Sonny Tufts
Member
- Joined
- Apr 25, 2012
- Messages
- 2,925
Can you cite an illegal income case were a defendant specifically claims that the income is not taxable because it was not federally derived?
No, because no one in an illegal income case has been dumb enough to raise such a frivolous defense.
If you can't then your argument holds no merit and you're just blowing smoke. I say this as someone who understands the law, not as someone who is a "tax protestor". If you don't raise a defense then you've waived the defense whether you had a legitimate defense or not.
But some defenses are so patently stupid that the fact they haven't been raised is irrelevant. Would you say that it's still an open question whether income earned by left-handed chiropractors born in March in a year divisible by 3 and who are missing their left big toe is taxable because this particular defense has never been raised?
Hendrickson's theory has a 100% loss record in court, which isn't surprising since there is absolutely no legal basis for his bogus claim that only income from federally-privileged activities is taxable. So if you would like to see instances in which his theory was raised and was rejected, you can look at Hendrickson's own losses or you can read abount the suckers who fell for his scam:
When the government filed the civil action against Hendrickson and his wife for the erroneous refunds paid to them, the government also filed six similar suits against some of his followers. "United States Sues Nine in Nationwide Crackdown on Tax-Refund Scam," U.S. Dept. of Justice Press Release (4/13/2006). The other suits were against Sharon K. Artman of Largo, Fla.; Michael J. Dowling of San Diego; Joy M. Ferguson of Henderson, Nev.; Melvin L. Gerstenkorn of Topeka, Kan.; Larry B. Golson and Debra G. Golson of Montgomery, Ala.; and James A. Spitzer of Winter Park, Fla. The government was successful in every case. See, e.g., United States v. Ferguson, 2007-1 U.S. Tax Cas. (CCH) par. 50,461 (D. Nev. 2007).
The judgment against James A. Spitzer was affirmed by the 11th Circuit Court of Appeals, and sanctions were imposed for bringing a frivolous appeal. United States v. James A. Spitzer, 245 Fed.Appx. 908, 2007 WL 2376783, 2007 TNT 163-5, No. 07-11073 (11th Cir. 8/21/2007), aff'ng No. 06-00479-CV-ORL-22JGG (U.S.D.C. M.D. Fla. 2/13/2007) (erroneous refund of $16,614 ordered repaid). In a later order, the District Court also ordered Spitzer to pay double attorneys' fees to the United States, in the amount of $16,285.35, "as a sanction for his frivolous and bad faith defense of the entire case." Id., at Docket #49 (7/25/2007). Spitzer later filed a motion with the District Court to vacate its judgment, claiming that the lower court had lacked subject matter jurisdiction and had ignored his challenge to the constitutionality of the income tax as an unapportioned "direct tax." The District Court summarily denied the motion and the Circuit Court affirmed on appeal on the grounds that Spitzer was simply trying to re-litigate the case he had already lost. United States v. James A. Spitzer, 2009 TNT 128-7, No. 08-15824 (11th Cir. 7/7/2009). (A footnote in the opinion notes that the sanctions previously imposed had not yet been paid.)
In the case of Hendrickson acolyte Andrew D. Scott, the United States Tax Court noted that Scott had informed the IRS that he was a follower of Hendrickson's book, Cracking the Code. The Court also noted that Scott did not consult with a tax attorney when filing his tax return, and did not check with an attorney on the validity of Hendrickson’s arguments. The IRS had warned Scott in writing that Hendrickson’s arguments had been repeatedly rejected by the courts. The Tax Court found Scott’s arguments — that he was not an “employee,” and that he did not earn “wages” — to be “frivolous and false.” The Court found Andrew Scott liable for a $10,031 deficiency in tax. The Court also sustained the IRS determination that Scott was liable for the accuracy-related penalty of $2,941 under Internal Revenue Code section 6662(a), and imposed a $20,000 penalty under Internal Revenue Code section 6673 for presenting a frivolous argument. Andrew D. Scott v. Commissioner, Docket No. 26392-06, United States Tax Court, Bench Op. (June 4, 2008), aff'd 2009 TNT 213-10, No. 08-4766 (2d Cir. 11/6/2009).
