Opinion ID: 2973554
Heading Depth: 3
Heading Rank: 2

Heading: Prima facie case for summons enforcement

Text: In order to ensure the proper determination of tax liability, Congress “has endowed the IRS with expansive information-gathering authority.” United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984). Section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602, is the “centerpiece of that congressional design.” Arthur Young, 465 U.S. at 816. Under § 7602, the Commissioner of the IRS is authorized, “[f]or the purpose of ascertaining the correctness of any return . . . , [t]o examine any books, papers, records, or other data which may be relevant or material to such inquiry” and to summon any person to produce such documents. 26 U.S.C. § 7602(a)(1) & (2). The summons power is not limited to the taxpayer under investigation, but may also be issued to a third party who has relevant information. 26 U.S.C. § 7602(a)(2). The courts, and not the IRS, are authorized to enforce this summons power. United States v. Will, 671 F.2d 963, 966 (6th Cir. 1982) (affirming the district court’s enforcement of a summons over the taxpayer’s objection that the summons was issued in bad faith). In United States v. Powell, 379 U.S. 48 (1964), the Supreme Court enunciated the analytical framework that governs enforcement decisions. First, for the government to establish a prima facie case for enforcement, it must demonstrate that (1) the investigation has a legitimate purpose, (2) the information summoned is relevant to that purpose, (3) the documents sought are not already in the IRS’s possession, and (4) the procedural steps required by the tax code have been followed. Id. at 57-58. “The requisite No. 05-5080 United States v. Monumental Life Ins. Co. Page 4 showing is generally made by the submission of the affidavit of the agent who issued the summons and who is seeking enforcement.” Will, 671 F.2d at 966. Once the government has made this prima facie showing, the burden shifts to the party being summoned to either disprove the elements of the prima facie case or “demonstrate that judicial enforcement of the summons would otherwise constitute an abuse of the court’s process.” United States v. Davis, 636 F.2d 1028, 1034 (5th Cir. 1981). In this case, Monumental claims that the IRS has failed to establish a prima facie case for the reasons discussed below. 1. Alleged insufficiency of the agent’s affidavit Monumental first argues that Marien’s affidavit in support of the petition to enforce the summons is insufficient because Marien was not the agent who issued the summons. Agent Lola Lee, who issued the summons, did not prepare the affidavit. But Marien is a specialist in the tax treatment of employee benefit plans and was specifically assigned to the Johnson investigation. Although this court’s authority on point states that the agent who issued the summons is an appropriate person to establish a prima facie case for enforcement, Will, 671 F.2d at 966, there is no caselaw holding that another IRS investigator is incompetent to provide the requisite information. Agent Marien had personal knowledge of the Johnson investigation and the documents needed to determine Johnson’s tax liability. See Fed. R. Civ. P. 56 (requiring affidavits to be based on personal knowledge). Because Marien, the IRS’s national specialist in this area, was competent to establish the Powell factors, his affidavit does not fail due to an alleged technical deficiency. The district court’s reliance on the affidavit, therefore, was not clearly erroneous. 2. The Neonatology documents Monumental also argues that many of the documents sought by the summons are already in the possession of the IRS. Specifically, Monumental produced some of the general information regarding its products when the IRS was investigating Neonatology Associates (the Neonatology documents). Neonatology Associates used many of the same types of insurance arrangements as Johnson. The IRS does not dispute that it already has the Neonatology documents, but claims it does not possess them in a form that it can employ in the investigation of Johnson because of the confidentiality requirements of 26 U.S.C. § 6103. Under 26 U.S.C. § 6103(a), federal tax returns and tax return information are confidential. “Federal employees may not disclose such information unless an exception is met, and a taxpayer has a statutory cause of action for damages” in the event of an unauthorized disclosure of return information. Rowley v. United States, 76 F.3d 796, 799 (6th Cir. 1996) (citation and quotation marks omitted); see also 26 U.S.C. § 7431(a) (imposing civil liability for disclosure of return information by a government agent). Return information includes “a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits . . . or any other data” collected by the IRS with respect to a return or with respect to the determination of possible tax liability. 26 U.S.C. § 6103(b)(2)(A). But return information does not encompass “data in a form which cannot be associated with or otherwise identify, directly or indirectly, a particular taxpayer.” 26 U.S.C. § 6103(b)(2)(D). Moreover, an explicit exception to the confidentiality requirements is made for “inspection by or disclosure to officers and employees of the Department of the Treasury whose official duties require such inspection or disclosure for tax administration purposes.” 