The Shared Responsibility Tax – Direct or Indirect?



Defining the Class for the ACA Penalty Tax

Pollock vs. Farmers’ Loan and Trust

157 U.S. 429, 557, 558 U.S. vs. Butler, 297 U.S. 1 [1935]

“In the matter of taxation, the Constitution recognizes the two great classes of direct and indirect taxes, and lays down two rules by which their imposition must be governed, namely: The rule of apportionment as to direct taxes, and the rule of uniformity as to duties, imposts, and excises….” (p. 557)

“Ordinarily, all taxes paid primarily by persons who can shift the burden upon some one else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes.” (p. 558)

Knowlton vs. Moore

178 U.S. 41 (1900)

“Direct taxes bear immediately upon persons, upon the possession and enjoyment of rights; indirect taxes are levied upon the happening of an event or exchange.” (p. 47)

“But it is asserted that it was decided in the income tax cases that, in order to determine whether a tax be direct within the meaning of the Constitution, it must be ascertained whether the one upon whom by law the burden of paying it is first cast can thereafter shift it to another person. If he cannot, the tax would then be direct in the constitutional sense, and, hence, however obvious in other respects it might be a duty, impost, or excise, it cannot be levied by the rule of uniformity, and must be apportioned.” (p. 81)

Thomas v. U.S.

192 U.S. 363 (1904)

“By the first clause of 8 of article I. of the Constitution, Congress is empowered ‘to lay and collect taxes, duties, imposts, and excises.’ ‘but all duties, imposts, and excises shall be uniform throughout the United States.’

“This division of taxation into two classes is recognized throughout the Constitution. . . . (p. 369)

“By clause 3 of 2, representatives and direct taxes are required to be apportioned according to the enumeration prescribed, and by clause 4 of 9, no capitation or other direct tax can be laid except according to that enumeration. . . .

“And these two classes, taxes so called, and ‘duties, imposts, and excises,’ apparently embrace all forms of taxation contemplated by the Constitution.” (p. 370)

Bromley v. McCaughn

280 U.S. 124, 127 [1929]

“The meaning of the phrase “direct taxes” and the historical background of the constitutional requirement for their apportionment have been so often and exhaustively considered by this Court, . . . . that no useful purpose would be served by renewing the discussion here. Whatever may be the precise line which sets off direct taxes from others we need not now determine. While taxes levied upon or collected from persons because of their general ownership of property may be taken to be direct, . . .  this Court has consistently held, almost from the foundation of the government, that a tax imposed upon a particular use of property or the exercise of a single power over property incidental to ownership is an excise which need not be apportioned, . . .”

 Flint v. Stone Tracy Co.

220 U.S. 107 (1911)

“And although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words ‘duties, imposts and excises,’ such a tax for more than one hundred years of national existence has as of yet remained undiscovered.”  (p. 151)

 Black’s Law Dictionary

6th Edition  . . . Excise Tax

“A tax imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. . . . A tax on the manufacture, sale, or use of goods or on the carrying on of an occupation or activity, or a tax on the transfer of property.  In current usage the term has been extended to include various license fees and practically every internal revenue tax except the income tax.”

 Black’s Law Dictionary

6th Edition  . . . Direct Tax

“One that is imposed directly upon property, according to its value.  It is generally spoken of as a property tax or an ad valorem tax.  Distinguishable from an indirect tax which is levied upon some right or privilege.”

There isn’t much more that can be said regarding the description of direct and indirect taxes.  The two definitions from Black’s law dictionary need a little work, however they do show the basic difference between the two classes of taxes authorized by the Constitution.  The Supreme Court, in defining the two classes of taxes, uses countless words and phrases to try and construct the difference.  If we cut through all the jungle, the answer is simple.  If you can pass the tax on to someone else, it is an indirect tax. If you cannot pass the tax on to someone else, it is direct.  Indirect taxes are imposed upon privilege (not rights; there is a difference), or regulated (licensed) activities, and must be uniform.  Direct taxes are imposed ‘directly’ upon persons or property, and must be apportioned among the States.  Can it be put more simply and clear?  Why does Supreme Court Justice John Roberts understand this simple declaration by the Court and sustained since the beginning.  The shared responsibility payment in the ACA was presented was presented as a “penalty.”  In order to rationalize the constitutionality of the Act Roberts, using his “legislative” authority, which he took upon himself, altered the penalty by calling it a “tax.”

