Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-00594/USCOURTS-caed-1_05-cv-00594-2/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 28:2201 Injunction

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Plaintiff,

v.

STEVE HEMPFLING, d/b/a FREE

ENTERPRISE SOCIETY,

Defendant.

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1:05-cv-00594 OWW SMS

MEMORANDUM DECISION AND

ORDER RE DEFENDANT’S MOTION

TO DISMISS AND MOTION FOR

SUMMARY JUDGMENT

I. INTRODUCTION

Defendant STEVE HEMPFLING, d/b/a FREE ENTERPRISE SOCIETY

(“Defendant” or “HEMPFLING”), moves to dismiss Plaintiff’s claim

under 26 U.S.C. § 6700. Defendant also states that he moves “in

the alternative” for summary judgment. Plaintiff, the UNITED

STATES OF AMERICA (“Plaintiff” or “Government”), opposes

Plaintiff’s motions.

II. PROCEDURAL HISTORY

On May 2, 2005, the Government filed a complaint seeking a

permanent injunction against Defendant pursuant to 26 U.S.C.

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§ 7402(a) and § 7408 to enjoin him from violating and interfering

with the administration of the internal revenue laws, including

violating 26 U.S.C. § 6700 and § 6701. (Doc. 1, Compl.) 

Defendant, initially proceeding pro se, filed his “Motion to

Dismiss or in the alternative for Summary Judgment” on June 29,

2005. (Doc. 8, Def.’s Mem.; see also Doc. 7, Motion; Doc. 9,

Hempfling Decl.) Defendant has since acquired legal

representation. He is now represented by counsel in this matter. 

(Doc. 29, “Order Attorney William R. McPike added for Steven

Hempfling”, filed August 3, 2005) Defendant moves to dismiss the

Government’s § 6700 claim and its claim for an injunction under

26 U.S.C. § 7402 pursuant to Federal Rule of Civil Procedure

12(b)(6). Defendant also argues that the Government should be

equitably estopped from bringing this case against him. The

estoppel argument is construed as a motion for summary judgment. 

However, Defendant filed no Statement of Undisputed Facts, as is

required by Local Rule 56-260(a) of the Local Rules for the

Eastern District of California (“Local Rules”).

The Government opposes. (Doc. 12, Pl.’s Opp., filed July

20, 2005; see also Docs. 13-22, attachments) The Government also

moves to continue the motion for summary judgment and for

additional time to conduct discovery pursuant to Federal Rule of

Civil Procedure 56(f). Plaintiff replied and opposes the Rule

56(f) motion for time. (Doc. 25, filed August 1, 2005)

Oral argument was heard on September 12, 2005. Robert

Metcalfe, Esq., appeared on behalf of the Government. Defendant

Steve Hempfling was present and William McPike, Esq., appeared on

his behalf.

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III. BACKGROUND

A. Summary of Pleadings.

The facts as alleged in the complaint are taken as true for

the purpose of a motion to dismiss. TwoRivers v. Lewis, 174 F.3d

987, 991 (9th Cir. 1999). 

The Government alleges that Defendant engages in a number of

activities in violation of the internal revenue laws, including

26 U.S.C. §§ 6700 and 6701. The Government requests an

injunction pursuant to 26 U.S.C. §§ 7402 and 7408(a), enjoining

Defendant from engaging in conduct in violation of §§ 6700 and

6701, including but not limited to making false statements

regarding tax benefits to be derived from a tax shelter and

assisting others in the preparation of tax forms. (See Doc. 1,

Compl. ¶¶ 3-4)

The Government’s claims arise out of various activities by

Defendant, including but not limited to conducting seminars,

selling commercial tax products, charging membership fees in the

“Free Enterprise Society” (which has optional membership fees for

a “civil support service” and a “legal defense fund”), and

posting advertisements for his commercial tax products on his

website (www.freeenterprisesociety.com). (Id. at ¶¶ 8-11, 15) 

Through these activities, the Government alleges that Defendant

“falsely purport[s] to demonstrate that: (1) there is no law

requiring individuals to file federal income tax returns or pay

income taxes; and (2) if Hempfling’s customers choose to stop

filing tax returns, then Hempfling’s ‘Reliance 2000’ package

would defeat any charge of willful failure to file a tax

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1 Specific examples of fraudulent statements made by

Hempfling in his commercial tax products (including the Reliance

2000 package, the W4 package, and seminar materials) include:

a. “There is No Law that Requires an Individual to

file income tax returns.” (2005 seminar flyer,

emphasis supplied)

b. “The income tax has never been anything but

voluntary.” (website description of Seminar 1)

c. “Over 1500 Reasons Why It May No [sic] Be A Good

Idea To File INCOME Tax Returns. The Choice Is

Yours.” (website description of Seminar 8901)

d. “IRS Liens and Levies Are Unenforceable.” 

(website description of Seminar 9201)

e. “[The Reliance 2000 package] will help stop

Failure to File charges, and if charged, will make

a very formidable defense.” (website description

of Reliance 2000)

f. “[The procedure set out in the W4 Alternative

Withholding Package] can mean more take home pay

as this procedure stops the federal withholding

from your paycheck.” (description of W-4 package)

g. “The above programs are designed for income tax

filers or non-filers alike. For non-filers these

programs are essential to respond legally to the

taxing agencies.” (membership information,

emphasis supplied)

(Doc. 1, Compl. ¶ 16)

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return.”1 (Id. at ¶ 9) 

Hempfling offers a “Reliance 2000” program that the

Government claims is used to facilitate, encourage, and assist

Hempfling’s customers to commit willful failure to file an income

tax return. (Id. at ¶ 12) The “Reliance 2000” Program has four

steps: (1) buy (for $80) and read a two-volume book by William

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“Bill” Benson titled The Law That Never Was, which falsely

concludes that the Sixteenth Amendment was never ratified;

(2) buy (for $250) The 16th Amendment Reliance Package from

Hempfling, which contains the “initial research” for Benson’s

book; (3) buy (for $50-75) and send Hempfling’s Redress of

Grievance Letter Package to the President, congressmen, and

senators, which asks the recipients to answer questions about the

ratification of the Sixteenth Amendment; and (4) buy (for $150

and up) and file Hempfling’s federal lawsuit package “asking for

an answer to the 16th Amendment question”). (Id.)

