202 F.3d 1093 (9th Cir. 2000), 98-17220, United States v. Estate Preservation Serv.

Docket Nº:98-17220, 98-17297
Citation:202 F.3d 1093
Party Name:UNITED STATES OF AMERICA, Plaintiff-Appellee, v. ESTATE PRESERVATION SERVICES, a Trust; ESTATE PRESERVATION SERVICES, INC.; ROBERT L. HENKELL, Defendants-Appellants. UNITED STATES OF AMERICA, Plaintiff-Appellee, v. ESTATE PRESERVATION SERVICES, a Trust Defendant, And WILLIAM F. SEFTON, Defendant-Appellant.
Case Date:January 25, 2000
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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202 F.3d 1093 (9th Cir. 2000)

UNITED STATES OF AMERICA, Plaintiff-Appellee,

v.

ESTATE PRESERVATION SERVICES, a Trust; ESTATE PRESERVATION SERVICES, INC.; ROBERT L. HENKELL, Defendants-Appellants.

UNITED STATES OF AMERICA, Plaintiff-Appellee,

v.

ESTATE PRESERVATION SERVICES, a Trust Defendant,

And

WILLIAM F. SEFTON, Defendant-Appellant.

Nos. 98-17220, 98-17297

United States Court of Appeals, Ninth Circuit

January 25, 2000

        Argued and Submitted October 7, 1999

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        COUNSEL: Joe Alfred Izen, Jr., Bellaire, Texas, for defendants-appellants Estate Preservation Services, A Trust; Estate Preservation Services, Inc.; and Robert J. Henkell.

        John R. Vaught, Vaught & Boutris, Oakland, California, for defendant-appellant William L. Sefton.

        Jonathan S. Cohen and Joan I. Oppenheimer, Tax Division, United States Department of Justice, Washington, D.C., for plaintiff-appellee.

        Appeals from the United States District Court for the Eastern District of California; Milton L. Schwartz, District Judge, Presiding. D.C. No. CV-97-01166-MLS GGH

        Before: Joseph T. Sneed and Harry Pregerson, Circuit Judges, and David O. Carter,1 District Judge.

        OPINION

        SNEED, Circuit Judge:

        We must decide the appropriateness of a preliminary injunction entered against the promoters of certain tax shelters. The United States filed suit in 1997 against Estate Preservation Services, a Trust; Estate Preservation Services, Inc.;2 Robert L. Henkell; and William L. Sefton ("Appellants"). Injunctive relief was sought under Title 26 United States Code Section 7408 to prevent Appellants from rendering abusive tax-shelter advice under Title 26 United States Code Section 6700. The district court granted a preliminary injunction in October 1998.3 Independent appeals were timely filed and subsequently

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consolidated sua sponte by this court. Jurisdiction exists under Title 28 United States Code Section 1292(a)(1).

        A district court's grant of a preliminary injunction is subject to " `limited review.' " FTC v. Affordable Media, LLC, 179 F.3d 1228, 1233 (9th Cir. 1999) (quoting Does 1-5 v. Chandler, 83 F.3d 1150, 1152 (9th Cir. 1996)). This court will therefore reverse a district court only when the lower court has committed an abuse of discretion. Id. An abuse of discretion occurs when a court bases its decision on an erroneous legal standard or on clearly erroneous factual findings. Id.

        The record on appeal indicates that the district court did not abuse its discretion by issuing the preliminary injunction against Appellants. We therefore affirm.

        I.

        Appellant Estate Preservation Services ("EPS") was in the business of marketing trusts and other asset protection devices. In 1992 EPS began vending irrevocable non-grantor trusts which it called "Asset Preservation Trusts" ("APTs"). EPS sold these APTs through a nationwide, multi-level marketing network of financial planners.

        Appellant Robert L. Henkell was the central figure in promoting and organizing the activities of EPS. In this capacity, Henkell spawned a variety of trust entities, including the APT. He published a training manual entitled "Asset Preservation Trusts (APT) -Description, Use & Benefits" ("APT Manual") to market the APT. The APT Manual made numerous representations about the permissibility of tax deductions and credits purportedly available to APTs. Henkell also conducted seminars during which he advised individuals on how to create and use APTs to generate tax deductions and reduce tax liability.

