Hendrickson Appeal -- USA Response Brief Now Online

[Joey Smith]

http://www.quatloos.com/tax_protestor-c ... sponse.pdf

[Joey Smith]

No. 07-1510 UNITED STATES OF AMERICA, Plaintiff-Appellee

v

.

PETER E. HENDRICKSON; DOREEN M. HENDRICKSON, Defendants-Appellants

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN BRIEF FOR THE APPELLEE JURISDICTIONAL STATEMENT

The United States commenced this action on April 12, 2006, by filing a complaint in the District Court seeking recovery of erroneous refunds of federal taxes made to Peter and Doreen Hendrickson (taxpayers),1 and also seeking an injunction requiring them to prepare

1 Collective reference herein to “taxpayers” is to both Peter and Doreen Hendrickson. Singular reference to “Hendrickson” is to Peter Hendrickson, whereas Doreen Hendrickson is referred to by both her first and last name. “R.” references are to the documents in the record on appeal, as numbered by the Clerk of the District Court.

amended returns for the years in issue and enjoining them from filing future returns that falsely report they were paid zero taxable compensation contrary to third-party information provided on IRS Forms W-2 and 1099. (R. 1.) The District Court had jurisdiction pursuant to Internal Revenue Code (“I.R.C.” or “the Code”) (26 U.S.C.) §§ 7402(a) and 7405(b), and 28 U.S.C. §§ 1340 and 1345.

The District Court entered judgment granting summary judgment to the Government on February 26, 2007. (R. 22.) On March 2, 2007, the Government filed a timely motion to amend the judgment under Fed. R. Civ. P. 52(b) (R. 23), which operated to postpone the running of the time for appeal until the District Court disposed of that motion. Fed. R. App. P. 4(a)(4)(A)(ii). Taxpayers filed motions on March 13, 2007, seeking relief from the judgment and reconsideration of the court’s decision. (R. 26, 27.) On April 17, 2007, taxpayers filed a notice of appeal from the judgment entered on February 26, 2007. (R. 31.) Although filed prior to the court’s disposition of the Government’s motion to amend, the notice of appeal operated under Fed. R. App. P. 4(a)(4)(B)(i) as an effective, timely appeal of the court’s later entry of final judgment following disposition of that motion.

- 3 On May 2, 2007, the District Court denied taxpayers’ post-judgment motions (R. 33, Order), and it granted the Government’s motion to amend by entry of an Amended Judgment and Order of Permanent Injunction (R. 34). On May 11, 2007, taxpayers filed a timely amended notice of appeal. See 28 U.S.C. § 2107; Fed. R. App. P. 4(a)(1)(B), 4(a)(4)(A)(ii), & 4(a)(4)(B)(ii). (R. 35.) This Court has jurisdiction under 28 U.S.C. § 1291.

STATEMENT OF THE ISSUES

1. Whether the District Court correctly granted summary judgment to the Government, holding that the Government was entitled under I.R.C. § 7405(b) to recover refunds of federal taxes that the IRS had erroneously paid to taxpayers based on incorrect wage and salary information reported by them on their 2002 and 2003 income tax returns.

2. Whether the District Court correctly issued an injunction requiring taxpayers to file amended 2002 and 2003 income tax returns and enjoining them from filing future returns that falsely report they were paid zero taxable compensation contrary to third-party information provided on IRS Forms W-2 and 1099.

STATEMENT OF THE CASE

The Government brought this suit seeking to recover federal taxes erroneously refunded to taxpayers in the total amount of $20,381 for taxable years 2002 and 2003, together with statutory interest thereon, and an injunction requiring taxpayers to file amended income tax returns for 2002 and 2003 and enjoining them from filing future returns that falsely report they were paid zero compensation contrary to third-party information provided on IRS Forms W-2 and 1099.

(R. 1.)

The District Court granted the Government’s motion for summary judgment (R. 9 MSJ; R. 21, 22 Order & Jgmt.), and it thereafter also granted the Government’s motion to amend the judgment to set forth the amounts of the erroneous refunds due from taxpayers and the precise terms of the injunctive relief granted (R. 23 Mot. to Amend; R. 34 Amended Jgmt.). It denied taxpayers’ motions seeking relief from the judgment. (R. 33 Order.) Taxpayers now appeal. (R. 31, 35.)

STATEMENT OF THE FACTS

A. Taxpayers’ compensation received in 2002 and 2003, the filing of their federal income tax returns, and the IRS’s refunding of all of their withholding taxes

During 2002 and 2003, Hendrickson was employed by Personnel Management, Inc. (PM), for which employment he was paid a salary.

(R.9 MSJ, Halbrook Decl. at 1.) PM issued Forms W-2 Wage and Tax Statements reporting to Hendrickson and to the IRS the following salary and withholding amounts (R.9 MSJ, Halbrook Decl. & Att.):
Year Salary Income Tax Withheld Social Security Tax Withheld Medicare Tax Withheld
2002 $58,965 $5,642.20 $3,655.83 $854.93
2003 60,608 5,620.02 3,757.60 878.72


Doreen Hendrickson was paid non-employee compensation ($3,773 for 2002 and $3,188 for 2003) by Una Dworkin, who reported the compensation on Forms 1099. (R.9 MSJ, Grant Decl. at 2–3.)

On their Form 1040 federal income tax returns for 2002 and 2003, taxpayers falsely reported that they were paid zero compensation, and they sought refunds of $10,152.96 for 2002 and $10,228 for 2003. (R.9 MSJ, Henline Decl., Att. 1, 2.) The amounts of the requested refunds

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are equal to all of the taxes (income, social security, and medicare ) withheld from Hendrickson’s salary during those years, less a small amount of tax ($28.34) that taxpayers admitted owing on an IRA distribution ($286.14) received by them in 2003. Taxpayers did not attach any third-party Forms W-2 or 1099 to their returns. Instead, they prepared their own Forms 4852 (Substitute for Form W-2) and 1099-MISC purporting to correct the third-party forms by reporting zero compensation received from employment, but reporting all of the tax withholdings reported by the third-party payers on Forms W-2 and 1099. (Id., Att. 1, 2.) On his Forms 4852, Hendrickson stated in Box 9 (“Explain your efforts to obtain Form W-2 . . . .”) (id., Att. 1 at 4, Att. 2 at 4):

Request, but the company refuses to issue forms correctly

listing payments of “wages as defined in [I.R.C. §§] 3401(a)

and 3121(a)” for fear of IRS retaliation. The amounts listed

as withheld on the W-2 it submitted are correct, however.

2 The social security (I.R.C. § 3101(a)) and medicare (I.R.C. § 3101(b)) portions of the withheld taxes represent the employee share of employment taxes deducted from employee wages pursuant to the Federal Insurance Contributions Act (FICA), codified at I.R.C. §§ 31013128. Hereafter, these taxes are referred to, collectively, as FICA taxes.

This corrected Form 1099-MISC is submitted to rebut a

document known to have been submitted by the party

identified above as “PAYER” which erroneously alleges a

payment to the party identified above as the “RECIPIENT”

of “gains, profit or income” made in the course of a “trade or

business.”

