LEGAL DISCLAIMER
I am not a Tax Lawyer, Nor do I play Dan Evans on the internet.
I am not a Certified Public Accountant, Nor do I play Paul Thomas on the internet.
I am not an Enrolled Agent, Nor do I play Richard Macdonald on the internet.
DO NOT TAKE MY WORD FOR ANYTHING ON THIS PAGE.
Go look it up for yourself.

U.S. Federal Income Tax

Possibly a discussion of the actual words of law?

Table of Contents

Post 1                    Post 8                Post 15
Post 2                    Post 9                  Post 16
Post 3                    Post 10                Post 17
Post 4                    Post 11                Post 18
Post 5                    Post 12                Post 19
Post 6                    Post 13                Post 20
Post 7                    Post 14                Post 21

As of post 10, this page is 120 kb. As this page can only get longer, please allow time for downloading. I think somewhere between 300 and 500 kb I'll start a second web page if the discussion continues that far.

If you want to discuss what the law does say, the Quatloos! Tax Protestor Forum is for you!
http://www.quatloos.com/Tax-Forums/
(so this blog can stay on topic about the current trial)

jg

I'll stay right here, thank you.

If you want to "discuss the law" here's my email
dalereastman at sprintmail dot com.

I will post the discussion on my own web space, edited for clarity. If you complain of the editing, I will show the complaint and link off page to show what the pre-edit words were.

You got the cajones to discuss the actual written words of law?

I have no problem if you want to send your email html so that whatever you highlight can be shown, ie. underlining, bolding, or italicizing. You do not get to choose color. That is for differentiating between the participants, and quotations of the laws.

18Sep2005:

Is Treasury Regulation 26 CFR 1.861-8 titled:

"Computation of taxable income from sources within the United States and from other sources and activities"?

Does Treasury Regulation 26 CFR 1.861-8(a)(1) State:

"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.

Sections 862(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources without the United States after gross income from sources without the United States has been determined.

This section provides specific guidance for applying the cited Code sections by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as ``deductions'') of the taxpayer."

Can you cite any other section that gives "specific guidance" for determining "taxable income"?

9/19/2005 6:34 PM
861@mail.com posted:

It is not clear how "specific guidance" may or may not be distinguishable from specific guidance; but there are any number of sections in the code and regulations that give specific guidance for determining taxable income depending on the particular circumstances of a given taxpayer.

The term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).

There is often specific guidance in both the statutes and the regulations for a given item of gross income and for a given deduction. Of course, "taxable income" may or may not be the same as "taxable income from sources within the United States".

As to what a given treasury regulation states, anyone can go to a copy of the Code of Federal Regulations and see what is the actual language contained in the regulation. For example, see gpoaccess.gov/Title26/

Generally, before attempting to discern the meaning of a regulation; it is best to start by reading the pertinent section of the statute. A regulation can not override the statute if there is a conflict. An interpretative regulation can not add to the scope of the law.

Sec. 861. Income from sources within the United States
a)Gross income from sources within United States
The following items of gross income shall be treated as income from
sources within the United States:

(1)Interest <snip details>
(2)Dividends <snip details>
(3)Personal services
Compensation for labor or personal services performed in the United
States; except that compensation for labor or services performed in
the United States shall not be deemed to be income from sources
within the United States if - <snip details>
(4)Rentals and royalties
Rentals or royalties from property located in the United States or
from any interest in such property, including rentals or royalties
for <snip details>
(5)Disposition of United States real property interest
Gains, profits, and income from the disposition of a United States
real property interest <snip details>
(7)Amounts received as underwriting income<snip details>
(8)Social security benefits
Any social security benefit (as defined in section 86(d)).

b)Taxable income from sources within United States
From the items of gross income specified in subsection (a) as
being income from sources within the United States there shall be
deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any
expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if
any, shall be included in full as taxable income from sources
within the United States. In the case of an individual who does not
itemize deductions, an amount equal to the standard deduction shall
be considered a deduction which cannot definitely be allocated to
some item or class of gross income...

Section 861(a) lists several of the most common items of domestic earnings of citizens and residents and says those items are treated as "income from sources within the United States".

Section 861(b) says: from the items specified in 861(a) take the deductions that properly apply and include the remainder in full as "taxable income from sources within the United States."
For the full text, see
http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_861

To illustrate, use the simple example of a woman named Rose that has compensation of $20,000 for labor or personal services performed in the United States and only a standard deduction of $4000. What is the amount that is included in full as taxable income from sources within the United States? We use section 861(a) to determine Rose has 20K gross income treated as income from sources within the United States and then section 861(b) (and others ) to deduct the 4K to arrive at 16K taxable income from sources within the United States.

The statutory language is clear to include under §861(b) the items listed in §861(a), after the appropriate deductions, in "taxable income from sources within the United States."

Regulation 1.861-8(a)(1) does not say it gives "specific guidance" for determining "taxable income".
It says, in part:

1.861-8(a)(1):

This section provides specific guidance
for applying the cited Code sections by prescribing rules for the
allocation and apportionment of expenses, losses, and other
deductions (referred to collectively in this section as "deductions")
of the taxpayer. 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. See paragraph (f)(1) of this section
for a list and description of operative sections.

Summarizing the above sentences from 1.861-8(a)(1):
The rules are for allocation and apportionment of deductions.
The rules apply under other sections, called operative sections.
The rules are under section 861 for determining "taxable income from sources within the United States."

For my simple example of Rose, there are is no allocation or apportionment of deductions. So, the clear language of the statute will not be modified by anything in 1.861-8(a)(1) when one applies the regulation properly for the purpose stated in the regulation. That is, with or without application of the regulation, the result is that Rose has 16K taxable income from sources within the United States.

When we look at the actual language, we can properly discern the meaning.

9/20/2005 12:35 AM
First, Thank you for participating.

1>The term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction). There is often specific guidance in both the statutes and the regulations for a given item of gross income and for a given deduction.

In citing section 63 above, you are citing a "DEFINITION".

Sec. 63. Taxable income defined

-STATUTE-
(a) In general
Except as provided in subsection (b), for purposes of this
subtitle, the term "taxable income" means gross income minus the
deductions allowed by this chapter (other than the standard
deduction).
(b) Individuals who do not itemize their deductions

The definition is NOT the command of the action that makes the result described. A definition of a thing is NOT the thing described.

Analogy:

Apple Code Sec. 63. Prepped Apple defined

-STATUTE-
(a) In general
Except as provided in subsection (b), for purposes of this
subtitle, the term "Prepped Apple" means Produce Apple minus the
skin and core allowed to be removed by this chapter.

A definition of a "Prepped Apple" is not a Prepped Apple. A "Prepped Apple is the result of an action(s) that changes a Produce Apple into a Prepped Apple. The term "Prepped Apple" means Produce Apple minus the peel and core. Such "definition" is not a command to action, nor is it instruction on how to do the act which leaves the result described (defined). The definition of taxable income is NOT an instruction to make gross income into taxable income, any more than the definition of a Prepped Apple is an instruction to make a Produce Apple into a Prepped Apple.

1>Of course, "taxable income" may or may not be the same as "taxable income from sources within the United States".

This statement is simply sophistry.

soph·is·try n., 1. Plausible but fallacious argumentation.
2. A plausible but misleading or fallacious argument.
American Heritage Electronic Dictionary

        The plausibility comes from the possible fact that there "might" be two different definitions in the code. That has not been found to be the case by myself.

        I admit to the plausibility because I HAVE found these two terms to be defined within the IRC: The term "trade or business" which is not the same as the term "trade or business within the United States".

        Absent a citation of such a defining of the term "taxable income", the fallacious part of the argument comes from the simple fact that "taxable income" can only come from one of three places: Within the U.S.; Without the U.S.; or two cases of from both within AND without the U.S.

        In the case of taxable income from both within AND without the United States, would be for example, a trucker hauling a load from somewhere in the U.S. to Canada. Part is from within, part is from without. Section 863 deals with allocating or apportioning the gross income (and thus the taxable income) to those two sources. Specifically in the case of this type of transportation income, the regulation IIRC provides that a U.S. trucker's compensation for services in this case is to be treated as if it came from totally within the U.S.

        So, absent a citation to the contrary, "taxable income" is from within the U.S. or without the U.S. based upon the "source" of the gross income it is derived from. (And this is NOT the "source" referred to in the 16th. Amendment.)

1>As to what a given treasury regulation states, anyone can go to a copy of the Code of Federal Regulations and see what is the actual language contained in the regulation. For example, see
gpoaccess.gov/Title26/

You state the obvious.

1>Generally, before attempting to discern the meaning of a regulation; it is best to start by reading the pertinent section of the statute. A regulation can not override the statute if there is a conflict. An interpretative regulation can not add to the scope of the law.

       Actually, I agree with your statement above.

(1)Interest <snip details>
<snip>
(3)Personal services
Compensation for labor or personal services performed in the United
States; except that compensation for labor or services performed in
the United States shall not be deemed to be income from sources
within the United States if - <snip details>
<snip>

1>Section 861(a) lists several of the most common items of domestic earnings of citizens and residents and says those items are treated as "income from sources within the United States".

Yes. I agree. Let's narrow it down even more. Item 861(a)(3) since this is where I would expect what a Citizen being paid for their work to lodge. I'll presume you agree unless you state otherwise.

Thus:

The following items of gross income shall be treated as income from
sources within the United States: Compensation for labor or personal services performed in the United States; <snip exceptions that don't apply to U.S. Citizens.>

1>Section 861(b) says: from the items specified in 861(a) take the deductions that properly apply and include the remainder in full as "taxable income from sources within the United States."
For the full text, see
http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_861

Thus:

From the Compensation for labor or personal services specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States.

1>To illustrate, use the simple example of a woman named Rose that has compensation of $20,000 for labor or personal services performed in the United States and only a standard deduction of $4000.

        Acceptable example.

1>What is the amount that is included in full as taxable income from sources within the United States?

        This is where we are going to differ.

1>We use section 861(a) to determine Rose has 20K gross income treated as income from sources within the United States and then section 861(b) (and others ) to deduct the 4K to arrive at 16K taxable income from sources within the United States.

