G THE B IN EN V C R H E S

A N 8 D 8 B 8 A E 1 R SINC Web address: http://www.nylj.com

VOLUME 234—NO. 52 WEDNESDAY, SEPTEMBER 14, 2005 TAX LITIGATION ISSUES

BY JOHN J. TIGUE JR. AND JEREMY H. TEMKIN Revenge of the Tax Protesters

ax protesters, or individuals noted that courts “have consistently who claim that they are not rejected …arguments [raised by tax legally required to pay taxes, protesters] and imposed substantial penal- have been around for a long ties on those taking these unsupportable T positions. Those potentially tempted by time. In recent years, however, the num- ber of tax protesters appears to have these schemes need to realize that they increased as numerous individuals and carry a heavy price for both the taxpayers 2 groups actively market and sell a variety of John J. Tigue Jr. Jeremy H. Temkin and the promoters.” As set forth in IRS materials supporting the claim that Notice 2005-30, civil and criminal American citizens are not obligated to pay penalties apply to taxpayers who make income taxes. As a result, the IRS has increased its frivolous arguments. Civil penalties Among the arguments raised by tax focus on prosecuting individuals who include a $500 penalty for filing a protesters are: (1) that the 16th make such arguments, which it views as frivolous income tax return and a penalty Amendment to the Constitution, which willful tax evasion. In March of this year, of up to $25,000 if a taxpayer pursues authorizes income taxes, was never IRS Commissioner Mark W. Everson frivolous arguments in court.3 Moreover, ratified; (2) that the Internal Revenue warned taxpayers of the dangers of appellate courts not only have affirmed Service (IRS) was never properly succumbing to tax protesters. He stated, the Tax Court’s imposition of penalties on established by Congress and is an illegal “Every filing season, thousands of taxpay- tax protesters, but also have imposed addi- entity; (3) that the Internal Revenue ers hear groundless theories suggesting tional penalties in some circumstances.4 Code (IRC) was not properly enacted; (4) that they don’t have to pay taxes or file Tax protesters and promoters of tax that “income” is not defined or does not returns. We want people to know the protest arguments also may face criminal include wages, tips or other compensation; truth about these frivolous arguments: prosecution for attempting to evade or and (5) that only foreigners and citizens of they don’t work.”1 Available on the IRS’s defeat taxes, willful failure to file a return U.S. territories (such as Puerto Rico and Web site are documents detailing the or making false statements on a return, Guam) and Washington, D.C., are obliged agency’s position, including IRS Notice statement or other document.5 to pay taxes. Despite the fact that a 2005-30, which describes 23 arguments Indeed, the IRS’s successful pursuit and majority of the population may classify made by tax protesters and five revenue punishment of tax protesters is evidenced these arguments and their proponents as rulings issued in conjunction with the by the agency’s statistics with respect to outlandish and incredible, many people notice that deal with specific protester one type of protester referred to as a are citing these assorted theories as claims frequently made to the IRS. “nonfiler.” The IRS describes nonfilers as reasons not to pay taxes. Finally, the IRS has created and maintains those who rely on the “zero tax theory” to a 56-page document entitled “The Truth argue they are not subject to tax on their John J. Tigue Jr. is a principal in About Frivolous Tax Arguments,” wages and other income earned or derived Morvillo, Abramowitz, Grand, Iason & addressing the arguments promoted by tax within the United States. For the fiscal Silberberg and a fellow of the American College protesters and their organizations. This year 2004, the IRS initiated 417 investiga- of Trial Lawyers. Jeremy H. Temkin also document, also available on the service’s tions into those tax protesters who did not is a principal in Morvillo, Abramowitz. Web site, cites recent cases decided by the file returns or filed returns with zero tax. Gretchan R. Ohlig, an attorney, assisted courts against tax protesters. Of those investigated, 317 were referred in the preparation of this article. IRS Chief Counsel Donald L. Korb for prosecution and 277 indictments or NEW YORK LAW JOURNAL WEDNESDAY, SEPTEMBER 14, 2005 informations were brought as a result. written publication of materials protesting cases involving taxpayers as opposed to Moreover, during fiscal 2002, 194 individ- the payment of taxes to the federal their professional advisors or accountants. uals identified by the IRS as nonfiling government was evidence of his wrongful The IRS declined to comment on the tax protesters were sentenced, with an intent in preparing the company’s tax verdict in favor of Mr. Banister, but the incarceration rate of 92.3 percent, up returns. In rebuttal, Mr. Banister had decision has received much attention more than 10 percent from the prior introduced an April 2001 e-mail between within the tax protest movement. Details year, and with an average prison term of a Department of Justice lawyer, who of the case are thoroughly documented on 36 months.6 previously had worked with Mr. Banister Web sites maintained by Mr. Banister and Despite advances by the IRS in its when he was at the IRS, and the chief of the organizations in which he is involved, pursuit of tax protesters, the tax protest the Western Division of the Department and the verdict is heralded as a