Furthermore, Hempfling advises his customers to purchase his

Reliance 2000 program, take these four steps, and stop filing tax

returns, in order to later be able to raise a good-faith defense

against tax evasion. (Id. at ¶ 13) Hempfling bases his advice

on the United Supreme Court’s decision in United States v. Cheek,

498 U.S. 192, 203 (1991), which held that an honest, good-faith

belief, no matter how unreasonable, that one was not required to

pay taxes or to file a tax return could defeat a “willfulness”

finding. The Government alleges that “in essence, Hempfling’s

Reliance 2000 program is a ready-made--and entirely fraudulent--

Cheek defense.” (Id.)

Hempfling runs a club or organization called the “Free

Enterprise Society,” through which he promotes his commercial tax

products (including Reliance 2000 as well as a “W4 Package”) and

for which membership costs $45 per year. Members may attend

seminars at no additional charge. (Id.)

Members of the Free Enterprise Society may join the “civil

support service” for an additional $20 per year, not including

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additional fees for letter-writing, brief-writing, and other oneon-one services. (Id. at ¶ 10) Members may also join (for $950

for the first year and $300 for each additional year) the “legal

defense fund,” which is described by Hempfling “as protection for

those who have chosen to take the ‘political stand’ that they are

not required to file federal income tax returns.” (Id. at ¶ 10) 

Hempfling promises to pay for fund members’ legal representation. 

(Id. at ¶ 14) The Government further alleges that “the legal

defense fund also facilitates, encourages, and assists

Hempfling’s customers to evade the payment of federal income

taxes.” (Id. at ¶ 11) 

Plaintiff also has a website (www.freeenterprisesociety.com)

on which he sells the same commercial tax products described

above, as well as books and other materials. The Government

seeks only to enjoin Hempfling from advertising or distributing

those materials that are subject to penalties under § 6700 or §

6701. (Id. at ¶ 15)

B. Background Re Estoppel Claim.

Defendant’s summary judgment argument is that the Government

should be estopped from bringing this action against him. 

Defendant bases this argument on a telephone conversation he had

with the attorney representing the Government in this case,

Evan Davis, in July 2004. Defendant states that Mr. Davis led

him “to believe that the Government was satisfied that the

defendant was neither promoting nor selling anything which would

be considered an abusive tax shelter.” (Doc. 8, Def.’s Mem. 16) 

Defendant asserts that the statements made by Mr. Davis during

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the July 2004 telephone conversation led Defendant to believe

that his conduct was not illegal. Defendant claims that Mr.

Davis informed Defendant that “it did not appear to him [i.e., to

Mr. Davis] that from what he had seen that [Defendant] would fall

under 26 U.S.C. Section 6700 and that he was undecided as to how

to proceed with [the] case.” (Doc. 9, Hempfling Decl. ¶ 16)

IV. LEGAL STANDARDS

A. Motion to Dismiss Under Federal Rule of Civil Procedure

12(b)(6).

Fed. R. Civ. P. 12(b)(6) allows a defendant to attack a

complaint for failure to state a claim upon which relief can be

granted. A motion to dismiss under Fed. R. Civ. P. 12(b)(6) is

disfavored and rarely granted: “[a] complaint should not be

dismissed unless it appears beyond doubt that plaintiff can prove

no set of facts in support of his claim which would entitle him

to relief.” Van Buskirk v. CNN, Inc., 284 F.3d 977, 980

(9th Cir. 2002) (citations omitted). In deciding whether to

grant a motion to dismiss, the court “accept[s] all factual

allegations of the complaint as true and draw[s] all reasonable

inferences in favor of the nonmoving party.” TwoRivers v. Lewis,

174 F.3d 987, 991 (9th Cir. 1999). 

“The court need not, however, accept as true allegations

that contradict matters properly subject to judicial notice or by

exhibit. Nor is the court required to accept as true allegations

that are merely conclusory, unwarranted deductions of fact, or

unreasonable inferences.” Sprewell v. Golden State Warriors,

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266 F.3d 979, 988 (9th Cir. 2001) (citations omitted). For

example, matters of public record may be considered under Fed. R.

Civ. P. 201, including pleadings, orders and other papers filed

with the court or records of administrative bodies. See Lee v.

City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). 

Conclusions of law, conclusory allegations, unreasonable

inferences, or unwarranted deductions of fact need not be

accepted. See Western Mining Council v. Watt, 643 F.2d 618, 624

(9th Cir. 1981).

B. Pleading Fraud Under Federal Rule of Civil Procedure

9(b).

Rule 9(b) of the Federal Rules of Civil Procedure states

that: 

In all averments of fraud or mistake, the

circumstances constituting fraud or mistake

shall be stated with particularity. Malice,

intent, knowledge, and other condition of

mind of a person may be averred generally.

A complaint alleging fraud meets the Rule 9(b) standard if it

alleges the time, place, and content of the fraudulent

statements, including reasons why the statements are false. In

re GlenFed., Inc., Securities Litig., 42 F.3d 1541, 1547-48 (9th

Cir. 1994) (en banc), rev’d on other grounds, 60 F.3d 591 (9th

Cir. 1995). Where fraud allegedly occurred over a period of

time, however, Rule 9(b)’s requirement that the circumstances of

fraud to be stated with particularity are less stringently

applied. See Fujisawa Pharm. Co., Ltd. v. Kapoor, 814 F. Supp.

720, 726 (N.D. Ill. 1993); U.S. ex rel. Semtner v. Med.

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Consultants, Inc., 170 F.R.D. 490, 497 (W.D. Okla. 1997).

