Tornichio v. United States, 1998 WL 381304 (N.D.Ohio))

United States District Court, N.D. Ohio.

Joseph T. TORNICHIO, Plaintiff,

v.

UNITED STATES OF AMERICA, Defendant.

No. 5:97CV2794.

March 12, 1998.

MEMORANDUM OF OPINION

MANOS, J.

On November 3, 1997. Joseph T. Tornichio, plaintiff, filed this action pro se seeking the refund of money he paid to the Internal Revenue Service ("I.R.S."). In particular, he seeks refund of amounts assessed against him by the I.R.S. as penalties for filing frivolous income tax returns. On December 31, 1997, Defendant filed a Motion To Dismiss, to which Plaintiff responded. The motion expresses an intent to seek sanctions pursuant to Fed R. Civ. P. 11. On January 28, 1998, Defendant filed a Motion For Sanctions.

For the reasons stated below, Defendant's Motion To Dismiss is GRANTED. It's Motion For Sanctions is GRANTED.

I. FACTS

Plaintiff filed a 1994 federal income tax return indicating his employer had withheld a portion of his wages for the payment of his federal income taxes. Despite the fact he had wages, he claimed on the return he had no taxable income, and put the amount withheld on the lines for overpayment and refund. He provided an attachment alleging he owed no taxes essentially because: (1) nothing in the Internal Revenue Code ("Code") makes him "liable" for taxes, (2) the filing requirement violates his Fifth Amendment right against self- incrimination, and (3) "income" under the Code is limited to gains from corporate activities.

In response, the I.R.S. assessed him a $500.00 penalty (which totaled $519.72 including interest) pursuant to 26 U.S.C. § 6702 for filing a frivolous return. Plaintiff paid the penalty. He filed a similar return for his 1995 income, and again the I.R.S. assessed him a $500.00 penalty (which totaled $577.60 including interest). This time the I.R.S. removed the funds from his bank account via administrative levy pursuant to 26 U.S.C. § 6331. The levy created an overdraft for the account, resulting in a $45.00 charge from the bank.

Plaintiff seeks refund of the penalties and reimbursement of the overdraft charge. [FN1] Defendant characterizes this action as a patently frivolous "tax protester" suit.

II. LAW

Defendant has moved to dismiss because the Complaint fails to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6). In deciding a motion to dismiss, the allegations in the Complaint are taken as true and viewed in the light most favorable to Plaintiff. A complaint will not be dismissed "unless it appears beyond a reasonable doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Hiser v. City of Bowling Green, 42 F.3d 382, 383 (6 th Cir.1994), cert. denied, 514 U.S. 1120, 115 S.Ct. 1984, 131 L.Ed.2d 871 (1995), quoting, Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Dana Corp. v. Blue Cross & Blue Shield Mutual of Northern Ohio, 900 F.2d 882, 885 (6 th Cir.1990). The complaint need only give fair notice as to the claim and the grounds upon which it rests. In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6 th Cir.1993).

Conclusory allegations, however, are not sufficient to state a claim. Rather, a complaint must set forth specific facts which, if proven, would warrant the relief sought. Sisk v. Levings, 868 F.2d 159, 161 (5 th Cir.1989). In addition, a court is not bound to accept as true a legal conclusion couched as a factual allegation. Papasan v. Allain, 478 U.S. 265, 286 106 S.Ct. 2932, 2944 (1986). A court likewise need not accept unwarranted factual inferences. Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6 th Cir.1987). Although pro se Complaints are held to less stringent standards than those filed by lawyers, they still must meet the basic pleading essentials. Wells v. Brown, 891 F.2d 591, 594 (6 th Cir.1989).

The Code states a tax is "hereby imposed on the taxable income of every individual". 26 U.S.C. § 1. (emphasis added). "Taxable income" means gross income minus deductions permitted under the Code. 26 U.S.C. § 63(a). "Gross income" means "all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services ..." 26 U.S.C. § 61(a).

With certain exceptions not relevant here, the Code requires all individuals file a return indicating a self-assessment of tax. See 26 U.S.C. § 6012. A penalty of $500.00 shall be assessed against any individual who files "what purports to be a return" which, inter alia, contains information on its face indicating the self-assessment is substantially incorrect, and is due to a position which is frivolous. 26 U.S.C. § 6702(a). [FN2]

III. ANALYSIS

Plaintiff challenges the I.R.S's conclusion that his returns fall within the penalty provision of section 6702(a). He also challenges the use of administrative levy to obtain payment of the second penalty. His arguments lack merit.

