SIGNIFICANCE OF BRUSHABER v. UNION PACIFIC RAILROAD, 240 U.S. 1 (1916)

SOURCE:  Great IRS Hoax, section 3.14.10


This case is one of the most frequently cited cases by the U.S. government in supporting its position that Subtitle A income taxes are constitutional.  It occurred just after the passage of the Sixteenth Amendment in 1916 and became a popular case for the government to cite because it is written in such a confusing way.  There is also a large amount of misinformation about this case promoted by the patriot community that we would like to eliminate.  Because of this fact, we will spend an unusual degree of attention analyzing the case to remove all doubt about its true significance.

The Brushaber  case was about a French Immigrant, Frank Brushaber, who lived in New York in the Borough of Brooklyn and who claimed to be a citizen of the State of New York but never claimed to be a U.S.**/federal citizen, which made him a “nonresident alien” for all intents and purposes.  Mr. Brushaber owned stock in the Union Pacific Railroad, a corporation chartered in the federal Territory of Utah before it became a State.  As a territory, Utah was part of the federal United States, and  as such, was a “domestic corporation” or “federal corporation” at the time it was formed.  Mr. Brushaber filed suit in federal District Court in New York to enjoin the Union Pacific Railroad from volunteering to pay federal income tax on its profits because he didn’t want his stock dividends correspondingly reduced as a result of the tax.  Note that the issue was not him personally paying income taxes on the stock, but the reduction of his dividends by the amount of taxes the corporation insisted on volunteering to pay prior to distributing the remaining profits to its shareholders.

Justice Edward D. White was the author of the opinion of the court in this case.  This was the same justice who wrote the dissenting opinion in the Pollock Decision back in 1895, which incidentally declared the income tax unconstitutional.  It was clear then, that he had an axe to grind and wanted to reverse the damage done by the Pollock decision.  You might want to go back and review Pollock v. Farmer's Loan and Trust Company, 157 U.S. 429, 158 U.S. 601 (1895) again to refresh your memory on this monumental case.  In the Brushaber case, it would appear that Justice White’s  method for reversing the damage done by the Pollock decision was to obfuscate the issues by writing a very confusing opinion.  The Brushaber decision is, without a doubt, one of the most confusing and difficult Supreme Court decisions of all to read and understand, and this is no accident, we believe.

The Brushaber decision ruled that the 16th Amendment did not amend or change the U.S. Constitution.  It decided that the federal corporation could not be stopped from volunteering to pay the federal income tax, even though this damaged the interests of its stockholders by reducing their dividends.  But don't take our word for it.  Here is what the U.S. Supreme Court, in Brushaber v. Union Pacific Railroad, said in the majority opinion:

"...the proposition and the contentions under [the 16th Amendment]...would cause one provision of the Constitution to destroy another;

That is, they would result in bringing the provisions of the Amendment exempting a direct tax from apportionment into irreconcilable conflict with the general requirement that all direct taxes be apportioned;

This result, instead of simplifying the situation and making clear the limitations of the taxing power, which obviously the Amendment must have intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion…

…Moreover in addition the Conclusion reached in the Pollock Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but on the contrary recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it.

…the Amendment demonstrates that no such purpose was intended and on the contrary shows that it was drawn with the object of maintaining the limitations of the Constitution and harmonizing their operation.”

…the [16th] Amendment contains nothing repudiating or challenging the ruling in the Pollock Case that the word direct had a broader significance since it embraced also taxes levied directly on personal property because of its ownership, and therefore the Amendment at least impliedly makes such wider significance a part of the Constitution -- a condition which clearly demonstrates that the purpose was not to change the existing interpretation except to the extent necessary to accomplish the result intended, that is, the prevention of the resort to the sources from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself and thereby to take an income tax out of the class of excises, duties and imposts and place it in the class of direct taxes...

Indeed in the light of the history which we have given and of the decision in the Pollock Case and the ground upon which the ruling in that case was based, there is no escape from the Conclusion that the Amendment was drawn for the purpose of doing away for the future with the principle upon which the Pollock Case was decided, that is, of determining whether a tax on income was direct not by a consideration of the burden placed on the taxed income upon which it directly operated, but by taking into view the burden which resulted on the property from which the income was derived, since in express terms the Amendment provides that income taxes, from whatever source the income may be derived, shall not be subject to the regulation of apportionment…

[Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916)]

And it further stated that taxes on income had been "sustained as excises in the past."  The ruling established that income tax is constitutional as an excise tax on federal corporations, but not as a direct tax.  The measure of whether it is a direct or an indirect/excise tax is determined by the burden the tax on income places on the property that is its object.  Who or what then is subject to an excise tax?  In most cases it is usually federal corporations.  You can see that by rereading  section 3.8.15.1, which talks about the legislative intent of the Sixteenth Amendment as described by President Taft in his speech to Congress on June 16, 1909.

