U.S. v. Balanced Financial Management, Inc.

• Decision Date: 30 July 1985
• Docket Number: Nos. 84-2210,84-2405 and 85-1238,s. 84-2210
• Citation: 769 F.2d 1440
• Parties: -5662, 54 USLW 2107, 85-2 USTC P 9584 UNITED STATES of America and William F. Conlon, Revenue Agent Internal Revenue Service, Appellees, v. BALANCED FINANCIAL MANAGEMENT, INC. and Kelley W. Crider, Appellants. UNITED STATES of America and William F. Conlon, Revenue Agent, Internal Revenue Service, Appellants, v. BALANCED FINANCIAL MANAGEMENT, INC. and Kelley W. Crider, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1440

769 F.2d 1440

56 A.F.T.R.2d 85-5662, 54 USLW 2107, 85-2

USTC P 9584

UNITED STATES of America and William F. Conlon, Revenue

Agent Internal Revenue Service, Appellees, v. BALANCED FINANCIAL MANAGEMENT, INC. and Kelley W. Crider,

Appellants.

UNITED STATES of America and William F. Conlon, Revenue

Agent, Internal Revenue Service, Appellants, v. BALANCED FINANCIAL MANAGEMENT, INC. and Kelley W. Crider, Appellees.

Nos. 84-2210, 84-2405 and 85-1238.

United States Court of Appeals Tenth Circuit.

July 30, 1985.

Frank C. Hider, Jr., Frank C. Hider, Jr., P.C., Dallas, Tex. (John D. Moats, Zisman and Moats, P.C., Denver, Colo., was also on briefs), for appellants/appellees Balanced Financial Management, Inc. and Kelley W. Crider.

Farley Katz, Atty., Tax Div., Dept. of Justice, Washington, D.C. (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Charles E. Brookhart, and Gary D. Gray, Attys., Tax Div., Dept. of Justice, Washington, D.C., and Robert N. Miller, U.S. Atty., Denver, Colo., were also on briefs), for appellees/appellants, U.S. and William F. Conlon.

Before HOLLOWAY, Chief Judge, SEYMOUR, Circuit Judge, and BOHANON, District Judge ^*.

HOLLOWAY, Chief Judge.

In Nos. 84-2210 and 84-2405, Balanced Financial Management, Inc. (BFM) and Kelley W. Crider appeal from an order of the district court directing them to obey an Internal Revenue Service administrative summons and denying their motion to enjoin further government investigations or collection of taxes and from an order denying their Federal Rules of Civil Procedure, Rule 60(b) motion. In No. 85-1238, the Government appeals from an order granting taxpayers' motion to dismiss a petition to show cause why the taxpayers should not be held in contempt, granting taxpayers' application for stay of enforcement of the district court's order directing taxpayers to obey the IRS administrative summons pending the appeal of the enforcement order in No. 84-2210, and directing the Government to pay $12,781.74 in attorneys' fees and costs incurred by the taxpayers in the contempt proceeding.

I

BFM is a financial planning organization which promotes investments in Jarelco, Inc. Jarelco owns master audio tape recordings and original art work relating to children's entertainment. BFM is an Arizona corporation with its principal business headquarters in Salt Lake City, Utah, and Jarelco is a Texas corporation with principal business headquarters in Dallas, Texas. The IRS began an investigation of BFM to determine "whether BFM is liable for any internal revenue tax including, but not limited to, the liability of BFM for the abusive tax shelter promoter penalty of 26 U.S.C. Sec. 6700 and whether the Internal Revenue Service should seek an injunction against BFM pursuant to 26 U.S.C. Sec. 7408." I R. 2.

On January 10, 1984, the IRS issued an administrative summons to taxpayers directing them to appear on January 20, 1984, before Revenue Agent William F. Conlon at the BFM offices in Arvada, Colorado, to testify and to produce for examination the documents and information described in the summons. Id. at 5. The taxpayers failed to appear in response to the summons. Id. at 3. On April 17, 1984, the Government filed a petition to enforce the summons in district court. Id. at 1.

