Standing Akimbo, Inc. v. United States

1

STANDING AKIMBO, INC., a Colorado corporation; SPENCER KIRSON; SAMANTHA MURPHY; JOHN MURPHY, Petitioners-Appellants, v. UNITED STATES OF AMERICA, through its agency the Internal Revenue Service, Respondent-Appellee.

No. 21-1379

United States Court of Appeals, Tenth Circuit

January 27, 2023

D.C. No. 1:18-MC-00178-PAB-KLM, D. Colo.

Before EID, BALDOCK, and CARSON, Circuit Judges.

ORDER AND JUDGMENT ^[*]

Bobby R. Baldock, Circuit Judge

Here we consider the latest battle in the war between Colorado licensed marijuana dispensaries and the Internal Revenue Service (IRS) over the latter's access to third-party held information related to its audits of the dispensaries and their owners. We are no strangers to this subject, having addressed it in one form or another no less than six times already. See, e.g., Green Sol. Retail, Inc. v United States, 855 F.3d 1111 (10th Cir. 2017); Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018); Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019); High Desert Relief, Inc v. United States, 917 F.3d 1170 (10th Cir. 2019); Standing Akimbo, LLC v. United States, 955 F.3d 1146 (10th Cir. 2020) ("Standing Akimbo I"); Speidell v. United States, 978 F.3d 731 (10th Cir. 2020). In keeping with those previous treatments, we exercise jurisdiction pursuant to 28 U.S.C. § 1291 and AFFIRM the district court's judgment.

I.

The facts of this case are well known to both us and the parties. Accordingly, we only summarize those facts essential to our disposition. Standing Akimbo, Inc.^[1] is a Colorado-licensed marijuana dispensary owned by Spencer Kirson, Samantha Murphy, and John Murphy (we refer to Standing Akimbo and its owners as the "Taxpayers"). The Internal Revenue Code prohibits such enterprises from taking deductions for business expenses. See 26 U.S.C. § 280E.^[2] As part of its efforts to enforce the tax code, the IRS began investigating the Taxpayers' tax filings to determine if they had taken deductions in violation of § 280E. This investigation led the IRS to audit the Taxpayers for the 2014, 2015, and 2016 tax years. The IRS requested documents from the Taxpayers to substantiate their filings. When the IRS found the Taxpayers' responses insufficient, it issued summonses to the Colorado Marijuana Enforcement Division (MED) seeking reports from its Marijuana Enforcement Tracking Reporting and Compliance system (METRC). The Taxpayers petitioned the district court to quash these summonses in two separate actions-the first addressing the summonses for the 2014 and 2015 tax years and the second addressing the summons for the 2016 tax year. In the first action, the district court denied the Taxpayers' petition to quash and we resolved the Taxpayers' appeal arising out that case in favor of the IRS. See Standing Akimbo I, 955 F.3d 1146. The present action pertains only to the summonses the IRS sent MED for reports relating to the Taxpayers' 2016 filings.

The IRS issued the summonses in question in September 2018. The first summons directed MED to provide a complete list of Standing Akimbo's licenses for 2016 as well as METRC's 2016 annual gross sales report, 2016 transfer reports, 2016 annual harvest reports, and 2016 monthly plants inventory reports for Standing Akimbo. The second and third summonses instructed MED to provide a complete list of all licenses held by Spencer Kirson, John Murphy, and Samantha Murphy in their individual capacities.

The Taxpayers responded before MED complied by filing a petition to quash the summons in the district court in accordance with 26 U.S.C. § 7609(b). Such proceedings follow "a familiar framework." Standing Akimbo I, 955 F.3d at 1154 (citation omitted). First, the IRS must make a threshold showing that it has not referred the matter to the Department of Justice for prosecution. Id. (citation omitted). Second, the IRS must meet the "slight" burden of demonstrating its "good faith in issuing the summons" by satisfying the four-factor test established in United States v. Powell, 379 U.S. 48 (1964). Standing Akimbo I, 955 F.3d at 1155; United States v. Stuart, 489 U.S. 353, 359 (1989). Those factors require the IRS to show (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 Code have been followed." Powell, 379 U.S. at 5758. If the IRS can make this showing, usually through an affidavit from the agent issuing the summons, it establishes the prima facie validity of the summons. Standing Akimbo I, 955 F.3d at 1155. Thereafter, the burden shifts to the taxpayer who must meet the "heavy burden" of "factually refut[ing] the Powell showing or factually support[ing] an affirmative defense." Id. (citation omitted).

