The opinion of the court was delivered by: STANLEY S. BROTMAN
Presently before the court is the motion of plaintiff, United States government, for summary judgment. For the reasons set forth below, the government's motion is granted in part and denied in part.
I. Factual and Procedural Background
The facts in the present matter are uncontested as they have been stipulated to by all parties. The uncontested facts are reproduced below in the sane format that they appear in the Joint Final Pretrial Order entered in this matter on September 2, 1994.
1. Defendants Harry Jones and Janet Jones are married and reside at the Sherman Avenue property. They have lived at that residence since September 1977 (Harry Jones ("HJ") Dep. Tr. at 13-16; Janet Jones ("JJ") Dep. Tr. at 10-11).
3. On September 17, 1977, defendants Harry Jones and Janet E. Jones granted a mortgage to Atco Savings and Loan Association on the Sherman Avenue property (a true and correct copy of said mortgage instrument is attached as Exh. B to the amended complaint; see also HJ Dep. Tr. at 18-19 and Exh. 5 annexed thereto; JJ Dep. Tr. at 19-21, and Exh. 3 annexed thereto).
4. Harry Jones and Janet Jones signed a promissory note to repay the loan made by Atco Savings and Loan which helped finance their purchase of the Sherman Avenue property. The mortgage was security against the property for the promissory note. (JJ Dep. Tr. at 22-23 and Exh. 4 (Promissory Note) annexed thereto; HJ Dep. Tr. at 17 and Exh. 4 annexed thereto).
5. During 1980 or 1981, Harry Jones joined the South Jersey Patriots, an organization or association which he described as a "constitutional study group." That association was a tax protestor group. Harry Jones was president of the South Jersey Patriots, and attended weekly meetings. Janet Jones also attended meetings of the South Jersey Patriots. (See JJ Dep. Tr. at 61, 62-63; see also HJ Dep. Tr. at 37-40).
6. Harry Jones maintains that between 1981 and 1984, he believed that his wages were exempt from taxation (see HJ Dep. Tr. at 36). Indeed, Harry Jones contended, and still contends, that only federal employees and citizens of the District of Columbia are subject to federal income tax (id. at 39-41).
7. In 1982, Harry Jones worked in the construction industry as a pipe fitter (id. at 8-9). In 1982, Harry Jones worked for Bechtle Power Corp. and received wages from that company (id. at 43 and Exh. 10 (Employee's Statement annexed thereto and signed by Harry Jones).
8. In 1982, Harry Jones received a total salary of $ 67,396.55 from Bechtle Power Corp. for his work as a pipe fitter (see HJ Dep. Tr. at 52-53 and Exh. 15A annexed thereto (1982 Federal Form 1040 income tax return for Harry Jones, and specifically the W-2 Form attached thereto)).
9. In or about 1982, Harry Jones and Janet Jones filed amended Federal Form 1040 income tax returns seeking refunds of taxes paid for tax years 1979 through 1981. The purported basis for the refund claims was that Harry Jones' labor was allegedly tax exempt. The amended returns for these years triggered audits by the Internal Revenue Service ("IRS") (HJ Dep. Tr. at 46-47).
10. On or about February 8, 1983, Harry Jones submitted a Federal Form W-4 claiming that he was exempt from taxation (id. at 33-34 and Exh. 9 annexed thereto).
11. By letter dated March 11, 1983, the IRS notified Harry Jones and Janet Jones that their amended income tax return for 1981 was under audit, and the IRS requested them to appear for an examination (HJ Dep. Tr. at 44-46; Exh. 11 annexed thereto).
12. By letter dated March 23, 1983, the IRS notified Harry Jones and Janet Jones that their amended tax return which claimed a refund for tax year 1981 was disallowed in full. The IRS advised Mr. and Mrs. Jones that, pursuant to 26 U.S.C. § 61, his income was taxable. (See HJ Dep. Tr. at 46-47, 49 and Exh. 13 annexed thereto).
13. During February or March 1983, Harry Jones filed a Federal Form 1040 income tax return for tax year 1982. He filed that return under the status of "married filing separate return." On the 1982 income tax return, Harry Jones claimed that his wages were deductible or tax exempt, and reported that he owed no income tax for 1982 (HJ Dep. Tr. at 39-41, 52-54; see Exh. 15A, 1982 Form 1040 income tax return; see also Exh. 10, Jones' Employee Statement). Indeed, Mr. Jones sought a refund of the taxes that had been withheld by his employer for 1982.