One of the purposes behind Rule 9(b)’s heightened pleading

requirement is to put defendants on notice of the specific

fraudulent conduct in order to enable them to adequately defend

against such allegations. See In re Stac Elec. Litig., 89 F.3d

1399, 1405 (9th Cir. 1996). Furthermore, Rule 9(b) serves “to

deter the filing of complaints as a pretext for the discovery of

unknown wrongs, to protect [defendants] from the harm that comes

from being subject to fraud charges, and to prohibit plaintiffs

from unilaterally imposing upon the court, the parties and

society enormous social and economic costs absent some factual

basis.” Id.

V. ANALYSIS

A. Heightened Pleading Standard Under Rule 9(b).

Hempfling argues that the Government’s claim for violation

of § 6700 should be dismissed because the Government’s

allegations fail to meet the heightened pleading standard set

forth in Rule 9(b) of the Federal Rule of Civil Procedure. The

Government argues that the Rule 9(b) pleading standard does not

apply to claims alleging violation of § 6700, and notes that

there are no cases holding that Rule 9(b)’s heightened pleading

standards apply to such claims. Hempfling does not dispute that

there are no cases holding that Rule 9(b) applies to claims for

violation of § 6700, although he argues that such pleading

standards nevertheless apply to § 6700 claims. Hempfling relies

on cases holding that Rule 9(b) applies to allegations of

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2 Hempfling argues that the Government cites an unpublished

case, Noske v. United States, 1992 WL 134723, 69 A.F.T.R.2d 92-

810, 92-1 USTC P 50,247, because it was not published in the

official reporter, the Federal Supplement. Noske was, however,

published in the American Federal Tax Reporter.

3 The cases the Government cites are: United States v.

Estate Preservation Servs., 202 F.3d 1093 (9th Cir. 2000); United

States v. Schiff, 379 F.3d 621 (9th Cir. 2004); United States v.

Kaun, 827 F.2d 1144 (7th Cir. 1987).

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violations of statutes that contain the words “false or

fraudulent.” He argues that § 6700 contains the words “false or

fraudulent,” and that Rule 9(b) therefore also applies to § 6700

claims.

First, Hempfling does not dispute the Government’s

contention that there are no cases holding that the Rule 9(b)

heightened pleading standard applies to § 6700 claims.2 The

court has also not located any such authority. The Government

argues that Rule 9(b) does not apply because application of

§ 6700 is “directed primarily at false statements and not at the

traditional badges of fraud.” (Doc. 12, Pl.’s Opp. 2) The

Government does not expand on this argument, nor does it define

what it means by “badges of fraud.” Based on the cases the

Government cites in support of its argument, it can be inferred

that the Government essentially argues that the five traditional

elements of fraud are not considered by the court in evaluating

claims under § 6700.3

The five traditional elements of fraud are:

(1) misrepresentation of a material fact;

(2) knowledge of falsity (scienter); 

(3) intent to defraud; 

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(4) justifiable reliance; and

(5) resulting damages.

Lazar v. Super. Ct., 12 Cal. 4th 631, 638 (1996).

The elements of a § 6700 claim are: 

(1) the defendants organized or sold, or

participated in the organization or sale

of an entity, plan, or arrangement; 

(2) defendants made or caused to be made

false or fraudulent statements

concerning the tax benefits to be

derived from the entity, plan, or

arrangement; 

(3) defendants know or had reason to know

that the statements were false

(scienter); 

(4) the false or fraudulent statements

pertained to a material matter; and

(5) an injunction is necessary to prevent

recurrence of that conduct. 

26 U.S.C. § 6700; United States v. Estate Preservation Servs.,

202 F.3d 1093, 1098 (9th Cir. 2000). Three elements of a § 6700

claim, read together, are the same as two elements of a fraud

claim, i.e., misrepresentation of a material fact and scienter. 

The Ninth Circuit has recently held that certain claims that

are not outright fraud claims, but are instead based on

allegations of fraudulent conduct, must be plead with

particularity in accordance with Rule 9(b)’s particularity

requirement. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-4

(9th Cir. 2003); see also In re Syncor ERISA Litig., 351 F. Supp.

2d 970 (C.D. Cal. 2004) (applying Vess in ERISA context); In re

Daou Systs. Inc. Securities Litig., 411 F.3d 1006 (9th Cir. 2005)

(applying Vess in securities fraud litigation). Defendant cites

to Vess and In re Daou, as well as to two other cases that do not

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4 Defendant actually cites to an earlier version of In re

Daou, In re Daou Systs., Inc., Securities Litig., 397 F.3d 704

(9th Cir. 2005), which was amended and superceded by 397 F.3d

704, the version of the case that is cited here.

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cite to Vess but nevertheless apply Rule 9(b)’s particularity

requirements in fraud-related contexts.4 Bly-Magee v. State of

California, 236 F.3d 1014, 1018 (9th Cir. 2001) (decided before

Vess, but applying Rule 9(b)’s particularity requirements to

allegations of violations of the Federal False Claims Act);

Edwards v. Marin Park, Inc., 356 F.3d 1058, 1065-66 (9th Cir.

2004) (where claim alleged was RICO violation, court does not

apply or cite to Vess, although notes that Rule 9(b) has long

been applied in RICO cases and cites supporting authority).

In Vess, the Ninth Circuit distinguished between two types

of claims. First, there are cases where a plaintiff alleges that

the defendant engaged in fraudulent conduct and where the

plaintiff relies entirely upon that course of conduct as the

basis of its claim. Vess, 317, F.3d at 1103-04. In such cases,

the complaint is considered to be “grounded in fraud,” and Rule

9(b)’s particularity requirement applies to the entire complaint. 

Id. Second, there are cases where a plaintiff alleges a

defendant engaged in some fraudulent conduct and some nonfraudulent conduct, and the plaintiff relies on both types of

conduct to support its claim. Id. at 1104. In such cases, Rule

9(b)’s particularity requirement does not apply to the complaint

as a whole, but instead applies to the averments of fraudulent

conduct only. Id. 

