The United States of America v. Malhas
Filing
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MEMORANDUM Opinion and Order Signed by the Honorable Amy J. St. Eve on 11/10/2015:Mailed notice(kef, )
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA,
Plaintiff,
v.
WADE MALHAS,
Defendant.
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No. 15-cv-3932
Judge Amy J. St. Eve
MEMORANDUM OPINION AND ORDER
On November 5, 2015, the Court held an evidentiary hearing where Defendant had the
burden of showing that he is not in possession or custody of the documents and records the
Internal Revenue Service (IRS) sought in its summons. Defendant failed to satisfy his burden,
and the Court grants the IRS’s motion to enforce its summons. Defendant must comply with the
summons and turn over all requested documents and records to the IRS by January 12, 2016.
BACKGROUND
The Internal Revenue Service (“IRS”) is investigating Wade Malhas’s (“Malhas”) tax
liability for the years 2006 through 2008. (R. 2 at 1.) Specifically, the IRS is investigating
Malhas’s “tax deficiencies due to the establishment of undisclosed offshore accounts and foreign
entities.” (R. 23 at 2.)
On April 8, 2014, the IRS issued a summons (“summons”) through Revenue Officer A.
Segally directing Malhas to “testify and to produce books, records, and other data[.]” (R. 2 at 2.)
On May 1, 2014, Malhas appeared in response to the summons; however, he failed to produce
any documents. (R. 2, Ex. A at 3, ¶ 8.) After a “last chance letter” and an extension of time,
Malhas failed to appear. (R.2 at 2.) As a result, the United States filed a “Petition to Enforce
IRS Summons” on May 4, 2015 (R. 2.) and a “Motion for an Order to Show Cause” on May 5,
2015. (R. 4.) On May 11, 2015, Malhas filed a “Response to United States’ Motion for an Order
to Show Cause,” arguing that “he had no documentation regarding foreign accounts as requested
in the IRS Summons”—known as the “lack of possession” defense. (R. 7 at 1.) On May 21,
2015, Malhas filed an affidavit to support his lack of possession defense. (R. 10.) Ultimately, on
May 29, 2015, the Court denied the Government’s “Motion for an Order to Show Cause” and
dismissed its “Petition to Enforce IRS Summons.” (R. 12.)
On June 26, 2015, the Government filed a motion for the Court to reconsider its ruling
regarding the “Motion for An Order to Show Cause.” (R. 14.) In support of its motion, the
Government provided evidence and affidavits alleging Malhas was the beneficial owner of the
accounts at issue, continued to make direct investments and withdrawals from the account during
the relevant time frame, and had power of attorney over the accounts. (R. 14 at 4, Exs. A-M.)
Put differently, the Government argued that Malhas failed to meet his “heavy burden” to
successfully allege the “lack of possession” defense. (Id. at 2.) On July 1, 2015, the Court
granted in part and denied in part the Government’s Motion to Reconsider. (R. 17.)
On July 10, 2015, Malhas filed an affidavit, claiming again that the documents were not
in his possession, custody, or control. (R. 18 at 1.) Further, Malhas alleged that he had “taken
all reasonable steps to confirm” that the documents were not in his custody. (Id.)
On September 10, 2015, the government filed a Second Motion for an Order to Show
Cause repeating the allegations from its first motion and citing, in part, Malhas’s deposition
taken on August 5, 2015. (R. 23.) The government argued Malhas’s “blanket assertion[s]” were
“not true” and failed to show “categorically and in detail why he is unable to comply.” (R. 23 at
7.) On September 25, 2015, Defendant Malhas filed a Response. (R. 26.) Malhas pointed, for
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the first time, to Exhibits F, G, L, and M from the government’s Motion for Reconsideration.
Specifically, Malhas argued that his control over the bank account at issue was cancelled on
August 3, 2004 when a third party he has never met, Ms. Moosleeithner-Batliner, became an
authorized signator and cancelled “the authorized signatory of Dr. Malhas.” (R. 26 at 3.)