As a result of taxpayers’ false statements on Forms 1040 and Forms 4852, the IRS was induced to issue erroneous refunds to them of all of the withheld income and FICA taxes for 2002 and 2003. (R.9 MSJ, Grant Decl. at 2-4.) As of April 15, 2003, the IRS credited the entire $10,152.96 of 2002 withholding taxes to taxpayers’ other outstanding tax liabilities by applying $1,699.86 to an unpaid tax liability owed by Doreen Hendrickson for 2000, and $1,931.99 and $6,521.11 to unpaid tax liabilities owed by Hendrickson for 2000 and 2001, respectively. (R. 9 MSJ, Henline Decl. at 9 and Att. 3, 5.) The IRS also treated as a tax overpayment the $10,228 of 2003 withholding taxes reported as refundable by taxpayers on their return. It credited a portion of that putative overpayment to taxpayers’ other outstanding tax liabilities as of April 15, 2004, and, on September 24, 2004, it issued a refund check to taxpayers for the remainder. Thus, it applied $5,551.44 to Hendrickson’s unpaid 2000 federal income tax liability, applied $515.66, $553.17, and $529.18 to unpaid frivolous return penalties assessed against taxpayers under I.R.C. § 6702, and issued

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taxpayers a Treasury check in the amount of $3,172.30. (Id., Henline Decl. at 16, 17, 18 and Att. 4, 6, 7, 8, 9.)

B. Hendrickson’s book, Cracking the Code

The scheme used by taxpayers for reporting their 2002 and 2003 income taxes is touted in Hendrickson’s book entitled Cracking the Code: The Fascinating Truth About Taxation in America, which he

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published in July 2003. (R. 9 MSJ, Henline Decl. at 24.) On page 76 of that book, Hendrickson states: “So, actually, withholding only applies to the pay of federal government workers, exactly as it always has (plus ‘State’ government workers, since 1939, and those of the

3 This refund check included a $32.91 credit resulting from over-application of amounts to pay off the frivolous return penalties, and $60.84 of accrued refund interest. (R. 9 MSJ, Henline Decl. at 18.)

4 Hendrickson’s involvement in tax-protest activities is longstanding. In 1992, he pled guilty to charges in connection with his involvement in the placing of a firebomb in a postal bin resulting in injuries to persons nearby. See United States v. Scarborough, 43 F.3d 1021, 1023 (6th Cir. 1994). That incident occurred on the last day for filing federal income tax returns in 1990, and Hendrickson testified that the device had been wrapped with a tea bag as a symbolic reference to the Boston Tea Party tax protest. Id. at 1023, 1026.

District of Columbia since 1921).” A copy of a Form 4852 (“Substitute for Form W-2, Wage and Tax Statement, etc.”) appears on page 230 of the book. (Id. at 24 and 25.)

After the release of Hendrickson’s book, IRS employees in the IRS’s Frivolous Return Program began to observe a trend in the filing of federal income tax returns upon which certain taxpayers reported zero wages, salaries, or other income and attached signed Forms 4852, filed under penalty of perjury, indicating they were paid no wages or salary from their employers, and, in some instances, stating that they had requested their employers to provide a proper Form W-2, but that the “company refuses to issue forms correctly listing payments of ‘wages as defined in [I.R.C. §§] 3401(a) and 3121(a)’ for fear of IRS retaliation.” (R. 9 MSJ, Henline Decl. at 19, 21-23.)

5 Hendrickson offers the book for sale on the internet. See http://www.losthorizons.com. At the time this brief was filed and served, Hendrickson was informing visitors to his website that readers of Cracking the Code “have already retained or taken back well over $2,352,181.19 from the federal and state governments— including Social Security and Medicare ‘contributions’— and kept it in their own pockets where it belongs, simply by knowing what the law actually says. These Americans have gotten back every penny they’ve paid or had withheld from them during the year as income taxes.” Ibid. Copies of refund checks and credits issued to persons who have acknowledged engaging in Hendrickson’s scheme are posted on the website, including the 2003 refund issued to taxpayers here. Ibid.



C. The instant erroneous-refund action commenced in the District Court

On April 12, 2006, the Government commenced this action in the District Court under I.R.C. §§ 7405(b) and 7402(a), seeking to recover the erroneous refunds made to taxpayers, as well as injunctive relief.

(R. 1.) The Government asserted that the scheme for obtaining tax refunds touted on Hendrickson’s website was fraudulent and was based on tax-protest notions uniformly rejected as frivolous by the courts. (R. 1 at 2-4.) It asserted that taxpayers had falsely reported their 2002 and 2003 compensation on Forms 1040, 4852, and 1099-MISC, misrepresenting that they did not receive accurate Forms W-2 and 1099 from third-party payors and failing to attach the third-party forms to their returns or to report the compensation reported thereon that they received (Id. at 4-7.) The Government stated that these falsehoods induced the IRS to issue erroneous refunds to taxpayers of the withheld taxes in issue. (Id. at 4-7, 10.) The Government asserted that it was entitled to injunctive relief under I.R.C. § 7402(a), because taxpayers’ scheme substantially interfered with enforcement of the internal revenue laws, was without legal basis, and was causing (and would continue to cause) irreparable injury to the United States. (Id. at 7-11.)

Taxpayers filed a motion to dismiss for lack of jurisdiction and failure to state a claim, and, alternatively, for a more definite statement of the Government’s claim, an order striking portions of the complaint, and a ruling that Government counsel had violated Fed. R. Civ. P. 11. (R. 4.) They argued that the Government had no legal capacity to bring a suit in the name of the “United States of America” (as opposed to the “United States”) (id. at 2); that the District Court lacked authority to enjoin them from filing returns contrary to their own belief as to what the law requires (id. at 3-6); that the complaint failed to state with sufficient specificity how their conduct was fraudulent or how it harmed the United States (id. at 7-11); that certain descriptive words or phrases in the complaint were “pejorative” terms that should be stricken (id. at 11); and, finally, that counsel for the Government had violated Rule 11 by making false allegations in the complaint (id. at 12).

The Government moved for summary judgment (R. 9), supported by: (1) the declaration of Kim Halbrook, personnel manager for PM, to

- 12 which were attached copies of the Forms W-2 issued by PM to Hendrickson for 2002 and 2003 (R.9, Halbrook Decl.); (2) the declaration of Shauna Henline, technical advisor and former team manager for the IRS’s Frivolous Return Program, to which were attached copies of the returns filed by taxpayers for 2002 and 2003 and IRS Certificates of Assessments and Payments for taxpayers for the same years (R.9, Henline Decl.); and (3) the declaration of IRS employee Terri Grant to which was attached a computation of taxpayer’s 2002 and 2003 income tax liabilities based on the earnings they had failed to report, showing that they were not entitled to any

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refund of withheld income taxes. (R.9, Grant Decl.).

The Government argued (R. 9 MSJ at 12-17) that it was entitled, as a matter of law, to recover the erroneous refunds, because it had demonstrated through its summary judgment submissions that taxpayers received tax refunds or credits of $10,156.92 and $10,228 to which they were not entitled, and that the Government had timely commenced this action within the applicable statute of limitations,

As discussed, infra at pp. 27-28, there are no circumstances that would have entitled taxpayers to a refund of the amounts withheld for FICA taxes.

I.R.C. § 6532(b). In addition, the Government argued (id. at 17-20) that equitable considerations warranted issuance of an injunction pursuant to I.R.C. § 7402(a), because the scheme used by taxpayers to underreport income substantially interfered with the IRS’s enforcement of the internal revenue laws, and was causing immediate and irreparable harm. The Government maintained, therefore, that taxpayers should be enjoined from filing any further returns that falsely report they received zero compensation and should also be required to file amended returns for tax years 2002 and 2003.

