Halophyte
10-21-2003, 01:31 AM
In order for the Federal Reserve to create money out of thin air they need collateral for the loan of money to the Federal government (Treasury). That collateral is a promise to repay at a specific interest rate with the promise of the capability to repay that loan.
The collateral for the loan is the fruit of the people's labor in the form of income taxes. (16th Amendment) Or is it?
Thus fiat money is created from the labor of our future....your children's children's children's future.
But this approaches the definition of slavery too damn closely.
Did it really happen? Did our own government sell us out to the corporate banking empire ?
Judge for yourself.
The following pages will conclusively document and prove the following points:
Point #1: While there are very broadly worded general statutory definitions of "gross income" and "taxable income" (26 USC § 61, 63)), there are also specific rules for determining when domestic income is taxable, and when foreign income is taxable.
Point #2: Under the geographical "source rules" contained in 26 USC § 861 and following, all income is categorized as either domestic income (income from sources within the United States, mainly per Section 861), or as foreign income (income from sources without the United States, mainly per Section 862). (Section 863 and related regulations give rules for segregating "combination" income—i.e. income partly from within and partly from without the U.S.—into domestic and foreign income.) These geographical "source rules" by themselves do not specify when income is taxable and when it is exempt.
Point #3: There are specific rules (mainly in 26 CFR § 1.861-8) describing when domestic income is taxable (non-exempt), and describing when foreign income is taxable. Those rules only show income to be taxable when derived from certain specific sources and activities, all of which are connected to international or foreign commerce (including, among other things, foreigners receiving income from the U.S., and Americans receiving certain foreign income). Those rules do not show the domestic income of most Americans to be taxable.
These points lead inescapably to the conclusion that tens of millions of Americans are incorrectly reporting their domestic income to be taxable, when their income does not legally constitute "taxable income" according to the law itself. While that conclusion is contrary to "conventional wisdom" (conventional ignorance of the exact wording of the law), it is not only proven by the current income tax statutes and regulations, but is solidly confirmed by more than 80 years of predecessor statutes and regulations.
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Point #1: While there are very broadly worded general statutory definitions of "gross income" and "taxable income" (26 USC § 61, 63), there are also specific rules for determining when domestic income is taxable and when foreign income is taxable.
Since 1913, Congress has employed a very broadly-worded general definition of "gross income," in order to exert "the full measure of its taxing power" (Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)). However, the Supreme Court has also stated that "It is elementary law that every statute is to be read in the light of the constitution," and that "However broad and general its language, it cannot be interpreted as extending beyond those matters which it was within the constitutional power of the legislature to reach" (McCullough v. Com. Of Virginia, 172 U.S. 102 (1898)).
The existence of Constitutional restrictions on Congress' ability to tax incomes is plainly manifested in the older regulations implementing Section 22 of the 1939 Code (the statute to which the Glenshaw ruling above referred). The older regulations regarding "excluded" income plainly stated that in addition to the statutory exclusions, certain other types of income were exempt from "gross income" because they were, "under the Constitution, not taxable by the Federal Government" (e.g. 26 CFR § 39.22(b)-1 (1956)).
To address the issue of exempt and non-exempt types of commerce, Congress enacted provisions describing when "income from sources within the United States" was taxable and describing when "income from sources without [outside of] the United States" was taxable. Those provisions were found in Section 217 of the Revenue Act of 1921, in Section 119 of the 1939 Code, and are now in Sections 861 and following of the current code.
In 1939, Section 22 generally defined "gross income" and subsection 22(g) stated: "For computation of gross income from sources within and without the United States, see Section 119." Both the House and Senate reports on the 1954 Code stated that "no substantive change" was made when the old Section 119 (1939) became the new Section 861 and following (except for a special rule about nonresident aliens temporarily in the country).
This again demonstrates the connection between the general definition of "gross income" and the specific rules about when domestic income is taxable and when foreign income is taxable. Inexplicably removed from the GPO version of the IRC in 2001, the USCA and USCS printings of the tax code still contain editorially-supplied cross references under Section 61 referring the reader to Section 861 regarding "Income from sources within the United States," and to Section 862 regarding "Income from sources without the United States."
