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Go look it up for yourself.

U.S. Federal Income Tax

Subjugation by taxation

Exempt, Excluded, or Eliminated Income

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        You, I, and Bill are prudent persons.  Having been apprised that certain items of income may be excluded income, logic dictates that we look in paragraph (d)(2) to answer the question, Is my income "excluded income"?

Code of Federal Regulations

Sec. 1.861-8 (d) Excess of deductions and excluded and eliminated income--
(2) Allocation and apportionment to exempt, excluded, or eliminated income. [Reserved] For guidance, see Sec. 1.861-8T(d)(2).

        Undeterred by the lengths the writers went to hide this, we will continue to follow the path.

Code of Federal Regulations
Sec. 1.861-8T (d)(2) Allocation and apportionment to exempt, excluded, or eliminated income--

(ii) Exempt income and exempt asset defined--
(A) In general.
For purposes of this section, the term exempt income means any income that is, in whole or in part, exempt, excluded, or eliminated for federal income tax purposes. The term exempt asset means any asset the income from which is, in whole or in part, exempt, excluded, or eliminated for federal tax purposes.

        We are still tracking down the answer to the question, Is my income "excluded income"?

Code of Federal Regulations
Sec. 1.861-8T (d)(2) Allocation and apportionment to exempt, excluded, or eliminated income--

(iii) Income that is not considered tax exempt.
The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:

        What are they trying to hide?

    Exempt = Not Taxable
Eliminated = Not Taxable
  Excluded = Not Taxable
 
    Not considered to be Exempt = Not considered to be Not Taxable
Not considered to be Eliminated = Not considered to be Not Taxable
  Not considered to be Excluded = Not considered to be Not Taxable

        Double Negatives cancel.

    Not considered to be Exempt = Not considered to be Not Taxable
Not considered to be Eliminated = Not considered to be Not Taxable
  Not considered to be Excluded = Not considered to be Not Taxable

    Not considered to be Exempt = Considered to be Taxable          
Not considered to be Eliminated = Considered to be Taxable         
  Not considered to be Excluded = Considered to be Taxable         

        Now let's parse the original with a proper understanding of what they are saying:

Code of Federal Regulations
Sec. 1.861-8T (d)(2)(iii) Income that is considered taxable.

The following items are considered to be taxable income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:

        This dovetails nicely with the general definition of taxable income in IRC section 63.

        Shall we finally look to see what items of income ARE taxable?

Code of Federal Regulations
Sec. 1.861-8T (d)(2)(iii) Income that is considered [taxable]

(A) In the case of a foreign taxpayer (including a foreign sales corporation (FSC)) computing its effectively connected income, gross income (whether domestic or foreign source) which is not effectively connected to the conduct of a United States trade or business;

(B) In computing the combined taxable income of a DISC or FSC and its related supplier, the gross income of a DISC or a FSC;

A DISC is a Domestic International Sales Corporation. 
A FSK is a Foreign Sales Corporation.

Code of Federal Regulations
Sec. 1.861-8T (d)(2)(iii) Income that is considered [taxable]

(C) For all purposes under subchapter N of the Code, including the computation of combined taxable income of a possessions corporation and its affiliates under section 936(h), the gross income of a possessions corporation for which a credit is allowed under section 936(a); and

(D) Foreign earned income as defined in section 911 and the regulations thereunder (however, the rules of Sec. 1.911-6 do not require the allocation and apportionment of certain deductions, including home mortgage interest, to foreign earned income for purposes of determining the deductions disallowed under section 911(d)(6)).

        Only paragraph (D) would apply to Bill... IF Bill was flipping burgers outside of the United States.  This point will be substantiated in the chapter examining the Form 1040 instructions.

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