Kornfeld v. Commissioner and the Step Transaction Doctrine

Step Transaction Doctrine Legal Theory Tax Deduction

The Step Transaction Doctrine

We will look at one more case before returning to our article series on the sixteenth amendment. This is a case every HTW reader should become very well acquainted with: Kornfeld v. Commissioner (1998). Though it’s primarily an income tax case, it contains a plethora of other important topics and subtopics, and it presents a message which every HTW reader should commit to memory.

In the past, we’ve learned that whether a transaction be taxable is dependent on its substance, and that courts apply the “substance over form” doctrine to determine the true nature of a business transaction. The substance over form doctrine is not the only tool utilized by courts to review a transaction, however; the so-called “step transaction doctrine” is another tool commonly used by courts to clarify the nature of a transaction for tax purposes. Under the step transaction doctrine, multiple “steps” may be classed together and regarded as a single transaction; in this way, steps which may have been taken simply for the specific goal of altering tax liability can be overturned. The step transaction doctrine does not exist to create tax liabilities where none should exist, but to assess tax liability properly by viewing a transaction with the greatest level of accuracy.

In other words, the step transaction doctrine imposes a sort of coherence to a multistep transaction so that it can be properly adjudicated. This is very common in law: legal theories often condense or codify reality so that it can be interpreted using preexisting categories. But the rationale for theories such as the step transaction doctrine is not only about simplicity; there is also the aim of viewing a matter according to its true nature. Even though the step transaction doctrine may “condense” things for the sake of simplicity, many contend that this theory (and other similar theories) portrays matters in a more accurate way, that it provides a clearer sense of what actually occurred. Let’s look at the details of the Kornfeld case to get a better sense of this doctrine and its rationale.

Facts

The facts of this case are a bit complicated. Kornfeld, a highly experienced tax attorney, established a revocable trust which he intended to use to purchase bonds. He entered into an agreement with his daughters in order to claim an amortization deduction on the bonds; the agreement was that Kornfeld would transfer funds (from the trust) to the bond issuing institution equal to the value of a life estate in the bonds and then the daughters would pay the balance on the bonds. The agreement also held that Kornfeld would deliver checks to the daughters for the exact amount which they paid to cover the balance.

Kornfeld and his daughters executed this initial agreement and Kornfeld obtained the bonds. Subsequently, the tax code was changed so that the amortization deduction sought by Kornfeld was made unavailable in situations involving related parties. In response, Kornfeld and his daughters made another agreement which included Kornfeld’s secretary; the second agreement held that the daughters would take a second life estate interest in the bonds following Kornfeld’s death, and that the secretary would have the final remainder interest upon the death of the daughters. Importantly, Kornfeld used IRS valuation tables to create his estimates for the value of his life estate interest. Kornfeld claimed amortization deductions on the bonds and then the IRS assessed a deficiency after they declared that the transaction had failed to produce a genuine life estate in the bonds.

Law

Under U.S. code – specifically section 167 – taxpayers may claim a depreciation deduction of a reasonable amount based on wear and tear for property held primarily for the production of income (such as a bond). IRC subsection 167(d) pertains to life tenants and beneficiaries of trusts. Under these rules, life estate interests in bonds – or “term interests” or limited interests – are considered amortizable (or depreciable) and thus taxpayers may claim a deduction for such an interest. Also see 26 CFR 1.167(a)-1.

Ruling

Applying the step transaction doctrine, the court rejected the argument made by Kornfeld that the payments made to his daughters (and secretary) had no real connection to the bond transaction, and that a genuine life estate interest had been created for tax purposes. The court based its decision on the fact that the seemingly disparate actions of the case were patently interdependent and all served to produce a single, underlying purpose. Kornfeld thought that he had devised a near foolproof scheme to completely avoid any tax liability on the bond transaction, but the court realized that a genuine limited interest had not been created and that Kornfeld had acquired total ownership of the bonds.

