Court rejects ‘obey-the-law’ injunction in employment tax case

By James A. Beavers, CPA, CGMA, J.D., LL.M.

A district court denied a proposed injunction requested by the government that would require a company and its owners to comply with their employment tax obligations, because the government would not suffer irreparable harm in absence of the injunction.

Background

Askins & Miller Orthopaedics PA is a medical practice in Sarasota, Fla., that is run by Roland Askins, its president, and his brother, Philip Askins, its vice president. Askins & Miller has employees, and, as an employer, the company is required to withhold income and Federal Insurance Contributions Act (FICA) taxes from its employees and pay over those taxes, along with its own share of FICA taxes, to the government.

Since at least 2010, Askins & Miller repeatedly failed to comply with its employment tax obligations. For the period between June 30, 2010, and Dec. 31, 2015, the company had unpaid employment taxes in 15 quarters, and, as of Jan. 5, 2017, its outstanding balance for those quarters was $273,112.89. Askins & Miller also had outstanding liabilities for all four quarters of 2016 and the first quarter and second quarter of 2017. The company and the Askins brothers have admitted that Askins & Miller made either no required deposits or only did so late in 27 of the 28 quarters between June 30, 2010, and March 31, 2017.

Askins & Miller repeatedly failed not only to pay its own share of FICA taxes, but also to pay over to the IRS the income and FICA taxes it withheld from its employees' wages. More than $80,000 (exclusive of fees, penalties, and interest) of the company's outstanding taxes from the first quarter of 2016 through the second quarter of 2017 consisted of money that the company withheld from its employees' wages but did not pay over to the IRS. The company's pre-2016 liabilities also reflected substantial sums that were withheld from its employees' wages but not paid over to the IRS.

The IRS made many unsuccessful attempts over the years to collect the liabilities owed, including levying on approximately two dozen entities, assessing trust fund recovery penalties against the Askins brothers, and filing notices of tax liens. The IRS spoke on numerous occasions with the Askins brothers, most times in person, to try to persuade them to come into compliance. Finally, the IRS entered into installment agreements with Askins & Miller twice, in 2012 and in 2014, but the company defaulted on both agreements. Despite the IRS's extensive efforts at collecting the company's outstanding tax liabilities, Askins & Miller continues to accumulate new liabilities faster than the IRS can collect the old ones.

The IRS seeks an injunction

Having failed in its collection efforts, the government decided to seek an injunction under Sec. 7402(a) from a district court against Askins & Miller and the Askins brothers. To this end it filed a motion with the court asking for "a preliminary injunction to require Defendants Askins & Miller Orthopaedics, P.A., Roland V. Askins III, and Philip H. Askins to comply with their employment tax obligations." The motion states that the purpose of the injunction was to ensure "that Defendants comply with the same tax laws that all other businesses must follow." The motion requested that the injunction include seven terms that would require Askins & Miller and the Askins brothers to perform certain actions prospectively:

(1) Defendants shall, for liabilities due on each employment tax return required to be filed after the date of the preliminary injunction, pay over to the IRS all income and Federal Insurance Contributions Act ("FICA") taxes withheld from employees and Askins & Miller's own share of FICA taxes (collectively, "employment taxes");

(2) Defendants shall segregate (i.e., hold separate and apart from all other funds) all employment taxes of employees of Askins & Miller and shall, on a semiweekly schedule, deposit them in an appropriate federal depository bank;

(3) Defendants shall not transfer any money or property to any other entity — except a payroll processing company that is shown a copy of the injunction and is approved in advance by Revenue Officer Richard Paulsen (or another employee designated by the IRS) — to have that entity pay the salaries or wages of Askins & Miller's employees. If Defendants employ an approved payroll processing company, all transfers shall include sufficient funds for the payroll processing company to make Askins & Miller's federal tax deposits, and Defendants shall provide the payroll processing company with the authority and information necessary to make such deposits;

(4) Except for use of a payroll processing company in accordance with paragraph three above, Defendants shall not assign any of Askins & Miller's property or rights to Askins & Miller's property or make any disbursements from Askins & Miller's accounts before making all required deposits and paying all required outstanding liabilities due on each employment tax return required to be filed after the date of the preliminary injunction;

(5) Defendants shall sign and deliver affidavits to the IRS at 5971 Cattle­ridge Boulevard, Suite 102-Mail Stop 5410, Sarasota, FL 34232, or to such other specific location as directed by the IRS, within two banking days after each employment tax deposit is due, stating that the requisite deposit was timely made;

(6) Defendant Roland V. Askins III shall notify the IRS of any new company or business he may come to own or manage; and

(7) Defendant Philip H. Askins shall notify the IRS of any new company or business he may come to own or manage.

The district court's decision

The District Court denied the government's request for the proposed injunction because it was an overbroad "obey-the-law" type of injunction that would be unenforceable. It also held that if the injunction were more narrowly drawn to proscribe specific statutory violations, it still would not be appropriate because the United States would not suffer irreparable harm absent an injunction.

