US v GBX involves a summons enforcement proceeding in the ongoing IRS attempt to crack down on alleged tax abuses stemming from conservation easements. The case highlights the government’s power to obtain information, even when an audit has concluded, though it does reveal some limits.
GBX buys, preserves and rehabilitates historic buildings, and facilitates taxpayers obtaining preservation easements to raise capital to rehabilitate the historic buildings.
The IRS has audited over 80 entities that GBX has worked with over the years. IRS sought documents from GBX relating to those materials for four of those entities relating to properties in Jacksonville and New Orleans. When GBX did not voluntarily turn the documents over, IRS issued a summons, asking that GBX bring the documents to an IRS office. GBX sent a letter to IRS saying that it thought the summons was improper, and, in any event, IRS effectively had the information already because GBX had offered the IRS an opportunity to inspect the documents at its offices.
There is a bit more nuance to this dispute between IRS and GBX but for purposes of this post I want to highlight one main aspect.
After the IRS issued the summons, IRS and GBX communicated, but it did not lead to a resolution. in March of 2023, under the partnership audit procedures, the IRS issued a Preliminary Partnership Examination Changes and Imputed Underpayment disallowing approximately twenty million dollars in deductions and proposing a penalty of over five million dollars.
Shortly after IRS issued its partnership exam changes the government brought a summons enforcement proceeding in federal district court. GBX opposed it and argued that the IRS’s conclusion of the audit obviated the need to obtain the documents via a summons, alleging that the summons enforcement was an end run around judicial discovery procedures given the IRS having concluded its examination.
In effect, GBX argued that the government’s actions at this last stage of the examination suggested that it was seeking documents for an illegitimate purpose, one of the factors courts examine summonses under the standard set forth in the Supreme Court’s Powell case.
The district court disagreed with GBX, leaning on the rationale in US v Gimbel, 782 F.2d 89 (7th Cir. 1986), where the Seventh Circuit ordered compliance in a summons enforcement proceeding even after the IRS had issued a notice of deficiency:
Similar to the arguments made by Respondent here, the respondent in Gimbel argued that the summons served no legitimate purpose because the deficiency notice had been sent and the IRS therefore had “already determined” liability. The Seventh Circuit rejected this argument holding that, while it might be proper to quash a summons “if, for example, the summons had become stale or the investigation had become mooted by a final, irrevocable determination of the taxpayer’s liability for the years in question,” there was nothing improper about the summons where the amount of the deficiency was still subject to redetermination.
More importantly for our purposes, the case in Gimbel involved a Tax Court proceeding which is procedurally further down the road than where the parties are in the case at bar. Nonetheless, the Seventh Circuit said this was not an abuse of the process as Respondent’s tax liability was not finally determined, thus the summons was for a legitimate purpose.
Using a similar analysis to conclude that the IRS had a legitimate purpose, the court held that the IRS seeking to enforce the summons with the case getting teed up for litigation was not an abuse of process, even though the revenue agent in the case admitted that the case would not be returned to her even if the IRS were to receive the requested documents. The court noted that the summons was issued long before the IRS issued its proposed audit adjustments.
The court proceeded to order GBX to comply with the summons although it was somewhat narrowed to ensure that the request was tailored to the properties in question, with one main exception. In the summons and in the enforcement proceedings the government asked for documents to be converted to PDFs. Given how much information was requested, the cost of PDF conversion was alleged to be substantial.
GBX had also offered IRS the opportunity to come to its offices and inspect the records as kept, as well as make copies of what it had. While the district court held that GBX’s offer to allow the IRS to inspect and copy documents was not enough to conclude that the documents were in the IRS’s constructive possession, it relied on the Federal Rules of Civil Procedure to conclude that GBX did not have to incur costs to convert the documents to PDFs. The opinion notes that the federal rules do not directly provide for reimbursement for a party’s costs associated with converting the format in which documents are ordinarily maintained.
Conclusion
GBX illustrates the headwinds that parties face when the IRS seeks to enforce a summons. The bare-knuckled fight at this stage, combined with the amount at stake in the adjustments, portend significant litigation on the adjustments’ merits.