United States v. Ericson, CIVIL 13-00551 LEK-KSC

• Decision Date: 30 November 2014
• Docket Number: CIVIL 13-00551 LEK-KSC
• Parties: UNITED STATES OF AMERICA, Plaintiff, v. James A. Ericson, Defendant.
• Court: U.S. District Court — District of Hawaii

UNITED STATES OF AMERICA, Plaintiff, v. James A. Ericson, Defendant.

CIVIL 13-00551 LEK-KSC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII

November 30, 2014

ORDER GRANTING IN PART THE GOVERNMENT'S MOTION FOR SUMMARY JUDGMENT

Before the Court is Plaintiff the United States of America's ("the Government") Motion for Summary Judgment ("Motion"), filed on September 18, 2014. [Dkt. no. 25.] Pro se Defendant James A. Ericson ("Ericson") filed his memorandum in opposition on October 27, 2014. [Dkt. no. 38.] The Court finds this matter suitable for disposition without a hearing pursuant to Rule LR7.2(d) of the Local Rules of Practice of the United States District Court for the District of Hawai'i ("Local Rules"). After careful consideration of the Motion, supporting and opposing memoranda, and the relevant legal authority, the Government's Motion is HEREBY GRANTED IN PART for the reasons set forth below.

BACKGROUND

On October 23, 2013, the Government filed its Complaint for Permanent Injunction and Other Equitable Relief ("Complaint") to enjoin Ericson, a paid professional federal tax returnpreparer, from preparing taxes. The Complaint alleges that Ericson has been a tax preparer for approximately thirty years, and a sole proprietor of a tax business on Maui for nearly twenty years. It further alleges that, during that time, Ericson engaged in fraudulent and deceptive conduct in that he: (1) took unrealistic and unsustainable positions on customers' tax returns; (2) willfully understated taxes due; and (3) recklessly and intentionally disregarded tax rules and regulations. [Complaint at ¶¶ 8-11.]

In essence, the Complaint alleges that, Ericson would meet briefly with his customers - mostly middle- and low-income wage earners - and ask them questions about work-related, personal, and hobby expenses, and then, with little or no documentation, claim unsupportable deductions based on fictitious businesses and misrepresentations of personal expenses, which would result in the understatement of their taxes due and, often, tax refunds. The Complaint alleges further that, in 2009, the Internal Revenue Service ("IRS") assessed civil penalties of $13,000 against Ericson for illegal tax preparation, pursuant to 26 U.S.C. § 6694(b), and informed him that his conduct was improper, but that Ericson continued to file fraudulent returns. [Id. at ¶¶ 13-22.]

The Complaint seeks injunctions pursuant to 26 U.S.C. § 7407 ("Count I") and 26 U.S.C. § 7402 ("Count II").Specifically, the Government seeks the following relief: a permanent injunction prohibiting Ericson from acting as a federal tax return preparer, assisting in preparing fraudulent tax returns, violating the tax laws, and engaging in conduct that interferes with the proper administration and enforcement of the tax laws; an order requiring Ericson to contact all customers since January 1, 2008, and individuals involved in his business, to inform them of the permanent injunction; an order requiring Ericson to produce to the Government contact information for his customers since 2008; the retention of the Court's jurisdiction over this matter and permission for the Government to continue discovery to monitor and enforce the injunction; and an award of costs and all other appropriate relief. [Complaint at pgs. 16-20.]

STANDARD

26 U.S.C. § 7407(b) provides that, if the court finds -

(1) that a tax return preparer has -

(A) engaged in any conduct subject to penalty under section 6694 or 6695, or subject to any criminal penalty provided by this title,

. . . , or

(D) engaged in any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws, and (2) that injunctive relief is appropriate to prevent the recurrence of such conduct,

the court may enjoin such person from further engaging in such conduct.

26 U.S.C. § 6694(a) defines "[u]nderstatement due to unreasonable positions," and 26 U.S.C. § 6694(b) defines "[u]nderstatement due to willful or reckless conduct."¹ The Ninth Circuit has explained that, "Section 6694 provides that a tax return preparer is subject to penalty if he prepares a return with understated liability due to an unreasonable position not supported by substantial authority." United States v. Kapp, 564 F.3d 1103, 1109 (9th Cir. 2009) (citing I.R.C. § 6694).²

To prevail under § 7407(b)(1)(A), the Government must prove that, "(1) [the defendant] prepared a return that understated liability, (2) due to an unreasonable position, i.e., a position that objectively had a less than one in three chance of being sustained on the merits, and (3) an injunction is appropriate to prevent recurrence." Kapp, 564 F.3d at 1109. If a court finds that the tax return preparer has "continually or repeatedly" engaged in misconduct, and that "an injunction prohibiting such conduct would not be sufficient to prevent suchperson's interference with the proper administration of this title, the court may enjoin such person from acting as a tax return preparer." § 7407(b).

