TEST ON DETERMINING TAXABLE DOMESTIC INCOME
- Dear List Subscriber,
As promised, I'm taking my own test. (I'm doing it all from memory, and the one think I don't remember is the numbered citations for Supreme Court rulings. Yes, I really am such a freak that all the citations below were done from memory.)
TEST ON DETERMINING TAXABLE DOMESTIC INCOME
Part 1: General Concepts
1) Is the federal "income tax" a "direct" tax, or an "indirect" tax, in the Constitutionalsense? Indirect. See Treasury Decision 2303, and Stanton v. Baltic Mining(Supreme Court).
2) Does the Constitution prohibit all federal taxation within the 50 states?
No. The only specific prohibition on the taxing power is that Congress cannot taxstate exports. However, there are "virtual" limitations on the taxing power, having todo with Congress' limited Constitutional power, and their inability to overstep thosebounds via a "tax" law (see Bailey v. Drexel).
3) Is the federal income tax imposed by the 16th Amendment?
No. The 16th Amendment does not impose any tax. It simply declares that "incometaxes" need not be apportioned as they are not considered "direct" taxes. (See T.D.2303 and Stanton v. Baltic Mining.)
4) Did the 16th Amendment have any effect on which income Congress can and cannottax?
No. It rendered nothing taxable that was not taxable before (Evans v. Gore); it did notextent the taxing power to new or excepted subjects (Peck v. Lowe); and it did notconfer any new power of taxation (Stanton v. Baltic Mining).
5) Which of the following does Congress (the Legislative Branch) enact?: case law,statutes, or regulations?
Statutes. They are enacted as "Statutes at Large," and then encoded into theUnited States Code.
6) Which of the following does the Executive Branch write?: case law, statutes, orregulations?
Regulations. (See 26 USC � 7805 for the authority for the Secretary of the Treasury topromulgate tax regulations.)
7) Which of the following comes from the Judicial Branch?: case law, statutes, orregulations?
Court rulings are referred to as "case law."
8) Which carries more legal weight, a Supreme Court ruling, or a District Court ruling?
Supreme Court. (That's why it's called the "Supreme" court.) The Constitution createsthe Supreme Court, which is above all other federal courts.
9) Which of the following carries the most legal weight?: IRS publications, IRS letters,
IRS regulations, IRS Revenue Rulings, or IRS forms.
Regulations. The regulations "outrank" all other IRS documents (see Part 4.10 of theInternal Revenue Manual), and under the Federal Register Act (44 USC) act as theofficial notice to the public of what the law requires.
10) According to the Supreme Court, EVERY statute, no matter how broadly worded,must be "interpreted" keeping this in mind: the regulations, the Constitution, or thelegislative history.
The Constitution. See McCullough v. Virginia.
Part 2: Important Sections
11) 26 USC � 1 imposes a tax on the ______________ of individuals. Which of thefollowing belongs in the blank?: "income," "gross income," "net income," or "taxableincome."
12) 26 USC � 63 generally defines "taxable income" to mean which of the following:
. Net income minus exemptions
. Gross income minus deductions
. All income not excluded by law
Gross income minus deductions.
13) 26 USC �� 861 through 863 do which of the following: List specific activities that aretaxable, which all relate to international commerce Describe what counts as domesticincome and what counts as foreign income. Specifically state that the domesticincome of most Americans is exempt from tax.
Describes what counts as domestic and what counts as foreign. Those sections ofthe statutes by themselves do NOT list the "specific sources and activities" whichgenerate taxable income.
14) What sections are to be used to determine taxable domestic income?
