REV. RUL. 2006-18 , I.R.B. 2006-15, MARCH 16, 2006
Frivolous tax returns; only certain persons subject to federal income tax. This ruling emphasizes to taxpayers, promoters, and return preparers that all individuals are subject to federal income tax. Any argument that Forms W-2 only record and report payments made to federal employees, or that only federal employees or residents of the District of Columbia or federal territories and enclaves earn wages subject to tax, has no merit and is frivolous.
The Service is aware that some taxpayers are claiming that only federal employees and persons residing in Washington, D.C. or federal territories and enclaves are subject to federal tax. These taxpayers may attempt to avoid their federal tax liability by submitting a Form 4852 (Substitute for W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) to the Internal
Revenue Service with a zero on the line for the amount of wages received. These taxpayers may also file tax returns showing no income and claiming a refund for withheld income taxes. The Service is also aware that some promoters market a book, package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.
This revenue ruling emphasizes to taxpayers, promoters, and return preparers that all individuals are subject to federal income tax. This revenue ruling also provides that the terms “employee” and “wages” carry the meanings given to them in the Internal Revenue Code, regulations, and publications of the Internal Revenue Service. Under the Internal Revenue Code, wages include any compensation received due to the performance of services as an employee, and the term employee includes any individual for whom the legal relationship between the individual and the person for whom the individual performs services is the legal relationship of employer and employee. All wages are included in gross income for purposes of determining federal income tax liability, and are also subject to federal employment taxes. Any argument that Forms W-2 only record and report payments made to federal employees, or that only federal employees or residents of the District of Columbia or federal territories and
enclaves earn wages subject to tax, 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. 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 determines whether taxpayers who have taken frivolous positions have filed all required tax returns, and computes the correct amount of tax and interest due, and determines whether civil or 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 only federal employees and persons residing in Washington, D.C. or federal territories and enclaves are subject to federal income and employment taxes.
Taxpayer A either 1) requests, by submitting a Form W-4, Employee’s Withholding Allowance Certificate, that his employer not withhold any amount of federal tax from wages earned, or 2) prepares a Form 4852 (Substitute for W-2) showing no wages received. In addition, taxpayer A either fails to file a return, or files a return with zero income claiming all withholding as a refund. Taxpayer A claims that he is not an “employee” and does not receive “wages” subject to federal income tax, as those terms are as defined in the Internal Revenue Code. Taxpayer A contends that the federal government can only legally demand an “income” tax from federal employees and persons residing in Washington, D.C. or federal territories and enclaves. Therefore, Taxpayer A claims that he does not have to pay “income” taxes — which Taxpayer A asserts also include employment
taxes such as Federal Insurance Contributions Act (FICA) taxes — to the federal government.
Section 3401(a) provides that “wages” include all remuneration for services performed by an employee for his employer. Section 3121(a) provides a similar definition of wages for FICA tax purposes. The argument that only federal employees and persons residing in Washington, D.C. or federal territories and enclaves are subject to tax is based on a misinterpretation of section 3401(c), which defines “employee” and states that the term “includes an officer, employee or elected official of the United States, a State, or any political subdivision thereof . . . .” Section 31.3401(c)-1 of the Employment Tax Regulations provides that the term “employee” includes every individual performing services if the relationship between that individual and the person for whom he performs such services is the legal relationship of employer and employee. Section 7701(c) states that the use of the word “includes” “shall not be deemed to exclude other things otherwise within the meaning of the term defined.”
Thus, the word “includes” as used in the definition of “employee” under § 3401(c) is a term of enlargement, not of limitation. Courts have recognized that federal employees and officials are among those within the definition of “employee,” which also includes private citizens. See Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986) (contention that taxpayer was not an “employee” is meritless, section 3401(c) does not limit withholding to the persons listed therein); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) (under section 3401(c), the category of “employee” includes privately employed wage earners; the word “includes” is a term of enlargement not of limitation, and the reference to certain
entities or categories is not intended to exclude all others); Pabon v. Commissioner, T.C. Memo. 1994-476 (1994) (taxpayer’s frivolous position that she was not subject to tax because she was not an employee of the federal or state governments warranted sanctions of $2,500).
