PROOF OF FACTS: Constitutional “income” limitations do not apply to DOMESTIC PROPERTY or ENTITIES so tax is on GROSS RECEIPTS instead of PROFIT

By ftsig-admin | June 5, 2025

EDITORIAL:

This case dealt with the issue of whether “income” entered on a domestic privileged return and subject to privileged deductions under 26 U.S.C. §162 is CONSTITUTIONAL “income” under Eisner v. Macomber. The court essentially concluded that it isn’t, by stating that deductions are a matter of legislative grace. Anyone who can TAKE privileged “trade or business” deductions has either domesticated ITSELF as a U.S. person or has domesticated its PROPERTY by “effectively connecting” it. Even if they have done NEITHER of these two things, if they are engaged in foreign affairs, they STILL cannot claim the protections of the constitution’s limitations upon direct taxes in Article 1, Section 2, Clause 3, and Article 1, Section 9, Clause 4. Thus, constitutional “income” limitations DO NOT apply after ANY of the following elections have happened:

  1. Filed a domestic return.
  2. Filed a foreign return and entered anything in the “effectively connected” section.
  3. Voluntarily engaged in foreign commerce as a nonresident entity not protected by the Constitution.

If this company wanted to challenge whether they are entitled to compute PROFT in entering income on the tax return, using the “effectively connected” portion of a DOMESTIC return was the WRONG way to do it. They SHOULD have filed a FOREIGN return, took no privileged deductions, not filed as an alien under the foreign affairs functions, and THEN and ONLY then could they have succeeded in the challenge they made.

This taxpayer was a domestic corporation. They filed an 1120M for the year 1960 and paid tax on their gross receipts rather than on profit or cost of goods sold. If they had been a foreign corporation operating within a constitutional state, they would instead:

  1. File the 1120F. See:
    https://www.irs.gov/pub/irs-pdf/f1120f.pdf
  2. Entered earnings from ONLY the United States government worldwide in Section 1: Income From U.S. Sources Not Effectively Connected With the Conduct of a Trade or Business in the United States which was only profit.
  3. Filed this lawsuit ONLY if the IRS tried to make the tax on anything OTHER than the U.S. government or upon GROSS RECEIPTS.

Taxpayer domestic corporation argued that the Sixteenth Amendment limited the tax to a tax on ONLY “profit”. The court held that:

  1. The Sixteenth Amendment wasn’t necessary to impose the tax.
  2. The taxing authority derived chiefly from Article 1, Section 8 of the constitution rather than the Sixteenth Amendment.
  3. The tax was on gross receipts RATHER than profit under what today is Section 61 of the Internal Revenue Code.

You can find the instructions for the 1120-F instead of the 1120 at:

Instructions for Form 1120-F (2024) | Internal Revenue Service
https://www.irs.gov/instructions/i1120f

The following quote is a LIE by the court:

“It could well be argued that the tax involved here is an “excise tax” based upon the receipt of money by the taxpayer. It certainly is not a tax on property and it certainly is not a capitation tax; therefore, it need not be apportioned.”

If the company filed domestic, the tax is on PUBLIC PROPERTY or USPI ONLY. The court is falsely PRESUMING that the only context for the word “property” is PRIVATE. That’s a violation of due process. They do this so that you won’t be informed WHERE their authority to tax REALLY comes from so you can’t challenge it.

BEGIN CASE:

In making its tax return, the taxpayer set out on form 1120M the usual figures required, including the tax due; the amount of tax shown to be due is the amount in dispute here, namely, $12,566.76. 

[. . .]

