In United States v. ITS Financial, LLC, the Sixth Circuit affirmed the district court’s injunction against a fraudulent tax preparation franchise, but not the franchise’s loan provider (a separate company belonging to the same owner).
Defendants’ “business model” consisted in large part of “luring low-income customers by advertising tax refund anticipation loans that were rarely awarded and sometimes not in fact available . . . . convinc[ing] them to let ITS file their tax returns . . . [or] fil[ing]their tax returns without permission, using information obtained in the loan application,” while charging “deceptive and exorbitant fees.” The returns were filed using pay stubs rather than W-2’s, which routinely resulted in understating customers’ tax liability.
After finding widespread non-compliance with a stipulated preliminary injunction that directed defendants to eliminate pay stub returns, stop charging certain fees and offer refund-anticipation loans only through third parties, the district court enjoined ITS Financial (the tax preparation franchise) and Tax Tree (the loan provider) from ““[o]perating, or being involved with in any way, any work or business relating in any way to preparation of tax returns” under Section 7402 of the Internal Revenue Code, which permits injunctions “as may be necessary or appropriate for the enforcement of the internal revenue laws.” The Sixth Circuit affirmed, notwithstanding Defendants’ contention—which the court did not dispute—that “[w]hile previous cases have specifically enjoined preparers from preparing taxes and giving advice to customers, no case has ever barred a franchisor or other company from working in the tax industry generally.”
The court affirmed the injunction as to ITS Financial, holding that it saw “no reason that a franchisor should be allowed to continue where its franchisee could not.” The court rejected Defendants’ argument that such an injunction was only available under Section 7407, which allows the court to enjoin a party from “acting as a tax preparer” after “continual[] or repeated[]” misbehavior, explaining that Section 7402(a), provides “a broad grant of authority,” especially to address “wrongdoing that is extreme in both magnitude and multitude,” and was appropriate here, where the Defendant was a franchise and not a tax preparer itself. The court noted that ITS Financial’s “violative conduct extended beyond direct preparation of taxes” and that its structure as a franchise resulted in “violations . . . even more serious and harmful than those that can be perpetrated by a lone tax preparer.” In response to Defendants’ argument that the injunction was vague and might include harmless activities like the sale of office supplies, the court quipped that Defendants “know well what relates to tax preparation,” and that the “district court was entitled to expect that the injunction would be interpreted with a modicum of common sense.”
As to Tax Tree, the court found it “difficult to ascertain what specifically justifies the injunction.” Because Tax Tree was not a tax preparer, the court held the district court erred in holding that Tax Tree violated Section 6695(f) of the Revenue Code, which fines tax preparers for endorsing clients’ refund checks. However, the court allowed that there might be other valid reasons to enjoin Tax Tree and remanded for the district court to determine whether there was any other basis.
The bottom line seems to be that, in the Sixth Circuit, a broad Section 7402 injunction will be upheld when there is sufficiently broad misconduct, and “delegat[ing] to . . . franchisees” will not “insulate” the parent franchise. Although the decision was unpublished and therefore technically not binding, it will likely be followed within the circuit. It will be interesting to see whether other circuits follow suit.
