The Bodwell Case

      Most of the readers of my newsletter know that I believe the strongest argument that we have against the Income Tax is the Fifth Amendment.   The IRS not only has a Fifth Amendment problem but the problem is getting worse for them. Another case in our arsenal is United States of America v. Ronald L. Bodwell,  95 C.D.O.S. 7359 (9th Circuit, June 17, 1995). 

      Bodwell appeared at the summons meeting but he failed to assert the Fifth Amendment because the IRS cancelled the meeting. The Court ruled that the case was remanded back so that Bodwell could assert his Fifth Amendment claim on a question-by-question basis.  The Court went on to say:

The Fifth Amendment "can be asserted in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory; and it protects against any disclosures which the witness reasonably believes could be used in a criminal prosecution or could lead to other evidence that might be so used."  Kastinger v. United States, 406 U.S. 441, 444-45 (1972).  A reasonable belief that information might be used to establish criminal failure to file a tax return can support a claim of Fifth Amendment privilege.  See United States v. Rendahl, 746 F.2d 553, 555-56 (9th Cir. 1984). 

      As you can see, the Ninth Circuit Court of Appeals takes the position that the Fifth Amendment can be asserted in civil as well as criminal proceedings and that it can clearly be asserted in response to an IRS Summons.  It is clear that the IRS cannot require individuals to answer questions over their Fifth Amendment objection in response to a summons.  So, ask yourselves, how can the IRS require the answers to questions on a tax return without issuing a summons?  Does it make any sense?

Some Important Tax  Cases

      Tax law is so complicated that no one can know it all.  It is a good idea, however, if you are involved in a fight with the IRS to have knowledge of some cases. The following cases will give you some basic knowledge of what the courts think on some basic issues.  The word "CIR" stands for the Commissioner of Internal Revenue.

      In US v. Edgerton, 734 F2d 913 (2nd Cir. 1984), the taxpayer could NOT be held in contempt of court for refusal to answer questions in regards to the whereabouts of tax records. In Stokowitz v. US, 831 F2d 893 (9th Cir. 1987), the court ruled that a taxpayer who alleged unlawful seizure and use of his information could pursue remedy through a Bivens or appropriate tort action.  In U.S. v. Commercial Nat. Bank of Peoria, 874 F2d 1165 (7th Cir. 1989), the court ruled that the government bears the burden of proof if they file an action to recover an erroneous refund.  In Conklin v CIR, 897 F2d 1027 (10th Cir. 1990), the court ruled that although the IRS can issue separate deficiency notices against husband and wife taxpayers who file joint returns, payment by one individual wipes out the liability of both. In Jones v. CIR, 903 F2d 1301 (10th Cir. 1990), the court ruled that if the taxpayer does not keep records, the CIR can reconstruct his gross receipts to arrive at an assessment.  In Ward v. CIR, 907 F2d 517 (5th Cir. 1990), the court ruled that a deficiency notice is ineffective if it is mailed to an improper address if the taxpayer has provided clear notice to the IRS about the address change.  In Olsen v. US, 952 F2d 236 (8th Cir. 1991), the court ruled that if an employer withholds social security and income taxes but does not turn them over to the government, the employee is still credited with the payment.

      In Resolution Trust Corp. v. Gill. 960 F2d 336 (3rd Cir. 1992), the court ruled that a properly executed levy does not automatically entitle the government to the taxpayer's property.  In Geisinger Health Plan v. C. I. R., 985 F2d 1210 (3rd Cir. 1993), the court determined that the courts are to give weight to IRS revenue rulings, but they may disregard them if they conflict with the statute they purport to interpret or its legislative history, or of they are otherwise unreasonable.  In Security Bank of Minnesota v. CIR, 994 F2d 432 (8th cir.1993), the court ruled that if there is a reasonable doubt about the meaning of a revenue statute, the doubt is resolved in favor of those taxed. 

      In Continental Illinois Corp. v. CIR, 998 F2d  513 (7th Cir. 1993, the court ruled that not every receipt is income.

       An objectively reasonable good-faith misunderstanding of the law negates willfulness and the government must show awareness of a legal duty in order to show willfulness.   U. S. v. Cheek, 882 F2d 1263 (7th Cir. 1989 and U.S. v. Hilgeford, 7 F3d 1340 (7th Cir. 1993).  The government must show three elements in the offense of failure to file a return.  The government must show that the defendant was required to file a tax return, that he failed to file a return and that he acted willfully.  See U. S. v. Nichols, 9 F3d 1420 (9th Cir. 1993). IRS Rulings do not have the force of law and are merely authority, Constantino v. TRW, Inc. 13 F3d 969 (6th Cir. 1994).  Once the IRS makes a proper assessment, the taxpayer must pay the tax and file a claim for a refund.  Hempel v. U.S. 14 F3d 572 (11th Cir. 1994. 

