Hopkins v. United States, 1985 WL 6373 (E.D.Va.))

United States District Court;  E.D. Virginia,

Newport News Division.

George T. Hopkins, Denise E. Hopkins, Plaintiffs

v.

United States of America, Defendant.

Civil Action No. 84-167-NN

7/22/85

CLARKE, District Judge.

Order

This matter is before the Court on cross-motions of the parties for summary judgment.   The Court has reviewed the briefs of the parties and the motions are now ripe for disposition.

In this action, the plaintiffs seek the abatement of a $500.00 civil penalty assessed against each plaintiff for filing a frivolous income tax return, pursuant to 26 U. S. C. §  6702.   The plaintiffs also seek refunds of the 15% prepayment ($75.00) of the penalty they made pursuant to 26 U. S. C. § 6703(c)(1), plus interest, attorney's fees and costs.

The plaintiffs were assessed the penalty on the basis of their amended income tax returns for the years 1980 and 1982.   On those returns, the plaintiffs reported as income from wages the amount listed on the W-2 Wage and Tax Statements furnished by their employers.   The plaintiffs proceeded to report a large portion of their salaries as a "cost of labor" on Schedule C-1, and then deducted that amount from their gross income as a business expense.   The result was that each plaintiff reported zero taxable income for 1980 and 1982 and represented to the Internal Revenue Service (IRS) that they owed no income tax for either year.

The IRS assessed a civil penalty of $500.00 against each of the plaintiffs, pursuant to 26 U. S. C. §  6702, for filing a frivolous income tax return. The plaintiffs paid $75.00 of the penalty for each of the years in question. The plaintiffs have filed this action in federal court for refund of the $150.00 on the grounds that the returns filed are not frivolous, that the act upon which the fines are based is unconstitutional, and that wages are not taxable income.

The United States has moved for summary judgment on the ground that there is no genuine issue of material fact in this litigation.   The plaintiffs have filed a response to the government's motion, as well as their own motion for summary judgment.

Section 6702 of the Internal Revenue Code (26 U. S. C. §  6702) provides in pertinent part that a penalty of $500.00 shall be assessed if (1) an individual files a return which contains information that on its face indicates that the self-assessment is substantially incorrect, and (2) that conduct is due to a frivolous position or a desire to delay or impede the administration of the income tax laws.   This section was added to the Code as a part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), and became effective on September 3, 1982.   Pub. L. No. 97-248, Title III, §  326(a), 96 Stat. 617 (1982).

The legislative history of §  6702 indicates that Congress was concerned about the large increase in the number of illegal protest returns being filed. See S. Rep. No. 494, 97th Cong., 2d Sess. 277, reprinted in 1982 U. S. Code Cong. & Ad. News 781, 1023-24.   In enacting this section, Congress sought to impose an immediately assessable penalty, in order to deter the filing of protest returns.  Id.  Under the previous laws, taxpayers who filed a protest return were subject to a penalty only if they also underpaid their tax.  Id.

Constitutional Arguments

The plaintiffs challenge the constitutionality of TEFRA, of which §  6702 was a part, alleging that it was enacted in violation of the origination clause, Article I, §  7, cl. 1 of the Constitution.   That clause states:  "All bills for raising revenue shall originate in the House of Representatives;  but the Senate may propose or concur with amendments as on other bills."

This allegation is meritless.   This court and many other courts have rejected similar challenges to the constitutionality of TEFRA.   See e.g., Scull v. United States [84-2 USTC P 9529], 585 F. Supp. 956 (E. D. Va. 1984); Stamp v. Commissioner [84-1 USTC P 9259], No. 83-C-7437 (N. D. Ill. Jan. 30, 1984);  Kloes v. United States [84-1 USTC P 9251], No. 83-C-814-S (W. D. Wis. Jan. 17, 1984);  Milazzo v. United States [84-1 USTC P 9167], Civ. No. 83-1901-T (S. D. Cal. Jan. 16, 1984);  Bearden v. Commissioner [84-1 USTC P 9264], 575 F. Supp. 1459, 1460-61 (D. Utah 1983);  Frent v. United States [83-2 USTC P 9561], 571 F. Supp. 739, 742 (E. D. Mich. 1983).   This Court addressed the identical argument in Scull, supra, and concluded that the argument is flawed because TEFRA did in fact originate in the House of Representatives.

