FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS April 7, 2020
Christopher M. Wolpert
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
STANDING AKIMBO, LLC, a Colorado
limited liability company; PETER
HERMES, an individual; KEVIN
DESILET, an individual; SAMANTHA
MURPHY, an individual; JOHN
MURPHY, an individual,
Petitioners - Appellants,
v. No. 19-1049
UNITED STATES OF AMERICA,
through its agency the Internal Revenue
Service,
Respondent - Appellee.
_________________________________
Appeal from the United States District Court
for the District of Colorado
(D.C. No. 1:17-MC-00169-WJM-KLM)
_________________________________
James D. Thorburn (Richard A. Walker with him on the briefs), of Thorburn Walker,
LLC, Greenwood Village, Colorado, for Petitioners-Appellants.
Nathaniel S. Pollock, Attorney, Tax Division (Richard E. Zuckerman, Principal Deputy
Assistant Attorney General; Travis A. Greaves, Deputy Assistant Attorney General;
Gilbert S. Rothenberg and Michael J. Haungs, Attorneys, Tax Division; Jason R. Dunn,
United States Attorney, Denver, Colorado, of Counsel, with him on the brief),
Department of Justice, Washington, D.C., for Respondent-Appellee.
_________________________________
Before LUCERO, PHILLIPS, and MORITZ, Circuit Judges.
_________________________________
PHILLIPS, Circuit Judge.
_________________________________
The Internal Revenue Service (IRS) is responsible to enforce the federal tax
code against marijuana businesses operating legally under state law. This led to a
civil audit of Peter Hermes, Kevin Desilet, Samantha Murphy, and John Murphy
(collectively, the “Taxpayers”) to verify their tax liabilities for their medical-
marijuana dispensary, Standing Akimbo, LLC. The IRS was investigating whether
the Taxpayers had taken improper deductions for business expenses arising from a
“trade or business” that “consists of trafficking in controlled substances.” 26 U.S.C.
§ 280E. But claiming to fear criminal prosecution, the Taxpayers declined to provide
the audit information to the IRS. This left the IRS to seek the information
elsewhere—it issued four summonses for plant reports, gross-sales reports and
license information to the Colorado Department of Revenue’s Marijuana
Enforcement Division (the “Enforcement Division”), which is the state entity
responsible for regulating licensed marijuana sales.
In Colorado federal district court, the Taxpayers filed a petition to quash the
summonses. The government moved to dismiss the petition and to enforce the
summonses. The district court granted the motion to dismiss and ordered the
summonses enforced. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
2
BACKGROUND
I. The Audit
The Taxpayers own Standing Akimbo, and Samantha Murphy is its business
manager.1 Standing Akimbo is a Colorado Limited Liability Company operating a
medical-marijuana dispensary in Denver, Colorado. Though such dispensaries are
legal under Colorado law, see Colo. Rev. Stat. Ann. § 44-10-102 (West 2020),
“marijuana is still classified as a federal ‘controlled substance’ under schedule I of
the [Controlled Substances Act (CSA)],” Green Sol. Retail, Inc. v. United States, 855
F.3d 1111, 1113 (10th Cir. 2017) (citations omitted), cert. denied, 138 S. Ct. 1281
(2018); see also 21 U.S.C. §§ 812 (listing marijuana as a Schedule I controlled
substance), 841 (prohibiting distribution of a controlled substance). This federal
classification has federal tax consequences for marijuana dispensaries, such as
§ 280E’s prohibition on their deducting business expenses. See 26 U.S.C. § 280E.
In May 2017, the IRS began investigating whether Standing Akimbo had
claimed business deductions prohibited by § 280E. That month, IRS Revenue Agent
Tyler Pringle provided Standing Akimbo written notice (in a letter) that the IRS was
auditing its return for the 2014 tax year. In the letter, Agent Pringle asked that
Standing Akimbo call him to discuss the items and documents he intended to request.
Agent Pringle enclosed a copy of Publication 1, which outlines the IRS’s audit
1
The magistrate judge noted in her recommendation to the district judge that
the Taxpayers are “believed to be the owners of Standing Akimbo, although none
admit ownership in their Petition.” App. vol. 2 at 74.
3
procedures. Under a section titled “Potential Third Party Contacts,” this publication
notes that the IRS may “sometimes talk with other persons if we need information
that you have been unable to provide, or to verify information we have received.”
Internal Revenue Serv., Dep’t of the Treasury, Catalog No. 64731W, Publication 1:
Your Rights as a Taxpayer (Rev. 9-2017), https://www.irs.gov/pub/irs-pdf/p1.pdf.2 In
a second letter, this one in June 2017, Agent Pringle notified Standing Akimbo that
the IRS had expanded the audit to include its return for the 2015 tax year, because it
raised the same issues as the 2014 return.
Because Standing Akimbo is a pass-through entity,3 its audit would necessarily
affect its owners’ tax returns. So Agent Pringle also sent letters, with Publication 1
attached, to Hermes and the Murphys, notifying them that the IRS would be
examining their personal-income-tax returns for the 2014 and 2015 tax years. Agent
Pringle had already notified Desilet that the IRS was examining his personal-income-
tax liabilities for 2014, 2015, and 2016 because it had no record of his filing returns
for these years.
2
On appeal, the parties have not provided a copy of this publication, but we
may take judicial notice of official government publications. See High Desert Relief,
Inc. v. United States, 917 F.3d 1170, 1175 n.1 (10th Cir. 2019) (citing Pueblo of
Sandia v. United States, 50 F.3d 856, 861 n.6 (10th Cir. 1995); Fed. R. Evid.
201(b)(2)).
3
For a pass-through entity, profits “pass through” the business to the owners
and are taxed under the individual-income tax; pass-through entities are not subject to
corporate-income tax. See What Are Pass-Through Businesses, Tax Pol’y Ctr.,
https://www.taxpolicycenter.org/briefing-book/what-are-pass-through-businesses
(last visited Feb. 6, 2020).
4
As part of the examinations, Agent Pringle sent the Taxpayers an Information
Document Request relating to the 2014 tax year. The Document Request sought,
among other things, a list of licenses held by Standing Akimbo and the Taxpayers, as
well as some specific reports from the Enforcement Division’s Marijuana
Enforcement Tracking Reporting Compliance (“METRC”) system: the annual gross-
sales report, transfer report, annual harvest report, and monthly-plant-inventory
reports. A month later, after receiving no response, Agent Pringle issued a second
Document Request requesting the same information. Then, when the IRS expanded
the audit to include the 2015 tax year, Agent Pringle issued a third Document
Request requesting this same information for 2015.
The Taxpayers only partially responded to these Document Requests and did
not provide enough information to substantiate their returns. For example, the
Taxpayers provided none of the requested METRC reports. They claimed that Agent
Pringle was in fact investigating federal drug crimes and declined to provide
potentially incriminating evidence without receiving immunity from prosecution.
The information the Taxpayers did provide was so minimal and incomplete
that Agent Pringle could not verify the accuracy of their returns. Accordingly, Agent
Pringle used other means to assist him in evaluating the returns: he issued four third-
party summonses to the Enforcement Division. One summons regarded Standing
Akimbo and requested a list of the licenses it had held from 2014 through 2015, as
well as its METRC annual gross-sales reports, transfer reports, annual harvest
reports, and monthly plant-inventory reports for 2014 and 2015 (the “Standing
5
Akimbo summons”). The other three summonses regarded the Taxpayers—one each
for Hermes, Desilet, and the Murphys—requesting a list of the licenses they had held
in 2014 and 2015 (collectively, the “Taxpayers summonses”). Agent Pringle provided
the Taxpayers copies of all the summonses, along with an explanation of their right
to petition to quash the summonses.
