607 F.2d 61 (3rd Cir. 1979), 79-1425, United States v. Garden State Nat. Bank

Docket Nº:79-1425 to 79-1428, 79-1681 and 79-1682.
Citation:607 F.2d 61
Party Name:UNITED STATES of America and Robert H. McCorry, Special Agent of the Internal Revenue Service, Appellees, v. GARDEN STATE NATIONAL BANK, Ben Shafer and Boot Strap, Ltd., Appellants. UNITED STATES of America and Robert H. McCorry, Special Agent of the Internal Revenue Service, Appellees, v. PALISADES SAVINGS AND LOAN ASSOCIATION, Ben Shafer and Boot
Case Date:October 10, 1979
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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Page 61

607 F.2d 61 (3rd Cir. 1979)

UNITED STATES of America and Robert H. McCorry, Special

Agent of the Internal Revenue Service, Appellees,

v.

GARDEN STATE NATIONAL BANK, Ben Shafer and Boot Strap, Ltd.,

Appellants.

UNITED STATES of America and Robert H. McCorry, Special

Agent of the Internal Revenue Service, Appellees,

v.

PALISADES SAVINGS AND LOAN ASSOCIATION, Ben Shafer and Boot

Strap, Ltd., Appellants.

UNITED STATES of America and Robert H. McCorry, Special

Agent of the Internal Revenue Service, Appellees,

v.

CITIZENS FIRST NATIONAL BANK OF NEW JERSEY, formerly known

as Oakland State Bank, Ben Shafer and Boot Strap,

Ltd., Appellants.

UNITED STATES of America and Robert H. McCorry, Special

Agent of the Internal Revenue Service

v.

FIRST JERSEY SAVINGS AND LOAN ASSOCIATION, Ben Shafer and

Boot Strap, Ltd., Appellants.

UNITED STATES of America and Robert H. McCorry, Special

Agent of the Internal Revenue Service, Appellees,

v.

UNITED JERSEY BANK, Ben Shafer, Marilee Shafer, and Boot

Strap, Ltd., Appellants.

UNITED STATES of America and Alexander Dombroski, Special

Agent, Internal Revenue Service, Appellees,

v.

ORANGE SAVINGS BANK.

UNITED STATES of America and Alexander Dombroski,

Special Agent, InternalRevenue Service

v.

The HERITAGE BANK, and Dorothy Miller, Roger L. Keech,

Sandra J. Keech, and Lakeville Fasteners, Inc., Appellants.

Nos. 79-1425 to 79-1428, 79-1681 and 79-1682.

United States Court of Appeals, Third Circuit

October 10, 1979

        Argued Sept. 4, 1979.

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        Bender & Frankel, Sandor Frankel (argued), New York City, for intervenors-appellants, Ben Shafer and Boot Strap, Ltd. and Roger L. Keech, Sandra J. Keech, and Lakeville Fasteners, Inc.

        Robert J. Del Tufo, U. S. Atty., Eric L. Chase, Asst. U. S. Atty. (argued), Newark, N. J., for appellees, United States of America and Robert McCorry.

        M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Charles E. Brookhart, John A. Dudeck, Jr., Tax Division, Dept. of Justice, Washington, D. C. (argued), for appellees, United States of America and Alexander Dombroski.

        Before ALDISERT, ROSENN and GARTH, Circuit Judges.

       OPINION

        GARTH, Circuit Judge.

        These appeals call upon us once again to review the enforcement procedures pertaining to Internal Revenue summonses. In Nos. 79-1425 through 79-1428, taxpayers Shafer and Boot Strap, Ltd. appeal from the district court's order enforcing summonses issued to banks for the production of records relating to taxpayers' liability. In No. 79-1681, Marilee Shafer, in addition to Shafer and Boot Strap, Ltd., appeals. A similar appeal is presented by taxpayers Roger and Sandra Keech and Lakeville Fasteners, Inc. at No. 79-1682. 1

        Benefiting from the instruction of United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978); United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975); United States v. Genser, 595 F.2d 146 (3d Cir. 1979) (Genser II ); and our recently published opinions in United States v. Genser, 602 F.2d 69 (3d Cir. 1979) (per curiam) (Genser III ), and United States v. Serubo, 604 F.2d 807 (3d Cir. 1979), we affirm the district court's enforcement of all summonses in both appeals, but we do so upon different grounds than the grounds upon which the district court relied. 2

       I.

