Opinion
Case No. CV-06-761-PHX-SMM.
May 15, 2006
ORDER
On November 22, 2005, Petitioner filed a verified petition to enforce an IRS summons (the "Petition") with respect to Respondents James Holoubek and Brenda Holoubek ("Respondents"). On February 13, 2006, Respondents filed their "Defense and Objections Pursuant to FRCP Rule 12" (the "Defense and Objections"). (Dkt. 10.) On March 14, 2006, in response to an Order to Show Cause issued to Respondents on December 2, 2005, the Court held a hearing. At the hearing, Respondents made an oral Motion to Quash the IRS Summonses issued to them. Petitioner filed a response to the Motion to Quash (dkt. 17), and Respondents replied (dkt. 18). Having considered the Petition and its supporting documents, the Defense and Objections of Respondents, the response and reply to the Motion to Quash, and the arguments of both parties at the hearing, the Court issues this Order.
FACTUAL PROCEDURAL BACKGROUND
Petitioner is conducting an investigation into the tax liabilities of Respondents for the tax years 2001, 2002, and 2003. (Dkt. 1 at ¶ 7; Dkt. 4 at ¶ 2.) In connection with that investigation, Petitioner believes that Respondents have in their possession and control documents relevant to the IRS's inquiry. (Dkt. 1 at ¶ 8; Dkt. 4 at ¶ 3.) Accordingly, on November 17, 2004, Revenue Agent Anthony Mendenhall issued two IRS summonses directing each of the Respondents to appear at the IRS office in Tempe, Arizona, on December 2, 2004, "to give testimony and produce for examination certain books, papers, records, or other data" (the "Summonses"). (Dkt. 1 at ¶ 8; Dkt. 4 at ¶ 3; Dkt. 16, Exs. A-B.) That same day, Revenue Agent Mendenhall served the Summonses on Respondent Brenda Holoubek by hand at Respondents' residence. (Dkt. 1 at ¶ 9; Dkt. 4 at ¶ 4; Dkt. 16, Exs. A-B.) On November 23, 2004, Respondents returned the Summonses to Revenue Agent Mendenhall by priority mail. (Dkt. 1 at ¶ 10; Dkt. 4 at ¶ 5.) On December 2, 2004, Respondents failed to appear as directed by the Summonses. (Dkt. 1 at ¶ 10; Dkt. 4 at ¶ 5.) To date, Respondents have failed to comply with the Summonses. (Dkt. 4 at ¶ 5.) Petitioners thus filed their verified Petition and a Motion for an Order to Show Cause on November 22, 2005. (Dkts. 1, 3, 4, 16.)
On December 6, 2005, this Court issued an Order to Show Cause, giving Respondents an opportunity to explain why they should not be compelled to obey and comply with the IRS Summonses. (Dkt. 5.) Petitioner was instructed to personally serve Respondents with the Order to Show Cause, the verified Petition and the Declaration of Revenue Agent Mendenhall within twenty-one days of the Court's order. (Id.) Petitioner has submitted evidence showing that each of these documents were properly and timely served by hand delivery to Respondent James Holoubek on December 20, 2005. (Dkt. 9.) On December 28, 2005, Respondents filed a motion to dismiss the case for lack of subject matter jurisdiction. (Dkt. 6.) On January 23, 2006, this Court denied the motion to dismiss. (Dkt. 8.) On February 13, 2006, Respondents filed their Defense and Objections (dkt. 10), to which Petitioner has responded (dkt.13).
On March 14, 2006, this Court held a hearing, at which Respondents made an oral Motion to Quash the IRS Summonses. Petitioner responded to the Motion to Quash on March 20, 2006 (dkt. 17), and Respondents replied on April 13, 2006 (dkt. 18).
DISCUSSION
"The IRS may issue a summons only for the purposes set out in 26 U.S.C. § 7602(a). Those purposes are `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 collecting any such liability.'" Crystal v. United States, 172 F.3d 1141, 1143 (9th Cir. 1999) (quoting § 7602(a)) (citation omitted). To enforce a summons, the government must satisfy the factors set forth in United States v. Powell, 379 U.S. 48 (1964). That is,
the government must establish that (1) the investigation will be conducted for a legitimate purpose; (2) the material being sought is relevant to that purpose; (3) the information sought is not already in the IRS's possession; and (4) the IRS complied with all the administrative steps required by the Internal Revenue Code.Crystal, 172 F.3d at 1143-44. "The government's burden is a slight one, and may be satisfied by a declaration from the investigating agent that the Powell requirements have been met." United States v. Dynavac, Inc., 6 F.3d 1407, 1414 (9th Cir. 1993). The burden is minimal "`because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted.'" Crystal, 172 F.3d at 1144 (citation omitted).