      The IRS cannot use its summons authority if its only purpose is to gather evidence for a criminal investigation.  U.S. v. Grunewad, 987 F2d 531 (8th Cir. 1993).  A tax levy reaches only property possessed and obligations existing at the time of the levy.  See U.S. v. Hemmen, 51 F3d 883 (9th Cir. 1995).

      The innocent spouse provision is remedial in nature.  It should be applied liberally in favor of the person claiming the benefits. See Friedman v. CIR, 53 F3d 523 (2nd Cir. 1995).  Federal tax liens do not automatically go in front of all other liens.  The first lien in time is the first lien in right. See Monica Fuel, Inc. v. IRS, 56 F3d 508 (3rd Cir. 1995). 

      Reasonable reliance on an expert opinion asserted in good faith can shield the taxpayer from penalties.  See Durrett v. CIR, 71 F3d 515 (5th Cir. 1996 and McMurray v. CIR, 985 F2d 36 (1st Cir. 1993).  Pro se litigants are given latitude in handling their cases in tax court, Moretti v. CIR, 77 F3d 637 (2d Cir 1996). 

     

      In a prosecution for tax evasion the government must prove the existence of a tax deficiency, an affirmative act or attempt to evade or defeat payment of the tax and willfulness.  See U. S. v. Voigt, 89 F3d 1050 (3rd Cir. 1996).  Internal Revenue Service Rulings do not have a binding affect on the Court of Appeals.  B.F. Goodrich Co. v. U.S., 94 F3d 1545 (Fed. Cir. 1996)

Pure Trusts and the Freedom Movement

 

      Various groups and individuals in the country are selling "pure trusts" or "common law" trusts to protect assets from the Internal Revenue Service.  They claim that since these trusts are based on the common law right to contract that they predate our laws and are exempt from the tax laws. Such a concept is ridiculous.  There is no authority for the argument.  Individuals who claim that these special trusts have some sort of magic protection are simply telling the gullible what they want to hear.  And since people are willing to pay a lot of money to listen to what they want to hear, these unscrupulous vendors are making a ton of money off the public. 

 

      Another kind of trust going around is the "Massachusetts Business Trust." Vendors make claims that these trusts do not have to file tax returns.  There is no basis for this argument either.  The IRS treats business trusts like corporations for tax purposes.  Also, there are disadvantages to a business trust.  The shareholders can be held personally liable for business trust debts.  The use of a business trust will not protect you from the IRS's claim that the trust owes taxes on its business income.  Furthermore, the IRS can go after the directors of the trust for the back taxes of the trust.  Don't set up a business trust for the purpose of avoiding taxes, it won't work.  There are no tax advantages.

 

 

THE REVENUE OFFICER

 

           

            The boys and girls that go out to harass the middle class are called Revenue Officers. There are about 8,000 Revenue Officers. They are divided into a field group for a particular area.  A Group Manager who has about 12 Revenue Officers under his charge supervises each field group. The Revenue Officers get their cases based on zip codes and by grade level. The most experienced Revenue Officers get the biggest cases involving the most amount of money.

 

            The Revenue Officers have unbelievable power in their collection activity.  They can seize bank accounts, accounts receivable and wages without the consent of their superior. All they have to do is sign their name to a Notice of Levy. However, they are also given a great deal of discretion to grant payment plans

            When the Revenue Officer gets a case he will follow the following procedure.

 

                 1.  The officer will make a visit to the home or place of business to discuss payment.

 

                2.  If the individual is not there, the Revenue Officer leaves his business card.

 

                 3.  The Revenue Officer will eventually interview the individual to either collect the money or work out a payment plan.

 

                 4.  If the individual is not cooperative, the Revenue Officer will search public records, etc. for assets and he will seize those assets.

 

     5.  If the Revenue Officer is frustrated in his attempt to get money, he may issue a summons to the individual and to third party record keepers. Of course the individual may wish to assert his Fifth Amendment Rights in response to specific questions at the collection summons meeting

As you can see, the IRS goes after "their" money.  So be prepared and informed.

 

 Community Property and the IRS

            Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states.  Community property refers to a form of property ownership between spouses. Generally property that is acquired during marriage other than by gift or inheritance is community property (Tex. Fam. Code Ann. Tit. 1, Section 5.10 (1985). 

 

            In community property states, both spouses are liable for delinquent taxes.  Each spouse is considered to own one-half of the community property.  This interest may be used to satisfy the individual tax liability. 

 

            In the case of United States v. Mitchell, 403 U. S. 190 (1971), a husband and wife did not file tax returns for the tax years 1955 through 1959.  They separated in 1960 and filed for divorce.  Before the divorce, the wife renounced all ownership in the community property.  Under Louisiana law, she was absolved from all debts contracted during marriage.  The IRS took the position that she should be liable for one-half the tax liability.  The Supreme Court found that both the husband and wife were liable and bound the community property of both individuals to satisfy the federal tax liability.

