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CHAPTER7.TXT
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Chapter 7:
Inside Sources
Frank Brushaber was taxed on a dividend he received from the
stock of a domestic corporation. Remember, the term "domestic"
in this context means "inside" the federal zone. The dividend
came, therefore, from a "source" that was situated inside this
zone. The exact legal meaning of the term "source" has been the
subject of much debate, both inside and outside the federal
courts. I would not presume to be the one who settles this
debate once and for all, least of all in the few pages dedicated
to this chapter. It is important to understand that the
Brushaber Court's decision turned, in large part, on a
determination of the "source" of the dividend which Frank
Brushaber received. That source was a domestic corporation which
had been chartered by Congress to build a railroad and telegraph
through the Utah Territory. As such, it was an "inside source"
-- a source that was situated inside the federal zone.
Frank Brushaber's income was "unearned" income. This means
that he did not exchange any of his labor in order to receive the
dividend paid to him by the Union Pacific Railroad Company.
Earned income, on the other hand, is income which is derived from
exchanging labor for something of value, like money. Also beyond
the scope of this chapter are the sad debate, and considerable
mass of IRS-sponsored confusion, that surround the legal
definition of "income". Author Jeffrey Dickstein has done an
extremely thorough job of documenting the history of judicial
definitions of the term "income". Many of those definitions are
in direct conflict with each other, but all Supreme Court
decisions on the question have been completely consistent with
each other. In Appendix J of this book, you will find one of our
formal petitions to Congress in which are summarized a number of
rulings on this issue by the Supreme Court and by lower courts
which concur. If you must also review the courts which do not
concur, you gluttons for punishment should buy Dickstein's great
book on the subject.
Back to sources. IRS Publication 54 explains in simple
terms that: "The source of earned income is the place where you
perform the services." I always enjoyed it when Sister Theresa
Marie would tell our third-grade class that the whole world is
divided into persons, places and things. How I long for those
simpler days! The courts have used the technical term "situs"
instead of "place" as follows:
We think the language of the statutes clearly demonstrates
the intendment [sic] of Congress that the source of income
is the situs of the income-producing service.
[C.I.R. vs Piedras Negras HB Co., 127 F.2d 260 (1942)]
[emphasis added]
Page 7 - 1 of 14
The Federal Zone:
It is useful to repeat the section of the Internal Revenue
Code (IRC) which was quoted in the last chapter. Specifically,
in the case of a nonresident alien individual, except where the
context clearly indicates otherwise, gross income includes only:
(1) gross income which is derived from sources within the
United States** and which is not effectively connected
with the conduct of a trade or business within the
United States**, and
(2) gross income which is effectively connected with the
conduct of a trade or business within the United
States**.
[26 USC 872(a)]
[emphasis added]
The term "gross income" is crucial, because it is the
quantity which triggers the filing requirement. It is like a
threshold, or so we are told by august members of the black robe
like Judge Eugene Lynch of the Federal District Court in San
Francisco. Section 6012 of the IRC reads, in pertinent part:
General Rule. -- Returns with respect to income taxes under
subtitle A shall be made by the following:
(1)(A) Every individual having for the taxable year gross
income which equals or exceeds the exemption
amount ...
except that subject to such conditions, limitations, and
exceptions and under such regulations as may be prescribed
by the Secretary, nonresident alien individuals subject to
the tax imposed by section 871 ... may be exempted from the
requirement of making returns under this section.
[26 USC 6012(a)]
[emphasis added]
Section 6012 is a pivotal section, if only because the IRS
is now citing this section (among others) as their authority for
requiring "taxpayers" to make and file income tax returns. As
you can plainly read with your own eyes, nonresident alien
individuals may be exempted from the requirement of making
returns. Diving into the many thousands of regulations which
have been "prescribed by the Secretary" is also beyond the scope
of this book. For now, realize that the regulations do exist and
that the quantity "gross income" for nonresident aliens includes
only two things: (1) gross income derived from sources within
the United States** and (2) gross income that is effectively
connected with a U.S.** trade or business. That's it!
