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United States v. Broccolo

December 13, 2006


The opinion of the court was delivered by: Kenneth M. Karas, District Judge


The Government alleges that Defendant Edward Broccolo ("Broccolo") prepared and filed, on behalf of his clients, fraudulent tax returns for the years 2000 through 2003. (Gov.'s Mem. 6.) On April 11, 2006, the Court issued a temporary restraining order ("TRO") enjoining Broccolo from preparing tax returns. (Doc. No. 2.) The Government now seeks a preliminary injunction prohibiting the same activity. The Parties have agreed that the TRO will remain in place until this preliminary injunction request is decided. (Gov.'s Reply Mem. 1.) For the reasons stated on the record on November 8, 2006, and herein, the Court grants in part the Government's request for a preliminary injunction.

I. Background

Since at least 2000, Broccolo has operated a tax return preparation business under the name Financial Center of South Westchester ("FCSW"). (Gov.'s Mem. 1; Dixon Decl. ¶ 6.) From 2000 to 2003, Broccolo prepared over 1500 individual tax returns, using either his own name or that of FCSW. (Dixon Decl. ¶ 7.) The Internal Revenue Service ("IRS") began investigating Broccolo because an unusual number of the returns that he prepared contained claims for a tax credit known as the "Hope Credit." The Hope Credit is an educational credit available to taxpayers for the first $1000 of qualified educational expenses paid to eligible post-secondary educational institutions. (Id. ¶¶ 3, 10.) The IRS investigation confirmed that Broccolo had regularly claimed this educational credit on behalf of clients who "had no eligible students in their households and incurred no qualifying post-secondary educational expenses." (Id. ¶ 12.) Based on the number of individual returns that Broccolo prepared containing the Hope Credit and other allegedly false deductions, the Government estimates its loss to be approximately $4 million. (Id. ¶ 18.)

As part of its investigation, the IRS"repeatedly requested that Defendant provide information . . . about his tax preparation business, including a list of all of his clients." (Id. ¶ 11.) According to the IRS, Broccolo ignored its written requests made repeatedly between January and August 2004, and refused to make himself available for an interview. (Id.; Dixon Supplemental Decl. ¶¶ 3, 22; Gov.'s Reply Mem. 6-7.)Broccolo claims that he does not recall ever refusing to speak with the IRS, and claims that to the extent that he failed to comply with IRS requests, it was because his poor health prevented him from responding.*fn1 (Broccolo Decl. ¶ 17.)However, in an affidavit submitted with his opposition brief, Broccolo admitted to having prepared false tax returns.*fn2

II. Discussion

A. Standard of Review

When an injunction is expressly authorized by statute, the standard preliminary injunction test is not applied. SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975). Instead, the Court must look to the "statutory conditions for injunctive relief," and may issue a preliminary injunction if those conditions are met. Id. at 808; see also SEC v. Gonzalez de Castilla, 145 F. Supp. 2d 402, 415 n.10 (S.D.N.Y. 2001) (noting that where a statutory remedy exists, the SEC "need not make the typical showing of likelihood of irreparable injury . . ."); United States v. Schmitt, 734 F. Supp. 1035, 1049 (E.D.N.Y. 1990) ("[I]rreparable harm is presumed when the Government seeks a preliminary injunction pursuant to a statute which expressly authorizes entry of an injunction upon a showing of violation of law by the Government.").

Here, the Government seeks a preliminary injunction under sections 7402(a), 7407, and 7408 of the Internal Revenue Code. See I.R.C. §§ 7402(a), 7407, 7408. Sections 7407 and 7408 contain express provisions authorizing district courts to enter injunctions upon the showing of a violation of the law. Accordingly, if the Government establishes a violation of either of these sections, the Court may issue a preliminary injunction. Section 7402(a) authorizes injunctive relief, but does not provide "statutory conditions." Mgmt. Dynamics, 515 F.2d at 807-08. Therefore, as discussed below, the traditional equitable considerations must be applied.

B. Internal Revenue Code § 7407

1. Broccolo's Misconduct

Internal Revenue Code § 7407, which applies only to income tax return preparers, permits a court to enjoin a defendant's offending conduct if the defendant has:

(A) engaged in any conduct subject to penalty under section 6694 or 6695, or subject to any criminal penalty provided by this title,

(B) misrepresented his eligibility to practice before the Internal Revenue Service, or otherwise misrepresented his experience or ...

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