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Case 3:10-mc-00024-GEB Case: 11-1612 Document: -DEA Document 003110561288 25 Filed Page: 01/07/11 58 Date Page Filed: 5 of 06/13/2011 17 PageID: 469 future proceedings, should the IRS assess new tax penalties for these tax years. This Court expresses no opinion on the merits of such a defense. However, the Court agrees with the primary point made by Magistrate Judge Arpert: that the IRC statute of limitations does not definitively preclude the IRS from making such an assessment in the future. (See id.) Petitioners had argued under the first Powell prong that the IRS had no legitimate investigative purpose, because the IRC’s three-year statute of limitaitons, IRC § 6501(a), barred the IRS from making further assessments against Petitioners. (Petrs.’ Omnibus Br. at 8.) Yet, the IRC statute of limitations applies to assessments of taxes, not to the IRS’s investigative tools, like summonses. See, e.g., Powell, 379 U.S. at 57 (“Reading the statutes as we do, the [IRS] Commissioner need not meet any standard of probable cause to obtain enforcement of his summons, either before or after the three-year statute of limitations on ordinary tax liabilities has expired.”); United States v. McHenry, 552 F. Supp. 2d 571, 574 (E.D. Va. 2008) (“The three-year statute of limitations contained in 26 U.S.C. § 6501(a) plainly applies only to assessment, not to summons or any other investigatory procedure.”). Furthermore, as Magistrate Judge Arpert correctly noted, the IRC statute of limitations exempts from the limitations period cases involving false or fraudulent returns, willful attempts to evade tax, and the failure to file a return. IRC § 6501(c)(1)–(3). In this case, the IRS agent assigned to this investigation claims that the IRS seeks documents from CitiBank and Sovereign Bank in order to determine whether or not Mr. Gangi was a bona fide resident of the Virgin Islands for the tax years 2000–2004. (Moss Decl. 3.) If Mr. Gangi was not a bona fide resident of the Virgin Islands but derived income from sources within the Virgin Islands, the Code required him to file a U.S. tax return for these years. IRC §§ 932(a)(1)–(2) (requiring the filing of tax returns in both 5 A-000013

Case 3:10-mc-00024-GEB Case: 11-1612 Document: -DEA Document 003110561288 25 Filed Page: 01/07/11 59 Date Page Filed: 6 of 06/13/2011 17 PageID: 470 the United States and the Virgin Islands). It is undisputed that Mr. Gangi did not file a U.S. tax return for these tax years. Thus, one of the aforementioned exceptions to the IRC statute of 1 limitations (false return, willful evasion, failure to file) may apply, in which case the IRC statute of limitations would not preclude further tax assessments against Petitioners. Consequently, the Court rejects Petitioners’ objection to the extent that Petitioners maintain that the IRC statute of limitations demonstrates that the IRS lacks a legitimate investigatory purpose under Powell. 2. Incomplete Legal Standard Petitioners next argue that Magistrate Judge Arpert application of the Powell standard was incomplete, because the R&R failed to account for Petitioners’ challenges on the “appropriate ground[s]. . . . that enforcement of the summons will result in an abuse of the court’s process.” (Petrs.’ Objections at 8.) Petitioners are correct that the Third Circuit in Rockwell recognized that a taxpayer could challenge an IRS summons on such grounds, see 1 In their original petition brief, Petitioners cited cases holding that failure-to-file exceptions to Code limitations provisions did not apply to cases where the taxpayer submitted the incorrect tax form, but still gave the IRS all the data it needed to assess the tax. See, e.g., Germantown Trust Co. v. Comm’r of Internal Revenue, 309 U.S. 304 (1940); Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. 1987). Yet, neither case addressed whether the failure to file tax returns with both the United States and the Virgin Islands, as required by IRC § 932(a), constituted a failure-to-file exception to the statute of limitations, as opposed to a wrong-form filing, which is not exempted from the limitations period. More importantly, though, these cases dealt with a tax assessment, not an IRS summons, which is issued during the investigative phase prior to a tax assessment. Even if the failure-to-file exception was categorically not applicable to Petitioners’ failure to file U.S. tax returns, the other two exceptions might still apply, if the IRS found that Petitioners filed a false return or willfully attempted to evade tax liability. As noted above, at this stage—a petition to quash an IRS subpoena—this Court need not consider the merits of Petitioners’ statute of limitations defense; this Court need only determine whether the IRS has a legitimate investigatory purpose. Under these circumstances, the Court cannot say that these cases or the IRC statute of limitations demonstrates that the IRS does not have a legitimate investigation purpose to issue these summonses. 6 A-000014

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