Published 1/31/2025

Your Time is Worth Nothing When You Exchange It for Wages

The IRS and Courts Have Said So. Challenge the Concept, and You'll be Penalized for Frivolity!

Here's JD's 2025 chat with Grok on the subject of income tax. He was interested in why my time is apparently worthless when exchanged for wages, even though wages are defined as "compensation." Aren't they to compensate me for giving up something of value? An employer gets to deduct my wages as a business cost. Why don't I as an individual get the same courtesy on my tax return? I could be playing tennis or bowling instead of slaving over a hot turntable spinning records 5 hours a night.

JD

Are there any federal court cases holding that "income" must be defined as a "gain or profit," and not "everything that comes in"?

Grok

Yes, there are federal court cases—primarily from the U.S. Supreme Court—that have held or stated that "income," for purposes of the federal income tax (particularly under the Sixteenth Amendment), must involve a "gain or profit" (often phrased as a realized gain derived from capital, labor, or both), and is not merely "everything that comes in" or all receipts. The most prominent and frequently cited case is Eisner v. Macomber, 252 U.S. 189 (1920). In that decision, the Supreme Court addressed whether stock dividends constituted taxable income and provided a key definition:

• The Court stated: "Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets."
• It emphasized: "Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed from it, and derived or received by the taxpayer for his separate use, benefit, and disposal."

This rejected the idea that income encompasses all accessions or everything received, focusing instead on realized gain or profit. The Court contrasted this with mere capital appreciation or rearrangements without severance and realization. Other cases have echoed or built on this:

• In Stratton's Independence, Ltd. v. Howbert (231 U.S. 399, 1913, pre-Sixteenth Amendment but influential), the Court described income as conveying "the idea of gain or increase arising from corporate activities," distinguishing it from capital or principal.
• In Goodrich v. Edwards (255 U.S. 527, 1921), the Court approved the definition of income as "'[t]he gain derived from capital, from labor, or from both combined,' provided it be understood to include profit gained through a sale or conversion of capital assets."
• Later cases like Commissioner v. Glenshaw Glass Co. (348 U.S. 426, 1955) broadened the statutory scope of gross income to include "all accessions to wealth, clearly realized, and over which the taxpayers have complete dominion," but still required realization and effectively treated it as a gain or profit. Glenshaw Glass noted that Eisner v. Macomber's narrower phrasing served a useful purpose in its context (stock dividends) but was not a universal touchstone—yet it did not repudiate the core idea that income involves gain rather than mere receipts.

Some older cases and quotes (e.g., from Southern Pacific Co. v. Lowe or Lynch v. Turrish) have been cited in arguments rejecting the notion that "all receipts—everything that comes in—are income," particularly in contexts rejecting broad government contentions that conversion of capital assets yields gross income in full without regard to basis or gain. These definitions arose mainly in constitutional challenges or interpretations of early income tax statutes post-Sixteenth Amendment. Modern tax law (under 26 U.S.C. § 61) defines gross income broadly as "all income from whatever source derived," and courts generally uphold taxation of wages, salaries, and realized gains as income without requiring a separate "profit" showing beyond realization. However, the older Supreme Court precedents explicitly distinguish "income" from mere inflows by requiring it to constitute gain or profit.Note that tax protester arguments sometimes overextend these cases to claim wages are not income (asserting no "gain" from labor exchange), but federal courts have consistently rejected such extensions as frivolous, affirming that compensation for services is taxable income. The core holdings above do stand for the proposition that income requires gain/profit, not just "everything that comes in."

JD

How does one make a gain pr profit from one's own labor? What is the "basis" over which a gain must be calculated? How is that basis determined, and by whom?

