Determination of Taxable Income
1. The United States Government is a corporation that has legislative and judicial jurisdiction over Washington DC and 22 Territories and the 20 percent of the land in the States of the Union that they own. (C.J.S. Corporations §883)
2. The States of the United States are the 22 Territories owned by the U.S. Government (26 CFR §31.3132), Domestic Mail Manual, (O’Donoghue v. United States)
3. The States of the Union are 50 sovereign nations that formed a union of the United States of America and created an agency to administer trade and relationships with other foreign nations and interstate commerce between the 50 nations. That agency is called the U.S. Government. (Attry. Gen. v. Naglee)( Articles of Confederation)
4. The U.S. District Courts are legislative territorial courts that have jurisdiction in the U.S. Territories and the land within the fifty nations that they own. Parties must be have citizenship in different territories or have trade within the territories. They have no jurisdiction over Citizens of the States of the Union. (United States v. Coe)
5. It is well settled in the U.S. Supreme Court that the States of the Union are foreign nations with respect to the legislative and judicial jurisdiction of the U.S. government.
(Wisconsin v. Pelican Is. Co)
6. It is also settled by the Supreme Court that the definition of “income tax” is an excise tax. Direct taxes on people’s personal property (wages) are not allowed by the Constitution. Therefore wages are not an excise taxable activity and such persons are not subject to that tax and they are not “taxpayers”. (Pollock, Brushaber and Eisner)
7. Nonresident aliens that receive income from within the U.S. must pay a tax. The IRC also states that a resident within the U.S. only pays taxes on income from foreign sources. (Brushaber, T.D. 2313, 26 CFR 1.871)
8. Your Social Security Trust is a U.S. person. If it works for a foreign corporation, it is subject to the income tax.
9. The key definitions that define the income tax: domestic, foreign, income tax, taxable income, State, United States, person, nonresident alien, taxpayer, resident, citizen, sources, jurisdiction and venue.
a) Domestic – Within U.S. territory, not part of a State of the Union (26 USC 7701)
b) Foreign – Not within U.S. territory, a State of the Union or any other nation, (Salonen v. Farley)
c) Income Tax – A tax on the income from an excise taxable activity, such as selling cigarettes. (Pollock, Brushaber and Eisner)
d) Taxable Income – Income that is not exempt from tax by law. (26 CFR 1.861-8)
e) State – One of the 22 territories owned by the United States
f) United States – The District of Columbia and the 22 territories (IRC)
g) Person – A trust or corporation (Black’s Law Dictionary)
h) Nonresident Alien – A person resident in a State of the Union or any other nation.
i) Taxpayer – One who is subject to the tax.
j) Resident – A taxpayer
k) Citizen - Every person born or naturalized in the United States and subject to its jurisdiction is a citizen (26 1.1-1(c))(26 CFR § 31.3132(e)-1)
l) Sources – The nations from which the income is derived (26 CFR 1.861-1)
m) Jurisdiction – The legislative and judicial jurisdiction of the U.S. government is sovereign only within the territory that it owns or the subject matter specifically granted by the Constitution.
n) Venue – The geographical area that the U.S. government owns
10. Statutes have no force or effect. Subjects of the statute are only required to obey regulations. Also, headings in the statutes or regulations are not a part of the statute or regulation. Therefore, they can be very misleading. (26 USC § 6011(a)) (California Bankers Assn. v. Schultz)
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter Section
C. Corporate distributions and adjustments 301
D. Deferred compensation, etc. 401
E. Accounting periods and methods of accounting 441
F. Exempt organizations 501
G. Corporations used to avoid income tax on shareholders 531
H Banking institutions 581
I. Natural resources 611
J. Estates, trusts, beneficiaries, and decedents 641
K. Partners and partnerships 701
L. Insurance companies 801
M. Regulated investment companies and real estate investment trusts 851
N. Tax based on income from sources within or without the United States 861
O. Gain or loss on disposition of property 1001
PART I - TAX ON INDIVIDUALS
(a) Married individuals filing joint returns and surviving spouses. There is hereby imposed on the taxable income of …
26 CFR 1.1-1 (This is the first sentence of the regulations)
Sec. 1.1-1 Income tax on individuals (Covers everyone on the Earth)
(a) General rule. (1) Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a nonresident alien individual. … The tax imposed is upon taxable income (determined by subtracting the allowable deductions from gross income)…In general, the tax is payable upon the basis of returns rendered by persons liable therefore
(b) Citizens or residents of the United States liable to tax. In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States. Pursuant to section 876, a nonresident alien individual who is a bona fide resident of Puerto Rico during the entire taxable year is, except as provided in section 933 with respect to Puerto Rican source income, subject to taxation in the same manner as a resident alien individual. As to tax on nonresident alien individuals, see sections 871 and 877.
