CSW Consulting, Inc. v. United States

• Decision Date: 15 December 2020
• Docket Number: Case No. 18-mc-00030-PAB
• Citation: 507 F.Supp.3d 1267
• Parties: CSW CONSULTING, INC., a Colorado corporation, Colorado Colitas, LLC, d/b/a/ Herbal Remedies, a Colorado limited liability company, and Carl S. Wemhoff, Petitioners, v. UNITED STATES of America, THROUGH its agency the INTERNAL REVENUE SERVICE, Respondent.
• Court: U.S. District Court — District of Colorado

507 F.Supp.3d 1267

CSW CONSULTING, INC., a Colorado corporation, Colorado Colitas, LLC, d/b/a/ Herbal Remedies, a Colorado limited liability company, and Carl S. Wemhoff, Petitioners,

v.UNITED STATES of America, THROUGH its agency the INTERNAL REVENUE SERVICE, Respondent.

Case No. 18-mc-00030-PAB

United States District Court, D. Colorado.

Signed December 15, 2020

James David Thorburn, Thorburn Law Group LLC, Greenwood Village, CO, Richard Allan Walker, Martinez Law, LLC, Longmont, CO, for Petitioners.

Charles J. Butler, U.S. Department of Justice-DC-# 683, Washington, DC, for Respondent.

ORDER

PHILIP A. BRIMMER, Chief United States District Judge

This matter is before the Court on petitioners’ Amended Petition to Quash Summonses [Docket No. 7] and the United States’ Motion to Dismiss Amended Petition and Enforce Summonses [Docket No. 10].¹

I. BACKGROUND

The Internal Revenue Service ("IRS") is conducting a civil audit of petitioner CSW Consulting, Inc. ("CSW") and its owner, petitioner Carl Wemhoff, for the 2013 through 2016 tax years. Docket No. 10-1 at 2, ¶ 4. Through petitioner Colorado Colitas, LLC, CSW, and Mr. Wemhoff operate a marijuana dispensary. Id. at 2, ¶ 6. In connection with the audit, David Hewell, an IRS revenue agent, requested documents from both CSW and Mr. Wemhoff. Id. at 3, ¶ 9–13. In response to Revenue Agent Hewell's requests, petitioners provided only "incomplete and redacted financial and other records." Id. at 4, ¶ 15. The IRS maintains that without further information it cannot verify petitioners’ accounting records, reconstruct petitioners’ income, or otherwise confirm the accuracy of the tax returns at issue. Docket No. 10 at 4. CSW also refused to produce information it provided to Colorado's Marijuana Enforcement Division ("MED") through the Marijuana Enforcement Tracking Reporting and Compliance ("METRC") system. Docket No. 10-1. at 4, ¶ 16. Colorado law requires marijuana businesses to report business, accounting, and financial information to the MED, and part of this requires marijuana businesses to account for their inventory using METRC. Docket No. 10 at 4.

The IRS states that this information from METRC is useful in an audit because it "can establish whether a marijuana business properly reported its gross receipts and allowed deductions for costs of goods sold." Id. Revenue Agent Hewell issued a summons to the MED seeking "METRC annual gross sales reports, transfer reports, annual harvest reports, and monthly plants inventory reports." Docket No. 10-1 at 5, ¶ 19. Revenue Agent Hewell also issued summonses to U.S. Bank National Association ("U.S. Bank") and Wells Fargo Bank N.A. ("Wells Fargo"). Id. at 5, ¶ 22. The IRS states that the information held by a business's bank "can assist in verifying the business's books and records and otherwise substantiate information stated on its federal income tax returns." Docket No. 10 at 4. Petitioners now seek to quash the summonses on the MED, U.S. Bank, and Wells Fargo, Docket No. 7 at 2, and the government seeks to enforce them. Docket No. 10. The MED, U.S. Bank, and Wells Fargo have not produced information in response to the summonses. Id. at 5.

II. DISCUSSION

In order to enforce a summons, the IRS must show that the "investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed—in particular, that the ‘Secretary or his delegate,’ after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect." United States v. Powell , 379 U.S. 48, 57-58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964).² "The requisite showing is generally made by affidavit of the agent who issued the summons and who is seeking enforcement." Id. (internal quotation marks omitted). The IRS's burden "is a slight one because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted." United States v. Balanced Fin. Mgmt., Inc. , 769 F.2d 1440, 1443 (10th Cir. 1985) (citation omitted).

If the IRS makes the prima facie showing required under Powell , the burden shifts to the party resisting enforcement, whose "burden is a heavy one."³ Id. at 1444 (citing United States v. Garden State National Bank , 607 F.2d 61, 68 (3d Cir. 1979) ). The party resisting enforcement must establish a defense, show a lack of good faith on the part of the IRS, or "prove that enforcement would constitute an abuse of the court's process." Id. (internal quotation marks omitted).

