40.00 ILLEGAL TAX PROTESTERS ^[FN1]

Updated October 2001

40.01 GENERALLY

40.02 SCHEMES

      40.02[1] Paper Terrorism

            40.02[1][a] Harassment Schemes

            40.02[1][b] Bogus Financial Instruments

      40.02[2] Warehouse Banks

      40.02[3] Trusts

      40.02[4] Church Schemes

            40.02[4][a] Generally

            40.02[4][b] Vow of Poverty

            40.02[4][c] Charitable Contributions

            40.02[4][d] First Amendment Considerations

40.03 TRIAL TACTICS/CONSIDERATIONS

      40.03[1] Criminal Summons

      40.03[2] 26 U.S.C. § 6103(h)(5) Juror Audit Information

      40.03[3] IRS Agents' Authority

      40.03[4] Indictment Not Sufficient Notice of Illegality

      40.03[5] Filing of Protest Documents: Is the Document Filed a Tax Return? 

            40.03[5][a] Generally

            40.03[5][b] What Is a Tax Return?

            40.03[5][c] What Is or Is Not a Tax Return: A Matter of Law

      40.03[6] Discovery of IRS Master Files

      40.03[7] Motions in Limine

      40.03[8] Attorney Sanctions

      40.03[9] Evidentiary Issues

            40.03[9][a] Prior or Subsequent Tax Protest Activities: Rule 404(b)

            40.03[9][b] IRS Agent's Testimony and Sequestration

            40.03[9][c] Admissibility of IRS Computer Records

      40.03[10] Use of Pseudonyms by IRS Revenue Agents and Officers

      40.03[11] Jury Nullification

40.04 WILLFULNESS

40.05 DEFENSES

      40.05[1] Good Faith 

            40.05[1][a] Reliance on Return Preparer/Accountant

            40.05[1][b] Reliance on Advice of Counsel

            40.05[1][c] No Defense in Non-Tax Cases

      40.05[2] Constitutional Challenges

            40.05[2][a] Fourth Amendment -- Unreasonable Search and Seizure

            40.05[2][b] Fifth Amendment -- Due Process; Freedom from Self-incrimination

            40.05[2][c] Tax Laws Are Unconstitutionally Vague

            40.05[2][d] Sixteenth Amendment Never Ratified

      40.05[3] Selective Prosecution and Freedom of Speech

            40.05[3][a] Generally

            40.05[3][b] Selective Prosecution Defense

            40.05[3][c] Freedom of Speech

      40.05[4] District Court Lacks Jurisdiction of Title 26 Offenses

            40.05[4][a]  Generally

            40.05[4][b] The Gold-Fringed Flag ("The American Maritime Flag of War")

      40.05[5] Filing Income Tax Returns Is Voluntary, Not Mandatory

      40.05[6] Wages Are Not Income

      40.05[7] Defendant Not A "Person" or "Citizen"; 

               District Court Lacks Jurisdiction Over Non-Persons and State Citizens

            40.05[7][a] Generally

            40.05[7][b] Filing 

U.S.

 Nonresident Alien Income Tax Return

      40.05[8] IRS Has Duty to Prepare Returns for Taxpayer (26 U.S.C. § 6020(b))

      40.05[9] Violation of the Privacy Act

      40.05[10] Federal Reserve Notes Are Not Legal Tender

      40.05[11] Form W-2 As Substitute for Form 1040

      40.05[12] Paperwork Reduction Act ("PRA") Defense

      40.05[13] Lack of Publication in the Federal Register

      40.05[14] Taxpayer's Name in Capital Letters or Misspelled

      40.05[15] Tax Protest Against Government Spending

APPENDIX

---

                        40.01  GENERALLY

      Over the past thirty years, illegal tax protesters have developed numerous

schemes to evade their income taxes and frustrate the Internal Revenue Service

under the guise of constitutional and other objections to the tax laws. 

Individuals who merely express dissatisfaction with the income tax system are not

criminally prosecuted.  However, the right to freedom of speech is not so

absolute as to protect conduct that otherwise violates or incites a violation of

the tax laws.  

United States

 v. Citrowske, 951 F.2d 899, 901 (8th

Cir. 1991).  See also 

United States

 v. Fleschner, 98 F.3d 155 (4th

Cir. 1996) (asking for First Amendment instruction); 

United States

 v.

Kuball, 976 F.2d 529, 532 (9th Cir. 1992) (First Amendment does not

protect those who go beyond mere advocacy, and assist in creation and operation

of tax evasion schemes.)

      Illegal tax protest schemes range from simply failing to file tax returns

to concealing financial transactions and assets in warehouse banks and trusts to

filing frivolous liens to interfere with IRS investigations.  These schemes give

rise to charges under all of the criminal tax statutes. [FN2]  Thus, this chapter

should be read in conjunction with those chapters of the Manual

that discuss the various substantive offenses in detail.  See

Chapters 8.00 through 29.00, supra.

---

                          40.02 SCHEMES

40.02[1]  Paper Terrorism

      40.02[1][a]  Harassment Schemes

      Illegal tax protesters have employed various schemes designed to harass IRS

employees and agents, as well as prosecutors and judges, and interfere with

audits and criminal investigations.  One of the earliest harassment schemes

involved filing false Forms 1099 with the IRS, reporting that an IRS agent,

judge, or prosecutor had been paid large amounts of money.  This scheme was

designed to trigger an IRS audit, during which the Form 1099 recipient would have

to explain the discrepancy between the income reported on his or her return and

that reported on the Form 1099.  See, e.g., 

United States

 v. Van

Krieken, 39 F.3d 227 (9th Cir. 1994); 

United States

 v.

Lorenzo, 995 F.2d 1448 (9th Cir. 1993).

      Form 1099 schemes have been  prosecuted under a variety of criminal tax

statutes.  See, e.g., United States v. Bowman, 173 F.3d 595, 599-600 

(6th Cir. 1999) (26 U.S.C. § 7212(a) is appropriate charge in Forms 

1099/1096 scheme); United States v. Winchell, 129 F.3d 1093, 1098-99 

(10th Cir. 1997) (26 U.S.C. §§ 7212(a) and 7206(1)); United 

States v. Heckman,30 F.3d 738 (6th Cir. 1994) (discussing 

application of sentencing guidelines in Form 1099 scheme charged as 26 

U.S.C. 7206(1)); 

United States

 v. Dykstra, 991 F.2d 450 (8th Cir. 

1993) (26 U.S.C. §§ 7206(1) and 7212(a)); 

United States

 v. 

Higgins, 987 F.2d 543, 544 (8th Cir. 1993) (26 U.S.C. §§ 

7206(1) and 7212(a)); 

United States

 v. Wiley, 979 F.2d 365, 367 (5th 

Cir. 1992) (18 U.S.C. §§ 371, 472, 1001 and 1002); United 

States v. Rosnow, 977 F.2d 399, 410-11 (8th Cir. 1992)(26 U.S.C. 

§§ 7206(1) and 7212(a), and 18 U.S.C. § 371); United 

States v. Kuball, 976 F.2d 529, 532 (9th Cir. 1992) (26 U.S.C. 

§§ 7206(1) and 7212(a)); 

United States

 v. Parsons, 967 F.2d 

452, 453 (10th Cir. 1992) (18 U.S.C. §§ 287 and 1001); United 

States v. Hildebrandt, 961 F.2d 116 (8th Cir. 1992) (18 U.S.C. § 

1001); 

United States

 v. Yagow, 953 F.2d 423, 427 (8th Cir. 1992) (26 

U.S.C. §§ 7206(1) and 7212(a)); 

United States

 v. 

Citrowske, 951 F.2d 899 (8th Cir. 1991) (18 U.S.C. § 1001); 

United States

 v. Telemaque, 934 F.2d 169, 170 (8th Cir. 1991) (18 

U.S.C. § 371).

      A recent resurrection of the so-called "Redemption" scheme involves the

filing of false Forms 8300  (Report of Receipt of More Than $10,000 in Cash in

A Trade or Business), Forms 4789 (currency transaction reports (CTRs)), and

Suspicious Activity Reports (SARs) for harassment purposes. [FN3]  Forms 8300 are

IRS reporting forms covered by the confidentiality provisions of 26 U.S.C. §

6103. [FN4]  Forms 4789 and SARs are Financial Crimes Enforcement Network

(FinCEN) documents not subject to tax information confidentiality requirements.

      Essentially, the new "Redemption" scheme involves filing one of these forms

with the IRS, reporting that a large amount of cash, sometimes foreign currency,

was paid to the named recipient.  IRS agents, federal and state prosecutors and

judges, state troopers and private creditors are often targeted.  Typically, the

protester will send his or her victim an IRS Form W-9, requesting a social

security number.  Even without the target's social security number, the protester

files Form 8300, which triggers a letter to the target from the IRS requesting

additional information and warning of possible penalties for incomplete

information.  Once the IRS learns the document is fraudulent, the IRS attaches

a "fraud" indicator to the computerized record and sends the form(s) to the

appropriate office of the IRS Criminal Investigation Division (CID) or Treasury

Inspector General for Tax Administration (TIGTA) for investigation.  CID

investigates all filings involving non-IRS employees, while TIGTA has

jurisdiction over filings against IRS personnel.  All cases, whether investigated

by CID or TIGTA, require authorization for prosecution from the Tax Division.

