Alternative minimum tax; refinanced mortgage interest. Interest paid on a home mortgage that has been refinanced more than one time is deductible as qualified housing interest for purposes of the alternative minimum tax to the extent the interest on the mortgage that was refinanced is qualified housing interest and the amount of the mortgage indebtedness is not increased.

Frivolous tax returns; Social Security refund. This ruling emphasizes to taxpayers and to promoters and return preparers that there is no right to a refund of, or a deduction for, Social Security taxes paid based on arguments that a taxpayer has waived the right to receive Social Security benefits or has donated Social Security taxes or benefits to the government. These arguments have no merit and are frivolous.

Frivolous tax returns; altering the jurat. This ruling deals with taxpayers who attempt to reduce their federal tax liability by striking or altering the written declaration (the jurat) that verifies that a return, declaration, statement or other document is made under penalties of perjury. The ruling emphasizes to taxpayers and to promoters and return preparers that striking or altering the jurat in a manner that negates its validity invalidates the return.

Frivolous tax returns; constitutionally based arguments. This ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax by making frivolous constitutionally based arguments.

Frivolous tax returns; protesting government programs or policies. This ruling emphasizes to taxpayers and to promoters and return preparers that liability for federal taxes does not depend on whether the taxpayer agrees with the government programs or policies that are funded with tax receipts. Any argument that taxpayers may refuse to report income or claim deductions because they oppose particular government programs or policies is frivolous and has no merit.

Frivolous tax returns; use of “straw man” to avoid tax. This ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax on the erroneous theory that the government has created a separate and distinct entity or “straw man,” in place of the taxpayer and that the taxpayer is not responsible for the tax obligations of the “straw man”. This argument has no merit and is frivolous.

Proposed regulations provide that a transaction will qualify for nonrecognition treatment under sections 332, 351, or 368 of the Code only if there is a transfer and a receipt of net value. The proposed regulations also provide guidance on the circumstances in which and the extent to which a creditor of an insolvent corporation may be treated as owning a proprietary interest in the target corporation for the purpose of satisfying the continuity of interest requirement. With respect to section 332, the regulations clarify that this section applies only to those cases in which the recipient corporation receives at least partial payment with respect to each class of stock which it owns in the liquidating corporation.

This notice sets out some of the most common frivolous arguments and schemes that taxpayers use to avoid their tax obligations. It also identifies civil and criminal penalties that the Service may impose against taxpayers who engage in abusive tax-avoidance schemes. Notice 2004-22 modified and superseded.

State and local general sales tax deduction. This notice provides guidance to taxpayers who elect to deduct state and local general sales taxes in lieu of state and local income taxes under section 164(b)(5) of the Code.

A list is provided of organizations now classified as private foundations.

Proposed regulations under section 3121 of the Code provide guidance regarding the treatment of payments made on account of sickness or accident disability under a workers’ compensation law for purposes of the Federal Insurance Contributions Act (FICA).

The Service, as a matter of administrative convenience, has established that certain truck body type classifications satisfy the weight-based exclusion provided in section 4051(a)(2) of the Code.

This agreement describes taxation of certain scholarships under the U.S.-Austria Income Tax Treaty. A copy of the News Release issued by the Director, International (U.S. Competent Authority), on March 1, 2005 (IR-2005-20), is set forth.

Frivolous tax returns; Social Security refund. This ruling emphasizes to taxpayers and to promoters and return preparers that there is no right to a refund of, or a deduction for, Social Security taxes paid based on arguments that a taxpayer has waived the right to receive Social Security benefits or has donated Social Security taxes or benefits to the government. These arguments have no merit and are frivolous.

Frivolous tax returns; altering the jurat. This ruling deals with taxpayers who attempt to reduce their federal tax liability by striking or altering the written declaration (the jurat) that verifies that a return, declaration, statement or other document is made under penalties of perjury. The ruling emphasizes to taxpayers and to promoters and return preparers that striking or altering the jurat in a manner that negates its validity invalidates the return.

Frivolous tax returns; constitutionally based arguments. This ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax by making frivolous constitutionally based arguments.

Frivolous tax returns; protesting government programs or policies. This ruling emphasizes to taxpayers and to promoters and return preparers that liability for federal taxes does not depend on whether the taxpayer agrees with the government programs or policies that are funded with tax receipts. Any argument that taxpayers may refuse to report income or claim deductions because they oppose particular government programs or policies is frivolous and has no merit.

Frivolous tax returns; use of “straw man” to avoid tax. This ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax on the erroneous theory that the government has created a separate and distinct entity or “straw man,” in place of the taxpayer and that the taxpayer is not responsible for the tax obligations of the “straw man”. This argument has no merit and is frivolous.

Public comments are requested on recommendations for items that should be included on the 2005-2006 Guidance Priority List. Taxpayers may submit recommendations for guidance at any time during the year. Recommendations submitted by April 30, 2005, will be reviewed for possible inclusion on the original 2005-2006 Guidance Priority List. Recommendations received after April 30, 2005, will be reviewed for inclusion in the next periodic update.

This notice sets out some of the most common frivolous arguments and schemes that taxpayers use to avoid their tax obligations. It also identifies civil and criminal penalties that the Service may impose against taxpayers who engage in abusive tax-avoidance schemes. Notice 2004-22 modified and superseded.

Is interest paid on a home mortgage that has been refinanced more than one time deductible as qualified housing interest for purposes of the alternative minimum tax?

In 1990, A borrowed $100x to purchase a principal residence (the 1990 mortgage). In 2000, the outstanding principal balance on the 1990 mortgage was $90x, and A refinanced the $90x balance of the 1990 mortgage (the 2000 mortgage). In 2004, the outstanding principal balance on the 2000 mortgage was $80x. A refinanced the $80x balance of the 2000 mortgage and borrowed an additional $30x. Thus, the total amount of A’s mortgage in 2004 was $110x (the 2004 mortgage). A did not use the $30x to acquire, construct, or substantially improve any property that was a principal residence or a qualified residence. At no time did A’s indebtedness to acquire his principal residence or a qualified residence exceed $1,000,000. A is not a married individual filing a separate return.

Section 55 of the Internal Revenue Code provides that the alternative minimum tax is a tax equal to the excess (if any) of the tentative minimum tax for the taxable year over the regular tax (defined in § 55(c)) for the taxable year.

Tentative minimum tax is defined in § 55(b)(1)(A) for noncorporate taxpayers as the sum of 26 percent of so much of the taxable excess as does not exceed $175,000, plus 28 percent of so much of the taxable excess as exceeds $175,000.