26 USC � 861(b) and 26 CFR � 1.861-8
26 USC � 861(a) and 26 CFR � 1.861-1
26 USC � 931 and 26 CFR � 1.931-1
26 USC � 861(b) and 26 CFR � 1.861-8. (See 26 CFR �� 1.861-1(a)(1), 1.861-1(b),1.861-8(a)(1), 1.862-1(b), 1.863-1(c).)
Part 3: About exempt income
15) All income is taxable EXCEPT for:
Income exempted by statute
Income from labor
Income excluded by statute or by the Constitution
By statute or the Constitution. See Section 39.22(b)-1 of the 1956 regulations, 29.22(b)-1 of the 1945 regulations ("Regulations 111"), and Article 71 of Treasury Decision3640, as well as the current 26 CFR � 1.312-6(b).
16) Where do the current regulations list what is NOT excluded because of theConstitution itself?
26 CFR � 1.861-8
26 CFR � 1.861-8T(d)(2)(iii)
26 CFR �� 1.61-1 and 1.63-1
26 CFR 1.861-8T(d)(2)(iii). The current regulations specify that the "items" listed inSection 61 are sometimes EXEMPT (26 CFR �� 1.861-8(a)(3), 1.861-8(b)(1)), anddirect the reader to 1.861-8T(d)(2). The current regulations no longer specify thatthe Constitution itself is WHY those items are in some cases exempt, but they stillgive a list of what is NOT "excluded by law," at 1.861-8T(d)(2)(iii).
17) According to the income tax regulations defining "gross income" from at least 1922to 1956, what "MUST" U.S. citizens include in their "gross income"?
Income received from foreign commerce
All income, domestic and foreign
Only income from federal possessions
Income they receive from foreign commerce.
Part 4: About 861 and its regulations
18) Where do the STATUTES describe the specific types of activities that are taxable?
Sections 861 through 863 Various statutes throughout of Subchapter N Sections 61and 63
Various statutes throughout Subchapter N, which the regulations refer to as "operativesections." (See 26 CFR �� 1.861-8(a)(1), 1.861-8(a)(4), 1.861-8(f)(1).)
19) What is a "class of gross income" made up of? The items of income listed in 26USC 61 Income from the specific sources listed in 1.861-8(f)(1) Income exmpted bystatute or the Constitution
One or more of the "items" listed in Section 61. (See 26 CFR � 1.861-8(a)(3).)
20) What is a "statutory grouping" of gross income?
All income from whatever source derived
The foreign income of nonresident aliens
Income from one of the activities listed in 1.861-8(f)(1)
Income from one of the "specific sources or activities" described in the "operativesections" listed at 1.861-8(f)(1). (See 26 CFR � 1.861-8(a)(4).)
21) To have taxable income under 26 CFR 1.861-8, one must receive:
A class of gross income
A statutory grouping of gross income
Income to which deductions may be apportioned
A statutory grouping of gross income. See 26 CFR �� 1.861-8(a)(4), 1.861-8(f)(1).
22) Where does 1.861-8 specifically say that the domestic income of U.S. citizens isexempt from tax?
It doesn't. While it can be (and should be) inferred from what that section does say,the section does not come right out and say "the domestic income of U.S. citizens isexempt from tax."
23) Where does 1.861-8 specifically say that the domestic income of most U.S. citizensis taxable?
In 1.861-8(a)(1)In 1.861-8(f)(1)
It doesn't. A study of the history of the section (such as Section 217 of the RevenueAct of 1921, and sections 29.119-1, 29.119-2, 29.119-9 and 29.119-10 of the 1945regulations) make it perfectly clear that the section does NOT mean that the domesticincome of all Americans is taxable.
24) If law specifies that "A," "B" and "C" are subject to a tax, but does NOT specifywhether "D" is subject to the tax, we should assume:
That "D" is taxable unless specifically exempted
That "D" is not subject to the tax
That "D" is always taxable
That "D" is not subject to the tax, under the principle of "inclusio unius est exclusioalterius." See also Gould v. Gould (Supreme Court), which says that tax laws are notto be interpreted to cover matters "not specifically pointed out."
Part 5: True or false
25) T/F: Only foreign income is taxable.