In another case, Joseph Alan Fennell's arguments — that the compensation he received in exchange for non-federally privileged private sector labor was not taxable, and that non-federally privileged private sector labor is not the subject of an excise (the U.S. federal income tax) — were rejected by the United States Tax Court. See Joseph Alan Fennell v. Commissioner, Docket No. 26285-07L, United States Tax Court, Order of Dismissal and Decision (June 17, 2008). Fennell appealed his Tax Court loss, but the United States Court of Appeals for the District of Columbia Circuit ruled that the Tax Court correctly determined that Fennell was barred from challenging the existence or amount of his tax liability, and that Fennell's challenges were "frivolous on the merits in any event." Joseph Alan Fennell v. Commissioner, no. 08-1314, March 12, 2009, United States Court of Appeals for the District of Columbia Circuit (per curiam).
Hendrickson supporter Patrick Michael Mooney is a two-time loser in federal court using the Cracking the Code scam. In 2008 a penalty of $1,000 under section 6673 was imposed by the Tax Court on Mooney for presenting frivolous arguments in connection with his 2004 tax return. The court rejected his argument that his wages earned from a private employer were not taxable and his argument that the term "employee" was limited to "someone performing the functions of a public office." Patrick Michael Mooney v. Commissioner, Docket No. 21647-06, United States Tax Court, Order of Dismissal and Decision (May 5, 2008), aff'd per curiam, No. 08-1899 (4th Cir. 1/21/2009). In a second Tax Court case, this one involving Mooney's 2005 income tax return (which was filled in with nothing but zeroes and rejected by the IRS as frivolous), the Tax Court affirmed the IRS determination of a deficiency and also affirmed penalties for failure to pay, failure to make estimated tax payments, and fraudulent failure to file a tax return (Mooney's 2005 "return" having been ruled to be not a valid income tax return), and then imposed $2,000 in sanctions for frivolous arguments. As a result of the Court's ruling, Mooney owed over $8,900 in taxes and penalties, plus interest, for the year 2005. Patrick Michael Mooney v. Commissioner, T.C. Memo. 2011-35 (Feb. 7, 2011).
In another case, an individual filed his 2005 federal income tax return reporting "zero" for wages, claiming a refund of the taxes withheld from his pay. A section 6702 frivolous penalty of $500 was imposed by the IRS. In the resulting litigation in the United States Tax Court, the individual argued that he was due the refund because his compensation constituted "earnings for private-sector, non-federally-privileged work" that the individual had performed as an engineer for his employer. The Tax Court ruled that the argument was "frivolous and groundless," and imposed a separate penalty of $5,000 under section 6673 for engaging in frivolous litigation. Ragan v. Commissioner, Docket No. 11966-08L, United States Tax Court, Order and Decision (Feb. 19, 2009).
Roger Charles Menner is a repeat offender who had been investigated by the Internal Revenue Service as early as 1996. See, e.g., Menner v. United States, case number 1:96MC15, 96-2 U.S. Tax Cas. (CCH) ¶50,574 (S.D.W.Va. July 29, 1996) (Menner's motion to quash IRS summons of bank records was denied; summons ordered enforced). He was eventually convicted of failure to file federal tax returns in a matter unrelated to Hendrickson's tax scheme. Menner went to federal prison and was released in 2000. In 2007, however, Menner claimed to be a follower of Hendrickson, posting information about his federal tax situation on Hendrickson’s web site. In 2008, Menner was charged with five counts of filing false federal income tax returns under Internal Revenue Code section 7206(1) and one count of obstruction under section 7212(a). See United States v. Menner, U.S. District Court, Eastern District of Virginia, Richmond Division, case no. 3:08-cr-00322-HEH-1. Hendrickson attempted to distance himself from Menner, asserting that Menner did not follow Hendrickson’s scheme properly. At any rate, on October 23, 2008, Menner — who had claimed to have followed Hendrickson's tax scheme — was found guilty on all counts. Menner's conviction was upheld on appeal. See United States v. Menner, case no. 09-4221, aff'd per curiam, U.S. Ct. App. for the Fourth Circuit (4/20/2010), cert. denied, U.S. Sup. Ct., case no. 09-11394 (Oct. 4, 2010), petition for rehearing denied, U.S. Sup. Ct. (12/13/2010). He was sent back to prison, this time on a sentence of five years and three months. Menner (inmate # 34851-083) was incarcerated in a federal prison in Virginia, and was released on May 17, 2013.
