-----------------------------------------------------------------------
  **TAXABLE\
  INCOME**

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

(Revised: 10/23/2000)

Larken Rose

**www.taxableincome.net**

**[Table of Contents]{.underline}**

1\) Overview Page 1\
2) The Basics Page 2\
3) English vs. Legalese Page 3\
4) Sources of Income Page 3\
5) Determining Taxable Income Page 6\
6) Specific Sources Page 8\
7) Operative Sections Page 10\
8) Summary of Current Law Page 12\
9) Taxing Power Page 12\
10) Constitutional Limits Page 15\
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 31\
16) The Other Side Page 38\
17) Conclusion Page 54

**[1) Overview]{.underline}**

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 United States citizens who live and
work exclusively within the 50 states, and the federal statutes and
regulations 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 even *attempted* to impose such a
tax. Instead, a limited income tax was imposed, and was worded in such a
way to give the impression that it was applicable to the income of most
Americans. However, a more in-depth study of the federal statutes and
regulations reveals that the tax is far more limited in scope than the
public has been led to believe.

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 law. The federal income tax is neither invalid nor unconstitutional.
The tax complies fully with the strict Constitutional limitations on the
power of Congress.

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, most of whom are ignorant
of the truth. Many citizens have been harassed, robbed, and imprisoned
unjustly, 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 fraud in
the history of the United States. (It is more a conspiracy of ignorance
than a conspiracy of secrecy, meaning that most of those involved in the
tax industry, including the IRS and tax professionals, are guilty of
incompetence and ignorance, rather than intentional deceit.)

This report will use the federal statutes and regulations themselves to
document that the scope of the federal income tax is far more limited
than the public generally believes. It will be shown that while many
types of "income" can be taxable, they can be taxable only if they come
from specific taxable activities (a.k.a. "sources"), and it will be
shown that the taxable "sources" apply only to those engaged in
international or foreign commerce, but do *not* apply to United States
citizens living and working exclusively within the 50 states.

All non-italicized comments (in brackets) within a citation in this
report are comments of the author, and do not appear in the text itself.
Also, all [underlined]{.underline} emphasis within citations has been
added by the author.

(After the body of the report, a "*Test For Tax Professionals*" is
included, for those who doubt the conclusions of this report.)

**[2) The Basics]{.underline}**

The laws enacted by Congress through the legislative process are
compiled into [statutes]{.underline} in the 50 "Titles" of the United
States Code. Each "Title" deals with a category of law, and Title 26 is
the federal tax title, often called the "Internal Revenue Code." A
federal agency then has the duty (assigned by Congress) to implement and
enforce the statutes by writing and publishing
[regulations]{.underline}, which explain that agency's 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 (under the Federal Register Act, Title 44 of the United
States Code), and are binding on the federal agencies (including the
IRS). For federal taxes, the Secretary of the Treasury is authorized to
write such 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" in five
different categories (unmarried people, married people filing jointly,
etc.). In each case, the wording reads "*there is hereby imposed on the
[taxable income]{.underline} 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]{.underline} minus the deductions allowed by this chapter...*"
> \[26 USC § 63\]

In other words, when someone determines his "*gross income*," and then
subtracts all allowable deductions, the remainder is "*taxable income*."
So for income to be "*taxable income*," it must first be "*gross
income*." The following section of the statutes gives the general
definition of "*gross income*":

> "*Sec. 61. Gross income defined\
> (a) General definition - ... gross income means all income from
> whatever [source]{.underline} 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 "income tax." Both of these assumptions are provably
incorrect. (The difference and relationship between "items" and
"sources" will be explained below.)

**[3) English vs. Legalese]{.underline}**

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 significantly
different from basic English, and therefore reading one section of the
law alone can be very misleading.

As a good example, 26 USC § 5841 states that "\[t\]*he Secretary* \[of
the Treasury\] *shall maintain a central registry of [all
firearms]{.underline} in the United States which are not in the
possession or under the control of the United States*." The 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 or no
resemblance to the meaning that those words have in common English. For
example, 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]{.underline} derived*." If the
law did not explain what constitutes "*[sources]{.underline} 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]{.underline}**

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]{.underline}
derived*." The phrase "*from whatever source derived*" may initially
appear all-encompassing, but for the specifics about "*income from
[sources]{.underline}*," the reader of the law is repeatedly referred to
Section [861]{.underline} 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:

> "*Sec. 61. Gross income defined\... gross income means all
> [income]{.underline} from whatever [source]{.underline} derived\...*\
> \
> *Income from [sources]{.underline} -\
> [Within]{.underline} the United States, see [section 861]{.underline}
> of this title.\
> Without the United States, see section 862 of this title.*"

So the section which generally defines "gross income" specifically
refers to 26 USC § 861 regarding income from "sources" *within* 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]{.underline} of income\
> Determination, 26 § [861]{.underline} et seq...\
> [Within]{.underline} the U.S., 26 § [861]{.underline}*"

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 interesting indicators. And, as will be shown, they are not
necessary for proving the relevance of 26 USC § 861 anyway.)

Sections 79, 105, 410, 414 and 505 each 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]{.underline} and following, relating to
[determination of sources of income]{.underline})*."

As shown, 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. Not surprisingly, Section 861
is entitled "*Income from sources within the United States*," and the
first two subsections are entitled "*[Gross income]{.underline} from
sources within United States*" and "*[Taxable income]{.underline} 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]{.underline} within or without the United States*." Clearly this
is relevant to a tax on "*[income]{.underline} from whatever
[source]{.underline} 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*," and the courts stated that "*the indexing
obligation is a central and essential feature of this congressional
plan*" (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]{.underline} inside or outside U.S., determination of
[sources]{.underline} of income, 26 CFR 1
([1.861-1]{.underline}\--1.864-8T).*" This is the *[only]{.underline}*
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 of them.

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]{.underline}*." The following is
how these regulations begin:

> "*Sec. 1.861-1 Income from [sources]{.underline} within the United
> States.\
> (a) Categories of income. Part I ([section 861]{.underline} and
> following), subchapter N, chapter 1 of the Code, and the regulations
> thereunder [determine the sources of income for purposes of the income
> tax]{.underline}.*" \[26 CFR § 1.861-1\]

The meaning of this is unmistakable. The "income tax" is imposed on
"*income from whatever [source]{.underline} 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]{.underline}*. Therefore, the meaning of "*income from whatever
[source]{.underline} derived*" (the 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]{.underline}
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]{.underline} firearms*" (in the example above)
expands the legal meaning of the word "*firearm*."

(In the citation "[26 CFR § 1.861-1]{.underline}" 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 is obviously
[not]{.underline} the section which "*determine*\[s\] *the sources of
income for purposes of the income tax*."

(There is a chart at the end of this report showing the outline of Part
I of Subchapter N and related regulations, and showing 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]{.underline}* about the income of United States citizens living
and working exclusively within the United States.

(The title of Part I of Subchapter N (of which 861 is the first
section), as it appears in the Government Printing Office version of the
Code, hints at the limited nature of the tax: "*Source rules and other
general rules relating to [foreign]{.underline} income*." (See page 29
regarding the title of Part I.) Under the usual overly-broad (and
incorrect) interpretation of the legal scope of the term "*gross
income*," this would appear as a contradiction, since "*Income from
sources [within]{.underline} the United States*" (the title of Section
861) would at first glance seem to be the opposite of "*foreign
income*." The specific taxable sources shown later demonstrate that
income from *within* the United States can be taxable only if received
by certain individuals *outside* of the United States, thus making the
income *foreign* income. But while the title of a part of the statutes
may indicate what that part is about, it should be mentioned that 26 USC
§ 7806(b) states that such titles do not change the actual meaning of
the law.)

**[5) Determining Taxable Income]{.underline}**

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]{.underline} 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]{.underline}. (Secs. [861-864]{.underline}; '54 Code.)*"
> \[Treasury Decision 6258\]

The sections which are specifically for determining
*[taxable]{.underline}* income from sources *[within]{.underline}* the
United States are [26 USC § 861(b)]{.underline} of the statutes, and the
corresponding regulations found at [26 CFR § 1.861-8]{.underline}. (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]{.underline} 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)]{.underline} and 863(a),* \[allowable
> deductions\]*. See Secs. [1.861-8]{.underline} 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, items of "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)]{.underline} of the statutes, and the corresponding regulations
in [1.861-8]{.underline}. These regulations are predictably entitled
"*Computation of [taxable income from sources within the United
States]{.underline} and from other sources and activities*," and
reiterate the point:

> "*Sections [861(b)]{.underline} and 863(a) state in general terms [how
> to determine taxable income of a taxpayer from sources within the
> United States]{.underline} after gross income from sources within 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:

> "*Determination of taxable income. The taxpayer\'s taxable income from
> sources [within or without]{.underline} the United States will be
> determined under the rules of Secs. [1.861-8]{.underline} through
> 1.861-14T for determining taxable income from sources
> [within]{.underline} the United States.*"\
> \[26 CFR § 1.863-1(c)\]

(The vast majority of tax professionals *[do not use these
sections]{.underline}* 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]{.underline} the United States*," as well as being the sections
to be used whether the income is from sources within *[or]{.underline}*
without the United States. A similar structure occurs in the regulations
under Section 862 (dealing with income from *outside* of the United
States):

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

Section 1.863-6 of the regulations (dealing with income from within a
foreign country or federal possession) 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)]{.underline} of the statutes and [26 CFR § 1.861-8]{.underline}
of the regulations are to be used to determine the taxable income from
sources within the United States.

**[6) Specific Sources]{.underline}**

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]{.underline}\
> (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]{.underline}:\
> (1) Interest\
> Interest from the United States or the District of Columbia\...\
> (2) Dividends\
> The amount received as dividends\...\
> (3) Personal services\
> Compensation for labor or personal services performed in the United
> States; except\...* \[other items listed\]" (26 USC § 861)

As with Section 61, it is easy to misconstrue this list of "items" as
being a list of "sources," which it is not, and the regulations related
to Section 861 prove this. (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. These same regulations
later specify that Section 861 is about items of income derived from
"*[specific]{.underline} 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]{.underline}.*" \[26
> CFR § 1.861-8(f)(3)(ii)\]

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]{.underline}
sources*."

> *"The rules contained in this section apply in determining [taxable
> income]{.underline} of the taxpayer from [specific
> sources]{.underline} 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]{.underline} source*."

> "*...the term 'statutory grouping' means the gross income from a
> [specific source]{.underline} or activity which [must first be
> determined in order to arrive at 'taxable income]{.underline}' from
> which [specific]{.underline} 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]{.underline} sources*."

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

From these it is clear that the term "*source*" as used in Sections 61
and 861 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]{.underline} of the taxpayer from [specific
> sources]{.underline} and activities under other sections of the Code,
> referred to in this section as operative sections. [See paragraph
> (f)(1) of this section]{.underline} 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."

> *"*\[T\]*he term 'statutory grouping' means the gross income from a
> [specific source]{.underline} 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]{.underline}.)*" \[26 CFR § 1.861-8(a)(4)\]

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]{.underline}
> 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]{.underline}...\
> (ii) \[Reserved\]\
> (iii) DISC and FSC taxable income...* \[international and foreign
> sales corporations\]*\
> (iv) Effectively connected taxable income. [Nonresident alien
> individuals]{.underline} and [foreign corporations]{.underline}
> engaged in trade or business within the United States...\
> (v) [Foreign]{.underline} base company income...*
>
> *(vi) Other operative sections. The rules provided in this section
> also apply in determining\--*\
> *(A) The amount of [foreign]{.underline} source items...\
> (B) The amount of [foreign]{.underline} mineral income...\
> (C) \[Reserved\]\
> (D) The amount of [foreign]{.underline} oil and gas extraction
> income...\
> (E)* (deals with [Puerto Rico]{.underline} tax credits)*\
> (F)* (deals with [Puerto Rico]{.underline} tax credits)*\
> (G)* (deals with [Virgin Islands]{.underline} tax credits)*\
> (H) The income derived from [Guam]{.underline} by an individual...\
> (I)* (deals with [China Trade Act]{.underline} corporations)*\
> (J)* (deals with [foreign]{.underline} corporations)*\
> (K)* (deals with insurance income of [foreign]{.underline}
> corporations)*\
> (L)* (deals with countries subject to [international
> boycott]{.underline})*\
> (M)* (deals with the [Merchant Marine Act]{.underline} 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 foreign under the law.) This
is the only list of "sources" in Part I of Subchapter N, or the
regulations thereunder, which (as the regulations say) "*determine the
sources of income for purposes of the income tax*."

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]{.underline} 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" in order for the
section to apply, and 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]{.underline}*" (namely, 861 and following and
related regulations) apply only to income 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]{.underline} derived*" (the general definition of "*gross
income*") subject to the income tax.

**[7) Operative Sections]{.underline}**

The earlier sections of Title 26 (namely 26 USC 61 and following) deal
with types 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]{.underline} within or without the United States.*" As the title
suggests, this subchapter explains when income from within or without
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]{.underline} and [foreign]{.underline}*

*corporations*" (Part II), "*Income from sources [without]{.underline}
the United States*" (Part III), "*Domestic [international]{.underline}
sales corporations*" (Part IV), and "*[International]{.underline}
boycott determinations*" (Part V). (\* See page 29 regarding 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 "within" and "without," but the *regulations*
thereunder make it clear that these rules apply only to the taxable
activities described throughout the *other* "Parts" of Subchapter N.

