Are Gold American Eagles Worth What Congress Has Said They Are Worth? Or: The IRS v. Robert Kahre

[Editor’s note: I am not a tax protester. Until researching the issue that is subject to this blog post, I thought all of the arguments raised by the tax protester crowd were frivolous.  On this issue, I am not so confident.]

Take a look at this gold coin.   It's a Gold American Eagle.  Look at the image on the right.  Do you see what the coin says on the bottom half, underneath the nesting baby eagle?

It says $50, right?

Indeed, it is (as I will explain below) $50. It’s worth as much as an Ulysses S. Grant. Well, if you believe it’s really only worth $50, send all of your Gold Eagles to me. I will sell them on eBay for about $1,000 each.

And now you can see the problem of Robert Kahre. Mr. Kahre is facing federal prison because he claimed that Gold Eagles are worth what Congress has said that Gold Eagles are worth.

Is Mr. Kahre’s position frivolous? I don’t think so. Please indulge me.

A Gold Eagle is “Legal Tender.”

Under 31 U.S.C. § 5112: "(a) The Secretary of the Treasury may mint and issue only the following coins: (7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold."

31 U.S.C. § 5112(h) provides: (h) The coins issued under this title shall be legal tender as provided in section 5103 of this title.

Title 31 U.S.C. § 5103 defined “legal tender.” Section 5103 states: “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”

See Mathes v. Commissioner of Internal Revenue, 576 F.2d 70, 71 (5th Cir. 1978) (per curiam) (“Congress has delegated the power to establish this national currency which is lawful money to the Federal Reserve System.”); United States v. Wangrud, 533 F.2d 495, 495 (9th Cir. 1976) (per curiam) (“By statute it is established that federal reserve notes, on an equal basis with other coins and currencies of the United States, shall be legal tender for all debts, public and private, including taxes.”).

The Courts Have Said: “A Dollar Is A Dollar.” In Thompson v. Butler, 95 U.S. 694, 696 (1877) (here), the United States Supreme Court stated: “A coin dollar is worth no more for the purposes of tender in payment of an ordinary debt than a note dollar. The law has not made the note a standard of value any more than coin. It is true that in the market, as an article of merchandise, one is of greater value than the other; but as money, that is to say, as a medium of exchange, the law knows no difference between them.”

In Crummey v. Klein Independent School District (here), the Fifth Circuit Court of Appeals heard a case where:  "Brent E. Crummey brought this lawsuit complaining that ... two employees of the KISD tax office, declined to accept Crummey’s fifty-dollar United States American Eagle gold coins for any more than the face value of the coins in Federal Reserve Note dollars as tender in payment for taxes Crummey owed."

The Fifth Circuit stated: "Regardless of any currency confusion that may have arisen in bygone eras, our present standard is clear: As legal tender, a dollar is a dollar."  Further: "As legal tender, a dollar is a dollar, regardless of the physical embodiment of the currency."

OK. A dollar is a dollar.

Mr. Kahre owed his employees dollars.  He paid them in dollars.  Specifically, he paid them fifty dollars via a Gold Eagle.  So what's the problem?

Cordner v. United States Does Not Apply.

In Cordner v. United States, 671 F.2d 367, 368- 69 (9th Cir. 1982), a taxpayer "received 275 $20 Double Eagle gold coins as a corporate dividend distribution."  The taxpayer "reported the dividend at the face value of the coins, $5,500 []."  The IRS disagreed, "charg[ing] appellants with a taxable dividend in an amount equal to the fair market value of the coins, which was $70,936."

A three-judge panel of the Ninth Circuit Court of Appeals agreed with the IRS: “We have no difficulty in holding that the gold coins here, though legal tender and hence ‘money’ for some purposes, are also ‘property’ to be taxed at fair market value because they have been withdrawn from circulation and have numismatic worth.”

Mr. Kahre has been paying his employees with coins that have not been withdrawn from circulation. Thefore, Cordner’s holding does not apply.

The panel did say, in dicta: “When legal tender, by reason of its value to collectors or the intrinsic worth of its contents, has a fair market value in excess of its face value or tender, then it should be deemed property other than money for purposes of section 301(b)(1)(A).” There are three problems with this dicta.

First, it is dicta. It is therefore not binding on any non-party. Dicta is, in essence, an unconstitutional advisory opinion – since it addresses issues not necessary to resolve, as Article III to the Constitution requires, to a “case or controversy.”

Second, the dicta was written in 1981. The law I discussed, above, was enacted in 1985. Thus, even if the dicta were binding; it would have been abrogated by federal statute.

Third, it is striking that this dicta does not address any of the statutory arguments I raised, above. It does not address the United States Supreme Court’s opinion in Thompson v. Butler, 95 U.S. 694, 696 (1877). It’s a flip and thoughtless (non) resolution of the complicated issue.

