Taxpayers cannot 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 another information return that reports income and income tax withholding, and rely on one or more of the frivolous arguments discussed throughout this outline to support 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, 2006-1 C.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. 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, 2005 WL 3536118, 97 A.F.T.R.2d (RIA) 548 (D. Ariz. Dec. 22, 2005), aff’d, United States v. Romero-Hill, 197 Fed. Appx. 613 (9th Cir. 2006); 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, 507 F.3d 1028 (6th Cir. 2007), cert. denied, 128 S. Ct. 2449 (2008). Conces refused to disclose the identities and documents as ordered by the court. See http://www.usdoj.gov/tax/txdv07121.htm. In February 2008, a federal court in Dallas permanently barred Phillip M. Ballard from preparing federal income tax returns for anyone other than himself. The court found that Ballard, whose business is called Asset & IRS Shield, Inc., prepared federal income tax returns for customers that falsely showed nothing but zeroes on most, if not all, lines. See http://www.usdoj.gov/tax/txdv08114.htm. Relevant Case Law: United States v. Schiff, 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.” Little v. United States, 2005 WL 2989696, at *4 (M.D.N.C. Nov. 7, 2005), aff’d, 178 Fed. Appx. 230 (4th Cir. 2006) – 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 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.” Oman v. Commissioner, T.C. Memo. 2010-276 – the court held that the Form 1040 submitted to the IRS by the taxpayer failed to meet one of the requirements to be a valid return in that it did not contain sufficient information to calculate tax liability. The form reported zeros for all income lines but one, despite other reportable income that the taxpayer received. The court also held that the purported return was invalid because it was not an honest and reasonable attempt to comply with the obligation to file a tax return. The court found that the Form 1040 and an attached notice—which claimed the return was signed and filed involuntarily and invoking the Fifth Amendment privilege against self-incrimination—“were part of a pattern of communications of meritless content that petitioner mailed to respondent evincing an intent on petitioner's part not to comply with his tax obligations.” Blaga v. Commissioner, T.C. Memo. 2010-170 – the court sustained the imposition of frivolous return penalties for four tax years based on the taxpayers’ returns reporting zero income or zero wages and zero tax, coupled with frivolous arguments, including wages do not constitute taxable income and the federal government lacks constitutional authority to impose tax on private citizens’ income. Lindberg v. Commissioner, T.C. Memo. 2010-67 – in granting the IRS’s motion for summary judgment, the court upheld a frivolous return penalty on the taxpayer based on the zero-wage return he filed. The court also imposed a $1,000 section 6673 penalty on the taxpayer for wasting the court’s limited resources. 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), aff’d, 70 Fed. Appx. 739 (5th Cir. 2003), cert. denied, 540 U.S. 1139 (2004) – 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: United States v. Cheek, 3 F.3d 1057, 1063 (7th Cir. 1993), cert. denied, 510 U.S. 1112 (1994) – 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), cert. denied, 503 U.S. 941 (1992) - 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) cert. denied, 501 U.S. 1238 (1991) – 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.” 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.” 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. IRS, 413 F.3d 297 (2d Cir. 2005) (“Schulz II”) is often cited to support this proposition. 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: Schulz v. IRS, 413 F.3d 297 (2d Cir. 2005) (“Schulz II”) – the court, upholding its prior per curiam opinion, reported at Schulz v. IRS, 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. 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. 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. 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. 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 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). In November 2009, Saladino and three co-defendants were convicted of conspiracy to defraud the United States by interfering with the IRS’ ability to accurately assess and calculate income taxes. A fourth co-defendant was acquitted and a fifth pled guilty in September. Saladino faces up to five years in prison and $250,000 in fines. http://www.oregonlive.com/portland/index.ssf/2009/11/federal_jury_finds_three_guilt.html 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.wpd; see also 2006 TNT129-31 (Jun. 23, 2006). In March 2008, a federal judge in Michigan barred Donald A. Gray from preparing federal income tax returns. The court found that Gray had been preparing tax returns for his customers based on the theory that wages are not income. The court ordered that Gray be barred from counseling others about the preparation of their returns, from holding himself out as a Certified Public Accountant, and from otherwise interfering with the administration and enforcement of the internal revenue laws. See http://www.usdoj.gov/tax/txdv08163.htm. Relevant Case Law: 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). 