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December 12, 2017

Federal Income Tax – Terms of Art


The Federal Income Tax laws are contained within U.S. Code Title 26 – Internal Revenue Code. You should go see it for yourself at https://www.law.cornell.edu/uscode/text/26/ and then come back here for some critical information needed to understand it.

The tax code uses many words and phrases that are known as Words of Art or Terms of Art. The definition for Words of Art from dictionary.law.com is:

n. 1) specialized language with meaning peculiar to a particular profession, art, technical work, science or other field of endeavor. 2) jargon known only to people who specialize in a particular occupation.

In this article I’ll use Terms of Art, I think it is more clear to see that the words have a special meaning now that they have been redefined from their common everyday usage to a legal, custom usage.

The question is, “Why is this important to understand?”

The answer is, because the tax code uses words and phrases that are common to everyday language which denote a certain meaning, however, within the Code they have a completely different meaning. Terms of Art are a common legal construct. They allow for everyone (in the know) to be on the same page as to a specific meaning of a word or phrase. At the same time, these same Terms of Art can be used to confuse or mislead anyone that isn’t aware of their specialized legal meaning.

Without understanding these special words and phrases as they relate to the tax code, you’ll be unable to see the truth of our tax system. In this article I am only focusing on the Federal Income Tax but what you learn here about Terms of Art will carry through to other areas of the U.S. Code.

Let’s have a look at these Terms of Art now:

26 U.S. Code § 7701 – Definitions

This Section of the Code deals with general definitions that are used throughout Title 26 – Internal Revenue Code.

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof - 
  (1) Person
The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.

  (9) United States
The term "United States" when used in a geographical sense includes only the States and the District of Columbia.

  (10) State
The term "State" shall be construed to include the District of Columbia, where such construction is necessary to carry out provisions of this title.

  (26) Trade or business
The term "trade or business" includes the performance of the functions of a public office.

  (30) United States person
The term "United States person" means -
(A) a citizen or resident of the United States,
(B) a domestic partnership,
(C) a domestic corporation,
(D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and
(E) any trust if -
  (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
  (ii) one or more United States persons have the authority to control all substantial decisions of the trust.
c) Includes and including
The terms "includes" and "including" when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.
26 U.S. Code § 3401 – Definitions

Section 3401 contains the definitions for Chapter 24 of the Tax Code which deals with Collection of Income Tax at Source on Wages.

(a) Wages
For purposes of this chapter, the term "wages" means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include remuneration paid - (a long list of exclusions are listed next.)

(c) Employee
For purposes of this chapter, the term "employee" includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term "employee" also includes an officer of a corporation.

(d) Employer
For purposes of this chapter, the term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that -
  (1) if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term "employer" (except for purposes of subsection (a)) means the person having control of the payment of such wages, and
  (2) in the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, the term "employer" (except for purposes of subsection (a)) means such person.
26 U.S. Code § 3121 – Definitions

Section 3121 contains the definitions for Chapter 21 of the Tax Code which deals with the Federal Insurance Contributions Act (FICA). It has it’s own custom definition of “wages”, “employee”, and “employment” which all rely upon the definitions of “United States” and “State”. These are even more restrictive than the custom definitions that you saw above in Section 3401.

(a) Wages
For purposes of this chapter, the term "wages" means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include - (a lengthy listing of exclusions)

(b) Employment
For purposes of this chapter, the term "employment" means any service, of whatever nature, performed (A) by an employee for the person employing him, irrespective of the citizenship or residence of either, (i) within the United States, or (ii) on or in connection with an American vessel or American aircraft under a contract of service which is entered into within the United States or during the performance of which and while the employee is employed on the vessel or aircraft it touches at a port in the United States, if the employee is employed on and in connection with such vessel or aircraft when outside the United States, or (B) outside the United States by a citizen or resident of the United States as an employee for an American employer (as defined in subsection (h)), or (C) if it is service, regardless of where or by whom performed, which is designated as employment or recognized as equivalent to employment under an agreement entered into under section 233 of the Social Security Act; except that such term shall not include - (a lengthy listing of exclusions)

(d) Employee
For purposes of this chapter, the term "employee" means -
(1) any officer of a corporation; or
(2) any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee; or
(3) any individual (other than an individual who is an employee under paragraph (1) or (2)) who performs services for remuneration for any person -
  (A) as an agent-driver or commission-driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services, for his principal;
  (B) as a full-time life insurance salesman;
  (C) as a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; or
  (D) as a traveling or city salesman, other than as an agent-driver or commission-driver, engaged upon a full-time basis in the solicitation on behalf of, and the transmission to, his principal (except for side-line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations;
  if the contract of service contemplates that substantially all of such services are to be performed personally by such individual; except that an individual shall not be included in the term "employee" under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services (other than in facilities for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed; or
(4) any individual who performs services that are included under an agreement entered into pursuant to section 218 of the Social Security Act.

