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Tax Protestor Cases Exhibit
("Damn, We Lost Again! And why is it that people who sell
tax protestor materials file their tax returns anyway . . .")

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Income taxes and two additional taxes were imposed on a person who didn't report or pay taxes on commissions, pension money, unemployment compensation, dividends, and wages.

KEEP READING IF:

*  You want to show clients or prospective clients that the income tax is real, it applies to them, and like it or not, if they receive income, they have to pay it.

*  The words from Where Have All The Flowers Gone,  "When will they ever learn?

Oh when will they ever learn?" play over and over in your mind when you hear certain schemes and impossible dreams.

BUT FIRST, A TRU GRIT NEWS FLASH FROM SPECIAL LISI COMMENTATOR, BOB WOLF:

Delaware just became the first state to sign into law a unitrust statute as part of its principal and income act.

New York passed its total return unitrust legislation last Wednesday afternoon, and it is waiting for its Governor's signature. issouri passed TRU legislation less than two weeks ago and it is awaiting its Governor's signature.

Pennsylvania is just about to introduce a bill to the same effect, giving trustees the choice between the power to adjust and the unitrust.

A number of other states are moving quickly on their unitrust statutes.

You'll hear more soon from Bob Wolf on Total Return Unitrust legislation.

Right now, you can read a number of articles and found an outline on TRUs at

http://www.leimberg.com     Go to the right hand side of the home page and look

for a box marked TRUs.  You'll find articles by Bob Wolf, Michel Nelson, Mark Edwards, David Diamond, Patti Spenser, and James Dam as well as link to a FORBES article on TRUs.

NOW BACK TO FURNISS, A HOT NEW CASE!

FACTS:

During 1990, Mr. Furniss received commissions of $17,516, a pension of $3,433, unemployment compensation of $4,065, dividends of $20, and wages of $804.

During 1994, Furniss received unemployment compensation of $2,450, dividends of $46, and wages of $27,747.

During 1996, Furniss received a pension of $5,920, unemployment compensation of $3,705, interest of $20, dividends of $36, and wages of $20,131.

But in spite of receiving these sums of money, Furniss didn't think he should have to file income tax returns or pay taxes for those years - so he didn't!

COMMENTARY:

The IRS, of course, felt otherwise.  It said all of that money Furniss received was reportable income.

Furniss didn't argue that he hadn't received the money - only that "there is insufficient authority to hold him liable for an income tax."  (Where have we heard that one before? - and how many times?  Isn't it nice to think that you are different from all the rest of us that have to report and pay taxes?)

So what did Furniss argue to prove his case?

First, he argued that the income tax is unconstitutional.

Alternatively, he said, the definition of income in the law didn't include what he received. 

The Tax Court had no trouble shooting down his misguided thinking with these long-standing reasons:

First, the income tax repeatedly has been held constitutional.

Second, the single most important and seminal section in the income tax law, Code Section 61(a) defines gross income generally as "all income from whatever source derived."  That section is careful to add that the term "all income" includes but is not limited to such items as compensation for services, commissions, interest, dividends, and pensions.

The Tax Court pointed out that Code Section 85(a) provides: "In the case of an

individual, gross income includes unemployment compensation."  

THE "FOREIGN INCOME" GAMBIT: 

Furniss shot back that Code Sections 911 (perhaps for emergency help?) and the regulations under Code Section 861 excluded the money he received from income.

The court lobbed that back and held that nothing in either Section 911 nor Section 861 operates to prevent Code Section 61 from applying to the money Furniss had received.  Section 911(a) allows an exclusion from gross income for "foreign earned income" at the election of a "qualified individual" (one whose tax home is in a foreign country).  Here, Furniss had no foreign earned income and was not a qualified individual.  (I suppose you could argue that the tax laws of this country may be strange and even alien at times but that does not make receipts of income foreign).

Nor did Furniss's Section 861 argument help.  He based his reliance on Section 861 by reading it to provide that items not defined in that provision are not subject to tax.  But he clearly misread (or read into it what he wanted to read into it) because Section 861(a)(1) and (3) provides that interest from the United States and compensation for labor or personal services performed in the United States (with exceptions that don't apply to his case) are items of gross income which shall be treated as income from sources within the United States.  So there's nothing in Code Section 861 that excludes any of the money he received

from income.  

