Yujuico v. US, C-91-4518-JPV.

Decision Date03 February 1993
Docket NumberNo. C-91-4518-JPV.,C-91-4518-JPV.
Citation818 F. Supp. 285
PartiesBenedicto V. YUJUICO and Teresita M. Yujuico, Petitioners, v. UNITED STATES of America, Internal Revenue Service, and Sylvia Sanders, Respondents.
CourtU.S. District Court — Northern District of California

James E. Merritt, Morrison & Foerster, Timothy A. Miller, San Francisco, CA, for petitioners.

Thomas F. Carlucci, Asst. U.S. Atty., San Francisco, CA, for respondents.

ORDER DENYING PETITION TO QUASH AND GRANTING MOTION TO ENFORCE IRS FORMAL DOCUMENT REQUEST

VUKASIN, District Judge.

INTRODUCTION

On December 14, 1993, this case came on for evidentiary hearing regarding a petition to quash and cross-motion to enforce an Internal Revenue Service formal document request. James Merritt appeared for petitioners. Assistant U.S. Attorney Thomas Carlucci appeared for respondents. The court heard the testimony of petitioner Benedicto Yujuico and the arguments of counsel, and reviewed the record herein, including the exhibits and pleadings filed to date. Having done so, this court now DENIES the petition to quash and GRANTS the motion to enforce the formal document request.

DISCUSSION
I. Law Governing Issuance and Enforcement of an FDR

Section 982 of the Internal Revenue Code authorizes the Internal Revenue Service ("IRS") to issue a formal document request ("FDR") to any taxpayer to obtain foreign-based documentation.1 Congress enacted section 982 as a pretrial discovery tool "to discourage taxpayers from delaying or refusing disclosure of certain foreign-based information to the IRS." Conf.Rept. 97-760, to accompany H.R. 4961, 97th Cong., 2d Sess., reprinted in 1982 U.S.C.C.A.N. 781, 1363 (hereinafter "Conference Report").

An FDR is "any request (made after the normal request procedures have failed to produce the requested documentation) for the production of foreign-based documentation which is mailed by registered or certified mail to the taxpayer at his last known address and which sets forth —

(A) the time and place for the production of the documentation
(B) a statement of the reason the documentation previously produced (if any) is not sufficient,
(C) a description of the documentation being sought, and,
(D) the consequences to the taxpayer of the failure to produce the documentation described in subparagraph (C)."

26 U.S.C. § 982(c)(1).

The consequence to a taxpayer who fails to substantially comply, within 90 days of the service of an FDR, is as follows:

any court having jurisdiction of a civil proceeding in which the tax treatment of the examined item is an issue shall prohibit the introduction by the taxpayer of any foreign-based documentation covered by such request.

26 U.S.C. § 982(a).

The purpose of the section 982 sanction is to prohibit the taxpayer from introducing at trial records he would not or allegedly could not earlier produce at the audit. An exception to the section 982 sanction is permitted if the taxpayer establishes that the failure to provide the requested documentation is due to reasonable cause.2

In any proceeding to quash, the United States may seek to compel compliance with the FDR. 26 U.S.C. § 982(c)(2)(A). The United States in the instant case seeks compliance with the FDR. The standards for enforcement of an IRS summons and an FDR are the same. International Marketing, Ltd. v. United States, 90-2, U.S.T.C. ¶ 50,476 (N.D.Cal.1990). Accordingly, the United States must demonstrate that the requirements for enforcement of a summons have been met in order to obtain enforcement of its FDR from this court.

The landmark case in the area of summons enforcement is United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). In Powell the Supreme Court set out the following standard for summons enforcement:

The United States must show: (1) that there is a legitimate purpose for the investigation; (2) that the material sought is relevant to that purpose; (3) that the material sought is not already within the IRS' possession; and (4) that those administrative steps which are required by the Internal Revenue Code have been taken.

Id., at 57-58, 85 S.Ct. at 255.

"The government may establish its prima facie case for summons enforcement by a declaration of an agent involved in the investigation averring the Powell good faith elements." Alphin v. United States, 809 F.2d 236, 238 (4th Cir.1987), cert. denied, 480 U.S. 935, 107 S.Ct. 1578, 94 L.Ed.2d 768 (1987); Accord, United States v. Samuels, Kramer and Co., 712 F.2d 1342, 1344-5 (9th Cir. 1983).

Once this showing has been made, the party challenging the summons bears the heavy burden of proving that enforcement of the summons would be an abuse of the court's process. United States v. Powell, supra, 379 U.S. at 58, 85 S.Ct. at 255; United States v. LaSalle National Bank, 437 U.S. 298, 316, 98 S.Ct. 2357, 2367, 57 L.Ed.2d 221 (1978). Unless the party challenging the summons can demonstrate that it was issued for an improper purpose, or was otherwise deficient, the government is entitled to enforcement of the summons. United States v. LaSalle National Bank, supra, at 316, 318, 98 S.Ct. at 2367, 2368. Although the LaSalle court was faced with a motion to enforce an IRS summons, since the standards for enforcement of a summons and an FDR are the same, the burdens of proof described in Powell and LaSalle apply equally to the FDR case at bar.

II. The Petition to Quash
A. Procedural Challenges

Petitioners attack the subject FDR on procedural grounds, contending that the FDR is vague and overbroad and that the government has failed to satisfy the administrative steps of the Internal Revenue Code. This court finds that petitioners procedural challenge lacks merit.

A valid FDR is any request made after the normal request procedures have failed to produce the requested documentation. See 26 U.S.C. § 982(c)(1). Here, the government has followed the normal request procedures since it began its investigation of petitioners in 1989. IRS agents Sanders and Silverman issued numerous Information Document Requests ("IDRs") throughout the investigation, but petitioner failed to produce much of the requested documentation. The government's issuance of the IDRs, and petitioners non-responsiveness to these requests, demonstrates that the government exhausted the informal procedures for requesting documents prior to issuing the FDR and thus complied with the administrative procedures mandated by section 982.

Petitioners also assert that the FDR should be quashed because the language of the FDR is vague in that it fails to specify the documents requested "item-by-item." Section 982 provides that the FDR must set forth "a description of the documentation being sought." 26 U.S.C. § 982(c)(1)(C). In the instant case, each numbered item in the FDR sets forth a description of the type of documentation sought. Further, the government's use of the language "any and all" in the FDR is not an infirmity. United States v. Abrahams, 905 F.2d 1276, 1282 (9th Cir. 1990); United States v. Wyatt, 637 F.2d 293 (5th Cir.1981). This court finds that the FDR complies with the specificity requirements of section 982.

It is the finding of this court that the government has established that it has met the standards in Powell; specifically, that the FDR was issued for a proper purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Internal Revenue Code have been followed.

B. Challenge for Reasonable Cause

Petitioners next contend that they have "reasonable cause" for not producing the records sought by the government or, alternatively, that they have "substantially complied" with the FDR. As to petitioners' first claim, section 982 provides that the sanction "shall not apply with respect to any documentation if the taxpayer establishes that the failure to provide the documentation as requested ... is due to reasonable cause." 26 U.S.C. § 982(b)(1).

Congress recognized that lack of control over a foreign corporation would constitute reasonable cause for the nonproduction of documents from the foreign corporation. The Conference Report states:

The conferees recognize that minority status can prevent a taxpayer from being able to produce certain records held by a foreign entity. However, the conferees also recognize that taxpayers may seek to hide behind minority status to avoid production of records. Accordingly, a determination of whether minority status is reasonable cause will be determined by
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