Opinion
Miscellaneous Action No. 3:01MC-14-C
August 13, 2003
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND RECOMMENDATION
This matter is before the court because the United States of America has filed a petition (docket no. 1) asking the court to enforce an administrative summons that the Internal Revenue Service (the "IRS") issued to the respondent, Monumental Life Insurance Company ("Monumental Life"). Monumental Life responded to the petition (docket no. 13) and the United States replied (docket no. 18B). The district court then referred the matter to the magistrate judge to conduct an evidentiary hearing and to prepare a recommendation regarding the disposition of the United States's petition.
Having reviewed the pleadings of the parties, and considered their arguments made and the evidence presented, the magistrate judge recommends that the district court not enforce the subpoena.
I. FINDINGS OF FACT
This is a seemingly simple, but rather convoluted case. Almost four years ago, the Internal Revenue Service served an administrative summons on Monumental Life, by which it sought records allegedly relevant to an ongoing investigation of Johnson Systems, Inc., a company that had purchased certain life insurance policies from Monumental Life (or one of its predecessors or affiliates). The IRS asserts that the purpose of its investigation, and the reason for the documents requested in the summons, is to determine whether Johnson Systems lawfully deducted certain contributions it made to an employee benefit plan.
See Gov't Exh. A and Attachments 1 and 2 to Decl. of John L. Marien, appended to the Pet. to Enforce IRS Summons (docket no. 1).
See Pet. to Enforce IRS Summons ("Petition") at ¶ 8 (docket no. 1).
Apparently, there exists a certain tax-avoidance technique involving the purchase of insurance plans that became somewhat popular among small businesses and professional groups in the 1990s. The arrangement, as effected, sprang from a lawful starting point. Under certain circumstances, it is perfectly legal for a small business, as part of an employee benefit plan, to buy term life policies for its employees at group rates and then deduct the premiums paid from its income. The unlawful twist on an otherwise legitimate plan typically works as follows. A small business (generally one in which the employees are the owners or principal shareholders) buys term insurance policies at inflated premiums. The amount in excess of the reasonable cost of the insurance risk is then allegedly placed in investment accounts for the employees. The total amount of the premiums, however, are deducted from the company's or the employee-shareholder's taxes and then, when the employees retire, they withdraw the accumulated funds, tax-free, from the investment accounts. Thus, a term policy, for which premiums may be deductible as a business expense and which does not normally accumulate cash value, improperly acts as a universal life policy, which typically does accumulate cash value, but for which premiums are not deductible and the value of which should be included in the employees' gross incomes.
See Carrie Coolidge, The Doctors' Plot, FORBES, Sept. 18, 2000, at 250; see also, e.g., Neonatology Assoc. v. Comm'r of Internal Revenue, 299 F.3d 221 (3rd Cir. 2002).
See 26 U.S.C. § 162.
See generally Neonatology, 299 F.3d 221.
The IRS believes that Johnson Systems and its principal owners engaged in this tax avoidance scheme by means of three different life insurance products administered by Monumental Life, and purchased from Monumental Life or one of its predecessors or affiliates. Accordingly, the IRS issued a summons seeking information about those types of policies and Monumental Life's communications with its agents and brokers and with Johnson Systems, so that it could determine (1) whether certain tax deductions taken by Johnson Systems were proper and, if not, (2) whether the cost of the premiums paid should be included in the participating employees' gross incomes.
Petition at ¶¶ 8-13.
Id.
The summons contains only twenty-four requests for documents, but actually seeks one hundred seventy-two different categories of documents, because of the many numbered sub-parts to the requests. Thus, the subpoena actually seeks a great volume of information. It also contains several requests for documents that are not explicitly limited to information related to the Johnson Systems investigation.
See Attachments 1 and 2 to the Decl. of John L. Marien (appended to docket no. 1).
Claiming that the summons was overly broad and unduly burdensome, Monumental Life elected not to voluntarily comply with the summons. Instead it filed a petition to quash the summons in the Western District of Kentucky. The court dismissed the petition on procedural grounds and, not long thereafter, Monumental Life produced approximately three hundred sixty documents responsive to the summons. Excluded from those documents were certain pieces of allegedly highly sensitive proprietary information, such as confidential pricing data and commission rates. Monumental Life indicated its willingness to produce those documents, but only if the United States was willing to enter into a protective order, because Monumental Life believes that, were this information made public, it would harm Monumental Life in the marketplace. The United States has consistently refused to agree to a protective order.
