TAXABLE INCOME

by Larken Rose [Revised: 4/15/2002]

NOTICE: Please Read!

www.taxableincome.net

Table of Contents

1) Overview Page 1

2) The Basics Page 2

3) English vs. Legalese Page 3

4) Sources of Income Page 4

5) Determining Taxable Income Page 5

6) Specific Sources Page 7

7) Operative Sections Page 10

8) Summary of Current Law Page 11

9) Taxing Power Page 12

10) Constitutional Limits Page 14

11) Exempt Income Page 18

12) Intent to Deceive Page 20

13) Cover-Up of 1954 Page 21

14) Other Cover-Ups Page 27

15) Clues and Hints Page 32

16) The Other Side Page 39

17) Conclusion Page 56

Also included (after the report):

. Chart of the current Part I of Subchapter N (and regulations).

. Chart of the predecessor to Part I (and regulations).

. Questions and Exhibits of "Operation Honest Inquiry."

Taxable Income - Larken Rose 1 Revised: 4/15/2002

1) Overview

Despite "common knowledge" to the contrary, the income of most Americans is not subject to the United States federal income tax. The strict limits on federal power imposed by the Constitution prohibited Congress from imposing a tax on the income of U.S. citizens who live and work exclusively within the 50 states, and the federal statutes and regulations themselves demonstrate that Congress did not impose such a tax. This was not due to an oversight or to some technical imperfection in the legislative process. Congress never attempted to impose such a tax. Instead, Congress imposed a far more limited income tax, applicable primarily to income derived from certain international and foreign commerce. However, that law was written in such a way that if the reader did not know where to look in the law, he was likely to get the incorrect impression that his income was taxable. However, other sections show that only income derived from "specific sources," which are all related to international or foreign commerce, is subject to the tax.

While following the proof of this may require concentration, it does not require any "leap of faith," or any questionable "interpretation" of the law. The legal system of the United States is a system of written law, and the words in the law must inform individuals of exactly what the law requires. Therefore, an accurate determination of what the law requires can be accomplished only by an examination of the relevant legal documents themselves, without regard for preconceived assumptions about what the law says. Despite the enormous, complex maze of federal statutes and regulations built up by government lawyers over the years, written in what is virtually a foreign language to most (sometimes called "legalese"), the truth is still quite provable, as will be shown below.

Though many have complained about and/or resisted the federal income tax, the truth is that most Americans have no reason at all to "protest" the tax. The federal income tax is neither invalid nor unconstitutional. What does warrant protest and demand for correction is how the tax has been (and continues to be) grossly misrepresented to the American people and misapplied by federal employees. Many citizens have been harassed, robbed, and unjustly imprisoned, and the few in government who knew the truth did nothing to stop it. Political power has long been associated with dishonesty and deception, but the misrepresentation of the federal income tax (referred to below as "the Great Deception") constitutes the most massive financial fraud in the history of mankind. (It is more a conspiracy of ignorance than a conspiracy of secrecy, meaning that most IRS employees and tax professionals are guilty of incompetence and ignorance, rather than intentional deceit.) Following the main report are included the three questions of "Operation Honest Inquiry" regarding the specific wording of the regulations under Section 861, along with related exhibits, which have baffled government officials and tax professionals alike. [All underline emphasis and non-italicized comments (in brackets) within a citation in this report are additions by the author, and do not appear in the text itself.]

2) The Basics

The laws enacted by Congress through the legislative process are compiled into statutes of the United States Code. Each of the 50 "titles" of the United States Code deals with a category of federal law, with Title 26 being the federal tax title, also called the "Internal Revenue Code." Federal agencies are empowered (by Congressional statute) to implement and enforce the statutes by writing and publishing regulations, which explain the agencies' interpretation of the statutes, as well as setting the rules which govern how the agency will enforce the statutes.

The regulations, when published in the Federal Register, are the official notice to the public of what the law requires of them (Federal Register Act, 44 USC), and are binding on the federal agencies, including the IRS. For federal taxes, the Secretary of the Treasury is authorized to write the regulations.

"Sec. 7805. Rules and regulations

(a) Authorization - . the Secretary [of the Treasury] shall prescribe all needful rules and regulations for the enforcement of this title [meaning Title 26]." [26 USC § 7805] (The citation "26 USC § 7805" refers to Section 7805 of the statutes of Title 26, with "USC" meaning "United States Code." The symbol "§" means "section." Citations of regulations are similar, but contain "CFR" instead, meaning "Code of Federal Regulations.")

Section 1 of the Title 26 statutes imposes the "income tax" on five categories of individuals (unmarried people, married people filing jointly, etc.). In each case, the wording reads, "there is hereby imposed on the taxable income of." The law generally defines "taxable income" in the following section of the statutes:

"Sec. 63. Taxable income defined

(a) In general - .the term "taxable income" means gross income minus the deductions allowed by this chapter." [26 USC § 63]

In other words, when someone determines his "gross income," and subtracts the allowable deductions, the remainder is "taxable income." So for income to be "taxable income" it must first be "gross income." The statues generally define "gross income" as follows:

"Sec. 61. Gross income defined

(a) General definition - . gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services...;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;... [more items listed]" [26 USC § 61]

This is the point at which many tax "experts" err, either by assuming that the "items" of income listed constitute "sources" of income, or by assuming that "from whatever source derived" means that all of the "items" of income listed, regardless of where they come from, are subject to the tax. Both of these assumptions are provably incorrect. (The difference and relationship between "items" and "sources" will be explained below.)

3) English vs. Legalese

In our system of written law, Congress may use a term to mean almost anything, as long as the law itself defines that meaning. When the written law explains the meaning of a term used in the law Standard English usage becomes irrelevant. For example, by the definition in 26 USC § 7701(a)(1), the term "person" includes estates, companies and corporations (in addition to individuals). While no one would call WalMart a "person" in everyday conversation, WalMart is a "person" under federal tax law. The legal use of a term is often quite different from basic English, and therefore reading one section of the law alone can be very misleading.

For example, 26 USC § 5841 states that "[t]he Secretary [of the Treasury] shall maintain a central registry of all firearms in the United States which are not in the possession or under the control of the United States." But this law has a far more limited application than this section by itself would seem to imply. In 26 USC § 5845(a) it is made clear that the term "firearm" in these sections does not include the majority of rifles and handguns (while the term "firearm" in basic English obviously would), but does include poison gas, silencers and land mines.

The average citizen reading the law will naturally tend to assume that he already knows what the words in the law mean, and may have difficulty accepting that the legal meaning of the words used in the law may bear little resemblance to the meaning that those words have in common English. Reading the phrase "all firearms" in Section 5841 in a way that excludes most rifles and handguns is contrary to instinctive reading comprehension, but any lawyer reviewing Sections 5841 and 5845 would confirm that such a reading would be absolutely correct. Reading one section of the law without being aware of the legal definitions of the words being used can give an entirely incorrect impression about the application of the law.

As demonstrated, sometimes the apparent meaning of a simple phrase in the law is very different from the legal meaning. The "income tax" is imposed on "income from whatever source derived." If the law did not explain what constitutes "sources of income," then the law would be interpreted using basic English. However, the law does explain what the term means, and therefore standard English usage is irrelevant.

4) Sources of Income

To review, the "income tax" is imposed on "taxable income," which means "gross income" minus deductions. "Gross income" is defined in 26 USC § 61 as "all income from whatever source derived." The phrase "from whatever source derived" may initially appear all encompassing, but for the specifics about "income from sources," the reader of the law is repeatedly referred to Section 861 and following (of the statutes) and the related regulations. For example, in all three major printings of Title 26 (the "United States Code," the "United States Code Annotated," and the "United States Code Service"), Section 61 itself has cross references similar to the following:

Income from sources -

Within the United States, see section 861 of this title.
Without the United States, see section 862 of this title."

So the section which generally defines "gross income" to mean "all income from whatever source derived" specifically refers to 26 USC § 861 regarding income from "sources" within the United States (and refers to 26 USC § 862 regarding income sources outside of the United States). A similar reference is also found in the indexes of the United States Code, which (although they vary somewhat in the exact wording) have entries such as:

"Income tax

Sources of income

Determination, 26 § 861 et seq.

Within the U.S., 26 § 861"

Again, income from "sources" within the United States is specifically dealt with by Section 861, and "determination" of sources of income is also dealt with by Section 861 and the following sections. (It should be mentioned that neither the cross-references nor the indexes are technically the law, but they are indications of how the law works. Unless someone wants to claim that they are incorrect, they are still useful indicators. And, as will be shown, they are not necessary for proving the relevance of 26 USC § 861 anyway.)

Numerous sections of the law (e.g. 79, 105, 410, 414, 505) identify Section 861 as the section which determines what constitutes "income from sources within the United States," and Section 306 even uses the phrase: "part I of subchapter N (sec. 861 and following, relating to determination of sources of income)."

Clearly 26 USC § 861 and following (which make up Part I of Subchapter N of the Code) are very relevant to determining what is considered a "source of income," and Section 861 in particular deals within income from "sources" within the United States. (Section 862 deals within from "without" (outside) the United States.) Not surprisingly, Section 861 is entitled "Income from sources within the United States," and the first two subsections are entitled "Gross income from sources within United States" and "Taxable income from sources within United States." Section 861 is also the first section of Subchapter N of the Code, which is entitled "Tax based on income from sources within or without the United States." Clearly this is relevant to a tax on "income from whatever source derived."

As mentioned before, the statutes passed by Congress are interpreted and implemented by regulations published in the Code of Federal Regulations ("CFR") by the Secretary of the Treasury. While the Index of the statutes (USC) is not technically the law (as mentioned above), the law does require that a "general index to the entire Code of Federal Regulations shall be separately printed and bound" (44 USC § 1510). The courts have stated that publishing a regulation in the Federal Register "makes it effective against the world," but added that without the "retrieval mechanism provided by an adequate index," individuals might not be able to find the rules which apply to them, so Congress required the index. The purpose for this requirement was to "eliminate secret law" (580 F.2d 1166 (3rd Cir., 1978)).

The reason this is important is that the Index of the CFR, under "Income taxes," has an entry that reads "Income from sources inside or outside U.S., determination of sources of income, 26 CFR 1 (1.861-1--1.864-8T)." This is the only entry in the Index relating to income from sources within the United States. The Code of Federal Regulations, including the Index, is the official notification to the public of what the law requires. Regarding "determination of sources of income," and "income from sources inside or outside U.S.," the Index refers the reader to 26 CFR § 1.861-1 and following, which are the regulations corresponding to Section 861 of the statutes. These regulations fall under the heading "Determination of sources of income." The following is how these regulations begin:

"Sec. 1.861-1 Income from sources within the United States.

