United States v. Theodore, 72-2390.

• Citation: 479 F.2d 749
• Decision Date: 31 May 1973
• Docket Number: No. 72-2390.,72-2390.
• Parties: UNITED STATES of America and Tobe H. Todd, Jr., Revenue Agent, Internal Revenue Service, Appellee, v. Charles THEODORE, as Vice-President of Theodore Accounting Service, P. A., and Theodore Accounting Service, a Professional Association, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

479 F.2d 749 (1973)

UNITED STATES of America and Tobe H. Todd, Jr., Revenue Agent, Internal Revenue Service, Appellee, v. Charles THEODORE, as Vice-President of Theodore Accounting Service, P. A., and Theodore Accounting Service, a Professional Association, Appellants.

No. 72-2390.

United States Court of Appeals, Fourth Circuit.

Argued April 2, 1973.

Decided May 31, 1973.

William B. Shearer, Jr., Greenville, S. C. (Robert A. Dobson, III, and Dobson & Dobson, Greenville, S. C., on brief) for appellants.

Charles E. Anderson, Atty., Tax Division, U. S. Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and John P. Burke, Attys., Tax Division, U. S. Dept. of Justice, John K. Grisso, U. S. Atty., and J. D. McCoy, III, Asst. U. S. Atty., on brief) for appellee.

Before SOBELOFF, Senior Circuit Judge, and FIELD and WIDENER, Circuit Judges.

SOBELOFF, Senior Circuit Judge:

This appeal results from a proceeding initiated by the Internal Revenue Service to enforce an administrative summons issued pursuant to 26 U.S.C. § 7602.¹ This section authorizes IRS to summon anyone in possession of pertinent records to appear and produce them, for the purpose of either ascertaining the correctness of any return or determining the correct tax liability of any person. Section 7604(b)² then authorizes District Courts to enforce 7602 summonses. In the instant case, the District Court ordered Charles Theodore, vice president of Theodore Accounting Service, P. A., and custodian of its records, to produce for examination and/or copying:

(1) All accounting records, workpapers, correspondence, memoranda and other documents in your possession or used by you in connection with the preparation of all Federal Income Tax returns for your customers and clients for the years 1969, 1970, and 1971.

(2) All retained copies of 1969, 1970 and 1971 Federal Income Tax returns, the originals of which were prepared by you for your customers and clients.

From this order, Appellants Theodore and Theodore Accounting Service now appeal.

I

In an effort to strike at one source of tax cheating, IRS initiated in 1972 a nationwide project to investigate individual professional tax preparers to determine whether they were filing accurate returns for their clients. To this end, special agents of the IRS's Intelligence Division, posing as ordinary customers, were sent to the offices of selected preparers. In this guise, the undercover agent would provide the preparer with all the information needed to complete a return. The preparer's work product would then be audited carefully to determine whether he had used accurately the information furnished him. If it appeared that the information had been used improperly but there was insufficient evidence of wrongdoing to warrant immediate criminal prosecution, the case would be transferred to IRS's Audit Division.

The Audit Division then promptly would issue a cease and desist order and ask the suspect preparer for copies of all other returns prepared by him. The alleged purpose of this request was to ascertain whether the suspect preparer had erred in computing the tax liabilities of his other clients as well. IRS would resort to a section 7602 summons to compel production only if a preparer refused voluntarily to make available for audit the requested information. If, during the course of IRS's auditing the returns of the preparer's other clients, errors in computing tax liabilities were uncovered, the affected taxpayers would be contacted to pay additional tax. And, if sufficient evidence were collected during the investigation to support criminal prosecution of the tax preparer involved, the matter would be referred back to the Intelligence Division for that purpose.

As part of this nationwide project, an IRS undercover agent visited the Theodore Accounting Service posing as a prospective client seeking assistance in the preparation of his tax return. A subsequent audit of the return prepared by the Theodore firm for the agent revealed that an incorrect tax refund had been requested. Thereupon, IRS issued a cease and desist order and requested access to all of the Theodore firm's records relating to tax returns prepared from 1969 through 1971 so that the service might "correct all tax returns which have been incorrectly prepared." Charles Theodore refused to give IRS the requested information and a section 7602 administrative summons was issued. The District Court enforcement proceeding and this appeal then followed.

