Sturman v. United States

Background

Petitioners in two related cases sought to quash, or cancel, Internal Revenue Service (IRS) summonses issued to financial institutions and other entities. The summonses sought copies of records for accounts connected to the petitioners and their businesses for tax years 2017 and 2018. After the petitions were filed, the IRS withdrew many of the summonses but continued seeking records through the outstanding summonses.

The IRS moved to dismiss the petitions concerning the withdrawn summonses as moot, meaning that no live dispute remained about those summonses. It also asked the court to deny the petitions concerning the outstanding summonses.

Legal standard

Under 26 U.S.C. § 7602, the IRS may issue a summons to determine the correctness of a tax return, determine tax liability, or collect a tax liability. To defend a summons against a petition to quash, the IRS must make a preliminary showing under the four factors identified in United States v. Powell: the summons must have a legitimate purpose, seek information relevant to that purpose, seek information not already in the IRS’s possession, and comply with required administrative procedures.

After the IRS makes that preliminary showing, the taxpayer bears a heavy burden to present specific facts and evidence suggesting bad faith or an improper purpose. A taxpayer may obtain an evidentiary hearing only by presenting credible facts or circumstances that plausibly raise such an inference.

Analysis

The court found that the IRS satisfied all four Powell factors. IRS agent James Oertel stated that the summonses were issued to investigate the petitioners’ tax liability for 2017 and 2018. The requested bank records could show the source and amount of deposits into accounts connected to the petitioners and their businesses. The IRS stated that it did not already possess the records and that it had provided the petitioners written notice of the investigation and summonses as required by IRS procedures.

The petitioners argued that records concerning their businesses were not relevant to their personal tax liability. The court rejected that argument, reasoning that records from corporations solely owned by David A. Sturman might shed light on the correctness of his tax return or the return of another corporation he solely owned.

The petitioners also argued that the IRS should have given direct notice to their businesses. The court rejected that argument because the governing statute requires notice to persons identified in the summons, and the petitioners did not establish that the businesses were persons identified in the summonses in a way requiring additional notice.

The petitioners asserted that the IRS issued the summonses to pressure them in a separate action seeking judgments for unpaid federal tax assessments against their corporations. They relied on the IRS’s withdrawal of some summonses, the referral of the audit from the collections department, the separate judgment action, and the IRS’s alleged failure to respond to Freedom of Information Act requests.

The court held that these circumstances did not plausibly show bad faith or an improper purpose. It found that opening an investigation after a collections referral was not evidence of bad faith, that withdrawing summonses could reflect an effort to resolve the dispute, and that the petitioners had not pursued the available Freedom of Information Act remedy. The court also found that the separate judgment action did not show that the personal tax investigation was merely a pretext or that the IRS was using the summonses to bypass discovery rules. The possibility that the records could also be used in the separate action did not make the personal tax investigation improper.

Disposition

Judge Jacquelyn Scott Corley granted the motion to dismiss the petitions seeking to quash the withdrawn summonses and denied the petitions seeking to quash the outstanding summonses. The petitioners were ordered to respond to the outstanding summonses. The order disposed of both cases, and the clerk was directed to close them.