Volume #1: Absurd Tax Protester Arguments – Section 861 Lunacy

Volume #1: Absurd Tax Protester Arguments – Section 861 Lunacy

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This post begins a series of posts I intend to write over the next few months on Absurd Tax Protester Arguments

Over the last two decades I have had dozens of people stroll into my office claiming that the income tax is illegal or that taxpayers can “opt out” of the system. Often, these people have been misled (brainwashed?) by some unscrupulous tax promoter who promises to remove them from the tax rolls forever for a “small” fee ($7,500.00 seems to be the mean figure). 

In my experience, the people who are susceptible to tax protester arguments are people who are unwilling to take responsibility for their mistakes and misdeeds. Instead, they look for a way out; for someone else to blame.

And what better way out is there then to be able to say that you failed to file your tax returns and pay your taxes because you were not legally required to do so.

Some of them get quite upset when you tell them the truth. For example, a few weeks ago a man called me trying to convince me to take his case and file a lawsuit against the IRS alleging that the income tax was illegal. I told him I was pretty certain that he had to pay taxes on the monies he received from customers for doing carpentry work. He got angry and accused me of being in cahoots with the IRS.

I am quite sure that had I told him what he wanted to hear (i.e., that tax on domestic labor is illegal) and that I’d help him sue the government, he would have paid me a healthy retainer.

That is the crux of the problem. Money.

Unscrupulous promoters of tax scams know very well what their potential customers (victims) want to hear. They promise big things (“you will never have to pay taxes” is a very big thing indeed). They show them form letters and legal memoranda that seem to support their arguments in compelling detail.

But its just double-speak designed to confuse the taxpayer and make him pay the seemingly brilliant promoter a fee.

Section 861 Lunacy

This is one of the more popular and creative tax protester arguments in circulation. 

Promoters of this scam intentionally take Section 861 out of context in order to convince U.S. citizens and permanent residents to file tax returns excluding income received from U.S. sources on the grounds that the income is not subject to tax because sections 861 through 865 purportedly provide that only certain foreign-source income is taxable.

But the sole purpose of Section 861’s inclusion in the Internal Revenue Code is to provide guidiance as to whether and when income is considered to be from a source within the United States or from a source outside the United States. Other sections of the tax code (especially sections 1, 61, and 63) provide that U.S. citizens are taxed on their income from all sources, whether from within or outside the United States. Section 861 applies to non-permanent residents who are not subject to tax on their foreign-source income and to permanent residents who paid taxes to other countries on income derived from a foreign (non-U.S.) source.

The law applicable to the taxability of U.S. source income is clear. Code Section 61 states that gross income “means all income from whatever source derived” and includes compensation for services. Treasury Regulation § 1.1- 1(b) states that, “[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.”

One of the more famous 861 tax protester/promoters is a man named Larken Rose. In 2005, he was sentenced to fifteen months in prison for failing to file income tax returns. He makes Blazing Saddles’ Gabby Johnson (the authentic frontier gibberish guy) sound like Laurence Olivier.

Larken Rose

Here are some cases that have shot down the ridiculous Section 861 argument:

Great-West Life Assur. Co. v. United States, 678 F.2d 180, 183 (Ct. Cl 1982) – the court stated that the source of income is largely irrelevant for U.S Citizens because they are taxed on their worldwide income.

Williams v. Commissioner, 114 T.C. 136, 138 (2000) – the court rejected the taxpayer’s argument Section 861 argument stating that it was “reminiscent of tax-protester rhetoric that has been universally rejected by this and other courts.”

Corcoran v. Commissioner, T.C. Memo. 2002-18, 83 T.C.M. (CCH) 1108, 1110 (2002) – the court ruled 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 ordered a $2,000 penalty under section 6673(a)(1) because the taxpayer ” . . . wasted limited judicial and administrative resources.”

Aiello v. Commissioner, T.C. Memo. 1995-40, 69 T.C.M. (CCH) 1765 (1995) – the court rejected the taxpayer’s argument that the only sources of income for purposes of section 61 are listed in section 861.

