Schoop v. Commissioner of Internal Revenue et al, No. 3:2013cv02233 - Document 22 (N.D. Cal. 2013)
Court Description: ORDER GRANTING MOTIONS TO DISMISS AND ORDERING COMPLIANCE WITH SUMMONSES. 14 1 (Illston, Susan) (Filed on 10/2/2013)
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Schoop v. Commissioner of Internal Revenue et al Doc. 22 1 2 3 4 5 6 7 IN THE UNITED STATES DISTRICT COURT 8 FOR THE NORTHERN DISTRICT OF CALIFORNIA 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 No. C 13-02230 SI Related Case Nos. 13-02232, 13-02233 CATHERINE SCHOOP, Plaintiff, ORDER GRANTING MOTIONS TO DISMISS AND ORDERING COMPLIANCE WITH SUMMONSES. v. COMMISSIONER OF INTERNAL REVENUE, and UNITED STATES OF AMERICA Defendants. / 17 Plaintiffs, Catherine Schoop and the corporation she owns, New York Frankfurter Company of 18 California, have filed three related actions against the United States and the Internal Revenue Service: 19 Schoop’s “Civil Action - Motion to Quash Summons” (C 13-2230 SI); New York Frankfurter 20 Company’s “Civil Action - Motion to Quash Summons” (C 13-2232 SI ); and Schoop’s “Civil Action 21 Motion to Quash Third Party Summons” (C 13-2233 SI). Defendant United States has filed a motion 22 to dismiss the three motions to quash, and to compel compliance with the summonses. 23 The United States’ motion is currently scheduled for a hearing on October 11, 2013. Docket No. 24 21 in Case No. 13-02230. Pursuant to Civil Local Rule 7-1(b), the Court finds these matters appropriate 25 for resolution without oral argument and hereby VACATES the hearing. For the reasons set forth 26 below, the Court hereby GRANTS the motion to dismiss the motions to quash and GRANTS the motion 27 to compel compliance with summonses. 28 Dockets.Justia.com 1 BACKGROUND Defendant Internal Revenue Service (“IRS”) is conducting a civil examination of the federal tax 3 liabilities of New York Frankfurter Company of California, Inc. for the tax years 2010-2011, and of 4 Catherine Schoop, the sole shareholder and President of New York Frankfurter, for the tax year 2009. 5 Grellas Decl. ¶ 1. Revenue Agent Ariana Grellas is the IRS agent in charge of the investigation. On 6 April 19, 2013, Grellas served a summons on New York Frankfurter, directing Schoop to appear on May 7 10, 2013 and to produce for examination documents relevant and material to the examination of the 8 federal income tax liability of New York Frankfurter. Grellas Decl. ¶ 4. On April 19, 2013, Agent 9 Grellas also issued a summons directing Schoop to appear on May 10, 2013, and to produce for 10 United States District Court For the Northern District of California 2 examination documents relevant and material to the examination of the federal income tax liability of 11 Schoop herself. Id. ¶¶ 12, 14. Schoop did not appear in response to either summons. Id. ¶¶ 5, 13. 12 On May 8, 2013, Grellas issued a summons to First American Title, seeking testimony and 13 documents relating to purchase and mortgage history of 343 Pioneer Way, Tahoe City, California, 14 purchased by Schoop in 2005. Mot. to Quash, p. 2 in Case No. 13-0223, Grellas Decl. ¶ 21. Grellas 15 stated that documents related to this purchase are relevant in conducting the examination of Schoop’s 16 federal income tax liability. Grellas Decl. ¶ 23. Grellas received a response to the summons from First 17 American Title by mail, but has not opened the mail envelope pending resolution of this summons 18 enforcement proceeding. Id. ¶ 22. Grellas stated all administrative steps required by the Internal 19 Revenue Code for issuance of the three summonses have been taken. Id. ¶¶ 10, 19, 26. 20 On May 16, 2013, plaintiffs filed the three “Civil Action - Motion to Quash Summons” 21 proceedings. Plaintiffs alleged that the information sought has already been obtained by the IRS and 22 that consequently the testimony of Schoop has no legitimate purpose. Mot. to Quash, p. 3; Ho Decl. ¶ 23 4-6. Plaintiffs alleged that the IRS summons of Schoop is improper and should be quashed because it 24 fails to meet two of the four elements set fourth by the Supreme Court in U.S. v. Powell 379 U.S. 48, 25 57-58 (1964). Mot. to Quash, p. 3. 26 On July 12, 2013, the United States filed its motions to dismiss plaintiffs’ motions and to compel 27 compliance with the summonses. Docket No. 14 in Case Nos. 13-02230 and 13-02233; Docket No. 13 28 in Case No. 13-02232. 