ELECTIONS: When “gross income” includes more than profit
SOURCE: Gross Income Worksheet-Nonresident Alien, Form #09.080**, Section 4; https://sedm.org/product/gross-income-worksheet-nonresident-alien-form-09-080/
1. Introduction
The Sixteenth Amendment limits the term “income” and therefore STATUTORY “gross income” to “profit”.
After examining dictionaries in common use (Bouv. L.D.; Standard Dict.; Webster’s Internat. Dict.; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act of 1909 (Stratton’s Independence v. Howbert, 231 U.S. 399, 415; Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185) — “Income may be defined as the gain derived from capital, from labor, or from both combined,” provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle Case (pp. 183, 185).
Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy. The Government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word “gain,” which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. “Derived — from — capital;” — “the gain — derived — from — capital,” etc. Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived,” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; — that is income derived from property. Nothing else answers the description.
[Eisner v. Macomber, 252 U.S. 189, 206-208 (1920); SOURCE: https://scholar.google.com/scholar_case?case=6666969430777270424]
However, there are occasions where an ELECTION of some kind can EXPAND the definition of “gross income” in 26 U.S.C. §61 beyond mere PROFIT to encompass MORE than mere “profit”, such as “GROSS RECEIPTS”. That election happens by one of two methods:
- Electing U.S. person status under 26 U.S.C. §7701(a)(30), which makes YOUR status PUBLIC rather than private. This has the effect of making all property connected to you by the franchise mark PUBLIC as well, since a Social Security Number is mandatory for all U.S. persons.
- “Effectively connecting” your earnings by entering them on the 1040-NR return.
How do we know this? The 1939 I.R.C. defined “gross income” as “gains, profits, and” while the 1954 Code removed these words:
“SEC. 22. GROSS INCOME.
“(a) GENERAL DEFINITION.—`Gross income’ includes gains, profits, and [REMOVED in 1954 code] income derived from salaries, wages, or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . .” (Emphasis added.)[4]
This Court has frequently stated that this language was used by Congress to exert in this field “the full measure of its taxing power.” Helvering v. Clifford, 309 U.S. 331, 334; Helvering v. Midland Mutual Life Ins. Co., 300 U.S. 216, 223; Douglas v. Willcuts, 296 U.S. 1, 9; Irwin v. Gavit, 268 U.S. 161, 166. Respondents contend that punitive damages, characterized as “windfalls” flowing from the culpable conduct of third parties, are not within the scope of the section. But Congress applied no limitations as to the source of taxable receipts, nor restrictive 430*430 labels as to their nature. And the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted. Commissioner v. Jacobson, 336 U.S. 28, 49; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87-91. Thus, the fortuitous gain accruing to a lessor by reason of the forfeiture of a lessee’s improvements on the rented property was taxed in Helvering v. Bruun, 309 U.S. 461. Cf. Robertson v. United States, 343 U.S. 711; Rutkin v. United States, 343 U.S. 130; United States v. Kirby Lumber Co., 284 U.S. 1. Such decisions demonstrate that we cannot but ascribe content to the catchall provision of § 22 (a), “gains or profits and income derived from any source whatever.” The importance of that phrase has been too frequently recognized since its first appearance in the Revenue Act of 1913[5] to say now that it adds nothing to the meaning of “gross income.”
Nor can we accept respondent’s contention that a narrower reading of § 22 (a) is required by the Court’s characterization of income in Eisner v. Macomber, 252 U.S. 189, 207, as “the gain derived from capital, from labor, or from both combined.”[6] The Court was there endeavoring to determine whether the distribution of a corporate stock dividend constituted a realized gain to the shareholder, or changed “only the form, not the essence,” of 431*431 his capital investment. Id., at 210. It was held that the taxpayer had “received nothing out of the company’s assets for his separate use and benefit.” Id., at 211. The distribution, therefore, was held not a taxable event. In that context—distinguishing gain from capital—the definition served a useful purpose. But it was not meant to provide a touchstone to all future gross income questions. Helvering v. Bruun, supra, at 468-469; United States v. Kirby Lumber Co., supra, at 3.
Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that they compensate for damages actually incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable but not the additional amount extracted as punishment for the same conduct which caused the injury. And we find no such evidence of intent to exempt these payments.
It is urged that re-enactment of § 22 (a) without change since the Board of Tax Appeals held punitive damages nontaxable in Highland Farms Corp., 42 B. T. A. 1314, indicates congressional satisfaction with that holding. Re-enactment—particularly without the slightest affirmative indication that Congress ever had the Highland Farms decision before it—is an unreliable indicium at best. Helvering v. Wilshire Oil Co., 308 U. S. 90, 100-101; Koshland v. Helvering, 298 U. S. 441, 447. Moreover, the Commissioner promptly published his nonacquiescence in this portion of the Highland Farms holding[7] and has, 432*432 before and since, consistently maintained the position that these receipts are taxable.[8] It therefore cannot be said with certitude that Congress intended to carve an exception out of § 22 (a)’s pervasive coverage. Nor does the 1954 Code’s[9] legislative history, with its reiteration of the proposition that statutory gross income is “all-inclusive,”[10] give support to respondent’s position. The definition of gross income has been simplified, but no effect upon its present broad scope was intended.[11] Certainly punitive damages cannot reasonably be classified as gifts, cf. Commissioner v. Jacobson, 336 U. S. 28, 47-52, nor do they come under any other exemption provision in the Code. We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to 433*433 bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income. See Helvering v. Midland Mutual Life Ins. Co., supra, at 223.
[Commissioner v. Glenshaw Glass Co, 348 U.S. 426 (1955)]
Notice that they indicated above that the CONSTITUTIONAL definition of “income” in the Sixteenth Amendment, meaning PROFIT, recognized in Eisner v. Macomber, 252 U. S. 189, 207, did NOT apply. When the 1939 I.R.C. was recodified in 1954, Section 22 of the 1954 code was reworded in the new 1954 code probably related to the above case, and the words “gains, profits and” were removed from the recodified section, even though the above case says there was no substantial change in the meaning of “income”.
[11] In discussing § 61 (a) of the 1954 Code, the House Report states:
“This section corresponds to section 22 (a) of the 1939 Code. While the language in existing section 22 (a) has been simplified, the all-inclusive nature of statutory gross income has not been affected thereby. Section 61 (a) is as broad in scope as section 22 (a).
“Section 61 (a) provides that gross income includes `all income from whatever source derived.’ This definition is based upon the 16th Amendment and the word `income’ is used in its constitutional sense.” H. R. Rep. No. 1337, supra, note 10, at A18.
A virtually identical statement appears in S. Rep. No. 1622, supra, note 10, at 168.
They could do this, because 26 U.S.C. §61 is only used by privileged fictional “U.S. persons” not protected by the Sixteenth Amendment because they elected to receive privileges, while 26 U.S.C. §871(a) is used by nonresident aliens who are still protected by the Sixteenth Amendment because they made no elections.
The current 26 U.S.C. §61, which derives from the 1986 I.R.C. and is the same as the 1954 I.R.C. is used only by “U.S. persons” and “trade or business” earnings, removes the words “gains and profits” from the 1939 I.R.C. and currently reads:
26 U.S. Code § 61 – Gross income defined
(a) General definition
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
26 U.S.C. §871(a), however still invokes the words “gains” and “profit” out of deference to the Sixteenth Amendment. The
26 U.S. Code § 871 – Tax on nonresident alien individuals
(a)Income not connected with United States business—30 percent tax
(1) Income other than capital gains
Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as—
(A) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
26 U.S.C. §871(b) “trade or business” earnings doesn’t even mention profit or gains because EVERYTHING is taxable on gross receipts.
26 U.S. Code § 871 – Tax on nonresident alien individuals
(b)Income connected with United States business—graduated rate of tax
A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2)Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
Since item 1, Electing U.S. Person status is forbidden to Compliant Members, the following subsections will delve into item 2 above.