Page 7 - 2 of 14
Inside Sources
You will note that the statute and its regulations make
frequent use of the terms "within" and "without", in order to
contrast the two terms as antonyms, or opposites. In this
context, the term "within" is synonymous with "inside"; the term
"without" is synonymous with "outside". "Within" and "without"
are antonyms. And the term "antonym" is an antonym for a
synonym! ("Good grief," declared Charlie Brown.) Thus, if you
are outside the federal zone, you are "without" the United
States** in the languid language of federal tax law. (Languid:
drooping or flagging from, or as if from exhaustion.) Can we
ever get along "without" the United States**?
The importance of "within" and "without" cannot be
emphasized too much. In the context of everything we now know
about jurisdiction within the federal zone, these terms are
crucial to understanding the territorial extent of Title 26. To
underscore this point, consider IRC Section 862(a), entitled
"Income from Sources Without the United States**":
(a) Gross Income from Sources without United States**. --
The following items of gross income shall be treated as
income from sources without the United States**: ...
(3) compensation for labor or personal services
performed without the United States**.
[26 USC 862(a)-(a)(3)]
[emphasis added]
Now, turn to IRS Form 1040NR. A copy of this form is found
in Appendix K. The "NR" stands for "NonResident". Nonresident
aliens file this form to report and pay tax on gross income as
defined in IRC Section 872(a). On page one of the 1990 version
of this form, there is a block of line items numbered 8 thru 22.
These items are summed to produce a total on line 23. "This is
your total effectively connected income," states the form. Now,
turn the form clockwise 90 degrees. Note, in particular, the
phrase near the left margin of page one which reads:
Income Effectively Connected With U.S.** Trade/Business
If you are a nonresident alien and you have no income which is
effectively connected with a U.S.** trade or business, then you
can, in good conscience, put a big fat ZERO on line 23. But,
this is not the whole story. On page 4 of Form 1040NR, there is
a table for computing "Tax on Income Not Effectively Connected
with a U.S.** Trade or Business". What would this be?
Page 7 - 3 of 14
The Federal Zone:
Recall IRC Section 872(a), quoted above. The only other
component of gross income for nonresident aliens is income which
is derived from sources within the United States**, like Frank
Brushaber's stock dividend. Lo and behold, this table itemizes
such things as dividends, interest, royalties, pensions, and
annuities. These are all items of unearned income, that is,
profits and gains derived from U.S.** sources other than
compensation for labor or personal services performed "within"
the United States**. The total tax is computed and entered on
line 81 of Form 1040NR. Unfortunately, true to form, line 81 in
this table says that "This is your tax on income not effectively
connected with a U.S.** trade or business." This is very
deceptive. Remember, gross income for nonresident aliens
includes only two kinds of gross income:
(1) gross income derived from sources within the U.S.**
which is not effectively connected with a U.S.** trade
or business and
(2) gross income which is effectively connected with the
conduct of a trade or business within the United
States**
Line 81 of Form 1040NR is referring to the first kind of gross
income, namely, gross income which is "not effectively connected
with a U.S.** trade or business". The second kind of gross
income is entered on page 1 at line 23 of this form. Again, it's
simple when you know enough to decode the Code. It's also very
easy to get confused when the confusion is intentional.
("Encode" and "decode" are antonyms, by the way.)
Unfortunately, the filing requirements for nonresident
aliens are not as straightforward as you might think, because the
regulations contain certain rules that are not found in the Code
itself, and the Code is frequently vague. To understand these
requirements, the regulations must be reviewed as they apply to
your particular situation. A brief overview is in order.
