United States v. Lui
| Decision Date | 31 July 2017 |
| Docket Number | Case No. 16-cv-00969-JST |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. LAWRENCE Y. LUI, Defendant. |
| Court | U.S. District Court — Northern District of California |
Before the Court is the United States' Verified Petition to Enforce Internal Revenue Service Summons ("the Petition") against Respondent Lawrence Lui. ECF No. 1. The Court will grant the petition in part and deny it in part.
The Petition arises from an Internal Revenue Service ("IRS") investigation into the tax liabilities of Lawrence Y. Lui ("Lui") and Gorretti L. Lui for the years of 2005 to 2012. ECF No. 1 at ¶ 3. On July 8, 2014, Revenue Agent Meiling Yang, a former Revenue Agent, served Petitioner with a summons related to the alleged tax liabilities. Id. ¶ 7. Agent Yang interviewed Lui pursuant to the summons on August 4, 2014. Id. ¶¶ 9-10. Lui refused to provide testimony, citing his Fifth Amendment privilege against self-incrimination, as well as other privileges. Id. ¶ 10. On July 29, 2015, Agent Lee served Lui with another summons for documents related to the alleged tax liabilities. Id. ¶ 11. The Government sought to compel the production of documents related to Wealth Grand Limited, a Hong Kong company ("WG"), Netfinity Assets Corporation, a British Virgin Islands company ("Netfinity"), and Jatur Sdn. Bhd., a Malaysian company ("Jatur"). ECF No. 1-3 at 7.
Agent Lee interviewed Lui pursuant to the second summons on August 28, 2015. ECF No. 1 at ¶ 14. Lui provided some responsive documents, but failed to provide all responsive documents or to provide testimony. Id.
Seeking a court order compelling Lui's cooperation with the summons, the Government filed the instant Petition on behalf of the IRS on February 26, 2016. ECF No. 1. On March 15, 2016, this Court found that the Government had established a prima facie case and ordered Lui to show cause as to why he should not be compelled to produce the requested documents and testimony. ECF No. 6. The parties subsequently submitted briefing. ECF Nos. 21-1, 33, 43, 47.1 The Government also moved to quash Lui's requests for admissions and documents. ECF Nos. 32, 38, 45, 51, 61. Lui moved to dismiss the record summons portion of the Government's complaint. ECF Nos. 59, 61, 62. The Court held a hearing on the order to show cause, as well as the other motions as they relate to the substance of the order to show cause on December 15, 2016. The Court ultimately ordered re-briefing on the order to show cause. ECF No. 73. Lui retained new counsel, ECF Nos. 75, 80, and submitted an Amended Memorandum of Points and Authorities opposing the Governments' summonses. ECF No. 82. The Government filed a new reply. ECF No. 84. Lui filed a sur-reply. ECF No. 88. The Court now considers all of the motions.
The IRS has authority to examine books and witnesses pursuant to a summons under 26 U.S.C. § 7602(a). "If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, records, or other data, the United States district court for the district in which such person resides or is found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, records, or other data." 26 U.S.C. § 7604.
The specific legal procedure governing the court's inquiry is well-established. See United States v. Powell, 379 U.S. 48 (1964); United States v. Clarke, 134 S. Ct. 2361 (2014). First, the United States must outline its prima facie case. See Crystal v. United States, 172 F.3d 1141 (9thCir. 1999). To do so, the United States must show that "(1) the investigation will be conducted for a legitimate purpose; (2) the material being sought is relevant to that purpose; (3) the information sought is not already in the IRS's possession; and (4) the IRS complied with all the administrative steps required by the Internal Revenue Code." Id. at 1143-44 (citing Powell, 379 U.S. at 57-58). "The government's burden is a slight one, and may be satisfied by a declaration from the investigating agent that the Powell requirements have been met." United States v. Dynavac, Inc., 6 F.3d 11407, 1414 (9th Cir. 1993). "The burden is minimal because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted." Crystal, 172 F.3d at 1144 (internal quotation omitted).
