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Taking my own test

(originally launched into cyberspace on 02/08/2003)
---

( Disclaimer #1: to those of you who are not very familiar with the 861
evidence yet, this particular message may give you a headache more than it
gives you information. For an overview of the issue, you can read this:
http://www.taxableincome.net/debate/war/ashcroft.html )

( Disclaimer #2: if you have trouble falling asleep, this long-winded
legalese diatribe should fix that for you.)

Dear List Subscriber,

A while back I sent a two-question test to David Cay Johnston, writer for
the New York Times. In response, he didn't answer the questions, and
instead directly contradicted what he had been arguing for several weeks
straight.

In short, he had been arguing that the language of Section 861 of the
statutes means that almost ALL domestic income is taxable. So I pointed him
to a very curious regulation implementing the predecessor of 861. His
"answer" was to turn around and say that Section 861 is "irrelevant" to
almost all of us. (He then denied having contradicted himself.)

Some people have had a few questions about that test, and the citations
mentioned in it, so I decided it would be good for me to take my own test.
So here goes. Here is the "test" I sent Mr. Johnston:

> 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 [meaning Mr. Johnston]
> 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 BENEFITS OF SECTION 251
  • ,
    > 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 (1967)]

    (Again, Mr. Johnston never answered the questions, but instead did a
    180-degree turn-around, claiming that 861 is "irrelevant" to the vast
    majority of Americans.)

    Before answering, I want to clarify something that a few of you noticed. (I
    am proud to have so many astute people on this list, who actually notice
    things like this.) The wording of 29.119-2 talks about "nonresident alien
    individuals, foreign corporations, and citizens of the United States, or
    domestic corporations which are entitled to the benefits of section 251."
    The way that was written, it can easily be read to mean:

    1) nonresident aliens
    2) foreign corporations
    3) all U.S. citizens
    4) domestic corporations entitled to the 251 thing

    In short, the regulation-writers screwed up in putting that comma in there
    before the "or." They REMOVED that comma in subsequent regulations (e.g. 26
    CFR § 39.119(a)-1). What it actually meant was:

    1) nonresident aliens
    2) foreign corporations
    3) U.S. citizens entitled to the 251 thing
    4) domestic corporations entitled to the 251 thing

    I've included a proof of this below my signature line below.

    ---------------------------------

    Now back to the test. To review, the 1939 STATUTE (Section 119, predecessor
    of 861) sounded like it was talking about ALL interest from U.S.
    investments, but the REGULATION that went along with the statute said that
    interest on U.S. 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" (26 CFR § 39.119(a)-1
    (1954)). (One was only "entitled to the benefits of section 251" if most of
    his income came from federal POSSESSIONS, such as Guam or Puerto Rico.)

    In other words, the REGULATION said that interest on U.S. investments was
    taxable for FOREIGNERS and for certain Americans who get most of their
    income from federal POSSESSIONS. The questions were: why the heck did the
    regulation-writers write THAT, and why did Congress APPROVE those
    regulations for years and years, if the statute really meant that ALL
    interest on domestic investments was taxable?

    One must understand the function and mechanics of what is now Subchapter N
    to be able to answer that. (Mr. Johnston obviously doesn't, so he ran away
    from it instead.)

    There are various sections throughout Subchapter N, sometimes called
    "operative sections," which describe "specific sources or activities,"
    income from which is taxable. For example, 871(b) is an "operative
    section," and it says that nonresident aliens doing business in the U.S.
    "SHALL BE TAXABLE" under Section 1. (Section 882 is another "operative
    section," which says the same thing about foreign corporations doing
    business here.)

    Parts 2 through 5 of Subchapter N describe all sort of activities or types
    of commerce, ALL of which relate to some type of INTERNATIONAL or FOREIGN
    commerce, including citizens receiving FOREIGN income (Part III), FOREIGNERS
    receiving domestic inome (Part II), and various rules about federal
    possessions, international and foreign sales corporations, etc. Those are
    ALL of the types of commerce, income from which is subject to the federal
    income tax.

    On the other hand, Part I (Sections 861 through 865) gives the rules about:
    1) which income counts as "within" and which counts as "without," and; 2)
    generally how to determine taxable income from within (861), and taxable
    income from without (862). (Basically they just say to subtract deductions
    from gross income.)

    However, 80 YEARS of regulations, as well as the statutory predecessor of
    861 (Section 217 from 1921) show that those GENERAL rules only show income
    to be taxable when it comes from the specific activities described in the
    OTHER sections mentioned above (a.k.a. "operative sections").

    That is WHY, despite the very general wording of Section 119 (1939), the
    related REGULATIONS said that the domestic income described in 119(a) was
    taxable for foreigners, and for Americans who receive most of their income
    from federal possessions. (See Sections 29.119-1, 29.119-2, 29.119-9, and
    29.119-10 of the 1945 regulations.) Those were the situations which the
    "operative sections" described as being taxable.

    A specific example might show how it all fits together.

    1) Section 861(a)(3) says that compensation for services performed in the
    U.S. is considered to be income from WITHIN the United States (regardless of
    where the payment actually comes from).

    2) Section 871(b) says that income which nonresident aliens receive from
    doing business in the U.S. is subject to the income tax.

    3) The GENERAL rules in 861 describe the kinds of domestic income which are
    taxable when derived from the SPECIFIC sources described in other sections.

