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Brent Wooley and Simpson Varkey, For ) Themselves and v. Jackson Hewitt Inc.

April 25, 2011

BRENT WOOLEY AND SIMPSON VARKEY, FOR ) THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
JACKSON HEWITT INC., A WHOLLY OWNED SUBSIDIARY OF ) JACKSON HEWITT TAX SERVICES INC.; FARRUKH SOHAIL, ) SMART TAX, INC. D/B/A JACKSON HEWITT TAX SERVICE; ) ASK TAX, INC. D/B/A JACKSON HEWITT TAX SERVICE; ) SMART TAX OF NORTH CAROLINA, INC. D/B/A ) JACKSON HEWITT TAX SERVICE; SMART TAX OF ) GEORGIA, INC. D/B/A JACKSON HEWITT TAX SERVICE; AND ) SOFAR, INC. D/B/A JACKSON HEWITT TAX SERVICE, DEFENDANTS.



The opinion of the court was delivered by: Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiffs Brent Wooley and Simpson Varkey brought this putative class action against Jackson Hewitt, Inc., Farrukh Sohail, Smart Tax, Inc., Ask Tax, Inc., Smart Tax of North Carolina, Inc., Smart Tax of Georgia, Inc., and Sofar, Inc., alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and Illinois statutory and common law. The court dismissed the RICO, state statutory consumer fraud, and unjust enrichment claims with prejudice under Rule 12(b)(6), but allowed Plaintiffs to proceed with a contract claim. 540 F. Supp. 2d 964 (N.D. Ill. 2008) (Castillo, J.). Plaintiffs sought and were allowed leave to file a fourth amended complaint, which purported to state claims for common law fraud, unconscionability, and breach of contract. Doc. 100. The court dismissed the fraud and unconscionability claims with prejudice under Rule 12(b)(6), but again allowed the contract claim to proceed. Docs. 120-121 (Castillo, J.). During the class discovery period, the court allowed Plaintiffs leave to file a fifth amended complaint, Doc. 178 (Castillo, J.), which states a single contract claim alleging that Defendants breached the Jackson Hewitt "Basic Guarantee." Doc. 188.

After class discovery closed, Plaintiffs moved for class certification. Doc. 198. Defendants Sohail, Smart Tax, and Jackson Hewitt responded. Docs. 206, 208. Plaintiffs filed a reply. Doc. 211. Defendant Ask Tax, which initially appeared (Doc. 55) but then defaulted (Doc. 151), did not respond. Defendants Smart Tax of North Carolina, Inc., Smart Tax of Georgia, Inc., and Sofar, Inc. not having been served with summons and not having appeared, did not respond. The motion is fully briefed and ready for disposition.

Background

The relevant facts were set forth in the first Rule 12(b)(6) ruling, see 540 F. Supp. 2d at 967-69, and will be restated here to the extent relevant to class certification. Defendant Jackson Hewitt provides tax preparation services throughboth company-owned offices and independently owned and operated franchise offices, all doing business under the brand name Jackson Hewitt Tax Services. During the 2002-2005 tax years, which encompass the putative class period, Defendant Farrukh Sohail held ownership interests in several Jackson Hewitt franchise offices, including offices owned by Defendants Smart Tax, Inc., and Ask Tax, Inc., which operated in Illinois; Defendant Smart Tax of North Carolina, Inc., which operated in North Carolina; Defendant Smart Tax of Georgia, Inc., which operated in Georgia; and Defendant Sofar, Inc., which operated in Michigan.

