Tax Protestor Follow-Up

I mentioned last week that Peter Hendrickson, one of this year's most noted tax protestors, was due for sentencing. He got a bit less than three years.

The government had asked for more, seeing as how Hendrickson is a major promoter of a fraudulent tax scheme, who boasts on his own website that his followers have procured more than $10 million in refunds using his method (he posts copies of the refund checks, making them easy for the IRS to find), and who, according to the government, may have induced over 10,000 people to file false refund claims. But, somewhat pathetically, even by the government's calculation, the total amount of taxes (including income, Medicare, and Social Security taxes) that Hendrickson himself tried to avoid over a seven year period (even considering his wife's income too) amounted to only a little over $100,000. That's about $14,300 a year. Working back from that figure, one can see that all of Hendrickson's efforts (his books, his website, etc., not to mention his day job) weren't pulling in that much dough. The result was that the sentencing guidelines recommended a fairly low sentence for him, and the judge chose not to depart upwards.

All that work, and not much to show for it. If you're going to pursue a career in fraud, one would think think the idea would be to make it pay. But in Hendrickson's case, the same amount of effort, if directed at something productive, could surely have earned a much better living. Ironically, Hendrickson was lucky he hadn't been more successful, or he'd probably find himself up the river for more time.

And Hendrickson's followers? Now that their guru has been convicted and sentenced, have the scales fallen from their eyes? Do they see him revealed as the fraud that he is?

Not at all. A specific court ruling against Hendrickson's theory means nothing to them. It only confirms their belief that Hendrickson "relies on and invokes NOTHING but very WELL-SETTLED LAW." The law, they continue to insist, is all on Hendrickson's side, and he lost because the "fedgoons and the shills" were conspiring against him. It's amazing how impervious to facts some people can be.

Thoguhts for Tax Day

Good article by E.J. Dionne in today's Washington Post. Dionne points out that, as much as we all dislike paying taxes, we should recognize that the IRS performs a vital function that provides the finances for our military troops, health and safety functions, and all the other positive things that government provides.

That's why it's particularly reprehensible that some politicians essentially condone or excuse terrorist attacks on the IRS, such as that of Joseph Stack, who flew an airplane into a building housing IRS offices. As Dionne observes, Representative Steve King said, "I think if we had abolished the IRS back when I first advocated it, he wouldn't have had a target for his airplane. . . . It's sad that the incident happened down in Texas, but by the same token, the IRS is an agency that's unnecessary."

Similarly, Senator Scott Brown's comments on the incident noted that it was tragic, but went on to say, "I don't know if it's related, but I can just sense not only in my election, but since being here in Washington, people are frustrated. They want transparency, they want their elected officials to be accountable and open and talk about the things that are affecting their daily lives. So I'm not sure that there's a connection, I certainly hope not. But we need to do things better."

You know, after 9/11, if anyone suggested that U.S. foreign policy or other U.S. actions might have played some role in motivating the attacks, they were blasted as terrorist sympathizers. Here we have a rather similar terrorist attack -- another suicide flight of a plane into a building(fortunately, on a smaller scale). It seems rather incredible that a politician's comment would be that "people are frustrated" and that "we need to do things better." How about, "that man was a horrible criminal and such actions can never be remotely justified"?

Filed Yet?

Tax returns are due tomorrow. NPR featured a story this morning about Tea Party tax protestors -- as well as some wealthy people who are actually asking for higher taxes. Have you filed yet?

I filed my returns yesterday, and in addition to pondering questions such as Why do we have to submit copies of our W-2s with our returns? Doesn't the IRS already get a copy from our employers?, I spent some time, as I so frequently do, thinking about tax protestors.

As Faithful Readers know, when I refer to tax protestors, I don't mean the slightly offbeat Tea Partiers, who, as far as I can tell, are simply demanding that government lower or eliminate income taxes. No, I mean a much crazier group of people -- the "tax protestors" who claim that under current law there is no legal obligation to pay income tax.

Yes, such people really exist -- so many, in fact, that I maintain a website debunking their kooky theories. Their theories start with the basic "there simply is no law that requires average Americans to pay income tax," and go on to more and more esoteric arguments, such as that "wages are not income" (because, you see, they merely represent an "equal exchange" of labor for its value in money), or that "the income tax is unconstitutional because it is not apportioned" or even that "income tax is slavery that violates the 13th Amendment." Needless to say, these theories are all complete nonsense, but it's stunning how many people fall for them.

Particularly incredible is how many people will support tax protestor gurus to the bitter end. The tax protestor du jour is a fellow named Peter Hendrickson, author of "Cracking the Code," who has his own website touting his absurd income tax theories, including a forum where his readers exchange thoughts. Now Hendrickson -- get this -- was recently found guilty of income tax crimes by a jury and is due to be sentenced on Monday. But if you browse the forum, you'll see that that hasn't stopped his readers from buying into his theories! Even now, some of them are proudly announcing that they've filed their first "CtC-educated" tax returns. The fact that CtC-educated returns don't seem to be working out too well for the guru himself is apparently not a deterrent.

