Opinion
CIVIL NO. 1:00cv446 and CIVIL NO. 1:00cv447
July 18, 2001
ORDER
This matter is before the court on the respondents' objections to Magistrate Judge Cosbey's Report and Recommendation, filed on April 26, 2001. The government responded to the objections on July 2, 2001.
For the following reasons, the court will adopt Magistrate Judge Cosbey's recommendation that the IRS summonses at issue be enforced.
Discussion
On November 30, 2000, the United States filed Petitions against Norma N. Crum and Ellis J. Crum, to enforce IRS summonses. On January 17, 2001, in accordance with 28 U.S.C. § 636 (b)(1)(B) of the Federal Magistrate's Act and N.D. Ind. L.R. 72.1(a), the undersigned entered an order referring the petitions to Magistrate Judge Cosbey for a Report and Recommendation.
On April 17, 2001, Magistrate Judge Cosbey entered his Report and Recommendation, which recommended that the summonses issued on June 9, 1999 be enforced as to all paragraphs except 6, 7, and 8.
A brief summary of the factual background is as follows. The Crums are husband and wife and reside in Kendallville, Indiana. In March 1994, the Crums established three separate trusts which they co-manage. These trusts are the MURC Family Trust ("MURC Trust"), the N E Management Trust ("N E Trust"), and the Sacred Music Trust ("Music Trust"). The MURC Trust is comprised of the Crums' personal residence, the N E Trust holds and maintains rental properties and the Music Trust derives income by printing and selling hymnals and gospel music.
The Crums have copies of all three trust instruments, listing the property placed in each trust. The Crums also have the trusts' taxpayer identification numbers, but do not have any trust tax returns. When money is paid out of the trusts, it is usually via checks, and the Crums have the trust bank statements and check registers. Additionally, the Crums maintain receipts for money paid into the trusts.
John Dietrich ("Dietrich"), an Internal Revenue Service ("IRS") Revenue Officer, is currently investigating possible administrative or judicial collection against the trusts to collect the Crums' personal income tax liabilities. Pursuant to 26 U.S.C. § 7602 , Dietrich served summonses upon the Crums, requiring that they give testimony and produce for examination certain books, records and other trust data. In response to the summonses, the Crums contend that no prima facie case for enforcement has been established, that they do not have some of the documents sought, and that the Fourth Amendment and Fifth Amendments protect them from having to produce the documents they do possess.
26 U.S.C. § 7602 (a) provides in relevant part:
For the purpose of . . . determining the liability of any person for any internal revenue tax . . . or collecting on 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.
To obtain enforcement of an administrative summons, the United States has the burden to come forward with a prima facie case showing that (1) the investigation is being conducted for a legitimate purpose; (2) the information sought is relevant to the investigation; (3) the information is not already in the government's possession; and (4) the administrative steps required by the Internal Revenue Code have been followed. United States v. Insurance Consultants of Knox, Inc., 187 F.3d 755, 759 (7th Cir. 1999). These requirements impose only a "minimal burden" that can be satisfied by a showing in an affidavit. Id. at 759.
In their arguments before Magistrate Judge Cosbey, the Crums attempted to rebut the United States' prima facie case by asserting that the information sought by the IRS is not relevant. Magistrate Judge Cosbey held that the Crums' irrelevancy argument failed because the information sought by the summonses is likely to "throw some light upon" the United States' legitimate efforts to investigate the Crums' tax liabilities and determine if the Crums' outstanding tax liabilities can be satisfied from trust assets or income. (Report and Recommendation at 9).
In their objections to the Report and Recommendation, the Crums argue that the United States failed to make its prima facie case by failing to prove the averment in Paragraph 12 of its Petitions. Paragraph 12 of the Petitions state: "The testimony and other data demanded by the summons relates to the liabilities under investigation, and might shed light on the correctness of the taxpayers' federal income tax return and [their] correct tax liabilities." The Crums argue that there is no evidence in the record to sustain the United States' averment in Paragraph 12 that the post-1993 trust records sought by the IRS in this case might shed light on the correctness of their federal income tax return and their correct tax liabilities. The Crums base their argument on the alleged fact that Dietrich only testified that the post-1993 trust records were relevant to the collection of the Crums' tax liabilities. The Crums claim that Dietrich did not testify about the relevancy of the trust records to the determination or correctness of the Crums' tax liabilities for prior taxable years, and that his declaration only addresses how the records relate to "administrative or judicial collection" and not to the determination of the Crums' tax liability.
Paragraph 12 of the two petitions at issue are identical, except that one refers to Norma Crum, while the other refers to Ellis Crum.
The Crums apparently agree that the evidence supports the averment that the requested evidence relates to the liabilities under investigation.
Dietrich's Declaration with respect to Norma Crum states, in pertinent part:
2. In my capacity as a Revenue Officer, I am conducting an investigation into possible administrative or judicial collection action against the MURC Family Trust, N E Management, a Trust, and Sacred Music, a Trust, to collect the income tax liability of Norma N. Crum for the year 1993.
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8. It is necessary to obtain the testimony and to examine the books, papers, records or other data sought by the summons in order to determine if administrative or judicial collection action should be pursued against the MURC Family Trust, N E Management, a Trust, and Sacred Music, a Trust, in order to collect the Federal tax liability of Norma N. Crum for the year 1993.