See Response to the IRS's Petition to Enforce Summons ("Response") at 6 (docket no. 13).
Id.; see also Civil Action No. 3:99MC-12-S (W.D. Ky.).
Id at 3, 6.
Id at 6.
Id
Id.; see also Tr. of Hr'g (Aug. 1, 2003) at 8-12.
Although Monumental Life produced several hundred documents and expressed a willingness to produce more, if provided appropriate protection, the IRS deemed the production "insignificant" with respect to the intended scope of the summons. Accordingly, it filed a petition to enforce the summons with the court. After extensive briefing, hearings, and at least one failed attempt at settlement negotiations, Monumental Life produced many additional documents and an itemized response to the summons. The United States subsequently filed a status report, however, in which it appeared to state that, contrary to Ms. Jackson's affidavit, Monumental Life produced no documents after its initial, allegedly "insignificant" production, and requested the court's prompt enforcement of the summons.
Response at 3, 6.
Petition at ¶ 7.
See Petition at ¶¶ 8-13.
See Aff. of Paula Jackson (docket no. 31).
See United States' Status Rep't (docket no. 34).
During a telephonic hearing before the court on August 1, 2003, the United States clarified that it had received all of the documents identified as being produced in Ms. Jackson's affidavit, with the exception of certain term conversion guidelines identified in paragraph 3(f) of the affidavit, which the United States was unable to locate. Counsel for Monumental Life immediately promised to produce another copy of those guidelines to the United States. Accordingly, it seems that the United States has the majority of the documents requested it its subpoena.
See Tr. of Hr'g (Aug. 1, 2003) at 5.
Id. at 6.
II. CONCLUSIONS OF LAW
Section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602, gives the IRS the authority to administratively summon any person or document that may be relevant to a tax investigation. See United States v. Will, 671 F.2d 963, 966 (6th Cir. 1981). The IRS's administrative summons authority is not limited only to the taxpayers under investigation. Rather, as is the case here, an administrative subpoena may also be issued to a third party who may have information relevant to the investigation of the taxpayer at issue. See 26 U.S.C. § 7602(a)(2). And, the government is entitled to information that has only "potential relevance" to the ongoing investigation. See United States v. Arthur Young Co., 465 U.S. 805, 814 (1984). Thus, the scope of the IRS's investigative authority is quite broad.
Although the IRS's investigative authority is broad, its discretion is not unfettered. There is some measure of oversight. "The IRS . . . has no power of its own to enforce the summons but must apply to the district court in order to compel production of the requested materials." See Will, 671 F.2d at 966 (citing 26 U.S.C. § 7604).
In United States v. Powell, 379 U.S. 48, 57-58 (1964), the Supreme Court established the standard for evaluating an IRS summons and described the requirements for both the IRS and the party seeking to quash the summons. "A prima facie case for enforcement is established by demonstrating that: (1) the investigation has a legitimate purpose; (2) the summoned materials are relevant to that investigation; (3) the information sought is not already in the IRS's possession; and (4) the IRS has followed the procedural steps outlined in 26 U.S.C. § 7603." Will, 671 F.2d at 966 (citing Powell, 379 U.S. at 57-58). The requisite showing is generally made by submission of an affidavit from the agent who issued the summons and seeks enforcement of it. See id.
Once this showing is made, the burden shins to the party seeking to quash the summons to demonstrate that enforcement of the summons would be an abuse of the court's process. Id. This burden is a heavy one. Kondik v. United States, 81 F.3d 655, 656 (6th Cir. 1996). The Supreme Court has declared that "[s]uch an abuse would take place if 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; accord Will, 671 F.2d at 967.
In this matter, the IRS's petition appears, at least on initial review, to meet the Powell requirements. Attached to the petition is a declaration from IRS agent John L. Marien that describes the nature of the investigation of Johnson Systems and the putative relevance of the summoned materials, states that the IRS does not have any of the materials in a form that it can use, and affirms that all necessary administrative steps prerequisite to the issuance of the summons were met. Mr. Marien is not the agent who initially issued the summons, but he is a national issue specialist who assists revenue agents nationwide with audits that involve the tax treatment of contributions to employee benefit plans. He has been specifically assigned to assist in the investigation of Johnson Systems.
