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Just What IS An Annual "Form 1040" Tax Return, Anyway?

SEVERAL DIFFERENT THINGS, ACTUALLY... To start with, any tax return is a form for reporting what the filer believes to be tax-relevant events (or the revenues resulting therefrom, more accurately-- remember, the tax is on the events, but is measured by the profitable outcome of those events). Some returns-- including 1040s-- are also a means by which the filer makes certain elections related to those reported revenues, and a means by which the filer calculates and acknowledges any consequent tax liability (which could be anything from $0 on up).

A return is never simply an indiscriminate report of all economic activity or the gains therefrom-- that is, it is never a report of "all that comes in".

Tax Return

 The form that the government requires a taxpayer to file with the appropriate official by a designated date to disclose and detail income subject to taxation and eligibility for deductions and exemptions, along with a remittance of the tax due or a claim for a refund of taxes that were overpaid.

http://legal-dictionary.thefreedictionary.com/tax+return (emphasis added)

"I hereby certify that the following is a true and faithful statement of the gains, profits, or income of _____ _____, of the _____ of _____, in the county of _____, and State of _____, whether derived from any kind of property, rents, interest, dividends, salary, or from any profession, trade, employment, or vocation, or from any other source whatever, from the 1st day of January to the 31st day of December, 1862, both days inclusive, and subject to an income tax under the excise laws of the United States."

The “affirmation” on the first income tax return form (emphasis added)

"[T]his [examination] right upon the part of the [IRS District] supervisor extends only to such books and papers as relate to their banking operations, and are connected with the internal revenue of the United States"

United States v. LaSalle Nat'l Bank, 437 US 298 (1978), quoting Stanwood v. Green, 22 F.Cas. 1077, 1079 (No. 13,301) (SD Miss. 1870) (emphasis added)

Further, of course, the law provides for listing some very particular gains as "Items specifically included in "gross income"" for purposes of "Computation of Taxable Income" under 26 U.S. Code Chapter 1, Subchapter B (and also list some things as specifically not to be included). The use in these provisions of "specifically" indicates that there are other things both appropriate to include and appropriate to exclude which are not specifically listed and therefore left to the discretion of the filer (and, of course, even in the case of something to be "specifically included", the filer is relied-upon to understand and apply the distinctions between, say, alimony subject to the tax-- due to being a portion of otherwise federally-taxable gains received by the payer of the alimony-- versus alimony which is not).

Clearly, return filers are expected to independently consider and decide the tax-relevance of any given event and the related gains, and a return such as a 1040 is not simply intended to be anyone's report of "all that comes in".

"INFORMATION RETURNS" SUCH AS W-2s or 1099s are similarly circumscribed, and are not intended to be simply reports of "all that went out to so-and-so".

Here are the specs for what payments are actually and exclusively to be reported on a W-2, for instance (codified at 26 USC §6051):

(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,

Obviously, this is not just "what got paid"...

Now look at the even-more-revealing regulatory provisions concerning "wage" reporting. For purposes of the "FICA" income taxes, the receipt of "wages" by which the tax is measured hinges on the payments being made in the course of "employment" as defined in the law at 26 USC §3121(b). In the regulations controlling the application of these provisions, we find:

26 CFR §31.3121(b)-4 Employment; excepted services in general

(a) Services performed by an employee for an employer do not constitute employment for purposes of the taxes if they are specifically excepted from employment under any of the numbered paragraphs of section 3121(b)....

(b)...

Example. … While no tax liability is incurred with respect to A’s remuneration for services performed in the employ of B (the services being excepted from employment)...

(Emphasis added.)

Similarly, the withholding provisions in Chapter 24 of the IRC (part of Subtitle C "Employment Taxes") at 3401(a), which identifies what is to be reported on a W-2 by a payer and on a 1040 by a recipient as "wages" constituting "income" on which the tax is laid are subject to these regulatory provisions:

26 CFR §31.3401(a)-2 Exclusions from wages.

(a) In general. (1) the term “wages” does not include any remuneration for services performed by an employee for his employer which is specifically excepted from wages under section 3401(a).

26 CFR §31.3401(c)-1 Employee

(h) Although an individual may be an employee under this section, his services may be of such a nature, or performed under such circumstances, that the remuneration paid for such services does not constitute wages within the meaning of section 3401(a).

Plainly, since some services performed for an employer by an employee-- however those terms are defined or distinguished-- don't constitute "employment", and some remuneration for the performance of such services doesn't qualify as "wages" required to be reported or declared and included in the calculation of taxes owed, both the payer and the recipient are expected to come to their own conclusions about whether any given payments or receipts qualify for reporting. Plainly, returns are NOT intended to be just "reports of what came in" (or "went out"), even for government entities, such as those to whom the regulations above apply.