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. 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.” United States v. Becker, 965 F.2d 383, 389 (7th Cir. 1992), cert. denied, 507 U.S. 971 (1993) – 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), cert. denied, 502 U.S. 1060 (1992) – 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. 1990), 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.” Stelly v. Commissioner, 761 F. 2d 1113 (5th Cir. 1985), cert. denied, 474 U.S. 851 (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.” 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 . . . .” 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.” Callahan v. Commissioner, 103 A.F.T.R.2d 2400, 2009 U.S. App. LEXIS 11342 (7th Cir. May 27, 2009) – the court rejected the petitioner’s argument that only “the gain from wages” (not the wages themselves) is taxable and characterized the argument as “beyond frivolous.” The court also imposed a $4,000 penalty for filing a frivolous appeal. Abdo v. United States, 234 F.Supp.2d 553 (M.D. N.C. 2002), aff’d, 63 Fed. Appx. 163 (4th Cir. 2003), cert. denied, 540 U.S. 1120 (2004) – 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), appeal dismissed, 54 Fed. Appx. 406 (5th Cir. 2002) – 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. Bigley v. Commissioner, T.C. Memo. 2010-29 – after warnings from both the IRS and the court that his arguments were frivolous and could result in a penalty, the court imposed a $5,000 section 6673(a) penalty on the taxpayer for arguing that his earnings were not taxable income and that he is not a taxpayer. Pugh v. Commissioner, T.C. Memo. 2009-138, 97 T.C.M. (CCH) 1791 (2009) – stating that the “petitioner advances shopworn arguments characteristic of tax defier rhetoric,” the court rejected the taxpayer’s argument that his wages were not taxable because of section 1341. The court imposed a $15,000 section 6673 penalty for advancing frivolous arguments. Carskadon v. Commissioner, T.C. Memo. 2003-237, 86 T.C.M. (CCH) 234, 236 (2003)– 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.” Wheelis v. Commissioner, T.C. Memo. 2002-102, 83 T.C.M. (CCH) 1543-45 (2002), aff’d, 63 Fed. Appx. 375 (9th Cir. 2003) – the court rejected the taxpayer’s frivolous argument that his wages were not taxable based on his belief that “[p]roperty (money) 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. 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.” 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. 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, Treas. Reg. § 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). 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: United States v. Thompson, 2009 WL 1531571 (E.D. Cal. May 28, 2009) – the court granted the Service’s motion for a default judgment that included $2,596.46 in frivolous return penalties and interest. In a prior case, an injunction had been imposed on the taxpayer and Rule 11 sanctions assessed for making a frivolous “Section 861” argument. Hillecke v. United States, 2009 WL 2015009 (D. Or. Jun. 30, 2009) – the district court adopted the magistrate judge’s opinion and as to the taxpayers’ argument that earnings do not constitute gross income because earnings are not listed as an item of income in Treas. Reg. § 1.861-8(f), found the argument frivolous. 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.” Rodriguez v. Commissioner, T.C. Memo. 2009-92, 97 T.C.M. (CCH) 1482 (2009) – the court upheld deficiencies determined by the commissioner, and stated, “The 861 argument is contrary to established law, and for that reason, frivolous.” The court also imposed a $25,000 section 6673(a)(1) penalty against the taxpayer in each of two consolidated cases. 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. Corcoran v. Commissioner, T.C. Memo. 2002-18, 83 T.C.M. (CCH) 1108, 1110 (2002), aff’d, 54 Fed. Appx. 254 (9th Cir. 2002), cert. denied, 538 U.S. 1036 (2003) – 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.” 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.” Madge v. Commissioner, T.C. Memo. 2000-370, 80 T.C.M. (CCH) 804 (2000), aff’d, 23 Fed. Appx. 604 (8th Cir. 2001), cert. denied, 537 U.S. 825 (2002) – the court labeled as “frivolous” the position that only foreign income is taxable. 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. Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201, 1202 (1993), aff’d, 42 F.3d 1391 (7th Cir. 1994) – 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), cert. denied, 531 U.S. 1014 (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 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), cert. denied, 469 U.S. 1164 (1985) – 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.” 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. 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. 1973), 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. 