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| Taxation in the United States |
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In the United States, the term “protest” as applied to a tax generally means “a declaration by a payer, esp. of a tax, that he does not concede the legality of a claim he is paying”Webster’s New World Dictionary of the American Language, p. 1142 (World Publishing Company, 2d Coll. Ed. 1970). Similarly, Black’s Law Dictionary defines a tax protest as:
The formal statement, usually in writing, made by a person who is called upon by public authority to pay a sum of money, in which he declares that he does not concede the legality or justice of the claim or his duty to pay it, or that he disputes the amount demanded; the object being to save his right to recover or reclaim the amount, which right would be lost by his acquiescence. Thus, taxes may be paid under "protest.”Black’s Law Dictionary, p. 1101 (5th Ed. 1979).
In the case of U.S. Federal taxes, however, the taxpayer\'s failure to protest does not deprive the taxpayer of the right to file an administrative claim with the Internal Revenue Service (IRS) for a refund and, if the claim is not allowed by the IRS, to sue for a tax refund in Federal district court.See generally ; ; and .
The term "protest" is also used to describe a taxpayer\'s formal written request for review, by the Appeals Division of the IRS, after the IRS issues a "Thirty-Day Letter" proposing an increased tax liability following an IRS examination of a tax return.Donald C. Alexander & Brian S. Gleicher, "IRS Procedures: Examination and Appeals," p. A-46 & A-47, Tax Management Portfolios, Vol. 623, Tax Management, Inc., a subsid. of The Bureau of National Affairs, Inc. (2d ed. 2004). Donald C. Alexander is a former Commissioner of Internal Revenue.
In 1972, the U.S. District Court for the Eastern District of Pennsylvania used the term tax "protestor" (protester) in United States v. Malinowski. This case, however, involved a taxpayer who was a member of the Philadelphia War Tax Resistance League who was protesting the use of tax money in the Vietnam War. The taxpayer was not making arguments that the tax law itself was invalid; he was essentially protesting the war, not the tax. The taxpayer had filed a false Form W-4, and admitted he knew that he was not legally entitled to claim the exemptions (allowances) he claimed on the W-4. Thus, Malinowski might be termed a tax resister rather than a tax protester. He was convicted, and his motion for a new trial or acquittal was denied.See generally United States v. Malinowski, 347 F. Supp. 347, 73-1 U.S. Tax Cas. (CCH) paragr. 9355 (E.D. Pa. 1972), aff\'d, 472 F.2d 850, 73-1 U.S. Tax Cas. (CCH) paragr. 9199 (3d Cir. 1973), cert. denied, 411 U.S. 970 (1973).
Beginning in the mid-1970s, U.S. Federal courts began using the term “tax protester” in still another, more narrow sense -- to describe persons who raised frivolous arguments about the legality of Federal taxes, particularly income taxes. This particular technical sense of the term is the sense described in the remainder of this article.
The first two federal cases to use the term in this manner were Gilbert v. Miriami75-2 U.S. Tax Cas. (CCH) paragr. 9603 (N.D. Ill. 1975). and United States v. Scott,521 F.2d 1188 (9th Cir. 1975)., coincidentally decided only two days apart. In Gilbert v. Miriami, the taxpayer (Walter Gilbert) sued the District Director of Internal Revenue (Charles Miriami) asking for injunctive and declaratory relief from enforcement of the internal revenue laws, including a request for a judgment that the statute prohibiting most suits to restrain the assessment or collection of Federal taxes was unconstitutional. The court rejected the taxpayer\'s claims. In Scott, the court noted that an undercover government agent had sworn out an affidavit regarding the agent’s infiltration into a "tax protester" organization. The case itself upheld the conviction of the leader of that organization, who had failed to file tax returns from 1969 to 1972, based on Constitutional arguments against the validity of the income tax.
A person could be both a tax protester and a tax resister if he or she believes that tax laws do not apply to him or her and also believes that taxes should not be paid based on the use to which the taxes are put. Some tax resisters have put forth legal arguments for their position — for instance that they cannot pay taxes for nuclear weapons development because this would put them in violation of the Nuremberg Principles — that could be considered varieties of tax protester theories.
