Originally published on Forbes.com.
Joseph Banister, a former KPMG accountant turned IRS investigator turned anti-tax activist, has lost another appeal. It is a fairly low stakes case $6,000- penalties under Code Section 6701 for aiding and abetting understatement of another person’s tax liability. At a thousand bucks a pop, it takes a lot for 6701 to add up to much. The case appears to be related to Banister’s one big court victory, his acquittal on charges of conspiracy, and helping to prepare false tax returns in 2005. Banister with a website that designates him The Agent for Truth is still a celebrity on alternative media.
What’s In A Name?
People like Banister are sometimes referred to as tax protesters. They don’t like that term. I don’t like to refer to people by names they dislike, but I also have trouble with some of the names they come up with like the “tax honesty” movement and patriots. You and I probably both sincerely believe that the law requires that we file returns and pay income tax if we have more than insubstantial income, as the word is ordinarily understood. And we also probably love our country. That makes us conventionally tax compliant. So, giving them the benefit of the doubt, I will refer to the tax honesty patriots as not conventionally tax compliant (NCTC). NCTC people like Joseph Banister see a different law than you and I see. They comply with their version of the law. We’ve got the entire federal judiciary on our side. Banister has Alex Jones, Kent Hovind, and people of like mind on his side. I like our odds better. Just saying.
What Is It All About?
After his acquittal in 2005, the IRS dug into returns Banister was involved in with a view to assessing civil penalties. They didn’t really come up with much – just twelve returns. And as noted at a thousand bucks a pop 6701 penalties don’t mount up that fast. What is great about the case is that it lets us see a sample of Joe Banister’s work on behalf of this clients. Here is the redacted copy of the 1996 1040X (amended return) of Walter and Denise Thompson that has Joseph Banister CPA as paid preparer.
The amended return wipes out all the income and requests that all the income tax be refunded. The refund is based on what is known as the 861 argument. The regulations under Code Section 861 are for sorting out whether income is from a foreign source or not. This is important to non-resident aliens who have some income from the United States and some other special situations. The 861 regulations are probably not something you or I have to concern ourselves about so much. Many of the NCTC think they have found in the 861 regulations the Tax Fairy, that Joe Kristan talks about, the magical sprite who can make your taxable income disappear. Daniel Evans in the Tax Protester FAQ, a fairly exhaustive catalog of NCTC mishegas has this to say about the 861 theory:
Even a casual reading of section 861 and its regulations makes it clear that the statute and regulations were enacted to deal with the problems of calculating the taxable incomes of nonresident aliens, or for dealing with special provisions for taxpayers with incomes from sources outside of the United States. Section 861 is part of Subchapter N of the Internal Revenue Code, which is titled “Tax Based on Income From Sources Within or Without the United States.” More specifically, section 861 is in Part I of Subchapter N, and Part I is titled “Source Rules and Other General Rules Relating to Foreign Income.” The other parts of Subchapter N are titled “Nonresident Aliens and Foreign Corporations,” “Income from Sources Without the United States,” “Domestic International Sales Corporations,” and “International Boycott Determinations.” Are you beginning to see a pattern?
In defending him against the penalties, Banister’s attorney was not maintaining that the 861 argument that he had incorporated into a return he prepared had any actual merit. This is an important point, because like his criminal acquittal, slipping out from under these penalties would not have proved that The Agent of Truth had discovered the TRUTH. Although, he might have made it sound that way in the alternative media conspiracy bubble.
The Defense
You don’t get to take a 6701 penalty assertion to Tax Court. The drill is that you pay 15% and sue for refund in district court. That is what Banister did. The district court granted summary judgement to the government on six of the twelve penalties, which is what is being appealed. There are some different nuances at work, so we will just talk about the Thompson returns.
Back in 2003, the IRS Office of Professional Responsibility revoked Banister’s right to represent clients before the IRS. He had that right as a CPA. A follow on to the OPR ruling would be revocation of his CPA license, but that is neither here nor there. The revocation was appealed to the Ninth Circuit where it was sustained. Among the things involved in the revocation was his raising the 861 argument. He should have known better so he can no longer represent taxpayers. Since the issue of him making a bad argument has been litigated once with respect to the revocation, he does not get to fight it again with respect to the penalty. That was the District Court ruling.
In his brief Banister’s attorney, Robert Bernhoft answers the estoppel argument by arguing that the prior proceeding (about the revocation) had a lesser standard of proof. He goes on indicating that the IRS needs to prove that Banister had actual knowledge that a document he created would result in an understatement of a client’s liability.
The Ruling
The Ninth Circuit was having none of it.
Given Banister’s background as a former tax collector, the research he admitted to conducting, and his own correspondence with the IRS—not to mention the manifest unreasonableness of his beliefs—no reasonable jury could find that Banister lacked actual knowledge that his theories were contrary to law within the meaning of Cheek. Indeed, Banister fails to cite any record evidence suggesting that he himself lacked such knowledge.
Other returns had other issues, one of which was whether you could understate somebody’s liability in a Collection Due Process hearing. In the Ninth Circuit view, you can and he did.