This subject is EXTREMELY important because it permits you to EXCLUDE from entering ANYTHING on the 1040-NR return as “income” if you don’t CONSENT to effectively connect that amount. We account for this option recognized by law to EXCLUDE earnings from the 1040-NR return with the following language in our 1040-NR Attachment;
5. Blocks 1 to 15: INCOME EFFECTIVELY CONNECTED WITH U.S. TRADE/BUSINESS
1. See definition of “effectively connected” later in section 11.
2. This section contains earnings described in 26 U.S.C. §871(b) from “sources within the United States” and is limited to earnings voluntarily associated with the “trade or business” excise taxable franchise defined as “the functions of a public office” in 26 U.S.C. §7701(a)(26). Everything listed in this section is subject to “trade or business” deductions under 26 U.S.C. §162. “United States” in this context means the government as a corporation, and not a geography. 26 C.F.R. §1.871-2(f) indicates that I am the only one who can “effectively connect” earnings in this section (“by that individual”). Thus, you have no authority to add ANYTHING to this section that I myself did not add, and certainly no type of “income”.
3. Values listed in this section are all zero, because:
3.1. The 1040-NR Instructions relating to Block 1a (wages) state: “Don’t include any income on line 1a Form 1040-NR that isn’t treated as effectively connected”. Thus, I can’t include any earnings from labor that I don’t consent to donate to a public use in order to procure the “benefit” of “deductions” under 26 U.S.C. §162 in connection with a “trade or business’.
3.2. There is no place on the Schedule NEC to enter earnings from my personal labor, thus recognizing that I can only put it on a tax return if I donate it to a public use by “effectively connecting” it.
3.3. Submitter does not consent and has no delegated authority or lawful authority to consent to “effectively connect” his/her earnings or him/her self to a statutory “trade or business” or public office either by entering it on the 1040-NR form or associating it with a statutory SSN/TIN franchise mark. He/she as the absolute owner of both is the only one authorized by law to do so as required by 26 C.F.R. §1.872-2(f) and as required by the Bill of Rights protecting all his/her private property.
3.4. Earnings are therefore expressly excluded from “gross income” under 26 C.F.R. §1.871-7(a)(4) in this section. It would constitute fraud and possibly a violation of 18 U.S.C. §912 for me to claim otherwise, as proven by: The Trade or Business Scam, https://sedm.org/Forms/05-MemLaw/TradeOrBusScam.pdf.
[1040-NR Attachment, Form #09.077, Section 5; https://sedm.org/Forms/09-Procs/1040NR-Attachment.pdf]
2. Tactics to get you to surrender the “profit” limitations of 26 U.S.C. §871(a) in exchange for the “effectively connected” trap in 26 U.S.C. §871(b) to “Upsell” you to become privileged and pay more tax
The Sixteenth Amendment only permits “income” to mean “profit”. The income tax is an indirect excise tax on PROFT and not CAPTIAL, meaning “gross receipts”. But the I.R.C. uses several tricks to “upsell you” to surrender the “profit” and “gain” limitations of the Sixteenth Amendment in exchange for privileged deductions, and it stealthily exploits your own legal ignorance in doing so:
1. They equivocated with the term “United States” throughout the code so you falsely believe that it consistently represents the CONSTITUTIONAL “United States***” GEOGRAPHY rather than a the FEDERAL CORPORATION that it actually is. That way if you are an American National, you will falsely believe that you owe a tax on earnings within the exclusive jurisdiction of a constitutional state.
2. 26 U.S.C. §871(a) and the Schedule NEC only tax profit as required by the Sixteenth Amendment, which is NOT “gross receipts”, but only PROFIT. You pay a flat 30% tax on this PROFIT amount, which is higher than what the average American would pay if they “effectively connected” and took deductions and credits.
3. BEFORE you would feel motivated to “upsell” to by “effectively connected”, your own legal ignorance would have to make you think that 26 U.S.C. §871(a) is gross receipts and not just profit.
