"Taxable Income"
by Larken Rose
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14) Other Cover-Ups
The current income tax is based upon the income tax of 1913. Though the original laws, and how they were portrayed to the public, were already deceptive, there are numerous examples, from the beginning of the tax up to today, of things being moved, reworded, renumbered and changed, in such a way to make the correct application of the laws more and more difficult to find.
1921
As shown above, some very telling phrases simply vanished from the regulations in 1954. But it was not only the regulations that lost some honesty along the way. The statutes found in the Revenue Act of 1921 show why the regulations said what they said up until 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, 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 or of a corporation entitled to the benefits of section 262 the computation shall also be made in the manner provided in section 217." As the current regulations and historical regulations state, the section is applicable to nonresident aliens, foreign corporations, and citizen or domestic corporations which receive much of their income from within federal possessions.
1921 CodeNet income of nonresident alien individuals
Sec. 217. (a) That in the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States:
(1) Interest...
(2) The amount received as dividends...
(3) Compensation for labor or personal services performed in the United States.
(4) Rentals or royalties...
(5) Gains, profits, and income from the sale of real property...
- - - - - - - - - - - - - - - - - - - -
(b) From the items of gross income specified in subdivision (a) there shall be deducted [allowable deductions]. The remainder, if any, shall be included in full as net income from sources within the United States.
1939 CodeSec. 119. Income from sources within United States
(a) Gross income from sources in United States.
The following items of gross income shall be treated as income from sources within the United States::
(1) Interest...
(2) Dividends...
(3) Personal services - Compensation for labor or personal services performed in the United States...
(4) Rentals and royalties...
(5) Sale of real property...
(6) Sale of personal property...
- - - - - - - - - - - - - - - - - - - -
(b) Net income from sources in United States
From the items of gross income specified in subsection (a) of this section there shall be deducted [allowable deductions]. The remainder, if any, shall be included in full as net income from sources within the United States.
Current CodeSec. 861. Income from sources within the United States
(a) Gross income from sources within United States
The following items of gross income shall be treated as income from sources within the United States::
(1) Interest...
(2) Dividends...
(3) Personal services - Compensation for labor or personal services performed in the United States...
(4) Rentals and royalties...
(5) Disposition of United States real property interest...
(6) Sale or exchange of inventory property...
(7) Amounts received as underwriting income...
(8) Social security benefits...- - - - - - - - - - - - - - - - - - - - -
(b) Taxable income from sources within United States
From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted [allowable deductions]. The remainder, if any, shall be included in full as taxable income from sources within the United States....
(c) The following items of gross income shall be treated as income from sources without the United States:...
- - - - - - - - - - - - - - - - - - - -
(d) From the items of gross income specified in subdivision (c) there shall be deducted [allowable deductions]. The remainder, if any, shall be treated in full as net income from sources without the United States.
(c) Gross income from sources without United States The following items of gross income shall be treated as income from sources without the United States:...
- - - - - - - - - - - - - - - - - - - -
(d) Net income from sources without the United States - From the items of gross income specified in subsection (c) of this section there shall be deducted [allowable deductions]. The remainder, if any, shall be treated in full as net income from sources without the United States.
Sec. 862. Income from sources without the United States (a) Gross income from sources without United States
The following items of gross income shall be treated as income from sources without the United States:...
- - - - - - - - - - - - - - - - - - - - -
(b) Taxable income from sources without United States - From the items of gross income specified in subsection (a) there shall be deducted [allowable deductions]. The remainder, if any, shall be treated in full as taxable income from sources without the United States...
(e) Items of gross income, expenses, losses and deductions, other than those specified in subdivisions (a) and (c), shall be allocated or apportioned to sources within or without the United States... (e) Income from sources partly within and partly without United States Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section, shall be allocated or apportioned to sources within or without the United States...
(f) Definitions...
Sec. 863. Special rules for determining source (a) Allocation under regulations
Items of gross income, expenses, losses, and deductions, other than those specified in sections 861(a) and 862(a), shall be allocated or apportioned to sources within or without the United States...
Sec. 864. Definitions and special rules...
Sec. 865. Source rules for personal property sales...
Although it is obvious to whom this section applied in 1921, some may question whether this is at all relevant to current law. Treasury Decision 8687, in discussing what the 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(e) of the Revenue Act of 1921, also reflects an intention that..." [Treasury Decision 8687]
This Treasury Decision, passed in late 1996, confirms that Section 217 of the Revenue Act of 1921 is the predecessor of the current Part I of Subchapter N, and shows that the IRS still refers to the 1921 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..." [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
In 1978, the wording of 26 CFR § 1.861-8 was changed significantly, and the title was changed from "Computation of Taxable Income from Sources Within the United States" to "Computation of taxable income from sources within the United States and from other sources and activities." Some have suggested that the current title implies that one should not be using this section unless he has income both from within the United States and from "other sources and activities." The older title, as well as the text of the current regulations, shows that this is not the case.
In addition to the title change, the section also went from less than one page in length to more than forty 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
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 to "Source rules and other general rules relating to foreign income." It should be mentioned that while titles of parts may give an indication of what the part is about, the title has no effect on the actual legal application.