D. The District Court’s decision

The Magistrate Judge to which this case was assigned (see R. 5) issued a report and recommendation recommending that the court deny taxpayers’ motion to dismiss and also deny the alternative relief sought therein. (R. 15.) He ruled (id. at 4) that the Government had “established beyond peradventure” that the District Court had subject matter jurisdiction under I.R.C. §§ 7402, 7405 and 28 U.S.C. §§ 1340, 1345, and rejected (id. at 4-5; R. 16, Errata sheet) taxpayers’ contention that the suit could not be brought in the name of the United States of America. He also ruled (R. 15 at 5-7) that the Government had stated,

- 14 with sufficient specificity and definiteness, its allegations that taxpayers had been issued erroneous tax refunds induced by fraudulent misrepresentations made on their returns. Finally, the Magistrate Judge (id. at 7-9) rejected taxpayers’ assertions that certain terms used in the complaint should be stricken and that counsel for the Government should be sanctioned under Fed. R. Civ. P. 11. The Magistrate Judge also issued a report and recommendation respecting the Government’s motion for summary judgment (R. 17), recommending that summary judgment be granted on the Government’s erroneous-refund claim and that summary judgment be granted, in part, on its claim for injunctive relief (id. at 10-11). He observed (id. at 7) that taxpayers had not denied filing returns claiming the refund amounts in issue and had not denied receiving those amounts. He ruled (ibid.) that taxpayers had advanced only “fanciful” tax-protest arguments that the refunds were not erroneous. He also found (id. at 7 n. 2) that the Government had established that the refunds were induced by fraud, such that the suit was timely with respect to both years in issue, even though not commenced with two years of the 2002 refund. See I.R.C. § 6532(b).

- 15 The Magistrate Judge went on to rule (R. 17 at 8-10) that the Government was entitled to an injunction prohibiting taxpayers from filing any further returns falsely reporting as zero the compensation paid to them by third-party payors. He observed (id. at 9) that taxpayers’ actions “impose an immediate and irreparable injury on the United States by impeding, impairing and obstructing the assessment and collection of federal taxes.” He also ruled, however (id. at 10), that, to the extent the Government sought to require taxpayers to file amended returns for 2002 and 2003, its request should be denied as moot, because taxpayers had already been found liable for the erroneous refunds in issue. After receiving written objections from taxpayers (R. 18, 19), the District Court issued an order accepting and adopting the Magistrate Judge’s report pertaining to taxpayers’ motion to dismiss (R. 20), and another order accepting in part and rejecting in part the Magistrate Judge’s report pertaining to the Government’s summary judgment motion (R. 21). The court rejected the portion of the Magistrate Judge’s report recommending partial denial of the Government’s request for an injunction, holding that an injunction requiring taxpayers to file

amended returns was not rendered moot by disposition of the erroneous refund issue. (R. 21 at 1.) The court observed that the Magistrate Judge’s position on mootness assumed that taxpayers’ “federal income tax withholdings on their 2002 and 2003 W-2s were equal to their eventual tax liability, which is not necessarily the case.” (Ibid.) The District Court entered a judgment providing that the Government’s motion for summary judgment was granted. (R. 22.)

Thereafter, the Government moved to amend the judgment to set forth the amounts of the erroneous refunds due from taxpayers and to provide the precise injunctive terms with which taxpayers must comply. (R. 23, 24.) Taxpayers filed motions seeking relief from, and reconsideration of, the judgment. (R. 26, 27.) The District Court denied taxpayers’ motions, ruling that they did not meet the standard for obtaining relief from the judgment and did not set forth grounds for reconsideration because they merely reargued the same non-meritorious positions previously presented. (R. 33.) The court granted the Government’s motion to amend, and entered an amended judgment setting forth the amounts due from taxpayers and providing the terms of the injunction. (R. 34.)

SUMMARY OF ARGUMENT

The Government brought this action to recover from taxpayers erroneous tax refunds that the IRS made to them based on their 2002 and 2003 federal income tax returns, and also to obtain an injunction requiring taxpayers to file amended correct returns for those years and to refrain in the future from filing returns that falsely report they have no taxable compensation contrary to the Forms W-2 and 1099 issued to them by third-party payors.

1. To establish its right to recover the refunds, the Government was required to show that the IRS had made the tax refunds to taxpayers in amounts certain, that the suit was commenced within the applicable statute of limitations, and that taxpayers were not entitled to the refunds. The District Court correctly decided on summary judgment that the Government had established all of these elements, and was entitled to judgment as a matter of law. The undisputed facts are that taxpayers filed income tax returns for 2002 and 2003 (accompanied by substitute Forms W-2 and 1099) on which they reported that they did not receive earnings subject to taxation (contrary to the actual Forms W-2 and 1099 issued to them, which they did not submit with their returns). On the returns, they claimed refunds of all the income and FICA taxes withheld from their earnings. As a result, the IRS refunded all of the taxes withheld from taxpayers’ earnings.

This suit was commenced in April 2006, within two years of the 2003 refund and within five years of the 2002 refund. With regard to the 2003 refund, the suit is plainly timely, as it was brought within the general two-year statute of limitations provided at I.R.C. § 6532(b). It is also timely as regards the 2002 refund, because the refund was induced by taxpayers’ material misrepresentations on their 2002 return that they had no taxable compensation, such that § 6532(b)’s extended five-year statute of limitations applied. Finally, the Government’s submissions showed that, if taxpayers had reported their compensation as required, they would have not been entitled to any refund for either year in issue.

Taxpayers’ arguments on appeal lack merit. Contrary to their understanding of things, this erroneous-refund suit is expressly authorized by I.R.C. § 7405. At bottom, their entire case is grounded on the wholly untenable and patently frivolous position that their

- 19 employee and non-employee earnings (which they do not deny receiving) are not subject to federal taxation.

2. The District Court correctly issued the injunction requested by the Government pursuant to its authority under I.R.C. § 7402(a) “to make and issue in civil actions, writs and orders of injunction, . . . and such other orders and processes, . . . as may be necessary or appropriate for the enforcement of the internal revenue laws.” Taxpayers’ scheme of inducing the IRS to issue erroneous refunds has not only exerted an unnecessary drain on the public fisc, but has substantially interfered with the internal revenue laws by administratively burdening the Government, requiring the IRS to expend considerable resources to detect the erroneous refunds, examine taxpayers’ 2002 and 2003 returns, and obtain the documents necessary to prove that the refunds were erroneous, and requiring the Department of Justice to pursue this litigation. In addition, because the scheme is disseminated through Hendrickson’s book, Cracking the Code, and is also touted on his website, the Government must, in copycat cases, suffer further drains on the public fisc and expend considerable further resources on the recovery of other erroneous refunds. The injunction against taxpayers here assists in sending a message to those potential copycats.

Taxpayers’ actions have thus imposed an immediate and irreparable injury on the United States by impeding, impairing, and obstructing the assessment and collection of federal taxes. In the absence of an injunction, the Government would continue to suffer irreparable injury because taxpayers and those who imitate them would continue to file these kinds of patently false tax returns. In contrast, taxpayers suffer no harm, because the injunction merely requires them to obey the internal revenue laws. Accordingly, the District Court properly issued the injunction.

ARGUMENT

I

The District Court correctly granted summary

judgment to the Government, holding that the

Government was entitled under I.R.C. § 7405(b) to

recover refunds of federal taxes that the IRS had

erroneously paid to taxpayers based on incorrect

wage and salary information reported by them on

their 2002 and 2003 income tax returns

Standard of review

“This Court reviews a grant of summary judgment de novo, making all reasonable inferences in favor of the non-moving party.” United States v. Guy, 978 F.2d 934, 936 (6th Cir. 1992).

A. The elements of an erroneous-refund suit

The Government is authorized to bring suit to recover tax refunds that have been erroneously issued. I.R.C. § 7405; see O’Gilvie v. United States, 519 U.S. 79, 90-91 (1996); Guy, 978 F.2d at 938. As the Eleventh Circuit has observed, § 7405 “underscores the continuing and strong federal interest in recovering erroneous disbursements.” United States v. McRee, 7 F. 3d 976, 981 n.3 (11th Cir. 1993). The underlying premise of restoring erroneous refunds “is that the taxpayer is unjustly enriched at the expense of the government and other taxpayers.”