The term “taxable excess” is defined in § 55(b)(1)(ii) as so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount provided for in § 55(d).

Alternative minimum taxable income is defined in § 55(b)(2) as the taxable income of the taxpayer for the taxable year determined with the adjustments provided in §§ 56 and 58, and increased by the amount of the items of tax preference described in § 57.

Section 56(b) contains the adjustments applicable to individuals, which include the adjustment for interest in § 56(b)(1)(C). Section 56(b)(1)(C) provides that, in determining the amount allowable as a deduction for interest, § 163(d), which provides limitations on investment interest, and § 163(h), which disallows deductions for personal interest, shall apply, except that in lieu of the exception under § 163(h)(2)(D) for qualified residence interest, the term “personal interest” shall not include any qualified housing interest.

Qualified housing interest is defined in § 56(e)(1) as interest that is qualified residence interest (as defined in § 163(h)(3)) and is paid or accrued during the taxable year on indebtedness that is incurred in acquiring, constructing, or substantially improving any property that is the principal residence (within the meaning of § 121) of the taxpayer at the time such interest accrues, or is a qualified dwelling that is a qualified residence (within the meaning of § 163(h)(4)). In addition, the last sentence of § 56(e)(1) provides that qualified housing interest includes interest on any indebtedness resulting from the refinancing of indebtedness meeting the requirements of qualified housing interest, but only to the extent that the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness immediately before the refinancing.

The legislative history to the enactment of § 56 as part of the Tax Reform Act of 1986 states “It is clarified that, for minimum tax purposes, upon a refinancing of a loan that gives rise to qualified housing interest, interest paid on the loan is treated as qualified housing interest to the extent that (1) it so qualified under the prior loan, and (2) the amount of the loan was not increased.” H.R. Conf. Rep. No. 841, 99^th Cong., 2d Sess., vol. II, at 259 (1986).

Section 163(h) of the Code provides that, in the case of a taxpayer other than a corporation, no deduction shall be allowed for personal interest paid or accrued during the taxable year. Under § 163(h)(2)(D), personal interest does not include qualified residence interest.

Qualified residence interest is defined in § 163(h)(3) as any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. Section 163(h)(3)(B) defines acquisition indebtedness as any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence. Section 163(h)(3)(B) also provides that acquisition indebtedness includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of acquisition indebtedness, or refinancing of acquisition indebtedness, but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. Under § 163(h)(3)(B)(ii), the aggregate amount of acquisition indebtedness for any period cannot exceed $1,000,000 (or $500,000 in the case of a married individual filing a separate return).

The term “qualified residence” is defined in § 163(h)(4)(A) as the principal residence (within the meaning of § 121) of the taxpayer and one other residence of the taxpayer that is selected by the taxpayer for the taxable year and that is used by the taxpayer as a residence (within the meaning of § 280A(d)(1)).

The 1990 mortgage is indebtedness incurred in acquiring A’s principal residence. The interest paid or accrued on the 1990 mortgage meets the requirements of qualified residence interest under § 163(h)(3). Thus, the interest paid or accrued by A on the 1990 mortgage is qualified housing interest for purposes of the alternative minimum tax.

The last sentence of § 56(e)(1), as clarified by the legislative history, indicates that when § 56(b)(1)(C) was enacted as part of the alternative minimum tax provisions, Congress intended that interest with respect to a refinancing of a loan that gives rise to qualified housing interest would be deductible for alternative minimum tax purposes to the extent the amount of the loan was not increased. When A refinanced the 1990 mortgage in 2000, the refinanced amount equaled the amount of the outstanding principal. Thus, the interest paid or accrued on the 2000 mortgage is deductible as qualified housing interest for purposes of the alternative minimum tax because the interest on the 1990 mortgage is qualified housing interest and the amount of the loan is not increased.

Similarly, when A refinanced the 2000 mortgage in 2004, the interest on the 2004 mortgage is qualified housing interest to the extent of the outstanding principal balance of the 2000 mortgage at the time of the refinancing because the interest on the 2000 mortgage is qualified housing interest. However, as part of the 2004 refinancing A borrowed an additional $30x, and A did not use the $30x to acquire, construct, or substantially improve any property that was a principal residence or a qualified residence. Accordingly, for alternative minimum tax purposes A may deduct only the interest paid or incurred on $80x and not the interest attributable to the additional $30x of the $110x of the 2004 mortgage.

Interest paid on a home mortgage that has been refinanced more than one time is deductible as qualified housing interest for purposes of the alternative minimum tax to the extent the interest on the mortgage that was refinanced is qualified housing interest and the amount of the mortgage indebtedness is not increased.

The principal author of this revenue ruling is Martin Scully, Jr. of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Mr. Scully at (202) 622-4960 (not a toll-free call).

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by striking or otherwise invalidating the written declaration (the jurat) that verifies that a return, declaration, statement, or other document is made under penalties of perjury as required by section 6065. The Service also is aware that some promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions, which include striking or otherwise invalidating the jurat. Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that striking or otherwise altering the jurat in a manner that negates or casts doubt on its validity invalidates the return. Any argument that the law does not require written verification of the accuracy of the return has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their federal tax obligations by taking frivolous positions, including frivolous positions based on arguments relating to an altered or amended jurat. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through the Service’s 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 to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether an injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

Whether a document, declaration, or statement that is required to be verified under penalties of perjury, pursuant to section 6065, is valid if the jurat has been stricken or otherwise altered in a manner that negates or casts doubt on validity of the return?

Situation 1. Individual taxpayer A filed a Form 1040A individual income tax return for the 2004 taxable year. Taxpayer A signed the form but crossed out the jurat on the return, and wrote the word “void” across it.

Situation 2. Individual taxpayer B filed a Form 1040A individual income tax return for the 2004 taxable year. Taxpayer B signed the Form 1040A without deleting or altering the jurat, but wrote across the top of the Form 1040A that “I deny that I owe the tax shown on this return.”

Section 6011(a) requires any person liable for taxes to file a return that includes “the information required by [the] forms or regulations” issued by the Service. See also Treas. Reg. sec. 1.6012-1(a)(6) (prescribing Form 1040 for making an income tax return). Section 6065 mandates that any return, declaration, statement, or other document required under the internal revenue laws and regulations “contain or be verified by a written declaration that it is made under the penalties of perjury.” For taxpayer convenience, paper returns all contain a pre-printed written declaration or jurat.

