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United States v. Ericson

United States District Court, D. Hawaii

November 30, 2014

James A. Ericson, Defendant

For United States of America, Plaintiff: Harry Yee, LEAD ATTORNEY, Office of the United States Attorney, Honolulu, HI; Jeremy N. Hendon, LEAD ATTORNEY, U.S. Department of Justice - Tax Division, Washington, DC.

James A. Ericson, Defendant, Pro se, Kihei, HI.


Leslie E. Kobayashi, United States District Judge.

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.] Pro se 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 Rules"). 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 forth below.


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 years. 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, tax refunds. 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. 16-20.]


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 laws, and
(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 substantial authority." 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. If 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 person's interference with the proper administration of this title, the court may enjoin such person from acting as a tax return preparer." § 7407(b).

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 ...

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