By Tom Clayton, MD
http://educate-yourself.org/cn/letterbarbarafelker26jun03.shtml
June 26, 2003

http://www.taxableincome.net/takestand/felker.html

Letter to Barbara Felker

The letter that follows this brief overview was sent by me, Tom Clayton, MD (Larken Rose's partner), as yet another attempt (for nearly three years) to COMPEL the Treasury Department's government designated "expert" regulation writing lawyers for Subchapter N, Section 861 and following to answer specific questions about the regulations under this section of the law that say what is almost exactly the opposite of what the public has been "led to believe" in regards to who has "taxable income" and who does not.

The written law is (and must be) constitutional, which means that it is not only written correctly but that it tells the truth. And tell the truth it does, provided the reader knows where to look and what to look for. For over 80 years, the law (primarily the regulations) is where the irrefutable PROOF is found that the income tax is imposed only on those engaged in INTERNATIONAL commerce. For the Treasury Department lawyers to refuse to acknowledge the truth in the regulations (which were last revised in 1978) is CRIMINAL, because (consistent with over 80 years of prior law) they do NOT show that the incomes of most Americans are taxed.

The public deserves to know the correct application of the law. They deserve to NOT be deceived by the Treasury Department, who wrote the regulations correctly that prove the severely limited scope of the tax (and where it has lain hidden in plain sight since 1924).

Subchapter N, Section 861 is the (previously) almost universally misunderstood (therefore misapplied) section of the law that proves that most of the public has NEVER owed federal income taxes and have for generations been DECEIVED.

The pubic deserves to NOT be deceived by government law-writing lawyers, who knew that there was no legal "requirement" for them to make the severely limited scope of the income tax law easy to find. Over the years, the government lawyers took full advantage of the public's ignorance of the law (as well as tax professionals who made assumptions and did not read the law carefully) and made it progressively harder to find the truth in the law that most Americans did NOT owe federal income taxes.

Thanks to the Internet and computer search engines, we have found all the pieces of the "puzzle" that the Treasury Department "hoped" nobody would ever find (in widely separated parts of the law that should have been placed together). The law does NOT lie and the evidence that the public has been defrauded for over 80 years will not go away.

The insurmountable problem for the federal government is that the purely domestically earned incomes of Americans are NOT SHOWN TO BE TAXABLE (and never have been) in the regulations under Section 861. In other words, the income taxation that the Treasury Department has been enforcing and misrepresenting to the public is MISSING FROM THE WRITTEN LAW.

The income tax statute 26 USC § 861(b) and its related regulations beginning at 26 CFR § 1.861-8 are those sections of the law that tell the reader WHEN income from sources within the United States (domestic commerce) is taxable. These are also the regulations that show the reader WHEN income from sources outside the United States is taxable (international commerce) and the regulations under 26 USC § 862 refer back to it.

The reader finds that the ONLY U.S. citizens with "taxable income" are those engaged in certain types of foreign and international commerce, which corresponds exactly with the areas over which Congress has jurisdiction granted by the Constitution. He finds NOTHING that talks about the income taxation of U.S. citizens enaged in purely domestic commerce (commerce within the 50 states). This is THEFT; theft by deception.

Everyone is required to obey the law as written, including government lawyers. If YOU are a person that the law shows has "taxable income" from sources within or without the United States, then you are required to pay taxes on it (after allowable deductions), whether you like it or not. But if your income is NOT shown to be taxable, then you have to do nothing, just like any other part of the law that does not apply to your circumstances. There is no such thing as a "voluntary" tax of any kind. People have not been "volunteering" to pay the tax, they have been deceived into thinking that the law required them to pay the tax, when in most (but not all) cases it did not do so.

The questions to the government designated "experts" were specifically designed to be answered yes or no using the exact words of those regulations in order to CONFIRM what the regulations say (that the only incomes derived from domestic commerce that are shown to be taxable are when they are received by foreigners). Those questions, with explanations of why they are so relevant (and showing how they must be answered), can be seen here.

As you will see, the severely limited scope of the income tax law is directly related to the fact that the Constitution did NOT grant Congress indirect income taxing jurisdiction over domestic commerce. Congress cannot (and Section 861 shows that they did not) impose an indirect (excise) tax on the incomes of Americans derived from domestic commerce. Congress can (and Section 861 shows that they did) impose an indirect income tax on the incomes of Americans derived from INTERNATIONAL commerce. [Congress does have the ability to impose a one time direct tax, but it must be apportioned].

The prior law (www.861evidence.com) proves that the regulations under Subchapter N come to the same conclusions for over 80 years. The income taxation that the public has been led to believe exists is MISSING; the law has NEVER talked about the taxation of the exclusively domestically earned incomes of U.S. citizens because the taxation of DOMESTIC COMMERCE with an indirect income tax is prohibited by the Constitution. This is why Congress cannot just change the law.

The law was deliberately arranged and written to mislead the reader so they they would get the "impression" that the income tax is a direct tax on incomes and all incomes are taxed, while the truth was buried in Section 861. The law taxes incomes from domestic commerce only when that income crosses country borders (of the United States) and is received by foreigners (which places it under foreign commerce, over which Congress has been given indirect income taxing jurisdiction). The makes the commerce part of commerce with foreign nations (the terms that the Constitution uses).

Once the structure of the deception is realized, the cumulative evidence in the law itself that the public has been deceived is simply overwhelming. There are many people from all walks of life that are realizing on their own (by looking at the specific words of the law) that the law is SEVERELY limited in scope (who it applies to and under what circumstances) and that most of them do NOT owe federal income taxes.