(a) Categories of income. Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax." [26 CFR § 1.861-1]

The "income tax" is imposed on "income from whatever source derived," and Section 861 and following, and the related regulations, determine what is considered a "source" of income "for purposes of the income tax." The first sentence of the regulations under 26 USC § 861 has stated this since 1954, when Section 861 first came into existence. Note that these define "the" sources of income subject to the tax, meaning there are no others. Therefore, the meaning of "income from whatever source derived" (the general definition of "gross income" in Section 61) is limited by Section 861 and following sections, and the related regulations. The meaning of the phrase "whatever source" depends completely on the meaning of the word "source." The word "whatever" does not expand the meaning of "source" any more than the phrase "all firearms" (in the example above) expands the legal meaning of the word "firearm." (In "26 CFR § 1.861-1" the "26" refers to Title 26, the "1" after "CFR" refers to Part 1 of the regulations ("Income Taxes"), and the ".861" refers to Section 861 of the statutes.) The above quote from the regulations (26 CFR § 1.861-1) also refutes the common but incorrect position that the "items" of income listed in Section 61 are "sources," since Section 61 obviously does not "determine the sources of income for purposes of the income tax." (There is a chart at the end of this report which outlines Part I of Subchapter N and related regulations, and shows the location and context of many of the citations used in this report.)

While the significance of Section 861 and the related regulations may be obvious, the point needs to be thoroughly proven, since most tax professionals concede that Section 861 and the related regulations are not about the income of United States citizens living and working exclusively within the United States.

5) Determining Taxable Income

In addition to the fact that Section 861 and following, and related regulations, determine what is considered a "source" of income subject to the income tax, the regulations also repeatedly state that these are also the specific sections to be used to determine "gross income" and "taxable income" from sources within and/or without the United States.

"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]

The sections which are specifically for determining taxable income from sources within the United States are 26 USC § 861(b) of the statutes, and the corresponding regulations found at 26 CFR § 1.861-8. (The regulations under Section 63, the section defining "taxable income," do not explain how to determine taxable income.) While the relevance of these sections may quickly become obvious, the repeated documentation is important since most tax professionals are already aware that these sections are not about the income of most Americans.

Section 861(b) (as mentioned above) is entitled "Taxable income from sources within United States." This section states that taxable income from sources within the United States is the gross income described in 861(a) minus allowable deductions. The regulations under Section 861 state (in the first paragraph):

"The statute provides for the following three categories of income:

(1) Within the United States. The gross income from sources within the United States. See Secs. 1.861-2 to 1.861-7, inclusive, and Sec. 1.863-1. The taxable income from sources within the United States. shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), [allowable deductions]. See Secs. 1.861-8 and 1.863-1." [26 CFR § 1.861-1(a)(1)]

(The other two categories of income are income from "without" (outside of) the United States, dealt with by Section 862 and related regulations, and income from sources partly within and partly without the U.S., dealt with by Section 863 and related regulations.)

As the above citation states, "gross income" from sources within the U.S. are dealt with by 861(a) of the statutes and 1.861-2 through 1.861-7 of the regulations. Taxable income is determined by 861(b) of the statutes, and the corresponding regulations in 1.861-8. These regulations are predictably entitled "Computation of taxable income from sources within the United States and from other sources and activities," and begin by saying the following:

"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]

In the regulations under Section 863 (concerning income from sources inside and outside the U.S.), the following is stated:

"The 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 for determining taxable income from sources within the United States." [26 CFR § 1.863-1(c)]

(The vast majority of tax professionals do not use these sections to determine taxable income from sources within the United States. At this point, the average citizen reading this report may guess that there must be some "context" or some other section, or something somewhere which would justify the tax professionals blatantly disregarding and disobeying the clear language used in the citations shown above. There is not.)

Note that sections 1.861-8 and following of the regulations are identified as the sections "for determining taxable income from sources within the United States," as well as being the sections to be used whether the income is from sources within or without the United States. A similar structure occurs in the regulations under Section 862:

"(b) Taxable income. The taxable income from sources without the United States. shall be determined on the same basis as that used in Sec. 1.861-8 for determining the taxable income from sources within the United States." [26 CFR § 1.862-1]

Section 1.863-6 of the regulations (dealing with income from foreign countries or federal possessions) also identifies sections 1.861-1 through 1.863-5 as applying "[t]he principles. for determining the gross and the taxable income from sources within and without the United States." Over and over again it is shown that 26 USC § 861(b) of the statutes and 26 CFR §1.861-8 of the regulations are to be used to determine taxable domestic income.

6) Specific Sources

Section 861 of the statutes uses general language that at first seems to apply to almost all income coming from within the United States.

"Sec. 861. Income from sources within the United States (a) Gross income from sources within United States

The following items of gross income shall be treated as income from sources within the United States:

(1) Interest

Interest from the United States or the District of Columbia...

(3) Personal services

Compensation for labor or personal services performed in the United States; except... [other items listed]" (26 USC § 861(a))

As with Section 61, it is easy to falsely conclude that these items are always taxable, but the regulations related to Section 861 prove this to be incorrect. (And, as will be shown later, the older regulations and statutes make the correct application of the law crystal clear.) The regulations in Section 1.861-8 begin by saying that Section 861(b) of the statutes describes "in general terms" how to determine taxable income from sources within the United States. However, these same regulations show that the general "within"/"without" rules found in the statutes of Section 861 and following are about income derived from "specific sources."

"(ii) Relationship of sections 861, 862, 863(a), and 863(b). Sections 861, 862, 863(a), and 863(b) are the four provisions applicable in determining taxable income from specific sources." [26 CFR § 1.861-8(f)(3)(ii)]

In the first paragraph of Section 1.861-8 of the regulations (the section "for determining taxable income from sources within the United States"), it is again made clear that the section applies only to the listed "items" of income when derived from "specific sources."

"The rules contained in this section apply in determining taxable income of the taxpayer from specific sources and activities." [26 CFR § 1.861-8(a)]

Again, a few paragraphs later, in defining the term "statutory grouping," these regulations again state that taxable income must come from a "specific source."

"[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." [26 CFR § 1.861-8(a)(4)]

In 26 CFR § 1.861-8(f)(1) it is again made clear that Section 1.861-8 (the section "for determining taxable income from sources within the United States") is applicable only to income derived from "specific sources."

"[T]he determination of taxable income of the taxpayer from specific sources or activities and which gives rise to statutory groupings [see previous citation] to which this section is applicable." [26 CFR § 1.861-8(f)(1)]

From these it is clear that the phrase "whatever source" as used in Sections 61 does not simply mean any activity from which income is derived. (If it did, there would be no need for Section 861 and following, and related regulations, to "determine the sources of income for purposes of the income tax.") The following citations show that Section 1.861-8(f)(1) lists the "specific sources" of income subject to the income tax.

Again, the first paragraph of 26 CFR § 1.861-8 states the following (the meaning of "operative section" will be explained below):

"The rules contained in this section 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)]

The definition of "statutory grouping" (mentioned above) also refers to "paragraph (f)(1)" as the list of "specific sources."

The regulations twice identify "paragraph (f)(1) of this section" (26 CFR § 1.861-8(f)(1)) as the list of specific sources. Paragraph (f)(1) itself confirms this again, and then lists the "specific sources" subject to the income tax:

"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 is applicable include the sections described below.

(i) Overall limitation to the foreign tax credit.

(ii) [Reserved]

(iii) DISC and FSC taxable income. [international and foreign sales corporations]

(iv) Effectively connected taxable income. Nonresident alien individuals and foreign

corporations engaged in trade or business within the United States.

(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.

(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 which has an election in effect under section 936 [this involves American individuals and companies receiving most of their income from within federal possessions];

(F) The exclusion for income from Puerto Rico for residents of Puerto Rico...

(G) [deals with Virgin Island tax credits]

(H) The income derived from Guam...

(I) The special deduction granted to China Trade Act corporations...

(J) [deals with foreign corporations]

(K) [deals with insurance income of foreign corporations]

(L) The international boycott factor...

(M) [deals with the Merchant Marine Act of 1936]." [26 CFR § 1.861-8(f)(1)]

None of these "sources" apply to United States citizens who live and work exclusively within the United States. (Federal "possessions," such as Guam, Puerto Rico, etc., are considered to be outside of the United States for income tax purposes.) This is the list of "specific sources" to which Part I of Subchapter N applies, and Part I and its regulations "determine the sources of income for purposes of the income tax" (26 CFR § 1.861-1).

The next subsection (1.861-8(g)) gives examples about how 26 CFR § 1.861-8 works, and states that "[i]n each example, unless otherwise specified, the operative section which is applied and gives rise to the statutory grouping of gross income is the overall limitation to the foreign tax credit under section 904(a)," again showing that there must be some "operative section" (describing some "specific source") in order for there to be taxable income.

So, to review, the sections which "determine the sources of income for purposes of the income tax" (namely, 861 and following and related regulations) only show income to be taxable when it derives from the "specific sources" listed in 26 CFR § 1.861-8(f)(1). Most people do not receive income from these "sources of income for purposes of the income tax," and most people do not, therefore, receive "income from whatever source derived" (the general definition of "gross income"), and do not receive "taxable income from sources within the United States."

7) Operative Sections

The earlier sections of Title 26 (namely 26 USC § 61 and following) deal with "items" of income that may be taxable (such as compensation for services). However, these sections do not specify where the transaction is taking place, or who is receiving the income. Obviously not everyone on earth who receives "compensation for services" is taxable under U.S. law. A separate part of the law, found in Subchapter N, deals with what types of commerce generate taxable income.

Subchapter N is entitled "Tax based on income from sources within or without the United States." As the title suggests, this subchapter explains when income from inside or outside the United States is subject to the income tax. The titles of the five "Parts" of Subchapter N are "Determination of sources of income*" (Part I), "Nonresident aliens and foreign corporations" (Part II), "Income from sources without the United States" (Part III), "Domestic international sales corporations" (Part IV), and "International boycott determinations" (Part V). (* See page 88 for more about the title of Part I of Subchapter N.) Parts II through V are obviously not about U.S. citizens who live and work exclusively within the states. The statutes of Part I of Subchapter N (beginning with 26 USC § 861) give general rules about determining taxable income from "within" (Section 861) and "without" (Section 862) the U.S., but the regulations thereunder make it clear that these rules apply only to income derived from the activities described throughout the other "Parts" of Subchapter N.