Also good for a laugh is Hendrickson's post-trial brief, in which he explains why he can't be guilty of the crimes charged. Among other things, Hendrickson claims that he is not a "person" subject to the tax laws. The reason is that section 7343 of the tax code provides that:

"The term 'person' as used in this chapter includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs."

Hendrickson deftly observes that the government failed to prove that he is an officer or employee of a corporation under any such duty!

Needless to say, Hendrickson doesn't understand the normal meaning of the English word "includes" -- and that's before we even get to section 7701(c) of the code, which (for the benefit of anyone who might be as language-impaired as Hendrickson) specifically provides that "The terms 'includes' and 'including' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined."

Sheesh. There's just no end to tax protestor nonsense. It looks like Hendrickson will be joining the growing ranks of tax protestor gurus who end up as guests of the state.

Pay your income taxes. It's not fun, but it's a lot easier than paying the interest and penalties, or doing the prison time, that can result if you don't.

Tax Protestor Redux

Was Andrew Joseph Stack, allegedly the man who flew a plane into a building containing IRS offices, a "tax protestor"? Some commenters on Saturday's post say yes, and some news organizations follow suit. But I disagree.

Of course, anyone is free to use any definition they want -- it's not as though these matters are regulated by some Tax Protestor Standards Board -- but in my view Stack lacked the essential qualities I have in mind when I call someone a tax protestor.

Let's consider the things Stack apparently did, as revealed in his alleged suicide note. As I noted on Saturday, he doesn't give all the details, so we don't really know what he did, but apparently he (1) tried to shield his income from taxes by creating a fake church, (2) failed to report distributions from his IRA as income, and (3) failed to report some of his wife's income, allegedly because of mistakes by his accountant. Does that make him a tax protestor?

There's a difference between a tax protestor and an ordinary tax cheat. Lots of people cheat on their taxes. Certainly, not reporting income does not by itself make someone a tax protestor.

In my mind, the first essential element of being what I call a tax protestor is that the person believes, or at least claims to believe, that what he is doing is lawful. Tax protestors claim that they're not evading taxes. They claim that there's no law requiring them to pay taxes, or that the tax law is unconstitutional, or that some obscure section of the tax code makes all domestic income nontaxable, or some such nonsense. So again, just failing to report income (as in items 2 and 3 above) doesn't qualify.

Second, in my view, tax protestor arguments are not just about pushing the envelope with regard to ambiguous loopholes in the tax code. When I call someone a tax protestor, I mean that their argument is so outlandish that no reasonable person could entertain it.

That's why I exclude Stack's escapade with the fake church. That comes closest to the flavor of tax protest -- Stack says he joined "a group of people who were having 'tax code' readings and discussions" and that they "carefully studied" the code and did everything necessary to make it legal not to pay taxes. That's the kind of thing that goes on at the absurd "seminars" offered by prominent tax protestors.

But what's different here is that the position doesn't seem nearly so outlandish as tax protestor positions. Again, it's hard to judge without knowing more detail about what Stack actually did. But churches are tax exempt. And the question of what constitutes a "church" is pretty complicated. The question of what constitutes a genuine religious belief is obviously delicate, and some organizations that initially arose in a secular context have successfully transformed themselves into tax-exempt religions (e.g., the Church of Scientology).

So either Stack believed that he and his buddies could successfully declare themselves to be a religion, or he was deliberately scamming. Either way, it's just not what I would call a tax protestor argument. There's a difference between trying to exploit one of the genuinely ambiguous loopholes in the tax system and having a crazy argument that most people don't have to pay taxes. I would feel the same way about someone who tried to claim most of their home as a home office, or who claimed their hobby expenses as business expenses, or who got involved in some sophisticated but phony tax shelter.

Finally, I would say that Stack's manifesto, and his life story as revealed in it, just don't have anything like the flavor of tax protest. Stack argues about whether it was right for the tax code, as changed in 1986, to forbid companies from treating software engineers such as himself as independent contractors. He says this change in the tax code made it impossible for him to succeed in business. He also says that one year he "decided that it would be irresponsible not to get professional help" with his taxes, so he gave all his information to an accountant and got screwed because the accountant failed to report some of his wife's income.

These are not the actions of a tax protestor. A tax protestor would be saying that income tax is entirely optional, that wages are not income, that you don't have to file because Form 1040 doesn't have an OMB control number, or crazy stuff like that. A tax protestor wouldn't get screwed by an accountant's mistake because a tax protestor wouldn't turn to a real professional for help with his taxes. A tax protestor wouldn't complain that the 1986 tax changes had doomed his business, because a tax protestor wouldn't recognize that there was any obligation to pay taxes to begin with.

As I see it, Stack may have tried to cheat on his taxes with his fake church scam. He may have failed to report income. And he certainly had a lot of disagreements with the tax code. But he's not what I have in mind when I use the term "tax protestor." Of course anyone else can use a different definition. But that's what I mean by the term.

