Writer Henry David Thoreau, along with most Quakers, refuses to pay a Massachusetts poll tax used to finance the Mexican-American War. The war resisters lose their cases in the courts. Thoreau spends a night in jail. Since then, many war resisters have refused to pay the portion of their taxes they say funds the military as a form of political protest. The courts have continued to rule against the protesters.
President Abraham Lincoln and Congress, in 1862, create the commissioner of internal revenue and enacte an income tax to pay war expenses. At first, Congress places a flat 3-percent tax on all incomes over $800. Later it will modify this principle to include a tax that rises with one’s level of income. Congress will repeal the income tax in 1872.
The Supreme Court rules in Pollock v. Farmer’s Loan and Trust that a federal income tax is unconstitutional because it violates Article I, Section 2 and Section 9 of the Constitution. These sections, known as the “rule of apportionment,” specify that all federal taxes must be imposed based on the population of each state, rather than directly on the people.
President William Taft sends a message to Congress on June 16, 1909, recommending the passage of a constitutional amendment to legalize federal income tax legislation. The 16th Amendment states that Congress has the power to tax incomes, from whatever “source” derived, without having to go through the complicated process of “apportionment” (dividing the tax up among the states based on population), which is a constitutional requirement for all “direct” taxes.
Three-quarters of the states ratify the 16th Amendment, which gives Congress the power to impose a uniform, direct income tax.
In Stratton’s Independence v. Howbert, the U.S. Supreme Court defines income under the tax law as the “gain derived from capital, from labor, or from both combined,” including both the dividends paid to corporate stockholders and the profit that is gained from selling assets. That same year, the first tax form, Form 1040, appears after Congress levies a 1 percent tax on net personal incomes above $3,000 with a 6 person surtax on incomes of more than $500,000.
In order to spur the collection of additional taxes necessary to finance World War I, Congress passes the War Revenue Act of 1917. The top rate of the income tax increases to 77 percent, an all-time high.
Established by Congress, the U.S. Tax Court gives taxpayers a place to dispute decisions made by the Internal Revenue Service involving payment of federal income, gift or estate taxes. Its decisions may be appealed to the federal courts of appeals and are subject to review by the U.S. Supreme Court. Today, 19 tax court judges are appointed by the president for terms of 15 years. The Tax Court’s offices are in Washington, D.C., but the judges travel across the country and conduct trials in 80 cities.
In United States v. Sullivan, the U.S. Supreme Court holds that financial gains made from illegal activities, such as drug sales or gambling, are taxable income under the Revenue Act of 1921. The Court finds that there is no reason to exclude revenues made from illegal businesses. The statute specifically requires payment from businesses of any kind and taxes would be due as if the business had been lawful.
To pay the rising costs of World War II, the Roosevelt administration institutes a new system for collecting income taxes, mandatory “withholding from wages and salaries.” Under this system, employers are required to deduct the tax from an employee’s wages or salary before paying the employee. This system means that more people pay taxes earlier in the tax year and that the burden shifts to the taxpayer to collect any overpayments by filing a yearly tax return.
The Bureau of Internal Revenue, first established in 1862, is reorganized and renamed the Internal Revenue Service. It remains the largest of the bureaus with the Department of the Treasury and is responsible for collection of federal taxes. One of the world’s largest tax administrators, the IRS deals directly with more Americans than any other institution, public or private.
In Commissioner v. Glenshaw Glass Co., the U.S. Supreme Court finds that earnings from a lawsuit (i.e., recovery of punitive damages for fraud or antitrust violations) is taxable income under the tax code. In a companion case, the Court also holds that money that a taxpayer receives from illegal “insider trading” on the stock market is also taxable gross income. The Court finds that Congress intended to treat any monetary gains as taxable unless specifically excluded by law.
The U.S. Tax Court imposes nearly $136,000 in penalties on 23 taxpayers for pursuing “frivolous cases” to delay the payment of their taxes. Emphasizing that these penalties are an important tool to help maintain faith in the tax system, the IRS has identified and rejected many claims raised by people who dislike or refuse to pay their taxes, such as filing returns with zeros on almost every line or demanding a refund equal to the amounts withheld from their earnings. In Aston v. Commissioner, the Tax Court imposes a maximum penalty of $25,000 for the first time, finding that a taxpayer’s groundless argument was primarily for the purpose of delay.