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									 1                                     MEMORANDUM OF LAW
 4   TO:            Clients of the Supreme Law Firm
 6   FROM:          Paul Andrew Mitchell, B.A., M.S.
 7                  Private Attorney General
 9   DATE:          January 23, 2003 A.D.
11   SUBJECT:       California Revenue and Taxation Code
12                  sections 17000 thru 21020
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.
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?
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:
29           Section 17002.      Definitions, effect on construction
31                   Except   where   the  context  otherwise  requires,   the
32                   definitions given in this chapter govern the construction
33                   of this part.
35           Section 17071.      Gross income
37                   Gross income shall be defined by Section 61 of the Internal
38                   Revenue Code.
40           Section 17072.      Adjusted gross income
42                   Adjusted gross income shall be defined by Section 62 of the
43                   Internal Revenue Code.
45           Section 17073.      Taxable income, exceptions
47           (a)     Taxable income shall be defined by Section 63 of            the
48                   Internal Revenue Code, except as otherwise provided.
50           Section 17074.      Ordinary income
52                   For purposes of this part, the term “ordinary income” shall
53                   be defined by Section 64 of the Internal Revenue Code.
                   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.
 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:
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.
17                    [Holmes v. McColgan, 110 P.2d 428, 17 C.2d 426 (1941)]
18                                                     [bold emphasis added]
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.
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:
34               http://www.supremelaw.org/fedzone11/index.htm
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:
40        The general term “income” is not defined in the Internal Revenue
41        Code.
43                                       [U.S. v. Ballard, 535 F.2d 400, 404]
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).
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.
             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:
 8   Income is NOT everything that “comes in”:
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" ....
14                      [Southern Pacific Co. v. John Z. Lowe, 247 U.S. 330]
15                                                     [bold emphasis added]
17   Corporate profits are "income":
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.
24                [Emanuel J. Doyle v. Mitchell Brothers Co., 247 U.S. 179]
25                                                    [bold emphasis added]
27   Congress CANNOT change the Constitution:
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]
42   Again, "income" is a gain, a profit:
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.
53                         [Mark Eisner v. Myrtle H. Macomber, 252 U.S. 189]
54                                                     [bold emphasis added]
             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":
 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 ....
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]
22   "Income" has been legally and officially defined:
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]
34   You do NOT obtain "income" by charging for services rendered:
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.
42                                   [Edwards v. Keith, 231 F. 111 (2nd Cir.)]
43                                                      [bold emphasis added]
45   No gain, no income -- no income, no tax:
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.
52                                          [Conner v. U.S., 303 F.Supp. 1187]
53                                                       [bold emphasis added]
             MEMORANDUM OF LAW in re California Personal Income Tax Act:
                                     Page 4 of 10
 1   "Income" means "gain" -- "gain" means "profit":
 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.
12                            [Staples v. U.S., E.D. Penna., 21 F.Supp. 737]
13                                                     [bold emphasis added]
15   Wages and profits are two DIFFERENT things:
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.
21                         [Oliver v. Halstead, 196 Va. 992; 86 S.E. 2d 858]
22                                                     [bold emphasis added]
24   Payment for labor is NOT profit:
26        Reasonable compensation for labor or services rendered is not
27        profit.
29                                   [Laureldale Cemetery Assoc. v. Matthews]
30                                           [345 Pa. 239; 47 A. 2d 277, 280]
31                                                      [bold emphasis added]
33   The meaning of "income" has been CONSISTENT in law:
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 ....
39                              [Bowers v. Kerbaugh-Empire Co., 271 U.S. 174]
40                                                      [bold emphasis added]
42   Again, "income" has had the SAME MEANING in law:
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.
49                                            [Burnet v. Harmel, 287 U.S. 103]
50                                                       [bold emphasis added]

             MEMORANDUM OF LAW in re California Personal Income Tax Act:
                                     Page 5 of 10
 1   "Income" is NOT the same as "gross receipts":
 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]
11   Try to find a principle that is better settled:
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.
19                         [Alan Stang, Tax Scam, Mt. Sinai Press, POB 1220]
20                       [Alta Loma 91701, CALIF. 1988, bold emphasis added]
22   Other cases not cited here say the SAME THING:
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.
31                 [Irwin Schiff, The Great Income Tax Hoax, Freedom Books]
32                    [POB 5303, Hamden, Connecticut 06518, 1985, page 475]
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.”
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.
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:
51        Provisions of a tax statute are to be construed strictly.
53                                           [Burnham v. Franchise Tax Board]
54                                      [341 P.2d 833, 172 C.A.2d 438 (1959)]
             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.
 5                        [California Emp. Com. v. Black-Fox Military Inst.]
 6                                [110 P.2d 729, 43 C.A.2d Supp. 868 (1941)]
 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):
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.
16                       [Bouvier’s Law Dictionary, Rawle’s Revision (1914)]
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.
23   RTC section 17017 defines the term “United States” as follows:
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.
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:
33        “State” includes the District of Columbia, and the possessions of
34        the United States.
36   Obviously, California State is not the District of Columbia           and
37   California State is not a possession of the United States.
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).
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.
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:
             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]
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.
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:
22                http://www.supremelaw.org/sls/31answers.htm
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.
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.
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.
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.
             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:
 6             http://www.supremelaw.org/cc/jetruman/oppososc.htm
 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.
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.
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.
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.
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).
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.
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.
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).
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.
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:
             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”;
 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;
 7   (3)   it apparently fails to create a specific tax liability for the
 8         receipt of compensation for professional services in California;
10   (4)   it omits “California” from its definition of the term “State”;
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;
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,
21   (7)   no such obligations arise under operation of any valid California
22         State laws.
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:
29                           http://www.supremelaw.org
32   Thank you for your professional consideration.
35   Sincerely yours,
37   /s/ Paul Andrew Mitchell
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
43   email:   supremelawfirm@yahoo.com

              MEMORANDUM OF LAW in re California Personal Income Tax Act:
                                     Page 10 of 10

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