As I remarked on Saturday, this result is somewhat ironic and shows that the term "tax protestor" is not a very good term. Someone who flies a plane into a building to protest his disagreement with income taxes is certainly what you would call a "tax protestor" if you didn't know the meaning that the term has developed. And someone who claims to agree completely with the tax code but who denies that it requires payment of income taxes would better be called a "tax denier." But for whatever reason, the term "tax protestor" has come to mean someone who has an outlandish theory about why the law doesn't require payment of income taxes. Stack may have been a tax cheat, but I wouldn't call him a tax protestor.

A Real Tax Protestor

By now you've all seen the terrible story of the man, apparently Andrew Joseph Stack, who flew a plane into a building housing some IRS offices because he was furious over various tax issues.

Faithful readers know that I have an eccentric interest in tax protestors. Curiously enough, as I explained to a Dow Jones reporter yesterday, Stack was not really a "tax protestor" as that term is commonly used. The term "tax protestor" is generally used to refer to people who, for various absurd and ridiculous reasons, claim that most Americans have no legal duty to pay income taxes. Stack, by contrast, understood that the law required him to pay taxes; he was just damned upset about it.

As tax protestors themselves plaintively point out, the term "tax protestor" is not really apt for use in describing them. They are not "protesting" taxes; they are just claiming (absurdly) that the law doesn't require them to pay tax. They might more accurately be called "tax deniers," a term coined by Dan Evans on the analogy of "Holocaust deniers." But even Dan himself calls them "tax protestors." That's just the term most people use.

Now Stack was a real tax protestor. He took action to protest his tax obligations. His terrible story shows what can happen when the country is filled with people spewing hateful anti-government rhetoric. I'm sure most people who do so don't ever plan to use violence and don't even particularly wish it to happen. But you can only call government agents so many horrible names, of which "jack-booted thugs" is one of the less caustic examples, before some crazy people will go over the edge. Hate groups are indirectly responsible for these terrible crimes.

Stack's suicide note, incidentally, shows that while he was not, as I say, a "tax protestor" in the usual sense, he wasn't exactly an upstanding taxpayer either. He doesn't give all the details of his past tax problems, so one can't be sure exactly what happened, but it seems like (1) he tried to take advantage of the special tax treatment of churches by organizing a fake church, (2) he claimed to have no income in a year in which he cashed out an IRA, which counts as receiving income, and (3) he claims to have been screwed over by the tax law changes made in 1986. The second point sounds like it could be an honest mistake that might happen to anyone, but the first point sounds like a deliberate scam, so I'm less inclined to give him the benefit of the doubt (and that's before we consider that he later flew an airplane into a building full of innocent people). As to the third point, I'm not up on all the details of the tax change Stack complained about, but I will say that the 1986 law had a big impact on my own family, as it basically made the previous line of work of some members of the family impossible. But no one in my family flew an airplane into a building. They just shifted their line of work.

So Stack was a terrible man and his story has a terrible ending. But just in case you thought you'd seen the stupidest thing a tax protestor could ever say, surf on over to Larken Rose's website (he's a convicted criminal, tax protestor, and self-described anarchist), and check out this statement in which he discusses Stack and says "generally I have to praise him for what he did."

Ed Brown, Down for Good

And speaking of tax protestors, I know no one else cares about this, but I have to note that Ed Brown, possibly the champion chump of all the tax protestors, has finally been sentenced for the weapons and other offenses he committed while holing up in his fortress-like home for months to avoid being taken to jail after his conviction for his actual tax offenses.

Ed Brown and his wife Elaine, faithful readers will recall, were charged with tax offenses after failing to file returns for several years on the usual absurd grounds (no law requires payment of taxes), stopped attendning their trial halfway through, were convicted, and were sentenced to 63 months in prison. To avoid arrest, they barricaded themselves in their New Hampshire home, replete with weapons, explosives, and nonperishable food. The standoff lasted for months, during which they repeatedly threatened a violent end if the Marhsals moved against them. But at last, in October 2007, the Marshals took them peacefully by sneaking in under the guise of being supporters.

If only Ed and Elaine had surrendered peacefully when sentenced, they would already be more than halfway done serving their time. But their armed resistance got them charged with numerous weapons and other offenses, and they were found guilty again. Earlier this week, Ed was sentenced. After blaming his problems on "Freemasons, Zionists, Jesuits, Knights Templar, the Fraternal Order of Police, [and] the Moose Lodge" and treating the court to statements such as "I am the government," Ed decided he'd rather be back in his cell when the judge pronounced sentence. So he didn't hear Judge Singal setence him to 37 years in prison -- which doesn't even start until he's done with his current 63 months.

Sad case, really. The court psychiatrist concluded that Ed did not suffer from a mental illness, and I presume there's some legalistic sense in which that is true, but to me, someone who believes the court is a fiction, that the Jesuits run everything, and that there's no law requiring payment of income tax, certainly has a geranium in the cranium. The man is not normal, and it's sad that his mental issues (even if they don't amount to a recognized mental illness) have led him to engage in so much self-destructive behavior that he will almost certainly now die in prison.

