Schulz v. I.R.S

• Decision Date: 29 June 2005
• Docket Number: Docket No. 04-0196.
• Citation: 413 F.3d 297
• Parties: Robert L. SCHULZ, Plaintiff-Appellant, v. INTERNAL REVENUE SERVICE and Anthony Roundtree, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

413 F.3d 297

Robert L. SCHULZ, Plaintiff-Appellant, v. INTERNAL REVENUE SERVICE and Anthony Roundtree, Defendants-Appellees.

Docket No. 04-0196.

United States Court of Appeals, Second Circuit.

Petition for Rehearing: March 2, 2005.

Decided: June 29, 2005.

Robert L. Schulz, pro se, Queensbury, NY.

Frank P. Cihlar, Assistant United States Attorney, Tax Division, United States Department of Justice, Washington, DC, for Defendants-Appellees.

Before: FEINBERG, STRAUB, and RAGGI, Circuit Judges.

STRAUB, Circuit Judge.

The government has moved to amend our per curiam opinion, reported at Schulz v. I.R.S., 395 F.3d 463 (2d Cir.2005) ("Schulz I"). In support of its motion, the government relies on arguments that it did not advance in the District Court or on the original appeal. In light of these new arguments, and because the proposed amendments, if accepted, would alter significantly our prior holding, we, at the government's suggestion, construe the motion to amend as a petition for panel rehearing. Having considered the arguments of the parties, we grant the petition to rehear for only the limited purpose and to the extent necessary to clarify our prior opinion and hold that: 1) absent an effort to seek enforcement through a federal court, IRS summonses "to appear, to testify, or to produce books, papers, records, or other data," 26 U.S.C. § 7604, issued "under the internal revenue laws," id., apply no force to the target, and no punitive consequences can befall a summoned party who refuses, ignores, or otherwise does not comply with an IRS summons until that summons is backed by a federal court order;¹ 2) if the IRS seeks enforcement of a summons through the federal courts, those subject to the proposed order must be given a reasonable opportunity to contest the government's request; 3) if a federal court grants a government request for an order of enforcement then any individual subject to that order must be given a reasonable opportunity to comply and cannot be held in contempt or subjected to indictment under 26 U.S.C. § 7210 for refusing to comply with the original, unenforced IRS summons, no matter the taxpayer's reasons or lack of reasons for so refusing.² Our prior opinion otherwise remains in effect to the extent that it is not inconsistent with this opinion. We grant the motion to extend time in which to file a petition for rehearing en banc.

BACKGROUND

The facts underlying the original appeal are set forth in our prior opinion, Schulz I, 395 F.3d at 464. For purposes of completeness and clarity, however, we repeat that work here.

The IRS served Schulz with a series of summonses in May and June of 2003, ordering Schulz to appear and provide testimony and documents in connection with an investigation of Schulz by that agency. Rather than comply with the summonses, Schulz filed a motion to quash in the United States District Court for the Northern District of New York. That motion was heard by Magistrate Judge David R. Homer and, on October 16, 2003, was dismissed for lack of subject matter jurisdiction. In his unpublished opinion the Magistrate Judge found that, because the IRS had not commenced a proceeding to enforce the summonses, no case or controversy existed, and if the IRS did attempt to compel compliance, the enforcement procedure described in § 7604 would provide Schulz with adequate opportunity to attack the summonses on their merits.

Schulz filed in the District Court an appeal from and objection to the Magistrate Judge's order. The District Court (David N. Hurd, Judge) denied those objections and dismissed the appeal on December 3, 2003, by an unpublished order. Schulz appealed to this Court. By our January 25, 2005, per curiam opinion, we affirmed. See Schulz I, 395 F.3d 463. The focus of that opinion was whether issuance of an IRS summons presents a case or controversy under Article III of the United States Constitution. Id. at 464. Relying on the Supreme Court's decisions in Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964), and United States v. Bisceglia, 420 U.S. 141, 95 S.Ct. 915, 43 L.Ed.2d 88 (1975), and in view of our decisions in Application of Colton, 291 F.2d 487 (2d Cir.1961), and United States v. Kulukundis, 329 F.2d 197 (2d Cir.1964), we held that a taxpayer's motion to quash an IRS summons, in the absence of an effort by the agency to seek enforcement of that summons in a federal court, does not present an Article III case or controversy. Schulz I, 395 F.3d at 465. Because that holding entailed overruling, in part, our prior holding in Colton, we circulated Schulz I to all active members of the Court prior to filing. Id. at n. 1.