It is well settled that if a taxpayer strikes or obliterates the jurat on a tax return or other document, the jurat is void, as is the underlying return, because the return no longer meets the requirements of section 6011(a) and section 6065. See Lucas v. Pilliod Lumber Co., 281 U.S. 245, 248 (1930) (a return that was not properly verified under oath by the corporate officers did not meet the requirements of 6011(a) and section 6065); Borgeson v. United States, 757 F.2d 1071, 1072-73 (10^th Cir. 1985) (the plain wording of section 6065 requires the jurat on any return); United States v. Moore, 627 F.2d 830, 834 (7th Cir. 1980) (the forms submitted by the taxpayer were not returns because the jurat was obliterated); Cupp v. Commissioner, 65 T.C. 68, 78-79 (1975) (documents submitted by the taxpayer that were not signed under penalty of perjury were not returns), aff’d without published opinion, 559 F.2d 1207 (3d Cir. 1977).

If the taxpayer adds language to the jurat, or adds language to the return that casts doubt on the validity of the jurat, courts look to the intent and effect of the change in order to determine the validity of the underlying return. A change that negates or casts doubt on the validity of the jurat, or the taxpayer’s intent to affirm the contents of the return under penalty of perjury, will void the jurat. See Williams v. Commissioner, 114 T.C. 136, 140-41 (2000) (language added by the taxpayer above the jurat box that denied liability for the tax reported on the return still had the effect of vitiating the verification); Sloan v. Commissioner, 102 T.C. 137, 141-47 (1994) (language added within the jurat box that “[raised] serious questions about whether petitioner [was] ‘denying’ the accuracy of the information contained in the return, ‘disclaiming’ the jurat altogether, or simply protesting the tax laws,” ultimately acted to invalidate the return), aff’d, 53 F.3d 799 (7^th Cir. 1995). If there is any doubt whether an addition or alteration to the jurat is intended to negate or deny the jurat, the Service is “entitled to construe alterations of the jurat against the taxpayer... .” Sloan v. Commissioner, 53 F.3d 799, 800 (7^th Cir. 1995).

There is no authority under any U.S. law that supports the position that individuals may avoid their income tax obligations by striking or otherwise modifying the jurat in a manner that casts doubt on its validity. Moreover, tampering with the form of a tax return, including the jurat, substantially impedes the Service’s ability to process and verify the return. Beard v. Commissioner, 82 T.C. 766, 776-777 (1984), aff’d, 793 F.2d 139 (6^th Cir. 1986). Courts routinely impose monetary penalties on taxpayers who cite constitutional and other frivolous arguments as a basis for striking or modifying the jurat. See Borgeson, 757 F.2d at 1073 (upholding imposition of frivolous return penalty under section 6702); Trowbridge v. Commissioner, T.C. Memo. 2003-165, aff’d, 378 F.3d 432 (5^th Cir. 2004).

In Situation 1, taxpayer A rendered the Form 1040A void by crossing out the jurat and writing “void” across it. In Situation 2, taxpayer B rendered the Form 1040A void by adding language to the Form 1040A that casts doubt on the validity of the jurat. This action represents a failure on the part of taxpayer B to verify the accuracy and truthfulness of the Form 1040A.

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability. In addition to liability for the tax due plus statutory interest, taxpayers who fail to file valid returns or pay tax based on an argument that they can alter or amend the jurat on a return face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) a $500 penalty imposed under section 6702 when the taxpayer files a document that purports to be a return but that contains a frivolous position or suggests a desire by the taxpayer to delay or impede the administration of Federal income tax laws; (2) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; and (3) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; and (2) willful failure to file a return under section 7203, for which the penalty is a significant fine and imprisonment for up to a year.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these frivolous positions may face civil and criminal penalties and also may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a penalty under section 6700 for promoting abusive tax shelters; (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 document under the internal revenue laws.

The law mandates that any return, declaration, statement, or other document required under the internal revenue laws and regulations contain a valid jurat. The claim that taxpayers can reduce their federal tax liability by striking or amending the jurat on a return, declaration, statement, or other document is frivolous.

The principal author of this revenue ruling is the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622-7950 (not a toll-free call).

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by claiming that the federal income tax is unlawful because it violates one or more provisions of the United States Constitution, or that they have a constitutional right not to comply with the federal tax laws. The Service is also aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on these arguments. Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax by making frivolous constitutionally based arguments.

The Service is committed to identifying individuals who attempt to avoid or evade their federal tax obligations by taking frivolous positions, including frivolous constitutional positions. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers 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 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 to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

1. Whether a taxpayer may refuse to file a federal income tax return, or to pay federal income tax, based on claims that the federal income tax is unconstitutional?

2. Whether a taxpayer may refuse to file a federal income tax return based on the claim that the requirement to do so violates the prohibition against self-incrimination contained in the Fifth Amendment to the U.S. Constitution?

1. Taxpayer A is a United States citizen who resides in state X. A attended seminars on the federal tax system sponsored by S, an attorney. S made claims at these seminars that the federal income tax is unconstitutional because: (a) the Sixteenth Amendment to the U.S. Constitution, which authorizes a federal income tax, was not properly ratified by the states; (b) the federal income tax violates the due process clause of the Fifth Amendment to the U.S. Constitution; and (c) the payment of taxes is a form of involuntary servitude or slavery prohibited by the Thirteenth Amendment to the U.S. Constitution. Based on these constitutionally-based positions promoted by S, A filed a Form W-4, Employee’s Withholding Allowance Certificate, with A’s employer that claimed excess exemptions so that little or no federal income tax would be withheld from A’s wages in 2004. Taxpayer A earned $40,000 of taxable income in 2004. Relying on these constitutionally-based positions promoted by S, A did not file a federal income tax return for 2004.

2. Taxpayer B is a United States citizen who earned $40,000 in taxable income in 2004. On B’s 2004 Form 1040, federal income tax return, B wrote “Fifth Amendment privilege” on each line and did not report any taxable income for the year.

The Sixteenth Amendment provides that Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration. U.S. CONST. amend. XVI. The United States Supreme Court has upheld the constitutionality of the income tax laws enacted subsequent to ratification of the Sixteenth Amendment. See, e.g., Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916) (relying on the Sixteenth Amendment in holding that the income tax provisions of the Tariff Act of 1913 were not unconstitutional).