Not a Bad Day's Work

The Federal Reserve trades government bonds -- and, more recently, other things -- primarily with a view to implementing policy. For example, it buys government bonds when it wants to expand the money supply and it sells them when it wants to contract the money supply. Its main goal is not to make a profit. But it acts with such skill that it usually does make a profit, and it's such a big operation that the profit is usually in the billions.

What happens to that profit? It goes back to the U.S. Treasury. And as the Post reports today, this year's profit is especially impressive: $45 billion, the highest amount in the bank's 96-year history.

Of course, part of the reason is that the Fed has been investing in riskier things over the last year. It's not just into humdrum U.S. government bonds anymore. So as would be true for any investor, higher risk can produce a better return. But it's still a higher risk, which might hurt the Fed (and therefore us) in future years. Still, a $45 billion return right now is pretty nice -- beats a sharp stick in the eye, as my father likes to say.

But why is Law Prof on the Loose caring about this? Faithful readers, this post is not really for you, but for that other, stranger part of my fan base, tax protestors. As you know, I am oddly fascinated with these unusual people who deny that any law actually requires payment of income tax. And recently, I have noticed that tax denial is increasingly linked to another set of strange beliefs, focused on the Federal Reserve. An increasing percentage of tax protestors also believe that there is something truly evil about the Fed -- that it's a cabal of bankers who secretly run our country (and the whole world, too) and are calling all the shots. And it's somehow responsible for the income tax -- income tax and the Fed were created at about the same time, and tax protestors somehow think that you couldn't have one without the other.

I'm not really expert on the Fed and I'm not in a position to say whether, on the whole, it is a good or a bad institution. But the tax deniers are into some truly ridiculous claims about it, the main one being that 100% of income tax revenues are used to pay interest on the national debt and therefore just go straight to the Fed. That is totally not true, as can be determined by just looking up the figures (unfortunately, looking things up is a skill many tax protestors lack): last time I checked, about 20% of income tax revenues got eaten up by debt payment, not 100% (it's probably more now, given how much extra borrowing the government is doing lately, but still a lot less than 100%), and besides, the Fed only owns a small percentage of U.S. debt anyway; most of it is in private hands.

Tax protestors also believe that the Fed is just a privately owned bank, that it charges interest on all U.S. currency, and that it is never audited. These myths are out of my realm, but a good web page on them can be found here.

Anyway, today's news story is primarily for the tax protestors. That Fed that you hate so much? It just handed $45 billion over to the U.S. Treasury. While Ben Bernanke, its CEO, pulled down a whopping salary of $199,000. Not a bad day's work.

Sad Echo for a Tax Protestor

I've mentioned before how pathetic, in the literal sense, the lot of a tax protestor can be: the government may not only throw you in jail, but it can seize and sell your possessions to pay your tax bill. But wait, it gets worse.

Ed and Elaine Brown, the sadly confused tax protestors who were sentenced in absentia to five years imprisonment after declining to attend their own trial, and who then held off the government for about eight months in a bizarre standoff in which they were holed up in their home before finally being captured and incarcerated, now face even more legal trouble.

During the standoff, Ed and Elaine threatened an apocalyptic ending -- they foresaw themselves leaving their home either free, or in body bags. They gathered up many weapons to defend themselves against the Feds and suggested that they wouldn't be the only ones ending up dead.

Well, you can't do that. It's against the law. And yesterday Ed and Elaine were convicted of a smorgasbord of offenses relating to the standoff -- Conspiracy to Prevent Officers of the US from Discharging Their Duties, Carrying & Possessing a Firearm in Connection with a Crime of Violence, that kind of thing -- that will add a minimum of thirty years to their existing sentences. Given that both of them are in their 60s, it seems likely that neither of them will ever leave prison alive.

What a sad, sad outcome for mixed-up people. It just shows how much people can suffer from tax protestor arguments, especially when it appears (in my lay estimation) that they suffer from some kind of mental illness that exacerbates their inability to distinguish law from hooey. But even they have to learn a modicum of self-control. It's one thing to dislike taxes -- everybody does that. And you can entertain yourself with crazy beliefs about the invalidity of taxes, and even government generally, as much as you want. But failure to pay is a crime, and gathering up guns and bombs and threatening the Feds with death is a crime too. Stay away from it.

P.G. Wodehouse, Tax Evader

Everyone loves P.G. Wodehouse -- his books were so good that Punch once remarked that he was "exhausting the superlatives of the critics." Even as you read this, I am enjoying Right Ho, Jeeves, which I received on CD as a present.

But did you know that Wodehouse had a big dispute over payment of U.S. taxes that went all the way to the Supreme Court? It's true. I'm editing a case from volume 337 of the U.S. Reports, and, flipping through it to get to the case I'm interested in, I happened across Commissioner v. Wodehouse, 337 U.S. 369 (1949).

Wodehouse sold the U.S. serial and book rights to some of his works. He claimed that the resulting income was from the sale of property, and that the U.S. did not, at the time, tax nonresident aliens on such income. The IRS claimed that the income was from royalties on a U.S. copyright, which was taxed.

