United States of America v. Dental Care Associates of Spokane Valley

The United States filed its First Amended Complaint in this action on June

16, 2015, seeking a permanent injunction against Defendants that would require

them to adhere to federal tax laws by timely filing employment tax returns, timely

paying the Internal Revenue Service (IRS) federal employment taxes, and not

assigning or transferring any property until Defendants pay the taxes that they have

withheld from employees’ paychecks. See ECF No. 17 at 2. The Government

alleges that Defendants own and operate a number of business entities with

employees which requires them to submit documentation and withhold and pay

federal income taxes, Federal Insurance Contribution Act (FICA) taxes, and

Federal Unemployment Tax Act (FUTA) excises related to their employees’

wages. Id. at 8-10. The Government argues that the entities run by Defendants,

including, among others, Dental Care Associates of Spokane Valley, P.S.; Dr.

James G. Hood Family Dentistry; Dr. James G. Hood, D.D.S., P.S.; Hood Family

Trust; and Whispering Pine Press Inc., have avoided such tax obligations since

2001 and continue to do so. See generally ECF No. 17.

According to the Government, the IRS has conferred with Defendants on

numerous occasions, notified them of their liabilities, and has sought compliance

through a variety of means prior to initiating this suit. Id. at 19; see also ECF No.

32 at 4-6. The IRS states that it has issued warnings, sought levies, and pursued

administrative action to force Defendants to adhere to their tax obligations. See

ECF No. 17 at 19-21, See also ECF No. 32 at 4-6. Defendants, however, continue

to avoid paying necessary taxes and continue to open new business entities

seemingly to avoid the oversight of the IRS. The Government found 52 businesses

listed under their names. See ECF Nos. 17 at 19. In doing so, Defendants have

accrued more than $700,000 in taxes owed to the IRS, according to IRS records,

and that debt continues to rise. See ECF No. 32 at 2. During the pendency of this

litigation, the United States seeks a preliminary injunction:

that prevents the entities or the Hoods from failing to obey any of the internal revenue laws, forces them to send facsimiles of the tax returns they file and proof of payment to the Revenue Officer assigned to the case on the day of filing and paying, and stops them from creating and operating new entities without notifying the IRS.

Id. at 1-2.

ANALYSIS

A preliminary injunction is “an extraordinary and drastic remedy, one that

should not be granted unless the movant, by a clear showing, carries the burden of

persuasion” (emphasis in original). Lopez v. Brewer, 680 F.3d 1068, 1072 (9th

Cir. 2012) (citing Mazurek v. Armstrong, 520 U.S. 968, 972, 117 S.Ct. 1865, 138

L.Ed.2d 162 (1997) (per curiam)). Ordinarily, to obtain a preliminary injunction,

the moving party must “demonstrate that (1) he is likely to succeed on the merits of

such a claim; (2) he is likely to suffer irreparable harm in the absence of

preliminary relief; (3) the balance of equities tips in his favor; and (4) that an

injunction is in the public interest.” Lopez, 680 F.3d at 1072 (citing Winter v.

Natural Res. Def. Council, Inc., 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249

(2008)).

In this case, the United States is seeking an injunction pursuant to 26 U.S.C.

§ 7402 which states in relevant part:

The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue … orders of injunction … and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.

Although the Ninth Circuit Court of Appeals has not yet determined whether

the traditional equitable factors must also be met to issue a preliminary injunction,1

the court in United States v. Thompson, 395 F. Supp. 2d 941, 945 (E.D. Cal. 2005)

held that “[b]ecause § 7402(a) grants the court injunctive power, the government

need only show that an injunction is appropriate for the enforcement of the internal

revenue laws, without reference to the traditional equitable factors.” In

considering the United States’ Motion, this Court assesses both whether or not the

preliminary injunction is necessary and appropriate to enforce internal revenue

laws and also whether or not the traditional equitable factors favor an injunction.

Importantly, “[t]he government bears the burden of proving each element

necessary for the issuance of the injunction by a preponderance of the evidence.”

United States v. Stephenson, 313 F. Supp. 2d 1054, 1057 (W.D. Wash. 2004)

“The Ninth Circuit has not determined whether the United States must show the

traditional equitable factors in order to obtain a preliminary injunction.” United

States v. Stephenson, 313 F. Supp. 2d 1054, 1056 (W.D. Wash. 2004).

