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The Fallacy of Larkin Rose’s 861 Argument

The 861 argument is totally erroneous on a variety of grounds, and  Larkin Rose has probably set the truth in taxation movement back about 10 years by promoting it as successfully as he has done.  What  is amazing is the lengths to which he and his advocates have gone in order to unravel what is essentially an irrelevant,[1] ninety-three page regulation that would have to be declared “void for vagueness” if it were “law” – when an understanding as why no one has to pay income taxes is really quite simple: there is simply no law (in my view) that makes anyone “liable” for the payment of income taxes.  What can be simpler than that?  

But that’s not all. In relying on the 861 argument - its advocates apparently ignore, or know nothing about numerous other aspects  related to income taxes. Their whole approach is based solely on a tunnel vision understanding that the only thing you have to know about the federal income tax is that only  “foreign source income” is subject to the tax.  Therefore,  according to 861 advocates, if one has foreign source “income” one is: (1)  “liable” for income taxes on such “income”; (2) required to pay taxes on that “income;” (3) required to file a return with respect to that “income”; (4) required to  keep books and records with respect to that “income”; (5) required to submit to IRS audits with respect to that  “income” – and, in addition, (6) since the income tax is based on “self-assessment,” those who have “foreign source income” are required, by law, to “self-assess” themselves for the taxes allegedly due on such “income.”  It has always been my belief and claim that no law requires any one to do any of those things - but 861 advocates obviously believe that there are laws requiring recipients of “foreign source income” to do all of the above.  I’m from Missouri – show me the law that provides for, or requires anyone to do any of the above.

In any case, to determine the basis of my beliefs and to decide if they are correct, one merely has to read my pleadings in connection with my current criminal prosecution and read what the government and the court have to say about these matters and see who is telling the truth – me or the government.     

But getting back to the 861 argument – its fundamental fallacy and overlooking all of its other fallacies - is that it is based on the assumption that the income tax is imposed on "sources" or "items" of “income” - rather than being an excise tax on “income” separated from those sources - therefore, say its advocates, it is important to determine where ones taxable “income” comes from.

In seeking to do this,  861 advocates concoct a distinction between "sources" of “income” and" items" of “income,” as is supposedly distinguished in section 61 - where no such distinction is actually made.  In any case, it would be a distinction without a difference.

Since the term "income" referred to in Code Section 61 refers to “income” received in the “constitutional sense” and not income received in the “ordinary sense,” the “source” of that “income” is immaterial as to whether or not it is taxable.   Obviously, if a corporation were to receive “foreign source income” but did not have a “profit” for that taxable year, if would pay no income taxes on its “foreign source income.”  Since section 61 does not make a distinction between corporations and individuals, how could the law require individuals to pay income taxes on “foreign source income,” but not corporations?  

While the above example should be enough to expose the entire fallacy of the 861 argument, I would simply call attention to what I wrote about the argument years ago, when I first addressed the argument.  I stated then that no court would ever sustain the argument (which, itself, would not make the argument invalid) since the argument provides the courts with a simple basis for rejecting it.  And sure enough, all the courts that that have heard the argument rejected it, for the reason I stated. [2]   

The following is what I said about the 861 argument years ago when I first wrote about it:    

The alleged definition of "Gross income" as used in Code Section 61 attempts to be all-inclusive, and that is what the courts will rule. No court is going to rule that the all inclusive phrase "from whatever source derived" as contained in the statute,  excludes some "sources" of income such as “foreign source income” as is allegedly excluded by the regulation.

If one accepts the fallacy that what Section 61 purports to tax are "sources" or "items" of revenue (and not "profit"), then the revenue from all "sources" will be held to be taxable.

Read the law.  That's what it says - if you accept its basic fallacy. Once you understand that Section 61 only purports to tax corporate profit[3] (which advocates of the 861 argument appear not to understand at all), you realize that it makes no difference where your items of revenue come from, either foreign or domestic sources - since the tax is only allegedly imposed on "profit," not on the individual "items" or "sources" that produced it.

As long as you do not have a "profit" (and individuals can not have a profit) you have received nothing that can possibly fall within the meaning of "Gross income" as that term is used in Code Section 61.