Promoters who claim that the federal income tax is unconstitutional often make frivolous arguments that there were defects in the ratification of the Sixteenth Amendment by the states. There are a number of variations on these frivolous arguments: (i) versions of the Amendment ratified by the states contained defects in spelling, punctuation, wording, or capitalization; (ii) state legislatures did not follow proper procedures in ratifying the amendment; (iii) state governors did not sign the amendment; (iv) one or more of the states that ratified the Amendment was not legally a state; and (v) the Amendment does not contain an enabling clause. These arguments have no merit, and courts have consistently rejected all challenges to the constitutionality of the federal income tax following enactment of the Sixteenth Amendment. See Knoblauch v. Commissioner, 749 F.2d 200, 201 (5th Cir. 1984) (“Every court that has considered this argument has rejected it.”). Arguments to the contrary are frivolous.

The Fifth Amendment prevents the federal government from taking property without due process of law. U.S. CONST. amend. V. Due process generally includes a right to notice and an opportunity to be heard. The Supreme Court has held that the procedures contained in the Internal Revenue Code fully satisfy the due process rights of taxpayers. See Phillips v. Commissioner, 283 U.S. 589, 595-99 (1931) (“The right of the United States to collect its internal revenue by summary administrative proceedings has long been settled. Where, as here, adequate opportunity is afforded for a later judicial determination of the legal rights, summary proceedings to secure prompt performance of pecuniary obligations to the government have been consistently sustained.”). The argument that due process requires a hearing before tax has to be paid or can be withheld from wages is frivolous.

The federal income tax only requires payment of taxes on a person’s income. It does not force a person to labor involuntarily, or to labor at all. The Thirteenth Amendment prohibits slavery and involuntary servitude, except as punishment when convicted of a crime. U.S. CONST. amend. XIII. The Thirteenth Amendment does not proscribe taxation. See Abney v. Campbell, 206 F.2d 836, 841 (5th Cir. 1953) (The specification, that the act violates the Thirteenth Amendment by imposing involuntary servitude upon an employer of domestic servants, seems to us far-fetched, indeed frivolous.”). Moreover, a prison sentence for failing to file a federal income tax return is not prohibited by the Thirteenth Amendment. See United States v. Drefke, 707 F.2d 978, 983 (8th Cir. 1983) (“The Thirteenth Amendment, however, is inapplicable where involuntary servitude is imposed as punishment for a crime.”). Failing to file a federal income tax return or to pay federal income tax based on the argument that it would constitute involuntary servitude is frivolous.

The Fifth Amendment provides that in a criminal case a person may not be compelled to be a witness against himself. U.S. CONST. amend. V. This generally means that a person cannot be forced to answer a question if the answer will be used against that person in a criminal prosecution. Courts have routinely held, however, that the Fifth Amendment provides no basis for failing or refusing to file a tax return. United States v. Stillhammer, 706 F.2d 1072, 1076-77 (10th Cir.1983) (“[T]he Fifth Amendment does not serve as a defense for failing to make any tax return, and a return containing no information but a general objection based on the Fifth Amendment does not constitute a return as required by the Code.”). The remote possibility that a taxpayer’s statement on a tax return might be used as evidence in a future criminal prosecution will not relieve a taxpayer from the obligation to file a tax return and properly report income and pay tax due. See California v. Byers, 402 U.S. 424, 427-29 (1971) (“[T]he remote possibility of incrimination is insufficient to defeat strong policies of disclosure called for by” government regulatory scheme.). Additionally, involvement in illegal activities will not relieve a person of the duty to file a federal income tax return because income earned from illegal activities is subject to the federal income tax. United States v. Sullivan, 274 U.S. 259, 263-64 (1927) (“It would be an extreme if not an extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime.”).

In determining the correct amount of tax due, the Service will include income that taxpayers attempt to exclude based on frivolous constitutional arguments. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on these and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; (2) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (3) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (4) a $500 penalty under section 6702 for filing a frivolous return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine 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 a significant fine and imprisonment of up to 1 year; or (3) making false statements on a return under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these frivolous arguments may face penalties and may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return prepared by an income tax preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

1. The Sixteenth Amendment to the U.S. Constitution was properly ratified and authorizes the federal income tax. Filing a federal income tax return and paying federal income tax does not constitute the taking of property without due process of law under the Fifth Amendment to the U.S. Constitution. Filing a federal income tax return, paying federal income tax, and incarceration for failure to comply with federal income tax obligations is not involuntary servitude or slavery prohibited by the Thirteenth Amendment to the U.S. Constitution. Arguments to the contrary are frivolous.

2. A taxpayer may not properly refuse to file a federal income tax return based on the claim that the requirement to do so violates the prohibition against self-incrimination of the Fifth Amendment to the U.S. Constitution. Arguments to the contrary are frivolous.

This revenue ruling was drafted by the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622-7950 (not a toll-free call).

The Service is aware that some taxpayers are attempting to reduce or eliminate their federal tax liability by taking the position that they are not required to pay taxes if those taxes might be used to support government programs or policies with which they disagree. Common examples include moral, ethical, or religious opposition to government spending for weapons programs, military operations, or medical research. The Service is also aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on these arguments. Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that liability for federal taxes does not depend on whether the taxpayer agrees with the government programs or policies that are funded with tax receipts. Any argument that taxpayers may refuse to report income or claim deductions because they oppose particular government programs or policies is frivolous and has no merit.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, including frivolous positions based on opposition to government programs or policies. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers 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 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 to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

Whether a taxpayer’s disagreement with government programs or policies on moral, ethical, religious or other grounds allows the taxpayer to refuse to file federal tax returns or to refuse to pay part or all of the taxpayer’s federal tax liability?

Section 1 of the Internal Revenue Code imposes a tax on all taxable income. There is no authority under the Internal Revenue Code or any other applicable law that allows taxpayers to refuse to file tax returns because they do not agree with government programs or policies. Further, it is well settled that deductions and credits are a matter of legislative grace and are not allowed unless specifically provided for in the Internal Revenue Code. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). There is no provision in the Internal Revenue Code that permits taxpayers to file returns claiming deductions or credits that reduce their taxable income by the percentage they estimate the government spends on programs or policies with which they disagree.

These frivolous positions are variations of arguments taxpayers have made about religion and taxation that have been repeatedly rejected by the courts. In United States v. Lee, 455 U.S. 252 (1982), a member of a religious denomination claimed that the payment of social security taxes violated his First Amendment right to free exercise of religion. The United States Supreme Court rejected this argument, stating that “the tax system could not function if denominations were allowed to challenge the tax system because tax payments were spent in a manner that violates their religious belief.” Id. at 260. The Court held that religious or moral beliefs that conflict with the payment of tax provide no basis for resisting the tax. Id.

