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The '861' Issue Rumbles On

Mike Godfrey,, New York

05 December 2000

See Discussion Forum Topic: IRS Tax Loophole - add a comment to the brand new Investors Offshore Discussion forum

Last week published a story on the '861' affair in the US (at reporting that some American citizens and companies have found a loophole in the IRS Tax Code which they say allows them, quite legitimately, to avoid paying Federal income tax. The article has generated quite a stream of correspondence, and without taking any sides on the issue, we publish here two of the more interesting contributions we received.

We opened a topic thread in our Discussion Forum on this point, so if anyone else would like to express a point of view we'd be more than happy to accommodate it! How about the IRS?

First is a letter from Mr Larken Rose, who is well-known as one of the leading 'gurus' on the 861 issue. Mr Rose writes as follows:

Dear Sirs,

This is regarding an article on your site, concerning what has become known as the "861" issue.

As someone at the forefront of this legal issue, I thought I'd share my thoughts with you, and you can do with them whatever you like (print them, ignore them, etc.).

First, not to complain about or criticize the article, but simply to clarify, I thought I'd address a couple technical issues regarding the issue. For example, the issue is not just that the IRS "has no authority to collect" federal "income taxes" from most people, but that no tax has ever been IMPOSED on the income of most Americans. (Of course, it would follow that the IRS also then has no authority to collect.)

The synopsis of the issue in the article, while close, is not quite accurate. (Admittedly, it's not a very "sound bite"-friendly issue.) Compensation for services (whether called "wages," "remuneration," etc.) actually CAN be taxable, but only if derived by those engaged in specific activities (described in the Treasury regulations as "specific sources"). In short, only income earned from certain activities in international or foreign commerce are subject to the tax (as only such transactions are generally subject to United States federal jurisdiction).

As for the content of the article, it is a great leap forward from the hatchet job of the issue which appeared in the New York Times (front page, November 19). Your article states that "what seems remarkable is that the IRS has not attempted to take enforcement action against any of the thousands of US citizens who are defying it, although it knows perfectly well what is going on." Like any other bully, the IRS will pick any fight it thinks it can win, but won't risk a possible loss. (For bullies, reputation is everything.)

After citing one of the meeting transcripts from my web site (which I appreciate), the article agrees that "the IRS certainly doesn't seem to put forward strong arguments against the '861' position." I would add that this was not simply due to the ignorance of a few low-level IRS agents (which by itself wouldn't be surprising). They brought in a "specialist" in such issues, who admitted to having contacted the IRS District Counsel to address the
matter. And still, after being given the entire position and all supporting citations in writing well in advance, they could only flounder and evade (as the transcript shows). Months letter, at a SECOND meeting on the issue, they still had nothing substantive.

Your article does say that people such as myself "are behaving selfishly, in the sense that it must be inequitable for a tiny minority to get a benefit which if extended to all citizens would bring the country to its knees." The reason my web site exists is precisely because I do NOT want to be the only one seeing the benefit. (And while it will bring the IRS to its knees, I believe removing that giant parasite will bring the country to its FEET.)

What I must disagree with the most is when the article says that either people like myself are wrong, or "the law is badly drafted, which could be put right by Congress in a matter of minutes." This piece of the law was not a mistake, and is not a loophole. It also cannot be "put right" by Congress (or they would have done it some time in the last 87 years). I respectfully invite your staff, your readers, and anyone else, to visit my site at (there is NOTHING for sale there), and to download my free report on the legal issue. My report includes the history of this deception, tracing it back through the years, showing that this was not at all a case of something being "badly drafted."

Again, I do appreciate the article, and the fact that, unlike most of the mainstream media, the author didn't feel the need to go into a mouth-frothing frenzy of anger over the issue. I hope my website will be of value to you if you choose to look further into this issue.


Larken Rose

And here is a letter from Dr Tom Clayton:

Mr. Godfrey:

Statutory law (laws passed by Congress) is written literally and must be read literally; the law means what the words say. To understand how the "income tax" deception has occurred, the key is to go back to 1916 and discover what the Supreme Court and Treasury Department said about the nature of the income tax being an excise tax (see below). It was relatively easy to hide this from the public, but once found, everything else falls into place.

When you read the actual law (instead of relying on teaching materials promulgated by accountants and other "tax professional" businesses who have made huge amounts of money off the deception, having been deceived as well), you discover that the entire structure of the "income tax" is built upon the fact that this tax is an excise or "indirect" tax, where what is really being taxed is the source of the income, not the income itself. This critical fact has been withheld from the public for over 87 years, and the "income tax" deception depended on it.

From "Taxable Income":

As the Supreme Court and the Secretary of the Treasury have repeatedly stated, the federal income tax is (and has always been) an indirect "excise" tax. Excises, generally speaking, are taxes imposed on certain activities or privileges. In light of this, there are some interesting comments in the Congressional Record from March 27, 1943 (page 2580). A statement is included by a "Mr. F. Morse Hubbard, formerly of the legislative drafting research fund of Columbia University, and a former legislative draftsman in the Treasury Department" (clearly someone whose job would require a comprehensive understanding of the proper application of the law). His comments include the following:

"The income tax is, therefore, 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 which they produce. The income is not the subject of the tax: it is the basis for determining the amount of the tax."

