40.00 ILLEGAL TAX PROTESTERS ^[FN1]

Updated October 2001

40.01 GENERALLY

40.02 SCHEMES

      40.02[1] Paper Terrorism

            40.02[1][a] Harassment Schemes

            40.02[1][b] Bogus Financial Instruments

      40.02[2] Warehouse Banks

      40.02[3] Trusts

      40.02[4] Church Schemes

            40.02[4][a] Generally

            40.02[4][b] Vow of Poverty

            40.02[4][c] Charitable Contributions

            40.02[4][d] First Amendment Considerations

40.03 TRIAL TACTICS/CONSIDERATIONS

      40.03[1] Criminal Summons

      40.03[2] 26 U.S.C. § 6103(h)(5) Juror Audit Information

      40.03[3] IRS Agents' Authority

      40.03[4] Indictment Not Sufficient Notice of Illegality

      40.03[5] Filing of Protest Documents: Is the Document Filed a Tax Return? 

            40.03[5][a] Generally

            40.03[5][b] What Is a Tax Return?

            40.03[5][c] What Is or Is Not a Tax Return: A Matter of Law

      40.03[6] Discovery of IRS Master Files

      40.03[7] Motions in Limine

      40.03[8] Attorney Sanctions

      40.03[9] Evidentiary Issues

            40.03[9][a] Prior or Subsequent Tax Protest Activities: Rule 404(b)

            40.03[9][b] IRS Agent's Testimony and Sequestration

            40.03[9][c] Admissibility of IRS Computer Records

      40.03[10] Use of Pseudonyms by IRS Revenue Agents and Officers

      40.03[11] Jury Nullification

40.04 WILLFULNESS

40.05 DEFENSES

      40.05[1] Good Faith 

            40.05[1][a] Reliance on Return Preparer/Accountant

            40.05[1][b] Reliance on Advice of Counsel

            40.05[1][c] No Defense in Non-Tax Cases

      40.05[2] Constitutional Challenges

            40.05[2][a] Fourth Amendment -- Unreasonable Search and Seizure

            40.05[2][b] Fifth Amendment -- Due Process; Freedom from Self-incrimination

            40.05[2][c] Tax Laws Are Unconstitutionally Vague

            40.05[2][d] Sixteenth Amendment Never Ratified

      40.05[3] Selective Prosecution and Freedom of Speech

            40.05[3][a] Generally

            40.05[3][b] Selective Prosecution Defense

            40.05[3][c] Freedom of Speech

      40.05[4] District Court Lacks Jurisdiction of Title 26 Offenses

            40.05[4][a]  Generally

            40.05[4][b] The Gold-Fringed Flag ("The American Maritime Flag of War")

      40.05[5] Filing Income Tax Returns Is Voluntary, Not Mandatory

      40.05[6] Wages Are Not Income

      40.05[7] Defendant Not A "Person" or "Citizen"; 

               District Court Lacks Jurisdiction Over Non-Persons and State Citizens

            40.05[7][a] Generally

            40.05[7][b] Filing 

U.S.

 Nonresident Alien Income Tax Return

      40.05[8] IRS Has Duty to Prepare Returns for Taxpayer (26 U.S.C. § 6020(b))

      40.05[9] Violation of the Privacy Act

      40.05[10] Federal Reserve Notes Are Not Legal Tender

      40.05[11] Form W-2 As Substitute for Form 1040

      40.05[12] Paperwork Reduction Act ("PRA") Defense

      40.05[13] Lack of Publication in the Federal Register

      40.05[14] Taxpayer's Name in Capital Letters or Misspelled

      40.05[15] Tax Protest Against Government Spending

APPENDIX

---

                        40.01  GENERALLY

      Over the past thirty years, illegal tax protesters have developed numerous

schemes to evade their income taxes and frustrate the Internal Revenue Service

under the guise of constitutional and other objections to the tax laws. 

Individuals who merely express dissatisfaction with the income tax system are not

criminally prosecuted.  However, the right to freedom of speech is not so

absolute as to protect conduct that otherwise violates or incites a violation of

the tax laws.  