 

            When the tax liability arises from the act of one spouse or from a premarital tax obligation, state law may determine that the debt is a community property debt. In Broday v. United States, 455 F.2d. 1097 (5th Cir. 1972), the Court ruled that to satisfy a wife's pre-marital tax debts, her community one-half interest in income earned by husband and solely managed by him was subject to a tax lien because premarital liabilities do not fall under the state statute.

 

            In United States v. Rodgers, 461 U.S. 677 (1983), a husband was declared liable for gambling taxes during his marriage.  After he died, the government claimed that the entire homestead interest of both spouses was responsible for the husband's wagering tax liability and it went after the community homestead.  The Court found that the wife's homestead interest was her separate property because it arose when the homestead was acquired. Since the purchase was made before the lien attached to the remainder of the property, the wife's separate property right could not be attached to satisfy the deceased husband's tax liability.  In other words, since the debt was not a community liability, the wife's separate property interest could not be attached.  In Rogers, the Court reached the significant conclusion that Section 7403(c) empowers the District Court to compel a sale of the entire fee interest in the homestead.  The surviving spouse may be forced to sell her separate homestead interest. 

 

            The government may attack the community property of both spouses to satisfy a federal tax lien. State exemptions from creditors are to be ignored for federal tax purposes. When the homestead of a delinquent taxpayer is an exemption from creditors and not a property right, it is ignored for federal tax liens.  Federal tax liens can attach to both community and separate property interests of the liable spouse.  Although the separate property of the non-liable spouse is not to be used to satisfy the tax liability of the delinquent spouse, the unbridled power of the IRS can create considerable problems and cause liquidation of assets.  

 

            In community property states, community income is defined as income from community property, salaries, wages and other pay for services of either or both the husband and wife during the marriage.  In the states of Arizona, California, Nevada, New Mexico and Washington, income from separate property is the income of the spouse who owns the property.  However, in Idaho, Louisiana, Texas and Wisconsin, income from separate property is community income.

 

            Property that is acquired after marriage is presumed by the IRS to be community property whether or not the title was taken in the name of the husband or wife.  If property is not definitely the property of one of the spouses, the income from such property is also community property. The method of acquisition is also used to determine if property should be classified as community or separate.  The substance and not the form of a transaction determines whether property acquisition is separate or community property.  In community property states, contracts between spouses, which change the characterization of ownership, have been held to be valid and effective under local property rules.  These agreements may be made before marriage or during the marriage. 

 

            Community property laws control the property owned by spouses that live within the state.  The interest that one spouse acquires in property other than that acquired during the marriage is governed by the law of the state the spouses lived in on the date that the property was acquired.

 

            Property which is owned in a non-community property state and which is purchased with community funds by spouses domiciled in a community property state, does not constitute community property.

 

            Individuals who are married filing separately in a community property state must each report one-half of their combined community income and deductions in addition to their separate income and deductions.

CHARACTERISTICS OF THE COLLECTION DIVISION

 

            The Internal Revenue Code has given the IRS Draconian Powers in relation to the collection of alleged taxes.  One of the main problems with this grant of ubiquitous power is that the statutes and the regulations do not state which powers should be exercised and when they should be exercised. The Internal Revenue Manual attempts to provide guidance but it still depends on the revenue officer's evaluation of the "facts and circumstances of the case." (IRM 56(12)1.1, MT 5600-26.

 

            Because of this situation, the IRS is not consistent in how it handles its various collection methods.  The fact that there is a lack of clear-cut guidelines gives the local revenue officer incredible power and discretion.  Many times, this discretion is not used wisely by the revenue officer and herein lies an incredible weakness in the IRS collection procedure.  Individuals who know the code and the procedures can catch the IRS in all kinds of mistakes in their overzealous attempt to extract the wealth of the American Public to put into the bottomless pit of bureaucratic waste.

 

            Revenue officers are not sympathetic to tax delinquents as a class; and generally when a case is assigned to a Revenue Officer, the case is already delinquent for a period of time.  The Revenue Officer takes the position that the individual has failed to take his "obligation" seriously.

 

            The Revenue Officer will sit down and deal, but he will demand that all back returns are filed and he will demand a 433-A Collection Information Statement.  If an individual who is not judgment proof takes a hard-core stance against the Revenue Officer, the IRS will not hesitate to attempt by any hard-core method to get the assets.  After all, it appears to be IRS policy, that it is better to have one more street person and to have a few more dollars for the feds to use in paying off the ever expanding National Debt.  (Sounds real rational, doesn't it?).  Actually, the Revenue Officer is really more interested in voluntary compliance with the "voluntary" tax system than he is in collecting taxes.