        I'm going to hack up your sentence just above to address the individual component concepts contained within it. I leave it intact so the reader can see where the phrases derive from that I am going to address.

1>We use section 861(a) to determine Rose has 20K gross income treated as income from sources within the United States <chop>

        And I agree, Rose does indeed have "20K gross income treated as income from sources within the United States". I think any reader can see that you are correct on this point simply by reading the quote of section 861 and this sentence.

        At this point though, you have failed to read the regulations under section 861. The first being Treasury Regulation 1.861-1, specifically 1.861-1(a) which states:

(a) Categories of income. Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax.

It's simple English at this point. This is a regulation under the 1954 IRC as amended. The word "source" is not the "source" referred to in the Sixteenth Amendment. A "SOURCE" is the origin of a thing that derives therefrom. Remove the source and the thing derived therefrom can no longer be derived. Example: A water pump in a park. The pump is a source of water. Remove the pump and there is no longer a source of water. Thus: Parsing the above Treasury Regulation:

(a) Categories of water. Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of water for purposes of quenching thirst.

        If a "source" is not used for purposes of the income tax, then the income or gross income from or derived from that source is not used for purposes of the income tax. No source, no income. No income, no taxable income. No taxable income, no tax.

        This is just a prelude to what is in the regulations under sections 861 et seq. As you shall see as we discuss and examine this unbelievable proposition, the regulations, and the statutes are consistent with themselves and each other.

I got almost to the bottom of my reply when I remembered that I didn't reply to the second half of what I hacked, so I had to come back up to this point to reply to the second half.

1>and then [we use] section 861(b) (and others ) to deduct the 4K to arrive at 16K taxable income from sources within the United States.

After coming back up here to address the above passage, I have decided to move it down because what I have addressed below, also addresses this passage in the same shot. Look for this passage below.

1>The statutory language is clear to include under §861(b) the items listed in §861(a), after the appropriate deductions, in "taxable income from sources within the United States."

          A quick review of a portion of 861(b) is in order here:

Please notice that the command is to 'deduct' the "properly apportioned or allocated" 'deductions'. Please notice that the command FAILS to say how to "properly apportion or allocate" the deductions. Thus, Treasury Regulation 1.861-8(a)(1) is literally correct when it states:

Simplifying snippage:

Sections 861(b) state[s] in general terms how to determine taxable income ... from sources within the United States...

These terms are in general because it only gives an overview of what is to be done according to regulation 1.861-8(a)(1). We can skip the next sentence for now, since it deals with 862 and items of gross income treated as income from sources outside the United States.

Thus, we can now read the literal self explanation of the third sentence of section 1.861-8(a)(1) which states:

This section [treasury regulation section 1.861-8] provides specific guidance for applying the cited Code sections [IRC sections 861(b), 862(b) & 863(a)] by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as ``deductions'') of the taxpayer.

Simplifying snippage and parse:

... treasury regulation section 1.861-8 provides specific guidance for applying the Code sections 861(b), 862(b) & 863(a) by prescribing rules for the allocation and apportionment of ``deductions'')

Thus we have the literal description of what treasury regulation 1.861-8 is about. Just to push it over the top, let us examine the titles and descriptions.

Treasury Regulation 1.861-8:

Computation of taxable income from sources within the United States and from other sources and activities.

Subsection 1.861-8(a):

In general.

Subsection 1.861-8(a)(1):

Scope.

1> Regulation 1.861-8(a)(1) does not say it gives "specific guidance" for determining "taxable income".

Section 63, which you cited yourself says taxable income is gross income minus the "deductions allowed"
Treasury regulation 1.861-8(a)(1) says it gives "specific guidance for applying section 861(b)".
Treasury regulation 1.861-8(a)(1) says that Section 861(b) tells us "in general terms how to determine taxable income ... from sources within the United States"
Section 861(b) tells us that deductions from gross income treated as income from sources within the U.S. must be properly allocated and apportioned without telling us HOW to properly allocate and apportion the 'deductions'.
Taxable income is computed or determined by subtracting the "properly allocated and apportioned" (861(b)) "deductions allowed" (63(a)).
Treasury regulation 1.861-8(a)(1) says it gives us "specific guidance ... by prescribing rules for the
allocation and apportionment of expenses, losses, and other deductions".

Now that it is over the top, and going down the other side, I'm going to give it one last shove for some additional momentum.

Regulation 1.862-1(b):

Taxable income. The taxable income from sources without the United States, in the case of the items of gross income specified in paragraph (a) of this section, shall be determined on the same basis as that used in Sec. 1.861-8 for determining the taxable income from sources within the United States.

Regulation 1.863-1(c):

Determination of taxable income. The taxpayer's taxable income from sources within or without the United States will be determined under the rules of Sec. Sec. 1.861-8 through 1.861-14T for determining taxable income from sources within the United States.

Here's that other half of a passage that I wanted to address way down here.

1>and then [we use] section 861(b) (and others ) to deduct the 4K to arrive at 16K taxable income from sources within the United States.

If you use section 861(b), you are to use regulation 1.861-8. Period. Remember, quote:

1>It says, in part:

1.861-8(a)(1):

1>Summarizing the above sentences from 1.861-8(a)(1):
1>The rules are for allocation and apportionment of deductions.

Yes. Agreed.
Without allocation and apportionment of the "deductions allowed" (sec. 63), there can be no "taxable income".

1>The rules apply under other sections, called operative sections.

Sort of. The "specific sources and activities" are under the other sections of the code. The rules are to be used to determine taxable income from those sources and activities. Since I'm close to the end of my reply, I'm going to address this just a little more at the end.

1>The rules are under section 861 for determining "taxable income from sources within the United States."

And for determining taxable income from sources without the United States, see regulation 1.862-1(b) linked above.

And for determining taxable income from sources both within AND without the United States at the same time, see regulation 1.863-1(c) linked above.

And for Computation of taxable income from sources within the United States and from other sources and activities, see the descriptive title.

1>For my simple example of Rose, there are is no allocation or apportionment of deductions.

Then you are not allowing Rose to deduct the 4K. As stated and cited above, if you use section 861(b) you must use regulation 1.861-8. You have activated the following passage of 861(b), bold highlighted with your example of Rose:

there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income

Which means you MUST use this passage of regulation 1.861-8(b)(1):

Although most deductions will be definitely related to some class of a taxpayer's total gross income, some deductions are related to all gross income.

In addition, some deductions are treated as not definitely related to any gross income and are ratably apportioned to all gross income.

In allocating deductions it is not necessary to differentiate between deductions related to one item of gross income and deductions related to another item of gross income where both items of gross income are exclusively within the same statutory grouping or exclusively within the residual grouping.

Which also means you MUST use this passage of regulation 1.861-8(b)(5):

Deductions related to all gross income.
If a deduction does not bear a definite relationship to a class of gross income constituting less than all of gross income, it shall ordinarily be treated as definitely related and allocable to all of the taxpayer's gross income except where provided to the contrary under paragraph (e) of this section.

And don't forget the deduction allowed under IRC section 164 for taxes paid. The rules for that is found under 1.861-8(e)(6).

1>So, the clear language of the statute will not be modified by anything in 1.861-8(a)(1) when one applies the regulation properly for the purpose stated in the regulation.

The "clear language of the statute" is only a general statement, of which regulation 1.861-8 supplies all the specific details.

1> That is, with or without application of the regulation, the result is that Rose has 16K taxable income from sources within the United States.

As the regulation states:

If you use the statute, you use the regulation.

1>... The result is that Rose has 16K taxable income from sources within the United States.

Nope. You didn't look deep enough into the regulations. Understandable. There's 21,000 words.

1>When we look at the actual language, we can properly discern the meaning.

Like you said: "when". You haven't seen all the language, and I haven't posted it all in my reply to you.

Returning to your statement: "The rules apply under other sections, called operative sections."

With 21,000 plus words, the intent by the legal drafter was to bury the truth under a mountain of words. There are three passages that deal with operative sections. These three sections also start to lead to the truth about

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. [1.861-8(a)(1)]

For purposes of this section, the term ``statutory grouping of gross income'' or ``statutory grouping'' means the gross income from a specific source or activity which must first be determined in order to arrive at ``taxable income'' from which specific source or activity under an operative section. (See paragraph (f)(1) of this section.) [1.861-8(a)(4)]

Operative sections. The operative sections of the Code which require the determination of taxable income of the taxpayer from specific sources or activities and which give rise to statutory groupings to which this section is applicable include the sections described below. [1.861-8(f)(1)]

It's late, I'm tired. I'm uploading this without comment on the three passages immediately above.

9/20/2005 1:43 AM

1>To illustrate, use the simple example of a woman named Rose that has compensation of $20,000 for labor or personal services performed in the United States and only a standard deduction of $4000.

2> *Acceptable example.*

2> *And I agree, Rose does indeed have "20K gross income treated as income from sources within the United States". I think any reader can see that you are correct on this point simply by reading the quote of section 861 and this sentence.*

1>The statute says the source of the income is "within the United States".

1>What is the amount that is included in full as taxable income from sources within the United States?

2> *This is where we are going to differ.*

§ 861(b) Taxable income from sources within United States
From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.

Rose has a standard deduction in the example of 4,000. Rose has 20,000 income from one item which has already been determined to be treated as "income from sources within the United States".

The deduction must be fully allocated, and is properly allocated, to the sole item of income; as that is the only possible way to allocate the sole deduction. The result of applying the clear language of the statute is that Rose has 16,000 of taxable income from sources within the United States.

2> *If a "source" is not used for purposes of the income tax, then the income or gross income from or derived from that source is not used for purposes of the income tax. No source, no income. No income, no taxable income. No taxable income, no tax.*

The sources that are determined in sections 861-865 are geographic (or perhaps better said to be based on location).These sections are about income from sources within the United States, income from without the United States, and rules to allocate expenses, losses, and deductions to sources within or without the United States.

2> *So, absent a citation to the contrary, "taxable income" is from within the U.S. or without the U.S. based upon the "source" of the gross income it is derived from. (And this is NOT the "source" referred to in the 16th. Amendment.)*

Agreed. Rose has 20K income from within the United States, 4K deduction from that income and 16k of taxable income from sources within the United States. The statute does not command nor require the use of any of the underlying regulations. When the general rule completely covers a case, the specific rules are neither necessary nor helpful; but can never result in the regulation conflicting
with the statute, unless the regulation has been misread or misapplied.

