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THE TRUTH ABOUT FRIVOLOUS TAX ARGUMENTS
NOVEMBER 30, 2007
This responds to some of the more common frivolous “legal arguments” made by
individuals and groups who oppose compliance with the federal tax laws. The
first section groups these arguments under six general categories, with variations
within each category. Each contention is briefly explained, followed by a
discussion of the legal authority that rejects the contention. The second section
responds to some of the more common frivolous arguments made in collection
due process cases brought pursuant to sections 6320 or 6330. These
arguments are grouped under ten general categories and contain a brief
description of each contention followed by a discussion of the correct legal
authority. A final section explains the penalties that the courts may impose on
those who pursue tax cases on frivolous grounds. It should be noted that the
cases cited as relevant legal authority are illustrative and are not intended to
provide an all-inclusive list relating to frivolous tax arguments.
I. FRIVOLOUS TAX ARGUMENTS IN GENERAL
A. The Voluntary Nature of the Federal Income Tax System
1. Contention: The filing of a tax return is voluntary.
Some assert that they are not required to file federal tax returns because
the filing of a tax return is voluntary. Proponents point to the fact that the
IRS itself tells taxpayers in the Form 1040 instruction book that the tax
system is voluntary. Additionally, the Supreme Court’s opinion in Flora v.
United States, 362 U.S. 145, 176 (1960), is often quoted for the
proposition that "[o]ur system of taxation is based upon voluntary
assessment and payment, not upon distraint."
The Law: The word “voluntary,” as used in Flora and in IRS publications,
refers to our system of allowing taxpayers initially to determine the correct
amount of tax and complete the appropriate returns, rather than have the
government determine tax for them from the outset. The requirement to
file an income tax return is not voluntary and is clearly set forth in
sections 6011(a), 6012(a), et seq., and 6072(a). See also Treas. Reg.
§ 1.6011-1(a).

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Any taxpayer who has received more than a statutorily determined amount
of gross income is obligated to file a return. Failure to file a tax return
could subject the non-complying individual to criminal penalties, including
fines and imprisonment, as well as civil penalties. In United States v.
Tedder, 787 F.2d 540, 542 (10th Cir. 1986), the court clearly states,
“although Treasury regulations establish voluntary compliance as the
general method of income tax collection, Congress gave the Secretary of
the Treasury the power to enforce the income tax laws through involuntary
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collection . . . . The IRS’ efforts to obtain compliance with the tax laws are
entirely proper.” The IRS issued Revenue Ruling 2007-20, 2007-14 I.R.B.
863, warning taxpayers of the consequences of making this frivolous
argument.
In August 2005, the Justice Department announced that Royal Lamarr
Hardy was sentenced to a 156-month prison term for, among other things,
selling a tax evasion scheme called the “Reliance Defense” that incorrectly
asserted the income tax laws were voluntary (i.e., the laws imposed no
legal obligation to pay tax or file a return). Hardy was also ordered to pay
costs of prosecution in the amount of $59,267.88, and restitution to the
IRS for $197,555. See 2005 TNT 169-12 (Aug. 31, 2005).
In August 2007, a federal court in New York permanently barred Robert L.
Schulz of Queensbury, N.Y., and his organizations, We the People
Congress and We the People Foundation, from promoting a tax scheme
that helped employers and employees improperly stop tax withholding
from wages on the false premise that federal income taxation is voluntary.
The court concluded that the First Amendment did not protect the two
organizations that operate the website, or their founder, because the site
incited criminal conduct. The court also ordered that the web site that sold
the materials stating that individuals can legally stop paying taxes be shut.
See http://www.usdoj/tax/txdv07214.htm, and
http://www.usdoj.gov/tax/txdv07595.htm
Relevant Case Law:
Helvering v. Mitchell, 303 U.S. 391, 399 (1938) – the U.S. Supreme Court
stated that “[i]n assessing income taxes, the Government relies primarily
upon the disclosure by the taxpayer of the relevant facts . . . in his annual
return. To ensure full and honest disclosure, to discourage fraudulent
attempts to evade the tax, Congress imposes [either criminal or civil]
sanctions.”
United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) – the court
held that “[a]ny assertion that the payment of income taxes is voluntary is
without merit.”
United States v. Tedder, 787 F.2d 540, 542 (10th Cir. 1986) – the court
upheld a conviction for willfully failing to file a return, stating that the
premise “that the tax system is somehow ‘voluntary’ . . . is incorrect.”
United States v. Richards, 723 F.2d 646, 648 (8th Cir. 1983) – the court
upheld conviction and fines imposed for willfully failing to file tax returns,
stating that the claim that filing a tax return is voluntary “was rejected in
United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983), wherein the
court described appellant’s argument as ‘an imaginative argument, but
totally without arguable merit.’”
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Woods v. Commissioner, 91 T.C. 88, 90 (1988) – the court rejected the
claim that reporting income taxes is strictly voluntary, referring to it as a
“‘tax protester’ type” argument, and found Woods liable for the penalty for
failure to file a return.
Johnson v. Commissioner, T.C. Memo. 1999-312, 78 T.C.M. (CCH) 468,
471 (1999) – the court found Johnson liable for the failure to file penalty
and rejected his argument “that the tax system is voluntary so that he
cannot be forced to comply” as “frivolous.”
2. Contention: Payment of tax is voluntary.
In a similar vein, some argue that they are not required to pay federal
taxes because the payment of federal taxes is voluntary. Proponents of
this position argue that our system of taxation is based upon voluntary
assessment and payment. They frequently claim that there is no provision
in the Internal Revenue Code or any other federal statute that requires
them to pay or makes them liable for income taxes, and they demand that
the IRS show them the law that imposes tax on their income. The stance
that is taken is that until the IRS can prove to these taxpayers’ satisfaction,
which is effectively impossible because they never will be satisfied, the
existence and applicability of the income tax laws, they will not report or
pay income taxes. These taxpayers reflexively dismiss any attempt by the
IRS to identify the laws, thereby continuing the cycle. The IRS has issued
Revenue Ruling 2007-20, 2007-14 I.R.B. 863, discussing this frivolous
position at length and warning taxpayers of the consequences of asserting
it.
The Law: The requirement to pay taxes is not voluntary and is clearly set
forth in section 1 of the Internal Revenue Code, which imposes a tax on
the taxable income of individuals, estates, and trusts as determined by the
tables set forth in that section. (Section 11 imposes a tax on the taxable
income of corporations.)
Furthermore, the obligation to pay tax is described in section 6151, which
requires taxpayers to submit payment with their tax returns. Failure to pay
taxes could subject the noncomplying individual to criminal penalties,
including fines and imprisonment, as well as civil penalties.
In discussing section 6151, the Eighth Circuit Court of Appeals stated that
“when a tax return is required to be filed, the person so required ‘shall’ pay
such taxes to the internal revenue officer with whom the return is filed at
the fixed time and place. The sections of the Internal Revenue Code
imposed a duty on Drefke to file tax returns and pay the . . . tax, a duty
which he chose to ignore.” United States v. Drefke, 707 F.2d 978, 981
(8th Cir. 1983).
In United States v. Kuglin, No. 03-20111 (W.D. Tenn. Aug. 8, 2003),
Vernice B. Kuglin faced criminal charges for falsifying Forms W-4 and
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failing to pay taxes on $920,000 of income between 1996 and 2001, but
was acquitted by a federal jury. Kuglin argued that she attempted to
determine whether the income was taxable but the Service did not
respond to her letters. Government officials issued press releases making
it clear that the outcome in Kuglin should be treated as an “aberration” and
noting that persons acquitted of criminal tax violations are not relieved of
their obligation to pay taxes due. See 2003 TNT 155-12 (Aug. 11, 2003);
2003 TNT 155-13 (Aug. 11, 2003); 2003 TNT 158-2 (Aug. 14, 2003).
The defendant in United States v. Brunet, No. 03-00057 (M.D. Tenn.
March 12, 2004), argued he could not find any information that would lead
him to conclude the Internal Revenue Code made him liable to file income
tax returns or pay taxes. In stark contrast to Kuglin, the jury returned
guilty verdicts against Brunet on four counts of tax evasion and the court
sentenced him to serve 27 months in prison. See 2004 TNT 51-33 (March
12, 2004).
There have been no civil cases where the Service’s lack of response to a
taxpayer’s inquiry has relieved the taxpayer of the duty to pay tax due
under the law. Courts have in rare instances waived civil penalties
because they have found that a taxpayer relied on a Service misstatement
or wrongful misleading silence with respect to a factual matter. Such an
estoppel argument does not, however, apply to a legal matter such as
whether there is legal authority to collect taxes. See, e.g., McKay v.
Commissioner, 102 T.C. 465 (1994), rev’d as to other issues, 84 F.3d 433
(5th Cir. 1996). Kuglin’s case, discussed above, did not prove to be the
exception. Despite her acquittal of criminal charges, on September 12,
2004, Kuglin entered a settlement with the IRS in the Tax Court in which
she agreed to pay more than half a million dollars in back taxes and
penalties. Kuglin v. Commissioner, Docket No. 21743-03; see 2004 TNT
177-6 (Sept. 13, 2004).
In August 2004, an appellate court affirmed a federal district court
preliminary injunction barring Irwin Schiff, Cynthia Neun, and Lawrence N.
Cohen from selling a tax scheme that fraudulently claimed that payment of
federal income tax is voluntary. United States v. Schiff, 379 F.3d 621 (9th
Cir. 2004); see http://www.usdoj.gov/tax/txdv04551.htm. Also, in October
2005, the trio was convicted by a Las Vegas jury for various criminal
charges relating to the federal income tax laws. See 2005 TNT 205-4
(Oct. 25, 2005). Schiff received a sentence of more than 12 years in
prison and was ordered to pay more than $4.2 million in restitution to the
IRS; Neun received a sentence of nearly 6 years and was ordered to pay
$1.1 million in restitution to the IRS; and, Cohen received a sentence of
nearly 3 years and was ordered to pay $480,000 in restitution to the IRS.
See http://www.usdoj.gov/opa/pr/2006/February/06_tax_098.html; 2006
TNT 38-67 (Feb. 24, 2006); 2006 TNT 24-62 (Feb. 3, 2006).
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Earlier this year, a dentist, Dr. Elaine Brown, and her husband, Ed Brown,
were prosecuted in a federal district court in New Hampshire of conspiracy
to defraud the federal government and, as to Dr. Brown, income tax
evasion, among other charges. These taxpayers claimed that they were
not subject to taxation and that the IRS never responded to their demands
for a legal explanation. In an opening statement to the jury, Ed Brown
proclaimed, “We will once and for all show beyond the shadow of a doubt .
. . that the federal income tax system is a fraud.” They failed to do so,
however, as the jury convicted the Browns on all charges. See
http://www.usdoj.gov/tax/usaopress/2007/txdv07WEM_Browns.pdf. After
being sentenced in April, they refused to surrender themselves to
authorities and were arrested at their home on October 4, 2007, to begin
serving their prison terms.

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Relevant Case Law:
United States v. Bressler, 772 F.2d 287, 291 (7th Cir. 1985) – the court
upheld Bressler’s conviction for tax evasion, noting, “[he] has refused to
file income tax returns and pay the amounts due not because he
misunderstands the law, but because he disagrees with it . . . . [O]ne who
refuses to file income tax returns and pay the tax owing is subject to
prosecution, even though the tax protester believes the laws requiring the
filing of income tax returns and the payment of income tax are
unconstitutional.”
Wilcox v. Commissioner, 848 F.2d 1007, 1008 (9th Cir. 1988) – the court
rejected Wilcox’s argument that payment of taxes is voluntary for
American citizens, stating that “paying taxes is not voluntary” and
imposing a $1,500 penalty against Wilcox for raising frivolous claims.
Schiff v. United States, 919 F.2d 830, 833 (2d Cir. 1990), cert. denied, 501
U.S. 1238 (1991) – the court rejected Schiff’s arguments as meritless and
upheld imposition of the civil fraud penalty, stating “[t]he frivolous nature of
this appeal is perhaps best illustrated by our conclusion that Schiff is
precisely the sort of taxpayer upon whom a fraud penalty for failure to pay
income taxes should be imposed.”
United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) – the court
stated that the “[taxpayers’] claim that payment of federal income tax is
voluntary clearly lacks substance” and imposed sanctions in the amount of
$1,500 “for bringing this frivolous appeal based on discredited, taxprotester
arguments.”
Packard v. United States, 7 F. Supp. 2d 143, 145 (D. Conn. 1998) – the
court dismissed Packard’s refund suit for recovery of penalties for failure
to pay income tax and failure to pay estimated taxes where the taxpayer
contested the obligation to pay taxes on religious grounds, noting that “the
ability of the Government to function could be impaired if persons could
6
refuse to pay taxes because they disagreed with the Government’s use of
tax revenues.”
Horowitz v. Commissioner, T.C. Memo. 2006-91, 91 T.C.M. (CCH) 1120 –
the court imposed sanctions in the amount of $10,000 in rejecting the
taxpayer’s arguments, including the frivolous claim that he could find no
statute or regulation making him liable for an income tax.
Bonaccorso v. Commissioner, T.C. Memo. 2005-278, 90 T.C.M. (CCH)
554 (2005) – the taxpayer filed zero returns based on the argument that
he found no Code section that made him liable for any income tax. The
court held that the taxpayer’s argument was frivolous citing to section 1
(imposes an income tax), section 63 (defines taxable income as gross
income minus deductions), and section 61 (defines gross income). The
court also imposed a $10,000 sanction against the taxpayer under section
6673 for making frivolous arguments.
3. Contention: Taxpayers can reduce their federal income tax
liability by filing a “zero return.”
Some taxpayers are attempting to reduce their federal income tax liability
by filing a tax return that reports no income and no tax liability (a “zero
return”) even though they have taxable income. Many of these taxpayers
also request a refund of any taxes withheld by an employer. These
individuals typically attach to the zero return a Form W-2, or other
information return that reports income and income tax withholding, and
rely on one or more of the frivolous arguments discussed throughout this
outline in support of their position.
The Law: There is no authority that permits a taxpayer that has taxable
income to avoid income tax by filing a zero return. Section 61 provides
that gross income includes all income from whatever source derived,
including compensation for services. Courts have repeatedly penalized
taxpayers for making the frivolous argument that the filing of a zero return
can allow a taxpayer to avoid income tax liability, or permit a refund of tax
withheld by an employer. Courts have also imposed the frivolous return
and failure to file penalties because such forms do not evidence an honest
and reasonable attempt to satisfy the tax laws or contain sufficient data to
calculate the tax liability. The IRS issued Revenue Ruling 2004-34, 2004-
1 C.B. 619, warning taxpayers of the consequences of making this
argument. Furthermore, the inclusion of the phrase “nunc pro tunc,” or
other legal phrase, does not have any legal effect and does not serve to
validate a zero return. See Rev. Rul. 2006-17, 2006-15 I.R.B. 748.
In December 2005, a federal district court in Arizona permanently barred
Beverly J. Hill and Darrell J. Hill (individually and doing business as
Superior Claims Management) from, among other things, preparing or
filing federal tax returns for any person or entity other than themselves.
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The court found that the couple filed zero returns on behalf of their clients
based on various frivolous tax arguments, thus interfering with the
administration and enforcement of the internal revenue laws. United
States v. Hill, 97 A.F.T.R.2d (RIA) 548, 2005 WL 3536118 (D. Ariz. 2005);
see also, 2005 TNT 248-8 (Dec. 27, 2005).
In April 2006, a federal district court in Michigan permanently barred
Charles Conces from promoting several fraudulent tax schemes, including
one in which he filed “zero returns” on behalf of his clients on the faulty
premise that income is not taxable. See
http://www.usdoj.gov/opa/pr/2006/April/06_tax_243.html; see also 2006
TNT 80-36 (Apr. 25, 2006). In March 2007, U.S. Marshals arrested
Conces. The arrest resulted from a federal judge’s order on February 23,
2007, finding Conces in civil contempt of court for failing to obey a court
order entered on February 8. The February 8 order compelled Conces to
disclose to the government the identities of certain persons for whom he
drafted or provided advice regarding federal income taxes, the identities of
the persons who are responsible for his website, and all documents that
he drafted or assisted in drafting for these persons. The order was
affirmed on appeal, United States v. Conces, ___F.3d __, 2007 WL
3406765 (6th Cir. 2007). Conces refused to disclose the identities and
documents as ordered by the court. See
http://www.usdoj.gov/tax/txdv07121.htm.
Relevant Case Law:
Little v. United States, 2005 WL 2989696, at *4 (M.D.N.C. 2005) –
taxpayer filed income tax returns showing “0” income and “0” tax liability,
even though his W-2 Forms showed taxable income. In response, the IRS
imposed penalties for submitting frivolous returns in violation of 26 U.S.C.
§ 6702. The court noted that multiple other courts have upheld such a
penalty assessment in similar cases where taxpayers filed a “zero return”
based on various “tax protester” arguments. Determining that plaintiff
failed to raise any genuine issues of material fact, the court upheld the
penalties.
Schultz v. United States, 2005 WL 1155203, at *3 (W.D. Mich. 2005) –
“Courts have consistently found the arguments made by Plaintiffs, or ones
very similar, in support of an all zero return to be frivolous.”
Yuen v. United States, 290 F.Supp.2d 1220,1224 (D. Nev. 2003) –
taxpayer's tax returns were substantially incorrect and frivolous, when he
filed returns with zeros on nearly every line, and thus, the court decided,
assessments of frivolous return penalties were valid.
Gillett v. United States, 233 F.Supp. 2d 874, 881 (W.D. Mich. 2002) – the
court stated “[n]umerous federal courts have upheld the imposition of the
$500 sanction by the IRS pursuant to 26 U.S.C. § 6702(a) [for frivolous
8
returns], where, as here, a tax form is filed stating that an individual had
no income, but the attached W-2 forms show wages, tips, or other
compensation of greater than zero.”
United States v. Schiff, et al., 379 F.3d 621 (9th Cir. 2004) – the court of
appeals upheld a federal district court preliminary injunction barring Irwin
Schiff and two associates from promoting their “zero-income” tax return
theories through his bookstore and three Internet websites. As the court
noted, Mr. Schiff “has a long history of opposition to the federal income tax
laws” and has never been successful in court with his theory that “the
federal income tax is voluntary.”
Bonaccorso v. Commissioner, T.C. Memo. 2005-278, 90 T.C.M. (CCH)
554 (2005) – the taxpayer filed zero returns based on the argument that
he found no Code section that made him liable for any income tax. The
court held that the taxpayer’s argument was frivolous citing to section 1
(imposes an income tax), section 63 (defines taxable income as gross
income minus deductions), and section 61 (defines gross income). The
court also imposed a $10,000 sanction against the taxpayer under section
6673 for making frivolous arguments.
Halcott v. Commissioner, T.C. Memo. 2004-214 – the court held the
taxpayer liable for the penalty under section 6651(a)(1) for failure to timely
file his return where the taxpayer filed a “zero return.”
Hill v. Commissioner, T.C. Memo. 2003-144, 85 T.C.M. (CCH) 1328, 1331
(2003) – the court imposed a $15,000 penalty under section 6673
because the taxpayer took the frivolous “zero return” position.
Rayner v. Commissioner, T.C. Memo. 2002-30, 83 T.C.M. (CCH) 1161
(2002) – the court imposed a $5,000 penalty under section 6673 where
the taxpayer argued the frivolous “zero return” position.
4. Contention: The IRS must prepare federal tax returns for a
person who fails to file.
Proponents of this argument contend that section 6020(b) obligates the
IRS to prepare and sign under penalties of perjury a federal tax return for
a person who does not file a return. Thus, those who subscribe to this
contention claim that they are not required to file a return for themselves.
The Law: Section 6020(b) merely provides the IRS with a mechanism for
determining the tax liability of a taxpayer who has failed to file a return.
Section 6020(b) does not require the IRS to prepare or sign under
penalties of perjury tax returns for persons who do not file and it does not
excuse the taxpayer from civil penalties or criminal liability for failure to
file.
Relevant Case Law:
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United States v. Cheek, 3 F.3d 1057, 1063 (7th Cir. 1993) – the court held
the district court did not err when it instructed the jury that defendant’s
belief that Section 6020 permitted the Secretary of the Treasury to prepare
a tax return for a person did not negate “in any way” the obligation to file a
tax return.
