Case 2:09-cv-07017-GHK-RC Document 36 Filed 03/08/10 Page 1 of 8

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Case No. CV 09-7017-GHK (RCx) Date March 8, 2010

Title United States v. Nyla McIntyre, et al.

Presiding: The Honorable GEORGE H. KING, U. S. DISTRICT JUDGE

Beatrice Herrera N/A N/A

Deputy Clerk Court Reporter / Recorder Tape No.

Attorneys Present for Plaintiffs: Attorneys Present for Defendants:

 None None

Proceedings: (In Chambers) Order re: Motion to Set Aside Default; Motion for Default
Judgment and Other Relief 

This matter is before the Court on Defendant Nyla McIntyre’s (“McIntyre”) 1 Motion to Set
Aside Default and the government’s Motion for Default Judgment and Other Relief. Relief. We have
considered the papers filed in support of and in opposition to the Motion to Set Aside Default and the
 papers filed in support of the Motion for Default Judgment and Other Relief. We deem the Motion to
Set Aside Default appropriate for resolution without oral argument. L.R. 7-15. The hearing set for 
March 8, 2010, at 9:30 a.m., is hereby VACATED and TAKEN OFF CALENDAR. With respect to
the Motion for Default Judgment and Other Relief, Defendant did appear at the hearing on that Motion
on January 11, 2010, but could not defend on the merits,
merits, given her default status. As the Parties are
familiar with the facts in this case, we will repeat them only as necessary. Accordingly, we rule as
follows.

I. Motion to Set Aside Default

Under Federal Rule of Civil Procedure 55(c), we “may set aside an entry of default for good 
cause. . . .” The “good cause” standard enunciated in Rule 55(c) is identical to
to that governing default
 judgment under Rule 60(b). Franchise Holding II, LLC v. Huntington Rests. Group, Inc., 375 F.3d 922,
925 (9th Cir. 2004); TCI Group Life Ins. Plan v. Knoebber , 244 F.3d 691, 696 (9th Cir. 2001). We
consider three factors in analyzing good cause: (1) whether the defendant’s culpable conduct led to the
default; (2) whether the defendant has a meritorious defense; and (3) whether lifting the default would 
 prejudice the plaintiff. Franchise Holding II , 375 F.3d at 926. “Where timely relief is sought from a
default . . . and the movant has a meritorious defense, doubt, if any, should be resolved in favor of the
motion to set aside the default so that cases may be decided on their merits.”  Mendoza v. Wright 
Vineyard Mgmt., 783 F.2d 941, 945-46 (9th Cir. 1986) (citation omitted).

1
 This Motion is brought by McIntyre. Since McIntrye is merely doing business as Co-
Defendant Approved Financial Services, Inc. and is McIntyre’s alter ego, it is not required to enter a
separate appearance and move separately to set aside the entry of default.
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Case No. CV 09-7017-GHK (RCx) Date March 8, 2010

Title United States v. Nyla McIntyre, et al.

In their Motion to Set Aside Default, Defendants have proffered no explanation for their failure
to answer the Complaint. (Dkt. No. 31, Feb. 3, 2010). Defendants’ culpable conduct led to the default.
In the Ninth Circuit, “if a defendant has received actual or constructive notice of the filing of the action
and failed to answer, its conduct is culpable.” Franchise Holding II , 375 F.2d at 926. Defendants have
also failed to assert a meritorious defense that would justify setting aside the default. Cf. Hawaii
Carpenters’ Trust Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986) (vacating entry of default
warranted where “there is some possibility that the outcome of the suit after a full trial will be contrary
to the result achieved by the default”). Further delay in enjoining Defendants’ conduct will also
 prejudice the government. We therefore DENY the Motion to Set Aside Default.

II. Motion for Default Judgment and Other Relief 

The government moves this Court for the entry of default judgment and a permanent injunction
against Defendants. Granting or denying default judgment is within our sound discretion. On motions
for default judgment, we accept as true the well-pleaded factual allegations of the complaint, except
those relating to damages. See Fair Housing of Marin v. Combs, 285 F.3d 899, 906 (9th Cir. 2002);
TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987).

McIntyre resides in Glendora, California, and does business in Covina, California, in the Central
District of California. (Compl. ¶ 4). McIntyre is the owner and manager of Defendant Approved 
Financial Services, Inc., a corporation doing business in Covina, California.  (Id . ¶ 5). Defendants
 prepare tax returns for others in exchange for compensation. Since 2006, Defendants have prepared and 
filed at least 2,876 federal income tax returns and amended returns.  (Id . ¶ 6). In 2009, Defendants
 prepared and/or filed at least 757 federal income tax returns. ( Id .). In 2008 and 2009, Defendants
 prepared and/or filed fraudulent federal income tax returns (Internal Revenue Service [“IRS”] Forms
1040X) for tax years 2005, 2006, 2007, and 2008, and prepared and/or filed with the IRS other 
documents on behalf of others in exchange for compensation.  (Id . ¶ 7).