United States v. MacPhail, 313 F. Supp.2d 729, 735 (S.D. Ohio 2004), aff’d in part, vacated in part on other issues, 149 Fed. Appx. 449 (6th Cir. 2005) (citation omitted). “As such, the government must show that the taxpayer has money ‘it ought not to retain.’” Id. (quoting United States v. Russell Mfg. Co., 349 F.2d 13, 16 (2d Cir. 1965)).

Section 7405(a) permits a suit to recover a tax refund that was made beyond the applicable statute of limitations, whereas § 7405(b) authorizes a suit to recover any tax refund that is otherwise erroneous. The Government commenced the instant suit pursuant to § 7405(b), and also sought interest on the erroneous refunds pursuant to § 7405(c). To prevail in an action brought under § 7405, the Government must establish: (1) that a refund of a sum certain was made to the taxpayer; (2) that the suit was timely filed; and (3) that the refund was erroneous (i.e., that the taxpayer was not entitled to the refund). See United States v. Commercial National Bank, 874 F.2d 1165, 1169 (7th Cir. 1989); Soltermann v. United States, 272 F.2d 387, 387 (9th Cir. 1959); United States v. Philadelphia Marine Trade Ass’n/Int’l Longshoremen’s Vacation Fund, 471 F. Supp.2d 518, 524

(E.D. Pa. 2007); Johnson v. United States, 228 F. Supp.2d 1218, 1221 (D. Colo. 2002), aff’d, 76 Fed. Appx. 873 (10th Cir. 2003). The Government established all of these elements here.

B. The Government established its entitlement to recover from taxpayers the erroneous tax refunds that the IRS issued to them

First, it is not disputed by taxpayers that, on their 2002 and 2003 tax returns, they claimed refunds of the taxes withheld from their compensation totaling $10,152.96 and $10,228, respectively. (R. 9 MSJ, Henline Decl., Att. 1, 2.) Moreover, taxpayers have not denied that they received the benefit of these amounts through the IRS’s application of credits to offset their other tax liabilities7 and the issuance to them of a Treasury check for the balance. (R. 9 MSJ, Henline Decl. at 9, 16, 17, 18.) Thus, the first element—that refunds of sums certain were issued to taxpayers—is established.

Second, the time for bringing an erroneous-refund action is within two years after the refund is made, or within five years if it appears

7 The IRS credited the putative overpayments to taxpayers’ other outstanding tax liabilities pursuant to the authority of I.R.C. § 6402(a). Such credits are treated the same as a cash refund for purposes of an erroneous-refund suit. See Guy, 978 F.2d at 939 (A “tax credit, which was improperly allowed, is in the nature of an erroneous refund and may be recovered under 26 U.S.C. § 7405.”)

that any part of the refund was induced by fraud or misrepresentation of a material fact. I.R.C. § 6532(b). Here, the refund for taxpayers’ 2003 tax year was made by applying credits to taxpayers’ other tax liabilities as of April 15, 2004, and by issuing them a Treasury check dated September 24, 2004. (R. 9 MSJ, Henline Decl. 16-18 & Att. 4, 6-9.) The Government timely filed this erroneous-refund action on April 12, 2006 (R. 1), within two years of making the 2003 refund. With respect to taxpayers’ 2002 tax year, the refund was made by applying credits to their other tax liabilities as of April 15, 2003, which is more than two years but less than five years prior to the Government’s commencement of this action. (Id., Henline Decl. 9 & Att. 3, 5.) The action is timely with respect to the 2002 refund because that refund was obtained through fraud or material misrepresentation.

The Government’s summary judgment submissions showed that the refunds for both years were based on taxpayers’ misrepresentations on their tax returns that they received zero taxable compensation, when, in fact, the information on third-party reports (IRS Forms W-2 and 1099) established that they had been paid considerable earnings that they intentionally failed to include on their returns. (R. 9 MSJ, Halbrook & Henline Decls. & Attachments thereto.) They not only failed to attach the Forms W-2 and 1099 to their returns, but went so far as to prepare substitute forms that included earnings information contrary to that reported on the Forms W-2 and 1099 issued by the third-party payors. (Ibid.) As the Magistrate Judge correctly concluded, the Government established that the refunds were induced by fraud or misrepresentations of material fact, where the income reported on taxpayers’ returns was “at odds with the information found on Peter Hendrickson’s Form W-2 for those years,” and where taxpayers “failed to attach the Forms W-2 to their tax returns [and] claimed the monies ‘due’ to them based on the amount of withholding indicated on those forms.” (R. 17 at 7 n. 2.) Cf. Lane v. United States, 286 F.3d 723, 732 (4th Cir. 2002) (holding that “the United States need not demonstrate more than gross negligence in order to avail itself of § 6432(b)’s five-year limitations period”); United States v. McLean, 420

F. Supp.2d 613 (E.D. Tex. 2006); United States v. McLean, 390 F. Supp.2d 475, 479 (D. Md. 2005) (misrepresentations concerning existence of trust on fiduciary tax return sufficient to trigger five-year statute of limitations under § 6532(b)).

Thus, with respect to the 2002 refund, which was made more than two years but less than five years from the date this action was commenced, the Government demonstrated that this erroneous-refund suit was timely filed under I.R.C. § 6532(b), and thus established that it met the second element for recovering the refunds in issue.

Third, the tax refunds plainly were erroneous, as taxpayers were not entitled to them and obtained them only because they falsely reported on their 2002 and 2003 returns, and on substitute Forms W-2 and 1099, that they did not receive compensation subject to income and FICA taxes. They failed to report the $62,738 and $63,796 of earnings actually paid to them that were reflected on the Forms W-2 and 1099 issued by PM and Dworkin. (R.9 MSJ, Henline Decl., Att. 1, 2.) The IRS’s computation of taxpayers’ income tax liabilities for 2002 and 2003, which was based on taxpayers’ receipt of the unreported compensation, established that taxpayers were not due a refund of income tax for either year, because their income tax liability in each year exceeded the amount withheld as income tax. (R.9, Grant Decl.) Thus, taxpayers’ federal income tax liabilities were computed by the IRS to be $6,327 for 2002 and $6,061 for 2003, whereas, the amounts of income taxes that were withheld from Hendrickson’s compensation were $5,642.20 in 2002 and $5,620.02 in 2003. (Ibid.)

Moreover, in no instance here could they be due a refund of any FICA taxes. Hendrickson was employed by PM during 2002 and 2003. His employer was required to withhold both income and FICA taxes from his compensation and pay them over to the IRS. See I.R.C. §§ 3101, 3102, 3401, 3402; Brewery, Inc. v. United States, 33 F.3d 589, 591 (6th Cir. 1994). FICA taxes of an employee are imposed at specified percentage rates on “wages” received by an employee “with respect to employment.” I.R.C. § 3101(a) and (b). FICA taxes are determined and deducted by the employer from the employee’s wages at the time the wages are paid. See I.R.C. § 3102(a).

In this regard, I.R.C. § 3121(a) broadly defines “wages” for purposes of FICA taxes as “all remuneration for employment . . . .” The term “employment” is defined in I.R.C. § 3121(b) as “any service, of whatever nature, performed . . . by an employee for the person employing him.” See Social Security Board v. Nierotko, 327 U.S. 358, 365-66 (1946) (emphasizing breadth of coverage of term “wages,” as used in these provisions, and holding that it means all compensation

- 28 paid by employer to employee as part of employer-employee relationship). A taxpayer’s liability for the social security portion of FICA tax withholdings is subject to a ceiling—once his annual wages reach a pre-determined wage base, he is no longer subject to further social security tax withholding for that year. See I.R.C. § 3121(a)(1); 42 U.S.C. § 430(b). Here, however, Hendrickson’s wages did not exceed

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the applicable wage base for either year in issue. There is no chance that his remuneration was subject to over-withholding, and, hence, no potential for an overpayment to be refunded. Since taxpayers were not entitled to a refund of the withheld FICA taxes, it necessarily follows that the IRS’s refunds of those taxes to them were “erroneous” within the meaning of I.R.C. § 7405(b).

