Opinion
CASE NO. CV-F-02-5694 LJO
June 26, 2002
ORDER ON PETITION TO QUASH IRS SUMMONS, MOTION FOR SUMMARY ENFORCEMENT OF IRS SUMMONS AND MOTION FOR SANCTIONS (Docs. 1, 7, 8, 10.)
INTRODUCTION
Petitioner C J Trust ("C J Trust") seeks to quash a summons issued by the Internal Revenue Service ("IRS") to Clovis Community Bank ("bank") and seeks a $1,500 sanction against the IRS and its counsel pursuant to 28 U.S.C. § 1927. The IRS seeks summary enforcement of the summons to the bank and to deny C J Trust's petition to quash the IRS summons and motion for the $1,500 sanction.
Pursuant to 28 U.S.C. § 636(c) and F.R.Civ.P. 73, the parties consented to proceed before United States Magistrate Judge Lawrence J. O'Neill, and by a June 25, 2002 order, this action was assigned to United States Magistrate Judge Lawrence J. O'Neill for all further proceedings. After review of to parties' papers, this Court considered the matter on the record and without the June 28, 2002 hearing or oral argument, pursuant to this Court's Local Rule 78-230(h).
For the reasons discussed below, this Court:
1. DENIES C J Trust's petition to quash the summons;
2. GRANTS the IRS' motion for summary enforcement of its summons; and
3. DENIES C J Trust's motion for a 28 U.S.C. § 1927 sanction.
BACKGROUND
The IRS and its Revenue Agent Roslyn Brooks ("Agent Brooks") are investigating federal income tax liabilities of Clinton R. and Judith L. Kneeland (the "Kneelands") for tax years 1999 and 2000. On March 1, 2000, Agent Brooks issued an IRS summons ("summons") to the bank to seek banking documents for all accounts of the Kneelands or for which they had signature authority for December 1998 to January 2001. The summons references known account 3015955 and specifically seeks signature cards, bank statements, deposit slips, checks for March, June and October, disbursement and repayment records for loan and credit line accounts, and savings account documents. In her declaration, Revenue Agent Brooks claims that based upon her review of a 1998 IRS audit of the Kneelands, she learned the Kneelands has signature authority over account 3015955.Revenue Agent Brooks completed a proof of service to certify she sent a copy of the summons by certified mail to the Kneelands at their post office box. The bank has not produced the requested records which are not in IRS possession. Agent Brooks notes in her declaration that this matter has not been referred as a criminal proceeding under 26 U.S.C. § 7602 (d).
Unless otherwise indicated, all further statutory references will be to the Internal Revenue Code, 26 U.S.C. § 1, et seq.
On March 20, 2002, C J Trust filed its Petition to Quash Summons ("petition") and noted that on March 5, 2000, the Kneelands, who are not trustees of C J Trust, received notice of the summons, but that C J Trust trustees Catherine Carroll ("Ms. Carroll") and Scott A. Shoop ("Mr. Shoop") had not received notice. According to the petition, the summons was issued without legitimate purpose to harass the Kneelands. C J Trust claims Ms. Carroll and Mr. Shoop are the only owners of account 3015955.
DISCUSSION Standing To Quash An IRS Quash Summons
The IRS has broad investigatory powers under the Internal Revenue Code. See 26 U.S.C. § 7601-7613. Under section 7602(a)(1), the IRS is empowered to issue a summons to compel examination of "books, papers, records or other data which may be relevant or material" to an inquiry for purpose of "ascertaining the correctness of any return, making a return where none has been made" and "determining" and "collecting" tax liability. The relevance requirement under section 7602 is whether the requested material "might have thrown light upon the correctness of the return." United States v. Arthur Young Co., 465 U.S. 805, 813-815 n. 11, 104 S.Ct. 1495, 1501 n. 11 (1984);David H. Tedder Associates, Inc. v. United States, 77 F.3d 1166, 1169 (9th Cir. 1996).
Under section 7608(a) and (b), IRS agents are authorized to "serve subpoenas and summonses issued under authority of the United States." Section 7602 provides the IRS is not limited to issuing summonses to taxpayers under investigation and is authorized to summon "any person having possession, custody, or care of books of account" relating to the taxpayer or to summon "any other person the Secretary may deem proper" to produce such information relevant and material to inquiry. 26 U.S.C. § 7602 (a)(2). A summons may be directed to almost anyone. See, e.g., Chen Chi Want v. United States, 757 F.2d 1000, 1002 (9th Cir. 1985) (statute provides IRS with "broad powers to summon information relevant to determining the liability of any taxpayer.") The summons power must be construed broadly since it is "critical to the investigative and enforcement functions of the IRS." United States v. Arthur Young Co., 465 U.S. 805, 104 S.Ct. 1495, 1501 (1984).
