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United States v. Marty

July 29, 2009

UNITED STATES OF AMERICA, PLAINTIFF,
v.
TERESA MARTY, DBA ADVANCED FINANCIAL SERVICES, LLC, DEFENDANT.



ORDER AND FINDINGS AND RECOMMENDATIONS

This matter was before the court on July 15, 2009, for hearing on the government's motion for a preliminary injunction.*fn1 Plaintiff, the United States, was represented by John Monroe, Trial Attorney, U.S. Department of Justice, Tax Division. Defendant, Teresa Marty, d/b/a Advanced Financial Services, LLC, appeared and represented herself. After consideration of the moving and opposing papers and the argument at the hearing, and for the reasons set forth below, the court recommends that plaintiff's motion be granted.

BACKGROUND

On March 4, 2009, plaintiff filed the underlying complaint seeking to enjoin defendant from engaging in alleged violations of the Internal Revenue Code. Defendant is engaged in the business of preparing tax returns that allegedly claim fraudulent refunds. Plaintiff has shown that the Internal Revenue Service ("IRS") has received at least 110 fraudulent federal income tax returns prepared by Marty in 2008 and 2009. Those returns resulted in at least $6.9 million in erroneous refunds to Marty's "clients" and over $26 million in fraudulent refunds claimed by her clients. Pl.'s Mot. for Prel. Inj., Exs. in Supp. Thereof, Henline Decl. Her method for this scheme is to claim on the clients' tax returns, as federal tax withheld, the amount of the clients' debt and payments to creditors rather than the amount actually withheld on behalf of the clients. The result is a grossly inflated amount reported on the clients' form 1040 as withheld federal taxes. Id.

Plaintiff's instant motion for preliminary injunction is made pursuant to 26 U.S.C. § 7402 (action to enforce internal revenue laws), 26 U.S.C. § 7407 ("action to enjoin tax return preparers"), and 26 U.S.C. § 7408 ("action to enjoin promoters of abusive tax shelters").

DEFENDANT'S OPPOSITION

In response to the motion, defendant has filed several documents challenging the jurisdiction of this court, and the authority of the United States to pursue this action.*fn2 See, e.g., Dckt. No. 13 (entitled "(Alleged) Defendant's Answer; Objection and Motion for Order for Ratification of Commencement; Motion for Dismissal with Prejudice"), No. 14 ("Mandatory Judicial Notice"), No. 19 ("Objections"), No. 28 ("Objections"), and No. 31 ("Declaration").

Defendant's arguments include the assertion that the United States may not pursue an action on behalf of the IRS; that "internal revenue" does not include "income;" and that the IRS and the United States District Courts "are willfully co-operating under a collusive misapplication of internal revenue BATF [Bureau of Alcohol, Tobacco and Firearms] administrative and procedural regulations in a conspiracy of silence to institute administrative and jurisdictional frauds under color of law, in criminal violation of 18 U.S.C. §§ 241, 242" (criminal statutes which provide no private right of action), Def.'s Objs., Dckt. No. 28, at p. 4. The court construes these filings as defendant's statements in opposition to the present motion, and in support of defendant's arguments made at the hearing on this matter. The court has duly considered the several statutes upon which defendant (and plaintiff) relies (and for which defendant has unnecessarily sought "judicial notice").*fn3 The court has reviewed defendant's contentions and, for the reasons that follow, finds them without merit.

PRELIMINARY INJUNCTION STANDARDS

"The proper legal standard for preliminary injunctive relief requires a party to demonstrate 'that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.'" Stormans, Inc. v. Selecky, ___F.3d. ___, 2009 WL 1941550 at *13 (9th Cir. July 8, 2009) (quoting Winter v. Natural Res. Def. Council, Inc., ___ U.S. ___, 129 S.Ct. 365, 375-76 (2008)). However, the general requirements for equitable relief are tempered by the specific criteria set forth in the internal revenue statutes relied upon here which expressly authorize preliminary injunctive relief. See, e.g., United States v. Estate Preservation Svcs, 202 F.3d 1093, 1098 (9th Cir. 2000) ("[t]he traditional requirements for equitable relief need not be satisfied since Section 7408 expressly authorizes the issuance of an injunction"); United States v. Reddy, 500 F. Supp.2d 877, 881 (N.D. Ill. 2007) ("[b]ecause IRC §§ 7407 and 7408 set forth the criteria for injunctive relief, the United States need only meet those criteria, without reference to the traditional equitable factors, for an injunction to issue under these sections" (citation and internal quotation omitted)).

