* * * * * * * * * *Introduction* * * * * * * * * * *
The following is a transcript of an Examination meeting on 4/18/2000 regarding two claims for refund (Forms 1040X). The examiner was Cathy Spaulding (abbreviated "C.S." below), with Mort Kafrissen (abbreviated "M.K." below) representing management, and agent Michael Enz (abbreviated "M.E." below). Mr. Enz presumably was in attendance because he specializes in so-called "frivolous" arguments. (By his own admission, all of the "tax protestor" arguments in the area end up on his desk.) Comments by IRS representatives are in blue text below.
Larken Rose (abbreviated "L.R." below) was representing himself and his wife (who did not attend), and had Gordon Smith (abbreviated "G.S" below) and Patricia Rose (abbreviated "P.R." below) attending as "witnesses." Comments by Larken Rose and his witnesses are in red text below. Comments in brackets (in black font) below are commentary of Larken Rose, and are not part of the transcript.
(Note: This is not intended to be a lesson on how to fight the IRS. Several important procedural and legal issues were intentionally skipped or ignored, because my goal was not just to win my particular case, but to collect as much evidence as possible showing that they have no response to the 861/"source" issue. In other words, I wanted to let them get to the point of arguing this, instead of battling them on some other issue. So again, I do not suggest that people imitate what I did here. My personal goal, and the goal of the site, is not to give "how to" lessons or battle plans, but simply to fully document that the other side cannot refute my conclusions about what is taxable and what is not. - Larken Rose)
* * * * * * * * * *Transcript (Page 1 of 4) * * * * * * * * * * *
C.S.: "Okay. Good morning."
Others: "Good morning."
C.S.: "Today is Tuesday, April seventeenth, the year two-thousand. The time is approximately..."
P.R.: "Its the eighteenth."
M.K.: "The eighteenth."
C.S.: "Im sorry. Tuesday, April eighteenth, two-thousand. The time is approximately eight thirty-three a.m. My name is Cathy Spaulding. Im a tax auditor at the Jenkintown IRS office of the Examination division. Im in group twenty-eight thirty-two. To my left is Mort Kafrissen, senior revenue agent who is acting on behalf of my manager, Charlie Judge. To my right is Michael Enz, another revenue agent whos here to witness this session. And Im meeting with Larken Rose, the secondary taxpayer, and were here to discuss the claim filed for the nineteen ninety-five and nineteen ninety-six tax years."
L.R.: "Ninety-four and ninety-five."
C.S.: "Im sorry. Ninety-four and ninety-five, tax years. And he has two witnesses... [indicates to P.R.]"
P.R.: "Pat Rose."
C.S.: "Okay, and..."
G.S.: "Gordon Smith."
C.S.: "Okay. Im advising you that this conversation today will be recorded, and thats pretty much it. Okay... and Im also informing you that the taxpayers as well are recording the session."
C.S.: "Okay. You requested this meeting, this face-to-face meeting for nineteen ninety-four, I guess to support your claim?"
L.R.: "I requested them for ninety-four and ninety-five. Eventually the two matters turned into one. They were filed separately, but somewhere along the line the IRS consolidated them into one.:
C.S.: "Well, were treating them as one because theyre both basically the same issue."
C.S.: "And were calling them claims because initially you filed showing tax due, which was paid..."
C.S.: "...and then you subsequently filed 1040X returns requesting money back. Alright, you said you had information to support your claim. What kind of information or documents do you have?"
L.R.: "Yes. Im going to quick run over the basics... well, you covered it mostly. Its claim for refund for ninety-four and ninety-five. The issue at hand -- and I think I pointed this out before in letters -- is not one of financial specifics. Im not contesting that the income was received which was reported on 1099. Im contesting the assumption that it was taxable. Now, I made that assumption, having never seen the law, when we filed the original return. So nothing of the financial specifics changed, but after examining the law, I have reason to believe it is not taxable, and that is why I filed for claim for refund."
