Petition for Writ of Certiorari — Kersting v. United States

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5 LY Zupreme Court, U.S. |

Gjye-eC3l FILED

OCT 91 1291

= $n CLERK

NO.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

HENRY F. K. KERSTING,

Petitioner,

UNITED STATES OF AMERICA and

INTERNAL REVENUE SERVICE,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

L. T. “BuTcH” BRADT

(Counsel of Record)

6303 Feldspar

Houston, Texas 77092-4716

(713) 681-2696

Fax: (713) 688-8212

MATTHEW K. CHUNG

Suite 1501

220 South King Street

Honolulu, Hawaii 96813

(808) 545-2060

Attorneys for Petitioner,

Henry F. K. Kersting

Of Counsel to Petitioner:

TERRENCE B. ROBINSON

One West Loop South, Suite 100

Houston, Texas 77027

(713) 736-3268

Alpha Law Brief Co.— 6113 Aletha Lane — Houston, Texas 77081 — 981-9000

QUESTIONS PRESENTED

(1) Are assessments made against a taxpayer under

26 U.S.C. Sections 6700 and 6701 penalties or taxes?

(2) Does the Anti-Injunction Act (26 U.S.C. Section

7421) bar a suit to enjoin collection of penalties assessed

against a taxpayer under Title 26 U.S.C. Sections 6700

and 6701?

(3) Is Petitioner entitled to an evidentiary hearing

on his suit to enjoin collection of penalties assessed

against him under 26 U.S.C. Sections 6700 and 6701?

(4) Does it violate Due Process and Equal Protec-

tion requirements to deny Petitioner a pre-deprivation

hearing on Petitioner’s Due Process challenge to penalties

assessed against him by the I.R.S. under 26 U.S.C. Sec-

tions 6700 and 6701?

(5) Are the procedures for administrative and judi-

cial review provided under 26 U.S.C. Section 6703 con-

Stitutionally deficient?

(6) What is the test to be applied in determining

whether Petitioner has suffered irreparable injury as a

result of conduct of the I.R.S. in assessing penalties

against him under 26 U.S.C. Sections 6700 and 6701

without affording a pre-deprivation hearing?

(7) What is the proper interpretation to be given to

the provisions of 26 U.S.C. Section 6703 regarding pay-

ment of fifteen (15% ) percent of the penalty as relates

to being able to stay collection of the penalties assessed

under Section 6701 and obtain judicial review?

(8) Is the term “abusive tax shelter” defined under

the I.R.S. Code?

(9) What is the definition to be given to the term

“tax period” as relates to penalties to be assessed under

26 U.S.C. Sections 6700 and 6701?

(10) What is the Statute of Limitations for penalties

assessed under 26 U.S.C. Sections 6700 and 6701?

(11) Were the penalties assessed by the Internal Re-

venue Service against Petitioner barred, in whole or in

part, by the Statute of Limitations?

(12) Must penalties assessed under 26 U.S.C. Sections

6700 and 6701 be assessed by year?

(13) May a District Court refuse to receive evidence

on the irreparable injury which Petitioner will suffer if

Petitioner’s affidavit of irreparable injury is uncontro-

verted?

(14) Must a Petitioner state, in his affidavit of irre-

parable financial injury, each and every fact on which he

bases his conclusion that he will suffer irreparable finan-

cial injury if he is denied a hearing to contest penalties

assessed against him—especially when the affidavit is un-

controverted?

(15) May the District Court dismiss an entire case for

lack of jurisdiction when part of the case involves return

of property seized by the I.R.S. under a subpoena?

ili

PARTIES

Petitioner-Appellant: Henry F. K. Kersting.

Respondent-Appellees: Internal Revenue Service and

the United States of America.

TABLE OF CONTENTS

CUBST INS PEGE EE ccs cccenescsccssavseseens

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A. Reasons For Granting The Writ. ...................

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C. CIN CII, pc neccev te wncveanses

1. Due Process Requirements. ................000.

2. Right To Pre-deprivation Process. ..............

3. Due Process Denials By A Cost Requirement. ....

4. Substantive Due Process: Void for Vagueness. ....

5. Irreparable Injury Through Constitutional Depriva-

EE RE TGR AE ISIN pa Ru ST Se ot

6. Lack of Adequate Due Process Safeguards. ......

D. The Anti-Injunction Act Does Not Bar This Action. .

7. Sections 6700 and 6701 Assess Penalties—Not

PR OR ed sis c0 5d SRA ae eo Te eae ee yes

8. Petitioner’s Suit Falls Within Anti-Injunction Act

D. Return of Seized Materials.

CONCLUSION

Exceptions.

a. Likelihood of Irreparable Injury to Petitioner...

b. Financial Injury May Constitute Irreparable

Harm.

d Applicable Statute of Limitations. ............

RSF FCS Ree ee Cece see ss tee ea

SSSR CEASCESECCO Bese cee Pee tastees eee a

TABLE OF AUTHORITIES

CASES

Atwood Turnkey Drilling v. Petroleo Brasiliero, 875 F.2d

SURE TSE, BORD Sc dca ciek cise ehee vacnee uae ns vss

Beacon Theatres, Inc. v. Westover, 359 U.S. 500 (1959) ...

Bob Jones University v. Simon, 416 U.S. 725 (1974) .....

Boddie v. Connecticut, 401 U.S. 371 (1971) ........-....

Bond v. United States, 872 F.2d 898 (9th Cir. 1989) .....

Botta v. Scanlon, 314 F.2d 392 (2nd Cir. 1963) .........

California Motor Transport Co. v. Trucking Unlimited, 404

Oe, SU CURED 6c 00d ie dene ether ated cheee diseases

Doran v. Salem Inn, Inc., 422 U.S. 922 (1975) ..........

Bived o. Dawes, 427 -9D. BGT LISTE): vce cs ccceweicwrsns

Enochs v. William Packing & Navigation Co., 370 US.

ae me | ) RRR rrr Tere errr rr erent er CT Terres

Fuentes v. Shevin, 407 U.S. 67 (1972) ........0--eeeeee

Gates v. U.S., 874 F.2d 584 (8th Cir. 1989) ............

H.P. Lambert Co. v. Secretary of Treasury, 354 F.2d 819

(CR. EE: dada shcavatnecevlsg eres cake eaceean

International Association of Firefighters, Local 2069 v. City

of Sylacauga, 436 F. Supp. 482 (N.D. Ala., E.D. 1977)

Jolly v. United States, 764 F.2d 642 (9th Cir. 1985) .....

Kahn v. United States, 753 F.2d 1208 (3rd Cir. 1985) ...

Lithe 0. Ladera, 359 US. SbF 4EGRR) 6 ii caddis sivas cs

Mathews v. Eldridge, 424 U.S. 319 (1976) ..............

Maynard v. Cartwright, 486 U.S. 356 (1988) ............

Milsen Co. v. Southland Corp., 454 F.2d 363 (7th Cir.

BOTT: soci hi cca cbcedhrs vine Wires reckon Hiardirics

Regal Drug Corp. v. Wardell, 260 U.S. 386 (1922) .......

Ross v. Meese, 818 F.2d 1132 (4th Cir. 1987) ...........

Ryland v. Shapiro, 708 F.2d 967, 971-972 (Sth Cir. 1983)

Gutierrez v. Municipal Ct. of the S.E. Judicial District, 838

Pe FOGG Coe Ga Oe ees Fade te ewer eeeeeesen

Sampson v. Murray, 415 U.S. 61 (1974) ...............

Schenley Distillers, Inc. v. Bingler, 145 F. Supp. 517 (W.D.

Pea. T9SG) Ors De Oe eh vos hed cevckaesncdecs

Spriggs v. U.S., 660 F. Supp. 789 (E.D. Va. 1987) ......

Tri-State Generation v. Shoshone River Power, Inc., 805

F.2n 353 CO as Deca bcan eee ekake vere eras

United States v. Abrahams, 312 F. Supp. 1035 (S.D. N.Y.