9/20/2005 7:06 PM

1>To illustrate, use the simple example of a woman named Rose that has compensation of $20,000 for labor or personal services performed in the United States and only a standard deduction of $4000.

2> *Acceptable example.*

2> *And I agree, Rose does indeed have "20K gross income treated as income from sources within the United States". I think any reader can see that you are correct on this point simply by reading the quote of section 861 and this sentence.*

3>The statute [subsection (b) more specifically] says the source of the income is "within the United States".

Actually, we still need a piece of subsection (a) for context.

The following items of gross income shall be treated as income from sources within the United States:

Thus, the true statement is the source of "gross income" treated AS "INCOME" is within the United States.
"Gross income" is a category. "Income" (which means 16th amendment income or income in the constitutional sense) is a sub-category and is not necessarily the same as the other "items of gross income" listed in 61(a)(1) through 61(a)(15).

When the specific item of gross income is "treated AS "INCOME", it is moved out of the one subcategory into the other. Though this does not make sense now, it will come into focus later.

1>What is the amount that is included in full as taxable income from sources within the United States?

Is Rose a nonresident alien or a Citizen living and working solely in one of the 50 states? It makes ALL the difference.

2> *This is where we are going to differ.*

§ 861(b) Taxable income from sources within United StatesFrom the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.

3>Rose has a standard deduction in the example of 4,000. Rose has 20,000 income from one item which has already been determined to be treated as "income from sources within the United States".

3>The deduction must be fully allocated, and is properly allocated, to the sole item of income; as that is the only possible way to allocate the sole deduction. The result of applying the clear language of the statute is that Rose has 16,000 of taxable income from sources within the United States.

If you use section 861(b), you MUST use regulation 1.861-8.

This section [treasury regulation section 1.861-8] provides specific guidance for applying the cited Code sections [IRC sections 861(b), by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as ``deductions'') of the taxpayer. [1.861-8(a)(1) - scope]

And I showed you those rules in my prior response:
You MUST use this passage of regulation 1.861-8(b)(1):

You MUST use this passage of regulation 1.861-8(b)(5):

And don't forget the deduction allowed under IRC section 164 for taxes paid. The rules for that is found under 1.861-8(e)(6).

Remember, The Secretary was given the authority to make all needful rules and regulations. What you are saying is that regulation 1.861-8 is not needful and thus is to be ignored. This is not the case, as shown by the very words in the regulation itself that mirror what you said:

"The deduction must be fully allocated, and is properly allocated, to the sole item of income"
If a deduction does not bear a definite relationship to a class of gross income constituting less than all of gross income, it shall ordinarily be treated as definitely related and allocable to all of the taxpayer's gross income...

2> *If a "source" is not used for purposes of the income tax, then the income or gross income from or derived from that source is not used for purposes of the income tax. No source, no income. No income, no taxable income. No taxable income, no tax.*

3>The sources that are determined in sections 861-865 are geographic (or perhaps better said to be based on location).These sections are about income from sources within the United States, income from without the United States, and rules to allocate expenses, losses, and deductions to sources within or without the United States.

Geographic Source Rules is a perfectly acceptable description of at least IRC section 861, 862, & 863.

However, I must again correct you on your sloppy usage of terms. These sections are about "items of gross income TREATED as income" from the geographic sources.

2> *So, absent a citation to the contrary, "taxable income" is from within the U.S. or without the U.S. based upon the "source" of the gross income it is derived from. (And this is NOT the "source" referred to in the 16th. Amendment.)*

3>Agreed. Rose has 20K income from within the United States, 4K deduction from that income and 16k of taxable income from sources within the United States.

Whoa! Not so fast. Remember regulation 1.861-1? It gave us a heads up to look for something. Did you check to see if the source of income was a source for purposes of the income tax?

Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax.
[1.861-1(a)(1)]

3>The statute does not command nor require the use of any of the underlying regulations.

Unsubstantiated assertion. The regulations are to the statutes as an owner's manual is to a new machine. Just as the owner's manual tells one how to operate the machine, the regulation tells one how to operate a statute.

By "operate a statute" I mean that the regulations give the details on what, when, where, who, how, and sometimes why that statute applies. The regulations under 861 were not written to be ignored which is exactly what I read in your words. "Don't look there." Sorry, I looked. And what I found applies.

3>When the general rule completely covers a case, the specific rules are neither necessary nor helpful; but can never result in the regulation conflicting with the statute, unless the regulation has been misread or misapplied.

You again jump to unsubstantiated conclusions based upon unsubstantiated assertions.
The specific always gives details to apply the general.

Specific rules are just that... Specific. You don't just throw them away because you don't like them.

I suspect you know where those rules take us, and you want to avoid going there. You don't get a choice. That is where the rules take us. Let the rules tell you what the rules say.

This argument that I think you are going to raise regarding "the regulation conflicting with the statute" or in other words, an argument that a regulation can not outrank a statute, is one I have seen before. If that is what you are planning to use, say so, so that I can address it and put it away. There is no conflict when you look at the big picture.

My summary opinion of your last post is that I think you are trying to say, 'don't look at regulation 1.861-8'. 1.861-8 IS the place where the rules for computing or determining taxable income are found.

In ending this, I'm going to leave you with these excerpts again:

Regulation 1.862-1(b):

Regulation 1.863-1(c):

Treasury Regulation 1.861-8:

Computation of taxable income from sources within the United States and from other sources and activities.

Subsection 1.861-8(a):

In general.

Subsection 1.861-8(a)(1):

Scope.

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.

This section [treasury regulation section 1.861-8] provides specific guidance for applying the cited Code sections [IRC section 861(b)] by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as ``deductions'') of the taxpayer.

9/20/2005 11:32 PM

4>If you use section 861(b), you MUST use regulation 1.861-8.

Some might cry "Unsubstantiated assertion." I ask you to support your claim. Why MUST I? Will the result be different if I do?

1>In our example, the only deduction Rose has is a standard deduction.

No matter how many specific rules are in the regulations not one will change the result determined by the statutory rules of section § 861(b). (Details to follow)

4>And I showed you those rules in my prior response:
You MUST use this passage of regulation 1.861-8(b)(1):

Although most deductions will be definitely related to
some class of a taxpayer's total gross income, some deductions are related to all gross income.

In addition, some deductions are treated as not definitely related
to any gross income and are ratably apportioned to all gross
income.

In allocating deductions it is not necessary to differentiate between deductions related to one item of gross income and deductions related to another item of gross income where both items of gross income are exclusively within the same statutory grouping or exclusively within the residual grouping.

4>You MUST use this passage of regulation 1.861-8(b)(5):

Section 861(b) gives more than adequate guidance to determine Rose's taxable income from within the United States in our example.

From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.

Although we have referred to this section as a general rule, there is specific mention of Rose's case wherein the standard deduction is considered a deduction which cannot definitely be allocated to some item or class of gross income. I most certainly should not use the passage in regulation 1.861-8(b)(5) that you cited. The portion of the regulation you cited in 1.861-8(b)(1) that mentions deductions that will be treated in the same manner as the standard deduction and are ratably apportioned to all gross income is in concurrence, but adds nothing, to the determination under the statute. It is not needed in this case.

4>Remember, The Secretary was given the authority to make all needful rules and regulations. What you are saying is that regulation 1.861-8 is not needful and thus is to be ignored.

Granted, in many cases the regulations are needed when there are facts and circumstances that are not clearly addressed in the statute. Our example of Rose is not such a case, and intentionally was selected to not be such a case. One need not necessarily ignore the regulations in such a case; but one can not correctly interpret the regulation and come to a result contrary to the plain language of the statute.

As asserted and agreed, before attempting to discern the meaning of a regulation; it is best to start by reading the pertinent section of the statute. My only purpose in this discussion,is to read the law and see what it does actually say. My purpose is best served by starting with the most simple case under one section of the statute and then, perhaps, adding complexity to the example which introduces the effects of other parts of the statutes and regulations.

Section 861(b) says the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income and there shall be deducted a ratable part of such deductions from the items in 861(a). Since our example was limited to only one item of income, the ratable part is all of the standard deduction.

Deducting all of the standard deduction of 4k from Rose's 20K leaves the remainder of 16K that shall be included in full as taxable income from sources within the United States.

That is what the statute says in section 861. It is what the law actually says.

9/21/2005 3:20 PM

I think a preview summary of your points and position as I understand them is in order.

a. In this simple example, you claim there is no need to look at the regulations.
b. There is 'more than adequate guidance' in just the statute.
c. Even if one reads the regulations, implied in your statement, is that the answer does not change.
d. Implied and not yet stated by you, is that if the answer changes, the regulations are somehow outside their authority.

4>If you use section 861(b), you MUST use regulation 1.861-8.

5>Some might cry "Unsubstantiated assertion." I ask you to support your claim.

LOL. Fair dinkum.

Though we are adversaries regarding the subject under debate, you have been civil and polite which translates into respectable. Thus I fully enjoy the ironic humor you have just presented.

Before I type my support, I am going to answer the next thing you have asked and by way of that, supply the requested substantiation.

5> Why MUST I? Will the result be different if I do?

The answer to the second question is yes. That means the answer to the first question is "because the result will be different."

Expounding upon this: I have shown you passages of the rules of specific guidance that address the simple example you have set up. Though your example, as you understand the tax laws generally, can be solved by only looking at the statute, you are not following proper procedure.

By proper procedure, I mean exactly that. Proper procedure is to use the regulations. Per the online IRM, 'The Treasury Regulations are the OFFICIAL INTERPRETATION of the statutes'. In fact, as far as the IRS employees are concerned, the IRM, which can be thought of as an employee handbook, states that "the treasury regulations are binding upon the IRS". If you are an IRS employee, my substantiation becomes very simple: It's binding upon you, and unless you read it and use it, you are ignoring your obligation to do your job properly.

I know you're not reading this page from the IRS website, since I've only had two visits from irs.gov, which significantly decreases the likelyhood that you're an IRS employee. So I must substantiate the position from a different direction.

