Gang v. US, 88 C 3136.

• Decision Date: 21 January 1992
• Docket Number: No. 88 C 3136.,88 C 3136.
• Citation: 783 F. Supp. 376
• Parties: Gabrielle S. GANG, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Illinois

783 F. Supp. 376

Gabrielle S. GANG, Plaintiff, v. UNITED STATES of America, Defendant.

No. 88 C 3136.

United States District Court, N.D. Illinois, E.D.

January 21, 1992.

David A. McGuire, Lane M. Gensburg, Stone, McGuire & Benjamin, Chicago, Ill., for plaintiff.

Frederick H. Branding, Johnson & Bell, Ltd., Chicago, Ill., Philip L. Sbarbaro, Noreene C. Stehlik, U.S. Dept. of Justice, Tax Div./Sp. Litigation, Washington, D.C., for defendant.

MEMORANDUM OPINION AND ORDER

ILANA DIAMOND ROVNER, District Judge.

I. INTRODUCTION

This case presents a novel question of federal tax law involving the effective date of a congressional amendment to a statute that penalizes the setting up of a fraudulent tax shelter. On August 31, 1987, the Internal Revenue Service ("IRS" or "Commissioner") assessed a $391,500 penalty against plaintiff Gabrielle Gang ("Gang") pursuant to 26 U.S.C. § 6700 for promoting an abusive tax shelter. Subsequently, Gang commenced this refund suit in federal court raising numerous issues regarding the penalty.

Section 6700 of the Internal Revenue Code¹ prohibits the promotion of abusive tax shelters. A person who "organizes" or "participates in the sale of any interest in" any "plan or arrangement" and who makes a fraudulent statement concerning the tax benefits available under the plan or makes a "gross valuation overstatement" concerning the property or services offered to investors under the plan, is liable for a penalty "equal to the greater of $1000 or 10 percent of the gross income derived or to be derived ... from such activity." Section 6700 (1982). Effective July 19, 1984, Congress amended this provision to substitute "20 percent" for "10 percent." See Tax Reform Act of 1984, Pub.L. No. 98369, § 143(a), 98 Stat. 494, 682 (1984).

Gang has now moved for summary judgment on one of the many issues she has raised in her complaint: whether an amendment to section 6700, which increased the penalty for selling fraudulent tax shelters from 10% to 20% of gross income, applies to her case. The IRS, in responding to Gang's motion, filed a cross-motion for partial summary judgment. In her reply to the IRS, Gang has conceded liability for violating the statute. (Plaintiff's Reply in Support of Motion for Summary Judgment at 1 n. 1).

II. FACTS

The facts of this case, which are complicated by a separate — and now completed — parallel proceeding in federal court, are not in dispute. After Gang filed her statement of uncontested facts, the IRS adopted her statement as its own. Gang is the president and sole owner of Datamatic Services, Inc. ("Datamatic") and has been since 1981. In the related case before Judge Nicholas J. Bua, a federal jury found, in 1987, that Datamatic was liable under § 6700 for promoting the same fraudulent tax shelter at issue in this case. In Datamatic Services, Inc. v. United States, 909 F.2d 1029 (7th Cir.1990), a decision which affirmed the lower court decision, the Seventh Circuit stated the following facts:

In April 1982, Datamatic agreed to buy for $1,200 (plus other costs for related services) from the Jones Medical Instrument Company (Jones Medical) machines called Tiffenaires, which are used by physicians to test the condition of a patient's lungs. Datamatic then offered the machines for sale to investors at $35,000 each. It drafted and distributed booklets to promote the sale, indicating that an investor could earn substantial income by buying the machine and then leasing it to a physician. The booklets also indicated that an investor could recover several times his cash investment through income tax benefits, in the form of investment tax credits, depreciation, and other deductions.

Datamatic sold 250 of the machines at a price of $35,000 each. Typically, an investor made a cash down payment and signed a short-term note to Datamatic, which together accounted for $6,250. A five-year note evidenced the remaining $28,750. Minimum annual installments of $2,600 (approximating the annual interest) were to be paid out of the investor's net leasing receipts. Each purchaser was to pay Datamatic an additional one-time service fee of $1,750.

Id., 909 F.2d at 1030-1031. Datamatic sold the last Tiffenaires in December 1983, but continued receiving income on the sales through 1990.

In 1986, the IRS assessed Datamatic a penalty pursuant to § 6700 based on Datamatic's promotion and sale of the Tiffenaires. The IRS determined Datamatic's penalty to be 10% of the gross income derived from the sale of Tiffenaires, or $391,500. The IRS denied Datamatic's claim for refund and Datamatic brought suit in federal district court. After a trial, the jury imposed a penalty of $400,000, which Judge Bua reduced to $391,500.