  1. Shafer and Boot Strap (Shafer)

            In September, 1977, the Internal Revenue Service began investigating Shafer's tax liability for the years 1974, 1975, and 1976. Appellee Special Agent Robert McCorry was assigned to the case at the outset and has since been in charge of the investigation. A revenue agent was also assigned to

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    the investigation in June 1978. 3 In July 1978, pursuant to I.R.C. §§ 7602, 7604, 4 McCorry issued four summonses which are subjects of this appeal, one to each of four respondent banks. On January 19, 1979, an additional summons was issued to United Jersey Bank. The record does not reveal the issuance date of the last summons issued to the Columbia Savings and Loan Association, however, inasmuch as these last two summonses were treated as a unit by all parties and the district court, we will assume that the Columbia summons issued no later than January 19, 1979. Each summons sought production of testimony, books, records, papers, and other data relating to Shafer. Notice was given Shafer under I.R.C. § 7609(a), and Shafer immediately caused the summonses to be stayed under I.R.C. § 7609(b)(2).

            On October 6, 1978 the Government applied for orders directing the banks to show cause why the first four summonses which had issued in July, should not be enforced. Shafer intervened to oppose enforcement on the ground that the summonses were issued solely for purposes of a criminal investigation and were therefore unenforceable under United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1977). The banks, which had been subpoenaed, took no position on enforcement. An evidentiary hearing was held over the objection of the Government on January 11, 1979. The Government contended that the issue of enforcement should have been disposed of on the pleadings. 5 On January 22, 1979 the district court, by memorandum opinion and order, directed compliance with these four summonses. United States v. Garden State National Bank, 465 F.Supp. 437 (D.N.J.1979). 6 In its opinion, the district court stated that the I.R.S.'s procedures were characterized by the "bad faith" condemned by LaSalle. The district court based this characterization on testimony of I.R.S. witnesses. That testimony purportedly established that the Service would not agree to negotiate a compromise on the civil aspects of a case until the issue of referral (to the Department of Justice) had been resolved. In essence, the district court determined that once a special agent of the Criminal Investigation Division has been assigned, no compromise can be effected by I.R.S. even though I.R.S. has not decided to refer the investigation to the Justice Department for criminal prosecution. Accordingly, the district court declared that, measured against its newly evolved "conference for compromise" standard, a taxpayer can show "institutional bad faith" on the part of I.R.S. if a conference looking toward a possible compromise is sought, and I.R.S. refuses to engage in such compromise negotiations. In such a situation, the district court would have held that "bad faith" had been established "in that the civil summons was being used solely as a means for deciding whether or not to refer for criminal prosecution, meanwhile (enabling the I.R.S.

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    to gather) evidence in support," Id. at 440. Despite this dictum, the district court enforced all four bank summonses on the ground that:

            (s)ince taxpayer has stated on the hearing record that no request for conference was made, the court finds that the problems which concern it are abstract, and concludes that taxpayer has not met the burden established by LaSalle.

            Id. at 441.

            Shafer appealed, and the Government consented to a stay pending determination of the appeal as to these four summonses. 7 This court ordered a stay as to the summonses appealed at No. 79-1681, See note 5 Supra.

  2. Keech and Lakeville (Keech)

            The Keech investigation by I.R.S. began sometime prior to February 1977. Appellee Special Agent Alexander Dombroski issued summonses similar to those in the Shafer matter to two banks. One summons was issued in July 1977 and the other in September 1977. Compliance with both summonses was stayed pursuant to I.R.C. § 7609(b)(2). In February 1979, the Government obtained orders to show cause why the summonses should not be enforced, and Keech intervened. On April 23, 1979, oral argument, but no testimony, was heard before the district court. At its conclusion, Keech was denied an evidentiary hearing and discovery. An order was entered on May 8, 1979 enforcing the summonses. The district court's stated ground for these actions differed from the grounds upon which it relied in granting enforcement of the Shafer summonses. Here the district court held that inasmuch as I.R.S. always retains an ultimate residual interest in collecting tax money even after a taxpayer's criminal conviction for tax fraud, I. e. I.R.S. never abandons its civil interest, a taxpayer in Keech's position could Never satisfy the LaSalle requirement of showing that the summons had been institutionally issued solely for purposes of a criminal investigation.

            Keech moved for a stay of enforcement in this court, which we granted on June 1, 1979. 8

           II.

            The central question in these appeals is whether the I.R.S. summonses were properly issued. The I.R.S. has power to issue summonses in the course of its investigation of civil tax liability even if evidence thereby uncovered might subsequently serve as the basis for a criminal prosecution of the taxpayer. The I.R.S. may not, however, use its power to issue administrative summonses for the Sole purpose of conducting or furthering a criminal investigation on its own behalf, or on the behalf of the Justice Department. Both Shafer and Keech contend that the summonses issued for their bank records were issued in bad faith for the sole purpose of furthering a criminal investigation and prosecution.

            United States v. LaSalle National Bank, supra; Genser II and III, supra ; and United States v. Serubo, supra, make clear that in a situation such as is presented here, where the I.R.S. has Not recommended criminal prosecution to the Justice Department

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    and the investigating agent has Not recommended prosecution to...

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