II. The Resulting Litigation
In Colorado federal district court, the Taxpayers filed a petition to quash the
summonses. They asserted that none of the summonses satisfied the Supreme Court’s
requirements for enforcement as announced in United States v. Powell, 379 U.S. 48
(1964). Specifically, the Taxpayers argued that the summonses lack a legitimate
purpose, are deficient because the IRS failed to follow necessary administrative
steps, exceed the IRS’s authority by forcing the Enforcement Division to create
reports, and impermissibly seek the identity of third-party taxpayers. The Taxpayers
also requested an evidentiary hearing to determine whether the summonses satisfied
the Powell requirements.
The government moved to dismiss the petition under Federal Rule of Civil
Procedure 12(b)(6) and to enforce the summonses under 26 U.S.C. §§ 7604(a) and
7609(b)(2)(A), arguing that Agent Pringle’s appended declaration established that the
summonses satisfied Powell’s requirements. The Taxpayers responded by reasserting
their initial grounds for quashing the summonses and listing six more: (1) Congress
has not authorized the IRS to investigate drug crimes, (2) the IRS must grant absolute
immunity before collecting nontax-crime information for tax purposes, (3) the
6
summonses violate the Taxpayers’ Fourth Amendment privacy rights, (4) the
summonses are overbroad, (5) the IRS’s investigation into nontax crimes violates
Powell’s good-faith requirement, and (6) enforcing the summonses would compel a
violation of Colorado law. The Taxpayers also noted that they “are fully asserting
Fifth Amendment privilege” in light of the IRS’s supposed admission that the audit is
“an investigation of whether the [T]axpayers violated federal criminal drug laws[.]”
App. vol. 1 at 118. Finally, they argued that because the motion to dismiss relies on
information outside the pleadings, the district court must convert it into a motion for
summary judgment.
The district judge referred the matter to a magistrate judge. The magistrate
judge did not convert the motion to dismiss into a motion for summary judgment, but
she still relied on Agent Pringle’s declaration in concluding that the IRS had met
Powell’s requirements. In addition, of course, the magistrate judge had available
before her the Taxpayers’ attachments to their response to the motion to dismiss. The
magistrate judge concluded that the Taxpayers had not sufficiently supported their
arguments against enforcement. So the magistrate judge recommended denying the
petition to quash, granting the motion to dismiss, and enforcing the summonses. The
magistrate judge also informed the parties of their right to object to the
recommendation and warned that failing to object would waive de novo review by
the district judge and would waive appellate review.
The Taxpayers timely objected to eight of the magistrate judge’s rulings:
(1) that the IRS had issued the summonses for a legitimate purpose, (2) that the
7
information summoned is relevant to that purpose, (3) that the IRS does not already
possess the information summoned, (4) that the potential for criminal prosecution
does not show any bad faith by the IRS, (5) that enforcement would not improperly
compel document creation, (6) that the Fourth Amendment does not protect the
information summoned, (7) that the summonses are not overbroad, and (8) that
enforcement would not compel a violation of state law. But the district judge
overruled the objections and fully adopted the recommendation. After considering
these arguments, the district judge denied the petition to quash, granted the motion to
dismiss, and enforced the summonses. The Taxpayers have timely appealed the
magistrate judge’s recommendation and the district judge’s order.
DISCUSSION
This case is grounded in the IRS’s statutory power to issue summonses to
assess taxes. We first provide an overview of this power and the framework that
courts follow when asked to enforce such a summons. Then we turn to our standard
of review. Finally, we address the Taxpayers’ three main arguments why we should
reverse and remand either for discovery or an evidentiary hearing.
First, the Taxpayers argue that the district court applied the wrong standard of
review by not converting the motion to dismiss into a motion for summary judgment.
Second, they assert that the district court misapplied Powell. Third, they argue that
they created an issue of fact regarding the IRS’s lack of good faith or its abuse of the
court’s process in enforcing the summonses. We address each argument in turn and
conclude that the Taxpayers fail at each step. We affirm.
8
I. The IRS’s Summons Power
Congress authorizes and requires the IRS “to make the inquiries,
determinations, and assessments of all taxes . . . imposed by” the Internal Revenue
Code (title 26 of the U.S. Code). 26 U.S.C. § 6201(a). As part of this authority,
Congress empowered the IRS with “broad latitude to issue summonses ‘[f]or the
purpose of ascertaining the correctness of any return, making a return where none has
been made, determining the liability of any person for any internal revenue tax . . . ,
or collecting any such liability.’” United States v. Clarke, 573 U.S. 248, 250 (2014)
(alteration in original) (quoting 26 U.S.C. § 7602(a)). The IRS has authority to issue
summonses to the subject taxpayer and to third parties who may have relevant
information. See 26 U.S.C. § 7602(a)(2); High Desert Relief, Inc. v. United States,
917 F.3d 1170, 1181 (10th Cir. 2019).
But the IRS has limits on its ability to issue and enforce third-party
summonses. For example, the IRS must provide the taxpayer with notice of such a
summons, and the taxpayer may intervene in any enforcement proceeding. See 26
U.S.C. § 7609(a)–(b). The taxpayer also has the right to petition a district court to
quash the third-party summons. Id. § 7609(b). The federal “district court for the
district within which the person to be summoned resides or is found shall have
jurisdiction to hear and determine [such] proceeding . . . [and a]n order denying the
petition shall be deemed a final order which may be appealed.” Id. § 7609(h)(1). In
that same proceeding, the IRS may counterclaim to enforce the summons, and the
district court’s decision will bind the third party “whether or not the person
9
intervenes in such proceeding[.]” Id. § 7609(b)(2)(A), (C). Such proceedings “should
be summary in nature and discovery should be limited.” High Desert, 917 F.3d at
1181 (quoting United States v. Stuart, 489 U.S. 353, 369 (1989)) (internal quotation
marks omitted).
Courts operate under a familiar framework during such proceedings. See id. at
1181–82 (quoting Sugarloaf Funding, LLC v. U.S. Dep’t of the Treasury, 584 F.3d
340, 345 (1st Cir. 2009)). “As a threshold matter, the IRS must first show that it has
not made a referral of the taxpayer’s case to the Department of Justice (‘DOJ’) for
criminal prosecution.” Id. at 1182 (citing Anaya v. United States, 815 F.2d 1373,
1377 (10th Cir. 1987)); see also United States v. LaSalle Nat’l Bank, 437 U.S. 298,
311–13 (1978). Then “the IRS ‘need only demonstrate good faith in issuing the
summons[,]’ . . . [which] means establishing what have become known as the Powell
factors[.]” Clarke, 573 U.S. at 250 (quoting Stuart, 489 U.S. at 359). Powell requires
that the IRS establish: (1) “that the investigation will be conducted pursuant to a
legitimate purpose,” (2) “that the inquiry may be relevant to the purpose,” (3) “that
the information sought is not already within the [IRS’s] possession,” and (4) “that the
administrative steps required by the [Internal Revenue] Code have been followed.”
379 U.S. at 57–58.
The IRS’s burden on these factors is slight “because the statute must be read
broadly to ensure that the enforcement powers of the IRS are not unduly restricted.”
United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1443 (10th Cir. 1985)
(citing United States v. Kis, 658 F.2d 526, 536 (7th Cir. 1981)). The IRS generally
10
meets this burden with an affidavit of the agent who issued the summons. See id.
(quoting United States v. Garden State Nat’l Bank, 607 F.2d 61, 68 (3d Cir. 1979);
and citing Kis, 658 F.2d at 537). The burden then shifts to the taxpayer to factually
refute the Powell showing or factually support an affirmative defense—conclusory
allegations are insufficient. See id. at 1444 (quoting Garden State, 607 F.2d at 71).
