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Tarpey v. United States

United States District Court, D. Montana, Butte Division

November 7, 2019

JAMES TARPEY, Plaintiff and Counter-Defendant,
v.
UNITED STATES, Defendant and Counter-Plaintiff.

          ORDER

          BRIAN MORRIS UNITED STATES DISTRICT COURT JUDGE

         Plaintiff and Counter-Defendant James Tarpey filed a Motion for Summary Judgment Regarding Amount of Penalty on May 16, 2019. (Doc. 52). Defendant and Counter-Plaintiff the United States filed its cross-motion for Summary Judgment Regarding Penalty Amount on June 20, 2019. (Doc. 63). The Court held a hearing on the motions on August 22, 2019, in Butte, Montana.

         BACKGROUND

         The background in this matter involves the same facts set forth in the Court's Order granting the United States's Motion for Summary Judgment. (Doc. 51). The Court resolved Tarpey's liability for penalties pursuant to 26 U.S.C. § 6700 in favor of the United States. (Doc. 51 at 21). The Court's Order did not resolve the amount of penalties to be assessed against Tarpey. The parties dispute the amount of penalty for which Tarpey should be liable. The United States requests that the Court enter judgment against Tarpey for the unpaid balance of the § 6700 penalty in the total amount of $9, 025, 265.24, plus interest. Tarpey asserts that his penalty should be $270, 215. The parties filed competing motions for summary judgment regarding the amount of penalty.

         LEGAL STANDARDS

         Summary judgment proves appropriate where the movant demonstrates that no genuine dispute exists “as to any material fact” and the movant is “entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex, 477 U.S. at 322-23. If the moving party satisfies that burden, summary judgment shall be granted unless the non-moving party demonstrates “specific facts showing that there is a genuine issue for trial.” Id. at 324.

         DISCUSSION

         The Court determined that the United States had met its burden to establish Tarpey's liability under § 6700(a) in its previous summary judgment order. (Doc. 51). The Court based this determination on its conclusion that the United States had proven the following elements by a preponderance of the evidence to establish a penalty under 26 U.S.C. § 6700(a)(2)(A): (1) that the defendant organized or sold, or participated in the organization or sale of, an entity, plan, or arrangement; (2) that the defendant made or caused to be made, false or fraudulent statements concerning the tax benefits to be derived from the entity, plan, or arrangement; (3) that the defendant knew or had reason to know that the statements were false or fraudulent; and (4) that the defendant's false or fraudulent statements pertained to a material matter. (Doc. 51 at 6, analyzing United States v. Estate Pres. Servs., 202 F.3d 1093, 1098 (9th Cir. 2000)). The current motions for summary judgment concern only the amount of the penalty to be assessed against Tarpey.

         Section 6700(a) provides alternative methods for computing the penalty for liability under the statute. The first sentence provides the computation of the penalty. 26 U.S.C. § 6700(a). This sentence sets forth the general rule that the penalty amounts to $1, 000 per activity, or if less, 100 percent of the gross income derived from such activity. Id. The third and final sentence sets forth the conduct for which the Court determined Tarpey to be liable. Id.; (Doc. 51). The third sentence modifies the computation method for conduct involving statements described in paragraph (2)(A) - “false or fraudulent statements.” 26 U.S.C.§ 6700(a)(2)(A). The third sentence disregards the $1, 000 per activity penalty calculation. Id. The third sentence instead directs that the individual stands liable for “50 percent of the gross income derived from the activity” when an individual organized or sold or participated in the organization or sale of an entity, plan, or arrangement under § 6700(a)(1) and makes false or fraudulent statements in connection with the organization of an entity, plan, or arrangement. § 6700(a).

