Tuesday, July 26, 2011


U.S. v. ROSS, Cite as 108 AFTR 2d 2011-XXXX, 07/11/2011

UNITED STATES OF AMERICA, Plaintiff - Appellee, v. LEI LAVARIAS ROSS, Defendant - Appellant.
Case Information:
Code Sec(s):
Court Name:
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT,
Docket No.:
No. 10-10354; D.C. No. 1:08-cr-00223-DAE-2; No. 10-10359; D.C. No. 1:08-cr-00223-DAE-1,
Date Decided:
07/11/2011Argued and Submitted June 13, 2011 Honolulu, Hawaii.
Prior History:
https://checkpoint.riag.com/9.3.0628/v10/images/link.gif
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT,
Appeal from the United States District Court for the District of Hawaii David A. Ezra, District Judge, Presiding
Before: ALARCĂ“N, WARDLAW, and N.R. SMITH, Circuit Judges.
MEMORANDUM *
Judge:
NOT FOR PUBLICATION



On April 21, 2008, a grand jury returned an indictment against David Ross and Lei Ross charging them both with one count of conspiracy to defraud the United States, 18 U.S.C. § 371, and separate counts of income tax evasion for each of the tax years from 1998 through 2002, 26 U.S.C. § 7201. At the conclusion of their 11-day joint trial in the United States District Court for the District of Hawaii, the Rosses were convicted of all counts. They appeal from their judgments of conviction. Their primary contention on appeal is that the district court erred in denying their motion for new trial without holding an evidentiary hearing on the question of whether David Ross's trial counsel, Alan Richey, had an actual conflict that adversely affected his performance at trial. They also challenge other evidentiary rulings and the failure to sever Lei Ross's trial from her husband's. We affirm.
I
The Rosses do not challenge the sufficiency of the evidence to support their convictions. Rather, they argue that the district court erred in denying their motion for new trial, which asserted that Richey, whom the Rosses had retained in mid-2003 to represent them before the IRS on civil tax matters, had an actual conflict of interest that deprived them of their Sixth Amendment right to effective assistance of counsel.
A new trial may be granted “if the interest of justice so requires.” Fed. R. Crim. P. 33(a). We review a district court's denial of a motion for new trial, and its decision not to hold an evidentiary hearing before ruling on a motion for new trial, for an abuse of discretion. United States v. Montes, 628 F.3d 1183, 1187 (9th Cir. 2011). “A district court abuses its discretion if it reaches a result that is “illogical, implausible, or without support in inferences that may be drawn from facts in the record.”” Id.(quoting United States v. Hinkson, 585 F.3d 1247, 1251 (9th Cir. 2009) (en banc)).
“In order to prevail on an ineffective assistance of counsel claim based on [a] conflict of interest, a defendant must show that “an actual conflict of interest adversely affected his lawyer's performance.””United States v. Miskinis , 966 F.2d 1263, 1268 (9th Cir. 1992) (quoting Cuyler v. Sullivan, 446 U.S. 335, 350 (1980)). “The customary procedure for challenging the effectiveness of defense counsel in a federal criminal trial is by collateral attack on the conviction under 28 U.S.C. § 2255.” United States v. Birges, 723 F.2d 666, 670 (9th Cir. 1984); see also United States v. Molina, 934 F.2d 1440, 1446 (9th Cir. 1991) (“We prefer appellants to raise such claims in a habeas proceeding because it permits the district judge first to decide whether the claim has merit, and second, if it does, to develop a record as to what counsel did, why it was done, and what, if any, prejudice resulted.”).
In United States v. Hanoum, 33 F.3d 1128 (9th Cir. 1994), we reviewed a new trial motion based on newly discovered evidence giving rise to an ineffective assistance of counsel claim. Id. at 1129. We stated that evidence properly considered in the context of a new trial motion is evidence that “relates to the elements of the crime charged,” explaining that
[t]he fact that Hanoum's attorney allegedly failed to do anything to prepare a case is material to whether

he was effective or not, but not to whether Hanoum is innocent or guilty of the crimes charged .... Additionally, evidence of ineffectiveness will seldom if ever indicate that a new trial would probably produce an acquittal. The same problem occurs: it is the underlying evidence suppressed or not presented by the attorney, not the attorney's ineffectiveness, that might produce the acquittal.
Id. at 1130–31. We declined, however, to reach the merits of Hanoum's conflict of interest claim, which consisted of “mere allegations” that had not been developed at a hearing. Id. at 1131–32.
The record before the district court was not sufficient to establish the precise nature and timing of any tax advice Richey gave the Rosses, and the district court was not obliged to conduct an evidentiary hearing to develop the record on that point. Such evidence would be material as to whether Richey rendered ineffective assistance of counsel and not as to whether the Rosses are guilty of willfully conspiring to defraud the government. Stated otherwise, the Rosses' conflict of interest claim does not demonstrate that the prosecution failed to present evidence sufficient to persuade a rational trier of fact of their guilt. Accordingly, we are persuaded that the district court did not abuse its discretion in denying the Rosses' new trial motion. A collateral attack pursuant to 28 U.S.C. § 2255 represents an appropriate procedural device to challenge the effectiveness of Richey's representation and also provides an adequate remedy for the Rosses' conflict of interest claim. See Miskinis, 966 F.2d at 1269 (“We emphasize that there is no fixed rule against determining the ineffectiveness question on direct appeal where the record so permits. Rather, the decision to defer resolution of an ineffective assistance of counsel claim is a discretionary one and depends upon the contents of the record in a particular case.”).
II
The Rosses also challenge evidentiary rulings that the district court made during the trial. “A district court's ruling excluding testimony is reviewed for abuse of discretion.” United States v. Moran, 493 F.3d 1002, 1012 (9th Cir. 2007). A district court abuses its discretion when its evidentiary rulings are “based on “an erroneous view of the law or a clearly erroneous assessment of facts.”” United States v. Nguyen, 465 F.3d 1128, 1130 (9th Cir. 2006) (quoting United States v. Morales, 108 F.3d 1031, 1035 (9th Cir. 1997)). “Reversal is required if it is “more probable than not” that error affected the verdict.” United States v. Alvarez, 358 F.3d 1194, 1205 (9th Cir. 2004) (quoting United States v. Rohrer, 708 F.2d 429, 432 (9th Cir. 1983)).
A
David Ross argues that the district court erred in excluding as hearsay his testimony about tax advice he received from various advisors. We have explained in prior opinions that, in criminal tax cases, a defendant's testimony about the tax advice on which he relied is not inadmissible as hearsay when it is offered to support a defense that the defendant relied in good faith on the advice of qualified experts. See Moran, 493 F.3d at 1013 (“[T]he defendant “has the right to tell the court his own version of the tax advice on which he claim[s] to have relied.” Such testimony does not constitute hearsay when not offered for the truth of the matter stated.”) (quoting United States v. Bishophttps://checkpoint.riag.com/9.3.0628/v10/images/link.gif 291 F.3d 1100, 1111 [89 AFTR 2d 2002-2745] (9th Cir. 2002)).
Although the district court erred as a matter of law in ruling that testimony reporting the tax advice was “hearsay,” it did not prevent David Ross from testifying about the advice he received from others as long as he framed it in terms of what he “understood” or learned from those advisors. Additionally, the district court admitted the trial testimony of two of David Ross's advisors and hundreds of pages of documents setting forth the advice the Rosses received and claimed to have relied upon. The district court's rulings did not prevent the jury from considering the evidence in support of the Rosses' good faith reliance defense. Accordingly, the district court's error in ruling that testimony about advice from a tax advisor is hearsay was harmless error.
B
The Rosses argue that the district court erred in excluding evidence of their reliance on advice they received from Richey. Rule 403 of the Federal Rules of Evidence provides that “[a]lthough relevant, evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence.” Fed. R. Evid. 403. An exception to the general rule that a district court's decision to exclude evidence at trial is reviewed for an abuse of discretion exists “when the district court excludes evidence under Federal Rule of Evidence 403 but does not engage in explicit balancing.” United States v. Leo Sure Chief, 438 F.3d 920, 925 (9th Cir. 2006). In such cases, the district court's determination is reviewed de novo.Id.
Although the district court did not expressly rely on Rule 403, its ruling reflects a determination that the relevance of the proffered evidence was outweighed by the potential for prejudice that could flow from creating an opportunity for the Government to call Richey as a rebuttal witness. Evidence of reliance on erroneous advice from Richey would not have negated a rational trier of fact's determination of willfulness in the years before the Rosses hired Richey: the years from 1998 through 2003. Any reliance on advice from Richey would have been relevant only to a portion of the single conspiracy count, which covered the period from 1998 through the time of the grand jury indictment in 2008. 1 Accordingly, we conclude that the district court did not err in excluding the proffered evidence. 2
III
Lei Ross contends that the trial court erred by failing to sever her trial from her husband's on the basis of an alleged conflict of interest with David Ross's trial counsel. She also argues that her own trial counsel rendered ineffective assistance by failing to make a timely motion for severance. We review claims that are not raised below for plain error. United States v. Nevils, 598 F.3d 1158, 1170 (9th Cir. 2010).
The district court was not obliged, sua sponte, to sever Lei Ross's trial from her husband's. Additionally, in light of the absence of reference to any facts in the trial record that relate to the basis for the decision of Lei Ross's counsel not to move to sever, a collateral attack on the conviction, pursuant to 28 U.S.C. § 2255, is the appropriate forum for Lei Ross to pursue her ineffective assistance of counsel claim.
AFFIRMED.

