Opinion
No. 02-X-74762
January 23, 2003
OPINION AND ORDER
This matter is before the Court on Plaintiff Herman Calamari's petition to quash an administrative summons issued by the Internal Revenue Service (IRS), and has been referred for hearing and determination pursuant to 28 U.S.C. § 636(b)(1)(A). The Court has reviewed Plaintiff's Petition to Quash, the United States' Motion and Brief for Summary Denial of Petition and for Enforcement of Summons, and the Plaintiff's Response. A hearing was held on January 21, 2002. For the reasons set forth below, the Petition to Quash is granted in part and denied in part.
I.
On November 12, 2002, IRS Agent George Zak issued a summons to Eric W. Freedman, an accountant, requesting the production of certain records relating to one of his clients, Plaintiff Herman Calamari. This was an administrative issued pursuant to 26 U.S.C. § 7602, and demanded the production of the following documents:
Any and all records in your possession, custody, or control that were prepared or relied upon in connection with the preparation of Herman Calamari's 1995 federal, state, and local tax returns;
Copies of all 1993, 1994, 1995, 1996, 1997, and 1998 state and local returns of Herman Calamari in your possession, custody, or control;
Copies of all invoices/billings or similar documents in your possession, custody, or control related to services performed for Herman Calamari during the calendar years 1993, 1994, 1995, 1996, 1997, 1998, and 1999.
Attached to the government's Response to the Petition to Quash is the sworn declaration of
Agent Zak, which includes the following statements:
2. I am conducting an examination to determine the correct federal gift tax liabilities of Herman Calamari for the 1993, 1995, 1996, 1997, and 1998 tax years and the federal income tax liabilities of Herman Calamari for the 1995 tax year.
11. It is relevant and necessary to the purpose of my examination to examine the records sought by the summons in order to properly determine the federal income tax liabilities of Herman Calamari for the 1995 tax year and federal gift tax liabilities of Herman Calamari for the 1993, 1995, 1996, 1997, and 1998 years.
Plaintiff challenges the summons on the grounds that (a) it was not issued for a legitimate purpose, (b) it does not seek material which is relevant to a legitimate purpose, and (c) it was not issued for a good-faith purpose.
In his initial Petition, Plaintiff also alleged that the summons seeks material which is already in the government's possession, and that "the IRS has not satisfied all administrative steps required by the United States Code in connection with the issuance of said Summons." These appear to be "boilerplate" allegations incorporating statutory language from § 7602, and Plaintiff is not to be faulted for crafting as inclusive a petition as possible, particularly in view of the strict time limits for filing a petition. However, following the hearing and argument of counsel, it is apparent to this Court that the government has complied with all necessary administrative steps with regard to the summons, and further, that there has been no showing that the IRS has possession of the documents it requests.
II.
26 U.S.C. § 7602 states, in pertinent part:
"For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary or his delegate is authorized. . .
"(1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry."
§ 7602 thus identifies four separate investigatory purposes which would support the issuance of an administrative summons: (1) to determine the correctness of any return, (2) making a return where none was made, (3) determining a person's liability "for any internal revenue tax," and (4) collecting such liability. In addition, the information sought must be "relevant or material" to one of these investigatory purposes.
The concept of relevance, as that term is used in § 7602, is extremely broad. To justify a summons under that section, the government is not held to a standard of probable cause, United States v. Powell, 379 U.S. 48, 57, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), nor to the relevancy standard used in deciding whether to admit evidence under Fed. Rule Evid. 401. United States v. Arthur Young Co., 465 U.S. 805, 814, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984). Courts have consistently held that § 7602 "endows the IRS with expansive information-gathering authority." United States v. Ritchie, 15 F.3d 592, 596 (6th Cir. 1994). The generally accepted standard is whether the inspection "might shed light on the accuracy of the taxpayer's returns." United States v. Davey, 543 F.2d 996, 1000 (2nd Cir. 1976).
