United States of America v. Ericson
ORDER GRANTING IN PART THE GOVERNMENT'S MOTION FOR SUMMARY JUDGMENT re 25 Motion for Summary Judgment. Signed by JUDGE LESLIE E. KOBAYASHI on 11/30/2014. GRANTED insofar as the Court FINDS that: Ericson prepa red returns that understated his customers tax liabilities; his positions in filing those returns were unreasonable; and an injunction is appropriate and necessary to prevent recurrence and for enforcement of the internal revenue laws. Further, it GR ANTS the Motion insofar as it enjoins Ericson This injunction is effectively immediately. The Court RESERVES ruling on all other aspects of the permanent injunction until it makes its ruling regarding the broader injunction after the hearing on that issue. Thus, it RESERVES ruling on, inter alia, the Governments request for a permanent injunction prohibiting Ericson from acting as a federal tax return preparer (eps)CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry
FILED IN THE
UNITED STATES DISTRICT COURT
DISTRICT OF HAWAII
Nov 30, 2014
SUE BEITIA, CLERK
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
UNITED STATES OF AMERICA,
James A. Ericson,
CIVIL 13-00551 LEK-KSC
ORDER GRANTING IN PART THE
GOVERNMENT’S MOTION FOR SUMMARY JUDGMENT
Before the Court is Plaintiff the United States of
America’s (“the Government”) Motion for Summary Judgment
(“Motion”), filed on September 18, 2014.
[Dkt. no. 25.]
Defendant James A. Ericson (“Ericson”) filed his memorandum in
opposition on October 27, 2014.
[Dkt. no. 38.]
The Court finds
this matter suitable for disposition without a hearing pursuant
to Rule LR7.2(d) of the Local Rules of Practice of the United
States District Court for the District of Hawai`i (“Local
After careful consideration of the Motion, supporting
and opposing memoranda, and the relevant legal authority, the
Government’s Motion is HEREBY GRANTED IN PART for the reasons set
On October 23, 2013, the Government filed its Complaint
for Permanent Injunction and Other Equitable Relief (“Complaint”)
to enjoin Ericson, a paid professional federal tax return
preparer, from preparing taxes.
The Complaint alleges that
Ericson has been a tax preparer for approximately thirty years,
and a sole proprietor of a tax business on Maui for nearly twenty
It further alleges that, during that time, Ericson
engaged in fraudulent and deceptive conduct in that he: (1) took
unrealistic and unsustainable positions on customers’ tax
returns; (2) willfully understated taxes due; and (3) recklessly
and intentionally disregarded tax rules and regulations.
[Complaint at ¶¶ 8-11.]
In essence, the Complaint alleges that, Ericson would
meet briefly with his customers – mostly middle- and low-income
wage earners – and ask them questions about work-related,
personal, and hobby expenses, and then, with little or no
documentation, claim unsupportable deductions based on fictitious
businesses and misrepresentations of personal expenses, which
would result in the understatement of their taxes due and, often,
The Complaint alleges further that, in 2009, the
Internal Revenue Service (“IRS”) assessed civil penalties of
$13,000 against Ericson for illegal tax preparation, pursuant to
26 U.S.C. § 6694(b), and informed him that his conduct was
improper, but that Ericson continued to file fraudulent returns.
[Id. at ¶¶ 13-22.]
The Complaint seeks injunctions pursuant to 26 U.S.C.
§ 7407 (“Count I”) and 26 U.S.C. § 7402 (“Count II”).
Specifically, the Government seeks the following relief: a
permanent injunction prohibiting Ericson from acting as a federal
tax return preparer, assisting in preparing fraudulent tax
returns, violating the tax laws, and engaging in conduct that
interferes with the proper administration and enforcement of the
tax laws; an order requiring Ericson to contact all customers
since January 1, 2008, and individuals involved in his business,
to inform them of the permanent injunction; an order requiring
Ericson to produce to the Government contact information for his
customers since 2008; the retention of the Court’s jurisdiction
over this matter and permission for the Government to continue
discovery to monitor and enforce the injunction; and an award of
costs and all other appropriate relief.
[Complaint at pgs. 16-
26 U.S.C. § 7407(b) provides that,
if the court finds –
(1) that a tax return 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,
. . . , 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.