See Decl. of John L. Marien at ¶¶ 3-10 (docket no. 1).
See id. at ¶¶ 7-10, 13.
Id. at ¶ 11. According to the United States, 26 U.S.C. § 6103 prohibits them from using relevant materials obtained in an unrelated proceeding as part of the Johnson Systems investigation. See Reply Br. at 18-19 (docket no. 18B).
Id. at ¶ 12.
The government has not explained why the summoning agent, Lola Lee, did not sign the declaration. The magistrate judge notes, however, that the court tried unsuccessfully to serve the first order entered in the case on Ms. Lee. The magistrate judge presumes she has left the employment of the IRS or is no longer assigned to the Johnson Systems audit.
Decl. of John L. Marien at U 2.
Id. at ¶ 3.
Monumental Life's arguments against enforcement of the IRS's administrative summons have evolved during the tortured history of this case. Distilled to its current essence, Monumental Life's objection to enforcement of the IRS's summons is this: (1) the putative justification for the summons ( i.e., the audit of Johnson Systems) was concluded long ago and required information much narrower in scope than the summons demands and, therefore, the IRS has no legitimate basis for insisting that the documents be produced; (2) but, even if the IRS did, some of the information requested is highly sensitive pricing and other proprietary information that should be protected from unnecessary disclosure to third parties.
At various times, however, Monumental Life has asserted that the summons should not be enforced because the petition to enforce the summons allegedly suffers from technical deficiencies, because it was issued in bad faith and for an improper purpose, because it is overly broad and unduly burdensome, because it seeks documents irrelevant to the Johnson Systems investigation, because it requests confidential and proprietary business information, and because the IRS already has many of the requested documents in its possession. The magistrate judge will address each underpinning of Monumental Life's argument, in turn.
See Monumental Life Insurance Company's response to the IRS's petition to enforce the summons (the "Response") at 11 (docket no. 13).
See id. at 3.
See Tr. of Hr'g on June 5, 2001, at 9 (docket no. 16).
Id.
See Response at 6.
See id. at 3; see also Tr. of Hr'g on June 5, 2001, at 10 (docket no. 16).
A. Alleged Technical Deficiencies
As a preliminary matter, Monumental Life asserts that the IRS has failed to make the prima facie showing required by Powell because the affidavit in support of their petition is deficient. Monumental Life argues that only an affidavit from the summoning agent is sufficient to support a petition to enforce a summons, because only that person has the "knowledge sufficient to make a credible sworn statement about the purpose and scope of the investigation."
See Response at 11 (docket no. 13).
Monumental Life's argument on this point is hypertechnical and lacks substance. Moreover, the cases it cites do not provide the legal support Monumental Life implies. Rather, they each make the ubiquitous and unremarkable comment noted above that the IRS generally can meet its burden of establishing the Powell factors by submitting an affidavit from the investigating agent. None of the cases cited by Monumental Life states that only affidavits of investigating agents are sufficient for the United States to meet its burden, nor can they reasonably be read to include any such implication. Furthermore, in this case, Agent Marien declared under penalty of perjury that he assisted in drafting the summons in question and that Ms. Lee, the issuing agent, was merely a conduit. Thus, the magistrate judge concludes that Agent Marien has sufficient knowledge of the documents needed to determine the tax liability of Johnson Systems and is competent to testify about whether the IRS satisfied the Powell factors with respect to the summons.
United States v. Gertner, 65 F.3d 963, 966 (1[st] Cir. 1995); United States v. Samuels, Cramer and Co., 712 F.2d 1342, 1345 (9th Cir. 1983); United States v. Garden State National Bank, 607 F.2d 61, 68 (3 Cir. 1979).
See Decl. of John L. Marien at ¶ 10 (docket no. 1).
B. Alleged Bad Faith and Improper Purpose
Monumental Life also asserts that the petition should be denied because the United States' motives for seeking enforcement have the "`smell' of impropriety." According to Monumental Life, the tax audit of Johnson Systems is already complete and, consequently, the IRS is attempting improperly to use its summons power to require Monumental Life's cooperation with a task force's general investigation that is unrelated to any audit of a specific tax payer. Monumental Life apparently believes that it is an additional target of the task force's investigation. The magistrate judge does not find that the record currently supports Monumental Life's assertions.
Response at 4 (docket no. 13).