On his lost horizons web site, Hendrickson has touted the case of Eugene George Warner of Alaska as an example of an individual who has been victorious using Hendrickson’s Cracking the Code, in particular with respect to Form 1040 tax returns for various years, including 1991 and 2001. Warner, an ex-con who has previously served time in federal prison, was indicted by a federal grand jury on twelve counts of mail fraud, two counts of bankruptcy fraud, one count of tax evasion (involving the tax year 1991, among others), one count of attempting to interfere with the administration of the internal revenue laws, and four counts of filing false tax returns (including the returns for years 1991 and 2001, per counts 3 and 5 of the First Superseding Indictment). See United States v. Eugene George Warner, case no. 3:07-cr-00123-RRB-JDR, U.S. District Court for the District of Alaska (Anchorage Division). Curiously, while Hendrickson has displayed various IRS notices issued to Warner as examples of evidence of Cracking the Code victories for Warner for 1991 and 2001, it is not clear that Warner actually used Hendrickson’s method for those years. Warner pleaded guilty to one count in the indictment in exchange for dismissal of the other charges. He was sentenced to 37 months in prison, and was incarcerated at the Federal Correctional Institution at Sheridan, Oregon (register # 13345-006, Bureau of Prisons, U.S. Dep't of Justice). Warner was released from prison on October 7, 2011.
At least three tax return preparers who relied on Cracking the Code have been enjoined from preparing tax returns, the courts holding that the returns were false and frivolous. United States v. Donald A. Gray, 2007 U.S. Dist. LEXIS 19833; 99 A.F.T.R.2d (RIA) 1695, 2007 TNT 56-10, No. 1:07-CV-42 (U.S.D.C. W.D. Mich. March 19, 2007); United States et al. v. Beverly J. Hill et vir. et al., 2005 U.S. Dist. LEXIS 38086; 97 A.F.T.R.2d (RIA) 548, 2006 TNT 27-13, No. CV-05-877-PHX (U.S.D.C. Ariz. Dec. 22, 2005); and United States v. Jeffrey R. Hunn, No. CV06-1458-PCT-FJM (U.S. Dist. Ct. for the District of Arizona, Aug. 18, 2006).
The Tax Court has approved an IRS determination to proceed with levies against "Warrior Bill Granger" (Hendrickson likes to call his pigeons "warriors") for an income tax deficiency assessed for 2003 and a frivolous return penalty assessed for the tax return that Granger filed for 2002. William R. Granger v. Commissioner, T.C. Memo 2009-258 (petitioner who failed to provide required financial information or properly completed Form 1040 for 2004 was properly denied a face-to-face collection due process hearing). The Lost Horizons web site contains copies of correspondence regarding Granger's failure to file for 2004 and the frivolous return penalty that could be imposed for what he actually filed.
Both the Tax Court and the 5th Circuit Court of Appeals cited the court opinion in Hendrickson's own loss in the erroneous refund action brought by the United States against him (see above) in imposing sanctions against a Hendrickson follower who contested frivolous return penalties that were imposed when he filed CtC-style amended returns. Adolfo Sandor Montero v. Commissioner, 2009 TNT 222-17, No. 09-60381 (5th Cir. 5/19/2009), aff'ng No. 023166-07L (U.S.T.C. 10/28/2008) (collection actions affirmed for frivolous return penalties imposed for amended returns for 2003 and 2004; $20,000 in sanctions imposed for frivolous arguments to the Tax Court). The same taxpayer also had frivolous return penalties imposed for returns for the years 2002, 2005, and 2006. See Adolfo Sandor Montero v. Commissioner, No. 13141-09L (U.S.T.C. 9/4/2009) (petition dismissed due to lack of jurisdiction because taxpayer failed to request collection due process hearing).
