The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge
Presently before the Court is the United States' Ex Parte Petition for Leave to Serve "John Doe" Summons ("Petition"). By way of its Petition, the United States seeks leave to serve, pursuant to 26 U.S.C. § 7609(f), an Internal Revenue Service ("IRS") "John Doe" Summons (hereafter "Summons") on California's Board of Equalization ("BOE"). For the following reasons, the United States' Petition is denied without prejudice.
The United States' current request derives from its need for information pertaining to property transfers that may affect the federal gift and estate taxes. Any person making "gifts" in excess of the annual exclusion amount must file a "Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return" ("Form 709"). 26 U.S.C. §§ 2503(b), 6019(a). Taxpayers have a lifetime credit against gift taxes, and Form 709 is used to track the amount of credit both: 1) utilized by the taxpayer; and
2) remaining for future use. Id., § 2505.
In addition, estate taxes may be due based on the value of an estate when transferred. Id., § 2001. The estate tax owed includes certain taxable gifts reported on Form 709 during the decedent's lifetime. Id.
The IRS has recently realized "a pattern of taxpayers failing to file Forms 709" for real property transfers between non-spouse related parties. The IRS has thus launched a "Compliance Initiative" to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.
Due to the structure of its own property tax system, California, like many other states, segregates the information sought by the IRS from other real property transfers. In California, increases in property taxes on a particular parcel of property are capped at two (2) percent per year, unless there is a change in property ownership. Cal. Const. art. 13A § 2. Propositions 58 and 193, however, extended this property tax cap to certain transfers of property from parents to children and grandparents to grandchildren. Id., § 2(h)(1)-(2); Cal. Rev. & Tax. Code § 63.1. To benefit from these Propositions, California taxpayers must file Forms BOE-58-AH (Claim for Reassessment Exclusion for Transfer Between Parent and Child) or BOE-58-G (Claim for Reassessment Exclusion for Transfer Between Grandparent and Grandchild). Declaration of Josephine Bonaffini ("Bonaffini Decl."), ¶ 14. These forms are filed with the local county assessor's office, and the respective assessor's offices then forward the information from the forms to the BOE. Id. The BOE maintains a statewide database of the information garnered from these forms. Id.
Because the BOE maintains the Propositions 58 and 193 information in a format that separates the property transfers relevant to the IRS Compliance Initiative from all other property transfers, the IRS has asked the BOE to turn over this data. Unlike many other states, however, the BOE has refused to disclose the requested information absent a summons because California law prohibits the disclosure of personal information without written consent unless required by law. Cal. Civ. Code § 1798.24.
Having been unable to secure the BOE's informal cooperation, the United States now seeks, pursuant to 26 U.S.C. §§ 7602(a) and 7609(f), a John Doe Summons ordering the State of California to produce the requested information.
"For the purpose of ascertaining the correctness of any return, making a return where none has been made, [or] determining the liability of any person for any internal revenue tax...", the Internal Revenue Code empowers the Secretary of the Treasury, or its delegate, "[t]o summon the person liable for tax or required to perform the act...or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper...to produce such books, papers, records, or other data, and to give such testimony...as may be relevant or material to such inquiry. 26 U.S.C. §§ 7602(a), 7701(11).
The IRS power to summon extends even to those situations in which the identity of the taxpayer is unknown. 26 U.S.C. § 7609(f). This power is somewhat limited, however, because where, as here, the IRS seeks to summon information that pertains to an unknown taxpayer and is in the custody of a third party, the United States must first make a showing to a court that:
1) its investigation relates to an ascertainable class of persons; 2) a reasonable basis exists for the belief that these unknown taxpayers may have failed to comply with Internal Revenue Laws; and 3) the United States cannot obtain the ...