Four Tax Sources at Issue

(1st Revision, March 13, 2000)

The gross income "source" position developed by Thurston Bell, Larken Rose and others applies primarily to Chapter 1 of the Internal Revenue Code generally. The key "gross income" term is defined, and "items" of income are listed at I.R.C. § 61. The definition is applicable to Subtitle A, except as otherwise defined in the subtitle, and only conditionally applies to other chapters of the Code.

The gross income "source" for Chapter 1 is ultimately resolved by 26 CFR § 1.861-8(f)(1). It applies only to United States "source" income for nonresident aliens and foreign corporations, with citizens and residents of the United States subject to the tax on foreign source income. David Bosset and various others are having success with this position supporting amended forms of various sorts that "zero" out previously reported "income". But there are other tax source potentially at issue. The relative portions of Regulation 1.861-8(f)(1), which determines gross income "source" for Chapter 1 and related chapters, follows:

The operative sections of the Code which require the determination of taxable income of the taxpayer from specific sources or activities and which gives rise to statutory groupings to which this section is applicable include the sections described below.

(i) Overall limitation to the foreign tax credit…
(ii)  [Reserved]
(iii) DISC and FSC taxable income… [international and foreign sales corporations]
(iv) Effectively connected taxable income. Nonresident alien individuals and foreign corporations engaged in trade or business within the United States…
(v) Foreign base company income…
(vi) Other operative sections. The rules provided in this section also apply in determining-- 
   (A) The amount of foreign source items…
   (B) The amount of foreign mineral income…
   (C) [Reserved]
   (D) The amount of foreign oil and gas extraction income…
   (E) (deals with Puerto Rico tax credits)
   (F) (deals with Puerto Rico tax credits)
   (G) (deals with Virgin Islands tax credits)
   (H) The income derived from Guam by an individual…
   (I) (deals with China Trade Act corporations)
   (J) (deals with foreign corporations)
   (K) The amount of income from the insurance of U.S. risks…
   (L) (deals with countries subject to international boycott)
   (M) (deals with the Merchant Marine Act of 1936)" [26 CFR § 1.861-8(f)(1)]
The second is Chapter 2 self-employment tax (26 U.S.C. §§ 1401-1403). Self-employment tax does not rely exclusively on the § 61 gross income definition. The implementing regulation for § 1402 is in 26 CFR § 1, but there are no general application regulations for §§ 1401 & 1403 (See Parallel Table of Authorities & Rules). While there are regulations published in 26 CFR, Part 1 for the other sections, they do have limited application, seemingly to the District of Columbia and insular possessions. At any rate, this chapter is strictly territorial as it is linked with the social welfare taxes of Chapter 21 at 26 U.S.C. §§ 1401 & 1402(b). The definitions at 26 CFR § 31.3121(e)-6 govern geographical application. Where the regulation of § 1402 is in 26 CFR Part 1, application is necessarily under Chapter 1, i.e., is restricted by the gross income "source", which includes income from foreign sources or insular possessions only. See particularly, 26 CFR § 1.861-8(f)(1)(iv)(E)-(G) above. This conclusion agrees with the various gross income "source" memorandums.

The third potential tax is Chapter 21, the Social Security or employment tax and attending taxes. This is geographically controlled by definitions at 26 CFR § 31.3121(e)-6 and 26 U.S.C. § 3121(e). Whether mandatory or voluntary, the Chapter 21 employment taxes can apply to private enterprise within the geographical United States, as defined in 26 CFR § 31.3121(e)-6(a), and a citizen of the geographical United States, as defined at 26 CFR § 31.3121(e)-6(b), can presumably participate in the scheme regardless of where he lives. The definitions at 26 CFR § 31.3121(e)-6 are as follows:

(a) When used in the regulations in this subpart, the term "State" includes the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, the Territories of Alaska and Hawaii before their admission as States, and (when used with respect to services performed after 1960) Guam and American Samoa.

(b) When used in the regulations in this subpart, the term "United States", when used in a geographical sense, means the several states (including the Territories of Alaska and Hawaii before their admission as States), the District of Columbia, the Commonwealth of Puerto Rico, and the Virgin Islands. When used in the regulations in this subpart with respect to services performed after 1960, the term "United States" also includes Guam and American Samoa when the term is used in a geographical sense. The term "citizen of the United States" includes a citizen of the Commonwealth of Puerto Rico or the virgin Islands, and, effective January 1, 1961, a citizen of Guam or American Samoa.

The fourth potential tax source at issue is the Federal employee tax in Chapter 24, "employee" defined at 26 U.S.C. § 3401(c) and "employer" at § 3401(d), as follows:
(c) Employee. For purposes of this chapter, the term "employee" includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term "employee" also includes an officer of a corporation.

