Not Written for You: The Income Tax Hidden in Plain Sight
Part 1 of 13
The Most Important Word You've Never Read
There is a word in the federal tax code that controls the meaning of nearly every major definition in the law. It sits in plain sight at 26 USC § 7701(c). Your payroll manager has never read it. Your accountant has never read it. Your employer's attorney almost certainly hasn't either.
The word is includes.
In everyday English, "includes" suggests an open-ended list. In the tax code, it is a legal term with a specific definition. The difference between the two readings is the difference between a law that reaches 160 million workers and one that reaches a narrow class of persons.
A Legal Term, Not a Word
When Congress writes its own definition for a term in a statute, the dictionary becomes irrelevant. The Supreme Court has said so plainly:
"When a statute includes an explicit definition, we must follow that definition, even if it varies from that term's ordinary meaning."— Meese v. Keene, 481 U.S. 465 (1987)
"It is axiomatic that the statutory definition of the term excludes unstated meanings of that term."— Colautti v. Franklin, 439 U.S. 379 (1979)
Once Congress writes a definition, that is the only meaning. Not what seems reasonable. Not what you've always believed. The words Congress chose.
What "Includes" Means
Here is how Congress defined it:
That's a brain teaser. Here is the same rule from a more recent tax regulation, in plain English:
Same meaning. One sentence. The items listed after "includes" establish a class. Things within that class count. Things outside it do not.
The Fruit Test
Suppose a statute says: "The term 'food' includes apples, strawberries, plums, and peaches."
What class do those items establish? Fruit.
Grapes are part of the definition even though they aren't listed. They're fruit. But steak is not. Neither is bread. Both are food in common speech. Neither is food as defined by that statute.
This is not a matter of opinion. It is a matter of reading.
Some people believe that because courts call "includes" a "term of expansion," they can add whatever they want to a definition. If that were true, 348 million Americans would each be free to invent their own meaning for every legal term in the code. Congress did not intend that. The text does not permit it.
A Real Law, Not a Hypothetical
The fruit example is illustrative. Here is a real one. The Social Security Act of 1935 defines "State" as follows:
In 1935, Alaska was not a state. It was a federal possession, purchased from Russia in 1867. Hawaii was not a state. It was a federal territory, annexed in 1893. Washington, D.C. is the seat of the federal government under Article I, Section 8, Clause 17 of the Constitution. It has never been a state.
What class do these three items establish? Places under the exclusive legislative jurisdiction of Congress. Not the states of the Union.
If you doubt that reading, consider what Congress did next. When Alaska became a state of the Union, Congress passed the Alaska Omnibus Act. It amended the definition by striking out Alaska. When Hawaii became a state, Congress passed the Hawaii Omnibus Act and struck out Hawaii.
Think about that. If the definition already included all 50 states, removing Alaska and Hawaii upon statehood would have been pointless. Congress removed them because they no longer fit the class. They had moved from federal territories to states of the Union, and the definition does not cover states of the Union.
Congress also knows how to write a definition that does include the 50 states. Title 23, § 101(a) reads: "The term State means any one of the 50 states, the District of Columbia or Puerto Rico." Notice two things. First, it says "means," not "includes." When a definition uses "means," it is strictly limited to the listed items. Second, it explicitly names the 50 states. The Social Security Act definition does neither.
Same word. Same Congress. Two very different classes. The difference is not accidental.
Why This Matters
Nearly every critical definition in the tax code uses the word "includes." Employee. Employer. Wages. Trade or business. State. United States. If you don't know what "includes" means, you can't read any of them correctly.
Here is an exercise. Ask your tax attorney, your CPA, or whoever prepares your returns to read one of the definitions we'll be covering in this series. Ask them to identify the class established by the enumerated items. Watch their face. In most cases, you will witness one of two reactions: genuine surprise or immediate discomfort. The few who already know what the definitions say will be the most interesting to talk to. The rest will have no idea what you're showing them.
The definitions are not hidden. They are unread.
Next: We read the definition of "employee" for payroll withholding. The class it establishes may surprise you.
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