L.R.: "I guess the first issue to deal with is the Services assumption that a 1099 is prima facie evidence of gross income received. So Im handing you a handout, and for the record Ill say what it is. It says Form 1099 at the top, and its the statute 6041A of the Internal Revenue Code, and the related regulations, which show that it does not have to be gross income to be reported on a 1099."
[contents of handout shown below]
"(a) Returns regarding remuneration for services
"(a) Returns regarding remuneration for services-
L.R.: "It only has to be remuneration, and the regulations specifically show that it may not be gross income. If the payor knows that its not, then he doesnt have to file a 1099. If he doesnt know, and it isnt, he may be filing and it still isnt gross income. So just based on the ten ninety-nine, I believe its incorrect for the Service to assume that gross income was received, and I am contesting the notion that the payments received constitute gross income within the meaning of section 61 of the Internal Revenue Code."
M.K.: "Larken -- youre Larken? -- You kind of lost me a little bit. Why isnt it gross income? Just because you receive a piece of paper, youre correct, doesnt necessarily mean its gross income."
[Note: M.K. apparently agreed that a 1099 is not proof of "gross income" received.]
L.R.: "Oh yeah, I havent gotten to that yet."
M.K.: "Oh, okay."
L.R.: "I just wanted to point out that a 1099 is not proof that gross income was received, its only proof that income was received, and I wanted to say right off the bat, Im not contesting that I received income. Thats not the issue. Were not arguing about whether..."
M.K.: "Oh, okay. Continue."
L.R.: "Now, because the disagreement here is a matter of law rather than factual specifics of whether I received income or not, what Id like to do is see what points we agree on, and see what points we disagree on, and if we can pinpoint the exact disagreement, I would like to request technical advice from the National Office. Here we have... for the record, this says technical advice at the top. Its segments of 26 CFR 601.105, which are the procedural examination regulations, and they point out that only the National Office can do technical advice, make rulings of law."
[contents of handout shown below]
"[T]echnical advice means advice or guidance as to the interpretation and proper application of internal revenue laws, related statutes, and regulations, to a specific set of facts, furnished by the National Office upon request of a district office in connection with the examination of a taxpayer's return or consideration of a taxpayer's return claim for refund or credit." [26 CFR § 601.105(b)(5)(i)(a)]
"A technical advice memorandum represents an expression of the views of the Service as to the application of law, regulations, and precedents to the facts of a specific case, and is issued primarily as a means of assisting district officials in the examination and closing of the case involved." [26 CFR § 601.105 (b)(5)(viii)(a)]
"The Assistant Commissioner (Technical), acting under a delegation of authority from the Commissioner of Internal Revenue, is exclusively responsible for providing technical advice in any issue involving the establishment of basic principles and rules for the uniform interpretation and application of tax laws [other than ATF taxes]. This authority has been largely redelegated to subordinate officials." [26 CFR § 601.105(b)(5)(i)(d)]
"[W]hile the case is under the jurisdiction of the district director, a taxpayer or his/her representative may request that an issue be referred to the National Office for technical advice on the grounds that... the issue is so unusual or complex as to warrant consideration by the National Office... [T]axpayers are encouraged to make written requests setting forth the facts, law, and argument with respect to the issue, and reason for requesting National Office advice..." [26 CFR § 601.105(b)(5)(iii)]
"If the taxpayer initiates the action to request advice, and his statement of the facts and point or points at issue are not wholly acceptable to the district officials, the taxpayer will be advised in writing as to the areas of disagreement... If agreement cannot be reached, both the statements of the taxpayer and the district official will be forwarded to the National Office." [26 CFR § 601.105(b)(5)(iii)(d)]
L.R.: "So... now we can discuss it in here, but if we cant settle the issue in here, under 601.105(b)(5)(iii), I will be requesting that the points that we cant agree on be sent to the National Office for technical advice. But the first step is to figure out what we actually disagree on."
C.S.: "I want to ask a question for clarification. As I understand it, the person who received the income was not actually you, but your spouse, correct?"
L.R.: "No. We both did. Its a joint business."
C.S.: "May I inquire the nature of the business?"
L.R.: "Were self-employed, but thats..."
