United States of America v. Hernandez

Filing 10

ORDER For Reassignment to a District Judge; REPORT AND RECOMMENDATION re 1 Petition to Enforce IRS Summonses. Signed by Magistrate Judge Howard R. Lloyd on 3/21/2017. (hrllc2, COURT STAFF) (Filed on 3/21/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

United States District Court
Northern District of California

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UNITED STATES OF AMERICA,
Petitioner,

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Case No.5:17-cv-00040-HRL
ORDER FOR REASSIGNMENT TO A
DISTRICT JUDGE

v.

REPORT RECOMMENDATION RE
PETITION TO ENFORCE IRS
SUMMONSES

JOSE HERNANDEZ,
Respondent.

Re: Dkt. No. 1
This matter is before the court on an order to show cause why respondent Jose Hernandez
should not be required to comply with Internal Revenue Service (IRS) summonses. Because not
all parties have consented to proceed before a magistrate judge, see 28 U.S.C. § 636(c) and Fed. R.
Civ. P. 73, the undersigned has prepared a report and recommendation as to the instant petition
and directs the Clerk of the Court to reassign this case to a district judge. Based upon the record
presented, as well as the discussion at the March 21, 2017 show cause hearing, this court
recommends that the petition be GRANTED.
BACKGROUND
According to the petition, the IRS is investigating the collection of respondent’s tax
liabilities for 2004-2007, 2009, and 2013-2015. (Pet. ¶ 3, Exs. A & B). The United States
(petitioner) believes that Hernandez has possession and control of records, documents and other

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information concerning the IRS’s inquiry, as to which the IRS has no access, possession or

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control. (See id. ¶ 5). As part of its investigation, petitioner served two summonses on

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respondent; and, the record before the court shows that service properly was made pursuant to 26

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U.S.C. § 7603.1 (Id. ¶ 6, Exs. A & B). However, Hernandez did not appear or produce testimony

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or records as requested by the summonses. (See id., ¶ 8). By letter dated December 1, 2016,

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respondent was given another opportunity to comply with the summonses by appearing for an

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appointment with Revenue Officer Angela Phillips on December 20, 2016. (Id. ¶ 9, Ex. C).

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According to the petition, Hernandez has still not complied. (Id. ¶ 10).
On January 5, 2017, petitioner filed the instant action to enforce the summonses. This

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court issued an order to show cause, setting a briefing schedule and a hearing for March 21, 2017.

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United States District Court
Northern District of California

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(Dkt. 7). The record shows that Hernandez was duly served with the verified petition and the

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order to show cause on February 2, 2017. (Dkt. 8). However, the court received no written

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response to the order to show cause, and Hernandez did not appear at the show cause hearing.

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DISCUSSION

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Under 26 U.S.C. § 7602(a), the IRS is authorized to issue a summons relevant to the

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investigation of any taxpayer’s liability. Summons may be issued for the purposes of

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“ascertaining the correctness of any return, making a return where none has been made,

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determining the liability of any person for any internal revenue tax or . . . collecting any such

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liability . . ..” 26 U.S.C. § 7602(a); see also Crystal v. United States, 172 F.3d 1141, 1143 (9th

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Cir. 1999) (quoting 26 U.S.C. § 7602(a)). To enforce a summons, the IRS must first establish

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“good faith” by showing that the summons (1) is issued for a legitimate purpose; (2) seeks

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information relevant to that purpose; (3) seeks information that is not already in the IRS’s

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possession; and (4) satisfies all of the administrative steps set forth in the Internal Revenue Code.

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United States v. Powell, 379 U.S. 48, 57-58 (1964). “‘The government’s burden is a slight one,

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Title 26 United States Code, Section 7603 provides that service of summons shall be made “by
an attested copy delivered in hand to the person to whom it is directed, or left at his last and usual
place of abode.” 26 U.S.C. § 7603(a). Further, “the certificate of service signed by the person
serving the summons shall be evidence of the facts it states on the hearing of an application for the
enforcement of the summons.” Id.
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and may be satisfied by a declaration from the investigating agent that the Powell requirements

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have been met.’” Crystal, 172 F.3d at 1144 (quoting United States v. Dynavac, Inc., 6 F.3d 1407,

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1414 (9th Cir. 1993)). “The burden is minimal ‘because the statute must be read broadly in order

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to ensure that the enforcement powers of the IRS are not unduly restricted.’” Id. (quoting Liberty

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Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir. 1985)).

