I've omitted a lot of detail here, but, as you can see, the "operative sections" all involve situations with some connection to foreign activities. From this, Rose concludes that the income a United States citizen gets from performing services within the United States is not taxable.
Nonsense. As noted earlier, because a United States citizen is taxed on all his or her income, from whatever source derived (see section 61), for most purposes it doesn't matter whether a citizen's income is from sources within or without the United States. But sometimes it does matter. The "operative sections" of regulation 1.861-8(f) are just a list of those situations in which it does matter (for more on when it does matter, see the basic 861 page). That's all this regulation does: it lists the code sections as to which it matters whether income is from sources within or without the United States. Section 61 is not listed, because, for the purpose of determining what constitutes a U.S. citizen's gross income, it doesn't matter whether the income is from sources within or without the United States.
In the end, that's what it all comes down to. The 861 argument, as articulated by Larken Rose, contains much, much buildup, but in the end it's all based on a misunderstanding of this regulation. The regulation just provides a list of the situations in which it matters whether income is from foreign sources or not. The regulation does not show that domestic income is not taxable. The above references, and particularly code section 61's definition of gross income as "all income from whatever source derived" (as opposed to section 871's limitation to "the amount received from sources within the United States"), shows that the domestic income of a U.S. citizen is subject to the income tax.
By the way, the notion that the whole thing turns on a regulation is somewhat ironic: most tax protestors are particularly insistent that they want the government to rely on laws (which have to be passed by Congress), not just regulations (which come from a government agency such as the IRS).
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