Internal Revenue Service TOMMY K. CRYER, J.D.

8/6/2019 Internal Revenue Service TOMMY K. CRYER, J.D.

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THEMEMORANDUM

Researched and Written by Tommy K. Cryer, J.f).Filed in support of his Motion to DismissEvasion Charges Filed Against Him

1nUnited States v. Tommy K. CryerNo. 06-50164-0IWestern District of LouisianaShreveport Division


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THEMEMORANDUMTABLE OF CONTENTS

BIOSTATEMENT OF THE CASEARGUMENT AND LAW

Tax Laws Subject to Strict ConstructionTHE INCOME TAX LAW DOES NOT 'PLAINLY AND

CLEARLY LAY'ANY TAX UPON DEFENDANT'S REVENUEThe Internal Revenue Code does not "Plainly and Clearly Lay"any liability for an income tax on defendant.The Internal Revenue Code does not "Plainly and Clearly Lay"a tax on any of defendant's revenues.

DEFENDANT'S REVENUES ARE NOT SUBJECT TOFEDERAL TAXATION BY EXCISEThe Federal Taxing PowerThe income tax is an exciseDefendant's activities and revenues are exempt from federalexcise taxation as being outside the taxing authority of thefederal governmentDefendant and his revenues are exempt from federal excisetaxation because they are within the sole and exclusivejurisdiction of the StateDefendant's revenues are exempt from federal excise taxationbecause the activity is the exercise of a fundamental,constitutionally protected right, and, therefore, outside thetaxing authority of the federal governmentDefendant's revenues do not constitute "income within themeaning of the Sixteenth Amendment" and the Constitution

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BIOGRAPHIC SUMMARYTommy K. Cryer

Attorney at Law4348 Youree Dr.Shreveport, LA [email protected]. (318) 86s-3392Personal:Bon-r Lake Charles, LA, September 11 ,1949Married (1) Carolyn Fisher, dec'd.(2) Bettye "Dee Dee" WoodardEducation:Sam Houston High School, Moss Bluff, LA,, 1967, third in class, American Heritage Award,Continental Oil Scholarship, T. H. Hanis Scholarship, JFK Memorial Scholarship, CivitanAward; Activities: Football letterman, FBLA, Beta Club, Drama Club founder and LiteraryRa11y.McNeese State University, Lake Charles, LA, B.A. 1970 (Psychology, Sociology, MilitaryScience & Pre-Law), 3.4 GPA (Note: Multi-major degree in three years)LSU Law School, Baton Rouge, LA, J.D. 1973, Honor Graduate, Order of the CoifInducted LSU Law School Flall of Fame, 1987.Military:Honorably Discharged, Captain, U. S. Army, Adjutant General Corps.Prol'essional:Louisiana Constitutional Convention, 1973, Special Advisor and Draftsman (Declaration (Bill)of Rights, Municipalities)Hargrove, Guyton, Ramey & Barlow, Shreveport, LA,1973-1975; Oil & Gas, Oil & GasTransmission (including extensive work in expropriation), Corporate, Estate, Estate Planning,Tmsts, Personal Injury and others.Private Practice, Shreveport, LA, 197 5 - Practice has included virtually every aspect of the law,both crimir-ral and civil, with clientele consisting of numerous individuals, families and


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businesses (including many third generation clients) whose varied needs have providedexperience and expertise across an extremely broad spectrum.Litigation in all courts, including pro hoc vice appointments to try cases in New York,Califomia and Texas.Extensive trial experience, bench and jury, and appellate experience including LouisianaSupreme Court, in which have been privileged to successfully advocate numerous cases forgingnew law (two of which were significant enough that the legislature overturned them within oneyear).Civic Activities:Shreveport Jaycees (exhausted rooster), Board of Directors, Legal Counsel, Chaired numerousprojectsCaddo Heights United Methodist Church, Board of Trustees I974-1980Shreveport Optimist Club, Board of DirectorsPast Master, W. H. Booth Lodge #380, F & AMPast Master, First Masonic District LodgeLouisiana Grand Lodge, Law & Jurisprudence Committee; Board of Charities and Benevolences;Education Committee; Certified Instructor; Lecturer at numerous Grand Master's Seminarsacross the stateScottish Rite Bodies, Shreveport Valley, 32"El Karubali Shrine, Shreveport, LAPast President, Shreveport High Twelve ClubChairman, Shreveport Republican PAC, 1991-3, Delegate 1992 State Republican Convention;oversaw and consulted for eleven campaigns, left office 11 and 0. (no longer active in politics)Personal Interests:Study of History and Constitutional LawHunting and FishingWoodworkingLicensed Pilot, Multi-engine Land


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CAVEAT:THIS MEMORANDUM WAS PREPARED ANDWRITTEN FOR OI\E SPECIFIC CASE AI\D MAY NOTAPPLY TO OTHERS.

IT IS NOT OFFERED AS LEGAL ADVICE NOR AS ALEGAL OPINION RELATIVE TO AI\YONE OTHERTHAN THE PARTY IN THIS CASE AND FOR THEISSUES PRESENTED BY THIS PARTICULARPROCEEDING.THE READER SHOULD OBTAIN INDEPENDENTADVICE FROM A LICEI{SED ATTORNEY BEFORERELYING ON THE APPLICABILITY OF ANY

AUTHORITIES CITED HEREII\ INSOFAR AS THEYMAY OR MAY NOT APPLY TO THE READER.THIS MATERIAL IS NOT COPYRIGHTED ANDREPRODUCTION AND DISTRIBUTION IS NOT OI{LYAUTHORIZED, BUT EI\COURAGED, PROVIDED THATTHE FOREGOII{G CAVEAT IS INCLUDED WITH ANYSUCH REPRODUCTIOI\ AND/OR DISTRIBUTION,

WHETHER IN WHOLE OR IN PART


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U\ITED STATES DISTRICT COURTWESTERN DISTRICT OF LOUSIANASHREVEPORT DIVISIONLINITED STATES OF AMERICA

V.TOMMY K. CRYER, Defendant

CASE NO. 06-50164-0rJUDGE: HICKSMAGISTRATE: HORNSBY

MEMORANDUM IN SUPPORTOFDEFENDANT'S FOURTH MOTION TO DISMISS INDICTMBNTMAY IT PLEASE THE COURT:

STATEMENT OF THE CASEOn October 25, 2006, the governrnent filed herein an indictment charging

defendant, TOMMY K. CRYER, hereinafter "Cryer", with two counts of taxevasion, alleging that during the years 2000 and 2001 Cryer had received taxableincome but had knowingly and willfi.rlly failed to timely file tax retums for saidyears and that, as an "affirmative act" of evasion Cryer had failed to file tax returnsfor the Tommy K. Cryer Trust, which, the indictment claims, had received taxableincome, thereby (presumably) concealing income and misleading the Internal


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Revenue Service, hereinafter IRS, into believing that Cryer had no income for theyears 2000 and 2001, all in violation of 26 U.S.C. $ 7201.

Defendant now files this motion pursuant to Rule I2(b) to dismiss bothcounts of the indictment, with prejr"rdice, on the basis that as a matter of lawrevenues received by him are not taxed or taxable under the provisions of theInconre Tax laws and regulations thereunder promulgated, nor are any revenuesreceived by hirn within the powers of the federal government to tax and that therevenues received by him are exempt from taxation by excise under theConstitution of the United States and that, therefore, an essential element of thecharges, a "tax due and owing", is absent in this case.

