Court Sustains Use of Regular Summons to Appraiser Investigated Even Though Third Party Taxpayers May be Identified (1/14/16)

In Clower v. United States, 2015 U.S. Dist. LEXIS 174254 (N.D. Ga. Dec. 17, 2015), here, the IRS issued a summons to Jim R. Clower, an appraiser, for "documents including, among other things, appraisal work files, documents reflecting customers for whom he prepared appraisals, and correspondence related to appraisals completed for the purpose of valuating real property for conservation or historical easements."  Those who observe the tax scene will recognize that there is a lot of abuse of overvaluation of conservation and historical easements for purposes of claiming charitable deductions.  And, the fatal flaw in many promoted tax schemes/shelters have for many years been grossly inflated valuations.  I infer that the IRS suspected Clower of doing multiple valuations that might require investigation for the possible assertion of penalties against Clower.  See § 6695(a),  Substantial and gross valuation misstatements attributable to incorrect appraisals, here.  The summons in question was clearly addressed to Clower with respect to his potential liability.  The summons was thus a regular IRS summons.

Should Clower respond to the summons, however, he would likely identify the clients for whom he had given appraisals.  In such cases, the IRS may not otherwise know who many of those clients were.  Presumably, the IRS already knew of at least one such client because the IRS had Clower's name.  Normally, if multiple potential taxpayers of an IRS investigation are unknown but identifiable through some common participant in an aggressive scheme (such as shelter promoters or even foreign banks), the IRS can issue a John Doe Summons ("JDS") to that common participant.  See § 7609(f), here.  The JDS requires court approval.  It is far less convenient for agents than issuing a regular summons where the regular summons could produce the same information.  That is apparently what happened in Clower.  The IRS issued the summons to Clower with respect to his potential liability and would thereby discover the identities of taxpayers using his services.  So this overlap of the regular summons and the JDS creates some tension, particularly if the IRS were to use the regular summons to avoid the hassle of the JDS.  As we say in the Saltzman & Book, Tax Practice & Procedure ¶ 12.05[4][b][v] John Doe Summons.(online, viewed 1/14/16) [footnotes in brackets, with links to the cited cases added by JAT]:

The Service sometimes finds that the John Doe Summons procedures slow it down. The Service must first convince DOJ Tax that it is worth seeking the district court's approval of the John Doe Summons. DOJ Tax must gear up and present the matter to an often skeptical and almost always overworked District Court who must play devil's advocate to the government's ex parte application for the summons. Obviously, the Service would much prefer to use its regular administrative summons, which has no such cumbersome steps. 

In United States v. Tiffany Fine Arts, Inc. [469 US 310 (1985), here], the Supreme Court blessed the Service's use of the regular administrative summons rather than the John Doe Summons where the target of the summons was a shelter promoter. The administrative summons was issued with the promoter identified as the taxpayer being investigated, but the information and documents sought could also identify otherwise unknown shelter investors who dealt with the promoter. The Service could then open investigations of the shelter investors. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure. 

After Tiffany Fine Arts, the Service saw an escape from the annoyances of the John Doe Summons procedures — simply find a reason to audit the third party with information or documents identifying otherwise unidentified taxpayers that arguably were relevant to a tax investigation of the third party. Tiffany Fine Arts says that will work. However, where the allegation of investigation of the third party is merely pretextual to get information about unidentified taxpayers with whom the third party dealt, courts are open to quashing the general administrative summons, thus relegating the Service to the John Doe Summons procedure.[United States v. Gertner, 65 F3d 963 (1st Cir. 1995), here]

Clower appeared to be making the Gertner argument.  The Court identified Clower's arguments as (bold face supplied by JAT:

According to the petition, Clower is a certified general appraiser who has performed independent fee appraisals since 1969. In his petition, Clower avers that the IRS summons violates the requirements of 26 U.S.C. § 7609(b)(2) because (1) it is at least in part a John Doe Summons, n1 and the IRS did not follow the requirements for issuing such a summons; (2) it is a fishing expedition designed to produce evidence [2]  that could expose Clower to penalties and probable prosecution; (3) it fails to specify the projects being investigated or the targets of those investigations; (4) it requires disclosure of sensitive personal and/or privileged documents and information belonging to persons who are not a part of the investigation; and (5) it is unreasonable and irrelevant because it asks for information outside the statute of limitations. Clower avers that the Court has jurisdiction to hear his petition pursuant to 26 U.S.C. § 7609(h)(1).

The first is the relevant one.  The Court dealt cryptically with the argument as follows:

The summons attached to the petition was issued to Jim R. Clower, "In the matter of Jim R. Clower under 26 USC Secs. 6694, 6695, 6700, 6701, 6707 and 6708."  Although Clower contends in his petition and his motion to strike that the summons is a John Doe summons and that it fails to specify the targets of the investigation(s), he has not offered any arguments or evidence to support this or to contradict the plain language of the summons.

Unlike Gertner where the summonsee established to the satisfaction of the district court judge that the IRS was not interested in the liability of the summonsee but just wanted to identify the otherwise unidentified taxpayer.  The facts of Gertner are unusual and anyone wanting to make a Gertner-like argument are well advised to obtain copies of the briefs and submission (including affidavits) in that case..  Of course, the summonsee of the regular summons will not be able to mount the attack in a direct motion to quash but must fail to comply and then assert the Gertner-like argument in a summons enforcement proceeding.

