CHAPTER SEVEN BANKRUPTCY

AN INTRODUCTION

            The Congress has given the Internal Revenue Service a draconian power to collect taxes.  They are allowed to garnish wages and leave you less than $400.00 a month.  They are allowed to take almost all your personal property and real estate with a very few small exceptions, and to do all that without a court order.  I am sure that if the individuals who wrote the Constitution knew the extent of the power of the IRS, they would roll over in their graves. There are very few ways to get out from under the burden of a debt to the IRS, but one way that can work is to file a Chapter 7 Bankruptcy.  You must plan for this action, however, and there are certain facts that must be true in order to qualify for bankruptcy of taxes.

            First of all, the taxes must be three years old. Secondly, returns must have been filed for at least two years.  Thirdly, the IRS must have 240 days to collect the tax from the date of assessment and there cannot be fraud present for a Chapter 7 discharge. If you have real estate and the IRS files a Federal Tax Lien before you get into the Bankruptcy Court, the IRS will have a secured lien, and your real estate can be sold by the trustee for payment. If you have other assets above the exemption amounts, these assets can also be sold to pay the IRS.

            It is for the above reasons that it is very important to plan for your bankruptcy.  If the IRS garnishes your wages, and you have not filed returns, you may want to file and negotiate with them on a Form 433A for a payment plan.  One issue that might be interesting, which has not been totally resolved is the issue of what constitutes an adequate return for purposes of the Bankruptcy Code.  For example, the IRS is supposed to file a return under 26 USC 6020 (B) before they can assess the tax.  If you are a gutsy person and want to try to make new law, you have no assets except possibly wages and you have not filed returns, you may  wish to file Chapter 7 when you are garnished and argue that a 6020 B return is adequate for provisions of the Bankruptcy Statute if it is adequate for the purposes of an assessment. After all, it doesn't seem fair that the IRS can file a return for you that creates an assessment but doesn't fulfill the requirements of filing for the Bankruptcy Code.  You will probably have to take this issue to the Court of Appeals or higher, but it might be interesting.  It has been raised somewhat in lower courts and has lost.  If you are kicked out of bankruptcy and your only debt was to the IRS and you have a no-asset case, you won't waive your right to do a Chapter 7 two years after filing your own returns; so you really have nothing to lose except some time and you might make new law.

            Now let's get into the issues of a Chapter 7.  The basic concept of a Chapter 7 is fairly simple.  You file a petition and there is a stay of creditor collection activity: This includes the IRS.  The Court will appoint a trustee to administer the case; you can exercise your exemption rights; available property is distributed to your creditors and you will be discharged from the remaining dischargeable pre- petition debts.  You will go to a hearing and you may be cross-examined by creditors. If all goes well, you will get a discharge. Of course, there are a whole bunch of rules that you must pay attention to.  These rules are in the Bankruptcy Code, which is Title 11 of the United States Code.

            A Chapter 7 case can be started by the debtor or by creditors.  We are concerned with the voluntary petition.  In order to file for Chapter 7, you must not have been a debtor in a case pending under the Code at any time during the 180 days preceding the filing of a new petition. If you had a case dismissed for "willful failure" of the debtor to abide by the orders of the court, or to appear before in the court in proper prosecution of the case," or if you requested voluntary dismissal of a previous case after you got an automatic stay.  This rule is to prevent abuse of the automatic stay.  Also, you must be an individual who resides in the United States or have a domicile or place of business in the United States.

            If you are married, you can each file petitions and you can also file jointly.  If you are living in a community property state, you need to take special care to see how your bankruptcy is affected by the community property laws of your state.

            Once you file a petition, the automatic stay goes into effect.  By the way, you only need to file the petition itself, to get the stay started.  The other forms are then due in about two weeks. The Chapter 7 will effectively freeze your problems and you will have a chance to deal with them. The IRS must definitely follow the automatic stay and if they don't, you should file a motion for contempt with the clerk of the Bankruptcy Court.   The automatic stay does not cover criminal actions or collection of property that is not the property of the estate like alimony, maintenance, or support.

            The trustee is appointed after the stay is granted His duties are to dispose of any property, which secures debts. You will have to file various statements explaining your property situation and the trustee will get his information from those forms.  The trustee will sell any property that is not exempt and the balance will be used to pay the debts.  You have both state and federal exemptions.  Some states require the use of state exemptions, some states allow you to use either exemption system.

