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1 MEMORANDUM OF LAW
2
3
4 TO: Clients of the Supreme Law Firm
5
6 FROM: Paul Andrew Mitchell, B.A., M.S.
7 Private Attorney General
8
9 DATE: January 23, 2003 A.D.
10
11 SUBJECT: California Revenue and Taxation Code
12 sections 17000 thru 21020
13
14
15 One of you has recently shared with us a Notice from the California
16 Franchise Tax Board (“FTB”), citing sections 17000 thru 21020 of the
17 Revenue and Taxation Code (“RTC”) aka Personal Income Tax Act as their
18 authority for imposing the California State income tax.
19
20 With this MEMORANDUM OF LAW we are responding to your request for a
21 professional answer to the following question: Do these statutes
22 create a specific liability for any taxes imposed upon the receipt of
23 compensation for professional services inside California State?
24
25 We began our investigation by examining specific legal definitions
26 found in the RTC sections cited above. In Chapter 3, Computation of
27 Taxable Income, please find the following statutory definitions:
28
29 Section 17002. Definitions, effect on construction
30
31 Except where the context otherwise requires, the
32 definitions given in this chapter govern the construction
33 of this part.
34
35 Section 17071. Gross income
36
37 Gross income shall be defined by Section 61 of the Internal
38 Revenue Code.
39
40 Section 17072. Adjusted gross income
41
42 Adjusted gross income shall be defined by Section 62 of the
43 Internal Revenue Code.
44
45 Section 17073. Taxable income, exceptions
46
47 (a) Taxable income shall be defined by Section 63 of the
48 Internal Revenue Code, except as otherwise provided.
49
50 Section 17074. Ordinary income
51
52 For purposes of this part, the term “ordinary income” shall
53 be defined by Section 64 of the Internal Revenue Code.
54
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 1 of 10
1 These five sections reveal two important characteristics of the RTC:
2 (1) it mirrors the Internal Revenue Code as published in the federal
3 Statutes at Large (read “federal municipal law”), and (2) it thereby
4 necessarily acquires the same flaws that also exist in that Code.
5
6 In fact, a California court has already ruled that the policy of the
7 California legislature is to follow federal provisions in the
8 administration of the Personal Income Tax Act -- Part 10 of the RTC.
9 Here is the pertinent holding from that court opinion:
10
11 The policy of the legislature in following federal provisions in
12 the Personal Income Tax Act makes available to the state a
13 groundwork of relevant federal experience and judicial
14 pronouncements which should be followed to insure effective
15 administration of the act.
16
17 [Holmes v. McColgan, 110 P.2d 428, 17 C.2d 426 (1941)]
18 [bold emphasis added]
19
20 Thus, before we descend into any of the particular flaws of the RTC,
21 it is important to realize that Citizens of California are fully
22 justified by this one court authority to follow federal judicial
23 pronouncements to insure effective administration of California’s
24 Personal Income Tax Act, e.g. U.S. v. Mason, 412 U.S. 391, 399-400.
25
26 I refer you now to the book entitled “The Federal Zone: Cracking the
27 Code of Internal Revenue,” first published by this writer in 1992 A.D.
28 In his concurring opinion in the case of U.S. v. Lopez in 1995 A.D.,
29 Justice Anthony Kennedy used the term “federal zone” as a household
30 word, giving it a permanent place in the history of American
31 constitutional jurisprudence. The electronic eleventh edition of this
32 book is now available on-line at Internet URL:
33
34 http://www.supremelaw.org/fedzone11/index.htm
35
36 In Chapter 7 of that book, entitled “Inside Sources,” we quote the
37 following holding of the U.S. Court of Appeals for the Eighth Circuit,
38 as follows:
39
40 The general term “income” is not defined in the Internal Revenue
41 Code.
42
43 [U.S. v. Ballard, 535 F.2d 400, 404]
44
45 We now incorporate “The Federal Zone” by reference, as if set forth
46 fully here, as a “groundwork” that is essential to understanding the
47 parallel flaws in California’s Personal Income Tax Act (RTC Part 10).
48
49 If the term “income” is not defined in the IRC, and if key sections of
50 the RTC depend upon parallel sections in the IRC, then it is correct
51 to conclude that the term “income” is not defined in the RTC either.
