Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-00594/USCOURTS-caed-1_05-cv-00594-10/pdf.json

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

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1

 UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Plaintiff,

vs.

STEVEN HEMPFLING, d/b/a FREE

ENTERPRISE SOCIETY, 

Defendant.

 /

1:05-cv-00594-LJO-SMS

ORDER GRANTING PLAINTIFF’S

MOTION TO STRIKE DEFENDANT’S

DEMAND FOR JURY TRIAL 

(Doc. 82)

Plaintiff’s motion to strike demand for jury trial came on

regularly for hearing on June 1, 2007 at 9:30 a.m. in Courtroom

No. 7 before the Honorable Sandra M. Snyder, United States

Magistrate Judge. Robert D. Metcalfe, Trial Attorney, Tax

Division for the U. S. Department of Justice, appeared

telephonically on behalf of Plaintiff. William McPike, Esq.,

appeared telephonically on behalf of Defendant. The Court has

reviewed the motion and memorandum in support thereof, the

opposition and memorandum in opposition thereto, as well as

Defendant’s surreply filed in response to Plaintiff’s oral

argument at the hearing. Upon receipt of Defendant’s surreply,

the matter was submitted to the Court.

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Procedural Background

On May 2, 2005, Plaintiff filed a complaint (Doc. 1) seeking

a permanent injunction pursuant to 26 U.S.C. §§ 7402 and 7408 for

violations of the Internal Revenue Code § 6700. The prayer (at

page 11) is for injunctive relief only and, “H. That the Court

grant the United States such other and further relief as the

Court deems appropriate.” 

On June 29, 2005, Defendant filed a motion to dismiss or for

summary judgment (Doc. 7). On September 23, 2005, the motion to

dismiss was denied on all grounds except under Rule 9(b), and

Plaintiff was granted twenty days to file an amended complaint

(Doc. 37). On October 13, 2005, Plaintiff filed an amended

complaint for permanent injunction (Doc. 39). On November 15,

2005, Defendant filed a motion to dismiss the amended complaint

(Doc. 43), and a motion to strike certain portions of the amended

complaint (Doc. 44), which motions were denied on February 22,

2006 (Doc. 56). On March 1, 2006, Defendant filed an

interlocutory appeal (Doc. 58), which was dismissed on June 15,

2006 (Doc. 70-2). On March 19, 2007, Defendant filed his answer

to the amended complaint (Doc. 75) alleging affirmative defenses. 

On April 4, 2007, Plaintiff filed a motion to strike affirmative

defenses (Doc. 79) which was granted in part and denied in part

on May 1, 2007 (Doc. 89), granting Defendant leave to amend his

fifth affirmative defense, with instructions. On May 15, 2007,

Defendant filed his amended answer which included a demand for

jury trial (Doc. 90). Plaintiff’s motion to strike demand for

jury trial, filed on April 9, 2007 (Doc. 82), is presently

submitted to this Court for decision (Doc. 92).

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Factual Background

Plaintiff’s amended complaint seeks a permanent injunction

against Defendant Steve Hempfling and his business, Free

Enterprise Society. 

Using the name Free Enterprise Society, Defendant conducted

tax-related seminars where he promoted commercial tax products

such as his previously-recorded seminars, the W4 package and the

“Reliance 2000" package which Plaintiff alleges falsely purported

to show that there is no law requiring individuals to file

federal income tax returns or pay income taxes. He also offered

for sale a “civil support service,” which allegedly demonstrates

that there is no law requiring individuals to file federal income

tax returns or pay income taxes. He also allegedly offered a

“civil support service” which entitled participants to obtain,

for additional fees, customized tax-related legal briefs and

correspondence, and a “legal defense fund” for non-filers that

provided support for those charged with willful failure to file

income tax returns in violation of IRC § 7203. He also is

alleged to have counseled customers in seminars and elsewhere

that there is no legal obligation to pay income tax.