*
  This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36-3.













www.irstaxattorney.com 888-712-7690

Monday, July 25, 2011

U.S. v. JONES, Cite as 108 AFTR 2d 2011-XXXX, 07/07/2011

UNITED STATES OF AMERICA Plaintiff, v. PENNY LEA JONES, f/k/a PENNY LEA WARDROP Defendant.
Case Information:

Code Sec(s):      
Court Name:      UNITED STATES DISTRICT COURT FOR THE DISTRICT OF IDAHO,
Docket No.:        Civil No. 4:09-cv-00547-EJL,
Date Decided:   07/07/2011.
Disposition:       
HEADNOTE

.

Reference(s):

OPINION

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF IDAHO,

MEMORANDUM ORDER

Judge: Honorable Edward J. Lodge U. S. District Judge

Before the Court is the United States' Motion for Summary Judgment against Defendant, Penny Lea Jones, formerly known as Penny Lea Wardrop. (Dkt. No. 17). The time for filing a response has passed with no response being filed. As such the Motion is now ripe for the Court's review. Having fully reviewed the record herein, the Court finds that the facts and legal arguments are adequately presented in the briefs and record. Accordingly, in the interest of avoiding further delay, and because the Court conclusively finds that the decisional process would not be significantly aided by oral argument, this Motion shall be decided on the record before this Court without oral argument. The Court finds as follows.

FACTUAL AND PROCEDURAL BACKGROUND

On October 27, 2009, the United States filed a Complaint in this action against the Defendant, Penny Lea Jones. (Dkt. No. 1.) The United States alleges Ms. Jones has been running a fraudulent tax return preparation business in Shelley, Idaho whereby she filed frivolous tax returns, amended tax returns, and other frivolous documents on behalf of others in exchange for compensation. (Dkt. No. 1.) This scheme, the United States argues, has defrauded the government of millions of dollars. (Dkt. No. 18.) The Complaint raises claims under 26 U.S.C. §§ 7402(a), 7407, and 7408 seeking a permanent injunction and other equitable relief to prohibit Ms. Jones from continuing her fraudulent tax return scheme. (Dkt. No. 1.)

In response, Ms. Jones has filed a “Truth Affidavit” which generally denies the allegations in the Complaint. (Dkt. No. 3.) The United States then filed a Motion for Preliminary Injunction which, on January 15, 2010, this Court granted. (Dkt. Nos. 4, 8.) On February 3, 2010, Ms. Jones filed a “Notice of Contract and Notice of Default and Notice of Summary Judgment” (“Notice”) essentially arguing jurisdiction is lacking and the case should be dismissed due to the United States “failure to respond.” (Dkt. No. 13.) On September 22, 2010, the United States filed its own Motion for Summary Judgment seeking entry of the requested permanent injunction against Ms. Jones. (Dkt. No. 18.) The Court now takes up these matters below.

SUMMARY JUDGMENT STANDARD

Motions for summary judgment are governed by Rule 56 of the Federal Rules of Civil Procedure. Rule 56 provides, in pertinent part, that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The court should state on the record the reasons for granting or denying the motion.” Fed. R. Civ. P. 56(a). 1 “A party asserting that a fact cannot be or is genuinely disputed must support the assertion by: (A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or (B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.” Fed. R. Civ. P. 56(c)(1).

The party moving for summary judgment has the initial burden of showing that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, 477 U.S. 242, 247–48 (1986). Once the moving party has met this initial burden, the nonmoving party has the subsequent burden of presenting evidence to show that a genuine issue of fact remains. The party opposing the motion for summary judgment may not rest upon the mere allegations or denials of her pleading, but must set forth specific facts showing that there is a genuine issue for trial.Id. at 248. If the non-moving party “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial” then summary judgment is proper as “there can be no “genuine issue of material fact,” since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986). 2

Moreover, under Rule 56, it is clear that an issue, in order to preclude entry of summary judgment, must be both “material” and “genuine.” An issue is “material” if it affects the outcome of the litigation. An issue, before it may be considered “genuine,” must be established by “sufficient evidence supporting the claimed factual dispute ... to require a jury or judge to resolve the parties' differing versions of the truth at trial.”Hahn v. Sargent ,  523 F.3d 461, 464 [101 AFTR 2d 2008-1933] (1st Cir. 1975) (quoting First Nat'l Bank v. Cities Serv. Co. Inc., 391 U.S. 253, 289 (1968)). The Ninth Circuit cases are in accord.See, e.g., British Motor Car Distrib. V. San Francisco Automotive Indus. Welfare Fund , 883 F.2d 371 (9th Cir. 1989).

According to the Ninth Circuit, in order to withstand a motion for summary judgment, a party

(1) must make a showing sufficient to establish a genuine issue of fact with respect to any element for which it bears the burden of proof; (2) must show that there is an issue that may reasonably be resolved in favor of either party; and (3) must come forward with more persuasive evidence than would otherwise be necessary when the factual context makes the non-moving party's claim implausible.
Id. at 374 (citation omitted). Of course, when applying the above standard, the Court must view all of the evidence in the light most favorable to the non-moving party.Anderson , 477 U.S. at 255; Hughes v. United States,  953 F.2d 531, 541 [69 AFTR 2d 92-472] (9th Cir. 1992).

DISCUSSION

1. Jurisdiction

Ms. Jones' filings challenge this Court's jurisdiction in this matter on the ground that there is no statute or Act of Congress making her liable for income taxes which the Court has jurisdiction to enforce. (Dkt. No. 3.) The United States asserts jurisdiction is proper here under 28 U.S.C. §§ 1340 and 1345 as well as 26 U.S.C. §§ 7402(a), 7407, 7408. (Dkt. No. 1.)

Federal courts have original jurisdiction over civil actions 1) arising under federal revenue laws and/or 2) commenced by the United States, or by any agency or officer thereof expressly authorized to sue by an Act of Congress. 28 U.S.C. §§ 1340, 1345.   Sections 7402,   7407, and   7408 are Acts of Congress expressly authorizing the United States to bring civil actions in the district in which the subject individual resides. 26 U.S.C. §§ 7402(a), 7407, 7408. Here, Ms. Jones resides in Idaho and operates a tax return preparation business using a post office box in Shelley, Idaho. As such, the Court finds jurisdiction and venue are proper.

2. Ms. Jones' Notice

Ms. Jones' filed her “Notice” alleging this matter should be dismissed because the United States failed to respond to her “Truth Affidavit” within ten business days. (Dkt. No. 13.) As such, she argues, the United States is in default and has accepted the truth of the facts as stated in her “Truth Affidavit.” (Dkt. No. 3, p. 6 and Dkt. No. 13.) Ms. Jones contends that her “Notice” is her formal acceptance to a binding contract, purportedly based on the United States' failure to respond, to award her summary judgment in this matter and nullifying this case. (Dkt. No. 13, p. 2.) The United States has not responded to these filings but instead filed its own Motion for Summary Judgment.

The Court concludes the United States is under no obligation to respond as demanded in Ms. Jones “Truth Affidavit” and “Notice.” (Dkt. Nos. 3, 13.) The Federal Rules of Civil Procedure instead require that Ms. Jones file an answer to the United States' Complaint. See Fed. R. Civ. P. 8, 12(a)(1). As such, the Court finds no “binding contract” or “private settlement” was formed here and the United States is not in default.

