Crystal v. U.S.

• Decision Date: 16 April 1999
• Docket Number: No. 97-56204,97-56204
• Citation: 172 F.3d 1141
• Parties: -1912, 99-1 USTC P 50,464, 99 Cal. Daily Op. Serv. 2760, 1999 Daily Journal D.A.R. 3609 John CRYSTAL; Victoria Crystal; John Crystal Pools, Inc., Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1141

172 F.3d 1141

83 A.F.T.R.2d 99-1912, 99-1 USTC P 50,464,

99 Cal. Daily Op. Serv. 2760,

1999 Daily Journal D.A.R. 3609

John CRYSTAL; Victoria Crystal; John Crystal Pools, Inc. Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee.

No. 97-56204.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 3, 1999.

Decided April 16, 1999.

Gary S. Lincenberg (argued) and Thomas R. Freeman, Bird, Marella, Boxer, Wolpert & Matz, Los Angeles, California, for the petitioners-appellants.

Charles E. Brookhart and Marion E.M. Erickson (argued), United States Department of Justice, Tax Division, Washington, D.C., for the respondent-appellee.

Appeal from the United States District Court for the Central District of California; Dickran M. Tevrizian, District Judge, Presiding. D.C. No. CV-96-07033-DT(Ex).

Before: PREGERSON and RYMER, Circuit Judges, and BURRELL, ^* District Judge.

Opinion by Judge RYMER; Concurrence by Judge PREGERSON.

RYMER, Circuit Judge:

John Crystal, Victoria Crystal, and Crystal Pools, Inc. appeal summary judgment in favor of the government denying their petition to quash and ordering enforcement of third party summonses issued by the Criminal Investigations Division ("CID") of the Los Angeles District of the Internal Revenue Service. The Crystals initiated contact for a voluntary disclosure with the Southern California District (where they lived), and were told by the Chief of the CID for that district that there was no prior IRS activity. Although incorrect, because a preliminary investigation was underway in the Los Angeles CID office, the district court found this was a case of the left hand not knowing what the right hand was doing. It concluded that while the government's conduct may have been careless, the summonses were not issued in bad faith. We agree, and as we have jurisdiction, 28 U.S.C. § 1291, we affirm.

I

On May 13, 1996, the Crystals engaged Roger M. Olsen to represent them and on the same day, Olsen called Richard Speier, Jr., Chief of the CID office in Los Angeles. Without revealing the taxpayers' names or business, Olsen asked whether a voluntary disclosure should be done with the CID office in Los Angeles, where his clients' business was located, or in the Southern California District, where they lived. Speier indicated that voluntary disclosures are generally handled in the district where the taxpayer resides. Olsen then called the Chief of the CID for the Southern California District, Wayne McEwan. Again without identifying the taxpayers, Olsen told McEwan that his clients wanted to file amended returns, that the additional income they intended to report was from legal sources, that he was not aware of any IRS investigations pertaining to his clients, and that his clients' business lawyer had contacted the Los Angeles Police Department about a former employee who had embezzled over $500,000 and threatened to contact the IRS. ¹ McEwan confirmed that the IRS still had a voluntary disclosure policy that permitted taxpayers to amend their returns without threat of criminal prosecution, and that Olsen's clients would qualify based on the preliminary profile given to him. After conferring with his clients, Olsen disclosed their identities to McEwan and faxed McEwan a confirmation letter with a powers of attorney attachment, dated May 23, which indicated that he wanted "to be sure that no prior activity of the above taxpayers has been initiated by the Internal Revenue Service-audit, collections, investigations, etc., for purposes of the timeliness of such a disclosure." McEwan requested a records check from CID records, as well as the Examination and Collection divisions, but turned up nothing on taxpayers. He reported Meanwhile, on May 15, 1996, an informant came in to the Los Angeles CID office with information about taxpayers' tax liability for the years 1991-1995. As a result, a preliminary investigation was opened on June 3 and assigned to Special Agent Linda T. Russell. Because the Crystals lived in Laguna Niguel, Speier sent a Request for Investigative Jurisdiction (to initiate a criminal investigation) to McEwan, which McEwan signed July 26, 1996. On August 22, the Los Angeles CID office initiated a full (or "subject") investigation of taxpayers, which was also assigned to Russell. As part of the investigation, Russell contacted John Crystal on August 27, who referred her to Olsen. On September 4, Olsen spoke with Speier, who said he was unaware of the pending voluntary disclosure with the Southern California CID office, and with McEwan, who said he was not aware there was a pending investigation of taxpayers by the Los Angeles CID office. Thereafter, Russell issued summonses to various record custodians and to two Crystal entities.