(e) State, United States, and citizen
For purposes of this chapter -
  (1) State
  The term "State" includes the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa.

  (2) United States
  The term "United States" when used in a geographical sense includes the Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa.
  An individual who is a citizen of the Commonwealth of Puerto Rico (but not otherwise a citizen of the United States) shall be considered, for purposes of this section, as a citizen of the United States.

(h) American employer
For purposes of this chapter, the term "American employer" means an employer which is -
(1) the United States or any instrumentality thereof,
(2) an individual who is a resident of the United States,
(3) a partnership, if two-thirds or more of the partners are residents of the United States,
(4) a trust, if all of the trustees are residents of the United States, or
(5) a corporation organized under the laws of the United States or of any State.

From the above legal definitions you can see how by using words of common meaning within the tax code it would be very easy to misunderstand the true legal nature of the Income Tax.

Take a look at the definition for “wages” from Section 3401, it includes other Terms of Art which each have their own custom, legal definitions. By using substitution we can get a better understanding of the legal meaning of “wages”. Let’s take out the word “employee” and put it’s actual definition in its place:

(a) Wages
For purposes of this chapter, the term "wages" means all remuneration (other than fees paid to a public official) for services performed by an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term "employee" also includes an officer of a corporation for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include remuneration paid - (a long list of exclusions are listed next.)

Now, we can clearly see that “wages” are only paid to someone that works for the Federal Government or an agency or instrumentality of it.

Let’s take a look at the all-familiar W-2 form that you receive every year from your employer. The Code that mandates these forms is located at 26 U.S. Code § 6051. I’ll copy (in part) below with relevant sections and Terms of Art highlighted.

26 U.S. Code § 6051 – Receipts for employees
(a) Requirement
Every person required to deduct and withhold from an employee a tax under section 3101 or 3402, or who would have been required to deduct and withhold a tax under section 3402 (determined without regard to subsection (n)) if the employee had claimed no more than one withholding exemption, or every employer engaged in a trade or business who pays remuneration for services performed by an employee, including the cash value of such remuneration paid in any medium other than cash, shall furnish to each such employee in respect of the remuneration paid by such person to such employee during the calendar year, on or before January 31 of the succeeding year, or, if his employment is terminated before the close of such calendar year, within 30 days after the date of receipt of a written request from the employee if such 30-day period ends before January 31, a written statement showing the following:
(1) the name of such person,
(2) the name of the employee (and his social security account number if wages as defined in section 3121(a) have been paid),
(3) the total amount of wages as defined in section 3401(a),
(4) the total amount deducted and withheld as tax under section 3402,
(5) the total amount of wages as defined in section 3121(a),
(6) the total amount deducted and withheld as tax under section 3101,

Replace the above Terms of Art with their legal meaning and what you end up with is that taxes are to be withheld only from an officer, employee, or elected official of the United States, a State, or any political subdivision thereof…

If you have a private sector job, then the money that they pay you is not “wages” as defined in the Income Tax laws. You do not owe taxes on your private sector pay and taxes should not be withheld from your pay either. Without knowing the meaning of “wages” though, we get fooled into thinking that everything we earn is taxable, when the truth of the matter is that most likely, that very little if any of your pay is taxable.

For a much more in-depth study of our Income Tax laws and how to go about setting your tax records straight and possibly getting some of your hard-earned money returned I encourage you to go to Lost Horizons and read everything there. Also, get a copy of the book Cracking the Code- The Fascinating Truth About Taxation In America for an excellent education on this subject.

~Patrick

One Response “Federal Income Tax – Terms of Art”

  1. Ric Moreno
    March 25, 2016 at 7:05 pm

    Awesome Primer on the subject of taxes in the United States of America! Thank you Patrick for putting me on a new path of understanding.

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