Petition for Writ of Certiorari — Clayton v. United States (No. 07-904)

Supreme Court, U.S.

FILED

a 07-904 JAN 4- 2008

No.

OFFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

CHARLES THOMAS CLAYTON,

Petitioner,

v.

UNITED STATES OF AMERICA,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Lowell H. Becraft, Jr.

Counsel of Record for Petitioner

403 Andrew Jackson Way

Huntsville, Alabama 35801

(256) 533-2535

WILSON-EPES PRINTING Co., INC. — (202) 789-0086 — WASHINGTON, D.C. 20002

QUESTION PRESENTED

Whether the Consumer Price Index,’ which is

used to determine the “minimum filing requirement”

amount for the filing of federal income tax returns, is

a “rule” for Administrative Procedures Act purposes

and is consequently void if not duly promulgated?

' The petition for writ of certiorari filed in

December, 2007, by Rachel McElhinney also raises an

issue concerning the Consumer Price Index.

i

TABLE OF CONTENTS

Page

QUESTION PRESENTED .................... 1

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TABLE OF AUTHORITIES eee re eer. eee ill

PETITION FOR A WRIT OF CERTIORARI ...... 1

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REET No ois Ge ds aod ve boas then waeus 1

SEAT Lies ENVOLVED .. 0... cc cee ren cnn. 1

STATEMENT OF THE CASE ................. 4

REASONS FOR GRANTING THE WRIT ....... 10

RENNIE: Su se eee Gk Sk ae ee Lea 18

APPENDIX

United States v. Clayton, 506° F.3d 405 ......... la

United States v. Clayton (U.S. District Court,

7.57. SO, Pe S, Te a ke ee 21a

TABLE OF AUTHORITIES

Cases: Page:

Alaniz v. Office of Personnel Management,

728 F.2d 1460 (Fed.Cir. 1984) ........ 9, 15, 16, 18

Appalachian Power Co. v. E.P.A.,

208 F.3d 1015 (D.C.Cir. 2000) ........... 8, 16, 17

Appalachian Power Company v. Train,

OGG F.2e O51 (008 Clr. 2077)... ww ce cee 8

Batterton v. Marshall,

648 F.2d 694 (D.C.Cir. 1980) ......... 9, 14, 16, 18

Brennan v. Ace Hardware Corp.,

495 F.2d 368 (8th Cir. 1974) ..............00068. 8

Christensen v. Harris County,

BER By ee | a rere 18

Coalition for Common Sense in Government

Procurement v. Secretary of Veterans Affairs,

464 F.3d 1306 (Fed.Cir. 2006) ................. 8

Coliseum Square Ass’n., Inc. v. Jackson,

465 F.3d 215, 229 (5th Cir. 2006) ............. 8,9

Dufresne v. Baer,

T44-F 24 1543 (11th Civ. 1984)... 6 ccc. 8

First Family Mortgage Corp. v. Earnest,

851 F.2d 843 (Gth Cir. 1988) ................00. 8

Gatter v. Nimmo,

G72 F.20 oan Core Cit. 1967) . wn we cc ecues 8

Hoctor v. U.S. Department of Agriculture,

Oe F.Se 060 Cite Cat. TORS) ow ke ccc ess 8

Kwon v. INS,

ae ©. BOO Grek Cae. BGI) 2 ww cn ic cen 8

Lynch v. United States Parole Com’n.,

768 F.2d 4901 (ond Civ. 1965) .. wc sinc ek. 8

il

iV

Phillips Petroleum Co. v. Johnson,

22 F.3d 616 (Sth Cir. 1904) ................. 8,18

Ramey v. Reinertson,

268 F.3d 955 (10th Cir. 2001) ................:. 8

Senn Park Nursing Center v. Miller,

104 [ll.2d 169, 470 N.E.2d 1029 (1984) ...... 13, 14

United States v. Bowers,

920 F.2d 220 (4th Cir. 1990) .................. 7

United States v. Harvey,

ee , BORD. cw ace scebecdese 8

Western Radio Servs. Co. v. Espy,

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Statutes:

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rsd 2s obs 6 ue bho koe OKO 8 3, 4, 11

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Es cs coke és mee eclskbndepewes 5, 7

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oe Er ree are re l

PETITION FOR A WRIT OF CERTIORARI

Petitioner Charles Thomas Clayton, M.D.

(“Clayton”) respectfully petitions for a writ of certiorari

to review a judgment of the United States Court of

Appeals for the Fifth Circuit.

OPINIONS BELOW

The opinion of the court of appeals, App., infra,

la, is reported at 506 F.3d 405. The opinion of the

district court, App., infra, 21a, is unreported.

JURISDICTION

The judgment of the court of appeals was

entered on October 29, 2007. App., infra, la. The

jurisdiction of this Court is invoked under 28 U.S.C.

§1254(1).

STATUTES INVOLVED

This petition concerns the definition of “rule” as

set forth in the Administrative Procedures Act, and the

relevant law provides in pertinent part as follows:

“For the purpose of this subchapter -

KkKKKK

“(4) ‘rule’ means the whole or a part of an agency

statement of general or particular applicability

and future effect designed to implement,

interpret, or prescribe law or policy or describing

the organization, procedure, or _ practice

tJ

requirements of an agency and includes the

approval or prescription for the future of rates,

wages, corporate or financial structures or

reorganizations thereof, prices, facilities,

appliances, services or allowances therefor or of

valuations, costs, or accounting, or practices

bearing on any of the foregoing;”

This petition also concerns the requirement to

make a federal income tax return, and the relevant law

provides in pertinent part as follows:

“(a) General rule.

“Returns with respect to income taxes under

subtitle A shall be made by the folla. -ing:

“(1)(A) Every individual having for the taxable

year gross income which equals or exceeds the

exemption amount, * * *”

xe**

“(D)(ii). The term ‘exemption amount’ has the

meaning given such term by section 151(d).”

26 U.S.C. §6012.

The above section of the 1986 Internal Revenue

Code references and is dependent on §151(d)(4), that

p

provides in pertinent part as follows:

“(4) Inflation adjustments.

“(A) Adjustment to basic amount of exemption.

“In the case of any taxable year beginning in a

3

calendar year after 1989, the dollar amount

contained in paragraph (1) shall be increased by

an amount equal to —

“Gi) such dollar amount, multiplied by

“Gii) the cost-of-living adjustment determined

under section 1(f)(3) for the calendar year in

which the taxable year begins, by substituting

‘calendar year 1988' for ‘calendar year 1992' in

subparagraph (B) thereof.”

26 U.S.C. §151.

Section 151(d)(4) is dependent on the above

referenced §1(f)(3), which provides as follows regarding

calculation of the above mentioned “cost-of-living

adjustment”:

“(3) Cost-of-living adjustment.

“For purposes of paragraph (2), the cost-of-living

adjustment for any calendar year is the

percentage (if any) by which —

“(A) the CPI for the preceding calendar year,

exceeds

“(B) the CPI for the calendar year 1992.

“(4) CPI for any calendar year.

“For purposes of paragraph (3), the CPI for any

calendar year is the average of the Consumer

Price Index as of the close of the 12-month

period ending on August 31 of such calendar

year.

“(5) Consumer Price Index.

“For purposes of paragraph (4), the term

‘Consumer Price Index’ means the last

Consumer Price Index for all-urban consumers

4

published by the Department of Labor. For

purposes of the preceding sentence, the revision

of the Consumer Price Index which is most

consistent with the Consumer Price Index for

calendar year 1986 shall be used.”

26 U.S.C. §1(£)(3).

STATEMENT OF THE CASE

1. Introduction.

This petition presents a crucial question

affecting not only the federal government but also the

American public. It concerns the method by which the

rate of inflation, the Consumer Price Index (“CPT”), is

determined. Presently, the CPI is calculated by the

Department of Labor (“DoL”) and this calculation

directly and indirectly affects hundreds of millions of

people as well as the budget of the federal government

itself. However, the American public, including any

interested economist or statistician, plays no role in

the determination of any CPI. Instead, for all that is

known regarding the actual process by which the DoL

determines any CPI, it is calculated in the hidden

backrooms of government buildings by unelected

bureaucrats.

