Gonzalez v. United States
| Decision Date | 04 October 2011 |
| Docket Number | Case No. 11-cv-4390 |
| Parties | ANTONIO S. GONZALEZ, Petitioner, v. UNITED STATES OF AMERICA, Respondent. |
| Court | U.S. District Court — Northern District of Illinois |
AMY J. ST. EVE, District Court Judge:
Before the Court is the government's Rule 12(b)(6) Motion to Dismiss Antonio S. Gonzalez's First Amended Petition to Quash IRS Third Party Summons. For the following reasons, the Court construes the government's motion to dismiss as a response to Mr. Gonzalez's Petition, denies the Petition and the request for an evidentiary hearing with prejudice, and denies the government's motion to dismiss pursuant to Rule 12(b)(6) as moot.
Petitioner Antonio S. Gonzalez is a United States citizen who resides in Miami, Florida. (R. 3, Petition at 1.)1 The Internal Revenue Service ("IRS") is conducting a criminal investigation of Mr. Gonzalez. (Id. at 2.) He is the sole shareholder of the law firm of Antonio S. Gonzalez, P.A. and GSMG, Inc., an entity licensed to provide boxing-related services. (R. 7-1, Morrow Decl. ¶ 3.) According to the IRS, Mr. Gonzalez has not filed federal income tax returns or paid federal taxes for the years 2006 through 2010. (Id.)
On June 8, 2011, IRS Criminal Investigation Division Special Agent Brett Morrow issued a summons for the production of documents under 26 U.S.C. § 7602(a) to Trans Union, a credit reporting business located in Chicago, Illinois (the "Summons"). (Id. at 5-6.) Special Agent Morrow also provided a copy of the Summons to Mr. Gonzalez on that same day. (R. 7-1, Morrow Decl. ¶ 7; R. 7-2, Service of Summons at 3.) The Summons sought "all records relative to the financial transactions" of Mr. Gonzalez from January 1, 2005 through the present, and it also required Trans Union to give testimony. (R. 3-1, Summons at 1-2.) On June 28, 2011, Mr. Gonzalez filed a Petition to Quash the Summons (R. 1), and on June 30, 2011, he filed a First Amended Petition to Quash (the "Petition"). On August 17, 2011, the United States filed a Motion to Dismiss the Petition. (R. 7.)
Because both parties attached materials outside the pleadings to their briefs, which is normally not permitted under Rule 12(b)(6), the Court will construe the government's motion to dismiss as a response to Mr. Gonzalez's Petition. See Pragovich v. IRS, No. 08-mc-12-JPG, 2008 WL 3385458 (S.D. Ill. Aug. 11, 2008) ().
"Section 7602 of the Internal Revenue Code grants the IRS 'broad power' to issue summonses to investigate violations of the tax code." Khan v. United States, 548 F.3d 549, 553 (7th Cir. 2008) (citing Miller v. United States, 150 F.3d 770, 772 (7th Cir. 1998)). Pursuant to that statute, the Secretary of the Treasury may "examine books and records, issue summonses and take testimony for the purposes of 'ascertaining the correctness of any return, making a return where none has been made; [or] determining the liability of any person for any internalrevenue tax. . . .'" Id. (citing 26 U.S.C. § 7602(a)). The Seventh Circuit has recognized that the IRS summons power is "vital to the efficacy of the federal tax system, which seeks to assure that taxpayers pay what Congress has mandated and to prevent dishonest persons from escaping taxation thus shifting heavier burdens to honest taxpayers." Id. at 553-54 (citing United States v. BDO Seidman, 337 F.3d 802, 810 (7th Cir. 2003)) (quotation marks omitted).
In United States v. Powell, the Supreme Court held that in order to establish a prima facie case of a valid IRS summons issued pursuant to 26 U.S.C. § 7602, the government must show that (1) it issued the summons for a legitimate purpose; (2) the summoned data may be relevant to that purpose; (3) the government does not already have the data; and (4) the government followed the Internal Revenue Code's administrative steps in issuing and serving the summons. 379 U.S. 48, 57-58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964); Khan, 548 F.3d at 554. Additionally, "the United States must not violate provisions of § 7602, including § 7602(d)(1), designed to ensure the summons is issued in good faith." Id. at 544. The government often demonstrates its prima facie case through affidavits of IRS agents involved in the investigation. 2121 Arlington Heights Corp. v. IRS, 109 F.3d 1221, 1224 (7th Cir. 1997). Once the government has established a prima facie case, the burden shifts to the taxpayer to show establish a valid defense. Id. The taxpayer may meet this "heavy burden" either by disproving the existence of one of the Powell factors or by identifying specific facts suggesting that the IRS issued the summons in bad faith. Id.