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

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]{.underline}* list
the taxable activities all in one place (26 CFR § 1.861-8(f)(1)), the
*[statutes]{.underline}* 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]{.underline} 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]{.underline} 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, nor any "*operative
section*" describing an activity in which a United States citizen living
and working exclusively within the 50 states receives income from within
the 50 states. 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. Other income does not legally constitute "*income from whatever
[source]{.underline} derived*."

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]{.underline} from whatever [store]{.underline} derived, including
the following toys: plastic cars, dolls, yoyos," etc. Then the law
stated that another section "determines the [stores]{.underline} 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]{.underline} criteria would have to be met for it
to legally constitute a "Zonko." For example, a baby bottle bought at
ToyWorld would [not]{.underline} 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]{.underline} 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]{.underline} from whatever [source]{.underline} derived*.")

**[8) Summary of Current Law]{.underline}**

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]{.underline} derived*."\
26 USC §§ 861 - 865, and related regulations, determine the taxable
"*sources of income*."\
26 CFR § 1.861-8 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]{.underline}**

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 obstacle 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]{.underline}.'*"\
> \[Commissioner v. Glenshaw Class Co., 348 U.S. 426 (1955)\]

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. (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 and origin of the
tax remains intact.)

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.]{.underline}*" \[McCullough v. Com. Of Virginia, 172 U.S. 102
> (1898)\]

(Notice that this is not some radical decision, but is considered
"*elementary law*.")

In other words, a statute may be more restricted that 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]{.underline}, 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]{.underline} 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,
that becomes 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]{.underline}\... 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]{.underline} exempt from
> the tax imposed by chapter 1. (See [section 22]{.underline}.)*"

Again, the regulations are admitting that some things *not* exempted by
*statute* are nonetheless exempt from federal 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]{.underline}.
> ([See section 22(b)]{.underline} 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) (referred to in the
previous citation) state:

> "*No other items are exempt from gross income [except]{.underline} (1)
> those items of income which are, [under the Constitution, not taxable
> by the Federal Government]{.underline}; (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]{.underline}*
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]{.underline}**

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]{.underline}. See [U.S. Const., Art.
> I, 8]{.underline}. As James Madison wrote, \"\[t\]he powers delegated
> by the proposed Constitution to the federal government are [few and
> defined]{.underline}. 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 "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]{.underline} option is that there are
*[no]{.underline}* 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]{.underline}* 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]{.underline}* on possessing a firearm near a school, to get around
the constitutional restriction that would otherwise exist.

The Supreme Court seems to agree that this option cannot be. The court
said that they could not allow Congress to control by
*[tax]{.underline}* legislation matters which they have no jurisdiction
to *regulate*. (Congress was attempting, in the following case, to
control "child labor" within the 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]{.underline}, would be to enact a detailed measure of
> complete regulation of the subject and enforce it by a [socalled
> tax]{.underline} 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]{.underline} 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]{.underline}.*"\
> \[Hill v. Wallace, 259 U.S. 44 (1922)\]

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]{.underline} option is that "*the power to lay and collect
taxes*" applies only 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.

> "\[T\]*he act obviously could not impose a tax forbidden by the
> Constitution\... The Constitution broadly empowers Congress not only
> \'to lay and collect taxes, duties, imposts, and excises,\' but also
> '[to regulate commerce with foreign nations]{.underline}.' 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 given *specific*
jurisdiction over "*regulat*\[ing\] *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]{.underline} is a
> burden on that commerce, and amounts to a [regulation]{.underline} 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 *int[er]{.underline}state*
commerce (commerce crossing state lines) and international commerce, it
has no jurisdiction over *int[ra]{.underline}state* 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." But 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]{.underline} 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]{.underline} 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.

Regarding the federal income tax, the courts' position on the matter is
ultimately irrelevant. Regardless of what the courts think Congress
*[could]{.underline}* have taxed, the statutes and regulations show what
Congress *[did]{.underline}* 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." 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]{.underline}, 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]{.underline}* expanded by the
16th Amendment.

**[11) Exempt Income]{.underline}**

The above issue of Constitutional limits on Congress' taxing power is
*[not]{.underline}* 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 believe their jurisdiction to tax
incomes was limited to individuals involved in international and foreign
commerce.

("International commerce" means trade which crosses country borders,
such as income from *within* the United States going to
*[non]{.underline}*resident aliens. "Foreign commerce" means trade which
happens entirely *outside* of the United States, such as a U.S. citizen
working and getting paid in a foreign country, or in a federal
possession.)

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]{.underline} (a) Gross
> income includes in general* \[items of income listed\] *derived from
> any source whatever, [unless exempt from tax by law]{.underline}. See
> sections [22(b)]{.underline} and 116.* \[the regulations under the
> cited section states that some income [not]{.underline} exempted by
> statute is "under the Constitution, not taxable by the Federal
> Government"\] *In general, [income]{.underline}* \[not "gross
> income"\] *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]{.underline} [must be included in their gross
> income]{.underline}; but special provisions are made for [nonresident
> aliens and foreign corporations]{.underline} by sections 211 to 238,
> inclusive, and, in certain cases, by section 251, for citizens and
> domestic corporations [deriving income from sources within
> possessions]{.underline} 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]{.underline} 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]{.underline}\... Profits of citizens, residents, or domestic
> corporations derived from sales in [foreign]{.underline} commerce
> [must be included in their gross income]{.underline}; but special
> provisions are made for [nonresident aliens]{.underline} by section
> 217 and for citizens and domestic corporations deriving at least 80
> per cent of their gross income from sources within
> [possessions]{.underline} of the United States by section 262.*"
> \[Article 31, Regulations 62 (1922)\]
>
> "*Art. 71. What [excluded]{.underline} from gross income.\--Gross
> income excludes the items of income specifically exempted by the
> statute and also certain [other kinds of income]{.underline} by
> statute or [fundamental law]{.underline} 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 is completely absent from
the *statutes* (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 give specifics to the public of what
the law requires, and here they do so. 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 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]{.underline} 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]{.underline}, beyond the clear import of the language
> used, or to enlarge their operations so as to embrace matters [not
> specifically pointed out]{.underline}.*"\
> \[Gould v. Gould, 245 U.S. 151 (1917)\]

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

> 1\) Nonresident aliens and foreign corporations receiving income from
> within the United States.
>
> 2\) Citizens of the United States receiving foreign income.\*
>
> 3\) Citizen or domestic corporation receiving a large percentage of
> income from within federal possessions (who are therefore taxed on
> their income from *within* the United States).

(\* Most of the evidence, including Subchapter N and the regulations
under 26 USC § 861, even 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). Only a few bits of evidence suggest that foreign source
income of citizens living and working *within* the United States could
be taxable.)

**[12) Intent to Deceive]{.underline}**

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 part entitled
"*miscellaneous matters*," buried deep in a confusing jumble of
regulations 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 deceive 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 (referred
to below as "the Great Deception"), 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 period of 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 the Great 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]{.underline}**

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]{.underline}."* \[1945 regulations\]

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]{.underline}*." \[26 CFR § 1.61-1\]

However, no mention of the Constitution remains. The phrase "*unless
excluded by [law]{.underline}*" is now read as being synonymous with
"unless excluded by [statute]{.underline}." 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.

But this 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]{.underline}; but special provisions are made for [nonresident
> aliens]{.underline} and [foreign corporations]{.underline}\... and, in
> certain cases\... for citizens and domestic corporations deriving
> income from sources within [possessions]{.underline} 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]{.underline}... of gross income enumerated in [section
61]{.underline}*." The regulations then refer the reader to "*paragraph
[(d)(2)]{.underline} of this section which provides that a [class of
gross income]{.underline} may include [excluded]{.underline} income*."
In other words, the "*items*" of income listed in Section 61 are not
necessarily taxable, but may be "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]{.underline} means
> any income that is, in whole or in part, [exempt]{.underline},
> excluded, or eliminated for [federal income tax]{.underline}
> purposes*." \[26 CFR § 1.861-8T(d)(2)(ii)\]

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

> "*(iii) Income that is not considered tax exempt. The following items
> are [not]{.underline} considered to be [exempt]{.underline},
> 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]{.underline} taxpayer...\
> (B) In computing the combined taxable income of a DISC or FSC...\
> (C) \...the gross income of a [possessions]{.underline}
> corporation...\
> (D) [Foreign earned income]{.underline} 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]{.underline} income*."
Unless those types of income not listed are exempt, paragraph (d)(2)
does [not]{.underline} 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 lists foreign income of citizens, income
from within possessions, and income of foreigners. 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]{.underline}* version showed the limitations of the
law in "step one" (the definition of "gross income"), the
*[current]{.underline}* 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]{.underline} and [foreign corporations]{.underline}*" and
"*citizens and domestic corporations deriving income from sources within
[possessions]{.underline} of the United States*." At the same time the
regulations under 119 mention "*[nonresident alien
individuals]{.underline}, [foreign corporations]{.underline}, and
citizens of the United States or domestic corporations entitled to the
benefits of [section 251]{.underline}.*")

In 1954, the admission of the limited application vanished from the
regulations defining "gross income," but remained in the regulations
under 26 USC § 861, and (to maintain literal accuracy) the regulations
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 (but certainly 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." When
the statutes were being rearranged and renumbered, Section 119 of the
1939 Code became all of 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]{.underline}\
§ 862. Income from sources without the United States\
§ 863. Items not specified in section 861 or 862\
§ 864. Definitions*

*[These sections]{.underline}, which are identical with sections 861-864
of the House bill, [correspond to section 119 of the 1939
Code]{.underline}. [No substantive change is made]{.underline}, 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]{.underline}, and
> citizens of the United States or domestic corporations [entitled to
> the benefits of section 251]{.underline}* \[this applies only to those
> who receive a large percentage of their income from within federal
> [possessions]{.underline}\] *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]{.underline} 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]{.underline} 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 old regulations under Section 119
states that the Code (specifically Section 119) 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]{.underline} and [foreign
> corporations]{.underline} 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]{.underline},
> only if and to the extent provided in sections 213, 215, 232, 233, and
> 251.*
>
> *Sec. 29.119-10. Apportionment of deductions.\
> From the [items]{.underline} 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]{.underline} and [foreign corporations]{.underline}
> engaged in trade or business within the United States, be deducted*
> \[allowable deductions\]*. The remainder shall be [included in full as
> net income]{.underline} from sources within the United States*..."

(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:

> "*(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]{.underline}.*" \[26
> CFR § 1.861-8(f)(3)(ii)\]

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. (Three other sections of the regulations
say that "*specific sources*" means the taxable activities described in
the "operative sections" throughout Subchapter N.) The regulations prior
to 1954 were short, plain, and clear about who they applied to. (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]{.underline}**     | **[AFTER 1954]{.underline}**      |
|                                   |                                   |
| 29.119-10 Apportionment of        | 1.861-8 Computation of Taxable    |
| deductions.                       | Income from Sources Within the    |
|                                   | United States                     |
| [From the items specified in      |                                   |
| sections 29.119-1 to              | \(a\) General. [From the items of |
| 29.119-6]{.underline}, inclusive, | gross income specified in §§      |
| as being derived specifically     | 1.861-2 to 1.861-7]{.underline},  |
| from sources within the United    | inclusive, as being income from   |
| States there shall, [in the case  | sources within the United States  |
| of nonresident alien individuals  | there shall be deducted the       |
| and foreign corporations engaged  | expenses, losses, and other       |
| in trade or business within the   | deductions properly apportioned   |
| United States]{.underline}, be    | or allocated thereto and a        |
| deducted the expenses, losses,    | ratable part of any other         |
| and other deductions properly     | expenses, losses, or deductions   |
| apportioned or allocated thereto  | which cannot definitely be        |
| and a ratable part of any other   | allocated to some item or class   |
| expenses, losses, or deductions   | of gross income. [The remainder,  |
| which cannot definitely be        | if any, shall be included in full |
| allocated to some item or class   | as taxable income from sources    |
| of gross income. [The remainder   | within the United                 |
| shall be included in full as net  | States]{.underline}. The ratable  |
| income from sources within the    | part is based upon the ratio of   |
| United States]{.underline}. The   | gross income from sources within  |
| ratable part is based upon the    | the United States to the total    |
| ratio of gross income from        | gross income                      |
| sources within the United States  |                                   |
| to the total gross income.        | Example. A [taxpayer]{.underline} |
|                                   | engaged in trade or business      |
| Example. A [nonresident alien     | receives for the taxable year     |
| individual]{.underline} engaged   | gross income from all sources in  |
| in trade or business within the   | the amount of \$180,000,          |
| United States whose taxable year  | one-fifth of which (\$36,000) is  |
| is the calendar year derived      | from sources within the United    |
| gross income from all sources for | States, computed as follows:      |
| 1942 of \$180,000, including      |                                   |
| there-in:                         | Interest on bonds of a domestic   |
|                                   | corporation \$9,000\              |
| Interest on bonds of a domestic   | Dividends on stock of a domestic  |
| corporation \$9,000\              | corporation 4,000\                |
| Dividends on stock of a domestic  | Royalty for the use within the    |
| corporation 4,000\                | United States of patents 12,000\  |
| Royalty for the use of patents    | Gain from sale of real property   |
| within the United States 12,000\  | \[in U.S.\] 11,000\               |
| Gain from sale of real property   | \-\-\-\-\-\-\--\                  |
| \[in U.S.\] 11,000\               | Total 36,000                      |
| \-\-\-\-\-\-\-\--\                |                                   |
| Total 36,000                      | \[remainder of example omitted\]  |
|                                   |                                   |
| \[remainder of example omitted\]  |                                   |
+-----------------------------------+-----------------------------------+

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]{.underline}*. 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]{.underline}* in 1954, but some key phrases in the
regulations were removed so as to make the truth less obvious. A similar
disappearance of a phrase occurred at the same time in the section of
regulations dealing with the "item" of "interest." The wording remained
*identical* except for the disappearing phrase.

