Opinion
Civil Action Nos. 7:03cv00834, 7:03cv00835, 7:04cv00037.
August 30, 2004
MEMORANDUM OPINION
This is a consolidated civil action brought by petitioner, Ritchie H. Conner, under 26 U.S.C. § 7609(h) to quash three separate Internal Revenue Service (IRS) summonses served on petitioner's third-party record-keepers as part of a criminal investigation into petitioner's tax liability for years 1996-2002. For the reasons stated, the court will hold an evidentiary hearing for the limited purpose of resolving issues of fact bearing on the central questions of whether the IRS already has the records from one of the record-keepers and whether the IRS is proceeding in good faith. The court finds, however, that the simple factual questions raised do not warrant discovery.
In an order entered June 8, 2004, this court granted an evidentiary hearing; in addition to discussing Conner's request for discovery, this opinion more clearly delineates the scope of that hearing.
I.
Special Agent Ross Pierson of the IRS served two of the disputed summonses on record-keeper Lloyd H. Hartman, one on December 3, 2003 (Summons I), and the other on January 6, 2004 (Summons II); for reasons explained below, these two summonses were identical in content. Pierson served the third summons on record-keeper Rudolph Valentino Nagy either on December 3 or 8, 2003 (Summons III). Upon receiving notice of each of these summonses, Conner filed motions to quash pursuant to 26 U.S.C. § 7609(h).
Pierson served Summons I on Hartman on December 3, 2003, and sent Conner notice of the summons by certified mail on December 8. Conner received the notice on December 10 and moved to quash on December 24. The summons requested "any and all documents in [Hartman's] custody or control relative to the financial transactions of Ritchie H. Conner" for the years 1996-2002, including, among other items, various tax returns, records used to complete those tax returns, client billing records, and bank statements. It is uncontested that, on the same day Pierson served the summons, Hartman turned the documents over and explained them to Pierson. Pierson claims that, after learning of Conner's filing of a petition to quash, he sealed the records in an envelope and has not reviewed them since.
Pierson and Hartman differ as to what Pierson told Hartman on the day he served Summons I. In an affidavit, Pierson claims to have explained Conner's right to petition to quash the summons and to have apprised Hartman that he need not respond to the summons until the return date, January 5, 2004. In an affidavit, Hartman disputes Pierson's claim and instead contends that Pierson refused to allow him to produce the requested records the following day and demanded their immediate production.
Pierson served Summons II on Hartman on January 6, 2004, instructing Hartman to appear at Pierson's office on February 9 and to produce the same documents requested in Summons I. The government claims it served this identical summons out of "an abundance of caution," implying that it served Summons II in an attempt to cure potential defects related to Summons I. Pierson served notice of Summons II on Conner the same day he served the summons. On January 23, 2004, Conner filed a petition to quash Summons II. Because he had already turned over the requested documents in response to Summons I, Hartman did not produce documents in response to Summons II.
Pierson served Summons III on third-party record-keeper Rudolph Valentino Nagy on either December 3 or 8, 2003, and he sent Conner notice by certified mail on December 8. Summons III requested the same types of documents as Summonses I and II had requested, including, among other items, various tax returns, records used to complete those tax returns, client billing records, and bank statements pertaining to years 1996-2002. Nagy produced the requested records on the day he was served. According to Pierson's affidavit, at the time of production of the records, Nagy provided a brief explanation of each document. Upon learning that Conner had filed a petition to quash, Pierson claims that he sealed the records in an envelope and that he did not read them.
Pierson and Nagy differ as to what Pierson told Nagy when he served Summons III. Pierson claims to have explained Conner's right to file a petition to quash; however, Nagy denies that Pierson ever mentioned the subject. Nagy also claims that Pierson demanded that he produce all requested documents immediately, not on the summons' January 5, 2004 return date. Conner filed a petition to quash Summons III on December 24, 2003.
II.
