HIGH DESERT RELIEF, INC., a New Mexico non-profit corporation, Plaintiff-Appellant,
UNITED STATES OF AMERICA, through its agency the Internal Revenue Service, Defendant-Appellee.
Appeals from the United States District Court for the
District of New Mexico (D.C. Nos. 1:16-CV-00469-MCA-SCY,
1:16-CV-00816-MCA-SCY, and 1:16-CV-01255-WJ-KBM)
D. Thorburn (Richard Walker with him on the briefs), Thorburn
Walker, LLC, Greenwood Village, CO, for Plaintiff-Appellant.
Michael J. Haungs, Attorney, Tax Division (David A. Hubbert,
Deputy Assistant Attorney General, Tax Division; Gilbert S.
Rothenberg and Patrick J. Urda, Attorneys, Tax Division; and
Robert C. Troyer, former Acting United States Attorney, of
counsel; with him on the briefs) Department of Justice,
Washington, D.C., for Defendant-Appellee.
LUCERO, HOLMES, and EID, Circuit Judges.
HOLMES, CIRCUIT JUDGE.
case arises out of the efforts of the Internal Revenue
Service ("IRS") to investigate the tax liability of
High Desert Relief, Inc. ("HDR"), a medical
marijuana dispensary in New Mexico. The IRS began an
investigation into whether HDR had improperly paid its taxes,
and specifically whether it had improperly taken deductions
for business expenses that arose from a "trade or
business" that "consists of trafficking in
controlled substances." 26 U.S.C. § 280E. Because
HDR refused to furnish the IRS with requested audit
information, the IRS issued four summonses to third parties
in an attempt to obtain the relevant materials by other
filed separate petitions to quash these third-party summonses
in federal district court in the District of New Mexico, and
the government filed corresponding counterclaims seeking
enforcement of the summonses. HDR argued that the summonses
were issued for an improper purpose-specifically, that the
IRS, in seeking to determine the applicability of 26 U.S.C.
§ 280E, was mounting a de facto criminal investigation
pursuant to the Controlled Substances Act ("CSA"),
21 U.S.C. § 801, et seq. HDR also asserted that
enforcement of § 280E was improper because an
"official [federal] policy of non-enforcement" of
the CSA against medical marijuana dispensaries had rendered
that statute's proscription on marijuana trafficking a
"dead letter" incapable of engendering adverse tax
consequences for HDR. Aplt.'s Opening Br. at 30.
petitions were resolved in proceedings before two different
district court judges. Both judges ruled in favor of the
United States on the petitions to quash, and separately
granted the United States' motions to enforce the
summonses. HDR challenges these rulings on appeal. Exercising
jurisdiction under 28 U.S.C. § 1291, we
a New Mexico medical marijuana dispensary. Although such
dispensaries are lawful under state law, see N.M.
STAT. ANN. §§ 26-2B-3, 26-2B-4 (2017),
"marijuana is still classified as a federal
'controlled substance' under schedule I of the
CSA." Green Solution Retail, Inc. v. United
States, 855 F.3d 1111, 1113 (10th Cir. 2017), cert.
denied, 138 S.Ct. 1281 (2018). And this federal
classification has potential tax consequences, even for
businesses that are lawful under state law. In particular,
while 26 U.S.C. § 162(a) allows taxpayers to claim
deductions for "all the ordinary and necessary expenses
paid or incurred . . . in carrying on any trade or
business," § 280E prohibits deductions for business
expenses when the underlying business "consists of
trafficking in controlled substances (within the meaning of
schedule I and II of the [CSA]) which is prohibited
by Federal law ." 26 U.S.C. § 280E (emphasis
February 2016, the IRS began to investigate whether HDR had
taken improper deductions and thus had outstanding tax
liabilities. IRS Revenue Agent Lisa Turk provided written
notice to HDR that its return for the fiscal year ending June
30, 2014 ("2014 return") had been selected for
examination. In this initial communication, Agent Turk
identified several preliminary issues for inquiry (e.g., the
costs of goods sold, gross receipts, and total deductions)
and provided HDR with a copy of IRS Publication 1.
Publication 1 outlines the IRS's audit procedures, and
also explains, under a section titled "Potential Third
Party Contacts," that the IRS might "sometimes talk
with other persons if we need information that you have been
unable to provide, or to verify information we have
received." IRS Publication 1, Your Rights as a
Taxpayer (Rev. 9-2017),
failing to receive a response from HDR by the date specified
on the notice, Agent Turk made a phone call to one of
HDR's two shareholders. During the call, the shareholder
confirmed that HDR grows and sells medical marijuana to
qualified patients. At that time, Agent Turk communicated,
once more, that the IRS's audit would focus on gross
receipts, costs of goods sold, and all other business
expenses, and then "proceeded to explain the
taxpayer's rights as outlined in Publication 1."
