Key Authorities Relating to Liability For & Collection of Subtitle
A & C Taxes
Revision 2.1 (Nov. 19, 1999)
The "normal" tax prescribed in section
1 of the Internal Revenue Code (26 U.S.C. § 1) is what most people
know as
income tax. The normal tax is a Federal employee
tax that issues against officers and employees of United States
Government, and officers and employees of
territories belonging to the United States. However, it is even more
restrictive than it appears at first blush
as only nonresident aliens and foreign corporations are subject to the
income tax
and social welfare taxes prescribed in Subtitles
A & C of the Internal Revenue Code from sources within the United
States. United States citizens living abroad
and who otherwise receive foreign-earned income effectively connected with
a trade or business, or income derived from
a United States possession, are required to pay these taxes. In both cases,
the wage is not the object of the tax, it
is the measure for determining the tax. They are privilege excise taxes
predicated
on benefits derived from government service.
It is noteworthy that in 1935, the U.S. Supreme
Court condemned Congress’ effort to implement the social welfare
system. See Railroad Retirement Board v. Alton
Railroad Co., cited below. Congress subsequently promulgated the
Social Security Act under auspices of a treaty,
but the application has always been solely in territories and insular
possessions belonging to the United States.
Knowing this, definitions of "State", "United States" and "citizen" at
26 CFR
§ 31.3121(e)-1 will be clear.
The two main authorities cited below are Title
26 of the United States Code of 1994, and Title 26 of the Code of
Federal Regulations, current through July
1998. A limited number of case cites, cites from the Statutes at Large,
and
other documents are included. This table of
authorities remains under construction.
United States Code
1. 26 U.S.C. § 1 …. Prescribes the "normal" tax,
a/k/a income tax, on officers and employees of the United States and
political subdivisions of the United States
(26 U.S.C. § 3401(c)) on "taxable income" (26 U.S.C. § 63) from
specific
sources designated elsewhere (26 U.S.C. §§
861 et seq.).
2. 26 U.S.C. § 61 … Gross income (items &
sources of). In notes following, lists §§ 861 et seq., for determining
source,
and § 861 for sources "within" the U.S.
3. 26 U.S.C. § 62 … Net income
4. 26 U.S.C. § 63 … Taxable income, i.e., "gross
income" (26 U.S.C. § 61) less deductions. No implementing regulations
are published in the Federal Register and
Code of Federal Regulations for "taxable income". Regulations published
under
this section relate only to amending returns
where there are legitimate tax liabilities.
5. 26 U.S.C. § 861 … Primary list of "sources"
for gross income (First section in Subchapter N, Part 1, of Subtitle A,
"Income Taxes". § 861(b) provides "general"
terms for determining income. See use of "income from sources" in the
phrasing. The "items" listed in the section
correspond with "items" listed in § 61. This section twice defines
"gross income"
in accordance with § 61.
6. 26 U.S.C. § 862 … sources of income "without"
the United States.
7. 26 U.S.C. § 863 … sources of income inside
and outside the United States. "Determination of taxable income".
8. 26 U.S.C. § 871(b)(1): "A nonresident alien
individual engaged in trade or business within the United States … shall
be
taxable as provided in section 1…" (§
1 imposes tax on individuals)
9. 26 U.S.C. § 882(a)(1): "A foreign corporation
engaged in trade or business within the United States … shall be taxable
as provided in section 11…" (§ 11 imposes
tax on corporations)
10. 26 U.S.C. § 3401(c), definition of "employee":
"For purposes of this chapter [Chapter 24, "Collection of Income Tax at
Source"], 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." One of the major illusions here is use of
the
term "State". See definition of "State" at
26 CFR § 31.3121(e)-1 below to verify that the "State" in question
is a territory
or insular possession of the United States,
not States of the Union. Officers of corporations where the United States
has
a proprietary interest are subject to "withholding
at the source". [Chapter cite editorially inserted.]
11. 26 U.S.C. § 3401(d), definition of "employer":
"For purposes of this chapter [Chapter 24, "Collection of Income Tax at
Source"], the term ‘employer’ means the person
for whom an individual performs or performed any service, of whatever
nature, as the employee of such person…" [Chapter
cite editorially inserted.]
12. 26 U.S.C. § 5821 … Prescribes tax on firearms
13. 26 U.S.C. § 5841 … Secretary shall maintain central
registry…
14. 26 U.S.C. § 5845(a) … Makes clear that "firearms"
relates to poison gas, silencers, land mines, and the like.