The Kornfeld case is a prime example of the step transaction doctrine at work. All HTW readers need to be aware of how the step transaction can affect their tax liabilities; if you aim to acquire a particular kind of tax treatment, you need to understand that your actions preceding any given transaction, as well as your actions which occur after a given transaction, can impact the tax treatment you ultimately receive. In the future – after a few more installments on the sixteenth amendment – we will look at a few more examples of how the step transaction doctrine has been used to alter the tax classification of a series of events.

Image credit: Investment Zen

A Few Thoughts on the New Seattle Soda Tax

Soda Tax Seattle Drink Council City

Seattle Soda Tax

On Monday, June 5, 2017, the Seattle City Council passed a motion which will implement a tax on sugary soft drinks (soda). This new “soda tax” is designed to reduce statewide obesity rates, particularly among children, and to raise additional funds for public projects. Expectedly, the passage of the soda tax has been met with both surprise and opposition as it raises issues regarding personal freedom and the role of government in the marketplace. Let’s look at the basic provisions and purposes of the tax and then discuss some of the arguments both in favor and against it.

Basic Facts

The soda tax was passed by a margin of 7-1; Lisa Herbold was the sole councilmember to vote against the tax. The city will collect 1.75 cents for every ounce of “sugary” soda, such as regular Coca-Cola, Pepsi and so forth. The tax will not be collected on diet sodas and sodas made by smaller distributors.

The tax is set to take effect on January 1, 2018. This date could be pushed forward, however, in the event that a legal challenge or other type of motion takes place in the interim. Prior to the vote on the tax, councilmember Herbold proposed several amendments which she claimed would mitigate some of the potential negative consequences of the tax. All of Herbold’s amendments failed except for her proposal that some of the tax proceeds be used to fund local food banks.

Pros and Cons

The chief architect of the tax, councilmember Tim Burgess, argued that the tax will make a positive impact on state obesity levels. Though the tax may (indirectly) encourage healthier eating habits, many opponents could argue that this tax represents an undesirable incursion by the state on the free market. Regardless of the price, people have a choice to purchase sugary soft drinks, and the tax on soda could easily be interpreted as a financial penalty on personal freedom. The soda tax, therefore, brings up the recurring issue of what role the government should play in preventing certain behaviors in the interest of the wider public good.

When viewed in this fashion, the soda tax acquires a rather lengthy pedigree. Sin taxes, such as those imposed on tobacco and liquor, have been relatively common throughout American history. In the 1920s (and early 1930s), we used Prohibition to guard against the supposedly toxic influence of alcoholic beverages; today, historians almost all concur that Prohibition was a failed experiment, but the issue of what level of responsibility the state has for promoting public health remains hotly contested. Here at HTC, we think it prudent to avoid a definitive stance on the issue; after all, we are not dealing with a ban or severe financial burden, only a small incentive to avoid sugary drinks. HTC is certainly very curious about the impact of the tax and we look forward to seeing hard numbers on whether the tax lives up to its expectations.

Source

Image credit: CapCase

Top Areas for Future Home Buyers in the Greater Seattle Region

Seattle Real Estate Property Value Market

Seattle Real Estate Market

Though many of our clients are homeowners, quite a few of our clients are currently in the market (or plan to be in the market) for a new home. For this reason, in our present article we’d like to take a moment to highlight some of the hottest areas for real estate purchases in the greater Seattle metropolitan region. These areas offer plenty of perks to residents: pleasant scenery, easy access to downtown, safety, economic opportunities and many other benefits. If you are hoping to buy a house, condo or townhome in the near future, you should give serious consideration to a place in one of these areas.

And once you count yourself among the crowd of homeowners, be sure to keep coming back to HTC as we’ll be able to assist you with all of the tax-related issues homeownership can bring up.

