Opinion
MC-22-00013-PHX-DWL
10-11-2022
Michele Almeleh, Petitioner, v. United States of America, Respondent.
ORDER
Dominic W. Lanza, United States District Judge
The Internal Revenue Service (“IRS”) issued a pair of summonses to Michele Almeleh, in her capacity as the treasurer of Arc Tec, Inc. (“Arc Tec”), seeking certain documents and testimony related to Arc Tec. Now pending before the Court are Almeleh's motion to quash the summonses (Doc. 1) and the IRS's motion to enforce the summonses (Doc. 7). For the following reasons, the motion to enforce is granted and the motion to quash is denied as moot.
BACKGROUND
I. Facts
Almeleh is the treasurer of Arc Tec. (Doc. 1 ¶ 1.) Almeleh is also treasurer of a related corporation, C&M Insurance Partners Protected Cell (“C&M”). (Doc. 9 ¶ 6.) The IRS is currently investigating “the facts and circumstances surrounding the captive insurance arrangement engaged in by Arc Tec and C&M.” (Id. ¶ 21.) More specifically, the IRS is investigating “the propriety of Arc Tec taking an ordinary and necessary business expense deduction for insurance premiums it paid to C&M” where “C&M then elected under Section 831(b) of the Internal Revenue Code to exclude from income the corresponding amount of premiums received from Arc Tec.” (Id. ¶ 20.)
See generally AMERCO, Inc. v. C.I.R., 979 F.2d 162, 165 (9th Cir. 1992) (“By ‘captive insurance company' we mean one which is organized for the purpose of insuring the liabilities of the parent and its affiliates. Since at least 1977 the Commissioner has taken the position that where the only insurance written by a captive insurance company is for the parent and its affiliates, there is no risk-shifting and hence no insurance.”).
Between September 2020 and October 2021, the IRS issued a series of Information Document Requests (“IDRs”) to Almeleh for various documents and business records related to Arc Tec. (Id. ¶¶ 22-29.) For example, the IRS requested copies of Arc Tec's tax returns (Doc. 1-8 at 2) and corporate governance documents (id. at 4). All told, the IRS issued 16 IDRs during this period, each with several subparts. (Doc. 1-8; Doc. 1 ¶ 20.)
Almeleh contends that she “successfully responded to each and every IDR” and eventually produced “approximately 3,000 pages of documents,” even though she felt the “speed and volume of the IDR's were intentional in an attempt to overwhelm [her.]” (Doc. 1 ¶ 20.) The IRS disagrees that Almeleh's responses to the IDRs were complete and disputes that it was motivated by an improper purpose when issuing them. (Doc. 9 ¶¶ 18, 22, 26-29.) Additionally, although Almeleh contends that it would have been impossible for the IRS to review the volume of documents she produced in response to the IDRs (Doc. 1 ¶ 20), the assigned IRS revenue agent avows under penalty of perjury that she has, in fact, reviewed all of the produced materials. (Doc. 9 ¶ 31.)
On March 9, 2022, based on its belief that Almeleh's responses to the IDRs were incomplete, the IRS issued two summonses to Almeleh in her capacity as Arc Tec's treasurer. (Doc. 1-2 at 2; Doc. 1-3 at 3.) Both described the matter as “Arc Tec, Inc.” and included the company's address. (Doc. 1-2 at 2, Doc. 1-3 at 3.) Both were personally served on Almeleh on March 10, 2022. (Doc. 9 ¶ 10.)
