Joseph Baxter et al v. United States of America

Filing 22

ORDER ON FIRST AMENDED PETITION TO QUASH; RESPONDENT'S MOTION FOR SUMMARY DENIAL OF FIRST AMENDED PETITION TO QUASH by Judge Yvonne Gonzale Rogers; granting in part and denying in part 10 Motion ; denying 16 Motion to Strike ; granting in part and denying in part 7 Amended Petition ; Denying as Moot 20 Motion to Shorten Time. (fs, COURT STAFF) (Filed on 2/8/2016)

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1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 6 JOSEPH GARY BAXTER AND PATRICIA MARY BAXTER, Petitioners, 7 v. 8 9 UNITED STATES OF AMERICA, United States District Court Northern District of California ORDER ON FIRST AMENDED PETITION TO QUASH; RESPONDENTS’ MOTION FOR SUMMARY DENIAL OF FIRST AMENDED PETITION TO QUASH Re: Dkt. Nos. 7, 10, 16, 20 Respondent. 10 11 Case No. 15-cv-04764-YGR Petitioners Joseph Baxter and Patricia Baxter (“Baxters” or “petitioners”) bring this action 12 against the United States (“government”), seeking to quash third party summonses the Internal 13 Revenue Service (“IRS”) served on the California Supreme Court for documents related to 14 payments made to petitioners. The government opposed and filed a motion for summary denial of 15 the first amended petition to quash (“FAP”). Having carefully considered the papers submitted1 16 and the pleadings in this action, oral argument held February 2, 2016, and for the reasons 17 discussed below, the Court GRANTS IN PART the first amended petition to quash and GRANTS IN 18 PART the motion for summary denial. 19 I. 20 The IRS randomly chose the Baxters as participants for a National Research Program 21 (“NRP”) audit for the 2011 tax year. (Dkt. No. 7, FAP ¶ 6.) The NRP examination led to an 22 investigation into the Baxters’ 2011 tax liabilities, which in turn resulted in the opening of an 23 examination of their 2012 federal income tax liabilities. (See id. ¶ 8.) On September 25, 2015, FACTUAL AND PROCEDURAL BACKGROUND 24 1 25 26 27 28 Petitioners filed a motion to strike the government’s reply in support of its motion for summary denial (Dkt. No. 16), arguing the government’s reply was filed in violation of the Civil Local Rules and this Court’s prior scheduling orders. Petitioners’ motion to strike is DENIED. The Civil Local Rules entitle the government to file a reply in support of its motion and the Court’s prior scheduling orders allowed the same, even if not explicitly. Petitioners’ arguments to the contrary do not persuade. Moreover, petitioners’ motion to enlarge or shorten time to accommodate briefing on the motion to strike (Dkt. No. 20) is DENIED AS MOOT. All motions were fully briefed and addressed at the February 2, 2016 hearing. 1 IRS agent Shirley Steen served two IRS third-party summonses on the California Supreme Court 2 directing them to provide “documents relating to billing statements, invoices, or other documents 3 resulting in payments to Petitioners, contracts operable during those time periods, and other 4 information about how attorneys are paid by the Judicial Council.” (Dkt. No. 10-2, “Steen Decl.,” 5 ¶ 11.) Petitioner Joseph Baxter, who is an attorney, represents capital defendants and is paid for 6 that work by the California Supreme Court. (FAP ¶ 9.) One summons served on the California 7 Supreme Court requested documents for the 2011 taxable year (the “Summons for 2011”) and 8 another requested documents for the 2012 taxable year (the “Summons for 2012”). (Id. ¶¶ 1, 8.) 9 On the same day, September 25, 2015, Agent Steen sent separate notices of service for each summons by certified mail to the Baxters, and both were returned as unclaimed mail. (Steen 11 United States District Court Northern District of California 10 Decl. ¶¶ 12, 15.) In addition, Agent Steen sent a notice of service of the Summons for 2011 to the 12 Baxters’ personal representative, Sara Baxter, petitioners’ attorney of record in this action. (Id. ¶ 13 12.) A similar notice of service of the Summons for 2012 was not sent to Sara Baxter because she 14 was not listed as the petitioners’ personal representative for their 2012 federal income tax 15 liabilities. (Id.) 16 On October 15, 2015 – twenty days after the notices were sent – petitioners instituted this 17 action, filing a petition to quash the Summons for 2011. (Dkt. No. 1.) October 20, 2015, 18 petitioners filed the FAP, which also seeks to quash the Summons for 2012. (FAP p. 2 n. 1.) 19 According to petitioners, they were “never served with the [Summons for 2012] and thus did not 20 include it within their [original] petition to quash.” (Id.) Petitioners became aware of the 21 Summons for 2012 on October 19, 2015, when counsel for the California Supreme Court informed 22 petitioners’ attorney thereof. (Id.) The FAP seeks to quash both summonses on several grounds, 23 including that: (1) the IRS failed to provide petitioners advance notice it would contact the 24 California Supreme Court in violation of 26 U.S.C. section 7602(c)(1), and (2) the documents the 25 IRS seeks are protected by the attorney-client privilege. 