52 This discovery can be confirmed by reading the entire body of
53 Definitions beginning at RTC section 17000.
54
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 2 of 10
1 Since the term “income” is not defined in the RTC or in the IRC, we
2 are justified by the holding in Holmes v. McColgan supra to search for
3 federal judicial pronouncements on this point. Fortunately for us,
4 the federal courts have been unusually clear on the correct legal
5 definition of “income”. Appendix “J” in “The Federal Zone” contains a
6 short list of those definitions, which are repeated here as follows:
7
8 Income is NOT everything that “comes in”:
9
10 We must reject ... the broad contention submitted in behalf of
11 the Government that all receipts -- everything that comes in --
12 are income within the proper definition of "gross income" ....
13
14 [Southern Pacific Co. v. John Z. Lowe, 247 U.S. 330]
15 [bold emphasis added]
16
17 Corporate profits are "income":
18
19 [Income] imports, as used here, something entirely distinct from
20 principal or capital either as a subject of taxation or as a
21 measure of the tax; conveying rather the idea of gain or
22 increase arising from corporate activities.
23
24 [Emanuel J. Doyle v. Mitchell Brothers Co., 247 U.S. 179]
25 [bold emphasis added]
26
27 Congress CANNOT change the Constitution:
28
29 In order, therefore, that the clauses cited above from Article I
30 of the Constitution may have proper force and effect ... it
31 becomes essential to distinguish between what is and what is not
32 "income," as the term is there used; and to apply the
33 distinction ... according to truth and substance, without regard
34 to form. Congress cannot by any definition it may adopt conclude
35 the matter, since it cannot by legislation alter the
36 Constitution, from which alone it derives its power to legislate,
37 and within whose limitations alone that power can be lawfully
38 exercised.
39 [Mark Eisner v. Myrtle H. Macomber, 252 U.S. 189]
40 [bold emphasis added]
41
42 Again, "income" is a gain, a profit:
43
44 Here we have the essential matter -- not a gain accruing to
45 capital, not a growth or increment of value in the investment;
46 but a gain, a profit, something of exchangeable value proceeding
47 from the property, severed from the capital however invested or
48 employed, and coming in, being "derived," that is received or
49 drawn by the recipient (the taxpayer) for his separate use,
50 benefit, and disposal -- that is income derived from property.
51 Nothing else answers the description.
52
53 [Mark Eisner v. Myrtle H. Macomber, 252 U.S. 189]
54 [bold emphasis added]
55
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 3 of 10
1 The Supreme Court has REPEATEDLY ruled that compensation for
2 professional services is not "income":
3
4 In determining the definition of the word "income" thus
5 arrived at, this court has consistently refused to enter into the
6 refinements of lexicographers and economists and has approved, in
7 the definitions quoted, what it believed to be the commonly
8 understood meaning of the term ....
9
10 We continue entirely satisfied with that definition, and,
11 since the fund here taxed was the amount realized from the sale
12 of the stock in 1917, less the capital investment as determined
13 by the trustee as of March 1, 1913, it is palpable that it was a
14 "gain or profit" "produced by" or "derived from" that investment,
15 and that it "proceeded," and was "severed" or rendered severable,
16 from, by the sale for cash, and thereby became that "realized
17 gain" which has been repeatedly declared to be taxable income
18 ....
19 [Merchant's Loan & Trust v. Smietanka, 255 U.S. 509]
20 [bold emphasis added]
21
22 "Income" has been legally and officially defined:
23
24 And the definition of "income" approved by this Court is: "The
25 gain derived from capital, from labor, or from both combined,"
26 provided it be understood to include profit gained through a sale
27 or conversion of capital assets. ... It is thus very plain that
28 the statute imposes the income tax on the proceeds of the sale of
29 personal property to the extent only that gains are derived
30 therefrom by the vendor ....
31 [Goodrich v. Edwards, 255 U.S. 527]
32 [bold emphasis added]
33
34 You do NOT obtain "income" by charging for services rendered:
35
36 The phraseology of form 1040 is somewhat obscure .... But it
37 matters little what it does mean; the statute and the statute
38 alone determines what is income to be taxed. It taxes only
39 income "derived" from many different sources; one does not
40 "derive income" by rendering services and charging for them.
41
42 [Edwards v. Keith, 231 F. 111 (2nd Cir.)]
43 [bold emphasis added]
44
45 No gain, no income -- no income, no tax:
46
47 Income is nothing more nor less than realized gain .... It is
48 not synonymous with receipts .... Whatever may constitute
49 income, therefore, must have the essential feature of gain to the
50 recipient .... If there is no gain, there is no income.
