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U.S. v. FRANCHI

February 12, 1991

UNITED STATES OF AMERICA, PLAINTIFF,
v.
THOMAS C. FRANCHI, DEFENDANT.



The opinion of the court was delivered by: Mencer, District Judge.

MEMORANDUM OPINION

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
  finds:

(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
  laws, and
  (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.

26 U.S.C. § 7407.

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 ...

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