Coleman v. C.I.R.

• Citation: 791 F.2d 68
• Decision Date: 07 May 1986
• Docket Number: 85-1601,Nos. 85-1202,s. 85-1202
• Parties: -1420, 86-1 USTC P 9401 Norman E. COLEMAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Gary HOLDER, Plaintiff-Appellant, v. SECRETARY OF the TREASURY and United States of America, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 68

791 F.2d 68

57 A.F.T.R.2d 86-1420, 86-1 USTC P 9401

Norman E. COLEMAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Gary HOLDER, Plaintiff-Appellant, v. SECRETARY OF the TREASURY and United States of America,

Defendants-Appellees.

Nos. 85-1202, 85-1601.

United States Court of Appeals, Seventh Circuit.

Submitted Dec. 17, 1985.

Decided May 7, 1986.

Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Robert P. Ruwe, Chief Counsel, I.R.S., Washington, D.C., for respondent-appellee.

Before WOOD, FLAUM, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Some people believe with great fervor preposterous things that just happen to coincide with their self-interest. "Tax protesters" have convinced themselves that wages are not income, that only gold is money, that the Sixteenth Amendment is unconstitutional, and so on. These beliefs all lead--so tax protesters think--to the elimination of their obligation to pay taxes. The government may not prohibit the holding of these beliefs, but it may penalize people who act on them.

It is an important function of the legal system to induce compliance with rules that a minority firmly believes are misguided. Legal penalties change the balance of self-interest; those who believe taxes wicked or unauthorized must nonetheless pay. When the legal system depends on honest compliance as much as the income tax system does--and when disobedience is potentially rewarding to those affected by the rule--it is often necessary to impose steep penalties on those who refuse to comply. We have consolidated the cases of two such people.

Norman Coleman did not file tax returns for 1979, 1980, or 1981. The Internal Revenue Service reconstructed Coleman's income for these years and concluded that he owed taxes of $4,806 for 1979, $6,454 for 1980, and $3,692 for 1981. The IRS also concluded that Coleman owed additions to tax exceeding $2,300. Coleman sought review in the Tax Court, demanding that the IRS prove the correctness of its computations and arguing, among other things, that wages are not income. Coleman declined to offer any evidence concerning his income; he insisted that the IRS bear the whole burden of production. The Tax Court granted summary judgment to the IRS, concluding that Coleman had presented no evidence that might undermine the presumption that the Commissioner's notice of deficiency is correct. Because Coleman had filed tax returns for the years before 1979 and demonstrated through the briefing an awareness of the legal obligation to file, the court imposed a penalty of $5,000 under 26 U.S.C. Sec. 6673, which authorizes the Tax Court to award damages when it concludes that the case has been "maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless...."

Gary Holder filed a tax return for 1980 but then filed an amended return on which he subtracted his wages from his gross income, leaving only $68.13 in taxable income. Holder attached to the amended return a screed insisting that wages are not income. The amended return requested a refund of $4,555.20. The IRS imposed a $500 penalty under 26 U.S.C. Sec. 6702 for filing a frivolous return. Holder paid 15% of the penalty and filed suit in the district court to recover the payment. 26 U.S.C. Sec. 6703. There he argued not only that wages are untaxable but also that Sec. 6702 is unconstitutional. The district court concluded that the suit is as frivolous as the tax return. It granted summary judgment to the government and ordered Holder to pay the attorneys' fees the government incurred in defending the action.

The billingsgate in appellants' briefs is customary in cases of this nature. Coleman says that wages may not be taxed because they come from his person, a depreciating asset. The personal depreciation offsets the wage, leaving no net income. Coleman thinks that only net income may be taxed under the Sixteenth Amendment--net income as Coleman defines it, rather than as Congress does. Holder, who styles himself a "private citizen," insists that wages may not be taxed because the Sixteenth Amendment authorizes only excise taxes, and in Holder's world excises may be imposed only on "government granted privileges." Because Holder believes that he is exercising no special privileges, he thinks he may not be taxed. These are tired arguments. The code imposes a tax on all income. See 26 U.S.C. Sec. 61. Wages are income, and the tax on wages is constitutional. See, among hundreds of other cases, United States v. Thomas, 788 F.2d 1250, 1253 (7th Cir.1986); Lovell v. United States, 755 F.2d 517 (7th Cir.1984); Granzow v. CIR, 739 F.2d 265, 267 (7th Cir.1984); United States v. Koliboski, 732 F.2d 1328, 1329 & n. 1 (7th Cir.1984). See also Brushaber v. Union Pacific R.R., 240 U.S. 1, 12, 24-25, 36 S.Ct. 236, 239, 244-45, 60 L.Ed. 493 (1916).