"...nor shall any table of contents, table of cross references, or similar outline, analysis, or descriptive matter relating to the contents of this title be given any legal effect."
[26 USC § 7806(b)]So when the title was changed (but the text of the law was not), the application of the law did not change. What changed was the appearance of the table of contents. Prior to the change, in light of the fact that the income tax applies to "income from whatever source derived," the table of contents made the relevance of 26 USC § 861 obvious:
Subtitle A, "Income taxes"
Chapter 1, "Normal taxes and surtaxes"
Subchapter N, "Tax based on income from sources within or without the United States"
Part I, "Determination of sources of income"
Section 861, "Income from sources within the United States"
(a) "Gross income from sources within the United States"
(b) "Taxable income from sources within the United States"When the title of Part I was changed, and the new title stated that the part was about "foreign income," it no longer appeared to be an obvious place for most people to look when determining their taxable income. This would certainly have the effect of drawing attention away from Section 861. Many tax professionals concede that Section 861 and the related regulations show income to be taxable only when it comes from certain activities related to international and foreign commerce. The new title gives the appearance that the part has no relevance to most people, and should not even be examined.
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
The Paperwork Reduction Act of 1980 requires that every form used by the federal government to collect information from the public first be approved by the Office of Management and Budget ("OMB"). The regulations at 26 CFR § 602.101 contain a table listing the OMB-approved forms for each section of regulations. The regulations at 26 CFR § 1.1-1 are entitled "Income tax on individuals," and correspond to 26 USC § 1 (which imposes the "income tax"). Up until 1995, the first line in this table identified Form 2555, "Foreign Earned Income," as the only approved form under 26 CFR § 1.1-1. In 1995, after many "tax resistance" groups had become aware of this, the listing for "1.1-1" was removed from the list, in order to avoid "confusion," according to the Department of the Treasury. The process of applying for, and receiving OMB approval for a form makes the possibility of an error extremely remote. The Department of the Treasury requested that Form 2555 be approved for 1.1-1, and the Office of Management and Budget approved it. When the entry drew too much attention, it was removed. At present no forms are approved for use with 26 CFR § 1.1-1.
15) Clues and Hints
There are numerous other bits of information that hint at the correct application of the law, a few of which are included here as supporting evidence.
On the Record
As the Supreme Court and the Secretary of the Treasury have repeatedly stated, the federal income tax is (and has always been) an indirect excise tax. Excises, generally speaking, are taxes imposed on certain activities or privileges. In light of this, there are some interesting comments in the Congressional Record from March 27, 1943 (page 2580). A statement is included by a "Mr. F. Morse Hubbard, formerly of the legislative drafting research fund of Columbia University, and a former legislative draftsman in the Treasury Department" (clearly someone whose job would require a comprehensive understanding of the proper application of the law). His comments include the following:
"The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax: it is the basis for determining the amount of the tax."
The income tax is imposed on "income from whatever source derived" (minus deductions). The mere receipt of income, by itself, is not (and could not be) the subject of this excise tax. It is the "source" which is the subject of the tax, and the amount of income received from that "source" is what is used to determine the amount of tax due. The above citations coincide well with the fact that the section of regulations for determining taxable income (26 CFR § 1.861-8) states that it applies only to income "from specific sources and activities." And the statutes and regulations under the part which "determine[s] the sources of income for purposes of the income tax" all apply only to these same "specific sources and activities," which are all related to international or foreign commerce.
Section 306
Section 306 of the statutes deals with individuals receiving income from selling certain stocks. After dealing with the income itself, the section discusses the "source" of income.
"Sec. 306. Dispositions of certain stock
(a) General rule
If a shareholder sells or otherwise disposes of section 306 stock…
(1) Dispositions other than redemptions -
If such disposition is not a redemption…
(A) The amount realized shall be treated as ordinary income…
(f) Source of gain - The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec. 861 and following, relating to determination of sources of income), be treated as derived from the same source as would have been the source if money had been received from the corporation as a dividend at the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871(a) or section 881(a), as the case may be." [26 USC § 306(f)]The section states that if the income comes from "sources within the United States," then it constitutes "gains, profits, and income" under Section 871(a) or 881(a). Sections 871 and 881 deal exclusively with nonresident aliens and foreign corporations, respectively (both are found in Part II of Subchapter N, "Nonresident aliens and foreign corporations"). The wording of Section 306 implies that if the income in question comes from "sources within the United States," then it must apply to one of these sections. If a citizen living and working in the United States receives the type of income dealt with in Section 306, and believes it constitutes "income from sources within the United States," halfway through the last sentence the reader is left in limbo. The sentence structure is "if A, then B." Using the usual overly-broad interpretation of the Code, if a citizen receives income from the type of stock mentioned from "sources within the United States," then that income "shall be considered to be" taxable for nonresident aliens or foreign corporations. A contradiction exists, unless one realizes that the term "sources of income" has a restricted meaning, which in this case would apply only to foreigners.