Hendrickson posted copies of refund checks to Robert Herriman on his website, but Herriman's suit to stop income tax withholding, to obtain an additional refund, and to stop the IRS from levying to collect taxes and frivolous return penalties was dismissed by a federal district court for failure to state a claim for which relief could be granted as to the withholding complaint and for lack of jurisdiction as to the other claims. Robert Herriman v. United States, No. 2:08-cv-807-FtM-29DNF (U.S.D.C. M.D. Fla. 12/3/2009) ("Plaintiff is subject to the income tax regulations, and his private wages will be considered income subject to tax collection."), aff'd No. 10-13454 (3/17/2011). The IRS records attached to the government's motion to dismiss show that the taxes that were refunded have been re-assessed, that the IRS has started collection actions against Herriman through levies, and that Herriman's tax returns and requests for collection due process hearings have resulted in penalties for frivolous filings. Id., Docket #19-2.
The "victory" of James Robert Morse was also posted to the Lost Horizons web site, but the "victory" was really just a claimed overpayment of $2,287.39 for the year 2006 that was not refunded but just applied to taxes still owed for 2003 and 2004. The IRS eventually reviewed their returns and assessed a deficiency of $1,787 for 2006, which was affirmed by the Tax Court, along with a deficiency and negligence penalty for 2005. James Robert Morse et ux. v. Commissioner, T.C. Memo. 2010-40, Nos. 17809-08, 26521-08 (2/25/2010) (describing petitioner's arguments as "nothing more than sophistry"). According to the Tax Court, the IRS also assessed frivolous return penalties of $500 against Mr. and Mrs. Morse.
One of Hendrickson's web pages claimed that "Warrior Couple Thwart An Arrogant IRS Motion For Summary Judgment" when the Tax Court denied the IRS's motion for summary judgment, but the Tax Court ultimately ruled on the merits of the case against the "Warrior Couple," approving the imposition of frivolous return penalties and allowing the IRS to proceed with the collection of the penalties by levy. James M. Blaga et ux. v. Commissioner, T.C. Memo. 2010-170, 19391-08L (8/3/2010). Mr. Blaga also had a second case involving a notice of deficiency for 2005, and the Tax Court affirmed a $11,619 deficiency, along with a $5,399.80 penalty for fraudulent failure to file under section 6651(f), a $1,042.72 late payment addition to tax under section 6651(a)(2), and a $280.17 addition to tax for failure to timely pay estimated taxes. James Michael Blaga v. Commissioner, No. 8101-09 (4/13/2010). A motion to vacate was filed by Mr. Blaga on 5/17/2010 and denied on 5/20/2010.
"CtC Warrior" David Nelson lost his refund suit against the United States, the magistrate judge (and district court) holding that "The fact that Northwest is a 'private sector company, which is not owned or operated on behalf of the United States' [citation omitted] is immaterial to the question of whether the remuneration Northwest paid Nelson for his work was 'compensation for services' within the meaning of 26 U.S.C. § 61(a)(1). It clearly was." Nelson v. United States, No. 3:08-cv-00508-MCR-EMT (U.S.D.C. N.D. Fla. 12/7/2009), aff'd No. 10-10730 (11th Cir. 8/12/2010) (unpublished) ("We have repeatedly rejected arguments, such as Nelson's, asserting that private sector employment income is not subject to federal taxation."). In a separate case, the United States Tax Court upheld an IRS determination of tax deficiency against Nelson of over $126,000, plus over $30,000 in penalties for failure to timely file a valid return, failure to timely pay the tax, presenting frivolous arguments in court, and other penalties. See Nelson v. Commissioner, T.C. Memo 2012-232, docket # 21102-10 (08/13/2012).
