Appeal Court Upholds IRS Summons For Cannabis Business Docs
According to Law360, a Michigan federal court correctly
dismissed a suit by cannabis business owners seeking to quash a third-party
summons issued by the IRS requesting their companies' records because the
summons aided a criminal investigation, the Sixth Circuit said Friday.
A three-judge panel determined that the summons issued to a data software
company by the Internal Revenue Service seeking financial records of
the various cannabis businesses that Kimberly and Richard Gaetano owned were
valid to determine whether they underreported their federal taxes, according to
The summons was essential to the agency's criminal investigation into whether
the couple owed federal taxes, and the IRS proved that the summons met
exceptions to the notice requirement under Internal Revenue Code Section
7609, U.S. Circuit Judge Ralph B. Guy Jr. said in the opinion.
"In sum, because the exception in Section 7609(c)(2)(E) applies, the bar
of sovereign immunity remains, and subject-matter jurisdiction does not
exist," Judge Guy said.
During the criminal investigation of the couple, the IRS issued a summons to
the owners of Portal 42 LLC, a data software company that provides
point-of-sale systems for cannabis businesses, of which the Gaetanos were
clients. The summons sought the Gaetanos' records held by Portal 42 from the
beginning of 2015 to Sept. 1, 2019, according to the opinion, and the couple
wasn't notified of the summons by the IRS.
The Gaetanos filed suit against the IRS in 2019, requesting that the summons be
quashed because they should have been notified under Section 7609, and argued
that the summons was issued in bad faith.
During the lower court proceedings, the couple conceded that Portal 42 wasn't a
third-party recordkeeper that required the IRS to notify the Gaetanos under an
exception to Section 7609, and the IRS testified that it was investigating
whether the Gaetanos underreported their federal taxes for their cannabis
The Michigan federal court determined that the IRS met the exceptions under
Section 7609 that allowed the summons to be issued without notice to the
Gaetanos and dismissed the couple's suit. The Gaetanos appealed that ruling,
arguing that the criminal investigation conducted by the IRS was invalid
because no quarterly tax period ends on Sept. 1, according to court documents.
In Its Opinion, The Sixth Circuit Affirmed That
The Lower Court Correctly Determined The Summons Was Connected To The IRS’
Investigation Into Whether The Gaetanos Underreported Their Federal Tax
Liability, Per An IRS Agent’s Affidavit.
The couple also failed to prove how the summons was required to meet a
four-factor test established by the U.S. Supreme Court in its 1964
decision in U.S. v. Powell stipulating when a summons is valid.
In its Powell ruling, the Supreme Court stipulated that an agency must state a
legitimate purpose for seeking information outside its possession that is
relevant to an investigation and proper administrative procedures must be
In the Gaetanos' case, the IRS agent's testimony alone most likely would have
satisfied the Powell standard, but the lower court didn't have to address the
issue because it correctly dismissed the suit for a lack of jurisdiction under
Section 7609, the appeals court said.
"We cannot proceed to the Powell test when Section 7609 does not confer
jurisdiction over this action," Judge Guy said. "As such, the
Gaetanos have placed the cart before the horse."