That is what the Brushaber Court (240 US 1) said was the whole purpose of the 16th Amendment. (See page 198 of "The Great Income Tax Hoax") The Supreme Court said in that decision, "The whole purpose of the 16 Amendment" was to separate a tax on income "from a consideration of the source" that produced the income.[4]

However the whole basis of the 861 argument is to focus on, and consider the "sources," that allegedly produced your revenue. Therefore the advocates of the 861 argument admit to not knowing what the 16 Amendment and the Brushaber decision were all about.

What is also incredible is that advocates of the 861 argument believe that argument is more fundamental as to why people might not to pay income taxes, than the fact that no statute exists that makes anyone (American citizens or resident aliens) even "liable" for the payment of income taxes - regardless of where their revenue comes from.

And while the Code provides a different definition of income for Americans living abroad than those living here, it is my claim that even Americans living abroad don't have to pay federal income taxes.

So advocates of the 861 argument close their eyes entirely to the fundamental fact that there are no provisions making Americans liable for income taxes regardless of where their revenue comes from.

In addition to everything else, 861 advocates also overlook that the income tax is still - legally - based on "self assessment."

This means that if you don't assess yourself with an income tax liability, under the law - you can't owe any income taxes regardless of where your revenue comes from or what produced it. So, in addition to everything else, 861 advocates admit to not even knowing about the "self-assessment" nature of the income tax.

In addition to that, 861 advocates claim that according to par. 8f of 861, I would have to file a return and pay income taxes on revenue I might have received from the extraction of foreign oil and gas; and certain other types of revenue the character of which I can't even begin to understand.

The point is, I don't care where anybody's revenue comes from, they don't have to file returns and pay income taxes on any of it for a variety of reasons - which apparently the advocates of the 861 argument know nothing about.

For example: Since all information on a tax return can be used against you, how can the law require you to file and pay income taxes even on sources of revenue allegedly reportable under 861? The answer is no law requires you to do so - for that very reason.

And lastly since all Americans have a constitutional right not to pay a federal tax which is not imposed either pursuant to the rule of apportionment or the rule of geographic uniformity (read the Brown decision posted on my web site where this is explained in detail),[5] and since the income tax is not imposed pursuant to either rule, its payment can not be made mandatory - regardless of where your revenue comes from.

And an understanding of this simple concept is far more valid and relevant than all the complicated gobbledygook upon which the 861 argument is based.

It is also obvious that pursuant to the wording of Code Section 61 only a corporate profit can fall within the meaning of "Gross income" - and "wages" "salary" and "compensation for personal services" simply do not fall within that definition.

As a matter of fact, these items were specifically removed from Code Section 61, even though they specifically appeared in Code Section 22 (the forerunner of Code Section 61) of the 1939 Code as shown in Exhibit G of "Schiff Report" 6-2.

And your understanding of this is far easier to use in explaining why "wages" and "compensation for personnel service" can not be taxable as income, rather than seeking to explain why such items do not fall into the items of allegedly taxable "sources" supposedly listed in Treasury Regulation 861.

However, there is yet another reason why the 861 argument is nonsense. Code Section 861 occupies 2 pages in the Code - but its alleged Regulation runs to 92 pages. Frankly, I get lost trying to understand it. But why do I have to understand it?

The law itself is very simple to understand and it tells me that nothing I receive in the form of revenue falls within the meaning of "Gross income" and is not taxable for a variety of other reasons. So why do I have to bother digesting 92 pages of complicated legalese?

The Regulation itself does not have the force and effect of law anyway. If you check, you will see that the support for Treasury Reg. 861 is always shown to be T.Ds (Treasury Decisions), not Code Section 861.

So the Regulation, not being legislative, is not even binding on the public (Though it is binding on the IRS, but who cares?).

In addition to everything else, the language of 861 is so complicated that I don't even believe that it says what its advocates say it says - that only 12 or so items fall within the sources of income that can be taxable to Americans.

As I read the Regulation, there seems to be a whole list of items in 861-1 that appear to be taxable to Americans as "income from domestic sources."

But apart from 861 there is 862 and 863 and 864 all complicated gobbledygook, and all focusing on the alleged taxability of various "sources" of revenue - when "sources" of revenue are not even made subject to the tax in the first place and no law requires anyone to pay income taxes in the second place - so why bother trying to decipher all that legalese.

Try reading Reg. 861, 862, 863 & 864. So if anybody seriously believes in the fundamental importance of Treas. Reg. 861 they are admitting to being ignorant concerning a whole range of issues involving income taxes.