In re Bergstrom, 949 F.2d 341, 343 (10th Cir. 1991) – recognized that
“[c]ourts have held that 26 U.S.C. § 6020(b) provides the IRS with some
recourse if a taxpayer fails to file a return as required under 26 U.S.C. §
6012, but that it does not excuse a taxpayer from the filing requirement.”
United States v. Barnett, 945 F.2d 1296, 1300 (5th Cir. 1991) - where
defense counsel in prosecution for willful failure to file individual federal
income tax returns raised inference that the IRS actually had some
statutory duty to file returns for delinquent taxpayers, court properly
instructed jury that IRS has no such duty.
Schiff v. United States, 919 F.2d 830, 832 (2d Cir. 1990) – the court
rejected the taxpayer’s argument that the IRS must prepare a substitute
return pursuant to section 6020(b) prior to assessing deficient taxes,
stating “[t]here is no requirement that the IRS complete a substitute
return.”
United States v. Lacy, 658 F.2d 396, 397 (5th Cir. 1981) – the court, in
upholding the taxpayer’s conviction for willfully and knowingly failing to file
a return, stated that “ . . . the purpose of section 6020(b)(1) is to provide
the Internal Revenue Service with a mechanism for assessing the civil
liability of a taxpayer who has failed to file a return, not to excuse that
taxpayer from criminal liability which results from that failure.”
Moore v. Commissioner, 722 F.2d 193, 196 (5th Cir. 1984) – the court
stated that “section [6020(b)] provides the Secretary with some recourse
should a taxpayer fail to fulfill his statutory obligation to file a return, and
does not supplant the taxpayer’s original obligation to file established by
26 U.S.C. § 6012.”
Stewart v. Commissioner, T.C. Memo. 2005-212, 90 T.C.M. (CCH) 269
(2005) – the court found that the IRS need not prepare a substitute return
in order to determine a deficiency where the taxpayer has not filed a return
for the year at issue.
5. Contention: Compliance with an administrative summons issued
by the IRS is voluntary.
Some summoned parties may assert that they are not required to respond
to or comply with an administrative summons. Proponents of this position
argue that a summons thus can be ignored. The Second Circuit’s opinion
in Schulz v. I.R.S., 413 F.3d 297 (2d Cir. 2005) (“Schulz II”) is often cited
to support this proposition.
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The Law: A summons is an administrative device with which the IRS can
summon persons to appear, testify, and produce documents. The IRS is
statutorily authorized to inquire about any person who may be liable to pay
any internal revenue tax, and to summons a witness to testify or to
produce books, papers, records, or other data that may be relevant or
material to an investigation. 26 U.S.C. § 7602; United States v. Powell,
379 U.S. 48 (1964). Sections 7402(b) and 7604(a) of the Internal
Revenue Code grant jurisdiction to district courts to enforce a summons,
and section 7604(b) governs the general enforcement of summonses by
the IRS.
Section 7604(b) allows courts to issue attachments, consistent with the
law of contempt, to ensure attendance at an enforcement hearing "[i]f the
taxpayer has contumaciously refused to comply with the administrative
summons and the [IRS] fears he may flee the jurisdiction." Powell, 379
U.S. at 58 n.18; see also Reisman v. Caplin, 375 U.S. 440, 448-49 (1964)
(noting that section 7604(b) actions are in the nature of contempt
proceedings against persons who “wholly made default or contumaciously
refused to comply,” with an administrative summons issued by the IRS).
Under section 7604(b), the courts may also impose contempt sanctions for
disobedience of an IRS summons.
Failure to comply with an IRS administrative summons also could subject
the non-complying individual to criminal penalties, including fines and
imprisonment. 26 U.S.C. § 7210. While the Second Circuit held in Schulz
II that, for due process reasons, the government must first seek judicial
review and enforcement of the underlying summons and to provide an
intervening opportunity to comply with a court order of enforcement prior
to seeking sanctions for noncompliance, the court’s opinion did not
foreclose the availability of prosecution under section 7210.
Relevant Case Law:
United States v. Becker, 58-1 U.S.T.C. ¶ 9403, at 68,062-68,064
(S.D.N.Y. 1958), aff’d, 259 F.2d 869 (2d Cir.) (per curiam), cert. denied,
258 U.S. 929 (1959) – In Becker, the defendant failed to produce certain
books and records specified in an IRS summons because, he claimed, the
books and records had been destroyed by fire. The government filed an
information on January 10, 1958, in which it charged that Becker, the
defendant, had violated 26 U.S.C. § 7210. Based upon the evidence
presented at trial (including the fact that some of the specified books were
subsequently produced in compliance with a grand jury subpoena), the
district court found that Becker had been duly summoned and, as a fact
beyond a reasonable doubt, had willfully and knowingly neglected to
produce certain books and papers called for by a summons served upon
him by a special agent of the IRS. Becker, 58-1 U.S.T.C. ¶ 9403, at
68,064. The court therefore found Becker guilty of the charge under
section 7210. Id.
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Schulz v. I.R.S., 413 F.3d 297 (2d Cir. 2005) (“Schulz II”) – the court,
upholding its prior per curiam opinion, reported at Schulz v. I.R.S., 395
F.3d 463 (2d Cir. 2005) (“Schulz I”), held that, based upon constitutional
due process concerns, an indictment under 26 U.S.C. § 7210 shall not lie
and contempt sanctions under 26 U.S.C. § 7604(b) shall not be levied
based on disobedience of an IRS summons until that summons has been
enforced by a federal court order and the summoned party, after having
been given a reasonable opportunity to comply with the court’s order, has
refused. The court noted that “[n]either this opinion nor Schulz I prohibits
the issuance of pre-hearing attachments consistent with due process and
the law of contempts.” Schulz II, 413 F.3d at 304.
B. The Meaning of Income: Taxable Income and Gross Income
1. Contention: Wages, tips, and other compensation received for
personal services are not income.
This argument asserts that wages, tips, and other compensation received
for personal services are not income, because there is allegedly no
taxable gain when a person “exchanges” labor for money. Under this
theory, wages are not taxable income because people have basis in their
labor equal to the fair market value of the wages they receive; thus, there
is no gain to be taxed. A variation of this argument misconstrues section
1341, which deals with computations of tax where a taxpayer restores a
substantial amount held under claim of right, to somehow allow a
deduction claim for personal services rendered.
Another similar argument asserts that wages are not subject to taxation
where a person has obtained funds in exchange for their time. Under this
theory, wages are not taxable because the Code does not specifically tax
these so-called “time reimbursement transactions.” Some take a different
approach and argue that the Sixteenth Amendment to the United States
Constitution did not authorize a tax on wages and salaries, but only on
gain or profit.
The Law: For federal income tax purposes, “gross income” means all
income from whatever source derived and includes compensation for
services. I.R.C. § 61. Any income, from whatever source, is presumed to
be income under section 61, unless the taxpayer can establish that it is
specifically exempted or excluded. In Reese v. United States, 24 F.3d
228, 231 (Fed. Cir. 1994), the court stated, “an abiding principle of federal
tax law is that, absent an enumerated exception, gross income means all
income from whatever source derived.” The IRS issued Revenue Ruling
2007-19, 2007-14 I.R.B. 843, advising taxpayers that wages and other
compensation received in exchange for personal services are taxable
income and warning of the consequences of making frivolous arguments
to the contrary.
12
Section 1341 and the cases interpreting it require taxpayers to return
funds previously reported as income before they can claim a deduction
under claim of right. To have the right to a deduction, the taxpayer should
appear to have an unrestricted right to the income in question. See
Dominion Resources, Inc. v. United States, 219 F.3d 359 (4th Cir. 2000).
It is a frivolous argument to claim a section 1341 deduction when there
has been no repayment by the taxpayer of an amount previously reported
as income. The Internal Revenue Service issued Revenue Ruling 2004-
29, 2004-1 C.B. 627, warning taxpayers of the consequences of making
this frivolous argument.
The Sixteenth Amendment provides that Congress shall have the power to
lay and collect taxes on income, from whatever source derived, without
apportionment among the several states, and without regard to any
census or enumeration. U.S. Const. amend. XVI. Furthermore, the U.S.
Supreme Court upheld the constitutionality of the income tax laws enacted
subsequent to ratification of the Sixteenth Amendment in Brushaber v.
Union Pacific R.R., 240 U.S. 1 (1916). Since that time, the courts have
consistently upheld the constitutionality of the federal income tax. For a
further discussion of the constitutionality of the federal income tax laws,
see section I.D. of this outline.
All compensation for personal services, no matter what the form of
payment, must be included in gross income. This includes salary or
wages paid in cash, as well as the value of property and other economic
benefits received because of services performed, or to be performed in
the future. Furthermore, criminal and civil penalties have been imposed
against individuals relying upon this frivolous argument.
Taxpayers who assert the position that wages are not taxable income, or
other frivolous positions, may later claim that they were ignorant of or did
not purposely disregard the requirements of the tax laws, such as the
requirements to report wages and to withhold and pay taxes. Also, a
handful of taxpayers who are criminally charged with violations of the
internal revenue laws have avoided conviction.
For instance, in October 2006, Tommy K. Cryer was charged with two
counts of tax evasion. Mr. Cryer asserted that there was no taxable gain
when a person "exchanges" labor for money. Mr Cryer was subsequently
acquitted on both criminal counts. See
http://www.usdoj.gov/usao/law/news/wdl20061026.pdf
Taxpayers should not mistake these cases for an indication that frivolous
positions that lead to criminal acquittals are legitimate or that the outcome
of other cases will protect a taxpayer from sanctions resulting from
noncompliance. Furthermore, while a few defendants have prevailed, the
vast majority are convicted. Also, even though a taxpayer may be
acquitted of criminal charges of noncompliance with Federal tax laws, the
13
Service is still free to pursue any underlying tax liability and is not barred
from determining civil penalties. See Helvering v. Mitchell, 303 U.S. 391
(1938); Price v. Commissioner, T.C. Memo. 1996-204.
In November 2004, a federal district court in Ohio barred Michael A.
Allamby from preparing federal tax returns and representing taxpayers
before the IRS. Mr. Allamby erroneously interpreted the instructions to
certain federal tax forms as requiring individuals to report their wages as
income only if they invested the wages to earn income. See
http://www.usdoj.gov/tax/txdv04733.htm; see also 2004 TNT 215-24 (Nov.
4, 2004). Also, in May 2005, a federal district court in Louisiana
permanently barred Richard A. Fuselier and Richard J. Ortt and their
organization, Compensation Consultants, from preparing tax returns and
promoting tax schemes, such as the “not for profit” scheme, which was
based on the premise that wages cannot be taxed. See
http://www.usdoj.gov/opa/pr/2005/March/05_tax_085.htm; see also 2005
TNT 94-16 (May 16, 2005).
In January 2005, a federal district court in California permanently enjoined
Joseph O. Saladino, founder of an organization known as the Freedom
and Privacy Committee, from promoting two schemes: the “claim of right”
program and the “corporation sole” scheme (discussed below in this
outline). See http://www.usdoj.gov/tax/txdv05005.htm; see also 2005 TNT
15-22 (Jan. 24, 2005). Also, in January 2005, a federal district court in
North Carolina permanently barred Frank D. Perkinson from selling the
“claim of right” program and the “corporation sole” scheme. See
http://www.usdoj.gov/opa/pr/2005/January/05_tax_005.htm; see also 2005
TNT 5-16 (Jan. 6, 2005).
In June 2006, Richard M. Blackstock was convicted on thirty-two counts of
assisting in the preparation of fraudulent returns based on his involvement
in filing various returns claiming deductions for wages, salaries and other
compensation under the frivolous “claim of right” theory. See
http://www.usdoj.gov/tax/usaopress/2006/txdv06Blackstock_USAO_OK.w
pd; see also 2006 TNT129-31 (Jun. 23, 2006).
Relevant Case Law:
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955) –
referring to the statute’s words “income derived from any source
whatever,” the Supreme Court stated, “this language was used by
Congress to exert in this field ‘the full measure of its taxing power.’ . . .
And the Court has given a liberal construction to this broad phraseology in
recognition of the intention of Congress to tax all gains except those
specifically exempted.”
Commissioner v. Kowalski, 434 U.S. 77 (1977) – the Supreme Court
found that payments are considered income where the payments are
14
undeniably accessions to wealth, clearly realized, and over which a
taxpayer has complete dominion.
Cheek v. United States, 498 U.S. 192 (1991) – the Supreme Court
reversed and remanded Cheek’s conviction of willfully failing to file federal
income tax returns and willfully attempting to evade income taxes solely
on the basis of erroneous jury instructions. The Court noted, however,
that Cheek’s argument, that he should be acquitted because he believed
in good faith that the income tax law is unconstitutional, “is unsound, not
because Cheek’s constitutional arguments are not objectively reasonable
or frivolous, which they surely are, but because the [law regarding
willfulness in criminal cases] does not support such a position.” Id.
(emphasis added). On remand, Cheek was convicted on all counts and
sentenced to jail for a year and a day. Cheek v. United States, 3 F.3d
1057 (7th Cir. 1993), cert. denied, 510 U.S. 1112 (1994).
United States v. Becker, 965 F.2d 383, 389 (7th Cir. 1992) – the court
found defendant’s contention that wages are not income to be “ridiculous.”
United States v. Sloan, 939 F.2d 499, 500 (7th Cir. 1991) – in rejecting
defendant’s argument that the revenue laws of the United States do not
impose a tax on income, the court recognized the “Internal Revenue Code
imposes a tax on all income.”
United States v. Connor, 898 F.2d 942, 943-44 (3d Cir.), cert. denied, 497
U.S. 1029 (1990) – the court stated that “[e]very court which has ever
considered the issue has unequivocally rejected the argument that wages
are not income.”
Lonsdale v. Commissioner, 661 F.2d 71, 72 (5th Cir. 1981) – the court
rejected as “meritless” the taxpayer’s contention that the “exchange of
services for money is a zero-sum transaction . . . .”
Stelly v. Commissioner, 761 F. 2d 1113 (5th Cir. 1985) – the Fifth Circuit
affirmed the Tax Court’s holding against the taxpayer’s argument that
taxing wage and salary income is a violation of the constitution because
compensation for labor is an exchange, not gain. The Fifth Circuit also
fined the taxpayer for bringing a frivolous appeal.
United States v. White, 769 F. 2d 511 (8th Cir. 1985) – the court issued a
permanent injunction to prevent the promotion of the argument that there
is no tax imposed on an exchange of property (labor) in an equal
exchange for property (wages).
United States v. Richards, 723 F.2d 646, 648 (8th Cir. 1983) – the court
upheld conviction and fines imposed for willfully failing to file tax returns,
stating that the taxpayer’s contention that wages and salaries are not
income within the meaning of the Sixteenth Amendment is “totally lacking
in merit.”
15
United States v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981) – the court
affirmed Romero’s conviction for willfully failing to file tax returns, finding,
in part, that “[t]he trial judge properly instructed the jury on the meaning of
[‘income’ and ‘person’]. Romero’s proclaimed belief that he was not a
‘person’ and that the wages he earned as a carpenter were not ‘income’ is
fatuous as well as obviously incorrect.”
Abdo v. United States, 234 F. Supp. 2d 553 (M.D. N.C. 2002), aff’d, 2003-
1 U.S.T.C. (CCH) ¶ 50,483 (4th Cir. 2003) – the tax preparer prepared
returns based on the argument that labor is an exchange for wages and
not taxable. The court cited Connor, supra, when finding that the tax
preparer misstated the law.
McCoy v. United States, 88 A.F.T.R.2d (RIA) 7116, 2001 U.S. Dist. LEXIS
18986 (N.D. Tex. Nov. 16, 2001) – the court rejected the taxpayer’s
argument that wages received were not income and described this
position as meritless.
Sumter v. United States, 61 Fed. Cl. 517, 523 (2004) – the court found the
taxpayer’s “claim of right” argument as “devoid of any merit” and that
section 1341 only applies to situations in which the claimant is compelled
to return the taxed item because of a mistaken presumption that the right
held was unrestricted and, thus, the item was previously reported,
erroneously, as taxable income. Section 1341 was inapplicable to Ms.
Sumter, because she had a continuing, unrestricted claim of right to her
salary income and had not been compelled to repay that income in a later
tax year.
Abrams v. Commissioner, 82 T.C. 403, 413 (1984) – the court rejected the
argument that wages are not income, sustained the failure to file penalty,
and awarded damages of $5,000 for pursuing a position that was
“frivolous and groundless . . . and maintained primarily for delay.”
Reading v. Commissioner, 70 T.C. 730 (1978), aff’d, 614 F.2d 159 (8th
Cir. 1980) – the court said the entire amount received from the sale of
one’s services constitutes income within the meaning of the Sixteenth
Amendment.
Cullinane v. Commissioner, T.C. Memo. 1999-2, 77 T.C.M. (CCH) 1192,
1193 (1999) – noting that “[c]ourts have consistently held that
compensation for services rendered constitutes taxable income and that
taxpayers have no tax basis in their labor,” the court found Cullinane liable
for the failure to file penalty, stating that “[his] argument that he is not
required to pay tax on compensation for services does not constitute
reasonable cause.”
Wheelis v. Commissioner, T.C. Memo. 2002-102, 83 T.C.M. (CCH) 1543-
45 (2002) – the court rejected the taxpayer’s frivolous argument that his
wages were not taxable based on his belief that “[p]roperty (money)
16
exchanged for property (labor not subject to tax)” is not subject to income
taxation. The court stated that such claims have been “consistently and
thoroughly rejected” by the courts and imposed a penalty against Wheelis
in the amount of $10,000 for making frivolous arguments.
Carskadon v. Commissioner, T.C. Memo. 2003-237, 86 T.C.M. (CCH)
234, 236 – the court rejected the taxpayer’s frivolous argument that
“wages are not taxable because the Code, which states what is taxable,
does not specifically state that ‘time reimbursement transactions,’ a term
of art coined by [taxpayers], are taxable.” The court imposed a $2,000
penalty against the taxpayers for raising “only frivolous arguments which
can be characterized as tax protester rhetoric.”
2. Contention: Only foreign-source income is taxable.
Some maintain that there is no federal statute imposing a tax on income
derived from sources within the United States by citizens or residents of
the United States. They argue instead that federal income taxes are
excise taxes imposed only on nonresident aliens and foreign corporations
for the privilege of receiving income from sources within the United States.
The premise for this argument is a misreading of sections 861, et seq.,
and 911, et seq., as well as the regulations under those sections.
The Law: As stated above, for federal income tax purposes, “gross
income” means all income from whatever source derived and includes
compensation for services. I.R.C. § 61. Further, Treasury Regulation
§ 1.1-1(b) provides, “[i]n general, all citizens of the United States,
wherever resident, and all resident alien individuals are liable to the
income taxes imposed by the Code whether the income is received from
sources within or without the United States.” I.R.C. sections 861 and 911
define the sources of income (U.S. versus non-U.S. source income) for
such purposes as the prevention of double taxation of income that is
subject to tax by more than one country. These sections neither specify
whether income is taxable, nor do they determine or define gross income.
These frivolous assertions are clearly contrary to well-established legal
precedent.
In March 2005, a federal district court in Florida barred Gregory T. Mayer
from preparing false or fraudulent returns and selling fraudulent tax
schemes relying upon, among other things, the frivolous section 861
argument, which falsely claims that income from sources in the United
States is not subject to federal income tax. See
http://www.usdoj.gov/opa/pr/2005/March/05_tax_119.htm; see also 2005
TNT 49-63 (Mar. 14, 2005). In August 2005, a federal district court in
Florida permanently barred Carel “Chad” Prater and Richard Cantwell
from promoting tax-fraud scams relying on the section 861 argument. See
http://www.usdoj.gov/opa/pr/2005/September/05_tax_505.html; see also
2005 TNT 204-51 (Aug. 30, 2005).
17
In May 2005, the Tenth Circuit affirmed the conviction and 108 month
sentence of Ernest G. Ambort for willfully aiding and assisting in the
preparation of false income tax returns. The basis of the conviction
involved seminars conducted by Mr. Ambort where he falsely instructed
the attendees that they could claim to be nonresident aliens with no
domestic source income, regardless of place of birth, so that they were
exempt from most federal income taxes. United States v. Ambort, 405
F.3d 1109 (10th Cir. 2005); see also 2005 TNT 86-10 (May 3, 2005).