In this regard, the Court does note in footnote 2:

The fact that the summons may serve a "dual purpose" of determining a known taxpayer's liabilities and "discovering information that would aid in identifying unnamed taxpayers and investigating their liabilities" does not make it a John Doe summons subject to the procedures in § 7609(f). See United States v. Gottlieb, 712 F.2d 1363, 1367-68 (11th Cir. 1983) (quoting United States v. Barter Sys., Inc., 694 F.2d 163, 169 (8th Cir. 1982)).

Clower and Tiffany Fine Arts illustrate that, if the IRS has a legitimate reason to investigate the common party and can fashion summonses seeking information and documents relevant to that investigation, the IRS can use the regular summons to, in part, identify third parties for investigation in the same process.

The other claims Clower made were also rejected.  Among the reasons is that the summons was issued to Clower with respect to his liability and the person to whom the summons is issue is not authorized to move to quash under § 7609 which deals with summonses to third parties.  This does not mean that the summonsee identified as being investigated cannot assert appropriate defenses.  It just means that the defenses are asserted in a summons enforcement proceeding initiated by the Government after the summonsee fails to comply.  Noncompliance with the summons will not itself draw sanctions; rather only noncompliance with the district court's enforcement order, if granted, can be sanctioned  Also, the seminal decision in United States v. Powell, 379 U.S. 48 (1964) sustaining the broad scope of the IRS summons, although not cited by the Court, really disposes of the balance of Clower's claims.

The docket entries indicate that Clower appealed on December 25, 2015 (presumably by online filing since I doubt the cleark's office was opened).

In Summons Enforcement Proceeding, Court Rejects Taxpayer's Lack of Possession Defense For Foreign Account Documents (12/2/15)

When the IRS or a grand jury has reason to believe that a taxpayer has a foreign account, it may issue compulsory process for the account documents.  The compulsory process will be an IRS summons or a grand jury subpoena.  As I have discussed earlier in this blog, many taxpayers have unsuccessfully asserted the Fifth Amendment privilege (via act of production).  The Courts have held that the required records doctrine overcomes the assertion of the Fifth Amendment privilege.

In United States v. Malhas, 2015 U.S. Dist. LEXIS 151990 (N.D. Ill. Nov. 10, 2015), here, the taxpayer attempted another tack -- the lack of possession defense.  In summary, the defense is that the a party subject to compulsory process cannot produce documents that he does not possess or, if he doesn't possess, have sufficient control over that he could possess the documents.  In Malhas, a summons enforcement proceeding, the Court ruled that, once the IRS has proved it likely that the taxpayer does have the possession or control, the summons can be enforced.

Some interesting features of the opinion are:

1.  "Malhas argued that his control over the bank account at issue [apparently then at UBS] 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.'" The opinion does not explain why someone Malhas had never met took over the signatory authority.  Apparently, the Court did not credit this cryptic claim.

2.  "Further, Malhas alleged that the bank transferred all assets from the account at issue [with UBS] to 'Banque Baring Brothers Sturdaza' on September 24, 2008, rendering any attempt to contact 'UBS for account documents . . . useless.'"  The opinion does not indicate how Malhas knew about that transfer if he had nothing to do with the account after 2004.  Apparently, the summons sought records.

3.  Also, the transferee bank -- Banque Baring Brothers Sturdaza -- is one I have not seen surface in the Swiss bank brouhaha.  The US TAX PROGRAM list of Swiss banks participating the U.S. DOJ Swiss Bank Program, here, does list the bank, but assigns no program category to it.  Yet, the timing of the transfer from UBS to Banque Baring Brothers suggests that the bank should perhaps be in the Category 2 program.   In this regard, all category 2 banks have not yet been identified.  The bank's website is here, indicating that the spelling of the last word is "Sturdza."  Googling turns up some interesting stuff, such as the indication in a BloombergBusiness article that it is "Swiss private bank overseeing the wealth of tennis players, soccer stars and other athletes."  See Giles Broom, Baring Swiss Bank for Rich Athletes Buys Asset Manager Coges (BloombergBusiness 2/4/13), here.

4.  Malhas dithered but finally indicated to the Court that, if it would just wait, 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.'"  Yet, he admitted 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."  The Court was not pleased and denied any further time before ruling on the summons enforcement petition, noting "its surprise that Malhas had not previously sought these documents from the banks at issue."

5.  The IRS presented "numerous documents [showing] that Malhas was connected to the banks at issue during the relevant time period."  The court later referred in the quote below to this as a "plethora of documents and records illustrating Malhas's connections with the international banks and the accounts at issue."

6.  In enforcing the summons, the Court has a good discussion of the law relating to the lack of possession defense and the burden on the summonsed party to prove the defense of lack of possession.  Here are the critical paragraphs from the discussion:

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. 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 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.

5.  The summons enforcement order gives Malhas until January 12, 2016, to comply.  If he pulled out all stops immediately after the order was issued, he may be able to retrieve the summonsed documents.