Tax Scams

Tax Scams
Here is the law  

"The Greatest Show on Earth" Circus legend PT Barnum accurately describes the intellectual underpinnings of the tax protester movement. Today's hucksters are getting rich promoting the notion that one does not have to pay federal income taxes on the money he or she earns. The victims of these scams pay twice: once to the huckster who entices them to a seminar or sells them a book costing big bucks; and again when the IRS or the Courts levy huge penalties and fines, in addition to the taxes owed plus interest. 
Quatloos!

Although the overwhelming majority of our citizens acknowledge their obligation to pay federal income taxes, there exists a tiny, but vocal, minority who share a delusion that they can single-handedly rebel against the system and avoid paying income taxes altogether. These people believe, that in spite of our tax laws, they have no obligation whatsoever to pay taxes, and they repeatedly assert this futile and frivolous claim before the IRS and in court.
Tax Scams/Consumer Alerts

 Many are using the Internet to espouse their irrational positions, and those uninformed taxpayers could be seduced by the argument that only "suckers" pay taxes. Actually, the opposite is true: Only "fools" would believe that the U.S. has no right to collect taxes from them, and those who play the tax protester game wind up big losers. Because tax protesters have moved onto the Internet, this month's Hot Topics will address their so-called legal arguments. 

While some tax protesters set forth sophisticated arguments that are nonetheless rejected as frivolous (See Coleman v Cm. 50 TCM 118, 120 (1985)), most fail to cite any legal precedent or cite to cases that are irrelevant to their theories. The courts are generally intolerant of "tax protester rhetoric and legalistic gibberish" uttered by errant and misinformed tax protesters.Pabon v. Cm. TCM 1994-476. A review of the Internal Revenue Code and case law shows that those making such arguments are routinely fined for abusing our court system and some wind up in prison. 

Addressing Common Tax Protester Arguments

• Historical Note: Income Taxes Do Not Violate Constitutional Rights

Americans can reminisce about a time in their history when direct income taxes were prohibited by the constitution. Prior to the adoption of the Sixteenth Amendment to the Constitution, the Constitutional requirement of apportionment among the states of "direct taxes" (Art. 1, Sec. 9, clause 4) prohibited Congress from passing an income tax act. The Sixteenth Amendment, ratified by the necessary three-fourths of the states on February 25,1913, eliminated the requirement of apportionment of taxes on incomes. It granted Congress power to lay and collect taxes on incomes, from whatever source derived, without apportionment. Thus, in 1913, the bull was let out of the cage, and however one may wish to fantasize, there is no going back now.

•  Even so, some tax protesters continue to challenge the constitutional authority of Congress to impose an income tax on individuals. They choose to ignore the last ninety years of constitutional law developed in this area. They also ignore the precise holding of the Supreme Court in Pollock v Farmer's Loan and Trust Co., 157 US 429, 158 US 601 on rehearing (1895)which stated that taxes on income from employment were not direct taxes and were not subject to the necessity of apportionment. Ficalora v Cm. 85-1 USTC Sec. 9103, 751 F 2d 85 (1984).

• In addition to arguing that the income tax is unconstitutional, tax protesters often claim that the Tax Court is an unconstitutional court, and that the income tax laws violate the individual's constitutional rights, such as the right of freedom of religion, the Fifth Amendment privilege against self-incrimination, and the Thirteenth Amendment's prohibition of involuntary servitude. The courts always reject these arguments and impose substantial penalties.

For Once and For All, Wages are Taxable Income and Federal Reserve Notes are Legal Tender

•  Many tax protesters may not realize that their arguments are frivolous. Arguments which the courts consider frivolous are subject to severe monetary sanctions (discussed later). They may believe their contentions are based on an intelligent and eloquently expressed analysis of their constitutional and God-given rights. That is probably what the taxpayer in the case of Peth v. Breitzmann, 85-1 USTC P 9321 thought. Peth is a typical individual who set forth a common laundry list of reasons that he was not required to pay taxes. Among other claims, he argued that wages were not includable in income; he was not a person liable for tax; he was not an employee; and federal reserve notes were not legal tender.

• The taxpayer further contended that he earned no "income" because the income taxes are directed to taxable gain, and since he receives a paycheck equal to the fair market value of his labor, there was no gain. The Court responded that "no court has ever accepted this argument for the purpose of determining taxable income. Indeed, it has always been rejected. For once and for all, wages are taxable income."

• In answer to the taxpayer's "silly" federal reserve argument, the Court pointed out that "Congress has declared federal reserve notes to be legal tender for all public and private debts, and this declaration is the supreme law of the land."

United States Citizens are Taxpayers Subject to the Jurisdiction of the IRS

• Many tax protesters improperly construe terms and definitions found in Code sections or tax cases to reach a conclusion that they are exempt from tax. These arguments are always futile and can be perilous to one's wallet. The IRS and the court will likely hold that such arguments are frivolous and subject the tax protester to monetary sanctions.