landmark movement is not fading into the sunset. of Justice’s Tax Division, which apparent- in the movement’s fight against taxes. Rather, it continues unabated, strength- ly showed that the government viewed However, it remains to be seen whether ened by occasional successes in the Mr. Banister to be a visible player in the verdict portends larger problems for courtroom. These courtroom victories are the tax protest movement. Using this the IRS in its pursuit of tax protesters. lauded on the tax protesters’ Web sites, evidence, Mr. Banister argued that the while loses are diminished or ignored. government’s prosecution was personal ‘Schulz v. IRS’ Furthermore, as noted by Commissioner rather than based on evidence of any Everson, a 2003 study shows that wrongdoing. He argued that in preparing Unlike its loss in the Banister trial, the 17 percent of Americans believe that it is the protest returns, he was merely trying IRS won its case against Robert Schulz, OK to cheat on taxes, up from 11 percent to obtain answers to questions posed by the chairman of a tax protester organiza- in 1999.7 his client regarding the legality of federal tion called We the People Foundation for income taxes.9 Constitutional Education Inc. However, The Criminal Case of Joseph Immediately after the trial, two jurors as detailed in our March 2005 article in related their view that although the IRS this journal, the IRS’s victory was far from Banister may have disagreed with the position unambiguous. In Schulz v. Internal Revenue The most recent victory by the tax taken by Mr. Banister in preparing the Service (Schulz I),11 Mr. Schulz, acting pro protest movement occurred in a federal tax returns, the government had failed se, sought to quash an administrative courtroom in California. In November to prove that the returns contained summons he had received from the IRS. A 2004, Joseph Banister, a former IRS any false information. Further, they said magistrate judge found that the district investigator and practicing certified public that Mr. Banister was honestly trying to court lacked jurisdiction to hear Mr. accountant involved in the tax protest get answers to his questions, which the Schulz’s motion because the IRS had movement, was indicted on charges that government consistently refused to neither attempted to enforce the sum- he helped prepare false tax returns. provide. Upon leaving the courtroom, Mr. mons in court nor sought any other reme- Specifically, Mr. Banister was charged Banister reportedly was met with cheers dy or sanction. Mr. Schulz appealed this with three counts of assisting in the from a crowd of supporters including decision, which was affirmed by the preparation of false tax returns and approximately 50 fellow tax protesters. district court and, ultimately, the U.S. one count of conspiracy to defraud the His attorney claimed that the verdict Court of Appeals for the Second Circuit. U.S. government. These charges stemmed meant that “American citizens have The Second Circuit’s per curiam from Mr. Banister’s preparation of tax the right to ask the government questions opinion went beyond the jurisdictional returns for a small California company and the government has a duty to answer issue, however, and found that “absent an run by another well-known tax protester, in good faith.”10 effort to seek enforcement through a Walter Thompson. Upon his indictment, In an interesting twist to the case, Mr. federal court, IRS summonses apply no Commissioner Everson commented Banister’s client, Mr. Thompson, had been force to taxpayers, and no consequence that “Joe Banister, a former IRS agent, convicted in a separate trial of failure to whatever can befall a taxpayer who knew exactly what he was doing. Tax withhold and pay taxes from the refuses, ignores, or otherwise does not professionals and employers who break the paychecks of his employees, and was comply with an IRS summons until that law will be held accountable.”8 sentenced to six years in prison. Although summons is backed by a federal court However, on June 23, 2005, a jury Mr. Thompson also was acquitted of the order.” Furthermore, the court found that acquitted Mr. Banister of all charges. conspiracy charges against him, his where a court grants an IRS request for According to press reports, the jury conviction as compared with Mr. enforcement, the taxpayer must be given a apparently rejected the government’s Banister’s acquittal may mark a difference reasonable opportunity to comply and argument that Mr. Banister’s oral and in the way juries apply criminal tax laws in “cannot be held in contempt, arrested, NEW YORK LAW JOURNAL WEDNESDAY, SEPTEMBER 14, 2005 detained, or otherwise punished for ance, not just for their failure to many successes under its belt, however, refusing to comply with the original IRS comply with a subsequent court order. it is unlikely that the IRS will be summons, no matter the taxpayer’s Furthermore, the IRS argued that the discouraged in its pursuit of tax protesters reasons or lack of reasons for so refusing.” attachment remedy set forth in §7604(b) or the deconstruction of the often Rather, only an individual’s refusal to of the code applied to a taxpayer’s initial “frivolous” arguments they make. comply with an order of the district court failure to comply with the administrative would subject him to sanctions. summons as well. ••••••••••••••••••••••••••••••• The IRC contains two relevant provi- The Second Circuit granted the IRS’s 1. Press Release, Internal Revenue Service, “IRS sions that pertain to the enforcement of motion for rehearing, but only for the Rebuts Those Making Frivolous Arguments on Paying Taxes” (March 14, 2005) (available at administrative summons. Section 7604(b) limited purpose of clarifying its prior http://www.irs.gov/irs/article/0,,id=136751,00.html). provides that the IRS may apply to the opinion. In Schulz v. IRS (Schulz II), the 2. Id. court for an “attachment” against the court modified its prior opinion only to 3. 