Frivolous Tax Argument

Frivolous Tax Argument

TAX PROTESTORS DO NOT WIN

See IRS replies to frivolous tax argument

http://www.irs.gov/taxpros/article/0,,id=159853,00.html 

Anti-Tax Law Evasion Schemes – Facts

Since shortly after the federal income tax was enacted in 1913, some individuals and groups have encouraged others not to comply with the law. There have been unsuccessful challenges about the applicability of tax laws using a variety of arguments. There have been assertions that the sixteenth Amendment was not properly ratified, the tax law was unconstitutional, the tax law did not apply to certain types of income, the tax law only applied to certain individuals, and the tax law violated one or more constitutional rights.

Despite the courts having consistently rejected these arguments, their promoters continue to expound them, even incurring penalties for bringing frivolous cases into court or for filing frivolous tax returns. They often present their arguments in a pseudo-legal format, luring unsuspecting people into participating in their schemes to evade taxes. Notice 2005-30, Internal Revenue Bulletin:  2005-14, April 4, 2005

Notice 2005-30, Internal Revenue Bulletin:  2005-14, April 4, 2005

Frivolous Arguments to Avoid When Filing a Return or Claim for Refund

Table of Contents

• SECTION 1. INTRODUCTION.
• SECTION 2. COMMON FRIVOLOUS ARGUMENTS.
• SECTION 3. CIVIL AND CRIMINAL PENALTIES.
• SECTION 4. EFFECT ON OTHER DOCUMENTS.
• SECTION 5. ADDITIONAL INFORMATION.

SECTION 1. INTRODUCTION.

As April 15 approaches, taxpayers are reminded to steer clear of abusive tax-avoidance schemes that purportedly allow them to reduce or eliminate taxes. If an idea to save on taxes seems too good to be true, it probably is.

Many abusive tax-avoidance schemes are based on frivolous arguments that the Service and the courts have repeatedly rejected. These schemes are often sold by promoters for a substantial fee, and may be sold over the Internet, through advertisements in newspapers and magazines, at conferences and seminars (including conferences for professional groups such as doctors or dentists), and through recommendations of friends or acquaintances who have learned about these schemes.

Section 2 of this notice sets out some of the most common frivolous arguments used by these abusive tax-avoidance schemes. The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by using schemes based on these and other frivolous arguments. Frivolous returns and other documents submitted to the Service are processed through its Frivolous Return Program. The Service also reviews other documents that make frivolous arguments to determine whether the individuals who submit these documents have filed required tax returns and paid all taxes due for previous years.

Section 3 of this notice identifies potential civil and criminal penalties. Taxpayers who engage in abusive tax-avoidance schemes will be liable for unpaid taxes and interest. In addition, the Service will impose civil and criminal penalties against taxpayers where appropriate. The Service also will determine appropriate penalties and consider taking other appropriate action against persons who promote these schemes and who prepare frivolous returns based on those schemes.

SECTION 2. COMMON FRIVOLOUS ARGUMENTS.

This section sets out some of the most common frivolous arguments used by taxpayers to avoid or evade tax.

·         “A taxpayer can avoid tax by filing a return that reports zero income and zero tax liability.” All taxpayers who receive more than the statutory minimum amount of gross income, from whatever source derived, must file returns and pay tax. No law, including the Internal Revenue Code, permits a taxpayer who has received wages or other income to file a return with zero income and zero tax liability. If a taxpayer has received income subject to federal tax, a return showing only zeroes for income and tax liability is not a valid return. Further, inclusion of the phrase “nunc pro tunc” or other legal jargon on an income tax return does not serve to validate an otherwise improper return.

·         “A taxpayer may avoid income tax by referring to a separate ‘straw man’ entity created by the use of the taxpayer’s name in all capital letters in government documents.” No authority supports the claim that individuals may avoid their federal income tax obligations based on “straw man” arguments. The use of all uppercase letters when including an individual’s name in government documents has no significance whatsoever.

·         “Wages are not taxable income, pursuant to section 1001, because taxpayers have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed.” All compensation received, no matter what the form of payment, must be included in gross income under section 61. This includes salary or wages paid in cash, as well as the value of property and other economic benefits received from services performed or to be performed in the future. Section 1001 governs gain or loss on the disposition of property, and has no application to compensation for services.

·         “The 16^th Amendment is invalid because it contradicts the original Constitution, was not properly ratified, and lacks an enabling clause.” The Sixteenth Amendment to the U.S. Constitution, which authorizes the income tax, was properly ratified by the states and is valid. Further, the argument that the Sixteenth Amendment is invalid due to the lack of an enabling clause is without merit because Congress has the power to lay and collect taxes pursuant to Article 1, Section 8, Clause 18 of the Constitution.

·         “A taxpayer can make a ‘claim of right’ to exclude the cost of his labor from income.” There is no “claim of right” doctrine under any federal law, including the Internal Revenue Code, that permits a taxpayer to deduct or exclude from gross income the value of his labor.

·         “Only income from a foreign source is taxable under section 861.” Sections 861 through 865 do not exclude income from taxable income. In particular, nothing in these sections or the Treasury regulations provides that only income earned from certain foreign sources is subject to U.S. tax.

·         “I am not a ‘citizen’ or a ‘person’ within the meaning of the Internal Revenue Code.” A citizen of any one of the 50 States (e.g., New York , California ) of the United States or of the District of Columbia is also a citizen of the United States and is subject to federal tax.

·         “Residents of States, such as New York or California , are residents of a foreign country and therefore not subject to U.S. income tax.” Under its specific conditions and limitations, section 911 permits a taxpayer to elect to exclude income from U.S. taxable income only when the taxpayer earns income abroad and resides outside the geographic boundaries of the United States . For purposes of section 911, States (e.g., New York or California ), the District of Columbia , and Commonwealths and Territories of the United States (e.g., Johnston Atoll) are not foreign countries.

·         “A taxpayer can escape income tax by putting assets in an offshore bank account.” A citizen or resident of the United States cannot use an offshore financial arrangement (such as a foreign bank or brokerage account, or a credit card issued by a foreign bank) to avoid his federal tax obligations. Taxpayers are required to disclose foreign financial accounts to the Treasury Department and may face civil and criminal penalties if they fail to do so.

·         “A taxpayer can eliminate tax by establishing a ‘corporation sole.’” A taxpayer cannot avoid income tax by establishing a “corporation sole.” A corporation sole may be used only by a legitimate religious leader for specific, limited purposes relating to the religious leader’s office.

·         “A taxpayer can place all of his assets in a trust to escape income tax while still retaining control over those assets.” A taxpayer who places assets in a trust but retains certain powers or interests over the assets, including the power to control the beneficial enjoyment of the assets, is treated as the owner of the assets for federal tax purposes and is subject to tax on the income from those assets.

·         “A taxpayer can deduct amounts paid to maintain his household by establishing a home business.” Business expenses, including expenses related to a home-based business, are not deductible unless the expenses relate to a legitimate profit-seeking trade or business. Promoters of home-based business schemes improperly encourage taxpayers to claim household expenses as business expense deductions when the purported home-based business is not a legitimate trade or business.

·         “Nothing in the Internal Revenue Code imposes a requirement to file a return.” Section 6011 expressly authorizes the Service to require, by Treasury regulation, the filing of tax returns. Section 6012 identifies persons who are required to file income tax returns. Under Treasury regulations, taxpayers who receive more than the statutory minimum amount of gross income must file income tax returns. Taxpayers also are required to pay any tax owed.

·         “Filing a tax return is ‘voluntary.’” Some people mistake the word “voluntary” for “optional” — but filing a tax return is not optional for those who meet the law’s minimum gross income requirements. The word “voluntary,” as used in IRS publications and elsewhere, refers to the fact that the U.S. tax system is a voluntary compliance system. This means only that taxpayers themselves determine the correct amount of tax and complete the appropriate returns, rather than have the government do this for them as is done in some other countries. This system of self-reporting does not make the filing of tax returns or the payment of tax voluntary. For those who do not comply with this system and fail to self-report their tax liability, the tax law authorizes various enforced compliance measures.

·         “Because taxes are voluntary, as an employer, I don’t have to withhold income or employment taxes from my employees.” Every taxpayer is responsible for completing and filing required returns and paying the correct amount of tax. An employer is required by law to withhold income and employment taxes from salary and wages paid to employees. Employers also must deposit the amounts withheld with the Service.

·         “A taxpayer can refuse to pay taxes if the taxpayer disagrees with the government’s use of the taxes it collects.” No law, including the Internal Revenue Code, permits a taxpayer to avoid or evade tax obligations on the grounds that the taxpayer does not agree with the Government’s past or possible future use of the taxes collected.

·         “A taxpayer can escape income taxes or the tax system by submitting a set of documents in lieu of a tax return.” Taxpayers must file income tax returns using the forms prescribed by the Service. No law, including the Internal Revenue Code, permits taxpayers to submit a document or series of documents to remove themselves from the income tax system.

·         “A taxpayer can avoid tax by filing a return with an attachment that disclaims tax liability.” A return with an attached disclaimer of tax liability is not a valid tax return under the law.

·         “A taxpayer can avoid tax by filing a return with an altered penalties of perjury statement.” Alterations to an income tax return or to the penalties of perjury statement may nullify a return.

·         “Certain taxpayers can claim a ‘reparations tax credit’ to right wrongs done in the past.” No law, including the Internal Revenue Code, permits a “reparations tax credit.”

·         “By purchasing equipment and services for an inflated price, a taxpayer can use the Disabled Access Credit to reduce tax or generate a refund.” The section 44 Disabled Access Credit, which is limited to expenses for specific medical equipment needed to make a business accessible to disabled individuals, may only be claimed for amounts actually paid by a taxpayer running a legitimate business. Promoters of this scheme improperly offer to sell equipment or services at inflated prices in order to generate a large credit. Taxpayers participating in this scheme, however, ultimately are not required to pay, and do not pay, the entire price stated in the sales contract.

