Conner v. U.S.

• Decision Date: 11 January 2006
• Docket Number: No. 05-1051.,05-1051.
• Citation: 434 F.3d 676
• Parties: Richie H. CONNER, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 676

434 F.3d 676

Richie H. CONNER, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 05-1051.

United States Court of Appeals, Fourth Circuit.

Argued December 1, 2005.

Decided January 11, 2006.

ARGUED: G. Nelson Mackey, Jr., Brumberg, Mackey & Wall, P.L.C., Roanoke, Virginia, for Appellant. Anthony Thomas Sheehan, United States Department of Justice, Tax Division, Washington, D.C., for Appellee. Paul Anthony Dull, Mark A. Black, Brumberg, Mackey & Wall, P.L.C., Roanoke, Virginia, for Appellant. ON BRIEF: Eileen J. O'Connor, Assistant Attorney General, Frank P. Cihlar, Tax Division, United States Department of Justice, Washington, DC; John L. Brownlee, United States Attorney, Office of the United States Attorney, Roanoke, Virginia, for Appellee.

Before LUTTIG and MICHAEL, Circuit Judges, and HAMILTON, Senior Circuit Judge.

Affirmed by published opinion. Senior Judge HAMILTON wrote the opinion, in which Judge LUTTIG and Judge MICHAEL joined.

OPINION

HAMILTON, Senior Circuit Judge:

Richie H. Conner (Conner), the subject of an ongoing criminal tax investigation, appeals the district court's order: (1) dismissing his petitions to quash certain summonses issued by the Internal Revenue Service (IRS) to two third-party record keepers; and (2) granting the government's cross motion for enforcement of such summonses. We affirm.

I.

Since the early 1970s, Conner has owned and operated Shags Lumber Company, a sole proprietorship in the business of purchasing and harvesting timber, pressing timber into wood products, and selling those products. In June 1999, IRS Agent Michael Durland began a civil audit of Conner's 1996 and 1997 federal income tax returns. Following completion of those audits, the IRS assigned IRS Agent Thomas Walker (Agent Walker) to audit Conner's 1998 and 1999 federal income tax returns. Subsequently, in February 2002, Agent Walker began to audit Conner's 2000 and 2001 federal income tax returns.

Accountant Rudolph Nagy (Accountant Nagy) had prepared Conner's 1996 through 2000 federal income tax returns and represented Conner before the IRS during its civil audits of those returns. A different accountant, Lloyd Hartman (Accountant Hartman), had prepared Conner's 2001 federal income tax return. As of March 2004, Conner had not yet filed a federal income tax return for 2002.

When Agent Walker received Conner's civil audit file, it contained few documents pertaining to tax years 1996 and 1997, because those documents had been transmitted to the IRS's Appeals Office. The file did, however, contain Conner's federal income tax returns and profit and loss statements for 1998 and 1999, which documents Agent Walker assumed came from Accountant Nagy, but did not know for certain. Agent Walker then requested additional records from Accountant Nagy, which he did not provide.

Conner retained an attorney to represent him in the civil audit of his federal income tax return for 2000. Agent Walker reviewed records pertaining to Conner's 2000 tax year at the attorney's office, copied those he needed, and authorized the return of the original records to Conner.

Agent Walker ultimately referred Conner's case to the IRS's Criminal Investigation Division for a tax fraud investigation with respect to tax years 1996 through 2002. Special Agent Ross Pierson (Special Agent Pierson) was assigned the case.¹

Before Special Agent Pierson issued the third-party summonses at issue in the present appeal, Special Agent Pierson reviewed the IRS's civil audit file on Conner and discussed the case with Agent Walker. Notably, the file contained documents indicating that Conner had directed Accountant Nagy to submit a set of federal income tax returns for the years 1994 through 1997 as part of a bank loan application, which returns reflected substantially more income than was reported on the returns Conner had filed with the IRS for the same years. These discrepancies, inter alia, prompted Special Agent Pierson to issue summonses to Accountants Hartman and Nagy in order that he (Special Agent Pierson) could compare records pertaining to Conner held by the accountants with those in the IRS's civil audit file on Conner.

