United States District Court, D. Colorado
GREEN SOLUTION, LLC, a Colorado Limited Liability Company, GREEN EARTH WELLNESS, INC., a dissolved Colorado Limited Liability Company, TGS MANAGEMENT, LLC, a Colorado Limited Liability Company, S-TYPE ARMORED, LLC, a Colorado Limited Liability Company, and IVXX INFUZIONZ, LLC, a Colorado Limited Liability Company, Petitioners,
v.
UNITED STATES OF AMERICA, through its agency the Internal Revenue Service, Respondent.
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.” ...