The employment tax withholding provisions do not affect whether wages are gross income. Section 61 provides that compensation for services is includable in gross income. Whether the compensation for services is in the form of wages, or in some other form, is irrelevant. The amount is still subject to income tax. All employees, not just federal employees and those living in federal territories and enclaves, are subject to income and employment taxes.
Federal income tax laws do not apply solely to federal employees and persons residing in the District of Columbia, or federal territories and enclaves, and any contrary contention is frivolous. The terms “employee” and “wages” as used by the Internal Revenue Code apply to all employees, unless specifically exempted by the Internal Revenue Code. The income tax withholding provisions do not affect whether an amount is gross income.
CIVIL AND CRIMINAL PENALTIES
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 the argument that Forms W-2 only record and report payments made to federal workers, or that only federal employees or residents of federal territories and enclaves earn wages, face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalties, which are generally equal to 20 percent of the amount of tax 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 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; (4) 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 (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 this frivolous position also may face criminal prosecution under: (1) section 7201 for attempting to evade or defeat tax, the penalty for which is a significant fine and imprisonment for up to 5 years; (2) section 7203 for willful failure to file a return, the penalty for which is a significant fine and imprisonment for up to a year; (3) section 7206 for making false statements on a return, statement, or other document, the penalty for which is a significant fine and imprisonment for up to 3 years.
Persons, including return preparers, who promote this frivolous position and those who assist taxpayers in claiming tax benefits based on 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 $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.
This revenue ruling was authored by 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).
TITLE 5 >
PART III >
Subpart A >
CHAPTER 21 > § 2105
§ 2105. Employee
(a) For the purpose of this title, “employee”, except as otherwise
provided by this section or when specifically modified, means an
officer and an individual who is—
(1) appointed in the civil service by one of the following
acting in an official capacity—
(A) the President;
(B) a Member or Members of Congress, or the Congress;
(C) a member of a uniformed service;
(D) an individual who is an employee under this section;
(E) the head of a Government controlled corporation; or
(F) an adjutant general designated by the Secretary concerned
under section 709 (c) of title 32;
(2) engaged in the performance of a Federal function under
authority of law or an Executive act; and
(3) subject to the supervision of an individual named by paragraph
(1) of this subsection while engaged in the performance of the
duties of his position.
(b) An individual who is employed at the United States Naval
Academy in the midshipmen’s laundry, the midshipmen’s tailor shop,
the midshipmen’s cobbler and barber shops, and the midshipmen’s
store, except an individual employed by the Academy dairy (if any),
and whose employment in such a position began before October 1,
1996, and has been uninterrupted in such a position since that date
is deemed an employee.
(c) An employee paid from nonappropriated funds of the Army and
Air Force Exchange Service, Army and Air Force Motion Picture Service,
Navy Ship’s Stores Ashore, Navy exchanges, Marine Corps exchanges,
Coast Guard exchanges, and other instrumentalities of the United
States under the jurisdiction of the armed forces conducted for
the comfort, pleasure, contentment, and mental and physical improvement
of personnel of the armed forces is deemed not an employee for the
(1) laws administered by the Office of Personnel Management,
(A) section 7204;
(B) as otherwise specifically provided in this title;
(C) the Fair Labor Standards Act of 1938;
(D) for the purpose of entering into an interchange agreement
to provide for the noncompetitive movement of employees
between such instrumentalities and the competitive service;
(E) subchapter V of chapter 63, which shall be applied so
as to construe references to benefit programs to refer to
applicable programs for employees paid from nonappropriated
(2) subchapter I of chapter 81, chapter 84 (except to the
extent specifically provided therein), and section 7902 of this
This subsection does not affect the status of these nonappropriated
fund activities as Federal instrumentalities.
(d) A Reserve of the armed forces who is not on active duty or
who is on active duty for training is deemed not an employee or
an individual holding an office of trust or profit or discharging
an official function under or in connection with the United States
because of his appointment, oath, or status, or any duties or functions
performed or pay or allowances received in that capacity.
(e) Except as otherwise provided by law, an employee of the United
States Postal Service or of the Postal Rate Commission is deemed
not an employee for purposes of this title.
(f) For purposes of sections 1212, 1213, 1214, 1215, 1216, 1221,
1222, 2302, and 7701, employees appointed under chapter 73 or 74
of title 38 shall be employees.
