US Internal Revenue Service: irb04-12

8/14/2019 US Internal Revenue Service: irb04-12

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Bulletin No. 2004-1March 22, 200

HIGHLIGHTS

OF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 200427, page 625.Tax avoidance schemes; meritless corporation sole ar-guments. This ruling emphasizes to taxpayers, tax schemepromoters and return preparers that, while a corporation soleis a legitimate corporate form that may be used by a religious

leader to hold property and conduct business for the benefit ofthe religious entity, a taxpayer cannot avoid income tax by es-tablishing a religious organization for tax avoidance purposes.

Rev. Rul. 200428, page 624.Frivolous tax returns; excluding gross income under sec-tion 911. This ruling emphasizes to taxpayers, and to promot-ers and return preparers who assist taxpayers with frivolous taxschemes, that there is no basis for excluding income earned ina State, Commonwealth, or Territory of the United States un-der section 911 of the Code. The ruling also describes manyof the possible civil and criminal penalties that apply to peoplewho claim tax benefits on their return based on frivolous claimsunder section 911.

Rev. Rul. 200429, page 627.Frivolous tax returns; meritless claim of right argu-ments. This ruling emphasizes to taxpayers, and to promot-ers and return preparers who assist taxpayers with frivoloustax schemes, that there is no claim of right doctrine that per-mits an individual to take the position that either the individualor the individuals income is not subject to federal income tax.The ruling also describes many of the possible civil and crimi-nal penalties that apply to people who make frivolous claim ofright arguments to evade tax.

Rev. Rul. 200430, page 622.Frivolous tax returns; attempting to avoid taxes undsection 861. This ruling emphasizes to taxpayers, and promoters and return preparers who assist taxpayers with tschemes, that there is no authority in sections 861 throu865 of the Code that permits an individual to take the positithat either the individual or the individuals U.S. based incom

is not subject to federal income tax. The ruling also describmany of the possible civil and criminal penalties that apply people who make frivolous section 861 arguments to evatax.

Rev. Rul. 200431, page 617.Frivolous tax returns; meritless removal argumentsThis ruling emphasizes to taxpayers, and to promoters and turn preparers who assist taxpayers with schemes, that theis no law, court decision or other authority that permits a tapayer to remove himself from the federal tax system in ordto avoid otherwise applicable taxes. Arguments to the contraare not only wrong, but frivolous.

Rev. Rul. 200432, page 621.Frivolous tax returns; meritless home-based businedeductions. This ruling emphasizes to taxpayers, and to pmoters and return preparers who assist taxpayers with claimifrivolous deductions based on a purported home-based buness, that there is no basis for claiming personal, living, afamily expenses as business deductions. This return posithas no merit and is frivolous.

(Continued on the next pag

Finding Lists begin on page ii.


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Rev. Rul. 200433, page 628.Frivolous tax returns; reparations tax credit. This rulingemphasizes to taxpayers, and to promoters and return prepar-ers who assist taxpayers with tax schemes, that there is noreparations tax credit that permits an individual to take theposition that the individual based on certain classifications isentitled to a large refund the individual would not otherwise re-ceive. The ruling also describes many of the possible civil andcriminal penalties that apply to people who claim refunds orother tax benefits on their returns based on frivolous repara-tions tax credits.

Rev. Rul. 200434, page 619.Frivolous tax returns; filing a zero return. This ruling em-phasizes to taxpayers, and to promoters and return preparerswho assist taxpayers with tax schemes, that a zero return willnot succeed in permitting an individual to take the position thatthe individual or the individuals income is not subject to federalincome tax. The ruling also describes many of the possible civiland criminal penalties that apply to people who file a frivolouszero return that requires the Service to conduct a deficiency

inquiry.

Rev. Rul. 200436, page 620.Fringe benefits aircraft valuation formula. For purposesof section 1.61-21(g) of the regulations, the Standard IndustryFare Level (SIFL) cents-per-mile rates and terminal charge ineffect for the first half of 2004 are set forth for determining thevalue of non-commercial flights on employer-provided aircraft.

Notice 200413, page 631.This notice provides information about common mistakes thatindividual taxpayers make when they prepare their individualfederal income tax returns. Taxpayers who avoid these mis-

takes can save themselves time in correcting the mistakes andspeed up the receipt of any refunds.

Notice 200422, page 632.This notice informs and educates taxpayers about how to avoidmaking frivolous arguments and what will happen if they do.This notice describes many of the frivolous arguments that peo-ple have made recently to reduce or eliminate their taxes. Italso describes many of the possible civil and criminal penaltiesthat apply to people who pay less tax than they owe or refuseto file their returns based on frivolous arguments.

EXEMPT ORGANIZATIONS

Announcement 200417, page 635.A list is provided of organizations now classified as private foun-dations.

Announcement 200418, page 639.Championship Drivers Association Benevolence Fund, of Indi-anapolis, IN, and Childrens Express Foundation, Inc., of Wash-ington, DC, no longer qualify as organizations to which contri-butions are deductible under section 170 of the Code.

March 22, 2004 2004-12 I.R.B.


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The IRS Mission

Provide Americas taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bul-letin contents are consolidated semiannually into CumulativeBulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-

stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considereand Service personnel and others concerned are cautionagainst reaching the same conclusions in other cases unlethe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.1986 Code.This part includes rulings and decisions based on provisions the Internal Revenue Code of 1986.

Part II.Treaties and Tax Legislation.This part is divided into two subparts as follows: SubpartTax Conventions and Other Related Items, and Subpart B, Leislation and Related Committee Reports.

Part III.Administrative, Procedural, and MiscellaneouTo the extent practicable, pertinent cross references to thesubjects are contained in the other Parts and Subparts. Alincluded in this part are Bank Secrecy Act Administrative Rings. Bank Secrecy Act Administrative Rulings are issued the Department of the Treasurys Office of the Assistant Se

retary (Enforcement).

Part IV.Items of General Interest.This part includes notices of proposed rulemakings, disbment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indfor the matters published during the preceding months. Themonthly indexes are cumulated on a semiannual basis, and apublished in the last Bulletin of each semiannual period.*

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropria

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

* Beginning with Internal Revenue Bulletin 200343, we are publishing the index at the end of the month, rather than at the beginning.

2004-12 I.R.B. March 22, 200


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Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986

Section 61.Gross IncomeDefined

Frivolous tax returns; meritless re-

moval arguments. This ruling empha-

sizes to taxpayers, and to promoters andreturn preparers who assist taxpayers with

schemes, that there is no law, court deci-

sion or other authority that permits a tax-

payer to remove himself from the federal

tax system in order to avoid otherwise ap-

plicable taxes. Arguments to the contrary

are not only wrong, but frivolous.

Rev. Rul. 200431

PURPOSE

The Service is aware that some individ-uals are attempting to reduce their federal

income tax obligations by claiming that

they have been removed or redeemed

from the federal tax system. Although the

specific arguments made by these individ-

uals vary, some argue that the Government

commits a fraud when it attempts to col-

lect debts, including tax debts, and that

this purported fraud allows individuals to

chargeback debts that the Government

purportedly owes to these individuals to

eliminate any asserted tax liability. Re-

moval, redemption, and chargebackschemes are referred to here collectively

as removal schemes and removal argu-

ments. Some promoters are marketing a

package, kit, or other materials that claim

to show individuals how they can avoid

paying income taxes based on these and

other meritless arguments.

