Page 4 - Tax Controversy Corner: The Internal Revenue Code Injunction Statutes

Tax CoNTroversY CorNer

injunction, to display a copy of the permanent injunction The Department of Justice and the federal courts rou-
on every page of their websites, and to provide a copy tinely use injunction actions as a way to prevent fraudu-
of the judgment to all of their employees, independent lent return preparation and tax shelter activity, using the
contractors, agents, directors, and officers. Finally, but equitable remedies in the injunction statutes to enforce the
36
perhaps most significantly, the government seeks an tax law and to put unscrupulous preparers and promoters
order under Code Sec. 7402(a) to require the defendants out of business. While civil tax and promoter penalties
to disgorge the gross receipts “that Defendants received are also a deterrent to bad actors, injunction actions may
from any source as a result of the abusive conservation serve as a greater deterrent, as they are public proceedings
easement syndication scheme described herein, together and also present the risk of substantial monetary loss in
with prejudgment interest thereon.” 37 the form of disgorgement.

ENdNotEs
* Ms. Brackney focuses her practice in the areas which claimed that the 16th amendment to the appointed to prevent promoters of energy tax

of civil and criminal tax controversies. she Constitution was not ratified and encourag- credit scheme from retaining their “ill-gotten
attended the University of Kansas school of Law ing taxpayers not to pay federal income tax); gains.”); Stinson, 239 Fsupp3d 1299 (M.D. Fla
and received her LL.M. in Taxation from New York Gleason, Ca-6, 432 F3d 678 (2005) (enjoining pro- 2017) (disgorgement ordered where defendant’s
University. she can be reached at mbrackney@ moter of “Tax Toolbox,” which advocated deduct- “unjust enrichment was directly derived from
kflaw.com. ing weddings, college tuition, travel expenses, utilizing his LLC as ‘a conduit for improper and
1 Chipungu, 2019 WL 858164 (M.D. Fla. Feb. 26, and other ordinary household expenditures). fraudulent tax return preparation.’”), aff’d, Ca-11,
2019), adopting report and recommendation, 8 Ernst & Whinney, Ca-11, 735 F2d 1296, 1300–1301 729 Fedappx 891 (2018).
2019 WL 885667 (M.D. Fla. Jan. 25, 2019). (1984); Pugh, 717 Fsupp2d 271 (e.D.N.Y. 2010). This 20 Code sec. 7402(a); Benson, 561 F3d at 726–727;
2 Id., at *2 (internal citations omitted); see also is consistent with the statutory language that Schulz, Ca-2, 517 F3d 606 (2008).
Brown, 274 Fsupp3d 794 (N.D. Ill. 2017) (perma- actions under Code secs. 7407 and 7408 may 21 Benson, 561 F3d at 727.
nent injunction warranted based on defendant’s be brought “separate and apart from any other 22 Champion, 2012 U.s. Dist. LexIs 9191 (C.D. Cal.
repeated preparation of false returns); Heggins, action brought by the United states … .” Code Jan. 24, 2012).
240 Fsupp3d 399 (W.D. N.C. 2017) (permanent secs. 7407(a), 7408(a). 23 RaPower-3, LLC, 343 Fsupp3d 1115 (2018). The
injunction warranted where preparer repeatedly 9 Code sec. 7408(a). defendants have appealed the district court’s
claimed entirely false deductions). 10 Code sec. 7408(b)(2); Hartshorn, Ca-10, 751 F3d decision. See Case No. 18-4158 (U.s. Court of
3 See, e.g., www.justice.gov/opa/pr/federal- 1194, 1198 (2014); Stover, 650 F3d 1099. appeals, 10th Cir.).
court-bars-florida-tax-return-preparers- 11 Preservation Servs. Est., Ca-9, 202 F3d 1093, 1106 24 Id., at 1193.
preparing-tax-returns; www.justice.gov/opa/ (2000). 25 Id., at 1198.
