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MURATORE v. DEPARTMENT OF THE TREASURY

April 15, 2004.

NICK MURATORE, et al., Plaintiffs,
v.
DEPARTMENT OF THE TREASURY, et al., Defendants



The opinion of the court was delivered by: DAVID LARIMER, Chief Judge, District

DECISION AND ORDER

Petitioners, Nick and Kathryn Muratore ("the Muratores") and Executive Session, Inc. ("ESI"), filed a petition to quash several summonses issued by the Internal Revenue Service ("IRS"), which seek various information concerning petitioners' financial transactions, as part of an investigation concerning Nick Muratore's*fn1 federal income tax liability for the tax years 1999, 2000 and 2001. Respondents Department of the Treasury, IRS and Special Agent Jarod Koopman*fn2 have filed a motion to enforce the summonses. DISCUSSION

I. General Principles

  "Because our system of federal taxation relies on self-reporting, it is essential that the IRS have the power to issue administrative summonses in order to have effective oversight." Upton v. I.R.S., 104 F.3d 543, 545 (2d Cir. 1997) (citing United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984), and United States v. Bisceglia, 420 U.S. 141, 145-46 (1975)). To that end, in 26 U.S.C. § 7601, "Congress gave the IRS a `broad mandate to investigate and audit persons' to insure compliance with federal tax laws." Upton, 104 F.3d at 545 (quoting Bisceglia, 420 U.S. at 145); see also Miller v. United States, 150 F.3d 770, 772 (7th Cir. 1998) ("the IRS is entitled to broad latitude in issuing summonses to enforce the tax laws").

  "As a necessary incident to the investigatory power," Congress has given the IRS "expansive authority" to:
summon the person liable for tax . . . or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry.
  Upton, 104 F.3d at 545-46; 26 U.S.C. § 7602(a)(2)). The Second Circuit has described this as a "wholesale grant of summons authority" that is "only `subject to the traditional privileges and limitations.'" United States v. Euge, 444 U.S. 707, 711, 714 (1980)). Pursuant to 26 U.S.C. § 7609, whenever a summons is served upon a "third-party recordkeeper,"*fn3 the IRS must give notice of the summons to the person who is identified as the subject of the records sought (ordinarily the taxpayer who is the subject of an IRS audit or investigation). 26 U.S.C. § 7609(a)(1). That person then has the right to initiate a proceeding in federal court to quash the summons. 26 U.S.C. § 7609(b), (h)(1).

  Although a taxpayer cannot bring a proceeding to quash an IRS summons served on him personally, see Pylar v. United States, 835 F. Supp. 1033, 1035 (W.D.Mich. 1993); Tabar v. United States, 142 F.R.D. 343, 344 (D.Utah 1992), the taxpayer can refuse to comply with the summons, and, "if the IRS seeks enforcement of the summons in district court, challenge the summons in district court." United States v. Ritchie, 15 F.3d 592, 597 (6th Cir.), cert. denied, 513 U.S. 868 (1994).

  To obtain enforcement of a tax summons, whether in opposition to a petition to quash or on its own motion to enforce the summons, the IRS must show that it has complied with four requirements established by the Supreme Court in United States v. Powell, 379 U.S. 48, 57-58 (1964): that the investigation has a proper purpose; the information sought may be relevant to that purpose; the IRS does not already have the information; and the IRS has followed the statutory requirements for issuing a summons. These "requirements impose only a minimal burden" on the IRS. Miller, 150 F.3d at 772. Affidavits by the investigating agent ordinarily are sufficient to make out the prima facie case for enforcement. PAA Mgmt., Ltd. v. United States, 962 F.2d 212, 219 (2d Cir. 1992).