That being said, the government's "mere assertion of relevance may not satisfy [its] burden. `Once a summons is challenged, it must be scrutinized by a court to determine whether it seeks information relevant to a legitimate investigative purpose. . . . The cases show that the federal courts have taken seriously their obligation to apply this standard to fit particular situations, either by refusing enforcement or narrowing the scope of the summons.'" United States v. Bell, 57 F.Supp.2d 898, 906 (N.D.Cal. 1999). (citation omitted).
In the present case, Petitioners have met their burden of meeting the Powell requirements, largely through the verification of the Petition by Revenue Agent Mendenhall. See Crystal, 172 F.3d at 1144 (stating that it was not disputed that special agent's declaration satisfied the Powell requirements and that therefore the government had "established a prima facie case to enforce the summonses"); Bell, 57 F.Supp.2d at 906 ("The government usually makes the requisite prima facie showing by affidavit of the agent.").
The verified Petition indicates that the IRS's investigation is being conducted for a legitimate purpose, namely, to determine the federal tax liabilities of Respondents for the tax years 2001, 2002, and 2003. See Dkt. 4 at ¶¶ 2-3; Dkt. 16, Exs. A-B. The Summonses are relevant to that purpose, asking Respondents to appear and bring with them documents related to their taxable income, see dkt. 4 at ¶ 6; dkt. 16, Exs. A, B. The information sought is not already in the IRS's possession. See id. at ¶ 7 (stating that "[t]he testimony, books, records, papers and other data sought by the summonses are not already in the possession of the IRS"). Finally, as stated in the verified Petition, the IRS has complied with all the administrative steps required by the Internal Revenue Code — "in particular, that `the Secretary or his delegate,' after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect." Powell, 379 U.S. at 58; see Dkts. 1 at ¶ 12 ("All administrative steps required by the Internal Revenue Code for the issuance of an IRS summons have been substantially followed."); Dkt. 4 at ¶ 4 Exs. A, B (confirming service of Summonses on Respondents by hand). Given that thePowell requirements have been met, the government has established a prima facie case to enforce the Summonses.
Once the government has established the Powell elements, "`those opposing enforcement of a summons . . . bear the burden to disprove the actual existence of a valid civil tax determination . . . purpose by the Service." United States v. Jose, 131 F.3d 1325, 1328 (9th Cir. 1997) (en banc) (quotingUnited States v. LaSalle Nat'l Bank, 437 U.S. 298, 316 (1978)). Once the prima facie case is made, "a `heavy' burden falls upon the taxpayer to show" failure to satisfy the Powell requirements, an abuse of process, or the lack of institutional good faith. Dynavac, 6 F.3d at 1414; Crystal, 172 F.3d at 1444. "Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation." Crystal, 172 F.3d at 1444 (citation omitted). In addition, "it has become clear sincePowell that gathering evidence after having decided to make a recommendation for prosecution would be an improper purpose, and that the IRS would be acting in bad faith if it were to pursue a summons enforcement under these circumstances." Id.
In response to the Order to Show Cause, Respondents' raised several legal points purporting to justify their refusal to appear for examination or to produce the documents summoned by Petitioner. (Dkt. 10.) The Court has distilled the following defenses from Respondents' papers and arguments at the hearing.
First Respondents contend the government's failure to publish in the Federal Register the Treasury Department Orders delegating the Secretary's power to administer various aspects of the tax laws to the Commissioner leaves the IRS and its officers powerless to investigate tax violations. (Dkt. 10 at ¶¶ 1.)
This contention cannot withstand a full reading of the Federal Register Act, 44 U.S.C. §§ 1501 to 1511 (the "Act"). The Act requires the publication in the Federal Register of the following items only:
(1) Presidential proclamations and Executive orders, except those not having general applicability and legal effect or effective only against Federal agencies or persons in their capacity as officers, agents, or employees thereof;
(2) documents or classes of documents that the President may determine from time to time have general applicability and legal effect; and
(3) documents or classes of documents that may be required so to be published by Act of Congress.44 U.S.C. § 1505(a)(1)-(3).