51
52 [Conner v. U.S., 303 F.Supp. 1187]
53 [bold emphasis added]
54
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 4 of 10
1 "Income" means "gain" -- "gain" means "profit":
2
3 Income" ... means "gain" "derived" from, and not accruing to,
4 capital or labor or from both combined, including profit gained
5 through the sale or conversion of capital, the gain not being
6 taxable until realized, and, in such connection, "gain" means
7 profit or something of exchangeable value, and "derived" means
8 proceeding from property, severed from capital, however invested
9 or employed, and coming in, received or drawn by taxpayer for his
10 separate use, benefit, and disposal.
11
12 [Staples v. U.S., E.D. Penna., 21 F.Supp. 737]
13 [bold emphasis added]
14
15 Wages and profits are two DIFFERENT things:
16
17 There is a clear distinction between "profit" and "wages" or
18 compensation for labor. Compensation for labor cannot be
19 regarded as profit within the meaning of the law.
20
21 [Oliver v. Halstead, 196 Va. 992; 86 S.E. 2d 858]
22 [bold emphasis added]
23
24 Payment for labor is NOT profit:
25
26 Reasonable compensation for labor or services rendered is not
27 profit.
28
29 [Laureldale Cemetery Assoc. v. Matthews]
30 [345 Pa. 239; 47 A. 2d 277, 280]
31 [bold emphasis added]
32
33 The meaning of "income" has been CONSISTENT in law:
34
35 ... "Income" has been taken to mean the same thing as used in the
36 Corporation Excise Tax Act of 1909, in the Sixteenth Amendment
37 and in the various revenue acts subsequently passed ....
38
39 [Bowers v. Kerbaugh-Empire Co., 271 U.S. 174]
40 [bold emphasis added]
41
42 Again, "income" has had the SAME MEANING in law:
43
44 ... and before the 1921 Act this Court had indicated ... what it
45 later held, that "income," as used in the revenue acts taxing
46 income, adopted since the 16th Amendment, has the same meaning
47 that it had in the Act of 1909.
48
49 [Burnet v. Harmel, 287 U.S. 103]
50 [bold emphasis added]
51
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 5 of 10
1 "Income" is NOT the same as "gross receipts":
2
3 Constitutionally the only thing that can be taxed by Congress is
4 "income." And the tax actually imposed by Congress has been on
5 net income as distinct from gross income. The tax is not, never
6 has been and could not constitutionally be upon "gross receipts"
7 ....
8 [Anderson Oldsmobile, Inc. v. Hofferbert, USDC Maryland]
9 [102 F.Supp. 902, bold emphasis added]
10
11 Try to find a principle that is better settled:
12
13 Remember that our source is not some "tax protest" group. Just
14 about everything we are telling you comes from the U.S. Supreme
15 Court. It would be difficult, and perhaps impossible, in our
16 system of jurisprudence, to find a principle better settled than
17 the one we have been citing.
18
19 [Alan Stang, Tax Scam, Mt. Sinai Press, POB 1220]
20 [Alta Loma 91701, CALIF. 1988, bold emphasis added]
21
22 Other cases not cited here say the SAME THING:
23
24 In addition to the cases cited above, the following also support
25 and affirm this definition of "income": ... United States v.
26 Supplee-Biddle Hardware Co., 265 U.S. 189; United States v.
27 Phellis, 257 U.S. 156; Miles v. Safe Deposit & T. Co., 259 U.S.
28 247; Irwin v. Gavit, 268 U.S. 161; Edwards v. Cuba R. Co., 268
29 U.S. 628.
30
31 [Irwin Schiff, The Great Income Tax Hoax, Freedom Books]
32 [POB 5303, Hamden, Connecticut 06518, 1985, page 475]
33
34 On this point, therefore, the pertinent decisions of federal and State
35 courts, particularly the U.S. Supreme Court, are quite clear in
36 holding that: (1) one does not derive income by rendering services and
37 charging for them, (2) reasonable compensation for labor, or for
38 services rendered, is legally not income because it is not “profit”,
39 and (3) income is definitely not everything that “comes in.”
40
41 The FTB Notice goes on to allege that RTC section 17041 imposes an
42 income tax on every individual who is in California for more than a
43 temporary or transitory purpose. Let us examine this claim
44 critically, in order to determine whether or not it is supported by
45 the pertinent statutes in California State, specifically the RTC.
46
47 First of all, it is essential to understand that California’s courts
48 have already ruled that the provisions of tax statutes must be
49 strictly construed:
50
51 Provisions of a tax statute are to be construed strictly.
52
53 [Burnham v. Franchise Tax Board]
54 [341 P.2d 833, 172 C.A.2d 438 (1959)]
55
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 6 of 10
1 The income tax law is purely a revenue measure, and upon the rule
2 of strict construction applied to such laws, its scope may well
3 be restrained to such matters as are clearly covered by it.
