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40.00 ILLEGAL TAX PROTESTERS [FN1]
Updated October 2001
40.01 GENERALLY
40.02 SCHEMES
40.02[1] Paper Terrorism
40.02[1][a] Harassment Schemes
40.02[1][b] Bogus Financial Instruments
40.02[2] Warehouse Banks
40.02[3] Trusts
40.02[4] Church Schemes
40.02[4][a] Generally
40.02[4][b] Vow of Poverty
40.02[4][c] Charitable Contributions
40.02[4][d] First Amendment Considerations
40.03 TRIAL TACTICS/CONSIDERATIONS
40.03[1] Criminal Summons
40.03[2] 26 U.S.C. § 6103(h)(5) Juror Audit Information
40.03[3] IRS Agents' Authority
40.03[4] Indictment Not Sufficient Notice of Illegality
40.03[5] Filing of Protest Documents: Is the Document Filed a Tax Return?
40.03[5][a] Generally
40.03[5][b] What Is a Tax Return?
40.03[5][c] What Is or Is Not a Tax Return: A Matter of Law
40.03[6] Discovery of IRS Master Files
40.03[7] Motions in Limine
40.03[8] Attorney Sanctions
40.03[9] Evidentiary Issues
40.03[9][a] Prior or Subsequent Tax Protest Activities: Rule 404(b)
40.03[9][b] IRS Agent's Testimony and Sequestration
40.03[9][c] Admissibility of IRS Computer Records
40.03[10] Use of Pseudonyms by IRS Revenue Agents and Officers
40.03[11] Jury Nullification
40.04 WILLFULNESS
40.05 DEFENSES
40.05[1] Good Faith
40.05[1][a] Reliance on Return Preparer/Accountant
40.05[1][b] Reliance on Advice of Counsel
40.05[1][c] No Defense in Non-Tax Cases
40.05[2] Constitutional Challenges
40.05[2][a] Fourth Amendment -- Unreasonable Search and Seizure
40.05[2][b] Fifth Amendment -- Due Process; Freedom from Self-incrimination
40.05[2][c] Tax Laws Are Unconstitutionally Vague
40.05[2][d] Sixteenth Amendment Never Ratified
40.05[3] Selective Prosecution and Freedom of Speech
40.05[3][a] Generally
40.05[3][b] Selective Prosecution Defense
40.05[3][c] Freedom of Speech
40.05[4] District Court Lacks Jurisdiction of Title 26 Offenses
40.05[4][a] Generally
40.05[4][b] The Gold-Fringed Flag ("The American Maritime Flag of War")
40.05[5] Filing Income Tax Returns Is Voluntary, Not Mandatory
40.05[6] Wages Are Not Income
40.05[7] Defendant Not A "Person" or "Citizen";
District Court Lacks Jurisdiction Over Non-Persons and State Citizens
40.05[7][a] Generally
40.05[7][b] Filing U.S. Nonresident Alien Income Tax Return
40.05[8] IRS Has Duty to Prepare Returns for Taxpayer (26 U.S.C. § 6020(b))
40.05[9] Violation of the Privacy Act
40.05[10] Federal Reserve Notes Are Not Legal Tender
40.05[11] Form W-2 As Substitute for Form 1040
40.05[12] Paperwork Reduction Act ("PRA") Defense
40.05[13] Lack of Publication in the Federal Register
40.05[14] Taxpayer's Name in Capital Letters or Misspelled
40.05[15] Tax Protest Against Government Spending
APPENDIX
40.01 GENERALLY
Over the past thirty years, illegal tax protesters have developed numerous
schemes to evade their income taxes and frustrate the Internal Revenue Service
under the guise of constitutional and other objections to the tax laws.
Individuals who merely express dissatisfaction with the income tax system are not
criminally prosecuted. However, the right to freedom of speech is not so
absolute as to protect conduct that otherwise violates or incites a violation of
the tax laws. United States v. Citrowske, 951 F.2d 899, 901 (8th
Cir. 1991). See also United States v. Fleschner, 98 F.3d 155 (4th
Cir. 1996) (asking for First Amendment instruction); United States v.
Kuball, 976 F.2d 529, 532 (9th Cir. 1992) (First Amendment does not
protect those who go beyond mere advocacy, and assist in creation and operation
of tax evasion schemes.)
Illegal tax protest schemes range from simply failing to file tax returns
to concealing financial transactions and assets in warehouse banks and trusts to
filing frivolous liens to interfere with IRS investigations. These schemes give
rise to charges under all of the criminal tax statutes. [FN2] Thus, this chapter
should be read in conjunction with those chapters of the Manual
that discuss the various substantive offenses in detail. See
Chapters 8.00 through 29.00, supra.
40.02 SCHEMES
40.02[1] Paper Terrorism
40.02[1][a] Harassment Schemes
Illegal tax protesters have employed various schemes designed to harass IRS
employees and agents, as well as prosecutors and judges, and interfere with
audits and criminal investigations. One of the earliest harassment schemes
involved filing false Forms 1099 with the IRS, reporting that an IRS agent,
judge, or prosecutor had been paid large amounts of money. This scheme was
designed to trigger an IRS audit, during which the Form 1099 recipient would have
to explain the discrepancy between the income reported on his or her return and
that reported on the Form 1099. See, e.g., United States v. Van
Krieken, 39 F.3d 227 (9th Cir. 1994); United States v.
Lorenzo, 995 F.2d 1448 (9th Cir. 1993).
Form 1099 schemes have been prosecuted under a variety of criminal tax
statutes. See, e.g., United States v. Bowman, 173 F.3d 595, 599-600
(6th Cir. 1999) (26 U.S.C. § 7212(a) is appropriate charge in Forms
1099/1096 scheme); United States v. Winchell, 129 F.3d 1093, 1098-99
(10th Cir. 1997) (26 U.S.C. §§ 7212(a) and 7206(1)); United
States v. Heckman,30 F.3d 738 (6th Cir. 1994) (discussing
application of sentencing guidelines in Form 1099 scheme charged as 26
U.S.C. 7206(1)); United States v. Dykstra, 991 F.2d 450 (8th Cir.
1993) (26 U.S.C. §§ 7206(1) and 7212(a)); United States v.
Higgins, 987 F.2d 543, 544 (8th Cir. 1993) (26 U.S.C. §§
7206(1) and 7212(a)); United States v. Wiley, 979 F.2d 365, 367 (5th
Cir. 1992) (18 U.S.C. §§ 371, 472, 1001 and 1002); United
States v. Rosnow, 977 F.2d 399, 410-11 (8th Cir. 1992)(26 U.S.C.
§§ 7206(1) and 7212(a), and 18 U.S.C. § 371); United
States v. Kuball, 976 F.2d 529, 532 (9th Cir. 1992) (26 U.S.C.
§§ 7206(1) and 7212(a)); United States v. Parsons, 967 F.2d
452, 453 (10th Cir. 1992) (18 U.S.C. §§ 287 and 1001); United
States v. Hildebrandt, 961 F.2d 116 (8th Cir. 1992) (18 U.S.C. §
1001); United States v. Yagow, 953 F.2d 423, 427 (8th Cir. 1992) (26
U.S.C. §§ 7206(1) and 7212(a)); United States v.
Citrowske, 951 F.2d 899 (8th Cir. 1991) (18 U.S.C. § 1001);
United States v. Telemaque, 934 F.2d 169, 170 (8th Cir. 1991) (18
U.S.C. § 371).
A recent resurrection of the so-called "Redemption" scheme involves the
filing of false Forms 8300 (Report of Receipt of More Than $10,000 in Cash in
A Trade or Business), Forms 4789 (currency transaction reports (CTRs)), and
Suspicious Activity Reports (SARs) for harassment purposes. [FN3] Forms 8300 are
IRS reporting forms covered by the confidentiality provisions of 26 U.S.C. §
6103. [FN4] Forms 4789 and SARs are Financial Crimes Enforcement Network
(FinCEN) documents not subject to tax information confidentiality requirements.
Essentially, the new "Redemption" scheme involves filing one of these forms
with the IRS, reporting that a large amount of cash, sometimes foreign currency,
was paid to the named recipient. IRS agents, federal and state prosecutors and
judges, state troopers and private creditors are often targeted. Typically, the
protester will send his or her victim an IRS Form W-9, requesting a social
security number. Even without the target's social security number, the protester
files Form 8300, which triggers a letter to the target from the IRS requesting
additional information and warning of possible penalties for incomplete
information. Once the IRS learns the document is fraudulent, the IRS attaches
a "fraud" indicator to the computerized record and sends the form(s) to the
appropriate office of the IRS Criminal Investigation Division (CID) or Treasury
Inspector General for Tax Administration (TIGTA) for investigation. CID
investigates all filings involving non-IRS employees, while TIGTA has
jurisdiction over filings against IRS personnel. All cases, whether investigated
by CID or TIGTA, require authorization for prosecution from the Tax Division.
There are several ways to prosecute these schemes. First, the prosecutor
should determine if the protester has attempted to pass any fraudulent sight
drafts or other financial instruments. This will require an inquiry with the
U.S. Secret Service and the Federal Bureau of Investigation. If the protester
has filed false Forms 8300 and used sight drafts, the prosecutor should
consider charging the sight drafts pursuant to 18 U.S.C. § 514 [FN5]
(see Chapter 40.02[1][b], supra), using the false
Forms 8300 as evidence of intent. If the protester has filed a large number of
false Forms 8300, 26 U.S.C. § 7212(a) is a possible charge. Because they
are signed under penalties of perjury, false Forms 8300 may also be charged as
violations of 26 U.S.C. § 7206(1). Neither Forms 4789 nor SARs contain
jurats, so they cannot form the bases for Section 7206(1) charges.
In some cases, it may be best to simply use the false Forms 8300 as
evidence to support an obstruction enhancement at sentencing. See, e.g.,
United States v. Veral Smith, 3:99-CR-00025 (D.ID 2000) (District Court
considered false Forms 8300 filed against prosecutors and judge as evidence
supporting obstruction enhancement).
Tax protesters also file frivolous liens against the property of federal
employees to harass them. The tax protester files with the local county recorder
a lien for a large amount of money against the federal employee's real property.
The purpose of the lien is to encumber the property. This tactic is designed to
disrupt IRS audits and investigations by personally targeting the financial
affairs of IRS personnel involved in the protester's case. The tax obstruction
statute, 26 U.S.C. 7212(a) [FN6], may be a viable charge
in these cases. See, e.g., United States v. Boos, Nos. 97-
6329, 97-6330, 1999 WL 12741 (10th Cir. Jan. 14, 1999); United States v.
Gunwall, Nos. 97-5108, 97-5123, 1998 WL 482787 (10th Cir. Aug. 12,
1998); United States v. Marsh, 144 F.3d 1229 (9th Cir. 1998)
(dismissing § 7212(a) charges for lack of venue); United States v.
Trowbridge, Nos. 96-30179, 96-30180, 1997 WL 144197 (9th Cir. Mar. 26,
1997); United States v. Bailey, No. 94-5219, 1995 WL 716276
(10th Cir. Nov. 22, 1995); Kuball, 976 F.2d at 531 (upholding Section
7212(a) conviction for sending threatening letters to IRS employees);
United States v. Reeves, 782 F.2d 1323, 1326 (5th Cir. 1986)
(upholding Section 7212(a) conviction for filing false liens) ("Reeves
II"). But see United States v. Bowman, 173 F.3d 595, 599
(6th Cir. 1999) (refusing to extend holding in Kuball, supra).
Tax protesters also sue agents, prosecutors, and judges, and threaten
"arrest" and "prosecution" in so-called "common-law" courts. "Common-law" courts
-- which have no legal standing -- are often set up by anti-government groups.
In some instances, they "indict" and "convict" individuals.
"Common-law" documents -- ranging from "promissory notes," to "arrest
warrants," to "criminal complaints" -- are created to resemble authentic legal
documents. See, e.g., United States v. Hart, 701
F.2d 749 (8th Cir. 1983); United States v. Knudson, 959 F.
Supp.1180 (D. Neb. 1997); United States v. Van Dyke, 568 F. Supp.
820 (D. Or. 1983). Depending on the circumstances, use of the documents may give
rise to 26 U.S.C. §7212(a) charges. See, e.g., United
States v. Wells, 163 F.3d 889, 899-900 (4th Cir. 1998);
Reeves, 782 F.2d 1323. Because use of "common law" documents often
begins during investigation and continues during prosecution, their use is
evidence of willfulness for substantive tax charges, or the basis for an
obstruction of justice or other enhancement at sentencing. See United
States v. Lindsay, 184 F.3d 1138, 1144 (10th Cir.) (upholding denial of
acceptance of responsibility for obstructive conduct such as filing numerous
frivolous documents), cert. denied, 528 U.S. 981 (1999);
Wells, 163 F.3d at 894, 897 (upholding upward departure for
"domestic terrorism" for use of common law arrest warrants).
Tax protesters also attempt to file frivolous lawsuits or criminal
complaints against prosecutors and agents in legitimate state and federal courts.
Cases based on these filings are rarely authorized for prosecution because such
lawsuits and criminal complaints are difficult to distinguish from the host of
frivolous cases filed in courts all the time -- thus, making it difficult to
overcome a defense based on the right to petition for a redress of grievances.
40.02[1][b] Bogus Financial Instruments
For years, protesters have submitted bogus financial instruments to "pay"
their tax liabilities and obtain erroneous IRS refunds, and to "pay" private
creditors. These instruments -- often entitled "Certified Money Order,"
"Certified Bankers Check," "Public Office Money Certificate," or "Comptroller
Warrant" -- are designed to deceive the IRS and financial institutions into
treating them as authentic checks or real money orders.
For example, a protester will submit a large bogus check to the IRS or a
creditor for an amount in excess of the amount owed and request refund of the
difference. If the IRS or creditor rejects the bogus check, the protester writes
threatening letters to force acceptance of the bogus payment.
Several groups promote use of such bogus financial instruments. One of the
earliest "bogus money order schemes" was perpetuated by an organization in
Wisconsin known as "Family Farm Preservation." See,
e.g., United States v. Stockheimer, 157 F.3d 1082
(7th Cir. 1998) (noting that the potential loss calculation exceeded $180
million).
An organization known as "USA First" learned of the scheme and sold over
800 "Certified Money Orders" (CMOs) with a face value of $61 million. See
United States v. Mikolajczyk, 137 F.3d 237, 239-240 (5th Cir. 1998);
United States v. Moser, 123 F.3d 813 (5th Cir. 1997).
