Charles Tummino, Plaintiff v. United States of America, Internal Revenue Service, Defendant.
U.S. District Court, Dist of Ore., Portland Div.; 06-CV-955-AC, December 14, 2009.
OPINION AND ORDER
Discussion
lity
1. Abusive tax shelter
Where the validity of the underlying tax liability is properly at issue, the Court will review the matter on a de novo basis. Goza v. C.I.R., 114 T.C. 176, 181 (2000) (citing H.R. Conf. Rep. 105-599, at 266 (1998)); see also Medlock v. United States, 325 F.Supp.2d 1064, 1076 (C.D. Cal. 2003). Therefore, this court reviews the question of Tummino's underlying tax liability de novo. To establish that Tummino participated in the promotion of an abusive tax shelter, the IRS must prove that he (1) participated in the sale of an investment plan and (2) made or furnished a statement with respect to tax benefits which he knew or had reason to know was false or fraudulent as to a material matter. 68 U.S.C. §6700(a); see also U.S. v. Campbell, 897 F.2d 1317, 1320 (5th Cir. 1990); U.S. v. Kuan, 827 F.2d 1144, 1147 (7th Cir. 1987).
Tummino argues that the IRS had not factually established that anything he did promoted an abusive tax shelter. Tummino claims generally that “there are many disputed facts.” (Pl. Mem. ¶ 35.) However, Tummino's arguments dispute the application of the law to the facts rather than the facts themselves. As discussed below, the IRS properly relied on the elements laid out in §6700(a), and elaborated on by Campbell and Kuan, in establishing the abusive nature of Tummino's behavior under the statute. Here, the first element of §6700 is satisfied by Tummino's admission that he contracted with Alpha to develop a sales force and to market the pay phone program.
To satisfy the second element, the IRS must prove that Tummino (1) made or furnished a statement with respect to tax benefits (2) which he knew or had reason to know (3) was false or fraudulent (4) as to a material matter. Campbell, 897 F.2d at 1317. First, Tummino made statements with respect to tax benefits in the marketing and training materials that he distributed to sales agents and customers, including a pamphlet and a video. Tummino alleges that after he left Alpha in 1998, Alpha hired a marketing company, SPA, to become Alpha's sole marketing agent. He further alleges that SPA discarded Tummino's marketing materials for the pay phone program in favor of materials developed by SPA. (Pl. Mem. ¶ 13-14.) Tummino, however, has failed to present even a scintilla of evidence to support these allegations.
To oppose summary judgment, Tummino relies exclusively his own conclusory allegations and those of his former attorney. “When the nonmoving party relies only on its own affidavits to oppose summary judgment, it cannot rely on conclusory allegations unsupported by factual data to create an issue of material fact.” Hansen v. U.S., 7 F.3d 137, 138 (9th Cir. 1993). As discussed in this court's prior ruling in this case, because Tummino's attorney has simply asserted having personal knowledge of “many” of the facts referred to in Tummino's opposition to summary judgment (Douglas Decl. ¶ 1), this court cannot ascertain which portions of the declaration are based on personal knowledge. Tummino's supplemental briefing on the motion for summary judgment offers no additional evidence to support his claim that his work was supplanted by that of SPA. Accordingly, this court concludes that the declaration of Tummino's attorney along with Tummino's own unsupported claims are insufficient under Rule 56(e) to oppose summary judgment.
Second, Tummino knew or had reason to know that the statements made were false or fraudulent. Tummino was a sophisticated business person with extensive experience in the sale of securities and insurance. He was aware of the importance of consulting with experts in particular fields when entering into new businesses. This is evidenced by his consultation with an attorney about whether participation in the pay phone program constituted the sale of securities.
Tummino claims that he sought the advice of a tax consultant and relied on the advice of Alpha's accountant with regard to the propriety of the pay phone program, but the record contains no evidence that he conferred with a tax consultant prior to entering into the pay phone program. Instead, Tummino relies only on the conclusory and general statements in his attorney's declaration, which this court already has found to be insufficient to raise a genuine issue of material fact. Tummino's alternative argument in his supplemental briefing, that he did not know or have reason to know that his statements were false because they were based on other literature promoting pay phone services, similarly fails, as he presents insufficient evidence that such literature existed or that he consulted such literature prior making statements concerning the tax benefits of the payphone program. 2 As a result, Tummino has failed to raise a genuine issue of material fact as to whether he knew or should have known that he was supplying false statements about the tax benefits of the pay phone programs.
Third, Tummino has failed to raise a genuine issue of material fact as to whether the statements he made in promotion of the pay phone program were false or fraudulent. In fact, Tummino does not even contest the IRS determination that the deductions and credits that he promised as a part of the pay phone program were not allowable.
Fourth and finally, Tummino's statements made in promotion of the pay phone program were material. A matter is considered material under §6700 “if it would have a substantial impact on the decision making process of a reasonably prudent investor.” U.S. v. Buttorff, 761 F.2d 1056, 1062 (5th Cir. 1985) (quoting S. REP. NO. 97-494, at 267 (1982)). In Buttorff, the Fifth Circuit held that this test was met where the taxpayer assured customers that the purported tax benefits of the tax shelter were lawful, despite consistent rejection of similar shelters by the courts. Id. The taxpayer in Buttorff counseled his clients not to seek separate opinions from lawyers or accountants. Id. Many of the victims of the tax shelter in Buttorff testified that had they known of the IRS's treatment of these shelters, they probably would not have invested in them. Id.
