United States v. Chen

• Citation: 952 F.Supp.2d 321
• Decision Date: 03 July 2013
• Docket Number: Civil Action No. 12–10973–WGY.
• Parties: UNITED STATES of America, Petitioner, v. Zhong H. CHEN, Respondent.
• Court: U.S. District Court — District of Massachusetts

952 F.Supp.2d 321

UNITED STATES of America, Petitioner,

v.Zhong H. CHEN, Respondent.

Civil Action No. 12–10973–WGY.

United States District Court, D. Massachusetts.

July 3, 2013.

William J. Lovett, Julia W. Monack, Collora LLP, Boston, MA, for Respondent.

Nathan L. Strup, U.S. Department of Justice, Tax Division, Washington, DC, for Petitioner.

MEMORANDUM & ORDER

YOUNG, District Judge.

I. INTRODUCTION

The United States of America (the “United States”) brings this petition on behalf of the Internal Revenue Service (the “IRS”) to enforce an administrative summons served by the IRS on Zhong H. Chen (“Chen”) pursuant to 26 U.S.C. section 7604(a). Pet. Enforce IRS Summons (“IRS Pet.”) ¶ 1, ECF No. 1. In support of its summons, the IRS alleges that its request for documents is necessary in order that it may “examine the summonsed records to properly determine the federal tax liabilities of Chu H. Ng and Zhong H. Chen for the taxable period ending December 31, 2008.” Id. ¶ 10. Chen, however, resists the United States's enforcement petition on several grounds: Chen argues, first, that the IRS has failed to satisfy the relevant requirements for obtaining judicial enforcement of its summons, Resp't's Answer & Defenses Pet. Enforce IRS Summons (“Resp't's Answer”) ¶ 21, ECF No. 7, and, moreover, that the IRS has waived the putative right to enforcement that it claims, id. ¶ 23; second, that the IRS is employing its administrative power for an ulterior—and improper—purpose, Resp't's Reply Gov't's Mem. Law Supp. United States' Pet. (“Reply”) 13, ECF No. 13; and, third, that he is protected from having to furnish the documents the IRS seeks in virtue of his Fifth Amendment privilege against self-incrimination, Resp't's Answer ¶ 22.

A. Undisputed Facts

The IRS has been attempting to assess the tax liabilities of Chu H. Ng and Zhong H. Chen for the taxable period ending December 31, 2008. IRS Pet. ¶ 10. In furtherance of this objective, the IRS served a summons on Chen dated September 12, 2011, which demanded that he appearbefore revenue agent David McClung (“McClung”) on September 27, 2011, at 9 AM at the IRS's Boston office to testify and furnish for examination the records described in the summons. Id. ¶ 6. Specifically, the IRS asked that Chen produce: (1) “original books and records used to prepared the 2008 individual income tax return”; (2) “copies of bank statements and deposit slips for [Chen's] business and personal (domestic and foreign) savings, checking, and investment accounts for the period January 1, 2008 through December 31, 2008”; and (3) “copies of records and documentation concerning business and personal receipts.” IRS Pet., Ex. 2, Summons 1, ECF No. 1–2. Chen has failed to comply with the IRS's document summons for documents that the IRS alleges are “necessary ... to properly determine the federal tax liabilities of Chu H. Ng and Zhong H. Chen for the taxable period ending December 31, 2008.” IRS Pet. ¶ 4. The IRS has expressed a particular interest in obtaining records which evidence Chen's maintaining offshore bank accounts. Mem. Law Supp. United States' Pet. (“Mem. Supp.”) 11, ECF No. 9.

Although Chen appeared at the September 27, 2011, meeting, he failed to produce the documents that the IRS had requested. See IRS Pet. ¶ 8. Instead of producing the relevant documents or answering McClung's questions, Chen read the following statement, seeking to invoke his Fifth Amendment privilege against self-incrimination: “On advice of counsel, I refuse to answer on the grounds that a full and complete answer may waive certain protections afforded me under the 5th Amendment to the U.S. Constitution.” Resp't's Answer ¶ 19. The United States therefore petitions this Court on the IRS's behalf for an order to enforce the administrative demand it has served on Chen. IRS Pet.

B. Procedural Posture

On May 31, 2012, the United States filed a petition to enforce the IRS's summons, id., which Chen answered on July 9, 2011, Resp't's Answer. On July 20, 2012, the United States filed a memorandum in support of its petition to enforce, Mem. Supp., to which Chen responded on July 24, 2012, Reply. The United States filed its own rejoinder on July 31, 2012, United States' Sur–Reply, ECF No. 14, to which Chen responded on August 15, 2012, Resp't's Resp. United States' Sur–Reply, ECF No. 17. On August 20, 2012, the United States filed a sur-sur-reply to Chen's response. United States' Sur–Sur–Reply, ECF No. 20.