The first summons required Almeleh to produce certain “books, records, papers, and other data relating to . . . tax liability” or “connected with the administration or enforcement of the internal revenue laws” and stated that “Attachments 1-3” provided more information about the scope of the materials being sought. (Doc. 1-2 at 2.) Attachment 3, in turn, specified that the IRS was seeking the following nine categories of documents: (1) “documents that reflect ownership interests in the Taxpayer”; (2) “documents that reflect the identity of the Taxpayer's current and former officers, directors or owners of the stock or other equity interests of the Taxpayer”; (3) “complete financial statements (either audited or compiled) for the Taxpayer including all footnote disclosures”; (4) “all Corporate Minutes of the Taxpayer”; (5) “all documents relating directly or indirectly to all risks covered by Captive Insurance, including, but not limited to” certain subcategories; (6) “all documents relating directly or indirectly to all insured risks of the Taxpayer that were not covered by Captive Insurance, including all other insurance policies with their pertinent riders and attachments”; (7) “[f]or each insurance policy produced in response to paragraph 6(c), above, . . . all documents relating to the premium payments for the purchase of Captive Insurance by ARC II LLC or any other parties, including, but not limited to payments, contracts and agreements”; (8) “all documents showing the relationship among ARC II LLC, Taxpayer and shareholders or officers of the Taxpayer”; and (9) “all documents related to all amounts due to or due from any shareholders or officers of the Taxpayer.” (Doc. 9-1 at 8-9.) The time frame at issue was the “tax periods ending December 31, 2018, December 31, 2019, and December 31, 2020.” (Doc. 1-2 at 2.) Almeleh was also required to appear on April 13, 2022. (Id.) However, the accompanying cover letter explained that if Almeleh produced the requested documents to the IRS before April 13, 2022, she would not be required to appear. (Doc. 9-1 at 1.)
Almeleh omitted Attachment 3 from the version of this summons she attached to her motion. (Doc. 1-2.)
As for the second summons, the record is complicated by the fact that the parties submitted different versions of it. The version attached to Almeleh's motion is a summons that required both the production of documents and testimony regarding those documents, with an appearance date of May 3, 2022. (Doc. 1-3 at 3.) In contrast, in the version attached to the IRS's motion, the provisions related to the production of documents are removed, such that it is only a summons to appear to provide testimony on May 3, 2022. (Doc. 9-2.)
Almeleh did not appear on either of the required dates and did not produce any documents in response to either summons. (Doc. 9 ¶¶ 11-13.)
Almeleh has also received three summonses in her capacity as the treasurer of C&M, resulting in a total of five summonses from the IRS. (Doc. 1 ¶¶ 18-19.)
II. Procedural History
On March 25, 2022, Almeleh filed a petition to quash the summonses. (Doc. 1.)
On June 7, 2022, the IRS filed a combined motion for summary denial of the petition to quash and motion to enforce the summonses. (Docs. 7, 8.)
On June 21, 2022, Almeleh filed a response. (Doc. 10.)
The following day, Almeleh filed a duplicate version of this document. (Doc. 11.)
On June 28, 2022, the IRS filed a reply. (Doc. 12.)
DISCUSSION
I. Jurisdiction
“IRS summonses are not self-enforcing, so the Government must seek enforcement from a federal district court if the person on whom a summons has been served refuses to comply.” United States v. Samuels, Kramer, & Co., 712 F.2d 1342, 1344 (9th Cir. 1983). The statute authorizing the IRS to initiate such an enforcement proceeding is 26 U.S.C. § 7402(b), which provides that “[i]f any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, or other data, the district court of the United States for the district in which such person resides or may be found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data.”
The procedural posture of this case is unusual in that it was not initiated by the IRS, via a motion to enforce under § 7402(b), but by Almeleh, via a preemptive motion to quash. According to the IRS, this approach is jurisdictionally improper because the tax code only authorizes motions to quash in one specific circumstance-when a summons is issued to a third party for records related to “any person (other than the person summoned)” and that person moves to quash under 26 U.S.C. § 7609(b)(2) before the third party would otherwise be required to respond.
The Court finds it unnecessary to wade into the parties' debate on this topic because the question of the summonses' enforceability is squarely presented by the IRS's motion to enforce. Thus, the Court will turn to that request first. And if enforcement is appropriate, it follows that Almeleh's motion to quash (assuming it is even properly before the Court) must be denied.