The Montana Freemen are perhaps the most notorious group to promote this
scheme. See, e.g., United States v. Wells, 163 F.3d
889 (4th Cir. 1998); United States v. Hanzlicek, 187 F.3d 1228
(10th Cir. 1999). For other examples of similar schemes, see
Broderick v. Goodroe, No. 99-55311, 2000 WL 194144 (9th Cir. Feb.
17, 2000); United States v. Switzer, Nos. 97-50265, 97-50293, 97-
50442, 1998 WL 750914 (9th Cir. Oct. 19, 1998).
The most recent bogus financial instrument scheme is the so-called
"Redemption" scheme. It involves the use of "Sight Drafts" or "Bills of
Exchange" and the filing of Forms 8300, 4789 and SARs. See
Chapter 40.02[1][a], supra.
The sight draft component of the recently resurrected "Redemption" scheme
is based on the outlandish premise that, when the United States went off the gold
standard in 1933, the government began to be funded with debt instruments secured
with the energy of current and future inhabitants. The theory is that a
fictitious identity or "straw man" was created for all Americans and the value
of a person's birth certificate became the collateral for our currency.
Supposedly, the value of an individual's birth certificate is determined by the
number of times it is traded on the world futures market and the amount is
purportedly maintained in a Treasury Direct Account under that person's social
security number.
A participant in the scheme attempts to reclaim his or her "straw man" and
therefore the value of the fictitious identity by redeeming his or her birth
certificate. The participant first files a Form UCC-1 with the Secretary of
State in any State, claiming title and security interest in his or her social
security, driver's license, and birth certificate numbers. The individual then
writes "acceptance for value," "non-negotiable charge back," or other prescribed
language diagonally on a government paper and returns it to the government
official who issued it. Typically, the types of documents used for redemption
include anything from a traffic ticket to a federal indictment. The "charge
back" allegedly creates a "treasury direct account" that contains the amount
assigned to the charge back, which the participant purportedly can then draw upon
by writing "sight drafts." "Sight drafts" are then written for varying amounts,
some as high as trillions of dollars. A Form UCC-3 indicating the partial
release of collateral in the amount of each sight draft is then filed with the
same Secretary of State who accepted the Form UCC-1.
The "sight draft" or bogus financial instrument is of very high print
quality and usually contains some reference to HJR 192, which is the House Joint
Resolution that took the United States off the gold standard in 1933. These
"sight drafts" or "bills of exchange" purport to be drawn on the United States
Treasury Department.
Historically, bogus financial instrument cases involving private creditors
were prosecuted under a variety of statutes such as:
* Conspiracy (18 U.S.C. § 371);
* Mail fraud (18 U.S.C. § 1341);
* Uttering a false security (18 U.S.C. § 472);
* Bank fraud (18 U.S.C. § 1344), and
* Possessing and uttering a counterfeit security (18 U.S.C. §
513).
See, e.g., United States v. Pullman, 187 F.3d 816
(8th Cir. 1999), cert. denied, 528 U.S. 1081 (2000);
Hanzlicek, 187 F.3d at 1230; Wells, 163 F.3d 889;
Stockheimer, 157 F.3d 1082.
Cases involving bogus financial instruments presented to the IRS can be
prosecuted as Klein conspiracies (18 U.S.C. §371) or
false claims for refunds (26 U.S.C. §287). To bring a false claim charge,
a prosecutor should have evidence that the protester expected a refund from the
IRS as a result of submitting the instrument. Such evidence might include : (1)
the protester's written request for a refund; (2) proof that the protester
received an IRS notice of tax due and owing, and, in response, submitted a bogus
check for a significant amount over the amount owed; and (3) that the protester
learned of this scheme in a seminar which advertised it would teach participants
how to obtain tax refunds. See, e.g., Hanzlicek, 187
F.3d at 1232 (discussing that a component of the scheme included obtaining large
refunds). Submission of bogus financial instruments may also be used as an
affirmative act of evasion (26 U.S.C. §7201).
In 1996, Congress passed 18 U.S.C. § 514 specifically in reaction to
the use of comptroller warrants. Noting that anti-government groups use
fictitious financial instruments to commit economic terrorism against government
agencies, private businesses, and individuals, Congress enacted Section 514 as
a Class B felony, which carries a maximum prison sentence of 25 years. 142 Cong.
Rec. S10155-02 (Sept. 10, 1996), pp. 196-197.
Section 514 provides in pertinent part that:
Whoever, with the intent to defraud --
(1) draws, prints, processes, produces, publishes, or otherwise makes,
or attempts or causes the same, within the United States;
(2) passes, utters, presents, offers, brokers, issues, sells, or
attempts or causes the same, or with like intent possesses, within the
United States; or
(3) utilizes interstate or foreign commerce, including the use of the
mails or wire, radio, or other electronic communication, to transmit,
transport, ship, move, transfer, or attempts or causes the same, to,
from, or through the United States,
any false or fictitious instrument, document, or other item appearing,
representing, purporting, or contriving through scheme or artifice, to
be an actual security or other financial instrument issued under the
authority of the United States, a foreign government, a State or other
political subdivision of the United States, or an organization, shall
be guilty of a class B felony.
Section 514 of Title 18 of the United States Code is the obvious charge
when prosecuting a case involving a sight draft. To date, four trials in the
District of Idaho have had successful results utilizing this statute:
United States v. Boone, 1:99-CR-00119; United States v.
Clapier, 1:99-CR-00120; United States v. Pahl, 1:99-CR-
00121; and United States v. Smith, 3:99-CR-0025. For filings
relating to these cases, see the Idaho federal courts web page at
http://www.id.uscourts.gov.
Before deciding which charges to bring in cases involving "sight drafts"
or "bills of exchange," a prosecutor should investigate and evaluate all the
evidence. The prosecutor should determine how often the protester used sight
drafts or bills of exchange and whether he or she also filed false Forms 8300,
CTRs or SARs.
One common concern in the prosecution of all bogus financial instrument
cases is "intended loss" as compared to "actual loss." Often, little or no
actual loss results from the use of the bogus instrument. In United States
v. Ensminger, 174 F.3d 1143 (10th Cir. 1999), the court was faced with
a scheme to obtain ownership of real property through submission of bogus
financial instruments. The District Court enhanced Ensminger's mail fraud
sentence under the sentencing guidelines based on an intended loss of $540,700,
the uncontested value of the property. The facts in Ensminger,
however, showed that there was no way the scheme could have succeeded, because
the properties Ensminger attempted to obtain were already sold to third parties.
Based on these facts and two previous decisions (United States v.
Galbraith, 20 F.3d 1054 (10th Cir. 1994); United States v.
Santiago, 977 F.2d 517 (10th Cir. 1992)), the Tenth Circuit held a ten-
level enhancement clearly erroneous. The Ensminger court noted
that the Fifth, Seventh, Ninth, Eleventh, and District of Columbia Circuits,
relying on application note 10 to section 2F1.1 of the guidelines (authorizing
a downward departure where a defendant attempted to negotiate an instrument that
was so obviously fraudulent that no one would seriously consider honoring it),
disagreed with its analysis. Ensminger, 174 F.3d at 1146-47.
On the other hand, in a case specifically involving use of bogus financial
instruments, the Fifth Circuit upheld sentencing based on the face value of the
Certified Money Orders even though there was no actual loss. See
Moser, 123 F.3d at 830. See also Switzer, Nos. 97-50265,
97-50293, 97-50442, 1998 WL 750914 (9th Cir. Oct. 19, 1998) (upholding sentence
based on intended loss); United States v. Lorenzo, 995 F.2d 1448,
1460 (9th Cir. 1993).
40.02[2] Warehouse Banks
"Warehouse banks" were common in mid-1980's abusive tax shelter schemes,
and they continue to be used by tax protesters to hide assets and income from the
IRS. Typically, the warehouse bank operates as a subsidiary or service wing of
a broader collective or association. Membership in the association is required
to use the warehouse bank services. See, e.g., United States v.
Meek, 998 F.2d 776, 778 (10th Cir. 1993).
A warehouse bank maintains total privacy of all "account holders" by
commingling the funds of numerous depositors in a single bank account held at a
legitimate bank. The depositor's privacy is achieved by using arbitrarily
numbered accounts, tracked by the warehouse bank operator. Using only the
account number, the depositor endorses all checks to the warehouse bank
association.
Depositors retrieve their funds by requesting cash via registered mail or
by instructing the warehouse bank operator to pay specific bills from the
warehouse bank account. Warehouse bank promoters also sell gold and silver to
members and claim to hold all deposit balances in gold or silver.
See United States v. Hawley, 855 F.2d 595, 597 (8th
Cir. 1988). The warehouse bank promoter asserts that only records of the current
balance and immediately preceding transaction are maintained in order to avoid
revealing records in the event of a subpoena or search warrant.
Some depositors also use trusts and unincorporated business organizations
(UBOs) to further conceal their identities. For example, a warehouse bank
customer might request that his or her paychecks be made payable in the name of
a trust or UBO, which then endorses the check to the warehouse bank association.
This method ensures that the original check deposited will not have the name of
the depositor. It can be traced back to a specific individual only if the name
of the trust or UBO being used by that individual is known.
Operators of warehouse banks have been prosecuted on Klein
conspiracy charges (26 U.S.C. §371) with varied results. See,
e.g., United States v. Caldwell, 989 F.2d 1056, 1058-1059 (9th
Cir. 1993) (reversing conspiracy conviction for failure to prove or instruct jury
that use of deceitful and dishonest means was an element of conspiracy charge);
United States v. Stelten, 867 F.2d 446, 451 (8th Cir. 1989)
(affirming conspiracy and tax evasion charges); United States v.
Cote, 929 F. Supp. 364, 366-68 (D.Or. 1996) (dismissing conspiracy
indictment for failure to allege an essential element of the crime, i.e.,
deceitful and dishonest means, and for failure to so instruct the grand
jury).
Warehouse bank operators have also been charged with violating currency
transaction reporting requirements. See Hawley, 855
F.2d at 599-602 (upholding instruction that allowed jury to find that the
Exchange was a "financial institution" because it was a "private bank").
Account holders have been charged with tax evasion, in violation of 26
U.S.C. §7201, and willful failure to file, in violation of 26 U.S.C. §
7203. See United States v. Dack, 987 F.2d 1282, 1285 (7th Cir.
1993); Meek, 998 F.2d at 778; United States v. Becker, 965
F.2d 383, 390 (7th Cir. 1992).
Use of a warehouse bank supports a "sophisticated means" enhancement at
sentencing. United States v. Frandsen, No. 99-30159, 2000 WL
366272, at *2 (9th Cir. Ap. 10, 2000) (purchasing cashier's checks from a
warehouse bank held to be use of sophisticated means), cert.
denied, 531 U.S. 890 (2000); Becker, 965 F.2d at 390.
Caution is advised during any investigation of a warehouse bank, however,
because of the danger of treading on First Amendment freedom of association
rights. Prosecutors must take care to avoid overly broad searches or subpoenas.
See, e.g., United States v. Ford, 184 F.3d 566, 578-
79 (6th Cir. 1999) (where search warrant authorizes a broader search than is
reasonable given facts in supporting affidavit, warrant is invalid and Fourth
Amendment rights violated), cert. denied, 528 U.S. 1161 (2000);
National Commodity and Barter Ass'n v. United States, 951 F.2d 1172,
1174 (10th Cir. 1991) (government must show compelling need and substantial
relationship to overcome freedom of association objection by barter
association); In re First National Bank, 701 F.2d 115, 118 (10th Cir.
1983). The remedy for an overbroad warrant is severance of the excess
portions from those that are sufficiently particular. Ford, 184 F.3d
at 578; United States v. Blakeney, 942 F.2d 1001, 1007 (6th Cir.
1991).
40.02[3] Trusts
Another well-known and frequently-promoted protester scheme is the use of
sham trusts, both foreign and domestic, to hide assets and property. A valid
trust is a legal arrangement whereby a grantor transfers property into a trust
and a trustee holds legal title to property for the benefit of another person,
the beneficiary. In order to be regarded as a valid trust for income tax
purposes, the trustee must manage and control the property for the beneficiary's
benefit. The beneficiary cannot manage or control the property. Treas. Reg.
§301.7701-4(a)&(b). Every trust that has over $600 in gross income or any
taxable income must file a tax return and must pay taxes on taxable income. 26
U.S.C. §6012(a)(4); 26 U.S.C. §641.
A trust is invalid for Federal income tax purposes if: (1) the grantor
retains the same relationship to the property both before and after the trust is
established, or (2) the trustee does not have independent control over the
property in the trust, or (3) the beneficiary did not receive an economic
interest in the property. 26 U.S.C. §§671-677; Treas. Reg.
§1.671-1 et seq;. Zmuda v. Commissioner, 79 T.C. 714,
720-722 (1982), aff'd, 731 F.2d 1417 (9th Cir. 1984); Markosian v.
Commissioner, 73 T.C. 1235 (1980); Hanson v. Commissioner, T.C.
Memo 1981-675, aff'd, 696 F.2d 1232 (9th Cir. 1983).
The use of "trusts" and "unincorporated business organizations" is promoted
on Internet web sites, by word-of-mouth, and through seminars. Trust scheme
promoters can be charged with a variety of offenses, including
Klein conspiracy (18 U.S.C. § 371), aiding and abetting tax
evasion (26 U.S.C. § 7201 & 18 U.S.C. § 2), aiding in preparation of
false tax returns (26 U.S.C. § 7206(2)), tax obstruction (26 U.S.C.
§7212(a)) and tax evasion (26 U.S.C. §7201) if they knowingly used the
trusts to evade taxes.
However, some trust scheme users may have a valid reliance defense if the
promoters present the trust scheme as a legal way to avoid taxes.
See Chapter 40.05[1][a] and [b], supra, for more
discussion of the reliance defense.
40.02[4] Church Schemes
40.02[4][a] Generally
Some protesters claim tax exempt status by feigning ordination in a church.
Many become ministers in mail-order churches, such as the Universal Life Church,
the Basic Bible Church of America, or the Life Science Church. Typically,
officers and members of the congregation include only the protester and his or
her immediate family.
Using church rubric, the protester usually adopts one of two schemes.
Under the first, the protester takes a sham vow of poverty and purportedly
assigns all income and worldly possessions to the church. The protester then
contends that his or her income is the church's income and, therefore, not
taxable to the minister, even though the protester uses the funds to pay personal
and other expenses just as he or she did before taking the sham vow of poverty.
See, e.g., United States v. Masat,
948 F.2d 923 (5th Cir. 1991); United States v. Dube, 820 F.2d 886
(7th Cir. 1987); United States v. Zimmerman, 832 F.2d 454 (8th Cir.