The plaintiffs additionally claim that they were denied due process of law, evidently because they were not given a hearing on the validity of their Fifth Amendment claims before they were assessed the $500.00 penalty.   The Constitution, however, does not require a hearing before the assessment and collection of the civil penalty imposed by Section 6702.   The legislative history of the section clearly demonstrates a congressional intent to have the penalty immediately assessed.   So long as the taxpayer has the right to sue for a refund after the assessment, there is no violation of due process.   See Bob Jones University v. Simon [74-1 USTC P 9438], 416 U. S. 725, 746 (1974);  Franklet v. United States [84-1 USTC P 9151], 578 F. Supp. 1552 (N. D. Cal. 1984);  Kidd v. Bradley, 578 F. Supp. 275 (N. D. W. Va. 1984); Milazzo v. United States [84-1 USTC P 9167], 578 F. Supp. 248 (S. D. Cal. 1984);  Stamp v. Commissioner of Internal Revenue [84-1 USTC P 9259], 579 F. Supp. 168 (N. D. Ill. 1984);  Bearden v. Commissioner of Internal Revenue [84-1 USTC P 9264], 575 F. Supp. 1459 (Utah 1983); Googe v. Secretary of the Treasury [84-1 USTC P 9172], 577 F. Supp. 758 (E. D. Tenn. 1983).

The plaintiffs assert that the term "frivolous" is not defined in the Internal Revenue Code.   The Court interprets this claim as an allegation that § 6702 violates the due process clause of the fifth and fourteenth amendments because it is void for vagueness.

All that is required by due process is that the prohibited conduct be described so that "the ordinary person exercising ordinary common sense can sufficiently understand and comply . . . ."  Civil Service Commission v. National Association of Letter Carriers, 413 U. S. 548, 579 (1973).

The language of §  6702 comports with this standard.   The term "frivolous" is one which the ordinary person understands to mean "having no basis in law or fact."   Webster's Third New International Dictionary 913 (1971). Furthermore, Congress defined the term "frivolous" as meaning "clearly unallowable."   S. Rep. No. 494, 97th Cong., 2d Sess. 278, reprinted in 1982 U. S. Code Cong. & Ad. News 781, 1024.   The term "frivolous" in §  6702 is not unconstitutionally vague.   See Kloes v. United States [84-1 USTC P 9251], No. 83-C-814-S (W. D. Wis. Jan. 17, 1984);  Franklet v. United States [84-1 USTC P 9151], No. C-83-3938-WWS (N. D. Cal. Jan. 9, 1984).

The plaintiffs argue that §  6702 infringes upon their first amendment right to petition the government for redress of grievances.   They allege that the assessment of the penalty amounts to a fine upon a taxpayer who is attempting to petition the government.

The assessment of a penalty for the violation of the internal revenue laws does not infringe upon the plaintiffs' first amendment rights.  See Milazzo v. United States [84-1 USTC P 9167], Civ. No. 83-1901-T (S. D. Cal., Jan. 16, 1984);  Bearden v. Commissioner [84-1 USTC P 9264], 575 F. Supp. 1459, 1461 (D. Utah 1983).   It does not prevent taxpayers from seeking changes in the internal revenue laws through appropriate channels.

The other Constitutional arguments alluded to by the plaintiffs in their complaint have all been squarely addressed and rejected by this Court in Scull v. United States [84-2 USTC P 9529], 585 F. Supp. 956.   The plaintiffs have failed to raise a single argument that differs in any way from arguments unsuccessfully raised by other tax protestors.

Application of §  6702 Penalty

In this case the plaintiffs have attempted to utilize a deduction that has been invoked by numerous tax protestors seeking to avoid payment of any federal income tax.   They have requested an unfounded business expense of their entire salary or enough of it to render their tax "0."   This deduction has never, to the knowledge of this Court, been upheld by any tribunal;  and the assessment of the Section 6702 penalty has been upheld by this Court and others. Cannon v. United States [83-1 USTC P 9699], 52 A. F. T. R. 2d 83-6348 (E. D. Mich. 1982);  Keetar v. United States, Civil Action No. 83-231-NN, Slip op. (E. D. Va., May 29, 1984);  Scull v. United States [84-2 USTC P 9529], 585 F. Supp. 956 (E. D. Va. 1984);  Hosey v. United States, Civil Action No. 84-111-NN, Slip op. (Feb. 8, 1985, E. D. Va.);  Gill v. Secretary [85-1 USTC P 9188], Civil Action No. 84-0543-R, Slip op. (Dec. 18, 1984, E. D. Va.).

The §  6702 penalty may be assessed only if three requirements are met.  First, the taxpayer must file what purports to be a tax return.  26 U. S. C. §  6702(a)(1).   The plaintiffs do not claim that this requirement has not been satisfied.

The second requirement is that the return must either fail to contain information which is sufficient to ascertain whether the self-assessment is correct, §  6702(a)(1)(A), or must contain information which on its face indicates that the self-assessment is substantially incorrect.  § 6702(a)(1)(B).   The Government asserts that the plaintiffs' returns meet the requirements of §  6702(a)(1)(B), in that they contain information which on its face indicates that the self-assessments are substantially incorrect.  The plaintiffs reported zero taxable income for 1980 and 1982, despite the fact that their W-2 forms indicated income from wages earned during those years.   A facial examination of the plaintiffs' returns indicates that their self- assessments are substantially incorrect.   The Court concludes that § 6702(a)(1)(B) has been satisfied.

