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GATES v. UNITED STATES

April 12, 1988

BILL GATES, PLAINTIFF
v.
UNITED STATES OF AMERICA, DEFENDANT



The opinion of the court was delivered by: EISELE

 GARNETT THOMAS EISELE, CHIEF UNITED STATES DISTRICT JUDGE.

 Pending before the Court are the defendant's motions for summary judgment. In its first motion, the defendant seeks summary judgment on the issue of the plaintiff's liability for promoting an abusive tax shelter in violation of 26 U.S.C. § 6700. In its second motion, the defendant seeks summary judgment on the issue of its calculation of the penalty imposed under Section 6700. The plaintiff has responded. For the reasons set forth below, the Court will grant both motions.

 The plaintiff, proceeding pro se, filed this action to contest a $ 69,000 penalty assessment made against him by the Internal Revenue Service ("IRS") pursuant to 26 U.S.C. § 6700 ("Promoting abusive tax shelters, etc."). The IRS alleges that the plaintiff solicited, recruited and managed a sales force for two separate tax shelter programs operated by H & L Schwartz, Inc., a California corporation. One program involved audio cassette tape master recordings and was promoted under the name American Educational Leasing ("AEL"). The other program involved videogame master programs and was promoted under the name American Videogame Leasing ("AVL").

 On October 29, 1987, the United States District Court for the Central District of California found that H & L Schwartz, Inc., engaged in conduct subject to penalty under Section 6700 and permanently enjoined the company, and Chief Operating Officer Illya Bond, from:

 
A. Taking any action in furtherance of the organization, promotion, marketing, leasing or selling of the American Educational Leasing Program and/or the American Videogame Leasing Program (hereinafter, the "Tax Shelters");
 
B. Representing that an investor in either of these Tax Shelters is entitled to Federal income tax deductions or credits, including investment tax credits and/or deductions for lease payments and distribution expenses, and from furnishing or distributing any oral or written information that indicates otherwise;

 United States v. H. L. Schwartz, Inc., CV No. 87-1122, United States District Court, Central District of California (October 29, 1987).

 On November 16, 1987, the United States Tax Court found that investors in the AEL program did not have an actual and honest profit objective. In disallowing the investors' deductions, the Tax Court concluded that Schwartz Inc.'s AEL program "had no economic substance" and that the fair market value of the AEL master was "no more than $ 300." The Court stated that the term "sham or fraudulent transaction" would describe the transaction entered into by the investors. Apperson v. Commissioner, T.C. Memo 1987-571 (1987).

 Section 6700 imposes a penalty on any person who:

 
(1)(A) organizes (or assists in the organization of)-
 
(i) a partnership or other entity,
 
(ii) any investment plan or ...

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