A "special procedure" is provided under section 7609 for third-party summonses. Under section 7609(a)(1), a summons may be issued to a third party (not the taxpayer) and which requires the third party to give "testimony on or relating to, the production of any portion of records made or kept on or relating to, or the production of any computer software source code . . . with respect to, any person (other than the person summoned) who is identified in the summons . . ." Section 7609(a)(1) further provides that "notice of the summons shall be given to any person so identified." (Emphasis added). The statute further provides that "[s]uch notice shall be accompanied by a copy of the summons which has been served and shall contain an explanation of the rights under subsection (b)(2) to bring a proceeding to quash the summons." 26 U.S.C. § 7609 (a)(1). Under section 7609(b)(2)(A), the right to challenge a summons is given to "any person who is entitled to notice of a summons under subsection (a)" (Emphasis added.) When an IRS summons is issued to a third party record keeper, the taxpayer, as a person "entitled to notice of a summons" under section 7609(a) has twenty days from the date of notice to bring a proceeding to quash the summons. 26 U.S.C. § 7609 (b)(2)(A); Ponsford v. United States, 771 F.2d 1305, 1309 (9th Cir. 1985).
Section 7609's primary purpose is "to require that the target taxpayer be given notice, so that he would be able to assert appropriate defenses." United States v. Pittsburgh Trade Exchange, Inc., 644 F.2d 302, 305 (3rd Cir. 1981); United States v. First Bank, 737 F.2d 269, 271 (2nd Cir. 1984). The "plain meaning" of section 7609(a) requires that notice be given only to the person(s) "identified" in the summons. First Bank, 737 F.2d at 273.
"[I]f a person is not entitled to notice under § 7609(a), he or she has no standing to initiate an action to quash the summons." Ip v. United States, 205 F.3d 1168, 1170, n. 3 (9th Cir. 2000). Section 7609(b)(2) "merely grants standing to the person entitled to notice so that he or she may challenge the summons in district court." Ip, 205 F.3d at 1172.
The IRS contends that it satisfied section 7609(a)'s notice requirements by notifying the Kneelands as the persons identified in the summons and that C J Trust lacks standing to quash the subpoena because it is not entitled to notice. The IRS argues that even if C J Trust has signature authority over account 3015955, C J Trust was not entitled to notice because it was not identified in the summons. The IRS relies on First Bank, 737 F.2d at 273, where the IRS was not required to give notice to a bank account's co-owner who was not target of IRS investigation and who was not identified in summons.
C J Trust argues Ms. Carroll and Mr. Shoop as trustees own account 3015955 to entitle them to notice. C J Trust asserts the IRS and Agent Brooks failed to articulate an exception to third-party notice requirements and to comply with section 7609(a) notice requirements. C J Trust points to Ip, 205 F.3d 1168, which addressed whether an individual with no tax liability and never under IRS investigation was entitled to notice when summonses were issued for her personal bank account records to aid IRS investigation into a corporation and collection of its tax liability. The Ninth Circuit noted the IRS had not presented evidence that the corporate assessed taxpayer had an interest in the individual's personal bank account to fall under an exception to the third party notice requirement (former 26 U.S.C. § 7609 (c)(2)(B) (now 28 U.S.C. § 7609 (c)(2)(D)). Ip, 205 F.3d at 1176. Accordingly, the individual was entitled to section 7609(a) notice to confer section 7609(b)(2) standing to challenge the summonses. Ip, 205 F.3d at 1177.
As noted by the IRS, Ip is distinguishable in that the taxpayers (the Kneelands) have at least a signature interest in account 3015955 which is not an individual account. The summons clearly identifies the Kneelands who were entitled to and received section 7609(a) notice as the persons "So identified." Such notice fulfills section 7609's chief purpose to notify target taxpayers to allow them to raise defenses. The summons does not identify C J Trust to grant it standing under section 7609(b)(2) to challenge the summons. The clear focus of the summons is the Kneelands. The situation at hand is analogous to First Bank in that the Kneelands have signature authority or co-control over account 3015955. In Ip, the individual whose personal bank records were sought and her bank accounts were not associated with the corporate target. Failing to quash the summons here is consistent with broad application of section 7609 for the IRS' critical investigative and enforcement powers.
Enforcement of Summonses
In addition to opposing C J Trust's petition, the IRS seeks to enforce the summons. In a proceeding to quash an IRS summons, the IRS "may seek to compel compliance with the summons," 26 U.S.C. § 7609 (b)(2)(A). To enforce an IRS summons, the IRS must establish a prima facie case to demonstrate its "good faith" that the summons: (1) is issued for a legitimate purpose; (2) seeks information relevant for that purpose; (3) seeks information that is not already within IRS possession; and (4) satisfies all administrative steps required by the United States Code. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255 (1964); Fortney v. United States, 59 F.3d 117, 119 (9th Cir. 1995).