This term "specific sources" is used in three other places in the regulations, every one of which specifically refers to taxable activities described in the "operative sections" of the statutes throughout Subchapter N (which are listed in 1.861-8(f)(1) of the regulations). In other words, while the regulations list the taxable activities all in one place (26 CFR § 1.861-8(f)(1)), the statutes describe those taxable activities in various sections throughout Subchapter N. The "specific sources" listed in the regulations each refer specifically to sections of the statutes (called "operative sections") describing those activities. For example, item "(iv)" on the list in 1.861-8(f)(1) specifically refers to sections 871(b)(1) and 882(a)(1) of the statutes, which state the following:

"A nonresident alien individual engaged in trade or business within the United States. shall be taxable as provided in section 1." [26 USC § 871(b)(1)]

"A foreign corporation engaged in trade or business within the United States. shall be taxable as provided in section 11[*]." [26 USC § 882(a)(1)]

(* Section 11 imposes the income tax on corporations; Section 1 imposes it on individuals)

Here the statutes state that these specific activities (or "sources") may produce taxable income. If an "item" of income (such as compensation for services) derives from the activity described in this "operative section," that income is subject to the income tax. The "shall be taxable" phrase would be entirely unnecessary if "from whatever source derived" had the broad meaning that the usual (and incorrect) interpretation of the law gives it.

There is no such "shall be taxable" phrase or any "operative section" for United States citizen living and working exclusively within the 50 states, and the regulations under Section 861 make it clear that the "items" of income must derive from a taxable source or activity described in an "operative section" of the statutes in order to be taxable.

The following analogy may help to clarify the matter of "items" of income and "sources" of income. Suppose that there was a law imposing a tax on "Zonkos," and that the law defined "Zonkos" as "all toys from whatever store derived, including the following toys: plastic cars, dolls, yoyos," etc. Then the law stated that another section "determines the stores for purposes of the Zonko tax," and that section listed "Bob's Toys," "Toy City," and "ToyWorld" as "toy stores."

In this example, there would be two distinct aspects of the term "Zonko": whether an item is a taxable "toy," and whether it comes from a taxable "store." Both criteria would have to be met for it to legally constitute a "Zonko." For example, a baby bottle bought at ToyWorld would not be a "Zonko" (even though it came from a "store"), if baby bottles are not within the legal definition of "toys." Also, a doll bought from "Chuck's Bargain Basement" also would not be a "Zonko" (even though it is a "toy"), as it did not come from something within the legal meaning of "store." A yoyo from Toyworld would be a "Zonko" as it is both a "toy" and comes from a "store."

Similarly, if an "item" of income (such as dividends) does not come from a taxable "source" or activity (such as a foreign corporation doing business within the United States), it does not constitute "gross income." While the law goes to great length to specify which "items" of income may be included in "gross income," the other condition must still be met in order for those items to be taxable: they must derive from a taxable "source" or activity under an "operative section" of Subchapter N (as explained in Section 1.861-8(f)(1) of the regulations).

(Note that the definition of "gross income" includes both criteria: "all income from whatever source derived.")

8) Summary of Current Law

The current statutes and regulations show the correct, limited application of the "income tax" imposed by 26 USC § 1, which is in conflict with what the public generally believes regarding the matter. To summarize,

. 26 USC § 1 imposes the income tax on "taxable income."

. 26 USC § 63 defines "taxable income" generally as "gross income" minus deductions.

. 26 USC § 61 defines "gross income" generally as income "from whatever source derived."

. 26 USC §§ 861 - 865 and related regulations determine the taxable "sources of income."

. 26 CFR § 1.861-8 (together with the various statutes of Subchapter N) shows that the taxable "sources of income" apply only to those engaged in international or foreign commerce (including commerce within federal possessions).

9) Taxing Power

While the current statutes and regulations document the limited application of the federal income tax, it is important to explain the reason why such a limit exists. Without an explanation of why the law is as it is, the conclusion may be unbelievable to some (regardless of the actual evidence). Certainly the limitation was not due to Congress not wanting to tax all income. Without some limit to Congress' power, the tax which most people now believe exists (a tax on the income of most Americans) would certainly have been imposed. According to the Supreme Court, the broad and general wording which Congress used to define "gross income" was intended to tax all income within their power to tax.

"This Court has frequently stated that this language [defining "gross income"] was used by Congress to exert in this field 'the full measure of its taxing power.'" [Commissioner v. Glenshaw Class Co., 348 U.S. 426 (1955)]

This ruling is speaking specifically of Section 22(a) of the Internal Revenue Code of 1939, which is the predecessor to the current 26 USC § 61. Congress has stated that the scope of "gross income" did not change when the law was rearranged and reworded in 1954. (It should be mentioned that the current tax code is basically just the income tax of 1913, but with many amendments over the years adding, removing, rewording, and renumbering various sections. The fundamental nature of the tax remains the same.)

The general language of the definition of "gross income" (past and present) may give an initial impression of an unlimited tax on the income of every individual. However, the meaning of a statute passed by Congress is limited to those matters which the Constitution puts under federal jurisdiction.

"It is elementary law that every statute is to be read in the light of the constitution.

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)] (Notice that this is not some radical decision, but is considered "elementary law.") In other words, a statute may be more restricted than its general wording suggests. The above case goes on to say that Constitutional restrictions are to be assumed when reading a statute (state or federal), even though they are not stated.

"So, although general language was introduced into the statute of 1871, it is not to be read as reaching to matters in respect to which the legislature had no constitutional power, but only as to those matters within its control. And, if there were, as it seems there were, certain special taxes and dues, which, under the existing provisions of the state constitution, could not be affected by legislative action, the statute is to be read as though it in terms excluded them from its operation." [McCullough v. Com. Of Virginia, 172 U.S. 102 (1898)]

So a federal statute is to be read as though it specifically excludes matters which the Constitution does not put under federal jurisdiction. So while, as the Supreme Court said, Congress intended to use the "full measure of its taxing power" by using such a generally worded definition of "gross income," the Supreme Court also admits that the income tax "cannot be applied to any income which Congress has no power to tax" [William E. Peck & Co. v. Lowe, 247 U.S. 165 (1918)]. So the general wording must be interpreted in light of the Constitutional limits on Congress' power. But this could pose a problem for the average citizen. How is he to know what the Constitutional limits are on Congress' power (when even federal judges disagree with each other on the matter)?

As mentioned at the beginning of this report, the Secretary of the Treasury is empowered (by statute) to implement and interpret the law. When the Treasury regulations are published in the Federal Register, they become the official notice to the public of what the law requires.

Therefore while the statutes may use general language (which might at first glance seem to include matters outside of federal jurisdiction), the regulations must give specifics. Though it is phrased somewhat differently than the current 26 USC § 61, the definition of "gross income" found in Section 22(a) of the 1939 Code appears all-encompassing. The regulations under the 1939 Code, however, are very telling. (The term "net income" was used back then, instead of "taxable income.")

"Sec. 29.21-1. Meaning of net income. The tax imposed by chapter 1 is upon income.

Neither income exempted by statute or fundamental law... enter into the computation of net income as defined by section 21."

The term "fundamental law" refers to the Constitution (as countless court rulings show). While the general wording of the statutes makes no such reference, here the regulations imply that some income not exempted by statute is nonetheless exempt from taxation under the Constitution. Note the distinction between income exempted by statute, and income exempted by the Constitution. This occurs again later in the same section:

"(b) Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by chapter 1. (See section 22.)"

Again, the regulations are admitting that some things not exempted by any statute are nonetheless exempt from taxation. The above citation refers us to Section 22 (of the 1939 Code) for the meaning of "gross income." The regulations under that section begin as follows:

"Sec. 29.22(a)-1. What included in gross income.

Gross income includes in general [items of income listed] derived from any source whatever, unless exempt from tax by law. (See section 22(b) and 116.)"

This refers the reader to Section 22(b) to learn what income is "exempt from tax." After saying that certain items are specifically exempted by statute, the regulations under section 22(b) state:

"No other items are exempt from gross income except (1) those items of income which are, under the Constitution, not taxable by the Federal Government; (2) those items of income which are exempt from tax on income under the provisions of any Act of Congress still in effect; and (3) the income exempted under the provisions of section 116."

Again the regulations explicitly state that some income is not constitutionally taxable, even though it is not specifically exempted by any statute passed by Congress. The statutes need not mention this, because (as shown above), the Constitutional limitations are to be assumed when reading any statute. But because the regulations must give specifics, the fact that some income not exempt by statute is exempted by the Constitution is specifically stated in the regulations.

(Many tax professionals are at a loss to explain this. They are unable to identify anything which is not taxable under the constitution, but which is not exempted by statute. While they may know of some things which are not constitutionally taxable (such as certain income of state governments), those things are already exempted by statute (such as 26 USC § 115).)

10) Constitutional Limits

At this point it is reasonable to consider what types of income might be (as the older regulations state) "under the Constitution, not taxable by the Federal Government." While the public seems largely ignorant of this fact, Congress has legal power over only those few matters which the Constitution puts under federal jurisdiction (and the Tenth Amendment clearly states this). Within the 50 states, Congress has legal control over only those matters listed in Article I, Section 8 of the Constitution.

"We start with first principles. The Constitution creates a Federal Government of enumerated powers. See U.S. Const., Art. I, 8. As James Madison wrote, "[t]he powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite."" [United States v. Lopez, 514 U.S. 549 (1995)]

In the 1995 case cited above, the Supreme Court threw out the first "Gun Free School Zone" law (a law forbidding individuals from possessing firearms near schools) as unconstitutional, on the grounds that it was outside of Congress' enumerated powers described in Article I, Section 8 of the Constitution. Not only did the court say this, but the lawyers on the other side tried to argue that the law was about regulating "interstate commerce" (which Article I, Section 8 puts under federal jurisdiction), demonstrating that they agreed that the law had to be based on something in Article I, Section 8.

Article I, Section 8 does include the "power to lay and collect taxes," but does not say what may be taxed by Congress. This allows for two options. The first option is that there are no limitations on what Congress can tax (though there are certain rules on how "direct" and "indirect" taxes must be imposed). The problem with this option is that it would essentially negate the entire Constitution, as this option would give Congress the jurisdiction and power to control anything and everything, provided it exerted that control through tax legislation. For example, if this option were true, in response to the Lopez decision mentioned above,

Congress could simply impose a $1,000,000 "tax" on possessing a firearm near a school, to get around the constitutional restriction that would otherwise exist.

The Supreme Court agreed that this option cannot be. The court said that they could not allow Congress to control by tax legislation matters which they have no jurisdiction to regulate. (Congress was attempting, in the following case, to control "child labor" within the 50 states through tax legislation.) The Supreme Court said the following:

"Grant the validity of this law, and all that Congress would need to do, hereafter, in seeking to take over to its control any one of the great number of subjects of public interest, jurisdiction of which the states have never parted with, and which are reserved to them by the Tenth Amendment, would be to enact a detailed measure of complete regulation of the subject and enforce it by a socalled tax upon departures from it. To give such magic to the word 'tax' would be to break down all constitutional limitation of the powers of Congress and completely wipe out the sovereignty of the states." [Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922)]

In the same year, the court also ruled on the Future Trading Act, which imposed a tax "on all contracts for the sale of grain for future delivery." The court quoted the citation above, and immediately afterward said this:

"This has complete application to the act before us, and requires us to hold that the provisions of the act we have been discussing cannot be sustained as an exercise of the taxing power of Congress conferred by section 8, article 1." [Hill v. Wallace, 259 U.S. 44 (1922)]

Clearly the court saw that Congress' power to lay and collect taxes does not grant unlimited jurisdiction over everything within the states. To ignore the limits of federal jurisdiction when reading the taxation clause would lead to concluding that Congress can control everything by tax legislation. (In fact, this reading would also mean that Congress has the power to tax everyone in China, since the taxing clause does not mention geographical jurisdiction either.)

