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GANG v. UNITED STATES

January 21, 1992

GABRIELLE S. GANG, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.


Rovner


The opinion of the court was delivered by: ILANA DIAMOND ROVNER

MEMORANDUM OPINION AND ORDER

 I. INTRODUCTION

 This case presents a novel question of federal tax law involving the effective date of a congressional amendment to a statute that penalizes the setting up of a fraudulent tax shelter. On August 31, 1987, the Internal Revenue Service ("IRS" or "Commissioner") assessed a $ 391,500 penalty against plaintiff Gabrielle Gang ("Gang") pursuant to 26 U.S.C. § 6700 for promoting an abusive tax shelter. Subsequently, Gang commenced this refund suit in federal court raising numerous issues regarding the penalty.

 Gang has now moved for summary judgment on one of the many issues she has raised in her complaint: whether the application of an amendment to section 6700, which increased the penalty for selling fraudulent tax shelters from 10% to 20% of gross income, applies to her case. The IRS, in responding to Gang's motion, filed a cross-motion for partial summary judgment. In her reply to the IRS, Gang has conceded liability for violating the statute. (Plaintiff's Reply in Support of Motion for Summary Judgment at 1 n.1).

 II. FACTS

 The facts of this case, which are complicated by a separate -- and now completed -- parallel proceeding in federal court, are not in dispute. After Gang filed her statement of uncontested facts, the IRS adopted her statement as its own. Gang is the president and sole owner of Datamatic Services, Inc. ("Datamatic") and has been since 1981. In the related case before Judge Nicholas J. Bua, a federal jury found, in 1987, that Datamatic was liable under § 6700 for promoting the same fraudulent tax shelter at issue in this case. In Datamatic Services, Inc. v. United States, 909 F.2d 1029 (7th Cir. 1990), a decision which affirmed the lower court decision, the Seventh Circuit stated the following facts:

 In April 1982, Datamatic agreed to buy for $ 1,200 (plus other costs for related services) from the Jones Medical Instrument Company (Jones Medical) machines called Tiffenaires, which are used by physicians to test the condition of a patient's lungs. Datamatic then offered the machines for sale to investors at $ 35,000 each. It drafted and distributed booklets to promote the sale, indicating that an investor could earn substantial income by buying the machine and then leasing it to a physician. The booklets also indicated that an investor could recover several times his cash investment through income tax benefits, in the form of investment tax credits, depreciation, and other deductions.

 Datamatic sold 250 of the machines at a price of $ 35,000 each. Typically, an investor made a cash down payment and signed a short-term note to Datamatic, which together accounted for $ 6,250. A five-year note evidenced the remaining $ 28,750. Minimum annual installments of $ 2,600 (approximating the annual interest) were to be paid out of the investor's net leasing receipts. Each purchaser was to pay Datamatic an additional one-time service fee of $ 1,750.

 Id., 909 F.2d at 1030-1031. Datamatic sold the last Tiffenaires in December 1983, but continued receiving income on the sales through 1990.

 In 1986, the IRS assessed Datamatic a penalty pursuant to § 6700 based on Datamatic's promotion and sale of the Tiffenaires. The IRS determined Datamatic's penalty to be 10% of the gross income derived from the sale of Tiffenaires, or $ 391,500. The IRS denied Datamatic's claim for refund and Datamatic brought suit in federal district court. After a trial, the jury imposed a penalty of $ 400,000, which Judge Bua reduced to $ 391,500.

 At the time of trial, the IRS also assessed a penalty against Gang personally in the amount of $ 391,500 for the same tax shelter. Like Datamatic, Gang paid 15% of the assessment ($ 58,725), as required by 26 U.S.C. § 6703(c)(1), and filed an administrative claim for refund. The claim was denied. She then filed suit in district court for a refund. She continued to receive income from the sale of the Tiffenaires in the form of wages from Datamatic through 1990. The parties have stipulated that Gang earned $ 501,486.46 in gross income over eight years from the sales.


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