4. Contention: Military retirement pay does not constitute income. Eligible retired United States military personnel may receive military retirement pay (MRP) from the agency responsible for disbursing these payment, the Defense Finance and Accounting Service (DFAS). Some individuals attempt to claim MRP does not constitute income for federal income tax purposes. The Law: The Tax Code defines gross income as “all income from whatever source derived, including . . . pensions.” I.R.C. § 61(a)(11). Military retirement pay is pension income within the meaning of section 61. Wheeler v. Commissioner, 127 T.C. 200, 205 n.11 (2006), affd. 521 F.3d 1289 (10th Cir. 2008); see also Eatinger v. Commissioner, T.C. Memo. 1990-310. Relevant Case Law: Wheeler v. Commissioner, T.C. Memo. 2010-188 – after ruling multiple filings from taxpayer were frivolous and warning taxpayer to stop making such arguments, Tax Court imposed a $25,000 penalty under section 6673(a)(1) because taxpayer continued to make the argument that his military retirement pay was not income and that he did not need to file federal income tax returns. Mathews v. Commissioner, T.C. Memo. 2010-226 – Tax Court held that a military veteran's retirement pay was includable in gross income, that he was subject to additions to tax for failure to file and pay taxes, and imposed a $500 penalty for "frivolous" arguments intended to delay the proceedings under section 6673(a)(1). Taxpayer had argued that his military retirement pay, including an amount garnished by the state for child support, was not income. 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. 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). In September 2006, a California federal district court barred James L. Tolbert from preparing federal tax returns. Tolbert promoted a tax avoidance scheme 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, and 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.justice.gov/archive/opa/pr/2006/September/06_tax_602.html. In May 2009, a Connecticut federal district court judge granted the government’s motion for a permanent injunction against Deowraj Buddhu and Sunita Buddhu, precluding them from: preparing or assisting in preparing federal tax returns; representing customers before the Internal Revenue Service; owning, working for, or volunteering for tax-return-preparation businesses; and promoting tax-fraud schemes. Sunita Buddhu and her father Deowraj Buddhu had operated a tax return preparation business in which they advised their clients that the IRS does not have authorization or jurisdiction to conduct examination of Connecticut residents’ tax returns. http://www.justice.gov/opa/pr/2009/May/09-tax-474.html. Relevant Case Law: United States v. Bowden, No. 09-10125, 2010 WL 4878745 (5th Cir. Nov. 30, 2010) – in denying an appeal of a sentence for tax evasion, the Fifth Circuit rejected taxpayer’s argument that he was a sovereign and not subject to the laws of the United States. United States v. Drachenberg, 623 F.3d 122 (2d Cir. 2010) – affirming conviction of Drachenberg for tax evasion and conspiracy to defraud the United States and rejecting his argument that the federal courts lacked jurisdiction because he was not a citizen of the United States. 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), cert. denied, 510 U.S. 1193 (1994) – 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 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. IRS, 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.” McLaurine v. Commissioner, T.C. Memo. 2010-236 – in rejecting as frivolous the taxpayer’s argument that the federal government cannot tax him because he is not a citizen of the United States but only Alabama, the court imposed a $1,000 section 6673 penalty. Callahan v. Commissioner, T.C. Memo. 2010-201 – the court imposed a $3,000 penalty under section 6673(a) for making frivolous arguments, including that petitioner was a citizen of only the “Republic of Wisconsin” rather than of the United States. Kay v. Commissioner, T.C. Memo. 2010-59 – the court imposed a $500 penalty under section 6673(a) for raising frivolous arguments in the proceeding, including that the petitioner “was not born a [U.S.] taxpayer” and that the United States may not tax him because “the United States is a corporation” to which he holds no “allegiance.” Rice v. Commissioner, T.C. Memo. 2009-169, 98 T.C.M. (CCH) 40 (2009) – the court affirmed the imposition of a section 6702 frivolous return penalty against the taxpayer and rejected the taxpayer’s claim that he was not liable for income tax because he resided in the “American Republic of Georgia” and was not a United States citizen. Knittel v. Commissioner, T.C. Memo. 2009-149, 97 T.C.M. (CCH) 1837 (2009) – the court imposed a $7,500 section 6673 penalty against the taxpayer for asserting the frivolous argument (among others) that he was “not a United States person as defined in I.R.C. section 7701(a)(30).” 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. Marsh v. Commissioner, T.C. Memo 2000-11, 79 T.C.M. (CCH) 1327, aff’d, 23 Fed. Appx. 874 (9th 2002), cert. denied, 537 U.S. 1029 (2002) - the court rejected the argument that the United States lacked legal standing to assess taxes because Marsh was a descendant from native Hawaiians. The court held that Marsh was a United States citizen subject to tax and not excluded as a purported member of the “Nation of Hawaii.” Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201, 1202-03 (1993), 42 F.3d 1391 (7th Cir. 1994) – 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.” 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 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, 2006-1 C.