The following table shows the parallels between the 1939 and current codes:
Issue: 1939 Code Current Code
General definition of "gross income" Section 22 Section 61
Link to within/without rules Section 22(g) X-ref under 61
Gross income from within U.S. Section 119(a) Section 861(a)
Taxable income from within U.S. Section 119(b) Section 861(b)
Gross income from without U.S. Section 119(c) Section 862(a)
Taxable income from without U.S. Section 119(d) Section 862(b)
Since 1954, the regulations implementing Section 861 have begun by saying that Part I (Section 861 and following) and the regulations thereunder "determine the sources of income for purposes of the income tax" (26 CFR § 1.861-1). One of the earliest official statements by the Treasury Department concerning Section 861 confirmed the purpose of those sections (all emphasis mine):
"Rules are prescribed for determination of gross income and taxable income derived from sources within and without the United States, and for the allocation of income derived partly from sources within the United States and partly without the United States or within United States possessions. §§ 1.861-1 through 1.864. (Secs. 861-864; '54 Code.)" [Treasury Decision 6258]
Of course, not all income from all commerce is taxable. The general statutory definition of "gross income" only gives a broad definition and a list of some of the more common "items" of income (compensation, interest, rents, dividends, etc.). That section does not deal with the geographical origin of income, the location of the recipient, or the type of commerce from which the income derives. Since statutory law is written literally, then these issues must be specifically addressed. And that is exactly what the reader finds. The regulations make it clear that those issues are addressed by Section 861 and following, and related regulations. After saying that Section 861 and following, and related regulations, "determine the sources of income for purposes of the income tax," the current regulations implementing Section 861 state the following:
"The statute provides for the following three categories of income:
(1) Within the United States. The gross income from sources within the United States, consisting of the items of gross income specified in section 861(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See Secs. 1.861-2 to 1.861-7, inclusive, and Sec. 1.863-1. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), the [allowable deductions]. See Secs. 1.861-8 and 1.863-1.
(2) Without the United States. The gross income from sources without the United States, consisting of the items of gross income specified in section 862(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See Secs. 1.862-1 and 1.863-1. The taxable income from sources without the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 862(b) and 863(a), the [allowable deductions]. See Secs. 1.862-1 and 1.863-1.
(3) Partly within and partly without the United States...
(b) Taxable income from sources within the United States. The taxable income from sources within the United States shall consist of the taxable income described in paragraph (a)(1) of this section plus the taxable income allocated or apportioned to such sources, as indicated in paragraph (a)(3) of this section." [26 CFR § 1.861-1]
The point is repeated in a more summarized way in Section 1.861-8 (which the regulation above refers to), which begins as follows:
"Sec. 1.861-8 Computation of taxable income from sources within the United States and from other sources and activities.
(a) In general--(1) Scope. Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the United States after gross income from sources within the United States has been determined. Sections 862(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources without the United States after gross income from sources without the United States has been determined." [26 CFR § 1.861-8]
This language concerning the determination of taxable domestic income and taxable foreign income could hardly be clearer. Some insist that most Americans should ignore Section 861 entirely when determining their taxable domestic income, but nothing in the regulations supports such a conclusion, and there are no citations qualifying or contradicting the clear instructions shown above concerning how to determine one's "taxable income from sources within the United States."
(As an aside, 26 CFR § 1.1-1 says that the tax is imposed upon "taxable income," and that U.S. citizens are taxed on their taxable income whether "from sources within or without the United States." Some use this to try to support the claim that all income—domestic and foreign—is taxable for U.S. citizens, and that citizens therefore should ignore Section 861 and following. Not only does this flawed leap of logic ignore the fact that not all income is "taxable income," but it is directly contradicted by 26 CFR § 1.863-1(c), which says that "[t]he taxpayer's taxable income from sources within or without the United States will be determined under the rules of Secs. 1.861-8 through 1.861-14T.")
To summarize, while Sections 61 and 63 give broadly worded general definitions of "gross income" and "taxable income," Section 861 and its regulations (and sometimes Section 863 as well) describe how to determine taxable domestic income, and Section 862 and its regulations (and sometimes Section 863 as well) describe how to determine taxable foreign income.
Point #2: Under the geographical "source rules" contained in 26 USC § 861 and following, all income is categorized as either domestic income (income from sources within the United States, mainly per Section 861), or as foreign income (income from sources without the United States, mainly per Section 862). (Section 863 and related regulations give rules for segregating "combination" income—i.e. income partly from within and partly from without the U.S.—into domestic and foreign income.) These "source rules" by themselves do not specify when income is taxable and when it is exempt.
Part I of Subchapter N contains the "source rules" which describe which income is considered domestic income ("income from sources within the United States") and which income is considered foreign income ("income from sources without the United States"). Section 861 deals with domestic income, Section 862 deals with foreign income, and Section 863 deals with income which comes partly from inside and partly from outside the U.S. (which, under rules of allocation or apportionment is then segregated into "within" and "without" income).
For different kinds of income, different rules are used to determine whether a certain "item" of income is considered domestic or foreign. For example, whether compensation for services is considered to be domestic income or foreign income is determined based on where the services were performed, not on where the payments come from (see Sections 861(a)(3) and 862(a)(3)). Interest, on the other hand, is generally "sourced" based on the location of the investment which produces the interest (see Sections 861(a)(1) and 862(a)(1)). (Other "source rules" exist for other types of income.) Those geographical "source rules" by themselves do not describe which income is exempt or which is taxable; they merely describe whether income is to be considered domestic income or foreign income.
