"Truth Attack" Co-Founder Loses 861 Argument (Again)

[LPC]

Gary Thomason, who is sometimes described as the co-founder (with Tommy Cryer) of "Truth Attack," lost his challenge to a notice of deficiency in Tax Court, which imposed $2,000 in sanctions, and has now lost his appeal to the 5th Circuit.

I am surprised that anyone is still flogging the 861 argument. I thought that even the dimmest bulbs had realized that one was a loser.

Gary L. Thomason v. Commissioner, No. 10-60200 (5th Cir. 11/15/2010), aff'ng No. 21182-08 (U.S.T.C.)

GARY L. THOMASON,
Petitioner-Appellant
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

Summary Calendar Clerk

Appeal from the Decision
of the United States Tax Court
TC No. 21182-08

Before REAVLEY, DENNIS, and CLEMENT, Circuit Judges.

PER CURIAM:*

Gary Thomason appeals pro se the tax court's order sustaining an IRS tax determination that he owed $2,313.13 in taxes and penalties, and imposing a $2,000 sanction on Thomason under 26 U.S.C. § 6673. We affirm the tax court's order.

In 2001, Thomason received $21,084 in wages and other taxable income from sources within the United States. But Thomason filed a 2001 federal income tax return reporting zero income and requesting a refund of $2,616 for income, Social Security, and Medicare taxes that had been withheld from his wages. The Internal Revenue Service (IRS) refused to accept Thomason's return on the grounds that the return was frivolous and required that a proper return be filed. Thomason resubmitted the same tax return. The IRS then prepared a substitute tax return for Thomason pursuant to 26 U.S.C. § 6020(b) and calculated that Thomason owed the federal government $1,926 in taxes and $387.13 in tax penalties. Thomason appealed the tax deficiency to the tax court, which denied his appeal and imposed a $2,000 sanction on Thomason under 26 U.S.C. § 6673.

Thomason raises numerous arguments before this court as to why the tax court's order was incorrect. All of Thomason's arguments as to his tax deficiency raise questions of law, which we review de novo. Whitehouse Hotel Ltd. v. Comm'r, 615 F.3d 321, 333 (5th Cir. 2010). He first argues that the § 6020(b) substitute tax return that the IRS prepared for him was invalid because it did not have a § 6020(b) certification, as required by IRS regulations. He also argues that the IRS tax penalties were invalid because they were based on an invalid § 6020(b) substitute tax return. But the record shows that the IRS did submit a § 6020(b) certification, prepared by a tax technician. Thomason argues that the tax technician did not have the authority to prepare the IRS certification, but IRS internal regulations specifically allow tax auditors, including tax technicians, to prepare the certification. See IRM 1.2.44.5(3); IRM 4.9.2.3(1). The § 6020(b) substitute tax return and corresponding penalties were valid.

Thomason next asserts that United States resident citizens are exempt from paying income tax on income sourced in the United States. Thomason's argument,a variant of the "U.S. Sources argument" or "861 argument," has been universally discredited. United States v. Bell, 414 F.3d 474, 475-76 (3d Cir. 2005) (per curiam); see also United States v. Clayton, 506 F.3d 405, 412 (5th Cir. 2007). "In general, all citizens of the United States . . . are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States." Rayner v. Comm'r, 70 F. App'x 739, 740 (5th Cir. 2003) (unpublished) (quoting Treas. Reg. § 1.1-1(b) (2003)) (internal quotation marks omitted).

Thomason also raises several other arguments as to why he did not have to file an income tax return or pay income taxes. He argues that, as a United States citizen residing in the United States, he is exempt from paying income taxes under Treas. Reg. § 1.6049-4(c)(1)(ii). But United States citizens are not on the list of tax-exempt entities set forth in § 1.6049-4(c)(1)(ii). Thomason avers that his bank erroneously withheld $9 in interest, but 26 U.S.C. § 61(a)(4) makes interest, in any amount, part of a recipient's gross income. He argues that United States citizens residing in the United States do not have to pay income tax because resident citizens are not on a list of taxpayers eligible for an extension under Treas. Reg. § 1.6081-5(a). This argument is illogical: The fact that resident citizens are not eligible for an extension has no bearing on their tax liability.