Dr. Clayton’s petition directly raises the

question of the legal validity of the DoL’s calculation of

the CPI. While this issue is raised solely in the context

of the CPI’s relationship to the requirement to make

federal income tax returns, it is undeniable that this

question is vastly broader than this context. Dr.

Clayton contends that the determination and

publication of the CPI by the DoL, which affects both

5

the American public and the federal government, must

be adopted via the procedures mandated by the

Administrative Procedures Act (“APA”), if any CPIis to

be accorded the force and effect of law.

2. Factual Background.

Prior to indictment, Dr. Clayton was a Texas

radiologist who practiced in Houston. Generally,

through the years up to and through 1998, Dr. Clayton

filed federal income tax returns and reported what he

made from his medical practice on those returns.

However starting in 2000, he commenced a study of the

Internal Revenue Code, and that study lead him to

conclude that he was not required to either file income

tax returns or pay income taxes. He thereafter ceased

filing income tax returns for the years 1999 and

following. In 2001 and 2002, he filed returns to amend

his previously filed tax returns for the years 1997 and

1998, and claimed therein that his income for these

two years was “zero.” These actions lead to his

indictment. See App., infra, 2a — 3a.

On April 4, 2006, a federal grand jury sitting in

the Western District of Texas at Austin returned an 8

count indictment against Dr. Clayton. Counts 1 and 2

thereof charged violations of 26 U.S.C. §7206(1), and

alleged that on April 10, 2001, Dr. Clayton filed a false,

Form 1040X federal income tax return to amend his

previously filed tax return for the year 1997 (count 1),

and that on April 6, 2002, Dr. Clayton filed a false,

Form 1040X federal income tax return to amend his

previously filed tax return for the year 1998 (count 2).

Counts 3 through 8 charged violations of 26 U.S.C.

§7203 and asserted that for the tax years 1999 through

2004, Dr. Clayton had willfully failed to filed federal

income tax returns.

6

On June 30, 2006, Dr. Clayton filed a motion to

dismiss counts 3 through 8 of the indictment, which

charged willful failure to file federal income tax

returns. In this motion, Dr. Clayton asserted that the

requirement to make federal income tax returns is

governed by 26 U.S.C. §6012, which in turn relies upon

26 U.S.C. §151(d) for determination of the minimum,

threshold filing requirement amount (the “exemption

amount” in the terms of the statute). Dr. Clayton noted

in his motion that since 1990, this minimum filing

requirement amount has been indexed to the rate of

inflation, the CPI, but there is nothing in either the tax

code itself or relevant tax regulations that sets forth

that amount for any year since 1990. Since an element

of a willful failure to file a tax return case concerns the

requirement to file such returns, and since the

threshold filing requirement amount is not established

by law, Dr. Clayton asserted that these counts of the

indictment should be dismissed as a matter of law.

The prosecution’s reply to this motion was short,

and its primary argument was set forth in a footnote in

its brief: “To determine one’s exemption amount, a

taxpayer has the choice of (1) reading the Form 1040

and/or the accompanying instructions for the pertinent

tax year, both of which explicitly state the exemption

amount for the various filing statuses, or (2) going

through the more complicated process of cross

referencing the statutes, regulations, and the consumer

price index to calculate the same number referenced in

option one. Either way, the taxpayer can accurately

determine the threshold filing requirement for any

given year.” The prosecution concluded its reply to Dr.

Clayton’s motion with the argument that “[w]hether

the exemption amount is enumerated in a code or

7

regulation is irrelevant to defendant’s argument that

he is not required to comply with a mere directive, as

the exemption amount does not compel the defendant

to act — section 7203 does.”

3. The District Court’s Decision.

On August 2, 2006, the district court denied Dr.

Clayton’s motion, stating, “[t]he Court agrees with the

Government that Defendant could easily have

determined the exemption amount triggering the filing

requirement in every year at issue by: (1) simply

reading the Form 1040 and/or the accompanying

instructions for the pertinent tax year, both of which

state the exemption amount, or (2) going through the

process of cross referencing the statutes, regulations,

and the consumer price index to calculate the figure

referenced in option one. The statutory requirement to

file income tax returns is located in 26 U.S.C. §§ 6001,

6011, and 6012, while § 7203 makes the willful failure

to file income tax returns a criminal offense. See

United States v. Bowers, 920 F.2d 220, 221—23 (4th Cir.

1990) (upholding convictions in a tax evasion case

because the federal regulations set forth sufficient

advice on how to obtain the forms or information

necessary to prepare a tax return). Here, if Defendant

had taken the time to follow the cross references

within the statutes and regulations, he would have

been able to determine the amount of gross income

that triggers the duty to file a tax return.” See App.,

infra, 22a — 23a.

The problem with the argument asserted by the

prosecution and adopted by the district court is that it

avoided addressing Dr. Clayton’s central point: the CPI

constitutes a “rule” for APA purposes and must be

adopted accordingly, and this argument offered by the

8

prosecution simply assumed without question the

validity of the CPI. The government has never asserted

that any CPI has actually been adopted via APA

procedures.

4. The Fifth Circuit’s Decision.

On appeal, Dr. Clayton alleged that the district

court erred in denying the above mentioned motion to

dismiss counts 3 through 8 of the indictment. As to the

government’s and district court’s position that the

minimum filing requirement amount (determined via

the CPI) could legally be provided by the Form 1040

instruction manuals, Dr. Clayton argued that a wealth

of decisional authorities,’ including Coliseum Square

* See also Lynch v. United States Parole Com’n.,

768 F.2d 491, 497 (2nd Cir. 1985); Gatter v. Nimmo,

672 F.2d 343, 347 (3rd Cir. 1982); Appalachian Power

Company v. Train, 566 F.2d 451, 455 (4th Cir. 1977);

United States v. Harvey, 659 F.2d 62, 64 (5th Cir.

1981); Kwon v. INS, 646 F.2d 909, 918 (5th Cir. 1981);

Phillips Petroleum Co. v. Johnson, 22 F.3d 616, 621

(5th Cir. 1994); First Family Mortgage Corp. uv.

Earnest, 851 F.2d 843, 845 (6th Cir. 1988); Hoctor v.

U.S. Department of Agriculture, 82 F.3d 165 (7th Cir.

1996); Brennan v. Ace Hardware Corp., 495 F.2d 368,

376 (8th Cir. 1974); Western Radio Servs. Co. v. Espy,

79 F.3d 896, 901 (9th Cir. 1996); Ramey v. Reinertson,

268 F.3d 955, 963 (10th Cir. 2001); Dufresne v. Baer,

744 F.2d 1543, 1549-50 (11th Cir. 1984); Appalachian

Power Co. v. E.P.A., 208 F.3d 1015, 1020-21 (D.C.Cir.

2000); and Coalition for Common Sense in Government

Procurement v. Secretary of Veterans Affairs, 464 F.3d

1306 (Fed.Cir. 2006).

9

Ass’n., Inc. v. Jackson, 465 F.3d 215, 229 (5th Cir.

2006), precluded such use as a matter of law. In

reference to Dr. Clayton’s argument that the CPI

constituted a “rule” for APA purposes, he relied on two

cases from the D.C. and Federal Circuits: Alaniz v.

Office of Personnel Management, 728 F.2d 1460

(Fed.Cir. 1984), and Batterton v. Marshall, 648 F.2d

694 (D.C.Cir. 1980). If the Fifth Circuit had adopted

the rule established in Alaniz and Batterton, it would

have held that Dr. Clayton’s motion should have been

granted and these counts of the indictment dismissed.

Instead, the Fifth Circuit established a new rule

at variance with that in Alaniz and Batterton. The

essence of the decision of the court of appeals is

contained in a single sentence: “The fact that § 6012

incorporates by reference the CPI, which is compiled

and published by an agency of the DOL, does not cause

the APA to be invoked. In this context, the CPI is

simply an ascertainable numerical standard, and there

is no requirement that such a standard incorporated

into a statute be itself an enforceable rule of law.”

App., infra, at 7a — 8a.

The courts in Alaniz and Batterton have

concluded that numerical calculations by federal

agencies (including the DoL), like “cost-of-living

adjustments” and the rate of unemployment, are

“rules” for APA and are void if such are not determined

via the procedural requirements of the APA. In sharp

contrast, the Fifth Circuit here has concluded precisely

the opposite of that reached by the courts in Alaniz and

Batterton.

