The opinion of the court was delivered by: Thomas J. McAVOY Senior United States District Judge
The United States of America commenced the instant action seeking to enjoin Defendants from promoting an illegal tax shelter. Presently before the Court are Defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12 and Plaintiff's cross-motion for summary judgment pursuant to Fed. R. Civ. P. 56.
Defendant Robert L. Shulz ("Schulz") organized Defendant We the People Foundation for Constitutional Education Inc., and We the People Congress, Inc. in 1997. The Complaint alleges that, although Shulz purports to have founded the corporate defendants for educational purposes, he "has used the two . . . entities . . . to market a nationwide tax-fraud scheme designed to help customers evade their federal tax liabilities and to interfere with the administration of the internal revenue laws." Compl. at ¶ 6.
Defendants distributed a "Tax Termination Package" as part of "Operation Stop Withholding" to help individuals stop withholding, paying, and filing federal taxes. The United States alleges that Defendants furthered their scheme through the use of false and misleading forms in place of standard Internal Revenue Service ("IRS") forms, and based upon the false premises that the federal income tax system is voluntary, the 16th Amendment to the United States Constitution was not property ratified, and that federal income tax does not apply to most wages.
The Complaint alleges that, among other things, "[a]s part of the Tax Termination scheme, Defendants give customers (both employers and employees) step-by-step instructions on how to fraudulently terminate withholding of federal income and employment taxes." Compl. at ¶ 14. The entire scheme is alleged to be premised upon false representations and legal positions known to have been rejected by the courts, including a criminal trial in which Schulz testified. See United States v. Simkanin, 420 F.3d 397 (5th Cir. 2005).
The Complaint alleges that Defendants' scheme causes harm to the Untied States by assisting customers to evade taxes and obstructing the IRS's efforts to administer the federal tax laws. The United States seek an injunction pursuant to Internal Revenue Code § 7408 precluding Defendants from making known false or fraudulent statements in connection with the organization or participation in the sale of a plan or arrangement regarding any tax benefit.
Presently before the Court is Defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12 and Plaintiff's cross-motion for summary judgment pursuant to Fed. R. Civ. P. 56.
Rule 56 of the Federal Rules of Civil Procedures governs motions for summary judgment. It is well settled that on a motion for summary judgment, the Court must construe the evidence in the light most favorable to the non-moving party, see Tenenbaum v. Williams, 193 F.3d 581, 593 (2d Cir. 1999), and may grant summary judgment only where "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56( c). An issue is genuine if the relevant evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). A party seeking summary judgment bears the burden of informing the court of the basis for the motion and of identifying those portions of the record that the moving party believes demonstrate the absence of a genuine issue of material fact as to a dispositive issue. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the movant is able to establish a prima facie basis for summary judgment, the burden of production shifts to the party opposing summary judgment who must produce evidence establishing the existence of a factual dispute that a reasonable jury could resolve in his favor. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). A party opposing a properly supported motion for summary judgment may not rest upon "mere allegations or denials" asserted in his pleadings, Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525-26 (2d Cir. 1994), or on conclusory allegations or unsubstantiated speculation. Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998).
a. Plaintiff's Request for Injunctive Relief
"Section 7408 of the Internal Revenue Code empowers a district court to grant an injunction when (1) the defendant has engaged in conduct subject to penalty under 26 U.S.C. § 6700, and (2) injunctive relief is appropriate to prevent recurrence of such conduct." United States v. Gleason, 432 F.3d 678, 682 (6th Cir. 2005). "Because section 7408 expressly authorized the issuance of an injunction, the traditionalrequirements for equitable relief need not be satisfied." Id.
1. Internal Revenue Code § 6700
The Court will first address whether Defendant's conduct implicates the proscriptions of 26 U.S.C. § 6700.*fn1 Section 6700 is aimed at abusive tax shelters. To obtain an injunction under § 6700, the government must prove five elements:
(1) the defendants organized or sold, or participated in the organization or sale of, an entity, plan, or arrangement; (2) they made or caused to be made, false or fraudulent statements concerning the tax benefits to be derived from the entity, plan, or arrangement; (3) they knew or had reason to know that the statements were false or fraudulent; (4) the false or fraudulent statements pertained to a material matter; and (5) an injunction is necessary to prevent recurrence of this conduct.
