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COHEN v. U.S.

February 10, 2004.

DAVID A. COHEN et al.
v.
UNITED STATES OF AMERICA



The opinion of the court was delivered by: STEWART DALZELL, District Judge

MEMORANDUM

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 Page 2 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 attract good Page 3 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 19.

  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 directing SEI Page 4 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

 Discussion

  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 Page 5 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 detailed Page 6 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 ...


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