United States v. Savoie

• Decision Date: 05 October 1984
• Docket Number: Civ. A. No. 84-1043.
• Citation: 594 F. Supp. 678
• Court: U.S. District Court — Eastern District of Louisiana
• Parties: UNITED STATES of America v. Gerald SAVOIE, Individually and doing business as Louisiana Caucus Club.

594 F. Supp. 678

UNITED STATES of America v. Gerald SAVOIE, Individually and doing business as Louisiana Caucus Club.

Civ. A. No. 84-1043.

United States District Court, D. Louisiana, Lake Charles Division.

October 5, 1984.

Joseph S. Cage, Jr., U.S. Atty., Shreveport, La., Larry Meuwissen, Lynne Battaglia, Tax Div., Dept. of Justice, Washington, D.C., Lawrence W. Moon, Jr., Asst. U.S. Atty., Lafayette, La., for the U.S.

Gerald Savoie, pro se.

Taylor W. O'Hearn, Shreveport, La., for defendant.

VERON, District Judge.

I. INTRODUCTION

This action was brought by the United States to obtain an injunction against Gerald Savoie, individually and doing business as the Louisiana Caucus Club, as well as against his agents, servants and employees. The Government claims that it is entitled to injunctive relief under sections 7402, 7407 and the recently enacted section 7408 of the Internal Revenue Code of 1954. 26 U.S.C. §§ 7402, 7407 & 7408. At the close of trial on September 19, 1984, we granted the Government a preliminary injunction. Based upon our further consideration of the evidence presented, and the arguments of the parties in light of applicable law, we now grant the Government an Order of Permanent Injunction based upon sections 7407 and 7408.¹

Our opinion discusses at some length the specific provisions of these statutes, because they have received little judicial treatment to date.

II. GERALD SAVOIE AS A PROMOTER OF ABUSIVE TAX-AVOIDANCE SCHEMES

A. Code Sec. 7408

Sections 331 and 332 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248, 96 Stat. 324, added sections 6700 and 7408 to the Internal Revenue Code. Section 7408 authorizes the Internal Revenue Service to sue for an injunction on the grounds that the defendant has engaged in conduct subject to penalty under section 6700. 26 U.S.C. § 7408(a). If the district court finds that the defendant has engaged in such conduct and that injunctive relief is appropriate to prevent its recurrence, then the court may enjoin the defendant from engaging in it or in any other activity subject to penalty under section 6700. Sec. 7408(b).

26 U.S.C. § 6700 penalizes the following 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 ...

* * * * * *

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.

Savoie argues that section 6700 applies only to promoters of abusive tax shelters and other abusive investment devices. His argument ignores the plain (and sweeping) language of the statute, which applies to "(ii) any investment plan or arrangement, or (iii) any other plan or arrangement." Sec. 6700(a)(1)(A) (emphasis added). Moreover, the Senate Finance Committee's Report on TEFRA confirms that Congress designed section 6700 as a "penalty provision specifically directed toward promoters of abusive tax shelters and other abusive tax avoidance schemes." S.Rep. No. 97-494, 97 Cong., 2d Sess. 266, reprinted in 1982 U.S.Code Cong. & Ad. News 781, 1014 (emphasis added).

B. Violation of Sec. 6700

We start our analysis under section 7408 by determining whether Savoie is subject to penalty under section 6700. This determination requires us to first ask whether Savoie has "organized" a tax-avoidance plan or arrangement within the meaning of section 6700(a)(1)(A)(iii). Savoie is the co-founder and Director of the Louisiana Caucus Club ("LCC" or "The Club"), the Louisiana affiliate of the American Patriot Network, which not only advocates four plans for evading income tax but also promises to help new members file amended tax returns based upon one or more of them. He authored two LCC tax publications: "Tax Loopholes for Working People" ("Tax Loopholes"), which details three of the plans, and the "Nameless Fifth Amendment Packet" ("Nameless Fifth"), which details the fourth. Thus Savoie has "organized" not one but several tax-avoidance plans, bringing us to our second question: whether Savoie has made false or fraudulent statements regarding (a) "the allowability of any deduction" in his promotion of the Schedule C and W-4 plans, (b) "the excludability of any income" in his promotion of the "Wages Not Income" plan, or (c) "the securing of any other tax benefit" in his promotion of the "Nameless Fifth" plan. We find that Savoie has made fraudulent statements of each type.