3. United States' Motion for Summary Judgment

The United States has filed its Motion for Summary Judgment along with supporting materials. (Dkt. Nos. 17–19.) The Motion seeks entry of a permanent injunction pursuant to 26 U.S.C. §§ 7402, 7407, and 7408. Ms. Jones has not responded to the Motion.

Generally, a “plaintiff seeking a[n] injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.”See American Trucking Ass'ns, Inc. v. City of Los Angeles , 559 F.3d 1046, 1052 (9th Cir 2009) (quotingWinter v. Natural Res. Def. Council, Inc. , 129 S.Ct. 365, 374 (2008)). However, because the applicable statues here set forth the criteria for injunctive relief, the Court need not consider the traditional factors for a permanent injunction.See United States v. Estate Pres. Servs. ,  202 F.3d 1093, 1098 [85 AFTR 2d 2000-603] (9th Cir. 2000); United States v. McIntyre,   715 F.Supp.2d 1003, 1009 [105 AFTR 2d 2010-2693] (C.D. Cal. 2010);United States v. Thompson ,   395 F.Supp.2d 941, 945–46 [96 AFTR 2d 2005-6498] (E.D. Cal. 2005); In re Dow Corning Corp., 280 F.3d 648, 657–58 (6th Cir. 2002). Instead the Court will analyze the requirements for issuance of an injunction as expressly provided in the relevant statutes.

A. Permanent Injunction under 26 U.S.C. §§ 7407 and 7408

Because Ms. Jones took frivolous positions on the tax returns she prepared, the United States argues an injunction under   § 7407 and   § 7408 is warranted. Entry of an injunction under both   § 7407 or   § 7408 requires the United States to show that 1) Ms. Jones engaged in the conduct identified in each of the statues and 2) the “injunctive relief is appropriate to prevent the recurrence of such conduct.” 26 U.S.C. § 7407(b)(2),  § 7408(b)(2). The Court will address each requirement as to each statute in turn below.

1) Conduct Identified in   § 7407

  Section 7407(a) provides courts with the power to enjoin federal tax return preparers who engage in conduct described in   § 7407(b). 26 U.S.C. § 7407(a). Thus, the United States must show Ms. Jones is a tax preparer and her conduct is such that it is within those identified in   § 7407(b)(1)(A)–(D). Stated differently, in order to obtain a permanent injunction against Ms. Jones pursuant to   § 7407, the United States must establish that she 1) engaged in conduct subject to penalty under   § 6694,   § 6695, or engaged in “any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws”; 2) “injunctive relief is appropriate to prevent the recurrence of such conduct”; and 3) she “continually or repeatedly engaged” in the proscribed conduct such that a more limited injunction prohibiting the misconduct “would not be sufficient to prevent such person's interference with the proper administration of this title.” McIntyre, 715 F.Supp.2d at 1009 (citing 26 U.S.C. § 7407(b);United States v. Kapp ,   564 F.3d 1103, 1109 [103 AFTR 2d 2009-2038] (9th Cir. 2009); United States v. Nordbrock,   828 F.2d 1401, 1403 [60 AFTR 2d 87-5677] (9th Cir. 1987) (stating that any violation of   Sections 6694 or   6695 must be willful in order to be “subject to penalty”)).

Here, Ms. Jones is a tax preparer. The term “tax return preparer” is defined as “any person who prepares for compensation...any return of tax imposed by the [Internal Revenue Code] or any claim for refund of tax imposed by the [Internal Revenue Code].” 26 U.S.C. § 7701(a)(36). Although her “Truth Affidavit” denies many of the United States' allegations, it also states that Ms. Jones is “a tax preparer.” (Dkt. No. 3, p. 2 ¶ 2.) The materials provided by the United States support this conclusion. The tax returns submitted by the United States contain Ms. Jones' name, address, and signature as the “preparer.” (Dkt. No. 4, Exs. 2, 3, 6, 7, 8, 10, 11, 12, 14.) Based on these materials, the Court finds Ms. Jones satisfies the definition of a “tax return preparer.”

As to the prescribed conduct applicable here,   § 7407(b) identifies conduct by a tax return preparer who 1) violates   § 6694, which prohibits the preparation or submission of a return containing an understatement of taxpayer's liability due to an unreasonable position and 2) engages in any “other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws.” 26 U.S.C. § 7407(b)(1)(A), (D); see also McIntyre, 715 F.Supp.2d at 1009 (quoting 26 U.S.C. §§ 6694(a)–(b) (“   Section 6694 prohibits the knowing understatement of tax liability by a tax return preparer due to either: (1) the taking of an “unreasonable position” (i.e. those not supported by “substantial authority” under subsection 6694(a)(2)); or (2) understatement due to willful or reckless conduct.”). Based on the record in this case, the Court concludes Ms. Jones has engaged in conduct identified in   § 7407(b)(1)(A) and (D).

The United States asserts Ms. Jones prepared “frivolous tax returns claiming large, but fraudulent, tax refunds based on an absurd...tax-fraud scheme, wherein she submits phony IRS forms to the IRS.” (Dkt. No. 4, Memorandum in Support, p. 2.) This scheme involves Ms. Jones submitting phony IRS Forms 1009-OID which purport to have been issued to or received by the taxpayer from a creditor of the taxpayer that withholds nearly all of the interest income reported on the returns in the amount of the debt; usually a mortgage, car loan, or credit card balance owed by the taxpayer to the creditor. 3 The alleged creditors on the forms are usually a credit card or mortgage company. The scheme here, is based on what is commonly referred to as “redemption theories” which claim taxpayers are entitled to access a secret treasury account to satisfy their tax liabilities by using IRS forms. (Dkt. No. 3, 4, 19, Dec. Henline.)

Under this theory, there exists an “unrestricted right for collections and return of funds/securities” issued to every child born in the United States. (Dkt. No. 3.); see also United States v. Weldon, No. 1:08-cv-01643-LJO-SMS,   2010 WL 1797529 [105 AFTR 2d 2010-2190], 2 (E.D. Cal. May 4, 2010) (discussing the “redemption” or “charge-back” theory). The birth certificates issued to such children become a registered security representing that child's life-long labor on a general average basis. The security is held in trust by the United States government, in whom the children are its stockholders, as a redeemable bond. The Social Security Administration tracks each persons' funds. Individuals may access the funds held in trust by filing an IRS Form 1099. This theory has been routinely rejected in all other jurisdictions. See Weldon,   2010 WL 1797529 [105 AFTR 2d 2010-2190], at 3. 4

Using this rejected tax theory, Ms. Jones promotes a tax-fraud scheme that involves filing fraudulent tax returns and other frivolous documents with the IRS on behalf of her customers. The tax returns prepared by Ms. Jones claim large, but fraudulent, tax refunds based on phony IRS Forms 1099-OID which she attaches with the returns. Likewise, Ms. Jones claims on her customers' IRS Form 1040 the total amount of the false OID as both interest income and false withholding. This results in increased tax liability for the customer but, because of the parallel false withholding claims, produces a huge false refund claim dwarfing the reported amount of taxes owed. Through this scheme, nonexistent withheld taxes reported in the returns prepared and filed by Ms. Jones has resulted in massive claimed refunds. Ms. Jones has prepared over 400 such fraudulent federal tax returns for customers. Ms. Jones has admitted, in her “Truth Affidavit,” to preparing the federal tax returns in question.

As a result of this scheme, Ms. Jones' customers do not file proper federal income tax returns and, instead, falsely claim tax refunds to which they are in fact not entitled. Such false returns potentially deprive the United States tax revenue properly due and owing as well as result in the payment of fraudulent returns. The United States contends that Ms. Jones has “repeatedly prepared and filed preposterous federal income tax returns reporting false income tax withholding and false interest income, and then requesting fraudulent refunds on behalf of her customers.” (Dkt. No. 18, p. 5.) Ms. Jones has, the United States argues, prepared “at least 437 tax returns claiming more than $168 million in fraudulent refunds” by understating the claimants' tax liabilities through unreasonable and frivolous positions, preparing “phony” documentation, and claiming “bogus” withholdings. 5 (Dkt. No. 18, p. 5.) The IRS asserts it has issued approximately $7 million of erroneous refunds as a result of these fraudulent filings. (Dkt. No. 19, Dec. Henline.) In support of its Motion for Preliminary Injunction and Motion for Summary Judgment, the United States has supplied the tax return information for several individuals. (Dkt. Nos. 4, 19.) The Court has reviewed this material and agrees that the returns, prepared by Ms. Jones, violate   § 6694 as they are knowing understatements of tax liability by a tax return preparer due to the taking of an unreasonable position.