(As an aside, IRS Notice 2001-40 states that "[n]othing in sections 861 to 865 of the Code limits the gross income subject to United States taxation to foreign-source income," as well as stating that "[t]he source rules do not operate to exclude from U.S. taxation income earned by United States persons from sources within the United States." Both statements are true, though somewhat misleading. The geographical "source rules" do not say that any income is exempt—though of course not all income is taxable—but simply distinguish between domestic ("within") income and foreign ("without") income.)
But again, using the misleading and deceptive technique of implying without actually stating, the unstated implication of that non-legally-binding "Notice" is that the domestic income of all Americans is taxable, because the "source rules" in Section 861 do not say they are exempt. By the same faulty logic, one could argue that all foreign income of foreigners must be taxable, because the "sources rules" in Section 862 do not say that it is exempt. Such a line of reasoning is clearly flawed, and is the result of either a gross misunderstanding of the purpose of Part I of Subchapter N, or an intentional effort to mislead the public.)
As shown above, 26 CFR § 1.861-8 begins by saying that "Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the United States" after domestic "gross income" has been determined. (The section then says that Sections 862(b) and 863(a) generally describe how to determine taxable foreign income.) The so-called "source rules" in Sections 861(a) and 862(a) (and in some cases Section 863 as well) categorize all income (whether taxable or not) as being either domestic or foreign.
Then, in keeping with the general definition of "taxable income" found in 26 USC § 63, Sections 861(b) and 862(b) state that from domestic gross income (861(a)) or foreign gross income (862(a)), one is to subtract the appropriate related deductions, with the remainder constituting taxable domestic income (861(b)) or taxable foreign income (862(b)).
But these general rules are not—and could not be—the final step in determining what is taxable and what is exempt. If these sections were the final step in determining what is taxable, all income—domestic and foreign—received by anyone under any circumstances would be taxable. Besides the obvious fact that this cannot be the case, such a conclusion would nullify any need for "source rules" or for the rest of Subchapter N, or for the rest of the tax code for that matter.
Point #3: There are specific rules (mainly in 26 CFR § 1.861-8) describing when domestic income is taxable (non-exempt), and describing when foreign income is taxable. Those rules only show income to be taxable when derived from certain specific sources and activities, all of which are connected to international or foreign commerce (including, among other things, foreigners receiving income from the U.S., and Americans receiving certain foreign income). Those rules do not show the domestic income of most Americans to be taxable.
The citations provided above under Point #1 show that one's taxable domestic income is to be determined under the rules of 26 USC § 861(b) and 26 CFR § 1.861-8. Those sections—as well as decades of predecessor statutes and regulations—show that all of the following must apply for someone to have "taxable income from sources within the United States":
1) He must receive a taxable "item" of income (e.g. compensation, interest, rents).
2) The "source rules" must categorize the income as domestic income.
3) The income must derive from a "specific source or activity" which is taxable.
While those three criteria are still present in the current regulations, they are far less clear than in the older statutes and regulations. For example, the current Section 861 and following came from Section 217 of the Revenue Act of 1925, which read as follows:
"Sec. 217. (a) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States:
(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including [exceptions]...;
(2) The amount received as dividends (A) from a domestic corporation other than [exceptions]...;
(3) Compensation for labor or personal services performed in the United states;
(4) Rentals or royalties from property located in the United States or from any interest in such property...; and
(5) Gains, profits, and income from the sale of real property located in the United States.
(b) From the items of gross income specified in subdivision (a) there shall be deducted the [allowable deductions]. The remainder, if any, shall be included in full as net income from sources within the United States." [Section 217, Revenue Act of 1925]
This older wording made it clear that all three criteria had to be met (taxable type of commerce, taxable item, and domestic origin) before that section showed income to constitute taxable domestic income.
For example, that section plainly was not saying that compensation for services performed in the U.S. was taxable for all U.S. citizens—only for citizens who received most of their income from within federal possessions (e.g. Guam, Puerto Rico) and who therefore were "entitled to the benefits of section 262."
(Section 232 of the 1925 Act stated that the rules of Section 217 also applied to foreign corporations, and a domestic corporation "entitled to the benefits of section 262," i.e. domestic corporations receiving most of their income from federal possessions (possessions are technically foreign to the United States). This shows that the only income that can be taxed by Congress must in some way either be derived from or related to certain specific types of foreign or international commerce.)
In 1928, the statute (then Section 119) continued to address the items and geographical origin of income, but the first phrase—dealing with the taxable activities or types of commerce—was removed. However, the related regulations remained virtually unchanged, and still made it plain that domestic income was only taxable for those engaged in certain types of commerce: nonresident aliens and foreign corporations doing business in the U.S., and Americans individuals and companies doing business in federal possessions. See Sections 29.119-1, 29.119-9 and 29.119-10 of the 1945 regulations (Regulations 111).