By way of an analogy, you go to the auto dealer and buy a new 2005 car. Proper procedure is to read the entire owner's manual from cover to cover before putting the key in the ignition. Who does that? It's not until you need to know something that is not common knowlege before one cracks the manual. Look at this, light duty driving has a 7,500 mile oil change interval. Or, Honey, check this out, here's the button for opening the trunk without a key.

Using the statute without using the regulations is like operating a machine having never read the operator's manual.

Granted, the above is a logical construct, and thus doesn't have the force of law. The simple fact that the amount of taxable income for Rose changes (which I know you are going to challenge next) when the regulations are applied is the proof that the regulations MUST be applied.

At this point in my reply, I'm not sure if I want to deal with the challenge I know I'm going to get from you pre-emptively or wait until you give it a little more voice.

This section [treasury regulation section 1.861-8] provides specific guidance for applying the cited Code sections [IRC sections 861(b)], by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as ``deductions'') of the taxpayer.
[1.861-8(a)(1) - scope]

1>In our example, the only deduction Rose has is a standard deduction.

5>No matter how many specific rules are in the regulations not one will change the result determined by the statutory rules of section § 861(b). (Details to follow)

As I indicated above, I know you are going to challenge the fact that the application of the regulation changes the result. To give fairness where due, you raised the issue of looking at the regulation in the first place. The answer to that challenge hinges upon whether the result changes, which can only be determined by looking at the regulations (more than just 1.861-8). If it is found that you are correct, then your position that the statute presents all the infomation needed to compute the taxable income in your simple example, though not proper procedure, is "workable". At that point the argument over looking at the regulations become moot.

The force of logic, moves us to looking at the regulations in spite of your opposition to doing so.
Once we are there, then the argument of what the regulations do to even your simple example with Rose, and then the subsequent challenge you are going to raise concerning the 'authority' of the regulations can be discussed.

4>And I showed you those rules in my prior response:
You MUST use this passage of regulation 1.861-8(b)(1):

Reg can be seen in prior post.

4>You MUST use this passage of regulation 1.861-8(b)(5):

Reg. can be seen in prior post.

5>Section 861(b) gives more than adequate guidance to determine Rose's taxable income from within the United States in our example.

I find this statement of yours to be an assertion for the reasons I state above. If the answer changes with the application of the regulation, then the regulation MUST be used. I assert that the regulation DOES change the answer. Obviously you assert the opposite.

This is in spite of the simple fact that the regulations exist to support the statutes. The regulations tell us when the statute applies, to whom it applies, and how to apply it. In analogous terms, you are telling us to not bother reading the owner's manual for this tool. The tool in this case, statute 861(b) whose function is to determine taxable income from gross income treated as income from sources within the U.S. That underscore will be explained at a much later point in a later post in this dialog. It means something to me, which I can not yet explain until other foundation stones are laid.

861(b):
From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.

5>Although we have referred to this section as a general rule, there is specific mention of Rose's case wherein the standard deduction is considered a deduction which cannot definitely be allocated to some item or class of gross income. I most certainly should not use the passage in regulation 1.861-8(b)(5) that you cited. The portion of the regulation you cited in 1.861-8(b)(1) that mentions deductions that will be treated in the same manner as the standard deduction and are ratably apportioned to all gross income is in concurrence, but adds nothing, to the determination under the statute. It is not needed in this case.

I have little to say to this other than what I have already stated. You are using the tool of the statute without concern or care as to what the operator's manual says about how to properly use the tool. The truth of this will be found in the operator's manual (regs) for the tool (statute) where it shows you to be improperly applying the tool (861(b)). Again, the proof of your position is to be found in proving the regs don't change the answer.

4>Remember, The Secretary was given the authority to make all needful rules and regulations. What you are saying is that regulation 1.861-8 is not needful and thus is to be ignored.

5>Granted, in many cases the regulations are needed when there are facts and circumstances that are not clearly addressed in the statute.

How would you know? For sake of argument, I'm stating you can't know, because you looked at the statute and (minus the info in the reg) decided you don't need to look at the reg, Thus you CAN'T know what the reg does. If you don't know what the reg does, you can NOT assert the lack of need to look at the reg.

5> Our example of Rose is not such a case, and intentionally was selected to not be such a case.

I understood that from the beginning. Thus, whether the regulations change the outcome or not is the sole proof you have to support your assertion that looking at the regs is not required. In order to prove that looking at the regs is not required, you have to look at the regs to prove they are not required. This puts you in a bind, because now you have to look at the regs to support your position.

5> One need not necessarily ignore the regulations in such a case; but one can not correctly interpret the regulation and come to a result contrary to the plain language of the statute.

I've anticipated this challenge because I have seen it before. As shown above, we are at the point where we need to look at the regs. I will explain (more for the lurkers, because I suspect you know where we are going) how and why the answer changes because of the regs, then you are going to challenge that result as contrary to the statute. I will then show you why it is not contrary to the statute.

5>As asserted and agreed, before attempting to discern the meaning of a regulation; it is best to start by reading the pertinent section of the statute. My only purpose in this discussion,is to read the law and see what it does actually say.

The "law" so far as it puts a burden of duty on any member of the general public, INCLUDES properly promulgated regulations. So, if your purpose is to read the law, you are REQUIRED to read the regulations. Properly promulgated regulations "have the full force and effect of law."
I can give the link to my page that cites the appropriate statutes and regulations on this issue if required.

5> My purpose is best served by starting with the most simple case under one section of the statute and then, perhaps, adding complexity to the example which introduces the effects of other parts of the statutes and regulations.

Starting with a simple case is an excellent way to get to the meat of the matter. In the case of your example, it gets the issue of looking at the regulation up on top, so to speak, very quickly. There is no need to add complexity to your fine example because, in my opinion, it has focused the discussion on the issue of look at the reg / don't look at the reg. In order to prove which of those is correct, we have to look at the reg. Looking at the reg, I say it changes the answer, you say it doesn't. (actually you say it can't, but we'll hash that out shortly).

5>Section 861(b) says the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income and there shall be deducted a ratable part of such deductions from the items in 861(a). Since our example was limited to only one item of income, the ratable part is all of the standard deduction.

Because you are missing a few tidbits of information, supplied by the regulations, your statement appears correct, but it is not correct.

5>Deducting all of the standard deduction of 4k from Rose's 20K leaves the remainder of 16K that shall be included in full as taxable income from sources within the United States.

5>That is what the statute says in section 861. It is what the law actually says.

If you don't bother to read and use the regulations to properly apply 861(a) and (b).

Although I have made the case for looking at the regulations so far as this debate is concerned as proof or disproof of your position, I will wait for your reply before forging ahead into what the regulations say, how and why it makes the answer different for Rose. Because I am aware of various contentions floating around, that I have not tracked down totally and studied, I am going to ask that in the example Rose has compensation for labor in any one of the 50 united States.

Time stamps in each cell are the post times of the emails that passed back and forth between 861@mail.com and myself.

Notifications that I had posted my reply (post 10) to 861 at mail.com were sent by myself at: 9/21/2005 3:20 PM and 9/23/2005 12:05 PM

Sent 9/23/2005 12:05 PM:
My first reply didn't get to you; or;
Your counter reply didn't get to me; or;
Your real life made some demands upon your time.

This addition to this page is made 9/24/2005 1:34 PM.

9/28/2005 12:16 PM

Not abandoned, just have not made the time, sorry.

10/2/2005 1:09 AM

So far, the statute in Section 861 has been presented and exemplified.

To recap (in simple language):
Section 861(a) lists certain items of gross income that are treated as income from within the United States.
Section 861(b) says from the items in 861(a) take the proper deductions and the remainder, if any, shall be included in full as taxable income from sources within the United States

It was agreed that "absent a citation to the contrary, "taxable income" is from within the U.S. or without the U.S. based upon the "source" of the gross income it is derived from. (And this is NOT the "source" referred to in the 16th Amendment)"

It was also agreed that if you don't read and use the regulations as you apply 861(a) and 861(b) that the result in the Rose example is to deduct all of the standard deduction of 4k from Rose's 20K for the remainder of 16K that shall be included in full as taxable income from sources within the United States.

The language in section 861(b) says a ratable part of a standard deduction shall be deducted from the items in 861(a). For Rose, with only one item, the ratable part must be the whole standard deduction.

Treasury regulation section 1.861-8 provides specific guidance for applying the cited Code sections [IRC section 861(b)] by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as "deductions'') of the taxpayer.

Since the only deduction in the example of Rose is the standard deduction and 861(b) gave instruction for the allocation and apportionment of that one deduction, in our case of only a single item listed in 861(a) it is my contention that there is not any further determination to be made to determine taxable income from within the United States.

As mentioned, my only purpose is to examine what the law says. The statute in section 861 says all that is needed to determine taxable income from within the United States for Rose.

We differ in whether or not the regulations under section 861 need to be read and used in our Rose example.

So far, the statute in Section 861 has been presented and exemplified.

To recap (in simple language):
Section 861(a) lists certain items of gross income that are treated as income from within the United States.

Section 861(b) says from the items in 861(a) take the proper deductions and the remainder, if any, shall be included in full as taxable income from sources within the United States

It was agreed that "absent a citation to the contrary, "taxable income" is from within the U.S. or without the U.S. based upon the "source" of the gross income it is derived from. (And this is NOT the "source" referred to in the 16th Amendment)"

based upon the [geographic location of the] "source" of the gross income, yes.

It was also agreed that if you don't read and use the regulations as you apply 861(a) and 861(b) that the result in the Rose example is to deduct all of the standard deduction of 4k from Rose's 20K for the remainder of 16K that shall be included in full as taxable income from sources within the United States.

However it is NOT agreed that the regulations are to be ignored.

The language in section 861(b) says a ratable part of a standard deduction shall be deducted from the items in 861(a). For Rose, with only one item, the ratable part must be the whole standard deduction.

You win your point only after proving that the regulations are to be ignored. If the regulations are to be ignored, they wouldn't have been written..

Treasury regulation section 1.861-8 provides specific guidance for applying the cited Code sections [IRC section 861(b)] by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as "deductions'') of the taxpayer.

Emphasis mine.