This revenue ruling emphasizes to indi-

viduals, and to promoters and return pre-

parers who assist individuals with these

schemes, that there is no authority under

any U.S. law that supports the argument

that an individual can be removed or re-

deemed from the federal tax system to

avoid tax liabilities or that an individual

can satisfy debts, including tax liabilities,

by making chargeback or other similar

arguments. Removal and redemption ar-

guments have no merit and are frivolous.

The Service is committed to identify-

ing individuals who attempt to avoid or

evade their tax obligations. The Service

will take vigorous enforcement action

against these taxpayers and against pro-

moters and return preparers who assist

taxpayers in taking these frivolous posi-

tions. Frivolous returns and other similar

documents submitted to the IRS are pro-

cessed through the Services Frivolous

Return Program. As part of this program,

the Service confirms whether taxpayers

who take frivolous positions have filed

all of their required tax returns, computes

the correct amount of tax and interest due,

and determines whether civil and crimi-

nal penalties should apply. The Service

also determines whether civil or criminal

penalties should apply to return preparers,

promoters, and others who assist tax-

payers in taking frivolous positions, and

recommends whether a court injunctionshould be sought to halt such activities.

Other information about frivolous tax po-

sitions is available on the Service website

at www.irs.gov.

DISCUSSION OF REMOVAL AND

REDEMPTION ARGUMENTS AND

SCHEMES

Removal arguments and schemes are

loosely related and take a variety of dif-

ferent forms. Proponents of removal argu-

ments and schemes typically claim, even

though they remain citizens or residents

of the U.S., that they are not required to

file federal tax returns and pay their tax

obligations because they have been re-

moved or redeemed from the federal tax

system. As a result of participating in

removal schemes, these individuals do not

file required returns or pay the income tax

that they owe.

In some variations of the removal ar-

gument, individuals claim that the Gov-

ernment commits a fraud when it attempts

to collect debts, including tax debts, andthat this purported fraud allows individu-

als to chargeback debts that the Govern-

ment purportedly owes to these individu-

als to eliminate any liability to the Gov-

ernment. In other variations, individuals

argue that Federal Reserve notes, or pa-

per money, are not legal tender and that

the Government has been wrongfully us-

ing taxpayers and their labor as security

for the Governments obligations. Other

individuals argue that they may reclaim

or chargeback, their own value from th

Government as a result of the Govern

ments wrongful conduct and then use tha

value to pay the individuals debts. Par

ticipants in removal schemes often attemp

to offset, collect or redeem their asserte

claims against the Government by using o

filing liens, bills of exchange, and variou

Uniform Commercial Code (UCC) forms

or by relying on misinterpretations of fed

eral laws and the Uniform Commercia

Code.

Participants in the removal scheme

may rely on one or more of the follow

ing erroneous arguments, alleged facts o

actions to support their frivolous claims

(a) the bankruptcy of the United Stateoccurred contemporaneously with the cre

ation of the Federal Reserve, the start o

the Great Depression, the removal of th

United States from the gold standard, o

the passage of House Joint Resolutio

192 (claimed to be a declaration of bank

ruptcy); (b) the Governments use of birt

certificates of taxpayers as registered se

curities; (c) the filing of documents wit

variations on a taxpayers name, (e.g

using all capital letters in some document

and standard capitalization in others) cre

ates a straw man or nom de guerre athe debtor to the Government that replace

the individual who has removed himsel

from the Governments jurisdiction; (d

the redemption of debts from the Gov

ernment by filing UCC forms, such a

the UCC1 form; (e) the submission o

documents to the U.S. Secretary of th

Treasury to establish a fictitious ban

account (sometimes referred to as a Trea

sury Direct Account) where the valu

of charged back debts is located; (f) th

practice of accepting for value officia

Government documents and the charginback of those documents by responding

to them with a private notice that may

include a Treasury Direct Account Num

ber, a Memory of Account Number

or a Posted Certified Account Number

and (g) the use of Bills of Exchange,

Form UCC3 and Sight Drafts to dis

charge debts to the Government. This lis

is not exclusive, however. Participants i

2004-12 I.R.B. 617 March 22, 200


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removal schemes also make other equally

frivolous arguments.

Instead of filing federal income tax re-

turns with the Service, participants in re-

moval schemes frequently send documents

and other correspondence to the Service

and other Government agencies. Exam-

ples of these documents include: improp-

erly filed Forms 1040ES, Estimated Tax

for Individuals, reporting the location of

the funds in a fictitious bank account from

which the IRS can collect taxes; improp-

erly filed Fiduciary Tax Returns; improp-

erly filed Forms 8300, Report of Cash Pay-

ments Over $10,000 Received in a Trade

or Business, reporting that a person or en-

tity has charged back after accepting

for value the Governments documents;

improperly filed Forms W9, Request for

Taxpayer Identification Number and Certi-

fication, to obtain a social security or em-

ployee identification number of a personorentity to include on the Form 8300; com-

mercial affidavits in lieu of tax returns

stating that the filer is a secured party and

has no income for a particular year; and

documents and correspondence to accept

for value IRS notices of tax liens and

levies to have the tax balances paid from

the filers Treasury Direct Account.

There is no authority under any U.S.

law that supports the claim that individ-

uals may avoid their federal income tax

obligations based on removal arguments

such as those described in this revenue rul-ing. Similarly, there is no authority under

any U.S. law that supports the claim that

requiring payment of a debt owed to the

Government by commercially acceptable

means amounts to a fraud by the Govern-

ment. Section 61 of the Internal Revenue

Code provides that gross income includes

all income from whatever source derived,

including compensation for services. Ad-

justments to income, deductions, and cred-

its must be claimed in accordance with the

provisions of the Internal Revenue Code

and the Treasury regulations thereunderand other applicable federal law. Section

6011 provides that any person liable for

any tax imposed by the Internal Revenue

Code shall make a return when required by

Treasury regulations, and that returns must

be in accordance with Treasury regulations

and IRS forms. Section 6012 identifies the

persons who are required to file income tax

returns. Section 6151, except as specifi-

cally provided, requires that taxpayers pay

their tax when the return is due. Section

6311 requires payment of taxes by com-

mercially acceptable means as prescribed

by Treasury Regulations.

Courts repeatedly have rejected re-

moval arguments and other similar ar-

guments as frivolous and have penalized

taxpayers who make these types of argu-

ments. See, e.g., United States v. Sloan,

939 F.2d 499, 500 (7th Cir. 1991) (affirm-

ing criminal conviction for tax evasion

and rejecting wholly defective argu-

ments that the federal tax laws did not

apply to taxpayer because he was a free-

born, natural individual, a citizen of the

State of Indiana, and a master not

servant of his Government); United

States v. Condo, 741 F.2d 238, 239 (9th

Cir. 1984) (affirming criminal conviction

for tax fraud and rejecting as frivolous

the argument that Federal Reserve Notes

are not valid currency, cannot be taxed,and are merely debts); United States

v. Rickman, 638 F.2d 182, 184 (10th Cir.

1980) (affirming criminal conviction for

willfully failing to file a return and re-

jecting the taxpayers argument that the

Federal Reserve Notes in which he was

paid were not lawful money within the

meaning of Art.1, 8, United States Con-

stitution).

Although individuals who rely on these

removal arguments generally do not file

federal income tax returns with the Ser-

vice, some individuals also are relying onremoval or similar frivolous arguments to

claim that they can reduce or eliminate

their tax by filing tax returns in which

they report zero income and tax liability.

See Rev. Rul. 200434, 200412 I.R.B.