Whatever the case, that language was dicta, since it went beyond the issue presented in the case. It is old dicta, that appears invalid in light of subsequent federal legislation.

You Can’t Convict Unless You Show a Mistake of Law.

Perhaps it is the case that legal tender should be treated differently when you’re paying an employee wages. There are clearly cases stating otherwise.  I spent three hours rather than three days on this post.  I likely have missed something.  That said, I have indeed found strong authority for Kahre's position.

Let’s assume that a legal god would determine that, here, a consistency would be foolish – and therefore the hobgoblin of little minds.

Federal law protects little minds. Ignorance of the law is no excuse – except in tax cases. You cannot convict a taxpayer unless you show that the taxpayer willfully violated federal law. See Cheek v. United States, 498 U.S. 192, 202 (1991); United States v. Bishop, 291 F.3d 1100, 1106 (9th Cir. 2002); Richey v. United States, 9 F.3d 1407 (9th Cir. 1993) (subjective good faith is sufficient).

What is the law of Gold American Eagles?

I know what I’d do. I’d claim the fair market value of the Gold Eagles. I am risk averse. In a Platonic sense, I believe that Gold Eagles should be taxable based on their face value. In the real world, I know what courts will do.

I have no doubt that if the Ninth Circuit hears this issue, it will echo Cordner v. United States. The Ninth Circuit will either ignore the complexities I mentioned; or it will find a way (disingenuous or otherwise) to distinguish them away. Still, I believe that a person could subjectively thing that he wasn’t required to pay taxes based on fair market value.

That I wouldn’t personally take that position does not change the fact that others might disagree with me. That I would not encourage others to take that position, again, do not change anything. A person could subjectively and reasonably believe that he was not required to pay taxed on the fair market value of the Gold American Eagles.

Mr. Kahre should be acquitted.

Comments

[Aaron]

We'll assume in this example that the gold $50 coin has a market value of $1,000. If I understand his scheme, he was doing the following:

1. An employee would perform work for him. Let's say, earning $1,000 in a pay period.

2. Kahre would pay the employee a $50 gold coin, compensating the employee based upon the market value of the coin, but paying employment taxes based upon his claim that he paid the employee only $50 and instructing the employee to report only $50 of income on his tax return.

3. The employee would go to Kahre's partner, and trade the gold coin for $1,000 cash.

If Kahre had claimed that the coins were worth $50, and paid the employee with 20 $50 gold coins, then paid taxes on the $1,000 wage, I'm sure the employee would be very, very happy and the government would have left him alone. But it seems that Kahre was only interested in the face value of the coin when it was convenient to him as part of a scheme to dodge taxes. (If Kahre truly believed he was paying his employees based upon the face value of the coins, as opposed to their market value, what of minimum wage laws?)

[Mike]

Yeah. He was self serving. So what? People look for tax loop holes evey day.

[Aaron]

Breaking the law is not a "loophole". There's no approach to his actions where he wasn't breaking tax laws, labor laws, or both.

[Mike]

Sure there was. I explained the approach in my post.

A gold eagle is currency. It has face value. If you pay someone in currency, then currency is what is claimed as income.

You might not agree. But that doesn't matter. In tax law, you have to show a knowingly violation of the law. There is more than enough contrary law out there to lead a person to think, "Yeah, this might be a little grey area or shady; but it's legal."

[Eric]

The coin has a face value of $50. End of discussion. If they're going to force them to pay taxes based on it's non-face value of $1000, why can't I pay LESS in taxes because the dollar is so DEVALUED? Inflation caused my dollars to be worth less, right?

[Mike]

Eric: Good point. For tax purposes: A dollar is worth a dollar, except when the dollar is a gold coin. Sounds like the IRS is the one that is being shady here.

[USLaw.com]

Fabulous post!

[Joe]

Wow. The IRS will stop at NOTHING to squeeze more taxes from us. But if the U.S. government issues a coin that says it is worth $50, shouldn't it be worth just that? Unless it is no longer being made and has become a collector's item.

[reinkefj]

I'm not a "tax protester" either. I am revolted by taxes. And, there's not a thing I can do about it. EXCEPT save my "wealth" in gold coins.

The "inflation tax" silently steals value from your wallet. The "corporate tax" is paid for by real people who buy stuff. The "estate tax" reaches into your grave to steal from your legacy.

Gold coins represents the common man's only defense against the taxes of the "King". Where's Robin Hood when you need him?

We, the People, or is that Sheeple, have been fooled. Fooled by the word "dollar". Derived from Thaller, the German coin maker, who made one ounce silver coins. Pound used to refer to a pound of silver. The dead old white guys knew that gold and silver would keep the politicians relatively honest. John Law and paper were a well=known fraud.

It's humorous that the politicians screwed up and actually put a dollar amount on an ounce of gold. What a farce!

[Revalando Occhio]

To avoid a capital gains issue one needs to circulate the coin at face value. A second monetary standard would be created de facto.