Weir v. US
| Decision Date | 29 June 1989 |
| Docket Number | Civ. A. No. 88-AR-5130-NW. |
| Citation | 716 F. Supp. 574 |
| Parties | D.J. WEIR, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Alabama |
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D.J. Weir, Florence, Ala., pro se.
Frank W. Donaldson, U.S. Atty., James D. Ingram, Asst. U.S. Atty., Lance J. Wolf and Cindy Lewis, Trial Attys., Tax Div., U.S. Dept. of Justice, Washington, D.C., for U.S.
This is an action brought pursuant to 26 U.S.C. § 6703(c), by D.J. Weir, pro se. Section 6703(c) is a procedural statute which first became effective on September 3, 1982. It provides that a person against whom a penalty pursuant to 26 U.S.C. § 6700 has been assessed by the Secretary of the Treasury as a result of the person's alleged participation in the formation or selling of an abusive tax shelter may pay to the Internal Revenue Service an amount not less than 15% of the amount of the penalty, file a claim with the IRS for a refund of the amount so paid, and, if the refund is denied, then bring an action in federal court for a determination of the assessed person's liability, if any, under § 6700. Because this opinion largely involves a discussion of the contentions contained in the government's post-trial brief, the Clerk is directed to file the government's brief which otherwise would not be a matter of record. Weir's post-trial brief is a layman's effort which adds little and will not be filed.
Before trial, the government moved for summary judgment under Rule 56, F.R. Civ.P. The Rule 56 motion, denied on May 5, 1989, contended that this court lacked jurisdiction, alleging that Weir failed to fulfill the statutory preconditions for filing this action. The merits of the assessment itself were not addressed in the government's Rule 56 motion and were not discussed by the court in its opinion of May 5. The court need not here repeat its reasons for denying the government's Rule 56 motion except to expand upon one aspect.
The purported penalty that is the subject of this proceeding was assessed pursuant to 26 U.S.C. § 6700(a), which is styled "Promoting abusive tax shelters, etc.", and which, as of the date Weir filed his complaint, provided:
Weir admittedly participated in the sale of 34 separate interests in so-called "lease-holds" in certain so-called "music master recordings" owned and promoted by Mid-South Music Corporation. The IRS insists not only that Mid-South was itself an abusive tax shelter but that these 34 interests, however they are categorized, were accompanied by Weir's giving of false and fraudulent information to his various purchasers during his sales pitches. The personal income derived by Weir in the years 1982 and 1983 as commissions from these 34 sales is conceded by both parties to be $26,914.83.
When this court wrote its opinion of May 5, it was puzzled by the fact that the purported assessment filed by the IRS on October 19, 1988, was exactly $26,914.83, the entire income derived by Weir from his allegedly abusive tax shelter sales, rather than $1,000.00 or $5,382.96 (20% of $26,914.83). The government's earlier explanation, which is the explanation it still gives, is unsatisfactory. At trial, Paul Williams, an IRS agent, testified that he chose not to employ either of two statutorily mandated alternative methods for computing the penalty. Instead, he reasoned (if what he did can be called "reasoning") that while the penalty could be either $1,000.00 per sale ($34,000.00 as a result of 34 sales), or 20% of the illegally derived gross income ($5,382.96 in this case), he felt that $34,000.00 would be an unreasonably high penalty inasmuch as it would be more than the entire income which Weir derived from his alleged sales, so the agent arbitrarily reduced the assessment to an innovative third alternative, namely, $26,914.83, Weir's entire illegal income. This reiteration at trial of the IRS's previously confessed aberrational computation only serves to confirm that this court was correct in allowing Weir access to this court by virtue of his having paid $807.44 (15% of 20% of his total income derived from the activity). This court, therefore, now reaffirms its finding that Weir did meet the statutory preconditions for filing suit in federal court. The IRS could not close this court's doors on Weir by employing an assessment formula not authorized by Congress.
The burden of proof was on the government to prove the essential elements which would justify its assessment. 26 U.S.C. § 6703(a). While an argument might be made for this burden to be "beyond a reasonable doubt" because of the very sizeable penalty or punishment which might result, this court is convinced that Congress intended the lesser "by a preponderance of the evidence" burden of proof recognized in Franklet v. United States, 578 F.Supp. 1552 (N.D.Cal.1984), aff'd, 761 F.2d 529 (9th Cir.1985).
The government did not plead "collateral estoppel" as a means of meeting its burden of proof of one of the essential elements of its case. No theory of "collateral estoppel" or of "issue preclusion" was mentioned in the government's answer or in the pre-trial order. Yet, in its post-trial brief, as it had done at trial, the government relied wholly upon "collateral estoppel" to prove the requisite statutory intent by Weir to misstate to his purchasers the tax effect of the tax shelter.
The government did not attempt to prove its penalty based on that alternative violation described in § 6700 involving a "gross valuation overstatement." This separate possible violation is contained in § 6700(a)(2)(B). No expert opinion was offered by the government as to the actual fair market values of the interests which Weir sold. Although the court would guess that the master recordings were worth much less than represented, for aught appearing in this evidence they were worth exactly what Mid-South and Weir said they were worth. Instead, the government relied entirely on the alternative set forth in § 6700(a)(2)(A), which requires, inter alia, a specific fraudulent intent as an essential element for the assessment of the penalty.
The court will examine the evidence bearing on the several elements relied on by the IRS, each element being essential for establishing liability under § 6700(a)(2)(A).
The first element necessary in order for liability to attach under that part of § 6700 relied upon here by the IRS is that the person assessed either assisted in organizing the alleged abusive tax shelter, or that he participated in the sale of an interest in the tax shelter. Weir took no part in organizing Mid-South. However, he did take part in organizing informal partnerships or joint ventures between or among his clients who, through these arrangements, indirectly purchased interests (called "securities" by the State of Alabama) in the Mid-South scheme. This distinction becomes academic because Weir admits having actually sold 34 interests of some kind, direct or indirect, in the Mid-South "leaseholds." Thus, the government has clearly met its burden of proving the first essential element.
The second element essential to a successful assessment against Weir is that Weir made some representation to a purchaser that the tax shelter did, in fact and law, provide the desired tax consequences. Weir admits that he stated to his customers his belief in the efficacy of the sheltering scheme outlined in the promotional material provided to him by Mid-South and by him to his customers. One of Weir's customers, Alene Ray, confirmed that Weir's sale to her was accompanied by what turned out to be erroneous tax advice. Thus, the United States successfully met its burden of proving this element.
The third element, just as essential as the first two, is that Weir knew or had reason to know that some statement or statements he made relative to the tax consequences of the purchase were "false or fraudulent as to any material matter." The government woefully failed in its effort to prove this element. There are at least three reasons how and why the government fell short.
A. In undertaking to prove that Weir knowingly defrauded his purchasers, the government, at trial for the first time, astonishingly relied exclusively upon a proposed application of the doctrine of affirmative collateral estoppel. The government neither pled nor gave any advance warning of its dependency on collateral estoppel. Nothing akin to issue preclusion was hinted at in the pre-trial order as the government's means, much less as its only means, of proving this essential element. Rule 8(c), F.R.Civ.P., uses the mandatory word "shall." This rule requires that any party who plans to rely on issue preclusion must invoke that principle formally and must allege minimum facts to form a basis for it. Rule 8(c) grants no exception for the IRS or for any other branch of government. It...
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...scienter because defendant was a "national recognized tax expert" with fifteen years of experience). Compare Weir v. United States, 716 F.Supp. 574, 580 (N.D.Ala.1989) (finding taxpayer did not have appropriate scienter when he relied upon legal opinions by experts in the field and didn't h......
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