COURT PERMANENTLY ENJOINS PROMOTION OF ABUSIVE TAX AVOIDANCE SCHEMES.

I. Brief Procedural History

Plaintiff, the United States, brought this action for preliminary and permanent injunctive relief pursuant to 26 U.S.C. §§ 6700, 6701, 7401, 7407 and 7408 (2003), against individual Defendants Carel Prater (a/k/a Chad Prater) and Richard Cantwell and corporate Defendants Tax Escape Service and New Found Freedom, among others (collectively "Defendants"), to enjoin them from promoting allegedly abusive tax-avoidance schemes based on the so-called "§ 861 argument," a meritless position that domestic income is not subject to the federal income tax, and from making other false and fraudulent representations regarding tax laws.

Plaintiff alleges, inter alia, that Defendants prepared, promoted and marketed tax-avoidance schemes (through seminars, newspaper advertisements, a book and a website) purporting to exempt Defendants' clients from federal income taxation and advising clients how to conceal their assets and income from the Internal Revenue Service (the "IRS") (Dkt. 1). On November 7, 2002, Plaintiff moved this Court for issuance of a preliminary injunction (Dkt. 2). On December 19, 2002, this Court entered an Order granting Plaintiff's preliminary injunction request finding that Defendants' conduct violated the Internal Revenue Code (the "IRC"), specifically 26 U.S.C. §§ 6700, 6701, 6694 and 6695 (Dkt. 23). Defendants did not appeal the entry of the preliminary injunction. Now, Plaintiff moves this Court for summary judgment converting the preliminary injunction into a permanent injunction (Dkts. 143 and 144), and Defendants oppose that motion (Dkts. 145 and 146).

Plaintiff claims that summary judgment is appropriate in this case because:

Plaintiff claims further that it is entitled to a permanent injunction based on the findings of fact made in support of the preliminary injunction because these findings clearly establish the United States' entitlement to a permanent injunction under IRC §§ 7407, 7408 and 7402(a). Plaintiff also claims that:

In the "Proposed Order" attached to its Motion, the United States sets forth twenty-one proposed findings of fact (Dkt. 144). These proposed findings of fact are nearly identical to the findings of fact set forth by the District Court's Preliminary Injunction Order (Dkt. 23) with the following exceptions: in paragraph 18 the term "has prevailed" is substituted for "will likely prevail;" the word "permanent" is substituted for "preliminary" throughout; certain footnotes or portions thereof have been deleted; and paragraph 21 has been added. The proposed findings of fact, as discussed below, support Plaintiff's position that summary judgment is appropriate in this case.

Defendants do not contest the United States' allegations or attempt to refute any of the proposed findings of fact by the submission of contravening affidavits or argument. Instead, Defendants challenge the Court's "territorial jurisdiction," as they have in the past (Dkt. 19) and also claim that because there is no "basis for the original complaint claiming violation of the 'Income Tax' law sections identified . . . there can be no legal and lawful basis to grant a summary order of permanent injunction" (Dkt. 145 at 4). Finally, Defendants demand that the preliminary injunction be lifted and that the Court "[o]rder an Evidentiary Hearing" where monetary damages to Defendants can be determined and where evidence can be presented to permit the Court to determine meaningful sanctions to be applied to the "offending Agencies and its [sic] agents" (Dkt. 145 at 4).

II. Standards for Summary Judgment and Permanent Injunction

A Court may grant summary 'judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P 56(c); see also Three Palms Pointe, Inc. v. State Farm Fire & Cas., Co. 362 F.2d 1317, 1318 (11th Cir. 2004)(stating that summary judgment is appropriate where there are no genuine issues of material fact).

The burden of establishing the absence of a genuine issue of material fact lies with the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The "movant bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record that] it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp., 477 U.S. at 323. To discharge this burden, the movant must demonstrate to the Court that there is an absence of evidence to support the nonmoving party's case. Id. at 325. However, after the movant has metits burden under Rule 56(c),the burden of production shifts and the non-movant "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electronic Industrial Co. v. Zenith Radio Corp. 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). According to Fed.R.Civ.P. 56(c), the non-movant "may not rest upon the mere allegations or denials of the adyerse Party's pleadings, but rather must provide the Court with "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(c); Matsushita, 474 U.S. at 587 (emphasis added).

