Why the 861 argument is wrong

Here's a lesson in logic and taxes for the 861 tax protesters, from the beginning of the argument.

26 USC 1 is captioned "Tax imposed." 1(c) reads: "There is hereby imposed on the taxable income of every individual ... a tax determined in accordance with the following table..." 1(a) covers married people and 1(b) covers heads of households. OK, so you have to pay taxes on your "taxable income," but what is it?

26 USC 63, helpfully captioned "Taxable income defined," reads in relevant part: "[F]or purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter." OK, so what's "gross income"?

26 USC 61, helpfully captioned "Gross income defined," reads: "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items..." The word "income" is not defined anywhere in the Code, but 61(a) gives a non-exhaustive list of what is meant by income. Many people have argued that something isn't income if it isn't on the list (an "item" of income). Maybe they'll find something one day, but so far they haven't, and the wording of the statute is plain. The first mistake is limiting income to listed "items."

However, we're not done yet, because income derives from "sources." This is where the 861 crowd gets excited. 26 USC 861(a) is captioned "Income from within the United States", and reads: "The following items of gross income shall be treated as income from sources within the United States..." The 861ers then jump to the Code of Federal Regulations, which starts defining all sorts of jargon like "specific sources," all of which is irrelevant to the plain meaning of the statute.

The biggest mistake here is assuming that the list in section 861 is exclusive. I could say "the following people are my brothers: Joe, Bob, and Greg." That doesn't mean these are all my brothers -- I may not have named them all. Compare 861: "The following items of gross income shall be treated as income from sources within the United States." That doesn't mean there aren't other items of gross income that are from sources within the United States. In fact, section 861 is in Subchapter N, Part 1, which is called "Source Rules and Other General Rules Relating to Foreign Income." The purpose of the section is to categorize, in borderline cases, whether income (whose existence we already assume) is domestic or foreign for tax purposes. It does not somehow place a limitation on gross income, which may derive from any source. Go back and read section 61 again.

Even so, "[c]ompensation for labor or personal services performed in the United States" is explicitly listed, in 861(a)(3). This means all employment income, which is the largest source of income for most people.

The last obvious mistake is jumping straight to the CFR. The laws passed by Congress, including the Internal Revenue Code, supersede the Code of Federal Regulations. The CFR attempts to interpret the law, and provide executive rulemaking where the law says it's allowed, but the law ultimately controls. In this case, the text of 861 is clear and unambiguous, and if the CFR's interpretation of the law is unclear or contradictory, the text of the law controls.

There are a number of other, more esoteric arguments that the 861ers make in regards "specific sources," the lack of acknowledgment of constitutional limitations on the ability to tax (which aren't listed for the simple reason that every lawyer has taken Con Law in law school, and likely considers it too obvious to even note), and others as well. I won't address them, since hopefully you already get the picture.