http://www.quatloos.com/taxscams/taxprotestorbsexposed.pdf
THE TRUTH ABOUT FRIVOLOUS TAX ARGUMENTS
I. The Voluntary Nature of the Federal Income Tax System . . . . . . . . . . . . . . . . 3
A. Contention: The filing of a tax return is voluntary . . . . . . . . . . . . . . . . . . . . . . 3
B. Contention: Payment of tax is voluntary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
C. Contention: The IRS must prepare federal tax returns for a person who fails
to file . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
II. The Meaning of Income: Taxable Income and Gross Income . . . . . . . . . . . . 6
A. Contention: Wages, tips, and other compensation received for personal
services are not income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B. Contention: Only foreign-source income is taxable . . . . . . . . . . . . . . . . . . . . 9
C. Contention: Federal Reserve Notes are not income . . . . . . . . . . . . . . . . . . 10
III. The Meaning of Certain Terms Used in the Internal Revenue Code . . . . . . 11
A. Contention: Taxpayer is not a “citizen” of the United States, thus not subject
to the federal income tax laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
B. Contention: The “United States” consists only of the District of Columbia,
federal territories, and federal enclaves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
C. Contention: Taxpayer is not a “person” as defined by the Internal Revenue
Code, thus is not subject to the federal income tax laws
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
D. Contention: The only “employees” subject to federal income tax are
employees of the federal government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
IV. Constitutional Amendment Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
A. Contention: Federal income taxes constitute a “taking” of property without
due process of law, violating the Fifth Amendment . . . . . . . . . . . . . . . . . . . 16
B. Contention: Taxpayers do not have to file returns or provide financial
information because of the protection against self-incrimination found in the
Fifth Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
C. Contention: Compelled compliance with the federal income tax laws is a
form of servitude in violation of the Thirteenth Amendment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
D. Contention: The Sixteenth Amendment to the United States Constitution
was not properly ratified, thus the federal income tax laws are
unconstitutional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
E. Contention: The Sixteenth Amendment does not authorize a direct nonapportioned
federal income tax on United States citizens . . . . . . . . . . . . . 22
V. Fictional Legal Bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
A. Contention: The Internal Revenue Service is not an agency of the United
States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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B. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
C. Contention: African Americans can claim a special tax credit as reparations
for slavery and other oppressive treatment . . . . . . . . . . . . . . . . . . . . . . . . . . 25
D. Contention: Taxpayers are entitled to a refund of the Social Security taxes
paid over their lifetime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
VI. “Untaxing” Packages or “Untaxing” Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
A. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PENALTIES FOR PURSUING FRIVOLOUS TAX ARGUMENTS . . . . . . . . . . . . . . . . 29
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THE TRUTH ABOUT FRIVOLOUS TAX ARGUMENTS
This responds to some of the more common frivolous “legal” arguments made by individuals and groups who oppose compliance with the federal tax laws. These arguments are grouped 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. A final section explains the penalties that the courts may impose on
those who pursue tax cases on frivolous grounds.
I. The Voluntary Nature of the Federal Income Tax System
A. 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 to determine the correct amount of
tax and complete the appropriate returns, rather than have the government
determine tax for them. The requirement to file an income tax return is not
voluntary and is clearly set forth in Internal Revenue Code §§ 6011(a),
6012(a), et seq., and 6072(a). See also Treas. Reg. § 1.6011-1(a).
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 noncomplying 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 collection . . . . The IRS’
efforts to obtain compliance with the tax laws are entirely proper.”
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
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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. 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.’”
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.”
B. 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.
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.
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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).
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.”
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.”
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
refuse to pay taxes because they disagreed with the Government’s use of
tax revenues.”
United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) – the court
stated that “[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, tax-protestor
arguments.”
C. 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 a federal tax return for a person who does not file a return. Thus,
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those who subscribe to this contention believe 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 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:
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.”
