U.S. v. Monumental Life Ins. Co.

• Decision Date: 03 March 2006
• Docket Number: No. 05-5080.,05-5080.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. MONUMENTAL LIFE INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 729

440 F.3d 729

UNITED STATES of America, Plaintiff-Appellee, v. MONUMENTAL LIFE INSURANCE COMPANY, Defendant-Appellant.

No. 05-5080.

United States Court of Appeals, Sixth Circuit.

Argued: February 2, 2006.

Decided and Filed: March 3, 2006.

ARGUED: Kevin L. Smith, Hines, Smith LLP, Costa Mesa, California, for Appellant.

John A. Dudeck, Jr., United States Department of Justice, Washington, D.C., for Appellee.

ON BRIEF: Kevin L. Smith, Hines, Smith LLP, Costa Mesa, California, David B. Tachau, Kevin M. Norris, Tachau, Maddox, Hovious & Dickens, Louisville, Kentucky, for Appellant.

John A. Dudeck, Jr., Frank P. Cihlar, United States Department of Justice, Washington, D.C., for Appellee.

Before: MERRITT, MARTIN, and GILMAN, Circuit Judges.

OPINION

RONALD LEE GILMAN, Circuit Judge.

Monumental Life Insurance Company appeals from the district court's order enforcing an administrative summons issued by the Internal Revenue Service (IRS). The summons requested voluminous documents from Monumental, a third party in the IRS's investigation of Johnson Systems, Inc. On appeal, Monumental argues that the district court erred in rejecting the magistrate judge's findings that (1) the IRS already had in its possession many of the documents requested, and (2) the IRS's summons was overbroad in that it sought documents not relevant to the investigation of Johnson. Monumental also contends that, even if we were to affirm the district court's decision, a protective order should be imposed upon any proprietary materials that Monumental is required to provide to the IRS. For the reasons set forth below, we REVERSE the judgment of the district court and deny enforcement of the IRS summons.

I. BACKGROUND

In November of 1999, the IRS served a third-party summons on Monumental in the civil investigation of Johnson's tax liability for the tax years from September 30, 1994 through September 30, 1997. The investigation focused on whether Johnson had properly taken income tax deductions for the contributions it made to its employee welfare benefit plan. Johnson's plan used employer contributions to purchase three different Monumental life insurance products for its employees: (1) the Continuous Group Term product (C-Group), (2) the Millennium Group 5 product (MG-5), and (3) the Signet 24 Group Life Insurance product.

John Marien, an IRS agent who specializes in investigating improper uses of employee benefit plans, explained in an affidavit that these types of insurance arrangements can be characterized as employee welfare benefit plans, deferred-compensation plans, or vehicles that hold assets for select employees. The classification of the insurance arrangement affects the tax consequences that attach. These arrangements are often used to disguise tax-avoidance schemes. Marien believed that the same types of life-insurance products provided by Monumental to Johnson were involved in the case of Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 2000 WL 1048512 (2000), aff'd, 299 F.3d 221 (3d Cir.2002). In that case, the Tax Court held that the contributions made by two professional medical corporations into an employee benefits program were disguised taxable dividends and not deductible expenses by the employer. 299 F.3d at 231-33.

Employers are not generally prohibited from funding term life insurance policies for their employees and deducting the premiums paid as business expenses. The magistrate judge explained, however, that an "unlawful twist" occurs when small businesses, in which the employees are generally the owners, buy term-insurance policies at inflated premiums and then place the amount in excess of the reasonable cost of the insurance risk into an investment account for the employees. In those cases, employers are disguising investments that accumulate cash value as deductible benefit-plan expenses.

To investigate whether Johnson's deductions exploited this unlawful twist, the administrative summons requested 172 categories of documents, including subparts, from Monumental. A copy of the summons is appended to this opinion. Some of the document requests related specifically to Johnson's insurance policies, while others related generally to the C-Group and MG-5 products that Monumental offered to many of its customers. For example, item 3(a) of the summons sought, in relation to Monumental's C-Group product, "[a]ll documents memorializing, describing, identifying and/or listing the insurance costs and/or premium rates in effect during the period beginning July 1, 1991 through September 30, 1999." This request, covering all of Monumental's customers who used the C-Group product during the time span identified by the IRS, was intended to better inform the IRS about how the product was generally administered by Monumental. Marien claimed that this information would help determine whether Johnson was deducting the proper amount as a business expense.