  Once the government has met its prima facie burden, "the taxpayer faces a `heavy burden' to either present facts to disprove one of the Powell factors, or to show that the IRS issued the summons in bad faith." Miller, 150 F.3d at 772 (quoting 2727 Arlington Heights Corp. v. IRS, 109 F.3d 1221, 1224 (7th Cir. 1997)); see also United States v. LaSalle Nat'l Bank, 437 U.S. 298, 316 (1978) (taxpayer's burden is a "heavy" one, which he must meet by "disprov[ing] the actual existence of a valid civil tax determination or collection purpose by the Service"); United States v. Insurance Consultants of Knox, Inc., 187 F.3d 755, 759 (7th Cir. 1999) ("The taxpayer can rebut the government's prima facie case only by alleging `specific facts' in rebuttal") (quoting Crystal v. United States, 172 F.3d 1141, 1144 (9th Cir. 1999)), cert. denied, 528 U.S. 1081 (2000); United States v. Derr, 968 F.2d 943, 945 (9th Cir. 1992) ("Enforcement of a summons is generally a summary proceeding to which a taxpayer has few defenses"); United States v. White, 853 F.2d 107, 111 (2d Cir. 1988) ("the taxpayer's burden of proof to establish that enforcement would be improper is significantly greater than the burden on the government to show a legitimate purpose"); United States v. Kis, 658 F.2d 526, 535 (7th Cir. 1981) (noting taxpayer's "extraordinarily heavy burden" to rebut IRS's prima facie case), cert. denied, 455 U.S. 1018 (1982).

  Because " [s]ummons enforcement proceedings are intended to be summary in nature so that an investigation can advance to an ultimate determination as to whether tax liability exists," White, 853 F.2d at 111, "the primary issue presented by a summons enforcement proceeding is not whether the IRS has established, or is even likely to establish guilt or liability on the taxpayer's part; rather, the issue is whether the IRS had a valid tax determination or collection purpose in issuing its summons." In addition, "[u]nless a taxpayer opposing enforcement of a summons makes a `substantial preliminary showing' of an alleged abuse, neither an evidentiary hearing nor limited discovery need be ordered by the district court." United States v. Tiffany Fine Arts, Inc., 718 F.2d 7, 14 (2d Cir. 1983) (quoting United States v. Morgan Guaranty Trust Co., 572 F.2d 36, 42-43 n. 9 (2d Cir.), cert. denied, 439 U.S. 822 (1978)), aff'd, 469 U.S. 310 (1985)*fn4; see also 2121 Arlington Heights Corp., 109 F.3d at 1226 ("Summons enforcement proceedings are intended to be summary in nature," and it is left to the district court's discretion to determine whether a hearing is necessary) (citations omitted).

 II. Analysis

  Applying these standards to the case at bar, I find that the IRS has made out a prima facie case, and that petitioners have failed to meet their burden of disproving any of the Powell factors or of showing bad faith on the IRS's part.

  In general, petitioners' challenge to the summonses rests on their assertion that the summonses are overly broad, and that the IRS has not demonstrated the relevance of many of the documents sought. Under 26 U.S.C. § 7602, however, the IRS is entitled even to information that has only "potential relevance" to its investigation, and it is not "required to establish that the documents it seeks are actually relevant in any technical, evidentiary sense." See Arthur Young, 465 U.S. at 814; see also United States v. Norwest Corp., 116 F.3d 1227, 1233 (8th Cir. 1997) ("The IRS need not state with certainty how useful, if at all, the summoned material will in fact turn out to be") (citing Arthur Young, 465 U.S. at 813-14 & n. 11).

  Here, the IRS has met its prima facie burden of showing that the documents sought may be relevant to a proper purpose of its investigation. As explained in the declaration of Special Agent Jarod J. Koopman (Docket #6), he is conducting a criminal investigation to determine Muratore's correct federal income tax liabilities for the tax years 1999, 2000 and 2001, and to determine whether Muratore has committed any tax offenses with respect to those tax years. Koopman Decl. ¶ 3. The summonses themselves relate to the Muratores' financial transactions during the period under investigation,*fn5 as well as transactions involving ESI, of which Muratore is president and sole shareholder.

  Petitioners' conclusory assertion that the requests are overbroad is without merit. In effect, petitioners seek to turn the Powell standard on its head, requiring the IRS to come forward with specific evidence showing precisely how each document sought is expected to yield information of evidentiary value. That is not what the law requires. Although the IRS does have the initial burden of showing relevance, the above-cited cases make clear that this burden is minimal, and that relevance is not to be determined according to the standards that would be applied at trial under the Federal Rules of Evidence. See Arthur Young, 465 U.S. at 814 ("an IRS summons is not to be judged by the relevance standards used in deciding whether to admit evidence in federal court"); Norwest, 116 F.3d at 1233 ("`Relevance' under the Powell test does not depend . . . on whether the information sought would be relevant in an evidentiary sense, but merely whether that information might shed some light on the tax return") (citingy4rt/mr Young, 465U.S. at813-14 & ...


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