PEARSON, District Judge.
The United States of America initiated the instant lawsuit to enjoin Defendant Steven R. Hinz from preparing federal tax returns for anyone other than himself, promoting an abusive scheme used to prepare and file fraudulent tax returns, and engaging in any other conduct in violation of internal revenue laws. ECF No. 1. On July 28, 2014, the case was referred to Magistrate Judge Kathleen B. Burke for preparation of a report and recommendation
Fed.R.Civ.P. 72(b)(2) provides that objections to a report and recommendation must be filed within 14 days after service. Objections to the magistrate judge's report were, therefore, due on August 17, 2015.
Accordingly, the Court hereby adopts the magistrate judge's Report and Recommendation. Summary judgment is entered in favor of the United States of America. Moreover, the Court enters the following permanent injunction against Defendant Steven R. Hinz:
(1.) Pursuant to I.R.C. §§ 7402(a), 7407 and 7408, Hinz and his representatives, agents, servants, employees, attorneys, independent contractors, and anyone in active concert or participation with him, are enjoined from, directly or indirectly:
(2.) Pursuant to I.R.C. § 7402, Hinz is enjoined from preparing his own federal tax returns claiming false income tax withholding and refunds based on amounts shown in false Forms 1099.
(3.) Pursuant to I.R.C. § 7402, Hinz is enjoined from filing, providing forms for, or otherwise aiding and abetting the filing of frivolous Forms 1040 or Forms 1099 for himself or others, including the notarizing or signing of certificates of service or similar documents in connection with frivolous tax returns.
(4.) Pursuant to I.R.C. § 7402, Hinz is enjoined from representing anyone other than himself before the IRS and from providing materials containing frivolous arguments to any other person to assist them in representing themselves before the IRS.
(5.) Pursuant to I.R.C. § 7402, any Preparer Tax Identification Number(s) held by, or assigned to Hinz shall be revoked. Hinz is enjoined from applying for a Preparer Tax Identification Number in the future or using any Preparer Tax Identification Number(s) assigned to any other person.
(6.) Pursuant to I.R.C. § 7402, any Electronic Filing Identification Number(s) held by, or assigned to, Hinz pursuant to 26 C.F.R. § 1.6011-7, shall be revoked. Hinz is enjoined from applying for an Electronic Filing Identification Number in the future or using any Electronic Filing Identification Number(s) assigned to any other person.
(7.) The United States may engage in post-judgment discovery to ensure compliance with this Order.
(8.) The Court will retain jurisdiction over this action for purposes of implementing and enforcing this Order.
IT IS SO ORDERED.
KATHLEEN B. BURKE, United States Magistrate Judge.
On October 12, 2012, Defendant Steven R. Hinz pleaded guilty to one count of conspiracy to defraud the United States, 18 U.S.C. § 371, fifteen related counts of aiding and assisting in the preparation of a false tax return, 26 U.S.C. § 7206(2), and one count of making a false return, 26 U.S.C. § 7206(1). Doc. 48-2, p. 7, ¶¶ 39, 40 (undisputed material facts). Based on the foregoing guilty pleas, Hinz's admissions, and other undisputed material facts, Plaintiff United States now moves for summary judgment pursuant to Fed. R. Civ. Pro. 56. (Doc. 48-1). Specifically, the United States seeks an injunction against Hinz pursuant to 26 U.S.C. § 7402(a), 7407, and 7408, enjoining Hinz from (1) preparing federal tax returns for anyone other than himself, (2) promoting the abusive scheme that he used to prepare and file false federal tax returns, and (3) engaging in other conduct that violates the internal revenue laws. Doc. 48-1, pp. 1-2. Hinz did not file a brief in response to the United States' motion. For the reasons explained below, there is no genuine issue of material fact; Plaintiff's motion should be granted; and a permanent injunction should be entered against Hinz.
Hinz operated a real estate business in Youngstown, Ohio. Doc. 48-4, pp. 3-4, ¶ 21. (plea agreement). He also offered tax services to his customers and employed a number of individuals for the purpose of carrying out tax services for his business. Doc. 48-4, p. 4, ¶ 22. In 2009, Hinz and his employees began filing fraudulent federal income tax returns for themselves and their customers using what is known as the "OID process." Doc. 48-2, pp. 1-2, ¶¶ 3-5, 7. The process involved preparing false Internal Revenue Service ("IRS") Forms 1099-OID and 1099A. Doc. 48-2, p. 2, ¶ 7. The Forms 1099-OID falsely reported that financial institutions, creditors, and other entities had withheld large amounts of federal income tax with respect to falsified or non-existent income. Doc. 48-2, p. 2, ¶ 8. Based on these fraudulently reported withholdings, Hinz or his employees filed false federal income tax returns that claimed large tax refunds. Doc. 48-2, pp. 2-3, ¶ 9. Neither he nor his customers were entitled to these refunds. Doc. 48-2, pp. 2-3, ¶ 9.
