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FRIVOLOUS TAX ARGUMENTS IN GENERAL
I. FRIVOLOUS TAX ARGUMENTS IN GENERAL
Some taxpayers assert that they are not required to file federal tax returns because the filing of a tax return is voluntary. Proponents of this contention point to the fact that the IRS tells taxpayers in the Form 1040 instruction book that the tax system is voluntary. Additionally, these taxpayers frequently quote Flora v. United States, 362 U.S. 145, 176 (1960), for the proposition that "[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint."
The Law: The word “voluntary,” as used in Flora and in IRS publications, refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in sections 6011(a), 6012(a), et seq., and 6072(a) of the Internal Revenue Code. See also Treas. Reg. § 1.6011-1(a).
Any taxpayer who has received more than a statutorily determined amount of gross income in a given tax year is obligated to file a return for that tax year. Failure to file a tax return could subject the non-compliant individual to civil and/or criminal penalties, including fines and imprisonment. In United States v. Tedder, 787 F.2d 540, 542 (10th Cir. 1986), the court stated that, “although Treasury regulations establish voluntary compliance as the general method of income tax collection, Congress gave the Secretary of the Treasury the power to enforce the income tax laws through involuntary collection . . . . The IRS’ efforts to obtain compliance with the tax laws are entirely proper.” The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2007-20, 2007-1 C.B. 863 and in Notice 2010-33, 2010-17 I.R.B. 609.
Relevant Case Law:
Helvering v. Mitchell, 303 U.S. 391, 399 (1938) – the Supreme Court stated that “[i]n assessing income taxes, the Government relies primarily upon the disclosure by the taxpayer of the relevant facts . . . in his annual return. To ensure full and honest disclosure, to discourage fraudulent attempts to evade the tax, Congress imposes [either criminal or civil] sanctions.”
United States v. Tedder, 787 F.2d 540 (10th Cir. 1986) – the 10th Circuit upheld a conviction for willfully failing to file a return, stating that the premise “that the tax system is somehow ‘voluntary’ . . . is incorrect.”
United States v. Richards, 723 F.2d 646 (8th Cir. 1983) – the 8th Circuit upheld a conviction and fines imposed for willfully failing to file tax returns, stating that the claim that filing a tax return is voluntary “was rejected in United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983).”
United States v. Hartman, 915 F.Supp. 1227, 1230 (M.D. Fla. 1996) – the court held that, “The assertion that the filing of an income tax return is voluntary is, likewise, frivolous.” The court noted that I.R.C. § 6012(a)(1)(A), “requires that every individual who earns a threshold level of income must file a tax return” and that “failure to file an income tax return subjects an individual to criminal penalty.”
United States v. Drefke, 707 F.2d 978 (8th Cir. 1983); United States v. Schulz, 529 F. Supp. 2d 341 (N.D.N.Y. 2007); Foryan v. Commissioner, T.C. Memo. 2015-114, 109 T.C.M. (CCH) 1591 (2015); Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014).
In a similar vein, some argue that they are not required to pay federal taxes because the payment of federal taxes is voluntary. Proponents of this position argue that our system of taxation is based upon voluntary assessment and payment. They frequently claim that there is no provision in the Internal Revenue Code or any other federal statute that requires them to pay or makes them liable for income taxes, and they demand that the IRS show them the law that imposes tax on their income. They argue that, until the IRS can prove to these taxpayers’ satisfaction the existence and applicability of the income tax laws, they will not report or pay income taxes. These individuals or groups reflexively dismiss any attempt by the IRS to identify the laws, thereby continuing the cycle. The IRS discussed this frivolous position at length and warned taxpayers of the consequences of asserting it in Rev. Rul. 2007-20, 2007-1 C.B. 863 and in Notice 2010-33, 2010-17 I.R.B. 609.
The Law: The requirement to pay taxes is not voluntary. Section 1 of the Internal Revenue Code clearly imposes a tax on the taxable income of individuals, estates, and trusts, as determined by the tables set forth in that section. (Section 11 imposes a tax on corporations’ taxable income.)
Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the non-complying individual to criminal penalties, including fines and imprisonment, as well as civil penalties.
In United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983), the Eighth Circuit Court of Appeals stated, in discussing section 6151, that “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the appropriate rate of income tax, a duty which he chose to ignore.”
