Court Refuses to Quash Summonses Issued in IRS Investigation of Corporation's Tax Liabilities

The United States' motion is currently scheduled for a hearing on October 11, 2013. Docket No. 21 in Case No. 13-02230. Pursuant to Civil Local Rule 7-1(b), the Court finds these matters appropriate for resolution without oral argument and hereby VACATES the hearing. For the reasons set forth below, the Court hereby GRANTS the motion to dismiss the motions to quash and GRANTS the motion to compel compliance with summonses.

On May 8, 2013, Grellas issued a summons to First American Title, seeking testimony and documents relating to purchase and mortgage history of 343 Pioneer Way, Tahoe City, California, purchased by Schoop in 2005. Mot. to Quash, p. 2 in Case No. 13-0223, Grellas Decl. ¶ 21. Grellas stated that documents related to this purchase are relevant in conducting the examination of Schoop's federal income tax liability. Grellas Decl. ¶ 23. Grellas received a response to the summons from First American Title by mail, but has not opened the mail envelope pending resolution of this summons enforcement proceeding. Id. ¶ 22. Grellas stated all administrative steps required by the Internal Revenue Code for issuance of the three summonses have been taken. Id. ¶¶ 10, 19, 26.

On May 16, 2013, plaintiffs filed the three "Civil Action -- Motion to Quash Summons" proceedings. Plaintiffs alleged that the information sought has already been obtained by the IRS and that consequently the testimony of Schoop has no legitimate purpose. Mot. to Quash, p. 3; Ho Decl. ¶ 4-6. Plaintiffs alleged that the IRS summons of Schoop is improper and should be quashed because it fails to meet two of the four elements set fourth by the Supreme Court in U.S. v. Powell 379 U.S. 48, 57-58 (1964). Mot. to Quash, p. 3.

On July 12, 2013, the United States filed its motions to dismiss plaintiffs' motions and to compel compliance with the summonses. Docket No. 14 in Case Nos. 13-02230 and 13-02233; Docket No. 13 in Case No. 13-02232.

The Ninth Circuit has further stated:

Plaintiffs claim that the government fails to satisfy the second and third Powell factors. Mot. to Quash, p. 3. Plaintiffs first challenge the government's satisfaction of the third Powell factor,¹ arguing that the all information sought by the IRS though these summonses has already been provided during the August 27, 2012 audit and by plaintiffs' counsel. Id. Plaintiffs then challenge the government's satisfaction of the second Powell factor claiming "since the information sought has already been obtained by the IRS, the testimony of petitioner can also serve no legitimate purpose and thus has no relevancy to express purposes in which the IRS may issue the summons." Id.

The relevance standard for an IRS summons is different from, and more relaxed than, admissibility standards under the Federal Rules of Evidence. Summoned material is relevant if it might "throw light" upon the correctness of the return. United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984). Congress expressly intended for the IRS to obtain materials "of even potential relevance to an ongoing investigation." Id. (emphasis in original).

As explained below, the Court finds that Agent Grellas' declaration establishes that the summoned materials are relevant, satisfying the minimal requisite showing for prima facie enforcement.

A. New York Frankfurter Summons

Grellas stated that New York Frankfurter provided documents and materials insufficient "to adequately substantiate the gross receipts reported on the tax returns." Grellas Decl. ¶ 3. This resulted in a notice being sent to New York Frankfurter, in care of Schoop, explaining that the records were inadequate. Id. The notice provided a list of reasons why the records provided are inadequate, specifically that:

Because these issues are relevant to the tax years under examination and need to be addressed to adequately substantiate the gross receipts reported on the 2010-2011 tax returns, Grellas stated it is necessary to interview Schoop in order to address these issues. Grellas Decl. at ¶¶ 3-4. The records sought from New York Frankfurter are both relevant to the examination of federal tax liability of New York Frankfurter and not in the IRS's possession. Id. at ¶¶ 3-8.

B. Schoop Summons

Grellas stated that Schoop provided documents insufficient "to substantiate examination issues, including possible dividends from New York Frankfurter, unexplained source of funding for living expenses when compared to filed tax returns, and questions regarding real property that was allegedly gifted to her son." Id. ¶ 15. Because these issues are relevant to the tax years under examination and need to be addressed to determine if it is necessary to open subsequent tax years for examination, Grellas stated it is necessary to interview Schoop in order to address these issues. Id. The records are not in the IRS's possession and are necessary for Agent Grellas' investigation. Id. at ¶¶ 14-16, 18.

C. First American Title Summons

Grellas stated that the records from First American Title are "information [that] may reveal the taxpayer's entitlement to deductions and income received during tax year 2009, additional sources of income, possible principal payments to her mortgage lender, bank accounts unknown to the IRS, income producing assets, or statements of income inconsistent with the income tax return filed." Id. ¶ 23. The documents provided were insufficient in addressing these issues Grellas claimed are relevant to the examination. Id. ¶ 24. Because the records from First American Title could potentially reveal new relevant information regarding Schoop's federal income tax liability, Grellas stated the records from First American Title are necessary in order to address these issues. See Arthur Young & Co., 465 U.S. at 814; Grellas Decl. ¶¶ 23-24.

The United States has established that the information requested by the three summonses is (1) relevant and (2) not currently in the IRS's possession. Therefore, the Court finds that the IRS has satisfied all the Powell factors.

Plaintiffs have not provided specific facts or evidence to support their allegations. Simply claiming information has "already been provided through the audit examination" and that in-person testimony is "completely irrelevant, harassing and unduly burdensome" lacks specificity and factual support to meet the plaintiff's heavy burden. See e.g. Pl's. Opp'n to Defs'. Mot. to Dismiss, p. 4. Without specific facts or evidence to support her allegations, plaintiffs cannot meet their burden to quash the summonses.²

Accordingly, this Court GRANTS the motion to dismiss the motions to quash, and ORDERS that plaintiffs comply with the summonses.

IT IS SO ORDERED.

DATED: October 2, 2013

² Plaintiffs also claim that the summonses are improper due to "criminal implications of CID investigation," claiming that Agent Grellas was actually conducting a criminal investigation under the auspices of a civil audit. Mot. to Quash, p. 3. As set forth in Grellas' Declaration, Grellas is conducting a civil audit which involves the issue of expenses which exceed reported income. Grellas Decl. ¶ 1. Additionally, Grellas stated that there has been no referral to the Department of Justice for criminal prosecution of matter described in any of the three summonses. Grellas Decl. ¶¶ 11, 20, 27.