Both Coleman and Holder also argue that the income tax is a taking, which abridges their right to earn income. Taxes indeed "take" income, but this is not the sense in which the constitution uses "takings." Article I, section 8, clause 1 of the constitution grants to Congress "Power To lay and collect Taxes". The power thus long predates the Sixteenth Amendment, which did no more than remove the apportionment requirement of Art. I, sec. 2, cl. 3 from taxes on "incomes, from whatever source derived". Although the government might try to achieve through special taxes what the Takings Clause of the Fifth Amendment forbids if done directly, the general tax levied by the Internal Revenue Code does not offend the Fifth Amendment. Brushaber, supra.

Coleman argues that the IRS had to prove the amount of his income; he needed to show nothing. The statute is otherwise. People must make an honest report of their income to the government. If they fail to do this, they must establish any inaccuracies in the Commissioner's reconstruction of their income. 26 U.S.C. Sec. 6020(b). His further argument that the Seventh Amendment requires a jury trial in the Tax Court is empty. Even in ordinary litigation, the Seventh Amendment does not require a jury trial when there are no facts in dispute, and Coleman put none in dispute. The Seventh Amendment at all events does not apply to civil litigation against the United States. McElrath v. United States, 102 U.S. (12 Otto) 426, 440, 26 L.Ed. 189 (1880); see also Atlas Roofing Co. v. OSHRC, 430 U.S. 442, 450-51, 97 S.Ct. 1261, 1266-67, 51 L.Ed.2d 464 (1977). Our circuit has apparently never held squarely that there is no right to a jury trial in the Tax Court, but other circuits have held this, and we agree with them. E.g., Parker v. CIR, 724 F.2d 469, 472 (5th Cir.1984); Funk v. CIR, 687 F.2d 264, 266 (8th Cir.1982).

Both appellants challenge the penalties imposed on them, contending that "frivolous" is too vague a designation to support a penalty. This is a staple term of civil litigation, however, and we have sustained against constitutional challenge 28 U.S.C. Sec. 1927, which allows awards against counsel for "vexatious" conduct. In re TCI, Ltd., 769 F.2d 441, 449 (7th Cir.1985). Statutes need not be unambiguous in every application to be constitutional. Many words acquire meaning through judicial and administrative construction over the years, and this evolutionary process is constitutional. E.g., CSC v. Letter Carriers, 413 U.S. 548, 93 S.Ct. 2880, 37 L.Ed.2d 796 (1973); cf. Rose v. Locke, 423 U.S. 48, 96 S.Ct. 243, 46 L.Ed.2d 185 (1975). Courts have been imposing penalties for frivolous litigation for hundreds of years, cf. Roadway Express, Inc. v. Piper, 447 U.S. 752, 764-67, 100 S.Ct. 2455, 2463-65, 65 L.Ed.2d 488 (1980), and the ambiguities that lurk in "frivolous" (or any other word) in marginal cases do not prevent the imposition of penalties. Uncertainty is a fact of legal life. The "law is full of instances where a man's fate depends on his estimating rightly, that is, as the jury subsequently estimates it, some matter of degree." Nash v. United States, 229 U.S. 373, 377, 33 S.Ct. 780, 781, 57 L.Ed. 1232 (1913). "Whenever the law draws a line there will be cases very near each other on opposite sides. The precise course of the line may be uncertain, but no one can come near it without knowing that he does so, if he thinks, and if he does so it is familiar to the ... law to make him take the risk." United States v. Wurzbach, 280 U.S. 396, 399, 50 S.Ct. 167, 169, 74 L.Ed. 508 (1930). See also, e.g., United States v. Powell, 423 U.S. 87, 96 S.Ct. 316, 46 L.Ed.2d 228 (1975).

The purpose of 26 U.S.C. Secs. 6673 and 6702 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate. A petition to the Tax Court, or a tax return, is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law. This is the standard applied under Fed.R.Civ.P. 11 for sanctions in civil litigation, and it is a standard we have used for the award of fees under 28 U.S.C. Sec. 1927 and the award of damages under Fed.R.App.P. 38. See Indianapolis Colts v. Mayor and City Council of Baltimore, 775 F.2d 177 (7th Cir.1985); In re TCI, supra; Lepucki v. Van Wormer, 765 F.2d 86 (7th Cir.) (attorneys' fees awarded), cert. denied, --- U.S. ----, 106 S.Ct. 86, 88 L.Ed.2d 71, damages awarded, --- U.S. ----, 106 S.Ct. 403, 88 L.Ed.2d 355 (1985); Steinle v. Warren, 765 F.2d 95, 102 (7th Cir.1985) ($2,500 damages awarded); Oglesby v. RCA Corp., 752 F.2d 272, 279-80 (7th Cir.1985). The inquiry is objective. If a person should have known that his position is groundless, a court may and should impose sanctions. See Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir. 1986).

Things are otherwise under Secs. 6673 and 6702, the appellants say; these statutes require not only a lack of objective support but also subjective bad faith. Coleman...