United States v. Smith, 5:17CV86-JRG-CMC

UNITED STATES OF AMERICA v. JEANNA SMITH

No. 5:17CV86-JRG-CMC

UNITED STATES DISTRICT COURT OF THE EASTERN DISTRICT OF TEXAS TEXARKANA DIVISION

October 31, 2018

MEMORANDUM ORDER ADOPTING REPORT AND RECOMMENDATION OF THE MAGISTRATE JUDGE

The above-entitled and numbered civil action was referred to United States Magistrate Judge Caroline M. Craven pursuant to 28 U.S.C. § 636. The Report of the Magistrate Judge which contains her proposed findings of fact and recommendations for the disposition of such action has been presented for consideration. Defendant Jeanna Smith ("Smith") did not file objections to the Report and Recommendation. The United States of America ("Government") filed partial objections to the Report and Recommendation. The Court has conducted a de novo review of the Magistrate Judge's findings and conclusions.

BACKGROUND

The July 26, 2017 Injunction Order

The Government brought this action pursuant to 26 U.S.C. §§ 7401 and 7402(a) to halt Smith's failure to timely file employment and unemployment tax returns ("Form 941" and "Form 940") and failure to timely pay the related federal employment and unemployment taxes owed by her businesses. At the request of Smith and the Government, the Court entered a Judgment and Permanent Injunction by Consent on July 27, 2017 ("Injunction Order").¹ Dkt. No. 30. TheInjunction Order ordered Smith to obey her employment and unemployment tax obligations, particularly as they applied to her business Paris Senior Care Group ("PSCG").

The Government's motion for order to show cause why Smith should not be held in contempt

On March 21, 2018, the Government moved the Court for an order to show cause why Smith should not be held in contempt for violating the Injunction Order. Dkt. No. 36. According to the Government's memorandum in support of its motion, since the Court issued the Injunction Order on July 27, 2017, requiring Smith to timely pay PSCG's employment and unemployment taxes, PSCG had accrued at least $38,837.98 in delinquent tax.² Dkt. No. 38 at pg. 4. According to the Government, the returns for the last quarter of 2017 and the first quarter of 2018 were likely delinquent as well, as no biweekly payments had been made to the IRS. Assuming the employment tax obligations for these two quarters are comparable to the previous two, PSCG would have accrued an additional $43,921.10 in delinquent employment taxes for a total of $87,842.20. Id.

The Government further asserted Smith and PSCG had either filed late or not at all the three Form 941 Employer's Quarterly Federal Tax Returns that had become due since the Injunction Order went into effect, and Smith and PSCG had also failed to file the 2017 Form 940 Employer's Annual Federal Unemployment ("FUTA") Tax Return, which was due on January 31, 2018. Id. Finally, the Government asserted Smith had also failed to submit to the IRS the monthly sworn affidavits reporting compliance with the Injunction Order which were due on the first of each month. Of the eight affidavits that were due between August 2017 and March 2018, Smith only submitted one affidavit - the one for January 2018, and that affidavit was filed two weeks late. Id. at pg. 5.

The Government requested the Court order Smith to show cause why she should not be held in contempt. According to the Government, if Smith failed to show cause, the Court should hold her in civil contempt to compel her compliance with the Injunction Order. The Government requested the Court conditionally incarcerate Smith following a finding of contempt, until she complies with the Injunction Order. Id. at pg. 7. The Government suggested no other sanctions that might enforce compliance with the Injunction Order.

April 19, 2018 show cause hearing

On March 22, 2018, the Court issued an Order to Show Cause, ordering Smith to file a response and setting a show cause hearing on April 19, 2018 to consider the evidence presented by the parties. Dkt. No. 39. The Court advised that Smith's failure to file a response and/or to appear at the hearing might result in a recommendation that the Court enter an order of contempt. Although Smith did not file a response as ordered, she did appear at the April 19, 2018 show cause hearing.

The Government filed a witness and exhibit list for the April 19 show cause hearing, including affidavits and other evidence, and presented testimony of IRS revenue officer Linda Andrews at the hearing. Smith also testified at the hearing. Smith did not deny she had violated the Injunction Order. Instead, she represented she would fully comply in the future. Dkt. No. 44 at 43:21-24. She further represented she would immediately open a separate bank account as required by the Injunction Order. Id. at 38:2-7. According to Smith, her goal was to retain an accountant to help take care of her books and to "keep running." Id. at 40:2-20.

