Six Questions Explained

1) Should I use the rules found in 26 USC § 861(b) and 26 CFR § 1.861-8 (in addition to any other pertinent sections) to determine my taxable domestic income?

2) If some people should not use those sections to determine their taxable domestic income, please show where the law says who should or should not use those sections for that.

Reason for first two questions: The regulations at 26 CFR § 1.861-8 begin by stating that Sections 861(b) and 863(a) state in general terms “how to determine taxable income of a taxpayer from sources within the United States” after gross income from the U.S. has been determined.  Section 1.861-1(a)(1) confirms that “taxable income from sources within the United States” is to be determined in accordance with the rules of 26 USC § 861(b) and 26 CFR § 1.861-8 (see also 26 CFR §§ 1.862-1(b), 1.863-1(c)).  Cross-references under 26 USCS § 61, as well as entries in the USC Index under the heading “Income Tax,” also refer to Section 861 regarding income (“gross” and “taxable”) from “sources within U.S.”

3) If a U.S. citizen receives all his income from working within the 50 states, do 26 USC § 861(b) and 26 CFR § 1.861-8 show his income to be taxable?

Reason for question: Section 217 of the Revenue Act of 1921, predecessor of 26 USC § 861 and following, stated that income from the U.S. was taxable for foreigners, and for U.S. corporations and citizens deriving most of their income from federal possessions, but did not say the same about the domestic income of other Americans.  The regulations under the 1939 Code (e.g. §§ 29.119-1, 29.119-2, 29.119-9, 29.119-10 (1945)) showed the same thing.  The current regulations at 1.861-8 still show income to be taxable only when derived from certain “specific sources and activities,” which still relate only to certain types of international trade (see 26 CFR §§ 1.861-8(a)(1), 1.861-8(a)(4), 1.861-8(f)(1)).

4) Should one use 26 CFR § 1.861-8T(d)(2) to determine whether his “items” of income (e.g. compensation, interest, rents, dividends, etc.) are excluded for federal income tax purposes?

Reason for question: The regulations (26 CFR § 1.861-8(a)(3)) state that a “class of gross income” consists of the “items” of income listed in 26 USC § 61 (e.g. compensation, interest, rents, dividends, etc.).  The regulations (26 CFR §§ 1.861-8(b)(1)) then direct the reader to “paragraph (d)(2)” of the section, which provides that such “classes of gross income” may include some income which is excluded for federal income tax purposes.

5) What is the purpose of the list of non-exempt types of income found in 26 CFR § 1.861-8T(d)(2)(iii), and why is the income of the average American not on that list?

Reason for question: After defining “exempt income” to mean income which is excluded for federal income tax purposes (26 CFR § 1.861-8T(d)(2)(ii)), the regulations list types of income which are not exempt (i.e. which are subject to tax), including the domestic income of foreigners, certain foreign income of Americans, income of certain possessions corporations, and income of international and foreign sales corporations; but the list does not include the domestic income of the average American (26 CFR § 1.861-8T(d)(2)(iii)).

6) What types of income (if any) are not exempted from taxation by any statute, but are nonetheless “excluded by law” (i.e. not subject to the income tax) because they are, under the Constitution, not taxable by the federal government?

Reason for question: Older income tax regulations defining “gross income” and “net income” said that neither income exempted by statute “or fundamental law” were subject to the tax (§ 39.21-1 (1956)), and said that in addition to the types of income exempted by statute, other types of income were excluded because they were, “under the Constitution, not taxable by the Federal Government” (§ 39.22(b)-1 (1956)).  (This is also reflected in the current 26 CFR § 1.312-6.)