1987); United States v. Ebner, 782 F.2d 1120 (2d Cir. 1986).
Under the second scheme, the protester supposedly makes charitable
contributions to a church of 50 percent of his or her adjusted gross income (the
maximum amount that can be deducted as a charitable contribution). 26 U.S.C.
§ 170(b). The "contribution" is then deposited into "the church's" bank
account, and the protester claims a deduction on his or her individual return,
even though the "donated" funds are used for his or her personal purposes.
See United States v. Heinemann, 801 F.2d 86, 88
(2d Cir. 1986).
40.02[4][b] Vow of Poverty
Generally, the government introduces evidence proving the protestor's
putative vow of poverty was not fulfilled in practice -- i.e., protester
lived and carried out his or her economic and financial affairs exactly as in the
past. See United States v. Peister, 631 F.2d 658
(10th Cir. 1980), upholding the conviction of Peister for filing a false
"withholding exemption certificate form W-4". Peister formed a church with
himself as minister, and his wife and parents as trustees, took a vow of poverty,
supposedly gifted all his worldly possessions to the church, set up church
checking accounts, and used the funds in those accounts for personal purposes.
Peister, 631 F.2d at 660. The government's evidence showed that
"the church was a shell entity, fully controlled by Peister and his wife, . . .
together with Peister's parents. The vow of poverty was one in form only, and
had no substantive effect on defendant's lifestyle." Peister,
631 F.2d at 660.
40.02[4][c] Charitable Contributions
In this scheme, the protester purports to donate to his or her church 50
percent of adjusted gross income (the maximum allowable amount for a charitable
contribution deduction). 26 U.S.C. §§ 170(a)(i); 170(b)(1)(A),(E).
The protester then uses the "donated" funds for personal purposes.
See United States v. Michaud, 860 F.2d 495 (1st Cir.
1988). In such cases, the government must prove that either no contribution or
gift to the church was made or that it was not made to a qualified church under
26 U.S.C. § 170(c)(2), which requires that "no part of the net earnings . . .
[inure] to the benefit of any private shareholder or individual."
There is no true charitable gift or contribution where a donor does not
totally relinquish dominion and control over his or her property.
See Pollard v. Commissioner, 786 F.2d 1063, 1066-67
(11th Cir. 1986); Stephenson v. Commissioner, 748 F.2d 331
(6th Cir. 1984); Macklem v. United States, 757 F. Supp. 6
(D.Conn. 1991); Gookin v. United States, 707 F. Supp. 1156 (N.D.
Cal. 1988). If a gift is made with the incentive of anticipated
economic benefit, no deduction is available even if the payment is made to a
tax-exempt organization. See Transamerica Corp. v. United
States, 902 F.2d 1540 (Fed. Cir. 1990); DeJong v.
Commissioner, 309 F.2d 373 (9th Cir. 1962); Hess v. United
States, 785 F. Supp. 137 (E.D. Wash. 1991); Dew v.
Commissioner, 91 T.C. 615 (1988) (members of Universal Life Church made
contributions to church with understanding that church was to pay all personal
bills incurred by the "contributor").
A tax protest church is not organized and operated exclusively for
religious purposes; therefore, it is not exempt from taxation. 26 U.S.C.
§ 501(c)(3). To enjoy tax-exempt status under section 501(c)(3), an
organization must satisfy three criteria: (1) it must be organized and operated
exclusively for an exempt purpose ("the organizational test"); (2) no part of its
net earnings may inure to the benefit of any private shareholder or individual
("the operational test"); and, (3) no substantial part of its activity may
include carrying on propaganda, or otherwise attempting to influence legislation,
or participating or intervening in any political campaign. 26 U.S.C. §
501(c)(3). See also Ecclesiastical Order of Ism of Am v.
Commissioner, 80 T.C. 833, 838 (1983), aff'd, 740 F.2d 967
(6th Cir. 1984); Unitary Mission of Church v. Commissioner, 74 T.C.
507, 512 (1980), aff'd, 647 F.2d 163 (2d Cir. 1981).
If a minister uses the religious organization's funds for personal purposes
or receives an excessive or unreasonable salary from the net earnings of the
church, there is deemed to be private inurement, and the church will fail the
operational test. United States v. Daly, 756 F.2d 1076, 1083 (5th
Cir. 1985). See also Hall v. Commissioner., 729 F.2d
632, 634 (9th Cir. 1984); United States v. Dykema, 666 F.2d 1096,
1101 (7th Cir. 1981).
40.02[4][d] First Amendment Considerations
Tax protesters often attempt to use the Freedom of Religion clause of the
First Amendment to prevent the government from questioning the integrity of the
protester's alleged religious beliefs. The courts have long held, however, that
the Freedom of Religion clause cannot be used as a blanket shield to prevent the
government from inquiring into the possible existence of criminal activity.
Davis v. Beason, 133 U.S. 333, 342-43 (1890); Cohen v. United
States, 297 F.2d 760, 765 (9th Cir. 1962). Thus, although the validity
of religious beliefs cannot be questioned, the sincerity of the person claiming
to hold such beliefs can be examined. United States v. Seeger,
380 U.S. 163, 184-85 (1965). See also United States
v. Ward, 989 F.2d 1015, 1018 (9th Cir. 1992) ("focus of judicial inquiry
is not definitional, but rather devotional . . . That is, is the defendant
sincere? Are his beliefs held with the strength of traditional religious
convictions?"); United States v. Daly, 756 F.2d 1076, 1081
(5th Cir. 1985); United States v. Moon, 718 F.2d 1210, 1227
(2d Cir. 1983); United States v. Dykema, 666 F.2d 1096, 1098-1102
(7th Cir. 1981); United States v. Peister, 631 F.2d 658, 665
(10th Cir. 1980). In Moon, the defendant argued that the trial
court was required to charge the jury that it must accept as conclusive the
Unification Church's definition of what it considered a religious purpose. The
Second Circuit flatly rejected the defense argument, citing Davis v.
Beason, 133 U.S. 333 (1890), and explaining that:
[t]he "free exercise" of religion is not so unfettered. The First
Amendment does not insulate a church or its members from judicial
inquiry when a charge is made that their activities violate a penal
statute. Consequently, in this criminal proceeding the jury was not
bound to accept the Unification Church's definition of what
constitutes a religious use or purpose.
Moon, 718 F.2d at 1227.
A similar argument was rejected in United States v. Jeffries,
854 F.2d 254 (7th Cir. 1988). In Jeffries, the defendant argued
that the IRS should not be permitted to define what constituted a church because
to do so would result in the creation of a "federal church, which would restrict
a person's individual religious beliefs." Jeffries, 854 F.2d at
256. In rejecting this argument, the court stated:
There is no need to try to resolve any conflict there may be between a
person's personal view of what constitutes a church and that which the
tax law recognizes as a church qualifying it for tax exempt status,
even if we could. For tax purposes, the tax law prevails.
Jeffries, 854 F.2d at 257.
Further, there is no First Amendment right to avoid federal income taxes
on religious grounds. United States v. Indianapolis Baptist
Temple, 224 F.3d 627, 629-31 (7th Cir. 2000), cert. denied,
531 U.S. 1112 (2001); United States v. Ramsey, 992 F.2d 831
(8th Cir. 1993). Therefore, the defendants' religious objections to filing tax
returns signed under penalty of perjury do not eliminate the requirement to file
tax returns. See United States v. Dawes, 874 F.2d
746, 749 (10th Cir. 1989) ("the requirement that the tax return be signed under
penalty of perjury is not an unconstitutional restriction on defendant's right
to freedom of religion"); Hettig v. United States, 845 F.2d 794
(8th Cir. 1988); Borgeson v. United States, 757 F.2d 1071
(10th Cir. 1985). But see Ward,
989 F.2d at 1018 (conviction of tax protester overturned because trial court
refused to allow him to swear oath of his own creation; "the court's interest in
administering the precise form of oath must yield to Ward's First Amendment
rights").
An order requiring a defendant to comply with federal income tax laws as
a condition of probation does not violate the First Amendment.
Ramsey, 992 F.2d at 833.
The courts also have held that the Internal Revenue Code sets forth
objective requirements or criteria (e.g., 26 U.S.C. §§ 170 and
501), which enable the Internal Revenue Service to determine whether an
organization qualifies as a tax-exempt organization or whether an individual's
contribution qualifies as a deductible charitable contribution, without entering
into the type of subjective inquiry that is prohibited by the First Amendment.
Dykema, 666 F.2d at 1100; Hall v. Commissioner,
729 F.2d 632, 635 (9th Cir. 1984). See also United
States v. Masat, 948 F.2d 923, 927 (5th Cir. 1991) (proper for district
court to give instruction that allowed jury to decide whether defendant was a
minister in a tax-exempt organization as defined in 26 U.S.C. § 501(c)(3)).
40.03 TRIAL TACTICS/CONSIDERATIONS
40.03[1] Criminal Summons
The government has the option, in misdemeanor cases, to charge the
defendant by filing a criminal information and issuing the defendant a summons
instead of arresting him pursuant to a warrant. Protesters have argued, however,
that a showing of probable cause is required under Fed. R. Crim.P. 9 and 4(a) for
issuance of a summons. The courts, however, have held to the contrary.
See United States v. Dawes, 874 F.2d 746, 750
(10th Cir. 1989); United States v. Birkenstock, 823 F.2d 1026,
1030-31 (7th Cir. 1987); United States v. Bohrer, 807 F.2d 159, 161
(10th Cir. 1986). See also United States v. Saussy,
802 F.2d 849, 851-52 (6th Cir. 1986). Compare United States
v. Kahl, 583 F.2d 1351, 1355 (5th Cir. 1978), where the court held that
an arrest warrant, rather than a summons, not based on a sworn affidavit violated
the requirements of Fed. R. Crim. P. 9.
40.03[2] 26 U.S.C. § 6103(h)(5) Juror Audit Information
Prior to August 5, 1997, Section 6103(h)(5) allowed any party in a tax
administration proceeding to obtain audit information about a prospective juror.
The information was limited to a "yes" or "no" answer to the inquiry about
whether a "prospective juror in such proceeding has or has not been the subject
of any audit or other tax investigation" by the IRS. 26 U.S.C. 6103(h)(5). This
provision was repealed on August 5, 1997. The repeal applies to "judicial
proceedings commenced after the date of enactment." Pub.L.No. 105-34, §
1283 (The Taxpayer Relief Act of 1997). [FN7]
40.03[3] IRS Agents' Authority
Illegal tax protesters sometimes raise the bizarre argument that IRS agents
cannot investigate tax offenses or appear in court because they are not agents
of the United States government but are agents of an alien foreign principal, the
International Monetary Fund (IMF). See United States v.
Rosnow, 977 F.2d 399, 413 (8th Cir. 1992). This argument is based on the
startling premise that the United States has been in bankruptcy since the gold
standard was eliminated. Because of the alleged bankruptcy, the United States
purportedly has no standing to demand money or file liens. Instead, the IMF was
supposedly given the power to collect income taxes, with the IRS as its
depository and fiscal agent. The theory is that the income taxes collected by
the IRS do not go into the United States Treasury but instead are deposited into
the Federal Reserve Bank for the benefit of the IMF. See DeLaRosa v.
Agents for International Money Fund Internal Revenue Service, No. CIV-
S951170DFLGGH, 1995 WL 769395 (E.D. Cal. Oct. 16, 1995). This argument has been
deemed "completely without merit [and] patently frivolous." United States
v. Jagim, 978 F.2d 1032, 1036 (8th Cir. 1992); see
also United States v. Higgins, 987 F.2d 543, 545
(8th Cir. 1993).
40.03[4] Indictment Not Sufficient Notice of Illegality
A tax protester may argue that an indictment is insufficient because it
fails to cite 26 U.S.C. § 6012, the section that requires a return to be
filed, or other Internal Revenue Code sections containing provisions for tax
liabilities. If the indictment contains the elements of the offense charged,
fairly informs the defendant of the charge against which he must defend, and
enables him to "plead an acquittal or conviction in bar of future prosecution for
the same offense," the indictment is constitutionally sufficient. United
States v. Vroman, 975 F.2d 669, 670-71 (9th Cir. 1992) (quoting
Hamling v. United States, 418 U.S. 87, 117 (1974)). The government
need not specifically cite 26 U.S.C. § 6012 in an indictment alleging
willful failure to file in violation of 26 U.S.C. § 7203.
Vroman, 975 F.2d at 671; United States v. Kahl, 583
F.2d 1351, 1355 (5th Cir. 1978).
In a similar vein, the Ninth Circuit has rejected the argument that an
indictment charging a violation of 26 U.S.C. § 7206 and setting forth the
elements of the offense was insufficient simply because the CFR provisions
dealing with the enforcement of section 7206 reference the Bureau of Alcohol,
Tobacco and Firearms, an agency unrelated to the case against the defendant.
United States v. Cochrane, 985 F.2d 1027, 1031 (9th Cir. 1993).
An indictment need only provide "the essential facts necessary to apprise the
defendant of the crime charged; it need not specify the theories or evidence upon
which the government will rely to prove those facts." Cochrane,
985 F.2d at 1031.
40.03[5] Filing of Protest Documents: Is the Document Filed a Tax Return?
40.03[5][a] Generally
Tax protestors frequently fail to file tax returns or file returns --
frequently unsigned, or signed with the jurat crossed out -- that report no
financial information and/or espouse tax protest rhetoric. See
Morgan v. Commissioner, 807 F.2d 81 (6th Cir. 1986); Mosher
v. Internal Revenue Service, 775 F.2d 1292, 1294 (5th Cir. 1985);
Edwards v. Commissioner, 680 F.2d 1268 (9th Cir. 1982);
Lovelace v. United States, No. 89-375TD, 1990 WL 284740, at *1
(W.D.Wash. Oct. 18, 1990), aff'd, 951 F.2d 360 (9th Cir. 1991).
40.03[5][b] What Is a Tax Return?
A tax return consists of an IRS Form 1040 (or other relevant form)
containing enough information about the taxpayer's income to compute the tax.
Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944); United
States v. Saussy, 802 F.2d 849, 854 (6th Cir. 1986); United States
v. Green, 757 F.2d 116, 121 (7th Cir. 1985); United States v.
Grabinski, 727 F.2d 681, 686 (8th Cir. 1984); United States v.
Verkuilen, 690 F.2d 648 (7th Cir. 1982); United States v.
Moore, 627 F.2d 830, 834 (7th Cir. 1980); United States v.
Smith, 618 F.2d 280, 281 (5th Cir. 1980); United States v.
Edelson, 604 F.2d 232, 234 (3d Cir. 1979); United States v.
