Opinion ID: 4523211
Heading Depth: 2
Heading Rank: 3

Heading: The Summonses Satisfy Powell.

Text: We now must determine whether the IRS proffered sufficient evidence to pass the no-DOJ-referral threshold and to establish the four Powell factors. We address each factor in turn and consider whether the Taxpayers have provided evidence to establish a genuine issue of material fact. We conclude that the government’s evidence passes the no-DOJ-referral threshold and satisfies its Powell burden and that the Taxpayers have failed to rebut it. 13 A. The IRS Has Not Referred the Taxpayers’ Case to the DOJ for Criminal Prosecution. The threshold question is whether the IRS has referred the Taxpayers’ case to the DOJ for criminal prosecution. See, e.g., High Desert, 917 F.3d at 1183. The IRS easily meets this slight burden with Agent Pringle’s declaration. Agent Pringle declared under penalty of perjury that “[n]o Department of Justice referral, as defined by 26 U.S.C. § 7602(d), is in effect with respect to Standing Akimbo, LLC, . . . Peter Hermes, John Murphy, Samantha Murphy, or Kevin Desilet for the tax periods under examination.” App. vol. 1 at 74–75 (Decl. of Agent Tyler Pringle, dated Dec. 19, 2017). “Such an ‘affidavit of the agent who issued the summons and who is seeking enforcement’ is sufficient to make ‘[t]he requisite showing.’” High Desert, 917 F.3d at 1184 (second alteration in original) (quoting Balanced Fin. Mgmt., 769 F.2d at 1443). The Taxpayers do not contest that this threshold matter has been met.6 B. The IRS Is Conducting the Investigation for a Legitimate Purpose. Next, we reach Powell’s first factor: whether “the investigation will be conducted pursuant to a legitimate purpose.” 379 U.S. at 57. Agent Pringle’s declaration again satisfies the IRS’s slight burden on this factor. Agent Pringle declared: “The IRS has assigned me to conduct an examination of the federal tax liabilities of Standing Akimbo, LLC, for the 2014 and 2015 tax years.” App. vol. 1 at 6 In its motion to dismiss, the government acknowledged that it bears the burden of establishing this matter, arguing that it did so through Agent Pringle’s declaration. The Taxpayers did not respond to this contention in their response, and the magistrate judge’s recommendation did not address it. 14 71. He also stated that, because Standing Akimbo’s audit would affect its owners’ tax returns, he opened examinations into the personal-income-tax returns of Desilet, the Murphys, and Hermes. He explained that, because the Taxpayers did not adequately respond to his Document Requests, he issued the third-party summonses to obtain the needed information to “verify the accuracy of Standing Akimbo’s internal books and records and to determine whether what Standing Akimbo reported on its returns is consistent with that information.” Id. at 73. As we will discuss in the next section concerning Powell’s second factor, the information summoned is relevant in determining whether the Taxpayers violated § 280E by taking improper deductions. Agent Pringle’s declaration sufficiently establishes that the IRS acted with a legitimate purpose. See High Desert, 917 F.3d at 1184 (explaining that the agent’s affidavit meets IRS’s slight burden). In response, the Taxpayers argue that the IRS acted with an illegitimate purpose, namely, investigating federal drug crimes. We have already rejected this argument. In 2017, we observed that “the IRS’s obligation to determine whether and when to deny deductions under § 280E[] falls squarely within its authority under the Tax Code.” Green Sol. Retail, 855 F.3d at 1121 (citing 26 U.S.C. §§ 6201(a), 7602(a); Clarke, 573 U.S. at 249). The next year we held that “it is within the IRS’s statutory authority to determine, as a matter of civil tax law, whether taxpayers have trafficked in controlled substances.” Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1197 (10th Cir. 2018), cert. denied, 139 S. Ct. 2745 (2019). Most recently, in High Desert, we relied on Green Solution and Alpenglow to hold that the 15 IRS has statutory authority to “mak[e] a determination that Congress expressly asked it to make—even if that determination requires the IRS to ascertain whether the taxpayer is engaged in conduct that could subject him or her to criminal liability under the CSA.” High Desert, 917 F.3d at 1187. So, even if the IRS had in fact issued the summonses to investigate federal drug crimes (and the Taxpayers have furnished no evidence in support of that), the IRS could still do so as part of determining § 280E’s applicability. See id. (“Congress ‘granted the [IRS] broad latitude to issue summonses “[f]or the purpose of . . . determining the liability of any person for any internal revenue tax.”’” (alterations in original) (quoting Clarke, 573 U.S. at 250)).7 The Taxpayers posit that they are not violating the CSA, because the CSA does not cover Colorado’s legal marijuana. First, the Taxpayers’ requests for immunity from prosecution for federal drug crimes contradict this argument. Second, this argument is unavailing. The CSA does not have to preempt Colorado law for 7 In a Federal Rule of Appellate Procedure 28(j) letter, the Taxpayers argue against § 280E’s constitutionality by relying on one partial dissent (joined by two other panelists) in an en banc United States Tax Court decision. The dissent opined that Congress had exceeded its Sixteenth Amendment authority in enacting § 280E. See N. Cal. Small Bus. Assistants Inc. v. Comm’r, 153 T.C. No. 4, 2019 WL 5423724, at  (2019) (Gustafson, J., concurring in part and dissenting in part). We are unpersuaded by this dissent. We agree with the majority, which ruled that § 280E falls within Congress’s authority under the Sixteenth Amendment to establish deductions. See id. at  (majority opinion). Further, we are bound by our decisions in Green Solution, Alpenglow, and High Desert that the IRS is properly enforcing § 280E. See, e.g., Robles-Garcia v. Barr, 944 F.3d 1280, 1284 (10th Cir. 2019) (“We are bound by our prior Tenth Circuit precedent.” (citing Lucio-Rayos v. Sessions, 875 F.3d 573, 582 (10th Cir. 2017))). 16 § 280E to apply. Section 280E applies when a business’s activities “consist[] of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” 26 U.S.C. § 280E (emphasis added). Congress’s use of “or” extends the statute to situations in which federal law prohibits the conduct even if state law allows it. Further, the CSA reigns supreme. See Gonzales v. Raich, 545 U.S. 1, 29 (2005) (“The Supremacy Clause unambiguously provides that if there is any conflict between federal and state law, federal law shall prevail. It is beyond peradventure that federal power over commerce is superior to that of the States to provide for the welfare or necessities of their inhabitants . . . .” (citation and internal quotation marks omitted)). “[S]tate legalization of marijuana cannot overcome federal law.” Feinberg v. Comm’r, 916 F.3d 1330, 1338 n.3 (10th Cir. 2019) (citing Hancock v. Train, 426 U.S. 167, 178 (1976)); see also Gonzales, 545 U.S. at 19 (“[A] primary purpose of the CSA is to control the supply and demand of controlled substances in both lawful and unlawful drug markets.”). So, despite legally operating under Colorado law, “the Taxpayers are subject to greater federal tax liability” because of their federally unlawful activities, and any “remedy [for this] must come from Congressional change 17 to § 280E or 21 U.S.C. § 812(c) (Schedule I) rather than from the courts.” Feinberg, 916 F.3d at 1338 n.3.8 The Taxpayers thus fail to create a genuine issue of material fact regarding whether the IRS has a legitimate purpose to investigate them.9 We agree with the district court that the IRS satisfied this factor. C. The IRS’s Summonses Seek Information Relevant to Its Legitimate, Investigatory Purpose. The second Powell factor requires the IRS to establish that “the inquiry may be relevant to the [investigation’s] purpose.” 