U.S. v. Ernst & Whinney

• Decision Date: 06 July 1984
• Docket Number: No. 83-8009,83-8009
• Citation: 735 F.2d 1296
• Parties: 84-2 USTC P 9618 UNITED STATES of America, Plaintiff-Appellant, v. ERNST & WHINNEY, a general partnership, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1296

735 F.2d 1296

84-2 USTC P 9618

UNITED STATES of America, Plaintiff-Appellant, v. ERNST & WHINNEY, a general partnership, et al., Defendants-Appellees.

No. 83-8009.

United States Court of Appeals Eleventh Circuit.

July 6, 1984.

Barbara V. Tinsley, Asst. U.S. Atty., Atlanta, Ga., Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Division, Michael L. Paup, Chief, Appellate Section, Richard Farber, Farley P. Katz, Tax Div., U.S. Dept. of Justice, Washington, D.C., for plaintiff-appellant.

Trammell E. Vickery, Atlanta, Ga., Daniel F. Kolb, Nancy Grunberg, Washington, D.C., for defendants-appellees.

Appeals from the United States District Court for the Northern District of Georgia.

Before HILL, VANCE and ANDERSON, Circuit Judges.

R. LANIER ANDERSON, III, Circuit Judge:

The United States filed this civil suit seeking to enjoin the accounting partnership Ernst & Whinney from actions allegedly interfering with the administration of Internal Revenue laws. The district court dismissed the action, finding that it lacked the power to issue an injunction pursuant to either 26 U.S.C.A. Sec. 7402 (West 1967) or 26 U.S.C.A. Sec. 7407 (Supp.1983), the statutory provisions pled by the United States. Because we conclude that each statutory provision could support the issuance of an injunction under certain of the facts alleged by the United States, we reverse and remand.

I. FACTUAL AND PROCEDURAL HISTORY

In March 1982, the government (hereinafter "IRS") filed a complaint against Ernst & Whinney and various individuals (collectively referred to as "Ernst") in the United States District Court for the Northern District of Georgia. Despite the fact that the record contains much dispute over the actions complained of by the IRS, we are bound to accept the complaint's allegations as true in reviewing the dismissal of the action. Miree v. DeKalb County, 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2, 53 L.Ed.2d 557 (1977).

The IRS claims focused on Ernst's promotion and use of a service designed to expand its client's ability to claim investment tax credits. The tax credit, 26 U.S.C.A. Secs. 38, 46-48 (West 1967), allows a taxpayer to credit against its federal income tax liability a percentage (generally 10%) of the cost of "qualifying property." The principal types of property qualifying for this treatment are tangible personal property and other tangible property used as an integral part of various manufacturing and business activities, but not including buildings and their structural components. 26 U.S.C.A. Sec. 48(a).

According to the complaint, Ernst identifies a taxpayer potentially eligible for the credit (e.g., a company constructing a new building) and approaches the party, making representations about possible tax savings through expanded use of the credit. If the party chooses to take Ernst's advice, consultants identify items of the property which are eligible for the credit and then obtain cost information about those items. A final study is then prepared, describing by specific terminology the items of property eligible for the credit and the associated costs.

The IRS contends that Ernst systematically develops misleading terminology for items not subject to the credit so as to improperly claim them as "qualifying property" within the statute. ¹ The result is a possibly drastic overuse of the tax credit by claims on ineligible property and the employment of bogus descriptions that frustrate IRS attempts to discover the improper claims. To stop this abuse, the IRS sought to enjoin Ernst from (1) promoting its investment tax credit service; (2) advising clients to use deceptive terminology to claim a credit for property not clearly eligible; (3) creating misleading audit documentation in support of the bogus claims; and (4) hindering IRS attempts to discover the identities of taxpayers who use the Ernst service. ²

The IRS pled two statutory provisions as support for its request that the court enjoin Ernst. The first, 26 U.S.C.A. Sec. 7402(a) provides as follows The district court of the United States, at the instance of the United States, shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the Internal Revenue laws.

The second provision, 26 U.S.C.A. Sec. 7407, is part of a general scheme regulating the activities of "income tax return preparers" ³ and it allows injunctions to be issued for various offenses by "tax preparers." Section 7407(c) provides, however, that a "tax preparer" charged with conduct subject to penalties under Secs. 6694-5 of the statute ⁴ can block an action for injunction by filing a $50,000 bond with the IRS as surety for the penalties. ⁵

After the IRS initiated this lawsuit, Ernst filed the $50,000 bond provided for in Sec. 7407(c). It then filed a motion to dismiss, arguing that the filing of bond barred any injunction against it as a "tax preparer" pursuant to Sec. 7407, and that Sec. 7402 did not give the court power to enjoin any other activities complained of.

