PROOF OF FACTS: Exemptions v. Exclusions

SOURCE: Excluded Earnings and People, Form #14.019, Section 4; https://sedm.org/Forms/14-PropProtection/ExcludedEarningsAndPeople.pdf

It is CRUCIAL to understand the distinction between being CONSTITUTIONALLY EXCLUDED from income tax versus being STATUTORILY EXEMPT. The reason is that if you do NOT understand this difference and you are a purveyor of tax information, you may become the target of UNJUST and ILLEGAL tax shelter prosecution as we were early in our history in about 2005. Even back then, we focused EXCLUSIVELY upon CONSTITUTIONALLY EXCLUDED earnings of non-resident non-persons and NEVER EXEMPT earnings STATUTORY “taxpayers”, so the abusive tax shelter prosecution was moot and they had to leave us alone. The following hilarious document on our site actually makes fun of these differences:

Your Rights as a “Nontaxpayer”, IRS Publication 1a, Form #08.008 https://sedm.org/LibertyU/NontaxpayerBOR.pdf

One court distinguishes EXCLUDED v. EXEMPT as follows:

“Initially, it is important to bear in mind the distinction between a tax exclusion and a tax exemption. Tax exemptions are items which the tax payer is entitled to excuse from the operation of a tax and, as such, are to be strictly construed against the tax payer. Tax exclusions, on the other hand, are items which were not intended to be taxed in the first place and, thus, to the extent there is any doubt about the meaning of the statutory language, exclusionary provisions are to be strictly construed against the taxing body. In fact, tax laws in general (with the exception of exemption clauses) are construed in favor of the tax payer and against imposition of the tax unless the legislative intent is clear and unambiguous.”

[In re Twisteroo Soft Pretzel Bakeries, Inc., 21 B.R. 665, 667 (Bankr. E.D. Pa. 1982)]

Below is a table comparing EXCLUDED v. EXEMPT earnings:

Table 3:  EXCLUDED v. EXEMPT earnings and people

#	Description	CONSTITUTIONAL “exclusion” (PRIVATE)	STATUTORY “exclusion” (PUBLIC)
		Excluded for PRIVATE people	Excluded for PUBLIC people	Exempt for PUBLIC people
1	Civil status of people pursuing this option	Nonresident “nationals” under Fourteenth Amendment, 8 U.S.C. §1101(a)(21), 8 U.S.C. §1408, or 8 U.S.C. §1101(a)(22)(B) ONLY.  NEVER aliens under 8 U.S.C. §1101(a)(3).	STATUTORY “citizens” (8 U.S.C. §1401) and “residents” (8 U.S.C. §1101(a)(3) aliens)
2	Approach described in	Non-Resident Non-Person Position, Form #05.020	“U.S. Person” Position, Form #05.053
3	Statutory authority	26 U.S.C. §872 26 U.S.C. §871(a)(3)	26 U.S.C. §911(a) (foreign earned income exclusion)26 C.F.R. 1.85-1 (unemployment compensation exclusion)	26 U.S.C. §163
4	Implemented on which tax return?	Form 1040NR	Form 1040
5	Tax withholding form(s)	Form W-8 (see Form #04.202)	Forms W-9 or W-4 or both
6	How implemented on tax return	Identifying earnings as not connected to “trade or business” and not derived from the statutory geographical “United States” as defined in 26 U.S.C. §7701(a)(9) and (a)(10) and 4 U.S.C. §110(d).	Exclusions on 1040 Tax Return	Deductions on a RESIDENT 1040 Tax Return
7	Earnings in this category are called	“Foreign estate” (26 U.S.C. §7701(a)(31))“Constitutionally exempt” or “exempt by fundamental law”	ExclusionsForeign earned income exclusionUnemployment exclusion	Deductions
8	Civil statutory jurisdiction or “in personam” jurisdiction over the “person” filing? (see: Great Cruz Bay, Inc., St. John v. Wheatley, 495 F.2d. 301, 307 (3d Cir. 1974))	No	Yes
9	Privilege (PUBLIC) or Right (PRIVATE)	Right	Privilege (because granted by civil statute)
10	Privilege (PUBLIC) or Right (PRIVATE) granted or recognized by	The Constitution	Civil statutes ONLY
11	Privilege (PUBLIC) or Right (PRIVATE) protected by	The common law, the criminal law, and the constitution ONLY		Civil statutes
12	Requires domicile (national) or residence (alien) in the forum?	No.  Not permitted.	Yes
13	Connected to the “trade or business” excise taxable franchise?	No	No	Yes
14	Operates extraterritorially, meaning outside the exclusive legislative jurisdiction of the granting power?	No	Yes
15	Allows “deductions” on a tax return under 26 U.S.C. §162?	No	No	Yes
16	Applicable where?	Within the exclusive jurisdiction of a constitutional state.	Within the exclusive jurisdiction of the national government either in the District of Columbia, federal territories, or federal enclaves within the state and abroad.
17	Illegal judicial activity that is used to promote or avoid this approach	Avoid by: Illegally expanding the statutory geographical definition of “United States” to add the exclusive jurisdiction of states of the Union.  See Form #05.014 for details.Illegally applying the 26 U.S.C. §61 definition of income rather than the 26 U.S.C. §871 definition.Involuntarily changing the filing status of the filer from nonresident to resident.  This is CRIMINAL IDENTITY THEFT per Form #05.046.	Promote by: Federal and state presence test ILLEGALLY applied to “nationals” by pretending they are “aliens”.  See Form #05.002, Section 13.1.Compelling all parties to have a civil domicile.  See Form #05.002, Section 15.Compelling people to submit the WRONG withholding form, the Forms W-4 or W-9 to get a job or do business.

An exclusion can of course be due to recognized limitations on the taxing power or limits on what is taxed under the tax statute; but it also may be statutory and therefore a matter of legislative grace, such as: 26 U.S.C. §911, or the statutory exclusion of 15% of Social Security benefits from income for nonresident aliens at 26 U.S.C. §871(a)(3), which then are taxed at a 30% rate.

Exemption is most often statutory and thus a matter of legislative grace but broadly “exempt” income can be synonymous income lawfully excluded from tax.

Even a nonresident alien is entitled to a personal exemption on “trade or business” earnings on the 1040NR form, before they reduced the personal exemption amount to $0 in 2017.   As we said, that’s a matter of legislative grace, but it’s not necessarily connected to a privileged status.

Also unemployment compensation (even received by a nonresident alien) may be excluded from gross income, depending on the total gross income the individual had.

For 2020, Congress enacted an across-the-board exclusion of the first $10k of unemployment compensation with the American Rescue Plan Act of 2021.  That also was not tied to privileged “citizen or resident” tax status.  See:

2020 Unemployment Compensation Exclusion FAQs, IRS https://www.irs.gov/newsroom/2020-unemployment-compensation-exclusion-faqs

Exclusion and exemption are similar, but an exclusion is targeted at a specific type of income. 

Exemption is an across-the-board reduction of the total amount of taxable income, regardless of what types of income the individual had. Such as the personal exemption.  The personal exemption was eliminated by the Tax Cuts and Jobs Act of 2017. The personal exemption used to be claimed on Form 1040 lines 6a, 6b, and line 422.

The exclusion for unemployment compensation is in the regulations at 26 C.F.R. §1.85-1.  We’ve had to argue with the IRS about that one because not even they knew that. Not all unemployment compensation is necessarily required to be included in gross income, though Congress has the right to impose tax on all of it. So that’s a statutory exclusion. The exclusion is dependent only on the total statutory “gross income” the individual had (must be below $20k) not on the tax status of the individual.