United States

 v. Citrowske, 951 F.2d 899, 901 (8th

Cir. 1991).  See also 

United States

 v. Fleschner, 98 F.3d 155 (4th

Cir. 1996) (asking for First Amendment instruction); 

United States

 v.

Kuball, 976 F.2d 529, 532 (9th Cir. 1992) (First Amendment does not

protect those who go beyond mere advocacy, and assist in creation and operation

of tax evasion schemes.)

      Illegal tax protest schemes range from simply failing to file tax returns

to concealing financial transactions and assets in warehouse banks and trusts to

filing frivolous liens to interfere with IRS investigations.  These schemes give

rise to charges under all of the criminal tax statutes. [FN2]  Thus, this chapter

should be read in conjunction with those chapters of the Manual

that discuss the various substantive offenses in detail.  See

Chapters 8.00 through 29.00, supra.

---

                          40.02 SCHEMES

40.02[1]  Paper Terrorism

      40.02[1][a]  Harassment Schemes

      Illegal tax protesters have employed various schemes designed to harass IRS

employees and agents, as well as prosecutors and judges, and interfere with

audits and criminal investigations.  One of the earliest harassment schemes

involved filing false Forms 1099 with the IRS, reporting that an IRS agent,

judge, or prosecutor had been paid large amounts of money.  This scheme was

designed to trigger an IRS audit, during which the Form 1099 recipient would have

to explain the discrepancy between the income reported on his or her return and

that reported on the Form 1099.  See, e.g., 

United States

 v. Van

Krieken, 39 F.3d 227 (9th Cir. 1994); 

United States

 v.

Lorenzo, 995 F.2d 1448 (9th Cir. 1993).

      Form 1099 schemes have been  prosecuted under a variety of criminal tax

statutes.  See, e.g., United States v. Bowman, 173 F.3d 595, 599-600 

(6th Cir. 1999) (26 U.S.C. § 7212(a) is appropriate charge in Forms 

1099/1096 scheme); United States v. Winchell, 129 F.3d 1093, 1098-99 

(10th Cir. 1997) (26 U.S.C. §§ 7212(a) and 7206(1)); United 

States v. Heckman,30 F.3d 738 (6th Cir. 1994) (discussing 

application of sentencing guidelines in Form 1099 scheme charged as 26 

U.S.C. 7206(1)); 

United States

 v. Dykstra, 991 F.2d 450 (8th Cir. 

1993) (26 U.S.C. §§ 7206(1) and 7212(a)); 

United States

 v. 

Higgins, 987 F.2d 543, 544 (8th Cir. 1993) (26 U.S.C. §§ 

7206(1) and 7212(a)); 

United States

 v. Wiley, 979 F.2d 365, 367 (5th 

Cir. 1992) (18 U.S.C. §§ 371, 472, 1001 and 1002); United 

States v. Rosnow, 977 F.2d 399, 410-11 (8th Cir. 1992)(26 U.S.C. 

§§ 7206(1) and 7212(a), and 18 U.S.C. § 371); United 

States v. Kuball, 976 F.2d 529, 532 (9th Cir. 1992) (26 U.S.C. 

§§ 7206(1) and 7212(a)); 

United States

 v. Parsons, 967 F.2d 

452, 453 (10th Cir. 1992) (18 U.S.C. §§ 287 and 1001); United 

States v. Hildebrandt, 961 F.2d 116 (8th Cir. 1992) (18 U.S.C. § 

1001); 

United States

 v. Yagow, 953 F.2d 423, 427 (8th Cir. 1992) (26 

U.S.C. §§ 7206(1) and 7212(a)); 

United States

 v. 

Citrowske, 951 F.2d 899 (8th Cir. 1991) (18 U.S.C. § 1001); 

United States

 v. Telemaque, 934 F.2d 169, 170 (8th Cir. 1991) (18 

U.S.C. § 371).