In Arthur Young, the Supreme Court noted:
"The language `may be' reflects Congress' express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation, without reference to its admissibility. The purpose of Congress is obvious: the Service can hardly be expected to know whether such data will in fact be relevant until it is procured and scrutinized. As a tool of discovery, the § 7602 summons is critical to the investigative and enforcement functions of the IRS. . . [T]he Service therefore should not be required to establish that the documents it seeks are actually relevant in any technical evidentiary sense." Id. (Emphasis in original) (internal citations omitted).
This is not to say that the government has carte blanche discovery rights, or that it is not held to some threshold showing of relevance. See United States v. Coopers Lybrand, 550 F.2d 615, 619 (10th Cir. 1977)("IRS does not, as it appears to assume on this appeal, have carte blanche discovery"); United States v. Matras, 487 F.2d 1271, 1275 (8th Cir. 1973)("The term `relevant' connotes and encompasses more that `convenience'"); United States v. Dauphin Deposit Trust Co., 385 F.2d 129, 131 (3rd Cir. 1967)("The Government is not entitled to go on a fishing expedition through appellant's records").
In United States v. Powell, 379 U.S. at 57-58, the Supreme Court held that a prima facie case for enforcement of a § 7602 summons is established if the government shows (1) the investigation has a legitimate purpose; (2) the summoned materials are relevant to that investigation; (3) the information sought is not already within the IRS's possession; and (4) the IRS has followed the procedural steps outlined in 26 U.S.C. § 7603. Once the government makes that showing, the burden shifts to the taxpayer to show that enforcement of the summons would be an abuse of the court's process. United States v. Will, 671 F.2d 963, 966 (6th Cir. 1982). The taxpayer can rebut the government's prima facie case by refuting one of the Powell factors, Mazurek v. United States, 271 F.3d 226, 230-31 (5th Cir. 2001), or by showing that "the summons had been 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." Powell, 379 U.S. at 58. Furthermore, an administrative summons "will be deemed unreasonable and unenforceable if it is overbroad and disproportionate to the end sought." United States v. Theodore, 479 F.2d 749, 754 (4th Cir. 1973).
Typically, the government makes its prima facie showing through submission of an affidavit of the investigating agent who issued the summons. United States v. Will, supra, 671 F.2d at 966. In the present case, IRS Agent George Zak has submitted a Declaration which identifies two purposes of his investigation: (1) to determine the federal income tax liabilities of Mr. Calamari for the 1995 tax year, and (2) to determine the correct federal gift tax liabilities of Mr. Calamari for the tax years 1993, 1995, 1996, 1997, and 1998. See Declaration, ¶¶ 2 and 11. I find that the government has met its burden of establishing a prima facie case for the enforcement of its subpoena under Powell, and that the burden of showing that it is unenforceable now falls upon the Plaintiff.
Plaintiff first argues that the IRS has failed to articulate a legitimate purpose for its investigation, particularly with regard to the 1995 income tax issues. He argues that any IRS claim for Mr. Calamari's income tax liability for 1995 is barred by the statute of limitations, and that the government has failed to present any evidence of fraud which would negate the statute of limitations. Plaintiff further argues that since his 1995 tax return was already audited in 1997-98, 26 U.S.C. § 7605(b) prohibits a second inspection of his books. Finally, Plaintiff contends that the IRS only expanded its investigation to include his 1995 tax liability after he hired an attorney and challenged the government's request for information relative to gift tax liability.
In his initial motion to quash, obviously filed prior to Agent Zak's Declaration, Plaintiff made a general allegation that there was no legitimate purpose to any part of the IRS's investigation. In his Response to the government's brief, he argues more specifically that there is no legitimate purpose for the 1995 income tax investigation.
26 U.S.C. § 6501(a) provides that "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed." However, § 6501(c) provides an exception in the case of a false or fraudulent return.
Neither the running of the statute of limitations nor the fact that Plaintiff's 1995 tax return was previously audited can serve to defeat the summons in this case. In Powell, 379 U.S. at 58. the Supreme Court clearly held:
"The burden of showing an abuse of the court's process is on the taxpayer, and it is not met by a mere showing, as was made in this case, that the statute of limitations for ordinary deficiencies has run or that the records in question have already been once examined."
