U.S. v. Hempfling, 1:05-CV-005940WW SMS.

• Citation: 431 F.Supp.2d 1069
• Decision Date: 22 February 2006
• Docket Number: No. 1:05-CV-005940WW SMS.,1:05-CV-005940WW SMS.
• Parties: UNITED STATES of America, Plaintiff, v. Steven HEMPFLING, d/b/a Free Enterprise Society, Defendant.
• Court: U.S. District Court — Eastern District of California

431 F.Supp.2d 1069

UNITED STATES of America, Plaintiff, v. Steven HEMPFLING, d/b/a Free Enterprise Society, Defendant.

No. 1:05-CV-005940WW SMS.

United States District Court, E.D. California.

February 22, 2006.

COPYRIGHT MATERIAL OMITTED

Robert Davis Metcalfe, U.S. Department of Justice/Tax Division, Washington, DC, for Plaintiff.

William McPike, Auberry, CA, for Defendant.

MEMORANDUM DECISION AND ORDER DENYING DEFENDANT'S MOTIONS TO DISMISS (DOC. 43) AND TO STRIKE (DOC. 44) AND SETTING SCHEDULING CONFERENCE

WANGER, District Judge.

I. INTRODUCTION

Plaintiff, the United States of America, brings this civil action to permanently enjoin Defendant Steven Hempfling, d/b/a the Free Enterprise Society ("Defendant" or "Hempfling"), from engaging in conduct allegedly in violation of the internal revenue laws. (See Compl., Doc. 39.) Defendant moves to dismiss Plaintiff's claims on the grounds that (i) the complaint does not allege fraudulent conduct with sufficient specificity; (ii) adjudication of the government's claims would require analysis of an issue that is non-justiciable; (iii) the claims impose an impermissible conclusive presumption against Hempfling, and (iv) the conduct is protected by the First Amendment. (Doc. 43.) Defendant also moves to strike certain portions of the complaint that make reference to the Declaration of Barbara Cantrell because that declaration is not attached to the amended complaint. (Doc. 44.)¹

II. PROCEDURAL HISTORY

On May 2, 2005, the Government filed a complaint against Defendant pursuant to 26 U.S.C. § 7402(a) and § 7408, seeking to permanently to enjoin him from violating and interfering with the administration of the internal revenue laws. (Doc. 1, Compl.) Defendant, initially proceeding pro se, filed his "Motion to Dismiss or in the alternative for Summary Judgment" on June 29, 2005. (Doc. 8, Def.'s Mem.; see also Doc. 7, Motion; Doc. 9, Hempfling Decl.) Defendant then acquired legal representation. (Doc. 29, filed August 3, 2005.)

Defendant initially moved to dismiss the Government's complaint on the ground that it did not state a claim under any of the potentially applicable internal revenue code sections. Defendant also maintained that the complaint failed to plead fraud with sufficient specificity as is required by Federal Rule of Civil Procedure 9(b). Finally, Defendant argued that the Government should be equitably estopped from bringing this case against him. The estoppel argument was construed as a motion for summary judgment. Oral argument was heard on September 12, 2005.

By memorandum order dated September 23, 2005, Defendant's estoppel argument was rejected. Defendant's motion to dismiss was denied on all grounds, except on the Rule 9(b) ground. Specifically, the district court reasoned:

Here, the Government bases its § 6700 claim on allegedly false and fraudulent statements by Plaintiff at seminars, on his website, and in his commercial tax products ... Allegations of fraud must include the time, place, and nature of the fraudulent statements, including reasons why the statements are false. The claims must include the "the who, what, when, where, and how" of the allegedly fraudulent conduct so that the Defendant may adequately defend against the allegations. Defendant does not dispute that the Government's complaint adequately pleads the "who an what." The Government's complaint sufficiently alleges that it was Plaintiff who made the allegedly false statements to individuals who participated in his seminars, visited his website (www.freeenterprise society.com), and purchased his commercial tax products. In addition, Defendant's complaint contains sufficient allegations of examples of the content of the allegedly false statements.

Defendant argues that the Government fails to allege the "when, where, and how." Taking the last question first, the Government's complaint sufficiently alleges the reasons why Defendant's allegedly false statements are false. Defendant's statements, including those to the effect that there is no requirement to pay income tax, IRS liens are unenforceable, and that a sufficient "good-faith" defense can be established if Defendant's advice is followed, and the Sixteenth Amendment was never ratified are false and misleading.

Defendant is correct, however, that Plaintiff's complaint fails to allege where or when the seminars took place and the commercial tax products were sold. While Rule 9(b)'s particularity requirement is not as stringently applied where fraud is alleged to have occurred over a longer period of time, Plaintiff's complaint lacks even a range of dates during which Plaintiff held his seminars, posted information on his website, and sold his products. Allegations of the location of the seminars would also serve Rule 9(b)'s purpose to protect Defendant against the potential "pretext for the discovery of unknown wrongs."