The Internet cannot be stopped from spreading the truth, but the DOJ lawyers are illegally trying to do so. At www.861.info, they can see for themselves how the government is actively trying to stop the public from learning that Subchapter N IS the CRITICAL section of the law that EVERYONE must use to determine whether or not their income is taxable.

This federal abuse of power that has for so many years enabled them to steal from the public is outrageous and must end, and the Internet is making that happen. The Internet has made the exact wording of the law available to anyone with a computer and Internet connection, free of charge. The Internet has dramatically changed the standards of proof. To be fair, this deception could only suceed because of widespread ignorance, but with the Internet this is no longer possible.

This is why I did NOT just ask them if my income earned exclusively within the 50 states was taxable or not, as so many poor souls have done over the years, "trusting" the federal government and Treasury Department to tell the truth. It would have been too easy to lie and tell me YES it was taxable, but that is not good enough anymore; the public is now DEMANDING to see where the law taxes them (just like they would demand to see proof if somebody came up to them and claimed that money was owed).

By having to answer the specifics of each STEP that exists in the law itself for the reader to determine whether he has "taxable income" or not, the regulation writing lawyers who know the law better than anyone else had three choices:
1. Answer correctly, which would "admit" that the regulations show that most Americans have been deceived into paying income taxes that most of them never owed (which is what they have showed for over 80 years), or
2. Answer incorrectly, which CONTRADICTS what the regulations show.
3. Refuse to answer to "avoid" having to tell the truth.

It is one thing to be ignorant of the law and make a mistake. But these government designated Subchapter N, Section 861-865 "experts" CANNOT claim to not know the regulations that they are supposed to be expert about.
But they have refused to answer the questions on multiple occasions. They have refused to even talk about the 861 regulations, proving that they are determined to continue MISREPRESENTING the severely limited scope of the federal income tax law to the public?as well as to the average IRS employee, in order to steal money not owed by law.

Knowingly deceiving even ONE member of the public is criminal misconduct, and a sad commentary on the state of the federal government, who could care less about the written law, meanwhile they are attacking the private sector for "fraud," when they are running the biggest fraud of them all. As you will see for yourself below, these conclusions are NOT a misinterpretation of the regulations. Once the structure of the deception is understood (diberately made to be difficult to understand) these regulations make sense, particularly when compared with prior law.

Furthermore, if this was wrong, then it would have been very EASY for them to "correct" me by simply showing where the law taxes my income. But they cannot do so because it does not exist in the law and they know it. Amazingly, there is proof that the lawyers at the DOJ ("Department of Justice") have known about the fraud for many years. For example, in 1985, in an argument submitted by Bruce Hinshelwood, Assistant United States Attorney in Orlando, Florida, he admitted:
"The government is unable, therefore, to offer case authority for the universally accepted proposition that a citizen of the United States, working and residing in the United States, subject to federal law, earning wages, and responsible for filing an income tax return, is liable for taxation." [Ward v. US, 11 th Cir.]

THE FAILURE TO SEE WHAT WAS MISSING

There is a basic principle that the law must CLEARLY STATE who is taxed and under what circumstances, and that is exactly what the regulations do under Section 861. The regulations do NOT show that incomes from domestic sources (commerce within the 50 states, meaning most incomes) are taxed if the income is received by US citizens, but those regulations do show that incomes derived from domestic commerce ARE taxed if the income is received by foreigners.

But for over 80 years this section of the law has been misunderstood and misapplied by nearly everyone because it shows that the ONLY taxable sources of income for U.S. citizens are related to certain specific types of foreign and international (not domestic) commerce. The law DOES mean what the words say.

I have worked with Larken Rose for over six years behind the scenes for the sole purpose of educating the public about the correct application of Subchapter N, Section 861 and following and the regulations thereunder. These actions are completely protected by the First Amendment, which the DOJ and IRS ignore, along with other basic rights of citizens and many other parts of the law that they are REQUIRED to obey, just like the public. We have been doing this solely because the public deserves to know the truth of what the law says.

The public is not stupid and the law does not lie. I was behind the scenes before my house was raided with no basis in law to do so. The DOJ knowingly violated my 1st Amendment rights to freedom of speech by stealing over 150 videos and other educational material. So, these thug tactics and gross violations of constitutional rights and criminal statutes have had the OPPOSITE effect that they "hoped" would happen; I am now on the front line with Larken. The DOJ may not give a damn about obeying the law, but we WANT publicity; the law does not lie and the evidence of this massive theft will not go away.

The bottom line is this: For the government (which is supposed to be by and for the people) to be deceiving the public into paying an income tax that most of them do not owe by keeping them ignorant of what the law specifically says is ethically, morally, and legally WRONG.

It is a bizarre situation indeed where members of the public are trying to COMPEL the government to obey the law that THEY WROTE. The DOJ lawyers knowingly disobeying the law and violating constitutionally protected rights cannot be and will not be tolerated.

But the fact of the matter is that we ARE a nation of the written rule of law and honest members of the public have no choice but to work to STOP this theft by deception. STEALING MONEY with no basis in law by deceiving the public about what the law specifically states cannot be tolerated now that the truth in the law is understood.

Can YOU just stand by while you and your neighbors are being robbed, now that you know what the law says? The complete proof is found on this website in the written report "Taxable Income," as well as other essays, and in video form entitled "Theft By Deception" which can be found at www.theft-by-deception.com.

