Opinion
No. C 04-00733 FMS.
March 18, 2005
ORDER GRANTING MOTION TO REOPEN CASE AND CONTINUING MOTION FOR CONTEMPT
In this action, the United States has requested that 1) this case be reopened due to the respondents' failure to comply with the Court's May 5, 2004 Order enforcing the Internal Revenue Service's summons and 2) that respondents be held in contempt for failing to comply with that Order. Based on the parties' submissions, oral argument and the record as a whole, the Court GRANTS the United States' motion to reopen the case, and continues the motion for contempt to April 14, 2005.
I. BACKGROUND
Respondents Montgomery Global Advisors V LLC ("Montgomery") and Groh Asset Management ("Groh") have been investigated by the Internal Revenue Service ("IRS") with respect to their packaging and sale of tax shelters. The IRS has been investigating whether the respondents' offerings comply with applicable revenue codes.
The IRS issued eight administrative summonses to the respondents on April 11, 2003 that required the respondents to produce papers, records and information, and to give testimony. The IRS, claiming that the respondents failed to comply, filed a petition to enforce the summonses. Respondents opposed the petition, and filed their opposition on April 20, 2004. On May 5, 2004, after considering both the petitioner's and respondents' positions, the Court granted the petition to enforce the Internal Revenue summonses. Respondents, however, have failed to fully comply with that Order. The United States now seeks to compel the respondents to comply with these summonses by requesting that the Court hold Montgomery and Groh in contempt.
II. LEGAL STANDARD
Once an enforcement order is final, the validity of that order cannot be challenged unless it has either been appealed or reconsidered. See Maggio v. Zeitz, 333 U.S. 56, 74 (1948). If a respondent does not have the documents requested by the summons, or if he otherwise wishes to contest the summons, respondent must present these arguments at the time of enforcement. Once this time has passed, the respondent loses his opportunity to challenge the summons on such grounds. In short, one cannot use the contempt proceeding to challenge an enforcement order. Id. at 75 ("It would be a disservice to the law if we were to depart from the long-standing rule that a contempt proceeding does not open to reconsideration the legal or factual basis of the order alleged to have been disobeyed . . ."); See also U.S. v. Rylander, 460 U.S. 752, 756-57 (1983)
Once an enforcement order is issued, a civil contempt proceeding is the appropriate mechanism for assuring compliance. United States v. Asay, 614 F.2d 655, 659 (9th Cir. 1980) (asserting that when contempt relief is designed to compel or compensate, it is civil in nature). A party will be held in contempt when it fails to obey, or fails to take adequate measures to follow, a court's clear instruction. Go-Video, Inc. v. Motion Pictures Ass'n of America, 10 F.3d 693, 695 (9th Cir. 1993). If a party 1) fails to follow a clear order of the Court, 2) the evidence of non-compliance is clear and convincing, and 3) the party has failed to show that it cannot comply, a court may hold that party in contempt pursuant to its inherent power. See Huber v. Marine Midland Bank, 51 F.3d 5, 10 (2d Cir. 1995).
Although the respondent may not challenge the validity of the enforcement order, it "may assert a present inability to comply with the order in question." Rylander, 460 U.S at 757. As Rylander explained, even though a court is bound to enforce the initial order, it cannot ignore when compliance is "factually impossible." Id. If such a defense is raised, however, the respondent has the burden of production: he must demonstrate that compliance is an impossibility. Id.
III. ANALYSIS
Respondents have neither appealed nor moved for reconsideration of the enforcement order. Although the respondents have raised arguments challenging the validity of the order, such as the improper purpose of the IRS, i.e. to "circumvent the procedural requirements of 26 U.S.C. section 7609(f)," Respondents' Opposition at 5, these arguments cannot defend against a motion for contempt. See Maggio, 333 U.S. at 75. Instead, the Court must accept the order as valid, and proceed to determine whether the order was clear and, if so, whether the respondents failed to comply.The May 5, 2004 Order granted the petition to enforce all sixteen summonses. These summonses, attached to the Declaration of Revenue Agent Margaret Johnson White as Exhibits 1 and 2, give detailed instructions to the respondents, including what action Montgomery and Groh should take if they are unable to locate the documents. The summonses also included definitions of applicable terms, and an extensive and detailed list of what documents should be produced. White Decl., Exh. 1, 2. Although the document requests in the summonses are lengthy, they are clear.
The respondents' failure to comply with the summonses, and thus the Order, is also clear. White's declaration and supporting spreadsheet clarifies which documents were requested by the United States but not provided by the respondents. White Decl. Further, the declaration of Mr. Roger Groh, and the supporting "missing document" list, support a finding that the respondents failed to comply. The "missing document" list includes notations, an asterisk or a number, indicating either that the document is not in Mr. Groh's possession or, if it is, that it would be delivered. An asterisk indicating that the respondents are not in possession of certain documents, without further detail, fails to satisfy the instructions of the summonses. Pursuant to the language of the summons, "If you are unable to locate documents or records, then state with specificity the efforts made to locate the documents or records and the reasons such documents or records are unavailable." White Decl. Exh. 1, 2.
An asterisk notation falls short of the required specificity, and is clear and convincing evidence that Montgomery and Groh failed to comply with the summonses and, thus, the Order. If the respondents do not have the records and documents in their possession, and cannot locate the documents, they must follow the guidelines of the summons. It is not adequate for the respondents to declare, without specificity, that these documents do not exist.
Finally, Montgomery and Groh have not demonstrated that they cannot comply with the order. There is no evidence that they cannot deliver the documents or declare, with specificity, why the documents cannot be provided.
IV. CONCLUSION
Having considered the papers submitted and oral argument by both sides in this matter, the Court ORDERS this case reopened and CONTINUES this matter until April 14, 2005. A hearing is set for Thursday, April 14, 2005, 2:00 p.m. to address respondents' compliance. If respondents have failed to comply by that time, the Court will find Montgomery and Groh in contempt of the May 5, 2004 enforcement order and assess a fine of $1,000.00 per day for everyday that the non-compliance continues, to commence on April 15, 2005.
As ordered at the March 17, 2005 hearing, within the next seven days the United States will 1) present respondents with a letter outlining the information still required in order to satisfy compliance and 2) present the Court with a declaration of the costs incurred in bringing the motion for contempt. Respondents will reimburse the United States for its costs in bringing this motion. This matter is continued until the April 14, 2005 hearing.