United States v. Vaught
| Decision Date | 16 August 2021 |
| Docket Number | 1:18-cv-00452-DCN |
| Parties | UNITED STATES OF AMERICA, Petitioner, v. STEVE VAUGHT, President of Alpha Lending, LLC, d/b/a Marigold Credit, and Member-Manager of Alpha Holding Company, LLC, Respondent, S. CROW COLLATERAL CORPORATION and STANLEY D. CROW, Intervenors. |
| Court | U.S. District Court — District of Idaho |
Pending before the Court are a Petition to Enforce IRS Summonses (Dkt. 1) by the United States of America (the “Government”) and a Second Amended and Supplemented Opposition to the Government's Petition to Enforce and Motion to Quash (Dkt. 39) by Intervenors S. Crow Collateral Corporation (“SCCC”) and Stanley D Crow.
Having reviewed the record and briefs, the Court finds that the facts and legal arguments are adequately presented. Accordingly, in the interest of avoiding further delay, and because the Court finds that the decisional process would not be significantly aided by oral argument, the Court will decide the matters without oral argument. Dist. Idaho Loc Civ. R. 7.1(d)(1)(B).
Upon review, and for the reasons set forth below, the Court DENIES the Petition to Enforce and GRANTS the Second Amended and Supplemented Opposition to the Government's Petition to Enforce and Motion to Quash.
On November 17, 2015, the Internal Revenue Service (“IRS”) initiated an examination of Intervenor Stanley D. Crow to determine whether he is subject to penalties under the Internal Revenue Code (“IRC”), 26 U.S.C. §§ 6700, 6707, and 6708.[1] The IRS is investigating Crow's role in transactions involving installment sales plans under 26 U.S.C. § 453.[2] More specifically, the IRS is assessing whether the installment sales transactions promoted by Crow and his company, SCCC, qualify as tax shelters subject to registration and disclosure requirements, as well as whether Crow has made false statements regarding tax benefits associated with such transactions. The investigation requires the IRS to make a determination regarding whether penalty conduct occurred and, if appropriate, to calculate the penalty amount.
On the day it initiated the examination, the IRS sent Crow a general notice entitled “Your Rights as a Taxpayer, ” also known as a “Publication 1.” Dkt. 27-1, ¶ 4. Publication 1 generally informs taxpayers subject to an examination that the IRS may contact third parties during the course of an investigation.[3] Id. On December 16, 2015, Internal Revenue Agents had an initial meeting with Crow to discuss the investigation. During the meeting, the Agents notified Crow that the IRS “may contact other persons or entities.” Id. ¶ 5. The parties dispute whether the IRS ever provided any additional notice of potential third-party contacts.
Over the nearly six years of its investigation of Crow, the IRS has issued multiple third-party summonses, and has made contact with at least sixteen third parties. Dkt. 39, at 12-13. In 2017, Crow and SCCC moved to quash third-party summonses issued to Pioneer Title Company in two cases before District of Idaho Judge Edward J. Lodge, 1:17-mc-09828-EJL-REB and 1:17-mc-09829-EJL-REB (collectively “the Pioneer Title Cases”). In the Pioneer Title Cases, SCCC and Crow argued that the IRS's investigation of Crow was pretextual, [4] and requested an evidentiary hearing to question IRS agents regarding the legitimacy of the investigation. The Pioneer Title court denied SCCC and Crow's request for an evidentiary hearing because they had not plausibly raised an inference of bad faith, and subsequently entered orders enforcing the Pioneer Title summonses. 1:17-mc-09828- EJL-REB, Dkts. 20, 26; 1:17-mc-09829-EJL-REB, Dkts. 18, 24. SCCC and Crow appealed the district court's decision, arguing they were entitled to an evidentiary hearing to crossexamine the IRS agents involved in issuing the summonses to Pioneer Title.
While these events were unfolding, the IRS continued its investigation of Crow, and issued the two summonses that are the subject of this suit. Specifically, the IRS issued a third-party summons to Steve Vaught as president of Alpha Lending LLC on January 19, 2018, as well as a third-party summons to Vaught as member-manager of Alpha Holding Company LLC, d/b/a Marigold Credit on January 24, 2018 (collectively “Vaught Summonses”). Alpha Lending LLC and Alpha Holding Company LLC (the “Alpha Companies”) have a business relationship with SCCC, and have served as a lender or escrow agent in SCCC's installment sales transactions. The Vaught Summonses directed Vaught to: (1) appear before the IRS on March 13, 2018; and (2) give testimony and produce for examination records and documents on behalf of the Alpha Companies. Vaught did neither.