The issue is whether Rule 9(b)’s particularity requirement

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applies to § 6700 claims. Under Vess, it appears that it does,

at least as to the allegations relating to allegedly fraudulent

conduct. The parties cited no cases, and the court found none,

that applied Rule 9(b) to § 6700. Likewise, there are also no

cases holding that Rule 9(b) does not apply to § 6700. Whether

or not Rule 9(b) applies, Defendant is entitled to know the time

frame of allegedly fraudulent conduct, as discussed below.

Here, the Government bases its § 6700 claim on allegedly

false and fraudulent statements by Plaintiff at seminars, on his

website, and in his commercial tax products. While the

Government maintains that Rule 9(b)’s particularity requirement

does not apply to § 6700, it argues in the alternative that its

complaint is sufficient under Rule 9(b). Allegations of fraud

must include the time, place, and nature of the fraudulent

statements, including reasons why the statements are false. 

In re GlenFed., 42 F.3d at 1547-48. The claims must include the

“the who, what, when, where, and how” of the allegedly fraudulent

conduct so that the Defendant may adequately defend against the

allegations. Vess, 317 F.3d at 1106 (quoting Cooper v. Pickett,

137 F.3d 616, 627 (9th Cir. 1997)). Defendant does not dispute

that the Government’s complaint adequately pleads the “who and

what.” The Government’s complaint sufficiently alleges that it

was Plaintiff who made the allegedly false statements to

individuals who participated in his seminars, visited his website

(www.freeenterprisesociety.com), and purchased his commercial tax

products. (See Doc. 1, Compl. ¶¶ 9, 12, 15) In addition,

Defendant’s complaint contains sufficient allegations of examples

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5 The Complaint lists the following examples of allegedly

false statements made in Defendant’s commercial tax products:

a. “There is No Law that Requires an Individual to

file income tax returns.” 

b. “The income tax has never been anything but

voluntary.”

c. “Over 1500 Reasons Why It May No [sic] Be A Good

Idea To File INCOME Tax Returns. The Choice Is

Yours.” 

d. “IRS Liens and Levies Are Unenforceable.”

e. “[The Reliance 2000 package] will help stop

Failure to File charges, and if charged, will make

a very formidable defense.” If the Reliance 2000

steps are followed, an individual can collect

sufficient evidence to prove a good-faith defense

based on the Supreme Court’s decision in United

States v. Cheek, 498 U.S. 192 (1991).

f. “[The procedure set out in the W4 Alternative

Withholding Package] can mean more take home pay

as this procedure stops the federal withholding

from your paycheck.”

g. “The above programs are designed for income tax

filers or non-filers alike. For non-filers these

programs are essential to respond legally to the

taxing agencies.”

h. The Sixteenth Amendment was never ratified.

(Doc. 1, Compl. ¶¶ 14, 16, 12)

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of the content of the allegedly false statements.5

Defendant argues that the Government fails to allege the

“when, where, and how.” Taking the last question first, the

Government’s complaint sufficiently alleges the reasons why

Defendant’s allegedly false statements are false. Defendant’s

statements, including those to the effect that there is no

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requirement to pay income tax, IRS liens are unenforceable, and

that a sufficient “good-faith” defense can be established if

Defendant’s advice is followed, and the Sixteenth Amendment was

never ratified are false and misleading. See, e.g., Schiff, 269

F. Supp. 2d at 1268-69.

Defendant is correct, however, that Plaintiff’s complaint

fails to allege where or when the seminars took place and the

commercial tax products were sold. While Rule 9(b)’s

particularity requirement is not as stringently applied where

fraud is alleged to have occurred over a longer period of time,

Plaintiff’s complaint lacks even a range of dates during which

Plaintiff held his seminars, posted information on his website,

and sold his products. Allegations of the location of the

seminars would also serve Rule 9(b)’s purpose to protect

Defendant against the potential “pretext for the discovery of

unknown wrongs.” In re Stac Elec., 89 F.3d at 1405.

Defendant’s motion to dismiss the Government’s § 6700 claim

for failure to comply with Rule 9(b) is GRANTED. The Government

is granted LEAVE TO AMEND to add allegations relating to when and

where the alleged violations occurred.

B. Defendant’s Rule 12(b)(6) Motion to Dismiss Plaintiff’s

Claim Under 26 U.S.C. § 6700.

The elements of a § 6700 claim are: 

(1) the defendants organized or sold, or

participated in the organization or sale

of an entity, plan, or arrangement; 

(2) defendants made or caused to be made

false or fraudulent statements

concerning the tax benefits to be

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derived from the entity, plan, or

arrangement; 

(3) defendants know or had reason to know

that the statements were false

(scienter); 

(4) the false or fraudulent statements

pertained to a material matter; and 

(5) an injunction is necessary to prevent

recurrence of that conduct.

26 U.S.C. § 6700; Estate Preservation Services., 202 F.3d at

1098. Defendant argues the Government fails to state a claim

under § 6700 for the following reasons: (1) fails to plead a

“tax benefit” as contemplated by the statute; (2) fails to plead

Defendant’s organization is registered as a “tax shelter” as

purportedly required by 26 U.S.C. § 6111 and § 6112; (3) fails to

allege that Defendant’s members “hold an interest” in his

organization, as is purportedly required by the statute; (4)

fails to plead a “plan or arrangement”; and (5) § 6700 is

unconstitutionally void. 

1. 26 U.S.C. § 6700(a)(2)(A): “Any Other Tax

Benefit.”

One of the five elements of a § 6700 claim is that the false

or fraudulent statement that is the subject of the claim be

material. To be material, the false statement must have a

substantial impact on the decision-making process or produce a

substantial tax benefit to a taxpayer. Schiff, 269 F. Supp. 2d

at 1271 (citing United States v. Estate Preservation Services, 38

F. Supp. 2d 846, 855 (E.D. Cal. 1998) (citing United States v.

Buttorff, 761 F.2d 1056, 1062 (5th Cir. 1985))). “Tax benefits”

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include: (1) the allowability of any deduction or credit; (2) the

excludability of any income; or (3) any other tax benefit. 26

U.S.C. § 6700(a)(2)(A).