Wodehouse lost, 5-3 (with one Justice recused). Frankly, he had a pretty decent argument. Without going into all the details, prior to 1936 U.S. law clearly would have taxed Wodehouse's income, but in that year Congress changed the law to relieve aliens of tax on slaes of property, but to increase the tax imposed on aliens for "dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income" from sources within the U.S. and required that the tax be withheld at the source.

The Court majority relied less on the new statutory language and more on its understanding of Congress's overall goal, which, in the Court's view, was to limit the tax on nonresident aliens to that which was readily collectible, while increasing the rate to make the change roughly revenue neutral. Money given for the use of copyrights, the Court thought, was readily accessible and a long-established source of revenue, and the Court discerned no congressional intent to change its taxablility.

Nothing ever changes in statutory interpretation. There are always disputes between those who want to parse each word Congress enacts and those who would rather enforce Congress's overall gestalt. Sorry, P.G., but Bertie and Uncle Fred will just have to pony up some of the ready.

More on that Repeal

Update: I sent Professor Randy Barnett yesterday's post, and what do you know, he agreed! By e-mail, he informed me that he's modified his proposal so that it doesn't just repeal the 16th Amendment, but specify clearly that Congress cannot impose an income tax. Of course, we still disagree on the policy of it.

And here's one more thought: why would you need to pass a constitutional amendment to repeal the income tax? Congress can repeal the income tax any time. Remember that a constitutional amendment requires an extraordinary supermajority of Americans to sign on: either two-thirds of each house of Congress needs to propose an amendment, or legislatures of two-thirds of the states need to call a ratifying convention (that's Professor Barnett's ambitious plan, even though it's never happened), and then three-quarters of the states need to ratify any proposed amendment. My goodness, if there were sufficient opposition to the income tax to get a constitutional amendment forbidding it through that procedure, why wouldn't Congress just repeal the income tax?

Income tax is not imposed on us by aliens from Mars; it comes from politicians who are responsive to public opinion. There are a lot of impediments to getting anything through Congress, but I find it hard to believe that there could be sufficient public support for a constitutional amendment taking away Congress's power to impose the income tax but not enough support to get a repeal of the income tax through Congress itself.

"Federalism Amendment"

Professor Randy Barnett of Georgetown University writes in the Wall Street Journal to propose a "federalism amendment" to the U.S. Constitution that would limit the powers of Congress, allegedly to what was originally intended. Part of his proposed amendment would repeal the 16th Amendment, which, Barnett says, "authorized a federal income tax." Repealing the amendment would, according to Barnett, "eliminate[] the federal income tax," and Congress would then have to impose something else, such as a national sales tax.

Professor Barnett's proposal is a bad idea on policy grounds, because the income tax is one of the few progressive taxes we have (i.e., richer people pay a higher percentage of their income than poorer people), and even it doesn't do the greatest job on this score, as Warren Buffett has pointed out (because dividends and capital gains receive preferential treatment, he pays a lower tax rate than his secretary). But a sales tax is regressive, so Barnett's proposal amounts to saying that the less wealthy should bear a higher proportion of the national tax burden relative to their incomes.

But putting policy issues aside, the even bigger problem with Barnett's proposal is that it would be ineffective. It wouldn't "eliminate[] the federal income tax," because Barnett is wrong when he claims that the 16th Amendment "authorized a federal income tax." As every tax protestor knows, the 16th Amendment in fact "conferred no new power of taxation."

The power to impose an income tax was granted by Article I, section 8 of the Constitution, which gives Congress the power to "lay and collect Taxes, Duties, Imposts and Excises." As is explained in detail here, the Supreme Court approved an income tax as early as 1880, prior to adoption of the 16th Amendment.

It's true that the 16th Amendment became necessary because the Supreme Court ruled that certain aspects of income tax were unconstitutional because they were "direct taxes" that, in accordance with the Constitution, had to be apportioned among the states according to the census. In a case called Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429, on reh'g, 158 U.S. 601 (1895), the Supreme Court, roughly speaking, disapproved an income tax on income from property (e.g., rents). That's the problem the 16th Amendment fixed.

So if the 16th Amendment were repealed, it might make income taxes on some income (income from property) unconstitutional, but it wouldn't eliminate taxes on wage and salary income. That would probably be OK with Professor Barnett, because if you like the idea of replacing a progressive income tax with a regressive sales tax, you probably like the idea of limiting income tax to wages and salary too, because it has the same effect of shifting the tax burden from the wealthy to the less wealthy. But apart from being a bad idea, it would not "eliminate the federal income tax."

It's also possible that the Supreme Court would conclude that Pollock was wrongly decided and that the constitutional prohibition on unapportioned "direct" taxes shouldn't apply to taxes on income from property, but only to taxes on the value of the property itself -- wealth taxes. In that case, repealing the 16th Amendment would have almost no effect on income taxes at all.

So if we're going to amend our precious Constitution based on bad policy ideas, we should at least do so effectively. Declaring that "the 16th article of amendment to the Constitution of the United States is hereby repealed," as Barnett proposes, would not eliminate the income tax. You'd need to say something more like, "Congress shall not impose a tax on incomes." If that's what you want, it's not so hard to state.