Grok

In tax law, the concepts of "gain" or "profit" from labor, as well as "basis," are primarily interpreted under the Internal Revenue Code (IRC) and relevant court precedents, such as those from the U.S. Supreme Court. I'll address each part of your query step by step, focusing on federal income tax implications, as that's the context where these terms often arise (e.g., from cases like Eisner v. Macomber). Note that while some fringe interpretations exist (often labeled as tax protester arguments), they have been consistently rejected by courts as frivolous, leading to penalties.How Does One Make a Gain or Profit from One's Own Labor?Under established U.S. tax law, the "gain or profit" from one's own labor is realized when you receive compensation in exchange for providing personal services. This compensation—such as wages, salaries, tips, bonuses, or other payments—represents the economic benefit or income derived from your labor. The Supreme Court in Eisner v. Macomber (252 U.S. 189, 1920) defined income to include "the gain derived from capital, from labor, or from both combined," emphasizing that it must be realized and severed for the taxpayer's benefit. Courts have repeatedly held that this applies directly to earnings from personal effort: when you perform work and get paid, that payment is the taxable gain from your labor.For example:

• If you're an employee, your paycheck is the gain from your labor.
• If self-employed, your net business income (after deductible expenses) is the profit from your labor and operations.
• Non-cash compensation, like property or benefits, is valued at fair market value (FMV) and treated as gain.

This is codified in IRC § 61(a)(1), which defines gross income as "all income from whatever source derived," explicitly including "compensation for services." There's no requirement for the payment to exceed some inherent "value" of the labor itself; the receipt of payment is the realization of gain. Economic theory aligns with this: labor is a factor of production, and its "profit" is the return (wages) minus any costs, but for tax purposes, the full compensation is income unless specifically excluded (e.g., certain fringe benefits under IRC § 132).

Some argue that exchanging labor for equivalent-value pay creates no "gain" (like bartering equals), but the IRS and courts deem this frivolous. For instance, in Revenue Ruling 2007-19, the IRS warns that such claims have no merit, as gross income includes all compensation for services, and relying on them can lead to civil penalties (e.g., up to $5,000 under IRC § 6702) or criminal charges.

Courts, like in Reese v. United States (24 F.3d 228, Fed. Cir. 1994), affirm that all accessions from labor are presumed income unless exempted.

What Is the "Basis" Over Which a Gain Must Be Calculated?"Basis" is a tax concept primarily used for property or investments, not personal labor. It refers to the taxpayer's investment in an asset, used to calculate gain or loss upon disposition (e.g., sale). Under IRC § 1001, gain = amount realized - adjusted basis. For example:

• If you sell stock bought for $1,000 (basis) for $1,500, the gain is $500.

For compensation from personal labor (wages/salaries), there is no "basis" subtracted from the payment to compute gain—the entire amount received is gross income under IRC § 61. Labor isn't treated as an "asset" with a cost basis; it's a service provided, and the payment is the direct income. This distinguishes it from capital gains, where basis prevents taxing the return of capital.However, in self-employment or business contexts, you can deduct ordinary and necessary expenses (e.g., tools, travel) from gross receipts to arrive at net profit (IRC § 162). But that's not a "basis" in labor itself—it's expense deduction. Attempts to claim a "basis in labor" (e.g., arguing your time/effort has a FMV basis equal to your pay, resulting in zero gain) are rejected as frivolous by the IRS and courts, as they misapply property tax rules to services.

For instance, in French v. Commissioner (T.C. Memo, referenced in 2025 Tax Court cases), the court dismissed such claims, citing Eisner to confirm that payment for labor is income without needing activity-specific proof.

How Is That Basis Determined, and by Whom?Basis determination applies to assets, not labor income. For property:

• Initial basis is generally the cost paid (IRC § 1012), including cash, debt assumed, or FMV of property exchanged.
• Adjusted basis adds improvements/capital additions and subtracts depreciation, losses, or distributions (IRC § 1016).
• It's determined by the taxpayer, based on records (e.g., purchase receipts), following IRS guidelines. The IRS can audit and adjust if unsubstantiated, but the burden is on the taxpayer to prove it (IRC § 6001 requires recordkeeping).

