Opinion
2:12mc351 2:12mc352
04-21-2016
Neuberger, Quinn, Gielen, Rubin & Gibber, P.A., Petitioner, v. United States of America, Respondent.
Thomas J. Farrell, Jennifer M. Stanley, Farrell & Reisinger LLC, Pittsburgh, PA, Paul B. Hynes, Jr., Paula M. Junghans, Zuckerman Spaeder LLP, Washington, DC, for Petitioner. Charles M. Flesch, Geoffrey J. Klimas, Andrew C. Strelka, Department of Justice, Washington, DC, Paul E. Skirtich, United States Attorney's Office, Pittsburgh, PA, for Respondent.
Thomas J. Farrell, Jennifer M. Stanley, Farrell & Reisinger LLC, Pittsburgh, PA, Paul B. Hynes, Jr., Paula M. Junghans, Zuckerman Spaeder LLP, Washington, DC, for Petitioner.
Charles M. Flesch, Geoffrey J. Klimas, Andrew C. Strelka, Department of Justice, Washington, DC, Paul E. Skirtich, United States Attorney's Office, Pittsburgh, PA, for Respondent.
MEMORANDUM OPINION
David Stewart Cercone, United States District Judge
I. INTRODUCTION
The Internal Revenue Service (the "IRS") is examining two limited liability companies, SL Zeta Health LLC ("SLZ") and Zeta Health Investors LLC ("ZHI"), who filed tax returns claiming millions of dollars in income tax losses for 2009 and 2010. Neither SLZ nor ZHI have their own bank accounts. All funds paid to, or on behalf these entities go through the attorney account of Maryland attorney Isaac Neuberger ("Neuberger"), and his law firm, Neuberger, Quinn, Gielen, Rubin & Gibber, P.A. ("Neuberger–Quinn").
On September 5, 2012, in connection with its examination, the IRS issued and served two attested copies of third party record keeper summonses on PNC Bank ("PNC") seeking production of "Attorney Escrow Account Records" for Neuberger–Quinn (the "Trust Account") for the years 2009 and 2010, and specifically the account number ending 5364 and all sub-accounts in which Neuberger–Quinn has an interest, or rights to act as signatories or to make withdrawals. The summonses seek the bank's signature cards, bank account statements, deposit slips, checks, records or all credit and debit memoranda, and Forms 1099 issued for account number ending 5364 and any sub-accounts. The IRS also requested Currency Transaction Reports and records pertaining to cash transactions.
In separate miscellaneous proceedings, Neuberger–Quinn has petitioned this Court to quash the summonses served on PNC . The United States of America (the "Government") has filed Motions for Summary Denial of Petition to Quash and for Summary Enforcement of IRS Summons Issued to PNC Bank. Neuberger–Quinn has responded and the matters are now before the Court.
At 2:12mc351, Neuberger–Quinn seeks to quash the summons seeking production from PNC of records of Neuberger–Quinn's attorney trust account related to SLZ, and at 2:12mc352, Neuberger–Quinn seeks to quash the summons seeking production from PNC of records of Neuberger–Quinn's attorney trust account related ZHI.
II. STATEMENT OF THE CASE
The IRS is examining transactions of taxpayers SLZ and ZHI that generated millions of dollars of income tax losses for the tax years ending December 31, 2009 and December 31, 2010. Government Statement of Undisputed Facts ("Gov.SUF") ¶ 3. Neuberger–Quinn asserts that Neuberger–Quinn and Neuberger were involved in the transactions that produced the losses to the extent they provided legal services to ZHI, and to the extent Neuberger served as "Manager" of ZHI. Neuberger–Quinn Response to Statement of Undisputed Facts ("N–Q RSUF") ¶ 3.SLZ, a limited liability company organized under the Delaware Limited Liability Act on August 28, 2008, is made up of members Sing Investments LLC ("Sing") and Larts Investments LLC ("Larts"). Gov. SUF ¶ 4(A)(1); Gov. Exhibit 1, p. 1 & Ex. A; N–Q RSUF ¶ 4(A)(1). Neuberger, the founding principal, as well as member, officer and or stockholder, of Neuberger–Quinn, is the manager of SLZ and signed the SLZ operating agreement for Larts as its "Manager" as well. Gov. SUF ¶ 4(A)(1); Gov. Exhibit 1, p. 18. As manager of SLZ, Neuberger was given "exclusive responsibility and authority for the conduct of [SLZ's] business" except for certain actions that required approval of SLZ's members. Gov. SUF ¶ 4(A)(2); Gov. Exhibit 1, §§ 6.1 & 6.2. No member of SLZ may act as an agent for, or contractually bind SLZ. Gov. SUF ¶ 4(A)(4); Gov. Exhibit 1, § 6.3; N–Q RSUF ¶ 4(A)(4).
