Subject: A Frivolous Summary

( Note: This didn't turn out as short as I was hoping, but I highly suggest reading it all anyway if you want a crash course in the 861 evidence. Also, feel free to distribute this however you see fit. - Larken Rose )

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Dear List Subscriber,

rhetoric.")

Various government officials have made the accusation that the issue Mr. Bell addresses is "frivolous," completely without merit, "nonsensical," contrary to established law, "absurd," and even "stupid." (Interestingly, several of the officials who have made such comments were appointed by the man who is best known for the line, "I did not have sex with that woman.")

The claim is not simply that Mr. Bell, and others who have reached the same conclusions, are incorrect; the claim is that their conclusions are so completely baseless and idiotic, that it's okay--or even necessary--to silence them using the force of law.

(Based on the same claim, the IRS nationwide refuses to discuss the substance of the issue, refuses to send the issue to their lawyers for an official ruling, and refuses to even process many tax returns which mention the issue, sending out threats of penalties instead.)

In light of today's "report" in the New York Times, I thought this would be a good time to put together a relatively brief summary of this "frivolous" and baseless "argument," that has no support in the law. So here goes:

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The income tax is imposed upon one's TAXABLE income, and nothing else. (Section 1 of the Internal Revenue Code imposes the tax on the "taxable income" of individuals, and Section 11 imposes it on the "taxable income" of

corporations.) Every tax professional knows that NOT all income is taxable, and that only someone who has TAXABLE income can possibly owe the tax. Here is how the tax professionals determine what is taxable:

Section 63 of the income tax statutes generally defines "taxable income" to mean "gross income" minus deductions. Section 61 generally defines "gross income" to mean "all income from whatever source derived," and it includes a list of some of the more common items of income, such as compensation for services, interest, rents, etc. There are other sections of the statutes which say that certain types of income (such as gifts, life insurance proceeds, income of state governments, etc.) are exempted from the tax. But other than those specific exceptions, the so-called "tax experts" conclude, based on the general definitions mentioned above, that the income of most Americans is taxable.

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So far we have not seen anything "frivolous"; all of the above is agreed upon by the status quo tax preparation industry.

But there is a slight problem. You see, according to those general definitions (found in Subchapter B of the income tax statutes), the income of several BILLION people is subject to the U.S. income tax. The general definitions above make the income of a Chinese man in China look just as taxable as the income of the average American. The general definitions say nothing about who is receiving the income, or where the income is coming from; they do NOT limit the tax to those inside the United States. Obviously Congress did not try to tax everyone on the planet, though you'd never know that from looking at the general definitions above.

If not for another part of the law--Subchapter N of the statutes--there would be NO limits on who could have taxable income, and from where. Subchapter N is entitled "Tax based on income from sources within or without the United States." As the title implies, this is the part of the law that specifies when income from inside the U.S. is taxable, and when income from outside the U.S. is taxable. Sure enough, Part II of Subchapter N shows that nonresident aliens (which would include all the Chinese people living in China) are only taxed on income which either comes from the U.S. or comes from doing business within the United States (see 26 USC § 871). This of course QUALIFIES the general definitions of "gross income" and "taxable income," and shows that it is a mistake (at least in this case) to rely on those general definitions alone.

Some tax professionals will know enough to say, "well if you're a citizen, it doesn't MATTER where the income comes from; it's all taxable," and they will point to Section 1.1-1(b) of the income tax regulations, which says that citizens are liable to the tax, whether their taxable income is "from sources within or without the United States." (Of course, that still depends upon what income is TAXABLE income.)

But now we come to something they DON'T say; a citation that no court has EVER mentioned, despite numerous citizens quoting it. No IRS form letter addresses it; no DOJ "press release" mentions it; no government lawyer wants to talk about it. When faced with it, most government officials respond either with a blank expression, or some pre-fab line about it being "frivolous." Keeping in mind that the tax professionals AGREE that citizens are taxed on their taxable income "from sources within or without the United States," here is what the legally-binding federal income tax statutes say:

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

Since citizens are taxed on their taxable income "from sources within or without the United States" (26 CFR § 1.1-1(b)), and the regulations plainly say that should use the rules in 26 CFR § 1.861-8 and following to determine their "taxable income from sources within or without the United States," do the tax professionals use those sections?

Nope. "That's frivolous. It has no merit. It's been ruled against. Now shut up or we'll shut you up."

You can't figure out what you owe until you determine your taxable income. The above citation says where to go to determine your taxable income. The tax professionals DO NOT DO WHAT THE REGULATIONS SAY. How curious.

Well, maybe we're missing something. Maybe we shouldn't be looking at 1.863-1(c), or maybe we're taking something out of context. Most tax professionals will, in fact, claim that we have no business looking to Section 861, or the related regulations, which would include 1.861-8, where the above citation pointed us. So maybe we jumped the gun, and that section is only to be used by certain people for certain things. Let's find out, shall we?