Don’t Try This At Home
A big difference between Joe Banister and other NCTC people is that somehow he manages to have first-class representation. The Bernhoft Law Firm, S.C. features Banister on its website, but gives pride of place to Wesley Snipes. Attorney Robert Bernhoft is on the faculty of the upcoming ABA Institute of Criminal Tax Fraud and Tax Controversy. I asked Attorney Bernhoft for his comment on the decision. He wrote me:
We’re very disappointed in the unpublished opinion. The penalty statute at issue required the highest scienter level, “actual knowledge,” and there was ample evidence in the record – including Mr. Banister’s lengthy deposition testimony, relevant aspects of which were quoted on brief – that showed what his intent was, and it had nothing whatever to do with understating anyone’s tax liability. Mr. Banister’s scienter was inappropriately decided against him on summary judgment, when that issue should have gone to a jury for determination.
Second, it appears that the 6-year IRS penalty investigation – an investigation that commenced in 2005 shortly after Mr. Banister was acquitted on all felony tax fraud and conspiracy charges by a jury of his peers – was an attempt at politically-motivated retribution against the former IRS special agent who was forced to resign his commission in 1999 after raising questions with his IRS superiors about aspects of the Internal Revenue Code he was enforcing.
It frankly boggles the mind that any government agency would spend six years and countless taxpayer dollars on an investigation that has now yielded $6,000 in penalties. I’m absolutely certain those taxpayer dollars could have, and should have been, spent on other important matters instead of needlessly hounding Mr. Banister to make a political statement.
I find the “Why me?” of rather “Why my client?” argument not very persuasive. The IRS has limited resources. Banister is trying to convince people that they don’t have to report their income using arguments that are patently absurd. It is reasonable to “target” him.
Another County Heard From
I ran the decision by Donald MacPherson, the self-styled Courtroom Commando, who I featured back in 2014. Mac’s use of the military metaphor is forgivable as he is an honest to goodness West Point graduate who served in Special Forces in Vietnam. He thinks that the Ninth Circuit got it wrong on the collection due process hearings since you can’t challenge liability in a CDP hearing, which means Banister’s documents could not understate it. Mac represents the NCTC, but has avoided drinking their Kool-Aid.
KPMG
I find it hilarious that Banister started out working for KPMG. Not long after he left KPMG would be front and center in promoting the bogus tax shelters. Tanina Rostain and Miltion C. Regan Jr. tell the story in Confidence Games – Lawyers, Accountants, and the Tax Shelter Industy
Spearheaded by partners in the Washington National Tax (WNT) office, the firm’s technical headquarters and think tank, several colleagues formed a group they called the “Skunk Works.” The group drew its name from the original Lockheed Corporation Skunk Works, which worked secretly to develop stealth fighter planes to deploy against the Axis powers during World War II.
Samuel Johnson remarked that “Every man thinks meanly of himself for not having been a soldier, or not having been at sea”. The skunk works moniker is a reflection of the fondness that CPAs have for dramatizing work that is clean and involves no heavy lifting or danger. Confidence Games goes on to quote Calvin Johnson (Relation to Samuel Johnson undetermined)
A ‘skunk works’ operation was once a secret research lab for developing planes to defeat the Nazis and the Communists. The KPMG tax skunk works dreamed up transactions against our United States.
Had Joe Banister stayed with KPMG rather than switching to one of the few accounting jobs that includes a gun, a badge and arrest powers, would he have become a key figure in the skunk works, which may have robbed the Treasury of more tax dollars than all the NCTC folks who while more numerous are usually playing for small stakes?
I don’t think so. The reason is that watching his presentations I actually think that Joe Banister – The Agent for Truth – is sincere. Note Attorney Bernhoft’s characterization of the IRS efforts in his case.
….politically-motivated retribution against the former IRS special agent who was forced to resign his commission in 1999 after raising questions with his IRS superiors about aspects of the Internal Revenue Code he was enforcing.
I really think that he sees himself that way and he gets plenty of support and reinforcement in that view.
What Alex Jones Will Never Ask
The narrative that Joe Banister puts forth in the alternative media conspiracy bubble is that he was a crackerjack CI agent for the IRS and that when he started studying NCTC arguments he saw that they had merit and he wanted to have the IRS investigate the matter. He met resistance and was encouraged to take up new employment. In the Alex Jones interview, there is then a discussion about why more people in the IRS don’t act as bravely as old Joe did. Fear of retribution figures high as one of the answers. The question that does not get asked is whether his theories have any merit. That is just assumed. Interviews with Kent Hovind had the same flavor.
The District Court’s summary judgment was only on six of the twelve penalties, so we may hear more from the Agent of Truth on this case. Who knows he might even win on those? Even if he does, trust me, don’t try this yourself.
Other Coverage
Quatloos! posted a copy of the decision, but it does not seem comments have started pouring in. Taxnotes has something behind its paywall. Tax Protester Dossiers has entries on both Banister and Attorney Bernhoft, but it is mostly ancient history. In the interview, Banister complained about his Wikipedia entry. Kent Hovind’s supporters had a similar lament. Rudy Davis referred to the site as Wikedipedia.
Joe Banister is still giving interviews. Here he is with the Freedom Law School last month. Sorry but I have not invested the lifespan into listening to the whole thing.