Although the findings of fact made in support of a preliminary injunction are not controlling at a later hearing for a permanent injunction, E.Remy Martin & Co., S.A. v. Shaw-Ross Int'l Imports, Inc. 756 F.2d 1525, 1527 n.1 (11th Cir. 1985), where there is no triable issue of fact, the court may convert a preliminary injunction to a permanent injunction without an evidentiary hearing. United States v. McGee, 714 F.2d 607, 613 (6th Cir. 1983); Socialist Workers Party v. Illinois State Bd. of Elections, 566 F.2d 586, 587 (7th Cir. 1977), aff'd other grounds, 440 U.S. 173 (1979); United States v. Byrd, 609 F.2d 1204, 1208-09 (7th Cir. 1979). The Court issuing the permanent injunction must "recast" its findings of fact and conclusions of law in terms of the permanent injunction standard, which is essentially the same as the standard for a preliminary injunction. Ciba-Geigy Corp. v. Bolar Pharm. Co., 747 F.2d 844, 847 (3d Cir. 1984). The exception is that the plaintiff must show actual, rather than likely, success on the merits. Amoco Production Co. v. Village of Gambell, Alaska, 480 U.S. 531, 546 n.12 (1987).

Because IRC §§ 7407 and 7408 set forth the criteria for injunctive relief, the United States need only meet those criteria, without reference to the traditional equitable factors, for an injunction to issue under these sections. See United States v. Estate Pres. Servs., 202 F.3d 1093, 1098 (9th Cir. 2000) ("The traditional requirements for equitable relief need not be satisfied since Section 7408 expressly authorizes the issuance of an injunction.").

To obtain a permanent injunction under IRC § 7407 the United States must show: (1) that the defendant is an "income tax return preparer" within the meaning of IRC § 7701(a)(36); (2) that he engaged in conduct described in § 7407(b)(1)(A)-(D); and (3) that injunctive relief is appropriate to prevent the recurrence of such conduct. United States v. Fernandez, 2005 WL 1332312, *1 (M.D. Fla. May 4, 2005)(citing United States v. Ernst & Whinney, 735 F.2d 1296, 1303 (11th Cir. 1984)).

IRC § 7408(a) gives the district courts power to issue an injunction under IRC § 7408(b) if it finds that 1) the person has engaged in any conduct subject to penalty under section 6700. . . or section 6701 . . . and 2) the injunctive relief is appropriate to prevent recurrence of such conduct. See United States v. Ratfield, et al., 2004 WL 3174420, *12 (S.D. Fla. Nov. 30, 2004).

IRC § 7402 gives the district courts power to issue injunctions as may be necessary or appropriate for the enforcement of the internal revenue laws of the United States. Ernst at 1300. Congress has expressly stated that injunctive relief under IRC § 7402(a) is "in addition to and not exclusive of any and all other remedies." See IRC § 7402(a). In Ernst the Eleventh Circuit held, however, that for an injunction to issue under IRC § 7402(a) the United States must meet the traditional equitable standard for an injunction. Ernst at 1301 ("the decision to issue an injunction under § 7402(a) is governed by the traditional factors shaping the . . . use of the equitable remedy."). Those factors are: (1) the likelihood of continuing irreparable injury to the United States, (2) the harm to the United States without the injunction outweighs any harm to the defendant if a permanent injunction is entered, (3) success on the merits of the case, and (4) the public interest favors entry of a permanent injunction. United States v. Fernandez, 2005 WL 1332312, *1 (M.D. Fla. May 4, 2005); See also Keener v. Convergys Corp., 342 F.3d 1264, 1269 (11th Cir. 2003) (citing Newman v. Alabama, 683 F.2d 1312, 1319 (11th Cir. 1982)).