The IRS relies on the Brushaber decision to prove the constitutionality of the income tax on natural persons, but ignores the Court's ruling in that case that the income tax is an excise tax and that the “person” paying the tax in this case was a federal corporation rather than a natural person.  The government and the IRS like to cite this case because the case was written in an especially confusing way.

In the Brushaber decision the U.S. Supreme Court ruled that a federal corporation may volunteer to pay the income tax on its profits, even though its stock dividends paid to nonresident alien stockholders living outside the federal zone were correspondingly reduced by the amount of income tax.  Shortly after the ruling in this case, the U.S. department of the Treasury issued Treasury Decision 2313 interpreting this case.  For those of you who have trouble interpreting the impact of this case, you can read the clear language of this decision below:

Treasury Decision Under Internal Revenue Laws of the United States

Vol. 18 January-December 1916

W. G. McAdoo

Secretary of the Treasury

Washington Government Printing Office 1917

 

T.D. 2313  Income Tax

Taxability of interest from bonds and dividends on stock of domestic corporations owned by nonresident aliens, and the liabilities of nonresident aliens under section 2 of the act of October 3, 1913.

 

Treasury Department

Office of Commissioner of Internal Revenue

Washington, D.C., March 21, 1916

To collectors of internal revenue:

Under the decision of the Supreme Court of the United States in the case of Brushaber v. Union Pacific Railway [sic] Co., decided January 24, 1916, it is hereby held that income accruing to nonresident aliens in the form of interest from the bonds and dividends on the stock of domestic corporations is subject to the income tax imposed by the act of October 3, 1913.

Nonresident aliens are not entitled to the specific exemption designated in paragraph C of the income-tax law, but are liable for the normal and additional tax upon the entire net income "from all property owned, and of every business, trade, or profession carried on in the [federal] United States," computed upon the basis prescribed in the law.

The responsible heads, agents, or representatives of nonresident aliens, who are in charge of the property owned or business carried on within the [federal] United States, shall make a full and complete return of the income therefrom on Form 1040, revised, and shall pay any and all tax, normal and additional, assessed upon the income received by them in behalf of their nonresident alien principals.

The person, firm, company, copartnership, corporation, joint-stock company, or association, and insurance company in the [federal] United States, citizen or resident alien, in whatever capacity acting, having the control, receipt, disposal, or payment of fixed or determinable annual or periodic gains, profits, and income of whatever kind, to a nonresident alien, under any contract or otherwise, which payment shall represent income of a nonresident alien from the exercise of any trade or profession[1] within the [federal] United States, shall deduct and withhold from such annual or periodic gains, profits, and income, regardless of amount, and pay to the officer of the United States Government authorized to receive the same such sum as will be sufficient to pay the normal tax of 1 per cent imposed by law, and shall make an annual return on Form 1042.

The normal tax shall be withheld at the source from income accrued to nonresident aliens from corporate obligations and shall be returned and paid to the Government by debtor corporations and withholding agents as in the case of citizens and resident aliens, but without benefit of the specific exemption designated in paragraph C of the law.

Form 1008, revised, claiming the benefit of such deductions as may be applicable to income arising within the [federal] United States and for refund of excess tax withheld, as provided by paragraphs B and P of the income-tax law, may be filed by nonresident aliens, their agents or representatives, with the debtor corporation, withholding agent, or collector of internal revenue for the district in which the withholding return is required to
be made.

That part of paragraph E of the law which provides that "if such person…is absent from the United States…the return and application may be made for him or her by the person required to withhold and pay the tax…" is held to be applicable to the return and application on Form 1008, revised, of nonresident aliens.

A fiduciary acting in the capacity of trustee, executor, or administrator, when there is only one beneficiary and that beneficiary a nonresident alien, shall render a return on Form 1040, revised;  but when there are two or more beneficiaries, one or all of whom are nonresident aliens, the fiduciary shall render a return on Form 1041, revised, and a personal return on Form 1040, revised, for each nonresident alien beneficiary.

The liability, under the provisions of the law, to render personal returns, on or before March 1 next succeeding the tax year, of annual net income accrued to them from sources within the United States during the preceding calendar year, attaches to nonresident aliens as in the case of returns required from citizens and resident aliens.  Therefore, a return on Form 1040, revised, is required except in cases where the total tax liability has been or is to be satisfied at the source by withholding or has been or is to be satisfied by personal return on Form 1040, revised, rendered in their behalf.  Returns shall be rendered to the collector of internal revenue for the district in which a nonresident alien carries on his principal business within the United States or, in the absence of a principal business within the United States and in all cases of doubt, the collector of internal revenue at Baltimore, Md., in whose district Washington is situated.

Nonresident aliens are held to be subject to the liabilities and requirements of all administrative, special, and general provisions of law in relation to the assessment, remission, collection, and refund of the income tax imposed by the act of October 3, 1913, and collectors of internal revenue will make collection of the tax by distraint, garnishment, execution, or other appropriate process provided by law.