Tom Clayton, MD

Letter to Barbara Felker

Tom Clayton, MD
[address redacted]

CERTIFIED MAIL
RETURN RECEIPT REQUESTED

June 26, 2003

Barbara Felker, Chief, Branch 3
Office of Associate Chief Counsel (International)
1111 Constitution Avenue NW
CC:INTL:B03/Rm 4555
Washington, DC 20224

Dear Ms. Felker:

In your response letters to me, you have admitted to being responsible for understanding the correct application of Part I of Subchapter N (Chapter 1) of the Internal Revenue Code, and 2001-1 I.R.B. Sec. 3.06 states that one of the issues under your jurisdiction is "determination of sources of income." The federal income tax law is correctly written and is completely constitutional.

Of course the regulations are the Treasury Department's official interpretation of the income tax statutes and act as the official notice to the public of what the law requires of them (44 USC); once published they have the force and effect of law and are binding on you, the IRS, and the public. The Internal Revenue Manual confirms that everything else produced by the Treasury Department and IRS (such as letter, notices, and publications, etc.) is not evidence of the law (see enclosed).

It has been over two and a half years since I began communicating in writing with you and your associates, asking a few very specific and reasonable questions about how one uses the regulations to determine their taxable domestic income. You did not write the regulations under 26 USC § 861 or their predecessors, but when a citizen like myself asks you very specific questions about how to properly apply those regulations, then you have a moral, ethical, and legal duty to help me understand (or confirm) what is or is not required of me according to the wording of the regulations themselves.

But despite my polite requests, you have on multiple documented occasions refused to answer the specific questions and instead sent me legally worthless form letters and "notices" containing misleading generalities, evasions, insults, accusations and threats. It has been over a year since a point-by-point breakdown of your deliberate attempts to deceive me and obfuscate the correct meaning of the regulations was put on the Internet at:

http://www.taxableincome.net/debate/attempts/irschief.html

You are no ordinary lawyer. As the official government representative for this section of the law at the Treasury Department, you have a special responsibility to correctly represent the meaning of the regulations at all times and in all situations. You of all people are in no position to claim that you do not know what those regulations say and what they mean, in part because you have access to the prior regulations since 1913 that come to the same conclusions. But besides being the official "expert" on this portion of the law, you have been made aware of the educational materials Larken Rose and I have produced regarding the critical issue of how to correctly determine taxable income.

The Internet has leveled the playing field; the public can now see the exact wording of the law so that they can determine for themselves what the law does or does not require them to do. For over five years Mr. Rose and I have been on a mission to use this remarkable educational tool to educate the public about the correct application of the law by clarifying the unnecessarily complicated regulations under Section 861. But even more important is how we have shown irrefutable proof that the correct application of this part of the law is the same as over 80 years of prior statutes and regulations (provided the reader knew where to look and what to look for).

We believe that the public deserves to know the truth in the law, and have done this at great personal sacrifice, time, and expense. The evidence in the law has been put in different forms (both written and graphical) to help the public understand regardless of how they learn best. Busting through the otherwise almost impenetrable legalese, they can see the exact wording of those parts of the law that are critical to accurately determining who has "taxable income" and who does not. Those materials include the free written report entitled "Taxable Income," the "Theft By Deception" video, and numerous essays and other evidence of the law found on the internet at:

http://www.taxableincome.net and www.theft-by-deception.com

Once the general public understands the correct application of the law (which the government has always said that they are required to understand and comply with), those citizens who do not owe federal income taxes can and will correct their behavior to comply with what the law actually says rather than what they have "assumed" (or been told) that it says. But this also means that those citizens who do owe federal income taxes can see where the law actually says that they owe (meaning that they are required to pay whether they like it or not) instead of not knowing that they owed these taxes. How can you be an enemy of the truth and still go to work every day?

It is ethically, morally, and legally intolerable for anyone whose job it is to correctly explain and administer the laws to spend even one second deceiving the public about what the law requires. Yet that is exactly what you and your associates have done for nearly three years. Your refusal to answer the specific questions is bad enough, but when you actively blocked my attempts to find other regulation-writing lawyers who might have actually answered the questions (such as Kay Bailey Hutchinson's office directing me to Mr. Jerry Traficanti) you accelerated our educational efforts. Your final letter to me of October 18, 2002, included the following:

"Your inquiry was forwarded to this office which has responsibility for administering and interpreting sections 861 through 865 of the Code and the accompanying regulations. In our prior correspondence to you dated December 21, 2000 and July 10, 2001, we provided you with information concerning the application of section 861. These correspondences set forth all of the general information we have on this topic." [Felker response letter, October 18, 2002]

On May 6th, 2003, everything changed for me. Early that morning, after I had gone to work, my 11-year-old daughter was home alone sick, while my wife was taking my youngest daughter to school. CID special agents Jack Bell, Jacob Avery, Paul Howard, and approximately ten other agents came (with firearms) to my private residence and yelled "THIS IS THE POLICE; WE HAVE A SEARCH WARRANT, OPEN THE DOOR!" She became hysterical, saying "You aren't going to arrest my mommy and daddy!" (At the same time, the IRS, under the direction of Donald Pearlman, executed a similar raid of Larken Rose's home in Hollywood, Pennsylvania.)

These raids were intolerable, unforgivable, and (as will be shown subsequently) grossly illegal. The IRS also seized over 300 "Theft By Deception" videos, copies of the "Taxable Income" report, and "Theft By Deception" bumper-stickers, all of which are unquestionably within the boundaries of speech protected under the 1st Amendment. In fact, since the video accuses government officials of wrongdoing (actively concealing the very limited scope of the federal income tax), it is precisely the kind of "political speech" that the 1st Amendment was specifically designed to protect.

