Opinion
Case No. 2:03-CV-1114 DB
April 2, 2004
REPORT RECOMMENDATION
The United States seeks enforcement of two Internal Revenue Service summonses issued to Respondents requiring them to appear and give testimony and to produce documents and other materials relevant to the tax liability of Starlike Properties, Inc. The case was referred to the magistrate judge under 28 U.S.C. § 636(b)(1)(B).
I. BACKGROUND
Unless otherwise indicated, the background information is derived from the Declaration of Denise Glaser (hereinafter "1st Glaser Decl."), a Revenue Agent with the Internal Revenue Service. (Dkt. #3.)
Revenue Agent Denise Glaser is conducting an investigation into the income tax liability of Starlike Properties, Inc. ("Starlike") for its taxable year ending June 30, 1998. (1st Glaser Decl. ¶ 2.) As part of the investigation and in accordance with 26 U.S.C. § 7602, on December 19, 2002, she issued two administrative third-party summonses, Forms 2039, to Respondents directing them to appear on February 14, 2003 at 9:00 a.m., at 7850 S.W. 6 Court, Room 355, Stop 4449, Plantation, Florida 33324, to testify and produce for examination books, papers, records, and other data described in the summonses. The summonses were substantially identical except that one was addressed to Leon D. Bear at his residence or abode, Skull Valley Reservation, 416 Skull Valley Road, Grantsville, Utah 84029, and the other was addressed to Leon D. Bear, Chairman of the Executive Committee, Skull Valley Band of Goshute Indians of Utah, and the Skull Valley Band of Goshute Indians of Utah, at the Band's business address, 2480 Main Street, Suite 110, Salt Lake City, Utah 84115. (1st Glaser Decl. ¶ 3.)
Copies of the summonses are attached to the Declaration of Denise Glaser as Exhibits A and B.
On January 8, 2003, Revenue Agent Mary Anne Thorem served attested copies of the summonses pursuant to 26 U.S.C. § 7603 as evidenced by the certificates of service on the reverse sides of the summonses. (See 1st Glaser Decl. ¶ 4, Ex. A B.) The summons addressed to Leon D. Bear, individually, was left "by the door" of his abode, 416 Skull Valley Road, Grantsville, Utah 84029, and the one addressed to Leon D. Bear, as Chairman of the Executive Committee, Skull Valley Band of Goshute Indians, and to the Skull Valley Band was left at the Band's business address at 2480 Main Street, Suite 110, Salt Lake City, Utah 84115, with Beverley Slack. (See 1st Glaser Decl. ¶ 4, Ex. A at 1-2, Ex. B at 1-2.)
On January 10, 2003, Revenue Agent Glaser served the notices required by 26 U.S.C. § 7609(a) on Starlike Properties, Inc., and other persons identified in the summonses (The Diversified Group, Inc., James Haber, Thomas Long, Registered Agency Services, Inc., United Bank of Switzerland, Steven Jacoby, and Falzan N.V.) by certified or registered mail as evidenced by the certificates of service on the reverse sides of the summonses. (See 1st Glaser Decl. ¶ 5, Ex. A at 2-3, Ex. B at 2-3.)
At the request of Respondents, the time and place for the return of the summonses was changed to March 4, 2003 at 2:00 p.m., at the IRS Office of Chief Counsel in Salt Lake City, Utah. At the agreed time, Respondent Leon D. Bear appeared with counsel, Joseph H. Thibodeau, but failed to comply fully with the summonses by testifying and producing all of the requested materials. Specifically, Respondent Bear refused to testify, and produced only three documents: articles of incorporation, an operating agreement, and a resolution related to the operating agreement. (1st Glaser Decl. ¶ 6.)
On December 17, 2003, Mr. Bear was indicted on two counts of theft from a tribal organization, one count of theft concerning programs receiving federal funds, and three counts of false statements on his personal tax return. (Indictment.)
The indictment is attached as Exhibit A to the Memorandum of Points and Authorities in Support of Respondents' Response to the United States' Petition to Enforce Internal Revenue Summonses (hereinafter "Resp."). (Dkt. no. 15.)
On December 19, 2003, the IRS filed the instant Petition to Enforce Internal Revenue Summonses. (Dkt. no 1.)
On December 23, 2003, this court ordered Respondents to show cause why they should not be compelled to testify and produce the information requested by the summonses. (Order to Show Cause, Dkt. no. 4.)
On January 20, 2004. Respondents filed a response raising several grounds why they should not be required to comply with the summonses including failure to satisfy the requirements set forth in United States v. Powell, 379 U.S. 48 (1964), and tribal sovereignty.
Argument was heard by the Magistrate Judge on February 12, 2004 with Carl Hankla appearing for Petitioner and Joseph Thibodeau for Respondents.