      There are several ways to prosecute these schemes.  First, the prosecutor

should determine if the protester has attempted to pass any fraudulent sight

drafts or other financial instruments.  This will require an inquiry with the

U.S.

 Secret Service and the Federal Bureau of Investigation.  If the protester

has filed false Forms 8300 and used sight drafts, the prosecutor should

consider charging the sight drafts pursuant to 18 U.S.C. § 514  [FN5]

(see Chapter 40.02[1][b], supra), using the false

Forms 8300 as evidence of intent.  If the protester has filed a large number of

false Forms 8300, 26 U.S.C. § 7212(a) is a possible charge.  Because they

are signed under penalties of perjury, false Forms 8300 may also be charged as

violations of 26 U.S.C. § 7206(1).  Neither  Forms 4789 nor SARs contain

jurats, so they cannot form the bases for Section 7206(1) charges.

      In some cases, it may be best to simply use the false Forms 8300 as

evidence to support an obstruction enhancement at sentencing.  See, e.g., 

United States

 v. Veral Smith, 3:99-CR-00025 (D.ID 2000) (District Court 

considered false Forms 8300 filed against prosecutors and judge as  evidence 

supporting obstruction enhancement).

      Tax protesters also file frivolous liens against the property of federal

employees to harass them.  The tax protester files with the local county recorder

a lien for a large amount of money against the federal employee's real property. 

The purpose of the lien is to encumber the property.  This tactic is designed to

disrupt IRS audits and investigations by personally targeting the financial

affairs of IRS personnel involved in the protester's case.  The tax obstruction

statute, 26 U.S.C. 7212(a) [FN6], may be a viable charge 

in these cases. See, e.g., United States v. Boos, Nos. 97- 

6329, 97-6330, 1999 WL 12741 (10th Cir. Jan. 14, 1999); 

United States

 v. 

Gunwall, Nos. 97-5108, 97-5123, 1998 WL 482787 (10th Cir. Aug. 12, 

1998); 

United States

 v. Marsh, 144 F.3d 1229 (9th Cir. 1998) 

(dismissing § 7212(a) charges for lack of venue); 

United States

 v. 

Trowbridge, Nos. 96-30179, 96-30180, 1997 WL 144197 (9th Cir. Mar. 26, 

1997);  

United States

 v. Bailey, No. 94-5219, 1995 WL 716276 

(10th Cir. Nov. 22, 1995); Kuball, 976 F.2d at 531 (upholding Section 

7212(a) conviction for sending threatening letters to IRS employees); 

United States

 v. Reeves, 782 F.2d 1323, 1326 (5th Cir. 1986) 

(upholding Section 7212(a) conviction for filing false liens) ("Reeves 

II").  But see United States v. Bowman, 173 F.3d 595, 599 

(6th Cir. 1999) (refusing to extend holding in Kuball, supra).

      Tax protesters also sue agents, prosecutors, and judges, and threaten

"arrest" and "prosecution" in so-called "common-law" courts.  "Common-law" courts

-- which have no legal standing -- are often set up by anti-government groups. 

In some instances,  they "indict" and "convict" individuals.

      "Common-law" documents --  ranging from "promissory notes," to "arrest

warrants," to "criminal complaints" -- are created to resemble authentic legal

documents.  See, e.g., United States v. Hart, 701

F.2d 749 (8th Cir. 1983); 

United States

 v. Knudson, 959 F.

Supp.1180 (D. 
Neb.
 1997); 

United States

 v. Van Dyke, 568 F. Supp.

820 (D. Or. 1983).  Depending on the circumstances, use of the documents may give

rise to 26 U.S.C. §7212(a) charges.  See, e.g., United

States v. Wells, 163 F.3d 889, 899-900 (4th Cir. 1998);

Reeves, 782 F.2d 1323.  Because  use of "common law" documents often

begins during investigation and continues during prosecution, their use is

evidence of willfulness for substantive tax charges, or the basis for an

obstruction of justice or other enhancement at sentencing.  See United

States v. Lindsay, 184 F.3d 1138, 1144 (10th Cir.) (upholding denial of

acceptance of responsibility for obstructive conduct such as filing numerous

frivolous documents), cert. denied, 528 U.S. 981 (1999);

Wells, 163 F.3d at 894, 897 (upholding upward departure for

"domestic terrorism" for use of common law arrest warrants).

      Tax protesters also attempt to file frivolous lawsuits or criminal

complaints against prosecutors and agents in legitimate state and federal courts. 

Cases based on these filings are rarely authorized for prosecution because such

lawsuits and criminal complaints are difficult to distinguish from the host of

frivolous cases filed in courts all the time -- thus, making it difficult to

overcome a defense based on the right to petition for a redress of grievances.

      40.02[1][b] Bogus Financial Instruments

      For years, protesters have submitted bogus financial instruments to "pay"

their tax liabilities and obtain erroneous IRS refunds, and to "pay"  private

creditors.  These instruments -- often entitled "Certified Money Order,"

"Certified Bankers Check," "Public Office Money Certificate," or "Comptroller

Warrant"  -- are designed to deceive the IRS and financial institutions into

treating them as authentic checks or real money orders.  

      For example, a protester will submit a large bogus check to the IRS or a

creditor for an amount in excess of the amount owed and request refund of the

difference.  If the IRS or creditor rejects the bogus check, the protester writes

threatening letters to force acceptance of the bogus payment.

      Several groups promote use of such bogus financial instruments.  One of the

earliest "bogus money order schemes" was perpetuated by an organization in

Wisconsin

  known as "Family Farm Preservation."  See,

e.g., United States v. Stockheimer,  157 F.3d 1082

(7th Cir. 1998) (noting that the potential loss calculation exceeded $180

million).

      An organization known as "

USA

  First" learned of the scheme and sold over

800 "Certified Money Orders" (CMOs) with a face value of $61 million.  See

United States

 v. Mikolajczyk, 137 F.3d 237, 239-240 (5th Cir. 1998);

United States

 v. Moser, 123 F.3d 813 (5th Cir. 1997).

      The Montana Freemen are perhaps the most notorious group to promote this

scheme.  See, e.g., United States v. Wells, 163 F.3d

889 (4th Cir. 1998); 

United States

 v. Hanzlicek, 187 F.3d 1228

(10th Cir. 1999).  For other examples of similar schemes, see

Broderick v. Goodroe, No. 99-55311, 2000 WL 194144 (9th Cir. Feb.

17, 2000); 

United States

 v. Switzer, Nos. 97-50265, 97-50293, 97-

50442, 1998 WL 750914 (9th Cir. Oct. 19, 1998).

      The most recent bogus financial instrument scheme is the so-called

"Redemption" scheme.  It involves the use of "Sight Drafts" or "Bills of

Exchange" and the filing of  Forms 8300, 4789 and SARs.  See

Chapter 40.02[1][a], supra.

      The sight draft component of the recently resurrected "Redemption" scheme

is based on the outlandish premise that, when the 

United States

 went off the gold

standard in 1933, the government began to be funded with debt instruments secured

with the energy of current and future inhabitants.  The theory is that a

fictitious identity or "straw man" was created for all Americans and the value

of a person's birth certificate became the collateral for our currency. 

Supposedly, the value of an individual's birth certificate is determined by the

number of times it is traded on the world futures market and the amount is

purportedly  maintained in a Treasury Direct Account under that person's social

security number.

      A participant in the scheme attempts to reclaim his or her "straw man" and

therefore the value of the fictitious identity by redeeming his or her birth

certificate.  The participant first files a Form  UCC-1 with the Secretary of

State in any State, claiming title and security interest in his or her social

security, driver's license, and birth certificate numbers.  The individual then

writes "acceptance for value," "non-negotiable charge back," or other prescribed

language diagonally on a government paper and returns it to the government

official who issued it.  Typically, the types of documents used for redemption

include anything from a traffic ticket to a federal indictment.  The "charge

back" allegedly creates a "treasury direct account" that contains the amount

assigned to the charge back, which the participant purportedly can then draw upon

by writing "sight drafts."  "Sight drafts" are then written for varying amounts,

some as high as trillions of dollars.  A Form UCC-3 indicating the partial

release of collateral in the amount of each sight draft is then filed with the

same Secretary of State who accepted the Form UCC-1.

      The "sight draft" or bogus financial instrument is of very high print

quality and usually contains some reference to HJR 192, which is the House Joint

Resolution that took the 

United States

 off the gold standard in 1933.  These

"sight drafts" or "bills of exchange" purport to be drawn on the 

United States

Treasury Department.

      Historically, bogus  financial instrument cases involving private creditors

were prosecuted under a variety of statutes such as:

      *     Conspiracy (18 U.S.C. § 371);

      *     Mail fraud (18 U.S.C. § 1341);

      *     Uttering a false security (18 U.S.C. § 472);

      *     Bank fraud (18 U.S.C. § 1344), and 

      *     Possessing and uttering a counterfeit security (18 U.S.C. §

            513). 

See, e.g., United States v. Pullman, 187 F.3d 816

(8th Cir. 1999), cert. denied, 528 

U.S.

 1081 (2000);

Hanzlicek, 187 F.3d at 1230; Wells, 163 F.3d 889;

Stockheimer, 157 F.3d 1082.

