The Tax Lawyer’s Blog

This tax protester argument is one of the least absurd because it doesn’t contend that wages and other forms of compensation for personal services are not income, but rather that there can be no taxable gain when someone exchanges his labor for money.

The website, Quatloos!, the self-proclaimed Cyber-Museum of Scams and Frauds), says that,

Under this theory, wages are not taxable income because people have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed.

Unfortunately, for protesters making this argument, there is the case of Cullinane v. Commissioner, T.C. Memo. 1999-2, 77 T.C.M. (CCH) 1192, 1193 (1999) in which it was noted that,

[T]he courts have consistently held that compensation for services rendered constitutes taxable income and that taxpayers have no tax basis in their labor. (Emphasis Added)

IRC § 61 states that for federal income tax purposes “gross income” means,

[A]ll income from whatever source derived, including (but not limited to) . . . compensation for services, including fees, commissions, fringe benefits, and similar items . . . .

Generally, all income received by a taxpayer is presumed to section 61 income unless the taxpayer can establish that it is specifically exempted or excluded. See Reese v. United States, 24 F.3d 228, 231 (Fed. Cir. 1994), where the court stated that,

 [A]n abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived.

Criminal and civil penalties have been assessed against protesters who have used the frivolous “wages are not income” argument.

Quatloos Cites the Relevant Case Law:

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955) - referring to the statute’s words “income derived from any source whatever, the Supreme Court stated, “this language was used by Congress to exert in this field ‘the full measure of its taxing power.’ . . . And the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted.

Commissioner v. Kowalski, 434 U.S. 77 (1977) - the Supreme Court found that payments are considered income where the payments are undeniably accessions to wealth, clearly realized, and over which a taxpayer has complete dominion.

United States v. Connor, 898 F.2d 942, 943-44 (3d Cir.), cert. denied, 497 U.S. 1029 (1990) - the court stated that “[e]very court which has ever considered the issue has unequivocally rejected the argument that wages are not income.”

Lonsdale v. Commissioner, 661 F.2d 71, 72 (5 th Cir. 1981) - the court rejected as “meritless” the taxpayer’s contention that the “exchange of services for money is a zero-sum transaction . . . .”

McCoy v. United States, 88 A.F.T.R.2d (RIA) 7116, 2001 U.S. Dist. LEXIS 18986 (N.D. Tex. Nov. 16, 2001) - the court rejected the taxpayer’s argument that wages received were not income and described this position as without merit.

Cheek v. United States, 498 U.S. 192 (1991) - the Supreme Court reversed and remanded Cheek’s conviction of willfully failing to file federal income tax returns and willfully attempting to evade income taxes solely on the basis of erroneous jury instructions. The Court noted, however, that Cheek’s argument, that he should be acquitted because he believed in good faith that the income tax law is unconstitutional, “is unsound, not because Cheek’s constitutional arguments are not objectively reasonable or frivolous, which they surely are, but because the [law regarding willfulness in criminal cases] does not support such a position.” Id. (emphasis added). On remand, Cheek was convicted on all counts and sentenced to jail for a year and a day. Cheek v. United States, 3 F.3d 1057 (7 th Cir. 1993), cert. denied, 510 U.S. 1112 (1994).

Reading v. Commissioner, 70 T.C. 730 (1978), aff’d, 614 F.2d 159 (8 th Cir. 1980) - the court said the entire amount received from the sale of one’s services constitutes income within the meaning of the Sixteenth Amendment.

United States v. Richards, 723 F.2d 646, 648 (8 th Cir. 1983) - the court upheld conviction and fines imposed for willfully failing to file tax returns, stating that the taxpayer’s contention that wages and salaries are not income within the meaning of the Sixteenth Amendment is “totally lacking in merit.

United States v. Romero, 640 F.2d 1014, 1016 (9 th Cir. 1981) - the court affirmed Romero’s conviction for willfully failing to file tax returns, finding, in part, that “[t]he trial judge properly instructed the jury on the meaning of ['income' and 'person']. Romero’s proclaimed belief that he was not a ‘person’ and that the wages he earned as a carpenter were not ‘income’ is fatuous as well as obviously incorrect.

Abrams v. Commissioner, 82 T.C. 403, 413 (1984) - the court rejected the argument that wages are not income, sustained the failure to file penalty, and awarded damages of $5,000 for pursuing a position that was “frivolous and groundless . . . and maintained primarily for delay.

Cullinane v. Commissioner, T.C. Memo. 1999-2, 77 T.C.M. (CCH) 1192, 1193 (1999) - noting that “[c]ourts have consistently held that compensation for services rendered constitutes taxable income and that taxpayers have no tax basis in their labor,” the court found Cullinane liable for the failure to file penalty, stating that “[his] argument that he is not required to pay tax on compensation for services does not constitute reasonable cause.

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