In August 2005, a Philadelphia jury convicted Larken Rose on five counts
of willful failure to file federal income tax returns based on the frivolous
section 861 argument. Mr. Rose was sentenced in federal district court to
15 months imprisonment, and must pay a fine of $10,000, as well as all
taxes, interest and penalties that he owes to the IRS. See
http://www.usdoj.gov/opa/pr/2005/August/05_tax_418.htm; see also 2005
TNT 157-22 (Aug. 12, 2005); 2005 TNT 225-17 (Nov. 22, 2005).
The IRS issued Revenue Ruling 2004-28, 2004-1 C.B. 624, which
discusses section 911, and Revenue Ruling 2004-30, 2004-1 C.B. 622,
which discusses section 861, warning taxpayers of the consequences of
making these frivolous arguments.
Relevant Case Law:
Great-West Life Assur. Co. v. United States, 678 F.2d 180, 183 (Ct. Cl.
1982) – the court stated that “[t]he determination of where income is
derived or ‘sourced’ is generally of no moment to either United States
citizens or United States corporations, for such persons are subject to tax
under I.R.C. § 1 and I.R.C. § 11, respectively, on their worldwide income.”
Takaba v. Commissioner, 119 T.C. 285, 295 (2002) – the court rejected
the taxpayer’s argument that income received from sources within the
United States is not taxable income, stating that “[t]he 861 argument is
contrary to established law and, for that reason, frivolous.” The court
imposed sanctions against the taxpayer in the amount of $15,000, as well
as sanctions against the taxpayer’s attorney in the amount of $10,500, for
making such groundless arguments.
Williams v. Commissioner, 114 T.C. 136, 138 (2000) – the court rejected
the taxpayer’s argument that his income was not from any of the sources
listed in Treas. Reg. § 1.861-8(a), characterizing it as “reminiscent of taxprotester
rhetoric that has been universally rejected by this and other
courts.”
Corcoran v. Commissioner, T.C. Memo. 2002-18, 83 T.C.M. (CCH) 1108,
1110 (2002) – the court rejected the taxpayers’ argument that his income
was not from any of the sources in Treas. Reg. § 1.861-8(f), stating that
the “source rules [of sections 861 through 865] do not exclude from U.S.
taxation income earned by U.S. citizens from sources within the United
18
States.” The court further required the taxpayers to pay a $2,000 penalty
under section 6673(a)(1) because “they . . . wasted limited judicial and
administrative resources.”
Aiello v. Commissioner, T.C. Memo. 1995-40, 69 T.C.M. (CCH) 1765
(1995) – the court rejected the taxpayer’s argument that the only sources
of income for purposes of section 61 are listed in section 861.
Madge v. Commissioner, T.C. Memo. 2000-370, 80 T.C.M. (CCH) 804
(2000) – the court labeled as “frivolous” the position that only foreign
income is taxable.
Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201,
1202 (1993) – the court rejected the taxpayer’s argument that his income
was exempt from tax by operation of sections 861 and 911, noting that he
had no foreign income and that section 861 provides that “compensation
for labor or personal services performed in the United States . . . are items
of gross income.”
3. Contention: Federal Reserve Notes are not income.
Some assert that Federal Reserve Notes currently used in the United
States are not valid currency and cannot be taxed, because Federal
Reserve Notes are not gold or silver and may not be exchanged for gold
or silver. This argument misinterprets Article I, Section 10 of the United
States Constitution.
The Law: Congress is empowered “[t]o coin Money, regulate the value
thereof, and of foreign coin, and fix the Standard of weights and
measures.” U.S. Const. Art. I, § 8, cl. 5. Article I, Section 10 of the
Constitution prohibits the states from declaring as legal tender anything
other than gold or silver, but does not limit Congress’ power to declare the
form of legal tender. See 31 U.S.C. § 5103; 12 U.S.C. § 411. In United
States v. Rifen, 577 F.2d 1111 (8th Cir. 1978), the court affirmed a
conviction for willfully failing to file a return, rejecting the argument that
Federal Reserve Notes are not subject to taxation. “Congress has
declared federal reserve notes legal tender . . . and federal reserve notes
are taxable dollars.” Id. at 1112. The courts have rejected this argument
on numerous occasions.
Relevant Case Law:
Sanders v. Freeman, 221 F.3d 846, 855 (6th Cir. 2000) – in regard to
defendant’s argument “that imposing sales tax on the sale of legal-tender
silver and gold coins unconstitutionally interferes with Congress's
exclusive power to coin money is simply untenable,” the court recognized
that “most, if not all, of the courts that have considered this issue have
held that imposing sales tax on the purchase of gold and silver coins and
bullion for cash does not infringe on Congress's constitutional power to
19
coin and regulate currency.” See also United States v. Davenport, 824
F.2d 1511, 1521 (7th Cir. 1987).
United States v. Condo, 741 F.2d 238, 239 (9th Cir. 1984) – the court
upheld the taxpayer’s criminal conviction, rejecting as “frivolous” the
argument that Federal Reserve Notes are not valid currency, cannot be
taxed, and are merely “debts.”
United States v. Rickman, 638 F.2d 182, 184 (10th Cir. 1980) – the court
affirmed the conviction for willfully failing to file a return and rejected the
taxpayer’s argument that “the Federal Reserve Notes in which he was
paid were not lawful money within the meaning of Art. 1, § 8, United
States Constitution.”
United States v. Daly, 481 F.2d 28, 30 (8th Cir.), cert. denied, 414 U.S.
1064 (1973) – the court rejected as “clearly frivolous” the assertion “that
the only ‘Legal Tender Dollars’ are those which contain a mixture of gold
and silver and that only those dollars may be constitutionally taxed” and
affirmed Daly’s conviction for willfully failing to file a return.
Jones v. Commissioner, 688 F.2d 17 (6th Cir. 1982) – the court found the
taxpayer’s claim that his wages were paid in “depreciated bank notes” as
clearly without merit and affirmed the Tax Court’s imposition of an addition
to tax for negligence or intentional disregard of rules and regulations.
C. The Meaning of Certain Terms Used in the Internal Revenue Code
1. Contention: Taxpayer is not a “citizen” of the United States, thus
not subject to the federal income tax laws.
Some individuals argue that they have rejected citizenship in the United
States in favor of state citizenship; therefore, they are relieved of their
federal income tax obligations. A variation of this argument is that a
person is a free born citizen of a particular state and thus was never a
citizen of the United States. The underlying theme of these arguments is
the same: the person is not a United States citizen and is not subject to
federal tax laws because only United States citizens are subject to these
laws.
The Law: The Fourteenth Amendment to the United States Constitution
defines the basis for United States citizenship, stating that “[a]ll persons
born or naturalized in the United States, and subject to the jurisdiction
thereof, are citizens of the United States and of the State wherein they
reside.” The Fourteenth Amendment therefore establishes simultaneous
state and federal citizenship. Claims that individuals are not citizens of the
United States but are solely citizens of a sovereign state and not subject
to federal taxation have been uniformly rejected by the courts. The IRS
issued Revenue Ruling 2007-22, 2007-14 I.R.B. 866, warning taxpayers of
the consequences of making this frivolous argument.
20
In April 2005, a federal district court in Georgia permanently barred
Jonathan D. Luman blocking him from selling his “Tax Buster” program
that was based on the false theory that customers can avoid paying tax by
renouncing their Social Security numbers and becoming sovereign
citizens. See http://www.usdoj.gov/opa/pr/2005/April/05_tax_190.htm; see
also 2005 TNT 93-17 (Apr. 7, 2005).
In September 2006, a federal district court in California permanently
barred James L. Tolbert from preparing income tax returns for others,
because he promoted a fraudulent tax scheme based on the frivolous
theory, among others, that state residents are not liable for federal income
tax since they are citizens of the state and not of the United States. See
http://www.usdoj.gov/opa/pr/2006/September/06_tax_602.html; see also
2006 TNT 177-31 (Sept. 8, 2006).
In January 2006, Lynn N. Ealy was sentenced in federal district court to 27
months imprisonment for his conviction on three counts of federal income
tax evasion and ordered to pay restitution of $84,174 to the IRS. The
evidence against Mr. Ealy demonstrated various affirmative acts of
evasion, including the fact that he claimed he was not a citizen of the
United States and the tax laws were unconstitutional. See 2006 TNT 18-
48 (Jan. 12, 2006).
Relevant Case Law:
United States v. Hilgeford, 7 F.3d 1340, 1342 (7th Cir. 1993) – the court
rejected "shop worn" argument that defendant is a citizen of the "Indiana
State Republic" and therefore an alien beyond the jurisdictional reach of
the federal courts.
United States v. Sileven, 985 F.2d 962 (8th Cir. 1993) – the court rejected
the argument that the district court lacked jurisdiction because the
taxpayer was not a federal citizen as “plainly frivolous.”
United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) – the court
rejected the Gerads’ contention that they were “not citizens of the United
States, but rather ‘Free Citizens of the Republic of Minnesota’ and,
consequently, not subject to taxation” and imposed sanctions “for bringing
this frivolous appeal based on discredited, tax-protester arguments.”
United States v. Sloan, 939 F.2d 499, 500 (7th Cir. 1991), cert. denied,
502 U.S. 1060, reh’g denied, 503 U.S. 953 (1992) – the court affirmed a
tax evasion conviction and rejected Sloan’s argument that the federal tax
laws did not apply to him because he was a “freeborn, natural individual, a
citizen of the State of Indiana, and a ‘master’ – not ‘servant’ – of his
government.”
United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987), cert. denied,
485 U.S. 1022 (1988) – the court found Ward’s contention that he was not
21
an “individual” located within the jurisdiction of the United States to be
“utterly without merit” and affirmed his conviction for tax evasion.
O'Driscoll v. Internal Revenue Service, 1991 U.S. Dist. LEXIS 9829, at *5-
6 (E.D. Pa. 1991) – the court stated, “despite [taxpayer’s] linguistic
gymnastics, he is a citizen of both the United States and Pennsylvania,
and liable for federal taxes.”
Bland-Barclay v. Commissioner, T.C. Memo. 2002-20, 83 T.C.M. (CCH)
1119, 1121 (2002) – the court rejected taxpayers’ claim that they were
exempt from the federal income tax laws due to their status as “citizens of
the Maryland Republic,” characterized such arguments as “baseless and
wholly without merit,” and required taxpayers to pay a $1,500 penalty for
making frivolous arguments.
Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201,
1202-03 (1993) – the court rejected Solomon’s argument that as an Illinois
resident his income was from outside the United States, stating “[he]
attempts to argue an absurd proposition, essentially that the State of
Illinois is not part of the United States. His hope is that he will find some
semantic technicality which will render him exempt from Federal income
tax, which applies generally to all U.S. citizens and residents. [His]
arguments are no more than stale tax protester contentions long
dismissed summarily by this Court and all other courts which have heard
such contentions.”
In September 2006, a federal district court in California barred James L.
Tolbert from preparing federal tax returns. Mr. Tolbert promoted a tax
scheme by representing, among other things, that residents of California
or other states are not liable for federal income tax because they are
“citizens of California (or other state) and not the United States,” or that
“American citizens working in the United States need not file federal
income returns because ‘compensation for labor’ is totally different in
meaning and in law from ‘income.’ See
http://www.usdoj.gov/tax/txdv05416.htm
2. Contention: The “United States” consists only of the District of
Columbia, federal territories, and federal enclaves.
Some argue that the United States consists only of the District of
Columbia, federal territories (e.g., Puerto Rico, Guam, etc.), and federal
enclaves (e.g., American Indian reservations, military bases, etc.) and
does not include the “sovereign” states. According to this argument, if a
taxpayer does not live within the “United States,” as so defined, he is not
subject to the federal tax laws.
The Law: The Internal Revenue Code imposes a federal income tax upon
all United States citizens and residents, not just those who reside in the
District of Columbia, federal territories, and federal enclaves. In United
22
States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990), cert. denied, 500
U.S. 920 (1991), the court cited Brushaber v. Union Pac. R.R., 240 U.S. 1,
12-19 (1916), and noted the United States Supreme Court has recognized
that the “sixteenth amendment authorizes a direct nonapportioned tax
upon United States citizens throughout the nation, not just in federal
enclaves.” This frivolous contention has been uniformly rejected by the
courts. Furthermore, the IRS issued Revenue Ruling 2006-18, 2006-15
I.R.B. 743, warning taxpayers of the consequences of making this
frivolous argument.
In April 2006, a federal district court in California permanently barred
Michael Muhammad (a.k.a., Michael Eugene Wall and Michael Muta Ali
Muhammad) from preparing federal income tax returns for others,
because he promoted a fraudulent tax scheme by preparing returns
reporting no income based on the theory that only income earned in the
District of Columbia and other federal territories need be reported. See
http://www.usdoj.gov/opa/pr/2006/April/06_tax_224.html; see also 2006
TNT 75-34 (Apr. 18, 2006).
In May 2005, a federal district judge sentenced Wayne C. Bentson to a
four year prison term to be followed by three years of probation, as well as
requiring Mr. Bentson to pay restitution of over $1.1 million for falsely
advising clients, among other things, that the internal revenue laws only
applied to individuals residing in the Virgin Islands, Guam and Puerto
Rico. See http://www.usdoj.gov/opa/pr/2005/May/05_tax_275.htm; see
also 2005 TNT 97-49 (May 18, 2005).
Relevant Case Law:
United States v. Cooper, 170 F.3d 691, 691 (7th Cir. 1999) – the court
sanctioned defendant for filing of frivolous appeal wherein he argued, in
pertinent part, that only residents of Washington, D.C. and other federal
enclaves are subject to the federal tax laws because they alone are
citizens of the United States.
United States v. Mundt, 29 F.3d 233, 237 (6th Cir. 1994) – the court
rejected "patently frivolous" argument that defendant was not a resident of
any "federal zone" and therefore not subject to federal income tax laws.
In re Becraft, 885 F.2d 547, 549-50 (9th Cir. 1989) – the court, observing
Becraft’s claim that federal laws apply only to United States territories and
the District of Columbia “has no semblance of merit,” and noting that this
attorney had previously litigated cases in the federal appeals courts that
had “no reasonable possibility of success,” imposed monetary damages
and expressed the hope “that this assessment will deter Becraft from
asking this and other federal courts to expend more time and resources on
patently frivolous legal positions.”
23
United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987), cert. denied,
485 U.S. 1022 (1988) – the court rejected as a “twisted conclusion” the
contention “that the United States has jurisdiction over only Washington,
D.C., the federal enclaves within the states, and the territories and
possessions of the United States,” and affirmed a tax evasion conviction.
Barcroft v. Commissioner, T.C. Memo. 1997-5, 73 T.C.M. (CCH) 1666,
1667, appeal dismissed, 134 F.3d 369 (5th Cir. 1997) – Barcroft claimed
that he was not “a ‘U.S. citizen,’ subject to federal jurisdiction, such as
‘officers, employees, and elected officials of the United States,’” and did
not “reside within a federal territory such as Washington D.C., or a federal
enclave within a State, or a U.S. possession.” The court noted that
Barcroft’s statements “contain protester-type contentions that have been
rejected by the courts as groundless,” the court sustained penalties for
failure to file returns and failure to pay estimated income taxes.
3. Contention: Taxpayer is not a “person” as defined by the Internal
Revenue Code, thus is not subject to the federal income tax laws.
Some maintain that they are not a “person” as defined by the Internal
Revenue Code, and thus not subject to the federal income tax laws. This
argument is based on a tortured misreading of the Code.
The Law: The Internal Revenue Code clearly defines “person” and sets
forth which persons are subject to federal taxes. Section 7701(a)(14)
defines “taxpayer” as any person subject to any internal revenue tax and
section 7701(a)(1) defines “person” to include an individual, trust, estate,
partnership, or corporation. Arguments that an individual is not a “person”
within the meaning of the Internal Revenue Code have been uniformly
rejected. A similar argument with respect to the term “individual” has also
been rejected. The IRS issued Revenue Ruling 2007-22, 2007-14 I.R.B.
866, warning taxpayers of the consequences of making this frivolous
argument.
Relevant Case Law:
United States v. Karlin, 785 F.2d 90, 91 (3d Cir. 1986), cert. denied, 480
U.S. 907 (1987) – the court affirmed Karlin’s conviction for failure to file
income tax returns and rejected his contention that he was “not a ‘person’
within meaning of 26 U.S.C. § 7203” as “frivolous and requir[ing] no
discussion.”
McCoy v. Internal Revenue Service, 88 A.F.T.R.2d (RIA) 5909, 2001 U.S.
Dist. LEXIS 15113, at *21, 22 (D. Col. Aug. 7, 2001) – the court dismissed
the taxpayer’s complaint, which asserted that McCoy was a nonresident
alien and not subject to tax, describing the taxpayer’s argument as
“specious and legally frivolous.”
24
United States v. Rhodes, 921 F. Supp. 261, 264 (M.D. Pa. 1996) – the
court stated that “[a]n individual is a person under the Internal Revenue
Code.”
Biermann v. Commissioner, 769 F.2d 707, 708 (11th Cir.), reh’g denied,
775 F.2d 304 (11th Cir. 1985) – the court said the claim that Biermann
was not “a person liable for taxes” was “patently frivolous” and, given the
Tax Court’s warning to Biermann that his positions would never be
sustained in any court, awarded the government double costs, plus
attorney’s fees.
Smith v. Commissioner, T.C. Memo. 2000-290, 80 T.C.M. (CCH) 377,
378-89 (2000) – the court described the argument that Smith “is not a
‘person liable’ for tax” as frivolous, sustained failure to file penalties, and
imposed a penalty for maintaining “frivolous and groundless positions.”
United States v. Studley, 783 F.2d 934, 937 n.3 (9th Cir. 1986) – the court
affirmed a failure to file conviction, rejecting the taxpayer’s contention that
she was not subject to federal tax laws because she was “an absolute,
freeborn, and natural individual” and went on to note that “this argument
has been consistently and thoroughly rejected by every branch of the
government for decades.”
4. Contention: The only “employees” subject to federal income tax
are employees of the federal government.
Some argue that the federal government can tax only employees of the
federal government; therefore, employees in the private sector are
immune from federal income tax liability. This argument is based on a
misinterpretation of section 3401, which imposes responsibilities to
withhold tax from “wages.” That section establishes the general rule that
“wages” include all remuneration for services performed by an employee
for his employer. Section 3401(c) goes on to state that the term
“employee” includes “an officer, employee, or elected official of the United
States, a State, or any political subdivision thereof . . . .”
The Law: Section 3401(c) defines “employee” and states that the term
“includes an officer, employee or elected official of the United States . . . .”
This language does not address how other employees’ wages are subject
to withholding or taxation. Section 7701(c) states that the use of the word
“includes” “shall not be deemed to exclude other things otherwise within
the meaning of the term defined.” Thus, the word “includes” as used in
the definition of “employee” is a term of enlargement, not of limitation. It
clearly makes federal employees and officials a part of the definition of
“employee,” which generally includes private citizens. The Internal
Revenue Service issued Revenue Ruling 2006-18, 2006-15 I.R.B. 743,
warning taxpayers of the consequences of making this frivolous argument.
25
In June 2006, a federal district court in California permanently barred
Christopher M. Hansen (using the business names of the “Family
Guardian” and the “Sovereignty Education and Defense Ministry) from
promoting a fraudulent tax scheme based on the frivolous theory, among
others, that only federal workers are subject to the Internal Revenue
Code. See http://www.usdoj.gov/opa/pr/2006/June/06_enrd_345.html;
see also 2006 TNT 107-98 (Jun. 2, 2006).
In March 2007, a federal court in Michigan issued a temporary restraining
order barring Donald A. Gray from preparing federal income tax returns for
others. The court found that the Portage, Michigan, man had been
preparing income tax returns for customers based on the frivolous theory
that wages are not income for federal tax purposes unless the wage
earner works for the government. See
http://www.usdoj.gov/tax/txdv07024.htm.
In May 2007, a federal court in Michigan permanently barred Peter and
Doreen Hendrickson from filing tax returns and forms on which they falsely
report their income as zero. The injunction order also requires the couple
to repay more than $20,000 in federal income, Social Security, and
Medicare taxes that they had obtained by filing false tax returns with the
IRS. The order notes that the couple based their improper conduct on a
book Peter Hendrickson wrote called “Cracking the Code.” The book
states that federal tax withholding and income taxes on wages are
applicable only for a limited class of people, primarily government
employees. See http://www.usdoj.gov/tax/txdv07320.htm.
