Hanna v. United States, 85-C-1159.

• Decision Date: 16 October 1986
• Docket Number: No. 85-C-1159.,85-C-1159.
• Citation: 647 F. Supp. 590
• Parties: Rusty J. HANNA, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Utah

647 F. Supp. 590

Rusty J. HANNA, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

No. 85-C-1159.

United States District Court, D. Utah, C.D.

October 16, 1986.

W. Andrew McCullough, McCullough, Jones, Jensen & Ivins, Orem, Utah, for plaintiffs.

Brent D. Ward, U.S. Atty., Lawrence J. Leigh, C. William Ryan, Asst. U.S. Attys., Salt Lake City, Utah, Glen R. Dawson, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant.

RULING ON DEFENDANT'S MOTION TO DISMISS

SAM, District Judge.

This is an action commenced by taxpayer Rusty J. Hanna to quash Internal Revenue Service summonses served on himself and Mini Spas, Inc., and on certain other business entities.

I

Special Agent Brent D. Conlin (Agent Conlin), of the Criminal Investigation Division of the Internal Revenue Service under the District Director of the Salt Lake City District, is investigating the tax liabilities of petitioner, Rusty J. Hanna (Hanna), for the taxable periods 1981, 1982, and 1983. As part of this investigation, Agent Conlin issued six Internal Revenue Service summonses directing the following persons and entities to testify and to produce certain records related to Hanna: Rusty J. Hanna and Mini Spas, Inc. (Mini Spas), H. Sherwood and Company (Sherwood), General Motors Acceptance Corporation (GMAC), Continental Bank and Trust (Continental), Valley National Financial Service Company (Valley National), and Westport Bank (Westport).

On September 23, 1985, Agent Conlin served summons on Rusty J. Hanna and Mini Spas by handing an attested copy of the summons to Hanna. Hanna received no notice of that summons because such notice is not required under 26 U.S.C. § 7602(a).¹ Also on September 23, 1985, Agent Conlin served Sherwood by handing Howard Sherwood an attested copy of the summons and sent notice of the summons by certified mail to Hanna's last known address, as required under 26 U.S.C. § 7609(a). On October 8, 1985, Agent Conlin had attested copies of summonses served on Lynne Pitkin at GMAC and Barbara Lund at Continental and sent notices of the summonses by certified mail to Hanna's last known address. On October 17, 1985, Agent Conlin had an attested copy of a summons served on Sheri Lance at Valley National, and on October 18, 1985, he sent notice of the summons by certified mail to Hanna's last known address. On October 21, 1985, Agent Conlin served a summons by handing an attested copy of the summons to an employee at Westport and sent notice of the summons by certified mail to Hanna's last known address. Hanna filed his Motion for Order to Quash Summonses on October 11, 1985 and his Amended Petition to Quash on October 30, 1985. The summoned parties failed to provide the requested material by the return date of each summons. To date, Agent Conlin has received and placed under seal information from Westport, GMAC, and Continental.

II

Jurisdiction, the Government's prima facie case and the taxpayer's burden.

The court must first determine whether each summons is properly before it because jurisdictional failure of an individual summons will result in dismissal of Hanna's Motion to Quash as to that summons. If the court should find subject matter jurisdiction, it must then rule on whether the issuance of each summons meets Supreme Court requirements, and if so, whether Hanna raises defenses that would render court-ordered enforcement of the summons an abuse of process.

Under 26 U.S.C. §§ 7602, 7604(a), and 7609(b)(2)(A), the court has subject matter jurisdiction to compel compliance with an Internal Revenue Service summons issued. Section 7602 authorizes service of summons for purposes of inquiring into the offense charged,² section 7604(a) lays jurisdiction for the enforcement of a summons with the district court for the district in which the summoned party resides,³ and section 7609(b)(2)(A) provides that all petitions to quash summonses must be dismissed if not filed within 20 days after proper notice is given.⁴ The taxpayer's rights to receive notice of service of a summons and to file a petition to quash arise under section 7609(b) only when records are in the custody of a "third-party recordkeeper," as defined in section 7609(a)(3)(A), and the burden of proving that an entity is a third-party recordkeeper rests with the taxpayer bringing the action to quash. Smith v. United States, 84-1 U.S. Tax Cas. (CCH) para. 9504 (M.D.Pa. 1984); Organtini v. United States, 84-1 U.S. Tax Cas. (CCH) para. 9281 (N.D.Ill.E. D.1984).

