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U.S. v. BELL

January 10, 2003


The opinion of the court was delivered by: Christopher C. Conner, United States District Judge.


Before the court*fn1 is the United States' motion for preliminary injunction. (Doc. 34). The parties have fully briefed the issues, and the matter is ripe for disposition.

I. Factual Background

Defendant Thurston Bell ("Bell") has fashioned a career by devising and publicizing ways to avoid paying federal income tax. Bell acknowledges that he has "dealt with the issue of taxes for eight and a half years on the edge of what would be seen as legal . . . ." Transcript of November 4, 2002 preliminary injunction hearing ("N.T."), pg. 28. A brief explanation of Bell's career as a tax protester is appropriate to put the United States' motion for preliminary injunction in context.

In the 1980s, Dell worked for Save-A.Patriot, "[a]n organization that believes that American citizens are not liable for income tax." (Doc. 36, Exhibit J, pg. 13). (See also Doc. 36, Exhibit C, pg. 66). As a case worker at Save-A-Patriot, Bell helped clients "avoid paying taxes or any number of other things that could happen as a result of not paying taxes." (Doc. 36, Exhibit J, pg. 17).

When Bell left Save-A-Patriot, he co-founded Tax-gate and created the website. (Doc. 36, Exhibit C, pp. 16-17). At Tax-gate, Bell drafted court pleadings and letters to the Internal Revenue Service ("IRS") and state taxing agencies on his clients' behalf. (Doc. 36, Exhibit J, pg. 25). See also id. at Exhibit 19 (letter date January 27, 1998, outlining Bell's tax avoidance argument). Bell charged his clients for tax advice and for preparation of documents directed to taxing authorities. (Doc. 36, Exhibit J, pg. 32). (See also Doc. 36, Exhibit K, pg. 88) (deposition testimony that Bell charged a $1,OOO.OO retainer before discussing certain tax matters).

Between 1998 and 2000, Bell established the National Institute for Taxation Education ("NITE"). On the NITE website,*fn2 Bell asserts, "The National Institute for Taxation Education (NITE) provides income tax help, solutions, and strategies that work for Citizens of the United States to legally declare their gross income to be Zero." (Doc, 36, Exhibit C, pg. 16). Bell's tax avoidance argument is commonly referred to as the "Section 861 argument" or the "U.S. Sources argument."

The Internal Revenue Code defines "gross income" as "all income from whatever source derived . . . ." 26 U.S.C. § 61 (a). Bell claims that the word "source" in section 61 is defined in the "Source Rules and Other General Rules Relating to Foreign Income." 26 U.S.C. § 861-865 (emphasis supplied). Section 861 states that certain "items of gross income shall be treated as income from sources within the United States . . . ." 26 U.S.C. § 861 (a). According to the U.S. Sources argument, domestically earned wages of U.S. citizens are not taxable because such wages are not specifically mentioned in the list of items of gross income that "shall be treated as income from sources within the United States." See 26 U.S.C. § 861 (a). Bell concedes that section 861 itself does not exempt domestically earned wages of U.S. citizens.*fn3 Nevertheless, he argues that such wages are not taxable because certain regulations promulgated under section 861 (i.e. 26 C.F.R. § 1.861-8 (a)(4), 1.861-8(f)(1), and 1.861-8T(d)(2)(ii)(A)) create an applicable exemption.

Bell's clients typically file zero income tax returns with an "asseveration of claimed income" attached, disputing the gross income indicated on the taxpayer's W-2 forms. (Doc. 36, Exhibit K, pg. 53). See also N.T. 59-60. When this method fails, Bell argues that the IRS has violated his clients' due process rights by not allowing them to cross-examine their employers regarding the gross income listed on their W-2 forms. (Doc. 36, Exhibit J, pg. 63). Bell's goal in seeking to cross-examine employers is to show an absence of gross income according to the fallacious U.S. Sources argument outlined above. (Doc. 36, Exhibit J, pg. 63). Bell's methods have secured erroneous tax refunds for numerous clients. (See, e.g., Doc. 36, Exhibit C, pg. 64-65).