+-----------------------------------+-----------------------------------+
| **[BEFORE 1954]{.underline}**     | **[AFTER 1954]{.underline}**      |
|                                   |                                   |
| 29.119-2. Interest.               | 1.861-2 Interest.                 |
|                                   |                                   |
| There shall be included in the    | \(a\) General. There shall be     |
| gross income from sources within  | included in the gross income from |
| the United States, [of            | sources within the United States  |
| nonresident alien individuals,    | all interest received or accrued, |
| foreign corporations, and         | as the case may be, from the      |
| citizens of the United States, or | United States, any Territory, any |
| domestic corporations which are   | political subdivision of a        |
| entitled to the benefits of       | Territory, or the District of     |
| section 251]{.underline}, all     | Columbia, and interest on bonds,  |
| interest received or accrued, as  | notes, or other interest-bearing  |
| the case may be, from the United  | obligations of residents of the   |
| States, any Territory, any        | United States, whether corporate  |
| political subdivision of a        | or otherwise, except\...          |
| 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]{.underline}**

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]{.underline}**

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. But 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 "items" of income (interest, dividends, compensation for labor,
rents and royalties, etc.). 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]{.underline}, the
following items of gross income shall be treated as income from sources
within the United States*:\..."

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

**[1921 Code]{.underline} [1939 Code]{.underline} [Current
Code]{.underline}**

+-----------------------+-----------------------+-----------------------+
| Net income of         | Sec. 119. Income from | Sec. 861. Income from |
| nonresident alien     | sources within United | sources within the    |
| individuals           | States                | United States         |
|                       |                       |                       |
| Sec. 217. (a) That    | \(a\) Gross income    | \(a\) Gross income    |
| [in the case of a     | from sources in       | from sources within   |
| nonresident alien     | United States.        | United States         |
| individual or of a    |                       |                       |
| citizen entitled to   | *The following items  | *The following items  |
| the benefits of       | of gross income shall | of gross income shall |
| section               | be treated as income  | be treated as income  |
| 262]{.underline},     | from sources within   | from sources within   |
| *the following items  | the United States*:   | the United States*:   |
| of gross income shall |                       |                       |
| be treated as income  | \(1\) Interest\...\   | \(1\) Interest\...\   |
| from sources within   | (2) Dividends\...\    | (2) Dividends\...\    |
| the United States*:   | (3) Personal          | (3) Personal          |
|                       | services -            | services -            |
| \(1\) Interest\...\   | Compensation for      | Compensation for      |
| (2) The amount        | labor or personal     | labor or personal     |
| received as           | services performed in | services performed in |
| dividends\...\        | the United            | the United            |
| (3) Compensation for  | States\...\           | States\...\           |
| labor or personal     | (4) Rentals and       | (4) Rentals and       |
| services performed in | royalties\...\        | royalties\...\        |
| the United States.\   | (5) Sale of real      | (5) Disposition of    |
| (4) Rentals or        | property\...\         | United States real    |
| royalties\...\        | (6) Sale of personal  | property              |
| (5) Gains, profits,   | property\...          | interest\...\         |
| and income from the   |                       | (6) Sale or exchange  |
| sale of real          | \- - - - - - - - -    | of inventory          |
| property\...          |  - - - - - - - - - -  | property\...\         |
|                       | - - - - - - - - - - - | (7) Amounts received  |
| \- - - - - - - - -    | -                     | as underwriting       |
|  - - - - - - - - - -  |                       | income\...\           |
| - - - - - - - - - - - | \(b\) Net income from | (8) Social security   |
| -                     | sources in United     | benefits\...          |
|                       | States                |                       |
| \(b\) From the items  |                       | \- - - - - - - - -    |
| of gross income       | From the items of     |  - - - - - - - - - -  |
| specified in          | gross income          | - - - - - - - - - - - |
| subdivision (a) there | specified in          | -                     |
| shall be deducted     | subsection (a) of     |                       |
| \[allowable           | this section there    | \(b\) Taxable income  |
| deductions\]. The     | shall be deducted     | from sources within   |
| remainder, if any,    | \[allowable           | United States         |
| [shall be included in | deductions\]. The     |                       |
| full as net income    | remainder, if any,    | From the items of     |
| from sources within   | [shall be included in | gross income          |
| the United            | full as net income    | specified in          |
| States]{.underline}.  | from sources within   | subsection (a) as     |
|                       | the United            | being income from     |
|                       | States]{.underline}.  | 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     |
|                       |                       | St                    |
|                       |                       | ates]{.underline}\... |
+-----------------------+-----------------------+-----------------------+
| \(c\) The following   | \(c\) Gross income    | Sec. 862. Income from |
| items of gross income | from sources          | sources               |
| shall be treated as   | [without]{.underline} | [without]{.underline} |
| income from sources   | United States         | the United States     |
| [without]{.underline} |                       |                       |
| the United            | The following items   | \(a\) Gross income    |
| States:\...           | of gross income shall | from sources without  |
|                       | be treated as income  | United States         |
| \- - - - - - - - -    | from sources          |                       |
|  - - - - - - - - - -  | [without]{.underline} | The following items   |
| - - - - - - - - - - - | the United            | of gross income shall |
| -                     | States:\...           | be treated as income  |
|                       |                       | from sources          |
| \(d\) From the items  | \- - - - - - - - -    | [without]{.underline} |
| of gross income       |  - - - - - - - - - -  | the United            |
| specified in          | - - - - - - - - - - - | States:\...           |
| subdivision (c) there | -                     |                       |
| shall be deducted     |                       | \- - - - - - - - -    |
| \[allowable           | \(d\) Net income from |  - - - - - - - - - -  |
| deductions\]. The     | sources without the   | - - - - - - - - - - - |
| remainder, if any,    | United States - From  | -                     |
| shall be treated in   | the items of gross    |                       |
| full as net income    | income specified in   | \(b\) Taxable income  |
| from sources          | subsection (c) of     | from sources without  |
| [without]{.underline} | this section there    | United States - From  |
| the United States.    | shall be deducted     | the items of gross    |
|                       | \[allowable           | income specified in   |
|                       | deductions\]. The     | subsection (a) there  |
|                       | remainder, if any,    | shall be deducted     |
|                       | shall be treated in   | \[allowable           |
|                       | full as net income    | deductions\]. The     |
|                       | from sources          | remainder, if any,    |
|                       | [without]{.underline} | shall be treated in   |
|                       | the United States.    | full as taxable       |
|                       |                       | income from sources   |
|                       |                       | [without]{.underline} |
|                       |                       | the United States\... |
+-----------------------+-----------------------+-----------------------+
| \(e\) Items of gross  | \(e\) Income from     | Sec. 863. Special     |
| income, expenses,     | sources partly within | rules for determining |
| losses and            | and partly without    | source                |
| deductions, other     | United States         |                       |
| than those specified  |                       | \(a\) Allocation      |
| in subdivisions (a)   | Items of gross        | under regulations     |
| and (c), shall be     | income, expenses,     |                       |
| allocated or          | losses and            | Items of gross        |
| apportioned to        | deductions, other     | income, expenses,     |
| sources within or     | than those specified  | losses, and           |
| without the United    | in subsections (a)    | deductions, other     |
| States\...            | and (c) of this       | than those specified  |
|                       | section, shall be     | in sections 861(a)    |
|                       | allocated or          | and 862(a), shall be  |
|                       | apportioned to        | allocated or          |
|                       | sources within or     | apportioned to        |
|                       | without the United    | sources within or     |
|                       | States\...            | without the United    |
|                       |                       | States\...            |
|                       | \(f\) Definitions\... |                       |
|                       |                       | 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 regulations under the *current* 26
USC § 863 should say (regarding sales of natural resources),
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]{.underline}(e) of the [Revenue Act of 1921]{.underline}, 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 Code 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]{.underline}\...*"
> \[Internal Revenue Manual, (4.2)7.2.1.1\]

When the phrase disappeared from the statutes after 1921, the
application of the law did not change. What changed was how easily the
truth could be found.

**[1978]{.underline}**

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]{.underline}*." 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]{.underline}* page in length to more than *[forty]{.underline}*
pages, with the appearance of the current maze of "*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]{.underline}**

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]{.underline} 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]{.underline}" for "[Determination of
> sources of income]{.underline}" 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]{.underline}, table of cross
> references, or similar outline, analysis, or [descriptive
> matter]{.underline} relating to the contents of this title be [given
> any legal effect]{.underline}.*"\
> \[26 USC § 7806(b)\]

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]{.underline} from whatever [source]{.underline} 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]{.underline} within or
without the United States*"\
Part I, "*[Determination of sources of income]{.underline}*"\
Section 861, "*[Income from sources]{.underline} within the United
States*"\
861(a) "*Gross [income from sources]{.underline} within United States*"\
861(b) "*Taxable [income from sources]{.underline} within United
States*"

When the title of Part I was changed in the GPO version, and the new
title stated that the part was about "*[foreign]{.underline} 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.

But 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]{.underline}**

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]{.underline}*," 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]{.underline}**

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]{.underline}**

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]{.underline} 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]{.underline} a tax on
> [income]{.underline} as such. It is an excise tax with respect to
> [certain activities and privileges]{.underline} 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]{.underline} from whatever
[source]{.underline} 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]{.underline} of
income [for purposes of the income tax]{.underline}*" all apply only to
these same "*specific sources and activities*," which are all related to
international or foreign commerce.

**[Section 306]{.underline}**

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]{.underline} 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)]{.underline}, 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]{.underline}, 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)]{.underline}, 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]{.underline}**

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]{.underline} ([as defined
> in section 911(d)(2)]{.underline})...*" \[26 USC § 1(g)\]

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]{.underline}\
> (A) In general\
> The term \"[earned income]{.underline}\" 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]{.underline} the United
States\
Subpart B \-- Earned income of citizens or residents of United States\
[Sec. 911]{.underline}. Citizens or residents of the United States
[living abroad]{.underline}*

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 define "gross income" and "taxable
income"). It is also telling that the definition itself (even 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]{.underline}, any community income
> of such individuals for the calendar year shall be treated in
> accordance with the [rules provided by section 879(a)]{.underline}.*"
> \[26 USC § 66\]

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]{.underline} individuals\
> (a) General rule - In the case of a married couple 1 or both of whom
> are [nonresident alien]{.underline} 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]{.underline}**

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]{.underline} Income\
> \
> You [must report]{.underline} unearned income, such as interest,
> dividends, and pensions, from sources [outside the United
> States]{.underline} unless exempt by law or a tax treaty. You [must
> also report]{.underline} earned income, such as wages and tips, from
> sources [outside the United States]{.underline}.\
> \
> 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]{.underline} income from
> sources [outside]{.underline} 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]{.underline} 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]{.underline} 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]{.underline} commerce [must
be included in their gross income]{.underline}*" (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]{.underline}**

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]{.underline}*, 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]{.underline} 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 that 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]{.underline}, who are in charge of the property owned or
> business carried on [within]{.underline} the United States, shall make
> a full and complete return of the income therefrom on [Form
> 1040]{.underline}, revised, and shall pay any and all tax, normal and
> additional, assessed upon the income received by them in behalf of
> their [nonresident alien]{.underline} 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]{.underline}, the fiduciary shall render a return
> on Form 1041, revised, and a personal return on Form 1040, revised,
> for each [nonresident alien]{.underline} 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]{.underline}**

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]{.underline} 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]{.underline} 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]{.underline} connected with
> United States business...\
> (c) Allowance of deductions and credits\
> (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]{.underline} rules and certain other
> [international]{.underline} 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 bulletin has 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]{.underline}*
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]{.underline} and [nonresident aliens]{.underline} 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]{.underline}, [foreign]{.underline} taxpayers deriving income
> from sources [within]{.underline} 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]{.underline}**

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]{.underline}**

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]{.underline} 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]{.underline} from [sources]{.underline} -\
> [Within]{.underline} the United States, see [section 861]{.underline}
> 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]{.underline} of income\
> [Determination]{.underline}, 26 § [861]{.underline} et seq...\
> [Within]{.underline} the U.S., 26 § [861]{.underline}*"

(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]{.underline} the United States.*" The first
subsection (26 USC 861(a)) is entitled "*[Gross income]{.underline} from
sources within United States*," and it states what "*shall be treated as
[income from sources]{.underline} 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]{.underline} 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]{.underline}*" in the Code of Federal Regulations (as did the
related *statutes* up until 1988).

