Nope. No income for sources derived outside of the U.S. or in the District of Columbia or those territories where the feds have sole authority = no income tax. I have never seen any listed source in IRC/USC 26 which would indicate that regular work income within the 50 states (other than income derived from the sale or manufacture of Alcohol, Tobacco, or Firearms) is subject to an excise tax (what the income tax was ruled by the Supreme Court).
The claim is that the Internal Revenue Code does not apply to most of the income of citizens of the United States because the only definitions of "sources of income" apply only to nonresident aliens and foreign corporations. (See I.R.C. section 861 and its regulations.) This argument is completely contrary to the express language of the Internal Revenue Code and its regulations.
Section 61(a) of the Internal Revenue Code states the general rule that "gross income" (which is the starting point for the calculation of taxable income " "means all income from whatever source derived...."
The regulations confirm that U.S. citizens (and residents) are taxed on all of their income, regardless of where the source is located, and so the source of income is irrelevant to U.S. citizens and residents.
"In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States." Treas. Reg. § 1.1-1(b).
The general rule, therefore, is that all income is included in gross income, and the taxpayer must demonstrate that the income is not taxable.
Even if it were necessary to establish a "source" for income in section 861, there are specific provisions in section 861 that specifically state that the income of most citizens is from sources within the United States.
For example, section 861(a) states that "The following items of gross income shall be treated as income from sources within the United States: ... (3) Compensation for labor or personal services performed in the United States;" (subject to certain exceptions not relevant here).
And the regulations state that "Gross income from sources within the United States includes compensation for labor or personal services performed in the United States irrespective of the residence of the payer, the place in which the contract for service was made, or the place or time of payment;" (subject to the exceptions stated in the statute, which are still not relevant here). Treas. Reg. § 1.861-4(a)(1).
Nonresident aliens and foreign corporations are taxed only on income from sources within the United States, so it is necessary to identify the sources of income (and deductions) for them, which is why there are regulations for them.
Needless to say, the courts have had no problem with the argument that a citizen and resident of the United States is not taxed on income earned within the United States:
"Petitioner also contends that no Federal statute imposes a tax on the income of citizens or residents of the United States that is derived from sources within the United States. Instead, petitioner asserts that Federal income taxes are excise taxes imposed only on the privilege of nonresident aliens and foreign corporations to receive income from sources within the United States. Petitioner's argument is unclear. Apparently, petitioner believes that the only sources of income for purposes of section 61 are listed in section 861, that income from sources within the United States is taxed only to nonresident aliens and foreign corporations pursuant to sections 871, 881, and 882, and that section 1461 is the only section of the Internal Revenue Code that makes anyone liable for the taxes imposed by sections 1 and 11.
"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 section '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." Aiello v. Commissioner, T.C. Memo. 1995-40.
"The arguments in Kaetz's appellate briefs, which he shrouds in hyperbole and platitudes, do not further his position. Through linguistic gymnastics, Kaetz contorts the relevant sections of the Internal Revenue Code and the Treasury Regulations to deduce that he does not have taxable income for the years 1991-1997. He premises his argument, inter alia, on the belief that United States citizens only earn taxable 'gross income' when living and working outside the United States, and that the 'Foreign Earned Income Form 2555 is the only form required to be filed[ ] by U.S. Citizens.' Appellant's Brief at 16-17, 18. He concludes his intricate deductive argument quite bluntly: 'Goodbye Income Taxes on Citizens with domestic income.' Id. at 18. The problem with his deduction is that it is based on false premises. Income earned in the United States, including salary, is taxable, see I.R.C. section 63, and 'Gross Income' can be quantified." Kaetz v. Internal Revenue Service, 225 F.3d 649, 2000 U.S. App. LEXIS 17068, 2000-2 U.S. Tax Cas. Par. 50,544, 85 A.F.T.R.2d 2183, KTC 2000-312, Docket #99-3346 (3d Cir. 6/7/2000), (unpublished opinion), aff'g 1999 U.S. Dist. LEXIS 8309, 99-1 U.S. Tax Cas. Par. 50,505, 83 A.F.T.R.2d 2536 (M.D.Pa. 1999).
