22 October 2018   Another great article by our Learned Colleague, Attorney Sally P. Schreiber  (Senior Editor at Tax Advisor)


Proposed regs. reflect amendments to all-events test and advance payments

In REG-104872-18, the IRS has proposed removing regulations on advance payments and long-term contracts to reflect amendments to Sec. 451 by the law known as the Tax Cuts and Jobs Act, P.L. 115-97.

Sec. 451(b), as amended, requires an accrual-method taxpayer to treat the all-events test for a particular item of gross income as met no later than when the item is taken into account as revenue in the taxpayer’s applicable financial statement or any other financial statement the IRS prescribes.

Sec. 451(c), as amended, requires an accrual-method taxpayer that receives any advance payment described in Sec. 451(c)(4) during the tax year to include it in income in the tax year of receipt or make an election to (1) include any portion of the advance payment in income in the tax year of receipt to the extent required under new Sec. 451(b); and (2) include the remaining portion in income in the following tax year. The election to defer advance payments of goods and services under new Sec. 451(c) is similar to the rules regarding the treatment of advance payments for goods, services, and other specified items in Rev. Proc. 2004-34.

Because new Sec. 451(c) and the election to defer advanced payments override the deferral method in Regs. Sec. 1.451-5, the IRS is proposing to remove that regulation and other regulations that cross-reference it.

The IRS also explained that the rules for changing a method of accounting under Sec. 446 from the method contained in Regs. Sec. 1.451-5 to another method will apply, but it asked for comments on whether any changes to existing procedural rules under Sec. 446 for changes in methods of accounting are necessary or desirable because of the removal of Regs. Sec. 1.451-5.

The IRS says the proposed rules will be effective the day they are published as final in the Federal Register.


11 October 2018: Federal Court Orders Tax Scheme Promoters to Disgorge $50 Million in Gains From Fraudulent Solar Energy Tax Scheme (He should have hired SELIG & AssociatesA federal court ordered R. Gregory Shepard and Neldon Johnson and companies RaPower-3 LLC, and International Automated Systems, Inc., to disgorge over $50 million in gross receipts from facilitating and promoting an abusive tax scheme involving false tax deductions and solar energy credits.

The court also barred defendants from promoting and marketing the scheme and ordered them to take steps to ensure that the public is not further harmed by their actions.

“We are gratified by the court’s decision, which mitigates the harm to the United States Treasury caused by defendants’ unlawful tax scheme,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division.  “As the court’s decision recognizes, a business model that is based on false and fraudulent conduct cannot be allowed to retain its income.”  

Based upon evidence the government submitted to the court during a 12-day bench trial, the court found that the defendants engaged in a “massive fraud.” The court stated that the defendants “each knew, or had reason to know, that their statements about the tax benefits purportedly related to buying solar lenses were false or fraudulent.”

The court stated that “[b]ecause of the manner in which Defendants promoted the scheme, the court concludes that $50,025,480 in gross receipts from the solar energy scheme came from money that rightfully belonged to the U.S. Treasury.” The court found that the defendants “obstructed discovery about their gross receipts and other topics involving their finances.”

The court stated that the United States showed a “reasonable approximation” of the total gross receipts from lens sales. In addition, the court held that defendants would not be allowed any credit of operating expenses because such credits “are not consistent with principles of equitable disgorgement.”

According to the opinion, defendant Neldon Johnson claimed to have invented purported solar energy technology involving solar thermal lenses placed in arrays on towers. The court found that to “make money from this purported solar energy technology, Johnson decided to sell a component of the purported technology: the solar lenses.”

Under the proper circumstances, the Internal Revenue Code allows a taxpayer engaged in a trade or business certain tax deductions for expenses the taxpayer incurs while generating income. Likewise, if all of the requirements are met, the tax law allows an “energy credit” for certain “energy property.”

However, in this case, the court concluded that the defendants “knew, or had reason to know, that their customers were not in a trade or business of leasing out solar lenses and, therefore, that their customers were not allowed the depreciation deduction or solar energy tax credit.”

The opinion also concluded that the defendants made “gross valuation overstatements” when they sold lenses to customers. The court found that the defendants sold each lens for a total purported price of $3,500. The court stated that the evidence showed that the raw cost of each supposed “lens” was very low and found that “[d]efendants’ technology does not work, and is not likely to work to produce commercially viable electricity or solar process heat. Therefore, each ‘lens’ is just one component of an inoperable system. It is not a piece of sophisticated technology such that premium pricing is appropriate for it.”

The court also barred defendants from promoting and marketing the scheme. The court stated that the defendants sold lenses using a multi-level marketing approach, and encouraged distributors to “bring still more people in to the multi-level marketing system and build an extensive ‘downline.’” The court concluded that, in this case, “[t]he toxic combination of multi-level marketing and misleading information creates an urgent need [for] an injunction.” 

The injunction requires, among other things, that the defendants stop making statements that a person who buys a lens is in a trade or business with respect to that lens; may lawfully claim a depreciation deduction or any other business expense deduction related to a solar lens; and may lawfully claim a solar energy credit related to a lens.

Further, the court ordered that the defendants disclose, in their marketing materials for lenses that the court “has determined that the solar energy technology of RaPower-3 in place from 2005 to 2018 is without scientific validation or substance and ineligible for tax credits or depreciation by individual purchasers of lenses.”


25 September 2018   Criminal Tax Fraud in the 4thDegree is a class E felony   A person commits criminal tax fraud in the fourth degree when he or she commits a tax fraud act or acts and, with the intent to evade any tax due under this chapter, or to defraud the state or any subdivision thereof, the person pays the state and/or a political subdivision of the state (whether by means of underpayment or receipt of refund or both), in a period of not more than one year in excess of three thousand dollars less than the tax liability that is due. 