            If you transferred property in the year preceding the bankruptcy or paid debts, you may still have to make that property a part of the estate.  If you receive property after the petition is filed, it too becomes the property of the estate.

            Once the trustee has made the property of the estate available for distribution, the process begins with the filing of a proof of claim.  The proof of claim must be filed within ninety days after the first date set for the meeting of creditors under Section 341(a).  Many times, the IRS does not file a proof of claim.  If that happens and the IRS tries to argue that the taxes were not discharged, you will need to go back to the Court with an motion for the Court to decide if the taxes were discharged.

            The Bankruptcy Code also provides for different types of priority claims and secured claims.     The chances are good that you will get a discharge as long as you have followed the proper procedures.  Some circumstances will prevent a discharge. These are as follows:

            (1) The debtor is not an individual.

            (2) Property was transferred or concealed fraudulently.

            (3) The debtor destroyed, falsified, or concealed financial records without justification.

            (4) The debtor acted fraudulently in connection with the bankruptcy proceeding.

            (5) The debtor failed to explain satisfactorily any losses of assets.

            (6) The debtor has refused to       obey court orders.

            (7) The debtor committed any of the foregoing acts in connection with a separate bankruptcy involving his relatives within one year prior to filing his bankruptcy proceeding.

            (8) The debtor was granted a discharge in a case commenced within six years before the date the bankruptcy petition was filed in the current case.

            (9) The debtor waives his discharge right.

Generally most debts are discharged except for the following:

            (1) Certain taxes

            (2) Debts incurred as a result of obtaining money, property, services or an extension or renewal of credit by certain fraudulent means; for luxury goods, or for cash advances aggregating more than $1,000 in certain cases.

            (3) Certain unscheduled debts

            (4) Debts incurred as a result of embezzlement or larceny.

            (5) Alimony, maintenance, or support obligations.

            (6) Debts for willful and malicious injury

            (7) Certain fines and penalties

            (8) Certain educational loans

            (9) Certain debts that existed at the time a previous bankruptcy case was filed.

            (10) Certain debts as a result of operating a motor vehicle while legally intoxicated.

            Read 11 USC Section 727 for more details on the above lists.

            You may refuse to testify and invoke your Constitutional privilege against self-incrimination during your hearing if you are cross examined without automatically losing your right to a discharge.  If you are granted immunity in the matter in which the privilege was invoked, and you refuse to respond, the Court will deny the discharge.

            You have redemption rights in connection with the bankruptcy.  You can pay the amount of the secured claim and if the goods are exempted, you can keep your goods.

            Remember that the Bankruptcy Code does give you relief from the IRS if the procedures are followed but be careful. If you feel insecure about filing pro-se, it shouldn't be too hard to get a local attorney to help you.  After the bankruptcy, there is still the issue of the Federal Tax Lien. You will have to write to the IRS and ask for removal of the Lien.  In general you should not have a problem with this, but if you do, there are appeal procedures and you can proceed into the District Court for relief.  Good Luck!

ON CHEEK, JURIES, PATRIOTS, GOLIATH,

THE FIFTH AMENDMENT AND THE DRAGON IN ITS LAIR

            As most patriots know, the Supreme Court ruled a while back in the Cheek case that the judge must give jury instructions that relate to the concept of willfulness.  The income tax system is so complicated that Congress added the concept of willfulness into the criminal violations of the Code.

            There are, however, some severe limitations to Cheek, and it is not the help in defending many patriot issues that some people think it is.           The Courts take the position that if you were smart enough to understand and to read, your non-traditional views on the tax system have to be a disagreement with the law and not a bonafide misunderstanding.  In order to really qualify for a defense on the misunderstanding, you would have to show that you are a total dope.  In other words, a Cheeky defense is proving to be absolutely worthless; because a disagreement with the law is not a defense to an indictment for not filing tax returns.

            So, the question is: what can the Patriot movement do about that? Unfortunately, right now there are many charlatans running a round the country preaching new theories such as the non-resident alien theory.  The problem with this theory and others like it is that because of the way it is currently raised, the individuals involved will be forced into a Cheek defense if the government proceeds criminally.  Many individuals are currently filing affidavits of rescission and revocation and others are filing 1040 NR's.  If these individuals are attacked, their only possible defense in a criminal case is going to be that they misunderstood the law. This is going to be a very difficult defense to make in front of a jury and they will be laughed out of the courtroom.

