United States of America v. John Doe

Filing 6

ORDER signed by Judge Morrison C. England, Jr. on 12/15/2011 GRANTING 4 Renewed Petition for Leave to Serve "John Doe" Summons filed by United States of America. (Reader, 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,
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

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

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

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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”). For the following reasons, the

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United States’ Petition is GRANTED.
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BACKGROUND1

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In its previous Order, ECF No. 3, the Court denied the

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United States’ Petition on the grounds that it did not meet one

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of the three elements necessary to grant a Summons.

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failing to meet one of the three elements is dispositive, the

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Court did not address the other two elements.

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Court also advised the United States that if it chose to resubmit

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the Petition, it would have to address four additional inquiries

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regarding the constitutionality of issuing a Summons to a state.

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Because

In its Order, the

The United States has now resubmitted the Petition.

The

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revised Petition expands on the discussion of the three required

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elements and also addresses each of the four inquires raised by

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the Court.

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This Order first addresses each of the three elements

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necessary for the issuance of a Summons and then turns to a

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consideration of each of the United States’ responses to the

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Court’s four additional inquiries.

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“For the purpose of ascertaining the correctness of any

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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 (“IRC”) empowers the Secretary

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of the Treasury, or its delegate to:

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For the purposes of this Order, the Court presumes
Petitioner’s familiarity with the facts and background of this
matter as set forth in its previous order.
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[S]ummon the person liable for tax or required to
perform the act...or any person having possession,
custody, or care of books of account containing entries
relating to the business of the person liable for tax
or required to perform the act, or any other person the
Secretary may deem proper ... to produce such books,
papers, records, or other data, and to give such
testimony ... as may be relevant or material to such
inquiry.

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26 U.S.C. §§ 7602(a), 7701(11).

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The IRS power to summon extends even to those situations in

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which the identity of the taxpayer is unknown. 26 U.S.C.

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§ 7609(f).

This power is somewhat limited, however, because

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

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to an unknown taxpayer, and the information is in the custody of

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a third party, the United States must make a showing to the court

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that:

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1) its investigation relates to an ascertainable class
of persons;

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2) a reasonable basis exists for the belief that these
unknown taxpayers may have failed to comply with Internal
Revenue Laws; and

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3) the United States cannot obtain the information sought
from another readily available source.

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Id.

The Court will address each of these elements in order.

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its prior order, the Court determined that the IRS failed to

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satisfy the third element.

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In

ANALYSIS

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A.

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An Ascertainable Class

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The Government seeks the identity of a class of California

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residents, between the years 2005 and 2010, who were involved in

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real property transfers from parents to their children or

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grandparents to their grandchildren for little or no

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consideration.

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individuals sought from the general public.

This request squarely particularizes the
Therefore, the Court

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finds that the IRS has properly identified and is investigating

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an ascertainable class of persons.

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B.

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Reasonable Belief of Failed Compliance

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The United States presents statistics certifying that this

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class of residents, involved in the identified transactions, are

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very likely to be in violation of the IRC.

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results of a survey conducted by the IRS illustrates that at

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least 50% and up to 90% of individuals within the identified

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class failed to file the Form 709, as required by the IRC.2

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For example, the

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IRS Form 709, the “Gift (and Generation-Skipping Transfer)
Tax Return, is used to report transfers subject to certain gift
and generation-skipping tax requirements.
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Additionally, an IRS attorney, through declaration, estimates

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that between 60% and 90% of taxpayers that transfer real property

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for little or no consideration to family members failed to file a

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Form 709.

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sufficient to support a reasonable belief of failed compliance by

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the identified class.

(Bonaffini Decl., ¶ 9).

The Court finds this

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C.

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Documents Not Readily Available Elsewhere

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Previously, this Court denied the United States’ petition

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because it failed to make the requisite showing that the

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information sought via the Summons was not readily available

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through other sources. In support of its initial Petition, the

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United States declared that the BOE was the only agency in

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California that maintains the necessary real property transfer

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data and that obtaining the records from each of California’s 58

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counties would be unduly burdensome.