The complaint states that Defendant’s “Reliance 2000"

program was used to facilitate, encourage and assist his

customers to commit willful failure to file tax returns and tax

evasion. That program included buying and reading a two-volume

book The Law That Never Was by William “Bill” Benson for $80,

which, Plaintiff alleges, falsely concludes that the Sixth

Amendment was never ratified; buying, for $250, The Sixteenth

Amendment Reliance Package from Defendant which purports to

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contain the “initial research” for The Law That Never Was; buying

from Defendant for $50 to $75 and sending to the president,

congressmen and senators copies of Defendant’s Redress of

Grievance Letter Package, which asked the recipients to answer

questions about the ratification of the Sixteenth Amendment; and,

buying, for $150 and up, and filing Defendant’s federal lawsuit

package asking for the answer to the “16th Amendment question.”

The amended complaint states that the United States is not

seeking to prohibit Defendant Hempfling from advertising or

distributing all books and other products listed in the website

www.freeenterprisesociety.com. Rather, the complaint seeks to

bar advertising and distribution only of those products and types

of products identified in the complaint as being subject to

penalties under IRC §§ 6700 or 6701, or to injunction under IRC

§§ 7408 or 7402. Defendant is alleged to have engaged in such

conduct in count I of the amended complaint. In count II of the

amended complaint, Plaintiff states that Defendant has engaged in

conduct that substantially interferes with the administration and

enforcement of the internal revenue laws, and prays that

Defendant be enjoined from such activity as he is likely to

continue to do so. 

Plaintiff seeks a permanent injunction enjoining Steven

Hempfling individually and d/b/a Free Enterprise Society from

engaging in conduct subject to penalty under IRC § 6700, any

conduct that interferes with the enforcement of the internal

revenue laws, and that injunctive relief against him, his

representatives, agents, servants, employees, and those in

concert or participation with him is appropriate to prevent

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recurrence of that conduct. Plaintiff requests that the

injunction require Hempfling’s representatives, agents, servants,

etc., turn over to Plaintiff any records that identify

individuals or entities who purchased or used any other tax

shelter, plan or arrangements in which Hempfling individually or

doing business as Free Enterprise Society has been involved. 

Plaintiff requests that the Court allow the Government full postjudgment discovery to monitor compliance with the injunction, and

that the Court grant the United States such other and further

relief as the Court deems appropriate.

Issues Presented

Plaintiff requests that the demand for jury trial be

stricken because there is no constitutional or statutory right to

trial by jury based on the allegations in the complaint. 

Plaintiff argues that a jury trial applies only to suits at

common law, not in equity. Curtis v. Loether, 415 US. 189, 193

(1974); Securities and Exchange Commission v. Rind, 991 F.2d

1486, 1493 (9th Cir. 1993). Plaintiff contends that suits at

common law are defined as “suits in which legal rights were to be

ascertained and determined” in contraindication to those where

equitable rights alone were regarded, and equitable remedies were

administered.” Pel-Star Energy, Inc. v. U.S. Dept. of Energy,

890 F.Supp. 532, 539 (W.D.La. 1995). Thus, Plaintiff asserts 

this is an equitable action seeking only injunctive relief, and

thus there is no right to a jury trial. United States v.

Westbanick Corp., 63 F.R.D. 366, 367 (E.D.Wis. 1974); Coca-Cola

Co. v. Cahill, 330 F.Supp. 354, 356 (W.D.Okla. 1971). At

//

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hearing, Plaintiff pointedly declared it was not now nor would it

be seeking any monetary penalties against Defendant. 

Defendant contends that he is entitled to a jury trial as

the Seventh Amendment provides that in “Suits at common law,

where the value in controversy shall exceed twenty dollars, the

right of trial by jury shall be preserved.” U.S. Const.Amend.

VII. Defendant argues that because of the government’s

allegation that they are seeking only an injunction against him

under § 7408, the government must prove that he was engaging in

conduct prohibited by § 6700, which provides a penalty of $1,000

per violation or some lesser amount if a defendant establishes a

lesser amount by way of showing that 100% of the gross income

derived by the person who violates its provisions is a lesser

amount. The government argues multiple violations of § 6700,

which requires proving false or fraudulent elements as well. 

Therefore, the amount at issue would be at least $1,000. 

Defendant contends that these penalties are “legal” or “at law”

issues, and the Seventh Amendment requires a jury trial, despite

the government’s “artful pleading” seeking only “an injunction.”