Thomason finally argues that the tax court abused its discretion in imposing a $2,000 penalty on Thomason under 26 U.S.C. § 6673(a)(1). We review the tax court's imposition of a penalty under § 6673 for abuse of discretion. Sandvall v. Comm'r, 898 F.2d 455, 459 (5th Cir. 1990). Section 6673(a)(1) states: "Whenever it appears to the Tax Court that . . . (B) the taxpayer's position in such proceeding is frivolous or groundless . . . the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $25,000." The tax court found that Thomason's arguments were "frivolous and groundless, and . . . were made for the purpose of delaying or avoiding entirely his tax reporting and payment obligations." As explained above, Thomason's arguments are either gross distortions of IRS regulations or stale arguments that this court and others have consistently rejected. See Clayton, 506 F.3d at 412; Bell, 414 F.3d 475-76. The tax court warned Thomason before trial that if he continued to pursue frivolous arguments at trial, he would be subject to sanctions. Thomason did not heed this warning, and the tax court did not abuse its discretion in imposing a $2,000 fee under § 6673(a)(1).

The judgment of the tax court is AFFIRMED.

FOOTNOTE

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

END OF FOOTNOTE

[JamesVincent]

Tell me if Im wrong but at $21k if he had filed his taxes, even if he had filed as single and claimed himself, wouldnt he have been close to either owing nothing or maybe even entitled to money back?

[Gregg]

Tell me if Im wrong but at $21k if he had filed his taxes, even if he had filed as single and claimed himself, wouldnt he have been close to either owing nothing or maybe even entitled to money back?

Not if he told his employer he was special and they didn't withhold.

[JamesVincent]

One of the things he tried to get was the $2,616 that had been with held from his wages. His employer had been withholding.

[LPC]

The Tax Court opinion is in the form of a transcript of a bench opinion, of which the following are excerpts:

On September 13, 2005, the Internal Revenue Service, hereafter the IRS, received a document that purported to be a Form 1040, U .S. Individual Income Tax Return, filed by petitioner for 2001. The purported return showed zeros for all income lines, reflected zero tax liability, and asserted a claim for refund of an alleged overpayment of $2,616. Attached to the purported return were four Forms 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, et cetera, with respect to Forms W-2 and 1099 that petitioner had received from Troubadour Enterprises, Inc.; Capital One F.S.B. (2 forms), and BDS Marketing, Inc. On each of the forms petitioner took the position that he received no income from the payor. On the Form 4832 with respect to BDS Marketing, petitioner disclosed that federal income tax of $1,111, Social Security tax of $1,220 and Medicare tax of $285 had been withheld.

By letter dated February 14, 2006, the IRS informed petitioner that his purported 2001 return was frivolous and that his position had no basis in law. The letter stated that the IRS would not respond to future correspondence relating to the frivolous positions, and it warned that the assertion of frivolous positions could have adverse consequences, including criminal prosecution and imprisonment, and monetary penalties. The letter asked petitioner to file a proper return within 30 days. Petitioner did not do so.

On or about March 11, 2008, the IRS prepared a substitute for return pursuant to section 6020(b) for petitioner's 2001 taxable year. An IRS officer who was authorized to act by Delegation Order 182 certified the return on March 11, 2008, as reflected on Form 13496, IRC Section 6020(b) Certification, which was admitted into evidence.

On May 23, 2008, respondent timely mailed to petitioner a notice of deficiency in which he
determined that petitioner had Form 1099 income from Troubadour Enterprises, Inc., and Capital One FSB and Form W-2 income from BDS Marketing, and that petitioner was liable for a deficiency of $1,926 and additions to tax under section 6651. Petitioner timely filed a petition contesting respondent's determinations.

