A Review of Pete Hendrickson's "Cracking the Code"

by Jim Davies

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Introduction

Before reading this book, I anticipated that it would reflect some entries in the author's web site FAQ page and be hostile to his rivals in the business of making sense out of the alleged income tax law; I was pleasantly surprised, for it is not. It presents a scholarly and readable account, delightfully and appropriately punctuated by quotations from "Alice in Wonderland", of why he finds in the Internal Revenue Code a tax upon the "income" derived from certain narrowly-defined Federal entities, but nobody else. Mr Hendrickson does take one ill-aimed swipe at Irwin Schiff (on page ix) by summarizing his position as "It doesn't matter what the code says, you can't Constitutionally tax me" and anyone with a passing knowledge of Irwin's work over the last twenty years will see that for the nonsense that it is; but even there, Hendrickson acknowledges that before the Internet made it so much easier to study the Internal Revenue Code, he had held such a view himself.

Mr Hendrickson credits that on-line accessibility with his discovery that in fact, the Code neither violates the Constitution nor taxes what ordinary people earn; and there, we're on common ground.

I must mention a minor but irritating omission which the book shares with the early editions of "The Federal Mafia": there's no subject index. This is a work likely to be unfamiliar to most readers, and after first reading one really needs to go back and refer to topics not fully absorbed the first time around; an index would save a great deal of searching. (Update: one is provided on the CtC web site.) However, let us see what it says.

CtC Theory

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"Cracking the Code" (CtC) has a great deal in common with Schiff's books such as "The Great Income Tax Hoax" and "The Federal Mafia" but homes in on the way that, starting in 1862, the Feds taxed only what they directly controlled: the pay of people working for them, and gains from entities they operated. His conclusion about what is taxable is handily summarized on page 89, as follows:

Remuneration or benefits (either immediate or deferred) paid by the Federal government, its agencies, instrumentalities and "State" governments; and the proceeds of and from federal corporations and instrumentalities and the proceeds of and from the conduct of a "trade or business."
The words in quotes there are, he shows earlier in CtC, defined in very special ways and carry not at all the same meaning as the same words in common use - a key part of the deception!

Hendrickson arrives at that conclusion by well-reasoned research reported in the first half of CtC which it is well worth reading and understanding. The pattern that emerges from the Code and its history is that, time after time, common words are used so as to give the impression that there is a widely-applicable income tax, whereas those words and terms have been carefully defined in the Code to have very restricted meanings.

The most common trick he reports is the Code's deceptive use of the word "include." Black's Law Dictionary, as cited in CtC's Foreword, explains Inclusio unius est exclusio alterius as "The inclusion of one is the exclusion of another. The certain designation of one person is an absolute exclusion of all others..." and we should note that this is not what we usually do in common speech.

Consider the declaration "The term 'fruit' includes tomatoes." You and I might regard a tomato as a vegetable - yet it grows on a plant, is soft to eat, and carries seeds and nutrients, all like a fruit, so there is some dispute about the matter. So I might for some purpose make you that declaration. Are you to take it to mean that "fruit" consists only of tomatoes? - of course not! Not in common speech. But according to Black's, in legal speech that's exactly how you ought to take it! So if I were to formulate a law equivalent to my everyday declaration, I'd have to say "The term 'fruit' includes, but is not limited to, tomatoes."

This is a crucial principle, on which CtC relies heavily; and Hendrickson acknowledges on page 56 that CS 7701(c) is "an 800 pound gorilla" that might demolish it. That Section says "The terms 'includes' and 'including' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined." That seems to say that the IRC has adopted its own "custom definition" of "include" to circumnavigate Black's.

Two pages of CtC are devoted to a rebuttal of the apparent meaning of 7701(c), centering on the reasoning that since the Section omits the word "common" to qualify "meaning", its whole import is that of an entirely circular argument and it is therefore wholly meaningless. I'm convinced - go read it yourself, see if you are! However I can't overemphasize that any flaw in that logic would invalidate the entire CtC theory.

CtC names very many instances where this "include" trick is pulled. For example (on page 75) CS 3401(a) defines "wages" as "...all remuneration for services performed by an employee for his employer..." but 3401(c) defines "employee" thus: "'employee' includes an officer, employee or elected official of the United States..." See the trick? In common speech we'll read that to mean "as well as all the usual meanings of the word, 'employee' also includes those Federal officials." Not at all! Using the grammatical construction revealed by Black's, the word includes only those officials!

Another: CS 1402(a) defines "net earnings from self-employment" as "the gross income derived by an individual from any trade or business..." but the term "trade or business" is defined in CS 7701 (a)(26) to "include the performance of the functions of a public office." Using Black's rules, that means that within the Code, "trade or business" means only the performance of the functions of a public office!

Similarly the term "United States" is defined to be tightly restricted, and on and on. The end result, as above, is that there is in Hendrickson's view no tax on the earnings of those not doing business with the Feds - but that there is one on those who do, and that's the difference between us.