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: Holmes v. Commissioner, T.C. Memo. 2010-42, 99 T.C.M. (CCH) 1165 (2010) – the court found that, notwithstanding its previous sanctions, the petitioner pressed on with “his misguided course of conduct,” warranting a more severe response. For the tax year in question, the petitioner attached to his tax return a 51-page argument claiming that he was not subject to income tax based on numerous frivolous theories, among them that he was not “a United States Person,” that the term “Secretary of the Treasury” in the Internal Revenue Code applies only to the Secretary of the Treasury of Puerto Rico, and that he was domiciled outside the United States because he lives in the “compact state of Texas state republic [sic].” In the litigation, he continued to assert frivolous challenges to his tax liability, resulting in a $10,000 penalty. 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.” 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, 2007-1 C.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.” 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.” Biermann v. Commissioner, 769 F.2d 707, 708 (11th Cir. 1985), 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. 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), dismissed, 2002 U.S. Dist. LEXIS 8303 (D. Colo. Mar. 28, 2002) (accepting magistrate judge’s recommendations and granting motions to dismiss) – 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.” 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.” 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, 2006-1 C.B. 743, warning taxpayers of the consequences of making this frivolous argument. 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. In November 2008, a federal court in Michigan arraigned Hendrickson on an indictment charging him with submitting false documents to the IRS. The 10-count indictment charges that Hendrickson filed IRS Forms 1040 and/or IRS Forms 4852 stating that he had received no wages for those years. See http://www.usdoj.gov/tax/usaopress/2008/txdv08_2008-11-12_phendrickson.pdf. On October 26, 2009, a jury found Hendrickson guilty of all 10 counts. http://www.justice.gov/tax/usaopress/2009/phendrickson.pdf. Hendrickson was subsequently sentenced to 33 months in prison and ordered to pay a $25,000 fine. Relevant Case Law: Montero v. Commissioner, 2009 WL 3929916 (5th Cir. Nov. 19, 2009) – the court affirmed a $20,000 section 6673(a) penalty against the petitioner for advancing frivolous arguments that he is not an employee earning wages as defined by sections 3121 and 3401. 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. 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.” 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 U.S.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.” Jenkins v. Commissioner, 483 F.3d 90, 92 (2d Cir. 2007), cert. denied, 552 U.S. 821 (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. 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 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), cert. denied, 449 U.S. 1126 (1981) – 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. 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 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), cert. denied, 501 U.S. 1238 (1991) – 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 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. 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: 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. United States v. Neff, 615 F.2d 1235, 1241 (9th Cir. 1980), 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. 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), cert. denied, 444 U.S. 917 (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. Daly, 481 F.2d 28, 30 (8th Cir. 1973), 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.” 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: United States v. Drefke, 707 F.2d 978, 983 (8th Cir. 1983), cert. denied, Jameson v. United States, 464 U.S. 942 (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), cert. denied, 446 U.S. 967 (1980) – 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), cert. denied, 400 U.S. 864 (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. 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.” Wilbert v. IRS (In re Wilbert), 262 B.R. 571, 578 (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.’” 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. United States v. Schulz, 529 F.Supp.2d 341 (N.D.N.Y. 2007), aff'd 517 F.3d 606 (2nd Cir. 2008), cert. denied, 129 S.Ct. 435 (2008). In March 2008, a federal court in California permanently barred Steven Hempfling from selling a tax fraud scheme that falsely claims to give customers a legal defense against criminal prosecutions for income tax evasion. The court found that Hempfling sold a “16th Amendment Reliance Program” that falsely promised customers that they could rely on the opinion of an Illinois tax defier, William Benson, to stop filing tax returns and to stop paying federal taxes and avoid being convicted of federal tax crimes. The court also barred Hempfling from selling “how-to” manuals that falsely tell customers that IRS tax liens and levies are invalid and that employers are not required to withhold federal income taxes from employees’ pay. See http://www.usdoj.gov/tax/txdv08250.htm. William Benson wrote the book The Law That Never Was, in which he asserts that the Sixteenth Amendment