United States District Court, D. Colorado
MEDICINAL WELLNESS CENTER, LLC, a Colorado Limited Liability Company, MEDICINAL OASIS, LLC, a dissolved Colorado Limited Liability Company, MICHAEL ARAGON, JUDY ARAGON, and STEVEN HICKOX, Petitioners,
v.
UNITED STATES OF AMERICA, through its agency the Internal Revenue Service, Defendant.
ORDER
PHILIP
A. BRIMMER CHIEF UNITED STATES DISTRICT JUDGE.
This
matter is before the Court on petitioners' Petition to
Quash Summonses [Docket No. 1] and the United States'
Motion to Dismiss Petition and Enforce Summonses [Docket No.
3].
I.
BACKGROUND
The
Internal Revenue Service (“IRS”) is conducting a
civil audit of petitioners Medicinal Wellness Center, LLC,
and Medicinal Oasis, LLC's tax liability for fiscal years
2014 and 2015. Petitioners Michael Aragon, Judy Aragon, and
Steven Hickox owned these two entities in 2014 and 2015.
Docket 3-1 at 2, ¶ 7. Because the two entities elected
to be treated as pass-through entities for tax purposes, the
results of an audit could affect their owners' income
taxes. As a result, the IRS opened civil audits of the 2014
and 2015 returns for the Aragons and Mr. Hickox. Id.
at 3, ¶ 11. In relation to the audit, Tyler Pringle, an
IRS revenue agent, informed petitioners that his department
had made a determination that petitioners were trafficking in
a controlled substance and that Revenue Agent Pringle sought
records to establish the extent of petitioners'
activities. Docket No. 1 at 3; Docket No. 3-1 at 3, ¶
12. In response to Revenue Agent Pringle's requests,
petitioners provided only “minimal, incomplete, and
redacted financial and other records.” Docket No. 3-1
at 4, ¶ 13. Revenue Agent Pringle issued summonses to
Colorado's Marijuana Enforcement Division
(“MED”), seeking “books, records, papers,
and other data, including METRC [Marijuana Enforcement
Tracking Reporting and Compliance] annual gross sales
reports, transfer reports, annual harvest reports, and
monthly plants inventory reports.” Id. at 4-5,
¶ 17. Petitioners now seek to quash those summonses,
Docket No. 1, and the government seeks to enforce the
summonses. Docket No. 3.[1]
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).[3]
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 Pringle
stating that he served the summonses in relation to an
“examination of the federal tax liabilities” of
petitioners and that petitioners operate at least one
marijuana retail dispensary and two marijuana grow
facilities, where they sell medicinal and recreational
marijuana. Docket No. 3-1 at 2, ¶ 5-6. 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 § 280E. Docket No. 3 at 9-10.
Petitioners
argue that the summonses do not have a legitimate purpose
because Congress did not empower the IRS to investigate
violations of federal criminal drug laws. Docket No. 7 at 12.
This argument is unavailing because petitioners have not
shown that a criminal investigation is pending or that the
summonses are connected to a criminal investigation. The
Tenth Circuit has rejected the argument that the IRS lacks
authority to determine whether petitioners are trafficking in
a controlled substance. See Green Sol. Retail, Inc. v.
United States, 855 F.3d 1111, 1121 (10th Cir. 2017)
(“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., 917 F.3d 1170, 1185. 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 (“I.R.C.”),
including § 280E. Revenue Agent Pringle's affidavit
establishes that the summonses are related to an
investigation of petitioners' tax liabilities, something
within the IRS's authority. Docket No. 3-1 at 2, ¶
4.
Regardless
of whether there is an active criminal investigation,
petitioners contend that the IRS is required to grant them
absolute immunity from criminal prosecution before issuing
the summonses. Docket No. 7 at 13. Petitioners argue that the
statutory scheme of I.R.C. § 280E creates a
“constitutional difficulty” because compelling a
taxpayer to turn over the requested information implicates a
taxpayer's Fifth Amendment privilege against
self-incrimination. Id. at 2; see also Medicinal
Wellness Center II, Docket No. 12 at 21-26
(petitioners' petition expanding on the same
argument).[4] Petitioners repeatedly contend that this
situation is “the IRS [having authority] to
administratively investigate and determine nontax
crimes.” Docket No. 7 at 13. In response, the
government contends that: (1) § 280E, as it governs
voluntary deductions, does not compel taxpayers to disclose
any information; (2) taxpayers do not have Fifth Amendment
rights in records voluntarily provided to a third party; and
(3) petitioners do not identify a “genuine
hazard” of self-incrimination. Medicinal Wellness
Center II, Docket No. 15 at 11-14.
“[T]he
Fifth Amendment protects against compelled
self-incrimination, not the disclosure of private
information.” Fisher v. United States, 425
U.S. 391, 401 (1976) (quoting United States v.
Nobles, 422 U.S. 225, 233 n.7 (1975)) (internal
punctuation omitted). Relying on this understanding of the
Fifth Amendment, the Tenth Circuit in In re First
Nat'l Bank, Englewood, Colo., 701 F.2d 115 (10th
Cir. 1983), concluded that an individual could not assert a
Fifth Amendment privilege to quash a subpoena directed at a
third party. The Tenth Circuit found that “[t]here can
be no violation of one's Fifth Amendment right not to
testify against oneself where the records are in the hands of
a third party; hence, one cannot complain on this ground
about a subpoena directed to third parties to produce
records.” Id. at 117. The Court follows that
logic here. Petitioners seek to quash summonses, which, like
subpoenas, direct that information be produced by a witness.
The summonses request information voluntarily provided by the
petitioners to the MED. See Docket No. 3-1 at 4,
¶ 15 (noting that “marijuana growers and
dispensaries must account for all marijuana plants and
products through the METRC system”). Therefore,
petitioners do not have a Fifth Amendment privilege with
respect to the information requested by the summonses because
the information is in the hands of a third party. See
First Nat'l Bank, 701 F.2d at 117. Accordingly, the
Court concludes that there is no requirement that the IRS
provide a grant of absolute immunity before issuing a summons
for information from third parties because taxpayers do not
have a Fifth Amendment privilege with respect to that
information.[5]
As the
government has met its burden, and petitioners' arguments
that rebut the government's prima facie case
fail, 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 ...