The second option is that "the power to lay and collect taxes" is limited to matters otherwise under federal jurisdiction. For example, Article I, Section 8 specifically puts international commerce under federal jurisdiction, and Article IV, Section 3 gives Congress control of federal possessions. However, "intrastate" commerce (commerce that happens entirely within a single state) is not under federal jurisdiction. So the power to tax, together with the clauses giving Congress jurisdiction over international commerce, and commerce within federal possessions, would give Congress the power to tax income from international commerce, and income from federal possessions.

The Supreme Court made an interesting comment in 1918 related to this. The case concerned the income tax act of 1913 (which is the basis of the current tax), and how it applied to a domestic corporation in the business of buying things in the states and selling them in foreign countries. The corporation was arguing that the tax in this case violated the provision of the Constitution which forbids the federal government from taxing exports from any state. The Court stated the following:

"The Constitution broadly empowers Congress not only 'to lay and collect taxes, duties, imposts, and excises,' but also 'to regulate commerce with foreign nations.' So, if [the clause forbidding taxes on exports from states] be not in the way, Congress undoubtedly has power to lay and collect such a tax as is here in question." [William E. Peck & Co. v. Lowe, 247 U.S. 165 (1918)]

In other words, if not for the question about whether this was a tax on state exports, this income would be taxable because Congress is given the general power "to lay and collect taxes," and is specifically given the power to "regulate commerce with foreign nations." The court obviously thought the second clause was relevant to whether Congress could tax such income.

The courts have long argued over the concept that "the power to tax is the power to destroy," meaning that the ability to tax something implies the ability to regulate it or to forbid it entirely. This conversely implies that if a government has no jurisdiction to regulate or forbid an activity, then it also has no jurisdiction to tax that activity. There are numerous Supreme Court cases dealing with the concept.

"[N]o state has the right to lay a tax on interstate commerce in any form... and the reason is that such taxation is a burden on that commerce, and amounts to a regulation of it, which belongs solely to congress. This is the result of so many recent cases that citation is hardly necessary." [Leloup v. Port of Mobile, 127 U.S. 640 (1888)]

In this case the court is stating the restrictions on what a state government can tax, but the underlying logic is clear. Taxing commerce is a burden on that commerce, and amounts to a regulation of commerce. While Congress is authorized to regulate interstate commerce (commerce crossing state lines) and international commerce, it has no jurisdiction over intrastate commerce (commerce occurring entirely within a single state). By the simple logic above, that means Congress cannot tax income from intrastate commerce.

"No interference by Congress with the business of citizens transacted within a state is warranted by the Constitution, except such as is strictly incidental to the exercise of powers clearly granted to the legislature." [License Tax Cases, 72 U.S. 462 (1866)]

It is true that the opinions of the courts have fluctuated significantly on this, from saying that the power to tax requires the power to regulate, to saying that Congress may tax things it cannot regulate, provided that taxation does not amount to regulation under the guise of a "tax." The courts have also upheld various "excise" taxes on certain activities and articles, even though the transactions may happen within a single state. But that is a far cry from claiming that "making a living" within the 50 states can be the subject of a federal excise tax.

Considering the massive "social engineering" in the income tax laws, punishing some behaviors and rewarding others, it would be difficult to argue that it would not constitute an attempt to regulate behavior.

One would be hard-pressed to find any provision in the Constitution justifying an attempt by Congress to require most Americans to subject all of their financial records to inspection by the federal government. In addition, within the 50 states Congress does not have general jurisdiction to reward and punish personal decisions. But for those who receive taxable income, the tax code rewards behaviors such as adopting children (26 USC § 23), having a mortgage (26 USC § 25), paying college tuition (26 USC § 25A), producing alternative fuels (26 USC § 29), using an electric car (26 USC § 30), employing Indians (26 USC § 45A), etc. (At the same time, the Code "punishes" other choices, such as getting married, or being too successful.)

In short, if the income of most Americans was subject to the federal income tax, Congress would have managed to "enact a detailed measure of complete regulation of [their personal choices] and enforce it by a socalled tax upon departures from it." But "[t]o give such magic to the word 'tax' would be to break down all constitutional limitation of the powers of Congress and completely wipe out the sovereignty of the states." (These are the words of the Supreme Court from the case of Bailey v. Drexel Furniture Co. (259 U.S. 20).) Congress cannot acquire such power within the 50 states, simply by passing such a law in the form of tax legislation. (Because the tax only applies to those engaged in certain international or foreign commerce, all the rewards and punishments in the Code are limited to those who are under federal jurisdiction; Congress is simply regulating matters which the Constitution gave them power over.)

Regarding the federal income tax, the courts' position on the matter is ultimately irrelevant. Regardless of what the courts think Congress could have taxed, the statutes and regulations show what Congress did tax. Whether the courts think Congress has the constitutional power to tax the income of all Americans is only relevant if Congress attempts to impose such a tax, which has not occurred. (The courts cannot expand the scope of a tax just by saying that Congress could have taxed more if they had wanted to.)

Brief mention should be made of the 16th Amendment to the Constitution, since there is a common but erroneous belief that the 16th Amendment expanded Congress' power to tax incomes. The purpose of the 16th Amendment, according to the Supreme Court in Brushaber v. Union Pacific (240 U.S. 1), and again in Stanton v. Baltic Mining (240 U.S. 103) was to make it clear that the income tax is, and has always been, an indirect "excise" tax, which never required "apportionment" (a cumbersome process required for all "direct" taxes, in which the tax is divided up among the states according to populations). The Secretary of the Treasury agreed with the Court in Treasury Decision 2303.

"The provisions of the sixteenth amendment conferred no new power of taxation, but simply prohibited [Congress' original power to tax incomes] from being taken out of the category of indirect taxation, to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment." [Treasury Decision 2303]

An in-depth explanation of direct and indirect taxes, and how they must be imposed, is not necessary here. The only relevant point is that Congress' taxing jurisdiction was not expanded by the 16th Amendment.

"As pointed out in recent decisions, [The Sixteenth Amendment] does not extend the taxing power to new or excepted subjects..." [Peck v. Lowe, 247 U.S. 165 (1918)]

11) Exempt Income

The above issue of Constitutional limits on Congress' taxing power is not intended to dispute the constitutionality of the income tax. In fact, the opinion of this author, the readers, and even the courts regarding the question of taxing jurisdiction ends up being irrelevant in this case. The statutes of Congress, together with the regulations of the Secretary of the Treasury (which must also be approved by Congress), show that they believed their ability to tax income was limited to those involved in international and foreign commerce.

As discussed above, the regulations under 22(a) of the 1939 Code show that the meaning of "gross income" does not include income which is exempt by statute, or other income which is "under the Constitution, not taxable by the Federal Government." But, as stated before, the regulations must specifically inform the public of what is required, rather than leaving people to guess at what is Constitutionally taxable. The following is the first paragraph of the 1945 regulations under the section of statutes defining "gross income":

"39.22(a)-1 What included in gross income (a) Gross income includes in general [items of income listed] derived from any source whatever, unless exempt from tax by law. See sections 22(b) and 116. [the regulations under the cited section states that some income not exempted by statute is "under the Constitution, not taxable by the Federal Government"] In general, income [not "gross income"] is 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. Profits of citizens, residents, or domestic corporations derived from sales in foreign commerce must be included in their gross income; but special provisions are made for nonresident aliens and foreign corporations by sections 211 to 238, inclusive, and, in certain cases, by section 251, for citizens and domestic corporations deriving income from sources

within possessions of the United States. Income may be in the form of cash or of property."

The regulations have made similar statements at least back to 1922.

"Art. 31. What included in gross income.--Gross income includes in general compensation for personal and professional services, business income, profits from sales of and dealings in property, interest, rent, dividends, and gains, profits, and income derived from any source whatever, unless exempt from tax by law... Profits of citizens, residents, or domestic corporations derived from sales in foreign commerce must be included in their gross income; but special provisions are made for nonresident aliens by section 217 and for citizens and domestic corporations deriving at least 80 per cent of their gross income from sources within possessions of the United States by section 262." [Article 31, Regulations 62 (1922)]

"Art. 71. What excluded from gross income.--Gross income excludes the items of income specifically exempted by the statute and also certain other kinds of income by statute or fundamental law free from tax." [Article 71, Regulations 62 (1922)]

Keeping in mind the matter of taxing jurisdiction, it becomes clear that the Secretary of the Treasury in these regulations was informing the public of which matters are constitutionally taxable by the federal government. This list of taxable activities was completely absent from the statutes defining "gross income" (in 1921 and 1939). As the Supreme Court has stated, "the statute is to be read as though it in terms exclude[s]" matters not within the constitutional power of the government to tax. At the same time, the regulations must specifically inform the public of what the law requires, and they did. Not surprisingly, the list of taxable activities in these regulations matches precisely those matters which the Constitution puts under federal jurisdiction (international and foreign commerce, and commerce in federal possessions).

Anyone claiming that this list of taxable activities is not exclusive (claiming instead that other types of income are also taxable) encounters several logical problems. For example, one must then claim that the regulations specifically say that some income not exempt by statute is exempt under the Constitution, but that those regulations never give any indication as to what income is meant. If this list is not the explanation of what is constitutionally taxable, then no further explanation seems to exist (which would violate the requirement that the regulations specifically state what the law requires).

In addition, one would be hard pressed to explain why these regulations bother to specifically point out these taxable activities (when the statutes do not), if this is not a complete list of what the Secretary believed to be constitutionally taxable.

While the regulations specifically mention the Constitutional limitations, and the limits are to be assumed when reading the statutes, this is not to say that the statutes give no indication of the limited nature of the tax. While the general statutory definition of "gross income" by itself may be misleading, there is plenty of evidence in the statutes that shows that Congress knew the limits of its power, and stayed within those bounds.

Most notably, the entire structure and contents of Subchapter N ("Tax based on income from sources within or without the United States") indicates that it is about international and foreign commerce. In that subchapter, Congress specifically enumerates the activities that are subject to the tax. Blindly assuming that the tax includes income from other activities is contrary to established law.

