BRENDA K. SANNES, District Judge.
Plaintiff pro se Robert L. Schulz brings this action against Defendant United States (the "Government") under 26 U.S.C. § 6703(c)(2), alleging that the Internal Revenue Service (the "IRS"): (i) erroneously assessed a penalty of $225,000 against him for promoting an abusive tax shelter; and (ii) seeking to bar the Government from retaliating against him. (Dkt. No. 8). On May 20, 2016, the Government asserted a counterclaim against Schulz, seeking a judgment for the unpaid $224,000 balance of the penalty the IRS assessed. (Dkt. No. 29, at 11). On March 7, 2017, the Court granted partial summary judgment to the Government, finding Schulz liable for promoting an abusive tax shelter under 26 U.S.C. § 6700, "leaving only the issue of the penalty due . . . which Schulz may challenge on the basis that he received no income from the abusive tax shelter." (Dkt. No. 88, at 10). Currently pending before the Court are: (i) the Government's motion for summary judgment, (Dkt. No. 196), which Schulz opposes, (Dkt. No. 213); and (ii) Schulz's motion for summary judgment, (Dkt. No. 197), which the Government opposes, (Dkt. No. 211). On June 11, 2018, the Court directed the parties to submit additional briefing as to whether We the People ("WTP"), "derived more than $225,000 in gross income in 2003 from the `activity' at issue in this case, that is, organizing, selling, or participating in the organization of abusive tax shelters." (Dkt. No. 216). The Government and Schulz submitted their letter briefs on the issue on June 22, 2018 and June 25, 2018, respectively.
Schulz is the founder of two not-for-profit entities known as We The People for Constitutional Education and We The People Congress, together known as "WTP." (Dkt. No. 197-2, ¶ 2). Schulz claims that he, through the activities of WTP, has devoted "his life to helping people understand the history, meaning, effect and significance of the provisions of the Declaration of Independence and their State and Federal constitutions and how to hold their public officials accountable to the rule of law pursuant to the First Amendment's Petition Clause." (Id., ¶ 4). Schulz has served as WTP's Chairman, President, and Chief Executive Officer since he founded the organization in 1997. (Dkt. No. 196-5, at 2; Dkt. No. 196-12, at 3). Schulz personally performed the administrative tasks required to establish and maintain WTP. (Dkt. No. 197-2, ¶¶ 9-11, 13-17, 20-21). WTP's corporate address has always been the same as Schulz's home address, and its offices have always been located in Schulz's home. (Dkt. No. 196-5, at 3-5). Schulz, however, has never received rent in exchange for providing the space, nor has he taken a deduction on his tax returns for donating the space to WTP. (Id., at 3-4). Other than Schulz's wife, only Schulz has an office at WTP. (Dkt. No. 196-12, at 6).
Schulz used WTP funds to defend himself in IRS actions and litigation, regardless of whether WTP was a named defendant.
Although Schulz claims that WTP had no employees,
In 2003, the board accepted Schulz's strategy to reform the WTP board with a national focus and granted Schulz "the power to remove and add members to the Board based solely upon his discretion." (Dkt. No. 196-5, at 55-61). In October 2003, explaining that he had "settled on a reorganization plan for" WTP, Schulz used this power to remove all but two members of WTP's board—himself and Burr Deitz, who also served as Secretary and Treasurer. (Dkt. No. 196-4, at 113). In January 2004, Schulz and Deitz—the only remaining board members— authorized Schulz "to have WTP continue to pay out-of-pocket expenses related to" the IRS's investigation into WTP and Schulz's violations of § 6700. (Dkt. No. 196-5, at 73).
One of WTP's goals was to "claim[] and exercis[e]" what Schulz has described as his "First Amendment Right to Petition the Government for Redress of Grievances" for the purpose of "obtaining the answers to important questions by Petitioning the leaders of the federal government." (Dkt. No. 8, ¶¶ 7, 11). To that end, WTP "repeatedly petitioned Defendant United States to respond to Petitions for Redress of Grievances related to alleged violations by the United States of," inter alia, "the Constitution's tax clauses (via the direct, un-apportioned tax on labor)." (Dkt. No. 197-2, ¶ 6). WTP's "written Petition for Redress of Grievances regarding tax withholding" was packaged in a blue folder titled "Legal Termination of Tax Withholding for Companies, Workers and Independent Contractors" (the "Blue Folder"). (Id. ¶ 8). The Blue Folder contained materials that "encouraged companies, workers and independent contractors to submit the content of the Blue Folder to their corporate lawyers and CPAs for a `rigorous review' of its accuracy with the goal of . . . legally ending tax withholding." (Id. ¶ 9). WTP distributed physical copies of the Blue Folder at WTP events and through the mail; a digital version was available by download from the WTP website. (Id. ¶¶ 11-13). Schulz argues that WTP never sold the contents of the Blue Folder, but only requested a "nominal donation of $20" from individuals who requested a physical copy to offset costs associated with printing and mailing the materials.