A. Assessment of the Penalties

Plaintiff filed what he purports to be returns. The returns indicate he had wages withheld, but no taxable income. This contradiction "on its face indicates the self-assessment is substantially incorrect" See 26 U.S.C. § 6702(a)(1)(B). Thus, the issue is whether the error is due to "a position which is frivolous" See 26 U.S.C. § 6702(a)(2)(B). To deny his returns are frivolous, Plaintiff relies essentially on the same arguments he asserted in the attachments to his tax returns.

In Sisemore v. United States, 797 F.2d 268 (6 th Cir.1986), the Sixth Circuit upheld penalties in a case similar to this one. The plaintiffs amended a joint tax return to deny their wages and salary were taxable "income". They submitted a memorandum with the return in support of their position. The Court concluded the amended return on its face indicated the self-assessment was substantially incorrect. It also concluded their position that wages are not taxable is frivolous. Double costs and attorneys fees were assessed against them pursuant to Fed. R.App. P. 38 for filing a frivolous appeal. Id. at 270-71.

Plaintiff's arguments are no less frivolous here. [FN3] First, Plaintiff argues the Code does not impose a tax "liability". The plain language of the Code belies this, stating the tax is "imposed". See 26 U.S.C. § 1. He attempts to distinguish between "imposing" a tax and creating a "liability" for tax. The Court fails to see a difference. Individuals have an affirmative duty to pay taxes. Gabelman v. Commissioner of Internal Revenue, 86 F.3d 609, 611 (6 th Cir.1996).

Plaintiff next argues the filing of a return violates his Fifth Amendment right against self-incrimination. [FN4] He relies on Garner v. United States, 424 U.S. 649 (1976). There, the Court held one may invoke the Fifth Amendment as to tax returns that would incriminate one for specific non-tax crimes, provided the privilege was claimed on the return. It does not stand for the proposition that the Fifth Amendment provides general protection against filing tax returns. Indeed, the Court reiterated the long-standing principle that the Fifth Amendment is not a defense to filing a return at all. Id. at 650, citing, United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037 (1927). In Brennan v. Commissioner of Internal Revenue, 752 F.2d 187, 189 (6 th Cir.1985), the Sixth Circuit held the blanket assertion of the Fifth Amendment privilege as to tax returns is a "frivolous position".

Plaintiff argues he is entitled to relief because the Code does not define income. The United States, however, is correct that "income" is afforded its every day usage as any gain derived from capital, labor, or both combined. See United States v. Richards, 723 F.2d 646, 648 (6 th Cir.1983). In addition, the Code explicitly defines "gross income", from which taxable income is computed, as including compensation for services, i.e., wages. 26 U.S.C. § 61(a); Charczuk v. Commissioner of Internal Revenue, 771 F.2d 471, 473 (10 th Cir.1985); Perkins v. Commissioner of Internal Revenue, 746 F.2d 1187, 1188 (6 th Cir.1984).

Relatedly, Plaintiff argues "income" should be interpreted as limited to corporate activities, and not include wages. He relies on a series of Supreme Court cases rendered shortly after ratification of the Sixteenth Amendment, and which define the scope of corporate income. None of those cases, however, stands for the proposition that only corporate income is taxable. To the contrary, like Richards, supra, many of these cases state: "income may be defined as gain derived from capital, from labor, or from both combined". See. e.g., Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 174, 46 S.Ct. 449, 70 L.Ed. 886 (1926); Merchant's Loan & Trust Co. v. Smietanka, 255 U.S. 509, 518, 41 S.Ct. 386, 65 L.Ed. 751 (1921); Eisner v. Macomber, 252 U.S. 189, 207, 40 S.Ct. 189, 64 L.Ed. 521 (1919); Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185, 38 S.Ct. 467, 62 L.Ed. 1054 (1918); Stratton's Independence, Ltd. v. Howbert, 231 U.S. 399, 415, 34 S.Ct. 136, 58 L.Ed. 285 (1913) (emphasis added). In particular, in Southern Pacific Co. v. Lowe, 247 U.S. 330, 333- 34, 38 S.Ct. 540, 62 L.Ed. 1142 (1918), the Supreme Court quoted the income statute at the time as imposing a tax on "every person residing in the United States ... upon the entire net income arising and accruing from all sources". Thus, the plain language of the authorities upon which Plaintiff relies belies his position.

Plaintiff next argues he should not be penalized because his filings constitute "returns" within the meaning of the Code. He relies on cases holding a return containing all zeroes is still a "return". His argument misses the point. He has not been penalized for failing to file returns, but for filing frivolous ones. Section 6702(a) penalizes a frivolous filing of "what purports to be a return". He admits he filed what he purports to be tax returns.