            The only possible approach to take is to either pay the taxes, post bond, or raise a timely issue relating to the alleged filing requirement.  Let's take some specific examples:

            Although, I think the citizenship argument is patently ridiculous, I do believe that people have a right to raise the issue.  The issue should not be raised on a 1040 NR; and it should not be raised by writing letters to the IRS telling them that you are not filing.  If you wish to raise that issue, you should pay and file a claim for a refund written on your own paper and not on a government refund claim form, and when the claim is denied, file a suit in the Federal District Court.  If you use that approach for all the new patriot ideas, many of which will get you a one way ticket to Club Fed, you will be able to raise your issues in a refund forum in Federal District Court and not in a criminal case.

            The IRS tyrants probably spend a lot of time sitting around laughing at some of the new super silly patriot arguments.  If you are an individual who has bought into the approaches discussed above, you are going to have a real rough time in the future and Cheek won't help you out one little bit unless your IQ and intellectual skills are very, very low.  You see, the problem is that the ladies and gentleman of the jury are never going to believe that you believe that stuff, especially if you have filed an exempt W-4 or have failed to make quarterly payments with large amounts of money coming in on 1099's.

            As a friend of mine said to me recently, "Juries are made up of 12 people who weren't smart enough to get out of jury duty. "Now, that is a sad commentary on the Federal Jury System, but unfortunately there is a lot of truth in it.  Just think for a moment, how juries are chosen.  They are chosen from lists created from people who vote.  People who vote believe in the system.  They file tax returns and they don't question authority.   They pay taxes and they file returns and they are simply not going to believe that you believe you are a non-resident alien when you live in California.  That is the way it is.

            So, is there any argument that can work?  Well, that depends; it depends on how hard you want to fight.  If you aren't ready for a scrap with the IRS, you should continue to file returns as you have in the past.  The patriot movement is not a place for individuals who want to save money on taxes. Save that for the traditional tax cheats.  Let the IRS put their efforts where the money is: in traditional tax evasion.  Let's help the freedom community change this system before it destroys the country.

            There is one very great and real problem with the income tax.  That problem was discovered years ago and it has been and probably always will be the most powerful argument in the freedom arsenal.  That weapon is the Fifth Amendment.  However, most individuals in relying on the Fifth Amendment have failed to assert the issue properly.

            The government takes the position that Sullivan and Garner require everyone to file returns, but that the Fifth Amendment can be taken on the return.  However, individuals have been prosecuted for taking the Fifth Amendment on the return.  Based on litigation in the Supreme Court and various courts of appeals since the Garner case was decided, it is quite possible that individuals who file tax returns waive their Fifth Amendment rights, and the government cannot require individuals to waive their Fifth Amendment Rights.  The problem is that it is important to show that you have a reason to be concerned about your Fifth Amendment Rights.

            If you are classified as an illegal tax protestor, you certainly have a reason to be concerned; because the illegal tax protestor code on an individual's IMF creates a criminal investigation interest in your case.  Everything you give to the IRS will be given to the CID and can be used against you criminally. The act of filing a tax return can also be used against you criminally to show that at the time you filed the return, you thought that you were required to file returns. If you are classified as an illegal tax protestor and you are concerned about waiving your Fifth Amendment Rights, you might seriously consider taking action to protect your rights.  In order to protect your rights, you must assert them.

            If you wish to file a Fifth Amendment type of return, for example, in order to keep the issues in the proper place, do not put exempt on the W-4; let the employer send the money to the IRS.  You can do a claim for a refund and sue later.  That way, you will have kept the issues in the civil arena.  It is highly unlikely that the IRS will go criminally against an individual who would get a refund from over withholding if he were to file a return.  They would really have trouble with willfulness in that fact situation.

            If the patriots in the Freedom Movement would have used this approach long ago, the Income Tax Hoax might have been exposed to the public by now.  The problem is that the principal reason that people get involved in the Freedom Movement is to save money on taxes.  They do not get involved in order to expose the HOAX.

            We do not need thousands of poor patriots offering their necks to the IRS chopping block.  We do need about 100 intrepid and gutsy people who are willing to prepare their cases so that the IRS and the Courts can be backed up on these issues.  However, this approach will take lots of commitment and money.  First of all we need the 100 front liners.  Then we need a huge support organization that can donate thousands of dollars to flagship litigation.  There really is a problem with the Income Tax and Irwin Schiff popularized the knowledge of these problems a most twenty years ago.  The problem is that the focus has been that of saving money and not on that of changing the system. The IRS is an incredibly powerful and resourceful agency.  It has been given draconian powers by Congress.  The judiciary is pledged to protect the IRS and the Income Tax.  If you are going to fight Goliath in Goliath's arena, you must strive to learn tactics that will bring him down.  When he dies, it will probably be because some little guy hit him in the head with a rock, There is no reason that cannot happen here.