619 (3/22/2004), for a discussion of this

frivolous position.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of

individuals who attempt to avoid or evade

their federal tax liability by refusing to filereturns and pay tax on the basis that they

have been removed or redeemed from the

federal tax system. In addition to liability

for the tax due plus statutory interest, in-

dividuals who fail to file and pay tax or

who claim refunds based on this or any

other frivolous arguments face substantial

civil and criminal penalties. Potential civil

penalties include: (1) the section 6651(f)

penalty for fraudulent failure to file, which

is up to 75 percent of the amount of taxes

the taxpayer should have reported on the

return ; (2) the section 6651(a)(1) penalty

for failure to file, which is equal to up to 25

percent of the amount of taxes the taxpayer

should have reported on the return; (3) the

section 6651(a)(2) penalty for failure to

pay, which is equal to .5 percent of the tax

for each month or fraction of a month the

tax remains unpaid, not to exceed a total

of 25 percent; and; (4) a penalty of up to

$25,000 under section 6673 if the taxpayer

makes frivolous arguments in the United

States Tax Court.

Individuals relying on this scheme also

may face criminal prosecution for: (1) at-

tempting to evade or defeat tax under sec-

tion 7201 for which the penalty is a fine of

up to $100,000 and imprisonment for up to

5 years; (2) willful failure to make a return

or pay tax under section 7203 for which

the penalty is up to $25,000 and imprison-ment of up to 1 year, or (3) making false

statements under section 7206 for which

the penalty is a fine of up to $100,000 and

imprisonment for up to 3 years.

Persons who promote this scheme and

those who assist taxpayers in claiming tax

benefits based on this scheme also may

face penalties. Potential penalties include:

(1) a $250 penalty under section 6694 for

each return prepared by an income tax re-

turn preparer who knew or should have

known that the taxpayers argument was

frivolous (or $1,000 for each return wherethe return preparers actions were will-

ful, intentional or reckless); (2) a $1,000

penalty under section 6701 for aiding and

abetting the understatement of tax; and (3)

criminal prosecution under section 7206

for which the penalty is a fine of up to

$100,000 and imprisonment for up to 3

years for assisting or advising about the

preparation of a false return or other docu-

ment under the internal revenue laws. Pro-

moters and others who assist taxpayers in

engaging in these schemes also may be en-

joined from doing so under section 7408.

HOLDING

Individuals may not avoid or evade

their tax liability by refusing to file re-

turns and pay tax on the basis that they

have been removed or redeemed from

the federal tax system or by claiming that

they can chargeback their debts to the

Government. Arguments that individuals

March 22, 2004 618 2004-12 I.R.B.


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may be removed or redeemed from the

federal tax system or may chargeback

their debts to the Government have no

merit and are frivolous. Individuals who

attempt to reduce their federal tax liabil-

ity by taking frivolous positions based

on these arguments will be liable for the

actual tax due plus statutory interest. In

addition, the Service will determine civil

penalties against individuals where appro-

priate, and those individuals may also face

criminal prosecution. The Service also

will determine appropriate civil penalties

against persons who prepare frivolous re-

turns or promote frivolous positions, and

those persons may also face criminal pros-

ecution. Promoters and others who assist

taxpayers in engaging in these schemes

also may be enjoined from doing so under

section 7408.

DRAFTING INFORMATION

This revenue ruling wasauthored by the

Office of Associate Chief Counsel (Proce-

dure and Administration), Administrative

Provisions and Judicial Practice Division.

For further information regarding this rev-

enue ruling, contact that office at (202)

6224940 (not a toll-free call).

Frivolous tax returns; filing a zero

return. This ruling emphasizes to taxpay-

ers, and to promoters and return preparers

whoassist taxpayerswith tax schemes, thata zero return will not succeed in permit-

ting an individual to take the position that

the individual or the individuals income

is not subject to federal income tax. The

ruling also describes many of the possible

civil and criminal penalties that apply to

people who file a frivolous zero return

that requires the Service to conduct a defi-

ciency inquiry.

Rev. Rul. 200434

PURPOSE

The Service is aware that some taxpay-

ers are attempting to reduce their federal

income tax liability by filing a return

that reports no income and no tax lia-

bility (a zero return) even though they

have taxable income. A taxpayer filing

a zero return invariably requests a refund

of any taxes withheld by an employer.

The Service also is aware that promoters,

including return preparers, are advising

or recommending that taxpayers take this

frivolous position. Some promoters may

be marketing a package, kit, or other ma-

terials that claim to show taxpayers how

they can avoid paying income taxes based

on this and other frivolous arguments.

This revenue ruling emphasizes to

taxpayers, and to promoters and return

preparers who assist taxpayers with these

schemes, that a taxpayer cannot avoid

income tax by filing a zero return. The

zero return position has no merit and is

frivolous.

The Service is committed to identifying

taxpayers who attempt to avoid or evade

their tax obligations by taking frivolous

positions, such as the filing of a zero

return. The Service will take vigorous en-

forcement action against these taxpayers

and against promoters and return prepar-

ers who assist taxpayers in taking thesefrivolous positions. Frivolous returns

and other similar documents submitted

to the Service are processed through its

Frivolous Return Program. As part of this

program, the Service confirms whether

taxpayers who take frivolous positions

have filed all of their required tax returns,

computes the correct amount of tax and

interest due, and determines whether civil

and criminal penalties should apply. The

Service also determines whether civil or

criminal penalties should apply against

return preparers, promoters, and otherswho assist taxpayers in taking frivolous

positions, and recommends whether a

court injunction should be sought to halt

such activities. Other information about

frivolous tax positions is available on the

Service website at www.irs.gov.

DISCUSSION OF THE ZERO RETURN

POSITION

Proponents of the zero return position

file income tax returns that report no in-

come and no tax liability even though thesetaxpayers have wages, salary or other in-

come. Taxpayers taking this position typi-

cally attach to the zero return a Form W2

or other information return that reports in-

come and income tax withholding and re-

quest refunds from the Service of the with-

held taxes. These taxpayers typically rely

on one or more frivolous arguments to sup-

port the position that wage or other income

is not subject to tax. See, e.g., Rev. Rul

200431, 200412 I.R.B. 617 and Notic

200422, 200412 I.R.B. 632 (March 22

2004).

There is no authority under U.S. law

that permits a taxpayer that has taxable in

come to avoid income tax by filing a zer

return. The claim that the filing of a zer

return will allow a taxpayer to avoid in

come tax liability, or will permit a refun

of any tax withheld by an employer, i

frivolous. Section 61 of the Internal Rev

enue Code provides that gross income in

cludes all income from whatever sourc

derived, including compensation for ser

vices. Adjustments to income, deductions

and credits must be in accordance with th

provisions of the Internal Revenue Cod

and the Treasury regulations thereunde

and other applicable federal law. Sectio

6011 provides that any person liable fo

any tax imposed by the Internal Revenu

Code shall make a return when required bTreasury regulations, and that returns mus

be in accordance with Treasury regulation

and IRS forms. Section 1.60111(b) of th

Treasury Regulations provides, in relevan

part, that each taxpayer should set fort

fully and clearly the information require

to be included on the return. Section 601

identifies the persons who are required t

file income tax returns.

Courts repeatedly have penalized tax

payers who filed zero returns despite hav

ing income sufficient to give rise to a ta

liability and have rejected frivolous arguments used by taxpayers to justify a zer

return position. See, e.g., Gillett v. Unite

States, 233 F. Supp. 2d 874 (W.D. Mich

2002) (Numerous federal courts have up

held the imposition of the $500 sanction b

the IRS pursuant to 26 U.S.C. 6702(a

[for frivolous returns], where, as here,

tax form is filed stating that an individ

ual had no income, but the attached W

forms show wages, tips, or other compen

sation of greater than zero.); Hill v. Com

missioner, T.C. Memo. 2003144 (impos

ing $15,000 penalty under section 6673 fofrivolous zero return position); Rayner v

Commissioner, T.C. Memo. 200230 (im

posing $5,000 penalty under section 667

for frivolous zero return position).