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States’ Petition because the United States had not demonstrated

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that contacting each of the 58 counties to retrieve the data was

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unduly burdensome.

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The Court denied the United

However, in its revised Petition, the United States makes

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clear that California’s BOE not only is obligated to collect the

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needed documents, the BOE is the only agency that will guarantee

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to have each and every property transaction for the time period

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sought, and in the format needed, ensuring accuracy and

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efficiency for the IRS’s investigation.

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Conversely, if the IRS were to approach each of the 58 counties

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in California, there is a chance that many of the counties would

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not have the needed documents.

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of counties do not record inter-family property transfers.

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result, the BOE is the most reliable and least burdensome option

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for the IRS.

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not have the necessary data assures this Court that the documents

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are not readily available in those venues.

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States has sufficiently met its burden.

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According to Petitioner, a number
As a

The likelihood that some California counties would

Therefore, the United

In light of the facts and analysis of the elements, the

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United States has sufficiently met its burden as to each of the

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three elements necessary for the issuance of a John Doe Summons.

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D.

Additional Inquiries Raised by the Court re John Doe
Summons on a State

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Background

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In its previous Order, this Court carried “serious concerns

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about the fact that the United States seeks to utilize the power

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of a federal court to sanction the issuance of a John Doe Summons

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upon a state.”

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second petition were to be submitted it would have to address

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four additional inquiries:

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The Court advised the United States that if a

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;
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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2.

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Analysis

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In addressing these inquiries, the United States urges the

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Court not to limit the IRS’s broad investigatory powers.

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Specifically, the power to summon documents relevant to a revenue

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investigation.

It supports its position by arguing that a state

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is a “person” for the purposes of 26 U.S.C §§ 7602(a) and

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7609(f); that states do not have immunity to bar a John Doe

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Summons; and that no additional judicial or administrative

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remedies can or should be taken.

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a.

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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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Section § 7602(a)(2) authorizes the IRS to summon any

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“person having possession, custody, or care of books or account

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relating to ... the person liable for tax [] ... , or any other

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person the Secretary may deem proper ....”

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not define the term “person,” this Court required the United

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States to discuss why the IRS considers a state to be a “person.”

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The Court is now persuaded that a state is a person within the

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meaning of § 7602(a).

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Because § 7602 does

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Because § 7602(a) and § 7609(f) do not define the term

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“person,” the Court must seek clarification from the IRC’s

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general “Definitions” provision found in § 7701.

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7701(a)(1) defines a “person” to “include an individual, a trust,

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estate, partnership, association, company or corporation.”

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this list does not identify states specifically, “it is equally

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clear that it does not exclude them.” Sims v. United States,

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359 U.S. 108, 112 (1959) (after reviewing the general

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“Definitions” provisions of § 7701, the Sims court found states

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to be included in the definition of “person” as used in another

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section of the IRC).

Section

While

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The Supreme Court has also found that the legislative

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history grants the IRS a broad and general authority to summon

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documents for legitimate inquiries:

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Indeed, the very language of § 7602 reflects...a
congressional policy choice in favor of disclosure of
all information relevant to a legitimate IRS inquiry.
In light of this explicit statement by the Legislative
Branch, courts should be chary in recognizing
exceptions to the broad summons authority of the IRS.

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United States v. Arthur Young & Co., 465 U.S. 805, 816-17 (1984)

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(emphasis in original).

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phrase to describe who the IRS could summon, leaving it to the

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Secretary’s discretion to summon “any...person the Secretary may

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deem proper.”

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include states in the statute, preventing the IRS from compelling

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any information from states or their subdivisions, would

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substantially curtail the IRS summons power.

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Congress chose the broadest possible

26 U.S.C § 7602(a)(2).

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An interpretation to not

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Therefore, although this issue does not appear to have been

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squarely addressed in the Ninth Circuit previously, this Court

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finds that a State is a person within the meaning of § 7602, a

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decision consistent with Sims and Arthur Young, as well as the

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holdings of courts in other circuits.

