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791 F.2d 68
Norman E. COLEMAN, Petitioner-Appellant,
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Gary HOLDER, Plaintiff-Appellant,
SECRETARY OF the TREASURY and United States of America,
Nos. 85-1202, 85-1601.
United States Court of Appeals,
Submitted Dec. 17, 1985.
Decided May 7, 1986.
Before WOOD, FLAUM, and EASTERBROOK, Circuit Judges.
EASTERBROOK, Circuit Judge.
Some people believe with great fervor preposterous things that just happen
to coincide with their self-interest. "Tax protesters" have convinced
themselves that wages are not income, that only gold is money, that the Sixteenth
Amendment is unconstitutional, and so on. These beliefs all lead--so tax
protesters think--to the elimination of their obligation to pay taxes. The
government may not prohibit the holding of these beliefs, but it may penalize
people who act on them.
It is an important function of the legal system to induce compliance with
rules that a minority firmly believes are misguided. Legal penalties change
the balance of self-interest; those who believe taxes wicked or unauthorized
must nonetheless pay. When the legal system depends on honest compliance as
much as the income tax system does--and when disobedience is potentially rewarding
to those affected by the rule--it is often necessary to impose steep penalties
on those who refuse to comply. We have consolidated the cases of two such people.
Norman Coleman did not file tax returns for 1979, 1980, or 1981. The Internal
Revenue Service reconstructed Coleman's income for these years and concluded
that he owed taxes of $4,806 for 1979, $6,454 for 1980, and $3,692 for 1981.
The IRS also concluded that Coleman owed additions to tax exceeding $2,300.
Coleman sought review in the Tax Court, demanding that the IRS prove the correctness
of its computations and arguing, among other things, that wages are not income.
Coleman declined to offer any evidence concerning his income; he insisted that
the IRS bear the whole burden of production. The Tax Court granted summary
judgment to the IRS, concluding that Coleman had presented no evidence that
might undermine the presumption that the Commissioner's notice of deficiency
is correct. Because Coleman had filed tax returns for the years before 1979
and demonstrated through the briefing an awareness of the legal obligation
to file, the court imposed a penalty of $5,000 under 26 U.S.C. s 6673, which
authorizes the Tax Court to award damages when it concludes that the case has
been "maintained by the taxpayer primarily for delay or that the taxpayer's
position in such proceedings is frivolous or groundless...."
Gary Holder filed a tax return for 1980 but then filed an amended return on
which he subtracted his wages from his gross income, leaving only $68.13 in
taxable income. Holder attached to the amended return a screed insisting that
wages are not income. The amended return requested a refund of $4,555.20. The
IRS imposed a $500 penalty under 26 U.S.C. s 6702 for filing a frivolous return.
Holder paid 15% of the penalty and filed suit in the district court to recover
the payment. 26 U.S.C. s 6703. There he argued not only that wages are untaxable
but also that s 6702 is unconstitutional. The district court concluded that
the suit is as frivolous as the tax return. It granted summary judgment to
the government and ordered Holder to pay the attorneys' fees the government
incurred in defending the action.
The billingsgate in appellants' briefs is customary in cases of this nature.
Coleman says that wages may not be taxed because they come from his person,
a depreciating asset. The personal depreciation offsets the wage, leaving no
net income. Coleman thinks that only net income may be taxed under the Sixteenth
Amendment--net income as Coleman defines it, rather than as Congress does.
Holder, who styles himself a "private citizen," insists that wages
may not be taxed because the Sixteenth Amendment authorizes only excise taxes,
and in Holder's world excises may be imposed only on "government granted
privileges." Because Holder believes that he is exercising no special
privileges, he thinks he may not be taxed. These are tired arguments. The code
imposes a tax on all income. See 26 U.S.C. s 61. Wages are income, and the
tax on wages is constitutional. See, among hundreds of other cases, United
States v. Thomas, 788 F.2d 1250, 1253 (7th Cir.1986); Lovell v. United States,
755 F.2d 517 (7th Cir.1984); Granzow v. CIR, 739 F.2d 265, 267 (7th Cir.1984);
United States v. Koliboski, 732 F.2d 1328, 1329 & n. 1 (7th Cir.1984).
See also Brushaber v. Union Pacific R.R., 240 U.S. 1, 12, 24-25, 36 S.Ct. 236,
239, 244-45, 60 L.Ed. 493 (1916).
Both Coleman and Holder also argue that the income tax is a taking, which
abridges their right to earn income. Taxes indeed "take" income,
but this is not the sense in which the constitution uses "takings." Article
I, section 8, clause 1 of the constitution grants to Congress "Power To
lay and collect Taxes". The power thus long predates the Sixteenth Amendment,
which did no more than remove the apportionment requirement of Art. I, sec.