Irwin, 561 F.2d 198, 200-01 (10th Cir. 1977); United States v.
Daly, 481 F.2d 28, 29 (8th Cir. 1973); United States v.
Porth, 426 F.2d 519, 523 (10th Cir. 1970).
A taxpayer who submits a form containing only his name, address, and
arguments supposedly excusing him from filing tax returns has not filed a
"return" within the meaning of the Internal Revenue Code. In Porth
and Daly, supra, taxpayers filed Forms 1040
containing only their names and addresses, and references to various
constitutional provisions which purportedly excused them from filing tax returns.
Appellate courts upheld both convictions. The Porth court held
that:
The return filed was completely devoid of information concerning his
income as required by the regulations of the IRS. A taxpayer's return
which does not contain any information relating to the taxpayer's
income from which the tax can be computed is not a return within the
meaning of the Internal Revenue Code or the regulations adopted by
the Commissioner.
Porth, 426 F.2d at 523 (citations omitted). See also
United States v. Kimball, 925 F.2d 356, 357 (9th Cir. 1991)
(en banc) (asterisks and no signature not a return); United
States v. Upton, 799 F.2d 432, 433 (8th Cir. 1986); United States
v. Green, 757 F.2d 116, 121 (7th Cir. 1985); United States v.
Mosel, 738 F.2d 157, 158 (6th Cir. 1984); United States v.
Vance, 730 F.2d 736, 738 (11th Cir. 1984); United States v.
Grabinski, 727 F.2d 681, 686 (8th Cir. 1984); United States v.
Stillhammer, 706 F.2d 1072, 1075 (10th Cir. 1983) ("the test is whether
the defendants' returns themselves furnished the required information for the IRS
to make the computation and assessment, not whether the information was available
elsewhere"); Verkuilen, 690 F.2d at 654; United States v.
Reed, 670 F.2d 622, 623-24 (5th Cir. 1982) (Form 1040 reflected only the
amount withheld from earnings and no other dollar figure, with refund claimed);
United States v. Crowhurst, 629 F.2d 1297, 1300 (9th Cir.
1980); United States v. Schiff, 612 F.2d 73, 77 (2d Cir. 1979);
Edelson, 604 F.2d at 234 .
Generally, Forms 1040 which report only zeros are not valid returns.
Mosel, 738 F.2d 157; United States v. Rickman,
638 F.2d 182, 184 (10th Cir. 1980); Moore, 627 F.2d at 835 ("when
apparent that the defendant is not attempting to file forms accurately disclosing
his income, he may be charged with failure to file a return"); United
States v. Smith, 618 F.2d 280, 281 (5th Cir. 1980);. But
see United States v. Long, 618 F.2d 74, 75 (9th Cir. 1980)
(zeros on Long's tax forms, unlike blanks, constituted information as to income
from which a tax could be computed just as if the return had contained other
numbers).
Courts have also held that tax forms reporting nothing or small amounts in
the blanks provided for income and expenses do not constitute legal
returns. Kimball, 925 F.2d at 357 (conviction upheld where returns
only reported asterisks); United States v. Malquist, 791 F.2d
1399, 1401 (9th Cir. 1986) (Form 1040 with word "object" written in all spaces
requesting information is not a return); Edelson, 604 F.2d at 234
(total income figure based on his interpretation of "constitutional dollars" and
a blanket claim of the Fifth Amendment as to all other items); United
States v. Brown, 600 F.2d 248, 251-52 (10th Cir. 1979) ("unknown" or
claimed "Fifth Amendment" responses on Forms 1040 are not returns).
A Form 1040 that shows only a bottom line figure for taxable income
with no information as to how the reported taxable income was derived
(such as the source of the income, the amount of gross income and
deductions, and the number of exemptions claimed) is not a valid
income tax return, as a matter of law.
Grabinski, 727 F.2d at 686-87.
On the other hand, omission of isolated information, such as a taxpayer's
social security number or names of dependent children, which does not impede the
IRS's ability to check a taxpayer's asserted tax liability, does not disqualify
the document as a valid a return. Grabinski, 727 F.2d at 686.
(But see, contra, Crowhurst, 629 F.2d at1300, in
which defendant filed Forms 1040 which were blank except for the defendant's
signature and request for refund of income tax withheld and attached Forms W-2.
The Ninth Circuit held that the Form 1040 with attached W-2s constituted returns
because they provided "the IRS with ostensibly complete information from which
a tax could be computed" and upheld the defendant's conviction under section
7206(1) for filing false returns. Crowhurst, 629 F.2d at 1300).
The Sixth Circuit has held that a return filed after the IRS
assesses deficiencies is not a return because it no longer serves a tax purpose
and has no legal effect. In re Hindenlang, 164 F.3d 1029, 1034
(6th Cir.), cert. denied, 528 U.S. 810 (1999).
40.03[5][c] What Is or Is Not a Tax Return: A Matter of Law or Fact?
Some courts hold that the determination whether a return is valid for
section 7203 purposes is a question of law for the court to decide.
United States v. Grabinski, 727 F.2d 681, 686 (8th Cir. 1984).
See also United States v. Upton, 799 F.2d 432, 433 (8th Cir.
1986); United States v. Green, 757 F.2d 116, 121-22 (7th Cir.
1985); United States v. Moore, 627 F.2d 830, 834 (7th Cir. 1980)
(unsigned Form 1040 not a return as a matter of law). This determination "in no
way removes from the jury fact questions regarding whether a defendant was
required to file a return, . . . actually failed to make a return, . . . and
whether a failure to file was willful." Grabinski, 727 F.2d at 686.
See also Green, 757 F.2d at 121.
Other courts caution that a jury should decide whether or not the filing
met the definition of a return. For example, the Sixth Circuit held that the
trial court should only "properly stat[e] the law respecting the definition of
a return, and [leave] it to the jury to decide whether [the] defendant had
properly filed a return." United States v. Saussy, 802 F.2d 849,
854 (6th Cir. 1986).
In Saussy, 802 F.2d at 854, the court found the following
jury instruction proper:
A document which does not contain sufficient information relating to
the taxpayer's income from which the tax can be computed is not a
return within the meaning of the Internal Revenue Code and the
Regulations thereunder. Whether any document submitted by the
defendant constitutes [a] tax return[] is a matter for the jury to
decide.
In United States v. Goetz, 746 F.2d 705, 709 (11th Cir.
1984), the Eleventh Circuit held that the trial court improperly invaded the
province of the jury by "determin[ing] that the documents filed by the defendants
did not contain any financial information, and conclud[ed] that, as a matter of
law, these documents were not returns." Goetz, 746 F.2d at 708.
See also United States v. Grote, 632 F.2d 387, 391 (5th Cir.
1980).
40.03[6] Discovery of IRS Master Files
Each individual who has filed a tax return with the IRS has a record in the
IRS master computer under his or her social security number. The IRS Individual
Master File (IMF) is the transcript generated by the IRS master computer. It
contains coded information about the individual's tax history, including the
filing of federal income tax forms, payment of taxes, refunds due, audits, and
IRS notices sent to the individual. The Certificates of Assessments and
Payments -- certified IRS records reflecting filings and payments by an
individual which are generally introduced at trial -- are prepared from the
information contained within the IMF.
Rule 16 of the Federal Rules of Criminal Procedure does not require the
government to provide the IMF in discovery absent some showing of materiality.
See United States v. Pottorf, 769 F. Supp. 1176, 1181
(D. Kan. 1991). When portions of the IMF are relevant, it may be sufficient to
provide just those relevant parts of the IMF in discovery. See
United States v. Fusero, 106 F.Supp.2d 921, 925 (E.D. Mich. 2000).
However, in United States v. Buford, 889 F.2d 1406, 1407-08
(5th Cir. 1989), the Fifth Circuit reversed the conviction of a defendant where
the district court denied his request for the IMF in discovery and failed to
perform a promised in camera inspection of the IMF. In
Buford, the government introduced evidence, for impeachment
purposes only, that the defendant failed to file his tax returns for several
years. The defendant testified that he had filed. In rebuttal, the government
called an IRS records custodian, who based her testimony on the Certificates of
Assessments and Payments, which were hand prepared using information taken from
the IMF. After eliciting evidence on cross-examination of the IRS custodian
which contradicted the information in the Certificates of Assessments and
Payments, the defendant repeatedly asked for an in camera review of the
IMF. The review never took place. The Fifth Circuit found that the district
court abused its discretion in denying discovery of the IMF and failing to
provide the in camera review of the IMF. Buford, 889 F.2d
at 1408.
40.03[7] Motions in Limine
In many tax protester cases, the defendant will attempt to present
"evidence" or argument relating to what the law should be, the constitutionality
and validity of the tax laws, or alternative interpretations of the tax laws not
relied upon by the defendant. In such cases, it may be useful to file a motion
in limine requesting an order to prevent the defendant from
presenting inappropriate and irrelevant materials that could confuse the jury.
The text of a sample motion in limine is set out as Appendix I at the end of this
chapter.
40.03[8] Attorney Sanctions
Attorneys representing protesters will sometimes repeatedly make frivolous
arguments or behave inappropriately in court. Such behavior is sanctionable.
See United States v. Engstrom, 16 F.3d 1006, 1010-12 (9th
Cir. 1994)(although defense counsel could not be held in contempt after a summary
procedure pursuant to Rule 42(a) of the Federal Rules of Criminal Procedure for
asserting during opening statement his client's belief in the trial court's
participation in a conspiracy to defraud the American people, his "various
disrespectful and confrontational remarks" to the trial judge warranted order
suspending his permission to practice in jurisdiction for three years);
United States v. Collins, 920 F.2d 619, 633-34 (10th Cir. 1990)
(upholding district court's revocation of defense counsel's pro hac vice
status after counsel, who had a "past reputation for hijacking judicial
proceedings onto his tax protester bandwagon," filed several legally frivolous
pre-trial motions); In re Becraft, 885 F.2d 547, 550 (9th Cir.
1990) (pursuant to Fed. R. App. Proc. 38, ordering defense counsel to pay $2,500
in damages for filing frivolous petition for rehearing);
United States v. Summet, 862 F.2d 784, 786-87 (9th Cir. 1988)
(upholding district court's formal censure of defense attorney and revocation of
his pro hac vice status when he violated local rules by continuously
challenging the court's authority and ignoring repeated warnings of the court);
United States v. Howell, 936 F.Supp. 774, 775-76 (D. Kansas 1996)
(denying defense attorney's motion for reconsideration of order revoking his
pro hac vice admission because he failed to appear at a pretrial motions
hearing, made false and misleading statements regarding his past disciplinary
proceedings to magistrate judge, and failed to disclose all past disciplinary
proceedings in an affidavit submitted to the court).
40.03[9] Evidentiary Issues
40.03[9][a] Prior or Subsequent Tax Protest Activities: Rule 404(b)
Evidence of tax protest activities of the defendant prior or subsequent to
the criminal conduct charged may be admissible at trial. It may be argued that
such evidence, if "intrinsic" or "intricately related to the facts of the case,"
is not even subject to Fed. R. Evid. 404(b) because it is directly probative of
willfulness, an element of the tax crime charged. United States v.
Hilgeford, 7 F.3d 1340, 1345 (7th Cir. 1993); see also United
States v. Williams, 900 F.2d 823, 825 (5th Cir. 1990) (other act evidence
is "intrinsic" and thereby not governed by Rule 404(b) when the evidence of the
other acts and the evidence of the crime charged are "inextricably intertwined,"
both acts are part of a "single criminal episode," or the other acts were
"necessary preliminaries" to the crime charged). Intrinsic evidence is subject
to the Fed. R. Evid. 403 balancing test, which requires the exclusion of relevant
evidence if its prejudicial effect substantially exceeds its probative value.
If it is determined that the evidence of other crimes or acts is extrinsic
to the case, the evidence may be admissible under Fed. R. Evid. Rule 404(b) to
show "intent, preparation, plan, knowledge, identity, or absence of mistake or
accident." Other act evidence may be admitted if the following four requirements
are met: (1) the evidence is offered for a proper purpose, a purpose other than
to demonstrate the defendant's propensity to commit the crime charged; (2) the
evidence is relevant; (3) the trial court makes a Fed. R. Evid. Rule 403
determination that the probative value of the evidence is not substantially
outweighed by its potential for unfair prejudice; and (4) the district court
submits a limiting instruction, if requested. Huddleston v. United
States, 485 U.S. 681, 691-92 (1988); United States v.
Grissom, 44 F.3d 1507, 1513 (10th Cir. 1995); United States v.
Zapata, 871 F.2d 616, 620 (7th Cir. 1989). Evidence of other similar
acts is relevant only if the evidence is sufficient to support a jury finding
that the defendant committed the similar act. Huddleston, 485 U.S.
at 689, Zapata, 871 F.2d at 620; See United States v.
Ayers, 924 F.2d 1468, 1473 (9th Cir. 1991) (articulating four-part test
for admission under 404(b) -- (1) sufficient evidence must exist for jury to find
defendant committed other acts; (2) other acts must be introduced to prove a
material issue; (3) other acts must not be too remote in time; and (4) if
admitted to prove intent, other acts must be similar to offense charged).
A defendant's prior or subsequent tax protest activities, filing and
payment history, or participation in civil tax court proceedings will often be
relevant in criminal tax cases, especially where the defendant raises a good
faith defense. See United States v. Wisenbaker, 14 F.3d 1022, 1028
(5th Cir. 1994) (prior state tax convictions relevant to prove willfulness and
to negate defendant's assertion of good faith defense); United States v.
McKee, 942 F.2d 477, 480 (8th Cir. 1991) (in section 7201 prosecution,
testimony concerning prior IRS audit and defendant's prior filing of false exempt
Form W-4 relevant to issues of intent or absence of mistake under Fed. R. Evid.
404(b)); United States v. Fingado, 934 F.2d 1163, 1165 (10th Cir.
1991) (in section 7203 prosecution, evidence of defendant's failure to file in
prior years admissible pursuant to Fed.R.Evid. 404(b) to prove willfulness);
United States v. Johnson, 893 F.2d 451, 453-54 (1st Cir. 1990)
(evidence that defendant submitted Form W-4 in 1987 claiming more allowances than
he was entitled to and failed to file a return in 1987 relevant to show
willfulness and absence of mistake in filing false Schedule C forms from 1982 to
1986); United States v. Poschwatta, 829 F.2d 1477, 1484 (9th Cir.