When an interested party challenges enforcement of an IRS summons, the initial burden rests with the government to establish a prima facie showing of good faith, requiring proof that the IRS has satisfied the following four elements: 1) the investigation is being conducted for a legitimate purpose; 2) the inquiry is relevant to that purpose; 3) the information sought is not already in the possession of the IRS; and 4) the administrative steps required by the Code have been followed.Alphin v. United States, 809 F.2d 236, 238 (4th Cir. 1987) (citing United States v. Powell, 379 U.S. 48, 57-58 (1965)). If and when the government has met this initial burden, the burden shifts to the challenging party, who is charged with showing that execution of the summons would constitute an abuse of the court's process. Id. The Fourth Circuit has equated this burden to "disproving the actual existence of a valid civil tax determination or collection purpose" and has characterized it as a "heavy burden." Id. (citing United States v. LaSalle National Bank, 437 U.S. 298, 316 (1978)).
The government has Pierson's affidavit, which, if credited, establishes the four elements of a prima facie case and is sufficient to meet the government's burden. See id. Thus, the burden now shifts to Conner, who must either disprove one or more elements of the government's prima facie showing or raise and prove an affirmative defense. Id. In an effort to meet his burden, Conner raises the same five arguments against each of the three summonses:
A) That Pierson failed to provide timely notice to Conner of the service of each of the summonses as required by 26 U.S.C. § 7609(a)(1);
B) That the IRS has subjected Conner to unnecessary examinations and investigations in violation of 26 U.S.C. § 7605(b);
C) That the summonses violate 26 U.S.C. § 7609(a) by requesting documents outside the relevant six-year statute of limitations;
D) That the IRS already has in its possession some or all of the documents requested;
E) That Pierson prematurely examined the records produced in response to Summonses I and III in violation of 26 U.S.C. § 7609(d). The court considers each of these arguments, in turn.
A.
Conner's first proffered ground for quashing the summonses is his claim that the IRS failed to give timely notice, and he seeks discovery in order to further this claim. The court finds that the notices of Summons I and Summons II complied with the statutory time limit, and, even assuming that notice of Summons III was served on Conner one day late, as Conner alleges, Conner has failed to demonstrate any prejudice occasioned by the one-day delay. Thus, the court rejects this ground, rendering related discovery or an evidentiary hearing on the issue unnecessary.
When the IRS seeks documents or testimony from a third-party record-keeper through service of a summons, 26 U.S.C. § 7609(a)(1) requires the IRS give the interested party notice within three days. Notice by certified mail to the interested party's last known address is sufficient so long as the mailing occurs within three days. 26 U.S.C. § 7609(a)(2). Should that third day fall on a Saturday, Sunday, or legal holiday, then the deadline for giving notice is extended to the next day which is not a Saturday, Sunday, or legal holiday. 26 U.S.C. § 7503. Rather than refuse enforcement of summonses for any and all procedural defects, courts have considered the good faith of the IRS agents involved and the prejudice, if any, occasioned by the procedural defect. See, e.g., United States v. Texas Heart Inst., 755 F.2d 469 (5th Cir. 1985) (refusing to quash third-party record-keeper summonses when the party named in the summons did not receive formal notice because the petitioner had actual knowledge of the summons and because the petitioner's ability to intervene and petition to quash was unaffected by the procedural omission). With these precepts in mind, the court denies Conner's motion to quash based on his claim that he did not receive timely notice.
Pierson served Summons I on Wednesday, December 3, 2003, and sent notice to Conner via certified mail on Monday, December 8, 2003. Because the third day from service fell on Saturday, December 6, 2003, the Monday, December 8, 2003 notice was timely. Pierson served Summons II on January 6, 2004, and sent notice to Conner via certified mail the same day. Unquestionably, it, too, was timely. Although Summons III presents a factual dispute regarding the date of notice, the court does not find this dispute material. Pierson claims to have served Nagy on December 8 and to have served notice on Conner the next day, December 9. Nagy claims Pierson served him on December 3, not December 8. Even if Nagy is correct, however, due to the "weekend rule" Pierson's notice is only one day late. This minor procedural transgression is not even remotely prejudicial, and is no ground for quashing Summons III.
