Opinion
Case No: 02-22694-CIV-MORENO
March 12, 2003
REPORT AND RECOMMENDATION
THIS CAUSE is before the Court on Plaintiff's Petition to Enforce Internal Revenue Service Summons (D.E. #1). The Court held a hearing regarding this matter on January 24, 2003, and has carefully reviewed the pertinent portions of the record and the relevant law. For the following reasons, it is respectfully recommended that the Court GRANT Plaintiff's Petition to Enforce Internal Revenue Service Summons.
BACKGROUND
The United States brought this action to enforce an IRS summons against Respondent Stewart G. Penny ("Penny"), as records custodian of Omni Building Contractors, Inc. ("Omni"). The United States represents that Revenue Officer Examiner Nancy Bailey is conducting an examination to determine the correct amount of tax liability of Omni for quarterly taxable periods that ended in 1999 and 2000. The summons, which was issued on March 13, 2002, and served on Penny on April 18, 2002, commands Penny to appear with several of Omni's books, records, papers, and other data relating to Omni's tax liability.
On April 30, 2002, and May 22, 2002, Penny appeared for deposition, but stated that he was invoking his Fifth Amendment right against self-incrimination, and therefore would not produce certain documents or answer questions. On May 13, 2002, Penny and his wife signed an amended 1999 tax return in which they declared as personal income amounts that were previously declared as Omni's corporate income on corporate tax returns. On September 13, 2002, the United States commenced this action. On October 14, 2002, Penny and his wife signed an amended 2000 tax return in which they declared as personal income amounts that were previously declared as Omni's corporate income on corporate tax returns. Also on October 14, 2002, Penny, acting as President of SDP Enterprises, Inc. ("SDP"), signed a corporate tax return in which SDP declared as its corporate income some of the income that was listed on Omni's original corporate tax returns.
DISCUSSION
In order to obtain judicial enforcement of a summons, the IRS must show (1) "that the investigation will be conducted pursuant to a legitimate purpose," (2) "that the inquiry may be relevant to [that] purpose," (3) "that the information sought is not already within the [IRS's] possession," and (4) "that the administrative steps required by the [Internal Revenue] Code have been followed." United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255 (1964); see also, e.g., United States v. Leventhal, 961 F.2d 936, 939 (11th Cir. 1992); Panton v. United States, 780 F. Supp. 797, 801 (S.D. Fla. 1991) (J. Marcus). "The IRS can satisfy this burden merely by presenting the sworn affidavit of the agent who issued the summons attesting to these facts. . . . Thereafter, the burden shifts to the party contesting the summons to disprove one of the four elements of the government's prima facie showing or convince the court that enforcement of the summons would constitute an abuse of the court's process." La Mura v. United States, 765 F.2d 974, 979-80 (11th Cir. 1985); see also, e.g., Leventhal, 961 F.2d at 939-40; Panton, 780 F. Supp. at 801. "The net result is that some minimal inquiry into matters underlying an IRS summons is permitted, but that inquiry will be limited solely to the four Powell elements, and may not be used as a forum to challenge the validity of an assessment." Panton, 780 F. Supp. at 801; see also, e.g., United States v. Harper, 662 F.2d 335, 336 (5th Cir. Unit B Nov. 1981) (The subpoenaed taxpayer's "desire to contest the underlying assessment will not suffice to meet that burden and defeat the IRS' prima facie showing.").
Decisions rendered by Unit B of the Fifth Circuit are binding on federal courts within the Eleventh Circuit. See United States v. Sanchez, 269 F.3d 1250, 1314 n. 16 (11th Cir. 2001); Stein v. Reynolds Secs., Inc., 667 F.2d 33, 34 (11th Cir. 1982).
In support of its Petition, the IRS has submitted the August 15, 2002, Declaration of Examiner Bailey. See D.E. #1, Exh. 1. Through that affidavit, the IRS has satisfied its burden of establishing a prima facie case of compliance with the four Powell factors. See La Mura v. United States, 765 F.2d 974, 979-80 (11th Cir. 1985); Aug. 15, 2002, Bailey Decl., ¶ 6-8. The burden therefore has shifted to Penny "to disprove one of the four elements of the government's prima facie showing or convince the court that enforcement of the summons would constitute an abuse of the court's process." La Mura v. United States, 765 F.2d 974, 979-80 (11th Cir. 1985); see also, e.g., Leventhal, 961 F.2d at 939-40; Panton, 780 F. Supp. at 801.
Penny contends that the Court should not enforce the summons for several reasons. First, Penny contends that Examiner Bailey and the IRS made misstatements which demonstrate that they acted in bad faith. Penny directs the Court to ¶ 2 of Bailey's November 22, 2002, Declaration, in which she stated: "Prior to the issuance of the summons in this case, I was never informed that Omni Building Contractors, Inc. was not a corporation or that Stewart G. Penny considered the business to be operated in any other business form." Penny asserts that contrary to Bailey's representation, she received a letter informing her of those facts on April 9, 2002, and the IRS summons is dated April 18, 2002, i.e., nine days after she received the letter.