Because review of the IRS's motion to dismiss requires the Court to consider a declaration outside of the pleadings, the Court must treat the motion as a motion for summary judgment under Fed. R. Civ. P. 56. Standing Akimbo, LLC v. United States , 955 F.3d 1146, 1155 (10th Cir. 2020) ("Because we are considering Agent Pringle's declaration, the IRS's motion to dismiss must be treated as one for summary judgment under Rule 56." (internal quotations omitted)). Under this standard, the Court will "view the record in the light most favorable to [the petitioners] and ask whether the IRS has shown that there are no genuine disputes of material fact and that it is entitled to judgment as a matter of law." Id. at 1156 (citations omitted). Substantive law determines whether facts are material in a case, so the criteria of Powell are "of central importance" in determining whether there are genuine disputes of material fact. Id. (citing High Desert Relief, Inc. v. United States , 917 F.3d 1170, 1181 (10th Cir. 2019) ). The "traditional summary-judgment standard of review precludes the [petitioners] from resting on conclusory statements because such statements do not suffice to create a genuine issue of material fact." Id. (internal quotations omitted).

A. Legitimate Purpose

The IRS provides a declaration from Revenue Agent Hewell stating that he served the summonses in relation to an "examination of the federal tax liabilities" of petitioners and that petitioners operate at least one marijuana dispensary. Docket No. 10-1 at 2, ¶¶ 4, 6. The IRS argues that its investigation of whether petitioners’ income derives from sale of marijuana is a legitimate purpose in light of the bar on deductions and credits for businesses trafficking in controlled substances under Internal Revenue Code § 280E. Docket No. 10 at 9–10.

Petitioners argue that the summonses do not have a legitimate purpose because Congress did not empower the IRS to investigate violations of federal criminal drug laws. Docket No. 7 at 15. Petitioners state that

the purpose of theses summonses is not to determine income or expenses, but to determine whether Petitioners have violated the CSA in order to apply Section 208E. However, Section 208E contains no language authorizing the IRS to investigate or administratively determine that a taxpayer is unlawfully trafficking in a controlled substance.

Id. Petitioners further argue that the government has read the case law incorrectly to give the IRS authority to administratively investigate and determine violations of federal criminal drug laws. Id. at 16.

Petitioners, however, have not shown that a criminal investigation is pending or that the summonses are connected to a criminal investigation. See Green Sol. Retail, Inc. v. United States , 855 F.3d 1111, 1121 (10th Cir. 2017) ("But § 280E has no requirement that the Department of Justice conduct a criminal investigation or obtain a conviction before § 280E applies." (citing Alpenglow Botanicals, LLC v. United States , No. 16-cv-00258-RM-CBS, 2016 WL 7856477, at *4 (D. Colo. Dec. 1, 2016) )). Moreover, the Tenth Circuit has rejected the argument that the IRS lacks authority to determine whether petitioners are trafficking in a controlled substance. See Alpenglow Botanicals, LLC v. United States , 894 F.3d 1187, 1197 (10th Cir. 2018) ("[I]t is within the IRS's statutory authority to determine, as a matter of civil tax law, whether taxpayers have trafficked in controlled substances."); Standing Akimbo , 955 F.3d at 1157 ("[E]ven if the IRS had in fact issued the summons to investigate federal drug crimes ... the IRS could still do so as part of determining § 280E ’s applicability."). While the IRS may lack authority to criminally prosecute petitioners for trafficking in controlled substances, the IRS has authority to make determinations about whether deductions are allowable under the Internal Revenue Code, including § 280E. Revenue Agent Hewell's affidavit establishes that the summonses are related to an investigation of petitioners’ tax liabilities, something within the IRS's authority. Docket No. 10-1 at 2, ¶ 4.

Regardless of whether there is an active criminal investigation, petitioners contend that the IRS is required to grant them absolute immunity from criminal prosecution before issuing the summonses. Docket No. 7 at 19–20. Petitioners argue that the statutory scheme of § 280E creates "constitutional difficulty" because compelling a taxpayer to turn over the requested information implicates a taxpayer's Fifth Amendment privilege against self-incrimination. Id. at 21. In response, the government contends that: (1) § 280E, as it governs voluntary deductions, does not compel taxpayers to disclose any information; (2) taxpayers do not have Fifth Amendment rights in records voluntarily provided to a third party; and (3) petitioners do not identify a "genuine hazard" of self-incrimination. Docket No. 10 at 11–14.

"The Fifth Amendment protects against compelled self-incrimination, not the disclosure of private information." Fisher v. United States , 425 U.S. 391, 401, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976) (quoting United States v. Nobles , 422 U.S. 225, 233 n.7, 95 S.Ct. 2160, 45 L.Ed.2d 141 (1975) ) (internal quotation marks omitted). Relying on this understanding of the ...