Hinz promoted the OID process to his customers and employees and to individuals he met through seminars and organizations. Doc. 48-2, p. 3, ¶ 11. He gave his customers the choice of having their returns prepared the conventional way or using the fraudulent OID process. Doc. 48-2, p. 3, ¶ 15. He informed his customers of the tax benefit they would receive using the fraudulent OID process compared to the conventional process. Doc. 48-2, p. 3, ¶ 16. Occasionally, customers were told that if they chose the OID process, they, alone, would be liable for any consequences with the IRS. Doc. 48-2, p. 3, ¶ 17.
Hinz instructed one of his employees, Ms. Heather English, to arrange with an outside company to electronically transmit approximately 411 sets of false Forms 1099-A and/or Forms 1099-OID to the IRS for about 57 customers. Doc. 48-2, p. 4, ¶ 19. After the IRS rejected some of the fraudulent filings, Hinz repeatedly directed English to have the company resubmit the false Forms and English repeatedly complied. Doc. 48-2, p. 4, ¶¶ 20-21.
Hinz charged each customer for the preparation of his or her OID process returns. Doc. 48-2, p. 5, ¶ 24. He required an upfront fee plus a percentage of the "tax benefit"-i.e., the fraudulent refund-obtained using the OID process. Doc. 48-2, pp. 5-6, ¶ 25. Hinz paid English to prepare the false forms and tax returns supporting the OID process. Doc. 48-2, p. 6, ¶ 28. In at least one instance, when the IRS sought to recover an improper refund from two of Hinz's customers, the customers asked Hinz to return the fee they paid him; he refused. Doc. 48-2, p. 6, ¶¶ 32-33. At times, Hinz told his customers to hide any portion of their OID refund that they had not already spent. Doc. 48-2, p. 6, ¶ 34.
Overall, Hinz's tax scheme reported approximately $13 million in false income and nearly as much in false withholding, and attempted to obtain more than $31.5 million in improper refunds. Doc. 48-2, p. 6, ¶ 35. The IRS issued at least $577,622 in improper refunds before it discovered Hinz's fraud. Doc. 48-2, p. 6, ¶ 36.
The district court sentenced Hinz to 108 months in prison. Doc. 48-2, p. 8, ¶ 45. In support of the sentencing decision, the court commented on Hinz's "complete disregard... for the laws of the United States;" Hinz's belief that "he is above the law;" Hinz's "complete lack [of] remorse" for his conduct; and the "likelihood of recidivism based upon all of [Hinz's] actions and statements." Doc. 48-2, p. 8, ¶ 46. Throughout the process, Hinz would not acknowledge that he is a person subject to the laws of the United States and refused to recognize the authority of the United States Courts. Doc. 48-2, p. 8, ¶ 47.
Summary judgment must be granted if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(a). The moving party bears the initial burden of establishing that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Judgment for the movant is proper when the facts as to each and every essential element are undisputed. Celotex Corp, 477 U.S. at 323, 106 S.Ct. 2548 (1986).
Once the moving party has shown that there is no genuine issue of material fact as to their claim, the non-moving party must then come forward with specific facts to demonstrate that there is a genuine issue of material fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The non-moving party must do more than simply show that there is some metaphysical doubt as to the material facts. Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Mere doubt or speculation will not carry the non-moving party's burden to defeat an otherwise properly supported motion for summary judgment. Anderson, 477 U.S. at 247-48, 106 S.Ct. 2505. The Court must draw from the evidence produced by the nonmoving party all justifiable inferences in favor of the non-movant. Id.
The United States asserts that undisputed material facts entitle it to judgment in its favor and a permanent injunction against Hinz. Doc. 48-1, p. 3. It moves for injunctive relief under 26 U.S.C. §§ 7402, 7407, and 7408. Id. Because the statutes each provide for injunctive relief, the United States does not need to satisfy the traditional elements for an injunction.