For example, Section 119(a)(1) from 1939—predecessor of 861(a)(1)—generally said that interest from domestic investments was to be considered domestic income (income from sources within the United States), without specifying when such income was taxable. The related regulations, however, stated that such domestic interest was to be "included in the gross income from sources within the United States, of nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations which are entitled to the benefits of section 251" (26 CFR § 29.119-2 (1945)). Clearly domestic interest was not taxable for everyone—only those engaged in the specified types of commerce.
Likewise, Section 29.119-10 of the 1945 regulations said that in the case of those engaged in the specified types of commerce, the types of domestic income listed in Section 119(a) of the statutes was (after deductions) to be included in full as taxable domestic income. Such domestic income was not taxable for all U.S. citizens.
The current regulations under Section 861 while far more voluminous and complicated than their predecessors, lead to the same conclusions. Section 1.861-8 (the primary section for determining one's "taxable income from sources within the United States") only shows income to be taxable when it derives from certain "specific sources or activities," all of which relate to international or foreign commerce.
To have income which is taxable under 26 CFR § 1.861-8, one must receive a "statutory grouping" of gross income, which means income from a specific type of commerce described in one of the various sections throughout Subchapter N. The regulations call those sections "operative sections."
As one example, Section 871(b) of the statutes states that nonresident aliens doing business in the United States "shall be taxable" under Section 1. Section 1.861-8(f)(1)(iv) (shown below) lists Section 871(b) as an "operative section," from which a taxable "statutory grouping" of income can come. So if a nonresident alien receives income from the type of commerce described in that "operative section" (Section 871(b)), then such income is taxable under Section 1.861-8.
As another example, Section 1.861-8(f)(1)(i) (also shown below) addresses foreign tax credits (addressed by Section 901 and following of the statutes), and in that case the "statutory grouping" of gross income is foreign-source income (including that of U.S. citizens). Again, if a citizen engages in that type of commerce (i.e. that "specific source or activity"), then the income he receives from it is taxable under Section 1.861-8.
"The rules contained in this section [26 CFR § 1.861-8] apply in determining taxable income of the taxpayer from specific sources and activities under other sections of the Code, referred to in this section as operative sections. See paragraph (f)(1) of this section for a list and description of operative sections." [26 CFR § 1.861-8(a)(1)]
"[T]he term 'statutory grouping' means the gross income from a specific source or activity which must first be determined in order to arrive at 'taxable income' from which specific source or activity under an operative section. (See paragraph (f)(1) of this section.)" [26 CFR § 1.861-8(a)(4)]
"The operative sections of the Code which require the determination of taxable income of the taxpayer from specific sources or activities and which gives rise to statutory groupings to which this section [26 CFR § 1.861-8] is applicable include the sections described below.
(i) Overall limitation to the foreign tax credit…in this case, the statutory grouping is foreign source income...
(ii) [Reserved]
(iii) DISC and FSC taxable income… [international, foreign sales corporations]
(iv) Effectively connected taxable income. Nonresident alien individuals and foreign corporations engaged in trade or business within the United States, under sections 871(b)(1) and 882(a)(1)...
(v) Foreign base company income…
(vi) Other operative sections. The rules provided in this section also apply in determining--
(A) The amount of foreign source items…
(B) The amount of foreign mineral income…
(C) [Reserved]
(D) The amount of foreign oil and gas extraction income…
(E) The tax base for citizens entitled to the benefits of section 931 and the section 936 tax credit of a domestic corporation...;
(F) [deals with Puerto Rico tax credits]
(G) [deals with Virgin Islands tax credits]
(H) The income derived from Guam by an individual…
(I) [deals with China Trade Act corporations]
(J) [deals with foreign corporations]
(K) [deals with insurance income of foreign corporations]
(L) [deals with countries subject to international boycott]
(M) [deals with the Merchant Marine Act of 1936]" [26 CFR § 1.861-8(f)(1)]
If one does not engage in any of those activities, he cannot have a "statutory grouping of gross income," and one who has no "statutory grouping" of income has no taxable income under 26 CFR § 1.861-8. Once again, aside from rules about specific federal possessions, international and foreign sales corporations, and certain foreign tax credits, the list of activities includes the same types of commerce which 80 years of predecessor regulations have included:
1) Certain foreign income of U.S. citizens (1.861-8(f)(1)(i) above).
2) The domestic income of foreigners (1.861-8(f)(1)(iv) above).
3) Certain income related to federal possessions (1.861-8(f)(1)(vi)(E) above).
U.S. citizens who live and work exclusively within the 50 states and who receive all of their income from the 50 states have no "statutory grouping," and therefore their income is not shown to be taxable by 26 CFR § 1.861-8 (the section for determining one's "taxable income from sources within the United States"). That being the case, it directly follows that the domestic income of most Americans is not taxable (regardless of what the "conventional wisdom" says), particularly in light of the following:
"In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen." [Gould v. Gould, 245 U.S. 151 (1917)]
In addition, Black's Law Dictionary (6th Edition) says that the doctrine of "inclusio unius est exclusio alterius" (the inclusion of one is the exclusion of others) means that "where law expressly describes a particular situation to which it shall apply, an irrefutable inference must be drawn that what is omitted or excluded was intended to be omitted or excluded."
