(originally launched into cyberspace on 05/19/2007)
I expect this to be my last message in this series regarding the
radio debate between myself and Jonathan Siegel (professor of law
at GWU). Again, the show is archived at the following site (bottom
of the page):http://www.getonyoursoapbox.com/podcast
Mr. Siegel's current position can be summed up as: Yes, you CAN use
Section 861 and its regulations to determine your taxable domestic
income, but your "worldwide" income (foreign and domestic) will
show up as taxable anyway. For example, he claims that 26 USC
861(a)(3) means that compensation earned for services performed in
the U.S. is taxable for everyone.
As you may have notice, I have a habit of trying to jam a million
points into one e-mail (along with two million supporting
citations), but this time I want to focus on just ONE section. That
one section is Section 217 of the Revenue Acts of the 1920's, the
"grandfather" of the current Section 861. All by itself, that older
statute is very telling.
I bet you've all seen signs along the highway that say something
along the lines of "trucks must use right lane." When you see
those, do you interpret that to mean "EVERYONE must use the right
lane"? Of course not. Why would someone make a rule that says
CERTAIN PEOPLE must do a certain thing, if they meant EVERYONE must
do that certain thing?
This painfully obvious concept is really the heart and soul of the
legal principle of "inclusio unius." It would be logically moronic
for a law to specifically say only that it applied to "A" and "B,"
if it was supposed to apply to "C" and "D" as well. So it makes
sense that, as the Supreme Court put it (in Gould v. Gould), we are
NOT supposed to assume that tax laws apply to "matters not
specifically pointed out." Why on earth would we?
Again, the reason for this is really basic logic. How goofy would
our legal system be if the law DIDN'T specifically say what it
applied to, and we all had to guess? What would such a law even
"Section 1. Somebody--we won't say who--must do the following..."
The only thing worse than that would be a law that said "People
with red hair must do the following" when it really meant that
"EVERYONE must do the following." The idea is obviously absurd. Any
idiot knows that when he sees a sign about trucks using the right
lane, the rule ISN'T ABOUT HIM, unless he's driving a truck.
Now suppose that there was a law that said that CERTAIN people must
pay a tax on any income they receive from working inside the United
States. Well, there is, and there has been for over ninety years.
Here is what it looked like in the 1920's:
“Sec. 217. (a) In the case of a NONRESIDENT ALIEN or of a citizen
ENTITLED TO THE BENEFITS OF SECTION 262, the following items of
gross income shall be treated as income from sources within the
(1) Interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise;
(2) The amount received as dividends from a domestic
(3) Compensation for labor or personal services performed in the
(4) Rentals or royalties from property located in the United
(5) Gains, profits, and income from the sale of real property
located in the United States;
(b) From the items of gross income specified in subdivision (a)
there shall be deducted [the allowable deductions]. The remainder,
if any, shall be included in full as net income from sources within
the United States.” [Section 217, Revenue Act of 1925]
So the listed types of domestic income are, after deductions, to be
reported as taxable income in the case of foreigners, and in the
case of citizens "entitled to the benefits of section 262." For the
record, here is what Section 262 back then said:
"(a) In the case of citizens of the United States or domestic
corporations, satisfying the following conditions, gross income
means only gross income from sources within the United States—(1)
If 80 per centum or more of the gross income of such citizen or
domestic corporation...for the three-year period immediately
preceding the close of the taxable year...was derived from sources
within a POSSESSION of the United States..." [Section 262, Revenue
Act of 1925]
So, to summarize a bit, if a person got most of his income from
federal possessions (e.g., Guam or Puerto Rico) he could be
"entitled to the benefit" of being taxed only on any income he
received from inside the states, and NOT on his possessions income.
(As a result, certain U.S. citizens COULD have taxable income from
inside the U.S.)
So now we can easily paraphrase the old Section 217: In the case of
FOREIGNERS, and in the case of Americans with POSSESSIONS income,
domestic interest, domestic wages, and other domestic income are,
after subtracting deductions, to be included as taxable domestic
Based on the principle mentioned above, all by itself that section
should raise some red flags. Aren't wages earned in the U.S.
taxable for EVERYONE, including ALL U.S. citizens as well as
foreigners? That's what "conventional wisdom" says. So, regardless
of what any other section of law might say, why on earth would
there be a section of law saying, in essence, that domestic wages
are taxable for foreigners and for CERTAIN Americans? I challenge
anyone to come up with an explanation for that which doesn't blow
"conventional wisdom" out of the water.
You might wonder whether some OTHER section said that such domestic
income was also taxable "in the case of all OTHER U.S. citizens."
Nope, but that shouldn't really come as a surprise. Why on earth
would one part of a law say that CERTAIN people must do something,
only to have another part of the law say that EVERYONE ELSE must do
it as well? (That would be like a traffic sign that said "trucks
must use right lane," followed by another sign that said "And
everyone else must also use the right lane, too." Why on earth
would that ever happen?)
There are a lot of different pieces to the income tax "puzzle," and
as a result, understanding the big picture takes time and effort.
But in some cases just ONE piece, all by itself, blasts a major
hole in conventional wisdom. And this is one of those pieces. If
"compensation for services performed in the United States" was
taxable for anyone who received it, there would be NO REASON for
there to have ever been a section of law worded like the old
While decades of obfuscation and complication have made the truth
more difficult to find THAT SECTION is what "evolved" into the
current Section 861 and its regulations, which STILL show that
income from within the U.S. is taxable for foreigners and for
CERTAIN Americans (those with possessions income). Why not say it's
taxable for ALL citizens? Why, in 90 YEARS, has the section about
U.S.-source income NEVER said that?
As I said before, I will be asking Professor Siegel two simple
questions regarding his claim that 861 means that domestic income
is taxable for all of us. Those questions are:
1) Did Section 217(a)(3) of the Revenue Act of 1925 mean that
compensation for services performed in the United States is taxable
for ALL U.S. citizens?
2) Did the scope and application of that part of the law CHANGE
somewhere along the line, on its way to becoming the current
The answer to the first is obviously "no." The answer to the second
is also "no," as demonstrated by Treasury Decision 8687, all the
regs under Section 119 of the 1939 Code, the "Wodehouse" Supreme
Court decision, and Congress' own reports on the different tax
So if that 1925 section DIDN'T mean that domestic wages are taxable
for all U.S. citizens, and the scope of that part of the law DIDN'T
change substantially since then, how could the current 861(a)(3)
mean that all domestic wages are taxable? It can't, and it doesn't.
Let's see how the professor explains this.