MAGISTRATE RECOMMENDS ENFORCEMENT OF IRS SUMMONSES.

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA

FINDINGS AND RECOMMENDATIONS

[1] On May 1, 2001, petitioners filed a petition to quash seven internal revenue service summonses served on third parties. On June 22, 2001, respondent the United States filed its opposition to the petition and a motion summarily to deny it. Hearing was held before the undersigned on August 30, 2001. Jeffrey B. Setness appeared for petitioners. Norma K. Schrock appeared for respondent.

REQUIREMENTS FOR ENFORCING IRS SUMMONSES

[2] The Ninth Circuit has summarized the well established and frequently referred to requirements for enforcing an IRS summons:

     To obtain enforcement of a summons, the IRS must first establish

[3] Petitioners contend the seven summonses at issue meet none of the Powell standards. They particularly contend the summonses were not issued for a legitimate purpose, and that they seek information already in the possession of the United States.

BACKGROUND

[4] Petitioners purchased two adjacent parcels of property, "Parcel I" in November, 1995, and "Parcel II" in January, 1996. Petitioners ripped out walnut trees on both Parcel I and Parcel II and replanted grapes. Underlying the pending motions in whether petitioners were entitled, in their amended 1997 tax return, to claim an abandonment loss for walnut trees destroyed on Parcel II in order to plant grapes. The dispute is complicated by an earlier, now resolved, dispute between petitioners and the IRS over the propriety of a 1996 abandonment loss for walnut trees destroyed on Parcel I in order to plant grapes.

[5] In an audit of petitioners' 1996 tax returns, the IRS questioned petitioners' abandonment loss deduction for the walnut trees destroyed on Parcel I. Finally resolving the question in November, 1998, petitioners were permitted to allocate 5% of the cost of the property to the trees, ($15,750/$315000), [sic] and to fully depreciate the removed trees. ¹ Subsequently, in December, 1998, having resolved the question of the deduction for the walnut trees removed from Parcel I, petitioners amended their 1997 tax returns to deduct the cost of 105 acres of walnut trees removed from Parcel II. ²

[6] Now, in an audit of the 1997 returns, the IRS is questioning petitioners' entitlement to deduct the cost of the trees removed from Parcel II. The parties agree that the issue resolves [sic] around petitioners' intent. If petitioners purchased Parcel II with the intent of tearing out the walnut trees and planting grapes, the deduction is not proper. Petitioners, however, contend that the issue was resolved in the prior audit, and the IRS, accordingly, may not revisit the issue. The IRS argues that having resolved the issue for a 1996 deduction pertaining to Parcel I does not resolve the issue for a 1997 deduction pertaining to Parcel II.

[7] The IRS has filed two declarations of Revenue Agent John Hall. In the first declaration, Agent Hall declares that he is investigating petitioners' tax liabilities for the year ending December, 1997. ³ He is attempting to determine if petitioners intended to destroy the walnut trees and replace them with grapes when they purchased Parcel II in 1996. He issued summonses to Delicato Vineyards, the supplier of the grapes planted on Parcel II. He issued summons to Lockeford Ranches, Inc., the seller of both Parcels I and II. ⁴ He issued summonses to Duarte Nursery and Cal- Western nurseries seeking documentation relating to petitioners' plan and intent to purchase vines for Parcel II, because they are listed as vendors in petitioners' tree and vine expense account for 1997. ⁵ He also issued summons for Ken Gross Well Drilling & Pump Service, seeking documents relating to petitioners' plan to upgrade the water supply on Parcel II. ⁶ The summons to DWS Ag., Inc. seeks documents relating to petitioners plan and intent to prepare the ground for planting grape vines. ⁷ The summons to Lionudakis Wood & Green Waste Recycling seeks documents relating to petitioners plan and intent to remove the trees. ⁸ In the second declaration, (Dkt. No. 14), Agent Hall declares that the IRS was unaware that petitioners had removed trees on Parcel II until they filed their amended 1997 return.

[8] The first and second Powell requirements are met. The investigation into the propriety of deductions on the 1997 tax return is a legitimate use of the summons power of section 7602(a), which provides that summonses are authorized for the purpose of determining taxpayers' tax liability. The court rejects petitioner's argument that the issue of the propriety of a 1997 abandonment loss on Parcel II was resolved in the audit of the 1996 abandonment loss on Parcel I. The deduction for abandonment loss on Parcel II was not taken until the amended 1997 return was filed in December 1998, one month after the resolution of the audit of the 1996 return. That audit did not involve the 1997 return. Accordingly, that audit did not resolve the issue of the propriety of an abandonment loss for Parcel II in the amended 1997 return.

[9] Relevance to the stated purpose is a broad standard by any means. This circuit has stated that the Service need only show "a realistic expectation rather than an idle hope that something might be discovered." Tedder v. United States, 77 F.3d 1166, 1168 (9th Cir. 1996) (quoting LaMura v. United States, 765 F.2d 974, 981 (9th Cir. 1985)). The Service must show that the summoned material "might throw light upon the correctness of the return." Tedder, 77 F.3d 1166, 1168 (9th Cir. 1996) (quoting United States v. Arthur Young & Co., 465 U.S. 805, 813-15 & n.11, 104 S. Ct. at 1501 & n.11 (1984)). Another formulation of the same test, approved by the Circuit, is that the Service must show "a realistic expectation rather than an idle hope that something might be discovered." Id. (Quoting LaMura v. United States, 765 F.2d 974, 981 (9th Cir. 1985)). The declarations of Agent Hall are sufficient to establish that the summons seeks relevant documents.