Relevant Case Law:
United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) – calling the
instructions Latham wanted given to the jury “inane,” the court said, “[the]
instruction which indicated that under 26 U.S.C. § 3401(c) the category of
‘employee’ does not include privately employed wage earners is a
preposterous reading of the statute. It is obvious within the context of [the
law] the word ‘includes’ is a term of enlargement not of limitation, and the
reference to certain entities or categories is not intended to exclude all
others.”
Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986) – the court
rejected Sullivan’s attempt to recover a civil penalty for filing a frivolous
return, stating “to the extent [he] argues that he received no ‘wages’. . .
because he was not an ‘employee’ within the meaning of 26 U.S.C.
§ 3401(c), that contention is meritless. . . . The statute does not purport to
limit withholding to the persons listed therein.” The court imposed
sanctions on Sullivan for bringing a frivolous appeal.
Peth v. Breitzmann, 611 F. Supp. 50, 53 (E.D. Wis. 1985) – the court
rejected the taxpayer’s argument “that he is not an ‘employee’ under
26
I.R.C. § 3401(c) because he is not a federal officer, employee, elected
official, or corporate officer,” stating, “[he] mistakenly assumes that this
definition of ‘employee’ excludes all other wage earners.”
Pabon v. Commissioner, T.C. Memo. 1994-476, 68 T.C.M. (CCH) 813,
816 (1994) – the court characterized Pabon’s position – including that she
was not subject to tax because she was not an employee of the federal or
state governments – as “nothing but tax protester rhetoric and legalistic
gibberish.” The court imposed a penalty of $2,500 on Pabon for bringing a
frivolous case, stating that she “regards this case as a vehicle to protest
the tax laws of this country and espouse her own misguided views.”
D. Constitutional Amendment Claims
1. Contention: Taxpayers can refuse to pay income taxes on
religious or moral grounds by invoking the First Amendment.
Some argue that taxpayers may refuse to pay federal income taxes based
on their religious or moral beliefs, or objection to the use of taxes to fund
certain government programs. These persons mistakenly invoke the First
Amendment in support of this frivolous position.
The Law: The First Amendment to the United States Constitution provides
that “Congress shall make no law respecting an establishment of religion,
or prohibiting the free exercise thereof; or abridging the freedom of
speech, or of the press; or the right of the people peaceably to assemble,
and to petition the Government for a redress of grievances.” The First
Amendment, however, does not provide a right to refuse to pay income
taxes on religious or moral grounds, or because taxes are used to fund
government programs opposed by the taxpayer. Nor does the First
Amendment protect commercial speech or speech that aids or incites
taxpayers to unlawfully refuse to pay federal income taxes, including
speech that promotes abusive tax avoidance schemes.
Relevant Case Law:
United States v. Lee, 455 U.S. 252, 260 (1982) – the U.S. Supreme Court
held that the broad public interest in maintaining a sound tax system is of
such importance that religious beliefs in conflict with the payment of taxes
provide no basis for refusing to pay, and stated that “[t]he tax system
could not function if denominations were allowed to challenge the tax
system because tax payments were spent in a manner that violates their
religious belief.”
United States v. Indianapolis Baptist Temple, 224 F.3d 627, 629 – 631
(7th Cir. 2000), cert denied, 531 U.S. 1112 (2001) – the court rejected
defendant’s Free Exercise challenge to the federal employment tax as
those laws were not restricted to the defendant or other religion-related
27
employers generally, and there was no indication that they were enacted
for the purpose of burdening religious practices.
United States v. Ramsey, 992 F.2d 831, 833 (8th Cir. 1993) – the court
rejected Ramsey’s argument that filing federal income tax returns and
paying federal income taxes violates his pacifist religious beliefs and
stated that Ramsey “has no First Amendment right to avoid federal income
taxes on religious grounds.”
Wall v. United States, 756 F.2d 52 (8th Cir. 1985) – the court upheld the
imposition of a $500 frivolous return penalty against Wall for taking a “war
tax deduction” on his federal income tax return based on his religious
convictions and stated the “necessities of revenue collection through a
sound tax system raise governmental interests sufficiently compelling to
outweigh the free exercise rights of those who find the tax objectionable
on bona fide religious grounds.”
United States v. Peister, 631 F2d. 658 (10th Cir. 1980) – the court rejected
Peister’s argument that he was exempt from income tax based on his vow
of poverty after he became the minister of a church he formed; his First
Amendment right to freedom of religion was not violated.
Jenkins v. Commissioner, 483 F.3d 90, 92 (2d Cir. 2007) - the court
upheld the decision of the Tax Court that the collection of tax revenues for
expenditures that offended the religious beliefs of individual taxpayers did
not violate the Free Exercise Clause of the First Clause, the Religious
Freedom Restoration Act of 1993, or the Ninth Amendment. In addition,
the court upheld the imposition of a $5,000 frivolous return penalty against
Jenkins.
2. Contention: Federal income taxes constitute a “taking” of
property without due process of law, violating the Fifth
Amendment.
Some assert that the collection of federal income taxes constitutes a
“taking” of property without due process of law, in violation of the Fifth
Amendment. Thus, any attempt by the IRS to collect federal income taxes
owed by a taxpayer is unconstitutional.
The Law: The Fifth Amendment to the United States Constitution provides
that a person shall not be “deprived of life, liberty, or property, without due
process of law . . . .” The U.S. Supreme Court stated in Brushaber v.
Union Pacific R.R., 240 U.S. 1, 24 (1916), that “it is . . . well settled that
[the Fifth Amendment] is not a limitation upon the taxing power conferred
upon Congress by the Constitution; in other words, that the Constitution
does not conflict with itself by conferring upon the one hand a taxing
power, and taking the same power away on the other by limitations of the
due process clause.” Further, the Supreme Court has upheld the
constitutionality of the summary administrative procedures contained in
28
the Internal Revenue Code against due process challenges, on the basis
that a post-collection remedy (e.g., a tax refund suit) exists and is
sufficient to satisfy the requirements of constitutional due process. Phillips
v. Commissioner, 283 U.S. 589, 595-97 (1931).
The Internal Revenue Code provides methods to ensure due process to
taxpayers: (1) the “refund method,” set forth in section 7422(e) and 28
U.S.C. '' 1341 and 1346(a), where a taxpayer must pay the full amount of
the tax and then sue in a federal district court or in the United States Court
of Federal Claims for a refund; and (2) the “deficiency method,” set forth in
section 6213(a), where a taxpayer may, without paying the contested tax,
petition the United States Tax Court to redetermine a tax deficiency
asserted by the IRS. Courts have found that both methods provide
constitutional due process.
The IRS issued Revenue Ruling 2005-19, 2005-1 C.B. 819, which
discusses this frivolous argument in more detail, warning taxpayers of the
consequences of attempting to pursue a claim on these grounds.
For a discussion of frivolous tax arguments made in collection due
process cases arising under sections 6320 and 6330, see Section II of this
outline.
Relevant Case Law:
Flora v. United States, 362 U.S. 145, 175 (1960) – the United States
Supreme Court held that a taxpayer must pay the full tax assessment
before being able to file a refund suit in district court, noting that a person
has the right to appeal an assessment to the Tax Court “without paying a
cent.”
Schiff v. United States, 919 F.2d 830 (2d Cir. 1990) – the court rejected a
due process claim where the taxpayer chose not to avail himself of the
opportunity to appeal a deficiency notice to the Tax Court.
3. Contention: Taxpayers do not have to file returns or provide
financial information because of the protection against selfincrimination
found in the Fifth Amendment.
Some argue that taxpayers may refuse to file federal income tax returns,
or may submit tax returns on which they refuse to provide any financial
information, because they believe that their Fifth Amendment privilege
against self-incrimination will be violated.
The Law: There is no constitutional right to refuse to file an income tax
return on the ground that it violates the Fifth Amendment privilege against
self-incrimination. In United States v. Sullivan, 274 U.S. 259, 264 (1927),
the U.S. Supreme Court stated that the taxpayer “could not draw a
conjurer’s circle around the whole matter by his own declaration that to
29
write any word upon the government blank would bring him into danger of
the law.” The failure to comply with the filing and reporting requirements
of the federal tax laws will not be excused based upon blanket assertions
of the constitutional privilege against compelled self-incrimination under
the Fifth Amendment.
The IRS issued Revenue Ruling 2005-19, 2005-1 C.B. 819, which
discusses this frivolous argument in more detail, warning taxpayers of the
consequences of attempting to pursue a claim on these grounds.
Relevant Case Law:
United States v. Schiff, 612 F.2d 73, 83 (2d Cir. 1979) – the court said that
“the Fifth Amendment privilege does not immunize all witnesses from
testifying. Only those who assert as to each particular question that the
answer to that question would tend to incriminate them are protected . . . .
[T]he questions in the income tax return are neutral on their face . . .
[h]ence privilege may not be claimed against all disclosure on an income
tax return.”
United States v. Brown, 600 F.2d 248, 252 (10th Cir. 1979) – noting that
the Supreme Court had established “that the self-incrimination privilege
can be employed to protect the taxpayer from revealing the information as
to an illegal source of income, but does not protect him from disclosing the
amount of his income,” the court said Brown made “an illegal effort to
stretch the Fifth Amendment to include a taxpayer who wishes to avoid
filing a return.”
United States v. Neff, 615 F.2d 1235, 1241 (9th Cir.), cert. denied, 447
U.S. 925 (1980) – the court affirmed a failure to file conviction, noting that
the taxpayer “did not show that his response to the tax form questions
would have been self-incriminating. He cannot, therefore, prevail on his
Fifth Amendment claim.”
United States v. Daly, 481 F.2d 28, 30 (8th Cir.), cert. denied, 414 U.S.
1064 (1973) – the court affirmed a failure to file conviction, rejecting the
taxpayer’s Fifth Amendment claim because of his “error in . . . his blanket
refusal to answer any questions on the returns relating to his income or
expenses.”
Sochia v. Commissioner, 23 F.3d 941 (5th Cir. 1994), cert. denied, 513
U.S. 1153 (1995) – the court affirmed tax assessments and penalties for
failure to file returns, failure to pay taxes, and filing a frivolous return. The
court also imposed sanctions for pursuing a frivolous case. The taxpayers
had failed to provide any information on their tax return about income and
expenses, instead claiming a Fifth Amendment privilege on each line
calling for financial information.
30
4. Contention: Compelled compliance with the federal income tax
laws is a form of servitude in violation of the Thirteenth
Amendment.
This argument asserts that the compelled compliance with federal tax laws
is a form of servitude in violation of the Thirteenth Amendment.
The Law: The Thirteenth Amendment to the United States Constitution
prohibits slavery within the United States, as well as the imposition of
involuntary servitude, except as punishment for a crime of which a person
shall have been duly convicted. In Porth v. Brodrick, 214 F.2d 925, 926
(10th Cir. 1954), the Court of Appeals stated that “if the requirements of
the tax laws were to be classed as servitude, they would not be the kind of
involuntary servitude referred to in the Thirteenth Amendment.” Courts
have consistently found arguments that taxation constitutes a form of
involuntary servitude to be frivolous.
The IRS issued Revenue Ruling 2005-19, 2005-1 C.B. 819, which
discusses this frivolous argument in more detail, warning taxpayers of the
consequences of attempting to pursue a claim on these grounds.
Relevant Case Law:
Porth v. Brodrick, 214 F.2d 925, 926 (10th Cir. 1954) – the court described
the taxpayer’s Thirteenth and Sixteenth Amendment claims as “clearly
unsubstantial and without merit,” as well as “far-fetched and frivolous.”
United States v. Drefke, 707 F.2d 978, 983 (8th Cir. 1983) – the court
affirmed Drefke’s failure to file conviction, rejecting his claim that the
Thirteenth Amendment prohibited his imprisonment because that
amendment “is inapplicable where involuntary servitude is imposed as
punishment for a crime.”
Ginter v. Southern, 611 F.2d 1226 (8th Cir. 1979) – the court rejected the
taxpayer’s claim that the Internal Revenue Code results in involuntary
servitude in violation of the Thirteenth Amendment.
Kasey v. Commissioner, 457 F.2d 369 (9th Cir. 1972) – the court rejected
as without merit the argument that the requirements to keep records and
to prepare and file tax returns violated the Kaseys’ Fifth Amendment
privilege against self-incrimination and amount to involuntary servitude
prohibited by the Thirteenth Amendment.
Wilbert v. Internal Revenue Service (In re Wilbert), 262 B.R. 571, 578, 88
A.F.T.R.2d 6650 (Bankr. N.D. Ga. 2001) – the court rejected the
taxpayer’s argument that taxation is a form of involuntary servitude
prohibited by the Thirteenth Amendment, stating that “[i]t is well-settled
American jurisprudence that constitutional challenges to the IRS’ authority
31
to collect individual income taxes have no legal merit and are ‘patently
frivolous.’”
5. Contention: The Sixteenth Amendment to the United States
Constitution was not properly ratified, thus the federal income tax
laws are unconstitutional.
This argument is based on the premise that all federal income tax laws are
unconstitutional because the Sixteenth Amendment was not officially
ratified, or because the State of Ohio was not properly a state at the time
of ratification. This argument has survived over time because proponents
mistakenly believe that the courts have refused to address this issue.
The Law: The Sixteenth Amendment provides that Congress shall have
the power to lay and collect taxes on income, from whatever source
derived, without apportionment among the several states, and without
regard to any census or enumeration. U.S. Const. amend. XVI. The
Sixteenth Amendment was ratified by forty states, including Ohio (which
became a state in 1803; see Bowman v. United States, 920 F. Supp. 623
n.1 (E.D. Pa. 1995) (discussing the 1953 joint Congressional resolution
that confirmed Ohio’s status as a state retroactive to 1803), and issued by
proclamation in 1913. Shortly thereafter, two other states also ratified the
Amendment. Under Article V of the Constitution, only three-fourths of the
states are needed to ratify an Amendment. There were enough states
ratifying the Sixteenth Amendment even without Ohio to complete the
number needed for ratification. Furthermore, the U.S. Supreme Court
upheld the constitutionality of the income tax laws enacted subsequent to
ratification of the Sixteenth Amendment in Brushaber v. Union Pacific
R.R., 240 U.S. 1 (1916). Since that time, the courts have consistently
upheld the constitutionality of the federal income tax.
Similarly, Robert L. Schulz, along with his organizations, We the People
Congress and We the People Foundation, marketed and distributed to
customers a fraudulent “Tax Termination Package” supposedly providing
a way for taxpayers to legally stop withholding and paying taxes. The
scheme was based on a number of false premises, including the claim
that the Sixteenth Amendment was not properly ratified. In August 2007,
a federal court permanently enjoined Mr. Schulz and his organizations
from promoting the scheme. See
http://www.usdoj.gov/tax/txdv07595.htm.
The IRS issued Revenue Ruling 2005-19, 2005-1 C.B. 819, which
discusses this frivolous argument in more detail, warning taxpayers of the
consequences of attempting to pursue a claim on these grounds.
Relevant Case Law:
32
Miller v. United States, 868 F.2d 236, 241 (7th Cir. 1989) (per curiam) –
the court stated, “We find it hard to understand why the long and unbroken
line of cases upholding the constitutionality of the sixteenth amendment
generally, Brushaber v. Union Pacific Railroad Company . . . and those
specifically rejecting the argument advanced in The Law That Never Was,
have not persuaded Miller and his compatriots to seek a more effective
forum for airing their attack on the federal income tax structure.” The court
imposed sanctions on them for having advanced a “patently frivolous”
position.
United States v. Stahl, 792 F.2d 1438, 1441 (9th Cir. 1986), cert. denied,
479 U.S. 1036 (1987) – stating that “the Secretary of State’s certification
under authority of Congress that the sixteenth amendment has been
ratified by the requisite number of states and has become part of the
Constitution is conclusive upon the courts,” the court upheld Stahl’s
conviction for failure to file returns and for making a false statement.
United States v. Foster, 789 F.2d 457 (7th Cir.), cert. denied, 479 U.S. 883
(1986) – the court affirmed Foster’s conviction for tax evasion, failing to file
a return, and filing a false W-4 statement, rejecting his claim that the
Sixteenth Amendment was never properly ratified.
Socia v. Commissioner, 23 F.3d 941 (5th Cir. 1994) – the court held that
defendant’s appeals which challenged Sixteenth Amendment income tax
legislation were frivolous and warranted sanctions.
Knoblauch v. Commissioner, 749 F.2d 200, 201 (5th Cir. 1984), cert.
denied, 474 U.S. 830 (1986) – the court rejected the contention that the
Sixteenth Amendment was not constitutionally adopted as “totally without
merit” and imposed monetary sanctions against Knoblauch based on the
frivolousness of his appeal. “Every court that has considered this
argument has rejected it,” the court observed.
Stearman v. Commissioner, T.C. Memo. 2005-39, 89 T.C.M. (CCH) 823
(2005), aff’d, 436 F.3d 533 (5th Cir. 2006). – the court imposed sanctions
totaling $25,000 against the taxpayer for advancing arguments
characteristic of tax-protester rhetoric that have been universally rejected
by the courts, including arguments regarding the Sixteenth Amendment.
In affirming the Tax Court’s holding, the Fifth Circuit granted the
government’s request for further sanctions of $6,000 against the taxpayer
for maintaining frivolous arguments on appeal, and the Fifth Circuit
imposed an additional $6,000 sanctions on its own, for total additional
sanctions of $12,000.
33
6. Contention: The Sixteenth Amendment does not authorize a
direct non-apportioned federal income tax on United States
citizens.
Some assert that the Sixteenth Amendment does not authorize a direct
non-apportioned income tax and thus, U.S. citizens and residents are not
subject to federal income tax laws.
The Law: The constitutionality of the Sixteenth Amendment has
invariably been upheld when challenged. And numerous courts have both
implicitly and explicitly recognized that the Sixteenth Amendment
authorizes a non-apportioned direct income tax on United States citizens
and that the federal tax laws as applied are valid. In United States v.
Collins, 920 F.2d 619, 629 (10th Cir. 1990), cert. denied, 500 U.S. 920
(1991), the court cited to Brushaber v. Union Pac. R.R., 240 U.S. 1, 12-19
(1916), and noted that the U.S. Supreme Court has recognized that the
“sixteenth amendment authorizes a direct nonapportioned tax upon United
States citizens throughout the nation.”
Relevant Case Law:
In re Becraft, 885 F.2d 547 (9th Cir. 1989) – the court affirmed a failure to
file conviction, rejecting the taxpayer’s frivolous position that the Sixteenth
Amendment does not authorize a direct non-apportioned income tax.
United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990) – the court
found defendant’s argument that the Sixteenth Amendment does not
authorize a direct, non-apportioned tax on United States citizens similarly
to be “devoid of any arguable basis in law.”
Lovell v. United States, 755 F.2d 517, 518 (7th Cir. 1984) – the court
rejected the argument that the Constitution prohibits imposition of a direct
tax without apportionment, and upheld the district court’s frivolous return
penalty assessment and the award of attorneys’ fees to the government
“because [the taxpayers’] legal position was patently frivolous.” The
appeals court imposed additional sanctions for pursuing “frivolous
arguments in bad faith.”
Broughton v. United States, 632 F.2d 706 (8th Cir. 1980) – the court
rejected a refund suit, stating that the Sixteenth Amendment authorizes
imposition of an income tax without apportionment among the states.
Stearman v. Commissioner, T.C. Memo. 2005-39, 89 T.C.M. (CCH) 823
(2005), aff’d, 436 F.3d 533 (5th Cir. 2006) – the court imposed sanctions
totaling $25,000 against the taxpayer for advancing arguments
characteristic of tax-protester rhetoric that has been universally rejected
by the courts, including arguments regarding the Sixteenth Amendment.
In affirming the Tax Court’s holding, the Fifth Circuit granted the
government’s request for further sanctions of $6,000 against the taxpayer
34
for maintaining frivolous arguments on appeal, and the Fifth Circuit
imposed an additional $6,000 sanctions on its own, for total additional
sanctions of $12,000.
E. Fictional Legal Bases
1. Contention: The Internal Revenue Service is not an agency of the
United States.
Some argue that the IRS is not an agency of the United States but rather
a private corporation, because it was not created by positive law (i.e., an
act of Congress) and that, therefore, the IRS does not have the authority
to enforce the Internal Revenue Code.
The Law: There is a host of constitutional and statutory authority
establishing that the IRS is an agency of the United States. The U.S.
Supreme Court stated in Donaldson v. United States, 400 U.S. 517, 534
(1971), “[w]e bear in mind that the Internal Revenue Service is organized
to carry out the broad responsibilities of the Secretary of the Treasury
under § 7801(a) of the 1954 Code for the administration and enforcement
of the internal revenue laws.”