United States v. Estate Preservation Servs., 202 F.3d 1093, 1098 (9th Cir. 2000); Gleason, 432 F.3d at 682. The Court will address each element seriatim.
a. Whether Defendants Organized or Sold, or Participated in the Organization or Sale of, an Entity, Plan, or Arrangement
Under § 6700, "any 'plan or arrangement' having some connection to taxes can serve as a 'tax shelter' and will be an 'abusive' tax shelter if the defendant makes the requisite false or fraudulent statements concerning the tax benefits." United States v. Raymond, 228 F.3d 804, 811 (7th Cir. 2000). In Raymond, the Seventh Circuit found that "the definition of a tax shelter in § 6700 is 'clearly broad enough to include a tax protester group.'" Id. (quoting United States v. Kaun, 827 F.2d 1144, 1147 (7th Cir. 1987).
The facts in the Raymond case are quite similar to the present one. Raymond and Bernhoft [were] active members of the U.S. Taxpayers Party and were the chief participants in a business known as Morningstar Consultants ("Morningstar"). Between January and June of 1996, Morningstar ran a weekly advertisement in a local Wisconsin newspaper under the caption "Just Say No." The Just Say No advertisement contained the following statements: 1) "Federal, State & Social Security Taxes are Voluntary;" and 2) "The Internal Revenue Service has no Statutory Authority to: Compel you to file a Tax Return, Require withholding from your paycheck, Levy or Lien your property, Audit your Books & Records." This advertisement was part of an effort by Morningstar to market the "De-Taxing America Program" (the "Program"). The Program consists of three volumes of materials. These materials contain information presenting the view that, among other things, the federal income tax is unconstitutional and that persons who are not federal employees or residents of the District of Columbia are not legally required to pay federal income tax. In addition to providing information regarding general tax-protest principles, the Program includes several forms and instructions to guide the purchaser through the process of "de-taxing." Purchasers are informed that if they complete the materials and directions in the Program they will be "withdrawn" from the jurisdiction of the federal government's taxing authorities and the social security system and will no longer be required to pay federal taxes. . . .
Program customers are instructed to file W-4 forms with their employers asserting that they are exempt from federal taxation and requesting that the employers stop withholding federal income tax and social security payments from their paychecks. . . .
The Program also provides the purchaser with instructions on how to complete future tax returns to reflect that the purchaser has not incurred any tax liability in the previous year and consequently does not owe any federal income or social security taxes.
Id. at 806-07. "The Program purported to provide step-by-step instructions for 'removing' the purchaser from the federal income and social security tax systems. The Program materials assured readers that the federal government is without authority to tax them and that by following the instructions outlined in the Program individuals can legally refuse to pay federal income and social security tax." Id. at 811. The Seventh Circuit concluded that the program was a tax shelter. The Raymond court further found that because the defendants in that case had sold the product, it qualified as a plan within the meaning of § 6700.
Here, as in Raymond, Shulz has organized the two corporate Defendants. See Def.'s Stmnt. of Mat. Facts at ¶ 1. Defendants offer materials to employees and employers stating that, among other things, Congress is without authority to legislate an income tax on people except in the District of Columbia and United States territories, the IRS is prohibited from compelling people to sign and file income tax returns, and the Sixteenth Amendment to the United States Constitution was never properly ratified and, therefore, the income tax violates the Constitution. Schulz Decl. #1 at Ex. B. Among other things, Defendants' materials instruct workers how to terminate their W-4 Agreement and demand that the employer discontinue making withholdings from their pay. Id. at Ex. C. In fact, Defendants provide forms for that very purpose. Id.*fn2 Thus, the Court finds that Defendants have organized a "plan" or "arrangement." Although there are some questions of fact concerning whether Defendants sold their materials, they clearly "organized" the materials for presentation.*fn3 Defendant Schulz admits that he undertook "'Operation Stop Withholding,' a national campaign to instruct company officials, workers and independent contractors on how to legally stop wage withholding." Schulz Decl. #1 at ¶ 4. Defendants also offer to provide a "customized legal opinion letter from an attorney or CPA to be sent to your company or their tax and/or legal advisors." Schulz Decl. #1 at Ex. C, p. 11. Stated otherwise, Defendants are promoting an abusive tax shelter. Accordingly, the first element is satisfied because Defendants organized a plan or arrangement concerning the avoidance of taxes.