The very fact that Conner was able to file the current petition to quash Summons III in due course indicates that Conner was not prejudiced by the alleged one-day delay.
B.
Conner also argues the IRS is subjecting him to duplicative investigations in violation of 26 U.S.C. § 7605(b). It is unclear whether Conner contends that review of documents from two record-keepers, as opposed to only one, is a transgression, that the statute is violated whenever the IRS reviews documents from any third-party record-keeper when they have already examined the taxpayer's own copies, or, finally, that review of the documents violates the statute because the IRS has already reviewed some or all of the requested documents as part of an earlier audit. However, regardless of which stance Conner has assumed, the argument is a non-starter because § 7605(b) does not prohibit the challenged conduct. Therefore, the court rejects this argument and accordingly denies discovery on the issue.Section 7605(b) guarantees that the government will make only one examination of a taxpayer's books for a particular tax year unless the taxpayer requests a second review or unless the Secretary, having conducted an investigation, notifies the taxpayer in writing that a second review will be necessary. The Fourth Circuit considered the scope of § 7605(b) in Spell v. United States, holding that IRS examination of tax records held by a record-keeper during a civil audit does not bar later review of the same records during a criminal investigation. 907 F.2d 36, 37-39 (4th Cir. 1990). Thus, if Conner is contending that examination of his records during an earlier civil audit forecloses later review as part of a criminal investigation, the court rejects that contention.
Alternatively, to the extent Conner is contending that § 7605 (b) prohibits the IRS from examining records held by third-party record-keepers because it also directly obtained those records from Conner, the court rejects that contention, as well. As the Court of Appeals made clear in United States v. Daffin, 653 F.2d 121, 124 (4th Cir. 1981), § 7605 (b) does not prevent the IRS from obtaining and examining the books of both a taxpayer and his accountant or record-keeper for comparison purposes. 653 F.2d 121, 124 (4th Cir. 1981). Of course, this reasoning also defeats any argument Conner makes in relation to the IRS's having sought records from two record-keepers: the IRS has a right to access both sets of records and to check for inconsistencies.
Having found none of Conner's arguments regarding § 7605(b) to be persuasive, the court rejects that claim and, therefore, denies Conner's request for discovery and an evidentiary hearing on the claim.
C.
Conner next argues that the court should quash the summonses based on the six-year statute of limitations of 26 U.S.C. § 6531. This argument, too, is misplaced because § 6531 in no way prevents the government from seeking potentially relevant evidence for use in a criminal tax investigation. Section 6531 only protects a taxpayer from being "prosecuted, tried, or punished" for an offense falling outside the six-year period. Nothing in the statute suggests that the section limits the government's ability to pursue relevant evidence for use in an otherwise proper investigation. See 26 U.S.C. § 6531. Thus, the IRS may pursue even that evidence which only has the potential to be relevant. See United States v. Arthur Young Co., 465 U.S. 805, 817 (1984).
Here, though Section 6531 may affect the government's ability to prosecute Conner for his conduct in 1996, the only year falling outside the six-year period in Conner's case, it in no way prohibits the government from seeking access to Conner's financial records from 1996, from which the government might permissibly glean relevant information regarding Conner's tax-related activities in successive years. See Arthur Young Co., 465 U.S. at 817. Therefore, the court rejects this argument and denies any discovery or further discussion in relation to it.
D.
Conner challenges the summonses by suggesting that the IRS already possesses the records it seeks. Conner alleges that the IRS obtained the same records from the record-keepers as part of an earlier civil audit, rendering the IRS's current requests duplicative. This challenge fails as to the summonses served on Hartman because Conner has failed to produce any evidence to meet his burden. As for the summons served on Nagy, an evidentiary hearing on the issue is necessary due to Pierson's and Nagy's conflicting accounts.