15. 26 U.S.C. § 7701(a)(1) … defines "person".
16. 26 U.S.C. § 7701(a)(16) … definition of "withholding
agent". Person required to deduct and withhold under provisions
of §§ 1441, 1442, 1443 or 1461.
17. 26 U.S.C. § 7701(a)(26) … defines "trade or business":
"The term ‘trade or business’ includes the performance of the
functions of a public office." Since "public
office" is representative of the class, it is exclusive of private enterprise
that isn’t
government connected. Definition by example
limits the definition to things of a kind, i.e., defining "fruit" as oranges,
lemons and grapefruit would limit the definition
to citrus fruits and would not include apples, strawberries and other kinds
of fruit.
18. 26 U.S.C. § 7701(a)(30) … definition of United
States person
19. 26 U.S.C. § 7701(c) … definition of includes
and including: "The terms ‘includes’ and ‘including’ when used in a
definition contained in this title shall not
be deemed to exclude other things otherwise within the meaning of the term
defined."
20. 26 U.S.C. § 7805(a) … Secretary of the Treasury
must promulgate regulations, delegation orders, etc.
21. 26 U.S.C. § 7805(e) … Temporary regulation issued
by the Secretary shall also be issued as proposed regulation;
temporary regulations expire after three years.
Code of Federal Regulations (current)
1. CFR Index, under "income taxes", has note to see
26 CFR §§ 1.861-1-1.864-8T to determine sources of income inside
or outside the U.S.
2. 26 CFR § 1.1-1, Income tax on individuals."(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. For optional tax in the case of taxpayers with adjusted
gross
income of less than $10,000 … see section
3. 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 therefor (subchapter A (sections 6001
and following), chapter 61 of the Code) or at the source of the income
by
withholding." [Key terms editorially underscored]
3. 26 CFR § 1.61-1 … Definition of gross income.
§ 1.61-1(a) has general definition: Gross income means all income
from
whatever source derived, unless excluded by
law. At (d)(2), refers to 26 CFR § 1.861-8T (temporary regulation).
4 .26 CFR § 1.63-1, "Taxable income". Regulation
pertains only to different claims, no regulation governing "taxable
income" as such.
5. 26 CFR § 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 area outside the United States, as the
case may be; and, with respect to the remaining income (particularly that
derived
partly from sources within the and partly
from sources without the United States), authorize the Secretary or his
delegate
to determine the income derived from sources
within the United States, either by rules of separate allocation or by
processes or formulas of general apportionment.
The statute provides for the following three catecories of income…"
Paragraph (1), sources within the United States,
to be determined by Code section 863(a), i.e., 26 CFR §§ 1.861-2
to
1.861-1, 1.863-2 to 1.861-7, and 1.863-1.
Code sections 861(b) and 863(a) govern, the regulations at 26 CFR §§
1.861-8 & 1.863-1. Paragraph 2, sources
without the United States, are governed by Code § 862(a), i.e., 26
CFR §§
1.862-1 & 1.863-1. Paragraph (3), income
from partly within and partly without the United States, are to be treated
under Code § 863(b)(1), (2) & (3);
determination of distribution by § 863(a) or (b); see 26 CFR §§
1.863-2 to
1.863-5.
6. 26 CFR § 1.861-8 … determination of taxable
income from within the United States. See in relation to 26 U.S.C. §
861(b). Computation of taxable income from
sources within the United States. § 1.861-8(f)(3)(ii) lists 26 U.S.C.
§§
861, 862, 863(a) & 863(b) as the four
applicable Code sections for determining "taxable income from specific
sources."
§ 1.861-8(a)(4) uses the term "statutory
grouping", thereby restating § 1.861-8(f)(3)(ii). See terminology
repeated
throughout the subpart. Definition of "statutory
grouping" at § 1.861-8(f)(1). Interchange with "operative sections".
The
list of "sources" is at § 1.861-8(f)(1).
See § 1,861-1(g) for limitations of "foreign" tax credit under 26
U.S.C. § 904(a).