Aplt.'s App. at 340 (Mem. for the file, dated Mar. 9,
she was not able to obtain further information directly from
HDR or its shareholders at this juncture, Agent Turk sent HDR
an initial Information Document Request ("Document
Request") relating to the dispensary's 2014 fiscal
year. An updated Document Request was re-issued to HDR after
the audit expanded to include HDR's tax return for the
fiscal year ending in June 30, 2015 ("2015
return"). Agent Turk included an additional copy of IRS
Publication 1 when providing notice of the expanded audit.
this period, Agent Turk also attempted to schedule an
interview with HDR to discuss the tax years at issue and to
tour the company's facilities. HDR ultimately objected to
any such contacts because of its concern that the IRS's
investigation into § 280E would be equivalent to a
criminal investigation under the CSA.
wariness of triggering penalties under the CSA also informed
its responses to the IRS's Document Requests. In
correspondence, HDR insisted that it would only "furnish
documentation . . . provided that [HDR is] given assurance
from the IRS, that the IRS will use the information furnished
for this civil audit, and not to support the IRS's
determination that the Taxpayer's business consists of
illegal activities." Id. at 79 (Letter from
Bridge West LLC to Agent Turk, dated May 23, 2016). The IRS
informed HDR that it could not receive documentation under
such a condition, as (1) the IRS was entitled to investigate
whether § 280E applied, and (2) § 6103 of the
Internal Revenue Code ("IRC")-which sets forth
certain circumstances under which the IRS must disclose
taxpayer material to other agencies-limited the IRS's
ability to agree to HDR's conditional offer. See
26 U.S.C. § 6103(i). In response, HDR told Agent Turk
that it "would not answer any questions, provide any
records, or provide . . . a tour of the business."
Aplt.'s App. at 239 (Decl. of Lisa Turk, dated Oct. 21,
2016). There is no indication from the record that HDR ever
sent the IRS any documents in response to either its initial,
or its subsequent, Document Requests.
alternative means to ascertain the correctness of HDR's
2014 and 2015 returns, the IRS issued four summonses to third
parties for information allegedly pertinent to those returns.
Summonses to My Bank and Southwest Capital Bank sought
information concerning HDR's bank accounts. A summons to
the New Mexico Department of Health's Medical Cannabis
Program was aimed at HDR's financial records and
statements, applications to the medical cannabis program,
cannabis product descriptions, and a description of HDR's
facilities. And a summons issued to the Public Service
Company of New Mexico, a local electric company, requested
information regarding HDR's application for service,
credit data, and also billing statements regarding HDR's
electricity consumption. Each time a summons was issued, HDR
was provided a notice of the summons, a copy of the summons,
and an explanation of HDR's right to bring a proceeding
to quash the summons.
first filed, in federal court, a petition to quash the
summonses that had been issued to the New Mexico Department
of Health and My Bank. HDR asserted that neither summons
satisfied United States v. Powell, 379 U.S. 48
(1964), which, as discussed infra, sets out the
requirements for the enforcement of an IRS summons.
Specifically, HDR claimed that the summonses were devoid of a
legitimate purpose because they were issued in furtherance of
a "pseudo-criminal investigation . . . to . . .
convict taxpayers of violating federal criminal drug
laws"-i.e., the CSA-and sought an evidentiary hearing to
test the IRS's alleged good faith. Aplt.'s App. at 10
(Pet. to Quash Summonses, dated May 23, 2016).
United States moved to dismiss HDR's petition, arguing
that the IRS satisfied each of the Powell criteria
and that the summonses were issued for the valid purpose of
determining the correctness of HDR's tax returns under
§ 280E. On the same day that the United States filed
this motion to dismiss HDR's first petition to quash, HDR
filed another petition to quash, this one directed at the
summons issued to the Public Service Company of New Mexico.
Because the arguments contained in HDR's second petition
largely mirrored those in the first, the two cases were
consolidated before one district court judge.
United States moved to dismiss the new petition regarding the
Public Service Company of New Mexico, appending a declaration
made by Agent Turk, as well as more documentary evidence. The
United States also moved to enforce the outstanding summonses
against My Bank and the Public Service Company of New Mexico,
but withdrew its request to enforce the summons issued to the
New Mexico Department of Health, as the IRS had successfully
obtained the summonsed information by means of a public
juncture, the district court judge handling the consolidated
cases gave notice that it was converting the government's
motions to dismiss into motions for summary judgment pursuant
to Fed.R.Civ.P. 12(d). The judge both explained her
rationale-the conversion allowed her to consider the
parties' supporting declarations and sundry exhibits-and
afforded the parties an opportunity to present additional
material. The government did not submit further filings; HDR
filed a supplemental pleading arguing that "the federal
drug laws which the IRS seeks to enforce through § 280E
are a 'dead letter, '" and could not therefore
serve as basis for the summonses at issue. Aplt.'s App.
