Mr. Lynn claims that the fourth sentence in § 1.861-8 (quoted below) is the "gatekeeper" for determining who should and should not use 26 USC § 861 and the related regulations. The third and fourth sentences of that section read as follows:
"This section [meaning § 1.861-8] provides specific guidance for applying the cited Code sections [referring to 861(b), 863(a), and 862(b)] for 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 [again, meaning § 1.861-8] 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)]
From this, Lynn concludes that one should not use 861 and the related regulations unless one has income from one of the categories referred to as "operative sections".
Larken and I pointed out to Mr. Lynn that there is nothing in Sections 1.861-1 through 1.861-7 that supports his claim. On the contrary, there are several sections as well as Treasury Decision 6258 that refute it, as Larken's Taxable Income report (www.taxableincome.net) painstakingly points out. Mr. Lynn's conclusion is that his "gatekeeper" sentence above should be read to mean, The rules contained in this section apply in determining taxable income of the taxpayer ONLY IF HIS/HER INCOME IS from specific sources and activities under other sections of the Code, referred to in this section as operative sections. The phrase "only if his/her income is", of course, does not appear in the cited sentence of § 1.861.8(a). It would be odd for the "gatekeeper" for 861 to not appear as the first sentence or at least in the first section of the regulations under 26 USC 861 (§ 1.861-1). Mr. Lynn explained this peculiar position by an analogy. He asked us to imagine a 25-page paper. The first 24 pages appear to apply to a broad situation. It is only on page 25 that one learns that the situation to which the first 24 pages apply is far narrower in scope than was initially presented. Certainly an author of a novel might do this for literary or dramatic effect. But Lynn is asking us to believe that the law was intentionally promulgated to provide this bizarre twist of meaning some 13 pages into the very regulations that are supposed to clarify the use of 26 USC 861!
Larken and I pointed out that none of the cross references to 26 USC 861 or its related regulations give any hint that those sections are applicable to Americans living in the U.S. only if they have foreign earned income. While we readily agreed with Mr. Lynn that cross references and entries in an index are not the law itself, it is remarkable that none of them provide any language whatsoever indicating that 26 USC 861 and its related regulations are limited for the purposes that Lynn claims. When I pressed Mr. Lynn on this point, he could only say that he didn't, and couldn't know, what was in the minds of the writers of those cross references and indices. Nor did he seem the least bit curious about this complete lack of support for his conclusions.
Larken pointed out that, in at least one year, he did in fact have a few dollars of foreign source income. Shouldn't Larken then use 861 and the regulations there under (at least for that year) to determine his taxable income from sources within the U.S.? Mr. Lynn went through a hypothetical example or two about how deductions might be properly allocated between foreign and domestic income, but strayed further and further from the question. In trying to bring Lynn back to the question, Larken pointed out repeatedly that § 1.861-8T(d)(2)(iii) provides a list of income that is not tax-exempt (i.e. is taxable) and that his domestic income isn't listed there. Mr. Lynn, while apparently agreeing that Larken should be using these sections in this particular situation of having foreign and domestic income, seemed to say that that section still doesn't apply to Larken's domestic income!
Finally, when asked what types income are "under the Constitution not taxable by the Federal Government" (§ 39.22 (b)-1, 1956; 26 CFR 1.312-6(b), 2004), Mr. Lynn could only guess. The problem is, his guesses again strayed from the question. He offered as one possibility that the government might impose an excise tax that was not uniformly applied, which would be unconstitutional. He offered as another possibility that a judge might rule that something is unconstitutional. Larken and I again tried to bring him back to the question, reminding him that the regulations refer to items of income that are exempt from taxation by the Constitution itself. Mr. Lynn insisted that Congress can tax darn near anything it wants to tax and finally admitted, "I do not know one specific item that is not taxable under the Constitution". Lynn is apparently unaware that:
• Treasury Decision 2303 embodied the Supreme Court ruling in Stanton v. Baltic Mining (240 U.S. at 103, 112) that "The provisions of the sixteenth amendment conferred no new power of taxation..." and affirmed that the income tax is an excise tax;
• F. Morse Hubbard, a legislative draftsman, was quoted in the Congressional Record on March 27, 1943, page 2580, as stating, "The income tax is not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by reference to the income they produce. The income is not the subject of the tax; it is the basis for determining the amount of tax."; and
• "The individual, unlike the corporation, cannot be taxed for the mere privilege of existing. The corporation is an artificial entity which owes its existence and charter powers to the state; but the individuals' rights to live and own property are natural rights for the enjoyment of which an
excise cannot be imposed." (Redfield v. Fisher, 292 P. 813, at 819)
..... to quote just a few citations.
Lynn admits that 26 USC 861 doesn't show the average American to be subject to federal taxation. But since he believes Congress can tax virtually anything it wants, he has to resort to reading into the fourth sentence of § 1.861-8 language that just isn't there and thereby conclude that 861 does not apply to most Americans. If Mr. Lynn would study the issue objectively, he would encounter the mountain of evidence contrary to his position.