Opinion ID: 183261
Heading Depth: 2
Heading Rank: 1

Heading: Good Faith and the Summons

Text: The IRS is authorized by statute to inquire into tax liabilities. 26 U.S.C. § 7601. In order to ascertain the correctness of any return, the IRS may issue a summons for records and documents from third parties in connection with a tax liability investigation. 26 U.S.C. § 7602(a). Summonses issued under Section 7602 must be served personally or left at the person's last and usual place of abode. 26 U.S.C. § 7603(a). To obtain enforcement of a summons, the Government has the initial burden of establishing a prima facie case showing that: (1) the investigation will be conducted for a legitimate purpose, (2) the inquiry is relevant to the purpose, (3) the information sought is not already within the IRS's possession, and (4) the administrative steps required by the IRS Code have been followed. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964); Ponsford v. United States, 771 F.2d 1305, 1307 (9th Cir.1985). The government's burden is a slight one, and may be satisfied by a declaration from the investigating agent that the Powell requirements have been met. United States v. Dynavac, Inc., 6 F.3d 1407, 1414 (9th Cir.1993). Once the government establishes a prima facie case, a party challenging the summons must show that the government is not entitled to use the court's process to enforce the summons. Powell, 379 U.S. at 58, 85 S.Ct. 248. A court will not enforce a summons if an abuse would take place if the summons [was] issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation. Id. It is a heavy burden to show an abuse of process or lack of good faith. Fortney v. United States, 59 F.3d 117, 120 (9th Cir.1995). The validity of a summons is normally tested as of the date of its issuance. United States v. Cromer, 483 F.2d 99, 101 (9th Cir.1973). However, the court may inquire as to the reasons for the summons and may not permit its process to be abused in enforcing the summons. Powell, 379 U.S. at 58, 85 S.Ct. 248.
Generally, submitting a declaration from the investigating agent that the Powell requirements have been met is sufficient to establish a prima facie case. Dynavac, 6 F.3d at 1414. Here, IRS Agent Cole submitted a declaration that he was investigating the Peskys' tax liabilities, that he did not have the relevant appraisal work file, and that the administrative process was followed. Agent Cole's declaration was not wholly accurate. The administrative process was not completely followed because Richey was served by certified mail rather than by personal service. See 26 U.S.C. § 7603(a). Nonetheless, as the district court found, Richey had actual notice of the summons, there was no prejudice to the Taxpayers who timely intervened, and the Government acted in good faith when it tried to effect service by certified mail. We agree with the reasoning of the Eighth and Fifth Circuits that substantial compliance with 26 U.S.C. § 7603(a)'s service requirements is sufficient if the IRS acted in good faith and there is no prejudice to the taxpayer. [1] In this case, the IRS's service error was clearly harmless. The minor service error was properly excused by the district court, and the Government satisfied its initial burden to establish a prima facie case in October 2008, with Agent Cole's declaration. Thereafter, the burden shifted to Richey and the Peskys to show that the Government acted in bad faith.
The parties do not dispute that the summons was issued in good faith in October 2008. What changed, according to Richey and the Peskys, is that the Peskys agreed to the Notice of Deficiency in December 2008, and paid the required assessment, interest, and penalties. They buttress their claim on section 4.8.9 of an internal IRS manual, which provides that when a taxpayer agrees to an assessment and collection of the entire deficiency, [u]pon receipt of a signed waiver or agreement, the following actions must be taken: . . . . Close the case agreed to Centralized Case Processing for assessment of the deficiency. Internal Revenue Manual § 4.8.9.19.3.2, available at http://www.irs. gov/irm/part4/irm_04-008-009-cont02.html (last accessed Nov. 22, 2010). Thus, they reason, since the audit was closed, the Government's continued efforts to enforce the summons were necessarily in bad faith. The district court sided with Richey and the Peskys, explaining: [I]t seems any discovery to clarify the appraisal at this stage is no longer in good faith since the notice of deficiency has issued and the taxpayers have paid the taxes and penalties assessed. While the prima facie case for enforcement of the summons under United States v. Powell et al [.], 379 U.S. 48 [85 S.Ct. 248, 13 L.Ed.2d 112] (1964)[,] is minimal, the IRS still has to provide some explanation of why the final appraisal report alone is insufficient to explain the appraiser's conclusion and why the IRS has an interest after the taxpayers have consented to the assessment which disallows the deduction calculated by the appraisal. We have not previously ruled whether an IRS summons initially issued in good faith can transmogrify into one issued in bad faith upon the taxpayer's consenting to a deficiency assessment. However, other circuits considering the issue have held in similar circumstances that there can be no showing of bad faith by the IRS in such circumstances unless there has been a predicate final, irrevocable determination of the taxpayer's liability. [2] We are persuaded by the reasoning of the Second and Seventh Circuits, and we hold that under the facts of this case, continued enforcement of an IRS summons is proper where the Taxpayers' liability has not been finally determined and there is no other evidence in the record that the summons was issued for an improper purpose, such as to harass the Taxpayers. See, e.g., Powell, 379 U.S. at 58, 85 S.Ct. 248. Here, the Peskys' tax liabilities had not been finally determined. The time period for the Peskys to file a petition with the Tax Court had not expired when the IRS sought enforcement of the summons. The Peskys further indicated that they would likely challenge the Notice of Deficiency and seek a refund. Moreover, even though the Peskys consented to the assessment, the IRS still had the ability to adjust the tax liability later, as noted on the assessment form the Peskys signed. Because the Peskys' tax liability could still change, even though the IRS's investigation had ostensibly concluded, the IRS had a legitimate reason to seek documentation essential to establishing the Peskys' tax liabilities. Thus, as long as the amount the Peskys allegedly owed to the IRS was subject to change, the IRS had a good-faith interest in obtaining the appraisal work file pursuant to the summons. We therefore conclude that Richey and the Peskys have not met their heavy burden of showing bad faith by the IRS, Fortney, 59 F.3d at 120, and that the summons is enforceable in accordance with its terms, which includes Richey's appearance before the IRS, unless other defenses are available to Richey and the Taxpayers.