Pursuant to section 7801, the Secretary of the Treasury has full authority
to administer and enforce the internal revenue laws and has the power to
create an agency to enforce such laws. Based upon this legislative grant,
the IRS was created. Thus, the IRS is a body established by “positive
law” because it was created through a congressionally mandated power.
Moreover, section 7803(a) explicitly provides that there shall be a
Commissioner of Internal Revenue who shall administer and supervise the
execution and application of the internal revenue laws.
In April 2006, a federal district court in Louisiana permanently barred
Eddie Ferrand, Glenda F. Elliott, and William N. Kennedy, from preparing
tax returns, because they had understated income on their customers’
federal income tax returns based on the frivolous premise, among others,
that the IRS is an illegal organization. See
http://www.usdoj.gov/opa/pr/2006/April/06_tax_226.html; see also 2006
TNT 75-36.
Relevant Case Law:
Salman v. Dept. of Treasury, 899 F. Supp. 471 (D. Nev. 1995) – the court
described Salman’s contention that the IRS is not a government agency of
the United States as wholly frivolous and dismissed his claim with
prejudice.
Young v. Internal Revenue Service, 596 F. Supp. 141 (N.D. Ind. 1984) –
the court granted summary judgment in favor of the government, rejecting
35
Young’s claim that the IRS is a private corporation, rather than a
government agency.
2. Contention: Taxpayers are not required to file a federal income
tax return, because the instructions and regulations associated
with the Form 1040 do not display an OMB control number as
required by the Paperwork Reduction Act.
Some argue that taxpayers are not required to file tax returns because of
the Paperwork Reduction Act of 1980, 44 U.S.C. § 3501, et seq. ("PRA").
The PRA was enacted to limit federal agencies' information requests that
burden the public. The "public protection" provision of the PRA provides
that no person shall be subject to any penalty for failing to maintain or
provide information to any agency if the information collection request
involved does not display a current control number assigned by the Office
of Management and Budget [OMB] Director. 44 U.S.C. § 3512.
Advocates of this contention claim that they cannot be penalized for failing
to file Form 1040, because the instructions and regulations associated
with the Form 1040 do not display any OMB control number.
The Law: The courts have uniformly rejected this argument on different
grounds. Some courts have simply noted that the PRA applies to the
forms themselves, not to the instruction booklets, and because the Form
1040 does have a control number, there is no PRA violation.
Other courts have held that Congress created the duty to file returns in
section 6012(a) and "Congress did not enact the PRA’s public protection
provision to allow OMB to abrogate any duty imposed by Congress."
United States v. Neff, 954 F.2d 698, 699 (11th Cir. 1992). Also, the IRS
issued Revenue Ruling 2006-21, 2006-15 I.R.B. 745, warning taxpayers of
the consequences of making this frivolous argument.
Relevant Case Law:
United States v. Patridge, __F.3d __, 2007 WL 3355739 (7th Cir. 2007) –
in the course of upholding the taxpayer’s conviction for tax evasion, the
court addressed and rejected the taxpayer’s contention that the
Paperwork Reduction Act foreclosed his conviction.
United States v. Wunder, 919 F.2d 34 (6th Cir. 1990) – the court rejected
Wunder’s claim of a PRA violation, affirming his conviction for failing to file
a return.
Salberg v. United States, 969 F.2d 379 (7th Cir. 1992) – the court affirmed
Salberg’s conviction for tax evasion and failing to file a return, rejecting his
claims under the PRA.
United States v. Holden, 963 F.2d 1114 (8th Cir.), cert. denied, 506 U.S.
958 (1992) – the court affirmed Holden’s conviction for failing to file a
36
return and rejected his contention that he should have been acquitted
because tax instruction booklets fail to comply with the PRA.
United States v. Hicks, 947 F.2d 1356, 1359 (9th Cir. 1991) – the court
affirmed Hicks’ conviction for failing to file a return, finding that the
requirement to provide information is required by law, not by the IRS.
“This is a legislative command, not an administrative request. The PRA
was not meant to provide criminals with an all-purpose escape hatch.”
Lonsdale v. United States, 919 F.2d 1440, 1445 (10th Cir. 1990) – the
court held that the Paperwork Reduction Act does not apply to
summonses and collection notices.
Saxon v. United States, T.C. Memo. 2006-52, 91 T.C.M. (CCH) 914
(2006) - the court, in imposing $5,000 sanctions against Saxon, found
claims that violation of the Paperwork Reduction Act excuses a taxpayer
from filing returns or paying taxes have been universally rejected as
meritless.
3. Contention: African Americans can claim a special tax credit as
reparations for slavery and other oppressive treatment.
Proponents of this contention assert that African Americans can claim a
so-called “Black Tax Credit” on their federal income tax returns as
reparations for slavery and other oppressive treatment suffered by African
Americans. A similar frivolous argument has been made that Native
Americans are entitled to a credit on their federal income tax returns as a
form of reparations for past oppressive treatment.
The Law: There is no provision in the Internal Revenue Code which
allows taxpayers to claim a “Black Tax Credit” or a credit for Native
American reparations. It is a well settled principle of law that deductions
and credits are a matter of legislative grace. See, e.g., Wilson v.
Commissioner, T.C. Memo. 2001-139, 81 T.C.M. (CCH) 1745 (2001).
Unless specifically provided for in the Internal Revenue Code, no
deduction or credit may be allowed.
The IRS indicated in News Release IR-2002-08, 2002 I.R.B. LEXIS 30,
that it will crack down on promoters of “slavery reparation tax credit” and
“Native American reparations” scams. See 2002 TNT 17-15 (Jan. 24,
2002). Also, according to the News Release, the IRS will implement a
new policy under which these reparation claims will be treated as a
frivolous tax return which could result in a potential $500 penalty. Id. The
IRS issued Revenue Ruling 2004-33, 2004-1 C.B. 628, warning taxpayers
of the consequences of making this frivolous argument. Also, with respect
to a somewhat similar argument, the IRS issued Revenue Ruling 2006-20,
2006-15 I.R.B. 746, warning taxpayers from claiming an exemption for
Native Americans from federal income tax liability based upon an
unspecified “Native American Treaty.”
37
Persons who claim refunds based on the slavery reparation tax credit or
assist others in doing so are subject to prosecution for violation of federal
tax laws. In July 2003, Robert L. Foster and Crystal D. Foster, father and
daughter, were convicted of conspiracy to defraud the United States with
respect to such claims and of filing false, fictitious and fraudulent claims.
On October 23, 2003, Robert Foster was sentenced to 13 years in prison
and Crystal Foster was sentenced to 3 years and 1 month in prison. See
2003 TNT 206-31 (Oct. 23, 2003). In September 2005, the Third Circuit
affirmed Robert Foster’s conviction, but remanded the case for
resentencing. See 2005 TNT 187-18 (Sept. 23, 2005).
Furthermore, the United States has a cause of action for injunctive relief
against a party suspected of violating the tax laws. Sections 7407 and
7408 provide for injunctive relief against income tax preparers and
promoters of abusive tax shelters, respectively, in these types of cases.
For example, on March 31, 2003, a federal district court permanently
barred tax return preparer, Andrew W. Wiley, from preparing federal
income tax returns claiming refunds based on a non-existent tax credit for
slavery reparations finding that Wiley engaged in “deceptive conduct
which has interfered substantially with the proper administration” of the tax
laws. United States v. Wiley, No. 3:02-cv-209WS (S.D. Miss. 2002); see
2003 TNT 62-18 (March 31, 2003).
In August 2007, a federal court in Georgia permanently barred Derrick
Sanders from promoting a tax fraud scheme involving false claims.
Sanders, in promoting the scheme, repeatedly made false statements that
the Yamassee group is a Native American tribe whose members are
exempt from federal income tax. Sanders also prepared forms for
customers to use improperly to instruct their employers to stop withholding
taxes from wages. See http://www.usdoj.gov/tax/txdv05494.htm and
http://www.usdoj.gov/tax/txdv06095.htm
Relevant Case Law:
Taylor v. United States, 57 Fed. Cl. 264, 266 (2003) – the court upheld
Service’s denial of Taylor’s refund claim, which was based on “being
reduced to a second class citizen, but billed first class citizenship taxes for
over 60 years,” holding that the Internal Revenue Code does not contain a
provision allowing slavery reparation claims.
Wilkins v. Commissioner, 120 T.C. 109 (2003) – the court found that the
Internal Revenue Code does not provide a tax deduction, credit, or other
allowance for slavery reparations.
George v. Commissioner, T.C. Memo. 2006-121 – the court rejected
George’s frivolous argument that he is an “Indian not paying taxes” finding
that Native Americans are subject to the same federal income tax laws as
are other United States citizens, unless there is an exemption created by
treaty or statute.
38
Gunton v. Commissioner, T.C. Memo. 2006-122 – the court rejected
Gunton’s frivolous arguments finding that Native Americans are subject to
the same federal income tax laws as are other United States citizens,
unless there is an exemption created by treaty or statute.
United States v. Bridges, 86 A.F.T.R.2d (RIA) 5280 (4th Cir. 2000) – the
court upheld Bridges’ conviction of aiding and assisting the preparation of
false tax returns, on which he claimed a non-existent “Black Tax Credit.”
United States v. Haugabook, 2002 U.S. Dist. LEXIS 25314 (M.D. Ga.
2002) – the court entered a permanent injunction against Haugabook
prohibiting him from preparing returns or other documents to be filed with
the IRS claiming a tax credit or refund for reparations for slavery or other
fabricated tax credits or refunds.
United States v. Mims, 2002 U.S. Dist. LEXIS 25291 (S.D. Ga. 2002) – the
court entered a permanent injunction against the defendants prohibiting
them from preparing returns or other documents with the IRS claiming a
credit or refund for reparations for slavery or any other fabricated tax credit
or refund.
United States v. Foster, 2002-1 U.S.T.C. (CCH) ¶ 50,263 (E.D. Va. 2002)
– the court held that the United States clearly established its right to
recover an erroneously paid refund in the amount of $500,000, plus
interest, where the claim for refund was based on the slavery reparation
tax credit.
United States v. Foster, 2002-2 U.S.T.C. (CCH) ¶ 50,785 (E.D. Va. 2002)
– the court held that no provision of the Internal Revenue Code allows for
a tax credit for slavery reparations and entered an injunction against
Foster (an income tax return preparer) prohibiting him from preparing
returns or refund claims based on fabricated tax credits.
4. Contention: Taxpayers are entitled to a refund of the Social
Security taxes paid over their lifetime.
Proponents of this contention encourage individuals to file claims for
refund of the Social Security taxes paid during their lifetime, on the basis
that the claimants have sought to waive all rights to their Social Security
benefits. Additionally, some advise taxpayers to claim a charitable
contribution deduction as a result of their “gift” of these benefits or of the
Social Security taxes to the United States.
The Law: There is no provision in the Internal Revenue Code, or any
other provision of law, which allows for a refund of Social Security taxes
paid on the grounds asserted above. In Crouch v. Commissioner, T.C.
Memo. 1990-309, 59 T.C.M. (CCH) 938 (1990), the Tax Court sustained
an IRS determination that a person may not claim a charitable contribution
deduction based upon the waiver of future Social Security benefits.
39
The IRS issued Revenue Ruling 2005-17, 2005-1 C.B. 823, which
discusses this frivolous argument in more detail, warning taxpayers of the
consequences of attempting to pursue a claim on these grounds.
5. Contention: An “untaxing” package or trust provides a way of
legally and permanently avoiding the obligation to file federal
income tax returns and pay federal income taxes.
Advocates of this idea believe that an “untaxing” package or trust provides
a way of legally and permanently “untaxing” oneself so that a person
would no longer be required to file federal income tax returns and pay
federal income taxes. Promoters who sell such tax evasion plans and
supposedly teach individuals how to remove themselves from the federal
tax system rely on many of the above-described frivolous arguments, such
as the claim that payment of federal income taxes is voluntary, that there
is no requirement for a person to file federal income tax returns, and that
there are legal ways not to pay federal income taxes.
The Law: The underlying claims for these “untaxing” packages are
frivolous, as specified above. Furthermore, the Internal Revenue Service
issued Revenue Ruling 2006-19, 2006-15 I.R.B. 749, warning that
taxpayers may not eliminate their federal income tax liability by attributing
income to a trust and claiming expense deductions related to that trust.
Promoters of these “untaxing” schemes as well as willful taxpayers have
been subjected to criminal penalties for their actions. Taxpayers who
have purchased and followed these “untaxing” plans have also been
subjected to civil penalties for failure to timely file a federal income tax
return and failure to pay federal income taxes.
Section 7408 provides a cause of action for injunctive relief to the United
States against a party suspected of violating the tax laws. On November
15, 2001, the United States filed complaints for permanent injunctions
pursuant to section 7408 against three individuals (David Bosset, Thurston
Bell, and Harold Hearn) for failing to sign tax returns, promoting schemes
that they knew were false or fraudulent, and engaging in the preparation of
documents that understate tax liability. United States v. Bosset, No. 8:01-
cv-2154-T-26TBM (M.D. Fla. 2001); United States v. Bell, No. 1:CV-01-
2159 (M.D. Penn. 2001); United States v. Hearn, No. 1:01-CV-3058 (N.D.
Ga. 2001).
On January 29, 2002, a consent order was entered in United States v.
Hearn in favor of the United States. The order permanently enjoined Mr.
Hearn and his representatives from, among other things, promoting or
selling tax shelter plans, including but not limited to the section 861
argument. (See Section I.B.2 of this outline concerning a section 861
argument.) In the order, Mr. Hearn agreed that he relied upon the
frivolous section 861 argument in making false or fraudulent statements
40
on federal income tax returns regarding the excludability of wages and
other items from income. A permanent injunction order was entered in
United States v. Bosset on February 27, 2003, barring Mr. Bosset from
promoting the frivolous section 861 argument. A permanent injunction
order was entered in United States v. Bell on January 29, 2004, enjoining
Mr. Bell from promoting frivolous positions for fraudulent tax schemes.
The Third Circuit affirmed the permanent injunction against Bell in July
2005. United States v. Bell, 414 F.3d 474 (3d Cir. 2005).
In September 2004, a federal district court granted a preliminary injunction
against James Binge and Terrence Bentivegna enjoining them from
promoting abuse tax shelters and preparing federal tax returns. The court
found that the plan promoted by these two individuals (doing business as
Accounting & Financial Services) encouraging others to form various
trusts without a legitimate legal basis in order to avoid federal taxes was
an abusive tax scheme. United States v. Binge et. al, No. 5:04-CV-01419
(N.D. Ohio Sept. 27, 2004); see http://www.usdoj.gov/tax/txdv04658.htm;
see also 2004 TNT 218-12 (Sept. 27, 2004). In March 2005, a federal
district court in Florida permanently barred Fred J. Anderson, Deborah A.
Martin, and Richard A. Walters from promoting sham trust tax schemes
that assisted customers in establishing trusts, foundations, and
corporations that the customers used to illegally eliminate or reduce their
federal tax liabilities by claiming improper deductions. See
http://www.usdoj.gov/opa/pr/2005/March/05_cdr_105.htm; see also 2005
TNT 45-46 (Mar. 8, 2005).
In April 2005, a federal district court in Georgia permanently enjoined
Jonathan D. Luman from promoting and selling his “Tax Buster Guide”
which falsely instructs customers they can refuse to file tax returns or pay
federal taxes based on various frivolous arguments. See
http://www.usdoj.gov/opa/pr/2005/April/05_tax_190.htm; see also 2005
TNT 93-17 (Apr. 7, 2005).
In June 2005, a federal district court judge in Los Angeles sentenced five
individuals (including the leader of the operation, Lynne Meredith)
associated with a tax fraud group known as “We the People” to prison
terms ranging from 20 months to 121 months. The convictions were
based on evidence that the group conducted seminars falsely instructing
attendees, among other things, that they could shield income and assets
from federal income taxation by using bogus “pure trusts.” See
http://www.usdoj.gov/usao/cac/text_only/pr2005/086.html; see also 2005
TNT 109-30 (Jun. 7, 2005).
In November 2005, a federal district court judge in Dallas sentenced
Daniel A. Fisher to nearly 20 years imprisonment and ordered him to pay
a $1,000,000 fine. The conviction was based, in part, on evidence that
Fisher prepared, or aided in preparing, income tax returns that were
fraudulent because they involved the creation of sham business entities
41
and transactions aimed at eliminating taxes owed by the taxpayers. See
http://www.usdoj.gov/usao/txn/PressRel05/fisher_daniel_irs_sen_pr.html;
2005 TNT 222-27 (Nov. 16, 2005).
In May 2006, a federal district court judge in Washington sentenced David
Carroll Stephenson to 8 years in prison and ordered him to pay more than
$8.5 million in restitution to the IRS. The conviction was based on
evidence that Stephenson assisted hundreds of taxpayers in forming and
operating sham trusts designed to evade paying income taxes. See 2006
TNT 97-27 (May 18, 2006).
Furthermore, persons making frivolous arguments may be denied the
ability to practice before the IRS. In July 2004, the Treasury Department
denied a request for reinstatement to practice before the IRS made by
Joseph R. Banister, now a CPA but formerly an IRS Criminal
Investigations agent. Mr. Banister made various frivolous arguments,
including the contention that only foreign-source income is taxable and the
contention that the Sixteenth Amendment was not ratified, which led to the
decision to deny his request. See 2004 TNT 145-3 (July 14, 2004).
Relevant Case Law:
United States v. Andra, 218 F.3d 1106 (9th Cir. 2000) – in affirming the
conviction of a promoter of an untaxing scheme for tax evasion and
conspiracy, the court found that it was proper to include the tax liabilities of
persons Andra recruited into a tax fraud conspiracy when calculating the
effect of his actions for sentencing.
United States v. Clark, 139 F.3d 485 (5th Cir.), cert. denied, 525 U.S. 899
(1998) – the court upheld convictions of defendants involved with The
Pilot Connection Society for conspiracy to defraud the United States and
aiding and abetting the filing of fraudulent Forms W-4.
Robinson v. Commissioner, T.C. Memo. 1995-102, 69 T.C.M. (CCH)
2061, 2062 (1995) – the court quoted language from Hanson v.
Commissioner, 696 F.2d 1232, 1234 (9th Cir. 1983) that “[n]o reasonable
person would have trusted this scheme to work.”
King v. Commissioner, T.C. Memo. 1995-524, 70 T.C.M. (CCH) 1152
(1995) – the court found King, who had followed the Pilot Connection’s
“untaxing” techniques, liable for penalties for failure to file returns and for
failing to make sufficient estimated tax payments.
United States v. Raymond, 228 F.3d 804, 812 (7th Cir. 2000), cert.
denied, 533 U.S. 902 (2001) – the court affirmed a permanent injunction
against taxpayers who promoted a “De-Taxing America Program,”
forbidding them from engaging in certain activities that incited others to
violate tax laws. The court said, “[W]e conclude that the statements the
appellants made in the Just Say No advertisement were representations
42
concerning the tax benefits of purchasing and following the De-Taxing
America Program that the appellants reasonably should have known were
false.”
United States v. Kaun, 827 F.2d 1144 (7th Cir. 1987) – the court affirmed
the district court’s injunction prohibiting the taxpayer from inciting others to
submit tax returns based on false income tax theories.
United States v. Krall, 835 F.2d 711 (8th Cir. 1987) – the court held that
the trusts used were shams. The defendant, an optometrist, exercised the
same dominion and control over the corpus and income of the trusts as he
had before the trusts were executed. The court further found the
defendant illegally attempted to assign his earned income to the various
trusts.
United States v. Scott, 37 F.3d 1564 (10th Cir. 1994) – the court
concluded the true grantor of the trusts was in substance the purchaser,
who was also the trustee, as well as the beneficiary. It was as if there
were no transfers at all. Therefore the purchaser was subject to tax on all
the income of the various trusts. The defendants were the promoters of a
multi-tiered trust package marketed to purchasers as a device to eliminate
tax liability without losing control over their assets or income.
United States v. Meek, 998 F.2d 776 (10th Cir. 1993) – the court upheld
Meek’s conviction of willfully failing to file an income tax return and willfully
attempting to evade taxes. Meek’s trust had been formed through his
membership in an organization (a “warehouse bank”) that provided its
members the opportunity to warehouse their funds until directed to
disburse them. The warehouse bank’s numbering system for conducting
transactions protected its members’ privacy, thus hiding their assets and
income.