Petitioner’s argument is that, since the tax-imposing provisions relied on here occur in the middle of an income tax statute and are labeled by Congress as “income tax” provisions, the sole test of their validity is whether they tax “income” within the meaning of the Sixteenth Amendment. A tax on receipts from sales without allowing a deduction for cost of goods sold, so the argument goes, is not a tax on “income,” not even “gross income,” but a tax on gross receipts; insurance premiums, it is contended, are a fund for the payment of loss claims and are, therefore, like sales with the loss claims analogous to cost of goods sold. Petitioner recognizes the principle that deductions are a matter of legislative grace, but contends that this principle only applies to deductions from gross income; a deduction of cost of goods sold from the receipts from sales, says petitioner, is not a matter of legislative grace but a matter of constitutional necessity.

Furthermore, says petitioner, the tax involved here is really a tax on various choses in action. A chose in action being property, a tax imposed thereon is a direct tax which, under the Constitution, must be apportioned amongst the States according to population. Admittedly this tax is not so apportioned. Therefore, says petitioner, the tax is unconstitutional.

We think petitioner’s argument imposes tighter restrictions on the federal taxing power than a century and a half of court decisions warrant. The taxing power of Congress granted by Article I of the Constitution[5] “is exhaustive and embraces every conceivable power of taxation”[6] and is subject only to certain constitutional restrictions. One such restriction is found in the due process clause of the Fifth Amendment.[7] Other restrictions are, of course, found in Article I, Sections 2 and 9 requiring direct taxes to be apportioned according to population;[8] Section 8 requiring uniformity;[9] and Section 9 prohibiting export duties.[10]

It did not take a constitutional amendment to entitle the United States to impose an income tax. Pollock v. Farmers’ Loan & Trust Co., 1895, 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759, Id., 158 U.S. 601, 15 S.Ct. 912, 39 L.Ed. 1108, only held that a tax on the income derived from real or personal property was so close to a tax on that property that it could not be imposed without apportionment.[11] The Sixteenth Amendment removed that barrier.[12] Indeed, the requirement for apportionment is pretty 20*20 strictly limited to taxes on real and personal property and capitation taxes.[13]

It is not necessary to uphold the validity of the tax imposed by the United States that the tax itself bear an accurate label.[14] Indeed, the tax upon the distillation of spirits, imposed very early by federal authority, now reads and has read in terms of a tax upon the spirits themselves, yet the validity of this imposition has been upheld for a very great many years.[15]

It could well be argued that the tax involved here is an “excise tax” based upon the receipt of money by the taxpayer. It certainly is not a tax on property and it certainly is not a capitation tax; therefore, it need not be apportioned. We do not think it profitable, however, to make the label as precise as that required under the Food and Drug Act. Congress has the power to impose taxes generally,[16] and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will.

So that leaves only the question of whether it is a violation of due process to impose a tax on gross receipts regardless of the fact that expenditures exceed the receipts. That question is so well settled by authority that we do not need to take long to answer it. Deductions from a tax are a matter of legislative grace[17] and if the grace is not sufficient to leave something over for the taxpayer, he has no legal grounds for complaint, whatever the hardship may be. The mere fact of intake being less than outgo does not relieve the taxpayer of an otherwise lawfully imposed tax.[18] Thus, various federal taxes on gross receipts have been upheld in a number of cases.[19]

[Penn Mutual Indemnity Company v. CIR, 277 F. 2d 16 – Court of Appeals, 3rd Circuit 1960;
SOURCE: https://scholar.google.com/scholar_case?case=18361690333552185237]

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FOOTNOTES:

[5] “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises * * * but all Duties, Imposts and Excises shall be uniform throughout the United States * * *.” U.S.Const. art. I, § 8, cl. 1.

[6] Brushaber v. Union Pac. R. R., 1916, 240 U.S. 1, 12, 36 S.Ct. 236, 239, 60 L.Ed. 493.

[7] See, e. g., United States v. Bennett, 1914, 232 U.S. 299, 34 S.Ct. 433, 58 L. Ed. 612; Brushaber v. Union Pac. R. R., 1916, 240 U.S. 1, 24-26, 36 S.Ct. 236, 60 L.Ed. 493.

[8] “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers * * *.” U.S.Const. art. I, § 2, cl. 3.

