Larry Becraft shows tax code excerpt revealing liability
Bob Hurt
You might want to evaluate what Larry Becraft has written below regarding whom the internal revenue code makes liable for income tax, particularly with respect to Pete Hendrickson’s method.
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Bob Hurt • 2460 Persian Drive #70 • Clearwater, FL 33763 USA • (727) 669-5511
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From: Becraft
Sent: Friday, December 31, 2010 6:14 PM
Subject: Re: Peter Hendrickson releases Cracking the Code: Larry
On 12/31/2010 4:48 PM, Larry Becraft wrote:
Here is my argument regarding Pete’s tax position and that asserted in his book.
The 1913 income tax act was allegedly broad, but that breadth was substantially reduced after Congress modified the income tax laws in response to the Brushaber decision. The income tax laws were written to be constitutional, but the “word-smithing” used in drafting those acts made the law appear broader than it really was. And this was intentional.
In order the determine how the income tax laws operate and apply, it is my opinion that study of all the old tax acts and regs is essential. By starting at the very beginning and following the law’s development, you can see how the tax operates. From this historical perspective, the tax is far different from the common perception.
Pete focused on withholding for the “meat” of his argument, but because Pete used for the most part “modern” income tax law, he drew incorrect conclusions. If you follow the development of withholding from the outset, you can see that in 1913, withholding allegedly applied to all “persons.” But in 1916 and 1917, the withholding scheme changed so that withholding applied only to non-resident aliens (“NRAs”). This was the condition of withholding all the way up thru the 1939 Code. In this scheme, federal employees were excluded, except for fed employees working abroad in some contexts.
The current withholding scheme we have today is based on 2 acts adopted during WWII. First, the Victory Tax Act of 1942 imposed a tax and collection scheme, but this act was in effect for less than a year when it was replaced by the Current Tax Payment act, which was eventually codified into the 1954 Code. Unless you are familiar with the history of these laws, you will completely miss how they operate. Pete did not know this history and drew incorrect conclusions. He simply made arguments “willy-nilly” based on a construction of various assorted provisions of the current Code. Personally, I disagree with the conclusions Pete reached. To assert that withholding applies only to fed employees, and the tax to be similarly applicable, is wrong. If anything, the tax is imposed on the taxable income of NRAs and foreign corporations.
Larry
As a follow-up on my last note regarding withholding, I provide below the only provision dealing with withholding in the 1934 act:
SEC. 143. WITHHOLDING OF TAX AT SOURCE.
(a) tax-free covenant bonds.—
(1) requirement of withholding.—In any case where bonds, mortgages, or deeds of trust, or other similar obligations of a corporation, issued before January 1, 1934, contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee, or to reimburse the obligee for any portion of the tax, or to pay the interest without deduction for any tax which the obligor may be required or per- mitted to pay thereon, or to retain therefrom under any law of the United States, the obligor shall deduct and withhold a tax equal to 2 per centum of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods, if payable to an indi- vidual, a partnership, or a foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein: Provided, That if the liability assumed by the obligor does not exceed 2 per centum of the interest, then the deduction and withholding shall be at the following rates:
(A) 4 per centum in the case of a nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens,
(B) 133/4 per centum in the case of such a foreign corporation, and
(C) 2 per centum in the case of other individuals and partnerships: Pro- vided further, That if the owners of such obligations are not known to the withholding agent the Commissioner may authorize such deduction and withholding to be at the rate of 2 per centum, or, if the liability assumed by the obligor does not exceed 2 per centum of the interest, then at the rate of 4 per centum.
(2) benefit of credits against net income.—Such deduction and withholding shall not be required in the case of a citizen or resident entitled to receive such interest, if he files with the with- holding agent on or before February 1 a signed notice in writing claiming the benefit of the credits provided in section 25(b); nor in the case of a nonresident alien individual if so provided for in regulations prescribed by the Commissioner under section 214.
(3) income of obligor and obligee.—The obligor shall not be allowed a deduction for the payment of the tax imposed by this title, or any other tax paid pursuant to the tax-free covenant clause, nor shall such tax be included in the gross income of the obligee.
(b) nonresident aliens.—All persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest (except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States and not having an office or place of business therein), rent, salaries, wages, premiums, annuities, compensations, remunera- tions, emoluments, or other fixed or determinable annual or period- ical gains, profits, and income, of any nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens, (other than income received as dividends of the class allowed as a credit bysection 25(a)) shall (except in the cases provided for in subsection (a) of this section and except as otherwise provided in regulations prescribed by the Commissioner under section 214) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to 4 per centum thereof: Provided, That the Commis- sioner may authorize such tax to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent.
(c) return and payment.—Every person required to deduct and withhold any tax under this section shall make return thereof on or before March 15 of each year and shall on or before June 15, in lieu of the time prescribed in section 56, pay the tax to the official of the United States Government authorized to receive it. Every such person is hereby made liable for such tax and is hereby indem- nified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section.
(d) income of recipient.—Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return.
(e) tax paid by recipient.—If any tax required under this sec- tion to be deducted and withheld is paid by the recipient of the income, it shall not be re-collected from the withholding agent; nor in cases in which the tax is so paid shall any penalty be imposed upon or collected from the recipient of the income or the withhold- ing agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment.
(f) refunds and credits.—Where there has been an overpay- ment of tax under this section any refund or credit made under the provisions of section 322 shall be made to the withholding agent unless the amount of such tax was actually withheld by the with- holding agent.
Withholding was based on this section from 1928 thru the 1939 Code, which was in effect until august, 1954.
Larry