In this case, it strains reason to think that the tax shelter component of the pay phone program was not a material consideration to those who enrolled in it. The only evidence in the record on this point is Tummino's acknowledgment that the tax credit is what attracted the customers of the payphone program. Further, the target market for the program is similar to that in Buttorff: apparently unsophisticated investors who were not in the business the previous year and to whom the taxpayer gave certain assurances regarding return on investment and taxability. No evidence allows a reasonable inference other than that the tax credit is what interested customers in the pay phone program and that, as with victims in Buttorff, they would have been less likely to invest in the pay phones had they known of the IRS's treatment of the deductions and tax credits promised by Tummino. Thus, the promise of deductions and tax credits as a result of investment in the pay phone program is material.
Accordingly, Tummino has failed to raise a genuine issue of material fact as to any of the elements of the IRS's conclusion that Tummino committed a violation of §6700.
2. Penalty
Tummino also argues that the IRS miscalculated the penalty under §6700 because it “assumes, without supporting factual basis, that [Tummino] actively promoted all 31,000 sales.” (Pl. Mem. ¶43.) Any person who “makes or furnishes or causes another person to make or furnish” a statement which the person knows or has reason to know is false or fraudulent as to any material matter is subject to the penalty under the statute. §6700(a)(1)(B) (emphasis added). Tummino does not contest the total number of phone sales made under the program. Nor does he contest the fact that he continued to have a financial interest in the pay phone program after he ceased to actively participate in the program. Furthermore, as discussed earlier, Tummino does not provide sufficient evidence to raise a genuine issue of material fact as to whether Alpha and SPA discarded the marketing and training materials developed by Tummino to market the pay phone program.
Taxpayers who violate §6700 are subject to “a penalty equal to the $1,000 or, if the person establishes that it is lesser, 100 percent of the gross income derived (or to be derived) by such person from such activity” with respect to “each activity.” §6700(a)(2). Thus, Tummino is subject to the lesser of $31,000,000 (31,000 sales multiplied by $1,000 per sale) or $1,437,450 (the total income derived by Tummino from the pay phone program). Because Tummino fails to raise a genuine issue of material fact as to whether the IRS properly counted the number of sales as applied to the calculation of the penalty and does not contest the total income derived from the pay phone program, the court will not disturb the IRS's determination that Tummino's liability is $1,437,450.
C. Collectibility
Where the validity of the underlying tax liability is not at issue, the court will review the administrative determination for abuse of discretion. Goza, 114 T.C. at 181 (citing H.R. Conf. Rep. 105-599, at 266 (1998)); see also Medlock, 325 F.Supp.2d at 1076. Having determined the underlying tax liability to be established, the court reviews the question of Tummino's doubts as to collectibility under an abuse of discretion standard. An abuse of discretion is a “‘plain error,’ namely, ‘discretion exercised to an end not justified by the evidence, a judgment that is clearly against the logic and effect of the facts as are found.’” Medlock, 325 F.Supp.2d at 1076 (citing Wing v. Asarco, Inc., 114 F.3d 986 (9th Cir. 1997)). An abuse of discretion occurs when a decision is based “on an erroneous view of the law or a clearly erroneous assessment of the facts.” Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006) (citations omitted).
Tummino fails to raise a genuine issue of material fact as to whether the IRS abused its discretion by concluding that he had dissipated assets and including those assets in the minimum acceptable offer. The Internal Revenue Manual (“IRM”) provides that when the taxpayer can show that assets have been dissipated to provide for necessary living expenses, these amounts should not be included in the reasonable collection potential (“RCP”). I.R.M. 5.8.5.4(4). 3 If the assets have been dissipated with a disregard of the outstanding tax liability, the IRS should consider including the value in the RCP. I.R.M. 5.8.5.4(5). If the taxpayer does not provide information showing the disposition of funds from dissipated assets, the IRS should consider including a portion or all of these values in an acceptable offer amount. I.R.M. 5.8.5.4(6). The IRM further provides that an offer may be returned at any time during processing if the taxpayer fails to provide information necessary to determine whether it should be accepted. 5.8.7.2.2.2(1). Consistent with these provisions, the IRS reasonably requested documents from Tummino pertaining to the disposition of the funds drawn from Tummino's IRA.
Tummino alleges that, contrary to the assertion of the IRS, he provided evidence that the withdrawals from his IRA were not dissipated assets. (Pl. Mem. ¶9.) Tummino, however, has not produced copies of any of the information that he alleges he submitted to the IRS for review. Even after Tummino obtained additional discovery, he failed to provide evidence that the withdrawals from his IRA were not dissipated assets. As a result, Tummino fails to raise a genuine issue of material fact as to whether the IRS abused its discretion by concluding that Tummino had dissipated assets and including those assets in the minimum acceptable offer. Therefore, the court will not disturb the IRS's determination of collectibility.
Conclusion
The United States' motion for summary judgment (#28) is GRANTED.
DATED this 14th day of December, 2009.

Footnotes


1
The parties have consented to jurisdiction by magistrate judge pursuant to 28 U.S.C. §631(c)(1).
2
Even if this court accepted Tummino's allegation of reliance on other literature as a basis for his knowledge, or lack thereof, of the tax benefits of pay phone programs, a review of Tummino's claims as to the contents of the "thesis" on which he relies reveal no literature discussing the tax benefits of pay phone programs.
3
The Secretary of Treasury or his designees may prescribe regulations to carry out the duties and power of the Secretary, including collection of receipts. 31 U.S.C. §321 (2009). The IRM establishes the organization and procedures of the IRS under the authority granted by §321.