II. Legal Standard
“[S]ummons enforcement proceedings are to be ‘summary in nature.'” United States v. Clarke, 573 U.S. 248, 254 (2014) (citation omitted). “[C]ourts may ask only whether the IRS issued a summons in good faith, and must eschew any broader role of overseeing the IRS's determinations to investigate.'” Id. (cleaned up). “[A]bsent contrary evidence, the IRS can satisfy that standard by submitting a simple affidavit from the investigating agent.” Id.
Procedurally, an enforcement proceeding is an “adversary hearing” in which a summoned party may “challenge the summons on any appropriate ground.” Donaldson v. United States, 400 U.S. 517, 527 (1971). “The summoned party must receive notice, and may present argument and evidence on all matters bearing on a summons's validity.” Clarke, 573 U.S. at 253-54.
Substantively, “[t]o obtain enforcement of a summons, the IRS must first establish its ‘good faith' by showing that the summons: (1) is issued for a legitimate purpose; (2) seeks information relevant to that purpose; (3) seeks information that is not already within the IRS' possession; and (4) satisfies all administrative steps required by the United States Code.” Fortney v. United States, 59 F.3d 117, 120 (9th Cir. 1995). These are often referred to as the “Powell requirements” because they are derived from United States v. Powell, 379 U.S. 48 (1964). Id. “The government's burden is ‘a slight one' and typically is satisfied by the introduction of the sworn declaration of the revenue agent who issued the summons that the Powell requirements have been met.” Id. “Once a prima facie case is made a ‘heavy' burden is placed on the taxpayer to show an ‘abuse of process' or ‘the lack of institutional good faith.'” Id. (quoting United States v. Dynavac, 6 F.2d 1407, 1414 (9th Cir. 1993)).
III. Prima Facie Case Under Powell
The IRS has submitted a declaration from IRS Revenue Agent Jie Guo stating that the four Powell requirements are satisfied. As for the first requirement (legitimate purpose), Guo contends the summonses were issued to “better understand all the facts and circumstances surrounding the captive insurance arrangement engaged in by Arc Tec and C&M, and to otherwise determine the correctness of Arc Tec's and C&M's returns.” (Doc. 9 ¶ 21.) Guo further avows that “[t]he above-described summonses were not issued to harass, or for any other improper purpose.” (Id. ¶ 18.)
As for the second requirement (relevance), Guo avows that the requested documents may help “to determine Arc Tec and C&M's correct federal tax liabilities for tax years 2018, 2019, and 2020” as well as to determine “whether C&M's election to exclude the premiums from income and the deduction taken by Arc Tec are proper.” (Id. ¶ 17.) Guo elaborates that the requested records “may . . . be relevant,” among other things, “to determine whether C&M was formed to operate as an insurance company or to act as a tax savings device; to determine whether the transactions between Arc Tec and C&M in 2018, 2019, and 2020 lacked economic substance; to determine whether the coverages that Arc Tec obtained, and the premiums that it paid, in 2018, 2019, and 2020 were justified by losses that it incurred in prior years; and to determine whether Arc Tec's coverage and premiums in years prior to 2018 suggested that the coverages and premiums paid in 2018, 2019, and 2020 related to the revenues of Arc Tec or some other reason not related to risk management.” (Id. ¶ 34.)
As for the third requirement (not currently in IRS possession), Guo avows that “[t]he documents and information demanded in the summonses are not already in the possession of the IRS.” (Id. ¶ 14.) In a related vein, Guo states that she has “reviewed all the information that has been produced by Arc Tec to the IRS to date” and that those IDR responses were “incomplete.” (Id. ¶¶ 29, 31.)
As for the fourth requirement (administrative steps), Guo avows that “[a]ll administrative steps required by the Internal Revenue Code for issuance and service of the summonses have been taken.” (Id. ¶ 15.) In particular, Guo clarifies that “[t]here is no ‘Justice Department referral,' as that term is described in Section 7602(d)(2) of the Internal Revenue Code, in effect with respect to Arc Tec for the tax years 2018, 2019, and 2020.” (Id. ¶ 16.)