Nor is it necessary for the government to allege or proffer facts to support a claim of fraud. In rejecting a standard which would require the government to show probable cause, Powell stated:
"Although a more stringent interpretation is possible, one which would require some showing of cause for suspecting fraud, we reject such an interpretation because it might seriously hamper the Commissioner in carrying out investigations he thinks warranted." Id., 379 U.S. at 53-54.
Further, § 7605(b), which generally limits the IRS to one inspection of a taxpayer's books, and which provides that "no taxpayer shall be subjected to unnecessary examination or investigations," does not apply to documents which, as here, are in the possession of a third party. Hinchcliff v. Clarke, 371 F.2d 697, 700 (6th Cir. 1967), cert. denied 387 U.S. 941, 87 S.Ct. 2073 (Mem) 18 L.Ed.2d 1327 (1967); United States v. Grayson County State Bank, 656 F.2d 1070, 1076 (5th Cir. 1981) (noting that other circuits have "consistently found that Section 7605(b) is a limitation upon the examination of a taxpayer's books of account and does not apply to an examination of books of account of a third person").
The fact that the IRS expanded the scope of its investigation after the Plaintiff obtained counsel and challenged a summons does not, by itself, show bad faith on the part of the government, but it does merit closer scrutiny. Plaintiff has submitted a letter from Agent Zak, dated September 24, 2001. and addressed to Plaintiff's counsel. That letter indicates that following a review of summonsed records from the Sumitomo Corporation, pursuant to "the ongoing 1995 gift tax examination," the IRS determined that the cost basis for the sale of stock reported on Mr. Calamari's 1995 income tax return appeared to be substantially overstated. For that reason, Agent Zak stated, he had requested re-examination of Plaintiff's 1995 return, and his request was concurred in by the Area Counsel and approved by the Area Director.
This letter is attached to Plaintiff's Response to Motion for Summary Denial of Petition to Quash Summons, filed on January 17, 2003.
On March 26, 2001, Judge Borman dismissed Plaintiff's petition to quash the summons for these records on procedural grounds. Calainari v. United States, E.D. Mich. No. 00-75514.
As stated, the Plaintiff has the burden of showing an abuse of the court's process or bad faith on the part of the IRS. Agent Zak's letter of September 24, 2001, shows a valid, good-faith basis for expanding the investigation, and that the decision to do so was reviewed and approved at two separate levels of IRS bureaucracy beyond Agent Zak. The Plaintiff has presented no other facts, other than the timing of the IRS's decision to reopen the 1995 income tax investigation, to substantiate his claim of bad faith or abuse of process. He has therefore not met his burden.
Accordingly, I find that the summons in this case was issued pursuant to a legitimate investigatory purpose, both as to Plaintiff's gift tax liabilities for the years indicated and his income tax liability for 1995.
Plaintiff next argues that the summonsed documents, in particular the state and local tax returns and the accountant's invoices or billings, are not relevant to the gift tax investigation. He contends that his Michigan tax returns cannot possibly have a nexus to a federal gift tax investigation because Michigan has no gift tax, and nothing on the Michigan form directly relates to a gift tax. However, as the Supreme Court held in United States v. Arthur Young Ca, supra, 465 U.S. at 814, the language of § 7602 "reflects Congress' express intention to allow the IRS to obtain items of even potential relevance," and "the Service can hardly be expected to know whether such data will in fact be relevant until it is procured and scrutinized" (Emphasis in original). For better or worse, Congress and the Supreme Court have determined that the standard of relevance under § 7602 is not high. Even though there is no corresponding Michigan gift tax, the Michigan return requests income and deduction information which is also reported on the federal return. Plaintiff acknowledges that, at least in part, state income tax is based on the adjusted gross income reported in the federal return. What if there were a discrepancy between income or deductions reported on the state return and those reported federally? Under the Arthur Young standard, that would at least be potentially relevant to the federal gift tax investigation.