False. There would be no Section 861(b) or 1.861-8 if income from within the U.S.(i.e. domestic income) was never taxable.
26) T/F: Only foreigners are subject to the tax.
False. U.S. citizens ARE taxed on certain income, primarily from foreign commerce.(See 26 USC � 901 and following, and 26 CFR �� 1.861-8(f)(1)(i) and 1.861-8T(d)(2)(iii)(D).)
27) T/F: The law does not make anyone liable for the tax.
False. Those who receive substantial taxable "gross income" are require to filereturns (26 USC � 6012) and pay the tax (26 USC � 6151). In addition,
Section 1461 makes the domestic employers of nonresident aliens liable
to withhold and collect the tax.
28) T/F: Section 861 lists the taxable activities.
False. Section 861 of the statutes merely describes what income is considereddomestic income. (Section 862 describes what counts as foreign
income.) Those statutes do NOT show ANY income to be exempt fromtax. It is the REST of Subchapter N, and the regulations under Section861, which show that income is only taxable when it comes from certainmatters related to international trade.
29) T/F: Section 861 says that all domestic income is taxable, but the regulation-writerschose to limit it to only international income.
False. A regulation cannot limit a statute. Section 861 (and 862) must beviewed in light of the REST of Subchapter N. The general wording of 861
does NOT mean that all domestic income is taxable for everyone, any
more than 861 means that all foreign income is taxable for everyone. Theregulations under 861 explain how, to have taxable income, one must firsthave income from a specific type of commerce described in an "operative
30) T/F: Only income specifically exempted by statute is exempt.
False. The Constitution itself exempts some income. See Section 39.22(b)-1 ofthe 1956 regulations, 29.22(b)-1 of the 1945 regulations ("Regulations
111"), and Article 71 of Treasury Decision 3640, as well as the current 26
CFR � 1.312-6(b).
Part 6: Essays:
31) Explain why Section 861(a)(3) does NOT mean that the domestic wages of allcitizens are subject to the tax.
A study of the history of the section, starting with Section 217 of the Revenue Act of1921, makes that obvious. (No one literate would have claimed that Section 217(a)(3)from 1921, predecessor of 861(a)(3), meant that the domestic wages of most U.S.citizens were taxable.)
Currently the "source rules" in 861 and 862 only tell what income counts as domesticand what income counts as foreign; those sections do NOT show ANY income to beexempt. It is the sections throughout the REST of Subchapter N which specificallydescribe the circumstances in which domestic income and/or foreign income isactually TAXABLE. The current regulations under Section 861 explain this, as follows:
Section 861, 862 and 863 are about income from SPECIFIC sources (26 CFR 1.861-8(f)(3)(ii)), and those "specific sources" are the activities or types of commerce describes in OTHER sections of the code, called "operative sections" (26 CFR �� 1.861-8(a)(4),1.861-8(f)(1)). One cannot have taxable income under 1.861-8 unless it derives from one of those specific types of commerce.
The older regulations prove this more clearly. As one example, Section 119 of the 1939 Code (predecessor of Section 861, and almost identical) by itself sounded like it meant that ALL "interest" from U.S. investments was domestic "gross income."However, the related regulations (29.119-2 (1945)) said quite plainly that such domestic interest was to be included in the gross income of nonresident aliens, foreigncorporations, and American business and citizens who receive most of their income from federal POSSESSIONS (e.g. Guam, Puerto Rico). Other sections back then (e.g. 29.119-1, 29.119-9, 29.119-10) also made it clear that the GENERAL terms of the statute did NOT mean that the list types of income were taxable for EVERYONE.
32) Explain why the general definition of "gross income" in 26 USC � 61 does NOT meanthat the domestic wages of all citizens are subject to the tax.
First of all, Section 61 begins by saying "except as OTHERWISE provided" inSubtitle A, which means that EVERYTHING ELSE in the whole code takesprecedence over the general definition.