A refund to Scott Ray Holmes was also posted to the Lost Horizons website for the year 2004, but the IRS eventually determined that his 2004 return was not a valid return and issued a notice of deficiency for that year. Holmes filed a petition with the Tax Court contesting the alleged deficiency, along with alleged deficiencies for 2005 and 2006, and the Tax Court not only confirmed the deficiencies but also imposed the maximum $25,000 in sanctions for his frivolous arguments. Scott Ray Holmes v. Commissioner, T.C.M. 2011-31. The maximum sanction was imposed because it was not Holmes's first visit to the Tax Court, and he had been similarly unsuccessful in T.C. Memo. 2006-80 (deficiencies upheld for 2002 tax year and $2,000 in sanctions imposed for frivolous arguments), T.C. Memo. 2010-42 (deficiencies upheld for 2003 tax year; $10,000 in sanctions imposed), and T.C. Memo. 2010-50 (IRS allowed to proceed with levy to collect the 2002 tax liability; $10,000 in sanctions imposed).
The notice of a refund issued to Steven and Sarah Waltner for the year 2007 also appear on the Lost Horizons website, and yet an opinion of the Court of Federal Claims (which dismissed their suit for additional refunds) states that a federal tax lien had been imposed against Sarah Waltner for $40,000 of penalties (apparently frivolous return penalties) for amended tax returns filed for the years 2003-2007. Steven T. Waltner and Sarah V. Waltner v. United States, No. 10-225T (U.S. Ct. Cls. 4/22/2011).
In the case of Kenneth R. Lindberg, the IRS assessed a $500 penalty for filing a frivolous tax return under Internal Revenue Code section 6702 (the law applicable at the time the tax return was filed, which was long before March 16, 2007, imposed only a $500 penalty, as opposed to the $5,000 penalty for frivolous returns filed on or after March 16, 2007). In addition, a $1,000 penalty under section 6673 was imposed on Lindberg by the United States Tax Court for frivolous litigation in connection with that return. In its decision, the Court specifically mentioned Peter Hendrickson and Cracking the Code (as well as the Herriman case cited above), and noted the similarity between the Cracking the Code scheme and what Lindberg had done on his tax return. The Court upheld the validity of the levy action on Lindberg's assets to collect the frivolous return penalty. Lindberg v. Commissioner, T.C. Memo. 2010-67, No. 5421-08L (April 6, 2010).
In a federal criminal case, Michael O'Daniel of Virginia admitted to having been influenced by Peter Hendrickson's Cracking the Code scheme. United States v. Michael I. O'Daniel, case no. 3:10-cr-00017-nkm-1, in the U.S. District Court for the Western District of Virginia (Charlottesville Div.). O'Daniel pleaded guilty to attempting to interfere with the administration of the internal revenue laws under 26 USC section 7212(a) and to uttering a fictitious obligation under 18 USC section 514(a)(2) in connection with his tax protester activities. The fifty-seven year old O'Daniel was inmate number 15255-084 at the Federal Correctional Institution at Cumberland, Maryland. He was released from prison on March 1, 2012.
The United States Tax Court has imposed penalties totaling $45,000 on David and Morena Mills for frivolous litigation in connection with the use of Hendrickson’s Cracking the Code scheme. Case number 003441-08, filed in the Tax Court on February 8, 2008, concerned the taxpayers’ 2004 and 2005 tax returns. In those years, Mr. Mills earned an average of about $80,000 working at an automobile dealership, yet contended that his earnings were not “wages.” When asked direct questions about Peter Hendrickson, Mr. Mills was evasive, but the Court nevertheless found that Mills was a follower of Hendrickson’s Cracking the Code scheme. On March 5, 2009, the Tax Court upheld the IRS determination of deficiency and the Court imposed $20,000 in penalties on Mr. and Mrs. Mills for engaging in frivolous litigation. The taxpayers appealed, but the United States Court of Appeals for the Ninth Circuit upheld the Tax Court’s judgment on July 22, 2011 (docket no. 09-72165). The taxpayers filed another petition on April 27, 2010 (U.S. Tax Court, case no. 009715-10), this one concerning their 2006 tax return. Mr. Mills earned about $90,000 in 2006. On June 9, 2011, the Tax Court ruled in favor of the IRS, and the Court imposed a $25,000 penalty for frivolous litigation.