On June 11, 1984, the taxpayers moved for a continuance of the summary enforcement hearing to give them time for discovery prior to an evidentiary hearing. The district court found that "[t]he government's actions comply with the requisite procedures and are neither duplicative nor harassing. The fact that BFM has operations in both Denver and Salt Lake City does not make the government's actions improper when it seeks information from both offices." Id. at 142. The district court also found that "BFM's allegations are insufficient to justify the order of an injunction pursuant to 26 U.S.C. Sec. 7408 restraining further government investigations or collection of taxes." Id. The district court denied the motion for an injunction and ordered taxpayers to obey the government's summons. Id. The taxpayers appealed from this order in No. 84-2210. Id. at 160.

The taxpayers filed a motion under Rule 60(b)(1) of the Federal Rules of Civil Procedure and for an order granting limited discovery before deciding whether to require them to comply with the IRS summons. The district court denied this motion. Id. at 145. The taxpayers also appealed from this order in No. 84-2405. Supp. I R. 12.

On November 27, 1984, the Government filed a petition for an order to show cause why BFM and Crider should not be held in contempt. Supp. II R. 1. The district court set December 14, 1984, as the date on which taxpayers were to appear and show cause. Id. at 14. On December 10, 1984, taxpayers filed an application for protective stay of the court's enforcement order pending appeal. Id. at 21.

Taxpayers appeared at the show cause hearing on December 14, 1984, through their counsel but counsel for the Government failed to appear. Id. at 50. At that hearing the district court orally granted taxpayers' motion to dismiss for failure by the Government to properly prosecute. The court also granted the application for a protective stay of the court's enforcement order pending appeal and the taxpayers' motion for attorney's fees and costs incurred in the contempt proceeding in the amount of $12,781.74. Id. at 51-53. On January 2, 1985, the district court granted to taxpayers attorney's fees and costs in the amount of $12,781.74. Id. at 53. The Government filed a motion to alter, amend, or reconsider this order which was denied. Id. at 55, 76. The Government appealed from the January 2 order in No. 85-1238. Id. at 77.

II

The Government's prima facie case and the taxpayer's burden

in meeting it

The Government sought to enforce the IRS administrative summons issued to taxpayers on January 10, 1984, pursuant to the provisions of 26 U.S.C. Sec. 7402(b) (1982) and 26 U.S.C. Sec. 7604(a) (1982). To enforce the summons the Commissioner of Internal Revenue must meet the standards set out in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). He 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....

Id. at 57-58, 85 S.Ct. at 254-255.

The 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. 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." United States v. Garden State National Bank, 607 F.2d 61, 68 (3d Cir.1979); see also Kis, 658 F.2d at 537. ¹ We believe that the Government made its Powell prima facie showing here and reject the taxpayers' contentions to the contrary, as we explain below.

The burden then shifts to the taxpayers. The burden is a heavy one. 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 much more than a very slight opening." United States v. Garden State National Bank, 607 F.2d 61, 70 (3d Cir.1979).

Kis, 658 F.2d at 538-39. (footnote omitted).

"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. "[I]f 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. ² We agree with these requirements and will apply them. See United States v. Scholbe, 664 F.2d 1163 (10th Cir.1981); United States v. Security Bank and Trust Company, 661 F.2d 847, 851 (10th Cir.1981); United States v. Traynor, 611 F.2d 809, 810 (10th Cir.1979). Unless these requirements are met, an evidentiary hearing "would be a waste of judicial time and resources." Kis, 658 F.2d at 540. (footnote omitted). 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 at 368 [3rd Cir.1975].

Garden State National Bank, 607 F.2d at 71.

III

The Taxpayers' objections to enforcement of the summons

On appeal, the taxpayers here argue that the district court's finding that the summons should be enforced should be reversed, or at the least, that taxpayers are entitled to limited discovery and an evidentiary hearing before the district...