Green Solution, LLC v. United States

          ORDER

          PHILIP A. BRIMMER Chief United States District Judge.

         This matter is before the Court on petitioners' Petition to Quash Summonses [Docket No. 1], the United States' Motion to Dismiss and Enforce Summonses [Docket No. 7], and the Petitioners' Motion for the Court to Postpone its Ruling Until an Opinion has Been Issued in Appellate No. 16-1281 [Docket No. 15].

         I. BACKGROUND

         Petitioners are related business entities, operated by Nicholas, Kyle, and Eric Speidell, that are engaged in the retail sale of marijuana-related products in Colorado. Docket No. 7-1 at 3, ¶¶ 10-11. The Internal Revenue Service (“IRS”) is conducting a civil audit of petitioners' tax liability for fiscal years 2013 and 2014. Docket No. 1 at 5, ¶ 18; Docket No. 7-1 at 2, ¶¶ 4-5. In relation to the audit, David Hewell, an IRS revenue agent, informed petitioners that his department had made a determination that petitioners were trafficking in a controlled substance and Revenue Agent Hewell requested that petitioners provide records to establish the extent of their activities. Docket No. 1 at 5-6, ¶¶ 19-20; Docket No. 7-1 at 4, ¶ 15. In response to Rev enue Agent Hewell's requests, petitioners produced bank records, which Revenue Agent Hewell believed were insufficient to substantiate the figures shown on petitioners' tax returns. Docket No. 1 at 6, ¶ 20; Docket No. 7-1 at 4-5, ¶¶ 14-20. T he IRS subsequently issued summonses to Wells Fargo Bank, NA, Verus Bank of Commerce, and Partner Colorado Credit Union seeking petitioners' “account information, bank statements, cancelled checks, wire transfer authorizations, deposit slips, correspondence, and other banking documents.” Docket No. 7-1 at 5, ¶¶ 21-23. Petitioners now seek to quash those summonses, Docket No. 1, and the government is seeking to enforce the summonses. Docket No. 7.

         In a separate proceeding, petitioner The Green Solution Retail, Inc. (“Green Solution”) sought similar relief against the IRS. See Green Sol. Retail, Inc. v. United States, 855 F.3d 1111, 1113 (10th Cir. 2017) (“Green Solution”).^[1] The Tenth Circuit affirmed the trial court's dismissal of Green Solution's claims as barred by the Anti-Injunction Act, 26 U.S.C. § 7421 (Internal Revenue C. § 7421). The Tenth Circuit rejected Green Solution's argument that the IRS acted outside its authority, concluding that “the IRS's obligation to determine whether and when to deny deductions under § 280E[] falls squarely within its authority under the Tax Code.” Green Solution, 855 F.3d at 1121.

         II. DISCUSSION

         In order to enforce a summons, the IRS must show 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 within the IRS Commissioner's possession, and that the administrative steps required by the Tax Code have been followed-in particular, that the ‘Secretary [of the Treasury] or his delegate,' after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect.” United States v. Powell, 379 U.S. 48, 57-58 (1964).^[2] The IRS's burden “is a slight one because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted.” United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1443 (10th Cir. 1985) (citation omitted). “The requisite showing is generally made by affidavit of the agent who issued the summons and who is seeking enforcement.” Id. (internal quotation marks omitted).

         If the IRS makes the prima facie showing required under Powell, the burden shifts to the party resisting enforcement, whose “burden is a heavy one.” Balanced Fin. Mgmt., Inc., 769 F.2d at 1444 (citing United States v. Garden State National Bank, 607 F.2d 61, 68 (3d Cir. 1979)). The party resisting enforcement must establish a defense, show a lack of good faith on the part of the IRS, or “prove that enforcement would constitute an abuse of the court's process.” Id. (internal quotation marks omitted).

         A. Legitimate Purpose

         The government provides a declaration from Revenue Agent Hewell stating that he served the summonses in relation to an “examination of the federal tax liabilities” of petitioners and that, “[b]ased on websites that appear to be associated with” petitioners, they “are engaged in the retail sale of marijuana and marijuana-related products in Colorado.” Docket No. 7-1 at 2, ¶ 4 and at 3, ¶ 11. The government argues that its investigation of whether petitioners' income derives from the sale of marijuana is a legitimate purpose in light of the bar on deductions and credits for businesses trafficking in controlled substances under Internal Revenue Code § 208E. Docket No. 7 at 7-10.

         Petitioners argue that “Section 280E requires there to be a finding of illegality under federal drug laws before it can be applied.” Docket No. 1 at 10. Petitioners claim that, because the IRS's authority is limited to enforcing the Internal Revenue Code, the “IRS does not have the authority to determine whether taxpayers have violated federal drug laws.” Id. at 12. Based on this alleged lack of necessary authority, petitioners argue that the IRS's investigation lacks a legitimate purpose.

         Petitioners' argument that the IRS lacks authority to determine whether they are trafficking in a controlled substance absent a criminal investigation has been rejected by the Tenth Circuit. See Green Sol. Retail, Inc., 855 F.3d at 1121 (“But § 280E has no requirement that the Department of Justice conduct a criminal investigation or obtain a conviction before § 280E applies.” (citing Alpenglow Botanicals, LLC v. United States, No. 16-cv-00258-RM-CBS, 2016 WL 7856477, at *4 (D. Colo. Dec. 1, 2016)); Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1197 (10th Cir. 2018) (“[I]t is within the IRS's statutory authority to determine, as a matter of civil tax law, whether taxpayers have trafficked in controlled substances.”); High Desert Relief, Inc. v. United States, 917 F.3d 1170, 1185 (10th Cir. 2019). While the IRS may lack authority to criminally prosecute petitioners for trafficking in controlled substances, the IRS has authority to make determinations about whether deductions are allowable under the Internal Revenue Code, including § 280E. Revenue Agent Hewell's affidavit establishes that the summonses are related to an investigation of petitioners' tax liabilities, something within the IRS's authority. Docket No. 7-1 at 2, ¶ 4. Therefore, the Court finds that the government has met its burden to show that its investigation of petitioners is being conducted for a legitimate purpose.

         B. Relevant to the Legitimate Purpose

         The government argues that the information it seeks is relevant because it will “shed light on [petitioners'] correct income for the 2013 and 2014 tax years by substantiating the cash flows coming in and going out of their business.” Docket No. 7 at 11. The government claims that the information will “assist the IRS in determining the extent of [petitioners'] business activities, whether or not [petitioners] have reported all of the income they earned in 2013 and 2014, and whether they accurately claimed and categorized deductions over those same years.” ...