Since the only deduction in the example of Rose is the standard deduction and 861(b) gave [GENERAL] instruction for the allocation and apportionment of that one deduction, in our case of only a single item listed in 861(a) it is my contention that there is not any further determination to be made to determine taxable income from within the United States.

As mentioned, my only purpose is to examine what the law says. The statute in section 861 says all that is needed to determine taxable income from within the United States for Rose.

We differ in whether or not the regulations under section 861 need to be read and used in our Rose example.

I think you have summed up our differences on the issue subject only to the minor modification of "geographic location" added above.

The single important difference I think you actually state quite succinctly; "We differ in whether or not the regulations under section 861 need to be read and used in our Rose example".

It is my contention, that if you are correct, using the regulations will not change the outcome. As I stated at length, it is not proper procedure, but it is "workable" if the answer is the same.

If you are not correct, using the regulations will change the outcome.

This is exactly what will happen when the regulations are used. I'm going to prove that, and you are going to say that the regulation is outside the authority of the statute. I'm then going to show you why that is really NOT the case. So, I'll take the first steps of our dance.

The following items of gross income shall be treated as income from
sources within the United States:
861(a)

This tells us that:
1. Items of gross income come from sources.
2. These sources in the case of "compensation for labor or personal services within the US" are geographically located by statute.

Graphically we have just been told SOURCE within ==> GROSS INCOME within.

Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax.
1.861-1(a)

These words are VERY clear and concise. These words are also the words that lead to unpleasant truths for CPA's and EA's. These words mean tax preparation industry people are going to be out of a job. I'll save the psych 101 for some other time. I will just launch into the analogy.

Before us are two hose bibs. One has a red hose attached to it, the other has a green hose attached to it.

Part 1 (section 861 and following), and the regulations thereunder determine the sources of water for the purposes of drinking water.

Simple logic. If a hose is not a source for purposes of drinking water, then the water from that hose is not water for the purposes of drinking water. When we read through all the appropriate regulations that determine the sources of drinking water, we find out that the red hose is not used for purposes of drinking water.

The green hose is connected to a potable water supply. The red hose is connected to a sewer recycling lawn irrigation system.

If a source is not used, then the issue from that source is not used. If a source does not exist, then the issue from that source does not exist.

If a source is not used for purposes of the income tax, then the money from that source is not used for the purpose of the income tax either.

In other words:

SOURCE ==> GROSS INCOME
SOURCE ==> GROSS INCOME

No source, no gross income.

The title of section 1.861-8 is:

Computation of taxable income from sources within the United States and from other sources and activities.

This gives us a good idea what section 1.861-8 is about... Computing taxable income from sources within the United States. The very thing you are claiming we don't need to look at.

The title of the subsection of 1.861-8(a) is:

(a) In general--

So subsection (a) is going to give us a general overview of what regulation section 1.861-8 does. Subsection (a) is going to give us a general overview of computing taxable income from sources within the United States.

The title of paragraph 1.861-8(a)(1) is:

(1) Scope.

So paragraph (1) is going to give us the scope of regulation 1.861-8 in computing taxable income from sources within the United States.

S1: 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.

S2: Sections 862(b) and 863(a) state in general terms how to determine taxable income of a taxpayer from sources without the United States after gross income from sources without the United States has been determined.

S3: This section provides specific guidance for applying the cited Code sections by prescribing rules for the allocation and apportionment of expenses, losses, and other deductions (referred to collectively in this section as ``deductions'') of the taxpayer.

S4: 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. See paragraph (f)(1) of this section for a list and description of operative sections.

Sentence 1 explaining the scope of 1.861-8 explains that IRC section 861(b) is only a general overview of the requirements, so to speak. General guidance if you will. sentence 3 tells us that 1.861-8 gives us "specific guidance". Regulation 1.861-8(a)(1) sentence 3 tells us that there are rules PRESCRIBED for the allocation and apportionment of the deductions.

pre·scribe v. pre·scribed, pre·scrib·ing, pre·scribes. --tr. 1. To set down as a rule or guide; enjoin. See Synonyms at dictate. 2. To order the use of (a medicine or other treatment). --intr. 1. To establish rules, laws, or directions. 2. To order a medicine or other treatment. 3. Law. a. To assert a right or title to something on the grounds of prescription. b. To become invalidated or unenforceable by the process of prescription.

Sentence 4 is logically consistent with the aforementioned sentence in 1.861-1(a) to wit: "and the regulations thereunder determine the sources of income for purposes of the income tax" meshes perfectly with "The rules contained in this section apply in determining taxable income of the taxpayer from specific sources and activities"

If a specific source or activity is a source for purposes of the income tax, then the receipts from such a source are to be used. If a source is not a source for purposes of the income tax, then the receipts from such a source are NOT to be used.

Returning briefly to section 63, Taxable income is gross income minus the deductions allowed. This DEFINITION is nothing more than an equation:

equation 1:
Z = X - Y

Where Z is taxable income, X is gross income, and Y is the deductions allowed.

Section 861(a) and 861(b) merely expand the equations slightly.

equation 2:
Zwithin = Xwithin - Y

The reason 861(b) only states in "general terms" how to determine taxable income from within is because it has only transformed the first simple equation into the second equation by making note of geographic source location. Contrary to how the professionals get taken by the slick wording, it is still no more than the statement of an equation or formula to get to the correct result. It is no more than the equation 2 as shown.

Returning to 1.861-1(a)

"and the regulations thereunder determine the sources of income for purposes of the income tax".
1.861-1(a)

1.861-1(a) tells us that certain sources are not used;
1.861-1(a) tells us that certain sources are used;
1.861-1(a) tells us that which are which will be given to us under other regulations.

The clear reading of the words and their meaning is unimpeachable. Some regulation will tell us WHICH sources are used. Those rules will be found in 1.861-8.

"The rules contained in this section apply in determining taxable income of the taxpayer from specific sources and activities"

Moving on. 1.861-8(a)(3) is titled, Class of gross income and it says:

For purposes of this section, the gross income to which a specific deduction is definitely related is referred to as a ``class of gross income'' and may consist of one or more items (or subdivisions of these items) of gross income enumerated in section 61, namely:
(i) Compensation for services, including fees, commissions, and similar items;

A new term, "class of gross income" is introduced. I'm parsing the above quote of (a)(3) by pulling the bolded words out:

a ``class of gross income'' and may consist of one item, namely:
(i) Compensation for services

Do not bother with the argument of what makes an item of gross income into a class of gross income because of the alignment of deductions. It does not matter. What matters is that a class of gross income can contain compensation for (labor or) services.

Now we take a look at subsection (b) of regulation 1.861-8.

1.861-8(b) is titled, Allocation--
1.861-8(b)(1) is titled, In general.
1.861-8(b)(1) states:

See paragraph (d)(1) of this section which provides that in a taxable year there may be no item of gross income in a class or less gross income than deductions allocated to the class, and paragraph (d)(2) of this section which provides that a class of gross income may include excluded income.

Parsing the above, again by pulling out the bold words:

See paragraph (d)(2) of this section which provides that a class of gross income may include excluded income.

Wouldn't a prudent person want to know if they have excluded income? I think they would. I know I would. So I'm going to look at paragraph (d)(2).

Paragraph (d) is labeled, Excess of deductions and excluded and eliminated income--
A little camouflage there. It's about deductions, you don't need to look there... WRONG.

Paragraph (d)(2) is labeled, Allocation and apportionment to exempt, excluded, or eliminated
income.

Just a minor point of logic, how can one be concerned about allocation and apportionment of deductions to excluded income unless one knows what that income is?

Paragraph (d)(2) then says:

[Reserved] For guidance, see Sec. 1.861-8T(d)(2).

Camouflage and then a maze.

Looking at 1.861-8T(d)(2) twenty-five pages later we find this:

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.

Recall that 1.861-1(a) says: "and the regulations thereunder determine the sources of income for purposes of the income tax" Recall that 1.861-8(a)(1) says: "The rules contained in this section apply in determining taxable income of the taxpayer from specific sources and activities" Notice now what d2iii tells us:

1.861-8T(d)(2)(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:

Recap: Camouflage; maze; and now riddles:

Tax Exempt = Not Taxable
Considered Tax Exempt = Considered Not Taxable
Not Considered Tax Exempt = Not Considered Not Taxable
Not Considered Tax Exempt = Not Considered Not Taxable
Not Considered Tax Exempt = Considered Taxable

All this subterfuge, obfuscations, and convolutions to keep the average Joe from looking at these next four paragraphs:

    (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;

    (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)).

Rose is not a foreign taxpayer;
Rose is not a DISC (domestic international sales corp);
Rose is not a FSK (foreign sales corp);
Rose is not a possessions corp;
Rose has no foreign earned income as defined in section 911.

You don't need to bother with addressing the minor arguments that others have tried. All have been addressed and refuted. The only one I haven't refuted until now, is the only one you have.

You are going to claim that the statute doesn't authorize the regulations to make something not taxable. I expect your reply to be very short, since the regulations cited all mesh with one another, and support one another in a logical manner.

Of course you can delay the inevitable, but your final argument is going to be that the regulations don't have the authority to do what the very regulations you have just read with your own eyes say they do.

After you make a simple statement to that effect, I'll explain why that is not the case.

>Graphically we have just been told SOURCE within ==> GROSS INCOME within.

In addition, Section 862 similarly deals with SOURCE without ==> GROSS INCOME without and Section 863 with SOURCE partly within/without ==> GROSS INCOME within/without. Still, it is the location that is determined.

>If a source is not used, then the issue from that source is not used. If a source does not exist, then the issue from that source does not exist.
>If a source is not used for purposes of the income tax, then the money from that source is not used for the purpose of the income tax either.
>In other words:
>SOURCE ==> GROSS INCOME
>SOURCE ==> GROSS INCOME
>No source, no gross income.

Certainly there are provisions that only use the income from within the United States, provisions that only use income from without the United States and others that use income both from within the United States and income from without the United States. For that reason, it is necessary to determine the sources of income for purposes of the income tax.

It is not clear what you mean by “if a source does not exist”. (see below about using/not using a source) It seems that the cases of within the United States, without the United States and partly within and partly without the United States do not allow for the possibility of an item of income to be treated as from a source that does not exist. In our Rose example the item is from a source within the United States.