            The economic situation is worsening for the middle class. We need to start promoting these concepts around the country. There are anxious ears that want to hear more and there are anxious hands ready to help.  We have upwards of twenty years of experience in the arena with Goliath.  We know what works and what doesn't work.  Let's put that knowledge to good use.  Let's slay the dragon in its lair.  There is no reason to be discouraged, there is simply reason to keep on keeping on and doing it better all the time.  Hang in there and remember that "the government can fool all of the people some of the time and some of the people all of the time, but it can't fool all of the people all of the time."

CRIMINAL AND CIVIL SANCTIONS: OVERKILL

The United States Congress, in attempting to enforce their abusive income tax system, has gone overboard increasing sanctions to assure its enforcement.

Generally, the IRS picks a few cases to pursue criminally, the vast majority of the cases are disposed of civilly.  Those unlucky individuals, who receive criminal harassment, later get the civil gun put to their heads. (See Spies v. US, 317 US 492 (1973); Helvering v. Mitchell, 303 US 391, 402 (1938).  Civil penalties will be asserted even though the individual has been convicted of a criminal charge and has received a severe sentence.

A friend of mine did not file his returns after he was ordered to do so by a Federal Judge.  The judge said that if he filed, he would not get any jail time even though the jury convicted him. My friend preferred to spend a year in prison to filing the returns.  One point he didn't realize is that the IRS civil penalties, standing alone, are so severe that their imposition can destroy the individual financially.  Upon leaving from prison, he was forced to file simply to get a job because the IRS would not work out a payment plan with him until he filed his returns.  Also, the Offer in Compromise and the Bankruptcy provisions are not workable unless returns have been filed. One wonders why Congress was motivated to add serious felony charges as cumulative punishment for the "tax cheat" because the civil penalties are so devastating. For years, the administrative question seemed to be: Why should a person be prosecuted for tax evasion?  Today the question seems to be: Why should a person not be prosecuted for tax evasion?  (See Balter, "A Ten Year Review of Fraud Prosecutions," 19 N.Y.U.  Inst. on Fed. Tax'n 1125 (1961).

Generally the IRS tries the criminal charges first. That means if you get a Statutory Notice of Deficiency for a particular year, the IRS is probably going to leave you alone criminally.  One case worth reading is U.S. vs. Blue, 384 US 251 (1966). This case gives one the chance to pursue the issue of the imposition of civil and criminal sanctions. The Supreme Court suggested that Blue file a motion in the district court to suppress the evidence on the basis of constitutional violations implicit in Blue being forced to file a petition in the Tax Court.  The District Court denied the motion without prejudice, but the case was pleaded with a nolo contendere and Blue's fine was suspended. The Tax Court case was then settled normally.

Another case of note is Comm'r v. Licavoli, 252 F.2d 268 (6th Cir. 1958). The Tax Court entered a decision of no deficiency because the government refused to comply with the court's order to file an amended answer referring to their allegations of fraud.  There was a criminal indictment for tax evasion pending parallel to the civil proceeding, the government argued that it could not be required to disclose its evidence because it would weaken its criminal case.

However the Circuit Court of Appeals rejected the government's argument and stated:

     On this issue we agree with the comment of the Trial Judge that the Tax Court must confine itself to its own problems.  We do not believe that a rule of pleading in civil actions, applicable in a case where no criminal action is pending, should be held not applicable in another case merely because a criminal action is pending.  The trial of a civil case is independent of a criminal action.

As you can see, civil and criminal sanctions can both be severe.  The IRS can use both against an individual.  They usually pursue the criminal action first and finish the case before they proceed civilly; and if they are proceeding civilly, there is a good chance that they will not proceed criminally as to that particular year.  It seems evident that Congress felt it must create an abusive penalty overload to support a tax system that is perceived by the public, and rightly so, as being unjust, unfair, and unreasonable.  As evidenced by the experience of civilizations throughout history, our country will learn someday that it is not possible to legislate abuse and enforce that abuse with fear and intimidation.  In the meantime, learn to protect yourselves.