In a recent IRS summons enforcement case, United States of America v. Trenk (January 22, 2007), the United States District Court for the District of New Jersey ruled that a taxpayer had the right to an evidentiary hearing to produce evidence as to his lack of possession defense.
In U.S. v. Trenk, the IRS issued a summons to Steven Trenk, the president of Gold Crown Insurance, seeking records and testimony relating to an investigation it was conducting into an alleged tax avoidance scheme between Gold Crown and one of its subsidiaries. Trenk objected to the summons. To support his objection, Trenk submitted an affi davit in which he swore that (1) he did not possess or control the records requested in the summons and (2) the summons constituted an impermissible “second inspection” because the government had already received the documents from Gold Crown’s accountants. The IRS moved to enforce the summons. In support of its motion, the IRS submitted a declaration of one of its agents stating that the records had not previously been produced. In addition, the IRS argued that Trenk needed to do more than make a general assertion that he did not have the documents and that, given Trenk’s position as president of Gold Crown, the court could presume his possession of the requested records.
The district court ruled that the IRS had met the four-fold preliminary showing required for enforcement of the summons: (1) that the investigation was being conducted for a legitimate purpose; (2) that the inquiry was relevant to such purpose; (3) that the information sought was not already in the IRS’s possession; and (4) that the administrative steps required by the tax code had been followed, including prior notice to the taxpayer. Ordinarily, such a showing would be enough to permit enforcement of the summons. The district court noted, however, that the taxpayer’s sworn statement that he did not possess or control the records meant that an evidentiary hearing was required to determine the possession or control issue as well as the “second inspection” issue. Critical to the district court’s reasoning was the fact that, if the summons were enforced on the IRS’s showing, the taxpayer would not be allowed to raise his defenses in a later civil contempt proceeding over his non-compliance.