Opinion
Civil No. 3:99MC4-V
August 9, 2000
MEMORANDUM AND RECOMMENDATION AND ORDER
THIS MATTER is before the Court on "Petitioner's "Objection to Magistrate's Recommendation" filed April 28, 1999 (document #17), objecting to the "Supplemental Order" of the undersigned filed April 19, 1999 (document #16)
I. FACTUAL AND PROCEDURAL BACKGROUND
Petitioner Patrick G. Davis has not filed income tax returns since 1989, and the Internal Revenue Service (IRS) is attempting to determine his tax liability for the years 1993 through 1997. In furtherance of that investigation, seventeen administrative summonses were issued by Tom Novota, Special Agent, Criminal Investigation Division, Internal Revenue Service ("Declaration of Tom Novota," [document #8]), seeking information to determine the amount of Davis' gross, adjusted and taxable income. In response, Davis has moved to quash these summonses.
Fourteen of the summonses — including the State Farm Insurance subpoena in this case, were the subject of a petition to quash in case number 3:99MC1-MU in which Chief District Judge Graham C. Mullen granted the Government's motion to dismiss and/or for summary enforcement.
The instant action was initiated on January 15, 1999, when Patrick G. Davis filed a "Petition To Quash Summons" (document #1), naming State Farm Insurance, Austin Homes, American Express and Davidson United Methodist Church as Respondents. On January 22, 1999 the Petitioner filed a "Motion To Quash-Attest" (document #2) alleging the contested summonses should be quashed because they were not "attested." On February 11, 1999 the Petitioner filed a "Request for Admissions" (document #4) and "Request for Production of Documents" (document #5)
Petitioner argues that the summonses should be quashed because he has been classified by IRS as a "Tax Protester" and that the summons are for the impermissible purpose of gathering evidence solely for a criminal investigation. He further alleges that the summonses were not issued in good faith, not conducted pursuant to a legitimate purpose, and generally not in accordance with the statutes and law authorizing the issuance of summonses. However, he provides no support for these bare allegations of abuse.
On March 1, 1999, the Government filed its "Motion for Summary Enforcement" (document #6) and "Motion To Dismiss in Part" (document #9), along with the "Declaration of Tom Novota" (document #8) and its "Memorandum in Support. . . ." (document #7)
The "Motion To Dismiss in Part" (document #9) sought to dismiss the Petition to Quash the summonses issued to State Farm Insurance and Davidson United Methodist Church, stating (1) neither State Farm Insurance nor Davidson United Methodist Church is a third-party recordkeeper as defined in 26 U.S.C. § 7603 (b) and the district court accordingly lacks subject matter jurisdiction; and, (2) in any event, the United States is not seeking to enforce either of these summonses (or the summons to Austin Homes) and there is therefore no enforcement to quash.
"Memorandum in Support of United States' Motion to Dismiss in Part" (document #10), fn. 2. Although the Motion to Dismiss does not address the Austin Homes subpoena other than to state it will not be enforced, the undersigned will likewise recommend that the petition to quash this subpoena be dismissed as Austin Homes is not a "third-party recordkeeper" and there is accordingly no subject-matter jurisdiction.
The undersigned previously granted the relief sought by the United States in its "Motion to Dismiss in Part" (document #9) and "Motion for Summary Enforcement" (document #6), by Order filed March 12, 1999. By "Supplemental Order" filed April 19, 1999 (document #16) these Orders were converted to recommended dispositions, so that the Petitioner's arguments could be heard and considered de novo by the District Court. It is from that recommendation the Petitioner appeals.
II. LEGAL DISCUSSION
Title 26, U.S. Code § 7602 provides, in pertinent part, that:
(a) For the purpose of . . . making a return where none has been made, the Secretary [or his Delegate] 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 any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax . . ., 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 testimony, under oath, as may be relevant or material to such inquiry. . . ."
Pursuant to section (d)(1), however, no summons may be issued if a Justice Department referral is in effect with respect to such person. A "Justice Department referral" is in effect if a grand jury investigation of, or the criminal prosecution of, such person has been recommended, or if any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information.
Whenever administrative summonses are issued pursuant to 26 U.S. Code § 7602, the taxpayer for whom testimony or records is sought is given notice of the summons and has the right to begin proceedings to quash such summons. 26 U.S.C. § 7609 (b)(2)
However, pursuant to § 7609(c)(2)(E)(i) and (ii), this does not apply to any summons issued by a criminal investigator of the Internal Revenue Service in connection with the investigation of an offense connected with the administration or enforcement of the internal revenue laws and served on any person who is not a third-party recordkeeper.