"...the term [employee]
includes officers and employees,
whether elected or appointed,
of the United States, a [federal] State, Territory, Puerto Rico or
any political subdivision, thereof, or the District of Columbia, or
any agency or instrumentality of any one or more of the foregoing.
The term 'employee' also includes an
officer of a corporation."
For purposes of this chapter,
the term ''employee'' includes [is limited to] an officer, employee,
or elected official of the United States, a State, or any political
subdivision thereof, or the District of Columbia, or any agency or instrumentality
of any one or more of the foregoing. The term ''employee'' also includes
an officer of a corporation.
lawyers, dentists, veterinarians, contractors, subcontractors, public
stenographers, auctioneers, and others who follow an independent trade,
business, or profession, in which they offer their services to the public,
are not employees."
8 Federal Register, Tuesday,
September 7, 1943, §404.104, pg. 12267
Employee:“The term employee specifically includes officers and
employees whether elected
or appointed, of
the United States, a state, territory, or political subdivision thereof
or the District of Columbia or any agency or instrumentality of any
one or more of the foregoing.”
Federal Register, Tuesday, September 7, 1943, §404.104, pg. 12267]
Black's Law Dictionary,
Sixth Edition, p. 517:
The word "elected," in its ordinary signification, carries with it the
idea of a vote, generally popular, sometimes more restricted, and cannot
be held the synonym of any other mode of filling a position.
[Black's Law Dictionary,
Sixth Edition, p. 517]
Black's Law Dictionary,
Sixth Edition, p. 99:
The designation of a person, by the person or persons having authority
therefor, to discharge the duties of some office or trust. In
re Nicholson's Estate, 104 Colo. 561, 93 P.2d 880, 884.
Office or public function.
The selection or designation of a person, by the person or persons having
authority therefor, to fill an office or public function and discharge
the duties of the same. The term "appointment" is to be distinguished
from "election." "Election" to office usually refers to vote of
people, whereas "appointment" relates to designation by some individual
or group. Board of Education of Boyle County v. McChesney, 235
Ky. 692, 32 S.W.2d 26, 27.
[Black's Law Dictionary,
Sixth Edition, p. 99]
Black's Law Dictionary,
Sixth Edition, p. 1082:
A right, and correspondent duty, to exercise a public trust. A
public charge or employment. An employment on behalf of the government
in any station or public trust, not merely transient, occasional, or
incidental. The most frequent occasions to use the word arise
with reference to a duty and power conferred on an individual by the
government; and, when this is the connection, "public office" is a usual
and more discriminating expression. But a power and duty may exist
without immediate grant from government, and may be properly called
an "office;" as the office of executor. Here the individual acts
towards legatees in performance of a duty, and in exercise of a power
not derived from their consent, but devolved on him by an authority
which quoad hoc is superior....
[Black's Law Dictionary,
Sixth Edition, p. 1082]
TITLE 5 >
PART III >
Subpart G >
CHAPTER 85 >
SUBCHAPTER I > § 8501
§ 8501. Definitions
For the purpose of this
(1) “Federal service” means service performed
after 1952 in the employ of the United
States or an instrumentality of the
which is wholly or partially owned by the United
does not include service
(except service to which subchapter II of this chapter applies) performed—
(D) outside the
United States, the Commonwealth
of Puerto Rico, and the Virgin Islands by an individual who is not a
citizen of the
(3) “Federal employee” means an individual
who has performed Federal service;
26: Internal Revenue
PART 1—INCOME TAXES
TAX ON SELF-EMPLOYMENT INCOME
§ 1.1402(c)-3 Employees.
(a) General rule.
Generally, the performance of service by an individual as an
employee, as defined in the Federal Insurance Contributions Act
(Chapter 21 of the Internal Revenue Code) does not constitute a
trade or business within the meaning of section 1402(c) and §1.1402(c)–1.
