Originally published on Forbes.com Mar 6th, 2014
For the most part the Tax Court has given up on tax protesters. Telling them that their arguments are frivolous and sanctioning them more or less exhausts the Tax Court’s patience. Judge Ronald L. Buch is relatively new to the Tax Court, appointed by President Obama on January 14, 2013, so he may still be blessed with some patience.
Regardless, he chose to give the arguments put forth by Steven Waltner a thorough discussion. This may be because Mr. Waltner was featured at some point on the Lost Horizons website as an example of someone who obtained a tax refund by following the teachings of Peter Eric Hendrickson‘s Cracking The Code – The Fascinating Truth About Taxation In America.
The book is pretty expensive and I didn’t want to use up most of my remaining Amazon points on it. So I went to the website for the high points. This is probably Hendrickson’s main point
The income tax is a benign, Constitutional tax that simply doesn’t apply to the earnings of most Americans. The tax laws themselves, scores of United States Supreme Court rulings, and every other relevant authority all acknowledge this truth in no uncertain terms.
….., a mature scheme has been in place for about the last 70 years which is designed to trick those ignorant of the nuances of the law into inadvertently declaring their unprivileged earnings to be privileged, allowing the government to treat them as subject to the tax.
Much like Irwin Schiff, Hendrickson places a lot of weight on Brushaber V Union Pacific Railroad Company, a 1916 Supreme Court Decision. I would recommend that anybody who is convinced by either Hendrickson or Schiff read that decision in its entirety rather than just the bits that they excerpt.
Likewise, before you buy into any argument that the income tax is very narrow in its application, you would be well served to read Judge Buch’s decision to see if your particular theory is addressed in it. Here are some of the high points.
United States Includes Massachusetts and Virginia – Even North Dakota
Much like the Humpty Dumpty passage at the start of Cracking the Code, the author at this point has redefined terms to mean what he wants them to mean: The term “United States” does not include the States, the term “employee” does not include most employees, and the term “person” does not include most people. It is only by venturing into this Through the Looking Glass world that the author can conclude that tax reporting through Forms W-2 and 1099 does not apply to private sector persons, a position echoed repeatedly by Mr. Waltner.
Include Does Not Exclude
Amongst the errors in this section is the author’s misapprehension of the meaning of the word “including”, or perhaps more accurately his ignoring it. For example, because certain out-of-date tax provisions expressly stated that they taxed income, including that of Federal employees, the author erroneously concludes that persons who are not Federal employees are not taxed. The Supreme Court rejected this view half a century ago.
Sheep For Shoes
The author’s tortured analysis erroneously concludes that remuneration for work is not profit and thus is not taxable. This proposition has already been rejected by the courts. Although we need not review the issue further, the author’s illogic is worth noting. The analysis begins with a simple analogy of a shepherd exchanging a sheep for shoes from a cobbler. The author asks whether in such a transaction either party received income, concluding “learly not”.
This may not be income in the author’s mind, but from a tax standpoint, it is income from a barter transaction and it is subject to tax. The rest of the author’s conclusions that flow from this analogy all fail because of his faulty premise.
Judge Buch sanctioned Mr. Waltner $2,500 for his frivolous arguments, which is something of a bargain. Typically the judges seem to go with $5,000 although the sanction can be as high as $25,000. An interesting question is whether Judge Buch’s extra work will do any good. I fear it may not.
Am I A Troll?
Trolls can be really bad news.
Hendrickson has a section of his website dedicated to immunizing his followers from posts like this one. He considers people like me trolls.
The effort also involves online activity by purportedly disinterested folks who we are supposed to imagine spend huge amounts of time posting “Stay away from this crazy stuff!” out of the goodness of their hearts and a selfless concern for the well-being of others. In other words, this is online activity by obvious government-connected or supervised “agents-provocateur” and the occasional “useful idiot” shill.
The debate can end up being a series of ad hominem arguments. I’ll just say that I have read the arguments and the cases they draw from and find Hendrickson and Schiff and the like unpersuasive. Daniel Evans has done a really thorough analysis of many protester theories, which is really worth a look. You can be certain that if you try their arguments in court, they will not work. That does not, however, mean that their techniques will not work for most people who try them. As far as I have been able to tell Hendrickson’s technique is to use Form 4852 to “correct” your W-2 wages to zero.
Judge Buch notes
……in spite of its extensive bureaucracy and technical equipment, the manpower and facilities of the IRS for policing compliance by every taxpayer are limited and that the effectiveness of the system depends upon the taxpayer’s voluntary obedience to the law.
I do find it intriguing that Hendrickson devotes a section of his website to explaining why other tax protester theories don’t work. He wants to drive home the point that you really need to buy his book. You can get Irwin Schiff’s for free.
It Might Work – Kind Of
Since Congress, in its wisdom, has decided to gut the IRS budget to punish the IRS for attempting to enforce confusing laws about political activity, non-compliance of all sorts is likely to slide by. Hendrickson’s technique seems well designed to exploit the situation. He does not recommend that you attach copies of the Magna Carta to your return or any other crazy stuff like that. He just has you use the forms that you are supposed to use to disagree with the information returns that you receive.
If you are willing to entirely discount the quite remote chance of criminal prosecution, it may well be a decent percentage play particularly if you are just about maximizing your current lifestyle rather than accumulating net worth and entirely amoral when it comes to meeting tax obligations. If you get caught, you can use the collection due process system to work something out based on your ability to pay. I would suspect that the really smart thing would be to “correct” your W-2 by 50% or so and not to drive your tax all the way down to zero. What is a truly awful idea is to try to make Schiff/Hendrickson arguments in any federal court. Making that clear with respect to Tax Court may be the main benefit of Judge Buch’s decision.
I still think it is a really terrible idea to enact Hendrickson’s strategy, but that’s just me. If you continuously make enough money so that income tax, as commonly understood, is a significant expense, you can lead a pretty nice life by disciplining yourself to live on your after-tax income. You will also be able to accumulate some net worth and have a stellar credit rating. You can risk those two things by engaging in tax mishegas. I don’t entirely discount the remote chance of forfeiting my liberty. I also don’t mind supporting the social safety net, frayed as it is, and many of the fine things the federal government does. I am particularly attached to the National Park Service.
Other Comments On The Case
I seem to be falling hopelessly behind, so several other bloggers have gotten to this case ahead of me. Lew Taishoff is quite pleased that Judge Buch took the trouble to write a long opinion
Judicial opinions are the ‘heart of the common law system’ and serve as ‘a critical component of what we understand to be the “law.”‘ Statutes and regulations provide simply an outline; judicial opinions fill in the details by providing the rule of law the court applied, the court’s rationale in applying that law, and the underlying facts.
Russ Fox expresses a similar sentiment.
I learned about the case from Joe Kristan, which is something of an embarrassment to me. I would have picked it up eventually, but I don’t know how Joe keeps so up to the minute during tax season. Joe writes
The Moral: No matter how many words they throw out there, tax protest arguments don’t work. Also, it’s unwise to take tax advice from advisors whose arguments can’t keep themselves out of prison.
Quatloos reproduced the decision in full and you will find many interesting comments there.
I guess the one advantage of falling behind is that I get to see what the other bloggers said.
You can follow me on twitter @peterreillycpa.
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