United States District Court, Southern District of California
April 11, 2003
KENDRICK BANGS KELLOGG, PETITIONER,
CHARLES O. ROSSOTTI, THE COMMISSIONER OF INTERNAL REVENUE; AND JULIE WILSON, SPECIAL AGENT, RESPONDENTS.
The opinion of the court was delivered by: Barry Moskowitz, District Judge
ORDER RE: ORDER TO SHOW CAUSE WHY SECOND AMENDED PETITION
SHOULD NOT BE GRANTED; DENYING UNITED STATES' MOTION TO DISMISS;
GRANTING UNITED STATES' MOTION FOR SUMMARY ENFORCEMENT; AND
DENYING PETITIONER'S MOTION FOR ENLARGEMENT OF TIME AS MOOT
On January 9, 2003, Petitioner Kendrick Bangs Kellogg filed a petition to quash seventeen summonses issued by the Internal Revenue Service ("IRS") on December 17, 2002, which seek financial and other records pertaining to Kellogg from third parties.*fn1 Kellogg simultaneously filed a motion to enlarge the time to file his petition. On January 13, 2003, Kellogg amended his petition to challenge four additional summonses issued by the IRS on January 2, 2003.*fn2 On January 30, 2003, Kellogg once more amended his petition to quash two additional summonses issued by the IRS on January 16, 2003.*fn3
The Court issued an order to show cause why Kellogg's Second Amended Petition (the "Petition") should not be granted, In response, the United States filed a motion to dismiss in part and for summary enforcement of the summonses in part.*fn4
On March 26, 2003, the Court held a hearing on the order to show cause, Kellogg's motion for enlargement of time, and the United States' motion. After the hearing, Kellogg and the United States filed supplemental papers relating to how and when the summonses were served on Kellogg. For the reasons discussed below, the United States' motion to dismiss is DENIED, the United States' motion for summary enforcement is GRANTED and Kellogg's motion for enlargement of time is DENIED AS MOOT.
A. The Seventeen Summonses Issued on December 17, 2002
The Government initially argued that Kellogg's Petition, as it relates to the seventeen summonses issued on December 17, 2002, must be dismissed because it is untimely. However, the Government was mistaken as to the date of service. Kellogg was served on December 20, 2002, via UPS second day delivery, not on December 19, 2002, via certified mail as originally asserted by the Government. (Supp. Willson Decl., ¶¶ 4-5.)
26 U.S.C. § 7609(b)(2)(A) provides that "any person who is entitled to notice of a summons . . . shall have the right to begin a proceeding to quash such summons not later than the 20th day after the day such notice is given in the manner provided in subsection (a)(2)." (Emphasis added.) Notice is given within the meaning of section 7609(b)(2)(A) on the date that the notice is mailed not the date that notice was received. Stringer v. United States, 776 F.2d 274, 275-76 (11th Cir. 1985); Berman v. United States, 264 F.3d 16, 19 (1st Cir. 2001).
Using the service date of December 20, 2002 to calculate the twenty day period, Kellogg's Petition was filed on time (on the 20th day). The Government concedes that Petitioner timely filed his Petition as to all 23 summonses.
Accordingly, the Court denies the Government's motion to dismiss. The Court also denies Kellogg's motion for enlargement of time as moot.
B. Enforcement of the Summonses
To establish a prima facie case validating the summonses at issue, the IRS must show (1) the investigation has a legitimate purpose; (2) the material sought is relevant to that purpose; (3) the IRS is not already in possession of the material sought; and (4) the IRS has complied with the applicable administrative requirements. United States v. Powell, 379 U.S. 48, 57-58 (1964); United States v. Blackman, 72 F.3d 1418-22 (9th Cir. 1995). The IRS need only make a minimal showing with regard to these elements. Blackman, 72 F.3d at 1422. After the IRS makes its prima facie case, a "heavy burden" falls upon the person seeking to quash the summons to disprove the IRS's assertions. Id. The taxpayer must allege specific facts and evidence to support his allegations of bad faith or improper purpose. Crystal v. United States, 172 F.3d 1141, 1144 (9th Cir. 1999).