After Schulz I was issued, the government filed the present "motion to amend or, in the alternative, to extend time to file a petition for rehearing en banc," which the government also invites us to view as a petition for panel rehearing. The government's principal concerns are that we misunderstand the nature of the jurisdictional bar on motions to quash IRS summonses and "misapprehend[] the consequences that ensue from the issuance of an IRS administrative summons." As to the latter point, the government appears to argue alternatively, or in combination, that: 1) the government may use the federal courts to punish taxpayers who disobey an IRS summons even if the summons is never enforced by a court order; 2) if an IRS summons is enforced by a court order, the court may punish disobedience of the IRS summons before providing the taxpayer an opportunity to comply with the court's order; or 3) if an IRS summons is enforced by a court order, the court may punish disobedience of the IRS summons even if the taxpayer complies with the court's order. In our view, expressed in Schulz I, none of these proposals is consistent with the comprehensive tax-enforcement scheme in which 26 U.S.C. §§ 7210, 7604(a), and 7604(b) are situated, constitutional due process, or the relevant precedents of this Court and the United States Supreme Court. Therefore, while we grant the petition for panel rehearing, we do so to clarify rather than to amend substantially Schulz I, which remains in force to the extent it is not inconsistent with this opinion.

DISCUSSION

Because it was the focus of the parties, our discussion in Schulz I focused primarily on the doctrinal rules of jurisdiction that the Supreme Court has derived from the "Cases" and "Controversies" clauses of the United States Constitution, Article III, Section 2. See Reisman, 375 U.S. at 443, 84 S.Ct. 508 (dismissing petition to quash "for want of equity"). Underlying our analysis there was the equally venerable line of Supreme Court doctrine limiting the protections afforded to administrative action by sovereign immunity based on the due process clauses of the Fifth and Fourteenth Amendments to the United States Constitution. The "leading cases on this question are Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908), and Oklahoma Operating Co. v. Love, 252 U.S. 331, 40 S.Ct. 338, 64 L.Ed. 596 (1920)." Reisman, 375 U.S. at 446, 84 S.Ct. 508. In particular, our decision in Schulz I was informed by concerns, also stated in Colton, 291 F.2d at 489-90, and Kulukundis, 329 F.2d at 199, "that the penalties of contempt [or prosecution] risked by a refusal to comply with the summonses are so severe that the statutory procedure amounts to a denial of judicial review." Reisman, 375 U.S. at 446, 84 S.Ct. 508.

On its present motion, the government presses the claim that Congress has, in the statutory scheme that includes 26 U.S.C. §§ 7210 and 7604, exercised its right to immunize agents of the IRS from suits seeking prospective relief from the enforcement of administrative summonses. That this is so was settled in Reisman. However, the privilege of that immunity comes with certain costs demanded by due process. Our holding in Schulz I took account of those costs while providing clear guidance to the government as to the constitutional limitations on its authority, and to taxpayers as to how their due process rights are protected by the statutory scheme. We take the opportunity provided by this petition to further explicate our view.

At issue on the present petition is whether 26 U.S.C. §§ 7210 and 7604 may be read to allow the imposition of penal consequences for failure to comply with an IRS summons or if levying of punishment for disobedience under those sections requires review by a federal court of the merits of a summons and, where the merits are upheld, a reasonable opportunity to comply with a court order of enforcement before punitive or coercive sanctions may be imposed. Addressing a view of 26 U.S.C. §§ 7210 and 7604 similar to that advanced by the government on this petition, Judge Friendly, writing for this Court, pointed out that:

If the statutory scheme were like that for enforcement of subpoenas of such agencies as the Interstate Commerce Commission, 49 U.S.C. § 12, or the Civil Aeronautics Board, 49 U.S.C. § 1484, there would be merit in the Government's position that courts ought not intervene at so early a stage; since disobedience to a subpoena under those statutes has no penal consequences until a judge has ordered its enforcement, there is no occasion for any preliminary resort to the courts. Here, however, at least the criminal penalty of § 7210 is incurred by disobedience, and it is not altogether plain that a contempt citation under § 7604(b) may not be. Under such circumstances the principle of Ex parte Young, 209 U.S. 123, 147, 28 S.Ct. 441, 52 L.Ed. 714 (1908) and Oklahoma Operating Co. v. Love, 252 U.S. 331, 336-337, 40 S.Ct. 338, 64 L.Ed. 596 (1920), comes into play; we see no reason why that principle should not be applicable to a summons, disobedience of which carries criminal penalties.... We are not unmindful of the potentialities of delay inherent in such an extra round— potentialities sufficiently serious without one, as illustrated, for...