379 U.S. at 57. Agent Pringle explained that the Standing Akimbo summons sought METRC data “account[ing] for all marijuana plants and products” and that this information “can establish whether a marijuana business properly reported its gross receipts and allowed deductions for 8 The Taxpayers filed a Rule 28(j) letter making a new statutory-interpretation argument regarding § 280E’s applicability to state-legal marijuana sales. The Taxpayers have waived this argument by waiting to raise it in a Rule 28(j) letter. See, e.g., Flores-Molina v. Sessions, 850 F.3d 1150, 1172 n.16 (10th Cir. 2017) (stating that we will not consider an argument raised for the first time in a Rule 28(j) letter). We decline to excuse this waiver because the argument rests on the above-rejected premise that § 280E may apply to the Taxpayers only if their legal sale of marijuana under Colorado law violates federal law. Further, the letter falls outside Rule 28(j). See Feinberg, 916 F.3d at 1337 n.2 (“A rule 28(j) letter’s purpose is ‘not to interject a long available but previously unmentioned issue for decision.’” (quoting Niemi v. Lasshofer, 728 F.3d 1252, 1262 (10th Cir. 2013))). 9 The Taxpayers have filed two Rule 28(j) letters attempting to raise new arguments contesting the IRS’s legitimate purpose in issuing the summonses. Both letters selectively quote and misconstrue documents to assert that the IRS’s “true purpose” is to disrupt and dismantle the state-legal marijuana industry. Taxpayers’ Second Nov. 13, 2019 28(j) Letter at 2, ECF No. 10694735. These arguments are waived because they were improperly raised for the first time in Rule 28(j) letters. See, e.g., Feinberg, 916 F.3d at 1337 n.2; Flores-Molina, 850 F.3d at 1172 n.16. 18 cost of goods sold.” App. vol. 1 at 72–73. According to Agent Pringle, he issued the Taxpayers summonses seeking a list of the Taxpayers’ licenses “to verify that these individuals own Standing Akimbo” and to “determine the correctness of the[ir] federal tax returns and federal tax liabilities.” Id. at 74–75. With this explanation, Agent Pringle’s declaration satisfies the IRS’s slight burden to establish that the information summoned may be relevant to its federal tax investigation into whether the Taxpayers had improperly deducted business expenses. On appeal, the Taxpayers respond with one contention: that the requested METRC data is irrelevant to the IRS’s legitimate purpose because that data tracks only marijuana plants, information relevant only to a federal-drug-crime investigation. To support this conclusory assertion, the Taxpayers provide a heavily redacted document purporting to be an IRS purchase lead sheet, which states: “METRC data does not track purchases other than tracking the amount of marijuana product transferred in, this report only tracks the amounts, not the costs; therefore, there are no verification in METRC’s to support any [cost of goods sold].” App. vol. 2 at 150. But the Taxpayers cannot use this document to create a material issue of fact. First, the Taxpayers have waived this argument by not raising it until objecting to the magistrate judge’s recommendation. See ClearOne Commc’ns, Inc. v. Biamp Sys., 653 F.3d 1163, 1185 (10th Cir. 2011) (stating that “[i]ssues raised for the first time in objections to the magistrate judge’s recommendation are deemed waived” (alteration in original) (quoting Marshall v. Chater, 75 F.3d 1421, 1426–27 (10th Cir. 1996)) (internal quotation marks omitted)). Though the Taxpayers had earlier 19 contended that the Standing Akimbo summons would not provide financial data, but instead only marijuana-plant information, they did not object on relevancy grounds until their objections to the magistrate judge’s recommendation. Second, even if we excused that waiver, the redacted document would be inadmissible hearsay. The Taxpayers rely on it for the truth of the matter asserted— that METRC does not provide cost-of-goods-sold information—without providing the foundation necessary to show the document meets an exception or exclusion to the hearsay rule. Evidence must be admissible at trial before it can create a genuine issue of material fact for summary judgment purposes. See, e.g., Argo v. Blue Cross & Blue Shield of Kan., 452 F.3d 1193, 1199 (10th Cir. 2006) (“To determine whether genuine issues of material fact make a jury trial necessary, a court necessarily may consider only the evidence that would be available to the jury.” (citation omitted)); Gross v. Burggraf Constr. Co., 53 F.3d 1531, 1541 (10th Cir. 1995) (“It is well settled in this circuit that we can consider only admissible evidence in reviewing