The Taxman Cometh

Lots of important news (including Al Franken's courtroom victory), but here at Law Prof on the Loose we have to take today to think about taxes and, of course, tax protestors.

A wave of protestors are planning "tea bag" parties for today, mailing tea bags to government officials, that sort of thing. Having some small personal experience (working on Capitol Hill) with the way our government makes spending decisions, I have to agree that there's a lot of waste in the system. Unfortunately, our legislative system is well set up to take care of special interests and it can be difficult to make the system serve the general public. It would be great to cut out wasteful spending and reduce taxes as a result.

But at the same time, let's not get too carried away. Taxes may be too high, but as Oliver Wendell Holmes said, with them we buy civilization. If the choice is between a good governmental system that has some waste as an inevitable side effect and a bad governmental system, I think the choice is clear.

Meanwhile, for those keeping score, here are a few tax protestor updates:

* Peter Hendrickson, author of "Cracking the Code" (which I believe promotes the idea that you can get out of paying taxes by "correcting" your W-2 to show that you earned zero wages) lost his own civil case and was permanently enjoined from falsely reporting zero income. He has filed a cert petition in the Supreme Court, which will be denied. He's also under criminal indictment. Not a promising record for someone who claims to have figured out the truth about income tax.

* Ed and Elaine Brown, arrested and jailed after a months-long standoff while they were holed up in their New Hampshire home (following their conviction on tax charges), are now under indcitment for crimes stemming from the standoff. They may never leave prison.

* Tommy Cryer, who was, remarkably, acquitted on criminal tax charges, is battling the IRS in a civil case. The IRS claims he owes over $1 million in taxes and penalties. A useful reminder that acquittal in a criminal tax case does not get you out of owing the money.

In short, tax protestors seem to be batting at about their usual average -- zero on civil cases, almost zero on criminal cases. Wake up protestors! You don't have to like the income tax, but it does exist.

Tax Protestor News Goes Mainstream!

Heavens, today's New York Times Magazine has a long article on tax protestors! As faithful readers know, tax protestors are one of my eccentric interests.

The NYT article mostly features Peter Hendrickson, currently under indictment for tax crimes. It also mostly employs the curious journalistic convetion of not taking sides -- it says that Hendrickson claims that most ordinary wages aren't subject to income tax, and that the IRS claims that they are, and it points out that tax protestors have no success in the courts, but it doesn't really resolve the point about who's right. The only argument that the article definitively rejects is the 861 argument, which it characterizes as an argument that "claims (erroneously) that Section 861 of the Internal Revenue Code holds that only income earned outside the country is taxable."

Thank goodness for the "erroneously." Look, I appreciate that journalists like to remain neutral, and that convention is quite useful and appropriate whenever a topic is remotely debatable, but some things just aren't. There is still a flat earth society, and I suppose you could quote a flat earth as "claiming" that the earth is flat and a real geologist as "claiming" that it's round, but what's the point? Don't journalists have some responsibility not to mislead readers into believing that something is a matter for legitimate debate and opinion when it isn't?

Well, we lawyers aren't perfect either, I suppose, but I think the article could more clearly have explained that tax protestors are a fringe group, not part of a legitimate debate.

Tax Protestor Sentenced

Faithful readers know that every now and again you have to put up with my eccentric interest in tax protestors.

Michael C. Irving, who was sentenced yesterday, was apparently a highly respected homicide detective in the D.C. Police Department, who had solved important cases. He was earning good money -- according to the government, he made over $180,000 in 2005 -- but he decided he didn't have to pay taxes on it. He seems to have fallen for a tax scam he heard about from a fellow detective, who told him that he'd attended a "tax seminar" and learned how to pay no taxes and get all his withholding back. Irving paid zero taxes from 2002 to 2005.

That sort of thing can enhance your lifestyle for a while -- apparently Irving kept hold of $130,000 that he should have paid in taxes. But now he's been sentenced to 14 months. Funny how cases like this never seem to persuade the tax protestor movement that there really is a law requiring you to pay taxes -- you might think that seeing people put in prison for violating that law would sort of convince people that the law exists, but somehow they just keep on going.

$900 Million Typo

Last week, I blogged about an error made by a government lawyer (later characterized by the government as a "typo") that nearly cost the government $200 million. But how would you like to be the lawyer responsible for a screw-up that cost your client $900 million?

It's an old case, but last week's incident reminds me of InverWorld v. Commissioner, a D.C. Circuit case from the 1990s. InverWorld, Ltd., a Cayman Islands corporation, didn't think it owed any U.S. taxes because it didn't think it conducted any trade or business in the U.S. The IRS, apparently believing that InverWorld had enough U.S. contact that it owed U.S. taxes, sent the company a notice that it owed $45 million in withholding taxes (i.e., FICA taxes on InverWorld employee income) and a separate notice that it had also owed several hundred million in corporate income tax.