C. Federal Jurisdiction

This Court has original jurisdiction pursuant to 26 U.S.C. Sections 7402(b) and 7604(a) and 28 U.S.C. sections 1340 and 1345.

II. ANALYSIS

The Secretary of the Treasury (the “Secretary”) is empowered to issue summonses pursuant to 26 U.S.C. section 7602(a) (“Section 7602”); he has, in turn, delegated his authority, through the IRS, to McClung pursuant to 26 C.F.R. section 301.7602–1 and IRS Delegation Order No. 4 (as revised). See IRS Pet. 1. Section 7602 authorizes the Secretary to act as follows:

For the purpose of ascertaining the correctness of any return ... [or] determining the liability of any person for any internal revenue tax ..., the Secretary is authorized ... [t]o summon the person liable for tax ... to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry.

26 U.S.C. § 7602(a)(2). The IRS therefore has broad powers under the Internal Revenue Code with respect to the gathering of information for the purposes of determining tax liability. United States v. Arthur Young & Co., 465 U.S. 805, 816, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984). Section 7602(d), however, adds a caveat to the IRS's broad power to issue administrative summonses which serves to circumscribe the IRS's power in situations where a Justice Department referral is in effect. 26 U.S.C. § 7602(d); 26 C.F.R. § 301.7602–1(c). Where a referral has been made to the Justice Department, the IRS is proscribed from obtaining information by means of the administrative summons process. 26 U.S.C. § 7602(d).

A. The Powell Standard

In order to obtain enforcement of its summons before a federal district court, the IRS must satisfy four criteria that the Supreme Court enumerated in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964):

[1] [The investigation has been] conducted pursuant to a legitimate purpose, [2] ... the inquiry may be relevant to the purpose, [3] ... the information sought is not already within the Commissioner's possession, and [4] ... the administrative steps required by the Code have been followed—in particular, ... the ‘Secretary or his delegate,’ after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect.

Id. at 57–58, 85 S.Ct. 248. Although the IRS bears the prima facie burden of showing that the four Powell criteria are met, this burden is, to borrow the First Circuit's language, “not taxing, so to speak.” United States v. Gertner, 65 F.3d 963, 966 (1st Cir.1995). The First Circuit has held, in particular, that the IRS may satisfy the burden by asserting in the “affidavit of the investigating agent that the requirements are satisfied.” United States v. Lawn Builders of New Eng., Inc., 856 F.2d 388, 392 (1st Cir.1988) (per curiam) (quoting Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir.1985) (per curiam)). Once the IRS has satisfied its prima facie burden through the affidavit of one of its officers, the burden of proof shifts to the summonsed taxpayer to “rebut the good-faith presumption that arises in consequence of the government's prima facie case.” Gertner, 65 F.3d at 967.¹

The taxpayer may rebut the prima facie case by disproving any one of the four Powell factors or by showing—more generally—that enforcement of the IRS summons would constitute an abuse of the court's process. Sugarloaf Funding, LLC v. U.S. Dep't of the Treasury, 584 F.3d 340, 346 (1st Cir.2009). An abuse of process would occur “if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.” Powell, 379 U.S. at 58, 85 S.Ct. 248.

In attempting to rebut the good faith of the IRS, “[t]he taxpayer's burden is heavy.” Sugarloaf Funding, 584 F.3d at 346. In particular, the taxpayer “must allege specific facts and evidence to supporthis allegations.” Id. (quoting Sterling Trading, LLC v. United States, 553 F.Supp.2d 1152, 1155–56 (C.D.Cal.2008)) (internal quotation marks omitted). The Second Circuit has further articulated the taxpayer's burden, including the degree of factual specificity with which his allegations must be pleaded:

Although mere conclusory allegations of wrongdoing unsupported by any evidence from which a court might draw an inference of abuse are insufficient to rebut the government's prima facie showing of a proper investigatory purpose, the taxpayer has met his burden if he alleges specific facts “from which a court might infer a possibility of some wrongful conduct by the Government.”

United States v. Millman, 765 F.2d 27, 29 (2d Cir.1985) (quoting United States v. Kis, 658 F.2d 526, 540 (7th Cir.1981)).

1. The IRS Has Satisfied Its Prima Facie Burden

The IRS has satisfied its prima facie burden in relation to its administrative power to summons documents pursuant to Section 7602. The affidavit of its revenue officer, and the IRS's petition to enforce its summons, each allege compliance with all of the Powell factors. See IRS Pet., Ex. 1, Decl. David McClung (“McClung Decl.”) ¶ 11, ECF No. 1–1; IRS Pet. ¶¶ 9–14. In addition, the IRS alleges in its petition that “there is no ‘Justice Department referral,’ as that term is described in Section 7602(d)(2) of the Internal Revenue Code, in...