26 U.S.C. § 6694(a) defines “[u]nderstatement due to unreasonable
positions,” and 26 U.S.C. § 6694(b) defines “[u]nderstatement due
to willful or reckless conduct.”1
The Ninth Circuit has
explained that, “Section 6694 provides that a tax return preparer
is subject to penalty if he prepares a return with understated
liability due to an unreasonable position not supported by
United States v. Kapp, 564 F.3d 1103,
1109 (9th Cir. 2009) (citing I.R.C. § 6694).2
To prevail under § 7407(b)(1)(A), the Government must
prove that, “(1) [the defendant] prepared a return that
understated liability, (2) due to an unreasonable position, i.e.,
a position that objectively had a less than one in three chance
of being sustained on the merits, and (3) an injunction is
appropriate to prevent recurrence.”
Kapp, 564 F.3d at 1109.
a court finds that the tax return preparer has “continually or
repeatedly” engaged in misconduct, and that “an injunction
prohibiting such conduct would not be sufficient to prevent such
Section 6695 refers to prohibited activities other than
tax understatement, and is not at issue in this case.
Courts and administrative regulations often refer to
Section 26 of the United States Code as the “Internal Revenue
Code” or “I.R.C.”
person’s interference with the proper administration of this
title, the court may enjoin such person from acting as a tax
26 U.S.C. § 7402 offers an alternative avenue for
declaratory relief, and supplements § 7407.
It provides that
district courts, “at the instance of the United States shall have
such jurisdiction . . . to render such judgments and decrees as
may be necessary or appropriate for the enforcement of the
internal revenue laws.”
The Government argues that Ericson should be
permanently enjoined from preparing taxes because: (1) he has
knowingly understated tax liabilities, in particular, by
improperly deducting expenses for cell phone and internet use,
“job hunting” and work-related travel, mileage on home-to-work
commutes, and work clothes expenditures, all as unreimbursed
employee expenses (“EBE”) on customers’ Schedules A (Itemized
Deductions), and deducting expenses related to customer hobbies
on customers’ Schedules C (Profit or Loss from Business);
(2) Ericson’s positions are unreasonable; and (3) he has
continually and repeatedly engaged in these violations over the
In his memorandum in opposition, Ericson neither denies
the general factual allegations regarding his business practices
nor the law and regulations that he was required to follow in
preparing his customers’ tax returns.
Rather he contends that
the Government misstates the evidence as to five of his
customers, whom the Government profiles at length in its
memorandum to “give a flavor of [Ericson’s] flagrantly abusive
conduct,” [Mem. in Supp. of Motion at 4-10,] and denies that the
IRS informed him what exactly he “was doing wrong” and claims
that the IRS told him that they were “dropping the
[Mem. in Opp. at 1-5.]
Also, throughout his memorandum in opposition, Ericson
argues that the Government engaged in improper conduct during the
depositions of his customers, see, e.g., Mem. in Opp. at 5 (“Also
[Government counsel] Mr. Hendon talks as if all hobby activities
are illegal and he does not address U.S. Tax Code Section 183
that allows some deductions for hobbies. He certainly did not
advise my clients during deposition that some hobby deductions
are allowed.”), and blames the customers for misleading him, see,
e.g., Mem. in Opp. at 1-2 (“We took $1,156 as a deduction for
wine research. Ms. Travis convinced me that she could provide
proof of these payments and convinced me that she has certain
responsibilities as Restaurant Manager.”). However, the former
argument fails because Ericson does not raise any genuine issues
of material fact as to the facts testified to in the depositions,
instead focusing on what the Government might have omitted. See
Fed. R. Civ. P. 56(c)(1) (“A party asserting that a fact . . . is
genuinely disputed must support the assertion by: (A) citing to
particular parts of materials in the record . . . ; or
(B) showing that the materials cited do not establish the absence
or presence of a genuine dispute . . . .”).
The Court rejects the latter argument as well. Although
§ 6694(a)(3) provides for an exception “if it is shown that there
is reasonable cause for the understatement and the tax return
preparer acted in good faith,” in making that determination “the
taxpayer’s effort to assess the proper level of tax is of utmost
These arguments fail to raise a genuine issue of
material fact for a number of reasons:
Ericsons’s Admissions Regarding the Facts
First, Ericson has already admitted the factual
predicates for the elements of the claim, and he has not
attempted to rebut the Government’s concise statement of facts.