If you are a nonresident alien with no gross income from
sources within the U.S.**, and with no U.S.** trade or business,
is it a good idea to file a 1040NR with zeroes everywhere? No,
it is not. The main reason is that filing any 1040 form can
provide the IRS with a legal reason to presume that you are a
"taxpayer", as that term is defined in the IRC. A later chapter
of this book will explore the "law of presumption" in some
detail. Your filed return can be used as evidence that you are a
taxpayer, that is, one who is subject to any internal revenue tax
because you are engaged in a "revenue taxable activity". A
U.S.** trade or business is a revenue taxable activity. Thus, a
key issue for nonresident aliens is whether or not they are
engaged in any U.S.** trade or business. The CFR regulations say
this about the filing requirement for nonresident aliens:
Page 7 - 4 of 14
Inside Sources
... [E]very nonresident alien individual ... who is engaged
in a trade or business in the United States at any time
during the taxable year or who has income which is subject
to taxation under Subtitle A of the Code shall make a return
on Form 1040NR. For this purpose it is immaterial that the
gross income for the taxable year is less than the minimum
amount specified in section 6012(a) for making a return.
Thus, a nonresident alien individual who is engaged in a
trade or business in the United States** at any time during
the taxable year is required to file a return on Form 1040NR
even though
(a) he has no income which is effectively connected with
the conduct of a trade or business in the United
States**,
(b) he has no income from sources within the United
States**, or
(c) his income is exempt from income tax by reason of an
income tax convention or any section of the Code.
[26 CFR 1.6012-1(b)(1)]
[emphasis added]
Thus, the gross income "threshold" defined in the filing
requirement at IRC 6012(a) is not relevant if a nonresident alien
is engaged in any U.S.** trade or business. Conversely, the
rules are somewhat different if a nonresident alien is not
engaged in any U.S.** trade or business. The regulations have
this to say about a nonresident alien in the latter situation:
A nonresident alien individual ... who at no time during the
taxable year is engaged in a trade or business in the United
States** is not required to make a return for the taxable
year if his tax liability for the taxable year is fully
satisfied by the withholding of tax at source under Chapter
3 of the Code.
[26 CFR 1.6012-1(b)(2)]
[emphasis added]
If a nonresident alien has no U.S.** trade or business and
no tax liability that required withholding (such as U.S.** source
income), then a return is not required. If you are a nonresident
alien and you remain in doubt as to whether or not you are
required to file a Form 1040NR, you might begin by reading all
the rules found in the Instructions for Form 1040NR. In general,
the instructions are much easier to read than the regulations,
but also understand that the regulations have the force of law
and the instructions do not. The instructions for form 1040NR
address the question of who must file as follows:
Page 7 - 5 of 14
The Federal Zone:
Use Form 1040NR if any of the four conditions listed below
and on page 2 applies to you:
1. You were a nonresident alien engaged in a trade or
business in the United States** during 1990. You must
file Form 1040NR even if:
a. none of your income came from a trade or businesss
conducted in the United States**,
b. you have no income from U.S.** sources, or
c. your income is exempt from U.S.** tax.
In any of the above three cases, do not complete the
schedules for Form 1040NR. Instead, attach a list of
the kinds of exclusions you claim and the amount of
each.
2. You were a nonresident alien not engaged in a trade or
business in the United States** during 1990 with income
on which not all U.S.** tax that you owe was withheld.
3. You represent a deceased person who would have had to
file Form 1040NR.
4. You represent an estate or trust that would have had to
file Form 1040NR.
[Instructions for Form 1040NR, page 1]
Now, what is a "trade or business" within the United
States**? Author and legal scholar Lori Jacques has concluded
that the meaning of a "trade or business" is confined to
performing the functions of a public office. This conclusion is
supported by an explicit definition of "trade or business" that
is found in the IRC itself:
Trade or Business. -- The term "trade or business" includes
the performance of the functions of a public office.
[26 USC 7701(a)(26)]
The Informer has come to the same conclusion, after years of
research. All of this "trade or business" activity, thus
defined, boils down to one simple thing: government employment.
If you work for the federal government, even if you are a
nonresident alien, the Congress reserves the power to define that
work as a "privilege", the exercise of which Congress can tax.