The Court is satisfied that these avowals are sufficient to establish a prima facie case of good faith. Almeleh's arguments to the contrary are unavailing.
As for the legitimate-purpose requirement, Almeleh argues the IRS's purpose in issuing the summonses was illegitimate because (1) the IRS has not identified any individualized or specific reason to suspect the captive insurance arrangement between Arc Tec and C&M is improper, and instead has chosen to “target[] captive insurances generally” and issued the summonses based on “the mere fact that [Arc Tec] had participated in a captive insurance transaction,” and/or (2) the summonses are part of a scheme to create settlement leverage. (Doc. 10 at 9-11.) To the extent Almeleh offers these arguments in support of her claim of bad faith, they are addressed in Part IV below. But to the extent these arguments are offered as evidence of an illegitimate purpose, they lack merit. The IRS “need not meet any standard of probable cause to obtain enforcement of his summons” and, like other agencies, “can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.” Powell, 379 U.S. at 57. See also United States v. Bisceglia, 420 U.S. 141, 146 (1975) (“[I]t would be naive to ignore the reality that some persons attempt to outwit the system, and tax evaders are not readily identifiable. Thus, . . . § 7602 provides the power to ‘examine any books, papers, records, or other data which may be relevant . . . (and to summon) any person having possession. . . of books of account . . . relevant or material to such inquiry.' Of necessity, the [investigative] authority so provided is not limited to situations in which there is probable cause, in the traditional sense, to believe that a violation of the tax laws exists. The purpose of the statutes is not to accuse, but to inquire. Although such investigations unquestionably involve some invasion of privacy, they are essential to our self-reporting system, and the alternatives could well involve far less agreeable invasions of house, business, and records.”).
Next, as for the relevance requirement, Almeleh contends that “[s]ince there is a material dispute of fact whether [Guo] has actually reviewed every document and piece of information received through the [IDRs], [the IRS] cannot in good faith describe with such reasonable certainty the items they need and which documents that they do not already possess from the IDR's.” (Doc. 10 at 12. See also Doc. 10-1 ¶ 33 [Almeleh declaration: “It is my belief Jie Guo has not even reviewed the documents submitted in response to the IDR's.”].) Putting aside that this argument seems to address the third Powell requirement rather than the second Powell requirement, there is no “material dispute of fact” here. The only person with personal knowledge about whether Guo reviewed all of the documents that were produced in response to the IDRs is Guo. And in her declaration, Guo clearly and unambiguously avows that she has reviewed all of the previously produced documents. (Doc. 9 ¶ 31.) Almeleh cannot conjure a dispute of fact on this point by speculating, without personal knowledge, that Guo's avowals are inaccurate. Nor does it strike the Court as incredible that an IRS revenue agent could review 3,000 pages of documents over a period of months.
Almeleh also contends the relevance requirement is not satisfied because the summonses “list[] no identifiable documents, records or data that are required. . . . The summons is a template in which it fails to identify a single specific item. At best [Almeleh's] interpretation of the request is that she is to bring and produce every scrap of paper, electronic data and computer known to her.” (Doc. 10 at 13.) This argument is unavailing. The scope of the first summons, which both sides agree was a summons compelling the production of documents, was limited by Attachment C, which identified the nine discrete categories of documents being sought by the IRS. This satisfied 26 U.S.C. § 7603(a)'s requirement that the summons describe the documents subject to production “with reasonable certainty.” The Court also notes that the nine enumerated categories of documents would plainly be relevant in an investigation concerning a captive insurance arrangement. See generally United States v. Zolin, 809 F.2d 1411, 1414 (9th Cir. 1987) (“The IRS' power to examine records in connection with tax investigations is broadly construed. The relevance of such evidence depends on whether it might throw light on the correctness of a taxpayer's returns.”); Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 323 (1985) (“We have never held . . . that the IRS must conduct its investigations in the least intrusive way possible. Instead, the standard is one of relevance.”). As for the second summons, although the version submitted with Almeleh's motion might be subject to an uncertainty/irrelevance challenge because it calls for the production of documents but does not appear to incorporate, by reference, the limitations set forth in Attachment C, the version submitted with the IRS's motion-which, therefore, is the only version subject to the enforcement request-does not call for the production of documents and simply calls for Almeleh to testify about the documents previously produced. This, too, satisfies the relevance threshold. Cf. 28 U.S.C. § 7602 (granting the IRS the power to “take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry”).