Madge v. Commissioner, T.C. Memo. 2000-370, 80 T.C.M. (CCH) 804 (2000) – the court labeled as “frivolous” the position that only foreign income is taxable.

Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201, 1202 (1993) – the court rejected the taxpayer’s argument that his income was exempt from tax by operation of sections 861 and 911, noting that he had no foreign income and that section 861 provides that “compensation for labor or personal services performed in the United States . . . are items of gross income.”

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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Comments

  1. SEARCHING THE UNITED STATES CODE TITLE 26
    Thus, a search of the United States Code Title 26 at the GPO access web site is quit revealing.

    The search of various words such as “liable,” came up with “zero” applications to citizen’s living and working in the United States. In other words, we could not find a law, which we would be “liable” for such taxes. Even though the Government has repeatedly told us that everyone is “liable” for income taxes. Yet, the government has, just like the search of the USC, never cited the law that makes citizens living and working in the United States “liable” for any such taxes. And again, the government tells us that it is “frivolous” and “without legal merit” when we ask for a citations that they and the United States Code cannot display.

    And as for Section 861– do the same search for “taxable income” sources, gross income and such and it leads to Section 861 and nowhere else. Yet the courts say it is “frivolous” and “without legal merit” to use these sections? Why? If the USC leads us here?

  2. John,

    The answer to your questions can be found in my post, in the links I included therein and in the myriad court opinions on the subject.

    It is an old tax protester trick (conspiracy theorists use it, too) to perpetually raise new questions after the old ones have been answered.

    The courts have repeatedly cited the law that imposes an income tax on U.S. residents.

    In fact, they have probably cited it as much or more than any other law they have ever cited.

    READ THE CASES!

  3. “The answer to your questions can be found in my post, in the links I included therein and in the myriad court opinions on the subject.”

    Well those cases are from the US Tax Court which is not a court of law, its an administration court. Lets get some real cases like

    U.S. v. Vernice Kuglin
    U.S. v. Joesph Banister
    U.S. V. Robert Lawrence
    U.S. v. Tommy Cryer
    U.s. v. Robert Kahre

    All were charged with income tax evasions, failure to file and pay and all were acquitted because the government could not prove it case against these individuals. The DOJ attorney’s could not should the law that made these individuals “liable” nor could they disprove or refute anything about Section 861 that it should not be used by citizens living and working in the United States.

    This destroys your position of,

    “It is an old tax protester trick (conspiracy theorists use it, too) to perpetually raise new questions after the old ones have been answered.”

    And your statement:
    “The courts have repeatedly cited the law that imposes an income tax on U.S. Residents”

    Well the government just could not find those “repeatedly cited laws.”

    Your using of the following regulation is not law:

    “Treasury Regulation § 1.1- 1(b) states that, “[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.”

    Were the Secretary of the Treasury is nowhere conferred the authority to legislate or make law or exceed the scope of the statute at 26 U.S.C. §1 that imposes the tax:

    “When enacting §7206(1) Congress undoubtedly knew that the Secretary of the Treasury is empowered to prescribe all needful rules and regulations for the enforcement of the internal revenue laws, so long as they carry into effect the will of Congress as expressed by the statutes. Such regulations have the force of law. The Secretary, however, does not have the power to make law, Dixon v. United States, supra.” [United States v. Levy, 533 F.2d 969 (1976)]

    So I guess the same say can be said of the government and lawyers as, It is an old government trick to tell individuals that this is “frivolous” and “without legal merit” to believe that you are not liable or that you can look at Section 861.

  4. John,

    I could write a two volume treatise on this stuff but what would be the point?

    You’d still claim that there is no law authorizing the income tax.

    Did you ever stop to think that Congress could pass such a law tomorrow if they so choose?

    The reason they don’t do it is because its not necessary. The law is on the books and the Courts have upheld it . . . repeatedly, over and over again, ad nauseum.

    Also, please tell me why thousands of tax attorneys, tax CPAs, tax judges, Congressional tax writers and intelligent financiers continue to pay income taxes if the income tax was clearly “illegal?’