Examples of basis by acquisition:

• Purchased asset: Purchase price + acquisition costs.
• Gifted: Generally the donor's basis (IRC § 1015), with FMV adjustments for loss calculations.
• Inherited: Stepped-up to FMV at death (IRC § 1014).
• Self-created (e.g., artwork): Costs of materials/labor hired, but not your own unpaid labor (as it's not a deductible or basis-adding expense).

For labor compensation, since no basis exists, there's nothing to determine. Claims inventing a labor basis (e.g., self-assessed FMV of time) are invalid and can trigger penalties.

The IRS position, as in "The Truth About Frivolous Tax Arguments," is that such arguments ignore § 61 and lead to consequences like accuracy-related penalties (20% under IRC § 6662) or fraud penalties (75% under IRC § 6663).

JD

Why is it frivolous to say that one's entire paycheck is not a gain, but an exchange of money for the laborer's time and applied skills? The IRS and courts have themselves called wages "compensation." Do wages "compensate" for something else of value which is exchanged?

Grok

The argument that wages or an entire paycheck do not constitute taxable "gain" or "income" because they represent a mere equal exchange for one's time, skills, or labor (with no net profit) is classified as frivolous under U.S. tax law for several reasons rooted in statutory definitions, longstanding judicial interpretations, and IRS guidance. This position fundamentally misapplies concepts like "basis" and "gain" from property transactions to personal services, ignores the broad scope of gross income under the Internal Revenue Code (IRC), and has been uniformly rejected by courts as meritless. I'll break this down step by step, including why "compensation" terminology does not support the exchange theory.Why the "Equal Exchange" Argument Is Frivolous

1. Statutory Definition of Gross Income Includes Compensation for Services Without Requiring a Separate "Profit" Calculation:
   • IRC § 61 defines gross income as "all income from whatever source derived," explicitly listing "compensation for services, including fees, commissions, fringe benefits, and similar items" as includible. This encompasses wages, salaries, and other payments for labor without any subtraction for the "value" of the time or effort expended. The law presumes all such receipts are income unless specifically excluded (e.g., certain gifts or reimbursements). There is no provision for treating labor as an asset with a "basis" equal to its fair market value, which would zero out the gain— that's a misapplication of rules meant for property sales (IRC § 1001, where gain = amount realized minus adjusted basis).

• The U.S. Supreme Court and lower courts have long held that income from labor is taxable as a realized gain, drawing from definitions in cases like Eisner v. Macomber (252 U.S. 189, 1920), where income includes "the gain derived from... labor." However, this does not mean wages must exceed some inherent cost of labor to qualify; the payment itself is the gain severed and received by the taxpayer. Courts view the exchange argument as ignoring this, treating it as an attempt to redefine income narrowly to evade taxes.

2. Labor Is Not Treated as "Property" with a Basis Under Tax Law:
   • The core flaw in the exchange theory is the claim that individuals have a "basis" in their labor equal to the wages received, resulting in zero taxable gain (similar to selling property at cost). However, tax law does not recognize personal labor or time as depreciable or basis-bearing property. Basis applies to tangible or intangible assets (e.g., stocks, real estate), not to services rendered. Attempting to assign a self-determined fair market value basis to one's own labor is not supported by any IRC provision and has been dismissed as baseless.

• For example, in Lonsdale v. Commissioner (661 F.2d 71, 5th Cir. 1981), the court rejected the "zero-sum transaction" idea for wages as "meritless." Similarly, United States v. Connor (898 F.2d 942, 3d Cir. 1990) stated that every court considering the issue has "unequivocally rejected the argument that wages are not income."

Other cases like Reading v. Commissioner (70 T.C. 730, 1978, aff'd 614 F.2d 159, 8th Cir. 1980) affirm that the full amount from selling one's services is income under the Sixteenth Amendment.