On November 17, 2009, petitioner' s case was called for trial. Before beginning the trial, the Court warned petitioner that if he continued to assert frivolous and groundless arguments regarding his obligation to file a return and to pay tax, it would consider imposing the penalty under section 6673. Petitioner testified at trial and/or stipulated that he received the items of income included in the notice of deficiency, that he resided in California throughout 2001, that he was a citizen of the United States, and that he did not reside in Puerto Rico at any time during 2001.

Upon completion of the trial, we permitted the parties to make closing arguments in lieu of posttrial briefing. Throughout his closing argument, petitioner continued to assert that he was not oblige d to file a return, that his income was not taxable, and that sections 861 and 911 authorized him to exclude his income from the purported return he filed for 2001.

OPINION

[...]

Petitioner constructed his case on a tortured reading of Code sections and regulations that have no application to his personal situation, and he engaged in an ill-advised and misguided attempt during trial to convince the Court that he was immune from the obligations imposed on every U.S. citizen residing in the United States who has sufficient income to file a proper return and to pay any tax that is due and owing. We reject that effort for what it is -- a futile attempt to justify his refusal to pay tax on the income he agrees he earned during 2001.

It is well-established that this Court is under no obligation to refute shop-worn and groundless arguments such as petitioner's with detailed explanations of why the arguments are in error. Williams v . Commissioner, 114 T.C. 136, 138-139 (2000) (quoting Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)). Suffice it to say that petitioner, like every other taxpayer, is required to file a Federal income tax return if he has sufficient income to require that a return be filed. Sec. 6012(a) .

In this case, petitioner received income during 2001 in an amount sufficient to require the filing of a return. Although petitioner filed a purported return, it contained entries of zero on every income line, as well as information indicating that petitioner was disputing that he received income as reflected on information returns filed by third-party payors.

Courts have routinely held that a return containing zeros with respect to every income line item and insufficient information from which to determine the taxpayer's correct tax liability ordinarily is not a valid return. United States v. Smith , 618 F.2d 280, 281 (5th Cir. 1980); Cabirac v. Commissioner , 120 T.C. 163, 169 (2003); and Beard v. Commissioner, 82 T.C. 766, 777 (1984). The return that petitioner filed did not contain sufficient information from which respondent could determine petitioner's correct tax liability.

Section 6020(b) authorizes the IRS to prepare a substitute for return whenever a taxpayer fails to file a valid return. Although petitioner attempts to suggest that section 6020(b) does not apply to income tax returns, that position is clearly wrong and must be rejected. Sec. 6020(b) (stating that the Commissioner shall prepare a substitute return for "any person [who] fails to make any return required by any internal revenue law or regulation") ; see Cabirac v. Commissioner, supra at 170-173.

Petitioner also contends that the IRS officer who prepared the section 6020(b) certification did not have authority pursuant to a proper delegation order to make the section 6020(b) certification . However, the information submitted and arguments made at trial were insufficient to satisfy petitioner's burden of proving that the substitute for return was invalid or that the certification was not authorized.

Having disposed of petitioner's procedural arguments, we reluctantly turn our attention to petitioner's misguided and frequently incomprehensible argument that he properly excluded his gross income from the purported 2001 return he filed.

When pressed by the Court at trial, petitioner argued that he was entitled to exclude his income, which he conceded was otherwise includible in income under section 61, under sections 861 and 911. Petitioner also tried to assert that the interrelationship of Code sections 1, 3401, and others supported his conclusion.

Sections 861 and 911 are simply not applicable to petitioner. Section 861, which establishes rules for determining whether and to what extent income of a nonresident alien or foreign corporation, henceforth foreign taxpayer, is sourced within the United States, obviously does not apply to petitioner because petitioner is not a foreign taxpayer and all of his income is sourced in the United States.

Section 911, which authorizes an exclusion from gross income for citizens or residents of the United States living abroad, also is inapplicable to petitioner because he did not reside abroad at any time during 2001. Because the Code sections are not applicable to petitioner, related regulations are also inapplicable and do not support petitioner's arguments.