The income tax is imposed on "income from whatever source derived" (minus deductions). The mere receipt of income, by itself, is not (and could not be) the subject of this excise tax. It is the "source" which is the subject of the tax, and the amount of income received from that "source" is what is used to determine the amount of tax due. The above citations coincide well with the fact that the section of regulations for determining taxable income (26 CFR § 1.861-8) states that it applies only to income "from specific sources and activities."
And the statutes and regulations under the part which "determine[s] the sources of income for purposes of the income tax" all apply only to these same "specific sources and activities," which are all related to international or foreign commerce.

Without knowing that the income tax was NOT a direct tax on incomes (which it could not be under the Constitution, absent apportionment), nobody, including tax professionals, knew to look for the sources of income, ignoring cross-references to 861 at the bottom of 26 USC 61, where gross income is defined as "all income from whatever source derived." This is almost universally misread as "no matter where it comes from," but this is incorrect. Every time that the law uses a unique word such as "source", then you must let the law tell you what it means and how it is used. You cannot supply your own version of what you "think" it means. And, the 16th amendment did not permit the direct taxation of incomes without apportionment, as claimed by the IRS verbally but never in official legal documents. Rather, it was telling the courts that the income tax was an excise tax that did not require apportionment.

From "Taxable Income":

Brief mention should be made of the 16th Amendment to the Constitution, since there is a common but erroneous belief that the 16th Amendment expanded Congress' power to tax incomes. The purpose of the 16th Amendment, according to the Supreme Court in Brushaber v. Union Pacific (240 U.S. 1), and again in Stanton v. Baltic Mining (240 U.S. 103) was to make it clear that the income tax is, and has always been, an indirect "excise"
tax, which never required "apportionment." The Secretary of the Treasury agreed with the Court in Treasury Decision 2303.

"The provisions of the sixteenth amendment conferred no new power of taxation, but simply prohibited [Congress' original power to tax incomes] from being taken out of the category of indirect taxation, to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment." [Treasury Decision 2303]

And, as shown in Section 861 and the regulations thereunder, the only sources of income taxable under federal law are those areas over which Congress has jurisdiction under the Constitution, which are foreign and international commerce, as well as commerce in federal possessions. Congress has never had jurisdiction over intrastate commerce, which is why these sources of income cannot and have never been taxed under federal law (most incomes).

The Supreme Court has ruled over and over that Congress has no business in states' business, and why nobody questioned the fact that people were turning over intrastate derived incomes to the federal government in light of this before is surprising. Most current members of Congress and nearly all IRS employees do not understand what the law really says or why it has to say what it does. Congress cannot change the law overnight, unless they throw out the Constitution.

You need to read the complete and newest version of "Taxable Income," by Larken Rose which is free (, and you will see for yourself the exact wording of the law and WHY the law was written the way that it is. He even shows that the current regulations are consistent with prior regulations. A few lawyers in the Treasury Department and the statute writers were able to deceive the public by writing the law to "imply"that most incomes were taxed, while maintaining the literal truth, as the law must, in order for it to be Constitutional. The game is up, and the IRS knows it. We are obligated to obey the law, not misinterpretations of the law, and you cannot keep the truth hidden from the public any longer thanks to the Internet.

Many people in the 'tax protester' movement were right, but for completely the wrong reasons. Even today, some of them refuse to look at the evidence in the law because it conflicts with what they have been selling people for so many years, people who have gone to jail because their "stuff" left them hanging (meaning that it was incorrect and not the law). These "tax protestors" almost to a man failed to use the actual federal statutes and regulations to back their position.

As a medical doctor, I cannot afford to think a certain way because it was what I learned in medical school IF new information shows that I was wrong. I am obligated to help my patients by keeping current. The same goes for other "professionals", realizing of course that finding out the literal truth of the income tax law generates huge amounts of denial, because it means that they have been doing things wrongly their entire professional lives, but there is no getting away from the wording of the law and the fact that as an excise tax, all contradictions about the "income tax" disappear. They were deceived as well, but some of them try to "hang on" because of the fact that they are the "experts" even when the evidence is right in front of them that they are wrong. And none of them can refute what Larken says. If the truth were something else, then it would be easy to show the part of the statutes and regulations that did so. And it also turns out that the government has never in any criminal trial been able to show where the law taxed domestic
incomes, and now we know why.

It simply made no sense when it was said that "although nobody is required to file a federal income tax return, if they do not "volunteer" to do so, then the government will throw them in jail." IF your income (sorry, income source) is taxed, then you are required to pay taxes, like it or not. If your income source is not taxed, then you are obligated to do exactly nothing under the law.


Tom Clayton, MD

See Discussion Forum Topic: IRS Tax Loophole - add a comment to the brand new Investors Offshore Discussion forum


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