United States v. Buttorff

• Decision Date: 13 April 1983
• Docket Number: Civ. A. No. CA3-82-2154D.
• Citation: 563 F. Supp. 450
• Parties: UNITED STATES of America, Plaintiff, v. Gordon Stephen BUTTORFF, Defendant.
• Court: U.S. District Court — Northern District of Texas

563 F. Supp. 450

UNITED STATES of America, Plaintiff, v. Gordon Stephen BUTTORFF, Defendant.

Civ. A. No. CA3-82-2154D.

United States District Court, N.D. Texas, Dallas Division.

April 13, 1983.

Randall M. Roden, Tax Div., Dept. of Justice, Washington, D.C., James A. Rolfe, U.S. Atty., Paula Mastropieri-Billingsley, Asst. U.S. Atty., Dallas, Tex., for plaintiff.

Joe Alfred Izen, Jr., Houston, Tex., for defendant.

MEMORANDUM OPINION AND ORDER

ROBERT M. HILL, District Judge.

Came on for consideration before the Court the Government's Motion for Preliminary Injunction against Defendant Gordon Stephen Buttorff (Buttorff). The Government claims that it is entitled to injunctive relief under the recently enacted section 7408 of the Internal Revenue Code of 1954. 26 U.S.C. § 7408. An evidentiary hearing was held before the Court on March 4 and 11, 1983. Based on the evidence presented at that hearing, and the arguments of the parties in light of the applicable law, the Court is of the opinion that the Motion for Preliminary Injunction should be granted.

I. Tax Equity and Fiscal Responsibility Act of 1982

Congress amended the Internal Revenue Code in 1982 to include injunctive relief as an available remedy against the promotion of abusive tax shelters. Section 321 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248, 96 Stat. 324 51 U.S.L.W. 99-100, added section 7408 to the Internal Revenue Code of 1954. The new section 7408 authorizes the United States to institute an action in federal district court at the request of the Secretary of Treasury to "enjoin any person from further engaging in conduct subject to penalty under section 6700 (relating to penalty for promoting abusive tax shelters, etc.)." Id. Section 6700 in turn defines those actions subject to penalty. The Court is permitted to grant injunctive relief upon a finding that: (1) the person has engaged in conduct proscribed in section 6700, and (2) injunctive relief is "appropriate to prevent recurrence of such conduct." § 7408(b).

Section 6700 provides the following description of prohibited acts:

(a) Imposition of Penalty.—Any person who—

(1)(A) organizes (or assists in the organization of)—

(i) a partnership or other entity,

(ii) any investment plan or arrangement, or

(iii) any other plan or arrangement, or

(B) participates in the sale of any interest in any entity or plan or arrangement referred to in subparagraph (a), and

(2) makes or furnishes (in connection with such organization or sale)—

(A) a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter, or

....

shall pay a penalty equal to the greater of $1,000 or 10 percent of the gross income derived by such person from such activity.

Id.

The legislative history of sections 7408 and 6700 evidences a dissatisfaction with previously existing remedies against the marketing and use of tax shelters. As the Senate Finance Committee indicated, the proliferation of abusive tax shelters, in combination with inadequate Internal Revenue Service (IRS) enforcement resources, "undermines public confidence in the fairness of the tax system and in the effectiveness of existing enforcement provisions." S.Rep. No. 97-494, 97th Cong., 2d Sess. at 266, U.S.Code Cong. & Admin.News 1982, pp. 781, 1014. The introduction of injunctive relief as an available remedy, according to the Senate Finance Committee report, was based on the perceived inadequacy of other penalty provisions and on the need to target the promoters, organizers, and salesmen of abusive tax shelters. S.Rep. No. 97-494, supra, at 266.

II. The Constitutional Pure Equity Trust

The Government's action against Buttorff stems from his work as executive director of Constitutional Trust Associates. Buttorff offers advice to his customers in conjunction with the sale of trust packages which he claims will enable taxpayers to avoid probate proceedings, significantly limit income tax liability, and add an element of privacy to their financial dealings. Examples of the trust documents offered through Constitutional Trust Associates are included in the record as Government Exhibits 4 and 6.

