TAX DEFIERS AND THE TAX GAP: STOPPING “FRIVOLOUS SQUARED” BEFORE IT SPREADS Nathan J. Hochman * I. INTRODUCTION Ever since the Sixteenth Amendment was ratified over ninety-five years ago and then upheld by the Supreme Court three years later,1 the central debate over income taxation has focused on what will be taxed, how much it will be taxed, and for how long it will be taxed. Over those many years, Americans have legitimately protested the “what,” the “how much,” and the “how long.” These “tax protestors” have sought change by working within the system, ad- vocating tax legislation before Congress, commenting on proposed IRS regula- tions interpreting the tax laws, and arguing before the Tax Court and other fed- eral courts about the meaning and application of particular tax laws. These “tax protestors” do not question the underlying legitimacy of the United States’ tax system but channel their protest to the details of the taxes themselves. Over the last fifty years, the term “tax protestor” has devolved from de- scribing those individuals engaged in legally valid and protected conduct to those individuals engaged in illegitimate tax defiance, who deny the legal un- derpinnings of the tax system itself. This “tax defier” conduct has taken many forms, including filing frivolous returns or no returns at all, flooding the IRS and courts with meritless arguments and positions that courts have uniformly * Nathan J. Hochman served as the Assistant Attorney General of the United States Department of Justice’s Tax Division from 2008 to 2009, and now practices as a partner at Bingham McCutchen LLP. Prior to serving as the Assistant Attorney General, he was a prin- cipal at the tax litigation law firm of Hochman, Salkin, Rettig, Toscher & Perez, P.C., and before that an Assistant United States Attorney in the United States Attorney’s Office’s Criminal Division in the Central District of California. Mr. Hochman received his J.D. from Stanford Law School and a B.A. from Brown University. Mr. Hochman would like to thank Jen Ihlo, the National Director of the Tax Division’s National Tax Defier Initiative, and Jen- nifer Vozne, former counsel to the Assistant Attorney General, for their invaluable research, support and assistance in writing this Article. The views expressed herein are the author's and do not represent the official position of Department of Justice. 1. Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916). 69 70 STANFORD LAW & POLICY REVIEW [Vol. 20:1 rejected for decades, and trying to pay off their tax debts with fictitious finan- cial instruments, such as comptroller warrants, sight drafts and bills of ex- change. The tax defiers have evolved their distribution network for their posi- tions over the years, from initially peddling their products to a relatively small audience in books, then audiotapes, videotapes, and DVDs, to reaching out to mass audiences through websites and blogs on the Internet that can be accessed with the click of a mouse. The irony of the tax defiers’ situation is that the very system that they re- ject pays for their ability to live in and reject that system. While tax defiers refuse to pay their fair share of taxes, they have no problem accepting their fair share of the benefits paid for by that tax system, including the courts they liti- gate in, the roads they drive on, the police and fire departments they call during emergencies, the military that defends them, the sanitation trucks they rely on to pick up their garbage, and the regulators they count on to ensure the safety of the food they eat, the water they drink, and the air they breathe. These tax defi- ers seemingly do not believe that, as Justice Oliver Wendell Holmes once said, “[T]axes are what we pay for civilized society.”2 They simply assume that someone else will bear that burden. To them, their cost to live in a “civilized society” is essentially nothing. But any “civilized society,” and in particular America’s “civilized society” is enormously expensive to operate—over $2.65 trillion annually at current count.3 To raise these funds through a voluntary self-assessment tax system, tax defiers’ arguments must be promptly addressed and effectively defeated to en- sure maximum compliance with the law. Such maximum compliance among the nation’s over 138 million taxpayers filing over 235 million returns annual- ly4 can only be achieved if honest taxpayers, who represent well over eighty- five percent of all taxpayers,5 have trust in the overall fairness of the system. Maintaining maximum compliance and a high level of trust in the system’s fairness are crucial, in turn, in addressing the Tax Gap—the gap between the amount of tax owed and collected on an annual basis. All efforts to ameliorate 2. See Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting). 