·         “Under section 3121 taxpayers can deduct the amount of Social Security taxes paid or get a refund of those taxes.” The Internal Revenue Code imposes Social Security tax on wages as defined in section 3121. Aside from the narrow exception for a religious exemption under section 3127, a taxpayer may not exclude wages from Social Security taxation on the basis that the taxpayer is waiving the right to receive Social Security benefits, and the Code does not authorize a deduction for, or refund of, Social Security taxes paid.

·         “A taxpayer may sell (or purchase) the right to claim a child as a qualifying child for purposes of the EIC.” A taxpayer may not purchase or sell the right to claim a child as a qualifying child for purposes of the earned income credit (EIC). In order to claim a child as a qualifying child for purposes of the EIC, the child must meet specific relationship, residency and age requirements.

The Service and the courts have repeatedly rejected these arguments and variations on them, and have rejected numerous other tax avoidance schemes and frivolous arguments used by taxpayers to avoid or evade taxes.

SECTION 3. CIVIL AND CRIMINAL PENALTIES.

Civil and criminal penalties may apply to taxpayers who make frivolous arguments. Potentially applicable civil penalties include:

(1) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return;

(2) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid;

 (3) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid;

 (4) a $500 penalty under section 6702 for filing a frivolous income tax return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers who take frivolous positions also may face criminal prosecution for:

(1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years;

(2) willful failure to file a return under section 7203, for which the penalty is a fine of up to $25,000 and imprisonment for up to one year; and

(3) making false statements on a return, statement, or other document under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote frivolous positions and those who assist taxpayers in claiming tax benefits based on frivolous positions may face penalties and may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include:

(1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless);

(2) a penalty under section 6700 for promoting abusive tax shelters;

(3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return, statement or other document under the internal revenue laws.

SECTION 4. EFFECT ON OTHER DOCUMENTS.

Notice 2004-22 is modified and superseded.

Rev. Rul. 2004-27, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• ISSUE
• FACTS
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Tax avoidance schemes; meritless “corporation sole” arguments. This ruling emphasizes to taxpayers, tax scheme promoters and return preparers that, while a “corporation sole” is a legitimate corporate form that may be used by a religious leader to hold property and conduct business for the benefit of the religious entity, a taxpayer cannot avoid income tax by establishing a religious organization for tax avoidance purposes.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the position that the taxpayer’s income belongs to a “corporation sole” created by the taxpayer for the purpose of avoiding taxes on the taxpayer’s income. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with this scheme, that a taxpayer cannot avoid income tax by establishing a corporation sole for the purpose of avoiding taxes on the taxpayer’s income. A corporation sole may be used only by a bona fide religious leader for specific, limited purposes relating to the religious leader’s office. The argument that a taxpayer’s income can be assigned to a corporation sole, and thus be exempted from taxation, has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, such as frivolous positions based on a meritless “corporation sole” argument. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUE

Whether a taxpayer may exclude income from taxation based on the argument that the taxpayer’s income belongs to a “corporation sole” created by the taxpayer for the purpose of avoiding taxes on the taxpayer’s income.

FACTS

A “corporation sole” is a corporate form authorized under certain state laws to enable bona fide religious leaders to hold property and conduct business for the benefit of the religious entity. A number of individuals are promoting the use of these entities to avoid taxes on income and conceal the taxpayer’s assets from tax collection. Participants in this scheme apply for incorporation under the pretext of being an official of a church or other religious organization or society. Participants then are provided with a state identification number that can be used to open financial accounts. Participants claim that their income is exempt from federal and state taxation because this income belongs to the corporation sole, which is claimed to be a tax exempt organization described in section 501(c)(3) of the Internal Revenue Code. Participants may further claim that because the taxpayer’s assets are held by the corporation sole, the taxpayer is not subject to collection actions for the payment of personal federal or state income taxes or for the payment of other obligations, such as child support.

LAW AND ANALYSIS

A valid corporation sole enables a bona fide religious leader, such as a bishop or other authorized church or other religious official, to incorporate under state law, in his capacity as a religious official. See, e.g., Berry v. Society of Saint Pius X, 69 Cal. App. 4th 354 (1999) (“One purpose of the corporation sole is to insure [sic] the continuation of ownership of property dedicated to the benefit of a religious organization which may be held in the name of its titular head.”). A corporation sole may own property and enter into contracts as a natural person, but only for the purposes of the religious entity and not for the individual office holder’s personal benefit. Title to property that vests in the office holder as a corporation sole passes not to the office holder’s heirs, but to the successors to the office by operation of law. A legitimate corporation sole is designed to ensure continuity of ownership of property dedicated to the benefit of a legitimate religious organization.

A taxpayer cannot avoid income tax or other financial responsibilities by purporting to be a religious leader and forming a corporation sole for tax avoidance purposes. The claims that such a corporation sole is described in section 501(c)(3) and that assignment of income and transfer of assets to such an entity will exempt an individual from income tax are meritless. Courts repeatedly have rejected similar arguments as frivolous, imposed penalties for making such arguments, and upheld criminal tax evasion convictions against those making or promoting the use of such arguments. See, e.g., United States v. Heineman, 801 F.2d 86 (2d Cir. 1986) (upholding conviction for promoting use of purported church entities to avoid taxes); United States v. Adu, 770 F.2d 1511 (9th Cir. 1985) (upholding conviction for aiding and assisting in the preparation and presentation of false income tax returns with respect to false charitable contribution deductions to same type of purported church entities involved in Heineman); Svedahl v. Commissioner, 89 T.C. 245 (1987) (sanctioning taxpayer for using contributions to purported church entities similar to those involved in Heineman to shield income and pay personal expenses).

CIVIL AND CRIMINAL PENALTIES

In addition to having to pay the actual tax due plus statutory interest, individuals who claim tax benefits on their returns based on a “corporation sole” scheme or other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

A taxpayer cannot use a corporation sole as a means to exclude the taxpayer’s income from taxation. Taxpayers attempting to reduce their federal tax liability by taking frivolous positions based on this argument will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers also may face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons also may face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Rev. Rul. 2004-28, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• ISSUE
• FACTS
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; excluding gross income under section 911. This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with frivolous tax schemes, that there is no basis for excluding income earned in a State, Commonwealth, or Territory of the United States under section 911 of the Code. The ruling also describes many of the possible civil and criminal penalties that apply to people who claim tax benefits on their return based on frivolous claims under section 911.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the position that their wages or other income are excluded from gross income under section 911 of the Internal Revenue Code because the State, Commonwealth, or Territory of the United States in which they resided or performed services is a foreign country. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with this scheme, that there is no basis under section 911 for excluding income earned in a State, Commonwealth, or Territory of the United States. This argument has no merit and is frivolous. Section 911 of the Internal Revenue Code permits a taxpayer to elect to exclude income from gross income for U.S. income tax purposes only when the taxpayer earns income and resides outside the United States under the conditions and limitations set forth in that section. For purposes of section 911, States, Commonwealths, and Territories of the United States are not foreign countries.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, such as frivolous positions based on meritless section 911 arguments. The Service will take vigorous enforcement action against such taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions.

Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUE

Whether an individual may exclude income under section 911 by claiming that he met the requirements of section 911 because a State, Commonwealth, or Territory of the United States is considered to be a foreign country under section 911.

FACTS

Situation 1. A, an individual, resides in State X, a State or Commonwealth of the United States , and performs services exclusively in State X. A was present in State X for all of his taxable year and is therefore not eligible in that taxable year for the exclusion from income under section 911 for citizens or residents of the United States living abroad. Based on the advice of a person who promotes the view that section 911 excludes income earned in a State, Commonwealth, or Territory of the United States because such State, Commonwealth or Territory is a foreign country, A files a return including a Form 2555, Foreign Earned Income, or a Form 2555-EZ, Foreign Earned Income. On the Form 2555 or Form 2555-EZ, A asserts that he is entitled to the exclusion from gross income under section 911 because he earned such income by performing services in, is a bona fide resident of, and has a tax home in, a foreign country (i.e., State X). A acknowledges on Form 2555 or Form 2555-EZ that the services were performed in State X and that he was a bona fide resident of State X, but contends that State X is a foreign country and not a part of the United States.

Situation 2. Same as Situation 1 except that A, a resident of State X, claims an exclusion from gross income under section 911 based upon his physical presence in State X. Specifically, A claims he satisfies the physical presence test of section 911 because he was physically present in a foreign country for at least 330 days during his taxable year. A acknowledges on Form 2555 or Form 2555-EZ that he was present in State X, but contends that State X is a foreign country and not a part of United States.

Situation 3. B, an individual, performed services in and resided on Johnston Island , one of the islands on Johnston Atoll. The Johnston Atoll is a Territory of the United States . B files a U.S. Federal Income Tax Return with a Form 2555 or a Form 2555-EZ in which he asserts that he is entitled to the exclusion from gross income under section 911 because he performed services in, is a bona fide resident of, and has a tax home in, a foreign country (i.e., Johnston Atoll).

LAW AND ANALYSIS

Section 911 allows individuals that meet its requirements to elect to exclude from gross income certain foreign earned income. To qualify for the exclusion under section 911, a U.S. citizen or resident working abroad must have a tax home in a foreign country and satisfy either the bona fide residence test or the physical presence test. For purposes of section 911, States, Commonwealths, and Territories of the United States are not foreign countries. Treas. Reg. § 1.911-2(g) & (h).

In the situations described above, A and B do not meet the requirements for the exclusion from gross income under section 911. The claim that section 911 excludes income earned in a State, Commonwealth, or Territory of the United States because such State, Commonwealth or Territory is a foreign country has no basis in law or fact. Courts repeatedly have rejected similar arguments as frivolous, imposed penalties for making arguments such as these in court, and upheld criminal tax evasion convictions against individuals making such arguments. Courts repeatedly have rejected similar arguments as frivolous, imposed penalties for making arguments such as these in court, and upheld criminal tax evasion convictions against individuals making such arguments. See, e.g., In re Becraft, 885 F.2d 547, 549-50 (9th Cir. 1989) (rejecting the claim that federal law governs only the District of Columbia and U.S. territories and sanctioning attorney for making frivolous arguments); United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987) (affirming tax evasion conviction and noting that claim that federal law applies only the District of Columbia, federal enclaves within States and U.S. territories is “utterly without merit”).