As a preliminary matter, the IRS summons was served on April 18, 2002, but it was issued (by Bailey) on March 13, 2002. Therefore, Bailey did not make a misstatement when she said that she was not advised of those facts "[p]rior to the issuance of the summons in this case. . . ." Nov. 22, 2002, Bailey Decl., ¶ 2 (emphasis added). Even if Bailey's statement had been incorrect, the Court finds no evidence of bad faith on her part.
Penny seems to believe that any misstatement constitutes proof of bad faith sufficient to warrant denial of enforcement of the summons, but that is not the case.
Penny also contends that the IRS, in its reply memorandum (which the IRS labeled its "Response to Respondent's Response to Order to Show Cause"), made a misstatement which demonstrates its bad faith: "By his affidavit, respondent contends that he filed an amended individual income tax return, Form 1040X, for 1999, but makes no contention regarding 2000." D.E. #12, at 4 n. 1. Penny contends that the IRS's statement is belied by the fact that "both Ms. Bailey and the I.R.S. . . . know . . . a corporate return for a valid corporation . . . was filed for 2000." Defendant's "Reply to Plaintiff's Response to Show Cause" (D.E. #14), at 2 ¶ 4.
Contrary to Penny's assertion, however, the IRS's statement was true. In his Affidavit, Penny only discussed the amended 1999 tax return, but did not reference a 2000 return. Penny Aff. (D.E. #5), ¶ 3. Therefore, the IRS did not even make a misstatement, let alone a misstatement in bad faith.
Penny next asserts that the IRS has not complied with the third Powell factor because the information sought is . . . already within the [IRS's] possession. . . .' United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255 (1964). Specifically, Penny contends that Examiner Bailey admitted in her Declarations that the IRS has in its possession documents that it seeks in the summons.
Examiner Baily stated that the IRS "now has in its possession" some of the "books, papers, records, or other data sought by the summons. . . ." Aug. 15, 2002, Bailey Decl., at 2 ¶ 6. However, she stated that "[t]he remaining necessary books, papers, records, or other data sought by the summons are not already in the possession of the Internal Revenue Service." Id. Because the IRS still does not possess some of the documents listed in the summons, the IRS has met the third Powell factor, despite the fact that the IRS now has some of those documents in its possession.
Penny next contends that in this investigation, Examiner Bailey is exceeding her scope of authority. Penny asserts that Bailey is only authorized to conduct an examination of Omni's tax liability with regards to employment and unemployment taxes, but that in one of her Declarations, Bailey stated that she is conducting an examination of the generic "tax liability" of Omni. Aug. 15, 2002, Bailey Decl., at ¶ 2.
Assuming Penny is correct regarding the scope of Bailey's authority, the fact that Bailey only stated that she is examining Omni's "tax liability" does not imply that she will examine any matters that fall outside the scope of her authority. The generic term "tax liability" includes within its ambit liability for employment and unemployment taxes, and use of the generic term does not indicate that Examiner Bailey intends to exceed the scope of her authority. An analogous situation would exist if Judge Moreno referred an action to the undersigned only for a recommendation as to whether the Court has subject matter jurisdiction. If the undersigned then issued an Order setting a hearing to consider the Court's "jurisdiction," the use of that generic term would not indicate that the undersigned intended to determine whether the Court had any type of jurisdiction other than subject matter jurisdiction (e.g., personal jurisdiction), and therefore would not imply that the undersigned was going to consider matters other than that which Judge Moreno had referred for a recommendation.
Penny next contends that the tax records the IRS seeks are personal, not corporate, records, and therefore are protected by Penny's Fifth Amendment right against self-incrimination. In certain circumstances, the act of producing documents may be testimonial in nature, and therefore may fall within the scope of the Fifth Amendment privilege. United States v. Doe, 465 U.S. 605, 612-17, 104 S.Ct. 1237, 1242-45 (1984). A corporation, however, does not have a Fifth Amendment privilege against self-incrimination, and the contents of business records are not protected by the Fifth Amendment. Braswell v. United States, 487 U.S. 99, 102, 108 S.Ct. 2284, 2287 (1988). Therefore, the custodian of corporate records may not resist production of the records on the ground that the act of production would incriminate him or her. Braswell, 487 U.S. at 100, 108 S.Ct. at 2286.