ARGUMENT AND LAWThere are three essential elements to the crime of tax evasion, namely (1)

willfulness; (2) existence of a tax deficiency; and (3) an affirmative act constitutingan evasiou or attempted evasion of the tax. Sansone v. United States,380 U.S.343, at 351, 85 S.Ct. 1004, at 1010 (i965); United States v. Bishop,264F.3d 535(5th Cir.2001); United States v. Daclc,l47 F.2dlI72,atl17417th Cir. 1984); andUnited states v. Mal, 942 F.2d 682, at 687 (9th Cir. 1991); united States v.


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Silkman,156 F.3d 833 (8th Cir. 1998). See also Lawnv. United States,355 U.S.339, at 361,78 S.Ct. 31 1 (1958). Mr. Cryer strenuously denies all three elements,but the absence of any one element constitutes a defense and is fatal to the charge.

Reserving all rights and objections to the indictment previously raised, it isrespectfully submitted that there is, as a matter of law, no tax deficiency due andowing by defendant.TAX LAWS SUBJECT TO STRICT CONSTRUCTION

Tax laws are clearly in derogation of personal rights and properly interestsand are, therefore, sr-rbject to strict construction, and any ambiguity must beresolved against imposition of the tax. In Billings v. (J.5.,232 Ll.S. 261,34 S.Ct.421 (1914), the Supreme Court clearly acknowledged this basic and long-standingrule of statutory construction:

"Tax statutes . . . should be strictly construed, and, if anyambiguity be found to exist, it must be resolved in favor of thecitizen. Eidman v. Martinez, 184 U.S. 578, 583; United States v.Wigglesworth, 2 Story, 369, 374; Mutual Benefit Life Ins. Co. v.Herold, 198 F. 199,201, affd 201 F. 918; Parkview Bldg. Assn. v.Herold,203 F. 876, 880; Mutual Trust Co. v. Miller, 177 N.Y. 51,57." (Id at p.265, emphasis added)


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Again, in {Jnited States v. Merriatn,263 U.S. 179, 44 S.Ct. 69 (1923), theSupreme Court clearly stated at pp. 187-88:

"On behalf of the Government it is urged that taxation is apractical matter and concerns itself with the substance of the thingupon which the tax is imposed rather than with legal forms orexpressions. But in statutes levying taxes the literal meaning of thewords employed is most important, for such statutes are not to beextended by implication beyond the clear import of the languageused. If the words are doubtful, the doubt must be resolvedagainst the Government and in favor of the taxpayer. Gould v.Gould,245 U.S. 151, 153." (emphasis added)This rule of strict construction against the taxing authority was reiterated in

Tandy Leather Contpany v. United States,347 F.2d 693 (5th Cir. 1965), whereJudge Hutcheson of our 5'l' Circuit eloquently and unequivocally proclaimed at p.694-5:

In ruling as he did, that the taxpayer had the obligation to showthat soles of the articles in suit were not subject to the excise taxescollected, the district judge was misled by the erroneous contention ofthe tax collector into misstating the rule of proof in a tax case. This is:that the burden in such a case is always on the collector to show, injustification of his levy and collection of an excise tax, that the statuteplainly and clearly lays the tax; that, in short, the fundamental rule isthat taxes to be collectible must be clearly laid.

"The Government's claim and the judge's ruling come down ineffect to the proposition that the state of construction of appellants'kits had reached such an advanced level that the tax levied on the


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finished products could be collected on their sale, though none hadbeen clearly laid thereon by statute. Shades of Pym and JohnHampden, of the Boston tea party, and of Patrick Henry and theVirginians! There is no warrant in law for such a holding. Gould v.Gould,245 U.S. 151, at p. 153, 38 S.Ct. 53, 62 L.Bd.211. In 51American Jurisprudence, "Taxation", Sec. 316, "Strict or LiberalConstruction", supported by a great wealth of authority, it is said:'Although it is sometirres broadly stated either thattax laws are to be strictly construed or, on the other hand,that such enactments are to be liberally construed, thisapparent conflict of opinion can be reconciled if it isbome in mind that the correct rule appears to be thatwhere the intent of rneaning of tax statutes, or statuteslevying taxes, is doubtful, they are, unless a contrarylegislative intention appears, to be construed moststrongly against the government and in fuvor of thetaxpuyer or citizen. Any doubts as to their meaning are tobe resolved against the taxing authority and in favor ofthe taxpayer. )l. {< {


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F. Supp. 829 (1968); Grays Harbor Chair and Manufacturing Company v. UnitedStates,265F. Supp. 254 (1967); Russellv. United States,260F. Supp. 493 (1966).

Thus, as we enter into the labyrinth of the Internal Revenue Code and itsrelated regulations, we must do so mindful of the hornbook rule that tax laws arestrictly construed and that when the letter of the law is subject to more than oneinterpretation, it must be construed against the imposition of the tax, the mle ofinterpretation of taxes being:

"that the burden in such a case is ulways on the collector to show, injustification of ltis levy and collection of an excise tax, that thestatute plainlv qnd clearlv la1,s the tax; that, in short, thefundamentul rule is that taxes to be collectible must be cleurlv laid."Tandy Leatlter Contpany, supra, at 694.

(emphasis added)

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THE INCOME TAX LAW DOES NOT ''PLAINLY AND CLEARLY LAYI'ANY TAX UPON DEFENDANT OR HIS REVENUEThe Internal Revenue Code does not "Plainly and Clearly Lay" any liabilityfor an income tax on defendant.

The Income Tax Law, Subtitle A of Title 26,Untted States Code, imposes atax on the taxable income of certain individuals in $ 1:

"26 a.S.C. $ 1.Tax Imposed."(a) Married individuals filing joint returns and surviving spouses"There is hereby imposed on the taxable income of -"(1) every married individual (as defined in section 7703) whomakes a single return jointly with his spouse under section 6013, and"(2) every surviving spouse (as defined in section2(a)),

a tax determined in accordance with the following table:

"(b) Heads of households"There is hereby imposed on the taxable income of every head ofa household (as defined in section 2(b)) a tax determined inaccordance with the following table:"(c) Unmarried individuals (other than surviving spouses and headsof households)

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"There is hereby imposed on the taxable income of everyindividual (other than a surviving spouse as defined in section 2(a) orthe head of a household as defined in section 2(b)) who is not amarried individual (as defined in section 7703) a tax determined inaccordance with the following table:

"(d) Married individuals filing separate returns"There is hereby imposed on the taxable income of every marriedindividual (as defined in section 7703) who does not make a singleretum jointly with his spouse under section 6013, a tax determined inaccordance with the following table: . . ." (emphasis added)

but this section does not designate anyone as liable for the payment of the tax.It should be noted at this point that titles and headings, such as "Married

individuals and surviving spollses filing joint returns" and "Heads of households"are not part of the law and have absolutely no legal effect. 26 U.S.C. $ 7806.Therefore, the actual statute commelrces with "There is hereby imposed . . ." Theimposition of the tax is on taxable income, only, not on any person or entity. Incontrast, see 26 U.S.C. $ 884, discussed lnore fully infra, which does impose a taxon an entity.