The collateral for the loan is the fruit of the people's labor in the form of income taxes. (16th Amendment) Or is it?
Thus fiat money is created from the labor of our future....your children's children's children's future.
But this approaches the definition of slavery too damn closely.
Did it really happen? Did our own government sell us out to the corporate banking empire ?
Judge for yourself.
The following pages will conclusively document and prove the following points:
Point #1: While there are very broadly worded general statutory definitions of "gross income" and "taxable income" (26 USC § 61, 63)), there are also specific rules for determining when domestic income is taxable, and when foreign income is taxable.
Point #2: Under the geographical "source rules" contained in 26 USC § 861 and following, all income is categorized as either domestic income (income from sources within the United States, mainly per Section 861), or as foreign income (income from sources without the United States, mainly per Section 862). (Section 863 and related regulations give rules for segregating "combination" income—i.e. income partly from within and partly from without the U.S.—into domestic and foreign income.) These geographical "source rules" by themselves do not specify when income is taxable and when it is exempt.
Point #3: There are specific rules (mainly in 26 CFR § 1.861-8) describing when domestic income is taxable (non-exempt), and describing when foreign income is taxable. Those rules only show income to be taxable when derived from certain specific sources and activities, all of which are connected to international or foreign commerce (including, among other things, foreigners receiving income from the U.S., and Americans receiving certain foreign income). Those rules do not show the domestic income of most Americans to be taxable.
These points lead inescapably to the conclusion that tens of millions of Americans are incorrectly reporting their domestic income to be taxable, when their income does not legally constitute "taxable income" according to the law itself. While that conclusion is contrary to "conventional wisdom" (conventional ignorance of the exact wording of the law), it is not only proven by the current income tax statutes and regulations, but is solidly confirmed by more than 80 years of predecessor statutes and regulations.
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Point #1: While there are very broadly worded general statutory definitions of "gross income" and "taxable income" (26 USC § 61, 63), there are also specific rules for determining when domestic income is taxable and when foreign income is taxable.
Since 1913, Congress has employed a very broadly-worded general definition of "gross income," in order to exert "the full measure of its taxing power" (Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)). However, the Supreme Court has also stated that "It is elementary law that every statute is to be read in the light of the constitution," and that "However broad and general its language, it cannot be interpreted as extending beyond those matters which it was within the constitutional power of the legislature to reach" (McCullough v. Com. Of Virginia, 172 U.S. 102 (1898)).
The existence of Constitutional restrictions on Congress' ability to tax incomes is plainly manifested in the older regulations implementing Section 22 of the 1939 Code (the statute to which the Glenshaw ruling above referred). The older regulations regarding "excluded" income plainly stated that in addition to the statutory exclusions, certain other types of income were exempt from "gross income" because they were, "under the Constitution, not taxable by the Federal Government" (e.g. 26 CFR § 39.22(b)-1 (1956)).
To address the issue of exempt and non-exempt types of commerce, Congress enacted provisions describing when "income from sources within the United States" was taxable and describing when "income from sources without [outside of] the United States" was taxable. Those provisions were found in Section 217 of the Revenue Act of 1921, in Section 119 of the 1939 Code, and are now in Sections 861 and following of the current code.
In 1939, Section 22 generally defined "gross income" and subsection 22(g) stated: "For computation of gross income from sources within and without the United States, see Section 119." Both the House and Senate reports on the 1954 Code stated that "no substantive change" was made when the old Section 119 (1939) became the new Section 861 and following (except for a special rule about nonresident aliens temporarily in the country).
This again demonstrates the connection between the general definition of "gross income" and the specific rules about when domestic income is taxable and when foreign income is taxable. Inexplicably removed from the GPO version of the IRC in 2001, the USCA and USCS printings of the tax code still contain editorially-supplied cross references under Section 61 referring the reader to Section 861 regarding "Income from sources within the United States," and to Section 862 regarding "Income from sources without the United States."