Courts repeatedly have rejected these and similar arguments that a taxpayer’s religious or moral beliefs permit the avoidance of federal taxes, and have imposed penalties against taxpayers who make these arguments. See Schehl v. Commissioner, 855 F.2d 364, 367 (6^th Cir. 1988) (“Alleged vocal opposition to taxes for a particular reason, and refusal to pay taxes, even if all assertions were taken as true . . . are simply not a basis to challenge an assessment of taxes.”); Nelson v. United States, 796 F.2d 164 (6^th Cir. 1986) (upholding the applicability and constitutionality of a frivolous return penalty imposed against a taxpayer who claimed a deduction based on religious objection to war expenditures); Randall v. Commissioner, 733 F.2d 1565, 1567 (11th Cir. 1984) (“[A]rguments involving objections to the Government’s military expenditures as a basis for non-payment of taxes have been raised by taxpayers many times, and in each instance the courts have rejected them.”).

The Service will disallow deductions or other claimed tax benefits, including the exclusion of income, based on frivolous arguments regarding opposition to government programs or expenditures. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on these and other frivolous arguments may face substantial civil and criminal penalties. Potentially applicable 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, which is equal to 75 percent of the amount of 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 makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these positions may be enjoined by a court pursuant to sections 7407 and 7408 and also may face potential civil and criminal penalties. Potential penalties include: (1) a $250 penalty under section 6694 for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return if the return preparer’s actions were willful, intentional, or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

Taxpayers may not refuse to file tax returns and may not claim deductions or credits on their tax returns based on their opposition to government programs or policies. Any claim that individuals may reduce their federal tax liability based on objections to the use of the taxes to support government programs or policies is frivolous and has no merit.

The principal author of this revenue ruling is the Office of the Associate Chief Counsel (Procedure & Administration) Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622-7950 (not a toll-free call).

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the incorrect position that their incomes are not subject to tax based on a theory that the government has created a separate and distinct entity, or “straw man,” in place of the taxpayer and that the taxpayer is not responsible for the tax obligations of the “straw man.” Some promoters market a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that a taxpayer cannot avoid income tax on the erroneous theory that the government has created a “straw man.” This argument has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, including frivolous positions based on meritless “straw man” or similar arguments. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers 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 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 to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov.

Whether the government’s use of different forms of a taxpayer’s name (e.g., different capitalization formats, spellings) creates a “straw man,” which is a separate and distinct legal entity from the taxpayer to allow the taxpayer to avoid federal tax obligations?

The “straw man” claim is premised on the erroneous theory that most government documents do not actually refer to individuals. Users of the “straw man” theory falsely claim that only documents using an individual’s name with “standard” capitalization, i.e., lower-case with only the beginning letters of each name capitalized, are legitimate. These individuals erroneously argue that the use of the individual’s name in all upper-case letters, which is common in some government documents, refers to a separate legal entity, called a “straw man.” These individuals also erroneously argue that, as a result of the creation of a “straw man,” they are not liable for the debts, including the tax debts, of their “straw man,” that taxing the “straw man” is illegal because the “straw man” is a debt instrument based upon the labor of a real person and is, therefore, a form of slavery, or that no tax is owed by the real individual because it can be satisfied, or offset, by money in a “Treasury Direct Account” held in the name of the “straw man.”

All individuals are subject to the provisions of the Internal Revenue Code. Section 1 imposes a tax on all taxable income. Section 61 provides that gross income includes all income from whatever source derived, including compensation for services. Adjustments to income, deductions, and credits must be claimed in accordance with the provisions of the Internal Revenue Code, the accompanying Treasury regulations, and 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 filed in accordance with Treasury regulations and IRS forms. Section 6012 identifies the persons who are required to file income tax returns. Section 6151 requires that taxpayers pay their tax when the return is due. Section 6311 requires payment of taxes by commercially acceptable means as prescribed by Treasury regulations.

There is no authority under the Internal Revenue Code or any other applicable law that supports the claim that taxpayers may avoid their federal tax obligations based on “straw man” arguments, as described in this revenue ruling, or on similar arguments. The formatting of a taxpayer’s name in all upper-case letters on government documents or elsewhere has no significance whatsoever for federal tax purposes. Courts have rejected as frivolous “straw man” arguments. United States v. Furman, 168 F.Supp.2d 609 (E.D. La. 2001) (rejecting criminal defendant’s contention that he was not properly identified in federal government documents that misspelled his name or used his properly spelled name in all capital letters). In addition, courts repeatedly have rejected similar arguments based on frivolous claims that purport to provide a basis for avoiding taxes, and have penalized taxpayers who have made these arguments. See, e.g., Lovell v. United States, 755 F.2d 517, 519 (7th Cir. 1984) (“[A]ll individuals, natural or unnatural, must pay federal income tax on their wages . . ..”); United States v. Romero, 640 F.2d 1014, 1017 (9th Cir. 1981) (“[I]n our system of government, one is free to speak out in open opposition to the provisions of the tax laws, but such opposition does not relieve a citizen of his obligation to pay taxes.”).

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability by refusing to file returns and pay tax, and will disallow deductions or other claimed tax benefits, including the exclusion of income, based on frivolous “straw man” arguments. In addition to liability for the tax due plus statutory interest, individuals who claim tax benefits on their returns, or fail to file returns, based on these and other frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; (2) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (3) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (4) a $500 penalty under section 6702 for filing a frivolous return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these theories also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which there is a significant fine and imprisonment for up to 5 years; (2) willful failure to file a return under section 7203, for which there is a significant fine and imprisonment for up to one year; or (3) making false statements on a return, statement, or other document under section 7206, for which there is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these theories and those who assist taxpayers in claiming tax benefits based on these frivolous arguments may face penalties and also may be enjoined by courts pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which there is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return, statement or other document under the internal revenue laws.

The use of different forms of a taxpayer’s name (different spellings, capitalization, etc.) does not create a “straw man” that allows taxpayers to avoid their federal tax obligations. Claims based on “straw man” arguments or on similar arguments, to avoid federal tax obligations, are frivolous and have no merit.

The author of this ruling is the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this ruling, contact that office at (202) 622-7950 (not a toll-free call).

The Service is aware that some taxpayers are filing claims for refund of the Social Security taxes paid on wages pursuant to the Federal Insurance Contributions Act (FICA) on the basis that they have waived their right to receive Social Security benefits. The Service also is aware that some taxpayers are attempting to reduce or eliminate their federal tax liability by taking similar frivolous return positions, including reporting as a charitable contribution deduction the amount of Social Security taxes paid, on the basis that they are donating these amounts to the government. Some promoters market a package, kit, or other materials, that claim to show taxpayers how they can obtain a refund or avoid paying income taxes based on these and other meritless arguments. This revenue ruling does not apply to individuals who have satisfied the requirements of the religious exemption from FICA provided in section 3127 of the Internal Revenue Code.