Although courts, in rare instances, have waived civil penalties because they have found that a taxpayer relied on an IRS misstatement or wrongful misleading silence with respect to a factual matter, there have been no cases in which the IRS’s lack of response to a taxpayer’s inquiry has relieved the taxpayer of the duty to pay tax due under the law. Such an estoppel argument does not, however, apply to a legal matter such as whether there is legal authority to collect taxes. See, e.g., McKay v. Commissioner, 102 T.C. 465 (1994).
Relevant Case Law:
United States v. Schiff, 379 F.3d 621 (9th Cir. 2004); see also http://www.usdoj.gov/tax/txdv04551.htm. – the court affirmed a federal district court’s preliminary injunction barring Irwin Schiff, Cynthia Neun, and Lawrence N. Cohen from selling a tax scheme that fraudulently claimed that payment of federal income tax is voluntary. In subsequent criminal trials, these three were convicted of violating several criminal laws relating to their scheme. See 2005 TNT 206-18. Schiff received a sentence of more than 12 years in prison and was ordered to pay more than $4.2 million in restitution to the IRS; Neun received a sentence of nearly 6 years and was ordered to pay $1.1 million in restitution to the IRS; and Cohen received a sentence of nearly 3 years and was ordered to pay $480,000 in restitution to the IRS. See http://www.usdoj.gov/opa/pr/2006/February/06_tax_098.html.
Keenan v. Commissioner, 233 F. App’x 719, 720 (9th Cir. 2007) – the 9th Circuit stated that “assertions that the tax system is voluntary” are frivolous.
Banat v. Commissioner, 80 F. App’x 705 (2d Cir. 2003) – The 2nd Circuit upheld $2,000 in sanctions against a taxpayer because his argument that “the payment of income taxes was voluntary” was “contrary to well-established law and thus was frivolous.”
United States v. Gerads, 999 F.2d 1255 (8th Cir. 1993) – the court stated that the “[taxpayers’] claim that payment of federal income tax is voluntary clearly lacks substance” and imposed sanctions in the amount of $1,500 “for bringing this frivolous appeal based on discredited, tax-protester arguments.”
Wilcox v. Commissioner, 848 F.2d 1007 (9th Cir. 1988) – the court rejected Wilcox’s argument that payment of taxes is voluntary for American citizens and imposed a $1,500 penalty against Wilcox for raising frivolous claims.
United States v. Schulz, 529 F.Supp.2d 341 (N.D.N.Y. 2007) – the court permanently barred Robert Schulz and his organizations, We the People Congress and We the People Foundation, from promoting a tax scheme that helped employers and employees improperly stop tax withholding from wages on the false premise that federal income taxation is voluntary.
Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014) – the court imposed several sanctions of $25,000 against a taxpayer who argued, amongst other frivolous arguments, that “the Internal Revenue Code does not establish any liability for the payment of Federal income tax.”
Other Cases: Schiff v. United States, 919 F.2d 830 (2d Cir. 1990); United States v. Berryman, 112 A.F.T.R.2d (RIA) 2013-6282 (D. Colo. 2013); United States v. Sieloff, 104 A.F.T.R.2d (RIA) 2009-5067 (M.D. Fla. 2009); United States v. Melone, 111 A.F.T.R.2d (RIA) 2013-1369 (D. Mass. 2013); Foryan v. Commissioner, T.C. Memo. 2015-114, 109 T.C.M. (CCH) 1591(2015); Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014); Horowitz v. Commissioner, T.C. Memo. 2006-91, 91 T.C.M. (CCH) 1120 (2006).
Some taxpayers attempt 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 “corrected” Form W-2 or another information return that reports income and income tax withholding, reling on one or more of the frivolous arguments discussed throughout this outline to support their position.
The Law: A taxpayer that has taxable income cannot legally 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 these forms do not evidence an honest and reasonable attempt to satisfy the tax laws or contain sufficient data to calculate the tax liability, which are necessary elements of a valid tax return. See Beard v. Commissioner, 82 T.C. 766, 777-79 (1984). Furthermore, including the phrase “nunc pro tunc” or other legal phrase has no legal effect and does not serve to validate a zero return. See Rev. Rul. 2006- 17, 2006-1 C.B. 748; Notice 2010-33, 2010-17 I.R.B. 609. The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2004-34, 2004-1 C.B. 619.
Relevant Case Law:
Kelly v. United States, 789 F.2d 94 (1st Cir. 1986) – the 1st Circuit found that the taxpayer’s failure to report any income from wages, the “unexplained designation of his Form W-2 as ‘Incorrect’, and his attempt to deduct as a cost of labor expense on Schedule C an amount almost identical to the amount of wages on Form W-2” established that his position (that compensation for his labor was not “wages” or taxable income) was both incorrect and frivolous.