The Taxpayers offered three primary lines of attack on the summonses. First, they asserted the IRS could not satisfy the four-factor test laid out in Powell for establishing the requisite showing for enforcing the summonses. Second, the Taxpayers claimed the summonses lacked good faith and abused process. Third, they asserted various constitutional violations relating to the summonses.

The IRS moved to dismiss the Taxpayers' petition and asked the district court to enforce the summons pursuant to 26 U.S.C. §§ 7604(a) and 7609(b)(2)(A).^[3] To support that motion, the IRS provided an affidavit from the agent assigned to audit the Taxpayers explaining the purpose of the IRS's investigation and the relevance of the METRC reports to it. The IRS argued this affidavit satisfied the requirement that it establish the prima facie validity of the summonses. See Anaya v. United States, 815 F.2d 1373, 1377 (10th Cir. 1987). The IRS further asserted that the Taxpayers' arguments failed to carry their "heavy burden" to show that the IRS lacked good faith or that enforcing the summonses would be an abuse of process. See id. at 1377-78. The motion to dismiss was fully briefed in February 2019 but remained pending until September 2021.

During the lengthy time the IRS's motion was pending, we decided Standing Akimbo I. See 955 F.3d 1146. Thereafter, the Taxpayers petitioned the Supreme Court for certiorari in that case. Although the Supreme Court denied the Taxpayers' petition, Justice Thomas authored a brief statement expressing his doubts on the integrity of Gonzales v. Raich, 545 U.S. 1 (2005) and Congress's authority to regulate the intrastate growth of marijuana. Standing Akimbo, LLC v. United States, 141 S.Ct. 2236 (2021) (Statement of Thomas, J. on denial of certiorari) ("Standing Akimbo I Statement"). The Taxpayers seized upon Justice Thomas's statement and attempted to add it to the arguments presented to the district court on the IRS's motion to dismiss, even though the motion was already fully briefed. The IRS in turn moved to strike the Taxpayers' submission of Justice Thomas's statement as supplemental authority.

The district court resolved each of these issues in its order granting the IRS's motion to dismiss. See Standing Akimbo, Inc. v. United States, No. 18-mc-00178-PAB, 2021 WL 3931224, (D. Colo. Sept. 2, 2021) ("Standing Akimbo II"). Recognizing the need to consider submissions beyond the pleadings, the district court converted the IRS's motion to dismiss into a motion for summary judgment as allowed by Fed.R.Civ.P. 12(d). See id. at *2. The district court found the IRS had "met its burden under Powell to show a prima facie case." Id. at *5. The district court went on to reject the Taxpayers' arguments about lack of good faith and process, noting the Taxpayers had "not presented factual support for their claims" and "failed to show a material issue of disputed fact" to carry their burden in the face of the IRS's prima facie showing. Id. at *9. As for Justice Thomas's statement, the district court concluded it "ha[d] no bearing on the Court's analysis" because the statement was non-precedential and Tenth Circuit precedent controlled the case. Id. The district court therefore "decline[d] to consider a new argument raised for the first time in supplemental authority based on no change in precedent." Id. (citing Hooks v. Ward, 184 F.3d 1206, 1233 n.25 (10th Cir. 1999)).

Accordingly, the district court granted the IRS's motion to dismiss and ordered the summonses be enforced. This appeal followed.

II.

Now before us, the Taxpayers present three overarching arguments. First, the Taxpayers allege the district court committed reversible error when it converted the IRS's motion to dismiss into a motion for summary judgment without providing them with sufficient notice and when it elected not to hold an evidentiary hearing. Appellants' Br. 14-16. Second, the Taxpayers argue the district court erred when it declined to consider Justice Thomas's statement as supplemental authority. Id. at 18-19. Finally, the Taxpayers claim the summonses should have been dismissed because the IRS lacked a "legitimate purpose" in issuing them and therefore failed to meet its burden under Powell. Id. at 2327, 29-35. We address each argument in turn.

A.

We begin by considering the Taxpayers' arguments pertaining to the first set of alleged procedural errors. District courts are obligated to treat a motion to dismiss as a motion for summary judgment whenever "matters outside the pleadings are presented to and not excluded by the court." Fed.R.Civ.P. 12(d). "All parties must be given a reasonable opportunity to present all material that is pertinent to the motion." Id. We review the "district court's decision to consider evidence beyond the pleadings and convert a motion to dismiss to a motion for summary judgment" for abuse of...