WTP reported $485,351 in "total revenue" to the IRS in 2003. (Dkt. No. 196-3, at 8). Schulz argues that, during that period, WTP's "Blue Folder-related activities took up an insignificant amount of WTP's time and resources," and were "small and unimportant in view of WTP's overall activities, total revenues and total expenses." (Dkt. No. 197-2, ¶ 28). The record indicates that WTP solicited and received donations in support of its other efforts to, inter alia, organize and sponsor a "Give Me Liberty national conference" and to "bring an action in 2004 against the United States . . . for a declaration of the Rights of People and the obligations of the government under the last ten words of the First Amendment—that is, the `petition clause.'" (Id. ¶ 30). Schulz asserts that, cumulatively calculated, the "gross revenue of 225 [Blue Folder] donations of $20 would represent .84% of WTP's [g]ross [r]evenue" as reported in 2003.
Under Federal Rule of Civil Procedure 56(a), summary judgment may be granted only if all the submissions taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party bears the initial burden of demonstrating "the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323. A fact is "material" if it "might affect the outcome of the suit under the governing law," and is genuinely in dispute "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248; see also Jeffreys v. City of New York, 426 F.3d 549, 553 (2d Cir. 2005) (citing Anderson). The movant may meet this burden by showing that the nonmoving party has "fail[ed] to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322; see also Selevan v. N.Y. Thruway Auth., 711 F.3d 253, 256 (2d Cir. 2013) (summary judgment appropriate where the non-moving party fails to "come forth with evidence sufficient to permit a reasonable juror to return a verdict in his or her favor on an essential element of a claim" (internal quotation marks omitted)).
If the moving party meets this burden, the nonmoving party must "set out specific facts showing a genuine issue for trial." Anderson, 477 U.S. at 248, 250; see also Celotex, 477 U.S. at 323-24; Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009). "When ruling on a summary judgment motion, the district court must construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant." Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 780 (2d Cir. 2003). Still, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts," Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986), and cannot rely on "mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986) (quoting Quarles v. Gen. Motors Corp., 758 F.2d 839, 840 (2d Cir. 1985)). Furthermore, "[m]ere conclusory allegations or denials cannot by themselves create a genuine issue of material fact where none would otherwise exist." Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (internal quotation marks omitted).
Where a plaintiff proceeds pro se, the Court must read his or her submissions liberally and interpret them "to raise the strongest arguments that they suggest." McPherson v. Coombe, 174 F.3d 276, 280 (2d Cir. 1999) (quoting Burgos v. Hopkins, 14 F.3d 787, 790 (2d Cir. 1994)). However, a pro se party's "`bald assertion,' completely unsupported by evidence, is not sufficient to overcome a motion for summary judgment." Jordan v. New York, 773 F.Supp.2d 255, 268 (N.D.N.Y. 2010) (citing Carey v. Crescenzi, 923 F.2d 18, 21 (2d Cir. 1991)); see also Wagner v. Swarts, 827 F.Supp.2d 85, 92 (N.D.N.Y. 2011).
The Government assessed penalties against Schulz pursuant to 26 U.S.C. § 6700 for promoting an abusive tax shelter. (Dkt. No. 197-2, ¶ 41). As the Court has already ruled that Schulz is liable for promoting an abusive tax shelter by virtue of WTP's distribution of the Blue Folders, (Dkt. No. 88), the only remaining issue is the propriety of the penalty assessed against him.