Sisemore v. United States, 797 F.2d 268 (6th Cir. 1986) – the 6th Circuit upheld the assessment of a frivolous-return penalty on taxpayers because “their amended return [showing no income] on its face clearly showed that their assessment of their taxes was substantially incorrect and that their position on the matter [that their wages were zero because received in equal exchange for their labor] was frivolous.”
Olson v. United States, 760 F.2d 1003 (9th Cir. 1985) – the 9th Circuit held that the district court properly found the taxpayer was liable for a penalty for filing a frivolous tax return because he listed his wages as zero and attempted “to escape tax by deducting his wages as ‘cost of labor’ and by claiming that he had obtained no privilege from a governmental agency.”
Davis v. United States Government, 742 F.2d 171 (5th Cir. 1984) – the 5th Circuit held as clearly frivolous the taxpayers’ reasons (“rejected . . . time and time again”) for reporting no wages and no gross income, when they had received over $60,000 in earnings or other compensation as evidenced by the Forms W-2 attached to their Form 1040.
United States v. Melone, 111 A.F.T.R.2d (RIA) 2013-1369 (D. Mass. 2013) – the court held that the taxpayer, who filed “zero returns,” falsely asserting he made no income, was liable for civil penalties.
United States v. Ballard, 101 A.F.T.R.2d (RIA) 1241, (N.D. Tex. 2008) – the court permanently enjoined a tax return preparer from engaging in further tax return preparation or tax advice because he prepared federal income tax returns for customers that falsely showed nothing but zeroes.
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 petitioner’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 under section 6673 for making frivolous arguments.
Other Cases: United States v. Schiff, 544 F. App’x 729 (9th Cir. 2013); United States v. Conces, 507 F.3d 1028 (6th Cir. 2007); United States v. Schiff, 379 F.3d 621 (9th Cir. 2004); United States v. Nichols, 115 A.F.T.R.2d (RIA) 2015-1971 (D. Wash. 2015); United States v. Hill, 97 A.F.T.R.2d (RIA) 2006-548 (D. Ariz. 2005); Little v. United States, 96 A.F.T.R.2d (RIA) 2005-7086 (M.D.N.C. 2005); Schultz v. United States, 95 A.F.T.R.2d (RIA) 2005-1977 (W.D. Mich. 2005); Waltner v. Commissioner, T.C. Memo. 2015-146, T.C.M. (RIA) 2015- 146 (2015); Hill v. Commissioner, T.C. Memo. 2014-101, 108 T.C.M. (CCH) 12 (2014); Shirley v. Commissioner, T.C. Memo. 2014-10, 107 T.C.M. (CCH) 1057 (2014); Waltner v. United States, 98 Fed. Cl. 737 (2011); Oman v. Commissioner, T.C. Memo. 2010-276, 100 T.C.M. (CCH) 548 (2010); Blaga v. Commissioner, T.C. Memo. 2010-170, 100 T.C.M. (CCH) 91 (2010).
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. 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:
Jahn v. Commissioner, 431 F. App’x 210 (3d Cir. 2011) – the 3rd Circuit held that even if the IRS prepares a return under section 6020(b), this “does not relieve the nonfiling taxpayer of his duty to file and does not equate to a filed return unless signed by the taxpayer.” The court found arguments to the contrary frivolous.
United States v. Cheek, 3 F.3d 1057 (7th Cir. 1993) – the 7th Circuit upheld the district court’s instruction to the jury that the 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 defendant’s obligation to file a tax return.
In re Bergstrom, 949 F.2d 341 (10th Cir. 1991) – the 10th Circuit 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.”
Schiff v. United States, 919 F.2d 830 (2d Cir. 1990) – the 2nd Circuit rejected the taxpayer’s argument that the IRS must prepare a substitute return pursuant to section 6020(b) before assessing deficient taxes, stating “[t]here is no requirement that the IRS complete a substitute return.”
Moore v. Commissioner, 722 F.2d 193 (5th Cir. 1984) – the 9th Circuit 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.”
Jagos v. Commissioner, T.C. Memo. 2017-022, 114 T.C.M. (CCH) 424 (2017) – the court found that the IRS was not required to prepare a substitute for return under section 6020 when the petitioner had already filed a return for the year at issue.
