NCBA/NCE v. US

• Decision Date: 22 October 1993
• Docket Number: Civ. A. No. 89-M-1912.
• Citation: 843 F. Supp. 655
• Parties: NATIONAL COMMODITY AND BARTER ASSOCIATION/NATIONAL COMMODITY EXCHANGE, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Colorado

843 F. Supp. 655

NATIONAL COMMODITY AND BARTER ASSOCIATION/NATIONAL COMMODITY EXCHANGE, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 89-M-1912.

United States District Court, D. Colorado.

October 22, 1993.

William A. Cohan, Jennifer A. Greene, Cohan & Greene, Encinitas, CA, for plaintiff.

Seth G. Heald, Office of Special Litigation, Tax Div., U.S. Dept. of Justice, Washington, DC, William G. Pharo, Asst. U.S. Atty., Denver, CO, for defendant.

MEMORANDUM OPINION AND ORDER

MATSCH, District Judge.

The National Commodity and Barter Association/National Commodity Exchange (NCBA/NCE) brings this suit against the United States for a refund of penalties assessed under I.R.C. § 6698 for failing to file partnership returns for the years 1979-1988 and I.R.C. § 6700 for promoting an abusive tax shelter. This court has jurisdiction over the matter pursuant to I.R.C. § 7422 and 28 U.S.C. § 1346(a)(1). A trial to the court was held November 16-19, 1992 and December 30, 1992. Extensive post-trial briefs were filed. This memorandum opinion constitutes the findings of fact and conclusions of law required by F.R.Civ.P. 52(a).

The NCBA, founded in 1979, is a self-described "voluntary, non-commercial, political and educational association." Amended Cmplt. ¶ 1. The NCBA operated a warehouse bank or warehouse exchange known as the National Commodity Exchange, or NCE. On April 5, 1985, the IRS levied a $20,000,000 jeopardy assessment against the NCBA pursuant to I.R.C. § 6700 for promoting an abusive tax shelter by disseminating false and fraudulent statements concerning the federal tax laws. Concurrent with the jeopardy assessment, under a search warrant, the IRS conducted a search and seizure at the NCBA's offices in Denver, Colorado, seizing cash and coins, as well as gold and silver bullion. The IRS also placed levies against NCBA bank accounts. Though the search and seizure was held unconstitutional, see Voss v. Bergsgaard, 774 F.2d 402, 406 (10th Cir.1985), the IRS served a levy on itself and retained the NCBA's assets to satisfy the $20,000,000 jeopardy assessment. On March 2, 1988, the NCBA filed a claim for refund with the IRS. This action was filed more than six months subsequent to that date on November 2, 1989 pursuant to I.R.C. § 6532(a)(1).

On June 22, 1990, the IRS assessed $4,223,000 in penalties against the NCBA under I.R.C. § 6698 for failing to file informational partnership tax returns for the years 1979-1988. By a letter dated January 31, 1991, the IRS notified the NCBA that it had abated the § 6700 penalty to $176,822 after a number of courts had disapproved the method by which the penalty was calculated. See, e.g., Gates v. United States, 874 F.2d 584, 587 (8th Cir.1989). Under the new computation method, the IRS penalized the NCBA/NCE based on a percentage of its gross income, which the IRS determined to be $1,384,226 for the years 1982-1985. The IRS applied the overpayment from the § 6700 abatement to the § 6698 penalties, notifying the NCBA by a letter dated April 18, 1991. The NCBA/NCE filed a claim for refund for the § 6698 penalties for the years 1979-1983 on June 15, 1992. The IRS disallowed the claim in a July 24, 1992 letter. An amended complaint seeking refund of the § 6698 penalties was filed in this court on August 7, 1992. The amended complaint also seeks an injunction against the IRS to keep it from enforcing the § 6698 penalties for 1984-1988.

The NCBA/NCE was conceived by John Grandbouche, a onetime candidate for lieutenant governor of Colorado and full-time proponent of libertarian and anti-monetarist ideas. After Grandbouche's death in 1986, John Voss took over as director of the NCBA. The NCBA recruited members and charged annual membership fees ranging from $100 to $180 over the course of the 1980s. It also had honorary members who were not charged membership fees. The NCBA began with about 200 members in 1979. Membership peaked near 2,000 in the early 1980s, but has declined since then on account of the 1985 seizure of the NCBA's assets. At the time of the search and seizure in 1985, the NCBA had approximately 1700 members.