However, in six cases set forth in paragraphs (b) to (g), inclusive,
of this section, the performance of service by an individual is
considered to constitute a trade or business within the meaning
of section 1402(c) and §1.1402(c)–1. (As to when an individual is
an employee, see section 3121 (d) and (o) and section 3506 and the
regulations under those sections in part 31 of this chapter (Employment
“The restrictions that the Constitution places upon the government in its capacity as lawmaker, i.e., as the regulator of private conduct, are not the same as the restrictions that it places upon the government in its capacity as employer. We have recognized this in many contexts, with respect to many different constitutional guarantees. Private citizens perhaps cannot be prevented from wearing long hair, but policemen can. Kelley v. Johnson, 425 U.S. 238, 247 (1976). Private citizens cannot have their property searched without probable cause, but in many circumstances government employees can. O’Connor v. Ortega, 480 U.S. 709, 723 (1987) (plurality opinion); id., at 732 (SCALIA, J., concurring in judgment). Private citizens cannot be punished for refusing to provide the government information that may incriminate them, but government employees can be dismissed when the incriminating information that they refuse to provide relates to the performance of their job. Gardner v. Broderick, [497 U.S. 62, 95] 392 U.S. 273, 277 -278 (1968). With regard to freedom of speech in particular: Private citizens cannot be punished for speech of merely private concern, but government employees can be fired for that reason. Connick v. Myers, 461 U.S. 138, 147 (1983). Private citizens cannot be punished for partisan political activity, but federal and state employees can be dismissed and otherwise punished for that reason. Public Workers v. Mitchell, 330 U.S. 75, 101 (1947); Civil Service Comm'n v. Letter Carriers, 413 U.S. 548, 556 (1973); Broadrick v. Oklahoma, 413 U.S. 601, 616 -617 (1973).”
[Rutan v. Republican Party of Illinois, 497 U.S. 62 (1990)]
When a person is being paid a salary for his loyal services,
any breach of that loyalty would appear to carry with it some loss
of money to the employer - who is not getting what he paid for.
Additionally, "[i]f an agent receives anything as a result of his
violation of a duty of loyalty to the principal, he is subject to
a liability to deliver it, its value, or its proceeds, to the principal."
Restatement (Second) of Agency 403 (1958). This duty may fulfill
the Court's "money or property" requirement in most kickback schemes.
v. United States, 483 U.S. 350 (1987)]
Although not disputing these principles, petitioner advances two
arguments in support of his claim that the statutes do not authorize
levy on the accrued salaries of
of a State. First, he contends
that a State is not a ‘person’ within the meaning of
s 6332, and, second, he argues that Congress, by specifically
‘upon the accrued salary or wages of any officer,
or elected official, of the United States, the District of Columbia,
or any agency or instrumentality’ thereof, but not similarly specifically
upon the accrued salaries or wages of
of a State, evinced its intention to exclude the latter from such
Though the definition of ‘person’ in
s 6332 does not mention States or any sovereign or political
entity or their officers among those it ‘includes' (Note 3), it
is equally clear that it does
not exclude them. This is made certain by the provisions of
s 7701(b) of the 1954 Internal Revenue Code that ‘The terms
‘includes' and ‘including’ when used in a definition contained in
this title shall not be deemed to exclude other things otherwise
within the meaning of the term defined.' 26 U.S.C. (Supp. V)
26 U.S.C.A. s 7701(b). Whether the term ‘person’ when used in
a federal statute includes a State cannot be abstractly declared,
but depends upon its legislative environment,
State of Ohio v. Helvering, 292 U.S. 360, 370, 54 S.Ct. 725, 727,
78 L.Ed. 1307;
State of Georgia v. Evans, 316 U.S. 159, 161, 62 S.Ct. 972, 973,
86 L.Ed. 1346. It is clear that
s 6332 is stated in all-inclusive terms of general application.
‘In interpreting federal revenue measures expressed in terms of
general application, this Court has ordinarily found them operative
in the case of state activities even though States were not expressly
indicated as subjects of tax.’