On November 4, 2002, the court held a hearing on plaintiff's motion for a preliminary injunction. On November 19, 2002, Bell filed a response to plaintiffs supplemental memorandum of law (Doc. 85), exhibits in support thereof (Doc. 86), and an additional deposition transcript. (Doc. 87).

II. Legal Standard

Plaintiff seeks preliminary injunctive relief under 26 U.S.C. § 7402. The court is authorized to grant such relief "as may be necessary or appropriate for the enforcement of the internal revenue laws." 26 U.S.C. § 7402. A preliminary injunction under section 7402 is governed by the same standard as a preliminary injunction undei Rule 65 of the Federal Rules of Civil Procedure. U.S. v. Rosile, 2002 WL 1760861 *1 (M.D.Fla. 2002); U.S. v. Bosset, 2002 WL 1058105 *1 (M.D.Fla. 2002). The court must evaluate four factors: (1) likelihood of success on the merits; (2) irreparable harm resulting from a denial of the relief; (3) the harm to the non-moving party if relief is granted; and (4) the public interest. Allegheny Energy. Inc. v. DQE. Inc., 171 F.3d 153, 158 (3d Cir. 1999) (citing A.C.L.U. of New Jersey v. Black Horse Pike Regional Bd. of Educ., 84 F.3d 1471, 1477 n. 2 (3d Cir. 1996) (en banc); Rosile, 2002 WL 1760861 *1. As the party seeking preliminary injunctive relief, the United States bears the burden of proof Mettler-Toledo, Inc. v. Acker, 908 F. Supp. 240, 245 (M.D.Pa. 1995). "The injunction should issue only if the plaintiff produces evidence sufficient to convince the district court that all four factors favor preliminary relief" Merchant & Evans, Inc. v. Roosevelt Bldg. Prods., 963 F.2d 328, 632-33 (3d Cir. 1992).

III. Discussion

A. Likelihood of Success on the Merits

In order to prevail on the merits, the United States must establish that an injunction is "necessary or appropriate for the enforcement of the internal revenue laws." 26 U.S.C. § 7402. Plaintiff argues that it is likely to succeed on the merits because "the § 861 Argument is completely meritless" and because Bell blindly insists on the argument's validity, "despite overwhelming evidence to the contrary." (Doc. 35 pg. 23). The court agrees with plaintiff.

Section 61(a) of the Internal Revenue Code states in pertinent part:

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived. . . including (but not limited to). . . [c]ompensation for services, including fees, commissions, fringe benefits, and similar items.

26 U.S.C. § 61 (a) (emphasis supplied).

The Supreme Court has "repeatedly emphasized the "sweeping scope' of [section: 61(a)] and its statutory predecessors." C.I.R. v. Schleier, 515 U.S. 323, 327-328 (1995) (citing C.I.R. v. Glenshaw Glass Co., 348 U.S. 426, 429 (1955); United States v. Burke. 504 U.S. 229, 233 (1992); Helvering v. Clifford. 309 U.S. 331, 334 (1940)). When it define gross income, Congress intended "to use the full measure of its taxing power." Glenshaw Glass, 348 U.S. at 429. Moreover, it is well-settled that wages or compensation for services constitute income and that individuals receiving income are subject to the federal income tax. See, e.g., 26 U.S.C. § 61 (a)(1); Central Illinois Public Service Co. v. U.S., 435 U.S. 21, 25 (1978), U.S. v. Connor, 898 F.2d 942, 943-44 (3d Cir. 1990); Coleman v. Commissioner, 791 F.2d 68, 70 (7th Cir. 1986).

Bell's U.S. Sources argument is nonsensical. It rests purely on semantics and takes the regulations promulgated under section 861 out of context.*fn4 As noted by the Tax Court in Christopher v. C.I.R., 2002 WL 71029 *3 (Tax Ct. 2002);

The rules of sections 861-865 have significance in determining whether income is considered from sources within or without the United States. The source rules do not exclude from U.S. taxation income earned by U.S. citizens from sources within the United States.

See also Great-West Life Assur. Co. v. United States, 678 F.2d 180, 183 (Ct. Cl. 1982) ("The determination of where income is derived or "sourced' is generally of no moment to either United States citizens or United States corporations, for such persons are subject to tax under ...

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