ZHI, a limited liability company organized under the Delaware Limited Liability Act on August 28, 2008, is made up of the following members: (1) SLZ ; (2) R & R Equities Management LLC ("R & R"); (3) Herne Hill Settlement Trust ("Herne Hill"); (4) Gazelle Riverside LLC ("Gazelle"); and (5) an individual, Mark David Rosen ("Rosen") (collectively the "Zeta Entities"). Gov. SUF ¶ 4(B)(1); Gov. Exhibit 2, p. 1 & Ex. A. Neuberger is also the "Manager" of ZHI and, with one exception, has the same authority and limitations on his authority that he has as the Manager of SLZ. N–Q RSUF ¶ 4(B)(2). The one exception is that, while Neuberger may not act on behalf of the Zeta Entities to enter into any new business venture outside the scope of their existing business without the written approval of a majority of their members, for ZHI that limitation is defined further to expressly include "any investment ... in assets other than (i) the FC Investors XIV Interest and (ii) short-term investments in money-market funds or similar financial instruments." Id.
SLZ is a 77% owner of ZHI. Gov. SUF ¶ 4(B)(3).
SLZ and ZHI each filed a Form 1065 partnership income tax return for 2009 with the IRS. Gov. SUF ¶ 6(A). The returns report that SLZ and ZHI started business on June 16, 2008. Id. SLZ's 2009 return identifies the taxpayer as "SL Zeta Health LLC Isaac M. Neuberger MBR." Gov. SUF ¶ 6(B). On ZHI's 2009 return, it listed its tax matters partner as SLZ by Isaac Neuberger "MBR". Gov. SUF ¶ 6(C). SLZ claimed income tax losses of $3,814,416 on its 2009 Form 1065 return, and $963,888 on its 2010 Form 1065 return. Gov. SUF ¶ 8(C). ZHI claimed income tax losses of $5,585,986 on its 2009 Form 1065 return, and $1,548,874 on its 2010 Form 1065 return. Id.
The IRS has determined that neither SLZ nor ZHI has its own bank account, all funds paid to or on behalf of the taxpayers go through Neuberger–Quinn's attorney trust account ("account"). Gov. SUF ¶ 7(A). Moreover, the IRS was informed that SLZ and ZHI are mere flow through entities with no business activities of their own. Gov. SUF ¶ 7(B).
In furtherance of their investigation of SLZ and ZHI, the IRS issued a summons for each taxpayer on June 14, 2012 to Neuberger–Quinn for, inter alia, "Escrow/Trust Account Records" for the firm of Neuberger–Quinn including "bank statements, deposit slips, cancelled checks—both front and back, records—both front and back, records showing details of checks drawn on the account, checks deposited, all debit and credit memos, and Forms 1099 issued." Gov. SUF ¶ 9. Neuberger–Quinn made a partial and inadequate response to the summonses. Gov. SUF ¶ 10.On September 5, 2012, the IRS issued and served two attested copies of third party record keeper summonses on PNC in connection with its examination of SLZ and ZHI. Gov. SUF ¶ 11. Each summons asked PNC to produce "Attorney Escrow Account Records" for Neuberger–Quinn for the years 2009 and 2010, and specifically the account number ending 5364 and all sub-accounts (the "5364 accounts") in which Neuberger–Quinn had an interest, or rights to act as signatories or to make withdrawals. Id. The summonses further requested PNC's signature cards, bank account statements, deposit slips, checks, records or all credit and debit memoranda, and Forms 1099 issued for the 5364 accounts, as well as Currency Transaction Reports and records pertaining to cash transactions. Id. PNC Bank has failed to comply with the summonses issued to it by the IRS. Gov. SUF ¶ 12.