10

REASONS FOR GRANTING THE WRIT

All U.S. courts of appeals, including the Fifth

Circuit, have rendered decisions’ analogous to that

asserted here by Dr. Clayton: edicts and commands of

federal agencies affecting the public at large by having

the effect of law constitute “rules” for purposes of the

APA, 5 U.S.C. §551, et seq., and are void if the

procedures required thereby are not followed.

Regarding this petition and the question raised here,

the Federal and D.C. Circuits have concluded that

agency actions identical to the determination of the

CPI constitute “rules” for APA purposes. In contrast,

the Fifth Circuit in this case has decided that the

determination of the CPI by the DoL, while clearly

affecting the public, is not a “rule” for APA purposes.

Certiorari should be granted to resolve this split in the

circuits regarding a very important matter of concern.

1. Significance and Importance of the CPI.

There exists, for at least two reasons, an

institutional motivation to determine the CPI as lower

than the actual rate of inflation. First, via a wide

number of federal laws, expenditures for items such as

welfare benefits, salaries for federal employees,

payments to private contractors, etc., are increased

when the rate of inflation increases. Under-reporting

the actual rate of inflation results in the reduction of

the rate of increase for federal expenditures, a

substantial cost-saving benefit.

Second, under-reporting the CPI results in

greater tax revenues received by the government. Tax

> See footnote 1.

1]

receipts derived from the federal income tax are

directly connected to the rate of inflation because tax

rates are indexed to the CPI as set forth in 26 U.S.C.

§1. As inflation pushes taxpayers into higher tax-

brackets, tax revenues grow. If the tax-brackets do not

rise as fast as the rate of inflation, real revenue growth

occurs. Consequently for these two reasons, those DoL

employees who actually calculate any CPI encounter a

tremendous financial incentive to determine that rates

of inflation are lewer than they actually are.

These conclusions were reached by a 1996

federal Advisory Commission To Study The Consumer

Price Index. This commission’s report titled Toward A

More Accurate Measure Of The Cost Of Living,‘ stated

as follows:

“The CBO has provided the Commission with

updated projections of the impact of hypothetical

corrections (reductions) of 0.5 and _ 1.0

percentage point in cost of living adjustments

for fiscal years 1997-2006. With a reduction of

0.5 percentage point the total contribution to

deficit reduction rises to $67.5 billion in 2006. Of

this amount, an increase in revenue accounts for

$22.3 billion and reductions in outlays,

including debt service, amounts to $45.3 billion

(of which debt service is $13.1 billion).

“CBO projections for the impact of a

hypothetical correction (reduction) in cost of

* Available on the Internet at:

http://www.ssa.gov/history/reports/boskinrpt.html

12

living adjustments of 1.0 percentage point are,

of course, even more dramatic. The total change

in the deficit in the year 2006 is $134.9 billion.

Federal revenues would be increased by $44.5

billion and federal outlays reduced by $90.5

billion; of the reduction in outlays $26.1 billion

can be attributed to lower debt service and $64.4

billion to lower outlays on indexed programs.

“Stated differently, if the change in the CPI

overstated the change in the cost of living by an

average of one percentage point per year over

this period, this bias alone would contribute

almost $135 billion to the deficit in the year

2006. That is one-third the projected baseline

deficit (which assumes no policy changes such as

the current balanced budget proposals). More

remarkably, the upward bias by itself would

constitute the fourth largest federal outlay

program, behind only social security, health care

and defense. By 2008, the increased deficit

would be $180 billion and national debt $1

trillion.”

As shown by this report, understating or

lowering any CPI results in a tremendous financial

benefit for the federal government, including an actual

increase in tax revenues. But, the CPI is not

determined by Congress itself, which alone possesses

the legislative power to tax, but instead by the DoL’s

Bureau of Labor Statistics, a federal agency lacking

constitutional power to tax. Dr. Clayton asks via this

petition a simple question: should not this number,

upon which billions of dollars depend and which affects

13

millions of people, be determined with public

participation according to the procedural requirements

set forth in the APA?

Review of the relevant statute containing the

APA definition of “rule” clearly demonstrates that the

CPI really is a rule. A “rule” encompasses “the

approval or prescription for the future of rates, wages,

corporate or financial structures or reorganizations

thereof, prices, facilities, appliances, services or

allowances therefor or of valuations, costs, or

accounting, or practices bearing on any of the

foregoing’; 5 U.S.C. § 551(4). The CPI prescribes for

the “future” a “rate” commonly described as the “rate

of inflation”, and it is effective at least until a new CPI

is determined and published. To the extent it is used to

increase the wages and salaries of federal employees,

it fits this definition precisely. Furthermore, the CPI is

directly composed by “valuations” of “prices” and thus

is not merely a “practice[ ] bearing on” these matters.

But most certainly, the CPI fits the more common

definition of a “rule” because it plainly implements the

law. Here, it implements the law regarding the making

of an income tax return.

Almost a quarter century ago, the Illinois

Supreme Court was confronted with the question of

whether a_ state agency's calculation of an

“inflation-update factor” determined by the CPI was a

rule for APA purposes. In Senn Park Nursing Center v.

Miller, 104 Ill.2d 169, 178, 470 N.E.2d 1029 (1984), at

issue were reimbursable costs owed to various nursing

homes by a state agency, the amounts of such costs to

be calculated via the CPI. That court held that there “is

no doubt that the amended inflation-update procedure

is an agency statement of general applicability. It does

4

implement a policy of the agency and is not a

statement dealing only with the internal management

of the agency. The rule does affect the rights and

procedures available to people and entities outside the

agency.”

At the time of the decision in Senn Park, the

D.C. Circuit had already decided Batterton v. Marshall,

648 F.2d 694 (D.C.Cir. 1980). In Batterton, that court

reviewed a change in the DoL’s method of measuring

unemployment for the purpose of allocating CETA

funds to the States. In noting that a change in this

method would have a substantial impact on a State's

right to receive CETA funds, that court held:

“Advance notice and public participation are

required for those actions that carry the force of

law. These ‘legislative’ or ‘substantive’ rules can

be issued only if Congress has delegated to the

agency the power to promulgate binding

regulations in the relevant area. Legislative

rules thus implement congressional intent; they

effectuate statutory purposes. In so doing, they

grant rights, impose obligations, or produce

other significant effects on private interests.

They also narrowly constrict the discretion of

agency officials by largely determining the issue

addressed. Finally, legislative rules have

substantive legal effect. They cannot be set aside

by the courts unless found ‘arbitrary, capricious,

an abuse of discretion, or otherwise not in

accordance with law’," J/d., at 701-02.

“Therefore, the development of statistics no

longer serves merely informational purposes,

15

nor does it simply assist preliminary

determinations prior to taking effective agency

action. Instead, the chain of agency actions

leading to allocation of funds under the

emergency job program provides for agency

discretion at only one link: the selection of

statistical methodology for collecting and

analyzing unemployment data. This certainly

places DOL's_ selection of a_ statistical

methodology within the APA's broad definition

of rule as ‘an agency statement... designed to

implement... law,” Id., at 705.

“The critical question is whether the agency

action jeopardizes the rights and interest of

parties, for if it does, it must be subject to public

comment prior to taking effect,” Jd., at 708.

A few years later in Alaniz v. Office of Personnel

Management, 728 F.2d 1460, 1467 (Fed.Cir. 1984), that

court was required to determine the validity of a

reduction in the increase of “cost-of-living adjustments”

for federal employees living in Alaska. The percentage

annual increase in COLAs for these employees was

found to be a “rule” for APA purposes, although void:

“We have little difficulty in concluding that the

district court correctly held that OPM's changes

in the COLA methodology fit within the APA's

definition of rulemaking. Section 551(5) (1982)

defines rulemaking as ‘agency process for

formulating, amending, or repealing a rule.’

666

These changes [modifications of the criteria in

16

the COLA methodology based on more recent

data, changes in consumer preference, and

changes in sociological patterns] can be

characterized as legislation on an

administrative level. ‘They were intended to

have a future effect on federal employees

receiving COLA compensation in the Anchorage

area. In addition, the court has no problem

perceiving the changes as amendments to a

prescription for wage rates. Based on the

foregoing, OPM's modifications of the COLA

methodology constitute rulemaking’.”