At the time of trial, the IRS also assessed a penalty against Gang personally in the amount of $391,500 for the same tax shelter. Like Datamatic, Gang paid 15% of the assessment ($58,725), as required by 26 U.S.C. § 6703(c)(1), and filed an administrative claim for refund. The claim was denied. She then filed suit in district court for a refund. She continued to receive income from the sale of the Tiffenaires in the form of wages from Datamatic through 1990. The parties have stipulated that Gang earned $501,486.46 in gross income over eight years from the sales.

Gang argues that the penalty rate should be 10% of $501,486.46, because she promoted the fraudulent tax shelter in 1982 and 1983 when § 6700 penalized such activity at 10%. At this percentage, Gang would owe the IRS $50,148.65, plus interest and additional credits to which Gang is entitled. If this is the case, the parties agree that Gang is now entitled to a refund of $8,576.35 from the IRS, given that she paid $58,725 in order to bring this suit.

The IRS argues that a penalty of 10% should be used with respect to income earned by Gang before July 19, 1984 — the effective date of the amendment to § 6700 which increased the penalty rate from 10% to 20% — and 20% with respect to income earned by Gang on or after July 19, 1984. Under this calculation, Gang's penalty is $92,180.94, plus interest and less additional credits to which she is entitled. If this is the correct amount, the parties agree that Gang still owes the IRS $33,455.94.

III. ANALYSIS

Summary judgment is properly granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A genuine issue of material fact exists when "there is sufficient evidence favoring the non-moving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). Any doubts about the sufficiency of the evidence should be resolved in favor of the non-moving party. Puckett v. Soo Line R. Co., 897 F.2d 1423, 1425 (7th Cir.1990). Because the parties agree on the facts of this case, no material issues of fact remain. In the absence of any such issues, the Court determines whether the moving party is entitled to judgment as a matter of law. Rizzo v. Caterpillar, Inc., 914 F.2d 1003, 1006 (7th Cir.1990).

A. Language of § 6700

The starting point in every case involving construction of a statute is the language itself. Ardestani v. I.N.S., ___ U.S. ___, 112 S.Ct. 515, 519, 116 L.Ed.2d 496 (1991). When Congress enacted § 6700 on September 3, 1982, it provided that any person who promotes abusive tax shelters "shall pay a penalty equal to the greater of $1,000 or 10 percent of the gross income derived or to be derived by such person from such activity." S.Rep. No. 494, 97th Cong., 2d Sess. reprinted in 1982 U.S.Code Cong. & Admin.News 781, 1014. On July 18, 1984, Congress amended this provision to substitute "20 percent" for "10 percent." H.R.Rep. No. 98-432, 98th Cong., 2d Sess., reprinted in 1984 U.S.Code Cong. & Admin.News 697, 1008-09. "The amendments made by this section shall take effect on the day after the date of enactment of this Act." Deficit Reduction Act of 1984, Pub.L. No. 98-369, § 143(c), 98 Stat. 494, 682 (1984). The language of this statute and the amendment is clear, straightforward and unambiguous. Effective July 19, 1984, Congress directed that those who, like Gang, have promoted abusive tax shelters "shall pay ... 20% of the gross income derived ... from such activity." (Emphasis added).

Gang argues that this interpretation of the statute amounts to an illegal retroactive application of the amendment. However, in response, the IRS points out that Gang is being penalized only for "activity" — the sale of Tiffenaires — that took place after the effective date of the original § 6700 on September 3, 1982. She therefore had notice that this "activity" was illegal. The penalty is not applied retroactively, because, after the amendment on July 18, 1984, Gang was on notice that any future income she "derived" from that fraudulent tax shelter would be penalized at a rate of 20%. Therefore, the application of the 20% penalty in this case is prospective only. The Court notes that even with a penalty of 20%, Gang will make a tidy profit of over $400,000 from her fraudulent activities.

Gang also argues that the legislative history from both the 1984 and 1989 amendments shows that Congress intended to penalize at 20% a promoter's "activity" only if the activity takes place after the effective date of the amendment. Yet, this Court looks beyond the express language of a statute only where that statutory language is ambiguous or where a literal interpretation would lead to an absurd result or thwart the purpose of the overall statutory scheme. United States v. Real Estate Known as 916 Douglas Ave., 903 F.2d 490, 492 (7th Cir.1990). Because the statutory language is clear, the Court need not review the legislative history. But even if the Court considers that history, the...