Opinion ID: 204030
Heading Depth: 2
Heading Rank: 2

Heading: The appellants' response

Text: The appellants advance three theories in support of their argument that, contrary to the district court's conclusion, they successfully rebutted the IRS's prima facie case. The first is that the summoned information is not relevant to a legitimate purpose. Next, they argue that the summonses themselves were not issued for a legitimate purpose. And finally, they claim that the summoned documents are already in the IRS's possession. We discuss each in turn.
The appellants' first substantive argument is that the information sought by the summonses is not relevant to a legitimate purpose. They set forth three supporting reasons: first, that the transactions in which they are engaged are different from the DAD shelter described in the CIP; second, that the IRS improperly targeted Hartigan's (and others') motives; and third, that the summonses were overbroad. We start our analysis by noting that the concept of relevance under § 7602 is broader than that under the Federal Rules of Evidence. Zugerese Trading LLC v. Internal Revenue Service, 2009 WL 1706583, No. 08-30894 (5th Cir. June 18, 2009) ( citing Arthur Young & Co., 465 U.S. at 813-14 n. 11, 104 S.Ct. 1495). Moreover, the IRS may investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not. Powell, 379 U.S. at 57, 85 S.Ct. 248 ( quoting United States v. Morton Salt Co., 338 U.S. 632, 642-43, 70 S.Ct. 357, 94 L.Ed. 401 (1950)). The gist of the appellants' first argument is that the transactions at issue here are not unlawful DAD shelters. Given the broad sweep of the IRS's investigative powers, however, such a determination is beyond the scope of the inquiries undertaken by the district court and this court in the summons enforcement context. See Superior Trading, 2008 WL 5192379 at , n. 10 (court in summons enforcement proceeding need not address whether transactions were lawful). The function of the [court] in an enforcement proceeding is not to test the final merits of the claimed tax deduction, but to assess within the limits of Powell whether the IRS issued its summons for a legitimate tax determination purpose. Howa Trading, 2008 WL 2323872 at  ( citing United States v. White, 853 F.2d 107, 116 (2nd Cir.1988)). Accordingly, we reject the appellant's argument that the claimed legality of their transactions provides a basis to quash the summonses. The appellants next argue that the motives of Hartigan and other persons or entities involved in the transactions at issue are completely irrelevant to the IRS's investigation. Again, given the wide breadth of relevance in the present context, we disagree. In a broad sense, the IRS is investigating the validity of the partnerships themselves for purposes of assessing the validity of the claimed tax losses. Thus, the IRS is permitted to inquire as to whether the parties intended to join together as partners to conduct business activity for a purpose other than tax avoidance. Andantech LLC v. Comm'r, 331 F.3d 972, 978 (D.C.Cir.2003). Next, the appellants' overbreadth argument focuses on the summonses' inclusion of the term, all documents, which, they claim, makes the summonses overbroad as a matter of law. The two cases upon which they rely, however, do not support this proposition. Both United States v. Theodore, 479 F.2d 749 (4th Cir. 1973) and Racca v. United States, 2007 WL 1108872, No. C06-1822RSM, (W.D.Wash. Apr. 11, 2007), contain fact-specific analyses that do not necessarily apply beyond their particular circumstances. Indeed, there are no cases that universally proscribe the use of all documents language. To the contrary, as the Fifth Circuit noted in rejecting an overbreadth claim in one of the many cases involving the same players and issues present here, a summons is not overbroad if it describes the requested material with sufficient particularity to permit the summoned party to respond adequately. Zugarese Trading, 2009 WL 1706583 at . [8] Here, the use of the term all documents is limited by reference to particular subject matters. We therefore conclude that the summonses are not overly broad.
