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.
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.”