Subtitle A does, however, designate partners as liable for the taxes onincome of a partnership, but only in their "individual" capacities (26 U.S.C. $ 701)

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while ceftain partnerships are declared liable for excess recapture of credits (26u"s.c.704).

Foreign corporations are specifically designated as the party liable forpayment of the "Branch profits tax" imposed by 26 U.S.C. $ 884 (which,incidentally, does impose the tax on "any foreign corporation").

The only other party that is identified in the income tax law as liable for thepayment of any income tax is revealed in26 U.S.C. $ 1461:

"Sec. 1461. Liability for withheld tax"Every person required to deduct and withhold anlz tax under thischapter is hereblv made liable for sr-rch tax and is hereby indemnifiedagainst the claims and demands of any person for the amount of anypayments made in accordance with the provisions of this chapter,"

(emphasis added)"This chapter" is "Chapter 3 - Withholding Tax on Nonresident Aliens and ForeignCotporations". Thus the liable party in this instance is anyone withholding tax onnonresident aliens and foreign corporations.

There are no other references in Subtitle A (the income tax law) to anyonebeing liable for the tax imposed by $ I other than those: partners (but only in their"individual" capacity); certain large partnerships in certain excess credit situations;

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foreign corporations; and those withholding taxes on nonresident aliens andforeign corporations.

There is only one other party that is identified as being liable for the incometax, but to find that party we have to jor.u'ney outside the realm of the income taxlaw to "Subtitle C - Employment Taxes", where we f,rnd:

"Sec. 3403. Liability for tax"The emplo),_er shall be liable for the palzment of the tax requiredto be deducted and withheld under this chapter l"Subtitle C -Entployntent Tares; Chapter 24 - Collection of Inconle Tax at Sourceon Wages"], and shall not be liable to any person for the amount ofany such payment." (ernphasis and lbracketed material] added)

Thus, the only persons being assigned any liability for the income taximposed by $ 1 are those five instarrces - partners, certain large parlnerships,foreign corporations, withholders of taxes on nonresident aliens and foreigncorporations and those employers required by Chapter 24 of Subtitle C to withholdtaxes on employees.

The absence, or near absence, of a statutory provision specifying exactlywho is liable for a tax ir-rrposed is not cLrstomary. 26 U.S.C. $$ 20324 and 20564specifically state who is liable for the Estate Tax; 26 U.S.C. $ 3102(b) specifically

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states who is liable for the FICA tax;: 26 U.S.C. $ 3202 specifically states who isliable for the Railroad Retirement Tax; 26 U.S.C. $ 3505 specifically imposesliability for Employment Taxes; 26 U,S.C. $$ 4002 and 4003 specify not only whois primarily liable, but who is secondarily liable for the Luxury PassengerAutomobile Excise Tax. See also: 26 U.S.C. $$ 4051 and 4052 (Heavy Trucksand Trailers Excise Tax); 26 U.S.C. $ 4071 (Tire Manufacture Excise Tax); 26U.S.C. Q 4219 (Manulacturers Excise Tax); 26 U.S.C. $ 4401 (Tax on Wagers);26 U.S.C. $ 4411 (Wagering Occupational Tax); 26 U.S.C. $ 4483 (Vehicle UseTax); 26 U.S.C. $ 4611 (Tax on Petroleum);26 U.S.C. 5 4662 (Tax on Chemicals);26 U.S.C. S 4912 (Tax on Contributions to Qualified Employer Pension Plans); 26U.S.C. $ 49808 (Excise Tax on Failure to Satisfy Continuation CoverageReqr-rirements of Group t{ealth Plans); 26 U.S.C. $ 4980D (Excise Tax on Failureto Meet Certain Group Health Plan Requirements); 26 U.S.C. $ 4980F (Excise Taxon Failure of Applicable Plans Reducing Benefit Accruals to Satisfy NoticeReqr.rirements); 26 U.S.C. $ 5005 (Gallonage Tax on Distilled Spirits); 26 U.S.C.$ 5043 (Gallonage Tax on Wines); 26 U.S.C. 5 5232 (Storage Tax on ImportedDistilled Spirits); 26 U.S.C. $ 5364 ('l'ax on Wine Imported in Bulk); 26 U.S.C. $5418 (Tax on Beer Imported in Bulk); 26 U.S.C. $ 5703 (Excise Tax on

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Manufacture of Tobacco Products); and 26 U.S.C. $ 575i (Tax on Purchase,Receipt, Possession or Sale of Tobacco Products), to name a few.

Considering the "standard in the drafting of taxation laws industry",particularly in view of the requirement of strict construction, the limitation ofliability to those five instances cannot be assumed to have been an oversight. Inthis instance the only ones liable are those specifically named as liable, just as inany other tax provision.

In United States v. Calamaro,354 U.S. 351,77 S.Ct. 1138 (1957), theSupreme Court reviewed the conviction of a "pick-up man" in a numbers gameoperation. Calamaro had been convicted of failure to pay an occupational tax,imposed not only on persons who are sr"rbject to the excise tax on being "engagedin the business" of wagering, but also on those who are "engaged in receivingwagers" on behalf of one subject to the excise tax.

Although the "pick-up man", CaIamaro, was the person who actuallyreceived the money from the players, handed out the betting slips to the playersand was acting on behalf of the "banker", the Supreme Court held that the he wasnot one who "engaged in receiving wagers" because "receiving wagers" meantaccepting or entering into the wager, not receiving the money for the wager. See

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also Grffin v. (Jnited States,588 F.2d 521 (5th Cir. 1979); Fine v. United States,206 F.Supp. 520 (Colo. 1962); Dralce v. United States,355 F.Supp. 710 (ED Mo.1973); and United States v. Mobil Corp,543 F. Sr.rpp. 507 (ND Tex. 1981) (26U.S.C. 6001 and 26 CFR 31.6001 stating records "shall at all times be available forinspection" by revenue officers did not permit IRS blanket access, without warrantor sllmmons, to browse tlrrough employee W-4's).

In Calanmro, the government cited a parallel regulation that more clearlyincluded the "pick-up" man as one who "engaged in receiving wagers", which theSupreme Court effortlessly dismissed:

"Finally, the Government points to the fact that the TreasuryRegulations relating to the statute purport to include the pick-up manamong those subject to the $ 3290 tax, and argues (a) that thisconstitutes an administrative interpretation to which we should giveweight in construing the statute, particularly because (b) section 3290was carried over in haec verba into $ 44tl of the Internal RevenueCode of 1954. We find neither argument persuasive. In light of theabove discussion, we cannot but regard this Treasury Regulationas no more than an attempted addition to the statute of somglhingwhich is not there. As such the regulation can furnish nosustenance to the statute. Koshland v. Helvering,298 U.S. 441 , 446-447. Nor is the Government helped by its argument as to the 1954Code. The regulation had been in effect for only three years, and thereis nothing to indicate that it was ever called to the attention ofCongress. The re-enactment of $ 3290 in the 1954 Code was notaccompanied by any congressional discussion which throws light onits intended scope. In such circumstances we consider the 1954 re-

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enactment to be without significance. Comnissioner v. GlenshawGlass Co.,348lJ .5. 426, 431. Calamaro: supra, at 358-9(emphasis added)

