Hawaii Pacific Finance, Ltd. v. United States of America, Department of Treasury, Internal Revenue Service

Filing 32

ORDER ADOPTING IN PART AND MODIFYING IN PART FINDINGS AND RECOMMENDATION THAT HAWAII PACIFIC FINANCE, LTD.'S PETITION TO QUASH IRS SUMMONSES BE DENIED AND THAT THE UNITED STATES PETITION TO ENFORCE IRS SUMMONSES BE GRANTED. Signed by JUDGE DERR ICK K. WATSON on 8/4/2014. - in case 1:13-cv-00692-DKW-RLP 25 ; in case 1:14-cv-00058-DKW-RLP 17 . ~ The Court hereby orders that: 1. Hawaii Pacific Finance, Ltd.'s Petition to Quash Internal Revenue Summonses is DENIED; 2. The United States' Petition to Enforce Internal Revenue Summonses is GRANTED; 3. Respondents are not entitled to an evidentiary hearing to explore their theories of improper purpose, see LaSalle Nat'l Bank, 437 U.S. at 316; 4. The IRS Summonses served upon Carolyn Richey, President of Hawaii Pacific Finance, Ltd., shall be enforced and she shall obey the Summonses in full; 5. Carolyn Richey, President of Hawaii Pacific Finance, Ltd., is directed to produce all documents re sponsive to the IRS Summonses by August 29, 2014 the Magistrate Judge's previously ordered compliance date of July 24, 2014 is vacated; and 6. Should Carolyn Richey, President of Hawaii Pacific Finance, Ltd., fail to fulfill the requirem ents of this order, the United States may move for a hearing on motion for contempt of this Court's order. Associated Cases: 1:13-cv-00692-DKW-RLP, 1:14-cv-00058-DKW-RLP(ecs, )CERTIFICATE OF SERVICEP articipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAI`I

HAWAII PACIFIC FINANCE, LTD.,

CIVIL NO. 13-00692 DKW-RLP
CIVIL NO. 14-00058 DKW-RLP

Petitioner,
[Consolidated]
vs.
UNITED STATES OF AMERICA,
DEPARTMENT OF TREASURY
INTERNAL REVENUE SERVICE,
Respondent.
_______________________________
UNITED STATES OF AMERICA,
Petitioner,
vs.
CAROLYN RICHEY, PRESIDENT,
HAWAII PACIFIC FINANCE, LTD.
Respondent.

ORDER ADOPTING IN PART AND
MODIFYING IN PART FINDINGS
AND RECOMMENDATION THAT
HAWAII PACIFIC FINANCE,
LTD.’S PETITION TO QUASH IRS
SUMMONSES BE DENIED AND
THAT THE UNITED STATES’
PETITION TO ENFORCE IRS
SUMMONSES BE GRANTED

ORDER ADOPTING IN PART AND MODIFYING IN PART
FINDINGS AND RECOMMENDATION THAT HAWAII PACIFIC
FINANCE, LTD.’S PETITION TO QUASH IRS SUMMONSES
BE DENIED AND THAT THE UNITED STATES’ PETITION
TO ENFORCE IRS SUMMONSES BE GRANTED
INTRODUCTION
Hawaii Pacific Finance (“HPF”) objects to the Magistrate Judge’s
June 26, 2014 Findings and Recommendation (“F&R”) denying its Petition to
Quash IRS Summonses and granting the United States’ Petition to Enforce IRS
Summonses. Because the Magistrate Judge correctly determined that the United
States established a prima facie case for enforcement, and HPF fails to raise a
plausible inference that the IRS Summonses were issued in bad faith, the Court
overrules HPF’s objections and ADOPTS IN PART and MODIFIES IN PART the
Findings and Recommendation.
BACKGROUND
This consolidated action involves two summonses served on
November 25, 2013, issued to Carolyn Richey as President of HPF. The first
summons was in the matter of Hawaii Pacific Finance, Ltd., seeking HPF records
relating to its Form 1120 for several successive annual fiscal periods (“HPF
Summons”). The second summons was issued in the matter of Wagdy A.