         The Court previously determined that Tarpey made false or fraudulent statements in connection with the organization of an entity, plan, or arrangement. (Doc. 51). This determination requires the Court to look to the third sentence of § 6700(a) to determine Tarpey's penalty liability. The penalty amount assessed against Tarpey shall be equal to 50% of the gross income that Tarpey derived from the “activity” at issue. 26 U.S.C. § 6700(a). The parties dispute what constitutes the “activity” for the purposes of calculating Tarpey's penalty liability.

         Tarpey seeks to limit the “activity” at issue only to appraisals performed for DFC by Tarpey, and, therefore, seeks to limit the penalty only to income derived from these appraisals. (Doc. 54 at 7). Tarpey asserts that his penalty liability should be limited to the $540, 429 that he earned from the appraisals. (Id. at 20-21). The parties do not dispute this amount.

         Tarpey asserts that each “activity” must be proved separately and that the United States has proven appraisals as the only activity undertaken by Tarpey. (Id. at 9). The United States argues, however, that Tarpey derived an additional $18.9 million through DFC from the timeshare donation scheme as a whole because DFC served as Tarpey's alter ego. (Doc. 64). The United States alleges that the Court should impute to Tarpey the full amount derived from DFC. Id. The Court must make the threshold determination of what constitutes the “activity” for purposes of computing the penalty under § 6700(a). The Court then must determine, if necessary, whether the alter ego theory presents an appropriate avenue to impute DFC's income to Tarpey.

         I. The “activity” at issue encompasses the entire time-share donation scheme

         Tarpey argues that the appraisals of timeshare donations to DFC represent the only activity for which the Court determined him liable. Tarpey asserts that § 6700(a) makes clear that “activity” proves distinct from “plan” or “arrangement.” Tarpey argues that this distinction indicates that the penalty must be imposed for each activity that the United States has proven, rather than for the entire plan or arrangement. Tarpey argues that this interpretation required the United States to prove all “activities” that were knowingly false or fraudulent. Tarpey concludes that 50% of his gross income of $540, 429 - the amount Tarpey derived in connection with appraisals - constitutes the appropriate penalty.

         Contrary to Tarpey's argument, the Court determined in its previous summary judgment order that Tarpey would be liable for penalty conduct under § 6700(a), including liability arising from having made false or fraudulent statements under § 6700(a)(2)(A). (Doc 51). The Court did not limit Tarpey's liability solely to the fraudulent appraisals. The Court's Summary Judgment Order admittedly focused on the conduct regarding the appraisals. This focus on appraisals arose from Tarpey's concession that he had organized or participated in the organization of an entity, plan, or arrangement. (Doc. 38 at 2). Accordingly, the Court's analysis focused primarily on whether Tarpey had made false or fraudulent statements and whether he knew he had made false or fraudulent statements. The Court rejects Tarpey's claim that the Court found him liable only for the specific appraisal activity. The question remains the scope of what the “activity” encompasses. 26 U.S.C. § 6700(a).

         The “activity” giving rise to the penalty against Tarpey encompasses the entire arrangement facilitated and organized by Tarpey to solicit timeshare donations, appraise the timeshares, and direct profits to his other organizations. As the Court's previous summary judgment order noted, “Tarpey appraised timeshares, accepted donations, and promised donors charitable contributions on federal tax returns.” (Doc. 51 at 20). The Court declines to view in isolation Tarpey's conduct of performing these appraisals.

         The appraisals constituted a distinct step within the overarching scheme. The particular, well-defined activity consists of Tarpey and others performing the fraudulent appraisals to inflate the value of the donations and thereby encourage tax-payers to participate through the enticement of a larger tax deduction. This greater participation by tax-payers, in turn, allowed Tarpey's for-profit companies to benefit from the fees associated with the sale of the donated timeshares.

         A closer inspection of § 6700(a) supports the Court's conclusion. The penalty computation under § 6700(a) changes when an “activity . . . involves a statement described in paragraph (2)(A).” 26 U.S.C. § 6700(a) (emphasis added). The use of the word “involves” signals that the “activity” encompasses more than ...


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