If the raid on our houses was designed to intimidate us, it has had the opposite effect. We have acted only according to what the law says and will now prove it to everyone. It is time for a showdown: honest public vs. crooked government lawyers. No more hiding, no more games; it is time to "let it all hang out." The evidence in Section 861 and following and the regulations thereunder is irrefutable and will now be brought squarely before the public. Let them examine the evidence in the law and see if they agree that Treasury Department lawyers have for generations knowingly been deceiving the majority of the public into paying federal income taxes that by law they do not owe.

I know the correct answers to the questions you refused to answer, but it is not because of any special knowledge on my part; it is simply from carefully reading the regulations that your department wrote to clarify the correct application of the statutes. The correct answers to my questions lead directly to a conclusion which is contrary to "conventional wisdom," which is why you refused to answer. The regulations in question (26 CFR § 1.861-1 and following) demonstrate that Congress did not tax the domestically-earned incomes of U.S. citizens earned exclusively from within the 50 states (i.e. the income of most Americans). In other words, the taxable sources of income do not include the purely domestic incomes of U.S. citizens.

Apparently you are content to ignore the government ethics and DC bar rules which require you to tell the truth. Perhaps you do not think that anyone is going to enforce them in your case. But when you and your associates are subpoenaed, you will be required to tell the truth under oath. The regulations do mean what they say; logically it could not be otherwise.

For "income" to be taxable it must derive from a taxable "source." The only taxable sources of income are related to foreign and international commerce and you know it. The conclusions of the following sections of the law?as well as decades of predecessor statutes and regulations?show that all of the following must apply for one to have "taxable income from sources within the United States."

TITLE 26 > Subtitle A > Chapter 1:

Subchapter A

Tax imposed on "taxable income."

Subchapter B

"Items" of income that may be taxed.

Subchapter N

Determining the taxable "sources" of income.

This is what must happen in order for there to be taxable domestic income:

1) One must receive a taxable "item" of income (e.g. compensation, interest, rents) (per 26 USC § 61 and following).

2) The "source rules" must categorize the income as domestic income (per 26 USC § 861(a) and 26 CFR §§ 1.861-2 through 1.861-7).

3) The income must derive from a "specific source or activity" which is taxable (per 26 CFR § 1.861-8 and following).

A careful examination of 26 CFR §1.861-8 (as well as over 80 years of predecessor statutes and regulations) shows that taxable sources of income are limited to the following types of commerce:

1) Certain foreign income of U.S. citizens (26 CFR § 1.861-8(f)(1)(i)).

2) The domestic income of foreigners (26 CFR § 1.861-8(f)(1)(iv)).

3) Certain income related to federal possessions (26 CFR § 1.861-8(f)(1)(vi)(E)).

But the odyssey of understanding the truth of the limited scope of the law did not have to be this difficult; the regulations are supposed to explain to the general public in terms that they can understand what the law means. But these regulations were deliberately made to be so complicated that it was virtually certain that the average reader would misunderstand the correct application of the law. What is even more remarkable is that most tax professionals were misled as well, but there are increasing numbers of them who understand that we are correct (that is, the law is correct).

If I had misunderstood these regulations (which is not the case), then it would have been easy enough for you to explain my errors. You should have been able to show exactly how I was wrong using the regulations alone (which is what you must use) to show me where the regulations explain that the incomes that U.S. citizens earn within the 50 states are taxed. The reason you cannot cite the regulations that prove this is simple: no such citations exist and they never have. And if the law does not say it, then the law does not mean it.

A fundamental distinction separates the language of the legislature-the body (such as Parliament or Congress) which institutes a legal text-and the language of the judiciary-the body (the law courts and judges) which interprets and applies that text. A pivotal role is played by the set of constitutional statements, statutes (Acts), and other documents which come from the legislature. In these cases, the words, literally, are law. [The Cambridge Encyclopedia of the English Language, 1995]

The widespread misconception that the judges determine what the law means is ridiculous. Even the Supreme Court agrees that it is almost always the job of Treasury, and not the courts, to determine how the tax laws are to be administered:

"[We] do not sit as a committee of revision to perfect the administration of the tax laws. Congress has delegated to the Commissioner, not to the courts, the task of prescribing "all needful rules and regulations for the enforcement" of the Internal Revenue Code. 26 U.S.C. 7805 (a). In this area of limitless factual variations, "it is the province of Congress and the Commissioner, not the courts, to make the appropriate adjustments."... The role of the judiciary in cases of this sort begins and ends with assuring that the Commissioner's regulations fall within his authority to implement the congressional mandate in some reasonable manner." [U.S. v. Correll, 389 U.S. 299 (1967)]

So, it is your job (and not the job of the courts) to truthfully address issues concerning this portion of the law. No one is challenging the validity or appropriateness of the regulations related to 26 USC § 861, the law is and must be constitutional. The illegal raid on my home now compels me to accelerate my efforts to show the evidence to the public. I will make it crystal clear that you personally were given multiple chances to correctly represent what the law says and has said for over 80 years and you refused to do so.

On the other hand, everyone deserves a second chance (in your case, a fifth chance). I am again enclosing a few specific, direct, obviously reasonable questions about the regulations that tell the reader how to determine their taxable domestic income. Here is your chance to make it right: just answer the four questions.

Unlike the earlier letters, I am making this letter very public, and copying it to numerous government officials, the press, the public at large, and it will be on the Internet. The law does not lie and the Treasury Department cannot be permitted to conceal the truth about the law any longer and attack private citizens and their families who are doing only what the law says. If you have nothing to hide, you must answer the questions!

