Action Recycling Inc. v. United States , 721 F.3d 1142 ( 2013 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ACTION RECYCLING INC., No. 12-35338
Petitioner-Appellant,
D.C. No.
v. 2:11-cv-00457-
JLQ
UNITED STATES OF AMERICA;
HEATHER BLAIR, IRS Agent,
Respondents-Appellees. OPINION
Appeal from the United States District Court
for the Eastern District of Washington
Justin L. Quackenbush, Senior District Judge, Presiding
Submitted June 5, 2013*
Seattle, Washington
Filed July 9, 2013
Before: Arthur L. Alarcón, M. Margaret McKeown,
and Sandra S. Ikuta, Circuit Judges.
Opinion by Judge McKeown
*
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
2 ACTION RECYCLING, INC. V. UNITED STATES
SUMMARY**
Tax
The panel affirmed the district court’s denial of a motion
to quash third-party summonses.
An agent of the Internal Revenue Service audited
taxpayer’s bank statements and notes but did not make any
copies. Later, the IRS served taxpayer with notice of third-
party summonses to two banks for the statements that the IRS
agent had reviewed and other documents. The panel held that
an IRS Revenue Agent’s review of records does not
automatically give the IRS permanent possession of all of the
information in those records and that a later summons for the
same records is permissible under United States v. Powell,
379 U.S. 48 (1964).
COUNSEL
Charles H. Hammer, Spokane, Washington, for Petitioner-
Appellant.
Teresa E. McLaughlin and Gretchen M. Wolfinger, United
States Department of Justice, Tax Division, Washington,
D.C., for Respondents-Appellees.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
ACTION RECYCLING, INC. V. UNITED STATES 3
OPINION
McKEOWN, Circuit Judge:
This appeal raises the question of whether the Internal
Revenue Service (“IRS”) permanently possesses all of the
information contained in a taxpayer’s records once it has
reviewed but not retained those records. We hold that an IRS
Revenue Agent’s review of records does not automatically
give the IRS permanent possession of all of the information
in those records and that a later summons for the same
records is permissible under the Supreme Court’s decision in
United States v. Powell, 379 U.S. 48, 57–58 (1964).
BACKGROUND
At the request of the IRS, Action Recycling Inc. (“Action
Recycling”) made available its 2009 bank statements at the
offices of its attorney. Revenue Agent Derik Hudson spent
85 hours auditing those statements and found approximately
$100,000 in unexplained deposits. Hudson took notes and
made a simple table of the total value of the deposits,
transfers, and withdrawals for each month. He did not copy
or retain any of the statements. Hudson then left the IRS, and
the open investigation was transferred to a new Revenue
Agent, Heather Blair. When Blair asked to further review the
2009 bank statements, Action Recycling refused to make the
records available. Pursuant to 26 U.S.C. § 7602, the IRS then
issued summonses to two banks for the statements that
Hudson had reviewed, as well as bank statements from 2010
and account signature cards and deposit slips from 2009 and
2010.
4 ACTION RECYCLING, INC. V. UNITED STATES
The IRS served Action Recycling with notice of the third-
party summonses, as required by 26 U.S.C. § 7609. Action
Recycling timely moved to quash, arguing that because the
IRS had previously reviewed the 2009 bank records, the
summonses for those records were issued in violation of the
prohibition on summonses for information already in the
possession of the IRS. Powell, 379 U.S. at 57–58. The
district court denied the motion, finding that Blair’s
declaration that the IRS did not possess the records satisfied
the government’s burden of demonstrating that the
summonses were properly issued. Action Recycling appeals.
We have jurisdiction pursuant to 28 U.S.C. § 1291. After
reviewing for clear error, we affirm. See Fortney v. United
States, 59 F.3d 117, 119 (9th Cir. 1995).