Further, Malhas alleged that the bank transferred all assets from the account at issue to “Banque
Baring Brothers Sturdaza” on September 24, 2008, rendering any attempt to contact “UBS for
account documents . . . useless.” (Id.)
On October 8, 2015, the Court determined that the IRS had demonstrated good faith in
issuing its summons against Malhas. (R. 28 at 3, citing United States v. Powell, 379 U.S. 48, 5758, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964)). The Court further concluded that Malhas had made
“some threshold showing” in support of his affirmative defense. (Id. at 4, citing United States v.
Kis, 658 F.2d 526, 539, n. 39 (7th Cir. 1981).) Thus, the Court scheduled an evidentiary hearing
for November 5, 2015 to give Malhas the opportunity to establish his affirmative defense.
On November 3, 2015, however, Malhas filed an emergency motion requesting the Court
to extend the November 5 evidentiary hearing for sixty days so that he could “take further steps
to confirm that he is unable to comply with the IRS summons.” (R. 29 at 2.) Specifically,
Malhas argued that he “intend[ed] to issue written requests to both the Union Bank of
Switzerland (UBS) and Banque Baring Brothers Sturdaza to forward to him, with a copy to the
IRS, all records, statements and documents regarding any and all non-U.S. accounts, pertaining
to Dr. Malhas . . . for the calendar years 2006, 2007, and 2008. (Id.) At the November 4, 2015
emergency motion hearing, Malhas acknowledged that, despite being approached by the IRS as
early as early 2012 and learning of the November 5 evidentiary hearing on October 8, he had yet
to make such contact with the banks at issue. Further, Malhas argued that the documents were
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likely relevant, as he expected that some of the documents the banks could produce would go
toward compliance with the IRS’s summons. The Court denied Malhas’s request to continue the
November 5 evidentiary hearing. The Court further noted its surprise that Malhas had not
previously sought these documents from the banks at issue.
The hearing took place on November 5. At the November 5 evidentiary hearing, Malhas
made two arguments, in relevant part: 1) the IRS in fact possessed the requested documents,
thereby rendering its petition invalid under the third Powell factor and 2) Malhas had previously
shown that he was no longer in possession of the documents at issue through the signatory and
asset-transfer documents described in his September 25 Response. Significantly, Malhas
presented no evidence to support either argument at the hearing. The IRS’s relevant response
was two-fold: 1) the IRS’s petition was valid under Powell, as the Court ruled in its October 8
Order, because the IRS specifically sought income documents not in its possession and 2) the
numerous documents that the IRS presented in its September 10 motion illustrated that Malhas
was connected to the banks at issue during the relevant time period. Specifically, the IRS argued
that Agent Segally, in her second affidavit, discussed Malhas’s “password” that allowed him to
still access the relevant accounts even after being removed as a signatory.
ANALYSIS
The crux of the issue is whether Malhas lacks possession of the documents and records
the IRS seeks. Malhas has alleged he does not. The Court disagrees.
In United States v. Clarke, the United States Supreme Court provided a framework for
IRS summons enforcement proceedings. 134 S. Ct. 2361, 189 L. Ed. 2d 330 (2014). The IRS
has the duty to make “inquiries, determinations, and assessments of all taxes,” using its
congressionally granted power. Id. at 2365. One of those powers is the power to issue
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summonses “for the purpose of ascertaining the correctness of any return, making a return where
none has been made, determining the liability of any person for any internal revenue tax . . . or
collecting any such liability.” Id. (citations and quotation marks omitted). Some summonses
direct the taxpayer “to appear . . . and to provide sworn testimony or produce ‘books, papers,
records, or other data . . . relevant or material to [a tax] inquiry.’” Id., citing 26 U.S.C. §6201(a).
If a taxpayer fails to comply with a summons, “the IRS may bring an enforcement action in
district court.” Id.