"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." [Gould v. Gould, 245 U.S. 151 (1917)]

While there are some complicated rules about various foreign tax credits, federal possessions, etc., the statutes and regulations, past and present, show that there are only three general situations in which there can be "taxable income" subject to the federal income tax:

1) Foreigners receiving income from within the United States.

2) Citizens of the United States receiving foreign income.*

3) U.S. corporations receiving most of their income from within federal possessions, technically "foreign" to the 50 states, who are then taxed on their income from within the states (see 26 USC § 936). (Before 1986, 26 USC § 931 also applied this "benefit" to individual U.S. citizens.)

(* Some evidence suggests that only "foreign earned income" of citizens is taxable under this category, meaning the citizen must physically be outside of the United States earning the income (see 26 USC § 911), while other evidence suggests that foreign source income of citizens living and working within the United States could also be taxable.)

12) Intent to Deceive

Following the current statutes and regulations, and arriving at the conclusion that most Americans do not receive taxable income, admittedly can be a somewhat complicated task (particularly for those unaccustomed to reading law). While the evidence speaks for itself, there is another factor that needs to be addressed to give credence to the conclusions of this report.

The taxable sources of income are listed in a portion of the regulations entitled "miscellaneous matters," buried deep in a confusing jumble where most tax professionals have never looked.

Regardless of how solid the citations are supporting the conclusion of this report, such a claim cannot be credibly made without also openly accusing the authors of the law of making a concerted effort to deceive the public. It would be absurd to claim that a law that is this difficult to decipher came about purely by accident. At the same time, an accusation that the lawmakers set out to defraud the public certainly requires supporting evidence. Such evidence is abundant.

There are many matters discussed previously in this report which would suggest an attempt to deceive. Did the authors not know that the phrase "from whatever source derived" would be read by most as meaning "no matter where it comes from"? Is it coincidence that the taxable "items" are listed near the very beginning of the law, but the taxable "sources" are not described until several thousand pages later? How did it happen that the list of taxable sources ended up under the unobtrusive heading "miscellaneous matters" in the regulations found in 26 CFR § 1.861-8(f)(1)? If the goal of the lawmakers was to convey the truth, the current statutes and regulations would not have been the result. The following is intended to expose efforts to conceal the truth, while having the law remain literally correct, as it must be.

Reviewing a situation at various points in time can be more informative than simply looking at the situation from one point in time. For example, if the license plate of a stolen car (but not the car itself) is found in a garage, that may not be conclusive evidence of a crime. However, a series of pictures taken over a few days can be very telling: an empty garage one day, a car fitting the description of the stolen car in the garage the next day, a welding machine next to the car the next day, pieces of a car there the next day, etc.

Similarly, looking at "snapshots" of certain parts of the law at different times, seeing how they were reworded, rearranged, etc., can give a clearer picture of this deception. While the current statutes and regulations certainly indicate intent to deceive, a longstanding and ongoing attempt to cover up the truth becomes apparent when tracing the law backwards in history.

13) Cover-Up of 1954

In 1954, the Code (the income tax statutes) underwent a major rearranging and renumbering (and to some extent, rewording). This change-over did not substantially change the law itself, but simply rearranged it. While there have been various amendments, the current Code retains the same general structure, numbering and content of the 1954 Code. At the time of the 1954 "transformation" of the Code, several changes helped to conceal the truth about the limited application of the federal income tax.

As shown above, the regulations in 1945 specifically stated (twice) that some income not exempt by statute was nonetheless exempt from federal taxation because of the Constitution. The 1945 regulations under the definition of "gross income" began as follows:

"Sec. 29.22(a)-1. What included in gross income.

Gross income includes in general [items of income listed] derived from any source whatever, unless exempt from tax by law." [1945 regulations] Those regulations then went on to explain that this refers to income exempt by statute or "fundamental law," meaning the Constitution. The current corresponding regulations begin in a similar manner:

"Sec. 1.61-1 Gross income. (a) General definition. Gross income means all income from whatever source derived, unless excluded by law." [26 CFR § 1.61-1] However, no mention of the Constitution remains. The phrase "unless excluded by law" is now almost universally misunderstood to mean "unless excluded by statute." The Constitutional limitations still apply (there have been no subsequent constitutional amendments relative to the taxing power), but the present regulations under 26 USC § 61 do not explicitly say that this is part of the "law" which exempts certain income. Instead, they use the general wording that leaves the reader free to assume that only income specifically exempted by statute is exempt from taxation.

The current regulations do show that some "law" outside of Title 26 still exempts some income from taxation.

"[A] class of income which is considered as wholly exempt from the taxes imposed by subtitle A includes any class of income which is:

(i) Wholly excluded from gross income under any provision of Subtitle A, or

(ii) Wholly exempt from the taxes imposed by Subtitle A under the provisions of any other law." [26 CFR § 1.265-1(b)]

The section goes on to say that "the term nonexempt income means any income which is required to be included in gross income." Even here, the specific reference to the Constitution has been removed, allowing the reader to assume that it refers only to exemption by some other statutory law (as opposed to the "fundamental law," the Constitution). The disappearance of the specific reference to the Constitution was only one part of a major shift in the structure of the Great Deception that occurred in 1954. Prior to 1954, the regulations stated that "gross income" included everything not exempt, and then made clear that some types of income were not taxable by the federal government because of the Constitution. The regulations regarding "What included in gross income" then went on to say the following:

"Profits of citizens, residents, or domestic corporations derived from sales in foreign commerce must be included in their gross income; but special provisions are made for nonresident aliens and foreign corporations... and, in certain cases... for citizens and domestic corporations deriving income from sources within possessions of the United States."

This list of taxable activities is absent from the current regulations under 26 USC § 61.

However, something very similar is found in the current regulations under 26 USC § 861.

The regulations under Section 861 twice define the term "class of gross income," saying that a "class of gross income" "may consist of one or more items. of gross income enumerated in section 61." The regulations in 26 CFR § 1.861-8 then refer the reader to "paragraph (d)(2) of this section which provides that a class of gross income may include excluded income."

In other words, the "items" of income listed in Section 61 are not necessarily taxable, but are in some cases "exempt" or "excluded" from the federal income tax. Paragraph (d)(2) states only "[Reserved]" (meaning there is no current regulation) but refers the reader to paragraph (d)(2) of the temporary regulations at 26 CFR § 1.861-8T. That section describes what is meant by exempt income.

"(ii) Exempt income and exempt asset defined--(A) In general. For purposes of this section, the term exempt income means any income that is, in whole or in part, exempt, excluded, or eliminated for federal income tax purposes." [26 CFR § 1.861-8T(d)(2)(ii)]

The section then goes on to specify what is not exempt (i.e. what is taxable). The following should be read carefully, since it starts with a double negative. If a certain kind of income is not exempt, it means it is subject to the federal income tax. Therefore, after being told that "items" of income (which make up "classes of gross income") are not always taxable, a list is given of the types of income which are subject to the federal income tax:

"(iii) Income that is not considered tax exempt. The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:

(A) In the case of a foreign taxpayer.

(B) In computing the combined taxable income of a DISC or FSC.

(D) Foreign earned income as defined in section 911." [26 CFR § 1.861-8T(d)(2)(iii)]

This is the entire list of non-exempt income. The idea that other types of income are also taxable (not exempt), despite not being listed, is contradicted by the regulations stating that paragraph (d)(2) "provides that a class of gross income [consisting of the "items" of income listed in 26 USC § 61] may include excluded income." Unless those types of income not listed are exempt, paragraph (d)(2) does not show that the "items" of income listed in Section 61 may be exempt. (A basic principle of law is that such a list is assumed to be exclusive and complete, unless a phrase such as "including, but not limited to." is used.)

While it is arranged and worded differently, this list of non-exempt income is essentially the same as the regulations under the old statute defining "gross income." It includes citizens with foreign income, those receiving income from within possessions, and foreigners with U.S. income. But while the 1945 regulations listed these "non-exempt" activities under the regulations defining "gross income," they are currently buried in dozens of pages of less prominent regulations under 26 USC § 861. So while the 1945 statute and regulation defining "gross income" by themselves indicated the limited application of the law, the trail to find the truth in the current law is more involved (though the end conclusion is the same).

The basic shift in the Great Deception in 1954 can be summed up as this: While the older version showed the limitations of the law in "step one" (the definition of "gross income"), the current statute and regulation defining "gross income" use the word "source" without further explanation, and additional steps must be followed to discover that the meaning of that term ("source") is determined by 26 USC § 861 and following, and related regulations.

Prior to 1954, the regulations did not say that Section 119 (predecessor to the current 861 and following) and its regulations "determined the sources of income for purposes of the income tax." Instead, the regulations under 22(a) (defining "gross income") list the exact same activities as Section 119 when discussing income from within the United States. In effect, both the regulations defining "gross income," and Section 119 and related regulations "determined the sources of income for purposes of the income tax."

(The older regulations defining "gross income" mention "nonresident aliens and foreign corporations" and "citizens and domestic corporations deriving income from sources within possessions of the United States." At the same time the regulations under 119 mention "nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations entitled to the benefits of section 251.")

Prior to 1954, not only did the regulations under the two sections match exactly, but there was a direct link between Section 22 (predecessor of 61) and Section 119 (predecessor of 861 and following). Section 22(g) of the 1939 statutes read: "For computation of gross income from sources within and without the United States, see Section 119." (As shown above, a similar cross-reference still exists under Section 61 in the three main printings of the Code, referring to Section 861 regarding "Income from sources within the United States," but prior to 1954 the reference was part of the actual text of the statutes.)

After 1954, the admission of the limited application of the tax vanished from the regulations defining "gross income," but the regulations under 26 USC § 861 began to say that 861 and following (and related regulations) "determine the sources of income for purposes of the income tax." This change removed any chance of the regulations under Section 61 raising suspicions.

(The way federal law works there is no requirement that a section which uses a term point to where the definition or explanation of that term can be found. As ludicrous as it seems, it would be perfectly legal for Section 1 of some law to impose a tax "on the transfer of each automobile," and then have Section 14,523(g)(4)(iii) say that "for the purposes of Section 1, the term 'automobile' means a blue Corvette owned by a foreigner." That is in essence how the Great Deception has been structured since 1954.)

While this makes the truth more difficult (though not impossible) to demonstrate with the current statutes and regulations alone, in retrospect it strongly confirms the limited nature of the tax, by showing that while the structure of the deception has changed, the conclusion remains the same.