As part of its prima facie case, the government must show that the IRS currently lacks the records sought. See Alphin v. United States, 809 F.2d 236, 238 (4th Cir. 1987). If the government submits an affidavit asserting that the IRS does not currently have the records, the burden shifts to the petitioner to make a contrary showing. See id.
Here, the government made its prima facie showing through Pierson's affidavit, which asserts that the IRS did not previously have the records sought, shifting the burden to Conner. Conner has countered that the IRS obtained those records as part of an earlier civil audit. However, he has proffered nothing to support this contention as to the records requested in Summonses I and II. Thus, Conner has failed to meet his burden as to those summones. Summons III is on different footing. Conner has submitted an amended affidavit from Nagy, explaining that Nagy, when representing Conner in audits for years 1996-2000, previously submitted "all of the information concerning [Conner's] income tax returns, and his books and records in [his] files." Nagy's testimony directly conflicts with that of Pierson, who claims that the IRS currently possesses only copies of Conner's 1998 and 1999 federal tax returns with attachments. Therefore, at the evidentiary hearing, the court will determine whether the IRS already has Nagy's records.
E.
Conner contends that the court should quash the summonses because the IRS violated 26 U.S.C. § 7609(d), which prohibits premature examination of records, when Pierson had the record-keepers explain the records to him and took detailed notes. The questions of whether Pierson effectively examined the records before Conner had an opportunity to exercise his statutory rights to challenge the summonses and of whether the examination, if there was one, was conducted in good faith remain unclear. To that end, the court will hold an evidentiary hearing to resolve certain critical factual disputes.
Section 7609(d) prohibits the IRS from examining records acquired from a third-party record-keeper before the close of the twenty-third day following the service of notice upon the party named in the summons. Here it is necessary to decide whether Pierson circumvented § 7609(d) and, if so, to evaluate the seriousness of the statutory violation, weighing such factors as Pierson's good faith and prejudice from the alleged premature examination. United States v. Bank of Moulton, 614 F.2d 1063, 1064-66 (5th Cir. 1980) (per curiam) (refusing to quash the contested summons after characterizing the interactions between the IRS agent and record-keepers as "conversational rather than interrogative and as primarily related to the administrative and procedural details involved in complying with the summons"). In that regard, conflicting affidavits have created the following evidentiary rifts which bear on Pierson's good faith:
Should the party named in the summons file a petition to quash, the IRS may not examine the records until after the court renders a decision. 26 U.S.C. § 7609(d).
1) Whether Pierson informed Hartman and Nagy that they had until the return date listed on the summons to produce the sought records ( i.e., whether Pierson demanded production of the documents on the day of service);
2) Whether Pierson informed Hartman and Nagy of Conner's right to petition to quash the summonses;
3) Whether Pierson merely engaged in a dialogue with the third-party record-keepers regarding the records, or whether he interrogated them concerning the records.
Thus, to determine the IRS's good faith, the court will resolve these factual discrepancies through an evidentiary hearing.
III.
Though the court grants an evidentiary hearing, the court finds the discovery requested by Conner to be unwarranted due to the simplicity of the remaining issues and the marginal utility of discovery. In the context of a petition to quash, a petitioner is not entitled to discovery as a matter of right, Hintze v. I.R.S., 879 F.2d 121, 126-27 (4th Cir. 1989), overruled on other grounds by Church of Scientology of California v. United States, 506 U.S. 9, 15-17 (1992); see also United States v. Southern Tanks, Inc., 619 F.2d 54, 56 (10th Cir. 1980) ("As a general rule, discovery is available in summons enforcement proceedings only in extraordinary situations."), and the court is of the opinion that resolution of the factual disputes here is distillable to credibility determinations that are not tethered to records.
IV.
For the reasons stated herein, an evidentiary hearing focusing on conflicting evidence related to the question of whether the IRS currently possesses the documents sought from Nagy as well as the question of whether the IRS acted in good faith is in order.