CIVIL AND CRIMINAL PENALTIES

In determining the correct amount of tax due, the Service will include income that taxpayers attempt to exclude based on frivolous section 911 arguments. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on this and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

Any position that the exclusion from gross income under section 911 applies to a taxpayer’s income because a State, Commonwealth, or Territory of the United States is considered to be a foreign country is frivolous. Taxpayers attempting to reduce their federal tax liability by taking frivolous positions based on this argument will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers also may face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons also may face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Rev. Rul. 2004-29, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• ISSUE
• FACTS
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; meritless “claim of right” arguments. This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with frivolous tax schemes, that there is no “claim of right” doctrine that permits an individual to take the position that either the individual or the individual’s income is not subject to federal income tax. The ruling also describes many of the possible civil and criminal penalties that apply to people who make frivolous “claim of right” arguments to evade tax.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the position that either they or their incomes are not subject to tax based on what they describe or refer to as a “claim of right.” The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with this scheme, that there is no “claim of right” doctrine that permits an individual to take the position that either the individual or the individual’s income is not subject to federal income tax. This argument has no merit and is frivolous. Section 1341 (“Computation of tax where taxpayer restores substantial amount held under claim of right”) of the Internal Revenue Code applies only when a taxpayer properly reports an amount of income in one taxable year and later repays all or a portion of that same amount in a later taxable year because the taxpayer, in fact, did not have an unrestricted right to that income.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, such as frivolous positions based on a meritless “claim of right” argument. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUE

Whether section 1341, relating to amounts “held under claim of right,” allows an individual to reduce his or her federal income tax liability with respect to an item that was not included in gross income for a prior taxable year.

FACTS

Individual taxpayer A has gross income for taxable year 1. A claims deductions that equal or exceed A’s gross income on A’s individual income tax return for taxable year 1. A’s claimed deductions may appear on various places on the return. For example, A may claim the deductions: (i) on Schedule A as compensation for personal labor; (ii) on Schedule C as a cost of A’s labor; or (iii) on other schedules or elsewhere on A’s return. Alternatively, A simply may not report all or some of A’s gross income on A’s return. Although the specific nature of A’s “claim of right” argument for the position taken on the return may vary, A’s position generally is that under a “claim of right,” either A or A’s income, or both, are not subject to federal income taxes.

No portion of A’s claimed deductions, or the amount of A’s gross income not reported on the return, was included in A’s gross income in any prior taxable year.

LAW AND ANALYSIS

Section 1341 governs the computation of income tax if: (i) an amount of income was included in a taxpayer’s gross income in a prior year(s) because it appeared that the taxpayer had an unrestricted right to such item; and (ii) a deduction exceeding $3,000 is allowable in the current taxable year because, after the close of such prior taxable year, it is established that the taxpayer did not have an unrestricted right to all or a portion of such item of income. There is no “claim of right” doctrine under U.S. law, including the Internal Revenue Code, that permits an individual to take the position that either the individual or the individual’s income is not subject to federal income tax.

Individuals such as Taxpayer A who make meritless “claim of right” arguments do not purport to have repaid amounts previously reported as income, but instead simply claim that either they or their incomes are not subject to tax. In many respects, the so-called “claim of right” argument being made by these taxpayers is no different than the argument that some taxpayers have made that compensation for personal services is not subject to taxation. Courts repeatedly have rejected these types of arguments as frivolous and have penalized taxpayers who make these types of arguments. See, e.g., Stelly v. Commissioner, 761 F.2d 1113, 1115 (5th Cir. 1985) (finding that the argument that taxing wage and salary income is unconstitutional because compensation for labor is an even exchange is obviously frivolous); Abrams v. Commissioner, 82 T.C. 403, 413 (1984) (rejecting argument that wages are not subject to the imposition and collection of tax as frivolous and groundless and imposing a $5,000 penalty under section 6673).

CIVIL AND CRIMINAL PENALTIES

The Service will disallow deductions or other claimed tax benefits, including the exclusion of income, based on frivolous “claim of right” arguments. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on this and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

Any claim that a taxpayer can use a “claim of right” argument to reduce the taxpayer’s federal income tax liability with respect to any item not included in gross income for a prior tax year is frivolous. Taxpayers attempting to reduce their federal tax liability by taking frivolous positions based on this argument will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers also may face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons also may face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Rev. Rul. 2004-30, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• ISSUE
• FACTS
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; attempting to avoid taxes under section 861. This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with tax schemes, that there is no authority in sections 861 through 865 of the Code that permits an individual to take the position that either the individual or the individual’s U.S. based income is not subject to federal income tax. The ruling also describes many of the possible civil and criminal penalties that apply to people who make frivolous section 861 arguments to evade tax.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the position that United States citizens and residents of the United States are not subject to tax on their wages and other income earned or derived within the United States (“the Section 861 position”). These taxpayers rely on sections 861 through 865 of the Code and the regulations (in particular, Treasury Regulation § 1.861-8) to argue that taxes are only imposed on income derived from certain foreign-based activities. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with this scheme, that there is no authority in sections 861 through 865 that permits an individual to take the position that either the individual or the individual’s U.S.-based income is not subject to federal income tax. This argument has no merit and is frivolous. The rules of sections 861 through 865 have significance solely in determining whether income is considered from sources within the United States or without the United States, which is relevant, for example, in determining whether a U.S. citizen or resident may claim a credit for foreign taxes paid.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, such as the Section 861 position. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUE

Whether an individual may avoid income tax by claiming that, under sections 861 through 865, United States citizens and residents are not subject to tax on wages and other income earned or derived in the United States .

FACTS

A taxpayer who is either a citizen or a resident of the United States files a return excluding income received from U.S. sources, claiming that the income is not subject to tax because sections 861 through 865 purportedly provide that only certain foreign source income is subject to tax.

LAW AND ANALYSIS

Sections 861 through 865 do not limit gross income subject to United States taxation to foreign-source income. In Notice 2001-40, 2001-1 C.B. 1355, the Service advised taxpayers that it considers the Section 861 position to be a frivolous position. Courts repeatedly have rejected this and similar arguments as frivolous, and have penalized taxpayers who make these types of arguments. See, e.g., Takaba v. Commissioner, 119 T.C. 285 (2002) (concluding that “[t]he 861 argument is frivolous” and sanctioning both the taxpayer and his attorney for making such frivolous arguments); Madge v. Commissioner, T.C. Memo. 2000-370 (concluding that the argument that only foreign income is taxable is frivolous). For more information, please see Notice 2001-40. Notice 2001-40 and other information on frivolous tax positions are available on the Service website at www.irs.gov.

CIVIL AND CRIMINAL PENALTIES

In determining the correct amount of tax due, the Service will include income that taxpayers attempt to exclude based on the Section 861 position. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on this and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

Any position that, under sections 861 through 865, United States citizens and residents are not subject to tax on wages and other income earned or derived in the United States is frivolous. Taxpayers attempting to reduce their federal tax liability by taking frivolous positions based on this argument will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers also may face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons also may face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Rev. Rul. 2004-31, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• DISCUSSION OF REMOVAL AND REDEMPTION ARGUMENTS AND SCHEMES
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; meritless “removal arguments.” This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with schemes, that there is no law, court decision or other authority that permits a taxpayer to remove himself from the federal tax system in order to avoid otherwise applicable taxes. Arguments to the contrary are not only wrong, but frivolous.

PURPOSE

The Service is aware that some individuals are attempting to reduce their federal income tax obligations by claiming that they have been “removed” or “redeemed” from the federal tax system. Although the specific arguments made by these individuals vary, some argue that the Government commits a fraud when it attempts to collect debts, including tax debts, and that this purported fraud allows individuals to “chargeback” debts that the Government purportedly owes to these individuals to eliminate any asserted tax liability. “Removal,” “redemption,” and “chargeback” schemes are referred to here collectively as “removal schemes” and “removal arguments.” Some promoters are marketing a package, kit, or other materials that claim to show individuals how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to individuals, and to promoters and return preparers who assist individuals with these schemes, that there is no authority under any U.S. law that supports the argument that an individual can be “removed” or “redeemed” from the federal tax system to avoid tax liabilities or that an individual can satisfy debts, including tax liabilities, by making “chargeback” or other similar arguments. Removal and redemption arguments have no merit and are frivolous.

The Service is committed to identifying individuals who attempt to avoid or evade their tax obligations. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the IRS are processed through the Service’s Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

DISCUSSION OF REMOVAL AND REDEMPTION ARGUMENTS AND SCHEMES

Removal arguments and schemes are loosely related and take a variety of different forms. Proponents of removal arguments and schemes typically claim, even though they remain citizens or residents of the U.S., that they are not required to file federal tax returns and pay their tax obligations because they have been removed or redeemed from the federal tax system. As a result of participating in removal schemes, these individuals do not file required returns or pay the income tax that they owe.

In some variations of the removal argument, individuals claim that the Government commits a fraud when it attempts to collect debts, including tax debts, and that this purported fraud allows individuals to “chargeback” debts that the Government purportedly owes to these individuals to eliminate any liability to the Government. In other variations, individuals argue that Federal Reserve notes, or “paper money,” are not legal tender and that the Government has been wrongfully using taxpayers and their labor as security for the Government’s obligations. Other individuals argue that they may reclaim, or “chargeback,” their own value from the Government as a result of the Government’s wrongful conduct and then use that value to pay the individuals’ debts. Participants in removal schemes often attempt to offset, collect or “redeem” their asserted claims against the Government by using or filing liens, bills of exchange, and various Uniform Commercial Code (UCC) forms, or by relying on misinterpretations of federal laws and the Uniform Commercial Code.

