Court Asked to Quash IRS Summons Issued for Records Sought by India

DEVENDRA SHARMA,
Petitioner,
v.
UNITED STATES OF AMERICA,
Respondent.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

VERIFIED PETITION TO QUASH INTERNAL REVENUE SERVICE SUMMONS

Petitioner, Devendra Sharma, submits this Petition, pursuant to 26 U.S.C. § 7609(b)(2), to quash an Internal Revenue Service third-party Summons issued to Bank of New York Mellon Corporation (“BNY Mellon”). A true and correct copy of the Summons is attached as Exhibit A.

PARTIES

1. Petitioner Devendra Sharma is a U.S. citizen who resides 111 West 67^th Street, Apartment 40-A, New York, New York, 10023.

2. Respondent is the United States of America, acting by and through the Internal Revenue Service. The IRS is an agency of the Department of the Treasury with offices throughout the country and in this District.

3. Non-party BNY Mellon is the entity to which the Summons is directed. BNY Mellon can be found in this District at 385 Rifle Camp Road, Third Floor, Woodland Park, New Jersey 07424, which is the address for BNY Mellon listed in the Summons.

4. Counsel for Petitioner are Karl Geercken and George B. Abney (to seek pro hac vice admission), with the Alston & Bird law firm. Mr. Geercken's address is 90 Park Avenue, 15th Floor, New York, New York, 10016-1387. Mr. Abney's address is 1201 West Peachtree Street, Suite 4900, Atlanta, Georgia, 30309-3424.

JURISDICTION AND VENUE

5. The Court has jurisdiction over this action pursuant to 26 U.S.C. § 7609(b)(2)(A), 26 U.S.C. § 7609(h), 28 U.S.C. § 1331, and 28 U.S.C. § 1340.

6. Venue is proper in this District, pursuant to 26 U.S.C. § 7609(h)(1), because BNY Mellon, the entity to which the Summons is directed, is located or can be found in this District.

7. The IRS agent who issued the Summons is Cherisse K. Lee, Tax Law Specialist. Issuance of the Summons was approved by Kalpesh D. Gandhi, Supervisory Tax Analyst. The Summons states that it was issued on October 6, 2020. The Summons states that is returnable on November 5, 2020, before Cherisse K. Lee, at an IRS office located at 24000 Avila Road, MS 1111, Laguna Niguel, California 92677.

8. Contemporaneously with this filing, pursuant to 26 U.S.C. § 7609(b)(2)(B), Petitioner Devendra Sharma is mailing a copy of this Verified Petition, with exhibits, to IRS Tax Analyst Cherisse K. Lee, and BNY Mellon, by certified mail. Pursuant to Fed. R. Civ. P. 4(i), Petitioner will also be serving the United States by certified mail to the Attorney General, Assistant Attorney General for Administration, and the Civil-Process Clerk for the U.S. Attorney's Office for the District of New Jersey.

STATEMENT OF FACTS

8. Petitioner Devendra Sharma is a U.S. Citizen but retains close family ties to the Republic of India where he was born.

9. On or about October 9, 2020, Petitioner received a copy of the Summons delivered to him by U.S. Mail.

10. The Summons states that it is issued, “In the matter of the India Income Tax Liabilities of Devendra Sharma.” See Exhibit A, pp. 1 & 2.

11. The Summons requires BNY Mellon to produce documents pertaining to all accounts owned, controlled, or under the signature authority of Petitioner, from 2010 through 2018, including:

a. Account opening documents (regardless of date);

b. Account signature cards (regardless of date);

c. Know-Your-Customer and Customer Due Diligence records, as required to be collected and maintained under the law (regardless of date); and,

d. Monthly account statements.

See Exhibit A, p. 2.

12. To the best of his knowledge, Petitioner is not under audit by either the U.S. Internal Revenue Service (“IRS”) or its Indian counterpart, the Indian Revenue Service.

13. Petitioner has not received any notice from either the IRS or the Indian Revenue Service advising him he is under audit.

14. Prior to receiving a copy of the Summons, Petitioner received no notice from the IRS that it intended to contact BNY Mellon or any other third-parties regarding his U.S. or Indian tax liabilities.

15. Petitioner's brother, Ramendra Sharma, lives in India.

16. Prior to his retirement, Ramendra Sharma was a career officer in the Indian Navy.

17. To the best of Petitioner's knowledge, the Indian Revenue Service has been conducting its audit of Ramendra Sharma since in or about December 2017.

