Opinion
Case No: 02-X-74762.
March 18, 2004
PRESENT: Honorable Gerald E. Rosen United States District Judge
ORDER AFFIRMING MAGISTRATE JUDGE'S JANUARY 23, 2003 OPINION AND ORDER At a session of said Court, held in The U.S. Courthouse, Detroit, Michigan on
This matter is presently before the Court on the Objections (Appeals) of Defendant United States of America and Plaintiff Calamari to the January 23, 2003 Opinion and Order issued by United States Magistrate Judge R. Steven Whalen granting, in part, and denying, in part, Plaintiff's Motion to Quash the summons issued by the IRS requesting production of Plaintiff's tax returns and other financial records in the possession of Plaintiff's accountant, Eric Freedman. The Magistrate Judge found that the summons issued by the IRS had a legitimate investigatory purpose with regard to Plaintiff's gift tax liabilities for the years 1993, 1995, 1996, 1997 and 1998, and for Plaintiff's 1995 income tax liability. The Magistrate Judge further found that the request for copies of Plaintiff's 1993, 1995, 1996, 1997 and 1998 state tax returns were relevant to the IRS's investigation of Plaintiff's gift tax liability. However, the Magistrate Judge found the request for Plaintiff's accountant's billing records/invoices for the years of 1993 through 1999 were irrelevant to the investigation. Accordingly, the Magistrate Judge denied the motion to quash, in part, and granted the motion, in part.
A. STANDARD OF REVIEW
Defendant's Motion to Quash Summons is a non-dispositive motion and as such, the Magistrate Judge's ruling on it is subject to reversal by the Court only "where it has been shown that the magistrate judge's order is clearly erroneous or contrary to law". 29 U.S.C. § 636(b)(1)(A). See also, Fed.R.Civ.P. 72(a) ("The district judge to whom the case is assigned shall consider [a party's] objections [to a magistrate judge's] order [on a nondispositive matter] and shall modify or set aside any portion of the magistrate judge's order found to be clearly erroneous or contrary to law.")
"A choice between two permissibly views of the weight of the evidence isn't clearly erroneous." Locklin v. Day-Glo Color Corp., 429 F.2d 873, 880 (6th Cir. 1970). To make a clearly erroneous finding, the reviewing court, on the entire evidence, must be left with a "definite and firm conviction that a mistake has been made." United States v. Yellow Cab Co., 338 U.S. 338, 342, 70 S.Ct. 177 (1949).
B. THE MAGISTRATE JUDGE'S RULING IS NOT CLEARLY ERRONEOUS OR CONTRARY TO LAW
The Court must first look to 26 U.S.C. § 7602 to determine whether the issuance of the summons was proper. Section 7602 identifies the following four investigatory purposes which would support the issuance of an administrative summons: (1) ascertaining the correctness of any return; (2) making a return when none was made; (3) determining any person's liability for any internal revenue tax; and (4) collecting such liability. Not only does the summons have to have one of the above four purposes, but also the information requested must be relevant to the purpose of the investigation.
28 U.S.C. § 7602(a) states the following:
For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized —
(1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;
(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and
(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.
In the present case, the IRS summons meets two of the above enumerated investigatory purposes. The government has provided the sworn declaration of Agent Zak in which he states the following: "In my capacity as a revenue agent, I am conducting an examination to determine the correct amount of the federal gift tax liabilities of Herman Calamari for the tax years 1993, 1995, 1996, 1997 and 1998, and the federal income tax liabilities of Herman Calamari for the tax year 1995." [Defendant's Ex. A (emphasis added)] Accordingly, the purpose of the summons falls under § 7602(1) and § 7602(3).
In United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), the Supreme Court held that the government did not have to meet a standard of probable cause to obtain enforcement of a summons. Instead, the Court held that in order to obtain enforcement of a summons, the IRS must demonstrate only: (1) a showing that there is a legitimate purpose for conducting the investigation, (2) that the inquiry is relevant to the purpose of the investigation, (3) that the requested documents are not already in the possession of the IRS, and (4) that the steps required by the Internal Revenue Code were followed.
The IRS has met its burden in establishing a prima facie case for enforcement of the summons at issue here. First, as indicated, the IRS had a legitimate purpose for its investigation: to determine Calamari's income tax liability and the correctness of his gift tax liabilities. The second prong of the Powell test requires that the inquiry must be relevant to the purpose of the investigation. Agent Zak's sworn declaration provides the following: "It is relevant and necessary to the purpose of my examination to examine the records sought by the summons in order to properly determine the federal income tax liabilities for Herman Calamari for the 1995 tax year and federal gift tax liabilities of Herman Calamari for the 1993, 1995, 1996, 1997, and 1998 years". [Defendant's Ex. A]. After conducting a hearing, the Magistrate Judge found that the government complied with the required administrative steps listed in the Code, and further, found that there was no showing that the IRS had possession of the requested documents. These findings satisfy the third and fourth prongs of the test. Therefore, the IRS met the Powell standard for establishing a prima facie case for enforcement of its summons.
