COUPLE PERMANENTLY ENJOINED FROM ACTING AS FEDERAL RETURN PREPARERS.

Defendants answered the complaint and filed a counterclaim against Plaintiff and a third party complaint against numerous Internal Revenue Service ("IRS") employees. Docs. ##14, 18-19. Defendants seek damages for alleged violations of IRC §§ 7433 and 7214. Id. ¶¶ 57-62.

Defendants do not dispute that they have sought income tax refunds for other individuals in numerous filings with the IRS. Docs ##18-19 ¶¶ 6-8, 40-41 ¶¶ 14(a)-(d), 16. Nor do Defendants dispute that they charged these individuals 25% of any refunds received. Docs. ##4 ¶ 14, 14 Ex. K1. Defendants nonetheless contend that they are not income tax return preparers because they were acting as "fiduciaries" when they submitted the filings to the IRS. Doc. #151 ¶ 5.

"A fiduciary is a person who holds something in trust for another." Ip v. United States, 205 F.3d 1168, 1176 (9th Cir. 2000). The IRC provides the following examples of a fiduciary: "guardian, trustee, executor, administrator, receiver, [or] conservator." Id. at 1173 (quoting IRC § 7701(a)(6)). The treasury regulations provide this definition:

Defendants do not contend that they are trustees, executors, or administrators with respect to the individuals for whom they have provided tax services. Rather, Defendants contend that they are fiduciaries because their filings with the IRS included IRS Form 56, titled "Notice Concerning Fiduciary Relationship." Doc. #151 ¶ 5. As the Court has previously held, however, Form 56 merely gives notice of a pre-existing fiduciary relationship and cannot, by itself, create the relationship. See United States v. Volling, No. MC-04-94-PHX-DGC (Dec. 8, 2004 Order) (granting the United States' motion to enforce IRS summons against respondent Roxann Volling and precluding Darrell Hill from appearing before the IRS on respondent's behalf because there was no evidence of a fiduciary relationship between them) (citing Gouveia v. Comm'r, T.C. Memo 2004-256 (2004)). Defendants have presented no evidence of any fiduciary relationship between them and the individuals for whom they have provided tax services. The Court thus concludes that Defendants have acted as income tax return preparers within the meaning of the IRC. See IRC § 7701(a)(36)(A); Ip, 205 F.3d at 1176-77 (finding no fiduciary relationship where the petitioner acted merely as a "liaison" or "communicator"); see also United States v. Savoie, 594 F. Supp. 678, 684 (W.D. La. 1984) (holding that the defendant was a paid preparer within the meaning of IRC based on uncontroverted evidence that he prepared three returns for a client for a twenty-five or thirty dollar fee).

Plaintiff argues that the undisputed evidence shows that Defendants have continually and repeatedly engaged in conduct that violates both § 6694 and § 6695. Doc. #128 at 6-8. In support of its argument, Plaintiff has presented evidence of the following:

Defendants have registered "Superior Claims Management" as a trade name with the Arizona Secretary of State. Doc. #4 ¶ 4. Defendants also have registered the related website, "www.getmytaxesback.com," with a registrar of internet domain names. Id. ¶ 5. Defendants offer on this website to recover previously paid taxes for other individuals, stating "We put Your Past Taxes in Your Bank!!!" Id. ¶ 8. Defendants further state that "[wage earnings are not 'taxable profit"' and that most people have erroneously been overpaying taxes their entire lives. Id. ¶ 11.

Between April 2003 and November 2004, Defendants filed with the IRS at least 252 income tax returns or claims that seek refunds due to the position that the taxpayers' wages are not taxable income under the IRC. Docs. ##6 ¶¶ 5-7 & Exs. A-D, 121 ¶ 6, 127 ¶¶ 26-73. Defendants neither identified themselves as tax return preparers nor listed identifying numbers on the filings. Doc. #6 ¶ 8. Defendants attached to each filing a five-page supplement that cites various court cases and provides: "The Supreme Court of the United States had already established that my labor for my wages was/and is not taxable income. Please reimburse my money without delay!" Doc. #6 ¶ 7, Exs. A-D.