1987) (prior tax conviction admissible to show why defendant was required by law
to file income tax returns); United States v. Birkenstock, 823 F.2d
1026, 1028 (7th Cir. 1987) (in section 7203 prosecution, defendant's prior
"pseudo-dollar/gold standard" returns properly admitted to show intent and
absence of mistake); United States v. Grosshans, 821 F.2d 1247,
1253 (6th Cir. 1987) (defendant's attendance at protester meetings admissible
to show that she knew what she was doing and knew she had an obligation to pay
taxes); United States v. Bergman, 813 F.2d 1027, 1029 (9th Cir.
1987) (in section 7203 prosecution, filing of false exempt W-4 admissible under
Fed.R.Evid. 404(b) to show willfulness); United States v. Blood,
806 F.2d 1218, 1222 (4th Cir. 1986) (where defendant represented himself and
testified in prior Tax Court proceedings, prior Tax Court decision admissible to
show intent and pattern of tax avoidance); United States v. Upton,
799 F.2d 432, 433 (8th Cir. 1986) (evidence that defendant had sent tax protester
materials to the IRS and had failed to comply with tax laws in prior and
subsequent years probative of willfulness); United States v.
Ausmus, 774 F.2d 722, 727 (6th Cir. 1985) (in section 7203 failure to pay
case, evidence that defendant failed to pay income taxes for years prior to and
following the years charged admissible to show pattern, plan and scheme
indicating that failure to pay taxes was not the result of accident, negligence
or inadvertence);United States v. Verkuilen, 690 F.2d 648, 656 (7th
Cir. 1982) (in section 7203 prosecution, evidence of defendant's submission of
correct Form W-4 and two subsequent false Forms W-4 prior to years charged
properly admitted to show willfulness, motive, and common pattern of illegal
conduct); But see United States v. Mikolajczyk, 137
F.3d 237, 244 (5th Cir. 1998) (trial court erred in admitting evidence of prior
filing of public notice "rescinding" tax returns during cross-examination of
defendant in mail fraud prosecution for submission of USA First "Certified Money
Orders," because government offered no evidence that defendant had protest motive
in submitting the "Certified Money Orders").
40.03[9][b] IRS Agent's Testimony and Sequestration
IRS agents usually testify during the course of a tax trial. Often such
testimony will consist of summarizing the government's documentary evidence and
providing tax requirements and calculations based on that testimony. Provided
the agent has been properly qualified as an expert witness, would be helpful to
the jury, and does not offer any opinion on the ultimate issue of guilt, such
testimony is fully admissible pursuant to Fed. R. Evid. 702. See
United States v. West, 58 F.3d 133, 140-41 (5th Cir. 1995) (admission
of testimony of IRS expert witness testimony, which included summary of testimony
given by other government witnesses, was not error because the agent referred to
other evidence when necessary to explain his analysis); United States v.
Moore, 997 F.2d 55, 58 (5th Cir. 1993) (citing cases); United
States v. Beall, 970 F.2d 343, 347 (7th Cir. 1992) (IRS expert's summary
of documentary evidence and testimony regarding tax consequences of subcontractor
relationship within agent's area of expertise); United States v.
DeClue, 899 F.2d 1465, 1473 (6th Cir. 1990) (IRS special agent with
accounting degree, regular IRS training and experience spanning seven years
qualified to testify as expert about tax due and owing); United States v.
Mann, 884 F.2d 532, 539 (10th Cir. 1989); United States v.
Barnette, 800 F.2d 1558, 1568-69 (11th Cir. 1986) (IRS expert auditor and
accountant properly permitted to give his opinion of the "income tax
implications" as applied to the defendant); United States v.
Marchini, 797 F.2d 759, 765-66 (9th Cir. 1986) (district court has
discretion to allow agent of IRS to testify as an "expert summary witness" based
upon the agent having heard the testimony of the other witnesses and having
reviewed the exhibits). But see United States v.
Benson, 941 F.2d 598, 603-06 (7th Cir. 1991) (conviction reversed where
IRS expert gave opinions not based on special knowledge or skill that was helpful
to jury).
An IRS agent who does testify as an expert/summary witness should be
allowed to remain in the courtroom during the trial, in addition to an
investigatory case agent designated as the representative of the government under
Rule 615(2). Fed. R. Evid. 615; see United States v.
Lussier, 929 F.2d 25, 30 (1st Cir. 1991); United States v.
Kosko, 870 F.2d 162, 164 (4th Cir. 1989) (IRS agent to testify as expert
witness allowed to remain in courtroom along with DEA agent). Some courts have
found that the government may only identify one agent for each subsection of Rule
615. See United States v. Pulley, 922 F.2d 1283,
1286 (6th Cir. 1991) (allowing only one agent under Rule 615(2) and one agent
under Rule 615(3); United States v. Farnham, 791 F.2d 331, 334-35
(4th Cir. 1986) (conviction reversed where court failed to exclude one of two
case agents during trial). But see United States v.
Jackson, 60 F.3d 128, 134 (2nd Cir. 1995) (holding that trial court has
discretion to exempt from the rule against witnesses more than one witness under
each subsection of Rule 615).
40.03[9][c] Admissibility of IRS Computer Records
Computer data evidence is often introduced in tax cases to show the
defendant's filing history, to prove that the defendant did not file returns as
required, or to show that the defendant received notices about his tax
liabilities. The introduction of the actual Individual Master File (IMF)
transcript of account through a witness can open the witness to cross-examination
by the defense about every code and piece of information contained in the
transcript. In order to avoid this problem, it may be wiser to simply offer IRS
computer records at trial in the form of Certificates of Assessments and
Payments, certified documents reflecting tax information kept on file at the IRS.
Protesters often challenge the admissibility of computer records, and
courts routinely reject such challenges. These records may be admitted under
Federal Rule of Evidence 803(6) as business records or under Rule 803(10) as
certificates of lack of official records. See Hughes v.
United States, 953 F.2d 531, 535 (9th Cir. 1992) (holding that
certificate of assessments and payments was proof of fact that federal tax
assessments actually were made); United States v. Spine, 945 F.2d
143, 149 (6th Cir. 1991) (certificates of assessments and payments, which showed
defendant filed no returns, admissible under Rule 803(10)); United States
v. Bowers, 920 F.2d 220, 223 (4th Cir. 1990) (IRS records admissible as
"certificates of lack of official record" under Rule 803(10)); United
States v. Neff, 615 F.2d 1235, 1241-42 (9th Cir. 1980) (IRS Certificates
of Assessments and Payments admissible under Rule 803(10));United States
v. Tarrant, 798 F. Supp. 1292, 1299 (E.D. Mich. 1992) (IRS certified
records of tax assessments and payments properly admitted under Rule 803(8) and
Rule 803(10)). Such records may be self-authenticating under Rule 902 if under
seal or they may be authenticated by an IRS employee. No showing of the accuracy
of the computer system needs to be made to introduce the documents.
See United States v. Ryan, 969 F.2d 238, 240
(7th Cir. 1992) (certified copies of master file transcripts admissible as self-
authenticating documents).
Some courts have admitted IRS computer records under the Rule 803(8)
hearsay exception for public records and reports. "[I]n criminal cases matters
observed by police officers and other law enforcement personnel" are excluded
from the public records hearsay exception. Fed. R. Evid. 803(8)(B). Rule
803(8)(C) prevents the government from using "factual findings resulting from an
investigation made pursuant to authority granted by law." Courts that have
admitted computer records under Rule 803(8) distinguished between law enforcement
reports prepared in routine, non-adversarial settings and those resulting from
the more subjective endeavor or on-the-scene type investigations of a crime. The
latter are excluded from the public records exception. United States v.
Wiley, 979 F.2d 365, 369 (5th Cir. 1992); see also
United States v. Wilmer, 799 F.2d 495, 500-01 (9th Cir. 1987)
(calibration report of breathalyser within public records exception to hearsay
rule because Rule 803(8)(B) was not intended to applied to "records of routine,
nonadversarial materials" made in nonadversarial setting). But see
United States v. Oates, 560 F.2d 45 (2nd Cir. 1977) (holding that
police and evaluative reports not satisfying the standards of Rule 803(8)(B) and
(C) may not qualify for admission under any other exception to the hearsay rule).
The holding in Oates has been widely criticized by several courts.
See, e.g., United States v. Sokolow, 91 F.3d 396, 405
(3rd Cir. 1996) (listing cases criticizing Oates as unduly broad
interpretation of Rule 803(8)); Hayes, 861 F.2d at 1229-30
(discussing criticism of Oates, holding that Oates
does not apply when IRS employee who obtained computer documents testifies at
trial, and upholding admission of IRS computer records under Rule 803(6));
United States v. Metzger, 778 F.2d 1195, 1200-02 (6th Cir. 1985)
(criticizing Oates and holding that the restriction of Rule
803(8)(C) does not apply to Rule 803(10)); United States v.
Quezada, 754 F.2d 1190, 1193-94 (5th Cir. 1985) (refusing to follow
Oates' inflexible application of Rule 803(8)(B)).
40.03[10] Use of Pseudonyms by IRS Revenue Agents and Officers
Criminal prosecutors should be aware that IRS Revenue Agents and Officers
are permitted to use officially-issued pseudonyms in their dealings with the
public. The use of official pseudonyms was first permitted in 1992 pursuant to
a decision of the Federal Service Impasse Panel (FSIP) [FN8]. Department of
the Treasury, Internal Revenue Service and National Treasury Employees Union,
No. 91 FSIP 229 at 4 (March 10, 1992). As part of the IRS Restructuring Act of
1997, Congress codified the use of pseudonyms with an effective date of July 22,
1998. Pub.L. 105-206, Title III, Section 3706, July 22, 1998, 112 Stat. 778.
Use of pseudonyms is intended to prevent personal harassment of IRS
employees by taxpayers and other members of the public, especially tax
protesters. Among the problems identified by the Treasury Employees' Union, and
upon which the FSIP relied, were assaults, threats, obscene phone calls at work
and at home, and filing of false interest and dividend reports (Form 1099), and
false liens, against IRS employees. The Union cited a 1988 Federal Bureau of
Investigation Report, which found that more IRS enforcement officers suffered
more assaults than any other law enforcement group in the Federal Government.
The FSIP held that "employees shall only be required to identify themselves
by last name" and "[i]f an employee believes that due to the unique nature of
[his/her] last name, and/or the nature of the office locale, that the use of the
last name will still identify [him/her] [s/he] may 'register' a pseudonym with
his or her supervisor." The IRS Restructuring and Reform Act of 1997 requires
that an employee give "adequate justification. . . including protection of
personal safety" and obtain prior approval from his or her supervisor before
using a pseudonym.
The pseudonym may be issued only in place of the employee's last name; the
real first name must be used. Once a pseudonym is issued, it is used by that
employee at all times while on duty, whether working in the field or in the
office. All history sheets, liens, levies and summonses are signed using the
pseudonym. Pocket commissions (credentials) are issued in the pseudonym only.
However, the IRS-issued identification, which allows access to IRS facilities,
may only be issued in the employee's real name.
There has been very little litigation concerning the use of pseudonyms and
what has occurred involves summons enforcement. Generally, courts have not
found fault with the practice. See, e.g., Sanders v. United
States, No. 94-1497, 1995 WL 257812 (10th Cir. May 2, 1995);
Springer v. Internal Revenue Service, Nos. S-97-0091 WBS GGH, S-97-
0092 WBS GGH, S-97-0093 WBS GGH, 1997 WL 732526 (E.D. Cal. Sept. 12, 1997);
United States v. Wirenius, No. CV 93-6786 JGD, 1994 WL 142394, at
*n.2 (C.D. Cal. Feb. 11, 1994); Dvorak v. Hammond, No. CIV 3-94-
601, 1994 WL 762194, at *n.1 (D. Minn. Dec. 5, 1994). But
see United States v. Nolen, 4:96-CV-934-A (N.D. Texas,
1997) (refusal of District Court to allow a Revenue Agent to use a pseudonym to
testify and stating that it would not allow such practice in the future). In
Nolen, the AUSA called the Revenue Agent to the stand, asked him
to state his name for the record and then immediately had the RA identify that
name as his pseudonym. The Court took issue with the fact that the RA gave his
pseudonym as his name, despite previous disclosure of the pseudonym to the court
in the declaration signed by the RA.
Obviously, as officers of the court, government attorneys should not submit
declarations or affidavits signed by an IRS employee using a pseudonym without
informing the court that a pseudonym is being used. Likewise, caution should be
exercised when tendering any witness who is using a pseudonym. Particular care
should be taken if your summary witness/IRS expert witness has used a pseudonym;
in those instances the witness should either relinquish the pseudonym or not be
used as a witness. In that regard, the IRS recognizes that the court must be
informed about the use of a pseudonym and that the employee's legal name may
ultimately have to be disclosed, depending on the circumstances of the case.
Minimally, consultation with your supervisor and with the IRS about how best to
proceed in these instances is advised.
40.03[11] Jury Nullification
"Jury nullification" is the concept that a jury has the right to ignore a
judge's instructions on the law in a trial, if it feels the law is unjust, and
acquit the defendant even if the government has proven guilt beyond a reasonable
doubt. Protesters often argue that the authors of the Bill of Rights intended
the Sixth Amendment to incorporate such a right. There is, however, no
constitutional right to a jury nullification instruction. United States
v. Powell, 955 F.2d 1206, 1213 (9th Cir. 1992); United States v.
Krzyske, 836 F.2d 1013, 1021 (6th Cir. 1988) (upholding court's response
to jury's inquiry about meaning of "jury nullification" that "[t]here is no such
thing as valid jury nullification. Your obligation is to follow the instructions
of the court as to the law given to you."); United States v.
Drefke, 707 F.2d 978, 982 (8th Cir. 1983); United States v.
Buttorff, 572 F.2d 619, 627 (8th Cir. 1978).
See also United States v. Dougherty, 473 F.2d
1113, 1130-1137 (D.C. Cir. 1972), for a thorough discussion of the issue of jury
nullification and its historical origins.
40.04 WILLFULNESS
Willfulness, the voluntary, intentional violation of a known legal duty
(Cheek v. United States, 498 U.S. 192, 201 (1991)), may be proved
entirely by circumstantial evidence. United States v. McCaffrey,
181 F.3d 854, 856 (7th Cir. 1999); United States v. Threadgill, 172
F.3d 357, 367 (5th Cir.1999); United States v. Tucker, 133 F.3d
1208, 1218 (9th Cir. 1998); United States v. King, 126 F.3d 987,
993 (7th Cir. 1997); United States v. Rosario, 118
F.3d 160, 164 (3d Cir. 1997); United States v. Klausner, 80 F.3d
55, 62 (2d Cir. 1996); United States v. Wynn, 61 F.3d 921, 925
(D.C.Cir. 1995); United States v. Daniel, 956 F.2d 540, 543 (6th
Cir. 1992); United States v. Fingado, 934 F.2d 1163, 1167
(10th Cir. 1991); United States v. Grumka, 728 F.2d 794, 797
(6th Cir. 1984); United States v. Gleason, 726 F.2d 385, 388
(8th Cir. 1984); United States v. Schiff, 612 F.2d 73, 77-78
(2d Cir. 1979); Hellman v. United States, 339 F.2d 36, 38 (5th Cir.
