THE INCOME TAX IS KILLING THE MIDDLE CLASS

 

 

            Back in 1950 when my parents were young and starting their family, taxes were low and life was good.  People were able to get into the middle class with one income and raising a family was not so complicated.

 

            Nowadays things are really different.  Two people in the family are working and the kids are not getting near as much attention.  In many cases they are raised by the television. We are paying federal income tax, state income tax and in some cases we even pay city income taxes.  We also pay sales taxes, property taxes, and excise taxes on tires, gasoline, etc.  If you are self-employed you are even paying out social security tax at a rate of 15.3 percent.  A middle class family making about $58,000 (living in a large eastern city) comes to approximately the following:

 

            $6,000 in local taxes

            $3,000 in state taxes

 $10,000 in federal income tax        and FICA.

            $1,000 in sales taxes

              $600 in gas taxes for two cars

              $200 in telephone taxes

              $160 in tolls

 

 

            You guessed it, this normal family is paying about $21,000 in taxes and that doesn't even include their $6,000 mortgage interest; the interest on their automobiles and credit cards, and the automobile insurance on their cars. Does anyone wonder why the middle class is having a harder time making it?  In New York State, the "Tax Freedom" date is May 22.  That means that a person in New York would work 142 days of the year before he can even buy himself a hamburger.

            The problem is that the burden is continually growing and there is no evidence that it will stop or even slow down in the near future.

 

            Thomas Jefferson once said that a "wise and good government shall not take from the mouth of labor the bread it has earned."

 

            When our Constitution was drafted, the founders took Jefferson's advise to heart and they drafted Article I, Section 9, Subsection 4 of the United States Constitution which prohibited a direct head or income tax in the United States.  Today's income tax was born in the Sixteenth Amendment.  When the income tax first started it was set at 1 percent with a 7 percent top and only the rich had to pay because the exemption left the middle class out of the pinch. The American Middle class now pays over 80 percent of the $500 billion or so dollars that the Treasury gets every year in individual taxes.

 

            The fact is that the middle class is disappearing and the extremely high rates of taxation are, to a large extent, responsible for its demise.  To add insult to injury, the Congress has passed many penalties and has heaped interest on at usurious rates.  Anyone who owed the IRS $1,000 three years ago, could easily now owe the government $3,000 in taxes interest and penalties.  Since the average IRS audit nets $5,000 in back taxes, the damage done to the average family by the increased interest and penalties can easily force a middle class family into bankruptcy.

 

            To top it all off, the IRS is collecting the income tax from the people by subterfuge and deceit.  There is no statute in the Internal Revenue Code that makes any person liable to pay an income tax.  Individuals make themselves liable by voluntarily filing a tax return and making themselves liable for the income tax; alternatively, the government can file a return for an individual under 26 USC 6020(b) and make the individual liable once the assessment is recorded in the office of the Secretary of the Treasury.

 

            The IRS refers to our tax system as a voluntary system and they say that people "voluntarily" file returns.

 

            Recently, case law has strongly supported the contention that returns must be filed voluntarily, because individuals who file returns waive their Fifth Amendment Rights.  In the case of United States v. Sharp at 920 F2d 1167, (1990) the 4th Circuit said:

 

            The Fifth Amendment's protection against self- incrimination applies in any type of proceeding, whether civil, criminal, administrative, investigatory, or adjudicatory.  And it applies not only to evidence which may directly support a criminal conviction, but to information which would furnish a link in the chain of evidence that could lead to prosecution as well as evidence which an individual responsibly believes could be used against him in a criminal prosecution."

 

            Well, the fact is that the IRS routinely uses information on tax returns in criminal tax cases and in other types of criminal cases.  The IRS even warns the public in its Privacy Act Notice in the 1040 Instruction Booklet, that any information given to them may be given to the Department of Justice and it is clear that the DOJ can use the information in criminal tax cases.

 

            The IRS deliberately refers to the income tax system as "voluntary" because they know that individuals who file 1040 returns waive their Fifth Amendment Rights and they know that they cannot require individuals to waive their Fifth Amendment Rights.  However, if an individual does not file a return, the IRS may prosecute him for willful failure to file returns and the Court will deny the defendant's motion to quash the use of information on any previously filed returns by informing the defendant that he submitted the information voluntarily and so the IRS can use it in the criminal trail.

 

            Yes it is a Catch-22.  Individuals cannot be required to file tax returns, but if they don't file them, they can be prosecuted for willfully not filing the returns.  In other words, you are required to "voluntarily" waive your Fifth Amendment Rights or face criminal and civil penalties for neglecting to "volunteer."