The difference may be numerically small (though see "Practice" below) but my difficulty in accepting that what CtC describes qualifies as an "income tax" even for them, stems from the absence of factors indispensable to any true tax, many listed even on the back cover of "The Federal Mafia":-

And so on. So if there is no income tax at all, why muddy the waters by saying there is one imposed on recipients of FedGov money?

I had suspected, prior to my review, that Mr Hendrickson had chosen to argue that an i-tax operates in Federal offices, enclaves and creations just to differentiate himself from others in the illegal-tax protest movement; but I no longer think so. He has clearly pursued a long path of study and has come to his conclusions regardless of his rivals without such guile - and he may well be right, that the thread of being free to tax what it controls (read: cut the pay of its employees) is a power the Feds do have and that the deception of a general tax on earnings was woven with that thread. Perhaps what he has found is what a blind man feels at one corner of an elephant; he may not be wrong, but nor is his account the whole truth.

CtC Practice

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On October 24th 2005 - a day that will live in infamy - Irwin Schiff was, with Cindy Neun and Larry Cohen, convicted of filing "false" tax returns based on his 30 years of tax-law research. Not once in the 6-week trial was the content of one of those returns allowed to be examined by the jury, so its verdict was an amazing piece of strong magic; but the sad event shows that the government is not interested in allowing any debate about what is and is not the law, merely in imposing its will by force. Even if Pete Hendrickson's perceptions of true law are more accurate than Irwin's, it gives us reason to expect that in due course he will meet the same fate and that the IRS will be no more responsive if we tell it we're not Federal employees than they do when we tell it just that we had no "income." As George Washington, who had good reason to know, observed: "Government is not reason,... it is force."

Is there, nonetheless, in CtC any reason to suppose that such a fate may be avoided; that if only illegal-tax protesters take this action instead of that, the IRS will roll over and admit "Okay, you found our weak spot. We surrender"?

Not much in the book itself, I was disappointed to find; it answers the reader's natural question "So what do I do now?" in only a very few of its pages, rather as did the first edition of "The Federal Mafia" 11 years earlier, but enhanced ever since by dozens of hours of audiotaped updates with advice on how to face down the IRS in many different types of encounter. So in fairness to CtC's author I've gone outside it to his web site to consider more of the practical actions being taken.

First, for practical advice in the book itself: from its later chapters the following emerges.

  1. Stop withholding; not by filing an "Exempt" W-4 but with a disclaimer or, if one is already in place, with a "Termination of Authority to Withhold" as shown on page 152
  2. Correct any misleading W-2s or 1099s, by using Forms 4852 or 1099-MISC, shown on page 230
  3. File a correct 1040 (presumably with zeros except for bank interest, though there's no example)
  4. Then deal with the resulting flak
The "resulting flak" may be much as we Zedheads have come to expect and deal with, and CtC says nothing about how to do so - though it does modestly warn readers that the IRS is unlikely to issue a refund but certain to foam at the mouth. CtC was written in 2003 and the associated web site reports very many refunds since, so the author may so far have proven overly pessimistic.

Second, then, I report on a visit to losthorizons.com even though it's strictly outside CtC's covers.

It's a busy site, with updates, appendices and a forum. The first thing I noticed was that, contrary to the modest expectations at the end of CtC, there are a large number of "CtC Warriors" (CtCWs) who have obtained refunds; the total displayed today is of $588,446.10 as reported to Pete Hendrickson, and includes refunds of SS "contributions", which is a high-order triumph. Considering CtC appeared only two years ago, that's not half bad - and of course it doesn't count the i-tax that users of his theory no longer pay, year by year; though he has a long way to go to match the magnificent total of $2 billion that his accusers last month said Irwin has cost the FedGov, over 25 years.

I next noticed that the site has a tasteful on-line store, from which one can order items to convey a freedom message etc, and a CD "companion" for CtC that has a cornucopia of good things on board including 26 CFR. The site does not include much by way of how-to materials and nothing equivalent to Irwin's "Series" audiotapes; Hendrickson indicates he doesn't want to make such. His advice is to study the law as revealed, then figure out how to proceed. That may be a good teaching strategy, or not - but it is probably wise for him, for it denies the Feds any excuse to accuse him of leading their sheep astray.

In the Forum FAQ section I found his opinion that someone working for the Post Office would receive taxable earnings. So would all receiving Social Security benefits; and while that may well be consistent with the CtC theory, it certainly impacts PH's claim (the web site shows he accepts that abbreviation) that the vast majority of earnings of almost all Americans are not taxable. It would help if this were laid out more clearly. SS checks are drawn on the Treasury, true; but they allegedly represent return on capital force-invested from earnings that were (by CtC) not taxable; so, why? And if USPS wages are taxable - presumably because that Corporation enjoys a Federally-protected monopoly - why would not those of, say, CBS (which operates under an FTC license) or any of the Baby Bells (created by Federal edict as local monopolies from the old AT&T monopoly)? How about "defense" contractors, who furnish killing-equipment to the FedGov as monopsonist? "National" banks are said to be Federal and so interest (and wages?) they pay is taxable; how about non-national banks, and how does one tell the difference? I don't know the answers, but with over 40 million SS recipients and - according to an ABC News list - nearly 12 million in Federal employ, perhaps the quite simple list of Federal instrumentalities on page 88 of CtC is not nearly as short as it looks, and scores of millions of Americans are required to pay at least some significant i-tax by CtC theory.

