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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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 IN THE MATTER OF THE TAX LIABILITIES OF: No. 2:10-mc-00130-MCE-EFB 12 13 14 15 16 17 18 19 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 20 21 22 ----oo0oo---Presently before the Court is the United States’ Ex Parte 23 Petition for Leave to Serve “John Doe” Summons (“Petition”). By 24 way of its Petition, the United States seeks leave to serve, 25 pursuant to 26 U.S.C. § 7609(f), an Internal Revenue Service 26 (“IRS”) “John Doe” Summons (hereafter “Summons”) on California’s 27 Board of Equalization (“BOE”). For the following reasons, the 28 United States’ Petition is GRANTED. 1 BACKGROUND1 1 2 3 In its previous Order, ECF No. 3, the Court denied the 4 United States’ Petition on the grounds that it did not meet one 5 of the three elements necessary to grant a Summons. 6 failing to meet one of the three elements is dispositive, the 7 Court did not address the other two elements. 8 Court also advised the United States that if it chose to resubmit 9 the Petition, it would have to address four additional inquiries 10 regarding the constitutionality of issuing a Summons to a state. 11 Because In its Order, the The United States has now resubmitted the Petition. The 12 revised Petition expands on the discussion of the three required 13 elements and also addresses each of the four inquires raised by 14 the Court. 15 This Order first addresses each of the three elements 16 necessary for the issuance of a Summons and then turns to a 17 consideration of each of the United States’ responses to the 18 Court’s four additional inquiries. 19 “For the purpose of ascertaining the correctness of any 20 return, making a return where none has been made, [or] 21 determining the liability of any person for any internal revenue 22 tax...,” the Internal Revenue Code (“IRC”) empowers the Secretary 23 of the Treasury, or its delegate to: 24 /// 25 /// 26 27 28 1 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. 2 1 [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. 2 3 4 5 6 26 U.S.C. §§ 7602(a), 7701(11). 7 The IRS power to summon extends even to those situations in 8 which the identity of the taxpayer is unknown. 26 U.S.C. 9 § 7609(f). This power is somewhat limited, however, because 10 where, as here, the IRS seeks to summon information that pertains 11 to an unknown taxpayer, and the information is in the custody of 12 a third party, the United States must make a showing to the court 13 that: 14 1) its investigation relates to an ascertainable class of persons; 15 2) a reasonable basis exists for the belief that these unknown taxpayers may have failed to comply with Internal Revenue Laws; and 16 17 3) the United States cannot obtain the information sought from another readily available source. 18 19 Id. The Court will address each of these elements in order. 20 its prior order, the Court determined that the IRS failed to 21 satisfy the third element. 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 3 In ANALYSIS 1 A. 2 An Ascertainable Class 3 4 The Government seeks the identity of a class of California 5 residents, between the years 2005 and 2010, who were involved in 6 real property transfers from parents to their children or 7 grandparents to their grandchildren for little or no 8 consideration. 9 individuals sought from the general public. This request squarely particularizes the Therefore, the Court 10 finds that the IRS has properly identified and is investigating 11 an ascertainable class of persons. 12 B. 13 Reasonable Belief of Failed Compliance 14 15 The United States presents statistics certifying that this 16 class of residents, involved in the identified transactions, are 17 very likely to be in violation of the IRC. 18 results of a survey conducted by the IRS illustrates that at 19 least 50% and up to 90% of individuals within the identified 20 class failed to file the Form 709, as required by the IRC.2 21 /// 22 /// 23 /// 24 /// 25 /// For example, the 26 27 28 2 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. 4 1 Additionally, an IRS attorney, through declaration, estimates 2 that between 60% and 90% of taxpayers that transfer real property 3 for little or no consideration to family members failed to file a 4 Form 709. 5 sufficient to support a reasonable belief of failed compliance by 6 the identified class. (Bonaffini Decl., ¶ 9). The Court finds this 7 C. 8 Documents Not Readily Available Elsewhere 9 10 Previously, this Court denied the United States’ petition 11 because it failed to make the requisite showing that the 12 information sought via the Summons was not readily available 13 through other sources. In support of its initial Petition, the 14 United States declared that the BOE was the only agency in 15 California that maintains the necessary real property transfer 16 data and that obtaining the records from each of California’s 58 17 counties would be unduly burdensome. 