C. Taxpayer’s arguments have no merit

1. Taxpayers continue to insist (Br. 18-24) that the compensation paid to them is not taxable because the Internal Revenue Code authorizes a tax only on wages earned from employment in

8 The wage base was $84,900 during 2002 and $87,000 during 2003. See 42 U.S.C.A. § 430 app. at 755 (West 2003).

government-related activities, and not on private-sector earnings.9 This interpretation of the Code is entirely fallacious. Taxpayers have not denied that they received the compensation in issue from PM and Dworkin. They insist, rather, that PM mischaracterized the compensation paid to Hendrickson as being taxable as “wages.” (Ibid.) This assertion is contrary to the relevant definitions in the very statutes upon which they rely. I.R.C. § 3121(a)(1) (“For purposes of this chapter, the term ‘wages’ means all remuneration for employment . . . .”); I.R.C. § 3401(a)(1) (“For purposes of this chapter, the term ‘wages’ means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer . . . .”). The compensation received by Doreen Hendrickson was reported by Dworkin as non-employee compensation. (R.9 MSJ, Grant Decl. at 2–3.) The question whether those amounts were “wages” is not relevant here, because for income tax purposes “gross income means all income from whatever source derived, including (but not limited to) . . . (1) compensation for services.” I.R.C. § 61(a). See

As noted, at pp. 8-9, supra, this is the same position touted in Hendrickson’s book, Cracking the Code.

Lovell v. United States, 755 F.2d 517, 519 (7th Cir. 1984) (money received in compensation for labor is taxable).

Taxpayers have never disputed that the amounts paid to them were to compensate them for services they performed for PM and Dworkin. Their argument that this compensation is not taxable because it was privately earned has been soundly rejected. See United States v Latham, 754 F.2d 747, 750 (7th Cir. 1985) (argument “that under 26 U.S.C. § 3401(c) the category of ‘employee’ does not include privately employed wage earners is a preposterous reading of the statute”); Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986); Abdo v. United States IRS, 234 F.Supp. 2d 553, 563 (M.D.N.C. 2002), aff’d, 63 Fed. Appx. 163 (4th Cir. 2003); O’Connor v. United States, 669

F. Supp. 317, 322 (D. Nev. 1987); Peth v. Breitzmann, 611 F. Supp. 50, 53 (E.D. Wis. 1985). Indeed, taxpayers’ argument that their earnings are not taxable as “wages” is of the same tax-protestor ilk that has been rejected by this Court and other courts as patently frivolous time and again. E.g., Perkins v. Commissioner, 746 F.2d 1187, 1188 (6th Cir. 1984); Lonsdale v. United States, 919 F.2d 1440, 1448 (10th Cir. 1990); Grimes v. Commissioner, 806 F.2d 1451, 1453 (9th Cir. 1986); McNair

v. Eggers, 788 F.2d 1509, 1510 (11th Cir. 1986); Motes v. United States, 785 F.2d 928, 928 (11th Cir. 1986); Lovell v. United States, 755 F.2d 517, 519 (7th Cir. 1984); Ficalora v. Commissioner, 751 F.2d 85 (2d Cir. 1985); Lively v. Commissioner, 705 F.2d 1017 (8th Cir. 1983); Knighten

v. Commissioner, 702 F.2d 59, 60 (5th Cir. 1983).10

2. Taxpayers contend (Br. 3-14, 19, 22-23) that the District Court erred in taking jurisdiction of this case where they had given their sworn statements on their tax returns and affidavits that the compensation paid to them was not taxable. They assert (Br. 8) that § 7405 can have no applicability to this case because it applies only to a “refund of an amount which has been determined by the filer to have been paid in as tax [emphasis in original].” The upshot of this argument is that the District Court (as well as the Government) was required to accept as true their sworn statements declaring that their

Taxpayers audaciously contend (Br. 21-22) that these cases are inapposite because the Government and the District Court have cited only to dicta or to out-of-context quotations. That assertion is, in and of itself, frivolous. Because they insist on taking frivolous positions on appeal, we are filing contemporaneously with this brief, pursuant to Fed. R. App. P. 38, a separate motion for imposition of $8,000 in sanctions against taxpayers for prosecuting this frivolous appeal. We suggest therein that the motion be carried with the case and decided by the panel at the same time as it disposes of the merits.

remuneration was not taxable, even though, as shown, the legal authority is entirely to the contrary. Taxpayers’ argument is untenable on its face. The District Court obviously was not required to accept taxpayers’ legal conclusion on the central issue in this case as meeting their evidentiary burden on summary judgment. Morgan v. Church’s Fried Chicken, 829 F.2d 10, 12 (6th Cir. 1987); Westlake v. Lucas, 537 F.2d 857, 858 (6th Cir. 1976); see also Avirgan v. Hull, 932 F.2d 1572, 1577 (11th Cir. 1991).

Taxpayers alleged by affidavit (R.13 Opp. at attachments) that:

(1) “No federal income tax was or is due and owing from [them] for the years 2002 and 2003 except as is indicated on the tax returns [they] filed;” (2) they were “private-sector, non-federally-connected individual[s];” (3) “[n]othing in [Hendrickson’s] book is false or fraudulent, nor is anything on [his] website;” (4) Halbrook was not qualified to determine whether Hendrickson was an “‘employee’” of PM, whether PM was his “‘employer,’” or whether Hendrickson was paid “‘wages,’” “as those terms [are] defined in the income tax laws;” and

(5) IRS employees Henline and Grant have “no personal knowledge whatsoever as to the nature of [Hendrickson’s] relationship with [PM],

the nature or legal status of his receipts, or anything else relevant to the instant action.”

These conclusory, self-serving assertions were insufficient to rebut the abundance of material documentation submitted by the Government in support of its summary judgment motion, which established that taxpayers were paid compensation by PM and Dworkin, but falsely indicated on their tax returns to the contrary, and were thus issued erroneous refunds. See Lewis v. Philip Morris, Inc., 355 F.3d 515, 533 (6th Cir. 2004) (“In order to survive a motion for summary judgment, the non-moving party must be able to show sufficient probative evidence [that] would permit a finding in [his] favor on more than mere speculation, conjecture, or fantasy.”) (internal quotations omitted); Bryant v. Kentucky, 490 F.2d 1273, 1275 (6th Cir. 1974) (conclusory, unsupported allegations do not meet the non-moving party’s burden).

Taxpayers (Br. 19-21) challenge the Halbrook declaration (R. 9 MSJ, attachment), asserting that Halbrook was not the employee at PM who issued the Forms W-2 to Hendrickson and that she therefore could not provide a competent declaration concerning PM’s issuance of the payroll manager at PM during relevant times and thus had

personal knowledge of the compensation paid to Hendrickson and of the

accuracy of the information included on the Forms W-2 issued to him.

(R. 9 MSJ, Halbrook Decl.) Whether or not she actually generated the

forms is beside the point. Taxpayers’ empty assertion that Halbrook

lacked any personal knowledge about the accuracy of the Forms W-2 is

wholly unsupported and in no way discredits Halbrook’s sworn

statements to the contrary.11

11 Taxpayers assert (Br. 20-21) that “Warren Rose” had the “legal responsibility for the content of the Forms W-2.” They have attached to their brief a copy of a written request, dated November 5, 2002, that Hendrickson purportedly made to PM asking that his 2002 Form W-2 be prepared so as to “ensure that nothing is listed as ‘wages’ which does not conform to the strict, legal definition of ‘wages’ within Title 26 USC.” (Br. attachment.) A handwritten statement signed by “Warren” appears at the bottom of that document stating “I’m sorry, but I can’t comply with your request.” (Ibid.) Taxpayers contend (Br. 20-21) that this document demonstrates that Halbrook did not give an accurate declaration. This document is not in the record, and thus not properly presented to this Court. See Landefeld v. Marion Gen. Hosp., 994 F.2d 1178, 1181 (6th Cir.1993) (“When reviewing a summary judgment decision, an appellate court must confine its review to the evidence as submitted to the district court.”). At all events, the document suggests only that a representative of PM understood Hendrickson’s request to be spurious and thus rejected it. The document does not undermine the truth or accuracy of the Halbrook declaration.