The following table shows the parallels between the 1939 and current codes:
Issue: 1939 Code Current Code
General definition of "gross income" Section 22 Section 61
Link to within/without rules Section 22(g) X-ref under 61
Gross income from within U.S. Section 119(a) Section 861(a)
Taxable income from within U.S. Section 119(b) Section 861(b)
Gross income from without U.S. Section 119(c) Section 862(a)
Taxable income from without U.S. Section 119(d) Section 862(b)
Since 1954, the regulations implementing Section 861 have begun by saying that Part I (Section 861 and following) and the regulations thereunder "determine the sources of income for purposes of the income tax" (26 CFR § 1.861-1). One of the earliest official statements by the Treasury Department concerning Section 861 confirmed the purpose of those sections (all emphasis mine):
"Rules are prescribed for determination of gross income and taxable income derived from sources within and without the United States, and for the allocation of income derived partly from sources within the United States and partly without the United States or within United States possessions. §§ 1.861-1 through 1.864. (Secs. 861-864; '54 Code.)" [Treasury Decision 6258]
Of course, not all income from all commerce is taxable. The general statutory definition of "gross income" only gives a broad definition and a list of some of the more common "items" of income (compensation, interest, rents, dividends, etc.). That section does not deal with the geographical origin of income, the location of the recipient, or the type of commerce from which the income derives. Since statutory law is written literally, then these issues must be specifically addressed. And that is exactly what the reader finds. The regulations make it clear that those issues are addressed by Section 861 and following, and related regulations. After saying that Section 861 and following, and related regulations, "determine the sources of income for purposes of the income tax," the current regulations implementing Section 861 state the following:
"The statute provides for the following three categories of income:
(1) Within the United States. The gross income from sources within the United States, consisting of the items of gross income specified in section 861(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See Secs. 1.861-2 to 1.861-7, inclusive, and Sec. 1.863-1. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), the [allowable deductions]. See Secs. 1.861-8 and 1.863-1.
(2) Without the United States. The gross income from sources without the United States, consisting of the items of gross income specified in section 862(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See Secs. 1.862-1 and 1.863-1. The taxable income from sources without the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 862(b) and 863(a), the [allowable deductions]. See Secs. 1.862-1 and 1.863-1.
(3) Partly within and partly without the United States...
(b) Taxable income from sources within the United States. The taxable income from sources within the United States shall consist of the taxable income described in paragraph (a)(1) of this section plus the taxable income allocated or apportioned to such sources, as indicated in paragraph (a)(3) of this section." [26 CFR § 1.861-1]
The point is repeated in a more summarized way in Section 1.861-8 (which the regulation above refers to), which begins as follows:
"Sec. 1.861-8 Computation of taxable income from sources within the United States and from other sources and activities.
(a) In general--(1) Scope. Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the United States after gross income from sources within the United States has been determined. Sections 862(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources without the United States after gross income from sources without the United States has been determined." [26 CFR § 1.861-8]
This language concerning the determination of taxable domestic income and taxable foreign income could hardly be clearer. Some insist that most Americans should ignore Section 861 entirely when determining their taxable domestic income, but nothing in the regulations supports such a conclusion, and there are no citations qualifying or contradicting the clear instructions shown above concerning how to determine one's "taxable income from sources within the United States."
(As an aside, 26 CFR § 1.1-1 says that the tax is imposed upon "taxable income," and that U.S. citizens are taxed on their taxable income whether "from sources within or without the United States." Some use this to try to support the claim that all income—domestic and foreign—is taxable for U.S. citizens, and that citizens therefore should ignore Section 861 and following. Not only does this flawed leap of logic ignore the fact that not all income is "taxable income," but it is directly contradicted by 26 CFR § 1.863-1(c), which says that "[t]he taxpayer's taxable income from sources within or without the United States will be determined under the rules of Secs. 1.861-8 through 1.861-14T.")
To summarize, while Sections 61 and 63 give broadly worded general definitions of "gross income" and "taxable income," Section 861 and its regulations (and sometimes Section 863 as well) describe how to determine taxable domestic income, and Section 862 and its regulations (and sometimes Section 863 as well) describe how to determine taxable foreign income.
Point #2: Under the geographical "source rules" contained in 26 USC § 861 and following, all income is categorized as either domestic income (income from sources within the United States, mainly per Section 861), or as foreign income (income from sources without the United States, mainly per Section 862). (Section 863 and related regulations give rules for segregating "combination" income—i.e. income partly from within and partly from without the U.S.—into domestic and foreign income.) These "source rules" by themselves do not specify when income is taxable and when it is exempt.
Part I of Subchapter N contains the "source rules" which describe which income is considered domestic income ("income from sources within the United States") and which income is considered foreign income ("income from sources without the United States"). Section 861 deals with domestic income, Section 862 deals with foreign income, and Section 863 deals with income which comes partly from inside and partly from outside the U.S. (which, under rules of allocation or apportionment is then segregated into "within" and "without" income).
For different kinds of income, different rules are used to determine whether a certain "item" of income is considered domestic or foreign. For example, whether compensation for services is considered to be domestic income or foreign income is determined based on where the services were performed, not on where the payments come from (see Sections 861(a)(3) and 862(a)(3)). Interest, on the other hand, is generally "sourced" based on the location of the investment which produces the interest (see Sections 861(a)(1) and 862(a)(1)). (Other "source rules" exist for other types of income.) Those geographical "source rules" by themselves do not describe which income is exempt or which is taxable; they merely describe whether income is to be considered domestic income or foreign income.
(As an aside, IRS Notice 2001-40 states that "[n]othing in sections 861 to 865 of the Code limits the gross income subject to United States taxation to foreign-source income," as well as stating that "[t]he source rules do not operate to exclude from U.S. taxation income earned by United States persons from sources within the United States." Both statements are true, though somewhat misleading. The geographical "source rules" do not say that any income is exempt—though of course not all income is taxable—but simply distinguish between domestic ("within") income and foreign ("without") income.)
