United States v. Philippe

UNITED STATES OF AMERICA, Plaintiff, v. BEN PHILIPPE; CLEBERT PHILIPPE; MICHELLE JENKINS; andRELIANCE 1 TAX SERVICES LLC, Defendants.

Case No. 6:20-cv-84-RBD-GJK

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION

March 17, 2021

REPORT AND RECOMMENDATION

This cause came on for consideration without oral argument on the following motion:

MOTION: MOTION FOR DEFAULT JUDGMENT AGAINST BEN PHILIPPE, CLEBERT PHILIPPE, AND RELIANCE 1 TAX SERVICES LLC (Doc. No. 35)

FILED: November 9, 2020

THEREON it is RECOMMENDED that the MOTION be GRANTED IN PART AND DENIED IN PART.

I. BACKGROUND.

On January 16, 2020, the United States of America (the "Government") filed the Complaint against Ben Philippe ("Ben"), Clebert Philippe ("Clebert"), Reliance 1 Tax Services LLC ("Reliance 1") (collectively, the "Defendants"), and Michelle Jenkins, seeking to permanently enjoin them from the following:

(1) acting as federal tax return preparers or requesting, assisting in, or directing the preparation or filing of federal tax returns, amended returns, or other related documents or forms for any person or entity other than themselves;

(2) preparing or assisting in preparing federal tax returns that they know or reasonably should know would result in an understatement of tax liability or the overstatement of federal tax refund(s) as penalized by 26 U.S.C. § 6694;

(3) owning, operating, managing, working in, investing in, providing capital or loans to, receiving fees or remuneration from, controlling, licensing, consulting with, or franchising a tax return preparation business;

(4) training, instructing, teaching, and creating or providing cheat sheets, memoranda, directions, instructions, or manuals, pertaining to the preparation of federal tax returns;

(5) maintaining, assigning, holding, using, or obtaining a Preparer Tax Identification Number (PTIN) or an Electronic Filing Identification Number (EFIN);

(6) engaging in any other activity subject to penalty under 26 U.S.C. §§ 6694, 6695, 6701, or any other penalty provision in the Internal Revenue Code; and

(7) engaging in any conduct that substantially interferes with the proper administration and enforcement of the internal revenue laws.

Doc. No. 1 at 47-48. The Government also asks that the Court, among other things, order Defendants to disgorge to it the gross receipts that they received forpreparing illegal tax returns. Id. at 50.

On January 20, 2020, Defendants were properly served. Doc. Nos. 5, 6, 8. Defendants failed to plead or otherwise defend this action. On February 14, 2020, the Clerk entered defaults against Defendants pursuant to Rule 55(a), Federal Rules of Civil Procedure. Doc. Nos. 18-20. On February 24, 2020, Jenkins filed an answer and affirmative defenses. Doc. No. 22. On October 14, 2020, Jenkins and the Government filed a stipulation in which Jenkins agreed to judgment being entered against her, and on March 3, 2021, the Court entered a judgment of permanent injunction and order of disgorgement in the amount of $25,000 against her. Doc. No. 38.

On November 9, 2020, the Government filed a motion for default judgment against Defendants (the "Motion"). Doc. No. 35. The Motion was served on the Defendants by first class U.S. mail. Id. at 23. The Defendants did not file a response to the Motion.

In the Motion, the Government states that Ben and Clebert "have prepared tax returns for compensation since at least 2012." Id. at 2. In 2015, Clebert incorporated Reliance 1 and was the manager and registered agent. Id. Ben owned and operated three tax preparation stores in Jacksonville, Florida, under the nameAllied Tax Services¹ and was the manager and registered agent of Allied Tax Services. Id.

The Government generally alleges that Defendants prepare tax returns for customers with low to moderate incomes that "generate bogus refunds . . . ." Doc. No. 1 at ¶¶ 16, 17. Defendants intentionally charge the customers exorbitant fees for preparing the fraudulent tax returns and hide the fees from their customers. Id. at ¶¶ 18, 131. Defendants also fail to provide their customers with copies of their completed tax returns. Id. at ¶ 125. The Government maintains that Defendants knew or should have known of the falsity of the tax returns that they prepared. Id. at ¶ 151. The Government alleges that Defendants' unlawful tax preparation practices include the following:

a. Making false claims for the Earned Income Tax Credit ["EITC"];

b. Circumventing due diligence requirements in order to unlawfully maximize the [EITC];

c. Fabricating businesses and related business income and expenses reported on Forms Schedule C;

d. Fabricating itemized deductions, including for unreimbursed employee business expenses and charitable contributions, reported on Forms Schedule A;

e. Improperly claiming false filing status, such as Head of Household;f. Claiming education credits to which their customers are not entitled;

g. Failing to provide customers with a copy of the completed tax return; and

h. Charging deceptive and unconscionable fees.