The summons identifies three categories of documents. The first is a request for records that were prepared or relied upon in connection with the preparation of the 1995 federal, state and local returns. Plaintiff argues that these documents are not relevant because the government "has not articulated a proper purpose to examine" them. Having found that Plaintiff's 1995 income tax liability is a legitimate subject for investigation, I also find that those records are relevant to that investigation.
Mr. Calamari files Michigan tax returns, but is not subject to any local income tax.
Plaintiff cites United States v. Theodore, supra, in support of his argument that his state tax returns are not relevant. Theodore, however, involved an extremely far-reaching summons which the court described as "unprecedented in its breadth." Id., 479 F.2d at 754. The summons in Theodore requested an accountant to produce all of the returns and all of the work records relating to all of his clients over a three-year period. The court held that the language of § 7602 "only allows IRS to summon information relating to the correctness of a particular return or to a particular person and does not authorize the use of open-ended Joe Doe summonses." Id. at 755. The summons in the present case is much more limited in scope, and, consistent with Theodore's holding as to the correct standard under § 7602, particularly describes the specific returns it seeks.
Accordingly, I find that the request for copies of Plaintiff's state tax returns for the years 1993, 1994, 1995, 1996, 1997 and 1998 is relevant to the IRS's investigation as to gift tax liability.
According to Agent Zak's Declaration, Plaintiff's gift tax liability for 1994 is not the subject of his investigation. Nevertheless, Plaintiff's state tax return for that year — which both precedes and follows other years which are being investigated — has at least minimal potential relevance under the broad standard of Arthur Young and Powell.
Finally, Plaintiff challenges the relevance of the third category of documents sought: his accountant's billing records or invoices for the years 1993, 1994, 1995, 1996, 1997, 1998, and 1999. This presents a much closer question. A billing record reflects work which was performed by an accountant, and the amount charged to the client. Even under the relaxed standard of relevance which inheres in § 7602, that information would have an extremely attenuated nexus with the matters under investigation. The nature of the accountant's work, and the information he relied on in preparing Plaintiff's returns would appear to be covered by the first two categories of documents, which I have determined to be obtainable through the summons. Unlike those items, the accountant's billing statements or invoices were not used in the preparation of the returns. See United States v. Coopers Lybrands, 550 F.2d at 619. Thus, the summons is "overbroad and disproportionate to the end sought" in relation to the billing records. United States v. Theodore, supra, 479 F.2d at 754.
In United States v. Matras, supra, 487 F.2d at 1274, the Court quoted Chief Judge Lumbard in United States v. Harrington, 388 F.2d 520, 524 (2nd Cir. 1968) as follows:
"The question *** is *** whether the `might' in the articulated standard, `might throw light upon the correctness of the return,' is in the particular circumstances an indication of a realistic expectation rather than an idle hope that something may be discovered."
The government's request for the billing records in this case represents more of a fishing expedition, or at least an "idle hope" of finding something, rather than a legitimate showing of relevance. Therefore, the summons will be quashed with respect to the request for copies of invoices/billings or similar documents in the possession or control of accountant Eric W. Freedman.
III.
For these reasons, I DENY the Plaintiff's motion to quash the summons issued to Eric W. Freedman as to the following requested documents and records:
Any and all records in [Eric W. Freedman's] possession, custody, or control that were prepared or relied upon in connection with the preparation of Herman Calamari's 1995 federal, state, and local tax returns;
Copies of all 1993, 1994, 1995, 1996, 1997, and 1998 state and local tax returns of Herman Calamari in your possession, custody, or control.
Further, I GRANT Plaintiff's motion to quash the summons issued to Eric W. Freedman as to the following requested documents and records:
Copies of all invoices/billings or similar documents in your possession, custody, or control related to services performed for Herman Calamari during the calendar years 1993, 1994, 1995, 1996, 1997, 1998, and 1999.
IT IS SO ORDERED.