Courts have upheld penalties under section 6702(a) against returns in which the filer has improperly used zeroes or left lines blank. See Fuller v. United States, 786 F.2d 1437, 1438-39 (9 th Cir.1986). In United States v. Kimball, 896 F.2d 1218, 1220 (9 th Cir.1990), relied on by Plaintiff, the Court stated a return containing all asterisks "might well be frivolous under section 6702"; vacated, United States v. Kimball, 925 F.2d 359, (9 th Cir.1991) (also stating section 6702 applies to any document which purports to be a tax return).

B. Administrative Levy

Plaintiff also challenges the use of administrative levy to collect the second penalty. See 26 U.S.C. § 6331. Courts have repeatedly upheld the use of administrative levy. See United States v. National Bank of Commerce, 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985); Capuano v. United States, 955 F.2d 1427, 1429 (11 th Cir.1992). In Harrell v. United States, 13 F.3d 232, 235-36 (7 th Cir.1993), the Court characterized a challenge to the levy process as "frivolous".

Even the authorities relied upon by Plaintiff clearly indicate his arguments are without merit. Had he followed the plain language of the cases and statutes he cited in the attachments to his tax returns, and again in his brief in opposition, he would have realized his returns were frivolous. Accordingly, his action is dismissed.

IV. RULE 11 SANCTIONS

Pursuant to Fed.R.Civ.P. 11, the United States moves for sanctions in the amount of reasonable attorneys' fees and costs Rule 11 provides, in part, presenting a pleading to the Court constitutes a certification that, to the best of one's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, the claims are warranted by existing law, or a non-frivolous argument for the extension, modification, or the reversal of existing law or the establishment of new law. Fed.R.Civ.P. 11(b). The Court may impose an "appropriate sanction" against a party whose pleading does not comport with the certification. Fed.R.Civ.P. 11(c). The reasonableness inquiry constitutes a determination of whether the pleading was well founded. Hartleip v. McNeilab, Inc., 83 F.3d 767, 778 (6 th Cir.1996), citing,Business Guides, Inc. v. Chromatic Communications Enters., Inc., 498 U.S. 533, 553, 111 S.Ct. 922, 112 L.Ed.2d 1140 (1991).

The nature of Plaintiff's claims is summed up in the similar case of Biermann v. Commissioner of Internal Revenue, 769 F.2d 707 (11 th Cir.1985). The Court stated: "These arguments are patently frivolous, have been rejected by courts at all levels of the judiciary, and, therefore, warrant no further discussion." Id . at 708. The analysis above confirms the frivolousness of Plaintiff's Complaint. Defendant's request for sanctions is granted.

It is no excuse that Plaintiff is pro se. The plain language of his own authorities should have demonstrated to him his position has no merit. In addition, to the extent he believed himself to be correct when he filed the Complaint, Defendant's motion to dismiss clearly demonstrated his position is meritless. The motion to dismiss also warned him of the possibility of sanctions. Furthermore, pursuant to Fed.R.Civ.P. 11(c)(1), the motion for Rule 11 sanctions was filed more than 21 days after service to permit him to withdraw the Complaint. Despite the warnings, instead of withdrawing the Complaint, Plaintiff not only continued to pursue his claims, but even requested sanctions against the United States. [FN5]

Numerous courts have imposed sanctions for filing and appealing claims similar to those here. See, e.g., Schoffner v. Commissioner of Internal Revenue, 812 F.2d 292, 294 (6 th Cir.1987) (the Sixth Circuit has given notice that tax protester cases are sanctionable); Sisemore v. United States, 797 F.2d 268, 270-71 (6 th Cir.1986) (sanctions imposed for claiming wages are not "income"), Stites v. Internal Revenue Service, 793 F.2d 618 (5 th Cir.1986) (upholding Rule 11 sanctions); Coleman v. Commissioner of Internal Revenue. 791 F.2d 68, 72 (7 th Cir.1986) (courts "regularly impose sanctions" in tax protester cases); Kelly v. United States, 789 F.2d 94, 98 (1 st Cir.1986) ("courts have not hesitated to impose sanctions" in tax protester cases); Charczuk v. Commissioner of Internal Revenue, 771 F.2d 471, 475-76 (10 th Cir.1985) (sanctions imposed for claiming income tax was unconstitutional and "income" is not defined); Hudson v. United States, 766 F.2d 1288, 1292 (9 th Cir.1985) (sanctions imposed for claiming income tax is unconstitutional and asserting blanket Fifth Amendment privilege as to tax returns).

