WITHOUT PREJUDICE
This thread isn't intended to speak against taxes or to give reasons why one ought not pay taxes, instead its intended as a discussion of core principles of 'income tax'. Seems quite a few 'tax protestor' articles fail to ever discuss the underlying principles (or the things obscured by the code). And being that these principles are laid bare in court cases you'd wonder why those who seem to be champions of liberty go on about how not to pay taxes but yet they do not discuss these underlying principles. This leads to this question: "If one is trying to de-code the code then why are they not discussing these principles?" Are they really trying to de-code the code or are they trying to get people in trouble? I would hope that comprehension of these principles might help someone avoid a mess of trouble. I am neither agreeing with these principles or disagreeing with them.
Fruit & Trees Doctrine.
Quite important in the income tax strata is the 'fruit of the tree' doctrine. The notion is that there are trees (capital) and there are fruit (income). One principle is that trees cannot be taxed--only fruit can be taxed.
Now what I am going to discuss are four foundational tax related scenarios.
Income Tax Scenario I: Income
John Smith mows Samantha Parker's lawn to a value of $50. Samantha Parker cuts John Smith's hair to the value of $50. John Smith and Samantha Parker are licensed professionals who are expected to pay 20% income tax. From certain strict accountings perspectives, in this scenario, both John Smith and Samantha Parker owe Tax Authorities $10.
Income Tax Scenario II: Capital Receipt
Barbar Gas-N-Eats has been wanting to upgrade its pumps to the state of the art models. Coincidentally, ACME Wifi Group comes along and offers Babar Gas-N-Eats $1,000,000 to improve its pumps if Barbar Gas-N-Eats will allow ACME Wifi Group to install wireless hubs where ACME Wifi Group will make money off of various transactions with users of its system.
The proprietor of Barbar Gas-N-Eats loves the idea and signs a contract with ACME Wifi which allows for two-way splitting of profits/cashflows and so forth.
In this scenario the $1,000,000 paid by ACME Wifi Group does not constitute income (i.e. an accountant ought not put it down as income) because its a capital receipt. You see, in income tax world, what ACME Wifi Group and Barbar Gas-N-Eats did was plant a tree. A rough-hewn income tax maxim: "You can't tax a tree". [Note: ACME Wifi Group can't necc. write that $1,000,000 off as a business expense either.]
Income Tax Scenario III: Employment
John Smith gets hired at Roto-Master Corp which manufacture's garden equipment. John Smith is offered $100,000 sweetener to take the job and move to Hoboken. John Smith agrees to take $200,000 a year as salary. To my knowledge, the $100,000 is not income its a capital receipt. The $200,000 constitutes income because its seen as the fruit of the tree (the established relationship).
Income Tax Scenario IV: Capital Gains
John Smith buys a tree for $9000. He makes $50,000 a year for five years selling the fruit of the tree then decides to *sell* the tree for $20,000. Capital gains tax might apply in the sale of the tree on the difference of $11,000. Income tax might apply on the $50,000 per annum sale of fruit. [Just for fun maybe replace "fruit" with the likes of 'widget, baseball bat, apple, books, meals or apparel'; and maybe replace tree with 'restaurant, company, bookshop or tobacco shop'".
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One could go and on but that ought to give you insights into how a tax court judge might see things. The "fruit of the tree" doctrine is applied in the Commonwealth of Canada, the Commonwealth of Australia, the United Kingdom, the United States and so on.
This is off the top of my head so perhaps study the matter for yourself.
Oh and btw, there are 'tax protestor' and tax knowledge type sights that discuss income tax issues and theories involving 'sources'. Well if you wanna know what they mean by 'sources of income' just replace the word 'income' with 'fruit' it becomes plain and clear that they mean "trees". Trees are the sources of income. Now whether a "tree" is 'in the United States' or "in the State of Texas" or "in de jure Deleware land" is something perhaps to be determined on a case by case basis.
See:
Lucas vs. Earl