 

            The best way to pop the IRS during collections is to thoroughly examine their procedures.  You may have to comply with the 433-A stuff if you are not judgment proof.  If you are judgment proof, the IRS may issue a summons.  However, there is extensive litigation pointing out the fact that individuals can legitimately raise the Fifth Amendment and decline to specifically answer questions.  The law gets stronger and stronger each day and in each circuit in this regard.

 

            If you wish to examine the procedural defects in collections, you must take a look at the following issues:

 

     1.  Was the assessment made at the time prescribed by law.

 

     2.  Did the IRS fail to send the individual a notice of the assessment and a demand for payment.

 

     3.  The notice and demand was received, but the IRS did not give the individual the opportunity to make a payment within the ten-day period.

 

     4.  The notice and demand was sent but was not sent to the individual's last known address.

 

     5.  Collection of the assessed tax by foreclosure of the tax lien is prohibited by the statute of limitations on collection.

 

     6.  The interest of the individual that the IRS asserts is subject to the tax lien is not "property or rights to property" of the individual.

 

 

            As you can see, the procedures the IRS must follow are very specific.  Although to fight back effectively, you must be better educated than they are.  Remember this:  IRS employees are just workers who have a job.  They don't go home at night and think up new issues.  There is a lot of turn over among them because it is hard to be an IRS Agent. (Imagine how their children must feel when their father goes to school during career day and the whole class finds out that their father is an IRS Agent!).  Becoming a dangerous adversary to the IRS is not that difficult. Just make up your mind you are going to do it.  If you are forced to back down because you have painted yourself into a corner, then do it. But realize that the war is not over.  As more and more individuals become educated and come out of the woodwork to raise important issues; the IRS Beast will falter and eventually die.  It will not be able to enforce such a complicated procedural law in the face of thousands of pro se litigants who know their rights and know IRS procedures.

 

 

 

 

A  Case Involving the Exempt W-4

 

      This article is to serve as a warning to those of you who insist in eliminating withholding as employees.  Hopefully you will take note.  The Case of United States of America vs. Ronald King, 96-4086 was decided by the Seventh Circuit Court of Appeals on October 2, 1997.  King had filed an exempt W-4 Form and he did not subsequently file tax returns.  Here are excerpts from the Court's opinion:

 

      "An affirmative act is some conduct undertaken at least in part because of a tax evasion motive, "the likely effect of which would be to mislead or conceal."  Spies v. United States, 3317 U.S. 492 (1943).  Filing a false Form W-4 satisfies the affirmative act requirement.  Sansone, 380 U.S. at 351; United States v. Sloan, 939 F.2d 499 (7th Cir. 1991)."

 

      The Court decided that the filing of a fraudulent W-4 Form also supplies the affirmative act for subsequent years even if no other W-4 was filed. The Court goes on to say:

      "We begin our analysis with United States v. Williams 928 F.2d 145 (5th Cir), cert denied, 502 U.S. 811 (1991) in which the Fifth Circuit held that the filing of a fraudulent Form W-4 (that had not legally expired) could supply the affirmative act required for tax evasion charges in subsequent years.  Williams was convicted of attempting to evade federal income tax for the tax years 1983, 1984, an 1985.  In October 1982 and March 1983, respectively, Williams submitted more withholding allowances than he was entitled to claim.  The instructions to the W-4 that Williams completed in March 1983 included the notice:  "Your Form W-4 remains in effect until you change it or, if you entered 'EXEMPT' on line 6b above, until February 15 of next year."  William maintained the March 1982 W-4 on file during the period charged in the indictment.

 

      On appeal to the Fifth Circuit, Williams conceded that his 1983 filing constituted an affirmative act for that tax year, but argued that the government neither alleged or proved subsequent affirmative acts for acts of the tax years 1984 and 1985 ...The court was not persuaded by Williams' argument...If the form is false, the form has the capacity to deceive for as long as it is kept on file...To find otherwise would be to allow the negligence of an employer to accrue to the benefit of an employee who has contravened the law in the first  place by filing a false and fraudulent Form W-4...We also note that it is irrelevant for our purposes here that King wrote "under duress" where he was instructed to sign his name.  See United States v. Robinson, 974 F.2d 575 (5th Cir. 1992) (noting that an unsigned tax form is sufficient evidence to support a conviction for tax evasion)."

 

      As you can see, the exempt W-4 approach that is currently used by various tax protest leaders and groups  around the country is bound to cause their gullible followers mountains of trouble in the future.  There is no doubt about it, the courts are going to hit the exempt W-4 very hard.

Dear Willie

 

 

 

Dear Willie:

 

I am preparing for Bankruptcy.  I would like to know which codes I need to pay the most attention to on my IMF.  I have filed returns but I want to be sure that I meet all the necessary requirements for bankruptcy pursuant to the IRS' computer files.

 

Can you tell me which are the most important codes?