After a July 11, 2014 hearing before the magistrate judge, at
which Ericson was present, see Minutes, filed 7/11/14 (dkt. no.
21), the magistrate judge issued his Order Granting United
States’ Motion to Compel Discovery (“7/11/14 Order”).4
In the 7/11/14 Order, he concluded that, inter alia,
Ericson’s “failure to provide any response to the United States’
First Requests for Admission results in those requests for
admission are admitted [sic] in this case[.]”
[Id. at 2.]
According to that ruling, Ericson has admitted that: he
has taken unrealistic and unsustainable positions on his
customers’ federal income tax returns; in preparing customer
returns, he willfully understated tax due; he recklessly and
intentionally disregarded tax rules and regulations; he
importance.” Rovakat, LLC v. Comm’r, 102 T.C.M. (CCH) 264 (T.C.
2011), aff’d, 529 F. App’x 124 (3d Cir. 2013) (citing Sec.
1.6664–4(b)(1), Income Tax Regs.). Here there is ample indicia,
described infra, that Ericson’s reliance was not in good faith.
The Government filed its Motion to Compel Discovery on
June 10, 2014. [Dkt. no. 15.]
improperly and purposefully reduced and understated tax
liabilities by fabricating business schedules, expenses and
income from non-existent businesses, by claiming false or
inflated credits, by deducting personal expenses which were not
legally deductible, and by deducting expenses related to
customers’ jobs that did not qualify to be deducted as EBE on
Schedule A; the IRS informed him that his tax return preparation
was improper and illegal; and notwithstanding the IRS warning,
Ericson continued to prepare tax returns in the same improper and
[Government’s Concise Statement of Material
Facts (“Govt. CSOF”), filed 9/18/14 (dkt. no. 25-2), Decl. of
Jeremy N. Hendon (“Hendon Decl.”), Exh. 2 (United States’ First
Requests for Admissions (“the RFAs”)) at ¶¶ 3-11.]
Moreover, Ericson had a second opportunity to rebut
those facts, but failed to do so.
In its CSOF, the Government
included similar facts and cited, in part, to the RFAs.
e.g., Govt. CSOF at ¶¶ 11 (“Defendant improperly and purposefully
reduced and understated his customers’ tax liabilities . . .”),
19 (“The Internal Revenue Service informed Defendant . . .”).
However, Defendant did not file a responsive statement of facts,
and thus these facts are again deemed admitted.
See Local Rule
LR56.1(g) (“For purposes of a motion for summary judgment,
material facts set forth in the moving party’s concise statement
will be deemed admitted unless controverted by a separate concise
statement of the opposing party.”).
As a result, the Government
has provided undisputed evidence that Ericson prepared returns
that understated liability, and these understatements due to
Kapp, 564 F.3d at 1109.
Ericson’s Concession Regarding the Law
Second, Ericson does not challenge the Government’s
statement of the law, but rather argues – contrary to his
admissions – that he did not act in the way that the Government
The Court here outlines the pertinent law, which the
Government substantively raised in its memorandum.
Regarding the purportedly impermissible deductions, 26
U.S.C. § 162 allows taxpayers to deduct “all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business.”
As the United States Tax
An expense is “ordinary” if it is “normal, usual,
or customary” in the taxpayer’s trade or business.
See Deputy v. du Pont, 308 U.S. 488, 495, 60 S.
Ct. 363, 84 L. Ed. 416 (1940). An expense is
“necessary” if it is “appropriate and helpful” in
the taxpayer’s business, but it need not be
absolutely essential. Commissioner v. Tellier,
383 U.S. 687, 689, 86 S. Ct. 1118, 16 L. Ed. 2d
185 (1966) (citing Welch v. Helvering, 290 U.S.
111, 113, 54 S. Ct. 8, 78 L. Ed. 212 (1933)).
Whether an expense is deductible pursuant to
section 162 is a question of fact to be decided on
the basis of all the relevant facts and
circumstances. Cloud v. Commissioner, 97 T.C.