But the regulations defining "gross income" were not the only place where the truth became less clear during the 1954 "transformation." As mentioned above, when the statutes were being rearranged and renumbered, Section 119 of the 1939 Code became Part I of Subchapter N (26 USC § 861 and following). The Senate report on the 1954 Code states the following:

"SUBCHAPTER N - TAX BASED ON INCOME FROM SOURCES WITHIN OR WITHOUT THE UNITED STATES

PART I - Determination of Sources of Income

§ 861. Income from sources within the United States

§ 862. Income from sources without the United States

§ 863. Items not specified in section 861 or 862

§ 864. Definitions

These sections, which are identical with sections 861-864 of the House bill, correspond to section 119 of the 1939 Code. No substantive change is made, except that section 861(a)(3) would extend the existing 90-day $3,000 rule in the case of a nonresident alien employee of a foreign employer to a nonresident alien employee of a foreign branch of a domestic employer."

Congress here states that the application of the law did not change (except for the specific detail mentioned). As would be expected, the statutes are nearly identical.

Sec. 119. [1939 Code] Income from sources within the United States

(a) Gross Income from Sources in United States.

The following items of gross income shall be treated as income from sources within the United States:...

Sec. 861. [current Code] Income from sources within the United States

(a) Gross income from sources within United States

The following items of gross income shall be treated as income from sources within the United States:...

Section 119 of the old statutes and Section 861 of the current statutes use general terms that could easily be misread as applying to any income from within the United States. But while the statutes did not change, the clarity of the regulations corresponding to these sections changed dramatically. The older regulations admitted the truth so plainly and so often that no step-by-step explanation is needed. The following is the equivalent of the current 26 CFR §1.861-1, in its entirety.

"Sec. 29.119-1. Income from sources within the United States.

Nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations entitled to the benefits of section 251 [this applies only to those who receive a large percentage of their income from within federal possessions] are taxable only upon income from sources within the United States. Citizens of the United States and domestic corporations entitled to the benefits of section 251 are, however, taxable upon income received within the United States, whether derived from sources within or without the United States. (See sections 212(a), 231(c), and 251.)

The Internal Revenue Code divides the income of such taxpayers into three classes:

(1) Income which is derived in full from sources within the United States;

(2) Income which is derived in full from sources without the United States;

(3) Income which is derived partly from sources within and partly from sources without the United States.

The taxable income from sources within the United States includes that derived in full from sources within the United States and that portion of the income which is derived partly from sources within and partly from sources without the United States which is allocated or apportioned to sources within the United States."

Note that the second paragraph in the older regulations shows that Section 119 of the statutes is for determining taxable income of "such taxpayers," meaning those deriving income from specific taxable activities. The general language of the statutes is applicable only to those involved in certain types of international and foreign commerce.

The subsequent sections of the older regulations (like the current regulations) then deal with specific "items" of income. The sections of regulations following that (which correspond to the current 26 CFR § 1.861-8) then deal with determining taxable income from sources within the United States. Again, the regulations clearly show the limited application of the law.

"Sec. 29.119-9. Deductions in general.

The deductions provided for in chapter 1 shall be allowed to nonresident alien individuals and foreign corporations engaged in trade or business within the United States, and to citizens of the United States and domestic corporations entitled to the benefits of section 251, only if and to the extent provided in sections 213, 215, 232, 233, and 251.

Sec. 29.119-10. Apportionment of deductions.

(There is a chart at the end of this report showing the outline and excerpts from Part I of Subchapter N and related regulations, and another chart showing the outline and excerpts from the corresponding statutes and regulations from before 1954.)

Can it be considered an accident that the current regulations are so overly-complex and confusing, while the older regulations blurted out the truth in plain English in the very first sentence? The fact that the statutes apply only to income from certain "specific sources" (relating to international and foreign commerce) is still stated in the current regulations, but rather than being in the first sentence, it is buried deep in the jumbled mess:

In fact, even here it does not specify to which "specific sources" it is referring; the meaning of that term has to be discovered by searching elsewhere in the regulations. (The three other sections of the regulations which use the term "specific sources" show that it refers to the taxable activities described in the "operative sections" throughout Subchapter N.) It was clear to whom the regulations prior to 1954 applied. (While many tax professionals are now aware of the correct application of Section 861 and its regulations, it certainly is not evident at first glance.)

When the regulations changed in 1954, they did not change directly into what the regulations are today. The current maze of "statutory groupings," "specific sources," "operative sections," etc. did not come about until 1978. Of particular note is how the regulations in 26 CFR § 1.861-8 appeared just after the change in 1954, and how the corresponding regulations appeared prior to 1954. The wording was only very slightly changed, but gives one of the most obvious examples of intent to deceive.

BEFORE 1954

29.119-10 Apportionment of deductions.

From the items specified in sections 29.119-1 to 29.119-6, inclusive, as being derived specifically from sources within the United States there shall, in the case of nonresident alien individuals and foreign corporations engaged in trade or business within the United States, be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the United States. The ratable part is based upon the ratio of gross income from sources within the United States to the total gross income.

Example. A nonresident alien individual engaged in trade or business within the United States whose taxable year is the calendar year derived gross income from all sources for 1942 of $180,000, including there-in:

Interest on bonds of a domestic corporation $9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the United States 12,000
Gain from sale of real property [in U.S.] 11,000

---------

AFTER 1954

1.861-8 Computation of Taxable Income from Sources within the United States

(a) General. From the items of gross income specified in §§ 1.861-2 to 1.861-7, inclusive, as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. The ratable part is based upon the ratio of gross income from sources within the United States to the total gross income

Example. A taxpayer engaged in trade or business receives for the taxable year gross income from all sources in the amount of $180,000, one-fifth of which ($36,000) is from sources within the United States, computed as follows:

Interest on bonds of a domestic corporation $9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use within the United States of patents 12,000
Gain from sale of real property [in U.S.] 11,000
Total 36,000

[remainder of example omitted]

Total 36,000

[remainder of example omitted]

The wording is nearly identical, except for two changes. The phrase stating that the whole section applies only to nonresident aliens and foreign corporations simply vanished. In addition, while the specifics of the example in the regulation remained identical, the phrase "a nonresident alien individual" was replaced with "a taxpayer." As Congress stated, the application of the law did not change in 1954, but some key phrases in the regulations were removed to make the truth less obvious. A similar disappearance of a phrase occurred at the same time in the section of regulations dealing with "interest" from the U.S. The wording remained identical except for the disappearing phrase.

BEFORE 1954

29.119-2. Interest.

There shall 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, all interest received or accrued, as the case may be, from the United States, any Territory, any political subdivision of a Territory, or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of residents of the United States, whether corporate or otherwise, except...

AFTER 1954

1.861-2 Interest.

(a) General. There shall be included in the gross income from sources within the United States all interest received or accrued, as the case may be, from the United States, any Territory, any political subdivision of a Territory, or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of residents of the United States, whether corporate or otherwise, except...

(Interest is the only "item" of income for which the regulations specifically mentioned who was receiving it, but the regulations cited above state that in the case of all of the "items" of income, the deductions and determination of taxable income can be done only by those engaged in the specific taxable activities.)

14) Other Cover-Ups

The current income tax is based upon laws that have existed for the better part of a century. Though the original laws, and how they were portrayed to the public, were already deceptive, there are numerous examples, from the beginning of the tax up to today, of things being moved, reworded, renumbered and changed, in such a way to make the correct application of the laws more and more difficult to find.

1921

As shown above, some very telling phrases simply vanished from the regulations in 1954. But it was not only the regulations that lost some honesty along the way. The statutes of the Revenue Act of 1921 show why the regulations said what they said back before 1954. Just as happened with the regulations, a telling phrase that existed in 1921 is no longer found in the statutes. The current Section 861 and its predecessors have remained basically the same for more than 70 years. The text begins "The following items of gross income shall be treated as income from sources within the United States:"

The section then lists certain "items" of income (interest, dividends, compensation for labor, rents and royalties, etc.) coming from inside the United States. In 1921 the section was very similar, but it began "That 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:..." One was "entitled to the benefits of section 262" only if most of his income came from federal possessions, such as Guam or Puerto Rico.

(While Section 217 itself mentions only individuals, Section 232 of the Act states that "[i]n the case of a foreign corporation or of a corporation entitled to the benefits of section 262 the computation shall also be made in the manner provided in section 217.")

1921 Code 1939 Code Current Code

Net income of nonresident alien individuals Sec. 217. (a) That 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...
(2) The amount received as dividends...
(3) Compensation for labor or personal services performed in the United States.
(4) Rentals or royalties...
(5) Gains, profits, and income from the sale of real property...

(b) From the items of gross income specified in subdivision (a) there shall be deducted [allowable deductions]. The remainder, if any, shall be included in full as net income from sources within the United States.

Sec. 119. Income from sources within United

States

(a) Gross income from sources in United States.

The following items of gross income shall be treated as income from sources within the United States:

(1) Interest...
(2) Dividends...
(3) Personal services - Compensation for labor or personal services performed in the United States...
(4) Rentals and royalties...
(5) Sale of real property...
(6) Sale of personal property...

(b) Net income from sources in United States. From the items of gross income specified in subsection (a) of this section there shall be deducted [allowable deductions]. The remainder, if any, shall be included in full as net income from sources within the United States.

Sec. 861. Income from sources within the United States

(a) Gross income from sources within United States

The following items of gross income shall be treated as income from sources within the United States:

(1) Interest...
(2) Dividends...
(3) Personal services - Compensation for labor or personal services performed in the United States...
(4) Rentals and royalties...
(5) Disposition of United States real property interest...
(6) Sale or exchange of inventory property...
(7) Amounts received as underwriting income...
(8) Social security benefits...

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

(b) Taxable income from sources within United States

From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted [allowable deductions]. The remainder, if any, shall be included in full as taxable income from sources within the United States...

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

(d) From the items of gross income specified in subdivision (c) there shall be deducted [allowable deductions]. The remainder, if any, shall be treated in full as net income from sources without the United States.

The following items of gross income shall be treated as income from sources without the United States:...

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

(d) Net income from sources without the United States - From the items of gross income specified in subsection (c) of this section there shall be deducted [allowable deductions]. The remainder, if any, shall be treated in full as net income from sources without the United States.

Sec. 862. Income from sources without the United States

(a) Gross income from sources without United States

The following items of gross income shall be treated as income from sources without the United States:...

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

(b) Taxable income from sources without United States - From the items of gross income specified in subsection (a) there shall be deducted [allowable deductions]. The remainder, if any, shall be treated in full as taxable income from sources without the United States...

(e) Items of gross income, expenses, losses and deductions, other than those specified in subdivisions (a) and (c), shall be allocated or apportioned to sources within or without the United States...

(e) Income from sources partly within and partly without United States

Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section, shall be allocated or apportioned to sources within or without the United States...

(f) Definitions...

Sec. 863. Special rules for determining source

(a) Allocation under regulations

Items of gross income, expenses, losses, and deductions, other than those specified in sections 861(a) and 862(a), shall be allocated or apportioned to sources within or without the United States...

Sec. 864. Definitions and special rules...

Sec. 865. Source rules for personal property sales...