was not properly ratified. On his website, Benson sold his book, accompanied with excepts from state legislative histories, records from the National Archives, court cases, and other materials, in what he titled a “Reliance Defense Package.” In January 2008, the District Court for the Northern District of Illinois granted a permanent injunction against Benson, barring him from promoting, organizing, or selling the “Reliance Defense Package” or the “16th Amendment Reliance Package” or any other tax shelter, plan, or arrangement. United States v. Benson, 2008 WL 267055 (N.D. Ill. Jan. 10, 2008). The district court, however, did not require Benson to turn over his customer list. In April 2009, the Seventh Circuit Court of Appeals upheld the permanent injunction but reversed and remanded regarding the customer list. 561 F.3d 718 (7th Cir. 2009). 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: Socia v. Commissioner, 23 F.3d 941 (5th Cir. 1994), reh’g denied, 35 F.3d 568 (5th Cir. 1994), cert. denied, 513 U.S. 1153 (1995) – the court held that defendant’s appeals which challenged Sixteenth Amendment income tax legislation were frivolous and warranted sanctions. 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. 1986), 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. 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), cert. denied, 547 U.S. 1207 (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. 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: United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990), cert. denied, 500 U.S. 950 (1991) – 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.” 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), cert. denied, 450 U.S. 930 (1981) – the court rejected a refund suit, stating that the Sixteenth Amendment authorizes imposition of an income tax without apportionment among the states. United States v. Hockensmith, 104 A.F.T.R.2d 2009-5133, 2009 WL 1883521 (M.D. Pa. Jun. 30, 2009) – the court rejected the taxpayer’s arguments that no law created an income tax and that the taxpayer was outside the government’s taxing authority. The court held that the Sixteenth Amendment allows for the taxation of income and eliminates the requirement for apportionment among the states. Maxwell v. Internal Revenue Service, 2009 WL 920533, 103 A.F.T.R.2d 2009-1571 (M.D. Tenn. Apr. 1, 2009) – the court found that the taxpayer’s arguments to have been “routinely rejected,” principally that there is no law that imposes an income tax nor is there a non-apportioned direct tax that could be imposed on him as a supposed non-citizen. Stearman v. Commissioner, T.C. Memo. 2005-39, 89 T.C.M. (CCH) 823 (2005), aff’d, 436 F.3d 533 (5th Cir. 2006), cert. denied, 547 U.S. 1207 (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. 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. IRS, 596 F.Supp. 141 (N.D. Ind. 1984) – the court granted summary judgment in favor of the government, rejecting 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, 2006-1 C.B. 745, warning taxpayers of the consequences of making this frivolous argument. Relevant Case Law: Dodge v. Commissioner, 317 Fed. Appx. 581 (8th Cir. 2009) – the court treated the taxpayer’s argument that the Form 1040 does not comply with the Paperwork Reduction Act as frivolous. Wolcott v. Commissioner, 103 A.F.T.R.2d 2009-1300 (6th Cir. 2008) – the court affirmed the Tax Court’s decision and rejected the taxpayer’s argument that the Form 1040 does not comply with the Paperwork Reduction Act. The court also granted respondent’s motion for sanctions under 12 U.S.C. § 1912 for frivolous appeal in the amount of $4,000. United States v. Patridge, 507 F.3d 1092 (7th Cir. 2007), cert. denied, 128 S.Ct. 1721 (2008), reh’g denied, 128 S.Ct. 2496 (2008) – 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. 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. 1992), 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. 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. 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. 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, 2006-1 C.B. 746, warning taxpayers from claiming an exemption for Native Americans from federal income tax liability based upon an unspecified “Native American Treaty.” 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: 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. 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. 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 U.S. Dist. LEXIS 3092, 2002-1 U.S.T.C. (CCH) ¶ 50,263 (E.D. Va. 2002), aff’d, 51 Fed. Appx. 915 (4th Cir. 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. 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. 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. 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. 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. 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. 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, 2006-1 C.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 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, 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, 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 and transactions aimed at eliminating taxes owed by the taxpayers. See; 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. 