Although Vaught and the IRS were in communication after Vaught failed to appear and produce documents, all communications ceased in July of 2018. Dkt. 4-1, ¶ 25. On October 17, 2018, the Government filed the instant Petition to Enforce the Vaught Summonses (“Government's Petition”). Dkt. 1. Vaught filed an answer and opposition to the Government's Petition. Dkt. 4. He also filed a motion for an evidentiary hearing to cross-examine the IRS agent who issued the Vaught Summonses, as well as the IRS agent who signed the declaration in support of the Government's Petition. Dkt. 6. SCCC and Crow (collectively the “Intervenors”) were later granted leave to intervene, and also filed an Opposition to the Government's Petition and a Motion to Quash the Vaught Summonses. Dkts. 7, 11. On December 21, 2018, the Intervenors requested that the Vaught litigation be stayed pending the outcome of their consolidated appeals of the Pioneer Title Cases.
On February 26, 2019, the Ninth Circuit issued an opinion in an unrelated IRS third-party summons enforcement case, J.B. v. United States, 916 F.3d 1161, 1164 (9th Cir. 2019). As a matter of first impression, the J.B. court interpreted 26 U.S.C. § 7602, which states the IRS must provide the taxpayer with “reasonable notice in advance” before seeking a taxpayer's financial records from third parties. 26 U.S.C. § 7602(c)(1).[5] The J.B. court held: “‘reasonable notice in advance' means notice reasonably calculated, under all the relevant circumstances, to apprise interested parties of the possibility that the IRS may contact third parties, and that affords interested parties a meaningful opportunity to resolve issues and volunteer information before third-party contacts are made.” 916 F.3d at 1164 (citing Jones v. Flowers, 547 U.S. 220, 226 (2006)). Based on the Ninth Circuit's holding in J.B., the Intervenors filed a Motion to Amend and Supplement their Opposition to the Government's Petition and Motion to Quash (“First Motion to Amend”). Dkt. 26.
While the First Motion to Amend was pending, the Government submitted notice of the Ninth Circuit's July 29, 2019 Memorandum in the Pioneer Title Cases. Dkt. 29. The Ninth Circuit affirmed the district court's holding that an evidentiary hearing was unnecessary in the Pioneer Title Cases because Crow and SCCC failed to identify specific facts and circumstances to raise a plausible inference that the IRS has improper motives in investigating Crow. Dkt. 29-1.
On October 14, 2019, the Intervenors filed a Second Motion to Amend their Opposition to the Government's Petition and Motion to Quash (“Second Motion to Amend”) based on, inter alia, documents the IRS had recently produced in response to a Freedom of Information Act (FOIA) request Crow served in 2017. Dkt. 33. Although it denied Vaught's request for an evidentiary hearing, this Court ultimately granted the Intervenors' First and Second Motions to Amend, and directed the Intervenors to formally file their second amended opposition to the Government's Petition by December 18, 2019. Dkts. 32, 38.
As the Court ordered, the Intervenors filed a Second Amended and Supplemented Opposition to the Government's Petition to Enforce and Motion to Quash on December 18, 2019. Dkt. 39. Briefing was ripe on January 16, 2020. However, on February 12, 2020, this case was reassigned to Visiting Judge James M. Moody from the Eastern District of Arkansas. Dkt. 44.
On October 5, 2020, Crow filed two miscellaneous cases before this Court, Crow v. United States (Case No. 1:20-mc-280-DCN) and Crow v. United States (Case No. 1:20-mc-281-DCN) (“Crow Cases”) to petition to quash additional third-party summonses the IRS issued in the course of investigating Crow. Crow subsequently filed a Motion to Consolidate the Crow Cases with the instant suit (Dkt. 47), and Judge Moody transferred this case back to the undersigned Judge on January 11, 2021. Dkt. 48.
The Government later withdrew the summonses that were the subject of the Crow Cases and moved to dismiss those cases because the Court no longer had jurisdiction under the mootness doctrine. 1:20-mc-280-DCN, Dkt. 14; 1:20-mc-281-DCN, Dkt. 14. On May 20, 2021 the Court dismissed the Crow Cases and denied the Intervenors' Motion to Consolidate. Dkt. 53.
Despite this lengthy procedural history, the only remaining issue before the Court is whether the Vaught Summonses should be enforced or quashed. Given the Ninth Circuit's holding in J.B., the Intervenors argue the Vaught Summonses are unenforceable because the IRS did not satisfy the notice requirements of 26 U.S.C. § 7602(c)(1). In the alternative, the Intervenors contend they are entitled to an evidentiary hearing because they have raised a plausible inference that the Vaught Summonses were issued in bad faith in an attempt to maximize third-party contacts to the detriment of Crow's reputation and business interests.
Congress has “authorized and required” the IRS “to make the inquiries, determinations, and assessments of all...
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