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Commissioner,506 F.2d 1144, 1151 (10th Cir. 1974) (holding the

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United States and the State of Utah to be “person” within the

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meaning of §§ 7701 and 2056); Chickasaw Nation v. United States,

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208 F.3d 871, 879 (10th Cir. 2000) (“Congress unambiguously

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intended for the word ‘person,’ as used in § 7701(a)(1), to

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encompass all legal entities, including Indian tribes and tribal

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organizations, that are the subject of rights and duties.”).

See Estate of Wycoff v.

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b.

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Whether a State’s Sovereign Immunity
Precludes Issuance of a John Doe Summons.

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The United States argues that both the 10th and 11th

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Amendments do not preclude an issuance of a John Doe Summons upon

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a state.

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the IRS’s authority to issue a John Doe Summons on a state.

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The federal courts have consistently analogized the IRS’s summons

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power to the federal grand jury’s power to subpoena. See, e.g.,

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United States v. Bisceglia, 420 U.S. 141, 147 (1975); United

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States v. Powell, 379 U.S. 68, 57 (1964).

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Tenth Amendment does not prevent a federal grand jury from

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subpoenaing a state. E.g., In re Special April 1977 Grand Jury,

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581 F.2d 589, 592 (7th Cir. 1978) (“Nothing in the United States

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Constitution immunizes any ‘exclusive domain of the state...from

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the reach of a federal grand jury.”).

This Court agrees.

The Tenth Amendment does not limit

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What is more, the

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If the Tenth Amendment cannot bar a grand jury subpoena, it

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cannot bar an IRS summons.3

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Simlarly, the Eleventh Amendment does not preclude the IRS

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from issuing a John Doe Summons on a State.

The Eleventh

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Amendment only provides immunity to states when sued by private

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individuals.

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Garret, 531 U.S. 356, 363 (2001) (“The ultimate gaurantee of the

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Eleventh Amendment is that nonconsenting States may not be sued

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by private individuals in federal court.”).

See, e.g., Board of Trustees of Un. Of Alabama v.

However, “[n]othing

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in the Eleventh Amendment has ever been seriously supposed to

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prevent a state [from] being sued by the United States.”

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Arizona v. California, 460 U.S. 605, 614 (1983).

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Accordingly, because the federal government’s sovereign

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authority extends to the IRS’s authority to investigate revenue

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violations; and because the IRS’s summons power cannot logically

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be barred by the Tenth or Eleventh Amendments due to its broad

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authority, this Court finds the Tenth and Eleventh Amendment

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inapplicable to preclude the IRS from issuing its John Does

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Summons.

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However, states are granted authority to assert requests
of privilege under Federal Rule of Evidence 501 when asked to
produce certain state records. In re Hampers, 651 F.2d 19, 21-23
(1st Cir. 1981)(holding qualified privilege for state revenue
commissioner). In the instant case, no claim of privilege has
been raised by the state.
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c.

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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.

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The United States asserts that exhaustion is not required

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because it has jurisdiction to issue its summons, but even if it

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were required to exhaust all administrative remedies, it has

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already done so.

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request for the relevant documents noting that the denial could

This Court agrees.

The BOE denied the IRS’s

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not be appealed within the BOE.

Specifically, the BOE advised

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the IRS that “[n]o administrative remedies exist to challenge the

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BOE’s decision.”

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carries authority to serve the John Doe Summons, but even if it

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were required to exhaust administrative remedies, it has

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sufficiently done so because no administrative appeal was

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available from the BOE’s decision.

The Court has already determined the IRS

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d.

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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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For this inquiry, the United States puts forward the

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identical argument as the previous one.

They find no legal

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requirement to pursue state remedies because the issue at hand is

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a federal one.

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federal law, any suit filed in state court pursuant to § 7609

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would almost automatically be removed to federal district court.

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Furthermore, the United States notes that under

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Once again, the Court agrees with the United States.

It

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would be impractical for the United States to exhaust all state

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judiciary remedies when the matter falls within the jurisdiction

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of the federal district court.

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CONCLUSION

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As a matter of law, and for the reasons set forth above,
Petitioner’s John Doe Summons request is GRANTED.
IT IS SO ORDERED.
Dated: December 15, 2011

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

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