USA v. JAMES

• Decision Date: 13 April 2011
• Docket Number: CIVIL ACTION NO. 11-913
• Parties: UNITED STATES OF AMERICA, Plaintiff, v. FRIDAY JAMES, d/b/a FRIKA TAX SERVICES, Defendant
• Court: U.S. District Court — Eastern District of Pennsylvania

UNITED STATES OF AMERICA, Plaintiff,

v.FRIDAY JAMES, d/b/a FRIKA TAX SERVICES, Defendant

CIVIL ACTION NO. 11-913

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Dated: April 13, 2011

MEMORANDUM

GENE E.K. PRATTER, J.

The United States of America filed this civil action against Friday O. James, seeking to permanently enjoin Mr. James from preparing or filing income tax returns for other tax filers. The Government invokes Sections 7402, 7407, and 7408 of Title 26 of the United States Code as authority for its effort. Presently before the Court is the Government's application for a temporary restraining order against Mr. James to temporarily enjoin him under 26 U.S.C. §§ 7407 and 7408 from acting as a tax preparer on behalf of other tax filers. In the alternative, the Government moves to temporarily enjoin Mr. James from preparing federal income tax returns and amended returns that claim first-time homebuyer credits, Schedule C expenses, or certain Schedule A expenses and miscellaneous deductions, and for the Court to require Mr. James to provide notice to his past and present clients of any injunctive order issued by this Court, See Gov't Mot. (Docket No. 3); Gov't Mem. of Law (Docket No. 2); Gov't Proposed Findings of Fact and Conclusions of Law (hereinafter "Gov't Suppl") (Docket No. 12).

The Court held a hearing on the Motion on February 28, 2011, during which the parties presented arguments and evidence, and the Government called eight witnesses to testify. During the hearing, the parties indicated their accord that it is appropriate given the circumstances here for the Court only to consider the Government's alternative injunctive relief, and this was subsequently confirmed in writing to this Court.¹ Accordingly, the Court only determines the issue of the Government's alternative injunctive relief.

For the reasons and on the basis stated below, the Court grants the Government's request for a temporary restraining order to enjoin Mr. James from engaging in certain conduct to the extent described in this Memorandum.

LEGAL STANDARD

In deciding a motion for injunctive relief, such as a temporary restraining order, under 26 U.S.C. §§ 7407, 7408, the Court considers both statutory and equitable criteria. The statutory factors arise under Sections 7407 and 7408, which authorize district courts to provide injunctive relief to enforce the United States Internal Revenue Code (the "IRC") consistent with the Court's jurisdiction pursuant to 26 U.S.C. § 7402(a).² Specifically, in order to issue an injunction a court must find under 26 U.S.C. § 7407(b) that: (1) the defendant is a tax preparer, (2) conduct is within one of the four areas of conduct identified under Section 7407(b)(1), and (3) injunctive relief is appropriate to prevent the recurrence of the proscribed conduct. See United States v. Franchi, 756 F. Supp. 889 (W.D. Pa. 1991).³ Similarly, before granting injunctive relief, the Court must find under Section 7408(b) that: (1) the defendant engaged in certain prohibited conduct under Section 7408(c), and (2) injunctive relief is appropriate to prevent the recurrence of such conduct. See United States v. Bell, 238 F. Supp. 2d 696, 705 n.8 (M.D. Pa. 2003), aff'd on other grounds, 414 F.3d 474 (3d Cir. 2005).⁴

Despite the Government's contention that the Court need only consider these statutory factors because both IRC provisions expressly authorize injunctive relief, the Court also considers the customary equitable criteria for granting injunctive relief.

First, the Court finds it appropriate to consider the equitable criteria in order to determine the propriety of injunctive relief in preventing the recurrence of conduct, which subparts (b)(2) of Sections 7407 and 7408 require. See Franchi, 756 F. Supp. 889; United States v. Venie, 691 F. Supp. 834 (M.D. Pa. 1988).⁵

Second, the Court does not find that the statute expressly precludes the Court's consideration of the general equitable factors, because neither Section 7407 nor Section 7408 limit the Court's jurisdiction in equity. Indeed, unless a statute explicitly provides to the contrary, district courts must consider the traditional equitable standard when deciding to grant equitable relief. United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483, 496 (2001) ("[W]hen district courts are properly acting as courts of equity, they have discretion unless a statute clearly provides otherwise."); Weinberger v. Romero-Bacelo, 456 U.S. 305, 313 (1982) ("The grant of jurisdiction to ensure compliance with a statute hardly suggests an absolute duty to do so under any and all circumstances, and a federal judge sitting as chancellor is not mechanically obligated to grant an injunction for every violation of law." (citations omitted)); Porter v. Warner Holding Co., 328 U.S. 395, 398 (1946) ("Unless a statute in so many words, or by a necessary and inescapable inference, restricts the court's jurisdiction in equity, the full scope of that jurisdiction is to be recognized and applied."). "Of course, Congress may intervene and guide or control the exercise of the courts' discretion, but we do not lightly assume that Congress has intended to depart from established [equity] principles." Romero-Bacelo, 456 U.S. at 313 (citing Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944)).