3.1. If you started by filing the 1040 return where it’s a VOLUNTARY gross receipts DIRECT tax, you would already be used to entering GROSS RECEIPTS on the 1040 return and probably would just continue in that BAD habit if you switched to the 1040-NR return and abandoned the “U.S. person” privilege.
3.2. The 1040-NR instructions never mention the words “gains or profit” in order to encourage you to make this FALSE presumption and CONTINUE this bad habit or entering GROSS RECEIPTS on the 1040-NR instead of only “profit” on the Schedule NEC. See for yourself:
| 1040-NR Instructions, IRS https://www.irs.gov/pub/irs-pdf/i1040nr.pdf |
3.3. Because your own legal ignorance about the INDIRECT EXCISE nature of the income tax on 26 U.S.C. §871(b), you would also feel more inclined to want to pursue deductions on the main 1040-NR return to. But in getting those, you have to DONATE the earnings to a PUBLIC use by “effectively connecting it”. In doing so, you surrender the protections of the Sixteenth Amendment under the Constitutional Avoidance Doctrine and the Public Rights Doctrine of the U.S. Supreme Court.
4. They also muddled the definition of “gross income” in 26 U.S.C. §61 as a tax on “gross receipts” rather than merely “profit” by not warning you in that section that it only pertains to U.S. persons, since “gross income” for nonresident aliens is covered in 26 U.S.C. §871. That way you would FALSELY believe that even for nonresident aliens, its DIRECT tax on gross receipts instead of only a profit tax.
The result at the end of the SOCIAL ENGINEERING pipeline baked into the nonresident alien filing process is that you:
- Unknowingly VOLUNTEER to pay a DIRECT tax on CAPITAL and GROSS RECEPTS (“trade or business”) instead of only profit as required by the Sixteenth Amendment. The only reason you would do this is because IRS maliciously kept you ignorant in the 1040NR instructions about the fact that Schedule NEC is only on profit while the 1040-NR is on gross receipts, just like the 1040.
- Pay on ALL EARNINGS from within a constitutional state PLUS federal territory because you think “United States” means that in the Constitution. 26 U.S.C. §871(a) is limited to geography while 26 U.S.C. §871(b) can apply anywhere and is nongeographical.
- Are forced to take privileged deductions to reduce the taxable income that is WAY bigger than the Sixteenth Amendment limitation on profit allows.
The “effectively connected” scam was invented in the 1966 Tax Act to allow you to DONATE your private earnings without knowing it, and to encourage you to do so by NOT telling you that you don’t need to because it’s a tax on profit and only paying tax on profit will always be cheaper than effectively connecting it. SCUM BAGS!
3. “Effectively Connected” Trap
“Effectively connected” is defined below:
26 U.S. Code § 864 – Definitions and special rules
(c)Effectively connected income, etc.
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 a definition, because it merely describes how to IMPLEMENT it but not WHY it exists. The WHY is answered by the more complete definition of “Effectively connected” below:
Effectively connected: Earnings from WITHOUT the “United States” (government) donated to a public use, a public purpose, and a public office to procure the benefits of a franchise privilege such as deductions under 26 U.S.C. §162 and 26 U.S.C. §873.
Our 1040-NR attachment defines “effectively connected” as:
11. Definitions
5. “Effectively connected” means otherwise private property CONSENSUALLY donated by its original owner to a public use, a public purpose, or a public office within the national and not state government, and thus connected to the statutory “trade or business” defined in 26 U.S.C. §7701(a)(26) as “the functions of a public office”. None of God’s entirely private property under my stewardship falls into this category. All of Gods’ property is absolutely owned private property protected by the constitution and defined as a “foreign estate” under 26 U.S.C. §7701(a)(31) and the First Amendment separation of church and state. Ownership of “trade or business” property, on the other hand, is QUALIFIED (shared) rather than ABSOLUTE (singular). “Trade or business” property ownership or control is shared by the owner and its government parens patriae, Creator, and owner. A portion of the shared ownership becomes a kickback (called a return) to compensate its trustee for his or her services.