In addition, there are TWO reasons to conclude that the general definition of "allincome from whatever source derived" (Section 61) is NOT as all-encompassing as itmay seem:
1) The regulations under Section 861 begin by saying that 861 and following, and relatedregulations, "determine the SOURCES of income for purposes of the income tax" (26CFR � 1.861-1). Section 61 lists some of the more common "items" of income, but itdoes NOT say ANYTHING about who is receiving the income, where it is coming from,etc. In fact, in the USCS printing of the Code, and in the USC and USCA printingsuntil 2001, Section 61 was followed by cross-references such as the following:
Income from sources within the United States, see section 861 of this title Income fromsources without the United States, see section 862 of this titleThe indexes of the code reinforce this, as under "Gross income" there are entries likethis:
- Within the U.S., � 861
- Without the U.S., � 862
Treasury Decision 6258 also states that 861 and following, and related regulations, gave the rules for determining GROSS INCOME (and taxable income) from sources within and without the United States.
If "all income from whatever source derived" meant "all income no matter where it comes from," NONE of those references would exist. In fact, there would be no need for Section 861 and 862 at all (or the rest of Subchapter N, for that matter), if the word "source" had no meaning.
2) According to the Supreme Court, ANY statute, however broadly worded, must beinterpreted in light of the Constitution (McCullough v. Virginia). The very generalstatutory definition of "gross income" has been around since the beginning of the tax,but the regulations defining "gross income," up until 1956, made it clear that therewere CONSTITUTIONAL restrictions on that very general definition. (See for exampleSection 39.22(b)-1 of the 1956 regulations.)
Likewise, the CURRENT regulations state that the "items" listed in Section 61 are NOT always taxable, but are sometimes EXCLUDED for federal income tax purposes (26 CFR �� 1.861-8(a)(3), 1.861-8(b)(1)). That by itself proves that reliance on the general definition in 61 alone in INSUFFICIENT to determine what income is taxable and what is not.
33) Explain why Section 1.1-1 does NOT mean that the domestic wages of all citizensare subject to the tax.
Section 1.1-1 says that citizens are liable to the taxes imposed by the code, whether their income is from sources within or without the United States. Of course, 26 USC � 1 (which those regulations interpret) make it obvious that the "taxes imposed by the code" are only upon TAXABLE income, not all income. Section 1.1-1 itself says that the tax is upon "TAXABLE income" (not all income), and Section 1.863-1(c) says that a taxpayer's
TAXABLE income "from sources within or without the United States," SHALL BE
DETERMINED under the rules in 1.861-8 and following. To read 1.1-1 as if it means that it's okay to just SKIP all the rules about DETERMINING your "taxable income" makes no sense at all. The tax applies ONLY to one's "taxable income," and Section 861 and its regulations (NOT Section 1.1-1) give the rules for DETERMINING one's taxable income.
34) Respond to the claim that most Americans should NOT look to Section 861 and its
regulations to determine their taxable domestic income.
In short, such a claim is a baseless assertion. ALL of the following show, WITHOUTqualification, that one's taxable domestic income is to be determined under the rulesof 26 USC � 861(b) and 26 CFR � 1.861-8 (and sometimes Section 863 as well):
26 CFR �� 1.861-1(a)(1), 1.861-1(b), 1.861-8(a)(1), 1.862-1(b), 1.863-1(c)TreasuryDecision 6258 Entries in the USC indexes under "gross income," "deductions" and
"taxable income, all of which refer to Section 861 regarding income from within theU.S.Cross-references under Section 61, and what probably was the reason for thosecross-references: Section 22(g) of the 1939 Code.
NONE of those say that one should look to 861 and its regulations to
determine their taxable domestic income only in CERTAIN circumstances.
Part 7: The Nasty Part
Take the test over again, only this time provide actual CITATIONS...
I did the first time.
(P.S. Yes, I really did do that test WITHOUT looking anywhere for citations. I readily admit to being an obsessed freak.)
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