Wooley v. Jackson Hewitt, Inc.
| Decision Date | 25 March 2008 |
| Docket Number | No. 07 C 2201.,07 C 2201. |
| Citation | 540 F.Supp.2d 964 |
| Parties | Brent WOOLEY, on behalf of himself and all others similarly situated, Plaintiff, v. JACKSON HEWITT, INC., a wholly owned subsidiary of Jackson Hewitt Tax Services, Inc.; Farrukh Sohail; Smart Tax, Inc. d/b/a Jackson Hewitt Tax Service; Ask Tax, Inc. d/b/a Jackson Hewitt Tax Service; and Certain Unknown Jackson Hewitt Franchisees # 1-100, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Clinton A. Krislov, Elizabeth H. Neugent Dixon, Matthew Reasor Bowman, Krislov & Associates, Ltd., Donald A. Statland, Attorney at Law, Chicago, IL, for Plaintiff.
Christina M. Tchen, Gretchen Maria Wolf, Skadden Arps Slate Meagher & Flom, LLP, Barry A. Spevack, Michael D. Monica, Theodore R. Eppel, Monica, Pavich & Spevack, Chicago, IL, Benjamin B. Klubes, Michael P. Kelly, Vanessa A. Nessmith, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, Edward Alan Cohen, Cohen & Hussien, P.C., Worth, IL, for Defendants.
Brent Wooley ("Plaintiff") brings this purported class action against Jackson Hewitt, Inc. ("Jackson Hewitt"), Farrukh Sohail ("Sohail"), Smart Tax, Inc. ("Smart Tax"), Ask Tax, Inc. ("Ask Tax") and unknown Jackson Hewitt Franchisees ("Franchisees") (collectively "the Defendants") alleging fraud in connection with Defendants' tax preparation services. Plaintiff alleges a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and state law claims for consumer fraud, breach of contract, and unjust enrichment. (R. 37, Second Amended Complaint ("SAC").) Presently before the Court are motions to dismiss filed by Jackson Hewitt (R. 49); Sohail and Smart Tax (R. 51); and Ask Tax (R. 59). For the following reasons, the motions are granted in part and denied in part.
Jackson Hewitt is the second largest income tax preparation company in the United States. (R. 37, SAC ¶ 5.) Jackson Hewitt operates its business with a combination of both Jackson Hewitt-owned offices and franchised offices, all of which bear the logo "Jackson Hewitt." (Id.) The franchised offices are operated pursuant to a Jackson Hewitt Franchise Agreement and operating manual, under which Jackson Hewitt supervises, directs, and controls all office operations. (Id.) There are 6,051 company-owned and franchised Jackson Hewitt offices in the United States. (Id.)
Sohail is the owner of more than 125 Jackson Hewitt franchise stores in various cities, including Chicago, Illinois; Atlanta, Georgia; Birmingham, Alabama; Detroit, Michigan; and Raleigh, North Carolina. (Id. ¶ 6.) Sohail and his wife are the owners and sole shareholders of Smart Tax, which operates at least 27 Jackson Hewitt franchise stores in the Chicago area. (Id. ¶ 7.) Sohail also "directly owns or controls" Ask Tax, which operates eight Jackson Hewitt franchise stores in the Chicago area. (Id. ¶ 8.) Sohail's stores prepared over 105,000 federal income tax returns in 2006. (Id. ¶ 6)
Plaintiff, who is employed by the United States Postal Service, engaged Jackson Hewitt to prepare his tax return for tax year 2002-2003. (Id. ¶ 4.) Plaintiff went to one of the Chicago area Jackson Hewitt stores, which he believes Sohail owned. (Id. ¶ 17.) Plaintiff's return was prepared by Jackson Hewitt employee Toya Neal ("Neal"). (Id. ¶ 4.) According to Plaintiff, Neal included false charitable and other deductions on his tax return which he did not authorize. (Id.) Plaintiff alleges that he nonetheless "signed his return and filed it in the form prepared by Jackson Hewitt, relying on Jackson Hewitt's purported competency and accuracy." (Id. ¶ 21.) Plaintiff's tax return was subsequently audited by the Internal Revenue Service ("IRS"), which disallowed the deductions and charged Plaintiff taxes, penalties, and interest. (Id. ¶ 22.)