3. Courts and IRS View This as a Frivolous Position Leading to Penalties:
   • The IRS explicitly lists this contention in its "The Truth About Frivolous Tax Arguments" document under Section I, labeling it as invalid and warning that relying on it can result in civil penalties (e.g., $5,000 frivolous return penalty under IRC § 6702), accuracy-related penalties (20% under IRC § 6662), or even criminal prosecution for tax evasion.

In Revenue Ruling 2007-19, the IRS addressed variations like "time-reimbursement transactions" or nontaxable exchanges, deeming them without merit.

• Recent cases reinforce this: In French v. Commissioner (T.C. Memo, as discussed in 2025 Tax Court analyses), the court dismissed claims that wages require proof of specific "gain-producing" activities, noting that payment for labor is inherently income.

The Tax Court can impose up to $25,000 in penalties for frivolous arguments in proceedings.

Overall, courts describe these claims as "totally lacking in merit" (United States v. Richards, 723 F.2d 646, 8th Cir. 1983) and not warranting detailed rebuttal due to their consistent rejection.

The Meaning of "Compensation" in Tax Context

• Yes, the IRS and courts frequently refer to wages as "compensation," but this supports taxation rather than exemption. "Compensation" simply means remuneration or payment provided in exchange for services rendered—it is the economic value received for the labor, which tax law treats as the taxable gain from that labor.

For instance, in Reese v. United States (24 F.3d 228, Fed. Cir. 1994), the court emphasized that all income is presumed taxable under § 61 unless exempted, and compensation for services falls squarely within that.

• Wages do "compensate" for something of value: the laborer's time, skills, and effort, which the employer values and pays for. However, this exchange does not create a nontaxable event because the IRC taxes the receipt of that compensation as income, without offsetting it against a fictional "cost" of labor. It's not like bartering property where basis might apply; personal services are directly taxed on the full amount received (minus allowable deductions like business expenses for self-employed individuals under IRC § 162).

In summary, while the argument may seem logical on its face by analogizing to property exchanges, it fails because tax law deliberately defines and taxes compensation for labor as income without such offsets. Promoting or relying on this position risks severe consequences, as it's been debunked repeatedly over decades. If you're considering this for tax filing, consulting a licensed tax professional is advisable to avoid penalties.

JD

Your summary seems to say that these arguments are frivolous because the IRS and courts have said so. What if the IRS and courts are wrong? Suppose I contract to paint a house for $1,000. I pay two laborers to do the work a total of $500, and the paint costs me $300. My taxable profit is $200. While my laborers are painting, I go off and play golf, a more enjoyable use of my time. I derived a gain from sale of the paint and the labor provided by my two employees. Isn't it possible that THAT is what the Eisner court meant?

Grok

Your question raises a fair point about the potential fallibility of institutions like the IRS and courts—after all, legal interpretations can evolve over time through new precedents, legislation, or societal shifts. However, under the U.S. system of government, Supreme Court rulings (like Eisner v. Macomber) and consistent lower court decisions create binding law that must be followed unless overturned. I'll address your hypothetical directly, explain how it aligns (or doesn't) with Eisner's intent based on the case's text and subsequent interpretations, and discuss the "what if" scenario factually, drawing from a range of sources including mainstream legal analyses, IRS guidance, and discussions of tax protester views for balance.Why Arguments Like the "Equal Exchange" Theory Are Deemed Frivolous (Beyond "Because Authorities Say So")It's not merely circular authority; these positions are frivolous because they contradict the plain text of the Internal Revenue Code (IRC), longstanding judicial precedents interpreting the Sixteenth Amendment, and economic principles embedded in tax law. For instance:

• IRC § 61 explicitly defines gross income as "all income from whatever source derived," including "compensation for services" (wages/salaries). There's no carve-out for "equal exchanges" of labor for pay.

Courts have ruled that this statutory language captures the full value of payments received for personal services as taxable gain, without needing to subtract a fictional "basis" in one's time or effort.