Defendant argues that the complaint is devoid of any

allegation of a “tax beneift.” Defendant argues that the

complaint does not contain allegations that he made false

statements regarding (1) the allowability of any deduction or

credit or (2) the excludability of any income. Defendant argues

that the Government’s allegations of misrepresentations regarding

non-filing and escaping prosecution are not the types of “tax

benefits” contemplated by the statute because the only “tax

benefis” contemplated by the phrase “other tax benefits” are

“‘deductions, credits, income exclusions,’ and the like.” The

Government argues that non-filing and escaping prosecution are

tax benefits and that they fall under the catch-all provision

“other tax benefits.” (Doc. 12, Pls.’ Mem. 5)

Defendant argues that the rules of statutory interpretation

require that the phrase “other tax benefit” be interpreted to

mean tax benefits similar to deductions, credits, and income

exclusions because these phrases appear as part of the same

sentence as “other tax benefit.” As the Government correctly

notes, Defendant’s narrow construction of § 6700 is not

consistent with how courts have interpreted the phrase “other tax

benefit.” See United States v. Raymond, 228 F.3d 804, 812-13

(7th Cir. 2000) (statements that paying taxes was voluntary);

Schiff, 269 F. Supp. 2d at 1270-71 (statements relating to

protecting against prosecution for fraudulently avoiding income

tax liability); Kaun, 827 F.2d at 1149 (statements relating to

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6 Sections 6111 and 6112 were amended in October 2004 by

Pub. L. 108-357, § 815(a) and § 815(b)(2).

18

stop filing tax returns).

Defendant’s argument that the Government fails to state a

claim under § 6700 for failure to allege a “tax benefit” is not

persuasive. Defendant’s Motion to Dismiss the Government’s

§ 6700 claim on this ground is DENIED.

2. 26 U.S.C. §§ 6111, 6112: Registration of a “Tax

Shelter” and Its Investors.

Defendant argues that the Government’s § 6700 claim should

be dismissed because the Government fails to allege Defendant’s

tax shelter was registered with the Government, as required by 26

U.S.C. § 6111. Defendant also argues that the Government fails

to allege that Defendant, as the organizer of a “potentially

abusive tax shelter,” failed to maintain a list of investors, as

required by 26 U.S.C. § 6112.6 The Government correctly notes

that the requirements of § 6111 have no connection with the

elements to be proved under § 6700. (Doc. 12, Pls.’ Mem. 5

n. 16) The requirements of § 6112 (and any related provisions of

the Code of Federal Regulations) also have no bearing on stating

a claim under §6700. Defendant has offered no persuasive

authority establishing a link, and there is nothing in the

language of the statutes that suggests such a link. Defendant’s

Motion to Dismiss the Government’s § 6700 claim on this ground is

DENIED.

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3. 26 U.S.C. § 6700(a)(2)(A): “Hold an Interest in

the Entity” or “Participate in the Plan or

Arrangement.”

Defendant argues that the Government fails to state a § 6700

claim because it fails to allege that Defendant promised tax

benefits to its customers who invested in his organization. 

Defendant argues the complaint contains no allegation that

members of the “Free Enterprise Society” are investors or that

they hold some “interest” in it. (Doc. 8, Def.’s Mem. 7) 

Section 6700 provides for the liability of persons who make

statements regarding a tax benefit that can be falsely or

fraudulently obtained “by reason of holding an interest in the

entity or participating in the plan or arrangement.” 26 U.S.C.

§ 6700(a)(2)(A). The Government does not dispute that members of

Defendant’s organization do not “hold an interest” in it. 

However, the Government also correctly argues that it is not

essential for a § 6700 claim that the customers or members “hold

an interest” in the plan. (Doc. 12, Pls.’ Mem. 7) The statute

provides that, to violate the statute, an individual need only to

represent that mere “participation” in the organization or plan

will confer some (fraudulent) tax benefit. The Government has

alleged that Defendant has made statements to the effect that his

customers would receive a tax benefit if they “participat[e]

directly in the...plan or arrangement.” 26 U.S.C.

§ 6700(a)(2)(A). Defendant’s Motion to Dismiss the Government’s

§ 6700 claim on this ground is DENIED.

//

//

//

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4. 26 U.S.C. § 6700(a)(1)(A)(iii): “Any Other Plan

or Arrangement.”

Defendant’s argument under the heading “No Other Plan or

Arrangement” on page 8 of his brief relates primarily to his “tax

benefit” argument. Liberally construed, however, Defendant’s

argument can be interpreted as an argument that the Government

has failed to allege that Defendant organized a “plan or

arrangement.” However, as Defendant himself quotes in his brief,

Paragraph 21 of the Complaint states that “[t]he Reliance 2000

package, W4 package, prior-seminar packages, civil support

service, and legal defense fund are plans or arrangements

organized and sold by Hempfling....” 

Defendant does not argue that the Reliance 2000 Package, W4

package and seminars do not substantively fall under the category

of “plan or arrangement.” Without deciding this issue, the court

nevertheless notes that plans or arrangements similar to those

that the Government alleges are organized and sold by Plaintiff

have been held to be “abusive tax shelters” within the definition

of § 6700. Schiff, 269 F. Supp. 2d at 1266-67; Kaun, 827 F.2d at

1149; United States v. White, 769 F.2d 511, 515 (8th Cir. 1985);

United States v. Cohen, 222 F.R.D. 652, 655 (W.D. Wash. 2004);

United States v. Cohen, 2005 WL 1491978 at *2, 95 A.F.T.R.2d

2005-2716 (W.D. Wash. May 13, 2005).

Defendant’s Motion to Dismiss the Government’s § 6700 claim

on this ground is DENIED.

