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Gangi v. United States

August 25, 2010


The opinion of the court was delivered by: Arpert, U.S.M.J.



This matter comes before the Court on the separate Petitions of Frank Gangi ("Mr. Gangi"), Ferrous Miner Holdings, Ltd., BABP VI, LLC, and Global Naps, Inc. (collectively, "Petitioners") to Quash the Summonses ("Summonses") served on third parties CitiBank and Sovereign Bank by Internal Revenue Agent Jackie Moss ("Agent Moss") [dkt. entry nos.1 & 5]. In response, the United States filed a Motion to Enforce [dkt. entry no. 4]. The Court has reviewed the written submissions of the parties and conducted oral argument on July 26, 2010. For the reasons that follow, the Petitions to Quash are denied and the Motion to Enforce the Summonses is granted.


A. Factual Background

The present matter arises from two administrative Summonses issued by the Internal Revenue Service. Pursuant to 26 U.S.C. § 7609(h) jurisdiction is conferred upon the District Court for the district in which the person to whom an administrative summons issued by the IRS is directed, resides or is found to hear and determine any proceeding to quash the Summons. Notwithstanding that the IRS sent its Summonses to Citi Bank and Sovereign Bank to South Dakota and Massachusetts, respectively, each is a banking institution with locations throughout the State of New Jersey. A physical presence, including a branch office of a summoned party, is sufficient for that party to be considered "found" within this district. See, e.g., Pilchesky v. United States, 2008 U.S. Dist. LEXIS 75170, *4-*7, 2008-2 U.S. Tax Cas. (CCH) P50, 629 (M.D. Pa. Sept. 29, 2008); Hopkins v. IRS, Civ. No. 07-262, 2008 U.S. Dist. LEXIS 45510, *10 (D.N.M. March 28, 2008). The Court also has jurisdiction pursuant to 28 U.S.C. § 1340 which confers upon this Court "original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue, or revenue from imports or tonnage except matters within the jurisdiction of the Court of International Trade."

In 1921 Congress created a new system of taxation in which United States Virgin Islands ("USVI") residents pay tax to the Virgin Islands Bureau of Internal Revenue ("BIR") rather than to the United States Internal Revenue Service ("IRS"). The purpose of this system is to facilitate the economic development of the USVI and assist the Islands in becoming self-supporting. HMW Indus., Inc. v. Wheatley, 504 F.2d 146, 150 (3d Cir. 1974). To facilitate the coordination of income taxation between the United States and the USVI, Congress enacted 26 U.S.C. § 932 which draws a clear distinction between individuals who are bona fide Virgin Islands residents and those who are not. A United States resident who receives income from the USVI but who is not a bona fide USVI resident, must file two tax returns, one with the US and the other with the USVI. See I.R.C. 932(a). Whereas, a bona fide resident of the USVI is relieved of any income tax liability to the United States and is only required to file a return with the USVI. See I.R.C. §932(c).

In December 2004, the IRS initiated an audit of Mr. Gangi to determine whether he was a bona fide USVI resident for the 2000- 2004 tax years. (Pet'rs' Br. at 4). Six years after the IRS's audit, Agent Moss issued Summonses to CitiBank and Sovereign Bank and Petitioners timely moved to quash the CitiBank Summons, to which the IRS responded by moving to enforce the Summonses. Id. at 5. The Summonses direct the recipients to produce all documents and records in their possession or under their control relating to Petitioners for the period December 31, 1999 to December 31, 2004.

B. Petitioners' Arguments in Support of the Petition to Quash

Petitioners argue that the Petitions to Quash should be granted because: (1) the IRS has not established that the Summonses were issued for a proper purpose, (2) the information sought is not relevant to that purpose and, (3) the government has not complied with administrative steps required by law.

First, Petitioners argue that the Summonses should be quashed because they were issued for an invalid purpose. The IRS has claimed that its legitimate purpose is investigating whether Mr. Gangi is a bona fide USVI resident. However, Petitioners explain that pursuant to I.R.C. §6501, the applicable three year statute of limitations has expired and, thus, the IRS has no authority to issue the Summonses under I.R.C. §7602 and, therefore, there can be no legitimate purpose because it has no right to pursue any relief in the first place. Id. at 8, 12.

Next, Petitioners argue that the Summonses should be quashed because the documents the IRS seeks from CitiBank and Sovereign Bank are not relevant to a determination of Mr. Gangi's residency or tax liability. Petitioners maintain that the IRS fails to meet the standard set forth by the United States Supreme Court, which requires the IRS to have a "realistic expectation rather than an idle hope that something may be discovered." Id. (quoting United States v. Arthur Young & Co., 465 U.S. 805, 813 & n.11 (1984)). Petitioners argue that the Affidavit of Agent Moss does nothing to establish relevance and its broad conclusory statements do not satisfy the government's burden. (Pet'rs' Br. at 18). Petitioners note that the IRS appears to be relying on a facts-and-circumstances test for residency as set forth in Sochurek v. Commissioner, 300 F.2d 34 (7th Cir. 1062), and argue that these factors are not applicable since Sochurek examined 26 U.S.C. § 911 and not 26 U.S.C.§ 871, § 932. Id. at 15. Nonetheless, Petitioners argue that even if the Sochurek facts-and-circumstances test was applicable none of the information or documents that could be obtained from CitiBank and Sovereign Bank would have any bearing on the Sochurek factors:

(1) intentions as to residency;

(2) establishment of his home in ...

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