The Treasury Department Orders are not Presidential proclamations or documents cited for publication by the President or by an Act of Congress. Nor are they orders having "general applicability and legal effect." Id. § 1505(a)(2). Rather, the Treasury Department Orders fall squarely within section 1505(a)(1)'s express exception for orders "effective only against Federal agencies or persons in their capacity as officers, agents, or employees thereof." Id. § 1505(a)(1). The Treasury Department Orders have no legal impact on, or significance for, the general public. They simply effect a shifting of responsibilities wholly internal to the Treasury Department. Accordingly, the Federal Register Act does not mandate the publication of the Treasury Department Orders.United States v. Saunders, 951 F.2d 1065, 1067-68 (9th Cir. 1991) ("we hold that the Federal Register Act does not mandate the publication of the [Treasury Department Orders] and that, as a consequence, the government's failure to publish them does not affect the validity of the Secretary's delegation of authority to the Commissioner"). As a consequence, the government's failure to publish the Treasury Department Orders does not affect the validity of the Secretary's delegation of authority to the Commissioner. Id.
Respondents' second argument is difficult to understand but apparently is as follows: the IRS was without power to issue the summons under § 7602 because "civil and criminal penalties attach only upon the violation of a regulation promulgated by the Secretary." (Dkt. 10 at ¶ 2.) Respondents are simply mistaken.
Section 7602 authorizes the Secretary of the Treasury to issue summonses for the purposes of determining the tax liability of "any person." 26 U.S.C. § 7602(a)(2). Similarly, Treasury regulation 26 C.F.R. § 301.7602-1 authorizes the government to issue summonses under § 7602 of the Code:
(a) 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 . . . any authorized officer or employee of the Internal Revenue Service may examine any books, papers, records or other data which may be relevant or material to such an inquiry; and take such testimony of the person concerned, under oath, as may be relevant to such inquiry.
(b) For the purposes described in § 301.7602-1(a), the Commissioner is authorized to summon the person liable for tax . . . to appear before one or more officers or employees of the Internal Revenue Service . . . [and the] Commissioner may designate one or more officers or employees of the IRS as the individuals before whom a person summoned pursuant to section . . . 7602 shall appear.
26 C.F.R. Treas. Reg. § 301.7602-1(a)(b). Thus, the IRS has both statutory and regulatory authority to issue the Summonses at issue here.
Respondents' third assertion — that the IRS lacks the authority to issue an administrative summons to determine an individual income tax liability, and only has the authority to issue administrative summons pertaining to "alcohol, tobacco and firearms, narcotic, and import and export taxes" fails. To support this argument, Respondents attach a page from the index to the C.F.R. indicating the regulations that purportedly provide the ATF with authority to implement the relevant Code sections.
The Summonses were issued pursuant to 26 U.S.C. § 7602 and 26 C.F.R. § 301.7602-1. (Dkt. 4 at ¶ 1.) Title 26 U.S.C. § 7601 gives the IRS Commissioner, as the Secretary's delegate, "a broad mandate to investigate and audit" persons to ensure compliance with federal tax laws. United States v. Bisceglia, 420 U.S. 141, 145 (1975). As a necessary incident to this investigatory power, Congress gave the Commissioner expansive authority in Section 7602(a) to examine records, to issue summonses, and to take testimony "[f]or the purpose of . . . determining the liability of any person for any internal revenue tax . . . or the liability at law[,] . . . or collecting any such liability," as well as for "inquiring into any offense connected with the administration or enforcement of the internal revenue laws." 26 U.S.C. § 7602(a)-(b) (emphasis added). The statute, by its very language, imposes no restrictions that limit the scope of the summons authority to persons involved in alcohol, tobacco, and firearms activities. As a result, Section 7602(a) imbues the IRS with expansive authority to gather information when conducting tax investigations. See United States v. Arthur Young Co., 465 U.S. 805, 813-15 (1984). Moreover, Treasury regulation 26 C.F.R. § 301.7602-1, which has already been set forth previously in this Order, likewise makes the same pronouncement by authorizing the IRS to implement § 7602 with respect to "any person." Supra at 6-7.
Finally, Respondents also appear to argue that the Petition should not be enforced because Revenue Agent Mendenhall lacked authority to issue the Summonses. (Dkt. 10 at ¶ 4.) Respondents are incorrect.