For example, the 1999 return for Kenneth and Patricia Malinowski for 1999 reported they received $411,883 in interest income and $72,599 as business income. (Dkt. No. 19, Ex. 17.) Schedule B of this 1999 return attributes nearly all of the interest income to income reported on the seven attached IRS Forms 1099-OID. (Dkt. No. 19, Ex. 17.) The IRS has no record of receiving any IRS Forms 1099-OID in 1999 from any entity on behalf of the Malinowski's as required by 26 U.S.C. § 6049(d)(6). (Dkt. No. 19, Exs. 22–23.) The record reflects similar fraudulent filings for the Malinowski's tax returns filed in 2000, 2001, 2003, and 2006. (Dkt. No. 19, Dec. Henline, ¶¶ 15–29.) The same is true of the other individuals for whom Ms. Jones prepared tax returns. (Dkt. Nos. 4, 19.)

Based on the foregoing, the Court finds that Jones has repeatedly and continually engaged in conduct in violation of 26 U.S.C. § 6694 by understating her customers' income tax liabilities by willfully preparing and filing frivolous and meritless federal tax returns and claims for refund that have no realistic possibility of being sustained on the merits. Similarly, the Court finds Ms. Jones has continually engaged in conduct in violation of 26 U.S.C. § 6695 by failing to remit a list of her customers or copies of their returns when the Internal Revenue Service requested those items as required by 26 U.S.C. § 6107(b).

2) Conduct Identified in   § 7408

Unlike   § 7407,   § 7408 is not limited to just tax preparers but allows courts to also enjoin anyone engaged in any specified conduct which, as relevant here, includes violations of   § 6701 prohibiting preparation of returns or other documents that the person knows will result in the understatement of tax liability. 26 U.S.C. § 7408(c)(1). “Under   section 7408, the United States must demonstrate a likelihood of success on the merits “(1) that [defendant] has engaged in any specified conduct [conduct subject to penalty under   §§ 6700 and/or 6701], and (2) that injunctive relief is appropriate to prevent recurrence of such conduct.” 26 U.S.C. § 7408(b), (c).” McIntyre, 715 F.Supp.2d at 1011 (citation omitted). 6

As determined above, the materials supplied by the United States in this case demonstrate that Ms. Jones' conduct falls within that outlined in   § 7408. Ms. Jones has prepared numerous tax returns and other documents which she knew would be used in connection with a material matter arising under the internal revenue laws and would result in an understatement of the liability for tax of another person.

Although the IRS notified her of the frivolousness of her scheme, Ms. Jones continued to prepare tax returns based upon such theories. (Dkt. No. 4, Dec. Henline.) In her “Truth Affidavit,” Ms. Jones argues that “no “Act of Congress” makes anyone “liable” for income taxes.” (Dkt. No. 3.) The “Truth Affidavit” also attaches a document entitled “Memorandum of Law in Support of 1099OID — Original Issue Discount,” containing arguments regarding redemption theory. These arguments have long been repeatedly rejected by courts. See Schiff v. United States,   919 F.2d 830, 834 [67 AFTR 2d 91-1062] (2d Cir. 1990); Lonsdale v. United States,   919 F.2d 1440, 1448 [67 AFTR 2d 91-1049] (10th Cir. 1990);Lively v. Commissioner ,   705 F.2d 1017, 1018 [51 AFTR 2d 83-1182] (8th Cir. 1983). Based on the foregoing, the Court finds Ms. Jones is fully aware that the theories upon which she prepared these tax returns is fraudulent. The Court also finds Ms. Jones has repeatedly and continually violated 26 U.S.C. § 6701 by preparing fraudulent returns that make false claims for refunds, knowing that such returns understate her customers' tax liabilities and that the returns will be used in connection with a material matter arising under the internal revenue laws. As such, the Court concludes that Ms. Jones has engaged in conduct specified in   § 7408.

3) Appropriate Relief to Prevent Recurrence of Such Conduct

As to the final requirement for both   §§ 7407,   7408, the United States argues a permanent injunction barring Ms. Jones from any tax return preparation is necessary and appropriate to prevent recurrence of the violating conduct listed in the applicable statues. (Dkt. No. 18, p. 5.) Ms. Jones will, the United States contends, continue to prepare and submit “bogus tax returns” given the number of such returns she has already filed, the monetary amount of fraudulent claims, and the fact that she continued to file such claims after being warned by the IRS. (Dkt. No. 18, pp. 6–7.)

The Court finds instructive the case cited to by the United States where the Ninth Circuit articulated the factors to consider in determining the likelihood of future   § 6700 violations and, thus, the need for an injunction. See Estate Pres. Servs., 202 F.3d at 1105. Such factors “include: (1) the gravity of the harm caused by the offense; (2) the extent of the defendant's participation; (3) the defendant's degree of scienter; (4) the isolated or recurrent nature of the infraction; (5) the defendant's recognition (or non-recognition) of his own culpability; and (6) the likelihood that defendant's occupation would place him in a position where future violations could be anticipated.” Id. (citations omitted); see also United States v. Schiff,   379 F.3d 621, 625 [94 AFTR 2d 2004-5460] (9th Cir. 2004) (recognizing the same factors). In that case, the claims brought by the United States were for alleged violations of 26 U.S.C. § 6700 regarding the rendering of abusive tax-shelter advice. The Ninth Circuit granted injunctive relief under   § 7408.

So too here, the Court finds absent an injunction, Ms. Jones is likely to continue to defraud the United States Treasury by intentionally understating her customers' income tax liabilities. The gravity of the harm caused by these offenses is sever given the number of returns and the amounts claimed in the fraudulently prepared tax documents as well as the amount of money paid out on the returns. Again, the United States has identified over 400 tax returns prepared by Ms. Jones in this case claiming more than $168 million in fraudulent refunds upon which the United States has paid out approximately $7 million in erroneous refunds. (Dkt. No. 19, Dec. Henline.) As determined above, Ms. Jones knew her actions were fraudulent but she continued to prepare tax returns in the same fraudulent manner. As stated in her “Truth Affidavit,” Ms. Jones runs a “tax return preparation business” and has been a “tax preparer for over 25 years.” (Dkt. No. 3, pp. 2, 3.) Thus, it is likely Ms. Jones will continue to violate the income tax laws in the future and an injunction is necessary to prevent such future violations.

B. Permanent Injunction under 26 U.S.C. § 7402

The United States also seeks a permanent injunction under   § 7402 which allows courts broad jurisdiction “to make and issue in civil actions, writs and orders of injunction...as may be necessary or appropriate for the enforcement of the internal revenue laws.” 26 U.S.C. § 7402(a). The United States argues an injunction is necessary to prevent Ms. Jones from substantially interfering with the internal revenue laws. (Dkt. No. 18, p. 7.)

As discussed above, the Court has reviewed the materials and documents provided by the United States in conjunction with the Motion for Preliminary Injunction and Motion for Summary Judgment. The Court has also considered Ms. Jones' “Truth Affidavit” and “Notice” as well as her arguments contained therein. (Dkt. Nos. 3, 13.) Having completed this review, and for the reasons articulated previously, the Court finds the United States' materials demonstrate a need for the issuance of an injunction against Ms. Jones in order to enforce the internal revenue laws. The United States asks that Ms. Jones be precluded from preparing tax returns for others, order her to notify her customers of the injunction, and to produce a customer list to the United States. (Dkt. No. 18, p. 8.) Based on the record, the Court finds the requested injunction is necessary to enforce the internal revenue laws. The requirements that Ms. Jones notify her customers, provide a customer list, and not prepare tax returns for others are appropriate in order to allow the necessary monitoring and ensure no further violations of the internal revenue laws occur.

The Court further finds Ms. Jones' fraudulent activities are sufficiently egregious that a narrow injunction prohibiting only certain enjoinable activities is unlikely to prevent continued interference by Jones with the proper administration of the internal revenue laws.