In Tax Loopholes, in LCC meetings and in meetings with tax clients, Savoie advises that wages are excludable from gross income because the exchange of services for money is a nonprofit transaction, the value of wages being exactly that of the labor expended for them. In the Nameless Fifth packet and in LCC meetings, Savoie baldly declares that if taxpayers answer certain questions on their returns, the information might be used against them, meaning that they can write the word "object" in response to questions about their last name, address, Social Security number, occupation and income. Not only are these statements false, they are "clearly frivolous." Davis v. United States Government, 742 F.2d 171 at 172, slip op. at 5806 (5th Cir. 1984). It is equally clear that Savoie has made fraudulent statements about the allowability of deductions in promoting the Schedule C and W-4 schemes.

Savoie generally advises LCC members that they can claim numerous exemptions from withholding on Form W-4 for anticipated business losses and estimated medical expenses. He also advises members that they can obtain tax refunds by filing a Schedule C that characterizes their wages as gross receipts from the contracting business and then takes an offsetting deduction for "costs of goods sold." But Savoie fails to warn that in order to qualify for these deductions, taxpayers must actually be in business or anticipate medical expenses. These omissions reduce Savoie's statements to gross frauds.

Our third inquiry under section 6700 is whether Savoie knew or had reason to know that his statements were false or fraudulent, and we find that he knew. Savoie holds himself out to the public as an IRS consultant familiar with the Internal Revenue Code, its accompanying Regulations, and the federal caselaw construing them. He was presumably aware, therefore, that his "Wages Not Taxes" and "Nameless Fifth" plans are stale ones as far as the courts are concerned, long deemed to be frivolous; indeed, the Fifth Circuit in Davis, supra, noted emphatically that these plans "have been rejected by us time and time again." Slip op. at 5806. Savoie was unquestionably aware of the fraudulence of his advice about the allowability of deductions under his Schedule C and W-4 plans, because it consisted exclusively of half-truths.

We have determined that Savoie organized several tax-avoidance plans about which he knowingly made false and fraudulent statements. To establish his violation of section 6700, we need to make only one additional finding: that those statements concerned "material matter." Dissatisfied LCC members and Savoie clients who are presently entangled in IRS audits, or who already have been assessed the "frivolous return" penalty of section 6702 plus interest on overdue taxes, would surely agree that they should have been warned about the frivolity of Savoie's "Wages Not Taxes" and "Nameless Fifth" plans. They would undoubtedly agree that they should have been told the complete story about his Schedule C and W-4 plans. The legality of Savoie's schemes was a matter of importance to LCC members and others receiving Savoie's advice, and thus his false and fraudulent statements must be considered material within the meaning of the statute.

C. Propriety of Injunctive Relief Under Sec. 7408

The decision to issue an injunction is governed by the traditional factors shaping the district court's use of the equitable remedy. Foremost among these factors is the requirement "that courts of equity should not act ... when the moving party has an adequate remedy at law and will not suffer irreparable injury if denied equitable relief." Younger v. Harris, 401 U.S. 37, 43-44, 91 S.Ct. 746, 750-51, 27 L.Ed.2d 669 (1971); O'Hair v. Hill, 641 F.2d 307, 310 (5th Cir.1981). It is also familiar doctrine that in considering injunctive relief, the courts may examine the effect of such relief on the public interest. See Hecht Co. v. Bowles, 321 U.S. 321, 330, 64 S.Ct. 587, 592, 88 L.Ed. 754 (1944) (court reviews statute allowing injunctions to stop violations of Emergency Price Control Act, and concludes that simple grant of injunctive remedy "affords a full opportunity for equity courts to treat enforcement proceedings under this emergency legislation in accordance with their traditional practices, as conditioned by the necessities of the public interest which Congress has sought to protect"); United States v. Ernst & Whinney, 735 F.2d 1296, 1301 (11th Cir.1984) (quoting Bowles).

The Government has no adequate remedy at law for combating Savoie's promotion of abusive tax-avoidance plans; actions against those following his plans would entangle the Government in a maze of lawsuits. And denying the Government injunctive relief would cause it irreparable injury. Defense counsel suggests that the Government will reap financial rewards if Savoie continues promoting his...