1: Sn a eee pene neh = pre Saree tN Pe air eee ty Nt eye yA

United States v. Dahlstrom, 713 F.2d 1423 (9th Cir. 1938),

CORE: CO, Ce Us FE knead ere eeeecrneeneen

Page

10,

CASES Page

United States v. Mazurie, 419 U.S. 544 (1975) .......... 16

United States v. National Dairy Corp., 372 U.S. 29 (1963) 16

United States v. Powell, 423 87 (1975) ....... ccc cee eeee 16

United States v. Pridgen, 403 F. Supp. 1109 (S.D. N.Y.

i | EEE ee By ttn Pe en Wee aN mee 21

Von der Ahe v. Howland, 508 F.2d 364 (9th Cir. 1974) .. 29

Weir v. U.S., 716 F. Supp. 574 (N.D. Ala. 1989) ........ 26, 29

Wolff v. McDonnell, 418 U.S. 539 (1974) ...........005- 10

CONSTITUTIONS

Page

First Amendment to the United States Constitution ...... 8

Fifth Amendment to the United States Constitution ...... 8

STATUTES

Title 5 U.S.C. Section 701-706; Administrative Proce-

ei nos bead 4c ad 6 UR kaa ee eee 8

Section 6501(a) of the Internal Revenue Code of 1954, as

amoenaee, 76 U.S.C. Section GIG | obec cc viel bewcesse 2, 20, 27

Section 6671(a) of the Internal Revenue Code of 1954, as

gupented, 26 U.S.C. Sectiow G67E 5... scckisteesusses 2

Section 6672 of the Internal Revenue Code of 1954, as

amended, 26 U.S.C. Section 6672 ...........cccees: 2

Section 6700 of the Internal Revenue Code of 1954, as

amended, 26 U.S.C. Section 6700 .......... 1, 2,3, 6,7, 8,9, 20

Section 6701 of the Internal Revenue Code of 1954, as

amended, 26 U.S.C. Section 6701 .......... 1, 2,3, 6,7, 8,9, 20

Section 6703 of the Internal Revenue Code of 1954, as

amended, 26 US.C. Section 6703 .. 2.0.05. . ccwcees 2, 8, 15, 23

Section 7421 of the Internal Revenue Code of 1954, as

amended, 26 U.S.C. Section 7421 (‘“Anti-Injunction

ME Dos Vinay Ge iccn bee wk Wesuale a bee etE SUL letess 2

ee ee a NR DADE. hc nok vale ku weh kee e Ne wns 8

Title 28 U.S.C. Section 2201-2202, Declaratory Judg-

NE BE Ode Bara aaa Cnidcs nd WE aioe ae we ee eee 8

ee ae a, PE PED Ss 5 og upc ev oatewan wenden 2, 8, 30

Stee GE bs ces on dawe wks idea bheckees 28

upee we Uc, Beet EASECG) nn hvac vceucvcescvavs 2

NO.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

HENRY F. K. KERSTING,

Petitioner,

UNITED STATES OF AMERICA and

INTERNAL REVENUE SERVICE,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

To the Honorable Chief Justice of the United States, and

to the Associate Justices of the United States Supreme

Court:

Henry F. K. Kersting (“Petitioner”) respectfully prays

that a Writ of Certiorari issue to review the decision of

the United States Court of Appeals for the Ninth Circuit,

which sustained an order of the United States District

Court of Hawaii dismissing Petitioner’s suit for injunctive

relief to obtain a pre-deprivation hearing relating to

penalties assessed against him by the Internal Revenue

Service (“I.R.S.”) under 26 U.S.C. Sections 6700 and

6701.

REPORT OF OPINIONS

The opinion of the Ninth Circuit Court of Appeals is

not reported but is set forth in Appendix C.

The order of the United States District Court for the

District of Hawaii is not a reported opinion and is set

forth in Appendices A and B.

JURISDICTION

The decision sought to be reviewed herein was entered

by the United States Court of Appeals for the Ninth

Circuit on August 2, 1991, and is set forth in Appendix C.

The jurisdiction of this Court is invoked under 28

U.S.C. Section 1254(1).

STATEMENT OF THE CASE

This case involves the question of Petitioner’s consti-

tutional right to a pre-deprivation hearing before having

to pay penalties assessed against him by the I.R.S.; and

whether the Anti-Injunction Act, 26 U.S.C. Section

7421(a), applies to and/or prohibits the issuance of a

preliminary injunction against the I.R.S.’s collection of

penalties assessed against Petitioner under I.R.C. Sections

STATUTES INVOLVED

The following statutes are involved in this case: 26

U.S.C. Sections 6501(a), 6671(a), 6672, 6700, 6701,

6703 and 7421; 28 U.S.C. Sections 2412 and 2462. These

are set forth in Appendix D.

The following Constitutional provisions are involved in

this case: the First and Fifth Amendments of the United

States Constitution. These are set forth in Appendix D.

6700 and 6701 without the affordance of a pre-depriva-

tion hearing when the percentage (15%) of the total

penalties assessed that Petitioner must have paid within

30 days of assessment to secure his day in court amounts

to approximately $581,789.54; and when failure to pay

said amount requires payment of $3,878,463 plus interest

before Petitioner can seek a refund and obtain his day in

court. The case further involves the irreparable injury

which will be caused to Petitioner due to his inability to

pay the penalties assessed against him and the imminent

denial of his right to Due Process and Equal Protection

under the Fifth Amendment of the United States Con-

stitution.

In October 1989, without prior hearing or meaningful

opportunity to be heard, the I.R.S. issued two notices of

penalties against Petitioner under 26 U.S.C. Sections 6700

and 6701, totaling $3,878,463 plus interest.’

1. The first notice received by Petitioner, dated October 16,

1989, showed a “penalty assessment” under Section 6700, of $1,545,-

201.00 for the “tax period December 31, 1988;” and indicated that

the amount of the penalty for promoting an abusive tax shelter is

the “greater of $1,000 or 20% of the gross income derived or to be

derived from the activity.”

In order for him to contest the penalty, the notice allowed

Petitioner thirty (30) days from the date of the notice to pay “15%

of the penalty and file a claim for refund on form 843.” The notice

further described the remedies after denial of the claim. The text

ended with the words “[i]f you do not take these actions, you will

have to pay the full amount shown below.” On the “Return This

Part . . .” portion of the notice were the words “Amount You

CAE: i ecadeans $1,545,201.00”

The second notice, imposed under Section 6701 and dated October

23, 1989, also identified as a Notice of Penalty Charge, showed an

additional penalty assessment against Petitioner in the amount of

$2,330,000.00, plus interest in the amount of $3,262.67 charged on

the prior balance of $1,545,201.00, for a total balance due of

$3,878, 463.67.

The second notice continued by saying that if Petitioner wanted

Being unable to pay 15% of the amounts shown as

“penalty assessments,’ or approximately $581,769.53,

within the required thirty (30) days to obtain his day in

court; with no pre-deprivation hearing on the penalties, or

even a meeting, much less any notice of the factual

basis of the penalties, Petitioner invoked the equity

jurisdiction of the District Court and filed suit against the

United States and the I.R.S.

Petitioner’s five count complaint raised claims chal-

lenging Sections 6700, 6701 and 6703 of the Code as a

violation of Petitioner’s constitutional rights.” Petitioner

also filed a Motion for Preliminary Injunction.

to contest the assessment, he had “30 days from the date of this

notice to pay 15% of the penalty and file a claim for refund on

form 843.” The notice further warned: “[i]Jf you do not take these

actions, you will have to pay the full amount shown below.” The

amount shown below on the “Return . . .” portion of the notice is

follows: “Amount You Owe ......... $3,878,463.67. This is the

same amount shown on the notice as “Balance Due.”

2. Count I alleged that Section 6703 violated Petitioner’s right

to procedural Due Process for failing to allow a _predeprivation

hearing prior to requiring payment of fifteen (15%) percent of the

total assessment. The count further sought a predeprivation hearing

and an order enjoining collection of the penalties assessed.

Count II chailenged Sections 6700, 6701 and 6703 as being viola-

tive of the Due Process and Equal Protection Clauses of the United

States Constitution as applied to Petitioner because the statutes pro-

vide no notice of what exactly is the prohibited conduct and because

he can only get his day in court by paying nearly $600,000 within 30

days of assessment, as a prerequisite to filing a refund claim and

thereby obtaining judicial review of the penalties assessed.

Count III sought to enjoin certain activities of the I.R.S. that

chill or interfere with Petitioner’s First Amendment rights of free

speech. Count IV sought to enjoin the I.R.S. from interfering in

Petitioner’s Fifth Amendment right to liberty and property. Count V

sought to force the I.R.S. to return documents which the I.R.S.

subpoenaed from Petitioner in January, 1989, in a separate pro-

ceeding and which had not been returned—-documents which were

necessary to attempt to understand and respond to the penalty

assessments imposed against Petitioner.

The District Court was presented with a complicated

denial of Petitioner’s constitutional right to Due Process,

to notice and hearing. By Larry Tahara’s declaration

(infra), Respondents admitted the arbitrary and capri-

cious nature of the assessments against the Petitioner

herein.

On November 13, 1989, within thirty days of the first

assessment, a hearing was had on Petitioners Motion

for Preliminary Injunction. Petitioner supported his mo-

tion with three (3) affidavits and over 150 pages of ex-

hibits. Petitioner attested to the demands contained in

the two notices of penalty charge; his inability to afford

or raise within 30 days the nearly $600,000, or 15%

of the total penalty charge required by the notice before

filing a refund claim and a challenge to the penalty assess-

ments; and Petitioner attested to the irreparable injury

which he would suffer by being forced into bankruptcy

if he was denied a pre-deprivation hearing.

Petitioner’s counsel, by affidavit, described, inter alia,

the failure of the I.R.S. to have a pre-assessment meeting

or hearing. The third affidavit provided an expert opinion

by Joe Alfred Izen, Jr. Esq., that the term “abusive tax

shelter” is undefined by the Code, and that the validity

of deductions generated by Petitioner’s corporations was

before the United States Tax Court in Dixon v. Com-

missioner, Docket No. 83-9283. The pending decision in

Dixon bears directly on whether such deductions gener-

ated by the corporations with which Petitioner is associ-

ated, if valid, could be considered “abusive.”