Notwithstanding the language used, it is the substance and operation of the object that determines whether it is a penalty or a tax.  Since Roberts declared the payment to be a tax, and the tax cannot be passed on to a third person, it is by definition a direct tax and must be apportioned.

Examine the administration of the income tax today and ask yourself if you can pass this tax on to someone else. The answer is self-evident.  Although this examination of the class of tax is the most apparent, it is not conclusive. The real test comes from what is the subject of the tax. The work of Otto Skinner goes into a deeper explanation of this test. [1] What is being taxed? There’s the rub, do we really know?  After reading the various court cases, the courts are still confused as to what the tax is called and what class it belongs to.

What Is The Source Of The Taxing Authority?

As simple as this sounds, the courts have thrown another wrench into the mix.  This was brought to light in the Supreme Court decision handed down in 1819, M’Culloch v. Maryland (17 U.S. 316).  Chief Justice Marshall addressed the subject of taxation, outlining several fundamental principles.  The principle that effects the authority of Congress to tax, comes under the heading of the “sovereign”.  To start with; “The original power of giving the law on any subject whatever, is a sovereign power.” (p. 409)  We really need to make the legislators understand this.  At page 428 of the opinion, Marshall makes a declaration that is questionable, when he said; “The people of a state, therefore, give to their government a right of taxing themselves and their property, . . .”  I would take exception to this resting on the following; “. . . what source do we trace this right? (Taxing)  It is obvious, that it is an incident of sovereignty, . . .”  Continuing; “All subjects over which the sovereign power of a state extends, are objects of taxation; but those over which it does not extend, are, upon the soundest principles, exempt from taxation.  This proposition may almost be pronounced self-evident.”

“The sovereignty of a state extends to everything which exists by its own authority, or is introduced by its permission; . . . ”

Nature of the Tax

Two landmark tax cases Brushaber and Stanton emphatically declare that the income tax is an excise tax.  “[T]he conclusion reached in the Pollock Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but, on the contrary, recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such . . .” [2]

“. . . Excises have been defined as taxes laid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges. . . . , it seems convenient to regard excises as including all internal taxes that are not property taxes, . . . So regarded, excises include income taxes.” [3] Referring back up the the legal dictionary (Black’s) definition of excise taxes, you will note that they exclude income taxes from the class of excise taxes. (?)  What are we to believe?  It’s a conspiracy!

“Senator Cummins: ‘It does not make any difference what it is named. … It does not; it can not. The character of a tax, must be determined by its essential characteristics. It must be determined by the circumstances under which it is laid and the thing or things upon which it is laid. Congress can not make an income tax a special excise tax by so denominating it. It can not make an excise tax a direct tax by so denominating it.” [4]

Representative Law of New York in remarks on the proposed amendment [1909; S.J.R. 40] expressed this view of the proposed tax; “It is my purpose to take advantage of this occasion to briefly define my attitude and views concerning the proposal to levy a special excise tax upon the net earnings of corporations organized for profit.” [5]

Given the stated fact that income taxes are excise taxes, are we filing the proper reporting form? According to the IRS the proper form for excise income taxes is form 720 not form 1040.  At any rate, so far it is well settled that the tax in question, is an ‘excise’ tax imposed on the ‘subjects’ or objects, over which the ‘sovereign’ has jurisdiction, ‘things’ that it creates or exist by its permission.

Subject of the Tax

We are looking at an excise tax and excise taxes are basically on privileges granted by the sovereign power, taxable activities, corporate charters, etc. We also know that they are not, and cannot be, imposed upon the rights of individuals which are secured by the Constitution. The Income Tax, by its operation, is not imposed upon property. In some courts income is not property. So could it be that the “income tax” imposed upon “income”? Some courts disagree saying that income is property, this would require the tax to be apportioned. The government has gotten around this in two ways. The first, which is more believable; the second uses the defense of the Sixteenth Amendment allows this direct tax. The fallacy of the second defense will be discussed later.