Defendant further asserts that although the relief sought in

the complaint is for an injunction only, Fed.R.Civ.P. 54(c)

specifically authorizes, if not requires, that the court grant

whatever relief a party may be entitled to, regardless of whether

or not is requested in the complaint. Defendant alleges that

“[I]t is of no moment that the government’s complaint only seeks

injunctive relief. If it proves the elements of § 6700, as it is

required to do to prevail on its complaint, it would be entitled

to whatever monetary penalties are allowed under the statute.” 

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(Defendant’s opposition, Doc. 91, p. 2:21-24) Defendant argues

that because he may be liable for the penalties under § 6700, the

issue becomes “legal” or “at law” and the Seventh Amendment

entitles him to a jury trial based upon the legal issues

involved.

He further argues that because this case may present both

legal and equitable matters is no reason to deny a jury trial. 

Assuming the case is a mix of legal and equitable claims, the

court has limited discretion in determining the sequence of

trial, and must, whenever possible, preserve the right to jury

trial. Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 510

(1959). He contends that only under the most imperative

circumstances can the right to a jury trial of legal issues be

lost through prior determination of equitable claims. Id. This

is true even in complex cases. In re U.S. Financial Securities

Litigation, 609 F.2d 411, 426 (9th Cir. 1979).

ANALYSIS

There is little dispute with regard to the Seventh

Amendment’s provision for jury trials. It provides that, “[I]n

Suits at common law, where the value in controversy shall exceed

twenty dollars, the right of trial by jury shall be preserved.”

Initially, it must be determined if the right to trial by

jury attaches to the particular statutory claim involved. 

First, we must “compare the statutory action to 18thcentury actions brought in the courts of England prior

to the merger of the courts of law and equity.” Tull v.

United States, 481 U.S. 412, 417 (1987)(cites omitted). 

Second, we must “examine the remedy sought and

determine whether it is legal or equitable in nature.” 

Id. at 417-18, (cites omitted). The second inquiry is

more important. Id. at 421. (emphasis added)

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Securities and Exchange Commission v. Rind, 991 F.2d 1486, 1493

(9th Cir.), cert. denied, 510 U.S. 963 (1993). In this case, the

court determined that joining an action for disgorgement of

profits to the injunction action did not entitle a defendant to a

jury trial because such joinder does not detract from the

equitable nature of the action. See also Coca-Cola Company v.

Cahill, 330 F.Supp. 354, 355 (W.D.Ok. 1971)(Claim for injunctive

relief and an equitable accounting are suits in equity and equity

courts have the power to decree complete relief; for that purpose

equity courts may accord what would be otherwise a legal remedy).

In assessing whether the Seventh Amendment provides for a

jury trial in a specific case “depends on the nature of the issue

to be tried rather than the character of the overall action.” 

Ross v. Bernhard, 396 U.S, 531, 538 (1970). In Ross, the Supreme

Court identified a three-part test, that is, following the first

two tests, evaluation of the practical abilities and limitations

of juries can be considered. Id. However, in a later case the

Supreme Court shifted the focus to the second issue –- the nature

of the relief sought. Hildebrand v. Bd. of Tr. of Mich. State

Univ., 607 F.2d F.2d 705 (1979), cert. denied, 456 U.S. 910

(1982). See also Curtis v. Loether, 415 U.S. 189 (1974). Thus,

it is important to remember that the remedy sought is the more

important element in deciding whether a claim is legal or

equitable. Tull v. United States, 481 U.S. 412, 417 (1987). 

The courts uniformly find that in cases such as this one,

where a statute authorizes injunctive relief for violation of

another section of the statute, the action is equitable and that

no jury trial is required. United States v. Ellis Research

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Laboratories, Inc., 300 F.2d 550, 554 (7th Cir. 1962)(No jury

trial required in action to enjoin defendants from shipping

misbranded device for diagnosis of disease under Food, Drug and

Cosmetic Act as the action sought only injunctive relief).

In United States v. Westbanick, 63 F.R.D. 366 (E.D.Wis.