Then, of course, there is the overall prescription at 26 USC §6012(a) that:

(a) General rule

 Returns with respect to income taxes under subtitle A shall be made by the following:

(1)

(A) Every individual having for the taxable year gross income which equals or exceeds the exemption amount, except that a return shall not be required of an individual— [a variety of additional exceptions follows]

Prior to seeing the provision of law we have just reviewed it might have been assumed that the only variable contemplated by this reporting requirement language concerns the aggregate amount that has "come in". But as has been shown, this is not the case. The real variable is how much (if any) of what has come in qualifies as "income" (under any of its various denominations), something to be determined by each individual considering whether or not he is subject to filing requirements, and what is to be reported on a return.

This fundamental character of the 1040 was illuminated during an exchange between Missouri Democratic Senator Bennett Clark, Connecticut Republican Senator John A. Danaher and testifying witnesses Charles O. Hardy of the Brookings Institution and Milton Friedman of the Treasury Department Division of Tax Research during a hearing on the revival of tax withholding before a subcommittee of the committee on finance, United States Senate, during the 77th Congress, Second Session on data relative to withholding provisions of the 1942 Revenue Act on August 21 and 22, 1942:

Senator Clark: "Of course, you withhold not only from taxpayers but nontaxpayers."

Mr. Hardy: "Yes."

...

Senator Danaher: "I have only one other thought on that point. In the event of withholding from the owner of stock and no taxes due ultimately, where does he get his refund?"

Mr. Friedman: "You're thinking of a corporation or an individual?"

Senator Danaher: "I am talking about an individual."

Mr. Friedman: "An individual will file an income tax return, and that income tax return will constitute an automatic claim for refund."

Both scenarios contemplated by the committee and its witnesses acknowledge that some earnings are not "income" to be reported as such and that the individual filer is to make the distinction and complete his 1040 in accordance with his conclusions. This is unambiguously so in the discussion of a "nontaxpayer" from whose receipts amounts are withheld, and only a little less so in the case of an individual from whose earnings amounts have been withheld but who concludes that he has not received [enough] "income" for any tax to be due and is expected therefore to produce a 1040 claiming a refund of the withheld amounts.

Plainly, returns are NOT intended to be just "reports of what came in" (or "went out"), for anyone, anytime. Instead, returns are intended, by the structure within which they operate, to be reports of only what the return-creator believes is relevant to the tax out of the greater class of "what came in" or "what went out".

SO WE SEE THAT A TAX RETURN IS A TESTIMONIAL INSTRUMENT-- evidence in a very narrow and rigidly circumscribed legal contest. It is the means by which a filer introduces his or her testimony (evidence) into a brief, judgeless, trial-by-paperwork concerning the question of who owes what to who relevant to the tax and in regard to the filer's activities over the period reported about on the return.

In this legal-contest testimonial role, a return might be filed to declare or acknowledge gains from taxable activities greater than the exemption amount; to rebut allegations of such gains; and/or to make a claim for the refund of amounts that have come into the government's hands against the possibility of a tax liability for the period involved.

This testimony-of-the-filer not as simply a "report of what came in" but as a declaration of the filer's conclusions concerning "what came in that is relevant to the tax"-- whether in endorsement or rebuttal of allegations of others or for purposes of one's own claims-- has been the statutory role of a 1040 from its inception, as clearly laid out in the statute establishing the purpose of the form:

"Sec. 93. And be it further enacted, ... Provided, that any party... shall be permitted to declare, under oath or affirmation, the form and manner of which shall be prescribed by the Commissioner of Internal Revenue, that he or she was not possessed of an income of six hundred dollars, liable to be assessed according to the provisions of this act, or that he or she has been assessed elsewhere and the same year for an income duty, under authority of the United States, and shall thereupon be exempt from an income duty; or, if the list or return of any party shall have been increased by the assistant assessor, in manner as aforesaid, he or she may be permitted to declare, as aforesaid, the amount of his or her annual income, or the amount held in trust, as aforesaid, liable to be assessed, as aforesaid, and the same so declared shall be received as the sum upon which duties are to be assessed and collected."

Only receipts of a type "liable to be assessed" are to be reported; this language clearly distinguishes a specific class of gains from all others, and clearly calls upon the filer to draw and apply this distinction when deciding what is to be reported on a return.

Click here to learn the distinction between of "income liable to be assessed" and gains, earnings and receipts NOT liable.