Frivolous Arguments Meaning of Taxable Income and Gross Income

There are certain arguments that the IRS terms as “frivolous”. These are arguments that the IRS and the courts have dismissed many times because they are not based on the correct interpretation of the law. Misinterpreting the meaning of income and wages is a ploy used by some to avoid paying income tax. When in conflict with the IRS, it pays to remember these 4 arguments below, shared by the IRS, regarding income, wages, and services that have been proven wrong in court again and again.

1. Wages, tips,and other compensation received for personal services are not income

If you assert that your wage, tips or any other compensation that you received in exchange for labor is not taxable income, it’s a frivolous argument that will not be accepted by the IRS or the courts. Using this argument, some people contest that wages are not taxable income because people have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed.

A variation of this argument is that wages are not subject to taxation where individuals have obtained funds in exchange for their time.

The IRS explains the law: For federal income tax purposes, ‘gross income’ means all income from whatever source derived and includes compensation for services. Any income, from any source is presumed to be income under section 61, unless the taxpayer can establish that it is specifically exempted or excluded. 

2. Only foreign-source income is taxable

Some people maintain that there is no federal statute that imposes a tax on income from sources within the U.S. This means that no U.S. citizen or resident of the United States is required to pay taxes on income earned from within the country. 

They argue that federal income taxes are excise taxes that only nonresident aliens and foreign corporations need to pay for the privilege of earning income within the U.S.

The IRS states the facts about what is considered income. For federal income tax purposes, ‘gross income’ means all income from whatever source. All citizens of the United States, including resident aliens are required to pay income tax on income earned within or outside of the country.

3. Federal Reserve Notes are not income

Some assert that Federal Reserve Notes currently used in the United States are not a valid currency and cannot be taxed because Federal Reserve Notes are not gold or silver and may not be exchanged for gold or silver.

The courts have rejected this argument on many occasions. In United States v. Rifen, the court stated that Congress has declared federal reserve notes legal tender . . . and federal reserve notes are taxable dollars. 

4. Military retirement pay does not constitute income

Some argue that Military Retirement Pay (MRP) is not income for federal income tax purposes. 

This is another misinterpretation of the law. The IRS clarified that the Internal Revenue Code defines gross income as all income from whatever source derived, including . . . pensions. Since military retirement pay is pension income within the meaning of section 61, it is taxable.