865 F. 2d 1271 - Century Government Securities Inc v. United States

MEMORANDUM*

Appellant Century Government Securities, Inc., timely appeals from an order granting in part and denying in part the Government's petition to enforce an administrative summons issued by the Internal Revenue Service. The district court had jurisdiction under IRC Secs. 7402(b), 7604(a) (1982), and we now have jurisdiction under 28 U.S.C. Sec. 1291 (1982). We affirm.

In 1986 the IRS, by its Agent, Stanley Woo, issued an administrative summons directing Appellant's President, Robert S. Shahin, to appear and testify regarding Appellant's federal income tax liability for its taxable years ending June 30, 1983, and June 30, 1984. The summons also directed Mr. Shahin to furnish certain documents and records relevant to the pending examination. Mr. Shahin declined to furnish all the requested documents and those that he did furnish omitted any information identifying Appellant's customers.

Thereafter the IRS filed a petition in the district court seeking judicial enforcement of the administrative summons. The district court held that the IRS had established a prima facie case for enforcement of the summons and ordered Mr. Shahin to show cause why he should not be compelled to produce the records as requested. Mr. Shahin objected to the enforcement of the summons because, according to him, the IRS already possessed the requested information and because the petition was invalidly supported by the declaration of Agent Woo's successor, Agent Gish. In addition, Mr. Shahin contended that he was entitled to an evidentiary hearing to expose the IRS's motive in issuing the summons, which, according to him, was solely to determine the tax liability of Appellant's customers. Finally, Mr. Shahin suggested that the IRS erroneously failed to satisfy the John Doe summons procedures of IRC Sec. 7609(f) (1982). The district court rejected these arguments and entered an order enforcing the petition except to the extent that the petition requested Mr. Shahin to produce Forms 1099, which were already in the IRS's possession. From this order Appellant appeals.

Appellant contends that the district court erred by: (1) finding that the IRS made a prima facie showing of the validity of the summons; (2) holding that Appellant was not entitled to an evidentiary hearing to examine whether the summons was issued in good faith; and (3) ordering enforcement of the summons. We review the district court's decision enforcing the summons under the clearly erroneous standard. Ponsford v. United States, 771 F.2d 1305, 1308 (9th Cir.1985). The decision denying the evidentiary hearing is reviewed for an abuse of discretion. United States v. Samuels, Kramer & Co., 712 F.2d 1342, 1345 (9th Cir.1983). But first we must consider whether the IRS satisfied its prima facie case, which under these circumstances we consider to be a question of law reviewed de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824 (1984).

Before the IRS can obtain judicial enforcement of an administrative summons it must first establish a prima facie case that "its use of the summons is 'in good-faith pursuit' of the purposes authorized by Congress," which "is typically made ... through the introduction of the sworn declaration of the IRS agent who issued the summons." Samuels, Kramer & Co., 712 F.2d at 1344-45 (citation omitted). Here, however, Agent Woo issued the summons, yet Agent Gish attested to its validity. Appellant contends that the district court should have found this declaration inadequate to support the IRS's prima facie case.

We disagree. As the Court of Appeals for the Seventh Circuit has stressed, the government's initial burden must be a "slight one, for the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted." United States v. Kis, 658 F.2d 526, 536 (7th Cir.1981), cert. denied, 455 U.S. 1018 (1982). For the same reason this court has held that a prima facie case "is established by a 'minimal' showing that the good faith requirement has been met," Samuels, Kramer & Co., 712 F.2d at 1345, and, although typically satisfied by the affidavit of the issuing agent, this showing can be satisfied by the affidavit of any agent who is familiar with the investigation, Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir.1985). Agent Gish, as the responsible investigating agent at the time of the enforcement proceedings, certainly was familiar with the purpose of the summons. We therefore hold that the district court correctly ruled that the IRS met its prima facie case.

Once the IRS makes a prima facie showing, the district court "issues an order requiring the party on whom the summons has been served to show cause, at an enforcement hearing, why compliance with the summons should not be required." Samuels, Kramer & Co., 712 F.2d at 1345. If the party raises sufficient doubt about the IRS's purpose in seeking enforcement of the summons the district court can order that an evidentiary hearing be held. Id. at 1347. This limited evidentiary hearing is triggered, however, only if the party alleges specific facts that raise "sufficient doubt" about an improper purpose. Id. at 1347-48 (citing United States v. Church of Scientology of Cal., 520 F.2d 818, 825 (9th Cir.1975)). Here, Appellant alleged that the IRS sought information about Appellant's customers even before it issued an administrative summons; that the dates of the requested information exceeded the scope of the taxable years under examination; that all the documents requested in the summons required Appellant in one way or another to reveal its complete customer information; and that at least one IRS Agent told Appellant that all the IRS needed was customer information.