6. Contention: A “corporation sole” can be established and used
for the purpose of avoiding federal income taxes.
Advocates of this idea believe they can reduce their federal tax liability by
taking the position that the taxpayer’s income belongs to a “corporation
sole” (these have also been referred to as “ministerial trusts”), an entity
created for the purpose of avoiding taxes. A valid corporation sole is a
corporate form that enables religious leaders to hold property and conduct
business for the religious entity. Participants in this scheme apply for
incorporation under the pretext of being an official of a church or other
religious organization. Participants contend that their income is exempt
from taxation because the income allegedly belongs to the corporation
sole, which is claimed to be a tax exempt organization described in
section 501(c)(3).
The Law: A valid corporation sole enables a bona fide religious leader,
such as a bishop or other authorized religious official, to incorporate under
43
state law, in his capacity as a religious official. See, e.g., Berry v. Society
of Saint Pius X, 69 Cal. App. 4th 354 (1999). A corporation sole may own
property and enter into contracts as a natural person, but only for the
purposes of the religious entity and not for the individual office holder’s
personal benefit. A legitimate corporation sole is designed to ensure
continuity of ownership of property dedicated to the benefit of a legitimate
religious organization.
A taxpayer cannot avoid income tax or other financial responsibilities by
purporting to be a religious leader and forming a corporation sole for tax
avoidance purposes. The claims that such a corporation sole is described
in section 501(c)(3) and that assignment of income and transfer of assets
to such an entity will exempt an individual from income tax are meritless.
Courts have repeatedly rejected similar arguments as frivolous, imposed
penalties for making such arguments, and upheld criminal tax evasion
convictions against those making or promoting the use of such arguments.
The IRS issued Revenue Ruling 2004-27, 2004-1 C.B. 625, which
discusses this frivolous argument in more detail, warning taxpayers of the
consequences of attempting to use this scheme.
In December 2004, a federal district court in Oregon permanently barred
Judy Harkins from selling a fraudulent tax scheme promoting the use of
“corporation sole.” The court found that Harkins falsely told customers the
plan could be used to avoid federal income tax and that Harkins knew or
had reason to know the statements were false. See
http://www.usdoj.gov/tax/txdv04777.htm; see also 2004 TNT 234-65 (Dec.
3, 2004). In April 2005, a federal district court in Washington entered a
preliminary injunction order barring Glen Stoll from selling a fraudulent
“corporation sole” and “ministerial trust” scheme on the Internet. The court
found that Stoll did not create the fraudulent entities for religious reasons,
but instead created them to operate businesses, such as pest-control and
carpet-cleaning companies. See http://www.usdoj.gov/tax/txdv05065.htm;
see also 2005 TNT 81-29 (Apr. 27, 2005).
44
Relevant Case Law:
United States v. Heineman, 801 F.2d 86 (2d Cir. 1986) – the court upheld
the conviction and three year prison sentence imposed against the
defendants for promoting use of purported church entities to avoid taxes.
United States v. Adu, 770 F.2d 1511 (9th Cir. 1985) – the court upheld the
conviction against Adu for aiding and assisting in the preparation and
presentation of false income tax returns with respect to false charitable
deductions to purported church entities.
Svedahl v. Commissioner, 89 T.C. 245 (1987) – the court sanctioned
Svedahl under section 6673 in the amount of $5,000 for using
contributions to purported church entities to shield income and pay
personal expenses.
II. FRIVOLOUS ARGUMENTS IN COLLECTION DUE PROCESS CASES
Under sections 6320 (pertaining to liens) and 6330 (pertaining to levies), the IRS
must provide taxpayers notice and an opportunity for an administrative appeals
hearing upon the filing of a notice of federal tax lien (section 6320) and prior to
levy (section 6330). Taxpayers have the right to seek judicial review of the IRS’s
determination in these proceedings. Section 6330(d). These reviews can extend
to the merits of the underlying tax liability, if the taxpayer has not previously
received the opportunity for review of the merits, e.g., did not receive a notice of
deficiency. Section 6330(c)(2)(B). A face-to-face administrative hearing
concerning a taxpayer’s underlying liability will not be granted if the hearing
request raises solely frivolous arguments. Treas. Reg. §§ 301.6320-1(d)(2) Q&A
D8; 301.6330-1(d)(2) Q&A D8. The Tax Court will impose sanctions pursuant to
section 6673 against taxpayers who seek judicial relief based upon frivolous or
groundless positions.
On December 6, 2006, Congress passed the Tax Relief and Health Care Act of
2006 (TRHCA), Pub.L. 109-432, 120 Stat. 2922 (2006). Section 407 of TRHCA
made revisions to sections 6320 and 6330. The TRHCA amended section 6330
by adding new subsection (g) to provide that the IRS may disregard any portion
of a section 6320 or 6330 hearing request that is based upon a position identified
as frivolous by the IRS in a published list or that reflects a desire to delay or
impede tax administration. Such portion shall not be subject to any further
administrative or judicial review. If the entire hearing request meets one or both
of these criteria, the hearing request will be denied. The TRHCA also amended
section 6702 to allow imposition of a $5,000 penalty for specified frivolous
submissions, including section 6320 or 6330 hearing requests, where any portion
of the submission meets one or both of these criteria. See section III below.
These amendments are effective for hearing requests made after March 15,
2007, the release date of Notice 2007-30, 2007-14 I.R.B. 883, identifying the list
45
of frivolous positions (which list was updated by Notice 2008-14, 2008-4 I.R.B.
___). Accordingly, in cases where the TRHCA amendments are applicable, a
taxpayer raising only frivolous issues may not only be ineligible for a face-to-face
hearing but may be denied any section 6320 or 6330 hearing.
Discussed below are some of the more common frivolous tax arguments raised
in collection due process cases.
A. Invalidity of the Assessment
1. Contention: A tax assessment is invalid because the taxpayer did
not get a copy of the Form 23C, the Form 23C was not personally
signed by the Secretary of the Treasury, or Form 23C is not a
valid record of assessment.
The Law: Tax assessments are formally recorded on a record of
assessment. Section 6203. The assessment is made by an assessment
officer signing the summary record of assessment. Treas. Reg. §
301.6203-1. The summary record of assessment must “provide
identification of the taxpayer, the character of the liability assessed, the
taxable period, if applicable, and the amount of the assessment.” Id. The
date of the assessment is the date the summary record is signed. Id.
There is no requirement in the statute or regulation that the assessment
be recorded on a specific form, that the Secretary of the Treasury
personally sign it, or that the taxpayer be provided with a copy of the
record of assessment before the IRS takes collection action. The IRS
issued Revenue Ruling 2007-21, 2007-14 I.R.B. 865, refuting the frivolous
argument that before the IRS may collect overdue taxes, the IRS must
provide taxpayers with a summary record of assessment made on a Form
23-C, Assessment Certificate – Summary Record of Assessments, or on
another particular form.
Relevant Case Law:
Williams v. Commissioner, T.C. Memo. 2005-94, 89 T.C.M. (CCH) 114
(2005) – in this collection due process case the court held that it was not
an abuse of discretion for the appeals officer to provide copies of the
transcripts of account (so-called MFTRA-X transcripts) to the taxpayer, in
lieu of the copies of the assessment documents that the taxpayer had
requested.
March v. Internal Revenue Service, 335 F.3d 1186, 1188 (10th Cir. 2003)
– the court held that the computer-generated certificate of assessment
and payment form utilized by the IRS to make assessment against the
taxpayers satisfied the regulatory requirements, where this computergenerated
form contained the same information as the non-computergenerated
form previously used and was signed by the assessment
officer.
46
Roberts v. Commissioner, 118 T.C. 365 (2002) – the petitioner in this
collection due process case argued that an assessment was invalid
because respondent did not use Form 23C, Assessment
CertificateBSummary Record of Assessments, but instead used Revenue
Accounting Control System (RACS) Report 006. The Tax Court held that
there was nothing in the law to show that the use of the RACS report was
not in compliance with the statute and regulation. The RACS report and
the Form 23C are both signed by an assessment officer.
Nestor v. Commissioner, 118 T.C. 162 (2002) – the petitioner in this
collection due process case requested production of certain documents at
the hearing, including the Form 23C. The court held that the petitioner
was not entitled to production of documents and that it was not an abuse
of discretion for the appeals officer to use Form 4340, Certificate of
Assessments and Payments to verify the assessment, for purposes of
section 6330(c)(1). The Form 23C was not required to verify the
assessment.
Perez v. Commissioner, T.C. Memo. 2002-274, 84 T.C.M. (CCH) 501
(2002) – the court held that it was not an abuse of discretion for an
appeals officer to rely on a MFTRA-X transcript, rather than producing or
relying upon a Form 23C, for purposes of section 6330(c)(1).
2. Contention: A tax assessment is invalid because the assessment
was made from a substitute for return prepared pursuant to
section 6020(b), which is not a valid return.
The Law: Section 6020(b)(1) provides that “[i]f any person fails to make
any return required by any internal revenue law or regulation made
thereunder at the time prescribed therefore, or makes, willfully or
otherwise, a false or fraudulent return, the Secretary shall make such
return from his own knowledge and from such information as he can
obtain through testimony or otherwise.” Section 6020(b)(2) further
provides that any return prepared pursuant to section 6020(b)(1) shall be
prima facie good and sufficient for all legal purposes. See also Treas.
Reg. § 301.6020-1.
Relevant Case Law:
Nicklaus v. Commissioner, T.C. Memo. 2005-156, 89 T.C.M. (CCH) 1499
(2005) - in this collection due process case petitioners argued that the
IRS could not prepare substitutes for returns for them because part
5.1.11.6.10 of the Internal Revenue Manual (IRM) (May 27, 1999) lists
seven returns that may be prepared under the authority of section 6020(b)
and does not mention Form 1040. The court disagreed. Under section
6020(b)(1) the IRS may prepare substitute returns for taxpayers who fail to
do so themselves. IRM provisions not cited by petitioners state that the
IRS may prepare substitutes for Forms 1040 under section 6020(b).
47
United States v. Updegrave, 97-1 U.S.T.C. ¶ 50,465 (E.D. Pa. 1997) – the
taxpayer argued that tax assessments may only be calculated from tax
returns filed by the taxpayer and that an inferior agent of the IRS may not
file substitute returns for the taxpayer. The court rejected this argument
as “utterly meritless.” The court recognized that section 6020(b)
authorizes the IRS to file substitute returns on behalf of taxpayers who fail
to voluntarily file returns and that the substitute return “shall be prima facie
good for all legal purposes.” Section 6020(b)(1) and (2). The court stated
that a taxpayer may not “stymie” the IRS’s collection of taxes by refusing
to file a tax return. The court also held that, while section 6020 authorizes
the Secretary of the Treasury to prepare substitute returns, such authority
has been delegated down to the District Director or any authorized IRS
officer or employee. Accordingly, the substitute return and the
assessments in this case were properly made by an employee of the IRS
in accordance with the Internal Revenue Code.
Holland v. La. Secretary of Revenue and Taxation, 97-1 U.S.T.C. ¶ 50,403
(W.D. La. 1997) – the court rejected the taxpayer’s argument that section
6020 does not apply to income taxes. The court further found that section
6065, requiring that a return be verified by a declaration under penalty of
perjury, does not apply to section 6020(b) returns.
B. Invalidity of the Statutory Notice of Deficiency
1. Contention: A statutory notice of deficiency is invalid because it
was not signed by the Secretary of the Treasury or by someone
with delegated authority.
The Law: Section 6212(a) provides the authority for the Secretary to send
notices of deficiency to taxpayers. Section 7701(a)(11)(B) defines
“Secretary” to include the Secretary of the Treasury or his delegate.
Section 7701(a)(12)(A)(i) defines the term Adelegate,” as used with respect
to the Secretary of the Treasury, to mean any officer, employee, or agency
of the Treasury Department duly authorized by the Secretary directly, or
indirectly by redelegation of authority, to perform a certain function. There
is no statutory requirement that the notice of deficiency be signed.
Relevant Case Law:
Reynolds v. Commissioner, T.C. Memo. 2006-192, 92 T.C.M. (CCH) 260
(2006) – in this collection due process case petitioner claimed that he
received invalid notices of deficiency because they were signed by the
compliance center director of the Ogden Service Center instead of the
Secretary. According to the court, it is well established that the Secretary
or his delegates may issue notices of deficiency.
48
Ball v. Commissioner, T.C. Memo. 2006-141, 92 T.C.M. (CCH) 7 (2006) –
in this collection due process case, petitioners argued that they received
no valid notice of deficiency because the notice that they received was not
signed by the Secretary of the Treasury. The court rejected this argument
as frivolous.
Wheeler v. Commissioner, T.C. Memo. 2006-109, 91 T.C.M. (CCH) 1194
(2006) - the court held that a valid notice of deficiency need not be signed
at all.
Nestor v. Commissioner, 118 T.C. 162 (2002) – in this collection due
process case, the Tax Court held that the Secretary’s authority to issue
statutory notices of deficiency has been delegated to district directors and
service center directors.
Michael v. Commissioner, T.C. Memo. 2003-26, 85 T.C.M. (CCH) 803
(2003) – the petitioner contested the validity of a notice of deficiency
signed by a service center director. The court rejected this argument as
frivolous.
Tavano v. Commissioner, 986 F.2d 1389 (11th Cir. 1993) – the court
rejected petitioner’s argument that the notice of deficiency was invalid
because it was unsigned.
2. Contention: A statutory notice of deficiency is invalid because the
taxpayer did not file an income tax return.
The Law: Section 6211(a) defines “deficiency” as the amount by which
the tax imposed by subtitle A or B – (including income, estate, and gift
taxes), or chapter 41, 42, 43, 44 (excise taxes) exceeds the excess of the
sum of the amount shown as the tax by the taxpayer upon his return (if
return made and amount shown thereon) plus any amounts previously
assessed (or collected without assessment) as a deficiency, over the
amount of rebates, as defined in section 6211(b)(2), made. In accordance
with this definition, a taxpayer’s failure to report tax on a return does not
prevent the Service from determining a deficiency in his federal income
tax and issuing a notice of deficiency, pursuant to section 6212(a).
Relevant Case Law:
Robinson v. Commissioner, T.C. Memo. 2002-316, 84 T.C.M. (CCH) 694
(2002) – the court found the petitioner liable for the section 6673(a)
penalty in this case where petitioner argued, among other frivolous
arguments, that the Service was not authorized to determine a deficiency
for a taxpayer who has not filed a return.
49
C. Invalidity of Notice of Federal Tax Lien
1. Contention: A notice of federal tax lien is invalid because it is
unsigned or not signed by the Secretary of the Treasury, or
because it was filed by someone without delegated authority.
The Law: The form and content of the notice of federal tax lien is
controlled by federal law. Section 6323(f)(3) provides that the form and
content of the notice of federal tax lien shall be prescribed by the
Secretary and shall be valid notwithstanding any other provision of law
regarding the form or content of a notice of lien. Treas. Reg. '
301.6323(f)-1(d) further provides that the notice of federal tax lien is filed
on a Form 668, which must identify the taxpayer, the tax liability giving rise
to the lien, and the date the assessment arose.
Relevant Case Law:
United States v. Union Cent. Life Ins. Co., 368 U.S. 291, 294 (1961) – the
Supreme Court held that the form used for filing a federal tax lien does not
have to comply with an additional state law requirement that it describe
the property affected, although the lien did have to be filed in a designated
state office.
Tolotti v. Commissioner, T.C. Memo. 2002-86, 83 T.C.M. (CCH) 1436
(2002) – in this collection due process case, the court upheld the validity
of a notice of federal tax lien filed on Form 668(Y) and bearing a facsimile
signature, although the lien was not certified as required by Nevada
statute. The court noted that it is “well-settled” that the form and content
of the notice of federal tax lien is controlled by federal, not state, law.
Section 6323(a) provides that “[t]he lien imposed by section 6321 shall not
be valid as against any purchaser, holder of a security interest,
mechanic’s lien holder, or judgment lien creditor until notice thereof which
meets the requirements of subsection (f) has been filed by the Secretary.”
Section 7701(a)(11)(B) defines “Secretary” to include the Secretary of the
Treasury or his delegate. Section 7701(a)(12)(A)(i) defines the term
“delegate”, as used with respect to the Secretary of the Treasury, to mean
any officer, employee, or agency of the Treasury Department duly
authorized by the Secretary directly, or indirectly by redelegation of
authority, to perform a certain function. See, e.g., Delegation Order 5-4,
Rev. 1) (delegating authority to sign notices of federal tax lien). There is
no requirement in the statute or regulation that the notice of federal tax
lien must be signed when filed.
Relevant Case Law:
Thompson v. Commissioner, T.C. Memo. 2004-204, 88 T.C.M. (CCH) 219
(2004) – in a collections due process case the court rejected petitioner’s
arguments as frivolous and groundless, including petitioner’s contention
50
that the notice of federal tax lien that he received was invalid because it
was not signed by the Secretary. The Secretary had delegated the
authority to issue notices of lien to certain IRS employees.
Uveges v. United States, 2002-2 U.S.T.C. ¶ 50,740 (D. Nev. 2002) B the
court noted that with respect to section 6323, among other Code sections,
which use the term “Secretary,” “Secretary” refers to the Secretary of the
Treasury and any delegates. See section 7701(a)(11)(B).
In re Kroll, 74 A.F.T.R.2d 94-6161 (W.D.Mich 1994) – in this bankruptcy
case the taxpayer-debtors challenged the notice of federal tax lien on the
ground that it was not signed. The court found that neither the statute nor
regulations relating to such lien require that the notice be signed, nor had
the debtors provided any explicit authority requiring that the notice be
signed to be valid.
2. Contention: The form or content of a notice of federal tax lien is
controlled by or subject to a state or local law, and a notice of
federal tax lien that does not comply in form or content with a
state or local law is invalid.
The Law:
The form and content of the notice of federal tax lien is controlled by
federal law. Section 6323(f)(3) provides that the form and content of the
notice of federal tax lien shall be prescribed by the Secretary and shall be
valid notwithstanding any other provision of law regarding the form or
content of a notice of lien. Treas. Reg. § 301.6323(f)-1(d) further provides
that the notice of federal tax lien is filed on a Form 668, which must
identify the taxpayer, the tax liability giving rise to the lien, and the date the
assessment arose
Relevant Case Law:
United States v. Union Cent. Life Ins. Co., 368 U.S. 291, 294 (1961) - the
Supreme Court held that the form used for filing a federal tax lien does not
have to comply with an additional state law requirement that it describe
the property affected, although the lien did have to be filed in a designated
state office.
Tolotti v. Commissioner, T.C. Memo. 2002-86, 83 T.C.M. (CCH) 1436
(2002) - in this collection due process case, the court upheld the validity of
a notice of federal tax lien filed on Form 668(Y) and bearing a facsimile
signature, although the lien was not certified as required by Nevada
statute. The court noted that it is “well-settled” that the form and content
of the notice of federal tax lien is controlled by federal, not state, law.
51
D. Invalidity of Collection Due Process Notice
1. Contention: A collection due process notice (Letter 1058, LT-11 or
Letter 3172) is invalid because it is not signed by the Secretary or
his delegate.
The Law: Section 6320(a)(1) provides that the Secretary shall notify a
taxpayer in writing of the filing of a notice of federal tax lien, pursuant to
section 6323, advising the taxpayer of the right to request a collection due
process hearing. Section 6330(a)(1) provides that no levy may be made
on any property or rights to property of any person unless the Secretary
has notified such person of his or her right to a collection due process
hearing before levy. There is no requirement for a signature on the
collection due process notice in the statute or regulations.
Section 7701(a)(11)(B) defines “Secretary” to include the Secretary of the
Treasury or his delegate. Section 7701(a)(12)(A)(i) defines the term
“delegate”, as used with respect to the Secretary of the Treasury, to mean
any officer, employee, or agency of the Treasury Department duly
authorized by the Secretary directly, or indirectly by redelegation of
authority, to perform a certain function. Section 7803(a)(2) provides
general authority for the Commissioner of Internal Revenue, as prescribed
by the Secretary. Treas. Reg. '' 301.6320-1(a)(1) and 301.6330-1(a)(1)
further provide that the Commissioner, or his or her delegate, will
prescribe procedures to provide notice of the right to request a collection
due process hearing. See, e.g., Delegation Order 5-3 (formerly D.O. 191
Rev. 3) (redelegation of authority with respect to levy notices).