[1040-NR Attachment, Form #09.077, Section 11: Definitions; https://sedm.org/Forms/09-Procs/1040NR-Attachment.pdf]
Note that there are TWO methods to volunteer to owe tax:
- ELECT to change YOUR status from private “nonresident alien” to PUBLIC “U.S. person”.
- Elect to convert your PRIVATE property from PRIVATE to PUBLIC by “effectively connecting” it.
“Effectively connecting” implements item 2 above, by converting your PROPERTY rather than YOURSELF from PRIVATE to PUBLIC.
“Effectively connecting” is an implementation of the rules for converting private to public recognized by the U.S. Supreme Court:
“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: 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”]; second, that if he devotes it to a public use, he gives to the public a right to control that use; and third, that whenever the public needs require, the public may take it upon payment of due compensation.”
[Budd v. People of State of New York, 143 U.S. 517 (1892);
SOURCE: https://scholar.google.com/scholar_case?case=17245612752943291505]
The above rules are summarized below:
Table 1: Rules for converting private property to a public use or a public office
| # | Description | Requires consent of owner to be taken from owner? |
| 1 | The owner of property justly acquired enjoys full and exclusive use and control over the property. This right includes the right to exclude government uses or ownership of said property. | Yes |
| 2 | He may not use the property to injure the equal rights of his neighbor. For instance, when you murder someone, the government can take your liberty and labor from you by putting you in jail or your life from you by instituting the death penalty against you. Both your life and your labor are “property”. Therefore, the basis for the “taking” was violation of the equal rights of a fellow sovereign “neighbor”. | No |
| 3 | He cannot be compelled or required to use it to “benefit” his neighbor. That means he cannot be compelled to donate the property to any franchise that would “benefit” his neighbor such as Social Security, Medicare, etc. | Yes |
| 4 | If he donates it to a public use, he gives the public the right to control that use. | Yes |
| 5 | Whenever the public needs require, the public may take it without his consent upon payment of due compensation. E.g. “eminent domain”. | No |
Rule 4 above is implemented by the “effectively connected” scam.
4. History of “effectively connecting”
The 1966 Tax Act added “effectively connected” income to the definition of “gross income” for a nonresident aliens. This was the same year they rolled out the 1040-NR tax return form. Before that, they only had the 1040 return and nonresident aliens used that form and didn’t check the box that asked “Are you a citizen or resident of the United States?”. See:
| Tax Return History-Citizenship, Family Guardian Fellowship https://famguardian.org/Subjects/Taxes/Citizenship/TaxReturnHistory-Citizenship/TaxReturnHistory-Citizenship.htm |
Before this, ONLY income that was ACTUALLY from a source within the United States would be “gross income” to a nonresident alien. Such income today would go on the Schedule NEC. Uncle Sam recognized that all Americans are nonresident aliens every year by default (unless they file 1040 for that year). So by creating this “effectively connected” nexus it allows for a purely CONTRACTUAL/CONSENSUAL liability to be created. Before that it was just mistake of law if a nonresident alien filed as a U.S. person and declared all his income as “gross income”.
By introducing this “effectively connected” nexus, the liability is created quasi-contractually through your consent (even if done by mistake) and therefore it is more solidly legal because there is from that point a basis in the Code for liability to arise that way. As if to further cover their asses, they added “national of the United States” to the Code in 1972 in a provision under with Public Law 92-580 for “nonresident” aliens that allowed for privileged deductions. That provision is now found in 26 U.S.C. §873.
Then later, in 1986, the “election to be treated as a resident alien” in 26 U.S.C. §6013(g) and (h) created a quasi-contractual basis for “U.S. person” whereas before that it would just have been purely mistake of law on the part of the nonresident alien filer. Even to this day, however, there is no statutory provision in the I.R.C. for a “national of the United States” who is a “nonresident alien” (state citizen) to elect to be treated as a “resident alien” or U.S. person if they are not married to one. The U.S. Supreme court DID, however, recognize the right of an American national abroad under 26 U.S.C. §911 to ELECT “U.S. person” status by filing the 1040 when abroad. This happened in Cook v. Tait, 265 U.S. 47 (1924). In that case, Cook ELECTED U.S. person status by filing a 1040 instead of a 1040-NR.