• For example, Section 1 of the Code "imposes an income tax on the income of every individual who is a citizen or resident of the United States..." [Reg. Sec. 1.1-1(a)]. The regulations further determine income tax liability on individuals as follows:

  (b) Citizens or residents of the United States liable to tax. In 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...Reg. Sec. 1.1-1

  (c) Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citizen.... Reg. Sec. 1.1-1.

•  Tax protesters often point out that the word "individual" is not defined in the Code or regulations, and conclude that they are not individual U.S. residents or citizens subject to federal income tax. However, read in context, the Code and regulations use the word "individual" in its common language usage; thus, the term need not be defined.  Clearly, you and I are "individuals" and are liable for federal taxes.  Any other interpretation of the clear language of the code is merely a word game played by people who have never won a case or ruling in any court.

•  In a similar attempt to manipulate language in the Code, the taxpayer in Blum v. IRS, 91-1 USTC Sec 50,140 (1991) a resident of Missouri, failed to persuade the Court that he was not a citizen of the United States subject to the jurisdiction of the IRS. He asserted the language in the Code limits to Washington D.C. or the United States territories.

• Likewise, a taxpayer's claim that as a natural born citizen of Montana he was a nonresident alien and, thus, not a "taxpayer" as defined in the Tax Code, was rejected by the Court as merit less. US v Hansen, 94-1 USTC Sec 50,075 (9th Cir, 1994).

• The Court also rejected as frivolous a taxpayer's contention that she was not a "taxpayer" because she was "an absolute, free born and natural individual." In US v Studley, 86-1 USTC Sec. 9390 (9th Cir, 1986) the Court noted that:

• ...this argument has been consistently and thoroughly rejected by every branch of the government for decades. Indeed advancement of such utterly merit less argument is now the basis for serious sanctions imposed on civil litigants who raise them.

•  The taxpayer in Peth maintained that he was not "an officer, employee, or elected official, of the United States, the District of Columbia, or any agency of the United States or the District of Columbia" under the levy and distraint provisions of 26 U.S.C. Sec. 6331(a), mistakenly assuming that this provision applies only to federal officers and employees.

• The taxpayer in Peth also argued unsuccessfully that he was not an "employee" under 26 U.S.C. Sec. 3401(c) because he is not a federal officer, employee, elected official, or corporate officer. The Court pointed out that this definition of "employee" does not exclude all other wage earners.

• Finally, the taxpayer in Peth failed to convince the Court that his wages were exempt from withholding under 26 U.S.C. Sec. 3401(a)(8)(B), which excludes remuneration for services rendered within a United States possession. The Court pointed out that the Plaintiff was wrong in assuming that Wisconsin is a "United States possession."

The Hooven Case is Irrelevant to Income Tax Liability

• Some tax protesters cite Blacks Law Dictionary (which is not legal precedent) for the definition of the United States:

United States. This terms has several meanings. It may be merely the name of the sovereign occupying the position analogous to that of the sovereigns in family of nations, it may designate territory over which the sovereignty of the United States extends, or it may be collective name of the states which are united by and under the Constitution. Hooven & Allision Co. vs. Evatt, U.S. Ohio, 324 U.S. 652.

• Somehow, tax protesters read this definition to mean that only "federal" and not "state" citizens are subject to federal income tax. They believe the case of Hooven & Allison Co. v. Evatt, 324 US 652 (1945), (Hooven I) provides legal precedent for the proposition that they are not liable for income taxes. However, the Hooven I case (which was subsequently overruled in part) was decided before the Internal Revenue Code of 1954 was enacted and has nothing whatsoever to do with an individual's liability for federal income tax. Hooven I dealt with whether state taxation of imports violates the Import-Export clause of the United States Constitution, Art. I, Sec. 10, cl .2. The Court concluded that imported merchandise is exempt from state taxation until it is removed from the package in which it is imported, or when used for the purpose for which it is imported. The Court, noting that the term "United States" may be used in any one of several senses, also concluded that although the Philippines is a territory belonging to the United States, it is not constitutionally united with it, and goods brought from the Philippines constitute "imports" within the meaning of the constitutional provision. Hooven I, 324 U.S. 671,673. 

• Limbach v. Hooven & Allison Co., 466 US 353 (1984) (Hooven II) overruled Hooven I to the extent that a state personal property tax could not be imposed until the goods are removed from the original packaging. The Court held that nondiscriminatory ad valorem property taxes are not prohibited by the Import- Export Clause. Thus, Hooven I and Hooven II are irrelevant to tax protester arguments. These cases are not legal authority for individual federal income tax liability cases and should not be cited as precedent.

