The 861 argument is a statutory argument used by tax protesters in the United States, which interprets a portion of the Internal Revenue Code as invalidating certain applications of income tax. The argument has uniformly been held by courts to be incorrect, and persons who have cited the argument as a basis for refusing to pay income taxes have been penalized, and in some cases jailed.
Internal Revenue Code section 861, entitled "Income from sources within the United States", is a provision of the Internal Revenue Code which delineates that some kinds of income shall be treated as income from sources within the United States, namely income of nonresident alien individuals, and certain foreign corporations, but it is not an exhaustive list of taxable income—the definitions in the section apply only to that section. The language of Section 861 is occasionally cited by tax protesters who claim that the statute excludes some portion of the income of U.S. citizens and resident aliens from taxation. [1]
Under the tax protesters' section 861 argument, only income derived from "taxable activities" listed in that section becomes "taxable income" (taxable "gross income" minus allowable deductions - 26 U.S.C. § 63). The list of taxable activities is located in Subchapter N and in Section 861 regulations. Proponents of this argument state that individuals with domestic income must go to the Section 861 regulations to determine if the activities that generate their income are taxable or not. Protesters state that regulation section 1.861-8T(d)(2)(iii) defines the taxable activities. The argument is that since the domestic activities of residents of the United States (Americans and resident aliens) are not shown to be taxable in that section, the domestic income derived from such activities does not become taxable "gross income" through the rest of the tax code. [2]
Tax protesters argue that the Internal Revenue Service (IRS) is misapplying section 861 to them, citing the case of Gould v. Gould. [3] The text of that case reads in part:
In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen.
Tax protesters argue that Gould v. Gould nullifies what tax protesters view as an attempt by the IRS to tax beyond the explicit provisions of the law. Section 861 did not exist in the year 1917, when the Gould case was decided, and the Court was neither presented with nor decided the issue of whether domestic or foreign income is not taxable. The terms "domestic income" and "foreign income" do not appear in the case, and the court's main ruling in Gould v. Gould—that alimony was not taxable to the recipient under the Revenue Act of 1913—was overturned by a subsequent Act of Congress, the current version of which is found in the Internal Revenue Code of 1986 at 26 U.S.C. § 71. [4]
The income taxes imposed on U.S. citizens and resident aliens are generally imposed under Subchapter A (not Subchapter N) of Chapter 1 of the Code. The income tax is imposed on the "taxable income" of individuals. [5]
The federal courts have consistently ruled that the argument that Section 861 excludes income of U.S. citizens and resident aliens from taxation is without legal merit. See Aiello v. Commissioner; [6] Williams v. Commissioner; [7] Corcoran v. Commissioner; [8] Loofbourrow v. Commissioner.; [9] United States v. Bell; [10] Dashiell v. Commissioner.; [11] Woods v. Commissioner; [12] and Buckardt v. Commissioner. [13]
The argument that United States citizens and residents are not subject to tax on their wages, etc., derived from sources within the United States, and variations of this argument, have been officially identified as legally frivolous Federal tax return positions for purposes of the $5,000 frivolous tax return penalty imposed under Internal Revenue Code section 6702(a). [14]
The earliest reported case in which section 861 is raised as a limitation on the income tax is the 1993 case of Solomon v. Commissioner. [15] In that case, the protester's primary argument was that "the State of Illinois is not part of the United States", [16] and that he was therefore a resident alien, subject to taxation only under the provisions of §861. The court ruled:
[P]etitioner's position is not bolstered by the regulations under section 861. To the contrary, section 861(a)(1) and (3) provides that interest from the United States and compensation for labor or personal services performed in the United States (with exceptions not applicable here) are items of gross income which shall be treated as income from sources within the United States. [17]
In Solomon, the court also stated:
