Can Section 861 of the Internal Revenue Code save you from income taxes?
Last week, the federal government sued
three businesses in California and Colorado to force them to withhold
payroll taxes from their employees' paychecks. This is the latest
chapter in a bizarre fight between the feds and adherents of what is
known as the "Section 861 argument" or the "861 position."
Despite Attorney General John Ashcroft's
well-documented prudery, the campaign isn't a crusade against people who
delve too deeply into the Kama Sutra. Rather, it's an
effort directed against a band of determined tax law enthusiasts who,
the Justice Department and federal courts say, willfully misinterpret a
section of the Internal Revenue Code in order to duck taxes.
Tax law is a field that naturally attracts people with the ability
and desire to endlessly parse words, clauses, and definitions. Adherents
of Section 861—as in Section 861 of Title 26 in the U.S. Code—exhibit
these extraordinary Talmudic capabilities. Rather than deny the
constitutionality of federal income taxes or the legitimacy of the
Internal Revenue Service, as some cruder tax protesters do, 861
protesters have attempted to ferret out contradictions within the text
of the famously convoluted tax code and beat the government at its own
game. (One 861 advocate's call to arms is titled: "Section 861: The Law
They Hope You Never Read.")
Larken Rose
is one of the primary exponents of the 861 position. Long suspicious of
the federal income tax, Rose, who with his wife operated a small
transcription service in Abington Township, Pa., began to examine
various arguments against it in the 1990s. He found most of them
illogical, until he stumbled on Section 861.
As detailed in his 79-page report,
the code contains general definitions of what constitutes gross income
and taxable income. At first blush, they appear to apply to virtually
all income earned by just about everybody. But certain regulations and
portions of the law that describe when domestic and foreign income are
taxable undermine that commonly held view, Rose claims. "The regulations
say that only income from specific types of commerce, all of which have
some kind of connection to international commerce or federal
possessions, are taxable," says Rose. In other words, if you don't
engage in foreign trade or work in a U.S. possession such as the
Northern Mariana Islands, your earnings shouldn't be subject to the
federal income tax.
The tightly reasoned and plentifullysourced tract,
which relies heavily on complicated disquisitions on the placement of
the word "the" and the definition of "source," is a form of what Walter Olson,asenior
fellow at the Manhattan Institute, calls "folk law": legal claims that
"bubbled up without any encouragement from the legal professions."
Lawyer Bernard Sussman less charitably describes this and other arguments in an online casebook as "Idiot Legal Arguments." Indeed, according to the New York Times, one
of the defendants in last week's 861 lawsuits, James Molen, who co-owns
a floral shop in Chico, Calif., "is part of a movement that contends
that court actions in which names are typed in all capital letters, as
the case filed yesterday was, are not valid." The theory, rejected by
courts many times over,
is that by typing a person's name in all capitals, the courts are
essentially describing a new entity, unrelated to the individual to whom
they mean to refer. (ee cummings' standing under such a regime is
unclear.)
For his part, Larken Rose—who is thoroughly logical—dismisses the all-caps argument, as well as the theories of Irwin Schiff, who argues that there is no law requiring U.S. citizens to pay income taxes.
A generation ago, 861 adherents might have quietly avoided filing
1040s and escaped detection. Furtive, small-scale practitioners of
activity that is illegal but largely harmless—like smoking pot—generally
escape prosecution. Those who do so loudly, however, invite legal
trouble. And 861 followers like Rose have been doing the equivalent of
holding a marijuana smoke-in at a public park. Rose has approached the
IRS to discuss his views and has posted the transcript of one such meeting on his site. He has sold "somewhere between 14,000 and 15,000 legal copies" of the video Theft by Deception.
"I know there are a bunch of bootlegs that are out there," he adds. (It
wouldn't surprise "Moneybox" to learn that there exists among those who
refuse to pay federal income taxes a high propensity to copy
intellectual property.) And at least 100,000 copies of the Rose's
"Taxable Income" report have been downloaded.
By courting controversy and thumbing their nose at the law, the folk
lawyers are striving to become folk heroes. And thanks to the Justice
Department's increasingly vigorous efforts to clamp down on their
activities, they may succeed. The feds have declared it a "a priority to
pursue promoters of frivolous and fraudulent tax schemes." Last May,
Larken Rose's house was raided by the Internal Revenue Service.
But when they have been caught in the maw of the courts, 861ers
haven't had much luck. Judges have repeatedly rejected claims based on
Section 861. As far as the legal system is concerned, it's law settled
many times over. Unlike folk remedies, folk law never seems to work—at
least when it comes to taxes.
http://www.slate.com/articles/business/moneybox/2003/07/americas_oddest_tax_dodge.single.html
http://www.slate.com/articles/business/moneybox/2003/07/americas_oddest_tax_dodge.single.html
that the find is a taxable event under a 1969 federal court ruling that
held a "treasure trove" is taxable the year it was discovered.