The Government has made out a prima facie case. The purpose of Special Agent Willson's investigation is to determine Kellogg's correct federal individual income tax liability for years 1998, 1999, 2000, 2001, and 2002 and to determine whether Kellogg has violated any provisions of the Internal Revenue Code or any other laws. (Willson Decl., ¶ 2.) This investigation is legitimate pursuant to 26 U.S.C. § 7602, which permits the IRS to issue summonses for purposes of determining the liability of any person for any internal revenue tax.
The material sought is relevant to the purpose of the investigation. Willson explains, "The summonses seek financial documents and information related to Kellogg, his spouse, and several entities, in which, I determined, based on my investigation, Kellogg has created or has an interest." (Willson Decl., ¶ 15.)
Willson also declares that to her knowledge, the IRS was not already in possession of the material sought and that the administrative requirements pertaining to summonses have been satisfied. (Willson Decl., ¶¶ 16-17.)
Kellogg has not disproved the IRS's prima facie case. Kellogg claims that the investigation is not legitimate and is conducted in bad faith. Kellogg claims that Form 2039 cannot be used in connection with income tax investigations because there are no regulations providing as such. Kellogg also claims that the "chain of authority" providing for the use of Form 2039, limits its use to excise taxes. These argument lack merit. Section 7602 of the Internal Revenue provides that for the purpose of determining the liability of any person for any internal revenue tax, the Secretary is authorized to summon any person the Secretary may deem proper to produce such books, papers, record, or other data as may be relevant to such inquiry. Under the plain language of the statute, Form 2039 can be used in connection with income tax investigations.
Kellogg further claims that the IRS is using the summonses for an improper purpose. Kellogg contends that (1) the IRS is attempting to harass him and coerce him to pay income taxes because he has the temerity to suggest that he is not liable for the taxes; (2) the IRS is attempting to coerce him into accepting the 100% levy of his social security benefit; (3) the IRS is improperly attempting to seek information about him even though it has failed to provide responses to his requests for information (i.e., a showing that he is liable for taxes). These arguments are unpersuasive.
There is no evidence that the IRS is doing anything but carrying out a legitimate investigation regarding Kellogg's income tax liability. Kellogg has taken the position that he is not liable for income taxes and apparently has not paid any for several years. The IRS disagrees with Kellogg's position and is entitled to investigate Kellogg's income tax liability.*fn5 Kellogg has not provided any evidence that the IRS is being vindictive or is exerting unlawful pressure on him.
Kellogg's claim that the IRS has violated the Freedom of Information Act, Privacy Act, and other laws by failing to respond to his requests for information is beyond the scope of the matter before the Court. This issue has no bearing on whether the IRS is conducting a legitimate investigation. See, e.g., United States v. McAnlis, 721 F.2d 334, 337 (11th Cir. 1983) (holding that compliance with the Privacy Act is not a prerequisite to enforcement of an IRS summons); United States v. Wills, 475 F. Supp. 492, 494 (M.D. Fla. 1979) (explaining that the enforcement of IRS summonses is not conditioned on FOIA compliance).
As for Kellogg's claim that the IRS is attempting to coerce him into accepting the 100% levy of his social security benefits, Kellogg has not established any nexus between the issuance of the summonses and the dispute regarding his social security benefits. Kellogg has not come forward with any evidence suggesting that the purpose of Willson's investigation is to somehow put pressure on him to not challenge the levy.
Kellogg also argues that the issuance of the summonses was improper because it is "virtually impossible to determine whether anyone has decided to recommend him to the Justice Department for prosecution." Section 7602(d)(1) provides: "No summons may be issued under this title, and the Secretary may not begin any action under section 7604 to enforce any summons, with respect to any person if a Justice Department referral is in effect with respect to such person." In United States v. LaSalle National Bank, 437 U.S. 298, 316-17 (1978), the Supreme Court held that the IRS will be deemed to have acted in bad faith if the IRS delays "in submitting a recommendation to the Justice Department when there is an institutional commitment to make the referral and the Service merely would like to gather additional evidence for the prosecution." (Emphasis added.)