Relevant Case Law:
Craig v. Commissioner, 119 T.C. 252 (2002) – the court held that for
purposes of section 6330(a), either the Secretary or his delegate (e.g., the
Commissioner) may issue a final notice of intent to levy. In this case, the
authority to levy was delegated to the Automated Collection Branch Chiefs
pursuant to Delegation Order No. 191 (Rev. 2), effective October 1, 1999.
Accordingly, the notice of intent to levy was valid.
Hodgson v. Commissioner, T.C. Memo. 2003-122, 85 T.C.M. (CCH) 1232
(2003) – taxpayer alleged that respondent’s determination was lawless
and erroneous for numerous reasons, including the fact that the section
6320 lien notice was not signed by the Secretary or his delegate. The
court held that the allegations were frivolous and without any merit, and
declined to address them. The court found the taxpayer liable for a
section 6673(a) penalty.
52
2. Contention: A collection due process notice is invalid because no
certificate of assessment is attached.
The Law: Sections 6320(a)(3) and 6330(a)(3) list the information required
to be included with the collection due process notice, such as the amount
of unpaid tax, the right of the person to request a collection due process
hearing, administrative appeals available, and the provisions of the
Internal Revenue Code and procedures pertaining to the notice of federal
tax lien or levy. See also Treas. Reg. '' 301.6320-1(a)(2), Q&A A10 and
301.6330-1(a)(3), Q&A A6. There is no requirement in the statute or
regulations that a certificate of assessment be attached to the collection
due process notice.
E. Verification Given as Required by I.R.C. § 6330(c)(1)
1. Contention: Verification requires the production of certain
documents.
The Law: Pursuant to sections 6320(c) and 6330(c)(1), at a collection due
process hearing, the appeals officer is required to obtain verification from
the Secretary that the requirements of any applicable law or administrative
procedure have been met. Section 6330(c)(1) does not require the
appeals officer to rely upon a particular document (e.g., the summary
record of assessment) to satisfy the verification requirement. Section
6330(c)(1) also does not require the appeals officer to give the taxpayer a
copy of the verification upon which the appeals officer relied. See also
Treas. Reg. '' 301.6320-1(e)(1) and 301.6330-1(e)(1). There is no
requirement in the statute or regulations that the taxpayer be provided with
any documents as a part of the verification process. As a matter of
practice, however, the taxpayer will be provided with a transcript of
account such as a Form 4340 or MFTRA-X computer transcript.
Transcripts such as the Form 4340 or MFTRA-X, which identify the
taxpayer, the character of the liability assessed, the taxable period and the
amount of the assessment, are sufficient to show the validity of an
assessment, absent a showing of irregularity.
Relevant Case Law:
Craig v. Commissioner, 119 T.C. 252 (2002) – the court held that section
6330(c)(1) does not require the appeals officer to rely upon a particular
document, such as the summary record of assessment, in order to satisfy
the verification requirement of section 6330(c)(1). Nor does it mandate
that the appeals officer actually provide the taxpayer with a copy of the
verification upon which the appeals officer relied. Taxpayer was provided
with Forms 4340, and did not demonstrate the invalidity of the assessment
or any of the information contained in the Forms 4340.
53
Nestor v.Commissioner, 118 T.C. 162 (2002) – appeals officer’s review of
Forms 4340 is sufficient to meet the verification requirement in section
6330(c)(1). Actual production of documents is not required.
Davis v. Commissioner, 115 T.C. 35 (2000) – appeals officer did not
abuse his discretion in relying on a Form 4340 to verify the validity of an
assessment, where the taxpayer can point to no evidence of irregularity in
the assessment process.
Standifird v. Commissioner, T.C. Memo. 2002-245, 84 T.C.M. (CCH) 371
(2002) – MFTRA-X transcript may be used for verification.
Schroeder v. Commissioner, T.C. Memo. 2002-190, 84 T.C.M. (CCH) 141
(2002) – TXMOD-A transcript is sufficient for verification.
Wagner v. Commissioner, T.C. Memo. 2002-180, 84 T.C.M. (CCH) 96
(2002) – Individual Master FileBMartinsburg Computing Center Transcript
is sufficient for verification.
F. Invalidity of Statutory Notice and Demand
1. Contention: No notice and demand, as required by I.R.C. § 6303,
was ever received by taxpayer.
The Law: Section 6303(a) provides that the Secretary shall, as soon as
practicable, and within 60 days, after the making of an assessment
pursuant to section 6203, give notice to each person liable for the unpaid
tax, stating the amount and demanding payment thereof. This notice is to
be left at the dwelling or usual place of business of such person, or shall
be mailed to such person’s last known address. See also Treas. Reg. §
301.6303-1(a) (failure to give notice within 60 days does not invalidate
notice). Nothing in the statute or regulation requires the Service to
establish receipt of the notice and demand, as long as it is mailed to the
taxpayer’s last known address.
At a collection due process hearing, an appeals officer may rely upon a
computer transcript to verify that notice and demand for payment has
been sent to a taxpayer in accordance with section 6303. For example,
the entry in a Form 4340 showing “notice of balance due” is a section
6303 notice and demand. On a TXMOD-A transcript, “status 21” indicated
in the notice section indicates a section 6303 notice and demand.
Relevant Case Law:
Reynolds v. Commissioner, T.C. Memo. 2006-192, 92 T.C.M. (CCH) 260
(2006) – in this collection due process case petitioner alleged he did not
receive a notice and demand for payment. According to the court, a
notice of balance due constitutes a notice and demand for payment for
54
purposes of section 6303(a). The Forms 4340 showed that the IRS had
promptly sent petitioner notices of balance due.
Craig v. Commissioner, 119 T.C. 252, 262-63 (2002) – Forms 4340
showed that petitioner was sent notices of balance due on the same dates
as assessments were made. The court held that a notice of balance due
on a Form 4340 constitutes notice and demand for purposes of section
6303(a). The court further noted that the form on which a notice of
assessment and demand for payment is made is irrelevant as long as it
provides the taxpayer with all the information required under section
6303(a).
United States v. Chila, 871 F.2d 1015, 1019 (11th Cir. 1989) – the
Eleventh Circuit held that the notice and demand requirements of section
6303 were only applicable to summary enforcement procedures, not as a
prerequisite to filing a civil action. The court further noted that, even if
notice was not required under section 6303, proper notice was given as
established by the Form 4340. Taxpayer did not deny on the record that
the notice was sent. He denied only that he had received it.
United States v. Lisle, 92-1 U.S.T.C. ¶ 50,286 (N.D. Cal.), citing Thomas
v. United States, 755 F.2d 728 (9th Cir. 1985) – Taxpayer claimed that
liens were invalid because the government failed to give her proper notice
and demand for payment as required by sections 6303(a) and 6321. The
Service submitted documentation establishing that it sent the taxpayer
notice. Proof that notice was sent is sufficient; the government need not
prove receipt.
2. Contention: A notice and demand is invalid because it is not
signed, it is not on the correct form (such as Form 17), or because
no certificate of assessment is attached.
The Law: Section 6303(a) provides that the Secretary shall, as soon as
practicable, and within 60 days, after the making of an assessment
pursuant to section 6203, give notice to each person liable for the unpaid
tax, stating the amount and demanding payment thereof. This notice is to
be left at the dwelling or usual place of business of such person, or shall
be mailed to such person’s last known address. See also Treas. Reg. §
301.6303-1(a) (failure to give notice within 60 days does not invalidate
notice). Notice and demand is sufficient for purposes of section 6303 as
long as it states the amount due and makes demand for payment. There
is no requirement in the statute or regulation that the notice and demand
be made on a specific form, have a signature, or include any specific
attachments.
Relevant Case Law:
55
Flathers v. Commissioner, T.C. Memo. 2003-60, 85 T.C.M. (CCH) 969
(2003) – court rejected as frivolous and/or groundless petitioner’s
argument that she did not receive proper notice and demand under
section 6303(a) because, according to petitioner, the IRS must use Form
17 in issuing such notice and demand.
Craig v. Commissioner, 119 T.C. 252 (2002) – numerous notices received
by petitioner, such as notices of intent to levy and notices of deficiency,
were sufficient to meet the requirements of section 6303(a). The form on
which notice of assessment and demand for payment is made is
irrelevant, as long as it provides the taxpayer with the information
specified in section 6303(a).
Keene v. Commissioner, T.C. Memo. 2002-277, 84 T.C.M. (CCH) 514
(2002) – notices such as final notice of intent to levy and Forms 4340 are
sufficient to constitute notice and demand within the meaning of section
6303(a) because they informed petitioner of the amount owed and
requested payment. The court rejected petitioner’s argument as frivolous
and groundless that a notice and demand for payment was not in accord
with a Treasury decision issued in 1914 that required a Form 17 be used
for such purpose.
G. Tax Court Authority
1. Contention: The Tax Court does not have the authority to decide
legal issues.
The Law: The United States Tax Court is a federal court of record
established by Congress under Article I of the United States Constitution.
Congress created the Tax Court to provide a judicial forum in which
affected persons could dispute tax deficiencies prior to payment of the
disputed amount. The jurisdiction of the Tax Court includes the authority
to hear tax disputes concerning notices of deficiency, notices of transferee
liability, certain types of declaratory judgment, readjustment and
adjustment of partnership items, review of the failure to abate interest,
administrative costs, worker classification, relief from joint and severable
liability on a joint return, and review of collection due process actions.
Section 7441 provides that “[t]here is hereby established, under article I of
the Constitution of the United States, a court of record to be known as the
United States Tax Court. The members of the Tax Court shall be the chief
judge and the judges of the Tax Court.” Section 7442 provides the “[t]he
Tax Court and its divisions shall have such jurisdiction as is conferred on
them by this title, by Chapters 1, 2, 3, and 4 of the Internal Revenue Code
of 1939, by title II and title III of the Revenue Act of 1926 (44 Stat. 10-87),
or by laws enacted subsequent to February 26, 1926.” See also sections
7443-7448.
56
Relevant Case Law:
Freytag v. Commissioner, 501 U.S. 868 (1991) – petitioners alleged that
the adjudication of their case by a special trial judge was not authorized by
section 7443A, and that the reassignment violated the appointments
clause of U.S. Const. art. II, § 2, cl. 2. The court of appeals rejected
petitioners' claims and affirmed. The Supreme Court granted certiorari and
affirmed, holding that section 7443A(b)(4) authorized the chief judge's
assignment of petitioners' cases to the special trial judge. The Court
further concluded that the special trial judge's appointment did not violate
the Appointments Clause because the Tax Court's role in the federal
judicial scheme closely resembled that of Article I courts, which were
given appointment power by the United States Constitution.
Burns, Stix Friedman & Co., Inc. v. Commissioner, 57 T.C. 392 (1971) –
petitioner sought review of income tax deficiencies, prior to the effective
date of the Tax Reform Act of 1969 (the Act), Pub. L. 91-172. The
petitioner contended that Congress exceeded its authority in creating the
court as a court of record under U.S. Const. art I without regard to the
sanctions of art. III. The court held that the provisions in the Act that
removed the court from the executive branch, made the court a court of
record, gave the court the power to punish for contempt, made review of
the court's decisions by appeal rather than by petition for review, and
simply recognized the court as a "court," was within Congress’ authority
without reliance upon U.S. Const. art. III.
Knighten v. Commissioner, 705 F.2d 777 (5th Cir. 1983) – petitioner
argued that, as a court created under Article I of the Constitution, the Tax
Court could not hear any cases that could be heard by Article III courts.
The court held that this contention was frivolous and that the argument
that the Tax Court violates Article III has been repeatedly rejected.
Martin v. Commissioner, 358 F.2d 63 (7th Cir. 1966) – petitioners’
contention that the Tax Court is without a valid constitutional existence
lacks substance and merit.
H. Challenges to the Authority of IRS Employees
1. Contention: Revenue Officers are not authorized to seize property
in satisfaction of unpaid taxes.
The Law: Section 6331(a) provides that “[i]f any person liable to pay any
tax neglects or refuses to pay the same within 10 days after notice and
demand, it shall be lawful for the Secretary to collect such tax ... by levy
upon all property and rights to property (except such property as is exempt
under section 6334) belonging to such person or on which there is a lien
provided in this chapter for the payment of such tax.” Section 6331(b)
provides that the term “levy” includes the power of distraint and seizure by
57
any means. In any case in which the Secretary may levy upon property or
property rights, he may also seize and sell such property or property
rights. Section 6331(b).
Section 7701(a)(11)(B) defines “Secretary” to include the Secretary of the
Treasury or his delegate. Section 7701(a)(12)(A)(i) defines the term
Adelegate,” as used with respect to the Secretary of the Treasury, to mean
any officer, employee, or agency of the Treasury Department duly
authorized by the Secretary directly, or indirectly by redelegation of
authority, to perform a certain function. See Treas. Reg. § 301.6331-
1(a)(1) (district director is authorized to levy). See e.g., Delegation Order
5-3 (formerly D.O. 191 Rev. 3) (redelegation of authority with respect to
levies to revenue officers and other Service employees).
Relevant Case Law:
Craig v. Commissioner; 119 T.C. 252 (2002) – the authority to levy on
petitioner’s property was delegated to Automated Collection Branch Chiefs
pursuant to Delegation Order No. 191 (Rev. 2), effective October 1, 1999.
2. Contention: IRS employees lack credentials. For example, they
have no pocket commission or the wrong color identification
badge.
The Law: The authority of IRS employees is derived from Internal Code
provisions, Treasury Regulations, and other redelegations of authority
(such as delegation orders). See the previous discussion on the authority
of revenue officers to seize property. The authority of IRS employees is
not contingent upon such criteria as possession of a pocket commission or
a specific type of identification badge.
Relevant Case Law:
Gunselman v. Commissioner, T.C. Memo. 2003-11, 85 T.C.M. (CCH) 756
(2003) – appeals officer at collection due process hearing does not have
to produce enforcement pocket commission for himself of for the Service
employee who signed the notice of lien filing.
I. Use of Unauthorized Representatives
1. Contention: Taxpayers are entitled to be represented at hearings,
such as collection due process hearings, and in court, by persons
without valid powers of attorney.
The Law: Section 330 of Title 31 of the United States Code authorizes the
Secretary of the Treasury to regulate the practice of representatives
before the Treasury Department and, after notice and an opportunity for a
proceeding, to suspend or disbar from practice before the Treasury
Department those representatives who are incompetent, disreputable, or
58
who violate regulations prescribed under section 330. Pursuant to section
330, the Secretary, in Circular No. 230 (31 CFR part 10), published
regulations that authorize the Director, Office of Professional
Responsibility, to act upon applications for enrollment to practice before
the Service, to make inquiries with respect to matters under the Director’s
jurisdiction, and to perform such other duties as are necessary to carry out
these functions. The regulations were most recently amended on July 26,
2002 (T.D. 9011, 2002-33 I.R.B. 356 [67 FR 48760] to clarify the general
standards of practice before the Service. Pursuant to Circular No. 230, a
representative must be an attorney in good standing, a certified
professional accountant, or an enrolled tax return preparer in good
standing. Attorneys and non-attorneys are only entitled to practice before
the United States Tax Court upon application and admission to practice,
pursuant to Tax Court Rule of Practice and Procedure 200.
Relevant Case Law:
Young v. Commissioner, T.C. Memo. 2003-6, 85 T.C.M. (CCH) 739 (2003)
– third party was not entitled to represent taxpayer in a collection due
process hearing because of non-compliance with Circular No. 230.
Katz v. Commissioner, 115 T.C. 329 (2000) – collection due process
hearings are informal, with no right to summons witnesses.
J. No Authorization Under I.R.C. § 7401 to Bring Action
1. Contention: The Secretary has not authorized an action for the
collection of taxes and penalties or the Attorney General has not
directed an action be commenced for the collection of taxes and
penalties.
The Law: Section 7401 provides that “[n]o civil action for the collection or
recovery of taxes, or of any fine, penalty, or forfeiture, shall be
commenced unless the Secretary authorizes or sanctions the proceedings
and the Attorney General or his delegate directs that the action be
commenced.” Treas. Reg. § 301.7401-1(a) further provides that such
action must be authorized by the Commissioner (or the Director, Alcohol,
Tobacco and Firearms Division, with respect to subtitle E of the Code), or
Chief Counsel for the IRS or his delegate, and such action must be
commenced by the Attorney General or his delegate.
Section 7701(a)(11)(B) defines “Secretary” to include the Secretary of the
Treasury or his delegate. Section 7701(a)(12)(A)(i) defines the term
Adelegate,” as used with respect to the Secretary of the Treasury, to mean
any officer, employee, or agency of the Treasury Department duly
authorized by the Secretary directly, or indirectly by redelegation of
authority, to perform a certain function. Section 7803(a)(2) provides
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general authority for the Commissioner of Internal Revenue, as prescribed
by the Secretary.
The Attorney General is the head of the Department of Justice, appointed
by the President. 28 U.S.C. § 503. The Attorney General may from time
to time make such provisions as he or she deems appropriate delegating
authority to any other officer, employee, or agency of the Department of
Justice. 28 U.S.C. § 510. See 28 U.S.C. '' 501-530D.
Relevant Case Law:
Perez v. United States, 2001-2 U.S.T.C. ¶ 50,735 (W.D.Tex. 2001) –
plaintiff requested the court to dismiss defendant’s counterclaim because
defendant did not attach a certified copy of the document in which the
Attorney General or a United States Attorney authorized a cause of action
against plaintiff, pursuant to section 7401. The court held that section
7401 does not require production of such document. Courts may
ordinarily presume that the United States complied with section 7401 and
obtained proper authorization to commence an action for the collection of
taxes. However, since the plaintiff contested such compliance, the United
States had to show that the counterclaim was in fact authorized. The
court held that the United States demonstrated compliance with section
7401 by producing a letter from the Office of Chief Counsel for the IRS to
a United States Attorney and a declaration from the counsel of record for
the United States.
United States v. Bodwell, 96-2 U.S.T.C. ¶ 50,592 (E.D. Cal. 1996) – the
court noted that the defendant’s argument that this suit was not authorized
because section 7401 is rooted in the Federal Regulations concerning the
Bureau of Alcohol, Tobacco and Firearms has been “flatly rejected” by the
Ninth Circuit.
United States v. Nuttall, 713 F. Supp. 132 (D. Del. 1989) – affidavit from
the Chief, Civil Trial Section, Central Region, Tax Division, United States
Department of Justice attached to government’s summary judgment
motion established authorization of the Secretary of the Treasury/Internal
Revenue Service. Department of Justice Tax Division Memorandum No.
83-19, dated May 5, 1983, also attached, established authorization by the
Attorney General to commence the action.
III. PENALTIES FOR PURSUING FRIVOLOUS TAX ARGUMENTS
Those who act on frivolous positions risk a variety of civil and criminal penalties.
Those who adopt these positions may face harsher consequences than those
who merely promote them. As the Seventh Circuit Court of Appeals noted in
United States v. Sloan, 939 F.2d 499, 499-500 (7th Cir. 1991), “Like moths to a
flame, some people find themselves irresistibly drawn to the tax protester
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movement’s illusory claim that there is no legal requirement to pay federal
income tax. And, like moths, these people sometimes get burned.”
Taxpayers filing returns with frivolous positions may be subject to the accuracyrelated
penalty under section 6662 (twenty percent of the underpayment
attributable to negligence or disregard of rules or regulations) or the civil fraud
penalty under section 6663 (seventy-five percent of the underpayment
attributable to fraud) or the erroneous claim for refund penalty under section
6676 (twenty percent of the excessive amount). Additionally, late filed returns
setting forth frivolous positions may be subject to an addition to tax under section
6651(f) for fraudulent failure to timely file an income tax return (triple the amount
of the standard failure to file addition to tax under section 6651(a)(1)). See
Mason v. Commissioner, T.C. Memo. 2004-247, 88 T.C.M. (CCH) 398 (2004)
(frivolous arguments may be indicative of fraud if made in conjunction with
affirmative acts designed to evade paying federal income tax).
