Recall in our previous discussion that in the case
of United States v. Burke (504 U.S. 229, 119 L Ed 2d 34,
112 S Ct. 1867), the Supreme Court ruled that "gross income" that was
to be taxed had to come from a source.
Why? Because otherwise the income tax laws would be so broad
as to tax EVERYONE in the world!
Federal government income taxes are imposed on sources
with specific geographical boundaries, and not the income itself, per
United States v. Burke.
The income is just a way to compute the amount of tax but the
tax itself is on a geographical and situational source.
Clearly, there has to be some section of the Internal Revenue
Code that ties the taxes we pay to some geographical boundary.
This section deals with that subject.
There is often a lot of confusion in people’s mind
over the significance of the word “source” that we’d like to clear up
before we go on. Therefore
we’d like to refine the use of the term before continuing on with an
explanation of specific “sources”.
Merriam Webster Dictionary of Law defines “source” as follows:
source
1: a point of origin
Example: the
source of the conflict
There are actually two uses of the word “source”
in the Internal Revenue Code.
“Source” is used to describe a TAX source (a source
for government revenue) in 26 U.S.C. Sec. 861, the 16th Amendment,
and the IRS regulations (1.861) we discuss subsequently.
Tax sources for the government are always tied to a geographical
boundary and the occurrence of a specific event or situation.
This is especially true of excise taxes, which occur on the happening
of a specific event.
For instance, there is a federal excise tax on gasoline.
The event of buying gasoline by consumers within the geographical
boundaries of the United States of America is an occasion for paying
that particular federal excise tax.
If the event occurs outside of the geographical boundaries of
the U.S.A. or doesn’t involve the buying of gasoline, then the tax can’t
be imposed.
“Source” is also used to describe an INCOME
source for individuals or “persons” (and not necessarily the
government) in Chapter 24 of the I.R.C, which is entitled “CHAPTER
24 - COLLECTION OF INCOME TAX AT SOURCE ON WAGES “
and section 3402 of the I.R.C.
These sections deal with withholding, but the withholding
is occurring on the citizen’s income source, which then
becomes the government’s revenue/tax source upon receipt
by the government. In this
case, the withholding on wages occurs as an imputed “excise tax” based
on the “event” of a citizen receiving income from their employer within
the geographical boundaries of the United States of America.
Note, however, that excise taxes that are Constitutional always
occur on business transactions and businesses.
Excise taxes are
referred to in the Constitution as indirect taxes,
as we learned in our discussion of the Supreme Court case of Pacific
Ins. Co. v. Soule, 74 U.S. 433, 1868 in section 6.4.2 and they
always fall on consumers
of the product made by the business.
Valid federal excise taxes CANNOT fall on natural persons or
citizens because then they become direct taxes.
Direct taxes on citizens violate Article 1, Section 9,
Clause 4 of the Constitution, which states “No Capitiation or other
direct tax shall be laid unless in proportion to the Census or Enumeration
herein before directed to be taken.”
In this case, the income taxes on wages are deducted and paid
by the employer (the business) with the consent or permission
of the employee (W-4), but in actuality they also REDUCE the income
of the recipient and the taxes must be accounted for and a return prepared
by the citizen/recipient, not the business, which makes them into a
direct tax that is clearly unconstitutional.
It is very important to understand this distinction.
A good way to think about this is if a tax reduces the income
of a citizen from what they otherwise would have received and if it
is involuntary and not discretionary, then it’s a direct tax.
This issue was settled in the Supreme Court Case of Pollack
v. Farmer’s Loan and Trust Company, 157 U.S. 429 and 158 U.S.
601, 1883.
With that out of the way, we’ll spend the remainder
of this section talking about government “sources” of income, so let's
review: the “income tax” is imposed on “taxable
income,” which means “gross
income” minus deductions.
“Gross income” is
defined in 26 USC § 61 as “all
income from whatever source
derived.” The phrase
“from whatever
source derived” may
initially appear all-encompassing, but for the specifics about “income
from sources,”
the reader of the law is repeatedly referred to Section
861 and following
(of the statutes) and the related regulations.
For example, in the full version of Title 26 (with all notes
and amendments) which appears on Congress’ own web site, Section 61
itself has the following
cross-reference:
“Income from sources
-
Within the United
States, see section 861
of this title.
Without the United States, see section 862 of this title.”
So the section which generally defines “gross income”
specifically refers to 26 USC § 861 regarding income from “sources”
within the United States** (the federal zone).
A similar reference is also found in the indexes of the United
States Code, which (although they vary somewhat in the exact wording)
have entries such as:
“Income tax
Sources of
income
Determination, 26
§ 861 et seq.
Within the U.S.,
26 § 861”
Again, income from “sources” within the United
States** (the federal zone) is specifically dealt with by Section 861,
and “determination” of sources
of income is also dealt with by Section 861 and the following sections.
In addition, Sections 79, 105, 410, 414 and 505 each identify
Section 861 as the section
which determines what constitutes “income
from sources within the
United States,” and Section 306 even uses the phrase “part
I of subchapter N (sec. 861
and following, relating to
determination of sources of income).”
As shown, 26 USC § 861 and following (which make
up Part I of Subchapter N of the Code) are very relevant to determining
what is considered a “source of income,” and Section 861 in particular
deals with income from “sources”
within the United States**
(the federal zone). Not
surprisingly, Section 861 is entitled “Income
from sources within the
United States,” and the first two subsections of Section 861 are
entitled “Gross
income from sources
within the United States” and “Taxable
income from sources
within the United States.”