Downtown Bothell

Though the economic recession of 2008-2009 slowed Bothell’s growth a bit, the city has managed to bounce back very well and has seen substantial development in the most recent few years. Multiple residential and commercial properties have been added to the city and more projects are on the horizon. The city boasts several important biotech and high-tech employers and also hosts the Bothell campus of the University of Washington. The median home value currently stands at $427,900 and the expected rate of appreciation is 5.2 percent.

Ravenna

Conveniently located very close to the University of Washington’s main campus and Seattle Children’s Hospital, the small town of Ravenna is an excellent choice for someone looking to acquire a stylish property in an urban setting. The town is receiving a large influx of tech professionals from California and elsewhere who are attracted to the stylish craftsmanship which characterizes Ravenna homes. Well-paid UW personnel and medical professionals are also flocking to the town given its location and pleasant community. The median home value is approximately $666,900 and the rate of appreciation is 7.1 percent.

Kirkland

Frequently regarded as Bellevue’s little cousin, the city of Kirkland is an easy choice for the most desirable real estate markets in the greater Seattle area. Between 2015 and 2016 the city saw a rise in home values of 11.7 percent and, though the exact rate will fluctuate, more good appreciation appears to be in store. Given its waterfront location and easy access to downtown Bellevue, Kirkland will likely continue to attract ambitious and affluent home seekers throughout the coming years. Kirkland Urban – the massive, mixed-use residential and commercial property which will host a movie theater, restaurants, bars, etc. – has an expected completion date of November, 2018 and play a considerable role in increasing Kirkland’s desirability.

Source

Image credit: Tim Durkan

Trump’s New Tax Proposal Could Have Substantial Impact on Seattle Homeowners

Trump Real Estate Deduction Seattle Tax Property Mortgage Interest

Trump’s Plan & the Seattle Market

President Donald Trump has developed a proposal to rewrite the tax code in such a way that it may render the mortgage interest deduction meaningless for all but a small minority of wealthy homeowners. Opponents argue that this provision would take away an important incentive of homeownership; supporters contend that the change benefits the majority of Americans and would expand homeownership opportunities for middle income earners.

Let’s examine Trump’s proposal in greater detail and highlight how the changes could impact the Seattle real estate market.

Proposed Revisions

The proposal contains a number of changes; perhaps the most important one is the raising of the standard deduction from its current level of $12,700 (for married couples filing jointly) to $24,000. On its face, Trump’s proposal does not eliminate the mortgage interest deduction, but its goal of substantially raising the standard deduction would mean that millions would cease to itemize their write-offs and consequently fail to deduct the interest from their home loan.

Trump’s plan also modifies existing deductions for state and local taxes, including property taxes. Opponents contend that the property tax deduction is another important perk of homeownership which should not be removed.

The Trump administration states that the changes will actually stimulate home purchases for low to middle income Americans because the higher standard deduction will enable greater savings. The proposal is also likely to trigger a measurable decline in average home pricings across the country which will increase access to homeownership.

Possible Impact

Currently, the Seattle real estate market has a median home price of approximately $722,250. This figure undoubtedly places Seattle among the most expensive real estate market in the country. Assuming the Seattle buyer puts down twenty percent, this median price means that the typical Seattle homeowner will pay roughly $2,735 per month in mortgage costs over a 30-year loan. Given its status, there’s no question that the Seattle real estate market will be impacted by the Trump proposal very heavily. A large number of our homeowners will suddenly be in a situation in which itemizing will no longer make financial sense. Trulia – the well-known property data provider – determined that the number of households eligible for the mortgage interest deduction in Seattle would drop from 56 percent down to 26 percent.

Whether Trump’s changes increase or decrease homeownership across the country obviously remains to be seen; what is certain is that the real estate industry as a whole is lined up in opposition to Trump’s proposal. Supporters and opponents both appear to have facts and figures which bolster their respective positions. Perhaps only a fair trial will determine whether Mr. Trump’s plan will be beneficial to the nation.