26 U.S.C. §§6702 and 6673. taxpayer for contempt “to enforce obedi- recognize that §7604(b) of the code 4. Recently, the Fifth Circuit added $4,000 to the Tax Court’s initial sanction, Raynor v. Comm’r, 2003 ence to the requirements of the summons allowed courts to issue attachments or U.S. App. Lexis 14173 (5th Cir. 2003), and the First and to punish [the taxpayer] for his default arrests, even without a prior court order Circuit imposed a $2,000 sanction against a taxpayer or disobedience.” And §7210 provides enforcing the administrative summons, who intentionally challenged a collection action in District Court rather than Tax Court, Marino v. that individuals who “neglect to appear or “to ensure attendance at an enforcement Brown, 357 F.3d 143 (1st Cir. 2004). to produce” summoned documents may be hearing ‘[i]f the taxpayer has contuma- 5. 26 U.S.C. §§ 7201, 7203 and 7206. See also charged with a misdemeanor. ciously refused to comply with the admin- Hillen v. Comm’r, Docket No. 1441-03L (2004) In Schulz I, the IRS argued that some or istrative summons and the Service fears he (imposing penalty of more than $14,000 against attor- ney who made frivolous arguments on behalf of his 14 all of these sanctions may be imposed by may flee the jurisdiction.’” client); the court as a result of a taxpayer’s failure Otherwise, the court’s holding as set http://www.irs.gov/compliance/enforcement/arti- to comply with the original summons, forth in Schulz I remained intact. Thus, a cle/0,,id=133814,00.html (listing more than 50 civil and criminal injunctions brought against promoters of rather than a failure to obey a subsequent party who refuses, ignores, or otherwise tax protest arguments in 2005). court order enforcing that summons. As does not comply with an IRS summons 6. Internal Revenue Service, Statistical Data— noted above, the Second Circuit rejected cannot be punished until that summons is Nonfiler Enforcement (available at http://www. this position, relying on the Supreme backed by a federal court order. Moreover, irs.gov/compliance/enforcement/article/0,,id=106380, 00.html). 12 Court’s opinion in Reisman v. Caplin. once enforcement of the order is sought, 7. See Hank Ezell, “Much to IRS’s Chagrin, Tax Shortly after the Second Circuit released the taxpayer must be given a reasonable Protesters Won’t Go Away,” Cox News Service, July its opinion in Schulz I, the We the People opportunity to respond and, if the govern- 18, 2005 (available at http://www.bradenton.com/ mld/bradenton/business/12159344.htm?template=con Foundation proclaimed the opinion a ment’s request is granted, the taxpayer tentModules/printstory.jsp). victory for taxpayers, posting the headline must be given a reasonable time to 8. Peymon Mottahedeh, “Famed IRS Whistleblower “Tax Payers Free to Ignore IRS Summons” comply. The Second Circuit reasoned that Gets Tax Fraud Acquittal,” American Free Press, Issue # 28, July 14, 2005 (available at www.americanfreep- on its Web site.13 The article went on to failure to provide such an opportunity for ress.net /html/famed_irs_whistleblower.html say that the decision had “nullified key full “judicial review before any coercive 9. Id. enforcement provisions of the [code], sanctions may be imposed” would result in 10. David Cay Johnston and Carolyn Marshall, stripping the IRS of much of its power to a violation of the taxpayer’s constitutional “Protesters Win a Case Over I.R.S.; U.S. Jury Acquits Preparer of Returns,” The New York Times, June 24, 15 compel compliance with its administra- due process. While the IRS still may seek 2005. tive demands for personal and private review of Schulz II by filing a petition for 11. 395 F.3d 463, 465 (2nd Cir. 2005); see John J. property.” rehearing en banc (as authorized by the Tigue and Jeremy H. Temkin, Tax Litigation Issues: “Recent Second Circuit Cases”, New York Law Apparently troubled by the decision Second Circuit’s opinion) or a petition for Journal, March 17, 2005. and its fallout, the IRS moved to a writ of certiorari, the impact of this case 12. 375 U.S. 440 (1964). amend the opinion or, in the alternative, is significant in that it diminishes the 13. See http://www.givemeliberty.org. extend the time for filing a petition IRS’s power to enforce its subpoenas 14. 413 F.3d 297, 299 n.1 (2nd Cir. 2005). 15. Id. at 298-299, 303. for rehearing en banc. In its motion, the against taxpayers. IRS distinguished between a taxpayer who in good faith refused to comply with This article is reprinted with permission from the Conclusion an administrative summons from those September 14, 2005 edition of the NEW YORK LAW JOURNAL. © 2005 ALM Properties, Inc. whose refusal was willful or in bad faith. In all likelihood, the results of the All rights reserved. Further duplication without In the case of the latter, the IRS argued Banister and Schulz cases, coupled with permission is prohibited. For information, contact that such individuals were subject to the continued strength of the tax protest ALM, Reprint Department at 800-888-8300 prosecution for their initial noncompli- movement, has given the IRS pause. With x6111. #070-09-05-0015