As previously explained, the Internal Revenue Code authorizes the Secretary of the Treasury, or his delegate, to issue administrative summonses for the purpose of ascertaining the correctness of any return or determining the liability of any person for any Internal Revenue tax. See 26 U.S.C. § 7602. Anthony Rodney Mendenhall is a Revenue Agent of the Internal Revenue Service and is authorized to issue and serve an IRS summons pursuant to the authority of 26 U.S.C. §§ 7602, 7608 and 26 C.F.R. § 301.7602-1(b)(1)-(2), and IRS Delegation Order No. 4, as revised. (Dkt. 4 at ¶ 1.) As set forth above, Respondents' contention that the delegated authority from the Secretary of the Treasury to the Commissioner of the Internal Revenue is invalid has been resoundingly rejected by the federal courts. See Saunders, 951 F.2d at 1067-68 (citing courts rejecting invalid delegation argument); supra at 5-6. The Treasury Delegation Orders are contained in the Internal Revenue Manual and are easily accessible to members of the public. See Saunders, 951 F.2d at 1067-68.
At the March 14, 2006 hearing, Respondents made an oral motion to quash the Summonses issued to them. In support of their Motion to Quash, Respondents argue that the IRS lacks authority to examine their books and records because the regulations implementing 26 U.S.C. § 7602 were promulgated under Title 27, U.S.C., which pertains exclusively to alcohol, tobacco, and firearms ("ATF"). (Dkt. 18 at 1-2.) Respondents are simply mistaken.
The plain language of 26 U.S.C. § 7602(a) allows the IRS to summon "any person" to determine his or her tax liability. The statute, by its very language, imposes no restrictions that limit the scope of the summons authority to persons involved in alcohol, tobacco, and firearms activities. Because the summoning authority of the IRS is plainly, unambiguously and expansively conferred upon that agency by the clear provisions of Section 7602(a) itself, the Statute requires no regulatory "assistance" in order to implement its provisions. This is the obvious distinguishing feature between Section 7602(a) and the cases cited by Respondents in support of their "implementing regulation" argument. See California Bankers Ass'n v. Schultz, 416 U.S. 21, (1974); United States v. Murphy, 809 F.2d 1427 (9th Cir. 1987). Each of these cases involved provisions of the Currency Reporting Act, see Title 31 U.S.C. § 5313(a). Unlike Section 7602(a), this statutes expressly provide for interpretative regulations in order to fully implement their statutory mandates.
The Court rejects as inapposite Respondents' reliance on Justice Thomas's dissent in Boeing Co. v. United States, 537 U.S. 437, 458 (2003), the Supreme Court's decision in Lyeth v. Hoey, 305 U.S. 188 (1938), which concerns inheritance taxes,Azanipour v. Immigration and Naturalization Service, 866 F.2d 743, 746 (5th Cir. 1989), which concerns immigration regulations, and United States v. Cartwright, 411 U.S. 546 (1973), because section 7602 does not require an implementing regulation and is implemented by 26 C.F.R. § 301.7602-1 in any event.
Alternatively, the Court rejects Respondents' "implementing regulation" argument because Treasury regulation 26 C.F.R. § 301.7602-1, which has already been set forth in this order, also allows the IRS to summon "any person" to determine his or her tax liability. The IRS therefore has both statutory and regulatory authority to issue the summons. Because Treasury regulation § 301.7602-1 authorizes the IRS to implement § 7602 with respect to "any person," the ATF regulations are not the exclusive source of authority for summons issued pursuant to 26 U.S.C. § 7602. The Court therefore rejects Respondents' argument that the authority delegated to the IRS to issue administrative summonses is limited to matters involving alcohol, tobacco, and firearms.
In sum, the Court finds that Petitioner has satisfied the Powell requirements and that Respondents have not demonstrated bad faith, abuse of process, or any other meritorious defense. The Court will therefore grant the Petition to enforce the IRS Summonses.
Accordingly,
IT IS HEREBY ORDERED that the Petitioner's Petition to Enforce the IRS Summonses is GRANTED (Dkt. 1.)
IT IS FURTHER ORDERED that Respondents' oral Motion to Quash is DENIED. (Dkt. 14.)
IT IS FURTHER HEREBY ORDERED that Respondents James M. Holoubek and Brenda L. Holoubek appear for examination before the IRS on Thursday, June 15, 2006, at 40 West Baseline Road, Suite 205, Tempe, Arizona, 85283 (602) 207-8275 and to testify and produce the requested books, records, and documents in compliance with the Summonses. For Respondents' convenience, the Summonses are attached to this Order.
IT IS FURTHER ORDERED that failure to comply with the Summonses, in the absence of good cause, may result in a finding of contempt of court, which may lead to incarceration and/or monetary penalty.
FORM