24 September 2018 New Jersey Tax Amnesty Program: On July 1, Gov. Phil Murphy signed into law a tax amnesty measure that offers relief to many taxpayers in a variety of situations and will help bridge the revenue shortfall in the state budget. It requires the Director of the Division of Taxation to establish a period not exceeding 90 days in duration which shall end no later than Jan. 15, 2019. Anyone behind on taxes owed for the time period between Feb. 1, 2009, and Sept. 1, 2017, would be eligible to participate, as long as they are not under criminal investigation.

Similar to New Jersey’s prior six amnesty initiatives, the new law provides for complete forgiveness of all penalties and one-half of the balance of accrued interest that is due as of Nov. 1, 2018, in return for non-refundable payment of the tax and remaining one-half of accrued interest due, and a waiver of the right to appeal any liability paid under amnesty.

Additionally, a significant aspect of this amnesty law is that it not only applies to unassessed amounts, but also to amounts currently under audit or being contested with the Division of Taxation, either at its Conference Branch or in the New Jersey Tax Court.

The new law applies to all state taxes administered by the Division of Taxation (e.g., gross income, sales and use tax, corporate business tax, motor fuels and so on) but does not apply to unemployment-type taxes administered by the Department of Labor.

Specifically, it applies to state tax liabilities for tax returns due on and after Feb. 1, 2009, and prior to Sept. 1, 2017. Consequently, for example, it can be used to obtain relief for a taxpayer’s 2009 through 2016 gross income tax, corporate business tax returns, and for all sales and use tax quarters ending Dec. 31, 2009, through June 30, 2017.

The Division of Taxation has not yet announced starting date for the amnesty period, which must end by Jan. 15, 2019. Thus, the taxpayers will have to make an amnesty payment within the time period established by the Director to take advantage of amnesty relief.

Dear David

I heard that wages, tips and money received for providing personal services aren’t taxable, is this right? 


Free Spirit

21 September 2018 This [wrongheaded] argument asserts that wages, tips, and other compensation received for personal services are not income, arguing there is no taxable gain when a person “exchanges” labor for money. Under this theory, wages are not taxable income because people have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed. A variation of this argument misconstrues section 1341—which deals with computations of tax where a taxpayer restores a substantial amount held under claim of right— to claim a deduction for personal services rendered.

Another similar argument asserts that wages are not subject to taxation where individuals have obtained funds in exchange for their time. Under this theory, wages are not taxable because the Code does not specifically tax “timereimbursement transactions.” Some individuals or groups argue that the Sixteenth Amendment to the United States Constitution did not authorize a tax on wages and salaries, but only on gain or profit.

The Law: For federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services. I.R.C. § 61. Any income, from whatever source, is presumed to be income under section 61, unless the taxpayer can establish that it is specifically exempted or excluded. See Reese v. United States, 24 F.3d 228, 231 (Fed. Cir. 1994) (“an abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived.”). In Rev. Rul. 2007-19, 2007-1 C.B. 843, and in Notice 2010-33, 2010-17 I.R.B. 609, the IRS advised taxpayers that wages and other compensation received in exchange for personal services are taxable income and warned of the consequences of making frivolous arguments to the contrary.

Section 1341 and the court opinions interpreting it require taxpayers to return funds previously reported as income before they can claim a deduction under claim of right. To have the right to a deduction, the taxpayer should appear to have had an unrestricted right to the income in question, but had to return the money. See Dominion Resources, Inc. v. United States, 219 F.3d 359 (4th Cir. 2000). The IRS, in Rev. Rul. 2004-29, 2004-1 C.B. 627, warned taxpayers of the consequences of frivolously claiming the section 1341 deduction when the taxpayer has not repaid an amount previously reported as income.

All compensation for personal services, no matter what the form of payment, must be included in gross income. This includes salary or wages paid in cash, as well as the value of property and other economic benefits received because of services performed or to be performed in the future. Criminal and civil penalties have been imposed against individuals who rely upon this frivolous argument.

Though a handful of taxpayers who were criminally charged with violations of the internal revenue laws have avoided conviction, taxpayers should not mistake those few cases as indicative that frivolous positions that fail to yield criminal convictions are legitimate or that because one taxpayer escaped conviction, taxpayers are protected from sanctions resulting from noncompliance. While a few defendants have prevailed, the vast majority are convicted. Furthermore, even if a taxpayer is acquitted of criminal charges of noncompliance with federal tax laws, the IRS may pursue any underlying tax liability and is not barred from determining civil penalties. See Helvering v. Mitchell, 303 U.S. 391 (1938); Price v. Commissioner, T.C. Memo. 1996-204, 71 T.C.M. (CCH) 2884 (1996).

Relevant Case Law:

Cheek v. United States, 498 U.S. 192 (1991) – Solely on the basis of erroneous jury instructions, the Supreme Court reversed and remanded Cheek’s conviction of willfully failing to file federal income tax returns and willfully attempting to evade income taxes. The Court noted, however, that Cheek’s argument that he should be acquitted because he believed in good faith that the income tax law is unconstitutional “is unsound, not because Cheek’s constitutional arguments are not objectively reasonable or frivolous, which they surely are, but because the [law regarding willfulness in criminal cases] does not support such a position.” Id. On remand, Cheek was convicted on all counts and sentenced to jail for a year and a day. Cheek v. United States, 3 F.3d 1057 (7th Cir. 1993).

