"Taxable Income" by Larken Rose pg3(Page 3 of 6)12) Intent to DeceiveFollowing 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. 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 this claim, 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 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 1954In 1954, the Code 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 several amendments, the current Code retains the same general structure, numbering and content of the 1954 Code. At the time of the 1954 "transformation" of the Code, several changes helped to conceal the truth about the limited application of the federal income tax. As shown above, the regulations in 1945 specifically stated (twice) that some income not exempt by statute was nonetheless exempt from federal taxation because of the Constitution. The 1945 regulations under the definition of "gross income" began as follows:"Sec. 29.22(a)-1. What included in gross income.Gross income includes in general [items of income listed] derived from any source whatever, unless exempt from tax by law." [1945 regulations]Those regulations then went on to explain that this refers to income exempt by statute or "fundamental law," meaning the Constitution. The current corresponding regulations begin in a similar manner:"Sec. 1.61-1 Gross income. (a) General definition. Gross income means all income from whatever source derived, unless excluded by law." [26 CFR § 1.61-1]However, no mention of the Constitution remains. The phrase "unless excluded by law" is now read as being synonymous with "unless excluded by statute." The Constitutional limitations still apply (there have been no subsequent constitutional amendments relative to the taxing power), but the present regulations under 26 USC § 61 do not explicitly say that this is part of the "law" which exempts certain income. Instead, they use the general wording that leaves the reader free to assume that only income specifically exempted by statute is exempt from taxation. 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; but special provisions are made for nonresident aliens and foreign corporations... and, in certain cases... for citizens and domestic corporations deriving income from sources within possessions of the United States."This list of taxable activities is absent from the current regulations under 26 USC § 61. However, something very similar is found in the current regulations under Section 861. The regulations under Section 861 twice define the term "class of gross income," saying that a "class of gross income" "may consist of one or more items… of gross income enumerated in section 61." The regulations then refer the reader to "paragraph (d)(2) of this section which provides that a class of gross income may include excluded income." In other words, the "items" of income listed in Section 61 are not necessarily taxable, but 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. This section describes what is meant by exempt income."(ii) Exempt income and exempt asset defined--(A) In general. For purposes of this section, the term exempt income means any income that is, in whole or in part, exempt, excluded, or eliminated for federal income tax purposes." [26 CFR § 1.861-8T(d)(2)(ii)]The section then goes on to specify what is not exempt. The following should be read carefully, since it starts with a double negative. If a certain kind of income is not exempt, it means it is subject to the federal income tax. Therefore, after being told that "items" of income (which make up "classes of gross income") may not be taxable, a list is given of the types of income which are subject to the federal income tax:"(iii) Income that is not considered tax exempt. The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them: (A) In the case of a foreign taxpayer…(B) In computing the combined taxable income of a DISC or FSC…(C) For all purposes under subchapter N of the Code… the gross income of a possessions corporation… (D) Foreign earned income as defined in section 911 and the regulations thereunder…" [26 CFR § 1.861-8T(d)(2)(iii)]This is the entire list of non-exempt income. The idea that other types of income are also taxable (not exempt), despite not being listed, is contradicted by the regulations stating that paragraph (d)(2) "provides that a class of gross income [consisting of the "items" of income listed in 26 USC § 61] may include excluded income." Unless those types of income not listed are exempt, paragraph (d)(2) does not show that the "items" of income listed in Section 61 may be exempt. (A basic principle of law is that such a list is assumed to be exclusive and complete, unless a phrase such as "including, but not limited to…" is used.)While it is arranged and worded differently, this list of non-exempt income is essentially the same as the regulations under the old statute defining "gross income." It lists foreign earned 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 version showed the limitations of the law in "step one" (the definition of "gross income"), the current statute and regulation defining "gross income" use the word "source" without further explanation, and additional steps must be followed to discover that the meaning of that term ("source") is determined by 26 USC § 861 and following, and related regulations. Prior to 1954, the regulations did not say that Section 119 (predecessor to the current 861) and 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 regulations defining "gross income" mention "nonresident aliens and foreign corporations by sections 211 to 237, inclusive, and, in certain cases, by section 251 for citizens and domestic corporations deriving income from sources within possessions of the United States." At the same time the regulations under 119 mention "nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations entitled to the benefits of section 251.")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 14523(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 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. The Senate report on the 1954 Code states the following:"SUBCHAPTER N - TAX BASED ON INCOME FROM SOURCESWITHIN OR WITHOUT THE UNITED STATESPART I - Determination of Sources of Income§ 861. Income from sources within the United States§ 862. Income from sources without the United States§ 863. Items not specified in section 861 or 862§ 864. DefinitionsThese sections, which are identical with sections 861-864 of the House bill, correspond to section 119 of the 1939 Code. No substantive change is made, except that section 861(a)(3) would extend the existing 90-day $3,000 rule in the case of a nonresident alien employee of a foreign employer to a nonresident alien employee of a foreign branch of a domestic employer."Congress here states that the application of the law did not change (except for the specific detail mentioned). As would be expected, the statutes are nearly identical. Sec. 119. [1939 Code] Income from sources within the United States(a) Gross Income from Sources in United States.The following items of gross income shall be treated as income from sources within the United States:...Sec. 861 [current Code]. Income from sources within the United States(a) Gross income from sources within United StatesThe 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 honesty of the regulations corresponding