U.S. v. Schiff, 03-16319.

• Decision Date: 09 August 2004
• Docket Number: No. 03-16319.,03-16319.
• Citation: 379 F.3d 621
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Irwin A. SCHIFF; Cynthia Neun; Lawrence N. Cohen, aka Larry D.C. No. Cohen, individually, and all doing business as Freedom Books, www.livetaxfree.com, www.paynoincometax.com and www.ischiff.com, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

379 F.3d 621

UNITED STATES of America, Plaintiff-Appellee, v. Irwin A. SCHIFF; Cynthia Neun; Lawrence N. Cohen, aka Larry D.C. No. Cohen, individually, and all doing business as Freedom Books, www.livetaxfree.com, www.paynoincometax.com and www.ischiff.com, Defendants-Appellants.

No. 03-16319.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 10, 2004.

Filed August 9, 2004.

COPYRIGHT MATERIAL OMITTED

Michael D. Stein, Las Vegas, NV, for the appellants.

Judith A. Hagley, U.S. Department of Justice, Washington, D.C., for the appellee.

Allen Lichtenstein, ACLU of Nevada, for the amici.

Appeal from the United States District Court for the District of Nevada; Lloyd D. George, District Judge, Presiding. D.C. No. CV-03-00281-LDG.

Before: HUG, ALARCON, and W. FLETCHER, Circuit Judges.

HUG, Circuit Judge:

Appellants Irwin Schiff, Lawrence Cohen, and Cynthia Nuen contest the constitutionality of a preliminary injunction entered by the District of Nevada enjoining them from promoting their "zero-income" tax theories. Specifically they argue (1) that the injunction is overbroad as it relates to a book they sell, The Federal Mafia, (2) that the requirement that they give the government their customer list violates both their own and their customers' First Amendment and Fourteenth Amendment associational rights, and (3) that the order that they place a copy of the injunction on their websites constitutes illegal compelled speech in violation of the First Amendment. We have jurisdiction pursuant to 28 U.S.C. § 1292(a). Because we agree that the government has shown a likelihood of success on the merits and that the provisions of the injunction do not violate the appellant's rights, we affirm.

I. Background

Irwin Schiff has a long history of opposition to the federal income tax laws.¹ For over thirty years he has maintained that the federal income tax is voluntary, although he has never been successful with that theory in court. With co-defendant Cynthia Nuen, he now operates Freedom Books in Las Vegas, Nevada. Co-defendant Lawrence Cohen is an employee at Freedom Books. Both through the bookstore and through three internet websites,² the defendants sell various tax packages that purport to teach the buyer how to "legally" stop paying federal income taxes. The book at issue in this injunction, The Federal Mafia: How the Government Illegally Imposes and Unlawfully Collects Income Taxes, is sold individually and as part of tax-avoidance packages.

The United States brought this civil action against the defendants in March 2003 pursuant to 26 U.S.C. § 7408, which authorizes a district court to enjoin any person from conducting activities that are subject to penalty under 26 U.S.C. §§ 6700 and 6701. These sections penalize individuals who organize, market, or promote tax evasion schemes. The district court granted a temporary restraining order, prohibiting the defendants from continuing with their business, and then, after a hearing, issued a preliminary injunction against the defendants on June 16, 2003. The defendants timely appealed the order. On September 3, 2003, a motions panel from this court stayed the order pending the outcome of this appeal.

The preliminary injunction provides in relevant part that the defendants may not engage in any of the following activities:

(1) Organizing, promoting, marketing or selling, or assisting in organizing, promoting, marketing or selling, any plan or arrangement which advises or encourages taxpayers to attempt to violate internal revenue laws or unlawfully evade the assessment or collection of their federal tax liabilities, including those that promote, sell, or advocate the use of the "zero income" tax return, and the use of false with-holding forms;

(2) Engaging in conduct subject to penalty under 26 U.S.C. § 6700, including organizing or selling a plan or arrangement and making or furnishing a statement regarding the excludability of income that they know or have reason to know is false or fraudulent as to any material matter; Engaging in conduct subject to penalty under 26 U.S.C. § 6700, including organizing or selling a plan or arrangement and making or furnishing a statement regarding the excludability of income that they know or have reason to know is false or fraudulent as to any material matter;

