From the IRM:

4.10.7.2.9.8 (05-14-1999)

Importance of Court Decisions

1. Decisions made at various levels of the court system are considered to be interpretations of tax laws and may be used by either examiners or taxpayers to support a position.

2. Certain court cases lend more weight to a position than others. A case decided by the U.S. Supreme Court becomes the law of the land and takes precedence over decisions of lower courts. The Internal Revenue Service must follow Supreme Court decisions. For examiners, Supreme Court decisions have the same weight as the Code.

3. Decisions made by lower courts, such as Tax Court, District Courts, or Claims Court, are binding on the Service only for the particular taxpayer and the years litigated. Adverse decisions of lower courts do not require the Service to alter its position for other taxpayers.

From TC Memo. 1995-40 (1995):

The Internal Revenue Service and the Treasury Department are aware that certain persons are promoting the view that U.S. citizens and residents are not subject to tax on their wages and other income earned or derived within the United States based on the claim that the Internal Revenue Code imposes taxes only on income derived from certain foreign-based activities. The Service and Treasury are issuing this notice to inform taxpayers that this reporting position has no basis in law.

The proponents of this position misread the Code and the Treasury Regulations. Although the proponents acknowledge that section 1 imposes income tax on ”taxable income,” that taxable income” consists of “gross income” minus deductions (section 63) and that “gross income” is income “from whatever source derived” (section 61), they assert that sections 861 through 865 of the Code and the regulations thereunder (in particular, Treasury regulation section 1.861-8) limit taxable “sources” of income to certain foreign-based activities.

That assertion is refuted by the express and unambiguous terms of the Code. Section 61 includes in gross income “all income from whatever source derived.” As the Supreme Court stated in Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429 (1955), "Congress applied no limitations as to the source of taxable receipts . . . .["] Nothing in sections 861 to 865 of the Code limits the gross income subject to United States taxation to foreign-source income. The rules of sections 861 through 865 have significance in determining whether income is considered from sources within the United States or without the United States, which is relevant, for example, in determining whether a U.S. citizen or resident may claim a credit for foreign taxes paid. See Great-West Life Assurance Co. v. United States, 678 F.2d 180, 183 (Ct. Cl. 1982) (stating that “[t]he determination of where income is derived or ‘sourced’ is generally of no moment to either United States citizens or United States corporations, for such persons are subject to tax under I.R.C. § 1 and I.R.C. § 11, respectively, on their worldwide income” and that “[l]ikewise, the income of a resident alien individual is taxed under I.R.C. § 1 without regard to source”). The source rules do not operate to exclude from U.S. taxation income earned by United States persons from sources within the United States. Williams v. Commissioner, 114 T.C. 136 (2000) (rejecting the claim that income was not subject to tax because it was not from any of the sources listed in Treas. Reg. sec. 1.861-8(a)); Aiello v. Commissioner, T.C. Memo. 1995-40 (1995) (rejecting the claim that section 861 lists the only sources of income relevant for purposes of section 61).

The courts have categorically rejected contentions that U.S. citizens are not lawfully subject to Federal income tax on their income from all sources and have upheld criminal convictions of individuals who based their refusal to pay Federal income tax on such contentions. See, e.g., United States v. Condo, 741 F.2d 238 (9th Cir. 1984).

Rebuttal to above:

Naturally, the Tax Court is not binding on anybody (especially the IRS) except for the poor sap that has his case there.

The court’s attempt to refute the petitioner’s position was as follows:

"Section 61(a) defines gross income generally as "all income from whatever source derived," including, but not limited to, compensation for services and interest. Sec. 61(a)(1), (4). Section 63 defines and explains the computation of "taxable income". Section 1 imposes an income tax on the taxable income of every individual who is a citizen or resident of the United States. Sec. 1.1-1(a)(1), Income Tax Regs.; see Habersham-Bey v. Commissioner, 78 T.C. 304, 309 (1982). Under section 61(a)(1) and (4), petitioner clearly is required to include his wages, tokes, and interest in gross income."

