United States of America v. Cade Corporation

Filing 13

ORDER Granting 1 Verified Petition to Enforce IRS Summons. Respondent is directed to obey the summons issued. The Clerk shall close this file. Signed by Hon. Edward J. Davila on 8/26/2016. (ejdlc3, COURT STAFF) (Filed on 8/26/2016)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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UNITED STATES OF AMERICA,

Case No. 5:16-cv-01996-EJD

Petitioner,
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ORDER GRANTING VERIFIED
PETITION TO ENFORCE INTERNAL
REVENUE SERVICE SUMMONS

v.
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CADE CORPORATION,

Re: Dkt. No. 1

Respondent.

United States District Court
Northern District of California

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This summons enforcement matter arises from an underlying investigation by the Internal

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Revenue Service (“IRS”) into the tax liabilities of taxpayer Rozann M. Stenshoel-Sousa for unpaid

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taxes for the 2000, 2001, 2002 and 2003 tax years. Petitioner the United States of America (“the

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Government”) has filed, and is presently seeking to enforce, an IRS Summons against

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Respondent, Cade Corporation (“Cade”), Ms. Stenshoel-Sousa’s employer. See Verified Pet. to

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Enforce Internal Revenue Service Summons (“Pet.”), Dkt. No. 1. The IRS submits that the

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information sought by the Summons is relevant to assessing and determining Ms. Stenshoel-

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Sousa’s assets, tax debts, and taxable income, among other things, in conjunction with its ongoing

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investigation. See Pet. ¶¶ 5, 7.

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On November 23, 2015, Revenue Officer Smith served an IRS Summons on Cade at its

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place of business. Pet. ¶ 6, 10; Resp’t’s Resp. to the Verified Pet. (“Resp.”), ¶ 6, Dkt. No 10. The

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Summons required Cade’s corporate officers to appear on January 13, 2016 “to give testimony and

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to bring for examination certain documents and records.” See Pet., Ex. A, Dkt. No. 1-1. On

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January 8, 2016, Ms. Stenshoel-Sousa filed a Petition to Quash IRS Summons, which was

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dismissed with prejudice on May 20, 2016. Pet.’s Reply in Support of Verified Pet. (“Reply”) at

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Exs, C, D, Dkt. Nos. 11-2, 11-3. Despite the dismissal of the Petition to Quash, Cade has thus far

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Case No.: 5:16-cv-01996-EJD
ORDER GRANTING VERIFIED PETITION TO ENFORCE IRS SUMMONS

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failed to comply with the Summons regarding Ms. Stenshoel-Sousa’s financial information. As a

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result, the Government filed the instant Petition to Enforce the Summons.

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On May 24, 2016, this Court issued an Order to Show Cause why the Summons should not

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be enforced, and on August 25, 2016, the parties appeared before Judge Edward J. Davila for a

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hearing on the matter. Dkt. Nos. 3, 12. Cade requests that the Court deny the Petition, or,

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alternatively, be given discovery and/or an evidentiary hearing. Resp. at 3. The Government

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opposes the request for discovery or an evidentiary hearing, and argues that Respondent “fail[ed]

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to raise any facts or evidence of bad faith to rebut Petitioner’s prima facie case” such that it would

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be entitled to discovery or a hearing. Reply at 3.

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United States District Court
Northern District of California

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Having reviewed the relevant pleadings and considered the arguments of counsel presented
at the hearing, the court finds, concludes, and orders as follows:
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The summons power is an investigative tool provided by Congress to enable the

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IRS to determine and assess all taxes due. 26 U.S.C. § 6201. The IRS is afforded significant

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authority to summons information necessary for investigative purposes. 26 U.S.C. § 7602; see

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United States v. Jose, 131 F.3d 1325, 1327 (9th Cir. 1997) (en banc). Specifically, the IRS is

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authorized to summon “any person having possession, custody, or care of books of account”

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relating to a taxpayer, or to summon “any other person” the IRS deems proper to produce

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information relevant to an inquiry. 26 U.S.C. § 7602(a)(2); see, e.g., Chen Chi Wang v. United

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States, 757 F.2d 1000, 1002 (9th Cir. 1985) (explaining that the IRS is invested with “broad

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powers to summon information relevant to determining the liability of any taxpayer.”). If the

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summoned party refuses to produce the requested information, the government may seek judicial

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enforcement of the summons in the district court. 26 U.S.C. § 7604. “The sole purpose of the

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enforcement proceeding is to ensure that the IRS has issued the summons for proper purpose and

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in good faith.” Jose, 131 F.3d at 1329 (citing United States v. Powell, 379 U.S. 48, 57–58 (1964)).