C. Conclusions of Law

The Court finds that Ms. Jones has continually and repeatedly engaged in conduct subject to penalty under 26 U.S.C. §§ 6694 and 6695, and that injunctive relief is appropriate under 26 U.S.C. § 7407 to prevent Ms. Jones and anyone acting in concert with her, from further engaging in such conduct.See Kapp , 564 F.3d at 1109. Jones has prepared over 400 returns understating her customers' returns based on a frivolous position not supported by any authority. Likewise, Court finds that Ms. Jones has engaged in conduct subject to penalty under 26 U.S.C. § 6701, which imposes penalties on any person who prepares or assists in the preparation of “any portion of a return, affidavit, claim, or other document” that she “knows (or has reason to believe) will be used in connection with any material matter” under the Internal Revenue Code and that she knows will “result in an understatement of the liability for tax.” Thus, injunctive relief is appropriate under 26 U.S.C. § 7408 to prevent Ms. Jones from further engaging in such conduct. See Schiff, 379 F.3d at 624. The Court further finds that because such conduct was continual and repeated, and because a narrower injunction would not be sufficient to prevent Ms. Jones's interference with the proper administration of the internal revenue laws, that Ms. Jones should be enjoined from further acting as a federal tax return preparer under both 26 U.S.C. §§ 7407, 7408. Finally, the Court finds that Ms. Jones engaged in conduct that interferes with the enforcement of the internal revenue laws, and that injunctive relief is appropriate pursuant to the Court's inherent equity powers and 26 U.S.C. § 7402(a) to prevent recurrence of such conduct.

ORDER

NOW THEREFORE IT IS HEREBY ORDERED that Plaintiff's Motion for Summary Judgment (Dkt. No. 17) is GRANTED. The Court HEREBY ENTERS a Permanent Injunction as follows:

Defendant Penny Lea Jones, formerly known as Penny Lea Wardrop, and anyone in active concert or participation with her, are enjoined from directly or indirectly:

(1.) From acting as a federal tax return preparer and from preparing or filing federal tax returns for others, and from representing others before the IRS, including prohibiting her from directly or indirectly:
(a.) Preparing or filing, or assisting in, or directing the preparation or filing of any federal tax return or amended return or other related documents or forms for any other person or entity;
(b.) Giving tax advice or assistance to anyone for compensation;
(c.) Engaging in activity subject to penalty under 26 U.S.C. §§ 6694 or 6695;
(d.) Engaging in any other activity subject to penalty under the Internal Revenue Code; and
(e.) Engaging in other conduct that substantially interferes with the proper administration and enforcement of the internal revenue laws.
(2.) From directly or indirectly by means of false, deceptive, or misleading commercial speech:
(a.) Organizing or selling tax shelters, plans or arrangements that advise or assist taxpayers to attempt to evade the assessment or collection of such taxpayers' correct federal tax;
(b.) Engaging in any other activity subject to penalty under 26 U.S.C. § 6700, including organizing or selling a plan or arrangement and making a statement regarding the excludability of income or any other tax benefit by participating in the plan that she knows or has reason to know is false or fraudulent as to any material matter;
(c.) Engaging in any activity subject to penalty under 26 U.S.C. § 6701; and
(d.) Directly or indirectly organizing, promoting, marketing, or selling any plan or arrangement that advises or encourages taxpayers to attempt to violate internal revenue laws or unlawfully evade the assessment or collection of their federal tax liabilities, including promoting, selling, or advocating the use of false Forms 1099 based on the false claims that:
(i.) Taxpayers can draw on the Treasury of the United States to pay their tax debt or other debts using Forms 1099 or other documents;
(ii.) Taxpayers can issue false Forms 1099 to a creditor and report the amount on the false Forms 1099 as income taxes withheld on their behalf, and;
(iii.) Taxpayers have a secret account with the Treasury Department which they can use to pay their debts or which they can draw on for refunds through a process that is often called “redemption” or “commercial redemption.”
(3.) From preparing her own federal income tax returns claiming false income tax withholding and refunds based on amounts shown in false Forms 1099 issued to her creditors, and;
(4.) From filing, providing forms for, or otherwise aiding and abetting the filing of frivolous Forms 1040, Forms 1040X, or Forms 1099 for herself or others, including the notarization or signing of certificates of service or similar documents in connection with the frivolous tax returns
IT IS FURTHER ORDERED that Defendant Penny Lea Jones shall produce to counsel for the United States, within fifteen days of this Order, a list that identifies by name, social security number, address, email address, and telephone number, all persons for whom she prepared federal tax returns or claims for refund in the last three (3) years. Within 14 days of the date of the entry of the return of service of this Order, Ms. Jones shall also contact by mail (and also by e-mail, if an address is known) all persons who have purchased any products, services or advice associated with the false or fraudulent tax scheme and inform those persons of the preliminary injunction entered against her. Within 28 days, Jones shall file with the Court a certificate, signed under penalty of perjury, that she has done so.

IT IS FURTHER ORDERED that Plaintiff shall personally serve the Defendant Penny Lea Jones with a copy of this Order forthwith and file a return of service

SO ORDERED.

DATED: July 7, 2011

Honorable Edward J. Lodge

U. S. District Judge

1
  Federal Rule of Civil Procedure 56 was revised effective December 1, 2010. Though the Motion for Summary Judgment in this case was filed prior to December 1, 2010, the Court will apply the revised Rule 56 as applying it in this action is not infeasible and does not work an injustice.See Fed. R. Civ. P. 86(a)(2)(B).
2
  See also, Rule 56(e) which provides:
((e)) Failing to Properly Support or Address a Fact. If a party fails to properly support an assertion of fact or fails to properly address another party's assertion of fact as required by Rule 56(c), the court may:
((1)) give an opportunity to properly support or address the fact;
((2)) consider the fact undisputed for purposes of the motion;
((3)) grant summary judgment if the motion and supporting materials--including the facts considered undisputed--show that the movant is entitled to it; or
((4)) issue any other appropriate order.
3
  The district court in McIntyre recently described a similar scheme as follows:
IRS Forms 1099-OID are used by issuers of financial instruments generating original issue discount (“OID”) to report OID income and any federal income tax withheld from that income. OID income refers to the difference between the discounted price at which a debt instrument is sold at issuance and the stated redemption price at maturity; it is taxable as interest over the life of the obligation. IRS Forms Schedule B are used to report interest and dividend income, and are attached to IRS Forms 1040. The fraudulent Forms 1099-OID that Defendants prepare and submit with returns they prepare falsely state that their customers are “payees” who receive OID income from their creditors. The fraudulent Forms 1099-OID typically show false income paid by a customer's creditors to the customer. Some of these forms even show the customer paying OID income to himself.
McIntyre,   715 F.Supp.2d 1003, 1006–07 [105 AFTR 2d 2010-2693] (internal citations omitted).

4
  “Courts have characterized the redemption theory as “implausible,” “clearly nonsense,” “convoluted,” and “peculiar.””Weldon , supra (citing Bryant v. Washington Mutual Bank, 524 F.Supp.2d 753, 760 (W.D.Va. 2007); United States v. Allison,   264 Fed.Appx. 450, 452 [101 AFTR 2d 2008-756] (5th Cir. 2008). “In the federal income tax context, the redemption theory is nonsensical and soundly rejected in this and all other jurisdictions.” Id. (citation omitted).
5
  In 2008 and 2009, the IRS has identified approximately 415 individual income tax returns and 22 business income tax returns that were prepared and filed by Ms. Jones that make fraudulent claims for refunds exceeding $169 million. (Dkt. No. 19, Dec. Henline.)
6
     Section 6700 proscribes, inter alia, the promotion of abusive tax shelters, while   section 6701 proscribes aiding and abetting understatement of tax liability.” McIntyre, 715 F.Supp.2d at 1011. “Under 26 U.S.C. § 6701, a person “(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document, (2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and (3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person,” may be penalized.” Id.



§ 6700 Promoting abusive tax shelters, etc.

 (a) New Law AnalysisWG&L Treatises Imposition of penalty.
Any person who—

(1)

(A) organizes (or assists in the organization of)—

(i) a partnership or other entity,

 (ii) any investment plan or arrangement, or

 (iii) any other plan or arrangement, or

 (B) participates (directly or indirectly) in the sale of any interest in an entity or plan or arrangement referred to in subparagraph (A) , and

 (2) makes or furnishes or causes another person to make or furnish (in connection with such organization or sale)—

(A) a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement which the person knows or has reason to know is false or fraudulent as to any material matter, or

 (B) WG&L Treatises a gross valuation overstatement as to any material matter,

shall pay, with respect to each activity described in paragraph (1) , a penalty equal to the $1,000 or, if the person establishes that it is lesser, 100 percent of the gross income derived (or to be derived) by such person from such activity. For purposes of the preceding sentence, activities described in paragraph (1)(A) with respect to each entity or arrangement shall be treated as a separate activity and participation in each sale described in paragraph (1)(B) shall be so treated.