NCBA membership brought certain benefits. NCBA members received a multi-volume set of loose-leaf "Freedom Books." The "Freedom Books" outlined the premises of the NCBA credo, and provided guidance for defending against tax audits and conducting pro se tax litigation. The first volume sets forth the fundamental tenets of the NCBA. Among those tenets are beliefs: that the originally conceived Constitutional system has been perverted; that the Federal Reserve is an extraconstitutional agency serving the interests of plutocratic banking interests; that the United States is headed for financial ruin because it has abandoned the gold standard; that the federal income tax is unconstitutional; and, specifically, that wages are not subject to taxation because they are not income. The second volume of the Freedom Books is entitled "Legal Briefs and Motions." The volume is a primer for conducting pro-se litigation and details the state and federal court systems and the process of litigation. The third volume, entitled "Courtroom Procedures," gives the NCBA's views on federal court jurisdiction, the role of grand juries and how to appeal an adverse tax ruling.

The Freedom Books also describe the purported advantages of warehouse banking. According to the Freedom Books, warehouse banks back deposits with `real' assets — gold and silver — and additionally afford depositors absolute privacy against the recordkeeping requirements of the IRS. In practice, the warehouse bank described by the Freedom Books was the NCE, the "service wing" of the NCBA. The NCE was a warehouse bank created, according to NCBA literature, to function outside of the illegitimate Federal Reserve System and invasive federal banking and tax laws. It was open only to NCBA members. The NCE did what the Freedom Books promised: The NCE converted depositors' Federal Reserve Notes (or "Ferns") into gold or silver. The NCE also claimed to give depositors complete privacy in conducting their personal finances. Accounts were numbered, not named. Account records were kept purportedly only for the immediately preceding NCE transaction. The NCE's promotional literature claimed account-holders' records would be beyond the reach of the IRS. Records on computer tape seized by the government show 679 separate accounts at the NCE. Most of the accounts were held by individuals, but some accounts belonged to other warehouse exchanges located about the country.

The NCE maintained checking accounts at several banks in the Denver area. It used depositors' money to purchase precious metals, and held depositors' assets in that form. The NCE also had in place a "price stabilization plan" to protect account-holders' assets from price fluctuations in the precious metals market. This plan required the maintenance of a reserve fund from which the NCE could absorb any losses an account-holder might incur if the price of metals dropped. When an account-holder wanted to withdraw money from his account, he would notify the exchange. The exchange would then send the account-holder cash via registered mail. Alternatively, the NCE offered a bill paying service, whereby account-holders would notify the exchange of bills they had to pay and to whom. The NCE would then write checks to those parties on the NCE's own account.

The NCE was initially operated by NCBA member Larry Martin. A dispute with Grandbouche in April 1983 over opening up the NCE to non-NCBA members led to Martin's departure. Martin's successor at the NCE was Joseph Gorman, who ran the exchange until March 1985. Gorman also had a falling out with Grandbouche and the NCBA, so much so that he took NCE's backup computer records and turned them over to the government.

The NCBA charged fees to users of the NCE. Joseph Gorman testified that $6000 per month of the service fees were deposited into an NCE account known as the "Founder's Fund." The remainder of the NCE's fees were kept by Gorman to maintain a reserve fund for the NCE, and to pay expenses. The Founder's Fund was under the sole control of John Grandbouche, who used the Founder's Fund deposits to further the mission of the NCBA as he saw fit. Founder's Fund money paid for a variety of NCBA activities, including the development of a high-mileage carburetor, publishing John Grandbouche's books and, after Grandbouche's death, paying his widow's expenses. John Voss assumed control of the Founder's Fund upon succeeding Grandbouche at the NCBA.

The NCE was one of a network of warehouse banks located throughout the country. Joseph Gorman testified that 63 "satellite" exchanges were established through NCBA members. These members paid to attend NCBA training seminars on running warehouse banks. Many of these satellite exchanges maintained accounts with the NCE and traded metals through the NCE.

The NCBA also circulated a monthly newsletter to members. Non-members could subscribe for $15, and later $20, per year. The newsletter covered topics ranging from the efforts of the NCBA movement, to home schooling, to pleas for aid for incarcerated tax offenders, to efforts to develop a high-mileage carburetor, to advertisements for books sold by the NCBA. The NCBA hosted annual seminars for members starting in 1981 and continuing until 1985. At these conclaves, Grandbouche, Voss and other NCBA representatives instructed concerning NCBA teachings.

Yet another activity of the NCBA involved the operation of a "legal department." The legal department charged members $25 and later $40 per hour for assistance to members involved in tax audits and litigation. A "Mutual Assistance Plan" (MAP) was also offered by the NCBA, which functioned as a sort of litigation insurance plan for members involved in civil and criminal tax disputes. The MAP covered an enrollee's litigation expenses up to certain dollar amounts...