26 In opposition to the FAP, the government contends that petitioners cannot challenge the 27 Summons for 2012 because the FAP was untimely with respect to that summons. The government 28 further contends that FAP should be denied as to both the Summons for 2011 and Summons for 2 1 2012 because it satisfied the requirements for enforcement of an administrative IRS summons as 2 announced by the Supreme Court in United States v. Powell, 379 U.S. 48 (1964), including the 3 advance notice requirement. Petitioners’ assertion of attorney-client privilege fails, according to 4 the government, because petitioners fail to show the documents would reveal the substance of 5 protected communications between attorney and client. Based thereon, the government requests 6 that the Court deny petitioners’ request that it quash both summonses. 7 II. 8 To enforce a summons or dismiss a petition to quash a summons, the government must 9 THE SUMMONS FOR 2011 first establish a prima facie case of good faith by making a showing that: (1) the underlying investigation is for a legitimate purpose, (2) the inquiry requested is relevant to that purpose, (3) 11 United States District Court Northern District of California 10 the information sought is not already in the government’s possession, and (4) the administrative 12 steps required by the Internal Revenue Code (“IRC”) have been followed. Powell, 379 U.S. at 57- 13 58. The government’s burden is “minimal” and “[a] prima facie case of good faith typically is 14 made through the introduction of the sworn declaration of the revenue agent who issued the 15 summons.” United States v. Gilleran, 992 F.2d 232, 233 (9th Cir. 1993). If the government 16 establishes its prima facie case, the burden of proof shifts to the party challenging the summons to 17 show “abuse of process” or “the lack of institutional good faith.” United States v. Dynavac, Inc., 6 18 F.3d 1407, 1414 (9th Cir. 1993). 19 The Court finds that the government has met its burden as to the first three Powell 20 requirements. First, the Summons for 2011 was issued for the legitimate purpose of investigating 21 the IRS’s suspicion of unreported income. (Steen Decl. ¶¶ 7, 9.) The government may use its 22 summons authority “merely on suspicion that the law is being violated, or even just because it 23 wants assurance that it is not.” Powell, 379 U.S. at 57. Second, the relevance requirement is 24 satisfied here. As the source of a significant amount of petitioners’ income during 2011, the 25 California Supreme Court is an obvious entity to summons upon suspicion of unreported income. 26 (Id. ¶ 18.) Third, the government has submitted testimony indicating the summonsed information 27 is not already in the government’s possession. (Id. ¶ 16) For example, the bank records already in 28 the government’s possession do not reveal all relevant information, such as the reason for 3 1 payment, which would allow the IRS to determine which payments were taxable income and 2 which were not. 3 As to compliance with IRC’s administrative steps (element four), the government has not 4 met its burden under Powell. The IRC limits IRS contact with third parties to occur only after 5 8 notice of the contact is given to the taxpayer: An officer or employee or the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made. 9 26 U.S.C. § 7602(c)(1). It is uncontested that the IRS did not provide advance notice to the 6 7 Baxters of its intent to make contact specifically with the California Supreme Court. Instead, the 11 United States District Court Northern District of California 10 government argues that it satisfied this requirement on July 25, 2013 by providing petitioners with 12 generic notice, i.e. IRS Publication 1, which states that the IRS will “sometimes talk with other 13 persons if [they] need information that [the taxpayers] have been unable to provide.” (Steen Decl. 14 ¶ 8, Exh. A.) The Court finds that the advance notice procedure cannot be satisfied by the 15 transmission of a publication about the audit process generally. The IRC and its implementing 16 regulations highlight that advance notice should be specific to a particular third party. For 17 example, a contact is “authorized” and therefore not subject to the advance notice requirement if 18 the “taxpayer or the taxpayer’s authorized representative requests or approves the contact.” 26 19 C.F.R. § 301.7602-2(f)(1)(i)(B) (emphasis supplied). In that regard, the implementing regulations 20 contemplate notice for each contact, not a generic publication’s reference that the IRS may talk to 21 third parties throughout the course of an investigation. The government’s argument that 22 Publication 1 satisfied their obligation of advance notice under Section 7602(c)(1) does not 23 persuade. 