Tax Protesters will be Sanctioned/Penalized 

• Peth v. Breitzmann, 611 F. Supp. 50, 53 (E.D. Wis. 1985) - The court rejected the taxpayer's argument "that he is not an 'employee' under I.R.C. § 3401(c) because he is not a federal officer, employee, elected official, or corporate officer," stating, "[he] mistakenly assumes that this definition of 'employee' excludes all other wage earners."  

• Congress, the courts and the IRS are not sympathetic to tax protest principles. In Peth, discussed above, the Court dismissed the taxpayer's action and awarded costs to the private defendants and double costs to the government. Finding that the taxpayer's action was frivolous and brought in bad faith, the Court pointed out that:

• A considerable amount of time has been spent processing plaintiff's action, and it has been determined to be wholly without merit. Indeed, it is frivolous. No reasonable person could seriously think that, for example, the revenue laws can be avoided and the government's tax collection efforts can be brought to a standstill, by the contention that wages are not income...
• ...[T]he First Amendment does not provide a broad license to file frivolous and vindictive lawsuits that harass and intimidate tax collection officials and delay tax collection efforts. Such lawsuits squander the monies of responsible persons who recognize their duty to carry a share of the nation's tax burden.
• The IRS is authorized to immediately assess a penalty of $500 upon an individual who files an income tax return containing a position which (a) does not contain information from which the correctness of the reported tax liability can be determined, (b) is substantially incorrect, (c) frivolous or (d) reflects a desire (which appears on the purported return) to delay or impede the administration of the Federal income tax laws. Sec. 6702 [1986 Code].
• To attack the waste of scarce judicial resources by tax protest activities, the Tax Court may require the taxpayer to pay to the United States a penalty of up to $25,000, whenever it appears to the Tax Court that the taxpayer's position is frivolous, groundless, or has been maintained primarily for delay. Sec. 6673 [1986 Code]. See: Coleman, 50 TCM at 120 (where damages under IRC Sec. 6673 were awarded to the government).
• The Supreme Court and a U.S. Court of Appeals are also authorized to impose penalties upon the taxpayer in any case where the decision of the Tax Court is affirmed and it appears that the appeal is frivolous, groundless or instituted primarily for delay. Sec. 7482 (c) (4) [1986 Code] Thus, the tax protester's efforts to avoid payment of income taxes may result in payment of significant penalties in addition to the income taxes he or she attempted to avoid.

Act on Those Beliefs -- Go to Jail
• Tax protester gibberish will not insulate you from a criminal tax evasion conviction. The Supreme Court in Cheek v US, 91-1 USTC 50,012 (1991), expressly stated that a tax protester's argument, which included the litany of claims that taxes were unconstitutional, were clearly frivolous and were not objectively reasonable (meaning that no reasonably objective person would believe in the merits of those arguments). In Cheeks, the taxpayer, who was convicted of tax evasion for failing to file income tax returns, argued that he was, in effect, "duped" by the tax protester rhetoric and honestly believed that he was not a taxpayer under the Internal Revenue Code. Cheek's claimed he attended seminars, listened to attorneys and engaged in self-study regarding the unconstitutionality of federal tax system. He claimed that because of this "indoctrination," he sincerely believed that the tax laws were unconstitutional.

• Some argument!! Once the tax protester movement finally makes it to the Supreme Court and the only defense to the crime of tax evasion is that the protester was stupid and brainwashed into believing the movement's propaganda !

• The Supreme Court sent the case back for a retrial, stating that to convict him of tax evasion the government had to prove that Mr. Cheek did not have a good faith belief that he was complying with the tax laws. The Court of Appeals erroneous held thatCheek was not entitled to raise the good faith belief argument because no reasonably objective person would ever believe he did not have an obligation to comply with the federal tax system. At the retrial, Cheek was once again convicted of tax evasion, was fined heavily and was sent to prison. Cheek failed to convince the trial that he had a good faith belief in his position. The same result will befall those tax protesters who fail to file tax returns: If caught, expect to go to prison for tax evasion.

• The Cheek case is interesting because it graphically demonstrates that relying on seminars, self-study and even attorney's opinions regarding the unconstitutionality of the tax system can (and usually will) land you in prison for tax evasion. The Supreme Court made it clear that the arguments used by tax protesters have no merit whatsoever. Clearly, the tax protester movement should stand beside the flat-earth society in terms of intellect and credibility.

Constructive Protest: Political Action and Tax Planning
• A taxpayer has the legal and moral right to decrease his or her tax liability through means which the law permits. Automatic Canteen Company of America v State Board of Equalization, 238 Cal. App. 2nd 372 (1965). However, tax protesters have used, and will likely continue to develop, a variety of groundless arguments in their attempts to circumvent federal income tax laws. Rather than waste time, energy and money in such futile pursuits, those opposed to paying taxes are best advised to use their resources in the political arena and in learning about legal means to reduce their tax liability. Tax protesters can support candidates and laws that will reduce the dreaded tax bite from every dollar earned. They can also become informed about legal ways to conduct their business affairs and plan their estates to reduce their tax liability.

