or state that they lack sufficient information regarding the sworn statements of the Complaints, and make affirmative averments regarding the issuance of grand jury subpoenas. Defendants, in their Answer and Motion, essentially make three arguments as to why the summonses should not be enforced. All three of these arguments are based on a prior grand jury proceeding and a prior civil proceeding in this District.
In their Answer and Motion, defendants contend that, on May 6, 1996, a federal grand jury in this District caused subpoenas duces tecum to issue to the Custodian of Records for OMT and MSI.
Also on May 6, 1996, a grand jury subpoena calling for "any and all accountant work papers, files, correspondence and tax returns for the years 1990 through 1995 for Eric Steinberg, Raymond McDowell, [OMT] and [MSU]" were served on defendants' accountant; the documents requested under this subpoena were the same as the documents currently being requested by the IRS summonses.
Defendants claim that they complied with the grand jury subpoenas, providing more than two dozen boxes of documents to an IRS Special Agent on behalf of the grand jury in May and June 1996. Defendants further contend that, save for approximately five boxes of documents, the IRS Special Agent has retained these documents.
Defendants also allege that, on December 2, 1996, the Assistant United States Attorney, directing the grand jury, requested OMT's authorization to give the Examination Division of the IRS access to any and all records in the government's possession. On January 31, 1997, OMT, through counsel, declined to authorize the access requested by the Assistant United States Attorney.
On April 24, 1997, the IRS directed administrative summonses to Joan Steinberg for certain records. On or about April 25-28, 1997, the IRS directed identical summonses to defendants' counsel, to the Assistant United States Attorney directing the grand jury, and to defendants' minority shareholder.
In response to these summonses, on May 21, 1997, defendants, as well as Joan Steinberg, filed an action to quash the grand jury subpoenas served upon them. This action was styled In the Matter of OMT Supermarket, Inc. and Middletown Supermarket, Inc., 97-MC-101 (E.D. Pa.). In this action, defendants and Mrs. Steinberg assigned as grounds for their motion: (1) that the IRS summonses sought disclosure of matters before the grand jury in violation of Federal Rule of Civil Procedure 6(e) and (2) that the IRS summonses were improper under 26 U.S.C. § 7602 (c). On July 8, 1997, the IRS, through Revenue Agent Kelly, served notice that it was withdrawing all the summonses. On July 28, 1997, a stipulation of dismissal was entered in that case.
Based on this foregoing information with respect to the previous grand jury proceeding and civil action, defendants claim that this Court should dismiss the United States' instant Complaints. The defendants advance three arguments in support of its motion. First, defendants argue that the instant IRS summonses seek disclosure of matters currently before a grand jury in violation of Federal Rule of Criminal Procedure 6(e). Second, the defendants contend that instant summonses are improper because such administrative summonses cannot be issued when there has been a Department of Justice "referral" by the IRS. See 26 U.S.C. § 7602(c). Finally, defendants contend that this Court should not enforce the summonses because the IRS has issued them in bad faith. Defendants claim that they are issued in bad faith because they "could only be the product of the criminal investigation."
In response, the United States generally argues that defendants' contentions are without. Specifically, the United States argues that the information and documents requested by the summonses are not subject to the requirements of Federal Rule of Criminal Procedure 6(e). In addition, the United States submits that the summonses were not issued in violation of 26 U.S.C. § 7602 (c) and that the summonses were not issued in bad faith.
For the following reasons, the Court will deny defendants' Motion and summarily enforce the IRS summonses that have been issued and served on defendants.
The Court has jurisdiction to enforce an IRS summons pursuant to 26 U.S.C. § 7402(b). Summons Enforcement proceedings are summary in nature and "their sole purpose is to ensure that the IRS has issued the summons for a proper purpose and in good faith." United States v. Rockwell International, 897 F.2d 1255, 1261 (3d Cir. 1990).
Petitioners must only satisfy the standards of good faith set out by the Supreme Court in United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964) in order to enforce an IRS summons. That is, "that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already with the [IRS] Commissioner's possession and that the Administrative steps required by the [IRC] have been followed." Powell, 379 U.S. at 57-58; Rockwell, 897 F.2d at 1262; United States v. Garden State Nat'l Bank, 607 F.2d 61, 67-69 (3d Cir. 1979); United States v. Wheaton, 791 F. Supp. 103, 104 (D.N.J. 1992). "Assertions in the affidavit of the investigative agent who is seeking enforcement that the Powell requirements are satisfied are sufficient to establish a prima facie case." Wheaton, 791 F. Supp. at 104 (citation omitted).
In this case, the United States has established a prima facie case for enforcement of the summonses. First, the Declaration of Revenue Agent Kelly establishes that the summonses were issued for a proper purpose, i.e., for an examination of the taxpayers' federal tax liabilities for tax years 1990 through 1995. (Kelly Decls. PP 2, 3, 5, 6, 8); see Garden State, 607 F.2d at 68 (holding that the IRS pursues a proper purpose under § 7602 when it seeks to determine the tax liability of the taxpayer). Second, the information and documents sought by the summonses may be relevant to the IRS examination of the taxpayers. Revenue Agent Kelly expects that the testimony, records, papers, and other data demanded in the summonses will reveal or lead to information regarding the correct tax liabilities of the taxpayers. (Kelly Decls. PP 2, 3, 5, 8). Accord Rockwell, 897 F.2d at 1263. Third, Revenue Agent Kelly states that the information and documents are not already in the possession of the IRS. (Kelly Decls. P 12).