Alaniz and Batterton are directly relevant to the

issue raised in this petition by Dr. Clayton. There is no

substantive difference between COLAs (the subject of

Alaniz) and annual changes in the CPI, which is a

factor used to determine the minimum filing

requirement amount (“exemption amount”) for the

filing of tax returns. To determine this minimum filing

requirement amount, the DoL must compile each CPI,

which is a statistical methodology no different (in a

legal sense) from the one used for unemployment

purposes by the same DoL in Batterton.

Alaniz and Batterton conform to the general

principles of a wide variety and large number of cases

concerning the APA. All of these cases hold that any

agency. edict, command or declaration designed to

implement or enforce law enacted by Congress and

which affects the public are rules, and must be

properly adopted as required by the APA. Typical of

these decisions is Appalachian Power Co. v. E.P.A., 208

F.3d 1015, 1020-21 (D.C.Cir. 2000), which held:

17

“EPA tells us that its Periodic Monitoring

Guidance is not subject to judicial review

because it is not final, and it is not final because

it is not ‘binding.’ * * * It is worth pausing a

minute to consider what is meant by ‘binding’ in

this context. Only ‘legislative rules’ have the

force and effect of law. See Chrysler Corp. v.

Brown, 441 U.S. 281, 302-03 & n. 31 (1979). A

‘legislative rule’ is one the agency has duly

promulgated in compliance with the procedures

laid down in the statute or in the Administrative

Procedure Act. If this were all that ‘binding’

meant, EPA's Periodic Monitoring Guidance

could not possibly qualify: it was not the product

of notice and comment rulemaking in

accordance with the Clean Air Act, 42 U.S.C. §

7607(d), and it has not been published in the

Federal Register. But we have also recognized

that an agency's other pronouncements can, as

a practical matter, have a binding effect. See,

e.g., McLouth Steel Prods. Corp. v. Thomas, 838

F.2d 1317, 1321 (D.C. Cir. 1988). If an agency

acts as if a document issued at headquarters is

controlling in the field, if it treats the document

in the same manner as it treats a legislative

rule, if it bases enforcement actions on the

policies or interpretations formulated in the

document, if it leads private parties or State

permitting authorities to believe that it will

declare permits invalid unless they comply with

the terms of the document, then the agency's

document is for all practical purposes ‘binding.’

See Robert A. Anthony, Jnterpretative Rules,

Policy Statements, Guidances, Manuals, and the

18

Like — Should Federal Agencies Use Them to

Bind the Public?, 41 Duke L.J. 1311, 1328-29

(1992), and cases there cited.”

But the Fifth Circuit in this case involving Dr.

Clayton has traversed the decisions not only in Alaniz

and Batterton, but also decisional authorities in the

same circuit? and many others. Its decision even

conflicts with this Court’s opinion in Christensen v.

Harris County, 529 U.S. 576 (2000), by giving to a

number calculated by the DoL and published only on

the Internet and in a few financial newspapers and

periodicals the force and effect of law.

It is entirely possible that the CPI is perhaps the

most significant “underground” regulation ever to exist

in American society. It affects hundreds of millions of

people and determines the flow of billions of dollars

annually. An agency edict this profound deserves to be

publicly determined, contrary to the decision of the

Fifth Circuit here.

CONCLUSION

The petition for writ of certiorari should be

> See Phillips Petroleum Co. v. Johnson, 22 F.3d

616, 621 (5th Cir. 1994)(“This change in valuation

technique dramatically affects the royalty values of all

oil and gas leases. Thus, the Procedure Paper should

have been published in the Federal Register and

offered for notice and comment. A party may not be

adversely affected by a rule promulgated in violation of

these requirements. 5 U.S.C. § 552(a)(1)”).

granted.

Respectfully submitted,

Lowell H. Becraft, Jr.

Counsel of Record for Petitioner

403 Andrew Jackson Way

Huntsville, Alabama 35801

(256) 533-2535

APPENDIX

APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 07-50002

UNITED STATES OF AMERICA, APPELLEE

v.

CHARLES THOMAS CLAYTON, APPELLANT.

Argued: September 5, 2007

Decided: October 29, 2007

Before KING, GARZA, and BENAVIDES, Circuit

Judges.

Per Curiam:

Defendant-appellant Charles Thomas Clayton

appeals from a jury verdict finding him guilty of two

counts of making and subscribing a false amended tax

return in violation of 26 U.S.C. § 7206(1) and six

counts of willful failure to file a tax return in violation

of 26 U.S.C. § 7203. Clayton appeals his conviction on

the six counts of willful failure to file a tax return,

arguing that the Internal Revenue Code and tax

regulations do not contain a valid exemption amount,

and as such there is no legal requirement to file a tax

return. He also appeals his conviction on the two

la

2a

counts of making and subscribing a false amended tax

return, arguing that: (1) the district court erred in

denying requested jury instructions pertaining to his

defense and, (2) there is insufficient evidence to

support his conviction. For the following reasons, we

AFFIRM.

I. FACTUAL AND PROCEDURAL

BACKGROUND

Defendant-appellant Charles Thomas Clayton is

a radiologist who resides and practices in Texas.

Clayton regularly filed federal income tax returns

until he associated with a tax protest organization in

1992. He did not file a 1992 tax return or pay tax on

his 1992 income. In October 1996, he pleaded guilty to

willful failure to file a federal income tax return for

1992 and was sentenced to one year probation. He

subsequently filed his 1997 and 1998 tax returns.

The events giving rise to the present conviction

center on Clayton’s tax returns for 1997 through 2004.

In 2000, Clayton began associating with Larken Rose,

a tax protestor. Together they launched a website and

produced a video promoting the “§ 861 argument,”

which asserted that the domestic income of American

citizens is not taxed via the Internal Revenue Code

(“IRC”). Around this time, Clayton also began writing

letters to the Internal Revenue Service (“IRS”) and

government officials, demanding that they refute the

§ 861 argument, and meeting with accountants to ask

questions about the federal income tax code. Clayton

received numerous replies explaining the fallacy of the

§ 861 argument, which Clayton patently refused to

3a

accept.

Clayton did not file returns for calendar years

1999 through 2004, although he earned over $1.5

million during that period. He also filed amended tax

returns for 1997 and 1998, via two “Form 1040X,

Amended U.S. Individual Income Tax Return” forms,

in which he reported his income as zero and requested

a refund of $167,596 in previously-paid tax.

Specifically, in April 2001, he filed a Form 1040X for

1997 reporting that his adjusted gross income was not

$246,979, as he had original reported, but $0. He

claimed a refund of $82,296. In April 2002, he filed a

Form 1040X for 1998 reporting that his adjusted gross

income was not $243,919, as he had original reported,

but $0. He claimed a refund of $85,300. Clayton

attached lengthy memoranda to each amended return

based on the § 861 argument.

On April 4, 2006, Clayton was charged with two

counts of making and subscribing a false Form 1040X

Amended U.S. Individual Income Tax Return for

calendar years 1997 and 1998 in violation of 26 U.S.C.

§ 7206(1). The indictment also charged him with six

counts of willful failure to file a tax return for calendar

years 1999 through 2004, in violation of 26 U.S.C. §

7203. With respect to the six counts of willful failure

to file a tax return, Clayton filed a motion to dismiss

the indictment, arguing that the government could not

satisfy the first element of the offense, namely that he

was required by law to file income tax returns for these

years, because the IRC does not establish a valid

exemption amount that triggers the duty to pay taxes.

The district court denied this motion. Clayton also

4a

submitted two jury instructions concerning his theory

of defense to the two counts of filing a false tax return.

The district court rejected his instructions. The jury

found Clayton guilty of all eight counts on August 29,

2006. On September 5, 2006, Clayton filed a Rule 29

motion for a judgment of acquittal on the two counts of

filing a false tax return, which the district court

denied. Clayton was sentenced to a total of sixty

months incarceration. Subsequently, we denied

Clayton’s motion for release on bail pending appeal,

concluding that Clayton had not shown that his appeal

raises a substantial question of law or fact.