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Guirguis, a debtor of HPF. (“Guirguis Summons”). HPF has filed a Petition to
Quash and the United States has filed a Petition to Enforce the Summonses in the
consolidated actions.
According to Richey, in 2001, HPF purchased a note and security
interests with Guirguis as debtor. In October 2012, the Internal Revenue Service
(“IRS”) issued a summons to HPF in the matter of Wagdy A. Guirguis seeking
documents and records. On November 21, 2012, HPF complied with the
summons. HPF next had contact with the IRS when Revenue Officer Ralph Fuller
attempted to levy upon rental proceeds from real property owned by Guirguis that
is secured by a first priority mortgage in favor of HPF. HPF asserted that its lien
rights to the rental proceeds were superior to those of the IRS. 6/12/14 Richey
Decl. ¶¶ 4-10.
An interpleader action commenced to determine the rights of HPF and
the IRS to the rental proceeds, and was removed to this district court on October 9,
2013 as Century 21 Liberty Homes v. United States of America, et al., Civ. No. 1313-00518 LEK-RLP (“Century 21 Action”). On April 7, 2014, according to the
Stipulation to Distribute Funds and Order filed in the Century 21 Action, HPF filed
a notice of disclaimer to the funds at issue, leaving the United States as the only
party with claims to the funds. Civ. No. 13-00518 LEK-RLP, Dkt. Nos. 29, 32.

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On May 30, 2014, the Century 21 Action was dismissed with prejudice, by
stipulation of the parties. Civ. No. 13-00518 LEK-RLP, Dkt. No. 34.
Richey claims that while the Century 21 Action was pending,
Revenue Officer Fuller contacted her by telephone and inquired “whether HPF’s
tax returns were filed, which information was already in the possession of the
IRS.” 6/12/14 Richey Decl. ¶ 14. She claims that:
Fuller also stated to me that he would pull her personal returns.
Fuller also told me that this could become a serious matter and
that I could ‘go to jail for a long time.’ I believed the
communication from Mr. Fuller to be a threat against HPF and
me, personally, if HPF continued to maintain its lien priority
over the IRS. Without first ever requesting that HPF
voluntarily provide documents, the IRS, through Fuller, issued
two summonses to HPF dated November 25, 2013.
6/12/14 Richey Decl. ¶¶ 15-19.
Revenue Officer Fuller, on the other hand, asserts that:
I explained to Carolyn Richey that refusal to comply with a
summons served upon her by the Internal Revenue Service may
result in a summons enforcement proceeding wherein a court
could order enforcement of the summons and could hold her in
contempt for refusal to comply; however, I made no statement
as to whether or not she would go to jail as a result of failing to
comply. . . .
[T]he summonses issued to Carolyn Richey were not intended
as a threat against Petitioner or against Ms. Richey in any way.
...
I am unaware of any criminal investigation with respect to
either Petitioner or Carolyn Richey.
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4/1/14 Fuller Decl. ¶¶ 16-18.
On December 16, 2013, HPF filed a Petition to Quash the
Summonses, and on February 3, 2014, the United States filed an action against
HPF and Richey (“Respondents”) to enforce the Summonses. The Magistrate
Judge held a hearing on the Petition to Quash and the Petition to Enforce the
Summonses on June 26, 2014. In the F&R, the Magistrate Judge found that the
IRS established that the Summonses were issued in good faith, and that HPF failed
to plausibly raise an inference of bad faith. HPF objects to the F&R because the
Magistrate Judge “enforced the summonses, and refused to quash them, without an
evidentiary hearing as to the legitimate purposes of the summonses.” Obj. at 1.
STANDARD OF REVIEW
When a party objects to a magistrate judge’s findings or
recommendations, the district court must review de novo those portions to which
the objections are made and “may accept, reject, or modify, in whole or in part, the
findings or recommendations made by the magistrate judge.” 28 U.S.C.
§ 636(b)(1); see also United States v. Raddatz, 447 U.S. 667, 673 (1980); United
States v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003) (en banc) (“[T]he
district judge must review the magistrate judge’s findings and recommendations de
novo if objection is made, but not otherwise.”).