ANALYSIS
The IRS may issue a summons pursuant to § 7602 for the
purpose of “ascertaining the correctness of any return,
making a return where none has been made, determining the
liability of any person for any internal revenue tax . . . or
collecting any such liability.” 26 U.S.C. § 7602(a). If the
IRS issues a summons to a third party, the taxpayer is entitled
to notice of the summons (subject to the exceptions set forth
in § 7609(c)(2)–(3)) and has a right to intervene and to move
to quash the summons. See 26 U.S.C. §§ 7603, 7609.
Congress has mandated that “[n]o taxpayer shall be subjected
to unnecessary examination or investigations, and only one
inspection of a taxpayer’s books of account shall be made for
each taxable year unless . . . the Secretary, after investigation,
notifies the taxpayer in writing that an additional inspection
is necessary.” 26 U.S.C. § 7605(b). In Powell, the Supreme
Court interpreted § 7605(b) to require the IRS to “show that
[1] the investigation will be conducted pursuant to a
ACTION RECYCLING, INC. V. UNITED STATES 5
legitimate purpose, [2] that the inquiry may be relevant to the
purpose, [3] that the information sought is not already within
the Commissioner’s possession, and [4] that the
administrative steps required by the Code have been
followed.” 379 U.S. at 57–58. Only the third limitation is at
issue here.
The purpose behind § 7602 is clear: it is intended “not to
accuse, but to inquire” and “[a]lthough such investigations
unquestionably involve some invasion of privacy, they are
essential to our self-reporting system.” United States v.
Bisceglia, 420 U.S. 141, 146 (1975); see also United States
v. Arthur Young & Co., 465 U.S. 805, 815–16 (1984)
(recognizing that the self-assessment system relies upon
taxpayers’ forthright reporting and “the concomitant power
of the Government to compel disclosure”). The burden
imposed by Powell “is a slight one, and may be satisfied by
a declaration from the investigating agent” addressing each
element. United States v. Dynavac, Inc., 6 F.3d 1407, 1414
(9th Cir. 1993). Indeed, the requirement is minimal “because
the statute must be read broadly in order to ensure that the
enforcement powers of the IRS are not unduly restricted.”
Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th
Cir. 1985) (per curiam).
It is undisputed that the IRS does not currently possess
copies of the statements. According to Action Recycling,
however, the summonses fall afoul of Powell because “the
IRS did have possession of all of the FYE 2009 bank
statements at one time, from which Agent Hudson was able
to obtain the information now sought by Agent Blair’s
summons.”
6 ACTION RECYCLING, INC. V. UNITED STATES
The Internal Revenue Code does not expressly prohibit a
summons for information already possessed by the IRS. This
restriction arises from the Supreme Court’s explanation in
Powell of what would constitute an “unnecessary”
examination, which the Code does prohibit. 379 U.S. at
57-58; see also United States v. Davis, 636 F.2d 1028, 1037
(5th Cir. 1981) (stating that “[r]ead in context, we construe
the ‘already possessed’ principle enunciated by Powell as a
gloss on § 7605(b)’s prohibition of ‘unnecessary’
summonses”). As noted in Powell, Congress enacted the
prohibition on unnecessary examinations in order to prevent
“overzealous” tax inspectors from making repeated visits to
the taxpayer that create “unnecessary annoyance.” 379 U.S.
at 54 (quoting 61 Cong. Rec. 5855 (Sept. 28, 1921)
(statement of Sen. Penrose)). Congress emphasized agents’
responsibility to exercise prudent judgment in wielding the
Code’s summons powers. Id. at 56. It did not “intend[] the
courts to oversee the Commissioner’s determinations to
investigate.” Id.
Assuming that the IRS temporarily had possession of all
of the information in the bank statements during the period
that Hudson was reviewing them, that information is not
currently in the IRS’s possession. The limited notes and
tabulations made by Hudson record only a monthly total of
deposits and expenditures. The notes do not include
information about each individual deposit and expenditure,
which is crucial to any calculation of Action Recycling’s
taxable income and legitimate deductions. The fact that the
IRS may have had access to the information at a prior time
does not necessarily mean that the IRS will be understood to
continue to possess that information.