      Cases involving bogus financial instruments presented to the IRS can be

prosecuted as Klein conspiracies (18 U.S.C. §371) or

false claims for refunds (26 U.S.C. §287).  To bring a false claim charge,

a prosecutor should have evidence that the protester expected a refund from the

IRS as a result of submitting the instrument.  Such evidence might include : (1)

the protester's written request for a refund; (2) proof that the protester

received an IRS notice of tax due and owing, and, in response, submitted a bogus

check for a significant amount over the amount owed; and (3) that the protester

learned of this scheme in a seminar which advertised it would teach participants

how to obtain tax refunds.  See, e.g., Hanzlicek, 187

F.3d at 1232 (discussing that a component of the scheme included obtaining large

refunds).  Submission of bogus financial instruments may also be used as an

affirmative act of evasion (26 U.S.C. §7201).

      In 1996, Congress passed 18 U.S.C. § 514 specifically in reaction to

the use of comptroller warrants.  Noting that anti-government groups use

fictitious financial instruments to commit economic terrorism against government

agencies, private  businesses,  and individuals, Congress enacted Section 514 as

a Class B felony, which carries a maximum prison sentence of 25 years.  142 Cong.

Rec. S10155-02 (Sept. 10, 1996), pp. 196-197.

      Section 514 provides in pertinent part that:

      Whoever, with the intent to defraud --

      (1) draws, prints, processes, produces, publishes, or otherwise makes, 

      or attempts or causes the same, within the 

United States

;

      (2) passes, utters, presents, offers, brokers, issues, sells, or 

      attempts or causes the same, or with like intent possesses, within the 

      

United States

; or

      (3) utilizes interstate or foreign commerce, including the use of the 

      mails or wire, radio, or other electronic communication, to transmit, 

      transport, ship, move, transfer, or attempts or causes the same, to, 

      from, or through the 

United States

,

      any false or fictitious instrument, document, or other item appearing, 

      representing, purporting, or contriving through scheme or artifice, to 

      be an actual security or other financial instrument issued under the 

      authority of the 

United States

, a foreign government, a State or other 

      political subdivision of the 

United States

, or an organization, shall 

      be guilty of a class B felony.

      Section 514 of Title 18 of the United States Code is the obvious charge

when prosecuting a case involving a sight draft.  To date, four trials in the

District of Idaho have had successful results utilizing this statute: 

United States
 v. Boone, 1:99-CR-00119; 

United States

 v.

Clapier, 1:99-CR-00120; 

United States

 v. Pahl, 1:99-CR-

00121; and United States v. Smith, 3:99-CR-0025.  For filings

relating to these cases, see the 

Idaho

 federal courts web page at

http://www.id.uscourts.gov.

      Before deciding which charges to bring in cases involving "sight drafts"

or "bills of exchange," a prosecutor should investigate  and evaluate all the

evidence.  The prosecutor should determine how often the protester used sight

drafts or bills of exchange and whether he or she also filed false Forms 8300,

CTRs or SARs.  

      One common concern in the prosecution of all bogus financial  instrument 

cases is "intended loss" as compared to "actual loss."  Often, little or no

actual loss results from the use of the bogus instrument.  In 

United States

v. Ensminger, 174 F.3d 1143 (10th Cir. 1999), the court was faced with

a scheme to obtain ownership of real property through submission of bogus

financial instruments.  The District Court enhanced Ensminger's mail fraud

sentence under the sentencing guidelines based on an intended loss of $540,700,

the uncontested value of the property.  The facts in Ensminger,

however, showed that there was no way the scheme could have succeeded, because

the properties Ensminger attempted to obtain were already sold to third parties. 

Based on these facts and two previous decisions (

United States

 v.

Galbraith, 20 F.3d 1054 (10th Cir. 1994); 

United States

 v.

Santiago

, 977 F.2d 517 (10th Cir. 1992)), the Tenth Circuit held a ten-

level enhancement clearly erroneous.  The Ensminger court noted

that the Fifth, Seventh, Ninth, Eleventh, and 

District of Columbia

 Circuits,

relying on application note 10 to section 2F1.1 of the guidelines (authorizing

a downward departure where a defendant attempted to negotiate an instrument that

was so obviously fraudulent that no one would seriously consider honoring it),

disagreed with its analysis.  Ensminger, 174 F.3d at 1146-47.

      On the other hand, in a case specifically involving use of bogus financial

instruments, the Fifth Circuit  upheld sentencing based on the face value of the

Certified Money Orders even though there was no actual loss.  See

Moser, 123 F.3d at 830.  See also Switzer, Nos. 97-50265,

97-50293, 97-50442, 1998 WL 750914 (9th Cir. Oct. 19, 1998) (upholding sentence

based on intended loss); United States v. Lorenzo, 995 F.2d 1448,

1460 (9th Cir. 1993).

40.02[2]  Warehouse Banks

      "Warehouse banks" were common in mid-1980's abusive tax shelter schemes,

and they continue to be used by tax protesters to hide assets and income from the

IRS.  Typically, the warehouse bank operates as a subsidiary or service wing of

a broader collective or association.  Membership in the association is required

to use the warehouse bank services.  See, e.g., 

United States

 v. 

Meek, 998 F.2d 776, 778 (10th Cir. 1993).

      A warehouse bank maintains total privacy of all "account holders" by

commingling the funds of numerous depositors in a single bank account held at a

legitimate bank.  The depositor's privacy is achieved by using arbitrarily

numbered accounts, tracked by the warehouse bank operator.  Using only the

account number, the depositor endorses all checks to the warehouse bank

association.  

      Depositors retrieve their funds by requesting cash via registered mail or

by instructing the warehouse bank operator to pay specific bills from the

warehouse bank account.  Warehouse bank promoters also sell gold and silver to

members and claim to hold all deposit balances in gold or silver. 

See 

United States

 v. Hawley, 855 F.2d 595, 597 (8th

Cir. 1988).  The warehouse bank promoter asserts that only records of the current

balance and immediately preceding transaction are maintained in order to avoid

revealing records in the event of a subpoena or search warrant.

      Some depositors also use trusts and unincorporated business organizations

(UBOs) to further conceal their identities.  For example, a warehouse bank

customer might request that his or her paychecks be made payable in the name of

a trust or UBO, which then endorses the check to the warehouse bank association. 

This method ensures that the original check deposited will not have the name of

the depositor.  It can be traced back to a specific individual only if the name

of the trust or UBO being used by that individual is known.

      Operators of warehouse banks have been prosecuted on Klein

conspiracy charges (26 U.S.C. §371) with varied results.  See,

e.g., United States v. 

Caldwell

, 989 F.2d 1056, 1058-1059 (9th

Cir. 1993) (reversing conspiracy conviction for failure to prove or instruct jury

that use of deceitful and dishonest means was an element of conspiracy charge);

United States

 v. Stelten, 867 F.2d 446, 451 (8th Cir. 1989)

(affirming conspiracy and tax evasion charges); 

United States

 v.

Cote
, 929 F. Supp. 364, 366-68 (D.Or. 1996) (dismissing conspiracy

indictment for failure to allege an essential element of the crime, i.e.,

deceitful and dishonest means, and for failure to so instruct the grand

jury).

      Warehouse bank operators have also been charged with violating currency

transaction reporting requirements.  See Hawley, 855

F.2d at 599-602 (upholding instruction that  allowed jury to find that the

Exchange was a "financial institution" because it was a "private bank").

      Account holders have been charged with tax evasion, in violation of 26

U.S.C. §7201, and willful failure to file, in violation of 26 U.S.C. §

7203.  See 

United States

 v. Dack, 987 F.2d 1282, 1285 (7th Cir. 

1993); Meek, 998 F.2d at 778;  

United States

 v. Becker, 965 

F.2d 383, 390 (7th Cir. 1992).

      Use of a warehouse bank supports a "sophisticated means" enhancement at

sentencing.  

United States

 v. Frandsen, No. 99-30159, 2000 WL

366272, at *2 (9th Cir. Ap. 10, 2000) (purchasing cashier's checks from a

warehouse bank held to be use of sophisticated means), cert.

denied, 531 U.S. 890 (2000); Becker, 965 F.2d at 390.

      Caution is advised during any investigation of a warehouse bank, however, 

because of the danger of treading on First Amendment freedom of association

rights.  Prosecutors must take care to avoid overly broad searches or subpoenas. 

See, e.g., United States v. Ford, 184 F.3d 566, 578-

79 (6th Cir. 1999) (where search warrant authorizes a broader search than is

reasonable given facts in supporting affidavit, warrant is invalid and Fourth

Amendment rights violated), cert. denied, 528 

U.S.

 1161 (2000); 

National Commodity and Barter Ass'n v. 

United States

, 951 F.2d 1172, 

1174 (10th Cir. 1991) (government must show compelling need and substantial 

relationship to overcome freedom of association objection by barter 

association); In re First National Bank, 701 F.2d 115, 118 (10th Cir. 

1983).  The remedy for an overbroad warrant is severance of the excess 

portions from those that are sufficiently particular.  Ford, 184 F.3d 

at 578; United States v. Blakeney, 942 F.2d 1001, 1007 (6th Cir. 

1991).