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Under a de novo standard, this Court reviews “the matter anew, the
same as if it had not been heard before, and as if no decision previously had been
rendered.” Freeman v. DirecTV, Inc., 457 F.3d 1001, 1004 (9th Cir. 2006); see
also United States v. Silverman, 861 F.2d 571, 576 (9th Cir. 1988). The district
court need not hold a de novo hearing. However, it is the Court’s obligation to
arrive at its own independent conclusion about those portions of the magistrate
judge’s findings or recommendation to which a party objects. United States v.
Remsing, 874 F.2d 614, 616 (9th Cir. 1989).
DISCUSSION
HPF does not object to the lion’s share of the Magistrate Judge’s
findings and recommendations. To that extent, the F&R is adopted as it were
issued by this Court. Reyna-Tapia, 328 F.3d at 1121.
To the extent HPF objects, it does so on the grounds that the
Magistrate Judge: (1) did not consider Revenue Officer Fuller’s threat to pull
Richey’s personal tax returns; (2) improperly adopted Revenue Officer Fuller’s
explanation of the alleged threat of jail time; and (3) misconstrued the evidence
regarding the lien disputes. Notwithstanding these objections, the Court agrees
with the Magistrate Judge that an evidentiary hearing is not warranted, and that the
Summonses should be enforced.

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I.

Adoption Of The F&R: No Objection By Respondents
The Court adopts the following findings made by the Magistrate

Judge without objection:
1.

The IRS is conducting an investigation to determine HPF’s federal tax
liabilities for the years 2002 through 2012.

2.

The IRS is conducting an investigation to determine the federal tax
liabilities for the trust fund recovery penalty under I.R.C. § 6672 for
Wagdy A. Guirguis for the tax periods ending March 31, 1999,
September 30, 1999, December 31, 1999, March 31, 2000, June 30,
2000, September 30, 2000, December 31, 2000, March 31, 2001, June
30, 2001, September 30, 2001, December 31, 2001, and June 30,
2010.

3.

On November 25, 2013, the IRS served two duly issued summonses
on Carolyn Richey, President of HPF, which directed Ms. Richey to
appear before IRS Revenue Officer Fuller on January 7, 2014, to
testify and produce certain books,
records, papers, and other data related to HPF and related to Wagdy
A. Guirguis as described in the summonses.

4.

As President of HPF, Ms. Richey had access to records pertaining to
HPF’s returns or returns-related information.
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5.

As President of HPF, Ms. Richey had access to financial records
relating to the collection of the tax liabilities for Wagdy A. Guirguis,
who indicated to the IRS that he owes significant monetary amounts
to HPF for outstanding loans.

6.

Ms. Richey filed a Petition to Quash the Summonses on December 16,
2013.

7.

Ms. Richey did not appear before Revenue Officer Fuller on January
7, 2014, and did not produce certain books, records, papers, and other
data described in the summonses.

8.

Ms. Richey’s failure to comply with the IRS summonses continued
until February 3, 2014, when the United States filed the Petition to
Enforce and the court issued the Order to Show Cause.

9.

On February 10, 2013, the Petition and the Order to Show Cause were
served on Christopher J. Muzzi, attorney for HPF.

10.

HPF has failed to make a showing of facts that give rise to a plausible
inference of improper motive.

F&R 9-11.
II.

Respondents’ Objections Based On Improper Purpose
Based on the enumerated objections, the primary issue before the

Court is whether Respondents have met their burden of showing bad faith
8

sufficient to require a limited evidentiary hearing. The Magistrate Judge found that
that they did not, and this Court agrees.
A.

Legal Framework
The IRS has the burden of establishing a prima facie case for

enforcement. United States v. Powell, 379 U.S. 48, 57-58 (1964). The IRS must
show that the summons (1) is issued for a legitimate purpose; (2) seeks information
relevant to that purpose; (3) seeks information that is not already within the IRS’s
possession; and (4) satisfies all administrative steps required by the United States
Code. Id. The IRS’s burden is “slight” and generally can be met by a sworn
declaration of the revenue agent who issued the summons that the Powell
requirements have been met. Fortney v. United States, 59 F.3d 117, 120 (9th Cir.
1995). Once the IRS has met its burden, the taxpayer faces the “heavy” burden of
showing an “abuse of process” or “lack of institutional good faith.” Id. An abuse
of process occurs “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.”
Powell, 379 U.S. at 58.
The United States Supreme Court, in United States v. Clarke, 134 S.
Ct. 2361, 2365 (2014), recently held “that a bare allegation of improper purpose
does not entitle a taxpayer to examine IRS officials. Rather, the taxpayer has a
9