II

The appellants initially raise several jurisdictional objections to the enforcement of the summons. We find none meritorious. It is first contended that since Charles Theodore rather than the corporation was named as party to the action, the District Court's enforcement order should be reversed and the summons quashed. This argument makes little sense. Charles Theodore is the proper party. Indeed, as the officer of the corporation who has custody and care of the records described, he is a member of the class specifically described in section 7602—"any person having possession, custody, or care of books of account." See United States v. Held, 435 F.2d 1361, 1364-1365 (6 Cir. 1970); also see Fed.R.Civ.P. 17(b).

Next, appellants argue that since Theodore Accounting Service, P. A., has never filed articles of association as is required by South Carolina law,³ the partnership never became a valid corporation and the requested records are therefore the personal property of Charles Theodore, entitled to Fifth Amendment protection. We agree with the District Court, Theodore v. United States, 347 F.Supp. 1070, 1071-1072 (D. S.C.1972), that the evidence presented demonstrates convincingly that Theodore Accounting Service held itself out to the general public and to the governments of South Carolina and the United States as a professional association and is now to be estopped from denying the existence and viability of its corporate entity. We further agree with the District Court that South Carolina continues to recognize de facto corporations and corporations by estoppel, see Theodore, supra, at 1072, citing Bethea v. Allen, 177 S.C. 534, 181 S.E. 893 (1935), and Dargan v. Graves, 252 S.C. 641, 168 S.E.2d 306 (1969), and that the privilege of self-incrimination is a purely personal one which cannot be invoked by or on behalf of a corporation or professional association.⁴See Theodore v. United States, supra. Cf. United States v. Bell, 448 F.2d 40 (9 Cir. 1971) (sole owner of corporation cannot assert personal privilege against incrimination as valid ground for refusing to produce corporate records).

III

The appellants also interpose what is commonly known as the criminal purpose objection. This court is urged to refuse enforcement of the section 7602 summons on the ground that while ostensibly issued in furtherance of the civil investigation of those for whom Theodore Accounting Service had prepared returns, in actuality the summons was issued to pursue a criminal investigation of Charles Theodore personally. The Supreme Court settled this issue in Donaldson v. United States, 400 U.S. 517, 536, 91 S.Ct. 534, 545, 27 L.Ed.2d 580 (1971), where it said:

We hold that under § 7602 an internal revenue summons may be issued in aid of an investigation if it is issued in good faith and prior to a recommendation for criminal prosecution.

Only where the sole objective of the investigation is to obtain evidence for use in a criminal prosecution will the purpose of the summons be said to violate the Fourth Amendment and enforcement be denied. The fact that the summons in reality may have a dual purpose or that the civil investigation may produce evidence that subsequently may be used in a criminal prosecution is no basis for objection. See Donaldson v. United States, supra; United States v. Held, 435 F.2d 1361 (6 Cir. 1970); United States v. Ruggeiro, 425 F.2d 1069 (9 Cir. 1970), cert. denied sub nom. Kyriaco v. United States, 401 U.S. 922, 91 S. Ct. 868, 27 L.Ed.2d 826 (1971); United States v. Salter, 432 F.2d 697 (1 Cir. 1970). There is ample evidence to support the District Court's finding that the Internal Revenue Service has not as yet recommended that Charles Theodore be prosecuted and that the Service has a genuine interest in auditing the returns of Theodore's clients to collect any deficiencies owed the Government. That a collateral result of this endeavor may be the eventual prosecution of Charles Theodore and that the Government has refused to promise him immunity from prosecution is of no consequence and in no way indicates any lack of good faith on the part of IRS. Nor does it make any difference that Theodore is not a taxpayer whose civil liability is being investigated but rather a third party in possession of pertinent records. See Hinchcliff v. Clarke, 371 F.2d 697 (6 Cir. 1967).

IV

While we agree with IRS that appellants' jurisdictional arguments and criminal purpose objection are without substance, we nevertheless reverse the District Court's enforcement of the section 7602 summons for reasons set forth below.

Theodore raises a serious objection to the compass of the summons in suit. Indeed the particular summons issued in this case is unprecedented in its breadth. IRS is asking for copies of all the returns of all Theodore's clients for the years 1969, 1970 and 1971, and all records, memos, workpapers, etc., pertaining to the returns. We are told that this involves some 1500 returns and accompanying documentation.

Courts have in the past sanctioned the use of John Doe summonses, but all such cases involved either a single unidentified taxpayer or a small group of unknown taxpayers. See, e. g., Tillotson v. Boughner, 333 F.2d 515, cert. denied, 379 U.S. 913, 85 S.Ct. 260, 13 L.Ed.2d 184 (7 Cir. 1964). IRS maintains that "The fact that in these cases only one or a few taxpayers were involved has no effect on the precedential value of these cases to the instant...