Replies

US-DIST-CT, [2003-1 USTC ¶50,236], U.S. District Court, Mid. Dist. Fla., United States of America, Plaintiff v. Everte Farnell, Defendant., Injunctions: Tax return preparer: Jurisdiction: Frivolous claims. --, (January 21, 2003)
United States of America, Plaintiff v. Everte Farnell, Defendant.

[EXCERPTS]

U.S. District Court, Mid. Dist. Fla.; 8:02-cv-1742-T-26TBM, January 21, 2003.

PRELIMINARY INJUNCTION

LAZZARA, District Judge: The Court makes the following findings of fact and conclusions of law, and enters this preliminary injunction...

Factual Findings

Both the plaintiff, the United States, and the defendant, Everte Farnell, have had the opportunity to submit evidence and be heard on the United States' preliminary-injunction motion. Based on the evidence, the Court finds as follows:

The US Sources Argument is indistinguishable from the Section 861 scheme, which has been rejected by courts in decisions dating back to 1993.

Everte Farnell promoted and continues to promote the US Sources Argument/Section 861 scheme, a frivolous and unrealistic position which posits that U.S. citizens' domestic income is not subject to the federal income tax. The Section 861 scheme, if employed on a return, requires the taxpayer using the scheme to list fraudulent and false information concerning the amount of income earned, and understates the taxpayer's liability.

Farnell knew or should have known that the Section 861 scheme is frivolous. Specifically: (1) the scheme is unrealistic and baseless on its face, (2) judicial decisions dating back to 1993 have universally rejected the scheme, (3) Farnell knew about several of these decisions, (4) the IRS has published documents describing the invalidity of the scheme, (5) Farnell had received at least one of these IRS publications, (6) IRS agents personally informed Farnell that the Section 861 scheme is frivolous, (7) another return-preparer personally informed Farnell that the Section 861 scheme is frivolous, and (8) Farnell knew that the IRS was investigating him for promoting abusive schemes and knew that the Department of Justice has filed an injunction suit against Thurston Bell, the NITE ringleader and the person with whom Farnell promoted the Section 861 and related schemes, to stop Bell from promoting the scheme.

Farnell is promoting the Section 861 scheme through the mail and in-person. He also promotes a related scheme known as "Third-Party Contracting" over the NITE website at www.nite.org., which purports to allow employees to legally take home all of their pay, tax-free, and which also purports to relieve employers of the requirement of paying federal employment taxes. Farnell further prepares income tax return for paying clients who then falsely claim that their income earned in the United States is non-taxable.

Farnell has repeatedly and willfully failed to list his social security number on federal income tax returns and amended returns he prepares for other taxpayers.

Farnell has repeatedly failed to maintain client lists or the returns of clients for whom Farnell has prepared federal income tax returns. He also failed to provide these records to the IRS when the IRS requested them.

Farnell has repeatedly, willfully and intentionally prepared federal income tax returns for clients stating that the clients' income is zero, and in the process has recklessly and intentionally disregarded IRS rules and regulations.

Farnell has interfered in the IRS's examinations of other taxpayers by attending meetings with the IRS and demanding that the IRS summon witnesses for his clients to cross-examine.

Absent this preliminary injunction, Farnell will continue to promote the Section 861 scheme, "Third-Party Contracting" arrangements, prepare false tax returns, and interfere in the IRS's examinations of other taxpayers using frivolous positions.

If this preliminary injunction is not granted, the United States will suffer irreparable harm. By refusing to list his social security number on returns he prepares for other taxpayers, and by signing in a cursive which is difficult to read, Farnell makes it virtually impossible for the IRS to catch all of the incoming, improper Farnell-prepared returns. Further, the Government will likely need to expend significant resources identifying, reviewing and examining returns and correspondence advocating the frivolous Section 861 scheme. Moreover, there is evidence that some erroneous refunds have already been paid to Farnell's clients. Identifying these persons and prosecuting erroneous refund claims will consume even more resources.

The Section 861 scheme and the related "Third-Party Contracting" arrangement are frivolous. Similarly frivolous are Farnell's claims that the IRS must summon witnesses for his clients to cross-examine in IRS administrative proceedings. The Government, therefore, will likely prevail on the merits.

This preliminary injunction is tailored to prevent Farnell from causing further injury to the United States and the public, and to prevent Farnell from further violating the law. Thus, the threatened injury to the United States outweighs any injury a preliminary injunction might cause.

The public is served by granting this preliminary injunction. If a preliminary injunction is granted, it will help to stem the spread of the frivolous Section 861 scheme and "Third-Party Contracting" arrangements. Farnell's clients will be protected from Farnell's fraudulent scheme and from the tax penalties and other adverse tax consequences resulting from participation in the frivolous schemes.