2, cl. 3 from taxes on "incomes, from whatever source derived". Although
the government might try to achieve through special taxes what the Takings
Clause of the Fifth Amendment forbids if done directly, the general tax levied
by the Internal Revenue Code does not offend the Fifth Amendment. Brushaber,
Coleman argues that the IRS had to prove the amount of his income; he needed
to show nothing. The statute is otherwise. People must make an honest report
of their income to the government. If they fail to do this, they must establish
any inaccuracies in the Commissioner's reconstruction of their income. 26 U.S.C.
s 6020(b). His further argument that the Seventh Amendment requires a jury
trial in the Tax Court is empty. Even in ordinary litigation, the Seventh Amendment
does not require a jury trial when there are no facts in dispute, and Coleman
put none in dispute. The Seventh Amendment at all events does not apply to
civil litigation against the United States. McElrath v. United States, 102
U.S. (12 Otto) 426, 440, 26 L.Ed. 189 (1880); see also Atlas Roofing Co. v.
OSHRC, 430 U.S. 442, 450-51, 97 S.Ct. 1261, 1266-67, 51 L.Ed.2d 464 (1977).
Our circuit has apparently never held squarely that there is no right to a
jury trial in the Tax Court, but other circuits have held this, and we agree
with them. E.g., Parker v. CIR, 724 F.2d 469, 472 (5th Cir.1984); Funk v. CIR,
687 F.2d 264, 266 (8th Cir.1982). Both appellants challenge the penalties imposed
on them, contending that "frivolous" is too vague a designation to
support a penalty. This is a staple term of civil litigation, however, and
we have sustained against constitutional challenge 28 U.S.C. s 1927, which
allows awards against counsel for "vexatious" conduct. In re TCI,
Ltd., 769 F.2d 441, 449 (7th Cir.1985). Statutes need not be unambiguous in
every application to be constitutional. Many words acquire meaning through
judicial and administrative construction over the years, and this evolutionary
process is constitutional. E.g., CSC v. Letter Carriers, 413 U.S. 548, 93 S.Ct.
2880, 37 L.Ed.2d 796 (1973); cf. Rose v. Locke, 423 U.S. 48, 96 S.Ct. 243,
46 L.Ed.2d 185 (1975). Courts have been imposing penalties for frivolous litigation
for hundreds of years, cf. Roadway Express, Inc. v. Piper, 447 U.S. 752, 764-67,
100 S.Ct. 2455, 2463-65, 65 L.Ed.2d 488 (1980), and the ambiguities that lurk
in "frivolous" (or any other word) in marginal cases do not prevent
the imposition of penalties. Uncertainty is a fact of legal life. The "law
is full of instances where a man's fate depends on his estimating rightly,
that is, as the jury subsequently estimates it, some matter of degree." Nash
v. United States, 229 U.S. 373, 377, 33 S.Ct. 780, 781, 57 L.Ed. 1232 (1913). "Whenever
the law draws a line there will be cases very near each other on opposite sides.
The precise course of the line may be uncertain, but no one can come near it
without knowing that he does so, if he thinks, and if he does so it is familiar
to the ... law to make him take the risk." United States v. Wurzbach,
280 U.S. 396, 399, 50 S.Ct. 167, 169, 74 L.Ed. 508 (1930). See also, e.g.,
United States v. Powell, 423 U.S. 87, 96 S.Ct. 316, 46 L.Ed.2d 228 (1975).
The purpose of 26 U.S.C. ss 6673 and 6702 is to compel taxpayers to think
and to conform their conduct to settled principles before they file returns
and litigate. A petition to the Tax Court, or a tax return, is frivolous if
it is contrary to established law and unsupported by a reasoned, colorable
argument for change in the law. This is the standard applied under Fed.R.Civ.P.
11 for sanctions in civil litigation, and it is a standard we have used for
the award of fees under 28 U.S.C. s 1927 and the award of damages under Fed.R.App.P.
38. See Indianapolis Colts v. Mayor and City Council of Baltimore, 775 F.2d
177 (7th Cir.1985); In re TCI, supra; Lepucki v. Van Wormer, 765 F.2d 86 (7th
Cir.) (attorneys' fees awarded), cert. denied, --- U.S. ----, 106 S.Ct. 86,
88 L.Ed.2d 71, damages awarded, --- U.S. ----, 106 S.Ct. 403, 88 L.Ed.2d 355
(1985); Steinle v. Warren, 765 F.2d 95, 102 (7th Cir.1985) ($2,500 damages
awarded); Oglesby v. RCA Corp., 752 F.2d 272, 279-80 (7th Cir.1985). The inquiry
is objective. If a person should have known that his position is groundless,
a court may and should impose sanctions. See Thornton v. Wahl, 787 F.2d 1151,
1154 (7th Cir. 1986).
Things are otherwise under ss 6673 and 6702, the appellants say; these statutes
require not only a lack of objective support but also subjective bad faith.
Coleman cites May v. CIR, 752 F.2d 1301 (8th Cir.1985), for this proposition.
As originally published May used a subjective test, although the court found
that May himself acted in subjective bad faith. The court later revised the
opinion, stating the inquiry as whether the taxpayer "knew or should have
known" that the claim, return, or argument was groundless. 55 A.F.T.R.2d
747, 751 (8th Cir.1985). "Should have known" is an objective test.
