Mollison v. U.S.
| Decision Date | 16 March 2007 |
| Docket Number | Docket No. 05-1557-cv(Con).,Docket No. 06-1554-cv(Con).,Docket No. 06-1550-cv(Con).,Docket No. 06-1542-cv(Con).,Docket No. 06-1553-cv(Con).,Docket No. 06-1555-cv(Con).,Docket No. 06-1545-cv(Con).,Docket No. 06-1539-cv(L).,Docket No. 06-1551-cv(Con). |
| Citation | 481 F.3d 119 |
| Parties | Nicole Vento MOLLISON, VIFX, LLC, As Successor in Interest to DTDV, Nicole Vento, Gail Vento, Renee Vento, VI Derivatives, LLC, Richard Vento, Lana Vento, Richard & Lana Vento 2000 Dynasty Trust, Petitioners-Appellants, v. UNITED STATES of America, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
Joseph M. Erwin (Steven M. Nachman, on the brief), Dallas, TX, for Petitioners-Appellants.
Sarah E. Light, Assistant United States Attorney (Michael J. Garcia, United States Attorney, Southern District of New York, Sean H. Lane, Assistant United States Attorney, on the brief), New York, NY, for Respondent-Appellee.
Before WINTER, WALKER, and STRAUB, Circuit Judges.
Petitioners-Appellants, who consist of members of the Vento family and their associated entities, seek to quash a third-party summons issued by the Internal Revenue Service ("IRS") to Salomon Smith Barney, Inc. as part of an investigation into potential tax liabilities arising from the sale of stock worth approximately $180 million. In dismissing the petitions and enforcing the summons, the District Court for the Southern District of New York (Jed S. Rakoff, Judge) concluded, inter alia, that the purpose of the summons was "legitimate" under United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), even assuming that petitioners were bona fide U.S. Virgin Islands residents. We agree. We further agree that the information the summons targeted was relevant to the investigation and not already in the IRS's possession, and that the summons was procedurally proper. Finally, we conclude that issuing the summons does not violate the Ventos' due process rights.
The information that the IRS seeks concerns the sale of stock in a software company called Objective Systems Integrators, Inc. ("OSI"), which Richard Vento co-founded in the 1980s. In 2000, the Ventos and several of their related entities held large blocs of OSI stock. In October of that year, Richard and Lana Vento transferred a portion of their holdings — almost $90 million worth of OSI stock — to two of those entities, a pair of limited liability companies in the United States called DTDV LLC and DTLV LLC.
Shortly thereafter, OSI filed a formal Plan of Merger with the Securities and Exchange Commission, pursuant to which Agilent Technologies, Inc. tendered an offer for all outstanding OSI shares. In January of 2001, the Ventos and their related entities sold their shares according to the tender. Salomon Smith Barney brokered the sales, which generated approximately $180 million in total gross income that eventually was distributed throughout several entities that the Ventos controlled.
Three aspects of the transaction and its surrounding circumstances caught the attention of the IRS. First, a pair of the Ventos' limited liability companies — Petitioners VI Derivatives LLC and VIFX LLC — reported almost all of this income on tax returns filed in 2001 with the United States Virgin Islands. Yet neither of these companies existed until seven months after the stock sale.
Second, the money reported by VI Derivatives and VIFX traveled a tortured path through entities controlled by the Ventos but never came to rest with the Ventos personally. Specifically, VI Derivatives reported $173 million of gross income and $149 million of net income, which it transferred to VIFX. In turn, VIFX parceled the $149 million among its various partners, including the aforementioned DTDV and DTLV, Petitioner Richard & Lana Vento Dynasty Trust, and the eponymous limited liability companies of Gail, Renee, and Nicole Vento. VIFX did not, however, pass any income to the Ventos personally, even though they were listed as its individual partners.
Third, during the tax year in which the stock sale occurred, the Ventos decided to move to the Virgin Islands. Prior to 2001, the Ventos, who are U.S. citizens, resided in Nevada and filed their individual tax returns in the United States. In July of 2001 — roughly six months after the stock sale — Richard Vento purchased a residence in St. Thomas. The record does not establish whether or when the Ventos actually began living there, or for how long. In any event, the Ventos filed their 2001 individual tax returns with the Virgin Islands Bureau of Internal Revenue. On those tax returns, the Ventos claimed that they contributed their Nevada residence to a charitable support organization bearing their name, which sold the home shortly thereafter.