The way the income tax is administered, I would say that the average person would say the it is their income that is being taxes, however, creditable authority, as will be discussed, state that income is only the measure of the tax. So the question still hangs in the air as to what is being taxed.

Given the nature of the income tax and how it is administered, when individuals claim that the income tax is a direct tax; in a sense they are right. The tax law deals with an indirect tax. As mentioned earlier, the law itself is constitutional under the law of contracts (that contract being the 1040 and the “voluntary” participation by the people), however, in viewing the tax, it is not the form but the substance of the tax that should be examined. [6] In light of the practices of the government in their administration of the income tax on individuals, it is evident that the IRS is administering an direct tax while calling it an indirect tax. In viewing the application of the tax it is important to understand what is being taxed. Is it people, property or events?

If the tax is on people or property (labor), and being administered as a direct tax (cannot be passed on to a third party), it should be ruled unconstitutional. Notwithstanding the Sixteenth Amendment, as the amendment did not overturn the Supreme Court’s decision in Pollock that direct taxes on property are unconstitutional without apportionment. Remember, that it is not the name of a tax. It is the substance, or how the tax effects the object being taxed.

Excise taxes are also not imposed upon the natural rights of Americans. Excise taxes can be imposed upon privileges. The Tennessee Supreme Court addressed this point; “‘Privileges are special rights, belonging to the individual or class, and not to the mass; properly, an exemption from some general burden, obligation or duty; a right peculiar to some individual or body.’ [7]

Since the right to receive income or earnings is a right belonging to every person, this right cannot be taxed as privilege.” [8]   The Supreme Court of Oregon agrees; “Individuals, unlike the corporation, cannot be taxes for mere privileges of existing. …; the individuals’ right to live and own property are natural rights for the enjoyment of which an excise cannot be imposed.” [9]   The United States Supreme Court; “Where rights secured by the Constitution are involved, there can be no rule-making or legislation which would abrogate them.” [10]

“There is no such thing in the theory of our national government as unlimited power of taxation in Congress. There are limitations of its powers arising out of the essential nature of all free government; there are reservations of individual rights, without which society could not exist, and which are respected by every government. The right of taxation is subject to these limitations.” [11]

“As in our intercourse with our fellow men certain principles of morality are assumed to exist, without which society would be impossible, so certain inherent rights lie at the foundation of all action, and upon a recognition of them alone can free institutions be maintained. These inherent rights have never been more happily expressed than in the Declaration of Independence, that new evangel of liberty to the people; “We hold these truths to be self evident,” that is so plain that their truth is recognized upon their mere statement, “that all men are endowed,” not by edicts of Emperors, or decrees of Parliament, or acts of Congress, but, “by their Creator with certain inalienable rights,” that is, rights which cannot be bartered away, or given away, or taken away except in punishment of crime, “and that among these are life, liberty, and the pursuit of happiness, and to secure these,” not grant them but secure them, “governments are instituted among men, deriving their just powers from the consent of the governed. [12]

“Among these inalienable rights, as proclaimed in that document, is the right of men to pursue their happiness, by which is meant the right to pursue any lawful business or vocation, in any manner not inconsistent with the equal rights of others, which may increase their prosperity or develop their faculties, so as to give their highest enjoyment.” [13]   Justice O’Connor expressed a like opinion when deciding the extent of Congressional authority under the commerce clause saying: “Congress exercises its conferred powers subject to the limitations contained in the Constitution. Thus, for example, under the Commerce Clause Congress may regulate publishers engaged in interstate commerce, but Congress is constrained in the exercise of that power by the First Amendment.” [14]

Often times the courts will determine the validity of a law based upon the doctrine of “public policy”. The cases just cited declare that rights are not the subject to majority rule, nor do they depend upon any election. [15]

Further the Supreme Court in Butcher’s Union v. Crecent City stated; “When such regulations do not conflict with any constitutional inhibition or natural right, their validity cannot be successfully controverted. The general government was not formed to interfere with or control them.” [16] This is a repeat of the principle declared by Miranda decision the Supreme Court made.