>This gives us a good idea what section 1.861-8 is about... Computing taxable income from sources within the United States. The very thing you are claiming we don't need to look at. .

Because section 861(b) commanded Rose to include the remainder in full as taxable income from within the United States taxable income has already been computed using the statute. Of course, many taxpayers will not have as simple a situation as Rose in our example; and they may very well need to use this regulation for the determination.

The scope of 1.861-8 is clearly and explicitly stated as rules for allocation and apportionment of deductions in S3. The regulation is thus limited to the part of section 861(b) that spoke of

“there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income.”

The statutory method of the section 861(a) items being treated as income from within the United States then the remainder after deductions being included in full in taxable income from within the United States is not, and can not be, changed by any rules or regulations that specifically guide allocation and apportionment of the deductions. Using the equation analogy, the method (or result) of determining one of the variables in the equation does not change the equation.

The regulation says in S4 that the application of this regulation is “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 regulation clearly states that it applies only to certain other sections.

Neither in S3 nor in S4 is there mention of treating income as within the United States, in contrast to the command to treat the listed items as income from within the United States in section 861(a). Also, there is no mention either of including (or excluding) income as taxable income from within the United States, in contrast to the command in section 861(b).

>1.861-1(a) tells us that certain sources are not used;
>1.861-1(a) tells us that certain sources are used;
>1.861-1(a) tells us that which are which will be given to us under other regulations.

§ 1.861-1 Income from sources within the United States.
a)Categories of income
Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax. These sections explicitly allocate certain important sources of income to the United States or to areas outside the United States, as the case may be; and, with respect to the remaining income (particularly that derived partly from sources within and partly from sources without the United States), authorize the Secretary or his delegate to determine the income derived from sources within the United States, either by rules of separate allocation or by processes or formulas of general apportionment. The statute provides for the following three categories of income:
(1)Within the United States. The gross income from sources within the United States, consisting of the items of gross income specified in section 861(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See §§1.861-2 to 1.861-7, inclusive, and §1.863-1. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. See §§1.861-8 and 1.863-1.
<snip for brevity>

[Edited to correct para. #'s.]

(b) Taxable income from sources within the United States. The taxable income from sources within the United States shall consist of the taxable income described in paragraph (a)(1) of this section plus the taxable income allocated or apportioned to such sources, as indicated in paragraph (a)(3) of this section.

The regulation says that these sections explicitly allocate certain important sources of income to the United States or to areas outside the United States, as the case may be. There is nothing about sources that are used and are not used that I can see.

The regulation says, for Rose, that the taxable income from sources within the United States shall be determined by deducting from the items of gross income specified in section 861(a), in accordance with sections 861(b), a ratable part of any expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. Using the equation analogy, the equation is not changed and we are to use the equation in the statute.

For our example of Rose, the result under the regulations is the same as only using the statute since there is no change in the equation or in the deductions (the ratable part of the standard deduction).

>You don't need to bother with addressing the minor arguments that others have tried. All have been addressed and refuted.

I do not know what arguments you mean. My only purpose, as stated, is to show what the law says. The regulations, as above, yield the same result for Rose as in the statute, without the regulations.

10/2/2005 11:52 pm

I suspect the snippage of this cite was a little premature, so I put it back.

>>Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax.
1.861-1(a)

>>Graphically we have just been told SOURCE within ==> GROSS INCOME within.

>In addition, Section 862 similarly deals with SOURCE without ==> GROSS INCOME without and Section 863 with SOURCE partly within/without ==> GROSS INCOME within/without. Still, it is the location that is determined.

Agreed. I suppose it's good to cite that for our audience that might not know what we are talking about.
-----------------------------------------------------------------
>>If a source is not used, then the issue from that source is not used. If a source does not exist, then the issue from that source does not exist.
>>If a source is not used for purposes of the income tax, then the money from that source is not used for the purpose of the income tax either.
>>In other words:
>>SOURCE ==> GROSS INCOME
>>SOURCE ==> GROSS INCOME
>>No source, no gross income.

>Certainly there are provisions that only use the income from within the United States, provisions that only use income from without the United States and others that use income both from within the United States and income from without the United States. For that reason, it is necessary to determine the sources of income for purposes of the income tax.

Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax.
1.861-1(a)

It says determine THE SOURCES, NOT determine the geographic location of the sources. Plain reading of the words. I notice you removed my analogy. I'm going to put it back in. Please attempt to get your mind around this.

Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax.
1.861-1(a)

--------------------------------------------------------------------
>>These words are VERY clear and concise. These words are also the words that lead to unpleasant truths for CPA's and EA's. These words mean tax preparation industry people are going to be out of a job. I'll save the psych 101 for some other time. I will just launch into the analogy.

>> Before us are two hose bibs. One has a red hose attached to it, the other has a green hose attached to it.

Part 1 (section 861 and following), and the regulations thereunder determine the sources of water for the purposes of drinking water.

>> Simple logic. If a hose is not a source for purposes of drinking water, then the water from that hose is not water for the purposes of drinking water. When we read through all the appropriate regulations that determine the sources of drinking water, we find out that the red hose is not used for purposes of drinking water.

>> The green hose is connected to a potable water supply. The red hose is connected to a sewer recycling lawn irrigation system.

>> If a source is not used, then the issue from that source is not used. If a source does not exist, then the issue from that source does not exist.

>> If a source is not used for purposes of the income tax, then the money from that source is not used for the purpose of the income tax either.

>It is not clear what you mean by “if a source does not exist”.

Then it is my duty to make it clear.

Is this a source of drinkable water?

Does drinkable water come from this source?
Then this is a source for purposes of drinkable water.

Is this a source of drinkable water?

Does drinkable water come from this source?
Then this does not exist as a source of drinkable water?

Is this a source of drinkable water?

If something is NOT a source, then something is NOT a source.

If a source does not exist, then the issue from that source (in this case, water) does not exist.

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

> (see below about using/not using a source) It seems that the cases of within the United States, without the United States and partly within and partly without the United States do not allow for the possibility of an item of income to be treated as from a source that does not exist. In our Rose example the item is from a source within the United States.

But is that source from within, a "source of income for purposes of the income tax"? The full text of 1.861-1(a) clearly indicates that the statutes as well as the REGULATIONS thereunder "determine the sources of income for purposes of the income tax."

Just like, is that source a source for purposes of drinkable water. If the outhouse is not a source of drinkable water, and is not a source for purposes of drinkable water under section 861 et seq. and the REGULATIONS thereunder, then what that source supplies DOES NOT GET USED for purposes of drinkable water.

If a source of gross income is not a source for purposes of the income tax, then what that source supplies (certain gross income) DOES NOT GET USED for purposes of the income tax.

-------------------------------------------------
>>This gives us a good idea what section 1.861-8 is about... Computing taxable income from sources within the United States. The very thing you are claiming we don't need to look at. .

>Because section 861(b) commanded Rose to include the remainder in full as taxable income from within the United States taxable income has already been computed using the statute.

This is no more than an assertion on your part. It is an assertion that, as I already have shown you, can only be proven to your advantage, if you can show that the regulations do not change the answer. On my last post I clearly showed you that they do change the answer.

You are still stuck on your assertion that we don't need the look at the regs. The regs give SPECIFIC GUIDANCE for applying section 861(b). You are asserting that we should not use the SPECIFIC GUIDANCE, that is specifically provided for applying section 861(b). The regulation itself tells you that you are to use the regulation to apply section 861(b). Here's S3 again:

How about some supporting regulations:

Regulation 1.862-1(b):

Regulation 1.863-1(c):

Regulation 1.861-8 IS TO BE USED TO DETERMINE TAXABLE INCOME. It does not say "except when Rose only has the standard deduction". Regulation 1.861-8 IS the rules FOR DETERMINING TAXABLE INCOME.

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

>Of course, many taxpayers will not have as simple a situation as Rose in our example; and they may very well need to use this regulation for the determination.

>The scope of 1.861-8 is clearly and explicitly stated as rules for allocation and apportionment of deductions in S3.

You make a fatal assumption about S3. You assume the rules have nothing to do with what the expenses are being allocated and apportioned to.

I have seen this argument before.

So let us use Set theory to highlight for you what you are missing. Let us recall our formulaic equations from section 63:

equation 1:
Z = X - Y

The X is a set. X contains several Items. Thus:

X = {item 1, item 2, item 3}

These Items come from several sources. One item per source.

Source A ==> item 1
Source B ==> item 2
Source C ==> item 3

Each item is valued thus:

Item 1 = $100
Item 2 = $200
Item 3 = $300

The value of Y has been determined to be $55 according to the regulations. According to 861(b) this $55 is to be apportioned and allocated to the gross income treated as income from sources within the US.

Source A is not a source for purposes of the income tax.
Source B is not a source for purposes of the income tax.

Therefore:

Item 1 is from a source that is not a source for purposes of the income tax.
Item 2 is from a source that is not a source for purposes of the income tax.

An operative sections of the code states that the deduction is to be allocated and/or apportioned to Source C/ Item 3. No operative section says to allocate or apportion any deduction to Source A /item 1 or Source B / item 2.

>The scope of 1.861-8 is clearly and explicitly stated as rules for allocation and apportionment of deductions in S3. >The regulation is thus limited to the part of section 861(b) that spoke of

The part of 861(b) only states in general terms:

Regulation 1.861-8 gives SPECIFIC GUIDANCE to apply the general termed description.

Note that S1 says it does this AFTER gross income from sources within the US has been determined.

Again, the plain reading of the words rule.

As I have pointed out several times now, if a source is not used, its gross income is not used.

861(b) states a how to for AFTER gross income from sources has been determined.
1.861-1(a) points out, that somewhere in the regulations these sources are determined "for the purposes of the income tax". And here we have S4 confirming what is said in 1.861-1(a):

>The statutory method of the section 861(a) items being treated as income from within the United States [IF the income IS from sources that are sources determined for purposes of the income tax] then the remainder after deductions being included in full in taxable income from within the United States

If the income is from a source that is NOT a source for purposes of the income tax, then the gross income is not used for purposes of the income tax. In other words, if the source is not used for purposes of the income tax, then the gross income from that source IS NOT TAXABLE.

>The statutory method [...] is not, and can not be, changed by any rules or regulations that specifically guide allocation and apportionment of the deductions.