See also, Iilater Quality Ass'tt v. United States,795 F.2d 1303 (7th Cir.1986), where, citing and quotirrg Calanmro,the court added at p. 1309:

"It is a basic principle of statutory construction that courtshave no right first to determine the legislative intent of a statuteand then, under the guise of its interpretation, proceed to eitheradd words to or eliminate other words from the statute'slanguage. DeSoto Securities Co. v. Commissioner, 235 F.2d 409,4ll(7th Cir. 1956); see also 2A Sutherland Statutory Construction $ 47.38(4th ed. 1984). Similarly, the Secretary has no power to change thelanguage of the revenue statutes because he thinks Congress mayhave overlooked something." (emphasis added)There is no dispute, nor does the government otherwise contend, that

defendant, Mr. Cryer, is not a partner in any partnership, is not a large partnership,nor is he a foreign corporation.a nor-resident alien nor on any

Mr. Cryer is not required to withhold any taxes onforeign corporation, nor is he required by Chapter

24 of Subtitle C to withhold taxes on any fees he receives. Accordingiy, the onlyway the income tax law could be interpreted as imposing any liability for incometax upon Mr. Cryer is by inference or implication.

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"But in statr-rtes levying taxes the literal meaning of the words employed ismost important , for such statutes ere not to be extended by implicution beyond theclear import of the language used. If the words are doubtful, the doubt must beresolved against the Government and in fbvor of the taxpayer." Merrianx, supra.

If the provisions of the Internal Revenue Code, even considering thoseoutside the Income Tax Law (Subtitle A) fail to "plainly and clearly" lay liabilityfor the tax upon Mr. Cryer, then they cannot be given that effect through strainedinterpretations, implication or inference. Nevertheless, the government claims thatMr. Cryer owes income taxes "tlrottglt none had been cleurly laid tltereon bystatute. Shades of Pym and John Hampden, of the Boston tea party, and of PatrickHenry and the Virginians! There is no rvarrant in law for such a holding." TandyLeotlrcr, supra.

It is, therefore, respectfully submitted that there is no statute that renders Mr.Cryer liable for an income tax, and, therefore, he is not so liable. Absent a lawfulliability for taxes, the essential element, liability for a tax deficiency, is lacking inthis case as a matter of law, and, accordingly, it is respectfully submitted that bothcounts of the indictment should be disrnissed, with prejudice.

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The Internal Revenue Code does not "Plainly and Clearly Lay" a tax on anyof defendantts revenues.The same rigid rule of strict construction laid down by the Supreme Court in

Billirtgs, Merriant, Gould and Calan'toro,,rupra, applies to the question of what istaxed as well as who is made liable for the tax.

Our second foray into the labyrinth begins as the first, with $ 1, whichimposes a tax "on taxable income." The first order of business is to determine thedefinition of the terms in order to define the scope of the tax. However, the firstobservation is stunning. Although the first 1,564 sections of the Internal RevenueCode are devoted to the Income Tax, the term "income", the very subject of thetax, is not defined. Nor is the term defined in any of the related regulationspromulgated by the Treasury Department.

Nor is the tenn "taxable" defined in the Code or regulations.The closest thing we have to definitions of "income" and "taxable" are all

qualified, "hybrid", definitions, income linked with another term. Thus when abody of statutory law fails to provide a definition of a tem, we must use itscustomary rneaning. Tuming to dictionaries, we find:

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Webster's Dictionary:Income. "A gain or recurrent benefit usually measured inmoney that derives from capital or labor"

(emphasis added)Black's Law Dictionary:Income. "The IglU in rnoney from one's business, labor orcapital invested; gains, profits or private revenue."

(emphasis added)and, since federal law provides no definition, we look to other laws:

Louisiana Civil Code:"Art. 551. Kinds of fruits

'rFruits are things that are produced by or derived fromanother thing without diminution of its substance."There are two kinds of fruits; natural fruits and civil fruits."Natural fruits are products of the earth or of animals."Civil fruits are revenues derived from a thing by operation oflaw or by reason of a juridical act, such as rentals, interest, and certaincorporate distributions. "

(emphasis added)

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In the Code we find hybrid definitions for "ordinary income" and "grossincome":

"26 U.S.C. S 64. Ordinary Income Defined."For purposes of this subtitle, the term "ordinary income"includes any gain from the sale or exchange of property which isneither a caprtal asset nor property described in section 1231(b). Anygain from the sale or exchange of property which is treated orconsidered, under other provisions of this subtitle, as "ordinaryincome" shall be treated as gain fiom the sale or exchange of propertywhich is neither a capital asset nor property described in section

123 1(b)."and"26 U.S.C. S 6L,Gross Income Defined."General Definition - Except as otherwise provided in this subtitle,gross income means all income lincome means incomel fromwhatever source derived, including (but not limited to) the followingitems:(1) Compensation for services, including fees, commissions, fringebenefits, and similar items; . . ."

(emphasis and lbracketed material] added)While the significance or import of the phrase "from whatever source

derived" will be more ftrlly discussed below, it is important at this point to at leastnote that the phrase "from whatever source derived" is tracked from the SixteenthAmendment, which provided that an income tax could not be classified as a direct

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tax by virtue of the source of that income. Brushaber v. (Jnion Pac. R.R., 240 U.S.1,36 S.Ct. 236 (1916); Tyee Realty Co. v. Anderson,240 U.S. 115,36 S.Ct.281(1916),' Stanton v. Baltic Mining Co.,240 U.S. 103, 36 S.Ct. 278 (1916) ThisAmendment was adopted in order to overrule Pollock v. Farmers' Loan and T. Co.,157 U.S. 537,15 S.Ct, 673 (1895), r,vhich held that atax on income derived fromproperty burdened the property and was, therefore, a direct property tax subject tothe requirement of apportionment. -fherefore, the reference to "from whateversource derived" is not an indication that Congress may tax any income from anysource, but is only an indication that an income tax (and a tax only on income) isnot to be classified as a direct tax, subject to the requirement of apportionment, byvirtue of the sollrce of the income. This is not to say that the tax is to be appliedand charged against all income without regard to its source.

The 16'r' Amendment did not expand the scope of Congress' power to tax(Brushaber, Stanton, Tyee, supra et a1.), thus although the source of income is nolonger a factor in determining whether the tax is direct or indirect, neither theiurisdiction of the federal government nor its taxing authority was enlarged toinclude authority to tax activities and privileges that it could not have taxed beforethe 16th Amendment. Source of income, then, is still a factor in determining the

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scope of the taxing authority of the federal government. (See discussions of Baileyv. Drexel Furniture Co., 259 U.S. 20, 36 S.Ct. 236 (1916); McCulloch v"Maryland, 17 U.S.316 (1819); and others, infra) As we will see, those factorswere also taken into consideration in the determination of taxable income in theCode and regulations.

The obvious common Llsage fol the term "taxable", although not readilyfor"rnd in Websters, is "able to be taxed", i.e., within the authority of a governmentto tax.