Participants in the removal schemes may rely on one or more of the following erroneous arguments, alleged facts or actions to support their frivolous claims: (a) the bankruptcy of the United States occurred contemporaneously with the creation of the Federal Reserve, the start of the Great Depression, the removal of the United States from the gold standard, or the passage of House Joint Resolution 192 (claimed to be a declaration of bankruptcy); (b) the Government’s use of birth certificates of taxpayers as registered securities; (c) the filing of documents with variations on a taxpayer’s name, (e.g., using all capital letters in some documents and standard capitalization in others) creates a “straw man” or “nom de guerre” as the debtor to the Government that replaces the individual who has removed himself from the Government’s jurisdiction; (d) the “redemption” of debts from the Government by filing UCC forms, such as the UCC-1 form; (e) the submission of documents to the U.S. Secretary of the Treasury to establish a fictitious bank account (sometimes referred to as a “Treasury Direct Account”) where the value of charged back debts is located; (f) the practice of “accepting for value” official Government documents and the “charging back” of those documents by responding to them with a “private notice” that may include a “Treasury Direct Account Number,” a “Memory of Account Number” or a “Posted Certified Account Number”; and (g) the use of “Bills of Exchange,” Form UCC-3 and “Sight Drafts” to discharge debts to the Government. This list is not exclusive, however. Participants in removal schemes also make other equally frivolous arguments.

Instead of filing federal income tax returns with the Service, participants in removal schemes frequently send documents and other correspondence to the Service and other Government agencies. Examples of these documents include: improperly filed Forms 1040-ES, Estimated Tax for Individuals, reporting the location of the funds in a fictitious bank account from which the IRS can collect taxes; improperly filed Fiduciary Tax Returns; improperly filed Forms 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, reporting that a person or entity has “charged back” after “accepting for value” the Government’s documents; improperly filed Forms W-9, Request for Taxpayer Identification Number and Certification, to obtain a social security or employee identification number of a person or entity to include on the Form 8300; “commercial affidavits” in lieu of tax returns stating that the filer is a secured party and has no income for a particular year; and documents and correspondence to “accept for value” IRS notices of tax liens and levies to have the tax balances paid from the filer’s “Treasury Direct Account.”

There is no authority under any U.S. law that supports the claim that individuals may avoid their federal income tax obligations based on removal arguments such as those described in this revenue ruling. Similarly, there is no authority under any U.S. law that supports the claim that requiring payment of a debt owed to the Government by commercially acceptable means amounts to a fraud by the Government. Section 61 of the Internal Revenue Code provides that gross income includes all income from whatever source derived, including compensation for services. Adjustments to income, deductions, and credits must be claimed in accordance with the provisions of the Internal Revenue Code and the Treasury regulations thereunder and other applicable federal law. Section 6011 provides that any person liable for any tax imposed by the Internal Revenue Code shall make a return when required by Treasury regulations, and that returns must be in accordance with Treasury regulations and IRS forms. Section 6012 identifies the persons who are required to file income tax returns. Section 6151, except as specifically provided, requires that taxpayers pay their tax when the return is due. Section 6311 requires payment of taxes by commercially acceptable means as prescribed by Treasury Regulations.

Courts repeatedly have rejected removal arguments and other similar arguments as frivolous and have penalized taxpayers who make these types of arguments. See, e.g., United States v. Sloan, 939 F.2d 499, 500 (7^th Cir. 1991) (affirming criminal conviction for tax evasion and rejecting “wholly defective” arguments that the federal tax laws did not apply to taxpayer 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. Condo, 741 F.2d 238, 239 (9^th Cir. 1984) (affirming criminal conviction for tax fraud and rejecting as “frivolous” the argument that Federal Reserve Notes are not valid currency, cannot be taxed, and are merely “debts”); United States v. Rickman, 638 F.2d 182, 184 (10^th Cir. 1980) (affirming criminal conviction for willfully failing to file a return and rejecting 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”).

Although individuals who rely on these removal arguments generally do not file federal income tax returns with the Service, some individuals also are relying on removal or similar frivolous arguments to claim that they can reduce or eliminate their tax by filing tax returns in which they report zero income and tax liability. See Rev. Rul. 2004-34, 2004-12 I.R.B. (3/22/2004), for a discussion of this frivolous position.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability by refusing to file returns and pay tax on the basis that they have been removed or redeemed from the federal tax system. In addition to liability for the tax due plus statutory interest, individuals who fail to file and pay tax or who claim refunds based on this or any other frivolous arguments face substantial civil and criminal penalties. Potential civil penalties include: (1) the section 6651(f) penalty for fraudulent failure to file, which is up to 75 percent of the amount of taxes the taxpayer should have reported on the return ; (2) the section 6651(a)(1) penalty for failure to file, which is equal to up to 25 percent of the amount of taxes the taxpayer should have reported on the return; (3) the section 6651(a)(2) penalty for failure to pay, which is equal to .5 percent of the tax for each month or fraction of a month the tax remains unpaid, not to exceed a total of 25 percent; and; (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Individuals relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; (2) willful failure to make a return or pay tax under section 7203 for which the penalty is up to $25,000 and imprisonment of up to 1 year, or (3) making false statements under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty under section 6694 for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

Individuals may not avoid or evade their tax liability by refusing to file returns and pay tax on the basis that they have been removed or redeemed from the federal tax system or by claiming that they can “chargeback” their debts to the Government. Arguments that individuals may be removed or redeemed from the federal tax system or may “chargeback” their debts to the Government have no merit and are frivolous. Individuals who attempt to reduce their federal tax liability by taking frivolous positions based on these arguments will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against individuals where appropriate, and those individuals may also face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons may also face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Rev. Rul. 2004-32, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• DISCUSSION OF HOME-BASED BUSINESS SCHEMES
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; meritless home-based business deductions. This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with claiming frivolous deductions based on a purported home-based business, that there is no basis for claiming personal, living, and family expenses as business deductions. This return position has no merit and is frivolous.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by claiming that otherwise nondeductible personal, living or family expenses are deductible because they relate to a purported home-based business of the taxpayer that, in fact, is not a bona fide home business. The purported business in these schemes is no more than an attempt to create the appearance of having a home-based business where none actually exists. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials, that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments. This home-based business scheme and the promotion of this scheme are described in more detail in this revenue ruling.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with home-based business schemes, that they cannot avoid income tax by claiming otherwise non deductible personal, living or family expenses as business deductions that supposedly relate to a purported home-based business that is not a bona fide trade or business. This argument has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

DISCUSSION OF HOME-BASED BUSINESS SCHEMES

Several promoters are selling packages of materials (sometimes referred to as a “Tax Toolbox” or a “Tax Toolkit”) containing video or audio tapes, workbooks, record-keeping aids, or other materials that the promoters claim will assist taxpayers in taking tax deductions for a taxpayer’s personal, living or family expenses under the guise of conducting a business, usually out of the taxpayer’s home. The promoters of these packages typically make one or more of the following claims: (1) taxpayers can legally reduce or eliminate their federal income taxes by establishing a business, regardless of whether the business is a bona fide business conducted for profit; (2) operating a business will permit the deduction of personal expenses (such as weddings, children’s allowances, and vacations) as legitimate business expenses; (3) placing a calendar, desk, file cabinet, telephone, or other office-type item in each room of a home will allow taxpayers to deduct all or most of the costs of operating their personal residences; or (4) by using the materials that the promoter sells, taxpayers are guaranteed to receive a large federal income tax refund or to reduce their federal income tax liability by a substantial amount.

Whether an individual is carrying on a bona fide trade or business depends on the facts and circumstances. Nevertheless, the actions taxpayers take as part of a home-based business scheme, such as the placing of a filing cabinet in a bedroom, invariably are taken for the purpose of claiming personal, living or family expenses as deductible business expenses, and not for the purpose of carrying on a bona fide trade or business. Home-based business schemes typically are used by taxpayers who perform all of their work at their employers’ place of business.

Section 262 disallows deductions for personal, living or family expenses, except as otherwise expressly provided by the Internal Revenue Code. Medical expenses, for example, are deductible only if the specific requirements of section 213 are satisfied. Similarly, the provisions of section 163(h) govern when an individual taxpayer may deduct interest on a mortgage or home equity loan. See I.R.C. §§ 163(h)(2) and (h)(3).

With respect to business expenses, only expenses paid or incurred during the taxable year in carrying on a trade or business may be deducted under section 162(a). A trade or business expense deduction under section 162, however, is not permitted with respect to a taxpayer’s residence unless specifically permitted in limited circumstances by section 280A. I.R.C. § 280A(a). For example, with respect to the business use of a taxpayer’s residence, section 280A provides that in order for allocable expenses to be deductible under that section, the portion of the taxpayer’s residence must be used exclusively by the taxpayer on a regular basis as a principal place of business for the taxpayer’s trade or business, or to meet or deal with patients, clients or customers in the normal course of the taxpayer’s trade or business. If the taxpayer is an employee, the exclusive and regular use of a portion of the taxpayer’s residence must be for the convenience of the taxpayer’s employer before any expenses relating to that part of the taxpayer’s residence may be deducted. I.R.C. § 280A(c).

Taxpayers participating in home-based business schemes invariably do not have a bona fide home-based business and are not using any portion of their residences exclusively and regularly for a work-related use. These schemes will not convert otherwise nondeductible personal, living or family expenses into legitimate deductions. Moreover, detailed recordkeeping cannot create a permissible deduction unless the expenses at issue are legitimate business expenses. Although deductions must be substantiated in order to be allowable, a taxpayer also must establish entitlement to the deduction, e.g., that the claimed expenses were ordinary and necessary for the production of income in a trade or business.

Courts routinely reject the types of arguments made by participants in home-based business schemes as frivolous and penalize taxpayers who make these types of arguments. Courts also have enjoined promoters who market frivolous tax avoidance schemes that utilize these frivolous arguments. See, e.g., United States v. Estate Preservation Services, 202 F.3d 1093 (9^th Cir. 2000) (ordering an injunction against a promoter of a trust scheme who made fraudulent statements that expenses related to a personal residence could be deducted if the residence was transferred to a trust); United States v. Buttorff, 761 F.2d 1056, 1060 (5^th Cir. 1985) (ordering an injunction against a promoter of a trust scheme who made fraudulent statements that personal consumption expenses could be deducted if personal property was transferred to a trust); Peete v. Commissioner, T.C. Memo. 2004-31 (imposing accuracy-related penalty against taxpayer who deducted personal and living expenses as purported business expenses related to recruiting participants in a tax avoidance pyramid scheme); Manley v. Commissioner, T.C. Memo. 1983-558 (disallowing deductions of claimed personal and living expenses and imposing both an accuracy-related penalty and a penalty under section 6673 for advancing frivolous arguments).