In light of these circumstances, the IRS commenced its investigation into whether the Ventos fully and properly reported their income for 2001. In general, the IRS is interested in whether the Ventos were bona fide residents of the Virgin Islands in 2001 or whether their claimed residency was merely a ruse to avoid filing U.S. income tax returns. Even if the Vento's Virgin Islands residency is bona fide, the IRS wishes to determine whether the Ventos' Virgin Islands tax returns fully reflect their individual incomes and those of their related entities, and if not, whether any residual income should have been reported in the United States. Finally, the IRS seeks to determine whether the Ventos properly attributed the income they did report, and in particular, whether Richard and Lana Vento properly assigned income from the sale of their OSI stock to the U.S. entities DTDV and DTLV.
In aid of its investigation, the IRS issued a summons to Salomon Smith Barney in New York. The summons, of which petitioners received notice, sought testimony and documents relating to the opening and maintenance of the Vento's accounts, the withholding of taxes, and the transfer and distribution of cash generated from OSI stock sales.
Petitioners attempted to quash the summons in the District Court, claiming that (1) the IRS lacked a legitimate purposes in issuing the summons because petitioners resided in the Virgin Islands and thus, pursuant to 26 U.S.C. § 932(c), were required to file only Virgin Islands tax returns; (2) the documents sought were not relevant to the question of petitioners' residency; (3) the IRS already had the information in its possession; (4) the IRS failed to follow proper procedures in issuing the summons because it violated the Tax Implementation Agreement between the United States and the Virgin Islands; and (5) the summons violated their due process rights. In response, the IRS counterclaimed to enforce the summons. In support of its counterclaim, the IRS submitted the declaration of Revenue Agent Robert Canale, in which he described the facts set forth above.
The District Court dismissed the petitions and enforced the summons. In particular, the District Court held that the IRS had a legitimate purpose in issuing the summons because the IRS was investigating whether the Ventos were bona fide Virgin Islands residents in 2001, and because even if they were, the IRS retains the authority to investigate the tax liabilities of Virgin Islands residents. The District Court summarily rejected the balance of petitioners' arguments and denied their motion for a stay pending appeal.
We review the District Court's factual findings for clear error and its interpretation of the Internal Revenue Code (the "Code") de novo. See Field v. United States, 381 F.3d 109, 111 (2d Cir.2004); United States v. Millman, 822 F.2d 305, 309 (2d Cir.1987).
The Code authorizes and requires the IRS to "make the inquiries, determinations, and assessments of all taxes." 26 U.S.C. § 6201(a). The Code further authorizes the IRS to "examine any books, papers, records, or other data which may be relevant or material" to its investigations. 26 U.S.C. § 7602(a)(1) (emphases added). In connection with this authorization, the IRS may "summon . . . any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax." 26 U.S.C. § 7602(a)(2).
As the statutory language establishes, the IRS's investigatory power "is quite broad." PAA Mgmt. Ltd. v. United States, 962 F.2d 212, 216 (2d Cir.1992). This authority, however, is not unbounded. The subject of an IRS investigation may petition to quash a third-party summons pursuant to 26 U.S.C. § 7609(b). A now-familiar scheme of shifting burdens, designed to ensure only the basic propriety of the investigation, applies to such petitions. First, the IRS must establish a prima facie case satisfying the criteria set forth in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). Specifically, the IRS must show that (1) "a legitimate purpose exists for the investigation," (2) "the summons may be relevant to that purpose," (3) "the information sought is not already in the possession of the government," and (4) "the procedural and administrative steps required by the Code have been followed." PAA Mgmt. Ltd., 962 F.2d at 215; see also Powell, 379 U.S. at 57-58, 85 S.Ct. 248.
Once the IRS establishes its prima facie case, "the burden shifts to the taxpayer to disprove one of the four Powell criteria, or to demonstrate that judicial enforcement would be an abuse of the court's process." United States v. Beacon Fed. Savs. & Loan, 718 F.2d 49, 52 (2d Cir.1983) (internal quotation marks omitted). "[T]he taxpayer's burden is a `heavy' one, which he must meet by `disprov[ing] the actual existence of a valid civil tax determination or collection purpose by the [IRS].'" United States v. White, 853 F.2d 107, 111 (2d Cir.1988).
Turning to the summons at issue here, the IRS made its preliminary showing by way of the Canale Declaration, which sets...
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