613, 618, 1991 WL 257963 (1991) (citing
Commissioner v. Heininger, 320 U.S. 467, 473–475,
64 S. Ct. 249, 88 L. Ed. 171 (1943)).
A trade or business includes performing
services as an employee, and, thus, an employee
may deduct expenses that are ordinary and
necessary to his or her employment. See Lucas v.
Commissioner, 79 T.C. 1, 6, 1982 WL 11121 (1982).
Noz v. Comm’r, 104 T.C.M. (CCH) 350 (T.C. 2012).
work-related items, such as travel, deductions may be allowed,
but only if additionally documented:
No deduction or credit shall be allowed –
(1) . . . for any traveling expense
(including meals and lodging while away from
(2) for any item with respect to an activity
which is of a type generally considered to
constitute entertainment, amusement, or
recreation, or with respect to a facility
used in connection with such an activity,
. . .
unless the taxpayer substantiates by adequate
records or by sufficient evidence corroborating
the taxpayer’s own statement (A) the amount of
such expense or other item, (B) the time and place
of the travel, entertainment, amusement,
recreation, . . . (C) the business purpose of the
expense or other item, and (D) the business
relationship to the taxpayer of persons
entertained . . . .
26 U.S.C. § 274(d).
Travel deductions have been further limited.
example, “when a trip consists of personal and business
activities the taxpayer may deduct the travel expenses only if
the trip is related primarily to the business purpose, which is a
facts and circumstances inquiry.”
Schenker v. Comm’r, No.
5755-07S, 2009 WL 211485, at *9 (T.C. Jan. 29, 2009) (citing
Rudolph v. United States, 370 U.S. 269, 275–276 (1962)).
to deduct “job hunting” trip expenses: the primary purpose of the
trip must be job hunting; only those expenses actually
attributable to job hunting may be deducted; and this allocation
must be documented.
Moreover, expenses for travel to and from work are nondeductible: “‘A taxpayer’s cost of commuting or driving to work
is not a deductible business expense . . . but rather is a
non-deductible personal expenses[.]’”
Nat’l Treasury Emps. Union
(NTEU) v. Fed. Labor Relations Auth., 418 F.3d 1068, 1072 (9th
Cir. 2005) (alterations in NTEU) (some citations omitted)
(quoting Sanders v. Commissioner, 439 F.2d 296 (9th Cir. 1971)
(citing Commissioner v. Flowers, 326 U.S. 465, 66 S. Ct. 250, 90
L. Ed. 203 (1946))).
Regarding hobbies, “expenses from a trade or business
are not deductible unless the activity is engaged in primarily
Prieto v. Comm’r, 59 F. App’x 999, 1000 (9th Cir.
2003) (citing 26 U.S.C. § 183(a); Wolf v. Comm’r, 4 F.3d 709, 713
(9th Cir. 1993)).
Further, the tax code provides for a cap on
deductions equal to the “gross income derived from such
26 U.S.C. § 183(b)(2).
The Government argues, and
this Court agrees, that this law applies to this case, and thus
the question is whether Ericson’s actions conform to these legal
The Government argues that Ericson had a practice
of deducting work expenses that were: neither necessary nor
ordinary to his customers’ occupations; improperly documented;
actually personal activities; and/or non-income generating
Ericson does not dispute these general contentions.
Ericson’s Purported Evidence
Third, even if the Court were to construe his
memorandum in opposition as a response to the Government’s CSOF,
it does not conform to the requirements of a declaration in
support of a memorandum.
See Welsh v. Wilcox Mem’l Hosp., Civil
No. 12-00609 LEK-KSC, 2012 WL 6047745, at *1 (D. Hawai`i Dec. 4,
2012) (“Although pro se litigants are held to less stringent
standards than those of their legal counterparts, a litigant’s
pro se status cannot excuse him from complying with the
procedural or substantive rules of the court.” (some citations
omitted) (citing Haines v. Kerner, 404 U.S. 519, 520 (1972) (per
curiam); Jackson v. Carey, 353 F.3d 750, 757 (9th Cir. 2003))).
Although Ericson signed his memorandum, he has neither sworn to
its truthfulness, nor affixed the phrase “under penalty of
Thus, it cannot be considered a “sworn affidavit in
opposition to summary judgment” under Federal Rule of Civil
Procedure 56 for the purpose of opposing the Government’s CSOF.