II. DISCUSSION
A. Powell Requirements
Section 7602 of the Internal Revenue Code gives the IRS the authority, for the purpose of ascertaining the correctness of a return or determining the tax liability of any person, to examine any relevant books, papers, or other data. In furtherance of this objective, the IRS may summon any person it deems proper to appear and "produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry," 26 U.S.C. § 7602(a).
In order to obtain enforcement of an IRS summons, the Commissioner must demonstrate that (1) the investigation will be conducted for a legitimate purpose; (2) that the information sought may be relevant to that purpose; (3) that the information is not already in the possession of the IRS; and (4) that the appropriate administrative procedures have been followed.United States v. Powell, 379 U.S. 48, 57-58 (1964). The government's burden "is a slight one because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted." United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1443 (10th Cir. 1985); accord Anaya v. United States, 815 F.2d 1373, 1377 (10th Cir. 1987). "The requisite showing is generally made by affidavit of the agent who issued the summons and who is seeking enforcement." Balanced Fin. Mgmt, Inc., 769 F.2d at 1443. Once the government makes this showing, the burden of going forward shifts to the taxpayer "to show enforcement of the summons would `constitute an abuse of the court's process,' or that in issuing the summons the IRS lacks `institutional good faith.'" Anaya, 815 F.2d at 1377 (citations omitted); accord Balanced Fin. Mgmt. Inc., 769 F.2d at 1444. This burden is a "heavy one." Balanced Fin. Mgmt. Inc., 769 F.2d at 1444.
In the instant case, the IRS made the requisite prima facie showing through the Declaration of Revenue Agent Glaser. (1st Glaser Decl. ¶¶ 8-11.) The burden then shifted to Respondents who contend that none of the four Powell requirements are satisfied, and that the summonses were not issued in good faith. 1. Legitimate Purpose
Respondents allege that the summonses were not issued for a legitimate purpose because there is no on-going investigation of Starlike. In support of this contention, Respondents note that the IRS issued a statutory notice of deficiency (90-day letter) to Stariike. In Respondents' view, when the 90-day letter was issued, the investigation was at an end. They contend, therefore, that the inquiry is not being conducted for a legitimate purpose.
The IRS responds that the summonses were issued in connection with a civil tax investigation which focused on an approximate $15.4 million deduction taken by Starlike Properties, Inc., an entity indirectly owned by the Band, on its tax return for the fiscal year ending June 30, 1998. (See Glaser Decl. in Support of Reply ¶ 2 (hereinafter "2d Glaser Decl.") attached as Ex. 1 to Reply Mem., Dkt. no. 17; Notice of Deficiency, attached as Ex. D to Resp.) The summonses seek documents and testimony relating to a certain foreign currency "put option" transaction which generated Starlike's loss deduction, and other transactions involving James Haber, President of Starlike (Haber Decl., Ex. E. to Resp.), and Diversified Group, Inc. which has been identified as a promoter of tax shelters. See United States v. Diversified Group. Inc., No. M-18-304, 2002 WL 31947904, at **l-2 (S.D.N.Y. Nov. 25, 2002) (stating that the IRS had received "twelve disclosure statements from taxpayers identifying DGI `as the promoter or manager of tax avoidance transactions."').
On December 8, 2003, the IRS issued Starlike a statutory Notice of Deficiency under 26 U.S.C. § 6212 for its taxable year ending June 30, 1998, indicating that Starlike owed additional tax of $4,432,615, plus a statutory penalty under 26 U.S.C. § 6662(a) of $886,523. The IRS states that, contrary to Respondents' assumption, the investigation of Starlike was not concluded with the issuance of the Notice of Deficiency. The IRS explains that the Notice was issued on December 8, 2003, because the statute of limitations on assessment was about to expire on December 31, 2003. The Notice of Deficiency did not represent the conclusion of the IRS' investigation into the tax liability of Starlike for the tax year ended June 30, 1998. (2d Glaser Decl. ¶¶ 8-10.)
The Seventh Circuit has expressly rejected the argument advanced by Respondents that issuance of a notice of deficiency precludes enforcement of a summons. United States v. Gimbel, 782 F.2d 89, 93 (7th Cir. 1986); see also PAA Mgmt., Ltd, v. United States, 962 F.2d 212, 217-18 (2d Cir. 1992) (rejecting a similar argument with regard to issuance of a final partnership administrative adjustment which the court stated was analogous to a deficiency notice for an individual). The Gimbel court stated that "the validity of [a] summons is tested as of the date of issuance of the summons." Gimbel, 782 F.2d at 93 (7th Cir. 1986) see PAA Mgmt. 962 F.2d at 219. A court "might properly deny enforcement of a summons that had a legitimate purpose when issued if, for example, the summons had become stale or the investigation had become mooted by a final, irrevocable determination of the taxpayer's liability for the years in question." Gimbel, 782 F.2d at 93; accord PAA Mgmt. 962 F.2d at 217.
Respondents in the instant case have not alleged that the summonses did not have a legitimate purpose at the time they were issued. Further, the summonses are not stale, and there has been no final and irrevocable determination of tax liability. Thus, issuance of the notice of deficiency did not invalidate the summonses.