    Oh, that’s right, we are all part of the conspiracy.

    Come on, man.

    Do yourself a very big favor and run away from this tax protester claptrap like Usain Bolt being chased by a Cheetah.

    People have tried this for decades and it hasn’t made even a dent in our tax system.

    You’re gonna find yourself rooming with Wesley Snipes you keep this up.

  5. Let the record speak for its self—Its not an “open and close” case as you lead others to believe. In those cases I mention, those individuals used what the law says and they were acquitted! How come the government could not prove their case against these “tax protesters?” Since it is so clearly written? The fact is, THE INCOME TAX LAW DOES NOT “PLAINLY AND CLEARLY LAY” ANY TAX UPON Americans living and working in the United States. Now you could write your two volume treatise but you will be hard press to explain why these individuals were acquitted when as you claim “The courts have repeatedly cited the law that imposes an income tax on U.S. Residents. In fact, they have probably cited it as much or more than any other law they have ever cited.” So, what happen it those cases I mention? The government could not produce a law.

  6. John,

    The cases you cited were jury cases.

    The defendants were acquitted because the juries found that the facts presented did not prove beyond a reasonable doubt that the law was violated.

    Juries find facts, they do NOT define or interpret the law.

    A jury acquitted O.J . of double murder.

    Using your “logic, that would mean it’s legal to kill your wife.

    This will be my last response to you.

    If you don’t get it by now, you never will.

  7. Wow! You removed my last comment!

    You stated,

    “The defendants were acquitted because the juries found that the facts presented did not prove beyond a reasonable doubt that the law was violated.”

    The law was not violated? These individuals did not pay or file tax returns. And they admitted it! And the “juries found that the facts presented did not prove beyond a reasonable doubt that the law was violated?” It sounds like you have just admitted that these juries could not find a law that made these “tax protesters” liable to pay and file income taxes.

    You stated,

    “Juries find facts, they do NOT define or interpret the law.”

    Well you’re wrong again as these following cases prove:

    “The jury has the right to judge both the law as well as the fact in controversy.”
    John Jay, 1st CHIEF JUSTICE U.S. Supreme Court, 1789

    “The jury has the right to determine both the law and the facts.”
    Samuel Chase, U.S. Supreme Court Justice, 1796

    “The jury has the power to bring a verdict in the teeth of both law and fact.”
    Oliver Wendell Holmes, U.S. Supreme Court Justice, 1902

    “The law itself is on trial quite as much as the cause which is to be decided.”
    Harlan F. Stone, 12th CHIEF JUSTICE U.S. Supreme Court, 1941

    “The pages of history shine on instances of the jury’s exercise of its prerogative to disregard instructions of the judge . . . ”
    U.S. vs. Dougherty, 473 F 2nd 1113, 1139. (1972)

    As you stated,

    “This will be my last response to you. If you don’t get it by now, you never will.”

    I can see why you made such a statement, you have been wrong in your rendering of law.

    If you don’t know, the case against Tommy Cryer was the government against a lawyer. I guess Mr. Cryer, an attorney really did not know what he as taking about.

    Well it was great talking with you. Keep the fraud alive

  8. John,

    There it is in its entirety.

  9. Peter,

    I’m paying income taxes, and will keep doing so. Rose does seem like a nutcase, but there are slicker presentations than Rose’s which I’ve blundered into. It doesn’t seem like you’ve answered John’s points, just rehashed what anyone can get from the IRS. Maybe you can shed some light here.

    1) Is the TC just administrative? Meaning it does not have authority to define or interpret the law?

    2) If that’s the case, then your left with Great-West Life Assur. Co. v. United States, which is about taxation on insurance bought by Canadians, and does not directly address 861, nor does it seem 861 was an argument of the plaintiff. I’ve been looking for a DIRECT argument against this application in court cases, but I just don’t see it.

    3) Is there any court case that actually establishes the 861 as frivolous directly? Every one I’ve looked up is either about another (truly frivolous) issue, or doing a circular reference to other court cases that do the same. You might point to Rose’s, but given his uber-Gabbyness, I’m going to have to write that one off.