This is a heavy burden. Id. (citing Garden State, 607 F.2d at 68). If the taxpayer
cannot meet this burden, “the district court should dispose of the proceeding on the
papers before it and without an evidentiary hearing”—a hearing may be granted only
if the burden is met. Id. at 1444 & n.2 (quoting Garden State, 607 F.2d at 71)
(internal quotation marks omitted). Further, limited discovery is available “only in
extraordinary situations” for “those defenses where . . . the taxpayer must rely on
information peculiarly within the knowledge or files of the Service.” Id. at 1445
(citations and internal quotation marks omitted). “Because ‘the burden of showing an
abuse of the Court’s process is on the taxpayer, it is . . . clear that the taxpayer must
make a substantial preliminary showing before even limited discovery need be
ordered.’” Id. (quoting United States v. Morgan Guar. Tr. Co., 572 F.2d 36, 42–43
n.9 (2d Cir. 1978)).
II. Standard of Review
We review for an abuse of discretion the district court’s denial of the
Taxpayers’ petition to quash. See High Desert, 917 F.3d at 1179 (citing Jewell v.
United States, 749 F.3d 1295, 1297 (10th Cir. 2014)). Committing an error of law
constitutes an abuse of discretion. See id. (quoting Wyandotte Nation v. Sebelius, 443
11
F.3d 1247, 1252 (10th Cir. 2006)). And because the district court’s decision on the
petition turned on issues of law, we review de novo. We also review de novo the
district court’s grant of the IRS’s motion to dismiss the petition and to enforce the
summonses.4 See id. (citing Jewell, 749 F.3d at 1297).
In determining whether the IRS met Powell’s requirements, we must consider
something outside the pleadings (i.e., Agent Pringle’s declaration). Because we are
considering Agent Pringle’s declaration, the IRS’s motion to dismiss “must be treated
as one for summary judgment under Rule 56.” Fed. R. Civ. P. 12(d). The district
court correctly applied the Powell framework but erred by considering Agent
Pringle’s declaration without converting the motion to dismiss to a motion for
summary judgment. But we will not reverse or remand on this error, because “we
may affirm on any basis that the record adequately supports.”5 High Desert, 917 F.3d
at 1181 (citing 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)).
And the record supports the government’s position under the summary-judgment
standard.
4
Though we have, at times, reviewed a district court’s decision to enforce a
summons for clear error, we review de novo here because the district court made no
factual findings and its ruling rested solely on legal issues. See, e.g., High Desert,
917 F.3d at 1179 n.4.
5
So, while we agree with the Taxpayers that the district court applied the
wrong standard of review, we do not grant them relief. Further, they waived appellate
review of this argument by failing to raise it in their objections to the magistrate
judge’s recommendation. See, e.g., Makin v. Colo. Dep’t of Corr., 183 F.3d 1205,
1210 (10th Cir. 1999).
12
Thus, we will apply our traditional Rule 56 summary-judgment standard in
assessing this case. See id. In so doing, “we will view the record in the light most
favorable to [the Taxpayers] 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.” Id. (citing Jewell, 749 F.3d at 1297). Because “‘[t]he substantive law at issue
determines which facts are material in a given case[,]’ . . . the substantive rubric that
the Supreme Court defined in Powell is of central importance in our determination of
whether there are genuine disputes of material fact here.” Id. (first alteration in
original) (citations omitted) (quoting Beaird v. Seagate Tech., Inc., 145 F.3d 1159,
1165 (10th Cir. 1998)). Notably, our traditional summary-judgment standard of
review precludes the Taxpayers from resting on conclusory statements because “such
statements ‘do not suffice to create a genuine issue of material fact.’” Id. (quoting
Alder v. Wal-Mart Stores, Inc., 144 F.3d 664, 674 (10th Cir. 1998)).
III. The Summonses Satisfy Powell.
We now must determine whether the IRS proffered sufficient evidence to pass
the no-DOJ-referral threshold and to establish the four Powell factors. We address
each factor in turn and consider whether the Taxpayers have provided evidence to
establish a genuine issue of material fact. We conclude that the government’s
evidence passes the no-DOJ-referral threshold and satisfies its Powell burden and
that the Taxpayers have failed to rebut it.
13
A. The IRS Has Not Referred the Taxpayers’ Case to the DOJ for
Criminal Prosecution.
The threshold question is whether the IRS has referred the Taxpayers’ case to
the DOJ for criminal prosecution. See, e.g., High Desert, 917 F.3d at 1183. The IRS
easily meets this slight burden with Agent Pringle’s declaration. Agent Pringle
declared under penalty of perjury that “[n]o Department of Justice referral, as defined
by 26 U.S.C. § 7602(d), is in effect with respect to Standing Akimbo, LLC, . . . Peter
Hermes, John Murphy, Samantha Murphy, or Kevin Desilet for the tax periods under
examination.” App. vol. 1 at 74–75 (Decl. of Agent Tyler Pringle, dated Dec. 19,
2017). “Such an ‘affidavit of the agent who issued the summons and who is seeking
enforcement’ is sufficient to make ‘[t]he requisite showing.’” High Desert, 917 F.3d
at 1184 (second alteration in original) (quoting Balanced Fin. Mgmt., 769 F.2d at
1443). The Taxpayers do not contest that this threshold matter has been met.6
B. The IRS Is Conducting the Investigation for a Legitimate Purpose.
Next, we reach Powell’s first factor: whether “the investigation will be
conducted pursuant to a legitimate purpose.” 379 U.S. at 57. Agent Pringle’s
declaration again satisfies the IRS’s slight burden on this factor. Agent Pringle
declared: “The IRS has assigned me to conduct an examination of the federal tax
liabilities of Standing Akimbo, LLC, for the 2014 and 2015 tax years.” App. vol. 1 at
6
In its motion to dismiss, the government acknowledged that it bears the
burden of establishing this matter, arguing that it did so through Agent Pringle’s
declaration. The Taxpayers did not respond to this contention in their response, and
the magistrate judge’s recommendation did not address it.
14
71. He also stated that, because Standing Akimbo’s audit would affect its owners’ tax
returns, he opened examinations into the personal-income-tax returns of Desilet, the
Murphys, and Hermes. He explained that, because the Taxpayers did not adequately
respond to his Document Requests, he issued the third-party summonses to obtain the
needed information to “verify the accuracy of Standing Akimbo’s internal books and
records and to determine whether what Standing Akimbo reported on its returns is
consistent with that information.” Id. at 73. As we will discuss in the next section
concerning Powell’s second factor, the information summoned is relevant in
determining whether the Taxpayers violated § 280E by taking improper deductions.
Agent Pringle’s declaration sufficiently establishes that the IRS acted with a
legitimate purpose. See High Desert, 917 F.3d at 1184 (explaining that the agent’s
affidavit meets IRS’s slight burden).
In response, the Taxpayers argue that the IRS acted with an illegitimate
purpose, namely, investigating federal drug crimes. We have already rejected this
argument. In 2017, we observed that “the IRS’s obligation to determine whether and
when to deny deductions under § 280E[] falls squarely within its authority under the
Tax Code.” Green Sol. Retail, 855 F.3d at 1121 (citing 26 U.S.C. §§ 6201(a),
7602(a); Clarke, 573 U.S. at 249). The next year we held that “it is within the IRS’s
statutory authority to determine, as a matter of civil tax law, whether taxpayers have
trafficked in controlled substances.” Alpenglow Botanicals, LLC v. United States, 894
F.3d 1187, 1197 (10th Cir. 2018), cert. denied, 139 S. Ct. 2745 (2019). Most
recently, in High Desert, we relied on Green Solution and Alpenglow to hold that the
15
IRS has statutory authority to “mak[e] a determination that Congress expressly asked
it to make—even if that determination requires the IRS to ascertain whether the
taxpayer is engaged in conduct that could subject him or her to criminal liability
under the CSA.” High Desert, 917 F.3d at 1187. So, even if the IRS had in fact
issued the summonses to investigate federal drug crimes (and the Taxpayers have
furnished no evidence in support of that), the IRS could still do so as part of
determining § 280E’s applicability. See id. (“Congress ‘granted the [IRS] broad
latitude to issue summonses “[f]or the purpose of . . . determining the liability of any
person for any internal revenue tax.”’” (alterations in original) (quoting Clarke, 573
U.S. at 250)).7
The Taxpayers posit that they are not violating the CSA, because the CSA
does not cover Colorado’s legal marijuana. First, the Taxpayers’ requests for
immunity from prosecution for federal drug crimes contradict this argument. Second,
this argument is unavailing. The CSA does not have to preempt Colorado law for
7
In a Federal Rule of Appellate Procedure 28(j) letter, the Taxpayers argue
against § 280E’s constitutionality by relying on one partial dissent (joined by two
other panelists) in an en banc United States Tax Court decision. The dissent opined
that Congress had exceeded its Sixteenth Amendment authority in enacting § 280E.