We used an objective test for penalties under the tax laws in Lovell v. United
States, supra, and there is no reason to change that approach. Section 6673,
for example, states alternative tests: whether the suit was "maintained
... primarily for delay" or whether the position is "frivolous or
groundless." The former is a subjective inquiry, the latter is objective;
either will support a penalty. See also In re TCI, supra, 769 F.2d at 445 (subjective
bad faith is important under s 1927 only when the litigation is objectively
The purpose of ss 6673 and 6702, like the purpose of Rules 11 and 38 and of
s 1927, is to induce litigants to conform their behavior to the governing rules
regardless of their subjective beliefs. Groundless litigation diverts the time
and energies of judges from more serious claims; it imposes needless costs
on other litigants. Once the legal system has resolved a claim, judges and
lawyers must move on to other things. They cannot endlessly rehear stale arguments.
Both appellants say that the penalties stifle their right to petition for redress
of grievances. But there is no constitutional right to bring frivolous suits,
see Bill Johnson's Restaurants, Inc. v. NLRB, 461 U.S. 731, 743, 103 S.Ct.
2161, 2170, 76 L.Ed.2d 277 (1983). People who wish to express displeasure with
taxes must choose other forums, and there are many available. Taxes are onerous,
no doubt, and the size of the tax burden gives people reason to hope that they
can escape payment. Self-interest calls forth obtuseness. An obtuse belief--even
if sincerely held--is no refuge, no warrant for imposing delay on the legal
system and costs on one's adversaries. The more costly obtuseness becomes,
the less there will be.
The contentions in this case are objectively frivolous. They have been raised
and rejected so often that this circuit now handles almost all similar cases
by unpublished orders. The Tax Court and the IRS were entitled to impose sanctions.
We, too, regularly impose sanctions in these cases. In Van Wormer this court
awarded attorneys' fees as a sanction for similar claims, and the Supreme Court
added $1,000 in damages. Our unpublished orders in cases of this sort regularly
end with awards of double costs and attorneys' fees in favor of the government.
Precisely because the substantive claims are so weak, and the opinions are
therefore unpublished, litigants may be unaware of our practice. The routine
use of sanctions does not deter unless people know what lies in store. See
also, e.g., Connor v. CIR, 770 F.2d 17, 20 (2d Cir.1985) (the argument that
wages are not income "has been rejected so frequently that the very raising
of it justifies the imposition of sanctions."). Our usual practice has
been to invite the government to submit an itemized request for attorneys'
fees. The keeping of time and expense records, and the preparation of affidavits
supporting requests for fees, are themselves avoidable costs of baseless litigation.
The government's brief in No. 85-1601 informs us that the average amount of
fees it has been awarded in tax protester litigation between July 26, 1984,
and June 12, 1985, is $1,258 per case. This includes only the fees that can
be directly attributed to litigation. In order to make simpler the task of
computing and awarding fees, courts sometimes impose uniform sanctions on the
authority of Fed.R.App.P. 38. The Supreme Court awarded a flat $1,000 in Van
Wormer on top of the fees we had earlier granted. We, too, have occasionally
named a penalty rather than requesting an individual computation of fees. E.g.,
Steinle, supra; Ruderer v. Fines, 614 F.2d 1128, 1132-33 (7th Cir. 1980); and
Clarion Corp. v. American Home Products Corp., 494 F.2d 860, 865-66 (7th Cir.),
cert. denied, 419 U.S. 870, 95 S.Ct. 128, 42 L.Ed.2d 108 (1974), each of which
imposes $2,500 as damages for frivolous appeals; and Hilgeford v. Peoples Bank,
776 F.2d 176, 179 (7th Cir.1985); and Wisconsin v. Glick, 782 F.2d 670 (7th
Cir.1986), each of which imposes a $500 penalty for a frivolous appeal. And
compare Hallowell v. CIR, 744 F.2d 406, 408 (5th Cir.1984) ($2,000 per tax
protest); and Crain v. CIR, 737 F.2d 1417, 1418 (5th Cir.1984) (same), with
Knoblauch v. CIR, 749 F.2d 200, 202-03 (5th Cir.1984) (individual calculation).
Because average awards of actual attorneys' fees in tax protest cases exceed
$1,000, we choose to impose sanctions of $1,500 in lieu of attorneys' fees.
Even $1,500 cannot cover the indirect costs of this litigation-- including
the costs that befall serious litigants, who must wait longer for their cases
to receive judicial attention. The decision to name a penalty rather than invite
proof of the government's actual attorneys' fees produces some imprecision,
doubtless. Coleman's case is a little more complex than Holder's--Coleman's
brief is 38 pages, the government's 31; Holder's brief is 10 pages, the government's
16. There should be no weeping over this imprecision, however. Coleman and
Holder could have avoided the penalty, and other people should avoid it, by
the most minimal concern for settled rules. They knew or should have known
that their claims are frivolous, and they (rather than their adversary) must
pay the cost of their self-indulgent litigation. The judgments are affirmed,
with double costs and $1,500 damages in each case.
to Tax Protestor Exhibit