Commissioner v. Kowalski, 434 U.S. 77 (1977) – the Supreme Court found that payments are considered income where the payments are undeniably accessions to wealth, clearly realized, and over which a taxpayer has complete dominion.

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955) – referring to the statute’s words “income derived from any source whatever,” the Supreme Court stated, “this language was used by Congress to exert in this field ‘the full measure of its taxing power.’ . . . And the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted.”

Richmond v. Commissioner, 474 F. App’x 754 (10th Cir. 2012) – the 10th Circuit noted that “it is well-settled that wages and interest payments constitute taxable income” and rejected the petitioner’s argument to the contrary as “completely lacking in legal merit and patently frivolous.”

Callahan v. Commissioner, 334 F. App’x 754 (7th Cir. 2009) – the 7th Circuit rejected the petitioner’s argument that only “the gain from wages” (not wages themselves) is taxable, characterizing the argument as “beyond frivolous.”

United States v. Sloan, 939 F.2d 499, 500 (7th Cir. 1991) – in rejecting the taxpayer’s argument that the United States’ revenue laws do not impose a tax on income, the 7th Circuit stated that the “Internal Revenue Code imposes a tax on all income.”

United States v. Connor, 898 F.2d 942, 943-44 (3d Cir. 1990) – the 3rd Circuit stated that “[e]very court which has ever considered the issue has unequivocally rejected the argument that wages are not income.”

Stelly v. Commissioner, 761 F.2d 1113 (5th Cir. 1985) – the 5th Circuit imposed double costs and attorney’s fees on the taxpayers for bringing a frivolous appeal and rejected their argument that taxing wage and salary income is a violation of the constitution because compensation for labor is an exchange rather than gain.

United States v. Richards, 723 F.2d 646 (8th Cir. 1983) – the 8th Circuit upheld conviction and fines imposed for willfully failing to file tax returns, stating that the taxpayer’s contention that wages and salaries are not income within the meaning of the Sixteenth Amendment is “totally lacking in merit.”

Lonsdale v. Commissioner, 661 F.2d 71, 72 (5th Cir. 1981) – the 5th Circuit rejected as “meritless” the taxpayer’s contention that the “exchange of services for money is a zero-sum transaction. . . .”

United States v. Romero, 640 F.2d 1014 (9th Cir. 1981) – the 9th Circuit affirmed Romero’s conviction for willfully failing to file tax returns, stating that “[his] proclaimed belief that he was not a ‘person’ and that the wages he earned as a carpenter were not ‘income’ is fatuous as well as obviously incorrect.”

Sumter v. United States, 61 Fed. Cl. 517 (2004) – the court found Ms. Sumter’s “claim of right” argument “devoid of any merit” stating that section 1341 only applies to situations in which the claimant is compelled to return the taxed item because of a mistaken presumption that the right held was unrestricted and, thus, the item was previously reported, erroneously, as taxable income. Section 1341 was inapplicable here because she had a continuing, unrestricted claim of right to her salary income and had not been compelled to repay that income in a later tax year.

Carskadon v. Commissioner, T.C. Memo. 2003-237, 86 T.C.M. (CCH) 234, 236 (2003) – the court rejected the taxpayer’s frivolous argument that “wages are not taxable because the Code, which states what is taxable, does not specifically state that ‘time reimbursement transactions,’ a term of art coined by [taxpayers], are taxable.” The court imposed a $2,000 penalty against the taxpayers for raising “only frivolous arguments which can be characterized as tax protester rhetoric.”

Other Cases: Jacobsen v. Commissioner, 551 F. App’x 950 (10th Cir. 2014); Garber v. Commissioner, 500 F. App’x 540 (7th Cir. 2013); United States v. Becker, 965 F.2d 383 (7th Cir. 1992); United States v. White, 769 F. 2d 511 (8th Cir. 1985); United States v. Bigley, No. 2:14-CV-0729-HRH, 2017 WL 2417911, at *5 (D. Ariz. May 10, 2017); United States v. Jones, No. 14-CV-0227, 2015 WL 6942071, at *1 (D. Minn. Nov. 10, 2015); United States v. Hopkins, 927 F. Supp. 2d 1120 (D. N.M. 2013); United States v. Reading, 110 A.F.T.R.2d 2012-5965 (D. Ariz. 2012); Abdo v. United States, 234 F.Supp.2d 553 (M.D.N.C. 2002); Green v. Commissioner, T.C. Memo. 2016-67, 111 T.C.M. (CCH) 1299 (2016); Leyshon v. Commissioner, T.C. Memo 2015-104, 109 T.C.M. (CCH) 1535 (2015); Shakir v. Commissioner, T.C. Memo. 2015-147, 110 T.C.M. (CCH) 137 (2015); Snow v. Commisioner, T.C. Memo. 2013-114, 105 T.C.M. (CCH) 1680 (2013); O’Brien v. Commissioner, T.C. Memo. 2012-326, 104 T.C.M. (CCH) 620 (2012); Pugh v. Commissioner, T.C. Memo. 2009-138, 97 T.C.M. (CCH) 1791 (2009);; Abrams v. Commissioner, 82 T.C. 403 (1984); Reading v. Commissioner, 70 T.C. 730 (1978).

Dear David

I heard that only “employees of the Federal Government” are subject to Federal Income Tax. Is this true? 