The Tax Relief Health Care Act of 2006 amended section 6702 to allow
imposition of a $5,000 penalty for frivolous tax returns and for specified frivolous
submissions other than returns, if the purported returns or specified submissions
are either based upon a position identified as frivolous by the IRS in a published
list or reflect a desire to delay or impede tax administration. Pub.L. 109-432, 120
Stat. 2922 (2006). The term specified submission means: a request for a
hearing under section 6320 (relating to notice and opportunity for hearing on
filing of a notice of lien), a request for hearing under section 6330 (relating to
notice and opportunity for hearing before levy), an application under section 6159
(relating to agreements for payment of tax liability in installments), an application
under section 7122 (relating to compromises), or an application under section
7811 (relating to taxpayer assistance orders). This amendment is effective for
frivolous returns or specified frivolous submissions made after March 15, 2007,
the release date of Notice 2007-30, 2007-14 I.R.B. 883, identifying the list of
frivolous positions. Notice 2008-14, 2008-4, I.R.B. ___, updates the prior list with
four additional frivolous positions: (1) the Ninth Amendment to the U.S.
Constitution allows a taxpayer to not pay taxes because of objections to military
spending; (2) only fiduciaries are taxpayers, or only persons with a fiduciary
relationship to the government must pay taxes; (3) a supposed “Mariner’s Tax
Deduction” (or the like) allows a taxpayer employed on a ship to deduct the cost
of meals provided by the employer at no cost to the taxpayer; and (4) the section
6421 fuels credit may be claimed in patently unallowable amounts without
meeting the requirements for the credit.
In the 1980s, Congress showed its concern about taxpayers misusing the courts
and obstructing the appeal rights of others when it enacted tougher sanctions for
bringing frivolous cases before the courts. Section 6673 allows the courts to
impose a penalty of up to $25,000 when they come to any of three conclusions:
- a taxpayer instituted a proceeding primarily for delay,
- a position is frivolous or groundless, or
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- a taxpayer unreasonably failed to pursue administrative remedies.
An appeals court explained the rationale for the sanctions in Coleman v.
Commissioner, 791 F.2d 68, 72 (7th Cir. 1986): “The purpose of § 6673 . . . is to
induce litigants to conform their behavior to the governing rules regardless of
their subjective beliefs. Groundless litigation diverts the time and energies of
judges from more serious claims; it imposes needless costs on other litigants.
Once the legal system has resolved a claim, judges and lawyers must move on
to other things. They cannot endlessly rehear stale arguments . . . . [T]here is no
constitutional right to bring frivolous suits . . . . People who wish to express
displeasure with taxes must choose other forums, and there are many available.”
Taxpayers who rely on frivolous arguments may also face criminal prosecution
for: (1) attempting to evade or defeat tax under section 7201, a felony, for which
the penalty is a fine of up to $250,000 and imprisonment for up to 5 years; or (2)
making false statements on a return under section 7206(1), a felony, for which
the penalty is a fine of up to $250,000 and imprisonment for up to 3 years.
Persons who promote frivolous arguments and those who assist taxpayers in
claiming tax benefits based on such arguments may also face various penalties
such as: (1) a $250 penalty under section 6694 for each return prepared by an
income tax return preparer who knew or should have known that the taxpayer’s
argument was frivolous (or $1,000 for each return where the return preparer’s
actions were willful, intentional or reckless); (2) a $1,000 penalty under section
6701 for aiding and abetting an understatement of tax; and (3) criminal felony
prosecution under section 7206(2) for which the penalty is up to $250,000 and
imprisonment for up to 3 years for assisting or advising about the preparation of a
false return or other document under the internal revenue laws.
Further, promoters who fail to comply with court orders run the risk of
incarceration for contempt of court. A tax scam promoter named James A.
Mattatall was arrested for failing to provide list of the names, addresses, phone
numbers, and Social Security numbers of his customers to the Justice
Department per the court’s order. See http://www.usdoj.gov/tax/txdv04699.htm.
Also, a taxpayer named Charles D. Saunders was held in civil contempt,
incarcerated and fined $250 a day until he complied with the court’s order
directing him to fully comply with a summons from the IRS. See 2006 TNT 164-
16 (August 18, 2006).
Relevant Case Law:
Jones v. Commissioner, 688 F.2d 17 (6th Cir. 1982) – the court found the
taxpayer’s claim that his wages were paid in “depreciated bank notes” as clearly
without merit and affirmed the Tax Court’s imposition of an addition to tax for
negligence or intentional disregard of rules and regulations.
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Baskin v. United States, 738 F.2d 975 (8th Cir. 1984) – the court found that the
IRS’s assessment of a frivolous return penalty without a judicial hearing was not
a denial of due process, since there was an adequate opportunity for a later
judicial determination of legal rights.
Holker v. United States, 737 F.2d 751, 752-53 (8th Cir. 1984) – the court upheld
the frivolous return penalty even though the taxpayer claimed the documents he
filed to claim a refund did not constitute a tax return. Noting that “[t]axpayers
may not obtain refunds without first filing returns,” the court then found that A[h]is
unexplained designation of his W-2 forms as ‘INCORRECT’ and his attempt to
deduct his wages as the cost of labor on Schedule C also establish the
frivolousness and incorrectness of his position.”
Rowe v. United States, 583 F. Supp. 1516, 1520 (D. Del. 1984) – the court
upheld the viability of section 6702 against various objections, including that it
was unconstitutionally vague because it does not define a “frivolous” return.
AFrivolous is commonly understood to mean having no basis in law or fact,” the
court stated.
Szopa v. United States, 460 F.3d 884 (7th Cir. 2006) – the court found that a
frivolous tax appeal warrants a presumptive sanction of $4,000, but that the court
would impose an $8,000 sanction against taxpayers who make repeated
frivolous appeals as Szopa did.
Gass v. United States, 2001-1 U.S.T.C. (CCH) ¶ 50,220 (10th Cir. 2001) – the
court imposed an $8,000 penalty for contending that taxes on income from real
property are unconstitutional. The court had earlier penalized the taxpayers
$2,000 for advancing the same arguments in another case.
Brashier v. Commissioner, 2001-1 U.S.T.C. (CCH) ¶ 50,356 (10th Cir. 2001) –
the court imposed $1,000 penalties on taxpayers who argued that filing sworn
income tax returns violated their Fifth Amendment privilege against selfincrimination,
after the Tax Court had warned them that their argument – rejected
consistently for more than seventy years – was frivolous.
McAfee v. United States, 2001-1 U.S.T.C. (CCH) ¶ 50,433 (N.D. Ga. 2001) –
after losing the argument that his wages were not income and receiving a $500
penalty, the taxpayer returned to court to try to stop the government from
collecting that penalty by garnishing his wages. The court stated that “bringing
this ill-considered, nonsensical litigation before this court for yet a second time is
nothing but contumacious foolishness which wastes the time and energy of the
court system,” and imposed a $1,000 penalty.
United States v. Rempel, 87 A.F.T.R.2d (RIA) 1810 (D. Ark. 2001) – the court
warned the taxpayers of sanctions and stated: “It is apparent to the court from
some of the papers filed by the Rempels that they have at least had access to
some of the publications of tax protester organizations. The publications of these
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organizations have a bad habit of giving lots of advice without explaining the
consequences which can flow from the assertion of totally discredited legal
positions and/or meritless factual positions.”
Sanctions Imposed Generally in Tax Court Cases:
Hanloh v. Commissioner, T.C. Memo. 2006-194, 92 T.C.M. (CCH) 266 (2006) -
the court imposed sanctions of $25,000 where the taxpayer continued to
advance frivolous and groundless arguments after having been warned that
making those arguments would result in sanctions.
Stallard v. Commissioner, T.C. Memo. 2006-42, 91 T.C.M. (CCH) 881 (2006) -
the court imposed sanctions of $25,000 where the taxpayer raised only frivolous
and groundless arguments noting that the taxpayer had been warned in the
current proceeding, and sanctioned in a prior proceeding, for raising frivolous
arguments.
Silver v. Commissioner, T.C. Memo. 2005-281, 90 T.C.M. (CCH) 559 (2005) –
the court imposed sanctions of $25,000 against the taxpayer for filing a frivolous
suit challenging his tax liability and making only groundless arguments.
Stearman v. Commissioner, T.C. Memo. 2005-39, 89 T.C.M. (CCH) 823 (2005
aff’d, 436 F.3d 533 (5th Cir. 2006) – the court imposed sanctions totaling $25,000
against the taxpayer for advancing arguments characteristic of tax-protester
rhetoric that has been universally rejected by the courts, including arguments
regarding the Sixteenth Amendment. In affirming the Tax Court’s holding, the
Fifth Circuit granted the government’s request for further sanctions of $6,000
against the taxpayer for maintaining frivolous arguments on appeal, and the Fifth
Circuit imposed an additional $6,000 sanctions on its own, for total additional
sanctions of $12,000.
Howard v. Commissioner, T.C. Memo. 2005-144, 89 T.C.M. (CCH) 1449 (2005)
– the court imposed a $12,500 penalty against the taxpayer, who had been
sanctioned previously, for making frivolous arguments and instituting the court
proceedings primarily for delay.
Brenner v. Commissioner, T.C. Memo. 2004-202, 88 T.C.M. (CCH) 212 (2004) –
the court imposed sanctions of $15,000 against the taxpayer where he continued
making frivolous arguments despite being specifically warned by the court
against doing so.
Chase v. Commissioner, T.C. Memo 2004-142, 87 T.C.M. (CCH) 1414 (2004) –
the court imposed sanctions of $20,000 against the taxpayer for continuing to
make frivolous arguments even though the court warned him that he would likely
be penalized if he persisted.
Trowbridge v. Commissioner, T.C. Memo. 2003-164, 85 T.C.M. (CCH) 1450
(2003) – the court imposed sanctions against former husband and wife, $25,000
64
for Mr. Trowbridge and $15,000 for Ms. Martin, where the taxpayers failed to
raise a single plausible argument.
Hill v. Commissioner, T.C. Memo. 2003-144, 85 T.C.M. (CCH) 1328, 1331 (2003)
– the court imposed a $15,000 penalty against the taxpayer because he
disregarded warnings from the court that his position was without merit.
Furthermore, the taxpayer had been previously sanctioned by the court in
another proceeding for raising frivolous arguments.
Nunn v. Commissioner, T.C. Memo. 2002-250, 84 T.C.M. (CCH) 403, 410 (2002)
– the court, on its own motion, imposed sanctions against the taxpayers in the
amount of $7,500 after warning taxpayers repeatedly that their frivolous
arguments could subject them to a penalty, stating “[w]here pro se litigants are
warned that their claims are frivolous . . . and where they are aware of the ample
legal authority holding squarely against them, a penalty is appropriate.”
Sawukaytis v. Commissioner, T.C. Memo. 2002-156, 83 T.C.M. (CCH) 1886,
1888 (2002) – the court imposed a $12,500 penalty against the taxpayer for
arguing the income tax is an excise tax and that he did not engage in excise
taxable activities. The court found the taxpayer’s “position, based on stale and
meritless contentions, is manifestly frivolous and groundless.”
Ward v. Commissioner, T.C. Memo. 2002-147, 83 T.C.M. (CCH) 1820, 1824
(2002) – the court imposed sanctions against the Wards in the amount of
$25,000 stating that “[t]heir insistence on making frivolous protester type
arguments indicates an unwillingness to respect the tax laws of the United
States.”
Gill v. Commissioner, T.C. Memo. 2002-146, 83 T.C.M. (CCH) 1816, 1819 (2002)
– the court imposed a $7,500 penalty against the taxpayer stating the taxpayer’s
“insistence on making frivolous protester type arguments indicates an
unwillingness to respect the tax laws of the United States.”
Monaghan v. Commissioner, T.C. Memo. 2002-16, 83 T.C.M. (CCH) 1102, 1104
(2002) – the court rejected the taxpayer’s frivolous arguments and imposed
sanctions in the amount of $1,500, stating that “[h]e has caused this Court to
waste its limited resources on his erroneous views of the tax law which he should
have known are completely without merit.”
Hart v. Commissioner, T.C. Memo. 2001-306, 82 T.C.M. (CCH) 934 (2001) – the
court imposed sanctions in the amount of $15,000 against the taxpayer, because
his delaying actions caused the Service and the court to needlessly spend time
preparing for the trial and writing the opinion.
Sigerseth v. Commissioner, T.C. Memo.2001-148, 81 T.C.M. (CCH) 1792, 1794
(2001) – pointing out that this case involving the use of trusts to avoid taxes was
“a waste of limited judicial and administrative resources that could have been
65
devoted to resolving bona fide claims of other taxpayers,” the court imposed a
$15,000 penalty.
MatrixInfoSys Trust v. Commissioner, T.C. Memo. 2001-133, 81 T.C.M. (CCH)
1726, 1729 (2001) – in claiming that his income belonged to his trust, the court
stated that the taxpayer had made “shopworn arguments characteristic of the
tax-protester rhetoric that has been universally rejected by this and other courts,”
and imposed a $12,500 penalty.
Madge v. Commissioner, T.C. Memo. 2000-370, 80 T.C.M. (CCH) 804 (2000) –
after having warned the taxpayer that continuing with his frivolous arguments –
that he was not a taxpayer, that his income was not taxable, and that only foreign
income was taxable – would likely result in a penalty, the court imposed the
maximum $25,000 penalty.
Haines v. Commissioner, T.C. Memo. 2000-126, 79 T.C.M. (CCH) 1844, 1846
(2000) – stating, “[p]etitioner knew or should have known that his position was
groundless and frivolous, yet he persisted in maintaining this proceeding
primarily to impede the proper workings of our judicial system and to delay the
payment of his Federal income tax liabilities,” the court imposed a $25,000
penalty.
Sanctions Imposed in Collection Due Process Cases:
Hassell v. Commissioner, T.C. Memo. 2006-196, 92 T.C.M. (CCH) 273 (2006) –
the court imposed sanctions against the taxpayer in the amount of $10,000 for
continuing to assert frivolous arguments.
Forbes v. Commissioner, T.C. Memo. 2006-10, 91 T.C.M. (CCH) 672 (2006) -
the court imposed a $20,000 sanction against the taxpayer holding the he failed
to assert any coherent claims and only raised frivolous arguments
Burke v. Commissioner, 124 T.C. 189 (2005) – the court imposed a $2,500
penalty against Burke for wasting judicial resources with his frivolous arguments
even though Burke abandoned several frivolous arguments at trial.
Carrillo v. Commissioner, T.C. Memo. 2005-290, 90 T.C.M. (CCH) 608 (2005) –
the court imposed a $5,000 sanction against the taxpayers for making frivolous
arguments despite being alerted to the potential use of sanctions against them.
Wetzel v. Commissioner, T.C. Memo. 2005-211, 90 T.C.M. (CCH) 266 (2005) –
the court imposed a $15,000 penalty against Wetzel, a professional tax return
preparer, for making frivolous arguments because he knew or should have
known the arguments were frivolous.
Hamzik v. Commissioner, T.C. Memo. 2004-223, 88 T.C.M. (CCH) 316 (2004) –
the court imposed sanctions of $15,000 against the taxpayer for his insistence in
66
making frivolous arguments subsequent to the court warning him of the likelihood
of penalties being imposed.
Aston v. Commissioner, T.C. Memo. 2003-128, 85 T.C.M. (CCH) 1260 – the
court imposed a $25,000 penalty against the taxpayer for continuing to maintain
frivolous arguments, despite having been warned in a previous proceeding
before the court that those arguments were without merit.
Fink v. Commissioner, T.C. Memo. 2003-61, 85 T.C.M. (CCH) 976, 980 – the
court imposed a $2,000 penalty against the taxpayer for raising “primarily for
delay, frivolous arguments and/or groundless contentions, arguments, and
requests, thereby causing the Court to waste its limited resources.”
Eiselstein v. Commissioner, T.C. Memo. 2003-22, 85 T.C.M. (CCH) 794, 796
(2002) – the court imposed a penalty of $5,000 against the taxpayer for raising
“frivolous tax-protester arguments” and referred to the “unequivocal warning”
issued by the court in Pierson v. Commissioner concerning the imposition of
sanctions against taxpayers abusing the protections provided for in sections
6320 and 6330.
Haines v. Commissioner, T.C. Memo. 2003-16, 85 T.C.M. (CCH) 771, 773 (2003)
– the court imposed a penalty of $2,000 against the taxpayers for making
“protester arguments which have, on numerous occasions, been rejected by the
courts.”
Gunselman v. Commissioner, T.C. Memo. 2003-11, 85 T.C.M. (CCH) 756, 759
(2003) – the court imposed a penalty of $1,000 against the taxpayer who argued
“that there is no Internal Revenue Code section that makes him liable for taxes.”
The court characterized the taxpayer’s argument as a “frivolous, tax-protester
argument.”
Young v. Commissioner, T.C. Memo. 2003-6, 85 T.C.M. (CCH) 739, 742 (2003)
– the court imposed a penalty of $500 against the taxpayer for “raising the same
arguments that [the court has] previously and consistently rejected as frivolous
and groundless.”
Roberts v. Commissioner, 118 T.C. 365, 372-73 (2002) - the court imposed a
$10,000 penalty against Roberts for making frivolous arguments stating “[i]n
Pierson v. Commissioner . . . we issued an unequivocal warning to taxpayers
concerning the imposition of a penalty under section 6673(a) on those taxpayers
who abuse the protections afforded by sections 6320 and 6330 by instituting or
maintaining actions under those sections primarily for delay or by taking frivolous
or groundless positions in such actions.”
Rennie v. Commissioner, T.C. Memo. 2002-296, 84 T.C.M. (CCH) 611, 614
(2002) – the court imposed a $1,500 penalty against the taxpayer for making
frivolous arguments and choosing “to ignore and/or not follow case precedent
and interpretation of the statutory law.”
67
Tornichio v. Commissioner, T.C. Memo. 2002-291, 84 T.C.M. (CCH) 578, 582
(2002) – the court imposed a $12,500 penalty against the taxpayer for making
frivolous arguments, stating “[f]ederal courts have unequivocally rejected his
protester arguments and sanctioned him for raising them.”
Davich v. Commissioner, T.C. Memo. 2002-255, 84 T.C.M. (CCH) 429, 435
(2002) – the court imposed a $5,000 penalty against the taxpayer case, stating “it
is clear that [the taxpayer] regards this proceeding as nothing but a vehicle to
protest the tax laws of this country and to espouse his own misguided views,
which we regard as frivolous and groundless.”
Davidson v. Commissioner, T.C. Memo. 2002-194, 84 T.C.M. (CCH) 156, 160-61
(2002) – the court imposed a $4,000 penalty for raising groundless arguments
noting that “[d]uring the administrative hearing, petitioner was provided with a
copy of the Court’s opinion in Pierson v. Commissioner [115 T.C. 576, 581
(2000)]. . . and was warned that his arguments were frivolous.”
Davis v. Commissioner, T.C. Memo. 2001-87, 81 T.C.M. (CCH) 1503 (2001) –
after warning that the taxpayer could be penalized for presenting frivolous and
groundless arguments, the court imposed a $4,000 penalty.
Pierson v. Commissioner, 115 T.C. 576, 581 (2000) - the court considered
imposing sanctions against the taxpayer, but decided against doing so, stating,
“we regard this case as fair warning to those taxpayers who, in the future,
institute or maintain a lien or levy action primarily for delay or whose position in
such a proceeding is frivolous or groundless.”
Sanctions Imposed Against Taxpayer’s Counsel:
Takaba v. Commissioner, 119 T.C. 285, 295 (2002) – the court rejected the
taxpayer’s argument that income received from sources within the United States
is not taxable income stating that “[t]he 861 argument is contrary to established
law and, for that reason, frivolous.” The court imposed sanctions against the
taxpayer in the amount of $15,000, as well as sanctions against the taxpayer’s
attorney in the amount of $10,500, for making such groundless arguments.
The Nis Family Trust v. Commissioner, 115 T.C. 523, 545-46 (2000) –
concluding that the petitioners chose “to pursue a strategy of noncooperation and
delay, undertaken behind a smokescreen of frivolous tax-protester arguments,”
the court imposed a $25,000 penalty against them, and also imposed sanctions
of more than $10,600 against their attorney for arguing frivolous positions in bad
faith.
Edwards v. Commissioner, T.C. Memo. 2002-169, 84 T.C.M. (CCH) 24, 42
(2002) – the court found that sanctions were appropriate against both the
taxpayer and the taxpayer’s attorney for making groundless arguments. The
court stated that “[a]n attorney cannot advance frivolous arguments to this Court
with impunity, even if those arguments were initially developed by the client.” In
68
a supplemental opinion, the court imposed sanctions against the taxpayer in the
amount of $24,000 and against the taxpayer’s attorney in the amount of $13,050.
Edwards v. Commissioner, T.C. Memo. 2003-149, 85 T.C.M. (CCH) 1357.
 

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