Application of Carroll

• Decision Date: 02 January 1957
• Citation: 149 F. Supp. 634
• Parties: In the Matter of the Application of the United States for an Order compelling Earl J. CARROLL to comply with an Internal Revenue Summons.
• Court: U.S. District Court — Southern District of New York

149 F. Supp. 634

In the Matter of the Application of the United States for an Order compelling Earl J. CARROLL to comply with an Internal Revenue Summons.

United States District Court S. D. New York.

January 2, 1957.

Hodges, Reavis McGrath, Pantaleoni & Downey, New York City, for Earl J. Carroll.

Paul Williams, U. S. Atty., by Foster Bam, Asst. U. S. Atty., New York City, of counsel, for the United States.

EDELSTEIN, District Judge.

This is a motion to vacate an ex parte order directing respondent, in effect, to obey an Internal Revenue Service summons that had been previously served on him. Section 7601 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 7601, authorizes the Secretary of the Treasury or his delegate to inquire after all persons who may be liable to pay an internal revenue tax, and Section 7602 provides for the examination of books and records and the taking of testimony which may be relevant or material to such inquiry. The analogous section of the 1939 Code, Section 3614, provided for the examination of books and the taking of testimony "bearing upon the matters required to be included in the return", but the phrasing of Section 7602 of the 1954 Code, in terms of data and testimony which "may be relevant or material" to the inquiry constitutes no material change from the prior law. Senate Committee Report No. 1622, p. 617. Section 7605(b) requires that no taxpayer shall be subjected to unnecessary examination or investigations. The examination of the respondent, who claims to have been, in the years under investigation, a bona fide resident of Germany whose income derived from the practice of international law, is directed not only to his general liability for taxes but also to the specific amounts payable. Respondent refused to answer questions or furnish data that he considers to bear upon the amount of tax payable, consenting only to submit to examination on his status as a bona fide resident of Germany. Any other examination, he contends, is unnecessary and not relevant or material to the inquiry, or "bearing upon the matters required to be included in the return", because under Section 116 of the 1939 Code, his income for the years in question was not reportable or taxable, being earned income of a bona fide foreign resident.

The pleadings which frame the issue for decision are the application for enforcement of the summons, consisting of two affidavits, the motion to vacate the ex parte order and the affidavit in opposition. The application for the ex parte order is treated as a complaint, and under Rule 8(a) of the Federal Rules of Civil Procedure, 28 U.S.C.A. it is necessary for the complaint to contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Martin v. Chandis Securities Co., 9 Cir., 128 F.2d 731. From the "complaint" it appears that the respondent was subpoenaed to appear before an officer of the Internal Revenue Service; that he declined to answer certain questions relating to the contractual and financial terms between himself and certain persons during the years 1944 and 1954; that he declined to furnish any information concerning other income earned in Germany or other foreign countries during the years 1944 to 1954 inclusive; and that he failed to produce for examination the books, records and papers required by the subpoena. Without more, it is apparent from the face of the complaint that the information sought is relevant to the inquiry concerning persons who may be liable to pay an internal revenue tax, or that it bears upon matters required to be included in a return, and by the very nature of the information required it does not appear to be unnecessary. Thus, the complait does not fail to state a claim for relief.

Respondent attempts to raise the issues of relevance and necessity by the allegations of fact in his motion to vacate. He sets forth at length facts to indicate that, during the years in question, his income consisted of fees earned as an international lawyer while he was a bona fide resident of Germany, thus qualifying him from exemption from the filing of a return and the payment of taxes under Section 116 of the 1939 Code. If he is not required to file a return for those years, an inquiry into the details of his income cannot be relevant or necessary. Therefore, he argues, the only inquiry presently proper is on the issue of his foreign residence.

Apparently he demands some sort of a threshold determination of the issue, but it is not at all clear how such a determination is to be achieved. The contention that the Internal Revenue Service is required to permit him to establish his bona fide foreign residence at the inquiry is without merit. The inquiry is strictly inquisitorial and not a judicial proceeding where rights are finally determined. In re Albert Lindley Lee Memorial Hospital, 2 Cir., 209 F.2d 122; Matter of Levine, D.C.S.D.N.Y.1956, 149 F.Supp. 642, affirmed on the opinion of Judge Kaufman, 2 Cir., 243 F.2d 175. The power vested in the Secretary is similar to the power vested in federal grand juries. Falsone v. United States, 5 Cir., 205 F.2d 734. A grand jury is not required to hear and decide the defenses of a prospective defendant.

Nor does this court have the power at this time to decide the issue of foreign residence so as to determine the coverage of the defendant by the internal revenue laws. Cf., Endicott Johnson Corp. v. Perkins, 317 U.S. 501, 63 S.Ct. 339, 87 L.Ed. 424; Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 66 S.Ct. 494, 90 L.Ed. 614. Congress has conferred upon the Secretary the power and duty to administer the internal revenue laws, including the law relating to the exemption from taxation of foreign residents, and it has provided a method of inquiry for effectuating that purpose. The eventual decision of whether or not an assessment shall be made is one for the appropriate administrative authority, not for ...