right to conduct that examination when he points to specific facts or circumstances
plausibly raising an inference of bad faith.” Clarke explains that:
As part of the adversarial process concerning a summons’s
validity, the taxpayer is entitled to examine an IRS agent when
he can point to specific facts or circumstances plausibly raising
an inference of bad faith. Naked allegations of improper
purpose are not enough: The taxpayer must offer some credible
evidence supporting his charge. But circumstantial evidence
can suffice to meet that burden; after all, direct evidence of
another person’s bad faith, at this threshold stage, will rarely if
ever be available. And although bare assertion or conjecture is
not enough, neither is a fleshed out case demanded: The
taxpayer need only make a showing of facts that give rise to a
plausible inference of improper motive. That standard will
ensure inquiry where the facts and circumstances make inquiry
appropriate, without turning every summons dispute into a
fishing expedition for official wrongdoing.
Id. at 2367-68.
Where the evidence of improper purpose includes conduct by
individual agents, the party opposing enforcement must demonstrate that the
institutional posture of the IRS was infected by the agent’s improper motives, as
follows:
To substantiate their claim that the Service’s conduct
demonstrates bad faith such that enforcement of the summonses
would amount to an abuse of process, the petitioners must show
that the IRS, as an institution, issued the summonses with some
illegitimate intent or that particular agents’ motives “infected
the institutional posture of the IRS.” 2121 Arlington Heights
Corp. v. I.R.S., 109 F.3d 1221, 1226 (7th Cir. 1997), citing
United States v. LaSalle Nat’l Bank, 437 U.S. 298, 316, 98
S.Ct. 2357, 57 L.Ed.2d 221 (1978).
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Cohen v. United States, 306 F. Supp. 2d 495, 505-06 (E.D. Pa. 2004).
B.

Analysis
1.

The IRS Has Established a Prima Facie Case

The Court agrees with the Magistrate Judge’s discussion and findings
that the IRS has satisfied the Powell factors, as set forth below:
Here, the Court finds that the IRS has demonstrated that the
Powell requirements have been met. The IRS submitted the
declaration of Revenue Officer Fuller, who issued the
Summonses, establishing that the Summonses meet the four
Powell requirements. See ECF No. 16-1, Fuller Decl.
Specifically, Revenue Officer Fuller’s declaration establishes
that:
(1) the Summonses were issued for a legitimate purpose as part
of the IRS’s investigation to determine HPF’s federal tax
liabilities for the calendar years 2002 through 2012 and the
IRS’s investigation to determine the federal tax liabilities for
the trust fund recovery penalty under I.R.C. § 6672 for Wagdy
A. Guirguis for the tax periods ending March 31, 1999,
September 30, 1999, December 31, 1999, March 31, 2000, June
30, 2000, September 30, 2000, December 31, 2000, March 31,
2001, June 30, 2001, September 30, 2001, December 31, 2001,
and June 30, 2010;
(2) the information sought through the Summonses may be
relevant to these investigations to help the IRS determine the
correct federal tax liabilities of HPF and to help the IRS
ascertain Wagdy A. Guirguis’s overall financial situation to
assist in collecting his federal tax liabilities;
(3) At the time the Summonses were issued they sought
documents not already within the IRS’s possession; and
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(4) all administrative requirements have been met with regard to
the summons.
F&R at 3-4. Because the IRS has made a prima facie case for enforcement, the
burden shifts to Respondents to show an “abuse of process” or the “lack of
institutional good faith.” Fortney, 59 F.3d 117 at 120.
2.

