United States v. Ernst & Whinney, Civ. A. No. C82-501A.

• Decision Date: 02 November 1982
• Docket Number: Civ. A. No. C82-501A.
• Citation: 549 F. Supp. 1303
• Parties: UNITED STATES of America, Plaintiff, v. ERNST & WHINNEY, et al., Defendants.
• Court: U.S. District Court — Northern District of Georgia

549 F. Supp. 1303

UNITED STATES of America, Plaintiff, v. ERNST & WHINNEY, et al., Defendants.

Civ. A. No. C82-501A.

United States District Court, N.D. Georgia, Atlanta Division.

November 2, 1982.

James E. Baker, U.S. Atty., Atlanta, Ga., for plaintiff.

Trammell E. Vickery, Hansell, Post, Brandon & Dorsey, Atlanta, Ga., Daniel F. Kolb, Davis Polk & Wardwell, Washington, D.C., for defendants.

ORDER

ROBERT H. HALL, District Judge.

This action was brought by the United States to enjoin the accounting firm of Ernst & Whinney ("E & W") and various agents and employees in its Atlanta, Georgia office from engaging in allegedly deceptive conduct in the preparation of federal income tax returns. The case is presently before the court on defendants' motion to dismiss for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted.

FACTS

The substance of the action by the government centers around a service offered by E & W known as an Investment Tax Credit Study ("ITC Study"). E & W's promotional literature describes the purpose of the ITC Study to be realization of the full advantage of the investment tax credit provided for by Sections 38 and 46-48 of the Internal Revenue Code of 1954 and the underlying Treasury Regulations.

Generally, the investment tax credit permits a taxpayer to credit against any federal income tax owed, 10 percent of the cost of qualifying property. Buildings and their structural components do not qualify for the credit. See 26 U.S.C. §§ 36, 46, 48; 26 C.F.R. §§ 1.38-1, 1.48-1. However, the government has alleged that E & W is misclassifying property that is clearly unqualified for the investment tax credit so as to appear on the taxpayer's books and records supporting its tax returns as qualifying property. Further, the government has charged that E & W is classifying tangible property, the nature of which is subject to different legal interpretations, by using misleading terminology designed to avoid having the property identified on the taxpayer's books as a questionable item. Finally, the government has alleged that E & W has failed to maintain or provide to their clients documentation sufficient to identify the specific cost components of the amounts claimed for the investment tax credit.

Arguing that these practices constitute deceptive, misleading, and obstructive conduct which substantially interferes with the proper administration of the internal revenue laws, the government seeks an injunction pursuant to 26 U.S.C. § 7407, or alternatively, 26 U.S.C. § 7402(a). The language, structure, and history of these two statutes are crucial to the determination of the present motion. Section 7407 provides:

§ 7407. Action to enjoin income tax return preparers

(a) Authority to seek injunction. — Except as provided in subsection (c), a civil action in the name of the United States to enjoin any person who is an income tax return preparer from further engaging in any conduct described in subsection (b) or from further acting as an income tax return preparer may be commenced at the request of the Secretary. Any action under this section shall be brought in the District Court of the United States for the district in which the income tax preparer resides or has his principal place of business or in which the taxpayer with respect to whose income tax return the action is brought resides. The court may exercise its jurisdiction over such action (as provided in section 7402(a)) separate and apart from any other action brought by the United States against such income tax preparer or any taxpayer.

(b) Adjudication and decrees. — In any action under subsection (a), if the court finds —

(1) that an income 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,

(B) misrepresented his eligibility to practice before the Internal Revenue Service, or otherwise misrepresented his experience or education as an income tax return preparer,

(C) guaranteed the payment of any tax refund or the allowance of any tax credit, 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. If the court finds that an income tax return preparer has continually or repeatedly engaged in any conduct described in subparagraphs (A) through (D) of this subsection and that an injunction prohibiting such conduct would not be sufficient to prevent such person's interference with the proper administration of this title, the court may enjoin such person from acting as an income tax return preparer.

(c) Bond to stay injunction. — No action to enjoin under subsection (b)(1)(A) shall be commenced or pursued with respect to any income tax return preparer who files and maintains, with the Secretary in the internal revenue district in which is located such preparer's legal residence or principal place of business, a bond in a sum of $50,000 as surety for the payment of penalties under sections 6694 and 6695.

Section 7402(a) provides:

§ 7402. Jurisdiction of district courts

(a) To issue orders, processes, and judgments. — 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 remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.

On its motion to dismiss, E & W argues vigorously that the government is not entitled to the injunction it seeks under either of these statutes. E & W argues that insofar as it is an income tax preparer, its posting of the bond provided for under § 7407(c) precludes the government's action for an injunction under § 7407. Second, it argues that insofar as it is not a preparer, no injunction can be sought under § 7402(a) because there is no substantive Code section to support such an action. These contentions and those of the government in opposition will be addressed more fully below.

DISCUSSION

1. Characterization of the motion to dismiss

The motion to dismiss by E & W has been asserted under both Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction and Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Although the motion could arguably be grounded upon either of these rules, the court has determined that it is more appropriately characterized as a 12(b)(6) motion. The government has asserted that this court has jurisdiction pursuant to both 28 U.S.C. § 1340 and § 1345. Section 1340 confers jurisdiction over "any civil action arising under any Act of Congress providing for internal revenue ..." Section 1345 provides that "except as otherwise provided by Act of Congress, the district courts shall have original jurisdiction of all civil actions, suits or proceedings commenced by the United States ..." In this action either statute gives this court jurisdiction. Since the government brought the action under §§ 7407 and 7402(a) of the Internal Revenue Code, § 1340 confers jurisdiction. Similarly, jurisdiction exists under § 1345 since the United States brought the action.

Although Rule 12(b)(6) may not apply perfectly to the instant motion, it seems more appropriate than 12(b)(1). A complaint is not to be dismissed under 12(b)(6) unless it appears to a certainty that no relief can be granted under any set of facts that can be proved in support of its allegations. The rule precludes dismissal except in the extraordinary case in which it appears from the complaint that there is some insuperable bar to relief. See United States v. Uvalde Consolidated Independent School District, 625 F.2d 547, 549 & n. 1 (5th Cir.1980). The controversy before the court on this motion seems to be just this: whether there is indeed some insuperable bar to relief. Accordingly, the motion will be treated as one pursuant to 12(b)(6) and the complaint must therefore be liberally construed in the light most favorable to the government and its allegations taken as true.

2. The statutes involved

Section 7407 was enacted as part of the Tax Reform Act of 1976, Pub.L.No. 94-455. It grants the Secretary of Treasury the power to seek an injunction in any district court prohibiting an income tax return preparer from engaging in specific practices or from acting as a preparer. The injunction may be sought against a preparer's (1) engaging in conduct subject to penalty under section 6694 or 6695 or subject to any criminal penalty, (2) misrepresenting his eligibility to practice before the IRS, experience, or education, (3) guaranteeing the payment of any tax refund or the allowance of any tax credit, or (4) engaging in any other fraudulent or deceptive conduct which substantially interferes with the internal revenue laws. However, § 7407(c) provides that the preparer can preclude an injunction action pursuant to § 7407(b)(1)(A) relating to conduct subject to penalty by filing a bond of $50,000 as surety for the payment of penalties.

The other statute under which the government seeks an injunction, § 7402(a), is much more general than § 7407. Enacted a decade before § 7407, § 7402(a) gives the district courts jurisdiction to issue injunctions, inter alia, to enforce the internal revenue laws. It also provides that the "remedies hereby provided are in addition to and not exclusive of any and all other remedies ... to enforce such laws."

3. E...