After paying these charges, Plaintiff sought reimbursement from Jackson Hewitt. (Id.) As a guarantee of its competence, Jackson Hewitt provides both a "Basic Guarantee" and a "Gold Guarantee." (Id. ¶ 12.) The Basic Guarantee, which is included in the cost of the tax preparation service, provides that "if Jackson Hewitt makes an error in your tax preparation, although Jackson Hewitt does not pay any additional tax assessed, Jackson Hewitt will reimburse you for any penalty or interest, which you must pay on such tax." (Id. ¶ 13.) The Gold Guarantee, offered for an additional $30, provides additional protection to taxpayers. (Id. ¶ 14.) Plaintiff purchased the Gold Guarantee at the time Neal prepared his taxes. (Id. ¶ 16.) The Gold Guarantee provides:
If the additional service is purchased at the time your tax return is prepared, Jackson Hewitt guarantees that in the event you must pay additional tax over and above what your tax return shows as a result of an error by Jackson Hewitt in the preparation of your individual tax return, you will be reimbursed for such additional tax up to a cumulative total of $5,000 for all tax returns covered hereunder.... Reimbursement under this Gold Guarantee is over and above the Basic Guarantee of reimbursement for penalty and interest."
(Id. ¶ 14.) The Gold Guarantee does not apply in certain situations, including where: the taxpayer provided incorrect or incomplete information to Jackson Hewitt; the taxpayer intended to defraud Jackson Hewitt or the IRS; or the taxpayer is "unable to produce sufficient or appropriate records to support [his or her] tax position before the government." (Id. ¶ 15 & Ex. 1, Agreement.)
In February 2005, Jackson Hewitt denied Plaintiffs request for reimbursement under the Gold Guarantee. (Id. ¶ 23.) According to the letter Plaintiff received, Jackson Hewitt determined that Plaintiff's damages were not covered under the Gold Guarantee for the following reason: "Our investigation indicates that you were unable to produce sufficient or appropriate records to support your tax position before the government regarding deductions claimed on your return." (Id. ¶ 23 & Ex. 2, Letter.)
Plaintiff alleges that Neal prepared tax returns for two other postal workers in 2002-03 and included false deductions in their returns as well. (Id. ¶ 24 & Ex. 3, Statements.) These deductions were also disallowed by the IRS, and Plaintiff alleges that Jackson Hewitt similarly refused to honor its guarantees to pay the taxes, interest, and penalties charged to these individuals. (Id. ¶ 24.) Plaintiff further alleges that there are numerous other taxpayers who were induced to file returns in reliance on Jackson Hewitt's competency and accuracy, and "to pay extra for the Gold Guarantee on returns whose items defendants knew would not stand up to an audit and for which no guarantee would be paid either." (Id. ¶¶ 25-26.)
In April 2007, the United States government filed a complaint seeking permanent injunctive relief against Smart Tax, Sohail, and other individual defendants, alleging that they engaged in "a pervasive and massive series of tax-fraud schemes."2 The government alleged that, among other actions, Sohail and his companies failed to teach income tax preparers critical elements related to tax return preparation, procedures for detecting fraudulent documents, or methods to question customers who provide questionable, suspicious, or fraudulent information. (Id., Compl.) According to the government, "[t]his lack of training directly contributes to the preparation of inaccurate, incomplete, and false tax returns." (Id. ¶ 11.) In October 2007, a consent judgment was entered permanently enjoining Sohail from acting as a federal income tax return preparer or otherwise preparing tax returns for anyone other than himself, his wife, or any corporations he owns. (Id., Consent Judgment.)
Also in April 2007, the United States government filed an action in the Northern District of Illinois raising similar allegations against Sohail and the employees at his Jackson Hewitt franchises in the Chicago area. (United States v. Smart Tax, Inc., No. 07-1802, 2007 WL 1061560 (N.D. Ill. filed Apr. 2, 2007), Compl.) Following the entry of the consent judgment in the Georgia case, the parties in the Illinois case, presided over by District Judge Blanche Manning, entered a stipulation of dismissal against Sohail; Judge Manning also entered a consent judgment against Smart Tax and Ask Tax permanently enjoining them from acting as federal income tax return preparers. (Id., R. 26, Consent Judgment.)
As a result of the consent judgments entered in the two government cases, Jackson Hewitt has agreed to buy back Sohail's franchises and will pay $19 million for some of the more than 150 franchises Sohail owns throughout the country. (R. 37, SAC ¶ 30.)
In April 2007, Plaintiff filed this suit challenging Jackson Hewitt's alleged practice of "creating fraudulent customer returns without authorization, input, or evidence provided by the customer," coupled with its failure to honor its guarantees "when Jackson-Hewitt-created items are challenged and disallowed by the IRS." (R. 37, SAC ¶ 1.) In the SAC, Plaintiff alleges the following claims: in Count I, a claim under the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/1, et. seq. ("ICFA"); in Count II, a claim under RICO; in Count III, a state law claim for unjust enrichment; and in Count IV, a state law claim for breach of contract. Jurisdiction is premised on the Class Action Fairness Act ("CAFA"), 28 U.S.C. 1332(d).
The Defendants move to dismiss the SAC in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6). (R. 49, 51, 59.)
When deciding a motion to dismiss under Rule 12(b)(6), the Court assumes all well-pleaded allegations in the complaint to be true and draws...
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