Now having said that - I am aware that some people who have made the effort to understand the 861 argument and present it so it does makes some sense have been able to confuse IRS agents with it. Fine. maybe, in some cases making an erroneous argument can be more effective than making a valid one - based on the fact that "income" means a corporate profit.[6]

However, those who use my material don't bother arguing "the law" to IRS agents anyway. Our approach is based on merely asking the agents to show us the law that authorizes them to do whatever it is they are trying to do, and we will pay the tax.

We are not going to waste our time explaining or debating the meaning of "income" with IRS agents. For those who want to do that, maybe the 861 argument is effective - but such people shouldn't kid themselves into thinking that they are making a legally valid argument. But if it works for you, fine - be my guest.

Now, while some may be able to confuse IRS agents with the 861 argument, I believe it will not fly at all in any court. The fact that it won't fly in court doesn't necessarily mean that the argument is invalid.

The fact that the law doesn't authorize a tax on wages also doesn't "fly" in our courts - as of today. But it certainly will fly and prevail some day, since it is a correct statement of the law, while the 861 argument is not.

I believe that those making the 861 argument will find themselves in Tax Court (a make believe court, I know), either in connection with challenging a "Deficiency Notice" or appealing a Collection Due Process "determination" - and they will base their position on the 861 argument. And the Tax Court will hold the 861 argument, in both cases, "frivolous," and may even impose sanctions on those who raise it. I hope I am wrong in this, but this is what I expect will happen.

In the end, the 861 argument will fade away, as will those who have based their reputations on it. 

More On the 861 Argument

When I first came across the 861 argument, I didn’t pay much attention to it because its erroneous character was immediately apparent – as covered above.

I also never sought to expose the fallacy of the 861 argument, because I don’t have time to address all of the erroneous arguments that are advanced in the anti-income tax movement. I was only motivated to do so when I did the piece on Thurston Bell, since his reliance on the 861 argument merely underscored how little Thurston Bell actually knows about income taxes.

However, yesterday, in cleaning out my files (in connection with our move to new offices), I came across an article entitled “Taxable Income” by Larkin Rose.

Since it was only 6 pages long, I though I’d read it. I didn’t have to read very far to discover where Larkin Rose (who, I believe, was the originator of the 861 argument) went wrong.

Under the caption “13) Cover-Up of 1954,” he writes,

“In 1954, the Code underwent a major rearranging and numbering (and to some extent, rewording). This change-over did not substantially change the law itself, but simply rearranged. it.”

Larkin Rose couldn’t be more wrong. Congress, in going from the 1939 Code to the 1954 Code, fundamentally and significantly changed the income tax “laws.”

For one thing, Section 11 of the 1939 Code provided that income taxes had to be “paid.” Such a provision was removed from the 1954 Code, and nowhere in the 1954 Code does the law require that income taxes have to “be paid.”

If this one fact alone does not constitute a “substantial change” in the law, then I don’t know what would.

In addition, all of the numerous references to the IRS (actually the Commissioner) that were in the 1939 Code were removed from the 1954 Code, and consequently the IRS was given no authority or power to enforce the provisions of the 1954 Code as it had been given such authority in the 1939 Code.

In addition, Section 22 of the 1939 Code listed “sources” or “items” which presumably were to be taxed as “income.” No claim was made in the 1939 Code that it sought to “define” the meaning of “Gross income.”

By contrast, Section 61 of the 1954 makes no attempt to list items that were to be taxable as “income.” Instead, Code Section 61 of the 1994 Code claimed to “define” the meaning of “Gross income,” (but failed to do so, for reasons I need not get into here, but which are fully explained in my books and tapes) and gave examples of items that presumably fell within that meaning.

But remember, the tax was to be imposed ON “income” (whatever that term means), but not on the listed items themselves. If the tax were to be imposed directly on those listed items, the tax would have to be apportioned – in order not to run afoul of the apportionment provisions of the Constitution and the Pollock decision, which, remember, was not repealed by the 16th Amendment.

Another big change between the 1939 Code and the 1954 Code is how they treated the meaning of a “deficiency.” The 1939 Code allowed the Commissioner of Internal Revenue to determine a “deficiency” even when no return was filed and no tax due was shown on any return.

No such authority is given to the IRS in the 1954 Code. Pursuant to the provisions of 6211 of the 1954 Code, only the Secretary of the Treasury (or his delegate, and not the Commissioner) can prepare a “deficiency” and only “if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon.”