Sincerely,

Tom Clayton, M.D.

Enclosures:

* Four questions regarding determining taxable income
* IRM (regarding the significance of the regulations)
* 2001-1 I.R.B. Sec. 3.06 (your responsibilities)
* Explanation of the critical issues (Points 1-3)

The Internal Revenue Manual confirms the importance of relying only on evidence of the law, such as the regulations:

"The Internal Revenue Code of 1986 is the primary source of Federal tax law."
[IRM § 4.10.7.2.1]

"The Internal Revenue Code is generally binding on all courts of 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..." [IRM § 4.10.7.2.1.1]

"Income Tax Regulations
The Federal Income Tax Regulations (Regs.) are the OFFICIAL TREASURY DEPARTMENT INTERPRETATION of the Internal Revenue Code" [IRM § 4.10.7.2.3.1]

"Authority of the Regulations
The Service IS BOUND BY THE REGULATIONS." [IRM § 4.10.7.2.3.4]

"Announcements --...Announcements can be relied on to the same extent as Revenue Rulings and Revenue Procedures WHEN THEY INCLUDE SPECIFIC LANGUAGE TO THAT EFFECT."

"Notices -- NOTICES are public ANNOUNCEMENTS issued by the Internal Revenue Service." [IRM § 4.10.7.2.4.1]

"Authority of Rulings and Procedures
Rulings do NOT have the force and effect of Treasury Department Regulations" [IRM § 4.10.7.2.6.1]

"Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position." [IRM § 4.10.7.2.8]

"Certain court cases lend more weight to a position than others. A case decided by the U.S. Supreme Court becomes the law of the land and takes precedence over decisions of lower courts. The Internal Revenue Service MUST follow SUPREME COURT decisions. For examiners, SUPREME COURT decisions have the same weight as the Code. Decisions made by lower courts, such as TAX COURT, DISTRICT COURTS, or Claims Court, are binding on the Service ONLY FOR THE PARTICULAR TAXPAYER and the years litigated. Adverse decisions of lower courts do not require the Service to alter its position for other taxpayers." [IRM § 4.10.7.2.9.8]

Questions submitted to Barbara Felker,
Office of Associate Chief Counsel, Branch 3

By Tom Clayton, MD

6-26-2003

1) Who should and who (if anyone) should not use the rules in 26 USC § 861(b) and the related regulations beginning at 26 CFR § 1.861-8 (in addition to any other pertinent sections) to determine his taxable domestic income?

2) If a U.S. citizen lives and works exclusively within the 50 states, and receives all of his income from within the 50 states, do 26 USC § 861(b) and 26 CFR § 1.861-8 show such income to be taxable?

3) Should one refer to 26 CFR § 1.861-8T(d)(2) to determine whether the "items" of income he receives (e.g. compensation, interest, rents) are exempt for federal income tax purposes?

4) What is the purpose of the list of non-exempt income in 26 CFR § 1.861-8T(d)(2)(iii), and why is the domestic income of the average American not on that list?

Overview:

The following pages will conclusively document and prove the following points:

Point #1: While there are very broadly worded general statutory definitions of "gross income" and "taxable income" (26 USC § 61, 63)), there are also specific rules for determining when domestic income is taxable, and when foreign income is taxable.

Point #2: Under the geographical "source rules" contained in 26 USC § 861 and following, all income is categorized as either domestic income (income from sources within the United States, mainly per Section 861), or as foreign income (income from sources without the United States, mainly per Section 862). (Section 863 and related regulations give rules for segregating "combination" income?i.e. income partly from within and partly from without the U.S.?into domestic and foreign income.) These geographical "source rules" by themselves do not specify when income is taxable and when it is exempt.

Point #3: There are specific rules (mainly in 26 CFR § 1.861-8) describing when domestic income is taxable (non-exempt), and describing when foreign income is taxable. Those rules only show income to be taxable when derived from certain specific sources and activities, all of which are connected to international or foreign commerce (including, among other things, foreigners receiving income from the U.S., and Americans receiving certain foreign income). Those rules do not show the domestic income of most Americans to be taxable.

These points lead inescapably to the conclusion that tens of millions of Americans are incorrectly reporting their domestic income to be taxable, when their income does not legally constitute "taxable income" according to the law itself. While that conclusion is contrary to "conventional wisdom" (conventional ignorance of the exact wording of the law), it is not only proven by the current income tax statutes and regulations, but is solidly confirmed by more than 80 years of predecessor statutes and regulations.

Point #1: While there are very broadly worded general statutory definitions of "gross income" and "taxable income" (26 USC § 61, 63), there are also specific rules for determining when domestic income is taxable and when foreign income is taxable.

Since 1913, Congress has employed a very broadly-worded general definition of "gross income," in order to exert "the full measure of its taxing power" (Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)). However, the Supreme Court has also stated that "It is elementary law that every statute is to be read in the light of the constitution," and that "However broad and general its language, it cannot be interpreted as extending beyond those matters which it was within the constitutional power of the legislature to reach" (McCullough v. Com. Of Virginia, 172 U.S. 102 (1898)).

The existence of Constitutional restrictions on Congress' ability to tax incomes is plainly manifested in the older regulations implementing Section 22 of the 1939 Code (the statute to which the Glenshaw ruling above referred). The older regulations regarding "excluded" income plainly stated that in addition to the statutory exclusions, certain other types of income were exempt from "gross income" because they were, "under the Constitution, not taxable by the Federal Government" (e.g. 26 CFR § 39.22(b)-1 (1956)).

