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PETERSON v. H & R BLOCK TAX SERVS.

September 29, 1998

BELINDA PETERSON, on her own behalf and on behalf of all others similarly situated, Plaintiff,
v.
H & R BLOCK TAX SERVICES, INC., a Missouri corporation doing business in Illinois, et al., Defendant.



The opinion of the court was delivered by: CASTILLO

MEMORANDUM OPINION AND ORDER

 Plaintiff Belinda Peterson originally filed this lawsuit in Illinois state court alleging that the defendants, H & R Block Tax Services, Inc. and ten unnamed corporate officers (collectively "Block" or "Block Tax"), intentionally misrepresented benefits she would receive from Block's "Rapid Refund" tax service for the purpose of inducing her to purchase that service. In addition to four state law claims, Peterson presented two claims under the federal racketeering statute ("RICO"), 18 U.S.C. §§ 1962, 1964. Block removed the case to federal district court on the strength of Peterson's RICO claims. Subsequently, this court dismissed Peterson's fiduciary-duty claim under Federal Rule of Civil Procedure 12(b)(6), Peterson v. H & R Block Tax Serv., Inc., 971 F. Supp. 1204 (N.D. Ill. 1997), and granted her motion for class certification. Peterson v. H & R Block Tax Serv., Inc., 174 F.R.D. 78 (N.D. Ill. 1997). Block now seeks summary judgment, attacking Peterson's ability to establish a genuine issue as to any of her allegations.

 After carefully reviewing the parties' arguments and evidentiary submissions, we conclude that Peterson has not presented evidence supporting an inference that Block intended to defraud its customers or that Block poses a threat of continuing criminal activity. In other words, Peterson has not raised a genuine issue whether Block engaged in a pattern of racketeering activity. For this reason, we grant judgment in favor of Block on Peterson's RICO claims. Further, we decline to exercise our discretionary jurisdiction under 28 U.S.C. § 1367 and remand Peterson's state law claims to state court.

 FACTS1

 A. Relevant Circumstances Surrounding the 1995 Tax Season

 Under its Rapid Refund program, Block files its customer's income tax returns electronically, thereby allowing the IRS to process the returns more quickly and mail refunds sooner. As part of the Rapid Refund program, Block offers customers the opportunity to apply for a Refund Anticipation Loan ("RAL") from an affiliated bank. An RAL is a loan against the expected amount of a customer's federal income tax refund. If the bank approves an RAL, it creates an account in the taxpayer's name and authorizes Block to issue a check to the taxpayer in the RAL amount. As part of the RAL application process, the taxpayer must authorize the IRS to deposit her refund directly into the taxpayer's account at the lending bank.

 Prior to January 1995, an integral component of the RAL service was the Direct Deposit Indicator, or DDI. A DDI was a signal from the IRS that it had received the return and had no information that would preclude direct deposit of the taxpayer's refund into the designated account. However, on October 26, 1994, Treasury Secretary Lloyd Bentsen announced efforts by the IRS to detect fraud in tax returns filed electronically and those claiming an earned income tax credit ("EITC"). (R.67, Block's 12M Statement Ex. A, Treasury News at 1.) One aspect of the fraud-detection program was discontinuation of DDIs. (Id. at 2.) Another aspect of the program was that the IRS would "delay refunds on any questionable returns with an invalid or missing taxpayer identification number." (Id. at 4 (emphasis in original).) The Commissioner of Internal Revenue, Margaret Milner Richardson, stated that the IRS would increase the number of returns examined for fraud, including returns claiming an EITC. (Id. at 6.) Finally, Commissioner Richardson stated: "While we remain committed to issuing refund checks timely on returns filed with complete and accurate information, refunds on returns with incorrect or missing social security number[s] will be delayed until we can verify that the taxpayer is due the refund." (Id. at 7.)

 On November 4, 1994, Block Tax officials met with Peggy Rule, IRS Electronic Filing Program Executive, in an effort to clarify the impact of the IRS's fraud detection efforts on Block's customers. (R. 72, Peterson's Response to Block's Statement of Facts, at P13.) At the meeting the IRS candidly refused to provide Block with sufficient information to make an informed decision on what to tell customers claiming an EITC. The IRS did say that "most electronically-filed returns with EITC claims would be processed within 21 days unless they were 'problematic.'" (Id.) But the IRS refused to define "problematic." (Id.)