Rule 65(d) of the Federal Rules of Civil Procedure requires that in an injunction, the "act or acts restrained or required" must be set forth in "reasonable detail" so that those subject to the injunction are on notice of the types of conduct that will violate the injunction. Courts, including the Eleventh Circuit (where an appeal of Askins & Miller's case would lie), have generally held that Rule 65(d) prohibits what is commonly called an obey-the-law injunction: one that requires the subjects of the injunction to obey a broad statute without describing specifically the type of conduct that is prohibited.

The district court found that the proposed injunction by the government was an obey-the-law injunction and therefore, under Eleventh Circuit precedent, would be unenforceable. In coming to this conclusion, the district court focused on the description of the injunction as an injunction requiring Askins & Miller and the Askins brothers "to comply with their employment tax obligations." The court stated that "[i]n short, the United States seeks an injunction that requires Defendants to comply with the Internal Revenue laws, or, in other words, to 'obey-the-law.' "

The court then considered whether a more narrowly drawn injunction that proscribed specific statutory violations would be enforceable. The district court, stating that the IRS's main concern was Askins & Miller's failure to remit withheld payroll taxes to the IRS, focused on the first of the terms of the government's proposed injunction in this analysis.

Citing the Supreme Court in ­McComb v. Jacksonville Paper Co., 336 U.S. 187 (1949), the district court stated that where a defendant had shown a proclivity for unlawful conduct, an injunction that by its terms prohibited statutory violations might be appropriate. The court determined that Askins & Miller and the Askins brothers had shown such a proclivity, based on their diversion and misappropriation of withheld employment taxes. Showing the proclivity was not enough, though; the court found that the injunction would still have to meet the specificity requirements of Rule 65(d) and the traditional four-part test employed to determine the propriety of injunctive relief.

An injunction will meet the specificity requirements of Rule 65(d) if it enjoins violations of a statute, the terms of the statute were specific, and the defendant in the case clearly knows what conduct the injunction addresses. The district court found that the employment tax statutes in question, Secs. 3102, 3111, 3402, 6302, and 6157, were specific and that based on the factual record in the case, Askins & Miller and the Askins brothers were aware of the conduct the injunction would address, which was "their failure to remit to the IRS taxes withheld from their employees." Thus, an injunction proscribing violations of the employment tax statutes would meet the specificity requirements of Rule 65(d).

The district court then considered the traditional factors used in determining the propriety of injunctive relief, which the Eleventh Circuit had specifically found applied to injunctions under Sec. 7402(a) in Ernst & Whinney, 735 F.2d 1296 (11th Cir. 1984). The traditional factors are (1) a substantial likelihood of success on the merits; (2) irreparable injury will be suffered absent the injunction; (3) the threatened injury outweighs the potential damage of the proposed injunction; and (4) the injunction would not be adverse to the public interest. Askins & Miller and the Askins brothers did not seriously contend that the first, third, and fourth factors had been established. They claimed, however, that the government had an adequate remedy at law and therefore it could not establish the second factor, irreparable harm.

Askins & Miller and the owners argued that the government had an adequate remedy at law because it could bring an action for damages to collect unpaid employment taxes, as it had previously done. The IRS took the position that its harm was irreparable because, although it could obtain an award of damages, it would be unable to collect any judgment against Askins & Miller and the Askins brothers.

Generally, the Eleventh Circuit has held that an injury is irreparable if damages would be difficult or impossible to calculate or if the injury cannot be undone through monetary remedies. The court determined that the IRS had failed to show either of these situations existed. According to the court, withheld payroll taxes are specific and can be accurately calculated, so it was not difficult or impossible to calculate the damages. The court further found that monetary damages were an adequate remedy, and that the fact that an award of monetary damages could not be collected did not constitute irreparable harm.

Thus, the court held an injunction under Sec. 7402(a) was not appropriate because the government had not shown it would suffer irreparable harm in the absence of an injunction. In parting, the district court stated "[w]hile Defendants do not contest their employment tax obligations, and the record demonstrates that they have failed to comply with those obligations and are likely to continue ignoring them, the United States, like any other creditor, must resort to the remedies provided by law."

Reflections

The government fared better a little way up the road in William C. Wilson, D.O., P.A., No. 3:17cv25-MCR-CJK (N.D. Fla. 11/6/17), another case involving a Florida medical practice that showed a marked reluctance to comply with its employment tax obligations. In that case, the district court approved the government's request for a similar motion, finding that the taxpayer's actions caused the government irreparable harm by causing a loss of tax revenue and forcing it to expend its resources in monitoring the taxpayers, encouraging them to comply with the law, and collecting their overdue tax liabilities. The court in William C. Wilson (and the magistrate judge who recommended the injunction) did not discuss the issue of obey-the-law injunctions, but merely accepted that an injunction was appropriate once it determined that the government would suffer "irreparable harm."

Askins & Miller Orthopaedics, P.A., No. 8:17-cv-00092 (M.D. Fla. 2/6/18)

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