Tax defiers and the tax gap: stopping 'frivolous squared' before it spreads.

• Author: Hochman, Nathan J.
• Position: Symposium: Closing the Tax Gap

1. INTRODUCTION

   Ever since the Sixteenth Amendment was ratified over ninety-five years ago and then upheld by the Supreme Court three years later, (1) the central debate over income taxation has focused on what will be taxed, how much it will be taxed, and for how long it will be taxed. Over those many years, Americans have legitimately protested the "what," the "how much," and the "how long." These "tax protestors" have sought change by working within the system, advocating tax legislation before Congress, commenting on proposed IRS regulations interpreting the tax laws, and arguing before the Tax Court and other federal courts about the meaning and application of particular tax laws. These "tax protestors" do not question the underlying legitimacy of the United States' tax system but channel their protest to the details of the taxes themselves.

   Over the last fifty years, the term "tax protestor" has devolved from describing those individuals engaged in legally valid and protected conduct to those individuals engaged in illegitimate tax defiance, who deny the legal underpinnings of the tax system itself. This "tax defter" conduct has taken many forms, including filing frivolous returns or no returns at all, flooding the IRS and courts with meritless arguments and positions that courts have uniformly rejected for decades, and trying to pay off their tax debts with fictitious financial instruments, such as comptroller warrants, sight drafts and bills of exchange. The tax defiers have evolved their distribution network for their positions over the years, from initially peddling their products to a relatively small audience in books, then audiotapes, videotapes, and DVDs, to reaching out to mass audiences through websites and blogs on the Internet that can be accessed with the click of a mouse.

   The irony of the tax defiers' situation is that the very system that they reject pays for their ability to live in and reject that system. While tax defiers refuse to pay their fair share of taxes, they have no problem accepting their fair share of the benefits paid for by that tax system, including the courts they litigate in, the roads they drive on, the police and fire departments they call during emergencies, the military that defends them, the sanitation trucks they rely on to pick up their garbage, and the regulators they count on to ensure the safety of the food they eat, the water they drink, and the air they breathe. These tax defiers seemingly do not believe that, as Justice Oliver Wendell Holmes once said, "[T]axes are what we pay for civilized society." (2) They simply assume that someone else will bear that burden. To them, their cost to live in a "civilized society" is essentially nothing.

   But any "civilized society," and in particular America's "civilized society" is enormously expensive to operate--over $2.65 trillion annually at current count. (3) To raise these funds through a voluntary self-assessment tax system, tax defiers' arguments must be promptly addressed and effectively defeated to ensure maximum compliance with the law. Such maximum compliance among the nation's over 138 million taxpayers filing over 235 million returns annually (4) can only be achieved if honest taxpayers, who represent well over eighty-five percent of all taxpayers, (5) have trust in the overall fairness of the system. Maintaining maximum compliance and a high level of trust in the system's fairness are crucial, in turn, in addressing the Tax Gap--the gap between the amount of tax owed and collected on an annual basis. All efforts to ameliorate the Tax Gap are premised on the bedrock belief in the tax system's legitimacy. Should such legitimacy come into question, the Tax Gap could well spiral upwards, rather than trend downwards.

   This Article will address the impact of the conduct of illegitimate "tax defiers," (6) as opposed to legitimate "tax protestors," on the Tax Gap. (7) To understand this impact, the Article will first identify the arguments tax defiers have promoted and then highlight the consistent responses that the courts have had rejecting these arguments. Second, the Article will focus on the potential impact tax defiers may have on the Tax Gap. Finally, the Article will detail the National Tax Defter Initiative recently promulgated by the United States Department of Justice' s Tax Division to combat current and future tax defter conduct.