The district court accepted Ernst's contentions and dismissed the complaint pursuant to Fed.R.Civ.P. 12(b)(6). United States v. Ernst & Whinney, 549 F.Supp. 1303 (N.D.Ga.1982). The court found it unnecessary to resolve the factual issue of whether Ernst was acting in the capacity of a "tax preparer" subject to Sec. 7407 remedies, or whether Ernst was merely acting as a "tax adviser" ⁶ and thus not subject to the statutory regulation of preparers. To the extent that Ernst was acting as a "tax preparer," the court below found that the conduct alleged by the IRS was subsumed within the category of "penalty conduct" for which the filing of a bond would preclude an action for injunction. Because the company had filed the bond, the court concluded that Ernst was no longer subject to injunction. 549 F.Supp. at 1306-09. The district court also found itself without authority to enjoin activities of Ernst which might have been taken in its capacity as a "tax adviser." In this regard, the court held that Sec. 7402 did not, by itself, allow for an injunction in the absence of an allegation that Ernst had breached a specific statutory duty imposed by a substantive provision of the Internal Revenue Code. Id. at 1311. The IRS brings this appeal. ⁷

We discuss first the availability of the injunctive remedy with respect to activities which Ernst may have undertaken as a "tax adviser," concluding that Sec. 7402 does empower district courts to enjoin such activities. Then we discuss activities which Ernst may have conducted as a "tax preparer," concluding that some activities fall within the "penalty conduct" category shielded from injunction by virtue of the Sec. 7407(c) bond provision, but also concluding that some alleged activity may fall outside the "penalty conduct" category. The latter activities would thus be subject to the Sec. 7407 injunctive remedy notwithstanding the filing of a bond.

II. ERNST AS A "TAX ADVISER"

We first consider the operation of Sec. 7402(a) as it supports injunctive relief against activities not falling within the provisions regulating tax preparers. 26 U.S.C.A. Sec. 7402(a) gives district courts the jurisdiction to issue injunctions in civil actions "as may be necessary or appropriate for the enforcement of the Internal Revenue laws." In this case, the government filed a civil suit seeking an injunction against an alleged interference with tax enforcement. Thus, at a first glance, the government's suit seems to fit precisely within the statutory provision.

Ernst argues, however, that Sec. 7402(a) is merely a jurisdictional statute and that the enumerated remedies cannot be invoked against it unless the government proves that Ernst has itself violated some specific tax provision by its advising activities. The district court found no "requisite underlying Code section [that creates] some duty on the part of the defendant sought to be enjoined." 549 F.Supp. at 1311. Because of the lack of a specific duty, the district court held that no injunction could issue under Sec. 7402(a).

We reject the district court's narrow construction of Sec. 7402(a) and hold that there need not be a showing that a party has violated a particular Internal Revenue Code section in order for an injunction to issue. The language of Sec. 7402(a) encompasses a broad range of powers necessary to compel compliance with the tax laws. See United States v. First National Bank, 568 F.2d 853, 855-56 (2d Cir.1977); Brody v. United States, 243 F.2d 378, 384 (1st Cir.1957). It has been used to enjoin interference with tax enforcement even when such interference does not violate any particular tax statute. See United States v. Ekblad, 732 F.2d 562 (7th Cir.1984) (Sec. 7402 used to enjoin individual's harassment of IRS agents designed to hinder their effectiveness); United States v. Hart, 701 F.2d 749 (8th Cir.1983) (same); United States v. VanDyke, 568 F.Supp. 820 (D.Or.1983) (same). ⁸ Furthermore, the statute has been relied upon to enjoin activities of third parties that encourage taxpayers to make fraudulent claims. United States v. Landsberger, 692 F.2d 501 (8th Cir.1982); United States v. May, 555 F.Supp. 1008 (E.D.Mich.1983). ⁹ These cases demonstrate that Sec. 7402(a) does give the district court the power to enjoin Ernst's activities as a tax adviser. ¹⁰

Of course, our legal conclusion is no indication of the propriety of injunctive relief against Ernst in the instant case. In addition to factual disputes that must be resolved, the decision to issue an injunction under Sec. 7402(a) is governed by the traditional factors shaping the district court's use of the equitable remedy. See, e.g., Hecht Co. v. Bowles, 321 U.S. 321, 329-30, 64 S.Ct. 587, 591-592, 88 L.Ed. 754 (1944) (court reviews statut...