United States v. Raymond, Robert R. , 228 F.3d 804 ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-4024
United States of America,
Plaintiff-Appellee,
v.
Robert R. Raymond, individually and doing
business as Morningstar Consultants,
and Robert G. Bernhoft, individually and
doing business as Morningstar Consultants,
Defendants-Appellants.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 97-C-207--Charles N. Clevert, Judge.
Argued June 2, 2000--Decided September 26, 2000
Before Flaum, Chief Judge, and Evans and Williams,
Circuit Judges.
Flaum, Chief Judge. Robert Raymond and Robert
Bernhoft appeal the district court’s entry of a
permanent injunction preventing them from
engaging in a number of activities related to the
sale of a collection of materials known as the
"De-Taxing America Program." For the reasons
stated herein, we affirm.
I. BACKGROUND
Raymond and Bernhoft are active members of the
U.S. Taxpayers Party and were the chief
participants in a business known as Morningstar
Consultants ("Morningstar"). Between January and
June of 1996, Morningstar ran a weekly
advertisement in a local Wisconsin newspaper
under the caption "Just Say No." The Just Say No
advertisement contained the following statements:
1) "Federal, State & Social Security Taxes are
Voluntary;" and 2) "The Internal Revenue Service
has no Statutory Authority to: Compel you to file
a Tax Return, Require withholding from your
paycheck, Levy or Lien your property, Audit your
Books & Records." This advertisement was part of
an effort by Morningstar to market the "De-Taxing
America Program" (the "Program").
The Program consists of three volumes of
materials. These materials contain information
presenting the view that, among other things, the
federal income tax is unconstitutional and that
persons who are not federal employees or
residents of the District of Columbia are not
legally required to pay federal income tax. In
addition to providing information regarding
general tax-protest principles, the Program
includes several forms and instructions to guide
the purchaser through the process of "de-taxing."
Purchasers are informed that if they complete the
materials and directions in the Program they will
be "withdrawn" from the jurisdiction of the
federal government’s taxing authorities and the
social security system and will no longer be
required to pay federal taxes.
The materials in the Program are pre-printed
with the purchaser’s name and various personal
information. The Program instructs the purchaser
to, among other things, send pre-printed letters
and numerous Freedom of Information Act ("FOIA")
requests to various government agencies,
including the Internal Revenue Service ("IRS"),
the Social Security Administration ("SSA") and
the Attorney General. Program customers are
instructed to file W-4 forms with their employers
asserting that they are exempt from federal
taxation and requesting that the employers stop
withholding federal income tax and social
security payments from their paychecks. The
Program also informs the purchaser that since any
previous tax payments were made entirely
voluntarily, he or she may request a refund of
taxes paid in prior years. The Program then
directs the purchaser to file several forms with
the IRS requesting a refund of taxes paid over
the previous three years. The Program also
provides the purchaser with instructions on how
to complete future tax returns to reflect that
the purchaser has not incurred any tax liability
in the previous year and consequently does not
owe any federal income or social security taxes.
The Program represents that all of the activities
it instructs its purchasers to pursue are legal
and that it is legal for purchasers to cease
paying federal taxes after completing the
instructions provided in the Program materials.
Morningstar sold the Program to fifty-five
customers in several different states for a
negotiated price ranging from $445 to $2,600 and
earned at least $34,578 from the sale of the
Program. At least 12 Program customers informed
their employers that they were exempt from
withholding and requested that the employers stop
withholding federal tax payments from their
paychecks. At least 20 Program customers failed
to file income tax returns for either the 1995,
1996 or 1997 tax year, which the IRS estimates
resulted in a loss of $691,731 to the United
States. In addition, the IRS estimates that it
spent a total of 291 hours responding to more
than 124 FOIA and Privacy Act requests sent by
the appellants or their customers. The IRS also
estimates that it spent more than 500 hours on
administrative functions such as audits,
responding to frivolous W-4 forms, and collecting
delinquent taxes as a result of the conduct of
persons who purchased Program materials.
By the summer of 1996, the appellants had
stopped selling and promoting the Program. On
November 15, 1996, the IRS informed the
appellants that an investigation of their
involvement with the sale of the Program had been
completed and that the IRS would pursue penalties
and a civil injunction as a result of this
investigation. On March 3, 1997, at the request
of IRS Assistant District Counsel Edward G.