5. Whether § 6700 Is Unconstitutionally Vague.

The “void-for-vagueness” doctrine holds that a statute is

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unconstitutionally vague if it fails to “give the person of

ordinary intelligence a reasonable opportunity to know what is

prohibited, so that he may act accordingly.” Grayned v. City of

Rockford, 408 U.S. 104, 108 (1972) (“It is a basic principle of

due process that an enactment is void for vagueness if its

prohibitions are not clearly defined.”). The standard to be

employed in determining vagueness depends on the statute at

issue.

Challenges to tax or civil laws that do not implicate First

Amendment rights are usually considered under a “specific” test,

i.e., whether the statute is vague as applied to the facts at

hand. United States v. MacKenzie, 777 F.2d 811, 816 (2d Cir.

1985); United States v. Mazurie, 419 U.S. 544, 550 (1975);

Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc.,

455 U.S. 489, 495 n. 7 (1982); see also Hersch v. United States,

685 F. Supp. 325, 327 (E.D.N.Y. 1988). The question under the

“specific test” is whether the statute reasonably gives notice to

the individual being charged with a violation that his conduct

likely constituted a violation. If an individual’s conduct is

clearly a violation of a statute, the individual cannot succeed

with a vagueness challenge, regardless of whether the language of

the statute may be far-reaching. Parker v. Levy, 417 U.S. 733,

756 (1974). If a statute is vague under the specific test, it is

not necessarily void altogether. It is only unconstitutional as

applied to the particular situation at issue.

Challenges to criminal laws, as well as to some civil laws,

are also analyzed under the facial validity test. If a statute

is facially vague, then it is void under all circumstances as

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opposed to in one particular situation. The facial validity test

has two separate but related inquiries, overbreadth and

vagueness. The first question is whether the statute is

overbroad, i.e., whether, on its face, it “reaches a substantial

amount of constitutionally protected conduct.” Hoffman Estates,

455 U.S. at 494-95. If the answer is yes, then the statute is

overbroad and therefore void. If the answer is no, the statute

may still be challenged on facial vagueness grounds.

In challenges to the “facial validity of an ordinance on

vagueness grounds outside the domain of the First Amendment,” the

challenger “must demonstrate that ‘the enactment is impermissibly

vague in all of its applications.’” Hotel and Motel Ass’n of

Oakland v. City of Oakland, 344 F.3d 959, 972 (9th Cir. 2003)

(quoting Hoffman Estates, 455 U.S. at 494-95)). In other words,

where the statute at issue does not implicate First Amendment

rights, the party challenging the statute must demonstrate that

“no set of circumstances exists under which the [statute] would

be valid.” Id. (quoting United States v. Salerno, 481 U.S. 739,

745 (1987)). In cases where the First Amendment is implicated,

however, the challenger need not necessarily demonstrate that the

statute is vague in all applications. California Teachers Ass’n

v. State Bd. of Educ., 271 F.3d 1141, 1149 n. 7 (9th Cir. 2001).

Although some cases hold that challenges to tax or civil

statutes are analyzed only under the specific test, the facial

vagueness test has been applied to civil statutes outside the

domain of the First Amendment. See e.g., Hotel and Motel, 344

F.3d 959. Defendant here does not succeed regardless of which

test applies. Defendant offers no persuasive argument or

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authority for vagueness as applied to him specifically or to the

statute on its face.

Here, Defendant argues the phrases “tax benefit” and “plan

or arrangement” are unconstitutionally vague. Under the specific

test, Defendant must demonstrate that § 6700 is vague and

ambiguous as applied to him. MacKenzie, 77 F.2d at 816. 

Defendant offers no persuasive argument that the terms “tax

benefit” and “plan or arrangement” are vague as applied to him. 

Defendant’s conduct, as alleged by the Government, falls squarely

within the terms of the statute. The “tax benefits” Defendant

offers through sale of his commercial tax products are not paying

income taxes and escaping monetary tax liability. The language

of the statute and the application of the statute by the courts

are sufficiently clear to have put Defendant on notice that nonpayment of taxes owed are the benefits contemplated by the

statute. See Raymond, 228 F.3d at 812-13 (statements that paying

taxes was voluntary); Schiff, 269 F. Supp. 2d at 1270-71

(statements relating to protecting against prosecution for

fraudulently avoiding income tax liability); Kaun, 827 F.2d at

1149 (statements relating to stop filing tax returns).

Also, the language of the statute and the statute’s

application are sufficiently clear to have put Defendant on

notice that his sale of commercial tax products such as the

Reliance 2000 package, the W4 package, and the seminars, are the

types of “plans or arrangements” contemplated by the statute. 

For example, in Kaun, the Seventh Circuit held that the

defendant’s seminars, pamphlets, and information kits promoting

tax evasion constituted a violation of § 6700. 827 F.2d at 1148

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(“The words ‘any other plan or arrangement’ are clearly broad

enough to include a tax protester group.”); see also Schiff, 379

F.3d at 627 (describing books, seminars, and other materials

promoted by defendant in § 6700 case). Here, Defendant’s

seminars, pamphlets, and commercial tax packages are not

significantly distinguishable from those in Kaun and Schiff.

Second, Defendant fails to meet his burden under the facial

vagueness test. To succeed under the facial vagueness test,

Defendant must show that the statute is vague in all of its

applications, unless he can show that the statute implicates

First Amendment freedoms. Hotel and Motel, 344 F.3d at 972;

Hoffman Estates, 455 U.S. at 494-95. Defendant offers no

persuasive argument or authority as to either prong. 

Defendant first argues that § 6700 implicates First

Amendment rights and that § 6700 should be analyzed under

heightened scrutiny. Defendant’s argument is not persuasive. 

Section 6700 does not implicate the First Amendment. Section

6700 prohibits, among other things, the sale or offer for sale of

false or fraudulent tax advice or other representations about the

tax laws. The sale or advertisement of tax advice or other

representations regarding the tax laws is commercial speech. 