To address the issue of exempt and non-exempt types of commerce, Congress enacted provisions describing when "income from sources within the United States" was taxable and describing when "income from sources without [outside of] the United States" was taxable. Those provisions were found in Section 217 of the Revenue Act of 1921, in Section 119 of the 1939 Code, and are now in Sections 861 and following of the current code.

In 1939, Section 22 generally defined "gross income" and subsection 22(g) stated: "For computation of gross income from sources within and without the United States, see Section 119." Both the House and Senate reports on the 1954 Code stated that "no substantive change" was made when the old Section 119 (1939) became the new Section 861 and following (except for a special rule about nonresident aliens temporarily in the country).

This again demonstrates the connection between the general definition of "gross income" and the specific rules about when domestic income is taxable and when foreign income is taxable. Inexplicably removed from the GPO version of the IRC in 2001, the USCA and USCS printings of the tax code still contain editorially-supplied cross references under Section 61 referring the reader to Section 861 regarding "Income from sources within the United States," and to Section 862 regarding "Income from sources without the United States."

The following table shows the parallels between the 1939 and current codes:
Issue: 1939 Code Current Code
General definition of "gross income" Section 22 Section 61
Link to within/without rules Section 22(g) cross-ref under 61
Gross income from within U.S. Section 119(a) Section 861(a)
Taxable income from within U.S. Section 119(b) Section 861(b)
Gross income from without U.S. Section 119(c) Section 862(a)
Taxable income from without U.S. Section 119(d) Section 862(b)

Since 1954, the regulations implementing Section 861 have begun by saying that Part I (Section 861 and following) and the regulations thereunder "determine the sources of income for purposes of the income tax" (26 CFR § 1.861-1). One of the earliest official statements by the Treasury Department concerning Section 861 confirmed the purpose of those sections (all emphasis mine):
"Rules are prescribed for determination of gross income and taxable income derived from sources within and without the United States, and for the allocation of income derived partly from sources within the United States and partly without the United States or within United States possessions. §§ 1.861-1 through 1.864. (Secs. 861-864; '54 Code.)" [Treasury Decision 6258]

Of course, not all income from all commerce is taxable. The general statutory definition of "gross income" only gives a broad definition and a list of some of the more common "items" of income (compensation, interest, rents, dividends, etc.). That section does not deal with the geographical origin of income, the location of the recipient, or the type of commerce from which the income derives. Since statutory law is written literally, then these issues must be specifically addressed. And that is exactly what the reader finds. The regulations make it clear that those issues are addressed by Section 861 and following, and related regulations. After saying that Section 861 and following, and related regulations, "determine the sources of income for purposes of the income tax," the current regulations implementing Section 861 state the following:

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

(1) Within the United States. The gross income from sources within the United States, consisting of the items of gross income specified in section 861(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See Secs. 1.861-2 to 1.861-7, inclusive, and Sec. 1.863-1. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), the [allowable deductions]. See Secs. 1.861-8 and 1.863-1.

(2) Without the United States. The gross income from sources without the United States, consisting of the items of gross income specified in section 862(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See Secs. 1.862-1 and 1.863-1. The taxable income from sources without the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 862(b) and 863(a), the [allowable deductions]. See Secs. 1.862-1 and 1.863-1.

(3) Partly within and partly without the United States...

(b) Taxable income from sources within the United States. The taxable income from sources within the United States shall consist of the taxable income described in paragraph (a)(1) of this section plus the taxable income allocated or apportioned to such sources, as indicated in paragraph (a)(3) of this section." [26 CFR § 1.861-1]

The point is repeated in a more summarized way in Section 1.861-8 (which the regulation above refers to), which begins as follows:

"Sec. 1.861-8 Computation of taxable income from sources within the United States and from other sources and activities.

(a) In general--(1) Scope. Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the United States after gross income from sources within the United States has been determined. Sections 862(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources without the United States after gross income from sources without the United States has been determined." [26 CFR § 1.861-8]

This language concerning the determination of taxable domestic income and taxable foreign income could hardly be clearer. Some insist that most Americans should ignore Section 861 entirely when determining their taxable domestic income, but nothing in the regulations supports such a conclusion, and there are no citations qualifying or contradicting the clear instructions shown above concerning how to determine one's "taxable income from sources within the United States."

(As an aside, 26 CFR § 1.1-1 says that the tax is imposed upon "taxable income," and that U.S. citizens are taxed on their taxable income whether "from sources within or without the United States." Some use this to try to support the claim that all income?domestic and foreign?is taxable for U.S. citizens, and that citizens therefore should ignore Section 861 and following. Not only does this flawed leap of logic ignore the fact that not all income is "taxable income," but it is directly contradicted by 26 CFR § 1.863-1(c), which says that "[t]he taxpayer's taxable income from sources within or without the United States will be determined under the rules of Secs. 1.861-8 through 1.861-14T.")

To summarize, while Sections 61 and 63 give broadly worded general definitions of "gross income" and "taxable income," Section 861 and its regulations (and sometimes Section 863 as well) describe how to determine taxable domestic income, and Section 862 and its regulations (and sometimes Section 863 as well) describe how to determine taxable foreign income.

Point #2: Under the geographical "source rules" contained in 26 USC § 861 and following, all income is categorized as either domestic income (income from sources within the United States, mainly per Section 861), or as foreign income (income from sources without the United States, mainly per Section 862). (Section 863 and related regulations give rules for segregating "combination" income?i.e. income partly from within and partly from without the U.S.?into domestic and foreign income.) These "source rules" by themselves do not specify when income is taxable and when it is exempt.

