The "IRS" just issued a new Revenue Ruling yesterday. I may get some heat for posting this, so please consider carefully.
More details about the tax laws appear at the Individual Rights Society website. Y'all pardon me if I have some work to do.Rev. Rul. 2007-42 (false statements in bold italics) wrote:Frivolous tax returns; private laborers or residents of the 50 states not subject to federal income tax.
This ruling emphasizes to taxpayers, promoters, and return preparers that all common-law workers, whether public- or private-sector, are wage-earning employees subject to federal income tax. Any argument that privately contracted laborers or residents of the 50 states are not employees for purposes of the employment and withholding taxes, or that persons not specifically described by the wage tax laws do not earn wages, has no merit and is frivolous.
PURPOSE
The Service is aware that some taxpayers are claiming that they are not subject to federal employment or federal withholding taxes on their wages or earnings. These taxpayers may attempt to avoid their federal tax liability by submitting a Form 4852 (Substitute for W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) to the Internal Revenue Service with a zero on the line for the amount of wages received. These taxpayers may also file tax returns showing zero or negligible income and claiming a refund for withheld amounts. The Service is also aware that some promoters market a book, package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.
This ruling emphasizes to taxpayers, promoters, and return preparers that all common-law workers, whether public- or private-sector, are wage-earning employees subject to federal income tax. This revenue ruling also provides that, under the Internal Revenue Code, wages include any compensation received due to the performance of services as an employee, and the term employee includes any individual for whom the legal relationship between the individual and the person for whom the individual performs services is the legal relationship of employer and employee. For purposes of federal employment taxes and federal withholding taxes, the legal relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. Further, all wages are gross income for purposes of determining federal income tax liability, and are also subject to federal employment taxes. Any argument that privately contracted laborers or residents of the 50 states are not employees for purposes of the employment and withholding taxes, or that persons not specifically described by the wage tax laws do not earn wages, has no merit and is frivolous.
The Service is committed to identifying taxpayers who attempt to avoid their federal tax obligations by taking frivolous positions. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through the Service’s Frivolous Return Program. As part of this program, the Service determines whether taxpayers who have taken frivolous positions have filed all required tax returns, and computes the correct amount of tax and interest due, and determines whether civil or criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether an injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.
ISSUE
Whether certain categories of persons, such as privately contracted laborers, residents of the 50 states, or persons not specifically described by the wage tax laws, are categorically not subject to wage tax.
FACTS
Taxpayer A either 1) requests, by submitting a Form W-4, Employee’s Withholding Allowance Certificate, that his employer not withhold any amount of federal tax from wages or earnings, or 2) prepares a Form 4852 (Substitute for W-2) showing no wages or earnings received. In addition, taxpayer A either fails to file a return, or files a return with zero or negligible income claiming all withholding as a refund. Taxpayer A claims that he is not an “employee” and does not receive “wages” subject to federal income tax, as those terms are as defined in the Internal Revenue Code. Taxpayer A contends that the federal government can only legally demand federal employment taxes and federal withholding taxes from persons specifically described as included in the wage tax laws. Therefore, Taxpayer A claims that he does not have to pay federal employment taxes (such as Federal Insurance Contributions Act (FICA) taxes) or federal withholding taxes to the federal government.
LAW AND ANALYSIS
Section 3401(a) provides that “wages” include all remuneration for services performed by an employee for his employer. Section 3121(a) provides a similar definition of wages for FICA tax purposes. The argument that persons not specifically described by the wage tax laws are categorically not subject to wage tax is based on misinterpretations of sections 3401(c) and 3121(b).
Section 3401(c) defines “employee” and states that the term “includes an officer, employee or elected official of the United States, a State, or any political subdivision thereof . . . .” Section 31.3401(c)-1 of the withholding tax regulations provides that the term “employee” includes every individual performing services if the relationship between that individual and the person for whom he performs such services is the legal relationship of employer and employee, and that the legal relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. Section 7701(c) states that the use of the word “includes” “shall not be deemed to exclude other things otherwise within the meaning of the term defined.” Thus, the word “includes” as used in the definition of “employee” under § 3401(c) is a term of enlargement, not of limitation. Courts have recognized that federal employees and officials are among those within the definition of “employee,” which also includes all workers under the common-law definition described in the withholding tax regulations. See Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986) (contention that taxpayer was not an “employee” is meritless, section 3401(c) does not limit withholding to the persons listed therein); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) (under section 3401(c), the category of “employee” includes privately employed wage earners; the word “includes” is a term of enlargement not of limitation, and the reference to certain entities or categories is not intended to exclude all others); Pabon v. Commissioner, T.C. Memo. 1994-476 (1994) (taxpayer’s frivolous position that she was not subject to tax because she was not an employee of the federal or state governments warranted sanctions of $2,500).
Similarly, Section 3121(b) defines “employment” and states that the term “means any service, of whatever nature, performed (A) by an employee for the person employing him, irrespective of the citizenship or residence of either, (i) within the United States . . . .” Section 3121(e)(2) defines “United States” and states that the United States “when used in a geographical sense includes the Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa.” Section 7701(c) states that the use of the word “includes” “shall not be deemed to exclude other things otherwise within the meaning of the term defined.” Thus, the word “includes” as used in the definition of “United States” under Section 3121(e)(2) is a term of enlargement, not of limitation. Courts have recognized that the Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa are within the definition of “United States,” which also includes the fifty states. See Nieman v. Commissioner, T.C. Memo 1993-533 (rejecting the “absurd proposition, essentially that the State of Illinois is not part of the United States”); U.S. v. Ward, 833 F.2d 1538 (11th Cir. 1987) (rejecting taxpayer’s “twisted conclusion” that federal tax laws only apply to individuals located within Washington, D.C., and federal enclaves, territories, and possessions, as “utterly without merit”; the word “includes” is a term of definition not of limitation); and U.S. v. Hopper, 2005 TNT 215-10, No. 05-MC-172 (U.S.D.C. E.D.N.Y. 10/29/2005) (the definition of “State” under the Internal Revenue Code does not exclude the fifty United States).
The employment tax withholding provisions do not affect whether wages are gross income. Section 61 provides that compensation for services is includable in gross income. Whether the compensation for services is in the form of wages, or in some other form, is irrelevant. The amount is still subject to income tax. All employees, whether federal employees or private-sector common-law employees, and whether working in federal territories and enclaves or working in the fifty states, are subject to income and employment taxes on their earnings.
HOLDING
Federal income tax laws apply to the earnings of private-sector common-law workers, and to the earnings of persons working within the fifty states, as well as to federal employees and persons working in the District of Columbia, or federal territories and enclaves; and any contrary contention is frivolous. The terms “employee” and “wages” as used by the Internal Revenue Code apply to all common-law workers, unless specifically exempted by the Internal Revenue Code. The income tax withholding provisions do not affect whether an amount is gross income.
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