 

            The IRS is using the word "voluntary" to mean "mandatory" so that they can have it both ways.  Now think about it.  If you are a middle class citizen, you are putting almost half of your income out to a government that gives you almost nothing in return.  You do not get health insurance from the government.  You do not get much of a retirement plan from the government and unlike all other industrial societies on the planet, your government does not have a safety net to help you if you are sick or become unemployed. The IRS can even invent an amount of money that you owe and seize your home and all your possessions (although they need a search warrant to enter your house, a judge will gladly give them one.)  They can garnish your wages down to about $300 per month and they can tow away your car and they can do all that without a court order.

 

            The tax system in the United States, which is destroying the middle class and offers them nothing of substance in return, is enforced by a Fascist Gestapo Agency that works above and beyond the Constitution. The First, Fourth and Fifth Amendments are completely ignored.

 

            Now, the next time that you get your tax return from your accountant and you prepare to sign it, you might just look it over and say to yourself.  Do I understand the contents of this return?  If you do understand it, then why did you give it to your accountant to prepare?  If you do not understand it, do you realize that you are committing perjury when you sign the return?  Do you think the government can require you to sign a document that you do not understand and also require you to sign it under the penalty of perjury?  Of course they cannot, that is why you are "voluntarily" signing it.  Do you realize that if you sign a 1040 and your accountant has made a mistake that you could prosecuted by the IRS and you could be sent to prison because you waived your Fifth Amendment Rights and gave them the information and that you committed perjury when you signed a return you did not understand?  Doesn't this make you mad?  Do you want to do something about it?  If so give my website to people and let them read for themselves. It is important to wake up and let the American People know how they are being fooled.

 

Jury Instructions in Criminal Tax Cases

 

        As you all know, the IRS has the power to attack individuals criminally for alleged violations of the Internal Revenue Code and they do use everything in their power for criminal intimidation.  It is therefore imperative that individuals understand their rights and the processes involved in the criminal case.  If you are attacked criminally and you elect a jury trial, you should know that you will be responsible to inform the judge of your proposed jury instructions.  Jury instructions tell the jury how they are going to rule.  Since your main defense to a criminal tax charge may be the element of willfulness, you must have jury instructions prepared to show the jury how to judge the element of willfulness.  The following jury instruction is an example of a well-written instruction explaining the element of willfulness to the jury.

 

      INSTRUCTION:

 

        If a person, in good faith, believes that he has paid all the taxes he owes, he cannot be guilty of criminal intent to evade the tax. He cannot be liable if in good faith he holds a misunderstanding of the requirements of the law or a good faith belief that his income was not taxable.  The grounds on which defendant bases his claims of good faith in a belief that his conduct was lawful may be considered in deciding whether he in fact acted in good faith, or whether he intended and willfully attempted to evade or defeat the tax.  A defendant's disagreement with the law, no matter how earnestly held, does not constitute a defense of good faith misunderstanding or mistake. It is the duty of all citizens to obey the law whether they agree with it or not.

 

        The issue of intent, as to whether the defendant willfully attempted to evade or defeat the tax, is one that you must determine from a consideration of all the evidence in the case bearing on the defendant's state of mind.

 

        In deciding whether the defendant has been proven to have attempted to evade or defeat the payment of a tax for which he was liable, that is to say whether he acted willfully, voluntarily and intentionally, you may consider all of his knowledge, the law of which he had knowledge, including any and all court decisions which came to his attention, the Internal Revenue Code, the constitution, and an y legal advice which was given to him.

 

        In considering the defendant's claim that in good faith he did not believe the law required him to file returns or to pay taxes on income, the question is, whether or not he truly held such a belief; and whether there was basis on which he could have held such a belief.  Your determination of these questions must be made after examining all of the evidence.

 

      Adapted from the Court's charge in United States v.  Schiff, 801 F.2d 108, 111 n.1 (2d Cir. 1986). See also Sand, Instruction 59-8 citing United States v. .Pompario ,  429 U.S. 10 (1976);  United States v.  Ruffin, supra, 575 F.2d 346.

 

Civil Actions Against Collections

 

            In Shaw 20 F3d 182 (5th Cir. 1994), the court ruled that Section 7433 is limited to actions for improper collection practices.  In Raymond, 983 F2d 63 (6th Cir. 1993), the court ruled that the IRS did not act with intentional or reckless disregard of the law when it returned money that it wrongfully levied upon to the owner more than nine months after the date of the levy.

 

            In Miklautsch, 90-2 USTC (D. Alaska 1990), the court ruled that since a collection agent had ignored previous Tax Court ruling that the case could be tried.