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 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. Clark, 139 F.3d 485 (5th Cir. 1998), 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. United States v. Scott, 37 F.3d 1564 (10th Cir. 1994), cert. denied, Skinner v. United States, 513 U.S. 1100 (1995) – 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. 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. Lizalek v. United States, T.C. Memo. 2009-122, 97 T.C.M. (CCH) 1639 (2009) – the taxpayer claimed that the Lizalek Trust was created when the Social Security Administration issued a Social Security card to the taxpayer. The taxpayer further claimed it was the trust that earned wages and other income, not the taxpayer. The court held that a valid trust did not exist and that the taxpayer earned the wages and other income includable in gross income. 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. 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 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). In March 2008, a federal court in Arizona permanently barred Elizabeth A. Gardner and her husband, Frederic A. Gardner, from promoting a tax fraud scheme involving a “corporation sole” program that they had sold to over 300 people. The court found that the Gardners falsely told customers they could use an entity called a “corporation sole” to avoid paying federal income taxes. See http://www.usdoj.gov/tax/txdv08230.htm. Relevant Case Law: United States v. Heineman, 801 F.2d 86 (2d Cir. 1986), cert. denied, 479 U.S. 1094 (1987) – 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), cert. denied, 475 U.S. 1030 (1986) – 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. 7. Contention: Taxpayers who did not purchase and use fuel for an off-highway business can claim the fuels tax credit. Proponents of this idea assert that taxpayers can claim the section 6421 fuels tax credit without regard to whether they qualify for the credit through the purchase and use of gasoline for an off-highway business. In addition, certain purveyors of fraudulent tax schemes have claimed on behalf of clients (usually on IRS Form 4136, Credit for Federal Tax Paid on Fuels) the tax credit under section 6427 for nontaxable uses of fuel when the taxpayers clearly are not entitled to the credit based on the facts, such as the taxpayers’ occupation and income level, type of motor vehicle and how it is used, and the volume of fuel claimed. The Law: These claims are frivolous. Section 6421(a) allows a tax credit for gasoline purchased and used in an off-highway business. Similarly, section 6427 provides a tax credit to certain purchasers of undyed diesel fuel used in an off-highway business. The diesel fuel credit is allowable both for off-highway business use or any use other than in a registered diesel-powered highway vehicle (e.g., in a private home for personal heating purposes). The circumstances in which the credits are available are specific and limited. The principal requirement is that the fuel be used in an off-highway business. Off-highway business use is the use of fuel in a trade or business or in an income-producing activity other than as a fuel in a vehicle registered for use on public highways. IRS Publication 225 (2008), Farmer’s Tax Guide, gives as examples of the off-highway business use of fuels: (1) use in stationary machines like generators, compressors, power saws, and similar equipment; (2) use in forklifts, bulldozers, and earthmovers; and (3) use in cleaning. Also, Publication 510 (2008), Excise Taxes, explains that, with some exceptions, a highway vehicle is one “designed to carry a load over a public highway,” including federal, state, county, and city roads and streets. Passenger cars, motorcycles, buses, highway trucks, tractor trailers, etc., generally are highway vehicles. The fuels tax credits, however, are being claimed without regard to these requirements and often in absurdly huge amounts that cannot possibly be for the quantity of fuel expended for off-highway purposes. Notice 2008-14, 2008-4 I.R.B. 310, lists such positions as frivolous. In November 2007, a federal district court judge in North Carolina permanently barred Nicole Baine from preparing federal income tax returns. According to the government’s civil injunction complaint, Baine prepared federal income tax returns for customers fraudulently claiming the fuel tax credits. The court in September entered a similar injunction order against Baine’s co-defendant, Anthony Green. See http://www.usdoj.gov/tax/txdv07893.htm. In January 2008, a federal court in Charlotte, North Carolina, entered a preliminary injunction against Kodjovi Raphael Totou who operates Queen City Tax Services. The order bars Totou from preparing or filing federal income tax returns until August 2008. The government complaint alleges that Totou claimed fraudulent fuels tax credits on customers’ returns. See http://www.usdoj.gov/tax/txdv08062.htm. Subsequently, in May 2008, Totou was permanently barred from preparing federal income tax returns. See http://www.usdoj.gov/tax/txdv08430.htm. In April 2008, a federal judge in Michigan barred Eric D. Parrish from preparing federal income tax returns. The complaint alleged that Parrish’s Detroit business, E Professionals, claimed bogus deductions and credits on customers’ federal income tax returns. Specifically, Parrish falsely claimed federal fuel tax credits on customers’ returns. The