Gaetano v. United States

Decision Date09 April 2021
Docket NumberNo. 20-1902,20-1902
Citation994 F.3d 501
Parties Kimberly Basehart GAETANO; Richard Gaetano, Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

ON BRIEF: Joseph Falcone, JOSEPH FALCONE, P.C., Southfield, Michigan, for Appellants. Elissa Hart-Mahan, Joan I. Oppenheimer, DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

Before: GUY, DONALD, and MURPHY, Circuit Judges.

RALPH B. GUY, JR., Circuit Judge.

The Internal Revenue Service (IRS) issued a summons to a point-of-sale systems provider, seeking records related to Richard and Kimberly Gaetano and their cannabis businesses. Alleging the summons was issued in bad faith, the Gaetanos brought this action to quash the summons under 26 U.S.C. § 7609. The district court dismissed the action for lack of subject-matter jurisdiction because the Gaetanos lacked standing. On appeal, the Government argues that § 7609 only waives the United States’ sovereign immunity to allow taxpayers to bring an action to quash certain third-party IRS summonses. As a matter of first impression, we conclude that the immunity waiver in § 7609 is subject to the statute's exceptions. One of those exceptions applies because the summons here was issued by an IRS criminal investigator "in connection" with an IRS criminal investigation and the summoned party is not a third-party recordkeeper. See 26 U.S.C. § 7609(c)(2)(E). Without a statutory waiver of the United States’ sovereign immunity, subject-matter jurisdiction cannot obtain. Accordingly, we affirm.

I.
A.

Kimberly and Richard Gaetano own several cannabis dispensary businesses located in Michigan. The IRS at some point began a criminal investigation of the Gaetanos to determine whether they owed federal taxes. On October 9, 2019, Special Agent Tyler Goodnight of the IRS's Criminal Investigation Division and another IRS agent interviewed the owners of Portal 42, LLC. Portal 42 is a software company that provides the cannabis industry with point-of-sale systems, featuring the capacity for businesses to track customer sales data or delete the data remotely with a "kill switch." The owners of Portal 42 confirmed that the Gaetanos are clients.

At the conclusion of the interview, Agent Goodnight served Portal 42 with a summons. The summons ordered Portal 42 (and its agent) to appear before Agent Goodnight to "give testimony" and produce various records "and other data relating to the tax liability or the collection of the tax liability or for the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws concerning [the Gaetanos] for the periods shown ." (Emphasis added). Above that statement, in the space labeled "Periods," it states "01/01/2015 to 09/01/2019." The attachment to the summons directed Portal 42 to produce "[a]ny and all" records related to the Gaetanos or one of their businesses (including records of sales, deliveries, and the hours employees worked) for the same period noted on the face of the summons—January 1, 2015 to September 1, 2019. The IRS did not notify the Gaetanos about the summons.

A few weeks later, Portal 42 sent Agent Goodnight an email with a hyperlink to the requested records. An IRS computer investigative specialist copied the documents to a disc, and the disc was placed in a sealed envelope. Agent Goodnight has not viewed the records Portal 42 produced, nor have any other personnel in the IRS's Criminal Investigation Division.

B.

On October 23, 2019, the Gaetanos filed a petition against the United States under 26 U.S.C. § 7609, seeking to quash the summons issued to Portal 42. In the petition, the Gaetanos alleged that the IRS should have notified them about the summons and that it was issued in bad faith. The district court referred the case to a magistrate judge.

The Government filed a motion to dismiss the petition and enforce the summons, arguing that, because Portal 42 is not a "third-party recordkeeper," the notice exception in § 7609(c)(2)(E) applies and, thus, the Gaetanos "lack standing to quash the summons." The Government attached a declaration from Agent Goodnight, stating that he was "conducting a criminal investigation to determine whether [the Gaetanos] understated their tax liability in violation of the Internal Revenue Code" and that the records summoned "are relevant and necessary" to that investigation. In opposition, the Gaetanos conceded that Portal 42 is not a third-party recordkeeper within the meaning of 26 U.S.C. § 7603(b)(2)(J), but asserted that there could be no criminal investigation for 2019 because (at the time) a tax return for 2019 was not yet due and because "Agent Goodnight's affidavit does not mention the tax years he is investigating."