Respondents served their opposing papers containing

the Declaration of Larry Tahara (“Tahara”), the Revenue

Agent generating the penalty notices, Tahara’s declara-

tion showed that he based the assessment against Peti-

tioner solely on the income of the various corporations

with which Petitioner is associated. Tahara further stated

that he had no idea what income Petitioner individually

earned from the alleged promotion or from the corpora-

ticns. Tahara assessed Petitioner individually just the

same.

Specifically, Tahara stated that he based the assessment

against Petitioner solely on the income of the various

corporations with which Petitioner is associated. Tahara

determined that the corporations with which Petitioner

is associated took in some $10,000,000 in gross income

from 1982 through 1988. To determine the amounts of

the penalty assessments against Petitioner under Section

6700 and 6701, Tahara said he calculated the penalties

by determining a figure:

“

. . equal to 10% of the total fees (gross income)

paid to Kersting’s corporations during the period

September 4, 1982, through July 17, 1984 and 20

percent of the amounts paid to Kersting’s corpora-

tions during the period July 18, 1984 through De-

cember 31, 1988. In determining the amount of the

Section 6701 penalty to be assessed in this case, I

reviewed the interest statements sent to the investors

and arrived at a penalty equal to $1,000 for each

investor in the programs for each year... .”

Tahara then attested to a yearly breakdown of the

penalties under both Sections 6700 and 6701 for each

year from 1982 through 1988. Tahara conjectured what

Petitioner might have made based on a percentage of the

corporations’ gross income; but he assessed Petitioner

individually the Section 6700 penalty based on the total

gross income of the corporations!

Respondents never contested Petitioner’s claim that he

did not have the nearly $600,000, that he could not raise

such a sum, and that he has never earned or received

the gross income necessary to arrive at the penalty

assessed by the I.R.S. against him. Again, this Court

should remember that Petitioner’s affidavit of irreparable

injury was uncontroverted by Respondents.

The District Court, sua sponte, dismissed the entire

case for lack of subject matter jurisdiction, without afford-

ing Petitioner an evidentiary hearing. (Appendix B) In

so acting, the Court didn’t address the return of Peti-

tioner’s records from the I.R.S., or the attorney’s fees

incurred in briging the suit to obtain the return of Peti-

tioner’s records and property.

On appeal to the Court of Appeals for the Ninth Cir-

cuit, the appeals court determined that the Petitioner was

required to pay 15% of $1,545,201 or $231,780.15,

under Section 6700 and 15% of $1,000 ($150) for a

single 6701 penalty.” The Ninth Circuit concluded that

Petitioner’s claim for return of documents was moot. The

Court of Appeals also determined that Petitioner provided

“no evidence irreparable injury would result” and there-

fore he had not met the requirements for avoiding the

strictures of the Anti-Injunction Act.

3. The Ninth Circuit’s determination that Petitioner need pay

only $150 of a single Section 6701 penalty to obtain judicial review

and (impliedly) a stay of collection of the rest of the Section 6701

penalties, completely ignores the absence of any legal authority for

this position. (See infra pages 9-10, n.4, and Substantive Due

Process) The Ninth Circuit cannot create a remedy not authorized

by Congress nor envisioned by a plain reading of Section 6703. The

only way for Petitioner to obtain judicial review of all of the

penalties while staying collection activities of all of the penalties

is by payment of 15% of the entire penalty assessments within

30 days.

The Ninth Circuit affirmed the District Court’s dis-

missal of Petitioner’s suit without addressing whether

assessments under 26 U.S.C. Sections 6700 and 6701 are

penalties to which the Anti-Injunction Act does not apply.

Kersting petitioned this Court for a writ of certiorari

to resolve the important constitutional issues raised by

this case.

The jurisdiction of the District Court was predicated

upon Title 28 U.S.C. Section 1331; Title 28 U.S.C. Sec-

tions 2201, 2202—the Declaratory Judgment Act; Title

5 U.S.C. Sections 701-706, the Administrative Proce-

dure Act; the First and Fifth Amendments to the United

States Constitution; Title 26 U.S.C. Sections 6700 - 6703

and 7609, et seq.; and, Title 28 U.S.C. Section 2412—

the Equal Access to Justice Act.

ARGUMENT

A. Reasons For Granting The Writ.

This case is ripe for Supreme Court review to resolve

the interpretation of an important Federal statute relating

to the Due Process safeguards inherent in the purported

“appeal rights” afforded after assessment of penalties by

by the I.R.S. This case is also ripe for Supreme Court

review to resolve a failure of the Ninth Circuit Court of

Appeals to follow binding precedents of this Court. This

case is also ripe for Supreme Court review to interpret

the procedure to be used in assessing penalties by the

I.R.S. in certain circumstances. This case is also ripe for

Supreme Court review to determine whether Congress

intended to except Sections 6700 and 6701 of the Code

from the statute of limitations. The statutory framework

in question has a substantial impact on power of the

I.R.S. to assess penalties and preclude taxpayers from

obtaining pre- and/or post-deprivation hearings on these

assessments. The statutory framework and the interpreta-

tion to be given thereto impact directly on First and Fifth

Amendment rights. This Court has yet to rule on issues

presented by this case and its guidance is required to

resolve an admittedly difficult question on the itnerpreta-

tion of a statute which has a direct and meaningful impact

on a significant segment of the public.

B. Statutory Framework.

The Internal Revenue Code, 26 U.S.C. Section 6700

authorizes the I.R.S. to impose penalties against persons

who “promote abusive tax shelters.” From 1982 to 1984

the penalty was the greater of $1,000 or 10% of the gross

income derived or to be derived by such person from such

activity. (Appendix D)

Section 6701 authorizes the I.R.S. to impose penalties

against persons who “aid and abet the understatement of

tax liability.” The penalty is $1,000 with respect to any

document relating to any taxpayer for any taxable period.

(Appendix D) The term “taxable period” is not defined.

To obtain judicial review of the penalties, Section 6703

requires Petitioner to pay 15% of the amount of the

penalties and file a claim for refund of the amount so paid

within 30 days of the notice and demand of any penalty

under Section 6700 or 6701. Failure to pay 15% of the

penalties and the filing of a claim for refund within 30

days, bars Petitioner from obtaining judicial review of

the I.R.S. action until the full penalties and interest are

paid. (Appendix D)*

C. Constitutional Deprivations.

1. Due Process Requirements.

“The right to be heard before being condemned to

suffer grievous loss of any kind,” whether loss of liberty,

property or reputation, “is a principle basic to our soci-

ety.” Mathews v. Eldridge, 424 U.S. 319 (1976).

“The Supreme Court consistently has held that some

form of hearing is required before an individual is

finally deprived of a property interest.”

Wolff v. McDonnell. 418 U.S. 539, 557-558 (1974).

“[{I]n order that they may enjoy that right (to a hearing)

they must first be notified.” Fuentes, infra.

“Procedural Due Process imposes constraints on gov-

ernmental decisions which deprive individuals of

“liberty” or “property” interests within the meaning

of the Due Process Clause of the Fifth or Fourteenth

Amendment. . . . The fundamental requirement of

Due Process is the opportunity to be heard at a mean-

ingful time and in a meaningful manner.

Eldridge, supra, at pp. 332-33 (1976) [Italic Emphasis

Supplied]; Boddie v. Connecticut, 401 U.S. 371 (1971);

Fuentes v. Shevin, 407 U.S. 67 (1972).

4. Sections 6700, 6701 and 6703 lack any hearing requirement

commensurate with Fifth Amendment Due Process. The only way to

obtain judicial review and stay collection activities is to pay fifteen

(15%) percent of the entire assessment within 30 days of the

penalty notice and seek a refund. The only alternatives for judicial

review without a stay are to pay the entire assessment, plus interest

and sue for a refund, or file bankruptcy.

The I.R.S. penalty assessment of almost $3.8 Million

is a significant property interest. Due Process requires

that Petitioner receive notice and a hearing before he must

pay the penalty. The I.R.S. notices required the payment

of nearly $600,000 before Petitioner could file a claim

for refund and obtain a hearing on the penalties. There

is no law, rule, regulation or court case which allows

Petitioner to stay collection activities and obtain judicial

review of the assessments with ut payment of 15% of the

entire penalty assessment against him. See, Note 3 and

4, supra. Petitioner was thus forced to sue for a hearing

and to enjoin collection activity pending such a hearing

under the principles shown below.

2. Right To Pre-deprivation Process.

Under the Constitution, Petitioner’s claim to a pre-

deprivation process must be determined considering three

factors:

“First, the private interest that will be affected by

the official action; second, the risk of an erroneous

deprivation of such interest through the procedures

used, and the probable value, if any, of additional or

substitute procedural safeguards; and finally, the

Government’s interest, including the function in-

volved and the fiscal and administrative burdens that

the additional or substitute procedural requirements

would entail.”

Mathews v. Eldridge, 424 U.S. 319, 335 (1976).

The issue of whether Sections 6700, 6701 and 6703

provide adequate Due Process protection and/or requires

Eldridge pre-deprivation hearing protection are matters

of first impression for this Court. The Ninth Circuit has

previously applied Eldridge to these statutes, as noted

below, but refused to apply their own precedent herein.

