UNITED STATES OF AMERICA v. BURGESS

Filing 7

OPINION. Signed by Judge John Michael Vazquez on 1/24/17. (sr, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

UNITED STATES,
Plaintiff

Civil Action No. 16-4011

V.

OPINION

JEANINE BURGESS,
Defendant.

John Michael Vazguez. U.S.D.J.
I.

INTRODUCTION
This matter comes before the Court on Plaintiffs (the “United States” or the

“Government”) unopposed motion for default judgment against Defendant Jeanine Burgess under
Fed. R. Civ. P. 55(b). D.E. 6. The Court reviewed all submissions made in support of the motion,
and considered the motion without oral argument pursuant to Fed. R. Civ. p. 78(b) and L. Civ. R.
73.1(b). For the reasons that follow. Plaintiffs motion is granted.
II.

FACTS AND PROCEDURAL HISTORY
Through this action, the Government seeks, pursuant to Internal Revenue Code (“IRC”)

Sections 7407, 7408, and 7402(a), to permanently enjoin Defendant from, among other things,

preparing and filing others’ federal tax returns. The Government alleges that Burgess, who is an
income tax preparer within the meaning of IRC Section 7701 (a)(36) (Compl.

¶ 4, D.E.

1), falsified

tax returns in a manner that understated tax liabilities and resulted in claims for inflated tax returns
for clients. Specifically, the Government alleges that Burgess prepared and filed tax returns that
claimed (1) false Schedule C businesses and business income, expenses and losses (Id.
(2) deductions for dependents who were not in fact dependents of the filer (Id.
Education Credits and the American Opportunity Credits (Id.

¶{

contributions and unreimburseable employee business expenses (Id.

111 33-40);

¶flJ 41-46);

(3) false

47-53); and (4) charitable

¶ffl 54-56).

For the 2009 through 2011 tax filing seasons. Burgess personally prepared more than one
thousand returns through her tax preparation business Seven Professional Associates (“Seven
Professional”). Id.

¶99,

12-15. Burgess operated Seven Professional, which was located in East

Orange, New Jersey. as a partnership with non-party Bertha Cajuste. id.

9 9.

Plaintiff, however,

“was listed as the principal, responsible official, and primary contact” on the Seven Professional
electronic filing number (“EFIN”). Id.

¶

10. In December 2011, Burgess was subjected to an

Earned Income Tax Credit (“EITC”) Due Diligence audit. Id.

¶ 25.

Through the audit, the Internal

Revenue Service (“IRS”) reviewed 77 federal income tax returns that Burgess prepared, and
assessed preparer penalties totaling $11,500 for all 77 returns.1 The IRS auditor determined that
twelve of the returns inappropriately reported profits or losses for Schedule C businesses, and that

Preparers who claim the E[TC are required to comply with additional due diligence requirements
such as asking specific questions about the filer’s eligibility for the EITC and keeping copies of
the worksheet that shows how the credit was computed. Many of the preparer penalties appear
related to deficiencies concerning these additional requirements. Compl. ¶926, 30.
7

Burgess failed to make proper inquires about whether the filers actually had dependents. Id. ¶J11
27-31. Burgess left Seven Professional at the end of the 2011 tax season. fd.

¶

17.

Despite the result of the audit, Burgess continued to prepare fraudulent returns. In 2013,
Burgess started BJ’s Tax Services. Burgess was the only tax preparer at the firm and filed 224
federal tax returns using Seven Professional’s EFIN.2 Id.

¶11 19-22.

In addition, Burgess repeatedly

used false Professional Preparer Tax Identification Numbers (“PTINS”) or PTINS that were
assigned to other preparers. Id.

¶11

57-59. Because Burgess used false PTINS. the IRS cannot

accurately determine the number of returns that Burgess actually prepared. IRS records, however,
indicate that Burgess prepared and filed at least 1,746 federal tax returns during the 2009-2014 tax
filing seasons. Id.

¶1J 59-60.

The IRS audited 89 of these returns and determined that 87 resulted

in a tax deficiency, totaling approximately $454,000. Id.

¶ 61.

The Government filed its complaint against Burgess on July 1,2016, and filed an affidavit
of service on July 27, 2016, indicating that Burgess was personally served on July 20, 2016. D.E.
3. Defendant failed to answer, move, or otherwise respond to the complaint. As a result. on
September 20, 2016, default was entered against Burgess for failure to plead or otherwise defend.3
D.E. 5. On October 13, 2016, Plaintiff filed this motion for default judgment pursuant to Rule
55(b).4 D.E. 6.

2

BJ’s Tax Services was located in Newark, New Jersey. Compl.

