We have discussed before the increasing practice of the Department of Justice Tax Division to seek an injunction against an operating business that pyramids its tax liabilities. Pyramiding is the term used for taxpayers who keep building higher and higher tax liabilities by failing to pay period after period. Usually, it applies to a company that fails to pay employment taxes by failing to withhold the income and employment taxes from its employees and pay the taxes over to the IRS. Pyramiding typically occurs when a company lacks sufficient cash flow but sometimes it results simply from greed and a belief that the IRS will not catch the person and make them pay.
If a company pyramids its employment taxes and the IRS has no practical means of collecting from the company, the IRS, many years ago, would shut the company down, or attempt to do so, by issuing levies or seizing property even though the company had no equity in seized assets or funds in the bank. By seizing assets of the business the IRS could effectively close the business temporarily and that might cause it to close permanently. Other levies would frequently stop suppliers from supplying or banks from lending even if they produced no dollar return. The goal of these seizures and levies was not to get money but to keep from losing more money. The practice of no equity seizures went away over 30 years ago. After the demise of no equity seizures, revenue officers longed for a tool to shut down the taxpayers in situations in which the taxpayer continued to run up liabilities no matter what the revenue officer tried to do.
Finally, the government, after many years of discussing the possibility, decided that it could bring an injunction action seeking to stop the pyramiding taxpayer from running up additional liabilities. Doing this through an injunction takes longer and cost more money from the perspective of the time and effort of the Department of Justice trial attorney but can prove an effective method of shutting down a business that continues to ignore the requirement to pay payroll taxes. In United States v. Askins and Miller Orthapedeatrics, D.C. Docket No. 8:17-cv-00092-JDW-MAP (11th Cir. 2019), the 11th Circuit agreed with the IRS that an injunction of the business was appropriate remedy to stop a business from continuing to incur employment taxes. In ruling for the IRS, the 11th Circuit reversed the decision of the district court which had denied the IRS injunctive relief. The case represents an important circuit level discussion of what the IRS needs in order to succeed in obtaining injunctive relief.
The business at issue was run by two brothers. The brothers had caused the business not to pay its employment taxes, both trust fund and non-trust fund, since 2010. The brothers also created trust and other entity accounts in order to hide the assets of the business. In many ways the case read as a textbook case for a criminal prosecution against the brothers. A high percentage of injunction cases seem to fit the bill for criminal prosecution and DOJ does prosecute people for failing to pay employment taxes – something it almost never did three decades ago. I do not know what causes the decision to fall into the injunction box rather than the prosecution box, but here the government chose the civil route.
The court described the situation as follows:
“The IRS has tried several collection strategies over the years. It started with an effort to achieve voluntary compliance: IRS representatives have spoken with the Askins brothers “at least 34 times” since December 2010, including 27 in-person meetings. Twice they entered into installment agreements that set up monthly payments to bring Askins & Miller back into compliance, but the company defaulted both times. Two other times, they warned Askins & Miller that continued noncompliance could prompt the government to seek an injunction.
The IRS has employed more aggressive means as well. It served levies on “approximately two dozen entities,” but most “responded by indicating that there were no funds available to satisfy the levies.” Three entities paid some money, but not nearly enough to satisfy Askins & Miller’s debts or to keep pace with its accrual of new liabilities. Additionally, the IRS’s ability to collect payments through levies has been hampered by the defendants’attempts to hide Askins & Miller’s funds and to keep the balances in Askins & Miller’s accounts low. Between 2014 and 2016, the Askins brothers transferred money from Askins & Miller to “RVA Trust,” which operates a private hunting club for the brothers, and “RVA Investments,” an accounting business associated with their father. The IRS also discovered additional accounts at BankUnited and Stonegate Bank. It did not seek to levy RVA Trust, RVA Investments, or the bank accounts because it discovered them after this case had been referred to the Department of Justice and because the IRS believed that “there is a substantial risk that any new levy would result in opening new undisclosed accounts and moving the money there.”
When the IRS finally gave up on its administrative collection efforts and referred the case to the Department of Justice for the pursuit of an injunction, it met another obstacle. The district court denied the motion without prejudice finding the declaration conclusory, and finding that the proposed injunction was “effectively an ‘obey-the-law’ injunction.” The IRS filed a new declaration with the district court trying again to convince it to enjoin the taxpayer’s actions. The district court again reached the conclusion that the requested injunction served as an order to obey the law. After the second attempt at the district court, the IRS appealed. While the case was pending in the district court, the taxpayer ran up even more liabilities.
To obtain a preliminary injunction under “the traditional factors,” the IRS must demonstrate 1) a substantial likelihood of success on the merits, 2) that it will suffer irreparable injury unless the injunction is issued, 3) that the threatened injury to the IRS outweighs whatever harm the proposed injunction might cause the defendants, and 4) that the injunction would not be adverse to the public interest. The district court noted that the parties essentially agreed that three of the four traditional elements for an injunction case were met by the facts of the case, but felt that the IRS could obtain a judgment for damages and, therefore, did not face irreparable injury. The IRS argued that such a judgment was meaningless under the circumstances since it had exhausted its administrative efforts with its powerful administrative tools in trying to collect the outstanding debt.