(4) Advertising, marketing or promoting any false, misleading, or deceptive tax position in any media for the purpose of advising or encouraging taxpayers to unlawfully evade the assessment or payment of federal income taxes, including the positions that (1) persons can legally stop paying taxes or become tax free by using the plan or arrangement; (2) federal income tax is voluntary; (3) there is no law requiring anyone to pay income tax; (4) there is no income tax, only a profits tax; (5) it is legal to report zero income regardless of what you may have earned, or to use false withholding forms; (6) Schiff's personal services as witness or brief writer will be materially helpful in defending criminal prosecution; or any other false, misleading, or deceptive tax position;

(5) Assisting others to violate the tax laws, including the evasion of assessment or payment of taxes;

(6) Inciting others to violate the tax laws, including evasion of assessment and payment of taxes;

(7) Instructing or assisting others to hinder or disrupt the enforcement of internal revenue laws by filing frivolous lawsuits, taking frivolous positions in an effort to impede IRS audits and Collection Due Process Hearings, or engaging in other conduct intended to interfere with the administration and enforcement of the internal revenue laws;

(8) Preparing or assisting in the preparation of any federal income tax return for any other person;

(9) Engaging in conduct subject to penalty under 26 U.S.C. § 6694 (preparing any part of a return or claim for refund that includes an unrealistic position);

(10) Engaging in any conduct subject to penalty under 26 U.S.C. § 6695 (failing to sign and furnish the correct identifying number on tax returns they prepare); or

(11) Engaging in any other activity subject to injunction or penalty under 26 U.S.C. §§ 7407, 6694, or 6695, including fraudulent or deceptive conduct that substantially interferes with the proper administration of the internal revenue laws.

The preliminary injunction also requires the defendants to submit to the government a list of their customers from January 1, 1999, through the present, including names, addresses, phone numbers, email addresses, and social security or employee identification numbers. Finally, the defendants are required to post a copy of the preliminary injunction order on the "Home" pages of the websites through which they conducted their business.

On appeal the defendants argue that the preliminary injunction violates their First Amendment rights because (1) it is overbroad as it relates to The Federal Mafia, (2) the forced disclosure of the customer list violates their own and their customers' associational rights, and (3) the placement of the order on their websites constitutes unconstitutional compelled speech.

II. Discussion

A. Standard of Review

This court reviews a district court's grant of a preliminary injunction for abuse of discretion. United States v. Estate Preservation Servs., 202 F.3d 1093, 1097 (9th Cir.2000). The scope of a preliminary injunction is also reviewed for abuse of discretion. See Idaho Watersheds Project v. Hahn, 307 F.3d 815, 823 (9th Cir.2002). A trial court abuses its discretion if it bases its decision on "an erroneous legal standard or on clearly erroneous factual findings." Estate Preservation Services, 202 F.3d at 1097.

B. Granting the Preliminary Injunction

A preliminary injunction may be granted when the plaintiffs demonstrate "either: (1) a likelihood of success on the merits and the possibility of irreparable injury; or (2) that serious questions going to the merits were raised and the balance of hardships tips sharply in [their] favor." Southwest Voter Registration Education Project v. Shelley, 344 F.3d 914, 917-18 (9th Cir.2003) (en banc) (quoting Clear Channel Outdoor, Inc. v. City of Los Angeles, 340 F.3d 810, 813 (9th Cir.2003)).

Courts use a specialized standard when reviewing preliminary injunctions issued pursuant to 26 U.S.C. § 7408. See Estate Preservation Servs., 202 F.3d at 1105; United States v. Kaun, 827 F.2d 1144, 1148 (7th Cir.1987); United States v. Buttorff, 761 F.2d 1056, 1062 (5th Cir.1985); SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir.1982). The district court must evaluate the likelihood of future § 6700 violations, and thereby determine whether an injunction is needed. Estate Preservation Servs., 202 F.3d at 1105. Factors that the court may consider when making this determination include the following: "(1) the gravity of the harm caused by the offense; (2) the extent of the defendant's participation, (3) the defendant's degree of scienter; (4) the isolated or recurrent nature of the infraction; (5) the defendant's recognition (or non-recognition) of his own culpability; and (6) the likelihood that the defendant's occupation would place him in a position where future violations could be anticipated." Id.

Given Schiff's extensive history of tax avoidance and the fact that the defendants operate a bookstore devoted to introducing others to his tax avoidance schemes, there is a strong likelihood that the defendants would violate § 6700 in the future. Therefore, the district court did not abuse its discretion when it granted the preliminary injunction.

C. The Scope of the Preliminary Injunction

The defendants argue that the injunction, even if appropriately granted, should be struck down because it violates their constitutional rights. They argue that the scope of the preliminary injunction is unconstitutionally broad as it relates to The Federal Mafia. They also argue that the injunction unconstitutionally compels them to...