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Monday, February 4, 2008

6 income tax questions the government refuses to answer

This symbol "§" means "section". USC means United States Code. CFR means Code of Federal Regulations.



1) Should I use the rules found in 26 USC § 861(b) and 26 CFR § 1.861-8 (in addition to any other pertinent sections) to determine my taxable domestic income?

2) If some people should not use those sections to determine their taxable domestic income, please show where the law says who should or should not use those sections for that.

3) If a U.S. citizen receives all his income from working within the 50 states, do 26 USC § 861(b) and 26 CFR § 1.861-8 show his income to be taxable?

4) Should one use 26 CFR § 1.861-8T(d)(2) to determine whether his “items” of income (e.g. compensation, interest, rents, dividends, etc.) are excluded for federal income tax purposes?

5) What is the purpose of the list of non-exempt types of income found in 26 CFR § 1.861-8T(d)(2)(iii), and why is the income of the average American not on that list?

6) What types of income (if any) are not exempted from taxation by any statute, but are nonetheless “excluded by law” (i.e. not subject to the income tax) because they are, under the Constitution, not taxable by the federal government?

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P.S. Below is a brief explanation, along with supporting citations,
for why the above questions are being asked.

Reasons questions 1 & 2: The regulations at 26 CFR § 1.861-8 begin
by stating 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 the U.S. has been
determined. Section 1.861-1(a)(1) confirms that "taxable income
from sources within the United States" is to be determined in
accordance with the rules of 26 USC § 861(b) and 26 CFR § 1.861-8
(see also 26 CFR §§ 1.861-1(b), 1.862-1(b), 1.863-1(c)). Cross-
references under 26 USCS § 61, as well as entries in the USC Index
under the heading "Income Tax," also refer to Section 861 regarding
income ("gross" and "taxable") from "sources within U.S."

Reason for question 3: Section 217 of the Revenue Act of 1921,
predecessor of 26 USC § 861 and following, stated that income from
the U.S. was taxable for nonresident foreigners, and for U.S.
corporations and citizens deriving most of their income from
federal possessions, but did not say the same about the domestic
income of other Americans. The regulations under the 1939 Code
(e.g. §§ 29.119-1, 29.119-2, 29.119-9, 29.119-10 (1945)) showed the
same thing. The current regulations at 1.861-8 still show income to
be taxable only when derived from certain "specific sources and
activities," which still relate only to certain types of
international trade (see 26 CFR §§ 1.861-8(a)(1), 1.861-8(a)(4),
1.861-8(f)(1)).

Reason for question 4: The regulations (26 CFR § 1.861-8(a)(3))
state that a "class of gross income" consists of the "items" of
income listed in 26 USC § 61 (e.g. compensation, interest, rents,
dividends, etc.). The regulations (26 CFR § 1.861-8(b)(1)) then
direct the reader to 26 CFR § 1.861-8(d)(2) which provides that
such "classes of gross income" may include some income which is
excluded for federal income tax purposes. (Section 1.861-8(d)(2)
merely redirects the reader to 1.861-8T(d)(2).)

Reason for question 5: After defining "exempt income" to mean
income which is excluded for federal income tax purposes, the
regulations (26 CFR § 1.861-8T(d)(2)(iii)) list types of income
which are not exempt (i.e. which are subject to tax), including the
domestic income of nonresident foreigners, certain foreign income
of U.S. citizens and residents, income of certain possessions
corporations, and income of international and foreign sales
corporations; but the list does not include the domestic income of
the average American.

Reason for question 6: Older income tax regulations defining "gross
income" and "net income" said that neither income exempted by
statute "or fundamental law" were subject to the tax (§ 39.21-1
(1956)), and said that in addition to the types of income exempted
by statute, other types of income were excluded because they were,
"under the Constitution, not taxable by the Federal Government" (§
39.22(b)-1 (1956)). (This is also reflected in the current 26 CFR §
1.312-6.)


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