1974) the court discussed the right to jury trial under Title

VIII of the Civil Rights Act of 1968. Section 812(c) provides

for damages, and if damages are requested, the 7th Amendment

guarantees the right to jury trial. Section 813 makes no

provision for damages whether compensatory or punitive in nature. 

Thus, in a case seeking only injunctive relief under the Act

pursuant to § 813, there is no right to a jury trial. At 63

F.R.D. at 367, the Court stated: 

This is generally true, no matter what the subject

matter of a particular suit may be. Professor Moore,

for example, has made the categorical observation that

. . . “in an action solely for an injunction there is

no right to jury trial” 5 Moore, Federal Practice ¶

38.24[1], at 190.1 (2d ed. 1971). See generally United

States v. Ellis Research Laboratories, Inc., 300 F.2d

550 (7th Cir.), cert. denied 370 U.S. 918 (1962); Adams

v. Fazzio Real Estate Co., 268 F.Supp. 630 (E.D.La.

1967, affd. 396 F.2d 146 (5th Cir. 1968) . . .

In United States v. Conces, 2006 WL 356929 (W.D.Mich. 2006),

WL356929, (W.D.Mich.2006) the United States sought injunctive

relief prohibiting Conces from violating internal revenue laws,

that is, from organizing, promoting, marketing or selling abusive

tax shelters under the same IRS statutes as here, and a demand

for jury trial was denied as there is no right to a jury trial

where the claims are equitable in nature.

Defendant argues that the government seeks an injunction

under §§ 7402 and 7408 for violations of § 6700, which is a

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penalty statute. Thus, the case requires resolution of legal or

at law issues of § 6700, and a jury trial is required under the

7th Amendment. 

The argument is without merit. Further, it is presented

without citation to any legal authority holding that reference to

the violations, which provide for monetary penalties, in seeking

an injunction under a statute that provides authority for such

injunction, makes the action one at law. It also ignores the

second inquiry set out in order to determine whether an action is

legal or equitable. In this case there is no question that the

relief sought here is equitable and would have been so in the

courts of England prior to the merger of law and equity. The

second, and most important inquiry, is whether the remedy sought

is legal or equitable. Tull v. United States, 481 U.S. 412, 417

(1987). Here, all that is requested is an injunction and thus

the matter is equitable and Defendant is not entitled to a jury

trial. 

Defendant next argues that under F.R.Civ.P. 54(c) the court

is authorized, if not required, to grant whatever relief a party

may be entitled, regardless of what is requested. Thus, if the

government proves the elements of § 6700, as it must do to obtain

an injunction, it would be entitled to monetary penalties. 

Because such penalties are legal, Defendant is entitled to a jury

trial. He argues that Plaintiff’s artful pleading cannot turn

this legal case into one seeking only an injunction.

Again, Defendant cites to no authority in support of this

circuitous argument. Further, United States v. Raymond, 78

F.Supp.2d 856 (E.D.Wis. 1999), illustrates that proof, by a

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preponderance of the evidence, of conduct subject to penalty

under § 6700, must be made by the government for it to obtain its

injunction. On Plaintiff’s motion for summary judgment and

permanent injunction, the court found the program involved was an

abusive tax shelter, and injunctive relief was appropriate. 

Thus, having to prove underlying violations for issuance of an

injunction does not turn an equitable action into one at law.

The relief sought by Plaintiff is an important consideration

and is given weight by the courts in determining if the matter is

equitable or legal. In Anti-Monopoly v. General Mills Fun Group,

611 F.2d 296 (9th Cir. 1979), Plaintiff argued that the judge

improperly denied it a jury trial. The original complaint

contained two counts for damages as well as seeking equitable

relief. Defendant counterclaimed for an accounting and damages. 

The counterclaim was withdrawn and without objection Plaintiff

severed the two legal claims. There was no error in denying the

jury trial since only equitable claims remained, and thus only

equitable remedies were sought. In agreement is Francis v.

Dietrick, 682 F.2d 485 (4th Cir. 1982) where Plaintiff amended

the complaint dropping claim for damages, thereby leaving only

equitable issues, and thus no jury trial required. Here, only

equitable remedies are sought. 