Dale's section ES1(b) states that:

Dale's regulation 1.ES1-1 states that:

You have $100 gross income from SOURCE A
You have $150 gross income from SOURCE B

Dale's Operative Section commands you to place the gross income from Source B into variable X of the equation for computing taxable income:

Z = X - Y

None of Dale's Operative Sections makes any command for you to do anything with regard to gross income from Source A.

Thus:

Z = 150 - Y

>Using the equation analogy, the method (or result) of determining one of the variables in the equation does not change the equation.

Incorrect. If the actual rules do what I just showed above, The Z changes based upon what is ALLOWED and required to be placed in X.

If a source is NOT a source for purposes of the income tax, then the gross income from that source is NOT gross income for purposes of the income tax.

>The regulation says in S4 that the application of this regulation is “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”.

Correct.

Remember, this is the ONLY regulation with the rules on how to determine taxable income. This regulation is REQUIRED for that purpose. Since we have to do this the hard way I'll be dragging out the supporting details in subsequent posts.

>The regulation clearly states that it applies only to certain other sections.

Have you already forgotten the other two sentences that complete the context?

The rules of regulation 1-861-8 provide specific guidance on how to apply section 861(b).
The rules of regulation 1-861-8 do this with rules on how to allocate and apportion the deductions to the gross income from specific sources and activities under other sections of the code.

In simple language, regulation 1.861-8 tells us how to apply deductions, and WHICH gross income to apply it to in conformance with IRC section 861(b).

>Neither in S3 nor in S4 is there mention of treating income as within the United States, in contrast to the command to treat the listed items as income from within the United States in section 861(a).

Section 861(a) sources the gross income as to which gross income is to be TREATED AS INCOME from sources within the US. (Emphasis is for later referral)

Section 861(a) does NOT tell us if the sources within the US are sources of income for purposes of the income tax.

>Also, there is no mention either of including (or excluding) income as taxable income from within the United States, in contrast to the command in section 861(b).

You are still nakedly asserting that Rose is not to use 1.861-8

>>1.861-1(a) tells us that certain sources are not used;
>>1.861-1(a) tells us that certain sources are used;
>>1.861-1(a) tells us that which are which will be given to us under other regulations.

§ 1.861-1 Income from sources within the United States.
(a)Categories of income
Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax. These sections explicitly allocate certain important sources of income to the United States or to areas outside the United States, as the case may be; and, with respect to the remaining income (particularly that derived partly from sources within and partly from sources without the United States), authorize the Secretary or his delegate to determine the income derived from sources within the United States, either by rules of separate allocation or by processes or formulas of general apportionment. The statute provides for the following three categories of income:
(1)Within the United States. The gross income from sources within the United States, consisting of the items of gross income specified in section 861(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See §§1.861-2 to 1.861-7, inclusive, and §1.863-1. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. See §§1.861-8 and 1.863-1.
<snip for brevity>

[Edited to correct para. #'s.]

>The regulation says that these sections explicitly allocate certain important sources of income to the United States or to areas outside the United States, as the case may be. There is nothing about sources that are used and are not used that I can see.

Thank you for the fact that you are at least looking.

However, you are not looking in the right place so you will not see them.

Between regulation 1.861-8 and 1.861-8T, there are over 21,000 words. I copied them into a word processor to count them.

>The regulation says, for Rose, that the taxable income from sources within the United States shall be determined by deducting from the items of gross income specified in section 861(a), in accordance with sections 861(b), a ratable part of any expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income.

That is exactly correct. That is what those words say. However, those are not the only words that have bearing on how to apply section 861(b).

>Using the equation analogy, the equation is not changed and we are to use the equation in the statute.

It's not the equation that is changed. It's the data that is used IN the equation that is changed.

>For our example of Rose, the result under the regulations is the same as only using the statute since there is no change in the equation or in the deductions (the ratable part of the standard deduction).

This is not correct. I thought I covered that in enough detail in my last post for you to understand. Perhaps I need to make shorter posts.

>>You don't need to bother with addressing the minor arguments that others have tried. All have been addressed and refuted.

>I do not know what arguments you mean.

All the arguments others have used. Don't worry about it. You are being a sporting gentleman, And I shall discuss with you, whatever you think to use to support your position.

My only purpose, as stated, is to show what the law says.

And my purpose is to show that you are changing the result when you don't use the regulations as required.

The regulations, as above, yield the same result for Rose as in the statute, without the regulations.

That is an assertion that is directly contradicted by the evidence in my previous post. I may have to dissassemble my position to even shorter points. I'm almost to the point of asking bunches of yes/no questions to make sure you see the points presented. We are definitely having a communication problem here.

The simple example is a woman named Rose that has compensation of $20,000 for labor or personal services performed in the United States and only a standard deduction of $4000. I will use the regulations, with detail for those that are applicable, to determine the taxable income from within the United States.

§ 1.861-1 Income from sources within the United States.
a)Categories of income. Part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder determine the sources of income for purposes of the income tax.

These sections explicitly allocate certain important sources of income to the United States or to areas outside the United States, as the case may be; and, with respect to the remaining income (particularly that derived partly from sources within and partly from sources without the United States), authorize the Secretary or his delegate to determine the income derived from sources within the United States, either by rules of separate allocation or by processes or formulas of general apportionment.

Certain important sources are allocated, explicitly, to within the United States or to outside the United States. Rose, our example, has no “remaining income”.

The statute provides for the following three categories of income:

There are three categories: within, without and partly within and partly without. There is not a category of income without a source. There is not a category of a source that is used. There is not a category of a source that is not used.

Within the United States. The gross income from sources within the United States, consisting of the items of gross income specified in section 861(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See §§1.861-2 to 1.861-7, inclusive, and §1.863-1.

For gross income from within the United States, the regulation says to take the items in 861(a) and add items under 863(a) determined to be from sources within the United States. §§ 1.861-8 is not included in the range of regulations to be seen. I will call this GIwithin.

For our example of Rose, GIwithin is the only item in 861(a), the 20K compensation for services (when looking no further than this regulation).

The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b) and 863(a), the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. See §§1.861-8 and 1.863-1.

In accordance with 861(b), taxable income from sources within the United States is determined by deducting from GIwithin the deductions allocated or apportioned to GIwithin and a ratable part of the deductions not allocated to some item or class of gross income.. §§ 1.861-8 is included in the regulations to be seen. I will call this TIwithin.

TIwithin = GIwithin - deductWithin, where deductWithin = deductions allocated or apportioned to GIwithin plus ratable part of the deductions not allocated to some item or class of gross income.

For our example of Rose, deductWithin is the standard deduction of 4K ratably taken over the only item in 861(a), the 20K compensation for services, or 4K.

For Rose, TIwithin = 20K - 4K = 16K the same result as looking only to the statute (when looking no further than this regulation).

(2) Without the United States. The gross income from sources without the United States, consisting of the items of gross income specified in section 862(a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863(a). See §§1.862-1 and 1.863-1. The taxable income from sources without the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 862(b) and 863(a), the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. See §§1.862-1 and 1.863-1.

(3) Partly within and partly without the United States. The gross income derived from sources partly within and partly without the United States, consisting of the items specified in section 863(b) (1), (2), and (3). The taxable income allocated or apportioned to sources within the United States, in the case of such income, shall be determined in accordance with section 863 (a) or (b). See §§1.863-2 to 1.863-5, inclusive.

(4) Exceptions. An owner of certain aircraft or vessels first leased on or before December 28, 1980, may elect to treat income in respect of these aircraft or vessels as income from sources within the United States for purposes of sections 861(a) and 862(a). See §1.861-9. An owner of certain aircraft, vessels, or spacecraft first leased after December 28, 1980, must treat income in respect of these craft as income from sources within the United States for purposes of sections 861(a) and 862(a). See §1.861-9A.

§ 1.861-1(a)(2), § 1.861-1(a)(3) and § 1.861-1(a)(4) are not relevant to our example Rose.

For our example Rose, this reduces to the same as in paragraph (a)(1) since there is no item partly within and partly without the United States. TIwithin =16K (so far, anyway)

(c) Computation of income. If a taxpayer has gross income from sources within or without the United States, together with gross income derived partly from sources within and partly from sources without the United States, the amounts thereof, together with the expenses and investment applicable thereto, shall be segregated; and the taxable income from sources within the United States shall be separately computed therefrom.

This is not relevant to our example Rose, as there is not any item of gross income derived partly from sources within and partly from sources without the United States.

Summary of section 1.861-1 as applied to Rose:

1.Certain important sources are allocated, explicitly, to within the United States or to outside the United States.
2. There are three categories: within the United States, without the United States and partly within and partly without the United States.
3. For gross income from within the United States, the regulation says to take the items in 861(a). GIwithin is the only item in 861(a), 20K.
4. In accordance with 861(b), taxable income from sources within the United States is determined by deducting from GIwithin a ratable part of the standard deduction. TIwithin = 16K.
There are several sections of the regulations that are not relevant to Rose:

§1.861-2     Interest.

§1.861-3     Dividends.

§1.861-3t     Dividends (temporary).

§1.861-5     Rentals and royalties.

§1.861-6     Sale of real property.

§1.861-7     Sale of personal property.

§ 1.861-4 Compensation for labor or personal services.
Compensation for labor or personal services performed wholly within the United States. (1) Generally, compensation for labor or personal services, including fees, commissions, fringe benefits, and similar items, performed wholly within the United States is gross income from sources within the United States.

This regulation goes on to provide specific guidance for exceptions and circumstances where the compensation is not gross income from sources within the United States. Since the statute in 861(a) already said that Rose has an item of income to be treated as income from within the United States applying any or all of the parts of this regulation does not change that result. I will not go through that exercise.

So far, using what §§1.861-1 through 1.861-7 actually say, taxable income from within the United States has been determined to be the same as when only using what section 861 of the statute says for our example Rose.

There has been some new and specific guidance provided for Rose. There are three categories: within the United States, without the United States and partly within and partly without the United States. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b), a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income.

We have been told to see §§1.861-8, but my use of that in Rose’s case will have to wait.

>>My only purpose, as stated, is to show what the law says.

>And my purpose is to show that you are changing the result when you don't use the regulations as required.