at 414, 419 (Pet'r's Supp. to Mot. for Summ. J.,
dated Mar. 9, 2017). In particular, HDR relied on two
Department of Justice directives-the "Ogden Memo"
issued in 2009, and the "Cole Memo," issued in
2013-as purported evidence of a "strong, official
federal policy of non-enforcement of the CSA against medical
marijuana dispensaries." Id. at 418, 420.
these proceedings were ongoing, HDR filed in the District of
New Mexico a third and final petition to quash, this time
directed at the IRS summons issued to Southwest Capital Bank.
This case was assigned to another district court judge. This
judge issued an order requesting that the parties show cause
why the case should not be consolidated with earlier
litigation filed by HDR (i.e., involving the two consolidated
before the parties filed their responses in the Southwest
Capital Bank case, the district court judge presiding over
the earlier litigation granted summary judgment to the United
States. The judge determined that the government carried its
prima facie burden of proving the four factors set out in
Powell, and that HDR failed to demonstrate that the
IRS had issued the summonses in bad faith. In addition, the
judge rejected HDR's argument that enforcement of §
280E was improper because the CSA's proscription on
marijuana trafficking had become a "dead letter."
The judge accordingly granted the United States' motions,
entered a separate order enforcing the summons to My Bank,
light of the above ruling, the judge presiding over the
Southwest Capital Bank case entered an order ruling in favor
of the IRS for "the same reasons" found by the
judge in HDR's earlier action, concluding that the
reasoning of the judge in the earlier action was "very
persuasive authority." Aplt.'s App. at 714 (Order,
dated Apr. 11, 2017). Thereafter, the judge in the Southwest
Capital Bank case entered an order enforcing the summons to
appealed from the rulings of both district court judges, and
those appeals have been consolidated for our resolution.
appeal, HDR makes two overarching arguments for why we should
reverse the district court judges' enforcement of the
summonses and their adverse rulings on HDR's petitions to
quash. First, HDR contends that the district judges
misapplied the Powell factors. To that end, HDR
attempts to refute the government's prima facie
Powell showing and to demonstrate that the IRS's
investigation did not proceed in good faith. Second, HDR
argues that the district court judges erred in not applying a
"dead letter rule" to the government's motions
to enforce the summonses.
resolution of both arguments turns on issues of law. We
address these issues in succession and conclude (A) that the
IRS met its initial burden to demonstrate that it acted in
good faith and HDR failed to thereafter rebut that showing,
and (B) that HDR's proposed "dead letter rule"
has no application here. We therefore uphold the dispositive
rulings of both district court judges.
review de novo the district court judges' dispositive
orders granting the IRS's motions. See Jewell v.
United States, 749 F.3d 1295, 1297 (10th Cir. 2014)
(applying de novo review to the district court's grant of
summary judgment to the government on its motion opposing the
taxpayer's petition to quash). Further, we will not
reverse a district court's denial of a petition to quash
an IRS summons unless the denial amounts to an abuse of
discretion. See id. at 1297; accord Hopkins v.
I.R.S., 318 Fed.Appx. 703, 705 (10th Cir. 2009)
(unpublished); Lain v. United States, 173 Fed.Appx.
651, 652 (10th Cir. 2006) (unpublished); see also
Sugarloaf Funding, LLC v. U.S. Dep't of the
Treasury, 584 F.3d 340, 346 (1st Cir. 2009).
a district court necessarily abuses its discretion "when
it commits an error of law." Wyandotte Nation v.
Sebelius, 443 F.3d 1247, 1252 (10th Cir. 2006);
accord Westar Energy, Inc. v. Lake, 552 F.3d 1215,
1224 (10th Cir. 2009); see also Fox v. Vice, 563
U.S. 826, 839 (2011) ("A trial court has wide discretion
when, but only when, it calls the game by the right
rules."); United States v. Clarke, 573 U.S.
248, 256 (2014) ("[T]he District Court's decision is
entitled to deference only if based on the correct legal
standard."). Because the disposition of this appeal
turns on issues of law, our standard of review in considering
the propriety of all of the district court judges'
decisions-that is, both the decisions related to the
IRS's motions and those pertaining to HDR's
petitions-is, as a practical matter, de novo.
the government's effort to demonstrate its satisfaction
of the Powell factors through the vehicle of motions
for summary judgment, see supra note 3, the
government contends that "in the summons context"
our authority instructs that traditional summary-judgment
standards should not apply insofar as they instruct courts to
view the evidence in the light most favorable to the
nonmovant. Aplee.'s Resp. Br. at 31. In other words, the
government appears to reason that, in this context, where
summary judgment in its favor would be based on a
determination that it had satisfied its burden under
Powell and would serve as the predicate for
enforcing its summonses, this traditional summary-judgment
principle does not apply.