In United States v. Powell, the United States Supreme Court set out the criteria for determining the enforceability of an IRS summons that is properly before the court. 379 U.S. 48, 57, 58, 85 S.Ct. 248, 254, 255, 13 L.Ed.2d 112 (1964). Powell held that to be enforceable the summons must: (1) be issued for a proper purpose; (2) seek information relevant to the purpose; (3) seek information not currently in the Government's possession; and (4) satisfy all the administrative steps regarding the service and issuance of the summons. Upon a showing of the above criteria, the United States establishes a prima facie case for enforcement of the summons. Smith v. United States, 592 F.Supp. 5753 (D.C.Conn.1984). "The burden to show a prima facie case 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 Financial Management, 769 F.2d 1440, 1443 (10th Cir.1985) (citing United States v. Kis, 658 F.2d 526, 536 (7th Cir.1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982)). "The requisite showing is generally made by affidavit of the agent who issued the summons and who is seeking enforcement." Balanced Financial Management, 769 F.2d at 1443 (quoting United States v. Garden State National Bank, 607 F.2d 61, 68 (3rd Cir.1979)); see also Kis, 658 F.2d at 537.

In Balanced Financial Management, the Tenth Circuit analyzed the burden that shifts to the taxpayer upon the Government's showing of a prima facie case and concluded that a taxpayer's failure to meet that burden should result in dismissal, without an evidentiary hearing, of his Petition to Quash. The Balanced Financial Management Court agreed with Kis that "summons enforcement proceedings `are intended to be summary in nature, ... as the sole reason for the proceedings ... is to ensure that the IRS has issued the summons for proper investigatory purposes under section 7602 and not for some illegitimate purpose....'" Balanced Financial Management, 769 F.2d at 1449 (quoting Kis, 658 F.2d at 535). Therefore, the taxpayer's burden is a heavy one. Id. at 1449 (citing Garden State National Bank, 607 F.2d at 68).

The taxpayer must "establish any defenses or ... prove that enforcement would constitute an abuse of the court's process." United States v. Genser, 582 F.2d 292, 302 (3d Cir.1978) (Genser I). He must "prove a lack of good faith, that the government has abandoned in the institutional sense its pursuit of possible civil penalties." United States v. Moll, 602 F.2d 134, 138 (7th Cir.1979). The taxpayer must do more than just produce evidence that would call into question the Government's prima facie case. The burden of proof in these contested areas rests squarely on the taxpayer. As the Third Circuit observed, "U.S. v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978) may not have closed the door in the taxpayer's face, but neither did it leave more than a very slight opening." United States v. Garden State National Bank, 607 F.2d 61, 70 (3d Cir.1979).

Balanced Financial Management, 769 F.2d at 1444 (quoting Kis, 658 F.2d at 538-39 (footnote omitted)).

Balanced Financial Management then discusses the taxpayer's affirmative defenses as follows:

`In responding to the Government's showing, it is clear that a taxpayer must factually oppose the Government's allegations by affidavit. Legal conclusions or mere memoranda of law will not suffice.' Garden State National Bank, 607 F.2d at 71. (citation omitted). `Allegations supporting a "bad faith" defense are ... insufficient if conclusionary.' Id. `If at this stage the taxpayer cannot refute the government's prima facie Powell showing or cannot factually support a proper affirmative defense, the district court should dispose of the proceeding on the papers before it and without an evidentiary hearing....' Id. It is only where material Government allegations `are factually refuted by the taxpayer, thus presenting a disputed factual issue, or where proper affirmative defenses such as those alleging "bad faith" under the tests of LaSalle and Genser II, are factually supported by the taxpayer's affidavits, the taxpayer is entitled to an evidentiary hearing.' U.S. v. McCarthy, 514 F.2d 368 at 368 3rd Cir.1975.

Balanced Financial Management, 769 F.2d at 1444, 1445 (quoting Garden State National Bank, 607 F.2d at 71 (footnote omitted).

United States v. Genser, 582 F.2d 292 (3rd Cir.1978), quotes with approval the following LaSalle explanation of the United States Supreme Court test for enforceability of IRS summonses as set out in United States v. Donaldson, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971):

In summary, then, several requirements emerge for the enforcement of an internal revenue summons. First, the summons must be issued before the Service recommends to the Department of Justice that a criminal prosecution, which reasonably would relate to the subject matter of the summons, be undertaken. Second, the Service at all times must use the summons authority in good-faith pursuit of the congressionally authorized purposes of § 7602. This second prerequisite requires the Service to meet the Powell standards of good faith. It also requires that the Service not abandon in an institutional sense ... the pursuit of civil tax determination or collection.

Genser, 582 F.2d at 301 (quoting United States v. LaSalle National Bank, ...