United States v. Howard Musin, Jill Schwartz-Musin, SSC Servs., Inc., 4:09–cv–00062–JAJ–CFB.

• Decision Date: 12 July 2011
• Docket Number: No. 4:09–cv–00062–JAJ–CFB.,4:09–cv–00062–JAJ–CFB.
• Citation: 953 F.Supp.2d 944
• Parties: UNITED STATES of America, Plaintiff, v. Howard MUSIN, Jill Schwartz–Musin, SSC Services, Inc., M–S Services, Inc., Schwartz's Systems Corporation, Defendants.
• Court: U.S. District Court — Southern District of Iowa

953 F.Supp.2d 944

UNITED STATES of America, Plaintiff,
v.
Howard MUSIN, Jill Schwartz–Musin, SSC Services, Inc., M–S Services, Inc., Schwartz's Systems Corporation, Defendants.

No. 4:09–cv–00062–JAJ–CFB.

United States District Court,
S.D. Iowa,
Central Division.

July 12, 2011.

[953 F.Supp.2d 946]

Beatriz T. Saiz, Geoffrey J. Klimas, Ann C. Reid, Miranda J. Bureau, Robert E. Fay, Sean Patrick Beaty, Washington, DC, for Plaintiff.

Ronald L. Mountsier, Dickinson Mackaman Tyler & Hagen PC, Des Moines, IA, for Defendants.

ORDER
JOHN A. JARVEY, District Judge.

This matter comes before the court pursuant to trial on the merits of this case in which the government seeks to enjoin the defendants from engaging in income tax preparation services. The court held an eight-day trial between January 10 and January 20, 2011. The court grants the government's requested injunction.

This case is primarily about the defendants' preparation of tax returns for small, home based businesses. The evidence showed a consistent pattern of abuse by the defendants on these returns. To the Musins, the ownership of a small business has been treated as a license to convert almost any of one's personal expenses into business deductions. According to them, if you believe that looking successful helps make you successful, your clothes, hair care, and manicures are deductible. If your dog barks while you are away from your home based business, it's deductible. If your child's nanny ever answered the business phone, the nanny is deductible. If you visit a business associate while on vacation, it is deductible. If you pay rent to yourself, or even if you don't, it's deductible. If you have a six year old child, payments to the child are deductible employee expenses. If you have used your living room television in a business meeting, it's deductible. And your hobbies, like scuba diving, pet cats and flying, easily deductible. It is not any one client or any particular deduction that is at issue here. It is a wholesale pattern of taking deductions without justification that entitles the government to injunctive relief.

The Court makes the following findings of fact and conclusions of law.

I. Findings of Fact A. Background

Defendants Jill Schwartz–Musin and Howard Musin are income tax preparers who specialize in preparing returns for home-based business. Musin and Schwartz–Musin primarily conduct business through Corporate Defendant SSC Services, Inc., but Schwartz–Musin also operates Corporate Defendants M–S Services, Inc. and Schwartz's Systems Corporation.

Schwartz–Musin worked for the IRS between 1972 and 1978, for part of that time as a Special Agent in the Criminal Investigation Division. (Tr. 25:2–8). Schwartz–Musin began preparing federal tax returns for clients in 1982. (Tr. 26:5–9). In 1987, she was barred from representing taxpayers in disputes with the IRS for falsely holding herself out to customers as a CPA. (Ex. 1027, Tr. 44:17–18). In particular, the IRS found:

Ms. Schwartz executed powers of attorney, Form 2848, indicating that she was a CPA licensed to practice in the state of Iowa. A check with the Iowa Society of Certified Public Accountants determined that this was not true.

...

The District Director's position is that by using the designation CPA in her dealings with the Internal Revenue Service when she was not a CPA, Ms. Schwartz gave false or misleading information to the Department of the Treasury and its employees [violating Section 10.51(b) of Circular 230].

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(Ex. 1027). Schwartz–Musin appealed the District Director's decision, stating “I used CPA to mean current power of attorney.” (Ex 1026, Tr. 41:24–42:10). The IRS Director of Practice affirmed the District Director's decision, stating that “[Schwartz–Musin] is familiar with tax and accounting matters and as such should have reasonably known that by using the initials CPA on official forms these initials would be construed to mean Certified Public Accountant.” (Ex. 1027).

Despite the IRS bar, Schwartz–Musin continued to represent clients before the IRS, submitting documents to the IRS during client audits, (Tr. 54:13–23), and once accompanying a client to an audit and answering questions posed by the examiner. (Tr. 61:8–62:1).

During audits in 1996 and 1997, Schwartz–Musin submitted back-dated leases to the IRS in an attempt to substantiate deductions she took for clients' rent expenses. In 2000, a grand jury in the Southern District of Iowa indicted Schwartz–Musin on eleven counts of obstructing the administration of the internal revenue laws and four counts of willfully failing to file federal income tax returns for her corporation. United States v. Musin, No. 4:00–CR–66 (S.D.Iowa July 28, 2000). Schwartz–Musin pled guilty in this Court to one count of obstructing the administration of internal revenue laws in violation of 26 U.S.C. 7212(a). Id. She received a sentence of ninety days in a community corrections facility, five months of home confinement, one year of probation, and a $15,000 fine. Id.