The IRS has sought the records of a corporation — Omni — and has requested them from Penny in his capacity as Omni's records custodian. Penny contends, however, that the records are personal because Omni did not exist in 1999 and 2000, the years for which the IRS seeks its records. In support of that contention, Penny claims that: (1) Florida dissolved Omni as a corporation in 1992, and at that time Omni reverted to a sole proprietorship; (2) even though Omni originally filed corporate tax returns for 1999 and 2000, Penny and his wife subsequently filed amended tax returns for 1999 and 2000 in which they declared as personal income amounts that were previously declared as Onmi's corporate income; and (3) a 2000 corporate income tax return was filed on behalf of SDP, in which SDP declared as its corporate income some of the income that was listed on Omni's original corporate tax returns.
During the relevant time period, Omni held itself out to be a corporation, despite the fact that it had been administratively dissolved by Florida. At a minimum, Omni: filed federal corporate income tax returns for 1999 and 2000; submitted a Form 1096 by which it reported Form 1099 income for the year 2000; maintained bank accounts in the corporate name (as evidenced by both bank statements and checks written on the account); and submitted checks to the IRS in 2000 which were drawn on a corporate account. Because Omni held itself out to be a corporation during the relevant time period, Penny is estopped from asserting that Omni was not a corporation during that period. See Fla. Stat. § 607.1904 ("No body of persons acting as a corporation shall be permitted to set up the lack of legal organization as a defense to an action against them as a corporation . . . Watson v. Commissioner of Internal Revenue, 690 F.2d 429, 431 (5th Cir. 1982) (`The Watsons' reliance on the privilege is misplaced. The documents sought were those of [a trust] . . ., not the Watsons' personal papers. . . . The Watsons strived valiantly, and in the Commissioner's mind improperly, to shelter income from taxation by use of a trust. It would be ironic indeed to allow them to ignore the very same trust in order to rely on the fifth amendment now that their trust has come to the Commissioner's attention and they allegedly fear criminal prosecution."); United States v. Harrison, 653 F.2d 359, 361-62 (8th Cir. 1981) ("In our view, those who form a separate business entity, hold that entity out as distinct and apart from the individuals involved, and file separate tax returns on behalf of the entity, are estopped from denying the existence and viability of that entity for Fifth Amendment purposes."); United States v. Theodore, 479 F.2d 749 (4th Cir. 1973) ("We agree with the District Court . . . that the evidence presented demonstrates convincingly that Theodor Accounting Service held itself out to the general public and to the governments of South Carolina and the United States as a professional association and is now to be estopped from denying the existence and viability of its corporate entity."). Therefore, Penny may not invoke the Fifth Amendment regarding the records that the IRS seeks.
Additionally, the facts that Penny and his wife filed amended individual tax returns for 1999 and 2000, and SDP filed a corporate tax return for 2000, are irrelevant to the determination of whether Omni held itself out to be a corporation during those years. Penny and his wife did not sign their amended 1999 tax return until May 13, 2002 — i.e., more than two years after the end of the period during which Omni held itself out to be a corporation, two months after the IRS served the summons on Penny, two weeks after Penny first appeared for deposition (on April 30, 2002) and invoked a Fifth Amendment privilege in response to Examiner Bailey's and other IRS representatives' questions, and only nine days before Penny appeared for the second time for deposition (May 22, 2002). Additionally, Penny and his wife did not sign their amended 2000 tax return until October 14, 2002, more than a month after the United States commenced this action. Similarly, Penny, acting as SDP's President, did not sign SDP's 2000 tax return until October 14, 2002.
In a related assertion, Penny claims that the IRS acted in bad faith because it did not inform the Court of the existence of the amended tax returns that he, his wife, and SDP filed in 2002. The Court does not find that to be evidence of bad faith. In fact, when the United States commenced this action, Penny and his wife had only filed the amended 1999 return, but had not filed the amended 2000 return, and SDP had not filed its 2000 return. Penny had ample opportunity to bring those returns to the Court's attention. Regardless, the returns have no bearing on the Court's recommendation.
Finally, Penny contends that the United States acted in bad faith because it: failed to advise this Court that Penny was represented by Robert A. Schupack, Esq., failed to notify Mr. Schupack of this action, and failed to copy certain documents to Mr. Schupack. Accepting Penny's representations, the Court does not find this to be evidence of bad faith conduct by the United States, and the United States' actions do not warrant a refusal by the Court to enforce the summons against Penny.
RECOMMENDATION
For the foregoing reasons, it is respectfully recommended that the Court GRANT Plaintiff's Petition to Enforce Internal Revenue Service Summons (D.E. #1)' and compel Respondent to comply with that summons.
The parties have ten (10) days from the date of this Report and Recommendation to file written objections, if any, with the Honorable Federico A. Moreno, United States District Judge. See 28 U.S.C. § 636. Failure to file timely objections may bar the parties from attacking on appeal the factual findings contained herein. See LoConte v. Dugger, 847 F.2d 745, 750 (11th Cir. 1988).