Source

Image credit: tiffany98101

To learn more about the mortgage interest deduction and other tax benefits of homeownership, see this presentation by our CPA Jessica Chisholm

Investment Property & the Personal Residence Exclusion

Vacation Home House Property Investment

Investment Property

Contrary to what many may suppose, the initial purpose underlying the acquisition of a property does not necessarily bar future invocation of the principal residence exclusion (under IRS section 121). As we’ve discussed earlier, Section 121 of the Internal Revenue Code allows homeowners to exclude up to $250,000 ($500,000 for married couples filing jointly) of gain from the sale of a “principal residence” (as defined by the code). What we haven’t mentioned yet, however, is that property may be converted from its original purpose — say, for investment — into a primary dwelling specifically to take advantage of the principal residence exclusion. This is an extremely useful piece of information for many real estate owners. In many cases, a person will acquire real property as an investment — a vacation rental house, for example — and then later decide to use that same property as a personal residence. As long as the property is used as a “principal residence” — meaning that the owner has used the property as a residence for at least two years out of the most recent five-year period — the owner may utilize the exclusion provided by section 121.

Converting Your Investment (Rental) Property into a Principal Residence

Perhaps the most common instance of “converting” a property initially used for investment purposes into a property eligible for the exclusion provided by section 121 is the conversion of rental property. If they have access to the requisite funds, many real estate owners choose to invest in rental property in order to generate regular supplemental income. They may decide to acquire a vacation house and then rent this property out to tenants. It may become financially beneficial (or financially necessary) for the real estate owner to eventually convert this investment rental property into a primary dwelling at some point in the future; once the owner satisfies the time requirements of the provisions of section 121, they can then sell the property and exclude as much of the gain as the section allows.

Converting investment property into a primary dwelling for the purpose of invoking section 121 of the IRC is just one piece of expertise that the team at HTC is familiar with. As promised, we will return to the sixteenth amendment very soon, but before we do we thought it helpful to draw attention to this little gem of tax knowledge. Stay tuned for more gems in the future!

Image credit: JD Lasica

If this article grabbed your attention, you should view our presentation on real estate tax advantages by our resident CPA Jessica Chisholm

The Basics of Tenancy-in-Common Ownership Arrangements

Real Estate Tenancy Common Ownership

Tenancy-in-Common Arrangements

Many of our clients are real estate owners and so in this installment of HTW we thought it beneficial to introduce the concept of tenancy-in-common ownership arrangements. A tenancy-in-common (TIC) is a form of joint ownership which involves multiple owners who share an undivided fractional interest in a single piece of real estate. This means that each owner possesses rights which are essentially identical to those of single owners rather than co-owners of typical partnerships. Being a co-owner in a tenancy-in-common arrangement confers numerous benefits; let’s discuss some of the basic characteristics of TICs and highlight a few of the distinguishing features of this type of arrangement.

Distinguishing Features

As mentioned, co-owners to a TIC possess undivided fractional interests in the underlying property. In practice, this means that they are not barred from freely transferring or alienating their interest in the TIC. At any time, a TIC co-owner can distribute their interest to another person without having to receive prior consent from the other co-owners. This distinguishes a TIC from other joint ownership arrangements, such as a tenancy-by-the-entirety.

Another distinguishing feature of TICs is the ability to have interests divided unequally among co-owners. Theoretically, in a TIC, one co-owner may possess a larger interest than other co-owners. In a scenario involving three co-owners, for instance, one co-owner may possess a fifty percent ownership and the two remaining co-owners may each possess an interest of twenty-five percent. This type of unequal division of ownership is either disallowed or typically not seen in alternative arrangements.

In a TIC, co-owners all share in the profits of the real estate and are all affected by changes in property value. Each co-owner receives a separate deed and insurance title to his or her interest in the real estate.