CIVIL AND CRIMINAL PENALTIES

In determining the correct amount of tax, the Service will disallow personal, living or family expenses that have been improperly claimed as business deductions. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on home-business schemes and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

Taxpayers cannot use schemes designed to create the appearance of having a home-based business, where none actually exists, for the purpose of converting otherwise nondeductible personal, living or family expenses into purportedly legitimate deductions. Arguments that such schemes generate tax benefits are frivolous. A taxpayer who is not engaged in a bona fide home-based trade or business cannot deduct, as a trade or business expense under section 162, any expenses alleged to relate to a purported home-based business. Taxpayers attempting to reduce their federal income tax liability by taking frivolous positions will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers also may face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons also may face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Even if a taxpayer is engaged in a bona fide trade or business or is conducting activities from his home for the convenience of his employer, the taxpayer must satisfy the specific requirements of the Internal Revenue Code, such as those contained in sections 162 and 280A, to be entitled to deduct expenses related to those activities.Personal, living or family expenses are not deductible except as otherwise expressly provided by the Internal Revenue Code. I.R.C. § 262(a).

Rev. Rul. 2004-33, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• DISCUSSION OF REPARATIONS TAX CREDIT SCHEME
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; “reparations tax credit.” This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with tax schemes, that there is no “reparations tax credit” that permits an individual to take the position that the individual based on certain classifications is entitled to a large refund the individual would not otherwise receive. The ruling also describes many of the possible civil and criminal penalties that apply to people who claim refunds or other tax benefits on their returns based on frivolous reparations tax credits.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal income tax liability by taking the position that they are entitled to a “reparations tax credit” or other similarly named credit because they are a member of a group or class based on race, ancestry, ethnicity, gender or other classification. Common examples of the purported reparations tax credit that have been promoted include the African-American reparations credit, the Black Heritage tax credit, and the Native American reparations credit. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can receive large refunds based on this claim, or how taxpayers can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with these schemes, that there is no reparations tax credit that entitles an individual to a refund of tax or to any other tax benefit, such as a credit against tax liability. This position is frivolous and has no merit. Although the Internal Revenue Code does allow special tax treatment for charitable organizations described in section 501(c)(3) that may help individuals who are needy or otherwise distressed and who are part of a general class of charitable beneficiaries, there is no U.S. law that allows for a reparations tax credit.

The Service is committed to identifying taxpayers who attempt to avoid paying income tax by taking frivolous positions, such as claiming a reparations tax credit. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

DISCUSSION OF REPARATIONS TAX CREDIT SCHEME

Participants in the reparations tax credit scheme typically file individual income tax returns that correctly report the taxpayers’ income, tax liability, and income tax withholding, but claim reparations tax credits in amounts that typically exceed their tax liabilities to reduce taxes that otherwise are owed and request refunds of purported overpayments of withheld taxes or excess refundable credits. Participants often claim the reparations tax credit either on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, identifying a fictitious regulated investment company or real estate investment trust, or as a withholding credit, Earned Income Credit, investment tax credit or another similar credit.

No law, including the Internal Revenue Code, allows taxpayers to claim a reparations tax credit or any other similarly-named credit. Courts repeatedly have rejected reparations tax credit claims as frivolous and penalized taxpayers making these claims and promoters and return preparers who assist taxpayer in making these frivolous claims. See, e.g., United States v. Bridges, 86 A.F.T.R.2d (RIA) 5280 (4^th Cir. 2000) (rejecting as frivolous the non-existent “Black Tax Credit” and upholding conviction for aiding and assisting the preparation of false tax returns); United States v. Haugabook, 2002 U.S. Dist. LEXIS 25314 (M.D. Ga. 2002) (ordering a permanent injunction against a promoter prohibiting the preparation of returns or other documents claiming a tax credit for slavery reparations or other similar frivolous credits and requiring that the promoter place an advertisement in the local newspaper declaring that there are no such tax credits); United States v. Mims, 2002 U.S. Dist. LEXIS 25291 (S.D. Ga. 2002) (ordering a permanent injunction against a promoter prohibiting the preparation of returns or other documents claiming a tax credit for slavery reparations or other similar frivolous credits); United States v. Foster, 2002-2 U.S.T.C. ( CCH ) ¶ 50,785 (E.D. Va. 2002) (holding “no provision of the Internal Revenue Code allows for a tax credit for slavery reparations” and ordering a permanent injunction prohibiting the preparation of returns or refund claims based on a “fabricated tax credit for slavery reparations”).

CIVIL AND CRIMINAL PENALTIES

The Service will disallow credits or refunds based on a reparations tax credit and will seek to recover any refund erroneously made to a taxpayer based on a reparations tax credit. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on this and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

Any claim that a taxpayer is entitled to a reparations tax credit or a refund or other tax benefit based on a reparations tax credit is frivolous. Taxpayers attempting to reduce their federal tax liability by taking frivolous positions based on this argument will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers may also face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons may also face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Rev. Rul. 2004-34, Internal Revenue Bulletin:  2004-12, March 22, 2004

Table of Contents

• PURPOSE
• DISCUSSION OF THE ZERO RETURN POSITION
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; filing a “zero return.” This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with tax schemes, that a “zero return” will not succeed in permitting an individual to take the position that the individual or the individual’s income is not subject to federal income tax. The ruling also describes many of the possible civil and criminal penalties that apply to people who file a frivolous “zero return” that requires the Service to conduct a deficiency inquiry.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal income tax liability by filing a return that reports no income and no tax liability (a “zero return”) even though they have taxable income. A taxpayer filing a zero return invariably requests a refund of any taxes withheld by an employer. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take this frivolous position. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other frivolous arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with these schemes, that a taxpayer cannot avoid income tax by filing a zero return. The zero return position has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid or evade their tax obligations by taking frivolous positions, such as the filing of a zero return. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply against return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

DISCUSSION OF THE ZERO RETURN POSITION

Proponents of the zero return position file income tax returns that report no income and no tax liability even though these taxpayers have wages, salary or other income. Taxpayers taking this position typically attach to the zero return a Form W-2 or other information return that reports income and income tax withholding and request refunds from the Service of the withheld taxes. These taxpayers typically rely on one or more frivolous arguments to support the position that wage or other income is not subject to tax. See, e.g., Rev. Rul 2004-31, 2004-12 I.R.B. and Notice 2004-22, 2004-12 I.R.B. (March 22, 2004).

There is no authority under U.S. law that permits a taxpayer that has taxable income to avoid income tax by filing a zero return. The claim that the filing of a zero return will allow a taxpayer to avoid income tax liability, or will permit a refund of any tax withheld by an employer, is frivolous. Section 61 of the Internal Revenue Code provides that gross income includes all income from whatever source derived, including compensation for services. Adjustments to income, deductions, and credits must be in accordance with the provisions of the Internal Revenue Code and the Treasury regulations thereunder and other applicable federal law. Section 6011 provides that any person liable for any tax imposed by the Internal Revenue Code shall make a return when required by Treasury regulations, and that returns must be in accordance with Treasury regulations and IRS forms. Section 1.6011-1(b) of the Treasury Regulations provides, in relevant part, that each taxpayer should set forth fully and clearly the information required to be included on the return. Section 6012 identifies the persons who are required to file income tax returns.

Courts repeatedly have penalized taxpayers who filed zero returns despite having income sufficient to give rise to a tax liability and have rejected frivolous arguments used by taxpayers to justify a zero return position. See, e.g., Gillett v. United States, 233 F. Supp. 2d 874 (W.D. Mich. 2002) (“Numerous federal courts have upheld the imposition of the $500 sanction by the IRS pursuant to 26 U.S.C. § 6702(a) [for frivolous returns], where, as here, a tax form is filed stating that an individual had no income, but the attached W-2 forms show wages, tips, or other compensation of greater than zero.”); Hill v. Commissioner, T.C. Memo. 2003-144 (imposing $15,000 penalty under section 6673 for frivolous “zero return” position); Rayner v. Commissioner, T.C. Memo. 2002-30 (imposing $5,000 penalty under section 6673 for frivolous “zero return” position).

CIVIL AND CRIMINAL PENALTIES

The Service will disallow any refund claim based on the filing of a zero return and will determine the correct amount of tax due from the taxpayer. The Service also will seek the return of any erroneous refund resulting from a zero return. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on this and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201 for which the penalty is a fine of up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206 for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming tax benefits based on this scheme also may face penalties. Potential penalties include: (1) a $250 penalty under section 6694 for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting an understatement of tax; and (3) criminal prosecution under section 7206 for which the penalty is up to $100,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

HOLDING

A taxpayer cannot use a zero return to avoid or evade the taxpayer’s federal income tax liability. Taxpayers attempting to avoid or evade their federal tax liability by taking frivolous positions will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers may also face criminal prosecution. The Service also will determine appropriate penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons may also face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

Rev. Rul. 2005-17, Internal Revenue Bulletin:  2005-14, April 4. 2005

Table of Contents

• PURPOSE
• ISSUES
• FACTS
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; Social Security refund. This ruling emphasizes to taxpayers and to promoters and return preparers that there is no right to a refund of, or a deduction for, Social Security taxes paid based on arguments that a taxpayer has waived the right to receive Social Security benefits or has donated Social Security taxes or benefits to the government. These arguments have no merit and are frivolous.

PURPOSE

The Service is aware that some taxpayers are filing claims for refund of the Social Security taxes paid on wages pursuant to the Federal Insurance Contributions Act (FICA) on the basis that they have waived their right to receive Social Security benefits. The Service also is aware that some taxpayers are attempting to reduce or eliminate their federal tax liability by taking similar frivolous return positions, including reporting as a charitable contribution deduction the amount of Social Security taxes paid, on the basis that they are donating these amounts to the government. Some promoters market a package, kit, or other materials, that claim to show taxpayers how they can obtain a refund or avoid paying income taxes based on these and other meritless arguments. This revenue ruling does not apply to individuals who have satisfied the requirements of the religious exemption from FICA provided in section 3127 of the Internal Revenue Code.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that there is no right to a refund of, or a deduction for, Social Security taxes paid based on arguments that a taxpayer has waived the right to receive Social Security benefits or has donated Social Security taxes or benefits to the government. These arguments have no merit and are frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, including frivolous positions based on arguments regarding waiver of Social Security benefits. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service’s website at www.irs.gov.

