FORMS: 9.9 EXEMPT INCOME
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This form is useful during an IRS examination for the purposes of establishing exempt income.


Exempt Income

A "class of gross income" "may consist of one or more items... of gross income enumerated in section 61." [26 C.F.R. 1.861-8(a)(3)]

"[P]aragraph (d)(2) of this section... provides that a class of gross income may include excluded income." [26 C.F.R. 1.861-8(b)(1)]

(26 C.F.R. 1.861-8(d)(2) redirects the reader to 26 C.F.R. 1.861-8T(d)(2).)

"(ii) Exempt income and exempt asset defined--(A) In general. For purposes of this section, the term exempt income means any income that is, in whole or in part, exempt, excluded, or eliminated for federal income tax purposes." [26 C.F.R. 1.861-8T(d)(2)(ii)]

"(iii) Income that is not considered tax exempt. The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:
(A) In the case of a foreign taxpayer…
(B) In computing the combined taxable income of a DISC or FSC
(C) For all purposes under subchapter N of the Code… the gross income of a possessions corporation…
(D) Foreign earned income as defined in section 911
" [26 C.F.R. 1.861-8T(d)(2)(iii)]

This derived from older regulations, showing that the Constitution exempts some income not exempted by statute.

"Sec. 29.21-1. Meaning of net income.
The tax imposed by chapter 1 is upon income. Neither income exempted by statute or fundamental law
[the Constitution]... enter into the computation of net income as defined by section 21." [26 C.F.R. 29.21-1 (1945)]

"Sec. 29.22(b)-1. Exemption--Exclusions from gross income.
Certain items of income specified in section 22(b) are exempt from tax and may be excluded from gross income... No other items are exempt from gross income except (1) those items of income which are, under the Constitution, not taxable by the Federal Government...
" [26 C.F.R. 29.22(b)-1 (1945)]

Similar to the current 26 C.F.R. 1.861-8T(d)(2) (cited above), the older regulations defining "gross income" specifically listed what is not exempt by statute or the Constitution.

"Sec. 29.22(a)-1. What included in gross income.
Gross income includes in general compensation for personal and professional services, business income, profits from sales of and dealings in property, interest, rent, dividends, and gains, profits, and income derived from any source whatever, unless exempt from tax by law. (See section 22(b)
[see citation above] and 116.)... Profits of citizens, residents, or domestic corporations derived from sales in foreign commerce must be included in their gross income; but special provisions are made for nonresident aliens and foreign corporations by sections 211 to 237, inclusive, and, in certain cases, by section 251 for citizens and domestic corporations deriving income from sources within possessions of the United States." [26 C.F.R. 29.22(a)-1 (1945)]

(These activities match the activities listed in the older regulations under Section 119 of the 1939 Code, which is the predecessor of the current Part I of Subchapter N.)