And finally, wo have the hybrid definition of "taxable income":26 U.S.C. S 63. Taxable Income Defined.(a) In general

Except as provided in subsection (b), for purposes of thissubtitle, the term "taxable income" means gross income minus thedeductions allowed by this chapter (other than the standarddeduction).Thus, when we combine the definitions we have, tlow: we have:Income : gains, profits, from capital, labor or bothTaxable : within the authority of the govemment to tax

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Thus, "taxable income" would be all gain ffrom activities that are within theauthority of the federal government to tax] derived from capital, from labor, orfrom both combined from whatever sollrce fthat is within the authority of thefederal government to tax] derived, and including certain enumerated items such asgains, or profits, from compensation for services, minus the deductions allowed bythis chapter (other than the standard deduction).

"Whatever" does not identify those sources that are within the authority ofthe federal government to tax, but in checking the index under "Income Tax" wefind "sources" and we also find "within the U.S." In order to detennine whatincome is taxable the index of the Code designates the starting point as 26 U.S.C. $861:

26 U.S.C. S S6l.Income from Sources within the United States.(a) Gross income from sources within United States

The following items of gross income shall be treated as incomefrom sources within the United States:lThis sectiott goes on to list items of gross inconle, but does not

define source nor does it specif-v any ssyrres. Following the statutorytext, ltowever, we are referred to tlrc Code of Federal Regulations:f

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''CODE OF FEDERAL REGULATIONS"General regulations, see 26 CIR'.f,9q-L86LI,

"Computation of taxable incopre from sources within U.S, andfrom other sources and activities, see 26 CFR Sec. 1,861-8."(emphasis and lbracketed materialJ added)

So, now our joumey into the labyrinth continues into the Code ofFederal Regulations:

"26 C.F.R. S 1.861-1 Income liom sources within the UnitedStates."(a) Categories of income.Part I (section 861 and followins), subchapter N, chapter I of theCode, and the regulations thereunder determine the sources ofincome for Jrurposes of the income tax. These sections explicitlyallocate certain in,rportant sources of income to the United States orto areas outside the United States, as the case may be; and, withrespect to the rernaining income (particularly that dorived parlly fromsources within and parlly from sources without the United States),authorize the Secretary or his delegate to determine the incomederived from sources within the United States, either by rules ofseparate allocation or by processes or forrrrulas of generalapportionment. The statute provides for the following three categoriesof income:"(l) Witltin tlte United States. The gross income from sources withinthe United States, consisting of the items of gross income specified insection 861(a) plus the items of gross income allocated or apportioned

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to such sources in accordance with section 863(a). See 26 C.F.R. $$1.861-2 to 1.861-7, inclusive, and 25 C.F.R. $ 1.863-1. The taxableincome from sources within the United States, in the case of suchincorne, shall be determined by deducting therefrom" inaccordance with sections 861(b) and 863(a), the expenses, losses,and other deductions properly apportioned or aliocated thereto and aratable part of any other expenses. losses, or deductions whichcannot definitely be allocated to some item or class of grossincome. See 26 C.F.R. QQ 1.861-8 and 1.853-1."(emphasis added)

There are two distinct provisions contained in this regulation that warrantour attention. First, the section informs us that $$ 861 et seq. are to be used todeterrnine taxable income, but, equally significant, is, second, that besides thededr-rctions of expenses, losses and other deductions referred to rn 26 U.S.C. $ 63(taxable income : gross income less deductions), we are now made aware thatthere are either items or sources of income that CANNOT be (as opposed to "arenot") included in gross income to begin with. The inescapable conclusion fromthis revelation is that not all income is includable in gross income, reaffirming ourprevious discussion of "from whatever source derived" as being reflective of the16ti' Amendment's prohibition of considering the source in classifying the incometax as anything other than an excise, rather than defining the scope of the tax toinclude "each and every" source.

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Now, in order to determine which sources canbe considered in determiningtaxable income and, conversely, which sources cannot be included in gross incometo begin with, $ 1.861-1(a)(1) directs us to $ 1.861-8:

"26 C.F.R. S 1.861-8 Computation of taxable income from sourceswithin the United States and liom other sources and activities."(a)In general -_ (1) Scope. Sections 861(b) and 863(a) state ingeneral terms hor,v to determine taxable income of a taxpayer fromsources within the United States after gross income from sourceswithin the Unitecl States has been determined.

fThis again confirms that gross income from within the U.S."whatever" sources derived is not necessarily subiect to federaltavation. "Tuxuble" income, tlrerefore, mast be something less thanall income from within from "whutever" source. Therefore, somesources within the United Ststes are tuxable and some sourceswithin the United States ure NOT taxable.J"Sections 862(b) and 863(a) state in general terms how to determinetaxable income of a taxpayer frorn sources without the United Statesafter gross income from sources without the United States has beendetennined. This section provides specific guidance for applying thecited Code sections by prescribing rules for the allocation andapportionment of expenses, losses, and other deductions (referred tocollectively in this section as deductions") of the taxpayer. The rulescontained in this section apply in deterrnining taxable income ofthe taxpayer from specilic sources and activities under othersections of the Code, referred to in this section as operativesections. See paragraph (fXl) of this section for a list and

'''(emphasis and lbraclceted material] added)

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So, what does paragraph (0(1) of this section identify as those specificsources and activities that determine whether income is taxable?

"(f) Miscellaneous matters -"(1) Operative sections. The operative sections of the Code whichrequire the determination of taxable income of the taxpayer fromspecific sources or activities and which give rise to statutorygroupings to which this section is applicable include the sectionsdescribed below."(i) Overall limitation to the foreign tax credit."(ii) fReserved]"(iii) DISC and FSC taxable incorne."(iv) Effectively connected taxable income. Nonresident alienindividuals and foreign corporations engaged in trade or businesswithin the United States"..."(v) Foreign base company incorne."(vi) Other operative sections. The rules provided in this section alsoapply in determining - -"(A) The amount of foreign source items of tax preference undersection 58(g) determined for purposes of the minimum tax;"(B) The amount of foreign mineral income under section 901(e);"(C) lReservedl

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"(D) The amount of foreign oil and gas extraction income and theamount of foreign oil related income under section 907;"(E) [Reserved] lThe tax base for citizens entitled to the benefits of$ 931 and the S 936 tax credit of a domestic corporation which hasan election in elTect under $936 - - deleted by amendment]"(F) fReserved] lThe exclusion for income from Puerto Rico forresidents of Puerto Rico - - deleted by amendmentl"(G) The limitation under section 934 on the maximum reductionin income tax liability incurred to the Virgin Islands;"(H) fReservedf llncome derived from Guam deleted bynmendmentl"(i) The special deduction granted to China Trade Actcorporationsunder section 941;"(J) The amount of certain U,S. source income excluded from thesubpart F income of a controlled foreign corporation under sectione52(b);"(I() The amount of income from the insurance of U.S. risks unders ecti on 9 5 3 (bX5 ) ld e alin g wit h .fo r e ig n c o rp o r ati o n sf;''(L) The international boycott factor and the specificallyattributable taxes and income under section 999; and"(M) The taxable income attributable to the operation of anagreement vessel under section 607 of the Merchant Marine Actof 1936, as amended, and the Capital Construction Fund Regulationsthereunder (26 CFR,part 3). See 26 CFR 3.2(bX3)."(ernphasis and lbracketed material] added)

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These sources, then, are what remains after deducting those items that"cat"u'rot" "be allocated to some item or class of gross income". 26 CFR $ 1.861-1

Whence came this acknowledgement that not all income, "from whateversource derived", is to be included in gross income?