The third and final requirement for the assessment of the §  6702 penalty is that the position asserted by the taxpayer is frivolous, § 6702(a)(2)(A), or demonstrates a desire to impede or delay the administration of the income tax laws.  §  6702(a)(2)(B).   The Government alleges that the plaintiffs' returns satisfy the requirements of both subsections, although only one subsection must be satisfied in order to assess the penalty.

Taking a "clearly unallowable deduction" was specifically defined by Congress as frivolous within the meaning of Section 6702 (S. Rep. 970-494, Vol. 1, 97th Cong., 2d Sess. 278).   Here the plaintiffs' claim that wages are not taxable as income within the "original intent" of the Sixteenth Amendment is plainly frivolous and has been repeatedly ruled so by courts having the occasion to address the issue.   See e.g., United States v. Moore [79-2 USTC P 9676], 692 F. 2d 95, 97 (10th Cir. 1979); Funk v. Commissioner [82-2 USTC P 9555], 687 F. 2d 264, 265 (8th Cir. 1982) (per curiam);  Lonsdale v. Commissioner [81-2 USTC P 9772], 661 F. 2d 71, 72 (5th Cir. 1981); United States v. Buras [81-1 USTC P 9126], 633 F. 2d 1356, 1361 (9th Cir. 1980);  Googe v. Secretary of the Treasury [84-1 USTC P 9172], No. Nov. 3- 83-608 (E. D. Tenn., Dec. 30, 1983);  United States v. Shugarman [84-2 USTC P 9871], 596 F. Supp. 186 (E. D. Va. 1984).

Accordingly, the Court FINDS that the assessment by the IRS of the penalty for a frivolous filing was justified in this instance.

The bulk of the remainder of the plaintiffs' response to the motion for summary judgment is their assertion that they are entitled to a jury trial. Although plaintiffs are normally entitled to a jury trial in tax return litigation, the function of the jury is to determine disputed issues of fact. The plaintiffs are entitled to a jury trial only as long as it appears from the pleadings that there is some issue of fact that may be tried by the jury.  Laskaris v. Thornburgh, 733 F. 2d 260 (3d Cir. 1984).   In this case, there is no disputed issue that may be determined by a jury;  the Court rules as a matter of law that the plaintiffs' amended returns were frivolous.

The Section 6702 penalty was appropriately applied.   The defendant's motion for summary judgment is GRANTED.   This action for return of payment of the penalty is hereby DISMISSED and the plaintiffs are liable for the entire penalty.

Sanctions

The defendant has moved for the imposition of sanctions against the plaintiffs in the form of costs and attorneys fees for defending this meritless action. One of the arguments in support of sanctions is that the plaintiffs in this action filed an identical complaint to the complaint filed in Ronald G. Gill v. United States, et al. [85-1 USTC P 9188], C/A 84-0543, Slip op. (Dec. 18, 1984, E. D. Va.).   The District Court in Gill summarily dismissed the complaint upon the motion of the United States.   The defendant argues that plaintiffs' reliance on the form petition rejected in Gill demonstrates that the instant action was commenced without a good faith argument for the extension, modification, or reversal of existing law, and that such a complaint violates Rule 11 of the Federal Rules of Civil Procedure.   The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper;  that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

The plaintiffs responded to the motion of the defendant by pointing out that the Gill decision came down on December 18, 1984, the same date that they filed their complaint in this court.   They argue that their complaint was filed in good faith.

The Court agrees with the United States that these plaintiffs were not acting in good faith in pursuing these obviously meritless contentions.   Even if their complaint was filed before the decision in Gill, they certainly must have learned of the decision in that case long before they filed their opposition to this motion.   Furthermore, an even cursory inquiry into the legislative history of Section 6702 or the case law surrounding each of their arguments would have revealed that their arguments have already been addressed and rejected by this Court in Scull, supra, and by the legislature and many other courts.

The defendant's motion for sanctions is GRANTED.   The plaintiffs are ORDERED to pay costs and reasonable attorneys fees incurred by the United States in defending this action.   The defendants are ORDERED to prepare affidavits in support of their request for attorneys fees within ten days of the date of this Order.   The plaintiffs will have ten days after the filing of the defendant's affidavits to respond to the affidavits.   It is further ORDERED that this action be, and it hereby is, DISMISSED.

The Clerk shall mail a copy of this Order to counsel for the plaintiffs and to the United States Attorney at Norfolk.