18 States’ Petition because the United States had not demonstrated 19 that contacting each of the 58 counties to retrieve the data was 20 unduly burdensome. 21 The Court denied the United However, in its revised Petition, the United States makes 22 clear that California’s BOE not only is obligated to collect the 23 needed documents, the BOE is the only agency that will guarantee 24 to have each and every property transaction for the time period 25 sought, and in the format needed, ensuring accuracy and 26 efficiency for the IRS’s investigation. 27 /// 28 /// 5 1 Conversely, if the IRS were to approach each of the 58 counties 2 in California, there is a chance that many of the counties would 3 not have the needed documents. 4 of counties do not record inter-family property transfers. 5 result, the BOE is the most reliable and least burdensome option 6 for the IRS. 7 not have the necessary data assures this Court that the documents 8 are not readily available in those venues. 9 States has sufficiently met its burden. 10 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 11 United States has sufficiently met its burden as to each of the 12 three elements necessary for the issuance of a John Doe Summons. 13 14 D. Additional Inquiries Raised by the Court re John Doe Summons on a State 15 1. Background 16 17 In its previous Order, this Court carried “serious concerns 18 about the fact that the United States seeks to utilize the power 19 of a federal court to sanction the issuance of a John Doe Summons 20 upon a state.” 21 second petition were to be submitted it would have to address 22 four additional inquiries: 23 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); 24 25 26 27 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 28 6 1 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. 2 3 2. 4 Analysis 5 6 In addressing these inquiries, the United States urges the 7 Court not to limit the IRS’s broad investigatory powers. 8 Specifically, the power to summon documents relevant to a revenue 9 investigation. It supports its position by arguing that a state 10 is a “person” for the purposes of 26 U.S.C §§ 7602(a) and 11 7609(f); that states do not have immunity to bar a John Doe 12 Summons; and that no additional judicial or administrative 13 remedies can or should be taken. 14 a. 15 Whether a State is a “Person” as that Word is Used in 26 U.S.C §§ 7602(a) and 7609(f). 16 17 Section § 7602(a)(2) authorizes the IRS to summon any 18 “person having possession, custody, or care of books or account 19 relating to ... the person liable for tax [] ... , or any other 20 person the Secretary may deem proper ....” 21 not define the term “person,” this Court required the United 22 States to discuss why the IRS considers a state to be a “person.” 23 The Court is now persuaded that a state is a person within the 24 meaning of § 7602(a). 25 /// 26 /// 27 /// 28 /// 7 Because § 7602 does 1 Because § 7602(a) and § 7609(f) do not define the term 2 “person,” the Court must seek clarification from the IRC’s 3 general “Definitions” provision found in § 7701. 4 7701(a)(1) defines a “person” to “include an individual, a trust, 5 estate, partnership, association, company or corporation.” 6 this list does not identify states specifically, “it is equally 7 clear that it does not exclude them.” Sims v. United States, 8 359 U.S. 108, 112 (1959) (after reviewing the general 9 “Definitions” provisions of § 7701, the Sims court found states 10 to be included in the definition of “person” as used in another 11 section of the IRC). Section While 12 The Supreme Court has also found that the legislative 13 history grants the IRS a broad and general authority to summon 14 documents for legitimate inquiries: 15 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. 16 17 18 19 United States v. Arthur Young & Co., 465 U.S. 805, 816-17 (1984) 20 (emphasis in original). 21 phrase to describe who the IRS could summon, leaving it to the 22 Secretary’s discretion to summon “any...person the Secretary may 23 deem proper.” 24 include states in the statute, preventing the IRS from compelling 25 any information from states or their subdivisions, would 26 substantially curtail the IRS summons power. 27 /// 28 /// Congress chose the broadest possible 26 U.S.C § 7602(a)(2). 