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
  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
   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
  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

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
   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

"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).