A Sad Tale of a Encounter with a Tax Protester

Thinking back to law school, I remember my constitutional law professor advising the aspiring lawyers to never take a position on an issue if that position does not pass the red face test. She explained that a position fails the red face test if you are embarrassed to state the position openly. Tax protesters should know that they will have to state their positions openly and they should be aware of the red face test (for the lay readers, tax protesters are those individuals who make various Constitutional and Biblical arguments as to why they should not have to pay any federal taxes). This type of emotional issue is never mentioned by the literature or by the individuals that promote tax protester ideologies. Tax protesters and potential tax protesters should be made aware of these emotional issues. When tax protesters solicit my counsel, I alert them to these emotional issues by telling the sad tale of my first encounter with a tax protester. I relate this story here with the intent of explaining what it is really like to be a tax protester. With that said, here is the sad tale:

I had arrived at the courthouse early, so I found my way to the courtroom where the U.S. Tax Court was going to convene and I took a seat in the middle pew. The only other persons there were the bailiffs and the IRS attorney and agent. A few spectators shuffled into the courtroom and took seats around me. The opposing parties entered the courtroom. The tax protester promoter led the way (he looked strikingly similar to a haggard Drew Carey – not to insult the real Drew Carey). The tax protester entered second. The tax protester’s support group entered last. At this point I did not know that this was a tax protester case.

The promoter made his way to the counsel table and started to unpack his briefcase. The promoter took the only item in his briefcase out and placed it on the table. It was a thick tome, which I assumed was an abridged version of the Internal Revenue Code (IRC). At the time, I remember thinking, “Wow, I have never seen anyone try to argue an entire case based solely on the IRC.” I began to wonder how anyone could put on a case without bringing any notes, documentation, or other evidence to support their position. As I settled in to see what this case was about, I noticed that the book that the promoter had set on the table was not the IRC. It was a copy of the Bible.

My attention then turned to the conversations between the members of the tax protester’s support group. One conversation centered on “government criminals” and something about hell. A second conversation involved one protester trying to sell the other a hush-hush mortgage “investment” that would elude prying eyes. As these two protesters discussed the mechanics of the deal, the salesman concluded that all the “investor” had to do was to write the salesman a personal check right then and the salesman would get back to the “investor” within a few weeks. He promised that there would be no paper trail and that, without incurring a tax liability, the “investment” would double in value in some specified time period. The transaction was obviously a scam and the look on the “investor’s” face revealed that he thought it was a scam too – but the “investor” still seemed interested in the deal. It sounded like they agreed to discuss the deal further after the hearing, but their conversation was drowned out by the court administrator’s voice.

The court administrator had came into the courtroom to tell the promoter that he was not allowed to sit at the counsel table or make arguments to the court because he was not an attorney. The promoter argued with the court administrator for several minutes. When the administrator explained that disbarred attorneys are not allowed to represent clients before the court, the promoter nervously glanced to his fan base in the pews to make sure that they did not hear the administrator’s comments. After that, the promoter quickly found his way to the pews. He sat right in front of me.

The promoter turned in my direction and instructed the young woman to the left of me to be sure to transcribe every word that transpired during the hearing. The young woman carried a 3” by 5” pad of paper and a pencil with a pink plume on the end. She wrote the words “Take Notes” on the pad of paper – the size of her writing was so large that those two words filled the first sheet of paper. Just when I was going to point out that there was already a court reporter in the courtroom and that she could buy an exact transcript for a few dollars, the judge entered the chamber.

As the court was going through introductions and calling the case, I turned my attention to the tax protester. She was a middle-aged woman. Other than not dressing up for court, she appeared to be normal. She would not stand out in a crowd.

My thoughts were interrupted when the IRS attorney started speaking. She indicated that the hearing was called to enforce a subpoena. Basically the IRS wanted the tax protester to turn over some bank statements. The court asked the tax protester why she had not turned over the documents. The tax protester appeared to be nervous. She did not answer the judge’s question. She tried to make several arguments. Some of the arguments appeared to involve something about the court’s powers, illegality, the Bible, and the Constitution. The protester’s sentences were choppy. The Judge had to interject to try to get the tax protester on track. The tax protester kept stopping mid-sentence and starting with a different argument. It was as if her mind were going too fast for her mouth. It was very apparent that the tax protester did not believe in the arguments that she was trying to make. The arguments really were ridiculous and the judge let her know that they were ridiculous. The tax protester kept looking in the promoter’s direction. I saw a look of shame and disbelief on the tax protester’s face. I felt sorry for her. All the while, the promoter was frantically trying to hand the protester a scrap of paper on which he had scribbled a note. It couldn’t have been more than two or three words. He was leaning way over the partition that separated the court from the pews and he was waiving his arm wildly. It really looked like he was going to fall over the partition. The tax protester never took the note. All the while she looked at the promoter with a look that said, “look what have you gotten me into,” “you are a con man,” and “I hate you” all at once.