> "*Sec. 1.861-1 [Income from sources within the United
> States]{.underline}.\
> (a) Categories of income. Part I ([section 861 and
> following]{.underline}), subchapter N, chapter 1 of the Code, [and the
> regulations thereunder]{.underline} [determine the sources of income
> for purposes of the income tax]{.underline}\... The statute provides
> for the following three categories of income:\
> (1) [Within]{.underline} the United States. [The gross income from
> sources within the United States, consisting]{.underline}*[\[\*\] *of
> the items of gross income specified in section 861(a)*]{.underline}
> *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]{.underline}, in the case of such income,
> [shall be determined by deducting therefrom, in accordance with
> sections 861(b)]{.underline} and 863(a), 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. See
> [Secs. 1.861-8]{.underline} and 1.863-1.\
> (2) [Without]{.underline} the United States\...\
> (3) [Partly within and partly without]{.underline} 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]{.underline} plus the taxable income allocated or apportioned
> to such sources, as indicated in paragraph (a)(3) of this section.*"
> \[26 CFR § 1.861-1\]

( \* While this is what the regulation says, it was probably intended to
say "consists," which would make it into a proper sentence, instead of a
fragment.)

While it is true that some people have to "apportion" certain income
which comes partly from inside and partly from outside the states (under
26 USC § 863), there is no indication at all that 26 USC § 861 is to be
used to determine taxable income from within the states *only* in these
unusual circumstances. In fact, such an "interpretation" (or more
accurately, "baseless assertion") is specifically shown to be incorrect
in another section of the regulations:

> "*(ii) Relationship of sections [861]{.underline}, 862, 863(a), and
> 863(b)\... [Each of these four provisions applies
> independently]{.underline}\...* \[T\]*wo or more of these provisions
> [may]{.underline} have to be applied at the same time to determine the
> proper allocation and apportionment of a deduction.*" \[26 CFR §
> 1.861-8(f)(3)(ii)\]

If the question is only about income from "sources" *within* the United
States, 26 USC § 861 and its regulations apply. If the question is only
about income from "sources" *outside* the United States, 26 USC § 862
and its regulations apply. If the question is about income that comes
partly from within and partly from without the United States, 26 USC §
863, and possibly 861 and/or 862 as well, and related regulations apply.
The claim that 26 USC § 861 only applies in the last scenario is simply
without merit.

(The tax professionals are aware that 26 USC § 861 *would* apply to a
nonresident alien getting income from *within* the United States, even
if he received no income from *outside* of the states, thus destroying
any claim that only those who have both "within" *and* "without" income
should be looking at the section.)

One thing the tax professionals may cite to try to prove that most
people should ignore Section 861 is the title of Part I of Subchapter N
(the first section of which is 26 USC § 861). In 1988, the title was
changed from "*Determination of sources of income*" to "*Source rules
and other general rules relating to [foreign]{.underline} income*" in
the Government Printing Office version of the Code. (See page 29
regarding the title of Part I.) The claim is that "if you don't have
foreign income, you shouldn't be looking there."

While the precise meaning of the new title is debatable, there is a more
basic reason to dismiss such an argument. 26 USC § 7806(b) states that
titles have *no* legal effect; only the actual text is the law. When the
title of Part I changed in 1988, the text of the law did *not* change.
(In addition, anyone relying on the title alone would have to argue that
before 1988, when the title was changed, the tax only applied to those
engaged in international or foreign commerce.) The actual text of the
sections, as well as the related regulations, shows no indication that
most people should ignore this part.

Regardless of the title, there is even *more* evidence (in addition to
what is above) that 26 USC § 861(b), and the corresponding regulations
found in 26 CFR § 1.861-8, are the specific sections to be used for
determining taxable income from sources within the United States.

> "*[Sec. 1.861-8]{.underline} [Computation of taxable income from
> sources within the United States]{.underline} \*and from other sources
> and activities.\
> (a) In general\--(1) Scope. Sections [861(b)]{.underline} and 863(a)
> state in general terms [how to determine taxable income of a taxpayer
> from sources within the United States]{.underline} after gross income
> from sources within the United States has been determined.*" \[26 CFR
> § 1.861-8\]

(\* The portion of the title of 1.861-8 after the asterisk (above) was
added in 1978.)

> "*Determination of taxable income. The taxpayer\'s taxable income from
> sources [within or without]{.underline} the United States will be
> determined under the rules of Secs. [1.861-8]{.underline} through
> 1.861-14T for determining taxable income from sources
> [within]{.underline} the United States.*"\
> \[26 CFR § 1.863-1(c)\]

In the previous citation, the regulations prove the point *twice* in one
sentence. First it says that taxable income from within
*[or]{.underline}* without is to be determined under the cited sections,
which means that one does not need income from within *and* without for
the section to apply. Then in the second half of the sentence, it
specifically refers to the cited sections (26 CFR § 1.861-8 and
following) as the sections "*for determining taxable income from sources
[within]{.underline} the United States*." And additional citations
agree.

> *"[Sec. 1.861-8]{.underline}* \[is the section\] *for determining the
> taxable income from sources [within]{.underline} the United States.*"
> \[26 CFR § 1.862-1\]

If not for the previous citations, some might try to bicker over the
correct legal application, based on the use of the word "and" in the
following two citations. But in light of the above, they just add *more*
support to the relevance of 26 USC § 861.

> "*Secs. [1.861-1 to 1.863-5]{.underline},* \[give the principles\]
> *for determining the gross and the taxable income from sources within
> [and]{.underline} without the United States.*" \[26 CFR § 1.863-6\]
>
> "*Rules are prescribed for determination of gross income and taxable
> income derived from sources within [and]{.underline} without the
> United States\... §§ [1.861-1 through 1.864]{.underline}. (Secs.
> [861-864]{.underline}; '54 Code.)*" \[Treasury Decision 6258\]

Again, there is *[no basis]{.underline}* for any assertion that 26 USC §
861(b) and 26 CFR § 1.861-8 should *not* usually be used to determine
taxable income from sources within the United States. And there is no
support for the claim that most people should *not* examine 26 USC § 861
to determine what constitutes "income from sources within the United
States."

(Some reading the general wording of 26 USC § 861 may get an incorrect,
overly-broad impression of which income is taxable, and that issue is
dealt with below.)

This general "pay no attention" position is the result of backwards
logic. The tax professionals start with the incorrect *assumption* that
most people receive taxable income. Therefore, when they discover that
26 USC § 861 and the related regulations do *[not]{.underline}* show
most income to be taxable, they incorrectly conclude (based on a false
premise) that that section should not be used by most people, even
though the statutes and regulations clearly state otherwise. This error
is usually stated as "that section doesn't *apply* to you." The
following analogy demonstrates the logical flaw with this half-truth.

As shown above (see page 3), one section of the statutes of Subtitle E
states that the Secretary shall maintain a central registry of "*all
firearms*." But a separate section defines the term "*firearm*," and the
legal meaning is far more restrictive than the meaning of the word in
common English. For example, a basic hunting rifle is obviously a
"firearm" in common English, but is *[not]{.underline}* considered a
"firearm" for purposes of Section 5841. An individual who owns a hunting
rifle could, therefore, correctly state that Section 5841 does not
impose any obligation on him.

Now imagine someone arguing to him the following: "The definition of
'firearms' [doesn't apply]{.underline} to your firearm, so you should
just ignore the definition in Section 5845. Just look at Section 5841,
where it says 'all firearms.' That includes your rifle." Such an
argument would be ludicrous, and yet this is precisely the logic (or
lack of logic) used by the tax professionals regarding 26 USC § 861.
Section 61 defines "*gross income*" generally as "*all income from
whatever [source]{.underline} derived*," and Part I of Subchapter N
(Section 861 and following) and related regulations "*determine the
[sources]{.underline} of income [for purposes of the income
tax]{.underline}*." Many tax professionals will argue that Section 861
"[doesn't apply]{.underline}" to most people, and therefore most readers
should *ignore* the sections which "*determine the sources of income for
purposes of the income tax*." This is entirely illogical, but it is the
only way for the tax professionals to avoid admitting their monumental
error. Contrary to the evidence, they continue to claim that most
citizens receive taxable income.

The following shows yet another link between Section 61 and Section 861,
by specifically stating that the "items" of income listed in *Section
61* can include income which is *not taxable*.

> A "class of gross income" "*may consist of one or more items\... of
> gross income enumerated in [section 61]{.underline}.*" \[26 CFR §
> 1.861-8(a)(3)\]
>
> "\[P\]*aragraph [(d)(2)]{.underline} of this section\... provides that
> a [class of gross income]{.underline} may include
> [excluded]{.underline} income.*" \[26 CFR § 1.861-8(b)(1)\]
>
> (26 CFR § 1.861-8[(d)(2)]{.underline} redirects the reader to 26 CFR §
> 1.861-[8T(d)(2)]{.underline}.)
>
> "*For purposes of this section, the term exempt income means any
> income that is, in whole or in part, [exempt]{.underline}, excluded,
> or eliminated for [federal income tax]{.underline} purposes*."\
> \[26 CFR § 1.861-[8T(d)(2)]{.underline}(ii)\]
>
> "*(iii) Income that is not considered tax exempt. The following items
> are [not]{.underline} considered to be [exempt]{.underline},
> eliminated, or excluded income\...*\
> *(A) In the case of a [foreign]{.underline} taxpayer...\
> (B) In computing the combined taxable income of a DISC or FSC...\
> (C) \...the gross income of a [possessions]{.underline}
> corporation...\
> (D) [Foreign earned income]{.underline}...*" \[26 CFR §
> 1.861-8T(d)(2)(iii)\]

The link between 26 USC § 61 and 26 USC § 861 (regarding income from
"sources" *within* the United States) is solidified by examining the
regulations under the predecessor to 26 USC § 61, namely, Section 22(a)
of the Internal Revenue Code of 1939. In defining "gross income," the
older regulations state that it means all income, except income which is
exempted by statute, or income which is "*under the Constitution, not
taxable by the Federal Government*." Then the regulations gave a list of
*non-exempt* income which is very similar to the above citation (from
the current regulations).

> *"Profits of citizens, residents, or domestic corporations derived
> from sales in [foreign]{.underline} commerce [must be included in
> their gross income]{.underline}; but special provisions are made for
> [nonresident aliens]{.underline} and [foreign
> corporations]{.underline}\... and, in certain cases\... for citizens
> and domestic corporations deriving income from sources within
> [possessions]{.underline} of the United States.*" \[26 CFR §
> 39.22(a)-1 (1945)\]

Notice, this is under the predecessor of Section [61]{.underline}, *not*
Section [861]{.underline}. But not surprisingly, the regulations under
the predecessor of 26 USC § 861 (Section 119 of the 1939 Code) listed
the *exact* same activities relating to income from *within* the United
States: "*[Nonresident alien individuals]{.underline}, [foreign
corporations]{.underline}, and citizens of the United States or domestic
corporations [entitled to the benefits of section 251]{.underline}*"
(only those with a large amount of income from within federal
possessions were "*entitled to the benefits of section 251*"). So
denying the current relevance of Section 861 requires one to also ignore
the legislative and regulatory history.

Except for the general definition of "gross income" ("*income from
whatever source derived*"), the main citation used by tax professionals
to justify their misinterpretation of the law is found in the
regulations related to Section 1 of the statutes, which imposes the tax.

> "*Sec. 1.1-1 Income tax on individuals.\
> (a) General rule. (1) Section 1 of the Code imposes an income tax on
> the [income of every individual]{.underline} who is a citizen or
> resident of the United States\... The tax imposed is upon [taxable
> income]{.underline} (determined by subtracting the allowable
> deductions from [gross income]{.underline})\...\
> (b) Citizens or residents of the United States liable to tax. In
> general, [all citizens of the United States]{.underline}, wherever
> resident, and all resident alien individuals [are liable to the income
> taxes imposed by the Code]{.underline} whether the income is received
> [from sources within or without the United States]{.underline}.*" \[26
> CFR § 1.1-1\]

This section by itself certainly gives the appearance that the tax
applies to most United States citizens. However, when one understands
what the terms used in this section legally mean, the conclusion is
quite different.

First, the tax does *[not]{.underline}* apply to the income of every
citizen, only to the "*[taxable income]{.underline}*" of every citizen.
Every tax professional knows that it is very possible to have income (in
some cases millions of dollars of income) without having any *taxable*
income. And the section itself admits that the tax applies only to
"taxable income," which is generally "gross income" minus deductions.