Langer, the Attorney General filed a civil suit
under 26 U.S.C. sec. 7408, requesting a permanent
injunction against the appellants’ sale of the
Program and against the appellants’ participation
in any conduct intended to interfere with the
enforcement of the internal revenue laws./1
The suit was referred to a magistrate judge
where the Government moved for summary judgment.
The magistrate judge issued a report recommending
that the Government’s motion be granted and a
permanent injunction be entered against the
appellants./2 The magistrate’s report also
informed the parties that they had ten days to
submit objections to the report and that failure
to file objections within that time period "shall
result in a waiver of your right to appeal all
factual and legal issues." The appellants
requested an extension of time to file their
objections that the district court granted.
However, the appellants did not file their
objections until two days after the extended
deadline. Because the appellants’ objections were
filed late, the district court issued an order
adopting the magistrate’s recommendation in its
entirety without review. The appellants then
filed a motion to reconsider that the district
court denied because it found there was no
excusable neglect for the appellants’ late filing
of their objections. The district court then went
on to state that it would have adopted the
magistrate’s recommendation even if the
appellants had filed their objections in a timely
fashion. Raymond and Bernhoft now appeal.
II. DISCUSSION
A. Jurisdiction
The appellants first assert that the district
court had no jurisdiction to hear this case
because the Secretary of the Treasury had not
authorized suit against the appellants as
required by the provisions of 26 U.S.C. sec.
7408./3
The appellants assert that the district court
receives jurisdiction from sec. 7408 to enter an
injunction to enforce a violation of sec. 6700.
However, the district court in fact is granted
jurisdiction to enter injunctions to enforce the
provisions of the Internal Revenue Code ("IRC"),
26 U.S.C. sec. 1 et seq., through the broad grant
of power authorized by sec. 7402(a)./4 Section
7402(a) explicitly grants district courts the
authority to issue injunctions to enforce the tax
laws and states that all remedies that are
normally available to the United States to
enforce its laws are not limited by that section.
Section sec. 7408, on the other hand, provides
a cause of action for injunctive relief to the
United States against a party suspected of
violating the tax laws that is independent of any
other cause of action. The specific provisions of
that section, including the provision that the
suit must be authorized by the Secretary of the
Treasury or his delegate, are procedural and not
jurisdictional. Therefore, even if we were to
conclude that the United States had not received
proper authorization from the Secretary of the
Treasury, that fact would not affect the
jurisdiction of the district court.
However, we conclude that this suit was
properly authorized by a delegate of the
Secretary of the Treasury. On January 28, 1997,
Edward G. Langer, Assistant District Counsel for
the Internal Revenue Service, wrote a letter to
Loretta C. Argrett, Assistant Attorney General
for the Tax Division of the Department of
Justice, requesting and authorizing that the
Justice Department commence an action to seek
injunctive relief against the appellants under 26
U.S.C. sec.sec. 7402 and 7408. Assistant District
Counsel Langer submitted a declaration to the
district court asserting that he was duly
authorized by the Secretary of the Treasury to
request that this action be commenced. The
appellants had ample opportunity to produce
evidence that contradicts this declaration and
have not done so. Therefore, we consider his
declaration sufficient evidence of Langer’s
authority to authorize this suit. See First
National Bank v. Insurance Co. of N. Amer., 606
F.2d 760, 768 (7th Cir. 1979) ("It is a general
rule of summary judgment procedure that denying
the allegations of affidavits supporting a motion
for summary judgment does not, Ipso facto, create
a genuine issue of material fact. Mere denials
unaccompanied by statements of any facts which
would be admissible in evidence at a hearing, are
not sufficient to raise a genuine issue of
fact.") (citation omitted); Wang v. Lake
Maxinhall Estates, Inc., 531 F.2d 832, 835 n.10
(7th Cir. 1976) (stating that at the summary
judgment stage uncontradicted affidavits are
taken as true). Thus, we conclude that the
district court had jurisdiction to hear the
Government’s claims against Bernhoft and
Raymond./5
B. Waiver
The Government argues that because the
appellants failed to file timely objections to
the magistrate’s report, they have waived their
right to appeal all factual and legal issues to
either the district court or to this Court.
