The Cheek Defense in IRS Disbarment Proceedings (11/26/12)

In Banister v. United States Department of the Treasury, 2012 U.S. App. LEXIS 24179 (9th Cir. 2012), here, an unpublished opinion,  the Ninth Circuit affirmed the district court's decision affirming the disbarment of Mr. Banister from practice before the IRS.  The Court opens:

Banister admitted to advising clients that they were not liable for income taxes based on his belief that the Sixteenth Amendment was not properly ratified and his understanding that Section 861 of the Internal Revenue Code, 26 U.S.C. § 861, and the regulations thereunder ("Section 861") exempted the clients from having to pay income taxes. He also admitted to signing a client's tax returns as the returns' preparer when the returns stated that the client was not liable for income taxes under Section 861. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm.

The ho-hum, routine, nonprecedential affirmance is not surprising given the claims that Banister made.  But, I think the Court's discussion if Banister's Cheek good faith defense is noteworthy, as a reminder.  The Cheek is that the defendant did not know the law and therefore could not have violated a known legal duty.  Cheek established that this defense was not available to a person who knows the law but claims the law is invalid.  That was Mr. Banister's problem in asserting the belief that the Sixteenth Amendment had not been properly ratified.

But, Mr. Banister had another arrow in his quiver -- that Section 861, properly read, exempted the persons he counseled from the income tax.  The question here was the role of the reasonableness of his belief.  Readers will recall that Cheek established the even an unreasonable belief that the law, properly interpreted, did not apply is a defense, but that the trier of fact (there the jury) could consider the unreasonableness of the belief as bearing upon whether the defendant actually knew the law's command and intentionally violated the command.  The Ninth Circuit said:

Banister's Section 861 position is "a case in which there is no claim that the provision at issue is invalid," and therefore the government must show that, despite his professed beliefs, Banister was "aware that the law impose[d] a duty upon him" and did not simply make "an innocent mistake[]." Id. at 201-02, 205. In this context, Banister reads Cheek's prohibition against considering the reasonableness of a professed good-faith belief too broadly. Cheek only narrowly prohibited the judge from "[c]haracterizing a particular belief as not objectively reasonable" and "transform[ing] the inquiry into a legal one," taking the issue away from the finder of fact. Id. at 203. Here, the ALJ also functioned as factfinder, and so under Cheek was free to consider the reasonableness of the asserted beliefs and "consider them to be nothing more than simple disagreements with known legal duties imposed by the tax laws." Id. at 203-04. 

As Banister's extensive research into Section 861 surely revealed, his position has been universally dismissed by our court system. See, e.g., Solomon v. Comm'r, 66 T.C.M. (CCH) 1201 (1993) (finding a taxpayer's tax avoidance argument was "not bolstered by the regulations under section 861," and sanctioning the taxpayer for making frivolous arguments including the Section 861 argument offered by Banister), aff'd by unpublished order, 42 F.3d 1391 (7th Cir. 1994). We view this universal dismissal of Banister's Section 861 position, coupled with his experience at the IRS and extensive research, as clear evidence that Banister's Section 861 position is a "simple disagreement[] with known legal duties" and not merely an "innocent mistake[]," thus undermining his claim regarding good-faith belief. The ALJ therefore did not err in rejecting this position as unreasonable and finding that Banister committed willful violations.