The Government calculated Schulz's penalty by first determining that the 225 Blue Folders Schulz distributed by mail constitute the "activities" that violated § 6700. (See Dkt. No. 215, at 6 ("Here, the transaction attacked is Schulz's organization, promotion, and distribution of the Tax Termination Packages in 2003.")). The Government then asserts that the "gross income" Schulz derived from those activities is properly considered as the gross revenue that WTP reported to the IRS in 2003, or $485,351. The Government therefore concludes that the penalty is correctly assessed at $225,000, i.e., the lesser of the "per activity" calculation and WTP's gross income.
"For purposes of calculating a Section 6700 penalty," however, "the government is concerned only with gross income to be derived from a particular, well-defined activity." In re MDL-731 Tax Refund Litig., 989 F.2d at 1302; see also Gardner, 145 T.C. at 179 ($47,000 penalty calculated by identifying "47 corporations sole organized by petitioners and correlat[ing] payments made by the customers" (emphasis added)); Alexander, 2010 WL 1643425, at *7, 2010 U.S. Dist. LEXIS 40108, at *17-18 (penalty of $1,152,000 appropriate where business record indicated 1,152 transactions and defendant's wife "burned all other records" of income from sales of tax shelter). Here, the particular activities at issue, as defined by the Government, are 225 distributions of the Blue Folder. Viewed in the light most favorable to Schulz, the evidence that the Blue Folders were offered for a suggested donation of $20 is sufficient to raise a question of fact as to whether WTP received less than $1,000 in gross income from each Blue Folder it distributed. (Dkt. No. 197-2, ¶ 24; Dkt. No. 211-1, ¶ 24). Furthermore, because there is evidence in the record indicating that WTP solicited and received donations in support of a variety of activities other than its distribution of 225 copies of the Blue Folder, (see, e.g., Dkt. Nos. 197-3; 197-4), there are material issues of fact as to whether WTP's total gross income—$485,351—constitutes the "gross income derived" from the specified activities by which the Government calculated the penalty.
Thus, without evidence correlating the amount of WTP's annual gross in 2003 with the amount of gross income WTP derived from distribution of each of the 225 Blue Folders, there remains a dispute of material fact as to whether the penalty is properly assessed at $225,000 or some lesser amount.
Regardless of whether the penalty is properly assessed as the gross income "derived . . . from such activity" or calculated on a "per activity" basis, no penalty can be assessed against Schulz unless WTP's income—as derived from the distribution of the 225 Blue Folders at issue here—can be imputed to him as an individual. The Government argues that it is entitled to summary judgment because the "undisputed evidence shows" that WTP functioned as Schulz's alter-ego at the time the income was generated, and that, therefore, any income generated by WTP can be imputed to Schulz in his individual capacity. (Id. at 16-23). Schulz, on the other hand, argues that he is entitled to summary judgment because the Government "has failed to show a factual basis . . . against Schulz's claim that the penalty should be zero because he derived no income from the activity." (Dkt. No. 197-1, at 7).
"Questions relating to the internal affairs of corporations—for profit or not-for-profit are — generally decided in accordance with the law of the place of incorporation." United States v. Funds Held in the Name or for the Benefit of Wetterer, 210 F.3d 96, 106 (2d Cir. 2000). The parties do not dispute that the two WTP entities were incorporated in New York. (Dkt. No. 196-3, at 1; Dkt. No. 196-5, at 33). "New York law permits a court to disregard the corporate form whenever necessary to prevent a fraud or to achieve equity." United States v. Cohn, 682 F.Supp. 209, 216 (S.D.N.Y. 1988). "Under New York law, an entity is a taxpayer's alter ego . . . where the taxpayer exercised control over the entity at issue, such that the entity has become a mere instrumentality of the taxpayer, and the taxpayer used this control to commit a fraud or other wrong resulting in unjust loss or injury." Magesty Sec. Corp. v. IRS, No. 10-cv-0638, 2012 WL 1425100, at *4, 2012 U.S. Dist. LEXIS 57514, at *12 (S.D.N.Y. Apr. 24, 2012)); see also Morris v. N.Y. State Dep't of Taxation & Fin., 82 N.Y.2d 135, 141 (1993) (stating that, in New York, "piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury"). "The mere claim that the corporation was completely dominated by the defendants, or conclusory assertions that the corporation acted as their `alter ego,' without more, will not suffice to support the equitable relief of piercing the corporate veil." Flushing Plaza Assocs. No. 2 v. Albert, 102 A.D.3d 737, 739 (2d Dep't 2013).