See, e.g., Davenport v. Bd. of Trs. of State Ctr. Cmty. Coll.
Dist., 654 F. Supp. 2d 1073, 1083 (E.D. Cal. 2009) (“Although a
lack of swearing is not a fatal defect, the declaration must be
made under penalty of perjury and must be attested to be true.”
(some citations omitted) (citing 28 U.S.C. § 1746; Kersting v.
United States, 865 F. Supp. 669, 676–77 (D. Haw. 1994))).
Moreover, even if the Court was to consider Ericson’s
memorandum as properly submitted evidence, it only attempts to
raise issues of genuine dispute as to the five customers he
And the Court questions whether Ericson is successful
in raising disputes that are relevant and material to the
specific issues in the Motion even for those five customers.
instance, Ericson admits that he took deductions for things he
knew were not deductible and instead appears to dispute the
contention – not raised by the Government – that Ericson always
took impermissible deductions.
For example, with regard to customer Lynn Travis,
Ericson disputes whether Ms. Travis’s Schedule A was entirely
[Mem. in Opp. at 1-3.5]
However, he does not deny
that he took deductions for two luxury hotel stays and bills for
food and wine as work-related, when Mrs. Travis testified that
these trips and expenditures were not required or expected by her
[Hendon Decl., Exh. 3 (Excerpts of Trans. of 9/2/14
Depo. of Lynn Travis (“Travis Depo.”)) at 52-54, 56-58.]
Similarly, Ericson does not deny writing off airfare for a trip
The Court focuses here on Ms. Travis because the issues
are illustrative and the majority of Ericson’s five-page
opposition focuses on her returns.
to California as work-related, when Mrs. Travis testified it was
purely for vacation.
[Id. at 54-56, 58.]
Thus, there is no
genuine issue of material fact that, for example, Ericson
misstated Mrs. Travis’s tax liabilities by “deducting expenses
relating to [her job] that do not qualify to be deducted as
unreimbursed employee expenses on Schedule A.”
See Govt. CSOF at
Ericson’s denials and interpretations of the evidence do
not create genuine issues of material fact.6
The Government’s Evidence of Fraudulent Practices
Even assuming there are factual disputes as to the five
illustrative customers (and disregarding the evidence attached to
the Hendon Declaration regarding them, such as their tax returns
and declarations, Ericson’s notes of his meetings with them, and
their deposition testimony), the Government has provided
sufficient evidence to show that – even viewed in the light most
favorable to Ericson – there is no genuine dispute as to
Ericson’s generally unsupportable practices.
See Crowley v.
Bannister, 734 F.3d 967, 976 (9th Cir. 2013) (stating that, at
summary judgment, the court “must determine, viewing the facts in
the light most favorable to the nonmoving party, whether there
Similarly, Ericson’s statements regarding the other four
customers do not create genuine issues of material fact as to
whether Ericson understated their tax returns, since he simply
argues that the Government has focused only on certain aspects of
the customers’ returns and that he was misled by the customers,
which this Court has already rejected. See note 3, supra.
are any genuine issues of material fact and whether the district
court correctly applied the relevant substantive law” (citation
and quotation marks omitted)); Miller v. Glenn Miller Prods.,
Inc., 454 F.3d 975, 987 (9th Cir. 2006) (“A fact is material if
it could affect the outcome of the suit under the governing
The Flannery Declaration
The Government provides the Declaration of Revenue
Agent Sean Flannery (“Flannery Declaration”), who attests that
the IRS initiated a Program Action Case (“PAC”) in 2009 and
audited eighty-two of Ericson’s customers, nearly all of which
resulted in the assessment of additional tax liabilities.
CSOF, Flannery Decl. at ¶ 6.]
As a result, the IRS notified
Ericson that his tax preparation practices were improper, fined
him $13,000, and continued to investigate his practices.
While Ericson argues that the IRS “did not specify what
[Ericson] was doing wrong,” [Mem. in Opp. at 4,] he does not
dispute that he was notified of wrongdoing and fined.
Nor can he
dispute that he was under continued investigation, since that
would not necessarily be within his personal knowledge.
Flannery also attests that, based on an analysis of 611
of Ericson’s customers’ returns between 2007 and 2012, the IRS
found a shortfall of $2,412,212 in tax assessment, which amounts
to over $30 million in revenue lost to the United States, and
that between eighty-six and ninety-two percent of Ericson’s
customers’ returns resulted in refunds.