Live Free or Die

ANSWER (Not a Chance!This [mistaken] contention asserts that the federal government can tax only employees of the federal government; therefore, employees in the private sector are immune from federal income tax liability. This argument is based on a misinterpretation of section 3401, which imposes responsibilities on employers to withhold tax from “wages.” That section establishes the general rule that “wages” include all remuneration for services performed by an employee for his employer. Section 3401(c) goes on to state that the term “employee” includes “an officer, employee, or elected official of the United States, a State, or any political subdivision thereof . . . .”

The Law: Section 3401(c) defines “employee” and states that the term “includes an officer, employee or elected official of the United States . . . .” This language does not address how other employees’ wages are subject to withholding or taxation. Section 7701(c) states that the use of the word “includes” “shall not be deemed to exclude other things otherwise within the meaning of the term defined.” Thus, the word “includes” as used in the definition of “employee” is a term of enlargement, not of limitation. It makes federal employees and officials a part of the definition of “employee,” which generally includes private citizens. The IRS has warned taxpayers of the consequences of making this frivolous argument. Rev. Rul. 2006-18, 2006-1 C.B. 743.

Relevant Case Law: 

Taliaferro v. Freeman, 595 F.App’x 961, 962-63 (11th Cir. 2014) – the 11th Circuit rejected as frivolous the taxpayer’s argument that the federal income tax applies only to federal employees, and ordered sanctions against him up to and including double the government’s costs.

Montero v. Commissioner, 354 F. App’x 173 (5th Cir. 2009) – the 5th Circuit affirmed a $20,000 section 6673(a) penalty against the taxpayer for advancing frivolous arguments that he is not an employee earning wages as defined by sections 3121 and 3401.

Sullivan v. United States, 788 F.2d 813 (1st Cir. 1986) – the 1st Circuit imposed sanctions on the taxpayer for bringing a frivolous appeal and rejected his attempt to recover a civil penalty for filing a frivolous return, stating “to the extent [he] argues that he received no ‘wages’. . . because he was not an ‘employee’ within the meaning of 26 U.S.C. § 3401(c), that contention is meritless. . . . The statute does not purport to limit withholding to the persons listed therein.”

United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) – calling the instructions the taxpayer wanted given to the jury “inane,” the court said, “[the] instruction which indicated that under 26 U.S.C. § 3401(c) the category of ‘employee’ does not include privately employed wage earners is a preposterous reading of the statute. It is obvious within the context of [the law] the word ‘includes’ is a term of enlargement not of limitation, and the reference to certain entities or categories is not intended to exclude all others.”

Briggs v. Commisioner, T.C. Memo 2016-86, 111 T.C.M. (CCH) 1389 (2016) – the court rejected the taxpayer’s frivolous argument that wages from private-sector employers are not “income” for Federal income tax purposes. The court imposed a $3,000 penalty against the taxpayer for “persist(ing) in raising frivolous arguments.”

Waltner v. Commissioner, T.C. Memo. 2014-35, 107 T.C.M. (CCH) 1189 (2014) – the court debunked the argument that only federal employees are taxed and imposed $2,500 sanction against the taxpayer for making frivolous arguments contained in Peter Hendrickson’s book “Cracking the Code.”

States v. Hendrickson, 100 A.F.T.R.2d (RIA) 2007-5395 (E.D. Mich. 2007) – the court permanently barred Peter and Doreen Hendrickson, who filed tax returns on which they falsely reported their income as zero, from filing tax returns and forms based on frivolous claims in Hendrickson’s book, “Cracking the Code,” that only federal, state, or local government workers are liable for federal income tax or subject to the withholding of federal taxes.

Other Cases: Peth v. Breitzmann, 611 F. Supp. 50 (E.D. Wis. 1985); Pabon v. Commissioner, T.C. Memo. 1994-476, 68 T.C.M. (CCH) 813 (1994).


12 September 2018: Can You Claim that You’re Not a “CITIZEN” of the UNITED STATES and Not Subject to Federal Income Tax Laws? (“No”) Some individuals argue that they have rejected citizenship in the United States in favor of state citizenship; therefore, they are relieved of their federal income tax obligations. A variation of this argument is that a person is a free born citizen of a particular state and thus was never a citizen of the United States. The underlying theme of these arguments is the same: the person is not a United States citizen and is not subject to federal tax laws because only United States citizens are subject to these laws.

The Law: The Fourteenth Amendment to the United States Constitution defines the basis for United States citizenship, stating that “[a]ll persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.” The Fourteenth Amendment therefore establishes simultaneous state and federal citizenship. Claims that individuals are not citizens of the United States but are solely citizens of a sovereign state and not subject to federal taxation have been uniformly rejected by the courts. The IRS has warned taxpayers of the consequences of making this frivolous argument. Rev. Rul. 2007-22, 2007-1 C.B. 866; Notice 2010-33, 2010-17 I.R.B. 609.

In a variation of this argument, taxpayers argue that although they are citizens of the United States, for the purposes of the Internal Revenue Code they are non-resident aliens and are subject to taxation only on income that is connected with the conduct of a trade or business. The 11th Circuit rejected this contention as frivolous.

Relevant Case Law:

Taliaferro v. Freeman, 595 F.App’x 961, 962-63 (11th Cir. 2014) – the 11th Circuit upheld the lower court’s dismissal of Mr. Taliaferro’s complaint seeking to enjoin the IRS from collecting taxes assessed against him. The court rejected as meritless his argument that, despite his U.S. citizenship, he is, for purposes of the tax code, a nonresident alien who is subject to taxation only on income that is connected with the conduct of a trade or business.

United States v. Bowden, 402 F. App’x 967 (5th Cir. 2010) – in denying an appeal of a sentence for tax evasion, the 5th Circuit rejected the taxpayer’s argument that he was a sovereign and not subject to the laws of the United States.