Likewise, the Dietrich Declaration with respect to Ellis Crum states, in pertinent part:
2. In my capacity as a Revenue Officer, I am conducting an investigation into possible administrative or judicial collection action against the MURC Family Trust, N E Management, a Trust, and Sacred Music, a Trust, to collect the income tax liabilities of Ellis J. Crum for the years 1991, 1992 and 1993.
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8. It is necessary to obtain the testimony and to examine the books, papers, records or other data sought by the summons in order to determine if administrative or judicial collection action should be pursued against the MURC Family Trust, N E Management, a Trust, and Sacred Music, a Trust, in order to collect the Federal tax liabilities of Ellis J. Crum for the years 1991, 1992 and 1993.
The Crums take issue with the Report and Recommendation because Magistrate Cosbey addresses only the relevancy of the records to thecollection of tax liability, and not to the determination of the Crums' tax liability. The Crums object to the fact that "[t]he Magistrate Judge makes no mention, and refers to no evidence, that these post-1993 trust records are relevant in determining the Crums' tax liability for prior tax years, which is the sole focus of Paragraph 12 of the United States' petitions." (Objections at 2-3).
Clearly, the Crums misunderstand the focus and objective of the United States' petitions. As Magistrate Judge Cosbey fully noted, the IRS is seeking to determine whether the income and/or assets of the trusts at issue can be used to pay off the Crums' tax liabilities. The language in Paragraph 12 of the petitions referring to the correctness of the Crums' tax liability is mere surplusage. The Crums are attempting to impose mathematical precision on the United States' petitions by objecting to the inclusion of this language. Such precision is not required by the law and, notably, the Crums have failed to direct the court to any law supporting their position on this issue. The Dietrich Declaration clearly supports the averment in Paragraph 12 of the Petitions that the information requested relates to the liabilities under investigation. Therefore, the undersigned agrees with Magistrate Judge Cosbey that the United States has shown that the information sought is relevant and has met its prima facie case of enforcement.
The Crums also argue that the Fifth Amendment applies to the production of the trust records created and maintained personally by the Crums. The Crums contend that the Fifth Amendment is implicated because the production of trust records that were created personally by the Crums will cause them to become primary informants against themselves in a subsequent criminal trial. Magistrate Judge Cosbey noted that the summonses ask for documents that the Crums possess as co-managers of the trust and that one would normally expect a trustee to hold such documents. (Report and Recommendation at 12). Magistrate Judge Cosbey noted that "an individual cannot rely on a personal privilege against self-incrimination to avoid producing the records of a collective entity which are in his possession in a representative capacity, even if those records might incriminate him personally." United States v. Maxey Co., P.C., 956 F. Supp. 823, 827 (N.D. Ind. 1997). Magistrate Judge Cosbey then held that since the summonses seek trust documents held by the Crums in a representative capacity, the Crums cannot assert a personal privilege under the Fifth Amendment. Insurance Consultants of Knox, Inc., 187 F.3d at 759 (7th Cir. 1999) (custodian of corporate records could not assert Fifth Amendment).
In their objections, the Crums take issue with Magistrate Judge Cosbey's determination that the trusts are collective entities. The United States Supreme Court has described a collective entity as:
an independent entity apart from its individual members. The group must be relatively well organized and structured and not merely a loose, informal association of individuals. It must maintain a distinct set of organizational records, and recognize the rights of beneficiaries to access trust records.Bellis v. United States, 417 U.S. 85, 93 (1974). As Magistrate Judge Cosbey noted, a valid trust under Indiana law meets this description because it is necessarily structured (Ind. Code § 30-4-1-1), is evidenced by organizational records (Ind. Code § 30-4-5-12), and recognizes the rights of beneficiaries to access trust records.
The Crums argue that the collective entity rule should not be applied to trusts. The Crums claim that neither the United States Supreme Court nor the Seventh Circuit Court of Appeals has ever applied the collective entity rule to trusts or trust representatives, or ever endorsed its application to trusts. This may be true. Nevertheless, it is clear that trusts have been recognized by the Circuit Courts of Appeals as collective and artificial entities. See In Re Grand Jury Subpoena, 973 F.2d 45, 48 (1st Cir. 1992); Watson v. Commissioner, 690 F.2d 429, 431 (5th Cir. 1978); United States v. Harrison, 653 F.2d 359, 361-62 (8th Cir. 1981); In Re Grand Jury Proceedings, 633 F.2d 754, 757 (9th Cir. 1980). Thus, in the absence of contrary Seventh Circuit decisions, this court finds it appropriate to follow the decisions of other circuits and apply the collective entity rule to trusts.
The Crums further argue that trusts do not fit well into the Supreme Court's collective entity definition, especially in the present case where the Crums manage the trusts personally and the trust records are not distinct from the Crums' own personal records. Notably, however, the Crums have not disputed that the trusts, as defined and regulated by Indiana law, meet the definition of a collective entity. (See Report and Recommendation at 14.) Therefore, in the absence of any authority suggesting that trusts are not collective entities, and in light of the evidence showing that the Crums purposefully placed their assets in three separate trusts, created the necessary trust documents, named a trustee and beneficiaries, maintained separate bank accounts, and generally held the trusts out as separate from themselves, the undersigned agrees with Magistrate Judge Cosbey's conclusion that the trusts are collective entities and the Fifth Amendment does not apply.
Conclusion
Based on the foregoing, the Report and Recommendation submitted by Magistrate Judge Cosbey on April 17, 2001, is hereby ADOPTED. The United States' Petitions to enforce the summonses issued on June 9, 1999 are hereby GRANTED as to all paragraphs except 6, 7 and 8.