Opinion
Civ. 01-4176
March 22, 2002
MEMORANDUM OPINION AND ORDER
Pending before the Court is Petitioners Thomas and Ruby Day's Petition to Quash IRS Summons. In response to the petition the United States of America has filed a Motion to Dismiss. Both parties have submitted briefs supporting their respective positions. The Court held a telephonic hearing regarding this matter on March 21, 2002. For the reasons stated below, the Government's Motion to Dismiss the Petition to Quash IRS Summons is granted.
On July 16, 2001 the IRS acting through Agent Theresa Alvarez issued a Summons directing the Citibank company, located at 701 East 60th Street North, P.O. Box 6034, Sioux Falls, South Dakota, 57117, to appear and produce financial records and documents related to the Petitioners. On the same day, Agent Alvarez sent by certified mail a copy of the summons to the Petitioners and their powers of attorney. Agent Alvarez also sent a copy of the summons by certified mail to the eight entities identified in the summons, namely Artic West, Artic International, Artic International Marketing Advance Refrigeration Technology, Ecology Resources, JTEC T R Enterprises Ltd., TRE International, and Wannabee Unlimited. Citibank complied with the summons and the information is being held by the IRS in a sealed envelop pending the outcome of this proceeding.
Agent Alvarez testified by telephone at the March 21, 2002 hearing in this matter. In accordance with the statements contained in her declaration. Agent Alvarez testified that she is investigating the individual income tax liabilities of the Petitioners for the tax years ending December 31, 1997 and December 31, 1998. Agent Alvarez states that the information sought by the summons is necessary to determine the tax liability of the Petitioners and is not already possessed by the IRS. Agent Alvarez claims that each of the eight above-mentioned entities is connected to the Petitioners and relevant to her investigation of the Petitioners' tax liability.
According to Agent Alvarez's declaration the following facts establish the link between the Petitioners and eight entities: Ruby Day has signature authority for T R Enterprises Ltd. bank account: in a loan application. Thomas and Ruby Day state that they are Vice-President and President respectively and that they are the owners of T R Enterprises Ltd.; Wannabee Unlimited is a beneficiary of T R Enterprises Ltd.; Wannabee Unlimited received distributions from T R Enterprise Ltd. and deducted expenses for Thomas and Ruby Day's personal residence. Artic West, Artic International, and Ecology Resources receive mail at the mailing address of T R Enterprises Ltd. Ruby Day has signature authority for an Ecology Resources bank account: Thomas Day has signature authority for an account of Arctic International Marketing Advance refrigeration Technology: JTEC is a trust which Thomas and Ruby Days's personal residence was transferred: JTEC'S mailing address is the same address as for TRE International Trust: a loan file show that checks from TRE International's checking account were used to make payments for Thomas and Ruby's Day's loan on their personal residence.
Agent Alvarez testified that she has not referred the Petitioners to the Department of Justice for criminal prosecution and that to the best of her knowledge and belief, there is no such criminal investigation is being conducted against the Petitioners. Agent Alvarez further testified that to her knowledge no criminal investigation in underway with respect to the conduct of System II Limited or any of its other clients. In her declaration to the Court Agent Alvarez state that all administrative steps required by the Internal Revenue Code for the issuance of an administrative summons have been taken and that the summons is not being employed to harass the Petitioners, but rather to examine any potential tax liability they may have for the years in question.
The Petitioners allege that IRS has demonstrated bad faith by using its administrative summons power to harass and intimidate men and women, including Petitioners, who have allegedly done business with a trust consulting firm that is the target of a wide-ranging IRS criminal investigation. According to the declaration of Thomas Day, Mr. Day purchased trust consulting service from System II Limited and was subsequently told by third parties that System II Limited had been "raided" by the IRS. In this "raid" the IRS obtained the customer lists for System II Limited. On December 13, 2002, the IRS sent a letter to the Petitioners explaining the its position that System II trust products fail to comply with income tax laws and informing the Petitioners that they should amend their income tax returns to reflect their proper income. The Petitioner's claim that the IRS is abusing its summons power to discourage use of business forms that it finds inconvenient or otherwise undesirable. On August 3, 2001, the Petitioners filed the instant motion to quash the IRS summons.
