DEFINITIONS: “Worldwide income”
EDITORIAL:
26 C.F.R. § 1.1-1(b) is the origin of “worldwide income”, even though it doesn’t use that term. What it does say is:
“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 last clause—“from sources within or without the United States”—is the regulatory articulation of the worldwide income principle, even though the phrase itself isn’t used.
So while “worldwide income” is a common shorthand in tax commentary and IRS publications, it’s not a statutory or regulatory term of art. Instead, it’s inferred from language like this, and from the structure of the Code itself—especially:
- 26 U.S.C. § 61: Defines gross income as “all income from whatever source derived.”
- 26 U.S.C. § 911: Allows exclusion of foreign earned income, which only makes sense if such income is otherwise taxable.
- Judicial interpretations, like Cook v. Tait, which affirm Congress’s authority to tax citizens on income earned abroad.
It would seem the “worldwide income” scam occurs through 863 via 1.861-8. What this means is that certain U.S. (government) sourced income makes its way to the U.S. person abroad via a foreign country through the “Special rules for determining source” under sec. 863.
The practical effect of this is that the U.S. person is taxed on foreignS income from a foreign geographical source and U.S. sourced (domesticS) income from a foreign geographical source as well. This gives them the ability to say a U.S. person is taxed on worldwide income—which is true—it’s just that the U.S. person would not be taxed on ALL worldwide income.
“worldwide income” is limited by Internal Revenue Code , 26 U.S.C. Subtitle A, Chapter 1, Subchapter N, Part I, which identifies ALL “income” a “taxpayer” can earn as “foreign income”
26 U.S. Code Subtitle A Chapter 1 Subchapter N Part I – SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME
Notice there are two different references to “income from [geographic] sources without the United States”?
- Subchapter N, Part I, § 862 (relating to foreign person income); and
- Subchapter N, Part III (stated within the part’s heading itself)
Because 1. relates to “foreign income” (read: foreign person income), it follows from the context that 2. Part III is attributable to U.S. persons.
For an idea of what “foreign” means in the context of “foreign income”, See:
What YOUR GOVERNMENT Thinks “Foreign” Means, FTSIG
https://ftsig.org/what-your-government-thinks-foreign-means/
26 C.F.R. 1.1-1(b): Citizens or residents of the United States liable to tax.
26 C.F.R. §1.1-1 – Income tax on individuals.
(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. Pursuant to section 876, a nonresident alien individual who is a bona fide resident of a section 931 possession (as defined in § 1.931-1(c)(1) of this chapter) or Puerto Rico during the entire taxable year is, except as provided in section 931 or 933 with respect to income from sources within such possessions, subject to taxation in the same manner as a resident alien individual. As to tax on nonresident alien individuals, see sections 871 and 877.
26 C.F.R. 1.861-8(f)(3)(i): Computation of taxable income from sources within the United States and from other sources and activities.
(f) Miscellaneous matters—
(3) Special rules of section 863(b)—
(i) In general. Special rules under section 863(b) provide for the application of rules of general apportionment provided in §§ 1.863-3 to 1.863-5, to worldwide taxable income in order to attribute part of such worldwide taxable income to U.S. sources and the remainder of such worldwide taxable income to foreign sources. The activities specified in section 863(b) are—
(A) Transportation or other services rendered partly within and partly without the United States,
(B) Sales of personal property produced by the taxpayer within and sold without the United States, or produced by the taxpayer without and sold within the United States, and
(C) Sales within the United States of personal property purchased within a possession of the United States.