• The Sixteenth Amendment (ratified 1913) empowered Congress to tax "incomes, from whatever source derived," without apportionment. Precedents confirm this includes wages as a form of gain from labor, rejecting narrower interpretations.

• Tax protester sources (e.g., websites or books arguing wages aren't income) often cite Eisner selectively but ignore that courts have dismissed such extensions as misapplications. For example, in Lonsdale v. Commissioner (661 F.2d 71, 5th Cir. 1981), the court called the zero-sum exchange idea "meritless," and similar rejections appear in cases like United States v. Connor (898 F.2d 942, 3d Cir. 1990).

Even sources sympathetic to protester views (e.g., Wikipedia's entry on tax protester arguments) acknowledge these claims have been "unequivocally rejected" by every court.

Frivolous status also stems from practical consequences: these arguments lack any basis in fact or law, leading to penalties (e.g., $5,000 under IRC § 6702 for frivolous returns) to deter abuse of the system.

They're not "wrong" just because authorities say so—they're wrong because they've failed rigorous testing in adversarial court proceedings over decades.Addressing Your Hypothetical and Its Relation to Eisner v. MacomberIn your example (contracting to paint a house for $1,000, paying $500 for laborers and $300 for paint, netting $200 while golfing), you're describing a self-employed business scenario where taxable income is net profit after deductible expenses (IRC § 162 allows ordinary and necessary business costs like subcontractor pay and materials).

Yes, that's correct—your $200 net is the taxable "gain" from the venture, reported on Schedule C (Form 1040). The laborers' $500 wages are their gross income (taxable to them as compensation for services), while you deduct it as a business expense.

But this doesn't mean Eisner intended to exempt direct wages from tax or require all labor income to show a "profit" beyond the exchange itself. Eisner (252 U.S. 189, 1920) was about whether stock dividends (mere reallocations of corporate value) were taxable income under the Sixteenth Amendment. The Court defined income as "the gain derived from capital, from labor, or from both combined," requiring it to be "severed" and realized for the taxpayer's benefit.

Wages fit this: they're the realized gain from labor, paid out (severed) to you.

• The Court's phrasing includes direct "gain... from labor" without mandating subtraction of personal effort as a "cost." Subsequent cases like Commissioner v. Glenshaw Glass Co. (348 U.S. 426, 1955) clarified that Eisner's definition was contextual, not limiting, and wages are unequivocally income.

• In your hypothetical, if you were an employee painter paid $500 directly (no business expenses), the full $500 is taxable gain from labor—no basis offset for your time, as personal labor isn't treated as property with a deductible cost under tax law.

Tax protester interpretations extending Eisner to claim zero gain from wage exchanges have been rejected as distortions (e.g., in French v. Commissioner, T.C. Memo, where the court said no proof of "gain-producing activities" beyond labor is needed).

Sources critiquing the mainstream view (e.g., tax protester sites or books) argue Eisner implies wages aren't gain unless profitable beyond equivalence, but no court has adopted this—it's seen as a misuse of the case, which wasn't about wages at all.

What If the IRS and Courts Are Wrong?

Hypothetically, if future rulings or amendments overturned these interpretations (e.g., redefining income to exclude wages or require labor basis), it could validate such arguments. Legal scholars occasionally debate Eisner's legacy—for instance, some argue its "realization" requirement (tax only on severed gains) could limit taxes on unrealized appreciations, as in recent cases like Moore v. United States (602 U.S. 572, 2024, affirming wages as income while rejecting protester twists).

Critics like those in academic articles suggest Eisner has been narrowed over time but not fundamentally challenged on labor income.

In reality, though, these institutions aren't "wrong" in isolation—they reflect a consensus built on constitutional text, legislative intent, and economic rationale (e.g., wages represent value created through labor, taxable as accession to wealth).

Challengers like Irwin Schiff or Larken Rose have promoted similar views but faced convictions for evasion, with courts deeming them baseless.