In Thomas v. Arn, 474 U.S. 140, 155 (1985), the
Supreme Court held that a circuit rule permitting
both the district court and the court of appeals
to refuse to review a magistrate’s report absent
timely objection does not violate the
Constitution, provided that the parties are given
clear notice that they may request an extension
of time for filing objections and that their
failure to file timely objections may result in
their inability to appeal the magistrate’s
recommendation. The Court then noted that
"because [this] rule is a nonjurisdictional
waiver provision, the Court of Appeals may excuse
the default in the interests of justice." Id. In
Video Views, Inc. v. Studio 21, Ltd., 797 F.2d
538 (7th Cir. 1986), we adopted such a rule in
this Circuit, concluding that failure to file
objections to a magistrate’s report with the
district judge waives the right to appeal but
that the party who failed to object has "the
opportunity to demonstrate that it had sufficient
cause for failing to object, such that waiver
should not be applied." Id. at 539-40; see also
Provident Bank v. Manor Steel Corp., 882 F.2d
258, 261 (7th Cir. 1989). In Hunger v. Leininger,
15 F.3d 664 (7th Cir. 1994), we clarified our
standard for determining when wavier should be
found because objections to a magistrate’s report
are filed late. We concluded that waiver should
not be applied where "the filing [of objections]
was not egregiously late and caused not even the
slightest prejudice to the [opposing party]." Id.
at 668; see also United States v. Robinson, 30
F.3d 774, 777 (7th Cir. 1994) (holding that the
appellant had not waived his right to appeal
where he filed objections to a magistrate’s
report two days late and the Government was not
prejudiced by the late filing).
In this case, the appellants filed their
objections to the magistrate’s report only two
days late. The objections were actually mailed on
the day that they were due and the appellants
claim that their error was based on a good faith
misapprehension of the law--they thought the
objections would be considered filed on the day
they were mailed rather than the day they were
received. In addition, the appellants were
scrupulous in meeting all of the other deadlines
in this case. The Government has identified no
prejudice that it incurred because of the late
filing of the appellants’ objections, and those
objections were not egregiously late. Therefore,
we decline to conclude that the appellants have
waived their right to appeal, and we now address
the merits of that appeal.
C. Summary Judgment
The district court granted summary judgment for
the Government and entered a permanent injunction
against the appellants forbidding them from
engaging in certain activities that incited
others to violate the tax laws. We review the
district court’s decision to grant summary
judgment de novo, drawing all reasonable
inferences in favor of the non-moving party. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
255 (1986). Summary judgment is appropriate only
if there is no genuine dispute of material fact
and judgment is appropriate as a matter of law.
Fed. R. Civ. P. 56(c); see Doe v. Cunningham, 30
F.3d 879, 882 (7th Cir. 1994).
The district court entered this injunction under
26 U.S.C. sec. 7408. Section 7408 grants a
district court the authority to enter a permanent
injunction against a defendant if it finds "(1)
that the person has engaged in any conduct
subject to penalty under section 6700 . . ., and
(2) that injunctive relief is appropriate to
prevent recurrence of such conduct." 26 U.S.C.
sec. 7408(b); United States v. Kaun, 827 F.2d
1144, 1147 (7th Cir. 1987). The appellants argue
that there is a genuine issue of material fact as
to whether the Government proved each of these
elements and that, therefore, the district court
erred in entering summary judgment for the
Government.
1. Violation of 26 U.S.C. sec. 6700
In order to establish a violation of 26 U.S.C.
sec. 6700, the Government must prove "(1) that
the defendant was involved in an abusive tax
shelter, and (2) that the defendant made
statements about the tax benefits investors would
receive if they participated in the shelter which
the defendant knew or had reason to know were
false or fraudulent." Kaun, 827 F.2d at 1147.
a. Tax shelter
Under sec. 6700 any "plan or arrangement"
having some connection to taxes can serve as a
"tax shelter" and will be an "abusive" tax
shelter if the defendant makes the requisite
false or fraudulent statements concerning the tax
benefits of participation. See 26 U.S.C. sec.
