Why do the regulations say that "Section 861 and following determine the sources of income for the purposes of the income tax?
Can't you read?
Section 861 unambiguously tells you that if compensation for labor of services is earned within the United States that must be included in the calculation of gross income as income from a source within the United States. Only nonresident aliens under specific circumstances are excepted under the section.
Sec. 861. Income from sources within the United States
(a) Gross income from sources(activities) within United States
The following items of gross income shall be treated as
income from sources(activities) within the United States:(3) Personal services
Compensation for labor or personal services performed in the United States;EXCEPT that compensation for labor or services
performed in the United States shall not be deemed to be income
from sources within the United States if -(A) the labor or services are performed by a nonresident
alien individual temporarily present in the United States for a
period or periods not exceeding a total of 90 days during the
taxable year, ***
Furthermore, we know from the following:
26 USC 7805(a) Rules and regulations
(a) Authorization - … the Secretary [of the Treasury] shall prescribe all needful rules and regulations for the enforcement of this title [Title 26]…" [26 USC § 7805]Thus under amplifying Treasury regulations for 26 USC 1, 26 CFR 1.1-1(a),(b)
Sec. 1.1-1 Income tax on individuals.
(a) General rule. (1) Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a nonresident alien individual.(b) Citizens or residents of the United States liable to tax. 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.
that United States Citizen are subject in a more absolute sense from section 1.
No need to resort to IRS tactics, I'm just engaging in a friendly discussion here.
Section 861 unambiguously tells you that if compensation for labor of services is earned within the United States that must be included in the calculation of gross income as income from a source within the United States. Only nonresident aliens under specific circumstances are excepted under the section.
Sec. 861. Income from sources within the United States
(a) Gross income from sources(activities) within United States The following items of gross income shall be treated as income from sources(activities) within the United States:
Okay, so bear with me here and parse this sentence with me:
The following items (what follows is a list of ITEMS, not a list of SOURCES) of gross income (what follows is a list of ITEMS of GROSS INCOME) shall be treated as income (NOT treated as taxable income, but as INCOME) from sources (activities) (What is a SOURCE or ACTIVITY? This paragraph does not say.) within the United States.
You have a list of items of gross income, which includes compensation for labor or personal services as an item of gross income. That is an item of income, not a source of income. If the labor was performed within the United States, then it is an item of gross income for which the source, whatever that may be, must be treated as though it is "within" the US. This says nothing about what the source is.
You are treating "income from sources" as if it were a single noun that defines the term "source," which it is not doing. Elsewhere in the regulations, there are references to specific sources.
And regardless, it is unwarranted to jump to the conclusion that all sources of income are automatically taxable. If the term "source" is defined in the code, which it is, saying "all sources" or "whatever source" is no different than when the code says "all firearms" in referring to sawed-off shotguns and landmines but not bolt-action rifles.
For example, if you were a Canadian, doing consulting work for the XYZ Canadian company within the US - say, doing a software installation for one of their US clients - and that company has no presence in the US other than you. You will receive an item of gross income in the form of the compensation for your labor, from the source of XYZ Canadian company. This paragraph states that the XYZ Canadian company, as the source, is considered to be WITHIN the US, even though it's a foreign corporation, since the labor was performed within the US.
Now, 26 CFR 1.861-8(a) states, "The rules contained in this section apply in determining taxable income of the taxpayer from specific sources and activities..."
Not any old source whatsoever, but SPECIFIC sources. In order to determine taxable income, you need to build "statutory groupings":
"[T]he term 'statutory grouping' means the gross income from a specific source or activity which must first be determined in order to arrive at 'taxable income' from which specific source or activity (See paragraph (f)(1) of this section.)" [26 CFR § 1.861-8(a)(4)]
So, in the example above, we have a statutory grouping of an item of gross income (compensation for labor) from a specific source (XYZ Corp) that is treated as "within" the United States (since the labor was performed in the US), involving a foreign corporation, XYZCorp in Canada.
"The rules contained in this section 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. See paragraph (f)(1) of this section for a list and description of operative sections." [26 CFR § 1.861-8(a)(1)]
Now, to determine taxable income, we go to the list of operative sections in paragraph (f)(1), as instructed in the regulations TWICE, in both 8(a)(1) and (4):
“The operative sections of the Code which require the determination of taxable income of the taxpayer from specific sources or activities and which gives rise to statutory groupings to which this section is applicable include the sections described below.
(i) Overall limitation to the foreign tax credi...
(ii) [Reserved]
(iii) DISC and FSC taxable income… [international and foreign sales corporations]
(iv) Effectively connected taxable income. Nonresident alien individuals and foreign corporations engaged in trade or business within the United States...
So in our example, the source of the item of gross income (compensation for labor) was a foreign corporation (XYZCorp) engaged in business (consulting) within the United States, and is here falling under an operative section that requires determination of taxable income.
"The operative sections of the Code which require the determination of taxable income" do not list anything that is applicable to a US citizen living and working exclusively within the United States.
I know it's hard to follow this line of reasoning, it's probably deliberately hard, in fact.