In addition paying $5 million in back taxes, Wesley Snipes has been sentenced to three years in jail for failing to file tax returns as required by law. In his plea for leniency, Snipes asserted that the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. protestor cheats who convinced him that he had no obligation to pay taxes were “wolves and jackals,” but to no avail.
We dissected the “§ 861 Argument” that Snipes fell for here:
Share this articleSnipes has relied on the “§ 861” argument, which asserts that only items listed in Section 861 of the Internal Revenue Code are taxable, and therefore, the domestic income of U.S. citizens is not taxable.
If only. All income, earned inside and outside the country, of U.S. citizens is taxable under Sections 1, 61, 63, and others. Section 861, and accompanying regulation 26 C.F.R. § 1.861-8, list what income is earned “inside” the country, and that’s relevant only to non-residents and foreign corporations because they only pay tax on domestic income. The list is typically not important for U.S. citizens, because they are taxed on all income, whether it is earned domestically or foreign. (One exception is that U.S. taxpayers who earn income overseas can receive a credit for taxes paid overseas, and the § 861 list can be used to determine what qualifies for the credit.)
Even putting that aside, among the taxable items on the § 861 list is “[c]ompensation for labor or personal services performed in the United States.” § 861(a)(3). So any income earned in the United States is taxable even under Section 861. IRS regulations re-iterate this point, stating:
“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.”
26 C.F.R. § 1.1-1(b). § 861 advocates argue that regulation § 1.861-8 (which provides more detail on types of income that are to be treated as “domestic”) overrides § 861(a)(3), but laws always override regulations.
The Internal Revenue Code is long and complicated, and we at the Tax Foundation work for a tax system that is simple and transparent, and doesn’t inhibit our economy with excessive burdens on individuals. But we’re not there yet. If someone tries to convince you that there’s no obligation to pay income taxes, remember that if it sounds too good to be true, it often isn’t true.