      A recent resurrection of the so-called "Redemption" scheme involves the

filing of false Forms 8300  (Report of Receipt of More Than $10,000 in Cash in

A Trade or Business), Forms 4789 (currency transaction reports (CTRs)), and

Suspicious Activity Reports (SARs) for harassment purposes. [FN3]  Forms 8300 are

IRS reporting forms covered by the confidentiality provisions of 26 U.S.C. §

6103. [FN4]  Forms 4789 and SARs are Financial Crimes Enforcement Network

(FinCEN) documents not subject to tax information confidentiality requirements.

      Essentially, the new "Redemption" scheme involves filing one of these forms

with the IRS, reporting that a large amount of cash, sometimes foreign currency,

was paid to the named recipient.  IRS agents, federal and state prosecutors and

judges, state troopers and private creditors are often targeted.  Typically, the

protester will send his or her victim an IRS Form W-9, requesting a social

security number.  Even without the target's social security number, the protester

files Form 8300, which triggers a letter to the target from the IRS requesting

additional information and warning of possible penalties for incomplete

information.  Once the IRS learns the document is fraudulent, the IRS attaches

a "fraud" indicator to the computerized record and sends the form(s) to the

appropriate office of the IRS Criminal Investigation Division (CID) or Treasury

Inspector General for Tax Administration (TIGTA) for investigation.  CID

investigates all filings involving non-IRS employees, while TIGTA has

jurisdiction over filings against IRS personnel.  All cases, whether investigated

by CID or TIGTA, require authorization for prosecution from the Tax Division.

      There are several ways to prosecute these schemes.  First, the prosecutor

should determine if the protester has attempted to pass any fraudulent sight

drafts or other financial instruments.  This will require an inquiry with the

U.S.

 Secret Service and the Federal Bureau of Investigation.  If the protester

has filed false Forms 8300 and used sight drafts, the prosecutor should

consider charging the sight drafts pursuant to 18 U.S.C. § 514  [FN5]

(see Chapter 40.02[1][b], supra), using the false

Forms 8300 as evidence of intent.  If the protester has filed a large number of

false Forms 8300, 26 U.S.C. § 7212(a) is a possible charge.  Because they

are signed under penalties of perjury, false Forms 8300 may also be charged as

violations of 26 U.S.C. § 7206(1).  Neither  Forms 4789 nor SARs contain

jurats, so they cannot form the bases for Section 7206(1) charges.

      In some cases, it may be best to simply use the false Forms 8300 as

evidence to support an obstruction enhancement at sentencing.  See, e.g., 

United States

 v. Veral Smith, 3:99-CR-00025 (D.ID 2000) (District Court 

considered false Forms 8300 filed against prosecutors and judge as  evidence 

supporting obstruction enhancement).

      Tax protesters also file frivolous liens against the property of federal

employees to harass them.  The tax protester files with the local county recorder

a lien for a large amount of money against the federal employee's real property. 

The purpose of the lien is to encumber the property.  This tactic is designed to

disrupt IRS audits and investigations by personally targeting the financial

affairs of IRS personnel involved in the protester's case.  The tax obstruction

statute, 26 U.S.C. 7212(a) [FN6], may be a viable charge 

in these cases. See, e.g., United States v. Boos, Nos. 97- 

6329, 97-6330, 1999 WL 12741 (10th Cir. Jan. 14, 1999); 

United States

 v. 

Gunwall, Nos. 97-5108, 97-5123, 1998 WL 482787 (10th Cir. Aug. 12, 

1998); 

United States

 v. Marsh, 144 F.3d 1229 (9th Cir. 1998) 

(dismissing § 7212(a) charges for lack of venue); 

United States

 v. 

Trowbridge, Nos. 96-30179, 96-30180, 1997 WL 144197 (9th Cir. Mar. 26, 

1997);  

United States

 v. Bailey, No. 94-5219, 1995 WL 716276 

(10th Cir. Nov. 22, 1995); Kuball, 976 F.2d at 531 (upholding Section 

7212(a) conviction for sending threatening letters to IRS employees); 

United States

 v. Reeves, 782 F.2d 1323, 1326 (5th Cir. 1986) 

(upholding Section 7212(a) conviction for filing false liens) ("Reeves 

II").  But see United States v. Bowman, 173 F.3d 595, 599 

(6th Cir. 1999) (refusing to extend holding in Kuball, supra).