But the more significant statement is found in 26 CFR § 1.1-1(b), which
states that citizens are taxed on their income, whether "*[from sources
within or without the United States]{.underline}*." This is absolutely
*true*, but easy to misconstrue. Because "*Section 861 and following\...
and the regulations thereunder, determine the [sources]{.underline} of
income [for purposes of the income tax]{.underline}*" (26 CFR §
1.861-1), the meaning of income "*from [sources]{.underline} within or
without*" the U.S. is already dependent upon 26 USC § 861 and following.
But there are several more specific points regarding the legal meaning
of "*[from sources within or without the United States]{.underline}*."

If a citizen is taxed on his income, whether "*from sources within or
without the United States*," it would certainly be logical to examine
that portion of the law which elaborates on "*Tax based on income [from
sources within or without the United States]{.underline}*." That is the
title of Subchapter N of the Code. Subchapter N *does* describe
situations in which citizens can have taxable income from "within" or
"without" the United States, or both. However, conspicuously absent from
Subchapter N is any mention of the income of most Americans. Citizens
can have taxable income from sources *outside* of the United States
under 26 USC § 911. Under 26 USC § 931, citizens are also taxable on
income received *within* the United States, if they first receive a
large portion of their income from within federal
*[possessions]{.underline}*.

> "*In the case of a citizen of the United States or a domestic
> corporation satisfying the following conditions, gross income means
> only [gross income from sources within the United
> States]{.underline}\-- (i) If 80 percent or more of the gross
> income\... was derived from sources within a [possession]{.underline}
> of the United States, and (ii) If 50 percent or more of the gross
> income\... was derived from the active conduct of a trade or business
> within a [possession]{.underline} of the United States\...\
> (c) Amounts received in the United States. Notwithstanding the
> provisions of section 931(a), there [shall be included in the gross
> income of citizens and domestic corporations therein
> specified]{.underline} all amounts, whether [derived from sources
> within or without the United States]{.underline}, which are
> [received]{.underline} by such citizens or corporations
> [within]{.underline} the United States.*"\
> \[26 CFR § 1.931-1\]

Regarding citizens having taxable income, these are the *only*
situations described in the section of the law concerning "*Tax based on
income [from sources within or without the United States]{.underline}*"
(Subchapter N). To *[assume]{.underline}* that matters not mentioned in
this part of the law still constitute "*income from sources within or
without the United States*" is contrary to established legal principles.

> "*In the interpretation of statutes levying taxes it is the
> established rule not to extend their provisions, [by
> implication]{.underline}, beyond the clear import of the language
> used, or to enlarge their operations so as to embrace matters [not
> specifically pointed out]{.underline}.*"\
> \[Gould v. Gould, 245 U.S. 151 (1917)\]

But, as if that weren't enough, there is something that even more
conclusively rebuts the misreading of 26 CFR § 1.1-1. To review, that
section states the following:

> "*The tax imposed is upon [taxable income]{.underline}\... In general,
> all citizens of the United States\... are liable to the income taxes
> imposed by the Code whether the income is received [from sources
> within or without the United States]{.underline}.*" \[26 CFR § 1.1-1\]

In light of the following, it becomes absurd to deny the relevance of 26
USC § 861 and the related regulations:

> "*The taxpayer\'s [taxable income]{.underline} [from sources within or
> without the United States]{.underline} [will be determined under the
> rules of Secs. 1.861-8]{.underline} through 1.861-14T.*" \[26 CFR §
> 1.863-1(c)\]

In addition, the Index of the Code of Federal regulations has an entry
which reads "*Income [from sources inside or outside U.S.]{.underline},
determination of sources of income, 26 CFR 1
([1.861-1\--1.864-8T]{.underline})*."

The regulations in 26 CFR § 1.1-1 are a masterpiece of deception. While
being literally correct (as the law must be), it is likely to give an
incorrect impression. For example, the language could have just as
easily (and just as correctly) stated that "everyone on earth, no matter
where he is and no matter where his income comes from, is taxable upon
his taxable income." The meaning of the statement is, of course, totally
dependent upon the meaning of "taxable income." It is a word game, where
what may be *inferred* differs from what is actually *stated*. If
someone does not have "*taxable income*," and if someone does not
receive "*income from sources*" (as defined by law), then 26 CFR § 1.1-1
becomes irrelevant. Nothing in the section has any effect on the legal
meaning of "taxable income" or "sources of income." Instead, the section
uses these terms in a context which makes them sound less restricted.

(As a reminder, the only form ever approved for use with the above
regulations under the Paperwork Reduction Act was Form 2555, "*Foreign
Earned Income*.")

The predecessors of the current regulations were worded slightly
differently.

> "*19.11-1 Income tax on individuals\
> Chapter 1 of the Internal Revenue Code* \[\*\]*\... imposes an [income
> tax on individuals]{.underline}, including a normal tax (section 11),
> a surtax (section 12), and a defense tax* \[\*\]*\... The tax is upon
> [net income]{.underline} which is determined by subtracting the
> allowable deductions from the [gross income]{.underline}. (See
> generally 21 to 24, inclusive.)*"

\[\* - Words omitted related only to which years the law was
applicable.\]

> "*19.11-2 Citizens or residents of the United States liable to tax\
> In general, citizens of the United States, wherever resident, are
> liable to the tax, and it makes no difference that they may own [no
> assets within the United States]{.underline} and may receive [no
> income from sources within the United States]{.underline}. Every
> resident alien individual is liable to the tax, even though his income
> is [wholly from sources outside the United States]{.underline}.*"

The wording of these regulations (from 1945), while deceptive, does not
give quite as persuasive a deception as the current regulations. The
only solid conclusion which can be inferred from these older regulations
is that income from *outside* of the United States can be taxable to
United States citizens and residents.

**[Out of Context]{.underline}**

The second erroneous "interpretation" which tax professionals have
regarding Section 861 is that it is relevant to everyone, but that it
*does* show the income of most people to be taxable. This is an easy
mistake to make, based on reading Section 861 of the statutes out of
context, and without knowing the history of the section. (There is
plenty of evidence suggesting that the statutes and regulations have
been altered specifically to allow for such a misreading, while the
previous statutes and regulations stated the truth more clearly.)

> "*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]{.underline}:\
> (1) Interest - [Interest from the United States]{.underline} or the
> District of Columbia, and interest on bonds, notes, or other
> interest-bearing obligations of noncorporate residents or domestic
> corporations not including\...* \[certain exceptions\]*\
> (3) Personal services - [Compensation for labor or personal services
> performed in the United States]{.underline}; except\...* \[certain
> exceptions\]*\
> (b) Taxable income from sources within United States\
> From the items of [gross income specified in subsection
> (a)]{.underline} 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]{.underline}.*" \[26 USC § 861\]

It is easy to see how this could be read to mean that the income of all
citizens who live and work within the states "*shall be treated as
income from sources within the United States*," and after taking
deductions, "*shall be included in full as taxable income from sources
within the United States*." (However, even most tax professionals knows
that such a reading of this section is incorrect.)

To fully understand the application of 26 USC § 861, it is essential to
understand the structure of Subchapter N of the Code, which is entitled
"*Tax based on [income from sources]{.underline} within or without the
United States*." As the title implies, Subchapter N elaborates on which
income from "sources" inside or outside the United States is taxable.
Subchapter N is divided into five "Parts," which are titled as follows:

> Part I - "*[Determination of sources of income]{.underline}*" \*\
> Part II - "*[Nonresident aliens]{.underline} and [foreign
> corporations]{.underline}*"\
> Part III - "*Income from sources [without]{.underline} the United
> States*"\
> Part IV - "*Domestic [international]{.underline} sales corporations*"\
> Part V - "*[International]{.underline} boycott determinations*"

(See page 29 concerning the title of Part I of Subchapter N.)

Parts II through V describe certain activities which are taxable. For
example, Part II includes 26 USC § 871 and 26 USC § 882, which state
that nonresident aliens and foreign corporations "shall be taxable"
under the income tax on certain income that comes from *within* the
states; and Part II includes 26 USC § 911 and 26 USC § 931, which show
that U.S. citizens are taxable on their "foreign earned income" (after a
large exemption), and are taxable on income received *within* the United
States if they also receive a large amount of income from within federal
*possessions*.

Part I includes 26 USC §§ 861 - 865, which give the general "source
rules" for determining what income counts as coming from "within" and
what counts as coming from "without" the United States. However, these
sections are about the income *only* of those engaged in the taxable
activities described in the *other* "Parts" of Subchapter N.

For example, under 26 USC § 871 nonresident aliens are taxed on their
income from *within* the United States, but *not* on their income from
outside the states. Nonresident aliens, therefore, must distinguish
between "within" income and "without" income, to determine their taxable
income (and they do that using 26 USC § 861 and following). In addition,
a United States citizen who receives a large amount of income from
within federal *possessions* is also only taxed on the income he
receives from *within* the United States. These are the
*[only]{.underline}* individuals whose income is made taxable by the
general terminology used in 26 USC § 861, and these are the
*[only]{.underline}* individuals who can have "*taxable income from
sources within the United States*."

The current regulations show that this is the case. This shows that the
"general terms" used in Section 861 of the statutes only applies to
income from "specific sources."

> "*Sections 861(b) and 863(a) state [in general terms]{.underline} how
> to determine taxable income of a taxpayer from sources within the
> United States\...*" \[26 CFR § 1.861-8\]
>
> "*(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]{.underline}.*" \[26
> CFR § 1.861-8(f)(3)(ii)\]

As shown above, 26 USC 861(b) says that the "items" of gross income
listed in 861(a), after deductions have been taken, "*[shall be included
in full as taxable income from sources within the United
States]{.underline}*." However, the corresponding regulations are found
in 26 CFR § 1.861-8, and state in the first paragraph that they "*apply
in determining taxable income of the taxpayer from [specific
sources]{.underline} and activities.*" So again we see that the general
terms of 861 of the statutes apply only to income from "*specific
sources*." And the regulations in *three places* tell us what is meant
by "*specific sources*."

> "*The rules contained in this section apply in determining taxable
> income of the taxpayer from [specific sources]{.underline} and
> activities under [other sections of the Code]{.underline}, referred to
> in this section as [operative sections]{.underline}. See [paragraph
> (f)(1)]{.underline} of this section for a [list and description of
> operative sections]{.underline}.*" \[26 CFR § 1.861-8(a)(1)\]
>
> *"*\[T\]*he term 'statutory grouping' means the gross income from a
> [specific source]{.underline} or activity which must first be
> determined in order to arrive at 'taxable income' from which [specific
> source]{.underline} or activity under an [operative
> section]{.underline}. ([See paragraph (f)(1) of this
> section]{.underline}.)*" \[26 CFR § 1.861-8(a)(4)\]
>
> "*The [operative sections]{.underline} of the Code which require the
> determination of taxable income of the taxpayer from [specific
> sources]{.underline} or activities and which gives rise to statutory
> groupings* \[see previous citation\] *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...* \[international, foreign sales
> corporation*s\]\
> (iv) Effectively connected taxable income. [Nonresident alien
> individuals and foreign corporations]{.underline} engaged in trade or
> business within the United States, under [sections 871(b)(1) and
> 882(a)(1)]{.underline}\...\
> (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]{.underline} 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)" \[26 CFR §
> 1.861-8(f)(1)\]

This is the list of "specific sources" to which the general wording of
26 USC § 861 and following apply. While various foreign tax credits and
obscure possessions rules complicate matters, those taxable on their
income from within the United States are still *nonresident aliens* and
*foreign corporations* who receive income from within the United States
(item "*(iv)*" on the list), and citizens and domestic corporations
which receive *possessions* income (item "*(vi)(E)*" and following).

The current regulations under 26 CFR § 1.861-8 are more than *forty*
pages long, and have been that way since 1978. Prior to 1978, the
section was less than *[one]{.underline}* page long, and there was no
mention of "operative sections," "statutory groupings," "specific
sources," etc. This explosion in the size and complexity of these
regulations happened *without* a significant change in the wording of
the statutes (which have remained basically the same for *[70
years]{.underline}*).

While the truth can still be found about the proper application of 26
USC § 861 (as shown above), it has certainly become more complicated
than it was previously. Sections 861 through 864 of the current statutes
came from Section 119 of the 1939 statutes, which used very similar
wording as the current sections.

> "*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\...\
> (3) Personal services - Compensation for labor or personal services
> performed in the United States\...*"

However, the regulations under the 1939 Code quite showed quite plainly
the limited application of the general terms of this section of the
statutes.

> "*Sec. 29.119-1. Income from sources within the United States.\
> [Nonresident alien individuals, foreign corporations]{.underline}, and
> citizens of the United States or domestic corporations [entitled to
> the benefits of section 251]{.underline} are taxable only upon income
> from sources within the United States\...*
>
> *The Internal Revenue Code divides the income of [such
> taxpayers]{.underline} into three classes:\
> (1) Income which is derived in full from sources [within]{.underline}
> the United States;\
> (2) Income which is derived in full from sources [without]{.underline}
> the United States;\
> (3) Income which is derived [partly from sources within and partly
> from sources without]{.underline} the United States.*"

Section 251 of the 1939 Code became 26 USC § 931 and following of the
current Code. Only those who received a large amount of income from
federal *possessions* were "*entitled to the benefits of section 251*"
(the "benefit" being that only their income from within the states was
taxable). The general wording of the statutes only applied to the income
of "*such taxpayers*," meaning those engaged in the taxable activities
described in *other* sections of the Code (now called "operative
sections" in the current regulations).