Notwithstanding the first sentence, if an activity with respect to which a penalty imposed under this subsection involves a statement described in paragraph (2)(A) , the amount of the penalty shall be equal to 50 percent of the gross income derived (or to be derived) from such activity by the person on which the penalty is imposed.
 (b) WG&L Treatises Rules relating to penalty for gross valuation overstatements.

(1) Gross valuation overstatement defined.
For purposes of this section , the term “gross valuation overstatement” means any statement as to the value of any property or services if—
(A) the value so stated exceeds 200 percent of the amount determined to be the correct valuation, and

 (B) the value of such property or services is directly related to the amount of any deduction or credit allowable under chapter 1 to any participant.

 (2) WG&L Treatises Authority to waive.
The Secretary may waive all or any part of the penalty provided by subsection (a) with respect to any gross valuation overstatement on a showing that there was a reasonable basis for the valuation and that such valuation was made in good faith.

 (c) Penalty in addition to other penalties.
The penalty imposed by this section shall be in addition to any other penalty provided by law.

 www.irstaxattorney.com 888-712-7690

Thursday, July 21, 2011


U.S. v. KENNEDY, Cite as 108 AFTR 2d 2011-XXXX, 07/05/2011

UNITED STATES OF AMERICA, Plaintiff, v. ALBERT ROD KENNEDY and RODRIGO G. GAONA, Defendants.
Case Information:

Code Sec(s):      
Court Name:      UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION,
Docket No.:        Civil Action No. SA-10-CV-341-XR,
Date Decided:   07/05/2011.
Disposition:       
HEADNOTE

.

Reference(s):

OPINION

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

Judge: XAVIER RODRIGUEZ UNITED STATES DISTRICT JUDGE

On this date, the Court considered the United States' Motion for Summary Judgment Against Rodrigo Gaona (Docket Entry No. 12) and Motion for Summary Judgment Against Albert Kennedy (Docket Entry No. 13). For the following reasons, the motions for summary judgment against both Defendants are GRANTED.

Factual Background

In 1998 or 1999, Defendants Rodrigo Gaona and Albert Kennedy, along with another individual George Forero, founded the company M.S. Patrol, Inc. Gaona, Kennedy, and Forero were the only officers of the company and the only members of the company's board of directors. Beginning in 2000, M.S. Patrol failed to pay over to the government payroll taxes that it had collected from its employees. Gaona was aware of the company's failure to pay the taxes from the first instance when they were not paid. Kennedy learned of the unpaid taxes in 2003 or 2004. Gaona and Kennedy jointly hired the law firm American Tax Relief to resolve the situation with the unpaid taxes. American Tax Relief ultimately did not resolve the dispute, purportedly because of Forero's failure to file his personal tax returns. M.S. Patrol continued to operate during that period. Gaona and Kennedy then hired the law firm Roni Lynn Deutch to continue attempts to resolve the unpaid taxes with the IRS. Shortly thereafter, in 2006, Gaona and Kennedy decided to cease M.S. Patrol's operations. No compromise was ever reached with the IRS.

On February 15, 2007 and June 11, 2008, a delegate of the Secretary of the Treasury made assessments against and gave notice and demand for payment to both Albert Kennedy and Rodrigo Gaona. The assessments represent the Defendants' purported liability for the unpaid employment taxes for M.S. Patrol under 26 U.S.C. § 6672. Both Defendants refused to pay the full amount of the assessments. The Government asserts that Kennedy owes a total of $326,101.01 plus interest and statutory additions, and that Gaona owes a total of $381,230.72 plus interest and statutory additions. The Government also seeks a ten percent surcharge for the cost of litigation, pursuant to 28 U.S.C. § 3011.

Procedural History

The United States filed a complaint with this Court on May 3, 2010, seeking to recover the unpaid taxes pursuant to 26 U.S.C. § 6672. 1 Kennedy filed an answer and cross-claim against Gaona on June 4, 2010. 2 Gaona filed an answer to the complaint and Kennedy's cross-claim on June 15, 2010. 3 The government filed a motion for summary judgment against Gaona on March 7, 2011, 4 and a motion for summary judgment against Kennedy on March 11, 2011. 5 Gaona filed no response to the government's motion. Kennedy filed a response on March 22, 2011, 6 and the government filed a reply on April 4, 2011. 7 With the Court's permission, Kennedy filed a sur-reply on April 29, 2011. 8

Legal Standard

Summary judgment is appropriate if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). An issue is “genuine” if the evidence is sufficient for a reasonable jury to return a verdict in favor of the nonmoving party.Anderson , 477 U.S. at 248; Hamilton v. Segue Software Inc., 232 F.3d 473, 477 (5th Cir. 2000). A fact is “material” if its resolution in favor of one party might affect the outcome of the case. Anderson, 477 U.S. at 248; Wyatt v. Hunt Plywood Co., Inc., 297 F.3d 405, 409 (5th Cir. 2002).

The burden is on the moving party to show that “there is an absence of evidence to support the nonmoving party's case.”Freeman v. Tex. Dep't of Criminal Justice , 369 F.3d 854, 860 (5th Cir. 2004) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). Once the moving party meets its initial burden, the nonmoving party “must ... set out specific facts showing a genuine issue for trial.” Fed. R. Civ. P. 56(e);Forsyth v. Barr , 19 F.3d 1527, 1537 (5th Cir. 1994). To avoid summary judgment, the nonmoving party must adduce admissible evidence that creates a fact issue concerning the existence of every essential component of that party's case and unsubstantiated assertions of actual dispute will not suffice.Thomas v. Price , 975 F.2d 231, 235 (5th Cir. 1992). The opposing party cannot establish a genuine issue of material fact by resting on the mere allegations of the pleadings.Hulsey v. State of Texas , 929 F.2d 168, 170 (5th Cir. 1991). The Court reviews all facts in the light most favorable to the nonmoving party. First Colony Life Ins. Co. v. Sanford, 555 F.3d 177, 181 (5th Cir. 2009). A motion for summary judgment cannot be granted simply because there is no opposition. Ford-Evans v. Smith, 206 Fed. Appx. 332, 334 (5th Cir. 2006).

Analysis

Employers are required to withhold their employees' share of federal income taxes and FICA taxes from the employees' wages. 26 U.S.C. §§ 3102(a), 3402(a). The employer then holds those funds in trust for the benefit of the United States. 26 U.S.C. § 7501(a); Slodov v. United States,   436 U.S. 238, 242–43 [42 AFTR 2d 78-5011] (1978); Howard v. United States,   711 F.2d 729, 733 [52 AFTR 2d 83-5777] (5th Cir. 1983). Employers are required to pay those withheld funds to the United States. Slodov, 436 U.S. at 324; Wood v. United States,   808 F.2d 411, 414 [59 AFTR 2d 87-512] (5th Cir. 1987). Individual employees are given credit for paying the taxes regardless of whether they are paid by the employer and thus cannot be held liable. Id.

The government may seek to collect the amount of the unpaid taxes from the employer or from the individuals responsible for the collection and nonpayment of the taxes. Id. Responsible persons may be held liable pursuant to 26 U.S.C. § 6672(a):

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over...
In order to establish liablility against an individual under   § 6672, the government must prove that the individual is a “responsible person” as defined by the statute, and that the individual willfully failed to collect, truthfully account for, or pay over the taxes. Barnett v. Internal Revenue Service,   988 F.2d 1449, 1453 [71 AFTR 2d 93-1614] (5th Cir. 1993). Any person required to collect, truthfully account for, or pay over any tax may be liable under the statute; the person need not satisfy all three qualifications. Slodov, 436 U.S. at 250. A factfinder's discretion in the responsibility determination is narrow, and courts regularly find responsibility as a matter of law. Barnett, 988 F.2d at 1455 n. 10.

A. Responsible Person

The Fifth Circuit takes “a broad view of who is a responsible person under   § 6672.” Logal v. United States,   195 F.3d 229, 232 [84 AFTR 2d 99-7047] (5th Cir. 1999) (citingBarnett , 988 F.3d at 1454). There are six factors to be considered in determining whether an individual is a responsible person.