6700(a)(1)(A); Kaun, 827 F.2d at 1147./6 In
United States v. Kaun, we held that the
definition of a tax shelter in sec. 6700 is
"clearly broad enough to include a tax protester
group." Kaun, 827 F.2d at 1148. In that case, we
concluded that the Wisconsin Society for Educated
Citizens ("WSEC"), an organization whose primary
purpose was to incite members to evade the tax
laws by engaging in a variety of activity
disruptive to the IRS including the filing of
false or fraudulent returns, was a plan or
arrangement that operated as an abusive tax
shelter as defined by sec. 6700. Id. at 1149.
In this case, the appellants participated in
Morningstar Consultants in order to promote and
sell the De-Taxing America Program. The Program
purported to provide step-by-step instructions
for "removing" the purchaser from the federal
income and social security tax systems. The
Program materials assured readers that the
federal government is without authority to tax
them and that by following the instructions
outlined in the Program individuals can legally
refuse to pay federal income and social security
tax. Several of Morningstar’s customers took
steps to evade the federal tax laws and filed
false or fraudulent income tax returns relying on
the instructions and assertions made in the
Program materials. As with the WSEC in Kaun, we
conclude that the Program is a tax shelter as
defined by sec. 6700 and that the appellants’
sale of the Program to over 55 customers in
several states through the business known as
Morningstar Consultants is the sale of an
interest in a plan that constitutes a tax shelter
as defined by sec. 6700(a)(1)(B).
b. False statements concerning tax benefits
In order to prove a violation of sec. 6700, the
Government must also show that the appellants
made false or fraudulent statements concerning
the tax benefits of participating in the plan or
arrangement. 26 U.S.C. sec. 6700(a)(2)(A); Kaun,
827 F.2d at 1147. In Kaun, the defendant held
WSEC meetings where he encouraged members and
potential members to file frivolous FOIA
requests, request that their employers forego
withholding federal taxes from their paychecks,
file false tax returns, and file fraudulent
requests for tax refunds. Id. at 1149. We held
that this activity was sufficient to satisfy the
false or fraudulent statements element of sec.
6700.
In this case, there is a disputed question of
fact concerning whether the appellants held
meetings where they made statements to Program
customers and potential customers that encouraged
them to evade federal tax laws. However, it is
undisputed that from January through June of
1996, the appellants ran the "Just Say No"
advertisement in a local Wisconsin paper in an
effort to induce potential customers to purchase
the De-Taxing America Program. In that
advertisement, the appellants made the
representations that payment of income tax is a
voluntary activity and that individuals cannot be
legally compelled to file tax returns or submit
to tax investigations or penalties. The
advertisement directed readers to contact
Morningstar Consultants "for more information"
regarding these assertions. Upon contacting
Morningstar, callers were encouraged to purchase
the De-Taxing America Program, and several
individuals in fact purchased the Program from
the appellants.
The statements appellants made in the Just Say
No advertisement are clearly false
representations concerning the government’s
authority to tax its citizens. See, e.g., United
States v. Hilgeford, 7 F.3d 1340, 1342 (7th Cir.
1993) (stating that the argument that an
individual is a sovereign citizen of a state who
is not subject to the jurisdiction of the United
States and not subject to federal taxing
authority is "shop worn" and frivolous); United
States v. Sloan, 939 F.2d 499, 500-01 (7th Cir.
1991) (same); Coleman v. Commissioner of Internal
Revenue, 791 F.2d 68, 70-72 (7th Cir. 1986)
(stating that the assertions that the federal
income tax is not a tax on all income, that wages
are not income, and that a tax on wages is
unconstitutional are "tired arguments" that are
"objectively frivolous"); Kile v. Commissioner of
Internal Revenue, 739 F.2d 265, 267-68 (7th Cir.
1984) (noting the "universal and longstanding
rejection" of the argument that wages are not
subject to income tax and that the federal income
tax is unconstitutional). These statements made
in conjunction with the sale of the Program
operated as false assurances that refusing to pay
taxes in accordance with the Program’s
instructions is a lawful activity for which the
government has no legal authority to punish
Program subscribers. As the district court noted,
the appellants are intelligent men. Bernhoft has
recently graduated from the University of
Wisconsin Law School. Raymond has run his own
business for twenty years and was the U.S.
