Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-alsd-1_07-cv-00883/USCOURTS-alsd-1_07-cv-00883-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

---

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ALABAMA

SOUTHERN DIVISION

J&M ASSOCIATES, INC., )

)

Plaintiff, )

)

v. ) CIVIL ACTION NO. 07-0883-CG-N

)

MARK CALLAHAN, d/b/a CALLAHAN )

FINANCIAL SOLUTIONS, et al., )

)

Defendants. )

ORDER

This matter is before the court on the motion of the United States of America to Quash 

Third-Party Subpoenas (doc. 130), its Memorandum (doc. 131), defendants’ Response (doc. 136)

and the government’s Reply (doc. 137). The case involves plaintiff’s claim arising from

unforseen tax consequences of plaintiff’s participation in the California Building Supply and

Wholesalers and Contractors League Voluntary Employer’s Beneficiary Association (“the

VEBA”). Plaintiff J&M Associates, Inc., and defendant American General Life Co., Inc., each

issued a subpoena to Revenue Agent Raspberry of the Internal Revenue Service, seeking the

agent’s testimony and production of documents concerning the audit and the determination that

plaintiff’s contributions to the VEBA were not deductible and the imposition of penalties for the

years 2004 and 2005.

The subpoenas seek copies of all documents relating to J&M Associates of Mississippi,

Michael Wilks and John Wilks for the 2004 and 2005 tax years, “including legal analyses for

failure to comply with IRS Code and/or regulations.” Upon plaintiff’s written request, the IRS

had previously provided copies to plaintiff’s counsel of income tax returns and work papers for

J&M Associates of Mississippi, Michael Wilks and John Wilks for the 2004 and 2005 tax years. 

Case 1:07-cv-00883-CG-N Document 139 Filed 03/01/10 Page 1 of 4
1

 That statute provides in pertinent part “[t]o the extent necessary to decision and when

presented, the reviewing court shall decide all relevant questions of law, interpret constitutional

and statutory provisions, and determine the meaning or applicability of the terms of an agency

action. The reviewing court shall--

...

(2) hold unlawful and set aside agency action, findings, and conclusions found to be--

(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

...

In making the foregoing determinations, the court shall review the whole record or those parts of

2

Anaylsis

The government raises three arguments in support of its Motion to Quash: (1) that the

subpoenas were not issued in conformity with the procedures established in 26 C.F.R.

§301.9000-2; (2) that the tax privacy provisions of 26 U.S.C. §6103 bar the requested testimony;

and (3) that the parties have not demonstrated that the decision of the IRS not to comply with the

subpoenas was arbitrary and capricious, as required for this court to overturn that decision. The

parties admit that they did not comply with the procedural requirements that they include a

summary of testimony sought, an estimate of the time that will be required for the testimony, etc. 

The parties argue that a supplemental statement–which they have attached as an exhibit to their

Response–will make the subpoenas compliant if they are reissued. They propose that the court

thus ignore the procedural flaws in the subpoenas which have been served. Presumably, such an

order would implicitly or explicitly overrule the government’s other arguments prospectively,

before such amended subpoenas have been served.

The Supreme Court held that department heads have authority to promulgate regulations

restricting employee testimony in private litigation. U.S. ex rel. Touhy v. Ragen, 340 U.S. 462

(1951) (regulation restricting testimony by employees of Justice Department upheld.) “Pursuant

to 5 U.S.C. 706(2)(A)1, the district court could only overturn [the agency’s] action if such action

Case 1:07-cv-00883-CG-N Document 139 Filed 03/01/10 Page 2 of 4
it cited by a party, and due account shall be taken of the rule of prejudicial error.”

2

 For courts in the Eleventh Circuit, precedent is clear on this point. But see Watts v.

SEC, 482 F.3d 501, 509 [footnote] (D.C. Cir. 2007)(“ For reasons explained in the text, we do

not believe the APA arbitrary and capricious standard applies when a court reviews an agency's

decision not to comply with a federal court subpoena.”).

3

 If the parties had not agreed, the agency would have had to have provided the full

administrative record on which the decision was made, to allow the court to review the decision

under the arbitrary and capricious statute. The IRS did not do so in connection with the instant

motion, but the agreement of the parties on this issue negates the need for production of the full

record.

3

was arbitrary, capricious, an abuse of discretion or otherwise contrary to law.” Moore v. Armour

Pharmaceutical Co., 927 F.2d 1194, 1197 (11th Cir. 1991) (review of Touhy issue on federal

subpoena).2 In reviewing an agency’s decision, the court is generally limited to review of the

administrative record before the agency at the time the decision was made. Alabama-Tombigbee

Rivers Coalition v. Kempthorne, 477 F.3d 125 (11th Cir. 2007). 

The parties’ approach would have the court review a hypothetical decision–whether or

not it would be arbitrary or capricious if the agency were to have denied permission to an agent

to testify if it had been called upon to respond to a subpoena that had complied with the

procedural requirements of the relevant regulations. This the court can not do. The decision

which the court may review was made on the basis of the subpoenas as they were served. The

IRS and the parties agree that the subpoenas did not comply with those regulations3, and thus this

court can not find the rejection of those non-compliant subpoenas to have been arbitrary or

capricious.

Conclusion

Accordingly, for the reasons set out herein it is hereby ORDERED that the Motion to

Case 1:07-cv-00883-CG-N Document 139 Filed 03/01/10 Page 3 of 4
4

Quash is GRANTED. 

DONE this the 1st day of March 2010.

/s/Katherine P. Nelson 

KATHERINE P. NELSON

UNITED STATES MAGISTRATE JUDGE

Case 1:07-cv-00883-CG-N Document 139 Filed 03/01/10 Page 4 of 4