Respondents also state that they believe that the taxpayer (Starlike) will invoke the jurisdiction of the Tax Court, after which comprehensive discovery on all matters sought through the summonses will be available to the government. (Resp. at 8.) They apparently suggest that the IRS should seek the requested information through discovery procedures. However, courts have held that a taxpayer's challenge of the IRS' determination in the Tax Court does not deprive the district court of jurisdiction to enforce the summons. Gimbel, 782 F.2d at 93;PAA Mgmt., 962 F.2d at 218 (stating "the mere existence of collateral Tax Court or other judicial proceedings does not deprive the IRS of its investigative powers.") Similarly, the likelihood that the IRS eventually might obtain relevant information through discovery in a Tax Court proceeding does not deprive it of the authority to summons the information at an earlier point in the process. PAA Mgmt., 962 F.2d at 219; Gimbel, 782 F.2d at 93 (stating "the mere fact that the Government might be able to obtain some or all of the documents through the Tax Court procedures does not by itself compel the conclusion that the Government's attempt to enforce the summons is being made in bad faith.") (footnote omitted); United States v. Arthur Andersen Co., 623 F.2d 725, 728 n. 5 (1st Cir. 1980) (holding that the 1RS is not barred from seeking enforcement of a summons simply because it can use bankruptcy discovery procedures). Indeed, Respondents themselves concede that there appears to be no legal prohibition to proceeding with the enforcement proceeding. (Resp. at 8.)
"Subsequently, on February 11, 2004, Starlike did in fact file a petition in the Tax Court seeking a redetermination of the deficiency and additions to tax set forth in the Notice of Deficiency. (See Second Declaration of James Haber and attachments thereto, Dkt. # 21.).
2. Relevance
Respondents state that the summonses are overbroad because they seek documents that do not relate directly to the taxpayer, Starlike, or the foreign currency transaction at issue. In addition, they allege that the summonses fail to describe the materials sought with reasonable certainty.
Respondents also assert that the Band is tax exempt. However, the tax-exempt status of the Band is irrelevant. The IRS investigation is of Starlike, which is a taxable entity.
The IRS has expansive information-gathering authority. United States v. Arthur Young Co., 465 U.S. 805, 816 (1984);Codner v. United States, 17 F.3d 1331, 1332 (10th Cir. 1994). Under 26 U.S.C. § 7602, the IRS is authorized to "examine any books, papers, records, or other data which may be relevant or material" to the inquiry. 26 U.S.C. § 7602(a)(1) (emphasis added). In order to meet the relevance standard, the material sought need not be admissible in federal court. The use of the language "may be" shows the express intent of Congress "to allow the IRS to obtain items of even potential relevance to an ongoing investigation, without reference to its admissibility." Arthur Young, 465 U.S. at 814. As the Supreme Court explained, the IRS cannot be expected to know whether summoned information will in fact be relevant until it has been obtained and scrutinized. Id. Because the summons is a critical tool of discovery in IRS investigative and enforcement functions, the IRS "should not be required to establish that the documents it seeks are actually relevant in any technical, evidentiary sense." Id.
The requirement of relevance is satisfied if the document sought "might throw light on the correctness of taxpayer's returns." United States y. City Nat'l Bank Trust Co., 642 F.2d 388, 389 (10th Cir. 1981) (quoting United States v. Davey. 543 F.2d 996. 1000(2dCir. 1976));accord United States v. Southwestern Bank Trust Co., 693 F.2d 994, 996 (10th Cir. 1982). In other words, the IRS is entitled to subpoena items "if there is some realistic expectation that they may illuminate the accuracy or inaccuracy of the taxpayer's return."City Nat'l Bank Trust Co., 642 F.2d at 390. The requisite showing is usually made by the affidavit of the agent seeking enforcement. City Nat'l Bank Trust Co., 642 F.2d at 389.
Respondents state that the summonses contain dozens of requests that are irrelevant because "they do not relate to any transaction whose treatment on a tax return is under audit." (Resp. at 11.) Respondents assert that the only entity with whom they have a connection is the taxpayer, Starlike. Yet, the summonses, in paragraphs 5 and 6 seek documents relating to investment opportunities involving other persons and entities. Respondents contend that these matters have not been shown to be relevant to Starlike, the object of the IRS' investigation.
Paragraphs 5 and 6 provide as follows:
5. All agreements, correspondence, memoranda, promotional materials or other documents regarding investment opportunities (except Starlike) for the Tribe received from any of the following persons or entities from July 1997 until the date of compliance with this summons:
a. The Diversified Group;
b. James Haber;
c. Thomas Long;
d. Registered Agency Services, Inc.;
e. UBS; or
f. Steven Jacoby.