Petitioner's arguments are the result of a distorted and misguided reading of Code provisions. Petitioner has constructed the arguments by irresponsibly extracting language from Code provisions and related regulations that simply do not apply to petitioner. Petitioner's actions reflect an appalling lack of competent research and analysis and suggest that he was motivated by goals that are simply not consistent with a good faith attempt to comply with the obligations imposed on taxpayers by the Federal tax system.

We reject petitioner's arguments as frivolous and groundless, and we find that the arguments were made for the purpose of delaying or avoiding entirely his tax reporting and payment obligations. We sustain respondent's determinations .

Finally, we consider whether sanctions are appropriate under 6673. Section 6673 (a)(1) provides that "Whenever it appears to the Tax Court that (A) proceedings before it have been instituted or maintained by the taxpayer primarily for delay, (B) the taxpayer's position in such proceeding is frivolous or groundless, or (C) the taxpayer unreasonably failed to pursue available administrative remedies, the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $25,000."

Before trial began, we warned petitioner that if he continued making the arguments and taking positions he had taken before the trail [sic], we might impose the section 6673 penalty. Despite this warning and other warnings he received during the administrative consideration of his case, petitioner persisted in wasting the time and resources of the Court and respondent with yet another regurgitation of shop-worn positions designed to avoid petitioner's tax obligations. See IRS Publication, "The Truth About Frivolous Tax Arguments" [www.irs.gov/pub/irs-utl/friv_tax.pdf].

We shall impose a penalty under section 6673(a)(1) of $2,000, and we warn petitioner that the penalty will likely be imposed again and increase in amount if he persists in making similar arguments to this Court in other cases .

Decision will be entered for respondent.

[grixit]

Ever buy the "floor model" of something? You get a small discount because it's usually banged up and scratched, some small accessories may be missing and sometimes there's no user manual. Often there's no warranty. That's what "shopworn" means, it refers to something that counts as used even before it leaves the store. That's fine for radios and toasters, but not arguments.

As it is, i'm surprised that this person didn't get anpther frivpen for the appeal.

[Imalawman]

There can be very good reason to delve into 861 and 911. In fact, I do a fair amount of international tax. But otherwise, one should stay far, far away from those sections. They are very confusing and unless you really undertake a study of taxation, you will not understand it.

[Gregg]

The Lostheads have a new thread about this guy and Truth Attack (maybe it should be Attacking Truth?)

http://www.losthorizons.com/phpBB/viewtopic.php?t=2684

[JamesVincent]

SkankBeat wrote,

"One of the ideas i have come across that i think has some merit is that when you do a $0.00 1040 you are essentially establishing you are a non-"taxpayer". So you are ineligible for "taxpayer" deductions and exemptions. If you claimed deductions or exemptions, and then swore to such entitlement, you are creating presumption that you are a "taxpayer". The IRS may be using this technicality against you. This may be one of the reasons the IRS does not provide details about a frivolous penalty for a $0.00 1040. The IRs does not want inform you that you made a contradiction. Is this bad faith? Yes. This goes back to the "looks like, smells like, tastes like a taxpayer, so must be a taxpayer". To stop the game-playing, raise issue with "the boss", the US Treasury of Secretary."

Actually I would think that if you try to write $0.00 in your income amounts then you are trying to say that you made no money in that tax year. If you then tried to claim exemptions (from what? you made no money right?) I guess it entitles you to a very pretty 8x10 piece of federal property somewhere scenic.

[Cathulhu]

Skanky's advice comes down to: "Lie on your tax return, do homage to me when the notably slow wheels of government take some time to grind you, and then rest assured I won't care when you go to jail. I'll blame you and say you didn't do what I said correctly."

[Thule]

Skanky's advice comes down to: "Lie on your tax return, do homage to me when the notably slow wheels of government take some time to grind you, and then rest assured I won't care when you go to jail. I'll blame you and say you didn't do what I didn't say correctly."

A slight correction. SkankBeat never tells people specificly what to do, he just hints to this Great Truth. That, and "Fraud on the Court".