(c) Who is a citizen. Every person born or naturalized in the United
States and subject to its jurisdiction is a citizen.
(Detailed information to use only after you have determined what country the person is a citizen of, and what country the income came from, plus many other exclusions. They are hoping that everyone on Earth will skip to this section and start computing)
Part
I. Definition of gross income, adjusted gross income, taxable income, etc.
II. Items specifically included in gross income.
III. Items specifically excluded from gross income. (Only a few details)
IV. Determination of marital status.(!1)
V. Deductions for personal exemptions.
VI. Itemized deductions for individuals and corporations.
VII. Additional itemized deductions for individuals.
VIII. Special deductions for corporations.
IX. Items not deductible.
X. Terminal railroad corporations and their shareholders.
XI. Special rules relating to corporate preference items.
PART I - DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC
Sec.
61. Gross income defined. (Gross generalization that contradicts itself)
62. Adjusted gross income defined.
63. Taxable income defined. (It is not defined here)
64. Ordinary income defined.
(etc)
(a) General definition
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;…
(b) Cross references
For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).
Sec. 1.61-1 Gross income
(a) General definition. Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration. For purposes of further illustration, Sec. 1.61-14 mentions several miscellaneous items of gross income not listed specifically in section 61. Gross income, however, is not limited to the
items so enumerated.
(b) Cross references. Cross-references to other provisions of the Code are to be found throughout the regulations under section 61. The purpose of these cross-references is to direct attention to the more common items, which are included in or excluded from gross income entirely, or treated in some special manner. To the extent that another section of the Code or of the regulations thereunder, provides specific treatment for any item of income, such other provision shall apply notwithstanding section 61 and the regulations thereunder. The cross references do not cover all possible items.
Subchapter N - Tax Based on Income From Sources Within or Without the United States
Part
I. Source rules and other general rules relating to foreign income.
II. Nonresident aliens and foreign corporations.
III. Income from sources without the United States.
IV. Domestic international sales corporations.(!1)
V. International boycott determinations.
PART I - SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME (Untrue! - this is the only place that defines taxable income)
Sec.
861. Income from sources within the United States.
862. Income from sources without the United States.
863. Special rules for determining source.
864. Definitions and special rules.
865. Source rules for personal property sales.
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:
(b) Taxable income from sources within United States
Sec. 1.861-1 Income from sources within the United States.
(a) Categories of income. Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax. These sections explicitly allocate certain important sources of income to the United States or to areas outside the United States, as the case may be;
(1) Within
the United States. The gross income from sources within the United States,
consisting of the items of gross income specified in section 861(a) plus the
items of gross income allocated or apportioned to such sources in accordance
with section 863(a). See Secs. 1.861-2 to 1.861-7, inclusive, and Sec. 1.863-1.
The taxable income from sources within the United States, in the case of
such income, shall be determined by deducting therefrom, in accordance with
sections 861(b) and 863(a), the 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 and 1.863-1.
(2) Without the United States. The gross income from sources without the United States, consisting of the items of gross income specified in section 862(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See Secs. 1.862-1 and 1.863-1. The taxable income from sources without the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 862(b) and 863(a), the 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. 1.862-1 and 1.863-1.
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. This section provides specific guidance for applying the cited Code sections by prescribing rules for
the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as ``deductions'') of the taxpayer. The rules contained in this section apply in determining taxable income of the taxpayer from specific sources and activities under other sections of the Code, referred to in this section as operative sections. See paragraph (f)(1) of this section for a list and description of operative sections. The operative sections include,
among others, sections 871(b) and 882 (relating to taxable income of a nonresident alien individual or a foreign corporation which is effectively connected with the conduct of a trade or business in the United States),
(d) Excess of deductions and excluded and eliminated income
(2) Allocation and apportionment to exempt, excluded, or eliminated income. [Reserved] For guidance, see Sec. 1.861-8T(d)(2).
(The following is the most important section in the entire IRC. All sections point to it to determine taxable income)
26 CFR 1.861- 8T (d)(2)(iii)
(d) Excess of deductions and excluded and eliminated items of income.
(2) Allocation and apportionment to exempt, excluded or eliminated 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.
(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:
(There is nothing here that applies to most people)
26 USC 862
(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:
(1) interest other than that derived from sources within the United States as provided in section 861(a)(1);
(2) dividends other than those derived from sources within the United States as provided in section 861(a)(2);
(3) compensation for labor or personal services performed 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 the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the United States.
