By Maya Rao and Eric Roper

Minneapolis police and state tax officials searched downtown nightclub Envy Thursday morning in connection with tax fraud allegations. 

The search warrant, announced Friday morning, coincides with an escalating battle between Envy and the city over the club's liquor license. The city's threats to revoke Envy's license have gone unanswered, triggering a potential legal fight.

UPDATE: A city spokesman said Friday afternoon that Envy agreed Thursday to surrender their liquor license. The withdrawal, which becomes effective Nov. 12., means the city can abandon its legal battle.

Janelle Tummel, communications director for the Minnesota Department of Revenue, said some of the documents seized were financial records. She said 12 of the department's auditors and investigators were involved in the search.

Envy is owned by James and Susan Beamon. They have not responded to repeated requests for comment.

According to the warrant, Minneapolis Police Lt. Christopher Hildreth informed an official with the Department of Revenue of reports from employees and others familiar with the club's operations that  the owners skim money out of certain cash registers at the bar that only take cash, and then do not report the income.

 A review of the owners' tax returns found that they reported "very low or negative income" in 2009 or prior tax years, and did not file any returns for 2010 or 2011, said the warrant, which was signed by Michael Morehead, special agent of the Department of Revenue. A state vehicles check found a 2011 Cadillac Escalade listed to James Beamon.

"Normally persons with the income levels reported by the Beamons could not afford a high priced Cadillac," the warrant stated.

The warrant also said that in the last year, the Department of Revenue has not received an estimated $40,000 to $50,000 in sales tax from admissions and food at the club. The department alleged that the Beamons possibly filed a fictitious 2010 tax return with the Minneapolis Licensing Division to give the apperance that they were legitimate business people with the finances to obtain a liquor license and operate a bar in the city. The return showed that they had over $500,000 in income from three other businesses that are inactive, non-filers, or report no income, the warrant said.