III. Findings of Fact and Conclusions of Law

Plaintiff presented support for its motion for preliminary injunction in the form of case law and supporting declarations (Dkts. 2-4), which Defendants failed to rebut during the preliminary injunction hearing. When Plaintiff moved for summary judgment converting the preliminary injunction into a permanent injunction, Defendants were again afforded the opportunity to proffer rebuttal evidence; however, Defendants failed to take advantage of this opportunity as well. Defendants' response does not delineate proposed findings that are in dispute (Dkts. 145 and 146). Rather, as noted above, Defendants simply reiterate arguments (Dkts. 19, 146, 148 and 149) that this and other Courts have found to be frivolous and without legal merit (Dkt. 152).

In support of its Motion, Plaintiff filed twenty-one (2 1) proposed findings of fact. Evidence support for the findings of fact exists in the declarations and attachments submitted in support of Plaintiff's Motion for Preliminary Injunction (Dkt. 4), which are not controverted by Defendants, and in the evidentiary (Dkt. 23) and contempt hearings (Dkts. 34-40) held before the Court. Because Defendants failed to rebut or contradict Plaintiff's evidence or to raise a single genuine issue of material fact, the Undersigned recommends that Plaintiff's twenty-one proposed findings of fact, as modified below, be accepted as true. See United States v. Raymond, 228 F.3d 804, 809 (11th Cir. 2000) (citing Wang v. Lake Maxinhall Estates, Inc., 531 F.2d 832, 835 n. 10 (7th Cir. 1976) for the proposition that at the summary judgment stage uncontradicted affidavits are taken as true).

As discussed in detail below, Defendants, even after the entry of the preliminary injunction, persist in filing documents in this case asserting the validity of the § 861 argument and contesting the jurisdiction of the Court. These documents indicate that Defendants have not accepted the findings by this (and other courts) that the tax scheme they promote is unlawful.

Plaintiff's success on the merits in combination with Defendants' demonstrated unwillingness to abide by the terms of the preliminary injunction leads to the incontrovertible conclusion that the issuance of a permanent injunction is appropriate, and in fact necessary, in this case. Evidence that Defendants continue to engage in behavior that led the Government to file this suit is provided by the findings of the Special Master assigned to this case that were filed on December 5, 2003, as well as the affidavits and documents referenced above that were filed in support of Plaintiff's Motion to Hold Defendants in Contempt (Dkt. 30). The necessity for a permanent injunction becomes especially clear upon review of Defendants' post-preliminary injunction filings in opposition to Plaintiff's Motion (Dkt. 145) and Defendants' Demand for Dismissal and Removal of Temporary Injunction (Dkt. 148) in which Defendants, undaunted and undeterred by the issuance of the preliminary injunction and other court sanctions, continue to assert their frivolous arguments about the legality of the tax code and jurisdiction of this Court.

The recommended language is straightforward and designed specifically and carefully to prevent Defendants from continuing to violate the law and from causing further injury. As of the filing of the request for preliminary injunction, Defendants had already cost the United States roughly $18 million in tax losses (Dkt 3 at 13, n.81 (citing to the Matthews Decl. ¶ 20)) and further caused the United States to devote substantial time and resources to detecting Defendants' tax schemes and prosecuting Defendants for engaging in this fraudulent conduct (Dkt 3 at 13, n.81 (citing to the Matthews Decl. ¶ 11)). In addition, as noted above, there is no indication on the record thus far that Defendants have acknowledged that the tax scheme they promote is unlawful. Thus, the continuing injury to the United States outweighs any injury a permanent injunction might cause to Defendants.

IV. Conclusion

Accordingly, the Undersigned reports and recommends that the District Court GRANT the United States' motion for summary judgment converting the preliminary injunction into a permanent injunction and award the United States its costs. Based on this recommendation, the Undersigned suggests that District Court incorporate the following language into any final order in this case:

Pursuant to IRC §§ 7402, 7407, and 7408, Prater and Cantwell, both individually and doing business through any entity, their representatives, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of this order are enjoined from:

Further, the Court ORDERS that the United States may conduct post-judgment discovery to monitor Defendants' compliance with this permanent injunction.

Further, the Court ORDERS that Prater and his associated entities pay the United States its costs, including the cost of the Special Master. The United States is to submit a bill of costs for consideration and approval by the Court.

RESPECTFULLY RECOMMENDED in Tampa, Florida, on this 30th day of August 2005.