It was on this web site that I found (under "Misunderstandings") a series of quite scornful critiques about PH's rivals. Irwin's zero return is said (without explanation) to be "self-contradictory" (update: PH has told me what he meant by that. It is that the zero return claims a refund of any i-tax withheld, but not of SS/Medicare taxes withheld, even though they are really just other forms of the alleged income tax) and his discovery that "income" consists of corporate profit is belittled - even while quoting the very SCOTUS decision (Merchants' Loan v Smietanka) that helps validate it, and by falsely alleging that Irwin left Subtitle C "off the radar screen." The contrast in manner between book and site is quite sharp; I wonder whether he wrote the former with due diffidence, as a newcomer to the field, while the site reveals a cranial enlargement brought about by the early and very pleasing success of his theory.

However, let's end the visit on a high note; PH tells of how a mere couple of weeks after 2003 publication, the Feds began a CS 6700 "investigation" of him and later "summoned" him to explain his nerve in publishing CtC. That may have been about the same time they had their 6700 six-shooter out and smoking from their book-banning injunction of Irwin's published works. PH resisted the summons and it was withdrawn! - to be replaced by another some months later, also withdrawn!

Such outstanding success is much to his credit, and I wish him well. It may be that he has indeed found the chink in the IRS' armor; let's hope so. It may also be just that the IRS has not yet figured out how to skewer him. After all, it took them 14 years after "The Federal Mafia" appeared to find out how to skewer Irwin. If PH has another 12 years of liberty, he could do them a fine heap of damage.

Summary

The immediate purpose of this Review was to offer an opinion to Zedheads (those who use Irwin Schiff's Zero Return legally to avoid the alleged income tax) about what we might do, now that - by the "strong magic" referenced above - a jury has for the first time declared such zero returns to be "false." Some had already decided to switch to the use of PH's method, so I hope this will help others to decide whether or not to do so too. Here, then, is that opinion.

First, it's worth forming a view about CtC's early success. Has it come because PH has discovered the "chink in the armor" meaning that use of it will succeed for ever, leaving the IRS helpless? Or did it result from the IRS' legendary roboticism - from their inability to react quickly to a new, unexpected set of avoidance techniques? We can recall that Zedheads too were getting refunds at least as late as 1998 - 6 years after publication of "The Federal Mafia" - and consider that perhaps the second explanation is the more likely. But each must decide for himself.

Second, note that if the IRS does in due course get its act together and start harassing CtC Warriors, there is no in-depth procedural advice provided to compare with the abundant set of tools with which Irwin has provided us, to deal with the FrivPen and We-Changed letters, the NoD, NOITL, etc etc ad naus. Nor, if I understand PH correctly, is there any plan to provide such a set.

Then however, I can see three circumstances in which there may be advantage in switching to the CtC method, or at least in borrowing some of its good ideas.

  1. If one reads CtC and considers this review and is convinced that PH is right - that in spite of Irwin's reasons for finding no i-tax whatever in tax law, there is in truth a tax on receipts with Federal origins, then of course reason and conscience (and perhaps the prospect of saving SS-tax as well as i-tax) will dictate becoming a full CtC Warrior. In that case: good bye, and good luck.
  2. If one has bust a gut to implement all Irwin has shown in his W-4 Packet about ending withholding yet failed, meeting an employer stone wall, one might try the W-4 techniques shown in CtC and on its associated web site. The statements made in the Declaration are irrelevant to law as we understand it, but if they are not untrue there seems little harm in using them; and whatever works is good. The money is, at day's end, ours and not the government's.
  3. If one works for oneself and is tired of dealing with the usual aftermath of filing zero, one might try filing 1099-MISCs to correct any 1099s issued, and then not filing any tax return. The language on the 1099-MISC refers to "income", so I reckon anyone can truly say that he received no income from the payer in question. Looks to me a good idea, that I've not seen before in the Zedhead community. If the IRS then asks How Come No 1040, one could reply along the lines of "I determined I had no income above the specified threshold, so think I am not required to file. I have double-checked my copy 1099s and 1099-MISCs on file, and reached the same conclusion again. Please let me know of any reason you may have to think otherwise, and have a good day."
Note, however, not to use Form 4852 to correct a W-2 filing - or not without fully changing into a CtC Warrior. That Form requires one to state that zero "wages" were received ("wages" being, in PH's view, a special term meaning the pay of Federal employees) and in our understanding, that simply isn't true; we receive wages but not income and I can't endorse lying, even to the IRS. A fulfilling life depends on high self-esteem, and that requires being true to oneself.

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