The complaint alleges that tax forms prepared at the Sohail franchises commonly contained five misrepresentations: (1) incorrect W-2 forms; (2) false filing statuses, such as having married couples file separate returns, which allowed each filer to claim to be single or a head of household; (3) misstatements regarding the number of dependents; (4) false earned income tax credit claims; and (5) false Schedule A deductions and Schedule C expenses. These allegations may or may not be correct, but they are not fanciful. In 2007, the federal government sued Sohail and the Illinois, Georgia, and North Carolina entities for tax fraud in the Northern District of Illinois, the Northern District of Georgia, and the Eastern District of North Carolina. Doc. 198-3. In the Georgia case, the government's disclosures stated that 51% of randomly-selected returns from the Georgia franchises contained errors, which led it to believe that 51% of the franchises' 24,000 total returns also contained errors. Doc. 198-4 at 42. In the North Carolina case, the government's disclosures stated that 20% of randomly-selected returns from the North Carolina franchises contained errors, which led it to believe that 20% of the franchises' 21,000 returns contained errors. Doc. 198-5 at 5. In the Illinois case, the government's disclosures stated that 60% of randomly-selected returns from the Illinois franchises contained errors, but did not indicate the total number of returns prepared by those franchises. Doc. 198-5 at 11. Although the government assigned much blame to the Sohail companies, it also recognized that customers often were at fault as well; the government alleged, for example, that "[m]any Smart Tax customers illegally claim purported dependents whose social security numbers they have purchased or 'borrowed' from friends or other customers or Smart Tax/Jackson Hewitt," and that some Sohail tax preparers "have sold or sell social security numbers to customers to use in this fraudulent manner." Doc. 198-3 at 16. The cases settled, with Sohail admitting no liability but paying a substantial sum to the government and agreeing to sell back his franchises to Jackson Hewitt.

Plaintiffs Wooley and Varkey had their 2002 and 2003 tax returns prepared at a Smart Tax franchise in Illinois. Each return was prepared by Toya Neal, a colleague of Plaintiffs' at the U.S. Postal Service facility at O'Hare Airport who moonlighted as a tax preparer. Neal had previously worked at H&R Block, where she prepared Wooley's returns for the 1999-2001 tax years. Wooley and Varkey patronized Smart Tax for the 2002 and 2003 tax years because Neal worked there.

The IRS audited Wooley's and Varkey's 2002 and 2003 returns, found that each contained unsubstantiated charitable deductions and other misrepresentations, and assessed additional taxes, interest, and penalties. Plaintiffs maintain that they did not authorize the deductions and misrepresentations, while Defendants say that Plaintiffs provided Neal with the false information and/or were equal participants in any wrongdoing. Prior to the returns being filed with the IRS, Plaintiffs signed declarations on the returns stating, "Under penalty of perjury, I declare that I have examined a copy of this tax return . to the best of my knowledge and belief, it is true, correct, and complete." Doc. 208-6 at 3; Doc. 208-8 at 3.

By virtue of having engaged the services of a Jackson Hewitt franchise, Plaintiffs were covered by Jackson Hewitt's "Basic Guarantee," which provides:

Jackson Hewitt has a unique ProFiler® tax preparation software, a computerized error checker, and training procedures designed to minimize the chance of an error in your tax return. However, if Jackson Hewitt makes an error in your tax preparation, although Jackson Hewitt does not pay any additional tax assessed, Jackson Hewitt will reimburse you for any penalty or interest, which you must pay on such tax. Further, if your tax return is audited, Jackson Hewitt will appear with you at the audit. Although Jackson Hewitt cannot act as your legal counsel or representative, Jackson Hewitt can explain how your return was prepared.

Doc. 188 at ¶ 17. Minor changes to the Basic Guarantee were made in the 2004 tax year, clarifying that "if a Jackson Hewitt tax preparer" makes an error, "the Jackson Hewitt office" in question will reimburse the resulting fees or penalties. Doc. 198-2 at 20 (changes emphasized). Prior to filing this action, neither Plaintiff demanded reimbursement under the Basic Guarantee for the penalties and interest they paid for the 2002 and 2003 tax years.

The complaint's sole surviving claim is that Defendants breached the Basic Guarantee by failing to reimburse Plaintiffs for interest and penalties assessed by the IRS. Their class certification motion defines the proposed class as follows:

All "persons" (a) who purchased Jackson Hewitt tax preparation services at a Sohail Group-owned Jackson Hewitt office, (b) who were assessed additional taxes, interest or penalties on the Jackson-Hewitt prepared tax filing based on one of the five preparer-initiated errors detailed in the U.S. Government's complaints against the Sohail Group, (c) where Jackson Hewitt did not reimburse the customer for any penalty or interest the customer paid on such tax; for the tax years 2002 to 2005.

Doc. 198 at 1-2. The motion also proposes what Plaintiffs call an "Alternative Class Definition":

Those "persons" (a) who purchased Jackson Hewitt tax preparation services at a Sohail Group-owned Jackson Hewitt office, (b) who were assessed additional taxes, interest or penalties on their Jackson-Hewitt prepared tax filings, (c) where Jackson Hewitt did not reimburse the customer for any penalty or interest customer paid on such tax; for the tax years 2002 to 2005.

Id. at ...


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