Taxpayers Party’s candidate for the United States
Senate. We attribute to both appellants a basic
knowledge of the law such that they should
reasonably be aware that their personal belief
that paying taxes is a voluntary activity does
not represent the current state of the law.
Therefore, we conclude that the statements the
appellants made in the Just Say No advertisement
were representations concerning the tax benefits
of purchasing and following the De-Taxing America
Program that the appellants reasonably should
have known were false.
Because the appellants participated in the sale
of the abusive tax shelter that is the De-Taxing
America Program and because the appellants made
false or fraudulent statements concerning the
benefits to be derived from the Program, we
conclude that the district court did not err in
finding that the appellants’ conduct violated 26
U.S.C. sec. 6700.
2. Likelihood of Recurrence
The appellants next contend that the district
court erred when it found that a permanent
injunction was necessary to prevent the
appellants from engaging in unlawful activity in
the future. They assert that because they stopped
selling the Program before they were even aware
that the government was investigating their
activities and because they submitted
declarations to the district court that they
would not sell the Program in the future, the
district court erred in concluding that there was
a significant chance that the appellants would
engage in unlawful activity such that a permanent
injunction was required.
In order to determine whether there is a
significant likelihood that the appellants’
involvement in the illegal activity at issue in
this case will reoccur, we examine the totality
of the circumstances surrounding the appellants
and their violation of the law. See Kaun, 827
F.2d at 1149. We look at factors such as: (1)
"the gravity of harm caused by the offense;" (2)
"the extent of the defendant’s participation and
his degree of scienter;" (3) "the isolated or
recurrent nature of the infraction and the
likelihood that the defendant’s customary
business activities might again involve him in
such transaction;" (4) "the defendant’s
recognition of his own culpability;" and (5) "the
sincerity of his assurances against future
violations." Id. at 1149-50; see also United
States v. W.T. Grant Co., 345 U.S. 629, 633
(1953).
The appellants first challenge the district
court’s finding that their activities
significantly harmed the United States. The
appellants assert that the district court erred
when it chose to believe the assertions of IRS
investigators as to the amount of loss suffered
by the United States as a result of the refusal
of Program customers to pay taxes, the numerous
FOIA and Privacy Act requests that were prompted
by Program instructions to which various federal
agencies were required to respond, and the
investigation and collection activities that the
IRS was required to pursue in response to Program
customers’ refusal to pay taxes, requests for
refunds and requests that taxes not be withheld
from their paychecks. The appellants note that no
criminal charges were pressed against them in
part because the Assistant United States Attorney
in charge of prosecuting their case determined
that the loss to the government was not
significant enough to merit a criminal
prosecution. The appellants assert that this fact
creates a genuine issue of material fact as to
whether the loss was significant enough to merit
a permanent injunction.
The Government presented the declarations of
several Program customers who admitted failing to
file income tax returns, filing requests for
refunds to which they were not entitled, and
submitting numerous FOIA requests. In addition,
the Government presented the declarations of IRS
officers regarding the administrative burden
placed on the IRS when it was required to respond
to Program customers’ information requests,
investigate Program customers’ unlawful tax
evasion activities, and engage in collection
efforts for taxes that were not paid by Program
subscribers. While disputes about the amount of
loss make it difficult to determine at this stage
the actual loss suffered by the United States as
a result of the appellants’ activities, it is
clear from the record that a significant loss did
in fact result. The fact that the Justice
Department did not consider this loss worthy of
criminal sanction does not contradict this
determination. See United States v. Palumbo
Brothers, Inc., 145 F.3d 850, 860 (7th Cir. 1998)
(noting that conduct that violates civil labor
laws must be analyzed independently to determine
whether it also merits criminal sanctions).
Therefore, we conclude that the district court
did not err when it found that the appellants’
activities in selling and promoting the Program
caused a loss to the government sufficient to
support the need for a permanent injunction.