      Tax protesters also sue agents, prosecutors, and judges, and threaten

"arrest" and "prosecution" in so-called "common-law" courts.  "Common-law" courts

-- which have no legal standing -- are often set up by anti-government groups. 

In some instances,  they "indict" and "convict" individuals.

      "Common-law" documents --  ranging from "promissory notes," to "arrest

warrants," to "criminal complaints" -- are created to resemble authentic legal

documents.  See, e.g., United States v. Hart, 701

F.2d 749 (8th Cir. 1983); 

United States

 v. Knudson, 959 F.

Supp.1180 (D. 
Neb.
 1997); 

United States

 v. Van Dyke, 568 F. Supp.

820 (D. Or. 1983).  Depending on the circumstances, use of the documents may give

rise to 26 U.S.C. §7212(a) charges.  See, e.g., United

States v. Wells, 163 F.3d 889, 899-900 (4th Cir. 1998);

Reeves, 782 F.2d 1323.  Because  use of "common law" documents often

begins during investigation and continues during prosecution, their use is

evidence of willfulness for substantive tax charges, or the basis for an

obstruction of justice or other enhancement at sentencing.  See United

States v. Lindsay, 184 F.3d 1138, 1144 (10th Cir.) (upholding denial of

acceptance of responsibility for obstructive conduct such as filing numerous

frivolous documents), cert. denied, 528 U.S. 981 (1999);

Wells, 163 F.3d at 894, 897 (upholding upward departure for

"domestic terrorism" for use of common law arrest warrants).

      Tax protesters also attempt to file frivolous lawsuits or criminal

complaints against prosecutors and agents in legitimate state and federal courts. 

Cases based on these filings are rarely authorized for prosecution because such

lawsuits and criminal complaints are difficult to distinguish from the host of

frivolous cases filed in courts all the time -- thus, making it difficult to

overcome a defense based on the right to petition for a redress of grievances.

      40.02[1][b] Bogus Financial Instruments

      For years, protesters have submitted bogus financial instruments to "pay"

their tax liabilities and obtain erroneous IRS refunds, and to "pay"  private

creditors.  These instruments -- often entitled "Certified Money Order,"

"Certified Bankers Check," "Public Office Money Certificate," or "Comptroller

Warrant"  -- are designed to deceive the IRS and financial institutions into

treating them as authentic checks or real money orders.  

      For example, a protester will submit a large bogus check to the IRS or a

creditor for an amount in excess of the amount owed and request refund of the

difference.  If the IRS or creditor rejects the bogus check, the protester writes

threatening letters to force acceptance of the bogus payment.

      Several groups promote use of such bogus financial instruments.  One of the

earliest "bogus money order schemes" was perpetuated by an organization in

Wisconsin

  known as "Family Farm Preservation."  See,

e.g., United States v. Stockheimer,  157 F.3d 1082

(7th Cir. 1998) (noting that the potential loss calculation exceeded $180

million).

      An organization known as "

USA

  First" learned of the scheme and sold over

800 "Certified Money Orders" (CMOs) with a face value of $61 million.  See

United States

 v. Mikolajczyk, 137 F.3d 237, 239-240 (5th Cir. 1998);

United States

 v. Moser, 123 F.3d 813 (5th Cir. 1997).

      The Montana Freemen are perhaps the most notorious group to promote this

scheme.  See, e.g., United States v. Wells, 163 F.3d

889 (4th Cir. 1998); 

United States

 v. Hanzlicek, 187 F.3d 1228

(10th Cir. 1999).  For other examples of similar schemes, see

Broderick v. Goodroe, No. 99-55311, 2000 WL 194144 (9th Cir. Feb.