[Flannery Decl. at ¶¶ 9-
Finally, Flannery attests that he analyzed the tax returns
and found evidence that Ericson regularly claimed improper
deductions, [id. at ¶¶ 12-13, 16-27,] as described more fully in
the customer evidence that follows.
The Government provides customer evidence regarding
Ericson’s fraudulent practices.
Ericson would only meet briefly
with his customers and focus largely on personal expenses, workrelated expenses, and hobbies.
See, e.g., Decl. of Steve T. Roan
at ¶¶ 5-8 (meeting for fifteen minutes and discussing personal
expenses, travel, wind surfing and surfing activities, and
expenses associated with coaching youth soccer); Decl. of Kenton
Detweiler at ¶¶ 6-8 (five to ten minutes, and discussing
recreational fishing, his rent, cell phone bills, and computer
and car expenses); Decl. of Michele Maalea at ¶¶ 5-6 (discussing
mileage driving to work, uniform at work, and art and photography
hobbies); Hendon Decl., Exhs. 7 (Excerpts of Trans. of 9/3/14
Depo. of John Livingstone) at 22-24 (discussing expenditures on
clothes for work, dinner at restaurants, cell phone, cable, and
golf balls), 8 (Excerpts of Trans. of 9/4/14 Depo. of Corey Brown
at 38 (discussing hobbies and personal travel).
Ericson would then use this information to
impermissibly deduct certain expenses from his customers’ tax
For instance, he would deduct payments for cell
phones, internet, clothes, travel, and mileage to and from work
from customers’ Schedules A.
[Govt. CSOF at ¶ 11 (comparing
Ericson’s notes with tax return entries regarding cable,
internet, mileage to work, and “job hunting” trips with customer
Schedules A and C).]
Where customers used their personal cell
phones and internet connection for work purposes, Ericson did not
require customers to provide allocations or documentation.
at ¶ 12 (citing Hendon Decl., Exh. 4 (Excerpts of Trans. of
9/3/14 Depo. of Julia Conlin (“Conlin Depo.”)) at 46-47 (computer
use), 60-62 (cell phone and internet)).]
The Government also offers evidence that Ericson would
deduct expenses for personal trips as “job hunting” and thus work
related, [id. at ¶ 13 (comparing notes with entries for “job
hunting” with Schedules A and deposition testimony that the trips
were for family reasons or vacation);] and fabricated businesses,
using phony schedules [id. at ¶¶ 14-15 (citing declarations
discussing volunteer youth soccer coaching, art and writing
hobby, and recreational fishing].
None of this evidence is
disputed or relies on the five customers discussed in Ericson’s
This customer evidence and the Flannery Declaration
show that there is no genuine issue of material fact that Ericson
prepared returns that understated liability, and Ericson
repeatedly engaged in such conduct.
Kapp, 564 F.3d at 1109.
See 26 U.S.C. § 7407(b);
Further, based on the clearly
established law discussed above, these deductions were not based
on substantial authority.7
For all of the foregoing reasons –
that Ericson admitted the conduct, he does not dispute the law he
was required to apply, his evidence is improper and does not
raise a genuine issue as to his general practices, and the
Government’s extensive evidence – there is no genuine issue of
material fact that Ericson has knowingly and repeatedly violated
the tax code.
The Court thus GRANTS summary judgment as to these
issues in favor of the Government.
The only issue that remains
is whether an injunction is appropriate and the scope of the
As Treasury Regulation 1.6662-4(d)(2) provides:
The substantial authority standard is an objective
standard involving an analysis of the law and
application of the law to relevant facts. The
substantial authority standard is less stringent
than the more likely than not standard (the
standard that is met when there is a greater than
50-percent likelihood of the position being
upheld), but more stringent than the reasonable
basis standard . . . . The possibility that a
return will not be audited or, if audited, that an
item will not be raised on audit, is not relevant
in determining whether the substantial authority
standard (or the reasonable basis standard) is
(Emphasis added.) Thus, Ericson’s argument that, for
example, “[n]o auditor has ever discounted my work for such
a reason,” [Mem. in Opp. at 3,] is unavailing.
