Tax Protester 861 Argument - Description of The Argument

Description of The Argument

Internal Revenue Code section 861, entitled "Income from sources within the United States", is a provision of the Internal Revenue Code which delineates what kinds of income shall be treated as income from sources within the United States. The language of Section 861 is occasionally cited by tax protesters who claim that the statute excludes some portion of the income of U.S. citizens and resident aliens from taxation under the provisions of the Code.

Under the tax protesters' section 861 argument, only income derived from "taxable activities" becomes "taxable income" (taxable "gross income" minus allowable deductions - 26 U.S.C. § 63). The list of taxable activities is located in Subchapter N and in Section 861 regulations. Proponents of this argument state that individuals with domestic income must go to the Section 861 regulations to determine if the activities that generate their income are taxable or not. Protesters state that regulation section 1.861-8T(d)(2)(iii) defines the taxable activities. The argument is that since the domestic activities of residents of the United States (Americans and resident aliens) are not shown to be taxable, the domestic income derived from such activities does not become taxable "gross income".

Tax protesters argue that the IRS is misapplying section 861 to them, citing the case of Gould v. Gould. The text of that case reads in part:

"In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen."

Tax protesters argue that Gould v. Gould nullifies what tax protesters view as an attempt by the IRS to tax beyond the explicit provisions of the law. Section 861 did not exist in the year 1917, when the Gould case was decided, and the Court was neither presented with nor decided the issue of whether domestic or foreign income is not taxable. The terms "domestic income" and "foreign income" do not appear in the case, and the court's main ruling in Gould v. Gould—that alimony was not taxable to the recipient under the Revenue Act of 1913—was overturned by a subsequent Act of Congress, the current version of which is found in the Internal Revenue Code of 1986 at 26 U.S.C. § 71.