The Service will disallow any refun

claim based on the filing of a zero return

and will determine the correct amount o

2004-12 I.R.B. 619 March 22, 200


7/29

tax due from the taxpayer. The Service

also will seek the return of any erroneous

refund resulting from a zero return. In ad-

dition to liability for tax due plus statutory

interest, individuals who claim tax bene-

fits on their returns based on this and other

frivolous arguments face substantial civil

and criminal penalties. Potentially appli-

cable civil penalties include: (1) the sec-

tion 6662 accuracy-related penalty, which

is equal to 20 percent of the amount of

taxes the taxpayer should have paid; (2) the

section 6663 penalty for civil fraud, which


taxes the taxpayer should have paid; (3) a

$500 penalty under section 6702 for filing

a frivolous return; and (4)a penalty of up to

$25,000 under section 6673 if the taxpayer


States Tax Court.

Taxpayers relying on this scheme also

may face criminal prosecution for: (1) at-tempting to evade or defeat tax under sec-



5 years; or (2) making false statements on

a return under section 7206 for which the

penalty is a fine of up to $100,000 and im-

prisonment for up to 3 years.






each return prepared by an income tax re-turn preparer who knew or should have

known that the taxpayers argument was

frivolous (or $1,000 for each return where

the return preparers actions were will-

ful, intentional or reckless); (2) a $1,000

penalty under section 6701 for aiding and

abetting an understatement of tax; and (3)

criminal prosecution under section 7206

for which the penalty is up to $100,000

and imprisonment for up to 3 years for as-

sisting or advising about the preparation

of a false return or other document under

the internal revenue laws. Promoters and

others who assist taxpayers in engaging in

these schemes also may be enjoined from

doing so under section 7408.

HOLDING

A taxpayer cannot use a zero return to

avoid or evade the taxpayers federal in-

come tax liability. Taxpayers attempting

to avoid or evade their federal tax liability

by taking frivolous positions will be liable

for the actual tax due plus statutory inter-

est. In addition, the Service will determine

civil penalties against taxpayers where ap-

propriate, and those taxpayers may also

face criminal prosecution. The Servicealso will determine appropriate penalties



those persons may also face criminal pros-

ecution. Promoters and others who as-

sist taxpayersin engaging in these schemes


section 7408.



Office of Associate Chief Counsel (Proce-dure and Administration), Administrative





26 CFR 1.6121: Taxation of fringe benefits.

Fringe benefits aircraft valuation for-

mula. For purposes of section 1.61-21(g)

of the regulations, the Standard Industry

Fare Level (SIFL) cents-per-mile rates and

terminal charge in effect for the first half

of 2004 are set forth for determining the

value of non-commercial flights on em-

ployer-provided aircraft.

Rev. Rul. 200436

For purposes of the taxation of fringe

benefits under section 61 of the Inter-

nal Revenue Code, section 1.6121(g) of

the Income Tax Regulations provides a

rule for valuing noncommercial flights

on employer-provided aircraft. Section

1.6121(g)(5) provides an aircraft valua-

tion formula to determine the value of such

flights. The value of a flight is determined

under the base aircraft valuation formula(also known as the Standard Industry Fare

Level formula or SIFL) by multiplying

the SIFL cents-per-mile rates applicable

for the period during which the flight was

taken by the appropriate aircraft multiple

provided in section 1.6121(g)(7) and then

adding the applicable terminal charge. The

SIFL cents-per-mile rates in the formula

and the terminal charge are calculated by

the Department of Transportation and are

reviewed semi-annually.

The following chart sets forth the termi-

nal charges and SIFL mileage rates:

Period During Which

the Flight Is Taken

Terminal

Charge

SIFL Mileage

Rates

1/1/04 6/30/04 $34.45 Up to 500 miles

= $.1884 per mile

5011500 miles

= $.1437 per mile

Over 1500 miles

= $.1381 per mile


The principal author of this revenue

ruling is Kathleen Edmondson of the

Office of Division Counsel/Associate

Chief Counsel (Tax Exempt and Govern-

ment Entities). For further information

regarding this revenue ruling, contact

Ms. Edmondson at (202) 6226040 (not a

toll-free call).

March 22, 2004 620 2004-12 I.R.B.


8/29

Section 262.Personal,Living, and Family Expenses

(Also, 280A.)

Frivolous tax returns; meritless

home-based business deductions. This

ruling emphasizes to taxpayers, and to

promoters and return preparers who assist

taxpayers with claiming frivolous deduc-tions based on a purported home-based

business, that there is no basis for claim-

ing personal, living, and family expenses

as business deductions. This return posi-

tion has no merit and is frivolous.

Rev. Rul. 200432

PURPOSE

The Service is aware that some tax-

payers are attempting to reduce their fed-

eral tax liability by claiming that otherwisenondeductible personal, living or family

expenses are deductible because they re-

late to a purported home-based business

of the taxpayer that, in fact, is not a bona

fide home business. The purported busi-

ness in these schemes is no more than an

attempt to create the appearance of hav-

ing a home-based business where none ac-

tually exists. The Service also is aware

that promoters, including return preparers,

are advising or recommending that taxpay-

ers take frivolous positions based on this

argument. Some promoters may be mar-keting a package, kit, or other materials,

that claim to show taxpayers how they can

avoid paying income taxes based on this

and other meritless arguments. This home-

based business scheme and the promotion

of this scheme are described in more detail

in this revenue ruling.

This revenue ruling emphasizes to tax-

payers, and to promoters and return pre-

parers who assist taxpayers with home-

based business schemes, that they cannot

avoid income tax by claiming otherwise

nondeductible personal, living or familyexpenses as business deductions that sup-

posedly relate to a purported home-based

business that is not a bona fide trade or

business. This argument has no merit and

is frivolous.

The Service is committed to identi-

fying taxpayers who attempt to avoid

their tax obligations by taking frivolous

positions. The Service will take vigorous

enforcement action against these taxpayers

and against promoters and return prepar-

ers who assist taxpayers in taking these

frivolous positions. Frivolous returns

and other similar documents submitted

to the Service are processed through its

Frivolous Return Program. As part of this

program, the Service confirms whether

taxpayers who take frivolous positions

have filed all of their required tax re-

turns, computes the correct amount of tax

and interest due, and determines whether

civil and criminal penalties should ap-

ply. The Service also determines whether

civil or criminal penalties should apply

to return preparers, promoters, and others

who assist taxpayers in taking frivolous

positions, and recommends whether a

court injunction should be sought to halt

such activities. Other information about

frivolous tax positions is available on the

Service website at www.irs.gov.

DISCUSSION OF HOME-BASED

BUSINESS SCHEMES

Several promoters are selling packages

of materials (sometimes referred to as a

Tax Toolbox or a Tax Toolkit) con-

taining video or audio tapes, workbooks,

record-keeping aids, or other materials that

the promoters claim will assist taxpayersin

taking tax deductions for a taxpayers per-

sonal, living or family expenses under the

guise of conducting a business, usually out

of the taxpayers home. The promoters ofthese packages typically make one or more

of the following claims: (1) taxpayers can

legally reduce or eliminate their federal in-

come taxes by establishing a business, re-

gardless of whether the business is a bona

fide business conducted for profit; (2) op-

erating a business will permit the deduc-

tion of personal expenses (such as wed-

dings, childrens allowances, and vaca-

tions) as legitimate business expenses; (3)

placing a calendar, desk, file cabinet, tele-

phone, or other office-type item in each

room of a home will allow taxpayers todeduct all or most of the costs of operat-

ing their personal residences; or (4) by us-

ing the materials that the promoter sells,

taxpayers are guaranteed to receive a large

federal income tax refund or to reduce their

federal income tax liability by a substantial

amount.