court found that Parrish repeatedly engaged in misconduct subject to penalties under federal tax laws, thus warranting the permanent ban on return preparation. See http://www.usdoj.gov/tax/txdv08295.htm. In May 2008, a federal court in Texas permanently barred Grace Machoko from preparing federal income tax returns for anyone other than herself. The court held that Machoko, whose business is called First Income Tax Services, repeatedly prepared fraudulent tax returns claiming false fuels tax credits. See http://www.usdoj.gov/tax/txdv08452.htm. In September 2008, a federal court in Dallas barred Farai Chihota from preparing federal income tax returns for others. According to the government’s complaint, Chihota’s Quick Tax Service prepared returns claiming fraudulent fuel tax credits. See http://www.usdoj.gov/tax/txdv08852.htm. In 2009, federal courts continued to grant injunctions against those who fraudulently claiming fuel tax credits for their clients. In April, for example, the Chicago-based tax preparation firm El Caminante Inc. and its principal operator Maric Colica were barred from preparing federal income tax returns claiming false fuels tax credits. http://www.justice.gov/opa/pr/2009/April/09-tax-330.html. In May, Georgia return preparer Ophelia Kelley, who operated two tax return preparation firms, was permanently barred from preparing tax returns for others, in part because of false fuel tax credits. http://www.justice.gov/opa/pr/2009/May/09-tax-435.html. In June another Georgia-based tax return preparer Derrick Jackson and his business, Tax Wisdom and International Tax Accounting Services, were permanently barred from preparing federal tax returns for others. http://www.justice.gov/opa/pr/2009/June/09-tax-577.html. In July, a federal district court in Florida permanently barred J’s Corporation, which was operated by Carole Exantus, from preparing federal tax returns. The court determined that J’s Corporation repeatedly prepared federal tax returns that claimed false tax credits, including false fuel tax credits, and deductions. http://www.justice.gov/opa/pr/2009/July/09-tax-695.html. 8. Contention: A Form 1099-OID can be used as a debt payment option or the form or a purported financial instrument may be used to obtain money from the Treasury. Advocates of this contention encourage individuals to use a Form 1099-OID, Original Issue Discount, or a bogus financial instrument such as a bonded promissory note as what purports to be a debt payment method for credit cards or mortgage debt. This scheme has evolved somewhat from an earlier frivolous position under which a secret bank account (sometimes referred to as a “straw man” account) was supposedly created at the Treasury Department for each U.S. citizen that individuals could use to pay tax and non-tax debts and claim withholding credits. Those who put forth this theory often argue that the proper way to redeem or draw on the account is to use some form of made-up financial instrument. This has frequently involved what looks like a check drawn on the United States Treasury or other similar paper instruments, e.g., bonded promissory notes. More recently, this redemption theory asserts that persons can draw on the secret or “straw man” Treasury account by sending a Form 1099-OID to a creditor and the creditor can present the form to the Treasury Department and receive full payment of the debt. The proponents appear to assert that the Form 1099-OID permits them to access their secret Treasury Account for an amount equal to the face amount of the Form 1099-OID in the form of a tax refund. Proponents of this theory appear to additionally argue that they have sold or transferred their debt or obligation to the person to whom they issued the Form 1099-OID in a transaction subject to sections 1271 through 1275 and that the debt or obligation is transferred with a discount of the full face amount. The issuer of the Form 1099-OID then treats the face amount of the Form 1099-OID as “other income” on the individual’s return. The “other income” amount, however, is not included in the taxable income line. Persons asserting this theory often significantly overstate withholding and claim an excessive refund in an amount close or identical to the inflated withholding. The Law: As the instructions to the Form 1099-OID indicate, the purpose of the form is to report the original issue discount of holders of OID obligations, like certificates of deposit, time deposits, bonds, debentures, bonus saving plans, and Treasury inflation-indexed securities, having a term of more than one year. OID is simply the excess of the stated redemption of the deposit, bond, or other financial obligation at maturity over its issue price. Under section 1272, OID is taxable as interest over the life of the obligation and must be included in the holder’s gross income each taxable year that the obligation is held. Certain obligations are excepted, including United States savings bonds and short-term (less than one year) and tax-exempt obligations. The Form 1099-OID is in no way a financial instrument. It is not a legitimate method of payment of any public or private debt, and it is not a means to withdraw or redeem money from the Treasury. Furthermore, as the federal Court of Appeals for the Sixth Circuit stated in United States v. Anderson, 353 F.3d 490, 500 (6th Cir. 2003), cert. denied, 541 U.S. 1068 (2004), the Treasury