And since 6211 is not supported by a legislative regulation, Section 6211 is really a benign statute. According to the actual provisions of the 1954 Code, if you do not file a tax return or if you file a return and show no tax due, you actually fall outside the provisions of the 1954 Code, and the income tax “laws” can not apply to you. Not so according to the provisions of the 1939 Code.

The 1939 Code allowed the IRS to subject you to the provisions of the 1939 Code, even if you didn’t file a return or show a an income tax due.

Basically in changing the Code as it did, Congress sought to bring the Code into conformity with a number of early, Supreme Court decisions that had held, among other things, that: 1) the 16th Amendment did not “amend” the Constitution, nor give the government any new taxing power, and 2) the effect of the Amendment was merely to allow the government to put an excise tax on corporate profit – a power Congress always had.

In changing the “law” as it did, Congress sought to make the 1954 Code constitutional, whereas the 1939 Code was unconstitutional on a variety of grounds.

And Larkin Rose basis much of his 861 argument on the provisions (and regulations) that apply to the 1939 Code – laws that Congress repealed when it went to the 1954 Code.

It is understandable how Larkin Rose missed these changes. Neither Congress nor the billion-dollar tax industry that feeds on the preparation of income tax returns and the payment of income taxes wanted these changes publicized.

In summation, the 861 argument rests on Larkin Rose’s mistaken belief that there was no “substantial change in the law” as between the 1939 and 1954 Codes. How wrong could an assumption be? If this doesn’t put the final nail in the coffin of the 861 argument, then I don’t know what would.

Irwin Schiff



[1] Since the authority for this regulation, as shown at the end of the Regulation,  is  Treasury Decision 8785 (and not Code section 861 itself), and since Treasury Decisions do not have the “force and effect of  law,” neither are regulations based on them.  This is a technique used by the government to mislead the public concerning the actual “force and effect” of income tax regulations as they appear in 26 C.F.R.  If you check the authority for regulations as shown  in 27 C.F.R., which deal with liquor, tobacco and firearms taxes,  you will see that the authority for those regulations are generally shown to be statutes  – either the statutes at large or Title 26 statutes, or  often both are shown.  No such statutory authority are ever shown in CFR 26 with respect to regulations that apply to the enforcement of income taxes.

[2] I believe that, so far, only U.S. Tax Courts have rejected the 861 argument. However, since the U.S. Tax Court is not court of law (it is actually a government agency masquerading as a court), no Tax Court judge had any jurisdiction to even consider the 861 argument, let alone rule upon its legal validity. However, since Larkin Rose has now been charged with several counts of willful failure to file income tax returns, he now has an opportunity to argue the legal validity of the 861 argument in a court of law.  However, he must do this in the form of a pre trial motion to dismiss the charges against him on that basis.  Once he goes to trial, he will only be able to argue that his “good faith” belief in the 861 argument persuaded him that he was not required to file.  And as long as the jury is persuaded he had such a “good faith” belief, (as I am sure he has), they should find him “not guilty.”  However, such a “not guilty” verdict, will not establish the legal validity of the 861 argument, only his “good faith” belief in it – as, for example, a midget might establish that he had a “good faith” belief that he isn't required to file because he's a midget.  Naturally the more rational is a person’s good faith belief, the more likely will a jury believe it – and certainly Larkin Rose’s belief is “rational” and believable, even though it is incorrect as a matter of law - as the judge will instruct the jury.  However, in instructing the jury on why the 861 argument is not law (which itself will be misleading, since Larkin’s trial should be about what Larkin believes the law to be, and not what it actually is) the judge will actually misinform and mislead the  jury as to what the law really is.

[3] Since corporate profit falls within the meaning of “income” in the “constitutional sense,” since a corporation’s profit is “separated” from the “sources” that produced the profit, and a tax on a corporations profit is not a direct tax on the individual “sources” that produced the profit.

[4] At the time I wrote this, I had not as yet filed my motions to dismiss – which, since they are now posted to this web site, provide a far more comprehensive understanding then what I was saying here.  

[5] When this was originally written no Memorandum of Law was then posted on my web site as to why the I income tax was not “traceable” to any of the powers conferred on Congress to “lay and collect taxes.”

[6] However, if I wrote this piece today, I would have been more technically correct,  by stating: “’income’ as used in section 61 means  ‘income’ used in its ‘constitutional sense’  as in a corporate profit.” 

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