Whether an individual is carrying on a

bona fide trade or business depends on the

facts and circumstances. Nevertheless, the

actions taxpayers take as part of a home

based business scheme, such as the plac

ing of a filing cabinet in a bedroom, invari

ably are taken for the purpose of claimin

personal, living or family expenses as de

ductible business expenses, and not for th

purpose of carrying on a bona fide trade o

business. Home-based business scheme

typically are used by taxpayers who per

form all of their work at their employers

place of business.

Section 262 disallows deductions fo

personal, living or family expenses, excep

as otherwise expressly provided by the In

ternal Revenue Code. Medical expenses

for example, are deductible only if the spe

cific requirements of section 213 are sat

isfied. Similarly, the provisions of sec

tion 163(h) govern when an individual tax

payer may deduct interest on a mortgage o

home equity loan. See I.R.C. 163(h)(2

and (h)(3).With respect to business expenses, onl

expenses paid or incurred during the tax

able year in carrying on a trade or busines

may be deducted under section 162(a

A trade or business expense deductio

under section 162, however, is not permit

ted with respect to a taxpayers residenc

unless specifically permitted in limite

circumstances by section 280A. I.R.C

280A(a). For example, with respect t

the business use of a taxpayers residence

section 280A provides that in order fo

allocable expenses to be deductible undethat section, the portion of the taxpayer

residence must be used exclusively by th

taxpayer on a regular basis as a principa

place of business for the taxpayers trad

or business, or to meet or deal with pa

tients, clients or customers in the norma

course of the taxpayers trade or busi

ness. If the taxpayer is an employee, th

exclusive and regular use of a portion o

the taxpayers residence must be for th

convenience of the taxpayers employe

before any expenses relating to that part o

the taxpayers residence may be deductedI.R.C. 280A(c).

Taxpayers participating in home-base

business schemes invariably do not hav

a bona fide home-based business and ar

not using any portion of their residence

exclusively and regularly for a work-re

lated use. These schemes will not con

vert otherwise nondeductible personal, liv

ing or family expenses into legitimate de

ductions. Moreover, detailed recordkeep

2004-12 I.R.B. 621 March 22, 200


9/29

ing cannot create a permissible deduction

unless the expenses at issue are legitimate

business expenses. Although deductions

must be substantiated in order to be al-

lowable, a taxpayer also must establish en-

titlement to the deduction, e.g., that the

claimed expenses were ordinary and nec-

essary for the production of income in a

trade or business.

Courts routinely reject the types

of arguments made by participants in

home-based business schemes as frivolous

and penalize taxpayers who make these

types of arguments. Courts also have en-

joined promoters who market frivolous

tax avoidance schemes that utilize these

frivolous arguments. See, e.g., United

States v. Estate Preservation Services,

202 F.3d 1093 (9th Cir. 2000) (order-

ing an injunction against a promoter of a

trust scheme who made fraudulent state-

ments that expenses related to a personalresidence could be deducted if the resi-

dence was transferred to a trust); United

States v. Buttorff, 761 F.2d 1056, 1060

(5th Cir. 1985) (ordering an injunction

against a promoter of a trust scheme who

made fraudulent statements that personal

consumption expenses could be deducted

if personal property was transferred to a

trust); Peete v. Commissioner, T.C. Memo.

200431 (imposing accuracy-related

penalty against taxpayer who deducted

personal and living expenses as purported

business expenses related to recruitingparticipants in a tax avoidance pyramid

scheme); Manley v. Commissioner, T.C.

Memo. 1983558 (disallowing deductions

of claimed personal and living expenses

and imposing both an accuracy-related

penalty and a penalty under section 6673

for advancing frivolous arguments).


In determining the correct amount of

tax, the Service will disallow personal,

living or family expenses that have beenimproperly claimed as business deduc-

tions. In addition to liability for tax due

plus statutory interest, individuals who

claim tax benefits on their returns based

on home-business schemes and other


and criminal penalties. Potentially ap-

plicable civil penalties include: (1) the

section 6662 accuracy-related penalty,

which is equal to 20 percent of the amount

of taxes the taxpayer should have paid; (2)

the section 6663 penalty for civil fraud,


of taxes the taxpayer should have paid;


filing a frivolous return; and (4) a penalty

of up to $25,000 under section 6673 if the

taxpayer makes frivolous arguments in the

United States Tax Court.













face penalties. Potential penalties include:(1) a $250 penalty for each return pre-

pared by an income tax return preparer

who knew or should have known that the

taxpayers argument was frivolous (or

$1,000 for each return where the return

preparers actions were willful, intentional

or reckless); (2) a $1,000 penalty under

section 6701 for aiding and abetting the

understatement of tax; and (3) criminal

prosecution under section 7206 for which

the penalty is a fine of up to $100,000

and imprisonment for up to 3 years for

assisting or advising about the preparationof a false return or other document under





HOLDING

Taxpayers cannot use schemes de-

signed to create the appearance of having

a home-based business, where none actu-

ally exists, for the purpose of converting

otherwise nondeductible personal, liv-ing or family expenses into purportedly

legitimate deductions. Arguments that

such schemes generate tax benefits are

frivolous. A taxpayer who is not engaged

in a bona fide home-based trade or busi-

ness cannot deduct, as a trade or business

expense under section 162, any expenses

alleged to relate to a purported home-based

business. Taxpayers attempting to reduce

their federal income tax liability by taking

frivolous positions will be liable for the

actual tax due plus statutory interest. In

addition, the Service will determine civil

penalties against taxpayers where appro-

priate, and those taxpayers also may face

criminal prosecution. The Service also

will determine appropriate civil penalties



those persons also may face criminal pros-

ecution. Promoters and others who assist

taxpayers in engaging in these schemes


section 7408.

Even if a taxpayer is engaged in a bona

fide trade or business or is conducting ac-

tivities from his home for the convenience

of his employer, the taxpayer must satisfy

the specific requirements of the Internal

Revenue Code, such as those contained in

sections 162 and 280A, to be entitled to

deduct expenses related to those activities.Personal, living or family expenses are not

deductible except as otherwise expressly

provided by the Internal Revenue Code.

I.R.C. 262(a).


This revenue ruling was authored by the





enue ruling, contact that office at (202)6224910 (not a toll-free call).

Section 861.IncomeFrom Sources Within theUnited States

(Also, 6662, 6663, 6702.)

Frivolous tax returns; attempting to

avoid taxes under section 861. This rul-

ing emphasizes to taxpayers, and to pro-

moters and return preparers who assist tax-payers with tax schemes, that there is no

authority in sections 861 through 865 of

the Code that permits an individual to take

the position that either the individual or the

individuals U.S. based income is not sub-

ject to federal income tax. The ruling also

describes many of the possible civil and

criminal penalties that apply to people who

make frivolous section 861 arguments to

evade tax.

March 22, 2004 622 2004-12 I.R.B.