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 when the petitioner has not filed a return for the year at issue.
Other Cases: United States v. Barnett, 945 F.2d 1296 (5th Cir. 1991); United States v. Lacy, 658 F.2d 396 (5th Cir. 1981).
Some summoned parties may assert that they are not required to respond to or comply with an administrative summons issued by the IRS. 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”), discussed below, is often inappropriately 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 summon a witness to testify or to produce books, papers, records, or other data that may be relevant or material to an investigation. I.R.C. § 7602; United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984); 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. I.R.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 before 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 2nd Circuit upheld its prior per curiam opinion, reported at Schulz v. IRS, 395 F.3d 463 (2d Cir. 2005) (“Schulz I”), and held that, based upon constitutional due process concerns, an indictment under section 7210 shall not lie and contempt sanctions under section 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.”
United States v. Becker, 58-1 U.S.T.C. ¶ 9403 (S.D.N.Y. 1958) – when Becker failed to produce certain books and records specified in an IRS summons, claiming that they had been destroyed by fire, the court found, based upon the evidence (including the fact that some of the specified books were subsequently produced in compliance with a grand jury subpoena), that Becker willfully and knowingly neglected to produce information called for by a summons in violation of section 7210.
Other Cases: United States v. Sanders, 110 A.F.T.R.2d (RIA) 2012-5910 (S.D. Ill. 2011).
This argument asserts that wages, tips, and other compensation received for personal services are not income, arguing there is 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 claim a deduction for personal services rendered.
Another similar argument asserts that wages are not subject to taxation where individuals have obtained funds in exchange for their time. Under this theory, wages are not taxable because the Code does not specifically tax “timereimbursement transactions.” Some individuals or groups 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. See Reese v. United States, 24 F.3d 228, 231 (Fed. Cir. 1994) (“an abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived.”). In Rev. Rul. 2007-19, 2007-1 C.B. 843, and in Notice 2010-33, 2010-17 I.R.B. 609, the IRS advised taxpayers that wages and other compensation received in exchange for personal services are taxable income and warned of the consequences of making frivolous arguments to the contrary.
Section 1341 and the court opinions 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 had an unrestricted right to the income in question, but had to return the money. See Dominion Resources, Inc. v. United States, 219 F.3d 359 (4th Cir. 2000). The IRS, in Rev. Rul. 2004-29, 2004-1 C.B. 627, warned taxpayers of the consequences of frivolously claiming the section 1341 deduction when the taxpayer has not repaid an amount previously reported as income.
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. Criminal and civil penalties have been imposed against individuals who rely upon this frivolous argument.
Though a handful of taxpayers who were criminally charged with violations of the internal revenue laws have avoided conviction, taxpayers should not mistake those few cases as indicative that frivolous positions that fail to yield criminal convictions are legitimate or that because one taxpayer escaped conviction, taxpayers are protected from sanctions resulting from noncompliance. While a few defendants have prevailed, the vast majority are convicted. Furthermore, even if a taxpayer is acquitted of criminal charges of noncompliance with federal tax laws, the IRS may 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, 71 T.C.M. (CCH) 2884 (1996).
Relevant Case Law:
Cheek v. United States, 498 U.S. 192 (1991) – Solely on the basis of erroneous jury instructions, 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. 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. 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).
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.”
Richmond v. Commissioner, 474 F. App’x 754 (10th Cir. 2012) – the 10th Circuit noted that “it is well-settled that wages and interest payments constitute taxable income” and rejected the petitioner’s argument to the contrary as “completely lacking in legal merit and patently frivolous.”
Callahan v. Commissioner, 334 F. App’x 754 (7th Cir. 2009) – the 7th Circuit rejected the petitioner’s argument that only “the gain from wages” (not wages themselves) is taxable, characterizing the argument as “beyond frivolous.”
United States v. Sloan, 939 F.2d 499, 500 (7th Cir. 1991) – in rejecting the taxpayer’s argument that the United States’ revenue laws do not impose a tax on income, the 7th Circuit stated that the “Internal Revenue Code imposes a tax on all income.”
United States v. Connor, 898 F.2d 942, 943-44 (3d Cir. 1990) – the 3rd Circuit 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) – the 5th Circuit imposed double costs and attorney’s fees on the taxpayers for bringing a frivolous appeal and rejected their argument that taxing wage and salary income is a violation of the constitution because compensation for labor is an exchange rather than gain.