The IRS devoted approximately four hours of employee time to the review of each filing. Doc. #121 ¶¶ 15-16. The IRS ultimately rejected the filings and responded to most of them by notifying the taxpayers that the position taken was frivolous and could result in the imposition of frivolous return penalties. Docs. ##6 ¶ 9, 121 ¶ 9. Many of these notices resulted in further filings and correspondence from Defendants. Doc. #121 ¶ 9.

In early 2004, the IRS issued Revenue Ruling 2004-29, which addresses the type of filings submitted by Defendants. Docs. ##5 121 ¶ 11. The ruling states in part:

Defendants assert in their three-page response that Plaintiff's "allegations are substantially unjustified." Doc. #151 ¶ 1. As Plaintiff points out in its reply, however, Defendants present no evidence showing that there is a genuine issue for trial. Doc. #155 at 1. Defendants merely state that the Court should deny Plaintiff's motion because it "perpetrates the denial of the Constitutional Rights, Guarantees and Protections of the Constitution of the State of Arizona and the Constitution of the United States." Doc. #151 at 3. Such conclusory statements are insufficient to survive summary judgment. See Fed R. Civ. P. 56(e); LRCiv 56.1(a); Celotex, 477 U.S. at 323-24.

The Court concludes that there is no genuine issue as to whether Defendants have repeatedly violated IRC §§ 6694 and 6695. Defendants have submitted numerous filings with the IRS seeking the return of taxes based on the frivolous position that wages are not taxable income under the IRC. Docs. ##6 ¶¶ 5-7 & Exs. A-D, 121 ¶ 6, 127 ¶¶ 26-73; see IRC § 61 (stating that "gross income means all income from whatever source derived, including . . . [c]ompensation for services"); United States v. Buras, 633 F.2d 1356, 1361 (9th Cir. 1980) ("Treas. Reg. § 1.61-2(a)(1) clearly includes wages within the definition of income."); United States v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981) ("Romero's proclaimed belief . . . that the wages he earned as a carpenter were not "income" is fatuous as well as obviously incorrect. . . . Compensation for labor or services, paid in the form of wages or salary, has been universally held by the courts of this republic to be income, subject to income tax laws currently applicable."); Gattuso v. Pecorella, 733 F.2d 709, 710 (9th Cir. 1984) ("Taxpayers' claim that their wages are not income is frivolous.") (citing Buras and Romero). Defendants knew that the IRS considered their position frivolous and that there was no realistic possibility that it would be sustained. Doc. #13 ¶¶ 3, 6, 10. Defendants nonetheless continued to submit frivolous filings to the IRS. Doc. #121 ¶ 6. The filings did not include tax-preparer identification numbers as required by the regulations, and Defendants have presented no evidence that their failure to provide identification numbers was due to reasonable cause and not due to willful neglect. Doc. #6 ¶ 8; see IRC § 6695(c); Savoie, 594 F. Supp. at 684 ("Savoie violated both sections 6694 and 6695. Savoie followed his 'Wages Not Income' plan in each of the returns and amended returns that we have uncontroverted evidence he prepared. . . . He affixed neither his signature nor a tax-preparer identification number to any of the returns[.]").

The Court further concludes that an injunction prohibiting only violations of IRC §§ 6694 and 6695 would not be sufficient to prevent Defendants' interference with the proper administration of the IRC. Defendants continue to hold the erroneous belief that wages are not taxable income under the IRC and that Plaintiff is thus "imposing against them unconstitutional taxation[.]" Doc #151 ¶ 1; see Docs. ##112 at 2, 152-53 (Defs.' Affs.). In fact, in April 2005 -- after Plaintiff filed this lawsuit -- Defendant Darrell Hill filed forms with the IRS in an attempt to reduce to zero dollars the amount of wages previously reported to the IRS by five of his former employers. Doc. #18 Ex. I (IRS Form 4852, Substitute for W-2, Wage and Tax Statement).² Such frivolous filings have impeded the ability of the IRS to administer tax laws and has placed significant administrative and financial burdens on the IRS. Doc. #121 ¶¶ 15-16.

The Court will grant Plaintiff's motion for summary judgment with respect to Count I and permanently enjoin Defendants from acting as federal income tax return preparers. See IRC § 7407(b)(2); Savoie, 594 F. Supp. at 685 ("[I]n light of Savoie's unyielding opposition to the current tax structure, we hardly need to explain that an injunction against conduct listed in subsection (b)(1) would be insufficient to safeguard tax administration from Savoie's interference.").