The record in this case establishes that petitioner had no interest in disputing either the deficiencies or the additions to tax determined by respondent. Furthermore, it is clear that petitioner instituted this action to delay the assessment and collection of his Federal income taxes. Rather, petitioner has raised only the tired, discredited arguments which are characterized as tax protester rhetoric. A petition to the Tax Court is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.… Based upon the established law, petitioner's position is frivolous and groundless. Taxpayers with genuine controversies were delayed while we considered this case. Accordingly, we will require petitioner to pay a penalty to the United States in the amount of $5,000. [18]
More recent attempts to avoid payment of taxes using the 861 argument have not contended that the protesters were non-citizens, but that the provision should be read as extending to all taxes. These efforts have resulted in a number of high-profile convictions of its proponents. Larken Rose, a noted advocate of the 861 argument, used the argument to challenge the IRS, and lost:
On November 22, 2005, in Philadelphia, PA, Larken Rose was sentenced to 15 months in prison, followed by one year supervised release and fined $10,000. Rose was convicted by jury in August 2005 to five counts of willful failure to file federal income tax returns. According to the evidence introduced at trial, Rose willfully failed to file personal federal income tax returns for calendar years 1998 through 2002, despite earning $500,000 during those years. On those amended returns, he reported no tax due and requested a refund for all income taxes paid in those years. At trial, Rose claimed that he failed to file returns and sought refund claims based on his determination that his income received inside the United States was not taxable under Internal Revenue Code Section 861 and regulations. The judge instructed the jury that this Section 861 argument is incorrect as a matter of law. [19]
In August 2006, Charles Thomas (Tom) Clayton, M.D., was found guilty by a jury in Federal court in Texas of two counts of willfully making false statements on tax returns and six counts of willfully failing to file tax returns. According to The Courier of Montgomery County, "Clayton's defense at the trial centered on the '861 argument' -- a defense used numerous times in previous years, but never successfully…" [20] According to a Justice Department news release, Clayton failed to file income tax returns for years 1999 through 2004 while receiving over $1.5 million in gross income. The government also charged that for years 1997 and 1998 Clayton filed false amended returns, claiming refunds of over $160,000. [21] Criminal investigators of the Internal Revenue Service had gathered information on Clayton during the IRS investigation of Larken Rose (see above). According to the prosecutor's office, Clayton "disregarded multiple written notices from the Internal Revenue Service informing him that his 861 argument was without merit", and Clayton "had also been told the same thing by two Certified Public Accountants". [22] On December 15, 2006, Clayton was sentenced to five years in prison and a fine of $50,000, plus a requirement that he pay over $7,400 in prosecution costs. [23] He appealed, but his conviction was upheld on appeal. [24]
In 2006, the government alleged that actor Wesley Snipes fraudulently attempted to obtain tax refunds using the 861 argument. On February 1, 2008, Snipes was found guilty on three misdemeanor counts of failing to file Federal income tax returns. He was acquitted on one felony count of conspiracy to defraud the government and one felony count of filing a false claim with the government. [25] [26] Following the acquittal, Snipes faced up to three years in prison, rather than the 16 years the felony charges could have brought. [26] On April 24, 2008, Snipes was sentenced to three years in prison. [27] [28] [29] Wesley Snipes' appeal of the three-year sentence was denied by a federal appeals court on Friday, July 16, 2010. [30] He was released to home confinement on April 2, 2013. [31] Co-defendant Eddie Ray Kahn was sentenced to ten years in prison, and another defendant, Douglas Rosile, was sentenced to four and half years in prison.
In another, less widely reported 2008 case, Clifford B. Marston was convicted of tax evasion and related claims despite his argument that his non-filing was based on a good faith belief that his income was not taxable. [32] Marston's conviction was upheld in part because he failed to file even after he became aware that Larken Rose (a proponent of the 861 argument) had been convicted of tax-related offenses. [33]
Frivolous litigation is the use of legal processes with apparent disregard for the merit of one's own arguments. It includes presenting an argument with reason to know that it would certainly fail, or acting without a basic level of diligence in researching the relevant law and facts. That a claim was lost does not imply the claim in itself was frivolous.