See N. Cal. Small Bus. Assistants Inc. v. Comm’r, 153 T.C. No. 4, 2019 WL 5423724,
at *12 (2019) (Gustafson, J., concurring in part and dissenting in part). We are
unpersuaded by this dissent. We agree with the majority, which ruled that § 280E
falls within Congress’s authority under the Sixteenth Amendment to establish
deductions. See id. at *4 (majority opinion). Further, we are bound by our decisions
in Green Solution, Alpenglow, and High Desert that the IRS is properly enforcing
§ 280E. See, e.g., Robles-Garcia v. Barr, 944 F.3d 1280, 1284 (10th Cir. 2019) (“We
are bound by our prior Tenth Circuit precedent.” (citing Lucio-Rayos v. Sessions, 875
F.3d 573, 582 (10th Cir. 2017))).
16
§ 280E to apply. Section 280E applies when a business’s activities “consist[] of
trafficking in controlled substances (within the meaning of schedule I and II of the
Controlled Substances Act) which is prohibited by Federal law or the law of any
State in which such trade or business is conducted.” 26 U.S.C. § 280E (emphasis
added). Congress’s use of “or” extends the statute to situations in which federal law
prohibits the conduct even if state law allows it.
Further, the CSA reigns supreme. See Gonzales v. Raich, 545 U.S. 1, 29
(2005) (“The Supremacy Clause unambiguously provides that if there is any conflict
between federal and state law, federal law shall prevail. It is beyond peradventure
that federal power over commerce is superior to that of the States to provide for the
welfare or necessities of their inhabitants . . . .” (citation and internal quotation marks
omitted)). “[S]tate legalization of marijuana cannot overcome federal law.” Feinberg
v. Comm’r, 916 F.3d 1330, 1338 n.3 (10th Cir. 2019) (citing Hancock v. Train, 426
U.S. 167, 178 (1976)); see also Gonzales, 545 U.S. at 19 (“[A] primary purpose of
the CSA is to control the supply and demand of controlled substances in both lawful
and unlawful drug markets.”). So, despite legally operating under Colorado law, “the
Taxpayers are subject to greater federal tax liability” because of their federally
unlawful activities, and any “remedy [for this] must come from Congressional change
17
to § 280E or 21 U.S.C. § 812(c) (Schedule I) rather than from the courts.” Feinberg,
916 F.3d at 1338 n.3.8
The Taxpayers thus fail to create a genuine issue of material fact regarding
whether the IRS has a legitimate purpose to investigate them.9 We agree with the
district court that the IRS satisfied this factor.
C. The IRS’s Summonses Seek Information Relevant to Its Legitimate,
Investigatory Purpose.
The second Powell factor requires the IRS to establish that “the inquiry may be
relevant to the [investigation’s] purpose.” 379 U.S. at 57. Agent Pringle explained
that the Standing Akimbo summons sought METRC data “account[ing] for all
marijuana plants and products” and that this information “can establish whether a
marijuana business properly reported its gross receipts and allowed deductions for
8
The Taxpayers filed a Rule 28(j) letter making a new statutory-interpretation
argument regarding § 280E’s applicability to state-legal marijuana sales. The
Taxpayers have waived this argument by waiting to raise it in a Rule 28(j) letter. See,
e.g., Flores-Molina v. Sessions, 850 F.3d 1150, 1172 n.16 (10th Cir. 2017) (stating
that we will not consider an argument raised for the first time in a Rule 28(j) letter).
We decline to excuse this waiver because the argument rests on the above-rejected
premise that § 280E may apply to the Taxpayers only if their legal sale of marijuana
under Colorado law violates federal law. Further, the letter falls outside Rule 28(j).
See Feinberg, 916 F.3d at 1337 n.2 (“A rule 28(j) letter’s purpose is ‘not to interject
a long available but previously unmentioned issue for decision.’” (quoting Niemi v.
Lasshofer, 728 F.3d 1252, 1262 (10th Cir. 2013))).
9
The Taxpayers have filed two Rule 28(j) letters attempting to raise new
arguments contesting the IRS’s legitimate purpose in issuing the summonses. Both
letters selectively quote and misconstrue documents to assert that the IRS’s “true
purpose” is to disrupt and dismantle the state-legal marijuana industry. Taxpayers’
Second Nov. 13, 2019 28(j) Letter at 2, ECF No. 10694735. These arguments are
waived because they were improperly raised for the first time in Rule 28(j) letters.
See, e.g., Feinberg, 916 F.3d at 1337 n.2; Flores-Molina, 850 F.3d at 1172 n.16.
18
cost of goods sold.” App. vol. 1 at 72–73. According to Agent Pringle, he issued the
Taxpayers summonses seeking a list of the Taxpayers’ licenses “to verify that these
individuals own Standing Akimbo” and to “determine the correctness of the[ir]
federal tax returns and federal tax liabilities.” Id. at 74–75. With this explanation,
Agent Pringle’s declaration satisfies the IRS’s slight burden to establish that the
information summoned may be relevant to its federal tax investigation into whether
the Taxpayers had improperly deducted business expenses.
On appeal, the Taxpayers respond with one contention: that the requested
METRC data is irrelevant to the IRS’s legitimate purpose because that data tracks
only marijuana plants, information relevant only to a federal-drug-crime
investigation. To support this conclusory assertion, the Taxpayers provide a heavily
redacted document purporting to be an IRS purchase lead sheet, which states:
“METRC data does not track purchases other than tracking the amount of marijuana
product transferred in, this report only tracks the amounts, not the costs; therefore,
there are no verification in METRC’s to support any [cost of goods sold].” App. vol.
2 at 150. But the Taxpayers cannot use this document to create a material issue of
fact. First, the Taxpayers have waived this argument by not raising it until objecting
to the magistrate judge’s recommendation. See ClearOne Commc’ns, Inc. v. Biamp
Sys., 653 F.3d 1163, 1185 (10th Cir. 2011) (stating that “[i]ssues raised for the first
time in objections to the magistrate judge’s recommendation are deemed waived”
(alteration in original) (quoting Marshall v. Chater, 75 F.3d 1421, 1426–27 (10th Cir.
1996)) (internal quotation marks omitted)). Though the Taxpayers had earlier
19
contended that the Standing Akimbo summons would not provide financial data, but
instead only marijuana-plant information, they did not object on relevancy grounds
until their objections to the magistrate judge’s recommendation.