III. LEGAL STANDARD
Section 7602(a) of the Internal Revenue Code ("IRC") authorizes the IRS to issue a summons "[f]or 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 collecting any such liability." 26 U.S.C. § 7602(a). To establish a prima facie case for enforcement of a summons, the IRS must show that: (1) the summons was issued for a proper purpose; (2) the information sought may be relevant to that purpose; (3) the information sought is not already in the IRS's possession; and (4) the required administrative steps have been taken. United States v. Powell, 379 U.S. 48, 57–58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). The IRS's initial burden is only slight or minimal, and can be satisfied by a declaration from the investigating agent that the requirements of Powell have been met. See United States v. Clarke, ––– U.S. ––––, 134 S.Ct. 2361, 2365, 189 L.Ed.2d 330 (2014) (to make the Powell showing, "the IRS usually files an affidavit from the responsible investigating agent.") "Once the IRS has made its prima facie case, the taxpayer bears the burden of disproving any one of the four Powell elements or otherwise demonstrating that ‘enforcement of the summons will result in an abuse of the court's process.’ " Masciantonio v. United States, 528 Fed.Appx. 120, 121 (3d Cir.2013) (citing United States v. Rockwell Int'l, 897 F.2d 1255, 1262 (3d Cir.1990) ).
Taxpayers bear a "heavy burden." Pickel v. United States, 746 F.2d 176, 183–85 (3d Cir.1984). To properly challenge the IRS's prima facie case, "Petitioners must present evidence in the form of affidavits." Bodensee Fund, LLC v. U.S. Dep't of Treasury–I.R.S., 2008 U.S. Dist. LEXIS 36016, 2008 WL 1930967, at *3 (E.D.Pa.2008). The Powell factors are the sole, proper focus of a Court's analysis of summons enforcement proceedings. C.f. United States v. Clarke, ––– U.S. ––––, 134 S.Ct. 2361, 2365, 189 L.Ed.2d 330 (2015) (holding that to succeed in an enforcement action, the IRS must establish the Powell factors), United States v. Rockwell Int'l, 897 F.2d at 1261 (holding that "the proper focus" of summons enforcement proceedings is the Powell factors); United States v. Barney, 2008 U.S. Dist. LEXIS 48361, 2008 WL 2537135, at *1 (W.D.Pa.2008) (holding that application of the Powell factors was "well established" as "[t]he standard for judicial enforcement of an IRS summons").
IV. DISCUSSION
The IRS has "expansive information-gathering authority" to determine tax liability under the Internal Revenue Code, including by issuance of summonses to taxpayers and third-party record holders. United States v. Arthur Young & Co., 465 U.S. 805, 816, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984) ; 26 U.S.C. § 7602. Taxpayers may petition to quash such summonses and the IRS may petition to enforce them. 26 U.S.C. §§ 7604, 7609. Enforcement proceedings are designed to be summary in nature. Donaldson v. United States, 400 U.S. 517, 529, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971).
The IRS is examining the SLZ and ZHI, two limited liability companies, who filed tax returns claiming millions of dollars in income tax losses for 2009 and 2010. Such claimed losses flow through to the members of SLZ and ZHI. SLZ and ZHI have no business activities of their own, so any income, gains, or losses are originating elsewhere and flowing to SLZ and ZHI before flowing through such entities. Moreover, SLZ and ZHI have direct or indirect relationships with multiple entities, including offshore trusts.See Gov. SUF ¶¶ 4, 5 & 6. Further, all of the funds reported flowing into and out of SLZ and ZHI were paid through Neuberger–Quinn's Trust Account. The taxpayers did not have their own bank accounts or their own books and records (i.e., journals, ledgers, work papers and other accounting material). Gov. SUF ¶ 8(B).
Neuberger–Quinn argues that the summonses should be quashed because: (1) the Government failed to establish a prima facie case; (2) the vast majority of the Trust Account records are not relevant to the issues under examination by the IRS; and (3) Neuberger–Quinn has established a genuine issue of material fact regarding whether the Trust Account records relate in any way to the correctness of SLZ's and ZHI's 2009 and 2010 tax returns or to the other issues under examination.