Schiff v. United States, 919 F.2d 830, 832 (2nd 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.”
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.”
II. The Meaning of Income: Taxable Income and Gross Income
A. 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.
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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 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 IV. 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.
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 undeniably
accessions to wealth, clearly realized, and over which a taxpayer has
complete dominion.
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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 . . . .”
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.
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).
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.
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.”
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.”
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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.”
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.”
B. 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. Further, these frivolous
assertions are clearly contrary to well-established legal precedent.
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.”
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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 tax-protester
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 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.”
C. 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
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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:
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. 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. 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.
III. The Meaning of Certain Terms Used in the Internal Revenue Code
A. 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.
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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.
Relevant Case Law:
O'Driscoll v. I.R.S., 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.”
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 an
“individual” located within the jurisdiction of the United States to be “utterly
without merit” and affirmed his conviction for tax evasion.
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-protestor 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
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more than stale tax protester contentions long dismissed summarily by this
Court and all other courts which have heard such contentions.”
B. 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
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.
Relevant Case Law:
In re Becraft, 885 F.2d 547, 549-50 (9th Cir. 1989) – the court, observing that
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.”
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) – noting that
Barcroft’s statements “contain protester-type contentions that have been
-14-
rejected by the courts as groundless,” the court sustained penalties for failure
to file returns and failure to pay estimated income taxes.
C. 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.
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.”
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.
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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.”
D. 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 an apparent
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.
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
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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 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.”
IV. Constitutional Amendment Claims
A. 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 Internal Revenue Service 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.”
-17-
Further, the Supreme Court has upheld the constitutionality of the summary
administrative procedures contained in 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.
In recent years, Congress passed new laws providing further protection for
taxpayers’ due process rights in collection matters. In the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206, § 3401,
112 Stat. 685, 746, Congress enacted new sections 6320 (pertaining to
liens) and 6330 (pertaining to levies) establishing collection due process
rights for taxpayers, effective for collection actions after January 19, 1999.
Generally, 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 also have the right
to seek judicial review of the IRS’s determination in these due process
proceedings. I.R.C. § 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. I.R.C. § 6330(c)(2)(B). However, the Tax Court has indicated
that it will impose sanctions pursuant to section 6673 against taxpayers who
seek judicial relief based upon frivolous or groundless positions.
Relevant Case Law:
Flora v. United States, 362 U.S. 145, 175 (1960) – the 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.”
-18-
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.
Goza v. Commissioner, 114 T.C. 176 (2000) – the court rejected the
taxpayer’s attempt to use the judicial review process as a forum to contest
the underlying tax liability, since the taxpayer had an opportunity to dispute
that liability after receiving the statutory notice of deficiency.
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.”
Davis v. Commissioner, T.C. Memo. 2001-87, 81 T.C.M. (CCH) 1503
(2001) – the court imposed a $4,000 penalty for frivolous and groundless
arguments, after warning that the taxpayer could be penalized for presenting
them.
B. Contention: Taxpayers do not have to file returns or provide financial
information because of the protection against self-incrimination
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 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.
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
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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.
C. 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
-20-
involuntary servitude referred to in the Thirteenth Amendment.” Courts have
consistently found arguments that taxation constitutes a form of involuntary
servitude to be frivolous.
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 to collect
individual income taxes have no legal merit and are ‘patently frivolous.’”
D. 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.
-21-
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, 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.
Relevant Case Law:
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.
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.
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
-22-
return, and filing a false W-4 statement, rejecting his claim that the Sixteenth
Amendment was never properly ratified.
E. 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 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.
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.
-23-
V. Fictional Legal Bases
A. Contention: The Internal Revenue Service is not an agency of the
United States.
Some argue that the Internal Revenue Service 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 Internal Revenue Service 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 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 Internal Revenue Service was created. Thus, the Internal Revenue
Service 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.