We ask whether such a person (i) is an officer or member of the board of directors; (ii) owns a substantial amount of stock in the company; (iii) manages the day-to-day operations of the business; (iv) has the authority to hire or fire employees; (v) makes decisions as to the disbursement of funds and payment of creditors; (vi) possesses the authority to sign company checks.
Barnett, 988 F.3d at 1455. Thus, an individual can be a responsible person even if he is not the person directly responsible for paying taxes or managing the finances of the company. See id. The crucial issue is whether an individual has the status, duty, power, and authority required to cause the taxes to be paid, regardless of whether or not he exercised it. Wood, 808 F.2d at 415;Howard , 711 F.2d at 734. It is relevant both whether the individual had the “actual authority or ability, in view of his status within the corporation, to pay the taxes owed,” as well as whether he “could have had “substantial” input” into the decisions at issue if he had wished to exercise his authority. Barnett, 988 F.2d at 1454–55.

A responsible person need not have the sole or final duty and authority to remit the taxes. Neckles v. United States,   579 F.2d 938, 940 [42 AFTR 2d 78-5807] (5th Cir. 1978). The law applies to any responsible persons, not just the most responsible person.Barnett , 988 F.2d at 1455 (citingHoward , 711 F.2d at 737). “There may be – indeed, there usually are — multiple responsible persons in any company.” Barnett, 988 F.2d at 1455.

1. Rodrigo Gaona

Gaona's deposition testimony is the only evidence submitted by the government on the issue of his liability, and he has presented no evidence to counter it. With regard to his responsibility, Gaona testified that during the relevant time period, he was president, chairman of the board, and partial owner of M.S. Patrol. 9 It appears that he held 47.5 percent of the stock, and it is clear that he held at least 33 percent. 10 He also stated that he had the authority to hire and fire employees, although he did not do so because Kennedy and Forero handled the hiring and firing. 11 He also had the authority to “direct authorized payment of bills”; “deal with major supplies and customers”; “negotiate corporate purchases, contracts, loans”; “open and close bank accounts”; “sign checks”; “guarantee, cosign corporate bank loans”; “make authorized bank deposits”; “authorize payroll checks”; “prepare federal tax returns”; “review federal tax returns”; and “determine company financial policy.” 12 He further stated that, although he and Kennedy both authority to do so, Gaona was the only one responsible for preparing and paying quarterly payroll tax returns for M.S. Patrol. 13 Finally, Gaona testified that he and Kennedy were responsible for making the ultimate decisions about the business. 14 He and Kennedy together decided to terminate the business in 2006 when it was no longer financially feasible to continue operating. 15

The foregoing evidence clearly establishes that Gaona was a “responsible person” under 26 U.S.C. § 6672.See Barnett , 988 F.3d at 1455. Gaona has submitted no evidence to the contrary. Accordingly, there is no issue of material fact regarding Gaona's responsible person status.

2. Albert Kennedy

The government argues that Kennedy is a responsible person because he satisfies each of the six indicia of responsibility identified in Barnett. 16 988 F.3d at 1455. Kennedy argues that he is not a responsible person because he had only nominal, if any, power, authority, and control over M.S. Patrol's finances and disbursements, and he did not have each of the sixBarnett indicia of responsibility. 17 The government argues that he need not have all six indicia of responsibility in order to be a responsible person. 18 The government also argues that Kennedy may be a responsible person even if he did not have the sole or final power or authority, and even if Gaona is considered to be more responsible than Kennedy. 19

To dispute his responsible person status, Kennedy relies on the fact that he owned only 5% of the company's stock, as compared to Gaona and Forero who each owned 47.5%. 20 However, the government has presented evidence to suggest that Kennedy may have owned 33% of the stock, rather than only the 5% that he claimed. 21 Kennedy also argues that he was Vice President of Marketing for M.S. Patrol, responsible for managing business and getting clients, 22 whereas Gaona was President and Treasurer and had responsibility for financial matters. 23 In his sur-reply, Kennedy also argues that Gaona “kept the financial documents of M.S. Patrol under lock and key during the periods at issue in this case,” and thus Kennedy had no physical access to M.S. Patrol's financial documents, no ability to determine who its creditors were, and no direct access to company checks without Gaona's permission. 24

Gaona testified that the company's financial records were kept “under lock and key,” but Gaona did not know whether Kennedy had the key to access them, or whether Kennedy had access to the key which was kept in a desk in the corporate office space. 25 He further testified, however, that Kennedy had a key to Gaona's desk where the company's checks were kept, and on occasion Gaona would unlock the desk to get a check for Kennedy. 26 On other occasions Kennedy would tell Gaona that he needed a check, Gaona would say okay, and Kennedy would get it. 27

The disputes regarding Kennedy's access to financial records and checks, and regarding his percentage of stock ownership, are not dispositive of his responsible person status. An individual may qualify as a responsible person even if he does not have knowledge that he has the requisite duty and authority.Barnett , 988 F.2d at 1454. “The crucial inquiry is whether a party...by virtue of his position in (or vis-a-vis) the company, could have had “substantial input” into such decisions, had he wished to exert his authority.”Id. Considering the other evidence presented, there is no fact issue regarding whether Kennedy is a responsible person under the statute.

Kennedy argues that “a majority of the Barnett factors are in doubt in this case,” specifically that “there are disputes as to whether Kennedy managed the day-to-day operations of the business, whether Kennedy made decisions as to the disbursement of funds and the payment of employees, and whether Kennedy had the authority to unilaterally hire and fire employees.” 28 Kennedy's own deposition testimony negates this argument. Even if Kennedy owns only a small percentage of the company's stock, he is a Vice-President of M.S. Patrol and one of only three members of its board of directors. See Barnett, 988 F.3d at 1455. Kennedy himself testified that he, Gaona, and Forero made major decisions about the company together. 29 He testified that he had the authority to hire, fire, and manage employees. 30 He had the authority to authorize paying bills, authorize payroll checks, make bank deposits, deal with major customers and suppliers, and negotiate contracts. 31 He and Gaona together opened and closed the corporate bank accounts, and both had the authority to sign checks. 32 See id.

Considering the foregoing evidence with reference toBarnett 's six indicia of responsibility, Kennedy clearly qualifies as a responsible person for purposes of 26 U.S.C. § 6672. See id. Kennedy has only unsupported arguments, but no contradicting evidence, in his briefing. Accordingly, no issue of material fact remains as to Kennedy's responsible person status.

B. Willful Failure to Collect, Truthfully Account For, or Pay Taxes

The government argues that Gaona and Kennedy both willfully failed to collect, account for, or pay over the unpaid taxes, because they continued to operate the business and authorize payments with knowledge that M.S. Patrol owed the unpaid taxes to the IRS, and because they intentionally undercapitalized M.S. Patrol when they started the company. 33 Once a responsible person is aware of the outstanding tax liability, he has a duty to pay the taxes before making payments to any other creditors. Logal, 195 F.3d at 232; Barnett, 988 F.2d at 1457 (citingMazo v. United States ,   591 F.2d 1151, 1154 [43 AFTR 2d 79-853] (5th Cir. 1979); Howard, 711 F.2d at 73. Evidence of failure to do so “establishes willfulness as a matter of law.”Barnett , 988 F.2d at 1457 (citingHoward , 711 F.2d at 735). Reckless disregard of the risk that the taxes may not be paid also amounts to willfulness.Logal , 195 F.3d at 232 (citing Gustin, 876 F.2d at 492).

1. Rodrigo Gaona

Gaona testified in his deposition that he knew that the company was unable to pay its taxes, and he knew that the IRS had sent a letter inquiring about the outstanding taxes. 34 Even with this knowledge, Gaona continued to receive his salary, 35 as did M.S. Patrol's other employees. 36 Gaona testified that he and Kennedy authorized these salary payments as well as rent payments. 37 Gaona, Kennedy, and Forero kept M.S. Patrol in business and operating for three years after knowing about the unpaid taxes. 38

The foregoing deposition testimony clearly establishes that Gaona willfully failed to collect and pay the taxes due to the IRS. See Logal, 195 F.3d at 232;Barnett , 988 F.2d at 1457 (citing Mazo v. United States,   591 F.2d 1151, 1154 [43 AFTR 2d 79-853] (5th Cir. 1979);Howard , 711 F.2d at 73. Gaona has presented no evidence to dispute it. Thus, Gaona was a responsible person under 26 U.S.C. § 6672, and he willfully failed to collect and pay the taxes owed by M.S. Patrol. Accordingly, the Court GRANTS summary judgment to the government on its claim against Rodrigo Gaona.