¶

19.

Rule 55(a) directs the Clerk of the Court to enter a party’s default when that party “against whom
a judgment for affirmative relief is sought has failed to plead or othenvise defend, and that failure
is shown by affidavit or otherwise.” Fed. R. Civ. P. 55(a).
Plaintiff’s certification of service, which was filed with this motion, indicates that Plaintiff mailed
3

III.

LAW AND ANALYSIS
A. Standard of Review
“The entry of a default judgment is largely a matter of judicial discretion, although the

Third Circuit has emphasized that such ‘discretion is not without limits,

.

.

.

and [has] repeatedly

state[d] [its] preference that cases be disposed of on the merits whenever practicable.” Chanel,
Inc.

GordashevsA]’, 558 F. Supp. 2d 532, 535 (D.N.J. 2008) (quoting F/ritz v. Woma Corp.. 732

F.2d 1178, 1181 (3d Cir.1984)).
Prior to entering a default judgment. the court must: “(I) determine it has jurisdiction both
over the subject matter and parties; (2) determine whether defendants have been properly served;
(3) analyze the Complaint to determine whether it sufficiently pleads a cause of action; and (4)
determine whether the plaintiff has proved damages.” Moroccanoil, Inc.

i’.

.1MG Freight Gip.

LLC. No. 14-5608, 2015 WL 6673839, at *1 (D.N.J. Oct. 30, 2015). Additionally. the Court must
consider the following three factors: (1) prejudice to the plaintiff if default is denied, (2) whether
the defendant appears to have a litigable defense, and (3) whether defendant’s delay is due to
culpable conduct. Id.; see also Nationwide Mitt. Ins. C’o. v. Starlight Ballroom Dance Cub, Inc.,
175 F. App’x 519, 522 (3d Cir. 2006).
B. Jurisdiction and Service
“Before entering a default judgment as to a party ‘that has not filed responsive pleadings,
the district court has an affirmative duty to look into its jurisdiction both over the subject matter
and the parties.” HIC4 Ethic. Loan Corp.

i’.

Surikoi’, No. 14-1045, 2015 WL 273656, at *2

a copy of this motion to Burgess on October 13, 2016. D.E. 6.
4

(D.NJ. Jan. 22, 2015) (quoting Ramada Wor/thtide, The.

i’.

Benton Harbor Hart Ohm, L.LG., No.

08—3452, 2008 WL 2967067, at *9 (D.N.J. July31, 2008)).
In this case, the United States is the plaintiff As a result, the Court has subject matter
jurisdiction pursuant to 28 U.S.C.

1345. In addition, this matter addresses multiple provisions

of the IRC. Consequently, the Court also has jurisdiction under 28 U.S.C.

§

1340. Finally, Section

7402 of the IRC provides that district courts “shall have such jurisdiction to make and issue in civil
actions

.

.

.

to render such judgments and decrees as may be necessary or appropriate for the

enforcement of the internal revenue laws.” 26 U.S.C.

§

7402(a). Therefore, the Court also has

subject matter jurisdiction over the action pursuant to Section 7402(a).
The Court also has personal jurisdiction over Defendant. Burgess resides in Kings County,
New York (Compl.

¶ 4). and the affidavit of service indicates that

she was personally served with

the summons and complaint in Brooklyn. D.E. 3. Burgess, however, owned two business in New
Jersey and prepared more than one thousand tax returns through these businesses. Compl.

¶f 9-

15, 19-21. As a result, the Court concludes that Burgess “purposefully directed” her activities at
residents of New Jersey such that the Court has specific jurisdiction over Defendant. See Display
Works, LLC v. Barney. 182 F. Supp. 3d 166, 180 (D.N.J. 2016) (“Specific jurisdiction over a
defendant exists when that defendant has ‘purposefully directed his activities at residents of the
forum and the litigation results from the alleged injuries that arise out of or relate to those
activities.” (quoting Burger King Coip. v. Rudzewiez, 471 U.S. 462, 472 (1985))). In addition,
Sections 7407 and 7408 of the IRC permit the United States to bring suit in the district in which
the individual has her principal place of business. 26 U.S.C.
5

§

7407(a), 7408(a). Section 7408

also permits the United States to bring suit where the individual “has engaged in specified
conduct.”

§

7408(a).

C. Sufficiency of Plaintiffs Causes of Action

Next, the Court must determine whether the complaint states a proper cause of action. The
Court must accept all well-pleaded factual allegations in the pleadings as true, except as to
damages. (‘hand, Inc.. 558 F. Supp. 2d at 535-36. Here, the Government states three causes of
action alleging that Defendant violated IRC Sections 7407, 7408, and 7402(a), respectively. The
Court will address each section in turn.
First, Section 7407 authorizes the United States to bring a civil action to enjoin a tax return
preparer5 who “engage[sj in any conduct subject to penalty under section 6694 or 6695

.