The appellants next argue that the IRS did not issue the summonses for a legitimate purpose. Specifically, they claim that the IRS intended to use the summonses in order to avoid more restrictive Tax Court discovery rules, to harass them, and to improperly extend the statute of limitations applicable to the examination of tax returns. By way of background, a notice of deficiency permits an individual taxpayer to bring a Tax Court proceeding to challenge the tax liability claimed by the IRS in the notice. 26 U.S.C. § 6213. In the partnership context, a notice of final partnership administrative adjustment (FPAA) is analogous to a notice of deficiency. 26 U.S.C. § 6226. Discovery in Tax Court proceedings is more limited than that permitted under the Federal Rules of Civil Procedure. Schneider Interests, L.P. v. Comm'r, 119 T.C. 151, 2002 WL 31163105 (2002); see also United States v. Admin. Enter., Inc., 46 F.3d 670, 672 (7th Cir. 1995) (Discovery in Tax Court proceedings is traditionally informal and noncoercive. . . .). Courts look to the timing of a summons relative to the commencement of [tax court] litigation in order to evaluate validity in the face of such allegations. Sterling Trading, 553 F.Supp.2d at 1159-60 ( citing PAA Mgmt., Ltd. v. United States, 962 F.2d 212, 219 (2d Cir. 1992)). Where the summons is issued before the commencement of judicial proceedings, that summons is generally not found to undermine the discovery process. Id. Here, as the district court noted, it is undisputed that the IRS issued the summonses before issuing the FPAA to Derringer. [9] Thus, the timing of the summons does not suggest that the IRS intended the summons as a pre-litigation discovery tool. . . . Id. The appellants argue that because the FPAA was a final determination of Derringer's tax liability, the summons could only have been for illegitimate purposes. This position, however, overstates the impact of the FPAA. The FPAA is not `final' in the sense that its issuance necessarily obviates the need for further information, [or] brings the curtain down on the IRS's administrative or investigative role. . . . PAA Mgmt., 962 F.2d at 219. Against this backdrop, the issuance of the FPAA does not invalidate the legitimacy of the Derringer summons. The appellants also rely on Rogers's version of a conversation with Weinger in which Weinger allegedly said that the IRS auditors were being guided by district counsel who planned to litigate regardless of the result of the audit and notwithstanding whether petitioners were able to prove bad business debt through the audit. The appellants rely on PAA Mgmt., Ltd. v. United States, No. 91C168, 1992 WL 346314 (N.D.Ill. Nov.19, 1992), for the proposition that the motive to use in litigation materials obtained by summons is evidence of an improper purpose. In PAA Mgmt, however, the court found that the IRS agent explicitly admitted that the IRS did not need the summoned materials for its examination, but rather that it only sought the material to protect the government's interests in Tax Court. 1992 WL 346314 at -6. There is no such admission here. Instead, the declaration in this case states that the information sought in the Derringer summons is still necessary to the determination of the accuracy of Derringer's returns. And contrary to the appellants' assertions, Weinger's alleged statement (which was in connection with a different summons enforcement proceeding [10] ) does not compel an outcome in their favor here, particularly in light of the fact that in the other proceeding Weinger expressly denied being directed by counsel to seek specific documents. Moreover, there is no prohibition against IRS agents speaking with district counsel during an examination. Good Karma, LLC, 546 F.Supp.2d at 604. Accordingly, we reject the appellants' discovery claim. The appellants' claim of harassment [11] is based on two specific claims, neither of which is sufficient to merit relief. First, they argue that the IRS threatened the imposition of severe penalties if they did not settle. The IRS does not dispute that it sought settlement; however, The mere fact that the IRS attempted to settle with taxpayers . . . hardly amounts to a `threat.' Sterling Trading, 553 F.Supp.2d at 1158. Next, the appellants claim that the IRS threatened one of their attorneys. According to an affidavit from the attorney, IRS agents believed that the attorney's responses to document requests were incomplete and told the attorney that failure to respond could result in a disciplinary referral. This conduct does not rise to the level of harassment, either. In the first place, the attorney did not characterize the agents' communications as threats, nor have other courts viewed them as threats. See, e.g., Superior Trading, 2008 WL 5192379 at  ( citing Ironwood Trading, 2008 WL 817066 at ). Perhaps more importantly, the alleged threats involved an individual and partnership entity distinct from any in this case. Accordingly, the appellants' claim of harassment fails. We also reject the appellants' argument that the summonses were issued as a means to improperly extend the applicable statutes of limitation. [12] As the district court noted, and as the appellants concede, it was the filing of the petition to quash that tolled the statute, not the issuance of the summonses. 26 U.S.C. § 7609(e)(1). The statute is also tolled if the summoned party does not comply within six months. 26 U.S.C. § 7609(e)(2). [13] In the end, the appellants fail to cite any evidence in support of their statute of limitations argument. Based on the foregoing, we affirm the district court's finding that the summonses were not issued for an improper purpose.
The appellants' final substantive argument is that the IRS is already in possession of the summoned documents. They rely on the fact that Rogers and the appellants' accountant have already appeared for interviews and produced documents. As previously noted, however, the IRS is entitled to obtain relevant records from third parties to compare for accuracy any records obtained from the taxpayer. While the appellants claim that more than one million pages of documents have been produced, they do not suggest how those documents are responsive to the summonses issued to Hartigan. See Sterling Trading, 553 F.Supp.2d at 1161 (rejecting identical argument). Nor do they dispute that Hartigan has not yet provided testimony, as was requested. The appellants' claim that the IRS is already in possession of the summoned documents therefore fails.