United States District Court, N.D. Illinois, Eastern Division
SAMUEL DER-YEGHIAYAN, District Judge.
This matter is before the court on Petitioner United States of America's motion for order to show cause. For the reasons stated below, the motion is granted.
Petitioner contends that the Internal Revenue Service (IRS) is conducting an investigation of Respondent Artex Risk Solutions, Inc. (Artex). The IRS is allegedly examining Artex's role in transactions involving captive insurance plans under 26 U.S.C. § 831, and investigating whether such transactions constitute abusive transactions. On December 19, 2013, the IRS issued two IRS administrative summonses (Summonses) to Artex. The Summonses directed a representative of Artex to appear before Revenue Agent Robert W. Meyer (Meyer) on January 9, 2014, give testimony, and produce for examination records and documents, including contracts, policies, promotional materials, and claims related to a captive insurance program or arrangement, as described in the Summonses. On January 9, 2014, an Artex representative allegedly appeared before Meyer, but failed to provide testimony or produce any documents. Artex has allegedly subsequently refused to comply with the Summonses. The IRS contends that the information and records that are sought in the Summonses may be relevant to the investigation of Artex and may shed light on whether Artex is subject to liability. Petitioner brought the instant action seeking to enforce the Summonses, and Petitioner has now filed a motion for rule to show cause as to why Artex should not have to comply with the Summonses.
Congress, has provided the "IRS with extensive authority to conduct effective tax investigations" and "[a]s a necessary incident to this investigatory power, Congress gave the [IRS] expansive authority in § 7602(a) to summon any person to provide information relevant to a particular tax inquiry." United States v. Crum, 288 F.3d 332, 333 (7th Cir. 2002). The IRS, however, is not empowered with authority to enforce the summons that it issues. United States v. BDO Seidman, 337 F.3d 802, 809-10 (7th Cir. 2003). The IRS must "apply to the district court to secure an enforcement order" when "a taxpayer fails to comply with a summons...." Id. (citing 26 U.S.C. § 7604). In a proceeding in which the IRS is seeking to enforce a summons, the IRS must first make out a prima facie case. Khan v. United States, 548 F.3d 549, 554 (7th Cir. 2008); Miller v. United States, 150 F.3d 770, 772 (7th Cir. 1998)(citing United States v. Powell, 379 U.S. 48, 57-58 (1964)); see also BDO Seidman, 337 F.3d at 809-10 (stating that in determining whether an IRS administrative summonses should be enforced, a court "must scrutinize them to determine whether they are made in good faith and seek information relevant to a legitimate investigative purpose"); see also United States v. Insurance Consultants of Knox, Inc., 187 F.3d 755, 759 (7th Cir. 1999)("[t]he Powell requirements impose only a minimal burden' on the agency" and "[t]hey can usually be satisfied by an affidavit stating that the government has met them"). If the Government is able to "make a prima facie showing of good faith, the burden shifts to the respondent to show that the enforcement of the summons would constitute an abuse of process." BDO Seidman, 337 F.3d at 809-10; see also Miller, 150 F.3d at 772 (stating that "[t]he Powell requirements impose only a minimal burden on the agency"); Knox, Inc., 187 F.3d at 759 (stating that "[t]he taxpayer can rebut the government's prima facie case only by alleging specific facts' in rebuttal").
Petitioner argues that it has satisfied all of the necessary steps to present a prima facie case and warrant enforcement of the Summonses. Artex argues that Petitioner has not presented a prima facie case. Artex also argues that the Summonses are an abuse of the IRS's power.
I. Evidentiary Hearing and Discovery
Artex argues that "[t]o the extent any of the necessary facts... are in dispute, respondent is entitled to an evidentiary hearing...." (Ans. 7). However, the Seventh Circuit has made clear that "[s]ummons enforcement proceedings are intended to be summary in nature, and it is left to the district court's discretion to determine whether a hearing is necessary." BDO Seidman, 337 F.3d at 810 (internal quotations omitted)(quoting 2121 Arlington Heights Corp. v. IRS, 109 F.3d 1221, 1224 (7th Cir. 1997)); see also United States v. Utecht, 238 F.3d 882, 887 (7th Cir. 2001)(stating that the taxpayer "bears the burden of making a prima facie showing before the district court must hold a hearing to investigate whether the IRS abused its civil summons power" and that the taxpayer "must present specific, detailed, and material facts in order to carry this burden"); United States v. Kis, 658 F.2d 526, 535 (7th Cir. 1981)(stating that "[i]n discussing the relative burdens of the parties in summons enforcement actions, " the court could not "stress too emphatically that these proceedings are intended to be summary in nature"); Adams v. I.R.S., 1999 WL 1001584, at *6 (N.D. Ind. 1999)(stating "only if the taxpayer has alleged specific facts that permit an inference of some improper purpose on the part of the government is the taxpayer entitled to an evidentiary hearing"). Artex has not pointed to any material disputed facts or facts indicating bad faith on the part of the IRS that need to be resolved in an evidentiary hearing prior to a ruling on Petitioner's motion. Artex has failed to provide information to the IRS in a timely fashion, and has further delayed its production while the IRS followed the procedures to enforce the Summonses. Artex has not provided sufficient justification to allow a further delay in its compliance by the scheduling of an evidentiary hearing prior to a ruling on Petitioner's motion. Summons enforcement actions are intended to be summary proceedings and Artex has not pointed to extraordinary circumstances or specific facts that warrant an evidentiary hearing in this case. Therefore, Artex's request for an evidentiary hearing is denied.
Artex also requests leave to conduct discovery in this case before the court rules on the instant motion. (Ans. Mot. 12). There is ample evidence in the record to enable the court to rule on the instant motion without discovery. As indicated above, the summons enforcement process should be summary in nature and Artex has not pointed to any specific need to conduct discovery in this case. Therefore, Artex's request for discovery is denied.
II. Prima Facie Case
Petitioner argues that it can establish a prima facie case. To make a prima facie case in a summons enforcement action, the IRS must establish: (1) that "the summons was issued for a legitimate purpose, " (2) that "the summoned data may be relevant to that purpose, " (3) that "the data is not already in the Government's possession, " and (4) that "the administrative steps required by the Internal Revenue Code for issuance and service have been followed." Khan, 548 F.3d at 554 (citing United States v. Powell, 379 U.S. 48, 57-58 (1964))(stating that "the United States must not violate provisions of § 7602, including § 7602(d)(1), designed to ensure the summons is issued in good faith"); see also Miller, 150 F.3d at 772 (stating that the IRS must make out a prima facie case, by establishing: (1) "that the investigation has a proper purpose, " (2) that "the information sought may be relevant to that purpose, " (3) that "the IRS does not already have the information, " and (4) that "the IRS has followed the statutory requirements for issuing a summons"); Kis, 658 F.2d at 536 (stating ...