Sec. 1.862-1 Income specifically from sources without the United States.
(a) Gross income. (1) The following items of gross income shall be treated as income from sources without the United States:
(i) Interest other than that specified in section 861(a)(1) and Sec. 1.861-2 as being derived from sources within the United States;
(ii) Dividends other than those derived from sources within the United States as provided in section 861(a)(2) and Sec. 1.861-3;
(iii) Compensation for labor or personal services performed without the United States;
(b) Taxable income. The taxable income from sources without the United States, in the case of 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 for determining the taxable income from sources within the United States.
(NRA are only taxed on income from conducting business or having sources within the U.S.)
PART II - NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
Subpart A - Nonresident Alien Individuals
Sec.
871. Tax on nonresident alien individuals.
872. Gross income.
873. Deductions.
874. Allowance of deductions and credits.
875. Partnerships; beneficiaries of estates and trusts.
876. Alien residents of Puerto Rico, Guam, American Samoa, or the Mariana Islands.
877. Expatriation to avoid tax.
(a) Income not connected with United States business - 30 percent tax
(b) Income connected with United States business - graduated rate of tax
(1) Imposition of tax
A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income, which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income, which is effectively connected with the conduct of a trade or business within the United States.
Sec. 1.871-1 Classification and manner of taxing alien individuals.
(a) Classes of aliens. For purposes of the income tax, alien individuals are divided generally into two classes, namely, resident aliens and nonresident aliens. Resident alien individuals are, in general, taxable the same as citizens of the United States; that is, a resident alien is taxable on income derived from all sources, including sources without the United States. See Sec. 1.1-1(b). Nonresident alien individuals are taxable only on certain income from sources within the United States and on the income described in section 864(c)(4) from sources without the United States, which is effectively connected for the taxable year with the conduct of a trade or business in the United States.
Sec. 1.871-7 Taxation of nonresident alien individuals not engaged in U.S. business.
(a) Imposition of tax. (1) This section applies for purposes of determining the tax of a nonresident alien individual who at no time during the taxable year is engaged in trade or business in the United States. However, see also Sec. 1.871-8 where such individual is a student or trainee deemed to be engaged in trade or business in the United States or where he has an election in effect for the taxable year in respect to real property income. Except as otherwise provided in Sec. 1.871-12, a nonresident alien individual to whom this section applies is not subject to the tax imposed by section 1 or section 1201(b) but, pursuant to the provision of section 871(a), is liable to a flat tax of 30 percent upon the aggregate of the amounts determined under paragraphs (b), (c), and (d) of this section which are received during the taxable year from sources within the United States. Except as specifically provided in such paragraphs, such amounts do not include gains from the sale or exchange of property. To determine the source of such amounts, see sections 861 through 863, and the regulations thereunder.
Sec. 1.871-8 Taxation of nonresident alien individuals engaged in U.S. business
or treated as having effectively connected income.
(a) Segregation of income. This section applies for purposes of determining the tax of a nonresident alien individual who at any time during the taxable year is engaged in trade or business in the United States… A nonresident alien individual to whom this section applies must segregate his gross income for the taxable year into two categories, namely (1) the income which is effectively connected for the taxable year with the conduct of a trade or business in the United States by that individual, and (2) the income which is not effectively connected for the taxable year with the conduct of a trade or business in the United States by that individual. … The determination of whether income or gain is or is not effectively connected for the taxable year with the conduct of a trade or business in the United States by the nonresident alien individual shall be made in accordance with section 864(c) and Secs. 1.864-3 through 1.864-7.
(b) Imposition of tax
(1) Income not effectively connected with the conduct of a trade or business in the United States. If a nonresident alien individual who is engaged in trade or business in the United States at any time during the taxable year derives during such year from sources within the United States income or gains ..
(2) Income effectively connected with the conduct of a trade or business in the United States—
(i) In general. If a nonresident alien to whom this section applies derives income or gains which are effectively connected for the taxable year with the conduct of a trade or business
in the United States by that individual, the taxable income or gains shall, except as provided in Sec. 1.871-12, be taxed …
(ii) Determination of taxable income. …Any income of the nonresident alien individual which is not effectively connected for the taxable year with the conduct of a trade or business in the United States by that individual shall not be taken into account in determining either the rate or amount of such tax.
26 USC 872
(a) General rule
In the case of a nonresident alien individual, except where the context clearly indicates otherwise, gross income includes only -
(1) Gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2) Gross income, which is effectively connected with the conduct of a trade or business within the United States.
(b) Exclusions
(7) Treatment of possessions - To the extent provided in regulations, a possession of the United States shall be treated as a foreign country for purposes of this subsection.