>>The regulations, as above, yield the same result for Rose as in the statute, without the regulations.

I think the three sentences just above, from the previous posts, highlight our differences. I think these three sentences are an excellent introduction to your post. Since I shouldn't tinker with your posts, I'm putting them back on the top of this cell as an introduction to your post where I address your points.

I remember a test similar to this from grade school. I was the only one in my class that did this correctly. What you are doing with the regulations, is what every other kid in my class did. You have failed to read all the instructions before starting the task.

CAN YOU FOLLOW INSTRUCTIONS?

Directions: A Practical Drill

One of the most common errors made by students during exams, is failing to read, understand and follow the examination directions. Test your skills by completing this drill.

Directions: Read the entire exercise before doing anything else. Do exactly as instructed. Under no circumstances are you to speak or ask a question. Be sure to keep your eyes on your own papers. When you have finished, sit quietly until everyone has finished this drill.

Name: _______________________________

Read every instruction before you do anything.
Proceed carefully and cautiously.
Write your name in the designated space provided therefor, below the paragraph that starts with the word "Directions".
Circle the word "name" in sentence three.
Draw five small squares in the supper lefthand corner of this page.
Put an "X" in each square.
Put a circle around each square.
Sign your name in the lower righthand corner of this page.
After your name, write "yes, yes, yes!"
Put a circle around each word in sentence number 8.
Put an X in the lower lefthand corner of this page.
Draw a triangle around the X you put down.
On the reverse side of this page, multiply 703 by 1,850.
Draw a rectangle around the word "page" in sentence number 3.
Snap the fingers of your left hand.
If you think you have followed these directions, write "I have" in the space provided below.
On the reverse side of this page, add 8,950 and 9,850.
Put a circle around your answer. Put a square around the circle.
Shut your eyes for just a few seconds.
Please ignore instructions four through nineteen, and follow the instructions in sentence number three, to complete this drill.

(Modified from the original provided by Prof. Howard R. Lurie, Villanova Law School. )

Source

You have not read ALL the pertinent regulations. You are not applying the regulations properly.

It says that Part I of subchapter N and the regulations thereunder determine the sources. Not one regulation, not just the regulations; but it says the sections and the regulations in this Part determine the sources. This is the first sentence describing what these sections do. It is a general statement without any specific guidance as to what are the sources or how is the determination to be made.

I'm going to break down your paragraph into its sentences and address them separately.

It says that Part I of subchapter N and the regulations thereunder determine the sources.

Agreed.

Not one regulation, not just the regulations; but it says the sections and the regulations in this Part determine the sources.

Agreed.

This is the first sentence describing what these sections do.

Yes. With emphasis on the "regulations thereunder" part.

It is a general statement without any specific guidance as to what are the sources or how is the determination to be made.

Agreed. "It is a general statement without any specific guidance" As is the following sentence:

Certain important sources are allocated, explicitly, to within the United States or to outside the United States. Rose, our example, has no “remaining income”.

For our readers, the "remaining income" needs to be explained. For example, If Bill the Burger Flipper works flipping burgers for a living in any one of the 50 united States, that is gross income treated AS income from sources within the US. If Bill goes on a working vacation in Spain and flips burgers for a living for a year while he is in Spain, that is gross income treated as income from sources without the US. Bill later gets a job flipping burgers in a diner car on a train that operates between Chicago and Toronto. That gross income from flipping burgers between Toronto and Chicago is "the remaining income", and it treated as income from sources both within and without the US.

The statute provides for the following three categories of income:

There are three categories: within, without and partly within and partly without. There is not a category of income without a source. There is not a category of a source that is used. There is not a category of a source that is not used.

Again, I am going to address the above paragraph one sentence at a time.

There are three categories: within, without and partly within and partly without.

Agreed. IF the source is a source for purposes of the income tax.

There is not a category of income without a source.

CORRECT!

Since there is no category of income without a source, If a source does not exist, there IS no income from that non-existent source.

If a source is not used for purposes of the income tax, then the gross income from that source is NOT USED for purposes of the income tax.

There is not a category of a source that is used.

Null point.

There is not a category of a source that is not used.

Null point.

For gross income from within the United States, the regulation says to take the items in 861(a) and add items under 863(a) determined to be from sources within the United States. §§ 1.861-8 is not included in the range of regulations to be seen.

Regulations 1.861-1 through 1.861-7 correspond to IRC section 861(a). Regulation 1.861-8 et seq. correspond to IRC section 861(b). You do not see the other regulations needed because you are not looking for them.

I will call this GIwithin.

Correct. Agreed.

For our example of Rose, GIwithin is the only item in 861(a), the 20K compensation for services

Correct. Agreed.

(when looking no further than this regulation).

Emphasis in the above paragraph, mine. Why would you look no further, when you are specifically noticed to see the two sections emphasized?

In accordance with 861(b), taxable income from sources within the United States is determined by deducting from GIwithin the deductions allocated or apportioned to GIwithin and a ratable part of the deductions not allocated to some item or class of gross income.. §§ 1.861-8 is included in the regulations to be seen. I will call this TIwithin.

Nevermind. You are looking.... Sort of. I spoke too soon... Maybe.

TIwithin = GIwithin - deductWithin, where deductWithin = deductions allocated or apportioned to GIwithin plus ratable part of the deductions not allocated to some item or class of gross income.

Agreed. Good so far.

For our example of Rose, deductWithin is the standard deduction of 4K ratably taken over the only item in 861(a), the 20K compensation for services, or 4K.

This is where you start to step into error. You are not there yet with the above sentence. But you are standing with your toes on the line ready to cross over it into error.

For Rose, TIwithin = 20K - 4K = 16K the same result as looking only to the statute (when looking no further than this regulation).

You are again making a naked assertion. Just as in the grade school example above, you have failed to read all the instructions before proceding with the task. Since this seems to be where our main point of contention is, I will address this specifically, and in detail.

(I know, we're guys and guys never read instructions, but we gotta go with the ladies on this one. We need to read ALL the instructions.)

§ 1.861-1(a)(2), § 1.861-1(a)(3) and § 1.861-1(a)(4) snipped since I agree with the following sentence and the reader can refer to your prior post.

§ 1.861-1(a)(2), § 1.861-1(a)(3) and § 1.861-1(a)(4) are not relevant to our example Rose.

Agreed.

For our example Rose, this reduces to the same as in paragraph (a)(1) since there is no item partly within and partly without the United States. TIwithin =16K (so far, anyway)

Correct in regard to paragraph (a)(3). It does not apply to Rose. My emphasis on your hedge, "so far anyway".

This is not relevant to our example Rose, as there is not any item of gross income derived partly from sources within and partly from sources without the United States.

Agreed.

Summary of section 1.861-1 as applied to Rose:

1.Certain important sources are allocated, explicitly, to within the United States or to outside the United States.

Of which we can ignore outside the US in Roses case. But yes; agreed

2. There are three categories: within the United States, without the United States and partly within and partly without the United States.

Of which again, we are only interested in the category of within, and again, I agree.

3. For gross income from within the United States, the regulation says to take the items in 861(a). GIwithin is the only item in 861(a), 20K.

IF you only look at this part of this regulation. This is where your error appears. You are NOT using ALL of the appropriate regulation's rules that apply.

4. In accordance with 861(b), taxable income from sources within the United States is determined by deducting from GIwithin a ratable part of the standard deduction.

IF GIwithin is from a source that is a source FOR PURPOSES OF THE INCOME TAX.

TIwithin = 16K.

This is a naked assertion. You have not used all the rules in the regulations that apply.

There are several sections of the regulations that are not relevant to Rose:

§1.861-2     Interest.
§1.861-3     Dividends.
§1.861-3t     Dividends (temporary).
§1.861-5     Rentals and royalties.
§1.861-6     Sale of real property.
§1.861-7     Sale of personal property.

Agreed.

IF GIwithin is from a source that is a source FOR PURPOSES OF THE INCOME TAX.

This regulation goes on to provide specific guidance for exceptions and circumstances where the compensation is not gross income from sources within the United States. Since the statute in 861(a) already said that Rose has an item of [GROSS] income to be treated as income from within the United States applying any or all of the parts of this regulation does not change that result. I will not go through that exercise.

Pulling the following sentence out of your paragraph above.

Since the statute in 861(a) already said that Rose has an item of income to be treated as [GROSS] income from within the United States applying any or all of the parts of this regulation does not change that result.

And splitting it into two halves to reply to each separately:

Since the statute in 861(a) already said that Rose has an item of [GROSS] income to be treated as income from within the United States...

IF GIwithin is from a source that is a source FOR PURPOSES OF THE INCOME TAX.

applying any or all of the parts of this regulation does not change that result.

Am I correct to assume when you say this regulation, you are referring to 1.861-4?
Or are you now referring to 1.861-8?

I will not go through that exercise.

To which exercise do you refer? That last 7 word sentence sure reads like you are refusing to apply a regulation because you don't like what it means.

If you are required to use a regulation, then you are required to use a regulation.

So far, using what §§1.861-1 through 1.861-7 actually say, taxable income from within the United States has been determined to be the same as when only using what section 861 of the statute says for our example Rose.

You have NOT applied all the pertinant rules, so your conclusion as to Rose's taxable income is still wrong. The result changes when all the rules are applied as they are supposed to be.

There has been some new and specific guidance provided for Rose. There are three categories: within the United States, without the United States and partly within and partly without the United States. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861(b), a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income.

We have been told to see §§1.861-8, but my use of that in Rose’s case will have to wait.

I sure hope what you mean by that last sentence is that you are going to be busy for awhile and won't be replying to this post right away because here is the sentence you started your reply with:

The simple example is a woman named Rose that has compensation of $20,000 for labor or personal services performed in the United States and only a standard deduction of $4000. I will use the regulations, with detail for those that are applicable, to determine the taxable income from within the United States.

Bold emphasis mine.

Parse: I will use the regulations ... to determine the taxable income from within the United States.

Then do so. Using ALL of the appropriate regulations.

Sec. 63. Taxable income defined
(a) In general
Except as provided in subsection (b), for purposes of this subtitle, the term "taxable income" means gross income minus the deductions allowed by this chapter (other than the standard deduction).

Table of Contents