17, 2000); 

United States

 v. Switzer, Nos. 97-50265, 97-50293, 97-

50442, 1998 WL 750914 (9th Cir. Oct. 19, 1998).

      The most recent bogus financial instrument scheme is the so-called

"Redemption" scheme.  It involves the use of "Sight Drafts" or "Bills of

Exchange" and the filing of  Forms 8300, 4789 and SARs.  See

Chapter 40.02[1][a], supra.

      The sight draft component of the recently resurrected "Redemption" scheme

is based on the outlandish premise that, when the 

United States

 went off the gold

standard in 1933, the government began to be funded with debt instruments secured

with the energy of current and future inhabitants.  The theory is that a

fictitious identity or "straw man" was created for all Americans and the value

of a person's birth certificate became the collateral for our currency. 

Supposedly, the value of an individual's birth certificate is determined by the

number of times it is traded on the world futures market and the amount is

purportedly  maintained in a Treasury Direct Account under that person's social

security number.

      A participant in the scheme attempts to reclaim his or her "straw man" and

therefore the value of the fictitious identity by redeeming his or her birth

certificate.  The participant first files a Form  UCC-1 with the Secretary of

State in any State, claiming title and security interest in his or her social

security, driver's license, and birth certificate numbers.  The individual then

writes "acceptance for value," "non-negotiable charge back," or other prescribed

language diagonally on a government paper and returns it to the government

official who issued it.  Typically, the types of documents used for redemption

include anything from a traffic ticket to a federal indictment.  The "charge

back" allegedly creates a "treasury direct account" that contains the amount

assigned to the charge back, which the participant purportedly can then draw upon

by writing "sight drafts."  "Sight drafts" are then written for varying amounts,

some as high as trillions of dollars.  A Form UCC-3 indicating the partial

release of collateral in the amount of each sight draft is then filed with the

same Secretary of State who accepted the Form UCC-1.

      The "sight draft" or bogus financial instrument is of very high print

quality and usually contains some reference to HJR 192, which is the House Joint

Resolution that took the 

United States

 off the gold standard in 1933.  These

"sight drafts" or "bills of exchange" purport to be drawn on the 

United States

Treasury Department.

      Historically, bogus  financial instrument cases involving private creditors

were prosecuted under a variety of statutes such as:

      *     Conspiracy (18 U.S.C. § 371);

      *     Mail fraud (18 U.S.C. § 1341);

      *     Uttering a false security (18 U.S.C. § 472);

      *     Bank fraud (18 U.S.C. § 1344), and 

      *     Possessing and uttering a counterfeit security (18 U.S.C. §

            513). 

See, e.g., United States v. Pullman, 187 F.3d 816

(8th Cir. 1999), cert. denied, 528 

U.S.

 1081 (2000);

Hanzlicek, 187 F.3d at 1230; Wells, 163 F.3d 889;

Stockheimer, 157 F.3d 1082.

      Cases involving bogus financial instruments presented to the IRS can be

prosecuted as Klein conspiracies (18 U.S.C. §371) or

false claims for refunds (26 U.S.C. §287).  To bring a false claim charge,

a prosecutor should have evidence that the protester expected a refund from the

IRS as a result of submitting the instrument.  Such evidence might include : (1)

the protester's written request for a refund; (2) proof that the protester

received an IRS notice of tax due and owing, and, in response, submitted a bogus

check for a significant amount over the amount owed; and (3) that the protester

learned of this scheme in a seminar which advertised it would teach participants

how to obtain tax refunds.  See, e.g., Hanzlicek, 187

F.3d at 1232 (discussing that a component of the scheme included obtaining large

refunds).  Submission of bogus financial instruments may also be used as an

affirmative act of evasion (26 U.S.C. §7201).

      In 1996, Congress passed 18 U.S.C. § 514 specifically in reaction to

the use of comptroller warrants.  Noting that anti-government groups use

fictitious financial instruments to commit economic terrorism against government

agencies, private  businesses,  and individuals, Congress enacted Section 514 as

a Class B felony, which carries a maximum prison sentence of 25 years.  142 Cong.