.

.

[or]

any other fraudulent or deceptive conduct which substantially interferes with the proper
administration of the Internal Revenue laws” and if “injunctive relief is appropriate to prevent the
recurrence of such conduct.” 26 U.S.C.

§

7407(b). Burgess is a tax return preparer who engaged

in conduct prohibited by Section 7407. For example, even after Burgess was assessed preparer
penalties through the EITC audit, she continued to prepare returns that “understate[d] her
customers’ correct tax liabilities by fabricating dependents, Schedule C businesses, expenses, tax
credits, and charitable contributions, and inappropriately claiming head of household status.” PIPs
Br. at 8 (citing Compl.

¶

25, 28-30, 33-59, 70). This conduct violates Section 6694, which

penalizes a preparer who willfully attempts “to understate the liability for tax on the return or

A tax return preparer is “any person who prepares for compensation, or who employs one or
more persons to prepare for compensation, any return of tax imposed by this title or any claim for
reftind of tax imposed by this title.” 26 U.S.C. § 770 l(a)(36).
6

claim” or has a “reckless or intentional disregard of rules or regulations.” 26 U.S.C.

§

6694(b)(2).

Moreover, injunctive relief is appropriate because Burgess “has been undeterred by tax preparer
penalties assessed by the IRS in the course of an EITC Audit and has continued to engage in the
conduct for which she was assessed penalties.” Pus Br. at 9; see a/so United States

i’.

Franc/ti,

756 F. Supp. 889, 893 (W.D. Pa. 1991) (“In an action for a statutory injunction, once a violation
has been demonstrated, the moving party need only show that there is a reasonable likelihood of
future violations in order to obtain relief” (citing United States

i

Karat. 827 F.2d 1144. 1148 (7th

Cir. 1987))). As a result, the Government states a sufficient claim for relief under Section 7407.
Next, “[tjo grant an injunction pursuant to
engaged in prohibited conduct under

§

§

7408, the court must find that (1) defendant

7408(c), and (2) injunctive relief is appropriate to prevent

the recurrence of such conduct.” United States v. Majene. No. 13-7238, 2014 WL 5846092, at *2
(D.N.J. Nov. 12, 2014) (citing United States

i’.

James, No. 11-913,2011 WL 1422894, at *1 (E.D.

Pa. Apr. 13, 2011)). Prohibited conduct includes “any action, or failure to take action which is
subject to penalty under section 6700. 6701, 6707. or 6708.” 26 U.S.C.

§

7408(c). Section 6701

imposes a penalty on any person (I) who aids or assists with the preparation of a return, (2) “who
knows (or has reason to believe) that such portion wilL be used in connection with any material
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.” 26 U.S.C.

§

6701(a). The

Government alleges that Burgess prepared federal tax returns for clients that she knew understated
their tax liabilities. In addition. Plaintiff was informed that this conduct was inappropriate through
the EITC audit yet continued to file similar false returns. Compl. ¶flj 25-32. Consequently, Burgess
7

is subject to penalty under Section 6701. And as discussed, injunctive relief is appropriate because
Defendant continued to file false returns even after preparer penalties for the same conduct were
assessed against her. Therefore, the Government states a sufficient claim for relief under Section
7408. See, e.g., Majette. 2014 5846092, at *2.
Finally, “Section 7402 broadly authorizes injunctions ‘as may be necessary or appropriate
for the enforcement of the internal revenue laws.” Id. (quoting 26 U.S.C.

§

7402(a)).

The

Government alleges that Burgess “engaged in conduct that substantially interferes with the
enforcement of the internal revenue laws, namely, the preparation and filing of federal income tax
returns that understate her customers’ correct federal income tax liabilities.” Compi.

¶

83. The

Government also alleges that Defendant’s conduct is causing irreparable injury by depriving the
United States of its lawful tax revenue. Id.

¶

85. The Court, therefore, concludes that this is a

sufficient basis upon which to enter an injunction pursuant to Section 7402(a). See. e.g., United
Statcsi’

j01j

No. 14-8456, 2016 WL 6988900, at *2 (S.D.N.Y. Sept. 23, 2016) (“Defendant

is subject to an injunction under 26 U.S.C.