In support of its prima facie case, the Government has provided the declaration of Agent Brigit Flannery ("Agent Flannery"), a Revenue Agent of the IRS employed in the Small Business/Self Employed Division. Flannery Declaration ("Flannery Decl.") ¶ 1. In an extremely comprehensive sworn declaration, Agent Flannery noted that she and Revenue Agent Jean Michelle Prouix ("Agent Prouix"), who is working with Agent Flannery on the examination, issued and served the record keeper summonses on PNC in connection with its examination of SLZ and ZHI on September 5, 2012. Flannery Decl. ¶¶ 2 & 10.
Agent Flannery asserts that the summonses were issued for the legitimate purposes of determining the correctness of SLZ's and ZHI's 2009 and 2010 tax returns, as well as determining what roles they played in a complex structure involving multiple foreign and domestic entities and how such roles affected the reporting on their Federal Form 1065 tax returns. Flannery Decl. ¶ 7(A). Moreover, because SLZ and ZHI do not have their own bank accounts or their own books and records, Neuberger–Quinn's complete account records are necessary to the investigation and Neuberger made a partial responses to the summonses issued that were grossly inadequate. Flannery Decl. ¶¶ 7(B) & 9. Specifically, Agent Flannery avers that Neuberger–Quinn produced:
partial copies of monthly bank statements from [the 5364 accounts], for 2009 and 2010. None of the statements produced were complete copies, and some of the statements were illegible or were cutoff. And those statements reveal that there are sub-accounts, and documents relating to such sub-accounts [that] were not produced. Further, NQ produced a couple of deposit slips for its operating account, not the account requested by the summonses. NQ produced no deposit slips and cancelled checks, or other records showing the details of checks drawn on the account, checks deposited, all debit and credit
memos, and Forms 1099 issued for the account.
Flannery Decl. ¶ 9. In addition, Agent Flannery asserts that she wants to compare the PNC's copies of the documents requested with those produced by Neuberger–Quinn. Flannery Decl. ¶ 13.
Neuberger–Quinn contends that the Government has not established the relevancy requirement of Powell because: (1) it identified only thirteen (13) entities or persons in its papers and the terms "related" and "additional" were not defined; (2) Agent Flannery's declaration contains inadmissible hearsay regarding the comments made about the taxpayers by their tax preparer, Joseph Leshkowitz ("Leshkowitz"); and (3) the Government has not shown the relevance of the Trust Account records regarding all of Neuberger–Quinn's clients for 2009 and 1010.
Neuberger–Quinn disputes the Government's allegation that the transactions that generated the tax losses "implicate about 60 related and/or additional entities" because "the Government does not define what it means by ‘related’ or ‘additional,’ does not provide any explanation on how the tax losses ‘implicate’ the entities, and, most importantly, does not even name any of the entities." N–Q RSUF ¶ 3. Neuberger–Quinn admits, however, that:
[O]n June 14, 2012, the IRS served two third-party summonses on [Neuberger–Quinn] in connection with the examinations of [SLZ and ZHI] ... Among other things, the [summonses] ... demanded the Trust Account records concerning [SLZ and ZHI] and 65 other entities for the 2009 and 2010 calendar years. Those 65 other entities were identified in an attachment to the [summonses].
Declaration of Hillel Tendler ("Tendler Decl. ") ¶ 14. The attachments to the IRS summonses listing the 65 entities are attached as Exhibits 3 & 4 to Tendler's Declaration. In its Petitions to Quash file with this Court, however, Neuberger–Quinn did not include the list of the 65 entities that were attached to each summons.
Attached as Exhibit B to each summons issued to Neuberger–Quinn was an identical list of 67 entities including SLZ and ZHI. Flannery Reply Decl. ¶ 4.
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Neuberger–Quinn's contention that the Government identified only thirteen (13) entities or persons in its initial papers is without merit. Moreover, the IRS has determined that 60 of the 65 entities on the list are directly or indirectly related to the taxpayers, yet when conducting an analysis of the activity in the Neuberger–Quinn trust account only 13 names were used as search terms to identify "transactions involving [SLZ and ZHI]" and transactions related to three projects in which the taxpayers allegedly invested. Flannery Reply Decl. ¶¶ 4 & 19; Tendler Decl. ¶ 12.