A. Traditional equitable factors

(1) Likelihood of success on the merits

“To establish a substantial likelihood of success on the merits, [the moving

party] must show ‘a fair chance of success.’” In re Focus Media Inc., 387 F.3d

1077, 1086 (9th Cir. 2004) (quoting Republic of the Philippines v. Marcos, 862

F.2d 1355, 1362 (9th Cir.1988) (en banc)). The United States has submitted

substantial reliable evidence supporting its claim that Defendants have failed to

pay their taxes. See e.g., ECF Nos. 33-34. For example, the Government

submitted Certificates of Assessment and Payment that demonstrate the proper

assessment, notice, and demand for taxes made by a representative of the Secretary

of the Treasury. ECF No. 32 at 9. In response, Defendants have not submitted any

viable legal arguments or defenses; they instead vaguely dispute the amounts

owed, detail their failed attempts at compliance, and submit details regarding

personal difficulties. See ECF Nos. 38-48. In light of the substantial evidence

supporting the United States’ claims, and in the absence of any viable defenses or

evidence to counter the same, this Court finds that the United States is sufficiently

likely to succeed on the merits of this litigation.

(2) Irreparable harm

The United States argues that Defendants continue to add to the significant

tax debt that they already have accrued, and absent an injunction, the public will be

forced to fund their business endeavors while they ignore their growing tax

liabilities. See ECF No. 32 at 9-10. Defendants fail to provide any evidence to the

contrary. See ECF Nos. 38-48.

As the alleged debt increases to an extent that Defendants may not be able to

pay and insofar as they continue to maintain business entities, this Court agrees

with the Government that under a preponderance of the evidence standard, it is

likely that irreparable harm would result if Defendants’ conduct is not enjoined.

(3) The balance of equities

The Government argues that the balance of equities weigh heavily in its

favor because it is simply requesting that Defendants be forced to comply with the

law. See ECF No. 32 at 9. As the Court in United States v. Campbell, 897 F.2d

1317, 1324 (5th Cir. 1990) (citing Dunlop v. Davis, 524 F.2d 1278 (5th Cir.1975))

held in dealing with a permanent injunction: “[a] permanent injunction against

future violations of a statute is permitted because such merely requires the enjoined

party to obey the law.”

Any hardships than an injunction would impose on Defendants would

already have arisen under relevant statutes, but absent an injunction, the United

States would continue to lose the benefits of obtaining tax revenues owed by

Defendants. Defendants address this factor with numerous repetitive declarations

that detail attempts to satisfy debts and that restate personal difficulties regarding

their family life. See ECF Nos. 38-48. Although the Court recognizes the severity

of Defendants’ personal hardships, the burden of complying with statutory

obligations is not dissipated by the presence of unfortunate or even tragic

circumstances. Accordingly, this Court finds that the balance of equities weighs in

favor of granting the requested preliminary injunction.

(4) Public Interest

According to the Government, the public is currently funding Defendants’

business entities, and the effect of Defendants’ ability to avoid taxes is serving as a

de facto subsidy of their businesses, supporting them against their law-abiding and

tax-paying competitors. See ECF No. 17 at 25-36, see also ECF No. 32 at 10.

Defendants do not provide any reason to believe that the public has an interest that

would be harmed by the requested preliminary injunction. See ECF Nos. 38-48.

Accordingly, the Government has met its burden of establishing by a

preponderance of the evidence that an injunction is in the public interest.

B. 26 U.S.C. § 7402 – “Necessary and appropriate”

The Government argues that an injunction is proper in this case pursuant to

26 U.S.C. § 7402 because “it is necessary or appropriate for the enforcement of the

internal revenue laws.” ECF No. 32 at 7-8. The Government states that

Defendants have failed to comply with their tax obligations after the Government

Case 2:15-cv-00023-RMP Document 69 Filed 11/20/15

sought compliance through administrative actions and other means prior to this

litigation, but nothing sufficed to ensure that Defendants paid their taxes. ECF No.

17 at 19, See also ECF No. 32 at 4-6, 24-26. Therefore, an injunction would be the

only adequate remedy to prevent Defendants from adding to their debt and finding

ways to avoid paying what they already owe. Defendants’ vague requests for “due

process” without any argument that would refute the Government’s assertion that

an injunction is necessary and appropriate are unpersuasive. See ECF Nos. 38-48.

In the absence of any contradicting evidence, the Government has proven by a

preponderance of the evidence that an injunction is necessary and appropriate to

ensure Defendants’ compliance with tax laws.

In light of the foregoing considerations, this Court finds that the requisite

conditions under 26 U.S.C. § 7402 are satisfied and all four of the traditional

equitable factors favor the entering of a preliminary injunction pending the

outcome of this case.