Section 861 is also the first section of Subchapter N of the
Code, which is entitled “Tax
based on income from sources
within or without the United States.”
Clearly this is relevant to a tax on “income
from whatever source
derived.”
As mentioned before, the
statutes passed by Congress
are interpreted and implemented by
regulations published in
the Code of Federal Regulations (“CFR”) by the Secretary of the Treasury.
The Index of the CFR, under “Income
taxes,” has an entry that reads “Income
from sources inside
or outside U.S., determination
of sources of income, 26 CFR 1 (1.861-1--1.864-8T).”
This is the only entry
in the Index relating to income from sources
within the United States**
(the federal zone), and the regulations listed (26 CFR § 1.861-1 and
following) correspond to Section 861 of the
statutes.
(The “26” refers to
Title 26, the “1” after “CFR”
refers to Part 1 of the regulations (“Income Taxes”), and the “.861”
refers to Section 861 of the statutes.)
These regulations fall under the heading “Determination
of sources of income.”
The following is how these regulations begin:
“Sec. 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.” [26 CFR § 1.861-1]
The meaning of this is unmistakable.
The “income tax” is imposed on “income
from whatever source
derived,” and Section 861 and following, and the related regulations,
determine what is considered a “source”
of income “for purposes of the
income tax.” The first
sentence of the regulations under 26 USC § 861 has stated this since
1954, when Section 861 first came into existence.
Note that these define “the”
sources of income subject to the tax, meaning
there are no others.
Therefore, the meaning of “income
from whatever source
derived” (the definition of “gross
income” in Section 61)
is limited by Section
861 (and following sections) and the related regulations.
The meaning of the phrase “whatever
source” depends completely on the meaning of the word “source.”
The word “whatever”
does not expand the meaning of “source”
any more than the phrase “all
firearms” (in the example above) expands the legal meaning of the
word “firearm.”
The above section of regulations also refutes the
common but incorrect position that the “items”
of income listed in Section 61 are “sources,”
since Section 61 is obviously
not the section which
determines the “sources”
of income for purposes of the income tax.
(There is a chart at the end of this report showing
the outline of Part I of Subchapter N and related regulations, and showing
many of the citations used in this report.)
While the significance of Section 861 and the related
regulations may be obvious, the point needs to be thoroughly proven,
since most tax professionals concede that Section 861 and its regulations
are
not about the income
of United States citizens living and working exclusively within the
50 states of the United States.
(Below it will be shown
why it is so significant
that “section 861 and following...
and the regulations thereunder, determine the sources of income for
purposes of the income tax.”).
The IRS’s own publications clarify the issue of “source” for
us. In IRS Publication
54 (for the year 2000, on page 4), we read the following:
Source
of Earned Income
The source
of your earned income is the place where you perform the services for
which you received the income. Foreign earned income is income you receive
for performing personal services in a foreign country. Where or how
you are paid has no effect on the source of the income. For example,
income you receive for work done in France is income from a foreign
source even if the income is paid directly to your bank ac-count in
the United States and your employer is located in New York City.
If you
receive a specific amount for work done in the United States, you must
report that amount as U.S. source income. If you cannot determine how
much is for work done in the United States, or for work done partly
in the United States and partly in a foreign country, determine the
amount of U.S. source income using the method that most correctly shows
the proper source of your income.
In most
cases you can make this determination on a time basis. U.S. source income
is the amount that results from multiplying your total pay (including
allowances, re-imbursements other than for foreign moves, and noncash
fringe benefits) by a fraction.
The numerator (top number) is the number of days you worked within
the United States. The
denominator is the total number of days of work for which you were paid.
IMPORTANT NOTE:
All uses of the term “United States” in the context of natural
persons actually mean the “federal zone” and not the 50 states of
the United States.
This is in complete agreement with the definition of the terms “United
States” and “State” found in 26 U.S.C. section 7700.
It is also consistent with Article 1, Section 9, Clause 4
and Article 1, Section 2, Clause 3 of the U.S. Constitution, which
forbid direct taxes on natural persons without using apportionment.
This is also suggested by the title of Part I of
Subchapter N (of which 861 is the first section), “Source
rules and other general rules relating to
foreign income.”
Under the usual overly-broad (and incorrect) interpretation of
the legal scope of the term “gross
income,” this would appear as a contradiction, since “Income
from sources within
the United States” (the title of Section 861) would at first glance
seem to be the opposite of “foreign
income.” The specific
taxable sources shown later demonstrate that income from
within the United States**
(the federal zone) can be taxable only if received by certain individuals
outside of the United
States** (the federal zone), thus making the income
foreign income.
For the purposes of the income tax, as we discussed in section
5.3, income earned from within the 50 states is counted as “foreign
income”.
While the title of a part of the statutes may indicate
what that part is about, it should be mentioned that 26 USC § 7806(b)
states that such titles do not change the actual meaning of the law
(“nor shall any… descriptive
matter relating to the contents of this title be given any legal effect”).
The above explanation for the title of Part I, Subchapter N is
therefore not crucial, but does give a possible explanation of why the
title is as it is.
(Question for Doubters:
Does Part I (Section 861
and following) of Subchapter N, and related regulations, determine what
is considered a “source” of income for purposes of the federal income
tax?)