The opinion of the court was delivered by: Michael P. McCUSKEY Chief U.S. District Judge
A rule to show cause hearing was held in this case on July 13, 2006. After allowing the parties to be heard on this matter, this court granted the United States' Petition to Enforce Internal Revenue Service Summons (#1). This court now enters a written opinion to fully explain its ruling.
On April 19, 2006, the United States of America, through Michael J. Roessner of the U.S. Department of Justice, Tax Division, filed a Petition to Enforce Internal Revenue Service Summons (#1) against Respondents, Steven Pruiett and Investment Planners, Inc. The Government stated that the Internal Revenue Service (IRS) is investigating Pruiett's sales of insurance products that promoted tax savings under 26 U.S.C. § 419A. The Government further stated that, in furtherance of the investigation, IRS summons were issued, and Pruiett has failed to comply with the summonses. The Government requested: (1) that this court enter an order directing Pruiett to show cause in writing as to why he should not comply with the IRS summonses issued on March 21, 2005; (2) that, after consideration of these arguments, this court enter an order directing Pruiett to appear before an IRS officer or employee at a time and place to be determined by that IRS official to give testimony and produce the books, records, papers, and other data requested by the summonses for examination and copying; and (3) that the Government recover its costs incurred in bringing the Petition. The Government also filed a Memorandum in Support (#2) and the Declaration of Darrell Strohman. Subsequently, the Government's oral motion to file a corrected affidavit was granted, and a corrected Declaration of Darrell Strohman (#4) was filed in support of the Petition.
In his Declaration, dated April 18, 2006, Strohman stated that he is an Internal Revenue Agent conducting an investigation of a possibly abusive tax scheme organized and promoted by Pruiett through his company Investment Planners, Inc. Strohman stated that Pruiett's possible abusive tax scheme involves 26 U.S.C. § 419A(f)(6). Pruiett is a resident of Champaign, Illinois, and Investment Planners, Inc. is an Illinois corporation with its principal place of business in Decatur, Illinois. Strohman stated that the type of investigation he is conducting is commonly referred to as a Section 6700 investigation, named after the section of the Internal Revenue Code which imposes a penalty on promoters of abusive tax schemes. Strohman stated that a Section 6700 investigation primarily involves gathering information. He stated that the IRS must secure information and documents from the promoter and other sources that demonstrate the operation and organizational structure of the tax scheme or plan and how and to whom they marketed it. In connection with this investigation, the IRS served Pruiett with two summonses to determine: (1) whether Pruiett's plans, both on paper and in practice, are consistent with the Internal Revenue Code; and (2) whether Pruiett made any false or fraudulent statements about the plans. One summons was directed to Pruiett personally and the other was directed to Investment Planners, Inc. Strohman recounted his interactions with Pruiett's attorney, Gary Kanter, following the issuance of the summonses. Strohman stated that, ultimately, Pruiett's counsel indicated that Pruiett would not comply with the summonses. Strohman further stated that the summoned documents are necessary to help determine whether Pruiett is engaging in conduct subject to penalty under § 6700. Strohman stated that all proper procedures were followed but that Pruiett failed to provide the requested documents and appear at the time required by the March 21, 2005, summonses and that his failure to comply has continued to the date of the Declaration. Strohman also stated that the documents and records sought are not in the IRS's possession. A copy of the Summons issued to Pruiett and a copy of the Summons issued to Investment Planners, Inc. were attached to the Declaration.
