United States of America v. John Doe

Filing 3

ORDER signed by Judge Morrison C. England, Jr on 5/20/11 ORDERING that the United States' Ex Parte Petition for Leave to Serve "John Doe" Summons is DENIED without prejudice.(Mena-Sanchez, L)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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IN THE MATTER OF THE TAX
LIABILITIES OF:

No. 2:10-mc-00130-MCE-EFB

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JOHN DOES, United States
taxpayers, who during any
part of the period January 1,
2005, through December 31,
2010, transferred real
property in the State of
California for little or no
consideration subject to
California Propositions 58 or
193, which information is in
the possession of the State of
California Board of
Equalization, sent to BOE by
the 58 California counties
pursuant to Propositions 58
and 193.

MEMORANDUM AND ORDER

----oo0oo---Presently before the Court is the United States’ Ex Parte

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Petition for Leave to Serve “John Doe” Summons (“Petition”).

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way of its Petition, the United States seeks leave to serve,

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pursuant to 26 U.S.C. § 7609(f), an Internal Revenue Service

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(“IRS”) “John Doe” Summons (hereafter “Summons”) on California’s

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Board of Equalization (“BOE”).

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United States’ Petition is denied without prejudice.

For the following reasons, the

By

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BACKGROUND1

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The United States’ current request derives from its need for

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information pertaining to property transfers that may affect the

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federal gift and estate taxes.

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excess of the annual exclusion amount must file a “Form 709

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United States Gift (and Generation-Skipping Transfer) Tax Return”

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(“Form 709").

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lifetime credit against gift taxes, and Form 709 is used to track

Any person making “gifts” in

26 U.S.C. §§ 2503(b), 6019(a).

Taxpayers have a

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the amount of credit both: 1) utilized by the taxpayer; and

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2) remaining for future use.

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Id., § 2505.

In addition, estate taxes may be due based on the value of

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an estate when transferred.

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includes certain taxable gifts reported on Form 709 during the

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decedent’s lifetime.

Id., § 2001.

The estate tax owed

Id.

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The IRS has recently realized “a pattern of taxpayers

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failing to file Forms 709” for real property transfers between

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non-spouse related parties.

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“Compliance Initiative” to investigate those taxpayers who have

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failed to file Forms 709.

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Initiative, the government has sought to capture data from states

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and counties regarding real property transfers taking place

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between non-spouse family members for little or no consideration

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during the period of January 1, 2005, through December 31, 2010.

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The IRS has thus launched a

As a part of this Compliance

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Unless otherwise stated, the following facts are taken
from the United States’ Memorandum in Support of Ex Parte
Petition for Leave to Serve “John Doe” Summons.
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Due to the structure of its own property tax system,

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California, like many other states, segregates the information

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sought by the IRS from other real property transfers.

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California, increases in property taxes on a particular parcel of

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property are capped at two (2) percent per year, unless there is

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a change in property ownership.

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Propositions 58 and 193, however, extended this property tax cap

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to certain transfers of property from parents to children and

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grandparents to grandchildren.

In

Cal. Const. art. 13A § 2.

Id., § 2(h)(1)-(2); Cal. Rev. &

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Tax. Code § 63.1.

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taxpayers must file Forms BOE-58-AH (Claim for Reassessment

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Exclusion for Transfer Between Parent and Child) or BOE-58-G

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(Claim for Reassessment Exclusion for Transfer Between

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Grandparent and Grandchild).

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(“Bonaffini Decl.”), ¶ 14.

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county assessor’s office, and the respective assessor’s offices

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then forward the information from the forms to the BOE.

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BOE maintains a statewide database of the information garnered

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from these forms.

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To benefit from these Propositions, California

Declaration of Josephine Bonaffini
These forms are filed with the local

Id.

The

Id.

Because the BOE maintains the Propositions 58 and 193

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information in a format that separates the property transfers

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relevant to the IRS Compliance Initiative from all other property

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transfers, the IRS has asked the BOE to turn over this data.

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Unlike many other states, however, the BOE has refused to

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disclose the requested information absent a summons because

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California law prohibits the disclosure of personal information

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without written consent unless required by law.

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§ 1798.24.
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Cal. Civ. Code

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Having been unable to secure the BOE’s informal cooperation, the

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United States now seeks, pursuant to 26 U.S.C. §§ 7602(a) and

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7609(f), a John Doe Summons ordering the State of California to

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produce the requested information.

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ANALYSIS

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“For the purpose of ascertaining the correctness of any
return, making a return where none has been made, [or]

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determining the liability of any person for any internal revenue

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tax...”, the Internal Revenue Code empowers the Secretary of the

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Treasury, or its delegate, “[t]o summon the person liable for tax

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or required to perform the act...or any person having possession,

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custody, or care of books of account containing entries relating

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to the business of the person liable for tax or required to

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perform the act, or any other person the Secretary may deem

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proper...to produce such books, papers, records, or other data,

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and to give such testimony...as may be relevant or material to

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such inquiry.