United States v. Richards, 723 F.2d 646 (8th Cir. 1983) – the 8th Circuit 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 5th Circuit 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 (9th Cir. 1981) – the 9th Circuit affirmed Romero’s conviction for willfully failing to file tax returns, stating that “[his] 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.”
Sumter v. United States, 61 Fed. Cl. 517 (2004) – the court found Ms. Sumter’s “claim of right” argument “devoid of any merit” stating 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 here 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.
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.”
Other Cases: Jacobsen v. Commissioner, 551 F. App’x 950 (10th Cir. 2014); Garber v. Commissioner, 500 F. App’x 540 (7th Cir. 2013); United States v. Becker, 965 F.2d 383 (7th Cir. 1992); United States v. White, 769 F. 2d 511 (8th Cir. 1985); United States v. Bigley, No. 2:14-CV-0729-HRH, 2017 WL 2417911, at *5 (D. Ariz. May 10, 2017); United States v. Jones, No. 14-CV-0227, 2015 WL 6942071, at *1 (D. Minn. Nov. 10, 2015); United States v. Hopkins, 927 F. Supp. 2d 1120 (D. N.M. 2013); United States v. Reading, 110 A.F.T.R.2d 2012-5965 (D. Ariz. 2012); Abdo v. United States, 234 F.Supp.2d 553 (M.D.N.C. 2002); Green v. Commissioner, T.C. Memo. 2016-67, 111 T.C.M. (CCH) 1299 (2016); Leyshon v. Commissioner, T.C. Memo 2015-104, 109 T.C.M. (CCH) 1535 (2015); Shakir v. Commissioner, T.C. Memo. 2015-147, 110 T.C.M. (CCH) 137 (2015); Snow v. Commisioner, T.C. Memo. 2013-114, 105 T.C.M. (CCH) 1680 (2013); O’Brien v. Commissioner, T.C. Memo. 2012-326, 104 T.C.M. (CCH) 620 (2012); Pugh v. Commissioner, T.C. Memo. 2009-138, 97 T.C.M. (CCH) 1791 (2009);; Abrams v. Commissioner, 82 T.C. 403 (1984); Reading v. Commissioner, 70 T.C. 730 (1978).
Some individuals and groups 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. These frivolous assertions are contrary to well-established legal precedent.
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.” 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 determine or define gross income.
The IRS has warned taxpayers of the consequences of making these frivolous arguments. Rev. Rul. 2004-28, 2004-1 C.B. 624 (discussing section 911); Rev. Rul. 2004-30, 2004-1 C.B. 622 (discussing section 861); Notice 2010-33, 2010-17 I.R.B. 609.
Some groups and individuals have adopted a variation of this argument and argue that income derived within the United States is actually foreign earned income and then they claim the foreign earned income exclusion. This contention has been rejected as frivolous by the courts.
Relevant Case Law:
United States v. Ambort, 405 F.3d 1109 (10th Cir. 2005) – the court affirmed the conviction and 108-month sentence of Ernest G. Ambort for willfully aiding and assisting in preparing false income tax returns, specifically for seminars he conducted during which 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.
Webb v. United States, 100 A.F.T.R.2d (RIA) 2007-6290 (E.D.N.Y 2007) – the court characterized the argument that income derived within “the 50 states” is foreign sourced income as “an absurd proposition” that is as absurd as arguing that “the State of Illinois is not part of the United States” and as nothing more “than stale tax protester contentions long dismissed summarily by this Court and all other courts which have heard such contentions.”
Great-West Life Assurance 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 sections 1 and 11, respectively, on their worldwide income.”
Takaba v. Commissioner, 119 T.C. 285, 295 (2002) – the court rejected the taxpayer’s argument that income received from sources within the United States is not taxable income, stating that “[t]he 861 argument is contrary to established law and, for that reason, frivolous.” The court imposed sanctions against the taxpayer as well as against the taxpayer’s attorney in the respective amounts of $15,000 and $10,500 for making such groundless arguments.
Corcoran v. Commissioner, T.C. Memo. 2002-18, 83 T.C.M. (CCH) 1108, 1110 (2002) – the court rejected the taxpayers’ argument that their 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 them 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 (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.”