Howard Musin has been working with Schwartz–Musin since approximately 1991, and they prepare returns through SSC Services, Inc. (Tr. 33:12–13). Schwartz–Musin stopped signing returns in 2002 or 2003, and Howard Musin now reviews and signs all returns prepared by SSC Services, including those prepared by Schwartz–Musin. (Tr. 36:18–19). Musin is an enrolled agent and is qualified to represent clients before the IRS. (Tr. 957:11–23). Schwartz–Musin works for SSC Services as an independent contractor through her corporation M_S Services, Inc.¹ (Tr. 30:5–9). Currently, Musin and Schwartz–Musin both perform preliminary work on returns, which involves examining a client's income and expense information, sometimes during an interview, and then entering the information into a computer program that generates federal returns.²

As part of its investigation of Defendants, the IRS audited 168 of Defendants' clients' tax returns from tax years 2003 to 2006. (Tr. 66:25–67:1). The IRS found almost all of those audits to contain inaccuracies—predominantly improper deductions—which have resulted in this litigation.

B. Schwartz–Musin's Tax Philosophy

Schwartz–Musin's remark during a March 12, 2005 speech aptly summarizes her tax preparation philosophy ³: “I think

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that you can write off just about everything that you do in your personal life through your business.” (Ex. 1537). And when asked at trial whether she can “call just about anything anything” on a return, Schwartz–Musin answered “I suppose given the right set of circumstances that would be true.” (Tr. 196:22–25).

Schwartz–Musin has given presentations to clients and potential clients, encouraging them to “write off their lifestyle.” To that end, she urges people to “be creative ... and look at the kind of lifestyle that you have ... and if you can find a way to write that off because you're now self-employed.” (Ex. 1534). In a March 25, 2002 presentation, Schwartz–Musin advised clients on how to write off personal vacations:

And if you want to take a trip—let's say you live in Iowa.... And so we have a lot of snow birds, and people go down to Texas or they go out to Arizona or they go over to California, and they enjoy the winter. And let's say you're in a position where you'd like to do that. Well, what you need to do is find a way of writing off that two-week trip or two-month trip, however long you're going to be gone.

(Ex. 1534).

Schwartz–Musin also advises clients to pay their children—some younger than six years old—to do chores for the business and to deduct salaries paid to the children as business expenses. (Ex. 1534, 1537). Similarly, she advises potential clients to employ their relatives in their business in order to make family-related travel a business deduction:

You want to go visit your mother for Thanksgiving.... If you're self-employed and you sponsor your mom into your business, now you're going to meet with your distributor. All of a sudden, that trip for Thanksgiving is a deductible business trip.

(Ex. 1534). Schwartz–Musin even advised clients that they could deduct ordinary books purchased at airports during travel as an “ordinary and necessary” business expense. (Ex. 1536).

A common example of Schwartz–Musin's “write-off-your-lifestyle” philosophy is the deduction of “image” expenses. In the same 2005 teleconference, she explains:

If you buy things that are either mandated by your company or that have a logo, a company logo on them, or they're ordinary and necessary for what you're doing, they are deductible business expenses. Now obviously for Mary Kay, Mary Kay has a director suit every year, so the director suit is deductible. But then you have to have shoes and a purse and a blouse and maybe a scarf to wear with that suit, that all becomes a deductible business expense, as well as the cost of having the suit cleaned or washing the blouses. If you have to buy formal clothes for a presentation or a suit for a presentation, that also is a deductible business expense.... Because again, it's your entire image, and that is the image that's listed on our sheet.

(Ex. 1536). She believes this applies equally to expenses for hair care, nail care, and makeup and has taken numerous deductions on behalf of clients for these kinds of expenses since approximately 1996 or 1997. (Tr. 182:5–8).

C. Misrepresentations of Qualifications

SSC Services has never employed a CPA, but Musin and Schwartz–Musin have

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represented otherwise on multiple occasions. From 2004 through 2008, SSC Services sent each of its clients a privacy policy, which began as follows:

CPAS, LIKE ALL PROVIDERS OF PERSONAL FINANCIAL SERVICES, ARE NOW REQUIRED BY LAW TO INFORM THEIR CLIENTS OF THEIR POLICIES REGARDING PRIVACY OF CLIENT INFORMATION. CPAS HAVE BEEN AND CONTINUE TO BE BOUND BY PROFESSIONAL STANDARDS OF CONFIDENTIALITY THAT ARE EVEN MORE STRINGENT THAN THOSE REQUIRED BY LAW. THEREFORE, WE HAVE...