ISSUES

1. Whether taxpayers are entitled to a refund of Social Security taxes paid on the theory that they have waived the right to receive Social Security benefits?

2. Whether taxpayers are entitled to a charitable contribution deduction for Social Security taxes paid on the theory that those amounts have been donated by them to the government?

FACTS

This plan includes claims for refund of Social Security taxes paid on wages under FICA, on the theory that the taxpayer has waived the right to receive Social Security benefits. Additionally, some taxpayers claim a charitable contribution deduction on the theory that they have donated their Social Security taxes, or their right to receive Social Security benefits, to the government.

LAW AND ANALYSIS

Social Security taxes are imposed on wages as defined in section 3121. There is no authority under the Internal Revenue Code (other than the narrow exception to the application of FICA tax provided in the religious exemption under section 3127) or any other applicable law that supports the claim that taxpayers may waive their right to receive Social Security benefits and thereby receive a refund of Social Security taxes paid. Similarly, there is no provision of law that would allow a taxpayer to claim a charitable contribution deduction as a result of the donation or gift to the government of the taxpayer’s right to receive Social Security benefits or of Social Security taxes paid.

In Crouch v. Commissioner, T.C. Memo. 1990-309, the taxpayers did not pay self-employment tax based on a claim that they had withdrawn from the Social Security system. The taxpayers also claimed a charitable contribution deduction based on a purported lump-sum gift to the government of Social Security benefits. The Tax Court rejected these positions, characterizing the taxpayers’ failure to pay self-employment tax as negligent and sustaining the Service’s disallowance of the charitable contribution deduction. See also Derksen v. Commissioner, 84 T.C. 355, 360 (1985) (“There are some specific exemptions from the [social security] tax but the desire not to be a part of the social security system, standing alone, is not one of them.”)

A refund claim must be based on a valid argument that the taxpayer has overpaid the tax that is lawfully due and owing. See, e.g., Lewis v. Reynolds, 284 U.S. 281, 283 (1932) (“[T]he taxpayer is not entitled to a refund unless he has overpaid his tax.”). Further, it is a well settled principle of law that deductions and credits are a matter of legislative grace. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Unless specifically provided for in the Internal Revenue Code, no deduction or credit is allowed. Neither section 3121, nor any other provision of the Internal Revenue Code, allows for a refund of Social Security taxes paid on the grounds that a taxpayer has purportedly waived all rights to receive Social Security benefits. Similarly, no provision of the Internal Revenue Code allows for a charitable contribution deduction based on the purported gift or donation of Social Security taxes or benefits to the government.

CIVIL AND CRIMINAL PENALTIES

The Service will disallow any claim for refund of Social Security taxes based on the frivolous argument that a taxpayer has waived the right to receive Social Security benefits. The Service will also disallow any deduction that is based on the theory that a taxpayer has given or donated the taxpayer’s Social Security taxes or Social Security benefits to the government. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on these and similar frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include, but are not limited to the following: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous income tax return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; or (2) making false statements on a return, statement, or other document under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these frivolous positions also may face penalties and may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return, statement, or other document under the internal revenue laws.

HOLDING

Taxpayers are not entitled to a refund of the Social Security taxes paid based on the position that they have waived the right to receive Social Security benefits. Moreover, a taxpayer is not entitled to a charitable contribution deduction based on the purported gift or donation of Social Security taxes or benefits to the government. Claims or deductions based on these positions are frivolous and have no merit.

Rev. Rul. 2005-18, Internal Revenue Bulletin:  2005-14, April 4, 2005  

Table of Contents

• PURPOSE
• ISSUE
• FACTS
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; altering the jurat. This ruling deals with taxpayers who attempt to reduce their federal tax liability by striking or altering the written declaration (the jurat) that verifies that a return, declaration, statement or other document is made under penalties of perjury. The ruling emphasizes to taxpayers and to promoters and return preparers that striking or altering the jurat in a manner that negates its validity invalidates the return.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by striking or otherwise invalidating the written declaration (the jurat) that verifies that a return, declaration, statement, or other document is made under penalties of perjury as required by section 6065. The Service also is aware that some promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions, which include striking or otherwise invalidating the jurat. Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that striking or otherwise altering the jurat in a manner that negates or casts doubt on its validity invalidates the return. Any argument that the law does not require written verification of the accuracy of the return has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their federal tax obligations by taking frivolous positions, including frivolous positions based on arguments relating to an altered or amended jurat. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through the Service’s Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether an injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUE

Whether a document, declaration, or statement that is required to be verified under penalties of perjury, pursuant to section 6065, is valid if the jurat has been stricken or otherwise altered in a manner that negates or casts doubt on validity of the return?

FACTS

Situation 1. Individual taxpayer A filed a Form 1040A individual income tax return for the 2004 taxable year. Taxpayer A signed the form but crossed out the jurat on the return, and wrote the word “void” across it.

Situation 2. Individual taxpayer B filed a Form 1040A individual income tax return for the 2004 taxable year. Taxpayer B signed the Form 1040A without deleting or altering the jurat, but wrote across the top of the Form 1040A that “I deny that I owe the tax shown on this return.”

LAW AND ANALYSIS

Section 6011(a) requires any person liable for taxes to file a return that includes “the information required by [the] forms or regulations” issued by the Service. See also Treas. Reg. sec. 1.6012-1(a)(6) (prescribing Form 1040 for making an income tax return). Section 6065 mandates that any return, declaration, statement, or other document required under the internal revenue laws and regulations “contain or be verified by a written declaration that it is made under the penalties of perjury.” For taxpayer convenience, paper returns all contain a pre-printed written declaration or jurat.

It is well settled that if a taxpayer strikes or obliterates the jurat on a tax return or other document, the jurat is void, as is the underlying return, because the return no longer meets the requirements of section 6011(a) and section 6065. See Lucas v. Pilliod Lumber Co., 281 U.S. 245, 248 (1930) (a return that was not properly verified under oath by the corporate officers did not meet the requirements of 6011(a) and section 6065); Borgeson v. United States, 757 F.2d 1071, 1072-73 (10^th Cir. 1985) (the plain wording of section 6065 requires the jurat on any return); United States v. Moore, 627 F.2d 830, 834 (7th Cir. 1980) (the forms submitted by the taxpayer were not returns because the jurat was obliterated); Cupp v. Commissioner, 65 T.C. 68, 78-79 (1975) (documents submitted by the taxpayer that were not signed under penalty of perjury were not returns), aff’d without published opinion, 559 F.2d 1207 (3d Cir. 1977).

If the taxpayer adds language to the jurat, or adds language to the return that casts doubt on the validity of the jurat, courts look to the intent and effect of the change in order to determine the validity of the underlying return. A change that negates or casts doubt on the validity of the jurat, or the taxpayer’s intent to affirm the contents of the return under penalty of perjury, will void the jurat. See Williams v. Commissioner, 114 T.C. 136, 140-41 (2000) (language added by the taxpayer above the jurat box that denied liability for the tax reported on the return still had the effect of vitiating the verification); Sloan v. Commissioner, 102 T.C. 137, 141-47 (1994) (language added within the jurat box that “[raised] serious questions about whether petitioner [was] ‘denying’ the accuracy of the information contained in the return, ‘disclaiming’ the jurat altogether, or simply protesting the tax laws,” ultimately acted to invalidate the return), aff’d, 53 F.3d 799 (7^th Cir. 1995). If there is any doubt whether an addition or alteration to the jurat is intended to negate or deny the jurat, the Service is “entitled to construe alterations of the jurat against the taxpayer... .” Sloan v. Commissioner, 53 F.3d 799, 800 (7^th Cir. 1995).

There is no authority under any U.S. law that supports the position that individuals may avoid their income tax obligations by striking or otherwise modifying the jurat in a manner that casts doubt on its validity. Moreover, tampering with the form of a tax return, including the jurat, substantially impedes the Service’s ability to process and verify the return. Beard v. Commissioner, 82 T.C. 766, 776-777 (1984), aff’d, 793 F.2d 139 (6^th Cir. 1986). Courts routinely impose monetary penalties on taxpayers who cite constitutional and other frivolous arguments as a basis for striking or modifying the jurat. See  Borgeson, 757 F.2d at 1073 (upholding imposition of frivolous return penalty under section 6702); Trowbridge v. Commissioner, T.C. Memo. 2003-165, aff’d, 378 F.3d 432 (5^th Cir. 2004).

In Situation 1, taxpayer A rendered the Form 1040A void by crossing out the jurat and writing “void” across it. In Situation 2, taxpayer B rendered the Form 1040A void by adding language to the Form 1040A that casts doubt on the validity of the jurat. This action represents a failure on the part of taxpayer B to verify the accuracy and truthfulness of the Form 1040A.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability. In addition to liability for the tax due plus statutory interest, taxpayers who fail to file valid returns or pay tax based on an argument that they can alter or amend the jurat on a return face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) a $500 penalty imposed under section 6702 when the taxpayer files a document that purports to be a return but that contains a frivolous position or suggests a desire by the taxpayer to delay or impede the administration of Federal income tax laws; (2) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; and (3) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; and (2) willful failure to file a return under section 7203, for which the penalty is a significant fine and imprisonment for up to a year.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these frivolous positions may face civil and criminal penalties and also may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a penalty under section 6700 for promoting abusive tax shelters; (2) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (3) criminal prosecution under section 7206, for which the penalty is a fine of up to $100,000 and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

HOLDING

The law mandates that any return, declaration, statement, or other document required under the internal revenue laws and regulations contain a valid jurat. The claim that taxpayers can reduce their federal tax liability by striking or amending the jurat on a return, declaration, statement, or other document is frivolous.