Next, as for the possession requirement, Almeleh contends (in addition to her earlier, unsupported argument about whether Guo actually reviewed the documents she produced in response to the IDRs) that the summonses would require her to re-produce some of those previously produced documents. (Doc. 10 at 15.) The IRS responds that Almeleh's “argument neglects that the IDR responses were not complete, and the summons seeks new information that was not previously sought by IDR. Moreover, the United States has made clear that it is not seeking enforcement for documents that Arc Tec earlier provided during the exam that would also be responsive to the summons request.” (Doc. 12 at 8.) Additionally, Guo clarifies in a supplemental declaration that “[t]o the extent Arc Tec has previously provided information that would be responsive to a summons request, the IRS is not seeking reproduction of that information.” (Doc. 12-1 ¶ 19.) Given this clarification, the Court is satisfied that the summonses do not seek production of documents already in the IRS's possession.
Finally, as for compliance with the administrative steps, Almeleh contends the “copy of the summons ([Doc] 9-2) ... is materially different that [sic] of the copy provided by Respondent, [so] there is a genuine issue of material fact.” (Doc. 10 at 14.) This argument is already addressed above-the version of the subpoena the IRS seeks to enforce, which is limited to testimony about the documents produced in response to the other subpoena, was issued for a legitimate purpose, seeks relevant information, and does not seek information already in the IRS's possession. Almeleh fails to cite any case supporting her contention that the IRS's effort to narrow the scope of the second subpoena, so that it only seeks testimony and not documents, somehow qualifies as a violation of administrative steps that would render the summons unenforceable. Cf. United States v. Payne, 648 F.2d 361, 363 (5th Cir. 1981) (“Powell did not hold that infringement of any code requirement would operate as a per se bar to enforcement of the IRS summons absent material harm. Nothing in the language of the code itself mandates this sanction for infringement. The correct approach for determining whether to enforce a summons requires the court to evaluate the seriousness of the violation under all the circumstances including the government's good faith and the degree of harm imposed by the unlawful conduct. Analyzing the present situation in light of this legal principle, we conclude that the instant violation of improper service was, at most, technical and not serious. More importantly, we have not discerned any bad faith on the part of the Government or harm or prejudice to the taxpayer Payne. Since these elements are lacking here, we find no reason for not affirming the . . . enforcement of the summons.”) (citation omitted).
IV. Bad Faith
As noted, when (as here) the government has met its burden of establishing a prima facie case for enforcement, the burden shifts to the challenger to show an abuse of process or lack of good faith. Fortney, 59 F.3d at 120. See also Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1393 (9th Cir. 1985) (“Assertions by affidavit of the investigating agent that the requirements are satisfied are sufficient to make the prima facie case. The burden then shifts to the taxpayer to show an abuse of process, e.g., that the summons was issued in bad faith for an improper purpose. The burden is a heavy one. The taxpayer must allege specific facts and evidence to support his allegations.”) (citations omitted).
In Clarke, the Supreme Court outlined the standards for bad faith. “[T]he taxpayer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge. But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person's bad faith, at this threshold stage, will rarely if ever be available. And although bare assertion or conjecture is not enough, neither is a fleshed out case demanded: The taxpayer need only make a showing of facts that give rise to a plausible inference of improper motive. That standard will ensure inquiry where the facts and circumstances make inquiry appropriate, without turning every summons dispute into a fishing expedition for official wrongdoing.” 573 U.S. at 254-55.