The Ninth Circuit’s legal precedents for upholding a

taxpayer's right to Due Process and a pre-deprivation

hearing arise from fact situations very similar to the

instant case. Jolly v. United States, 764 F.2d 642 (9th

Cir. 1985); Bond v. United States, 872 F.2d 898, 900

(9th Cir. 1989).

In Jolly, supra, at p. 645, the Ninth Circuit considered

Jolly’s claim to pre-deprivation process in the context of

penalties assessed against him for filing a frivolous tax

return and found that such a claim must be examined

considering the Eldridge three-part test noted above.” Jolly

demonstrated no financial or other hardship from having

to pay $75 (15% of $500) before obtaining judicial

review of the I.R.S. assessments (while Petitioner here

raises a Due Process challenge to the administrative and

judicial procedures that would require him to pay nearly

$600,000 before a meaningful opportunity to be heard

could be had).

In applying the Eldridge test, the Ninth Circuit stated:

“If the individual bringing a procedural Due Process

challenge demonstrates “a likelihood of irreparable

harm resulting from the lack of a pre-deprivation

hearing,” it is unlikely that the government will be

able to demonstrate any public interest that will

overcome the individual’s interest, and some addi-

5. Unlike Petitioner, Jolly could turn to a long line of cases to

know that his conduct constituted the filing of a “frivolous return”

for purposes of Section 6702 before he filed same. The merits and

validity of the investments promoted by Petitioner, however, have no

explicit statutory or case law prohibition and remain at issue before

the Tax Court.

tional form of pre-deprivation process will probably

be required. Jn the absence of such a showing, how-

ever, Eldridge requires courts to “balance the govern-

mental interest in [retaining] the existing process

against the private interest that will be affected and

the probability of erroneous deprivation associated

with that process.”

Jolly at page 645 [Italic Emphasis Supplied], quoting

Kahn v. United States, 753 F.2d 1208, 1219-20 (3rd

Cir. 1985).

In simple terms, Eldridge and Jolly require that if the

taxpayer demonstrates a likelihood of irreparable injury

from the lack of a pre-deprivation hearing, “some addi-

tional form of pre-deprivation process will probably be

required.” Jolly at 641 [Italic Emphasis Supplied] But

the Ninth Circuit went further and explained “that Eld-

ridge’s three-part test must be applied in evaluating pro-

cedural Due Process challenges to Section 6703 regardless

of any favorable finding as to irreparable injury.” Jolly,

at 645, citing Kahn, supra.

Even if the taxpayer fails to demonstrate irreparable

injury, the Court must still apply the three-part Eldridge

test and “balance the governmental interest in retaining

the existing process against the private interest” affected

by the process, and the “probability of erroneous depriva-

tion associated with that process.” /d. Thus, Jolly required

the District Court and the Ninth Circuit in this case to

apply the Eldridge balancing test to Petitioner’s claim

even after finding that he did not show irreparable injury.

Had they done so, they would have found the govern-

ment’s interest in the existing administrative procedure

(i.e., questionable notice, no hearing, and no showing of

the government’s evidence against him) outweighed by

Petitioner’s private interest in obtaining review of the

penalties without first paying the nearly $600,000 re-

quired in this case and the clear risk of erroneous depriva-

tion associated with the process. Obviously, the District

Court and the Ninth Circuit misunderstood the import

of Jolly.

The distinctions between Jolly and the instant case are

obvious. The critical difference is the disparity in the size

of the payment required ($75 versus $600,000) before

obtaining judicial review of the assessments. This em-

phasizes the reasons to apply these authorities to the

I.R.S.’s actions herein and grant the relief sought by

Petitioner.

Finally, the Government’s interest in retaining the exist-

ing procedures involved herein do not merit abrogating

Due Process. The I.R.S. has not shown any public interest

that overcomes Petitioner’s individual interest herein, and

some additional form of pre-deprivation process is there-

fore required. Eldridge, supra, requires courts to balance

the governmental interest in [retaining] the existing pro-

cess against the private interest that will be affected and

the probability of erroneous deprivation associated with

that process. The District Court was therefore bound to

hold a hearing and apply the Eldridge test to Petitioner’s

claim.

3. Due Process Denials By A Cost Requirement.

This Court has—

“{e|stablished that a statute or a rule may be held

constitutionally invalid as applied when is operates to

deprive an individual of a protected right . . . [jJust

as a generally valid notice procedure may fail to

satisfy Due Process because of the circumstances of

the defendant, so too a cost requirement, valid on its

face, may offend Due Process because it operates to

foreclose a particular party's opportunity to be

heard.”

Boddie v. Connecticut, 401 U.S. 371, 379-380 (1971)

{Italic Emphasis Supplied].

Further, the right of access to the courts springs from

the First Amendment. Ryland v. Shapiro, 708 F.2d 967,

971-972 (Sth Cir. 1983).

“".. [t]he right to petition extends to all departments

of the Government. The right of access to the courts

is indeed but one aspect of the right of petition.”

California Motor Transport Co. v. Trucking Unlimited,

404 U.S. 508, 510 (1972).

Respondents’ conduct in assessing the penalties denied

Petitioner the opportunity for judicial review of the assess-

ments without forcing him into bankruptcy. This is an

unparalleled interference with, and an abridgement of,

Petitioner’s First and Fifth Amendment rights, to petition

for the redress of grievances, to Due Process and to Equal

Protection.

By illegally lumping penalties attributable to seven

separate years into the “tax period ended 12/31/88,”

Respondents set the amount that Petitioner must have

paid within 30 days so high as to deny him access to a

judicial review as contemplated under Section 6703. Peti-

tioner is thus to suffer the “slings and arrows” of the

I.R.S.’s collection activities without ever being able to

obtain judicial review of the penalties unless he files bank-

ruptcy—while losing all his assets. Thus, without this

Court’s intervention he will also suffer constitutional de-

privations unequaled in enormity at the hands of the I.R.S.

4. Substantive Due Process: Void for Vagueness.

Due Process requires that statutes give persons reason-

able notice that their conduct is at risk, otherwise the

statutes will fail for vagueness. Maynard v. Cartwright,

486 U.S. 356 (1988); United States v. Powell, 423 U.S.

87 (1975); United States v. Mazurie, 419 U.S. 544

(1975); United States v. National Dairy Corp., 372 USS.

29 (1963). Petitioner can only be punished for violation

of known standards of conduct. United States v. Dahl-

strom, 713 F.2d 1423 (9th Cir. 1983), cert. denied, 466

U.S. 980. Here, the Internal Revenue Code fails to define

the term “abusive tax shelter,” but penalizes Petitioner

for its promotion.

The Due Process Clause requires this Court to examine

Sections 6700 and 6701 to see if they gave Petitioner

reasonable notice that he was engaging in prohibited con-

duct (especially when the merits of the alleged shelters

have yet to be decided by the United States Tax Court);

and whether the statutes afforded Petitioner a “meaningful

hearing at a meaningful time.” This Court should be

mindful that nowhere contained in the Code is a defini-

tion of an “abusive tax shelter.”

5. Irreparable Injury Through Constitutional

Deprivation.

Petitioner has properly alleged a deprivation of Con-

stitutional rights, which case authority holds constitutes

irreparable injury as a matter of law.

As stated by the Ninth Circuit:

“{[w]hen an alleged deprivation of a constitutional

right is involved, most courts hold that no further

showing of irreparable injury is necessary.”

Gutierrez v. Municipal Ct. of the S.E. Judicial District,

838 F.2d 1031 (9th Cir. 1988); See also Elrod v. Burns,

427 U.S. 347, 373 (1976); Ross v. Meese, 818 F.2d

1132 (4th Cir. 1987); and /nternational Association of

Firefighters, Local 2069 v. City of Sylacauga, 436 F.

Supp. 482 (N.D. Ala., E.D. 1977).

Having been afforded no pre-deprivation hearing on

the penalties and upon failure to pay the 15% required

by Section 6703, the denial of a post-deprivation hearing

was assured. Thus, the District Court and the Ninth Cir-

cuit should have held, as this Court should hold, that the

constitutional deprivations suffered by Petitioner consti-

tute irreparable injury as a matter of law.

6. Lack of Adequate Due Process Safeguards.

The risk of erroneous deprivation in this case is great.

When the I.R.S. issues these penalties, the merits of the

underlying “shelter” often remain to be determined. This

is not a question of a taxpayer’s self-assessment for pur-

poses of a frivolous return penalty. Jolly, supra. Here the

I.R.S. must determine not only Petitioner’s gross income

from the activity, but also the number of documents

allegedly prepared by him. The facts of the assessments are

complicated, involving over seven years, thirty-five corpora-

tions, thousands of other taxpayers, and allegedly millions

of dollars in gross revenues. But the I.R.S. afforded Peti-

tioner no meaningful opportunity to be heard before or

after assessing the nearly $4,000,000 in panalties against

him.