The United States asserts that Hinz is barred from disputing the facts that show he abused the federal income tax laws under the doctrine of collateral estoppel. Doc. 48-1, p. 4. The doctrine of collateral estoppel applies when three requirements have been met: "(1) the issue in the current action and the prior action are identical; (2) the issue was actually litigated; and (3) the issue was necessary and essential to the judgment on the merits." United States v. Beaty, 245 F.3d 617, 624 (6th Cir.2001) ("It is well established that a prior criminal conviction may work an estoppel in favor of the government in a subsequent civil proceeding."); Gray v. Comm'r of Internal Revenue, 708 F.2d 243, 246 (6th Cir.1983) ("A guilty plea is as much a conviction as a conviction following jury trial.''). Here, Hinz's guilty plea and subsequent conviction act as an estoppel in favor of the United States in the current civil proceeding. See id. The same facts that led to Hinz's conviction under 26 U.S.C. § 7206(2) are at issue here, the issue was actually litigated in Hinz's prior case, and the issue was essential to the judgment against him. See Beaty, 245 F.3d at 624; Richey v. United States, 9 F.3d 1407, 1411 (9th Cir.1993) (conviction under § 7206(2) estopped tax return preparer from denying willfulness under a subsequent civil action). Therefore, Hinz is estopped from denying the undisputed facts that show he abused the federal income tax laws. See id.; Beaty, 245 F.3d at 624.
Furthermore, Hinz's guilty plea is an admission of all the facts set forth in the indictment that support the elements of the crime charged. See United States v. Louchart, 680 F.3d 635, 637 (6th Cir.2012); McCarthy v. United States, 394 U.S. 459, 466, 89 S.Ct. 1166, 22 L.Ed.2d 418 (1969) ("a guilty plea is an admission of all the elements of a formal criminal charge."). When Hinz pleaded guilty, he explicitly admitted the facts set forth in the factual basis for his plea agreement. Doc. 48-4, p. 3, ¶ 20.
The plain text of 26 U.S.C. § 7402(a) gives the courts broad authority to issue injunctions "as may be necessary or appropriate for the enforcement of the internal revenue laws ... in addition to and not exclusive of any and all other remedies ..." ITS Financial, LW, 592 Fed.Appx. at 394 (quoting 26 U.S.C. § 7402(a)). The statute is "essentially a catch-all provision that grants federal courts the authority to issue any remedy that may be necessary and appropriate `for the enforcement of the internal revenue laws.'" United States v. Allen, 2014 WL 5305518, at *4 (S.D.Ohio Oct. 14, 2014). "The language of § 7402(a) manifest[s] a congressional intention to provide the district courts with a full arsenal of powers to compel compliance with the internal revenue laws." United States v. Elsass, 978 F.Supp.2d 901, 939 (S.D.Ohio 2013) (quoting Brody v. United States, 243 F.2d 378, 384 (1st Cir.1957)). For example, § 7402(a) has been used to enjoin interference with tax enforcement even when such interference does not violate any particular tax statute. ITS Financial, LLC, 592 Fed.Appx. at 394.
Hinz's unlawful conduct clearly falls within the evils that the broad statutory language of 7402(a) seeks to prevent. Hinz engaged in, and encouraged others to engage in, a scheme to prepare and file false federal income tax returns. Doc. 48-4, p. 9, ¶ 31. He submitted about 411 sets of the fraudulent forms and related processing documents showing a total of approximately $13 million in false income, and sought more than $3.15 million in improper refunds. Doc. 48-4, p. 12, ¶ 41d. He collected a total of $577,622 in improper refunds before the IRS discovered his fraud. Doc. 48-4, p. 14, ¶ 44. He told his customers to hide any portion of their refund they still had in their possession. Doc. 48-4, p. 15, ¶ 48.
Throughout Hinz's criminal proceedings he refused to acknowledge that he is a person subject to the laws of the United States, including IRS laws, and refused to recognize the authority of the United States Courts. Doc. 48-8; see United States of America v. Hinz et al., Crim. Case No. 4:11-cr-00586, Doc. 145, p 20 (Transcript of Sentencing Proceedings). He displayed a complete disregard for the laws of the United States and a belief that he is above the law; for example, during Hinz's sentencing, the trial court noted his complete lack of remorse and the likelihood of recidivism based upon all of his actions and statements. Doc. 48-8; see United States of America v. Hinz et al., Crim. Case No. 4:11-cr-00586, Doc. 145, pp. 18-19. It is, therefore, likely that he will continue to promote and administer the OID scheme absent a permanent injunction. Accordingly, the injunction against Hinz is necessary and appropriate pursuant to § 7402(a).
Sections 7407 and 7408 allow the Court to grant an injunction against a person who engaged in specified conduct and injunctive relief is appropriate to prevent the recurrence of such conduct. As described below, Hinz engaged in conduct prohibited by these sections and injunctive relief is appropriate to prevent him from further engaging in such conduct.