While there have been people throughout history who challenged the assessment of taxes as beyond the power of the government, the modern tax protester movement began after World War II. One of the first people to fit this description was Vivien Kellems, a Connecticut industrialist and political activist who in 1948 refused to withhold taxes from the wages of her employees based on the claim that the government had no power to require such withholding. Kellems lost a case contesting withholding. She later asserted that the income tax itself was not being assessed in accordance with the law.
The tax protester movement began to develop a greater following in the late 1960s and early 1970s. Many books, lectures and other materials promised to help people avoid having to pay taxes. In 1975, the term “tax protester” began to appear in reported court decisions.
The Seventh Circuit Court of Appeals summed up one case as follows:
Like moths to a flame, some people find themselves irresistibly drawn to the tax protestor movement\'s illusory claim that there is no legal requirement to pay federal income tax. And, like the moths, these people sometimes get burned. Lorin G. Sloan believed these claims and because he acted upon them now faces four months in a federal prison; there can be little doubt that he has been burned.
[…]
The real tragedy of this case is the unconscionable waste of Mr. Sloan’s time, resources, and emotion in continuing to pursue these wholly defective and unsuccessful arguments about the validity of the income tax laws of the United States. Despite our rejection of Mr. Sloan’s legal analysis of the tax laws, we are not unmindful of the sincerity of his beliefs. On the other hand, we are less sure of the sincerity of the professional tax protestors who promote their views in literature and meetings to persons like Mr. Sloan, yet are unlikely ever to face the type of penalties incurred by him.United States v. Sloan, 939 F.2d 499 (7th Cir. 1991), cert. denied, 502 U.S. 1060 (1992).
Ideas associated with the tax protester movement have been forwarded under different names over time. These ideas have been put forth, for example, in the broader Christian Patriot and Posse Comitatus movements, which generally assert that the Constitution has been usurped by the federal government.
Arguments made by tax protesters generally fall into several categories: that the Sixteenth Amendment was never properly ratified; that the Sixteenth Amendment does not permit the taxation of individual income, or particular forms of individual income; that other provisions of the Constitution such as the First, Fifth, or the “Missing Thirteenth Amendment” eliminate an obligation to file a return; that citizens of the states are not also citizens of the United States; that the statutes enacted by the United States Congress pursuant to their constitutional taxing power are defective or invalid; and that the government and the courts engage in various conspiracies to conceal the above deficiencies.
In another Seventh Circuit case, the Court observed:
Some people believe with great fervor preposterous things that just happen to coincide with their self-interest. “Tax protesters” have convinced themselves that wages are not income, that only gold is money, that the Sixteenth Amendment is unconstitutional, and so on. These beliefs all lead — so tax protesters think — to the elimination of their obligation to pay taxes.Coleman v. Commissioner, 791 F.2d 68, 69 (7th Cir. 1986).
In the United States, "protesting" Federal income taxes is not, in and of itself, a criminal offense. The United States Congress has, however, enacted a law imposing a monetary civil penalty under Internal Revenue Code section 6702 for taking a frivolous position on a U.S. Federal tax return. The penalty is $500 for positions taken on or before March 15, 2007. For positions taken after that date, the penalty amount has been increased to $5,000.See , as amended by section 407 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432. [Note: The text of section 6702 at the link to the Legal Information Institute at the Cornell University Law School web site, showing a $500 penalty amount, has not yet been updated, as of late September 2007, to reflect the $5,000 penalty.] The Internal Revenue Service has issued a list of positions considered to be legally frivolous.See Notice 2008-14, I.R.B. 2008-4 (Jan. 14, 2008), Internal Revenue Service, U.S. Department of the Treasury (superseding Notice 2007-30). Shauna Henline, the senior technical adviser of the Frivolous Return Program at the Internal Revenue Service, has testified that the IRS receives about 20,000 to 30,000 frivolous tax returns per year, and that approximately 100,000 related letters and other documents are received each year.Rick Cundiff, "Trial notebook: a good reason to quit early," Jan. 24, 2008, Ocala Star-Banner, at [2].
