The case of Muldrow v EZ File & Aleenah Cittendon involves a family dispute that implicates the Internal Revenue Code’s civil penalty for the fraudulent issuance of an information return. Angelica Muldrow and Ajeenah Crittendon, Muldrow’s aunt, have been in a longstanding dispute concerning guardianship over Muldrow’s mother, Crittendon’s sister. The relationship deteriorated over 2021 and 2022, with hostile phone calls, emails and text messages.
In the summer of 2021, Crittendon emailed Muldrow, demanding that she return jewelry:
As I stated you have until Sept. 28th to return. If I don’t receive them back . . . it simply means you received something of value that you refused to return. You will be assessed the appraisal value of each piece x 3. It [sic] called damages/fraud, so play your games with someone else. When IRS come knocking at the door for the taxes including Georgia Dept of Revenue let’s see how far you get with playing your games! . . . If you want to continue sending your emails I will bill you at my billable rate and forward to you my Invoice. Pay it or not pay it. If you elect to not pay it you will also receive a 1099-Misc. for my labor!
Not every day that a family disagreement leads to a threat to issue an information return, but Crittendon knows her way around tax forms, given that she owns and operates EZ E-File, a California based tax prep business. That leads us to Section 7434, which imposes a civil penalty on someone who issues a fraudulent information return. Damages are the greater of $5,000 or actual economic damages. We have discussed 7434 before, with a focus on whether it can serve as the basis for awarding damages when an information return is issued in connection with a misclassified employee. See guest blogger Omeed Firouzi and Can Intentionally Filing an Improper Information Return Justify a Claim for Damages Under Section 7434?…Part IV.
This kind of case is a more straightforward application of the statute, and exemplifies what Congress had in mind when imposing additional liability for issuing phony tax information returns.
Back to the family mess. By September of 2021, the dispute continued, with Muldrow emailing her aunt, demanding to speak to her mom, and sending emails and family pictures which her aunt allegedly did not show to her mom.
In early 2022, Crittendon issued one 1099-MISC to Muldrow in the amount of $320,600 and another in the amount of $29,470. That led Muldrow, a Georgia resident, to file a complaint in federal court seeking damages and an injunction.
Crittendon admitted that first Form 1099 was based on Muldrow causing $320,660.00 of damage to Defendants for “fraudulent, harassing, [and] defaming actions.”
As the district court noted, and as readers no doubt know, “[t]his is not a basis for the issuance of a Form 1099. To hold so would allow potentially aggrieved parties to skip litigation and judgment in favor of simply assigning arbitrary values to Forms 1099 without due process whatsoever.”
The district court granted a preliminary injunction that ordered Crittendon to refrain from issuing any more incorrect 1099s and ordered her to issue two corrected 1099’s showing that she made no payments to her niece.
This is a pretty straightforward application of 7434, though there were some wrinkles. First, the complaint did not allege damages under 7434, but rather focused on a more general cause of action relating to generic damages, and the district court judge on their own came up with Section 7434 as a basis for awarding the statutory minimum of $5,000. In fact the appellate opinion notes that the plaintiff’s lawyer admitted at the hearing that they had not been aware of that Code Section. On appeal, Crittendon argued that the judge overstepped their authority by awarding damages without it being alleged in the complaint, but the Eleventh Circuit deemed the argument as waived, as it was not raised below.
In addition, I was not aware of 7434 as the springboard for injunctive type relief. Typically in order to grant injunctive relief, the party seeking relief must show irreparable harm, and courts have generally required more than economic harm to meet that standard. On appeal, Crittendon also challenged the finding that there was harm beyond economic harm. While the lower court noted that injunctive relief has been granted with respect to false filings on the basis that the filings created administrative burdens, Crittendon noted that the lower court relied on cases pointing to burdens imposed on the IRS. Given that a private individual was seeking the injunction, rather than the government, Crittendon contended that her niece had not established that she suffered irreparable harm. While appeals courts typically review the granting of injunctive relief on a de novo basis, the appeals court also declined to entertain it on the merits due to it not being raised below.
In addition to these issues, there was also a question of jurisdiction of Crittendon in federal district court in Georgia, given her lack of connection to Georgia. As this too was not raised below, the court did not entertain the argument.
I am not sure how the court would have addressed these issues if they had been timely raised. What I am fairly certain of is that it is not a good idea to issue a 1099 because you have a personal or business dispute and you know that issuing a 1099 that is phony will trigger hassles with the IRS and state taxing authorities.