The Government's Notice of Continued Noncompliance

Before the Magistrate Judge issued a recommendation after the April 19 hearing, the Government filed on May 30, 2018, a Notice of Continued Noncompliance with the Court'sInjunction Order. Dkt. No. 45. According to the notice, Smith had made little progress, if any, on her April 19 pledge to become current with her obligations under the injunction.³

June 21, 2018 supplemental show cause hearing

On June 1, 2018, the Magistrate Judge issued a Notice of Supplemental Hearing Regarding Order to Show Cause, setting a supplemental hearing on this matter June 21. On June 19, the United States filed a witness and exhibit list for the "follow up to the April 19, 2018 show cause hearing." Dkt. No. 49. The Government listed IRS Revenue Officer Linda Andrews and Smith as witnesses. Although Smith acknowledged receipt of the order setting the supplemental hearing, she did not appear at the June 21 supplemental show cause hearing nor file any response to the Government's notice of continued noncompliance.

The Government's supplemental briefing on remedies following a finding of contempt

At the request of the Magistrate Judge, the Government submitted supplemental briefing on June 29 on available sanctions that would be appropriate. Dkt. No. 53. According to the Government, the Injunction Order entered a year prior had been ineffective in inducing Smith's compliance with the tax laws, and Smith had allowed PSCG to incur at least $45,000 in additional delinquent employment taxes since the Injunction Order took effect. Thus, the Government arguedthat unless Smith could cure her violations within fifteen days, the Court should modify the Injunction Order to require Smith to shut down her business and to prohibit Smith from owning or operating a business with employees for five years. The Government submitted examples of district court orders requiring defendants to shut down their businesses after the defendants were deemed to have violated an injunction. Alternatively, the Government asserted if "Smith needs additional time to wind the business down or has difficulties doing so, she has the option to file for a Chapter 7 bankruptcy action, so that a receiver appointed by the bankruptcy court can orderly wind down the business." Dkt. No. 53 at pg. 4.

SEPTEMBER 13, 2018 REPORT AND RECOMMENDATION

On September 13, 2018, the Magistrate Judge entered a Report and Recommendation, recommending Defendant Jeanna Smith, through her operation of PSCG, be held in civil contempt of the Court's July 27, 2017 Judgment and Permanent Injunction by Consent and that she be given an opportunity to purge herself of her contempt. Specifically, the Magistrate Judge recommended the Court order the Government to file with the Court and serve on Smith, within ten days from the date of entry of any Order Adopting the Report and Recommendation, a sworn declaration from Revenue Officer Andrews setting forth the outstanding returns and the exact amount due and owing by Smith to the Government under the terms of the Injunction Order as of the date of the Order Adopting.

The Magistrate Judge further recommended that if Smith fails to purge herself of her contempt within fifteen days following the filing of the sworn declaration by remitting to the Government the returns and the amounts set forth in the sworn declaration, the Government be ordered to file with the Court and serve on Smith a proposed receivership order, identifying areceiver and recommending the terms of the receivership. The Magistrate Judge noted in most cases relied upon by the Government where a court modified the scope of a permanent injunction to require the winding down of a business as the appropriate sanction for civil contempt, the court had first appointed a receiver (or ordered the defendant to engage an accountant) to oversee the preparation of required tax returns and to assist the business in making required federal tax payments. Report and Recommendation at pg. 14.

THE GOVERNMENT'S RESPONSE

In its response to the Magistrate Judge's Report and Recommendation, the Government agrees with the Magistrate Judge's finding of contempt and allowing fifteen days to purge the contempt. However, the Government believes Smith's business is not viable, and thus, objects to the part of the Report and Recommendation recommending the Government be ordered to identify a receiver in the event Smith fails to purge herself of her contempt. According to the Government, forcing PSCG to shut down is the best remedy for Smith's contempt.

Alternatively, the Government asserts any receiver should be appointed at Smith's or PSCG's expense. According to the Government, before such a receiver is even considered by the Court, Smith should be required to establish its feasibility, by financial statements, bank accounts, and documents, that (1) PSCG is a financially viable business; (2) PSCG would be a financially viable business if it were complying with the injunction; and (3) that it would be a financially viable business while complying and while paying a receiver's salary. The Government...