514 F.2d 368 (3rd Cir. 1975), 74-1665, United States v. McCarthy

Docket Nº:74-1665
Citation:514 F.2d 368
Party Name:UNITED STATES of America, and Boyd W. Hemphill, Special Agent of the Internal Revenue Service, Appellees, v. Jack McCARTHY, Vice President and Office Manager of Bar Mar Warehousing Corp., and Bar Mar Warehousing Corp., Appellants.
Case Date:April 10, 1975
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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514 F.2d 368 (3rd Cir. 1975)

UNITED STATES of America, and Boyd W. Hemphill, Special

Agent of the Internal Revenue Service, Appellees,

v.

Jack McCARTHY, Vice President and Office Manager of Bar Mar

Warehousing Corp., and Bar Mar Warehousing Corp.,

Appellants.

No. 74-1665

United States Court of Appeals, Third Circuit

April 10, 1975

Argued Feb. 13, 1975.

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[Copyrighted Material Omitted]

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Donald J. Williamson, Oradell, N. J., for appellants.

Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Robert E. Lindsay, William A. Whitledge, Attys., Tax Div., Dept. of Justice, Washington, D. C., for appellees; Jonathan L. Goldstein, U. S. Atty., of counsel.

Before SEITZ, Chief Judge, and ALDISERT and GARTH, Circuit Judges.

OPINION

SEITZ, Chief Judge.

This is an appeal from a final judgment of the district court, entered under 26 U.S.C. § 7604 (1970), ordering Jack McCarthy and Bar Mar Warehousing Corp., ("defendants") to produce certain books and records listed in an administrative summons issued pursuant to 26 U.S.C. § 7602 (1970) by Internal Revenue Service Special Agent Hemphill. 1

I. Factual Background

Defendants failed to comply with the Internal Revenue Service summons on August 14, 1973. Thereafter, the Internal Revenue Service and Agent Hemphill ("plaintiffs") initiated these proceedings to enforce the summons. Upon filing a complaint, plaintiffs obtained an Order to Show Cause. Defendants filed a Motion to Vacate the Order to Show Cause and upon the return date of the Order filed an answer which contained several counterclaims (the answer was later amended to construe these counterclaims as affirmative defenses).

In essence, plaintiffs' complaint, and an affidavit of Agent Hemphill attached to it, contained the following allegations: that Agent Hemphill had issued a summons

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requesting an appearance by an officer or agent of defendant-corporation for testimony and production of certain documents, that the materials sought were in the possession of defendants, that they were necessary to ascertain the correct tax liability of defendant-corporation for the years 1969 through 1972, and that defendants had failed to comply with the summons on its return date.

Defendants' responsive pleadings alleged, in pertinent part, that the summons should be held unenforceable because: (1) the material sought in the summons had previously been made available to the Service and was presumptively in the Service's possession; (2) in view of the Service's prior examination of the years in question and its prior access to the material sought in the summons, any further access would constitute a "second inspection" which, under 26 U.S.C. § 7605(b) (1970), might only be had after the Secretary or his delegate had notified defendant-corporation that an additional inspection was necessary; (3) no such notice had been sent defendants; (4) Agent Hemphill had been engaged in harassment of persons related to defendant corporation by business or personal ties in an apparent attempt to coerce defendants to waive "their constitutional and statutory rights; " and (5) the investigation was criminal in nature since it was being conducted by an agent in the IRS intelligence division, it being the function of that division to provide evidence for criminal prosecutions and not to ascertain tax liability.

On the return date of the Order to Show Cause, the district court heard oral argument on the Motion to Vacate. At that time counsel for defendants requested pretrial discovery. The court did not grant the request; moreover, despite the allegations by both parties which appear to have raised factual disputes, the court did not conduct an evidentiary hearing, ostensibly having concluded that the case could be decided as a matter of law. 2

On April 14, 1974, by Letter Opinion, the district court denied defendants' Motion to Vacate the Order to Show Cause and granted final judgment to plaintiffs. An order enforcing the administrative summons was signed July 8, 1974. The order was stayed pending this appeal.

