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stating that the Court lacked subject matter jurisdiction because the summoned financial institution did not have an office in the state of California
Summary of this case from Grant v. Internal Revenue ServiceOpinion
Case No. 02-CV-2076-H
January 15, 2003
On October 21, 2002, Petitioner Robert M. Scharringhausen filed a Petition to Quash twelve Internal Revenue Service ("IRS") summonses. On January 9, 2003, the United States, pursuant to an order granting its request to shorten time to file a petition to enforce the summonses, filed both its opposition to Scharringhausen's Petition and its own motion summarily to enforce eleven of the twelve summonses that Scharringhausen seeks to quash. The United States seeks to dismiss Mr. Scharringhausen's Petition to Quash with respect to one summons, and to deny the petition to quash and to grant its motion to summarily enforce the other eleven summonses. Pursuant to Local Rule 7.1(d)(1), the court deems this matter appropriate for submission on the parties' moving papers. After carefully considering the submissions of the parties, the court DISMISSES the petition with respect to the MasterCard International summons, GRANTS the United States' motion for summary enforcement of the Wells Fargo Bank and California Bank and Trust summonses and DENIES Scharringhausen's Petitions to Quash with respect to the Wells Fargo and California Bank and Trust summonses.
I. BACKGROUND
The IRS is examining the tax liabilities of Mr. Scharringhausen for the years 1999 and 2000, and has begun to expand that investigation to include the year 2001. The IRS has instituted a project to identify people holding credit cards issued by banks in certain "tax haven" countries, and the investigation of Mr. Scharringhausen resulted from information obtained by the IRS from that project.
The IRS's preliminary investigation indicated that Mr. Scharringhausen might be conducting personal transactions or business activities through fictitious businesses and entities, none of which have filed tax returns for 1999 or 2000, and that he may have established accounts with or through other individuals to conduct these financial transactions. Therefore, acting pursuant to § 7602 of the Internal Revenue Code, Huong T. Phan, the IRS agent in charge of the investigation, issued the twelve IRS administrative summonses seeking information on this matter. The following summonses are at issue in this case:
Nos. 1-10: On October 1, 2002, Agent Phan issued ten summonses to Wells Fargo Bank seeking financial information on accounts for which Mr. Scharringhausen had signature authority.
No. 11: On October 9, 2002, Agent Phan issued a summons to California Bank and Trust to obtain financial information on another account for which Mr. Scharringhausen had signature authority.
No. 12: On October 9, 2002, a summons was issued to MasterCard International seeking transactional information on the offshore credit card in Mr. Scharringhausen's name.
On October 21, 2002, Mr. Scharringhausen filed a Petition to Quash the ten summonses issued to Wells Fargo, the summons issued to California Bank and Trust, and the summons issued to MasterCard International. On January 9, 2002, the United States filed its opposition to Mr. Scharringhausen's Petition and also moved to enforce the summonses to Wells Fargo and California Bank and Trust, and to dismiss the Petition as to the MasterCard International summons. Having carefully considered the submissions of the parties and the arguments of counsel, for the reasons discussed below the court DISMISSES the petition with respect to the MasterCard International summons, DENIES the Petition to Quash with respect to the Wells Fargo summonses and the California Bank and Trust summons, and GRANTS the government's motion summarily to enforce the Wells Fargo summonses and the California Bank and Trust summons.