§

7402(a) because he has repeatedly engaged in

conduct that substantially interferes with the administration of the internal revenue laws.”).
Thus, the complaint states three valid claims.
D. Damages
Plaintiff seeks for the Court to preliminarily enjoin Defendant, “individually and doing
business as Seven in One Professional Associates and Bi’s Tax Service or under any other name
or using any other entity” from preparing or assisting in the preparation of tax returns altogether
and enjoining her from acting as an income tax preparer. Compl.
8

¶ F.

As discussed, the complaint

alleges facts that satisfy the statutory requirements, as set forth in IRC Sections 7402, 7407, and
7408, for injunctive relief However, despite the Government’s argument that the Court only needs
to consider these statutory factors to issue an injunction (P1? s Br. at 11-12), the Court will also
consider the traditional equitable factors for granting injunctive relief. See, e.g., Majcite, 2014
WL 5846092, at *3 (applying equitable factors to determine whether injunctive relief was
appropriate due to defendant’s violation of multiple provisions of the IRC); James, 2011 WL
1422894, at *2 (“[U]nless a statute explicitly provides to the contrary, district courts must consider
the traditional equitable standard when deciding to grant equitable relief”).
The equitable factors require that the Court to consider “(I) the likelihood that the moving
party will succeed on the merits; (2) the extent to which the moving party will suffer irreparable
harm without injunctive relief (3) the extent to which the nonmoving party will suffer irreparable
harm if the injunction is issued; and (4) the public interest.” Liberty Lincoln-Mercury, Inc. v. Ford
Motor Cv.. 562 F.3d 553. 556 (3d Cir. 2009) (quoting McNeil Nutritionals, LLC

i’.

Heartland

Sweeteners, LLC. 511 F.3d 350, 356-57 (3d Cir. 2007)). The Court concludes that Plaintiff is
likely to succeed on the merits due to the large number of fraudulent returns uncovered by the
Government and the complete lack of any evidence that would serve to excuse or defend Plaintiffs
conduct. See. e.g., Majette, 2014 WL 5846092. at *3 (concluding that there was a likelihood of
success on the merits due to the large volume of fraudulent tax returns filed). In addition, the
United States will suffer irreparable harni without injunctive relief The Government’s proofs
demonstrate that Burgess’ conduct has caused almost $500,000 in lost tax revenue, and such losses
will grow if Burgess continues to prepare fraudulent returns. See, e.g., id. (irreparable harm found
9

where tax preparer caused $3 million loss to the United States and nothing prevented defendant
from continuing to prepare tax returns); James. 2011 WL 1422892, at *9 (irreparable harm found
where Government could not prevent defendant from preparing improper returns without
injunctive relief).

Moreover, because Burgess uses false PTINS or PTINS assigned to other

preparers, the United States is unable to determine the fiJI amount of its losses. Next, although an
injunction would clearly harm Burgess, the balance of the harms favors the Government due to
Defendant’s “demonstrated ability and willingness to commit tax fraud.” Majette, 2014 WL
5846092, at *3 Finally, the public interest factor weighs in favor of equitable relief because
Burgess’ conduct harmed not only the United States as a whole due to lost tax revenue, but each
individual client for which Burgess prepared a fraudulent return. Id.
In conclusion, the statutory and equitable factors both demonstrate that equitable relief is
appropriate here.
E. Default Judgment Factors
Before imposing the extreme sanction of default judgment, district courts must make
explicit factual findings as to (I) whether the party subject to default has a meritorious defense,
(2) the prejudice suffered by the party seeking default, and (3) the culpability of the party subject
to default. Moroccanoil, Inc., 2015 WL 6673839, at *1.
Here, all three factors weigh in favor of entering default judgment. First, without a default
judgment. Plaintiff has no other means of seeking relief for the harm allegedly caused by
Defendant. Because Plaintiff failed to respond the complaint, the Government cannot vindicate
its claims against Burgess or prevent further wrongful conduct. See United States
10

i

Chandler,

No. 15-8537, 2017 WL 101307, at *3 (D.N.J. Jan. 10, 2017). Next, “Defendant has put forth no
evidence or facts containing any information that could provide the basis for a meritorious
defense.” HIC’A Ethic. Loan Corp., 2015 WL 273656, at *3 Indeed, she has failed to respond in
any manner.

Additionally, there is nothing on the face of the complaint indicating that a

meritorious defense is available. Lastly, Defendant’s failure to answer, without providing any
reasonable explanation, permits the Court to draw an inference of culpability on her part. See

Chandler, 2017 WL 101307, at *3 As a result, the Court finds that defaultjudgment is warranted.
IV.

CONCLUSION
For the reasons set forth above, Plaintiffs motion for a default judgment is granted. An

appropriate order accompanies this opinion.
Dated: January 24, 2017

John Michael Vazb.J.

11