40.02[3]  Trusts

      Another well-known and frequently-promoted protester scheme is the use of

sham trusts, both foreign and domestic, to hide assets and property.  A valid

trust is a legal arrangement whereby a grantor transfers property into a trust

and a trustee holds legal title to property for the benefit of another person,

the beneficiary.  In order to be regarded as a valid trust for income tax

purposes, the trustee must manage and control the property for the beneficiary's

benefit.  The beneficiary cannot manage or control the property.  Treas. Reg.

§301.7701-4(a)&(b).  Every trust that has over $600 in gross income or any

taxable income must file a tax return and must pay taxes on taxable income.  26

U.S.C. §6012(a)(4); 26 U.S.C. §641.

      A trust is invalid for Federal income tax purposes if: (1) the grantor

retains the same relationship to the property both before and after the trust is

established, or (2) the trustee does not have independent control over the

property in the trust, or (3) the beneficiary did not receive an economic

interest in the property.  26 U.S.C. §§671-677;  Treas. Reg. 

§1.671-1 et seq;.  Zmuda v. Commissioner, 79 T.C. 714, 

720-722 (1982), aff'd, 731 F.2d 1417 (9th Cir. 1984); Markosian v. 

Commissioner, 73 T.C. 1235 (1980); Hanson v. Commissioner, T.C. 

Memo 1981-675, aff'd, 696 F.2d 1232 (9th Cir. 1983).

      The use of "trusts" and "unincorporated business organizations" is promoted

on Internet web sites, by word-of-mouth, and through seminars.  Trust scheme

promoters can be charged with a variety of offenses, including

Klein conspiracy (18 U.S.C. § 371), aiding and abetting tax

evasion (26 U.S.C. § 7201 & 18 U.S.C. § 2), aiding in preparation of

false tax returns (26 U.S.C. § 7206(2)), tax obstruction (26 U.S.C.

§7212(a)) and tax evasion (26 U.S.C. §7201) if they knowingly used the

trusts to evade taxes.

      However, some trust scheme users may have a valid reliance defense if the

promoters present the trust scheme as a legal way to avoid taxes.

See Chapter 40.05[1][a] and [b], supra, for more

discussion of the reliance defense.

40.02[4]  Church Schemes

40.02[4][a]  Generally

      Some protesters claim tax exempt status by feigning ordination in a church. 

Many become ministers in mail-order churches, such as the 

Universal
 
Life
 
Church

,

the 
Basic
 
Bible
 
Church
 of 
America
, or the 

Life
 
Science
 
Church

.  Typically,

officers and members of the congregation include only the protester and his or

her immediate family.  

      Using church rubric, the protester usually adopts one of two schemes. 

Under the first, the protester takes a sham vow of poverty and purportedly

assigns all income and worldly possessions to the church.  The protester then

contends that his or her income is the church's income and, therefore, not

taxable to the minister, even though the protester uses the funds to pay personal

and other expenses just as he or she did before taking the sham vow of poverty. 

See, e.g., United States v. Masat,

948 F.2d 923 (5th Cir. 1991);  

United States

 v. Dube, 820 F.2d 886

(7th Cir. 1987); 

United States

 v. Zimmerman, 832 F.2d 454 (8th Cir.

1987); 

United States

 v. Ebner, 782 F.2d 1120 (2d Cir. 1986).

      Under the second scheme, the protester supposedly makes charitable

contributions to a church of 50 percent of his or her adjusted gross income (the

maximum amount that can be deducted as a charitable contribution).  26 U.S.C.

§ 170(b).  The "contribution" is then deposited into "the church's" bank

account, and the protester claims a deduction on his or her individual return,

even though the "donated" funds are used for his or her personal purposes. 

See 

United States

 v. Heinemann, 801 F.2d 86, 88

(2d Cir. 1986).

      40.02[4][b]  Vow of Poverty

      Generally, the government introduces evidence proving the protestor's

putative vow of poverty was not fulfilled in practice -- i.e., protester

lived and carried out his or her economic and financial affairs exactly as in the

past.  See 

United States

 v. Peister, 631 F.2d 658

(10th Cir. 1980), upholding the conviction of Peister for filing a false

"withholding exemption certificate form W-4".  Peister formed a church with

himself as minister, and his wife and parents as trustees, took a vow of poverty,

supposedly gifted all his worldly possessions to the church, set up church

checking accounts, and used the funds in those accounts for personal purposes. 

Peister, 631 F.2d at 660.  The government's evidence showed that

"the church was a shell entity, fully controlled by Peister and his wife, . . .

together with Peister's parents.  The vow of poverty was one in form only, and

had no substantive effect on defendant's lifestyle."  Peister,

631 F.2d at 660.

      40.02[4][c]  Charitable Contributions

      In this scheme, the protester purports to donate to his or her church 50

percent of adjusted gross income (the maximum allowable amount for a charitable

contribution deduction).  26 U.S.C. §§ 170(a)(i);  170(b)(1)(A),(E). 

The protester then uses the "donated" funds for personal purposes. 

See 

United States

 v. Michaud, 860 F.2d 495 (1st Cir.

1988).  In such cases, the government must prove that either no contribution or

gift to the church was made or that it was not made to a qualified church under

26 U.S.C. § 170(c)(2), which requires that "no part of the net earnings . . .  

[inure] to the benefit of any private shareholder or individual."

      There is no true charitable gift or contribution where a donor does not

totally relinquish dominion and control over his or her property. 

See Pollard v. Commissioner, 786 F.2d 1063, 1066-67

(11th Cir. 1986);  Stephenson v. Commissioner, 748 F.2d 331

(6th Cir. 1984); Macklem v. 

United States

, 757 F. Supp. 6

(D.Conn. 1991); Gookin v. 

United States

, 707 F. Supp. 1156 (N.D.

Cal.

 1988).  If a gift is made with the incentive of anticipated

economic benefit, no deduction is available even if the payment is made to a

tax-exempt organization.  See Transamerica Corp. v. United

States, 902 F.2d 1540 (Fed. Cir. 1990); DeJong v.

Commissioner, 309 F.2d 373 (9th Cir. 1962); Hess v. United

States, 785 F. Supp. 137 (E.D. Wash. 1991); Dew v.

Commissioner, 91 T.C. 615 (1988)  (members of 

Universal
 
Life
 
Church

 made

contributions to church with understanding that church was to pay all personal

bills incurred by the "contributor").

      A tax protest church is not organized and operated exclusively for

religious purposes; therefore, it is not exempt from taxation.  26 U.S.C.

§ 501(c)(3).  To enjoy tax-exempt status under section 501(c)(3), an

organization must satisfy three criteria: (1) it must be organized and operated

exclusively for an exempt purpose ("the organizational test"); (2) no part of its

net earnings may inure to the benefit of any private shareholder or individual

("the operational test"); and, (3) no substantial part of its activity may

include carrying on propaganda, or otherwise attempting to influence legislation,

or participating or intervening in any political campaign.  26 U.S.C. §

501(c)(3).  See also Ecclesiastical Order of Ism of Am v.

Commissioner, 80 T.C. 833, 838 (1983), aff'd, 740 F.2d 967

(6th Cir. 1984); Unitary 

Mission

 of Church v. Commissioner, 74 T.C.

507, 512 (1980), aff'd, 647 F.2d 163 (2d Cir. 1981).

      If a minister uses the religious organization's funds for personal purposes

or receives an excessive or unreasonable salary from the net earnings of the

church, there is deemed to be private inurement, and the church will fail the

operational test.  

United States

 v. Daly, 756 F.2d 1076, 1083 (5th

Cir. 1985).  See also Hall v. Commissioner., 729 F.2d

632, 634 (9th Cir. 1984); 

United States

 v. Dykema, 666 F.2d 1096,

1101 (7th Cir. 1981).

      40.02[4][d]  First Amendment Considerations

      Tax protesters often attempt to use the Freedom of Religion clause of the

First Amendment to prevent the government from questioning the integrity of the

protester's alleged religious beliefs.  The courts have long held, however, that

the Freedom of Religion clause cannot be used as a blanket shield to prevent the

government from inquiring into the possible existence of criminal activity. 

Davis v. Beason, 133 

U.S.

 333, 342-43 (1890); Cohen v. United

States, 297 F.2d 760, 765 (9th Cir. 1962).  Thus, although the validity

of religious beliefs cannot be questioned, the sincerity of the person claiming

to hold such beliefs can be examined.  

United States

 v. Seeger,

380 

U.S.

 163, 184-85 (1965).  See also 

United States

v. Ward, 989 F.2d 1015, 1018 (9th Cir. 1992) ("focus of judicial inquiry

is not definitional, but rather devotional . . .  That is, is the defendant

sincere?  Are his beliefs held with the strength of traditional religious

convictions?"); United States v. Daly, 756 F.2d 1076, 1081

(5th Cir. 1985);  

United States

 v. Moon, 718 F.2d 1210, 1227

(2d Cir. 1983); 

United States

 v. Dykema, 666 F.2d 1096, 1098-1102

(7th Cir. 1981); 

United States

 v. Peister, 631 F.2d 658, 665

(10th Cir. 1980).  In Moon, the defendant argued that the trial

court was required to charge the jury that it must accept as conclusive the

Unification
 
Church

's definition of what it considered a religious purpose.  The

Second Circuit flatly rejected the defense argument, citing 

Davis

 v.