6. All documents, such as journal records, journal entries, ledger postings, deposit and withdrawal slips, checks, money orders, account statements, wire transfers and/or instructions, invoices, or other similar documents that reflect or pertain to the payment or receipt of fees paid, received or transmitted (including but not limited to finder's fees) with respect to any investment opportunities for which documents responsive to document request 5 above are provided.
(Attach. A to Summonses, ¶¶ 5-6, Ex. A B to 1st Glaser Decl.)
In response, the Government states that the transaction under investigation appears to involve a tax shelter which also involved other persons and entities on the list set forth in paragraph 5 of the summonses, including the Diversified Group and James Haber. The IRS seeks documents that might provide pattern evidence of shelter activity which might have a bearing on the transaction in question, (See Summonses; Tr, at 75-77, 85-86.) The Government points out that courts have admitted pattern evidence in tax shelter cases. See, e.g., Sochin v. Commissioner, 843 F.2d 351, 355 (9th Cir. 1988) (upholding admission of evidence of other investor transactions as relevant in making sham determination); Karme v. Commissioner, 673 F.2d 1062, 1064 (9th Cir. 1982) (holding that although testimony did not relate to particular transaction at issue, it tended to show a pattern or practice of tax planning of which the transaction was a part). As previously noted, the standard of relevance required to enforce a summons is much lower than the standard for admissibility of evidence in federal court. Arthur Young Co., 465 U.S. at 814. The court thus concludes that the IRS has made a sufficient showing that the information sought may be relevant to the legitimate purpose of the investigation.
"Tr." refers to the transcript of the March 4, 2003 meeting held in response to the summonses between Mr. Bear and counsel for both parties, attached to the Response as Attachment C.
Respondents also contend that the summonses fail to describe the materials requested with "reasonable certainty" as required by section 7603 because of the use of inclusive modifiers such as "pertain to," "with respect to," and "including but not limited to." The court concludes that the use of these modifiers does not make the summonses overbroad or too vague to be enforced.
Section 7603 provides that "[w]hen the summons requires the production of books, papers, records, or other data, it shall be sufficient if such books, papers, records, or other data are described with reasonable certainty." 26 U.S.C. § 7603(a).
The Tenth Circuit has repeatedly recognized that the summoning power of the IRS under section 7602 is relatively broad. United States v. Berney, 713 F.2d 568, 572 (10th Cir. 1983); United States v. MacKay, 608 F.2d 830, 832 (10th Cir. 1979). A summons is not overbroad when it "advise[s] the summoned party what is required of him with sufficient specificity to permit him to respond adequately to the summons." United States v. Wyatt 637 F.2d 293, 302 n. 16 (5th Cir. 1981); United States v. Giordano, 419 F.2d 564, 569 (8th Cir. 1969)("[B]roadness alone is not sufficient justification to refuse enforcement of a subpoena so long as the material sought is relevant.") (quoting Adams v. FTC. 296 F.2d 861, 867 (8th Cir. 1961)).See Berney, 713 F.2d at 572 (upholding enforcement of a summons against a claim that it was defective for being vague and overbroad, and noting that it was uncontested that the IRS needed the information to determine the taxpayers' personal tax liability).
In the instant case, Revenue Agent Glaser has filed a Declaration stating that she needs the documents and testimony requested in the summons to complete her investigation (2d Glaser Decl. ¶ 9), and that the information sought may be relevant to the investigation (1st Glaser Decl. ¶ 11). Respondents have not provided any evidence to show that the requested documents are not relevant. Further, the document requests are sufficiently clear to allow Respondents to identify the documents sought. Accordingly, the court concludes that the IRS has satisfied the relevancy requirement, and that the summonses describe the materials sought with "reasonable certainty" as required by section 7603.
3. Information Not Already in Possession of the IRS
Respondents assert that the summonses are unenforceable under the third prong of Powell, because the requested documents are already in the possession of the IRS. Respondents also suggest that they do not have the requested documents in their possession.
To obtain enforcement of a summons, the IRS must show that "the information sought is not already in the Commissioner's possession."Powell, 379 U.S. at 57-58. Once the IRS makes a prima facie showing that it does not possess the requested documents, the burden is on the respondent to establish actual possession of the information by the Commissioner. United States v. Garrett, 571 F.2d 1323, 1328 (5th Cir. 1978). Even if the IRS possesses a few of the documents, enforcement of the summonses is proper "when [the] summons as a whole is not harassing [and] the bulk of the materials summoned is not demonstrably in the possession of the IRS." United States v. Davis, 636 F.2d 1028, 1038 (5th Cir. 1981). In the instant case, the IRS made the requisite showing through the sworn statement of Revenue Agent Glaser that the summoned documents and testimony are not in the possession of the IRS. (2d Glaser Decl. ¶ 9.)