In some cases, taxpayers have argued that section 6702, the "frivolous argument" penalty statute, is itself unconstitutional. That argument was rejected in Hazewinkel v. United States (taxpayer\'s arguments -- that sections 6702 and 6703 violate both procedural and substantive due process because there is no right to a prior hearing, and that the word "frivolous" is unconstitutionally vague -- were rejected).84-1 U.S. Tax Cas. (CCH) paragr. 9152 (D. Minn. 1983). See also Pillsbury v. Commissioner, a case in which taxpayer Leecil Pillsbury\'s argument -- that section 6702 violates the Fifth Amendment Due Process Clause of the Constitution -- was ruled to be without merit. In that case, the court also ruled the following taxpayer arguments to be invalid: (1) the argument that section 6702 is an unconstitutional Bill of Attainder; (2) the argument that section 6702 unconstitutionally authorizes the imposition of cruel and unusual punishment; (3) the argument that section 6702 unconstitutionally violates the doctrine of separation of powers; (4) the argument that section 6702 unconstitutionally violates the taxpayer\'s First Amendment rights to petition the government for redress of grievances.Pillsbury v. Commissioner, 84-1 U.S. Tax Cas. (CCH) paragr. 9211 (E.D. Mich. 1984). See also Duke v. Commissioner (tax protester argument that 6702 was unconstitutional was rejected by the court)84-1 U.S. Tax Cas. (CCH) paragr. 9221 (S.D. Tex. 1984). and Kane v. United States (taxpayer\'s argument -- that because section 6702 does not define the term "frivolous," the statute is unconstitutionally vague -- was rejected). 84-1 U.S. Tax Cas. (CCH) paragr. 9229 (D. Ariz. 1984). and Hudson v. United States (taxpayer\'s arguments -- that section 6702 unconstitutionally violates taxpayer\'s First Amendment rights, that section 6702 violates due process rights by failing to provide a hearing before assessment of a penalty, that section 6702 is an unconstitutional bill of attainder, and that section 6702 is unconstitutionally vague -- were ruled to be without merit).766 F.2d 1288, 85-2 U.S. Tax Cas. (CCH) paragr. 9575 (9th. Cir. 1985) (per curiam).
The Congress has enacted Internal Revenue Code section 6673 imposing civil monetary penalties for making frivolous arguments in proceedings before the United States Tax Court. The law provides that frivolous arguments may result in a penalty of up to $25,000.See .
In a non-criminal case in a United States district court, a litigant (or a litigant\'s attorney) who presents any pleading, written motion or other paper to the court is deemed to have certified that, to the best of the presenter\'s knowledge and belief, the legal contentions "are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law".Rule 11(b)(2), Federal Rules of Civil Procedure. Monetary civil penalties for violation of this rule may in some cases be imposed on the litigant or the attorney under the Federal Rules of Civil Procedure.Rule 11(c), Federal Rules of Civil Procedure. In one recent case, for example, the Seventh Circuit issued an order giving such an attorney "14 days to show cause why he should not be fined $ 10,000 for his frivolous arguments".United States v. Patridge, 507 F.3d 1092, 1097 (7th Cir. 2007).
Congress has enacted section 1912 of title 28 of the United States Code providing that in the United States Supreme Court and in the various courts of appeals where litigation by the losing party has caused damage to the prevailing party, the court may impose a requirement that the losing party pay the prevailing party for those damages.See . A person who raises a frivolous argument in a Federal appeals court may also be subject to monetary penalties under Rule 38 of the Federal Rules of Appellate Procedure.See, e.g., Crain v. Commissioner, 737 F.2d 1417, 84-2 U.S. Tax Cas. (CCH) paragr. 9721 (5th Cir. 1984) (per curiam).
Prior to the Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998 Act"), the Internal Revenue Service had defined a tax protester scheme as "any scheme without basis in law or fact for the ostensible purpose of expressing dissatisfaction with the substance, form, or administration of the tax laws be [sic; "by"] either interfering with tax administration or attempting to illegally avoid or reduce tax liabilities."Kline v. Internal Revenue Serv. (In re Kline), 26 Fed. Appx. 849, 851 n.1, 2002-1 U.S. Tax Cas. (CCH) paragr. 50,303 (10th Cir. 2002).[3]
The IRS has not released records indicating who the agency defined as "illegal tax protesters" (coded as TC-148). In testimony before Congress in 1997, former IRS historian Shelley L. Davis contended that the IRS kept lists of citizens "for no reason other than that their political activities might have offended someone at the IRS [ . . . .]" and she charged that "anyone who offers even legitimate criticism of the tax collector is [labeled by the IRS as] a tax protester [ . . . ]"IRS Nightmares Get Senate Hearing: Finance panel hears from parade of witnesses critical of tax agency, CNN AllPolitics, Sept. 24, 1997, at [4]
After the 1997 congressional hearings, Congress responded with the 1998 Act. Subsection (a) of section 3707 of the 1998 Act now prohibits "officers and employees of the Internal Revenue Service" from designating a taxpayer as an “illegal tax protester” or using any similar designation for a taxpayer.Sec. 3707(a), Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998). By contrast, subsection (b) of section 3707 provides: "An officer or employee of the Internal Revenue Service may designate any appropriate taxpayer as a nonfiler, but shall remove such designation once the taxpayer has filed income tax returns for 2 consecutive taxable years and paid all taxes shown on such returns."Sec. 3707(b), Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998).
The IRS has concluded, in Service Center Advice 200107034 dated November 15, 2000, that the statutory prohibition on the use of the term "illegal tax protester" by IRS personnel does not prohibit the IRS from maintaining a database of frivolous tax return filers as part of its Frivolous Return Program. IRS Advice 200107034 states (in part):
According to the IRS:
The Criminal Investigation (CI) division of the Internal Revenue Service investigates reports of violations of the federal criminal tax statutes,See generally "Criminal Investigation (CI) At-a-Glance," Internal Revenue Service, U.S. Dep\'t of the Treasury, at [5]. In the Internal Revenue Code, the CI division is referred to as the "Intelligence Division" of the IRS. See subsection (b) of . The Intelligence Division, formerly known as the "Intelligence Unit," changed its name to "Criminal Investigation" in July of 1978 (see "The History of IRS Criminal Investigation (CI)," Internal Revenue Service, U.S. Dep\'t of the Treasury, at [6]), although section 7608 has not been amended by Congress to reflect this change. including tax evasion under , willful failure to file tax returns or pay tax under , willful filing of false returns under , and violations of other statutes, and refers tax cases to the Tax Division of the U.S. Department of Justice for prosecution.
In United States v. Amon, Alan Amon was convicted of filing a false withholding allowance certificate under . Rather than having been indicted by a grand jury, Amon had been charged by the U.S. Department of Justice in a document called an information. He appealed the conviction, in part on the ground that the government\'s prosecution of him was "unconstitutionally selective." The United States Court of Appeals for the Tenth Circuit noted that the trial court had agreed that Amon was "selected for prosecution because he is an active and outspoken [tax] protester."United States v. Amon, 669 F.2d 1351, 81-2 U.S. Tax Cas. (CCH) paragr. 9495 (10th Cir. 1981), cert. denied, 459 U.S. 825, 103 S. Ct. 57 (1982). The trial court had ruled that Amon\'s "status as an active protester was insufficient to establish selective prosecution" and that no illegal discrimination occurs where the government prosecutes individuals "for actions which they take in failing to comply with the tax laws" where an effect of the prosecution is "to dissuade others from engaging in that kind of tax protest." The Court of Appeals agreed, stating: "Merely showing that the Government elected, under established IRS directives, to prosecute an individual because he was vocal in opposing voluntary compliance with the federal income tax law, without also establishing that others similarly situated were not prosecuted and that the prosecution was based on racial, religious or other impermissible considerations, does not demonstrate an unconstitutionally selective prosecution."Id.
The Department of Justice may obtain a federal court ruling to the effect that a specific tax protester activity constitutes the promotion of an illegal tax shelter under Internal Revenue Code section 6700 (), and may obtain a court order prohibiting that activity under , as it did in the case of United States v. Robert L. Schulz, We the People Foundation for Constitutional Education, Inc., and We the People Congress, Inc..Per curiam opinion, Feb. 22, 2008, case no. 07-3729-cv, United States Court of Appeals for the Second Circuit.
As of February 2008, the Department of Justice is reportedly "planning a crackdown on the so-called tax protester movement."Robert Schmidt, Feb. 20, 2008, "Tax Deniers Targeted by U.S. Officials After Wesley Snipes Case," Bloomberg News, at [7]. Assistant U.S. Attorney General Nathan Hochman, the head of the Tax Division of the Justice Department, has stated: "Too many people succumb to the fallacy, the illusion, that you don\'t have to pay any tax under any set of conditions [ . . . ] That is a growing problem."Id. According to a Bloomberg News report, the U.S. government has a 97 percent conviction rate in criminal tax denier cases.Id.