to these sections changed dramatically. The older regulations admitted the truth so plainly and so often that no step-by-step explanation is needed. The following is the equivalent of the current 26 CFR § 1.861-1, in its entirety. "Sec. 29.119-1. Income from sources within the United States.Nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations entitled to the benefits of section 251 [this applies only to those who receive a large percentage of their income from within federal possessions] are taxable only upon income from sources within the United States. Citizens of the United States and domestic corporations entitled to the benefits of section 251 are, however, taxable upon income received within the United States, whether derived from sources within or without the United States. (See sections 212(a), 231(c), and 251.)The Internal Revenue Code divides the income of such taxpayers into three classes:(1) Income which is derived in full from sources within the United States;(2) Income which is derived in full from sources without the United States;(3) Income which is derived partly from sources within and partly from sources without the United States.The taxable income from sources within the United States includes that derived in full from sources within the United States and that portion of the income which is derived partly from sources within and partly from sources without the United States which is allocated or apportioned to sources within the United States."Note that the second paragraph in the 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 and foreign corporations engaged in trade or business within the United States, and to citizens of the United States and domestic corporations entitled to the benefits of section 251, only if and to the extent provided in sections 213, 215, 232, 233, and 251.Sec. 29.119-10. Apportionment of deductions.From the items specified in sections 29.119-1 to 29.119-6, inclusive, as being derived specifically from sources within the United States there shall, in the case of nonresident alien individuals and foreign corporations engaged in trade or business within the United States, be deducted [allowable deductions]. The remainder shall be included in full as net income from sources within the United States…"Regarding income from within the United States, the older regulations defining "gross income" describe the exact same taxable activities as the regulations of that time related to "income from sources within the United States" (namely, nonresident aliens and foreign corporations getting income from within the United States, and citizens and domestic corporations who receive much of their income from within federal possessions). "No substantive change" was made when Section 119 became Sections 861 and following, which implies that Section 119 and its regulations "determine[d] the sources of income for purposes of the income tax" (as the current regulations state). The older regulations did not need to say this, since the regulations defining "gross income" also specifically listed what activities could generate taxable income. So in 1945, the regulations defining "gross income" and the regulations under the old Section 119 "determine[d] the sources of income for purposes of the income tax." Today only the regulations under Section 861 list the taxable activities. (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.)(Question for Doubters #6: Do the older regulations under the predecessor of 26 USC § 861 show income of U.S. citizens living and working within the 50 states as taxable?)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 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." [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 very 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 195429.119-10 Apportionment of deductions.From the items specified in sections 29.119-1 to 29.119-6, inclusive, as being derived specifically from sources within the United States there shall, in the case of nonresident alien individuals and foreign corporations engaged in trade or business within the United States, be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the United States. The ratable part is based upon the ratio of gross income from sources within the United States to the total gross income.Example. A nonresident alien individual engaged in trade or business within the United States whose taxable year is the calendar year derived gross income from all sources for 1942 of $180,000, including there-in:Interest on bonds of a domestic corporation $9,000Dividends on stock of a domestic corporation 4,000Royalty for the use of patents within the United States 12,000Gain from sale of real property [in U.S.] 11,000---------Total 36,000[remainder of example omitted] AFTER 19541.861-8 Computation of Taxable Income from Sources Within the United States(a) General. From the items of gross income specified in §§ 1.861-2 to 1.861-7, inclusive, as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. The ratable part is based upon the ratio of gross income from sources within the United States to the total gross incomeExample. A taxpayer engaged in trade or business receives for the taxable year gross income from all sources in the amount of $180,000, one-fifth of which ($36,000) is from sources within the United States, computed as follows:Interest on bonds of a domestic corporation $9,000Dividends on stock of a domestic corporation 4,000Royalty for the use within the United States of patents 12,000Gain from sale of real property [in U.S.] 11,000--------Total 36,000[remainder of example omitted]The wording is nearly identical, except for two changes. The phrase stating that the whole section applies only to nonresident aliens and foreign corporations simply vanished. In addition, while the specifics of the example in the regulation remained identical, the phrase "a nonresident alien individual" was replaced with "a taxpayer." As Congress stated, the application of the law did not change in 1954, but some key phrases in the regulations were removed 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 195429.119-2. Interest.There shall be included in the gross income from sources within the United States, of nonresident alien individuals, foreign corporations, and citizens of the United States, or domestic corporations which are entitled to the benefits of section 251, all interest received or accrued, as the case may be, from the United States, any Territory, any political subdivision of a Territory, or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of residents of the United States, whether corporate or otherwise, except... AFTER 19541.861-2 Interest.(a) General. There shall be included in the gross income from sources within the United States all interest received or accrued, as the case may be, from the United States, any Territory, any political subdivision of a Territory, or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of residents of the United States, whether corporate or otherwise, except...(Interest is the only "item" of income for which the regulations specifically mentioned who was receiving it. But the regulations cited above state that in the case of all of the "items" of income, the deductions and determination of taxable income can be done only by those engaged in the specific taxable activities.)