The Internal Revenue Code, its rules and regulations

fail to provide any other procedure for obtaining judicial

review and a stay of collection activities, other than pay-

ment of 15% of the entire assessment within 30 days and

the filing of a claim for refund. Even if you concede that

Petitioner could pay $150 of one Section 6701 penalty

and thereby obtain a stay of collection activities and

judicial review of that one penalty assessment, it ignores

Petitioner’s inability to thereby stay collection activities

and obtain judicial review of the other 2,329 Section 6701

penalties assessed against him. See, Notes 3 and 4 supra.

There is no procedure to allow a taxpayer to require

the I.R.S. to hold a pre-assessment hearing. The only

procedure to stay collection of the entire assessment and

obtain judicial review of the I.R.S. assessments under

Sections 6700 and 6701 is through payment of 15% of

the entire assessment within thirty (30) days. Failing

that, the only other statutory remedies available to the

taxpayer are to pay the entire assessment plus interest and

sue for a refund, or to file bankruptcy.°

Unlike Bob Jones University v. Simon, 416 U.S. 725

(1974), the Section 6703 procedures complained of here-

in do not—

6. This is obviously no remedy since if the taxpayer can pay

almost $4,000,000 after 30 days, the taxpayer should be able to pay

$600,000 within 30 days of assessment. The problem arises when the

taxpayer cannot pay the nearly $600,000 within 30 days because then

the taxpayer can only obtain judicial review by filing of bankruptcy.

Otherwise, the I.R.S. can levy upon and sell all of the taxpayer’s

assets and he will never be able to raise the entire assessment

amount, much less obtain judicial review.

“offer petitioner a full, albeit delayed, opportunity

to litigate the legality of the Service’s [penalty assess-

ments] .. .”

In contrast, these procedures assure Petitioner will be

afforded no opportunity to litigate their legality at all.

B. The Anti-Injunction Act Does Not Bar This

Action.

The Anti-Injunction Act, 26 U.S.C. Section 7421, (the

“Act”) does not apply and an injunction may issue where

the tax sought to be enjoined is in reality a penalty or

special and extraordinary circumstances are present.

Schenley Distillers, Inc. v. Bingler, 145 F.Supp. 517, 520-

21 (W.D. Penn., 1956), aff'd 353 U.S. 933. The Act

preceded Schenley, supra.

The Act does not prevent the granting of relief by way

of injunction where an assessment, in the form of a tax, is

in reality a penalty in the nature of punishment. Lipke v.

Lederer, 259 U.S. 557 (1922); Regal Drug Corp. v. War-

dell, 260 U.S. 386 (1922). These cases, while of narrow

scope, are still good law, as noted in Bob Jones University

v. Simon, 416 U.S. 725, 743 (1974) [relying upon

Graham v. Dupont, 262 U.S. 234 (1923)].

The District Court and the Ninth Circuit held that the

Anti-Injunction Act barred Petitioner’s suit. Petitioner

disagrees. The I.R.S. assessed a penalty against him, not

a tax. There is no basis in law or fact for the lower

Courts’ determination that the amounts assessed were

taxes, not penalties, thereby allowing the Anti-Injunction

Act to bar this suit.

Petitioner also can find no authority that applies the

Act to preclude Due Process, and to deny notice and a

hearing on the merits of the tax or penalty. Petitioner

sought to enjoin collection of the statutorily required 15%

until he received a pre-deprivation hearing, or a full

hearing on the merits of the assessment. The District

Court and the Ninth Circuit, however, applied the Act

to deny the injunction, thereby enforcing the assessments

and requiring the 15% payments before allowing a hear-

ing on the merits. Congress never intended to use the Act

to deny Due Process or Equal Protection. But it hap-

pened here.

7. Sections 6700 and 6701 Assess Penalties—

Not Taxes.

The clear reading of Sections 6700 and 6701, with the

legislative history of these statutes, shows that these

statutes deal with penalties—not taxes.

“When by its very nature the imposition is a penalty,

it must be so regarded. . . . It lacks all of the ordin-

ary characteristics of a tax, whose primary function

“is to provide for the support of the government”

and clearly involves the idea of punishment for in-

fraction of the law—the definite function of a

penalty.”

Lipke, supra, at pages 562.

Title 26 U.S.C. Section 6671 (Appendix D), does not

make the Section 6700 and 6701 penalties taxes, it states

instead that they “. . . shall be assessed and collected in

the same manner as taxes.” This is exceedingly different

from Chapter 68, Subchapter A (Title U.S.C. §§ 6651,

et seq.), wherein the “penalty” is added to and becomes

part of the tax.

Title 26 U.S.C. Section 6672 (Appendix D) is also not

dispositive of the issue before the Court, since that sanc-

tion, although denominated a penalty, is merely a tax

collection device. Botta v. Scanlon, 314 F.2d 392 (2nd

Cir. 1963); United States v. Abrahams, 312 F.Supp. 1035

(S.D. N.Y. 1970); United States v. Pridgen, 403 F.Supp.

1109 (S.D. N.Y. 1975).

8. Petitioner’s Suit Falls Within Anti-Injunc-

tion Act Exceptions.

The District Court and the Ninth Circuit adopted the

government’s arguments that penalties assessed pursuant

to Sections 6700 and 6701 of the Code are deemed to be

taxes, and thereby applied the Anti-Injunction Act to

dismiss Petitioner’s entire case. Assuming, arguendo, that

the Anti-Injunction Act does apply to said penalties, the

Courts hereunder erred by failing to find that Petitioner’s

claims fit within judicial exceptions to the Act.

The standards for exception to the Anti-Injunction Act

are set out in Bob Jones University v. Simon, 416 U.S.

725, 736-37 (1974) (plaintiff must show irreparable in-

jury and “certainty of success on the merits.”) and in

Enochs v. William Packing & Navigation Co., 370 US.

1, 7 (1962) (A preliminary injunction should issue only

“if it is clear under the circumstances that under no cir-

cumstances could the Government prevail”). The courts

erred in failing to find that Petitioner’s claims met said

standards, for as shown herein, Petitioner showed both irre-

parable injury and his certainty of success on the merits.

Under an exception to the Anti-Injunction Act one

must show that “equity jurisdiction otherwise exists.” Re-

spondents have argued that Petitioner “clearly has an

adequate remedy available in the form of a refund suit.”

As stated above, Petitioner was required to pay nearly

$600,000 within 30 days in order to obtain this supposed

remedy (which he was not able and is still not able to

pay). It requires a great “leap of faith” to pretend that

this could ever be considered an adequate remedy. Surely

the term “adequate” must imply some practical ability

by a plaintiff to access the proposed remedy. Neither Peti-

tioner, nor anyone else, could reasonably be asked to

meet such a financial burden in such a short time in search

of redress by the courts and yet realistically be said to

have been afforded an “adequate” remedy. Petitioner is

simply unable to pay such an exorbitant amount. This

Court should remember that this exorbitant amount was

assessed in clear derogation of statute and controlling case

law. Bond, supra. Now the Respondents would use this

improper and constitutionally invalid assessment to msure

Petitioner’s inability ever to challenge the assessments’

unconstitutionality.

Again, as this honorable Court has stated—

“[a] cost requirement, valid on its face, may offend

Due Process because it operates to foreclose a parti-

cular party’s opportunity to be heard.”

Boddie, supra, at p. 380.

Clearly, a requirement that so effectively forecloses

one’s opportunity to be heard negates any argument of

“adequate” remedy.

a. Likelihood of Irreparable Injury to Peti-

tioner.

Irreparable injury is the essential prerequisite for in-

junctive relief in any case. This Court has stated:

“(t]he basis of injunctive relief in the federal courts

has always been irreparable harm and inadequacy of

legal remedies.”

Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506-

507 (1959).

The denial of Due Process, whether a full hearing on

the merits or a pre-deprivation hearing, for Petitioner,

coupled with the imminent denial of subsequent recourse

in the courts clearly results in irreparable injury to Peti-

tioner. Petitioner was arbitrarily and capriciously assessed

penalties by the I.R.S., then required to pay a percentage

amounting to almost $600,000 (which he and clearly very

few people could be expected to be able to raise in the

(30) thirty days allotted under Section 6703). Upon his

failure to pay this exorbitant amount, Petitioner was auto-

matically required to pay $3,878,463 in total penalties

plus interest without any further recourse. Clearly, this is

effectively a deprivation of Due Process and Equal Pro-

tection amounting to injury of an irreparable nature where

Petitioner is required to pay such an exorbitant amount

without any further redress in the courts. This is particu-

larly so, when the I.R.S. made no challenge to Petitioner’s

verified assertion of his inability to pay the penalty assess-

ment percentage or his being forced into bankruptcy if he

is denied a pre-deprivation hearing.

b. Financial Injury May Constitute Irrepar-

able Harm.

While the Due Process deprivations suffered by Peti-

tioner sufficiently evidence irreparable injury, case author-

ity makes it clear that irreparable injury may also be

shown in the form of financial harm. Doran v. Salem Inn,

Inc., 422 U.S. 922, 932 (1975). Contrary to the Ninth

Circuit’s determination that such harm will not constitute

irreparable injury, this Court, as well as other Circuit

Courts, have clearly determined otherwise.