 

            IRS Regulation 301.7433-1 is the regulation that provides guidance relating to the civil cause of action under Section 7433 for certain unauthorized collection actions.

 

            In summary, if the IRS attacks you, there are various remedies but you must be careful of the Anti-Injunction Act.

 

Wrongful Levy Actions

 

            The court ruled in Aspinall, 984 F2d 355 (10th Cir. 1993), that the plaintiffs did not have standing to sue under Section 7426 when the IRS seized gold and currency from the National Commodity and Barter Association in Denver, Colorado because the plaintiffs were merely general creditors and therefore they did not have interest in the property sufficient to confer standing under 7426. Also, a plaintiff whose residence was searched could not claim an interest in the property in his possession at the time of seizure because he was acting as an agent for the account holders.  Fiduciaries have no interest in or lien on property that would give them standing to maintain a wrongful levy action.  This case is very scary because it stands for the proposition that if a third party is holding your funds and the IRS takes the funds for an alleged liability of the third party, then your cause of action is against the third party and not against the IRS.

 

            In Winebenner, 924 F2d 851 (9th Circuit 1991), the court ruled that the exclusive remedy by a third party whose property has been levied or sold by the IRS is an action pursuant to 7426 and a claim for quiet title is barred. 

 

            In Baddour, Inc., 802 F2d 801 (5th Cir 1986), a plaintiff sued both the IRS and the IRS agent working on the case.  The court ruled that the IRS agent is not the proper defendant with respect to any acts for which action could be maintained under Section 7426. 

 

            In Hamilton, 806 F Supp., (D. Conn, 1992), the court ruled that an executed quitclaim deed defeated a levy in spite of the fact that it was not recorded. 

 

 

Case Law on the Offer in Compromise

 

            In the case of Coy, 377 F2d 925, (9th Cir., 1967), the taxpayer sued the IRS because the IRS did not refund a deposit made with an offer in compromise.  The IRS took the position that the amount was part of the proceeds of the sale of property on which the IRS had a lien and the offer was submitted to defeat the collection of tax.  The individual made false statements in the offer for which he was convicted. The court ruled that he could not get the money back because his offer was part of a fraudulent scheme. 

 

            In Feinberg, 372 F.2d 359 (3rd Cir. 1967), the court ruled that the IRS could collect the entire amount of the tax liability in spite of the taxpayer's contention that the three year statute of limitations for assessment had expired.

 

            In the case of Waller, 767 F. Supp 1042(ED Cal 1991), the court ruled that an accepted offer in compromise bars a subsequent refund suit. 

 

            In McGee, 566 F. Supp. 960 MD Fla. 1982), the court ruled that the wording of the check written to the IRS had no binding effect on the IRS to accept it as a offer in compromise.  The requirements for a compromise under Section 7122 were not met and the wording of the check had no effect against the IRS.

 

            In Minnis, Jr. 79-1 USTC (SD Ala. 1979), the court ruled that an earlier offer in compromise extended the statute of limitations on collection.

 

            In Shanahan, 78-1 USTC 9404 (WD Mo. 1977), the court ruled that the IRS was not required to accept a relatively small offer. 

 

 

Court Actions Against Levies

 

            In Gordon, 322 F. Supp. 537 (EDNY 1970), an individual sued the IRS for levying her wages for taxes that were owed by corporations owned by her parents.  Her signature had been forged on a corporate signature card.  The court ruled that Section 7426 governed the case because an assessment had not been made against the plaintiff.  The court could issue an injunction since Section 7421(a) did not govern.

 

 In Monsky, 297 F. Supp (EDNY 1968),  The court granted an injunction because the collection of the tax would cause irreparable injury and the IRS could not prevail under any circumstances.  The plaintiff argued that the collection of the tax would result in the loss of his insurance policies and business and that the IRS could not prevail  because the assessments were made after the statute of limitations had run.

 

            In Logan Planing Mill Co. 212 F. Supp 906 (D. W. Va. 1962), the court allowed an injunction suit by a third party. The wrongful taking of a third party's property by the IRS is not within Section 7421.

 

            In Helvey, 199 F. Supp (WD Okla. 1961), the plaintiff argued that her signature was forged on joint returns by her husband.  The returns did not reflect any of her income.  The IRS assessed her and the IRS  argued that the joint return was ratified by the fact that she signed the tax court petition. She argued that she signed the petition because her husband's attorney promised her that her signing would not cause a problem for her.  The court ruled in her favor and granted an injunction.