However, Defendant claims that by artful pleading,

Plaintiffs thinly veil the real underlying legal claims which

exposes him to penalties under 26 U.S.C. § 6700. As Tull, and

Ross, supra, set out, the relief sought by Plaintiff is the most

important element to consider, and Plaintiffs only seek

injunctive relief. 

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Indeed, it would be error if Plaintiff were awarded

compensatory and/or punitive damages, as Defendant suggests, when

only equitable remedies are sought. Harris v. Richards Mfg. Co.,

675 F.2d 811, 814-15 (6th Cir. 1982), an action seeking only

equitable relief, and “such other and further relief as may be

deemed necessary and proper,” was tried without a jury. In the

post-trial brief Plaintiff sought compensatory and punitive

damages in its proposed findings of fact and conclusions of law

and the court awarded both compensatory and punitive damages. On

appeal Defendant contended that such an award denied them a trial

by jury. The appellate court held that it was error to award

damages where they were never prayed for nor specifically 

proved, and when the pleadings gave Defendants no hint that

damages were to be litigated. This was denial of the right to

have legal issues tried before a jury and the court reversed the

award of damages. 

Therefore, Defendant’s argument that Plaintiff, by artful

pleading, is seeking legal as well as equitable remedies is

meritless. Plaintiff seeks only equitable relief, and is

entitled only to the relief prayed for. 

Because Plaintiff will be required to prove factual

questions concerning the alleged abusive tax shelters does not

necessarily establish the claim is legal nor mandate a jury

trial. If no monetary damages are sought by Plaintiff, there is

no right to a jury trial. Anti-Monopoly v. General Mills Fun

Group, 611 F.2d 296 (9th Cir. 1979); Louis Kemp, Superior

Seafoods, Inc. v. Tyson Foods, Inc., 2001 WL 1636512 (D.Minn).

An equitable claim may involve a legal issue of fact or may turn

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on a question of fact, but the existence of an issue of fact does

not per se create a legal claim which would entitle a party to a

jury trial. Shubin v. U.S. District Court for the S.D. of

California, 313 F.2d 250, 251 (9th Cir. 1963); Anti-Monopoly,

Inc. v. General Mills Fun Group, Inc., 1976 WL 20999 (N.D.Cal.

1976), reversed and remanded, 611 F.2d 296, 308 (9th Cir. 1979)

(reversed on trademark issue, but affirmed on holding that

existence of factual question of trademark validity does not

necessarily mandate a jury trial, and if no monetary damages are

sought, jury trial properly denied as complaint was for equitable

relief). In agreement, Louis Kemp, Superior Seafoods, Inc. v.

Tyson Foods, Inc., 2001 WL 1636512 (D.Minn).

It should be noted that a prayer that includes language

requesting “all relief to which the plaintiff may appear to be

entitled” or “such further relief as may be deemed proper” is not

somehow magical and all encompassing, and does not constitute a

prayer for legal relief in the form of damages. Such catchall

phrases are limited to relief of the same kind that is

specifically enumerated, i.e., equitable relief. Deringer v.

Columbia Transportation Div., Oglebay Norton Co., 866 F.2d 859,

863 (6th Cir. 1989); Harris v. Richards Mfg. Co., Inc., 675 F.2d

811, 815 (6th Cir. 1982).

Finally, Defendant argues that this case may present both

legal and equitable matters, and thus the court is required to

examine the case further. Beacon Theatres, Inc. v. Westover, 359

U.S. 500 (1959); In re U.S. Financial Securities Litigation, 609

F.2d 411, 426 (9th Cir. 1970). However, as indicated above,

there is no mixed issue here to analyze because Plaintiff seeks a

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purely equitable remedy, assuring the Court at hearing it would

not be seeking any monetary penalties against Defendant. 

In view of the above, there is no doubt that Plaintiff seeks

only equitable relief and Defendant is not entitled to a jury

trial.

Therefore, Plaintiff’s motion to strike demand for jury

trial is hereby GRANTED.

IT IS SO ORDERED.

Dated: July 3, 2007 /s/ Sandra M. Snyder 

icido3 UNITED STATES MAGISTRATE JUDGE

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