3. Office of Management and Budget, The Budget for Fiscal Year 2008, Budget To- tals at 151, available at http://www.whitehouse.gov/omb/budget/fy2008/summary tables.aspx. 4. INTERNAL REVENUE SERV., INTERNAL REVENUE SERVICE DATA BOOK 4 (2007) , available at http://www.irs.gov/pub/irs-soi/07databk.pdf. 5. See INTERNAL REVENUE SERV. OVERSIGHT BD., 2007 TAXPAYER ATTITUDE SURVEY 2 (2008), available at http://www.treas.gov/irsob/reports/2008/2007_Taxpayer- Attitude-Survey.pdf (stating that over ninety-five of taxpayers completely or mostly agree that it is every American’s civic duty to pay their fair share of taxes, and over eighty-nine of taxpayers completely or mostly agree that everyone who cheats on their taxes should be held accountable). 2009] TAX DEFIERS AND THE TAX GAP 71 the Tax Gap are premised on the bedrock belief in the tax system’s legitimacy. Should such legitimacy come into question, the Tax Gap could well spiral up- wards, rather than trend downwards. This Article will address the impact of the conduct of illegitimate “tax defiers,”6 as opposed to legitimate “tax protestors,” on the Tax Gap.7 To under- stand this impact, the Article will first identify the arguments tax defiers have promoted and then highlight the consistent responses that the courts have had rejecting these arguments. Second, the Article will focus on the potential im- pact tax defiers may have on the Tax Gap. Finally, the Article will detail the National Tax Defier Initiative recently promulgated by the United States De- partment of Justice’s Tax Division to combat current and future tax defier con- duct. II. TAX DEFIERS’ FRIVOLOUS CONSTITUTIONAL ATTACKS ON THE TAX SYSTEM Since the 1950s, tax defiers have unsuccessfully utilized a variety of con- stitutional arguments to attempt to undermine the legitimacy of the income tax system. These constitutional attacks have spanned from direct attacks on the Sixteenth Amendment to the invocation of the First, Fifth, Eighth, Ninth, Thir- teenth and Fourteenth Amendments in support of their contentions. All such arguments have met been met with uniform and consistent rejection by the tax courts, district courts, and appellate courts that have addressed them. A. Sixteenth Amendment Frivolous Claims A starting point for many tax defiers’ constitutional claims has been the Sixteenth Amendment itself. Ratified in 1913, the Sixteenth Amendment states: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and 6. Others have used the term “tax deniers” to describe those who attempt to rational- ize and justify their refusal to accept indisputable historical facts concerning the constitutio- nality of the income tax system. See, e.g., Daniel Evans, The Tax Protestor FAQ, http://evans-legal.com/dan/tpfaq.html. While “tax deniers” fall within the subset of “tax defiers,” tax defiance conduct goes well beyond merely denying the legitimacy of the tax system to include affirmative actions taken against the government in pursuit of misguided beliefs (e.g., filing false tax returns, recording fraudulent liens on government personnel, submitting bogus bills of exchanges to pay for tax debts). 7. As part of the Internal Revenue Service Restructuring and Reform Act of 1998, the IRS was prohibited from tracking “tax protesters” in its databases. 26 U.S.C. § 6651 (2008). For those tax defiers who file tax returns with tax defier positions in them or fail to file tax returns at all based on these arguments, the IRS classifies them as “frivolous non- filers.” 72 STANFORD LAW & POLICY REVIEW [Vol. 20:1 without regard to any census or enumeration.” The Sixteenth Amendment arose, in part, in response to the Supreme Court’s two decisions in Pollock v. Farmers’ Loan and Trust Co.,8 which overturned Congress’ efforts to tax in- come deriving from property by finding such tax to be a non-apportioned “di- rect tax” in violation of Article I, Section 9 of the Constitution.9 Tax defiers have challenged the validity of the Sixteenth Amendment with arguments rang- ing from alleging its improper ratification to asserting that it did not cure the problem of income taxes being impermissible non-apportioned “direct taxes” on property. With respect to the ratification argument, tax defiers posit that the Six- teenth Amendment was never properly ratified and therefore not part of the Constitution. They contend that thirty-four out of the thirty-eight states ratified an amendment that contained errors of diction, capitalization, punctuation and spelling; since at least three-fourths of the states did not approve exactly the same text, they proclaim that the amendment did not go into effect.10 As the courts have discussed, this argument is not new but was considered by Secretary of State Philander Knox in 1913 when he certified that the amendment had been ratified.