10/29

Rev. Rul. 200430

PURPOSE

The Service is aware that some tax-

payers are attempting to reduce their fed-

eral tax liability by taking the position that

United States citizens and residents of the

United States are not subject to tax on

their wages and other income earned or de-rived within the United States (the Sec-

tion 861 position). These taxpayers rely

on sections 861 through 865 of the Code

and the regulations (in particular, Treasury

Regulation 1.8618) to argue that taxes

are only imposed on income derived from

certain foreign-based activities. The Ser-

vice also is aware that promoters, includ-

ing return preparers, are advising or rec-

ommending that taxpayers take frivolous

positions based on this argument. Some

promoters may be marketing a package,

kit, or other materials that claim to showtaxpayers how they can avoid paying in-

come taxes based on this and other merit-

less arguments.


payers, and to promoters and returnprepar-

ers who assist taxpayers with this scheme,

that there is no authority in sections 861

through 865 that permits an individual to

take the position that either the individual

or the individuals U.S.-based income is

not subject to federal income tax. This ar-

gument has no merit and is frivolous. The

rules of sections 861 through 865 have sig-

nificance solely in determining whether in-

come is considered from sources within

the United States or without the United

States, which is relevant, for example, in

determining whether a U.S. citizen or res-

ident may claim a credit for foreign taxes

paid.


taxpayers who attempt to avoid their tax

obligations by taking frivolous positions,

such as the Section 861 position. The Ser-

vice will take vigorous enforcement ac-tion against these taxpayers and against



tions. Frivolous returns and other sim-

ilar documents submitted to the Service

are processed through its Frivolous Return

Program. As part of this program, the

Service confirms whether taxpayers who

take frivolous positions have filed all of

their required tax returns, computes the

correct amount of tax and interest due,




penalties should apply to return prepar-

ers, promoters, and others who assist tax-


recommends whether a court injunction

should be sought to halt such activities.



at www.irs.gov.

ISSUE

Whether an individual may avoid in-

come tax by claiming that, under sections

861 through 865, United States citizens

and residents are not subject to tax on

wages and other income earned or derived

in the United States.

FACTS

A taxpayer who is either a citizen or

a resident of the United States files a re-

turn excluding income received from U.S.

sources, claiming that the income is not

subject to tax because sections 861 through

865 purportedly provide that only certain

foreign source income is subject to tax.

LAW AND ANALYSIS

Sections 861 through 865 do not limit

gross income subject to United States tax-

ation to foreign-source income. In Notice

200140, 20011 C.B. 1355, the Service

advised taxpayers that it considers the Sec-

tion 861 position to be a frivolous position.

Courts repeatedly have rejected this and

similar arguments as frivolous, and have

penalized taxpayers who make these types

of arguments. See, e.g., Takaba v. Com-

missioner, 119 T.C. 285 (2002) (conclud-

ing that [t]he 861 argument is frivolous

and sanctioning both the taxpayer and hisattorney for making such frivolous argu-

ments); Madge v. Commissioner, T.C.

Memo. 2000370 (concluding that the ar-

gument that only foreign income is taxable

is frivolous). For more information, please

see Notice 200140. Notice 200140 and

other information on frivolous tax posi-

tions are available on the Service website

at www.irs.gov.


In determining the correct amount o

tax due, the Service will include incom

that taxpayers attempt to exclude base

on the Section 861 position. In additio

to liability for tax due plus statutory in

terest, individuals who claim tax benefit

on their returns based on this and othe

frivolous arguments face substantial civiand criminal penalties. Potentially appli

cable civil penalties include: (1) the sec

tion 6662 accuracy-related penalty, whic

is equal to 20 percent of the amount o

taxes thetaxpayershould have paid; (2) th

section 6663 penalty for civil fraud, whic

is equal to 75 percent of the amount o

taxes the taxpayer should have paid; (3)


a frivolousreturn; and (4)a penalty of up t

$25,000 under section 6673 if the taxpaye

makes frivolous arguments in the Unite

States Tax Court.


may face criminal prosecution for: (1) at

tempting to evade or defeat tax under sec

tion 7201 for which the penalty is a fine o

up to $100,000 and imprisonment for up t

5 years; or (2) making false statements o

a return under section 7206 for which th

penalty is a fine of up to $100,000 and im


Persons who promote this scheme an

those who assist taxpayers in claiming ta

benefits based on this scheme also mayface penalties. Potential penalties include

(1) a $250 penalty for each return pre

pared by an income tax return prepare

who knew or should have known that th

taxpayers argument was frivolous (o


preparers actions were willful, intentiona

or reckless); (2) a $1,000 penalty unde

section 6701 for aiding and abetting th

understatement of tax; and (3) crimina

prosecution under section 7206 for whic


and imprisonment for up to 3 years foassisting or advising about the preparation

of a false return or other document unde

the internal revenue laws. Promoters an




2004-12 I.R.B. 623 March 22, 200


11/29

HOLDING

Any position that, under sections 861

through 865, United States citizens and

residents are not subject to tax on wages

and other income earned or derived in the

United States is frivolous. Taxpayers at-

tempting to reduce their federal tax liabil-

ity by taking frivolous positions based on

this argument will be liable for the actualtax due plus statutory interest. In addi-

tion, the Service will determinecivilpenal-

ties against taxpayers where appropriate,

and those taxpayers also may face crimi-

nal prosecution. The Service also will de-

termine appropriate civil penalties against

persons who prepare frivolous returns or

promote frivolous positions, and those per-

sons also may face criminal prosecution.

Promoters and others who assist taxpay-

ers in engaging in these schemes also may

be enjoined from doing so under section

7408.









Section 911.Citizens orResidents of the UnitedStates Living Abroad

(Also, Sections 6662, 6663, 6702.)

Frivolous tax returns; excluding

gross income under section 911. This

ruling emphasizes to taxpayers, and to

promoters and return preparers who as-

sist taxpayers with frivolous tax schemes,

that there is no basis for excluding in-

come earned in a State, Commonwealth,

or Territory of the United States undersection 911 of the Code. The ruling also

describes many of the possible civil and

criminal penalties that apply to people who

claim tax benefits on their return based on

frivolous claims under section 911.

Rev. Rul. 200428

PURPOSE



tax liability by taking the position that their

wages or other income are excluded from

gross income under section 911 of the In-

ternal Revenue Code because the State,

Commonwealth, or Territory of the United

States in which they resided or performed

services is a foreign country. The Ser-

vice also is aware that promoters, includ-

ing return preparers, are advising or rec-

ommending that taxpayers take frivolous

positions based on this argument. Some

promoters may be marketing a package,

kit, or other materials that claim to show

taxpayers how they can avoid paying in-

come taxes based on this and other merit-

less arguments.This revenue ruling emphasizes to tax-

payers, and to promoters and return prepar-


that there is no basis under section 911

for excluding income earned in a State,


States. This argument has no merit and

is frivolous. Section 911 of the Inter-

nal Revenue Code permits a taxpayer to

elect to exclude income from gross income

for U.S. income tax purposes only when

the taxpayer earns income and resides out-

side the United States under the conditionsand limitations set forth in that section.

For purposes of section 911, States, Com-

monwealths, and Territories of the United

States are not foreign countries.


ing taxpayers who attempt to avoid their

tax obligations by taking frivolous posi-

tions, such as frivolous positions based on

meritless section 911 arguments. The Ser-

vice will take vigorous enforcement action

against such taxpayers and against promot-

ers and return preparers who assist taxpay-

ers in taking these frivolous positions.Frivolous returns and other similar

documents submitted to the Service are

processed through its Frivolous Return









penalties should apply to return preparers,

promoters, and others who assist tax-


recommends whether a court injunction

should be sought to halt such activities.



at www.irs.gov.