 

Sincerely,

 

Prepared

 

 

Dear Prepared:

 

You should get your IMF via FOIA and attempt to figure out the date the IRS credits your returns as filed and the date of the assessment.

 

The following codes are the most important to remember:

 

            150  Return filed and tax assessed.

            290  Additional tax assessed.

            300  Additional tax or assessment by examination.

            460  Extension to file return.

            480  Offer in compromise pending.

            582  Tax lien recorded.

            610  Remittance with return.

            780  Account compromise.

            977  Amended return filed.

 

 

            Generally the IRS will have a computer code of 150 showing that a return was filed.  However, beware, this 150 might stand for the return the IRS filed, and that return is not sufficient for purposes of a  Chapter 7.  It is possible that they coded the return that you filed with a 977.  You should also ask for copies of the returns you filed about two months after you file them.

 

            You can get a copy of the IRS 6209 Manual or get help from me on this issue if you wish.  The fact is that you must be very careful to be sure that you have the proof you need before you go into the bankruptcy court.  Hope things go OK, give me a call if you need help.

 

COLLECTION NOTICES

 

 

            An Article by Bill Conklin

 

            The  purpose of the IRS Collection Division is to collect taxes as cheaply as possible.  The IRS uses computers for efficiency.  There are ten Regional Service Centers that analyze returns.  The computer will decide if there is a computational error and will analyze the return to figure a DIF score (Returns are audited as a result of certain DIF scores).

 

            The starting point for collection by the IRS is the receipt of a document at the service center showing tax liability.  That document may be a tax return, an audit closing agreement, an audit deficiency, or a Tax Court judgment.  Once the IRS receives the return or other document, they begin their dunning procedure. The first notice issued is a document called the "Notice and Demand." This document states the alleged liability and requests payment within ten days.  The statutes require this notice for the creation of a Federal Tax Lien and if the IRS doesn't send you one; you should be able to defeat their assessment in court. In an assessment for individual income taxes, the individual will receive at least three subsequent notices before the IRS starts administrative collection procedures. The second notice is called "Notice 502: Second Notice of Taxpayer Delinquent Account."  The next notice is "Notice 503; Request for Immediate Payment." and the last notice is Notice 504; Final Notice."  Notice 504 is sent by certified mail and it is a nasty notice.  The IRS will start enforced collection activity after 30 days.

 

            The IRS will then issue a Notice of Levy approximately six weeks after the Final Notice.  If the Service Center does not know what to levy, they will assign the case to the Automated Collection System (ACS) or they will issue a Taxpayer Delinquent Account (TDA) to the local office for collection.  Then a local agent will have the case and will pursue it.   If the ACS takes the case, they will search for the "taxpayers" and their assets.  The ACS computer will give the technician an electronic display of the individual's account.  The computer will dial the number and will redial later if it gets as busy signal.  IRS technicians have a script, which they read.  They attempt to determine where the taxpayer works and what banks he uses.  If you get a phone call from ACS, that means they don't have the information they need in order to levy your wages.  The IRS has almost unlimited power to harass individuals with the ACS.  If you are receiving harassment from ACS, you may wish to request that the account be transferred to a local Collection individual.  It is close to impossible to deal with the ACS and resolve a problem; and remember that they can issue a Notice of a Levy with the push of a button. If you have assets that cannot be discovered by the ACS; you might want to wait till the Revenue Officer enters the case to begin negotiation.  Of course, if you are a very private individual and you are concerned about your Fifth Amendment Rights, you may wish to assert your rights in response to a collection summons from a Revenue Officer.  See Chapter SF in the Anti-IRS Technical Manual. Good luck and don't ignore collection notices if you are not judgment proof.

 

THE IRS COLLECTION PROCEDURES

 

            An Article by Bill Conklin

 

            The IRS has the power to collect taxes through levy.  In order to pursue a levy, the IRS must have created a lien through the proper procedure; in other words, the IRS must have made an assessment, there must have been a Notice and Demand and the individual must have refused to pay (IRC 6321).

 

            The Federal Tax Lien arises at the time the assessment is made which is the date that the Form 23-C is signed by an assessment officer (IRC 6322).  The lien will continue for ten years or until the deficiency is paid.  The lien may also be satisfied through an abatement, the acceptance of an Offer in Compromise, or discharge in a liability in a bankruptcy proceeding.

 

            A lien extends for ten years from the date of assessment but the statute of limitations can be extended for the following reasons:

 

     1.  The individual signs a waiver of statute of limitations.

 

     2.  The individual leaves the USA for more than six months (IRC Section 6503(c).

 

     3.  The individual files bankruptcy, which extends the statute of limitations for the time of the bankruptcy plus six months.  (IRC Section 6503(b)(i).

 

     4.  The individual files an Offer in Compromise, which extends the statutory period for the time the IRS considers the proposal plus one year.

