This argument asserts that wages,
tips, and other compensation received for personal services
are not income, because there is allegedly no taxable gain
when a person “exchanges” labor for money. Under
this theory, wages are not taxable income because people have
basis in their labor equal to the fair market value of the
wages they receive; thus, there is no gain to be taxed.
Some take a different approach and argue that
the Sixteenth Amendment to the United States Constitution
did not authorize a tax on wages and salaries, but only on
gain or profit.
For federal income tax purposes, “gross
income” means all income from whatever source derived
and includes compensation for services. I.R.C. § 61.
Any income, from whatever source, is presumed to be income
under section 61, unless the taxpayer can establish that it
is specifically exempted or excluded. In Reese v. United States,
24 F.3d 228, 231 (Fed. Cir. 1994), the court stated, “an
abiding principle of federal tax law is that, absent an enumerated
exception, gross income means all income from whatever source
The Sixteenth Amendment provides that Congress
shall have the power to lay and collect taxes on income, from
whatever source derived, without apportionment among the several
states, and without regard to any census or enumeration. U.S.
Const. amend. XVI. Furthermore, the U.S. Supreme Court upheld
the constitutionality of the income tax laws enacted subsequent
to ratification of the Sixteenth Amendment in Brushaber v.
Union Pacific R.R., 240 U.S. 1 (1916). Since that time, the
courts have consistently upheld the constitutionality of the
federal income tax.
All compensation for personal services, no matter
what the form of payment, must be included in gross income.
This includes salary or wages paid in cash, as well as the
value of property and other economic benefits received because
of services performed, or to be performed in the future.
Furthermore, criminal and civil penalties have been imposed
against individuals relying upon this frivolous argument.
Relevant Case Law:
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955)
– referring to the statute’s words “income
derived from any source whatever,” the Supreme Court
stated, “this language was used by Congress to exert
in this field ‘the full measure of its taxing power.’
. . . And the Court has given a liberal construction to this
broad phraseology in recognition of the intention of Congress
to tax all gains except those specifically exempted.”
Commissioner v. Kowalski, 434 U.S. 77 (1977) – the Supreme
Court found that payments are considered income where the
payments are undeniably accessions to wealth, clearly realized,
and over which a taxpayer has complete dominion.
United States v. Connor, 898 F.2d 942, 943-44
(3d Cir.), cert. denied, 497 U.S. 1029 (1990) – the
court stated that “[e]very court which has ever considered
the issue has unequivocally rejected the argument that wages
are not income.”
Lonsdale v. Commissioner, 661 F.2d 71, 72 (5th Cir. 1981)
– the court rejected as “meritless” the
taxpayer’s contention that the “exchange of services
for money is a zero-sum transaction . . . .”
McCoy v. United States, 88 A.F.T.R.2d (RIA) 7116, 2001 U.S.
Dist. LEXIS 18986 (N.D. Tex. Nov. 16, 2001) – the court
rejected the taxpayer’s argument that wages received
were not income and described this position as meritless.
Cheek v. United States, 498 U.S. 192 (1991) – the Supreme
Court reversed and remanded Cheek’s conviction of willfully
failing to file federal income tax returns and willfully attempting
to evade income taxes solely on the basis of erroneous jury
instructions. The Court noted, however, that Cheek’s
argument, that he should be acquitted because he believed
in good faith that the income tax law is unconstitutional,
“is unsound, not because Cheek’s constitutional
arguments are not objectively reasonable or frivolous, which
they surely are, but because the [law regarding willfulness
in criminal cases] does not support such a position.”
Id. (emphasis added). On remand,
Cheek was convicted on all counts and sentenced to jail for
a year and a day. Cheek v. United States, 3 F.3d 1057 (7th
Cir. 1993), cert. denied, 510 U.S. 1112 (1994).
Reading v. Commissioner, 70 T.C. 730 (1978), aff’d,
614 F.2d 159 (8th Cir. 1980) – the court said the entire
amount received from the sale of one’s services constitutes
income within the meaning of the Sixteenth Amendment.
United States v. Richards, 723 F.2d 646, 648 (8th Cir. 1983)
– the court upheld conviction and fines imposed for
willfully failing to file tax returns, stating that the taxpayer’s
contention that wages and salaries are not income within the
meaning of the Sixteenth Amendment is “totally lacking
United States v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981)
– the court affirmed Romero’s conviction for willfully
failing to file tax returns, finding, in part, that “[t]he
trial judge properly instructed the jury on the meaning of
[‘income’ and ‘person’]. Romero’s
proclaimed belief that he was not a ‘person’ and
that the wages he earned as a carpenter were not ‘income’
is fatuous as well as obviously incorrect.”
Abrams v. Commissioner, 82 T.C. 403, 413 (1984)
– the court rejected the argument that wages are not
income, sustained the failure to file penalty, and awarded
damages of $5,000 for pursuing a position that was “frivolous
and groundless . . . and maintained primarily for delay.”
Cullinane v. Commissioner, T.C. Memo. 1999-2, 77 T.C.M. (CCH)
1192, 1193 (1999) – noting that “[c]ourts have
consistently held that compensation for services rendered
constitutes taxable income and that taxpayers have no tax
basis in their labor,” the court found Cullinane liable
for the failure to file penalty, stating that “[his]
argument that he is not required to pay tax on compensation
for services does not constitute reasonable cause.”
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