Second, even if we excused that waiver, the redacted document would be
inadmissible hearsay. The Taxpayers rely on it for the truth of the matter asserted—
that METRC does not provide cost-of-goods-sold information—without providing
the foundation necessary to show the document meets an exception or exclusion to
the hearsay rule. Evidence must be admissible at trial before it can create a genuine
issue of material fact for summary judgment purposes. See, e.g., Argo v. Blue Cross
& Blue Shield of Kan., 452 F.3d 1193, 1199 (10th Cir. 2006) (“To determine whether
genuine issues of material fact make a jury trial necessary, a court necessarily may
consider only the evidence that would be available to the jury.” (citation omitted));
Gross v. Burggraf Constr. Co., 53 F.3d 1531, 1541 (10th Cir. 1995) (“It is well
settled in this circuit that we can consider only admissible evidence in reviewing an
order granting summary judgment.” (citations omitted)).
And even if we could consider this evidence,10 it would not create a genuine
issue of material fact. The IRS has authority to summon information “of even
potential relevance to an ongoing investigation.” United States v. Arthur Young &
Co., 465 U.S. 805, 814 (1984). Even assuming the METRC data does not provide
10
Notably, another attachment to the Taxpayers’ response to the IRS’s motion
to dismiss contradicts their argument that METRC does not track financial
information. A document purporting to be an Enforcement Division guide to
summonses for METRC data states that METRC tracks gross sales.
20
cost-of-goods-sold information, the data may still be relevant to the IRS’s
investigation in other ways. For example, it could provide inventory figures and help
Agent Pringle “verify the accuracy of Standing Akimbo’s internal books and
records.” App. vol. 1 at 73.
Finally, the Taxpayers concede that METRC information is relevant in
determining whether they trafficked in marijuana—a relevant and proper inquiry the
IRS may make in determining § 280E’s application. See High Desert, 917 F.3d at
1187; Alpenglow, 894 F.3d at 1197. In fact, in High Desert we concluded that the
summonses met Powell’s second factor, in part because the information sought
“would be used to determine whether [the taxpayer] was growing or selling
marijuana.” High Desert, 917 F.3d at 1191. Accordingly, the Taxpayers fail to create
a genuine dispute of material fact here. We agree with the district court that the IRS
satisfied the second Powell factor.
D. The IRS Does Not Already Possess the Information Summoned.
We next examine Powell’s third factor: whether “the information sought is . . .
already within the Commissioner’s possession.” Powell, 379 U.S. at 57–58. Agent
Pringle declared that the IRS did not already possess the information sought in the
summonses. The summonses are also specific in what they request—licenses held by
the Taxpayers and specific METRC reports for tax years 2014 and 2015. Agent
Pringle explained that the Taxpayers had only partially responded to his Document
Requests and that their production did not include any information reported to the
Enforcement Division, including METRC data. This satisfies the IRS’s slight burden.
21
The Taxpayers did not contest that this factor is satisfied until they objected to
the magistrate judge’s recommendation. So this argument is waived. See ClearOne
Commc’ns, 653 F.3d at 1185. Even if we excused this waiver, the Taxpayers would
still not prevail. They contend that this factor is not satisfied because “there is no
legitimate basis to seek the preparation of METRC reports.” App. vol. 2 at 95
(Objections to Recommendation). This contention rests on their assertion that they
have already produced “voluminous” records for Agent Pringle’s inspection, giving
him enough information to complete his audit. Id. But this argument does not rebut
the IRS’s showing that it does not possess the information summoned. On appeal, the
Taxpayers concede that they did not provide the requested METRC data. And the
record offers no support that they have provided a list of the licenses they held in
2014 and 2015. The Taxpayers bear the burden of providing facts to contest the IRS’s
prima facie showing under Powell. See, e.g., Balanced Fin. Mgmt., 769 F.2d at 1444.
They did not meet this burden. The Taxpayers failed to demonstrate the existence of
a genuine factual dispute whether the IRS already possessed the information
summoned; we agree with the district court that the IRS satisfied this factor.
E. The IRS Followed the Required Administrative Steps.
Finally, we turn to Powell’s fourth factor: whether “the administrative steps
required by the Code have been followed.” Powell, 379 U.S. at 58. Agent Pringle’s
declaration again satisfies the IRS’s slight burden here. Agent Pringle stated that he
“complied with the administrative steps that the Internal Revenue Code requires” in
issuing the summonses. App. vol. 1 at 74–75. The Taxpayers do not contest on appeal
22
that this factor has been met. We agree with the district court that the IRS satisfied
this final Powell factor.
***
Accordingly, we agree with the district court’s determination that the IRS met
its prima facie showing under Powell and that the Taxpayers failed to carry their
“heavy burden” to factually oppose this showing. Balanced Fin. Mgmt., 769 F.2d at
1449. We next turn to whether the Taxpayers have met their burden to make an
affirmative defense against enforcement of the summonses.
IV. The Taxpayers Fail to Establish a Lack of Good Faith or an Abuse of
Process.
Besides contesting the IRS’s prima facie Powell case for enforcement, the
Taxpayers argue that the IRS did not act in good faith in issuing the summonses and
that enforcing the summonses would abuse the court’s process. In this vein, the
Taxpayers raise five arguments against enforcement: (1) the IRS’s ability to share the
collected information with law enforcement constitutes bad faith, (2) enforcing the
summonses would improperly force the Enforcement Division to create documents,
(3) the summonses seek information that the Fourth Amendment protects, (4) the
summonses are overbroad, and (5) enforcing the summonses would compel a
violation of Colorado law. We address each argument in turn and conclude that all
five arguments fail. The Taxpayers have not met their burden to factually support
these arguments. The district court thus correctly ruled that the Taxpayers are not
entitled to an evidentiary hearing or discovery and enforced the summonses.
23
A. The IRS’s Ability to Share the Collected Information with Law
Enforcement Does Not Constitute Bad Faith.
The Taxpayers first contend, as a practical matter, that the IRS cannot split its
civil investigatory authority from any possible associated criminal investigation into
federal drug crimes. From this, the Taxpayers argue that the IRS’s investigation is in
bad faith. They assert that by refusing to grant them immunity from prosecution for
federal drug crimes, the IRS has turned its investigation “‘quasi-criminal’ which
triggers heightened constitutional rights for the taxpayer[s].” Appellants’ Opening
Br. at 25 (citing Boyd v. United States, 116 U.S. 616 (1886)). They also argue that the
IRS cannot rely on 26 U.S.C. § 7602 to obtain the information summoned, because
the information will be used, in part, to evaluate the presence of any federal drug
crimes. To get there, the Taxpayers rely on the Marchetti v. United States, 390 U.S.
39 (1968), line of cases.11
Again, however, the Taxpayers did not argue this point before the magistrate
judge, instead first raising it to the district court in their objections to the magistrate
judge’s recommendation. By not raising this point with the magistrate judge, they
have waived it. ClearOne Commc’ns, 653 F.3d at 1185.
Forgiving this waiver would not help the Taxpayers. They proffer nothing to
support their conclusory assertion that the IRS’s refusal to grant immunity turned its
11
Based on our review of the Taxpayers’ arguments in the district court, the
cases to which they refer besides Marchetti are Leary v. United States, 395 U.S. 6
(1969), Grosso v. United States, 390 U.S. 62 (1968), and Haynes v. United States,
390 U.S. 85 (1968).
24
civil tax investigation “quasi-criminal.” They rely on Boyd, but Boyd dealt with a
forfeiture prescribed by a criminal statute as a penalty for committing fraud. See 116
U.S. at 617, 634. There, the criminal statute authorized the government to compel
offenders to produce information that would be used against them in a later criminal
or forfeiture proceeding. See id. at 622–23. The Supreme Court determined that
proceedings “for penalties and forfeitures, incurred by the commission of offenses
against the law, are of [the] quasi criminal nature” necessitating Fourth and Fifth
Amendment protections. Id. at 634. Boyd is thus inapposite to a strictly civil
investigation into whether the Taxpayers violated the tax code. The tax code, and not
a criminal statute, prescribes the IRS’s enforcement of § 280E. Here, the IRS sought
the information to determine the Taxpayers’ tax liabilities.