(d) Employer. For purposes of this chapter, the term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person…

The last two tax sources do not rely on the definition of gross income at I.R.C. § 61. Generally speaking, the last two are the two presumed as these are the taxes linked to State income taxes. If and when there is no Federal income tax liability, there is no State income tax liability.

The distinction between the Chapter 1 income tax and wages, i.e., two different taxes, or tax sources, is recognized in several court cases, with Commissioner v. Kowalski, 434 U.S. 77 (1977) among them:

The income tax is imposed on taxable income, 26 U.S.C. § 1. Generally, this is gross income minus allowable deductions. 26 U.S.C. § 63(a). Section 61(a) defines as gross income "all income from whatever source derived" including, under § 61(a)(1), "[c]ompensation for services." The withholding tax, in some contrast, is confined to wages, § 3402(a), and § 3401(a) defines as "wages," all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash.

The two concepts -- income and wages -- obviously are not necessarily  the same. Wages usually are income.

The Department of Treasury has been helpful in unraveling the longstanding income tax scam via Internet. Possibly the greatest treasure posted on the Department of the Treasury network is the Treasury Financial Manual, produced by the Financial Management Service. Volume I, Part 3, Chapter 4000 prescribes the process by which Federal employee taxes are to be collected by the agency, then transferred to IRS:
This chapter prescribes procedures for (1) withholding and depositing Federal income, social security, and medicare taxes on wages paid to civilian and military employees; (2) for filing tax returns with the Internal Revenue Service (IRS); and (3) for filing income tax statements with the Social Security Administration (SSA).  

For information beyond the scope of this chapter, refer to IRS Publication 15, Circular E, Employer's Tax Guide, or an IRS office. Circular E describes employer tax responsibilities; explains withholding, depositing, and reporting requirements; and paying taxes.  It explains the forms your employees must use and those you must send to the IRS and SSA.

Withheld Federal taxes will be transferred to the IRS using the FEDTAX application of the Government-On-line Accounting Link System (GOALS).  Any Federal agency that has not been established on FEDTAX should contact GOALS Marketing, Financial Management Service (FMS), on FTS 874-8788 or 202-874-8788.

Withholding of qualified State, county and local taxes, in accordance with 31 CFR § 215, is then prescribed in Volume I, Part 3, Chapter 5000, here in part:
This chapter provides instructions for withholding State, city, or county income taxes when an agreement has been reached between a State, city, or county and the Secretary of the Treasury.  Agreements between the Secretary of the Treasury and States, cities, or counties prescribe how Federal agencies withhold State, city, or county income or employment taxes from the compensation of Federal employees and Armed Forces members.  (See 31 CFR  215 at Appendix 1). 
A list of States that have entered into agreements, and designated State tax offices to receive inquiries, is included as Appendix 2.  A list of cities and counties that have entered into agreements, the type of tax to be withheld for each city or county, and the designated city or county tax offices to receive inquiries is included as Appendix 3.  A list of States, cities, and counties with other-than-standard agreements is at Appendix 4.
Administration of I.R.C. Chapter 24 tax, qualified State, county and local taxes, and other Federal personnel obligations, is under authority of 5 U.S.C. §§ 5512-5520a, not Subtitle F of the Internal Revenue Code generally. The Internal Revenue Service should never come into direct contact with employees except on the rare occasion an employee would file for a special refund for overpayment of employment tax in the event he is employed by two or more foreign employers in the course of the year, or he is due a refund from the employer and the employer refuses to pay. Normally a Federal employer is responsible for collecting underpayments or refunding overpayments to the employee, and is supposed to repay taxes erroneously collected from an employee. See 26 CFR § 31.6413(a)-1 in particular. In the event an employee is employed by two or more foreign employers and happens to over-pay employment tax, he can secure direct refunds by filing a Form 1040 return (See particularly 26 CFR § 601.401(d)(4)), but the only other mandatory use of Form 1040 appears to be for withholding agents who withhold the Chapter 1 income tax from earnings of nonresident aliens. This is set out in Treasury Decision 2313 [imported from Larken Rose memorandum]:
Under the decision of the Supreme Court of the United States in the case of Brushaber v. Union Pacific Railway Co., decided January 24, 1916, it is hereby held that income accruing to nonresident aliens in the form of interest from the bonds and dividends on the stock of domestic corporations is subject to the income tax imposed by the act of October 3, 1913. [Treasury Decision 2313]
Note how in this case an "item" of income (interest) is subject to the income tax when paid to nonresident aliens, because that is one of the legal "sources" of taxable income.  Treasury Decision 2313 continues as follows:
The responsible heads, agents, or representatives of nonresident aliens, who are in charge of the property owned or business carried on within the United States, shall make a full and complete return of the income therefrom on Form 1040, revised, and shall pay any and all tax, normal and additional, assessed upon the income received by them in behalf of their nonresident alien principals. [Treasury Decision 2313]
Finally, the 1040 Form does not comply with Paperwork Reduction Act mandates as the OMB number is not listed for any of the taxing and liability statutes for chapters 1, 2, 21 & 24, so the defense at 5 CFR § 1320.6(b) is absolute. IRS has no administrative or judicial remedies; the defense can be raised at any time.

