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United States v. Pope

United States District Court, E.D. Michigan, Southern Division

November 30, 2017



          DAVID M. LAWSON United States District Judge.

         The government has sued the defendants, who are engaged in the business of preparing income tax returns for individuals, seeking a permanent injunction forbidding them from ever engaging in that activity. The government contends that the defendants have filed numerous fraudulent returns that claimed false deductions and understated the amount of tax due. The Court previously entered a preliminary injunction barring the defendants from preparing and filing tax returns on behalf of others while this case is pending. Discovery has closed, and the case is scheduled for trial. The government now has filed a motion for summary judgment, offering declarations and documentary evidence that establishes the elements of its claims. The defendants' response does not raise a material fact question, primarily because they asserted their rights under the Fifth Amendment and refused to respond to any substantive discovery by the government about their conduct or to furnish any affidavits or declarations in response to the motion. Because the undisputed facts show that the government is entitled to the relief it requests as a matter of law, the Court will grant the government's motion and enter final judgment in the case.


         The Internal Revenue Service initiated an investigation of the defendants' tax preparation service in 2011. IRS Revenue Agent Yolanda Churchwell stated in a declaration that defendant Denise Pope operated a tax preparation business using various business names since approximately 2006. Pope's businesses - known as Uneek Business Solutions, CDP Accounting Services PC, and CDP Tax Services, Inc. - prepared at least 2, 770 1040 returns for tax years 2009, 2010, 2011, and 2012. Based on the results of its investigation of Pope and her partner, Janise Jones, the IRS revoked the electronic filing identification numbers (EFIN) for Uneek Business Solutions and CDP Accounting, Inc. However, Churchwell averred that Pope and Jones then began filing tax returns under a different EFIN assigned to CDP Tax Services, Inc.

         Churchwell says that the IRS examined 87 returns prepared by Pope, Jones, or other employees of Pope's tax preparation businesses between 2008 and 2012, and all but two of them stated false claims. The IRS calculated the total tax deficiency for those 85 returns at $461, 463.63. She identified a pattern that emerged from the 87 returns examined. False or unsubstantiated charitable contributions were reported on 31 of the returns (“often using the exact same false amounts for contributions - $6, 000 in cash contributions and $5, 000 per non-cash donation”); 28 returns reported false or non-qualifying unreimbursed employee business expenses; and 25 returns claimed false Schedule C expenses. The IRS determined that in many cases where Schedule C expenses were claimed to offset income, the taxpayer clients did not own or operate any business, and deductions were taken for costs that are not valid business expenses, such as ordinary costs of commuting to and from work. Some of the returns also used false or inflated business expenses to offset income in order to claim the Earned Income Tax Credit, and other returns claimed refundable tax credits for education expenses, where the taxpayers never attended college and had no educational expenses during the tax year.

         The government included with its motion a representative sample of declarations from nine taxpayer clients of the defendants. Jason Poindexter attested that he hired CDP Accounting Services to prepare his 2010 and 2011 returns, and that Denise Pope prepared those returns for him. Mot. Summ. J., Ex. B, Decl. of Jason Poindexter ¶ 2-3 (Pg ID 327). Poindexter provided Pope with W-2 forms from his employment at Greektown Casino and his mortgage interest statements, but he did not furnish any other financial information to Jones for use in preparing his returns. Id. ¶¶ 1, 4. Poindexter received a refund on both of his 2010 and 2011 tax returns, but he did not review his tax forms until he was contacted by the IRS regarding the statements made on them. Id. ¶¶ 5-6. Poindexter subsequently learned that his returns for both years included Schedule C forms claiming business expenses of $16, 495 for 2010 and $8, 307 for 2011, but he never provided documents to Pope to substantiate any such expenses, and he never told Pope that he owned or operated any business. Id. ¶¶ 7-9. Poindexter also attested that his returns for both years claimed education credits of $4, 000 and reported cash charitable donations of $6, 000, but he never told Pope that he had any education expenses or made any charitable donations for either of those years. Id. ¶¶ 10-11.