Beason, 133 U.S. 333 (1890), and explaining that:

      [t]he "free exercise" of religion is not so unfettered.  The First 

      Amendment does not insulate a church or its members from judicial 

      inquiry when a charge is made that their activities violate a penal 

      statute.  Consequently, in this criminal proceeding the jury was not 

      bound to accept the 

Unification
 
Church

's definition of what 

      constitutes a religious use or purpose.

Moon, 718 F.2d at 1227.

      A similar argument was rejected in United States v. Jeffries,

854 F.2d 254 (7th Cir. 1988).  In Jeffries, the defendant argued

that the IRS should not be permitted to define what constituted a church because

to do so would result in the creation of a "federal church, which would restrict

a person's individual religious beliefs."  Jeffries, 854 F.2d at

256.  In rejecting this argument, the court stated:

      There is no need to try to resolve any conflict there may be between a 

      person's personal view of what constitutes a church and that which the 

      tax law recognizes as a church qualifying it for tax exempt status, 

      even if we could.  For tax purposes, the tax law prevails.

Jeffries, 854 F.2d at 257.

      Further, there is no First Amendment right to avoid federal income taxes

on religious grounds.  
United States
 v. 

Indianapolis

 Baptist

Temple

, 224 F.3d 627, 629-31 (7th Cir. 2000), cert. denied,

531 
U.S.
 1112 (2001); 

United States

 v. Ramsey, 992 F.2d 831

(8th Cir. 1993).  Therefore, the defendants' religious objections to filing tax

returns signed under penalty of perjury do not eliminate the requirement to file

tax returns.  See 

United States

 v. Dawes, 874 F.2d

746, 749 (10th Cir. 1989) ("the requirement that the tax return be signed under

penalty of perjury is not an unconstitutional restriction on defendant's right

to freedom of religion"); Hettig v. United States, 845 F.2d 794

(8th Cir. 1988); Borgeson v. United States, 757 F.2d 1071

(10th Cir. 1985).  But see Ward,

989 F.2d at 1018 (conviction of tax protester overturned because trial court

refused to allow him to swear oath of his own creation; "the court's interest in

administering the precise form of oath must yield to Ward's First Amendment

rights").  

      An order requiring a defendant to comply with federal income tax laws as

a condition of probation does not violate the First Amendment. 

Ramsey, 992 F.2d at 833. 

      The courts also have held that the Internal Revenue Code sets forth

objective requirements or criteria (e.g., 26 U.S.C. §§ 170 and

501), which enable the Internal Revenue Service to determine whether an

organization qualifies as a tax-exempt organization or whether an individual's

contribution qualifies as a deductible charitable contribution, without entering

into the type of subjective inquiry that is prohibited by the First Amendment. 

Dykema, 666 F.2d at 1100; Hall v. Commissioner,

729 F.2d 632, 635 (9th Cir. 1984).  See also United

States v. Masat, 948 F.2d 923, 927 (5th Cir. 1991) (proper for district

court to give instruction that allowed jury to decide whether defendant was a

minister in a tax-exempt organization as defined in 26 U.S.C. § 501(c)(3)).

---

40.03 TRIAL TACTICS/CONSIDERATIONS

40.03[1]  Criminal Summons

      The government has the option, in misdemeanor cases, to charge the

defendant by filing a criminal information and issuing the defendant a summons

instead of arresting him pursuant to a warrant.  Protesters have argued, however,

that a showing of probable cause is required under Fed. R. Crim.P. 9 and 4(a) for

issuance of a summons.  The courts, however, have held to the contrary. 

See United States v. Dawes, 874 F.2d 746, 750

(10th Cir. 1989); United States v. Birkenstock, 823 F.2d 1026,

1030-31 (7th Cir. 1987); United States v. Bohrer, 807 F.2d 159, 161

(10th Cir. 1986).  See also United States v. Saussy,

802 F.2d 849, 851-52 (6th Cir. 1986).  Compare United States

v. Kahl, 583 F.2d 1351, 1355 (5th Cir. 1978), where the court held that

an arrest warrant, rather than a summons, not based on a sworn affidavit violated

the requirements of Fed. R. Crim. P. 9.

40.03[2]  26 U.S.C. § 6103(h)(5) Juror Audit Information

      Prior to August 5, 1997, Section 6103(h)(5) allowed any party in a tax

administration proceeding to obtain audit information about a prospective juror. 

The information was limited to a "yes" or "no" answer to the inquiry about

whether a "prospective juror in such proceeding has or has not been the subject

of any audit or other tax investigation" by the IRS.  26 U.S.C. 6103(h)(5).  This

provision was repealed on August 5, 1997.  The repeal applies to "judicial

proceedings commenced after the date of enactment."  Pub.L.No. 105-34, §

1283 (The Taxpayer Relief Act of 1997). [FN7]

40.03[3]  IRS Agents' Authority

      Illegal tax protesters sometimes raise the bizarre argument that IRS agents

cannot investigate tax offenses or appear in court because they are not agents

of the United States government but are agents of an alien foreign principal, the

International Monetary Fund (IMF).  See United States v.

Rosnow, 977 F.2d 399, 413 (8th Cir. 1992).  This argument is based on the

startling premise that the United States has been in bankruptcy since the gold

standard was eliminated.  Because of the alleged bankruptcy, the United States

purportedly has no standing to demand money or file liens.  Instead, the IMF was

supposedly given the power to collect income taxes, with the IRS as its

depository and fiscal agent.  The theory is that the income taxes collected by

the IRS do not go into the United States Treasury but instead are deposited into

the Federal Reserve Bank for the benefit of the IMF.  See DeLaRosa v.

Agents for International Money Fund Internal Revenue Service, No. CIV-

S951170DFLGGH, 1995 WL 769395 (E.D. Cal. Oct. 16, 1995).  This argument has been

deemed "completely without merit [and] patently frivolous."  United States

v. Jagim, 978 F.2d 1032, 1036 (8th Cir. 1992); see

also United States v. Higgins, 987 F.2d 543, 545

(8th Cir. 1993).

40.03[4]  Indictment Not Sufficient Notice of Illegality

      A tax protester may argue that an indictment is insufficient because it

fails to cite 26 U.S.C. § 6012, the section that requires a return to be

filed, or other Internal Revenue Code sections containing provisions for tax

liabilities.  If the indictment contains the elements of the offense charged,

fairly informs the defendant of the charge against which he must defend, and

enables him to "plead an acquittal or conviction in bar of future prosecution for

the same offense," the indictment is constitutionally sufficient.  United

States v. Vroman, 975 F.2d 669, 670-71 (9th Cir. 1992) (quoting

Hamling v. United States, 418 U.S. 87, 117 (1974)).  The government

need not specifically cite 26 U.S.C. § 6012 in an indictment alleging

willful failure to file in violation of 26 U.S.C. § 7203. 

Vroman, 975 F.2d at 671; United States v. Kahl, 583

F.2d 1351, 1355 (5th Cir. 1978).

      In a similar vein, the Ninth Circuit has rejected the argument that an

indictment charging a violation of 26 U.S.C. § 7206 and setting forth the

elements of the offense was insufficient simply because the CFR provisions

dealing with the enforcement of section 7206 reference the Bureau of Alcohol,

Tobacco and Firearms, an agency unrelated to the case against the defendant. 

United States v. Cochrane, 985 F.2d 1027, 1031 (9th Cir. 1993). 

An indictment need only provide "the essential facts necessary to apprise the

defendant of the crime charged; it need not specify the theories or evidence upon

which the government will rely to prove those facts."  Cochrane,

985 F.2d at 1031.

40.03[5]  Filing of Protest Documents: Is the Document Filed a Tax Return?

      40.03[5][a]  Generally 

      Tax protestors frequently fail to file tax returns or file returns --

frequently unsigned, or signed with the jurat crossed out -- that report no

financial information and/or espouse tax protest rhetoric.  See

Morgan v. Commissioner, 807 F.2d 81 (6th Cir. 1986); Mosher

v. Internal Revenue Service, 775 F.2d 1292, 1294 (5th Cir. 1985);

Edwards v. Commissioner, 680 F.2d 1268 (9th Cir. 1982);

Lovelace v. United States, No. 89-375TD, 1990 WL 284740, at *1

(W.D.Wash. Oct. 18, 1990), aff'd, 951 F.2d 360 (9th Cir. 1991).

      40.03[5][b]  What Is a Tax Return?

      A tax return consists of an IRS Form 1040 (or other relevant form)

containing enough information about the taxpayer's income to compute the tax. 

Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944); United

States v. Saussy, 802 F.2d 849, 854 (6th Cir. 1986); United States

v. Green, 757 F.2d 116, 121 (7th Cir. 1985); United States v.

Grabinski, 727 F.2d 681, 686 (8th Cir. 1984); United States v.

Verkuilen, 690 F.2d 648 (7th Cir. 1982); United States v.

Moore, 627 F.2d 830, 834 (7th Cir. 1980); United States v.

Smith, 618 F.2d 280, 281 (5th Cir. 1980); United States v.

Edelson, 604 F.2d 232, 234 (3d Cir. 1979); United States v.

Irwin, 561 F.2d 198, 200-01 (10th Cir. 1977); United States v.

Daly, 481 F.2d 28, 29 (8th Cir. 1973); United States v.

