United States District Court, D. Montana, Butte Division
MORRIS UNITED STATES DISTRICT COURT JUDGE
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 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.
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.
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.
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).
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.
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.
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.
“activity” at issue encompasses the entire
time-share donation scheme
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
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).
“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.
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
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 ...