The Taxpayers also proffer no evidence that the IRS’s investigation “is part of
a larger criminal investigation,” apart from alleging that the IRS has refused to grant
them immunity from any criminal prosecution.12 Appellants’ Opening Br. at 25. But
12
In a Rule 28(j) letter, the Taxpayers assert that this refusal to grant
immunity, combined with the IRS’s reservation of its right to prosecute, leads to a
reasonable inference “that the Government intends to prosecute based upon the
information provided in the audit.” Taxpayers’ Nov. 13, 2019 28(j) Letter at 2, ECF
No. 10694621. The record does not show that the IRS has reserved rights to
prosecute. And even if this were true and we drew the inference that the IRS intends
to eventually refer this case to the DOJ for prosecution, this inference would not void
the IRS’s legitimate, tax-investigatory purpose in issuing the summonses. As the
Supreme Court reasserted in LaSalle, there is “no reason to force the Service to
choose either to forgo the use of congressionally authorized summonses or to
abandon the option of recommending criminal prosecutions to the [DOJ].” 437 U.S.
at 307. “Congress has not categorized tax fraud investigations into civil and criminal
components[,]” so a summons may be issued for a proper purpose when there has
25
this does not refute Agent Pringle’s statement that the IRS has not referred the case to
the DOJ. The Taxpayers have offered no evidence that the government is criminally
investigating them, let alone that the IRS is involved. See LaSalle, 437 U.S. at 311–
12 (“The preceding discussion suggests why the primary limitation on the use of a
summons occurs upon the recommendation of criminal prosecution to the [DOJ].
Only at that point do the criminal and civil aspects of a tax fraud case begin to
diverge.” (citations omitted)). In LaSalle, the Supreme Court reiterated its previous
conclusion “that Congress had authorized the use of summonses in investigating
potentially criminal conduct.” Id. at 307 (citation omitted). So long as the IRS has not
referred the case to the DOJ and has issued the summonses in good faith as defined
by the Powell factors as here, the summonses are enforceable notwithstanding the
possibility of later referral to the DOJ.13 See id. at 307, 313–14.
been no “recommendation of criminal prosecution to the [DOJ]” as here. Id. at 311.
The Taxpayers also assert that the summonses have no proper purpose absent the IRS
explaining why the materials the Taxpayers have produced are insufficient to
complete the audit. This argument fails because nothing requires such a showing
from the IRS. It is enough that Agent Pringle attested that the Taxpayers “ha[d] not
provided sufficient information to substantiate the figures shown on [their] tax
returns.” App. vol. 1 at 72.
13
Notably, the IRS is limited in when it can disclose gathered information for
nontax criminal-investigatory purposes. For example, the DOJ must seek a court
order to obtain such information, and the IRS cannot disclose the information unless
it is unavailable from other sources. See 26 U.S.C. § 6103(i)(1)(B). The Taxpayers
asserted for the first time at oral argument that the IRS has authority to disclose
information sua sponte in its discretion, relying on § 6103(a) and United States v.
One Coin-Operated Gaming Device, 648 F.2d 1297 (10th Cir. 1981), but these
sources do not support that assertion and § 6103(i) expressly precludes it.
26
Marchetti does not change this result or remove the IRS’s authority to issue
summonses under § 7602 when investigating potential § 280E violations. The
Taxpayers rely on Marchetti to assert that if the IRS is using the information
summoned to investigate federal drug crimes, the summonses would be “outside of
[the] normal regulatory environment.” Appellants’ Opening Br. at 25. But Marchetti
does not stand for that proposition, and the IRS’s investigating drug activity within
§ 280E is a proper purpose. See Alpenglow, 894 F.3d at 1197; Green Sol. Retail, 855
F.3d at 1121. Further, in Alpenglow we distinguished Marchetti and its related cases
from the IRS’s investigations under § 280E. See Alpenglow, 894 F.3d at 1197. That
analysis holds true here. The Marchetti line of cases is inapposite: those cases
involve the invocation of a Fifth Amendment privilege to overcome IRS regulations
requiring a taxpayer to disclose information carrying a real risk of self-incrimination.
See id.; see also Feinberg, 916 F.3d at 1336 (“The petitioners in those cases,
however, were prosecuted for failing to comply with a statute compelling them to
provide self-incriminating information, and the Court determined the Fifth
Amendment privilege provided a complete defense to that failure.” (citations
omitted)). The Taxpayers have not raised a Fifth Amendment challenge on appeal,
and § 280E does not require disclosure of incriminating information. Thus, the
Taxpayers have failed to factually establish that the IRS issued the summonses in bad
faith. We agree with the district court that this argument fails.
27
B. The Standing Akimbo Summons Does Not Improperly Force the
Enforcement Division to Create Documents.
The Taxpayers next argue that enforcing the Standing Akimbo summons
would be an abuse of process because the summons improperly compels the
Enforcement Division to create documents.14 They point to Samantha Murphy’s
declaration that Standing Akimbo does not produce the METRC reports summoned
and that “[t]o the best of [her] knowledge, these reports are not reports that are
ordinarily created by the Marijuana Enforcement Division.” App. vol. 1 at 43. They
also claim that they have raised a genuine issue of material fact based on the IRS’s
failure to provide evidence that the reports existed at the time they were summoned.
This argument fails. The Taxpayers bear the sole burden of factually
supporting their affirmative defenses. See, e.g., Balanced Fin. Mgmt., 769 F.2d at
1444 (“[I]f at this stage the taxpayer cannot . . . factually support a proper affirmative
defense, the district court should dispose of the proceeding on the papers before it
and without an evidentiary hearing.” (alteration in original) (quoting Garden State
Nat’l Bank, 607 F.2d at 71) (internal quotation marks omitted)). To proceed with this
affirmative defense, the Taxpayers must provide evidence that the summons forces
the Enforcement Division to create documents. They have not provided any such
evidence. Samantha Murphy’s conclusion that she believes the Enforcement Division
does not routinely create the reports summoned is insufficient and does not support
14
The government has not contested the Taxpayers’ ability to raise this
argument under the statutory scheme.
28
the defense.15 Argo, 452 F.3d at 1200 (“Accordingly, at the summary judgment stage,
‘statements of mere belief’ in an affidavit must be disregarded.” (quoting Tavery v.
United States, 32 F.3d 1423, 1426 n.4 (10th Cir. 1994))).
On its face, the Standing Akimbo summons does not require the creation of
new documents. The summons requests that the Enforcement Division provide a
“[c]opy” of the reports summoned. App. vol. 1 at 18. A copy of something generally
assumes that the something already exists. See Copy, Merriam-Webster,
https://www.merriam-webster.com/dictionary/copy (last visited Jan. 31, 2020). With
no original report, no copy is possible. If the Enforcement Division does not have the
requested reports, then by the IRS’s guidelines the Enforcement Division need not
create and produce them. Nothing requires the Enforcement Division to create the
records, and the summons does not purport to say otherwise. See United States v.
Davey, 543 F.2d 996, 1000 (2d Cir. 1976) (“[Section] 7602 does not require
preparation or production of records not yet in existence.” (citation omitted)).
Further, despite the Taxpayers’ argument, the IRS need not identify what
records exist before enforcing the summons, because nothing requires the IRS to do
so. E.g., High Desert, 917 F.3d at 1181–82 (noting that the IRS must show that it did
not refer the case to the DOJ and that it meets the Powell factors to obtain
enforcement of a summons). If the Taxpayers are arguing that the district court
extended the summons to reach the entire METRC database, this argument
15
Further, the Taxpayers provide other hearsay evidence that contradicts
Samantha Murphy’s statement. See supra note 10.
29
misconstrues the district court’s language and also fails. We thus agree with the
district court that the Taxpayers have failed to meet their burden to establish this
affirmative defense.