This revenue ruling emphasizes to taxpayers and to promoters and return preparers that there is no right to a refund of, or a deduction for, Social Security taxes paid based on arguments that a taxpayer has waived the right to receive Social Security benefits or has donated Social Security taxes or benefits to the government. These arguments have no merit and are frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, including frivolous positions based on arguments regarding waiver of Social Security benefits. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers 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 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 to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service’s website at www.irs.gov.

1. Whether taxpayers are entitled to a refund of Social Security taxes paid on the theory that they have waived the right to receive Social Security benefits?

2. Whether taxpayers are entitled to a charitable contribution deduction for Social Security taxes paid on the theory that those amounts have been donated by them to the government?

This plan includes claims for refund of Social Security taxes paid on wages under FICA, on the theory that the taxpayer has waived the right to receive Social Security benefits. Additionally, some taxpayers claim a charitable contribution deduction on the theory that they have donated their Social Security taxes, or their right to receive Social Security benefits, to the government.

Social Security taxes are imposed on wages as defined in section 3121. There is no authority under the Internal Revenue Code (other than the narrow exception to the application of FICA tax provided in the religious exemption under section 3127) or any other applicable law that supports the claim that taxpayers may waive their right to receive Social Security benefits and thereby receive a refund of Social Security taxes paid. Similarly, there is no provision of law that would allow a taxpayer to claim a charitable contribution deduction as a result of the donation or gift to the government of the taxpayer’s right to receive Social Security benefits or of Social Security taxes paid.

In Crouch v. Commissioner, T.C. Memo. 1990-309, the taxpayers did not pay self-employment tax based on a claim that they had withdrawn from the Social Security system. The taxpayers also claimed a charitable contribution deduction based on a purported lump-sum gift to the government of Social Security benefits. The Tax Court rejected these positions, characterizing the taxpayers’ failure to pay self-employment tax as negligent and sustaining the Service’s disallowance of the charitable contribution deduction. See also Derksen v. Commissioner, 84 T.C. 355, 360 (1985) (“There are some specific exemptions from the [social security] tax but the desire not to be a part of the social security system, standing alone, is not one of them.”)

A refund claim must be based on a valid argument that the taxpayer has overpaid the tax that is lawfully due and owing. See, e.g., Lewis v. Reynolds, 284 U.S. 281, 283 (1932) (“[T]he taxpayer is not entitled to a refund unless he has overpaid his tax.”). Further, it is a well settled principle of law that deductions and credits are a matter of legislative grace. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Unless specifically provided for in the Internal Revenue Code, no deduction or credit is allowed. Neither section 3121, nor any other provision of the Internal Revenue Code, allows for a refund of Social Security taxes paid on the grounds that a taxpayer has purportedly waived all rights to receive Social Security benefits. Similarly, no provision of the Internal Revenue Code allows for a charitable contribution deduction based on the purported gift or donation of Social Security taxes or benefits to the government.

The Service will disallow any claim for refund of Social Security taxes based on the frivolous argument that a taxpayer has waived the right to receive Social Security benefits. The Service will also disallow any deduction that is based on the theory that a taxpayer has given or donated the taxpayer’s Social Security taxes or Social Security benefits to the government. In addition to liability for tax due plus statutory interest, individuals who claim tax benefits on their returns based on these and similar frivolous arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include, but are not limited to the following: (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, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty under section 6702 for filing a frivolous income tax 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.

Taxpayers relying on these frivolous positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; or (2) making false statements on a return, statement, or other document under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these frivolous positions also may face penalties and may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return, statement, or other document under the internal revenue laws.

Taxpayers are not entitled to a refund of the Social Security taxes paid based on the position that they have waived the right to receive Social Security benefits. Moreover, a taxpayer is not entitled to a charitable contribution deduction based on the purported gift or donation of Social Security taxes or benefits to the government. Claims or deductions based on these positions are frivolous and have no merit.

This revenue ruling was authored by the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622-7950 (not a toll-free call).

Following is a copy of the News Release issued by the Director, International (U.S. Competent Authority) on March 1, 2005 (IR-2005-20).

IR-2005-20, March 1, 2005

WASHINGTON — The Competent Authorities of Austria and the United States have reached a mutual agreement on the taxation of certain scholarships under Article 20 (Students and Trainees) and Article 21 (Other Income) of the U.S.-Austria income tax treaty.

The agreement constitutes a Mutual Agreement in accordance with the Income Tax Treaty Between Austria and the United States. The Treaty entered into force on Feb. 1, 1998.

The text of the Agreement is as follows:

The Department of Treasury and Internal Revenue Service invite public comment on recommendations for items that should be included on the 2005-2006 Guidance Priority List.

Treasury’s Office of Tax Policy and the Service use the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The 2005-2006 Guidance Priority List will establish the guidance that the Treasury Department and the Service intend to issue from July 1, 2005, through June 30, 2006. The Treasury Department and the Service recognize the importance of public input to formulate a Guidance Priority List that focuses resources on guidance items that are most important to taxpayers and tax administration.

As is the case whenever significant legislation is enacted, the Treasury Department and the Service have dedicated substantial resources to published guidance projects necessary to implement the provisions in the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (“AJCA”), enacted on October 22, 2004. As a consequence, new guidance projects were added to the Guidance Priority List, as updated on December 21, 2004. The Treasury Department and the Service will continue to evaluate the priority of each guidance project in light of the AJCA and other developments during the 2005-2006 plan year.

In reviewing recommendations and selecting projects for inclusion on the 2005-2006 Guidance Priority List, the Treasury Department and the Service will consider the following:

1. Whether the recommended guidance resolves significant issues relevant to many taxpayers;

2. Whether the recommended guidance promotes sound tax administration;

3. Whether the recommended guidance can be drafted in a manner so that taxpayers can easily understand and apply the guidance;

4. Whether the Service can administer the recommended guidance on a uniform basis; and

5. Whether the recommended guidance reduces controversy and lessens the burden on taxpayers or the Service.

Taxpayers may submit recommendations for guidance at any time during the year. Please submit recommendations by April 30, 2005, for possible inclusion on the original 2005-2006 Guidance Priority List. The Service plans to update the 2005-2006 Guidance Priority List periodically to reflect additional guidance that the Treasury Department and the Service intend to publish during the plan year. The periodic updates allow the Treasury Department and the Service to respond to the need for additional guidance that may arise during the plan year. Recommendations for guidance received after April 30, 2005, will be reviewed for inclusion in the next periodic update.