Oddly enough, the only thing incorrect in this statement is the last sentence. Here are a few points the court skipped right over (whether accidentally or on purpose):

1) The court skipped right over the word "source" while quoting Section 61, implying that it has no significance, and that "from whatever source" means "no matter where it comes from." This again ignores the fact that the regulations say that "section 861 and following... and the regulations thereunder determine the sources of income for purposes of the income tax" (26 CFR § 1.861-1), and ignores the fact that the specific rules concerning "gross income" from sources within the United States are found in 26 USC § 861(a) and related regulations.

2) The court was either unaware, or failed to mentioned, that the income tax regulations specifically say that those "items" listed in Section 61, including "compensation for services," make up "classes of gross income" (26 CFR § 1.861-8(a)(3)) which are in some cases excluded for federal income tax purposes (26 CFR § 1.861-8(b)(1)). Those regulations then lead to 26 CFR § 1.861-8T(d)(2), which contains a specific list of the types of income that "are not considered to be exempt, eliminated, or excluded income." (That list most likely does not include the income of the petitioner, or the income of the vast majority of those who petition the Tax Court.)

3) The court mentions the section that generally defines "taxable income" (26 USC § 63) but failed to mention that the specific rules for determining one’s "taxable income from sources within the United States" are found in 26 USC § 861(b) and 26 CFR § 1.861-8 (see 26 CFR §§ 1.861-1(a), 1.861-1(b), 1.861-8(a), 1.863-1(c)). Unfortunately, there is no indication in the ruling that the petitioner mentioned any of the numerous citations demonstrating that point.

By citing general definitions, while completely ignoring the myriad of specific citations shown above, the Tax Court ruled against the petitioner without ever really addressing the substance of the issue. For example, the ruling said nothing about whether or not one was to use 26 CFR § 1.861-8 for determining taxable income from sources within the United States. The court then quoted the Court of Appeals for the Ninth Circuit as saying "Compensation for labor or services, paid in the form of wages or salary, has been universally held by the courts of this republic to be income, subject to the income tax laws currently applicable." This is true, but irrelevant. Compensation (a.k.a. "wages") is an "item" of income, which is taxable if derived from a taxable "source" or activity. What constitutes "income," and when income is taxable, are two distinct issues.

From the above only one fact can be determined, that being the willingness of the IRS, and their backers in the courts and Department of Justice to completely disregard the truth. In so doing they defile the constitution, the laws of congress and their own regulations:

The definition of gross income in the IRC of 1939 can be traced back to section 213 of the Revenue Act of 1918 (refer to paragraph 5.5.1 on page 5-2). In the 1939 code it is found in section 22 as follows:

SEC. 22. GROSS INCOME.

General Definition.- "Gross Income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service ... of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses commerce or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever...."

Here it can again be noticed that it is the gains, profits, and income that is derived from, and not the salaries, wages, or compensation for personal service, etc. themselves.

A look at the regulations from the Code of Federal Regulations in effect from 1939 to 1953 will help clarify the meanings of “net” and “gross” income

The Code of Federal Regulation (CFR) Title 26 "Income Tax Regulation", in effect from 1939 to 1953, under section 39.21-1 and 39.22 (a)-1 defined the then accepted definition of income as it applied to the current tax system. Section 39.21-1 is titled "Meaning of net income" and, in part, says:

"(a) The tax imposed by chapter 1 is upon income. Neither income exempted by statute or fundamental law, nor expenses incurred in connection therewith, other than interest, enter into the computation of net income as defined by section 21. …Income (in the broad sense) meaning all wealth which flows in to the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other distribution of capital assets. …"

Here the statement “Neither income exempted by statute or fundamental law, nor expenses incurred in connection therewith, other than interest, enter into the computation of net income as defined by section 21” is extremely important for it explicitly removes from the term “income” that income which is exempted by statue or fundamental law (the Constitution of the United States of America). The cites of the Supreme Court given on page 2-2 constitute fundamental law, via the court’s interpretation and is therefore the Law of the Land.

Section 39.22 (a)-1 is named "What is included in gross income" and reads, in part:

Gross income includes, in general, compensation for personal and professional services, business income, profits from sales of and dealings in property, interest, rent, dividends, and gains, profits, and income derived from any source whatever, unless exempt by law. See sections 22(b) and 116. In general, income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets."