Brushaber v. Union Pacific Railroad Co., 240 U.S. 1 (1916), was a landmark United States Supreme Court case in which the Court upheld the validity of a tax statute called the Revenue Act of 1913, also known as the Tariff Act, Ch. 16, 38 Stat. 166, enacted pursuant to Article I, section 8, clause 1 of, and the Sixteenth Amendment to, the United States Constitution, allowing a federal income tax. The Sixteenth Amendment had been ratified earlier in 1913. The Revenue Act of 1913 imposed income taxes that were not apportioned among the states according to each state's population.
Tax noncompliance is a range of activities that are unfavorable to a government's tax system. This may include tax avoidance, which is tax reduction by legal means, and tax evasion which is the criminal non-payment of tax liabilities. The use of the term "noncompliance" is used differently by different authors. Its most general use describes non-compliant behaviors with respect to different institutional rules resulting in what Edgar L. Feige calls unobserved economies. Non-compliance with fiscal rules of taxation gives rise to unreported income and a tax gap that Feige estimates to be in the neighborhood of $500 billion annually for the United States.
Irwin Allen Schiff was an American libertarian and tax resistance advocate known for writing and promoting literature in which he argued that the income tax in the United States is illegal and unconstitutional. Judges in several civil and criminal cases ruled in favor of the federal government and against Schiff. As a result of these judicial rulings Schiff was in a hospital prison serving a sentence of 162 months at the time of his death at the age of 87. The Federal Bureau of Prisons reported that Schiff died on October 16, 2015.
Cheek v. United States, 498 U.S. 192 (1991), was a United States Supreme Court case in which the Court reversed the conviction of John L. Cheek, a tax protester, for willful failure to file tax returns and tax evasion. The Court held that an actual good-faith belief that one is not violating the tax law, based on a misunderstanding caused by the complexity of the tax law, negates willfulness, even if that belief is irrational or unreasonable. The Court also ruled that an actual belief that the tax law is invalid or unconstitutional is not a good faith belief based on a misunderstanding caused by the complexity of the tax law, and is not a defense.
A tax protester, in the United States, is a person who denies that he or she owes a tax based on the belief that the Constitution of the United States, statutes, or regulations do not empower the government to impose, assess or collect the tax. The tax protester may have no dispute with how the government spends its revenue. This differentiates a tax protester from a tax resister, who seeks to avoid paying a tax because the tax is being used for purposes with which the resister takes issue.
The Law That Never Was: The Fraud of the 16th Amendment and Personal Income Tax is a 1985 book by William J. Benson and Martin J. "Red" Beckman which claims that the Sixteenth Amendment to the United States Constitution, commonly known as the income tax amendment, was never properly ratified. In 2007, and again in 2009, Benson's contentions were ruled to be fraudulent.
America: Freedom to Fascism is a 2006 American film by filmmaker and activist Aaron Russo, covering a variety of subjects that Russo contends are detrimental to Americans. Topics include the Internal Revenue Service (IRS), the income tax, Federal Reserve System, national ID cards, human-implanted RFID tags, Diebold electronic voting machines, globalization, Big Brother, taser weapons abuse, and the use of terrorism by the government as a means to diminish the citizens' rights.
The Internal Revenue Service Restructuring and Reform Act of 1998, also known as Taxpayer Bill of Rights III, resulted from hearings held by the United States Congress in 1996 and 1997. The Act included numerous amendments to the Internal Revenue Code of 1986. The bill was passed in the Senate unanimously, and was seen as a major reform of the Internal Revenue Service.
Tax protesters in the United States have advanced a number of arguments asserting that the assessment and collection of the federal income tax violates statutes enacted by the United States Congress and signed into law by the President. Such arguments generally claim that certain statutes fail to create a duty to pay taxes, that such statutes do not impose the income tax on wages or other types of income claimed by the tax protesters, or that provisions within a given statute exempt the tax protesters from a duty to pay.
Tax protesters in the United States advance a number of conspiracy arguments asserting that Congress, the courts and various agencies within the federal government—primarily the Internal Revenue Service (IRS)—are involved in a deception deliberately designed to procure from individuals or entities their wealth or profits in contravention of law. Conspiracy arguments are distinct from, though related to, constitutional, statutory, and administrative arguments. Proponents of such arguments contend that all three branches of the United States government are working covertly to defraud the taxpayers of the United States through the illegal imposition, assessment and collection of a federal income tax.