In Liberty Financial Services v. United States, 778 F.2d 1390, 1392 (9th Cir. 1985), the Ninth Circuit Court of Appeals explained the shifting burdens from the IRS to the taxpayer to address enforcement of IRS summonses:
To establish a need for judicial enforcement, this showing need only be minimal. This is necessarily true 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 Financial Management, Inc., 769 F.2d 1440, 1443 (10th Cir. 1985). Assertions by affidavit of the investigating agent that the requirements are satisfied are sufficient to make the prima facie case. United States v. Samuels, Kramer Co., 712 F.2d 1342, 1345 (9th Cir. 1983); United States v. Kis, 658 F.2d 526, 536-37 (7th Cir. 1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982). The burden then shifts to the taxpayer to show an abuse of process, e.g., that the summons was issued in bad faith and for an improper purpose. United States v. Powell, 379 U.S. at 58, 85 S.Ct. at 255. The burden is a heavy one. United States v. Balanced Financial Management, Inc., 769 F.2d at 1444. The taxpayer must allege specific facts and evidence to support his allegations. United States v. Samuels, Kramer Co., 712 F.2d at 1347-48.
The Ninth Circuit has further commented:
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. United States v. Dynavac Inc., 6 F.3d 1407, 1414 (9th Cir. 1993); United States v. Gilleran, 992 F.2d 232, 233 (9th Cir. 1993). 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." Dynavac, 6 F.3d at 1414.
Fortney, 59 F.3d at 119.
The IRS contends it has established a prima facie case to enforce the summons because the requested routine records serve the legitimate purpose to help determine the Kneelands' 1999 and 2000 tax liabilities. The IRS argues C J Trust fails to meet its heavy burden to establish abuse of process or lack of institutional good faith in that C J Trust makes only conclusory assertions without alleging supporting specific facts or evidence. C J Trust claims the summons was issued solely for harassment and without legitimate purpose.
This Court finds that Agent Brooks' declaration satisfies the Powell requirements to establish a prima facie case that she issued the summons in good faith. In her declaration, Agent Brooks explained that she issued the summons in the course of her legitimate investigation into Kneelands' 1999 and 2000 tax liabilities and that based on a 1998 audit of the Kneelands, she learned they have signature authority over account 3015955. She confirmed she served the Kneelands notice of the summons on March 1, 2002 by certified mail. In addition, she declared that all IRS administrative procedures for issuance of the summons were followed, the IRS lacks possession of the information and documents sought by the summons, and there has been no referral for a criminal proceeding. C J Trust offers no evidence to satisfy its heavy burden to show IRS abuse of process or the lack of institutional good faith
Sanctions
C J Trust seeks a $1,500 sanction under 28 U.S.C. § 1927 for what it characterizes as the IRS and its counsel's frivolous summonses and motions and knowing failure to follow administrative requirements. C J Trust points to a prior action entitled C J Trust v. United States, Case No. CV F 00-5696 REC DLB, where the IRS withdrew its summons for what C J Trust claims was failure to follow administrative requirements.
28 U.S.C. § 1927 addresses liability for excessive costs and provides in relevant part:
Any attorney or other person admitted to conduct cases in any court of the United States . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.
The statute is strictly construed "so that the legitimate zeal of an attorney in representing her client is not dampened." F.D.I.C. v. Conner, 20 F.3d 1376, 1384 (5th Cir. 1994) (quoting Browning v. Kramer, 931 F.2d 340, 344 (5th Cir. 1991)). A 28 U.S.C. § 1927 sanction is appropriate when the multiplication of proceedings is both "unreasonable" and "vexatious." Conner, 20 F.3d at 1384 (5th Cir. 1994). A 28 U.S.C. § 1927 sanction is "penal." Conner, 20 F.3d at 1384; Browning v. Kramer, 931 F.2d 340, 344 (5th Cir. 1991).
A 28 U.S.C. § 1927 sanction "must be supported by a finding of subjective bad faith." New Alaska Development Corp. v. Guetschow, 869 F.2d 1298, 1306 (9th Cir. 1989); see Estate of Blas ex rel. Chargualaf v. Winkler, 792 F.2d 858, 860 (9th Cir. 1986); Barnd v. City of Tacoma, 664 F.2d 1339, 1343 (9th Cir. 1982). "Bad faith is present when an attorney knowingly or recklessly raises a frivolous argument or argues a meritorious claim for the purpose of harassing an opponent." Estate of Blas, 792 F.2d at 860.
C J Trust provides insufficient detail regarding its prior action to quash an IRS summons to demonstrate the IRS or its counsel unreasonably and vexatiously multiplied proceedings based on bad faith. As discussed above, the IRS does not pursue frivolous arguments here and there is no showing of IRS harassment or "subjective" bad faith. A 28 U.S.C. § 1927 sanction is unwarranted.
Moreover, as noted by the IRS, if C J Trust is a prevailing party, under section 7430, C J Trust may seek an award of legal expenses unless the IRS establishes its position "is substantially justified." 26 U.S.C. § 7430 (a) and (c)(4)(B)(i).
CONCLUSION AND ORDER
For the reasons discussed above, this Court:
1. DENIES C J Trust's petition to quash the summons;
2. GRANTS the IRS' motion for summary enforcement of its summons;
3. DENIES C J Trust's motion for a 28 U.S.C. § 1927 sanction; and
4. DIRECTS this Court's clerk to close this action.