The IRS “need only demonstrate good faith in issuing the summons” to succeed in an
enforcement action. Id. (citation and quotation marks omitted); see also Kis, 658 F.2d at 536
(“The burden is a slight one, for the statute must be read broadly in order to ensure that the
enforcement powers of the IRS are not unduly restricted.”). Indeed, “[i]n order to gain the
issuance of a show cause order, the [IRS] does need to meet any standard of probable cause,
even if the . . . statute of limitations on ordinary tax liabilities has expired.” Kis, 658 F.2d at 536.
Instead, the IRS must simply establish “what has become known as the Powell factors”: “‘[1)]
that the investigation will be conducted pursuant to a legitimate purpose; [2)] that the inquiry
may be relevant to the purpose; [3)] that the information sought is not already within the [IRS’s]
possession; and [4)] that the administrative steps required by the [Internal Revenue] Code have
been followed.’” Clarke, 134 S. Ct. at 2365, citing Powell, 379 U.S. at 57-58,. “[T]he court may
ask only whether the IRS issued a summons in good faith [and], . . . absent contrary evidence,
the IRS can satisfy that standard by submitting a simple affidavit from the investigating agent.”
Id. at 2367.
“A person receiving an IRS summons is, as we have often held, entitled to contest it in an
enforcement proceeding.” Id., citing United States v. Bisceglia, 420 U.S. 141, 146, 95 S. Ct.
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915, 43 L. Ed. 2d 88 (1975). “In these proceedings, the taxpayer carries the burden of
establishing affirmative defenses.” United States v. Seetapun, 750 F.2d 601, 604 (7th Cir. 1984),
citing Kis, 658 F.2d at 542. One “appropriate ground” to challenge IRS summonses is the “lack
of possession or control of records.” United States v. Rylander, 460 U.S. 752, 757, 103 S. Ct.
1548, 75 L. Ed. 2d 521 (1983) (citation omitted). To do so, the taxpayer’s “responsibilities
surely go further than a pro forma demand and cursory search for records.” Seetapun, 750 F.2d
at 605. Indeed, “if at this stage the taxpayer cannot refute the government’s prima facie Powell
showing or cannot factually support a proper affirmative defense, the district court should
dispose of the proceeding on the papers before it and without an evidentiary hearing.” Kis, 658
F.2d at 539, citing Powell, 379 U.S. at 58.
If, however, the taxpayer “make[s] some threshold showing” in support of his affirmative
defense, he may be “entitled to the hearing.” Id. at 539, n. 39; see also Powell, 379 U.S. at 58, n.
18 (referring to the “adversary hearing to which the taxpayer is entitled before enforcement is
ordered”). Particularly, when taxpayers allege they cannot comply with a summons because they
lack possession of requested documents or records, evidentiary hearings at the enforcement stage
become important. Taxpayers cannot allege for the first time during contempt proceedings that
they lacked possession of the relevant documents during the enforcement proceedings. See
Rylander, 460 U.S. at 757 (“It would be a disservice to the law if we were to depart from the
long standing rule that a contempt proceeding does not open to reconsideration the legal or
factual basis of the order alleged to have been disobeyed and thus become a retrial of the original
controversy.”). Some Circuit Courts of Appeals have interpreted the Supreme Court’s
admonition as a requirement that district courts definitively decide whether taxpayers possess the
documents before ordering production under penalty of contempt. See United States v. Gippetti,
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153 F. App’x. 865, 868 (3d Cir. 2005) (“[A]n express determination of possession or control is
required. If the District Court determines that [taxpayer] does not possess or have control over
the records the government is seeking—and it is [taxpayer’s] burden—enforcement should be
denied. If, however, the Court determines that he does possess or have control over those
records, failure to produce the records will be on pain of contempt.”); see also United States v.
Barth, 745 F.2d 184, 187 (2d Cir. 1984) (“Before ordering production on penalty of contempt,
the district court should expressly determine that the respondent possesses the summoned
documents.”).
