Opinion
Case No.: CV-S-04-1247-RLH (RJJ).
March 21, 2005
ORDER
(Motion to Quash Summons-#1, Motion to Dismiss-#5)
Before the Court is Petitioner's Motion to Quash Internal Revenue Service Summons (#1), filed September 8, 2004, and Respondent's Motion to Dismiss (#5), filed December 9, 2004. The Court has also considered Petitioner's Opposition (#9), filed January 26, 2005, as well as the Respondent's Reply (#10), filed February 10, 2005.
BACKGROUND
In an examination of Magna Ultra Trust (hereinafter "Magna") for the years 1999, 2000, and 2001, the Internal Revenue Service (hereinafter "IRS") served a summons upon Nevada State Bank on August 19, 2004. The summons sought, inter alia, the bank records of Petitioner. Petitioner filed the present Motion to Quash Summons on the grounds that the IRS failed to explain how the records are relevant to an examination of Magna, claiming further that Magna and Petitioner are unrelated.
The IRS alleges that Petitioner and Magna were both parties to a transaction or series of transactions the IRS refers to as an "offshore deferred compensation agreement". This type of agreement is described by respondent in its Motion to Dismiss as follows:
Under this scheme, a taxpayer signs an employment contract with a foreign employee-leasing company, which then assigns the rights to the employment contract to a United States leasing company, which in turn leases the taxpayer's service back to the taxpayer's business. As part of the employment contract with the foreign company, most of the payments made to the United States leasing company are diverted into a non-qualified deferred compensation plan and held offshore for the taxpayer's benefit. . . . While, as a general rule, an employer cannot deduct deferred pay until it is paid to the employee and reported on the employee's tax return, under the scheme the taxpayer's business deducts the full pay package now when it makes the payment to the United States leasing company. The "leased employee" only reports the income currently received, which doesn't include the deferred compensation. Typically, however, the taxpayer repatriates the funds held offshore by the use of credit cards, loans or mortgages.
The taxpayer in the present transaction was allegedly Dennis L. Sharp (hereinafter "Sharp"). Sharp entered into a personal services contract with International Executive Leasing, an Irish sole proprietorship (hereinafter "IEL"). IEL simultaneously entered into a contract to provide Sharp's services to Petitioner, who subsequently entered into a contract with Sharp Associates, LLC, in which Magna was the sole member. The IRS contemplates that Sharp has numerous offshore mortgages in order to repatriate theses funds.
DISCUSSION
The IRS may serve a summons for production of information relevant to "determining the liability of any person for internal revenue tax." 26 U.S.C. § 7602(a). Any person who is entitled to notice of such summons has the right to move to squash the summons. 26 U.S.C. § 7609(b). The Supreme Court has expressed what the IRS must show to obtain judicial enforcement of such a summons. United States v. Powell, 379 U.S. 48, 57-58 (1964). However, here the IRS has not moved to enforce the summons, but rather to dismiss Petitioner's Motion to Quash Summons. This Court agrees with the standard used in Cosme v. Internal Revenue Service, 708 F.Supp. 45 (E.D.N.Y. 1989), where the court explained:
[W]hen faced with a petition to quash an IRS third-party summons, the government need not move to enforce the summons. Instead the government can rely on the voluntary compliance of third parties to effectuate the summons. Thus, when a taxpayer petitions to quash a summons, the government can move to dismiss the petition. Such a motion mirrors a 12(b)(6) motion to dismiss for failure to state a claim. In a motion to dismiss the petition, the government does not have to establish a Powell prima facie case. Instead, the burden shifts immediately to the petitioner to establish a valid defense to the summons.Id. at 48.
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides that a court may dismiss a complaint for "failure to state a claim upon which relief can be granted." "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Yamaguchi v. U.S. Dept. of the Air Force, 109 F.3d 1475, 1481 (9th Cir. 1997). All factual allegations set forth in the complaint "are taken as true and construed in the light most favorable to [p]laintiffs." Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1999). Dismissal is appropriate "only if it is clear that no relief could be granted under any set of facts that could be proven consistent with the allegations." Hishon v. King Spalding, 467 U.S. 69, 73 (1984); see also McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir. 1988).
Petitioner has failed to establish an adequate defense to the summons. Petitioner's arguments in its opposition can be narrowed down to one: it claims that the records sought are not relevant to the examination of Magna. The Court disagrees. Petitioner has not denied its involvement with Magna in a transaction or series of transactions that the IRS refers to as an "offshore deferred compensation agreement." Viewing the facts as alleged by Petitioner and in a light most favorable to Petitioner, the Court holds that the records sought are relevant to the examination of Magna.
CONCLUSION
Accordingly, and for good cause appearing,IT IS HEREBY ORDERED that Respondent's Motion to Dismiss (#5) is GRANTED.
IT IS FURTHER ORDERED that Petitioner's Motion to Quash Internal Revenue Summons (#1) is DENIED.