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Once the government has met its burden in establishing the Powell elements, if the
taxpayer chooses to challenge the enforcement, he bears a heavy burden to show an abuse of

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process or lack of good faith on the part of the IRS. Indeed, “‘[e]nforcement of a summons is

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generally a summary proceeding to which a taxpayer has few defenses.’” Crystal, 172 F.3d at

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1144 (quoting United States v. Derr, 968 F.2d 943, 945 (9th Cir. 1992)). “‘The taxpayer must

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United States District Court
Northern District of California

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allege specific facts and evidence to support his allegations of bad faith or improper purpose.’” Id.

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(quoting United States v. Jose, 131 F.3d 1325, 1328 (9th Cir. 1997)). As explained by the Ninth

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Circuit:

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The taxpayer may challenge the summons on any appropriate grounds,
including failure to satisfy the Powell requirements or abuse of the court’s
process. Such an abuse would take place if the summons had been issued
for an improper purpose, such as to harass the taxpayer or to put pressure on
him to settle a collateral dispute, or for any other purpose reflecting on the
good faith of the particular investigation. In addition, it has become clear
since Powell that gathering evidence after having decided to make a
recommendation for prosecution would be an improper purpose, and that
the IRS would be acting in bad faith if it were to pursue a summons
enforcement under these circumstances. While neither the Powell elements
nor the LaSalle requirements is an exhaustive elaboration of what good faith
means, still the dispositive question in each case is whether the Service is
pursuing the authorized purposes in good faith.
Id. at 1144-45 (internal quotes and citations omitted).
While the government’s burden is not great, it is not necessarily satisfied by an agent’s

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mere assertion of relevance. United States v. Goldman, 637 F.2d 664, 667 (9th Cir. 1980). Once a

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summons is challenged, it must be scrutinized by the court to determine whether it seeks

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information relevant to a legitimate investigative purpose, and the court may choose either to

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refuse enforcement or narrow the scope of the summons. Id. at 668.

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In the instant case, petitioner has met its burden of showing that the Powell elements have
been satisfied, largely through the verification of the petition by Revenue Officer Phillips. See
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Crystal 172 F.3d at 1144 (stating that it was undisputed that the special agent’s declaration

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satisfied the Powell requirements and that the government therefore “established a prima facie

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case to enforce the summonses”); Dynavac, Inc., 6 F.3d at1414 (stating that the government’s

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burden “may be satisfied by a declaration from the investigating agent that the Powell

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requirements have been met.”); United States v. Bell, 57 F. Supp.2d 898, 906 (N.D. Cal. 1999)

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(“The government usually makes the requisite prima facie showing by affidavit of the agent.”).

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Here, the verified petition indicates that the IRS’s investigation is being conducted for a

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legitimate purpose of ascertaining respondent’s assets and liabilities as part of an effort to

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investigate federal tax liabilities for certain periods of time. (Pet. ¶ 3). The summonses are
relevant to that purpose and asks respondent to appear and bring with him documents pertaining to

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United States District Court
Northern District of California

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his assets and liabilities (e.g., bank statements, checkbooks, canceled checks, saving account

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passbooks, and records or certificates of deposit). (See id., Exs. A & B). The petition further

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indicates that the information is not already in the IRS’s possession, that there has been no referral

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for criminal prosecution of this matter, and that all administrative steps required by the internal

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Revenue Code for the issuance of the summons have been taken. (Id. ¶¶ 5, 7, 11-12).

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Because petitioner has met its burden in establishing the Powell elements, the burden shifts

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to Hernandez to disprove the actual existence of a valid civil tax determination or collection

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purpose. As discussed above, he did not file any response to the order to show cause and did not

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appear at the show cause hearing. This court therefore finds that he has not met his burden of

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showing an abuse of process or lack of good faith on the part of the IRS and recommends that the

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verified petition to enforce the IRS summonses be granted. In any event, at the motion hearing,

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petitioner advised that it has been in contact with Hernandez’s accountant, who reports that

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Hernandez is willing to cooperate with the government to resolve this matter.

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Based on the foregoing, this court ORDERS the Clerk of the Court to reassign this case to

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a district judge, with the RECOMMENDATION that the petition be granted and that an order be

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issued enforcing the IRS summonses and directing Hernandez to appear before the IRS on a date

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certain to provide testimony and produce the requested documents and records.

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Any party may file objections to this report and recommendation with the district judge
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within 14 days after being served with a copy. See 28 U.S.C. § 636(b)(1)(B), (C); Fed. R. Civ. P.

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72. Petitioner is directed to promptly serve a copy of this report and recommendation on Hernandez

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and to file a proof of service with the court.

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Dated: March 21, 2017

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HOWARD R. LLOYD
United States Magistrate Judge

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United States District Court
Northern District of California

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5:17-cv-00040-HRL Notice has been electronically mailed to:
Thomas Moore [e-mail], [e-mail],
[e-mail], [e-mail]

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United States District Court
Northern District of California

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