First, Respondents assert that they never possessed any of the requested documents. In support of this contention, they have submitted the Declaration of James Haber, President of Starlike, in which Mr. Haber states that Starlike "never provided any documentation as requested under the Summons" to Mr. Bear or the Band. (Haber Decl. ¶ 10, Attachment E to Resp.) However, the summonses clearly request documents not necessarily provided to Mr. Bear and the Band by Starlike. Therefore, Mr. Haber's statement does not establish that Respondents were never in possession of the requested documents.
As the IRS points out, Respondents' statements regarding possession of the documents are contradictory and inconsistent. At the March 4, 2003 meeting, counsel for Respondents represented that in addition to the three documents produced at the meeting, Respondents might possess a few additional responsive documents, but counsel had not yet reviewed them. (See Tr. at 87-91.) Subsequently, Lori B. Skiby, Vice Chair of the Band and the custodian of its records, stated in her declaration that to the best of her knowledge the Band has never had possession or control of any documents relating to Starlike. (Skiby Decl. ¶¶ 1, 6, Attachment H to Resp.) This statement appears to be inconsistent with the fact that Respondents had already produced three relevant documents, and counsel represented that there might be a few others. In any event, the summonses request many documents not directly related to Starlike.
In another statement apparently contradictory to the statement of Ms. Skiby, Respondents assert that any of the requested documents that might have been in their possession were taken during a search executed pursuant to a search warrant of the offices of their Taipai Project on April 16, 2003, an event that occurred after the March 4, 2003 meeting. In support of this assertion, Respondents have submitted the Declaration of Beverley B. Slack. (Attachment I to Resp.) Ms. Slack states that she is an independent contractor under contract to the Band's Taipai Project. (Slack Decl. ¶ 1.) Ms. Slack states that prior to April 16, 2003, all records related to the Band's activities regarding Starlike were kept in boxes marked "continuance" on the floor of her office at the Taipai Project office building at 2480 South Main Street, Suite 110, Salt Lake City, Utah 84115. (Id. ¶ 4.) Ms. Slack states that she was present during the search of April 16, 2003, and the agents seized all of the boxes marked "continuance." (Id. ¶¶ 5-6.)
In response to Ms. Slack's assertions, Petitioner has submitted the Declaration of John A. Gardner, a special agent with the FBI, who assisted with the search of the office. (Gardner Decl. ¶¶ 1-2, Ex. 3 to Reply Mem.) Special Agent Gardner states that among the items seized during the search were three cardboard boxes of documents marked "Continuance." Special Agent Gardner has maintained custody of those boxes since they were seized. (Id. ¶ 4.) On January 29, 2004, at the request of counsel for the government, Special Agent Gardner skimmed the contents of the boxes to determine whether they contained any documents involving Starlike. Aside from a letter from Revenue Agent Glaser to attorney Thomas Long, Special Agent Gardner did not find any such documents. (Id. ¶ 5.) Special Agent Gardner states, however, that the three boxes seized were not the only boxes of "continuance" documents in the office. He recalls that there were approximately fifty other boxes containing what appeared to be "continuance" documents. The agents did not seize those boxes, which were located in a different part of the office than the boxes they seized. (Id. ¶ 6.)
At the time of the hearing on February 12, 2004, Respondents presented the Second Declaration of Beverley B. Slack, Docket No. 20, filed February 19, 2004. In this second declaration, Ms. Slack asserts that paragraph six of Special Agent Gardner's declaration is false and that the three boxes seized were the only boxes of "continuance" documents. At the hearing, Petitioner requested that Ms. Slack's second declaration be stricken as untimely. The court agrees and strikes the declaration as not timely filed.
After reviewing the submissions of the parties, the court concludes that Respondents have failed to make the necessary showing that the requested documents are actually in the possession of the IRS. SeeGarrett, 571 F.2d at 1328 (holding that to defeat a summons, a person must show actual possession of the information by the IRS.) Respondents should make a good-faith search of their records to determine if they have any documents responsive to the summonses. Further, if some of the requested documents are not in their actual possession, but are under their control, they should make every reasonable effort to obtain those documents for the benefit of the IRS.See United States v. Hall No. 2:03-mc-2-FtM-29DNF (M.D. Fla. Dec. 30, 2003) (holding the respondents in contempt for failing to use all reasonable efforts to obtain their account records from a third party) (attached as Ex. 4 to Reply Mem).
As discussed, the summonses seek other documents not directly related to Starlike that may be in Respondents' possession. Further, the summonses request testimony from Mr. Bear who may be able to provide information as to the whereabouts of the documents as well as information concerning the foreign currency transaction at issue and other facts that may aid the investigation of Starlike's tax liability. Accordingly, the third prong of Powell is satisfied.
