Same Garbage, New Package
Apparently acting on the idea that repeating garbage enough times will make it true, the IRS has added another blurb to its web site about "frivolous" arguments, which mentions the 861/"source" issue. There is really nothing new in it, but for the sake of thoroughness, we will address it. Part "II, B" of the article attempts to refute the contention that "Only foreign-source income is taxable." In describing this contention, they then say that some claim that the income tax is an excise "imposed only on nonresident aliens and foreign corporations for the privilege of receiving income from sources within the United States." Which is it? Is it about the domestic income of foreigners, or foreign income? They just described two contradictory contentions, neither of which is correct. Exactly how much respect should we have for someone’s attempt to refute the issue, when they give two grossly inaccurate descriptions of the position, which contradict each other?
After this twisted, contradictory "straw man" set-up (mischaracterizing the opposition’s position in order to more easily refute it), the IRS article says that "for federal income tax purposes, ‘gross income’ means all income from whatever source derived and includes compensation for services." A couple things they fail to mention (surprise, surprise) are:
1) The section that general defines "gross income" to mean "all income from whatever source derived" includes a cross-reference to Section 861 regarding "income from sources within the United States." And the first thing the regulations under Section 861 state is that "section 861 and following... and the regulations thereunder determine the sources of income for purposes of the income tax" (26 CFR § 1.861-1).
2) They mention that Section 61 includes "compensation for services" as an "item" of income. What they don’t mention is that the regulations specifically state that a "class of gross income" "may consist of one or more items (or subdivisions of these items) of gross income enumerated in section 61" (26 CFR § 1.861-8(a)(3)) (including "compensation for services"), and that "a class of gross income may include excluded income" (26 CFR § 1.861-8(b)(1)), meaning that the "items" are in some cases "exempt, excluded, or eliminated for federal income tax purposes" (26 CFR § 1.861-8T(d)(2)(ii)). The regulations then list the circumstances in which income is not excluded from taxation.
"(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) ...the gross income of a DISC or a FSC;
(C) ...the gross income of a possessions corporation for which a credit is allowed under section 936(a); and
(D) Foreign earned income as defined in section 911 and the regulations thereunder..." [26 CFR § 1.861-8T(d)(2)(iii)]
(Does your "compensation for services" fall into any of those categories?)
The IRS article then quotes 26 CFR § 1.1-1 as saying that citizens are taxed on income "from sources within or without the United States." What they fail to mention is that the same section says that "The tax imposed is upon taxable income (determined by subtracting the allowable deductions from gross income)." They also didn’t mentioning the following regulation:
"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." [26 CFR § 1.863-1(c)]
(We apologize for shouting, but we thought that maybe if we put it in REALLY BIG letters, even government lawyers would be able to read it.)
Click here for more information about the misreading of 26 CFR § 1.1-1.
The IRS article then states that "I.R.C. sections 861 and 911 define the sources of income (U.S. versus non-U.S. source income) for such purposes as the prevention of double taxation of income that is subject to tax by more than one country." Funny how their explanation of what Section 861 is for keeps changing. The only constant is that it never matches what the regulations say 861 is for. (See citations below.) The IRS article also says that Section 861 and 911 "neither specify whether income is taxable, nor do they determine or define gross income." Therefore, here are a few things the authors of the IRS article would like you to believe:
1) Despite the fact that the section which general defines "gross income" to mean "all income from whatever source derived" includes a cross-reference to Section 861 regarding "Income from sources within the United States," Section 861 isn’t really about determining or defining gross income.
2) Despite the fact that the section of the older statutes which defined "gross income" contained a direct reference to the predecessor of Section 861 and following "For computation of gross income from sources within and without the United States" (Section 22(g), 1939 Code), that section really wasn’t about determining or defining gross income.
3) The portion of the law entitled "Gross income from sources within United States" (26 USC § 861(a)) is not about determining or defining gross income.
4) Despite the fact that the Treasury regulations say 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)" (26 CFR § 1.861-1(a)(1)) those sections aren’t really about determining or defining gross income.
5) Despite the fact that Treasury Decision 6258 says that "Rules are prescribed for determination of gross income and taxable income derived from sources within and without the United States" and refers to "§§ 1.861-1 through 1.864. (Secs. 861-864; ’54 Code.)," those sections aren’t really about determining or defining gross income, nor do they specify whether income is taxable.
6) Despite the fact that the regulations say that "The taxable income from sources within the United States... shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a)" the allowable deductions (26 CFR § 1.861-1(a)(1)), those sections aren’t really about determining what income is taxable.
7) Despite the fact that the regulations at 26 CFR § 1.861-8 are entitled "Computation of taxable income from sources within the United States and from other sources and activities," that section is not really about determining what income is taxable. (Also, prior to 1978, when the title of the section was just "Computation of taxable income from sources within the United States," it wasn’t really about determining what income is taxable.)
8) Despite the fact that the regulations say 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," those sections aren’t really about determining what income is taxable.
9) Despite the fact that the regulations state that taxable income from sources outside of the United States "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" (26 CFR § 1.862-1), and say that Section 1.861-1 and following give the princples "for determining the gross and the taxable income from sources within and without the United States" (26 CFR § 1.863-6), those sections aren’t really about determining what income is taxable.
10) Despite the fact that the regulations state that "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" (26 CFR § 1.863-1(c)), those sections aren’t really about determining what income is taxable.
11) Despite the fact that 26 USC 861(b) in entitled "Taxable income from sources within United States," and despite the fact that the text of that section states what "shall be included in full as taxable income from sources within the United States," that section isn’t really about determining what income is taxable.
12) Despite the fact that the regulations under Section 861 show that the "items" listed in Section 61 (which make up "classes of gross income") are in some cases "excluded... for federal income tax purposes" (26 CFR § 1.861-8(b)(1), 1.861-8T(d)(2)(ii), those sections aren’t really about determining what income is taxable.
13) Despite the fact that the regulations under Section 861 give a list of the those types of income which "are not considered to be exempt, eliminated, or excluded income" (26 CFR § 1.861-8T(d)(2)(iii)), it’s not really about determining what income is taxable.
The IRS article ends the discussion of the issue by citing what they call "relevant case law," which consists of four Tax Court cases. What they don’t mention is that "Decisions made by lower courts, such as Tax Court... are binding on the Service only for the particular taxpayer and the years litigated" (IRM, § [4.2]7.2.9.8), while "The Service is bound by the regulations" (IRM, § [4.2]7.2.3.4). Tax Court rulings are not binding as "precedent" on the IRS, on any other court, or on any individual other than the one in the particular case ruled on. The IRS ignores its own regulations, which are binding on all IRS employees, and instead cites baseless assertions which are not binding on the IRS, from a pseudo-court which it routinely disagrees with. On top of all that, the Tax Court’s assertions about the issue are just as baseless as those of the IRS. Click here for more information about the Tax Court’s provably incorrect assertions about the 861/"source" issue. (Apparently one bureaucrat quoting the baseless assertions of another bureaucrat is supposed to be a logical proof of something.)
The IRS keeps cranking out the same provably incorrect garbage, and keeps dodging the specific questions about their own regulations. If there actually was a substantive rebuttal the 861/"source" issue, shouldn’t the IRS have been able to find it by now?
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