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A Test for Mr. Johnston

(originally launched into cyberspace on 01/31/2003)

Dear Mr. Johnston,

I am sending a copy of this message to a couple thousand individuals who
subscribe to my e-mail updates, and whatever response you send I will
forward to them as well. From it, they can judge for themselves your
knowledge of the law, your open-mindedness, and your honesty.

A fairly involved discussion can be had about all the complexities of the
regulations under Section 861 and the predecessor statutes and regulations
(regarding "statutory groupings," "operative sections," "allocation of items
of income," "classes of gross income," etc.). I could ask dozens of
reasonable questions, and-—based on my past experience with you-—I expect
you would respond with dozens of evasions. That may seem a bit harsh to
some who read this, but your response to the one clear example below will
tell them if I am being unfair in my treatment of you.


You claim that Section 861 shows the domestic income of most Americans to be
taxable. You cite 861(a)(3) (and the related regulations at 1.861-4) which
discuss compensation for services performed in the United States, and claim
that such compensation is taxable for EVERYONE because of the wording of
Section 861 of the statutes. I assume you would make the same claim
concerning the other items listed in 861(a), such as interest on domestic
investments (861(a)(1)), dividends from domestic companies (861(a)(2)),
rentals of property located in the U.S. (861(a)(4)), etc. You also claim
that, even if the regulations under Section 861 did exempt the domestic
income of most Americans (which you deny that they do), the statute takes
precedent and such a regulation would be irrelevant. (If you think I have
mischaracterized your position, let me know.)


The predecessor to the current Section 861 and following was Section 119 of
the 1939 Code, and both the House and the Senate (in their reports on the
1954 IRC) stated that "no substantive change [was] made" when 119 became 861
and following. Section 119(a) from 1939 was almost identical to the current
861(a). Here is part of what that STATUTE said:

"Sec. 119. Income from sources within United States
(a) Gross income from sources in United States.
The following items of gross income shall be treated as income from sources
within the United States:
(1) Interest - Interest from the United States, any Territory, any political
subdivision of a Territory, or the District of Columbia, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate
or otherwise, not including... [exceptions omitted]"
[Section 119, Internal Revenue Code of 1939]

I assume that you would claim that that statute (just like the current
861(a)(1)) means that interest from domestic investments-—with a few rare
exceptions-—is taxable for EVERYONE. Granted, based on that STATUTE alone,
that is an easy impression to get. However, here are the REGULATIONS which
were written to implement that part of the statutes (emphasis added):

"29.119-2. Interest.
There shall be included in the gross income from sources within the United
States, of NONRESIDENT ALIEN individuals, FOREIGN corporations, and citizens
of the United States, or domestic corporations which are ENTITLED TO THE
  • , all interest received or accrued, as the case
    may be, from the United States, any Territory, any political subdivision of
    a Territory, or the District of Columbia, and interest on bonds, notes, or
    other interest-bearing obligations of residents of the United States,
    whether corporate or otherwise, except... [exceptions omitted]" [26 CFR §
    29.119-2 (1945)]

    (* One was only "entitled to the benefits of section 251" if most of his
    income came from federal possessions.)

    I have two simple questions about this:

    1) What on earth made the regulation-writers think that THAT is what the
    regulations should say (i.e. why did they put in the part about nonresident
    aliens and such, when the statute did NOT say that)?

    2) Why on earth did Congress APPROVE those regulations for twenty-some
    YEARS, thus giving them the "effect of law"*?

    [* - "Treasury regulations and interpretations long continued without
    substantial change, applying to unamended or substantially reenacted
    statutes, are deemed to have received congressional approval and have the
    effect of law." - U.S. Supreme Court, UNITED STATES v. CORRELL, 389 U.S. 299

    What a strange "interpretation" of that statute, don’t you think? If
    Congress MEANT that interest from domestic investments was taxable for
    EVERYONE, why did the regulation-writers write THAT (shown above); what on
    earth possessed them to add in those others things, and why didn’t Congress
    complain about it, and make them change it?

    I know a few thousand people who would find that curious, to say the least.
    If you cannot answer the question yourself, I’m sure that as the leading tax
    reporter for the biggest newspaper in the country, you have enough
    connections to get someone from IRS counsel to answer it. Whatever answer
    you can give, whether with help from government officials or not, will be
    sent to my e-mail update list. If you choose not to answer, I will tell
    them that instead.


    Larken Rose
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