If you believe a change is needed, advocacy through Congress (e.g., tax reform bills) is the path, not non-compliance, which risks audits, penalties, or prosecution.

For personalized advice, consult a tax attorney or CPA.

JD

You're right that I would have to promote a change in law through Congress, inasmuch as arguing it in court would immediately be deemed frivolous and penalized. That route is closed to me. But this should have been avoided by requiring a clear definition of "income" before the 16th amendment was ratified.

Grok

Thanks for your time.

You're welcome—it's been an interesting and thoughtful discussion. You're spot on that challenging the current interpretation head-on in court tends to trigger the "frivolous" label quickly, often with penalties attached, because the precedents are so entrenched. The path through Congress (or a future constitutional amendment) is indeed the realistic avenue for any fundamental change. On your point about the lack of a clear, explicit definition of "income" before the Sixteenth Amendment's ratification in 1913: that's a valid historical observation, and it's one that scholars and courts have revisited many times. The Amendment itself simply says Congress shall have power "to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." It deliberately avoids defining "incomes" in detail.

Historical Context and Why No Explicit Definition

The Amendment was crafted primarily as a direct response to the Supreme Court's 1895 decision in Pollock v. Farmers' Loan & Trust Co. (157 U.S. 429), where the Court (in a 5-4 ruling) struck down much of the 1894 federal income tax as an unapportioned "direct tax" (which the Constitution required to be divided among states by population). Pollock treated taxes on income from property (like rents, dividends, or interest) as effectively taxes on the property itself—hence "direct" and needing apportionment.

• The goal of the Amendment, as expressed in congressional debates, contemporary press coverage, and early Supreme Court interpretations (e.g., Brushaber v. Union Pacific Railroad Co., 240 U.S. 1, 1916, and Stanton v. Baltic Mining Co., 240 U.S. 103, 1916), was not to invent or narrowly define "income" from scratch. Instead, it aimed to restore Congress's pre-Pollock "complete and plenary power of income taxation" by removing the apportionment barrier for taxes on incomes, regardless of source.
• Before Pollock, Congress had imposed income taxes (e.g., during the Civil War via the Revenue Act of 1861 and later acts), and the understanding was broad: income included gains from labor, business, property, etc., without a rigid constitutional definition. The Amendment's framers and ratifiers focused on overriding Pollock's source-based restriction rather than pinning down a precise dictionary-style definition of the term.
• Ratification debates and public understanding emphasized practicality—enabling a progressive tax to fund government without relying heavily on tariffs (which disproportionately burdened lower-income groups)—over philosophical debates about what "income" exactly meant. There was no push for an explicit definition because the intent was to revert to the status quo ante Pollock, where Congress had wide latitude.

The Role of Later Cases Like Eisner v. Macomber

The more detailed definition you referenced—"the gain derived from capital, from labor, or from both combined"—emerged in Eisner v. Macomber (252 U.S. 189, 1920), several years after ratification. That case addressed whether stock dividends counted as taxable income (the Court said no, as they weren't "realized" or severed from capital). While influential, Eisner interpreted the Amendment in its specific context and has been narrowed over time (e.g., in Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 1955, which broadened gross income to "accessions to wealth, clearly realized"). Modern courts generally view the Amendment as not imposing a strict constitutional definition but allowing Congress broad statutory flexibility (as in IRC § 61).In short, the absence of an explicit definition in the Amendment wasn't an oversight that "should have been avoided"—it reflected the political and legal reality: the Amendment's core purpose was remedial (fix the apportionment problem from Pollock), not definitional. A narrower or more rigid definition might have limited Congress's taxing power in unforeseen ways or failed to garner ratification support from diverse states. If a clearer constitutional definition had been required or included, the modern income tax system as we know it might look very different—or might not exist at all. Thanks again for the engaging back-and-forth; it's rare to dive this deep into the history and logic. If you ever want to explore related topics (like recent cases touching on realization requirements), feel free to ask. Take care!