II. DISCUSSION

A. Whether Inclusion of the Consumer Price

Index Negates the Duty to File a Tax

Return

Clayton argues that the district court erred in

denying his motion to dismiss the six counts of willful

failure to file a federal tax return because the court

erroneously determined that the government satisfied

the first element of a 26 U.S.C. § 7203 violation—that

Clayton was required to file a federal tax return. See

United States v. Buckley, 586 F.2d 498, 503-04 (Sth Cir.

1978) (providing that in order to establish a violation

of 26 U.S.C. § 7203, the government must prove (1)

that the defendant was required to file a return; (2)

that the defendant failed to file a return; and (3) that

the failure to file a return was willful); see also United

States v. Matosky, 421 F.2d 410, 413 (7th Cir. 1970)

(same); Sansone v. United States, 380 U.S. 343, 351

(1965).

Sa

Clayton contends that no “law” requires the

filing of a federal income tax return because, in

establishing the exemption amount in 26 U.S.C.

§ 6012,’ the government failed to comply with the

procedural requirements of the Administrative

Procedure Act (“APA”). 5 U.S.C. §§ 551-558. Clayton

contends that the statute’s reliance on the Consumer

Price Index (“CPI”) to calculate the exemption amount”

' Title 26 U.S.C. § 6012 provides: “Returns with

respect to income taxes under subtitle A shall be made

by ... [e]very individual having for the taxable year

gross income which equals or exceeds the exemption

amount.” 26 U.S.C. § 6012(a) (emphasis added).

> The term “exemption amount” as used in §

6012 is defined by 26 U.S.C. § 151(d)(1): “Except as

otherwise provided in this subsection, the term

‘exemption amount’ means $2,000.” 26 U.S.C. §

151(d)(1). Section 151(d)(4) in turn provides for

inflation adjustments to the $2,000 figure listed in §

151(d):

after 1989, the dollar amount contained

in paragraph (1) shall be increased by an

amount equal to—

(1) such dollar amount, multiplied by

(ii) the cost-of-living adjustment

determined under [26 U.S.C.] section

1(£)(3) for the calendar year in which the

taxable year begins, by substituting

“calendar year 1998” for “calendar year

1992” in subparagraph (B) thereof.

6a

strips the exemption amount of legal force because the

CPI is compiled by the Department of Labor (“DOL”)

and has not been promulgated pursuant to the APA.®

26 U.S.C. § 151(d)(4). Title 26 U.S.C. § 1(£)(3) provides

that “the cost-of-living adjustment for any calendar

year is the percentage (if any) by which—({A) the CPI

[(Consumer Price Index)] for the preceding calendar

year, exceeds (B) the CPI for the calendar year 1992.”

26 U.S.C. § 1(H(3). Finally, 26 U.S.C. § 1()5 provides

that “the term ‘Consumer Price Index’ means the last

Consumer Price Index for all-urban consumers

published by the Department of Labor.” 26 U.S.C. §

1(£)(5).

‘Clayton also argues that to the extent that the

exemption amount is listed in the Form 1040

instruction booklet, under the APA, 5 U.S.C. §§

551-558, this instruction booklet cannot impose a legal

duty on individuals because those exemption amounts

are not published in the Federal Register. See United

States v. Harvey, 659 F.2d 62, 64 (5th Cir. 1981)

(holding that the Veterans Administration’s loan

servicing manual had no force and effect of law because

it was not “promulgated in accordance with the

procedural requirements of the [APA]”). Clayton

asserts that at best, the Form 1040 instruction booklet

can be considered as an interpretive regulation not

subject to the procedures of the APA, but that an

interpretive regulation cannot form the basis for a civil

or criminal action against Clayton. See Drake uv.

Honeywell, Inc., 797 F.2d 603, 607 (8th Cir. 1986) (“An

Ta

We review questions of statutory interpretation

de novo. United States v. Adam, 296 F.3d 327, 330 (5th

Cir. 2002).

Clayton’s argument that an exemption amount

based on the CPI cannot trigger tax lability is

unpersuasive. Clayton’s obligation to file a federal

income tax return is derived from 26 U.S.C. § 6012.

Section 6012, being a congressionally enacted federal

statute, is not the rule of an “agency” as the term

agency is defined by the APA. See Franklin uv.

Massachusetts, 505 U.S. 788, 800 (1992) (explaining

that “[t]he APA defines ‘agency’ as ‘each authority of

the Government of the United States, whether or not

it is within or subject to review by another agency,” but

explicitly does not include the Congress) (citing

5 U.S.C. §§ 701(b)(1), 551 (1)). The fact that § 6012

incorporates by reference the CPI, which is compiled

and published by an agency of the DOL, does not cause

action based on a violation of an interpretive rule does

not state a legal claim. Being in nature hortatory,

rather than mandatory, interpretive rulescan never be

violated.”).

Clayton’s Form 1040 instruction booklet

argument is a red herring. Although the IRS indeed

publishes the annual exemption amounts in the Form

1040 instruction booklet and other government

publications, the government makes no claim that the

exemption amount listed in the Form 1040 instruction

booklet has the force of law. Instead, the exemption

amount is calculated under a formula that is set forth

in § 6012 of the IRC.

8a

the APA to be invoked. In this context, the CPI is

simply an ascertainable numerical standard, and there

is no requirement that such a standard incorporated

into a statute be itself an enforceable rule of law. Cf.

Ashcroft v. ACLU, 535 U.S. 564, 585 (2002) (holding

that the incorporation of “community standards,” by

itself, did not make the Child Online Protection Act

unconstitutionally overbroad).

Furthermore, a statute providing the basis for

criminal prosecution may incorporate other provisions

by reference. See United States v. Iverson, 162 F.3d

1015, 1021 (9th Cir. 1998). In United States v. Iverson,

the Ninth Circuit held that a state statute and

municipal code that incorporated by reference federal

standards for the term “pollutants” did not fail for

unconstitutional vagueness. Jd. The court reasoned

that “a statute is not unconstitutionally vague merely

because it incorporates other provisions by reference;

a reasonable person of ordinary intelligence would

consult the incorporated provisions.” Id.

The Ninth Circuit’s rationale is persuasive here.

The CPI is an objective standard that has been

approved by Congress, via the IRC, to adjust the bare

minimum exemption amount of $2,000 for inflation. A

reasonable person of ordinary intelligence, if he did not

want to avail himself of the IRS documents and notices

publishing the applicable exemption amounts, would

consult the CPI and make the necessary calculations to

determine his gross income for tax purposes. See Pond

v. Commy, 211 Fed. Appx. 749, 752 (10th Cir. 2007)

(unpublished) (explaining that the IRC’s provision of a

specific number, $2000, and a statutory formula for

9a

adjusting that number, adequately defines the

exemption amount and permits a taxpayer to be

penalized for noncompliance); see also United States v.

Priest, Nos. 06-10438, 06-10447, 06-10448, 2007 WL

1961885, at *2 (9th Cir. July 5, 2007) (unpublished

mem.) (holding that “the alleged imprecision [caused

by incorporating the CPI] in determining a statutorily

provided exemption does not void, as a matter of law,

the obligation to file a tax return”).

B. Whether the Denial of the Defense’s Jury

' Instructions Was an Abuse of Discretion

Clayton argues that the district court abused its

discretion in denying the jury instructions he

requested on his theory of defense to the two counts of

filing a false income tax return.

We review a properly preserved challenge to jury

instructions for an abuse of discretion. United States

v. Finley, 477 F.3d 250, 261 (5th Cir. 2007). “A district

court has broad discretion in framing the instructions

to the jury and this [c]ourt will not reverse unless the

instructions taken as a whole do not correctly reflect

the issues and law.” United States v. McKinney, 53

F.3d 664, 676 (5th Cir. 1995). “While a defendant is

entitled to an instruction on his theory of defense, he

has no right to particular wording.” United States v.

Simmons, 374 F.3d 313, 319 (Sth Cir. 2004). “When

considering an appeal for failure to give defendant’s

requested defense theory instruction, we review

‘whether the court’s charge, as a whole, is a correct

statement of the law and whether it clearly instructs

jurors as to the principles of law applicable to the

10a

factual issues confronting them.” /TJd. (quoting

McKinney, 53 F.3d at 676) (emphasis added).

