Monday, April 6, 2015

The Day the Taxes Died

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That the Secretary of the Treasury is hereby directed to cause the immediate destruction of all income-tax returns and any copies thereof, with all statements and records relative thereto, now in possession of the Treasury Department, by reason of "An Act to reduce taxation," and so forth, in effect August twenty-eighth, eighteen hundred and ninety-four.
On this day in 1896, Congress approved House Joint Resolution No. 42, providing for the immediate destruction of income tax returns and records that the Treasury had received. In his 1897 annual report, the Secretary of the Treasury confirmed that the office had delivered all income tax returns and other documents to a specially-appointed committee, which "totally destroyed the same by burning."

As April 15 approaches (see our earlier post for help with locating free or low-cost filing assistance), it's tempting to wish for a world where the Internal Revenue Service is again directed to burn all of its tax returns. But what caused this unusual congressional mandate in the first place? The answer lies in an 1894 statute, found at 28 Stat. 509-71 (HeinOnline view). Section 27 of "An Act to reduce taxation" created a 2% annual income tax on private citizens' gains, income, and property over $4,000, to be collected from 1895 to 1900.

Copy of income tax form 365 (1894),
reprinted in S. Exec. Doc. 53-63.

Treatises like The Federal Income Tax Explained (1894) and United States Income Tax Law Simplified for Businessmen (1895) rushed to explain the new taxation plan, only the second personal income tax in U.S. history (a previous Civil War-era income tax was repealed after the war's conclusion, leaving customs receipts and tariffs as the primary sources of federal revenue).

By early 1895, legal challenges to the income tax had made their way to the U.S. Supreme Court. In Pollock v. Farmers Loan & Trust Co., 158 U.S. 601, the Court invalidated section 27 of the 1894 act as unconstitutional. (Filings from the Supreme Court case can be found in The Making of Modern Law: U.S. Supreme Court Records & Briefs, 1832-1978.)

In response to the controversial Pollock opinion, Congress began to consider a constitutional amendment, which found bipartisan support in 1909. The Sixteenth Amendment, authorizing Congress with the "power to lay and collect taxes on incomes," was ratified in February 1913. A brief history of this seminal time period in federal tax law can be found in a 2013 article by University of Delaware law professor Sheldon D. Pollack, Origins of the Modern Income Tax, 1894-1913. For more information, check out Richard Joseph's 2004 book The Origins of the American Income Tax: The Revenue Act of 1894 and its Aftermath.

While many readers may fantasize about the "good old days" of burnt tax returns as they fill out their 1040s, even today's Internal Revenue Service must fight continued attacks on its legitimacy. A number of quasi-legal arguments against the IRS and payment of income tax have achieved "urban legend" status, to the extent that the IRS debunks them annually in a detailed publication, The Truth About Frivolous Tax Arguments. Among the many debunked anti-tax myths in the 69-page document include a few complaints about the validity of the Sixteenth Amendment, which superseded the Supreme Court's Pollock ruling and laid the foundation for our current income tax system. As the IRS notes, "The constitutionality of the Sixteenth Amendment has invariably been upheld when challenged. Numerous courts have both implicitly and explicitly recognized that the Sixteenth Amendment authorizes a non-apportioned direct income tax on United States citizens and that the federal tax laws are valid as applied." In other words – don't push your luck; this isn't 1896.

To learn more about the history of American income tax, check out the resources in the Goodson Law Library research guide to Federal Tax. In particular, section 1.1 of the Bittker & Lokken treatise Federal Taxation of Income, Estates and Gifts (Tax Collection KF 6335 .B57 1999 & online in WestlawNext) provides a quick overview of the 1894 statute, its invalidation by the U.S. Supreme Court, and the subsequent effort to ratify the Sixteenth Amendment to the U.S. Constitution. For help locating these or other tax-related resources, be sure to Ask a Librarian.