1964).
[T]rial courts should follow a liberal policy in admitting evidence
directed towards establishing the defendant's state of mind. No
evidence which bears on this issue should be excluded unless it
interjects tangential and confusing elements which clearly outweigh
its relevance.
United States v. Collorafi, 876 F.2d 303, 305 (2d Cir. 1989).
In protester cases, admissible evidence of willfulness includes:
1. Tax protest activities and philosophies. United States v.
Eargle, 921 F.2d 56, 58 (5th Cir. 1991); United States
v. Grosshans, 821 F.2d 1247, 1252 (6th Cir. 1987);
United States v. Bergman, 813 F.2d 1027, 1029 (9th Cir.
1987); United States v. Turano, 802 F.2d 10, 11-12
(lst Cir. 1986); United States v. Marchini, 797 F.2d
759, 766 (9th Cir. 1986). [FN9] But see United
States v. Knapp, 25 F.3d 451, 456 n.1 (7th Cir. 1994)
(declining to review propriety of court's instruction that tax
protester status could be considered in determining willfulness
because issue not raised below).
2. Filing blatantly false IRS Forms W-4. United States v.
Johnson, 893 F.2d 451, 453 (1st Cir. 1990). See
also United States v. Brooks, 174 F.3d 950, 955 (8th
Cir. 1999); United States v. Kassouf, 144 F.3d 952, 955
(6th Cir. 1998); Hanson v. Commissioner, 975 F.2d 1150,
1153 (5th Cir. 1993); United States v. Mal, 942 F.2d
682, 685 & n.3 (9th Cir. 1991); United States v. Sloan,
939 F.2d 499, 502 (7th Cir. 1991); United States v.
Pabisz, 936 F.2d 80, 81 (2d Cir. 1991); United States
v. Williams, 928 F.2d 145, 148-49 (5th Cir.
1991); United States v. Connor, 898 F.2d
942, 945 (3rd Cir. 1990); United States v. Johnson, 893
F.2d 451, 453 (1st Cir. 1990); United States v.
Schmitt, 794 F.2d 555, 560 (10th Cir. 1986); United
States v. Ferguson, 793 F.2d 828, 831 (7th Cir. 1986);
Granado v. Commissioner, 792 F.2d 91, 93-94 (7th Cir.
1986); United States v. Shivers, 788 F.2d 1046, 1048
(5th Cir. 1986); United States v. Carpenter, 776 F.2d
1291, 1295 (5th Cir. 1985); Zell v. Commissioner, 763
F.2d 1139, 1146 (10th Cir. 1985); United States v.
Williams, 644 F.2d 696, 701 (8th Cir. 1981).
3. Prior taxpaying history, such as the prior filing of valid tax
returns followed by the filing of a protest return and receipt of a
letter from the Internal Revenue Service telling the defendant that
his return "did not comply with tax laws and might subject him to
criminal penalties." United States v. Shivers,
788 F.2d 1046, 1048 (5th Cir. 1986). See also
United States v. Daniel, 956 F.2d 540, 543 (6th Cir.
1992); United States v. Fingado, 934 F.2d 1163 (10th
Cir. 1991); United States v. DeClue, 899 F.2d 1465
(6th Cir. 1990); United States v. Poschwatta, 829 F.2d
1477, 1483 (9th Cir. 1987); United States v. Upton,
799 F.2d 432, 433 (8th Cir. 1986); United States v.
Green, 757 F.2d 116, 123-24 (7th Cir. 1985); United
States v. Grumka, 728 F.2d 794, 796 (6th Cir. 1984);
United States v. Moore, 627 F.2d 830, 832 (7th Cir.
1980); Hayward v. Day, 619 F.2d 716, 717 (8th Cir.
1980); United States v. Francisco, 614 F.2d 617, 618
(8th Cir. 1980); United States v. Karsky, 610 F.2d
548, 551 (8th Cir. 1979).
4. Subsequent taxpaying conduct. Fed. R. Evid. 404(b); United
States v. Bank of New England, N.A., 821 F.2d 844, 858 (1st.
Cir. 1987); United States v. Upton, 799 F.2d 432, 433
(8th Cir. 1986); United States v. Sempos, 772 F.2d 1,
2 (1st Cir. 1985); United States v. Richards, 723 F.2d
646, 649 (8th Cir. 1983); United States v. Serlin, 707
F.2d 953, 959 (7th Cir. 1983); United States v.
McCorkle, 511 F.2d 477, 479 (7th Cir. 1974).
5. The amount of a defendant's gross income. Fingado, 934
F.2d at 1168; United States v. Bohrer, 807 F.2d 159,
161-62 (10th Cir. 1987); United States v. Payne,
800 F.2d 227 (10th Cir. 1986). The higher the defendant's gross
income, the less likely the defendant was unaware of the filing
requirement and the more likely the defendant's failure was
intentional rather than inadvertent.
6. Proof that knowledgeable persons warned the defendant of tax
improprieties. United States v. Dack, 987 F.2d 1282,
1285 (7th Cir. 1993); Fingado, 934 F.2d at 1168;
United States v. Collorafi, 876 F.2d 303, 305 (2d Cir. 1989);
United States v. Sempos, 772 F.2d 1, 2 (1st Cir. 1985);
United States v. Grumka, 728 F.2d 794, 797 (6th Cir.
1984).
40.05 DEFENSES
40.05[1] Good Faith
A defendant's conduct is not willful if the jury finds it resulted from
"ignorance of the law or a claim that because of a misunderstanding of the law,
he had a good faith belief that he was not violating any of the provisions of the
tax laws." Cheek v. United States, 498 U.S. 192, 202 (1991).
Cheek claimed that he did not file tax returns because he believed that: (1) he
was not a taxpayer within the tax laws, (2) wages are not income, (3) the
Sixteenth Amendment did not authorize the taxation of individuals, and (4) the
Sixteenth Amendment was unenforceable. Cheek, 498 U.S. at 195.
The Court explained that:
In the end, the issue is whether, based on all the evidence, the
Government has proved that the defendant was aware of the duty at
issue, which cannot be true if the jury credits a good-faith
misunderstanding and belief submission, whether or not the
claimed belief is objectively reasonable.
Cheek, 498 U.S. at 202 (emphasis added). The Supreme Court held
the trial court's jury instructions that Cheek's good faith beliefs or
misunderstanding of the law would have to be objectively reasonable to negate
willfulness were erroneous, stating:
It was therefore error to instruct the jury to disregard evidence of
Cheek's understanding that, within the meaning of the tax laws, he was
not a person required to file a return or pay income taxes and that
wages are not taxable income, as incredible as such misunderstandings
of and beliefs about the law might be.
Cheek, 498 U.S. at 203.
The trial court did not err, however, in instructing the jury not to
consider Cheek's claims that tax laws are unconstitutional:
We thus hold that in a case like this, a defendant's views about the
validity of the tax statutes are irrelevant to the issue of
willfulness, need not be heard by the jury, and if they are, an
instruction to disregard them would be proper. For this purpose, it
makes no difference whether the claims of invalidity are frivolous or
have substance.
Cheek, 498 U.S. at 206. See also United
States v. Saussy, 802 F.2d 849, 853 (6th Cir. 1986); United States
v. Payne, 800 F.2d 227, 229 (10th Cir. 1986); United States v.
Mueller, 778 F.2d 539, 541 (9th Cir. 1985); United States v.
Latham, 754 F.2d 747, 751 (7th Cir. 1985); United States v.
Burton, 737 F.2d 439, 442 (5th Cir. 1984); United States v.
Kraeger, 711 F.2d 6, 7 (2d Cir. 1983); United States v.
Pilcher, 672 F.2d 875, 877 (11th Cir. 1982); United States v.
Moore, 627 F.2d 830, 833 n.l (7th Cir. 1980); United States v.
Karsky, 610 F.2d 548, 550 (8th Cir. 1979).
The Cheek Court stated that a jury considering a good faith
belief claim:
would be free to consider any admissible evidence from any source
showing that . . . [the taxpayer] was aware of his . . . [duties under
the tax laws], including evidence showing his awareness of the Code or
regulations, of court decisions rejecting his interpretations of the
tax law, of authoritative rulings of the Internal Revenue Service, or
any contents of the personal income tax return forms and accompanying
instructions . . . .
Cheek, 498 U.S. at 202.
In determining whether a subjective good faith belief was held, a jury
should not be precluded from considering the reasonableness of the taxpayer's
interpretation of the law.
[T]he more unreasonable the asserted beliefs or misunderstandings are,
the more likely the jury will consider them to be nothing more than
simple disagreement with known legal duties imposed by the tax laws
and will find that the Government has carried its burden of proving
knowledge.
Cheek, 498 U.S. at 203-04. After remand and retrial, the Seventh
Circuit upheld Cheek's conviction, United States v. Cheek, 3 F.3d
1057 (7th Cir. 1993), finding that the trial court's instruction that the jury
could "consider whether the defendant's stated belief about the tax statutes was
reasonable as a factor in deciding whether he held that belief in good-faith" was
proper. Cheek, 3 F.3d at 1063.
See also United States v. Becker, 965 F.2d
383, 388 (7th Cir. 1992); United States v. Powell, 955 F.2d 1206,
1212 (9th Cir. 1992) (jury may consider "the reasonableness of the interpretation
of the law in weighing the credibility" of defendants' subjective belief that
they were not required to file tax returns).
Tax protesters often claim to believe, allegedly based on a careful study
of legal decisions, statutes, legal treatises, and the like, that they are not
required to file returns or pay taxes, and attempt to introduce such materials
into evidence. See, e.g., United States v.
Bonneau, 970 F.2d 929, 931 (1st Cir. 1992); United States v.
Willie, 941 F.2d 1384, 1391 (10th Cir. 1991). In order to introduce such
materials into evidence, the taxpayer must lay a sufficient foundation of
reliance. Even if he lays such a foundation, the materials may not be admitted
into evidence because of competing interests. For example, such material may:
(1) confuse the jury as to the law (see United States v.
Stafford, 983 F.2d 25, 28 n.14 (5th Cir. 1993); United States v.
Payne, 978 F.2d 1177, 1181-82 (10th Cir. 1992);
United States v. Barnett, 945 F.2d 1296, 1301 (5th Cir. 1991);
Willie, 941 F.2d at 1395-97; United States v.
Gleason, 726 F.2d 385, 388 (8th Cir. 1984); United States v.
Kraeger, 711 F.2d 6, 7-8 (2d Cir. 1983)), (2) assist a defendant who
wishes to undermine the authority of the court, and (3) turn the trial into a tax
protester circus (see Willie, 941 F.2d at 1395 &
n.8).
If such materials are not admitted into evidence, the defendant can still
convey his core defense to the jury through testimony about his beliefs and how
he arrived at them. See Barnett, 945 F.2d at 1301;
United States v. Hairston, 819 F.2d 971, 973 (10th Cir. 1987). It
is for the district court to weigh the various competing interests and determine,
in its discretion, whether, to what extent, and in what form, legal materials
upon which a defendant claims to have relied should be admitted in any given
case. See Willie, 941 F.2d at 1398; Fed. R. Evid.
403. [FN10]
A prosecutor should not seek to exclude such evidence in all situations.
See United States v. Gaumer, 972 F.2d 723, 725
(6th Cir. 1992) (error not to allow defendant to read relevant excerpts of court
opinions and Congressional Record upon which he assertedly relied in determining
that he was not required to file tax returns); United States v.
Powell, 955 F.2d 1206, 1214 (9th Cir. 1992) ("In section 7203
prosecutions, statutes or case law upon which the defendant claims to have
actually relied are admissible to disprove that element [willfulness] if
the defendant lays a proper foundation which demonstrates such reliance."
(emphasis in original)). Restraint should be exercised where appropriate so as
not to jeopardize convictions on appeal. This is particularly true where the
defendant has made a specific claim of reliance on a relatively limited amount
of material. See Barnett, 945 F.2d at 1301 n.3
(noting that exclusion of specific proffer of one or two sentences from an IRS
handbook may have been error, albeit harmless, and contrasting this specific
proffer with the "voluminous,' cover the waterfront' exhibits" that defendant had
originally offered). In such a situation, the prosecutor should consider
requesting a limiting instruction rather than opposing the admission of such
evidence. [FN11]
For examples of jury instructions on willfulness and the good faith defense
that have been upheld, see United States v. Dykstra,
991 F.2d 450, 452-53 (8th Cir. 1993); United States v. Dack,
987 F.2d 1282, 1285 (7th Cir. 1993); Stafford, 983 F.2d at
27; United States v. Becker, 965 F.2d 383, 388 (7th Cir. 1992);
United States v. Droge, 961 F.2d 1030, 1037-38 (2d Cir. 1992);
United States v. Masat, 948 F.2d 923, 931-32 (5th Cir. 1991);
United States v. Fingado, 934 F.2d 1163, 1166-67 (10th Cir. 1991);
United States v. Collins, 920 F.2d 619, 622-23 (10th Cir. 1990).
40.05[1][a] Reliance on Return Preparer/Accountant
"Reliance on a qualified tax preparer is an affirmative defense to a charge
of willful filing of a false tax return." United States v.
Charroux, 3 F.3d 827, 831 (5th Cir. 1993) (citation omitted).
Reliance on the advice of third parties, such as preparers or accountants,
may negate the element of willfulness in prosecutions for: (1) tax evasion in
violation of 26 U.S.C. § 7201 (United States v. Fawaz, 881
F.2d 259, 265 (6th Cir. 1989)); (2) willful failure to pay, keep records, or
supply required information, in violation of 26 U.S.C. § 7203 (United
States v. Civella, 666 F.2d 1122, 1126 (8th Cir. 1981); United
States v. Wilson, 550 F.2d 259, 260 (5th Cir. 1977)); (3) tax perjury,
in violation of 26 U.S.C. § 7206(1) (United States v.
Brimberry, 961 F.2d 1286, 1290 (7th Cir. 1992)).
In order to claim successfully third-party reliance, a defendant must show
that he truthfully and completely: (1) disclosed all relevant facts to the
preparer or accountant, and (2) in good faith relied on the preparer's or
accountant's advice. United States v. Masat, 948 F.2d 923, 930 (5th
Cir. 1991); United States v. Wilson, 887 F.2d 69, 73 (5th Cir.