 

     5.  If the individual is sued by the IRS, they may get a judgment from the Court.

 

            If the statute of limitations is about to end and the individual will not sign a waiver, the IRS may initiate a seizure against wages.  Good luck and hang in there, remember it won't last forever.

 

PLEASE RUN THIS AD IN YOUR LOCAL NEWSPAPER:

 

 

Download a free copy of:

 

Why No One is Required to File Tax Returns at www.anti-irs.com.

 

Tax Liens and the IRS

 

      Tax liens create a problem because if the IRS has filed a lien, the lien survives the bankruptcy even if the underlying tax is dischargeable.  The situation can get extremely complex.  Generally if a debtor owns real property and a tax lien has been recorded, the tax is nondischargeable as too the extent of the equity on their property.  See In re Ridgley 81 B.R. 65 (1987) (Oregon).  If the tax upon which the lien is based is discharged in the bankruptcy, the lien may not attach to "after-acquired" assets.  Since the tax is discharged, the government cannot levy on after-acquired assets such as bank accounts, wages, vehicles or real property.

 

      A tax lien survives bankruptcy only if it is based on a nondischargeable tax claim, or if it is based on a dischargeable claim, it survives only on the equity in the debtor's property which existed on the date of bankruptcy.  See In re Leavel 124 B.R. 535 (Bkrtcy.S.D.Ill.1991). If the tax is dischargeable, and there is no property in existence for the lien to attach to, the claim is a general unsecured clam and the lien is of no effect.  See In re Payne Bankr. LEXIS 1325.

 

      If a debtor has a home with $20,000 of exempt equity, the tax would be discharged but the lien would remain on the exempt property.  If the debtor were to sell his home in the future, the IRS would receive the value of their lien at the sale.  This is because the tax lien attaches to the equity in real or personal property, whether or not the equity is protected by a bankruptcy exemption.  Please note that dischargeable taxes cannot be collected by exempt property.  (11 U.S.C. Section 522(c)(1) Section 522(c)(2)(C)).

 

      It may be necessary to file an adversary proceeding to determine the validity or extent of the federal tax lien.  In the tax case, Matter of Beard, 112 B.R. 951 (Ind. 1990), the court laid out various approaches to attacking a lien.  Said the court: "There are at least three different ways a secured claim may be challenged.  The amount of the claim can be questioned by objecting to its allowance.  The value of the lien can be put in issue by a request to determine secured status.  The lien itself can be directly attacked. Of these challenges, the first two are contested matters, while the third requires an adversary proceeding." The court continued, "Objections to the allowance of a claim and the determination of secured status are contested matters.  The issues they raise do not require an adversary proceeding."  And, "Among the disputes which are specifically identified as requiring an adversary proceeding is one which asks the court to determine the validity, priority, or extent of a lien...."

 

      It is important to attack tax liens that are invalid.  The trustee or the debtor has the power to avoid an invalid tax lien.  If the lien is expired, a lien against a different individual, a lien is on property which is not owned by the debtor, a lien filed during the automatic stay, a lien recorded in the wrong county, a lien for discharged taxes now being asserted on future-acquired assets.

 

      A tax lien is an unsecured claim until the IRS files the lien in the appropriate county.  The Supreme Court has stated that:

 

"On December 9, 1986, the United States assessed Mr. and Mrs. McDermott for unpaid federal taxes due for the tax years 1977 through 1981.  Upon that assessment, the law created a lien in favor of the United States on all real and personal property belonging to the McDermott's, including after-acquired property (cites omitted). Pursuant to 26 U.S.C. section 6323(a), howeer, that lien could "not be valid as against any purchaser, holder of a security interest, mechanics lien, or judgment lien creditor until notice thereof...has been filed."  U. S. v. McDermott, 113 S.C. 1526, 1528 (1993).

      There are various arguments that can be very effective for challenging the Federal Tax Lien.  Listed below are some good arguments that may be used to sek avoidance of a tax lien:

 

      1.    The lien was filed in the wrong office.  See, In re Aikin 128 B.R. 4 (D. Maine 1991).

 

      2.  There is an incorrect name on the Notice of Lien.  See Davis v. U.S. 705 F.,Supp. 446, also United States v. Clark 1981 WL 1790 (S.D. Fla. 1981).  In Matter of De La Vregne, 156 B.R. 773 (Bkrtcy.E.D.La 1993), the court avoided a lien because the taxpayer's name was spelled improperly.

 

      3.  In In re Barnett, 62 B. R., the lien was invalid because it was filed in the wrong county.

 

      4.  Liens have been declared invaid when there is a mistake in filing or perfecting.  See In re McLean 891 F.2d 474 (3rd Cir. 1989) (City improperly indexed tax lien for muni taxes); In re Hill 166 B.R. 444 (Bkrtcy.D.N.M. 1993) (state tax lien invalid because notice was mailed to the wrong address);  In re Southern Transfer and Storage Co. 157 B.R. 691 (Bkrtcy. M.D.Fla. 1993), IRS failed to perfect lien by failing to note the lien on the certificate of title of the motor vehicles in question.