Porth, 426 F.2d 519, 523 (10th Cir. 1970).

      A taxpayer who submits a form containing only his name, address, and

arguments supposedly excusing him from filing tax returns has not filed a

"return" within the meaning of the Internal Revenue Code.  In Porth

and Daly, supra, taxpayers filed Forms 1040

containing only their names and addresses, and references to various

constitutional provisions which purportedly excused them from filing tax returns. 

Appellate courts upheld both convictions.  The Porth court held

that:

       The return filed was completely devoid of information concerning his 

       income as required by the regulations of the IRS. A taxpayer's return 

       which does not contain any information relating to the taxpayer's 

       income from which the tax can be computed is not a return within the 

       meaning of the Internal Revenue Code or the regulations adopted by 

       the Commissioner.

Porth, 426 F.2d at 523 (citations omitted).  See also

United States v. Kimball, 925 F.2d 356, 357 (9th Cir. 1991)

(en banc) (asterisks and no signature not a return); United

States v. Upton, 799 F.2d 432, 433 (8th Cir. 1986); United States

v. Green, 757 F.2d 116, 121 (7th Cir. 1985); United States v.

Mosel, 738 F.2d 157, 158 (6th Cir. 1984); United States v.

Vance, 730 F.2d 736, 738 (11th Cir. 1984); United States v.

Grabinski, 727 F.2d 681, 686 (8th Cir. 1984); United States v.

Stillhammer, 706 F.2d 1072, 1075 (10th Cir. 1983) ("the test is whether

the defendants' returns themselves furnished the required information for the IRS

to make the computation and assessment, not whether the information was available

elsewhere"); Verkuilen, 690 F.2d at 654; United States v.

Reed, 670 F.2d 622, 623-24 (5th Cir. 1982) (Form 1040 reflected only the

amount withheld from earnings and no other dollar figure, with refund claimed);

United States v. Crowhurst, 629 F.2d 1297, 1300 (9th Cir.

1980); United States v. Schiff, 612 F.2d 73, 77 (2d Cir. 1979);

Edelson, 604 F.2d at 234 .

      Generally, Forms 1040 which report only zeros are not valid returns.

Mosel, 738 F.2d 157; United States v. Rickman,

638 F.2d 182, 184 (10th Cir. 1980); Moore, 627 F.2d at 835 ("when

apparent that the defendant is not attempting to file forms accurately disclosing

his income, he may be charged with failure to file a return"); United

States v. Smith, 618 F.2d 280, 281 (5th Cir. 1980);. But

see United States v. Long, 618 F.2d 74, 75 (9th Cir. 1980)

(zeros on Long's tax forms, unlike blanks, constituted information as to income

from which a tax could be computed just as if the return had contained other

numbers). 

      Courts have also held that tax forms reporting nothing or small amounts in

the blanks provided for income and expenses do not constitute legal

returns.  Kimball, 925 F.2d at 357 (conviction upheld where returns

only reported asterisks);  United States v. Malquist, 791 F.2d

1399, 1401 (9th Cir. 1986) (Form 1040 with word "object" written in all spaces

requesting information is not a return); Edelson, 604 F.2d at 234

(total income figure based on his interpretation of "constitutional dollars" and

a blanket claim of the Fifth Amendment as to all other items); United

States v. Brown, 600 F.2d 248, 251-52 (10th Cir.  1979) ("unknown" or

claimed "Fifth Amendment" responses on Forms 1040 are not returns).

       A Form 1040 that shows only a bottom line figure for taxable income 

       with no information as to how the reported taxable income was derived 

       (such as the source of the income, the amount of gross income and 

       deductions, and the number of exemptions claimed) is not a valid 

       income tax return, as a matter of law.

Grabinski, 727 F.2d at 686-87.

      On the other hand, omission of isolated information, such as a taxpayer's

social security number or names of dependent children, which does not impede the

IRS's ability to check a taxpayer's asserted tax liability, does not disqualify

the document as a valid a return.  Grabinski, 727 F.2d at 686.

(But see, contra, Crowhurst, 629 F.2d at1300, in

which defendant filed Forms 1040 which were blank except for the defendant's

signature and request for refund of income tax withheld and  attached Forms W-2. 

The Ninth Circuit held that the Form 1040 with attached W-2s constituted returns

because they provided "the IRS with ostensibly complete information from which

a tax could be computed" and upheld the defendant's conviction under section

7206(1) for filing false returns. Crowhurst, 629 F.2d at 1300).

      The Sixth Circuit has held that a return filed after the IRS

assesses deficiencies is not a return because it no longer serves a tax purpose

and has no legal effect.  In re Hindenlang, 164 F.3d 1029, 1034

(6th Cir.), cert. denied, 528 U.S. 810 (1999).

      40.03[5][c]  What Is or Is Not a Tax Return: A Matter of Law or Fact?

      Some courts hold that the determination whether a return is valid for

section 7203 purposes  is a question of law for the court to decide. 

United States v. Grabinski, 727 F.2d 681, 686 (8th Cir. 1984). 

See also United States v. Upton, 799 F.2d 432, 433 (8th Cir.

1986); United States v. Green, 757 F.2d 116, 121-22 (7th Cir.

1985); United States v. Moore, 627 F.2d 830, 834 (7th Cir. 1980)

(unsigned Form 1040 not a return as a matter of law).  This determination "in no

way removes from the jury fact questions regarding whether a defendant was

required to file a return, . . . actually failed to make a return, . . . and

whether a failure to file was willful." Grabinski, 727 F.2d at 686. 

See also Green, 757 F.2d at 121. 

      Other courts caution that a jury should decide whether or not the filing

met the definition of a return.  For example, the Sixth Circuit held that the

trial court should only "properly stat[e] the law respecting the definition of

a return, and [leave] it to the jury to decide whether [the] defendant had

properly filed a return." United States v. Saussy, 802 F.2d 849,

854 (6th Cir. 1986).  

      In Saussy, 802 F.2d at 854, the court found the following

jury instruction proper:

      A document which does not contain sufficient information relating to 

      the taxpayer's income from which the tax can be computed is not a 

      return within the meaning of the Internal Revenue Code and the 

      Regulations thereunder. Whether any document submitted by the 

      defendant constitutes [a] tax return[] is a matter for the jury to 

      decide.

      In United States v. Goetz, 746 F.2d 705, 709 (11th Cir.

1984), the Eleventh Circuit held that the trial court improperly invaded the

province of the jury by "determin[ing] that the documents filed by the defendants

did not contain any financial information, and conclud[ed] that, as a matter of

law, these documents were not returns."  Goetz, 746 F.2d at 708. 

See also United States v. Grote, 632 F.2d 387, 391 (5th Cir.

1980).

40.03[6]  Discovery of IRS Master Files

      Each individual who has filed a tax return with the IRS has a record in the

IRS master computer under his or her social security number.  The IRS Individual

Master File (IMF) is the transcript generated by the IRS master computer.  It

contains coded information about the individual's tax history, including the

filing of federal income tax forms, payment of taxes, refunds due, audits, and

IRS notices sent to the individual.  The Certificates of Assessments and

Payments -- certified IRS records reflecting filings and payments by an

individual which are generally introduced at trial -- are prepared from the

information contained within the IMF.

      Rule 16 of the Federal Rules of Criminal Procedure does not require the

government to provide the IMF in discovery absent some showing of materiality. 

See United States v. Pottorf, 769 F. Supp. 1176, 1181

(D. Kan. 1991).  When portions of the IMF are relevant, it may be sufficient to

provide just those relevant parts of the IMF in discovery.  See

United States v. Fusero, 106 F.Supp.2d 921, 925 (E.D. Mich. 2000). 

However, in United States v. Buford, 889 F.2d 1406, 1407-08

(5th Cir. 1989), the Fifth Circuit reversed the conviction of a defendant where

the district court denied his request for the IMF in discovery and failed to

perform a promised in camera inspection of the IMF.  In

Buford, the government introduced evidence, for impeachment

purposes only, that the defendant failed to file his tax returns for several

years.  The defendant testified that he had filed.  In rebuttal, the government

called an IRS records custodian, who based her testimony on the Certificates of

Assessments and Payments, which were hand prepared using information taken from

the IMF.  After eliciting evidence on cross-examination of the IRS custodian

which contradicted the information in the Certificates of Assessments and

Payments, the defendant repeatedly asked for an in camera review of the

IMF.  The review never took place.  The Fifth Circuit found that the district

court abused its discretion in denying discovery of the IMF and failing to

provide the in camera review of the IMF.  Buford, 889 F.2d

at 1408.

40.03[7]  Motions in Limine

      In many tax protester cases, the defendant will attempt to present

"evidence" or argument relating to what the law should be, the constitutionality

and validity of the tax laws, or alternative interpretations of the tax laws not

relied upon by the defendant.  In such cases, it may be useful to file a motion

in limine requesting an order to prevent the defendant from

presenting inappropriate and irrelevant materials that could confuse the jury. 

The text of a sample motion in limine is set out as Appendix I at the end of this

chapter.

40.03[8]  Attorney Sanctions

      Attorneys representing protesters will sometimes repeatedly make frivolous

arguments or behave inappropriately in court.  Such behavior is sanctionable. 