Part I of Subchapter N contains the "source rules" which describe which income is considered domestic income ("income from sources within the United States") and which income is considered foreign income ("income from sources without the United States"). Section 861 deals with domestic income, Section 862 deals with foreign income, and Section 863 deals with income which comes partly from inside and partly from outside the U.S. (which, under rules of allocation or apportionment is then segregated into "within" and "without" income).

For different kinds of income, different rules are used to determine whether a certain "item" of income is considered domestic or foreign. For example, whether compensation for services is considered to be domestic income or foreign income is determined based on where the services were performed, not on where the payments come from (see Sections 861(a)(3) and 862(a)(3)). Interest, on the other hand, is generally "sourced" based on the location of the investment which produces the interest (see Sections 861(a)(1) and 862(a)(1)). (Other "source rules" exist for other types of income.) Those geographical "source rules" by themselves do not describe which income is exempt or which is taxable; they merely describe whether income is to be considered domestic income or foreign income.

(As an aside, IRS Notice 2001-40 states that "[n]othing in sections 861 to 865 of the Code limits the gross income subject to United States taxation to foreign-source income," as well as stating that "[t]he source rules do not operate to exclude from U.S. taxation income earned by United States persons from sources within the United States." Both statements are true, though somewhat misleading. The geographical "source rules" do not say that any income is exempt?though of course not all income is taxable?but simply distinguish between domestic ("within") income and foreign ("without") income.)

But again, using the misleading and deceptive technique of implying without actually stating, the unstated implication of that non-legally-binding "Notice" is that the domestic income of all Americans is taxable, because the "source rules" in Section 861 do not say they are exempt. By the same faulty logic, one could argue that all foreign income of foreigners must be taxable, because the "sources rules" in Section 862 do not say that it is exempt. Such a line of reasoning is clearly flawed, and is the result of either a gross misunderstanding of the purpose of Part I of Subchapter N, or an intentional effort to mislead the public.)

As shown above, 26 CFR § 1.861-8 begins by saying that "Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the United States" after domestic "gross income" has been determined. (The section then says that Sections 862(b) and 863(a) generally describe how to determine taxable foreign income.) The so-called "source rules" in Sections 861(a) and 862(a) (and in some cases Section 863 as well) categorize all income (whether taxable or not) as being either domestic or foreign.

Then, in keeping with the general definition of "taxable income" found in 26 USC § 63, Sections 861(b) and 862(b) state that from domestic gross income (861(a)) or foreign gross income (862(a)), one is to subtract the appropriate related deductions, with the remainder constituting taxable domestic income (861(b)) or taxable foreign income (862(b)).

But these general rules are not?and could not be?the final step in determining what is taxable and what is exempt. If these sections were the final step in determining what is taxable, all income?domestic and foreign?received by anyone under any circumstances would be taxable. Besides the obvious fact that this cannot be the case, such a conclusion would nullify any need for "source rules" or for the rest of Subchapter N, or for the rest of the tax code for that matter.

Point #3: There are specific rules (mainly in 26 CFR § 1.861-8) describing when domestic income is taxable (non-exempt), and describing when foreign income is taxable. Those rules only show income to be taxable when derived from certain specific sources and activities, all of which are connected to international or foreign commerce (including, among other things, foreigners receiving income from the U.S., and Americans receiving certain foreign income). Those rules do not show the domestic income of most Americans to be taxable.

The citations provided above under Point #1 show that one's taxable domestic income is to be determined under the rules of 26 USC § 861(b) and 26 CFR § 1.861-8. Those sections?as well as decades of predecessor statutes and regulations?show that all of the following must apply for someone to have "taxable income from sources within the United States":

1) He must receive a taxable "item" of income (e.g. compensation, interest, rents).

2) The "source rules" must categorize the income as domestic income.

3) The income must derive from a "specific source or activity" which is taxable.

While those three criteria are still present in the current regulations, they are far less clear than in the older statutes and regulations. For example, the current Section 861 and following came from Section 217 of the Revenue Act of 1925, which read as follows:

"Sec. 217. (a) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States:

(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including [exceptions]...;

(2) The amount received as dividends (A) from a domestic corporation other than [exceptions]...;

(3) Compensation for labor or personal services performed in the United states;

(4) Rentals or royalties from property located in the United States or from any interest in such property...; and

(5) Gains, profits, and income from the sale of real property located in the United States.

(b) From the items of gross income specified in subdivision (a) there shall be deducted the [allowable deductions]. The remainder, if any, shall be included in full as net income from sources within the United States." [Section 217, Revenue Act of 1925]

This older wording made it clear that all three criteria had to be met (taxable type of commerce, taxable item, and domestic origin) before that section showed income to constitute taxable domestic income.

For example, that section plainly was not saying that compensation for services performed in the U.S. was taxable for all U.S. citizens?only for citizens who received most of their income from within federal possessions (e.g. Guam, Puerto Rico) and who therefore were "entitled to the benefits of section 262."

(Section 232 of the 1925 Act stated that the rules of Section 217 also applied to foreign corporations, and a domestic corporation "entitled to the benefits of section 262," i.e. domestic corporations receiving most of their income from federal possessions (possessions are technically foreign to the United States). This shows that the only income that can be taxed by Congress must in some way either be derived from or related to certain specific types of foreign or international commerce.)