The measure of that tax is the amount of income derived. Author
Lori Jacques summarizes government employment as follows:
Page 7 - 6 of 14
Inside Sources
It appears that the federal income tax is the graduated tax
on income effectively connected with a U.S.** trade or
business as described in IR Code Sec. 871(b) which is
government employment. Remember the nonresident alien does
not pay tax on non U.S.** source income. If the nonresident
alien signs a Form W-4 he is obviously presumed to be a
government employee with "effectively connected income."
[United States Citizen vs National of the United States]
[page 39, emphasis added]
Another competent author and IRS critic, Frank Kowalik, has
also arrived at similar conclusions about the "taxability" of
employment with the federal government. In his thorough book
entitled IRS Humbug, IRS Weapons of Enslavement, Kowalik argues
with exhaustive proof that a tax "return" is really just a
kickback. Government employees are expected to return or "kick
back" some of their earnings to the Treasury, in obvious and
grateful tribute to the great giver of all federal privileges,
Uncle Sam. Kowalik's arguments and accompanying complaints are
so persuasive that Rep. Jack Brooks, Chairman of the House
Judiciary Committee, has scheduled Kowalik's request for redress
as Petition No. 107. In a personal letter to me, Frank Kowalik
wrote the following:
I read with interest your Redress (12-24-90) to Barbara
Boxer. I also delivered a Redress to Congress making Tom
Foley, House Speaker, my personal representative. My book
"IRS Humbug" was an exhibit in this Redress. Jack Brooks,
Chairman of the House Judiciary Committee, was among those
copied. From his letter (copy attached) my Redress has been
referred to the Committee on the Judiciary as Petition No.
107. As I understand it, it will be heard in the session
after the holidays. I also provide information on "IRS
Humbug" that covers the fact that federal income tax is not
a tax on labor. It is a kickback program between the
federal government and its employees.
[personal communication, December 10, 1991]
[emphasis added]
Taken together, The Informer, Lori Jacques and Frank Kowalik
appear unanimous in understanding the term "trade or business" to
include only the performance of the functions of a public office.
This conclusion is, of course, supported by the explicit
definition of "trade or business" which is found in the IRC
itself at 7701(a)(26). Note, however, that this definition does
not say "includes only"; it says "includes".
Page 7 - 7 of 14
The Federal Zone:
Once again, we are haunted by the ambiguity that results
from not knowing for sure whether "includes" is expansive or
restrictive. If "includes" is restrictive, then The Informer,
Lori Jacques, and Frank Kowalik are all correct about the
inferences they have drawn from the statute and its regulations.
If "includes" is expansive, however, then we have to look
elsewhere for things that are "otherwise within the meaning of
the term defined", that is, otherwise within the meaning of
"U.S.** trade or business".
An expansive intent is manifested by the explicit
definitions of "includes" and "including" that are found at IRC
7701(c). The issues of statutory construction that arise from
these definitions of "includes" and "including" are so complex, a
subsequent chapter of this book will revisit these terms in more
detail. The conclusions in that chapter should already be
obvious to you. For now, suffice it to say that the intended
clarification at 7701(c) is anything but. The hired lawyers who
wrote this stuff should have known better than to use terms that
have a long history of semantic confusion. For this reason, and
for this reason alone, I am now convinced that the confusion is
inherent in the language chosen by these hired "guns" and is
therefore deliberate.
There is evidence that the meaning of "trade or business" is
not limited to the performance of the functions of a public
office. The Code itself contains a second definition of "trade
or business within the United States**" as follows:
Trade or Business within the United States**. --
For purposes of this part, part II, and chapter 3, the term
"trade or business within the United States**" includes the
performance of personal services within the United States**
at any time within the taxable year ....