This definition again specifies “derived from”, therefore showing that unless it qualified as "gains and profits", it was not to be included for tax purposes.

Section 116 relates to the exemption of the compensation of specific “employees”, but the regulations for section 22(b) bear looking at. In part it reads as follows:

Sec. 29.22(b)-1. Exemption--Exclusions from gross income.

Certain items of income specified in section 22(b) are exempt from tax and may be excluded from gross income. These items, however, are exempt only to the extent and in the amount specified. No other items are exempt from gross income except (1) those items of income which are, under the Constitution, not taxable by the Federal Government; (2) those items of income which are exempt from tax on income under the provisions of any Act of Congress still in effect; and (3) the income exempted under the provisions of section 116."

Notice item 1 where it specifically states “those items of income which are, under the Constitution, not taxable by the Federal Government”. This exempts the compensation of Americans employed in the private sector within the 50 State Republics, refer to the cites given on page 2-2. Again it references section 116 (of the 1939 IRC). Section 116 corresponds to the following sections of the IRC of 1954 (same sections as in the IRC of 1986):

1939 Sec. 116 116(a) 116(b) 116(c) 116(d), (e) 116(f) 116(g) 116(h) 116(i) 116(j), (k) 116(l) 1954 911 N/A 892 115 943 526 893 121(a)(17) 912 933 Title: Citizens or residents of the United States living abroad N/A Income of foreign governments and of international organizations Income of States, municipalities, etc. Other definitions and special rules Shipowners' protection and indemnity associations Compensation of employees of foreign governments or international organizations Exclusion of gain from sale of principal residence (struck out by Subsec. (a). Pub. L. 94-455, Sec. 1901(a)(21) Exemption for certain allowances Income from sources within Puerto Rico

From the above, the reference to section 911 of the IRC should sound familiar as it was related to the definition of “wages” in paragraph 5.4.2 on page 5-12.

If the Parallel Table for 26 CFR in effect in 1991 it will be noticed that it shows the following:

26 U.S.C. (1939 I.R.C.)

22 ........................................... 26 Part 519

40 ........................................... 26 Part 1

62 ...........................26 Parts 509,513,514,520,521

143-144 ...................................... 26 Part 521

Meaning that section 22 of the IRC of 1939 has governing regulations in 26 Part 519, which is (or was) the Tax Treaty with Canada.

It also shows that section 62 of the IRC of 1939 (derived from Vol 52, Page 480, chp 289, sec.62) had governing regulations in 26 Parts 509, 513, 514, 520, and 521. All of these pertain to tax treaties with other nations. It also is the section of the IRC of 1939 that the present section 7805, Rules and regulations IRC is derived from.

The Public Salary Tax Act of 1939 (50 Stat. 574), passed April 22, 1939, amended section 22(a) of the Internal Revenue Code (of 1939) to amend the definition of "gross income" to "(includ[e] personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing)". This act relates "to the taxation of the compensation of public officers and employees" (header, 53 Stat. 574), which term "officer or employee" includes "a member of a legislative body and a judge or officer of a court." (Sec. 210, 53 Stat. 577)

In section 4 of the act we find "The United States hereby consents to the taxation of compensation, received after December 31, 1938, for personal service as an officer or employee of the United States, any Territory or possession or political subdivision thereof, the District of Columbia, or any agency or instrumentality of any one or more of the foregoing , by any duly constituted taxing authority having jurisdiction to tax such compensation, if such taxation does not discriminate against such officer or employee because of the source of such compensation." (See 4 USC 111.) This allowed the States to tax federal employees.

Limitation of application was probably most clearly disclosed via the Public Salary Tax Act of 1939. The title of the act is on page 574 of volume 50 of the Statutes at Large (50 Stat. 574): “Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Public Salary Tax Act of 1939".

This act is important beyond its value in disclosing the nature and application of the normal tax as it provides a date of demarcation relative to the judicial branch of Federal government. Federal judges challenged and exempted themselves from the normal tax imposed in 1918 based on the provision in Article III, Sec. 1 of the Constitution prohibiting reduction in compensation for judges of the United States. The chief justice took a similar stand in 1862. However, in the Public Salary Tax Act of 1939, we find that Federal judges appointed after June 6, 1932 were subject to the normal tax:

Sec. 209. In the case of the judges of the Supreme Court, and of the inferior courts of the United States created under article III of the Constitution, who took office on or before June 6, 1932, the compensation received as such shall not be subject to income tax under the Revenue Act of 1938 or any prior revenue Act.