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2.

The IRS bears the initial burden of establishing a “good faith” basis for the

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summons by showing that the summons: (1) is issued for a legitimate purpose; (2) seeks

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information relevant to the purpose; (3) seeks information not already within the IRS’s possession;

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Case No.: 5:16-cv-01996-EJD
ORDER GRANTING VERIFIED PETITION TO ENFORCE IRS SUMMONS

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and (4) satisfies all of the administrative steps required by the Internal Revenue Code. Powell,

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379 U.S. at 57–58; Jose, 131 F.3d at 1327; United States v. Dynavac, Inc., 6 F.3d 1407, 1414 (9th

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Cir. 1993). The government’s burden in this regard is minimal, and generally may be satisfied by

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a declaration or affidavit from the investigating agent that the Powell requirements have been met.

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United States v. Cathcart, 409 F. App’x 74, 75 (9th Cir. 2010); see also United States v. Bell, 57 F.

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Supp. 2d 898, 906 (N.D. Cal. 1999). However, “[t]he government’s burden, while not great, is

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also not non-existent,” and if a summons is challenged, “it must be scrutinized by a court to

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determine whether it seeks information relevant to a legitimate investigative purpose.” United

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States v. Goldman, 637 F.2d 664, 667-68 (9th Cir.1980).

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3.

The party opposing enforcement of a summons may do so “on any appropriate

United States District Court
Northern District of California

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grounds,” including failure to satisfy the Powell requirements. Reisman v. Caplin, 375 U.S. 440,

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449 (1964). However, once the government establishes a prima facie case, a “heavy” burden then

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falls upon those opposing enforcement to show either an abuse of process or a lack of good faith.

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United States v. LaSalle Nat’l Bank, 437 U.S. 298, 316 (1978); Jose, 131 F.3d at 1328. “The

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[party opposing enforcement] must allege specific facts and evidence to support [its] allegations”

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of bad faith or improper purpose. Jose, 131 F.3d at 1328; (quoting Liberty Fin. Servs. v. United

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States, 778 F.2d 1390, 1392 (9th Cir. 1985)).

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4.

As part of a summons enforcement proceeding, the district court also has great

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discretion to limit or deny requests for discovery and evidentiary hearings. United States v.

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Stuckey, 646 F.2d 1369, 1373 (9th Cir. 1981); United States v. Church of Scientology of

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California, 520 F.2d 818, 821 (9th Cir. 1975). Discovery in a summons enforcement proceeding

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is the exception rather than the rule. Stuckey, 646 F.2d at 1374. While some circuits regularly

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allow pre-hearing discovery, the Ninth Circuit permits “limited discovery only if the [requesting

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party] can make a substantial preliminary showing of abuse or wrongdoing.” Id. (quoting Church

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of Scientology, 520 F.2d at 824). If the allegations by the party opposing enforcement of the

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summons are sufficient, a limited evidentiary hearing may be conducted. However, the party must

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be able to provide at least “a minimal amount of evidence” in order to justify an evidentiary

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Case No.: 5:16-cv-01996-EJD
ORDER GRANTING VERIFIED PETITION TO ENFORCE IRS SUMMONS

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hearing. Id. at 1372; see e.g., United States v. Popkin, 623 F.2d 108, 109 (9th Cir. 1980). The

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court may then decide if discovery is warranted. Stuckey, 646 F.2d at 1374.

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5.

