SOURCE:  Adapted from IRS Humbug, Frank Kowalik, pp. 146-148.

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Since 26 U.S.C. §61 does not indicate the fact that "gross income" is restricted to specific property the I.R. Code had to detail this fact elsewhere.  This is accomplished in section 931.

Prior to 1986, section 931 of the 1954 I.R. Code provided the exact terms as to what income is deemed to be "gross income" in the I.R. Code in this manner:

Sec. 931.  INCOME FROM SOURCES WITHIN POSSESSIONS OF THE UNITED STATES [provided in part]

(a) General rule.

    In the case of individual citizens of the United States, gross income means only gross income from sources within the United States if the conditions of both paragraph (1) and paragraph (2) are satisfied:

(1)  3-year period.  If 80 percent or more of the gross income of such citizen...was derived from sources within a possession of the United States; and

(2)  Trade or business.  If 50 percent or more of his gross income was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another.

...

(h)  Employees of the United States

     For purposes of this section, amounts paid for services performed by a citizen of the United States as an employee of the United States or any agency thereof shall be deemed to be derived from sources within the United States.

    Chapter 3 laid the foundation for understanding that "within" and "without" in conjunction with the "United States" means within or without the United States Government.  This section 931 confirms this by saying that "gross income" MEANS ONLY gross income from sources within a possession of the United States and from the active conduct of a trade or business within a possession of the United States.  The 50 States of the United States of America are not possessions of the United States.  But, Federal areas within the 50 States are deemed to be possessions (definition in chapter 15, footnote 7).  The U.S. Congress can only pass laws for United States possessions and laws with regard to income only when the U.S. Government is the source of the income within its possession.  This is the reason for having to state that the pay of employees of the United States is deemed to be derived from sources within the United States.

    The old section 931 is provided to demonstrate the difference between it and the current section 931.  In the 1954 I.R. Code, the source was emphasized, whereas in the 1986 I.R. Code the place is emphasized and the source of one's income is concealed.  By adding vagueness, the intent could only be to mislead.  This is part of the IRS humbug.

   The 1986 I.R. Code section 931 reads in part:

Sec. 931.  INCOME FROM SOURCES WITHIN GUAM, AMERICAN SAMOA, OR THE NORTHERN MARIANA ISLANDS

(a)  GENERAL RULE.--In the case of an individual who is a bona fide resident of a specified possession during the entire taxable year, gross income shall not include---

(1)  income derived from sources within any specified possession, and

(2)  income effectively connected with the conduct of a trade or business by such individual within any specified possession.

(c)  SPECIFIC POSSESSIONS.--For purposes of this section, the term "specific possession" means Guam, American Samoa, and the Northern Mariana Islands.

(d)  SPECIAL RULES.--For purposes of this section--

(1)  EMPLOYEE OF THE UNITED STATES.--Amounts paid for services performed as an employee of the United States (or any agency thereof) shall be treated as not described in paragraph (1) or (2) of subsection (a).

   Inverse construction similar to that used in section 6012 (chapter 8) is used here.  Unlike the old section 931 (which made a definite statement restricting the meaning of gross income) section 931 in the 1986 I.R. Code excludes certain income from "gross income" and then, pursuant to section 931(d), excludes amounts paid to Federal Government employees from the exclusion.  This accomplished the same result as section 931(h) of the 1954 I.R. Code where amounts paid to anyone for performance of personal services as an employee of the United States was deemed to be "gross income" without regard to any formulas put forth in section 931(a) of the 1954 I.R. Code for "individuals" employed by the U.S. Government by virtue of a trade or business effectively connected within the United States.  Again showing that the term "within the United States" means within the U.S. Government and that income from sources other than the U.S. Treasury is foreign to the jurisdiction of the IRS.¹¹

   With section 931(a) and (d) of the 1986 I.R. Code, Congress is saying that "gross income" does not include income received by an individual (Federal Government employee) who is a bona fide resident of a specified possession when that income was derived from sources within the specified possession or if the income was effectively connected with the conduct of a trade or business by such individual (Federal Government employee) within any specified possession unless the U.S. Government was the source of the income.  Since there is equal treatment under the laws of the United States of America, this cannot be limited to persons who are bona fide residents of these specified possessions.  The fact that "gross income" does not include what anyone receives from a source other than the U.S. Government applies to anyone.  But, by emphasizing specified possessions, there is enough vagueness injected to cloud the fact the source of the income, not the place, is the controlling factor.  The fact that the term "gross income" in the I.R. Code includes only income derived from the U.S. Government as compensation "for services performed as an employee of the United States or any agency thereof" is demonstrated here (also see section 3401(a) in chapter 6).  You cannot enter into an employment agreement with a place, the employer must be the source.  Again confirming it is legal kickback pursuant to employment agreements which control whether income is "gross income" subject to the I.R. Code laws. 

Click here for the current version of this section:  26 U.S.C. §931

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[11]  Chapter 3 of this book demonstrates how this fits in with the definition given for "foreign estate and trust" in section 7701(a)(31) of the I.R. Code.