24 In light of petitioners’ objection to their administrative compliance, the government 25 professes to be “unclear [as to] what additional notice Petitioners (an attorney and his spouse), 26 represented in at least one examination by another attorney, are demanding from the IRS.” (Dkt. 27 No. 15 at 9:9-11.) The Court is not persuaded by this unsubstantiated proffer. No agent swore of 28 such confusion. As the government concedes, petitioners were not “strangers to IRS audits.” (Id. 4 1 at 9:13.) Advance notice could have been satisfied in myriad ways. See 26 C.F.R. § 301.7602- 2 2(d)(1) (“pre-contact notice may be given either orally or in writing”); Highland Capital 3 Management LP v. United States, --Fed.Appx.--, 2015 WL 5692377 (2d Cir. Sept. 29, 2015) 4 (finding oral notice to taxpayers sufficient to satisfy Section 7602(c)(1)’s advance notice 5 requirement before issuing third party administrative summons). In short, the IRS simply failed in 6 this particular administrative duty. 7 The government having failed to show compliance with the administrative steps provided 8 in the IRC, the Summons for 2011 cannot be enforced. See Powell, 379 U.S. at 57-58. 9 Petitioners’ motion to quash the Summons for 2011 is GRANTED. *** 10 United States District Court Northern District of California 11 Should the government choose to satisfy the advance notice requirement and subsequently 12 re-issue the Summons for 2011, the government must also comply with the parameters as set forth 13 with respect to the Summons for 2012, infra, to avoid disclosure of privileged materials. 14 Specifically, any such summons issued by the government shall direct the California Supreme 15 Court to first deliver the summonsed documents to the Court for an in camera review to determine 16 whether the documents contain any privileged attorney-client communications. 17 Prior to re-issuing the Summons for 2011, the government shall also meet and confer with 18 petitioners to ensure compliance with Powell, including efforts to narrow the scope of the 19 summons to include only information not already in the possession of the government. 20 III. THE SUMMONS FOR 2012 21 With respect to the Summons for 2012, the Court is without jurisdiction to address the 22 petition to quash. Proceedings to quash an IRS summons must be filed no later than the twentieth 23 day after the notice of a third-party summons is mailed to petitioners. 26 U.S.C. § 7609(b)(2)(A); 24 Mollison v. United States, 568 F.3d 1073, 1076 (9th Cir. 2009). The twenty-day limitations period 25 is jurisdictional and “is a condition precedent to the waiver of sovereign immunity.” Ponsford v. 26 United States, 771 F.2d 1305, 1309 (9th Cir. 1985). Here, it is undisputed the FAP was filed to 27 include a challenge to the Summons for 2012 more than twenty days after the IRS mailed it to 28 petitioners. Petitioners argue that the Court may nevertheless assert jurisdiction over the 5 1 government for three reasons,2 namely because: (1) Rule 15 allows for relation back to the date of 2 the original petition, within the twenty-day period; (2) petitioner Joseph Baxter was in San Diego 3 when notice was mailed to him; and (3) the IRS failed to serve notice of the Summons for 2012 on 4 their personal representative Sara Baxter. The Court addresses petitioners’ arguments in turn. First, petitioners correctly assert that Rule 15(a)(1) allows amendment to pleadings as a 5 6 matter of course. However, new allegations and claims in an amended pleading do not 7 automatically date back to the time of the original pleading for purposes of limitation periods, 8 such as Section 7609(b)(2)(A). See Fed.R.Civ.P. 15(c). Pursuant to Rule 15(c), an amended 9 pleading relates back to the time of the original pleading when “the law that provides the applicable statute of limitations allows relation back” or where “the amendment asserts a claim or 11 United States District Court Northern District of California 10 defense that arose of the conduct, transaction, or occurrence set out – or attempted to be set out – 12 in the original pleading.” Here, Section 7609 does not allow relation back to quash an IRS 13 summons. In fact, no statutory provision allows for relation back in this instance. Next, the 14 Summons for 2012 is a separate transaction not addressed by the original petition, which only 15 challenged the Summons for 2011. See Henderson v. United States, 1999 WL 810380 (D.Co. 16 Aug. 17, 1999) (denying motion to amend petition to quash where amendment would add 17 untimely challenge of summons to same third-party entity as original petition for records 18 pertaining to different tax year). Relation back under Rule 15(c) cannot save this jurisdictional 19 defect. 