C. The IRS Does Not Need Probable Cause to Obtain the METRC
Data Summoned.
The Taxpayers next argue that they have a reasonable expectation of privacy in
the METRC data because Colorado law criminalizes its disclosure. They argue that
the district court misapplied controlling Fourth Amendment law in applying the third-
party doctrine without considering Carpenter v. United States, 138 S. Ct. 2206
(2018). The Taxpayers assert that Carpenter supports their position that they have a
reasonable expectation of privacy in the METRC data, which would require that the
IRS obtain a search warrant supported by probable cause.
This argument also fails. The Taxpayers have no reasonable expectation of
privacy in the METRC data collected on their business. The Fourth Amendment
protects “[t]he right of the people to be secure in their persons, houses, papers, and
effects, against unreasonable searches and seizures.” U.S. Const. amend. IV. It
applies only when “the person invoking its protection can claim a ‘justifiable,’ a
‘reasonable,’ or a ‘legitimate expectation of privacy’ that has been invaded by
government action.” Smith v. Maryland, 442 U.S. 735, 740 (1979) (citations omitted).
But “a person has no legitimate expectation of privacy in information he voluntarily
turns over to third parties.” Id. at 743–44 (citing United States v. Miller, 425 U.S.
435, 442–44 (1976); Couch v. United States, 409 U.S. 322, 335–36 (1973); United
30
States v. White, 401 U.S. 745, 752 (1971) (plurality opinion); Hoffa v. United States,
385 U.S. 293, 302 (1966); Lopez v. United States, 373 U.S. 427 (1963)). This
principle, known as the third-party doctrine, applies “even if the information is
revealed on the assumption that it will be used only for a limited purpose.” Miller,
425 U.S. at 443 (citations omitted). The Supreme Court recently reaffirmed this
doctrine in Carpenter. See 138 S. Ct. at 2220 (“We do not disturb the application of
Smith and Miller . . . .”).
Contrary to the Taxpayers’ assertions, Carpenter’s holding precluding the
third-party doctrine’s application does not apply to them. Carpenter examined a
narrow issue: whether the third-party doctrine should apply to the collection of cell-
site-location information (CSLI). Id. The METRC records differ markedly from
CSLI. METRC tracks the movement of plants, and CSLI tracks people. Further, the
Taxpayers voluntarily provided the information summoned to the Enforcement
Division so they could legally conduct their business; this differs from CSLI, which
collects information “without any affirmative act on the part of the user beyond
powering up.” Id. Carpenter’s analysis in precluding the third-party doctrine’s
application to CSLI is thus inapplicable here.
The third-party doctrine applies to the METRC data summoned here. The
Taxpayers chose to operate a marijuana business under Colorado law and, thus,
agreed to provide certain information to the Enforcement Division. As required by
law, the METRC database stores this information, constructing reports that the
Enforcement Division may access as needed. The METRC reports are the
31
Enforcement Division’s property—the Taxpayers have no ownership, possession, or
propriety interest in them. See Miller, 425 U.S. at 440–43; cf. United States v. Leary,
846 F.2d 592, 598 (10th Cir. 1988) (finding a reasonable expectation of privacy when
defendants “retained control over the premises and records”). So the Taxpayers have
no expectation of privacy in these reports. See Miller, 425 U.S. at 440–43. Because
the Taxpayers have no Fourth Amendment right at stake, the IRS need not obtain a
warrant supported by probable cause to get the records. See id. at 444.
Finally, though we agree that Colorado law deems the METRC records
confidential, we do not agree that this confidentiality provides the Taxpayers with a
Fourth Amendment interest in them. The statute they rely on to establish that the
METRC information is confidential has been repealed and its amended version has
been relocated. See Colo. Rev. Stat. Ann. § 12-43.3-202(d) (West 2018). The now-
applicable statute provides that the Enforcement Division “shall maintain the
confidentiality of . . . information obtained from a medical marijuana or retail
marijuana licensee . . . that [is] exempt from public inspection pursuant to state law.”
Colo. Rev. Stat. Ann. § 44-10-204(1)(a) (West 2020). But such information “may be
used . . . for investigation or enforcement of any international, federal, state, or local
securities law or regulations[.]” Id. And “[n]othing in this article 10 limits a law
enforcement agency’s ability to investigate unlawful activity in relation to a medical
marijuana business or retail marijuana business.” Id. § 44-10-202(3).
We thus fail to see how this statute precludes the sharing of such information
with the IRS—an agency tasked with enforcing federal-tax laws with its own duty to
32
keep information confidential. See 26 U.S.C. § 6103(a) (providing that an agent must
maintain as confidential any return information obtained “in connection with his
service”). And even if the statute somehow provides the Taxpayers a right of privacy
here, the statute would be preempted by the Supremacy Clause. Under the Supremacy
Clause, state law is preempted when it “stands as an obstacle to the accomplishment
and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz,
312 U.S. 52, 67 (1941). The Taxpayers’ reading of the statute would substantially
impede the IRS’s ability to summon METRC records under § 7602.16
The IRS has met the Powell factors establishing the Fourth Amendment
reasonableness of the Standing Akimbo summons. The Taxpayers have failed to rebut
this showing, so the IRS does not need probable cause. See, e.g., Powell, 379 U.S. at
51 (holding that the government needs to show probable cause only when the
taxpayer raises a substantial question that judicial enforcement constitutes an abuse
of process); United States v. Reis, 765 F.2d 1094, 1096 (11th Cir. 1985) (“The
enforcement of an IRS summons does not violate the fourth amendment as long as
the IRS has complied with the Powell requirements.” (citations omitted)); United
States v. Shlom, 420 F.2d 263, 266 (2d Cir. 1969) (stating that a valid summons does
not constitute a search and seizure). We thus agree with the district court that the
Taxpayers failed to establish this defense.
16
For this reason, we need not conduct a full preemption analysis. See Presley
v. United States, 895 F.3d 1284, 1292 n.6 (11th Cir. 2018).
33
D. The Summonses Are Not Overbroad.
The Taxpayers next assert that the IRS did not issue the summonses in good
faith because they are overbroad. They point out that the Taxpayers summonses
request a list of all licenses held by the Taxpayers for the 2014 and 2015 tax years.17
They argue that because this “go[es] way beyond asking about ownership in Standing
Akimbo,” the summonses are overbroad. Appellants’ Opening Br. at 34.
This argument also fails. As discussed, the Taxpayers bear a heavy burden to
provide specific facts supporting their defense. See Balanced Fin. Mgmt., 769 F.2d at
1444. They provide no authority for their contention that the summonses are
overbroad for failure to explain the IRS’s need for information about the Taxpayers’
licenses apart from Standing Akimbo. Powell does not require that the IRS explain
why it seeks information beyond showing its potential relevance to a legitimate
purpose. The IRS has shown the information summoned is relevant, and the
Taxpayers failed to rebut this showing. See supra Section III.C.
Further, the summonses specifically describe the information they seek and
limit the request to the tax years in question. The summonses are thus proportionate
to the ends sought and are not a “fishing expedition.” United States v. Coopers &
Lybrand, 550 F.2d 615, 621 (10th Cir. 1977) (quoting United States v. Theodore, 479
F.2d 749, 754 (4th Cir. 1973)) (internal quotation marks omitted). Under these facts,
17
The Taxpayers do not appear to contest the reasonableness of the IRS’s
seeking a list of licenses held by Standing Akimbo.
34
the summonses cannot be overbroad. See United States v. Berney, 713 F.2d 568, 572
(10th Cir. 1983). We agree with the district court that the Taxpayers failed to
establish this affirmative defense.18
E. Enforcing the Standing Akimbo Summons Would Not Compel a
Violation of Colorado Law.