The end result was that the tax protester pulled the documents out of her purse, handed them to the judge, and the judge reviewed them and turned them over to the IRS agent. There were only about two or three pieces of paper. It looked like only one bank statement. The court adjourned. It was really anticlimactic.

When I looked around, I noticed that the promoter and the protester support group had disappeared. They had crept out of the courtroom during the hearing. The non-tax protester spectators took their time leaving the courtroom. They were laughing and making jokes about the tax protester and the promoter. The tax protester was watching the crowd exit the courtroom and she was listening to their jokes. Eventually the tax protester and I were the only people remaining in the courtroom. The tax protester noticed that her counsel and her support group had abandoned her. She started crying. She was looking in my direction for some sign of reassurance. I did feel sorry and embarrased for her, but there was really nothing I could have done to make her feel any better. I remember thinking that she was lucky not to have been held in contempt and taken into custody. That was the only positive thing that I could think of at the moment. Realizing that she would not want to hear that point at the moment, I walked out of the courtroom.

Ever since that encounter I have wondered how the desire to not pay any taxes could lead this woman, a who appeared to be outwardly normal, to think that it was acceptable to come into court and make such ridiculous arguments — especially when she obviously didn’t really believe in them. The woman did not appear to have any mental health issues, but I find it difficult to believe that a sane individual would take such actions. If she was sane, I wonder if her will was somehow overpowered or she was manipulated or misled by the promoter of the tax protester ideology. I often wonder if these types of promoters have the same skill set that cult leaders are purported to have.

The worst part of whole the experience is that the tax protester had apparently earned so little taxable income that she would have only had to pay a small tax liability – much less than the amount that she probably paid the promoter. Based on the testimony it sounded as if she could not afford to pay the tax and the promoter’s fee. That was the first time that I encountered a tax protester and that is the only time that I have heard anyone try to make arguments that clearly fail the red face test. It was a sad tale indeed.

July 2nd, 2005 | No Comments »

Tax Breaks Will Not Create an Ownership Society

The Bush administration has had mixed success in getting its ‘ownership society’ policies enacted into law. However, there is one area in which the administration has been very successful: getting tax breaks enacted into law. Many of these tax breaks are aimed at encouraging taxpayers to take steps towards ‘ownership’ – such as saving for education, health care, and retirement and borrowing to purchase a home. These ‘ownership society’ tax breaks are politically correct, but they are not realistic given the current state of our society or economy.

These ‘ownership’ tax incentives are aimed primarily at poor and middle-class Americans (most of the tax breaks have phase-outs that preclude higher income earners from taking advantage of the tax benefits). However, tax breaks are not really beneficial for poorer Americans. The fact is that most poor and middle-class Americans already pay no, or only nominal, federal income taxes. In most cases these groups receive income tax refunds. In addition, these groups are heavily debt laden. Why would a tax break spur these groups to increase their savings when these groups are not even been able to pay off their current debts? These tax incentives are particularly questionable when you consider that a majority of the debt carried by poorer American consists of credit card debt, which can incur an interest rate in excess of 20%. These tax break incentives look even less appealing for these groups when you consider that real wages have not been keeping up with inflation. Why would these groups start or increase saving when their earnings are decreasing and their living expenses are increasing? In this environment, for poorer Americans, investing in groceries might be more appropriate than investing in the stock market.

Even if these incentives were successful, these poorer groups would not be able to effectively invest and manage their own money. As a result, most of the savings would flow into government-backed securities and mutual funds that hold significant portions of government-backed securities. Most financial advisers would agree that investing a large portion of a portfolio in these vehicles is not advisable given the recent devaluation of the dollar, the current historically low interest rates, the increasing budget and trade deficits, and increasing foreign competition. Therefore, incentives encouraging poorer Americans to save could result in these groups suffering significant financial losses.

Taking out debt to finance home ownership may be just as detrimental. Many believe that we are currently experiencing a housing bubble. So even if incentives were effective to increase home ownership, they would only encourage poorer Americans to buy in at the market high. Moreover, poor and middle-class Americans, who are typically less credit worthy, are more likely to pay higher mortgage interest and fees and be sold adjustable rate mortgages rather than fixed rate mortgages. Mortgage rates are expected to increase and, as a result, mortgage payments on adjustable rate mortgages will increase. Consequently, these incentives will only serve to increase in the number of poorer Americans who face home foreclosures.

These tax breaks may have been feasible in different social and economic times. They are not feasible today. This does not mean that the Bush administration should abandon the ‘ownership society’ ideology. Instead, the Bush administration might pursue other non-tax incentives, such as passing usury laws to cap credit card interest rates or passing laws that would help poorer Americans buy homes at below market rates.