Neuberger–Quinn also objects to Agent Flannery's statements relating to information obtained from Leshkowitz, who prepared the federal tax returns of SLZ and ZHI, as inadmissible hearsay. Leshkowitz indicated that the taxpayers have no bank accounts, conduct no business of their own, and are mere flow through entities that run funds through Neuberger–Quinn's Trust Account at PNC.
A statement, however, is not hearsay when that statement is offered against a party and "was made by a person whom the party authorized to make a statement on the subject." FED. R. EVID. 801(d)(2)(C) ; see United States v. Sokolow, 91 F.3d 396, 402 (3d Cir.1996) ; Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1198 (3d Cir.1993). Here, the IRS received powers of attorney from Neuberger authorizing Leshkowitz and his firm to represent and speak to the IRS on behalf of SLZ and ZHI in connection with the examination of their 2009 and 2010 tax years. Flannery Decl. ¶ 5B(3), n.4. Specifically, the IRS received the following:
(1) On March 28, 2011, the IRS received a Form 2848, Power of Attorney and Declaration of Representative, executed by Isaac Neuberger on behalf of SLZ, authorizing Leshkowitz to speak on SLZ's behalf regarding the subject matter set forth therein, specifically to "perform any and all acts that I (we) can perform with respect to the tax matters described [on line 3 of For, 2848] ..." Flannery Reply Decl. ¶ 8(a); Exhibit 8;
(2) On May 3, 2011, the IRS received a Form 2848, Power of Attorney and Declaration of Representative, executed by Isaac Neuberger on behalf of SLZ, authorizing Leshkowitz to speak on SLZ's behalf regarding the subject matter set forth therein. Flannery Reply Decl. ¶ 8(b); Exhibit 9;
(3) On May 13, 2011 and May 18, 2011, the IRS received two (2) Forms 2848, Power of Attorney and Declaration of Representative, executed by Andre Zolty, Trustee of Larts Trust, authorizing Leshkowitz to speak on behalf of SLZ (5/13/2011) and ZHI (5/18/2016), regarding the subject matter set forth in the form. Flannery Reply Decl. ¶ 8(c); Exhibit 10; and
(4) On May 30, 2012 and June 7,2012, the IRS received two (2) Forms 2848, Power of Attorney and Declaration of Representative, executed by Andre Zolty, Trustee of Larts Trust, authorizing Leshkowitz, and his associate Jacqueline Regaldo, to speak on behalf of SLZ (5/30/2011) and ZHI (6/7/2016), regarding the subject matter set forth in the form. Flannery Reply Decl. ¶ 8(d); Exhibit 11.
Leshkowitz, therefore was acting as an agent of SLZ and ZHI and any statements made with regard to the subject matter set forth in the power of attorney forms were admissions of a party opponent through its authorized agent and are not hearsay. United States v. Sokolow, 91 F.3d at 402.
Neuberger–Quinn also argues that the Government has requested records that, "while not technically privileged," arise out of the relationship between Neuberger–Quinn and its many attorneys and clients who had nothing to do with the tax matters under examination. The Government, however, argues that it is not required to prove that all funds flowing through the Trust Account are connected to the taxpayers before it can gain access to PNC's records regarding the Trust Account. Further, the Government contends that Neuberger–Quinn is incorrect in its contention that there is a heightened relevance standard when the summons is issued to a third party instead of the taxpayer.
Congress has given the IRS an extraordinarily broad mandate to enforce the internal revenue laws, including the intentionally broad powers contained in § 7602 of the Internal Revenue Code. See United States v. Arthur Young & Co., 465 U.S. at 816, 104 S.Ct. 1495. The administrative subpoena power of the IRS is not dependent upon the existence of probable cause, but can be utilized "merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." See United States v. Powell, 379 U.S. at 57, 85 S.Ct. 248. Under the liberal standard of § 7602, the Government is entitled even to information that has only "potential relevance" to the investigation. United States v. Arthur Young & Co., 465 U.S. 805, 814, 104 S.Ct. 1495.