Other sections of the act of importance are the following:

SEC 1. Section 22 (a) of the Internal Revenue Code (relating to the definition of "gross income") is amended by inserting after the words "compensation for personal service" the following: ("including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of the foregoing)".

SEC 2. Section 116 (b) of the Internal Revenue Code (exempting compensation of teachers in Alaska and Hawaii from income tax) is repealed.

SEC. 3. Section 22 (a) of the Internal Revenue Code is amended by adding at the end thereof a new sentence to read as follows: "In the case of judges of courts of the United States who took office on or before June 6, 1932, the compensation received as such shall be included in gross income".

SEC. 210. For the purposes of this Act, the term "officer or employee" includes a member of a legislative body and a judge or officer of a court.

As a result of sections 1 and 3 Section 22 of the IRC now reads as follows:

SEC. 22. GROSS INCOME.

General Definition.-"Gross Income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of the foregoing) ... of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses commerce or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.... In the case of judges of courts of the United States who took office on or before June 6, 1932, the compensation received as such shall be included in gross income."

Again this shows that it relates to the income derived from salaries, wages, or compensation for personal service. It also stipulates that the compensation of judges who took office on or before June 6, 1932 shall be included in gross income.

In the present code section 61 defines "gross income":

Sec. 61. Gross income defined

(a) General definition

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions,

fringe benefits, and similar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Alimony and separate maintenance payments;

(9) Annuities;

(10) Income from life insurance and endowment contracts;

(11) Pensions;

(12) Income from discharge of indebtedness;

(13) Distributive share of partnership gross income;

(14) Income in respect of a decedent; and

(15) Income from an interest in an estate or trust.

(b) Cross references

For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).

CROSS REFERENCES

Capital gains and losses, see section 1201 et seq. of this title. Guaranteed payments to partner for services or use of capital considered as made to one not member of partnership for purposes of this section, see section 707 of this title.

Income from sources -

Within the United States, see section 861 of this title.

Without the United States, see section 862 of this title.

The first thing to be noted is where it states “income from whatever source derived, including (but not limited to) the following items. This is important for it uses two words or terms, “source” and “items” which indicates that each has its own meaning. In light of this, the word "source" maintains its distinction and viability under the Federal Rules of Statutory Construction. It states that the “income” is derived from the source, which in turn can be any of the items listed. Let’s see how Black’s Law Dictionary defines the words “item” and “source”:

Item. Also; likewise; in like manner;

again; a second time. This word was formerly used to mark the beginning of a new paragraph or division after the first, whence is derived the common application of it to denote a separate or distinct particular of an account or bill. One of the portions, equal or unequal, into which anything is divided, or regarded as divided; something less than a whole; a number, quantity, mass, or the like, regarded as going to make up, with others or another, a larger number, quantity, mass, etc., whether actually separate or not; a piece, fragment, fraction, member or constituent.

A separate entry in an account or a schedule, or a separate particular in an enumeration of a total.

An "item" in an appropriation is an indivisible sum of money dedicated to a stated purpose. For commercial paper purposes, a negotiable or non-negotiable writing for the payment of money that is collected through the collection process governed by U.C.C. Article 4. U.C.C. § 4-104(1)(g).

Source. That from which any act, movement~ information, or effect proceeds. A person or thing that originates, sets in motion, or is a primary agency in producing any course of action or result. An originator; creator; origin. A place where something is found or whence it is taken or derived. See also Cause.

A look at the regulations for section 61 is in order. These are found in 7 CFR Part 3 and 26 CFR Part 1. Concentration here will be those in 26 CFR Part 1. which are as follows:

Section Listing: Title:

1.61-1 Gross income.

1.61-2 Compensation for services, including fees, commissions, and similar items.

1.61-2T Taxation of fringe benefits--1985 through 1988 (temporary).

1.61-3 Gross income derived from business.

1.61-4 Gross income of farmers.