Eddie Ray Kahn is an American tax protester. Kahn is currently in prison for tax crimes, with a tentative release date of 2026. Kahn founded the group American Rights Litigators and ran the for-profit businesses "Guiding Light of God Ministries" and "Eddie Kahn and Associates." According to the U.S. Justice Department, all three organizations are or were illegal tax evasion operations.
We the People Foundation for Constitutional Education, Inc. also known as We the People Foundation is a non-profit education and research organization in Queensbury, New York with the declared mission "to protect and defend individual Rights as guaranteed by the Constitutions of the United States." It was founded by Robert L. Schulz. At the U.S. Department of Justice, he is known as a "high-profile tax protester". The Southern Poverty Law Center asserts that Schulz is the head of the leading organization in the tax protester movement. The organization formally served a petition for redress of grievances regarding income tax upon the United States government in November 2002. In July 2004, it filed a lawsuit in an unsuccessful attempt to force the government to address the petition. The organization has also served petitions relating to other issues since then.
Tommy Keith Cryer, also known as Tom Cryer, was an attorney in Shreveport, Louisiana who was charged with and later acquitted of willful failure to file U.S. Federal income tax returns in a timely fashion. In a case in United States Tax Court, Cryer contested a determination by the U.S. Internal Revenue Service that he owed $1.7 million in taxes and penalties. Before the case could come to trial, Cryer died June 4, 2012. He was 62.
Tax protester Sixteenth Amendment arguments are assertions that the imposition of the U.S. federal income tax is illegal because the Sixteenth Amendment to the United States Constitution, which reads "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", was never properly ratified, or that the amendment provides no power to tax income. Proper ratification of the Sixteenth Amendment is disputed by tax protesters who argue that the quoted text of the Amendment differed from the text proposed by Congress, or that Ohio was not a State during ratification, despite its admission to the Union on March 1, 1803, more than a century prior. Sixteenth Amendment ratification arguments have been rejected in every court case where they have been raised and have been identified as legally frivolous.
Tax protesters in the United States advance a number of constitutional arguments asserting that the imposition, assessment and collection of the federal income tax violates the United States Constitution. These kinds of arguments, though related to, are distinguished from statutory and administrative arguments, which presuppose the constitutionality of the income tax, as well as from general conspiracy arguments, which are based upon the proposition that the three branches of the federal government are involved together in a deliberate, on-going campaign of deception for the purpose of defrauding individuals or entities of their wealth or profits. Although constitutional challenges to U.S. tax laws are frequently directed towards the validity and effect of the Sixteenth Amendment, assertions that the income tax violates various other provisions of the Constitution have been made as well.
A tax protester is someone who refuses to pay a tax claiming that the tax laws are unconstitutional or otherwise invalid. Tax protesters are different from tax resisters, who refuse to pay taxes as a protest against a government or its policies, or a moral opposition to taxation in general, not out of a belief that the tax law itself is invalid. The United States has a large and organized culture of people who espouse such theories. Tax protesters also exist in other countries.
Tax protester arguments are arguments made by people, primarily in the United States, who contend that tax laws are unconstitutional or otherwise invalid.
First National Bank of Montgomery v. Jerome Daly, Dec. 9, 1968, also known as the Credit River Case, was a case tried before a justice of the peace in Minnesota in 1968. The decision in that case is sometimes cited by opponents of the United States banking system.
Tax protesters in the United States advance a number of administrative arguments asserting that the assessment and collection of the federal income tax violates regulations enacted by responsible agencies –primarily the Internal Revenue Service (IRS)– tasked with carrying out the statutes enacted by the United States Congress and signed into law by the President. Such arguments generally include claims that the administrative agency fails to create a duty to pay taxes, or that its operation conflicts with some other law, or that the agency is not authorized by statute to assess or collect income taxes, to seize assets to satisfy tax claims, or to penalize persons who fail to file a return or pay the tax.
