Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ohio: Tax return preparation franchisor enjoined from tax business, (Nov 8, 2013)

By Tobias J. Gillett, J.D., LL.M.

The federal district court in Dayton, Ohio, has permanently enjoined ITS Financial, LLC, the parent company of the Instant Tax Service franchise, and its principal, Fesum Ogbazion, from further involvement in the tax return preparation business (U.S. v. ITS Financial, LLC, November 6, 2013, Black, T.). The court reached its decision to shut down Instant Tax Service, which claimed to be the fourth-largest tax preparation firm in the United States, following a two-week trial in Cincinnati in June. The order also halts operations by two other Ogbazion-owned entities, Tax Tree LLC and TCA Financial LLC.

On March 28, 2012, the Justice Department filed complaints in the federal district courts in Dayton, Chicago, Indianapolis, Las Vegas, and Kansas City against Instant Tax Service franchisor ITS Financial, its sole owner Ogbazion, and five owners of ITS franchises, alleging that the franchisor had been “aware of, and even enable[d],” the franchisees’ “systemic and pervasive tax fraud.”

According to the complaint against the franchisor, filed in Dayton, ITS used “false and deceptive loan products principally to lure customers into its local stores so that franchisees may charge them unconscionably high tax preparation fees and added fees.” The franchisees would allegedly encourage their mostly low-income customers to apply for loans knowing that many of them would not meet the criteria to qualify. Although customers allegedly believed they were merely applying for loans, ITS franchisees and return preparers would routinely file tax returns without having customers’ Forms W-2 or the customers’ authorization. ITS allegedly knew of the franchisees’ conduct from customer complaints, and profited directly from it, according to the Department of Justice.

The franchisees allegedly engaged in the fraudulent conduct in order to maximize the amount of their customers’ refunds, which would then permit the franchisees to charge excessive fees directly to the customers’ refund checks, often without the customers’ knowledge. ITS’s approximately 150 franchises allegedly filed over 100,000 tax returns each year in 2011 and 2012.

In its decision, the court found that ITS and Ogbazion had engaged in a range of fraudulent conduct, including: filing tax returns for customers without their permission and encouraging franchisees to do the same; training and encouraging franchisees to prepare and file tax returns prematurely with paycheck stubs that omitted and understated income, resulting in the submission of false federal tax returns; defrauding customers by marketing false and fraudulent loan products to lure them into the tax-preparation offices; defrauding customers by requiring franchisees to charge phony and exorbitant fees; forging customers’ signatures on loan checks and using those forged checks to operate Ogbazion’s businesses; willfully failing to pay over $1 million of their own employment taxes and lying about assets in connection with the collection of those taxes, while hiding money in a secret bank account and defrauding the United States and third party creditors; lying on government forms and encouraging franchisees to do the same; obstructing government agents and materially assisting franchisees in circumventing Internal Revenue Service law enforcement efforts involving the suspension of electronic filing identification numbers; and telling franchisees to lie to government agents in connection with IRS compliance visits.

The court concluded that the “astonishing array of repeated fraudulent and deceptive conduct” justified an injunction “permanently barring Defendants from operating, or being involved with in any way, any business relating in any way to preparation of tax returns.”

“Defendants’ repeated attempts at trial and in argument to downplay the gravity of their lawlessness was stunning,” the court observed. “The Court concludes that even today Defendants have not fully recognized their culpability. Ultimately, the nature, scope, and gravity of Defendants’ offenses, and the unrepentant attitude toward their commission, demonstrate the necessity for a complete injunction putting the Defendants permanently out of business.”

In addition, the court concluded that Ogbazion and ITS Financial had violated the terms of a preliminary injunction order that the court had entered in October 2012 with their consent. The court found that they had violated certain lending and consumer protection laws by discriminating against active-duty military personnel on loan applications and by failing to obtain a state lending license in a timely manner, despite agreeing not to violate those laws. The court also found that they violated the preliminary injunction order by causing their franchisees to provide tens of thousands of customers with Truth-in-Lending Act disclosure forms falsely stating that the loans carried no finance charges and an annual percentage rate (APR) of zero.

“We are gratified by the court’s decision, which serves to protect hard-working taxpayers who were targeted by Instant Tax Service, and also safeguards all honest taxpayers from the harm done by fraudulent tax filings,” said Assistant Attorney General Kathryn Keneally of the Justice Department Tax Division in a statement. “As described by the court, this company grew large through abhorrent means - filing returns without customer authorization, forging customer signatures, pushing fraudulent loan products, and much more. As the court’s decision recognizes, a business model based on false and fraudulent conduct cannot be allowed to prevail.”

The case is No. 3:12-cv-95.

Attorneys: Nathan E. Clukey for Department of Justice Tax Division. Thomas Patrick Whelley, II (Dinsmore and Shohl) for ITS Financial, LLC, Tax Tree, LLC and TCA Financial, LLC.

Companies: ITS Financial, LLC; Tax Tree LLC; TCA Financial LLC

Cases: FranchisingDistribution OhioNews