Appellants do not dispute that they were the
primary figures in Morningstar Consultants or
that Morningstar’s chief purpose was to sell the
De-Taxing America Program. Therefore, we conclude
that the appellants were significant participants
in the sale of the "abusive tax shelter" that is
the subject of this case. Furthermore, when
customers contacted Morningstar to purchase the
Program, they were asked to provide personal
information that would be included on the pre-
printed forms that were part of the Program
materials. Thus, we also conclude that the
appellants acted with the intent that Program
purchasers follow the instructions provided in
the Program materials and submit the forms and
letters contained therein. In addition, the
appellants’ activities were not an isolated
instance of misconduct but consisted of the sale
of the Program to at least 55 persons over a six
month period.
Moreover, the appellants have expressed no
remorse concerning their participation in the
unlawful activities at issue here. Throughout the
documents they presented to the district court
and during oral argument before this Court, the
appellants consistently held to their view that
federal tax laws are unconstitutional and that
the government has no authority to compel the
payment of federal taxes. In Kaun, we concluded
that the fact that the defendant "steadfastly
maintained his total lack of culpability" was an
indication that he would likely engage in similar
unlawful activity in the future in the absence of
an injunction prohibiting such activity. 827 F.2d
at 1150. This case does differ from Kaun, in that
the appellants here stopped selling the Program
before the IRS investigation of their activities
had come to fruition and have asserted before the
district court that they will not engage in such
activities in the future.
We recognize that the defendants had not been
involved in the challenged activity for several
months before the action to enjoin this activity
was commenced. However, while voluntary cessation
of unlawful activity and promises not to engage
in that activity in the future are relevant to
determining the necessity of an injunction, they
do not lead inevitably to the conclusion that an
injunction is unnecessary. See W.T. Grant Co.,
345 U.S. at 633 ("Along with its power to hear
the case, the court’s power to grant injunctive
relief survives discontinuance of the illegal
conduct."); see also City of Mesquite v.
Aladdin’s Castle, Inc., 455 U.S. 283, 289 (1982);
Milwaukee Police Ass’n v. Jones, 192 F.3d 742,
748 (7th Cir. 1999). The appellants continue to
be active members of the U.S. Taxpayers Party and
continue to forcefully advocate their beliefs
regarding the alleged dubious legality of the
federal tax system. In addition, they have
refused to acknowledge that their conduct in this
matter was anything other than perfectly lawful.
In light of these facts, we conclude that their
claims that they will not engage in unlawful
activity in the future are insufficient to
overcome the other circumstances that indicate
that there is a significant likelihood that the
appellants will again incite others to violate
the tax laws. See Haywood v. North Am. Van Lines,
Inc., 121 F.3d 1066, 1071 (7th Cir. 1997)
("[C]onclusory allegations and selfserving
affidavits, if not supported by the record, will
not preclude summary judgment."); Slowiak v. Land
O’Lakes, Inc., 987 F.2d 1293, 1295 (7th Cir.
1993) ("Self-serving affidavits without factual
support in the record will not defeat a motion
for summary judgment."). Accordingly, the
district court was justified in finding that a
permanent injunction was necessary under these
circumstances.
D. First Amendment
The appellants finally argue that the injunction
entered against them by the district court
violates their right to freedom of speech. The
appellants contend that their activities
concerning the promotion and sale of the De-
Taxing America Program constitute political
advocacy that is protected by the First Amendment
and that the district court’s injunction is an
unconstitutional prior restraint on political
speech.
The injunction issued by the district court in
this case is virtually identical to the
injunction at issue in Kaun./7 See 827 F.2d at1146 n.1. In that case, we expressed our grave
concern regarding the constitutionality of the
injunction issued by that district court.
However, we elected to construe the injunction
narrowly so that its provisions fit within the
bounds of the Constitution rather than strike
down the injunction and require the district
court to fashion a more narrowly-drawn order. See
id. at 1150. Like the Kaun injunction, we
conclude that the injunction here is a prior
restraint on speech. See id.; see also Alexander
v. United States, 509 U.S. 544, 550 (1993)
("Temporary restraining orders and permanent
injunctions--i.e., court orders that actually
forbid speech activities--are classic examples of
prior restraints."). However, as in Kaun, we
construe the injunction narrowly such that it is
not an impermissible prior restraint that
violates the First Amendment rights of the
appellants.