Rev. Rul. 2005-19, Internal Revenue Bulletin:  2005-14, April 4, 2005  

Table of Contents

• PURPOSE
• ISSUES
• FACTS
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDINGS
• DRAFTING INFORMATION

Frivolous tax returns; constitutionally based arguments. This ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax by making frivolous constitutionally based arguments.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by claiming that the federal income tax is unlawful because it violates one or more provisions of the United States Constitution, or that they have a constitutional right not to comply with the federal tax laws. The Service is also aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on these arguments. Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax by making frivolous constitutionally based arguments.

The Service is committed to identifying individuals who attempt to avoid or evade their federal tax obligations by taking frivolous positions, including frivolous constitutional positions. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUES

1. Whether a taxpayer may refuse to file a federal income tax return, or to pay federal income tax, based on claims that the federal income tax is unconstitutional?

2. Whether a taxpayer may refuse to file a federal income tax return based on the claim that the requirement to do so violates the prohibition against self-incrimination contained in the Fifth Amendment to the U.S. Constitution?

FACTS

1. Taxpayer A is a United States citizen who resides in state X. A attended seminars on the federal tax system sponsored by S, an attorney. S made claims at these seminars that the federal income tax is unconstitutional because: (a) the Sixteenth Amendment to the U.S. Constitution, which authorizes a federal income tax, was not properly ratified by the states; (b) the federal income tax violates the due process clause of the Fifth Amendment to the U.S. Constitution; and (c) the payment of taxes is a form of involuntary servitude or slavery prohibited by the Thirteenth Amendment to the U.S. Constitution. Based on these constitutionally-based positions promoted by S, A filed a Form W-4, Employee’s Withholding Allowance Certificate, with A’s employer that claimed excess exemptions so that little or no federal income tax would be withheld from A’s wages in 2004. Taxpayer A earned $40,000 of taxable income in 2004. Relying on these constitutionally-based positions promoted by S, A did not file a federal income tax return for 2004.

2. Taxpayer B is a United States citizen who earned $40,000 in taxable income in 2004. On B’s 2004 Form 1040, federal income tax return, B wrote “Fifth Amendment privilege” on each line and did not report any taxable income for the year.

LAW AND ANALYSIS

The Sixteenth Amendment provides that Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration. U.S. CONST. amend. XVI. The United States Supreme Court has upheld the constitutionality of the income tax laws enacted subsequent to ratification of the Sixteenth Amendment. See, e.g., Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916) (relying on the Sixteenth Amendment in holding that the income tax provisions of the Tariff Act of 1913 were not unconstitutional).

Promoters who claim that the federal income tax is unconstitutional often make frivolous arguments that there were defects in the ratification of the Sixteenth Amendment by the states. There are a number of variations on these frivolous arguments: (i) versions of the Amendment ratified by the states contained defects in spelling, punctuation, wording, or capitalization; (ii) state legislatures did not follow proper procedures in ratifying the amendment; (iii) state governors did not sign the amendment; (iv) one or more of the states that ratified the Amendment was not legally a state; and (v) the Amendment does not contain an enabling clause. These arguments have no merit, and courts have consistently rejected all challenges to the constitutionality of the federal income tax following enactment of the Sixteenth Amendment. See Knoblauch v.  Commissioner, 749 F.2d 200, 201 (5th Cir. 1984) (“Every court that has considered this argument has rejected it.”). Arguments to the contrary are frivolous.

The Fifth Amendment prevents the federal government from taking property without due process of law. U.S. CONST. amend. V. Due process generally includes a right to notice and an opportunity to be heard. The Supreme Court has held that the procedures contained in the Internal Revenue Code fully satisfy the due process rights of taxpayers. See Phillips v.  Commissioner, 283 U.S. 589, 595-99 (1931) (“The right of the United States to collect its internal revenue by summary administrative proceedings has long been settled. Where, as here, adequate opportunity is afforded for a later judicial determination of the legal rights, summary proceedings to secure prompt performance of pecuniary obligations to the government have been consistently sustained.”). The argument that due process requires a hearing before tax has to be paid or can be withheld from wages is frivolous.

The federal income tax only requires payment of taxes on a person’s income. It does not force a person to labor involuntarily, or to labor at all. The Thirteenth Amendment prohibits slavery and involuntary servitude, except as punishment when convicted of a crime. U.S. CONST. amend. XIII. The Thirteenth Amendment does not proscribe taxation. See Abney v. Campbell, 206 F.2d 836, 841 (5th Cir. 1953) (The specification, that the act violates the Thirteenth Amendment by imposing involuntary servitude upon an employer of domestic servants, seems to us far-fetched, indeed frivolous.”). Moreover, a prison sentence for failing to file a federal income tax return is not prohibited by the Thirteenth Amendment. See United States v. Drefke, 707 F.2d 978, 983 (8th Cir. 1983) (“The Thirteenth Amendment, however, is inapplicable where involuntary servitude is imposed as punishment for a crime.”). Failing to file a federal income tax return or to pay federal income tax based on the argument that it would constitute involuntary servitude is frivolous.

The Fifth Amendment provides that in a criminal case a person may not be compelled to be a witness against himself. U.S. CONST. amend. V. This generally means that a person cannot be forced to answer a question if the answer will be used against that person in a criminal prosecution. Courts have routinely held, however, that the Fifth Amendment provides no basis for failing or refusing to file a tax return. United States v. Stillhammer, 706 F.2d 1072, 1076-77 (10th Cir.1983) (“[T]he Fifth Amendment does not serve as a defense for failing to make any tax return, and a return containing no information but a general objection based on the Fifth Amendment does not constitute a return as required by the Code.”). The remote possibility that a taxpayer’s statement on a tax return might be used as evidence in a future criminal prosecution will not relieve a taxpayer from the obligation to file a tax return and properly report income and pay tax due. See California v. Byers, 402 U.S. 424, 427-29 (1971) (“[T]he remote possibility of incrimination is insufficient to defeat strong policies of disclosure called for by” government regulatory scheme.). Additionally, involvement in illegal activities will not relieve a person of the duty to file a federal income tax return because income earned from illegal activities is subject to the federal income tax. United States v. Sullivan, 274 U.S. 259, 263-64 (1927) (“It would be an extreme if not an extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime.”).

CIVIL AND CRIMINAL PENALTIES

In determining the correct amount of tax due, the Service will include income that taxpayers attempt to exclude based on frivolous constitutional arguments. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on these and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; (2) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (3) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (4) a $500 penalty under section 6702 for filing a frivolous return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; (2) willful failure to make a return or pay tax under section 7203, for which the penalty is a significant fine and imprisonment of up to 1 year; or (3) making false statements on a return under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these frivolous arguments may face penalties and may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return prepared by an income tax preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

HOLDINGS

1. The Sixteenth Amendment to the U.S. Constitution was properly ratified and authorizes the federal income tax. Filing a federal income tax return and paying federal income tax does not constitute the taking of property without due process of law under the Fifth Amendment to the U.S. Constitution. Filing a federal income tax return, paying federal income tax, and incarceration for failure to comply with federal income tax obligations is not involuntary servitude or slavery prohibited by the Thirteenth Amendment to the U.S. Constitution. Arguments to the contrary are frivolous.

2. A taxpayer may not properly refuse to file a federal income tax return based on the claim that the requirement to do so violates the prohibition against self-incrimination of the Fifth Amendment to the U.S. Constitution. Arguments to the contrary are frivolous.

Rev. Rul. 2005-20, Internal Revenue Bulletin:  2005-14, April 4, 2005  

Table of Contents

• PURPOSE
• ISSUE
• LAW AND ANALYSIS
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; protesting government programs or policies. This ruling emphasizes to taxpayers and to promoters and return preparers that liability for federal taxes does not depend on whether the taxpayer agrees with the government programs or policies that are funded with tax receipts. Any argument that taxpayers may refuse to report income or claim deductions because they oppose particular government programs or policies is frivolous and has no merit.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce or eliminate their federal tax liability by taking the position that they are not required to pay taxes if those taxes might be used to support government programs or policies with which they disagree. Common examples include moral, ethical, or religious opposition to government spending for weapons programs, military operations, or medical research. The Service is also aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on these arguments. Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that liability for federal taxes does not depend on whether the taxpayer agrees with the government programs or policies that are funded with tax receipts. Any argument that taxpayers may refuse to report income or claim deductions because they oppose particular government programs or policies is frivolous and has no merit.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, including frivolous positions based on opposition to government programs or policies. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUE

Whether a taxpayer’s disagreement with government programs or policies on moral, ethical, religious or other grounds allows the taxpayer to refuse to file federal tax returns or to refuse to pay part or all of the taxpayer’s federal tax liability?

LAW AND ANALYSIS

Section 1 of the Internal Revenue Code imposes a tax on all taxable income. There is no authority under the Internal Revenue Code or any other applicable law that allows taxpayers to refuse to file tax returns because they do not agree with government programs or policies. Further, it is well settled that deductions and credits are a matter of legislative grace and are not allowed unless specifically provided for in the Internal Revenue Code. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). There is no provision in the Internal Revenue Code that permits taxpayers to file returns claiming deductions or credits that reduce their taxable income by the percentage they estimate the government spends on programs or policies with which they disagree.

These frivolous positions are variations of arguments taxpayers have made about religion and taxation that have been repeatedly rejected by the courts. In United States v. Lee, 455 U.S. 252 (1982), a member of a religious denomination claimed that the payment of social security taxes violated his First Amendment right to free exercise of religion. The United States Supreme Court rejected this argument, stating that “the tax system could not function if denominations were allowed to challenge the tax system because tax payments were spent in a manner that violates their religious belief.” Id. at 260. The Court held that religious or moral beliefs that conflict with the payment of tax provide no basis for resisting the tax. Id.