"Taxable Income"
by Larken Rose
(Page 3 of 6)

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12) Intent to Deceive

Following the current statutes and regulations, and arriving at the conclusion that most Americans do not receive taxable income, admittedly can be a somewhat complicated task. 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 this claim, 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 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

In 1954, the Code 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 several amendments, the current Code retains the same general structure, numbering and content of the 1954 Code. At the time of the 1954 "transformation" of the Code, several changes helped to conceal the truth about the limited application of the federal income tax.

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

"Sec. 29.22(a)-1. What included in gross income.
Gross income includes in general [items of income listed] derived from any source whatever, unless exempt from tax by law." [1945 regulations]

Those regulations then went on to explain that this refers to income exempt by statute or "fundamental law," meaning the Constitution. The current corresponding regulations begin in a similar manner:

"Sec. 1.61-1 Gross income. (a) General definition. Gross income means all income from whatever source derived, unless excluded by law." [26 CFR § 1.61-1]

However, no mention of the Constitution remains. The phrase "unless excluded by law" is now read as being synonymous with "unless excluded by statute." The Constitutional limitations still apply (there have been no subsequent constitutional amendments relative to the taxing power), but the present regulations under 26 USC § 61 do not explicitly say that this is part of the "law" which exempts certain income. Instead, they use the general wording that leaves the reader free to assume that only income specifically exempted by statute is exempt from taxation.

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; but special provisions are made for nonresident aliens and foreign corporations... and, in certain cases... for citizens and domestic corporations deriving income from sources within possessions of the United States."

This list of taxable activities is absent from the current regulations under 26 USC § 61. However, something very similar is found in the current regulations under Section 861. The regulations under Section 861 twice define the term "class of gross income," saying that a "class of gross income" "may consist of one or more items… of gross income enumerated in section 61." The regulations then refer the reader to "paragraph (d)(2) of this section which provides that a class of gross income may include excluded income." In other words, the "items" of income listed in Section 61 are not necessarily taxable, but 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. This section describes what is meant by exempt income.

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

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

"(iii) Income that is not considered tax exempt. The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:
(A) In the case of a foreign taxpayer…
(B) In computing the combined taxable income of a DISC or FSC…
(C) For all purposes under subchapter N of the Code… the gross income of a possessions corporation…
(D) Foreign earned income as defined in section 911 and the regulations thereunder…" [26 CFR § 1.861-8T(d)(2)(iii)]

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

While it is arranged and worded differently, this list of non-exempt income is essentially the same as the regulations under the old statute defining "gross income." It lists foreign earned 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 version showed the limitations of the law in "step one" (the definition of "gross income"), the current statute and regulation defining "gross income" use the word "source" without further explanation, and additional steps must be followed to discover that the meaning of that term ("source") is determined by 26 USC § 861 and following, and related regulations.