"Plaintiff argues further that his remuneration is exempt from taxation under 26 U.S.C. § 861(a)(3)(C)(ii), and thus excludable under 26 U.S.C. § 61 and, by reference, excludable under Wisconsin law. Suffice it to say that if plaintiff wished to avail himself of § 861( a)(3)(C)(ii), he would have to show that his work was done for a foreign office, or an office in a United States possession, of a domestic business entity. He has not alleged this, and it is clear from the record that he performed his work in the State of Wisconsin for Wisconsin employers." Peth v. Breitzmann, 611 F. Supp. 50 (E.D.Wis. 1985), 1985 U.S. Dist. LEXIS 21509, 85-1 U.S.T.C. ¶9321, 55 AFTR2d 1280.
"At the hearing on respondent's Motion For Summary Judgment, petitioner also claimed that 'all of my gross income was received without the United States as defined in Subchapter N of 26 CFR 1.861-1', and 'I am not a citizen of the federal U.S. I make a living in the state of Illinois as a right, and I am not subject to the jurisdiction of the federal United States.' "We find no support for petitioner's position in the authorities he cites. ... "[P]etitioner's position is not bolstered by the regulations under section 861. To the contrary, section 861(a)(1) and (3) provides that interest from the United States and compensation for labor or personal services performed in the United States (with exceptions not applicable here) are items of gross income which shall be treated as income from sources within the United States." Solomon v. Commissioner, T.C. Memo 1993-509.
"As a citizen of the United States during the years at issue, petitioner is subject to United States Federal income tax on his worldwide income. Sec. 1; Cook v. Tait, 265 U.S. 47 (1924); sec 1.1-1(a)(1) and (c), Income Tax Regs. It is unnecessary to determine whether that income was from sources within or without the United States since petitioner is not a nonresident alien. See sec. 861." Norman F. Dacey, T.C. Memo 1992-187.
"[Defendant's] argument in favor of vacating judgment is almost incomprehensible, and, to the extent it is understandable, is meritless....
"Defendant on unnumbered pages five and six [of Defendant's Memorandum in Support of his Motion to Vacate Judgment] analyzes several tax regulations, after which he contends: 'Nonresident aliens and foreign corporations are liable for income tax from sources within the United States, where Citizens and residents of the several States are liable only for gross income from foreign sources and insular possessions of the United States.' (Id. at 5.) ....
"Defendant's arguments appear to boil down to the following: the judgment against Defendant is void because (1) the federal government has no power to impose income tax on him; and (2) the federal government did not comply with certain requirements found in the tax regulations when it acted against him to secure payment from him for unpaid taxes. Neither contention has merit. The first is tax protester rhetoric that contradicts over fifty years of tax law in this country. Plaintiff must pay income taxes; the federal government has the right to pursue him for unpaid taxes." United States v. Bell, 86 AFTR2d ¶2000-5209; CIV F 95-5346 OWW SMS (U.S.D.C. E.D.Ca. 7/24/2000).
On September 26, 2000, George and Dorothy Henderson, of Roseville, California, were convicted in the U.S. District Court for the Eastern District of California of conspiring to defraud the IRS, aiding in the presentation of false tax returns, and other charges arising out of their sale of bogus trust schemes to generate false deductions for clients, as well as helping clients to hide income by routing monies through a variety of domestic and foreign accounts. According to an article in the New York Times, Mr. and Mrs. Henderson decided to argue at their sentencing that "they were exempt from tax under Section 861 of the Internal Revenue Code, contending that the statute excludes most Americans from income taxes." Mrs. Henderson's lawyer, Donald Dorfman, tried to discourage his client, but said that "She insisted on speaking and telling the judge about the 861 position and how as a sovereign citizen of California the federal courts had no jurisdiction and all sorts of gibberish." After listening to their arguments, Judge Garland E. Burell Jr. added five months to Mrs. Henderson's prison sentence and added eight months to Mr. Henderson's prison sentence. See, "California Couple Sentenced for Helping Clients Evade Taxes," by David Cay Johnston, New York Times (2/23/2001).