Other Cases: Carmichael v. United States, 128 F. App’x 109 (Fed. Cir. 2005); Hillecke v. United States, 104 A.F.T.R.2d (RIA) 2009-5267 (D. Or. 2009); United States v. Thompson, 103 A.F.T.R.2d (RIA) 2009-2421 (E.D. Cal. 2009); Rodriguez v. Commissioner, T.C. Memo. 2009-92, 97 T.C.M. (CCH) 1482 (2009); Madge v. Commissioner, T.C. Memo. 2000-370, 80 T.C.M. (CCH) 804 (2000); Aiello v. Commissioner, T.C. Memo. 1995-40, 69 T.C.M. (CCH) 1765 (1995); Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201 (1993).
Proponents of this contention 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 courts have rejected this argument on numerous occasions.
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’s power to declare the form of legal tender. See 31 U.S.C. § 5103; 12 U.S.C. § 411. In an opinion affirming a conviction for willfully failing to file a return and rejecting the argument that Federal Reserve Notes are not subject to taxation, the court stated that “Congress has declared federal reserve notes legal tender . . . and federal reserve notes are taxable dollars.” United States v. Rifen, 577 F.2d 1111, 1112 (8th Cir. 1978).
Relevant Case Law:
Sanders v. Freeman, 221 F.3d 846 (6th Cir. 2000) – finding that the 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 6th Circuit 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.”
United States v. Condo, 741 F.2d 238 (9th Cir. 1984) – the 9th Circuit 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 6th Circuit 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 (10th Cir. 1980) – the 10th Circuit 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 (8th Cir. 1973) – the 8th Circuit 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.
United States v. Molen, 110 A.F.T.R.2d (RIA) 2012-5242 (E.D. Cal. 2012) – the court dismissed as frivolous the taxpayer’s arguments “that federal reserve notes, i.e., U.S. dollars, are ‘worthless securities’ and cannot create taxable income” and that “federal reserve notes are merely ‘debts’ that cannot be taxed.”
Other Cases: United States v. Davenport, 824 F.2d 1511 (7th Cir. 1987).
Eligible, retired United States military personnel may receive military retirement pay (MRP) from the agency responsible for disbursing these payments, the Defense Finance and Accounting Service (DFAS). Some individuals argue that MRP does not constitute income for federal income tax purposes.
The Law: The Internal Revenue 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); see also Eatinger v. Commissioner, T.C. Memo. 1990-310.
Relevant Case Law:
Wheeler v. Commissioner, T.C. Memo. 2010-188, 100 T.C.M. (CCH) 180 (2010) –the Tax Court imposed a $25,000 penalty under section 6673(a)(1) because the taxpayer continued to argue 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, 100 T.C.M. (CCH) 336 (2010) – In addition to penalties for failure to file and pay taxes, the Tax Court imposed a $500 penalty under section 6673(a)(1) against Mr. Mathews for his "frivolous" argument that his military retirement pay, including an amount garnished by the state for child support, was not income.
1. Contention: Taxpayer is not a “citizen” of the United States and thus is 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 has warned taxpayers of the consequences of making this frivolous argument. Rev. Rul. 2007-22, 2007-1 C.B. 866; Notice 2010-33, 2010-17 I.R.B. 609.
In a variation of this argument, taxpayers argue that although they are citizens of the United States, for the purposes of the Internal Revenue Code they are non-resident aliens and are subject to taxation only on income that is connected with the conduct of a trade or business. The 11th Circuit rejected this contention as frivolous.
Relevant Case Law:
Taliaferro v. Freeman, 595 F.App’x 961, 962-63 (11th Cir. 2014) – the 11th Circuit upheld the lower court’s dismissal of Mr. Taliaferro’s complaint seeking to enjoin the IRS from collecting taxes assessed against him. The court rejected as meritless his argument that, despite his U.S. citizenship, he is, for purposes of the tax code, a nonresident alien who is subject to taxation only on income that is connected with the conduct of a trade or business.
United States v. Bowden, 402 F. App’x 967 (5th Cir. 2010) – in denying an appeal of a sentence for tax evasion, the 5th Circuit rejected the 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) – the 2nd Circuit affirmed Drachenberg’s conviction for tax evasion and conspiracy to defraud the United States and rejected 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 7th Circuit 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. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) – the 8th Circuit 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) – the 7th Circuit 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) – the 11th Circuit 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.
Waltner v. Commissioner, T.C. Memo. 2014-35, 107 T.C.M. (CCH) 1189 (2014) – the court dismissed the possibility of being a citizen of a state but not the United States as “nonsensical” and “backwards; one cannot be a citizen of a State without also being a citizen of the United States. Indeed, citizenship in the United States is “paramount and dominant” over State citizenship.”