(Doc. 37 at 13-15 (internal citations omitted)(emphasis added).) The complaint was dismissed with leave to amend in accordance with the above reasoning. (Id.)

III. FACTUAL BACKGROUND

The facts as alleged in the complaint are taken as true for the purpose of a motion to dismiss. TwoRivers v. Lewis, 174 F.3d 987, 991 (9th Cir.1999).

The Government's claims arise out of various activities by Defendant, including but not limited to conducting seminars, selling commercial tax products, charging membership fees in the "Free Enterprise Society" (which has optional membership fees for a "civil support service" and a "legal defense fund"), and posting advertisements for his commercial tax products on his website (www.freeenterprise society.com). (Id. at ¶¶ 8-11, 15.) Through these activities, the Government alleges that Defendant "falsely purport[s] to demonstrate that: (1) there is no law requiring individuals to file federal income tax returns or pay income taxes; and (2) if Hempfling's customers choose to stop filing tax returns, then Hempfling's `Reliance 2000' package would defeat any charge of willful failure to file a tax return."² (Id. at ¶ 9.)

Hempfling offers a "Reliance 2000" program that the Government claims Is used to facilitate, encourage, and assist Hempfling's customers to commit willful failure to file an income tax return. (Id. at ¶ 12) The "Reliance 2000" Program has four steps: (1) buy (for $80) and read a two-volume book by William "Bill" Benson titled The Law That Never Was, which falsely concludes that the Sixteenth Amendment was never ratified; (2) buy (for $250) The 16th Amendment Reliance Package from Hempfling, which contains the "initial research" for Benson's book; (3) buy (for $50-75) and send Hempfling's Redress of Grievance Letter Package to the President, congressmen, and senators, which asks the recipients to answer questions about the ratification of the Sixteenth Amendment; and (4) buy (for $150 and up) and file Hempfling's federal lawsuit package "asking for an answer to the 16th Amendment question". (Id.)

Furthermore, Hempfling advises his customers to purchase his Reliance 2000 program, take these four steps, and stop filing tax returns, in order to later be able to raise a good-faith defense against tax evasion. (Id. at ¶ 13.) Hempfling bases his advice on the United Supreme Court's decision in Cheek v. United States, 498 U.S. 192, 203, 111 S.Ct. 604, 112 L.Ed.2d 617 (1991), which held that an honest, good-faith belief, no matter how unreasonable, that one was not required to pay taxes or to file a tax return could defeat a "willfulness" finding. The Government alleges that "in essence, Hempfling's Reliance 2000 program is a ready-made — and entirely fraudulent — Cheek defense." (Id.)

Hempfling runs a club or organization called the "Free Enterprise Society," through which he promotes his commercial tax products (including "Reliance 2000" as well as a "W4 Package") and for which membership costs $45 per year. Members may attend seminars at no additional charge. (Id.)

Members of the Free Enterprise Society may join the "civil support service" for an additional $20 per year, not including additional fees for letter-writing, brief-writing, and other one-on-one services. (Id. at ¶ 10.) Members may also join (for $950 for the first year and $300 for each additional year) the "legal defense fund," which is described by Hempfling "as protection for those who have chosen to take the `political stand' that they are not required to file federal income tax returns." (Id. at ¶ 10.) Hempfling promises to pay for fund members' legal representation. (Id. at ¶ 14.) The Government further alleges that "the legal defense fund also facilitates, encourages, and assists Hempfling's customers to evade the payment of federal income taxes." (Id. at ¶ 11.)

Plaintiff also has a website (www.freeenterprise society.com) on which he sells the same commercial tax products described above, as well as books and other materials. (Id. at ¶ 15.) The Government seeks only to enjoin Hempfling from advertising or distributing those materials that are subject to penalties under § 6700 or § 6701. (Id. at ¶ 17.)

IV. STANDARD OF REVIEW

A. Motion to Dismiss Under Federal Rule of Civil Procedure 12(b)(6).

Federal Rule of Civil Procedure 12(b)(6) allows a defendant to attack a complaint for failure to state a claim upon which relief can be granted. A Rule 12(b)(6) motion is disfavored and rarely granted: "[a] complaint should not be dismissed unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Van Buskirk v. CNN, Inc., 284 F.3d 977, 980 (9th Cir.2002) (citations omitted). In deciding whether to grant a motion to dismiss, the court "accept[s] all factual allegations of the complaint as true and draw[s] all reasonable inferences in favor of the nonmoving party." TwoRivers, 174 F.3d at 991.

"The court need not, however, accept as true allegations that contradict matters properly subject to judicial notice or by exhibit. ...