Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D.N.C.: Tax prep franchisor wins summary judgment in dispute involving fraudulent tax filings, (Jan 23, 2026)

By Patricia K. Ruiz, J.D.

The franchisor discovered tax returns were altered to redirect tax refunds away from customers and to the franchisee.

The U.S. District Court for the Eastern District of North Carolina granted summary judgment in favor of JTH Tax LLC, doing business as Liberty Tax Service (Liberty), in its franchise dispute against CMB Tax Service, LLC and its principals, Jeffery and Cindy Serbus. The ruling resolves long-running allegations involving improper sharing of Preparer Tax Identification Numbers (PTINs), fraudulent tax return submissions, and substantial outstanding debt owed under two promissory notes (JTH Tax LLC d/b/a Liberty Tax Service v. CMB Tax Service, LLC, No. 4:21-cv-22-BO-BM (E.D.N.C. Jan. 21, 2026)).

Background. The Serbuses, operating through CMB Tax Service, entered into a Liberty franchise relationship in 1999, eventually expanding to nine locations across ten Liberty territories. All locations operated under franchise agreements renewed between 2015 and 2017, each requiring compliance with federal and state regulations, including Internal Revenue Service (IRS) rules governing electronic filing. The IRS assigns Electronic Filing Identification Numbers (EFINs) to authorized Electronic Return Originators (EROs), and individual tax preparers must use their own IRS-issued Preparer Tax Identification Numbers (PTINs). Under Liberty’s systems, each tax return must include both numbers, and franchisees are responsible for ensuring compliance with all IRS requirements.

Fraudulent return scheme and whistleblower allegations. In early 2021, Liberty discovered a fraudulent scheme in which customer tax refunds were diverted to prepaid debit cards controlled by a former employee of the Serbuses. Liberty’s investigation revealed that tax returns were altered and submitted without managerial approval, redirecting refunds away from customers. Evidence tied the fraudulent filings directly to the franchise locations, and all altered returns bore Jeffery Serbus’s EFIN.

The company also received a whistleblower tip from an employee reporting that Cindy Serbus encouraged employees without PTINs to use other employees’ credentials. Multiple employees corroborated the allegations, stating they were required to share PTIN-linked logins—conduct prohibited by both IRS regulations and a consent order Liberty had previously entered into with the Department of Justice. The consent order specifically required Liberty to prohibit PTIN-sharing and to maintain a whistleblower hotline, which ultimately produced the report.

Termination of franchise agreements. Following its investigation, Liberty terminated all CMB franchise agreements under Section 8(b), which permits immediate termination without notice when a franchisee commits a material violation of law or engages in conduct harmful to the Liberty brand. Liberty simultaneously seized and took over the franchise locations. The Serbuses argued that Liberty wrongfully terminated the agreements in order to capture profitable stores, claiming that Liberty should have proceeded under Section 8(c), which provides for termination with notice and an opportunity to cure. The court rejected this defense, holding that Sections 8(b) and 8(c) are not conflicting provisions and that the misconduct—including fraudulent returns and PTIN-sharing—constituted a material violation of IRS rules and the consent order. Liberty was therefore authorized to terminate without notice.

Breach-of-contract claims and defenses. The court held that the franchisees materially breached the agreements by failing to comply with federal law and by permitting employee misconduct that facilitated fraud. The Serbuses argued the fraud was the result of a system-wide “hack” of Liberty’s software, but the court noted that no evidence supported such a breach—only the Serbus-operated locations experienced the fraudulent activity. They also argued Liberty failed to provide adequate software support, but the court found this did not excuse the franchisees’ own contractual violations.

The Serbuses raised a recoupment defense, seeking to offset alleged losses related to franchise termination and unpaid fees. The court held that the defense failed because recoupment applies only to losses arising from the same transaction as the claim at issue, and Liberty’s claims under the promissory notes and franchise agreements were based on separate and unrelated transactions.

Promissory notes. Beyond the franchise-agreement claims, Liberty sought repayment of more than $178,000 borrowed by CMB Tax through two promissory notes issued to finance operating expenses. The Serbuses did not dispute the debts but again asserted recoupment, which the court rejected for the same reasons.

Summary judgment granted. Concluding that no genuine issues of material fact existed, the court granted Liberty’s motion for summary judgment and denied the defendants’ competing motion.

The Case is No. 4:21-cv-22-BO-BM.

Judge: Boyle, T.

Attorneys: Kendra N. Stark (Gordon Rees Scully Mansukhani, LLP) for JTH Tax LLC d/b/a Liberty Tax Service f/k/a JTH Tax, Inc. Edwin L. West, III (Brooks, Pierce, McLendon, Humphrey & Leonard, LLP) for CMB Tax Service, LLC, Jeffrey Serbus and Cindy Serbus.

Companies: JTH Tax LLC d/b/a Liberty Tax Service f/k/a JTH Tax, Inc.; CMB Tax Service, LLC

Cases: FranchisingDistribution NorthCarolinaNews