Federal Income Tax - Pursuant to Article 4 § 3(2)
This page updated on August 8, 2018.
If you desire to understand the federal income tax, you have to look at its beginning legislation and try to make sense of it.
Two questions that need to be asked and answered:
Where did the legislation apply?
Why was the tax not uniform?
The federal income tax is not pursuant to the constitutionally express authority for taxation delegated to Congress at Article 1 § 8(1). It is pursuant to an implied power of Article 4 § 3(2), Congress' constitutionally delegated powers over its territory and other property. The federal income tax is not a national tax, it is in the nature of a state income tax. By knowing what evidences to look for, one can discern the true nature of the income tax.
(I started studying the federal income tax around 1975. I have read numerous articles and books concerning it and absolutely none of them ever explained or made sense out of the following definitions. The information in my book allows one to comprehend these definitions.)
The following are definitions from the income tax acts for the years listed:
That the word “State” or “United States” when used in this section shall be construed to include any Territory, Alaska, the District of Columbia, Porto Rico, and the Philippine Islands, when such construction is necessary to carry out its provisions.
Definition at 39 Stat. 773 from Income Tax Act of 1916:
That the word “State” or “United States” when used in this section shall be construed to include any Territory, the District of Columbia, Porto Rico, and the Philippine Islands, when such construction is necessary to carry out its provisions.
Definition at 40 Stat. 302 from Income Tax Act of 1917:
The term “United States” means only the States, the Territories of Alaska and Hawaii, and the District of Columbia.
To understand the above definitions, one must be aware that the term "Territory" has two different meanings in the law. The following is from a 1933 Supreme Court decision:
In this connection, the peculiar language of the territorial clause, article 4, s 3, cl. 2, of the Constitution, should be noted. By that clause Congress is given power 'to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.' Literally, the word 'territory,' as there used, signifies property, since the language is not 'territory or property,' but 'territory or other property.' There thus arises an evident difference between the words 'the territory' and 'a territory' of the United States. The former merely designates a particular part or parts of the earth's surface--the imperially extensive real estate holdings of the nation; the latter is a governmental subdivision which happened to be called a 'territory,' but which quite as well could have been called a 'colony' or a 'province.' 'The Territories,' it was said in First National Bank v. County of Yankton, 101 U.S. 129, 133, 25 L.Ed. 1046, 'are but political subdivisions of the outlying dominion of the United States.'
So Territory as used in Article 4 § 3(2) includes the real estate holdings of the United States, which are subject to its jurisdiction, as well as any area which Congress has organized under a governmental body prior to such area becoming a State of the Union. Congress exercises legislative jurisdiction over these areas and can make "all needful rules and regulations" for them while acting in its capacity as a state legislature over such areas. We can see from the definitions above that both uses of the term "Territory" are used. Hawaii and Alaska were incorporated as United States' Territories in 1898 and 1912 respectively. Puerto Rico became a Commonwealth in 1952. The District of Columbia can't be an organized Territory of the United States and the Philippine Islands was never an organized Territory of the United States. So in the 1913 and 1916 acts, the term "Territory" was used in the sense of areas of land over which Congress was the supreme legislative body pursuant to Article 4 § 3(2). In the 1917 Act definition, the term "Territory" was used for Alaska and Hawaii in the sense of an area organized and incorporated under a governmental body.
In 1915 the book, A Treatise on the Federal Income Tax Under the Act of 1913, was written by Roger Foster of the New York Bar. On page 152 of that work, he writes the following:
§ 34. Incidence of the tax with respect to territory and places exempted from the same. The tax applies to all citizens of the United States, wherever resident, to all residents of the United States irrespective of their citizenship, to the income of all property owned and and of every business, trade or profession carried on, in the United States by persons residing elsewhere.1 It is levied in Alaska, the District of Columbia, Porto Rico and the Philippine Islands.2 But it is "provided that the administration of the law and the collection of the taxes imposed in Porto Rico and the Philippine Islands shall be by the appropriate internal revenue officers of those governments, and all revenues collected in Porto Rico and the Philippine Islands thereunder shall accrue intact to the general governments, thereof, respectively."3 The Act expressly directs: "That the word 'State' or 'United States' when used in this section shall be construed to incude any Territory, Alaska, the District of Columbia, Porto Rico, and the Philippine Islands, when such construction is necessary to carry out its provisions."4 Although there might be ground for argument that the phrase "any Territory" applies to the Hawaiian Islands, it was the evident intention of Congress that the residents of Hawaii, at least when not citizens of the United States, are exempt from the tax, for the reason that the Legislature of Hawaii has imposed an Income Tax upon all residents of that territory.5
[Footnote #5] 5 Hawaii Law of April 30, 1901, Session of 1901, Act 20, quoted in full, infra, Part V.
Please note that Hawaii and Alaska were both organized Territories of the United States at the time of the 1913 Income Tax Act with Hawaii being exempted from the Act while Alaska was specifically included.
Congress has the power to lay and collect taxes over United States' territories and insular possessions pursuant to the constitutional authority of Article 4 § 3(2).
From a 1920s federal case:
Lawrence v. Wardell, Collector. 273 F. 405 (1921). Ninth Circuit Court of Appeals.