Prior to 1954, the regulations did not say that Section 119 (predecessor to the current 861) and 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 regulations defining "gross income" mention "nonresident aliens and foreign corporations by sections 211 to 237, inclusive, and, in certain cases, by section 251 for citizens and domestic corporations deriving income from sources within possessions of the United States." At the same time the regulations under 119 mention "nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations entitled to the benefits of section 251.")

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 14523(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 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. The Senate report on the 1954 Code states the following:

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

PART I - Determination of Sources of Income

§ 861. Income from sources within the United States
§ 862. Income from sources without the United States
§ 863. Items not specified in section 861 or 862
§ 864. Definitions

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

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

Sec. 119. [1939 Code] Income from sources within the United States
(a) Gross Income from Sources in United States.
The following items of gross income shall be treated as income from sources within the United States:...

Sec. 861 [current Code]. Income from sources within the United States
(a) Gross income from sources within United States
The following items of gross income shall be treated as income from sources within the United States:...

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

"Sec. 29.119-1. Income from sources within the United States.
Nonresident alien individuals, foreign corporations, and citizens of the United States or domestic corporations entitled to the benefits of section 251 [this applies only to those who receive a large percentage of their income from within federal possessions] are taxable only upon income from sources within the United States. Citizens of the United States and domestic corporations entitled to the benefits of section 251 are, however, taxable upon income received within the United States, whether derived from sources within or without the United States. (See sections 212(a), 231(c), and 251.)

The Internal Revenue Code divides the income of such taxpayers into three classes:
(1) Income which is derived in full from sources within the United States;
(2) Income which is derived in full from sources without the United States;
(3) Income which is derived partly from sources within and partly from sources without the United States.

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

Note that the second paragraph in the 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 and foreign corporations engaged in trade or business within the United States, and to citizens of the United States and domestic corporations entitled to the benefits of section 251, only if and to the extent provided in sections 213, 215, 232, 233, and 251.

Sec. 29.119-10. Apportionment of deductions.
From the items specified in sections 29.119-1 to 29.119-6, inclusive, as being derived specifically from sources within the United States there shall, in the case of nonresident alien individuals and foreign corporations engaged in trade or business within the United States, be deducted [allowable deductions]. The remainder shall be included in full as net income from sources within the United States…"

Regarding income from within the United States, the older regulations defining "gross income" describe the exact same taxable activities as the regulations of that time related to "income from sources within the United States" (namely, nonresident aliens and foreign corporations getting income from within the United States, and citizens and domestic corporations who receive much of their income from within federal possessions). "No substantive change" was made when Section 119 became Sections 861 and following, which implies that Section 119 and its regulations "determine[d] the sources of income for purposes of the income tax" (as the current regulations state). The older regulations did not need to say this, since the regulations defining "gross income" also specifically listed what activities could generate taxable income. So in 1945, the regulations defining "gross income" and the regulations under the old Section 119 "determine[d] the sources of income for purposes of the income tax." Today only the regulations under Section 861 list the taxable activities.

(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.)

(Question for Doubters #6: Do the older regulations under the predecessor of 26 USC § 861 show income of U.S. citizens living and working within the 50 states as taxable?)

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 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." [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 very 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

29.119-10 Apportionment of deductions.

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

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

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

[remainder of example omitted]

AFTER 1954

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

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

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

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

[remainder of example omitted]

The wording is nearly identical, except for two changes. The phrase stating that the whole section applies only to nonresident aliens and foreign corporations simply vanished. In addition, while the specifics of the example in the regulation remained identical, the phrase "a nonresident alien individual" was replaced with "a taxpayer." As Congress stated, the application of the law did not change in 1954, but some key phrases in the regulations were removed 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

29.119-2. Interest.

There shall be included in the gross income from sources within the United States, of nonresident alien individuals, foreign corporations, and citizens of the United States, or domestic corporations which are entitled to the benefits of section 251, all interest received or accrued, as the case may be, from the United States, any Territory, any political subdivision of a Territory, or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of residents of the United States, whether corporate or otherwise, except...

AFTER 1954

1.861-2 Interest.

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

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

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