The opinion of the court was delivered by: STEWART DALZELL, District Judge
XÉlan, The Economic Association of Health Care Professionals,
is a California-based organization that has marketed "tax reduction
plans" and other services to tens of thousands of physicians under the
leadership of dentist-cum-financial guru L. Donald Guess.*fn1 Pursuant
to an investigation into the tax liability of two xélan members,
Doctors David and Margaret Cohen, the Internal Revenue Service has issued
summonses directing SEI Private Trust Company of Oaks, Pennsylvania, to
produce documents relating to a disability trust program with more than
$400 million in assets that it administered on xélan
behalf until September of 2003.*fn2
The Cohens and xélan have filed petitions to quash the
summonses, and the Government has filed an omnibus motion for summary
enforcement. For the reasons provided below, we dismiss the petitions to
quash and grant the Government's motion for enforcement.
Factual and Procedural Background
Petitioner Dr. David A. Cohen is a Florida orthodontist and the sole
full-time employee and shareholder of David Andrew Cohen, DMD, MS, PA.
His wife, petitioner Dr. Margaret Cohen, is a pathologist and employee of
Ameripath, Inc. In May of 1997, xelan prepared a "Tax Reduction Plan" for
David Cohen that promised to lower his federal income taxes from $143,040
to $49,880 per annum and enable him to achieve a "Critical Capital Mass"
of $3,000,000 by diverting as much of his practice's net income as
possible into purportedly tax-free and tax-deferred programs.
See Marien Decl. Ex. 1.
Around the time that her husband received his Tax Reduction Plan,
Margaret Cohen successfully lobbied Ameripath for leave to participate
in xelan. According to a document the IRS obtained, she sent Vice
President of Human Resources Stephen Fuller a xelan videotape along with
a letter containing the friendly warning that if the company wanted to
pathologists, "strategies must be developed to lower their tax
liability" because "[h]igh income employees . . . will not tolerate
the current structure of withholding from their salary for long." Marien
Decl. Ex. 7.
Between January of 1998 and June of 2002, the Cohens accumulated over
a million dollars in xelan-sponsored programs, thereby claiming hundreds
of thousands of dollars in tax savings. David Cohen's professional
corporation remitted about $393,500 in purported premiums to the xelan
disability insurance trust. Cohen did not report these premiums as
income, and the corporation fully deducted them as the qualified cost of
purchasing disability insurance for its employee. Ameripath similarly
withheld, pre-tax, some $504,852 from Margaret Cohen's salary and
remitted it to the disability insurance trust. Finally, David Cohen has
claimed charitable deductions for contributions of approximately
$200,000 to the xelan Foundation, which administers "personal public
charity foundations" from which "[d]octors and family members of doctors
may be compensated . . . for their own teaching, research, and other
pro-bono work on charitable projects important to them that are approved
for funding by the Board of Directors. . . ." Marien Decl. Ex. 1, at
The Internal Revenue Service is now examining the tax liabilities of
the Cohens and David Cohen's professional corporation for the years 1998
to 2001. Pursuant to its investigation, the Service has issued summonses
Private Trust Company to produce all documents in its possession
relating not only to the Cohens but also to all other participants in the
disability trust. The Cohens and xelan have filed petitions to quash
these summonses, arguing that the IRS is seeking information from SEI in
bad faith and that its purpose is to uncover the identities of other
xelan participants without complying with the procedural requirements for
a "John Doe" summons under I.R.C. § 7609(f).*fn3
The Internal Revenue Code grants the IRS authority to issue
administrative summonses for the production of "books, papers, records,
or other data" to determine the correctness of any return or the tax
liability of any person. I.R.C. § 7602(a)(1). The Supreme Court has
underscored the breadth of this power by analogizing it to that of a
grand jury, "which does not depend on a case or controversy for power to
get evidence but can investigate merely on suspicion that the law is
being violated, or even just because it wants assurance that it is not."
United States v. Powell, 379 U.S. 48, 57 (1964).
This Court has jurisdiction under I.R.C. §§ 7402(b) and 7604(a) to
enforce IRS summonses. Our Court of Appeals has observed that "[s]ummons
enforcement proceedings are designed to be 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 Int'l, 897 F.2d 1255, 1261 (3d Cir.
1990). In determining whether the summonses are enforceable, we apply
Powell's burden-shifting regime. First, the Government must
make a prima facie showing that (1) the investigation will be conducted
pursuant to a legitimate purpose, (2) the inquiry may be relevant to
that purpose, (3) the information sought is not already within the
Commissioner's possession, and (4) the administrative steps that the
Code requires have been followed. Powell, 379 U.S. at 57-58.
The petitioner must then prove either that the Government has not
satisfied one of the elements of its prima facie case or that
enforcement of the summons would be an abuse of the court's process.
Id. Although the petitioner need not conclusively disprove the
prima facie case, he must point to serious weaknesses in the
Government's proffer or create a "substantial question in the court's
mind" concerning the Government's purpose. United States v.
Gertner, 65 F.3d 963, 967 (1st Cir. 1995).
A. The Government's Prima Facie Case
In support of its prima facie case, the Government has offered the
declarations of Internal Revenue Agent Catherine Johns, who is conducting
the Cohen audit, and Agent John L. Marien, an IRS Technical Advisor who
specializes in the improper uses of employee welfare benefit funds and is
assisting Agent Johns in her investigation. Upon scrutiny of these
affidavits, we conclude that the Government has established a prima
facie case for the enforcement of these summonses.
First, Agents Marien and Johns have declared that the Service is
seeking information from SEI for the legitimate purpose of determining
the Cohens' tax liability and that it can properly proceed under §
7602 because there has been no Justice Department referral. Johns Decl.
¶¶ Marien Decl. ¶¶ 37-38. It is well-settled that an affidavit of
the investigating officer is sufficient to make a prima facie case, and
we therefore find ...