1.61-5 Allocations by cooperative associations; per-unit retain certificates-- tax treatment as to cooperatives and patrons.

1.61-6 Gains derived from dealings in property.

1.61-7 Interest.

1.61-8 Rents and royalties.

1.61-9 Dividends.

1.61-10 Alimony and separate maintenance payments; annuities; income from life insurance and endowment contracts.

1.61-11 Pensions.

1.61-12 Income from discharge of indebtedness.

1.61-13 Distributive share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust.

1.61-14 Miscellaneous items of gross income.

1.61-15 Options received as payment of income.

1.61-21 Taxation of fringe benefits.

Only two need to be looked at, 1.61-1 and 1.61-2 in order to determine what gross income is in regards to U.S. Citizens living within the United States and employed in the private sector.

A. 26 CFR Section 1.61-1 - Gross income Subsection (a) of this section reads as follows

Sec. 1.61-1 Gross income.

(a) General definition. Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration. For purposes of further illustration, Sec. 1.61-14 mentions several miscellaneous items of gross income not listed specifically in section 61. Gross income, however, is not limited to the items so enumerated.

The key words here are “unless excluded by law”. It then refers back to section 61 and 1.61.14 for the listing. Since there is no legal effect for this section in the Federal Register no more time will be spent on it, but the words “unless excluded by law” do bear attention, for earlier it has been shown that the remuneration of U.S. Citizens living and working within the 50 Sovereign States does not constitute “income”. Refer to the cites given on page 2-2.

B. 26 CFR Section 1.61-2- Compensation for services, including fees, commissions, and similar items

Subsection (a) of this section reads as follows

Sec. 1.61-2 Compensation for services, including fees, commissions, and similar items.
(a) In general. (1) Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances are income to the recipients unless excluded by law. Several special rules apply to members of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service of the United States; see paragraph (b) of this section.

Notice the words “wages”, “salaries”, “commissions”, and “compensation” then specifies what these are:
(1) Wages, salaries, commissions paid salesmen,
(2) compensation for services on the basis of a percentage of profits,
(3) commissions on insurance premiums, tips, bonuses (including Christmas bonuses),
(4) termination or severance pay,
(5) rewards,
(6) jury fees,
(7) marriage fees and other contributions received by a clergyman for services,
(8) pay of persons in the military or naval forces of the United States,
(9) retired pay of employees, pensions, and retirement allowances are income to the recipients

Also, section 61 of the IRC included the statement “For items specifically included in gross income, see part II (sec. 71 and following.” Of these section 72 is the only one that with a preliminary check for regulations shows that it has legal effect and it is in regards to annuities; certain proceeds of endowment and life insurance contracts. Due to the nature of its subject content it will not be addressed.

Finally, we want to return to section 61 of the IRC and note what is stated in the cross-references given at the very end. Here it refers us to section 861 for income from sources within the United States and to section 862 for income from sources without the United States. Therefore lets look first at section 861 which is located in Subtitle A - Income Taxes, Chapter 1 – Normal Taxes and Surtaxes - Subchapter N - Computation of Taxable Income Part I - Source Rules and Other General Rules Relating to Foreign Income.

I could add more, but the regulations at 1-61-1 and 1-61-2 both include the words "unless excluded by Law". Section 3401(a)(8)(A)(i), with regulations of final effect at This is born out by Federal Register entry for 26 CFR section 31.3401(a)-1 at T.D. 6654, 28 FR 5251, May 28, 1963 shown in figure 5-2 on page 5-2 where it states for section 31.3401(a)-1: (a) In general. (1) The term ``wages'' means all remuneration for services performed by an employee for his employer unless specifically excepted under section 3401(a) or excepted under section 3402(e).

and in Title 42, section 409 that defines “wages. In section 409(b), Regulations providing exclusions from term the following is stated: “Nothing in the regulations prescribed for purposes of chapter 24 of the Internal Revenue Code of 1986 (relating to income tax withholding) which provides an exclusion from ``wages'' as used in such chapter shall be construed to require a similar exclusion from ``wages'' in the regulations prescribed for purposes of this subchapter.” So the exclusion applies to the FICA withholdings also. I must remind you that the 16th Amendment did not change the constitution, and there have been no amendments since that changed it in regards to taxation.