26 U.S.C. § 6103(h)(1). Internal use by the IRS of the Neonatology documents in the Johnson investigation, therefore, would not violate the confidentiality requirements. No. 05-5080 United States v. Monumental Life Ins. Co. Page 5 The IRS further argues, however, that “actual possession of or access to information by the IRS is not an absolute ban to enforcement of a summons for that information,” quoting Phillips v. United States, No. 98-3128, 1999 WL 228585, at  (6th Cir. March 10, 1999) (unpublished). But the summoned taxpayer in Phillips produced no evidence to contradict the IRS agent’s affidavit declaring that the IRS did not possess any of the requested information. Id. The quoted language in Phillips is therefore dicta, to say nothing of the fact that the case is also unpublished. Phillips is thus easily distinguishable from the present case, where the IRS does not dispute that it already possesses certain of the requested documents. In addition, the proposition stated in Phillips that actual possession is not an absolute ban to summons enforcement derives from a Fifth Circuit case in which there was little evidence that the IRS actually had possession of the summonsed documents. See Davis, 636 F.2d at 1037 (enforcing a summons in part where the taxpayer did not request discovery as to whether the IRS possessed the questioned documents). The Fifth Circuit in Davis balanced the unnecessary harassment of the taxpayer inherent in a summons requesting already-possessed information with the need to expedite summons-enforcement proceedings to allow for effective investigations by the IRS. Id. at 1038-39. This balancing test was applied in another unpublished case from this circuit, United States v. Alpha Medical Management, Inc., No. 96-5825, 1997 WL 359065, at  (6th Cir. June 26, 1997), which held that district courts may limit enforcement of a summons to documents not already possessed by the IRS, but that actual possession is not an absolute ban. In the present case, the district court held that Monumental has not shown that the IRS “has practical means to access any [of the Neonatology documents, nor has Monumental] shown that production of these documents would work an unnecessary hardship on [Monumental].” But even assuming without deciding that this circuit would adopt the Davis balancing test, the burden must be placed on the government rather than on Monumental to prove that the government’s interests outweigh Monumental’s hardship. See United States v. Theodore, 479 F.2d 749, 755 (4th Cir. 1973) (holding that the obligation is upon the IRS to demonstrate that it has no practical way of obtaining the material within its possession). The government should bear this burden because Monumental has successfully shown that the IRS does, in fact, possess some of the requested materials in a form it can use in this investigation. Because Monumental has successfully rebutted the government’s prima facie showing as required by Powell, the IRS must prove that, on balance, the Neonatology documents cannot be practicably accessed. The IRS, by simply asserting that the Neonatology documents have been locked in a file somewhere, has not shown that the Davis balancing test weighs in its favor, even if we were to accept the government’s argument that Davis applies. Although summons-enforcement proceedings are designed to be summary in nature and to be concluded quickly, United States v. Kis, 658 F.2d 526, 535 (7th Cir. 1981), the district court should not have dismissed Monumental’s meritorious objections simply to “avoid a fresh round of litigation regarding exactly which documents the IRS already may have.” Expediting an IRS summons is an important consideration, but it is not the only goal. Monumental, because it is a third party to the IRS’s investigation of the taxpayer Johnson, deserves greater protection against a burdensome summons. See United States v. Bisceglia, 420 U.S. 141, 157 (1975) (holding that federal courts should scrutinize summonses issued to third parties with extra care) (superseded by statute on other grounds). Finally, the IRS argues that the validity of a summons should be tested as of the time that it was issued. The summons to Monumental was issued in November of 1999, almost nine months before the Tax Court’s decision in Neonatology, causing the IRS to claim that there is no proof that it possessed the documents at the time the summons was issued. It relies on United States v. Kemper Money Market Fund, Inc., 781 F.2d 1268, 1278 (7th Cir. 1986) (assessing the validity of a summons as of the time that it was issued in affirming the denial of fees and costs to the taxpayer). But Kemper is inapplicable because it dealt with the question of whether a referral for criminal prosecution No. 05-5080 United States v. Monumental Life Ins. Co. Page 6 invalidated a summons, an entirely different issue than the one before us. Id. The IRS cites no authority for the proposition that, in this equitable proceeding, the panel may not consider the fact that the Neonatology documents are now in the IRS’s possession. See Kennedy v. Rubin, 254 F. Supp. 190, 194 (N.D. Ill. 1966) (“[A] suit to compel compliance with an administrative subpoena is, by nature of the relief sought, a mandatory injunction proceeding, equitable in character. . . .”). Because Monumental has demonstrated that the Neonatology documents are already in the IRS’s possession, the IRS has not satisfied this aspect of the Powell requirements. The district court therefore committed a clear error in enforcing the summons with respect to those documents. 