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Tax Protestor Cases Exhibit
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ADOPTED OCTOBER 3, 2000

CALIFORNIA STATE BOARD OF EQUALIZATION

PERSONAL INCOME TAX APPEAL

DECISION

Proposed Assessment
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Appellant                       Year              Tax     Penalty
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Steven E. Lundy            1996            $1,397    $279.401
Case No. 28592

Representing the Parties:
For Appellant: Steven E. Lundy
For Franchise Tax Board: Mark McEvilly, Tax Counsel

Counsel For Board of Equalization: Donald L. Fillman, Tax Counsel

QUESTIONS: (1) Whether appellant's California wages are subject to California's tax laws.

 (2) Whether respondent properly determined appellant's tax liability.

 (3) Whether appellant has maintained a frivolous or groundless position before this Board.

Facts and Contentions

[1] Appellant filed a personal income tax return form for 1996 that contained zeros except for the taxes withheld. It claimed a full refund based on a stated zero "state wages from your Form(s) W-2," and zero taxable income. However, attached to the return form was a Form W-2 that showed wages and other compensation of $35,232.60. Respondent relied on appellant's claim of no taxable income and issued the refund. Subsequently, respondent received information that appellant's federal adjusted gross income was $35,232. Respondent issued a Notice of Proposed Assessment (NPA) dated September 28, 1998. The NPA calculated additional tax of $1,397. (An accuracy- related penalty was also imposed. But since respondent withdrew the penalty, it is not an issue in this case.) Appellant filed a protest. After the protest hearing respondent issued a Notice of Action that affirmed the NPA. Appellant appealed. Appellant contends that wages are not subject to income tax. In both his protest and his brief, appellant cites many pages of "authorities" that purport to support this contention.

[2] Tax Law. Respondent's determination is presumed correct and appellant bears the burden of proving that it is erroneous. (Todd v. McColgan (1949) 89 Cal.App.2d 509.) Appellant's contention has been universally rejected by the Board, as well as by the courts, since it was first presented many years ago. (See Appeals of Fred R. Dauberger, et al., Cal. St. Bd. of Equal., Mar. 31, 1982; Appeal of Alfons Castillo, 92-SBE-020, July 30, 1992, and Appeal of Walter R. Bailey, 92-SBE-001, Feb. 20, 1992, and cases cited therein.) R&TC section 17071 provides that IRC section 61, which defines gross income, shall apply, except as otherwise provided. IRC section 61 provides as follows:

"(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Alimony and separate maintenance payments;

(9) Annuities;

(10) Income from life insurance and endowment contracts;

(11) Pensions;

(12) Income from discharge of indebtedness;

(13) Distributive share of partnership gross income;

(14) Income in respect of a decedent; and

(15) Income from an interest in an estate or trust.

(Emphasis added.)

[3] Appellant correctly cites R&TC section 17071 as defining gross income with reference to IRC section 61. Yet appellant proceeds to grossly miscite and misapply the history of this section of the law to conclude that only certain narrow types or sources of income are subject to the tax laws. This limited list is contended to include only sources of income listed in "26 CFR Section 1.861- 8(f)(1)." (App. Br., p. 8.) The United States Tax Court, in Solomon v. Commissioner 1993 RIA TC Memo Para. 93,509, dismissed this contention as frivolous, and imposed a $5,000 penalty for pursuing a frivolous position before the tax court. Thus, appellant's obvious misapplication of plain language has already been determined to be a groundless and frivolous position.

[4] Appellant further contends that the term "income" is not specifically defined in the tax codes. This should not be surprising. Many words are not defined in the tax codes, often because they have a commonly understood meaning that the applicable legislative body did not feel obliged to define specially for the tax code. The United States Supreme Court has resolved many cases where complicated issues have made it difficult to determine whether a certain type of payment should be included in the commonly understood definition of "income" (such as the proceeds from an insurance policy). But the United States Supreme Court has never had any difficulty with such commonly understood sources of income as compensation for services, such as wages, salaries, and tips.

[5] In United States v. Burke (1992) 504 U.S. 229, the United States Supreme Court stated as follows, at page 233:

"The definition of gross income under the Internal Revenue Code sweeps broadly. Section 61(a), provides that 'gross income means all income from whatever source derived,' subject only to the exclusions specifically enumerated elsewhere in the Code. As this Court has recognized, Congress intended through Section 61(a) and its statutory precursors to exert 'the full measure of its taxing power,' Helvering v. Clifford, 309 U.S. 331, 334 (1940), . . . and to bring within the definition of income any 'accession to wealth.' Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431(1955) . . . ."

[6] The United States Court of Appeal for the Ninth District (which includes California) considered a case similarly argued as the present case. In United States v. Romero (9th Cir. 1981) 640 F.2d 1014, in which the taxpayer's criminal conviction was upheld on all five counts, the court stated at page 1016, as follows:

"Courts are established at public expense to try issues, not to
play games.

" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .

"Romero's proclaimed belief that he was not a "person" and that the wages he earned as a carpenter were not "income" is fatuous as well as obviously incorrect . . . . Compensation for labor or services, paid in the form of wages or salary, has been universally held by the courts of this republic to be income, subject to the income tax laws . . . .

" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .

"[Romero] is attempting willfully and intentionally to shift his burden to his fellow workers by the use of semantics. He seems to have been inspired by various ... groups across the land who postulate ... theories of tax avoidance, all to the detriment of the common weal and of themselves.

"...............................................................

"In our system of government, one is free to speak out in open opposition to the provisions of the tax laws, but such opposition does not relieve a citizen of his obligation to pay taxes."

(Emphasis added.)

[7] It is apparent that appellant has not attempted to understand the meaning of the material he cites, but rather, seeks to take words and phrases from cases, statutes, and regulations and attempt to twist them to say what he wishes them to say. Appellant is not alone in this pursuit. The federal courts have had many years of experience dealing with these contentions, and have uniformly rejected them. Yet they keep coming back. The following two citations are illustrative:

"Like moths to a flame, some people find themselves irresistibly drawn to the . . . illusory claim that there is no legal requirement to pay federal income tax. And, like the moths, these people sometimes get burned."

(United States v. Sloan (7th Cir. 1991) 939 F.2d 499.)

"Some people believe with great fervor preposterous things that just happen to coincide with their self-interest . . . . The government may not prohibit the holding of these beliefs, but it may penalize people who act on them."

(Coleman v. Commissioner (7th Cir. 1986) 791 F.2d 68, 69.)

[8] Frivolous Appeal Penalty. R&TC section 19714 provides for a penalty for filing a frivolous return, or maintaining a frivolous or groundless position before the Board. These penalties are in addition to other penalties that may be applied.

[9] We conclude that appellant has failed to meet his burden of establishing that respondent's assessment of tax was erroneous. We further conclude that the position appellant has maintained before the Board, concerning the exclusion of wages from the definitions of "gross income," "income," or "taxable income", is frivolous or groundless. Accordingly, we impose a penalty of $750 as authorized by R&TC section 19714.

[10] The action of respondent, subject to its concession as stated in footnote 1, is sustained and we impose a further penalty of $750.

FOOTNOTE

¹ Respondent indicates that it has withdrawn the (accuracy- related) penalty

END OF FOOTNOTE

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