In communication with the Utah State Legislature concerning the subject of the State Income Tax, the Office of Legislative Research and General Counsel stated “that the tax is imposed on state taxable income of every resident individual”. This is still a vague answer, for instance; if the particular individual is a resident and their income is derived from sources out side of the State there would be a foreign jurisdiction problem. What is clear is that the State of Utah is taxing the people (resident) and the income is used as the measure of the tax. In the case of non-resident individuals, the tax is imposed upon their employment and the income generated from within the State is used as a measure.

In either case, the bottom line is that the State income tax is a direct tax on people, therefore, people are the subject of the Utah State Income Tax. The one instance because you live in Utah, and the other because you are employed in the State of Utah.

The Courts Remain Confused

Notwithstanding the forgoing, the lower courts still are not consistent.  Reviewing several lower court decisions that have effected the lives of many individuals, you see the inconsistencies, as the courts change direction to bring about the outcome they desire.  For example; in Parker v. Commissioner, the 5th Circuit (1984), rejected the contention that the (income) tax is an excise, and that the court (brushaber) determined, that the sixteenth amendment provided the needed constitutional basis for the imposition of a direct non-approtioned income tax.  “The sixteenth amendment merely eliminates the requirement that the direct income tax be apportioned among the States. . . .  The sixteenth amendment was enacted for the express purpose of providing for a direct income tax.” [17]

In Coleman v. Commissioner, the 7th Circuit (1986), held that an argument that the tax was an excise was frivolous on its face saying, “[t]he power thus long predates the Sixteenth Amendment, which did no more than remove the apportionment requirement. . . .” [18]

And in U.S. v. Francisco, the 8th Circuit (1980), the court misquotes the Brushaber court declaring that Brushaber held this tax to be a direct one, “the purpose of the Sixteenth Amendment was to take the income tax ‘out of the class of excises, duties and imposts place it in the class of direct taxes'”. [19]

In the Tax Court, Lonsdale v. CIR, (1981), the argument put forth by the Lonsdales that the income tax is a direct tax and must be apportioned among the several States was rejected by the court, “[t]his requirement was eliminated by the sixteenth amendment.” [20]

Finally, in U.S. v. Lawson, the 10th Circuit (1982), expressed its contempt for the contention that the federal income tax was an indirect excise tax.  “The Sixteenth Amendment removed any need to apportion income taxes among the States that otherwise would have been required by Article I, Section 9, clause 4.” [21]

John R. Luckey, (an attorney, no less) falls flat on his face with conclusions like this;  “. . .  [S]ince the ratification of the Sixteenth Amendment, it makes no practical difference which classification one gives to the income tax.  …, the only distinction between a direct tax and an indirect tax is that the direct tax must be apportioned.  …, the Sixteenth Amendment, without classifying the income tax, empowers Congress to lay and collect taxes on incomes, from whatever source, without apportionment.”  (Frequently Asked Questions Concerning the Federal Income tax, Congressional Research Service)  Mr. Luckey, esq., fails to do his homework, or is inclusion with others who have been passing this falsehood along.

Chief Justice John Roberts and friends’ opinion on Obamacare and the mandate also shows the confusion and misunderstanding that continues in the court system.  For the most part they tried to explain why the penalty tax was not direct in nature concluding “[t]he shared responsibility payment is thus not a direct tax that must be apportioned among the several States.”  Pardon me, but all direct taxes MUST be apportioned;  NO exception!  And since there are ONLY two classes of federal taxes, this left the only other option, placing the “shared responsibility payment” in the class of indirect taxes, unless they found that “hitherto unknown power of taxation” referred to by the Brushaber Court (240 U.S. 1, 11).  Sometimes it is what the Court does not say that stands out and in this case when the Court said the penalty “. . . is thus not a direct tax that must be apportioned among the several States.”  Do you mean that this is a “direct” tax, relieved from the rule of apportionment?

