Alternative Tax Thinker Trying The Puerto Rico Gambit

The conventional term for someone like Brian Swanson is tax protester, which Wikipedia defines as someone who refuses to pay a tax claiming that the tax laws are unconstitutional or otherwise invalid. In 1998 Congress forbade IRS from designating people “illegal tax protesters”, but that does not prevent others including the courts from throwing the term around. Still I don’t like it, so what I am going to call Brian Swanson is an alternative tax thinker.

I first heard from Brian in 2018 and we have been email buddies of a sort since then. In his first email he told me that he had read Peter Hendrickson’s book and based on what he read corrected his returns and got a full refund. Peter Hendrickson with his Lost Horizons website where he teaches you about “cracking the code” may currently be the leading alternative tax thinker.. I have been covering Hendrickson since 2014. Most recently one of Hendrickson’s disciples was convicted on seven counts of knowingly and fraudulently filing false income tax returns and some bankruptcy related charges.

Doing Your Own Research

Brian had “done his own research” though and decided that Hendrickson was not quite right. He had written his own book correcting what he sees as Hendrickson’s errors and he gave me an electronic copy to review. That book was based on the theory that Americans don’t understand the difference between capital and income. His brief explanation was:

“The 16th Amendment applies to income only, it does not apply to capital. One works to create capital and from invested capital one derives income. Referring to capital as “earned income” is an attempt to eliminate capital in personal finance and trick people into paying more tax than they owe. Employment earnings are capital and investment earnings are income and my book explains why.”

Constitutional Tax Structure: Why Most Americans Pay Too Much Federal Income Tax is available but it is on the pricey side and I can’t really recommend it. He also has a website Capital VS. Income that explains the theory. The idea is that earnings from labor are not income but rather create capital. Only the earnings from capital are income. To an accountant who thinks in double entry Brian’s theory doesn’t even make good nonsense.

When Brian wrote me in 2018 it was a sort of heads up. He was not interested in becoming more famous. He is a really nice guy and does not get mad when I tell him that I think his ideas are nonsense and practically beg him to quit. I was not successful. He has run up enough of a litigation record to make himself newsworthy. I found he had eight cases in PACER. A couple of them are about his objection to people in Georgia having to vote for their Senators given that George did not ratify the Seventeenth Amendment. The rest are tax related. There was also a Tax Court case.

Still I will be a little vague about some of his details even though they are public record. He is about fifty years old and receives a federal pension. He also teaches high school. He has a degree in systems engineering from a well known college. He believes that he should pay income tax on the federal pension but not the high school salary.

He prefaced his explanation as to why wages are not taxable income with this:

“I’m not a judge, a lawyer nor do I have any formal or informal legal training. What I do know is that the law is an abstraction. It doesn’t exist in the real world. It is literally a code similar to a computer programming code. It works the same way.

A computer programmer can create the variables and then can define what they mean. A computer program can define a variable called “apple” and assign it as an integer variable and give it the value of 10. “Apple
AAPL
” = 10. In the real world an apple is a fruit, but in the code it can be 10. That’s abstraction. In the Tax Code, the variables are called “legal terms” and are usually expressed with quotes meaning that this term does not necessarily have the same meaning in the code as it does in the real world. The different Subtitles in the Tax Code are like subroutines in a program. They are self-contained and run independently and the functions of each routine do not operate outside of its defined Subtitle without permission. “

Brushaber

The great thing about engaging with alternative tax thinkers is how much history you end up studying and how much time you spend thinking about the Constitution. The big division in the Constitution is between direct and indirect taxes. Regular people don’t think about it much because we don’t have any direct taxes because they are not really practical. Direct taxes have to be apportioned among the states. What happened with the income tax was that in 1895 in Pollock v Farmer’s Loan and Trust the Supreme Court ruled that an income tax to the extent it was taxing income from property was a direct tax and therefore would need to be apportioned which effectively killed it.

The Sixteenth Amendment passed in 1913 allows an income tax on income from any source without apportionment. So are income taxes direct or indirect taxes? Who cares? They don’t have to be apportioned regardless. Brian cares and you can read about it in his appeal to the Supreme Court of the 11th Circuit decision where he was sanctioned for frivolity.