[26 USC 864(b)]
[emphasis added]
It is tempting to interpret this definition only "for
purposes of this part, part II, and chapter 3". I will not take
the bait, because it is more important to stay above a major
addiction of the federal zone: obfuscation. You may have
already begun to notice how frequently the IRC makes reference to
other sections, subsections, subparts, subtitles, and
subchapters. Sure, these other places in the law must be taken
into account before the "performance of personal services" can be
fully understood as defined. I can see that as well as anybody
else. But two can play this game. Is there any reason in the
statute to suspect that these remote references might not even be
valid? First, read the following sub-statute within the statute,
and then decide for yourself (go ahead, you have my permission):
Page 7 - 8 of 14
Inside Sources
Construction of Title.
[Sec. 7806(a)]
(a) Cross References. -- The cross references in this title
to other portions of the title, or other provisions of
law, where the word "see" is used, are made only for
convenience, and shall be given no legal effect.
[Sec. 7806(b)]
(b) Arrangement and Classification. -- No inference,
implication, or presumption of legislative construction
shall be drawn or made by reason of the location or
grouping of any particular section or provision or
portion of this title, nor shall any table of contents,
table of cross references, or similar outline,
analysis, or descriptive matter relating to the
contents of this title be given any legal effect. The
preceding sentence also applies to the side notes and
ancillary tables contained in the various prints of
this Act before its enactment into law.
[26 USC 7806]
[emphasis added]
If the statute itself is entirely too frustrating to
decipher, it is no wonder why the IRS has published literally
hundreds of instruction booklets and official IRS "Publications"
to help "clarify" the myriad rules and forms. At last count,
there were more than 5,000 IRS forms in the IRS Printed Product
Catalog quoted elsewhere in this book. To conclude our
discussion of "U.S.** trade or business", you might want to
obtain a copy of IRS Publication 519, U.S. Tax Guide for Aliens.
This 40-page booklet expresses the English language in words that
are much easier to understand than the statute itself. It even
has its own Index. Be forewarned, however, that official IRS
"Publications" do not have the force of law because they have not
been published in the Federal Register, nor do any of them
display control numbers and expiration dates issued by the Office
of Management and Budget (OMB). (If the IRS makes an error, it's
not their fault anyway.) Publication 519 has this to say about a
trade or business inside the United States**:
Trade or Business
Whether you are engaged in a trade or business in the United
States** depends on the nature of your activities. The
discussions that follow will help you determine whether you
are engaged in a trade or business in the United States**.
[continued ...]
Page 7 - 9 of 14
The Federal Zone:
Personal Services
If you perform personal services in the United States** at
any time during the tax year, you usually are considered
engaged in a trade or business in the United States**. You
are engaged in a trade or business in the United States** if
you perform services in this country and receive
compensation such as wages, salaries, fees, tips, bonuses,
honoraria, or commissions.
[Publication 519: U.S. Tax Guide for Aliens]
[page 8]
Back to sources one more time. (It's so easy to get
sidetracked by some remote code reference that has no legal
effect!) The interested reader and intrepid investigator will be
happy to know that there are literally "oodles" of regulations
which go into details, great and small, about the life and times
of Mr. and Mrs. Nonresident Alien. Here is a blockbuster for
which I am eternally grateful to Tarzan The Informer for weeding
out of the jungle of slippery lines and double negatives:
Nonresident aliens. A nonresident alien individual never
has self-employment income. While a nonresident alien
individual who derives income from a trade or business
carried on within the United States**, Puerto Rico, the
Virgin Islands, Guam, or American Samoa (whether by agents
or employees, or by a partnership of which he is a member)
may be subject to the applicable income tax provisions on
such income, such nonresident alien individual will not be
subject to the tax on self-employment income, since any net
earnings which he may have from self-employment do not
constitute self-employment.
[26 CFR 1402(b)-3(d)]
[emphasis added]
A nonresident alien individual never has self-employment income.
I agree completely with The Informer: "never" always means never.