Although it is obvious to whom this section applied in 1921, some may question whether this is at all relevant to current law. Treasury Decision 8687, in discussing what the current regulations under 26 USC § 863 should say, specifically refer to Section 217 of the 1921 Code in trying to determine the "legislative intent" of Congress.

"The legislative history to section 863's predecessor, section 217(e) of the Revenue Act of 1921, also reflects an intention that..." [Treasury Decision 8687]

This Treasury Decision, passed in late 1996, confirms that Section 217 of the Revenue Act of 1921 is the predecessor of the current Part I of Subchapter N, and shows that the IRS still refers to the 1921 statutes to determine the proper application of the current Code. The Internal Revenue Manual shows that the courts, as well as the IRS, considers legislative history when determining the correct application of the law.

"The courts give great importance to the literal language of the Code but the language does not solve every tax controversy. Courts also consider the history of a particular code section..." [Internal Revenue Manual, (4.2)7.2.1.1]

When the tell-tale phrase disappeared from the statutes after 1921, the application of the law did not change. What changed was the effort required to find the truth.

1978

In 1978, the wording of 26 CFR § 1.861-8 was changed significantly, and the title was changed from "Computation of Taxable Income from Sources Within the United States" to "Computation of taxable income from sources within the United States and from other sources and activities." Some have suggested that the current title implies that one should not be using this section unless he has income both from within the United States and from "other sources and activities." The older title, as well as the text of the current regulations, shows that this is not the case.

In addition to the title change, the section also went from less than one page in length to more than thirty pages, and a host of new "legalese" terms appeared, including "operative sections," "statutory groupings," "specific sources," etc. There were no significant changes in the statutes in 1978 that would explain this sudden expansion of the related regulations. This sudden explosion in size and complexity of these regulations seems to serve no purpose other than to confuse matters and obfuscate the truth.

1988

Prior to 1988, the title of Part I of Subchapter N (which begins with Section 861) was "Determination of sources of income" (which is still the heading of the related regulations). In 1988, this title was changed in the Government Printing Office version of the Code to "Source rules and other general rules relating to foreign income." "1988 - Pub. L. 100-647, title I, Sec. 1012(h)(2)(D), Nov. 10, 1988, 102 Stat. 3503, substituted "Source rules and other general rules relating to foreign income" for "Determination of sources of income" in item for part I." [Notes under Subchapter N]

Interestingly, the "United States Code Service" version of the Code still shows the title to be "Determination of sources of income." The USCS version of the Code tries to stay true to the original laws, or "Statutes at Large," thus giving a more accurate representation of what the law requires. Apparently the change of the title in 1988 only affected what appeared in the Government Printing Office ("GPO") version of the Code, as it did not actually amend the "Statutes at Large." So the title is now different in different printings. Because the USCS is generally more reflective of the underlying law itself, that is the version which this report will defer to. It should be mentioned that while titles of parts may give an indication of what the part is about, the title has no effect on the actual legal application.

"...nor shall any table of contents, table of cross references, or similar outline, analysis or descriptive matter relating to the contents of this title be given any legal effect." [26 USC § 7806(b)]

So when the title was changed in the GPO version (but the text of the sections was not), the application of the law did not change. What changed was the appearance of the table of contents. Prior to the change, in light of the fact that the income tax applies to "income from whatever source derived," the table of contents made the relevance of 26 USC § 861 obvious:

Subtitle A, "Income taxes"

Chapter 1, "Normal taxes and surtaxes"

Subchapter N, "Tax based on income from sources within or without the United States"

Part I, "Determination of sources of income"

Section 861, "Income from sources within the United States"

861(a) "Gross income from sources within United States"

861(b) "Taxable income from sources within United States"

(The regulations under 26 USC § 861(b) at the time were entitled "Computation of taxable income from sources within the United States.")

When the title of Part I was changed in the GPO version, and the new title seemed to imply that the part was about "foreign income," it no longer appeared to be an obvious place for most people to look when determining their taxable income. This would certainly have the effect of drawing attention away from Section 861.

Many tax professionals concede that Section 861 and the related regulations show income to be taxable only when it comes from certain activities related to international and foreign commerce. The new title gives the appearance that the part has no relevance to most people, and should not even be examined.

This change resulted in a curious situation: a part whose title says it is about "foreign income" is identified as the part which (along with the related regulations) "determine[s] the sources of income for purposes of the income tax."

1995

The Paperwork Reduction Act of 1980 requires that every form used by the federal government to collect information from the public first be approved by the Office of Management and Budget ("OMB"). The regulations at 26 CFR § 602.101 contain a table listing the OMB-approved forms for each section of regulations. The regulations at 26 CFR § 1.1-1 are entitled "Income tax on individuals," and correspond to 26 USC § 1 (which imposes the "income tax").

Up until 1995, the first line in this table identified Form 2555, "Foreign Earned Income," as the only approved form under 26 CFR § 1.1-1. In 1995, after many "tax resistance" groups had become aware of this, the listing for "1.1-1" was removed from the list, in order to avoid "confusion," according to the Department of the Treasury. The process of applying for, and receiving OMB approval for a form makes the possibility of an error extremely remote. The Department of the Treasury requested that Form 2555 be approved for 1.1-1, and the Office of Management and Budget approved it. When the entry drew too much attention, it was removed. At present no forms are approved for use with 26 CFR § 1.1-1.

15) Clues and Hints

There are numerous other bits of information that hint at the correct application of the law, a few of which are included here as supporting evidence.

On the Record

As the Supreme Court and the Secretary of the Treasury have repeatedly stated, the federal income tax is (and has always been) an indirect "excise" tax. Excises, generally speaking, are taxes imposed on certain activities or privileges. In light of this, there are some interesting comments in the Congressional Record from March 27, 1943 (page 2580). A statement is included by a "Mr. F. Morse Hubbard, formerly of the legislative drafting research fund of Columbia University, and a former legislative draftsman in the Treasury Department" (clearly someone whose job would require a comprehensive understanding of the proper application of the law). His comments include the following:

"The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax: it is the basis for determining the amount of the tax."

The income tax is imposed on "income from whatever source derived" (minus deductions).

The mere receipt of income, by itself, is not (and could not be) the subject of this excise tax.

It is the "source" which is the subject of the tax, and the amount of income received from that "source" is what is used to determine the amount of tax due. The above citations coincide well with the fact that the section of regulations for determining taxable income (26 CFR § 1.861-8) states that it applies only to income "from specific sources and activities." And the statutes and regulations under the part which "determine[s] the sources of income for purposes of the income tax" all apply only to these same "specific sources and activities," which are all related to international or foreign commerce.

Section 306

Section 306 of the statutes deals with individuals receiving income from selling certain stocks.

After dealing with the income itself, the section discusses the "source" of income.

"Sec. 306. Dispositions of certain stock

(a) General rule

If a shareholder sells or otherwise disposes of section 306 stock.

(1) Dispositions other than redemptions - If such disposition is not a redemption.

(A) The amount realized shall be treated as ordinary income.

(f) Source of gain - The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec. 861 and following, relating to determination of sources of income), be treated as derived from the same source as would have been the source if money had been received from the corporation as a dividend at the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871(a) or section 881(a), as the case may be." [26 USC § 306(f)]

The section states that if the income comes from "sources within the United States," then it constitutes "gains, profits, and income" under Section 871(a) or 881(a). Sections 871 and 881 deal exclusively with nonresident aliens and foreign corporations respectively (both are found in Part II of Subchapter N, "Nonresident aliens and foreign corporations"). The wording of Section 306 implies that if the income in question comes from "sources within the United States," then it must apply to one of these sections. If a citizen living and working in the United States receives the type of income dealt with in Section 306, and believes it constitutes "income from sources within the United States," halfway through the last sentence the reader is left in limbo. The sentence structure is "if A, then B." Using the usual overly-broad interpretation of the Code, if a citizen receives income from the type of stock mentioned from "sources within the United States," then that income "shall be considered to be" taxable for nonresident aliens or foreign corporations. A contradiction exists, unless one realizes that the term "sources of income" has a restricted meaning, which in this case would apply only to foreigners.

Strange Links

In various sections of the statutes, Section 911 is referenced where it does not seem to fit in, if one accepts the common, overly-broad interpretation of the Code. One example exists in Section 1 itself (the section imposing the income tax on individuals). Subsection (g) of Section 1 deals with certain income of children being treated as income of that child's parents, and shows that the term "earned income" is defined in 26 USC § 911(d)(2).

"(g) Certain unearned income of minor children taxed as if parent's income.

(4) Net unearned income

For purposes of this subsection--

(A) In general

The term "net unearned income" means the excess of--

(i) the portion of the adjusted gross income for the taxable year which is not

attributable to earned income (as defined in section 911(d)(2))." [26 USC § 1(g)]

This section (26 USC § 1(g)) is referred to later in Section 59(j), and Section 911(d)(2) is again mentioned as the section which defines "earned income." Other sections, such as 26 USC § 66(d) and 26 USC § 469(e), also refer to Section 911(d)(2) for the definition of "earned income." There is nothing peculiar about the definition in 26 USC § 911(d)(2) itself, which states the following:

"(d) Definitions and special rules

For purposes of this section--

(2) Earned income

(A) In general

The term "earned income" means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include." [26 USC § 911(d)]

What is interesting is the location of the definition:

Subchapter N -- Tax based on income from sources within or without the United States

Part III -- Income from sources without the United States

Subpart B -- Earned income of citizens or residents of United States

Sec. 911. Citizens or residents of the United States living abroad

While it is true that the location of such a definition does not legally change the meaning of the definition, it is still somewhat telling that the definition is found in Subchapter N, rather than in Subchapters A and B (which impose the tax, and generally define "gross income" and "taxable income"). It is also telling that the definition itself (though the definition is also "borrowed" by other sections) says that the definition is "for purposes of this section," meaning Section 911, which deals exclusively with the "foreign earned income" of United States citizens.

Another strange connection occurs in the section regarding "community income" (which comes shortly after Section 63, which defines "taxable income").

"Sec. 66. Treatment of community income

(a) Treatment of community income where spouses live apart

If- (1) 2 individuals are married to each other.;

(2) such individuals-- (A) live apart. (B) do not file a joint return.;

(3) one or both of such individuals have earned income for the calendar year which

is community income; and

(4) no portion of such earned income is transferred (directly or indirectly) between such individuals before the close of the calendar year, then, for purposes of this title, any community income of such individuals for the calendar year shall be treated in accordance with the rules provided by section 879(a)." [26 USC § 66]

Note that this is giving the rules applicable to all of Title 26 regarding "community income." But the section it refers to for such rules reads:

"Sec. 879. Tax treatment of certain community income in the case of nonresident alien individuals

(a) General rule - In the case of a married couple 1 or both of whom are nonresident alien individuals and who have community income for the taxable year, such community income shall be treated as follows:." [26 USC § 879(a)]

The text here specifically states that it applies only where one or both are nonresident aliens. To use the same rules for two citizens of the United States, Section 66 would have to say something similar to "shall be treated in accordance with the rules provided by 879(a) regarding nonresident aliens, notwithstanding the fact that the individuals may be citizens or residents of the United States." But it says no such thing, implying that "community income" applies only if at least one partner is a nonresident alien.

