The opinion of the court was delivered by: Mencer, District Judge.
On December 20, 1990, the plaintiff, United States of
America ("government"), filed the present action against the
defendant, Thomas C. Franchi, requesting that this court enter
preliminary and permanent injunctions to enjoin Franchi from
acting as a tax preparer.
The government also filed a motion for a temporary
restraining order. A hearing on the motion for a temporary
restraining order was held before this court on January 3,
1991. On January 4, 1991, this court denied the government's
motion for a temporary restraining order.
The jurisdiction of this court rests upon 26 U.S.C. § 7402(a),
and 26 U.S.C. § 7407. District courts are statutorily
authorized to issue injunctions at the request of the United
States for the enforcement of the internal revenue laws.
Section 7402(a) states the following:
The district courts of the United States at the
insistence of the United States shall have such
jurisdiction to make and issue in civil actions .
. . orders of injunction . . . and to render such
judgments and decrees as may be necessary or
appropriate for the enforcement of the internal
revenue laws. The remedies hereby provided are in
addition to and not exclusive of any and all
other remedies of the United States in such
courts or otherwise to enforce the laws.
26 U.S.C. § 7402(a).
The legislative history of the 1982 Act notes that a Section
7402 injunction is additional to the tax preparer injunction,
and recognizes "the great latitude inherent in § 7402 equity
jurisdiction to fashion appropriate equitable relief," and
further states that the district court may "enjoin any action
to impede proper administration of the tax laws or any action
which violates criminal statutes." See Senate Finance
Committee, Tax Equity and Fiscal Responsibility Act of 1982,
S.Rep. No. 494, 97th Cong., 2d Sess., reprinted in 1982
U.S.Code Cong. & Adm.News pp. 781, 1016-17. United States v.
Ernst & Whinney, 735 F.2d 1296, 1301 (11th Cir. 1984).
In addition to this general grant of authority to issue
injunctions, district courts are specifically authorized to
enjoin income tax preparers from engaging in certain
prohibited conduct. 26 U.S.C. § 7407 provides that:
(a) Authority to seek injunction.
A civil action in the name of the United States
to enjoin any person who is an income tax
preparer from further engaging in any conduct
described in subsection (b) or from further
acting as an income tax preparer may be commenced
at the request of the Secretary
(b) Adjudication and decrees.
In any action under subsection (a), if the court
(1) that an income tax preparer 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 education as an
income tax preparer,
(C) guaranteed the payment of any tax refund or
the allowance of any tax credit, or
(D) engaged in any other fraudulent or deceptive
conduct which substantially interferes with the
proper administration of the Internal Revenue
(2) that injunctive relief is appropriate to
prevent the recurrence of such conduct, the court
may enjoin such person from further engaging in
such conduct. If the court finds that an income
tax preparer has continually or repeatedly
engaged in any conduct described in subparagraphs
(A) through (D) of this subsection and that an
injunction prohibiting such conduct would not be
sufficient to prevent such person's interference
with the proper administration of this title, the
court may enjoin such person from acting as an
income tax preparer.
During the Congressional debate that led to the Tax Reform
Act of 1976, of which 26 U.S.C. § 7407 was to become a part,
the language accompanying the legislative history is helpful to
the case at hand. It states, "The injunctive relief sought by
the Secretary must be commensurate with the conduct which led
to the seeking of the injunction . . . Nothing in this
provision is to alter the inherent authority of the courts to
limit the scope and duration of any injunction as is deemed
appropriate given the actions leading to the request for
injunctive relief." See Senate Finance Committee, Tax Reform
Act of 1976, S.Rep. No. 1203, 94th Cong., 2d Sess., reprinted
in U.S.Code & Admin.News, page 3788.
The legislative history of § 7407 is important for this
court's analysis. For one reason there is a dearth of cases
that have applied the statute, and secondly the intended
application of the law can be gleaned from its background. In
the examples cited by the Senate Finance Committee, both the
scope and the duration of the injunction were tailored to meet
the equities of the particular situation at hand.
In order to issue an injunction pursuant to 28 U.S.C. § 7407,
three prerequisites must be met: first, the defendant must be a
tax preparer; second, the conduct complained of must fall
within one of the four areas of proscribed conduct, §
7407(b)(1); and third, the court must find that an injunction
is "appropriate to prevent the recurrence" of the proscribed
conduct, § 7407(b)(2). United States v. Ernst & Whinney,
735 F.2d 1296, 1303 (Ilth Cir. 1984).
Our first step in our analysis is to determine whether
Thomas Franchi is an income tax preparer within the meaning of
26 U.S.C. § 7701(a)(36). Thomas C. Franchi calls himself a "Tax
Accountant, Financial Consultant, and Notary Public." (See
government exhibit No. 1). The evidence introduced during four
days of testimony shows that Mr. Franchi has prepared thousands
of income tax returns during the past decade, and leads to the
conclusion that Mr. Franchi falls within the definition of an
income tax preparer according to § 7701(a)(36). This section
describes a preparer as "any person who prepares for
compensation, or who employs one or more persons to prepare for
compensation, any return of tax imposed by subtitle A or any
claim for refund of tax imposed by subtitle A." This court
finds that Thomas Franchi meets the definition of an income tax
preparer for the purpose of this action.
Our second task under Section 7407 is to determine whether
Franchi violated 26 U.S.C. § 6694 or 6695, or engaged in
other conduct listed in its subsection (b)(1). Section
7407(b)(1)(A) concerns conduct subject to penalty under § 6694
or 6695, or to any criminal penalty. Only the more expansive
civil penalty sections, added at the same time as the
injunctive provisions of § 7407, are important here. Section
6694 provides in pertinent part:
§ 6694. Understatement of taxpayer's liability by
income tax preparer.
(a) Negligent or intentional disregard of rules
and regulations. — If any part of any
understatement of liability with respect to any
return or claim for refund is due to the negligent
or intentional disregard of rules and regulations
by any person who is an income tax preparer with
respect to such return or ...