The U.S. Tax Court imposed a penalty of $10,000 on Louie Elias in case number 024624-06L. Mr. Elias filed his petition in this case on December 1, 2006. For the year 2001, the Internal Revenue Service showed that Mr. Elias had an adjusted gross income of over $62,000, yet Elias had filed a 2001 federal income tax return showing his income to be zero. In a hearing on February 24, 2009, Judge Diane L. Kroupa noted that Mr. Elias was "a follower of Mr. Hendrickson and cracking the Code [sic]." The Court ruled in favor of the IRS, and imposed the $10,000 penalty against Elias for filing a frivolous lawsuit against the IRS.
Before his return to federal prison in 2010, Peter Hendrickson touted the tax protester antics of his follower Justin Carl Laue, referring to Laue's written response to one IRS notice as being "cogent, scholarly and calm." In the United States Tax Court, however, the "Cracking the Code" arguments were uniformly unsuccessful in litigation over Laue's 2005 and 2006 federal income taxes. The Court determined that Justin Laue had combined federal income tax deficiencies of $73,857 for 2005 and 2006, on compensation of nearly $200,000 that Laue had contended was not "income." The Court rejected Laue's arguments and ruled that the Internal Revenue Service was correct — that Laue was liable for over $35,700 in penalties for failure to timely file a valid return, failure to timely pay, and failure to make timely installment payments of estimated tax. The Tax Court imposed another $5,000 in penalties against Laue because of Laue's use of the frivolous "Cracking the Code" arguments in court. Laue was determined to owe over $114,000 plus interest. See Laue v. Commissioner, T.C. Memo 2012-105, docket numbers 023661-10 and 023666-10 (April 11, 2012).
In Clark v. Commissioner, the U.S. Tax Court ruled that the Internal Revenue Service did not abuse its discretion by filing a notice of federal tax lien against Erik Stephen Clark for his unpaid federal income tax for 2007, and for statutory penalties that had been imposed for filing frivolous tax returns for 2006 and 2008. For the year 2006, Clark originally filed his federal income tax return reporting wages of over $59,000. However, in March 2009, he filed an amended return with a Form 4852, changing wage amount to zero (a tactic often used by individuals following the Cracking the Code scheme). He included a typical statement to the effect that "my company issued me an erroneous W-2 and listed my payments as 'wages' as defined in the IRC Sect. 3401(a) and 3121(a), for fear of retaliation from the IRS. I am a private-sector citizen (non-federal employee), employed by a private-sector company (non-federal entity) as defined in 3401(c)(d). I am not employed in a 'trade or business', nor am I an 'officer of a corporation'”. Clark filed a year 2008 return with a Form 4852, also reporting wages of zero, with a similar explanation. He filed a 2007 return in which he apparently did not use the Cracking the Code scheme. The IRS asserted $10,000 in penalties under section 6702 of the Internal Revenue Code for filing frivolous tax returns (i.e., $5,000 each, for the years 2006 and 2008). In September 2010, the IRS issued a Notice of Federal Tax Lien (NFTL) Filing. An IRS settlement officer determined that the filing of the NFTL was appropriate, and Clark filed his Tax Court petition to contest that determination. The Tax Court found that the Cracking the Code arguments Clark raised with the IRS settlement officer were frivolous positions. The Court stated that Clark had "taken a multitude of frivolous and groundless positions characteristic of tax protesters." The Court upheld the issuance of the NFTL. Further, in his presentation to the IRS settlement officer in an attempt to get the IRS to remove the $10,000 in statutory penalties for filing frivolous returns, Clark had simply persisted in using the frivolous arguments. The IRS settlement officer understandably refused to accept those arguments or remove the penalties. The Court ruled that the IRS settlement officer was correct in refusing to consider Clark's frivolous arguments. See Memorandum Opinion, Erik Stephen Clark v. Commissioner, T.C. Memo. 2012-182, docket # 6118-11L (07/02/2012). On the day of the decision, Clark complained in a post on Peter Hendrickson's web site that "They [the Tax Court] totally ignored my argument/fact that I did not engage in any revenue taxable activity. Didn't even mention it in their decision. This really has me disillusioned…."
http://tpgurus.wikidot.com/peter-hendrickson