4
5 [California Emp. Com. v. Black-Fox Military Inst.]
6 [110 P.2d 729, 43 C.A.2d Supp. 868 (1941)]
7
8 For guidance on the meaning of “strict construction” we find the
9 following explanation in Bouvier’s Law Dictionary, Rawle’s Revision
10 (1914):
11
12 A strict construction is one which limits the application of the
13 provisions of the instrument or agreement to cases clearly
14 described by the words used. It is called, also, literal.
15
16 [Bouvier’s Law Dictionary, Rawle’s Revision (1914)]
17
18 In light of these established guidelines, we are now forced to
19 confront a very important question: Is California State clearly
20 mentioned in pertinent definitions of the Personal Income Tax Act?
21 Our answer is “No” for the following verifiable reasons.
22
23 RTC section 17017 defines the term “United States” as follows:
24
25 “United States,” when used in a geographical sense, includes the
26 states, the District of Columbia, and the possessions of the
27 United States.
28
29 Be careful not to assume that the term “states” refers to the 50
30 States of the Union, because RTC section 17018 defines the term
31 “State” expressly as follows:
32
33 “State” includes the District of Columbia, and the possessions of
34 the United States.
35
36 Obviously, California State is not the District of Columbia and
37 California State is not a possession of the United States.
38
39 Federal Territories and Possessions are those lands which have been
40 acquired by the federal government pursuant to the Territory Clause in
41 the U.S. Constitution; they do include such places as Guam, Virgin
42 Islands, American Samoa and Puerto Rico (read “the federal zone”).
43 Federal territories are decidedly not States of the Union; they are
44 not stars on the American flag! See IRC 3121(e).
45
46 Therefore, observing the stated mandate of strict construction,
47 inhabitants of California do not normally reside “in this state”
48 [sic], because the term “state” here has a very specific definition
49 which does not even mention “California” as such.
50
51 There is another, very important rule of statutory construction known
52 as “inclusio unius est exclusio alterius” (in Latin). Black’s Law
53 Dictionary, Sixth Edition, carefully explains this rule as follows:
54
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 7 of 10
1 Inclusio unius est exclusio alterius. The inclusion of one is
2 the exclusion of another. The certain designation of one person
3 is an absolute exclusion of all others. ... This doctrine decrees
4 that where law expressly describes [a] particular situation to
5 which it shall apply, an irrefutable inference must be drawn that
6 what is omitted or excluded was intended to be omitted or
7 excluded.
8 [bold emphasis added]
9
10 Thus, an inference must be drawn that California was omitted from the
11 definition of “State” at RTC section 17018, because the California
12 Legislature intended to omit or exclude California. Not only is this
13 an inference that must be drawn; it is also an irrefutable reference.
14
15 Although this finding may appear extremely strange at first, there is
16 a rational explanation. By way of introduction, and to set the right
17 foundation for what is to follow, the reader is strongly encouraged to
18 read and study this writer’s publication entitled “31 Questions and
19 Answers about the Internal Revenue Service,” abbreviated “31Q&A” and
20 available on-line at Internet URL:
21
22 http://www.supremelaw.org/sls/31answers.htm
23
24 Briefly, the population of federal citizens who inhabit the 50 States
25 is now legally regarded as a legislative democracy that is subject to
26 the municipal jurisdiction of the federal government. Within that
27 municipal jurisdiction, the rights that were once designed to be
28 insured by the U.S. Constitution are now considered to be matters of
29 legislative and judicial discretion, and no longer mandatory
30 guarantees over which government has no discretion whatsoever.
31
32 Using strict construction of the Guarantee Clause in the U.S.
33 Constitution and contrived precedents decided by the Supreme Court,
34 chief among which is Downes v. Bidwell, a doctrine has evolved for
35 over 100 years whereby the Constitution of the United States, as such,
36 does not extend beyond the limits of the several States which are
37 united by and under it. This doctrine is now called the Downes
38 Doctrine.
39
40 Later, the U.S. Supreme Court elaborated this doctrine, in the case of
41 Hooven & Allison v. Evatt, by holding that the guarantees of the U.S.
42 Constitution extend into the federal zone only as Congress makes those
43 guarantees applicable, by enacting statutes for that specific purpose.
44 In other words, fundamental Rights do not exist inside the federal
45 zone until and unless Congress decides to extend them into that zone.