  10. Virginia says:

    Interesting stuff…….my question is, what gives anyone else the authority over another to tax man’s labor and energy? If every man/woman has the God-given right to labor, create, use what they create,etc.. as heirs of this earth (not owners, just usage rights) why should man be forced by involuntary servitude by anyone? If slavery is abolished, which I believe it is, then only voluntary servitude is allowed, right? If everyone is considered equal under the law, then each should be able to make the decision for themselves whether or not they so desire to voluntarily (not force, otherwise you have slavery remember?) consent to being taxed on their labor/energy? Just some things to think about……….if people really looked at it, they labor and give their energy for free really, they just don’t know it. If all of society would work out of love and forgiveness for the sake of all their brothers and sisters, we would not require such a strong arm to force us into compliance, but the people themselves are greedy and egotistical, so I guess we must continue in our illusion that we have made for ourselves. We cannot blame anyone else.

  11. Virgina,

    Thanks for your comment and questions. Here are my short answers

    Question: “what gives anyone else the authority over another to tax man’s labor and energy? If every man/woman has the God-given right to labor, create, use what they create,etc.. as heirs of this earth (not owners, just usage rights) why should man be forced by involuntary servitude by anyone?”

    Answer: According to the Supreme Court, the U.S. Constitution does.

    Question: “If slavery is abolished, which I believe it is, only voluntary servitude is allowed, right?”

    Answer: Right. And the courts have consisentently held that the income tax on wages does not violate the 13th amendment.

    Question: “If everyone is considered equal under the law, then each should be able to make the decision for themselves whether or not they so desire to voluntarily (not force, otherwise you have slavery remember?) consent to being taxed on their labor/energy?”

    Answer: See prior answer.

  12. My God Peter, what you are essentially saying is that our forefathers were idiots! Why else would they complain about King George “taxing us without our permission” in the declaration of independence, and then turn around and create a document that allows for the very same treatment in the constitutional republic they formed? It defies logic. Not only that but there is the little issue about Article, Sec.9, Par.1 of the constitution which specifically prohibits what you contend is allowable in U.S.Title 26.
    …and another thing… you (and almost every other “tax professional”) always mention section 61 with its definition of “Gross Income”. So where is the definition of the term “income”? Isn’t that important if one is to understand what “Gross Income” is comprised of?

  13. Here are some “pesky” little facts of law that we “tax protestors” only seem to know…

    “The income tax… …is an excise tax with respect to certain activities and privileges which is measured by reference to the income [earnings] which they produce.”

    House Congressional Record, March 27, 1943, page 2580

    “…the requirement to pay [excise] taxes involves the exercise of privilege.”
    Flint vs. Stone Tracy Co. 220 U.S. 107 (1911);

    “The terms ‘excise tax’ and ‘privilege tax’ are synonymous. The two are often used interchangeably.”
    American Airways v. Wallace, 57 F.2d 877, 880 (Dist. Ct., M.D. Tenn., 1937);

    “The ‘Government’ is an abstraction, and its possession of property largely constructive. Actual possession and custody of Government property nearly always are in someone who is not himself the Government but acts in its behalf and for its purposes. He may be an officer, an agent, or a contractor. His personal advantages from the relationship by way of salary, profit, or beneficial personal use of the property may be taxed…”
    United States v. County of Allegheny, 322 US 174 (1944).

    These can’t just be ignored Peter, whether the “courts have consistently ruled” or not.

  14. Mustafa,

    The federal courts are aware of all of these arguments and have dismissed them.

  15. Mustafa,

    Wrong. The founding fathers only objected to taxation without representation.

  16. Uh huh… so says you…again.
    What I am really interested in is what YOU, Peter Pappas think about the court cases and the opinions derived from them that I have mentioned numerous times. Don’t parrot what anyone else has said or “ruled”, what do YOU think Peter?
    Do they make any sense at all to you or are they just background noise lost in a chorus of tax paying hallelujahs?

  17. Mustafa,

    I think they are the law.