A person commits the felony of filing a false tax

return in violation of 26 U.S.C. § 7206(1) when he

“fwjillfully makes and subscribes any _ return,

statement, or other document, which contains or is

verified by a written declaration that it is made under

the penalties of perjury, and which he does not believe

to be true and correct as to every material matter.”

§ 7206(1).

Clayton requested two jury instructions

concerning his theory of defense to the counts of filing

a false income tax return for 1997 and 1998. Clayton’s

theory of defense at trial was that the two Form

1040Xs that he submitted to amend his tax returns for

1997 and 1998 were not false returns, but rather were

proper and lawful claims for refunds. Clayton asserted

that he filed Form 1040X returns to initiate a process

whereby, if his claims for a refund were denied, he

could present in a later district court proceeding his §

861 argument that income derived from sources within

the United States is non-taxable income. Accordingly,

he attached to his two Form 1040X returns lengthy

memoranda explaining his § 861 argument. Clayton

contends that whether the returns were false or were

claims tor refunds was a central focus of the trial, and,

based on the evidence, the jury could have concluded

these issues in favor of Clayton

The jury instructions Clayton requested detail

the Form 1040X filing procedure and are as follows:

lla

REFUND LAWSUITS

If a taxpayer has filed a return and paid

taxes for a prior year, he may seek a

refund of taxes paid for that year. This is

accomplished by filing a Form 1040X

within 3 years thereof. If such a claim is

denied, a taxpayer may sue to recover the

refund and may assert in such refund

lawsuit whatever legal arguments he

believes are valid.

REFUND SUITS

A taxpayer is barred from raising in a

refund suit grounds for recovery not

clearly and specifically set forth in his

claim for a refund on Form 1040X,

including all attachments. All grounds

upon which the taxpayer relies must be

stated in his claim for refund so as to

apprise the IRS of what to look into.

Anything not raised in the claim cannot

be raised later in a suit for a refund. The

refund suit must be filed in either federal

District Court or a Claims Court, but

cannot in [sic] Tax Court.

Clayton’s argument lacks merit because his

proposed jury instructions are misleading. Clayton

asserts that a Form 1040X cannot give rise to liability

for filing a false tax return because it is simply a form

used toclaim a refund. See 26 C.F.R. 301.6402-3(a)(2).

His instructions would serve to bolster that argument.

Form 1040X is entitled “Amended U.S. Individual

Income Tax Return” and is verified by a written

12a

declaration that it was made under penalties of

perjury. Because Form 1040X is used to report all

changes or corrections to a filed return, even when the

form is used to claim a refund, it is still a return that

amends an originally filed return. As such, Form

1040X can give rise to hability for filing a false tax

return.

Our decisions, and those of other circuits,

support the conclusion that filing a false claim for the

refund of taxes gives rise to legal liabilsty for filing a

false tax return. See, e.g., United States v.. Martin, 790

F.2d 1215 (5th Cir. 1986) (defendant convicted of

conspiracy to aid and assist in the preparation of false

tax returns and false tax refund claims in violation of

26 U.S.C. § 7206(2) and 18 U.S.C. §§ 371, 287); United

States v. Ambort, 405 F.3d 1109 (10th Cir. 2005)

(defendant convicted of sixty-nine counts of aiding and

assisting in the preparation of false federal tax returns,

in violation of 26 U.S.C. § 7206(2), for advising

individuals on how to complete Form 1040X and the

nonresident alien income tax return form). Moreover,

use of a legal procedure to challenge tax liability does

not preclude criminal liability. In Ambort, where a

defendant advised clients to file Form 1040X to avoid

tax liability, he attempted to avoid conviction on

charges of aiding and assisting in the preparation of

false federal tax returns by arguing that he was simply

following established procedures for obtaining a

refund. Jd. at 1116. The Tenth Circuit rejected his

argument, stating that the defendant could not

“disguise his knowing disregard of well-established

legal principles and duties as a good faith procedural

effort to evade those principles and duties.” Id.

13a

We have already rejected, in an unpublished

opinion, as “patently frivolous” and “absurd” the

argument that income derived from sources within the

United States is non-taxable income under § 861.

Rayner v. Comm’r, 70 F. App’x 739, 740 (5th Cir. 2003)

(unpublished). As such, Clayton should not avoid

liability for filing a false tax return simply because he

used the procedural device of Form 1040X to challenge

his tax liability under the § 861 argument.

Accordingly, because Clayton’s proposed

instructions would not clearly instruct jurors about the

effect of filing a false Form 1040X, the district court did

not abuse its discretion in denying them.‘

C. Whether sufficient evidence was presented

to find guilt beyond a reasonable doubt

Clayton argues that the district court erred in

denying his post-trial motion for judgment of acquittal

on the two counts of filing a false income tax return for

1997 and 1998 because the evidence was insufficient to

support his conviction. Clayton first asserts that it is

clear from the facts that he was making a “claim for

refund” of taxes previously paid and thus could not be

‘Since Clayton’s appellate challenge to the jury

instructions does not relate to the element of wilfulness

under § 7206(1), we find it unnecessary to determine

whether his proffered jury instructions, which were

intended to explain and support his “theory of defense,”

would have created confusion as to the willfulness

element.

l4a

charged for filing false returns. He relies on our

decision in United States v. Levy, 533 F.2d 975 (5th Cir.

1976), for the proposition that liability cannot arise

from a form that is not authorized by a regulation. He

contends that the Form 1040X cannot give rise to

liability because it is identified as a claim for refund in

certain tax code provisions. He further contends that

Form 1040X allows him to file an amended tax return

based on any legal argument.

Clayton next argues that the evidence that his

amended returns were false falls short of proving his

guilt beyond a reasonable doubt. He contends that the

attachments that he filed with his amended returns

advancing his § 861 argument make clear that his

purpose in filing the amended returns was to claim a

refund, not to file a false return. He further asserts

that where the evidence is evenly balanced, entry of a

judgment of acquittal is proper.

We review the district court’s denial of Clayton’s

motion for acquittal de novo. United States v.

Anderson, 174 F.3d 515, 522 (Sth Cir. 1999) (citing

United States v. Payne, 99 F.3d 1273, 1278 (5th Cir.

1996)). In reviewing the sufficiency of the evidence, we

view the evidence and the inferences drawn therefrom

in the light most favorable to the verdict, and we

determine whether a rational jury could have found the

defendant guilty beyond a reasonable doubt. /d. (citing

United States v. Burton, 126 F.3d 666, 669 (5th Cir.

1997); Payne, 99 F.3d at 1278). “The evidence need not

exclude every reasonable hypothesis of innocence or be

wholly inconsistent with every conclusion except that

of guilt, and the jury is free to choose among

15a

reasonable constructions of the evidence.” Jd. (quoting

Burton, 126 F.3d at 669-70). “Moreover, our standard

of review does not change if the evidence that sustains

the conviction is circumstantial rather than direct.” Id.

(citing Burton, 126 F.3d at 670; United States v.

Cardenas, 9 F.3d 1139, 1156 (5th Cir. 1993); United

States v. Bell, 678 F.2d 547, 549 n.3 (5th Cir. Unit B

1982)).

A person commits the felony of filing a false tax

return in violation of 26 U.S.C. § 7206(1) when he

“willfully makes and subscribes any return, statement,

or other document, which contains or is verified by a

written declaration that it is made under the penalties

of perjury, and which he does not believe to be true and

correct as to every material matter.” § 7206(1).

Clayton’s initial arguments, which essentially

contend that the Form 1040X cannot give rise to legal

liability for filing a false tax return, have no merit. We

have rejected similar arguments brought under Levy

that certain schedules appended to tax returns could

not give rise to legal liability for filing a false tax

return. United States v. Damon, 676 F.2d 1060,

1063-64 (5th Cir. 1982) (holding that a false Schedule

C is an “integral” part of a tax return and is

incorporated therein by reference, thus giving rise to

liability under § 7206(1)); United States v. Taylor, 574

F.2d 232, 237 (5th Cir. 1978) (same as to Schedules E

and F). Also, as we previously discussed, filing a false

claim for the refund of taxes may give rise to legal

hability for filing a false tax return, and the mere use

of the correct legal procedure will not preclude liability.

See Ambort, 405 F.3d at 1116 (stating that the

l6a

defendant “cannot disguise his knowing disregard of

well-established legal principles and duties as a good

faith procedural effort to evade those principles and

duties”).