Section 7407 allows the Court to grant an injunction against any person
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 [the IRC] or any claim for refund of tax imposed by [the IRC]." 26 U.S.C. § 7701(a)(36)(A). The term "person" is defined broadly by the IRC to include individuals, partnerships, companies, and corporations. See id., § 7701(a)(1). "The preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund." § 7701(a)(36)(A). The reason "tax return preparer" was defined broadly "was to ensure that the person who makes the decisions and calculations involved in preparing a particular return will be considered the preparer of that return, even if that person `does not actually place the figures on the lines of the taxpayer's final tax return.'" Elsass, 978 F.Supp.2d at 909-910 (quoting Goulding v. United States, 957 F.2d 1420, 1424-25 (7th Cir.1992) (quoting, in turn, H.R. Rep No. 658, 94th Cong., 2d Sess. 275, reprinted in 1976 U.S.C.C.A.N. 3171)). "Tax return preparer" includes employers whose employees prepare tax returns. Id. at 911.
Individuals may be enjoined under § 7407 when they have, in relevant part: (1) engaged in any conduct that is subject to criminal penalty under the Internal Revenue Code; or (2) engaged in any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws; and (3) injunctive relief is appropriate to prevent the recurrence of such conduct. 26 U.S.C. § 7407(b)(1)(A) & (D), (b)(2).
Hinz pleaded guilty to fifteen counts of violating 26 U.S.C. § 7206(2), aiding and assisting the preparation of false federal income tax returns. Doc. 48-2, p. 7, 1139. He admitted to preparing OID returns and other false IRS forms in exchange for money. Id. ¶ 31. He also admitted to hiring and paying English to prepare OID returns, thus meeting the definition of "tax return preparer" under § 7701(a)(36)(A). He has clearly engaged in conduct that is subject to criminal penalty under the Internal Revenue Code. See § 7407(b)(1)(A). He also engaged in a variety of fraudulent or deceptive conduct that substantially interfered with the proper enforcement of the internal revenue laws, see § 7407(b)(1)(D), such as repeatedly re-submitting false 1099-A Forms, refusing to refund fees when his customers were asked to repay the IRS, and advising his customers to hide their false refunds from the IRS. Doc. 48-5, p. 2, ¶ 15. (Declaration of Heather English); Doc. 48-4, p. 15, ¶¶ 46, 48. As such, Hinz engaged in an excess of conduct prohibited by § 7407.
In addition to § 7407, the Government also urges the Court to enjoin Hinz under § 7408. Section 7408, in relevant part, allows a court to enjoin an individual from further engaging in conduct prohibited by
Section 6700 relates to the promotion of abusive tax shelters and imposes a penalty on any person who: (1) organizes or participates in the sale of a plan or arrangement, (2) makes statements or causes another person to make statements with respect to any tax benefit in connection with that organization or sale, (3) and knew or had reason to know that his statements were false or fraudulent as to any material matter. § 6700(a); see Gleason, 432 F.3d at 682. "Statements with a `substantial impact' on the decision to purchase a tax package pertain to a material matter." Id. at 683. Under § 6700, "any `plan or arrangement' having some connection to taxes can serve as a `tax shelter' and will be an `abusive' tax shelter if the defendant makes the requisite false or fraudulent statements concerning the tax benefits of participation." Elsass, 978 F.Supp.2d at 934.
Here, Hinz engaged in an elaborate and well-planned scheme to prepare and file false federal income tax returns for his customers from whom he collected a fee for his services. Doc. 48-4, pp. 9-10, ¶¶ 31, 37. He promoted the scheme and kept the taxpayers advised of developments by conference calls, group emails, and individual conversations. Id. p. 10, ¶ 34. He selected a few returns to file as test cases, and when the IRS subsequently issued refunds based on those false returns, Hinz informed clients of the refunds as proof that the process worked. Id., ¶ 35. Hinz's conduct more than satisfies the broad definition of "plan" under § 6700; see Gleason, 432 F.3d at 682.
Hinz made and caused others to make statements to his customers with respect to large tax refunds using the OID process scheme, which he promoted and collected money from. Doc. 48-3, p. 2, ¶ 5 (Indictment); 48-4, p. 11, ¶ 37. He knew or had reason to know that these statements were false and fraudulent. Hinz pleaded guilty to fifteen counts of aiding and assisting in the preparation of a false or fraudulent tax return, hence he has admitted that the returns were false. Doc. 48-4, p. 3, ¶ 20; see Lonchart, 680 F.3d at 637. He gave his customers the option of having their returns prepared the conventional way or using the fraudulent OID process, thus he knew that what he was doing was unlawful. Doc. 48-4, p. 11, ¶ 38. He informed his customers that they would receive a larger refund using the OID process compared to the conventional return. Id. Further, when the IRS rejected some of the false forms that were submitted, Hinz directed his employee, English, to re-submit the false forms repeatedly until they were accepted. Doc. 48-3, p. 7, ¶ 23; 48-5, p. 2, ¶ 13. He also advised his customers to hide any portion of their OID refunds they did not immediately spend. Doe. 48-4, p. 15, ¶¶ 46, 48. See Gleason, 432 F.3d at 682.