Willson declares that Kellogg's case has not been referred to the Department of Justice as a criminal proceeding. Kellogg has not provided any evidence to the contrary. Kellogg has also failed to come forward with any specific facts establishing that the IRS has already made an institutional commitment to make the referral. (Kellogg misconstrues LaSalle as holding that the issuance of summonses is prohibited once anyone in the IRS decides to make a recommendation to the Department of Justice.) Due to the absence of any facts or evidence supporting Kellogg's suspicion that the IRS has already decided to refer his case to the Department of Justice, the Court cannot find that the IRS is acting in bad faith. See United States v. Jose, 131 F.3d 1325, 1328 (9th Cir. 1997) (holding that the respondent, who alleged that the underlying reason for the Government's motion to enforce summonses was a pending criminal prosecution, did not come close to meeting his burden because he provided no facts or evidence to support his allegation).
Kellogg's claim that the information sought is already in the IRS's possession or available through other means is conclusory. Kellogg does not explain why he thinks the information is already in the IRS's possession or available through other means, nor does he provide any evidence supporting his claim.
Kellogg's best argument is that the IRS has not complied with all of the administrative steps required by the Internal Revenue Code. It appears that Willson did not strictly comply with the notice requirements of 26 U.S.C. § 7609 (a)(2). Willson mailed the summonses to Kellogg via UPS or first-class mail instead of by certified or registered mail as prescribed by section 7609(a)(2). (Suppl. Willson Decl., ¶¶ 4, 9, and 12.) However, Willson explains that she also served the summonses on Milton H. Baxley II and Bryan D. Malatesta, individuals who are listed as having power of attorney to act on behalf of Kellogg before the IRS. (Id.) The first seventeen summonses were served on Baxley and Malatesta by way of UPS. (Suppl. Willson Decl., ¶ 4.) The remaining summonses were served via certified mail. (Suppl. Willson Decl., ¶¶ 9 and 12.) Moreover, in a letter dated December 20, 2002, Kellogg informed Willson that he is "not authorized to pick up certified mail" addressed to him and requested that she send certified mail to Baxley. (Exh. 22 to Suppl. Willson Decl.)
Kellogg argues that because Willson failed to serve the summonses as required by section 7609(a)(2), the Government has not satisfied the fourth prong of the Powell test which requires compliance with applicable administrative requirements. However, courts have held that strict compliance with the notice requirements of section 7609 is not necessary. See, e.g., Int'l Bus. Ent. v. United States, 1995 WL 381626 (S.D. Cal. Mar. 30 1995) (holding that the fourth Powell requirement is not strictly construed on a motion to quash); Villella v. United States, 2000 WL 968773 (S.D.N.Y. July 12, 2000) (holding that the failure to comply with the taxpayer notice requirements of section 7609 does not necessarily warrant the quashing of third-party summonses). As explained by the Fifth Circuit, "[t]he correct approach for determining whether to enforce a summons requires the court to evaluate the seriousness of the violation under all the circumstances, including the government's good faith and the degree of harm imposed by the unlawful conduct." United States v. Bank of Moulton, 614 F.2d 1063, 1066 (5th Cir. 1980).
The Court is convinced that Willson acted in good faith, particularly as to the summonses served after Kellogg informed Willson not to send him certified mail. To ensure that Kellogg received proper notice Willson always served Baxley and Malatesta in addition to Kellogg. Kellogg was not prejudiced in any way; Kellogg admits that he received the summonses and was able to bring a timely petition to quash all of the summonses.
In conclusion, Kellogg has failed to overcome the Government's prima facie case for enforcement of the summonses. Therefore, the Court grants the United States' motion to summarily enforce the summonses and denies Kellogg's Petition in its entirety.
For the reasons discussed above, Kellogg's motion for enlargement of time [5-1] is DENIED AS MOOT. The United States' motion to dismiss is DENIED. The United States' motion to summarily enforce the summonses is GRANTED. The Court ORDERS COMPLIANCE with the summonses within thirty-five days after this order is entered. Kellogg's Second Amended Petition to Quash Third Party Administrative Summonses is DENIED. The Clerk shall enter judgment accordingly.
IT IS SO ORDERED.