Uncle Sam knew since 1919 (if not before that) they were relying on deception to DUPE 1040 filers into liability based on the filer’s MISTAKES OF LAW. They wanted tax liability to be more legally solid, so they added these provisions to the Code in 1966, 1972 and in 1986 respectively that would transform what had been up to that point a reliance on duping Americans into pure mistakes of law into these quasi-contractual devices for American nonresident aliens to effectively “opt in” to being liable. This gave everyone running the SCAM more plausible deniability than they had before.
5. “Effectively Connecting” expands STATUTORY “gross income” beyond CONSTITUTIONAL “income”
All waivers of constitutional protections and rights begin with consent, which we call an “election” in this document. Among those waivers are the protections of the Sixteenth Amendment limitation upon “income” as including only PROFIT. Once that consent is given, the Public Rights Doctrine and the Constitutional Avoidance Doctrine of the U.S. Supreme Court kick in, which recognize a waiver of constitutional and Sixteenth Amendment protections. You can learn more about these doctrines in:
| Catalog of U.S. Supreme Court Doctrines, Litigation Tool #10.020 https://sedm.org/Litigation/10-PracticeGuides/SCDoctrines.pdf |
In order for an amount to be taxable as more than just profit as required by the Sixteenth Amendment, there must be a voluntary election to “effectively connect” the earning by placing it in the “effectively connected” section of the 1040-NR return. The Treasury Regulations recognize TWO types of “effective connection”:
1. Voluntary “effective connection” by the taxpayer for income from sources WITHOUT the “United States”.
1.1. This is described in 26 C.F.R. §1.872-2(f).
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.
1.2. Notice the phrase “by that individual”, meaning you CHOOSE it rather than have it determined by someone else unilaterally.
2. “Deemed effectively connected” without any choice or action by the taxpayer.
2.1. This is found in 26 C.F.R. §1.871-8.
2.2. It includes a nonresident alien student or trainee who is deemed under 26 U.S.C. §871(c) and 26 C.F.R. §1.871-9 to be engaged in trade or business in the United States.
6. Types of income subject to taxation of TOTAL amount received, rather than just profit
Income subject to taxation on TOTAL amount received appears ONLY on the “effectively connected” section of the 1040-NR or the 1040 returns. Everything on the 1040 return is “trade or business” earnings because it is subject to “deductions” under 26 U.S.C. §162 and is earned by the “U.S. person” fiction and office, rather than the human officer consensually occupying said office. These types of income include:
- Interest income:
1.1. Interest from savings accounts
1.2. Bond interest (e.g., municipal bonds, corporate bonds)
1.3. Interest from certificates of deposit (CDs) - Dividend income:
2.1. Qualified dividends (e.g., from stocks)
2.2. Non-qualified dividends (e.g., from real estate investment trusts) - Rent and royalty income:
3.1. Rental income from properties
3.2. Royalties from intellectual property (e.g., patents, copyrights)
3.3. Royalties from natural resources (e.g., oil, gas) - Business income:
4.1. Self-employment income (e.g., freelance work)
4.2. Business income from pass-through entities (e.g., partnerships, S corporations) - Retirement income:
5.1. Pension income
5.2. Annuity income
5.3. Distributions from retirement accounts (e.g., 401(k), IRA) - Prize and award income:
6.1. Lottery winnings
6.2. Contest prizes
6.3. Awards (e.g., Pulitzer Prize) - Unemployment compensation:
7.1. State unemployment benefits - Alimony:
9.1. Received alimony (note: changed by Tax Cuts and Jobs Act)
Note that the above types of income do NOT appear on the Schedule NEC, because they must be voluntarily connected to the “trade or business” excise taxable franchise by the nonresident alien who owns them by simply entering them on the 1040-NR return in the “effectively connected” section. Pensions appear on BOTH the Schedule NEC or the 1040-NR so they let you choose whether to pay on the gross receipts for the 1040-NR or only profit on the Schedule NEC.