Interesting Way to Bust the "All That Comes In" Myth
All we need is a chisel.
One of the easiest ways to bust the ALL THAT COMES IN Income Tax myth can be found, interestingly enough, in a section of the Internal Revenue Code whose extended breakdown is exceedingly tedious and unnecessarily complex… as is pretty much the whole rest of the code… but I digress…
26 U.S. Code § 6049 - Returns regarding payments of interest
This section took me so darn long to breakdown that I reached Beehiiv’s post length limit and had to break my breakdown of it into two parts.
Part 1: 7,000 words
Part 2: Looks like it’ll be around 4,000
As people ask me whether their this or that income is subject,1 I find this section helpful for those who have felt overwhelmed or fearful about reading the code.
There’s no question that the tax code is complex. Confusing. That’s why we hire trained professionals to do our paperwork. But while figuring out whether you should be receiving a Form W-2 from your day job requires cascading definitions five levels deep from the same and different sections, chapters, and subtitles, this type of payment is fully painted on one page.
26 U.S. Code § 6049
Subsection (a) of Section 6049 of the IRC defines the requirements for reporting payments of Interest. When “interest” is mentioned, it is given the definition found in subsection (b).2
26 U.S. Code § 6049 - Returns regarding payments of interest
(a) Requirement of reporting
Every person—(1)who makes payments of interest (as defined in subsection (b)) aggregating $10 or more to any other person during any calendar year, or
(2)who receives payments of interest (as so defined) as a nominee and who makes payments aggregating $10 or more during any calendar year to any other person with respect to the interest so received,
shall make a return according to the forms or regulations prescribed by the Secretary, setting forth the aggregate amount of such payments and the name and address of the person to whom paid.3
From the colloquial looks of it, if you lent me $10,000 at 2% simple interest, it would appear that I shall make a return as the secretary prescribes because:
I’m a person,
You’re a person, and
I’m paying you $200/year in interest, which is well over the limit.4
All the requirements are met! And, I want to be a good, Law-Abiding Citizen! Show me your papers, please! I have a FORM to fill!
Well, not so fast. Perhaps there’s more to discover first as a Reading-Comprehending Citizen. After all, Section (a) did tell us that interest’s custom definition was in subsection (b), so we’d be remiss if we didn’t look…
So, let us not be remiss:
26 U.S. Code § 6049 - Returns regarding payments of interest
(a) . . .
(b) Interest defined
(1) General Rule
For purposes of subsection (a), the term “interest” means—
[A-G list of stuff not important right now](2) Exceptions
For purposes of subsection (a), the term “interest” does not include—(A) interest on any obligation issued by a natural person,
(…)
Whoa!
My $200 interest payment to you is not interest as defined in subsection (b)!
Even though it seemed like it at first, because subsection (a)(1) was really clear that when persons pay each other more than $10, it counts!5 But now here it explicitly says not! Cool.
And we chisel that type of payment away from taxable income (as defined in the IRC)6.
It’s kinda like those test tests we got in school when the teacher was feeling funny. The front page instructions: “Read everything before beginning.” Over the page, the instructions at the end: “Fill nothing out, just turn in with your name on top.” Felt dumb for trying to get a head start before, during, and after erasing all the answers I had written.
This whole thing may seem dumb, and even unlikely to happen, but I’ve seen people take into consideration taxes on “interest income” in their personal dealings.
Now I know it’s dumb.
And it makes sense. That’s why I like this example and made it into a post. It’s clean, easy to understand, and you get everything you need on one page. It also perfectly showcases, when the nitty gritty is observed, that
.
And, now when I try to get your SSN to prepare a Form 1099-INT, you can go like this:
If you’re curious, the answer is “if the code says so”
When a term is given a definition in the code itself, we must use the given definition, and throw our understanding out the window. Essentially, think of “interest” as an empty canvas, and the code instructions for what to draw.
Regardless, even were we to grant the Attorney General's views "substantial weight," we still have to reject his interpretation, for it conflicts with the statutory language discussed supra, at 940. The Attorney General, echoed by the dissents, tries to overcome that language by relying on other language in the statute; in particular, the words "partial birth abortion," a term ordinarily associated with the D&X procedure, and the words "partially delivers vaginally a living unborn child." Neb. Rev. Stat. Ann. § 28326(9) (Supp. 1999). But these words cannot help the Attorney General. They are subject to the statute's further explicit statutory definition, specifying that both terms include "delivering into the vagina a living unborn child, or a substantial portion thereof." Ibid.
When a statute includes an explicit definition, we must follow that definition, even if it varies from that term's ordinary meaning….
Colautti v. Franklin, 439 U. S., at 392-393, n. 10 ("As a rule, 'a definition which declares what a term "means" ... excludes any meaning that is not stated' ")
Justice Breyer. Stenberg v. Carhart, 530 U.S. 914 (2000)
The related instructions in the Code of Federal Regulations says to use a Form 1099-INT to reports payments of interest.
Let me know if you pulled your hair out over that example, internally [or externally] screaming, “NO!”
The term “person” is also custom defined in Section 6049:
Person. The term “person” includes any governmental unit and any agency or instrumentality thereof and any international organization and any agency or instrumentality thereof.
26 U.S. Code § 63 - Taxable income defined
(a) In general
Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).
26 U.S. Code § 61 - Gross income defined
(a) General definition
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:(4) Interest (except of the type defined in 6049 § (b)(2)(A));