Almeleh's primary bad-faith argument concerns the IRS's conduct during settlement negotiations. She states that Arc Tec was offered a settlement agreement but the “IRS refuses to allow calculations and other information to carefully review and understand the settlement agreement in [a] manner as to grant informed consent.” (Doc. 10 at 9.) Initially, the Court struggles to understand how the IRS's decision to explain or not explain the proposed settlement terms bears on the propriety of the summonses for additional records and testimony. Perhaps Almeleh's theory is that the IRS is angry that Arc Tec didn't accept the settlement offer, and thus has decided to burden Arc Tec with overbroad document requests in an attempt to force a settlement or extract revenge, but that theory is poorly articulated and not compelling.
At any rate, although Almeleh asserts that “Guo has failed to provide the numbers and calculations necessary to make an informed decision” (Doc. 10-1 ¶ 14), Guo responds by providing a detailed timeline of attempts to contact Almeleh's representatives and provide information to make the necessary calculations (Doc. 12-1 ¶¶ 12-16). Almeleh's declaration adds no detail about the requests or refusals. Further, Almeleh provides no declarations from her representatives suggesting those calculations were never received. Whether Almeleh's representatives failed to forward those calculations to her is unknown, but even still, the failure to discuss specific settlement terms and their tax implications does not undermine the conclusion that the summonses were issued for the proper purpose of investigating Arc Tec's tax liability, nor does it raise an inference of bad faith.
Almeleh also contends that “[a]lthough no direct statement has been made, it is my subjective belief that based on interactions with Revenue Agent Jie Guo that I am being targeted, pressured and harassed for not signing . . . the settlement agreement.” (Doc. 101 ¶ 22.) This allegation fails to meet Almeleh's burden to allege wrongdoing with sufficient particularity. United States v. Church of Scientology of Calif., 520 F.2d 818, 824 (9th Cir. 1975) (“Conclusory allegations carefully tailored to the language of Powell . . . that the Service has issued summons for an improper purpose such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, are easily made” and can place “undue burdens on the Service and impede what is supposed to be a summary enforcement procedure”). Accordingly, Almeleh has not met her heavy burden of showing bad faith or an abuse of process.
V. Evidentiary Hearing
“If the taxpayer is able to make a sufficient showing of bad faith on the Government's part, the taxpayer is entitled to a limited evidentiary hearing.” Samuels, Kramer & Co., 712 F.2d at 1346-47. “To make a showing of bad faith sufficient to trigger a limited evidentiary hearing, a taxpayer must ‘do more than allege an improper purpose;' ‘some evidence' must be introduced to support the allegations made.” Id. at 1347 (quoting Church of Scientology, 520 F.2d at 824).
As discussed above, because Almeleh failed to produce “specific facts or circumstances plausibly raising an inference” of bad faith or an abuse of process, her request for an evidentiary hearing is denied. Clarke, 573 U.S. at 254-55.
VI. Costs
In her response to the IRS's motion, Almeleh requests costs. (Doc. 10 at 25.) Under 26 U.S.C. § 7430, “[i]n any administrative action or court proceeding which is brought by or against the United States in connection with the determination, collection or refund of any tax . . . the prevailing party may be awarded . . . reasonable litigation costs.” The prevailing party must have “substantially prevailed with respect to the most significant issue or set of issues presented.” Id. § 7430(c)(4). See also Fed.R.Civ.P. 54(d)(1).
The most significant issue in this proceeding is whether the summonses will be enforced. Given that they will be, and their scope largely remains intact, Almeleh is not the prevailing party and thus is not entitled to costs.
Accordingly, IT IS ORDERED that:
1. The IRS's motion to enforce (Doc. 7) is granted.
2. Almeleh's petition to quash (Doc. 1) is denied as moot.
3. The Clerk shall terminate this action.