Id. 3-5, 8, 15.
As support for its argument that the IRS has concluded the investigation of Johnson Systems, Monumental Life attaches two sets of forms putatively prepared by the IRS with respect to both Johnson Systems and its two principal shareholders, Billy Jack and Ruth Johnson. The first type of form is Form CG-4549, which appears to be a computation of taxes due and penalties assessed. The second type of form is Form 886A, which appears to be a largely narrative analysis of the basis for the computations in Form CG-4549.
The forms pertaining to Johnson Systems are unsigned and undated and, although they calculate taxes due and penalties assessed for specific years, they appear to be drafts. Indeed, the Form 886A pertaining to Johnson Systems notes:
This computation represents an analogous determination of the cost of insurance as well as a computation of the excess contributions to fund the conversion credits. The actual cost of insurance is available and could be obtained from Monumental Life. Monumental Life was summoned for this information, however, they refused to produce the requested information and have been referred for possible enforcement action.
See Response, Exh. 1, at page 21 of Johnson Systems Form 886A.
Monumental Life points to this same language as support for their assertion that the investigation has been concluded. It claims it provided the data specifically cited as missing in the report and, thus, the IRS has no legitimate basis for asking the court to enforce its summons.
The magistrate judge concludes that Monumental Life has overstated its case. The magistrate judge finds more persuasive the United States' argument that the documents Monumental Life has proffered as evidence of a concluded investigation are, at best, merely evidence of a settlement offer. Assuming that is what they are, and not merely the draft estimates they appear on their face to be, they apparently have been rejected. Consequently, they provide no reason why the IRS should not be permitted to continue its investigation and do not establish any bad faith on the part of the agency. If there were a signed, definitive document, no doubt Monumental Life would inform the court.
Monumental Life also argues that the IRS's enforcement efforts are the product of bad faith because Monumental Life is an unidentified, but actual, target of the IRS's investigation. The magistrate judge concludes that there is no evidence currently before the court to support that assertion. Even if there were, however, the Supreme Court's holding in Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310 (1985), suggests that enforcement of the summons would still be proper.
In Tiffany Fine Arts, the Supreme Court upheld the enforcement of so-called "dual purpose summons" in which the IRS seeks information relevant to its investigation of the recipient of the summons and also information relevant to potential investigations of unnamed third parties. Id. at 324. In its analysis, the Supreme Court focused its attention largely on Congress' concern that the IRS not "use its summons power to engage in `fishing expeditions' that might unnecessarily trample upon taxpayer privacy." Id. at 320. It ultimately decided, however, that so long as a party with a real interest in the investigation has the opportunity to oppose enforcement, a dual-purpose summons is permissible. Id. at 322.
Here, Monumental Life has had the opportunity, of which it has energetically availed itself, to oppose enforcement. Thus, the concerns expressed by Congress and evaluated in Tiffany Fine Arts do not appear applicable here, In addition, the magistrate judge notes that a party asserting bad faith bears a heavy burden of proof, and must establish bad faith on the part of the agency itself, not just improper motives of its employees. United States v. LaSalle Nat'l Bank, 437 U.S. 298, 316-18 (1978). Monumental Life has failed to meet its burden, and the magistrate judge cannot independently discern any bad faith on the part of the IRS.
C. The IRS Already Possesses Many of the Documents it Seeks
Monumental Life's strongest argument against enforcement of the summons is that the IRS already possesses many of the documents it requests in the summons. Monumental Life has produced several documents responsive to the summons in two rounds of discovery. When the IRS first issued the summons, Monumental Life produced approximately 360 documents specific to Johnson Systems. Then, after the IRS petitioned the court for enforcement of the summons and at the strong encouragement of the court, the parties attempted to resolve their differences. Following that meeting, Monumental Life produced many more documents. ( See, Aff. of Paula Jackson (docket no 31); Tr. of Hr'g (Aug. 1, 2003) at 4-5.) Thus, the IRS appears to have at least the majority of the documents it seeks.
The remainder, according to Monumental Life, fall into two categories: (1) documents already produced to the IRS in connection with the investigation of and litigation against another taxpayer, and (2) certain highly sensitive business information (e.g., agent commissions and marketing allowances), which would have a severe negative impact on Monumental Life's business if publicly disclosed, and for which they request a protective order. The magistrate judge will address the second issue, to the extent necessary, later. The first, however, directly affects whether the Powell criteria have been met.