Sec. 1.872-1 Gross income of nonresident alien individuals
(a) In general--(1) Inclusions. The gross income of a nonresident alien individual for any taxable year includes only (i) the gross income which is derived from sources within the United States and which is not effectively connected for the taxable year with the conduct of a trade
or business in the United States by that individual and (ii) the gross income, irrespective of whether such income is derived from sources within or without the United States, which is effectively connected for the taxable year with the conduct of a trade or business in the United
States, by that individual. For the determination of the sources of income, see sections 861 through 863 and the regulations thereunder. For the determination of whether income from sources within or without the United States is effectively connected for the taxable year with the conduct of a trade or business in the United States, see sections 864(c) and 871 (c) and (d), Secs. 1.864-3 through 1.864-7, and Secs. 1.871-9 and 1.871-10. For special rules for determining the income of an alien individual who changes his residence during the taxable year, see Sec. 1.871-13.
Sec. 1.872-2 Exclusions from gross income of nonresident alien individuals.
(f) Other exclusions. Income which is from sources without the United States, as determined under the provisions of sections 861 through 863, and the regulations thereunder, is not included in the gross income of a nonresident alien individual unless such income is effectively connected for the taxable year with the conduct of a trade or business in the United States, by that individual.
(U.S. citizens and residents are only taxed on foreign income)
26 USC § 861(b), and the related regulations in 26 CFR § 1.861-8, are the sections to be used to determine taxable income from sources within the United States.
26 CFR § 1.863-1(c), "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 § 1.861-8, "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."
26 CFR § 1.861-1, "The taxable income from sources within the United States… shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), [allowable deductions]. See Secs. 1.861-8 and 1.863-1."
26 CFR §
1.862-1, "Sec.
1.861-8 [is the section] for determining the taxable income from sources within
the United States."
Treasury Decision 6258, "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.)"
26 CFR § 1.863-6, "Secs. 1.861-1 to 1.863-5 [give the principles] for determining the gross and the taxable income from sources within and without the United States."
26 USC § 861(b) is entitled "Taxable income from sources within the United States," and clearly state how to determine what "shall be included in full as taxable income from sources within the United States." The corresponding regulations in 26 CFR § 1.861-8 are entitled "Computation of taxable income from sources within the United States *and from other sources and activities." (The portion of the title after the asterisk was added in 1978.)
The regulations in 26 CFR § 1.861-8 state that a "class of gross income," which is made up of the "items" listed in 26 USC § 61, may include income exempted from the federal income tax.
26 CFR § 1.861-8(a)(3), A "class of gross income" "may consist of one or more items... of gross income enumerated in section 61."
26 CFR § 1.861-8(b)(1), "[P]aragraph (d)(2) of this section... provides that a class of gross income may include excluded income."
(26 CFR § 1.861-8(d)(2) redirects the reader to 26 CFR § 1.861-8T(d)(2).) Regarding excluded income, the reader is referred 26 CFR § 1.861-8T(d)(2), which states:
26 CFR § 1.861-8T(d)(2)(ii), "(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)(iii), "(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) ...the gross income of a possessions corporation…
(D) Foreign earned income…"
In 1977, the table of contents of the Internal Revenue Code showed the following.
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
Subsection 861(b), Taxable income from sources within the United States
The regulations under 26 USC § 861(b) (found in 26 CFR § 1.861-8) were entitled "Computation of taxable income from sources within the United States."
The 1945 income tax regulations twice state that some income not exempted from tax by statute, is nonetheless exempt from taxation by the Constitution.
"Sec. 29.21-1. Meaning of net income. [the term "net income" later became "taxable income."]
The tax imposed by chapter 1 is upon income. Neither income exempted by statute or fundamental law [the Constitution]... enter into the computation of net income as defined by section 21."
"Sec. 29.22(b)-1. Exemption--Exclusions from gross income.
Certain items of income specified in section 22(b) are exempt from tax and may be excluded from gross income... No other items are exempt from gross income except (1) those items of income which are, under the Constitution, not taxable by the Federal Government..."
The 1945 regulations under the definition of "gross income" specifically enumerate certain taxable activities.
"39.22(a)-1, What is included in gross income
(a) Gross income includes in general [items of income listed] derived from any source whatever, unless exempt from tax by law. See sections 22(b) and 116. [the regulations under 22(b) stated that some income not exempted by statute is nonetheless "under the Constitution, not taxable by the Federal Government."]... 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 by sections 211 to 238, inclusive, and, in certain cases, by section 251, for citizens and domestic corporations deriving income from sources within possessions of the United States.