Defendants promote a tax fraud scheme that involves filing fraudulent federal income tax returns
and other documents, including Forms 1099-OID and Forms Schedule B, with the IRS on behalf of their 
customers. ( Id . ¶¶ 8, 10). Defendants fabricate federal income tax withholdings on tax returns they
 prepare, resulting in fraudulent refund claims by their customers in amounts as large as nearly $2.7
million per customer. ( Id . ¶ 9; Mot., Ex. 9). IRS Forms 1099-OID are used by issuers of financial
instruments generating original issue discount (“OID”) to report OID income and any federal income tax
withheld from that income. ( Id . ¶ 13). OID income refers to the difference between the discounted 
 price at which a debt instrument is sold at issuance and the stated redemption price at maturity; it is
taxable as interest over the life of the obligation. ( Id .); see also 2009 Form 1099-OID, available at 
http://www.irs.gov/pub/irs-pdf/f1099oid.pdf. IRS Forms Schedule B are used to report interest and 
dividend income, and are attached to IRS Forms 1040.  (Id . ¶ 14). The fraudulent Forms 1099-OID that
Defendants prepare and submit with returns they prepare falsely state that their customers are “payees”
who receive OID income from their creditors. ( Id . ¶ 16). The fraudulent Forms 1099-OID typically

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Case No. CV 09-7017-GHK (RCx) Date March 8, 2010

Title United States v. Nyla McIntyre, et al.

show false income paid by a customer’s creditors to the customer. ( Id . ¶ 17). Some of these forms even
show the customer paying OID income to himself. ( Id .).

Defendants next prepare tax returns reporting false income which equals or approximates the
total amount of the false OID, and claim false withholding on the customer’s IRS Form 1040 (or 
1040X). ( Id . ¶ 19). On these returns, Defendants have claimed false refunds often in excess of 
$200,000 and as high as $2.7 million in one case.  (Id . ¶ 19). In some cases, Defendants do not prepare
Forms 1099-OID, and instead, submit a false Form Schedule B reporting false interest income from
creditors and false withholding. ( Id . ¶ 21). IRS Forms 1096 are used to transmit Forms 1099-OID (and 
other forms) to the IRS. ( Id . ¶ 15). The Forms 1096-A Defendants file also falsely report federal
income tax withheld. ( Id . ¶ 23). Defendants fail to sign under penalty of perjury the IRS Forms 1096
they submit. ( Id . ¶ 24). The apparent purpose of Defendants’ frivolous IRS Forms 1040, 1040X, 1099-
OID, 1096-A, and Schedules B is to request fraudulent tax refunds, and this scheme is based in part on
McIntyre’s apparent belief that secret accounts exist that can be accessed to pay these bogus refund 
claims. ( Id . ¶ 25).

In 2009, Defendants prepared and filed a 2006 Form 1040X amended federal income tax return
on behalf of Victor and Amanda Castorena. On the return, Defendants requested a fraudulent refund of 
$2,685,782, falsely claiming an income tax withholding totaling $2,704,847. To support these
fraudulent claims, Defendants attached thirteen false IRS Forms 1099-OID and a corresponding
Schedule B. ( Id . ¶ 27; Henline Decl., Ex. 3). In July 2009, after Defendants had already been advised 
that their practices were fraudulent during an interview with IRS officials on June 10, 2009, Defendants
 prepared a 2005 Form 1040X amended return for Chris and Celeste Chaney (“the Chan eys”). (Henline
Decl. ¶¶ 14, 18; Mot., Ex. C; Compl. ¶¶ 28, 30-33). On the Form 1040 attached to the Form 1040X,
Defendants requested a fraudulent refund of $1,124,542, and falsely reported $1,684,876 in taxable
interest income and $1,684,205 in federal withholding. (Compl. ¶ 28). The Form 1040 was not signed 
 by Defendants or the Chaneys, but it directed the IRS to the Form 1040X which reported the Chaney s
owed $559,663 for 2005. ( Id .). In 2008, Defendants prepared and filed a 2006 Form 1040X amended 
return for John and Kallya Georgiades. ( Id . ¶ 29). Defendants claimed a fraudulent refund for 
$807,460, reported $0 in taxable interest income, and $807,500 in federal income tax withholding.  Id 
( .).
In support of these claims, Defendants prepared and attached five fraudulent IRS Forms 1099-OID,
1096, and a Form Schedule B.  (Id .).