The district court rejected Appellant's request for an evidentiary hearing because, in its opinion, Appellant's evidence was insufficient to raise even "the slightest hint of impropriety." In the district court's judgment, Appellant's argument amounted to a claim that the IRS's sole motive was to obtain information relating to Appellant's customers. This claim, according to the district court, was undermined by the fact that the "requested information would surely be relevant to the taxpayer's own liabilities." This rationale is borne out by Agent Gish's affidavit, in which he states:

As part of the process of verifying the income and expenses claimed by [Appellant] on its federal income tax returns, the Internal Revenue Service needs to verify that the transactions reflected in the books and records of [Appellant] actually occurred as represented by the books and records of [Appellant]. This can be accomplished by contacting the customers of [Appellant] associated with particular transactions and questioning them about the transactions which appear on the books and records of [Appellant].

Because the requested information was necessary to determine Appellant's own tax liabilities, the district court concluded that it would be irrelevant that the IRS would also obtain tax information relating to Appellant's customers. See Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 317 n. 5 (1985) (if the IRS is pursuing a legitimate investigation of a taxpayer, it does not matter that the IRS will obtain simultaneously tax information of others related to the taxpayer). We cannot say that the district court abused its discretion in denying an evidentiary hearing on the basis of its finding that the IRS was pursuing a legitimate investigation of Appellant.

Once the IRS satisfies its prima facie case, the "burden then shifts to the taxpayer to show an abuse of process," Liberty Fin. Servs., 778 F.2d at 1392, which the taxpayer could establish by proving the absence of any of the following factors: (1) that "the investigation is conducted for a legitimate purpose"; (2) that "the material sought is relevant to that purpose"; (3) that "the IRS does not already possess the material sought"; and (4) that "the IRS has complied with administrative regulations." United States v. Author Servs., Inc., 804 F.2d 1520, 1524 (9th Cir.1986) (citing United States v. Powell, 379 U.S. 48, 57-58 (1964)), modified, 811 F.2d 1264 (9th Cir.1987). Moreover, if the summons seeks information unrelated to the summoned party, the IRS must show compliance with the John Doe summons procedures of IRC Sec. 7609(f) (1982). See Liberty Fin. Servs., 778 F.2d at 1393.

Appellant argues first that the district court's order enforcing the summons was clearly erroneous because the IRS's purpose was illegitimate. This argument essentially repeats the argument discussed in Part II above, that is, that the IRS's true motive in obtaining the documents was to acquire evidence against Appellant's customers, not Appellant itself. The district court decided, however, that the information sought by the summons was important to determining Appellant's own tax liability even though it would have the incidental effect of providing the IRS with information about the tax liability of Appellant's customers. As before, this finding is not clearly erroneous.

Appellant argues next that the district court's order enforcing the summons was clearly erroneous because the IRS already possessed the information it sought in the summons. This argument is premised on the fact that the IRS had in its files Forms 1099 that contained the identities of Appellant's customers. The district court ruled, however, that although the IRS could not obtain duplicate Forms 1099, see United States v. Bank of Cal., 652 F.2d 780, 783 (9th Cir.1980), there is no rule that would restrict it from obtaining different documents that contain similar information. As a practical matter simply knowing the identities of Appellant's customers would be useless to the IRS unless it could identify which transactions each customer participated in. The documents sought by the IRS contained this information, and it was not clearly erroneous for the district court to permit the IRS to obtain them.

Finally, Appellant argues that the district court's order enforcing the summons was clearly erroneous because the IRS failed to comply with the procedural prerequisites of section 7609(f). Appellant's argument would be correct only if the district court had decided that the sole purpose of the summons was to investigate the tax liabilities of Appellant's customers. See Tiffany, 469 U.S. at 322. But again, the district court determined that the information sought by the summons was relevant to determining Appellant's own tax liability. Thus, the district court correctly decided that under Tiffany the IRS was not required to comply with section 7609(f). See id. at 323 ("when the IRS does not comply with Sec. 7609(f), the focus must be on whether the information sought is relevant to the investigation of the summoned party"); see also Liberty Fin. Servs., 778 F.2d at 1393 ("even assuming that the summons was served for the dual purpose of investigating both the tax liability of Liberty and also of unnamed parties, the IRS need not comply with section 7609(f) 'as long as all the information sought is relevant to a legitimate investigation of the summoned taxpayer' " (quoting Tiffany, 469 U.S. at 324)). In sum, we believe the district court's decision enforcing the summons was not clearly erroneous.

The district court's order enforcing the summons is hereby AFFIRMED.