16th Amendment

Robert Ellis 27/03/2019

The wonderful, glorious, terrific 16th amendment to the constitution.

When Congress passed the 16th amendment to the constitution making it legal for the U.S. government to directly tax individual citizens, they didn't word it well.

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

Congress became uneasy that the amendment wouldn't pass. In an attempt to rescue the amendment, they took the unprecedented action of changing to amendment via the media. At that time the media consisted of newspapers. So Congress took adds out in every (?) newspaper in the nation telling people Congress would tax only profits. With that wording, the amendment passed easily in 1913. It was not defeated by a single state.

That became part of the legislative history, and was subsequently used to determine Congress' intention. What we eventually ended up with was a tax system for individual wage earners that didn't allow any deductions other than those allowed by Congress, and a tax system for businesses that allowed any deduction that was ordinary & necessary in pursuit of profits by a business. In other words, today individuals can deduct nothing, but businesses can deduct anything as long as they can meet certain criteria.

The concept of taxing only profits was codified in section 162 in the 1952 tax code.

"Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. ... However, the costs of going between one business location and another business location generally are deductible under § 162(a)."

In 1955, the concept was ratified by the Supreme Court in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Glenshaw Glass is considered an important tax case, but not for the reason it was actually important. It was important because it established two tax systems, one for individuals and one for businesses.

Over time three additional criteria were added. To "ordinary & necessary," "reasonable" was added. So today's criteria reads, "ordinary, necessary & reasonable in pursuit of profits in a business activity."

Over time, two more criteria were added; "valid business purpose," & "economic substance." Both of these criteria were used to combat tax scams "Boss" & "Son of Boss."

So Today, individual taxpayers can deduct nothing that isn't authorized by Congress. But business taxpayers can deduct anything that's ordinary, necessary & reasonable in pursuit of profits in a business as long as it's supported by a valid business purpose and has economic substance.

So there you go. The constitution even provides a mechanism for justifying business deductions.

I'm a fan.

The tax system this created is the best tax system in the world for business. It's a major reason the U.S. is leading the world by leaps & bounds. It has created a completely new industry (profession ?) that no other country has. At least to this extent. Every country has VAT tax or Income tax or something, but our system is the only one that encourages digging deep to find ways to cut your income tax by finding anomalies or differences or discrepancies between codes. The US tax system has existed since the Civil War. In 150 years numerous anomalies, discrepancies, differences, etc. have cropped up that businesses can take advantage of to cut tax. This is the essence of tax strategy.