THE NATURE AND LIMITS OF THE “INCOME TAX” are not the consequence of the structure of the law or definitions therein– it is, in fact the other way around. However, because that structure and those definitions are carefully designed to conform and confine the tax to its proper nature and limits, understanding the very easily comprehended former brightly illuminates the more difficult latter (a concise presentation of which can be found within this document; see ‘Cracking the Code- The Fascinating Truth About Taxation In America’ for a comprehensive treatment).
I’m going to briefly discuss two definitions in US income tax law– those given by statute to the terms “wages” and “trade or business”. Between them these two terms are integral to the vast majority of all “income-receipt” allegations made about Americans.
Understanding these definitions will make clear that the receipts of most Americans don’t fall within either of these classes. Simple logic recognizes that because receipts that DO fall within these special classes are distinguished in the law as being subject to the tax, those receipts that DON’T fall within them are not subject. As Black’s Law Dictionary puts it in its 6th edition:
“Inclusio unius est exclusio alterius. The inclusion of one is the exclusion of another. The certain designation of one person is an absolute exclusion of all others. … This doctrine decrees that where law expressly describes [a] particular situation to which it shall apply, an irrefutable inference must be drawn that what is omitted or excluded was intended to be omitted or excluded.”
LET’S FIRST TAKE A LOOK at “wages”– a term presented at 26 USC § 3401(a) and provided with a compound definition:
Sec. 3401. – Definitions
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,…
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.
(NOTE: Tax law actually contains two definitions of “wages”, one related to “withholding” against taxes related to such receipts, and one to the receipts on which FICA and FUTA taxes fall. While the “withholding” definition above hinges on the meaning of “employee”, the “FICA and FUTA” “wage” definition at § 3121(a) instead hinges on a custom definition of “employment” found at § 3121(b). However, discussing the one suffices for discussing both, for as the US Supreme Court holds in Rowan Cos. v. United States, 452 US 247 (1981), “The plain language and legislative histories of the relevant statutes indicate that Congress intended for its definition of “wages” to be interpreted in the same manner for FICA and FUTA as for income-tax withholding.” Thus, while the FICA and FUTA taxes don’t fall on all “wages” subject to the withholding provisions and in that sense there are two different subclasses of “wages”, the nature of what qualifies as any kind of tax-relevant “wage” is the same.)
It will be observed that the definition of “employee” deploys the term “includes”, rather than the more conventional “means” often found in definitions. The reason for the use of this specialized term is to invoke a special rule of construction for “includes” found at 26 USC § 7701(c):
(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.
Under this rule, the term “includes” provides for what courts have described as a “calculated indefiniteness”. This is the expandability of the meaning of a statutory term to things not listed in the definition (indefiniteness), but only things of the same character as those listed (calculated).
In a statutory definition, the term defined is stripped of all external meaning, being left with only the specified meaning given by the custom definition. Normally, what is listed or described in the custom definition is comprehensive and closed. But under the rule of construction at 26 USC 7701(c), the use of “includes” allows an “indefiniteness” to the scope of the custom definition in that it can embrace things of the same kind as those enumerated even though not listed, while at the same time being “calculated” in that such expansion cannot reach beyond the specialized class illustrated by the enumerated examples.
For example, under the “includes” rule the definition of “employee” at 3401(c) embraces any variety of federal worker– even varieties not described (some of which may not even exist at the time the definition is written). All such, listed in the statutory definition or not, are within the general class defined and circumscribed by the illustrative examples that ARE listed or described.
At the same time, this “indefiniteness” in the statutory definition is “calculated” in that it can’t be construed to embrace workers NOT having the characteristics of the members of the class which are listed and by which the class’s nature is illustrated. This means that while any kind of federal worker can be deemed an “employee” (whose remuneration received as such qualifies as “wages”) NON-federal workers, being unrepresented in the illustrative list provided by Congress, cannot be deemed to be such “employees”, and the pay to such excluded workers cannot be deemed “wages”.
The United States Treasury Department has concisely expressed this rule:
“The terms “includes and including” do not exclude things not enumerated which are in the same general class;” 27 CFR 26.11 and 27 CFR 72.11
Here’s how the United States Supreme Court explains the rule:
“[T]he verb “includes” imports a general class, some of whose particular instances are those specified in the definition.”
Helvering v Morgan’s, Inc, 293 U.S. 121, 126 fn. 1 (1934);
“[I]ncluding… …connotes simply an illustrative application of the general principle.”
Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 62 S.Ct. 1 U.S. (1941).
A number of federal circuit court rulings provide examples of this rule in operation. For instance, in Mueller v. Nixon, 470 F.2d 1348 (6th Cir. 1972), the Sixth Circuit analyzes the meaning of “person” under the language and structure of 26 U.S.C. § 6671(b), which deploys the “includes” term in its statutory definition: