Friday, April 29, 2011

Some Stubborn People

Patrick M. Mooney v. Commissioner, TC Memo 2011-35
John A. Raeber v. Commissioner, TC Memo 2011-39
U.S. v. Mostler, 107 AFTR 2d 2011-847

In a fiduciary capacity I once found myself between a tax protester and the IRS. The result was me and the rest of his family being tortured in probate court for over a decade.  Thanks to that experience and a tendency to accumulate generally useless information that I find entertaining, I tend to follow protester type cases.  I have an admiration for stubborn independent thinkers.  There is a limit, though and these folks go well beyond it.

Patrick M. Mooney v. Commissioner, TC Memo 2011-35

 Mr. Mooney did some independent study on the Income Tax Code. He came up with something extraordinary which he shared with the world:

Petitioner operates his own Web site, on which he has published, among other things, an editorial entitled “Unlearning Pays! Hendrickson, Mooney and Others Bring IRS to (Code) in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. Heel.” In that editorial, he wrote: "[A] private sector worker's earnings are not legally subject to the federal tax on income. They never have been, and as long as we still have a Constitution, they never will be.” In that editorial, he also described his plans to request refunds for taxes withheld from his earnings in previous years and to assert that he is not subject to withholding in the current year. He wrote that his strategy is a “get out of income taxes free' Monopoly card” for life.

The website is still there although I didn't find the tax advice or any commentary on how it worked out for him. It was one of those really brilliant plans:

In accordance with the plan described on his Web site, petitioner submitted a Form 1040, U.S. Individual Income Tax Return, for his 2005 tax year with zeros in all boxes for reporting income. He claimed a refund of $2,647.48, which was the amount of Social Security and Medicare taxes that had been withheld from his paychecks. He attached to the Form 1040 two Forms 4852, Substitute for Form W-2, Wage and Tax Statement. In his testimony at trial, petitioner stated that his contention that he had zero income in 2005 is based on his belief that he did not participate in any taxable activity since he lives in the Commonwealth of Virginia and works for private corporations. During 2005, petitioner received $32,207 for services performed for Interstate Industries, Inc. (Interstate Industries), and $2,400 for services performed for the Centre, Inc. (the Centre). Petitioner submitted to both entities Forms W-4 on which he claimed to be exempt from income tax withholding because he expected to have no Federal tax liability. In consequence, the payors withheld no income tax from his compensation.

Despite its fearsome reputation in some circles, the IRS actually has a lot of patience with this type of nonsense:

Respondent also referred petitioner to documents on the Internal Revenue Service Web site titled “Why do I Have to Pay Taxes?” and “The Truth about Frivolous Tax Arguments”, which provided petitioner with specific legal citations explaining why frivolous tax-protester arguments similar to his own have been rejected. Petitioner read both documents.

My mother used to say "Patience is a virtue". I agree and also note that it doesn't always work:

Petitioner dismissed those warnings and respondent's letter, writing that respondent's position has “no merit in the law”, and he protested respondent's disallowance of his refund claim in a letter dated June 15, 2006.

The court found that his behaviour was fraudulent. 

Despite petitioner's being fully informed by respondent about the frivolous nature of his arguments, petitioner's correspondence with respondent has been filled with tax-protester arguments and has not addressed the factual accuracy of respondent's determination. Petitioner has also previously attempted to use similar arguments to dispute his tax liability before this Court, and he is aware that we consider such arguments frivolous and groundless. Petitioner was unsuccessful in his prior litigation before this Court. Yet petitioner has persisted in claiming that he is not subject to Federal income tax or income tax withholding.

I always think of fraud as requiring a little more cleverness than this mishegas.  On the other hand I think the Tax Court cut him a break on the penalty for wasting the Tax Court's time:

We have already imposed a $1,000 penalty pursuant to section 6673(a)(1) on petitioner in petitioner's prior case, during which he raised substantially the same arguments that he has now raised in the instant case. Apparently, the $1,000 penalty did not deter petitioner from making frivolous and groundless arguments before this Court. Accordingly, we shall impose a $2,000 penalty on petitioner pursuant to section 6673. If petitioner persists in raising frivolous arguments before this Court, wasting time and resources that should be devoted to taxpayers with genuine controversies, and continues to refuse to shoulder his fair share of the tax burden, we will not hesitate in the future to impose a significantly higher penalty. Petitioner should think carefully before he files another frivolous or groundless petition with this Court.

The maximum penalty is $25,000.

John A. Raeber v. Commissioner, TC Memo 2011-39

Mr. Raeber was not quite as wacky as Mr. Mooney.  He is probably not a "tax protester" in the classic sense.