2 1 LEGAL STANDARD To enforce a summons, the IRS must establish a prima facie case: (1) that there is a legitimate 3 purpose for the investigation; (2) that the material sought in the summons is relevant to that purpose; 4 (3) that the material sought is not already within the possession of the IRS; and (4) that those 5 administrative steps which are required by the Internal Revenue Code have been taken. Powell, 379 6 U.S. at 57-58. Once the government establishes its prima facie case, the party moving to quash the 7 summons carries the burden of disproving the existence of a valid purpose or proving that enforcement 8 of the summons would be an abuse of the court’s process. Id. at 58. Abuse of process takes place “if 9 the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure 10 United States District Court For the Northern District of California 2 on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular 11 investigation.” Id. 12 The Ninth Circuit has further stated: 13 The government's burden is a “slight one” and typically is satisfied by the introduction of the sworn declaration of the revenue agent who issued the summons that the Powell requirements have been met. United States v. Dynavac, Inc., 6 F.3d 1407, 1414 (9th Cir.1993); United States v. Gilleran, 992 F.2d 232, 233 (9th Cir.1993). Once a prima facie case is made a “heavy” burden is placed on the taxpayer to show an “abuse of process” or “the lack of institutional good faith.” Dynavac, 6 F.3d at 1414. 14 15 16 Fortney v. United States, 59 F.3d 117, 120 (9th Cir. 1995). 17 18 DISCUSSION 19 1. The IRS has established a prima facie case supporting enforcement of the summonses 20 The IRS may establish its prima facie case for enforcement of summonses by providing the 21 investigating agent’s sworn statement that the Powell factors are met. Liberty Fin. Serv. v. United 22 States, 778 F.2d 1390, 1392 (9th Cir. 1985). Here, the IRS has provided such a declaration by Agent 23 Grellas. The declaration states that: (1) the investigation has the legitimate purpose of ascertaining the 24 federal income tax liability of New York Frankfurter and Schoop; (2) the summonses were issued to 25 gather material relevant to ascertaining the federal tax liability of New York Frankfurter and Schoop; 26 (3) that the materials sought by the summonses are not already within the possession of the IRS; and 27 (4) that all administrative steps required by the Internal Revenue Code were taken. See Grellas Decl. 28 3 1 Plaintiffs claim that the government fails to satisfy the second and third Powell factors. Mot. 2 to Quash, p. 3. Plaintiffs first challenge the government’s satisfaction of the third Powell factor,1 3 arguing that the all information sought by the IRS though these summonses has already been provided 4 during the August 27, 2012 audit and by plaintiffs’ counsel. Id. Plaintiffs then challenge the 5 government’s satisfaction of the second Powell factor claiming “since the information sought has 6 already been obtained by the IRS, the testimony of petitioner can also serve no legitimate purpose and 7 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, 9 admissibility standards under the Federal Rules of Evidence. Summoned material is relevant if it might 10 United States District Court For the Northern District of California 8 “throw light” upon the correctness of the return. United States v. Arthur Young & Co., 465 U.S. 805, 11 814 (1984). Congress expressly intended for the IRS to obtain materials “of even potential relevance 12 to an ongoing investigation.” Id. (emphasis in original). 13 As explained below, the Court finds that Agent Grellas’ declaration establishes that the 14 summoned materials are relevant, satisfying the minimal requisite showing for prima facie enforcement. 15 16 A. 17 Grellas stated that New York Frankfurter provided documents and materials insufficient “to 18 adequately substantiate the gross receipts reported on the tax returns.” Grellas Decl. ¶ 3. This resulted 19 in a notice being sent to New York Frankfurter, in care of Schoop, explaining that the records were 20 inadequate. Id. The notice provided a list of reasons why the records provided are inadequate, 21 specifically that: 22 1. 23 2. 24 3. New York Frankfurter Summons Daily sales sheets were not retained. Taxpayer should retain original daily sales slips and sales summary spreadsheets. Inventory records were not retained. Taxpayer should retain original inventory count sheets. No record of amounts taken from daily sales for petty cash. Taxpayer should track the source and application of petty cash funds. 