Schiff, 379 F.3d at 629-30 (holding that district court did not

abuse discretion in enjoining publication of defendant’s book to

the extent that the book constituted advertising by claiming that

readers could lawfully avoid paying income taxes with the help of

defendant’s commercial tax products); Hersch, 685 F. Supp. at 329

(“Plaintiff’s representations were...made in connection with his

efforts to promote a scheme of tax shelters and thus constitute

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commercial speech.”) (citing cases); United States v. Bell, 414

F.3d 474, 481 (3d Cir. 2005) (holding that defendant’s offers for

sale of commercial tax products, including information packets

and seminars on tape, constituted commercial speech); see also

Estate Preservation Services, 202 F.3d at 1106 (upholding Section

7408 injunction against First Amendment challenge on the grounds

that the injunction “proscribes only fraudulent conduct”). 

Commercial speech receives some protection under the First

Amendment, but false or fraudulent commercial speech does not. 

See Schiff, 379 F.3d at 626, 630; Central Hudson, 447 U.S. at

562-63; Bell, 238 F. Supp. 2d at 703-4 (citing cases). Because

§ 6700 prohibits false or fraudulent commercial speech, it does

not implicate the First Amendment.

The test that therefore applies requires Defendant to

demonstrate that § 6700 is vague in all possible applications. 

Hotel and Motel, 344 F.3d at 972; Hoffman Estates, 455 U.S. at

494-95. Defendant has not met this burden. Many cases have

found violations of § 6700 without any difficulty in applying

“tax benefit” or “plan or arrangement” to tax evasion schemes. 

Schiff, 269 F. Supp. 2d at 1266-67; Kaun, 827 F.2d at 1149;

United States v. White, 769 F.2d 511, 515 (8th Cir. 1985);

United States v. Cohen, 222 F.R.D. 652, 655 (W.D. Wash. 2004);

United States v. Cohen, 2005 WL 1491978 at *2, 95 A.F.T.R.2d

2005-2716 (W.D. Wash. May 13, 2005).

Defendant’s Motion to Dismiss the Government’s § 6700 claim

on void-for-vagueness grounds is DENIED.

//

//

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C. Defendant’s Rule 12(b)(6) Motion to Dismiss the

Government’s Claim for an Injunction under § 7402.

Defendant argues that § 7402 alone cannot be the basis for

an injunction. Defendant also argues that the Government’s

complaint mischaracterizes § 7402 in claiming that it can bar

Defendant’s interference with enforcement of the internal revenue

laws, even when no particular law has been violated. Defendant’s

arguments are misplaced. The language of § 7402 alone is clear: 

“The district courts...shall have such jurisdiction to make and

issue in civil actions...orders of injunction...and to render

such judgments and decrees as may be necessary or appropriate for

the enforcement of the internal revenue laws.” 26 U.S.C. § 7402. 

Also, as the Government points out, § 7402 has long been

employed by federal district courts to enjoin tax evasion

activities similar to those Defendant is alleged to have

committed. United States v. Ernst & Whitney, 735 F.2d 1296,

1300, 1306 (11th Cir. 1984) (holding that there is no requirement

to make a showing that a party has violated a particular section

of the Internal Revenue Code for district court to have authority

under § 7402 to issue injunction); United States v. Bell, 238 F.

Supp. 2d 696, 699-700, 705 (M.D. Penn. 2003), aff’d, 414 F.3d 474

(3d Cir. 2005) (issuing injunction under § 7402 where defendant

sold information packets and seminar tapes with false tax

advice); United States v. Cohen, 222 F.R.D. 652, (W.D. Wash.

2004) (issuing injunction under both § 7408 and § 7402 against

defendant asserting that the federal income tax is a “hoax” and

that individuals are not required to file federal income taxes);

United States v. Rivera, 2003 WL 22429482, 92 A.F.T.R.2d 2003-

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7 The Government construes conclusory statements in

Defendant’s declaration as a Motion for Summary Judgment on the §

6700 and § 6701 claims:

28. I have never knowingly or intentionally made a

false or fraudulent statements [sic] as to any

material matter with respect to the allowability

of any deduction or credit, the excludability of

27

6844 (C.D. Cal. July 18, 2003) (issued injunction under both

§ 7408 and § 7402 against defendant who offered for sale tax

advice that private employers are not required to withhold

federal taxes from their employees wages and that individuals are

not required to file federal income taxes).

Defendant’s argument that the district court lacks authority

to issue an injunction under § 7402 is without merit. This court

has such authority based on the express terms of the statute and

on the application of § 7402 by other courts in similar

situations. Defendant’s Motion to Dismiss the Government’s claim

for an injunction under § 7402 is DENIED.

C. Defendant’s “Motion for Summary Judgment.”

In the alternative to his Motion to Dismiss, Defendant

brings a “Motion for Summary Judgment.” Defendant argues that

the Government should be estopped from bringing this action

against Defendant based on Defendant’s contention that the

Government’s attorney led him to believe he was not violating th

law in a July 2004 telephone conversation. In addition, the

Government construes two conclusory statements in Defendant’s

declaration a summary judgment motion on the issue of whether

Defendant violated § 6700 and § 6701.7 Defendant’s estoppel

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any income, or the securing of any other tax

benefit by reason of holding an interest in any

entity or participating in any plan or arrangement

which I knew or had reason to know was false or

fraudulent as to any material matter as

contemplated within 26 U.S.C. Section 6700, nor

have I ever sold or participated in any type of

tax shelter, abusive or otherwise as contemplated

under 26 U.S.C. Sections 6700 or 6701.

29. I have never knowingly or otherwise, aided,

assisted in, procured, or advised with respect to

the preparation or presentation of any portion of

a return, affidavit, claim or other document as

contemplated under 16 U.S.C. Section 6700 and

6701.

(Doc. 9, Hempfling Decl. ¶¶ 28, 29) These conclusory denials do

no more than dispute the Government’s claims.