On May 16, 2006, Magistrate Judge David G. Bernthal entered an Order to Show Cause (#6). Judge Bernthal stated that Respondents were ordered to appear before this court on June 29, 2006, at 1:00 p.m. to show cause why they should not be compelled to obey the Internal Revenue summons issued on March 21, 2005. In this Order, Judge Bernthal stated that he had considered the Government's Petition, the Declaration of Darrell Strohman, and the accompanying Memorandum of law. Judge Bernthal found that the file in this case reflects a prima facie showing that the investigation is being conducted for a legitimate purpose, that the inquiry may be relevant to that purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Internal Revenue Code have been followed. Judge Bernthal therefore determined that, pursuant to United States v. Powell, 379 U.S. 48, 57-58 (1964), the burden of coming forward shifted to Respondents to oppose enforcement of the summons. Judge Bernthal stated that any defense or opposition to the Petition had to be made in writing and filed at least 14 days prior to the date of the show cause hearing. The Order stated:
At the show cause hearing, the Court will consider all issues raised by respondents. Only those issues brought into controversy by the responsive pleadings and supported by affidavit will be considered. Any uncontested allegation in the petition will be considered admitted.
The record shows that the Order to Show Cause was served on Respondents on May 22, 2006. On June 14, 2006, at the oral request of the parties, the show cause hearing was rescheduled for July 13, 2006, at 11:00 a.m.
On June 16, 2006, attorneys Gary Kanter and Lane Gensburg entered their appearance on behalf of Respondents. On June 20, 2006, Respondents filed their Answer to the Government's Petition to Enforce Internal Revenue Summons (#11) and Memorandum in Opposition (#12), with attached exhibits.
In their Response to the Petition, Respondents stated that Investment Planners, Inc. is a registered broker providing various financial products and services to clients and that Pruiett is the president and 67 percent shareholder in Investment Planners. Respondents argued that the summonsed information is not limited to 419A(f)(6) plans determined by the IRS to be abusive, but includes information on any and all 419A(f)(6) plans in which Respondents may have been involved. They argued that "[s]uch request amounts to nothing more than a blatant fishing expedition, and is irrelevant to the purpose of the Section 6700 investigation Strohman is conducting." Respondents argued that, because they are being investigated under Section 6700 for promoting abusive tax shelters, "they have the right to limit the information they are compelled to produce to only those plans determined by the IRS to be abusive." Respondents contended that, without providing that information, "the IRS cannot establish that the information sought by the Summonses is relevant or that the Summonses were issued for a proper purpose." Respondents contended that this court should deny the Petition because: (1) the Government failed to make a prima facie case to enforce the March 2005 summons under the Powell standard; and (2) enforcement of the summons would constitute an abuse of process. Respondents also argued that they should be entitled to discovery. They asserted that a limited evidentiary hearing should be conducted and discovery should be authorized if the "court is not convinced that the summons were issued for a proper purpose." Respondents provided this court with numerous documents, including Pruiett's affidavit and correspondence between Pruiett's counsel and IRS representatives.
On July 3, 2006, the Government filed its Reply Memorandum in Support of Petition to Enforce Internal Revenue Summons (#13). In its Reply, the Government argued that Respondents' exhibits demonstrate the IRS's repeated good faith attempts to limit the summoned information and Respondents' continued failure to respond to the IRS summonses. The Government argued that Respondents' response fails to offer any legitimate defense to enforcing the summons so that they have clearly failed to meet their heavy burden. The Government also stated that the documents requested in the summons "go to the heart of the IRS investigation regarding I.R.C. § 419A(f)(6)." The Government contended that the demand is not too indefinite and the information sought is reasonably relevant to the IRS investigation.
At the hearing, Respondents' counsel argued that this court should not allow the Government to conduct a fishing expedition and also argued that the case relied upon by the Government, Benistar Employer Servs. Trust Co. v. United States, 2005 WL 3429423 (D. Conn. 2005), involved a third-party record keeper summons and has no application to this case. Respondents also argued that, if this court determined that the summonses should be enforced, they should be limited to the sixteen 419A(f)(6) promotions identified in a letter from Jason Anderson, an attorney for the IRS's Office of Chief Counsel.
"Congress has established a statutory structure that endows the IRS with extensive authority to conduct effective tax investigations." United States v. Crum, 288 F.3d 332, 333 (7th Cir. 2002). Under 26 U.S.C. §§ 7402(b) and 7604(b), district courts have jurisdiction to enforce an administrative summons in an adversarial proceeding commenced by the filing of a ...