1989); United States v. Michaud, 860 F.2d 495, 500 (1st Cir. 1988);
United States v. Meyer, 808 F.2d 1304, 1306 (8th Cir. 1987);
United States v. Whyte, 699 F.2d 375, 379 (7th Cir. 1983);
United States v. Samara, 643 F.2d 701, 703-704 (10th Cir. 1981);
United States v. Pomponio, 563 F.2d 659, 662 (4th Cir. 1977);
United States v. Lisowski, 504 F.2d 1268, 1272 (7th Cir. 1974);
United States v. Stone, 431 F.2d 1286, 1289 (5th Cir. 1970). In
other words, "to avail himself of the defense, a defendant must demonstrate that
he provided full information to the preparer and then filed the return without
having reason to believe it was incorrect." Charroux, 3 F.3d at
831 (citation omitted).
"In a tax evasion case in which the defendants assert that blind reliance
on their accountant, not criminal intent, caused an under reporting, the critical
datum is not whether the defendants ordered the accountant to falsify the return,
but, rather, whether the defendants knew when they signed the return that it
understated their income." United States v. Olbres, 61 F.3d 967,
971 (1st Cir. 1995). A defendant who knew the return's contents and knews that
the income figure reported on the return was understated, cannot claim to have
blindly relied on a preparer. Id. "A jury may permissibly infer
that a taxpayer read his return and knew its contents from the bare fact that he
signed it." Id.
Good faith reliance on third parties is an issue to be determined by the
jury. Meyer, 808 F.2d at 1306. Therefore, a jury instruction on
this issue should be submitted if credible evidence of third-party reliance is
presented at trial. A defendant who demonstrates that he (1) made full
disclosure of all pertinent facts, and (2) relied in good faith on this advice
is entitled to a reliance-on-advice-of-accountant jury instruction. United
States v. Ford, 184 F.3d 566, 579 (6th Cir. 1999), cert.
denied, 528 U.S. 1161 (2000). A reliance-on-advice-of-accountant
instruction may be warranted "even without per se testimony that the
defendant relied on the accountant's advice, so long as the circumstances support
an inference that he did so rely." Id. See also United States v.
Duncan, 850 F.2d 1104, 1115-19 (6th Cir. 1988).
Where there is no evidentiary basis for a reliance defense, however, a
defendant is not entitled to a jury instruction. United States v.
Evangelista, 122 F.3d 112, 118 (2d Cir. 1997).
The defendant's education, sophistication, and degree of reliance are
relevant to a reliance defense. See United States v. Estate Preservation
Services, 202 F.3d 1093, 1103 (9th Cir. 2000) (defense unavailable to a
physicist who received training in taxation at the University of Southern
California Law School). A defendant who seeks advice, but chooses to: (1) ignore
advisors skeptical as to the legality of his statements, and (2) follow the
advice of others who "unquestioningly agree[d] to further his scheme" will not
succeed in asserting third-party reliance. Estate Preservation
Services, 202 F.3d at 1103.
Furthermore, a taxpayer may not successfully assert this defense when
certain information -- such as filing deadlines -- is common knowledge.
United States v. Boyle, 469 U.S. 241, 251-52 (1985).
40.05[1][b] Reliance on Advice of Counsel
Reliance on the advice of an attorney in the preparation of incomplete or
"Fifth Amendment" returns is a defense raised by some protesters. If the
evidence presented at trial is sufficient to warrant it, the court should
instruct the jury that the defendant's conduct is not "willful" if he acted with
a good faith misunderstanding based on the advice of counsel. See
United States v. Becker, 965 F.2d 383, 387-88 (7th Cir. 1992)
(upholding refusal to give reliance instruction where there was no testimony
that: (1) defendant told lawyer everything about his situation, (2) attorney gave
defendant specific advice in response, and (3) defendant followed that advice);
United States v. Benson, 941 F.2d 598, 615 (7th Cir. 1991) (proper
to instruct jury that reliance on counsel was a "circumstance" to consider in
determining willfulness); United States v. Snyder, 766 F.2d 167,
169 (4th Cir. 1985) (testimony not sufficient to justify instruction concerning
good faith reliance).
The Seventh Circuit, in United States v. Cheek, 3 F.3d 1057
(7th Cir. 1993), used the following test to determine whether Cheek was entitled
to a reliance on counsel defense instruction:
In order to establish an advice of counsel defense, a defendant must
establish that: " (1) before taking action, (2) he in good faith
sought the advice of an attorney whom he considered competent, (3) for
the purpose of securing advice on the lawfulness of his possible
future conduct, (4) and made a full and accurate report to his
attorney of all material facts which the defendant knew, (5) and acted
strictly in accordance with the advice of his attorney who had been
given a full report."
Cheek, 3 F.3d at 1061 (citing Liss v. United States,
915 F.2d 287, 291 (7th Cir. 1990)). The Seventh Circuit held that Cheek was not
entitled to the instruction because he did not seek advice on possible future
conduct, but "merely continued on a course of illegal conduct begun prior to
contacting counsel". Cheek, 3 F.3d at 1062. Cheek did not make
a full disclosure to his attorney nor follow his attorney's advice that he should
obey the tax laws until told by a court that the laws were not valid.
Cheek, 3 F.3d at 1062.
40.05[1][c] No Defense in Non-Tax Cases
In Cheek v. United States, 498 U.S. 192 (1991), the Supreme
Court carefully limited the "good faith" defense to tax cases, emphasizing "the
complexity" of the Internal Revenue Code, 498 U.S. at 200, the
"average citizen's" difficulty in comprehending duties it imposes, 498 U.S. at
199, and the construction of "willfulness" in the tax context, 498 U.S. at 201.
Various appellate courts have confirmed Cheek's limited
application. See United States v. Boots, 80 F.3d
580, 594 (1st. Cir. 1996) ("defendant's initially weak contention [that
Cheek defense is available in wire fraud case] is not even arguably
tenable"); In re Air Disaster at Lockerbie Scotland, 37 F.3d 804,
818 (2d Cir. 1994) ("our subsequent decisions and those of other courts
acknowledge Cheek's limited application"); United States v.
Gay, 967 F.2d 322 (9th Cir. 1992) (mail and property fraud); United
States v. Chaney, 964 F.2d 437, 453-54 (5th Cir. 1992)
(false statements on bank records). But see
Ratzlaf v. United States, 507 U.S. 1060 (1993) (The word "willfully" in
31 U.S.C. § 5322(a) requires that the government prove in a prosecution for
structuring cash transactions that the defendant knew that structuring is
unlawful). [FN12]
40.05[2] Constitutional Challenges
40.05[2][a] Fourth Amendment -- Unreasonable Search and Seizure
The statutory requirement to file tax returns does not violate the Fourth
Amendment. Flint v. Stone Tracy Co., 220 U.S. 107, 177 (1911).
Likewise, the government's use at trial of a defendant's filed income tax
returns or Forms W-4 does not violate the Fourth Amendment right against
unreasonable searches and seizures. United States v. Amon,
669 F.2d 1351, 1358 (10th Cir. 1981); United States v. Warinner,
607 F.2d 210, 212-13 (8th Cir. 1979).
The IRS has authority to obtain evidence through the execution of search
warrants. United States v. Rosnow, 977 F.2d 399, 409 (8th Cir.
1992). In Rosnow, the court noted that "Congress gave the IRS wide
authority to conduct criminal investigations, including the execution of search
warrants, regarding those individuals suspected of violating the tax laws."
Rosnow, 977 F.2d at 399. See also Donaldson v. United
States, 400 U.S. 517, 522, 537 (1971) (IRS third-party summons do not
violate Fourth Amendment); United States v. Scott, 975 F.2d 927,
928 (1st Cir. 1992) (IRS systematic search, seizure, and reconstruction of
shredded documents from garbage bag in front of defendant's home did not violate
Fourth Amendment); United States v. Dunkel, 900 F.2d 105, 106
(7th Cir. 1990), vacated on other grounds, 111 S.Ct. 747 (1991)
(use of financial records obtained from taxpayer's dumpster does not violate
Fourth Amendment).
40.05[2][b] Fifth Amendment -- Due Process; Freedom from
Self-incrimination
Tax protesters sometimes claim that taxes constitute a "taking" of property
without due process of law, in violation of the Fifth Amendment. Schiff
v. United States, 919 F.2d 830, 832 (D.Conn. 1989); Irwin Schiff, The
Federal Mafia: How It Illegally Imposes and Unlawfully Collects Income Taxes
21, 26 (1992). But the Supreme Court held that the government's need for
revenues justifies use of summary procedures to collect taxes. Phillips
v. Commissioner, 283 U.S. 589, 595 (1931). The Internal Revenue Code
itself provides methods to ensure due process to taxpayers: (1) "the refund
method," set forth in 26 U.S.C. § 7422(e) and 28 U.S.C. §§ 1341,
1346(a), whereby a taxpayer must pay the full amount of the tax and then sue in
district court or in the Federal Court of Claims for a refund, and (2) "the
deficiency method," set forth in 26 U.S.C. § 6213(a), whereby a taxpayer
need not pay the contested tax if he immediately petitions U.S. Tax Court to
redetermine the deficiency. Courts have found both methods to provide due
process. Flora v. United States, 362 U.S. 145 (1960);
Schiff, 919 F.2d at 832.
To similar effect, tax protesters often submit tax returns on which they
refuse to provide any financial information, asserting their Fifth Amendment
right against self-incrimination. U.S. Const. amend. V. However, the Supreme
Court has long held that the statutory requirement to file tax returns does not
violate the Fifth Amendment. Flint v. Stone Tracy Co., 220 U.S.
107, 177 (1911).
Section 6702 of Title 26 of the United States Code ("Frivolous Income Tax
Returns") imposes a civil penalty against any individual who, motivated by "a
position which is frivolous" or "a desire (which appears on the purported return)
to delay or impede the administration of Federal income tax laws," files an
incomplete return. Courts repeatedly have found Fifth Amendment privilege claims
on incomplete forms frivolous. See Sochia v. Commissioner,
23 F.3d 941 (5th Cir. 1994) (return frivolous where defendant supplied only names
and claimed Fifth Amendment privilege by inserting phrase: "Object -- Fifth
Amendment"); Mosher v. IRS, 775 F.2d 1292 (5th Cir. 1985) (taxpayer
struck jurat from return); Eicher v. United States, 774 F.2d 27
(1st Cir. 1985) (blanket claim of privilege on return
frivolous); Ricket v. United States, 773 F.2d 1214 (11th Cir. 1985)
(return containing only signature and date, and invoking privilege was
"frivolous"); Peeples v. Commissioner, 771 F.2d 77 (4th Cir. 1984)
(words "refused" and Fifth Amendment claim rendered return frivolous);
Hudson v. United States, 766 F.2d 1288 (9th Cir. 1985)
(taxpayer's statement that complete return could be used to prosecute false
claims action insufficient to invoke Fifth Amendment protection).
Return forms containing little or no financial information from which a tax
can be computed are sometimes referred to as "Fifth Amendment returns." The
filing of a so-called Fifth Amendment return may constitute an affirmative act
for the purpose of proving evasion. See United States v.
Waldeck, 909 F.2d 555, 559 (1st Cir. 1990) ("filing of returns containing
only name, a signature, a figure for federal income tax withheld, asterisks at
numbered lines in lieu of information and the statement '[t]his means specific
exception is made under the Fifth Amendment, U.S. Constitution,'" is an
affirmative act of evasion); United States v. DeClue, 899 F.2d
1465, 1471 (6th Cir. 1990) (filing of return with no financial information, on
which was typed, "object: self-incrimination," is affirmative act of evasion).
In United States v. Sullivan, 274 U.S. 259 (1927), the Court
held that the privilege against compulsory self- incrimination is not a defense
to prosecution for failing to file. The Court indicated, however, that the
privilege could be claimed against specific disclosures sought on a return,
saying (274 U.S. at 263):
If the form of return provided called for answers that the defendant
was privileged from making he could have raised the objection in the
return, but could not on that account refuse to make any return at
all.
See also Garner v. United States, 424 U.S.
648, 650 (1976).
Sullivan is frequently cited for the proposition that a
taxpayer may not use the Fifth Amendment to justify the failure to file any
return at all. See, e.g., Garner,
424 U.S. at 650; United States v. Dack, 987 F.2d 1282, 1284
(7th Cir. 1993); United States v. Wunder, 919 F.2d 34, 37 (6th Cir.
1990); United States v. Poschwatta, 829 F.2d 1477, 1482 n. 3
(9th Cir. 1987); United States v. Leidendeker,
779 F.2d 1417, 1418 (9th Cir. 1986); United States v. Stillhammer,
706 F.2d 1072, 1076-77 (10th Cir. 1983); United States v. Pilcher,
672 F.2d 875, 877 (11th Cir. 1982); United States v. Lawson,
670 F.2d 923, 927 (10th Cir. 1982) (cases cited); United States v.
Reed, 670 F.2d 622, 623-24 (5th Cir. 1982); United States v.
Booher, 641 F.2d 218, 219 (5th Cir. 1981); United States v.
Edelson, 604 F.2d 232, 234 (3d Cir. 1979).
A taxpayer may refuse to answer specific questions or disclose specific
information if such disclosure would be incriminating. The courts have
uniformly held, however, that disclosure of routine financial information on a
tax return ordinarily does not, in itself, incriminate an individual, and does
not violate one's Fifth Amendment right against self-incrimination.
Garner, 424 U.S. at 651; California v. Byers, 402
U.S. 424, 428, 430 (1971) ("the mere possibility of incrimination is insufficient
to defeat the strong policies in favor of a disclosure"); United States v.
Warner, 830 F.2d 651, 653-54 (7th Cir. 1987); United States v.
Heise, 709 F.2d 449, 451 (6th Cir. 1983); United States v.
Drefke, 707 F.2d 978, 982-83 (8th Cir. 1983); Lawson,
670 F.2d at 927; Reed, 670 F.2d at 623-24; United States v.
Carlson, 617 F.2d 518 (9th Cir. 1980) (no valid Fifth Amendment privilege
excusing failure to file Form 1040 to cover up false Form W-4 previously filed
by defendant); United States v. Neff, 615 F.2d 1235, 1238-41
(9th Cir. 1980); United States v. Schiff, 612 F.2d 73, 77-83
(2d Cir. 1979); Edelson, 604 F.2d at 234; United States v.