NO PROOF, NO DEDUCTIONS:

Next, Furniss claimed that he was entitled to Schedule A, Itemized Deductions, and Schedule C, Profit or Loss From Business, deductions for the years in issue. Of course, the law requires that the taxpayer has the burden of proof on this

issue.   Here, he failed to introduce any such evidence or even indicate the

specific deductions to which he believed he was entitled.  So the court disallowed the deductions he had taken.SECTION 6651(a)(1) ADDITION TO TAX

Tax law imposes an additional tax for failure to file a timely return.  The only defense against this penalty is to prove that the failure is due to reasonable cause and not due to willful neglect. Since he couldn't prove a reasonable cause for his failure to file, he was held liable for the Section 6651 additional tax.

SECTION 6654(a) ADDITION TO TAX

As Doctor Seuss would say, THAT IS NOT ALL, OH NO, THAT IS NOT ALL!  Section

6654(a) imposes yet another addition to tax in the case of any underpayment of estimated tax by an individual. This tax is mandatory - unless a statutory exception applies. The point is, there is no provision in this Code Section relating to reasonable cause and lack of willful neglect. It is mandatory and

extenuating circumstances are irrelevant.   Since none of  the statutory

exceptions applied, and since Furniss presented no argument regarding payments of

estimated tax, the Tax Court held him liable for this tax as well.  

THE QUESTION IS, WHY ARE THEY FIGHTING AN ALREADY LOST BATTLE?

Furniss was not alone in the loser's circle.  One June 11th, in U.S. v. Robert R. Raymond, et al., (S. Ct. Dkt. No. 00-1412) the Supreme Court denied certiorari (i.e. it declined to hear) and by doing so upheld a permanent injunction against the promotion of a "De- Taxing America Program". 

This case involved two promoters, Robert Raymond and Robert Bernhoft, who operated as Morningstar Consultants.  They found gullible taxpayers and sold them what they marketed as their "De-Taxing America Program," a scheme that encouraged

buyers of this plan to avoid paying income taxes.   Detaxing was found to be an

abusive tax shelter because false statements were made in brochures and ads about the tax results plan purchasers would obtain.

The court had no doubt that, unstopped, Raymond and Bernhoft would continue to encourage others to violate the tax law so it held that injunctive relief was appropriate.  It discarded their argument that their program promotion was political advocacy and that the injunction violated their free speech rights. Although the court concluded that the order was in fact a prior restraint on their speech, it held that the injunction - even though permanent - was not constitutionally impermissible.

Sometimes, for some folks, it seems that pain is not only the best but the only way to learn.

HOPE THIS HELPS YOU HELP OTHERS STAY OUT OF TROUBLE AND AVOID BOTH PAIN AND FAME!

Steve Leimberg

Steve Leimberg's Estate Planning Newsletter

Copyright LISI 2001

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Go to http://www.leimbergservices.com  Log in.

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Click UPDATE. It's that easy!

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CITES:

David Furniss v. Commissioner; T.C. Memo. 2001-137; No. 13860-99, June 11th, 2001; IRC Sec. 61(a)(1), (4), (7), (11). See also Solomon v. Commissioner, T.C. Memo. 1993-509, affd. without published opinion 42 F.3d 1391 (7th Cir. 1994). )

IRC Sec. 911(d)(1).  See  Section 6651(a)(1) and United States v. Boyle, 469 U.S. 241, 245 (1985); United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994); Harris v. Commissioner, T.C. Memo. 1998-332 for information on additions to tax for failure to file. For information on the addition to tax under section 6654(a), see Recklitis v. Commissioner, 91 T.C. 874, 913 (1988); Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980); Estate of Ruben v. Commissioner, 33 T.C. 1071, 1072 (1960)

For cases holding the income tax constitutional, see Charczuk v. Commissioner, 771 F.2d 471, 472-473 (10th Cir. 1985), affg. T.C. Memo. 1983-433; Abrams v. Commissioner, 82 T.C. 403, 406-407 (1984); Bivolcic v. Commissioner, T.C. Memo. 2000-62; Stelly v. Commissioner, 761 F.2d 1113, 1115 (5th Cir. 1985).

See United States v. Robert R. Raymond, et al., No. 99-4024 (7th Cir. Sept. 26, 2000).

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