In the Taxpayers’ last attempt to assert a defense to enforcement, they argue
that enforcing the Standing Akimbo summons would require the individual
complying with it to violate Colorado law.19 They point to two Colorado statutes: one
making the METRC data confidential and one making disclosure of the data a
misdemeanor. They argue that the Supremacy Clause does not preempt these statutes
18
The magistrate judge appears to have misunderstood the Taxpayers’
argument and addressed only the Standing Akimbo summons. We need not remand,
however, because we may affirm on any basis adequately supported by the record.
E.g., High Desert, 917 F.3d at 1181.
19
The government argues that the Taxpayers lack standing to bring this
argument. In an unpublished case, we recognized that “plaintiffs lack standing ‘to
assert as defenses enforcement issues which only affect the interests of the third-
party record keeper, such as the defense that the third-party record keeper was not
properly served with the summons.’” Gass v. U.S. Dep’t of Treasury, 216 F.3d 1087,
2000 WL 743671, at *5 (10th Cir. 2000) (unpublished table opinion) (quoting Wright
v. United States, 964 F. Supp. 336, 338 (M.D. Fla. 1997); and citing King v. United
States, 684 F. Supp. 1038, 1041 (D. Neb. 1987)). Arguing that a summons requires
an individual to commit a crime and risk imprisonment is very different from arguing
improper service or that a summons is unduly burdensome. Cf. King, 684 F. Supp. at
1041. Further, it appears that, if the METRC data is confidential as the Taxpayers
argue and if the summons were instead directed at them, the Taxpayers’ turning over
the data summoned would also constitute a crime. See Colo. Rev. Stat. Ann. § 44-10-
201(4) (West 2020) (“Any person who discloses confidential records or information
in violation of the provisions of this article 10 commits a class 1 misdemeanor . . . .”
(emphasis added)). So this issue affects more than the Enforcement Division’s
interests, and we conclude that the Taxpayers have standing to bring this argument.
35
and that the statutes protect their Fifth Amendment rights against forced disclosure of
federal drug crimes.
The Colorado legislature has repealed the statutes the Taxpayers rely upon in
their briefs.20 The current statutes state that the Enforcement Division
shall maintain the confidentiality of:
(a) Reports or other information obtained from a medical marijuana or retail
marijuana licensee . . . containing any individualized data, information, or
records related to the applicant or licensee or its operation, including sales
information, leases, business organization records, financial records, tax
returns, credit reports, cultivation information, testing results, and security
information and plans, or revealing any customer information, or any other
records that are exempt from public inspection pursuant to state law. Such
reports or other information may be used only for a purpose authorized by
this article 10, for investigation or enforcement of any international, federal,
state, or local securities law or regulations, or for any other state or local law
enforcement purpose.
Colo. Rev. Stat. Ann. § 44-10-204(1)(a). Certain disclosures constitute a crime: “Any
person who discloses confidential records or information in violation of the provisions of
this article 10 commits a class 1 misdemeanor and shall be punished as provided in
section 18-1.3-501.” Id. § 44-10-201(4). Article 10 also provides: “Nothing in this article
10 limits a law enforcement agency’s ability to investigate unlawful activity in relation to
a medical marijuana business or retail marijuana business.” Id. § 44-10-202(3).
Section 204(1)(a) allows disclosure of the confidential information for “a purpose
authorized by this article 10,” such as section 202(3)’s allowing a law-enforcement
agency’s investigation into a medical marijuana dispensary’s unlawful activity. Here, the
20
The legislature repealed the statutes effective October 1, 2018.
36
IRS’s investigation into whether the Taxpayers’ unlawfully claimed business deductions
falls within this authorized purpose. So an Enforcement Division employee’s compliance
with the summons seeking the confidential METRC information would not violate “the
provisions of this article 10” and, thus, would not constitute a crime. Id. § 44-10-201(4).
The Taxpayers’ interpretation of the statutory scheme is unpersuasive.21 It
ignores section 202(3)’s plain language disallowing limitations on a law-enforcement
agency’s investigation. Further, the Taxpayers provide no evidence that Colorado has
prosecuted any Enforcement Division employees for complying with a summons
requesting METRC reports or that the Enforcement Division has objected to any such
summons because it perceives that its compliance constitutes a crime.22 Finally, the
Taxpayers’ reliance on the Fifth Amendment is misplaced because the Enforcement
21
Under the Taxpayers’ interpretation, the Enforcement Division officials
would violate Colorado law by complying with the IRS’s summons. This would
impede the IRS’s ability to summon information relevant to completing its required
§ 6201 duties. The Supremacy Clause enables federal law to preempt state law when
it “stands as an obstacle to the accomplishment and execution of the full purposes
and objectives of Congress.” Hines, 312 U.S. at 67. So, even if the Taxpayers’
interpretation were correct, the Colorado statutes would have to yield. See Presley,
895 F.3d at 1292 n.6.
22
In their reply brief, the Taxpayers attach a motion filed in the United States
Tax Court showing Arizona’s views on its own “substantively identical marijuana
privacy laws.” Appellants’ Reply Br. at 12. But the laws are not “substantively
identical.” Compare Ariz. Rev. Stat. Ann. § 36-2810(A) (West 2019) (preventing
disclosure “except as necessary for authorized employees of the department to
perform official duties”), with Colo. Rev. Stat. Ann. § 44-10-204. We do not consider
this motion, which provides no insight into how Colorado views its laws, or the
government’s Rule 28(j) letter response. It is telling that, unlike Arizona, Colorado
apparently has not contested enforcement of an IRS summons requesting METRC
information.
37
Division—a third party—holds the information, so the Taxpayers have no Fifth
Amendment interests in it. See First Nat’l Bank, Englewood v. United States, 701
F.2d 115, 117 (10th Cir. 1983) (“There can be no violation of one’s Fifth
Amendment right not to testify against oneself where the records are in the hands of a
third party; hence, one cannot complain on this ground about a subpoena directed to
third parties to produce records.”). The Taxpayers have failed to carry their burden
on this attempt to prevent enforcement of the Standing Akimbo summons. We agree
with the district court that enforcing this summons does not compel a violation of
state law.
***
The Taxpayers did not meet their burden to show that the IRS acted in bad
faith in issuing the summonses or that it is abusing the court’s process in asking for
their enforcement. The Taxpayers’ appended declarations neither create a genuine
issue of material fact nor support their defenses, so the district court correctly
enforced the summonses without discovery or a hearing. See Balanced Fin. Mgmt.,
769 F.2d at 1444 & n.2. With no genuine issue of material fact, the district court
properly entered judgment in the IRS’s favor, and we affirm.23
23
The Taxpayers assert in a Rule 28(j) letter that without service of a
summons under Federal Rule of Civil Procedure 4 to Colorado, “no order against
Colorado is valid.” Taxpayers’ Nov. 4, 2019 28(j) Letter at 1, ECF No. 10692528.
This argument is waived because the Taxpayers waited to improperly raise it in a
Rule 28(j) letter. See, e.g., Feinberg, 916 F.3d at 1337 n.2; Flores-Molina, 850 F.3d
at 1172 n.16. This argument is also meritless. The Taxpayers served the Enforcement
Division when they filed the petition, and the Enforcement Division is “bound by the
38
CONCLUSION
We conclude that the Taxpayers have failed to overcome the IRS’s showing of
good faith under Powell and have failed to establish that enforcing the summonses
would constitute an abuse of process. The Taxpayers’ failures mean that they are not
entitled to an evidentiary hearing or to limited discovery. We thus affirm the district
court’s denial of the petition to quash, its judgment in favor of the government, and
its enforcement of the summonses.
decision in [this] proceeding” despite its non-intervention. 26 U.S.C.
§ 7609(b)(2)(C).
39
Standing Akimbo, LLC v. United States
Combined Opinion