“No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before diected to be taken.” U.S.Const. art. I, § 9, cl. 4.

[9] See note 5 supra.

[10] “No Tax or Duty shall be laid on Articles exported from any State.” U.S. Const. art. I, § 9. cl. 5.

[11] See Brushaber v. Union Pac. R. R., 1916, 240 U.S. 1, 12-19, 36 S.Ct. 236, 60 L.Ed. 493; Stanton v. Baltic Mining Co., 1916, 240 U.S. 103, 112-113, 36 S.Ct. 278, 60 L.Ed. 546.

[12] “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” U.S.Const. Amend. XVI.

[13] See Hylton v. United States, 1796, 3 Dall. 171, 3 U.S. 171, 1 L.Ed. 556; Springer v. United States, 1880, 102 U.S. 586, 26 L.Ed. 253; Pollock v. Farmers’ Loan & Trust Co., supra.

[14] Pollock v. Farmers’ Loan & Trust Co., 1895, 157 U.S. 429, 580-581, 15 S.Ct. 673, 39 L.Ed. 759; Steward Machine Co. v. Davis, 1937, 301 U.S. 548, 581-582, 57 S.Ct. 883, 81 L.Ed. 1279.

[15] See Thompson v. United States, 1892, 142 U.S. 471, 12 S.Ct. 299, 35 L.Ed. 1084; Schenley Distillers, Inc. v. United States, 3 Cir., 255 F.2d 334, certiorari denied 1958, 358 U.S. 835, 79 S.Ct. 57, 3 L.Ed. 2d 72.

[16] Brushaber v. Union Pac. R. R., 1916, 240 U.S. 1, 12, 36 S.Ct. 236, 60 L.Ed. 493; Steward Machine Co. v. Davis, 1937, 301 U.S. 548, 581, 57 S.Ct. 883, 81 L.Ed. 1279.

[17] Stanton v. Baltic Mining Co., 1916, 240 U.S. 103, 108-111, 36 S.Ct. 278, 60 L. Ed. 546; Burnet v. Thompson Oil & Gas Co., 1931, 283 U.S. 301, 304, 51 S.Ct. 418, 75 L.Ed. 1049; Helvering v. Independent Life Ins. Co., 1934, 292 U.S. 371, 381, 54 S.Ct. 758, 78 L.Ed. 1311; New Colonial Ice Co. v. Helvering, 1934, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L. Ed. 1348; White v. United States, 1938, 305 U.S. 281, 292, 59 S.Ct. 179, 83 L.Ed. 172; Commissioner of Internal Revenue v. Sullivan, 1958, 356 U.S. 27, 28, 78 S. Ct. 512, 2 L.Ed.2d 559.

[18] Wilson Milling Co. v. Commissioner, 8 Cir., 1943, 138 F.2d 249, 251, certiorari denied 1944, 320 U.S. 800, 64 S.Ct. 430, 88 L.Ed. 483.

[19] See e. g., Pacific Ins. Co. v. Soule, 1868, 7 Wall. 433, 74 U.S. 433, 19 L.Ed. 95; Spreckels Sugar Refining Co. v. McClain, 1904, 192 U.S. 397, 24 S.Ct. 376, 48 L. Ed. 496; United States v. Kahriger, 1953, 345 U.S. 22, 73 S.Ct. 510, 97 L.Ed. 754. Cf. Commissioner of Internal Revenue v. Sullivan, 1958, 356 U.S. 27, 29, 78 S.Ct. 512, 2 L.Ed.2d 559.

[20] Scott Taxation of Casualty Insurance Companies, 44 Va.L.Rev. 935, 936-37 (1958). The author points out that the mutuals are the ones defending the tax structure of Section 207 while the stock companies are attacking it. Id. at 938.

For a brief summary of the history of Section 207 of the Internal Revenue Code of 1939, see Vickrey, Insurance Under the Federal Income Tax, 52 Yale L.J. 534, 573-75 (1943).

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