United States of America v. Wells et al
Filing
10
ORDER granting 9 United States of America's Motion for Entry of Default Judgment and Permanent Injunction. A Final Judgment of Permanent Injunction shall issue this day. Signed by Honorable David C. Bramlette, III on June 5, 2018. (JBR)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
WESTERN DIVISION
UNITED STATES OF AMERICA
V.
PLAINTIFF
CAUSE NO. 5:17-CV-140-DCB-MTP
SHAMEKA N. WELLS and
ELIZABETH STEPHENS
DEFENDANTS
ORDER AND OPINION
Before the Court is the United States of America’s Motion for
Entry of Default Final Judgment and Permanent Injunction [Doc. 9]
against Shameka N. Wells, individually and doing business as S&D
Tax Service, LLC, and Elizabeth Stephens.
Background
This dispute arises from an IRS investigation of Wells,
Stephens, and S&D Tax Service, LLC for preparing thousands of
federal income tax returns that falsified business losses and
profits to boost the Earned Income Tax Credits customers could
claim.1 These tax scams, the Government estimates, deprived the
United States Treasury of millions of dollars in tax revenue.
1 The Earned Income Tax Credit reduces the tax liability of working people
with low to moderate income. See 26 U.S.C. § 32.
The Government sued to permanently enjoin Wells and Stephens
from preparing federal tax returns for others.2 In support of its
proposed permanent injunction, the Government’s Complaint cites
three
Internal
Revenue
Code
injunctive-relief
provisions,
26
U.S.C. §§ 7402(a), 7407, and 7408.
Wells and Stephens live and work in McComb, Mississippi.
Wells formed S&D in 2010 and continues to use S&D’s Electronic
Filing
Identification
Number,
even
though
the
company
was
dissolved in 2011.
The Government complains that Wells and Stephens “prepare
false and fraudulent federal income tax returns that understate
their customers’ federal income tax liabilities and overstate
refunds to which they are entitled.” Doc. 1, ¶8. They do so, the
Government alleges, by preparing returns claiming Earned Income
Tax Credits “based on fabricated business losses or profits.” Doc.
1,
¶13.
These
fabricated
losses
or
profits
are
reported
on
“Schedule C” forms linked to bogus businesses. Doc. 1, ¶¶18-19.
Neither Defendant has appeared. Both, however, were served:
Stephens by personal service on December 13, 2017, Wells by
personal service on January 2, 2018. Docs. 4, 5. Citing Defendants’
failure to plead or otherwise defend, the Government moved for
The Court’s subject-matter jurisdiction is based on 28 U.S.C. §§ 1340,
1345 and 26 U.S.C. § 7402(a).
2
2
entry of default on January 26, 2018. Docs. 6, 7. Three days later,
the Clerk of Court entered a Federal Rule of Civil Procedure 55(a)
default against Wells and Stephens. Doc. 8.
The Government now moves the Court to enter a default judgment
permanently enjoining Wells and Stephens from preparing federal
tax returns for others.
I
After the Clerk of Court enters a defendant’s default, the
plaintiff may apply to the Court for entry of a default judgment.
FED. R. CIV. P. 55(b)(1). The Government applied for and obtained
an entry of default against Wells and Stephens, who have to date
failed to plead or otherwise defend. Doc. 8.
A default judgment does not automatically follow an entry of
default. 10A Charles Alan Wright, Arthur R. Miller, and Mary Kay
Kane, Federal Practice & Procedure § 2688.1 (4th ed., Supp. 2018).
That is because Wells and Stephens, as the defaulting defendants,
admit only those allegations that are well-pleaded; they do not
admit conclusions. Nishimatsu Const. Co. v. Houston Nat. Bank, 515
F.2d 1200, 1206 (5th Cir. 1976) (Wisdom, J.).
A default judgment is a “drastic remedy” reserved for “extreme
situations.” Sun Bank of Ocala v. Pelican Homestead and Sav. Ass’n,
874 F.2d 274, 276 (5th Cir. 1989). In other words, the serious
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consequences that attend default judgments demand that they not be
blithely entered. Lindsey v. Prive Corp., 161 F.3d 886, 893 (5th
Cir. 1998). A default judgment is improper, for example, when
material
fact-issues
remain
or
a
complaint’s
allegations
are
indefinite. Id. at 893.
To decide if the allegations of the Government’s Complaint
are well-pleaded, the Court looks to
Federal Rule of Civil
Procedure 8 and the “plausibility” standard. Wooten v. McDonald
Transit Assocs., Inc., 788 F.3d 490, 498 (5th Cir. 2015) (citing
Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v.
Twombly, 550 U.S. 544 (2007)).
