United States v. McEligot

Decision Date06 April 2015
Docket NumberCase No. 14-cv-05383-JST
CourtU.S. District Court — Northern District of California
PartiesUNITED STATES OF AMERICA, Plaintiff, v. ROBERT MCELIGOT, Defendant.
ORDER DENYING MOTION TO DISMISS AND ORDERING IN CAMERA REVIEW
Re: ECF Nos. 17, 18

Currently before the Court is the United States' Verified Petition to Enforce Internal Revenue Service Summons ("the petition") against Respondent Robert McEligot. ECF No. 1. McEligot has filed a motion to dismiss the petition. ECF No. 17. The Court held a hearing on the matter on March 12, 2015. Following the hearing, the Court ordered Respondent to produce for in camera review the redacted documents for which Respondent had asserted the tax practitioner privilege.

I. Background
A. Procedural History

The IRS issued a summons on McEligot in connection with a civil tax audit of Lawrence Lui for tax years 2005 through 2012, during which period McEligot served as Lui's certified professional accountant. Although McEligot attended the summons hearing, he stated that he would answer questions only if the IRS permitted Lui's attorneys also to attend the hearing. ECF No. 21 at 2. Because the IRS refused to allow Lui's counsel to be present, McEligot refused to testify. Id. McEligot provided the IRS with redacted versions of subpoenaed documents. Id.

The United States subsequently brought this petition to enforce the summons. The Court found that the United States had established a prima facie case under United State v. Powell, 379 U.S. 48 (1964), and directed the Respondent to show cause why he should not be compelled toappear and provide documents and testimony as required by the summons. ECF No. 9. McEligot has filed an opposition to the petition, ECF No. 18, as well as a motion to dismiss the enforcement proceeding as moot. ECF No. 17.

Lui filed a motion to intervene before the Court in the summons enforcement proceedings pursuant to 26 U.S.C. § 7609(b)(1), which the government did not oppose. ECF Nos. 11, 14. The Court previously granted Lui's motion for intervention. ECF No. 19.

B. Jurisdiction

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.

II. Motion to Dismiss

McEligot has filed a motion to dismiss the petition, ECF No. 17, asserting that his only objection to complying with the summons stemmed from the Government's refusal to allow Lui to be present at the IRS proceedings at which McEligot would testify. Therefore, McEligot argues that the petition is now moot, since "Lui's representative has intervened as a party and can be present at the proceedings to assert any privileges when questions are posed and records are produced." Id. at 2. But McEligot's own motion acknowledges the Government's position that Lui's intervention in this District Court enforcement proceeding does not entitle Lui to be present at the summons proceedings before the IRS. Indeed, the Government argues in response to Lui's motion to dismiss that "Liu's [sic] counsel should not be allowed to be present during the questioning of a third-party witness, Respondent herein." ECF No. 21 at 5 (emphasis added). Thus, the petition is not moot, and the Court must resolve the question of whether Lui has a right to be present at the IRS proceeding.

The Court first observes that the same statute that allows Lui to intervene in this court is silent with regard to his right to intervene before the IRS. 26 U.S.C. § 7609(b) permits certainindividuals identified under Section 7609(a) "the right to intervene in any proceeding with respect to the enforcement of such summons under section 7604." Section 7604, in turn, establishes the jurisdiction of the federal district court to hear summons enforcement proceedings. But nothing in Section 7609(b) provides individuals identified in Section 7609(a) the right to be present during the IRS proceedings at which testimony or documents are produced.

McEligot and Lui also ground Lui's alleged right to intervene in the IRS proceeding on the Supreme Court's decision in Reisman v. Caplin, 375 U.S. 440 (1964), which held that taxpayers have the right to intervene in IRS hearings regarding their tax liabilities. They place particular weight on the following passage from that case:

This Court has never passed upon the rights of a party summoned to appear before a hearing officer under § 7602. However, the Government concedes that a witness or any interested party may attack the summons before the hearing officer. There are cases among the circuits which hold that both parties summoned and those affected by a disclosure may appear or intervene before the District Court and challenge the summons by asserting their constitutional or other claims. We agree with that view and see no reason why the same rule would not apply before the hearing officer. Should the challenge to the summons be rejected by the hearing examiner and the witness still refuse to testify or produce, the examiner is given no power to enforce compliance or to impose sanctions for noncompliance.