To give a more specific example, the 1939 *[statutes]{.underline}* said
this:

> "*The following items of gross income shall be treated as income from
> sources within the United States:\...\
> (1) Interest. - Interest 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, corporate or otherwise, not including\...*"\
> \[26 USC § 119 (1939)\]

While the related *[regulations]{.underline}* said this:

> "*There shall be included in the gross income from sources within the
> United States, of [nonresident alien]{.underline} individuals,
> [foreign corporations]{.underline}, and citizens of the United States,
> or domestic corporations which are [entitled to the benefits of
> section 251]{.underline}, 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\...*" \[26
> CFR § 29.119-2\]

While the older regulations clearly show the limited application of the
predecessors of 26 USC § 861, going even further back shows the
*statutes* proving this as well. The following is the 1921 predecessor
of the current Sections 861 through 864.

> "*Sec. 217. (a) That [in the case of a nonresident alien individual or
> of a citizen entitled to the benefits of section 262]{.underline}, the
> following items of gross income shall be treated as income from
> sources within the United States:\
> (1) Interest\...\
> (3) Compensation for labor or personal services performed in the
> United States\...*" \[Section 217, Revenue Act of 1921\]

While this section mentioned only *individuals*, Section 232 of the same
Act stated that "\[i\]*n the case of a [foreign corporation]{.underline}
or of a [corporation entitled to the benefits of section
262]{.underline} the computation shall also be made in the manner
provided in [section 217]{.underline}.*"

Other than the tell-tale phrase "vanishing," the text is very similar to
the current Section 861. There can be no doubt about the correct
application of the 1921 statute, and the regulations (past and present)
show that the scope of the section has not changed.

(If someone insists, based on reading Section 861 by itself and out of
context, that all income from within the United States is taxable to
everyone, then he would also have to claim that Section 862, by itself
and out of context, shows that all income from *outside* the United
States is taxable to everyone, as the wording is very similar. It
states, in the same general terms, that "*compensation for labor or
personal services performed [without]{.underline} the United States*"
"*shall be treated as income from sources without the United States*,"
and that after taking allowable deductions, the remainder "*shall be
treated in full as [taxable income]{.underline} from sources
[without]{.underline} the United States*." Either several hundred
million Chinese owe the United States a lot of money, or the general
language in Sections 861 and 862 only applies to those engaged in
activities described *elsewhere* in Subchapter N, such as a United
States citizen living and working in a foreign country (see 26 USC §
911).)

**[Residual Groupings]{.underline}**

(The following explanation deals with an issue which was most likely
*intended* to be confusing. It is included for the purpose of being
thorough in documenting and refuting anything likely to be used to try
to counter the conclusions of this report.)

Some (who are unaware of the statutory and regulatory history of 26 USC
§ 861) may claim, based on the current regulations, that all income that
comes from somewhere other than the "specific sources" makes up a
"residual grouping" of gross income, which is nonetheless taxable. This
position is based entirely on the current regulations in 26 CFR §
1.861-8, which state the following:

> "\[T\]*he term '[statutory grouping]{.underline} of gross income' or
> 'statutory grouping' means the [gross income from a specific source or
> activity]{.underline} 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)]{.underline} of
> this section.) [Gross income]{.underline} from [other sources or
> activities]{.underline} is referred to as the '[residual
> grouping]{.underline} of gross income' or 'residual grouping.'*" \[26
> CFR § 1.861-8(a)(4)\]

So "statutory groupings" means income from the specific taxable
"sources" listed in 26 CFR § 1.861-8(f)(1). The implication some see
here is that income from *[other]{.underline}* "sources" (referred to as
"*residual groupings*") can also be taxable, because it too is referred
to as "gross income." The idea is that "gross income" must constitute
"taxable income" (after deductions are subtracted), since the definition
of "taxable income" is "gross income" minus deductions. However, the
regulations often use the term "gross income" in a more generic way,
meaning any income, whether taxable or not. In fact, the regulations
specifically state that the "*residual grouping*" may be
[excluded]{.underline} from federal taxation.

> "\[T\]*he [residual grouping]{.underline} may include, or consist
> entirely of, [excluded income]{.underline}. See [paragraph
> (d)(2)]{.underline} of this section with respect to the allocation and
> apportionment of deductions to excluded income*." \[26 CFR §
> 1.861-8(a)(4)\]

And the regulations lead to this list of what is not exempt from
taxation:

> "*(A) In the case of a [foreign]{.underline} taxpayer...\
> (B) In computing the combined taxable income of a [DISC or
> FSC]{.underline}...\
> (C) ...the gross income of a [possessions]{.underline} corporation...\
> (D) [Foreign earned income]{.underline}...*" \[26 CFR §
> 1.861-8T(d)(2)(iii)\]

A clear example of tax-exempt income being referred to as "gross income"
in a "residual grouping" is shown below. As stated in 26 USC §
882(a)(2), foreign corporations are only taxable on "*gross income which
is effectively connected with the conduct of a trade or business
[within]{.underline} the United States*." The following example
therefore shows that any regulation which discusses "gross income" (not
"taxable income") from the "residual grouping" in no way shows that the
residual grouping must be taxable.

> "*Since X is a [foreign corporation]{.underline}, the [statutory
> grouping]{.underline} is gross income effectively connected with X\'s
> trade of business in the United States, namely gross income from
> sources within the United States, and the [residual
> grouping]{.underline} is [gross income]{.underline} not effectively
> connected with a trade or business in the United States, namely gross
> income from [countries A and B]{.underline}.*" \[26 CFR § 1.861-8(g),
> Example 21\]

The fact that the regulations refer to income as "gross income" clearly
does not mean it is taxable. In discussing an item of income, the
regulations state the following:

> "*[Gross income]{.underline} from sources within the United States
> includes compensation for labor or personal services performed in the
> United States\...*\" \[26 CFR § 1.861-4\]

In the generic sense, compensation for labor within the United States is
always \"gross income.\" However, as the current regulations repeatedly
explain, it can only be "taxable income" if it comes from a "specific
source." The older regulations dealt with this "item" of income in a
very similar way, but the context of the surrounding regulations made it
perfectly clear in what situations this "item" could be taxable.

> \"*Sec. 29.119-1. Income from sources within the United States.\
> [Nonresident alien individuals]{.underline}, [foreign
> corporations]{.underline}, and citizens of the United States or
> domestic corporations [entitled to the benefits of section
> 251]{.underline} are taxable only upon income from sources within the
> United States\...*
>
> *The Internal Revenue Code divides the income of [such
> taxpayer]{.underline} 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\...*
>
> *Sec. 29.119-2. Interest\...\
> Sec. 29.119-3. Dividends\...\
> Sec. 29.119-4. Compensation for labor or personal services. - Except
> as provided in section 119(a)(3), [gross income from sources within
> the United States includes compensation for labor or personal
> services]{.underline} performed within the United States\...\
> Sec. 29.119-5. Rentals and royalties\...\
> Sec. 29.119-6. Sale of real property\...*
>
> *Sec. 29.119-10. Apportionment of deductions.\
> From the [items]{.underline} 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]{.underline} and [foreign corporations]{.underline}
> engaged in trade or business within the United States, be deducted*
> \[allowable deductions\]*. The remainder [shall be included in full as
> net income]{.underline} from sources within the United States\...*\"

The fact that income is referred to in the regulations as "gross income"
certainly doesn't mean it is taxable. Deductions must be divided between
the "statutory grouping" (income from a "specific source") and the
"residual grouping" (income from anywhere else). This does not mean that
the "residual grouping" is taxable. The regulations show in several
places that there must be an "operative section" which applies in order
to determine taxable income.

> "*A taxpayer to which this section applies is required to allocate
> deductions to a class of gross income and, then, if necessary to make
> the determination required by [the operative section]{.underline} of
> the Code, to apportion deductions within the class of gross income
> between the statutory grouping of gross income (or among the statutory
> groupings) and the [residual grouping]{.underline} of gross income.*"
> \[26 CFR § 1.861-8(a)(2)\]

The regulation which states that the "residual grouping" may be exempt
from taxation also shows that there must be an "operative section"
applicable.

> "*In some instances, where [the operative section]{.underline} so
> requires, the statutory grouping or the residual grouping may include,
> or consist entirely of, excluded income*."\
> \[26 CFR § 1.861-8(a)(4)\]

This is only logical, based on the simple fact that the section "*for
determining taxable income from sources within the United States*" (26
CFR § 1.861-8) states over and over again that it is for determining
taxable income from "*specific sources*," not the "residual groupings."

> "*The [rules contained in this section apply]{.underline} in
> determining taxable income of the taxpayer from [specific
> sources]{.underline} and activities under other sections of the Code,
> referred to in this section as operative sections...*" \[26 CFR
> 1.861-8(a)(1)\]
>
> "*The operative sections of the Code which require the determination
> of taxable income of the taxpayer from specific sources or activities
> and which give rise to statutory groupings [to which this section is
> applicable]{.underline} include the sections described below...*"\
> \[26 CFR 1.861-8(f)(1)\]
>
> "*A taxpayer [to which this section applies]{.underline} is required
> to allocate deductions to a class of gross income and, then, if
> necessary to make the determination required by [the operative
> section]{.underline} of the Code, to apportion deductions...*" \[26
> CFR § 1.861-8(a)(2)\]

The regulations (and statutes) are not about determining taxable income
from anywhere other than the "specific sources." Part of the confusion
is from the fact that, in stating that the "residual grouping" *may*
consist of excluded income, the regulations imply that it also *may* be
taxable. This is *correct*, but deceptive. The possibility of the
"residual grouping" being taxable could easily lead to the erroneous
conclusion that income from somewhere *other* than the "specific
sources" might be taxable. The assumption is that the "residual
grouping" *cannot* be from one of the listed "specific sources." This is
not the case.

In doing the calculations for [two]{.underline} "specific sources"
(described in "operative sections"), the regulations state that all the
calculations must be done for each "specific source" *separately*.
Paragraph (f)(1) lists the "specific sources" under the "operative
sections," and then the next paragraph states the following:

> "*Where more than one operative section applies, it may be necessary
> for the taxpayer to apply this section [separately]{.underline} for
> each applicable operative section.*"\
> \[26 CFR § 1.861-8(f)(2)(i)\]

While a person is calculating all the deductions, etc. for the
[first]{.underline} "specific source," his income from the
[second]{.underline} "specific source" falls in the category of
"*residual grouping*." Likewise, when he is doing the calculations for
the taxable income from the [second]{.underline} "specific source," the
income from the [first]{.underline} is in the "*residual grouping*." The
temporary regulations at 26 CFR § 1.861-8T demonstrate this.

> "*Thus, in determining the separate limitations on the foreign tax
> credit imposed by section 904(d)(1) or by section 907, the income
> within a separate limitation category constitutes a [statutory
> grouping]{.underline} of income and all other income not within that
> separate limitation category (whether domestic or [within a different
> separate limitation category]{.underline}) constitutes the [residual
> grouping]{.underline}*." \[26 CFR § 1.861-8T(c)(1)\]

(The same thing is said again in 26 CFR § 1.861-8T(f)(1)(ii).)

So even an example in the regulations showing that the "residual
grouping" may be taxable does *[not]{.underline}* prove that income from
somewhere other than the "specific sources" may be taxable. (And the
"operative sections" involving individuals receiving income from within
federal possessions also makes it possible for a taxpayer to have
"taxable income" from within *and* without the United States, adding
further room for confusion.)

The "residual grouping" argument relies on making assumptions based on
something that complex deduction allocation examples might seem to
suggest, but do not state (that income not from the "specific sources"
can be taxable), while at the same time ignoring several sections of
regulations which contradict this theory. The over-complexity of these
regulations seems designed to cause confusion and uncertainty. But even
if the current complicated regulations by themselves, combined with some
"creative interpretation," allowed for the "residual grouping" argument
to have some credibility, the older regulations (as shown above) erase
that credibility entirely.

The 1945 regulations made no mention of "operative sections," "specific
sources," "statutory groupings" or "residual groupings," and did not
consist of dozens of pages of a jumbled, confusing mess. Since there was
nothing about "residual groupings" back then to base an argument on, to
use the argument now would require the claim that since 1945 there must
have been a massive expansion of what income is taxable, from
international and foreign commerce to [all]{.underline} commerce, and
that the Secretary decided to inform the public of this by subtle
innuendos hidden in confusing examples about deduction allocation rules
related to the per-country limitation on the foreign tax credit.
(Meanwhile, Congress stated that "no substantive change" was made in the
law.) Obviously, such a claim would be absurd.