Id. at ¶ 20.

One of the ways Defendants obtained tax refunds was to "mak[e] false claims for purported unreimbursed employee business expenses." Id. at ¶ 70. Defendants would claim inflated amounts for, among other things, mileage for commuting to and from work, clothes bought to wear to work, and cell phones, none of which are legitimate deductions. Id. at ¶¶ 75-77, 79, 82-84, 86, 87, 89-90, 94, 96-97, 99, 103, 106, 108. A second method Defendant employed to obtain inflated tax refunds was to artificially increase or decrease the customers' incomes so that the customers would receive close to the maximum EITC. Id. at ¶¶ 21, 25. Defendants altered the income by "reporting non-existent businesses on bogus Forms Schedule C." Id. at ¶ 28. Depending on whether the goal was to raise or lower the customers' incomes, Defendants would either "report substantial business income, but little or no expenses [or] . . . report substantial expenses, but little or no income." Id. The Government alleges a number of specific instances of this conduct. Id. at 29-68. The Government's uncontradicted averments aresufficient to prove that Defendants falsely claimed the EITC for customers; falsely claimed on Forms Schedule C that customers had non-existent businesses to falsely lower or raise the reported taxable income; reported fabricated unreimbursed employee business expenses to falsely lower customers' reported taxable income; charged unconscionably high tax preparation fees, and failed to provide their customers with completed tax returns.

The Government alleges that the Defendants caused harm to the Government, their customers, legitimate tax return preparers, and to the public. Id. at ¶¶ 128-35. The Government contends that it is harmed by the lost tax revenue and having to devote limited resources to detecting Defendants' false claims and collecting the lost tax revenue. Id. at ¶¶ 129, 132. Defendants' customers are harmed because, in addition to the exorbitant fees Defendants charged, the fraudulent returns expose them to civil and criminal penalties and repayment of the fraudulently obtained refunds. Id. at ¶¶ 130-31. Legitimate tax return preparers are harmed because they are losing business due to Defendants' claims of producing higher tax refunds for their clients. Id. at ¶ 134. Finally, the public is harmed "by [Defendants] undermining public confidence in the federal tax system and encouraging widespread violations of the internal revenue laws." Id. at ¶ 135.

Based on the allegations set forth above, the Government maintains that it is entitled to a permanent injunction pursuant to 26 U.S.C. §§ 7407, 7408, and7402(a), as set forth in Counts I, II, and III, respectively. Id. at 39-46. Under Count IV, the Government also asks for a disgorgement pursuant to 26 U.S.C. § 7402(a) of the gross receipts that Defendants received for preparing the fraudulent tax returns. Id. at 46.

In the Motion, the Government requests a default judgment against Defendants. Doc. No. 35 at 1. Furthermore, the Government requests that the Court find that Defendants continually and repeatedly engaged in conduct subject to penalty under 26 U.S.C. §§ 6694(a), (b), and 6695(g), and that, pursuant to 26 U.S.C. § 7407, an injunction prohibiting such conduct would not be sufficient to prevent Defendants' interference with the proper administration of the tax laws and that Defendants should be permanently enjoined from acting as tax return preparers and working, owning, or investing in a tax preparation business. Id. at 11-14. The Government argues that it is entitled to an injunction under 26 U.S.C. § 7408 because Defendants engaged in conduct subject to a penalty under 26 U.S.C. § 6701, including preparing false Schedules A and C and bypassing EITC due diligence requirements. Id. at 14-15. Finally, the Government contends that it is entitled to an injunction and disgorgement under 26 U.S.C. § 7402. Id. at 18-21.

II. THE LAW.

A. Default Judgment.

The Federal Rules of Civil Procedure establish a two-step process for obtaining default judgment. First, when a party against whom a judgment for affirmative relief is sought fails to plead or otherwise defend as provided by the Federal Rules of Civil Procedure, and that fact is made to appear by affidavit or otherwise, the clerk enters a default. Fed. R. Civ. P. 55(a). Second, after obtaining a clerk's default, the plaintiff must move for a default judgment. Fed. R. Civ. P. 55(b). Before entering a default judgment, the court must ensure that it has jurisdiction over the claims and parties, and that the well-pleaded factual allegations of the complaint, which are assumed to be true, adequately state a claim for which relief may be granted. See Nishimatsu Constr. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975).²

A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2)....