pr/justice-department-seeks-shut-down-two- 12 Kapp, Ca-9, 564 F3d 1103, 1109 (2009); Davison, 26 Id., at 1199.
texas-tax-return-preparers; www.justice.gov/ 691 Fsupp2d 1033, 1040 (W.D. Mo. 2009). 27 Id., at 1198–1199.
opa/pr/federal-court-bars-louisiana-tax- 13 Code sec. 7407(b)(2). 28 Id., at 1193.
return-preparer-preparing-tax-returns; see also 14 Demesmin, 87 Fsupp3d 1293 (M.D. Fla. 2015); 29 See Nancy Zak et al., No. 1:18-Cv-05774-aT (N.D.
Patrick e. Tolan, Jr., It’s About Time: Registration Pugh, 717 Fsupp2d 271 (e.D.N.Y. 2010). Ga.). The allegations in the Complaint have not
and Regulation Will Boost Competence and 15 Preservation Servs. Est., 202 F3d 1093; Hinz, 126 been proven and the defendants strenuously
Accountability of Paid Tax Preparers, 31 va. Tax. Fsupp3d 921. deny them. See answer filed on February 20,
rev. 471, 482 & n. 50 (2012) (collecting DoJ press 16 Cruz, Ca-11, 611 F3d 880, 883 (2010). 2019 (Docket entry #15); see also www.justice.
releases and noting that in the past 10 years, the 17 Code sec. 7407(b)(2). McIntyre, 715 Fsupp2d 1003 gov/opa/pr/justice-department-sues-shut-
Department of Justice has “obtained injunctions (C.D. Cal. 2010) (continued and repeated conduct, down-promoters-conservation-easement-tax-
against hundreds of unscrupulous tax return preparer’s strong ideological motivation, ada- scheme-operating-out.
preparers and tax scam promoters.”). mant refusal to acknowledge the unlawfulness 30 Complaint in Nancy Zak et al., No. 1:18-Cv-05774-aT
4 Code sec. 7408(a). of conduct, and persistence in the face of Irs’s (N.D. Ga.).
5 Code sec. 7408(c) (citing 31 UsC §330). warnings warranted permanent injunction). 31 Id., at ¶¶ 4, 55–56; Code sec. 170(h).
6 A.B. Stover, Jr., Ca-8, 2011-2 ustc ¶50,582, 650 18 Hand-Bostick, 2014 U.s. Dist. LexIs 143088 (N.D. 32 Id., at ¶ 5.
F3d 1099 (enjoining promoter of structures Tex. oct. 8, 2014) (declining to permanently 33 Id., at ¶ 171 (citing Notice 2017-10, 2017-4 IrB
which involved use of Iras and employee stock enjoin defendants even though they engaged in 544 (Dec. 23, 2016)). a “listed transaction” is any
ownership plans to improperly defer tax); Hinz, conduct that violated Code secs. 6694 and 6701 transaction that is the same as or substantially
126 Fsupp3d 921 (N.D. ohio 2015) (enjoining because it was their first offense and their con- similar to one of the types of transactions that
promoter of “oID process” where taxpayers duct did not indicate that they would continue to the Irs has identified as a tax avoidance trans-
submitted false Forms 1099-oID reporting promote tax shelter activity); Broccolo, 2006 U.s. action in a notice, regulation, or other form of
large amounts of federal income tax withheld Dist. LexIs 90241 (s.D.N.Y. Dec. 13, 2006) (preparer published guidance. reg. §1.6011-4(b)(2); Code

by financial institutions to claim fraudulent enjoined from preparing individual returns due sec. 6707a(c)(2).
refunds); Cathcart, 2009 U.s. Dist. LexIs 32427 to claiming false educational tax credits on 34 Complaint in Nancy Zak et al., No. 1:18-Cv-05774-aT
(N.D. Cal. apr. 2, 2009) (enjoining promoter of over 1,500 individual returns, but permitted to (N.D. Ga.) (relief sought), at ¶¶ (a)–(e).
“90% Loans” scheme which involved the sale continue preparing corporate returns under Irs 35 Id., at ¶ (f).
of stock disguised as loans to evade tax). supervision). 36 Id., at ¶¶ (g)–(i).
7 W.J. Benson, Ca-7, 2009-1 ustc ¶50,330, 561 F3d 19 RaPower-3, LLC, 325 Fsupp3d 1237, 1248 (D. Utah 37 Id., at ¶ (m).
718 (enjoining promoter and author of book 2018) (disgorgement ordered and receiver

60 JoUrNAl of pAsstHroUgH ENtItIEs MAY–JUNE 2019