Taxpayers raised a question of whether the closure of their business rendered the case moot. The court went through a thorough analysis of factors of mootness factors and determined that remanding the case to the district court for a determination of mootness would serve no purpose but delay stating:
“Given the undisputed facts before us, we do not believe that the defendants can satisfy their “heavy” and “formidable” burden of making it “absolutely clear” that their behavior will not recur. And “we are unpersuaded that a remand would further the expeditious resolution of the matter.” Sheely, 505 F.3d at 1188 n.15 (conducting mootness analysis without remanding for further fact finding). The district court already concluded that the defendants have “a proclivity for unlawful conduct” and are “likely to continue ignoring” their tax obligations. The record demonstrates a near-decade-long saga in which the IRS has pursued Askins & Miller time and again. Over that time span, the defendants have funneled money to new accounts and entities as the IRS closed in on the old ones. For at least the time between November 2015 and mid-2018, Askins & Miller continued as a going concern despite reporting “no investments, no accounts or notes receivable, no real estate, and no business equipment.” Against that backdrop — and in light of the defendants’ admissions that Askins & Miller “continues to exist” and that one of the brothers continues to practice medicine — “we can discern no reason for sending the question of mootness back to the district court for further review or fact finding.” Id.
Then the circuit court moved on to examine the issue of whether the IRS had an adequate remedy of law. Addressing that issue, the court acknowledged that it had not addressed the issue in its past ruling. It found that prospect of even more losses in the future made a compelling case for granting the injunction stating:
“The fact that the IRS is attempting to avoid future losses is key. As the IRS notes, it “is an involuntary creditor; it does not make a decision to extend credit.” In re Haas, 31 F.3d 1081, 1088 (11th Cir. 1994). As long as the brothers continue to accrue employment taxes, the IRS continues to lose money. This sets the IRS apart from the position of other creditors (who can cut their losses by refusing to extend additional credit), and — crucially — means that the injunction sought is not simply an attempt to provide security for past debts. Rather, the proposed injunction here would staunch the flow of ongoing future losses as the brothers continue to accumulate tax liabilities — unlike in cases where the loss has already been inflicted or would be attributable to a single event, where we have stated that injuries are irreparable only when they “cannot be undone through monetary remedies.” E.g., Scott, 612 F.3d at 1295 (quoting Cunningham v. Adams, 808 F.2d 815, 821 (11th Cir. 1987)).
Indeed, the record and the district court’s own findings demonstrate that the government’s proposed injunctive relief is “appropriate for the enforcement of the internal revenue laws,” 26 U.S.C. § 7402(a), and that the government will likely suffer irreparable injury absent an injunction. Among other things, the district court noted that Askins & Miller had “a proclivity for unlawful conduct,” had “diverted and misappropriated” the employment taxes it had withheld from its employees’ wages, and was “likely to continue ignoring” its employment tax obligations. The IRS’s declaration demonstrates that, over a period of several years, it expended considerable resources making numerous — and unsuccessful — attempts to collect Askins & Miller’s unpaid taxes. And in the face of all that, as the declaration explained, Askins & Miller is effectively judgment-proof. In short, the record amply demonstrates that, absent the requested injunction, the government will continue to suffer harm from Askins & Miller’s willful and continuing failure to comply with its employment tax obligations — including lost tax revenue and the expenditure of a disproportionate amount of its resources monitoring Askins & Miller and attempting to bring it into compliance — and that, in all likelihood, the government will never recoup these losses.”
Having determined that the IRS did not have an adequate remedy at law, the circuit court ended by addressing the district court’s concern that the IRS merely sought an obey the law injunction. Here, it stated that:
“Finally, the proposed injunction goes well beyond merely requiring compliance with the employment tax laws. In fact, it lists numerous concrete actions for the defendants to take — to name only a few, segregating their funds, informing the IRS of any new business ventures, and filing various periodic affidavits — well beyond what a simple “obey-the-law” injunction would look like. In short, this case does not raise the sort of fair notice concerns that Rule 65(d) is designed to address.”
The Askins and Miller case represents a major victory for the IRS. The problem with pyramiding business taxes needs a solution. After many years of floundering to find a solution, the IRS has combined with the Tax Division of the Department of Justice over the past decade (or more) to pursue injunctions against the most egregious taxpayers engaged in pyramiding in situations in which the decision is made not to prosecute. This is a great development for everyone except the taxpayers who pyramid. The government needs to aggressively pursue these taxpayers. Doing so requires significant resources, but success can stop taxpayers who fail to pay year after year. The 11th Circuit provides a great discussion for how to stop this action. The effort expended in succeeding here shows the difficulty the government encounters as it seeks to stop this type of taxpayer action and the amount of resources it must expend to do so.