4. Failure to Follow the Proper Administrative Steps
Under the fourth prong of Powell, the Government must show that "the administrative steps required by the Code have been followed."Powell 379 U.S. at 58. Respondents contend that the IRS failed to follow the proper administrative steps. In particular, they allege (1) failure to give notice of intent to record the interview with Mr. Bear, (2) improper service of the summonses on Respondents, and (3) improper place of return.
a. Failure to Give Notice of Intent to Record the Interview
Under section 7521(a)(2)(A), an officer or employee of the IRS may record any interview with a taxpayer, if he informs the taxpayer of such recording prior to the interview. Respondents contend that the IRS failed to comply with this provision because it did not provide ten days' notice of the intent to record the meeting with Mr. Bear. Ms. Glaser responds that she informed Respondents' counsel by telephone prior to February 14, 2003, that she intended to have a court reporter present to make a record of the meeting. (2d Glaser Decl. ¶ 6.)
Section 7521(a)(2)(A) itself does not require ten days' notice. The ten-day notice requirement was imposed by "administrative pronouncement" in Notice 89-51, 1989-1 C.B. 691.
It is unnecessary to resolve the dispute over whether adequate notice was provided because the court finds that failure to provide ten days' notice did not violate the fourth prong of Powell, Section 7521, by its express language, applies to in-person interviews with the "taxpayer," not to third-party summonses. In the instant case, the "taxpayer" is Starlike, rather than Respondents. Several courts have concluded that the IRS need not comply with other provisions of section 7521 to obtain enforcement of a summons. See, e.g., Reimer v. United States, 43 F. Supp.2d 232, 237 (N.D.N.Y. 1999); Reimer v. United States, No. 98-CV-74753-DT, 1999 WL 33219993, at *3 (E.D. Mich. June 7, 1999); Pham v. United States, No. 1:98CV1669, 1999 WL 691962, at *2 (N.D. Ohio Aug. 3, 1999); Nelson v. United States. No. C 94-1345 FMS, 1994 WL 519485, at *6 (N.D. Cal. Sept. 19, 1994),aff'd, 62 F.3d 1425 (9th Cir. 1995); see also Cypress Funds. Inc. v. United States, No. 99-3840, 2000 WL 1597833, at **3 (6th Cir. Oct. 20, 2000) (unpublished opinion).
Further, the IRS may require the respondent to testify on the record because section 7602's provision for "testimony, under oath" envisions the preparation of an official transcript. United States v. Huber, No. 01-0719, 2001 U.S. Dist. LEXIS 12520, at *1 (D.N.J. June 14, 2001) (copy attached to Reply Mem., as Ex. 6). Finally, it is undisputed that Respondents now have ample notice of the IRS's intent to record Mr. Bear's testimony.
b. Failure to Make Proper Service
Next, Respondents state that the government failed to satisfy the fourth prong of the Powell standard because they were not properly served with the IRS summonses. Specifically, they allege that although the return of the summons directed to Mr. Bear, personally, states that it was left by the door at his usual place of abode at 416 Skull Valley Road, Grantsville, Utah, this address was not his usual place of abode. In addition, Respondents state that the office at 2480 S. Main St., Salt Lake City, Utah, where the other summons was left with Beverley Slack, is not the Band's place of business, and that Ms. Slack was not authorized to accept service for the Band.
Even if service of the summonses was defective, as Respondents allege, defective service does not preclude enforcement of the summonses. As other courts have observed, an IRS summons is not self-enforcing. Rather, the IRS must seek enforcement by the district court if the person summoned fails to comply. United States v. Gilleran, 992 F.2d 232, 233 (9th Cir. 1993); United States v. Samuels. Kramer Co., 712 F.2d 1342, 1344 (9th Cir. 1983). Thus, there is no risk that failure to deliver the summons could result in a default judgment or contempt proceedings. United States v. Bichara, 826 F.2d 1037, 1039 (11th Cir. 1987).
To obtain enforcement, the IRS must make the preliminary showing underPowell. The district court then issues an order to show cause why the summons should not be enforced. Gilleran, 992 F.2d at 233; Bichara, 826 F.2d at 1039. The district court acquires personal jurisdiction over the individual or entity summonsed by service of the show cause order and the petition for enforcement of the summons. This service must comply with Rule 4 of the Federal Rules of Civil Procedure. Gilleran, 992 F.2d at 233; Bichara, 826 F.2d at 1039; see United States v. Miller, 609 F.2d 336, 338 (8th Cir. 1979). Only refusal to comply with the district court's order would subject the respondent to contempt proceedings. Gilleran, 992 F.2d at 233; see Bichara, 826 F.2d at 1039. In an unpublished opinion, the Tenth Circuit has agreed with the reasoning of and Bichara andGilleran that the statutory procedure for enforcement of the summons provides adequate due process. United States v. Celenze, No, 95-2116, 1996 WL 98833, at **1 (10th Cir. Mar. 6, 1996)
Respondents also contend that it was improper to leave the summons "by the door" of Mr. Bear's supposed abode instead of leaving it with a responsible person. In support of their position, Respondents citeUnited States v. Giertz, 650 F. Supp. 886 (S.D. Fla. 1987) which held that merely depositing a summons at a residence does not comport with due process, and that the summons must be left with a person of suitable age and discretion. While Giertz tends to support Respondents' contention, the court concludes that the better reasoned analysis is that taken by the courts in Bichara andGilleran as discussed above. Those courts noted that section 7603(a) unambiguously authorizes the IRS to serve the summons by leaving it at the usual place of abode, and contains no requirement that the summons be left with a competent person. Both courts declined to read such a requirement into the statute. Bichara, 826 F.2d at 1039;see Gilleran, 992 F.2d at 233. Accordingly, the court concludes that the allegedly defective service did not render the summonses unenforceable. c. Improper Place of Return
Respondents object to the place of return of the summonses which originally was designated as Plantation, Florida. However, the IRS has since agreed to change the place of return to Salt Lake City, Therefore, this issue is resolved.