Taxpayers are not required to submit recommendations for guidance in any particular format. Taxpayers should, however, briefly describe the recommended guidance and explain the need for the guidance. In addition, taxpayers may include an analysis of how the issue should be resolved. It would be helpful if taxpayers suggesting more than one guidance project would prioritize the projects by order of importance. If a large number of projects are being suggested, it would be helpful if the projects were grouped in terms of high, medium or low priority.

Taxpayers should send written comments to:

or hand deliver comments Monday through Friday between the hours of 8 a.m. and 4 p.m. to:

Alternatively, taxpayers may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov. Taxpayers should include “Notice 2005-25” in the subject line. All comments will be available for public inspection and copying in their entirety.

For further information regarding this notice, contact Crystal Foster of the Office of Associate Chief Counsel (Procedure and Administration) at (202) 622-7326 (not a toll-free call).

As April 15 approaches, taxpayers are reminded to steer clear of abusive tax-avoidance schemes that purportedly allow them to reduce or eliminate taxes. If an idea to save on taxes seems too good to be true, it probably is.

Many abusive tax-avoidance schemes are based on frivolous arguments that the Service and the courts have repeatedly rejected. These schemes are often sold by promoters for a substantial fee, and may be sold over the Internet, through advertisements in newspapers and magazines, at conferences and seminars (including conferences for professional groups such as doctors or dentists), and through recommendations of friends or acquaintances who have learned about these schemes.

Section 2 of this notice sets out some of the most common frivolous arguments used by these abusive tax-avoidance schemes. The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by using schemes based on these and other frivolous arguments. Frivolous returns and other documents submitted to the Service are processed through its Frivolous Return Program. The Service also reviews other documents that make frivolous arguments to determine whether the individuals who submit these documents have filed required tax returns and paid all taxes due for previous years.

Section 3 of this notice identifies potential civil and criminal penalties. Taxpayers who engage in abusive tax-avoidance schemes will be liable for unpaid taxes and interest. In addition, the Service will impose civil and criminal penalties against taxpayers where appropriate. The Service also will determine appropriate penalties and consider taking other appropriate action against persons who promote these schemes and who prepare frivolous returns based on those schemes.

This section sets out some of the most common frivolous arguments used by taxpayers to avoid or evade tax.

The Service and the courts have repeatedly rejected these arguments and variations on them, and have rejected numerous other tax avoidance schemes and frivolous arguments used by taxpayers to avoid or evade taxes.

Civil and criminal penalties may apply to taxpayers who make frivolous arguments. Potentially applicable civil penalties include: (1) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; (2) the section 6662 accuracy-related penalty, which is equal to 20 percent of the amount of taxes the taxpayer should have paid; (3) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (4) a $500 penalty under section 6702 for filing a frivolous income tax return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers who take frivolous positions also may face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, for which the penalty is a significant fine and imprisonment for up to 5 years; (2) willful failure to file a return under section 7203, for which the penalty is a fine of up to $25,000 and imprisonment for up to one year; and (3) making false statements on a return, statement, or other document under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote frivolous positions and those who assist taxpayers in claiming tax benefits based on frivolous positions may face penalties and may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years for assisting or advising about the preparation of a false return, statement or other document under the internal revenue laws.

Notice 2004-22 is modified and superseded.

Other information about frivolous tax positions is available on the Service website at www.irs.gov.

The principal author of this notice is the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice, contact that office at (202) 622-7800 (not a toll-free call).

This notice provides guidance to taxpayers regarding the election to deduct state and local general sales taxes in lieu of state and local income taxes under § 164(b)(5) of the Internal Revenue Code for taxpayers who elect to itemize deductions under § 63(e). Section 164(b)(5) was added by § 501 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, and applies for taxable years beginning after December 31, 2003, and before January 1, 2006.

Section 164(a)(3) provides, in part, that taxpayers may deduct state and local income taxes in the taxable year the taxes are paid or incurred. Under § 164(b)(5), taxpayers may elect to deduct state and local general sales taxes in lieu of state and local income taxes.

A general sales tax is a tax imposed at one rate with respect to the retail sale of a broad range of classes of items. Section 164(b)(5)(B). In determining whether the tax is imposed on a broad range of classes of items, the fact that sales taxes do not apply to some or all food, clothing, medical supplies, and motor vehicles is disregarded. Section 164(b)(5)(C)(i). In determining whether the tax is imposed at one rate, the fact that the tax rate that applies to food, clothing, medical supplies, or motor vehicles is lower than the general tax rate is disregarded. Section 164(b)(5)(C)(ii).

In general, sales taxes that are imposed at a rate other than the general rate of tax are not deductible. However, sales taxes imposed on (1) food, clothing, medical supplies, or motor vehicles at a rate lower than the general rate of tax may be deducted, and (2) motor vehicles at a rate in excess of the general sales tax rate may be deducted only at the general sales tax rate. Section 164(b)(5)(D) and (F).

If the amount of a sales tax is separately stated and paid by the consumer (other than in connection with a trade or business), the amount of the tax is treated as a tax imposed on and paid by the consumer rather than the seller. Therefore, the consumer may deduct sales taxes that are imposed on the seller if the tax is separately stated (as on a contract or receipt) and paid by the consumer. Section 164(b)(5)(G).

A compensating use tax is treated as a sales tax if the tax (1) is imposed on the use, storage, or consumption of an item, and (2) is complementary to a general sales tax that would be deductible with respect to similar items. Section 164(b)(5)(E).

Taxpayers who elect to deduct state and local sales taxes may deduct either actual sales taxes paid or incurred, as evidenced by appropriate records, or an amount determined under tables provided by the Service. For 2004, tables are provided in Publication 600, Optional State Sales Tax Tables. A taxpayer who elects to use the optional sales tax tables may deduct (1) the amount determined under the tables, as provided in the instructions, plus (2) the actual amount of state and local general sales taxes paid on motor vehicles, boats, and certain other specified items. Section 164(b)(5)(H).

The principal author of this notice is David M. Christensen of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Mr. Christensen at (202) 622-7900 (not a toll-free call).

To minimize disputes regarding the determination of whether a truck body satisfies the weight-based exclusion provided in § 4051(a)(2) of the Internal Revenue Code, the Service, as a matter of administrative convenience, has established certain body type classification safe harbors.