Relevant Case Law:
Salman v. Dept. of Treasury, 899 F. Supp. 471 (D. Nev. 1995) – the court
described Salman’s contention that the Internal Revenue Service is not a
government agency of the United States as wholly frivolous and dismissed
his claim with prejudice.
Young v. I.R.S., 596 F. Supp. 141 (N.D. Ind. 1984) – the court granted
summary judgment in favor of the government, rejecting Young’s claim that
the Internal Revenue Service is a private corporation, rather than a
government agency.
-24-
B. 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).
Relevant Case Law:
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 return and
rejected his contention that he should have been acquitted because tax
instruction booklets fail to comply with the PRA.
-25-
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
found that the PRA “is inapplicable to ‘information collection request’ forms
issued during an investigation against an individual to determine his or her
tax liability.”
C. 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 socalled
“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 (January 24, 2002).
Further, 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.
Furthermore, section 7408 provides a cause of action for injunctive relief to
the United States against a party suspected of violating the tax laws. On
March 6, 2002, the United States filed civil suits to enjoin two tax return
preparers (Andrew L. Wiley and Robert L. Foster) from preparing federal
income tax returns claiming refunds based on a non-existent tax credit for
slavery reparations. United States v. Wiley, No. 3:02-cv-209WS (S.D. Miss.
2002); United States v. Foster, No. 3:02-cv-133 (E.D. Va. 2002).
-26-
Relevant Case Law:
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.”
D. 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.
VI. “Untaxing” Packages or “Untaxing” Trusts
A. 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. Promoters of these “untaxing” schemes as
well as willful taxpayers have been subjected to criminal penalties for their
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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.
Furthermore, 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 that permanently enjoined Mr. Hearn and his
representatives from, among other things, promoting or selling tax shelter
plans (including but not limited to the § 861 argument). In the order, Mr.
Hearn agreed that he relied upon the frivolous § 861 argument in making
false or fraudulent statements on federal income tax returns regarding the
excludibility of wages and other items from income.
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
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“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,
121 S. Ct. 2242 (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 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.
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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 protestor 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 accuracy-related
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 (seventyfive
percent of the underpayment attributable to fraud). Tax preparers who submit returns
maintaining groundless positions may be subject to penalties in addition to those imposed
on their clients.
Moreover, section 6702 provides for the imposition of a $500 penalty against any
individual who files a frivolous income tax return. The legislative history underlying this
section states, “the Committee is concerned with the rapid growth of deliberate defiance of
the tax laws by tax protesters. The Committee believes that an immediately assessable
penalty on the filing of protest returns will help deter the filing of such returns.” S. Rep. No.
494, 97th Cong., 2d Sess. 277, reprinted in 1982 U.S.C.C.A.N. 781, 1023-24.
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
- 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.”
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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.
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 “[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 section
6702 against various objections, including that it was unconstitutionally vague because it
does not define a “frivolous” return. “Frivolous is commonly understood to mean having no
basis in law or fact,” the court stated.
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.
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.
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
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judicial and administrative resources that could have been 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.
The Nis Family Trust v. Commissioner, 115 T.C. 523, 545-46 (2000) – concluding that the
Nis 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.
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.
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.
Gass v. United States, 2001 U.S. App. LEXIS 1513 (10th Cir., Feb. 2, 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 U.S. App. LEXIS 6270 (10th Cir., Apr. 13, 2001) – the
court imposed $1,000 penalties on taxpayers who argued that filing sworn income tax
returns violated their Fifth Amendment privilege against self-incrimination, after the Tax
Court had warned them that their argument – rejected consistently for more than seventy
years – was frivolous.
McAfee v. United States, 2001 U.S. Dist. LEXIS 7131, at *4 (N.D. Ga., Apr. 4, 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, 2001 U.S. Dist. LEXIS 8518, at *5 (D.
Ak. Feb. 14, 2001) – the court warned the taxpayers of sanctions and stated: “It is
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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 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.”
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