5. Good Faith
In Powell, the Supreme Court observed that because the court's process is invoked to enforce a summons, the court may not allow its process to be abused. "Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation." Powell, 379 U.S. at 58. Respondents contend that enforcement of the summons is not undertaken in "good faith" and therefore it would constitute an abuse of the court's process.
a. Improper Purpose
Respondents suggest that the summonses were issued for an improper purpose; i.e., to put pressure on Mr. Bear in the criminal case. However, Respondents have not shown any direct connection between the civil tax investigation of Starlike's alleged $15 million loss deduction on its tax return and the criminal charges in the indictment against Mr. Bear.
Under established case law, so long as the summonses were issued in good faith for a legitimate purpose, it is no defense to enforcement of the summonses to say that the evidence obtained might be used in a criminal prosecution against Mr. Bear.See United States v. Security Bank Trust Co., 661 F.2d 847, 852 (10th Cir. 1981) (stating "a tax fraud investigation normally has both a civil and a criminal component; thus, the Service may use the subpoena power to obtain evidence for its civil investigation even though the same evidence may be used in a criminal prosecution."); United States v. Hodgson, 492 F.2d 1175, 1177 (10th Cir. 1974)("A dual purpose investigation does not invalidate the summons."); United States v. Theodore, 479 F.2d 749, 753 (4th Cir. 1973) (stating that the fact that a summons "may have a dual purpose or that the civil investigation may produce evidence that subsequently may be used in a criminal prosecution is no basis for objection."); United States v. Giordano, 419 F.2d 564, 569 (8th Cir. 1969)("The fact that an investigation for the purpose of determining tax liability is deemed likely to produce evidence warranting criminal prosecution does not make the use of summons an improper use.") (quoting United States v. Haves, 408 F.2d 932, 936 (7th Cir. 1969). Only where the sole purpose of the summons is to gain evidence for a criminal prosecution will enforcement be denied. Theodore, 479 F.2d at 753.
b. Fifth Amendment Privilege Against Self-Incrimination
Respondents also suggest a lack of good faith by the government in putting Mr. Bear in a position where he might choose to assert the Fifth Amendment privilege. As the IRS argues, this does not evidence bad faith on the part of the government. Mr. Bear is free to raise the privilege if he so chooses. However, as the government points out, any Fifth Amendment claim is premature.
It is settled law that a person may not refuse to answer questions or to produce documents on the basis of a general claim of constitutional privilege. Instead, he must appear in response to the summons and make specific objections to specific questions or requests for particular documents. United States v. Dick, 694 F.2d 1117, 1119 (8th Cir. 1982). See also United States v. Brown, 918 F.2d 82, 84 (9th Cir. 1990) (taxpayer may not make a blanket claim of privilege, but must assert the claim on a question-by-question or document-by-document basis). Further, Mr. Bear, as custodian of the Band's records, may not assert the privilege on the ground that producing the Band's records would incriminate him personally. See Braswell v. United States, 487 U.S. 99, 108-09(1988).
B. Sovereign Immunity
Respondents claim that due to tribal sovereignty, the Band is not subject to the summons authority of the IRS. The Supreme Court has recognized the sovereignty of Indian Tribes as "domestic dependent nations." Cherpkee Nation v. Georgia, 30 U.S. 1, 12, 5 Pet. 1, 17(1831). However, "Congress has plenary authority to limit, modify or eliminate the powers of local self-government which the tribes otherwise possess." Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978). "Unlike the states, Indian tribes possess only a limited sovereignty that is subject to complete defeasance." Donovan v. Coeur d'Alene Tribal Farm, 751 F.2d 1113, 1115 (9th Cir. 1985) (citing Rice v. Rehner, 463 U.S. 713, 719 (1983)).
The government acknowledges that the Band is a "recognized" Indian Tribe.
