Avoiding “Effectively Connected”
“Effectively connected” is only used in the context of “nonresident aliens”. The only position this site takes is the Nonresident Alien Position. The definition of “effectively connected” is as follows:
26 U.S. Code § 864 – Definitions and special rules
(c)Effectively connected income, etc.
(1)General rule
For purposes of this title—
(A) In the case of a nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year, the rules set forth in paragraphs (2), (3), (4), (6), (7), and (8) shall apply in determining the income, gain, or loss which shall be treated as effectively connected with the conduct of a trade or business within the United States.
(B) Except as provided in paragraph (6) [1] (7), or (8) or in section 871(d) or sections 882(d) and (e), in the case of a nonresident alien individual or a foreign corporation not engaged in trade or business within the United States during the taxable year, no income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the United States.
The above is not really a definition, because it doesn’t explain the PURPOSE of “effectively connecting”. That purpose is to donate PRIVATE property to a PUBLIC use, a PUBLIC office, and a PUBLIC purpose through an election. If they told you that was the purpose, you wouldn’t “effectively connect” ANYTHING called “income”!
People filing the 1040NR naively think that by entering “income” in the “effectively connected” portion of the 1040NR, they are obtaining the ability to REDUCE their tax liability by taking “trade or business” deductions under 26 U.S.C. §162. However, something much more sinister is happening here.
The “effectively connected” section of the 1040NR is also used to list “income” such as “wages” from the W-2 in Block 1a of the 1040NR. If you enter earnings from the W-2 on the 1040NR form in the “effectively connected” section, you are converting your PRIVATE labor to a PUBLIC use, and thus VOLUNTEERING to be an uncompensated civil statutory ’employee” working for Uncle Sam for free! Putting your PRIVATE earnings from labor on the form makes the ENTIRE amount “income” even though it wouldn’t otherwise be, and thus, makes the income tax a “gross receipts” tax on PROPERTY, rather than merely on PROFIT
The regulations governing the submission of withholding agreements agree with these conclusions.
26 C.F.R. § 31.3402(p)-1 – Voluntary withholding agreements.
§ 31.3402(p)-1 Voluntary withholding agreements.
(a) Employer-employee agreement.
An employee and his employer may enter into an agreement under section 3402(p)(3)(A) to provide for the withholding of income tax upon payments of amounts described in paragraph (b)(1) of § 31.3401(a)-3, made after December 31, 1970. An agreement may be entered into under this section only with respect to amounts which are includible in the gross income of the employee under section 61, and must be applicable to all such amounts paid by the employer to the employee. The amount to be withheld pursuant to an agreement under section 3402(p)(3)(A) shall be determined under the rules contained in section 3402 and the regulations thereunder. See § 31.3405(c)-1, Q&A-3 concerning agreements to have more than 20-percent Federal income tax withheld from eligible rollover distributions within the meaning of section 402.
We must remember, however, that the above regulation is satisfied by merely submitting the W-4, even though it doesn’t identify itself as an “agreement”.
26 C.F.R. § 31.3402(p)-1 – Voluntary withholding agreements.
§ 31.3402(p)-1 Voluntary withholding agreements.
(b) Form and duration of employer-employee agreement. (1)(i) Except as provided in subdivision (ii) of this subparagraph, an employee who desires to enter into an agreement under section 3402(p)(3)(A) shall furnish his employer with Form W-4 (withholding exemption certificate) executed in accordance with the provisions of section 3402(f) and the regulations thereunder. The furnishing of such Form W-4 shall constitute a request for withholding.
So you aren’t really getting the Constitutionally required “reasonable notice” that you in fact are VOLUNTEERING UNLESS you actually read the statutes and regulations that implement the W-4.If they notified you that you were volunteering to make your entire earnings taxable and that you had the right to UNVOLUNTEER somewhere on the W-4, almost no one would do it!
Worst yet, if you decide NOT to “effectively connect” your earnings from labor by transferring W-2 amounts onto the 1040NR “effectively connected” section, you might ask whether they can then on the Schedule NEC (Not Effectively Connected). An examination of that form reveals NO BLOCK for writing in earnings from your labor, because they are NOT subject to income tax if they are NOT “effectively connected”, meaning VOLUNTARILY DONATED by you to a PUBLIC use, PUBLIC office, and PUBLIC purpose by writing them into block 1a of the 1040NR return!
Note that amounts withheld under Subtitle C for “employment” withholding are merely CREDITS to income taxes owed in Subtitle A AFTER one files a tax return. They are not “taxes” or “treated AS IF” they are “taxes” under Subtitle A and we have found any evidence to support this.
If you are compelled to submit a W-4 instead of the more proper W-8 for withholding purposes, upon later filing the 1040NR return, you can get all the W-2 withholding back, including Social Security deductions. This is because the W-2 withholding is a credit against taxes owed under Subtitle A, and if you owe no taxes, you can get the credit back.
The key thing to avoid “effective connection” of earnings is found in the following regulation:
26 C.F.R. §1.872-2 – Exclusions from gross income of nonresident alien individuals.
(f) Other exclusions.
Income which is from sources without the United States, as determined under the provisions of sections 861 through 863, and the regulations thereunder, is not included in the gross income of a nonresident alien individual unless such income is effectively connected for the taxable year with the conduct of a trade or business in the United States by that individual. To determine specific exclusions in the case of other items which are from sources within the United States, see the applicable sections of the Code. For special rules under a tax convention for determining the sources of income and for excluding, from gross income, income from sources without the United States which is effectively connected with the conduct of a trade or business in the United States, see the applicable tax convention. For determining which income from sources without the United States is effectively connected with the conduct of a trade or business in the United States, see section 864(c)(4) and § 1.864-5.
Note that YOU are the only one who can “effectively connect” your earnings to a privileged “trade or business” as indicated by the phrase “by that individual”. NO ONE ELSE can do that. The reason is that you are the owner of yourself and your property and therefore the ONLY one who can lawfully CONVERT or DONATE or DEROGATE that PRIVATE property to a PUBLIC USE, a PUBLIC OFFICE, and a PUBLIC PURPOSE to “effectively connecting” it. This was acknowledged by the U.S. Supreme Court when they held:
“Men are endowed by their Creator with certain unalienable rights,-‘life, liberty, and the pursuit of happiness;’ and to ‘secure,’ not grant or create, these rights, governments are instituted. That property [or income] which a man has honestly acquired he retains full control of, subject to these limitations:
[1] First, that he shall not use it to his neighbor’s injury, and that does not mean that he must use it for his neighbor’s benefit [e.g. SOCIAL SECURITY, Medicare, and every other public “benefit”];
[2] second, that if he devotes it to a public use, he gives to the public a right to control that use; and
[3] third, that whenever the public needs require, the public may take it upon payment of due compensation.”
More on the “trade or business” scam that is the VEHICLE for making the donation at:
The “Trade or Business” Scam, Form #05.001 (OFFSITE LINK)
https://sedm.org/Forms/05-MemLaw/TradeOrBusScam.pdf
Donating your property to the government and thereby CONVERTING it from PRIVATE to PUBLIC is only one of many ways you VOLUNTEER to pay income tax. Other ways are documented in:
How American Nationals Volunteer to Pay Income Tax, Form #08.024 (OFFSITE LINK)
https://sedm.org/Forms/08-PolicyDocs/HowYouVolForIncomeTax.pdf