           

In Kamholz, 94 TC 11 (1990), the IRS issued a Statutory Notice of Deficiency and the individual petitioned the Tax Court.  The IRS sent a final notice of levy while the actions were pending.  The IRS had not invoked jeopardy assessment procedures.  The court held that the IRS failed to prove the assessments were not the subject of the matters pending before the court and the court enjoined the IRS from further collection proceedings.

 

Most of the time injunctive relief against the IRS is denied because of the Anti-Injunction Act.  In Williams Packing and Navigation Co, 370 US 965 (1962), the Supreme Court said that the lower court's reliance on the doctrine of Miller v. Standard Nut Margarine Co, 284 US 498 (1932), did not apply because the IRS's claim had foundation. 

 

            In Church of Scientology of California 920 F2d 1481 (9th Cir. 1990, the court ruled that the anti-injunction act precludes granting of injunctive relief against the IRS to restrain tax assessments. In Bilbo, 633 F2d 1137 (5th Cir. 1981), the court ruled that even though the assessment was based on gambling information from an illegal wiretap, the anti-injunction act prevented the taxpayer from restraining the IRS from collecting the tax.

 

            In Blech,595 F2d 462 (9th Cir. 1979), the court held that it had no jurisdiction over a suit to enjoin the collection of taxes because of the anti-injunction act.

 

            In Professional Eng, Inc. 527 F2d 597 (4th Cir. 1975), the court denied injunctive relief when the taxpayer challenged the constitutionality of various provisions of the Internal Revenue Code. In Westgate-California Corp, 496 F2d 839 (9th Cir. 1974), the Court of Appeals ruled that the district court did not have the jurisdiction under Section 6213(a) to enjoin the IRS's actions. In Kopas, 33 AFTR2d 74-884 (6th Cir. 1974), the court denied injunctive relief when the taxpayer sought to enjoin a jeopardy assessment.  In Walker, 333 F2d 768 (9th Cir 1964), the court ruled that the taxpayer could test the merits of an assessment by suing for a refund and that he could not get injunctive relief. In McClure, 330 F2d 954, (6th Cir. 1964), the court denied the individual's request for a temporary restraining order because he did not show extraordinary or exceptional circumstances to warrant an exception to the ban on such suits  that Section 7421 establishes. In Botta, 314 F2d (2d Cir. 1963), the court denied an injunction to corporate officers that were resisting the collection of unpaid withholding taxes because the Supreme Court held in Williams Packing and Navigation Company. 370 US 1 (1962) that an injunction will lie only where there is both an adequate remedy at law and a clear showing that the IRS cannot possibly prevail.

 

            In Fair 89-2 USTC (D. Colo 1989), the court dismissed a mandamus action and stated that the individual had another available method to contest a statutory notice of deficiency.  The proper way to contest a deficiency is to petition the Tax Court or pay the deficiency and sue for a refund.

 

            In Burns, 84-2 USTC (SD Fla. 1984), a suit to stop the collection by the IRS was dismissed under the anti-injunction rule.

 

IRS Losses in Tax Court

 

 

            In the case of Robert Maddox, TC Memo 1998-449, the IRS delayed a doctor's audit so long that the three year statute of limitations on the audits was almost expired.  The IRS said that if the doctor did not voluntarily agree to extend the time to conduct the audit, they would disallow all deductions.  The doctor went to Tax Court and District Counsel agreed that all the deductions were reasonable.  The doctor argued that the IRS should be forced to pay his legal expenses.  The IRS answered that their position was valid because he had not shown the IRS any records.  The court ruled that since the auditor had not asked to see any records for the deductions, the disallowance was unreasonable.  The IRS was ordered to pay the legal fees.

 

            In William E. Smith, ND Ind, 98-2 USTC 50,728, the court ruled that a family business cannot be forced to liquidate in order to pay owner's tax. The court ruled that a corporation is a separate legal entity from Smith.  The IRS cannot take the corporation assets to settle his debts.

 

            In the case of Laurel Anne Curtis, unreported opinion 1/12/99, the court ruled that assessments of unreported income must be substantiated. The IRS believed that a woman had not reported income that she received from rental properties.     She refused to cooperate with the IRS audit and she refused to produce records.  The IRS assessed taxes and penalties against her.  The court ruled that since records of income payments are generally not under the taxpayer's control, the IRS had the burden of proving that such payments occurred.  Its allegations of unreported income are not presumed to be correct.

            In the case of Lemuel O. Nixon, WD Pa., No. 99-2 USTC 50,673, the court ruled that an individual who served on a volunteer basis as a president of a local non-profit corporation was not responsible for the 100 percent penalty when the corporation failed to pay employment taxes.  The IRS garnished Nixon's pension after he had paid the tax and filed a claim for a refund.  The IRS was ordered to pay his legal bills.