this to Olsen on June 5. Olsen and McEwan then had several telephone conversations during which Olsen outlined "the details of the tax issues and facts relating to the Crystals and Crystal Corp." The last conversation occurred at the end of July, when McEwan agreed to allow the Crystals time to complete their amended returns and advised Olsen that this created no problem for their voluntary disclosure. At some point, the Crystals made a $2,500 payment to the IRS in anticipation of settling their tax deficiencies, ² but they never completed or filed amended returns.

Taxpayers filed a petition and a supplemental petition requesting the district court to quash the summonses or, in the alternative, to conduct discovery. The petition alleges that the Crystals were misled by the affirmative misrepresentations of the IRS that it was not conducting a criminal investigation, as a result of which they made voluntary disclosures, and that the investigation was not being conducted in good faith. The government moved for summary judgment on the grounds that the voluntary disclosure policy creates no rights for taxpayers, and that they failed to show that enforcement of the summonses would be an abuse of the court's process. The district court allowed taxpayers to depose McEwan, Speier and Russell. After supplemental papers were filed, the court granted the government's motion for summary judgment. It concluded that even if the voluntary disclosure were timely and the Crystals had made an actual disclosure, the IRS was not precluded from using third party summonses to certify the accuracy of their disclosures or from investigating the Crystals. The court also determined that the testimony at best tended to show that the government acted carelessly, but that it did not disclose bad faith on behalf of McEwan or any other IRS employee. Accordingly, it found that the summonses were issued in good faith.

Taxpayers have timely appealed the district court's ruling.

II

The IRS may issue a summons only for the purposes set out in 26 U.S.C. § 7602(a). See United States v. LaSalle National Bank, 437 U.S. 298, 316 n. 18, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978). 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." 26 U.S.C. § 7602(a). Section 7609(b)(2)(A) permits a taxpayer identified in an IRS summons served on a third party recordkeeper to begin a proceeding to quash the summons; in turn, the government may seek to compel compliance. To defeat a petition to quash, or to enforce a summons, the government must establish that (1) the investigation will be conducted for a legitimate purpose; (2) the material being 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 or collection purpose by the Service.... Without a doubt, this burden is a heavy one.' " United States v. Jose, 131 F.3d 1325, 1328 (9th Cir.1997) (en banc) (quoting LaSalle, 437 U.S. at 316, 98 S.Ct. 2357). As we observed in Derr, "[e]nforcement of a summons is generally a summary proceeding to which a taxpayer has few defenses." United States v. Derr, 968 F.2d 943, 945 (9th Cir.1992). " 'The taxpayer must allege specific facts and evidence to support his allegations' of bad faith or improper purpose." Jose, 131 F.3d at 1328 (quoting Liberty, 778 F.2d at 1392). ³

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. See United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). "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." Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir.1985). Here, it is undisputed that Special Agent Russell's declaration satisfies all of the Powell requirements. Therefore, the government established a prima facie case to enforce the summonses.

"The taxpayer 'may challenge the summons on any appropriate grounds,' including failure to satisfy the Powell requirements or abuse of the court's process." Id. (quoting Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964)). "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." Powell, 379 U.S. at 58, 85 S.Ct. 248. In addition, it has become clear since Powell that gathering evidence after having decided to make a recommendation for prosecution would be an improper purpose,...