In this case, Defendants claim on their website to be able to "get your back taxes reimbursed to you" based on the debunked theory that "[w]age earnings are not 'taxable profit."' Doc. #4 Ex A. Defendants mislead potential customers by stating that their "procedures are legitimately filed with the taxing entities" and that they "engage the agencies forthrightly." Id. Defendants falsely promise that "at worst, all [the taxing entities] can say is 'no"' and that such a response will cost the customer "nothing." Id.

"Although these claims are far-fetched, they . . . mislead a customer into believing that he or she could use [Defendants' services] to legally stop paying income taxes." Schiff, 379 F.3d at 630. The Court accordingly will order Defendants to remove from their website all advertising for their fraudulent tax services. See id. (affirming an injunction that prohibited the defendants from promoting or marketing the use of "zero income" tax returns and false withholding forms); Savoie, 594 F. Supp. at 683 (enjoining the defendant from promoting fraudulent tax-avoidance schemes or advertising material to be used by taxpayers to avoid the payment of tax); United States v, Kaun, 633 F. Supp. 406, 409 (E.D. Wis. 1986) ("Consistent with [the] broad, remedial purpose of § 7402(a), the federal courts have routinely relied on its grant of injunctive authority to preclude individuals . . . from disseminating their rather perverse notions about compliance with the Internal Revenue laws or from promoting certain tax avoidance schemes.") (citations omitted).

The Court concludes that knowing the identities of Defendants' customers will assist the IRS in identifying frivolous returns and determining whether any erroneous refunds have been issued. The Court will order Defendants to disclose to Plaintiff the identities of any individuals for whom Defendants have filed tax documents with the IRS since January 1, 2002, and notify such individuals of the disclosure.

II. Plaintiff's and Third Party Defendants' Motions to Dismiss.

In Counts I and II of their counterclaim/third party complaint, Defendants seek damages for alleged violations of IRC §§ 7433 and 7214. Does. ##18-19 ¶¶ 57-62. Defendants allege that Plaintiff "has recklessly, intentionally and negligently . . . disregarded provisions of Title 26 U.S.C., and regulations promulgated under the Title to falsely accuse and prosecute [Defendants] as 'federal tax return preparers[.']" Id. ¶ 40. Defendants allege that Third Party Defendants have violated their oaths of office, disregarded provisions of the IRC, and threatened and implemented collection actions without due process. Id. ¶¶ 44-51.

Plaintiff and Third Party Defendants move to dismiss the claims against them pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction. Does. ##24, 104. They argue that jurisdiction is lacking because Defendants have failed to show a waiver of sovereign immunity. Id.

Plaintiff argues that it has not waived sovereign immunity with respect to Defendants' § 7433 claim because Defendants have not exhausted the administrative remedies available to them under Treasury Regulation § 301.7433-1(e). Doc. #25 at 4-5. Defendants do not dispute that they have failed to exhaust administrative remedies. Rather, they allege that no administrative remedies are available to them due to Plaintiff's "systemic disregard" for the IRC and the regulations promulgated thereunder. Docs. ##18-19 ¶ 52.

Plaintiff's alleged disregard for the IRC does not excuse Defendants' failure to exhaust administrative remedies. See IRC § 7433(d)(1) (permitting a taxpayer to sue the United States for disregarding the IRC only after the taxpayer has exhausted administrative remedies); Treas. Reg. § 301.7433-1(a)(2) (same). Defendants have thus failed to show that Plaintiff has waived its sovereign immunity with respect to Defendants' § 7433 claim. See Holloman v. Watt, 708 F.2d 1399, 1402 (9th Cir. 1983) (reversing the award damages against federal officials based on sovereign immunity and stating: "A waiver of sovereign immunity cannot be implied but must be unequivocally expressed. The party who sues the United States bears the burden of pointing to such an unequivocal waiver of immunity.") (citations and alterations omitted). The Court will dismiss Defendants' § 7433 claim against Plaintiff for lack of subject matter jurisdiction. See Conforte v. United States, 979 F.2d 1375, 1377 (9th Cir. 1993) ("Conforte may not bring this action against the United States under . . . § 7433 without exhausting her administrative remedies. She has not done so. The court lacked jurisdiction to hear her.") (citations omitted).