Once the district court has determined that an evidentiary hearing is warranted, “the
burden still rests heavily on the taxpayer.” Kis, 658 F.2d at 544. Indeed, “[i]n most cases in
which a hearing is held, the district court should be able either to order or to deny enforcement of
the summons at that time.” Id. In sum, the burden rests squarely on the defendant’s shoulders at
the evidentiary hearing to rebut the government’s summons.
A number of Circuit Courts of Appeals have detailed what the taxpayer must show at this
hearing to successfully illustrate that he “lacks possession” of the relevant documents. Some
have held that it is within the district court’s discretion to simply determine whether the facts
show that the taxpayer does, or does not, possess the relevant documents. See Barth, 745 F.2d at
187-88 (directing the lower court to “rule explicitly on [the defendant’s] defense of
nonpossession based on the present record and on any additional evidence the parties may wish
to present” and concluding that if the lower court “finds that [the defendant] possesses the
[documents], then enforcement may be granted; if [the court] determines that [the defendant]
does not possess them, then enforcement should be denied”); see also Gippetti, 153 F. App’x. at
868, citing Barth, 745 F.2d at 187. Others have established the standard in more detail.
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Specifically, they have stated that, “the party resisting enforcement bears the burden of
producing credible evidence that he does not possess or control the documents sought.” United
States v. Billie, 611 Fed. App’x. 608, 610 (11th Cir. 2015), quoting United States v. Huckaby,
776 F.2d 564, 567 (5th Cir. 1985). Importantly, this “credible evidence” standard operates on a
sliding scale: the more the government’s evidence suggests the defendant possesses the
documents at issue, the heavier the defendant’s burden to successfully demonstrate that he does
not. Id. at 610-11 (“[T]he burden would be heavy in the present circumstances—[the
defendant’s] prior production of materials and his title as Custodian of Records strongly suggest
he maintains control and possession.”).
Here, Malhas has failed to satisfy his burden regardless of what standard the Court
applies. Specifically, Malhas did not present any evidence at the November 5 evidentiary
hearing, let alone “credible evidence” that he did not possess the documents at issue. Huckaby,
775 F.2d at 567. As the government noted, the Court has already found that the IRS’s petition
was valid under Powell, rendering Malhas’s eleventh hour argument otherwise, moot. Further,
the IRS’s plethora of documents and records illustrating Malhas’s connections with the
international banks and the accounts at issue overshadowed Malhas’s cursory references to the
signatory and asset-transfer documents. Specifically, the IRS undercut the importance by
pointing out Malhas’s “password” that enabled him to access the accounts at issue without a
signature. Thus, Malhas’s utter lack of evidence left him unable to convince the Court that he
does not have possession or custody of the documents. Indeed, even Malhas implied just the
opposite. In his November 3 emergency motion, Malhas suggested the banks at issue may
possess the summonsed documents, admitting that “[i]f the banks produce documents sought by
Petitioner in response to Dr. Malhas’ request, compliance would presumably no longer be an
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issue, and enforcement will be moot.” (R. 29 at 2.) Similarly, when asked by the Court at the
November 4 emergency motion hearing what he expected to receive from the banks, Malhas
admitted that he expected the institutions could produce relevant documents that may go toward
compliance with the IRS’s summons. These admissions cut against any argument that Malhas
does not possess the documents, and it certainly does not satisfy his heavy burden at this stage.
See Kis, 658 F.2d at 544. Accordingly, the Court concludes that Malhas has failed to meet his
heavy burden, and the IRS has presented compelling evidence that he possesses or has custody of
the documents and records the IRS seeks. The Court, therefore, orders him to comply with the
IRS’s summons by January 12, 2016.
CONCLUSION
For the foregoing reasons, the Court finds that Defendant has failed to satisfy his burden
to support his “lack of possession” defense. As a result, the Court grants the government’s
motion and enforces the summons. Defendant is ordered to comply with the IRS summons by
January 12, 2016.
DATED: November 10, 2015
ENTERED
______________________________
AMY J. ST. EVE
United States District Court Judge
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