As noted above, and as conceded by the United States (see Reply at 1) the insurance products at issue in this matter were the same ones at issue in the investigation and later litigation against Neonatology Associates. See Neonatology Associates, P.A. v. Commissioner, 115, T.C. 43 (2000). As part of the Neonatology investigation and subsequent litigation, Monumental Life produced much of the general information regarding its products that is now being sought in this matter. It now objects to producing the same documents again as an unnecessary and wasteful exercise. The IRS, for its part, does not dispute that it has the documents to which Monumental Life refers, but asserts that it is prohibited from using them because of the restrictions imposed by 26 U.S.C. § 6103.
Under 26 U.S.C. § 6103(a), "federal tax returns and tax return information are, with certain exceptions, confidential." Rowley v. United States, 76 F.3d 796, 799 (6th Cir. 1996) (internal citation omitted). As a result, federal employees may not disclose such information, except pursuant to a statutory exception, and an aggrieved taxpayer has a statutory cause of action against any person who knowingly or negligently discloses return information in violation of § 6103. Id.; see also 26 U.S.C. § 7431(a).
The term "disclosure" is defined very broadly to mean "the making known to any person in any manner whatever a return or return information." 26 U.S.C. § 6103(b)(8). The term "return information" is defined (in pertinent part) almost as broadly to encompass
(a) a taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary [of the Treasury] with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition or offense . . .
but such term does not include 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)(A). The term "taxpayer return information" means return information as defined in § 6103(b)(2) that is filed with, or furnished to, the Secretary of the Treasury "by or on behalf of the taxpayer to whom such return information relates." See 26 U.S.C. § 6103(b)(3).
In what could be construed as a laudable effort to provide the maximum protection to taxpayer privacy, the IRS interprets the aforementioned subsections of § 6103 as broadly as possible. They interpret them so broadly, in fact, that they consider any information gathered during the investigation of a taxpayer, regardless of its source ( e.g., a newspaper clipping) or nature ( i.e., whether it could identify, directly or indirectly, a particular taxpayer) to be return information. (Tr. of Hr'g (Aug. 1, 2003) at 18-19.) What is more, they interpret the confidentiality requirements to prohibit not only disclosure to persons outside the agency, but also intra-agency disclosure. According to the United States, "any return information [that] is gathered [with respect to] a taxpayer is put into a little file and that file is essentially closed and sealed and . . . that information cannot be used in any other taxpayer's investigation." (Tr. of Hr'g (Aug. 1, 2003) at 17.)
While the magistrate judge appreciates the IRS's concerns for taxpayer privacy, it seems that caution has trampled sense to some extent. First of all, the language of the statute itself contradicts the IRS's interpretation of return information, and several United States Courts of Appeals do not share the IRS's views. The Ninth, Tenth and D.C. Circuits have all determined, at various times, that "return information" does not include data or documents in forms that cannot be associated with or otherwise identify (either directly or indirectly) a particular taxpayer. See, e.g., Neufield v. Internal Revenue Service, 646 F.2d 661 (D.C. Cir. 1981); Long v. Internal Revenue Service, 596 F.2d 362 (9th Cir. 1979); First Western Government Securities, Inc. v. United States, 706 F.2d 356 (1986). Although the Sixth Circuit has not directly addressed this point, it has indicated its unwillingness to read too much into the definition of return information. In re Grand Jury Investigation, 688 F.2d 1068, 1070 (6th Cir. 1982) (requiring some "nexus between the data and information obtained and the furtherance of obligations controlled by Title 26). Thus, any information produced by Monumental Life in connection with the Neonatology investigation and litigation that does not, either directly or indirectly, implicate or identify a taxpayer, would not constitute return information. General information about Monumental Life's insurance products seems to fall squarely within the Sixth Circuit's understanding of what is not "return information."
The Sixth Circuit also has declared that once return information is made part of the public domain, e.g., as part of a trial or pending litigation, the United States is not liable for any subsequent disclosure. See Rowley v. United States, 76 F.3d 801 (6th Cir. 1996).
Even if the district court were to agree with the broadest interpretation of the term "return information," however, the documents at issue would still be available for use in the Johnson Systems investigation. This is true because 26 U.S.C. § 6103(h) contains an explicit exception to the confidentiality requirements that is applicable in this case. That subsection states: "Returns and return information shall, without written request, be open to 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).