The Tax Division of the U.S. Department of Justice prosecutes violations of the federal criminal tax statutes, generally after an investigation and referral of a case by the Criminal Investigation division of the Internal Revenue Service. See, e.g., subsection (d) of .
Many Appeals Courts have made blanket statements repudiating tax protester arguments. For example, see the Seventh Circuit case of United States v. Buckner:830 F.2d 102 (7th Cir. 1987).
For the record, we note that the following beliefs, which are stock arguments of the tax protester movement, have not been, nor ever will be, considered "objectively reasonable" in this circuit:
(1) the belief that the Sixteenth Amendment to the Constitution was improperly ratified and therefore never came into being;
(2) the belief that the Sixteenth Amendment is unconstitutional generally;
(3) the belief that the income tax violates the Takings Clause of the Fifth Amendment;
(4) the belief that the tax laws are unconstitutional;
(5) the belief that wages are not income and therefore are not subject to federal income tax laws;
(6) the belief that filing a tax return violates the privilege against self-incrimination; and
(7) the belief that Federal Reserve Notes do not constitute cash or income.
The case of Cheek v. United States involves a U.S. Supreme Court decision on tax protester arguments. The Cheek case involved a tax protester who was prosecuted for tax evasion under . In Cheek, the Court stated:
Claims that some of the provisions of the tax code are unconstitutional are submissions of a different order. They do not arise from innocent mistakes caused by the complexity of the Internal Revenue Code. Rather, they reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable. Thus, in this case, Cheek paid his taxes for years, but after attending various seminars and based on his own study, he concluded that the income tax laws could not constitutionally require him to pay a tax.Cheek v. United States, 498 U.S. 192, at 205-206, 111 S. Ct. 604, 112 L. Ed. 2d 617, 91-1 U.S. Tax Cas. (CCH) paragr. 50,012 (1991) (footnote omitted).
The Supreme Court in Cheek continued:
We do not believe that Congress contemplated that such a taxpayer, without risking criminal prosecution, could ignore the duties imposed upon him by the Internal Revenue Code and refuse to utilize the mechanisms provided by Congress to present his claims of invalidity to the courts and to abide by their decisions. There is no doubt that Cheek, from year to year, was free to pay the tax that the law purported to require, file for a refund and, if denied, present his claims of invalidity, constitutional or otherwise, to the courts. See 26 U.S.C. 7422. Also, without paying the tax, he could have challenged claims of tax deficiencies in the Tax Court, 6213, with the right to appeal to a higher court if unsuccessful. 7482(a)(1). Cheek took neither course in some years, and, when he did, was unwilling to accept the outcome. As we see it, he is in no position to claim that his good-faith belief about the validity of the Internal Revenue Code negates willfulness or provides a defense to criminal prosecution under 7201 and 7203. Of course, Cheek was free in this very case to present his claims of invalidity and have them adjudicated, but, like defendants in criminal cases in other contexts who “willfully” refuse to comply with the duties placed upon them by the law, he must take the risk of being wrong.Cheek, 498 U.S. 192, at 206.
After a remand by the Supreme Court, the tax protester in Cheek was ultimately convicted, and the conviction was upheld on appeal. The Supreme Court refused to hear his petition for review of his conviction after the remand, and he was sent to prison.United States v. Cheek, 3 F.3d 1057, 93-2 U.S. Tax Cas. (CCH) paragr. 50,473 (7th Cir. 1993), cert. denied, 510 U.S. 1112, 114 S. Ct. 1055 (1994).
If a jury finds that a criminal defendant had a subjective good faith belief due to a misunderstanding based on the complexity of the tax law (and not based on an argument about its constitutionality), that belief may be a defense with respect to the element of willfulness, even if the belief is unreasonable.Cheek v. United States, 498 U.S. 192 (1991). This is due to the general mens rea requirement needed to hold someone criminally liable and the specific intent needed in the Cheek case and word willfully in the statute (see specific intent crimes). Persons acquitted of criminal tax evasion may still be prosecuted civilly, and required to pay the taxes assessed, along with civil penalties.
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