"Sources" are listed at § 1.861-8(a)(3)
as follows: "(3) Class of gross income. For purposes of this section, the
gross
income to which a specific deduction is definitely
related is referred to as a 'class of gross income' and may consist of
one
or more items (or subdivisions of these items)
of gross income enumerated in section 61, namely: (i) Compensation for
services, includins fees, commissions, and
similar items; (ii) Gross income derived from business; (iii) Gains derived
from
dealing in property; (iv) Interest; (v) Rents;
(vi) Royalties; (vii) Dividents; (viii) Alimony and separate maintenance
payments; (ix) Annuities; (x) Income from
life insurance and endowment contracts; (xi) Pensions; (xii) Income from
discharge of indebtedness; (xiii) Distributive
share of parnership gross income; (xiv) Income in respect of a decedent;
(xv)
Income from an interest in an estate or trust.
(4) Statutory groupings of gross income and residual grouping of gross
income. For purposes of this section, the
term 'statutory grouping of gross income' or 'statutory grouping' means
the
gross income from a specific source or activity
which must first be determined in order to arrive at 'taxable income' from
which specific source or activity under an
operative section…" Sources are listed at § 1.861-8(f): "(f) Miscellaneous
matters -- (1) Operative sections. The operative
sections of the Code which require the determination of taxable
income of the taxpayer from specific sources
or activities and which give rise to statutory groupings to which this
section
is applicable include the sections described
below. (i) Overall limitation to the foreign tax credit…" There are several
other paragraphs of this nature, then (vi)
is more specific as to what is a taxable source: "(vi) Other operative
sections.
The rules provided in this section also apply
in determining -- (A) The amount of foreign source items of tax preference
… (B) The amount of foreign minieral income
… (C) [Reserved] … (D) The amount of foreign oil and gas extraction
income … (E) The tax base for citizens entitled
to the benefits of section 931 and the section 936 tax credit for a
domestic corporation which has an election
in effect under section 936; (F) The exclusion for income from Puerto Rico
for residents of Puerto Rico … (G) The limitation
under section 934 on the maximum reduction in income tax liability
incurred to the Virgin Islands; (H) The income
derived from Guam by an individual who is subject to section 935; (I) The
special deduction granted to China Trade Act
corporations under section 941; (J) The amount of certain U.S. source
income excluded from the subpart F income
of a controlled foreign corporation under section 952(b); (K) The amount
of
income from the insurance of U.S. risks under
section 953(b)(5); (L) The international boycott factor and the specifically
attributable taxes and income under section
999; and (M) The taxable income attributable to the operation of an
agreement vessel under section 607 of the
Merchant Marine Act of 1936, as amended, and the Capital Construction
Fund Regulations thereunder…"
7. 26 CFR § 1.861-8T. See 26 CFR § 1.861-8T(d)(2)(ii)
& (iii) for determination of what is exempt and what is expired.
See reference at § 1.61-1(d)(2) above.
The listing of nonexempt income sources is at § 1.861-8T(d)(2)(iii)(A)-(D).
Relevant portions of § 1.861-8T(d) follow:
"(d) Excess of deductions and excluded and eliminated items of income…"
"(2)(ii) Exempt income and exempt asset defined
-- (A) In general. For purposes of this section, the term exampt income
means any income that is, in whole or in part,
exempt, excluded, or eliminated for federal income tax purposes. The term
exempt asset means any asset the income from
which is, in whole or in part, exempt, excluded, or eliminated for federal
tax purposes." … "(iii) Income that is not
considered tax exampt. The following items are not considered to be exampt,
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
(including a foreign sales corporation (FSC)) computing its effectively
connected income, gross income (whether domestic
or foreign source) which is not effectively connected to the conduct
of a United States trade or business; (B)
In computing the combined taxable income of a DISC or FSC and its related
supplier, the gross income of a DISC or a
FSC; (C) For all purposes under subchapter N of the Code, including the
computation of combined taxable income of
a possessions corporation and its affiliates under section 936(h), 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 (however, the rules of Sec. 1.911-6 do not require the allocation
and apportionment of certain deductions, including
home mortgage interest, to foreign earned income for purposes of
determining the deductions disallowed under
section 911(d)(6))."
8. 26 CFR § 1.862-1. Instructs that income
from sources without the United States is to be determined on the same
basis
as that used in § 1.861-8 for determining
taxable income from sources within the United States.
9. 26 CFR § 1.863-1 … Categories of income.
"Determination of taxable income" at § 1.863-1(c).