Title 26 U.S.C. Section 7402 provides for entry of a preliminary injunction upon the showing by the United States that such an order "may be necessary or appropriate for the enforcement of the internal revenue laws."*fn4 26 U.S.C. § 7402(a). Section 7407 of Title 26 U.S.C. provides for entry of a preliminary injunction prohibiting a party from acting as an income tax return preparer where the United States shows a likelihood of success on the merits of a claim "that [defendant] has continually or repeatedly engaged in [proscribed] conduct . . . , and that an injunction prohibiting such conduct would not be sufficient to prevent such person's interference with the proper administration of this title." 26 U.S.C. § 7407 (b)(2). The conduct proscribed by this statute includes conduct that is "subject to penalty under section 6694 ['understatement of taxpayer's liability by income tax return preparer'] or 6695 [obligations and responsibilities of tax preparer]," and "any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws." 26 U.S.C. § 7404(b)(1)(A), (D). Under section 7408, the United States must demonstrate a likelihood of success on the merits "(1) that [defendant] has engaged in any specified conduct [conduct subject to penalty under §§ 6700 and/or 6701], and (2) that injunctive relief is appropriate to prevent recurrence of such conduct." 26 U.S.C. § 7408(b), (c). Section 6700 proscribes, inter alia, the promotion of abusive tax shelters, while section 6701 proscribes aiding and abetting understatement of tax liability.

As discussed below, the court finds that preliminary injunctive relief is necessary here for the United States to enforce the internal revenue laws, as well as to halt the preparation and filing of further fraudulent tax documents and claims.

ANALYSIS

Here, the government has shown that Defendant Teresa Marty operates a business in Placerville, California, under the name Advanced Financial Services, LLC, preparing tax returns for others in exchange for compensation. Pl.'s Mot. for Prel. Inj., Ex. is Supp. Thereof, Decl of Shauna Henline,*fn5 at ¶¶ 3-5. Marty is an Enrolled Agent in the State of California, and claims to be a "Certified Wealth Preservation Planner," and "Certified Asset Protection Planner." Id., at ¶ 5. In 2008 and 2009, Marty, individually and doing business as Advanced Financial Services, LLC, prepared and filed fraudulent tax returns (IRS Form 1040) for the tax years 2007 and 2008, and fraudulent amended tax returns (IRS Forms 1040X) for previous years, and prepared and filed with the IRS other frivolous documents on behalf of others in exchange for compensation. Id., at ¶ 6.

In particular, Marty promotes a tax-fraud scheme that involves filing fraudulent tax returns and other frivolous documents with the IRS on behalf of her customers. Id., at ¶¶ 6, 8. The returns Marty prepares for others fabricate the amount of tax withheld on behalf of her customers. The false reporting to the IRS of the tax withheld on her customers' returns results in fraudulent refund claims by those customers in amounts as large as $2.7 million per customer. Id., at ¶ 12. In support of these fraudulent refund claims, Marty prepares and files with the IRS false Forms 1099-OID. Id., at ¶¶ 8-13. Form 1099-OID is a form document used to report a type of income referred to as Original Issue Discount (hereafter "OID") income, which is a reportable form of taxable interest based on the difference between the maturity and issuance prices of a debt instrument. These forms, prepared by Marty, falsely state that her customers issued debt instruments that generated OID income or that her customers purchased debt instruments that generated OID income. Id. The forms are claimed to be issued or received by her customers to or from a creditor(s) of the customer, usually a credit card company or a mortgage ...


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