ISSUE

Whether an individual may exclude in-

come under section 911 by claiming that

he met the requirements of section 911 be-

cause a State, Commonwealth, or Territory

of the United States is considered to be a

foreign country under section 911.

FACTS

Situation 1. A, an individual, resides in

State X, a State or Commonwealth of theUnited States, and performs services ex-

clusively in State X. A was present in State

X for all of his taxable year and is therefore

not eligible in that taxable year for the ex-

clusion from income under section 911 for

citizens or residents of the United States

living abroad. Based on the advice of a

person who promotes the view that sec-

tion 911 excludes income earned in a State,


States because such State, Commonwealth

or Territory is a foreign country, A files

a return including a Form 2555, ForeignEarned Income, or a Form 2555EZ, For-

eign Earned Income. On the Form 2555 or

Form 2555EZ, A asserts that he is entitled

to the exclusion from gross income under

section 911 because he earned such income

by performing services in, is a bona fide

resident of, and has a tax home in, a foreign

country (i.e., State X). A acknowledges on

Form 2555 or Form 2555EZ that the ser-

vices were performed in State X and that

he was a bona fide resident of State X, but

contends that State X is a foreign country

and not a part of the United States.Situation 2. Same as Situation 1 ex-

cept that A, a resident of State X, claims

an exclusion from gross income under sec-

tion 911 based upon his physical presence

in State X. Specifically, A claims he sat-

isfies the physical presence test of section

911 because he was physically present in a

foreign country for at least 330 days during

his taxable year. A acknowledges on Form

2555 or Form 2555EZ that he was present

March 22, 2004 624 2004-12 I.R.B.


12/29

in State X, but contends that State X is a

foreign country and not a part of United

States.

Situation 3. B, an individual, per-

formed services in and resided on John-

ston Island, one of the islands on Johnston

Atoll. The Johnston Atoll is a Territory of

the United States. B files a U.S. Federal

Income Tax Return with a Form 2555 or

a Form 2555EZ in which he asserts that

he is entitled to the exclusion from gross

income under section 911 because he per-

formed services in, is a bona fide resident

of, and has a tax home in, a foreign coun-

try (i.e., Johnston Atoll).

LAW AND ANALYSIS

Section 911 allows individuals that

meet its requirements to elect to exclude

from gross income certain foreign earned

income. To qualify for the exclusion un-

der section 911, a U.S. citizen or residentworking abroad must have a tax home in a

foreign country and satisfy either the bona

fide residence test or the physical presence

test. For purposes of section 911, States,

Commonwealths, and Territories of the

United States are not foreign countries.

Treas. Reg. 1.9112(g) & (h).

In the situations described above, A

and B do not meet the requirements for the

exclusion from gross income under section

911. The claim that section 911 excludes

income earned in a State, Commonwealth,

or Territory of the United States because

such State, Commonwealth or Territory is

a foreign country has no basis in law or

fact. Courts repeatedly have rejected simi-

lar arguments as frivolous, imposed penal-

ties for making arguments such as these

in court, and upheld criminal tax evasion

convictions against individuals making

such arguments. Courts repeatedly have

rejected similar arguments as frivolous,

imposed penalties for making arguments

such as these in court, and upheld criminal

tax evasion convictions against individu-als making such arguments. See, e.g., In

re Becraft, 885 F.2d 547, 54950 (9th Cir.

1989) (rejecting the claim that federal law

governs only the District of Columbia and

U.S. territories and sanctioning attorney

for making frivolous arguments); United

States v. Ward, 833 F.2d 1538, 1539 (11th

Cir. 1987) (affirming tax evasion con-

viction and noting that claim that federal

law applies only the District of Columbia,

federal enclaves within States and U.S.

territories is utterly without merit).


In determining the correct amount of

tax due, the Service will include income

that taxpayers attempt to exclude based on

frivolous section 911 arguments. In addi-

tion to liability for tax due plus statutoryinterest, individuals who claim tax bene-

fits on their returns based on this and other


and criminal penalties. Potentially appli-

cable civil penalties include: (1) the sec-

tion 6662 accuracy-related penalty, which


taxes the taxpayer should have paid; (2) the

section 6663 penalty for civil fraud, which


taxes the taxpayer should have paid; (3) a


a frivolous return; and (4)a penalty of up to$25,000 under section 6673 if the taxpayer


States Tax Court.














(1) a $250 penalty for each return pre-








understatement of tax; and (3) criminalprosecution under section 7206 for which



assisting or advising about the preparation

of a false return or other document under





HOLDING

Any position that the exclusion from

gross income under section 911 applie

to a taxpayers income because a State

Commonwealth, or Territory of the Unite

States is considered to be a foreign coun

try is frivolous. Taxpayers attempting t

reduce their federal tax liability by taking

frivolous positions based on this argumenwill be liable for the actual tax due plu

statutory interest. In addition, the Servic

will determine civil penalties against tax

payers where appropriate, and those tax

payers also may face criminal prosecution

The Service also will determine appropri

ate civil penalties against persons who pre

pare frivolous returns or promote frivolou

positions, and those persons also may fac

criminal prosecution. Promoters and oth

ers who assist taxpayers in engaging in




This revenue ruling wasauthored by th

Office of Associate Chief Counsel (Proce

dure and Administration), Administrativ

Provisions and Judicial Practice Division

For further information regarding this rev

enue ruling, contact that office at (202


Section 6651.Failure toFile Tax Return or to Pay Tax

Tax avoidance schemes; meritles

corporation sole arguments. This rul

ing emphasizes to taxpayers, tax schem

promoters and return preparers that, whil

a corporation sole is a legitimate corpo

rate form that may be used by a religiou

leader to hold property and conduct busi

ness for the benefit of the religious entity

a taxpayer cannot avoid income tax b

establishing a religious organization fo

tax avoidance purposes.

Rev. Rul. 200427

PURPOSE

The Service is aware that some tax

payers are attempting to reduce their fed

eral tax liability by taking the position tha

the taxpayers income belongs to a cor

poration sole created by the taxpayer fo

2004-12 I.R.B. 625 March 22, 200


13/29

the purpose of avoiding taxes on the tax-

payers income. The Service also is aware

that promoters, including return preparers,

are advising or recommending that taxpay-

ers take frivolous positions based on this

argument. Some promoters may be mar-

keting a package, kit, or other materials

that claim to show taxpayers how they can

avoid paying income taxes based on this

and other meritless arguments.

This revenue ruling emphasizes to

taxpayers, and to promoters and return

preparers who assist taxpayers with this

scheme, that a taxpayer cannot avoid in-

come tax by establishing a corporation

sole for the purpose of avoiding taxes on

the taxpayers income. A corporation sole

may be used only by a bona fide religious

leader for specific, limited purposes relat-

ing to the religious leaders office. The

argument that a taxpayers income can be

assigned to a corporation sole, and thus beexempted from taxation, has no merit and

is frivolous.


taxpayers who attempt to avoid their tax

obligations by taking frivolous positions,

such as frivolous positions based on a mer-

itless corporation sole argument. The

Service will take vigorous enforcement ac-

tion against these taxpayers and against



tions. Frivolous returns and other sim-

ilar documents submitted to the Serviceare processed through its Frivolous Return









penalties should apply to return prepar-

ers, promoters, and others who assist tax-


recommends whether a court injunctionshould be sought to halt such activities.



at www.irs.gov.

ISSUE

Whether a taxpayer may exclude in-

come from taxation based on the argument

that the taxpayers income belongs to a

corporation sole created by the taxpayer

for the purpose of avoiding taxes on the

taxpayers income.