.01 In General. Section 4051(a)(1) imposes a tax on the first retail sale of certain enumerated articles including automobile truck chassis and bodies and truck trailer and semitrailer chassis and bodies. Section 4051(a)(2) provides an exclusion from the tax imposed by § 4051(a)(1) for truck chassis and bodies suitable for use with a vehicle that has a gross vehicle weight (GVW) of 33,000 pounds or less. Similarly, § 4051(a)(3) provides an exclusion for truck trailer and semitrailer chassis and bodies suitable for use with a trailer or semitrailer that has a GVW of 26,000 pounds or less.

Section 145.4051-1(a)(4) of the Temporary Excise Tax Regulations Under the Highway Revenue Act of 1982 (Pub. L. 97-424) provides the following rules for determining whether automobile truck chassis and bodies are suitable for use with a vehicle which has a gross vehicle weight of 33,000 pounds or less and whether truck trailer or semitrailer chassis and bodies are suitable for use with a trailer or semitrailer which has a gross vehicle weight of 26,000 pounds or less. The term “suitable for use” is defined as practical and commercial fitness for such use. In addition, a chassis or body possesses practical fitness for use with a vehicle if it performs its intended function up to a generally acceptable standard of efficiency with the vehicle, and a chassis or body possesses commercial fitness for use with a vehicle if it is generally available for use with the vehicle at a price that is reasonably competitive with other articles that may be used for the same purpose. Thus, a truck chassis which is suitable for use with a vehicle having a gross vehicle weight of 33,000 pounds or less, is not subject to the tax imposed by § 4051(a)(1) regardless of the body actually mounted thereon. If an exempt body is mounted on a taxable chassis (or a taxable body is mounted on an exempt chassis) and the resulting vehicle is a highway vehicle as defined in § 48.4061(a)-1 of the Manufacturers and Retailers Excise Tax Regulations, the taxable chassis or body, as the case may be, nevertheless remains subject to such tax.

Under § 145.4051-1(e)(3)(ii), a seller of a completed chassis, body, or vehicle must establish a weight rating for each article sold. Since the weight rating of the chassis and the GVW of a completed vehicle would normally be the same, a truck chassis seller is aided in establishing a weight rating for a chassis by the guidelines set forth in § 145.4051-1(e)(3)(v). Section 145.4051-1(e)(3)(v) generally defines GVW as the maximum total weight of a loaded vehicle.

.02 Reason for Revenue Procedure. Section 145.4051-1(e)(3)(v) simplifies sellers’ determinations of whether chassis meet the “suitable for use” standard for a weight-based exclusion. However, since there are no federal excise tax guidelines to establish a weight rating for a truck body, and because many truck bodies are specialized in nature, sellers do not routinely ascribe GVW ratings to the bodies they sell. In some cases, sellers do not know the GVW of the vehicle on which the body (or similar bodies sold by others) will be mounted. Thus, it may be difficult for a seller of a truck body to determine whether the body meets the “suitable for use” standard for a weight-based exclusion.

.01 Classifications of Truck Body Types. The Service will not challenge a seller’s determination that any of the following classifications of truck body types meet the “suitable for use” standard and sales thereof are excluded from the retail excise tax by virtue of § 4051(a)(2):

(1) Platform truck bodies 21 feet or less in length;

(2) Dry freight and refrigerated truck van bodies 24 feet or less in length;

(3) Dump truck bodies with load capacities of 8 cubic yards or less; or

(4) Refuse packer truck bodies with load capacities of 20 cubic yards or less.

.02 Bodies Not Within a Classification. The Service has established the classifications set forth in section 3.01 after a review of manufacturers’ and retailers’ data for certain truck body types. A body type described above that does not fall within the classification parameters of its body type (for example, a platform truck body longer than 21 feet), or a body type not described above, may nevertheless still satisfy the “suitable for use” standard if the seller can establish that, pursuant to § 145.4051-1(a)(4), the truck body has practical and commercial fitness for use with a vehicle having a GVW of 33,000 pounds or less.

This revenue procedure is effective for sales on or after April 4, 2005. In the case of sales before April 4, 2005, the Service will not challenge sellers who take positions consistent with this revenue procedure with respect to sales of truck bodies described in section 3.01.

The principal author of this revenue procedure is Theodore N. Margopulos of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue procedure, contact Barbara Franklin at (202) 622-3130 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking.

This document contains proposed regulations that provide guidance regarding the treatment of payments made on account of sickness or accident disability under a workers’ compensation law for purposes of the Federal Insurance Contributions Act (FICA).

Written and electronic comments must be received by June 9, 2005.

Send submissions to: CC:PA:LPD:PR (REG-160315-03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-160315-03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayer may submit comments electronically, via the IRS Internet site at www.irs.gov/regs or via Federal Rulemaking Portal at www.regulations.gov (IRS and REG-160315-03).

Concerning the proposed regulations, David Ford of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), (202) 622-6040; concerning submissions of comments, the hearing and/or to be placed on the building access list to attend the hearing, LaNita Van Dyke (202) 622-7180 (not toll-free numbers).

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

The principal author of these regulations is David Ford of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt/Government Entities). However, other personnel from the IRS and Treasury Department participated in their development.

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Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking.

This document contains proposed regulations providing guidance regarding corporate formations, reorganizations, and liquidations of insolvent corporations. These regulations provide rules requiring the exchange (or, in the case of section 332, a distribution) of net value for the nonrecognition rules of subchapter C to apply to the transaction. The regulations also provide guidance on determining when and to what extent creditors of a corporation will be treated as proprietors of the corporation in determining whether continuity of interest is preserved in a potential reorganization. Finally, the regulations provide guidance on whether a distribution in cancellation or redemption of less than all of the shares one corporation owns in another corporation satisfies the requirements of section 332. The proposed regulations affect corporations and their shareholders.

Written and electronic comments and requests for a public hearing must be received by June 8, 2005.

Send submissions to: CC:PA:LPD:PR (REG-163314-03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. to 4 p.m. to CC:PA:LPD:PR (REG-163314-03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC or sent electronically, via the IRS internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (IRS and REG-163314-03).

Concerning the proposed regulations on the reorganization provisions and regarding issues raised by the proposed regulations with respect to provisions other than those related to corporate liquidations and subchapter K, Jean Brenner, (202) 622-7790; concerning the proposed regulations on corporate liquidations, Sean McKeever, (202) 622-7750; concerning the application of the principles of the proposed regulations to transfers of property to partnerships under subchapter K, Jeanne Sullivan or Michael Goldman, (202) 622-3070; concerning submissions of comments and/or requests for a public hearing, Treena Garrett, (202) 622-7180 (not toll-free numbers).

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

The principal authors of these proposed regulations are Jean Brenner and Sean McKeever of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development.

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The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)-7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.