"No! Just shut up and pay up, or else!"

Again, the general definitions of "gross income" and "taxable income" (26 USC §§ 61, 63) don't say anything about who exactly is receiving the income, or where it is coming from. Since the above citation told us to us the rules of 1.861-8 to determine our "taxable income from sources within or without the United States," let's see how that section starts. Read it carefully.

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

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

Looks clear enough. Sections 861(b) and 863(a) are for determining taxable income from INSIDE the U.S., and Sections 862(b) and 863(a) are for determining taxable income from OUTSIDE the U.S.

"NO! THAT'S FRIVOLOUS, COMPLETELY WITHOUT MERIT, AND THE COURTS HAVE CONSISTENTLY RULED AGAINST IT!!! < froth, froth >"

Uh... but it's what the regulations SAY in plain English. Are the regulations "frivolous"? Or is it just "frivolous" to BELIEVE them when they contradict conventional wisdom? Again, let's make sure we're not missing something. Here is an outline of 861 through 863:

Section 861: Income from sources within the United States

Subsection 861(a): Gross income from sources within United States

Subsection 861(b): Taxable income from sources within United States Section 862: Income from sources without the United States

Subsection 862(a): Gross income from sources without United States

Subsection 862(b): Taxable income from sources without United States

Section 863 and its regulations deal with income that comes partly from inside and partly from outside the United States (for example, if you had a job where you would travel and do work in different countries), and gives rules about how to divide up such income into "within" income and "without" income.

All this matches the statement shown above, that says that "Sections 861(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources within the United States after gross income from sources within the United States has been determined," and that "Sections

862(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources without the United States after gross income from sources without the United States has been determined." There's no hint that most of us should just IGNORE those sections. In fact, under Section 61 itself (which generally defines "gross income" to mean "all income from whatever source derived")=, the USCS and USCA printings of the tax code (and the USC version up until 2001) even included cross-references such as these:

"Income from sources -

within the United States, see section 861 of this title.

without the United States, see section 862 of this title."

(The indexes of the code contain similar entries.)

The first section of regulations under Section 861 (namely, 26 CFR §

1.861-1) further elaborates on how to determine taxable income from INSIDE the U.S., from OUTSIDE the U.S., and income from partly within and partly without. Regarding income from WITHIN the U.S., it says that "The gross income from sources within the United States, consist[s] of the items of gross income specified in section 861(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a)," and then says that "The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with Sections 861(b) and 863(a)," the allowable deductions. (And the section then refers the reader to Sections 1.861-8 and 1.863-1, both of which are quoted above.) Again, that just reinforces the citations shown above.

POINT #1: IS IT PATENTLY "FRIVOLOUS" TO BELIEVE THAT ONE SHOULD USE THE RULES OF 26 USC § 861(b), AND THE RELATED REGULATIONS BEGINNING AT 26 CFR § 1.861-8, TO DETERMINE HIS TAXABLE DOMESTIC INCOME?

Various tax professionals insist that most people should NOT look there, in spite of the above citations. Why?

"Those sections are only about foreign income."

"Those sections are only for foreigners."

"Those sections are only for those who have foreign AND domestic income." "Those sections are only for those who need to allocate deductions between domestic and foreign income." "Those sections are only for people who need to determine the geographic origin of their income."

Oddly enough, the tax professionals don't even agree with each other about what the sections are for, and NONE of them agree with what the regulations actually SAY the section are for. Where do they get the idea that most people should ignore those sections? They get it from a false premise and backwards logic.

As we will soon see, Sections 861(b) and 1.861-8 show various types of domestic income (income from within the United States) to be taxable, but NOT for the average American. "Everyone knows that most Americans owe the tax, so if some sections (like 861 and its regulations) do NOT show that income to be taxable, people shouldn't be looking there." THAT is the "logic" of the so-called "experts." Your income MUST be taxable, but 861 and its regulations DON'T show it to be taxable, so you must be looking in the wrong place. In other words, "that evidence doesn't lead to my conclusion, so DON'T LOOK AT IT."

"THE COURTS HAVE RULED AGAINST THIS!!! PAY UP OR GO TO JAIL!!! < froth, froth >"

If you DO look at those sections, and talk about them, and try to get open, honest answers from your government about the issue, you will be vilified, threatened, fined, accused of being a law-breaker, and possibly SILENCED BY FORCE (as Mr. Bell has been). Nifty.