C.S.: "Looks like youre self-employed in the health care profession in some manner."
L.R.: "Yeah, transcription; medical transcription."
L.R.: "Okay, so should we... Ive basically simplified it down to two main points to start with, and I want to see just what we disagree on, if anything, and whether it can be settled here. Now, first some things that hopefully well agree on. Do we agree that section one of the Code imposes the tax, section 63 defines taxable income as..."
C.S. and M.K.: "61."
[Note: All three IRS employees get the section number wrong.]
L.R.: "No, section 63 defines taxable income as gross income minus deductions. Section 61 defines gross income. Do we agree on that?"
L.R.: "Now, at this point, the error that most people make, including I believe most IRS employees, is a misreading of section 61 which the regulations clarify, and show the problem with. Im going to hand you a thing -- for the record its the page that says sources of income at the top."
[contents of handout shown below]
"Sec. 61. Gross income defined
"Income from sources -
"Determination of sources of income - Table of
"Income from sources inside or outside U.S., determination of sources of income, 26 CFR 1 (1.861-1--1.864-8T)." [Index of the Code of Federal Regulations]
L.R.: "Its start with section 61, general definition of gross income, which generally defines it as all income from whatever source derived, including (but not limited to) the following items. And it lists items of income such as compensation for services, gross income derived from business, interest, rents, a bunch of other items. I concede that I receive compensation for services, that item of income. The problem here is that people read that word source to be this list [pointing to list of items], and in section 61 itself, in the full version of Title 26, Congress own version -- and Ill hand you a copy of that --..."[contents of handout shown below]
26 USC Sec. 61 01/26/98
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter B - Computation of Taxable Income
PART I - DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
Sec. 61. Gross income defined
(a) General definition
Except as otherwise provided in this subtitle, gross income means
all income from whatever source derived, including (but not limited
to) the following items:
(1) Compensation for services, including fees, commissions,
fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(8) Alimony and separate maintenance payments;
(10) Income from life insurance and endowment contracts;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.
(b) Cross references
For items specifically included in gross income, see part II
(sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).
(Aug. 16, 1954, ch. 736, 68A Stat. 17; July 18, 1984, Pub. L. 98-369, div. A, title V, Sec. 531(c), 98 Stat. 884.)
Capital gains and losses, see section 1201 et seq. of this title.
Guaranteed payments to partner for services or use of capital considered as made to one not member of partnership for purposes of this section, see section 707 of this title.
Income from sources -
Within the United States, see section 861 of this title.
Without the United States, see section 862 of this title.
Items specifically excluded from gross income -
Certain death benefits, see section 101 of this title.
Income from discharge of indebtedness, see section 108 of this title.
Items specifically included in gross income -
Alimony and separate maintenance payments, see section 71 of this title.
Annuities; certain proceeds of endowment and life insurance contracts, see section 72 of this title.
Recipients of income in respect of decedents, see section 691 of this title.
Trust income attributable to grantors and others as substantial owners includible in gross income, see section 671 of this title.
L.R.: "Theres a cross-reference at the bottom which says income from sources, within the United States, see section 861 of this title, and without is 862, but I receive no income from without. And on the sheet I gave you about sources of income, the regulations under 861, the first thing they state, is that 861 and following, and the regulations thereunder, determine the sources of income for purposes of the income tax. Section 61 does not. Section 61 lists the more common items of income, but the Secretary of the Treasury is here stating that 861 and following -- do you have this one, that says sources of income at the top?"
M.E.: "Thats for foreign... sources outside."
[The section titled "Income from sources WITHIN the United States" (26 USC § 861) is about income from sources OUTSIDE the United States? Not exactly a shining example of expertise in tax law.]
L.R.: "Do you have a citation which makes this [pointing to 26 CFR 1.861-1 quote on Sources of Income handout] mean something other than what it says?"
M.E.: "You have to look at the whole section. Hold on. [gets up]"
M.E.: "You have to look at the whole 800s, you just dont pull things out of the air, and assume that..."
L.R.: "Thats fine. Ill look at it. I have 861 here if you want it."