         To Phuovone attested that his tax returns for 2010, 2011, and 2012 were prepared for him by defendant Pope (2010) and defendant Jones (2011 and 2012). Ex. C, Decl. of To Phuovone ¶¶ 2-3 (Pg ID 330). Phuovone received a refund for each of those tax years, but he did not review his tax forms before he signed them. Id. ¶¶ 5-6. Phuovone later learned that his 2010 return claimed education expenses of $5, 000 for him and his wife, but he never told Pope that he or his wife paid any education expenses for that year; he told Pope only that he takes two or three classes a year required by his employer, and his employer reimbursed all of the expenses for them. Id. ¶ 7. Phuovone did not give Pope any information to substantiate any amount of education expenses for 2010. Ibid. Phuovone's returns stated that he made cash charitable donations of $8, 400 in 2010, $12, 000 in 2011, and $13, 700 in 2012, but Phuovone never told Pope or Jones that he made any such donations and never provided them with any information to substantiate those amounts. Id. ¶ 8. Phuovone's 2011 return also reported non-cash charitable contributions that added up to $15, 000, but Phuovone never told Jones that he made donations valued at that amount. Phuovone told Jones that he made three donations to the Salvation Army of (1) a bag of used clothing, (2) a bag of used clothing and a VCR, and (3) four interior doors. Jones stated the value of those donations on his return at $5, 000 each. Id. ¶ 9. Phuovone's 2012 return reported non-cash donations that added up to $30, 250, but he told Jones only that he made donations to various organizations on six occasions consisting of several bags of used clothing, used furniture, and used appliances. Once again, Jones valued those six donations at $5, 000 each on the 2012 return. Id. ¶ 10.

         Bouavone Nguyen attested to similarly unsubstantiated or overstated deductions claimed on his tax return for 2011, which was prepared by defendant Jones, including: (1) $4, 000 of education expense credit claimed for expenses incurred by Nguyen, where Nguyen did not tell Jones that he incurred any education expenses that year; (2) $14, 000 in cash charitable contributions that Nguyen never told Jones that he made; (3) non-cash charitable donations of some used furniture and a bag of used purses, which Jones valued at $5, 000 each; and (4) an employee business expense deduction for 21, 320 miles driven in 2011, where Nguyen never told Jones that he incurred any vehicle related business expenses and did not tell her that he drove his car for work purposes. Ex. D, Decl. of Bouavone Nguyen (Pg ID 333-35).

         Other taxpayers reported similar patterns of false and unsubstantiated deductions, expenses, donations, and credits stated on their tax returns that were prepared by Pope or Jones. Ex. E, Decl. of Som Boualyvongsane (Pg ID 336-339) (false business expenses, education credits, cash and non-cash charitable donations, and unreimbursed employee expenses for tax years 2010 and 2011); Ex. F, Decl. of Yolanda Agnew (Pg ID 340-45) (false or unsubstantiated business expenses and charitable donations for tax years 2011-2014); Ex. G, Decl. of Jamall Coleman (Pg ID 346-48) (false business expenses and education credits for 2010 and 2011); Ex. H, Decl. of Latisha McCrear (Pg ID 349-51) (false business expenses and education credits for 2011); Ex. I, Decl. of Christina Davis (Pg ID 352-53) (false business expenses and improperly deducted commuting costs for 2011); Ex. J, Decl. of Steve Radosavac (Pg ID 354-55) (false education credits for 2010).

         June Foster testified at her deposition that she was employed seasonally as a receptionist at Pope's CDP Tax Services business for a few months each year for three years, from 2012 through 2014. Ex. K, June Foster dep. at 8, 11-12, 30, 39, 46 (Pg ID 359-375). The defendants identified Foster as an “employee” of their tax business in their answers to the government's interrogatories. Foster testified that she was paid $10 per hour for her work, at various times either in cash or by check. Foster dep. at 30. Foster's tax returns were prepared for her each year by either Pope or Jones. For each of those years the returns did not include any income paid to Foster by the tax return business, which was reported to Foster on Form 1099s. Id. at 13-14, 30, 39, 40-41, 47-48. Foster testified that Pope and Jones knew that she was paid for her work, and she never told them not to report the income she received from her work in the tax preparation business. Id. at 40-41, 47-48.

         In their responses to questions propounded for their depositions on written questions, defendants Pope and Jones each asserted their Fifth Amendment privileges against self-incrimination in response to all of the substantive inquiries about their tax preparation activities.

         The government filed its complaint in this case on March 31, 2015. The complaint seeks injunctive relief only and pleads two counts for violations of the Internal Revenue Code based on: (1) fraudulent or deceptive conduct that substantially interferes with the proper administration of the internal revenue laws, I.R.C. §§ 6694, 6695, 7407 (26 U.S.C. §§ 6694, 6695, 7407) (Count I); and (2) aiding, assisting, or advising with respect to the preparation or presentation of a federal tax return knowing, or having reason to believe, that it will result in an understatement of another person's tax liability, I.R.C. §§ 6701(a), 7408 (Count II). In addition to the demands for remedial injunctive relief under sections 7407 and 7408 to halt the specific violations, the complaint also pleads in Count III a demand for permanent injunctive relief under I.R.C. § 7402(a), to enforce the revenue laws by enjoining the defendants from continuing to prepare and file false and fraudulent tax returns.

         The government filed its motion for summary judgment after discovery closed in this case. After they requested and received an extension of the time to respond, the defendants timely filed a response, and the government filed a reply. A bench trial is scheduled to begin later next month. However, no trial will be necessary because the defendants have ...

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