The Government must prove that an injunction is
appropriate to prevent recurrence of the improper tax reporting.
See 26 U.S.C. § 7407(b); Kapp, 564 F.3d at 1109.
court has explained:
When addressing likelihood of recurrence, courts,
including the Ninth Circuit Court of Appeals, have
looked to the following factors: 1) the gravity of
the harm caused by the offense; 2) the extent of
the defendant’s participation and his degree of
scienter; 3) the isolated or recurrent nature of
the infraction; 4) the defendant’s recognition or
non-recognition of her own culpability; and 5) the
likelihood that the defendant’s customary business
activities might again involve her in such
United States v. Moser, No. Civ.CV05-00262ACKBMK, 2005 WL
3277965, at *4 (D. Hawai`i Oct. 17, 2005) (some citations
omitted) (citing United States v. Schiff, 379 F.3d 621, 625 (9th
The Court FINDS that, without an injunction,
Ericson is likely to continue to engage in misconduct.
undisputed evidence shows: the IRS examined 611 federal income
tax returns of Ericson’s customers from 2007 through 2012 and
found a total tax shortfall of $2,412,212, which amounts to an
average of $3,948 per return, and a loss of $30,052,176 in
This citation refers to the magistrate judge’s Findings
and Recommendation to Grant Plaintiff’s Motion for Default
Judgment of Permanent Injunction Against Lou Ann Palermini Moser,
which the district judge adopted on December 9, 2005. 2005 WL
treasury revenue; in 2009, the IRS informed Ericson that his
practices were improper and fined him; and Ericson continued to
improperly deduct expenditures.
[Govt. CSOF at ¶¶ 8-9, 19.]
his memorandum in opposition, Ericson continues to deny that he
has done anything wrong, even in light of the evidence.
facts weigh in favor of an injunction according to the factors
described in Moser.
The Court would reach a similar conclusion
under § 7402 since an injunction here is “necessary [and]
appropriate for the enforcement of the internal revenue laws.”
The Court therefore GRANTS the Motion insofar as the
Government moves for a permanent injunction to stop Ericson from
filing fraudulent tax returns.
The Court, however, RESERVES
ruling on the Motion insofar as the Government requests an
injunction prohibiting Ericson from acting as a federal tax
While there may be sufficient evidence to
support such a broad injunction, it is a drastic remedy, and
since Ericson is pro se and has not had an opportunity to be
heard on the issue in open court, this Court finds it prudent to
set a hearing on the matter.
The Court shall set that hearing
and a briefing schedule on the permanent injunction in an
entering order to follow this Order.
On the basis of the foregoing, the Government’s Motion
for Summary Judgment, filed September 18, 2014, is HEREBY GRANTED
It is GRANTED insofar as the Court FINDS that: Ericson
prepared returns that understated his customers’ tax liabilities;
his positions in filing those returns were unreasonable; and an
injunction is appropriate and necessary to prevent recurrence and
for enforcement of the internal revenue laws.
Further, it GRANTS
the Motion insofar as it enjoins Ericson as follows.
Ericson, and all those in active concert or
participation with him, are prohibited from:
(1) preparing or assisting in preparing or filing
federal tax returns, amended returns, or other related documents
or forms that they know, or reasonably should know, will result
in an understatement of tax liability or the overstatement of
federal tax refund(s);
(2) engaging in any other activity subject to penalty
under 26 U.S.C. § 6694 or any other penalty provision in the
Internal Revenue Code; and
(3) engaging in any conduct that substantially
interferes with the proper administration and enforcement of the
This injunction is effectively immediately.
RESERVES ruling on all other aspects of the permanent injunction
until it makes its ruling regarding the broader injunction after
the hearing on that issue.
Thus, it RESERVES ruling on, inter
alia, the Government’s request for a permanent injunction
prohibiting Ericson from acting as a federal tax return preparer.
IT IS SO ORDERED.
DATED AT HONOLULU, HAWAII, November 30, 2014.
/s/ Leslie E. Kobayashi
Leslie E. Kobayashi
United States District Judge
UNITED STATES OF AMERICA V. JAMES A. ERICSON; CIVIL 13-00551 LEKKSC; ORDER GRANTING IN PART THE GOVERNMENT’S MOTION FOR SUMMARY
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