3. There also is no merit to taxpayers’ argument (Br. 9-14) that the amounts refunded to them were deposits rather than payments of tax, and thus not recoverable in an action brought under § 7405. Taxpayers maintain (ibid.) that they never owed any taxes requiring them to pay the amounts withheld from Hendrickson’s compensation, and observe that the IRS’s own Forms 4340 reflect little or no assessed tax liability against them. As already demonstrated, their underlying contention that their compensation is not subject to income and FICA taxes is frivolous. In addition, the timing of the IRS’s formal assessment of their income tax liabilities has no bearing on whether and when they owe unpaid taxes.

A tax deficiency resulting from the underreporting of income tax on a return ordinarily cannot be formally assessed until certain procedural steps are followed. See I.R.C. §§ 6211-6215. However, a taxpayer’s liability arises as a consequence of realizing income over the course of the tax year, not as a consequence of an assessment. See State Farm Life Ins. Co. v Swift, 129 F.3d 792, 799, 800 n. 41 (5th Cir. 1997) (recognizing that, under the Code, “taxes are owed and payable to the IRS at a given time” and “an assessment does not create or change the taxpayer’s initial tax obligation that was owed”); Zeier v. United States, 80 F.3d 1360, 1364 (9th Cir. 1996); Moran v. United States, 63 F.3d 663, 666 (7th Cir. 1995); cf. Laing v. United States, 423 U.S. 161, 170 n. 13 (1976) (“The ‘assessment,’ essentially a bookkeeping notation, is made when the Secretary or his delegate establishes an account against the taxpayer on the tax rolls. 26 U.S.C. § 6203.”). Taxpayers rely largely upon Rosenman v. United States, 323 U.S. 658 (1945), and its progeny, for the proposition that a payment to the IRS in advance of an assessment is not a payment of tax (Br. 9-13), but those cases are inapposite. They stand only for the limited proposition that certain remittances in advance of assessment are not considered a payment of tax (within the meaning of current I.R.C. § 6511(a)) for purposes of the running of the statute of limitations on refund claims. Rosenman, 323

U.S. at 662-63. See Rev. Proc. 84-58, superseded by Rev. Proc. 2005-18 (specifying procedure for taxpayers to follow to remit deposits, rather than tax, for purposes of suspending the running of interest on tax deficiencies asserted by the IRS). For purposes of § 6511, income and social security taxes withheld from wages are treated as taxes paid on April 15 of the next year. I.R.C. § 6513(b)(1), (c). In any event, it bears

- 37 noting in this regard that the no-payment-prior-to-assessment argument that taxpayers glean from Rosenman has been squarely rejected. Baral v. United States, 528 U.S. 431, 435-39 (2000). Indeed, this Court, and others, have held that where the IRS determines after year end that it has assessed too little tax because of incorrect information supplied on a taxpayer’s return, with the result that withholdings were improperly refunded and a tax “deficiency” exists (see I.R.C. § 6211), the Government has the option of either immediately pursuing recovery in an erroneous-refund suit or pursuing administrative assessment in accordance with the deficiency procedures set forth at I.R.C. §§ 6211-6215 (allowing assessment of a tax deficiency only after the IRS provides the taxpayer notice of the deficiency and an opportunity to litigate his liability in the United

12

States Tax Court). See, e.g., Beer v. Commissioner, 733 F.2d 435, 43637 (6th Cir. 1984); United States v. Farley, 202 F.3d 198, 201-03 (3d Cir. 2000); Singleton v. United States, 128 F.3d 833, 836-37 (4th Cir. 1997); cf. Bilzerian v. United States, 86 F.3d 1067, 1068-69 (11th Cir. 1996)

12

After the tax is assessed, if the taxpayer fails to pay it upon notice and demand, the IRS may proceed to recover it through its administrative lien and levy powers. See I.R.C. §§ 6301-6344.

(where tax assessment had been previously made and paid by the taxpayer, but was erroneously refunded due to IRS computer error, Government’s remedy was a timely erroneous-refund suit or to reassess the liability pursuant to the Code’s deficiency procedures).

Thus, the Government’s authority under I.R.C. § 7405 to bring an action in federal district court to recover an erroneous refund of tax is not limited to actions seeking recovery of previously assessed taxes. In this regard, taxpayers are simply wrong when they assert (Br. 15-17) that only the Tax Court has potential jurisdiction in this situation. The Government opted to seek immediate judicial recovery of the erroneous refunds it made to taxpayers, and contrary to their understanding of things, authority for bringing the lawsuit expressly rests in I.R.C. § 7405.

4. Taxpayers raise a number of other meritless arguments, none of which warrants extended discussion. They contend (Br. 14-15) that this suit is barred by the tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201, which prohibits courts from issuing a judgment declaring the rights of parties with respect to federal taxes. The Government here did not seek or receive a declaratory judgment; rather, it obtained a money judgment in the amount of the erroneous refunds, plus interest, and an injunction requiring taxpayers to correct their false returns and prohibiting them from filing further false returns. The Declaratory Judgment Act has no application here.

Taxpayers assert (Br. 17-18) that counsel for the Government did not comply with Section 1 of Executive Order No. 12988, 61 F.R. 4729 (1996), which sets forth guidelines to “promote just and efficient resolution of civil claims” on behalf of the Government, and, at Section 1(a), directs Government counsel, before filing a complaint, to make a

reasonable effort to notify all disputants about the nature of the dispute and to attempt to achieve a settlement, or confirm[ ] that the referring agency that previously handled the dispute has made a reasonable effort to notify the disputants and to achieve a settlement or has used its conciliation process.

Section 7 of the Executive Order provides, however, that the guidelines are “intended only to improve internal management of the executive branch in resolving disputes,” and that it “shall not be construed as creating any right or benefit, substantive or procedural, enforceable at law or in equity by a party against the United States, its agencies, its officers, or any other person” or “any right to judicial review involving the compliance or noncompliance of the United States.” Thus, even assuming taxpayers are correct in their assertion, they have no remediable complaint. In any event, given that this case involves taxpayers’ procurement of tax refunds through the making of false misrepresentations, the matter is arguably among the kinds of cases that fall outside the scope of the executive order. See Exec. Ord. No. 12988, Sec. 8(b), 61 F.R. at 4733.

Next, taxpayers complain (Br. 26) that the District Court’s grant of summary judgment to the Government denied them their Seventh Amendment right to a trial by jury. Where, as here, the party opposing summary judgment has raised no genuine issue to be tried, judgment may be entered as a matter of law for the moving party, pursuant to the federal rules and without Seventh Amendment implications. Fidelity & Deposit Co. v. United States, 187 U.S. 315, 320-321 (1902); Ortman v. Thomas, 99 F.3d 807, 811 (6th Cir. 1996).

Finally, taxpayers assert (Br. 24-26) that this case is really an effort by the Government to suppress Hendrickson’s book, Cracking the Code, in violation of the First Amendment. This, too, is patently without merit, as the suit was brought to recover erroneous tax refunds made to taxpayers and to prohibit them from filing returns that falsely report zero taxable compensation contrary to third-party information provided on IRS Forms W-2 and 1099. Whatever First Amendment right Hendrickson might have to express frivolous notions of the federal tax system in his book (cf. United States v. Schiff, 379 F.3d 621, 626630 (9th Cir. 2004)), he plainly has no right to put those notions to use by filing false tax returns.