 

      5.  If the government records the lien during the automatic stay, the lien is void.  In re Schwartz, 954 F.2d 569 (9th Cir. 1992), the court held that a debtor in a Chapter 13 can avoid an otherwise properly filed tax lien where the lien arose from an assessment which occurred during the automatic stay.

 

      6.  If the IRS fails to refile a lien that must be refiled to be perfected, the lien may be voided.  See U.S. v. LMS Holding Co. 161 B.R. 1020 (N.D.Okl. 1993)

 

      7.  The lien may be  void if it contains inadequate information.  The lien must include the identity of the lienor, the property subject to lien, and the amount of the lien.  See In re B and B Printing Co. 164 B.R. 273 (Bkrtcy.S.D.Ohio 1993).

 

      8.  If a tax lien is expired, it is not valid.  Currently a tax lien has an expiration date (IRC Section 6323(g)) which occurs ten years plus 30 days (increased from six years, effective No. 5, 1990) after the initial filing, this date is found on the notice of the tax lien.  If a bankruptcy petition is fled after the expiration, the tax claim would be unsecured.

 

      9.  A lien is invalid as to after-acquired assets.  A federal tax lien does not attach to property acquired after the bankruptcy petition is filed.  When the tax is dischargeable in all other respects, the lien is good only as to property owned by the debtor on the date of the filing, and is not valid as against after-acquired property.  See In re Baund, 289 F. Supp 604 (9th Cir. 1970).  Also see U.S. v. Sanabra, 414 F,2d 1121 (7th Cir. 1970).  The Court stated:  "...in our opinion...the dominant purpose of the change (in bankruptcy law) was to relieve a debtor of the burden of these older taxes after bankruptcy.  The government's interpretation would permit it to enforce (to the extent of assets acquired by the discharged debtor) collection of all its taxes, regardless of their age, if a lien had been filed. This would to so substantial a degree frustrate the real purpose of the amendment that Congress must not have intended the result."

 

      10.  A lien is invalid if it is based on an invalid assessment See U.S. v. Janis 96 S.Ct. 3021 (1976).

 

      11.  The lien is invalid if it is filed on non-levyable property.  See In re Voelker, 164 B.R. 308 (W.D. Wis 1993)

 

Prepare your Defense in Bankruptcy

 

     In the last few years a lot of individuals have bankrupted their back taxes.  The IRS is striking back and fighting very hard.  If you have been classified as a tax protestor or if you have a retirement account, the IRS may try to deny you a discharge in a Chapter 7.  The following is from a debtor's brief arguing against the IRS' position.  Hopefully the IRS will not prevail on these issues.

 

The government argues that the Ross Smith is a tax protestor and for that reason his taxes were not discharged in the Chapter 7 because he is a tax protestor.  However Smith filed tax returns. It is true that he sent a letter to the IRS with an attorney opinion letter attached in which he argued that he was not required to file a tax return.  However, he did file tax returns.  His taxes for the years 1985, 1986, 1987, 1988, 1989, 1990, and 1991 in the approximate amount of $100,000 were discharged in the Chapter 7 that he previously filed because the taxes were three years old, the returns were filed more than two years before the bankruptcy was filed and there had been 240 days from the date of assessment.

           

The U. S. Supreme Court rendered a ruling in 1991 in Cheek v. United States 111 S. Ct. 604 (1991) that overturned a tax evasion conviction for failing to file returns and for tax evasion on the basis that the jury should have been informed that a true belief that one has no lawful duty to pay taxes could negate the element of willfulness.  Said the Court, "In this case, if Cheek asserted that he truly believed that the Internal Revenue Code did not purport to treat wages as income, and the jury believed him, the Government would not have carried its burden to prove willfulness, however unreasonable a court might deem such a belief. We thus disagree with the Court of Appeals' requirement that a claimed good-faith belief must be objectively reasonable if it is to be considered as possibly negating the government's evidence purporting to show a defendant's awareness of the legal duty at issue."  This provides for a subjective standard in weighing the debtor's beliefs.  The Cheek rule has been applied in bankruptcy cases by a number of courts; for example, Smith v. United States of America 169 B.R. 55 (Bkrtcy. S.D. In 1994); Graham v. Internal Revenue Service 1994 Bankr. LEXIS 1256; Internal Revenue Service v. Peterson 152 B.R. 329 (D Wyo 1993).

 

            In this case, Smith did send a letter to the IRS stating that counsel advised him that he was not required to file returns.  However in spite of this fact, he did file normal returns two years before the filing of the Chapter 7 Bankruptcy.