There is no disagreement that the IRS would like copies of the documents requested in the subpoena as part of their official duties with respect to tax administration. Indeed, the United States's very reason for petitioning for the enforcement of the IRS's summons is that certain IRS employees require the information they seek to complete their investigation of Johnson Systems. Accordingly, the magistrate judge finds no merit in the IRS's assertion that the Johnson Systems investigators cannot review the Neonatology file and, therefore, do not effectively have the documents in their possession. There is a paucity of cases in the Sixth Circuit (and Courts of Appeals generally) that have evaluated the scope of § 6103(h)(1), but there appears to reason not to give the section its plain meaning. Cf. Young v. Burks, 1988 WL 62396 (6th Cir. 1988)(unpublished).
The magistrate judge thus concludes that general business information provided by Monumental Life with respect to the policies at issue can copied from, or inspected in, the Neonatology file and used by the IRS as part of the Johnson Systems investigation. Pursuant to the analysis adopted by the United States Court of Appeals for the Sixth Circuit, such documents do not constitute return information, but, even if they did, the IRS employees participating in the Johnson Systems investigation would still be permitted to review and use them. Consequently, the United States has a portion of the documents it seeks in its possession and, cannot fully satisfy at least one of the Powell requirements.
The question now becomes whether and to what extent enforcement is proper. Clearly, if the IRS had all of the documents in its possession, enforcement would not be proper under Powell. It is less clear what the court should do when the IRS has some, but not all, of the documents requested already in its possession. The magistrate judge would be generally inclined to recommend in such a circumstance that the district court enforce the subpoena in part and deny it in part. The United States, however, asserts that this approach is untenable.
Citing to decisions of the United States Courts of Appeals for the Fifth and Ninth Circuits, the United States argues that a district court has no discretion to modify the terms of a subpoena — it must enforce in total, or not at all. See Tr. of Hr'g (Aug. 1, 2003) at 8 (citing to United States v. Jose, 131 F.3d 1325 (9th Cir. 1997) and United States v. Barrett, 837 F.2d 1341 (5th Cir. 1988)). In the cases cited by the United States, the Fifth and Ninth Circuits evaluated whether a district court can conditionally enforce a subpoena to ensure that the IRS would not improperly disclose return information. Each declared that it could not.
The court in Jose essentially adopted the holding of Barrett, in which the court declared
In a summons enforcement proceeding, the district court's only task is to determine whether the summons should or should not be enforced. This inquiry is limited to ensuring that the government has complied with the four Powell criteria, and that its process is not being abused. There is no statutory authority, nor congressional indication that existing statutes supply the authority, nor Supreme Court authority, to allow the district court to make any consideration except whether or not to enforce the summons. . . . There is no middle ground because to create that remedy would unduly hamper the investigative efforts of the IRS.Jose, 131 F.3d at 1329 (citing Barrett, 837 F.2d at 1350 (internal citations omitted)). As support for this holding, both courts noted that the Supreme Court consistently has declared the IRS's summonsing authority to be broad and has refused to impose limitations upon that broad authority absent an express, unambiguous Congressional directive. Id.; Barrett, 837 F.2d at 1349.
Unfortunately, the Sixth Circuit has not addressed the issue of conditional enforcement, either in the contexts presented in Jose and Barret (i.e., whether the court can impose restrictions on the use of the subpoenaed material) or in this case ( i.e., whether the court can enforce part, but not all, of a subpoena). The magistrate judge cannot predict how the Sixth Circuit would decide the issue, but finds the reasoning of Jose and Barrett persuasive. The magistrate judge is particularly mindful of the admonition in Barrett that "[i]f a court were to [conditionally enforce a subpoena], it would then potentially have to become involved in the proceeding again at a later date to ensure compliance with the conditions it imposed." Barrett, 837 F.2d at 1349. Not only would such a result set a precedent that might unduly burden judicial resources, the lack of finality regarding enforcement decisions also would likely unduly burden the IRS's investigative efforts. Neither outcome is palatable.