25 26 1 27 28 Two of the motions to quash state that they challenge IRS compliance with the fourth Powell factor, which relates to having performed the administrative steps required by the Internal Revenue Code. However, the discussion in each motion concerns only whether the information is already in the IRS’s possession, which is the third Powell factor. See Docket No. 1, p. 3 in Case Nos. 13-02230, 1302232. 4 1 4. No record of catering contacts. Taxpayer should retain original catering contracts, including a record of payments received for each catering contract. 2 3 Grellas Decl. Ex. 2, p. 2. 4 Because these issues are relevant to the tax years under examination and need to be addressed 5 to adequately substantiate the gross receipts reported on the 2010-2011 tax returns, Grellas stated it is 6 necessary to interview Schoop in order to address these issues. Grellas Decl. at ¶¶ 3-4. The records 7 sought from New York Frankfurter are both relevant to the examination of federal tax liability of New 8 York Frankfurter and not in the IRS’s possession. Id. at ¶¶ 3-8. 9 United States District Court For the Northern District of California 10 B. Schoop Summons 11 Grellas stated that Schoop provided documents insufficient “to substantiate examination issues, 12 including possible dividends from New York Frankfurter, unexplained source of funding for living 13 expenses when compared to filed tax returns, and questions regarding real property that was allegedly 14 gifted to her son.” Id. ¶ 15. Because these issues are relevant to the tax years under examination and 15 need to be addressed to determine if it is necessary to open subsequent tax years for examination, 16 Grellas stated it is necessary to interview Schoop in order to address these issues. Id. The records are 17 not in the IRS’s possession and are necessary for Agent Grellas’ investigation. Id. at ¶¶ 14-16, 18. 18 19 C. First American Title Summons 20 Grellas stated that the records from First American Title are “information [that] may reveal the 21 taxpayer’s entitlement to deductions and income received during tax year 2009, additional sources of 22 income, possible principal payments to her mortgage lender, bank accounts unknown to the IRS, income 23 producing assets, or statements of income inconsistent with the income tax return filed.” Id. ¶ 23. The 24 documents provided were insufficient in addressing these issues Grellas claimed are relevant to the 25 examination. Id. ¶ 24. Because the records from First American Title could potentially reveal new 26 relevant information regarding Schoop’s federal income tax liability, Grellas stated the records from 27 First American Title are necessary in order to address these issues. See Arthur Young & Co., 465 U.S. 28 at 814; Grellas Decl. ¶¶ 23-24. 5 1 The United States has established that the information requested by the three summonses is (1) 2 relevant and (2) not currently in the IRS’s possession. Therefore, the Court finds that the IRS has 3 satisfied all the Powell factors. 4 5 2. Plaintiffs have not met their burden to support quashing the summonses As the IRS has established a prima facie case for enforcement of the summonses, the burden 7 shifts to plaintiffs to “challenge the summons on any appropriate ground,” such as alleging that the IRS 8 abused the court’s process by issuing the summons “for an improper purpose, such as to harass the 9 taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on 10 United States District Court For the Northern District of California 6 the good faith of the particular investigation.” Powell, 379 U.S. at 58 (quoting Reisman v. Caplin, 375 11 U.S. 440, 449 (1964) (internal quotes omitted). Plaintiffs’ burden is “a heavy one,” requiring “specific 12 facts and evidence to support his allegations.” Liberty Fin. Serv., 778 F.2d at 1392. 13 Plaintiffs have not provided specific facts or evidence to support their allegations. Simply 14 claiming information has “already been provided through the audit examination” and that in-person 15 testimony is “completely irrelevant, harassing and unduly burdensome” lacks specificity and factual 16 support to meet the plaintiff’s heavy burden. See e.g. Pl’s. Opp’n to Defs’. Mot. to Dismiss, p. 4. 17 Without specific facts or evidence to support her allegations, plaintiffs cannot meet their burden to quash 18 the summonses.2 19 20 21 Accordingly, this Court GRANTS the motion to dismiss the motions to quash, and ORDERS that plaintiffs comply with the summonses. IT IS SO ORDERED. 22 Dated: October 2, 2013 23 SUSAN ILLSTON UNITED STATES DISTRICT JUDGE 24 25 26 27 28 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. 6
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