b. Whether Defendants Made or Caused to be Made, False or Fraudulent Statements Concerning the Tax Benefits to be Derived From the Entity, Plan, or Arrangement
"[T]o prove a violation of § 6700, the Government must also show that the [defendants] made false or fraudulent statements concerning the tax benefits of participating in the plan or arrangement." Raymond, 228 F.3d at 812. "Two types of statements fall within the statutory bar: statements directly addressing the availability of tax benefits and those concerning factual matters that are relevant to the availability of tax benefits." United States v. Cambpell, 897 F.2d 1317, 1320 (5th Cir. 1990). Once again, referral to Raymond is instructive. In that case, the Seventh Circuit found that the defendants' statements that "payment of income tax is a voluntary activity and that individuals cannot be legally compelled to file tax returns or submit to tax investigations or penalties" "are clearly false representations concerning the government's authority to tax its citizens." Id. That court concluded that "[t]hese statements made in conjunction with the sale of the Program operated as false assurances that refusing to pay taxes in accordance with the Program's instructions is a lawful activity for which the government has no legal authority to punish Program subscribers." Id.
Defendants' conduct here is virtually identical to that in Raymond. Defendants make claims similar to those in Raymond. Among other things, Defendants affirmatively state that domestic income is not taxable, the filing of a tax return is voluntary, see Defs' Mem. of Law at 10; Schulz Decl. #1 at Ex. B, p. 14, and that the 16th Amendment was not properly ratified and, therefore, the income tax is unconstitutional.*fn4 Defendants also instruct that, "[o]nce the government has been properly notified and termination of withholding has been procedurally put into effect, the [employer] has no further reporting requirements under U.S. law." Schulz Decl. #1 at Ex. C, p. 8. Defendants further claim that the IRS is prohibited by the Fourth and Fifth Amendments from compelling people to sign and file income tax returns. Schulz Decl. #1 at Ex. C. Defendants also claim that they, and other taxpayers, have the right to "retain [their] money until [their] grievances are redressed (remedied)." Schulz Decl. #1 at Ex. H, p.2.*fn5 These are all false statements of fact. See 26 U.S.C. § 3102 (requiring employers to make deductions from wages); Raymond, 228 F.3d at 812 (discussing various similar false statements about taxes); Schiff v. United States, 919 F.2d 830 (2d Cir. 1990); United States v. Sitka, 845 F.2d 43, 47 (2d Cir. 1988) ("[F]ederal courts have upheld and relied on the Sixteenth Amendment for more than seventy-five years. . . . The Sixteenth Amendment was proposed by Congress and ratified by the states in accordance with procedures set out in Article V of the Constitution, and its ratification was then certified after careful scrutiny by a member of the executive branch acting pursuant to statutory duty. The validity of that process and of the resulting constitutional amendment are no longer open questions.") (internal citations omitted); Coleman v. Commission of Internal Revenue, 791 F.2d 68, 70-72 (7th Cir. 1986) (statements that wages are not income and that the income tax is unconstitutional are false and "tired arguments"); United States v. Carley, 783 F.2d 341, 344 (2d Cir. 1986) ("'[T]here is no question but that Congress has the authority to impose an income tax.'") (quoting Ficalora v. Commissioner, 751 F.2d 85, 87 (2d Cir. 1984)); Ficalora, 751 F.2d at 88 (wages are taxable income); Kile v. Commissioner of Internal Revenue, 739 F.2d 265, 167-68 (7th Cir. 1984) ...