28

argument can be decided as a matter of law. However, the

arguments regarding violations of § 6700 and § 6701 will not be

considered. Defendant has filed no Statement of Undisputed

Facts, as is required by LR 56-260(a). Little if any discovery

has been conducted in this case. Finally, these issues were not

presented in a properly noticed summary judgment motion and will

therefore not be construed as such.

Equitable estoppel may be asserted against the Government,

but in order to do so, a party must first show that (1) the

Government engaged in “affirmative misconduct going beyond mere

negligence;” (2) that the Government’s misconduct will cause

serious injustice; and (3) that the estoppel will not harm the

public interest. Watkins v. United States Army, 875 F.2d 699,

706-7 (9th Cir. 1988); Pauly v. United States Dep’t of Agric.,

348 F.3d 1143, 1149 (9th Cir. 2003) (quoting S & M Inv. Co. v.

Tahoe Reg’l Planning Agency, 911 F.2d 324, 329 (9th Cir. 1990)). 

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Once a party establishes that estoppel may be asserted against

the Government, the party must then establish the four elements

necessary to prove equitable estoppel: “(1) the party to be

estopped must know the facts; (2) he must intend that his conduct

shall be acted upon, or must so act that the party asserting the

estoppel had the right to believe that it was so intended;

(3) the latter must be ignorant of the true facts; and (4) he

must rely upon the conduct to his injury.” Watkins, 875 F.2d at

709 (9th Cir. 1988) (quoting United States v. Wharton, 514 F.2d

406, 412 (9th Cir. 1975)). 

Defendant argues the Government should be estopped from

bringing this case against him because Mr. Davis represented to

Defendant in a July 2004 telephone conversation that Defendant’s

actions were not illegal. In his declaration, Defendant states

that what Mr. Davis actually told him was that “from what [Mr.

Davis] had seen,” Defendant’s actions would not fall under 26

U.S.C. § 6700 and that Mr. Davis was “undecided” as to how to

proceed with Defendant’s case. (Doc. 9, Hempfling Decl. ¶¶ 5,

16; see also ¶ 12 (“Mr. Davis explained to me that there were

several elements which he needed to look for prior to bringing an

action under 26 U.S.C. Section 6700.”)) The Government disputes

Defendant’s representations regarding what was said during the

July 2004, but argues that even if Defendant’s characterization

of the facts was correct, Defendant cannot succeed on his

estoppel claim. 

Defendant must first establish the foundation for an

estoppel claim against the Government in the first place. First,

Defendant argues that Mr. Davis engaged in affirmative misconduct

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by representing to him that “the government was satisfied that

the defendant was neither promoting nor selling anything which

would be considered an abusive tax shelter.” However,

Defendant’s statements in his own declaration defeat this

argument. To show affirmative misconduct, a party must show

misrepresentation or concealment of a material fact, although it

is not necessary to show intent to deceive. Watkins, 875 F.2d at

707. Defendant admits that Mr. Davis told him that the

Government was undecided as to whether to bring a § 6700 action

against him. (Doc. 9, Hempfling Decl. ¶¶ 5, 12, 16) Defendant

has not asserted that, at the time he made this statement,

Mr. Davis was misrepresenting any fact. As the Government points

out, it had nothing to gain by delaying instituting an injunction

suit against a tax protester. (Doc. 12, Pl.’s Opp. 13) 

Defendant has not established the “affirmative misrepresentation”

element, even if his version of the facts were accepted and not

disputed.

Second, Defendant cannot establish that a substantial

injustice will occur if the Government is not estopped from

bringing this action against him. Defendant admits that

Mr. Davis told him the Government had not yet decided to bring a

suit against him. Defendant did not change his position to his

detriment based on Mr. Davis’ purported statement and is in no

worse position than if he had not spoken to Mr. Davis.

Third, Defendant cannot establish that there is no undue

harm to the public interest if this case were not allowed to

proceed. As the Government notes, “[t]he present injunction

action is directed at halting Hempfling’s false and fraudulent

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actions, which harm the public and his customers in particular.” 

(Doc. 12, Pl.’s Opp. 13) Defendant has failed to establish the

elements necessary to bring an estoppel claim against the

Government.

Even if Defendant could bring an estoppel claim against the

Government, Defendant’s estoppel claim cannot succeed because he

fails to establish the four required elements for estoppel. 

These four elements are: (1) that Mr. Davis knew that the

Government intended to later prosecute Mr. Davis under § 6700;

(2) that Mr. Davis intended that his phone call would induce

Defendant to continue to act to violate the law; (3) that

Defendant was ignorant of the Government’s alleged intent to

later prosecute him; and (4) that Defendant relied on Mr. Davis’

representations to his detriment. Defendant’s estoppel claim is

based on the premise that Mr. Davis falsely represented to

Defendant that Defendant’s actions did not constitute a violation

of § 6700. However, Defendant admits in his own declaration that

this is not what Mr. Davis told him. Defendant has offered no

evidence that Mr. Davis called him in July 2004 with the intent

to induce him to continue to violate the internal revenue laws. 

Defendant wanted to continue his tax advice business. He does

not allege he had any intent of discontinuing his business under

any circumstances.

Even if Defendant’s motion for summary judgment were

properly before the court, Defendant has, through his own

statements, failed to establish the absence of a genuine issue of

material fact. Defendant’s Motion for Summary Judgment on

equitable estoppel grounds is DENIED.

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VI. CONCLUSION

For all the foregoing reasons, Defendant’s

motion to dismiss Plaintiff’s complaint is

DENIED on all grounds, except under Rule

9(b). Plaintiff shall have twenty (20) days

to amend. Defendant shall have twenty (20)

days to file a response.

To the extent Defendant moves for summary

judgment on estoppel and any other grounds,

its motion is DENIED.

The Government’s Rule 56(f) motion for

additional time to conduct discovery is MOOT.

SO ORDERED. 

DATED: September _23__, 2005. 

/s/ OLIVER W. WANGER 

______________________________

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

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