The District Court and Ninth Circuit’s cite this Court’s

decision in Sampson v. Murray, 415 U.S. 61 (1974) to

support their decisions. The reliance on this decision is

misguided in that the facts of Sampson v. Murray differ

significantly from those presented here by Petitioner. In

Sampson, the Respondent’s unverified complaint alleged

merely that “she might be deprived of her income for an

indefinite period of time.” This alleged temporary depriva-

tion of income in Sampson cannot be equated with the

imminent threat of bankruptcy and financial ruin faced by

Petitioner herein, especially in light of the continued col-

lection activities which have occurred durng the last two

years. Indeed this Court has ruled in Doran v. Salem, Inc.,

supra, that where—

“

. respondents alleged (and petitioner did not

deny) that absent preliminary relief they would

suffer a substantial loss of business and perhaps even

bankruptcy, ...

this type of injury sufficiently meets the standards for

granting injunctive relief.

Several Circuit Courts have recognized this form of

irreparable harm as well. The Fifth Circuit in Atwood

Turnkey Drilling v. Petroleo Brasiliero, 875 F.2d 1174

(Sth Cir. 1989) found injunctive relief appropriate where

no evidence was submitted to contradict the claim that

respondent would be forced into bankruptcy. The Fifth

Circuit stated that while it is the general rule that injunc-

tive relief is inappropriate where harm is strictly financial,

“an exception exists where the potential economic

loss is so great as to threaten the existence of the

movant’s business.”

Id. at 1179. [Citations Omitted] See generally, Milsen

Co. v. Southland Corp., 454 F.2d 363 (7th 1971); Tri-

State Generation v. Shoshone River Power, Inc., 805 F.2d

351 (10th Cir. 1986).

As for the District Court’s and Ninth Circuit’s conclu-

sion that some additional form of documentation is re-

quired for Petitioner’s assertion of financial injury, there is

no basis in law for such a requirement. This is particularly

so in light of Respondents’ failure to contradict Peti-

tioner’s assertion of financial injury. See Doran v. Salem

Inn, Inc., supra, at 2568; and Atwood Turnkey Drilling

v. Petroleo Brisiliero, supra, at 1179. Thus, Petitioner’s

allegations of imminent financial ruin clearly refute the

lower Courts’ finding of no irreparable injury here.

c. Success On The Merits.

The second requirement for exception under Anti-In-

junction Act analysis is the certainty of success on the

merits. Pre-enforcement injunction may be granted only

“Tijf it is clear that under no circumstances could the

Government ultimately prevail.” Enochs, supra, at p. 7.

On the merits, clearly even the Respondents cannot estab-

lish their claim of a proper penalty assessment against

Petitioner.

There are several fatal defects in the Government’s

case. According to Tahara, the penalties were assessed

against Petitioner based on the income to corporations

with which Petitioner is associated. The assessment was

therefore made in contravention of the statutes and rele-

vant case law. Jolly, supra, and Bond, infra. Sections 6700

and 6701 require penalties to be assessed upon the gross

income to the promoter, not upon the income to corpora-

tions with which the promoter is associated. Bond v.

United States, 872 F.2d 898, 900 (9th Cir. 1989). Re-

spondents’ previous admission that they have no idea what

income Petitioner has derived from the alleged promotion

is further evidence of the arbitrary and capricious nature

of the assessment in this case.

Respondents have jv Jicially admitted that the penalties

against Petitioner unuer Section 6700 were assessed by

attributing the involved corporations’ entire income to

Petitioner, thereby ignoring the corporate form. It is im-

portant for this Court to note that of the corporations

ostensibly involved, Petitioner owns no shares therein and

all are widely held.

Under Section 6700, a penalty for organizing or pro-

moting abusive tax shelter is assessed as “the greater of

$1,000 or 20% of the gross income derived or to be de-

rived by such person from such activity.” 26 U.S.C.

6700(a) [Emphasis Supplied]. (Appendix D) See Gates

v. U.S., 874 F.2d 584 (8th Cir. 1989); also Spriggs v.

U.S., 660 F.Supp. 789 (E.D. Va. 1987).

“The statute does not provide an alternative in the

amount of $1000 for each sale of an investment,

much less for another alternative .. . invented by the

I.R.S. for Appellant’s case.”

Weir v. U.S., 716 F.Supp. 574 (N.D. Ala. 1989).

There is also no provision in the statutes for “lumping”

all the penalties (covering a seven year period) into the

“tax period ended 12/31/88, as was done in this case.

The assessments have thus clearly been made illegally

and cannot stand upon judicial review.

d. Applicable Statute of Limitations.

If the assessments against Petitioner are in fact for the

years set forth in Tahara’s declaration (supra), then part

of the assessments are void, ab initio, as having been

assessed after the running of the applicable statute of

limitations, 26 U.S.C. Section 6501 (three year statute of

limitations) or 28 U.S.C. Section 2462 (general five year

statute of limitations). (Appendix D) This Court must

determine the proper statute of limitations to be applied

in this case.

In relevant part, 28 U.S.C. Section 2462 reads:

“Except as otherwise provided by Act of Congress,

an action, suit or proceeding for the enforcement of

any civil fine, penalty, or forfeiture, pecuniary or

otherwise, shall not be entertained unless commenced

within five years from the date when the claim first

accrued...

Respondents argue that without a specific statute of

limitations, none should be implied of imposed. Although

Sections 6700 and 6701 were enacted with no express

statute of limitations provided, in 26 U.S.C. Section

6671(a), it states that penalties “shall be assessed and

collected in the same manner as taxes,” and Section 650]

(a) provides that “any tax imposed by this title shall be

assessed within 3 years after the return was filed .. .”

Thus, an evident argument is that the statute of limita-

tions for Section 6700 penalties should be 3 years. While

Petitioner does contend that this is the appropriate limita-

tion to be applied, an alternative is recognized and man-

dated by law.

As 28 U.S.C. Section 2462 makes plain, suit for en-

forcement of any penalty must be commenced within five

(5) years from the date when claim first accrued, except

as otherwise provided. While failure to provide a specific

limit might suggest no limit of time, as stated in H.P.

Lambert Co. v. Secretary of Treasury, 354 F.2d 819

(C.A. 1, 1965)—

“the general policy of statutes of limitations is so

deeply ingrained in our legal system that a period

of limitations made generally applicable to such pro-

ceedings, as is Section 2462, is not to be avoided

unless that purpose is made manifestly clear.”

There is no indication that Congress intended to exclude

Section 6700 and 6701 penalties from the operative effect

of either the general statute of limitations embodied in

28 U.S.C. Section 2462 or the three year statute of limita-

tions relating to the assessment and collection of taxes,

26 U.S.C. Section 6501.

Section 6501(a) depends on the filing of a tax return.

Section 6700 assessments clearly do not depend on the

filing of a tax return. Rather, assessment of Section 6700

penalties occur after alleged abusive conduct prohibited

by Section 6700 occurs. The I.R.S. has been aware of the

alleged activities of Petitioner since before the effective

date of the penalty statutes involved herein, yet as attested

to by Tahara, penalties have been assessed against Peti-

tioner under both Sections 6700 and 6701 for each year

from 1982 through 1988.

Whether this Court should accept the view that a 3 year

or the general 5 year period of limitations apply, clearly

the assessments made by Respondents are in derogation of

the statutes of limitation.’

Each of the aforesaid defects is singularly fatal to the

Respondents’ case. There is no acceptable rationale for

the purportec penalty assessments made by Respondents.

Any arbitrary and capricious tax assessment, without any

statutory basis, is void ab initio. See Weir v. U.S., 716

F.Supp. 574 (N.D. Ala. 1989). The I.R.S. cannot justify

the unjustifiable. Thus, even under the most liberal view

of the law and facts, “under no circumstances could the

Government ultimately prevail” in the imposition of the

penalties assessed against Petitioner.

D. Return of Seized Materials.

Irrespective of whether Petitioner’s attempt to enjoin

collection of the penalties assessed against him was barred

by the Anti-Injunction Act, Petitioner’s claim for the re-

turn of the items subpoenaed from him by the I.R.S. plus

his claim for attorney’s fees for having to bring the suit,

were not barred and the District Court had jurisdiction to

entertain same. Von der Ahe v. Howland, 508 F.2d 364

(9th Cir. 1974).

After the hearing on November 13, 1989, the I.R.S.

returned to the Petitioner what they represented to be the

items subpoenaed from the Petitioner and which were the

subject of Petitioner’s claim for mandatory injunctive

7. This Court should note that the Respondents are advancing

inconsistent positions with respect to the statute of limitations for

the I.R.S. cannot treat the penalties as taxes for the purposes of

refund and the application of the Anti-Injunction Act while treating

the penalties as penalties for the purposes of the statute of limitations.

relief for their return. Petitioner disputes that all items

were returned to him by the I.R.S. The District Court,

however, must retain continuing jurisdiction to completely

resolve the claim, and ensure that all Petitioner’s records

are returned. Thereafter, the Court has jurisdiction to

assess attorneys fees and costs in Petitioner’s favor for

bringing the claim for return of his records under the

Equal Access to Justice Act, 28 U.S.C. Section 2412

(Appendix D).

CONCLUSION

For all the reasons stated herein, this petition should be

granted and a writ of certiorari should issue to review the

decision below.