Finally, all of the administrative steps for the issuance and service of the summons have been followed. Specifically, Revenue Agent Kelly was authorized to issue the summonses,
and the summonses were personally served on OMT and MSI. (Kelly Decls. PP 1, 4). Accordingly, the United States has established its prima facie case for enforcement of the summonses at issue pursuant to the authorities cited above.
Once the existence of the Powell factors have been established by the petitioner, the burden shifts to, and falls heavily upon, the defendant to disprove the existence of a valid purpose or to show that enforcement of the summonses would otherwise be an abuse of the court's process. Wheaton, 791 F. Supp. at 105 (citing among other cases Powell, 379 U.S. at 58, 85 S. Ct. 248, 13 L. Ed. 2d 112; Rockwell, 897 F.2d at 1262 ("an 'appropriate ground' for challenging the summons exists when the taxpayer disproves one of the four elements of the government's Powell showing, or otherwise demonstrates an abuse of the court's process")).
In this proceeding, defendants have challenged the IRS summonses by asserting that the information and documents sought are protected from disclosure under Rule 6(e) of the Federal Rules of Criminal Procedure, that the summonses were issued in violation of 26 U.S.C. § 7602, and that the summonses were issued in bad faith. However, defendants have failed to demonstrate, by affidavit or declaration, sufficient facts and legally cognizable grounds to oppose enforcement of the IRS summonses. Instead, they rely on a series of documents from which they make a series of incorrect assumptions to argue that the summonses were issued in bad faith and that Rule 6(e) and § 7602 apply to bar enforcement. This is neither evidence as required under this Court's Order, nor is it legally sufficient under case law to support defendants' opposition to the United States' Complaints. See Moutevelis v. United States, 727 F.2d 313, 315 (3d Cir. 1984) (an evidentiary hearing is an IRS summons case "is required only when, judged by the standard of the Fed. R. Civ. P. 56(c), the petition and affidavits in support and in opposition to it establish a material fact issue").
Legal conclusions, whether asserted in a brief, at oral argument, or in an answer or an affidavit, in opposition to the enforcement of an IRS summons are insufficient. See Garden State, 607 F.2d at 71. Moreover, "uncontested allegations in the Government's [complaint] and affidavit must be accepted as admitted. [Furthermore,] if at this stage the defendant cannot refute the government's prima facie [case under the criteria set forth in] Powell . . . or cannot factually support a proper affirmative defense, the district court should dispose of the proceeding on the papers before it and without an evidentiary hearing." Id. (emphasis added).
In this case, the defendants have neither put in issue allegations of the Complaints, nor have they raised any valid affirmative defenses. Thus, an evidentiary hearing to determine the propriety of the summonses is not necessary.
First, the records and information sought by the IRS summonses are not covered by Rule 6(e) of the Federal Rules of Civil Procedure. In their Answer and Motion to Dismiss, the defendants baldly conclude that the records sought by the IRS summonses are insulated from subsequent disclosure under Fed. R. Crim. P. 6(e) because these records were previously produced in response to three grand jury subpoenas. (Answer PP 8, 14). However, defendants' unsupported assumptions are refuted by the declaration of Assistant United States Attorney Sarmousakis who caused the grand jury subpoenas to be issued in the first instance.
Although defendants did produce certain records to the grand jury, these records are not covered by Rule 6(e) of the Federal Rules of Criminal Procedure, since they were created prior to the issuance of the grand jury subpoenas. (Sarmousakis Decl. PP 5-6). Indeed, it has been well-established in this Circuit for over 14 years that if documents exist independently of the grand jury process, they are not matters occurring before the grand jury for purposes of Rule 6(e). See In re Grand Jury Matter (Garden Court Nursing Home), 697 F.2d 511, 513 (3d Cir. 1983).
Furthermore, merely because a grand jury subpoenas documents, that fact alone does not subject the documents to Rule 6(e). In re Grand Jury Investigation, 630 F.2d 996, 1000 (3d Cir. 1980); see also Garden Court Nursing Home, 697 F.2d at 513 (citations omitted). As explained by the Third Circuit in In re Grand Jury Investigation :
Rule 6(e) shields solely "matters occurring before the grand jury." It is designed to protect from disclosure only the essence of what takes place in the grand jury room, in order to preserve the freedom and integrity of the deliberative process. See, e.g., United States v. Procter & Gamble, 356 U.S. 677, 681, 78 S. Ct. 983, 985, 2 L. Ed. 2d 1077 (1958); United States v. Rose, 215 F.2d 617, 628-29 (3d Cir. 1954). The Rule is not intended "to foreclose from all future revelation to proper authorities the same information or documents which were presented to the grand jury." United States v. Interstate Dress Carriers, Inc., 280 F.2d 52, 54 (2d Cir. 1960). The mere fact that a particular document is reviewed by a grand jury does not convert it into a "matter occurring before the grand jury" within the meaning of Rule 6(e). Documents such as business records sought . . . here are created for purposes independent of grand jury investigations, and such records have many legitimate uses unrelated to the substance of grand jury proceedings.
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When testimony or data is sought for its own sake-for its intrinsic value in the furtherance of a lawful investigation-rather than to learn what took place before the grand jury, it is not a valid defense to disclosure that the same information was revealed to a grand jury or that the same documents had been, or were presently being, examined by a grand jury. (citation omitted).