See United States v. Engstrom, 16 F.3d 1006, 1010-12 (9th

Cir. 1994)(although defense counsel could not be held in contempt after a summary

procedure pursuant to Rule 42(a) of the Federal Rules of Criminal Procedure for

asserting during opening statement his client's belief in the trial court's

participation in a conspiracy to defraud the American people, his "various

disrespectful and confrontational remarks" to the trial judge warranted order

suspending his permission to practice in jurisdiction for three years);

United States v. Collins, 920 F.2d 619, 633-34 (10th Cir. 1990)

(upholding district court's  revocation of defense counsel's pro hac vice

status after counsel, who had a "past reputation for hijacking judicial

proceedings onto his tax protester bandwagon," filed several legally frivolous

pre-trial motions); In re Becraft, 885 F.2d 547, 550 (9th Cir.

1990) (pursuant to Fed. R. App. Proc. 38, ordering defense counsel to pay $2,500

in damages for filing frivolous petition for rehearing);

United States v. Summet, 862 F.2d 784, 786-87 (9th Cir. 1988)

(upholding district court's formal censure of defense attorney and revocation of

his pro hac  vice status when he violated local rules by continuously

challenging the court's authority and ignoring repeated warnings of the court);

United States v. Howell, 936 F.Supp. 774, 775-76 (D. Kansas 1996)

(denying defense attorney's motion for reconsideration of order revoking his

pro hac vice admission because he failed to appear at a pretrial motions

hearing, made false and misleading statements regarding his past disciplinary

proceedings to magistrate judge, and failed to disclose all past disciplinary

proceedings in an affidavit submitted to the court).

40.03[9]  Evidentiary Issues

      40.03[9][a]  Prior or Subsequent Tax Protest Activities: Rule 404(b)

      Evidence of tax protest activities of the defendant prior or subsequent to

the criminal conduct charged may be admissible at trial.  It may be argued that

such evidence, if "intrinsic" or "intricately related to the facts of the case,"

is not even subject to Fed. R. Evid. 404(b) because it is directly probative of

willfulness, an element of the tax crime charged.  United States v.

Hilgeford, 7 F.3d 1340, 1345 (7th Cir. 1993); see also United

States v. Williams, 900 F.2d 823, 825 (5th Cir. 1990) (other act evidence

is "intrinsic" and thereby not governed by Rule 404(b) when the evidence of the

other acts and the evidence of the crime charged are "inextricably intertwined,"

both acts are part of a "single criminal episode," or the other acts were

"necessary preliminaries" to the crime charged).  Intrinsic evidence is subject

to the Fed. R. Evid. 403 balancing test, which requires the exclusion of relevant

evidence if its prejudicial effect substantially exceeds its probative value.

      If it is determined that the evidence of other crimes or acts is extrinsic

to the case, the evidence may be admissible under Fed. R. Evid. Rule 404(b) to

show "intent, preparation, plan, knowledge, identity, or absence of mistake or

accident."  Other act evidence may be admitted if the following four requirements

are met: (1) the evidence is offered for a proper purpose, a purpose other than

to demonstrate the defendant's propensity to commit the crime charged; (2) the

evidence is relevant; (3) the trial court makes a Fed. R. Evid. Rule 403

determination that the probative value of the evidence is not substantially

outweighed by its potential for unfair prejudice; and (4) the district court

submits a limiting instruction, if requested.  Huddleston v. United

States, 485 U.S. 681, 691-92 (1988); United States v.

Grissom, 44 F.3d 1507, 1513 (10th Cir. 1995); United States v.

Zapata, 871 F.2d 616, 620 (7th Cir. 1989).  Evidence of other similar

acts is relevant only if the evidence is sufficient to support a jury finding

that the defendant committed the similar act.  Huddleston, 485 U.S.

at 689, Zapata, 871 F.2d at 620; See United States v.

Ayers, 924 F.2d 1468, 1473 (9th Cir. 1991) (articulating four-part test

for admission under 404(b) -- (1) sufficient evidence must exist for jury to find

defendant committed other acts; (2) other acts must be introduced to prove a

material issue; (3) other acts must not be too remote in time; and (4) if

admitted to prove intent, other acts must be similar to offense charged).

      A defendant's  prior or subsequent tax protest activities, filing and

payment history, or participation in civil tax court proceedings will often be

relevant in criminal tax cases, especially where the defendant raises a good

faith defense.  See United States v. Wisenbaker, 14 F.3d 1022, 1028

(5th Cir. 1994) (prior state tax convictions relevant to prove willfulness and

to negate defendant's assertion of good faith defense); United States v.

McKee, 942 F.2d 477, 480 (8th Cir. 1991) (in section 7201 prosecution,

testimony concerning prior IRS audit and defendant's prior filing of false exempt

Form W-4 relevant to issues of intent or absence of mistake under Fed. R. Evid.

404(b)); United States v. Fingado, 934 F.2d 1163, 1165 (10th Cir.

1991) (in section 7203 prosecution, evidence of defendant's failure to file in

prior years admissible pursuant to Fed.R.Evid. 404(b) to prove willfulness);

United States v. Johnson, 893 F.2d 451, 453-54 (1st Cir. 1990)

(evidence that defendant submitted Form W-4 in 1987 claiming more allowances than

he was entitled to and failed to file a return in 1987 relevant to show

willfulness and absence of mistake in filing false Schedule C forms from 1982 to

1986); United States v. Poschwatta, 829 F.2d 1477, 1484 (9th Cir.

1987)  (prior tax conviction admissible to show why defendant was required by law

to file income tax returns); United States v. Birkenstock, 823 F.2d

1026, 1028 (7th Cir. 1987) (in section 7203 prosecution, defendant's prior

"pseudo-dollar/gold standard" returns properly admitted to show intent and

absence of mistake);  United States v. Grosshans, 821 F.2d 1247,

1253 (6th Cir. 1987)  (defendant's attendance at protester meetings admissible

to show that she knew what she was doing and knew she had an obligation to pay

taxes);  United States v. Bergman, 813 F.2d 1027, 1029 (9th Cir.

1987) (in section 7203 prosecution, filing of false exempt W-4 admissible under

Fed.R.Evid. 404(b) to show willfulness); United States v. Blood,

806 F.2d 1218, 1222 (4th Cir. 1986) (where defendant represented himself and

testified in prior Tax Court proceedings, prior Tax Court decision admissible to

show intent and pattern of tax avoidance); United States v. Upton,

799 F.2d 432, 433 (8th Cir. 1986) (evidence that defendant had sent tax protester

materials to the IRS and had failed to comply with tax laws in prior and

subsequent years probative of willfulness); United States v.

Ausmus, 774 F.2d 722, 727 (6th Cir. 1985) (in section 7203 failure to pay

case, evidence that defendant failed to pay income taxes for years prior to and

following the years charged admissible to show pattern, plan and scheme

indicating that failure to pay taxes was not the result of accident, negligence

or inadvertence);United States v. Verkuilen, 690 F.2d 648, 656 (7th

Cir. 1982) (in section 7203 prosecution, evidence of defendant's submission of

correct Form W-4 and two subsequent false Forms W-4 prior to years charged

properly admitted to show willfulness, motive, and common pattern of illegal

conduct); But see United States v. Mikolajczyk, 137

F.3d 237, 244 (5th Cir. 1998) (trial court erred in admitting evidence of prior

filing of public notice "rescinding" tax returns during cross-examination of

defendant in mail fraud prosecution for submission of USA First "Certified Money

Orders," because government offered no evidence that defendant had protest motive

in submitting the "Certified Money Orders").

      40.03[9][b]  IRS Agent's Testimony and Sequestration

      IRS agents usually testify during the course of a tax trial.  Often such

testimony will consist of summarizing the government's documentary evidence and

providing tax requirements and calculations based on that testimony.  Provided

the agent has been properly qualified as an expert witness, would be helpful to

the jury, and does not offer any opinion on the ultimate issue of guilt, such

testimony is fully admissible pursuant to Fed. R. Evid. 702.  See

United States v. West, 58 F.3d 133, 140-41 (5th Cir. 1995) (admission

of testimony of IRS expert witness testimony, which included summary of testimony

given by other government witnesses, was not error because the agent referred to

other evidence when necessary to explain his analysis); United States v.

Moore, 997 F.2d 55, 58 (5th Cir. 1993) (citing cases); United

States v. Beall, 970 F.2d 343, 347 (7th Cir. 1992) (IRS expert's summary

of documentary evidence and testimony regarding tax consequences of subcontractor

relationship within agent's area of expertise); United States v.

DeClue, 899 F.2d 1465, 1473 (6th Cir. 1990) (IRS special agent with

accounting degree, regular IRS training and experience spanning seven years

qualified to testify as expert about tax due and owing); United States v.

Mann, 884 F.2d 532, 539 (10th Cir. 1989); United States v.

Barnette, 800 F.2d 1558, 1568-69 (11th Cir. 1986) (IRS expert auditor and

accountant properly permitted to give his opinion of the "income tax

implications" as applied to the defendant); United States v.

Marchini, 797 F.2d 759, 765-66 (9th Cir. 1986) (district court has

discretion to allow agent of IRS to testify as an "expert summary witness" based

upon the agent having heard the testimony of the other witnesses and having

reviewed the exhibits).  But see United States v.