The government's burden to demonstrate its prima facie case under Powell is a slight one, and it is easily met here. See 2121 Arlington Heights Corp., 109 F.3d at 1224.2 Special Agent Morrow's declaration affirms that the IRS issued the Summons, which seeks documents and testimony related to Mr. Gonzalez's financial transactions, to a credit reporting business for the legitimate purpose of determining the correct federal income tax liabilities of Mr. Gonzalez for 2006 through 2010 and whether he has committed any offense of the internal revenue laws during those years. See Powell, 379 U.S. at 57-58; Morrow Decl. ¶ 8. Special Agent Morrow also stated that the government does not already have the requested data and that it complied with all of the Internal Revenue Code's administrative procedures in issuing the Summons. Powell, 379 U.S. at 57-68; Morrow Decl. ¶¶ 9-11. He further avers that a Justice Department referral is not in effect with respect to Mr. Gonzalez. (Morrow Decl. ¶ 12.)
Because the government has demonstrated its prima facie case, the burden shifts to Mr. Gonzalez to disprove that the government has met the Powell factors or set forth specific facts showing bad faith. See 2121 Arlington Heights Corp., 109 F.3d at 1224. Mr. Gonzalez posits three reasons why the Court should quash the Summons: 1) the IRS issued the Summons for an invalid purpose; 2) enforcement of the Summons would be an abuse of the Court's process; and3) the IRS failed to comply with the advanced notice requirement in 26 U.S.C. § 7602(c). (Petition, passim.) He further requests a "limited adversarial hearing" regarding whether the IRS issued the Summons for an improper purpose. (Id. at 3-4.)
Mr. Gonzalez's "improper purpose" and "abuse of process" arguments are essentially one and the same. Mr. Gonzalez argues that the IRS issued the Summons for the improper purpose of gathering information for a criminal investigation and that because the IRS issued the Summons in connection with a criminal investigation, it did so in "bad faith." Both arguments are without merit.
Before Congress amended 26 U.S.C. § 7602 in 1982, the IRS could issue administrative summonses for only four purposes: 1) ascertaining the correctness of a tax return; 2) making a return where none had been made; 3) determining the liability of any person for any internal revenue tax; and 4) collecting any liability for any internal revenue tax. See United States v. LaSalle Nat'l Bank, 437 U.S. 298, 302 n.3, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978). In LaSalle, the Supreme Court held that the IRS did not have authority under § 7602 to issue summonses solely for the purpose of a criminal investigation. Id. at 316-17. Justice Stewart and three other justices dissented, arguing that the IRS could issue summonses solely for criminal investigation purposes as long as the IRS had not referred the investigation to the Department of Justice for criminal prosecution. Id. at 319-21.
Congress responded to the LaSalle case by amending § 7602 such that it now permits the IRS to issue summonses "for the purpose of inquiring into any offense connected with theadministration or enforcement of the internal revenue laws." 26 U.S.C. § 7602(b) (emphasis added). An exception to this rule exists under § 7602(d)(1), which states that the IRS may not issue a summons with respect to any person "if a Justice Department referral is in effect with respect to such person." 26 U.S.C. § 7602(d)(1). The statute continues on to provide that a "Justice Department referral" is in effect when 1) "the Secretary has recommended to the Attorney General a grand jury investigation of, or the criminal prosecution of, such person for any offense connected with the administration or enforcement of the internal revenue laws"; or 2) "any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information (within the meaning of section 6103(b)) relating to such person." The request referenced in section 6103(h)(3)(B) is "a written request from the Attorney General, the Deputy Attorney General, or an Assistant Attorney General for a return of, or return information relating to, a person named in such request." 26 U.S.C. § 6103(h)(3)(B).
As the Seventh Circuit has recognized, there is "some debate" as to whether LaSalle's "solely criminal purpose" ground still exists after the 1982 amendments to § 7602. See United States v. Michaud, 907 F.2d 750, 752, n.2 (7th Cir. 1990) (en banc). In Michaud, the Seventh Circuit expressly declined to resolve the debate. Id.
The plain text of § 7602 specifically provides that the IRS may not issue a summons "if a Justice Department referral is in effect." 26 U.S.C. § 7602(d)(1). Under a plain reading, the IRS may issue summonses pursuant to § 7602 even when the sole purpose of the investigation at issue is criminal, provided that the IRS has not referred the case to the ...
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