Another important feature of TICs is the ability of TIC co-owners to use their interest as part of a section 1031 exchange. As we’ve discussed several times, section 1031 allows capital gains tax to be deferred in the event that the proceeds from the sale of real property are reinvested in other real property of like-kind. Typically, section 1031 may not be invoked by traditional partnerships, but TICs are an important example of a jointly owned piece of real estate which may partake in a 1031 transaction.

In the near future, following a few more articles on the sixteenth amendment, we will discuss TICs in greater detail by exploring some legal cases involving TICs and section 1031 of the IRC.

Image credit: Phillip Pessar

HTW Post-Season News & Upcoming Small Business Webcasts

News Update Huddleston Tax CPAs Webcast

Huddleston Tax Weekly News

Now that we’re past our busiest part of the year, HTW is happy to announce that we’ll be continuing our previous trend of bringing topical, high-quality material to our readers on a regular basis. HTW would like to continue examining the contours of the sixteenth amendment for a bit longer; the reason for this is because we believe firmly that an understanding of this exceedingly important political act is vital to gaining a full picture of our whole tax edifice. But after we explore the amendment in a bit more detail, we’re excited to say that we’ll be moving on to other issues which should be equally interesting to our audience. We will explore more real estate cases, current tax cases, international issues, and plenty of other exciting things.

Small Business Webcast

We’d also like to draw our readers’ attention to two upcoming webcasts which will be hosted from our site, smallbusinesswebcast.com. The first webcast — The Tax Benefits of Real Estate Ownership — will be given by our CPA, Jessica Chisholm. Jessica has given this presentation previously and is well familiar with this specialized area. The second webcast — Tax Reduction Strategies for Small Law Firms — will be presented by our CPA, Steven Lok. Assisting small law firms is one of Steven’s specializations.

As always, these presentations are entirely free to attend. We hope you enjoy these webcasts and the many more entertaining articles HTW has in store!

Image credit: manoftaste.de

Hylton v. United States & the Practical Difficulties of Apportionment

In early June of 1794, Congress passed a “carriage tax” aimed at carriages used for business purposes. The tax was to be collected annually for as long as the carriage owner maintained ownership of the carriage. The original Constitution of the U.S. recognized a distinction between direct taxes and indirect taxes, but it did not establish definitive guidelines for determining whether a new tax is direct or indirect. At the time of the adoption of the Constitution, it was established that poll taxes (or “capitation” taxes) and land taxes were direct taxes, but there was no formal mechanism for sorting a given tax into either category. Hence, though the authority of Congress to pass the carriage tax was never brought into question, what category the tax should be assigned was unclear.

Carriage Tax Constitution Law Amendment

Carriage Tax

In Hylton v. United States (1796), a suit was brought to collect a debt which was derived from the carriage tax. Hylton (the defendant in the original case) claimed that the carriage tax statute was unconstitutional. Hylton reasoned that the carriage tax was a direct tax and because the statute did not follow the rule of apportionment the tax had to be struck down under the Constitution. At the time of the suit, Hylton was in possession of 125 carriages.

The justices of the Supreme Court – who all wrote their own opinion of the case – determined that the carriage tax was an indirect tax and that, consequently, Hylton was liable for the debt. The justices decided that there was no compelling reason to suppose that the carriage tax fell within the meaning of a direct tax as understood by the framers of the Constitution. The framers understood that poll taxes and taxes on land were “direct” taxes; this classification had a basis in the conditions present among the states at that time. Although the carriage tax may have been superficially dissimilar from other indirect taxes in some ways, the justices could not find that this level of dissimilarity warranted classification as a direct tax.

Hylton entered the case with one critical disadvantage: the practical difficulties of apportioning the carriage tax by population were such that classifying the tax as a direct tax would have led to absurd results. Carriage ownership varied greatly from state to state, and so the carriage tax would have imposed an unfair burden on certain states if it were apportioned as a direct tax. The federal government would have been compelled to adopt new and unusual measures in order to artificially correct the unfair burden created by such a tax. The justices all concurred that the unfair results and practical difficulties of apportionment provided sufficient grounds for classification as an indirect tax.