United States v. Drachenberg, 623 F.3d 122 (2d Cir. 2010) – the 2nd Circuit affirmed Drachenberg’s conviction for tax evasion and conspiracy to defraud the United States and rejected his argument that the federal courts lacked jurisdiction because he was not a citizen of the United States.

United States v. Hilgeford, 7 F.3d 1340, 1342 (7th Cir. 1993) – the 7th Circuit rejected "shop worn" argument that defendant is a citizen of the "Indiana State Republic" and therefore an alien beyond the jurisdictional reach of the federal courts.

United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) – the 8th Circuit rejected the Gerads’ contention that they were “not citizens of the United States, but rather ‘Free Citizens of the Republic of Minnesota’ and, consequently, not subject to taxation” and imposed sanctions “for bringing this frivolous appeal based on discredited, tax-protester arguments.”

United States v. Sloan, 939 F.2d 499, 500 (7th Cir. 1991) – the 7th Circuit affirmed a tax evasion conviction and rejected Sloan’s argument that the federal tax laws did not apply to him because he was a “freeborn, natural individual, a citizen of the State of Indiana, and a ‘master’ – not ‘servant’ – of his government.”

United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987) – the 11th Circuit found Ward’s contention that he was not an “individual” located within the jurisdiction of the United States to be “utterly without merit” and affirmed his conviction for tax evasion.

Waltner v. Commissioner, T.C. Memo. 2014-35, 107 T.C.M. (CCH) 1189 (2014) – the court dismissed the possibility of being a citizen of a state but not the United States as “nonsensical” and “backwards; one cannot be a citizen of a State without also being a citizen of the United States. Indeed, citizenship in the United States is “paramount and dominant” over State citizenship.”

Kay v. Commissioner, T.C. Memo. 2010-59, 99 T.C.M. (CCH) 1236 (2010) – the court imposed a $500 penalty under section 6673(a) against James Kay for raising frivolous arguments in the proceeding, including that he “was not born a [U.S.] taxpayer” and that the United States may not tax him because “the United States is a corporation” to which he holds no “allegiance.”  

Other CasesUnited States v. Sileven, 985 F.2d 962 (8th Cir. 1993); Nevius v. Tomlinson, 113 A.F.T.R.2d 2014-1872 (W.D. Miss. 2014); O'Driscoll v. IRS, 1991 U.S. Dist. LEXIS 9829 (E.D. Pa. Jul. 16, 1991); Bruhwiler v. Commissioner, T.C. Memo. 2016-18, 111 T.C.M. (CCH) 1071 (2016); Carlson v. Commissioner, T.C. Memo. 2012-76, 103 T.C.M. (CCH) 1408 (2012); Callahan v. Commissioner, T.C. Memo. 2010-201, 100 T.C.M. (CCH) 225 (2010); Rice v. Commissioner, T.C. Memo. 2009-169, 98 T.C.M. (CCH) 40 (2009); Knittel v. Commissioner, T.C. Memo. 2009-149, 97 T.C.M. (CCH) 1837 (2009); BlandBarclay v. Commissioner, T.C. Memo. 2002-20, 83 T.C.M. (CCH) 1119, 1121 (2002); Marsh v. Commissioner, T.C. Memo 2000-11, 79 T.C.M. (CCH) 1327 (2000); Solomon v. Commissioner, T.C. Memo. 1993-509, 66 T.C.M. (CCH) 1201, 1202-03 (1993).


Todd Beamer 

First to Fight


11 September 2018: Is Compliance with an IRS Summons (really and truly) Voluntary? Summoned parties have asserted that they are not required to respond to or comply with an administrative summons issued by the IRS. Proponents of this position argue that a summons thus can be ignored. The Second Circuit’s opinion in Schulz v. IRS, 413 F.3d 297 (2d Cir. 2005) (“Schulz II”), discussed below, is often inappropriately cited to support this proposition.

The Law: A summons is an administrative device with which the IRS can summon persons to appear, testify, and produce documents. The IRS is statutorily authorized to inquire about any person who may be liable to pay any internal revenue tax, and to summon a witness to testify or to produce books, papers, records, or other data that may be relevant or material to an investigation. I.R.C. § 7602; United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984); United States v. Powell, 379 U.S. 48 (1964). Sections 7402(b) and 7604(a) of the Internal Revenue Code grant jurisdiction to district courts to enforce a summons, and section 7604(b) governs the general enforcement of summonses by the IRS.

Section 7604(b) allows courts to issue attachments, consistent with the law of contempt, to ensure attendance at an enforcement hearing "[i]f the taxpayer has contumaciously refused to comply with the administrative summons and the [IRS] fears he may flee the jurisdiction." Powell, 379 U.S. at 58 n.18; see also Reisman v. Caplin, 375 U.S. 440, 448-49 (1964) (noting that section 7604(b) actions are in the nature of contempt proceedings against persons who “wholly made default or contumaciously refused to comply” with an administrative summons issued by the IRS). Under section 7604(b), the courts may also impose contempt sanctions for disobedience of an IRS summons.

Failure to comply with an IRS administrative summons also could subject the non-complying individual to criminal penalties, including fines and imprisonment. I.R.C. § 7210. While the Second Circuit held in Schulz II that, for due process reasons, the government must first seek judicial review and enforcement of the underlying summons and to provide an intervening opportunity to comply with a court order of enforcement before seeking sanctions for noncompliance, the court’s opinion did not foreclose the availability of prosecution under section 7210.