46
47 The main problem with the Downes Doctrine, strictly speaking, is that
48 it was contrived without any reference whatsoever to two Acts of
49 Congress which expressly extended all guarantees of the U.S.
50 Constitution into the District of Columbia in 1871, and then into all
51 federal territories in 1873. Thus, the Downes Doctrine was
52 effectively destroyed 30 years before the fact, and the U.S. Supreme
53 Court is at fault for systematically overlooking these two Acts of
54 Congress for over 100 years.
55
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 8 of 10
1 In the present context, the Downes Doctrine is relevant because the
2 U.S. Supreme Court has also issued a series of decisions which uphold
3 the concept of a “State within a state”. See the discussion of this
4 concept at paragraph 25 in the winning brief found at Internet URL:
5
6 http://www.supremelaw.org/cc/jetruman/oppososc.htm
7
8 The population of federal citizens who inhabit California State is
9 legally regarded as a “state within a State”: collectively they are a
10 federal legislative democracy that is co-habitating with the sovereign
11 Citizens of the California Republic inside the territorial limits of
12 California State.
13
14 The U.S. Constitution is controlling, however, in part because the
15 Tenth Amendment guarantees to all federal citizens and to all State
16 Citizens that the common law of California shall be preserved.
17
18 Why is this so? Answer: because the Tenth Amendment is in the U.S.
19 Constitution, and the entire U.S. Constitution has already been
20 extended into D.C. and into all federal territories, without
21 exception.
22
23 For example, section 22.2 of the California Civil Code (“CCC”) states
24 that the common law shall be the rule of decision in all California
25 courts.
26
27 CCC sections 1426 and 1428 acknowledge that an obligation arises
28 either from the operation of law, or from the contract of the parties
29 (and nothing else).
30
31 And CCC section 1708 states that the only obligation that arises from
32 the operation of law is to abstain from injuring the person or
33 property of another, or infringing upon any of his rights.
34
35 As such, these sections are a nearly perfect re-statement of the
36 common law as transported here from England by early colonial
37 Americans. Without damage or injury, there is no jurisdiction.
38
39 It is quite obvious now that the Internal Revenue Code is federal
40 municipal law that was deliberately written to appear as if it applies
41 throughout the 50 States of the Union. This intentional deception was
42 accomplished by means of deliberate vagueness in several key places,
43 most notably in the definitions of key terms like “State” and “United
44 States” and elsewhere too. For example, see IRC 7851(a)(6)(A).
45
46 Because the Sixth Amendment guarantees our fundamental Right to know
47 the nature and cause of every accusation, such deliberate deceptions
48 necessarily render those definitions void for vagueness. Accordingly,
49 such intentional deceptions are unconstitutional.
50
51 Insofar as, and to the same extent that California’s Personal Income
52 Tax Act was expressly written to mirror the underlying assumptions and
53 deceptions of the Internal Revenue Code, it too is a deception upon
54 all the Citizens and other inhabitants of California State because:
55
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 9 of 10
1 (1) it intentionally omits any definition of the key term “income”;
2
3 (2) it appears to encourage the Franchise Tax Board to expand the
4 meaning of “income” beyond the limits already established by
5 standing decisions of the U.S. Supreme Court;
6
7 (3) it apparently fails to create a specific tax liability for the
8 receipt of compensation for professional services in California;
9
10 (4) it omits “California” from its definition of the term “State”;
11
12 (5) it contradicts the common law of California as re-stated and
13 codified in California Civil Code sections 22.2, 1426, 1427,
14 1428, 1550, 1567 and 1708;
15
16 (6) it appears to create obligations to pay income taxes on
17 compensation for professional services when no valid, binding
18 contracts exist to that end between the Citizens of California
19 and the State of California; and,
20
21 (7) no such obligations arise under operation of any valid California
22 State laws.
23
24
25 If the Supreme Law Firm can provide any further assistance in these
26 matters, please do not hesitate to contact us at the email address
27 published at our Internet website:
28
29 http://www.supremelaw.org
30
31
32 Thank you for your professional consideration.
33
34
35 Sincerely yours,
36
37 /s/ Paul Andrew Mitchell
38
39 Paul Andrew Mitchell, B.A., M.S.
40 Private Attorney General and Federal Witness
41 http://www.supremelaw.org/decs/agency/private.attorney.general.htm
42
43 email: supremelawfirm@yahoo.com
MEMORANDUM OF LAW in re California Personal Income Tax Act:
Page 10 of 10