Courts repeatedly have rejected these and similar arguments that a taxpayer’s religious or moral beliefs permit the avoidance of federal taxes, and have imposed penalties against taxpayers who make these arguments. See Schehl v.  Commissioner, 855 F.2d 364, 367 (6^th Cir. 1988) (“Alleged vocal opposition to taxes for a particular reason, and refusal to pay taxes, even if all assertions were taken as true . . . are simply not a basis to challenge an assessment of taxes.”);  Nelson v. United States, 796 F.2d 164 (6^th Cir. 1986) (upholding the applicability and constitutionality of a frivolous return penalty imposed against a taxpayer who claimed a deduction based on religious objection to war expenditures); Randall v. Commissioner, 733 F.2d 1565, 1567 (11th Cir. 1984) (“[A]rguments involving objections to the Government’s military expenditures as a basis for non-payment of taxes have been raised by taxpayers many times, and in each instance the courts have rejected them.”).

CIVIL AND CRIMINAL PENALTIES

The Service will disallow deductions or other claimed tax benefits, including the exclusion of income, based on frivolous arguments regarding opposition to government programs or expenditures. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on these and other frivolous arguments may face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and (4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these positions may be enjoined by a court pursuant to sections 7407 and 7408 and also may face potential civil and criminal penalties. Potential penalties include: (1) a $250 penalty under section 6694 for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return if the return preparer’s actions were willful, intentional, or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

HOLDING

Taxpayers may not refuse to file tax returns and may not claim deductions or credits on their tax returns based on their opposition to government programs or policies. Any claim that individuals may reduce their federal tax liability based on objections to the use of the taxes to support government programs or policies is frivolous and has no merit.

Rev. Rul. 2005-21, Internal Revenue Bulletin:  2005-14, April 4, 2005

Table of Contents

• PURPOSE
• ISSUE
• DISCUSSION OF THE “STRAW MAN” CLAIM
• CIVIL AND CRIMINAL PENALTIES
• HOLDING
• DRAFTING INFORMATION

Frivolous tax returns; use of “straw man” to avoid tax. This ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax on the erroneous theory that the government has created a separate and distinct entity or “straw man,” in place of the taxpayer and that the taxpayer is not responsible for the tax obligations of the “straw man”. This argument has no merit and is frivolous.

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the incorrect position that their incomes are not subject to tax based on a theory that the government has created a separate and distinct entity, or “straw man,” in place of the taxpayer and that the taxpayer is not responsible for the tax obligations of the “straw man.” Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax on the erroneous theory that the government has created a “straw man.” This argument has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, including frivolous positions based on meritless “straw man” or similar arguments. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

ISSUE

Whether the government’s use of different forms of a taxpayer’s name (e.g., different capitalization formats, spellings) creates a “straw man,” which is a separate and distinct legal entity from the taxpayer to allow the taxpayer to avoid federal tax obligations?

DISCUSSION OF THE “STRAW MAN ” CLAIM

The “straw man” claim is premised on the erroneous theory that most government documents do not actually refer to individuals. Users of the “straw man” theory falsely claim that only documents using an individual’s name with “standard” capitalization, i.e., lower-case with only the beginning letters of each name capitalized, are legitimate. These individuals erroneously argue that the use of the individual’s name in all upper-case letters, which is common in some government documents, refers to a separate legal entity, called a “straw man.” These individuals also erroneously argue that, as a result of the creation of a “straw man,” they are not liable for the debts, including the tax debts, of their “straw man,” that taxing the “straw man” is illegal because the “straw man” is a debt instrument based upon the labor of a real person and is, therefore, a form of slavery, or that no tax is owed by the real individual because it can be satisfied, or offset, by money in a “Treasury Direct Account” held in the name of the “straw man.”

All individuals are subject to the provisions of the Internal Revenue Code. Section 1 imposes a tax on all taxable income. Section 61 provides that gross income includes all income from whatever source derived, including compensation for services. Adjustments to income, deductions, and credits must be claimed in accordance with the provisions of the Internal Revenue Code, the accompanying Treasury regulations, and other applicable federal law. Section 6011 provides that any person liable for any tax imposed by the Internal Revenue Code shall make a return when required by Treasury regulations, and that returns must be filed in accordance with Treasury regulations and IRS forms. Section 6012 identifies the persons who are required to file income tax returns. Section 6151 requires that taxpayers pay their tax when the return is due. Section 6311 requires payment of taxes by commercially acceptable means as prescribed by Treasury regulations.

There is no authority under the Internal Revenue Code or any other applicable law that supports the claim that taxpayers may avoid their federal tax obligations based on “straw man” arguments, as described in this revenue ruling, or on similar arguments. The formatting of a taxpayer’s name in all upper-case letters on government documents or elsewhere has no significance whatsoever for federal tax purposes. Courts have rejected as frivolous “straw man” arguments. United States v. Furman, 168 F.Supp.2d 609 (E.D. La. 2001) (rejecting criminal defendant’s contention that he was not properly identified in federal government documents that misspelled his name or used his properly spelled name in all capital letters). In addition, courts repeatedly have rejected similar arguments based on frivolous claims that purport to provide a basis for avoiding taxes, and have penalized taxpayers who have made these arguments. See, e.g., Lovell v. United States, 755 F.2d 517, 519 (7th Cir. 1984) (“[A]ll individuals, natural or unnatural, must pay federal income tax on their wages . . ..”); United States v. Romero, 640 F.2d 1014, 1017 (9th Cir. 1981) (“[I]n our system of government, one is free to speak out in open opposition to the provisions of the tax laws, but such opposition does not relieve a citizen of his obligation to pay taxes.”).

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability by refusing to file returns and pay tax, and will disallow deductions or other claimed tax benefits, including the exclusion of income, based on frivolous “straw man” arguments. In addition to liability for the tax due plus statutory interest, individuals who claim tax benefits on their returns, or fail to file returns, based on these and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; (2) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (3) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (4) a $500 penalty under section 6702 for filing a frivolous return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these theories also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which there is a significant fine and imprisonment for up to 5 years; (2) willful failure to file a return under section 7203, for which there is a significant fine and imprisonment for up to one year; or (3) making false statements on a return, statement, or other document under section 7206, for which there is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these theories and those who assist taxpayers in claiming tax benefits based on these frivolous arguments may face penalties and also may be enjoined by courts pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which there is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return, statement or other document under the internal revenue laws.

HOLDING

The use of different forms of a taxpayer’s name (different spellings, capitalization, etc.) does not create a “straw man” that allows taxpayers to avoid their federal tax obligations. Claims based on “straw man” arguments or on similar arguments, to avoid federal tax obligations, are frivolous and have no merit.

PENALTIES FOR FRIVILOUS ARGUMENT

. James Kubon, Petitioner v. Commissioner, Respondent., Dkt. No. 1795-04L , T.C. Memo. 2005-71, April 4, 2005 .

MEMORANDUM OPINION

HAINES, Judge : This case is before the Court on respondent's motion for summary judgment filed pursuant to Rule 121 and to impose a penalty under section 6673.¹

Background.

On his 1999 tax return, petitioner reported zero income and requested a full refund of all taxes withheld. Petitioner attached to his tax return two pages of tax-protester boilerplate which asserted that no section of the Internal Revenue Code made him liable for income taxes.

Discussion

Petitioner argues that his wages are not taxable income. His arguments are indistinguishable from those that have been uniformly rejected, and no further discussion of them is warranted. See United States v. Connor, 898 F.2d 942, 943 (3d Cir. 1990); Coleman v. Commissioner, 791 F.2d 68, 70 (7th Cir. 1986); Sauers v. Commissioner, 771 F.2d 64, 66 (3d Cir. 1985), affg. T.C. Memo. 1984-367; Connor v. Commissioner, 770 F.2d 17, 20 (2d Cir. 1985); Biermann v. Commissioner, 769 F.2d 707, 708 (11th Cir. 1985); Waters v. Commissioner, 764 F.2d 1389, 1389 (11th Cir. 1985); Perkins v. Commissioner, 746 F.2d 1187, 1188 (6th Cir. 1984), affg. T.C. Memo. 1983-474; Knighten v. Commissioner, 702 F.2d 59, 60 (5th Cir. 1983); Funk v. Commissioner, 687 F.2d 264, 264 (8th Cir. 1982), affg. T.C. Memo. 1981-506.


Petitioner's allegations regarding the authority of the individual issuing the notice of intent to levy are meritless. The Secretary or his delegate (including the Commissioner) may issue collection notices, and authority to issue notices regarding liens and to levy upon property has in turn been delegated to specified collection and compliance personnel. Secs. 6320(a), 6330(a), 7701(a)(11)(B) and 12(A)(i), 7803(a)(2); secs. 301.6320 -1(a)(1), 301.6330 -1(a)(1), Proced. & Admin. Regs.; Delegation Order No. 191 (Rev. 3, June 11, 2001 ); Delegation Order No. 196 (Rev. 4, Oct. 4, 2000 ); see also Craig v. Commissioner, 119 T.C. 252, 263 (2002); Everman v. Commissioner, T.C. Memo. 2003-137.

We conclude that respondent did not abuse his discretion in determining that collection should proceed and that respondent is entitled to judgment as a matter of law.

6. Section 6673 Penalty

Section 6673(a)(1) authorizes the Court to require a taxpayer to pay to the United States a penalty in an amount not to exceed $25,000 whenever it appears to the Court that the taxpayer's position in the proceeding is frivolous or groundless. Sec. 6673(a)(1)(B).

The parties stipulated that petitioner has been provided with a copy of an IRS Notice which outlines common frivolous arguments and has been advised by respondent that the Court may require a taxpayer to pay a penalty up to $25,000 pursuant to section 6673 if it appears to the Court that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position is frivolous or groundless.

In our November 3, 2004 , Order, we gave petitioner the opportunity to present proper issues, as specified in section 6330(c)(2), during his section 6330 hearing. We warned petitioner, however, that if he persisted in making frivolous and groundless arguments, with respect to this case, the Court would be in a position to impose a penalty under section 6673(a)(1). Petitioner ignored the Court's warning and simply pursued his arguments, which the Court has held to be frivolous, groundless, and meritless in numerous cases. Under the circumstances, we shall grant respondent's motion and impose a penalty on petitioner pursuant to section 6673(a)(1) in the amount of $10,000.

We have considered all of petitioner's contentions, arguments, and requests that are not discussed herein, and we conclude that they are without merit or irrelevant.