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Tillman v. United States

United States District Court, D. Maryland

April 8, 2014

MILTON TILLMAN, Petitioner,
v.
UNITED STATES OF AMERICA, Respondent.

MEMORANDUM OPINION

ELLEN L. HOLLANDER, District Judge.

Milton Tillman, petitioner, has filed a Petition To Quash Summonses (ECF 1, the "Petition to Quash" or "Pet."), in which he challenges two third-party administrative summonses issued by the Internal Revenue Service ("IRS"). Id. ¶ 1. The summonses pertain to an investigation led by IRS Revenue Agent Carla Johnson with respect to petitioner's civil tax liability for the calendar years 2006 through 2010, in which he allegedly failed to file tax returns. See Declaration of Carla Johnson, September 9, 2013, ECF 6-1 ¶ 2. The investigation follows Tillman's federal convictions in 2010 for submitting a false tax return, unlawfully engaging in the insurance business, and wire fraud. See United States v. Tillman et al., Criminal Case No. CCB-10-cr-00067 (D. Md.). Respondent, the United States (the "Government"), has filed an Opposition To Petition To Quash And Motion To Enforce Internal Revenue Service Summons (ECF 6, "Motion to Enforce").[1]

No hearing is necessary to resolve the matter. See Local Rule 105.6. For the reasons that follow, I will deny the Petition to Quash and grant the Motion to Enforce.

I. Legal Standards

The third-party administrative summonses were issued on July 29, 2013, to Provident Bank[2] and SunTrust Bank, pursuant to 26 U.S.C. § 7602. See ECF 6-2 (summons issued to Provident Bank) and ECF 6-3 (summons issued to SunTrust Bank). Section 7602 authorizes the IRS to issue summonses to third parties for documentary production "[f]or 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 the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, " id. § 7602(a), and for "the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws." Id. § 7602(b).

Courts must examine the validity of administrative summonses of the sort that petitioner challenges here, because "it is the court's process which is invoked to enforce the administrative summons and a court may not permit its process to be abused." United States v. Powell, 379 U.S. 48, 58 (1965); accord Xelan, Inc. v. United States, 361 F.Supp.2d 459, 463 (D. Md. 2005). Pursuant to 26 U.S.C. § 7609(h), this Court has jurisdiction to resolve this dispute. See Xelan, Inc., 361 F.Supp.2d at 461.

In Alphin v. United States, 809 F.2d 236 (4th Cir.), cert. denied, 480 U.S. 935 (1987), the Fourth Circuit observed that, pursuant to the Supreme Court's decision in Powell, the IRS's exercise of its summons power "is limited to the purposes established in § 7602, " and "may not be used for improper purposes, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute.'" Alphin, 809 F.2d at 237-38 (quoting Powell, 379 U.S. at 58). In a proceeding to quash an IRS summons under § 7609, the burden is on the government to "show that its summons authority is being used in good faith pursuit of [the statutory] purposes." Alphin, 809 F.2d at 238.

The government meets this burden initially by establishing a "prima facie case, " consisting of four elements as articulated by the Supreme Court in Powell : "1) the investigation is being conducted for a legitimate purpose; 2) the inquiry is relevant to that purpose; 3) the information sought is not already in the possession of the IRS; and 4) the administrative steps required by the Code have been followed." Id. (citing Powell, 379 U.S. at 57-58); accord Conner v. United States, 434 F.3d 676, 680 (4th Cir. 2006). "The government's burden is fairly slight" and can be satisfied "by an affidavit of an agent involved in the investigation averring the Powell good faith elements." Alphin, 809 F.2d at 238; see also Conner, 434 F.3d at 680 ("The burden on the government to produce a prima facie showing of good faith in issuing the summons is slight or minimal.'") (citation omitted).

"Once the government has made its prima facie case, the burden shifts to the party challenging the summons to show that enforcement would be an abuse of the court's process." Alphin, 809 F.2d at 238. This burden is "heavy, " because it requires the challenger to prove a negative: the challenger must "disprov[e] the actual existence of a valid civil tax determination or collection purpose." Id. (citing United States v. LaSalle Nat'l Bank, 437 U.S. 298, 316 (1978)).

The district court ordinarily "should dispose of the proceeding on the papers before it... without an evidentiary hearing'" and without "allow[ing] discovery, " unless the "the party challenging the summons... allege[s] specific facts in its responsive pleadings, supported by affidavits, from which the court can infer a possibility of some wrongful conduct by the IRS." Alphin, 809 F.2d at 238 (citation omitted); see also Conner, 434 F.3d at 682. "Mere allegations of bad faith will not suffice'" to make the required "preliminary demonstration of abuse." Alphin, 809 F.2d at 238 (citation omitted); see also Bell v. United States, 521 F.Supp.2d 456, 460 (D. Md. 2007) (rejecting the petitioner's claim that administrative steps were not fulfilled, where the petitioner alleged that the Government failed to comply with notification requirements but "provide[d] no evidence to support this allegation").

Section 7602 specifically prohibits the issuance of a summons "if a Justice Department referral is in effect" with respect to the person about whom records are sought. Id. § 7602(d). The phrase "Justice Department referral" encompasses two scenarios: (1) where the Treasury "has recommended to the Attorney General a grand jury investigation of, or the criminal prosecution of, [the] person [at issue] for any offense connected with the administration or enforcement of the internal revenue laws"; or (2) where the Justice Department has, in the course of its own investigation, requested disclosure by the Treasury of a "tax return or tax return information" regarding the person at issue. Id. § 7602(d)(2)(A)(i)-(ii).

The prohibition in § 7602(d) represents the legislative "codifi[cation of] the essence" of the Supreme Court's holding in LaSalle Nat'l Bank, 437 U.S. 298, to the effect that "the IRS may not issue a summons once it has recommended prosecution to the Justice Department...." United States v. Stuart, 489 U.S. 353, 362-63 (1989) (citing LaSalle and discussing post- LaSalle enactment of provision now codified as § 7602(d), then codified as § 7602(c)). The rationale of this rule is that the IRS should not be permitted "to become an information-gathering agency for other departments, including the Department of Justice, " LaSalle, 437 U.S. at 317, thereby effectively "broaden[ing] the Justice Department's right of criminal litigation discovery or... infring[ing] on the role of the grand jury as a principal tool of criminal accusation." Id. at 312; accord Stuart, 489 U.S. at 363.

Section 7602 also identifies, in a section titled "Termination, " several situations in which a "Justice Department referral shall cease to be in effect with respect to a person[.]" 26 U.S.C. § 7602(d)(2)(B). Among other situations, termination has occurred when "a final disposition has been made of any criminal proceeding pertaining to the enforcement of the internal revenue laws which was instituted by the Attorney General against such person...." Id. § 7602(d)(2)(B)(ii). Notably, "each taxable period (or, if there is no ...


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