authority that the government relies on in making this
argument is an unpublished decision from our court,
Villarreal v. United States, 524 Fed.Appx. 419 (10th
Cir. 2013) (unpublished), which the district court judges
here cited to support similar reasoning. Specifically, the
Villarreal panel held that, in the
summons-enforcement context, "the traditional summary
judgment standards such as viewing the facts in [the
taxpayer's] favor, do not apply. Instead, [the
taxpayer's] burden 'is significantly more stringent
than that of a party opposing a motion for summary
judgment.'" Id. at 423 (quoting United
States v. Kis, 658 F.2d 526, 543 (7th Cir. 1981)). HDR
contests the government's Villarreal-based
argument, arguing that there is no reason to deviate from the
traditional summary-judgment framework.
conclude that our published disposition in Jewell
undercuts the government's argument, and, based on
Jewell, the district court judges were mistaken in
relying on Villarreal. In Jewell, we held
that the traditional summary-judgment standard applies in the
summons context when the taxpayer presents a challenge to the
government's prima facie case under Powell. See
749 F.3d at 1297 n.1 ("The government argues that the
summary judgment standard does not apply when the government
makes its prima facie case under [Powell]. But the
issue here is whether the government presented a
prima facie case under Powell." (emphasis
added)). Jewell thus provides the proper
summary-judgment standard in this instance because, like the
taxpayer in Jewell, HDR disputes the
government's prima facie case under Powell.
the district court judges were mistaken in applying the
modified summary-judgment standard that the
Villarreal panel articulated, it is axiomatic that
we may affirm on any basis that the record adequately
supports. See, e.g., Safe Streets All. v.
Hickenlooper, 859 F.3d 865, 879 (10th Cir. 2017);
Champagne Metals v. Ken-Mac Metals, Inc., 458 F.3d
1073, 1088 (10th Cir. 2006). Accordingly, in our assessment
of whether the district court judges properly entered
judgment against HDR, see infra, we will apply
traditional Rule 56 summary-judgment standards and carefully
consider the record de novo.
specifically, we will view the record in the light most
favorable to HDR and ask whether the IRS has shown that there
are no genuine disputes of material fact and that it is
entitled to judgment as a matter of law. See Jewell,
749 F.3d at 1297. Notably, "[t]he substantive law at
issue determines which facts are material in a given
case." Beaird v. Seagate Tech., Inc., 145 F.3d
1159, 1165 (10th Cir. 1998). Accordingly, as explicated
infra, the substantive rubric that the Supreme Court
defined in Powell, 379 U.S. at 57-58, is of central
importance in our determination of whether there are genuine
disputes of material fact here.
the traditional summary-judgment standard will not permit HDR
to rest on conclusory statements in the summary-judgment
record; such statements "do not suffice to create a
genuine issue of material fact." Adler v. Wal-Mart
Stores, Inc., 144 F.3d 664, 674 (10th Cir. 1998);
see Mitchell v. City of Moore, Okla., 218 F.3d 1190,
1199-1200 (10th Cir. 2000) (noting that the plaintiff's
"conclusory statement" was "woefully
inadequate to survive a summary judgment motion").
address the substantive legal framework governing the
enforcement of administrative summonses. "Congress has
'authorized and required' the IRS 'to make the
inquiries, determinations, and assessments of all taxes'
the [IRC] imposes." Clarke, 573 U.S. at 249-50
(quoting 26 U.S.C. § 6201(a)), accord Codner v.
United States, 17 F.3d 1331, 1332 (10th Cir. 1994).
"[I]n support of that authority," Congress has
given the IRS "broad latitude" to issue summonses
"[f]or the purpose of ascertaining the correctness of
any return, making a return where none has been made, [and]
determining the liability of any person for any internal
revenue tax." Clarke, 573 U.S. at 250 (quoting
26 U.S.C. § 7602(a)). These summonses may be issued not
only to the taxpayer being investigated, but also to
third-parties who may hold relevant information. See
26 U.S.C. § 7602(a)(2). If a summonsed person or entity
fails to comply with a summons, the IRS can bring an
enforcement proceeding in a district court. See id.
at § 7604.
the taxpayer is not entirely without defenses. For instance,
Congress requires the IRS to give notice of a third-party
summons, id. at § 7609(a), and has granted the
taxpayer the right to petition a district court to quash such
a summons. Id. at § 7609(b)(2). That said, in
proceedings to quash a third-party summons, the government
can counterclaim for enforcement. Id. at §
7609(b)(2)(A). The proceedings associated with these dueling
motions "should be summary in nature and discovery
should be limited." United States ...