The Government then shifted theories in its reply. It argued that § 7609(c)(2)(E) is an exception to the United States’ sovereign immunity waiver for petitions to quash, and that the exception applied "because Agent Goodnight is a criminal investigator for the IRS" and Portal 42 is not a third-party recordkeeper. The Government also attached a supplemental declaration from Agent Goodnight, clarifying that he was "conducting a criminal investigation into [the Gaetanos for the] alleged filing of false income tax and employment tax returns for tax years 2015 through 2018, and quarterly filings for 2019." The Gaetanos filed a supplemental brief to reiterate their position. Relying on a different summons—which Agent Goodnight had issued to JP Morgan Chase Bank on November 20, 2019, seeking the Gaetanos’ records related to the "Periods" of "01/01/2015 to 11/01/2019"—the Gaetanos asserted that there are no tax periods that end on November 1, 2019, and "the IRS is simply changing the tax periods under investigation as time goes on."1

After a hearing on the motion, the magistrate judge dismissed the Gaetanos’ petition to quash for lack of subject-matter jurisdiction because the Gaetanos "don't have standing" under § 7609. Nonetheless, the magistrate judge ordered that the summons be enforced because the Gaetanos had failed to establish that the summons was issued in bad faith. The Gaetanos filed objections.

The district court overruled most of the Gaetanos’ objections, concluding that the petition to quash must be dismissed for lack of subject-matter jurisdiction because the facts fit within the exception in § 7609(c)(2)(E). But the court set aside the portion of the magistrate judge's order that enforced the summons because, without subject-matter jurisdiction over the Gaetanos’ case, the court concluded such relief could not be granted and, in any event, the court noted that the Government had stated "Portal 42 ha[d] already complied."2

The Gaetanos appeal.

II.

"[T]he party asserting federal jurisdiction when it is challenged has the burden of establishing it." DaimlerChrysler Corp. v. Cuno , 547 U.S. 332, 342 n.3, 126 S.Ct. 1854, 164 L.Ed.2d 589 (2006). How the court resolves a subject-matter jurisdiction challenge depends on whether the motion presents a "facial attack or a factual attack." Carrier Corp. v. Outokumpu Oyj , 673 F.3d 430, 440 (6th Cir. 2012) (quoting Gentek Bldg. Prods., Inc. v. Sherwin-Williams Co. , 491 F.3d 320, 330 (6th Cir. 2007) ). A "facial attack" is asserted when the movant accepts the alleged jurisdictional facts as true and "questions merely the sufficiency of the pleading" to invoke federal jurisdiction. Gentek , 491 F.3d at 330. A "factual attack," by contrast, is advanced when the movant contests the alleged jurisdictional facts by introducing evidence outside the pleadings. See id. ; Amburgey v. United States , 733 F.3d 633, 636 (6th Cir. 2013). Here, the Government mounts a factual attack by relying on Agent Goodnight's affidavits.

In such a case, "the district court has wide discretion to allow affidavits, documents, and even a limited evidentiary hearing to resolve jurisdictional facts," Gentek , 491 F.3d at 330, and "the court can actually weigh evidence to confirm the existence of the factual predicates for subject-matter jurisdiction." Carrier Corp ., 673 F.3d at 440. Factual findings made by the district court are reviewed for clear error. Id. But "review of the district court's application of the law to the facts is de novo ." Wayside Church v. Van Buren Cty. , 847 F.3d 812, 817 (6th Cir. 2017) (quoting RMI Titanium Co. v. Westinghouse Elec. Corp. , 78 F.3d 1125, 1135 (6th Cir. 1996) ).

III.

The Government asserts sovereign immunity as a jurisdictional bar to this action. "Absent a waiver, sovereign immunity shields the Federal Government and its agencies from suit." FDIC v. Meyer , 510 U.S. 471, 475, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994). "Sovereign immunity is jurisdictional in nature." Id. It implicates a court's subject-matter jurisdiction because the "terms of [the United States’] consent to be sued in any court define that court's jurisdiction to entertain the suit." See id. (citation omitted); see also Brownback v. King , ––– U.S. ––––, 141 S. Ct. 740, 749, ––– L.Ed.2d –––– (2021). An action to quash a summons issued by the IRS is a suit against the United States requiring a waiver of its sovereign immunity. See Clay v. United States , 199 F.3d 876, 879 (6th Cir. 1999) ; Barmes v. United States , 199 F.3d 386, 388 (7th Cir. 1999) ; Taylor v. United States , 292 F. App'x 383, 385 (5th Cir. 2008). Any "waiver of sovereign immunity must be ‘unequivocally expressed’ in statutory text," Fed. Aviation Admin. v. Cooper , 566 U.S. 284, 290, 132 S.Ct. 1441, 182 L.Ed.2d 497 (2012) (quoting Lane v. Pena , 518 U.S. 187, 192, 116 S.Ct. 2092, 135 L.Ed.2d 486 (1996) ), and must be "strictly construed, in terms of its scope, in favor of the sovereign." Lane , 518 U.S. at 192, 116 S.Ct. 2092 ; Orff v. United States , 545 U.S. 596, 601-02, 125 S.Ct. 2606, 162 L.Ed.2d 544 (2005).

The Gaetanos claim jurisdiction obtains under 26 U.S.C. § 7609. We disagree. The United States’ sovereign immunity...

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