ACTION RECYCLING, INC. V. UNITED STATES 7
The Court in Powell read the limitations in § 7605(b)
narrowly, further supporting the district court’s determination
that the facts here fall outside of the third Powell limitation.
See 379 U.S. at 53–59 (cautioning against a stringent
interpretation that could “hamper the Commissioner in
carrying out investigations he thinks warranted,” and noting
that “the legislative history of § 7605(b) indicates that no
severe restriction was intended”); see also Arthur Young,
465 U.S. at 816–17 (emphasizing that “courts should be chary
in recognizing exceptions to the broad summons authority of
the IRS or in fashioning new privileges that would curtail
disclosure under § 7602”). We join the Fourth, Fifth, and
Seventh Circuits in rejecting the argument that the IRS
already “possesses” the summonsed information simply
because a Revenue Agent has previously reviewed the
documents. See Spell v. United States, 907 F.2d 36, 38 (4th
Cir. 1990) (holding that “the showing of abuse of process
necessary to quash an administrative summons must be
‘predicated on more than the fact of re-examination’”)
(quoting Powell, 379 U.S. at 51); United States v. Texas
Heart Inst., 755 F.2d 469, 476–77 (5th Cir. 1985), overruled
on other grounds by United States v. Barrett, 837 F.2d 1341,
1351 (5th Cir. 1988) (en banc) (per curiam); United States v.
Lenon, 579 F.2d 420, 421–22 (7th Cir. 1978).
Action Recycling complains that if we reject its argument,
then “the third prong of the Powell Doctrine is in fact
meaningless.” Action Recycling is mistaken. Where the IRS
already possesses copies of particular records obtained from
the taxpayer, it cannot issue repeat summons to the taxpayer
for the exact same records. This limitation prevents
unnecessary summonses that are designed to “harass the
taxpayer” or that otherwise abuse the court’s process. See
Powell, 379 U.S. at 54–59. This limitation was not designed,
8 ACTION RECYCLING, INC. V. UNITED STATES
however, to obstruct the ability of the IRS to obtain relevant
information necessary to a legitimate investigation. See
United States v. Euge, 444 U.S. 707, 711 (1980) (noting that
“this Court has consistently construed congressional intent to
require that if the summons authority claimed is necessary for
the effective performance of congressionally imposed
responsibilities to enforce the tax Code, that authority should
be upheld absent express statutory prohibition or substantial
countervailing policies”); see also Liberty Fin. Servs.,
778 F.2d at 1393 (holding that IRS can request copies of
documents it already possesses from other sources in order to
confirm their accuracy).
We decline to contort the narrow holding in Powell to
create a new barrier to the IRS’s summons power. As the
Court stated repeatedly in Powell, “[t]he burden of showing
an abuse of the court’s process is on the taxpayer, and it is not
met by a mere showing, as was made in this case, that . . . the
records in question have already been once examined.”
379 U.S. at 58.
As to the remaining Powell factors, the IRS documented
through Blair’s declaration that the investigation has a
legitimate purpose, that the records sought may be relevant to
that purpose, and that the IRS followed the required
administrative steps. With this prima facie case established,
Action Recycling “‘bear[s] the burden to disprove the actual
existence of a valid civil tax determination or collection
purpose by the Service. . . . Without a doubt, this burden is
a heavy one.’” United States v. Jose, 131 F.3d 1325, 1328
(9th Cir. 1997) (en banc) (quoting United States v. LaSalle
Nat’l Bank, 437 U.S. 298, 316 (1978)). Action Recycling has
not met this burden. To the contrary, the record demonstrates
that the summonses were not issued in “bad faith or for an
ACTION RECYCLING, INC. V. UNITED STATES 9
improper purpose.” Crystal v. United States, 172 F.3d 1141,
1153 (9th Cir. 1999). Accordingly, the IRS has established
its compliance with the Powell standards and the summonses
may be enforced.
AFFIRMED.