[10] An IRS summons is overbroad if it "does not advise the summoned party what is required of him with sufficient specificity to permit him to respond adequately to the summons, and where enforcement would constitute an unreasonable search in violation of the Fourth Amendment." United States v. Wyatt, 637 F.2d 293, 302, n.16 (5th Cir. 1981) (citations omitted). "The fact that the records called for [are] extensive is not material [to the enforceability of the summons]." United States v. Luther, 481 F.2d 429, 432-33 (9th Cir. 1973); accord United States v. Abrahams, 905 F.2d 1276, 1285 (9th Cir. 1990), and cases cited therein. "Broadness alone is not sufficient justification to refuse enforcement of a subpoena so long as the material sought is relevant." Adams v. F.T.C., 296 F.2d 861, 867 (8th Cir. 1961). Moreover, as previously discussed, the relevance standard is broad. In making the relevance determination:

     As the language of section 7602 clearly indicates, an IRS

[11] The documents sought in the seven summonses are described with sufficient specificity. The court accepts the declarations of the Revenue Agent and finds that the Service has met its burden to demonstrate that the Powell requirements have been met, and the Service is engaging in a permissible civil and not criminal inquiry in that it is investigating whether petitioners properly reported income for the year in question.

2. [sic] PETITIONERS BURDEN

[12] The burden then shifts to the person opposing enforcement to disprove the assertions of the Service. Fortney, 59 F.3d at 119; United States v. Balanced Fin. Management, 769 F.2d 1440, 1444, (10th Cir. 1985) (quoting United States v. Garden State Nat'l Bank, 607 F.2d 61, 71 (3d Cir. 1979)).

[13] Petitioners have failed to meet their burden. Even if, as petitioners speculate, Revenue Agent Hall was aware of, and disagrees with, the earlier resolution of the prior dispute, those facts do not demonstrate that his investigation of the 1997 deduction is improper. No authority has been presented for the proposition that, since the service permitted depreciation of the walnut trees on Parcel II in the 1996 return, during a year in which petitioner's farmed the trees on Parcel II, it is thereafter bound to accept the subsequent abandonment loss (seemingly, a different type of depreciation altogether). Additionally, the determination of intent and the condition of the trees on Parcel I is not dispositive of the same questions pertaining to a different parcel purchased at a different time. That the IRS has copies of four of the documents sought by the summons is not dispositive either. United States v. Davies, 636 F.2d 1028, 1037 (5th Cir. 1981); United States v. Luther, 481 F.2d 429, 432 (9th Cir. 1973). While the IRS concedes that the summons [sic] in question were served by certified mail rather than by personal service as required by 26 U.S.C. section 7603(b) is not grounds to quash the summons at the request of petitions [sic] who lack standing to assert the defense that a third party was not properly served. See Gass v. United States, 83 A.F.T.R. 2d 99-1683, *16 (Col. 1999) aff'd, 216 F.3d 19987 (10th Cir. 2000; Wright v. United States, 964 F. Supp. 336, 338-39 (M.D. Fla. 1997), aff'd 132 F.3d 1461 (11th Cir. 1997). Moreover, petitioners do not assert this as a ground to quash the summons, and advised the court at hearing that they are not challenging the summonses on that ground.

[14] For the reasons set forth herein, IT IS RECOMMENDED that the petition to quash the IRS summonses be DENIED, and the government's motion to enforce the summonses be GRANTED.

[15] These findings and recommendations are submitted to the United States District Judge assigned to this case pursuant to the provisions of Title 28 U.S.C. section 636(b)(1). Within twenty (20) days after being served with these findings and recommendations, any party may file written objections with the court and serve a copy on all parties. Such a document should be captioned. "Objections to Magistrate Judge's Findings and Recommendations." Any reply to the objections shall be served and filed within ten days after service of the objections. The parties are advised that failure to file objections within the specified time may waive the right to appeal the District Court's order. Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991).

DATED: September 7, 2001.

² On their original return, petitioners reported depreciation of $182,467. On their amended return, they reported depreciation of $526,019, resulting in a farm loss of $112,703.

³ Dockets Nos. 8 & 10 are the same declaration. No. 8 has a faxed signature; No. 10 has an original signature.

⁴ The IRS does have a copy of the land purchase contract for Parcel I.

⁵ The IRS has a copy of a 1995 contract and invoice from Duarte for 1995.

⁶ The IRS has an invoice dated May 9, 1997, supplied by petitioners.

⁷ The IRS has a copy of an invoice dated May 30, 1997, for "ripping" the ground to "prep" 100 acres on Parcel II.

⁸ The IRS has a copy of an invoice dated March 3, 1997, with a job number Hall believes indicated that the order for the services was placed in 1995.