If the employee has a delinquent or defaulted liability to the United States, the employer is supposed to try to work things out. If that fails, the General Accounting Office, as general agent of the Treasury, is supposed to certify the obligation. If GAO, as general agent of the Treasury, verifies an obligation yet the employee refuses to pay, the Attorney General, in his capacity as Solicitor of the Treasury, may initiate litigation for collection (See 5 U.S.C. § 5512 & attending notes). Litigation for collection of delinquent tax, as well as other obligations to the United States, must proceed in compliance with the Federal Debt Collection Procedure Act in Chapter 176 of Title 28 (28 U.S.C. §§ 3001, et seq.).

Requirements for the W-2 and 1099 are mentioned in various chapters of Volume I of the Treasury Financial Manual, so these are copies of "employee" or contract agent returns, where the "employer" is required to withhold, keep books and records, report, etc. Virtually all Subtitle C administrative regulations, and Chapters 21 & 24 withholding requirements, are in 26 CFR Part 31. An employee isn't required to keep books & records, file returns, etc., except in special circumstance (See particularly, 26 CFR § 6001-1(d)). The employer is responsible for increasing or decreasing withholding, making refunds, and initially determining liability.

An additional liability under Chapter 21 & 24 may colorably be made through contract where private enterprise contracts public works. See 40 U.S.C. § 270a.

We don't have proven resolution process yet, but are deploying pilot strategy in two cases. One involves filing "zero" 1040 Forms with affidavits, and the other is simply returning notice of, "I'm not required to file" to a query about the individual not filing. In the first case, IRS has no evidence of requirement to file, but in the second, dredged up two 1099 forms for the year in question.

Responses in both cases are being returned with copies of Form 9452 work sheets for determination of filing requirements. These work sheets are not intended for filing, but they constitute evidence of alleged taxpayer's review so we will send copies with reply letters. The Form 9452 sets out six different sources or categories of "gross income", then has a total space. In five of the first six, we will enter the statutory and/or regulatory authority as follows, the authorities we're inserting on the dotted lines in brackets here:

1. Wages, salaries, tips [I.R.C. § 3401(d) sources] … Zero.

2. Taxable interest income [I.R.C. Chapter 1 sources (26 CFR § 1.861-8(f)(1)] … Zero

3. Dividend income [same as #2] … Zero

4. Taxable refund (state and local income taxes) [nothing entered] … Zero

5. Taxable retirement income [I.R.C. Chapter 1 courses] … Zero

6. Other taxable income [I.R.C. Chapter 2 from chapter 1 & 24 sources] … Zero

The line 7 "Gross Income" total is necessarily Zero.

In the case where the Zero 1040s with affidavits were filed, a region officer threatened to impose a frivolous return penalty (§ 6702), and refused to address matters of law or the fact that the returns were filed in good faith under extenuating circumstance. These kinds of threats represent standard IRS procedure, but we happened to read § 6703(a), which places the burden of proof on the Secretary: "In any proceeding involving the issue of whether or not any person is liable for a penalty under 6700, 6701 or 6702, the burden of proof with respect to such issue shall be on the Secretary."

We're of the opinion that the region officer has created liability for himself under 26 U.S.C. § 7414(a)(1), (2), (3) & (9), 18 U.S.C. § 241 & 242, and the applicable criminal statute for mail fraud. He is clearly trying to deprive us of administrative due process, as well as judicial due process, and is engaging in threats and attempted extortion.

In the second case, we will return a cover letter reply with the Form 9452 work sheet in order to challenge the bogus 1099 Forms. If push comes to shove, we will use interrogatories or subpoena the "employers" responsible for the 1099 Forms as witnesses in an administrative hearing. Sixth Amendment rights cannot be deprived even in administrative due process, particularly where the burden of proof lies with the Secretary. Both are building contractors in Kansas and Oklahoma who do not work on government contracts (40 U.S.C. § 270a), so they have no obligation for Federal income tax, either.

We know what IRS is doing, of course. Whenever they set someone up for administrative assault, or even criminal prosecution, they are exiting the I.R.C. at § 7327, which pertains to customs, and are presuming a commercial crime relating to drug laws under regulations at 26 CFR § 403. But if they fail to bail out or disclose authority, we will have affidavits of complaint filed with the Inspector Treasury General of Tax Administration and the Assistant Attorney General over the Criminal Division of the Department of Justice (28 CFR § 0.55 delegation of authority) within a very short time.

Here is a short list of people who have unearthed significant authorities incorporated in this memorandum: Thurston Bell, Larken Rose, Tarheel, Pat Patton, the Informer, and a multitude of others.

Dan Meador