The only remaining issue is the amount of sanctions. Rule 11 provides for the imposition of an "appropriate sanction", which does not necessarily mean attorneys' fees and expenses. See Fed.R.Civ.P. 11(c); Donaldson v. Clark, 819 F.2d 1551, 1557 (11 th Cir.1987). The primary factor in determining the amount is deterrence. Other factors include compensation to the aggrieved party, mitigation of effort by the aggrieved party to avoid excessive expenses, and the sanctioned party's ability to pay. Danvers v. Danvers, 959 F.2d 601, 605 (6 th Cir.1992). The Court may also consider the cost to the judicial system in time and effort. Rose v. Franchetti, 979 F.2d 81, 86-87 (7 th Cir.1992).

The parties have not briefed what constitutes an "appropriate sanction". The United States has requested attorneys' fees and expenses as a sanction, but has not requested a specific amount or given reasons why such amount would be appropriate. Accordingly, the parties have five (5) days within which to provide an additional brief addressed solely to the amount of sanctions.

V. CONCLUSION

Defendant's Motion To Dismiss is GRANTED. Defendant's Motion For Sanctions pursuant to Fed.R.Civ.P. 11 is GRANTED. The parties have five (5) days within which to provide an additional brief addressed solely to the amount of sanctions.

IT IS SO ORDERED.

ORDER

Pursuant to the Memorandum of Opinion issued in the above-captioned case this date, Defendant's Motion To Dismiss is GRANTED. Defendant's Motion For Sanctions pursuant to Fed.R.Civ.P. 11 is GRANTED. The parties have five (5) days within which to provide an additional brief addressed solely to the amount of sanctions.

IT IS SO ORDERED.

On November 3, 1997, Joseph T. Tornichio, plaintiff, filed this action pro se seeking the refund of penalties assessed against him by the Internal Revenue Service ("I.R.S.") for filing frivolous income tax returns. On March 12, 1998, the Court granted Defendant's Motion To Dismiss and Motion For Sanctions pursuant to Fed.R.Civ.P. 11 The Court requested briefing solely as to what would be an appropriate sanction because this issue had not been adequately briefed by the parties.

In response, Defendant requested an award of $760.48, the purported amount of attorneys' fees and expenses incurred in this case. Plaintiff alleges any sanction would be inappropriate. Defendant's request is GRANTED.

The primary factor in determining the amount is deterrence. Other factors include compensation to the aggrieved party, mitigation of effort by the aggrieved party to avoid excessive expenses, and the sanctioned party's ability to pay. Danvers v. Danvers, 959 F.2d 601, 605 (6 th Cir.1992). The Court may also consider the cost to the judicial system in time and effort. Rose v. Franchetti, 979 F.2d 81, 86-87 (7 th Cir.1992).

Defendant requests an award of its attorneys' fees and expenses as a sanction. Plaintiff already has been penalized twice by the I.R .S. for filing frivolous returns, but persists in his claim that he does not owe taxes. Given this is his third penalty with respect to his tax returns, awarding the full amount of fees and expenses is justified as appropriate for deterring similar conduct in the future.

As to the factors of compensation and mitigation, the Court finds the amount requested is reasonable given the nature of the case. The amount requested is adequately supported by affidavit and is comparable to or less than sanctions awarded similar case. (See, e.g., cases cited in Defendant's brief regarding the amount of sanctions.) Furthermore, in his brief Plaintiff does not allege any financial problems. Thus the Court finds the sanction would not impose excessive hardship upon Plaintiff.

Accordingly, pursuant to Fed.R.Civ.P. 11, Plaintiff is ORDERED to pay Defendant a sanction in the amount of $760.48.

IT IS SO ORDERED.

Footnotes:

FN1. He has filed a separate action seeking refund of the amounts withheld from his wages for years 1994, 1995, and 1996. That case is before Judge Patricia Gaughan.

FN2. 26 U.S.C. § 6702(a) states in its entirety: 

If -(1) any individual files what purports to be a return of the tax imposed by subtitle A which -(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or (B) contains information that on its face indicates that the self-assessment is substantially incorrect; and 

(2) the conduct referred to in paragraph (1) is due to -(A) a position which is frivolous, or (B) a desire (which appears on the purported return) to delay or impede the administration of the Federal Income tax laws, 

then such individual shall pay a penalty of $500. 

(Emphasis added.)

FN3. The plaintiffs in Sisemore alleged wages constitute an equal exchange for labor, and thus are not "income". Mr. Tornichio does not make that specific argument here.

FN4. Plaintiff claims he is not asserting his right against self- incrimination, but rather his right not to be a witness against himself. The Court fails to see the difference.

FN5. Plaintiff's request for sanctions is DENIED.