8 An interpretation to not 1 Therefore, although this issue does not appear to have been 2 squarely addressed in the Ninth Circuit previously, this Court 3 finds that a State is a person within the meaning of § 7602, a 4 decision consistent with Sims and Arthur Young, as well as the 5 holdings of courts in other circuits. 6 Commissioner,506 F.2d 1144, 1151 (10th Cir. 1974) (holding the 7 United States and the State of Utah to be “person” within the 8 meaning of §§ 7701 and 2056); Chickasaw Nation v. United States, 9 208 F.3d 871, 879 (10th Cir. 2000) (“Congress unambiguously 10 intended for the word ‘person,’ as used in § 7701(a)(1), to 11 encompass all legal entities, including Indian tribes and tribal 12 organizations, that are the subject of rights and duties.”). See Estate of Wycoff v. 13 b. 14 Whether a State’s Sovereign Immunity Precludes Issuance of a John Doe Summons. 15 16 The United States argues that both the 10th and 11th 17 Amendments do not preclude an issuance of a John Doe Summons upon 18 a state. 19 the IRS’s authority to issue a John Doe Summons on a state. 20 The federal courts have consistently analogized the IRS’s summons 21 power to the federal grand jury’s power to subpoena. See, e.g., 22 United States v. Bisceglia, 420 U.S. 141, 147 (1975); United 23 States v. Powell, 379 U.S. 68, 57 (1964). 24 Tenth Amendment does not prevent a federal grand jury from 25 subpoenaing a state. E.g., In re Special April 1977 Grand Jury, 26 581 F.2d 589, 592 (7th Cir. 1978) (“Nothing in the United States 27 Constitution immunizes any ‘exclusive domain of the state...from 28 the reach of a federal grand jury.”). This Court agrees. The Tenth Amendment does not limit 9 What is more, the 1 If the Tenth Amendment cannot bar a grand jury subpoena, it 2 cannot bar an IRS summons.3 3 Simlarly, the Eleventh Amendment does not preclude the IRS 4 from issuing a John Doe Summons on a State. The Eleventh 5 Amendment only provides immunity to states when sued by private 6 individuals. 7 Garret, 531 U.S. 356, 363 (2001) (“The ultimate gaurantee of the 8 Eleventh Amendment is that nonconsenting States may not be sued 9 by private individuals in federal court.”). See, e.g., Board of Trustees of Un. Of Alabama v. However, “[n]othing 10 in the Eleventh Amendment has ever been seriously supposed to 11 prevent a state [from] being sued by the United States.” 12 Arizona v. California, 460 U.S. 605, 614 (1983). 13 Accordingly, because the federal government’s sovereign 14 authority extends to the IRS’s authority to investigate revenue 15 violations; and because the IRS’s summons power cannot logically 16 be barred by the Tenth or Eleventh Amendments due to its broad 17 authority, this Court finds the Tenth and Eleventh Amendment 18 inapplicable to preclude the IRS from issuing its John Does 19 Summons. 20 /// 21 /// 22 /// 23 /// 24 /// 25 3 26 27 28 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. 10 c. 1 2 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. 4 5 The United States asserts that exhaustion is not required 6 because it has jurisdiction to issue its summons, but even if it 7 were required to exhaust all administrative remedies, it has 8 already done so. 9 request for the relevant documents noting that the denial could This Court agrees. The BOE denied the IRS’s 10 not be appealed within the BOE. Specifically, the BOE advised 11 the IRS that “[n]o administrative remedies exist to challenge the 12 BOE’s decision.” 13 carries authority to serve the John Doe Summons, but even if it 14 were required to exhaust administrative remedies, it has 15 sufficiently done so because no administrative appeal was 16 available from the BOE’s decision. The Court has already determined the IRS 17 d. 18 19 Whether the United States Should be Required to Attempt to Pursue any and all State Court Remedies Prior to Seeking Relief in Federal Court. 20 21 For this inquiry, the United States puts forward the 22 identical argument as the previous one. They find no legal 23 requirement to pursue state remedies because the issue at hand is 24 a federal one. 25 federal law, any suit filed in state court pursuant to § 7609 26 would almost automatically be removed to federal district court. 27 /// 28 /// Furthermore, the United States notes that under 11 1 Once again, the Court agrees with the United States. It 2 would be impractical for the United States to exhaust all state 3 judiciary remedies when the matter falls within the jurisdiction 4 of the federal district court. 5 CONCLUSION 6 7 8 9 10 11 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 12 13 14 _____________________________ MORRISON C. ENGLAND, JR. UNITED STATES DISTRICT JUDGE 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12

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