Because the carriage tax was a tax on personal property, the Hylton decision came to the fore nearly one hundred years after it was made during the case of Pollock v. Farmers’ Loan & Trust Co. (1895). The Pollock case ruled that a tax on income from personal property (and real property) was a direct tax and must follow the rule of apportionment; this ruling effectively overturned the decision made in Hylton. Those who objected to the Pollock decision predicated their objection on the fact that the decision made the imposition of a federal income tax a near impossibility. Implementing a federal income tax which followed the apportionment rule would have been excessively burdensome for the federal government for a number of reasons. The sixteenth amendment was drafted in order to bypass the sort of practical difficulties associated with apportionment which was discussed in Hylton.

Image credit: eddiecoyote

The Will of the People

Will People Tax Sixteenth Amendment

Will of the People

The phrase “the will of the people” has greater importance for Americans than it has for citizens of other states around the world. In large part, this stems from our deeply entrenched view of our system of government as a system which has developed entirely from the collective will of a free populace. The American public firmly believes that its governmental institutions are a direct extension of its collective will, a sort of living representation of its political voice. And to a good extent this view is accurate: our system has been informed by non-elite citizens to a considerably greater degree when compared with foreign systems across the globe. Though the history of these United States is much less egalitarian than most people care to appreciate, it is correct to say that the American project is more of a “popular” phenomenon than has been the case throughout most of history.

What most Americans do not realize, however, is that the will of the people can move society in any conceivable direction. Common perception tends to see the people’s collective will as an inherently benign force ceaselessly pushing our country in a way which maximizes our freedom and dispels injustice. But, as is often the case, common perception does not faithfully reflect reality. The will of the people is neither benign nor nefarious; it simply expresses whatever whims the people may have at a given moment. And if the people’s whims happen to push us toward less freedom or less justice – however that is defined – then that is precisely the direction we will be pushed in. Our constitution does not guarantee a certain quantum of freedom; as we learned in our prior installment, it provides that our lives may be encroached upon in any number of ways so long as the people’s will is expressed in the form of amendment.

This fact may come as a shock to many Americans. Our optimism tends to impart benevolent motives onto the public’s collective will in nearly every situation. What we have to understand, however, is that it makes little sense to ascribe any particular value to our collective will because our will can be shaped by just about any force imaginable – expediency, necessity, desire, passion. The sixteenth amendment did not simply address the practical difficulties associated with the apportionment requirement, it also expressed a public desire to ameliorate the widespread economic inequality which was present at the time of its passage. And it also enlarged the sovereignty of the federal government in relation to the states. It would be inaccurate to say that the results which followed the amendment were inherently just or proper; what is true is that these results were congruent with the collective sentiment of that era.

As we explore the sixteenth amendment in greater and greater detail, it is important for us to keep in mind that this amendment only represents the ability of our constitution to express the desires of the public, it is not an example of benevolent societal change.

In our next installment, we will discuss the case of Hylton v. United States (1796) and look at the impact that the ruling of this case had on the development of the sixteenth amendment.

Image credit: frankieleon

The Sixteenth Amendment & the Issue of State Sovereignty

Sixteenth Amendment Income Tax State Sovereignty

The Sixteenth Amendment

In the next several installments of Huddleston Tax Weekly, we will discuss in great detail some of the controversies which were stirred by the sixteenth amendment. As we’ve noted in previous installments of HTC, the sixteenth amendment to the U.S. Constitution was an act of awesome importance. Through this amendment, the Congress was freed of the various constraints on its taxing power which had existed since the founding of the country. The original U.S. Constitution expressly gave Congress the power to tax, but it also set certain restrictions on this taxing power; excise (indirect) taxes had to be uniformly imposed, and direct taxes had to be properly apportioned among the several states. Prior to the sixteenth amendment, judicial opinions on tax law often dealt with determining whether a given tax should be classified as either direct or indirect. The sixteenth amendment removed the necessity of making such determinations.

