The Definition of "Trade or Business" in the IRC

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In the Internal Revenue Code, Congress often explains how the statute operates by defining key terms. One of those definitions appears in 26 U.S.C. §7701(a)(26).

There Congress states:

“The term trade or business includes the performance of the functions of a public office.”

That language deserves careful attention.

When Congress writes statutory definitions, the words chosen are not random. Definitions reveal how Congress structured the operation of the law itself.

In this case, Congress specifically identifies the performance of the functions of a public office within the definition of trade or business.

That drafting choice becomes clearer when we look at the historical origins of the federal income tax.

During the Civil War, Congress enacted the Revenue Act of 1862, which established the first federal income tax system. In the debates recorded in the Congressional Globe, Congress described the taxable class as including:

“all salaries of officers, or payments to persons in the civil, military, naval, or other employments or service of the United States.”

In other words, the early federal income tax system identified taxation in connection with persons serving within the government itself.

Now compare that historical structure with the modern statutory definition.

Today, the Internal Revenue Code identifies the performance of the functions of a public office within the definition of trade or business.

This reflects the same drafting method Congress has long used: identifying specific classes of persons and activities that bring individuals within the operation of a statute.

And when interpreting tax statutes, the Supreme Court has repeatedly held that the scope of those laws must be determined by the language Congress enacted.

In Gould v. Gould, the Court stated that taxation statutes must not be extended beyond the clear import of the language used.

And in United States v. Merriam, the Court reaffirmed that tax laws cannot be expanded by implication or presumption.

Which means that when Congress defines a term such as trade or business, the meaning of that definition must be determined by the words Congress actually chose.

Understanding these definitions is essential, because statutory definitions reveal how Congress structured the tax system itself.

In the next discussion, we will examine another important part of that structure — the statutory classes of persons described in the Internal Revenue Code and how those classifications relate to the operation of the tax statutes. But rest assured, if you are sensing that the class of persons liable for the tax today and in 1862 were those in the employ of the federal government, your intuition is not wrong. Then and now, the Federal government’s jurisdiction was and is Washington DC and those within its domain.

And as always…

May truth reign supreme.

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