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Discussion
The first issue that we must decide is whether Mr. Rusten’s
self-employment income was properly subject to tax in the United
States. Section 1401 imposes a tax on the self-employment income
of every individual, including the income earned by an American
citizen working in a foreign country. See Duncan v.
Commissioner, 86 T.C. 971, 972 (1986). While section 911
excludes foreign earned income from gross income under certain
circumstances, section 911 does not apply to self-employment
income. Sec. 1402(a)(11). However, section 1401(c) provides
that if there is an agreement in effect between the United States
and a foreign country pursuant to section 233 of the Social
Security Act, then self-employment income of an individual is
exempt from American self-employment taxes to the extent that
under the agreement the income is subject to tax under the Social
Security system of the foreign country.
In order to minimize the risk of subjecting workers to both
American and Canadian employment taxes, the United States and
Canada signed a totalization agreement to allocate Social
Security and other taxes (employment taxes) paid by workers who
would otherwise be subject to both tax regimes. Agreement With
Respect to Social Security, U.S.-Can., Mar. 11, 1981, 35 U.S.T.
3403. The totalization agreement was made pursuant to section
233 of the Social Security Act, and it governs self-employment
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