FRIVOLOUS SUBJECT: 26 U.S.C. 83 and 26 C.F.R. 1.83-1 Allows you to deduct the cost of your labor from gross income
FALSE CLAIM:
26 U.S.C. §83 and 26 C.F.R. §1.83-1 permit me to deduct the cost of my labor as PROPERTY from the earnings received from my labor. Thus, my net “gross income” for labor would be zero so I owe no tax on my labor. On this subject, 26 U.S.C. §83 says:
26 U.S. Code § 83 – Property transferred in connection with performance of services
(a)General rule
If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—
(1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over
(2) the amount (if any) paid for such property,
shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.
The regulation at 26 C.F.R. §1.83-1 says:
26 CFR §1.83-1 – Property transferred in connection with the performance of services.
§ 1.83-1 Property transferred in connection with the performance of services.
(a) Inclusion in gross income—
(1) General rule.
Section 83 provides rules for the taxation of property transferred to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services by such employee or independent contractor. In general, such property is not taxable under section 83(a) until it has been transferred (as defined in § 1.83-3(a)) to such person and become substantially vested (as defined in § 1.83-3(b)) in such person. In that case, the excess of—
(i) The fair market value of such property (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) at the time that the property becomes substantially vested, over
(ii) The amount (if any) paid for such property,
shall be included as compensation in the gross income of such employee or independent contractor for the taxable year in which the property becomes substantially vested. Until such property becomes substantially vested, the transferor shall be regarded as the owner of such property, and any income from such property received by the employee or independent contractor (or beneficiary thereof) or the right to the use of such property by the employee or independent contractor constitutes additional compensation and shall be included in the gross income of such employee or independent contractor for the taxable year in which such income is received or such use is made available. This paragraph applies to a transfer of property in connection with the performance of services even though the transferor is not the person for whom such services are performed.
REBUTTAL:
This provision seems to relate to property transferred by the PAYOR and not the one performing the services. Thus, it would not relate to you who performed the labor or services.
It is thus strange for a LABORER who performs the labor to say that “IRC Section 83 APPLIES” in order to AVOID a tax liability on remuneration for services. IRC Section 83 is NOT a limiting provision. It is a provision that expressly includes in gross income the excess value of property (over its fair market value) when transferred in connection with performance of services by a taxpayer who is a PAYOR.
If anything, A LABORER trying to avoid tax would need to argue Section 83 does NOT apply. This is because:
- IRS typically uses this provision in assessing an additional income tax liability after auditing the PAYOR company.
- The PAYOR company uses this provision in calculating deductions of the net proceeds paid to its workers for cost of services.
We have never seen a case where IRS or a court asserted that someone’s “wages” or other remuneration for labor constitute gross income under IRC Section 83. Such remuneration is typically asserted IN TOTAL to be “gross income” under IRC Sec. 61. Any other approach would be out of the norm.
Perhaps there are exceptions we don’t know about. But it seems to us that in the case of those working for “wages” it would only be appropriate to argue that section 83 does NOT apply. Even then it would apply only where it has been asserted by IRS or a court that section 83 DOES apply in a way that INCREASES their “gross income”.
IRC Section 83 would apply to excess of what is paid or property transferred by the PAYOR for the SERVICES over their fair market value of those SERVICES.
What we’re seeing is shoehorn attempts to argue that “labor is property according to the U.S. Supreme Court, I.R.C. Section 83 applies to property therefore it applies to my labor, since the FMV of my labor is what my employer pays me, there is no gain.
I.R.C. Section 83 if anything applies to tangible or intangible property such as restricted stock units, stock options, etc given as compensation. FMV rules would apply in this case where the strike price and some future price clash.
We don’t see how this “property” could ever reasonably be construed to include labor as property, because the only property referenced is that of the PAYOR, not the LABORER.
Also if one’s labor is the “transferred property” then the party for whom the labor is performed would be the recipient of the transferred property. But IRC section 83 specifically excludes the one for whom the services are performed from its provisions.
A Better Approach
The greater issue is that the Sixteenth Amendment limits income to profit, which means the cost of producing the labor is deductible. Most elections remove this restriction and make the ENTIRE AMOUNT or “GROSS RECEIPT” taxable. Such elections would certainly include:
- A “U.S. person” election to convert the status of the LABORER from PRIVATE to PUBLIC.
- An “effectively connected” election to convert the status of the EARNINGS from PRIVATE to PUBLIC.
Either one of the above elections allows what would otherwise be a direct unapportioned tax on “gross receipts”, which the U.S. Supreme Court said violates the Sixteenth Amendment:
“We must reject in this case, as we have rejected in cases arising under the Corporation Excise Tax Act of 1909 (Doyle, Collector, v. Mitchell Brothers Co., 247 U.S. 179, 38 Sup. Ct. 467, 62 L. Ed.–), the broad contention submitted on behalf of the government that all receipts—everything that comes in-are income within the proper definition of the term ‘gross income,’ and that the entire proceeds of a conversion of capital assets, in whatever form and under whatever circumstances accomplished, should be treated as gross income. Certainly the term “income’ has no broader meaning in the 1913 act than in that of 1909 (see Stratton’s Independence v. Howbert, 231 U.S. 399, 416, 417 S., 34 Sup. Ct. 136), and for the present purpose we assume there is not difference in its meaning as used in the two acts.”
[Southern Pacific Co., v. Lowe, 247 U.S. 330, 335, 38 S.Ct. 540 (1918)]
Thus, elections PERMIT and FACILITATE what would otherwise be a direct tax in Sixteenth Amendment parlance. 26 U.S.C. §83(b) is an example of this in action:
26 U.S. Code § 83 – Property transferred in connection with performance of services
(b)Election to include in gross income in year of transfer
(1)In general
Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—
(A)the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over
(B)the amount (if any) paid for such property.
If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.
ALL earnings from labor entered on the 1040-NR tax return would go in the “effectively connected” section, which means the labor is DONATED to a public use. There is not even a place on the Schedule NEC to enter labor or services that are NOT “effectively connected” so this is a clue. The only party who can “effectively connect” the income is the laborer. After the labor is donated by entering it in the “effectively connected” section of the tax return, it’s pointless to then argue that it is then YOUR PRIVATE labor or PRIVATE property. It’s public property at that point earned by a fictitious office called “nonresident alien” that Uncle Sam created and owns. You are completely out of the picture and already lost the war by “effectively connecting” the earnings.
It’s therefore better to simply NOT “effectively connect” the labor by not entering it on the tax return and attaching a statement stating so, such as Form 8275.
It’s also better to simply claim that a nonresident alien doesn’t earn:
- Wages under:
1.1. 26 U.S.C. §3401(a)(6)
1.2. 26 C.F.R. §31.3401(a)(6)-1(b) in the case of income tax and
1.3. 26 C.F.R. §31.3121(b)-3(c)(1) in the case of Social Security - Self-Employment Income under 26 U.S.C. §1401 and 26 U.S.C. §1402(b).
The SEDM 1040-NR attachment takes this position:
1040-NR Attachment, Form #09.077
https://sedm.org/Forms/09-Procs/1040NR-Attachment.pdf