Some tax professionals will point out that 861 and following, and related regulations, give rules about determining the geographic origin of income, rules about allocating deductions, etc. They then make the flying leap that those sections should be ignored for everything else. They simply refuse to believe that those sections are to be used to determine your "taxable income from sources within the United States," even though the regulation specifically and repeatedly SAY that the sections do that (see 26 CFR §§ 1.861-1(a)(1), 1.861-1(b), 1.861-8(a), 1.862-1(b), 1.863-1(c).) Here is one of the first things the Treasury Department ever said about Section 861 and

following:

"Rules are prescribed for determination of gross income and taxable income derived from sources within and without the United States, and for the allocation of income derived partly from sources within the United States and partly without the United States or within United States possessions. §§ 1.861-1 through 1.864. (Secs. 861-864; ’54 Code.)" [Treasury Decision 6258]

Again, where does that say most of us should IGNORE those sections? If you go back, and read ONLY the actual citations in this article (and skip my commentary), how could any sane, honest person claim that it is not just wrong, but patently "FRIVOLOUS" to think you should use 861(b) and 1.861-8 to determine your "taxable income from sources within the United States"? Such an accusation is either the result of complete lunacy, or absolute dishonesty. (Whether the judge in Mr. Bell's case was an idiot or a criminal remains to be seen.)

Faced with all the citations above, occasionally a tax professional will cave, and say "okay, maybe you SHOULD use those sections," but will follow up with, "but they show your income to be taxable anyway!" And that brings us to the second point. Having shown abundant reason why we should use

861(b) and 1.861-8 to determine our taxable domestic income, now we must see what income those sections show to be taxable.

First, it should be explained that the income tax code does not just spring out of nowhere each year. The tax code has been amended, complicated, and expanded over the years, but the underlying tax has been in place for over 80 YEARS. The history of any given section can shed led on what the CURRENT law means. For example, the recent Treasury Decision 8687 shows that the regulation-writers refer to the 1921 statutes to decide what the CURRENT regulations under Section 861 should say. In addition, according to the Internal Revenue Manual, "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 (1999)).

So let us begin at the beginning, and examine where the current Section 861 came from. It came from Section 217 of the Revenue Act of 1921. At that time, no one with even basic reading comprehension skills would think the section was saying that the domestic income of the average American was taxable. It said quite plainly that in the case of FOREIGNERS, and in the case of Americans receiving most of their income from federal POSSESSIONS (like Guam or Puerto Rico), certain types of domestic income were to be included in full as taxable domestic income. That section unquestionably did NOT say that the domestic income of most Americans was to taxable.

The section would later become Section 119 of the 1939 Code. By then the STATUTE no longer said precisely WHO could have taxable domestic income. The statute (which has remained the same since) just says which income counts as income from "within," and which income counts as income from "without." The statute didn't say anything about when such types of income were taxable... but the related REGULATIONS did. Again, they quite plainly showed that domestic income was taxable for foreigners, and for Americans doing business in federal possessions. (See 26 CFR §§ 29.119-1, 29.119-2, 29.119-9 and 29.119-10 of the 1945 regulations.)

Though the regulations underwent wording changes since then to make them obscenely complicated and convoluted, the SUBSTANCE has not changed. The general wording of the STATUTES of 861 and 862 still just give rules about "within" and "without" (without saying WHEN such income is taxable), but the REGULATIONS spell out when such income is taxable.

(Some now point to 861(a)(3), which addresses compensation for services performed within the U.S., claiming that that would cover the income of most Americans. Interestingly, IRS Chief Counsel, and most other high-ranking government officials, do NOT argue this, because they know the history of the section, and know that if they AGREE that we should be looking at Section 861 at all, they are one step away from disaster.)

IRS form letters like to say that the "source" rules in 861 and following are only about determining the geographic origin of income, and do not exempt the average citizen's income from taxation. At least in one sense, this is entirely TRUE. It is also a very lawyer-like response, since it evades the question, and IMPLIES something false while saying something true.

The current regulations still show that income from WITHIN the United States is only taxable when it comes from the various specific activities listed in 26 CFR § 1.861-8(f)(1), which are all about certain types of international or foreign commerce (including Americans getting FOREIGN income, and FOREIGNERS getting income from here). While the path to that conclusion is now somewhat muddled and twisted (see 26 CFR §§ 1.861-8(a)(1), 1.861-8(a)(4), 1.861-8(f)(1)), the history of the section leaves no room for

doubt: these sections do NOT say that the domestic income of the average American is taxable.

POINT #2: IS IT PATENTLY "FRIVOLOUS" TO BELIEVE THAT 26 USC § 861(b), AND THE RELATED REGULATIONS BEGINNING AT 26 CFR § 1.861-8, DO NOT SHOW THE DOMESTIC INCOME OF THE AVERAGE AMERICAN TO BE TAXABLE?

