US v. Venie, Civ. No. 88-0454.

• Decision Date: 19 April 1988
• Docket Number: Civ. No. 88-0454.
• Citation: 691 F. Supp. 834
• Parties: UNITED STATES of America, Plaintiff, v. Arthur G. VENIE, d/b/a Convenience Income Tax Service, Defendant.
• Court: U.S. District Court — Middle District of Pennsylvania

691 F. Supp. 834

UNITED STATES of America, Plaintiff, v. Arthur G. VENIE, d/b/a Convenience Income Tax Service, Defendant.

Civ. No. 88-0454.

United States District Court, M.D. Pennsylvania.

April 19, 1988.

Sally A. Lied, Asst. U.S. Atty., Harrisburg, Pa., Robert K. Coulter, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for plaintiff.

Arthur G. Venie, Convenience Income Tax Service, Harrisburg, Pa., for defendant.

MEMORANDUM

HERMAN, District Judge.

Procedural Background

On March 25, 1988, the plaintiff, United States of America ("government"), filed the present action against the defendant, Arthur G. Venie, d/b/a Convenience Income Tax Service ("Venie"), requesting that this Court enter preliminary and permanent injunctions to enjoin Venie from acting as an income tax return preparer.

The government also filed a motion for a temporary restraining order. A hearing on the motion for a temporary restraining order was held March 29, 1988. After hearing the testimony of James Carmody (group manager of the Examination Division of the Internal Revenue Service ("IRS"), Harrisburg, PA), Stephan Butler (tax auditor, IRS, Harrisburg, PA), and Venie, the court issued a temporary restraining order which enjoined Venie from preparing any federal income tax return or portion thereof and from employing any persons to prepare returns at his direction or under his control. In addition, the court scheduled a hearing on the government's request for preliminary injunctive relief for April 6, 1988, in order to provide Venie with the opportunity to retain counsel and to present evidence.

At the hearing conducted April 6, 1988, the government offered the testimony of several taxpayers whose tax returns had been prepared by Venie for the tax years 1984-86, and the testimony of Clyde Cooper, a special agent of the Internal Revenue Service who, in an undercover capacity, employed Venie to prepare his 1986 federal income tax return. The government also offered into evidence the affidavits of various other taxpayers whose tax returns had been prepared by Venie.

Proceeding pro se, Venie also testified at the hearing. He offered into evidence three newspaper articles,¹ eleven "Reports of Individual Income Tax Examination Changes" issued by the IRS to various taxpayers whose tax returns Venie had prepared, and correspondence to Venie from the District Counsel of the IRS dated January 4, 1988.

Factual Background

On January 7, 1987, the Examination Division of the IRS in Harrisburg, PA, opened a "preparer project"² to examine returns prepared by Venie for the tax years 1984-86. Up to the date of March 29, 1988, the IRS had examined approximately 1,600 tax returns prepared by Venie. The amount of the deficiency per return has averaged in excess of $1,025.00. So far, the IRS has spent 3,000 hours on this preparer project. The examination of one return takes approximately two hours. The IRS expects to examine 2,800-3,000 returns by the completion of the project. This total figure represents approximately 75% of the returns prepared by Venie for the tax years 1984-86.

Upon finding a deficiency in a tax return prepared by Venie, the IRS meets with the taxpayer. Some taxpayers pay their deficiency immediately (the records indicate that $150,000 in deficiencies has been paid); other taxpayers agree to pay the deficiency periodically (currently, the IRS has agreements for payment in the amount of $900,000). The IRS has been unsuccessful in contacting 150 taxpayers who owe taxes for deficiencies.

The IRS estimates the gross value of the understatement for those returns prepared by Venie for the tax years 1984-86 to be $1,000,000 per year. The IRS also estimates that approximately one of ten families in the Greater Harrisburg Area has been affected by this case. Most of these families are low-income families.

In order to successfully complete this project, the IRS has had to borrow tax auditors from other districts, employ additional clerical personnel, and utilize the Philadelphia Service Center.³

Discussion

District courts are statutorily authorized to issue injunctions at the request of the United States for the enforcement of the internal revenue laws. Section 7402 of Title 26, U.S.C., provides the following:

The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions ... orders of injunction ... 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.

26 U.S.C. § 7402(a). In addition to this general grant of authority to issue injunctions, district courts are specifically authorized to enjoin income tax preparers from engaging in certain prohibited conduct. Section 7407 provides that:

... 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....

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

(1) that an income tax 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.

26 U.S.C. § 7407.

Our first step is to determine whether Venie is an income tax return preparer under 26 U.S.C. § 7701(a)(36).⁴ He calls himself a "Personal Income Tax Specialist" with 14 years experience. He charges a flat fee of $25.00 to prepare a non-itemized return and $35.00 to prepare an itemized return. Venie operates his business under the name of "Convenience Income Tax Service" and employs persons to aid him in the preparation of returns. He admits to having serviced at least 500 clients in 1984, 700 clients in 1985, and 1,000 clients in 1986. The government has introduced into evidence various taxpayer's returns with Venie's signature on the "Paid Preparer's Signature" line. See Plaintiff's Exhibits 3-19. Clearly, these facts reveal that under the internal revenue laws Venie is an income tax return preparer.

We must next determine if Venie, as a tax return preparer, has engaged in such conduct enumerated in subsection (b)(1) of 26 U.S.C. § 7407. Accordingly, we find that Venie has (1) engaged in conduct subject to penalty under 26 U.S.C. § 6694; (2) guaranteed the payment of tax refund; and (3) engaged in other fraudulent or deceptive conduct which substantially interferes with the proper administration of the internal revenue laws. 26 U.S.C. § 7407(b)(1)(A), (C), (D).

Section 6694 provides that if a tax return preparer's understatement of liability is due to negligent or intentional disregard of rules and regulations or due to a willful attempt to understate liability, then such person shall pay either $100 per return or $500 per return respectively.⁵ Although, at this point, we do not need to determine whether Venie's understatement constitutes negligence, intentional disregard, or willfulness, we do find that on most tax returns he prepared, Venie consistently understated tax liability with full knowledge that the taxpayer was not entitled, under the internal revenue laws, to such a tax refund. Venie's understatement of tax liability falls into two categories. First, Venie consistently filed returns under the status "Head of Household" regardless of whether the person met the requirements for "Head of Household" status.⁶ Second, Venie consistently overstated the amount of the taxpayer's child care expenses. In our view, Venie's conduct is clearly that conduct to which 26 U.S.C. § 6694 is addressed.

We also find that Venie, at least on one occasion, has guaranteed the payment of tax refunds. Clyde Cooper, the IRS undercover agent whose testimony we find credible, testified that Venie asked him whether he wanted to owe money to the IRS or to make money. When Cooper asked Venie to clarify this remark, Venie allegedly stated that if Cooper and his wife filed joint tax returns, they would owe money; if they each filed "Head of Household," they would make money. Cooper's testimony is the only direct evidence on this point. However, several taxpayers testified that they learned of Venie by word of mouth. See, e.g., Plaintiff's Exhibits 16, 17, 18. Because most taxpayers for whom Venie prepared returns received refunds, it would seem that part of the reason friends and neighbors recommended Venie was due to his implicit "guarantee" of a tax...