Prior to 1954, the income tax was levied upon "net income". Gross incomewas, pursuant to the pleceding act, the 1939 Code, determined in accordance withthe 1940 regulations, of which $ 19.22(b)-1 provided:

"(b) Exclusions from gross income - The following itemsshall not be included in gross income and shall be exempt fromtaxation under this chapter:"Sec. 19.22(b)-1. Exemptions-Exclusions from grossincome-Certain items of income specified in section 22(b) ateexempt from tax and may be excluded from gross income. Theseitems, however, are exempt only to the extent and in the amountspecified. No other items are exempt from gross income except (i)those items of income which are. under the Constitution. nottaxable by the Federal Government; (2) those items of incornewhich are exempt from tax on income under the provisions of any Actof Congress still in effect: and (3) the income exempted under theprovisions of section 1 16. Since the tax is imposed on net income, theexemption referred to above is not to be confused with the deductionsallowed by section 23 and other provisions of the Internal RevenueCode to be made fiom gross income in computing net income. As toother items not to be included in gross income, see sections 112 andll9 lthe predecessor of the current LB6l - I et seq.l . . . "

(emphasis and lbracketed materiall added)

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The previous regulations for the income tax laws contained simitrar, if notidentical, acknowledgements that not all income is Constitutionally taxable by thefederal govemment (early versions referred to exempt income being that which isnot taxable by the federal govemment "uttder fundamental law").

The admission made in these regulations is nothing less than shocking.Gross income is defined in the 1939 Code $ 22(a) as virtualiy everything. Code $22(b) lists some exemptions, like tax free interest and life insurance. But then thegovernment admits, mumbling r-rp its sleeve, that some of those things listed in $22(a) are also exempt because they are, "under the Constitution, not taxable by thefederal government." If some of those items are not taxable, then why includethem in gross income in the first place?

Not to make light of the gravity of the matter before the Court, but the bestway to illustrate the import of this revelation is to imagine a new game show:Welcome to another exciting episode of "What's My Tax" with your host, MannyHauls. Our contestant today is John Q. Public! Are you up there John? Well,COME ON DOWN! Now, as you can see, Johnny, we have an affay of doors

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here, salaries, compensation for services, rents, dividends, interest, and. .we11,there are too many for us to read them all off, but you can See them.

Now, Johnny, as you can see, we've already marked some of those doors foryou, like "life insurance" over there, "tax-free interest" back here, just to get youstarted, but here's the good news: Some of these other doors are actuallyConstitutionaily EXEMPT! That's right, Johnny, EXEMPT! So here's the deal:You pick one of the doors, and if that door is correct, you get an EXEMPTION!!and you get to keep the money we aren't allowed to take. How's that for a pttze?(ar"rdience cheers)

But here's the catch: If you choose the wrong door, Beulah the chimp willblow her horn and you get the booby prize INTEREST and PENALTIES!!(audience goes "Aawwww") This would be funny if it were not true.

Similarly, in the 1939 Code itself, there is a clear indication that not allincome is Constitutionally taxable inconte, notwithstanding the 16th Arnendmentand its "from whatever source derived" phrase. $ 115(0(1) and (h)(2) of the 1939Code provide:

"(0 (1)corporation tostock shall notGENERAL RULE-A distribution made by aits shareholders in its stock or a right to acquire itsbe treated as a dividend to the extent that it does not

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constitute income to the shareholder within the meaning of theSixteenth Amendment to the Constitution.''(h) EFFECT ON EAI{NINGS AND PROFITS OFDISTRIBUTION OF STOCI(S-The distribution (whether beforeJanuary 7, 1939, or on or after such date) to a distributee by or onbehalf of a corporation of its stock or securities, of stock or securitiesof another corporation, or of property or money, shall not beconsidered a distribution of earnings or profits of any corporation . . ."(2') if the distribution was not subject to tax in the hands ofsuch distributee because it did not constitute income to him withinthe meaning of the Sixteenth Arnendment to the Constitution orbecause exempt to him under section 115(0 of the Revenue Act of1934,48 Stat. 712, or a corresponding provision of, a prior RevenueAct." (emphasis added)

Thus, prior to 1954 the tax was imposed on "net income" and although theCode and the regulations did not disclose what income is beyond the ability of thefederal government to tax, nor did they disclose what income is not includedwithin the meaning of "income" in the 16'1' Amendment, at least it did disclose thatsome items or sources of income are exempt from taxation'

While the citizen seeking to understand what was expected of him wouldhave to conduct a great deal of legal research to identify the limits of the federaltaxing authority and to determine what income is and is not included within the

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meaning of the l6tlt Amendment, at least he was, to some extent, "on notice" tolook for those exemptions.

The 1954 Code and the regulations promulgated thereunder, which was notconsidered to have made any significant substantive changes in the income tax law(and which, certainly, did not enlarge the Constitutional scope of federal taxationauthority nor the Constitutional definition of "income"), primarily reordered andrenurnbered the old Code and regulations. The new Code, however, made twovery signifi cant "adjustments".

First, the tax was now imposed on "taxable" income. While the term isdefined in its hybrid fonn, "taxable income", in $ 63 (drawing our attention fromthe separate meanings of the words), when placed in context with the second major" adj ustment", the term " t axabl e" income becomes monumentally signifi cant.

Second, except for 26 CFR 1.312-6, each and every reference to theConstitution, to firndamentai law, to limitations on the federal taxing authority andto the Sixteenth Amendment's meaning of "income" was purged, erased, banishedfror-n both the Code and the regulations.

The previous disclosures of Constitutional exemptions, exemptions underfundamental law, Constitutional limitations of federal taxing authority and the

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qualified scope of the word "incorle" within the meaning of the SixteenthAmendment, were no longer deemed necessary. Since the imposition of the taxitself was limited by changing "net income" to "taxable" income, imposing the taxonly on that income the federal government was Constitutionally entitled, able, totax, tax-able, thereby, technically, excluding all Constitutionally exempt orexcluded income from the effects of the tax. By excluding exempt and excludedincome in the imposition itsell there was apparently no longer any need perceivedby tlie government to disclose that not all income is "taxable" income.

Thus, $ 86i of the Code and its parallel regulations,26 CFR 1.861-1 et seq.are vestigial disclosures, what is left of the previous $ 22(b) exemptions and $ I 15qualifications of the meaning of "incorne". There is, however, another vestigialremnant of those disclosures. Conducting a search of the regulations for "exempt",we are, not surprisingly, led back to $ 861, more particularly,26 CFR 1.861-8T(d)(2xii) and (iii):

"(ii) Exempt income and exempt asset defined - (A) In general. Forpurposes of this section, the term exempt income means any incomethat is, in whole or in part, exempt, excluded, or eliminated forfederal income tax purposes. The term exempt asset means any assetthe income from which is, in whole or in part, exempt, excluded, oreliminated for federal tax purposes.