Hinz had reason to know that his statements were false or fraudulent as to a material matter. Factors relevant to this question includes: (1) the defendant's level of sophistication and education; (2) the defendant's familiarity with tax matters; and (3) the extent of the defendant's reliance upon knowledgeable professionals. Gleason, 432 F.3d at 683. The Court considers "what a reasonable person in [his] subjective position would have discovered." United States v. Campbell, 897 F.2d 1317, 1321-22 (5th Cir.1990).
Here, Hinz has not asserted that he relied upon knowledgeable professionals, but rather held himself out as an expert tax return preparer when he promoted the
Section 6701 creates a penalty for any person:
26 U.S.C. § 6701(a). As detailed above, Hinz knew that the federal income returns and Forms 1099 he prepared and filed, or instructed others to prepare and file, contained false statements of income withholdings which would result in a substantial understatement of his customers' tax liabilities. 26 U.S.C. § 6701(a). Doc. 48-4, pp. 9-14, ¶¶ 31, 41-43. As such, Hinz clearly engaged in conduct prohibited by § 7408.
In determining the need for an injunction to prevent future recurrence of violations under §§ 7407 and 7408, a court should consider various factors, including, but not limited to: (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. Gleason, 432 F.3d at 683.
Taking all the above stated factors into consideration, injunctive relief is appropriate in this case. The government was severely harmed by Hinz's OID process scheme and suffered a loss of $577,622 in fraudulent tax refunds. Doc. 48-4, p. 14, ¶ 44. The effort spent in seeking to recover the refunds issued to Hinz and his customers cost the IRS valuable resources and time.
Hinz promoted the OID process scheme to multiple individuals and charged a fee for his services. Doc. 48-3, pp. 4-5, ¶¶ 10, 14; see also Doc. 48-4, pp. 10, 16, ¶¶ 33, 37. He initiated the OID process, which he had learned about from seminars he attended. Doc. 48-5, p. 1, ¶¶ 6-7. He hired individuals to carry out the scheme and instructed them on how to prepare the false Forms. Doc. 48-5, p. 2, ¶¶ 12-13. He and his employees persuaded numerous individuals to file OID tax returns. Doc. 48-3, p. 4, ¶ 9; see also Doc. 48-4, p. 10, ¶ 32. Thus, Hinz participated extensively in the fraudulent scheme. See Gleason, 432 F.3d at 683.
The egregiousness of Hinz's conduct is amplified by the fact that he continued to file false federal income tax returns in the face of mounting IRS concerns. Doc. 48-3, p. 7, ¶ 23. Moreover, he was asked by some of his customers to return a portion of the money owed to the IRS, which he refused to do. Doc. 48-4, p. 15, ¶ 48. In fact, Hinz blamed his customers and the IRS for the results of his OID process scheme. As the district court noted at his criminal sentencing, he displayed complete disregard for the laws of the United States and denied that he is subject to the laws of the United States. Doc. 48-8; United States of America v. Hinz et al., Crim. Case No. 4:11-cr-00586, Doc. 145, p 20. He showed no remorse for his conduct and the likelihood of recidivism based upon his actions and statements is high. Doc. 48-8; United States of America v. Hinz et al., Crim. Case No. 4:11-cr-00586, Doc. 145, p 20. See Gleason, 432 F.3d at 683. Therefore, an injunction is appropriate under to §§ 7407 and 7408 to prevent Hinz from further engaging in prohibited conduct. As noted, Hinz did not respond to the Government's Motion for Summary Judgment; he does not dispute any allegations therein. Accordingly, the Court should grant the United States Motion for Summary Judgment and issue an injunction against Hinz.
For the reasons stated above, the United States is entitled to broad relief against Hinz in order to prevent him from interfering with the proper administration of the United States' income tax system. It is therefore recommended that the Court: (1) enter summary judgment in favor of the United States and (2) issue permanent injunctive relief pursuant to §§ 7402, 7407, and 7408. See Doc. 48-1 (United States' Proposed Order).
Filed July 29, 2015.
Doc. 48-4, p. 3, ¶ 20.