Wilmette Partk Dist. v. Campbell, 338 U.S. 411, 416, 70 S.Ct. 195,
198, 94 L.Ed. 205, and cases cited. We think that the subject
matter, the context, the legislative history, and the executive
interpretation, i.e., the legislative environment, of
s 6332 make it plain that Congress intended to and did include
States within the term ‘person’ as used in
Nor is there merit in petitioner's
contention that Congress, by specifically providing in
upon the accrued salaries of federal
but not mentioning state
evinced an intention to exclude the latter from
The explanation of that action by Congress appears quite clearly
to be that this Court has held in
Smith v. Jackson, 246 U.S. 388, 38 S.Ct. 353, 62 L.Ed. 788,
that a federal disbursing officer might not, in the absence of express
congressional authorization, set off an indebtedness of a federal
to the Government against the
salary, and, pursuant to that opinion, the Comptroller General ruled
that an ‘administrative official served with (notices of
would be without authority to withhold any portion of the current
salary of such
in satisfaction of the notices of
26 Comp.Gen. 907, 912 (1947). It is evident that
6331 was enacted to overcome that difficulty and to subject
the salaries of federal
to the same collection procedure as are available against all other
of a State. [NOTE: If they
signed a W-4 or filed a return or didn't argue against being called
"taxpayers" or used a federal identifying number, then they definitely
were federal "employees" because all "taxpayers" are "public officers"]
Accordingly we hold that
upon the accrued salaries of state
for the collection of any federal tax.
FN3. 26 U.S.C.(Supp. V)
26 U.S.C.A. s 6332, provides:
‘(a) Requirement.-Any person in possession of (or obligated
with respect to) property or rights to property subject to
levy upon which a
levy has been made shall, upon demand of the Secretary
or his delegate, surrender such property or rights (or discharge
such obligation) to the Secretary or his delegate, except such
part of the property or rights as is, at the time of such demand,
subject to an attachment or execution under any judicial process.
‘(b) Penalty for violation.-Any person who fails or refuses
to surrender as required by subsection (a) any property or rights
to property, subject to
levy, upon demand by the Secretary or his delegate, shall
be liable in his own person and estate to the United States
in a sum equal to the value of the property or rights not so
surrendered, but not exceeding the amount of the taxes for the
collection of which such
levy has been made, together with costs and interest
on such sum at the rate of 6 percent per annum from the date
‘(c) Person defined.-The term ‘person,’ as used in subsection
(a), includes an officer or
employee of a corporation or a member or
employee of a partnership, who as such officer,
employee, or member is under a duty to surrender the
property or rights to property, or to discharge the obligation.'
[Sims v. U.S., 359 U.S. 108, 79 S.Ct. 641 (1959)]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
PART 31_EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE--Table
Subpart D_Federal Unemployment Tax Act (Chapter 23, Internal Revenue
Code of 1954)
Sec. 31.3306(i)-1 Who are employees.
(a) Every individual is an employee if the
relationship between him and the person for whom he performs services
is the legal relationship of employer and employee. (The word ``employer''
as used in this section only, notwithstanding the provisions of
Sec. 31.3306(a)-1, includes a person who employs one or more
(b) Generally such relationship
exists when the person for whom services are performed has
the right to control and direct the individual who performs
the services, not only as to the result to be accomplished by the
work but also as to the details and means by which that result is
accomplished. That is, an employee is subject to the will and control
of the employer not only as to what shall be done but how it shall
be done. In this connection, it is not necessary that the employer
actually direct or control the manner in which the services are
performed; it is sufficient if he has the right to do so. The right
to discharge is also an important factor indicating that the
person possessing that right is an employer. Other factors characteristic
of an employer, but not necessarily present in every case, are the
furnishing of tools and the furnishing of a place to work, to the
individual who performs the services. In general, if an individual
is subject to the control or direction of another merely as to the
result to be accomplished by the work and not as to the means and
methods for accomplishing the result, he is an independent
contractor. An individual performing services as an independent
contractor is not as to such services an employee. Individuals
such as physicians, lawyers, dentists, veterinarians, construction
contractors, public stenographers, and auctioneers, engaged in the
pursuit of an independent trade, business, or profession, in which
they offer their services to the public, are independent contractors
and not employees.
Black’s Law Dictionary, Abridged
6th Edition, p. 1230:
Essential characteristics of a ‘public office’ are:
Authority conferred by law,
Fixed tenure of office, and
Power to exercise some of the sovereign functions of government.
Key element of such test is that “officer is carrying out a sovereign
Essential elements to establish public position as ‘public office’
Position must be created by Constitution, legislature, or through
authority conferred by legislature.
Portion of sovereign power of government must be delegated to
Duties and powers must be defined, directly or implied, by legislature
or through legislative authority.
Duties must be performed independently without control of superior
power other than law, and
Position must have some permanency.”
[Black’s Law Dictionary, Abridged 6th Edition, p. 1230]