Furthermore, "in determining whether to pierce the corporate veil," New York courts consider multiple factors including: "the absence of the formalities . . . that are part and parcel of the corporate existence, i.e., . . . election of directors, keeping corporate records and the like," "whether funds are put in and taken out of the corporation for personal rather than corporate purposes," "overlap in ownership, officers, directors, and personnel," "common office space, address and telephone numbers of corporate entities," "the amount of business discretion displayed by the allegedly dominated" entity, and "whether the corporation in question had property that was used by other of the corporations as if it were its own." Weinreich v. Sandhaus, 850 F.Supp. 1169, 1178-79 (S.D.N.Y.) (citing Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 138 (2d Cir. 1991)). Considering all of these factors in tandem with the significant harm Schulz sought and inflicted upon the Government, both prevention of fraud and promotion of equity require attributing the gross income WTP derived from promoting the abusive tax shelters to Schulz personally as WTP's alter ego.
First, even viewed in the light most favorable to Schulz, the evidence in the record indicates that Schulz maintained virtually exclusive control over WTP, its activities, and its assets. With regard to operations and finances, it is difficult to distinguish where Schulz ends and where the organization begins. WTP was Schulz's sole occupation, and Schulz was WTP's sole animating force. In addition to functioning as the "voice" of the organization, Schulz alone determined WTP's mission, how to pursue that mission through programming and strategic decisions, and whether and when to change course. Schulz simultaneously served as WTP's President, Chief Executive Officer, and Chairman of WTP's Board of Directors. WTP's only permanent physical presence was inside Schulz's own home, where only he and his wife maintained offices. Schulz was the only person authorized to draw a salary from WTP. Schulz used WTP funds to pay for his health insurance, as well as portions of his electric and telephone bills. Schulz used WTP funds for litigation and other legal expenses, regardless of whether WTP was a named party. Schulz mixed WTP and personal expenses, paying WTP expenses with his personal credit cards and using WTP funds directly to make payments on those cards. Altogether, Schulz acknowledges that he made more than $100,000 in "unsecured loans" to WTP. At Schulz's direction, WTP "loaned" over $8,000 to Burr Deitz after Deitz stole that money from WTP. Finally, Schulz had the power to add or remove board members authority to fire board members "on his sole discretion." And Schulz exercised that power when he removed all board members, except one, in 2003.
Second, as described above, Schulz I already determined that together, Schulz and WTP promoted an abusive tax shelter in violation of § 6700, and that the "gravity of harm" caused by their conduct is "manifest." See Schulz I, 529 F. Supp. 2d at 346-53 (explaining that although "the exact cost of Defendants' conduct appears to be unknown," the estimated cost to the United States Treasury is approximately $4.8 million). Infliction of such an injury is at the core of Schulz's stated mission: enabling "companies, workers, and independent contractors" to "stop withholding, filing and paying," (Dkt. No. 197-3, at 4), a "tax [that] is fraudulent in its origin and illegal in its operation" for the purpose of "execut[ing] a mass-movement to Cut Government Funding," (id. at 14).
The record indicates that Schulz exercised dominion and control over the entity to such a degree that WTP is more accurately understood as his mere instrumentality, and that he used that instrumentality to organize and promote abusive tax shelters in violation of § 6700, causing significant injury to the Government. Accordingly, there is no issue of material fact as to whether WTP's income derived from the distribution of the Blue Folders is properly imputed to Schulz as his alter ego. The only issue remaining for trial is the amount of gross income WTP—and by extension, Schulz—derived from the specified activities used to calculate the penalty amount under § 6700, i.e., organizing and promoting an abusive tax shelter through distribution of the 225 Blue Folders at issue in this case.
For these reasons, it is hereby
26 U.S.C. § 6700 (2000).
Id. at 1308 (citation omitted). Here, the Government has not attempted to demonstrate how WTP's gross income exceeded $1,000 with respect to each of the 225 Blue Folders "sold." Rather, relying entirely on its presumption of correctness, the Government simply asserts that 100% of WTP's annual gross revenue for 2003 is attributable to distribution of the Blue Folder. The record is devoid of evidence indicating what proportion of WTP's annual revenue, if any, corresponds to the distribution of all 225 Blue Folders collectively—let alone what income may be attributed to the sale of each Blue Folder individually.
