Archive for the ‘ Seen in the Courtroom ’ Category

Is it true that there is no law requiring payment of income tax?

My tenure as an IRS attorney caused me to think deeply about taxes, courts, and government. And it helped me see how I can help individuals who face the tax system.

There are people – common in the San Fernando Valley – who believe that the government does not have the right to collect taxes. At the IRS offices, we called them “constitutionally challenged.” We weren’t allowed to call them “tax protestors.” A common assertion they made: there is no law that requires them to pay income tax. Oh, they’ll say that the 16th Amendment wasn’t properly ratified because Ohio wasn’t a state in 1916, or that the term “person” in I.R.C. § 6012 isn’t defined, therefore doesn’t include them, or that receiving “cash” isn’t “income.” Debating them made me think about the IRS’s mission. It also made me think about what a mentally healthy person does.

Someone recently showed me a case involving a bankruptcy debtor who filed Uniform Commercial Code Financing Statements against federal employees because he didn’t like the way the federal employees were doing their jobs. It brought me back five years, to a case where the taxpayer didn’t like the IRS collecting taxes from him, and didn’t like that I was helping the IRS collect taxes from him. He filed a UCC-1 financing statement against me in the amount of $41 million (or was it billion?). I wasn’t alone; the statement also named 10 other IRS personnel and a Tax Court judge. It’s a good thing I had already gotten a home loan.

That particular taxpayer had used a novel argument against the IRS: he was not only a “natural-born, 13th Amendment citizen,” but also a “U.S. Vessel.” As such, he had a prior lien against his earnings under the Tax Court’s maritime jurisdiction that trumped the federal government’s contractual right to payment from him.

This argument, of course, was not seaworthy, and the judge did not even dignify it with comment beyond the word “frivolous.” (The IRS has identified a host of other arguments that are “frivolous;” the kindest word I can use is “creative.”)

My sometime-vessel taxpayer left the bounds of mental health when he adopted an extravagantly unrealistic statement: “I am a U.S. vessel.” Yes, there are legal fictions (corporations are persons), but they are few and widely-accepted.

More importantly: the taxpayer made a grave mistake when he said that the government had a contractual right to taxes.

Attorneys and the general public must be clear about this. There is nothing “contractual” about taxes. Taxation is extortion. It is only legal because all three branches of the government, which controls the legitimate use of power and violence, say it is legal. Regardless of its morality and justice, the income tax exists. It’s mentally healthy to recognize this and deal with it, rather than claiming that some tortured loophole rescues me from its obligations.

Because I know the way the IRS works, and the workings of the income tax, I can help most people live with and, sometimes, even defeat the IRS. But not if that person also thinks he’s a boat.

Who is the Bankruptcy Trustee?

When you file a bankruptcy, you no longer own your own goods. They pass into a bankruptcy estate owned by a trustee, who is supposed to act for the good of your creditors.
This means that a debtor generally does not have the right to sell his own assets between filing bankruptcy and getting a discharge.
In chapter 7, or liquidation, bankruptcies, the trustee has the duty to investigate your assets and determine what he may sell off to satisfy creditor claims. Usually, because of the exemptions provided by state law, there is nothing to sell off. The debtor continues on his or her way by shedding debts but not goods. We call these “no-asset cases.”
In chapter 13 bankruptcies, which involve a personal reorganization, there are two trustees: the debtor himself, and the chapter 13 trustee. Here, the bankruptcy estate includes the next five years of the debtor’s income. The debtor keeps legal title to goods, and the chapter 13 trustee ensures that the debtor is making his best efforts toward paying into the plan.
In chapter 11 bankruptcies, the debtor is also the trustee, a position known as the “debtor-in-possession.” In corporate cases, the company’s former management may continue to serve as the debtor-in-possession; in cases of willful mismanagement, the court may oust the former management and install a new trustee.

The tenant who wanted her rent back

My client was a landlady who rented her three-unit house not far from the beach in Ventura. The county came by one day and put yellow tags on two of the units, calling them “substandard” and evicting the tenants that day. Why “substandard?” Mostly because the area was zoned for one unit only: there was no way to have three units on the lot legally. But there were other, fixable, health and safety issues; the building was not the Ritz-Carlton.
Three months later, the landlady had demolished the units, short-sold the remaining house, and filed for bankruptcy protection.
The tenant in the middle unit didn’t want her to get off so easy. She filed an adversary proceeding, a lawsuit, in the bankruptcy asserting a nondischargeable debt: she claimed she was entitled to a refund of all the rent she had paid, since the unit was illegal the entire time and California law says you can’t collect rent on an illegal or uninhabitable unit. She claimed that the debt was nondischargeable, that is, the landlord should still owe it despite getting bankruptcy protection, because the landlord had collected each rent check by fraud, or because the act of renting the unit was a “willful and malicious” tort.
My client refused to settle: she didn’t see any reason she should refund rent for a period of time (three and a half years) when the tenant actually occupied the apartment without an express complaint. The tenant demanded a five-figure lump-sum payment to drop the case.
So we went to trial. Trials in bankruptcy court are blessedly short: no juries, just the judge, the parties, and the testifying witness. Not much chance to argue: the judge knew the law, and we had submitted briefs beforehand.
The tenant testified that she developed some questions about the legality of the units, and visited the city’s planning department. She discovered that the units were indeed illegal. “You didn’t bring this to the landlady’s attention then, did you?” “No,” the tenant admitted. “I was scared of her, and besides, I didn’t want to jeopardize the place where I was living, the benefit of my tenancy.”
The tenant also testified that she knew, from her first phone conversation with the landlady, that the unit she would rent had some issues. She took it anyway because she was desperate.
At the end of the trial, right after we finished our [short] closing arguments, the judge made findings of fact from the bench. No fraud, no willful and malicious tort, judgment for defendant. My landlady client was able to walk away from her debts, including this frivolous one.
Facts win cases; bad lawyering can lose them. Here, the facts spoke for themselves. Without a lawyer, however, the landlady would have been lost in the morass of procedures and evidence objections (who but a lawyer really knows what “hearsay” is?).
Even more so than other clients, bankruptcy clients need to make a cost-benefit analysis. Had the landlady not fought the case, she would have left her bankruptcy with a nondischargeable judgment of around $50,000. Her defense cost around $15,000. She might have settled for $15,000 before trial, but negotiations broke off. It’s up to the client to determine when to settle or go forward; the landlady went forward because of principle, but later regretted not just writing a check to settle. But who knows? Had she settled early on, she might have regretted that course of action too.
If you face a similar situation, a bankruptcy in Ventura or Los Angeles counties where someone wants to make sure you don’t get your discharge, we can help you at Faucher & Associates.