. [emphasis added]

Notice the similarity in language. Some people wonder why this statute at large never has been codified. Ignorance and incompetence are plausible reasons and should not be dismissed easily. However, deceit would seem a better explanation. Why indeed not transcribe such an important statute? Especially when so many people today ask the simple question, “Where is the law that makes me liable?”

Had legislators codified section 1 of the 1916 act people would more easily recognize the tax law that launches the issue of liability. Sadly, vagueness and deceit seems to be the preferred bureaucratic method of dealing with people. To admit that this original statute has not been transcribed into the Code would be a sign of incompetence and ignorance. To admit such an omission would cause people to start investigating other potential problems with the Code. The result would be a can of worms because there are additional transcription issues. Pretending to be a jack-booted thug and tough guys seems easier than being honest and forthright.

That the original 1916 statute is not codified into the Internal Revenue Code is irrelevant. The Code is not considered positive law but is only prima facie evidence of the law. If there is any conflict with the codified version then the original statutes prevail. For an example of how this issue would be decided if presented to the Supreme Court justices, read Fulman v. United States.[6] Of course, how many people are going to investigate the original statutes?

Finis.

Terms of Use

Next: Chapter 12: Gains, Profits, and Income — The Deceptive Camel

Table of Contents

Bibliography

Endnotes

[1] Volume 39 Statutes at Large, 64th Congress Session I, Chapter 463, p. 756, enacted September 8, 1916.

[2] 220 U.S. 107 (1911), at page 154.

[3] Volume 38 Statutes at Large, 63rd Congress Session I, Chapter 16, section II, p. 166, enacted October 3, 1913.

[4] Volume 39 Statutes at Large, 64th Congress Session I, Chapter 463, p. 756, enacted September 8, 1916.

[5] Volume 39 Statutes at Large, 64th Congress Session I, Chapter 463, p. 756, enacted September 8, 1916.

[6] 434 U.S. 528 (1978).