In 1928, the statute (then Section 119) continued to address the items and geographical origin of income, but the first phrase?dealing with the taxable activities or types of commerce?was removed. However, the related regulations remained virtually unchanged, and still made it plain that domestic income was only taxable for those engaged in certain types of commerce: nonresident aliens and foreign corporations doing business in the U.S., and Americans individuals and companies doing business in federal possessions. See Sections 29.119-1, 29.119-9 and 29.119-10 of the 1945 regulations (Regulations 111).

For example, Section 119(a)(1) from 1939?predecessor of 861(a)(1)?generally said that interest from domestic investments was to be considered domestic income (income from sources within the United States), without specifying when such income was taxable. The related regulations, however, stated that such domestic interest was to be "included in the gross income from sources within the United States, of nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations which are entitled to the benefits of section 251" (26 CFR § 29.119-2 (1945)). Clearly domestic interest was not taxable for everyone?only those engaged in the specified types of commerce.

Likewise, Section 29.119-10 of the 1945 regulations said that in the case of those engaged in the specified types of commerce, the types of domestic income listed in Section 119(a) of the statutes was (after deductions) to be included in full as taxable domestic income. Such domestic income was not taxable for all U.S. citizens.

The current regulations under Section 861 while far more voluminous and complicated than their predecessors, lead to the same conclusions. Section 1.861-8 (the primary section for determining one's "taxable income from sources within the United States") only shows income to be taxable when it derives from certain "specific sources or activities," all of which relate to international or foreign commerce.

To have income which is taxable under 26 CFR § 1.861-8, one must receive a "statutory grouping" of gross income, which means income from a specific type of commerce described in one of the various sections throughout Subchapter N. The regulations call those sections "operative sections."

As one example, Section 871(b) of the statutes states that nonresident aliens doing business in the United States "shall be taxable" under Section 1. Section 1.861-8(f)(1)(iv) (shown below) lists Section 871(b) as an "operative section," from which a taxable "statutory grouping" of income can come. So if a nonresident alien receives income from the type of commerce described in that "operative section" (Section 871(b)), then such income is taxable under Section 1.861-8.

As another example, Section 1.861-8(f)(1)(i) (also shown below) addresses foreign tax credits (addressed by Section 901 and following of the statutes), and in that case the "statutory grouping" of gross income is foreign-source income (including that of U.S. citizens). Again, if a citizen engages in that type of commerce (i.e. that "specific source or activity"), then the income he receives from it is taxable under Section 1.861-8.

"The rules contained in this section [26 CFR § 1.861-8] apply in determining taxable income of the taxpayer from specific sources and activities under other sections of the Code, referred to in this section as operative sections. See paragraph (f)(1) of this section for a list and description of operative sections." [26 CFR § 1.861-8(a)(1)]

"[The term 'statutory grouping' means the gross income from a specific source or activity which must first be determined in order to arrive at 'taxable income' from which specific source or activity under an operative section. (See paragraph (f)(1) of this section.)" [26 CFR § 1.861-8(a)(4)]

"The operative sections of the Code which require the determination of taxable income of the taxpayer from specific sources or activities and which gives rise to statutory groupings to which this section [26 CFR § 1.861-8] is applicable include the sections described below.
(i)

Overall limitation to the foreign tax credit?in this case, the statutory grouping is foreign source income...
(ii)

[Reserved]
(iii)

DISC and FSC taxable income? [international, foreign sales corporations]
(iv)

Effectively connected taxable income. Nonresident alien individuals and foreign corporations engaged in trade or business within the United States, under sections 871(b)(1) and 882(a)(1)...
(v)

Foreign base company income?
(vi)

Other operative sections. The rules provided in this section also apply in determining--
(A)

The amount of foreign source items?
(B)

The amount of foreign mineral income?
(C)

[Reserved]
(D)

The amount of foreign oil and gas extraction income?
(E)

The tax base for citizens entitled to the benefits of section 931 and the section 936 tax credit of a domestic corporation...;
(F)

[deals with Puerto Rico tax credits]
(G)

[deals with Virgin Islands tax credits]
(H)

The income derived from Guam by an individual?
(I)

[deals with China Trade Act corporations]
(J)

[deals with foreign corporations]
(K)

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

[deals with countries subject to international boycott]
(M)

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

If one does not engage in any of those activities, he cannot have a "statutory grouping of gross income," and one who has no "statutory grouping" of income has no taxable income under 26 CFR § 1.861-8. Once again, aside from rules about specific federal possessions, international and foreign sales corporations, and certain foreign tax credits, the list of activities includes the same types of commerce which 80 years of predecessor regulations have included:

1) Certain foreign income of U.S. citizens

(1.861-8(f)(1)(i) above).

2) The domestic income of foreigners

(1.861-8(f)(1)(iv) above).

3) Certain income related to federal possessions (1.861-8(f)(1)(vi)(E) above).

U.S. citizens who live and work exclusively within the 50 states and who receive all of their income from the 50 states have no "statutory grouping," and therefore their income is not shown to be taxable by 26 CFR § 1.861-8 (the section for determining one's "taxable income from sources within the United States"). That being the case, it directly follows that the domestic income of most Americans is not taxable (regardless of what the "conventional wisdom" says), particularly in light of the following:

"In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen." [Gould v. Gould, 245 U.S. 151 (1917)]

In addition, Black's Law Dictionary (6th Edition) says that the doctrine of "inclusio unius est exclusio alterius" (the inclusion of one is the exclusion of others) means that "where law expressly describes a particular situation to which it shall apply, an irrefutable inference must be drawn that what is omitted or excluded was intended to be omitted or excluded."

Posted 07/25/03