FACTS

A corporationsole is a corporateform

authorized under certain state laws to en-

able bona fide religious leaders to hold

property and conduct business for the ben-efit of the religious entity. A number of

individuals are promoting the use of these

entities to avoid taxes on income and con-

ceal the taxpayers assets from tax col-

lection. Participants in this scheme apply

for incorporation under the pretext of be-

ing an official of a church or other reli-

gious organization or society. Participants

then are provided with a state identifica-

tion number that can be used to open fi-

nancial accounts. Participants claim that

their income is exempt from federal and

state taxation because this income belongs

to the corporation sole, which is claimed

to be a tax exempt organization described

in section 501(c)(3) of the Internal Rev-

enue Code. Participants may further claim

that because the taxpayers assets are held

by the corporation sole, the taxpayer is not

subject to collection actions for the pay-

ment of personal federal or state income

taxes or for the payment of other obliga-

tions, such as child support.

LAW AND ANALYSIS

A valid corporation sole enables a bona

fide religious leader, such as a bishop or

other authorized church or other religious

official, to incorporate under state law, in

his capacity as a religious official. See,

e.g., Berry v. Society of Saint Pius X, 69

Cal. App. 4th 354 (1999) (One purpose

of the corporation sole is to insure [sic] the

continuation of ownership of property ded-

icated to the benefit of a religious organi-

zation which may be held in the name of

its titular head.). A corporation sole mayown property and enter into contracts as a

natural person, but only for the purposes of

the religious entity and not for the individ-

ual office holders personal benefit. Title

to property that vests in the office holder

as a corporation sole passes not to the of-

fice holders heirs, but to the successors to

the office by operation of law. A legitimate

corporation sole is designed to ensure con-

tinuity of ownership of property dedicated

to the benefit of a legitimate religious or-

ganization.

A taxpayer cannot avoid income tax or

other financial responsibilities by purport-

ing to be a religious leader and forming

a corporation sole for tax avoidance pur-

poses. The claims that such a corporation

sole is described in section 501(c)(3) and

that assignment of income and transfer

of assets to such an entity will exempt an

individual from income tax are meritless.

Courts repeatedly have rejected similar

arguments as frivolous, imposed penalties

for making such arguments, and upheld

criminal tax evasion convictions against

those making or promoting the use of

such arguments. See, e.g., United States v.

Heineman, 801 F.2d 86 (2d Cir. 1986) (up-

holding conviction for promoting use of

purported church entities to avoid taxes);

United States v. Adu, 770 F.2d 1511 (9th

Cir. 1985) (upholding conviction for aid-ing and assisting in the preparation and

presentation of false income tax returns

with respect to false charitable contribu-

tion deductions to same type of purported

church entities involved in Heineman);

Svedahl v. Commissioner, 89 T.C. 245

(1987) (sanctioning taxpayer for using

contributions to purported church entities

similar to those involved in Heineman to

shield income and pay personal expenses).


In addition to having to pay the ac-

tual tax due plus statutory interest, indi-

viduals who claim tax benefits on their re-

turns based on a corporation sole scheme

or other frivolous arguments face substan-

tial civil and criminal penalties. Poten-

tially applicable civil penalties include: (1)

the section 6662 accuracy-related penalty,


of taxes the taxpayer should have paid; (2)

the section 6663 penalty for civil fraud,


of taxes the taxpayer should have paid; (3)a $500 penalty under section 6702 for fil-

ing a frivolous return; and (4) a penalty

of up to $25,000 under section 6673 if the

taxpayer makes frivolous arguments in the

United States Tax Court.






March 22, 2004 626 2004-12 I.R.B.


14/29









(1) a $250 penalty for each return pre-








understatement of tax; and (3) criminal

prosecution under section 7206 for which



assisting or advising about the preparation

of a false return or other document underthe internal revenue laws. Promoters and




HOLDING

A taxpayer cannot use a corporation

sole as a means to exclude the taxpayers

income from taxation. Taxpayers attempt-

ing to reduce their federal tax liability by

taking frivolous positions based on this ar-

gument will be liable for the actual tax dueplus statutory interest. In addition, the Ser-

vice will determine civil penalties against

taxpayers where appropriate, and those

taxpayers also may face criminal prose-

cution. The Service also will determine

appropriate civil penalties against persons

who prepare frivolous returns or promote

frivolous positions, and those persons also

may face criminal prosecution. Promoters

and others who assist taxpayers in engag-

ing in these schemes also may be enjoined

from doing so under section 7408.









Section 6662.Impositionof Accuracy-RelatedPenalty

Frivolous tax returns; meritless

claim of right arguments. This ruling

emphasizes to taxpayers, and to promoters

and return preparers who assist taxpayers

with frivolous tax schemes, that there is no

claim of right doctrine that permits an

individual to take the position that either

the individual or the individuals income

is not subject to federal income tax. The

ruling also describes many of the possi-

ble civil and criminal penalties that apply

to people who make frivolous claim of

right arguments to evade tax.

Rev. Rul. 200429

PURPOSE



tax liability by taking the position that ei-

ther they or their incomes are not subject

to tax based on what they describe or refer

to as a claim of right. The Service also is

aware that promoters, including return pre-

parers, are advising or recommending that

taxpayers take frivolous positions based on

this argument. Some promoters may be

marketing a package, kit, or other materi-

als that claim to show taxpayers how they

can avoid paying income taxes based onthis and other meritless arguments.


payers, and to promotersand return prepar-


that there is no claim of right doctrine

that permits an individual to take the po-

sition that either the individual or the indi-

viduals income is not subject to federal in-

come tax. This argument has no merit and

is frivolous. Section 1341 (Computation

of tax where taxpayer restores substantial

amount held under claim of right) of the

Internal Revenue Code applies only whena taxpayer properly reports an amount of

income in one taxable year and later repays

all or a portion of that same amount in a

later taxable year because the taxpayer, in

fact, did not have an unrestricted right to

that income.


ing taxpayers who attempt to avoid their

tax obligations by taking frivolous posi-

tions, such as frivolous positions based on

a meritless claim of right argument. Th

Service will take vigorous enforcement ac

tion against these taxpayers and agains

promoters and return preparers who assis

taxpayers in taking these frivolous posi

tions. Frivolous returns and other sim

ilar documents submitted to the Servic

are processed through its Frivolous Retur

Program. As part of this program, th

Service confirms whether taxpayers wh

take frivolous positions have filed all o

their required tax returns, computes th

correct amount of tax and interest due

and determines whether civil and crimi

nal penalties should apply. The Servic

also determines whether civil or crimina

penalties should apply to return prepar

ers, promoters, and others who assist tax

payers in taking frivolous positions, an

recommends whether a court injunctio

should be sought to halt such activities

Other information about frivolous tax positions is available on the Service websit

at www.irs.gov.

ISSUE

Whether section 1341, relating t

amounts held under claim of right,

allows an individual to reduce his or he

federal income tax liability with respec

to an item that was not included in gros

income for a prior taxable year.

FACTS

Individual taxpayer A has gross incom

for taxable year 1. A claims deduction

that equal or exceed As gross income o

As individual income tax return for tax

able year 1. As claimed deductions ma

appear on various places on the return. Fo

example, A may claim the deductions: (i

on Schedule A as compensation for per

sonal labor; (ii) on Schedule C as a cos

of As labor; or (iii) on other schedules o

elsewhere on As return. Alternatively, A

simply may not report all or some of A

gross income on As return. Although thspecific nature of As claim of right ar

gument for the position taken on the retur

may vary, As position generally is that un

der a claim

US Internal Revenue Service: irb04-12

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