Title 26 U.S.C. § 7603 (b) lists ten categories of "third-party recordkeepers." They are: (1) banks, (2) consumer reporting agencies, (3) persons extending credit through the use of credit cards, (4) brokers, (5) attorneys, (6) accountants, (7) barter exchanges, (8) regulated investment companies, (9) enrolled agents, or (10) owners or developers of computer software source code.
Neither State Farm Insurance, Davidson United Methodist Church nor Austin Homes is a "third-party recordkeeper" and these summonses fit squarely into the provisions of 26 U.S.C. § 7609 (c)(2)(E)(i) and (ii) . The Court therefore lacks subject matter jurisdiction and the undersigned will recommend that the United States' "Motion To Dismiss in Part" (document #9) be granted.
The one remaining summons petitioner seeks to quash, to American Express, is directed to a "third-party recordkeeper" as defined in 26 U.S.C. § 7603 (b), and the Court has jurisdiction to consider Petitioner Davis' challenge to enforcement of this summons. His petition must fail as to this summons, as well, however.
The Supreme Court has repeatedly held that "the § 7602 summons is critical to the investigative and enforcement functions of the IRS."E.g., United States v. Arthur Young Co., 465 U.S. 805, 818 (1984);accord United States v. Bisceglia, 420 U.S. 141, 145-46 (1975)
The mere claim that a taxpayer "is being investigated because [he] is a tax protestor does not prove bad faith." United States v. Feminist Federal Credit Union, 635 F.2d 529, 530 (6th Cir. 1980); see also United States v. Pillsbury Credit Union, 661 F.2d 1195, 1196 (8th Cir. 1981) ("the fact that an investigation was conducted by [CID] special agents without the assistance of revenue agents does not by itself show the absence of a civil purpose")
In United States v. Powell, 379 U.S. 48, 57-58 (1964), the Supreme Court set out the good faith elements IRS must meet when seeking judicial enforcement of a summons, stating, it
must [first] show [1] that the [underlying] investigation will be conducted pursuant to a legitimate purpose, [2] that the inquiry may be relevant to the purpose, [3] that the information sought it not already within the Commissioner's possession, and [4] that the administrative steps required by the Code have been followed — in particular, that the "Secretary [of the Treasury] or his delegate," after investigation, has determined the . . . examination [of records] to be necessary and has notified the taxpayer in writing to that effect.
In order to establish a prima facie case for the enforcement of a civil summons issued pursuant to § 7602(a), the IRS need only present "an affidavit of an agent involved in the investigation averring the Powell good faith elements," and, at this stage, the government's burden is fairly slight. Alphin v. United States, 809 F.2d 236, 238 (4th Cir. 1987); see also Hintze v. Internal Revenue Service, 879 F.2d 121, 126 (4th Cir. 1989) . Summons enforcement proceedings must be kept summary in nature with the limited purpose of determining "that the IRS has issued the summons for a proper purpose and in good faith." United States v. Barrett, 837 F.2d 1341 (5th Cir. 1988)
The "Declaration of Tom Novota," (document #8), satisfies the Powell "good faith" elements. The United States has therefore established its prima facie case for summons enforcement and the burden shifts to petitioner to disprove the existence of a valid purpose or to show that enforcement of the summons would otherwise be an abuse of the Court's process. Powell, 379 U.S. at 58; Hintze, 809 F.2d at 238. Where a taxpayer "cannot refute the government's prima facie Powell showing or cannot factually support a proper affirmative defense, the district court should dispose of the proceeding on the papers before it and without an evidentiary hearing." Garden State National Bank v. United States, 607 F.2d 61, 71 (3rd Cir. 1979)
At a minimum, "the party challenging the summons must allege specific facts in its responsive pleadings, supported by affidavits, from which the Court can infer some wrongful conduct by the IRS." Alphin 809 F.2d at 238. "Mere allegations of bad faith will not suffice." United States v. Kis, 658 F.2d 526, 539 (7th Cir. 1981). Rather, "the affidavit must particularize those specific facts from which an inference may be drawn that the conduct of the Service was improper." Hintze, 879 F.2d at 127.