Department does not maintain depository accounts against which an individual can draw a check, draft, or any other financial instrument. The notion of secret accounts assigned to each citizen is pure fantasy. In addition to potential civil and criminal tax penalties for misuse of the Form 1099-OID, persons who fraudulently use false or fictitious instruments may be guilty of federal criminal offenses, such as under sections 287 and 514(a) of title 18. The IRS has issued Revenue Ruling 2005-21, 2005-1 C.B. 822 (“straw man”) and Revenue Ruling 2004-31, 2004-1 C.B. 617 (commercial redemption) warning taxpayers of the consequences of making such frivolous arguments. In November 2008, a federal jury convicted Winfield Thomas and Jeanne Herrington, who promoted bogus financial instruments called “Bills of Exchange,” of conspiracy to impede the IRS. Herrington was also convicted of corruptly interfering with the administration of the internal revenue laws. Thomas and Herrington claimed taxpayers could use the “Bills of Exchange” to pay their tax liabilities. Thomas was sentenced to 30 months imprisonment and three years of supervised release. Herrington was sentenced to 96 months imprisonment and three years of supervised release. http://www.justice.gov/opa/pr/2009/May/09-tax-532.html. In August 2009, Rodney K. Justin, a North Carolina doctor was convicted of four counts of corruptly obstructing the administration of the internal revenue laws for sending “Bills of Exchange,” fictitious financial instruments, to the IRS as payment for over $350,000 in taxes. http://www.justice.gov/opa/pr/2009/August/09-tax-879.html. The Department of Justice has successfully brought several injunction cases against tax return preparers who utilize the 1099-OID scheme. In August 2009, the District Court for the Eastern District of California granted a preliminary injunction against Teresa Marty individually and through her return preparation business Advance Financial Services, LLC, barring Marty and her business from acting as a federal return preparer. United States v. Marty, 09-cv-006000, 2009 WL 3111823 (E.D. Cal. Aug. 31, 2009); http://www.justice.gov/opa/pr/2009/September/09-tax-937.html. The court found that Marty prepared and filed fraudulent tax returns with false federal tax withholding. The court ordered Marty to provide the United States with a customer list and to notify her customers of the court’s order. In November 2009, injunctions were granted against three tax returns preparers who used Form 1099-OID to claim inflated refunds for their clients. Specifically, a preliminary injunction was granted against Tennessee tax return preparer Karen Liane Miller. Miller v. Commissioner, 2009 WL 4060274 (M.D. Tenn. Nov. 23, 2009); http://www.justice.gov/opa/pr/2009/November/09-ag-1260.html. And permanent injunctions were granted against California tax return preparers Susan Guan, individually and through her company SRN Financial Services Inc., and Jacqueline Cornejo, individually and through her company J.C. Income Tax Services, barring them from preparing tax returns. http://www.justice.gov/opa/pr/2009/November/09-tax-1261.html; United States v. Guan, 2009 WL 4609654, 104 A.F.T.R.2d 2009-7471 (C.D.Cal. 2009); http://www.justice.gov/opa/pr/2009/November/09-tax-1276.html; United States v. Cornejo, 2009 WL 4609602 (C.D.Cal. 2009). In August 2010, a district court granted injunctions against Evelyn and Blaine Johnston of Abaco Executive Services, Inc. The experienced tax return preparers used the 1099-OID scheme to request refunds for their clients on at least 92 fraudulent returns. United States v. Johnston, No. 5:09cv359 (N.D. Fla. August 4, 2010). Relevant Case Law: United States v. Heath, 525 F.3d 451 (6th Cir. 2008) - defendant was convicted of presenting a fictitious financial instrument under 18 U.S.C. § 514(a) for sending to the IRS a so-called “Registered Bill of Exchange” that appeared to be a certified check but for which there was no actual account. United States v. Anderson, 353 F.3d 490, 500 (6th Cir. 2003), cert. denied, 541 U.S. 1068 (2004) - upholding criminal convictions relating to a conspiracy involving the creation and offering of almost 200 fictitious sight drafts purporting to be drawn on the United States Treasury with an aggregate face value of more than $550 million. United States v. Cunningham, No. 10cv1377-IEG(RBB), 2011 WL 11445 (S.D. Cal. Jan. 3, 2011) – holding taxpayer in contempt for refusing to comply with a court order to provide documents and testimony summoned by the IRS pursuant to an investigation regarding his participation in a Form 1099 OID scheme. The court further warned taxpayer that he must comply by January 20, 2011 or the court will issue a warrant for his arrest. United States v. Oehler, 2003 WL 1824967 (D. Minn. Apr. 2, 2003), aff’d, 116 Fed. Appx. 43 (8th Cir. 2004) - jury convicted Oehler of 30 counts of presenting a fictitious obligation with intent to defraud. As part of his defense, he testified that he believed that every citizen has an account with the United States Treasury containing hundreds of thousands of dollars and that those funds can be accessed using sight drafts drawn on the Treasury. Ernle v. Commissioner, T.C. Memo. 2010-237 – holding petitioner liable for fraud based on various filings including phony Forms 1099-OID and imposing a 6673(a) penalty of $4,000. www.irstaxattorney.com 888-712-7690