U.S. v. Author Services, Inc.

Decision Date03 March 1987
Docket NumberNos. 85-6194,s. 85-6194
Parties-6273, 86-2 USTC P 9819 UNITED STATES of America, Plaintiff-Appellant-Cross-Appellee, v. AUTHOR SERVICES, INC., Defendant-Appellee-Cross-Appellant. /6195.
CourtU.S. Court of Appeals — Ninth Circuit

John Dudeck, Michael L. Paup, Chief, App. Section, U.S. Dept. of Justice, Washington, D.C., for plaintiff-appellant-cross-appellee.

Michael L. Hertzberg, New York City, Stephen A. Lenske, Mark L. Edwards, Lenske, Lenske & Heller, Woodland Hills, Cal., for defendant-appellee-cross-appellant.

Appeal from the United States District Court for the Central District of California.

Before TANG and BRUNETTI, Circuit Judges, and JAMESON, * District Judge.

TANG, Circuit Judge:

The United States petitioned the district court to enforce an Internal Revenue Service (IRS) summons served on Author Services, Inc. (ASI) in connection with a criminal tax investigation of L. Ron Hubbard. 1 ASI contended the IRS was not acting in good faith and sought an evidentiary hearing to support that contention. ASI appeals from the district court's denial of its request for an evidentiary hearing and from the enforcement order; the United States appeals from the district court's restriction on the IRS's use of the documents, prohibiting release of the documents to any other government agency without a court order unless criminal tax prosecution is sought. We affirm.

BACKGROUND

In August 1984 the Los Angeles District Office of the IRS began a tax investigation of individuals connected with the Church of Scientology (Church), including L. Ron Hubbard. On September 13, 1984 the IRS served an administrative summons in connection with the Hubbard investigation on ASI, a literary business management company whose principal client was L. Ron Hubbard.

ASI refused to produce the documents because it could not get the IRS to agree to a nondisclosure agreement specifying the IRS would not provide copies of the produced documents to persons not involved in the IRS investigation without ASI approval. The IRS commenced judicial process to enforce the summons on April 3, 1985.

The Church of Scientology moved to intervene and the district court granted the motion on June 10, 1985. ASI and the Church both opposed enforcement on the ground that the IRS was seeking enforcement in bad faith. On June 10, 1985 the district court held a hearing on enforcement of the summons. The court denied ASI's request for an evidentiary hearing, taking judicial notice of the fact that the evidentiary hearing held April 29 and 30, 1985 in the related case, United States v. Zolin, (appeal pending, 9th Cir. Docket Nos. 85-6065, 6105), had produced no evidence of IRS bad faith. The court ordered the summons enforced but added that no documents produced could be delivered by the IRS to any agency or individual without

a court order unless criminal tax prosecution is sought.

DISCUSSION
I. Evidentiary Hearing

This court in 1975 approved the use of limited evidentiary hearings in summons enforcement proceedings for the purpose of sifting out "those rare cases where bald allegations of harassment or improper purpose can be substantiated." United States v. Church of Scientology, 520 F.2d 818, 824 (9th Cir.1975). When allegations in the pleadings are sufficient to raise doubt about the Service's purposes the district court may hold a hearing of the scope it decides is necessary. Id. at 825. We review the decision to deny an evidentiary hearing for abuse of discretion. United States v. Samuels, Kramer and Co., 712 F.2d 1342, 1345 (9th Cir.1983).

In this case the district court denied the request on the ground that the bad faith allegations had been raised and held to be insubstantial in the related Zolin case, in which the court recently had held an evidentiary hearing. The court took judicial notice of the facts developed in the Zolin hearing, and in doing so it did not abuse its discretion. It is well established that a court may take judicial notice of its own records. Shuttlesworth v. City of Birmingham, 394 U.S. 147, 157, 89 S.Ct. 935, 942, 22 L.Ed.2d 162 (1969); Diamond v. Pitchess, 411 F.2d 565, 566 (9th Cir.1969). ASI argues the district court relied on the doctrine of collateral estoppel rather than judicial notice in deciding not to hold an evidentiary hearing. This contention is without merit. A decision to hold a hearing rests on a court's determination that sufficient doubt about the IRS's purpose has been raised to require further investigation. In this case, the district court had no doubts about the legitimacy of the IRS's purpose because of the facts elicited during the Zolin hearing. The facts were properly relied on under the doctrine of judicial notice, and the court did not invoke the doctrine of collateral estoppel at all.