    Here is what good old Section 1.861-8 says:

    "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 sources within the United States has been determined... The
    rules contained in this section apply in determining taxable income of the
    taxpayer from SPECIFIC SOURCES AND ACTIVITIES under OTHER sections of the
    Code, referred to in this section as OPERATIVE SECTIONS... The operative
    sections include, among others, SECTIONS 871(b) and 882 (relating to taxable
    income of a NONRESIDENT ALIEN individual or a foreign corporation which is
    effectively connected with the conduct of a trade or business in the United
    States)."

    Only a lawyer would write something like that. If you look at the older
    statute (Section 217 from 1921) none of that "operative section" or
    "specific source" garbage was in there. It just said in the case of
    NONRESIDENT ALIENS, and in the case of Americans getting most of their
    income from federal POSSESSIONS, certain types of income (after deductions)
    were to be included in full as taxable domestic income. But back to the
    current regulations, they do tell the truth, though in a "lawyeresque" sort
    of twisted, indirect way.

    Again, Sections 861 and 862 general describe how to determine taxable income
    from within and from without, respectively. However...

    "Sections 861, 862, 863(a), and 863(b) are the four provisions applicable in
    determining taxable income from SPECIFIC SOURCES." [26 CFR §
    1.861-8(f)(3)(ii)]

    If you aren't getting income from those "specific sources," then 861-863 are
    NOT saying that your income is taxable. The other three times the term
    "specific sources" is used (1.861-8(a)(1), 1.861-8(a)(4), 1.861-8(f)(1)),
    the reader is directed to 1.861-8(f)(1) for a "list and description" of the
    so-called "operative sections" describing the "specific sources and
    activities."

    (Every time I try to explain this in an understandable way, it makes me want
    to strangle a lawyer.)

    The list in 1.861-8(f)(1) refers to certain foreign income of Americans
    (item "i"), international and foreign sales corporations (item "iii"),
    nonresident aliens and foreign corporations doing business here (items "iv"
    and "v"), those doing business in federal possessions and other foreign and
    international matters (item "vi"). (Notice that these are exactly the types
    of commerce which Parts II through V of Subchapter N are all about.)
    Conspicuously absent from the list is anything about Americans who just get
    income from inside the 50 states.

    Okay, I tried to avoid shameless self-promotion in this e-mail, but now I
    give up. If you don't want to buy a copy of "Theft By Deception" for
    yourself, borrow it from a friend, go to one of the free showings of it, or
    find some other way to see it (heck, illegally bootleg it if it's the only
    way you'll see it). If you have the general gist of what I said above, then
    when you watch Step Six of the video ("Intent to Deceive") you will want to
    strangle a lawyer too.

    The current mangled maze of legalese garbage ("specific sources," "operative
    sections," etc.) was DESIGNED to confuse you. If you see what it came from,
    you'll see exactly what the sections really MEAN, and you'll also see how
    they were trying to COVER UP what they really mean, without actually
    removing the literal truth from the regulations.

    Anyway, that's why 29.119-2 said what it said. The regulation-writers knew
    that the GENERAL terms of 119 only meant that those types of domestic income
    are taxable when they derive from the specific types of commerce described
    in the OTHER sections (i.e. "operative sections").

    If anyone actually made it this far through this message, you deserve a
    medal (or else you should be institutionalized... I'm not sure which).

    Sincerely,

    Larken Rose
    This email address is being protected from spambots. You need JavaScript enabled to view it.
    http://www.theft-by-deception.com

    ---------------------------------------

    [Here is my explanation of the poor wording of 29.119-2:]

    The regulation-writrers put a comma in 29.119-2 (1945) where there shouldn't
    have been one. (It was removed for subsequent printings.) Luckily, half a
    zillion other citations show that it meant that interest on domestic
    investments was to be included in the gross income from sources
    within the United States

    (1) of nonresident alien individuals
    (2) of foreign corporations
    (3) of citizens of the United States who
    are entitled to the benefits of section 251
    (4) of domestic corporations that are
    entitled to the benefits of section 251

    If you look up the following citations, you will see that it did NOT mean
    foreigners plus all citizens plus domestic corporations entitled to the 251
    thing.

    Section 29.119-9 from the same regulations (1945) talked about deductions
    being allowed "to nonresident alien individuals and foreign corporations
    engaged in trade or business within the United States, and to citizens of
    the United States and domestic corporations entitled to the benefits of
    section 251..."

    Section 29.119-1 talked about "Nonresident alien individuals, foreign
    corporations, and citizens of the United States or domestic corporations
    entitled to the benefits of section 251."

    Even farther back, Section 217 in 1925 (predecessor of 119 and 861) said
    this: "In the case of a nonresident alien individual or of a citizen
    entitled to the benefits of section 262, the following items of gross income
    shall be treated as income from sources within the United States:..."

    (Another section back then (232) also added foreign corporations and
    domestic corporations entitled to the 251 thing.)

    In fact, the current regulations at 1.861-8(f)(1)(vi)(E) talk about "The tax
    base for citizens entitled to the benefits of section 931 and the section
    936 tax credit of a domestic corporation which has an election in effect
    under section 936." (The citizen thing actually hasn't applied since 1986.)

    So they clearly screwed up by putting that comma in, realized it, and took
    it out in later printings.