2. Albert Kennedy

The government has presented evidence that Kennedy signed at least five IRS Form 941s in 2004 showing that the taxes remained unpaid. 39 Kennedy testified in his deposition that he did not learn of the unpaid taxes until 2003 or 2004. 40 He argues that he would not have had knowledge before that, because the payroll information was kept behind lock and key by Gaona, who did not know whether Kennedy had a key. 41 He also claims that he did not prepare the tax returns, and he did not review the information on the Form 941s that Gaona presented for him to sign, because he was led to believe that the taxes were being paid. 29 Gaona testified that the form would have been filled out when Kennedy signed it, but he did not have any recollection of presenting any particular Form 941 for Kennedy's signature. 30

If the only evidence of Kennedy's knowledge was the signatures on the Form 941s, there may be a dispute of material fact as to his knowledge and therefore his willfulness. Kennedy also testified at his deposition, however, that all employees continued to be paid all the way until the termination of the company, even after he learned about the unpaid taxes in 2003 or 2004. 31 He also testified that he signed payroll checks to Forero after he knew about the unpaid taxes. 32 Kennedy's admission that he signed paychecks and knew that employees continued to get paid, even after knowing about the unpaid taxes, amounts to willfulness as a matter of law under Fifth Circuit precedent. 33 See Mazo, 591 F.2d at 1197;Barnett , 988 F.2d at 1457–58. Accordingly, the Court also GRANTS summary judgment to the government on its claim against Kennedy.

Conclusion

Summary judgment is GRANTED to the United States on its claim against Rodrigo Gaona and Albert Kennedy. All claims by the United States against both Kennedy and Gaona are disposed of by this order. 34 It is therefore ORDERED, ADJUDGED, and DECREED that Plaintiff United States of America recover from Defendant Rodrigo Gaona the amount of $381,230.72, plus interest and other statutory additions, including the 10% litigation surcharge authorized by 28 U.S.C. §3011. 35 It is further ORDERED, ADJUDGED, and DECREED that Plaintiff United States of America recover from Defendant Albert Kennedy the amount of $326,101.01, plus interest and other statutory additions, including the 10% litigation surcharge authorized by 28 U.S.C. §3011.

It is ORDERED that Plaintiff shall recover its costs of the action from the Defendants. Plaintiff shall file its bill of costs in the form required by the Clerk of this Court within fourteen (14) days of the date of this judgment. 36

Kennedy has also filed a cross-claim against Gaona for indemnity for any amounts that Kennedy may be held liable to the Plaintiff (Docket Entry No. 6). No party has filed a motion for summary judgment on that claim. Accordingly, Kennedy's cross-claim remains pending in anticipation of the July 18, 2011 trial date and July 7, 2011 pretrial conference set by this Court's May 19, 2011 order (Docket Entry No. 21). In light of this summary judgment order, if the remaining parties wish to continue the pretrial conference and/or trial date, the Court will consider timely motions to do so.

It is so ORDERED.

SIGNED this 5th day of July, 2011.

XAVIER RODRIGUEZ

UNITED STATES DISTRICT JUDGE

1
  Pl.'s Orig. Compl., May 3, 2010 (Docket Entry No.1).
2
  Kennedy's Orig. Ans. and Cross-Claim, Jun. 4, 2010 (Docket Entry No. 6).
3
  Gaona's Orig. Ans., Jun. 15, 2010 (Docket Entry No. 8).
4
  Pl.'s Mot. for Summ. J. against Gaona, Mar. 7, 2011 (Docket Entry No. 12).
5
  Pl.'s Mot. for Summ. J. against Kennedy, Mar. 11, 2011 (Docket Entry No. 13).
6
  Kennedy's Resp. to Pl.'s Mot. for Summ. J. against Kennedy, Mar. 22, 2011 (Docket Entry No. 15).
7
  Pl.'s Reply to Kennedy's Resp. to Pl.'s Mot. for Summ. J. against Kennedy, Apr. 4, 2011 (Docket Entry No. 17).
8
  Kennedy's Sur-Reply to Pl.'s Reply, Apr. 29, 2011 (Docket Entry No. 20).
9
  Deposition of Rodrigo Gaona 41:18–44:14, Jan. 31, 2011 (attached as Exhibit 1 to Pl.'s Mot.).
10
  Id. 62:5–8.
11
  Id.44:21–45:5.
12
  Id. 46:1–49:13.
13
  Id. 21:7–15.
14
  Id. 70:2–11.
15
  Id. 27:20–25.
16
  Def.'s Mot. against Kennedy at 7.
17
  Kennedy's Resp. at 5.
18
  Def.'s Reply at 2.
19
  Def.'s Mot. against Kennedy at 5–6.
20
  Deposition of Albert Kennedy 10:13–15, Jan. 31, 2011 (Ex. A. to Kennedy's Resp.); Minutes of Organizational Board Meeting of M.S. Patrol 3, Jun. 1, 1998 (Ex. C. To Kennedy's Response).
21
  U.S. Corporation Income Tax Return, signed Sep. 22, 2003, at Schedule E (attached as Ex. 3 to Pl.'s Mot. against Kennedy).
22
  Kennedy Dep. 17:7–11
23
  Id. 13:17–24; Gaona Depo. 77:19–78:16.
24
  Kennedy's Sur-Reply at 2;
25
  Gaona Dep. 79:12–80:3
26
  Id. 115:20–116:11.
27
  Id. 116:12–18.
28
  Kennedy's Sur-Reply at 2.
29
  Kennedy Depo. 28:2–3.
30
  Id. 28:21–22:4.
31
  Id.29:5–25.
32
  Id. 24:18–26:2; 29:14–18.
33
  Pl.'s Mot. against Gaona at 7–9; Pl.'s Mot. against Kennedy at 7. Because the Court can determineno issues of material fact regarding willfulness, and thus grant summary judgment on those grounds, the Court need not consider the undercapitalization argument.
34
  Gaona Depo. 22:18–24:11.
35
  Id. 23:18–20.
36
  Id.28:1–11.
37
  Id. 51:10–52:1.
38
  Id. 24:17–25:9.
39
  Ex. 5 to Pl.'s Mot. against Kennedy.
40
  Kennedy Depo. 54:2–12.
41
  Kennedy's Resp. at 6; Gaona Depo. 79:19–80:3.
29
  Kennedy's Resp. at 6; Kennedy Depo 43:2–44:4, 63:3–64:25.
30
  Gaona Depo. 76:16–77:6
31
  Kennedy Depo. 37:25–38:4.
32
  Id.56:6–11.
33
  Kennedy relies on a Sixth Circuit case, Cline v. United States,   997 F.2d 191 [72 AFTR 2d 93-5230] (6th Cir. 1993), for the proposition that “an officer of a company who did not occupy the dominant role of the financial affairs of the corporation and failed to cause others to pay the withholding taxes did not amount to willfulness under   § 6672.” Kennedy's Resp. at 6. However, this Court is bound by Fifth Circuit precedent which clearly holds that a responsible person acts willfully when he has knowledge of the unpaid taxes yet continues to make payments to unpaid creditors. See Mazo, 591 F.2d at 1197; Barnett, 988 F.2d at 1457–58.
34
  The government does not limit its claims against Kennedy to only those taxes unpaid after he gained knowledge, but rather claims unpaid taxes against Kennedy starting in September 2000. Pl.'s Compl. ¶¶ 7–8. The Court notes that the language of the statute provides for recovery against any person who “willfully fails to collect, truthfully account for, and pay over any tax...” 26 U.S.C. § 6672. Because Kennedy failed to truthfully account for and pay over all of the unpaid taxes, not just those which were assessed after him gaining knowledge that they were unpaid, there does not appear to be any basis to limit his liability. Kennedy has not argued or provided case law to suggest that the claim should be limited to only those periods after which he gained knowledge of the unpaid taxes.
35
  28 U.S.C. § 3011 authorizes the government to recover “a surcharge of 10 percent of the amount of the debt in connection with the recovery of the debt, to cover the cost of processing and handling the litigation and enforcement under this chapter of the claim for such debt,” in any action or proceeding under Subchapter B or C of the Federal Debt Collection Procedure Act.
36


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