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United States v. Webb

January 31, 2007

UNITED STATES OF AMERICA, PLAINTIFF,
v.
GARRY P. WEBB A/K/A GARRY P. WEBB-BEY, DEFENDANT.



The opinion of the court was delivered by: Townes, United States District Judge

MEMORANDUM and ORDER

By motion dated December 6, 2006, plaintiff United States of America moves for a preliminary injunction, principally seeking to enjoin defendant Garry Webb a/k/a Garry Webb-Bey, an income tax return preparer, from preparing or assisting in the preparation of federal income tax returns on behalf of any person other than himself. For the reasons set forth below, plaintiff's motion is granted to the extent described below.

BACKGROUND

In September 2006, plaintiff brought this action pursuant to three sections of the Internal Revenue Code ("IRC") -- 26 U.S.C. §§ 7402(a), 7407 and 7408 -- principally seeking to permanently enjoin defendant from preparing or assisting in the preparation and filing of income tax returns for other people. The complaint alleges, inter alia, that defendant, who "prepares federal income tax returns and amended federal income tax returns for customers for a fee," has repeatedly "falsely underreport[ed] his customers' income . . . by . . . claiming a fraudulent foreign earned income exclusion." Complaint at ¶¶ 5-6. Specifically, plaintiff alleges that defendant falsely informs his customers that income earned within the fifty United States is "foreign income," and files tax returns for customers in which such income is completely offset by foreign income exclusions. Id. at ¶¶ 7-8. This underreporting of income has allegedly resulted in plaintiff paying refunds to customers who are not entitled to them. Id. at ¶ 7.

According to the complaint, defendant "has been preparing federal tax returns claiming false foreign earned income exclusions since at least 1997." Id. at ¶ 10. Indeed, despite the fact that defendant improperly fails to sign the returns he prepares and signs for customers, the Internal Revenue Service ("IRS") has identified 82 returns prepared by Webb which claim this fraudulent foreign earned income exclusion. Id. at ¶¶ 11-12.

Defendant failed to file a timely answer to this complaint. On October 30, 2006, the Clerk of Court entered defendant's default pursuant to Fed. R. Civ. P. 55(a). However, rather than move for a default judgment pursuant to Fed. R. Civ. P. 55(b), plaintiff moved for a preliminary injunction. By Memorandum and Order dated December 11, 2006, this Court directed defendant to respond to that motion on or before January 12, 2007. To date, no response has been received. Nonetheless, plaintiff has filed a reply, urging this Court to expeditiously grant the preliminary injunctive relief it seeks.

DISCUSSION

In order to obtain a preliminary injunction in actions in which this Court's authority to grant such relief is rooted wholly in the equity jurisdiction of the federal court, the moving party must show "that (1) absent injunctive relief, it will suffer irreparable harm, and (2) either (a) that it is likely to succeed on the merits, or (b) that there are sufficiently serious questions going to the merits to make them a fair ground for litigation, and that the balance of hardships tips decidedly in favor of the moving party." Otokoyama Co. v. Wine of Japan Import, Inc., 175 F.3d 266, 270 (2d Cir. 1999). However, "[w]hen an injunction is expressly authorized by statute, the standard preliminary injunction test is not applied." United States v. Broccolo, No. 06-CV-2812 (KMK), 2006 WL 3690648, at *1 (S.D.N.Y. Dec. 13, 2006) (citing SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975)). In such cases, courts focus on the "statutory conditions for injunctive relief," and may issue a preliminary injunction if such conditions are met. Id. The movant need not show irreparable harm. See Mgmt. Dynamics, Inc., 515 F.2d at 808 (quoting SEC v. Torr, 87 F.2d 449, 450 (2d Cir. 1937) ("[I]t is of no moment that the plaintiff has failed to show threatened irreparable injury or the like"). Rather, when "the Government has satisfied the statutory conditions of the statute, irreparable harm to the public is presumed." United States v. Schmitt, 734 F.Supp. 1035, 1049 (E.D.N.Y. 1990).

In this case, plaintiff bases its motion for preliminary injunctive relief on three statutes:

26 U.S.C. §§ 7407, 7408 and 7402(a). Since each of these statutes sets forth different conditions for obtaining preliminary injunctive relief, each statute is separately analyzed below.

Section 7407

Section 7407, which applies solely to income tax return preparers, authorizes a district court to enjoin a preparer from, among other things, "engaging in any conduct subject to penalty under [26 U.S.C.] section 6694 or 6695," if it finds that injunctive relief is appropriate to prevent a recurrence of such conduct. 26 U.S.C.§7407(b)(1)(A) and (b)(2). Plaintiff alleges that defendant has violated both section 6694 and 6695. First, plaintiff argues that defendant violated § 6694(a), which subjects income tax return preparers to a penalty if they knowingly understate liability on a return or claim a refund based on a frivolous position "for which there was not a realistic possibility of being sustained on its merits." Second, plaintiff argues that defendant violated § 6695(b), which provides that "[a]ny person who is an income tax return preparer with respect to any return or claim for refund, who is required by regulations prescribed by the Secretary to sign such return or claim, and who fails to comply with such regulations" shall pay a penalty.

In light of defendant's default in this case, there is no question that defendant violated these provisions. "Where, as here, 'the court determines that [a] defendant is in default, the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.'" Chen v. Jenna Lane, Inc., 30 F. Supp. 2d 622, 623 (S.D.N.Y. 1998) (quoting 10A C. Wright, A. Miller & M. Kane, Federal Practice & Procedure § 2688, at 58-59 (3d ed. 1998)). Therefore, by defaulting, defendant has admitted for purposes of this action that (1) he is an income tax return preparer in that he prepares federal income tax returns for customers for a fee, (2) he falsely underreported his customers' income by claiming a fraudulent foreign income exclusion and (3) he improperly failed to sign the returns he prepared and filed for customers. See Complaint at ¶¶ 5, 6 and 11. Since this conduct violates both § 6694 and § 6695, this Court is statutorily authorized to enjoin such conduct if it determines that an injunction is appropriate to prevent a recurrence. See 26 U.S.C. § 7407(b).

"The Second Circuit has articulated several factors to be considered in assessing the probability of future infractions: (1) the degree of scienter involved, (2) the isolated or recurring nature of the fraudulent activity, (3) the defendant's appreciation of his wrongdoing, and (4) the defendant's opportunities to commit future violations." Broccolo, 2006 WL 3690648, at *3 (quoting SEC v. Softpoint, Inc., 958 F.Supp. 846, 867 (S.D.N.Y. 1997), citing SEC v. Commonwealth Chem. Sec., 574 F.2d 90, 100 (2d Cir. 1978)). Other circuits have considered additional factors, such as "the gravity of ...


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