Monumental moved to quash the summons. After the district court dismissed Monumental's motion, Monumental delivered approximately 350 pages of documents to the IRS. Monumental also expressed a willingness to produce more documents if the IRS would place them under a protective order to keep the proprietary information confidential. This the IRS was unwilling to do. Moreover, the IRS was displeased with Monumental's production of an insignificant portion of the requested documents, so it filed a petition to enforce the summons in April of 2001. Attached to this petition was Marien's affidavit. Marien averred that Monumental's full compliance with the summons would assist the IRS in characterizing the arrangements made by Johnson in order for the IRS to determine the tax consequences. In addition, he declared that the documents sought by the summons were not already in the possession of the IRS in a form useable to investigate Johnson.

Monumental raised several objections to the enforcement of the summons, prompting the district court to refer the case to a magistrate judge. In August of 2003, after lengthy proceedings that included six hearings, further production of documents by Monumental, and an attempted settlement between the parties, the magistrate judge issued his findings of fact, conclusions of law, and recommendations. The magistrate judge concluded that (1) the summons did not suffer from technical difficulties, (2) the IRS did not issue the summons in bad faith, (3) the government already had a portion of the requested documents in its possession because of the Neonatology investigation, and (4) some of the documents that the government requested were irrelevant to the investigation. Because the magistrate judge did not believe that partial enforcement of the summons was legally permissible, he recommended that the district court deny enforcement in full. He also recommended that the district court not require a protective order, if the summons were to be enforced, because placing a condition on the enforcement of an IRS summons is improper according to the Ninth Circuit decision in United States v. Jose, 131 F.3d 1325, 1329 (9th Cir.1997).

The government then filed an objection to the magistrate judge's recommendation. In October of 2004, the district court declined to follow the recommendation of the magistrate judge and entered an order enforcing the summons in full. The district court, applying a de novo standard of review, rejected the conclusions of the magistrate judge that some of information sought by the IRS was irrelevant and that the IRS possessed some of the documents requested in a form that it could use in the Johnson investigation. Monumental now appeals.

II. ANALYSIS

A. Standard of review

A district court's order enforcing an IRS summons will not be reversed unless clearly erroneous. Wagenknecht v. United States, 22 Fed.Appx. 482, 483 (6th Cir.2001) (unpublished) (citing Fortney v. United States, 59 F.3d 117, 119 (9th Cir. 1995)). Clear error exists if we are "left with the definite and firm conviction that a mistake has been committed." Alexander v. Local 496, Laborers' Int'l Union of N. Am., 177 F.3d 394, 402 (6th Cir.1999). Issues of statutory interpretation, however, are reviewed de novo. Fortney, 59 F.3d at 119.

B. Prima facie case for summons enforcement

In order to ensure the proper determination of tax liability, Congress "has endowed the IRS with expansive information-gathering authority." United States v. Arthur Young & Co., 465 U.S. 805, 816, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984). Section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602, is the "centerpiece of that congressional design." Arthur Young, 465 U.S. at 816, 104 S.Ct. 1495. Under § 7602, the Commissioner of the IRS is authorized, "[f]or the purpose of ascertaining the correctness of any return. . ., [t]o examine any books, papers, records, or other data which may be relevant or material to such inquiry" and to summon any person to produce such documents. 26 U.S.C. § 7602(a)(1) & (2). The summons power is not limited to the taxpayer under investigation, but may also be issued to a third party who has relevant information. 26 U.S.C. § 7602(a)(2).

The courts, and not the IRS, are authorized to enforce this summons power. United States v. Will, 671 F.2d 963, 966 (6th Cir.1982) (affirming the district court's enforcement of a summons over the taxpayer's objection that the summons was issued in bad faith). In United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), the Supreme Court enunciated the analytical framework that governs enforcement decisions. First, for the government to establish a prima facie case for enforcement, it must demonstrate that (1) the investigation has a legitimate purpose, (2) the information summoned is relevant to that purpose, (3) the documents sought are not already in the IRS's possession, and (4) the procedural steps required by the tax code have been followed. Id. at 57-58, 85 S.Ct. 248. "The...