Federal income tax deductions
The origin of taxation in the United States dates back to the Constitution and, therefore, the Constitution is the ultimate source of the power to tax. Originally, the Constitution empowered Congress to lay and collect taxes, duties, imports and excises, to pay the debts and provide for the common defense and general welfare of the United States. In granting this power, Congress also limited the power of taxation in that all duties, imports, and excises shall be uniform throughout the United States, that direct taxes should be laid in proportion to the population. It was within these confinements that many cases tested the constitutionality of the early tax laws, a test many of the taxes did not pass. During the late 1800s, the terms uniform and direct taxes were very important concepts.
In the late 1880s, support was mounting at the state level for an income tax. Although this proposed tax and others like it were never passes, they encouraged others to investigate the possibilities of a federal income tax. Ultimately this led to the actual passage of the Wilson Tariff Bill of 1894. This bill was not an income tax bill; however, an amendment was attached to the bill which allowed for an income tax. The provisions of this income tax law stated that the tax would commence on January 1, 1895, and continue until January 1, 1900. It was a 2 percent tax on all gains, profits, and income over $4,000 derived from any kind of property, rents, interest dividends, or salaries, or from any profession, trade, employment, or vocation. Income was defined to include interest on all securities except federal bonds which were exempt by law of their issuance from any federal taxation. The Act also imposed a 2 percent tax on net profits of corporations but not on partnerships.
There was much criticism of this law. Concerns arose that provisions such as the $4,000 exemption made the law discriminatory against certain groups. Consequently, many cases were brought before the courts. The major point raised by opponents of the Act was whether or not such a tax on income derived from property was a direct tax in the sense commonly understood in the Constitution. A direct tax was held to be a tax on the land and, therefore, had to be apportioned among the states.
The Supreme Court declared the law unconstitutional in a case. It characterized the income tax as a direct tax and stated that the Constitution provides that no direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken. Therefore, the Court invalidated a significant portion of the law and rendered income tax apportionment impossible. Further, the Court considered the property tax a direct tax and excise and duties taxes as indirect taxes. The Court stated, in a five-to-four decision, that a tax on real estate and on personal property is a direct tax and, therefore unconstitutional and void, because not apportioned according to representation, all these sections constituting one entire scheme of taxation are necessarily invalid.
The Court expressed, in one of its longest opinions, no opinion on whether or not the income tax provisions were unconstitutional. Thus, with this decision, the first federal income tax law since the Civil War in the United States was declared to be unconstitutional.
By late 1908, it was abundantly clear that only by passage of a constitutional amendment would the government receive the power needed to impose a federal income ax. Therefore, an amendment was passed by Congress in 1909. However, because of the length of time required to ratify a constitutional amendment, Congress simultaneously passed the Corporation Excise Tax of 1909. The Tax Act of 1909 was the first Act to be upheld by the courts that taxed corporate profits. Prior to this time, corporate profits were taxes free except for a short period of time during the Civil War.
The Federal income tax is comprised of a complicated and continually evolving blend of legislative provisions, administrative pronouncement, and judicial decisions. The primary purpose of the tax law is obviously to raise revenue, but social, political, and economic objectives are also extremely important. These various objectives, which frequently work at cross purposes with the revenue raising objective of the law, must be examined and understood to gain an appreciation of the rationale underlying the immense multipurpose body of law known as the federal income tax.
Statutory authority is primarily the Internal Revenue Code, but it also includes the U.S. constitution and tax treaties. The authority of the U.S. government to raise revenue through a federal income tax is derived from the Sixteenth Amendment to the Constitution. Following ratification of this Amendment, the federal income tax law enacted on October 3, 1913, and was made retroactive to March 1, 1913.
Most taxes incurred by a trade or business with the exception of federal income taxes are deductible for tax purposes as business expenses. Federal income taxes are not deductible on the federal income tax return since the return is being prepared to compute the amount of federal income taxes due. Taxes withheld from employee wages such as federal, state, and local income taxes payable and F.I.C.A. taxes are not a proper business deduction to an employer since the employer has merely withheld these amounts from employee wages and remitted the amounts to the appropriate governmental authorities.
Other Articles