18. To the best of Petitioner's knowledge, Ramendra Sharma and his representatives have fully cooperated with the Indian Revenue Service throughout the course of its audit.

19. To the best of Petitioner's knowledge, Ramendra Sharma and/or his representatives have meet with the Indian Revenue Service on 15-20 separate occasions and participated in numerous telephone conferences related to the audit. Ramendra Sharma and/or his representatives have also promptly provided hundreds of documents to the Indian Revenue Service, including documents regarding specific real property transactions in India.

20. On at least one occasion during the course of its audit of Ramendra Sharma, the Indian Revenue Service requested information from Ramendra Sharma and his representatives regarding Petitioner.

21. Petitioner promptly, and voluntarily, provided the requested information to Ramendra Sharma who, in turn, provided the information to the Indian Revenue Service.

22. To the best of Petitioner's knowledge, the Indian Revenue Service has examined certain real property transactions involving Ramendra Sharma, including the following:

a. residential property located in Delhi, acquired by Ramendra Sharma in or about August of 1981;

b. residential property located in Mumbai, acquired by Ramendra Sharma in or about April of 1998;

c. residential property located in Secunderabad, acquired by Ramendra Sharma in or about August of 1983; and,

d. approximately 9.5 acres of undeveloped farm land located on the outskirts of the State of Delhi, acquired between in or about 2011-2013 by a business entity in which Ramendra Sharma has an interest.

23. To the best of Petitioner's knowledge, Ramendra Sharma and his representatives provided substantial information to the Indian Revenue Service regarding the above listed property transactions.

24. On a date prior to October 6, 2020, the Indian Revenue Service submitted an Exchange of Information (“EOI Request”) to the IRS pursuant to the 1991 Tax Convention between the United States and the Republic of India (“Tax Treaty”).¹ A true and correct copy of the Tax Treaty is attached as Exhibit B.

25. Based upon information provided by IRS Tax Analyst Cherisse K. Lee, the Summons challenged in this matter was issued by the IRS pursuant to the EOI Request from the Indian Revenue Service.

26. The Internal Revenue Service has denied Petitioner's request for a copy of the EOI request submitted by the Indian Revenue Service.

27. Based upon information provided by IRS Tax Analyst Cherisse K. Lee, in its EOI Request the Indian Revenue Service states that Petitioner has not provided requested information by them during the course of their audit of Ramendra Sharma.

28. Based upon information provided by IRS Tax Analyst Cherisse K. Lee, in its EOI Request the Indian Revenue Service states that the statute of limitations for its audit of Remendra Sharma expired on December 31, 2019, but that the information sought “will be useful beyond that date.”

29. Based upon information provided by IRS Tax Analyst Cherisse K. Lee, in its EOI request the Indian Revenue Service states that it is seeking information regarding the acquisition of property in India, including property describes as follows:

a. residential property located in Deli;

b. residential property located in Mumbai;

c. residential property located in Secunderabad; and,

d. a “big chunk” of land located in the “heartland” of Deli.

30. Upon information and belief, these four properties listed in the EOI Request are the same four properties the Indian Revenue Service inquired about during the audit of Ramendra Sharma and about which Ramendra Sharma and his representatives provided substantial information.

31. Petitioner now submits this Petition to Quash the Summons for the reasons and on the grounds set forth below.

ARGUMENT

a. IRS Summons Authority and Requirements

32. Section 7602 of the Internal Revenue Code grants the IRS authority to issue summonses to examine any books, papers, records, or other data which may be relevant or material to:

ascertaining the correctness of any return, making a return where none has been made, determining the liability of a person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting and such liability. . . .

See 26 U.S.C. § 7602(a)(1)

33. While courts have interpreted the authority conferred by Section 7602 broadly, the IRS's power is not limitless. See, e.g., United States v. Bisceglia, 420 U.S. 141, 146 (1975) (“the Government may not exercise its investigative and inquisitorial power without limit — the examination is 'unreasonable' and impermissible if it is overbroad”); United States v. Coopers & Lybrand, 550 F.2d 615, 620 (10th Cir. 1977) (“Once a summons is challenged it must be scrutinized by a court to determine whether it seeks information relevant to a legitimate investigative purpose and is not meant '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'”) (citation omitted).