Rec. S10155-02 (Sept. 10, 1996), pp. 196-197.

      Section 514 provides in pertinent part that:

      Whoever, with the intent to defraud --

      (1) draws, prints, processes, produces, publishes, or otherwise makes, 

      or attempts or causes the same, within the 

United States

;

      (2) passes, utters, presents, offers, brokers, issues, sells, or 

      attempts or causes the same, or with like intent possesses, within the 

      

United States

; or

      (3) utilizes interstate or foreign commerce, including the use of the 

      mails or wire, radio, or other electronic communication, to transmit, 

      transport, ship, move, transfer, or attempts or causes the same, to, 

      from, or through the 

United States

,

      any false or fictitious instrument, document, or other item appearing, 

      representing, purporting, or contriving through scheme or artifice, to 

      be an actual security or other financial instrument issued under the 

      authority of the 

United States

, a foreign government, a State or other 

      political subdivision of the 

United States

, or an organization, shall 

      be guilty of a class B felony.

      Section 514 of Title 18 of the United States Code is the obvious charge

when prosecuting a case involving a sight draft.  To date, four trials in the

District of Idaho have had successful results utilizing this statute: 

United States
 v. Boone, 1:99-CR-00119; 

United States

 v.

Clapier, 1:99-CR-00120; 

United States

 v. Pahl, 1:99-CR-

00121; and United States v. Smith, 3:99-CR-0025.  For filings

relating to these cases, see the 

Idaho

 federal courts web page at

http://www.id.uscourts.gov.

      Before deciding which charges to bring in cases involving "sight drafts"

or "bills of exchange," a prosecutor should investigate  and evaluate all the

evidence.  The prosecutor should determine how often the protester used sight

drafts or bills of exchange and whether he or she also filed false Forms 8300,

CTRs or SARs.  

      One common concern in the prosecution of all bogus financial  instrument 

cases is "intended loss" as compared to "actual loss."  Often, little or no

actual loss results from the use of the bogus instrument.  In 

United States

v. Ensminger, 174 F.3d 1143 (10th Cir. 1999), the court was faced with

a scheme to obtain ownership of real property through submission of bogus

financial instruments.  The District Court enhanced Ensminger's mail fraud

sentence under the sentencing guidelines based on an intended loss of $540,700,

the uncontested value of the property.  The facts in Ensminger,

however, showed that there was no way the scheme could have succeeded, because

the properties Ensminger attempted to obtain were already sold to third parties. 

Based on these facts and two previous decisions (

United States

 v.

Galbraith, 20 F.3d 1054 (10th Cir. 1994); 

United States

 v.

Santiago

, 977 F.2d 517 (10th Cir. 1992)), the Tenth Circuit held a ten-

level enhancement clearly erroneous.  The Ensminger court noted

that the Fifth, Seventh, Ninth, Eleventh, and 

District of Columbia

 Circuits,

relying on application note 10 to section 2F1.1 of the guidelines (authorizing

a downward departure where a defendant attempted to negotiate an instrument that

was so obviously fraudulent that no one would seriously consider honoring it),

disagreed with its analysis.  Ensminger, 174 F.3d at 1146-47.

      On the other hand, in a case specifically involving use of bogus financial

instruments, the Fifth Circuit  upheld sentencing based on the face value of the

Certified Money Orders even though there was no actual loss.  See

Moser, 123 F.3d at 830.  See also Switzer, Nos. 97-50265,

97-50293, 97-50442, 1998 WL 750914 (9th Cir. Oct. 19, 1998) (upholding sentence

based on intended loss); United States v. Lorenzo, 995 F.2d 1448,

1460 (9th Cir. 1993).

40.02[2]  Warehouse Banks

      "Warehouse banks" were common in mid-1980's abusive tax shelter schemes,

and they continue to be used by tax protesters to hide assets and income from the

IRS.  Typically, the warehouse bank operates as a subsidiary or service wing of

a broader collective or association.  Membership in the association is required

to use the warehouse bank services.  See, e.g., 

United States

 v. 