26 U.S.C. § 7402 offers an alternative avenue for declaratory relief, and supplements § 7407. It provides that district courts, "at the instance of the United States shall have such jurisdiction . . . to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws."

DISCUSSION

I. Ericson's Opposition

The Government argues that Ericson should be permanently enjoined from preparing taxes because: (1) he has knowingly understated tax liabilities, in particular, by improperly deducting expenses for cell phone and internet use, "job hunting" and work-related travel, mileage on home-to-work commutes, and work clothes expenditures, all as unreimbursed employee expenses ("EBE") on customers' Schedules A (Itemized Deductions), and deducting expenses related to customer hobbies on customers' Schedules C (Profit or Loss from Business); (2) Ericson's positions are unreasonable; and (3) he has continually and repeatedly engaged in these violations over the years.

In his memorandum in opposition, Ericson neither deniesthe general factual allegations regarding his business practices nor the law and regulations that he was required to follow in preparing his customers' tax returns. Rather he contends that the Government misstates the evidence as to five of his customers, whom the Government profiles at length in its memorandum to "give a flavor of [Ericson's] flagrantly abusive conduct," [Mem. in Supp. of Motion at 4-10,] and denies that the IRS informed him what exactly he "was doing wrong" and claims that the IRS told him that they were "dropping the investigation."³ [Mem. in Opp. at 1-5.]

These arguments fail to raise a genuine issue of material fact for a number of reasons:

A. Ericsons's Admissions Regarding the Facts

First, Ericson has already admitted the factual predicates for the elements of the claim, and he has not attempted to rebut the Government's concise statement of facts. After a July 11, 2014 hearing before the magistrate judge, at which Ericson was present, see Minutes, filed 7/11/14 (dkt. no. 21), the magistrate judge issued his Order Granting United States' Motion to Compel Discovery ("7/11/14 Order").⁴ [Dkt. no. 22.] In the 7/11/14 Order, he concluded that, inter alia, Ericson's "failure to provide any response to the United States' First Requests for Admission results in those requests for admission are admitted [sic] in this case[.]" [Id. at 2.]

According to that ruling, Ericson has admitted that: he has taken unrealistic and unsustainable positions on his customers' federal income tax returns; in preparing customer returns, he willfully understated tax due; he recklessly and intentionally disregarded tax rules and regulations; heimproperly and purposefully reduced and understated tax liabilities by fabricating business schedules, expenses and income from non-existent businesses, by claiming false or inflated credits, by deducting personal expenses which were not legally deductible, and by deducting expenses related to customers' jobs that did not qualify to be deducted as EBE on Schedule A; the IRS informed him that his tax return preparation was improper and illegal; and notwithstanding the IRS warning, Ericson continued to prepare tax returns in the same improper and illegal manner. [Government's Concise Statement of Material Facts ("Govt. CSOF"), filed 9/18/14 (dkt. no. 25-2), Decl. of Jeremy N. Hendon ("Hendon Decl."), Exh. 2 (United States' First Requests for Admissions ("the RFAs")) at ¶¶ 3-11.]

Moreover, Ericson had a second opportunity to rebut those facts, but failed to do so. In its CSOF, the Government included similar facts and cited, in part, to the RFAs. See, e.g., Govt. CSOF at ¶¶ 11 ("Defendant improperly and purposefully reduced and understated his customers' tax liabilities . . ."), 19 ("The Internal Revenue Service informed Defendant . . ."). However, Defendant did not file a responsive statement of facts, and thus these facts are again deemed admitted. See Local Rule LR56.1(g) ("For purposes of a motion for summary judgment, material facts set forth in the moving party's concise statement will be deemed admitted unless controverted by a separate concisestatement of the opposing party."). As a result, the Government has provided undisputed evidence that Ericson prepared returns that understated liability, and these understatements due to unreasonable positions. Kapp, 564 F.3d at 1109.

B. Ericson's Concession Regarding the Law

Second, Ericson does not challenge the Government's statement of the law, but rather argues - contrary to his admissions - that he did not act in the way that the Government claims. The Court here outlines the pertinent law, which the Government substantively raised in its memorandum.

Regarding the purportedly impermissible deductions, 26 U.S.C. § 162 allows taxpayers to deduct "all the ordinary and necessary expenses paid or incurred during the taxable...