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United States v. Pugh

June 1, 2010


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


Based on the submissions of the parties and the undisputed evidence in the record regarding the application of plaintiff, the UNITED STATES OF AMERICA ("plaintiff" or the "Government"), for a permanent injunction against the defendants, ARCHIE J. PUGH, JR. and THEODORE PUGH, each individually and d/b/a/ ARCHIE'S TAX & ACCOUNTING SERVICE (collectively, the "Pughs" or "defendants"), pursuant to §§ 7402(a), 7407, and 7408 of the Internal Revenue Code (26 U.S.C.) ("I.R.C."), the court sets forth herein its Findings of Fact and Conclusions of Law as follows and enters this permanent injunction against Archie J. Pugh, Jr. and Theodore Pugh, individually and doing business as Archie's Tax and Accounting Service.*fn1


1. This court has jurisdiction over the parties and subject matter of this case.

2. Defendant Archie J. Pugh, Jr. ("Archie") is the sole proprietor of Archie's Tax and Accounting Services located at 136-17 Thurston Street, Jamaica, New York. Archie and Theodore Pugh ("Theodore") both prepare federal tax returns at that location.

3. Archie, a self-professed experienced federal income tax return preparer, has worked in the field of tax return preparation and accounting for more than 30 years and received a Certificate of Graduation from the National Tax Training School in 1989.

4. The Internal Revenue Service ("IRS") has identified, from 2001 to 2004, 245 federal income tax returns prepared by Theodore and 267 prepared by Archie containing their respective social security numbers as the paid preparer. In addition, Archie prepared 168 returns in 2003 using his electronic identification number, 261 returns in 2007 and 247 in 2008 using his social security number or his electronic identification number. Theodore prepared 111 returns in 2007 using his social security number or his electronic identification number.

5. From at least 1998, Archie and Theodore have been promoting and preparing federal income tax returns based on the so-called "claim of right" program. As a part of this program, the Pughs advise, prepare, and assist in the preparation of all or a substantial portion of their clients' federal income tax returns, which claim frivolous "claim of right" deductions. Theodore Pugh charged customers for preparation of those returns.

6. Further, as part of the scheme, the Pughs make numerous false or fraudulent statements to their clients, including:

i. that all compensation or earnings are deemed nontaxable;

ii. that their customers have a common law and constitutional right (under the Fourteenth Amendment to the United States Constitution) to exclude from taxation all compensation for personal services or labor rendered;

iii. that I.R.C. § 1341 codifies this so-called common law or constitutional right and entitles their customers to take a deduction in the amount of compensation earned, which in most cases eliminates a participant's tax liability;

iv. that filing returns with the "claim of right" deduction would result in large refunds;

v. that such claims are legal; and

vi. that the defendants had won cases on this issue in court.

7. As part of the scheme, the Pughs have continuously and repeatedly falsified IRS Form 1040, Form 8275, and Schedule A on their clients' returns. A substantial portion of the Pughs' return preparation business is focused on preparing fraudulent returns that interfere with the administration of the internal revenue laws.

8. The Pughs' "claim of right" program is organized and marketed by the defendants through word-of-mouth and client referrals.

9. Since April 2003, the IRS has referred to the IRS Frivolous Return Program ("FRP") at least 92 frivolous filings of returns and claims prepared by Archie and Theodore and has identified at least 79 returns prepared by the Pughs for 45 customers claiming "unrestricted claim of right" deductions between 1998 and 2005. These 79 returns examined by the IRS deduct over $3.8 million in wage income from the taxpayers' adjusted gross income and claim over $500,000 in tax refunds on the basis of the "claim of right" scheme. In some customers' individual federal income tax returns, the Pughs deducted wage income in amounts as high as $284,421, $112,732 and $107,465.

10. The IRS has made clear that there is no "claim of right" doctrine under I.R.C. § 1341 or any other statute that allows an individual to take the position espoused by the Pughs that neither the individual nor the individual's income is subject to federal income taxes. The Pughs' preparation of many of these "claim of right" returns was contemporaneous with 2004 and 2005 IRS Revenue Rulings and IRS annual consumer warnings that tax return preparers would face civil and criminal penalties for using or marketing the "claim of right."

11. Courts, too, have repeatedly rejected the argument that compensation for personal services is not subject to taxation, and have specifically rejected the so-called "claim of right" doctrine as lacking any basis in law.

12. The Pughs have persisted in preparing fraudulent returns for their clients, even after being informed by their clients that their "claim of right" tax returns were being audited and disallowed by the IRS, and continue to insist that the "claim of right" doctrine is legitimate under the law. Theodore has encouraged his clients to fight the IRS.

13. Although the Pughs admittedly advise and/or prepare tax returns with "claim of right" deductions on behalf of their clients, they did not sign the returns as the paid preparers. Instead, the Pughs have their customers sign the tax returns, and either leave blank the "Paid Preparer's" signature block or type "SELF PREPARED" therein in order to conceal their identity as the preparers.

14. The Pughs' efforts to conceal their involvement in the preparation of frivolous and fraudulent returns include, inter alia:

i. leaving blank the name of the preparer of their clients' tax returns;

ii. typing "SELF PREPARED" on the line of the tax return for the signature of the preparer;

iii. as to Theodore Pugh, requesting payment in cash and refusing to provide receipts for his tax preparation services, and advising his clients to mislead the Internal Revenue Service regarding his ...

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