Meek, 998 F.2d 776, 778 (10th Cir. 1993).

      A warehouse bank maintains total privacy of all "account holders" by

commingling the funds of numerous depositors in a single bank account held at a

legitimate bank.  The depositor's privacy is achieved by using arbitrarily

numbered accounts, tracked by the warehouse bank operator.  Using only the

account number, the depositor endorses all checks to the warehouse bank

association.  

      Depositors retrieve their funds by requesting cash via registered mail or

by instructing the warehouse bank operator to pay specific bills from the

warehouse bank account.  Warehouse bank promoters also sell gold and silver to

members and claim to hold all deposit balances in gold or silver. 

See 

United States

 v. Hawley, 855 F.2d 595, 597 (8th

Cir. 1988).  The warehouse bank promoter asserts that only records of the current

balance and immediately preceding transaction are maintained in order to avoid

revealing records in the event of a subpoena or search warrant.

      Some depositors also use trusts and unincorporated business organizations

(UBOs) to further conceal their identities.  For example, a warehouse bank

customer might request that his or her paychecks be made payable in the name of

a trust or UBO, which then endorses the check to the warehouse bank association. 

This method ensures that the original check deposited will not have the name of

the depositor.  It can be traced back to a specific individual only if the name

of the trust or UBO being used by that individual is known.

      Operators of warehouse banks have been prosecuted on Klein

conspiracy charges (26 U.S.C. §371) with varied results.  See,

e.g., United States v. 

Caldwell

, 989 F.2d 1056, 1058-1059 (9th

Cir. 1993) (reversing conspiracy conviction for failure to prove or instruct jury

that use of deceitful and dishonest means was an element of conspiracy charge);

United States

 v. Stelten, 867 F.2d 446, 451 (8th Cir. 1989)

(affirming conspiracy and tax evasion charges); 

United States

 v.

Cote
, 929 F. Supp. 364, 366-68 (D.Or. 1996) (dismissing conspiracy

indictment for failure to allege an essential element of the crime, i.e.,

deceitful and dishonest means, and for failure to so instruct the grand

jury).

      Warehouse bank operators have also been charged with violating currency

transaction reporting requirements.  See Hawley, 855

F.2d at 599-602 (upholding instruction that  allowed jury to find that the

Exchange was a "financial institution" because it was a "private bank").

      Account holders have been charged with tax evasion, in violation of 26

U.S.C. §7201, and willful failure to file, in violation of 26 U.S.C. §

7203.  See 

United States

 v. Dack, 987 F.2d 1282, 1285 (7th Cir. 

1993); Meek, 998 F.2d at 778;  

United States

 v. Becker, 965 

F.2d 383, 390 (7th Cir. 1992).

      Use of a warehouse bank supports a "sophisticated means" enhancement at

sentencing.  

United States

 v. Frandsen, No. 99-30159, 2000 WL

366272, at *2 (9th Cir. Ap. 10, 2000) (purchasing cashier's checks from a

warehouse bank held to be use of sophisticated means), cert.

denied, 531 U.S. 890 (2000); Becker, 965 F.2d at 390.

      Caution is advised during any investigation of a warehouse bank, however, 

because of the danger of treading on First Amendment freedom of association

rights.  Prosecutors must take care to avoid overly broad searches or subpoenas. 

See, e.g., United States v. Ford, 184 F.3d 566, 578-

79 (6th Cir. 1999) (where search warrant authorizes a broader search than is

reasonable given facts in supporting affidavit, warrant is invalid and Fourth

Amendment rights violated), cert. denied, 528 

U.S.

 1161 (2000); 

National Commodity and Barter Ass'n v. 

United States

, 951 F.2d 1172, 

1174 (10th Cir. 1991) (government must show compelling need and substantial 

relationship to overcome freedom of association objection by barter 

association); In re First National Bank, 701 F.2d 115, 118 (10th Cir. 

