Taxpayers vs. Nontaxpayers

This post is in response to a posting on the Yahoo discussion group. Here is the posting:

--- In ALD-forum@yahoogroups.com, Timothy Hodges wrote:
>
> Instead of taking up a huge amount of space here to explain the difference
> between a taxpayer and a nontaxpayer I will simply direct you here:
>
> http://tinyurl.com/yuftkh

Here is the relevant quote from that URL:

Most Americans today feel that the IRC applies to everyone. No matter how many Americans believe it to be true it is still factually and legally inaccurate. The IRC only applies to "taxpayers". This is a pivotal point. Let's see what the federal courts have said on this issue:

"The revenue laws are a code or system in regulation of tax assessment and collection. They relate to taxpayers, and not to nontaxpayers. The latter are without their scope. No procedure is prescribed for nontaxpayers, and no attempt is made to annul any of their rights and remedies in due course of law. With them [nontaxpayers] Congress does not assume to deal, and they are neither of the subject nor of the object of the revenue laws". [emphasis added]
Economy Plumbing and Heating Co. v. United States, 470 F. 2d 585 (1972)

As you can see, the IRC does not apply to everyone.

This argument wildly misconstrues the case cited. Economy Plumbing was a case in the Court of Federal Claims, website http://www.uscfc.uscourts.gov. The United States Court of Federal Claims is the trial court for citizens to sue the federal government. See 28 U.S.C. 1491. I have noted parenthetically the errors made by the argument at the URL above.

Economy Plumbing and another company (Lieb) built dormitories, mess halls, and other buildings on Scott AFB in Illinois. The work was reduced in scope, and the Corps of Engineers eventually awarded them $544,848.33 together; however, before Economy was paid, the General Accounting Office diverted $477,587.66 directly to the IRS to pay Lieb's outstanding tax liabilities. Economy, who was obviously displeased by all this, filed a tax refund, but the IRS did nothing, so Economy brought suit. The outcome of that suit was a refund of over $473,000 of the payment to Economy (the difference being uncontested payroll taxes). Because the trial took time, Economy filed a motion to award interest. The government objected, all of which led to this opinion. 470 F.2d 585, 586-87 (Ct. Cl. 1972).

The court stated flat out that "[the] sole question before us is whether or not plaintiffs are entitled to interest on their judgment from the time the amount thereof was paid by GAO to the IRS to satisfy Lieb's tax lien." (First error: this is not a tax opinion, it's an opinion on whether to award interest damages.)

Economy argued that it was a taxpayer, due to the fact that its money was paid to the IRS, while the government argued Economy was not a taxpayer, and did not deserve a refund because it did not overpay taxes. (Second error: the party seeking relief from the IRS was trying to be declared a taxpayer, not a non-taxpayer.)

The court's take? "We agree with the defendant that the plaintiffs are not taxpayers in this case with respect to these funds within the meaning of the revenue laws. Lieb was the taxpayer and is not a party to this action. While it is true that there was a misapplication of plaintiffs' funds to the payment of Lieb's taxes, this wrongful act did not result in plaintiffs becoming taxpayers to the extent of the misapplied funds. Neither was there any overpayment of plaintiffs' taxes."

This is a decent, solid ruling that makes sense. Economy didn't have to pay Lieb's taxes, so Economy had no right to Lieb's tax refund (if any). In that very limited sense, Economy was not a taxpayer. Of course, Economy paid about $4500 in payroll taxes, which as noted above were legitimate and not recovered.

The relevant quote (in blue above) was lifted from Long v. Rasmussen, 281 F. 236 (D. Mont. 1922), a Prohibition era case in which a tax collector confiscated Long's still, which she wanted returned. That court said that the suit was one of trespass, not taxation, so the tax laws did not apply because Long was a "non-taxpayer" for the purposes of the suit. The entire quote, in context, with the above quote colored blue:

"The revenue laws are a code or system in regulation of tax assessment and collection. They relate to taxpayers, and not to nontaxpayers. The latter are without their scope. No procedure is prescribed for nontaxpayers, and no attempt is made to annul any of their rights and remedies in due course of law. With them Congress does not assume to deal, and they are neither of the subject nor of the object of the revenue laws. The instant suit is not to restrain assessment or collection of taxes of Wise, but is to enjoin trespass upon property of plaintiff, and against whom no assessment has been made, and of whom no collection is sought. Note, too, the taxes are not assessed against the property. This presents a widely different case than that wherein the person assessed, or whose property is assessed, seeks to restrain assessment or collection on the theory that he or it is exempt from taxation, or that for any reason the tax is illegal." 281 F. at 238.

There are additional errors with using this quote. Third error: the quote was lifted from a trespass case, not a tax case. Long merely involved a tax collector -- the plaintiff sued on the wrong theory. Fourth error: the use of the word "nontaxpayer" in the quote refers to the fact that the issue in dispute wasn't a tax issue at all. This is the sense in which it is used in Economy Plumbing: Economy wasn't a taxpayer because the issue in dispute, improper diversion of funds to the IRS, wasn't a tax issue. The quote in red above takes this totally out of context, and tries to read the quote as if it defines "nontaxpayer" as a separate category of person under the IRC itself. That's not at all what these courts were talking about.

Fifth error: not providing any sort of other evidence. Extraordinary claims require extraordinary proof. A single cite to a misconstrued quote from a 35 year old case which has no binding legal precedent is not enough. In fact, and I'll be darned if this isn't a coincidence, the Federal Circuit came out within the last two weeks and said that Economy Plumbing was not a tax refund case at all! See Clintwood Elkhorn Mining Co. v. United States, 2007 U.S. App. LEXIS 1625, *6-7 (Fed. Cir. Jan. 22, 2007).

In short: the argument misconstrues the quote and the law for a number of reasons. It's not convincing.