The full text of the sixteenth amendment is as follows: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Clearly, this amendment was directly responsive to a number of judicial decisions which, through their treatment of certain forms of taxation, had curtailed the taxing function of Congress. For instance, the Pollock case ruled that taxes on income derived from real property and personal property (such as stocks and bonds) were direct and therefore subject to the apportionment requirement. Pollock and other judicial opinions made the imposition of a federal income tax a practical – though not theoretical – impossibility. By removing the apportionment requirement, the sixteenth amendment made the implementation of such a tax an exceedingly simple matter.

The potential impact of the sixteenth amendment on state sovereignty was an issue immediately recognized by both the legal profession and the political establishment. Since it allowed Congress to collect taxes on incomes from any conceivable source, it apparently encompassed state securities; and by taxing state securities the Congress would be effectively lessening the power of the states in relation to the federal government. In his 1919 essay entitled “Power of Congress to Tax State Securities Under the Sixteenth Amendment,” Albert Ritchie argued that the amendment did not actually extend to state securities because the amendment was never intended to grant any new taxing powers to the Congress; the amendment was merely designed to consolidate Congress’ existing taxing powers, and since the power to tax state securities had historically been considered unconstitutional, and the authors of the amendment were themselves wary of the taxing of state securities, it follows that the amendment could not have granted a new power to tax state securities.

At the time of its publication, this essay by Mr. Ritchie must’ve had a great appeal. If taken solely on its words, the sixteenth amendment undoubtedly encompassed state securities, and it certainly raised the sovereignty of the federal government in relation to the states. But Mr. Ritchie’s reasoning involves looking behind the plain text of the amendment and considering the larger historical context in which this amendment was birthed. Given the conclusions to which it led, this reasoning certainly would’ve found plenty of open ears in 1919.

But Mr. Ritchie’s argument had at least one major weakness: it failed to recognize that the limited nature of state sovereignty has always been an established constitutional principle. As Mr. Harry Hubbard pointed out in his Harvard Law Review article entitled “The Sixteenth Amendment” in 1920, there is no constitutional basis for the notion that either the states or the federal government must have a certain degree of sovereignty. The Constitution provides that state sovereignty may be reduced if the people so desire with the power of amendment. The only principle which cannot be amended is the right of each state to have equal political representation. Thus, if the states choose to enlarge the role of the federal government through a constitutional amendment there is no higher authority which can be invoked to bar such a choice.

Mr. Hubbard argued that, given this reality, the sixteenth amendment was intended to cover state securities. The text did not need to specifically mention state securities in order to address any sort of historical trend against this type of taxation; if the amendment reduced state sovereignty simultaneously at the time that it consolidated Congress’ taxing power then this would have been a natural extension of the will of the people. We may like to suppose that, past a certain point, state sovereignty may not be encroached upon. But there is actually no constitutional foundation for this supposition. State sovereignty may be an ideal, but it is not unassailable and is very much subject to transformation depending on the whims of the public. In the end, the authors must have been aware of the amendment’s impact on state sovereignty, and it follows that any reduction in state sovereignty was fully permissible because these authors were merely acting as instruments of the people.

References

Hubbard, Harry. “The Sixteenth Amendment.” Harvard Law Review, Vol. 33, No. 6 (April, 1920), 794-812.

Ritchie, Albert C. “Power of Congress to Tax State Securities Under the Sixteenth Amendment.” American Bar Association Journal, Vol. 5, No. 4 (October, 1919), 602-613.

Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895)

Hylton v. United States, 3 U.S. 171 (1796)

Image credit: Gamma Man

Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

(800) 376-1785
40 Lake Bellevue Suite 100, Bellevue, WA 98005

Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.