• From Merchants' Loan & Trust Co v Smietanka (1921), 255 US 509. The court referred to several post-ratification cases and to the 1909 (pre-ratification) Corporation Excise Tax Act, and said:-'There can be no doubt that the word ["income"] must be given the same meaning and content in in the Income Tax Acts of 1916 and 1917 that it had in the Act of 1913.  When to this we add that in Commr. Eisner v Macomber, supra, a case arising from the same Income Tax Act of 1916 which is here involved, the definition of "income" which was applied was adopted from Stratton's Independence, Ltd v Howbert, 231 US 399 (1913), supra, arising under the Corporation Excise Tax Act of 1909, with the addition that it should include "profit gained through the sale or conversion of capital assets", there would seem to be no room to doubt that the word must be given the same meaning in all of the Income Tax Acts of Congress that was given to it in the Corporation Excise Tax Act and that what that meaning is has now become definitely settled by decisions of this Court.' Since that 1909 Act imposed an excise tax upon corporate profits, it is "definitely settled" that "income" for tax purposes consists of corporate profits. This is entirely consistent with the earlier Brushaber opinion that Amendment 16 gave Congress "no new taxing power."

• The Brushaber case  was about a French Immigrant, Frank Brushaber, who lived in New York in the Borough of Brooklyn and who claimed to be a citizen of the State of New York but never claimed to be a U.S. federal citizen, which made him a “nonresident alien” for all intents and purposes.  Mr. Brushaber owned stock in the Union Pacific Railroad, a corporation chartered in the federal Territory of Utah before it became a State.  As a territory, Utah was part of the federal United States, and  as such, was a “domestic corporation” or “federal corporation” at the time it was formed.  Mr. Brushaber filed suit in federal District Court in New York to enjoin the Union Pacific Railroad from volunteering to pay federal income tax on its profits because he didn’t want his stock dividends correspondingly reduced as a result of the tax.  Note that the issue was not him personally paying income taxes on the stock, but the reduction of his dividends by the amount of taxes the corporation insisted on volunteering to pay prior to distributing the remaining profits to its shareholders.   

• The Brushaber decision ruled that the 16th Amendment did not amend or change the U.S. Constitution.  It decided that the federal corporation could not be stopped from volunteering to pay the federal income tax, even though this damaged the interests of its stockholders by reducing their dividends.  Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916).  

• The IRS relies on the Brushaber decision to prove the constitutionality of the income tax on natural persons, but ignores the Court's ruling in that case that the income tax is an excise tax and that the “person” paying the tax in this case was a federal corporation rather than a natural person.  

• Irwin Schiff has been convicted of criminal violations of the tax laws in three separate trials over the last thirty years, and has served time in prison following each conviction. His latest conviction, on October 24, 2005, was for conspiracy to defraud the United States, five counts of aiding and assisting in the filing of false federal income tax returns (i.e., the “zero returns” he prepared for his clients), attempting to evade and defeat the payment of tax, and six counts of filing false federal income tax returns, for which he was sentenced to 9 years and 7 months in prison and 36 months of supervised release, and ordered to pay $4,256,249.78 in restitution. United States v. Irwin A. Schiff, No. 2:04-CR-00119-1 (D.C. Nev. 3/14/2006), aff'd No. 06-10199 (9th Cir. 12/26/2007) (unpublished opinion). He was also convicted of 15 counts of criminal contempt for repeatedly refusing to comply with the rulings of the judge during his trial, for which he was sentenced to an additional one year in prison. Those convictions were vacated because of a procedural issue (see United States v. Cohen, 510 F.3d 1114, No. 06-10145 (9th Cir. 12/26/2007), but the trial judge imposed a prison sentence of 11 additional months on remand. In a second appeal, Schiff argued that he was not competent to act as his own lawyer and should be granted a retrial, but that argument was rejected as well.  United States v. Irwin A. Schiff, 2010 TNT 114-11, No. 08-10408 (9th Cir. 6/11/2010). According to the on-line inmate locator of the Federal Bureau of Prisons, Schiff is prisoner #08537-014, and his projected release date is October 7, 2016, when he will be 88 years old. The United States also has a civil judgment against Schiff for back taxes, penalties, and interest totaling $2,651,187.51, plus interest and other statutory additions accruing after June 14, 2004. United States v. Irwin A. Schiff, No. CV-S-01-0895 (D.C. Nev. 7/12/2004), aff’d No. 05-15233, 2006 TNT 176-15 (9th Cir. 9/11/2006) (unpublished opinion; sanctions of $6,000 imposed), cert. den. No. 07-5812 (10/1/2007).

Reference: The-Truth-About-Frivolous-Tax-Arguments