 The power of Congress, in the imposition of taxes and providing for the collection thereof in the possessions of the United States, is not restricted by constitutional provision (section 8, article 1), which may limit its general power of taxation as to uniformity and apportionment when legislating for the mainland or United States proper, for it acts in the premises under the authority of clause 2, section 3, article 4, of the Constitution, which clothes Congress with power to make all needful rules and regulations respecting the territory or other property belonging to the United States..
In the following Treasury Orders, it can be seen that the Commissioner was authorized to administer the internal revenue laws in U.S. territories and insular possessions. No such delegation of authority can be found authorizing the Commissioner to administer the internal revenue laws within the legislative jurisdictions of the several States.
TO 150-01 dated February 27, 1986
6. U.S. Territories and Insular Possessions. The Commissioner shall, to the extent of authority otherwise vested in him, provide for the administration of the United States internal revenue laws in the U.S. territories and insular possessions and other authorized areas of the world.
TO 150-01 dated September 28, 1995
3. U.S. Territories and Insular Possessions. The Commissioner of Internal Revenue shall, to the extent of authority vested in the Commissioner, provide for the administration of the United States internal revenue laws in the U.S. territories and insular possessions and other areas of the world.
The authors of the Constitution in their design of that document intended for taxes to be as uniform as possible. The Article 1 § 8 clause for taxes provides that excise taxes are to be uniform and direct taxes are to be fairly apportioned according to population. Now if some areas are being taxed and other areas aren't, or tax laws are being passed specifically for some areas while other areas are under a different set of tax laws, then it is assured that such tax laws are not pursuant to Article 1 § 8(1) but Article 4 § 3(2). In the 1913 tax code the following page is found, which substantiates part of the information in the Foster treatise.
|It is plain to see
from the above page of the 1913 income tax act that
while the act applied to Porto (Puerto) Rico and the
Philippine Islands the internal revenue taxes collected
were to be covered into the respective treasuries of
those two insular possessions with those taxes being
administered not by United States officers but by the
internal revenue officers of those governments, and the
Philippine Islands' government was specifically
authorized to use its own court system in administering
the income tax. It is quite plain that Congress in
the 1913 income tax act was making laws specifically for
areas under its Article 4 § 3(2) legislative
jurisdiction. It is interesting to note that if
one will go read at this webpage http://welcome.topuertorico.org/government.shtml
one will see that while the United States administers
Social Security in Puerto Rico the Puerto Ricans are
otherwise exempt from the Internal Revenue Code.
Again, by reading from the 1920s federal court case, one can see that Congress was making laws specifically for areas under Congress' Article 4 § 3(2) legislative jurisdiction and also, neither was the tax uniform. While previous to 1918 some citizens of the United States in certain possessions of the United States were taxed, it was not until the 1918 act that the incomes of all citizens of the United States wherever resident were made taxable.
When Congress enacted the Revenue Law of October 3, 1917, by section 5 (Comp. St. 1918, Sec. 6336vv) it saw fit to provide expressly that the provisions of the title should not extend to the Philippines or Porto Rico, and the local Legislatures were given power to amend, alter, modify, or repeal the income tax laws in force in the islands, respectively. The result was that under the act of 1916 the entire net income of every individual, a citizen or resident of the United States, resident in the Philippines, became taxable thereunder, but subject to the jurisdiction of the Philippines in respect to tax matters. But Congress, acting doubtless under the after-war needs, by the Revenue Act of 1918, changed the situation and made the net income of every individual citizen of the United States taxable, no matter where he resides. In the place of the taxes imposed by the act of 1916 (subdivision (a) section 1), and by the act of 1917 (section 1) the net income of 'every individual' was subject to the rate prescribed (section 210); and in place of taxes imposed by subdivision (b), section 1, of the act of 1916, and section 2 of the act of 1917 (Comp. St. 1918, Sec. 6336aaa), but in addition to the normal tax imposed by section 210 of the act the surtaxes prescribed should be collected.
 The comprehensiveness of the 1918 act is as great as language could make it, for it applied to the income of every individual, changing the rates, and obviously imposing taxes at the new rates, where no tax could have been imposed prior to the 1918 act. We are unable to infer that, by using the words 'in lieu of,' Congress meant to tax only those incomes of individuals who had been subject to taxation under the two prior acts. It is more reasonable to hold that, where the individual was liable under the prior act of 1916, the new act of 1918 became the controlling standard. Where, by the act of 1917, he was relieved of the increased rates of that act, but had been subject to the 1916 act, he was covered by the provisions of the 1918 act, and in the event he was never before included he became liable under the very broad terms of the act of 1918. Section 260, supra, of the act of 1918, also leads to the conclusions indicated. The language there used discriminates, by making individuals who are citizens of a possession of the United States, yet not otherwise citizens of the United States, and who are not residents of the United States, subject to be taxed only as to income derived from sources within the United States. Unless such a person has income so derived, he is not subject to the act.When one becomes acquainted with the proper information, it becomes plain that the income tax is not pursuant to Article 1 § 8(1). The income tax applies to incomes and persons which or who are subject to the Article 4 § 3(2) legislative jurisdiction Congress exercises over its territory and other property. Until Americans understand that, they will not understand the federal income tax.
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