Relevant Case Law: 

Schulz v. IRS, 413 F.3d 297 (2d Cir. 2005) (“Schulz II”) – the 2nd Circuit upheld its prior per curiam opinion, reported at Schulz v. IRS, 395 F.3d 463 (2d Cir. 2005) (“Schulz I”), and held that, based upon constitutional due process concerns, an indictment under section 7210 shall not lie and contempt sanctions under section 7604(b) shall not be levied based on disobedience of an IRS summons until that summons has been enforced by a federal court order and the summoned party, after having been given a reasonable opportunity to comply with the court’s order, has refused. The court noted that “[n]either this opinion nor Schulz I prohibits the issuance of pre-hearing attachments consistent with due process and the law of contempts.”

United States v. Becker, 58-1 U.S.T.C. ¶ 9403 (S.D.N.Y. 1958) – when Becker failed to produce certain books and records specified in an IRS summons, claiming that they had been destroyed by fire, the court found, based upon the evidence (including the fact that some of the specified books were subsequently produced in compliance with a grand jury subpoena), that Becker willfully and knowingly neglected to produce information called for by a summons in violation of section 7210.


10 September 2018: Can You Really (and legally) Reduce Your Federal Tax Liability By Filing a ZERO DOLLAR TAX RETURN? Some taxpayers attempt to reduce their federal income tax liability by filing a tax return that reports no income and no tax liability (a “zero return”) even though they have taxable income. Many of these taxpayers also request a refund of any taxes withheld by an employer. These individuals typically attach to the zero return a “corrected” Form W-2 or another information return that reports income and income tax withholding, reling on one or more of the frivolous arguments discussed throughout this outline to support their position.

The Law: A taxpayer that has taxable income cannot legally avoid income tax by filing a zero return. Section 61 provides that gross income includes all income from whatever source derived, including compensation for services. Courts have repeatedly penalized taxpayers for making the frivolous argument that the filing of a zero return can allow a taxpayer to avoid income tax liability or permit a refund of tax withheld by an employer. Courts have also imposed the frivolous return and failure to file penalties because these forms do not evidence an honest and reasonable attempt to satisfy the tax laws or contain sufficient data to calculate the tax liability, which are necessary elements of a valid tax return. See Beard v. Commissioner, 82 T.C. 766, 777-79 (1984). Furthermore, including the phrase “nunc pro tunc” or other legal phrase has no legal effect and does not serve to validate a zero return. See Rev. Rul. 2006- 17, 2006-1 C.B. 748; Notice 2010-33, 2010-17 I.R.B. 609. The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2004-34, 2004-1 C.B. 619.

Relevant Case Law:

Kelly v. United States, 789 F.2d 94 (1st Cir. 1986) – the 1st Circuit found that the taxpayer’s failure to report any income from wages, the “unexplained designation of his Form W-2 as ‘Incorrect’, and his attempt to deduct as a cost of labor expense on Schedule C an amount almost identical to the amount of wages on Form W-2” established that his position (that compensation for his labor was not “wages” or taxable income) was both incorrect and frivolous.

Sisemore v. United States, 797 F.2d 268 (6th Cir. 1986) – the 6th Circuit upheld the assessment of a frivolous-return penalty on taxpayers because “their amended return [showing no income] on its face clearly showed that their assessment of their taxes was substantially incorrect and that their position on the matter [that their wages were zero because received in equal exchange for their labor] was frivolous.”

Olson v. United States, 760 F.2d 1003 (9th Cir. 1985) – the 9th Circuit held that the district court properly found the taxpayer was liable for a penalty for filing a frivolous tax return because he listed his wages as zero and attempted “to escape tax by deducting his wages as ‘cost of labor’ and by claiming that he had obtained no privilege from a governmental agency.”

Davis v. United States Government, 742 F.2d 171 (5th Cir. 1984) – the 5th Circuit held as clearly frivolous the taxpayers’ reasons (“rejected . . . time and time again”) for reporting no wages and no gross income, when they had received over $60,000 in earnings or other compensation as evidenced by the Forms W-2 attached to their Form 1040.

United States v. Melone, 111 A.F.T.R.2d (RIA) 2013-1369 (D. Mass. 2013) – the court held that the taxpayer, who filed “zero returns,” falsely asserting he made no income, was liable for civil penalties.

United States v. Ballard, 101 A.F.T.R.2d (RIA) 1241, (N.D. Tex. 2008) – the court permanently enjoined a tax return preparer from engaging in further tax return preparation or tax advice because he prepared federal income tax returns for customers that falsely showed nothing but zeroes.

Bonaccorso v. Commissioner, T.C. Memo. 2005-278, 90 T.C.M. (CCH) 554 (2005) – the taxpayer filed zero returns based on the argument that he found no Code section that made him liable for any income tax. The court held that the petitioner’s argument was frivolous, citing to section 1 (imposes an income tax), section 63 (defines taxable income as gross income minus deductions), and section 61 (defines gross income). The court also imposed a $10,000 sanction under section 6673 for making frivolous arguments.