Once the Government meets its initial burden, the burden shifts to the respondent. Id. Id. at 1144 (internal quotation omitted). Established grounds for challenging the summons include demonstrating "failure to satisfy the Powell requirements." United States v. Jose, 131 F.3d 1325, 1328 (9th Cir. 1997) (en banc). Abuse of process, such as bad faith use of the procedure to harass or pressure the taxpayer regarding other disputes, is also recognized as grounds to invalidate the summons. Powell, 379 U.S. at 58. The Government also may not seek enforcement of a summons when it has already decided to recommend the matter for prosecution. See United States v. LaSalle National Bank, 437 U.S. 298, 314 (1978). "[T]he dispositive question in each case is whether the Service is pursuing the authorized purposes in good faith." Crystal, 172 F.3d at 1144-45 (internal quotation omitted).
This Court previously found that the Government had established a prima facie case under Powell based upon its initial Petition and accompanying Declaration. ECF No. 6 at 1. The Government demonstrated through Agent Lee's declarations and the supporting documents that the investigation's purpose is to seek Lui's testimony and records regarding tax liabilities. ECF No. 1 at ¶ 3. The declarations of Agent Lee and the supporting documents establish that the material sought is relevant to the investigation's purpose. ECF No. 1 at ¶¶ 3, 4, 6, 8, 12. Thedeclarations assert that the IRS does not presently possess the records sought. Id. at ¶ 6. The Government contends there has been no referral to the Department of Justice for criminal prosecution of the matters described in the summons. Id. at ¶ 17. Finally, the Government asserts that it has complied with all administrative steps required, including proper notice and summons. Id. at ¶ 16.
Because the Government has carried its initial burden and established a prima facie case, the burden shifts to Lui to rebut the Government's assertions. Crystal, 172 F.3d at 1144.
The IRS seeks documents related to Lui's interest in foreign entities and bank accounts. ECF No. 84 at 5. The IRS summons is broad in scope. It seeks various agreements, certificates, articles for establishing the entity, by-laws, letters, documents identifying various positions and organizational structures, invoices, bank documents, contracts and other important documents. ECF No. 1-3. Lui argues that he does not possess, control, or have custody of any of these documents. ECF No. 82, 88. The Government contends that Lui had an obligation to retain such documents and has not provided credible evidence as to why they are not - or no longer - in his possession. ECF No. 84.
Pursuant to 26 U.S.C. § 982(c)(1), the IRS may issue a foreign document request ("FDR") to any taxpayer to request foreign-based documentation. "Foreign-based documentation" is "any documentation which is outside the United States and which may be relevant or material to the tax treatment of the examined item." 26 U.S.C. § 982(d). "Congress enacted Section 982 as a pretrial discovery tool 'to discourage taxpayers from delaying or refusing disclosure of certain foreign-based information to the IRS.'" Matter of Int'l Mktg., Ltd. v. United States, No. C-901839-SAW, 1990 WL 138528, at *1 (N.D. Cal. Aug. 20, 1990) (citations omitted). Enforcement of a FDR is subject to the same standards as an administrative summons under Powell. See Larue v. United States, No. 3:15-cv-00705-HZ, 2015 WL 9809798, at *2 (D. Or. Dec. 22, 2015).
"An IRS summons imposes a duty to retain possession of summoned documents pending a judicial determination of the enforceability of the summons." United States v. Asay, 614 F.2d 655, 660 (9th Cir. 1980). A party's obligations become fixed when the summons is served. SeeCouch v. United States, 409 U.S. 322, 329 n. 9, 93 S. Ct. 611, 616 (1973) (citing United States v. Zakutansky, 401 F.2d 68, 72 (7th Cir. 1968), cert. denied, 393 U.S. 1021, 89 S.Ct. 628; United States v. Lyons, 442 F.2d 1144 (1st Cir. 1971)); see also United States v. Darwin Const. Co., Inc., 873 F.2d 750, 755 (4th Cir. 1989) (). The party resisting enforcement bears the burden of producing credible evidence that he does not possess or control the documents sought.2 See United States v. Huckaby, 776 F.2d 564, 567-8 (5th Cir. 1985); United States v. Billie, 611 Fed. Appx. 608, 610 (11th Cir. 2015).
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