The Court’s analysis is unchanged by the type of relief the
Government seeks: District courts in this circuit routinely enter
default-judgment-based
permanent
injunctions.
See,
e.g.,
Epic
Tech, LLC v. Lara, No. 4:15-CV-01220, 2017 WL 590331, at *8 (S.D.
Tex. Nov. 29, 2017); Coach, Inc. v. Trendy Texas, LLC, No. H-163150, 2017 WL 4652444, at *6 (S.D. Tex. Oct. 17, 2017).
II
In support of the injunction it proposes, the Government
directs the Court to Internal Revenue Code §§ 7402(a), 7407, and
7408. Whether an injunction should issue under each provision turns
on the well-pleaded allegations of the Government’s Complaint.
Nishimatsu, 515 F.2d at 1206. Because the permanent injunction the
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Government requests is permitted by statutes, the Court need not
consider the traditional prerequisites for injunctive relief.
United States v. Buttorff, 761 F.2d 1056, 1059 (5th Cir. 1985).
Rather, an injunction shall issue if the Complaint’s well-pleaded
allegations show that the statutory conditions are met.
A
The Court turns first to Internal Revenue Code § 7407. That
provision empowers the Court to enjoin a “tax return preparer”
from preparing federal tax returns for others if the Court finds
that (1) the tax return preparer has “continually or repeatedly”
violated Internal Revenue Code § 6694 or § 6695; and (2) an
injunction prohibiting only violations of Internal Revenue Code §
6694 or § 6695 would not suffice to prevent the tax return preparer
from interfering with the proper administration of the Internal
Revenue Code. 26 U.S.C. § 7407.
i
As
to
§
7407’s
first
requirement,
the
well-pleaded
allegations of the Government’s Complaint show that Wells and
Stephens are “tax return preparers” who have repeatedly violated
Internal Revenue Code §§ 6694 and 6695.
A “tax return preparer” includes “any person who prepares for
compensation, or who employs one or more persons to prepare for
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compensation, any return of tax imposed by” the Internal Revenue
Code.
26
U.S.C.
§
7701(36)(A).
The
Complaint’s
well-pleaded
allegations show that Wells and Stephens prepared tax returns for
thousands of customers for compensation. Doc. 1, ¶11. So Defendants
are “tax return preparers” under Internal Revenue Code § 7407.
The well-pleaded allegations of the Government’s Complaint
also show that Wells and Stephens repeatedly violated Internal
Revenue Code §§ 6694 and 6695.
Regarding § 6694, Wells and
Stephens prepared returns that knowingly understated customers’
tax liabilities. Doc. 1, ¶26. And regarding § 6695, Wells and
Stephens “repeatedly . . . fail[ed] to exercise due diligence in
determining the eligibility of their customers to claim EITCs.”
Doc. 1, ¶¶40-42.
ii
As
to
§
7407’s
second
requirement,
the
well-pleaded
allegations of the Government’s Complaint show that a narrower
injunction, prohibiting Defendants from violating Internal Revenue
Code § 6694 or § 6695, will not do. A permanent injunction
prohibiting Wells and Stephens from acting as tax return preparers
is necessary to prevent them from interfering with the proper
administration of the internal revenue laws.
To decide whether the Government’s proposed injunction is
appropriate,
the
Court
considers
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(1)
the
egregiousness
of
Defendants’ conduct; (2) the isolated or recurrent nature of the
infraction; and (3) the extent of Defendants’ participation in the
offense. United States v. Stinson, No. 17-11412, 2018 WL 2026928,
at *4 (11th Cir. May 1, 2018).
Applying those factors here, the Complaint’s well-pleaded
allegations show that the Government’s proposed injunction is
appropriate. First, Defendants’ conduct is egregious. To start,
Wells and Stephens reported non-existent businesses and fabricated
losses linked to them. They also withheld tax documents from
customers and bilked the Government of “likely several million
dollars.” Doc. 1, ¶33. Second, Defendants’ conduct is recurrent:
during a four-year span, Wells and Stephens prepared 5,410 returns;
many, if not all, were fraudulent. And third, Wells and Stephens
falsified
the
returns
and
so
“directly
participated”
in
the
misconduct that supplies the basis for the permanent injunction
the Government requests.
A
narrower
injunction
will
not
protect
the
Government’s
interest in the proper administration of the Internal Revenue Code.
The scale of the schemes, the brazenness of the fraud, and the
continuation of operations well into 2017 suggest that Defendants
will continue to falsify returns if they are not permanently
enjoined from preparing returns for others. See United States v.
Stover, 650 F.3d 1099, 1112 (8th Cir. 2011); United States v.
7
Gleason,
432
F.3d
678,
684
(6th
Cir.