Respectfully submitted,

L. T. “BUTCH” BRADT

(Counsel of Record)

6303 Feldspar

Houston, Texas 77092-4716

(713) 681-2696

MATTHEW K. CHUNG

Suite 1501

220 South King Street

Honolulu, Hawaii 96813

(808) 545-2060

TERRENCE B. ROBINSON

(Of Counsel to Petitioner)

One West Loop South, Suite 100

Houston, Texas 77027

APPENDIX A

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF HAWAII

CIVIL NO. 89-00860 ACK

HENRY F.K. KERSTING,

Plaintiff,

UNITED STATES OF AMERICA AND

COMMISSIONER OF INTERNAL REVENUE,

Defendants.

Filed Nov. 15, 1989

JUDGMENT

This court denied Plaintiff's Motion for Preliminary

Injunction. This court, sua sponte, dismissed the action for

lack of subject matter jurisdiction. Accordingly, JUDG-

MENT IS HEREBY ENTERED FOR DEFENDANTS.

IT IS SO ORDERED.

/s/ SPENCER WILLIAMS

United States District Court

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF HAWAII

CIVIL NO. 89-00860 ACK

HENRY F.K. KERSTING,

Plaintiff,

UNITED STATES OF AMERICA, ET AL.,

Defendants.

Filed Nov. 15, 1989

ORDER DENYING PRELIMINARY

INJUNCTION

This action came before this court on the Plaintiff's

Motion for Preliminary Injunction. The Internal Revenue

Service (“IRS”) has assessed penalties against plaintiff

under sections 6700 and 6701 of the Internal Revenue

Code (the “Code”). Plaintiff seeks a preliminary in-

junction against the IRS to enjoin the IRS from assessing

and/or collecting any part of the penalties assessed

against him under sections 6700 and 6701 of the Code.

Plaintiff argues that the denial of a pre-assessment review

violates his rights to due process, equal protection, and

first amendment rights. Having considered the pleadings

and arguments, this court HEREBY DENIES the motion

and DISMISSES the suit for lack of subject matter juris-

diction.

DISCUSSION:

The Anti-Injunction Act, section 7421(a) of the Code

States that “[n]lo suit for the purpose of restraining

the assessment or collection of any tax shall be main-

tained in any court by any person whether or not such

person is the person against whom such tax was as-

sessed.” Penalties are treated as taxes for these purposes.

Section 6171(a) of the Code.

An exception to the Anti-Injunction Act exists in

which the plaintiff can show irreparable injury and

“certainty of success on the merits.” Bob Jones University

v. Simon, 416 U.S. 725, 736-37 (1974). A preliminary

injunction should issue only “if it is clear under the

circumstances that under no circumstances could the

Government prevail.” Enoch vy. Williams Packing &

Navigation Co., 370 U.S. 1, 7 (1962).

Plaintiff has failed to show irreparable injury if the

penalties are assessed. Plaintiff claims only that the

penalties will cause “financial ruin forever,” but he has

submitted no supporting documentation to prove his

financial status.

Plaintiff also cannot prove that the government has

no chance of winning. Currently, the tax court in a

related case, Dixon v. Commissioner, Docket No. 9382-

83, has been deliberating for a few months after a

lengthy trial of the investors in plaintiffs investment

plans. The government withstood summary judgment

motions in the Dixon case. It is clear that although there

is a slight chance that plaintiff's investment plans might

be proven valid, there is no “certainty” that the govern-

ment will fail to show that plaintiff's tax schemes are

illegal.

Therefore, the plaintiff cannot meet Anti-Injunction

Act applies, and this court must dismiss for lack of

subject matter jurisdiction. Enoch v. Williams, 370 U.S.

at 7.

Accordingly, this court HEREBY DISMISSES the case

for lack of subject matter jurisdiction.

IT IS SO ORDERED.

/s/ SPENCER WILLIAMS

United States District Court

APPENDIX C

NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

NO. 89-16459

D.C. NO. CV-89-0860-ACK

HENRY KERSTING,

Plaintiff-Appellant,

Vv.

UNITED STATES OF AMERICA and

COMMISSIONER INTERNAL REVENUE SERVICE,

Defendants-Appellees.

Filed August 2, 1991

MEMORANDUM*

Appeal from the United States District Court

for the District of Hawaii

Alan C. Kay, District Judge, Presiding

Argued and Submitted October 5, 1990

San Francisco, California

BEFORE: SCHROEDER, BRUNETTI, Circuit Judges,

and BREWSTER**, District Judge

Henry Kersting appeals from an order of the District

Court for the District of Hawaii dismissing sua sponte,

* This disposition is not appropriate for publication and may not

be cited to or by the courts of this circuit except as provided by

Circuit Rule 36-3.

** Honorable Rudi M. Brewster, United States District Judge

for the Southern District of California, sitting by designation.

for lack of subject matter jurisdiction, his action against

the Internal Revenue Service and the United States. We

have jurisdiction under 28 U.S.C. § 1291 and affirm.

I. Background

In October 1989 the Internal Revenue Service (“IRS”)

assessed penalties against Kersting for promoting abusive

tax shelters. Appellant was assessed $1,545,201 under 26

U.S.C. § 6700 and $2,330,000 under 26 U.S.C. § 6701.

The procedures in the Internal Revenue Code allowing a

taxpayer to contest income or estate assessments in tax

court without first paying the tax, §§ 6211-6213, do not

apply to $6700 and 6701 penalties. Under § 6703, a

taxpayer’s sole remedy in the case of $$ 6700 and 6701

assessments is to pay fifteen percent of the penalty within

thirty days and then to file a claim for refund with the

IRS. and upon disallowance of that claim, to bring a

iefund action in district court. For § 6700 penalties,

the taxpayer is required to pay fifteen percent of the

entire penalty to reach federal court. For § 6701 penal-

ties, the taxpayer may pay fifteen percent of a single

assessment (i.e., $150) and then file a refund action

to determine the legality of all the § 6701 penalties.’

Instead of complying with the procedures set out in

$ 6703, Kersting filed suit in federal district court. His

complaint alleged (a) that the § 6703 procedural re-

quirements violate due process and equal protection, and

(b) that §§$ 6700 and 6701 violate due process and

1. In this case, Kersting was required to pay fifteen percent of

$1,545,201 ($231,780.15) under $6700, and fifteen percent of

$1,000 ($150) for a single § 6701 penalty. Kersting was assessed a

total of $2,330,000 under § 6701.

equa! protection. Kersting asked the court to declare

the Code provisions unconstitutional and to issue an

injunction enjoining the IRS from collecting the assess-

ments.”

The district court denied Kersting’s motion for pre-

liminary injunction and dismissed sua sponte the action

in its entirety for lack of subject matter jurisdiction.

Under the provisions of the Anti-Injunction Act, 26

U.S.C. § 7421, the court held that Kersting could not

maintain a suit to restrain the assessment or collection

of the section 6700 or 6701 penalties. Therefore, the

court found that it was without jurisdiction to consider

the case.

The court rejected Kersting’s argument that it should

hear the case under a judicially created exception to

the Anti-Injunction Act. That exception permits an action

to restrain the assessment or collection of a tax when a

taxpayer demonstrates a certamnty of success on the

merits and that irreparable injury will result if the action

is precluded. Enoch v. Williams Packing & Navigation

Co., 370 U.S. 1, 6-7 (1962); Elias v. Connett, 908

F.2d 521, 526 (9th Cir. 1990). The court found

Kersting made no showing the assessment would cause

him irreparable injury. The court also held Kersting

failed to demonstrate a certainty of success on the merits.

II. Standard of Review

We review the district court decision to dismiss for

lack of subject matter jurisdiction de novo. Kruso v.

2. Kersting also sought return of various documents from the

government. As these documents were returned before the matter was

considered by the district court, we hold Kersting’s claim on appeal

with regard to these documents is moot.

International Tel. and Tel., 872 F.2d 1416, 1421 (9th

Cir. 1989).

Ill. Discussion

We need not reach the question whether Kersting was

certain to succeed on the merits because we agree with

the district court he provided no evidence irreparable

injury would result. To demonstrate irreparable harm

for the purpose of avoiding the strictures of the Anti-

Injunction Act, it is necessary to demonstrate some-

thing more than “mere monetary harm or financial hard-

ship. . . .” Elias, 908 F.2d at 526. Indeed, to satisfy

this prong of the Enochs exception, it is necessary to

demonstrate that the harm resulting from forcing Kers-

ting to protest the assessments in accordance with the

procedure set out in 26 U.S.C. § 6706 is not capable

of redress. As the Supreme Court has observed:

The key word in this consideration is irreparable.

Mere injuries, however substantial, in terms of

money, time and energy necessarily expended in

the absence of a stay, are not enough. The pos-

sibility that adequate compensatory or other cor-

rective relief will be available at a later date, in

the ordinary course of litigation, weighs heavily

against a claim of irreparable harm.

Sampson v. Murray, 415 U.S. 61, 90 (1974) (quoting

Virginia Petroleum Jobbers Ass'n. v. FPC, 259 F.2d 921,

925 (1958)) (emphasis original in Virginia Jobbers).

