United States v. Elsass

• Decision Date: 17 October 2013
• Docket Number: Case No. 2:10–cv–336.
• Parties: UNITED STATES of America, Plaintiff, v. Tobias H. ELSASS, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

978 F.Supp.2d 901

UNITED STATES of America, Plaintiff,

v.Tobias H. ELSASS, et al., Defendants.

Case No. 2:10–cv–336.

United States District Court,

S.D. Ohio,

Eastern Division.

Oct. 17, 2013.

Brian H. Corcoran, Department of Justice Tax Division, Erin Healy Gallagher, Ben Franklin Station, Natalie Sexsmith, United States Department of Justice, Washington, DC, Mark Thomas D'Alessandro, Columbus, OH, for Plaintiff.

Brian J. Laliberte, Brian J. Laliberte Co., LPA, Columbus, OH, for Defendants.

MEMORANDUM OPINION AND ORDER

PETER C. ECONOMUS, District Judge.

Presently pending before the Court are the Parties' cross-motions for summary judgment (Docs. 212 & 230) and the Defendants' Motion to Strike Certain Government Summary Judgment Exhibits (Doc. 236). For the reasons that follow, the Court will DISMISS without deciding the motion to strike, and GRANT in PART and DENY in PART the cross motions for summary judgment. Further, the Court GRANTS injunctive relief to the Government as specified in the Judgment and Permanent Injunction filed concurrently with this opinion and order.

I.

Plaintiff, the United States of America, brings the instant civil action against Defendants Tobias H. Elsass (“Elsass”), Fraud Recovery Group, Inc. (“FRG”), and Sensible Tax Services, Inc. (“STS”) seeking to enjoin the Defendants from providing certain services to taxpayers on the grounds that the Defendants have frequently engaged in practices that violate the tax laws.

FRG and STS are entities founded and controlled by Elsass. Collectively, the Defendants are in the business of helping taxpayers claim tax refunds through tax deductions for theft losses made allowable by § 165 of the Internal Revenue Code (“I.R.C.”), 26 U.S.C. § 165. The Defendants'business focuses on purported theft losses arising from investment scams such as the one famously orchestrated by Bernie Madoff. Their business model consists of researching and identifying investment scams that might give rise to § 165 theft-loss deductions, marketing their services to the victims of such scams, and assisting the victims in filing amended tax returns to obtain a tax refund based on the loss sustained through the scam. In exchange for these services, the Defendants are compensated by a percentage of the refund obtained.

In bringing this action, the Government contends that the Defendants have frequently engaged in practices that run afoul of the I.R.C. and the rules and regulations governing the United States' income tax scheme promulgated by the Treasury Department and the Internal Revenue Service (“IRS”). Among other allegations, the Government contends that the Defendants frequently and willfully have attempted to obtain theft-loss deductions for their customers in instances where doing so is improper or altogether groundless. To prevent the Defendants from continuing to operate in ways that it contends blatantly run afoul of the tax laws, the Government seeks to permanently enjoin the Defendants pursuant to §§ 7402, 7407, and 7408 of the I.R.C. from engaging in the business of assisting taxpayers with § 165 theft-loss deductions.

After conferring with the Parties as the case approached trial, the Court determined that the action could likely be resolved through cross-motions for summary judgment. ( See Doc. 208.) The Parties have accordingly moved for summary judgment and briefing on the issues is now complete.

II.

Before discussing the Parties' motions for summary judgment, the Court first considers the Defendants' pending motion to strike Government Exhibits 77, 156, 157, 191, 286, 340, 341, 342, 353, 456, 458, 459, 479, 482, 483, 498, 501, 502, 503, and 504. (Doc. 236.) Defendants argue that the Court should not consider these documents on various grounds. However, as the Court has not relied upon any of the identified exhibits in deciding the pending summary judgment motions nor in determining the appropriate relief to the Government, it is unnecessary for the Court to decide the legal merits of the Defendants' motion to strike. Accordingly, the Defendants' Motion to Strike Certain Government Summary Judgment Exhibits (Doc. 236) is dismissed.

III.

A.

The Court now turns to the cross-motions for summary judgment. Summary judgment is proper where “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The moving party bears the initial burden of “informing the district court of the basis for its motion, and identifying those portions of the ‘pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,’ which it believes demonstrates the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting prior version of Fed. R. Civ. P. 56). The movant may meet this burden by demonstrating the absence of evidence supporting one or more essential elements of the non-movant's claim. Id. at 323–25, 106 S.Ct. 2548. Once the movant meets this burden, the opposing party “must set forth specific facts showing that there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (quotation and citation omitted).