            In Richard L. and Kathryn Dykman, TC Memo 1999-79, the court ruled that a couple was not responsible for the negligence penalty because they had invested in an abusive tax shelter that they were advised to invest in because of a trusted CPA.

 

            In Arthur Zipp, TC Memo 1998-371, the court ruled that underpaying taxes by itself is not fraud and horrible bookkeeping is not fraud either.  The IRS did not show that Zipp had followed any plan to underpay or evade taxes or hide his income and the fraud penalty was not allowed.

 

            In the case of Irene Sandra Schipper, ED NY, 98-2 USTC 50.825, the court ruled that a lady who received a mistaken $9,000 tax refund did not have to pay it back because the IRS didn't ask for its return until after the time limit for doing so had passed.  The IRS demanded its return and levied her wages.  The Tax Court ruled that the IRS had been negligent not only in trying to recover the refund after the deadline but also in releasing confidential tax return information to her employer.  She kept the refund and then got $4,800 in damages from the IRS.

 

            As you can see, the above cases show examples of extreme abuse by the IRS. These are situations that should never have happened in the first place.  We need to get rid of the IRS.

 

Fraudulent Conveyance Cases

 

            In Cate, 85-1 USTC (ED Tenn, 1984), the court ruled that no fraudulent conveyance took place when the IRS sought to impose transferee liability on the taxpayer for her husband's payments on her house and car.  In Hagaman, 100 TC 180 (1993), the court ruled that the taxpayer was liable as a transferee under Section 6901(a) when property was transferred to her by her future husband before marriage.

 

            In Ewart, 85 TC 544 (1985), the court established fraudulent   conveyance against the individual. In Alonso, 78 TC 577, the court ruled that the wife was subject to transferee liability since property received by means of tenancy by the entirety is subject to transferee liability where the creation of the tenancy renders the transferor insolvent and thereby causes the tenancy to be void under state law to the extent that creation of the tenancy was for less than full inadequate consideration.  In this case the creation of the tenancy rendered the husband insolvent and constituted a fraud on the creditors and made the creation of the tenancy void.

 

            In Scott, 70 TC 71 (1978), the court determined that transferee liability existed when the husband transferred the proceeds of the sale of stock to his wife. In Nutter, 54 TC 290 (1970), the court ruled that no transferee liability existed when real property was taken in exchange for satisfaction of debt.  In Tyrell 64 TCM 1543, RIA TC Memo, the court ruled that there was no transferee liability where property transfer under the divorce decree was not fraudulent.  In Cavanaugh, 62 TCM 554, the court ruled that a conveyance for inadequate consideration resulted in transferee liability. In Ranno, 60 TCM 1306, the court ruled that the transfer of the house was fraudulent and the transferee was liable for the transferor's unpaid taxes.

 

            In Nicholson, 48 TCM 272, the court ruled that the transferee was liable when the transfer was made after the tax liability accrued and left the transferor insolvent.

 

            As you can see from the above discussion, the issue of transferring property to trusts and other individuals and entities is a complicated one if the expected result is to protect the property from seizure by the IRS.  You must be very careful that the IRS cannot use transferee liability and fraudulent conveyance arguments against you.  Unfortunately many of the individuals who are selling asset protection systems to the public either have no understanding of the above law or simply do not care.

Civil Actions against IRS

 

            In the case of Miklautsch, 90O2 USTC 50,587  (D. Alaska 1990), the court ruled in favor of the taxpayer.  The IRS had assessed taxes on gains from tax shelters despite a contrary Tax Court holding and issued a deficiency notice against the taxpayers.  They were unable to pay the assessments and the IRS initiated collection proceedings and sold their residence at auction.  Section 7433 provides that if, in connection with any collection of federal tax, any officer or employee of the IRS recklessly or intentionally disregards any provision of the Code or Regulations, the taxpayer may sue for up to $100,000 in damages.  In a prior proceeding,  the Tax Court found that no gain or loss should be recognized in the transactions.  The revenue officers choose to ignore the ruling in making the assessments.  The court found that there was a factual issue and it refused to dismiss the action.    

The Priority of Tax Liens

 

            A tax lien has priority over other liens when it stands in line in front of other liens.  Under Internal Revenue Code Section 6323(a), the filing of a notice of lien gives the federal tax lien priority over any liens that may follow even if it has not yet attached to identifiable property.  In the case of TKB Int'l, 995 F2d 1460, the court ruled that tax liens were invalid because they were not filed properly under Section 6323.  The liens were not valid against the purchaser even though the buyer had knowledge of the existence of the tax liens