The ridiculous complexity of the current regulations under 26 USC § 861,
and particularly the explosion in 1978 of the regulations in 26 CFR §
1.861-8 from less than *one* page to more than *forty* (with no
corresponding change in the statutes) certainly seems to indicate that
the intent was to obfuscate the truth. If the goal was to convey the
*[truth]{.underline}*, 26 CFR § 1.861 would look something like this:

> "The items of income listed in 26 USC § 861 are only taxable to
> nonresident aliens, foreign corporations, and citizens or domestic
> corporations which are entitled to the benefits of 26 USC § 931
> (because they receive a large amount of their income from within
> federal possessions). In determining taxable income, it is sometimes
> necessary to allocate deductions and expenses between income from the
> taxable activities, and non-taxable income from other activities."

(Note: This is a *hypothetical* regulation, *not* an actual regulation.)

This is quite close to what the older regulations stated. While there
are a few more details to address than the above hypothetical regulation
addresses, there is simply no justification for the forty-some pages of
jumbled mess that is currently found in the regulations under Section
861, including the needlessly twisted maze of "residual groupings,"
"statutory groupings," "specific sources," "operative sections," etc.
(terms which do *[not]{.underline}* appear anywhere in the statutes).
The only plausible explanation for the current regulations is an
*[intent to deceive]{.underline}*.

**[Tie-Breaker]{.underline}**

The common "interpretation" of the income tax laws relies on multiple
assumptions, as well as simply ignoring various sections which
contradict those assumptions. Some may wish to imagine that some other
"sources" of income which the law does not mention must also be taxable.
Some may like to assume that everything is taxable unless the law
specifically says it is not. And some may say that if there is some
uncertainty about what the law requires, then the government by default
"wins." All of these are in direct conflict with a basic principle of
tax law, which has been explained on numerous occasions by the Supreme
Court.

> "*In the interpretation of statutes levying taxes it is the
> established rule [not]{.underline} to extend their provisions, [by
> implication]{.underline}, beyond the clear import of the language
> used, or to enlarge their operations so as to embrace matters [not
> specifically pointed out]{.underline}. In case of doubt they are
> construed most strongly against the government, and [in favor of the
> citizen]{.underline}.*" \[Gould v. Gould, 245 U.S. 151 (1917)\]
>
> "*In view of other settled rules of statutory construction, which
> teach that\... if doubt exists as to the construction of a taxing
> statute, the doubt should be resolved [in favor of the
> taxpayer]{.underline}*\..." \[Hassett v. Welch, 303 U.S. 303 (1938)\]

The extensive evidence of the correct, limited application of the income
tax leaves little room for doubt. But even if the IRS, or others who
would challenge the conclusions of this report, could obfuscate and
confuse matters to the point where "it could go either way," the Supreme
Court makes it clear that such a disagreement is to be settled in favor
of the citizen, *[not]{.underline}* the government.

**[17) Conclusion]{.underline}**

Because of the Constitution, Congress could not impose a tax on all
income earned in the United States. What Congress did instead was to
impose a tax on matters which they *could* tax (international and
foreign commerce), and write the law in such a way that it would give
the *impression* that it also applied to the income of most Americans.
The Secretary of the Treasury wrote corresponding regulations with a
similar goal: to tell the truth while implying a lie. Despite a
longstanding and ongoing effort by some in government to confuse and
obfuscate, the literal truth has remained in the law. Though it is a
complex process, the current statutes and regulations by themselves do
reveal the limited application of the federal income tax laws. The older
statutes and regulations then add extensive reinforcement and clarity to
the conclusions reached by deciphering the current law. The historical
documents also give ample evidence to justify an accusation, against the
legislators in Congress and the authors of the regulations at the
Department of the Treasury, of *[intent to defraud]{.underline}* the
American people of money not legally owed.

Aside from arguments about specific details, there is one giant hurdle
for those who would still insist that most Americans receive taxable
income: what is the alternate explanation that accounts for *every*
citation in this report? There is extensive documentation, not only in
the current statutes and regulations, but throughout more than 80 years
of statutory and regulatory history, which supports the conclusions of
this report. It would be absurd to claim that a tax was imposed on the
income of most Americans, and that by mistake or coincidence Congress
and the Secretary put into the statutes and regulations such an enormous
amount of information, spanning nearly a century, which indicates that
the tax applies only to those engaged in international or foreign
commerce. Quite simply, there is no conclusion other than the conclusion
of this report which explains all of the evidence.

**[Test For Tax Professionals]{.underline}**

1\) In light of part four of this report (page 3 and following), do 26
USC § 861 and following, and the related regulations, determine what
constitutes a "source" of income subject to the federal income tax?

2\) In light of part five of this report (page 6 and following), are 26
USC § 861(b), and the related regulations in 26 CFR § 1.861-8, the
sections to use to determine taxable income from sources within the
United States?

3\) In light of part six of this report (page 8 and following), is the
income of citizens living and working exclusively within the United
States shown to be taxable under 26 USC § 861(b) and 26 CFR § 1.861-8?

4\) In light of part nine of this report (page 12 and following), what
income *not* exempted by statute is, because of the Constitution, not
taxable by the federal government?

5\) In light of part ten of this report (page 15 and following), does
Congress have the ability to control anything it wants to within the 50
states, provided it exerts that control through *tax* legislation?

6\) In light of part sixteen of this report (page 38 and following), are
there any citations of statutes or regulations which show that the
income of citizens living and working exclusively within the 50 states
are subject to the federal income tax?

7\) A former legislation draftsman for the Treasury Department stated
that the income tax in *not* a tax on income per se, but is an excise
tax on "*certain activities and privileges*" (see page 31). Is this
correct, and if so, to what activities and privileges do you think was
he referring?

8\) In light of what the older regulations defining "gross income" said
(see page 18), are the activities mentioned (related to international
and foreign commerce) *[all]{.underline}* of the constitutionally
taxable activities? If not, where do the regulations specify which
income is not taxable by the federal government because of the
Constitution? And if not, what is the purpose of mentioning those few
specific activities (since the statute does not mention them)?

9\) Is there some explanation which accounts for all of the citations in
this report, and which shows the income of most Americans to be taxable?

[Part I of Subchapter N, and the regulations thereunder:]{.underline}

STATUTES REGULATIONS

+----------------+-----------------------------------------------------+
| [Subchapter    | Part I - Income taxes                               |
| N]             |                                                     |
| {.underline} - | **[Determination of sources of                      |
| Tax based on   | income]{.underline}**                               |
| **income from  |                                                     |
| sources**      | **Sec. 1.861-1 Income from sources within the       |
| within or      | United States.**                                    |
| without the    |                                                     |
| United States  | > \(a\) Categories of income. **[Part I (section    |
|                | > 861 and following), subchapter N, chapter 1 of    |
| [Part          | > the Code, and the regulations thereunder          |
| I]             | > determine the sources of income for purposes of   |
| {.underline} - | > the income tax]{.underline}**... The statute      |
| **             | > provides for the following three categories of    |
| [Determination | > income:                                           |
| of Sources of  | >                                                   |
| Income]        | > \(1\) **Within the United States**. The gross     |
| {.underline}** | > income from sources within the United States,     |
| \*             | > consisting of the items of gross income specified |
|                | > in section **861(a)**... \[plus part of 863       |
| **[Sec.        | > income\] See Secs. 1.861-2 to 1.861-7, inclusive, |
| 861            | > and Sec. 1.863-1. The **taxable income from       |
| ]{.underline}. | > sources within the United States**... shall be    |
| Income from    | > determined by deducting therefrom, in accordance  |
| sources within | > with sections **[861(b)]{.underline}** and        |
| the United     | > 863(a), \[allowable deductions\]... See Secs.     |
| States**       | > **[1.861-8]{.underline}** and 1.863-1.            |
|                | >                                                   |
| > a\) Gross    | > \(2\) Without the United States...                |
| > income from  | >                                                   |
| > sources      | > \(3\) Partly within and partly without...         |
| > within       | >                                                   |
| > United       | > \(b\) **Taxable income from sources within the    |
| > States       | > United States**. The taxable income from sources  |
| >              | > within the United States shall consist of the     |
| > The          | > taxable income described in paragraph (a)(1) of   |
| > following    | > this section... \[plus part of (a)(3) income\]    |
| > items of     | >                                                   |
| > gross income | > \(c\) Computation of income... \[deals with       |
| > shall be     | > income from both within and without U.S.\]        |
| > treated as   |                                                     |
| > income from  | Sec. 1.861-2 Interest.                              |
| > sources      |                                                     |
| > within the   | Sec. 1.861-3 Dividends.                             |
| > United       |                                                     |
| > States:      | Sec. 1.861-4 Compensation for labor or personal     |
| >              | services.                                           |
| > \(1\)        |                                                     |
| > Interest...  | Sec. 1.861-5 Rentals and royalties.                 |
| >              |                                                     |
| > \(2\)        | Sec. 1.861-6 Sale of real property.                 |
| > Dividends... |                                                     |
| >              | Sec. 1.861-7 Sale of personal property.             |
| > \(3\)        |                                                     |
| > Personal     | **[Sec. 1.861-8 Computation of taxable income from  |
| > services -   | sources within the United States]{.underline} and   |
| > Compensation | from other sources and activities.**                |
| > for labor or |                                                     |
| > personal     | > \(a\) In general\--(1) Scope. **Sections          |
| > services...  | > [861(b)]{.underline} and 863(a) state in general  |
| >              | > terms [how to determine taxable income of a       |
| > \(4\)        | > taxpayer from sources within the United           |
| > Rentals and  | > States]{.underline}** after gross income from     |
| > royalties... | > sources within the United States has been         |
| >              | > determined... **The rules contained in this       |
| > \(5\)        | > section apply in determining taxable income of    |
| > Disposition  | > the taxpayer from [specific sources]{.underline}  |
| > of United    | > and activities under other sections of the        |
| > States real  | > Code**, referred to in this section as            |
| > property     | > **operative sections**. See **[paragraph          |
| > interest...  | > (f)(1)]{.underline}** of this section for a list  |
| >              | > and description of operative sections. The        |
| > \(6\) Sale   | > operative sections include, among others,         |
| > or exchange  | > sections **[871(b)]{.underline}** and             |
| > of inventory | > **[882]{.underline}**...                          |
| > property...  | >                                                   |
| >              | > \(2\) Allocation and apportionment of             |
| > \(7\)        | > deductions...                                     |
| > .            | >                                                   |
| ..underwriting | > \(3\) Class of gross income. For purposes of this |
| > income...    | > section, the gross income to which a specific     |
| >              | > deduction is definitely related is referred to as |
| > \(8\) Social | > a "class of gross income" and may consist of one  |
| > security     | > or more **items**... of gross income enumerated   |
| > benefits...  | > in **section 61**, namely:... \[lists items\]     |
| >              | >                                                   |
| > **[(b)       | > \(4\) Statutory grouping of gross income and      |
| > Taxable      | > residual grouping of gross income. For purposes   |
| > income from  | > of this section, the term "statutory grouping of  |
| > sources      | > gross income" or **"statutory grouping" means the |
| > within       | > gross income from a [specific source]{.underline} |
| > United       | > or activity [which must first be determined in    |
| > States]      | > order to arrive at "taxable income"]{.underline}  |
| {.underline}** | > from which [specific source]{.underline} or       |
| >              | > activity under an operative section. (See         |
| > From the     | > [paragraph (f)(1)]{.underline} of this            |
| > items of     | > section.)**...                                    |
| > gross income | >                                                   |
| > specified in | > \(5\) Effective date...                           |
| > subsection   | >                                                   |
| > (a) **as     | > \(b\) Allocation... \[defines "class of gross     |
| > being income | > income" again\] **See... paragraph (d)(2) of this |
| > from sources | > section which provides that a class of gross      |
| > within the   | > income may include excluded income**.             |
| > United       | >                                                   |
| > States**     | > \(c\) Apportionment of deductions...              |
| > there shall  | >                                                   |
| > be deducted  | > \(d\) Excess of deductions and **excluded and     |
| > the          | > eliminated income**...                            |
| > expenses,    | >                                                   |
| > losses, and  | > \(2\) Allocation and apportionment...             |
| > other        | > \[Reserved\] For guidance, see Sec.               |
| > deductions   | > **1.861-8T(d)(2)**.                               |
| > properly     | >                                                   |
| > apportioned  | > \(e\) Allocation and apportionment...             |
| > or allocated | >                                                   |
| > thereto and  | > \(f\) Miscellaneous matters\--(1) Operative       |
| > a ratable    | > sections. **The operative sections of the Code    |
| > part of any  | > which require [the determination of taxable       |
| > expenses,    | > income of the taxpayer from specific              |
| > losses, or   | > sources]{.underline} or activities and which give |
| > other        | > rise to statutory groupings to which this section |
| > deductions   | > is applicable include the sections described      |
| > which cannot | > below**.                                          |
| > definitely   | >                                                   |
| > be allocated | > \(i\) Overall limitation to the **foreign** tax   |
| > to some item | > credit... \[26 USC 904\]                          |
| > or class of  | >                                                   |
| > gross        | > \(ii\) \[Reserved\]                               |
| > income.      | >                                                   |
| > **The        | > \(iii\) **DISC** and **FSC** taxable income...    |
| > remainder,   | > \[26 USC 925, 994\]                               |
| > if any,      | >                                                   |
| > shall be     | > \(iv\) Effectively connected taxable income.      |
| > included in  | > **Nonresident alien individuals** and **foreign   |
| > full as      | > corporations** engaged in trade or business       |
| > taxable      | > within the United States, under sections          |
| > income from  | > **871(b)(1)** and **882(a)(1)**...                |
| > sources      | >                                                   |
| > within the   | > \(v\) **Foreign** base company income... \[26 USC |
| > United       | > 954\]                                             |
| > States**...  | >                                                   |
| >              | > \(vi\) Other operative sections. The rules        |
| > \(c\)        | > provided in this section also apply in            |
| > Foreign      | > determining\--                                    |
| > business     | >                                                   |
| > r            | > \(A\) The amount of **foreign** source items...;  |
| equirements... | > (B) The amount of **foreign** mineral income...;  |
| >              | > (C) \[Reserved\]; (D) The amount of **foreign**   |
| > \(d\)        | > oil and gas...; (E) \[about Puerto Rico\]; (F)    |
| > Special rule | > \[about Puerto Rico\]; (G) \[about Virgin         |
| > for...       | > Islands\]; (H) The income derived from            |
| > subsection   | > **Guam**...; (I) \[about China Trade Act\]; (J)   |
| > (a)(2)(B)... | > \[about foreign corporations\]; (K) \[about       |
| >              | > insurance income of **foreign** corporations\];   |
| > \(e\) Income | > (L) The **international** boycott factor...; (M)  |
| > from certain | > \[about Merchant Marine Act\]...                  |
| > railroad     | >                                                   |
| > rolling      | > \(2\) Application to more than one operative      |
| > stock...     | > section....                                       |
| >              | >                                                   |
| > \(f\) Cross  | > \(3\) Special rules of section 863(b)             |
| > reference... | >                                                   |
|                | > \(i\) In general...                               |
| (\* - See page | >                                                   |
| 29 regarding   | > \(ii\) Relationship of sections 861, 862, 863(a), |
| the title of   | > and 863(b). Sections **[861]{.underline}**, 862,  |
| Part I of      | > 863(a), and 863(b) are the four provisions        |
| Subchapter N.) | > applicable in **determining taxable income from   |
|                | > [specific sources]{.underline}**...               |
|                | >                                                   |
|                | > \(g\) General examples. The following examples    |
|                | > illustrate the principles of this section. In     |
|                | > 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)...                           |
|                |                                                     |
|                | **Sec. [1.861-8T]{.underline} Computation of        |
|                | taxable income from sources within the United       |
|                | States** and from other sources and activities      |
|                | (temporary).                                        |
|                |                                                     |
|                | > \(a\) In general... (b) Allocation... (c)         |
|                | > Apportionment of deductions...                    |
|                | >                                                   |
|                | > \(d\) Excess of deductions and **excluded and     |
|                | > eliminated items of income**.                     |
|                | >                                                   |
|                | > \(1\) \[Reserved\]                                |
|                | >                                                   |
|                | > \(2\) Allocation and apportionment to exempt,     |
|                | > excluded or eliminated income\--                  |
|                | >                                                   |
|                | > \(i\) In general...                               |
|                | >                                                   |
|                | > \(ii\) 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]{.underline}, excluded, or eliminated for |
|                | > [federal income tax]{.underline} purposes**...    |
|                | >                                                   |
|                | > \(iii\) Income that is not considered tax exempt. |
|                | > The following items are **[not]{.underline}**     |
|                | > considered to be **[exempt]{.underline}**,        |
|                | > 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**...                          |
|                | >                                                   |
|                | > \(C\) For all purposes under subchapter N... the  |
|                | > gross income of a **possessions** corporation...  |
|                | >                                                   |
|                | > \(D\) **Foreign earned income** as defined in     |
|                | > section 911 and the regulations thereunder...     |
|                | >                                                   |
|                | > \(iv\) Prior years....                            |
|                | >                                                   |
|                | > \(e\) Allocation and apportionment of certain     |
|                | > deductions...                                     |
|                | >                                                   |
|                | > \(f\) Miscellaneous matters\--(1) Operative       |
|                | > sections... \[no list yet\]... (g)                |
|                | > \[Reserved\]...                                   |
|                |                                                     |
|                | Sec. 1.861-9T through 1.861-18 \[allocation &       |
|                | special rules, income from aircraft & vessels,      |
|                | research, computer programs, etc.\]                 |
+----------------+-----------------------------------------------------+