Furthermore, after reviewing the evidence in

the light most favorable to the verdict, we conclude

that a jury reasonably could have found Clayton guilty

on Counts 1 and 2 in the indictment. The government’s

theory of the case was that Clayton had been

constructing a putative defense centered around his

sham § 861 argument as early as June 2000, before

ever having filed a false Form 1040X. The evidence

presented, and reasonable inferences’ therefrom,

revealed that Clayton knew that his § 861 argument

was invalid under the law, and therefore, that his

amended returns based on that argument, were false.

The government’s evidence included Clayton’s 1997

and 1998 original returns, stating his income as

$246,979 and $243,919, respectively, juxtaposed with

Clayton’s Form 1040X returns, purporting that his

adjusted gross income for 1997 and 1998 was, in fact,

zero.

Additionally, the evidence showed that before

Clayton filed his first Form 1040X in April 2001,

seeking a refund from 1997, he received at least three

responses to letters he sent demanding answers to his

§ 861 argument, which all invalidated the theory.

Clayton received a letter from the United States

Department of Treasury on December 21, 2000, stating

that a U.S. citizen is subject to tax on his or her

worldwide income, and that the source rules of

§§ 861-865 of the IRC do not limit or exclude items

17a

from consideration for purposes of determining a U.S.

citizen’s taxable income. Clayton also received

correspondence from David Johnston, a New York

Times reporter, who told him the § 861 argument was

a fantasy, pure and simple. When, Clayton challenged

this conclusion based on the fact that Johnston was not

a lawyer, Clayton received yet another response from

Johnston stating that he asked lawyers, including tax

lawyers, and everyone agreed that taxes are owed.

Also, testimony from Clayton’s CPA David Smith

revealed that he advised Clayton that the theory was

invalid. However, Clayton dismissed these replies and

advice and submitted Form 1040X based on his § 861

argument anyway.

The evidence also showed that before sending

his second Form 1040X in April of 2002 to request a

refund for the original 1998 tax return, Clayton

received at least three more responses to his letters,

similarly putting him on notice that his § 861

argument was flawed. In May of 2001, he received two

emails from Tax Help stating that the obligation to pay

taxes is not optional, the average citizen knows taxes

are required, and income includes all income

worldwide. In July 2001, the IRS sent him another

letter with an attached Notice 2001-40 stating that

those who continue to follow the § 861 argument in

refusing to file returns may well be subject to criminal

penalties. Again, Clayton testified that he disregarded

these letters as not addressing the issue he presented.

Additionally, by Clayton’s own written words, it

was reasonable for a jury to conclude, beyond a

reasonable doubt, that he willfully filed what he

18a

subjectively knew were false amended returns. The

evidence revealed that in June 2000, around the time

Clayton initiated his research regarding the § 861

argument, he sent an email to a fellow tax protester,

Larken Rose, stating that “by God (or whatever) I am

going to screw [the IRS] for screwing me.” In the same

month, Clayton sent Rose another email discussing

how to deceive the online public into thinking more

than just a few people were advocating the § 861

argument. He ended that email with the line:

“Sometimes (most of the time) I am so full of shit it

amazes me.” In yet another email exchange with Rose,

Clayton seemed to be constructing a defense to future

litigation when he discussed documenting the “solid

stuff” about the § 861 argument, and then stated, “if

they were ever stupid enough to bring it to court, that

knowing what I do about what can be dealt with in

criminal court (which is ANYTHING convinced me of

my position) that ail this stuff would be brought out

formally and kill them dead.” Then, in March of 2001,

Clayton mentioned taking “proactive steps” to protect

himself from indictment in another email to Rose.

On this evidence, a rational jury could have

found beyond a reasonable doubt that Clayton knew

his Form 1040X returns were false under the tax laws

and wilfully filed them in violation of 26 U.S.C.

§ 7206(1) to obtain refunds for 1997 and 1998.

Ill. CONCLUSION

For the foregoing reasons, we AFFIRM the

district court’s judgment.

19a

EMILIO M. GARZA, Circuit Judge, specially

concurring:

I concur in the panel’s excellent opinion. I write

separately to suggest that the panel’s holding reached

in Part II.B, dealing with Clayton’s requested jury

instructions, can be supported by a separate rationale,

and to distinguish the probative weight to be given

some of the evidence mentioned in Part II.C, where the

panel opinion discusses the sufficiency of evidence to

establish Clayton’s guilt.

Clayton’s proposed instructions need not have

been included by the district court because of their

likelihood to mislead jurors. First and foremost, these

instructions do not give the jury any guidance as to

what the government must prove, or what Clayton may

legitimately raise in defense, specifically generating

confusion as to the willfulness element under §

7206(1). The proposed instructions suggest that his

use of a Form 1040X impacts the willfulness of his

action, and thus his criminal liability under § 7206(1).

By providing information about an irrelevant refund

lawsuit process that allows a taxpayer to pursue

“whatever legal arguments he believes are valid,” these

instructions draw attention away from the willfulness

vel non of Clayton’s use of the Form 1040X. Clayton

acted wilfully in his false filing regardless of the form

used. Further, Clayton cannot undermine willfulness

in a § 7206 prosecution based on any argument he

chooses. See Cheek v. United States, 498 U.S. 192, 206

(1991); United States v. Ambort, 405 F.3d 1109, 1115-

16 (10th Cir. 2005) (excluding defendants’ testimony

that they beheved they were following proper

20a

procedures to challenge the existing law as irrelevant

to willfulness under § 7206). Merely invoking the

unrelated process of a refund lawsuit does not change

this fact. In fashioning jury instructions, the district

court should clearly instruct jurors as to the applicable

issues of law and fact confronting them. See United

States v. Simmons, 374 F.3d 313, 319 (5th Cir. 2004).

Clayton’s instructions would have misguided jurors as

to the willfulness element of his crime. For this

reason, I agree that the district court did not abuse its

discretion in denying Clayton’s proposed instructions.

Concerning the evidence supporting Clayton’s

guilt discussed in Part II.C, I agree that each item of

evidence included in the panel opinion provides some

proof of Clayton’s willfulness. FED. R. Evip. 401.

However, it should be noted that Clayton’s own

statements are much more probative of his willfulness

than information given to him by a newspaper

reporter. While the latter provides some evidence,

standing alone it could not establish Clayton’s

willfulness.

2la

IN THE UNITED STATES DISTRICT COURT FOR

THE WESTERN DISTRICT OF TEXAS

AUSTIN DIVISION

Case No. A0O6-CR-069 SS

UNITED STATES OF AMERICA,

V.

CHARLES THOMAS CLAYTON,

Defendant.

ORDER

BE IT REMEMBERED on the 28th day of July

2006, the Court called the above-styled cause for a

hearing, and the parties appeared through counsel.

Before the Court were Defendant’s Motion to Dismiss

Counts 3 Through 8 for Lack of Filing Requirement

[#16], Defendant’s Motion to Dismiss Counts 3

Through 8 for Failure to Comply with the Paperwork

Reduction Act [#17], Defendant’s Motions in Limine

[#18, 19], Defendant’s Motion to Compe! Disclosure of

the Government’s Trial Exhibits [#20], Defendant’s

Motion to Compel Discovery of Personnel Files [#21],

Defendant’s Motion to Inspect Jury Records [#22],

Defendant’s Motion for Disclosure of Information

Regarding the Jury Panel and Jury Contact [#23],

Defendant's Motion for Disclosure of the IRS Special

Agent’s Report [#24], the Government’s Response

[#25]. and Defendant’s Reply [#28]. Having considered

the motions, the Government’s response, Defendant’s

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reply, and the arguments presented at the hearing, the

Court now confirms its oral announcements with the

following written opinion and orders.

Background

Defendant Charles Thomas Clayton, a

radiologist, was indicted by the grand jury in April

2006 for violations of 26 U.S.C. § 7206(1)—willful

subscription to false income tax returns- nd §

7203—willful failure to file federal income tax returns.

The indictment alleges that Clayton did not file federal

income tax returns for calendar years 1999 through

2004 although he received gross income totaling

approximately $1.5 million during that time period.