Accordingly, the magistrate judge concludes that the district court should not partially enforce the subpoena with respect to documents not already in the IRS's possession, as that would constitute conditional enforcement and would further prolong the matter and the court's involvement with attempts to discern what, exactly, remains to be produced. Instead, the magistrate judge concludes that the IRS's petition should be denied, because it has failed to establish, as required by Powell, that it does not already have the documents it seeks in its possession. The IRS would not be thwarted in its investigative efforts were its petition denied. The IRS is free to review its files carefully and then issue a more narrowly-tailored subpoena that requests only documents it does not already possess.
D. The Summons Seeks Irrelevant and Proprietary Information
Monumental Life also argues that the court should decline to enforce the subpoena because the IRS seeks irrelevant information and highly confidential business information, such as marketing allowances and commission rates, that would have adversely affect Monumental Life's position in the marketplace were it to be made available to its competitors. Because the magistrate judge has concluded already that the district court should deny enforcement of the subpoena, it will not address these issues in detail.
The magistrate judge notes, however, that some of the document requests do appear to seek irrelevant information. Nevertheless, Monumental Life has already produced much, if not all, of the allegedly irrelevant information.
See, e.g., Request 3(a), which seeks "[a]ll documents memorializing, describing, identifying and/or listing the insurance costs and/or premium rates in effect during the period beginning July 1, 1991 through September 30, 1999," even though Johnson Systems is under investigation only with respect to years 1994 through 1998.
See Aff. of Paula Jackson (docket no. 31).
With respect to the highly confidential business information, the United States asserts that Monumental Life's concerns about possible disclosure to its competitors are unfounded, because it would be prohibited from disclosing that information pursuant to 26 U.S.C. § 6103. Because of the Sixth Circuit's interpretation of the definition of "return information," however, it is possible that some of the proprietary information, to the extent that it was general information not associated with or capable of identifying a particular taxpayer, may not enjoy the full protections of § 6103. Consequently, were conditional enforcement possible, the magistrate judge would have recommended that the district court require the IRS to enter into a protective order to ameliorate Monumental Life's legitimate concerns. Because conditional enforcement is not possible, however, this issue is moot.
The United States has argued that it cannot be forced to enter into a protective order because there is no federally-created privilege against disclosure proprietary information, and IRS subpoenas are not subject to state created privileges. See Ltr. from Jennifer Vozne, Dep't of Justice, to Magistrate Judge Moyer (Aug. 5, 2003) (citing United States v. Arthur Young Co., 465 U.S. 805, 817 (1984) and Scotty's Contracting Stone, Inc. v. Unite States, 326 F.3d 785, 791 (6th Cir. 2003)). The magistrate judge disagrees with the United States' position. See Fed.R.Civ.P. 26(c) (affording the district court broad discretion to issue a protective order). Be that as it may, there would be nothing to prohibit the district court from requiring the United States (1) to affirm its assertion that, the language of the statute notwithstanding, it will treat all material produced by Monumental Life as if it were "return information" and will agree to be bound by the requirements of 26 U.S.C. § 6103, and all that entails, with respect to "return information," and (2) to file all such material under seal if litigation is commenced.
III. RECOMMENDATION
In this matter a mountain has perhaps been made of a mole hill. Both sides have chosen to argue every conceivable point that putatively favors their positions, rather than focus their energies on determining what is reasonable and what is genuinely worth fighting about. As a result, positions have been polarized and justice has been delayed. While the magistrate judge recognizes that the IRS has broad authority in its investigations, and rightfully so, its failure to acknowledge that its discretion is not unfettered has not served it well in this matter. Likewise, Monumental Life has frequently devolved into hyperbole in its analysis of the IRS's motives.
Were partial enforcement of the subpoena possible, the magistrate judge would have recommended a solution that would dispense with the chaff and provide the IRS with the material it legitimately needs. The magistrate judge accepts the IRS's argument that partial enforcement is not possible, however. Thus, since the IRS seeks some irrelevant information and also seeks many materials it already has in its possession, the magistrate judge concludes that it has not satisfied its burden under Powell and, therefore, recommends that the district court deny enforcement of the subpoena. As noted above, the IRS is always free to issue another, more narrowly-tailored subpoena that can satisfy the Powell criteria.
NOTICE
Within ten (10) days after being served a copy of these proposed findings of fact, conclusions of law, and recommendation, any party who wishes to object must file and serve written objections, or further appeal is waived. Thomas v. Am, 782 F.2d 813 (6th Cir. 1984); 28 U.S.C. § 636(b)(1)(C); Fed.R.Civ.P. 72(b).