But again, using the misleading and deceptive technique of implying without actually stating, the unstated implication of that non-legally-binding "Notice" is that the domestic income of all Americans is taxable, because the "source rules" in Section 861 do not say they are exempt. By the same faulty logic, one could argue that all foreign income of foreigners must be taxable, because the "sources rules" in Section 862 do not say that it is exempt. Such a line of reasoning is clearly flawed, and is the result of either a gross misunderstanding of the purpose of Part I of Subchapter N, or an intentional effort to mislead the public.)
As shown above, 26 CFR § 1.861-8 begins by saying that "Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the United States" after domestic "gross income" has been determined. (The section then says that Sections 862(b) and 863(a) generally describe how to determine taxable foreign income.) The so-called "source rules" in Sections 861(a) and 862(a) (and in some cases Section 863 as well) categorize all income (whether taxable or not) as being either domestic or foreign.
Then, in keeping with the general definition of "taxable income" found in 26 USC § 63, Sections 861(b) and 862(b) state that from domestic gross income (861(a)) or foreign gross income (862(a)), one is to subtract the appropriate related deductions, with the remainder constituting taxable domestic income (861(b)) or taxable foreign income (862(b)).
But these general rules are not—and could not be—the final step in determining what is taxable and what is exempt. If these sections were the final step in determining what is taxable, all income—domestic and foreign—received by anyone under any circumstances would be taxable. Besides the obvious fact that this cannot be the case, such a conclusion would nullify any need for "source rules" or for the rest of Subchapter N, or for the rest of the tax code for that matter.
Point #3: There are specific rules (mainly in 26 CFR § 1.861-8) describing when domestic income is taxable (non-exempt), and describing when foreign income is taxable. Those rules only show income to be taxable when derived from certain specific sources and activities, all of which are connected to international or foreign commerce (including, among other things, foreigners receiving income from the U.S., and Americans receiving certain foreign income). Those rules do not show the domestic income of most Americans to be taxable.
The citations provided above under Point #1 show that one's taxable domestic income is to be determined under the rules of 26 USC § 861(b) and 26 CFR § 1.861-8. Those sections—as well as decades of predecessor statutes and regulations—show that all of the following must apply for someone to have "taxable income from sources within the United States":
1) He must receive a taxable "item" of income (e.g. compensation, interest, rents).
2) The "source rules" must categorize the income as domestic income.
3) The income must derive from a "specific source or activity" which is taxable.
While those three criteria are still present in the current regulations, they are far less clear than in the older statutes and regulations. For example, the current Section 861 and following came from Section 217 of the Revenue Act of 1925, which read as follows:
"Sec. 217. (a) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States:
(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including [exceptions]...;
(2) The amount received as dividends (A) from a domestic corporation other than [exceptions]...;
(3) Compensation for labor or personal services performed in the United states;
(4) Rentals or royalties from property located in the United States or from any interest in such property...; and
(5) Gains, profits, and income from the sale of real property located in the United States.
(b) From the items of gross income specified in subdivision (a) there shall be deducted the [allowable deductions]. The remainder, if any, shall be included in full as net income from sources within the United States." [Section 217, Revenue Act of 1925]
This older wording made it clear that all three criteria had to be met (taxable type of commerce, taxable item, and domestic origin) before that section showed income to constitute taxable domestic income.
For example, that section plainly was not saying that compensation for services performed in the U.S. was taxable for all U.S. citizens—only for citizens who received most of their income from within federal possessions (e.g. Guam, Puerto Rico) and who therefore were "entitled to the benefits of section 262."
(Section 232 of the 1925 Act stated that the rules of Section 217 also applied to foreign corporations, and a domestic corporation "entitled to the benefits of section 262," i.e. domestic corporations receiving most of their income from federal possessions (possessions are technically foreign to the United States). This shows that the only income that can be taxed by Congress must in some way either be derived from or related to certain specific types of foreign or international commerce.)
In 1928, the statute (then Section 119) continued to address the items and geographical origin of income, but the first phrase—dealing with the taxable activities or types of commerce—was removed. However, the related regulations remained virtually unchanged, and still made it plain that domestic income was only taxable for those engaged in certain types of commerce: nonresident aliens and foreign corporations doing business in the U.S., and Americans individuals and companies doing business in federal possessions. See Sections 29.119-1, 29.119-9 and 29.119-10 of the 1945 regulations (Regulations 111).
For example, Section 119(a)(1) from 1939—predecessor of 861(a)(1)—generally said that interest from domestic investments was to be considered domestic income (income from sources within the United States), without specifying when such income was taxable. The related regulations, however, stated that such domestic interest was to be "included in the gross income from sources within the United States, of nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations which are entitled to the benefits of section 251" (26 CFR § 29.119-2 (1945)). Clearly domestic interest was not taxable for everyone—only those engaged in the specified types of commerce.
