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Medicinal Wellness Center, LLC v. United States

United States District Court, D. Colorado

April 24, 2019

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,
UNITED STATES OF AMERICA, through its agency the Internal Revenue Service, Defendant.



         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]


         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 ...

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