The district court has re-written the first
paragraph of the Kaun injunction so that it
clearly applies only to activities that incite
others to violate the tax laws. Incitement to
imminent unlawful activity is unprotected speech,
see Brandenburg v. Ohio, 395 U.S. 444, 447
(1969), and an individual may be enjoined from
engaging in it. See Pittsburgh Press Co. v.
Pittsburgh Comm’n on Human Relations, 413 U.S.
376, 390 (1973); Times Film Corp. v. City of
Chicago, 365 U.S. 43, 47-48 (1961); Near v.
Minnesota, 283 U.S. 697, 716 (1931). As in Kaun,
we interpret this paragraph to mean that the
appellants may be found in contempt only where
the evidence shows that they "actually persuaded
others, directly or indirectly, to violate the
tax laws" or if their "words and actions were
directed toward such persuasion in a situation
where the unlawful conduct was imminently likely
to occur." 827 F.2d at 1151-52. With this
interpretation, the first paragraph of the
injunction poses no constitutional difficulties.
The second paragraph of the injunction pertains
to advertising, marketing or selling documents
that provide false income tax advice. Following
our reading of the Kaun injunction, we interpret
the second paragraph to prohibit only false,
deceptive or misleading commercial speech that is
related to the provision of tax advice. 827 F.2d
at 1152. It is permissible for the government to
prevent the dissemination of false or misleading
commercial speech. See Zauderer v. Office of
Disciplinary Counsel, 471 U.S. 626, 638 (1985)
("The States and the Federal Government are free
to prevent the dissemination of commercial speech
that is false, deceptive, or misleading.");
Central Hudson Gas & Elec. Corp. v. Public Serv.
Comm’n, 447 U.S. 557, 561-62 (1980). Therefore,
the second paragraph, as we now construe it, does
not exceed the government’s power to
constitutionally regulate speech.
The third paragraph relates to the provision of
materials or assistance for the filing of false
IRS forms. As with the first paragraph, we read
the third paragraph to prevent only speech used
to further the imminent illegal activity of
preparing false tax forms. See Kaun, 827 F.2d at
1152. As noted above, speech intended to incite
imminent unlawful activity is not
constitutionally protected. Therefore, this
paragraph, as we read it, does not present First
Amendment concerns.
The fourth paragraph prohibits the filing of
frivolous FOIA requests with the IRS. In Kaun, we
held that frivolous FOIA requests, like frivolous
litigation, are not constitutionally protected.
Id. at 1153. Therefore, we conclude that the
fourth paragraph of the injunction also poses no
constitutional difficulties.
The fifth paragraph of the injunction is simply
a flat prohibition on activity that violates 26
U.S.C. sec. 6700. As noted above, courts may
enjoin illegal activity without running afoul of
the constitution.
As with the injunction in Kaun, we have
narrowly construed the provisions of the district
court’s injunction in order to preserve it from
the constitutional difficulties that a broader
reading would present. However, we caution
district courts, wherever possible, to craft
injunctions that are not in need of narrowing
constructions by this Court. Although we did not
strike down the injunction in Kaun, we expressed
our serious concerns regarding the potential
breadth with which the language used by that
district court could be read. Kaun, 827 F.2d at
1150, 1151. Rather than simply repeating that
language and depending on this Court’s
restrictive reading to avoid constitutional
complications, the district court should have
drafted in the first instance an injunction that
was narrowly tailored to prohibit only those
activities that can be restrained consistent with
the First Amendment. However, as in Kaun, we have
construed this district court’s injunction
narrowly and conclude that under this restrictive
reading, the injunction does not violate
appellants’ First Amendment rights.
III. CONCLUSION
For the foregoing reasons, the district court’s
entry of a permanent injunction preventing the
defendants from engaging in various activities
related to the sale of the "De-Taxing America
Program" and the incitement to violate federal
tax laws is
Affirmed.
/1 Criminal charges were not pursued against the
appellants because the Government determined that
the amount of loss suffered by the United States
did not warrant criminal penalties and because
the Government was concerned that a criminal
prosecution of the appellants would implicate the
appellants’ rights under the First Amendment.