On appeal, defendants seek reversal of the district court's enforcement order on the grounds that the district court erred in denying them an evidentiary hearing and pretrial discovery since they had sufficiently brought into controversy the enforceability of the summons.

Plaintiffs' reply on appeal is basically that the district court correctly enforced the IRS summons where defendants "had made no showing that enforcement would constitute an abuse of the court's process." 3 Plaintiffs further contend that defendants failed to demonstrate the need for a hearing, that they had in fact waived any such hearing, and that they had failed to demonstrate criminal purpose, harassment, or that plaintiffs' access to defendant-corporation's books would constitute a "second inspection."

II. Supreme Court Precedent

By failing to comply with the summons on or before its return date, defendants compelled plaintiffs to seek enforcement in the district court under

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26 U.S.C. § 7604 (1970). Both Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1963) and United States v. Powell,379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), indicate that the taxpayer is entitled to a hearing prior to enforcement and contemplate that, in the course of this hearing, the taxpayer "may challenge the summons on any appropriate ground," Reisman, 375 U.S. at 449, 84 S.Ct. at 513; Powell,379 U.S. at 58, 85 S.Ct. 245. The purpose of the hearing, as was stated in Powell, is to prevent abuse of the court's process. The Court stated:

Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation. Powell, 379 U.S. at 58, 85 S.Ct. at 255.

The Court indicated that the burden of demonstrating such an abuse of process is on the taxpayer.

Under Powell, however, the abuse of process issue is only reached after the government has made a preliminary showing in support of the summons. In Powell, the Supreme Court held that the government must show: (1) that the investigation has a legitimate purpose and that the inquiry may be relevant to that purpose, (2) that the information sought is not already within the government's possession and (3) that the steps required by the Internal Revenue Code have been followed "in particular that the 'Secretary or his delegate,' after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect." Powell, 379 U.S. at 58, 85 S.Ct. at 255.

But the Supreme Court in Powell did not indicate what form this "showing" by the government was to take or, indeed, what procedures were to govern in enforcement proceedings. Nor did the Powell decision give any guidance concerning the use of discovery in an enforcement proceeding. 4 Because we are remanding, and in view of the circumstances of this case, we believe it is appropriate to suggest procedural guidelines which we think would be of assistance to the district court in enforcement cases.

III. Procedure for Summons Enforcement Proceedings

Keeping in mind that Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1970), held that the Federal Rules of Civil Procedure apply in summons enforcement proceedings, subject to appropriate limitation by the district court, we think the following would be generally acceptable procedure.

1. The Secretary or his delegate would file a complaint accompanied by an affidavit of the agent who issued the summons, seeking enforcement. The complaint should separately allege compliance with each of the requirements of the Powell test of enforceability. The affidavit should support these allegations.

2. Process on the complaint could be in the form of an order served on the person summoned fixing a deadline for filing any responsive pleading, albeit an informal pleading, together with an affidavit, and any motions, and directing that person to show cause at a date and time certain why an order should not be entered enforcing the administrative summons. The order should provide that unless the court determines otherwise, any motions and issues raised by the pleadings will be considered at the return date of the order to show cause. In addition, the order should state that only those issues raised in motions or brought into controversy by the responsive pleading and supported by affidavit will be

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considered at the return of the order and that any uncontested allegation in the complaint will be taken as admitted.

3. At the hearing on the order, the Secretary should be prepared to prove the allegations of the complaint that the summons complies with the Powell requirements. He should also be prepared to rebut any proper defenses asserted by the person summoned.

The person summoned should be prepared to produce any evidence rebutting the government's case and also to assume the burden as to affirmative issues raised by him for the purpose of demonstrating that enforcement of the summons would constitute an abuse of the court's process. After completion of the hearing, the district court in conformity with Fed.R.Civ.P. 52(a), should make the requisite findings of fact and conclusions of law.

4. Although the proceedings are of a summary nature, 5 if the district court concluded that it could not fairly decide the case on the record before it at the return of the order, it would be free to direct further proceedings, including discovery, if requested.

The procedure we suggest is...

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