Defendants' claim against Third Party Defendants must be dismissed because § 7433 permits suits against only the United States, not IRS employees. IRC § 7433(a) ("[A] taxpayer may bring a civil action for damages against the United States[.]") (emphasis added); see Treas. Reg. § 301.7433-1(a) (same); Gilbert v. DaGrossa, 756 F.2d 1455, 1458 (9th Cir. 1985) ("[A] suit against IRS employees in their official capacity is essentially a suit against the United States. As such, absent express statutory consent to sue, dismissal is required.") (citations omitted).³

IT IS ORDERED:

1. Plaintiff's motion to dismiss counterclaims (Doc. #24) is granted.

2. Third Party Defendants' motion to dismiss third party complaint (Doc. #104) is granted.

3. Plaintiff's motion for summary judgment (Doc. #126) is granted.

4. Defendants Beverly and Darrell Hill, individually and doing business as Superior Claims Management or as any other entity, are permanently enjoined from directly or indirectly:

a. Acting as federal tax return preparers or assisting in or directing the preparation and/or filing of any federal tax return or claim for refund for any person or entity other than themselves;

b. Appearing as representatives for any person or entity whose tax liabilities are under examination or investigation by the IRS;

c. Preparing or assisting in the preparation of a document related to a matter material to the internal revenue laws that includes a position that they know would result in the understatement of tax liability; and

d. Engaging in other conduct that they know will interfere with the administration and/or enforcement of the internal revenue laws.

5. Defendants shall, within 15 days from the date of this Order, remove from their website, www.getmytaxesback.com, all information advertising their services as federal income tax preparers, consultants, fiduciaries, or personal representatives and all false or fraudulent statements regarding the meaning and application of the internal revenue laws, including, but not limited to, any statements that wages or earnings are not taxable income.

6. Defendants shall, within 15 days from the date of this Order, post a complete copy of this Order and the Court's separate Permanent Injunction on their website, www.getmytaxesback.com.

7. Defendants shall, within 30 days from the date of this Order, disclose to Plaintiff's counsel a list that identifies by name, social security number, mailing address, e-mail address, telephone number, and tax periods all persons for whom Defendants have prepared federal income tax returns or claims for refund since January 1, 2002.

8. Defendants shall, within 30 days from the date of this Order, notify in writing and, if an e-mail address is known, by e-mail all persons described in paragraph 7 above with respect to whom the Court has ordered Defendants to disclose identifying information to Plaintiff's counsel.

9. Defendants shall, within 30 days from the date of this Order, file with the Court a notice certifying that they have complied fully with the requirements set forth in paragraphs 5 through 8 above.

10. All other pending motions are denied as moot.

11. The Clerk shall terminate this action.

DATED this 22nd day of December, 2005.

² It appears that Defendant discovered this new practice from the book by Peter Hendrickson, "Cracking the Code: The Fascinating Truth About Taxation in America." Docs. ##18-19 Exs. F. Defendants included the book with their answers and have avowed their belief in the book's interpretation of the IRC. Docs. ##12 ¶ 4, 13 ¶ 4, 18-19 Exs. E.

³ To the extent Third Party Defendants have been sued in their individual capacities, an action for damages is still barred. See Wages v. IRS, 915 F.2d 1230, 1235 (9th Cir. 1990) (holding that the remedies provided by Congress, particularly the right to sue the United States for a refund of taxes improperly collected, foreclose a damages action against IRS employees under Bivens v. Six Unknown Federal Narcotics Agents, 403 U.S. 388 (1971)).

IT IS ORDERED that Defendants Beverly and Darrell Hill, individually and doing business as Superior Claims Management or as any other entity, are permanently enjoined from directly or indirectly:

1. Acting as federal tax return preparers or assisting in or directing the preparation and/or filing of any federal tax return or claim for refund for any person or entity other than themselves;

2. Appearing as representatives for any person or entity whose tax liabilities are under examination or investigation by the IRS;

3. Preparing or assisting in the preparation of a document related to a matter material to the internal revenue laws that includes a position that they know would result in the understatement of tax liability; and

4. Engaging in other conduct that they know will interfere with the administration and/or enforcement of the internal revenue laws.

DATED this 22^nd day of December, 2005.