DISCUSSION
The IRS has authority, pursuant to 26 U.S.C. § 7602 to summons book and records and to take testimony for the purpose of ascertaining a taxpayer's correct tax liability. This Court is empowered to issue orders compelling with an IRS summons. See 26 U.S.C. § 7402 (b) and 7604 (a); see also United States v. Moon, 616 F.2d 1043, 1045 (8th Cir. 1980). In order to obtain enforcement of a summons, the IRS must show the following: "what the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed." United States v. Powell, 379 U.S. 48, 57 (1964). In the instant case, the IRS has carried its burden of establishing each of these four requirements.
First, Agent Alvarez testified that the purpose of the summons is to investigate the tax liability of the Petitioners for the tax years ending December 31, 1997 and December 31, 1998. This is clearly a legitimate purpose. Second, Agent Alvarez has shown that the inquiry is relevant to the investigation of the Petitioners' tax liability by establishing substantial connections between the investigation of the Petitioners' tax liability by establishing substantial connections between the Petitioners and the entities for which she seeks to obtain records. Third, the agent's declaration states that the information sought is not already possessed by the IRS, and finally. Agent Alvarez has complied with the administrative steps required by the Code by determining that further examination is necessary and sending notice to the taxpayers to that effect. Therefor, the requirements established by the Supreme Court inPowell have been satisfied. See Powell, 379 U.S. at 57.
Once the IRS has established its prima facie case, the burden shifts to the taxpayer to disprove of the prima facie elements or to demonstrate that enforcement of the summons would constitute an abuse of the court's process. See United States v. Claes, 747 F.2d 491, 494 (8th Cir. 1984). "That burden is a heavy one." Id. The taxpayer must show that either the IRS is acting in bad faith or that the IRS has abandoned any civil purpose of the investigation. See id. Here the Petitioners have alleged that the IRS is acting in bad faith. In support of their allegation, the Petitioners point to the IRS "raid" of System II Limited, the trust promoter from which the Petitioners purchased consulting services. The Petitioners contend that the IRS is harassing them as part of a larger scheme to investigate criminal conduct of System II Limited and its clients and further to discourage use of business forms that the IRS finds inconvenient or otherwise undesirable.
Petitioners claim that, at this stage in the stage in the proceeding, the Court must take their allegations as true and construe all factual disputes in their favor. As a matter of procedure under Federal Rule of Civil Procedure 12(b)(6) this is of course true. See Young v. City of St. Charles, Missouri, 244 F.3d 623, 627 (8th Cir. 2001). The Petitioners further point out that in its motion to dismiss the Government relied on the declaration of Agent Alvarez and thus relied on materials outside the pleadings transforming the Government's motion to dismiss into a motion for summary judgment. Again, as a matter procedural law, this is true.See Gibb v. Scott, 958 F.2d 814, 816 (8th Cir. 1992). From this, the Petitioners claim that the Court cannot consider several statements contained in Agent Alvarez's declaration because the statements were not based on personal knowledge but rather on information and belief and thus fail to comply with Rule 56(c).
Although Petitioners' argument may seem persuasive at first glance, to adopt Petitioners' approach would be to abandon the summary nature with which these proceedings are to be conducted. The Petitioners properly point out that the Federal Rules of Civil Procedure apply to proceedings regarding an IRS summons. See Fed.R.Civ.P. 81(a)(3) ("These rules apply to proceedings to comply the giving of testimony or production of documents in accordance with a subpoena issued by an officer or agency of the United States under any statute of the United States except as otherwise provided by statute or by rules of the district court or by order of the court in the proceedings.") Yet Rule 81(a)(3) allows the Court to limit application of the Federal Rules of Civil Procedure when to apply them literally would impair the summary nature of the proceeding. See United States v. Dick, 694 F.2d 1117, 1118 (8th Cir. 1982) (Rule 81(a)(3) gives district court discretionary authority to limit the applicability of the rules); see also J. Moore, Federal Practice, 81.06(1). As explained by the Advisory Committee on Rules 1946, the flexibility in the rule "allows full recognition of the fact that rigid application of the rules in the proceedings may conflict with the summary determination desired." Here, rigid adherence to the requirements of Rule 56(c) would conflict with the summary nature of this proceeding. As the Fourth Circuit held in Alphin v. United States, 809 F.2d 236, 239 (4th Cir. 1987), the declaration satisfies the concerns of Rule 56(c) than an affidavit be made on personal knowledge because it was made by the agent who is assigned to the case and who issued the summons being challenged. To require more, would turn this proceeding into a mini-tray thereby ignoring the summary nature of these proceedings. Furthermore, Agent Alvarez testified in this proceeding and was subject to cross-examination.