In United States v. Will, 671 F.2d 963, 966 (6th Cir. 1982), the Sixth Circuit held that after the government makes its showing of a prima facie case, the burden shifts to the taxpayer to show that the enforcement of the summons would be an abuse of the court's process. To show an abuse of the court's process, the taxpayer must show that the purpose of the investigation was either improper or in bad faith. Will 671 F.2d at 966.
Plaintiff Calamari argues that the investigation of the IRS was improper not only based on his lack of legitimate purpose argument — which, as shown above has no merit — but also argues that the IRS is barred from conducting an investigation with regard to his 1995 income tax liability due to the statute of limitations. Plaintiff further argues no evidence of fraud was presented by the IRS so as to negate the statute of limitations.
Generally, an IRS investigation must be commenced within 3 years from the date of filing. However, 26 U.S.C. § 6501(c) authorizes the investigation of fraudulent returns without regard to the statute of limitations. In any event, the Court in Powell held that a petitioner cannot show abuse of process "by a mere showing that the statute of limitations for ordinary deficiencies has run." Powell 379 U.S. at 58. The Court further found that it was inappropriate to use a stringent interpretation of § 7602 because "it might seriously hamper the Commissioner in carrying out investigations he thinks warranted * * *, and because the legislative history of § 7605(b) indicates that no severe restriction was intended." Powell 379 U.S. at 58. In light of the foregoing authorities, the Court agrees with the Magistrate Judge's finding that the IRS investigation was not barred by the statute of limitations.
The Magistrate Judge also found that the plaintiff failed to show bad faith on part of the government. The Plaintiff contends that the IRS acted in bad faith when it expanded the scope of its investigation after the Plaintiff obtained counsel and challenged the summons. However, the record reflects that there was a good faith basis for expanding the investigation. Furthermore, the decision to expand the investigation was reviewed and approved at two separate levels within the IRS beyond Agent Zak. The Opinion and Order indicates that there were no further facts presented to substantiate Plaintiff's claim of bad faith or abuse of power. Therefore, the Court finds no merit in Plaintiff's "bad faith" argument.
The Magistrate Judge found that the request for copies of Plaintiff's 1993 through 1998 state tax returns and any and all records pertaining to the 1995, federal, state, and local taxes were relevant to the IRS's investigation as to the gift tax. Determining whether the information requested is relevant to the purpose of the investigation is a more difficult question. The generally accepted standard for relevancy is whether the requested information "might throw light on the correctness of the taxpayer's return." United States v. Young, 465 U.S. 805, 814, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984). The court in Young held that the language "may be" in § 7602 "reflects Congress' intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation, without reference to admissibility." Young at 814. Although the government's burden to show relevancy is slight, the IRS is required to demonstrate that there is a realistic expectation and not just idle hope that something might be discovered. La Murra v. United States, 765 F.2d 974, 981 (11th Cir. 1985).
There is a realistic expectation that the IRS might discover something from the state tax returns. As the Magistrate Judge notes in his Opinion and Order and as Plaintiff acknowledges, the state income tax is based on the adjusted gross income reported in the federal return. This would not only be potentially relevant but it also meets the standard accepted by most courts that the requested documents "might throw light on the correctness of the taxpayer's return". Accordingly, like the Magistrate Judge, the Court finds that the request of copies of Plaintiff's 1993 through 1998 state tax returns was relevant to the IRS's investigation as to Plaintiff's tax liability.
The Magistrate Judge, however, found that the accountant's billing records for the years 1993 through 1999 were not relevant to the investigation. The accountant's billing invoices were not used in preparation of the tax returns. Furthermore, the Magistrate Judge has granted the summons with respect to information that the accountant relied on in preparing Plaintiff's tax returns. If the billing invoices were used in preparation of the tax returns, then they would be covered under the above provision. Moreover, the government's stated purpose for obtaining the billing records, i.e., that they may shed light on whether services were provided for any estate or gift tax services, is without merit. The Plaintiff does not deny the fact that no gift tax returns were ever filed. For these reasons, the Court agrees with the Magistrate Judge's determination that the request of the billing invoices is not relevant to the purpose of the investigation.
In sum, having reviewed and considered Plaintiff's and Defendant's Objections and supporting documents and the entire record of this matter, the Court finds that the Magistrate Judge's rulings were not clearly erroneous or contrary to law. See 29 U.S.C. § 636(b)(1)(A).
Therefore,
IT IS HEREBY ORDERED that the Magistrate Judge's January 23, 2003 Opinion and Order granting the motion to quash in part and denying the motion in part be, and hereby is, AFFIRMED.