Conclusions of Law

After considering all evidence and argument submitted, the Court makes the following conclusions of law:

The "US Sources Argument" and the "Section 861 scheme" (which are indistinguishable from each other) are frivolous schemes. Proponents of these schemes, including Farnell, claim that domestically-earned income is exempt from taxation, based on an unrealistic and frivolous interpretation of IRC §§61 and 861- 865 and certain Treasury Regulations, including 26 C.F.R. §§1.861-8(f) and 1.861-8T(d)(2)(ii)(A). These Code sections and regulations do not exempt domestically-earned income from taxation.

The United States has presented the Court with persuasive evidence that Farnell has engaged in conduct subject to penalty under IRC §§6700 and 6701.

Absent this preliminary injunction, Farnell will continue to violate IRC §§6700 and 6701.

Therefore, a preliminary injunction is warranted under IRC §7408.

Farnell has repeatedly violated IRC §§6694(a) and (b), and 6695.

Absent this preliminary injunction, Farnell will continue to violate Sections 6694 and 6695.

Therefore, a preliminary injunction is also warranted under IRC §7407.

Farnell, in addition to the violations noted above, is impeding IRS examinations of other taxpayers by asserting frivolous positions about due process. The evidence therefore shows that a preliminary injunction is appropriate under IRC §7402. Specifically:

(a) The United States and the public will suffer irreparable harm in the absence of this preliminary injunction and that Farnell will suffer little, if any, harm if the preliminary injunction is granted.

(b) The Government has a high likelihood of success on the merits, and Farnell's position is unrealistic and frivolous.

(c) Further, the United States has presented credible evidence that the public interest will be served through granting this preliminary injunction.

ORDER

This Court finds that the United States has presented sufficient evidence to obtain a preliminary injunction, based on the factual findings listed above. Therefore, the Court ORDERS that the defendant, Everte Farnell, and his representatives, employees, agent and all other persons in active concert or participation with Farnell who receive actual notice of this Order are enjoined, until the Court orders otherwise, from:

engaging in activity subject to penalty under IRC §6700, including organizing and/or selling a plan or arrangement (including, without limitation, the U.S. Sources Argument and the Section 861 scheme) and making a statement regarding the excludability of income which constitutes commercial speech that they know or have reason to know is false or fraudulent as to any material matter;

engaging in activity subject to penalty under IRC §6701, including preparing and/or assisting in the preparation of a document related to a matter material to the internal revenue laws that includes a position (including, without limitation, the U.S. Sources Argument and the Section 861 scheme) that they know will result in the understatement of tax liability;

engaging in any other activity subject to penalty under IRC §§6700, or 6701;

engaging in conduct subject to penalty under IRC §§6694 and 6695;

interfering in the IRS's examinations of other taxpayers by taking frivolous positions, including but not limited to making arguments during tax examinations of other taxpayers based on the Section 861 scheme, demanding that the IRS summons witnesses in administrative proceedings, and requesting that clients be allowed to cross-examine witnesses in IRS audits.

engaging in other similar conduct that substantially interferes with the proper administration and enforcement of the internal revenue laws, including engaging in false, deceptive or misleading commercial speech, or engaging in other false speech which is directed to incite the imminent evasion or attempted evasion of federal taxes and is likely to produce such action.

Further, and in addition to the above prohibition against engaging in conduct subject to penalty under IRC §§6700 and 6701, the Court ORDERS that, within 30 days of the date of entry of this order, Farnell must mail (by United States Mail and, if an e-mail address is known, electronic mail) a copy of this order to: (1) every current and/or former for whom Farnell has performed any tax-related service or provided any tax-related advice; and (2) all persons to whom Farnell otherwise sold or distributed any tax-related products, documents, services, or advice.

The Court further ORDERS that Farnell must then, within 31 days of this Order, file with the Court a declaration, executed under penalty of perjury, stating that he has complied with the terms of this order in the immediately preceding paragraph of this Order.

The Court further ORDERS that within 31 days of the date of entry of this Order Farnell shall serve the United States with a list of physical and electronic mail addresses to which he sent a copy of this Order. Farnell shall file a certificate of service with the Court that same day evidencing his compliance with this paragraph of the Order.

The Court further ORDERS that Farnell is ENJOINED from preparing any federal income tax return for any other person (not including himself) until further order of the Court.

The Court further ORDERS that Farnell must, within 10 days of this Order, serve the United States with a list of all persons for whom Farnell has prepared federal income tax returns. Farnell shall file a certificate of service with the Court that same day evidencing his compliance with this paragraph of the Order.

Further, the Court ORDERS that Farnell and his representatives, employees, agents and all other persons in active concert or participation with Farnell who receive actual notice of this Order are enjoined from destroying, dissipating, or altering any documents, including electronic records, that relate in any way to this lawsuit and/or Farnell's clients.

DONE and ORDERED.