Therefore, taking the total of Agent Alvarez's testimony and declaration and the facts proffered by the Petitioners, the Court finds that this case is appropriate for summary disposition. Here "the burden that must be met by a taxpayer resisting enforcement is significantly more stringent than that of a party opposing a motion for summary judgment." United States v. Kis, 658 F.2d 526, 543 (7th Cir. 1981). cert denied, 455 U.S. 1018 (1982). Presumably in an effort to meet that burden, the Petitioners requested an evidentiary hearing so that they could establish their contention that the IRS is acting in bad faith and so that they could inquire as to whether their case has been referred to the Department of Justife for criminal prosecution. As stated above, the Court granted the Petitioners' request for an evidentiary hearing. Yet even with this opportunity, the Petitioners have failed to meet their burden.
With respect to Petitioners' allegation that IRS is acting in bad faith, the Petitioners have failed to substantiate their claim. The Court has seen no evidence that IRS is engaging in anything other than a legitimate investigation of the Petitioners' tax liability for the years in question. Although the Petitioners' have alleged that the IRS is attempting to discourage the use of certain business forms and harass clients of System II Limited, the Court has seen no evidence to support this contention. Here, like in Moon, there is no evidence to show the IRS's bad faith. See Moon, 616 F.2d at 1046.
The Petitioners' have also failed to establish that the sole purpose of the IRS investigation is to gather evidence for a criminal prosecution of either System II Limited entities or the Petitioners themselves. The Supreme Court has held that IRS may issue a summons even though the investigation may eventually result in a recommendation for criminal prosecution. See United States v. LaSalle National Bank, 437 U.S. 298, 309 (1978); Donaleson v. United States, 400 U.S. 517, 532-36 (1971). The IRS abuses its summons authority only when the sole purpose of the summons is to gather evidence for a criminal prosecution. See Claes, 747 F.2d at 495 (citations omitted). "The question whether a summons was issued solely for the purpose of criminal investigation does not depend on the motive of the investigating agent but must be answered by an examination of the institutional posture of the IRS at the time the summons was issued."Id. (quoting LaSalle, 437 U.S. at 316). Here it is clear that when the summons was issued, the IRS was investigating the tax liability of the Petitioners.
The Petitioners argue that the record before the Court doses not establish the institutional posture of the IRS. The institutional posture of the IRS at the time the summons was issued is a question of fact for this Court to determine. See Claes, 747 F.2d at 495. Here the Petitioners have no facts to contradict Agent Alvarez's statements that the case has been referred for criminal prosecution and that no criminal investigation is underway. There are simply to establish that the institutional posture of the IRS is criminal in nature. On much stronger facts, the Eighth Circuit has upheld a finding that the institutional posture of the IRS is not solely criminal in nature. In United States v. Claes, the Eighth Circuit held that referral of a case number to the Criminal Investigation Division of the IRS nor the intent of an agent to build a criminal case is determinative of the IRS institutional posture. See id. (citations omitted). In the instant case, there is no evidence of any referral to the IRS Criminal Investigation Division nor any statement by Agent Alvarez that she intends to build a criminal case. On the facts before the Court, the Court finds that the institutional posture of the IRS is not criminal in nature.
Although the Government has not sought enforcement of the IRS summons, the Court finds that the Government has established the four elements ofPowell test and that the Petitioners have failed to carry their burden of disproving one of the prima facie elements or to demonstrate that enforcement of the summons would constitute an abuse of the court's process. Therefor, the Court finds that is has the ability to enforce the summons at issue, but since Citibank has already voluntarily complied, the Court will grant the Government's motion to dismiss rather than order enforcement of the summons.
IT IS SO ORDERED.