Lawyers at InverWorld filed a timely petition to contest the assessment of withholding taxes, but said nothing about the notice that the company owed corporate income taxes. The IRS therefore proceeded to assess the company for the corporate income taxes. With interest and penalties thrown in, the amount owed was $900 million. The IRS sent InverWorld a bill.

At this point, the company woke up and said that it was also contesting its corporate income tax bill. But guess what? The time to contest that amount (measured from the original notice) had expired. And the court ruled that the petition contesting the assessment of withholding taxes was insufficient to contest the income taxes. So, the court said to InverWorld, no process for you -- kindly pony up the $900 million that you don't think you owe.

The case had a certain hypothetical quality about it, inasmuch as it seemed highly unlikely that InverWorld was actually going to pay the money in any event -- it was off in the Cayman Islands and I doubt the IRS would be able to get hold of any of the company's assets. So I'm guessing the company just vanished into the Caribbean mist and never actually paid the money.

Still, how would you like to be the lawyer who was responsible for a screw up that led to a $900 million judgment against your client? It pays to be careful.

$200 Million Typo

Typos are always embarrassing, but how would you like to be responsible for a typo that, a court rules, fatally costs your client money? Not fun, particularly if the amount of money involved is $200 million. As you can see here, a U.S. government lawyer had this unhappy experience -- but was rescued at the last minute.

A certain Walter Anderson was convicted, by guilty plea, of income tax evasion. Apparently, Anderson used "a complex scheme involving several foreign corporations" to hide about $450 million in earnings over five years.

Now, let's just pause for one second here. If I earned $450 million over five years, I think I would be happy to pay the $200 million or so I would owe in taxes and live fabulously on the $250 million I'd have left. I don't think giving up the $200 million would bother me that much. But then, perhaps that's why I haven't earned $450 million. Maybe, to earn that much, you have to want every penny of it. Maybe I just don't have the right attitude.

Anyway, Anderson wanted that $200 million so much that he risked going to prison for it, which he is now doing -- for nine years (that's why I still think my attitude works better). But here's the funny part: the plea agreement provided that "the court may order restitution pursuant to 18 U.S.C. § 3572." The obvious purpose here was that the court sentencing Anderson to prison would also have power to order him to pony up the taxes he'd evaded. But there was one little problem: 18 U.S.C. § 3572 isn't the restitution statute. It's the fines statute. The restitution

statute is 18 U.S.C. § 3663.

Oh, that's just "a typo" and not "something that the court should be getting wrapped up about," said the U.S. attorney. Not so fast, said the district court. Under the applicable statute, the court only had power to order restitution "to the extent agreed to by the parties in a plea agreement," and the plea agreement only permitted restitution under a non-applicable statute, so there was no power to order restitution. Sorry, your typo cost the government $200 million.

Actually, the error was not really a "typo"--no one tried to type "3663" and accidentally hit the keys for "3572." It was more like a "wrongo" or even a "stupido"--someone deliberately put in the number of the wrong statute.

In any event, the court of appeals came to the rescue, ruling (correctly, I would say) that (1) the restitution statute requires authority for restitution in a plea agreement, but does not require citation to the restitution statute in the agreement, and (2) the other conduct of the parties made it very clear that they intended the plea agreement to provide restitution authority. So they allowed restitution.

So all's well that ends well, but how would you like to be the attorney who made what might have been a $200 million error?

Communism

There's a lot of talk lately about how Barack Obama's tax plans amount to socialism, or even communism. Let's take a look at a typical example, from radio talk show host Neal Boortz. Boortz recently wrote a letter "To The Undecided Voter," in which he says the undecideds should "try to base your final choice on some substantive facts." I'm all for that, but Boortz seems to be the one who needs to get his facts straight. Boortz says that "what Barack Obama is pushing here, at least insofar as his tax policies are concerned, is communism." He elaborates in this vivid passage:

"Let's talk heartbeats. Sounds weird, but I'm going somewhere here. A bit of Internet research led me to the fact that the average number of heartbeats in a life time for a human being is about one billion. To make this more understandable, the average human heart beats around 70 times a minute. In one eight-hour work day your heart beats around 33,600 times. This is your heart beating .. every beat subtracted from the one billion .. every beat a part of your life gone, never to be recovered. If you are a moderately successful human being Barack Obama is going to take about 13,000 (39%) of those heartbeats away from you every working day. Put your finger on your wrist and feel your pulse. Feel every heartbeat. Just count up to 100. How much of your life went by as you counted? You can't get those beats back. They're gone, for good. Remember, you only have a finite number of those beats of your heart left ... and Obama wants 13,000 of them every working day of your life. Those heartbeats – your life – being expended creating wealth. Your heartbeats, your wealth. Obama wants them. You don't need them. Someone else does. The police power of the state."

What Boortz might have said a little more accurately is:

"Barack Obama is going to take about 13,000 (39%) of those heartbeats away from you every working day if you make more than $250,000 a year. If, like 95% of all Americans, you make less than that -- say, you're one of those plumbers, waitresses, bricklayers or teachers whom John McCain loves so much -- then Barack Obama is going to take no more of your heartbeats than the federal government takes now. In fact, he's going to give most of you a tax cut, so that he'll take fewer heartbeats than the federal government takes now, and fewer than John McCain will take. For 95% of you.