20 With respect to petitioners’ second argument, they claim that notice was never “given” 21 because petitioner Joseph Baxter was away in San Diego when the notice was mailed to his home 22 address. See 26 U.S.C. § 7609(b)(2)(A). In that regard, petitioners argue that the clock on the 23 twenty-day period never started because notice was not properly given under the statute. The 24 25 26 27 28 2 In reply, petitioners raised a fourth argument: the related proceeding is consolidated herewith, conferring the Court with jurisdiction to not allow the government to enforce the Summons for 2012 during the pendency of the related proceeding. However, petitioners did not provide and the Court cannot discern any authority by which it may exercise jurisdiction over the sovereign to adjudicate a claim for which the government has not waived immunity to suit. Consolidation would not alter the analysis. And, the other proceeding to which petitioners refer is administratively related and not consolidated herewith. See Case No. 15-cv-02138-YGR. 6 1 Court disagrees. Section 7609 requires notice be sent by certified mail to petitioners’ “last known 2 address.” Petitioners do not contend that the address to which Agent Steen sent the notices does 3 not meet that definition. The Court finds that notice was “given” to petitioners when the notice 4 was sent by certified mail on September 25, 2015, triggering the twenty-day period. 5 Finally, petitioners similarly argue that the twenty-day period never started because the 6 IRS failed to give notice of the Summons for 2012 to their personal representative, Sara Baxter. 7 Petitioners fail to provide any authority for the proposition that Sara Baxter was entitled to notice 8 of the Summons for 2012. Although Sara Baxter is the personal representative for petitioners in 9 connection with their 2011 tax liabilities, petitioners had not designated her as their personal representative for their 2012 tax liabilities. (Steen Decl. ¶ 12.) Regardless, petitioners argue that 11 United States District Court Northern District of California 10 the government had actual knowledge that Sara Baxter represented petitioners in connection with 12 their 2012 tax liabilities because she is their attorney of record in a related action challenging 13 evaluation of their 2012 tax liabilities. See Case No. 15-cv-02138-YGR (Dkt. No. 1). While 14 understanding the practical attractiveness of this argument, petitioners have provided no authority 15 upon which the Court may impose such an obligation on the government. 16 Petitioners’ failure to institute a proceeding to quash the Summons for 2012 within the 17 twenty-day period divests the Court of jurisdiction over their petition to quash the same. The 18 government’s motion is GRANTED with respect to the Summons for 2012. 19 20 *** While the Court cannot entertain a petition to quash the Summons for 2012, it must be 21 assured that the attorney-client privilege will not be violated thereby. Petitioners’ assertions of 22 privilege are not as conclusory as the government suggests. For example, it is plausible that 23 attorney billing records submitted to the California Supreme Court could reveal litigation strategy. 24 See Clarke v. American Commerce Nat. Bank, 974 F.2d 127, 129 (9th Cir. 1992) (“ledgers, 25 statements, and time records which also reveal ….litigation strategy, or the specific nature of the 26 services provided, such as researching particular areas of law, fall within the privilege”). 27 28 To determine whether the documents contain privileged material, and prevent disclosure of the same, the documents produced by the California Supreme Court shall be subject to an in 7 1 camera review by the Court prior to disclosure. See United States v. Zolin, 491 U.S. 554, 574-75 2 (1989) (courts often review contested material when parties disagree whether a privilege applies). 3 Accordingly, the government shall advise the California Supreme Court that the 4 summonsed documents must be delivered to this Court prior to disclosure to the government. 5 Once received, the Court will refer the review to a magistrate judge who will contact the parties 6 and may order any further briefing on the topic as needed. 7 IV. 8 Based on the foregoing, petitioners’ first amended petition to quash is GRANTED as to the 9 10 CONCLUSION Summons for 2011, and the government’s motion for summary denial is GRANTED as to the Summons for 2012. The petition and motion are otherwise DENIED. United States District Court Northern District of California 11 This Order terminates Docket Numbers 7, 10, 16, and 20. 12 IT IS SO ORDERED. 13 14 15 Dated: February 8, 2016 ______________________________________ YVONNE GONZALEZ ROGERS UNITED STATES DISTRICT COURT JUDGE 16 17 18 19 20 21 22 23 24 25 26 27 28 8

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