/2 The injunction entered against the appellants
orders that the appellants:
"are hereby ENJOINED, directly or indirectly from
engaging or undertaking to engage in any and all
of the following activities:
1. Inciting other individuals and entities to
understate their federal tax liabilities, avoid
the filing of federal tax returns, or avoid
paying federal taxes based upon (a) the false
representation that wages, salaries, or other
compensation for labor or services are exempt
from federal income taxation, or (b) any other
such frivolous claim with respect to the scope of
federal income taxation, or (c) any false or
fraudulent claim regarding the allowability of
any deduction or credit, the excludability of any
income, or the securing of any other tax benefit
for federal income tax purposes;
2. Advertising, marketing, or selling any
documents or other information advising taxpayers
that wages, salaries, or other income not
specifically excluded from taxation under Title
26 of the United States Code are not taxable
income;
3. Providing forms for or assisting any individual
in the preparation of false Internal Revenue
Forms W-4, W4E, 1040X, and any other form,
return, or declaration claiming that the taxpayer
is exempt from federal income taxation or
entitled to excessive withholding allowances;
4. Filing, providing forms for, or otherwise
aiding and abetting the filing of frivolous
Freedom of Information requests with the Internal
Revenue Service; and
5. Engaging in any other conduct subject to
penalty under Section 6700 of the Internal
Revenue Code, Title 26 of the United States Code.
/3 Section 7408 provides in relevant part:
(a) Authority to seek injunction--A civil action
in the name of the United States to enjoin any
person from further engaging in conduct subject
to penalty under section 6700 . . . may be
commenced at the request of the Secretary [of the
Treasury]. . . . The court may exercise its
jurisdiction over such action (as provided in
section 7402(a)) separate and apart from any
other action brought by the United States against
such person.
/4 Section 7402(a) provides in pertinent part:
The 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 to
render such judgments and decrees as may be
necessary or appropriate for the enforcement of
the internal revenue laws. The 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.
/5 The appellants have submitted a Motion to Strike
Portions of Appellee’s Brief, and Motion for an
Order to Show Cause Why Government Counsel Should
Not Be Sanctioned. These motions are based on the
Government’s inclusion in the appendix to its
brief of two documents that were not included in
the record before the district court below. The
Government referred to these documents in a
footnote to its brief and pointed out that the
documents were not part of the record below.
We agree with the appellants that the inclusion
of these documents in the Government’s appendix
was improper, and we have not relied on these
documents in our consideration of this case. See
Berwick Grain Co., Inc. v. Illinois Dep’t of
Agric., 116 F.3d 231, 234 (7th Cir. 1997) ("The
appellate stage of the litigation process is not
the place to introduce new evidentiary
materials."); Holmberg v. Baxter Healthcare
Corp., 901 F.2d 1387, 1392 n.4 (7th Cir. 1990)
(noting that references to facts outside the
record are properly stricken). Therefore, we will
grant the appellants’ motion to strike these
documents from the Government’s appendix and
references to these documents in the Government’s
brief.
However, we cannot conclude that the
Government’s conduct here merits sanctions.
Therefore, we deny the appellants’ motion for an
order to show cause why the government should not
be sanctioned.
/6 Section 6700 of Title 26 of the United States
Code provides monetary penalties for:
(a) . . .--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 (directly or indirectly) in the
sale of any interest in an entity or plan or
arrangement referred to in subparagraph (A), and
(2) makes or furnishes or causes another person
to make or furnish (in connection with such
organization or sale)--
(A) a statement with respect to the allowability
of any deduction or credit, the excludability of
any income, or the securing of any other tax
benefit by reason of holding an interest in the
entity or participating in the plan or
arrangement which the person knows or has reason
to know is false or fraudulent as to any material
matter . . . .
/7 The injunctions are identical with the following
exceptions:
In the first paragraph the words "Organizing,
selling, or assisting in the organization of an
entity or otherwise promoting any plan or
arrangement based upon . . ." in the Kaun
injunction, see 827 F.2d at 1146 n.1, have been
replaced by the words "Inciting other individuals
and entities to understate their federal tax
liability, avoid the filing of federal tax
return, or avoid paying federal taxes based upon
. . . ."
The fifth paragraph of the Kaun injunction
regarding the filing of frivolous lawsuits has
been omitted and the sixth paragraph of the Kaun
injunction is re-numbered as the fifth paragraph
of the instant injunction.