3. Relevance of the documents requested Monumental next challenges the relevance of many of the documents requested. Applying the Powell test for relevance, the question is whether the records requested “might” throw light upon the correctness of a return. Arthur Young, 465 U.S. at 814-15 & n.11. This threshold is “very low,” United States v. Noall, 587 F.2d 123, 125 (2d Cir. 1978), but judicial protection against sweeping or irrelevant orders is “particularly appropriate in matters where the demand for records is directed not to the taxpayer but to a third-party.” Theodore, 479 F.2d at 754 (citation and quotation marks omitted) (emphasis removed). Marien’s affidavit asserts that all of the documents requested are relevant to the investigation of Johnson. He further states that the determination of deductions claimed by Johnson and the characterization of insurance arrangements is a complex and fact-intensive inquiry. The district court found that Marien’s affidavit sufficiently established relevance because courts “have consistently recognized that declarations or affidavits by IRS directors or agents generally satisfy the Powell requirements.” See, e.g., United States v. Stuart, 489 U.S. 353, 360-61 (1989) (holding that the Powell requirements were satisfied by an IRS employee’s affidavit); Will, 671 F.2d at 966 (holding that the requisite showing for the Powell factors is generally made by an affidavit of the issuing agent). On appeal, Monumental contends that many of the documents sought by the IRS relate not to Johnson, but to other unnamed taxpayers. According to Monumental’s brief, paragraphs three through seven of the summons request “practically everything related to various insurance policies as a whole, including insurance pricing, agent commission, marketing allowances, and reinsurance information, as they are sold to insureds all over the country.” Monumental therefore argues that the summons is overbroad and disproportionate to the ends sought. See Theodore, 479 F.2d at 754 (reversing the district court’s order enforcing a summons because it was “unreasonable”). The magistrate judge agreed with Monumental that “Request 3(a),” which seeks “[a]ll documents memorializing, describing, identifying, and/or listing insurance costs and/or premium rates in effect during the period beginning July 1, 1991 through September 30, 1999 ” seemed particularly irrelevant because the IRS was only investigating Johnson’s tax liability between 1994 and 1997. In response, the IRS contends that it is authorized to determine the “course and conduct” of its audits. See United States v. Northwest Corp., 116 F.3d 1227, 1233 (8th Cir. 1997). It further argues that the details on Monumental’s product lines will assist the IRS in classifying the true nature of Johnson’s benefit plan. To fully understand the purpose of the payments made to the plan, and to discern whether the payments are intended to accumulate value, the IRS asserts that it must examine the general operation of Monumental’s group policies. Proceedings seeking enforcement of an IRS summons are intended to be summary in nature, and “defining the permissible scope of the hearing is a decision left to the discretion of the district court.” Will, 671 F.2d at 968 (permitting the district court to decide if further discovery on the Powell factors is warranted). Nevertheless, in close cases, the “mere assertion of relevance” by an No. 05-5080 United States v. Monumental Life Ins. Co. Page 7 IRS agent will not necessarily satisfy the government’s burden. United States v. Goldman, 637 F.2d 664, 667 (9th Cir. 1980). The present case exemplifies an exceptional circumstance where automatic reliance upon an agent’s affidavit is not adequate because (1) the subpoena is directed to a third party, not to the taxpayer being investigated, (2) the IRS seeks a voluminous amount of highly sensitive proprietary information about Monumental’s general administration of its products, (3) the IRS has opposed the imposition of a protective order, and (4) the magistrate judge, who spent years considering the scope of the summons, found that the IRS was seeking “some irrelevant information.” We agree with the magistrate judge that some of the documents requested by the IRS appear to be far removed from the investigation of Johnson’s tax liability. The district court’s abbreviated analysis of this issue does not persuade us otherwise. In this case, where a large burden is imposed upon a third party to produce proprietary documents that the IRS has refused to place under a protective order, Marien’s word that all of the documents summoned are relevant should not be the end of the district court’s inquiry. We would normally remand this case with instructions for the district court to limit enforcement of the summons to relevant documents that are not already in the IRS’s possession. Narrowing the scope of the documents that may be summoned constitutes the partial enforcement of a summons, which an unpublished case in this circuit has found permissible. See Alpha Medical Mngt., 1997 WL 339065 at  (limiting enforcement of the summons to documents not already “accessible to the IRS”). See also Part II.C. below (distinguishing partial enforcement from conditional enforcement of a summons). In this case, however, the magistrate judge has held six hearings and undertaken extensive efforts to work out a compromise. The fact that the parties could not reach a mutually agreeable solution leads us to believe that a remand to the district court to determine which documents are relevant and which are not would prompt a long, drawn-out, and contentious process. In proceedings that have already spanned several years, we think the best course, in terms of both administrative and judicial efficiency, is to deny enforcement of the summons in full and permit the IRS, if it wishes, to redraft a more narrowly tailored summons that complies with the Powell requirements.