So much of T.D. 1976 as relates to ownership certificate 1004, T.D. 1977 (certificate Form 1060), 1988 (certificate Form 1060), T.D. 2017 (nontaxability of interest from bonds and dividends on stock), T.D. 2030 (certificate Form 1071), T.D. 2162 (nontaxability of interest from bonds and dividends on stock) and all rulings heretofore made which are in conflict herewith are hereby superseded and repealed.

This decision will be held effective as of January 1, 1916.

                                                      W. H. Osborn

                                      Commissioner of Internal Revenue

Approved, March 30, 1916:

Byron R. Newton,

Acting Secretary of the Treasury

Notice that Treasury Decision 2313 explained that the Brushaber decision ruled the tax to be constitutional on receipts of nonresident aliens only who were involved in a “trade or profession” in the United States and that the taxes must be declared on a 1040 form?  It is crucial to understand the meaning of “trade or profession”, which we describe in section 3.12.1.22 to mean the holding of a public office in the federal United States.  In effect what the Treasury was saying above is that the only persons who complete the 1040 form are those who have elected to have their income treated as effectively connected with a “trade or business” in the federal United States, which means these people elected to be treated as elected or appointed U.S. officials for U.S. tax purposes.  This means at some point that these persons filed a 1040 form and made an election under 26 U.S.C. 6013(g) and never bothered to revoke that election.  It is extremely important that they revoke the election under that section to eliminate the taxability of this income.

Another important historical note about the Brushaber case was that the tax Act of 1913  contained a section creating a duty or liability to pay the income tax which was later removed starting with the 1954 code.  Therefore the above TD 2313 could talk about the liability to withhold taxes on income “effectively connected with a trade or business” in the [federal] United States, which was equivalent to saying that those who had volunteered to pay the tax by making the election under 26 U.S.C. 6013(g) must include income from federal corporations.  Notice that the court never bothered to explain whether or not Frank Brushaber had made such an election, and if they had they would have given away the government’s biggest secret.  Based on the outcome of the case, however, we assume that Brushaber must have made the election.. 

We must remember that because of later Supreme Court Rulings, most notably Stanton v. Baltic Mining, 240 U.S. 103 (1916), the Sixteenth Amendment was ruled to be irrelevant and gave no new taxing powers to the U.S. government.

"..by the previous ruling it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived, that is by testing the tax not by what it was -- a tax on income, but by a mistaken theory deduced from the origin or source of the income taxed. "

[Stanton v. Baltic Mining, 240 U.S. 103 (1916)]

For the average American the Brushaber case should be, beyond contention, the most momentous, and consequential Supreme Court case ever tried…together, of course, with the beautifully lucid TD 2313, which implements it. For, they nail down two major points: the unambiguous and unarguable definition of the ‘United States,’ and the income tax obligations of most Americans—due to their relationship to this particular ‘United States’—namely, NONE. 

It seems almost beyond belief that these two precious documents were ignored by the American taxpayer, at the time. Reading them today, it is indeed unfathomable that they did not become a watershed event, completely precluding the events that have ensued. As it happened, however, not much happened until over half a century later. But, since then, many thousands of previous taxpayers have elected out of the system. We mention in section 5.3.5 that the Internal Revenue Code permits this, at 26 USC 6013 (g) Election to treat nonresident alien individual as resident of the United States (4) Termination of election (A) Revocation by taxpayers, which allows a nonresident alien to re-establish his/her previous status (one time only—see subsection 5), after having knowingly or unknowingly elected to "be treated as a resident of the United States." (6013(g)(1).) In other words, this is an escape hatch to get out of the system that one almost always inadvertently entered, when filing his/her first Form 1040 in order to get a refund, at the age of 14. One thereby declared oneself a resident of the District United States, as well as a U.S. citizen, for tax purposes. But, Section 6013 allows one to revoke this uninformed choice. I won’t go into why such relief must be written into statutory law, but believe me, they wouldn’t do it if they didn’t need to.

You can read about this case yourself at the following location on the web:

http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=240&invol=1

Subsequent Supreme Court decisions that referenced this case interpreted it as follows, quoting from Peck v. Lowe, 247 U.S. 165 (1918):

The Sixteenth Amendment, although referred to in argument, has no real bearing and may be put out of view. As pointed out in recent decisions, it does not extend the taxing power to new or excepted subjects, but merely removes all occasion, which otherwise might exist, for an apportionment among the States of taxes laid on income, whether it be derived from one source or another. Brushaber v. Union Pacific R.R. Co., 240 U.S. 1, 17-19; Stanton v. Baltic Mining Co., 240 U.S. 103, 112-113.


[1] See the definition of “trade or business” found in 26 U.S.C. 7701(a)(26) found in section 3.9.1.20, which indicates that “trade of business” are synonymous with holding of a political office in the federal United States.

 

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Last revision: August 14, 2009 08:07 AM
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