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Mr. Johnston Flunks...

(originally launched into cyberspace on 02/01/2003)

Dear List Subscriber,

Yesterday I sent a two-question test for David Cay Johnston, reporter for
the New York Times. Recently he has argued over and over again that Section
861 of the current statutes says that the domestic income of almost everyone
is taxable. He says that if the regulations under Section 861 say
otherwise, then they are wrong, and are "outranked" by the statute.

Yesterday I pointed out one simple example, to see if he could explain it.
I point out that the predecessor to 861 (Section 119 of the 1939 Code) was
worded almost exactly the way the current 861 is worded. That STATUTE
seemed to say that all interest from domestic investments was to be included
as "income from sources within the United States."

However, the REGULATIONS written to implement that part of the statutes said
that interest from domestic investments was to 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 BENEFITS OF SECTION 251
[which only apples to those who get most of their income from federal
possessions]" [26 CFR § 29.119-2 (1945)].

I asked Mr. Johnston two questions about that strange situation. Here is a
direct quote of my questions:

< begin quote >

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?

< end quote >

Well here is Mr. Johnston's answer, in it's entirety:

"Section 861 only applies to --
1. Those living in the United States who have income from outside of the
United States.
2. Nonresident aliens who have taxable income from inside the United
For everyone else, notably individuals who work in the United States for any
employer, Section 861 is irrelevant."

First of all, that didn't answer the questions at all. It also directly
contradicts what Mr. Johnston has been arguing for several weeks at least.

Again, this is a fine example of what we're up against. Mr. Johnston knew
that the example I gave demolishes his claim that Section 861 is showing ALL
domestic income to be taxable. (His non-answer basically admits that.)
When I prove his position to be wrong, what does he do? Does he even
DISCUSS it, or ponder WHY the regulations say that? Nope. He changes to
some other argument--anything that will support conventional wisdom.

Is THAT the kind of curiosity, and instinct to investigate, that makes a
great reporter? Or is that the kind of
"pay-no-attention-to-the-disturbing-evidence" that makes a great spin-doctor
for the IRS? You decide.


Larken Rose
This email address is being protected from spambots. You need JavaScript enabled to view it.

P.S. Mr. Johnston also constantly harps on how no judge, lawyer, public
official, etc. agrees with our position, as if that constitutes a
substantive rebuttal to anything. He will soon have to change his tune on
that one as well. (Hmmm... I can just see a mafia lord saying "all of my
henchman say that your allegations of fraud against me are frivolous.")