10. 26 CFR §§ 1.1401-1 et seq., self-employment
tax. Relevant section is § 1.1402(a)-1 Definition of net earnings
from
self-employment. "(a) Subject to the special
rules set forth in §§ 1.1402(a)-3 to 1.1402(a)-17, inclusive,
and to the
exclusions set forth in §§ 1.1402(c)-2
to 1.1402(c)-7, inclusive, the term 'net earnings from self-employment'
means: (1)
The gross income derived by an individual
from any trade or business carried on by such individual, less the deductions
allowed by chapter 1 of the Code which are
attributable to such trade or business…" See definition of "trade or business"
at 26 U.S.C. § 7701(a)(26), as applicable
solely to public office, and "sources" of gross income otherwise treated
in this
index. [Key terms editorially underscored]
11. 26 CFR § 1.1441-1, "Requirements for withholding
of tax on nonresident aliens, foreign partnerships, and foreign
corporations. Except as otherwise provided
in §§ 1.1441-3, 1.1441-4, and 1.1441.6, to the extent that the
items
specified in § 1.1441-2 constitute gross
income from sources within the United States, withholding of a tax…" There
is
no comparable authority for withholding from
a citizen or resident of the United States from sources within the United
States.
12. 26 CFR § 1.1441-5 "Claiming to be a person not
subject to withholding. (a) Individuals. For purposes of chapter 3 of
the Code, an individual's written statement
that he or she is a citizen or resident of the United States may be relied
upon
by the payor of the income as proof that such
individual is a citizen or resident of the United States. This statement
shall
be furnished to the withholding agent in duplicate.
An alien may claim residence in the United States by filing Form 1076
with the withholding agent in duplicate in
lieu of the above statement … (c) Disposition of statement and form. The
duplicate copy of each statement and form
filed pursuant to this section shall be forwarded with a letter of transmittal
to
Internal Revenue Service Center, Philadelphia,
PA 19255. The original statement shall be retained by the withholding
agent." This statement, from "sources within
the United States," should terminate withholding.
13. 26 CFR § 1.1442-1, Withholding of tax on foreign
corporations.
14. 26 CFR § 1.1443-1, Foreign tax-exempt organizations.
15. 26 CFR § 1.1461-1 for application of withholding
provisions relating to bonds; § 1.1461-2 relating to returns; §
1.1461-3 for payment of withheld tax; §
1.1461-4 for adjustments for overwithholding of tax.
16. 26 CFR § 1.6001-1 Records. Paragraph (a) prescribes
requirement for keeping records by anyone liable, then
paragraph (d) stipulates that the district
director will provide notice to whoever is required to keep books &
records.
Paragraph (d) in particular is important as
§ 31.6001-1(d) specifically states that employees aren't required
to keep
books and records unless they file for a special
refund of some kind. In other words, the "employer", as defined at 26
U.S.C. § 3401(d), via the withholding
agent, is required to keep books and records, withhold at source, file
returns, and
pay the Subtitles A income and Subtitle C
social welfare taxes. The requirement that the withholding agent is required
to
withhold from nonresident aliens, foreign
partnerships, and foreign corporations (§ 1.1441-1), and not citizens
and
residents of the United States (26 CFR §
1.1441-5), confirms that only nonresident aliens and foreign juristic entities
are
liable for Subtitle A & C taxes from sources
within the United States.
17. 26 CFR § 31.3121(e)-1. Defintions of "State",
"United States", and "citizen". "(a) When used in the regulations in this
subpart, the term ‘State’ includes the District
of Columbia, the Commonwealthof 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
the 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."
18. 26 CFR § 31.6001-1 Records in general. Paragraph
(a) makes the requirement for keeping records; paragraph (d)
addressed records of employees: "(d) Records
of employees. While not mandatory (except in the case of claims), it is
advisable for each employee to keep permanent,
accurate records showing the name and address of each employer for
whom he performs services as an employee,
the dates of beginning and termination of such services, the information
with
respect to himself which is required by the
regulations in this subpart to be kept by employers, and the statements
furnished in accordance with the provisions
of § 31.6051-1."
19. 26 CFR §§ 1.6011-1 through 1.6012-7T; 31.6402(a)-1
through end of Part 31. These regulations provide particulars
so far as employees filing returns, etc.,
and the manner in which employees should apply for refunds from employers,
then
the employers file for refunds, or in the
alternative, the employee may file for direct refunds if he first bills
the employer,
but the employer refuses to pay.
20. 26 CFR § 601.101(a) describes functions of the
Internal Revenue Service. The only specific authority for administration
is, "The Director, Foreign Operations District,
administers the internal revenue laws applicable to taxpayers residing
or
doing business abroad, foreign taxpayers deriving
income from sources within the United States, and taxpayers who are
required to withhold tax on certain payments
to nonresident aliens and foreign corporations."