34. Furthermore, courts proceed more cautiously when the IRS summons is directed at a third party who is not the target of an investigation, see United States v. Harrington, 388 F.2d 520, 523 (2d Cir. 1968), and a summons will face more exacting scrutiny where it seeks records from a third party who is an individual rather than a corporate entity. See In re McVane, 44 F.3d 1127, 1138 (2d Cir. 1995). “'With regard to subpoenas seeking such material, . . . 'an administrative agency is not automatically entitled to obtain all material that may in some way be relevant to a proper investigation. Rather . . . the agency must make some showing of need for the material sought beyond its mere relevance to a proper investigation.'” Id. (citing Federal Election Comm'n v. Larouche Campaign, 817 F.2d 233, 234-35 (2d Cir. 1987)).

35. In United States v. Powell, 379 U.S. 48 (1964), the Supreme Court established the “Powell factors” — four prerequisites that the IRS must meet to make out a prima facie case that a Section 7602 summons is valid. The four Powell factors are: (1) the investigation must be conducted for a legitimate purpose; (2) the summons must be relevant to that purpose; (3) the IRS must not already have the information sought; and, (4) the IRS must have followed all applicable administrative steps. See id., at 57-58.

36. Based on information known at this time, the IRS cannot satisfy the Powell factors.

37. Petitioner has standing to challenge this failure. Where, as here, the IRS issues a Section 7602 summons to a third-party, the person identified in the summons has the right to initiate a proceeding to quash the summons. See 26 U.S.C. § 7609(b)(2)(A). As BNY Mellon is a third-party, and Petitioner is a person identified in the Summons and whose records are sought by the Summons, he has standing to challenge the Summons.²

b. The Summons Should be Quashed Because the IRS Failed to Provide Advance Notice of Third-Party Contacts.

38. The fourth Powell factor, which requires the IRS to comply with administrative requirements, is addressed first because the IRS's failure to adhere to its administrative requirements taints the entire Summons and calls for it to be quashed in full.

39. Among the administrative steps the IRS must comply with is the requirement to provide the target of an investigation with notice. Notice in advance is an explicit requirement imposed by Section 7602(c) which provides in pertinent part:

An officer or employee of the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer unless such contact occurs during a period (not greater than 1 year) which is specified in a notice . . . which informs the taxpayer that contacts with persons other than the taxpayer are intended to be made during such period . . . and is provided to the taxpayer not later than 45 days before the beginning of such period.

See 26 U.S.C. § 7206(c)(1)(A) & (B).

40. This requirement is grounded in common sense. It gives the taxpayer an opportunity to work with the IRS to provide the requested information before the IRS contacts third-parties, which could potentially waste the IRS's time, embarrass the taxpayer and harm its reputation, or otherwise lead to negative results that could have been avoided. See Gangi v. United States, Civil Action No. 10-24, 2011 U.S. Dist. LEXIS 156213, *25 (D.N.J. Jan. 7, 2011). The legislative history to Section 7602(c) gives no indication that advance notice to the taxpayer is optional, but rather states that advance notice is necessary because of the potential “chilling effect on the taxpayer's business and . . . damage [to] the taxpayer's reputation in the community” in the absence of advance notice. See Senate Rep. No. 105-174, 105th Cong., 2nd Sess. 77 (1998). The Senate Finance Committee explained that it believed “that taxpayers should have the opportunity to resolve issues and volunteer information before the IRS contacts third parties.” Id. (emphasis added). The IRS showed no regard for this concern when it issued the Summons to BNY Mellon without any prior notice to Petitioner. 

41. The failure to provide a taxpayer with advance notice of a third-party summons constitutes grounds to quash the Summons. See Gangi, 2011 U.S. Dist. LEXIS 156213 at *25. Further, it precludes any argument that the IRS's non-compliance should be excused because it acted in good faith. See U.S. v. Jillson, 1999 U.S. Dist. LEXIS 17921, *6-7 (S.D. Fla. 1999) (“By failing to provide a notice of contact letter prior to serving the summonses, [taxpayer] was denied the opportunity to resolve issues and volunteer information prior to contact, and as such was not only harmed, but was harmed in the very way Section 7602(c) was enacted to remedy. As such, despite the good faith on the part of the IRS, we must quash the summonses.”).