Id. at 445 (emphasis added) (citations omitted).

Reisman, however, is not the last word the subject. Seven years later, the Supreme Court took up the case of Donaldson v. United States, 400 U.S. 517, 522 (1971), to resolve a split among the circuit courts regarding Reisman. Rejecting the view that Reisman "guarantee[d] intervention for the taxpayer," id. at 529, the Donaldson Court "held that taxpayers could only intervene in a third-party summons case where they could demonstrate a 'significantly protectable interest' barring disclosure, e.g., a legal privilege such as an evidentiary privilege." Ip v. United States, 205 F.3d 1168, 1171-72 (9th Cir. 2000). Donaldson clarified that the language McEligot and Lui now quote from Reisman regarding a taxpayers' ability to intervene before the hearing officer and the Court in order to challenge a summons was "permissive," rather than "mandatory." Donaldson, 400 U.S. at 529. The Court explained that, in Reisman, "the Court recognized that intervention by a taxpayer in an enforcement proceeding might well be allowed when thecircumstances are proper. But the Court did not there pronounce, even when confronted with a situation concerning an attorney's work product, that the taxpayer possesses an absolute right to intervene in any internal revenue summons proceeding. The usual process of balancing opposing equities is called for." Id.

Following the Donaldson decision, "Congress enacted a major overhaul of the Internal Revenue Code in 1976," based in part on the widely-held view that the Donaldson decision had placed "too great a restriction on the procedural rights of taxpayers." Ip, 205 F.3d at 1172; see also Barnhart v. United Penn Bank, 515 F. Supp. 1198, 1203 (M.D. Pa. 1981) (noting that Section 7609 "resulted from a reaction to several decisions by the United States Supreme Court which granted the IRS broad latitude in the enforcement of administrative summonses."). "To a large extent, these procedural modifications sprang from a conviction that taxpayers deserved greater safeguards against improper disclosure of records held by third parties." Ip, 205 F.3d at 1172. The revisions required "parties to whom the records pertain [to be] advised of the service of a third-party summons, and [to be] afforded a reasonable and speedy means to challenge the summons where appropriate." Id. (quoting H.R.Rep. No. 94-658, at 307 (1975), reprinted in 1976 U.S.C.C.A.N. 2897, 3203 and S.Rep. No. 94-938, pt. 1, at 368-369 (1976), reprinted in 1976 U.S.C.C.A.N. 3439, 3797-3798.)

Although Donaldson spurred Congressional changes to certain IRS provisions regarding notice of third party summons, no Court has interpreted those changes as reviving Reisman's suggestion - which the Supreme Court disavowed in Donaldson - that taxpayers have a mandatory right to intervene at the summons hearing of a third party. The Ninth Circuit examined Section 7609 at length in Ip and explained that "[t]he purpose of the notice provision is to allow people to assert defenses, such as the attorney-client privilege or relevancy objections, that would be unavailable to them in the absence of notice." Id. Under the statute, however, "a person entitled to notice is allotted no extra protection from the IRS's power to summons; rather, § 7609(b)(2) merely grants standing to the person entitled to notice so that he or she may challenge the summons in district court." Id. (emphasis added). Therefore, so long as the taxpayers' ability to challenge the third party summons before the District Court is preserved, nothing in Section7609 gives the taxpayer any absolute right to intervene in the underlying summons proceeding.

The Government additionally notes that "[t]he Fourth Circuit, Tenth Circuit, Fifth Circuit, and a District Court within the Ninth Circuit have held that a taxpayer has no right to be present at the interview of the party being summoned." ECF No. 21 at 4. In United States v. Newman, 441 F.2d 165 (5th Cir. 1971) the Fifth Circuit held that a taxpayer could not intervene or be present at the IRS hearing, noting that United States v. Powell, 739 U.S. 48 (1964) had compared such proceedings to grand jury proceedings. The Newman court noted that the investigatory, non-adversarial nature of the proceedings "would be frustrated by requiring those persons not parties who might be later affected to be allowed to take an active part through private counsel in such proceedings."1 Newman, 441 F.2d at 174. In United States v. Traynor, 611 F.2d 809, 811 (10th Cir. 1979), the Tenth Circuit...

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