Irwin, 561 F.2d 198, 201 (10th Cir. 1977). See also
United States v. Saussy, 802 F.2d 849, 854-55 (6th Cir. 1986);
United States v. Green, 757 F.2d 116 n.7 (7th Cir. 1985) (affirming
use of jury instruction that reporting income from legitimate activities would
not fall within the Fifth Amendment privilege).
In appropriate situations, a Fifth Amendment claim may be asserted as to
specific line items on tax forms. Sullivan, 274 U.S. at 263;
United States v. Harting, 879 F.2d 765, 770 (10th Cir. 1989);
United States v. Flitcraft, 863 F.2d 342, 344 (5th Cir. 1988);
United States v. Shivers, 788 F.2d 1046, 1049 (5th Cir. 1986)
(amount of taxpayer's income not privileged though source may be);
Heise, 709 F.2d at 450-51; United States v.
Turk, 722 F.2d 1439, 1441 (9th Cir. 1983); United States v.
Verkuilen, 690 F.2d 648, 654 (7th Cir. 1982); Edelson,
604 F.2d at 234.
In order to assert validly a Fifth Amendment privilege against self-
incrimination, a defendant must:
* Claim the privilege on his return (Garner v. United
States, 424 U.S. at 665; Sullivan, 274
U.S. at 263-64);
* As an objection to a specific question (Heligman v.
United States, 407 F.2d 448, 450-51 (8th Cir. 1969));
* Demonstrate a real and substantial danger of self-incrimination
(Daly v. United States, 393 F.2d 873, 878 (8th
Cir. 1968));
* Submit to the reviewing court's arbitration of the claim
(Heligman, 407 F.2d at 450-51).
A court's determination that the defendant's claim of the Fifth Amendment
privilege against self-incrimination is invalid does not, however,
prohibit the defendant from offering evidence to the effect that he believed in
good faith he could properly assert the privilege. Such a good faith claim, even
if erroneous, is a valid defense to the element of willfulness, if believed by
the jury. Saussy, 802 F.2d at 854-855; Poschwatta,
829 F.2d at 1482 n.3; Shivers, 788 F.2d at 1048 n.1; United
States v. Goetz, 746 F.2d 705, 710 (11th Cir. 1982).
Whether the defendant validly exercised the privilege against
self-incrimination is a question of law for the court. Turk,
722 F.2d at 1440. On the other hand, whether the defendant asserted the
privilege in good faith, thereby entitling the defendant to acquittal, is a
question of fact for the jury to resolve. United States v. Smith,
735 F.2d 1196, 1198 (9th Cir. 1984); Turk, 722 F.2d at 1440;.
40.05[2][c] Tax Laws Are Unconstitutionally Vague
Sections 7203, 7205 and 7206 have withstood challenges that they are
unconstitutionally vague. United States v. Cochrane, 985 F.2d 1027,
1031 (9th Cir. 1993) (section 7206) ("The void-for-vagueness doctrine requires
[only] that a penal statute define the criminal offense with sufficient
definiteness that ordinary people can understand what conduct is prohibited")
(citation omitted)); United States v. Dunkel, 900 F.2d 105, 107
(7th Cir. 1990) ("it is enough that a reasonable person can see what Congress is
driving at"), vacated on other grounds, 498 U.S. 1043 (1991)
(section 7203); United States v. Price, 798 F.2d 111, 113
(5th Cir. 1986) (section 7205); United States v. Pederson, 784 F.2d
1462, 1463-64 (9th Cir. 1986) (section 7203); United States v.
Parshall, 757 F.2d 211, 215 (8th Cir. 1985) (section 7203); United
States v. Damon, 676 F.2d 1060, 1062 (5th Cir. 1982) (section
7206(2)); United States v. Annunziato, 643 F.2d 676, 677-78
(9th Cir. 1981) (section 7205); United States v. Russell, 585 F.2d
368, 370 (8th Cir. 1978) (section 7203); United States v. Buttorff,
572 F.2d 619, 624-25 (8th Cir. 1978) (section 7205); United States v.
Lachmann, 469 F.2d 1043, 1046 (lst Cir. 1972) (section 7203).
40.05[2][d] Sixteenth Amendment Never Ratified
Using various arguments, tax protesters claim that the Sixteenth Amendment,
which grants Congress the power to collect taxes without consideration to
apportionment, is not part of the United States Constitution. See
Christopher S. Jackson, The Inane Gospel of Tax Protest: Resist Rendering
Unto Caesar -- Whatever His Demands, 32 Gonz. L. Rev. 291, 301-302
(1997) (reciting litany of tax protester arguments).
The Supreme Court has stated that such assertions are political questions
beyond federal court jurisdiction. Coleman v. Miller, 307 U.S.
433, 450-56 (1939) (Black, J., concurring); see also Baker v.
Carr, 369 U.S. 186, 214-15 (1962).
Lower courts, however, have repeatedly rejected the contention that the
Sixteenth Amendment was never properly ratified, and that the federal government
therefore lacks the authority to collect an income tax. Socia v.
Commissioner, 23 F.3d 941 (5th Cir. 1994); United States v.
Benson, 941 F.2d 598, 607 (7th Cir. 1991) (rejecting argument based on
clerical errors and state protocols); United States v. Collins,
920 F.2d 619, 629 (10th Cir. 1990); In re Becraft, 885 F.2d 547,
549 (9th Cir. 1989); Miller v. United States, 868 F.2d 236, 239-41
(7th Cir. 1989); United States v. Sitka, 845 F.2d 43, 44-47
(2d Cir. 1988) (rejecting clerical errors argument); United States v.
Ward, 833 F.2d 1538, 1539 (11th Cir. 1987); United States v.
Dube, 820 F.2d 886, 891 (7th Cir. 1986); Pollard v.
Commissioner, 816 F.2d 603, 604-05(11th Cir. 1987); United States
v. Stahl, 792 F.2d 1438, 1439 (9th Cir. 1986); Coleman v.
Commissioner, 791 F.2d 68, 70-71 (7th Cir. 1986); Sisk v.
Commissioner, 791 F.2d 58, 61 (6th Cir. 1986) (rejecting clerical errors
and "Ohio not a State" arguments); United States v. Thomas, 788
F.2d 1250, 1253 (7th Cir. 1986) (rejecting view that literal text is essential
to proper adoption); Biermann v. Commissioner, 769 F.2d 707 (11th
Cir. 1985); Knoblauch v. Commissioner, 749 F.2d 200, 201-202 (5th
Cir. 1984) (variant wording in state ratification resolution without consequence;
"Ohio not a State" argument rejected).
As stated in United States v. House, 617 F.Supp. 237, 240
(W.D. Mich. 1985):
The sixteenth amendment and the tax laws passed pursuant to it have
been followed by the courts for over half a century. They represent
the recognized law of the land.
40.05[3] Selective Prosecution and Freedom of Speech
40.05[3][a] Generally
Tax protesters have asserted that their prosecution violates their First
Amendment right of freedom of speech. Protesters commonly argue that they are
being prosecuted merely because they are outspoken, prominent critics of the
Internal Revenue Code. This is actually a selective prosecution defense, not a
First Amendment defense. There is consensus among the circuits that liability
for a false or fraudulent tax return cannot be avoided by invoking the First
Amendment. United States v. Rowlee, 899 F.2d 1275, 1279 (2d Cir.
1990).
On the other hand, where the protester is prosecuted under an aiding or
abetting charge, e.g., 18 U.S.C. § 2 or 26 U.S.C. § 7206(2), or
a conspiracy charge, the protester may claim that his or her counseling or advice
to others was limited to speech, not action and is, therefore, protected by the
First Amendment. In certain limited instances, a First Amendment freedom of
speech may be presented. See Brandenburg v. Ohio, 395 U.S. 444,
448-49 (1969); United States v. Fleschner, 98 F.3d 155, 158-59 (4th
Cir. 1996); United States v. Kelley, 769 F.2d 215, 217 (4th Cir.
1985) (construing Brandenburg).
In Brandenburg, 395 U.S. at 448-49, the Supreme Court held
that speech that advocates law-breaking, but incites no imminent unlawful
activity, is protected. Brandenburg, 395 U.S. at 448-49. If,
however, an advisor willfully assists the preparation of a actual false return,
in violation of 26 U.S.C. § 7206(2), by advising a tax return preparer to
claim a deduction on the return of the taxpayers, which the advisor knew the
taxpayers were not entitled to take, the advisor cannot successfully argue that
this conduct was protected speech. United States v. Knapp, 25 F.3d
451, 457 (7th Cir. 1994). Nor can a tax shelter promoter who advises others to
prepare actual false returns successfully claim First Amendment protection.
See Fleschner, 98 F.3d at 158-59;
Kelley, 769 F.2d at 217; United States v. Kelley, 864 F.2d
569, 576-77 (7th Cir. 1989).
40.05[3][b] Selective Prosecution Defense
"A selective prosecution claim is not a defense on the merits to the
criminal charge itself, but an independent assertion that the prosecutor has
brought the charge for reasons forbidden by the Constitution." United
States v. Armstrong, 517 U.S. 456, 464 (1996).
The test for selective prosecution is rigorous. In order to overcome the
presumption of prosecutorial regularity, a defendant must prove, "by clear
evidence," that the decision to prosecute was based on "an unjustifiable
standard, such as race, religion, or other arbitrary classification . . .
directed so exclusively against a particular class of persons . . . with a mind
so unequal and oppressive" that prosecution amounts to a "practical denial" of
equal protection. Armstrong, 517 U.S. at 464 (citations omitted).
The defense that protesters are being selectively prosecuted because they are
outspoken opponents of the Internal Revenue Code rarely succeeds.
The defendant who asserts selective prosecution carries a heavy burden.
In United States v. Berrios, 501 F.2d 1207, 1211 (2d Cir. 1974),
the Second Circuit defined the defendant's burden:
To support a defense of selective or discriminatory prosecution, a
defendant bears the heavy burden of establishing, at least
prima facie, (1) that, while others similarly situated
have not generally been proceeded against because of conduct of the
type forming the basis of the charge against him, he has been singled
out for prosecution, and (2) that the government's discriminatory
selection of him for prosecution has been invidious or in bad faith,
i.e., based upon such impermissible considerations as race,
religion, or the desire to prevent his exercise of constitutional
rights.
Other circuits have adopted this rigorous standard. United States
v. Aguilar, 883 F.2d 662, 705 (9th Cir. 1989); United States v.
Michaud, 860 F.2d 495, 499-500 (lst Cir. 1988); United States v.
McMullen, 755 F.2d 65, 66 (6th Cir. 1984); United States v.
Dack, 747 F.2d 1172, 1176 n.5 (7th Cir. 1984); United States v.
Holecek, 739 F.2d 331, 333-34 (8th Cir. 1984); United States v.
Mangieri, 694 F.2d 1270, 1273 (D.C. Cir. 1982); United States v.
Damon, 676 F.2d 1060, 1064 (5th Cir. 1982); United
States v. Amon, 669 F.2d 1351, 1356 n.6 (10th Cir. 1981); United
States v. Rice, 659 F.2d 524, 527 (5th Cir. 1981).
The defendant must overcome the presumption that the prosecution has been
legitimately undertaken prior to being entitled to discovery or a hearing on the
issue of selective prosecution. United States v. Bennett, 539 F.2d
45, 54 (10th Cir. 1976). The IRS is not required to treat similarly all who
engage in roughly the same conduct. Michaud, 860 F.2d at 499.
Vigorous prosecution is not selective prosecution. United States v.
Brewer, 681 F.2d 973, 974 (5th Cir. 1982).
The defendant has the initial burden of establishing the two parts of a
prima facie case of selective prosecution. He must present "some
evidence tending to show the existence of the essential elements of the defense
and that the documents in the government's possession would indeed be probative
of these elements." Berrios, 501 F.2d at 1211-12. See
also United States v. Bohrer, 807 F.2d 159, 161
(10th Cir. 1986); United States v. Moon, 718 F.2d 1210, 1229
(2d Cir. 1983).
The Sixth, Seventh, and Eighth Circuits have held that the defendant must
"raise a reasonable doubt about the prosecutor's purpose" to be entitled to a
hearing. United States v. Hazel, 696 F.2d 473, 475 (6th Cir.
1983); United States v. Catlett, 584 F.2d 864, 866 (8th Cir. 1978);
United States v. Falk, 479 F.2d 616, 623 (7th Cir. 1973).
The Third, Fifth, Sixth, and Ninth Circuits have used such phrases as
"colorable entitlement" to the defense, "some credible evidence," and enough
facts "to take the question past the frivolous stage" in setting the threshold
for requiring discovery or a hearing. United States v. Hazel,
696 F.2d 473, 475 (6th Cir. 1983); Damon, 676 F.2d at 1064-65;
United States v. Torquato, 602 F.2d 564, 569-70 (3d Cir. 1979);
United States v. Oaks, 508 F.2d 1403, 1404 (9th Cir. 1974)
United States v. Berrigan, 482 F.2d 171, 181 (3d Cir. 1973).
If the defendant makes such a showing, the burden shifts to the government
to show that there was no selective prosecution.
As a practical matter, the government should resist discovery or a hearing
on this issue until the defendant has made the requisite showing of selective
prosecution: defendants may use frivolous claims of selective prosecution to
obtain documents -- such as internal government memoranda -- they otherwise would
not be entitled to under Fed. R. Crim. P. 16.
Generally, courts have upheld government targeting of vocal tax protesters
for prosecution against defendants' selective prosecution attacks. United
States v. Johnson, 577 F.2d 1304, 1309 (5th Cir. 1978); United
States v. Pottorf, 769 F. Supp. 1176, 1184 (D. Kan. 1991). The
government's initiation of prosecution because of a defendant's "great notoriety"
as a protester would not, as a matter of law, be an impermissible basis for
prosecution. United States v. Hazel, 696 F.2d 473, 475 (6th Cir.
1983). See also United States v. Kelley, 769 F.2d 215, 217 (4th
Cir. 1985).
The fact that some tax evaders and protesters elude prosecution is
insufficient to establish selective prosecution. Brewer, 681 F.2d
at 974. The defendant must show that others similarly situated were not
prosecuted and that the prosecution was based on some impermissible
consideration, such as race or religion. United States v. Amon,
669 F.2d 1351, 1356-57 (10th Cir. 1981).
See also United States v. Rice, 659 F.2d 524,
527 (5th Cir. 1981) ("selection for prosecution based in part upon the potential
deterrent effect on others serves a legitimate interest in prompting more general
compliance with the tax laws").
As the Fourth Circuit stated in Kelley, 769 F.2d at 218:
There is no impermissible selectivity in a prosecutorial decision to
prosecute the ringleader and instigator, without prosecuting his