II. DISCUSSION
A. Motion to Dismiss as to MasterCard International summons
The United States moves to dismiss for lack of jurisdiction Scharringhausen's Petition as to the MasterCard International summons. This is a proceeding under 26 U.S.C. § 7609(b)(2) to quash a third party summons. Internal Revenue Code § 2609 sets forth special procedures and jurisdictional limitations for petitions to quash third-party summonses. That statute provides in pertinent part that "[t]he United States district court for the district within which the person to be summoned resides or is found shall have jurisdiction to hear and determine any proceeding brought under subsection (b)(2) . . ." 26 U.S.C. § 7609(h)(1) (2000). In this case, the party summoned, MasterCard International has offices in the states of New York, Washington D.C., Florida, Delaware, and Georgia, as well as various foreign countries. (Declaration of Norma Schrock at ¶ 8, Exhibit 17) It does not have an office in California. (Exhibit 17) Thus, this court lacks jurisdiction over the petition to quash the MasterCard International summons because MasterCard International neither resides in nor can be found within the Southern District of California. Fortney v. United States, 59 F.3d 117, 119 (9th Cir. 1995). Therefore, the court grants Respondent's Motion to Dismiss the Petition to Quash with respect to the MasterCard International summons.
B Enforceability of Summonses Issued to Wells Fargo Bank and California Bank and Trust
The IRS has broad powers to summon information relevant to determining the liability of any taxpayer. Chen Chi Wang v. United States, 757 F.2d 1000, 1002 (9th Cir. 1984). The Internal Revenue Code authorizes the IRS to issue summonses to third parties to testify and produce records for purposes of ascertaining the correctness of a tax return or determining the tax liability of any person. See 26 U.S.C. § 7602 and 7609; United States v. Derr, 968 F.2d 943, 945 (9th Cir. 1992). District courts have jurisdiction to review petitions to quash a summons and to order its enforcement. 26 U.S.C. § 7604(a) and 7609(h)(1) (2000).
To obtain judicial enforcement of the summons, the IRS must satisfy the factors set forth in United States v. Powell, 379 U.S. 48 (1964). The IRS must show: "the investigation has a legitimate purpose, the inquiry is relevant to that purpose, the information sought is not already in the possession of the IRS, and it followed all requisite administrative steps." United States v. Blackmun, 72 F.3d 1418, 1422 (9th Cir. 1995).
The IRS must make only a "minimal showing" on these elements. Id. The "statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted." Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir. 1985); see also United States v. Tanoue, 94 F.3d 1342, 1345 (9th Cir. 1996). Assertions in a declaration by an investigating officer can satisfy the IRS's burden.Blackman, 72 F.3d at 1422; Liberty Fin., 778 F.2d at 1392.
If the IRS makes such a showing, the taxpayer then has a "heavy" burden to disprove the elements or to demonstrate an abuse of process or bad faith. Blackman, 72 F.3d at 1422; Liberty Fin., 778 F.2d at 1392. The taxpayer must present "specific facts and evidence" to support any allegations. Liberty Fin., 778 F.2d at 1392.
The court finds that the government has satisfied the standard for enforcement of the summonses under Powell. First, the government has shown, based on the sworn statement of the investigating IRS agent, that it is examining Mr. Scharringhausen's tax liabilities for the years 1999 and 2000, and is in the process of commencing an investigation into his liabilities for 2001. According to Agent Phan's declaration, the government initiated the investigation because of information gathered in its offshore credit card project. The summonses were issued to obtain information regarding those investigations, which is a legitimate purpose under Powell. Mr. Scharringhausen contends that the investigation was not made for a legitimate purpose, but rather was instituted either for a vindictive purpose in connection with a prior criminal case against Mr. Scharringhausen, or else in an attempt to collect on an earlier debt for which the government has filed a lien. However, Scharringhausen's bare assertions of possible nefarious motivations for the current investigation are not supported by "specific facts and evidence" of any kind-much less the sort that would meet the "heavy burden" of demonstrating abuse of process or bad faith by the IRS. Thus, Mr. Scharringhausen has not successfully rebutted the government's prima facie case for the existence of a legitimate purpose under Powell.