 On December 28, 1994, the IRS posted "Fact Sheet FS-94-10" on its Electronic Filing Systems Bulletin Board outlining the fraud-prevention strategies for the 1995 tax season. *fn2" (R. 67, Block's 12M Statement Ex. C.) Because Peterson relies heavily on FS-94-10 to establish Block's intent, we quote extensively from it:

 
During Fiscal Year 1995, the IRS is emphasizing the importance of using correct taxpayer identification numbers (TINs) on tax returns, and of providing complete and accurate information when claiming refundable credits, such as the Earned Income Tax Credit and motor fuel credits.
 
The IRS has enhanced its processing systems to detect signs of possible noncompliance -- intentional or unintentional -- earlier and faster. These signs include missing, invalid, or duplicate TINs and the claiming of refundable credits in unusual circumstances. The IRS is committed to ensuring that people who are entitled to the EITC receive it. It is equally determined that ineligible taxpayers and fraud perpetrators do not take advantage of this and other refundable credits.
 
The additional scrutiny given to these tax returns may result in delayed refunds even for some taxpayers who have filed complete and accurate returns. In some cases, taxpayers will receive their refunds in two installments to ensure that federal revenues are properly protected.

 (Id. at 3.) Later, in the "Question and Answer" section of FS-94-10, the IRS states

 
We are not delaying all EITC refunds -- some taxpayers claiming the credit may encounter delays. We're selecting returns based on our experience with questionable refunds. Just as we don't reveal exactly how we select returns for audit, we're not going to reveal exactly how we determine which EITC claims to review.

 (Id. at 4, question no. 2.) In the same section, the IRS declares that "the vast majority of taxpayers will get their money in the usual time if they provide us accurate and complete information," (id. at 5, question no. 6), but that "some perfectly correct returns may be temporarily caught up by the screens and filters we're using to catch questionable returns," (id., question no. 7). Finally, FS-94-10 reports that

 
the IRS is reviewing every returns [sic] that is filed. All returns are run against our criteria. The screens we are using are based on what we've learned from our fraud control efforts in recent years. We can't discuss the specifics about our reviews, since this could give those attempting fraud a roadmap for avoiding our checkpoints.

 (Id. at 6, question no. 8.)

 At about the same time FS-94-10 was released, Block Tax officials met a second time with the IRS. Again, the IRS refused to say how many refunds would be delayed due to the increased scrutiny of EITC returns, stating "only that the number would be somewhere between a few and a million." (R. 72, Peterson's Response, at P 17.)

 After the IRS announced the elimination of DDIs, several banks that had previously offered RALs to Block's customers decided not to do so. In fact, Beneficial National Bank ("Beneficial") was the only lending institution that would continue to make RALs. Beneficial, however, decided it too would screen RAL applications more stringently when deciding whether to authorize a loan.

 Based on the foregoing information, Judy Keisling, Vice President of Operations Systems for Block Tax, created an "RAL Fact Sheet" for RAL applicants. (R. 67, Block's 12M Statement Ex. E [hereinafter "December Fact Sheet"].) The December Fact Sheet first describes the changes instituted by the IRS:

 
The IRS has made a change and will no longer tell the bank if your refund can be used to pay off your loan. In some cases the banks are limiting loans because of this new IRS policy. H & R BLOCK MUST FILE YOUR RETURN WITH THE IRS before the bank will tell us whether you will receive all of your money in a few days, only part of your money in a few days, or whether you will have to wait 3 weeks to get any of your money.

 (Id.) The three possible outcomes were not options available for RAL applicants to chose from; rather, they were three possible outcomes based on whether Beneficial decided to grant the RAL application, grant the application in part, or deny the application. If the RAL was granted, Beneficial agreed to a loan in the full amount of the claimed refund. In the case of a partial RAL, Beneficial agreed to a loan against only part of the claimed refund (the "first check" available within three days of filing) and would then forward the balance when the IRS deposited the refund into the account, presumably within 21 days of filing. Finally, if the RAL was denied, the applicant would receive their refund once the IRS had deposited it in their account.

 The December Fact Sheet then provides three squares in which the tax preparer calculates the fees and check amounts under each of the bank's options. Each "calculation square" states that the final payment would occur "in 3 weeks." Finally, the sheet instructs customers how to obtain information on the status of their loan application and states that "the amount you receive in 3 weeks will be based on the IRS refund actually deposited at the lender bank." Prior to its distribution and use, the December Fact Sheet was reviewed by H & R Block management, *fn3" as were all ...


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