21. 26 CFR § 601.401(d)(4) … For special refund of
"employee tax" (Social Security, etc.), where a "taxpayer" is
employed by two or more employees during the
course of the year and over-pays employment tax, a special refund may
be secured by filing a Form 1040.
22. 26 CFR § 602.101 lists current applicable OMB
numbers (Paperwork Reduction Act). Until recently, Form 2555
(Foreign Earned Income) was approved under
26 CFR § 1.1-1, but no forms are currently approved. Constructively
supports conclusion that only U.S. citizens
living abroad with foreign-earned income are subject to "normal" tax
prescribed in 26 U.S.C. § 1. Only OMB-approved
forms for §§ 1.861-1 through 1.861-8 are U.S. income tax returns
for nonresident aliens and foreign corporations
(Forms 1040NR & 1120-F). See note from Treasury Decision 2313
relating to nonresident aliens, etc. See 5
CFR § 1320.6(a) for mandate of current OMB number and Paperwork
Reduction Act notice; § 1320.6(b) imposes
a bar against administrative or judicial action for refusal to complete
noncompliant forms.
Code of Federal Regulations (1939 & 1945 ed.)
1. 26 CFR § 29.22(a)-1 … Determines what is taxable
income, unless "exempt from tax by law." Generally corresponds
with current 26 CFR § 1.861-8T, only
states exemptions clearer, particularly with relation to exemptions by
the
Constitution.
Statutes at Large
1. 40 Stat. 1062, the revenue act of 1918. Sec. 210
provided, "That, in lieu of the taxes imposed by subdivision (a) of
section 1 of the Revenue Act of 1916 and by
section 1 of the Revenue Act of 1917, there shall be levied, collected,
and
paid for each taxable year upon the net income
of every individual a normal tax at the following rates…" In the definition
of "gross income", Sec. 213(a) (40 Stat. 1065),
application to U.S. government and territorial government officers and
employees was made clear: "[Gross income]
Includes gains, profits, and income derived from salaries, wages or
compensation for personal service (including
in the case of the President of the United States, the judges of the Supreme
and inferior courts of the United States,
and all other officers and employees, whether elected or appointed, of
the United
States, Alaska, Hawaii, or any political subdivision
thereof, or the District of Columbia, the compensation received as
such)…"
2. 50 Stat. 574, "Public Salary Tax Act of 1939":
"Section 1. Section 22(a) of the Internal Revenue Code (relating to the
definition of ‘gross income’) is amended by
inserting after the words ‘compensation for personal service’ the following:
(‘including personal service as an officer
or employee of a State, or any political subdivision thereof, or any agency
or
instrumentality of any one or more of the
following)’." The "normal" tax was subsequently codified in Chapter 1 of
the
Internal Revenue Code of 1954, as amended
in 1986.
Miscellaneous Documents
1. T.D. 2313: "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." An additional paragraph
reads: "The responsible heads, agents, or representatives of nonresiden
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 from the income received by them
in behalf of their nonresident alien principals."
Case Cites
"The catalogue of means and actions which might be imposed upon an employer
in any business, tending to the satisfaction and
comfort of his employees, seems endless. Provision for free medical
attendance, nursing, clothing, food, housing, and education
of children, and a hundred other matters might with equal propriety
be proposed as tending to relieve the employee of mental
strain and worry. Can it fairly be said that the power of Congress
to regulate interstate commerce extends to the prescription of
any or all of these things? It is not apparent that they are really
and essentially related solely to the social welfare of the worker,
and therefore remote from any regulation of commerce as such? We think
the answer is plain. These matters obviously lie
outside the orbit of congressional power." Railroad Retirement Board
v. Alton Railroad Co., 295 U.S. 330, 55 S. Ct. 758
(1935)
"In the present context these principles require timely and adequate
notice detailing reasons, and an effective opportunity to
defend by confronting any adverse witnesses and by presenting arguments
and evidence. These rights are important in
cases...challenged as resting on incorrect or misleading factual premises
or on misapplication of rules or policies to the facts of
particular cases." Goldberg v. Kelly 397 U.S. 254 (1970). Comments
in Goldberg relate to administrative due process, as
required by the Administrative Procedures Act. For further particulars
relating to administrative due process, see also, Bothke
v. Fluor Engineers and Constructors, Inc., 713 F.2d 1405 (1983).