"Yes, if you are in the top 5% of all American earners, Barack Obama is going to take 39% of your heartbeats. And guess what? John McCain is going to take 35% of them. That's what the federal government's been taking for the last 8 years, under President Bush's tax cuts for the richest.

"Somehow, it seems that I think that 35% of your heartbeats is the all-American, super-capitalist amount of heartbeats to take, but taking 39% constitutes communism.

"I guess the truth is that I, Neal Boortz, don't have the foggiest clue what communism even is, if I think Barack Obama is proposing communism at 39% but John McCain isn't at 35%."

Look, if people don't like Obama's tax plan, that's fine. But the essence of it is changing the top rate from 35% to 39%. The essence of it is going back to where we were in the 1990s for those making more than $250,000 a year. Maybe you think all progressive taxation is communism, in which case Barack Obama is a communist and so is John McCain and so is George Bush, Ronald Reagan, and every President we've had for nearly 100 years. But if you're willing to admit that we have capitalism now, and especially if you're willing to admit we had it in the 1990s, then calling Obama's tax plan communism is just plain stupid.

Over the Top

Just a short, self-aggrandizing note: sometime late yesterday, my website had its 100,000th visitor. That doesn't count blog readers, who are tracked separately.

The great majority of the visitors are interested in my income tax pages. Interest waxes and wanes with the calendar. During tax season, the pages typically get about 500 hits from 200-300 visitors. This time of year 100-200 visitors a day is the norm. The daily traffic also serves as a barometer of events in the tax protestor world: when it shoots up, I know something is happening. I had nearly 1600 visitors the day Ed and Elaine Brown were arrested. Although there are false positives: nearly 600 visitors showed up this Sunday, but the only apparent reason is that a link to the pages that appeared on a popular discussion board.

I never imagined that proving that there really is a law requiring people to pay income tax would be my most public face. But there it is -- apparently there are a lot of people out there (100,000 or more) who need guidance on this issue. I'm happy to provide it.

Back to Law

I've had a lot of non-legal posts lately (I was distracted with grading), so back to a good old law topic for today.

Earlier this week, the Supreme Court came down with an interesting Commerce Clause case, Department of Revenue of Kentucky v. Davis. Kentucky, like many states, exempts income derived from its own bonds from state income tax, but requires its residents to pay state income tax on income derived from bonds of other states. The question was whether this practice violates the "dormant" Commerce Clause.

The Commerce Clause of the Constitution says that "The Congress shall have Power . . . To regulate Commerce . . . among the several States." It does not expressly forbid the states from doing anything, but for nearly 200 years it has been understood to have the negative (or "dormant") implication that it generally prohibits state discrimination against interstate commerce. A state could not, for example, impose a 3% sales tax on goods produced within the state but a 6% sales tax on goods imported from other states. The result of this important prohibition is that the United States is a "free trade zone." It's not a point one thinks about much, but as other nations form free trade zones of their own, we appreciate more how important the dormant Commerce Clause is.

Does Kentucky's tax scheme violate the dormant Commerce Clause? Not too surprisingly, the Supreme Court said no. As the Court observed, 41 states treat give special tax treatment to income from their own bonds, and the practice has been around for nearly a century, so it would have been a bit of a surprise to find out that it's been unconstitutional this whole time.

The interesting part of the case is Justice Thomas's concurrence. Thomas agreed with the Court's result, but not its Commerce Clause analysis. Rather, Thomas said that he agreed with the Court's rejection of the plaintiff's dormant Commerce Clause argument on the ground that there is no such thing as the dormant Commerce Clause. Thomas said that he would entirely discard the Court's dormant Commerce Clause jurisprudence.

Wow. I often wonder about whether Justice Thomas is serious when he says stuff like this. He's proved time and again that he's the most radical Justice, a Beamon jump beyond the others. In addition to saying that he would give up on the dormant Commerce Clause, he has said that he would really enforce the nondelegation doctrine (which could prohibit Congress from delegating power to administrative agencies) and what he perceives as the originally intended limits on Congress's Comerce Clause power. If all of these views were enforced, a pretty huge chunk of the federal government would be unconstitutional.

It's one thing to say stuff like this when there's only one of you. But what if there were four others on the Court? Would Thomas really vote to eliminate half or more of the federal government? I wonder if he's really serious about this stuff or if he's just indulging himself while he can.

Tax Tip

April 15 is approaching, faithful readers, and of course, I know the question on all of your minds is, "what about all that stuff I stole last year? How do I account for it on my taxes?"

Not to fear; helpful tax tips are here, and straight from the IRS, too. Page 90 of Publication 17, "Your Federal Income Tax," provides the simple answer:

"Stolen property. If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner."

Sorry, it's too late to return that property you stole last year. You'll just have to report it now. You got its fair market value appraised, didn't you?

And here's your Bonus Tax Tip! What about those bribes? Page 87: "If you receive a bribe, include it in your income."

As another author might say, I am not making this up.