Guess Who’s Not Getting Audited by the IRS

Georges Marciano, the co-founder of jean maker Guess?, Inc., recently lost his bid in a federal court to force the Internal Revenue Service to audit his tax returns.

In the unusual case, chronicled by the Legal Times, Marciano filed suit against IRS Commissioner Doug Shulman, alleging that the IRS had violated his rights by declining to investigate or audit his tax returns.

According to the opinion handed down by U.S. District Court Judge Harlan Kennedy on July 1, Marciano claimed that in 2005 and 2006 he uncovered fraud and embezzlement by former employees of his apparel company amounting to nearly $200 million. Believing the fraudulent transactions would have significant consequences for his tax liability, Marciano tried to get copies of his recent tax returns from the IRS.

However, the IRS at first was unable to provide him with his tax returns for 2000, 2001, 2002, 2003, 2004 and 2006. Despite indications that the taxes had not been properly filed as of at least the year 2000, Marciano received two refund checks from the IRS dated April 25, 2006, for $233,706.27 and $647,290.90, ostensibly for the taxes he had paid in 2000. Marciano apparently believed that he owed the IRS money, and that audits by the IRS would help uncover the financial wrongdoing of his former employees, accountants and bookkeepers.

“Marciano subsequently received more refund checks for the years between 2000 and 2006,” the court wrote. “Marciano returned all of these checks to the IRS, requesting an explanation for their issuance. The IRS initially replied only that Marciano’s account for the year 2000 had been adjusted because he had ‘requested a tentative carryback or restricted interest claim,’ and eventually sent Marciano a letter in June 2009 informing him that ‘no tax issues exist.’”

Unlike most taxpayers, Marciano was apparently dissatisfied with the IRS’s response that he had no outstanding tax issues. Not only that, but he objected to receiving refund checks totaling nearly $900,0000. For most people, this would not be considered a big problem.

Meanwhile, as these events were unfolding, Marciano filed two lawsuits in the Superior Court of Los Angeles against his former accountants, bookkeepers and other employees. For their part, the former employees filed counterclaims against Marciano for libel and intentional infliction of emotional distress, and in July 2009, the Superior Court entered judgments against Marciano in both lawsuits. Then in October 2009, Marciano’s judgment creditors commenced an involuntary Chapter 11 bankruptcy action against him in the U.S. Bankruptcy Court for the Central District of California.

Marciano filed suit against the IRS on Aug. 10, 2009, according to the court, seeking a stay of execution of the state court judgments against him and the attachment of the bank accounts he believed to have been fraudulently opened in his name. He also wanted a tax lien to be placed on his property, an injunction against any further state court proceedings against him, a declaration that the IRS had violated his rights (including his due process rights under the Constitution), and both a writ of mandamus and an injunction requiring the IRS to furnish him with certain documents and to commence a thorough investigation or audit of his tax liability.

On Aug. 21, 2009, Marciano next moved for a temporary restraining order and preliminary injunction providing these various forms of relief. Following a hearing, the court denied that motion.

Marciano alleged that the state court judgment was “contrary to law” and “without justification” and that the ensuing trial was “a farce” and “a mockery of justice.”

The IRS subsequently moved to dismiss the lawsuit for failure to state a claim upon which relief might be granted and lack of subject-matter jurisdiction.

Judge Kennedy ruled in favor of the IRS, noting, among other things, that Marciano had not exhausted his remedies to file a Freedom of Information Act suit in federal court, and had established no clear enforceable duty.

“Furthermore, with respect to Marciano’s attempt to force the Service to audit his returns, investigate other (unnamed) individuals, or issue a ‘prophylactic’ tax lien on all his real property, Marciano does not even identify a statute that creates these duties, let alone a statute that provides a cause of action for a private individual to sue if those duties were violated,” the judge wrote. “Accordingly, the Court lacks jurisdiction to entertain his complaint for relief.”

The judge also took exception to Marciano’s claim that the IRS had violated his Fifth Amendment rights, writing, “Marciano’s request for relief under the Fifth Amendment must be dismissed because Marciano has no Fifth Amendment right to be audited.”

The judge also pointed out that Marciano was basing part of his lawsuit on statutes designed to protect individuals who were being threatened by the IRS for not paying their taxes. Instead, he was asserting the opposite.

“The decision to examine a taxpayer’s return lies within the discretion of the Secretary of the Treasury,” the judge pointed out. “Thus, there is no duty to audit plaintiff’s returns, let alone a duty that is ‘equivalent to a positive command.’”

It’s difficult to know what to make of the lawsuit, but then those Guess ads were always kind of enigmatic. As for Marciano, it’s likely that whatever refund money he received from the IRS eventually went to pay for his legal bills.

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