Here, the Government alleges and submits the following as evidence that the

Summons satisfies the Powell requirements:
First, the Summons was issued for the legitimate purpose of aiding in the collection of
unpaid tax liabilities for Ms. Stenshoel-Sousa. See 26 U.S.C. § 7602(a); Pet. ¶¶ 3, 7.
Second, the Summons seeks information relevant to that purpose because the Government
believes that Cade is “in possession and control of records, papers and other data regarding income

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and other matters covered by [the Officer’s] inquiry,” and which can “reasonably be expected to

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assist in the ascertainment and/or collection of tax liabilities of Ms. Stenshoel-Sousa.” Pet. ¶¶ 5,

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United States District Court
Northern District of California

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7. Additionally, Magistrate Judge Beeler’s Report and Recommendation regarding Ms. Stenshoel-

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Sousa’s Petition to Quash further found: (1) Cade’s information may be relevant to determining

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“assets available to satisfy [Ms. Stenshoel-Sousa’s] tax liability because she apparently owns an

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interest in the company;” (2) Cade’s “possible repayment of Ms. Stenshoel-Sousa’s loans or

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mortgage is relevant to an evaluation of her overall level of income,” because “discharge of

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indebtedness is a form of income;” and (3) the information at issue “is relevant to collection now,

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despite the tax liability being assessed for years 2000-03.” Stenshoel-Sousa v. United States, No.

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16-MC-80009-LB, 2016 WL 2962891, at *3 (N.D. Cal. Apr. 7, 2016), report and recommendation

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adopted sub nom. Stenshoel - Sousa v. United States, No. 16-MC-80009-JD, 2016 WL 2939072

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(N.D. Cal. May 20, 2016); see 26 U.S.C. § 61(a)(12).

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Third, the IRS affirmatively asserts that the information sought by the Summons is not
already within the IRS’s possession or control. Pet. ¶ 5.
And fourth, the IRS states that it has satisfied all of the administrative steps required by the

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Internal Revenue Code. Pet. ¶ 11. Specifically, the IRS asserts that it properly served the

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Summons upon Respondent at its place of business, and Respondent admits it received service.

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Pet. ¶ 6, 10; Resp. ¶ 6.

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6.

The Court finds that the IRS has set forth a prima facie case satisfying the four

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Case No.: 5:16-cv-01996-EJD
ORDER GRANTING VERIFIED PETITION TO ENFORCE IRS SUMMONS

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Powell requirements and the burden now shifts to Cade to show an abuse of process or lack of

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good faith. However, Cade’s only argument is that it has “no evidence from which to evaluate the

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IRS’ and/or [Revenue Officer] Joe Smith’s purpose, conduct, administrative steps, and more.”

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Resp. at 2. From this, Cade summarily requests that the Petition be dismissed with prejudice. Id.

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at 3. Although counsel for Cade argued at the hearing on this matter that certain actions taken by

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the IRS toward Ms. Stenshoel-Sousa are suggestive of bad faith, Cade offered no specific facts or

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evidence to support such allegations, nor was this argument addressed by Respondent’s pleadings.

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See Liberty, 778 F.2d at 1392. Accordingly, the Court finds that Cade has not presented sufficient

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evidence of bath faith, nor has it offered facts or argument sufficient to rebut the Government’s
prima facie case.

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United States District Court
Northern District of California

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7.

As to Cade’s request that it be afforded discovery and/or an evidentiary hearing, the

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Court finds that Cade has failed to make a preliminary showing of bad faith or allege that

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enforcement of the summons would likely result in an abuse of the court’s process. See Stuckey,

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646 F.2d at 1374; Resp. at 2-3. Nor does Cade allege what relevant evidence it anticipates

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discovery would be likely to uncover in this case. See Resp. at 2-3.

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Based on the forgoing, the Court hereby GRANTS the Government’s Verified Petition to

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Enforce the IRS Summons served on Cade Corporation, and DENIES Respondent’s request for

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discovery and/or an evidentiary hearing.

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It is FURTHER ORDERED that Respondent is directed to obey the summons issued; to

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appear before Special Agent Joe Smith, or any other proper officer of the IRS, at such time and

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place as may hereafter be determined, to give testimony as demanded in the summons.

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The Clerk shall close this file.

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IT IS SO ORDERED.

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Dated: August 26, 2016
______________________________________
EDWARD J. DAVILA
United States District Judge

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Case No.: 5:16-cv-01996-EJD
ORDER GRANTING VERIFIED PETITION TO ENFORCE IRS SUMMONS