“In considering a motion for summary judgment, the Court must view the facts and draw all reasonable inferences therefrom in a light most favorable to the nonmoving party.” Williams v. Belknap, 154 F.Supp.2d 1069, 1071 (E.D.Mich.2001) (citing 60 Ivy Street Corp. v. Alexander, 822 F.2d 1432, 1435 (6th Cir.1987)). The purpose of summary judgment “is not to resolve factual issues, but to determine if there are genuine issues of fact to be tried.” Abercrombie & Fitch Stores, Inc. v. Am. Eagle Outfitters, Inc., 130 F.Supp.2d 928, 930 (S.D.Ohio 1999). Ultimately, this Court must determine “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson, 477 U.S. at 251–52, 106 S.Ct. 2505.

B.

Prior to discussing the injunctive relief sought by the Government, the Court will first give a very brief overview of the Defendants and their business model. As explained below, the Court will also briefly dispose of the majority of the Government's claims as they pertain to the conduct of STS.

Elsass was an attorney admitted to practice law in Ohio in 1980. (Elsass Dep. 14, Gov. Ex. 486, Doc. 226, PAGEID # 7486.) ¹ He ceased practicing law after his law license was suspended in 1998. ( Id. at 16, Doc. 226, PAGEID # 7488.) Prior to forming FRG, he worked as a salesman for a business known as JK Harris, “selling” § 165 theft loss deductions to victims of financial scams. ( See id. at 39, Doc. 226, PAGEID # 7496.) After his employment with JK Harris ended in December 2005, he founded FRG the following January. ( Id. at 170, Doc. 226–2, PAGEID # 7555.) Elsass initially operated FRG out of his home, but toward the end of 2008, he moved the business to its present location of 965 High Street in Worthington, Ohio. (United States' Statement of Contested and Uncontested Facts, ¶ 11, Doc. 229–1, PAGEID 8192–93.)

Elsass is the President and Chief Executive Officer of FRG. (Elsass Dep. 199, Gov. Ex. 486, Doc. 226–3, PAGEID # 7564.) He is the company's only officer and only shareholder. ( Id.) FRG charges contingent fees for its services. Under the company's initial fee structure, customers had two options; either they could make an advance cash payment, calculated as a percentage of the estimated tax refund, or the fee could be deferred and taken by FRG as a percentage of the actual refund received. ( See id. at 254–55, Doc. 226–4, PAGEID 7584–85.) The current fee structure is similar, with prepay customers paying 15% of the expected return and deferred customers paying what Elsass terms a blended fee—7.5% cash in advance and 20% of the final refund. ( Id. at 637, Doc. 227–7, PAGEID # 7827.) According to Elsass, a large portion of FRG's customers are elderly. ( Id. at 76, Doc. 226, PAGEID # 7507.)

STS is owned by FRG and was created in 2009 so that customer tax returns could be prepared in-house. ( Id. at 71, PAGEID # 7506.) The Defendants represent that STS is still an active Ohio corporation, but that there is no present intention for it to again become actively involved in the theft-loss deduction business. (Defs.' Mem. Opp'n 1 n. 1, Doc. 235, PAGEID # 8685.) Upon reviewing the extensive record produced by the Government, the Court concludes that the Government has failed to offer evidence linking STS directly to the enjoinable conduct of the other Defendants analyzed herein, with the exception of aiding and abetting the understatement of tax liability in violation of I.R.C. § 6701, as discussed in Part III.B.2.b, infra. However, given that STS is owned solely by Elsass through his ownership of FRG, the Court's conclusion in this regard has no impact on the ultimate relief to the Government awarded concurrently with this decision. Nonetheless, the Court grants the Defendants' motion for summary judgment as to the claims against STS with the exception of the violations of § 6701.

1.

Section 7407 of the I.R.C. vests the Court with authority to enjoin “tax return preparers” from engaging in certain conduct specified in that section. Further, if the Court determines that a person acting as a tax return preparer has “continually or repeatedly engaged in [the specified prohibited conduct] and that an injunction prohibiting such conduct would not be sufficient to prevent such person's interference with the proper administration of [the I.R.C.],” it may enjoin the person from acting as a tax return preparer. 26 U.S.C. § 7407(b).

Here, the Government argues that the Defendants are tax return preparers as that term is defined by statute and that they have repeatedly engaged in a myriad of conduct made...