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llr'lote tlte absence of reference to 'fundamental law", "under theConstitutiotx, not taxable by the federal governnxent", or "not incontewitltin tlte meaning of the Sixteenth Amendment'f"(iii) Income that is not considered tax exempt."The following items are not considered to be exempt, eliminated, orexcluded income and, thus, may have expenses, losses, or otherdedr-rctions allocated and apportioned to them:"(A) In the case of a foreign taxpayer (including a foreign salescorporation (FSC)) computing its effectively connected income,gross income (whether domestic or foreign source) which is noteff'ectively connected to the conduct of a United States trade orbusiness;"(B) In computing the combined taxable income of a DISC or FSClinternational or foreign sales corporation) and its related supplier,the gross income of a DISC or a FSC;"(C) For all purposes under subchapter N of the Code, including thecomputation of combined taxable income of a possessionscorporation and its affiliates under section 936(h), the gross incomeof a possessions corporation for which a credit is allowed undersection 936(a); and"(D) Foreign earned income as defined in section 911 and theregnlations thereunder (however, the rules of Sec. l.9ll-6 do notrequire the allocation and apportionrnent of certain deductions,including home mortgage interest. to foreign earned income forpllrposes of determining the deductions disallowed under section91 1(dX6))." (emphasis and lbracketed materiall added)

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Although this provision defines exempt income, it, again and still, does notidentify or refer us to what those exernptions are or upon what they are based.Instead, it tells us what is NOT exempt, leading to the reasonable supposition thatany income other than that which is not exempt is, or at least may very well be,"exerrpt, excluded or eliminated" from federal income tax.

Congress and the Treasury Department have statutorily and throughregulations, respectively, acknowledged that there are limitations upon Congress'power to tax and that there are items and sources of income that areConstitutionally exempt from taxation by the federal government. 1939 Code and1940 regulations, supra. The present Code and regulations acknowledge that someincome CANNOT be attributed to gross income; that some income is exempt fromtaxation; that the current Code and regulations specify those sources that CAN beincluded in gross income for determination of taxable income ($ 1.861-8(f)(1)) andspecify those items that are not exempt ($ 1.861-8T(dX2Xiii)).

Remembering that tax laws nrust be strictly construed and that anyambiguity rnust be resolved against imposition of the tax, it can, therefore, only beconcluded that sources of income other than those enumerated cannot be includedin gross income and that items of income other than those items of income

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specified as not exempt, are exempt from the federal income tax. With the soleexception of those sources specifically identified as taxable and those itemsspecifically identified as not exempt, it cannot be said that the tax has "been plainlyand clearly laid" on any other sources or items of income. Billings, Merriant,Gould, Tandy Leather, supra.

There is no dispute, nor does the government otherwise contend, that Mr.Cryer has received no income, gains, from any of the taxable sources enumeratednor has he received any non-exempt items of income specified, and, therefore, thatno tax has been clearly laid on the fees received by Mr. Cryer for legal services.

It is a virtual certainty that the government will argue that there is anotherinterpretation of the Codal and regulatory provisions detailed hereinabove, "But instatutes levying taxes the literal meaning of the words employed is most important,for such statutes are not to be extended by implication beyond the clear import ofthe language used. If tlrc words are doubtful, the doubt must be resolved againstthe Government and in favor of the taxpayer." Merriant, supra.

If the provisions of the Intemal Revenue Code, even considering thoseoutside the Income Tax Law (Subtitle A) fail to "plainly and clearly" lay a taxupon Mr. Cryer's revenues, then they cannot be given that effect through strained

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interpretations, implication or inference. Nevertheless, the government claims thatMr. Cryer owes income taxes on those revenues "though none had been cleurlylaicl thereon by statute. Shades of Pym and John Hampden, of the Boston teaparty, and of Patrick Henry and the Virginians! There is no warrant in law for sucha holding." Tandy Leather, supra.

It is, therefore, respectfully submitted that the Internal Revenue Code andregulations do not plainly and clearly irnpose a tax on Mr. Cryer's revenues, and,therefore, there can be no federal income tax owed thereon. Without "plain andclear" imposition of taxes there can be no tax deficiency and that essential element,liability for a tax deficiency, is lacking in this case as a matter of law.Accordingly, it is respectfully submitted that both counts of the indictment shouldbe dismissed, with prejudice.

DEFENDANT'S REVENUES ARE I\OT SUBJECT TO FEDERALTAXATION BY EXCISEThe Federal Taxing Power

The Supreme Courl has on countless occasions described the taxing powerof the federal government as "al1 encompassing", and from one standpoint it is "ail

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encompassing". The manner and means of exercising that "a11 encompassing"power of taxation are not, however, limitless. A review of the Constitutionalprovisions specifying those means is helpful in understanding those limitations'

Article I, $ 2, cl. 3:"Representatives and direct Taxes shall be apportioned among theseveral States which may be included within this Union, according totheir respective Numbers... ."

Article I, $ 8, cl. 1:"The Congress shall have Power To lay and collect Taxes,Duties, Imposts and Excises, to pay the Debts and provide for thecommon Defence and general Welfare of the United States; but allDuties, Imposts and Excises shall be uniform throughout the United

States".. ""Article I, $ 9o cl. 4:"No Capitation, or other direct, Tax shall be laid, unless in Proportionto the Census or Enumeration herein before directed to be taken... ."To these provisions has been added:"Amendment XVI - Status of Income Tax Clarified.

"The Congress shal1 have power to lay and collect taxes onincomes, from whatever Source derived, without apportionmentamong the several States, and without regard to any census orenumeration."

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In these provisions are incorporated the long-standing practice andunderstanding that all taxes must fall into one of two classes, direct or indirect,with duties, imposts and excises being considered as indirect and taxes on propertyor person as direct,

The limitation on direct taxes is perfectly harmonious and parallel to theintent of the framers in restricting the powers of the new federal government,keeping it at ar:rns length from the citizens of the "Free and Independent States."1The gravest concerr of both the States and the People was that the federalgovefflment would seek to govern the People, whether through regulation or bytaxation, a role generally regarded as the exclusive realm of the States-somethingneither the Peopie nor the States were willing to tolerate or permit. Congress waspennitted to tax the pubtric, but only indirectly. Any tax on person or property hadto be imposed through the States, not directly upon any citizen. The States, notCongress, would then decide through what means and from what resources the tax,more like an assessment, would be paid.

I An understanding ofthe distinction between the nature olthe individual and free-standing sovereignty ofthe Statesand the restricted and cotidjtional sovereignty conferred by the Constitution is inherent in the fact that theDeclaration of lndependence did not establish the independence ofthe "United States", but only ofthe "Free andIndependent States."

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There are no Constitutional limitations urpon the subject of a direct tax, and,therefore, it can honestly be said that the taxing authority of Congress is "allencompassing." For example, Congress could pass a one dollar tax on each foot ofbeach frontage, but that tax would not be imposed on citizens owning beach-frontproperty. The total amount of the tax would be calculated and then apportionedamong the States, each state receiving an assessment for its apportioned share ofthe totai, and without regard to the fact that most States have no beach frontage.

Indirect taxation, however, was limited by its definition, which excludes thetaxation of person or property from jts class of taxation. This form of taxationdiffered in more than the question of means and manner, that distinction being thatevery indirect tax is voh:ntary upon and avoidable by the citizen. Any tax upon anactivity can be avoided by choosing not to engage in the taxed activity. Thus, thecrtrzen "accedes" or "consents" to the tax by engaging in the activity that is taxed.In this vein, a tax upon the activity of breathing, being unavoidable and not, at leastreasonably, within the ability of the citizen to abstain, would not be an indirect tax.While at least in theory a breathing tax couid be imposed, it would have to beconsidered direct and apporlioned among the States.