The District Court correctly issued an injunction

requiring taxpayers to file amended 2002 and 2003

income tax returns and enjoining them from filing

future returns that falsely report they were paid zero

compensation contrary to third-party information

provided on IRS Forms W-2 and 1099

Standard of review

A district court’s decision to grant an injunction is reviewable for abuse of discretion. United States v. Szoka, 260 F.3d 516, 521 (6th Cir. 2001).

A. Section 7402 of the Code authorizes district courts to issue such orders as may be necessary and appropriate for the enforcement of the internal revenue laws

The Government sought injunctive relief in this case pursuant to

I.R.C. § 7402(a). (R. 1, Compl. at 7-11.) Section 7402(a) provides in relevant part that “[t]he district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, . . . and such other orders and processes, . . . as may be necessary or appropriate for the enforcement of the internal revenue laws.” In addition, § 7402(a) states that “[t]he remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.”

Courts have interpreted § 7402(a) broadly, holding that it manifests “a congressional intention to provide the district courts with a full arsenal of powers to compel compliance with the internal revenue laws.” Brody v. United States, 243 F.2d 378, 384 (1st Cir. 1957). See also United States v. Ernst & Whinney, 735 F.2d 1296, 1300 (11th Cir. 1984). In United States v. First Nat’l City Bank, 379 U.S. 378, 380 (1965), the Supreme Court interpreted § 7402(a) as authorizing the court to grant an injunction against a taxpayer’s transfer of rights in property to avoid tax collection. The court reasoned that the scope of the courts’ power under § 7402(a) must be considered in light of the public interest involved and noted that courts of equity may go much further to give relief in furtherance of the public interest. 379 U.S. at 380, 383. Similarly, the relief granted by the District Court here meets these requirements of being an appropriate and reasonable measure to protect the public fisc.

Following First Nat’l City Bank, the courts of appeals have consistently recognized that § 7402(a) gives the courts broad authority to issue a wide variety of orders, as necessary or appropriate for enforcing the internal revenue laws. For example, in Ernst & Whinney, 735 F.2d at 1300, the Eleventh Circuit relied on § 7402(a) to enjoin an accounting firm from interfering with tax enforcement, specifically noting that the power given to the district court under § 7402(a) “encompasses a broad range of powers necessary to compel compliance with the tax laws.” See also United States v. Raymond, 228 F.3d 804, 809 (7th Cir. 2000) (§ 7402(a) contains a “broad grant of power” including “authority to issue injunctions to enforce the tax laws”); United States v. Ekblad, 732 F.2d 562 (7th Cir. 1984) (§ 7402(a) used to enjoin harassment of IRS agents designed to hinder their effectiveness); United States v. Hart, 701 F.2d 749 (8th Cir. 1983) (same); United States v. Asay, 614 F.2d 655, 661 (9th Cir. 1980) (district court had jurisdiction to compel production of papers under § 7402(a)).

In this vein, “the decision to issue an injunction under § 7402(a) is governed by the traditional factors shaping the district court’s use of the equitable remedy.” Ernst & Whinney, 735 F.2d at 1301. In other words, a district court may enjoin conduct if the moving party succeeds on the merits, has no adequate remedy at law, and would suffer irreparable injury absent an injunction. Alabama v. U.S. Army Corps. of Engineers, 424 F.3d 1117, 1128 (11th Cir. 2005). And the injunction may issue “to enjoin interference with tax enforcement even when such interference does not violate any particular tax statute.” Ernst & Whinney, 735 F.2d at 1300. See United States v. Kaun, 633 F. Supp. 406, 409 (E.D. Wis. 1986) (“federal courts have routinely relied on [§ 7402(a)] . . . to preclude individuals . . . from disseminating their rather perverse notions about compliance with the Internal Revenue laws or from promoting certain tax schemes”), aff’d, 827 F.2d 1144 (7th Cir. 1987). See generally United States v. Lee, 455 U.S. 252, 253 (1982) (noting that “the broad public interest in maintaining a sound tax system is of . . . a high order.”); Ekblad, 732 F.2d at 563 (finding in a case brought under IRC § 7402 that “[t]he United States has standing to seek relief from actual or threatened interference with the performance of its proper governmental functions”).

B. Injunctive relief was properly granted here

But for the District Court’s injunction here, taxpayers could continue to seek and obtain tax refunds under false pretenses, tout their “successes” on Hendrickson’s website, and exploit those “successes” to sell more copies of Cracking the Code, thereby further emboldening other individuals to engage in the same fraudulent scheme. The District Court’s order clearly is consistent with Congress’s intent that the courts issue such orders as are necessary and appropriate to enforce the internal revenue laws.

Taxpayers filed income tax returns and Forms 4852 and 1099 (R. 9 MSJ, Henline Decl. & Att. 1, 2) that fraudulently reported that they received no income or wages when they knew they had gross incomes of more than $60,000 during each of the taxable years in question. They filed these false tax returns in order to obtain refunds of the income and FICA taxes that had been withheld from Hendrickson’s compensation in 2002 and 2003. The IRS was accordingly induced to issue erroneous refunds totaling $20,380.96.13

13 The IRS’s issuance of erroneous refunds under these circumstances is unfortunate but not surprising. “Alas, the Commissioner, confronted (continued...)

As the District Court concluded (R. 34 at 6), taxpayers’ conduct in filing false returns caused substantial interference with the internal revenue laws by administratively burdening the Government, requiring the IRS to expend considerable resources to detect the erroneous refunds, examine their 2002 and 2003 returns, and obtain the documents necessary to prove that the refunds were erroneous, and requiring the Department of Justice to pursue this litigation. In addition, because of their example, which they take pains to disseminate on Hendrickson’s website, which in turn advertises his book about the scam, the Government must, in copycat cases, suffer additional drains on the public fisc and expend considerable further

14

resources on the recovery of other erroneous refunds. The injunction

13 (...continued) by millions of returns and an economy which repeatedly must be nourished by quick refunds, must first pay and then look. This necessity cannot serve as the basis of an ‘estoppel.’” Warner v. Commissioner, 526 F.2d 1, 2 (9th Cir. 1975); see also Gordon v. United States, 757 F.2d 1157, 1160 (11th Cir. 1985).

See, e.g., United States v. Ferguson, 2007 WL 911756 (D. Nev. 2007) (erroneous-refund suit); United States v. Gray, 2007 WL 851873 at *1 (W.D. Mich. 2007) (return preparer who followed the practice described in Hendrickson’s book was enjoined from preparing further returns); United States v. Hill, 2005 WL 3536118 at *5 (D. Ariz. 2005) (to similar

(continued...)

against taxpayers here assists in sending a message to those potential copycats. Taxpayers’ actions have imposed an immediate and irreparable injury on the United States by impeding, impairing, and obstructing the assessment and collection of federal taxes in accordance with the internal revenue laws. The District Court correctly concluded that, in the absence of an injunction, the Government would continue to suffer irreparable injury because taxpayers and those who imitate them would continue to file these kinds of false tax returns. (R. 34 at 7.)

In contrast, taxpayers suffer no harm, because the injunction merely requires them to act in accordance with the internal revenue laws, i.e., to file corrected amended 2002 and 2003 income tax returns and to refrain in the future from filing returns that falsely report they were paid zero taxable compensation contrary to third-party information provided on IRS Forms W-2 and 1099. Their suggestion (Br. 26-28) that the injunction implicates their constitutional rights because it “dictates the content of the testimony” that they must give on their tax returns is absurd.

14 (...continued) effect).

Since the Government met all of the proper standards and the § 7402(a), the District Court properly issued the injunction.

CONCLUSION

The judgment of the District Court is correct and should be affirmed.