42. The IRS did not provide any advance notice to Petitioner, as required by Section 7602(c), before contacting BNY Mellon. Petitioner first learned of the Summons after it was issued and a copy was mailed to him on or about October 6, 2020. Because the IRS cannot satisfy the fourth Powell factor, the Summons should be quashed.

c. The Summons Should be Quashed Because the IRS Investigation is not Conducted for a Legitimate Purpose.

43. The first Powell factor requires that the investigation must be conducted for a legitimate purpose. See Powell, 379 U.S. at 57-58. The Summons states it is being issued in the matter of “The India Income Tax Liabilities of Devendra Sharma.” See Exhibit A, pp. 1 & 2. Of course, the determination of civil income tax liabilities is a legitimate purpose for issuing an IRS summons. However, neither the IRS not the Indian Revenue Service has advised Petitioner that he is under audit or examination for any tax or for any tax years. Petitioner's brother, Ramendra Sharma, has been under audit by the Indian Revenue Service, but the Summons makes no mention of such audit. Because Petitioner's Indian income tax liabilities are not under examination, the Summons misrepresents its purpose and, absent a contrary showing by the IRS, could not have been issued for a legitimate purpose.

d. The IRS Summons Should be Quashed Because the Evidence Sought is Not Relevant to a Legitimate Investigation.

44. Relevance under the second Powell factor connotes more than mere convenience for the government and does not extend to all materials that might lead to a more comprehensive understanding of the taxpayer. See United States v. Coopers & Lybrand, 550 F.2d 615, 621 (10th Cir. 1977) (citing United States v. Matras, 487 F.2d 1271 (8th Cir. 1973)). Rather, relevance is determined by whether the information might potentially shed light upon the tax liability of the taxpayer under examination. United States v. Monumental Life Ins. Co., 440 F.3d 729, 735-36 (6th Cir. 2006); United States v. Rockwell Int'l, 897 F.2d 1255, 1263 (3d Cir. 1990). Under this standard, barring “irrelevant or sweeping orders is particularly appropriate” when, as here, “the demand for records is directed not to the taxpayer but to a third-party.” Monumental Life Ins. Co., 440 F.3d at 735-36 (6th Cir. 2006) (citing United States v. Theodore, 479 F.2d 749, 754 (4th Cir. 1973) (internal quotations omitted)).

45. As noted previously, because Petitioner's Indian income tax liabilities are not under audit or examination, the stated purpose of the Summons is a misrepresentation and, consequently, the Summons is not legitimate. The evidence sought by the Summons, therefore, cannot be relevant to a legitimate purpose.

46. Furthermore, to the extent the Summons seeks information related to the four properties in India, substantial information regarding those properties has already been provided to the Indian Revenue Service by Ramendra Sharma and his representatives. See ¶¶ 22 & 23.

47. Lastly, the breadth of information sought — BNY Mellon account statements from 2010 thorough 2018 — confirms that the Summons constitutes an improper fishing expedition. The bank account records requested certainly depict tens of thousands of transactions, the overwhelming majority of which could not possibly be related to the property transactions that appear to be the focus of the investigation by the Indian Revenue Service. Three of those property transactions took place in 1981, 1983, and 1998, decades before the years listed in the Summons (2010-2018) for which BNY Mellon account statement are sought. See United States v. Theodore, 479 F.2d 749, 754 (4th Cir. 1973) (“A summons will be deemed unreasonable and unenforceable if it is overbroad and disproportionate to the end sought.”); United States v. Harrington, 388 F.2d 520, 523 (2d Cir. 1968) (“[T]he Government may not exercise its investigative and inquisitorial power without limit — the examination is unreasonable and impermissible if it is overbroad, out of proportion to the end sought, or if it is so unrelated to the matter properly under inquiry as to exceed the investigatory power.”).

RELIEF REQUESTED

WHEREFORE, Petitioner Devendra Sharma respectfully requests that the Court:

(i) Quash the Summons in its entirety for the reasons discussed in this Petition; and,

(ii) Grant such other, further, and different relief as this Court deems to be just and proper.

Dated this 26^th day of October 2020.

ALSTON & BIRD LLP

Karl Geercken
ALSTON & BIRD LLP
90 Park Ave
New York, NY 10016
(212) 210-9471 (telephone)
(212) 922-3931 (facsimile)
E-mail: Karl.Geercken@alston.com

George B. Abney (to seek admission pro hac vice)
ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
(404) 881-7000 (telephone)
(404) 881-4777 (facsimile)
E-mail: George.Abney@alston.com