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Lyons Trading, LLC v. United States

February 8, 2008

LYONS TRADING, LLC, PETITIONER,
v.
UNITED STATES OF AMERICA, DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, RESPONDENT.



The opinion of the court was delivered by: Thomas W. Phillips United States District Judge

Phillips

MEMORANDUM OPINION

This matter is before the court on petitioner's petition to quash summons [Doc. 1], respondent's motion to deny petition to quash and for enforcement of summons [Doc. 14], petitioner's motion to stay proceedings pending transfer decision by Judicial Panel on Multidistrict Litigation [Doc. 15], and respondent's motion for a protective order [Doc. 30]. Because the Judicial Panel on Multidistrict Litigation has issued an order denying transfer [Doc. 29], petitioner's motion to stay is DENIED as MOOT. Because the United States has established a prima facie case to obtain enforcement of the summons and because petitioner has not met its burden of showing that enforcement would be an abuse of process, petitioner's motion to quash will be DENIED and respondent's motion to deny and enforce will be GRANTED. Accordingly, the United States's motion for a protective order is DENIED as MOOT.

I. BACKGROUND

On July 29, 2007, Agent Weinger of the United States Department of the Treasury, Internal Revenue Service ("IRS") issued a summons to James C. Denneny, III, an individual residing in or around Knoxville. Mr. Denneny is a partner of and indirectly owns 98% of Lyons Trading, LLC, the petitioner. Petitioner buys "distressed" debt from Brazilian companies. "Distressed" debt consists of consumer accounts receivable on which payments have stopped.

As a limited liability company ("LLC"), petitioner has elected to be treated as a partnership for tax purposes. As such, losses "pass through" the company to the individual partners, who may claim the losses on their tax returns. The IRS is currently examining the correctness of the returns filed by petitioner and other entities which pass on losses to their partners, as well as the correctness of returns filed by the individuals to whom those losses pass. The IRS began investigating petitioner in 2006 regarding the correctness of returns filed in tax years ending on December 31, 2003 and December 31, 2004.

Petitioner now moves to quash the summons issued to Mr. Denneny, a third party to this action. The United States has moved to deny the petition to quash and enforce the summons.

II. ENFORCEMENT OF SUMMONS

A. Nature of Suit

As an initial matter, this court must address the nature of this suit to determine the standards applied. Throughout petitioner's response brief to the United States's motion to deny and enforce, petitioner argues that particular allegations in its petition to quash should be deemed true because the United States did not specifically deny or respond to those allegations. In so doing, petitioner rests on conclusory allegations and claims that it is allowed to do so because Rule 8 of the Federal Rules of Civil Procedure states that a "pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. Pro. 8(a)(2).

The nature of this dispute, however, is different from that of an ordinary civil suit contemplated by Rule 8. In its response brief, petitioner disputes the IRS's characterization of this proceeding as summary in nature and cites to Seventh Circuit case law in support. [See Doc. 24 at 48-51]. Yet it is petitioner who is mistaken as to the nature of this proceeding. The Supreme Court has noted, "Congress ... [laid] down an easily administrable test in § 7602(c): 'Summons enforcement proceedings should be summary in nature ....' " United States v. Stuart, 489 U.S. 353, 369 (1989) (quoting S. Rep. No. 97-494, Vol. 1, p. 285 (1982)). The Sixth Circuit likewise characterizes summons enforcement proceedings as summary. E.g., United States v. Monumental Life Ins. Co., 440 F.3d 729, 736 (6th Cir. 2006) ("Proceedings seeking enforcement of an IRS summons are intended to be summary in nature ...."); United States v. Will, 671 F.3d 963, 968 (6th Cir. 1982) ("A proceeding seeking enforcement of an IRS summons is ... of a summary nature.").

This court therefore must treat this proceeding as summary in nature. This is not to say that the Federal Rules of Civil Procedure are wholly inapplicable. Although they do apply to this case, they are subject to limitation by the court. 47 C.J.S. Internal Revenue § 626 (2007). Moreover, Rule 8 in particular is inapplicable because this is not a typical civil dispute. A motion to quash a summons is not comparable to a complaint in an ordinary civil suit. Rather, the court evaluates a motion to quash a summons or a motion to enforce a summons under the following standard: First, the government must establish a prima case for enforcement, typically through the use of an affidavit demonstrating that the government has met the requirements of a prima facie case. E.g., United States v. Monumental Life Ins. Co., 440 F.3d 729, 733 (6th Cir. 2006). The burden then shifts to the petitioner to demonstrate an abuse of process. Id. In so doing, the petitioner cannot rest on the basis of bare allegations in its petition and likewise cannot assert that those allegations which the government did not explicitly deny are accepted as true. E.g., United States v. Ins. Consultants of Knox, Inc., 187 F.3d 755, 759 (7th Cir. 1999) ("The taxpayer can rebut the government's prima facie case only by alleging 'specific facts' in rebuttal."). Rather, this court, as will be discussed in more detail below, will review the record to determine whether a prima facie case has been established and whether petitioner has met its burden of demonstrating an abuse of process. Petitioner's arguments that it need simply plead under the liberal requirements of Rule 8, as well as petitioner's arguments that denied allegations which the IRS did not specifically deny must be accepted as true, are therefore without merit.

The summary nature of a summons enforcement proceeding will be discussed more specifically below in the context of petitioner's request for discovery and an evidentiary hearing.

B. Procedural Appropriateness of the United States's Response

Petitioner contests the procedural appropriateness of the United States's response. Petitioner claims that the IRS's motion "does not come under the rubric of 12(b), Rule 56 or any other federal rule. Accordingly, it should be stricken." [Doc. 24 at 16].

Bearing in mind that this is a summary proceeding, the United States's response is typical of summons enforcement proceedings where a taxpayer has filed a motion to quash. See, e.g., Chiang v. United States, 31 F. App'x 412, 413 (9th Cir. 2002) (petitioner filed a motion to quash the summons and the government filed a motion to enforce the summons); Rich v. Cripe, No. 97- 6405, 1998 U.S. App. LEXIS 31546, at *2-3 (6th Cir. Dec. 15, 1998) ("[Petitioner] filed a motion to quash summons in the district court .... The United States filed a motion to enforce the summons ...."); Steiniger v. Comm'r, No. 04-CV-4044, 2005 U.S. Dist. LEXIS 2211, at *1 (E.D. Pa. Feb. 16, 2005) ("Presently before the Court is Petitioner Diane Steiniger's Petition to Quash Summons of Internal Revenue Service and Respondent United States Commissioner of Internal Revenue's Motion for Summary Denial of the Petition to Quash & Summary Enforcement of Summons."); Cavallaro v. United States, 153 F. Supp. 2d 52, 54 (D. Mass. 2001), aff'd, 284 F.3d 236 (1st Cir. 2002) ("The Cavallaros have filed a motion ...


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