Likewise, Section 29.119-10 of the 1945 regulations said that in the case of those engaged in the specified types of commerce, the types of domestic income listed in Section 119(a) of the statutes was (after deductions) to be included in full as taxable domestic income. Such domestic income was not taxable for all U.S. citizens.
The current regulations under Section 861 while far more voluminous and complicated than their predecessors, lead to the same conclusions. Section 1.861-8 (the primary section for determining one's "taxable income from sources within the United States") only shows income to be taxable when it derives from certain "specific sources or activities," all of which relate to international or foreign commerce.
To have income which is taxable under 26 CFR § 1.861-8, one must receive a "statutory grouping" of gross income, which means income from a specific type of commerce described in one of the various sections throughout Subchapter N. The regulations call those sections "operative sections."
As one example, Section 871(b) of the statutes states that nonresident aliens doing business in the United States "shall be taxable" under Section 1. Section 1.861-8(f)(1)(iv) (shown below) lists Section 871(b) as an "operative section," from which a taxable "statutory grouping" of income can come. So if a nonresident alien receives income from the type of commerce described in that "operative section" (Section 871(b)), then such income is taxable under Section 1.861-8.
As another example, Section 1.861-8(f)(1)(i) (also shown below) addresses foreign tax credits (addressed by Section 901 and following of the statutes), and in that case the "statutory grouping" of gross income is foreign-source income (including that of U.S. citizens). Again, if a citizen engages in that type of commerce (i.e. that "specific source or activity"), then the income he receives from it is taxable under Section 1.861-8.
"The rules contained in this section [26 CFR § 1.861-8] apply in determining taxable income of the taxpayer from specific sources and activities under other sections of the Code, referred to in this section as operative sections. See paragraph (f)(1) of this section for a list and description of operative sections." [26 CFR § 1.861-8(a)(1)]
"[T]he term 'statutory grouping' means the gross income from a specific source or activity which must first be determined in order to arrive at 'taxable income' from which specific source or activity under an operative section. (See paragraph (f)(1) of this section.)" [26 CFR § 1.861-8(a)(4)]
"The operative sections of the Code which require the determination of taxable income of the taxpayer from specific sources or activities and which gives rise to statutory groupings to which this section [26 CFR § 1.861-8] is applicable include the sections described below.
(i) Overall limitation to the foreign tax credit…in this case, the statutory grouping is foreign source income...
(ii) [Reserved]
(iii) DISC and FSC taxable income… [international, foreign sales corporations]
(iv) Effectively connected taxable income. Nonresident alien individuals and foreign corporations engaged in trade or business within the United States, under sections 871(b)(1) and 882(a)(1)...
(v) Foreign base company income…
(vi) Other operative sections. The rules provided in this section also apply in determining--
(A) The amount of foreign source items…
(B) The amount of foreign mineral income…
(C) [Reserved]
(D) The amount of foreign oil and gas extraction income…
(E) The tax base for citizens entitled to the benefits of section 931 and the section 936 tax credit of a domestic corporation...;
(F) [deals with Puerto Rico tax credits]
(G) [deals with Virgin Islands tax credits]
(H) The income derived from Guam by an individual…
(I) [deals with China Trade Act corporations]
(J) [deals with foreign corporations]
(K) [deals with insurance income of foreign corporations]
(L) [deals with countries subject to international boycott]
(M) [deals with the Merchant Marine Act of 1936]" [26 CFR § 1.861-8(f)(1)]
If one does not engage in any of those activities, he cannot have a "statutory grouping of gross income," and one who has no "statutory grouping" of income has no taxable income under 26 CFR § 1.861-8. Once again, aside from rules about specific federal possessions, international and foreign sales corporations, and certain foreign tax credits, the list of activities includes the same types of commerce which 80 years of predecessor regulations have included:
1) Certain foreign income of U.S. citizens (1.861-8(f)(1)(i) above).
2) The domestic income of foreigners (1.861-8(f)(1)(iv) above).
3) Certain income related to federal possessions (1.861-8(f)(1)(vi)(E) above).
U.S. citizens who live and work exclusively within the 50 states and who receive all of their income from the 50 states have no "statutory grouping," and therefore their income is not shown to be taxable by 26 CFR § 1.861-8 (the section for determining one's "taxable income from sources within the United States"). That being the case, it directly follows that the domestic income of most Americans is not taxable (regardless of what the "conventional wisdom" says), particularly in light of the following:
"In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen." [Gould v. Gould, 245 U.S. 151 (1917)]
In addition, Black's Law Dictionary (6th Edition) says that the doctrine of "inclusio unius est exclusio alterius" (the inclusion of one is the exclusion of others) means that "where law expressly describes a particular situation to which it shall apply, an irrefutable inference must be drawn that what is omitted or excluded was intended to be omitted or excluded."