Following Instructions

Form 1040 is divided into several categories, such as personal information, "Filing Status," "Exemptions," "Income," etc. In the instruction booklet for that form, there is a section that gives line-by-line instructions. The general category of "Income" begins as follows:

"Foreign-Source Income

You must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. You must also report earned income, such as wages and tips, from sources outside the United States.

If you worked abroad, you may be able to exclude part or all of your earned income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

Community Property States... *

Rounding Off to Whole Dollars..." [1996 Instruction Booklet for Form 1040]

(* - This concerns "community income," which is dealt with above. This would apply only to a United States citizen married to a nonresident alien.)

That is all it has to say about the general subject of income. The booklet then tells where the listed "items" (interest, dividends, wages, etc.) should be entered on Form 1040. While there is a statement specifically saying that "you must report" these items if from sources outside the United States, there is no statement that these items must be reported if they come from within the United States.

This admission in the booklet is very easy for most readers to simply disregard as irrelevant to them. But if there was the need to say that foreign-source income must be reported, why was there no need to say that any other income must be reported? Why did the statement not say that foreign source income "as well as domestic income" must be reported? One is left free to make the incorrect assumption that all income must be reported, when this is not the case.

A similar situation exists with IRS Publication 525, "Taxable and Nontaxable Income." The first thing this publication says concerning taxes, which appears on the cover, is: "Important Reminder Foreign Source Income. If you are a U.S. citizen, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law."

Then, in the introduction (which follows the above "reminder"), the publication states that the publication "discusses many kinds of income and explains whether they are taxable or nontaxable." Other than the "foreign source income" reminder, the publication deals only with "items" of income, not "sources." Again, one is left free to assume that income from within the United States is taxable to U.S. citizens, but it is not stated.

The two documents cited above, which say that citizens "must report" income coming from outside of the United States, coincide perfectly with the older regulations defining "gross income." For example, the 1922 income tax regulations state that certain income not exempted by statute is nonetheless free from taxation because of "fundamental law" (the Constitution). The regulations then state that "[s]uch tax-free income should not be included in the return of income and need not be mentioned in the return." At the same time, the regulations also stated that "[p]rofits of citizens, residents, or domestic corporations derived from sales in foreign commerce must be included in their gross income" (and then mention special rules regarding foreigners and those who have possessions income). The current IRS publications, as shown above, still contain similar language.

Treasury Decision 2313

The Supreme Court's decision in the Brushaber case in 1916 (240 U.S. 1) is often cited by the IRS as demonstrating that the income tax is Constitutional (which it is, because of its very limited legal application). What the IRS fails to mention, and what is not apparent from looking at the court's ruling in the case, is that the case concerned income from within the United States accruing to a nonresident alien, which is subject to the income tax. Treasury Decision 2313 makes this apparent.

"Under the decision of the Supreme Court of the United States in the case of Brushaber v. Union Pacific Railway Co., decided January 24, 1916, it is hereby held that income accruing to nonresident aliens in the form of interest from the bonds and dividends on the stock of domestic corporations is subject to the income tax imposed by the act of October 3, 1913." [Treasury Decision 2313]

Note how in this case an "item" of income (interest) is subject to the income tax when paid to nonresident aliens, because nonresident aliens getting domestic income is one of the legal "sources" of taxable income. The decision also states a proper use of Form 1040.

"The responsible heads, agents, or representatives of nonresident aliens, who are in charge of the property owned or business carried on within the United States, shall make a full and complete return of the income therefrom on Form 1040, revised, and shall pay any and all tax, normal and additional, assessed upon the income received by them in behalf of their nonresident alien principals." [Treasury Decision 2313]

While this in itself does not prove that Form 1040 should not be used in any other situation, something telling appears later in the decision. Speaking of the responsibility of fiduciaries of domestic entities, it states:

"[W]hen there are two or more beneficiaries, one or all of whom are nonresident aliens, the fiduciary shall render a return on Form 1041, revised, and a personal return on Form 1040, revised, for each nonresident alien beneficiary."

This both implies that a Form 1041 is not required if there are no nonresident alien beneficiaries (only citizens and residents), as well as implying that a Form 1040 is not to be issued for the citizen and resident beneficiaries.

Other Clues

As mentioned above, the only form ever approved for use with section 26 CFR § 1.1-1 of the regulations (under the Paperwork Reduction Act) was Form 2555, "Foreign Earned Income."

In addition, the only form approved by the Office of Management and Budget for 26 CFR § 1.861-2 and -3 (which deal with interest and dividends from within the United States) is Form 1040NR, "U.S. Nonresident Alien Income Tax Return." Similarly, the only form approved under 26 CFR § 1.861-8 itself is Form 1120-F, "U.S. Income Tax Return of a Foreign Corporation."

Below each section of regulations in the CFR there is a citation of the legal authority under which the regulations are made. The statutory authority for 26 CFR § 1.861-8 is listed as 26 USC § 7805 (which is the general rule-making authority for the Secretary, as shown in the first citation of this report), as well as 26 USC § 882(c), which reads:

"Tax on income of foreign corporations connected with United States business.

(1) Allocation of deductions

(A) General rule... the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary." [26 USC § 882(c)]

This matches the fact that only the income tax return for a foreign corporation has been approved for use with this section of regulations by the OMB. The newer, temporary regulations in 26 CFR § 1.861-8T cite no statutory authority, but instead cite Treasury Decision 8228, which states that the authors of the regulation both work in the "Office of the Associated Chief Counsel (International)." The scope of the regulations is identified in the first paragraph of Treasury Decision 8228:

"Summary: This document provides temporary Income Tax Regulations relating to the allocation and apportionment of interest expense and certain other expenses for purposes of the foreign tax credit rules and certain other international tax provisions." [Treasury Decision 8228]

So the authorities cited as the legal basis for the regulations for "determining taxable income from sources within the United States" (temporary and final) show that the regulations are about international commerce.

Another legal resource which demonstrates the true applicability of the "income tax" is the annotated index of the United States Code. While there are different versions which vary somewhat in exact wording, under "Income tax, citizens," only things such as citizens "living abroad" or "about to depart from U.S." are listed.

Both the indexes and the contents of "Internal Revenue Bulletins" (which contain rulings and decisions by the IRS regarding interpretation of the law) reinforce the conclusions of this report. For example, the 1957-1960 cumulative bulletins have nine listings under "Citizens," every one of which deals with citizens being outside of the United States. This same bulletin, under "Income - Source," has 35 listings, all of which deal with specific issues related to international commerce, with one exception; and that exception again reinforces the significance of Part I of Subchapter N, and the related regulations:

"Within and without United States; determination. - Rules are prescribed for determination of gross income and taxable income derived from sources within and without the United States... §§ 1.861-1 through 1.864. (Secs. 861-864; '54 Code) T.D. 6258, C. B. 1957-2, 368."

The bulletins show similar patterns year after year, from 1913 (when the basis of the current federal income tax was written) to the present. Another resource which indicates the true nature of the "income tax" is the Internal Revenue Manual, which is the instruction manual for all divisions of the Internal Revenue Service. The Criminal Investigation Division of the IRS is the division which deals with criminal violations of the federal "income tax" laws, including tax evasion and failure to file a return. Section 1132.55 of the Internal Revenue Manual (entitled "Criminal Investigation Division") begins as follows:

"The Criminal Investigation Division enforces the criminal statutes applicable to income, estate, gift, employment, and excise tax laws. involving United States citizens residing in foreign countries and nonresident aliens subject to Federal income tax filing requirements." [IRM, Section 1132.55 (1991 Ed.)]

Similarly, the federal regulations found in 26 CFR § 601.101(a) describe in general the functions of the Internal Revenue Service. The only specific mention in these regulations of who or what is subject to taxes administered by the Internal Revenue Service reads as follows:

"The Director, Foreign Operations District, administers the internal revenue laws applicable to taxpayers residing or doing business abroad, foreign taxpayers deriving income from sources within the United States, and taxpayers who are required to withhold tax on certain payments to nonresident aliens and foreign corporations." [26 CFR § 601.101(a)]

In keeping with the deceptive structure used throughout the statutes and regulations, the reader is left to assume that some other matters are also under IRS jurisdiction, but nothing else is specifically mentioned.

16) The Other Side

As most tax professionals believe that most Americans have taxable income, their position regarding Section 861 and other matters should be specifically presented and refuted. The incorrect readings of Section 861 and related regulations fall into two main categories. The two approaches are in conflict with each other, and both are provably incorrect.

Pay No Attention

The first erroneous general "interpretation" which tax professionals have regarding Section 861 is that it is usually irrelevant, and should be ignored by most people. This approach rests on the misreading of "from whatever source derived" (as used in 26 USC § 61) to mean "no matter where it comes from." In all three major printings of Title 26 (USC, USCS, USCA), Section 61 itself has a cross-reference similar to the following:

"Income from sources -

Within the United States, see section 861 of this title

Without the United States, see section 862 of this title"

The Indexes of the United States Code reinforce the point, with entries such as:

"Income tax
Sources of income
Determination, 26 § 861 et seq.
Within the U.S., 26 § 861"

(While neither the cross-reference nor the index are technically the law, they certainly indicate that one should reference 26 USC § 861 for the details about gross income from "sources" within the United States.)

On examining Section 861 itself, we find that it is entitled "Income from sources within the United States." The first subsection (26 USC 861(a)) is entitled "Gross income from sources within United States," and it identifies what "shall be treated as income from sources within the United States." There is no indication in the section that it should only be used if someone also has income from outside the states, and there is no indication that it only determines in certain unusual cases what "shall be treated as income from sources within the United States." (While it is easy for a reader to assume that he knows what "income from sources within the United States" means, the law specifically answers the question, so speculations and assumptions are irrelevant.)

The second subsection (namely, 26 USC § 861(b)) is entitled "Taxable income from sources within United States," and it states how to determine what "shall be included in full as taxable income from sources within the United States." Again, the text gives no indication whatsoever that these sections should only be used to determine "gross income" and "taxable income" from within the United States in certain unusual circumstances.

But the language of the statutes is not all that the "experts" have to ignore in order to come to their erroneous conclusion. The regulations also explicitly and repeatedly show the relevance of 26 USC § 861. These regulations fall under the heading of "Determination of sources of income" in the Code of Federal Regulations.