2005).
What
is
more,
permanently enjoining Defendants would save the IRS the cost of
investigating Defendants’ future violations and promote respect
for the Internal Revenue Code.
The well-pleaded allegations of the Government’s Complaint
show that (1) Wells and Stephens are “tax return preparers” who
have “continually or repeatedly” violated Internal Revenue Code §§
6694 and 6695, and (2) an injunction prohibiting such conduct would
not suffice to prevent Wells and Stephens from interfering with
the
proper
administration
of
the
Internal
Revenue
Code.
Nishimatsu, 515 F.2d at 1206. The Government is therefore entitled
to a permanent injunction against Wells and Stephens under Internal
Revenue Code § 7407.
B
Next,
the
Government
seeks
a
permanent
injunction
under
Internal Revenue Code § 7408. The Court may enter an injunction
under § 7408 if it finds that (1) a person has engaged in conduct
subject to penalty under Internal Revenue Code §§ 6700, 6701, 6707,
or 6708; and (2) injunctive relief is “appropriate” to prevent
recurrence of such conduct. The Court so finds here.
The
first
§
7408
requirement
is
met.
The
well-pleaded
allegations of the Government’s Complaint show that Wells and
Stephens engaged in conduct subject to penalty under Internal
8
Revenue Code § 6701. Wells and Stephens knowingly preparing returns
that
understated
customers’
tax
liability
by
claiming
Earned
Income Tax Credits to which customers were not entitled. Doc. 1,
¶46.
The second § 7408 requirement is also met. The well-pleaded
allegations of the Government’s Complaint show that an injunction
is appropriate to prevent Wells and Stephens from continuing to
knowingly
prepare
returns
that
understate
customers’
tax
liability. See Buttorff, 761 F.2d at 1062-63. Wells and Stephens
have routinely falsified returns to understate customers’ tax
liabilities; there is no indication that, if not enjoined, they
will stop doing so.3
The well-pleaded allegations of the Government’s Complaint
show that (1) Wells and Stephens have engaged in conduct subject
to penalty under Internal Revenue Code § 6701; and (2) injunctive
relief is “appropriate” to prevent recurrence of that conduct.
Nishimatsu, 515 F.2d at 1206. The Government is therefore entitled
to a permanent injunction against Wells and Stephens under Internal
Revenue Code § 7408.
Defendants’ tax return preparation activities have not slowed. By
November 2017, Wells and Stephens had prepared 709 federal income tax returns
for the 2017 filing year. Doc. 1, ¶11. Eighty-Nine percent of them claimed the
Earned Income Tax Credit. Doc. 1, ¶11.
3
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C
The
Government
also
seeks
a
permanent
injunction
under
Internal Revenue Code § 7402(a), which permits the Court to issue
such injunctions “as may be necessary or appropriate for the
enforcement of the internal revenue laws.”
Fifth Circuit opinions offer limited guidance in this area.
The cases do not, for example, articulate a standard for issuing
a permanent injunction under Internal Revenue Code § 7402(a). See
United States v. Padron, No. 7:17-CV-9, 2017 WL 2060308, at *4 &
n. 42 (S.D. Tex. May 12, 2017)(acknowledging the absence of Fifth
Circuit precedent on the topic). So the district courts in this
circuit have simply applied the statute as it reads, asking whether
the Government has shown that an injunction is “necessary or
appropriate” to enforce the internal revenue laws. United States
v. Daffron, No. 3:17-CV-265-CWR-FKB, 2017 WL 4339404, at *1 (S.D.
Miss. Aug. 21, 2017); Padron, 2017 WL 2060308, at *4.
The Government has made that showing here. The well-pleaded
allegations of its Complaint show that a § 7402(a) injunction is
appropriate to enforce the internal revenue laws, for essentially
the same reasons stated in § II(A)(ii) of this Order and Opinion.
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III
The well-pleaded allegations of the Government’s Complaint
supply the Court with a sufficient basis to enter a default
judgment
of
permanent
injunction
against
Shameka
N.
Wells,
individually and doing business as S&D Tax Service, LLC, and
Elizabeth Stephens under Internal Revenue Code §§ 7402(a), 7407,
and 7408.
Accordingly,
IT IS ORDERED AND ADJUDGED that the United States of America’s
Motion for Entry of Default Final Judgment and Permanent Injunction
[Doc. 9] against Shameka N. Wells, individually and doing business
as S&D Tax Service, LLC, and Elizabeth Stephens is GRANTED.
A Final Judgment of Permanent Injunction shall issue this
day.
SO ORDERED AND ADJUDGED, this the 5th day of June, 2018.
/s/ David Bramlette_________
UNITED STATES DISTRICT JUDGE
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