an order granting summary judgment.” (citations omitted)). And even if we could consider this evidence,10 it would not create a genuine issue of material fact. The IRS has authority to summon information “of even potential relevance to an ongoing investigation.” United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984). Even assuming the METRC data does not provide 10 Notably, another attachment to the Taxpayers’ response to the IRS’s motion to dismiss contradicts their argument that METRC does not track financial information. A document purporting to be an Enforcement Division guide to summonses for METRC data states that METRC tracks gross sales. 20 cost-of-goods-sold information, the data may still be relevant to the IRS’s investigation in other ways. For example, it could provide inventory figures and help Agent Pringle “verify the accuracy of Standing Akimbo’s internal books and records.” App. vol. 1 at 73. Finally, the Taxpayers concede that METRC information is relevant in determining whether they trafficked in marijuana—a relevant and proper inquiry the IRS may make in determining § 280E’s application. See High Desert, 917 F.3d at 1187; Alpenglow, 894 F.3d at 1197. In fact, in High Desert we concluded that the summonses met Powell’s second factor, in part because the information sought “would be used to determine whether [the taxpayer] was growing or selling marijuana.” High Desert, 917 F.3d at 1191. Accordingly, the Taxpayers fail to create a genuine dispute of material fact here. We agree with the district court that the IRS satisfied the second Powell factor. D. The IRS Does Not Already Possess the Information Summoned. We next examine Powell’s third factor: whether “the information sought is . . . already within the Commissioner’s possession.” Powell, 379 U.S. at 57–58. Agent Pringle declared that the IRS did not already possess the information sought in the summonses. The summonses are also specific in what they request—licenses held by the Taxpayers and specific METRC reports for tax years 2014 and 2015. Agent Pringle explained that the Taxpayers had only partially responded to his Document Requests and that their production did not include any information reported to the Enforcement Division, including METRC data. This satisfies the IRS’s slight burden. 21 The Taxpayers did not contest that this factor is satisfied until they objected to the magistrate judge’s recommendation. So this argument is waived. See ClearOne Commc’ns, 653 F.3d at 1185. Even if we excused this waiver, the Taxpayers would still not prevail. They contend that this factor is not satisfied because “there is no legitimate basis to seek the preparation of METRC reports.” App. vol. 2 at 95 (Objections to Recommendation). This contention rests on their assertion that they have already produced “voluminous” records for Agent Pringle’s inspection, giving him enough information to complete his audit. Id. But this argument does not rebut the IRS’s showing that it does not possess the information summoned. On appeal, the Taxpayers concede that they did not provide the requested METRC data. And the record offers no support that they have provided a list of the licenses they held in 2014 and 2015. The Taxpayers bear the burden of providing facts to contest the IRS’s prima facie showing under Powell. See, e.g., Balanced Fin. Mgmt., 769 F.2d at 1444. They did not meet this burden. The Taxpayers failed to demonstrate the existence of a genuine factual dispute whether the IRS already possessed the information summoned; we agree with the district court that the IRS satisfied this factor. E. The IRS Followed the Required Administrative Steps. Finally, we turn to Powell’s fourth factor: whether “the administrative steps required by the Code have been followed.” Powell, 379 U.S. at 58. Agent Pringle’s declaration again satisfies the IRS’s slight burden here. Agent Pringle stated that he “complied with the administrative steps that the Internal Revenue Code requires” in issuing the summonses. App. vol. 1 at 74–75. The Taxpayers do not contest on appeal 22 that this factor has been met. We agree with the district court that the IRS satisfied this final Powell factor.