Not Written for You: The Income Tax Hidden in Plain Sight
Part 4 of 13
Trade or Business: Official Use Only
In many states, government vehicles carry a sticker that reads "For official use only." That phrase is a remarkably accurate description of one of the most misunderstood terms in the tax code.
The term is "trade or business." You have heard it a thousand times. You assume it means what you do for a living. It does not.
One enumerated item. One class. The performance of the functions of a public office.
The typical response to this definition goes something like: "Well, it means all ordinary business activities plus the functions of a public office." That is a pleasant thought. It is also made up. Nothing in the definition says that. Nothing in the code says that. Nothing the Supreme Court has said permits that reading.
We learned in Part 1 that "includes" establishes a class from the enumerated items. There is one item here: public office. The class is official government business.
Section 162 Proves It
Look at how the term is used. Section 162 of the code provides the deductions available to those "carrying on any trade or business." Most people assume this covers private enterprise. Substitute the definition and the opening reads:
"There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on the performance of the functions of a public office."
Now read what follows in the statute. The place of residence of a Member of Congress. Federal employees certified by the Attorney General. Capital contributions to a wholly-owned federal corporation. Denial of deductions for lobbying and political expenditures — which exist to influence the performance of the functions of a public office.
Every specific provision in Section 162 addresses official government activity. Not one addresses a plumber's truck payment or a restaurant's food costs.
Why It Matters
The term "trade or business" appears again and again throughout Subtitle A and its regulations. Certain obligations become mandatory if one is "engaged in trade or business." Certain exemptions apply if one is not.
If trade or business means what Congress defined it to mean — official government functions — then every provision hinging on that term has a far narrower reach than the public has been led to believe.
But of course, the public has never read the definition. Neither have most of the professionals who tell the public what the law requires.
Next: The sole statute that commands payroll withholding. It is one sentence long. It does not name which tax is being collected.
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