Other Cases: United States v. Schiff, 544 F. App’x 729 (9th Cir. 2013); United States v. Conces, 507 F.3d 1028 (6th Cir. 2007); United States v. Schiff, 379 F.3d 621 (9th Cir. 2004); United States v. Nichols, 115 A.F.T.R.2d (RIA) 2015-1971 (D. Wash. 2015); United States v. Hill, 97 A.F.T.R.2d (RIA) 2006-548 (D. Ariz. 2005); Little v. United States, 96 A.F.T.R.2d (RIA) 2005-7086 (M.D.N.C. 2005); Schultz v. United States, 95 A.F.T.R.2d (RIA) 2005-1977 (W.D. Mich. 2005); Waltner v. Commissioner, T.C. Memo. 2015-146, T.C.M. (RIA) 2015- 146 (2015); Hill v. Commissioner, T.C. Memo. 2014-101, 108 T.C.M. (CCH) 12 (2014); Shirley v. Commissioner, T.C. Memo. 2014-10, 107 T.C.M. (CCH) 1057 (2014); Waltner v. United States, 98 Fed. Cl. 737 (2011); Oman v. Commissioner, T.C. Memo. 2010-276, 100 T.C.M. (CCH) 548 (2010); Blaga v. Commissioner, T.C. Memo. 2010-170, 100 T.C.M. (CCH) 91 (2010).


7 September 2018: Is Paying Federal Taxes Voluntary? Some argue that they are not required to pay federal taxes because the payment of federal taxes is voluntary. Proponents of this position argue that our system of taxation is based upon voluntary assessment and payment. They frequently claim that there is no provision in the Internal Revenue Code or any other federal statute that requires them to pay or makes them liable for income taxes, and they demand that the IRS show them the law that imposes tax on their income. They argue that, until the IRS can prove to these taxpayers’ satisfaction the existence and applicability of the income tax laws, they will not report or pay income taxes. These individuals or groups reflexively dismiss any attempt by the IRS to identify the laws, thereby continuing the cycle. The IRS discussed this frivolous position at length and warned taxpayers of the consequences of asserting it in Rev. Rul. 2007-20, 2007-1 C.B. 863 and in Notice 2010-33, 2010-17 I.R.B. 609.

The Law: The requirement to pay taxes is not voluntary. Section 1 of the Internal Revenue Code clearly imposes a tax on the taxable income of individuals, estates, and trusts, as determined by the tables set forth in that section. (Section 11 imposes a tax on corporations’ taxable income.) Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the non-complying individual to criminal penalties, including fines and imprisonment, as well as civil penalties. In United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983), the Eighth Circuit Court of Appeals stated, in discussing section 6151, that “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the appropriate rate of income tax, a duty which he chose to ignore.”

Although courts, in rare instances, have waived civil penalties because they have found that a taxpayer relied on an IRS misstatement or wrongful misleading silence with respect to a factual matter, there have been no cases in which the IRS’s lack of response to a taxpayer’s inquiry has relieved the taxpayer of the duty to pay tax due under the law. Such an estoppel argument does not, however, apply to a legal matter such as whether there is legal authority to collect taxes. See, e.g., McKay v. Commissioner, 102 T.C. 465 (1994).

Relevant Case Law:

United States v. Schiff, 379 F.3d 621 (9th Cir. 2004); see also http://www.usdoj.gov/tax/txdv04551.htm. – the court affirmed a federal district court’s preliminary injunction barring Irwin Schiff, Cynthia Neun, and Lawrence N. Cohen from selling a tax scheme that fraudulently claimed that payment of federal income tax is voluntary. In subsequent criminal trials, these three were convicted of violating several criminal laws relating to their scheme. See 2005 TNT 206-18. Schiff received a sentence of more than 12 years in prison and was ordered to pay more than $4.2 million in restitution to the IRS; Neun received a sentence of nearly 6 years and was ordered to pay $1.1 million in restitution to the IRS; and Cohen received a sentence of nearly 3 years and was ordered to pay $480,000 in restitution to the IRS. See http://www.usdoj.gov/opa/pr/2006/February/06_tax_098.html.

Keenan v. Commissioner, 233 F. App’x 719, 720 (9th Cir. 2007) – the 9th Circuit stated that “assertions that the tax system is voluntary” are frivolous.

Banat v. Commissioner, 80 F. App’x 705 (2d Cir. 2003) – The 2nd Circuit upheld $2,000 in sanctions against a taxpayer because his argument that “the payment of income taxes was voluntary” was “contrary to well-established law and thus was frivolous.”

United States v. Gerads, 999 F.2d 1255 (8th Cir. 1993) – the court stated that the “[taxpayers’] claim that payment of federal income tax is voluntary clearly lacks substance” and imposed sanctions in the amount of $1,500 “for bringing this frivolous appeal based on discredited, tax-protester arguments.”

Wilcox v. Commissioner, 848 F.2d 1007 (9th Cir. 1988) – the court rejected Wilcox’s argument that payment of taxes is voluntary for American citizens and imposed a $1,500 penalty against Wilcox for raising frivolous claims.

United States v. Schulz, 529 F.Supp.2d 341 (N.D.N.Y. 2007) – the court permanently barred Robert Schulz and his organizations, We the People Congress and We the People Foundation, from promoting a tax scheme that helped employers and employees improperly stop tax withholding from wages on the false premise that federal income taxation is voluntary.

Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014) – the court imposed several sanctions of $25,000 against a taxpayer who argued, amongst other frivolous arguments, that “the Internal Revenue Code does not establish any liability for the payment of Federal income tax.”

Other Cases: Schiff v. United States, 919 F.2d 830 (2d Cir. 1990); United States v. Berryman, 112 A.F.T.R.2d (RIA) 2013-6282 (D. Colo. 2013); United States v. Sieloff, 104 A.F.T.R.2d (RIA) 2009-5067 (M.D. Fla. 2009); United States v. Melone, 111 A.F.T.R.2d (RIA) 2013-1369 (D. Mass. 2013); Foryan v. Commissioner, T.C. Memo. 2015-114, 109 T.C.M. (CCH) 1591(2015); Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014); Horowitz v. Commissioner, T.C. Memo. 2006-91, 91 T.C.M. (CCH) 1120 (2006).