Section 7602(a)(2) is a statute of general applicability which authorizes service of an 1RS summons on any person the Secretary deems proper. It is settled law that "a general statute in terms applying to all persons includes Indians." Federal Power Comm'n v, Tuscarora Indian Nation. 362 U.S. 99. 116 (1960); accord Coeur d'Alene, 751 F.2d at 1115. See, e.g., Confederated Tribes of Warm Springs Reservation of Or. v. Kurtz, 691 F.2d 878 (9th Cir. 1982) (holding that tribes are subject to federal excise tax). However, courts have recognized three exceptions to this rule:
A federal statute of general applicability that is silent on the issue of applicability to Indian tribes does not apply to them if: (1) the law touches "exclusive rights of self-governance in purely intramural matters"; (2) the application of the law to the tribe would "abrogate rights guaranteed by Indian treaties"; or (3) there is proof "by legislative history or some other means that Congress intended [the law] not to apply to Indians,"Coeur d'Alene, 751 F.2d at 1116 (quoting United States v. Farris, 624 F.2d 890, 893-94 (9th Cir. 1980)).
Several courts have relied upon this analysis to determine that various federal statutes apply to Indian tribes. See, e.g., NLRB v. Chapa De Indian Health Program, Inc., 316 F.3d 995, 999 (9th Cir. 2003) (upholding enforcement of NLRB subpoenas to tribe); United States v. White, 237 F.3d 170, 173 (2d Cir. 2001) (holding that IRC ¶ 60501 applies to Indians); United States v. Funmaker, 10 F.3d 1327, 1330-31 (7th Cir. 1993) (holding that federal arson statute applies to Indians); Smart v. State Farm Ins. Co., 868 F.2d 929 (7th Cir. 1989) (ERISA applies to Indian tribe employer); Coeur d'Alene, 751 F.2d at 1115-18 (Occupational Safety and Health Act (OSHA) applied to tribal enterprise); compare Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709 (10th Cir. 1982) (holding that OSHA did not apply to tribal enterprise because application would abrogate a right protected by treaty). Although the Tenth Circuit has questioned the continuing vitality of Tuscarora, see, e.g., Navajo Forest Prods, 692 F.2d at 713, the court has nevertheless applied the above analysis to find that federal statutes did not apply to Indians. Nero v. Cherokee Nation of Qkla., 892 F.2d 1457, 1462-63 (10th Cir. 1989) (federal statute did not apply because it would "affect the Tribe's right to self-governance in a purely internal matter," i.e., the right to define its own membership); EEOC v. Cherokee Nation, 871 F.2d 937 (10th Cir. 1989) (holding that ADEA was not applicable because it would interfere with right protected by treaty).
As discussed, section 7602 is a statute of general applicability that by its terms allows the IRS to summon not only the person liable for tax or a third-party record-keeper, but also "any other person the Secretary may deem proper" to appear and produce records and give testimony under oath as may be relevant to the inquiry. 26 U.S.C. § 7602(a)(2). Further, the statute does not fall within any of the three exceptions to the so-called Tuscarora rule that a statute of general applicability applies to Indians. The summonses were issued to further the IRS examination of the tax return of Starlike, a taxable corporation, which was owned indirectly by the Band. The summonses seek information concerning the Band's investment in Starlike and do not touch upon the Band's "exclusive rights of self-governance in purely intramural matters." Second, enforcement of the summonses would not abrogate any rights guaranteed by Indian treaties. Finally, Respondents have not provided legislative history or any other indication that Congress intended section 7602 not to apply to Indians.
Respondents assert that enforcement of the summonses would violate a treaty, but do not explain this assertion.
As an officer of the Band, Mr. Bear is not protected by the tribe's immunity from suit. Martinez, 436 U.S. at 58. See Puyallup Tribe. Inc. v. Dep't of Game of Washington, 433 U.S. 165, 171-72 (1977). Accordingly, the court concludes that enforcement of the summonses is not barred by sovereign immunity. C. Privileged Documents
Courts have enforced IRS summonses in cases where the defense of sovereign immunity has not been raised. See, e.g., United States v. Fond due Lac Reservation Bus. Comm., 906 F. Supp. 523 (D. Minn. 1995) (summons issued to a tribal committee challenged on ground that tribe was not subject to wagering tax); United States v. Brown, 824 F. Supp. 124 (S.D. Ohio 1993) (holding that Indian must comply with summons despite his claim of exemption from income tax).
Respondents also claim that some of the documents might be protected by the attorney-client privilege or the work product doctrine. To the extent that respondents believe this is the case, they may raise their objections on a document-by-document basis in a privilege log.
III. RECOMMENDATION
For the foregoing reasons, the government's motion to enforce the summonses should be granted. Respondents should be ordered to appear before Revenue Agent Glaser, or any other IRS agent, at the IRS offices in Salt Lake City at a time to be designated by the IRS, to give testimony before a court reporter or stenographer, and to produce documents for examination and copying as requested in the summonses.Copies of the foregoing Report and Recommendation are being mailed to the parties, who are hereby notified that they have the right to object to the Report and Recommendation. The parties are further notified that they must file any objections to the Report and Recommendation with the clerk of the district court, pursuant to 28 U.S.C. § 636(b), within ten (10) days after receiving it. Failure to file objections may constitute a waiver of those objections on subsequent appellate review.