1983).  The remedy for an overbroad warrant is severance of the excess 

portions from those that are sufficiently particular.  Ford, 184 F.3d 

at 578; United States v. Blakeney, 942 F.2d 1001, 1007 (6th Cir. 

1991).

40.02[3]  Trusts

      Another well-known and frequently-promoted protester scheme is the use of

sham trusts, both foreign and domestic, to hide assets and property.  A valid

trust is a legal arrangement whereby a grantor transfers property into a trust

and a trustee holds legal title to property for the benefit of another person,

the beneficiary.  In order to be regarded as a valid trust for income tax

purposes, the trustee must manage and control the property for the beneficiary's

benefit.  The beneficiary cannot manage or control the property.  Treas. Reg.

§301.7701-4(a)&(b).  Every trust that has over $600 in gross income or any

taxable income must file a tax return and must pay taxes on taxable income.  26

U.S.C. §6012(a)(4); 26 U.S.C. §641.

      A trust is invalid for Federal income tax purposes if: (1) the grantor

retains the same relationship to the property both before and after the trust is

established, or (2) the trustee does not have independent control over the

property in the trust, or (3) the beneficiary did not receive an economic

interest in the property.  26 U.S.C. §§671-677;  Treas. Reg. 

§1.671-1 et seq;.  Zmuda v. Commissioner, 79 T.C. 714, 

720-722 (1982), aff'd, 731 F.2d 1417 (9th Cir. 1984); Markosian v. 

Commissioner, 73 T.C. 1235 (1980); Hanson v. Commissioner, T.C. 

Memo 1981-675, aff'd, 696 F.2d 1232 (9th Cir. 1983).

      The use of "trusts" and "unincorporated business organizations" is promoted

on Internet web sites, by word-of-mouth, and through seminars.  Trust scheme

promoters can be charged with a variety of offenses, including

Klein conspiracy (18 U.S.C. § 371), aiding and abetting tax

evasion (26 U.S.C. § 7201 & 18 U.S.C. § 2), aiding in preparation of

false tax returns (26 U.S.C. § 7206(2)), tax obstruction (26 U.S.C.

§7212(a)) and tax evasion (26 U.S.C. §7201) if they knowingly used the

trusts to evade taxes.

      However, some trust scheme users may have a valid reliance defense if the

promoters present the trust scheme as a legal way to avoid taxes.

See Chapter 40.05[1][a] and [b], supra, for more

discussion of the reliance defense.

40.02[4]  Church Schemes

40.02[4][a]  Generally

      Some protesters claim tax exempt status by feigning ordination in a church. 

Many become ministers in mail-order churches, such as the 

Universal
 
Life
 
Church

,

the 
Basic
 
Bible
 
Church
 of 
America
, or the 

Life
 
Science
 
Church

.  Typically,

officers and members of the congregation include only the protester and his or

her immediate family.  

      Using church rubric, the protester usually adopts one of two schemes. 

Under the first, the protester takes a sham vow of poverty and purportedly

assigns all income and worldly possessions to the church.  The protester then

contends that his or her income is the church's income and, therefore, not

taxable to the minister, even though the protester uses the funds to pay personal

and other expenses just as he or she did before taking the sham vow of poverty. 

See, e.g., United States v. Masat,

948 F.2d 923 (5th Cir. 1991);  

United States

 v. Dube, 820 F.2d 886

(7th Cir. 1987); 

United States

 v. Zimmerman, 832 F.2d 454 (8th Cir.

1987); 

United States

 v. Ebner, 782 F.2d 1120 (2d Cir. 1986).

      Under the second scheme, the protester supposedly makes charitable

contributions to a church of 50 percent of his or her adjusted gross income (the

maximum amount that can be deducted as a charitable contribution).  26 U.S.C.

§ 170(b).  The "contribution" is then deposited into "the church's" bank

account, and the protester claims a deduction on his or her individual return,

even though the "donated" funds are used for his or her personal purposes. 

See 

United States

 v. Heinemann, 801 F.2d 86, 88

(2d Cir. 1986).

      40.02[4][b]  Vow of Poverty