Kay v. Commissioner, T.C. Memo. 2010-59, 99 T.C.M. (CCH) 1236 (2010) – the court imposed a $500 penalty under section 6673(a) against James Kay for raising frivolous arguments in the proceeding, including that he “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.”
Other Cases: United States v. Sileven, 985 F.2d 962 (8th Cir. 1993); Nevius v. Tomlinson, 113 A.F.T.R.2d 2014-1872 (W.D. Miss. 2014); O'Driscoll v. IRS, 1991 U.S. Dist. LEXIS 9829 (E.D. Pa. Jul. 16, 1991); Bruhwiler v. Commissioner, T.C. Memo. 2016-18, 111 T.C.M. (CCH) 1071 (2016); Carlson v. Commissioner, T.C. Memo. 2012-76, 103 T.C.M. (CCH) 1408 (2012); Callahan v. Commissioner, T.C. Memo. 2010-201, 100 T.C.M. (CCH) 225 (2010); Rice v. Commissioner, T.C. Memo. 2009-169, 98 T.C.M. (CCH) 40 (2009); Knittel v. Commissioner, T.C. Memo. 2009-149, 97 T.C.M. (CCH) 1837 (2009); BlandBarclay v. Commissioner, T.C. Memo. 2002-20, 83 T.C.M. (CCH) 1119, 1121 (2002); Marsh v. Commissioner, T.C. Memo 2000-11, 79 T.C.M. (CCH) 1327 (2000); Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201, 1202-03 (1993).
2. Contention: The “United States” consists only of the District of Columbia, federal territories, and federal enclaves
Some individuals and groups 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. The 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.” United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990) (citing Brushaber v. Union Pac. R.R., 240 U.S. 1, 12-19 (1916)). Courts have uniformly rejected this frivolous contention, and the IRS has warned taxpayers of the consequences of making this frivolous argument. Rev. Rul. 2006-18, 2006-1 C.B. 743; Notice 2010-33, 2010-17 I.R.B. 609.
Relevant Case Law:
Taliaferro v. Freeman, 595 F.App’x 961, 962-63 (11th Cir. 2014) – the 11th Circuit rejected the argument that Congress has taxing authority over only federal enclaves, noting that “[for nearly a century], the 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.”
United States v. Cooper, 170 F.3d 691 (7th Cir. 1999) – the court sanctioned Cooper for filing a frivolous appeal wherein he argued 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 (6th Cir. 1994) – the court rejected the "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 (9th Cir. 1989) – the 9th Circuit imposed monetary damages on Becraft, an attorney, based on his advocacy of frivolous claims, such as that federal laws apply only to United States territories and the District of Columbia, which the court found had “no semblance of merit.”
United States v. Ward, 833 F.2d 1538 (11th Cir. 1987) – 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 conviction for tax evasion.
Wnuck v. Commissioner, 136 T.C. 498 (2011) – the court described in detail why this argument (based on a misreading of an employment tax provision that includes Puerto Rico, the Virgin Islands, Guam, and American Samoa within the term “United States”) is frivolous and imposed a $5,000 penalty under section 6673 for maintaining this and other frivolous arguments.
Other Cases: Waltner v. Commissioner, T.C. Memo. 2014-35, 107 T.C.M. (CCH) 1189 (2014); Tiernan v. United States, 2013 U.S. Claims LEXIS 1769 (Fed. Cl. November 12, 2013); Holmes v. Commissioner, T.C. Memo. 2010-42, 99 T.C.M. (CCH) 1165 (2010); Ulloa v. Commissioner, T.C. Memo. 2010-68, 99 T.C.M. (CCH) 1280 (2010).
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 individuals and groups 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. In a variation of this argument, some individuals and groups argue that IRS correspondences addressed to taxpayers in all CAPITAL LETTERS are not valid. Proponents of this argument claim there is a legal distinction under state law that entities such as corporations are legally addressed in this manner and since taxpayers are not “fictional legal entities,” the correspondence is not valid.
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 has warned taxpayers of the consequences of making this frivolous argument. Rev. Rul. 2007-22, 2007-1 C.B. 866; Notice 2010-33, 2010-17 I.R.B. 609.
Relevant Case Law:
Young v. Commissioner, 551 F.App’x 229, 203 (8th Cir. 2014) – the 8th Circuit rejected as “simply meritless” the taxpayer’s argument that the Internal Revenue Code does not make individuals liable for the payment of federal income taxes, imposing an $8,000 sanction for his frivolous claims.