Special Agent Pierson (accompanied by another IRS special agent and Agent Walker) personally served a summons on Accountant Hartman on December 3, 2003, and a summons on Accountant Nagy on December 8, 2003. The summonses were virtually identical. The first page directed the named accountant to appear at the IRS's office in Staunton, Virginia, before Special Agent Pierson on January 5, 2004, to produce the documents described on the second page relating to Conner's financial transactions for 1996 through 2002. The third and fourth pages quoted extensively from Internal Revenue Code sections containing the rights of third parties who receive summonses for taxpayer records. Rather than producing the summoned documents at the IRS's office in Staunton, Virginia on January 5, 2004, Accountants Hartman and Nagy turned over the summoned documents to Special Agent Pierson on the day of service.

Conner's third petition to quash pertains to a second summons served on Accountant Hartman. Believing that he had been tardy in giving Conner notice of the first summons served on Accountant Hartman, Special Agent Pierson served a second summons on Accountant Hartman in early January 2004. Accountant Hartman did not produce any documents in response to this second summons because he had already complied with the first summons.²

Pursuant to IRC § 7609(h), Conner filed petitions in the United States District Court for the Western District of Virginia to quash each of the three third-party summonses. The district court consolidated the petitions and held an evidentiary hearing on December 10, 2004, in order to resolve factual disputes bearing on the questions of whether the IRS issued the summonses in good faith and whether the IRS currently possessed the records sought.³ Special Agent Pierson, Agent Walker, Accountant Hartman, and Shag Lumber Company's office manager, Eunice Montgomery, testified at the evidentiary hearing. The district court also considered affidavits by Special Agent Pierson, Accountant Hartman, and Accountant Nagy. Accountant Nagy died before the evidentiary hearing.

Following the evidentiary hearing, the district court made the following findings of fact in a Memorandum Opinion issued on December 17, 2004:

1) Pierson did not demand production of the documents on the day of service;

2) Each summons conspicuously noted its return date;

3) Hartman produced the documents on the day of service in order to avoid having to appear at the IRS office on the summons return date;

4) Pierson did not verbally inform Hartman and Nagy of Conner's right to petition to quash; however, he gave them each a written explanation of Conner's rights, and each had an opportunity to read it before producing the records 5) Pierson questioned Hartman and Nagy about their relationship with Conner; however, he did not by that questioning, in effect, prematurely examine the records;

6) Upon learning of Conner's petitions to quash, Pierson sealed the records in envelopes, and they have remained sealed to this date;

7) As of this date, neither Pierson nor any other IRS agent has examined the sealed records;

8) Conner has failed to demonstrate that the IRS already possessed the records at the time Pierson served the summonses.

(J.A. 463).

Based on these findings, the district court denied Conner's petitions to quash and granted the government's, motion to enforce the summonses. This timely appeal followed. Pursuant to motion by Conner, the district court stayed the effect of its final order pending appeal.

II.

When an interested party challenges enforcement of an IRS summons, under United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), the initial burden rests with the government to establish a prima facie showing of good faith in issuing the summons, requiring proof that the IRS has satisfied the following four elements: (1) the investigation is being conducted for a legitimate purpose; (2) the inquiry is relevant to that purpose; (3) the information sought is not already in the possession of the IRS; and (4) the administrative steps required by the Internal Revenue Code have been followed. United States v. Stuart, 489 U.S. 353, 359-60, 109 S.Ct. 1183, 103 L.Ed.2d 388 (1989); Powell, 379 U.S. at 57-58, 85 S.Ct. 248; Alphin v. United States, 809 F.2d 236, 238 (4th Cir.1987). The burden on the government to produce a prima facie showing of good faith in issuing the summons is "slight or minimal." Mazurek v. United States, 271 F.3d 226, 230 (5th Cir.2001) (internal quotation marks omitted). Indeed, the government need only present "an affidavit of an agent involved in the investigation averring the Powell good faith elements" in order to establish a prima facie case for enforcement of a civil summons. Alphin, 809 F.2d at 238.

Once the IRS has made such a showing... it is entitled to an enforcement order unless the taxpayer can show that the IRS is attempting to abuse the court's process. 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. The taxpayer carries the burden of proving an abuse of the court's process.

Stuart, 489 U.S. at 360, 109 S.Ct. 1183 (internal quotation marks and citations omitted).

We review the district court's factual findings underlying its enforcement order for clear error, Hintze v. Internal Revenue Service, 879 F.2d 121, 125 (4th Cir.1989), overruled on other grounds, Church of Scientology of California v. United States, 506 U.S. 9, 15-17, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992), and its legal rulings de novo, see, e.g., Hillman v. Internal...