        Appellant William L. Sefton is a Certified Public Accountant who was held out as an "executive vice president" of EPS. Sefton received his Masters in Accounting from the University of Southern California in 1966 and was licenced as a Certified Public Accountant for nearly 30 years before the government filed this action. Sefton has described his practice as "primarily that of preparing income tax returns for individuals." He has claimed throughout this case to have had no expertise in the field of trust taxation. Nonetheless, Sefton spoke at EPS programs about living trusts and recruited to EPS thirty sales agents, some of whom sold APTs. EPS compensated Sefton in the form of a "sales override" on each of the three occasions that his recruits sold an APT.

        The Internal Revenue Service ("IRS") learned of APTs while auditing individual taxpayers in 1995. The IRS determined that APTs were tax shelters designed to claim excessive and/or improper deductions. It formally assessed penalties of $1.254 million each against Henkell and EPS pursuant to Section 67004 of the Internal

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Revenue Code.5

        Shortly after these penalties were levied, Henkell began marketing "Estate Management Trusts" ("EMTs") in lieu of "Asset Preservation Trusts." He modified the APT Manual to conform to this new EMT program. Henkell also formed the New Dynamics Foundation ("NDF"). NDF materials stated that a taxpayer could reduce his or her tax burden through forming private charitable foundations. The government alleged in its complaint that Henkell created the EMTs and NDF to mask illegalities and to further evade the properly applicable tax law. It was also averred that Sefton facilitated tax shelter abuses associated with NDF, which he helped Henkell to found.

        II.

        Congress added the statutory provisions that apply to this litigation, I.R.C. Sections 6700 and 7408, as part of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub. L. No. 97-248, 96 Stat. 324. The government must prove five elements to obtain an injunction under these statutes: (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. I.R.C. SS 6700(a), 7408(b). The government bears the burden of proving each element by a preponderance of the evidence. United States v. H&L Schwartz, 1987 WL 45223, at *6 (C.D.Cal. 1987), aff'd sub nom, Bond v. United States, 872 F.2d 898 (9th Cir. 1989). The traditional requirements for equitable relief need not be satisfied since Section 7408 expressly authorizes the issuance of an injunction. Trailer Train Co. v. State Bd. of Equalization, 697 F.2d 860, 869 (9th Cir.), cert. denied, 464 U.S. 846 (1983); United States v. Buttorff, 761 F.2d 1056, 1059 (5th Cir. 1985).

        Each Appellant claims that the government failed to prove the above elements. We will consider their arguments separately since Henkell and EPS take somewhat different approaches in their briefs than does Sefton. Finally, we will address whether the preliminary injunction to any extent is in conflict with the First Amendment.

        A. Henkell and EPS

        Henkell and EPS do not deny organizing or selling, or participating in the organization or sale of, an entity, plan, or arrangement. They do not deny that their words would have been materially fraudulent if they misrepresented the tax consequences of these devices. Further, they do not deny that their conduct, if prohibited by Section 6700, would likely recur and that injunctive relief would be a necessary precaution.

        Henkell and EPS do contend, however, that: (1) they did not promote any abusive tax shelters by making false statements about United States tax law; and (2) even if they did make false statements, they never knew or had reason to know that those statements were untrue, i.e., they

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did not act with the requisite scienter under Section 6700.

        We conclude in section 1 infra that the promotion statements were false, and in section 2 infra that Henkell and EPS uttered the statements with the scienter necessary to violate Section 6700.

        1. The False Tax Advice

        The district court determined that Henkell and EPS made at least four misrepresentations about the purported tax benefits of APTs, EMTs, and donor-directed foundations. These misrepresentations concerned: (1) the basis of property placed in trust; (2) the strategy of "upstreaming" income; (3) the deductibility of personal expenses and the depreciation of an owner-occupied home; and (4) the deductibility of certain donations to donor-directed charitable foundations.

        Henkell and EPS argue that no specific evidence of any EPS customers violating United States tax laws was ever adduced. They miss the point. Section 6700(a)(2)(A) penalizes promoters, like Henkell and EPS, who knowingly utter false statements with respect to certain tax matters. Whether EPS customers used that misinformation to violate the law is irrelevant. Congress intentionally omitted taxpayer reliance as an element of the offense. See S. REP . NO. 97-494, vol. 1 at 268 (1982), reprinted in 1982 U.S.C.C.A.N. 781, 1916.

        With this in mind, we turn to the four primary areas of Appellants' fraudulent conduct and to the conclusions reached by the district court.

        (a) Step-up in Basis of Property Placed in Trust

        The APT manual represented that taxpayers could transfer equipment into an APT at no cost to the trust, and thereby give the trust a higher basis in the equipment than it had in the hands of the taxpayer. The district court did not commit clear error in holding these statements to be fraudulent.

        I.R.C....

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