United States v. Karlin, 785 F.2d 90, 91 (3d Cir. 1986) – the 3rd Circuit 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 (9th Cir. 1986) – in affirming a conviction for failure to file income tax returns, the 9th Circuit rejected the taxpayer’s contention that she was not subject to federal tax laws because she was “an absolute, freeborn, and natural individual” and noted that “this argument has been consistently and thoroughly rejected by every branch of the government for decades.”
Biermann v. Commissioner, 769 F.2d 707 (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.
Timmins v. Commissioner, T.C. Memo. 2017-86, 113 T.C.M. (CCH) 1412 (T.C. 2017) – the court rejected taxpayer’s argument that he was merely an agent of the taxpayer as frivolous
Balice v. Commissioner, T.C. Memo. 2015-46, 109 T.C.M. (CCH) 1220 (2015) – the taxpayer served interrogatories demanding that the IRS admit that he is not a “person” liable to taxes, among other frivolous contentions. The court granted the IRS a protective order excusing it from answering these frivolous interrogatories and imposed a $25,000 sanction against the taxpayer.
Waltner v. Commissioner, T.C. Memo. 2014-35, 107 T.C.M. (CCH) 1189 (2014) – the court rejected Steven Waltner’s argument that he was not a “person” under section 6671 and imposed a $2,500 sanction against him for making frivolous arguments.
Holmes v. Commissioner, T.C. Memo. 2010-42, 99 T.C.M. (CCH) 1165 (2010) – the court dismissed as “frivolous and groundless” the taxpayer’s claim that correspondences addressed to him in all capital letters are invalid because of “creat[ing] a false legal impression that he is a “fictional legal entity” and not entitled to his constitutional rights,” and imposed a penalty of $10,000 under I.R.C. section 6673.
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.”
Other Cases: United States v. Rhodes, 921 F. Supp. 261, 264 (M.D. Pa. 1996); McCoy v. Internal Revenue Service, 88 A.F.T.R.2d (RIA) 5909 (D. Col.2001).
4. Contention: The only “employees” subject to federal income tax are employees of the federal government.
This contention asserts 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 on employers 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 makes federal employees and officials a part of the definition of “employee,” which generally includes private citizens. The IRS has warned taxpayers of the consequences of making this frivolous argument. Rev. Rul. 2006-18, 2006-1 C.B. 743.
Relevant Case Law:
Taliaferro v. Freeman, 595 F.App’x 961, 962-63 (11th Cir. 2014) – the 11th Circuit rejected as frivolous the taxpayer’s argument that the federal income tax applies only to federal employees, and ordered sanctions against him up to and including double the government’s costs.
Montero v. Commissioner, 354 F. App’x 173 (5th Cir. 2009) – the 5th Circuit affirmed a $20,000 section 6673(a) penalty against the taxpayer 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 (1st Cir. 1986) – the 1st Circuit imposed sanctions on the taxpayer for bringing a frivolous appeal and rejected his 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.”
United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) – calling the instructions the taxpayer 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.”
Briggs v. Commisioner, T.C. Memo 2016-86, 111 T.C.M. (CCH) 1389 (2016) – the court rejected the taxpayer’s frivolous argument that wages from private-sector employers are not “income” for Federal income tax purposes. The court imposed a $3,000 penalty against the taxpayer for “persist(ing) in raising frivolous arguments.”
Waltner v. Commissioner, T.C. Memo. 2014-35, 107 T.C.M. (CCH) 1189 (2014) – the court debunked the argument that only federal employees are taxed and imposed $2,500 sanction against the taxpayer for making frivolous arguments contained in Peter Hendrickson’s book “Cracking the Code.”
States v. Hendrickson, 100 A.F.T.R.2d (RIA) 2007-5395 (E.D. Mich. 2007) – the court permanently barred Peter and Doreen Hendrickson, who filed tax returns on which they falsely reported their income as zero, from filing tax returns and forms based on frivolous claims in Hendrickson’s book, “Cracking the Code,” that only federal, state, or local government workers are liable for federal income tax or subject to the withholding of federal taxes.
Other Cases: Peth v. Breitzmann, 611 F. Supp. 50 (E.D. Wis. 1985); Pabon v. Commissioner, T.C. Memo. 1994-476, 68 T.C.M. (CCH) 813 (1994).
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