Here, the language of Sections 7407 and 7408 does not explicitly provide that Congress intended to mandate injunctive relief under a particular set of circumstances and thereby displace the Court's discretion when it acts in equity. Both Sections use permissive terms, specifically, "the court may enjoin," as well as language that compels the Court to exercise its discretion in determining "that the injunctive relief is appropriate to prevent the recurrence of such conduct." Such statutory language suggests the Court's equitable discretion is unaffected and that the customary equitable standard applies in considering the Government's Motion. See Flynn v. United States, 786 F.2d 586, 591 (3d Cir. 1986) (finding that the language of Section 6213(a) of the IRC, 26 U.S.C. § 6213(a), by providing that certain activities "may be enjoined," was indicative that "equitable relief is not mandatory in all such cases, but instead lies within the discretion of the court, [and thus] there is no reason to cast off those principles that traditionally have informed the exercise of a court's broad equity powers.").⁶ Accordingly, the Court shall proceed to consider and apply the equitable standard in determining whether the injunctive relief "is appropriate" to prevent recurrent conduct pursuant to Sections 7407 and 7408. The equitable standard requires the Court to evaluate four factors: "(1) the likelihood that the moving party will succeed on the merits; (2) the extent to which the moving party will suffer irreparable harm without injunctive relief; (3) the extent to which the nonmoving party will suffer irreparable harm if the injunction is issued; and (4) the public interest." Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 562 F.3d 553, 556 (3d Cir. 2009) (quoting McNeil Nutritionals, LLC v. Heartland Sweeteners, LLC, 511 F.3d 350, 356-357 (3d Cir. 2007)).

FINDINGS OF FACT⁷

Based on the evidence and the parties' arguments, the Court finds as follows:

1. Mr. James operates a business called Frika Tax Services located in Philadelphia, Pennsylvania.

2. Mr. James prepares federal income tax returns on behalf of his clients for compensation.

3. Frika Tax Services has several employees who assist Mr. James.

4. Mr. James completed training online with the Internal Revenue Service ("IRS").

5. Mr. James has worked for several years in the tax preparation business and previously worked for H&R Block and Liberty Tax Service.

6. Mr. James's name is used as the tax preparer on tax returns prepared at Frika Tax Service. Using an Electronic Filing Identification Number ("EFIN"), Mr. James electronically files many of his clients' tax returns.

7. The IRS is conducting an investigation of Mr. James to determine whether he has engaged in conduct subject to penalty and injunction under 26 U.S.C. §§ 6701, 6694, 7402, 7407. As part of the investigation, IRS revenue agents and tax compliance officers have audited tax returns prepared by Mr. James, conducted interviews with some of Mr. James's clients, and reviewed IRS computer reports reflecting data on Mr. James's return preparations. Auditing the individual returns prepared by Mr. James has been time and labor intensive; seven to ten revenue agents and tax compliance officers have been assigned to audit returns prepared by Mr. James. Additionally, the IRS executed a search warrant at Frika Tax Services in April 2010.

8. An IRS revenue agent contacted Mr. James by mail in September 2010 to notify him that he was under investigation for his return preparations and that he may face penalties or injunctive action.

9. The IRS has identified 717 federal income tax returns that Mr. James electronically filed using his EFIN for the processing year 2009, which processing year includes returns for the 2008 tax year.

a. 157 of the 717 returns claimed the first-time homebuyer credit (the "FTHB credit"). The IRS audited 26 of those 157 returns claiming the FTHB credit and determined that only one of Mr. James's clients from these 26 returns was entitled to the FTHB credit.

b. As of October 7, 2010, IRS records reflect that the IRS disallowed the FTHB credit on 102 returns that Mr. James prepared for the 2008 tax year. The total amount owed for the 102 returns prepared by Mr. James for the 2008 tax year claiming the FTHB credit for taxpayers who did not qualify is $776,500.

10. The IRS has identified that Mr. James filed 33 amended federal income tax returns that claimed the FTHB credit for the 2008 tax year.

a. The IRS audited each of the 33 amended returns and determined that among those 33 returns only two of Mr. James's clients...