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26 U.S.C. §§ 7602(a), 7701(11).

The IRS power to summon extends even to those situations in

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which the identity of the taxpayer is unknown.

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§ 7609(f).

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where, as here, the IRS seeks to summon information that pertains

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to an unknown taxpayer and is in the custody of a third party,

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the United States must first make a showing to a court that:

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26 U.S.C.

This power is somewhat limited, however, because

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1) its investigation relates to an ascertainable class of

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persons; 2) a reasonable basis exists for the belief that these

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unknown taxpayers may have failed to comply with Internal Revenue

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Laws; and 3) the United States cannot obtain the information

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sought from another readily available source.

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Id.

The Court need not address the first two above requirements

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because the United States has failed to make the requisite

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showing that the information sought via the Summons is not

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readily available through other sources.

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In support of its

Petition, the United States has declared only that:

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1) “In California, BOE is the only agency that
maintains information about Propositions 58 and 193
real property transfers in a format which separates it
from all other property transfers for a particular
year.” Bonaffini Decl., ¶ 30.

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2) “The State of California [BOE] has stated that it
cannot provide [the requested information] without a
summons due to the restrictions of Cal. Civ. Code
§ 1798.24.” Id., ¶ 8.

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3) “The IRS’ only option for obtaining this
information, other than the John Doe summons at issue,
is to search through all property transfers of any kind
that occurred in 2005, 2006, 2007, 2008, 2009, and
2010, in the property records of each of California’s
58 counties. Examining every property transfer in
California over a five-year period as recorded in
fifty-eight different offices to determine which ones
are related-party transfers for little or no
consideration is...an unreasonable administrative
burden on the IRS.” Id., ¶ 31.

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These conclusory assertions do not provide any detail

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regarding the IRS’s contacts with the BOE.

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unclear who at the IRS contacted the BOE,2 who within the BOE was

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contacted, when these contacts occurred, or whether, prior to

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filing its Petition, the United States exhausted all of its

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remedies within the BOE to try to obtain the information sought.

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For example, it is

Likewise, though the IRS states that the BOE is the only

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agency from which the necessary data is readily available, the

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United States’ papers indicate that the information is filed with

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each of California’s counties prior to being forwarded to the

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BOE.

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specific property transactions critical to the IRS Compliance

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Initiative cannot be obtained directly from the counties without

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resort to a review of every property transaction conducted

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throughout the State of California.

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It thus remains unclear why information pertaining to the

Accordingly, because the United States has failed to show

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that the information sought cannot be obtained from another

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readily available source, the instant Petition is denied without

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prejudice.

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According to the only declaration submitted in conjunction
with the Petition, the declarant, Ms. Bonaffini, is responsible
for contacting “IRS Governmental Liaisons in state governments”
and the “Government Liaison then makes contact with the state or
county government authorities to facilitate disclosure of data in
order to help the IRS identify taxpayers who may have failed to
file required Forms 709.” Id., ¶ 5. No declaration from any
“Government Liaison” actually responsible for contacting the BOE
is before the Court.
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It bears mention here as well, however, that, should the

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United States choose to renew its Petition, this Court has

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serious concerns about the fact that the United States seeks to

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utilize the power of a federal court to sanction the issuance of

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a John Doe Summons upon a state.

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of the case law has revealed no other circumstances on par with

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the United States’ current request.

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resubmitting the Petition, the United States is cautioned that it

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must address, inter alia, the following issues:

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Indeed, the Court’s own review

As such, prior to

1) Whether a state is a “person” as that word is used
in 26 U.S.C. §§ 7602(a) and 7609(f);

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2) Whether a state’s sovereign immunity precludes
issuance of a John Doe Summons;

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3) Whether, assuming a state is subject to the Court’s
power to issue a John Doe Summons, the United States
must exhaust all administrative remedies prior to
proceeding in federal court; and

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4) Whether the United States should be required to
attempt to pursue any and all state court remedies
prior to seeking relief in federal court.

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The Government is strongly advised to be thorough in any future

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briefing since it will be asking this Court to make a decision

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ex parte without the benefit of any similar briefing from the

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state.

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CONCLUSION

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Accordingly, for the reasons just stated, the United States’

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Ex Parte Petition for Leave to Serve “John Doe” Summons is DENIED

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without prejudice.

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IT IS SO ORDERED.
Dated: May 20, 2011

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_____________________________
MORRISON C. ENGLAND, JR.
UNITED STATES DISTRICT JUDGE

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