The factual allegations in Zolin were identical to those raised by ASI. Specifically ASI sought to prove the IRS's bad faith by showing that: (1) the IRS had improperly advised Department of Justice (DOJ) attorneys of the time and place (Ventura Holiday Inn) of scheduled witness interviews, with the consequence that DOJ attorneys interviewed the witnesses on the same day, allegedly under color of IRS authority; and (2) the IRS had improperly released information to a third party, Gerald Armstrong, who allegedly was involved in a plot to discredit an ASI officer. Both of these allegations were made during the Zolin hearing by the Church's attorney. The hearing consisted of a one hour and fifteen minute examination of Phillip Xanthos, IRS Branch Chief of the Los Angeles Criminal Investigation Division. Xanthos denied there was any communication with the DOJ about the Ventura interviews and he denied that Armstrong was on the IRS payroll. The court was convinced by his testimony that the summons was validly issued pursuant to a bona fide criminal tax investigation and that there was no improper purpose.

The judge then said, at the June 10 ASI proceeding, that he saw no need for another hearing and that nothing ASI wished to offer as evidence would change his mind. ASI argued that it wanted to cross-examine Kruse, a DOJ attorney, and Lipkin, the IRS agent responsible for setting up the Ventura interviews, because they could shed more light on the bad-faith claim arising out of that incident. The judge indicated the matter had been litigated far beyond what was reasonable in a proceeding of that sort. Kruse's Declaration expressly stated he had not used any IRS authority or legal process to assist in his defense of the DOJ in the Church tort suit against the Government. Lipkin's Declaration similarly denied that DOJ had ever asked him to summon any witness.

Given the facts presented to the court, it did not abuse its discretion in refusing to hold another hearing.

II. Summons Enforcement

This court reviews a summons enforcement decision under the clearly erroneous standard. Ponsford v. United States, 771 F.2d 1305, 1308 (9th Cir.1985). The district court must make four essentially factual determinations in deciding to enforce a summons: (1) whether the investigation is conducted for a legitimate purpose; (2) whether the material sought is relevant to that purpose; (3) that the IRS does not already possess the material sought; and (4) that the IRS has complied with administrative regulations. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-55, 13 L.Ed.2d 112 (1964). These substantive standards remain the same after the 1982 procedural changes. Ponsford, 771 F.2d at 1307 (citing La Mura v. United States, 765 F.2d 974, 977 n. 2 (11th Cir.1985)).

The only enforcement requirement in dispute is the purpose of the investigation. ASI urges that the entire investigation was being conducted in bad faith, for the collateral purpose of discovering information which could be useful to the DOJ in defending in several on-going civil suits brought by the Church. ASI contends that the district court applied the wrong standard in evaluating the purpose of the investigation. ASI argues the court improperly focused only on the good faith of this particular summons rather than of the investigation as a whole. The court said during the Zolin hearing that "this case is not going to get expanded into a full-scale investigation of how the IRS gets its information. The question is whether this summons proceeding is a legitimate part of a legitimate tax investigation." The court asked on several occasions why questions about the circumstances of the Ventura interviews were relevant to the good faith of the ASI summons. Nevertheless, the court heard the examination of Xanthos and reviewed all the pleadings and concluded the summons met the Powell standards because no evidence had been adduced which showed improper purpose.

ASI relies on United States v. La Salle National Bank, 437 U.S. 298, 317, 98 S.Ct. 2357, 2367, 57 L.Ed.2d 221 (1978) for its argument that the IRS's bad faith is evidenced by its having become an information-gathering agency for other departments. The Supreme Court cited information gathering as an example of bad faith, but it also said the party resisting enforcement must "disprove the actual existence of a valid civil tax determination or collection purpose by the Service." Id. at 316, 98 S.Ct. at 2367. In this case, the district court was convinced there was a tax investigation in progress and it was not persuaded that the IRS was improperly collecting information for the DOJ. ASI insists the appearance of DOJ attorneys at the witness interview scheduled by IRS proves there was improper exchange of information or abuse of summons authority. The district court reasoned the dual interviews could have been scheduled at the request of the witnesses, and at any rate the incident did not prove the IRS had the illicit motive of gathering information for the DOJ.

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