During the June 2009 interview, McIntyre claimed that the federal government maintains secret
accounts that taxpayers can access, and that the use of Forms 1099-OID to access these funds by
reporting any money that has passed through the taxpayers’ accounts, e.g. bank loans, is lawful. ( Id .
 ¶ 32). The IRS has identified at least 62 fraudulent returns prepared and/or filed by Defendants in 2008
and 2009 that request refunds based on Defendants’ fraudulent Forms 1099-OID and Schedules B.  (Id .
 ¶ 35). Many of the refund requests on these fraudulent returns exceed $200,000, and one return requests
a refund of almost $2.7 million. ( Id .). The total amount of refunds requested on those 62 returns is
approximately $23.2 million. ( Id .; Henline Decl. ¶ 6). As of September 21, 2009, Defendants had 
 prepared and filed at least 46 federal income tax returns (and amended returns) in 2009 alone, claiming

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Case No. CV 09-7017-GHK (RCx) Date March 8, 2010

Title United States v. Nyla McIntyre, et al.

fraudulent refunds using their Forms 1099-OID scheme. (Compl. ¶ 36; Henline Decl. ¶ 13).
Defendants’ scheme has resulted in the IRS’s issuance of over $1.4 million in erroneous payments to
their customers. (Compl. ¶ 39; Mot., Ex. 9 (listing fraudulent returns submitted by Defendants and 
identifying four cases in which funds were erroneously released); Henline Decl. ¶¶ 6, 60). The
government has also incurred the expense of conducting an investigation into Defendants’ fraudulent
return preparation and responding to and processing the documents Defendants submitted. (Compl.
 ¶ 40).

Prior to the entry of default judgment, we must satisfy ourselves that the Local Rules and the
 Eitel factors have been satisfied. First, Local Rule 55-1 states that: “[w]hen application is made to the
Court for a default judgment, the application shall be accompanied by a declaration in compliance with
[Rule] 55(b)(1) and/or (2) and include the following: (a) When and against what party the default was
entered; (b) The identification of the pleading to which default was entered; (c) Whether the defaulting
 party is an infant or incompetent person, and if so, whether that person is represented by a general
guardian, committee, conservator or other representative; (d) That the Servicemembers Civil Relief Act
(50 App. U.S.C. § 521) does not apply; and (e) That notice has been served on the defaulting party, if 
required by [Rule] 55(b)(2).” On January 8, 2010, the government submitted a declaration making these
required representations to the Court. (Dkt. No. 18). Second, in Eitel v. McCool, 782 F.2d 1470 (9th
Cir. 1986), the Ninth Circuit set forth seven factors for our consideration in determining whether or not
to grant a default judgment:

(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3)
the sufficiency of the complaint, (4) the sum of money at stake in the action; (5) the possibility of 
a dispute concerning material facts; (6) whether the default was due to excusable neglect, and (7)
the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the
merits.

 Id . at 1471-72. In light of the facts described above, we believe these factors militate in favor of 
granting the Motion. The possibility of prejudice to the United States is substantial. The Complaint is
clearly sufficient. There is no money at stake in this action, only permanent injunctive relief. Given
McIntyre’s admissions to her willful violations during the June 2009 interview, her persistence in this
fraudulent scheme even after the interview, and the ideological motivation for Defendants’ actions, we
think a dispute as to a material fact is unlikely in this case. (Compl. ¶¶ 30-33; Henline Decl. ¶¶ 14-18).
To the extent factors (6) and (7) might favor Defendants, we do not think these factors counsel in favor 
of a different outcome. Although McIntyre appeared at the hearing on the Motion for Default Judgment,
she did not file an Opposition and has not done so since. McIntyre only stated that she had retired from
tax return preparation and was willing to discuss settlement with the government. (Dkt. No. 23).
Settlement discussions subsequently broke down. ( Id .).

Accordingly, we hereby GRANT the Motion for Default Judgment.

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Case No. CV 09-7017-GHK (RCx) Date March 8, 2010

Title United States v. Nyla McIntyre, et al.

as a tax return preparer places her at significant risk of recidivism. Given her beliefs and willful
defiance of the IRS officials’ warning, her continued work as a professional tax preparer will permit her 
to perpetuate this fraudulent scheme and succeed with respect to a fraction of the submissions.
Therefore the Estate factors counsel in favor of granting a permanent injunction under § 7408 as well.

IV. Conclusion

Accordingly, we hereby GRANT the government’s Motion and permanently enjoin Defendant

from preparing tax returns for others under 26 U.S.C. §§ 6694, 7407 and from aiding and abetting the
understatement of tax liability by, among other things, advising other persons or entities, on how to
submit fraudulent IRS Forms 1099-OID, under 26 U.S.C. §§ 6701, 7408. Based on the foregoing and 
the record in this case, we hereby ORDER the permanent injunction set forth separately in the
 judgment.

IT IS SO ORDERED.
 – : –

Initials of Deputy Clerk Bea

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