[Part I of Subchapter N, and the regulations thereunder
(continued):]{.underline}

STATUTES REGULATIONS

+----------------+-----------------------------------------------------+
| **[Sec.        | Sec. 1.862-1 Income specifically from sources       |
| 862]{          | **without** the United States.                      |
| .underline}**. |                                                     |
| Income from    | > \(a\) Gross income... \[lists items of income\]   |
| sources        | >                                                   |
| **without**    | > \(b\) Taxable income. The taxable income from     |
| the United     | > sources without the United States, in the case of |
| States...      | > the items of gross income specified in paragraph  |
|                | > (a) of this section, shall be determined on the   |
|                | > same basis as that used in **[Sec.                |
|                | > 1.861-8]{.underline} for determining the taxable  |
|                | > income from sources within the United States**.   |
|                | >                                                   |
|                | > \(c\) Income from certain property...             |
+----------------+-----------------------------------------------------+
| **[Sec.        | Sec. 1.863-0 Table of contents...                   |
| 863]{          |                                                     |
| .underline}**. | Sec. 1.863-1 Allocation of gross income under       |
| Special rules  | section 863(a).                                     |
| for            |                                                     |
| determining    | > \(a\) In general. Items of gross income other     |
| source...      | > than those specified in section 861(a) and        |
| \[deals with   | > section 862(a)...                                 |
| income from    | >                                                   |
| sources partly | > \(b\) Natural resources...                        |
| within and     | >                                                   |
| partly without | > \(c\) Determination of taxable income. The        |
| the United     | > taxpayer\'s **taxable income from sources [within |
| States\]       | > or without]{.underline} the United States [will   |
|                | > be determined under the rules of Secs.            |
|                | > 1.861-8]{.underline} through 1.861-14T [for       |
|                | > determining taxable income from sources within    |
|                | > the United States]{.underline}**.                 |
|                | >                                                   |
|                | > \(d\) Scholarships, fellowship grants, grants,    |
|                | > prizes and awards\--                              |
|                | >                                                   |
|                | > \(e\) Effective dates...                          |
|                |                                                     |
|                | Sec. 1.863-2 through 1.863-5 \[about allocation and |
|                | apportionment, income from sales, transportation    |
|                | services, etc.\]                                    |
|                |                                                     |
|                | Sec. 1.863-6 Income from sources within a foreign   |
|                | country or possession of the United States.         |
|                |                                                     |
|                | > The principles applied in **[Secs. 1.861-1 to     |
|                | > 1.863-5]{.underline}**, inclusive, for            |
|                | > **[determining the gross and the taxable income   |
|                | > from sources within and without the United        |
|                | > States]{.underline}** shall generally be applied, |
|                | > for purposes of the income tax, in determining    |
|                | > the gross and the taxable income from sources     |
|                | > within and without a foreign country, or within   |
|                | > and without a possession of the United States.    |
|                |                                                     |
|                | Sec. 1.863-7 Allocation of income attributable to   |
|                | certain notional principal contracts under section  |
|                | 863(a).                                             |
+----------------+-----------------------------------------------------+
| **[Sec.        | Sec. 1.864-1 through 1.864-8T \[definitions\]       |
| 864]{          |                                                     |
| .underline}**. |                                                     |
| Definitions    |                                                     |
| and special    |                                                     |
| rules...       |                                                     |
+----------------+-----------------------------------------------------+
| **[Sec.        | Sec. 1.865-1T through 1.865-2T \[Loss with respect  |
| 865]{          | to personal property\]                              |
| .underline}**. |                                                     |
| \[personal     |                                                     |
| property       |                                                     |
| sales\]        |                                                     |
+----------------+-----------------------------------------------------+

[Predecessor of Part I of Subchapter N, and related regulations
(1945)]{.underline}

STATUTES REGULATIONS

+----------------------+-----------------------------------------------+
| Sec. 119. Income     | Sec. 29.119-1. Income from sources within the |
| from sources within  | United States.                                |
| the United States    |                                               |
|                      | [Nonresident alien individuals]{.underline},  |
| \(a\) Gross Income   | [foreign corporations]{.underline}, and       |
| from Sources in      | citizens of the United States or domestic     |
| United States. - The | corporations [entitled to the benefits of     |
| following items of   | section 251]{.underline} \[\*\] are taxable   |
| gross income shall   | only upon income from sources within the      |
| be treated as income | United States. Citizens of the United States  |
| from sources within  | and domestic corporations [entitled to the    |
| the United States:   | benefits of section 251]{.underline}          |
|                      | \[**\***\] are, however, taxable upon income  |
| \(1\) Interest. -    | received within the United States, whether    |
| Interest from the    | derived from sources within or without the    |
| United States, any   | United States. (See sections 212(a), 231(c),  |
| Territory, any       | and 251.)                                     |
| political            |                                               |
| subdivision of a     | The Internal Revenue Code divides the income  |
| Territory, or the    | of [such taxpayers]{.underline} into three    |
| District of          | classes:\                                     |
| Columbia, and        | (a) Income which is derived in full from      |
| interest on bonds,   | sources within the United States;\            |
| notes, or other      | (b) Income which is derived in full from      |
| interest-bearing     | sources without the United States;\           |
| obligations of       | (c) Income which is derived partly from       |
| residents, corporate | sources within and partly from sources        |
| or otherwise, not    | without the United States.                    |
| including:...        |                                               |
|                      | The taxable income from sources within the    |
| \(2\) Dividends...\  | United States includes that derived in full   |
| (3) Personal         | from sources within the United States and     |
| services. -          | that portion of the income which is derived   |
| Compensation for     | partly from sources within and partly from    |
| labor or personal    | sources without the United States which is    |
| services...\         | allocated or apportioned to sources within    |
| (4) Rentals and      | the United States.                            |
| royalties...\        |                                               |
| (5) Sale of real     | Sec. 29.119-2. Interest. There shall be       |
| property...\         | included in the gross income from sources     |
| (6) Sale of personal | within the United States, of [nonresident     |
| property...          | alien individuals]{.underline}, [foreign      |
|                      | corporations]{.underline}, and citizens of    |
| \(b\) Net Income     | the United States or domestic corporations    |
| from Sources in      | which are [entitled to the benefits of        |
| United States. -     | section 251]{.underline} \[\*\], all interest |
| From the items of    | received or accrued, as the case may be, from |
| gross income         | the United States, any Territory, any         |
| specified in         | political subdivision of a Territory, or the  |
| subsection (a) of    | District of Columbia, and interest on bonds,  |
| this section there   | notes, or other interest-bearing obligations  |
| shall be deducted    | of residents of the United States, whether    |
| \[allowable          | corporate or otherwise, except:...            |
| deductions\]. [The   |                                               |
| remainder, if any,   | Sec. 29.119-3. Dividends...\                  |
| shall be included in | Sec. 29.119-4. Compensation for labor or      |
| full as net income   | personal services...\                         |
| from sources within  | \                                             |
| the United           | Sec. 29.119-5. Rentals and royalties...\      |
| States]{.underline}. | Sec. 29.119-6. Sale of real property...\      |
|                      | Sec. 29.119-7. Income from sources without    |
| \(c\) Gross Income   | the United States...\                         |
| from Sources         | Sec. 29.119-8. Sale of personal property...   |
| [                    |                                               |
| Without]{.underline} | Sec. 29.119-9. Deductions in general.\        |
| United States...     | The deductions provided for in chapter 1      |
|                      | shall be allowed to [nonresident              |
| \(d\) Net Income     | alien]{.underline} individuals and [foreign   |
| from Sources         | corporations]{.underline} engaged in trade or |
| [                    | business within the United States, and to     |
| Without]{.underline} | citizens of the United States and domestic    |
| United States...     | corporations [entitled to the benefits of     |
|                      | section 251]{.underline} \[\*\], only if and  |
| \(e\) Income from    | to the extent provided in sections 213, 215,  |
| Sources [Partly      | 232, 233, and 251.                            |
| Within and Partly    |                                               |
| Without]{.underline} | Sec. 29.119-10. Apportionment of deductions.\ |
| United States...     | From the items specified in sections 29.119-1 |
|                      | to 29.119-6, inclusive, as being derived      |
| \(f\) Definitions... | specifically from sources within the United   |
|                      | States there shall, in the case of            |
|                      | [nonresident alien individuals]{.underline}   |
|                      | and [foreign corporations]{.underline}        |
|                      | engaged in trade or business within the       |
|                      | United States, be deducted \[allowable        |
|                      | deductions\]. [The remainder shall be         |
|                      | included in full as net income from sources   |
|                      | within the United States]{.underline}...      |
|                      |                                               |
|                      | \[\* - One can be entitled to the benefits of |
|                      | section 251\                                  |
|                      | only if he receives a certain percentage of   |
|                      | his income\                                   |
|                      | from within federal                           |
|                      | [possessions]{.underline}.\]                  |
+----------------------+-----------------------------------------------+