“This question should not be in dispute because this Court has already answered the question in Brushaber and Knowlton, but many courts of appeals seem to contradict this Court’s decisions. The Eleventh Circuit held in its decision that:

The Supreme Court recognized that the Sixteenth Amendment authorizes a direct, non-apportioned income tax upon United States citizens throughout the country. See Brushaber, 240 U.S. at 12-19. (App. 3)

The Eleventh Circuit cites Brushaber for this erroneous holding. However, The Supreme Court said no such thing. Brushaber actually states that:

The 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. See Brushaber, 240 U.S. 18.

In one sentence, The Supreme Court simultaneously demolishes the idea of a non-apportioned direct tax and a uniform direct tax. No direct tax is relieved from apportionment and no direct tax can be uniform. Yet, according to The Eleventh Circuit, Brushaber authorizes a direct, non-apportioned income tax upon United States citizens. How can this be? Will this Court refuse to correct this error?”

I think he may actually have a point about how the appellate courts interpret the Brushaber decision in an inconsistent manner. I don’t think the whole system is going to crash because of it anytime soon. Prior to Pollock the income tax was seen as indirect which makes it subject to the rule of uniformity. Pollock said that to some extent it was a direct tax. The Sixteenth Amendment removes the apportionment requirement to the extent, if any, that there was one. It would probably be nice to clear up this confusion, but in the mean time you and I and Brian have to keep paying. An income tax does not have to be apportioned. It probably needs to be uniform, but who cares because it is uniform and there is no threat for the moment that Congress is going to make it other than uniform.

But Brian has another inspiration as he sees a flaw in uniformity.

But What About Puerto Rico?

This one is really great. Let’s put our Brushaber worries aside and go with the income tax being indirect. Well then it has to be uniform, which it pretty much is. When you move from New York to Massachusetts you might have different state returns to file but the federal returns are the same. It does not work that way if you move to Puerto Rico. If you become a bona fide resident of Puerto Rico you may not need to file a federal tax return at all. Puerto Rico has its own income tax, but it is different enough from the federal income tax that we don’t have uniformity.

So Brian thinks he has found the key to bring the system crashing down. He is particularly excited about a recent Supreme Court decision ( United States v Vaello Madero April 21, 2022) that gets into the complicated story of the status of Puerto Rico. Madero had been collecting SSI while living in New York. He moved to Puerto Rico. SSI is not available to residents of Puerto Rico. He managed to collect anyway and he was getting sued to pay back more than $28,000. Madero argued that denying SSI to residents of Puerto Rico violated the equal-protection component of the Fifth Amendment’s Due Process Clause. District and Appeals courts agreed with Madero, but the Supremes ruled 8-1 in favor of the government.

“The deferential rational-basis test applies. And Puerto Rico’s tax status – in particular, the fact that residents of Puerto Rico are typically exempt from most federal income, gift, estate and excise taxes – supplies a rational basis for likewise distinguishing residents of Puerto Rico from residents of the States for purposes of Supplemental Security Income benefits program.”

Overall the opinion by Justice Kavanaugh does not seem to be of any help to Brian’s objection to not being taxed uniformly. What excites him is the concurring opinion by Justice Gorsuch. The different treatment of Puerto Rico is supported by several early 20th Century Supreme Court decisions known as the “Insular Cases”. Justice Kavanaugh had to concur because neither side argued that the Insular Cases be overturned.

The Insular Cases came about as there were disputes about how the Constitution was supposed to apply to the territories that came under US rule as a result of the Spanish American War, Puerto Rico being among them. You can get a sense of the type of thinking that was floating around when you notice that the USA stepping into ruling these territories inspired Rudyard Kipling to write the poem “Take Up The White Man’s Burden“. Essentially the Constitution didn’t apply to those sort of people. Judge Gorsuch writes:

“The Insular Cases have no foundation in the Constitution and rest on racist stereotypes. They deserve no place in our law.”

Brian has a case live now in the United State District Court for the Southern District of Georgia – Brian Swanson v USA where he is making his argument. It defies easy summary, but you can get a taste of it here in his response to a government motion to dismiss.

My legal brain trust does not have much patience for alternative tax thinkers, so I will have to leave you with my analysis. In the event that the Insular Cases get overturned it will not mean that those of us living in the nifty fifty won’t have to pay the federal income tax. As a matter of fact Judge Kavanaugh’s opinion addresses that possibility.

“And if this Court were to require identical treatment on the benefits side, residents of the States could presumably insist that federal taxes be imposed on residents of Puerto Rico and other Territories in the same way that those taxes are imposed on residents of the States.”

I have to say that I have a certain admiration for Brian Swanson, even though I wish that he would find a new hobby.