6 September 2018:  Is Filing a Tax Return Voluntary? Some taxpayers assert that they are not required to file federal tax returns because the filing of a tax return is voluntary. Proponents of this contention point to the fact that the IRS tells taxpayers in the Form 1040 instruction book that the tax system is voluntary. Additionally, these taxpayers frequently quote Flora v. United States, 362 U.S. 145, 176 (1960), for the proposition that "[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint."

The Law: The word “voluntary,” as used in Flora and in IRS publications, refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in sections 6011(a), 6012(a), et seq., and 6072(a) of the Internal Revenue Code. See also Treas. Reg. § 1.6011-1(a).

Any taxpayer who has received more than a statutorily determined amount of gross income in a given tax year is obligated to file a return for that tax year. Failure to file a tax return could subject the non-compliant individual to civil and/or criminal penalties, including fines and imprisonment. In United States v. Tedder, 787 F.2d 540, 542 (10th Cir. 1986), the court stated that, “although Treasury regulations establish voluntary compliance as the general method of income tax collection, Congress gave the Secretary of the Treasury the power to enforce the income tax laws through involuntary collection . . . . The IRS’ efforts to obtain compliance with the tax laws are entirely proper.” The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2007-20, 2007-1 C.B. 863 and in Notice 2010-33, 2010-17 I.R.B. 609.

Relevant Case Law:

Helvering v. Mitchell, 303 U.S. 391, 399 (1938) – the Supreme Court stated that “[i]n assessing income taxes, the Government relies primarily upon the disclosure by the taxpayer of the relevant facts . . . in his annual return. To ensure full and honest disclosure, to discourage fraudulent attempts to evade the tax, Congress imposes [either criminal or civil] sanctions.”

United States v. Tedder, 787 F.2d 540 (10th Cir. 1986) – the 10th Circuit upheld a conviction for willfully failing to file a return, stating that the premise “that the tax system is somehow ‘voluntary’ . . . is incorrect.”

United States v. Richards, 723 F.2d 646 (8th Cir. 1983) – the 8th Circuit upheld a conviction and fines imposed for willfully failing to file tax returns, stating that the claim that filing a tax return is voluntary “was rejected in United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983).”

United States v. Hartman, 915 F.Supp. 1227, 1230 (M.D. Fla. 1996) – the court held that, “The assertion that the filing of an income tax return is voluntary is, likewise, frivolous.” The court noted that I.R.C. § 6012(a)(1)(A), “requires that every individual who earns a threshold level of income must file a tax return” and that “failure to file an income tax return subjects an individual to criminal penalty.”

Other Cases: 

United States v. Drefke, 707 F.2d 978 (8th Cir. 1983); United States v. Schulz, 529 F. Supp. 2d 341 (N.D.N.Y. 2007); Foryan v. Commissioner, T.C. Memo. 2015-114, 109 T.C.M. (CCH) 1591 (2015); Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014).


5 September 2018: Employment Practices Liability Insurance (EPLI) covers companies against claims or lawsuits filed by employees, former employees and employment candidates regarding their employment relationship with an employer.  EPLI policies can cover seasonal employees, leased employees and independent contractors. EPLI insurance coverage protects a company, its directors, officers, current and former employees.  A company can use EPLI insurance to cover expenses involved in defending against claims or lawsuits related to employment (regardless of the outcome) and EPLI provides indemnification of the employer if the case is settled or a verdict is obtained against the employer. EPLI insures against claims of discrimination (based on age, sex, race, religion, color and national origin), sexual harassment claims, wrongful termination (including constructive discharge and retaliatory discharge), infliction of emotional distress and breach of contract, violation of the Family Medical Leave Act or other leave laws.  Additionally, some policies contain a catch-all category to provide coverage for claims of discrimination based on protected categories (e.g., sexual orientation) that are not covered under federal discrimination statutes, but may be covered by state or local law.  For more information call David Selig directly at (212) 974-3435



4 September 2018: The U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit. The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive. For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction. The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.




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(She should have hired SELIG & Associates) Jacqueline Ramos, aka Jackie Acosta, of Salinas, California, pleaded guilty yesterday to one count of conspiring to submit false claims for income tax refunds and two counts of bank fraud, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and United States Attorney Alex G. Tse  According to documents and information provided to the court, Ramos conspired with others to defraud the Internal Revenue Service (IRS) by filing false tax returns to obtain fraudulent refund checks, and then depositing the checks into bank accounts under their control.  The false returns included fake income, bogus dependents, and sham education expenses. By filing these fraudulent returns, Ramos and her co-conspirators are alleged to have stolen more than $9 million in tax refunds. Two of those co-conspirators, Ana Bajo, aka Ana Covarrubias, and Norma Morfin, aka Norma Mandujano, pleaded guilty earlier this year to related tax charges. U.S. District Court Judge Lucy H. Koh scheduled sentencing for March 20, 2019.  Ramos faces a maximum sentence of ten years in prison for the conspiracy count and thirty years for each of the bank fraud counts, in addition to a period of supervised release, restitution, and monetary penalties. Principal Deputy Assistant Attorney General Zuckerman and United States Attorney Tse commended the IRS special agents who investigated this case, as well as the Department of Justice attorneys who are handling it, Assistant United States Attorney Michael G. Pitman and Trial Attorney Christopher Magnani. SELIG & Associates. Aggressive Tax Advocates We Solve Serious Tax Problems. For a FREE legally privileged consultation with a Federal Tax Practitioner and licensed Attorney call (212) 974-3435


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