A. Commercial Speech

Buttorff contends that § 7408 permits an unconstitutional imposition of a prior restraint on protected speech. Before reaching the issue of whether a prior restraint is permissible in this instance, the Court must first decide whether the speech involved is protected under the first amendment. Buttorff does not dispute the fact that the statute is aimed at commercial speech. While commercial speech has experienced periods of expanded judicial protection under the first amendment, this protection has never extended to shield misleading commercial speech. As the Supreme Court noted in Virginia Pharmacy Bd. v. Virginia Consumer Council, 425 U.S. 748, 771-72, 96 S.Ct. 1817, 1830-31, 48 L.Ed.2d 346 (1976), "Untruthful speech, commercial or otherwise, has never been protected for its own sake .... The First Amendment, as we construe it today does not prohibit the State from insuring that the stream of commercial information flows cleanly as well as freely." Id.

The Supreme Court recently repeated this theme in In re R.M.J., 455 U.S. 191, 102 S.Ct. 929, 71 L.Ed.2d 64 (1982). In R.M.J. the Court noted that advertising may be prohibited entirely when the particular content or method of advertising suggests that it is inherently misleading or when experience has proven that in fact such advertising is subject to abuse. Id. at 203, 102 S.Ct. at 937, 71 L.Ed.2d at 74. In addition to misleading commercial speech, the Court has refused to shield speech which proposes an illegal activity or transaction. See Village of Hoffman Estates v. Flipside, Hoffman Estates Inc., 455 U.S. 1186, 102 S.Ct. 1186, 71 L.Ed.2d 362 (1982) (government may ban entirely any speech promoting illegal drug use). The struggle to balance the competing interests of public information and government regulation is absent when the activity promoted is itself unlawful. Pittsburgh Press Co. v. The Pittsburgh Commissioner on Human Relations, 413 U.S. 376, 389, 93 S.Ct. 2553, 2560, 37 L.Ed.2d 669 (1973) (upheld ordinance forbidding sex-designated help wanted columns).

The extension of first amendment protection to commercial speech recognizes the informational function of advertising and promotion. Central Hudson Gas & Electric Co. v. Public Service Comm'n., 447 U.S. 557, 563, 100 S.Ct. 2343, 2350, 65 L.Ed.2d 341 (1980). "Consequently, there can be no constitutional objection to the suppression of commercial messages that do not accurately inform the public about lawful activity. The government may ban forms of communication more likely to deceive the public than to inform it, ... or commercial speech related to illegal activity...." Id. The Court finds that the alleged activity under attack in this action may properly be subject to control consistent with the first amendment. Having found that the alleged abuses do not fall within the protection of the first amendment, the Court need not wrestle with the appropriateness of a prior restraint except as that issue presents itself on the merits.

B. Violation of Section 6700

The first step in the Court's analysis under section 7408 is to determine whether Buttorff's promotion and sale of the Constitutional Pure Equity Trust is subject to penalty under Section 6700 of the Internal Revenue Code of 1954. The evidence introduced for purposes of determining the Government's entitlement to a preliminary injunction indicates that Buttorff has engaged in such conduct.

The Government presented evidence that Buttorff advises his customers that all expenses of the trust, other than food consumed at home, are deductible. Several witnesses who purchased trusts from Buttorff indicated that they were advised to transfer all of their property into the trust and to then claim trust deductions for expenses relating to house maintenance and repair, insurance, automobile upkeep, and utilities. Buttorff's defense focused on the tortured construction of a hypothetical under which each of these expenses would qualify for a legitimate deduction. This response falls short of removing Buttorff's conduct from the purview of section 6700.¹ Buttorff's customers indicated that they were not told that the trust had to involve the running of a legitimate business. Buttorff's presentation focused on the trust's ownership of property as the quality essential to deductions, rather than the actual location and operation of a business. Both the trust owners' testimony and tape of a speech which Buttorff made (Government's Exhibit 9) reveal this inadequacy. As a general rule, personal expenses are not deductible. Buttorff's representation to the contrary, in the absence of statements of legitimate circumstances and conditions, constitute fraudulent statements as to a material matter under section 6700(a)(2)(A).

In addition to specific misleading statements, Buttorff assured prospective customers that the benefits of the trust could be secured lawfully. Disapproval of the techniques incorporated in the Constitutional Pure Equity Trust has been adamant and consistent. A recent case, Hanson v. Commissioner, 696 F.2d 1232 (9th Cir.1983), affirmed a tax court judgment of unpaid taxes and penalties based on a finding that a similar trust had no economic substance. The Ninth Circuit upheld the Tax Court's assessment of a negligence penalty against the taxpayer, stating "no reasonable person would have trusted this scheme to work," and characterizing the trust as a "`flagrant tax avoidance scheme' repeatedly rejected by the courts." Id. at 1234.

The courts have also found that pure...