U. S. v. CRUZ, et. al., U.S. App. LEXIS 14587 (11th Cir. 2010)
Appeal from United States v. Cruz, 618 F. Supp. 2d 1372, (S.D. Fla., 2008)
Opinion by retired United States Supreme Court Justice Sandra Day O'Connor.
The Court for the Southern District of Florida enjoined defendant tax return preparers (TRP) form continuing to intentionally overstate clients deductions and credits and misrepresenting eligibility to practice before the IRS, but refused to bar them from operating as TRPs, and denied plaintiff U.S.'s post judgment motion to require notifying clients of the injunction.
The U.S. appealed.
The injunction was precisely the relief 7407(b)(2) called for to prevent the recurrence of the overstatements. In denying the complete bar, the district court stressed the TRPs good faith efforts to reform their practice, as request to compel defendants to notify their customers of the Court's injunction, we remand for consideration of that proposal.
The District Court correctly relied upon the fact that each of the eleven errors outlined in the chart above decreased dramatically from 2003 to 2006, after the defendants realized the IRS was investigating them and after NTS implemented new quality control measures.
The only errors that the District Court determined were based on unreasonable positions, in violation of Section 6694(a), were occurring with decreasing frequency. The District Court appropriately concluded from this evidence that the defendants had significantly reformed their deceptive practices.
The court "may enjoin" persons from acting as tax return preparers if the statutory prerequisites are satisfied, not that it "shall" or "must" issue such an injunction. The Government's argument has also been squarely rejected by several of this Court's cases addressing parallel statutory provisions. See United States v. Ernst and Whinney, 735 F.2d 1296, 1301 (11th Cir. 1984) ("[T]he decision to issue an injunction under 7402(a) is governed by the traditional factors shaping the district court's use of the equitable remedy."); Klay v. United Healthgroup, Inc., 376 F.3d 1092, 1098 (11th Cir. 2004) ("[W]hen Congress authorizes injunctive relief, it implicitly requires that the traditional requirements for an injunction be met in addition to any elements explicitly specified in the statute.").
The District Court acted within its discretion when, based on its conclusion that its limited injunction will be effective at preventing future violations, it declined to issue the broader injunction requested by the Government. It did not rely on any clearly erroneous factual finding in exercising that discretion.
In this case, the Government brought a suit against defendants seeking to enjoin them from operating as tax return preparers. The complaint alleged that the defendants engaged in a fraudulent tax preparation scheme in which they would intentionally overstate deductions and credits on their clients tax returns in an effort to reduce their clients tax liabilities and increase their refunds. It further alleged that the defendants made various misrepresentations regarding their eligibility to practice before the IRS.
The District Court found that the defendants had engaged in deceptive practices in preparing tax returns and issued an injunction specifically prohibiting them from further engaging in any such conduct. It declined to completely bar them from operating as tax return preparers, as the Government requested, finding such an extreme measure was unwarranted under the circumstances of the case.
The District Court also denied a post-judgment motion filed by the Government seeking to require the defendants to notify their clients of the Court's injunction. The Government now brings this appeal. It argues that the District Court abused its discretion when (1) it did not completely enjoin defendants from acting as tax return preparers, and (2) it refused to require defendants to notify their customers of the injunction.
We find that the District Court was within its discretion in finding that such a broad injunction was not warranted under the facts of this case. But because the District Court failed to give any reasons for rejecting the evidenced by the notable decline in evidenced by the notable decline in the number and rate of errors in the problem areas. The relevant inquiry was whether the violations had abated, not whether the average tax loss declined. Section 7407(b)(1)(A) only proscribed understatements based on unreasonable or knowingly wrong positions. So while there was evidence understatements continued after the investigation began, they were not tied to unreasonable positions as prohibited by the statute.
It was not illogical to find that educational programs could curb negligent misconduct, and the IRS was authorized to monitor the TRPs. The decision to issue the injunction was governed by the traditional factors shaping equitable remedies. The postjudgment motion was denied without comment, thus it was not possible to know if the district court properly or improperly exercised its discretion. That denial was vacated and on remand, finding and an explanation were needed.
The district court's judgment was affirmed as to denying the complete bar, but because the district court failed to give any reasons for rejecting the request to compel the TRPs to notify their clients of the injunction, that order was vacated and remanded for consideration of that proposal.
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