In this case, the district court stated, “Plaintiff has

failed to show irreparable injury if the penalties are

assessed. Plaintiff claims only that the penalties will cause

‘financial ruin forever,’ but he has submitted no support-

ing documentation to prove his financial status.” Order

Denying Preliminary Injunction at 2. Our independent

review of the record has revealed no evidence of harm

beyond “mere financial hardship.” Indeed, at trial,

Kersting alleged that he did not have, and was unable

to raise sufficient funds to comply with § 6703. Affidavit

of Henry Kersting, Excerpts of Records at B, 4 13-14.

We therefore conclude the Anti-Injunction Act properly

was applied in this case, and thus the district court was

without jurisdiction to consider the matter.

AFFIRMED.

10a

APPENDIX D

AMENDMENT -I—FREEDOM OF RELIGION,

SPEECH AND PRESS; PEACEFUL ASSEMBLAGE;

PETITION OF GRIEVANCES

Congress shall make no law respecting an establish-

ment of religion, or prohibiting the free exercise thereof;

or abridging the freedom of speech, or of the press; or

the right of the people peaceably to assemble, and to

petition the Government for a redress of grievances.

AMENDMENT V—GRAND JURY INDICT-

MENT FOR CAPITAL CRIMES; DOUBLE

JEOPARDY; SELF-INCRIMINATION; DUE

PROCESS OF LAW; JUST COM-

PENSATION FOR PROPERTY

No person shall be held to answer for a capital, or

otherwise infamous crime, unless on a presentment or

indictment of a Grand Jury, except in cases arising in

the land or naval forces, or in the Militia, when in

actual service in time of War or public danger; nor shall

any person be subject for the same offense to be twice

put in jeopardy of life or limb; nor shall be compelled

in any criminal case to be a witness against himself,

nor be deprived of life, liberty, or property, without

due process of law; nor shall private property be taken

for public use, without just compensation.

26 U.S.C. § 6501. LIMITATIONS ON ASSESSMENTS

AND COLLECTION

(a) General rule-—Except as otherwise provided in this

section, the amount of any tax imposed by this title shall

lla

be assessed within 3 years after the return was filed

(whether or not such return was filed on or after the date

prescribed) or, if the tax is payable by stamp, at any time

after such tax became due and before the expiration of

3 years after the date on which any part of such tax was

paid, and no proceeding in court without assessment for

the collection of such tax shall be begun after the expira-

tion of such period.

26 U.S.C. § 6671. RULES FOR APPLICATION OF

ASSESSABLE PENALTIES

(a) Penalty assessed as tax.—The penalties and liabili-

ties provided by this subchapter shall be paid upon notice

and demand by the Secretary, and shall be assessed

and collected in the same manner as taxes. Except as

”

otherwise provided, any reference in this title to “tax

imposed by this title shall -be deemed also to refer to

the penalties and liabilities provided by this subchapter.

(b) Person defined.—The term “person”, as used in

this subchapter, includes an officer or employee of a

corporation, or a member or employee of a partnership,

who as such officer, employee, or member is under a

duty to perform the act in respect of which the violation

occurs.

26 U.S.C. § 6672. FAILURE TO COLLECT AND

PAY OVER TAX, OR ATTEMPT

TO EVADE OR DEFEAT TAX

(a) General rule-—Any person required to collect,

truthfully account for, and pay over any tax imposed

by this title who willfully fails to collect such tax, or

truthfully accounts for and pay over such tax or will-

12a

fully attempts in any manner to evade or defeat any such

tax or the payment thereof, shall, in addition to other

penalties provided by law, be liable to a penalty equal

to the total amount of the tax evaded, or not collected,

or not accounted for and paid over. No penalty shall

be imposed under section 6653 for any offense to which

this section is applicable.

(b) Extension of period of collection where bond is

filed.—

(1) In general.—If, within 30 days after the

day on which notice and demand of any penalty ,

under subsection (a) is made against any person,

such person—

(A) pays an amount which is not less than

the minimum amount required to commence a

proceeding in court with respect to his tiability

for such penalty.

(B) files a claim for refund of the amount so

paid, and

ments of paragraph (3),

no levy or proceeding in court for the collection of

the remainder of such penalty shall be made, be-

gun, or prosecuted until a final resolution of a

proceeding begun as provided in paragraph (2).

Notwithstanding the provisions of section 7421(a),

the beginning of such proceeding or levy during

the time such prohibition is in force may be enjoined

by a proceeding in the proper court.

(2) Suit must be brought to determine liability

for penalty.—If, within 30 days after the day on

on which his claim for refund with respect to any

penalty under subsection (a) is denied, the person

described in paragraph (1) fails to begin a pro-

13a

ceeding in the appropriate United States district

court (or in the Court of Claims) for the deter-

mination of his liability for such penalty, paragraph

(1) shall cease to apply with respect to such penalty,

effective on the day following the close of the 30-

day period referred to in this paragraph.

(3) Bond—The bond referred to in paragraph

(1) shall be in such form and with such sureties

as the Secretary may by regulations prescribe and

shall be in an amount equal to 1% times the

amount of excess of the penalty assessed over the

payment described in paragraph (1).

(4) Suspension of running of period of limitations

on collection—The running of the period of limi-

tations provided in section 6502 on the collection

by levy or by a proceeding in court in respect of

any penalty described in paragraph (1) shall be

suspended for the period during which the Secretary

hibited from collecting by levy or a proceeding in

court.

(5) Jeopardy collection —\f the Secretary makes

a finding that the collection of the penalty is in

jeopardy, nothing in this subsection shall prevent

the immediate collection of such penalty.

26 U.S.C. § 6700. PROMOTING ABUSIVE TAX

SHELTERS, ETC.

(a) Imposition of penalty—Any person who—

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

of )—

(i) a partnership or other entity,

(ii) any investment plan or arrangement, or

(iii) any other plan or arrangement, or

(B) participates in the sale of any interest in an

entity or plan or arrangement referred to in sub-

paragraph (A), and

Aili taniiaatan asin cian ceaiiemeeeiaiaaiadliii

14a

(2) makes or furnishes (in connection with such

organization or sale)—

(A) a statement with respect to the allow-

ability of any deduction or credit, the exclud-

ability of any income, or the securing of any

other tax benefit by reason of holding an interest

in the entity or participating in the plan or ar-

rangement which the person knows or has reason

to know is false or fraudulent as to any material

matter, or

(B) a gross valuation overstatement as to any

material matter,

shall pay a penalty equal to the greater of $1,000

or 20 percent of the gross income derived or to be

derived by such person from such activity.

(b) Rules relating to penalty for gross valuation over-

statements.—

(1) Gross valuation overstatement defined.—

For purposes of this section, the term “gross valua-

tion overstatement” means any statement as to the

value of any property or services if—

(A) the value so stated exceeds 200 percent

of the amount determined to be the correct valu-

ation, and

(B) the value of such property or services is

directly related too the amount of any deduction

or credit allowable under chapter 1 to any par-

ticipant.

(2) Authority to waive-—The Secretary may

waive all or any part of the penalty provided by

subsection (a) with respect to any gross valuation

overstatement on a showing that there was a reason-

able basis for the valuation and that such valuation

was made in good faith.

15a

alty imposed by this section shall be in addition to any

other penalty provided by law.

26 U.S.C. § 6701. PENALTIES FOR AIDING AND

ABETTING UNDERSTATEMENT

OF TAX LIABILITY

(a) Imposition of penalty—Any person—

(1) who aids or assists in, procures, or advises with

respect to, the preparation or presentation of any

portion of a return, affidavit, claim, or other docu-

ment in connection with any matter arising under the

internal revenue laws,

(2) who knows that such portion will be used in

connection with any material matter arising under

the internal revenue laws, and

(3) who knows that such portion (if so used) will

result in an understatement of the liability for tax

of another person,

shail pay a penalty with respect to each such document in

the amount determined under subsection (b).

(b) Amount of penalty.—

(1) In general.—Except as provided in paragraph

(2), the amount of the penalty imposed by subsec-

tion (a) shall be $1,000.

(2) Corporations.—lf the return, affidavit, claim,

or other document relates to the tax liability of a

corporation, the amount of the penalty imposed by

subsection (a) shall be $10,000.

(3) Only I penalty per person per period.—If any

person is subject to a penalty under subsection (a)

with respect to any document relating to any tax-

payer for any taxable period (or where there is no

l6a

taxable period, any taxable event), such person shall

not be subject to a penalty under subsection (a)

with respect to any other document relating to such

taxpayer for such taxable period (or event).

(1) In general.—For purposes of subsection (a),

the term “procures” includes—

(A) ordering (or otherwise causing) a subor-

dinate to do an act, and

(B) knowing of, and not attempting to prevent,

participation by a subordinate in an act.

(2) Subordinate.—for purposes of paragraph (1),

the term “subordinate” means any other person

(whether or not a director, officer, employee, or

agent of the taxpayer involved) over whose activities

the person has direction, supervision, or control.

(d) Taxpayer not required to have knowledge.—Sub-

section (a) shall apply whether or not the understatement

is with the knowledge or consent of the persons author-

ized or required to present the return, affidavit, claim, or