15. By letter dated June 9, 1983, the IRS sent Mr. Jones a final demand notice seeking payment of the $ 500.00 penalty assessment. By letter dated June 18, 1983, Mr. Jones responded by stating that he did not owe the tax and that he challenged the right of the IRS to charge him with "a fine for [filing] a frivolous return." (See IRS letter dated June 9, 1983 and Mr. Jones' response thereto, collectively annexed as Exh. D to the declaration of Charles Flesch.)
16. On June 9, 1983, for consideration of $ 10.00 and "love and affection," defendant Harry Jones conveyed his interest in the Sherman Avenue property to his wife Janet Jones (a true and correct copy of the deed of conveyance between defendants Harry C. Jones and Janet E. Jones is annexed as Exh. C to the amended complaint; see also HJ Dep. Tr. at 54-56 and Exh. 16 annexed thereto; JJ Dep. Tr. at 57-59 and Exh. 13 annexed thereto). After the conveyance of the Sherman Avenue property, Harry Jones continued to reside at the premises (see JJ. Dep. Tr. at 60). The June 9, 1983 deed was recorded on July 11, 1983 (see Exh. 16, page 4 to HJ. Dep. Tr.).
17. Neither Harry Jones nor Janet Jones notified Atco Savings and Loan Association of the transfer of title to Janet Jones. Harry Jones, however, remained indebted to Atco Savings and Loan Association for the mortgage payments by virtue of the promissory note he had signed (JJ Dep. Tr. at 67-68, 70; HJ Dep. Tr. at 56).
18. After the conveyance of the Sherman Avenue property to Janet Jones, Mr. Jones continued to make payments to Atco Savings & Loan Association on the mortgage until about 1988. Thereafter, Mr. Jones' mother made payments on the mortgage on his behalf (see HJ Dep. Tr. at 25-28).
19. After the conveyance of the Sherman Avenue property to Janet Jones, Mr. Jones owned no property (see JJ Dep. Tr. at 68-70).
20. In response to what he termed as a proposed IRS notice of deficiency for tax year 1982, on March 12, 1984, Harry Jones wrote the IRS advising that his wages were not income and not taxable (HJ Dep. Tr. at 64, Exh. 23 annexed thereto).
21. On June 14, 1984, the IRS wrote Harry Jones providing him with its examination report regarding an income tax deficiency for tax year 1982 and proposing an assessment of various penalties (HJ Dep. Tr. at 65-66 and Ex. 24 annexed thereto). In response, Harry Jones denied the audit findings (HJ Dep. Tr. at 66-67 and Exh. 25 annexed thereto).
22. By letter dated April 5, 1985, the IRS sent Harry Jones a notice of income tax deficiency for tax year 1982. In that notice (which incorporated the aforesaid examination report in part), the IRS asserted that Harry Jones was liable for an income tax deficiency, in the amount of $ 26,975.28, and was also liable for various penalties as set forth therein (HJ Dep. Tr. at 69, Exh. 25 (IRS Notice of Deficiency) annexed thereto).
23. By letter dated April 15, 1985, Harry Jones wrote the IRS admitting that he received the Notice of Deficiency. In his April 15 letter, Jones set forth various tax protestor statements, including asserting that the IRS had no authority to issue him the Notice of Deficiency (see HJ Dep. Tr. at 69, 71-72, and Exh. 27 annexed thereto).
24. Harry Jones did not petition the U.S. Tax Court to contest the IRS' April 5, 1985 Notice of Deficiency (HJ Dep. Tr. at 71).
25. A delegate of the Secretary of the Treasury made assessments against defendant Harry C. Jones for additional tax and penalties for the tax year ending December 31, 1982, on the dates and in the amounts set forth below:
Type of Assessment Amount Internal Revenue
Assessment Date Assessed Code Section
Penalty 4/12/83 $ 500.00
Income Tax 10/21/85 $ 26,975.28
Negligence 10/21/85 $ 6,055.66 6653(a)(1) & (2)
Estimated Tax 10/21/85 $ 2,143.80 6654
of Income Tax
Penalty $ 2,697.53 6651.
26. Notices of the assessments, referred to in paragraph 25, above, and demands for payment were duly sent to Harry C. Jones (Declaration of Russell Mattaboni at P 5; see also certified Form ...