2. TAX DEFIERS' FRIVOLOUS CONSTITUTIONAL ATTACKS ON THE TAX SYSTEM

   Since the 1950s, tax defiers have unsuccessfully utilized a variety of constitutional arguments to attempt to undermine the legitimacy of the income tax system. These constitutional attacks have spanned from direct attacks on the Sixteenth Amendment to the invocation of the First, Fifth, Eighth, Ninth, Thirteenth and Fourteenth Amendments in support of their contentions. All such arguments have met been met with uniform and consistent rejection by the tax courts, district courts, and appellate courts that have addressed them.

   1. Sixteenth Amendment Frivolous Claims

      A starting point for many tax defiers' constitutional claims has been the Sixteenth Amendment itself. Ratified in 1913, the Sixteenth Amendment states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." The Sixteenth Amendment arose, in part, in response to the Supreme Court's two decisions in Pollock v. Farmers' Loan and Trust Co., (8) which overturned Congress' efforts to tax income deriving from property by finding such tax to be a non-apportioned "direct tax" in violation of Article I, Section 9 of the Constitution. (9) Tax defiers have challenged the validity of the Sixteenth Amendment with arguments ranging from alleging its improper ratification to asserting that it did not cure the problem of income taxes being impermissible non-apportioned "direct taxes" on property.

      With respect to the ratification argument, tax defiers posit that the Sixteenth Amendment was never properly ratified and therefore not part of the Constitution. They contend that thirty-four out of the thirty-eight states ratified an amendment that contained errors of diction, capitalization, punctuation and spelling; since at least three-fourths of the states did not approve exactly the same text, they proclaim that the amendment did not go into effect. (10)

      As the courts have discussed, this argument is not new but was considered by Secretary of State Philander Knox in 1913 when he certified that the amendment had been ratified. In United States v. Thomas, the court noted that the Supreme Court follows the "enrolled bill rule" which means that if a legislative document was authenticated in regular form by the appropriate officials, the court treats that document as properly adopted. (11) Since Secretary Knox declared that a sufficient number of states had ratified the Sixteenth Amendment, and his decision was not "transparently defective," such a decision "is now beyond review." (12)

      With regard to the impermissible "direct tax" argument, many tax defiers have held that federal income taxes are unconstitutional because, notwithstanding the Sixteenth Amendment, they are "direct taxes" that must be apportioned among the states in accordance with the census. They rely on the language of Article I, Section 9, Clause 4 of the Constitution, which predated the Sixteenth Amendment, mandating that "direct taxes" be apportioned in order to be constitutional. Because income taxes are not so apportioned among the states, tax defiers conclude that the income tax laws violate the Constitution and should be unenforceable.

      This argument has long been addressed and rejected by the Supreme Court. In 1916, a unanimous Supreme Court in Brushaber v. Union Pacific Railroad Co. ruled the income tax law, promulgated after the ratification of the Sixteenth Amendment, constitutional because "the whole purpose of the Amendment was to relieve all income taxes when imposed from apportionment from a consideration of the source whence the income was derived." (13) The Court explicitly acknowledged that the Sixteenth Amendment was drawn for the purpose of "doing away for the future with the principle upon which the Pollock Case was decided [in 1894 and 1895]," namely that a tax on the income received and emanating from property was the same as a direct tax on property itself requiring apportionment among the states to be constitutional. (14) Thus, from almost the genesis of the Sixteenth Amendment, the Supreme Court has emphatically rejected the "direct tax" constitutional argument.

      Yet, tax defiers have continued over the years to beat their heads against the walls of this judicial rejection of their argument. Frustrated with such frivolous arguments, courts have exacted sanctions from tax defiers for their insistence in repeatedly raising them. For instance, in 1989, the Ninth Circuit upheld a $2,500 sanction against criminal defense counsel Lowell Becraft, Jr. for advancing the "direct tax" argument in a petition for rehearing after the panel affirmed his client's tax convictions. The court held:

      [Becraft's] position can fairly be reduced to one elemental proposition: The Sixteenth Amendment does not authorize a direct non-apportioned income tax on resident United States citizens and thus...