 

            The government argues that its lien on the debtor's exempt property, viz., his retirement, secures the taxes.  The debtor's retirement is exempt from levy.  The government cannot levy the debtor's retirement.  The question arises, does the fact that certain property is exempt from levy render it immune from lien as well.  If the IRS is barred from levying (i.e. seizing) the property, then doesn't common sense lead to the conclusion that an interest in the property secured by a lien is a worthless fiction? 

 

            There is significant case law that has ruled in favor of the debtor on this issue. In In re Voelker, 164 B. R. 308 (W.D. Wis 1993), the Court quoted the original opinion in Barbier, 896 F.2d 377 (9^th Cir. 1990) supra (rev'd on appeal); "…it defies common sense to argue that the IRS is nevertheless secured by and entitled to payment for property that it cannot levy upon to satisfy its lien."  The Voelker opinion states "Section 6332(b) moreover, defines "levy" for purposes of this section as 'the power of distraint and seizure by any means."…Section 6334, therefore, exempts property from all forms of execution, not just levy. This includes tax liens."  And, this court cites the legislative history of 11 U.S.C. Section 522(c) to the effect that "…assets exempted from levy pursuant to 26 U.S.C. 6334 cannot be applied to satisfy tax lien claims. (S. Report No. 989, 95^th Cong. 2d Sess. 76 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5862.  See also, in favor of the debtor's lien avoidance rights on non-levyable assets, In re Ray, 48 B.R. 534 (Bankr.S.D. Ohio 1988); In re Riley, 88 B.R. 906 (Bankr. W.D. Wis 1987) In re Driscoll, 57 Bankr, 322 (Bankr. W.D. Wis. 1986).

 

            Wherefore it is prayed that this honorable Court will rule that the IRS' claim in this action is unsecured and not secured as the IRS claims and that the Court will deny the application to dismiss this bankruptcy.

 

           

 

The History of the Freedom Movement Continued

      In the early 70's, Mike Tecton of Virginia was one of the most outspoken critics of the Internal Revenue Service.  During the 1950s he became convinced that the federal tax system was unjust and unconstitutional.  He quit filing tax returns.  The IRS didn't bother him for years.  In 1973 he decided that it was his patriotic duty to tell the world about the income tax situation.  He started writing pamphlets, sent out news releases and went on a lecture tour.  The IRS then became interested in his case and attacked him criminally for not filing tax returns for the years 1971, 1972, and 1973.  He burned a 1040 Form on the steps of the courthouse.  The government took him to trial and the first trial resulted in a hung jury.  He went to trial again and he was convicted.  He received a mild sentence of $100 fine and 6 months supervised probation.  He could have received a sentence of three years and a $30,000 fine.  Then the IRS proceeded against him civilly.  They seized his bank accounts. and levied his wages.  He lost his job.  He then organized the Thomas Jefferson Equal Tax Society and distributed a newsletter called the Emancipator in which he exposed the unconstitutional attributes of the Federal Income Tax.  He did all this in the early and middle 1970s more than twenty years ago.  He was a brave and very early Freedom Fighter.

      George Kindred was another fellow from the late 60s who became interested in the income tax problem.  He and his friend James Freed filed Fifth Amendment tax returns in 1968 and they conducted rallies and distributed literature attacking the IRS and the Federal Reserve System. The State of Michigan attacked them, when they refused to give up records they were incarcerated for contempt.  They spent 148 days in jail.  After their release, they were arrested by the Feds for inducing individuals to file exempt W-4 Forms.  The indictment was eventually dropped because the government's witnesses changed their testimony.  In 1974, Kindred formed the Patriot's Committee.  He passed out a great deal of information on the Federal Tax System. 

      The government then proceeded civilly against Kindred and he continued to fight.  He raised very early on, many of the arguments that are still important today regarding the Fifth Amendment, the fact that Tax Court judges are retired IRS employees, BLS assessments, etc.

      George Kindred was an important early fighter in the Freedom Movement.

      Lucille Moran started fighting the IRS in the early 1960s. She published a book entitled:  How to Refuse Income Taxes Legally.  She argued that no one can be forced to file a 1040 because indictments against taxpayers are based on information supplied by the taxpayers themselves.  Her belief was that the only way to fight the IRS was to simply supply no information.  She did not believe in the filing of Fifth Amendment returns, an approach  that was used by many of the other freedom fighters of her era.  She raised the issue of the voluntary nature of filing returns and other arguments that we still use today.  Her basic tenant was that: No citizen should file any return at all; and there is no valid reason for executing a signed or unsigned return under protest.  She maintained that without voluntary cooperation from millions of taxpayers, the IRS is hopeless.  During the late seventies, she was very active in promoting her ideas about the tax system. 

            She was indicted in 1980 for "aiding an abetting in the filing of false income tax returns." The IRS eventually dropped their case against her.  She passed away in 1983