APPLICATION OF UNITED STATES (CARROLL)

• Decision Date: 08 July 1957
• Docket Number: No. 362,Docket 24468.,362
• Citation: 246 F.2d 762
• Parties: Application of the UNITED STATES, Appellee, for an Order compelling Earl J. CARROLL, Appellant, to comply with an Internal Revenue Summons.
• Court: U.S. Court of Appeals — Second Circuit

246 F.2d 762 (1957)

Application of the UNITED STATES, Appellee, for an Order compelling Earl J. CARROLL, Appellant, to comply with an Internal Revenue Summons.

No. 362, Docket 24468.

United States Court of Appeals Second Circuit.

Argued June 4, 1957.

Decided July 8, 1957.

Hodges, Reavis, McGrath & Downey, New York City (John P. McGrath, Martin D. Jacobs and Martin H. Proyect, New York City, of counsel), for appellant.

Paul W. Williams, U. S. Atty. for S. D. of New York, New York City (Foster Bam and Miriam R. Goldman, Asst. United States Attys., New York City, of counsel), for appellee.

Before MEDINA, LUMBARD and WATERMAN, Circuit Judges.

MEDINA, Circuit Judge.

Appellant, an American citizen, lived and practiced law in Germany for most of the time from 1946 to 1954. During that period, he numbered among his clients Alfred Krupp von Bohlen and Halback, and Frederick Flick, the German industrialists. He may have earned a substantial amount of money from his practice, but he reported none, claiming to be within the exemption of Section 116 of the Internal Revenue Code of 1939 (substantially re-enacted I.R.C.1954, Section 911, 26 U.S.C.A. § 911), which applies to wages, salaries, professional fees and other amounts received as compensation for personal services actually rendered, earned without the United States by an American citizen who establishes to the satisfaction of the Secretary that he is a bona fide resident of a foreign country.

Acting pursuant to authority conferred by law,¹ agents of the Internal Revenue Service summoned appellant to appear and give testimony relative to his residence and earnings in Germany. At hearings on August 16 and 17, 1956, appellant testified at length concerning his residence abroad. He refused, however, to answer questions relating to the following matters:

(a) The contractual and financial terms between Earl J. Carroll and Alfred Krupp von Bohlen and Halback during the years 1944 through 1954.

(b) The contractual and financial terms between Earl J. Carroll and Frederick Flick during the years 1944 through 1954.

(c) Any and all information concerning other income earned in Germany or other foreign countries during the years 1944 to 1954, inclusive.

His refusal was based on the ground that he had conclusively demonstrated his bona fide residence in a foreign country, thus rendering investigation of his earnings there "unnecessary" within the meaning of I.R.C.1954, Section 7605(b), 26 U.S.C.A. § 7605(b).²

The agents then sought and obtained from the District Court an ex parte order compelling appellant to testify in accordance with the summons that had been served upon him. Appellant thereupon moved the District Court to vacate the ex parte order, which motion was denied by Judge Edelstein, in an opinion reported at 149 F.Supp. 634, and this appeal followed. We think the decision and reasoning of the District Court were correct.

Appellant relies on two cases in particular to support his position. In Martin v. Chandis Securities Co., 9 Cir., 128 F.2d 731, the court affirmed an order of the court below quashing a previous order compelling testimony, on the ground that the testimony was "unnecessary" because the application for the initial order showed on its face that the claim was barred by limitations. The Government contended in that case that since a claim based on fraud would not be barred, further investigation was not "unnecessary." The parties agreed that the Government was obliged to allege only reasonable grounds for suspicion of fraud, and the court expressly refrained from expressing an opinion on what the Government must allege. The holding was that the Government had not shown such grounds.

In In re Brooklyn Pawnbrokers, Inc., D.C.E.D.N.Y., 39 F.Supp. 304, 305, Judge Moscowitz held that, where the Government is investigating a claim barred by limitations in the absence of fraud, a general allegation of fraud is insufficient, that the Government is required to set forth facts affording reasonable basis for a suspicion of fraud. The holding was that "to permit the government to examine as to statute barred years upon a mere conclusory allegation of fraud is to deprive the taxpayer of that freedom from unreasonable harassment which he has a right to expect under a democratic form of government."

There are cases going the other way. In In re Keegan, D.C.S.D.N.Y., 18 F. Supp. 746, 748, the person summoned likewise objected that the statute of limitations had run. The Government said merely that it wished to investigate the possibility of fraud, to which it was replied that this was a "fishing expedition." Judge Patterson refused to vacate the order requiring obedience to the summons, saying, "Of course it is a fishing expedition, but it is none the less an examination which the revenue officers are entitled to make. I take it that whenever the officers charged with gathering in income tax decide to make a check to see whether a taxpayer has paid the full amounts due, they are doing no more than their duty when they summon persons with whom the taxpayer may have had dealings of a financial nature to reveal those dealings * * *."

In another case in which the investigation was said to be "unnecessary" because of the statute of limitations, Peoples Deposit Bank & Trust Co. v. United States, 6 Cir., 212 F.2d 86, 87, certiorari denied 348 U.S. 838, 75 S.Ct. 37, 99 L.Ed. 661, "a special agent of the Bureau of Internal Revenue testified in substance, that from his investigation he had concluded that there was strong suspicion of a false or fraudulent tax return by E. F. Prichard, Sr., for a certain year or years prior to the statutory limitation." The court held that "The special agent was not obliged to disclose in detail the facts relative to his investigation and conclusion, nor was the District Court obliged to require proof of facts showing reasonable grounds to believe that the tax returns of E. F. Prichard, Sr., and others were false or fraudulent." This decision was followed in In re Wood, D.C.W.D.Ky., 123 F.Supp. 297; Id., D.C., 130 F.Supp. 121.

Several cases have held investigations not to be "unnecessary," although it does not appear that facts were alleged which indicated probable cause for the investigation. Norda Essential Oil and Chemical Co. v. United States, 2 Cir., 230 F.2d 764, certiorari denied 351 U.S. 964, 76 S.Ct. 1028, 100 L.Ed. 1484; Globe...