United States District Court, E.D. Pennsylvania
April 9, 2004.
DAVID A. COHEN et al.
UNITED STATES OF AMERICA
The opinion of the court was delivered by: STEWART DALZELL, District Judge
MEMORANDUM AND ORDER
In the motion now before us, the petitioners seek a stay of our Order
of February 10, 2004, which granted the Government's motion for the
summary enforcement of summonses directing SEI Private Trust Company to
produce documents relating to a disability trust program it administered
until September of 2003 on behalf of petitioner xélan, The
Economic Association of Health Professionals.*fn1 See
generally David Cohen v. United States, F. Supp.2d
, 2004 WL 250545 (E.D. Pa. Feb. 10, 2004).
Stay of an order enforcing a summons pending appeal is an
"extraordinary remedy." United States v. Judicial Watch, Inc.,
241 F. Supp.2d 15, 16 (D.D.C. 2003). A party seeking such a stay must
satisfy a four-part balancing test:
(a) the applicant [for the stay] must make a
strong showing that he is likely to succeed on the
merits of the appeal; (b) the applicant [must]
establish that unless a stay is granted he will
suffer irreparable injury; (c) no substantial harm
will come to other interested parties; and (d) a
stay would do no harm to the public interest.
United States v. Manchel, Lundy & Lessin, 477 F. Supp. 326
334-35 (E.D. Pa. 1979), quoting Bauer v.
McLaren, 332 F. Supp. 723, 729 (S.D. Iowa 1971); United States v. Jones, 1999 WL
1057210, at *1 (D.S.C. Oct. 5, 1999).
For the reasons provided below, we conclude that the petitioners have
failed to satisfy this standard.
In the first place, the petitioners argue that they are likely to
succeed on appeal because Agent Marien's declaration does not expressly
articulate the Government's contention that it may need to contact other
disability trust participants to determine what xélan told them
about the program and to determine, inter alia,
whether "common risk factors such as the age, occupation, and health of
the participants have any effect on the premiums and benefits under the
program." Govt.'s Reply (Mot. Summary Enforcement) at 5.
As the Court of Appeals for the Seventh Circuit noted in the very case
that the petitioners have cited, summons proceedings are meant to be
summary in nature, and the Government's burden in establishing its prima
facie case is not a heavy one. Miller v. United States,
150 F.3d 770, 772 (7th Cir. 1998). In view of this jurisprudence, we cannot
conclude that Government's briefs must parrot the agent's affidavits, or
that it generate these very different documents by cutting-and-pasting
the latter into the former. What is required is an affidavit offering a
sufficient and not necessarily exhaustive explanation of
why the information the Service seeks may be relevant to the
investigation. The Government amply satisfied this requirement here. Agent Marien's
declaration detailed the Service's difficulties in obtaining accurate and
complete information about the operation of the trust. Moreover, it
explained that the Service seeks records relating to other participants
so that it can develop a complete understanding of how the disability
trust operates, determine whether it is, in fact, a program of insurance,
and calculate the qualified cost of the insurance it provides the Cohens.
Marien Decl. ¶ 36-38;
The arguments in the Government's reply brief were reasonable glosses
on Agent Marien's detailed explanation of why the Service cannot
determine the Cohens' tax liability without a developing a full
understanding of the workings of the trust, which in turn requires
examination of documents relating to other participants. The
jurisprudence in this area does not require more.
The petitioners also suggest that the fact that the Government
articulated some of the reasons for enforcing the summonses in a reply
brief somehow casts doubt on its bona fides. They
neglect to mention that we solicited the reply brief in response to the
petitioner's attempt to stipulate that other participants' records would
not shed light on whether the disability trust is a program of insurance.
The petitioners cannot heap ashes on the Government for sharpening its
arguments in response to their own litigation stratagem. Finally, the petitioners appear to argue that we erred in declining to
grant an evidentiary hearing at which they could have cross-examined
Agent Marien on whether he would actually use the information gleaned
from the SEI records to reconstruct the "actuarial underpinnings" of the
disability trust. A hearing is warranted in summary enforcement
proceedings only if the taxpayer has factually refuted material
Government allegations or has factually supported an affirmative defense.
United States v. Garden State Nat'l Bank, 607 F.2d 61, 71 (3d
As we explained in our memorandum opinion of February 10, 2004, the
petitioners failed to satisfy this standard. Although they produced a
sizeable body of evidence in support of their contention that the
disability trust program is actuarially sound and satisfies the
definition of insurance*fn2, they never refuted the Government's
contention that the Service needs additional information to complete
and then verify to its satisfaction its understanding of
how the trust operates. As we also noted in February, the Government's
showing in this regard was particularly strong because xélan and
the Cohens have provided the Service with conflicting information about
the trust and because xélan has shifted actual administration of
the trust offshore. The petitioners have also failed to establish that they will suffer
irreparable harm if we decline to grant a stay. While they contend that
enforcement of the summonses will likely result in the invasion of other
xélan participants' privacy, the standard for obtaining a stay is
whether the movants, and not similarly-situated individuals,
will suffer irreparable harm.
Xélan's contention that enforcement of these summonses will
irreparably harm its own reputation is more colorable but does not
withstand close scrutiny. While enforcement of these summonses may harm
xélan by leading some physicians to reconsider whether what we
might diplomatically term xélan's more aggressive programs are
indeed the road to tax-deferred riches (or, in xélanese, the
accumulation of "critical capital mass"), any such squeamishness would,
at most, merely add to the loss of reputation that xélan may
already have suffered since the Service began its investigation. Not only
has The New York Times covered this case, see Lynnley
Browning, Judge Backs I.R.S. Effort to Get Tax Shelter Files,
N.Y. Times, February 13, 2004, at C3, but the petitioners report that the
Service has already opened audits on at least eighty other xélan
participants. In sum, the cat is already out of the bag, and any
incremental reputational harm xélan may sustain by enforcement of
the summonses is no grounds for staying the Order.
Turning to the remaining elements of the petitioners' burden, we
conclude that the interests of justice point away from granting their
motion. As we note above, the conflicting information the petitioners have provided and the manner in which
xélan has structured the disability trust have already frustrated
the Service's efforts to conclude the Cohen audit, and the public has a
strong interest in having the Service do its job promptly and completely.
Accord Judicial Watch, 241 F. Supp.2d at 18.
In sum, xélan and the Cohens have not shown that a stay pending
appeal is warranted here. However, we agree with the petitioners that a
temporary stay is reasonable so that they can seek a stay from the Court
It is hereby ORDERED that:
1. Petitioners' motion for a stay pending appeal is DENIED;
2. Petitioners' request for a temporary stay pending their application
for a stay from the Court of Appeals is GRANTED; and
3. Petitioners shall apply for such a stay by May 7, 2004.