The point of this chapter is to stress the extreme
importance of understanding "sources" as they affect the
nonresident alien like you and me. Remember how Frank Brushaber
ultimately lost his bid to the Supreme Court of the United
States. He received a dividend that was issued by a "domestic"
corporation. Even though he was found to be a nonresident alien
with respect to the United States**, his dividend was found to be
unearned income from a source inside the United States**, inside
the federal zone. The Informer nicely summarizes the overall
situation as follows:
Page 7 - 10 of 14
Inside Sources
YOU ARE NOT TAXABLE IF YOU ARE:
ITEM 1: a non resident alien NOT carrying on a trade
or business with the U.S.** or State of a
Union State;
ITEM 2: a non resident alien NOT making source income
from within the United States**;
ITEM 3: a non resident alien NOT having a trademark,
patent, or copyright;
ITEM 4: a non resident who is NOT a fiduciary, so you
cannot be a person of incidence with respect
to a person of adherence;
then the income tax is not imposed, under subtitle A,
chapter 1 on a non resident alien. So you fit the
description under 26 USC Sections 2(d) & 872.
[Which One Are You?, page 24]
[emphasis in original]
The complex issues of patents, trademarks, copyrights and
fiduciaries are beyond the scope of this book. My "sources" tell
me that The Informer is writing another book, hopefully to
clarify some of the legal in's and out's of being a fiduciary.
Author Lori Jacques has arrived at a remarkably similar
conclusion about nonresident aliens. The first person "I" in the
following excerpt is author Jacques:
It is conclusive the Department of Treasury, Internal
Revenue Service, has no authority within the several states,
it is just as conclusive that any income deriving from
within the jurisdiction of the national government is
taxable to the person receiving it. The treasury decision
on Brushaber confirms that.
The tax on the nonresident alien conforms to all
constitutional provisions:
1. Uniform taxation of 30% on unearned income from U.S.**
sources.
2. No reporting of private information as the tax is
withheld at source or else the government has all the
information of amount it has paid -- just return the
receipt to prove the tax was paid.
[continued ...]
Page 7 - 11 of 14
The Federal Zone:
3. Graduated taxation on income received from trade or
business conducted within the United States**,
permitted because only the states are parties to the
compact guaranteeing unalienable rights and
uniform/apportioned taxation. The federal areas are
always exempt from laws guaranteeing equal treatment.
4. No public notice has been published in the Federal
Register since state citizens, nonresident to the
United States** as defined, are not affected by the
delegation of authority orders.
After the evidence is in, I now believe that under the
internal revenue law I am a "national" and a nonresident
alien to federal jurisdiction who has no U.S.** source
income nor any effectively connected income with a U.S.**
trade or business for which I am liable to render a return.
[United States Citizen vs National of the United States]
[page 44, emphasis added]
This lengthy excerpt does an excellent job of summarizing a
mountain of earnest legal research and writing by author and
scholar Lori Jacques. My hat's off to you, Lori, for doing a
"totally boss" and uniquely thorough job. I take issue only with
your statement above that "the Internal Revenue Service has no
authority within the several States." Without clarifying the tax
liability that attaches to income from "inside sources", this
statement could be misleading. Remember that Frank Brushaber's
liability attached to income from such a source. The Informer
has accurately qualified the precise extent of federal tax
jurisdiction within the 50 States of the Union as follows:
Yes, the IRS can go into the States of the Union by Treasury
Decision Order, to seek out those "taxpayers" who are
subject to the tax, be they a class of individuals that are
United States** citizens, or resident aliens. They also can
go after nonresident aliens that are under the regulatory
corporate jurisdiction of the United States**, when they are
effectively connected with a trade or business with the
United States** or have made income from a source within the
United States** that they have entered into an agreement
with, for then they are in the state of the forum.
[Which One Are You?, page 98]
[emphasis added]
# # #
Page 7 - 12 of 14
Inside Sources
Reader's Notes:
Page 7 - 13 of 14
The Federal Zone:
Reader's Notes:
Page 7 - 14 of 14