Petitioner has failed to present any evidence in the form of an affidavit or otherwise that would demonstrate bad faith on the part of the Service and has therefore failed to meet his heavy burden. The summons issued to American Express should be enforced.
As noted above, Petitioner filed a "Motion To Quash-Attest" (document #2)
Title 26, U.S. Code § 7603 requires that an "attested copy" of the summons be served on the person to whom it is directed. The "Declaration of Tom Novota," (¶ 6) states that he served an attested copy of the summonses to the person to whom it was directed, i.e., State Farm Insurance, Austin Homes, Davidson United Methodist Church and American Express. This is precisely what the statute requires: it does not require that an attested copy of the summons be served on the person to whom notice is required pursuant to § 7609(a)(1) (in this instance, Petitioner Davis). See Kondik v. United States, 81 F.3d 655 (6th Cir. 1996); and Covington v. United States, 853 F. Supp. 888 (W.D.N.C.),aff'd 27 F.3d 562 (1994).
Petitioner cites a 1991 district court case from Nebraska, Mimmick v. United States, in support of his argument on this point. However, the district in Mimmick court denied enforcement of the summons because attested copies were not served on the third-party recipients, as the statute clearly requires; Mimmick lends no support whatsoever for Petitioner's argument that the summons served on him had to be attested. In any event, the district court's decision in Mimmick was reversed, the Eighth Circuit holding the defect to be insubstantial and "the summons . . . enforceable notwithstanding the lack of separate attestations."Mimmick v. United States, 952 F.2d 230, 232 (8th Cir. 1991).
Petitioner's "Motion To Quash-Attest" is meritless, and the undersigned will likewise recommend that it be denied.
Finally, as also noted above, Petitioner filed two discovery motions: "Request for Admissions" (document #4) and "Request for Production of Documents" (document #5). Discovery should not be allowed at this stage unless the taxpayer makes a preliminary demonstration of abuse, Hintz v. Internal Revenue Service, 789 F.2d 121, 127 (4th Cir. 1989), quoting Alphin v. United States, 809 F.2d 236, 238 (4th Cir. 1987) . Petitioner has made no such showing, and discovery is inappropriate.
Having considered the motions and various other pleadings and supporting documents, and the applicable law, the undersigned will recommend that the petition to quash summons be denied and dismissed with prejudice; that the United States' "Motion to Dismiss in Part" and "United States' Motion for Summary Enforcement" be granted, and that American Express be directed to comply with the IRS summons to the extent they have not already fully responded.
III. RECOMMENDATION
NOW THEREFORE, FOR THE FOREGOING REASONS, the undersigned recommends that:
1. The Petition to Quash (document #1) be DENIED AND DISMISSED WITH PREJUDICE; and that Petitioner's "Objection to Magistrate's Recommendation (document #17) be found to be without merit;
2. Petitioner's "Motion To Quash-Attest" (document #2) be DENIED;
3. The Government's "Motion To Dismiss in Part" (document #9) be GRANTED; and
4. The Government's "Motion for Summary Enforcement" (document #6) be GRANTED.
IV. ORDER
1. All discovery is STAYED pending Judge Voorhees' decision herein. (To wit, Petitioner's "Request for Admissions" (document #4) and "Request for Production of Documents" (document #5) filed February 11, 1999.)
V. NOTICE OF APPEAL RIGHTS
The parties are hereby advised, pursuant to 28 U.S.C. § 636 (b)(1) (c), that written objections to the proposed findings of fact and conclusions of law and the recommendation contained in this Memorandum and Recommendation and Order must be filed with the district court within ten (10) days after receipt of same. Snyder v. Ridenour, 889 F.2d 1363, 1365 (4th Cir. 1989); United States v. Rice, 741 F. Supp. 101, 102 (W.D.N.C. 1990). Failure to file objections to this Memorandum and Recommendation and Order with the district court constitutes a waiver of the right to de novo review by the district court, Snyder, 889 F.2d at 1365, and may preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140 (1985); Wright v. Collins, 766 F.2d 841, 845-46 (4th Cir. 1985); United States v. Schronce, 727 F.2d 91, 93-94 (4th Cir.), cert. denied, 467 U.S. 1208 (1984).
The Clerk is directed to send copies of this Memorandum and Recommendation and Order to each of the parties herein; and to the Honorable Richard L. Voorhees.
SO ORDERED AND RECOMMENDED this _____ day of August, 2000.