Respectfully submitted,

[Imalawman]

http://www.quatloos.com/tax_protestor-c ... sponse.pdf

having trouble with the link and the copied portion below seems to be missing every other page. Anyone else having problems?

[webhick]

http://www.quatloos.com/tax_protestor-c ... sponse.pdf

having trouble with the link and the copied portion below seems to be missing every other page. Anyone else having problems?

No problems here...well, actually, Acrobat Pro 7.0 threw up the first time it loaded. Not sure if it was because I was trying to see pages that hadn't loaded yet or if it was making a statement on the Hendricksons being referred to as "taxpayers". Could also be because I haven't activated the product after doing the hard drive swap last Saturday.

[Imalawman]

http://www.quatloos.com/tax_protestor-c ... sponse.pdf

having trouble with the link and the copied portion below seems to be missing every other page. Anyone else having problems?

No problems here...well, actually, Acrobat Pro 7.0 threw up the first time it loaded. Not sure if it was because I was trying to see pages that hadn't loaded yet or if it was making a statement on the Hendricksons being referred to as "taxpayers". Could also be because I haven't activated the product after doing the hard drive swap last Saturday.

That's what Acrobat was doing to me. Hmmm, well, I'll keep trying. Thanks.

[BBFlatt]

It works fine for me.

[Imalawman]

got it. Acrobat was just being weird.

[Nikki]

http://www.quatloos.com/tax_protestor-c ... sponse.pdf

You left out one of the best parts:

STATEMENT REGARDING ORAL ARGUMENT
Counsel for the Government respectfully inform the Court that they believe that oral argument is not necessary in this case because it is apparent from the briefs that appellants’ arguments are devoid of merit.

[Joey Smith]

Merely waiting for John Bulten's comments.

I remember him posting something over on LostHeads to the effect that every one of Pete's arguments required reversal, and he thought that the U.S. Attorney's were in a panic to try to respond to Pete's brief (such as it was).

Actually, the US Attorney could have just responded "Pete's appeal is a pile of legal crap" and that would be have been both accurate and enough for the court of appeals to reverse.

[Imalawman]

Actually, the US Attorney could have just responded "Pete's appeal is a pile of legal crap" and that would be have been both accurate and enough for the court of appeals to reverse.

I believe the US came as close as it could to saying that on a number of occasions. The ruling on this appeal should be fairly quickly handed down. The only question is if the court will impose the $8,000.00 fine. I'm betting that they will.

[ASITStands]

got it. Acrobat was just being weird.

You might want to try Adobe Reader 8. Super cool! And, it fixed all my Adobe problems. 6.xxx had problems, which were helped somewhat by 7.xxx, but 8.1.0 is super smooth.

It's not a big resource hog like the others.

[ASITStands]

Actually, the US Attorney could have just responded "Pete's appeal is a pile of legal crap" and that would be have been both accurate and enough for the court of appeals to reverse.

I believe the US came as close as it could to saying that on a number of occasions. The ruling on this appeal should be fairly quickly handed down. The only question is if the court will impose the $8,000.00 fine. I'm betting that they will.

Fairly quick, but Hendrickson still has a Reply Brief, and, of course, he'll go for reconsideration or rehearing. Such is the fever. I don't think he'd be so ignorant as to take to the S.Ct.

[grammarian44]

Merely waiting for John Bulten's comments.

I remember him posting something over on LostHeads to the effect that every one of Pete's arguments required reversal, and he thought that the U.S. Attorney's were in a panic to try to respond to Pete's brief (such as it was).

Actually, the US Attorney could have just responded "Pete's appeal is a pile of legal crap" and that would be have been both accurate and enough for the court of appeals to reverse.

The government brief is quite detailed considering the general irrelevance of Pete's arguments. They could have just said it was all crap, or they could have said nothing whatsoever. Instead, they went the extra mile.

Bulten thought the government was in a panic because they were almost late in filing the brief. He doesn't seem to realize that waiting until the last minute to file a brief is a standard tactic that minimizes the other party's opportunity to respond. It's just the way litigation works most of the time.

Like Joey, I'm curious about JJB's response. But I'm less curious about his response to the government brief than I am about his response to the Sixth's denial of Pete's appeal, which will come in a month or three.

[rachel]

Merely waiting for John Bulten's comments.

I remember him posting something over on LostHeads to the effect that every one of Pete's arguments required reversal, and he thought that the U.S. Attorney's were in a panic to try to respond to Pete's brief (such as it was).

Actually, the US Attorney could have just responded "Pete's appeal is a pile of legal crap" and that would be have been both accurate and enough for the court of appeals to reverse.

You will probably be waiting until John...I mean Pete, to finish his response.
Then you'll see Pete....I mean John, show up again on the forum.
Happened the exact same way the last time with Pete. Or is it John?

[Joey Smith]

Pete and John are not the same, at least physically and legally.

John is merely Pete's sycophant, must like Steve Swan was Irwin Schiff's worshipper right up until the point that Swan received a bunch of years in prison and finally figured out the Irwin was just a two-bit scam artist as we had been telling him all along.

One of these days John may figure out that Pete Hendrickson is just another two-bit tax scammer; nothing more, nothing less.

[Imalawman]

Pete and John are not the same, at least physically and legally.

John is merely Pete's sycophant, must like Steve Swan was Irwin Schiff's worshipper right up until the point that Swan received a bunch of years in prison and finally figured out the Irwin was just a two-bit scam artist as we had been telling him all along.

One of these days John may figure out that Pete Hendrickson is just another two-bit tax scammer; nothing more, nothing less.

He's been strangely quiet today, one wonders if the inevitable is finally sinking in.

[webhick]

He's been strangely quiet today, one wonders if the inevitable is finally sinking in.

He may just be taking his time to prepare a rebuttal/excuse.

[LPC]

He [Bulten] doesn't seem to realize that waiting until the last minute to file a brief is a standard tactic that minimizes the other party's opportunity to respond. It's just the way litigation works most of the time.

That, and the tendency of lawyers to procrastinate and file at the last minute.

I've often thought that, if all the rules that required filing responses "within X days" were changed to read that the response "shall be filed on the Xth day, and neither sooner nor later than that," the practice of law would not be affected at all.

[jg]

Glad to see this:

10 Taxpayers audaciously contend (Br. 21-22) that these cases are inapposite because the Government and the District Court have cited only to dicta or to out-of-context quotations. That assertion is, in and of itself, frivolous. Because they insist on taking frivolous positions on appeal, we are filing contemporaneously with this brief, pursuant to Fed. R. App. P. 38, a separate motion for imposition of $8,000 in sanctions against taxpayers for prosecuting this frivolous appeal. We suggest therein that the motion be carried with the case and decided by the panel at the same time as it disposes of the merits.

[webhick]

He [Bulten] doesn't seem to realize that waiting until the last minute to file a brief is a standard tactic that minimizes the other party's opportunity to respond. It's just the way litigation works most of the time.

That, and the tendency of lawyers to procrastinate and file at the last minute.

I've often thought that, if all the rules that required filing responses "within X days" were changed to read that the response "shall be filed on the Xth day, and neither sooner nor later than that," the practice of law would not be affected at all.

I beg to differ. If they changed it to read the way you mentioned, all the filings would be done at five minutes to five on the only day instead of sometime on the last day.

The post office would hate it. And then they'd go nuts and start shooting up lawyers offices, and then they'd have no one to represent them except the lawyers who filed earlier in the day on the only day to file and really...who wants a lawyer who files early? Doesn't that denote some kind of incompetence when you have a lawyer who files early in the day and leaves like an 8 hour window for the other side to receive the filing early the next morning, build a time machine, travel back in time to anytime within that 8 hour window and spend the majority of that window at a day spa getting their shiatsu on all while still having time to get their response filed at five minutes to five?

Any competent lawyer would file at the last possible minute.