HPF Fails to Demonstrate Bad Faith or Improper Process

Upon careful review of the specific objections raised by Respondents,
the Court concludes that they have not plausibly raised an inference of bad faith.
The Court first addresses HPF’s contentions that the F&R does not
address “how it ever could have been acceptable for [Revenue Officer] Fuller to
threaten to pull Ms. Richey’s personal tax returns, or why that would not at least be
the minimal evidence of bad faith requiring a hearing under Fortney,” and that the
F&R “accepts Fuller’s explanation and description of his threat of jail time,
without admitting that in doing so [it] was in essence weighing the credibility of
the witnesses.” Obj. at 1516. Even assuming Richey’s version of events is true,
the alleged statements do not establish an improper purpose by the IRS. That is so
because it is the “institutional posture” of the IRS that must be examined; the
personal intent of a single agent, while relevant, is not dispositive. LaSalle Nat’l
Bank, 437 U.S. at 316 (citing Groder v. United States, 816 F.2d 139, 144 (4th Cir.
1987)). Courts have emphasized that “the line between enforceable and
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unenforceable summonses should not be ‘drawn . . . on the basis of the agent’s
personal intent.’” United States v. Millman, 822 F.2d 305, 308 (2d Cir. 1987)
(quoting LaSalle Nat’l Bank, 437 U.S. at 316). Instead, the purpose of the good
faith inquiry “is to determine whether the agency is honestly pursuing the goals of
§ 7602 by issuing the summons.” LaSalle Nat’l Bank, 437 U.S. at 316 (emphasis
added); see also Millman, 822 F.2d at 309 (A person challenging an IRS summons
“must show the absence of a valid purpose underlying the summons, and must do
so by reference to the IRS’s institutional posture. . . .”).
The Ninth Circuit, interpreting Groder, emphasized that bad faith is
“not simply an agent acting unreasonably or unsatisfactorily.” Crystal v. United
States, 172 F.3d 1141, 1149 (9th Cir. 1999); see also Groder, 816 F.2d at 145
(rejecting taxpayer’s attempt to introduce a “reasonable agent” standard into the
bad faith inquiry). Indeed, even if the motivation of an individual IRS agent is
suspect, the summons may nevertheless be enforced absent a showing that the
improper motivation somehow “infected the institutional posture of the IRS.”
Crystal, 172 F.3d at 1150 (quoting 2121 Arlington Heights Corp. v. IRS, 109 F.3d
1221, 1226 (7th Cir. 1997)). At most, Fuller’s alleged threats to pull Richey’s
personal tax returns, or that she could “go to jail for a long time,” constitute tough
language. Such “tough language” did not warrant an inference of bad faith in 2121
2121 Arlington Heights Corp. In that case, the Seventh Circuit found that an
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agent’s purported threat to ruin the respondent’s business was insufficient to
compel a finding of bad faith on the part of the IRS as an institution. 109 F.3d at
1225-26. Instead, the court determined that such remarks amounted to “tough
language” that was “simply not enough to show bad faith on the part of the
government.” Id. at 1226. In fact, unprofessional conduct by an individual agent,
including making comments identical to those allegedly made here, has been found
to be insufficient to show bad faith on the part of the IRS:
The Respondents also, in attempting to show harassment, put
forth evidence of the Agent’s statements about Respondents
going to jail and the possibility of opening other audits. These,
too, are insufficient to show bad faith through improper
purpose. “The real issue presented is not whether the taxpayer
perceived the Agent’s actions as threats, but whether there is a
legitimate purpose for the investigation.” United States v. Tex.
Inst., 755 F.2d 469, 479 (5th Cir. 1985), overruled on other
grounds by United States v. Barrett, 837 F.2d 1341 (5th Cir.
1988). The Court does not condone the manner in which the
Agent apparently communicated with Mr. Doyle, in particular.
But unprofessionalism, or even inappropriate expressions of
hostility, perhaps born of frustration, do not equate to
harassment and retaliation.
United States v. Doyle, 2007 WL 2670057, at *5 (D. Kan. Sept. 7, 2007) (footnote
omitted). Accordingly, even assuming that Revenue Officer Fuller’s conduct was
suspect, there is no evidence in the record that it infected the institutional posture
of the IRS.