In 2006 and 2007 petitioner worked as a self-employed consultant to various architects throughout the world. He operated his consulting business as a sole proprietorship and reported his income and expenses from the business on a Schedule C. Petitioner timely filed Forms 1040, U.S. Individual Income Tax Return, for 2006 and 2007, and attached Schedules C on which he reported gross income of $336,475 and $334,860, respectively, and business expenses of $252,013 and $253,490,  respectively.

Respondent audited petitioner's 2006 and 2007 returns and requested that petitioner substantiate all of his Schedule C business expenses. Petitioner refused to substantiate any of his claimed business expenses, arguing that the substantiation requirement violates his Fifth Amendment rights under the U.S. Constitution. Respondent then issued petitioner a notice of deficiency disallowing petitioner's deductions for business expenses claimed on his Schedules C.

I have some level of sympathy with his argument:

Petitioner argues that reporting his expenses on his 2006 and 2007 Schedules C and signing his returns under penalty of perjury constitute sufficient substantiation.

The Court does not:

We have long held that signing a return under penalty of perjury is not sufficient to substantiate its accuracy.

I think I get the Court's point much as I would like to live in a world where a man's word is his bond.

This is where I start losing sympathy for Mr. Raeber:

At trial the Court warned petitioner that his Fifth Amendment claim would not excuse him from his burden to substantiate his claimed business expenses and offered petitioner an additional opportunity to introduce evidence to satisfy his burden. However, petitioner continued to assert his Fifth Amendment privilege and offered no further evidence to substantiate his claimed business expenses. Accordingly, we sustain respondent's disallowance of petitioner's deductions for business expenses claimed on his Schedules C for 2006 and 2007.

So there you are in a court and the judge is explaining to you that the privilege against self-incrimination, one of the two things that you can learn are in the Constitution by watching television regularly, doesn't apply to tax returns.  (The other thing you learn is "separation of church and state", which actually isn't there).  Do you really think that you are the first person since 1913 to make this argument and that the system is going to see the error of its ways ?

U.S. v. Mostler, Cite as 107 AFTR 2d 2011-847

From a young age, Mostler claims to have held the belief that the payment of federal income taxes was voluntary. Despite this belief, Mostler paid his income taxes from 1982 through 2000. Following some additional research, largely conducted on the Internet, Mostler decided not to pay his taxes from the years 2000 through 2005. Although he was contacted by IRS agents, their refusal to respond to his letters with an affidavit of authority to collect taxes led him to conclude that he still did not have to pay. When an IRS agent arrived at his home, however, it caused some familial strife, and Mostler agreed to pay his back taxes and to continue to pay his taxes going forward. Despite this agreement, he still maintains his belief that the payment of federal income taxes is entirely voluntary.

In a recent post about abusive tax shelters, I observed that if you start talking about whether a six year statute of limitations applies, it is a sign that you have a really bad plan on your hands.  What could be worse ?   What is worse is when you start arguing about jury instructions.

Mostler first argues that the District Court's jury instruction on the issue of willfulness was confusing as a whole, although he concedes that no single statement by the District Court was incorrect. The District Court stated as follows:

The third element the Government must prove beyond a reasonable doubt is that the defendant acted willfully. Willfully means a voluntary and intentional violation of a known legal duty.... Defendant's conduct was not willful if he acted through negligence or a mistake or accident or due to a good faith misunderstanding of the requirements of the law. A good faith belief is one that is honestly and genuinely held. A good faith misunderstanding of the law or a good faith belief that one is not violating the law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable. A defendant's views about the validity of the tax statutes are irrelevant to the issue of willfulness and need not be considered by the jury. However, mere disagreement with the law or belief that the tax laws are unconstitutional or otherwise invalid does not constitute a good faith misunderstanding of the requirements of law. All persons have a duty to obey the law whether or not they agree with it. Any claim that the tax laws are invalid, unconstitutional, or inapplicable is incorrect as a matter of law.

 Mostler asserts that this instruction left the jury confused because although the issue of whether the tax laws actually did apply to him is irrelevant for the jury, the issue of whether he believed that the tax laws applied to him is at the heart of his defense. He argues that a reasonable juror easily could have concluded from this instruction that she was required to convict even if Mostler had a good faith misunderstanding of the mandatory nature of the tax laws.

Sadly the majority of us deluded people who believe that taxes are mandatory will be paying for Mr. Mostler to be closely supervised for 18 months.

As long as we continue to have a self-assessment system and a free country, there are going to be
cases like this.  Weak enforcement and the multiplication of procedural safeguards sometimes make me think that taxes are effectively voluntary for a lot of people.

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