Discussion

I. Defendant’s Motion to Dismiss Counts 3—8 for

Lack of Filing Requirement [#16] Defendant moves to

dismiss Counts 3 through 8 of the indictment, for

failure to file income tax returns, because the statutes

and regulations do not provide notice of the threshold

filing requirement. Defendant asserts his Fifth

Amendment right of due process, claiming a lack of

notice that his failure to file tax returns was illegal

and/or that 26 U.S.C. § 6012 is ambiguous as to the

exemption amount that triggers the filing requirement.

Defendant argues that the exemption amount does not

appear in the code or the federal regulations; therefore,

its appearance in other IRS publications is not “law”

with which American citizens are required to comply.

The Court agrees with the Government that

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Defendant could easily have determined the exemption

amount triggering the filing requirement in every year

at issue by: (1) simply reading the Form 1040 and/or

the accompanying instructions for the pertinent tax

year, both of which state the exemption amount, or (2)

going through the process of cross referencing the

statutes, regulations, and the consumer price index to

calculate the figure referenced in option one. The

statutory requirement to file income tax returns is

located in 26 U.S.C. §§ 6001, 6011, and 6012, while §

7203 makes the willful failure to file income tax

returns acriminal offense. See United States v. Bowers,

920 F.2d 220, 221-23 (4th Cir. 1990) (upholding

convictions in a tax evasion case because the federal

regulations set forth sufficient advice on how to obtain

the forms or information necessary to prepare a tax

return). Here, if Defendant had taken the time to

follow the cross references within the statutes and

regulations, he would have been able to determine the

amount of gross income that triggers the duty to file a

tax return. Accordingly, Defendant’s motion to dismiss

is denied.

II. Defendant’s Motion to Dismiss Counts 3-8 for

Failure to Comply with the Paperwork Reduction Act

[#17]

Next Defendant moves to dismiss Counts 3—8 for

failure to comply with the Paperwork Reduction Act

(“PRA”) because the forms for the subject years do not

contain correct OMB numbers, or otherwise have PRA

defects, so the Government has failed to comply with

the PRA, 44 U.S.C. § 3512. Defendant essentially

argues that the 1995 amendment to 44 U.S.C. § 3512

24a

so changed the Act that pre-1995 case law holding that

a PRA violation does not bar a criminal prosecution for

failure to file a tax return is no longer controlling. See

United States v. Kerwin, 945 F.2d 92, 92 (5th Cir. 1991)

(upholding conviction for willful failure to file an

income tax return under § 7203 because the PRA does

not apply to the statutory requirement that a taxpayer

file an income tax return); United States v. Hicks, 947

F.2d 1356, 1359-60 (9th Cir. 1991) (holding that

Congress did not intend to repeal § 7203 by enacting

the PRA).

Defendant’s argument is unavailing because

those courts that have examined the issue post-1995

have decided that the PRA does not invalidate the

statutory requirement to file tax returns. United States

v. Ouwenga, 173 F. App’x 411, 417 (6th Cir. 2006);

Alford v. United States, No. 3:02-CV-1719-M, 2002 WL

31415800 (N.D. Tex. Oct. 22, 2002); United States v.

Foster, No. CRIM.97-700103JMRRLE, 1997 WL

685371 (D. Minn. May 27, 1997). Additionally, the

regulations implementing the PRA of 1995 explicitly

provide that the PRA does not “preclude the imposition

of a penalty on a person for failing to comply with a

collection of information that is imposed on the person

by statute-e.g., 26 U.S.C. § 6011(a) (statutory

requirement for a person to file a tax return)”). 5

C.F.R. § 1320.6(e). Accordingly, Defendants motion is

denied.

III. Defendant’s Motions in Limine [#18, 19]

Defendant’s first motion in limine [#18] requests

that the Government be prohibited from “appealing to

25a

the jury’s prejudice, emotion, or pecuniary interest

during trial,” and Defendant’s second motion in limine

[#19] seeks to prevent the Government from offering

into evidence Defendant’s prior conviction for failure to

file a tax return and Defendant’s bankruptcy.' For the

reasons stated at the hearing, both motions in limine

are denied. This denial is not an order of admissibility;

rather, admissibility determinations will be made after

proper objection at the proper time during trial.

IV. Defendant’s Motion to Compel Disclosure of the

Government’s Trial Exhibits [#20]

Defendant moves for an order directing the

Government to disclose the exhibits it plans to use at

trial, and the Government opposes the motion. The

Court notes that the Government has an open file

discovery policy. For the reasons set forth during the

hearing, the motion is granted, and the Government

shall provide Defendant with inclusive lists of both

exhibits and witnesses it plans to use at tral by

August 14, 2006. Likewise, Defendant shall produce to

the Government by August 17, 2006, its trial exhibit

and witness lists.

V. Defendant’s Motion to Compel Discovery of

Personnel Files [#21]

Defendant moves for an order directing

' As for the bankruptcy evidence, Defendant has

objected to an order signed and agreed to by Defendant.

26a

disclosure to Defendant of the personnel files of

government witnesses, or, in the alternative, for in

camera review of those files with a determination of

whether the files should be disclosed to the Defendant.

United States v. Henthorn, 931 F.2d 29 (9th Cir. 1991),

provides that the Government must “disclose

information favorable to the defense that meets the

appropriate standard of materiality ... . If the

prosecution is uncertain about the materiality of

information within its possession, it may submit the

information to the trial court for an in camera

inspection and evaluation... .” Id. at 30-31 (quoting

United States v. Cadet, 727 F.2d 1453, 1467-68 (9th

Cir. 1984). “[T]he government has a duty to examine

personnel files upon a defendant’s request for their

production.” Henthorn, 931 F.2d at 31. “However,

following that examination, the files need not be

furnished to the defendant or the court unless they

contain information that is or may be material to the

defendant’s case.” Id. In accordance with the Henthorn

case, the Court orders the Government to provide any

personnel files of testifying witnesses that contain

information that is or may be material to the

defendant’s case to the Court under seal for in camera

inspection by August 14, 2006.

VI. Defendant’s Motion to Inspect Jury Records [#22]

and Defendant’s Motion for Disclosure of Information

Regarding the Jury Panel and Jury Contact [#23]

For the reasons stated at the hearing, both

motions are denied. Defendant shall have access to

information about the jury panel on the morning of

jury selection, as the jurors do not prepare

27a

questionnaires until that time. The Government stated

on record that it did not possess information about the

jury panel at this time. If the Government does come to

possess such information between the time of the

hearing and the beginning of trial, it shall disclose

such information to Defendant.

As it stands, the Government, the Defendant,

and the Court will get the same information about the

jury panel at the same time, which is the morning of

jury selection.

VIl. Defendant’s Motion for Disclosure of the IRS

Special Agent’s Report [#24]

As stated at the hearing, Defendant’s motion is

granted. The Government shall provide Defendant

with a certification from the [RS Special Agent that

Defendant has been provided with a complete copy of

his report recommending prosecution.

Conclusion

In accordance with the foregoing:

IT IS ORDERED that Defendant’s Motion to

Dismiss Counts 3-8 for Lack of Filing Requirement

[#16] and Defendant’s Motion to Dismiss Counts 3-8

for Failure to Comply with the Paperwork Reduction

Act [#17] are DENIED;

IT IS FURTHER ORDERED that Defendant’s

Motions in Limine [#18, 19] are DENIED;

IT IS FURTHER ORDERED that Defendant’s

Motion to Compel Disclosure of the Government’s Trial

28a

Exhibits [#20] is GRANTED and the Government shall

provide Defendant with inclusive lists of both exhibits

and witnesses it plans to use at trial by August 14,

2006. Likewise, Defendant shall produce to the

Government by August 17, 2006, its trial exhibit and

witness lists;

IT IS FURTHER ORDERED that Defendant’s

Motion to Compel Discovery of Personnel Files [#21] is

GRANTED as set forth above;

IT IS FURTHER ORDERED that Defendant’s

Motion to Inspect Jury Records [#22] and Defendant’s

Motion for Disclosure of Information Regarding the

Jury Panel and Jury Contact [#23] are DENIED; and

IT IS FINALLY ORDERED that Defendant’s

Motion for Disclosure of the IRS Special Agent’s Report

[#24] is GRANTED.

SIGNED this the 2nd day of August 2006.

SAM SPARKS

UNITED STATES

DISTRICT JUDGE