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The primary issue, then, in any act of taxation by Congress is whether thetax is indirect, in which case the tax must meet the requirement of uniformity, ordirect, in which case the tax must be apportioned among the states. That issuesurfaced almost immediately. In Hyltan v. United States,3 U.S. l7l (1796), theSupreme Court was required to address a challenge that a tax on caniages "for theconveyance of persons" was a direct tax on property, carriages. The Court,however, distinguished between a tax on the ownership of property and one on theconsumption (since caniages wear out) of the property, i.e., an avoidable activity,and upheld the tax as an excise, not requiring apportionment.

In 1861 the first tax on income was enacted. It imposed a tax on all incomederived from property and was generally considered and implemented as, althoughno formal challenge was ruled upon, an indirect excise tax on the use of theproperty for gain. Thus the lines of demarcation between the two taxes, primarilydue to Hylton, becomes clearer. A tax on property or person is a direct tax,requiring apportionment, and a tax on privileged and avoidable activities is anindirect tax, requiring uniformity.

The questions remaining, however, are: l) What is the scope of taxationauthority of the federal government in general? And 2) What activities may be the

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proper subject of an excise tax? No determination of the extent of the federaltaxing authority can be made without first answering those two questions.

The answer to the first was not long in coming. The scope of taxingauthority was first and thoroughly dealt with in 1819 in McCulloch v. Maryland,17 U.S. 316 (1819). The Supreme Court was required to define the limits of taxingauthority a State2, Maryiand, due to its attempt to tax the national bank, a bodyestablished by Congress. Justice MarshalI, atp. 429:

"It may be objected to this definition, that the power of taxationis not confined to the people and property of a state. It may beexercised upon every object brought within its jurisdiction. This istrue, But to what source do we trace this right? It is obvious' that it isan incident of sovereigntyo and is co-extensive with that to which itis an incident. All subjects over which the sovereign power of astate extends, are objects of taxation; but those over which it doesnot extend, ^y% upon ttre soundest principles, exemlrt fromtaxation. This proposition may almost be pronounced self-evident.

"The sovereignty of a state extends to everything which existsby its own authoritv, or is introduced by its pg!g!qn."(emphasis added)

2 lt should be noted, in passing, that the taxing authority in this instance is ofa full, free-standing sovereignty, not alimited or conditional sovereignty ol sovereignty by convention.46


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It should be noted that these principles are not some antiquated philosophicalenunciations, but are foundational Constitutional law, in full force and effect3 andrelied upol'r hundreds of times by our courts, even as recently as this year (See U.S.v. Reynard,02-50476 (9th Cir. l-12-2007)).

Also noteworthy, is that in defining the extent of the taxing authority of asovereignty as co-extensive with its jLrrisdiction, and, particularly, in defining allwithout tliat jurisdiction to be exempt from that authority, we are not hearing thisfrom one who is unsympathetic to the powers of government. Marshall was astaunch Federalist. McCulloclr is best known and remembered for its expansion offederal authority and his maximal views of jr,rrisdiction are best evidenced in thisruling, where he holds that "not delegated" does not mean "not delegated" becauseit does not say "not expressiy delegated" (at 406) and that "necessary" does notmean "necessary" because it does not say "absolutely necessary" (at4I4).

t This brief description of the legislative power and sovereignty of the state is found in a variety of subsequentdecisjons and is thus a well established principle; sce lYeston v. City Council of Charlstott,2Pet. (27 U.S.) 449,467(1829): The Providen


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It can safely be said, then, that the recognition of a State,s power to tax,which would either exceed or at least equal that of a sovereignty by convention, asco-extensive with its jurisdiction, wo,rd be an ample standard to apply insurveying the authority of the federal government to tax. Therefore, if we proceedwith this analysis on the basis of assigning to the federal government the fulltaxing authority, subject to the restrictions on manner and means of that taxation,of an original and free-standing sovereignty, such as a state, we can be assured thatwe will not be undercutting or minin,izing that authority.

From McCulloch, then, we can conclude:A. The power to tax is of the

taxing authority;B. All things without that jurisdiction are @by the taxing authority; arrd

c. The jurisdiction of a sovereignty extends to arl things thatexist by its authoritv or are introduced with its permission.

Since the taxing authority of the federal government, then, is co-extensivewith it's jurisdiction, a sulvey of that jurisdiction is necessary in order to define thelimits of that taxing authority. Prior to doing so, there is another bookend to the

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extent of taxing authority. McCullocl.t not only deiineated and defined the area orscope over which a sovereignty may exercise its power to tax, but also definedthose areas over which a sovereignty rnay NOT exercise its power to tax. Marshallat 431:

That the power to tax involves the power to destroy; that the power todestroy may defeat and render useless the power to create; that thereis a plain repugnance in conferring on one government a power tocontrol the constitutional measures of another, which other, withrespect to those very measures, is declared to be supreme overthat which exerts the control, are propositions not to be denied.(emphasis added)

That answers the question of whether a State can tax those matters that areunder the jurisdiction of the federal government and where the federalgovernment's authority over those matters is supreme, but what about the reverseof that issue? Who is the supreme authodty over those matters within the State'sjurisdiction? The answer to that question was also provided by the Supreme Courtin Farrington v. Tennessee, 95 U.S. 679 (187?)4, where the Supreme Courtrecognized that in the areas within State jurisdiction, State law is supreme to that ofthe federal government. Farrington at 685:

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"In cases involving Federal questions affecting a State, the Statecannot be regarded as standing alone. It belongs to a union consistingof itself and all its sister States. The Constitution of that union, and"the laws made in pursuance thereof, are the supreme law of the iand,. . . any thing in the Constitution or laws of any State to the contrarynotwithstanding;" and that law is as much a part of the law of everyState as its own local laws and Constitr"rtion. Farmers' & Mechanics'Bankv. Deering, 91 U.S. 29."Yet every State has a sphere of action where the authority of thenational sovernment mav not infrude. Within that domain theState is as if the .union were not. Such are the checks and balancesin our complicated but wise system of State and national polity."

(emphasis added)Thus, just as the State's power of taxation may not be exercised over those

items within its borders where federal jurisdiction is supreme, the federalgovefflment's authority to tax may not be exercised over those items or activitiesover which the jurisdiction of the State government is supreme. The principle isfurther reinforced by the Supreme Court agatrl, rn Bailey v. Drexel FuntitureContpany (Chitd Labor Case),259 U.S. 20,42 S.Ct. 449 (1922)s, in which case theSupreme Court struck down a federal tax on the employment of children. ChiefJustice Taft, writing at p.37:aNoris Fctrringtonarelicofbygonedays,itisstill controllingConstitutjonal law,havingbeencitedandfollowedover one hundred thirty times and as recently as 2005, See Loffil Steel Products, Inc. v. Delta Brands, Inc.,

Internal Revenue Service TOMMY K. CRYER, J.D.

Documents

Transcript of Internal Revenue Service TOMMY K. CRYER, J.D.