If the law specifically directs you to use certain sections (i.e. 861 and its regulations) to determine your taxable domestic income, and those sections do NOT show your income to be taxable, what should you conclude? Here is what the Supreme Court says:

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

Where in Section 861 or its regulations is it "specifically pointed out" that your domestic income is taxable? Nowhere, because it ISN'T. But why not? This couldn't have been an 80-year typo. We're not talking about a mistake, or a loophole. It was written this way on purpose. So why didn't they tax YOUR income?

The general definition of "gross income" found in the current regulations defines the term to mean all income from whatever source derived, "unless excluded by law." If you ask a tax preparer what that last phrase means, you will almost always get an answer like this: "Well, some types of income, like gifts and life insurance proceeds, are specifically exempted by other sections of the code, but everything else is taxable." They have always believed that the only income exempt for income tax purposes are the types exempted by the statutes in the tax code. The current 26 CFR § 1.265-1 unequivocally shows that is INCORRECT. It makes the distinction between income exempted by the tax code, and income exempted for income tax purposes by "any other law." What other law?

Again, examining the history of the law sheds some light on the issue. The older regulations defining "gross income" mentioned the types of income exempt by statute, and then said that no OTHER types of income were exempted from taxation, EXCEPT those types of income which were, "under the Constitution, not taxable by the Federal Government" (26 CFR § 39.22(b)-1 (1956)). That statement blows apart the entire false premise on which almost every tax professional bases his conclusions: the premise that only income specifically exempted by STATUTE is exempted from taxation. They simply have no explanation for this.

Of course, we can't just GUESS at what is or isn't Constitutionally taxable, and since the regulations raised the question, they would have to answer it. They did. The regulations under the 1939 Code clearly said that Americans MUST include income they receive from "foreign commerce," and that the domestic income of foreigners and certain people doing business in federal possessions are to be included (26 CFR § 39.22(a)-1 (1956)). (Note how that matches exactly what the regulations under the predecessor of 861 said about when DOMESTIC income could be taxable.)

"That's old. That doesn't apply anymore! Pay up or you're in trouble!"

Though the older sections are not still in effect themselves, they certainly clarify the meaning of the CURRENT statutes and regulations. For example, the CURRENT regulations say that the "items" of income listed in the general definition of "gross income" (26 USC § 61), such as compensation, interest, rents, dividends, make up "classes of gross income," which in some cases are EXEMPT from taxation (26 CFR §§ 1.861-8(a)(3), 1.861-8(b)(1)). Again, no court ruling, form letter, or government press release even MENTIONS those citations, much less explains them. They just pretend they're not there.

Again, we cannot just GUESS at what is exempt, nor do we need to. The regulations direct us to 1.861-8T(d)(2) which gives a specific list of those types of income which are NOT exempt (in other words, the kinds of income that ARE taxable). As in the older regulations, the list includes certain FOREIGN income of Americans, and the U.S. income of foreigners, but does NOT include the domestic income of the average American (26 CFR § 1.861-8T(d)(2)(iii)). The "experts" have no explanation for this. They don't know what that list is even for, or why YOUR income isn't on the list. They can't explain it, so they ignore it. Better yet, they call it "frivolous" to even MENTION it.

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I won't bother here to get into WHY Congress had to impose such a limited tax. That and a whole lot of addition evidence can be seen in the "Taxable Income" report, available for free here:

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Based on the explanation and citations above, is it not somewhat curious that the government's response is almost always "THAT'S FRIVOLOUS AND COMPLETELY WITHOUT MERIT!!"? If we're missing something, or there is some other citation which would clarify or correct something, why not PRESENT IT? Why are judges issuing injunctions against people, silencing them by force, without ever addressing any of the SUBSTANCE of the above issue (and why is the Department of "Justice" requesting such injunctions)? Why is there a nationwide pattern of the IRS openly REFUSING to say what its OWN position is on the points above? In the vast majority of cases, they won't SAY whether you should use 861(b) and 1.861-8 to determine your taxable domestic income, but they will try to FINE you for saying you should. Is that not odd? Is that "due process"?

Never mind. I take it all back. A couple ex IRS agents, posing as "judges" in the glorified administrative hearing now called "Tax Court" (whose "rulings" are not binding on any court, or on the IRS, or on you and me) have baseless asserted that the issue is frivolous. So it must be. Evidence be damned. And a couple judges have issued injunctions, relying on the assertions of the Tax Court "judges." Never mind that they can't figure out the specifics of their OWN position. Never mind the piles of citations supporting the issue, and the complete lack of contradictory citations. The King has said that you pathetic peasants shall not speak of this. He has decreed it to be frivolous. So shut up and pay up, or we'll fine you thousands of dollars and silence you by force. Welcome to the land of the free.

Sincerely,

Larken Rose

larken@taxableincome.net

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