Just by coincidence, Justice White (Brushaber) saw this coming and brings this to the attention of Chief Justice Roberts and company; “. . . the confusion . . . arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation, that is, a power to levy an income tax which although direct should not be subject to the regulation of apportionment applicable to all other direct taxes. . . . .  . . . [T]he contention that the Amendment treats a tax on income as a direct tax although it is relieved from apportionment and is necessarily therefore not subject to the rule of uniformity as such rule only applies to taxes which are not direct, thus destroying the two great classifications which have been recognized and enforced from the beginning, is also wholly without foundation.”  (Brushaber, at 18)

With all due respect to the Court, this “shared responsibility payment” is most assuredly a direct tax.  Having reviewed the previous court definitions on the two classes of taxes, this penalty “tax”, being assessed against the citizen, cannot be passed on to another.

By identifying this payment as being indirect, there are several problems that previous Courts have pointed out.  For one,  “. . . indirect taxes are levied upon the happening of an event or an exchange.’  [Justice White, Knowlton v. Moore,  178 U.S. 41 (1900)]  “In other words,  (indirect) tax is imposed upon the doing of business of the character described,  . . .”  [Flint v. Stone Tracy Co., 220 U.S. 107  (1911)]

Also, an indirect tax is one that can be passed on to a third party who is responsible to pay the tax. “Ordinarily, all taxes paid primarily by persons who can shift the burden upon some one else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes.”  [Pollock vs. Farmers’ Loan and Trust, 157 U.S. 429, 557, 558]  The “shared responsibility payment” falls directly on the sovereign and can not be shifted to another.  By the Court’s own definition, this tax is direct.  By being direct, it must be apportioned; and since it does not make itself compatible to apportionment, it is unconstitutional and the Affordable Care Act, which is not affordable, must be struct down.

L.S. Glazier


1. The Biggest Tax Loophole of All

2. Brushaber v. Union Pac., 240 U.S. 1, at 16

3. Herman vs. Baltimore, 189 Md. 191; 173 A.L.R. 1310, 1314 (emphasis added) (See also 26 R.C.L., Taxation(1920), 25. Excises Classified.

4. Congressional Record, Senate, June 30,19__; p. 3976

5. Appendix to the Congressional Record, Friday July 9, 1909

6.  Helvering v. Edison Bro. Stores, 133 F. 2d 575; Herman v. Baltimore,__ Md __, 173, ALR 1310, 55 A2d 491

7.  Quoting, Lonas v. State, 50 Tenn. 287, 307

8.  Jack Cole Co. v. MacFarland, 337 S.W. 2d 453 at 456 [1960]

9.  26 R.C.L. Taxation § 209, p. 236; Cooley Taxation (4th ed.) §1676, Redfield v. Fisher, 292 P. Reporter 813, 819 [1930]; See also the Supreme Court of Arkansas, Sims v. Ahrens, 271 S.W. 720, 722 [1925]; Thompson v. Wiseman, 75 S.W. 2D 393, 394 [1934]

10. Miranda v. Arizona, 384 U.S. 436, 471; Lucas v. Forty-forth Gen. Assembly, 377 U.S. 713, 736-737 [1964]; Adair v. U.S., 208 U.S. 161,173 [1907]; Adkins v. Children’s Hospital, 261 U.S. 525, 545 [1922]; Allgeyer v. Louisiana, 165 U.S. 578, 589 [1896]

11. Loan Associates v. Topeka, 20 Wallace 655; Parkersburg v. Brown, 106 U.S. 487; United States v. Lopez, S. Ct., No. 93-1260; United States v. Lopez, 514 U.S. 549

12. Butcher’s Union Co. v. Crescent City Co., 111 U.S. 746, at 756-757 (1883)

13. Butcher’s, supra, at 757

14. New York v. United States, supra (emphasis added)

15. Lucas v. Forty-forth Gen. Ass’m., supra 736, 737

16. Butcher’s Union, 754

17. 724 F.2d 469

18. 791 F.2d 68

19. 614 F.2d 617

20. TC Memo 1981-122

21. 670 F.2d 923; See also; Broughton v. U.S., 632 F.2d 706, 8th Circuit (1980)



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