The government has also made a prima facie showing of relevance, the second Powell factor. This factor is met where the information "might throw light upon the correctness of the return." David H. Tedder Assoc., Inc. v. United States, 77 F.3d 1166, 1168 (9th Cir. 1996). To make a prima facie case of relevance, "the IRS must demonstrate `in the particular circumstances an indication of a realistic expectation rather than an idle hope that something maybe discovered.'" Id. at 1168-69 (quoting United States v. Goldman, 637 F.2d 664, 667 (9th Cir. 1980)). In this case, Mr. Scharringhausen did not file returns for 1999 or 2000, and the IRS expects the information to illuminate the financial activities of entities through which it believes Mr. Scharringhausen did business (and earned income) in those years. Thus, the information is relevant to determining the correctness of Mr. Scharringhausen's tax liabilities for years 1999 and 2000. Mr. Scharringhausen raises no argument and presents no evidence disputing the relevancy of the information, and hence the court finds that the government has met its burden of showing relevancy under Powell.
The government has also made a prima facie showing on the third Powell factor, that the information it seeks is not already in the possession of the IRS. In his sworn statement Agent Phan declares that the IRS does not already have the information or documents in its possession. Mr. Scharringhausen argues that the IRS already has this information because he provided it to his probation officer as part of the conditions for his supervised release. However, the information disclosed to Mr. Scharringhausen's probation officer is not in the possession of the IRS, nor has Mr. Scharringhausen shown that the IRS could obtain that information from the probation officer. Indeed, as the government notes, disclosure of that information to at least one outside group, the U.S. Attorney's office, is specifically forbidden absent an order of the sentencing court. The court therefore finds that Mr. Scharringhausen has not met his burden of rebutting the government's prima fade case on the third Powell factor.
Finally, the court finds that the government followed the administrative steps required by the Code. The investigating agent's declaration states that all administrative steps have been followed with one possible exception. The possible exception concerns the requirement under Internal Revenue Code § 7609(a)(1) that notice of a summons issued to a third-party recordkeeper should be given to "any person . . . who is identified in the summons." Several of the business entities listed on the summonses served on the two banks list Mr. Scharringhausen as their registered agent, and he was provided with notice o those summonses. Several of the entities listed other persons as registered agents, but those agents had invalid addresses listed. The investigating agent therefore provided notice only to Mr. Scharringhausen. The court finds that because Mr. Scharringhausen received notice of the summonses on time, he was not prejudiced by this technical violation of section 7609(a)(1). Hence, the government has made a prima facie showing that it met the fourth Powell factor.
While he did not raise the issue of the technical violation of section 7609(a)(1) noted above, Mr. Scharringhausen claims that the IRS failed to comply with the three day notice requirement with respect to the Wells Fargo summonses. Section 7609(a)(1) requires: "If any summons to which this section applies requires the giving of testimony on or relating to, the production of any portion of records made or kept on or relating to, or the production of any computer software source code . . . with respect to, any person (other than the person summoned) who is identified in the summons then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made . . ." The summonses state that they were "[i]ssued under the authority of the Internal Revenue Code this 1st day of September, 2002." However, Mr. Scharringhausen did not receive notice of the summonses until October 2, 2002. In his declaration, Agent Phan states that the summonses were actually issued on October 1, 2002, and that the September 1, 2002, date is a typographical error. In any case, Agent Phan asserts, and the Service of Summons, Notice and Recordkeeper Certificates support, that the summonses were not served until October 1, 2002. Because the statute identifies the date of service on the summoned party as the date triggering the three-day notice period, and because Mr. Scharringhausen did receive notice within three days of the date of service (October 1, 2002), the IRS did comply with the service requirement of section 7609(a).
For the reasons discussed above, the court finds that the government has satisfied the Powell factors with respect to the ten summonses issued to Wells Fargo and the summons issued to California Bank and Trust. Therefore, the court denies Mr. Scharringhausen's Petition to Quash these eleven summonses and orders that the summoned parties comply with the summonses.
III. CONCLUSION
For the reasons discussed above, the court DISMISSES the petition with respect to the MasterCard International summons, DENIES Scharringhausen' s Petitions to Quash as to the Wells Fargo Bank and California Bank and Trust summonses, and GRANTS the United States' motion to summarily enforce the IRS summonses
IT IS SO ORDERED.