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Finally, even if Revenue Officer Fuller’s statements were somehow
false or misleading, Respondents did not suffer any harm as a result. Unlike the
taxpayers in Crystal, Respondents did not voluntarily disclose any information in
detrimental reliance upon an agent’s statement. Rather, in the present case,
Respondents refused to turn over any documents and moved to quash. The Court
acknowledges Richey’s belief that the communications from Revenue Officer
Fuller were “a threat against HPF and her, personally,” and that “Fuller’s action
simply crossed the line.” Opp. to Petition to Enforce at 1-2. As discussed above,
however, the “standard focuses on the institutional posture of the Service instead of
on the motivation of individual agents.” United States v. Stuckey, 646 F.2d 1369,
1375 (9th Cir. 1981).
Next the Court turns to Respondents’ argument that the F&R fails to
consider a pattern of “ongoing lien disputes in which the summonses (made after
the first such dispute arose) could be evidence of bad faith.” Obj. at 16. This
argument implies that the IRS issued the Summonses to put pressure on
Respondents to settle a collateral dispute. The F&R notes that “the Summonses
were issued thirteen days after the IRS filed its answer in the Century 21 Action.”
There is no dispute, however, that the Century 21 Action has been dismissed. F&R
6. The Court agrees with the Magistrate Judge’s finding that:

15

HPF has not presented sufficient evidence to plausibly raise an
inference of bad faith as to the IRS’s purpose for issuing the
Summonses. As HPF concedes, the Century 21 Action was
dismissed by stipulation of the parties. The stipulation was
entered into after HPF filed a notice of disclaimer to the funds
at issue and the parties entered into a stipulation to distribute
the funds. There is absolutely no indication in the record that
the disclaimer or stipulations in the Century 21 Action were
based on duress or entered into because of any pressure put on
HPF by the IRS.
F&R 6. Indeed, if the IRS’s purpose in issuing the Summonses was to gain an
advantage in the action that has now been dismissed for more than two months,
one would expect the IRS’s enforcement efforts to wane. That has not been the
case.
To the extent Respondents claim that the Summonses were issued to
gain an advantage in a second interpleader action involving lien priorities – see
Civ. No. 14-00256 JMS-BMK, filed by the City and County of Honolulu against
defendants GMP Hawaii, Inc., HPF, and the IRS – that claim makes even less
sense. See F&R 6-7 n.3. The second interpleader action was not filed until May
29, 2014, six months after the Summonses issued. Clearly then, this second action
could not have motivated the issuance of the Summonses six months prior.
CONCLUSION
On the basis of the foregoing, and after careful de novo review and
consideration of the Findings and Recommendation and record in this matter, the
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Court hereby OVERRULES HPF’s Objections and ADOPTS IN PART and
MODIFIES IN PART the Magistrate Judge’s June 26, 2014 Findings and
Recommendation That Hawaii Pacific Finance, Ltd.’s Petition to Quash IRS
Summonses Be Denied and that the United States’ Petition to Enforce IRS
Summonses Be Granted. The Court hereby orders that:
1.

Hawaii Pacific Finance, Ltd.’s Petition to Quash Internal Revenue
Summonses is DENIED;

2.

The United States’ Petition to Enforce Internal Revenue Summonses
is GRANTED;

3.

Respondents are not entitled to an evidentiary hearing to explore their
theories of improper purpose, see LaSalle Nat’l Bank, 437 U.S. at
316;

4.

The IRS Summonses served upon Carolyn Richey, President of
Hawaii Pacific Finance, Ltd., shall be enforced and she shall obey the
Summonses in full;

5.

Carolyn Richey, President of Hawaii Pacific Finance, Ltd., is directed
to produce all documents responsive to the IRS Summonses by
August 29, 2014 – the Magistrate Judge’s previously ordered
compliance date of July 24, 2014 is vacated; and

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6.

Should Carolyn Richey, President of Hawaii Pacific Finance, Ltd., fail
to fulfill the requirements of this order, the United States may move
for a hearing on motion for contempt of this Court’s order.
IT IS SO ORDERED.
DATED: August 4, 2014 at Honolulu, Hawai’i.

________________________________________________________________
Hawaii Pacific Finance, Ltd. v. U.S., Civ. Nos. 13-00692 DKW-RLP, 14-0058
DKW-RLP; ORDER ADOPTING IN PART AND MODIFYING IN PART
FINDINGS AND RECOMMENDATION
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