When evaluating the relevance of summoned information, then, courts apply a deferential standard of review that permits any document that "might throw light upon the correctness of the return." Id. at 814 n. 11, 104 S.Ct. 1495 (quoting United States v. Harrington, 388 F.2d 520, 524 (2d Cir.1968) ). The standard requires only a showing of potential relevance because the IRS "can hardly be expected to know whether such data will in fact be relevant until they are procured and scrutinized." Id. at 814, 104 S.Ct. 1495 (citation omitted). The minimal relevancy standard applies whether a summons is directed to the taxpayer or it is directed to a third party. See 2121 Arlington Heights Corp. v. United States, 109 F.3d 1221, 1224–1225 (7th Cir.1997) (enforcing summons issued to telephone company in examination of restaurant-taxpayer); Cohen v. United States, 306 F.Supp.2d 495, 500–502 (E.D.Pa.2004) (The relevance standard for enforcement of summons was met where IRS agent offered highly particularized declaration for pursuing the investigation of the third party).
Here, Agent Flannery stated in her sworn declaration that she issued the summons to determine the correctness of SLZ's and ZHI's 2009 and 2010 tax returns, as well as determining what roles they played in a complex structure involving multiple foreign and domestic entities and how such roles affected the reporting on their Federal Form 1065 tax returns. Flannery Decl. ¶¶ 1 & 7(A). Moreover, because SLZ and ZHI do not have their own bank accounts, do not have their own books and records, they run their business transactions through Neuberger–Quinn's Trust Account, and there appear to be at least 60 entities connected to the taxpayers, Neuberger–Quinn's complete account records are relevant to the investigation. Flannery Decl. ¶ 7(B).
Finally, Agent Flannery avers that no "Justice Department referral" is in effect with respect to the taxpayers and that all administrative procedural steps required by the IRC for enforcement of the summonses issued to PNC were followed. Flannery Decl. ¶¶ 14 & 15.
Based upon Agent Flannery's declaration, the Court finds that: (1) the summonses served on PNC were issued for the legitimate purpose of determining the correctness of SLZ's and ZHI's 2009 and 2010 tax returns, and of determining the roles they played in a complex structure described above, and how such roles affected the reporting on their Federal Form 1065 tax returns; (2) the records sought by the summonses might shed light on those issues and are therefore relevant to the IRS's investigation; (3) the information and documents sought by the summonses were not in the possession of the IRS when they were issued; and (4) the administrative steps required by IRC were followed. The Government has, therefore, met its initial burden and has established a prima facie case in support of the summonses issue to PNC.
Further, after a comprehensive review of the record, the Court finds that Neuberger–Quinn is unable to meet its heavy burden in opposing enforcement of the summonses. Tendler's incomplete search and redacted summaries are simply insufficient to rebut he Government's prima facie case. Where "material Government allegations are factually refuted by the taxpayer, thus presenting a disputed factual issue, or where proper affirmative defenses are factually supported by the taxpayer's affidavits, the taxpayer is entitled to an evidentiary hearing." United States v. Garden State Nat'l Bank, 607 F.2d 61, 71 (3d Cir.1979). However, if the taxpayer, and/or challenging party, is unable to "refute the government's prima facie case or cannot factually support a proper affirmative defense, ‘the district court should dispose of the proceeding on the papers before it and without an evidentiary hearing’." Alphin v. United States, 809 F.2d 236, 238 (4th Cir.1987) (citing United States v. Garden State Nat'l Bank, 607 F.2d at 71 ).").
V. CONCLUSION
Based on the forgoing, the Court will grant the motions to enforce the summonses and will deny the petitions to quash the summonses. An appropriate Order follows.
ORDER OF COURT
AND NOW, this 21stday of April, 2016, upon consideration of the Motions for Summary Denial of Petition to Quash and for Summary Enforcement of IRS Summons Issued to PNC Bank (Document No. 16 at 2:15mc351; Document No. 16 at 2:15mc352), Neuberger–Quinn's response thereto, the briefs and appendices filed in support thereof, in accordance with the Memorandum Opinion filed herewith,
IT IS HEREBY ORDERED that the Government's Motions to Enforce are GRANTED. Neuberger–Quinn's Petition to Quash IRS Summons (Document No. 1 at 2:15mc351; Document No. 1 at 2:15mc352) are DENIED and DISMISSED. The Clerk shall mark this case closed.