June 29th, 2005 | No Comments »

Repeal of the Estate Tax & the Legacy of the Baby Boomer Generation

Much has been said about the Baby Boomer generation’s lack of retirement saving. There can be no doubt that this issue will continue to be important. An equally important but less cited issue is what will happen to the wealth that the Boomer generation has acquired. The reality is that the boomer generation has amassed a huge amount of wealth. This wealth is going to eventually pass to the government or the next generation of Americans. This transfer of wealth will have a dramatic impact on our overall financial health and it will dramatically impact American society.

While it may not currently be a popular notion, passing wealth to the government might just be the best option available to Boomer generation. The statistics vary, but the size of the Boomer’s wealth should be more than enough to eliminate all or a large portion of our national debt (the national debt is currently at about $7 trillion and many believe that Boomers currently hold $10 trillion in wealth). From a policy perspective, it only seems fair that the generation that created a large portion of, and benefited the most from, the national debt should pay for it. Accomplishing such a feat could be the best legacy that the Boomer generation could ever hope to leave. The Boomer generation’s indifference towards estate planning helps ensure that this will come about. However, that assumes that the estate tax is not repealed. If the estate tax is repealed, then more of the Boomer’s wealth will pass to the next generation of Americans.

The consequences of such a large transfer of wealth to one generation could be disastrous for American society. One only has to think of the problems associated with today’s stereotypical trust fund kid to see what American society will look like in the future. It is time to ask whether we really should be creating an America where a large portion of American society is composed of trust fund kids. We must explore issues such as what impact this population will have on the traditional American society. Will the traditional American independent do-it-yourself hard working and innovative spirit succumb to a society focused on leisure and self-entitlement? Will this passage of wealth only serve to widen the gulf separating the have and have-nots?

Wealth holders may be able to reduce the consequences of this wealth transfer by taking steps now to prepare their beneficiaries to receive their wealth. This preparation would need to include teaching inheritors the financial and life skills necessary to cope with wealth. It is probably a fair statement to say that most Americans are not comfortable with or able to provide this type of service. In fact, most estate planning professionals are not able to provide this service. By way of example, think of the estate-planning attorney that goes to great pains to pass as much wealth to the next generation as possible, but does nothing to prepare the next generation to handle the wealth.

Wealth coaches, who provide a combination of financial and life coaching services, may be able to help wealth holders address these issues. The financial industry follows the money, so we can expect that the number of wealth coaches offering these services will increase in proportion to the amount of wealth that passes from the boomer generation to younger generations. If brought in early in the beneficiary’s life, these wealth coaches are in a position to “un-trust fund kid” inheritors before they actually receive their wealth, facilitate the transfer of wealth from one generation to the next when the time arises, and oversee the inheritor after the wealth holder is gone. The only question remaining is whether the current wealth holders will employ wealth coaches to help the lower generations. The boomer generation’s lack of estate planning and retirement saving tends to indicate that they will not.

When these issues are considered it appears that the estate tax should not be repealed. Instead, we might need to start thinking about increasing the estate tax rate to something closer to 100% — or higher.

June 22nd, 2005 | No Comments »

The Real Social Security Crisis

The President’s Social Security reform agenda has generated very little interest. However, the President’s Social Security reform agenda presented the mainstream media with an opportunity to present the pros and cons of our Social Security system. As with most issues, the mainstream media’s coverage of this issue has missed the mark.

Contrary to the express or implied message of the mainstream media, the baby boomer generation is not simply going to check out of the employment market, retire, and draw down our nation’s health care and social security resources. That scenario might have been fitting for the boomer’s parent’s generation, but it most certainly is not fitting for the boomer generation.

The reality is that baby boomers as a group are more healthy and active in their advanced years than any generation of Americans that we have ever known. Combine this with the fact that we are have shifted from a manufacturing-based economy to a non-physically demanding knowledge-based economy and you have the potential for baby boomers to be economically productive well into their 80s, 90s and possibly their 100s.

Besides, the boomers have established themselves as a generation that does things their own way. Given that there will be far fewer workers to fill positions vacated by boomers, boomers will be in a position to write their own job descriptions and define their own work conditions. So why would boomers act contrary to their past behavior and why would they squander the opportunity to do what they want? As many of my boomer clients have said, why would I want to check out now when I am having so much fun?

Each of these issues leads one to the conclusion that a large number of boomers are going to continue working. If so, they will also continue to pay into the Social Security system – they won’t be drawing from the system. It is this continued paying into the system that will easily keep our current system afloat. Why has the mainstream media not included these issues in their coverage of the Social Security “crisis?”

June 15th, 2005 | No Comments »