C.S.: "[Addressing M.E.] Do you need to pause, or are you okay?"
M.E.: "Keep going."
[C.S. checks Services recording machine]
L.R.: "Our tapes go 74 minutes, so you just have to watch yours."
L.R.: "And we dont... its fine if we dont agree on this, because it can be sent for technical advice, but might as well at least see..."
M.E.: "Thats not whats gonna happen. What youre gonna do is file a claim if you disagree with us. The IRS has its position, and your next step is to file a claim..."
L.R.: "On the regulations, the examination regulations, they specifically state that I am allowed to request that it be sent for..."
M.E.: "And were refusing it."
[Keep in mind, agent Enz is not even the one in charge of this case. As far as I can tell, he was only a "witness."]
L.R.: "Okay, well I have appeal rights for that."
M.E.: "Right, I know. You petition the claims court."
L.R.: "No. I petition the National Office. The regulations state so. If you want to look up 26 CFR 601.105, you are not allowed to blanket refuse the request without appeal rights. But lets see if we can settle it here first."
M.K.: "As I remember, 861 has something to do with people that have income from within and without the United States..."
C.S.: "Right, foreign income. Foreign source income"
M.E.: "Right, for nonresident aliens."
[Foreign source income of nonresident aliens isnt taxable. More expertise on display.]
M.K.: "...nonresident aliens."
L.R.: "Now, thats basically true, but the error here is one of logic, where you begin by assuming my income is taxable, and when you examine 861 and see that it is not about my income, you assume its irrelevant, but the regulations I gave you state that Part I of Subchapter N and the related regulations, quote, determine the sources of income for purposes of the income tax. It specifically says that. So if my source isnt there, I dont at all mind you saying its not about me. Because it specifically says it determines the sources of income for purposes of the income tax."
[approximately 20-second pause]
C.S.: "It doesnt appear that the technical advice issues any rule of law, its just basically interpretation..."
[Not exactly eager to deal with the issue, are they? Why suddenly bring up technical advice procedures again?]
M.K.: "Yeah, only if theres a question..."
M.E.: "The tech advice is usually the IRS requesting District Counsel how we want to handle something. A letter ruling is what you want."
L.R.: "No. What I gave you is the regulation stating that I can request technical advice. It says so. I dont know... is that what he [M.E.] has, the technical advice page?"
M.K.: "It says the Commissioner...
L.R.: "When its under the jurisdiction of the District Director, the taxpayer can request technical advice."
M.K.: "Oh yeah. The taxpayer may request that an issue be referred to the National Office... if its unusual or complex as to warrant consideration... [quietly skimming over the page aloud]."
[C.S. asks M.K. to speak up]
L.R.: "Well, hes [M.K.] just brushing over stuff. I know what it is."
C.S.: "I think it says request. It doesnt say that its something that..."
L.R.: "Heres all of 601.105, and I didnt want to, ya know, have you sit here and read eight million pages. But if the taxpayer initiated the action, and the Service disagrees, then theres appeal procedures that I can use to... and eventually I can send it to the National Office without your consent, along with your protest that you didnt want it sent there, which is what it says."
C.S.: "You would do that after we formally issue a notice of claim disallowance or something, which we havent done yet."
L.R.: "That would be after you refuse to send technical advice. [reading from regulations] If agreement cannot be reached, both the statements of the taxpayer and the District official will be forwarded to the National Office. So even if we cant reach an agreement on whether to send technical advice, they both go into the National Office."
M.E.: "Are you a United States citizen?"
[This was most likely an attempt to bait me into using some other argument (one he has a response to), like arguing that Im a nonresident alien.]
C.S.: "And your spouse is a U.S. citizen as well?"
L.R.: "Yeah. Now I have a really brief, simple affidavit that just says Im a citizen and I dont receive any income from outside of Pennsylvania. I dont think you have any reason to contest that, but just so we have it on the record."
L.R.: "So I guess on this point..."
C.S.: "Does the same situation exist for your spouse as well?"
[Does it look to you like they want to discuss anything EXCEPT what I asked?]
Continued on Next Page>>
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