Benson, 941 F.2d 598, 603-06 (7th Cir. 1991) (conviction reversed where

IRS expert gave opinions not based on special knowledge or skill that was helpful

to jury).

      An IRS agent who does testify as an expert/summary witness should be

allowed to remain in the courtroom during the trial, in addition to an

investigatory case agent designated as the representative of the government under

Rule 615(2).  Fed. R. Evid. 615; see United States v.

Lussier, 929 F.2d 25, 30 (1st Cir. 1991); United States v.

Kosko, 870 F.2d 162, 164 (4th Cir. 1989) (IRS agent to testify as expert

witness allowed to remain in courtroom along with DEA agent).  Some courts have

found that the government may only identify one agent for each subsection of Rule

615.  See United States v. Pulley, 922 F.2d 1283,

1286 (6th Cir. 1991) (allowing only one agent under Rule 615(2) and one agent

under Rule 615(3); United States v. Farnham, 791 F.2d 331, 334-35

(4th Cir. 1986) (conviction reversed where court failed to exclude one of two

case agents during trial). But see United States v.

Jackson, 60 F.3d 128, 134 (2nd Cir. 1995) (holding that trial court has

discretion to exempt from the rule against witnesses more than one witness under

each subsection of Rule 615).

      40.03[9][c]  Admissibility of IRS Computer Records

      Computer data evidence is often introduced in tax cases to show the

defendant's filing history, to prove that the defendant did not file returns as

required, or to show that the defendant received notices about his tax

liabilities. The introduction of the actual Individual Master File (IMF)

transcript of account through a witness can open the witness to cross-examination

by the defense about every code and piece of information contained in the

transcript.  In order to avoid this problem, it may be wiser to simply offer IRS

computer records at trial in the form of Certificates of Assessments and

Payments, certified documents reflecting tax information kept on file at the IRS.

      Protesters often challenge the admissibility of computer records, and

courts routinely reject such challenges.  These records may be admitted under

Federal Rule of Evidence 803(6) as business records or under Rule 803(10) as

certificates of lack of official records.  See Hughes v.

United States, 953 F.2d 531, 535 (9th Cir. 1992) (holding that

certificate of assessments and payments was proof of fact that federal tax

assessments actually were made); United States v. Spine, 945 F.2d

143, 149 (6th Cir. 1991) (certificates of assessments and payments, which showed

defendant filed no returns, admissible under Rule 803(10)); United States

v. Bowers, 920 F.2d 220, 223 (4th Cir. 1990) (IRS records admissible as

"certificates of lack of official record" under Rule 803(10)); United

States v. Neff, 615 F.2d 1235, 1241-42 (9th Cir. 1980) (IRS Certificates

of Assessments and Payments admissible under Rule 803(10));United States

v. Tarrant, 798 F. Supp. 1292, 1299 (E.D. Mich. 1992) (IRS certified

records of tax assessments and payments properly admitted under Rule 803(8) and

Rule 803(10)).  Such records may be self-authenticating under Rule 902 if under

seal or they may be authenticated by an IRS employee.  No showing of the accuracy

of the computer system needs to be made to introduce the documents. 

See United States v. Ryan, 969 F.2d 238, 240

(7th Cir. 1992) (certified copies of master file transcripts admissible as self-

authenticating documents).

      Some courts have admitted IRS computer records under the Rule 803(8)

hearsay exception for public records and reports.  "[I]n criminal cases matters

observed by police officers and other law enforcement personnel" are excluded

from the public records hearsay exception.  Fed. R. Evid. 803(8)(B).  Rule

803(8)(C) prevents the government from using "factual findings resulting from an

investigation made pursuant to authority granted by law."  Courts that have

admitted computer records under Rule 803(8) distinguished between law enforcement

reports prepared in routine, non-adversarial settings and those resulting from

the more subjective endeavor or on-the-scene type investigations of a crime.  The

latter are excluded from the public records exception.  United States v.

Wiley, 979 F.2d 365, 369 (5th Cir. 1992); see also

United States v. Wilmer, 799 F.2d 495, 500-01 (9th Cir. 1987)

(calibration report of breathalyser within public records exception to hearsay

rule because Rule 803(8)(B) was not intended to applied to "records of routine,

nonadversarial materials" made in nonadversarial setting).  But see

United States v. Oates, 560 F.2d 45 (2nd Cir. 1977) (holding that

police and evaluative reports not satisfying the standards of Rule 803(8)(B) and

(C) may not qualify for admission under any other exception to the hearsay rule). 

The holding in Oates has been widely criticized by several courts. 

See, e.g., United States v. Sokolow, 91 F.3d 396, 405

(3rd Cir. 1996) (listing cases criticizing Oates as unduly broad

interpretation of Rule 803(8));  Hayes, 861 F.2d at 1229-30

(discussing criticism of Oates, holding that Oates

does not apply when IRS employee who obtained computer documents testifies at

trial, and upholding admission of IRS computer records under Rule 803(6));

United States v. Metzger, 778 F.2d 1195, 1200-02 (6th Cir. 1985)

(criticizing Oates and holding that the restriction of Rule

803(8)(C) does not apply to Rule 803(10)); United States v.

Quezada, 754 F.2d 1190, 1193-94 (5th Cir. 1985) (refusing to follow

Oates' inflexible application of Rule 803(8)(B)).

40.03[10]  Use of Pseudonyms by IRS Revenue Agents and Officers

      Criminal prosecutors should be aware that IRS Revenue Agents and Officers

are permitted to use officially-issued pseudonyms in their dealings with the

public.  The use of official pseudonyms was first permitted in 1992 pursuant to

a decision of the Federal Service Impasse Panel (FSIP) [FN8].  Department of

the Treasury, Internal Revenue Service and National Treasury Employees Union,

No. 91 FSIP 229 at 4 (March 10, 1992).  As part of the IRS Restructuring Act of

1997, Congress codified the use of pseudonyms with an effective date of July 22,

1998.  Pub.L. 105-206, Title III, Section 3706, July 22, 1998, 112 Stat. 778.

      Use of pseudonyms is intended to prevent personal harassment of IRS

employees by taxpayers and other members of the public, especially tax

protesters.  Among the problems identified by the Treasury Employees' 
Union
, and

upon which the FSIP relied, were assaults, threats, obscene phone calls at work

and at home, and filing of false interest and dividend reports (Form 1099), and

false liens, against IRS employees.  The 
Union
 cited a 1988 Federal Bureau of

Investigation Report, which  found that more IRS enforcement officers suffered

more assaults than any other law enforcement group in the Federal Government.

      The FSIP held that "employees shall only be required to identify themselves

by last name" and "[i]f an employee  believes that due to the unique nature of

[his/her] last name, and/or the nature of the office locale, that the use of the

last name will still identify [him/her] [s/he] may 'register' a pseudonym with

his or her supervisor."  The IRS Restructuring and Reform Act of 1997 requires

that an employee give "adequate justification. . .  including protection of

personal safety" and obtain prior approval from his or her supervisor before

using a pseudonym.

      The pseudonym may be issued only in place of the employee's last name; the

real first name must be used.  Once a pseudonym is issued, it is used by that

employee at all times while on duty, whether working in the field or in the

office.  All history sheets, liens, levies and summonses are signed using the

pseudonym.  Pocket commissions (credentials) are issued in the pseudonym only. 

However, the IRS-issued identification, which allows access to IRS facilities,

may only be issued in the employee's real name.

      There has been very little litigation concerning the use of pseudonyms and

what has occurred  involves summons enforcement.  Generally, courts have not

found fault with the practice.  See, e.g., Sanders  v. United

States, No. 94-1497, 1995 WL 257812 (10th Cir. May 2, 1995);

Springer v. Internal Revenue Service, Nos. S-97-0091 WBS GGH, S-97-

0092 WBS GGH, S-97-0093 WBS GGH, 1997 WL 732526 (E.D. Cal. Sept. 12, 1997);

United States v. Wirenius, No. CV 93-6786 JGD, 1994 WL 142394, at

*n.2 (C.D. Cal. Feb. 11, 1994); Dvorak v. Hammond, No. CIV 3-94-

601, 1994 WL 762194, at *n.1 (D. Minn. Dec. 5, 1994).  But

see 
United States
 v. Nolen, 4:96-CV-934-A (N.D. 

Texas

,

1997) (refusal of District Court to allow a Revenue Agent to use a pseudonym to

testify and stating that it would not allow such practice in the future).  In

Nolen, the AUSA called the Revenue Agent to the stand, asked him

to state his name for the record and then immediately had the RA identify that

name as his pseudonym.  The Court took issue with the fact that the RA gave his

pseudonym as his name, despite previous disclosure of the pseudonym to the court

in the declaration signed by the RA.

      Obviously, as officers of the court, government attorneys should not submit

declarations or affidavits signed by an IRS employee using a pseudonym without

informing the court that a pseudonym is being used.  Likewise, caution should be

exercised when tendering any witness who is using a pseudonym.  Particular care

should be taken if your summary witness/IRS expert witness has  used a pseudonym;

in those instances the witness should either relinquish the pseudonym or not be

used as a witness.  In that regard, the IRS recognizes that the court must be

informed about the use of a pseudonym and that the employee's legal name may

ultimately have to be disclosed, depending on the circumstances of the case. 

Minimally, consultation with your supervisor and with the IRS about how best to

proceed in these instances is advised.