Bisceglia v. United States

• Decision Date: 18 October 1973
• Docket Number: No. 72-1783.,72-1783.
• Parties: Richard V. BISCEGLIA, as Vice President of the Commercial Bank, Middlesboro, Kentucky, Respondent-Appellant, v. UNITED STATES of America and B. L. Brutscher, Special Agent, Internal Revenue Service, Petitioners-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

486 F.2d 706 (1973)

Richard V. BISCEGLIA, as Vice President of the Commercial Bank, Middlesboro, Kentucky, Respondent-Appellant, v. UNITED STATES of America and B. L. Brutscher, Special Agent, Internal Revenue Service, Petitioners-Appellees.

No. 72-1783.

United States Court of Appeals, Sixth Circuit.

Argued February 2, 1973.

Decided October 18, 1973.

Mary J. McGinn, Tax Div., Dept. of Justice, Washington, D. C., for petitioners-appellees; Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Crombie J. D. Garrett, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief; Eugene E. Siler, Jr., U. S. Atty., Moss Noble, Asst. U. S. Atty., of counsel.

William A. Watson, Middlesboro, Ky., for respondent-appellant; Watson & Watson, Middlesboro, Ky., of counsel.

Before McCREE and LIVELY, Circuit Judges, and KENNEDY,^* District Judge.

McCREE, Circuit Judge.

This appeal requires us to determine whether the Internal Revenue Service may use a civil summons to compel a third party to produce for examination records pertaining to the financial affairs of unspecified and unidentified persons and organizations for the purpose of ascertaining their identities. We hold that it may not.

The facts of the case are not disputed. On November 6, 1970, and on November 16, 1970, the Cincinnati branch of the Federal Reserve Bank of Cleveland received deposits of currency from the Commercial Bank of Middlesboro, Kentucky. Each deposit included $20,000 in one-hundred dollar bills which were "tissue paper thin" and in such a badly deteriorated condition that they were no longer fit for circulation. (Appendix at 22) Accordingly, the Cincinnati Branch of the Federal Reserve Bank destroyed them.

Apparently pursuant to federal reporting requirements,¹ the Cincinnati branch of the Federal Reserve Bank reported these deposits to the Internal Revenue Service (IRS). The report informed the IRS of the "deteriorated condition" of the bills "apparently resulting from a long period of storage."²

The Intelligence Division of the IRS, suspecting that this money may not have been properly reported for income tax purposes by the person or persons who had transferred it to the Commercial Bank, assigned Special Agent B. L. Brutscher to investigate possible criminal violations of the tax laws. During his investigation, Brutscher, allegedly pursuant to section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602 (1967),³ caused a summons, "In the matter of the tax liability of John Doe," served on Richard V. Bisceglia, vice president of the Commercial Bank, requesting that he testify and bring with him

those books and records which will provide information as to the person(s) or firm(s) which deposited, redeemed or otherwise gave to the Commercial Bank $100 bills U. S. Currency which the Commercial Bank sent in two shipments of (200) two hundred each $100 bills to the Cincinnati Branch of the Federal Reserve Bank on or about November 6, 1970 and November 15, 1970.

When Bisceglia refused to comply with the summons, Special Agent Brutscher, pursuant to sections 7402(b) and 7604(a) of the Internal Revenue Code, 26 U.S.C. §§ 7402(b), 7604(a) (1967),⁴ filed a petition in United States District Court to enforce the summons. At the hearing on the petition, evidence was adduced showing that it was unusual for the Commercial Bank to deposit with the Federal Reserve Bank so large an amount of money of one hundred dollar denominations and so large a number of bills in such a deteriorated condition. Although the IRS thought that there might be tax liability for 1970 because it appeared that someone might have been hoarding money for a considerable period of time in an unusual storage place, the IRS admitted that it neither suspected nor was it investigating a particular person or taxpayer. Instead, the purpose of the summons was to ascertain the identity of that person or those persons who had transferred the deteriorated bills to the Commercial Bank and then to determine whether anyone was liable for income taxes. Bisceglia testified that the bank had both cash and deposit tickets for the period in question. He explained, however, that only deposit tickets disclose the identity of a person making a deposit. Cash tickets show only the amount of cash deposited and the identity of the teller who received the deposit. He also informed the court that the bank keeps no records of exchange transactions, that is, transactions in which an individual exchanges his currency for new currency or for currency of different denominations.

In opposition to the enforcement of the summons, Bisceglia urged four affirmative defenses: (1) the summons was neither authorized by section 7602 of the Internal Revenue Code nor was it valid under the Fourth Amendment because it failed to specify the identity of the taxpayer being investigated; (2) a section 7602 civil summons was improper because the dominant purpose of the investigation was criminal; (3) the general nature of the summons made it impossible and impracticable for the bank to notify every taxpayer who had transacted business with the bank during the period of time in question and therefore denied the bank's customers their right to challenge its enforcement; and (4) the IRS had not acted in good faith in issuing the summons.

The district court, on June 1, 1972, rejected Bisceglia's affirmative defenses and ordered the bank to make available to the IRS those records reasonably related to the investigation. To avoid overburdening the bank and unnecessarily disclosing the transactions of bank customers that were not relevant to the IRS inquiry,⁵ the court specified the records required as

those deposit tickets, if any, of the Commercial Bank, Middlesboro, Kentucky, which reflect cash deposits during the period from October 16, 1970, through November 16, 1970, in the amount of $20,000.00, and those deposit tickets, if any, of said bank which reflect cash deposits involving one hundred dollar bills totaling amounts equal to or in excess of $5,000.00 per deposit for a like period.

Bisceglia has appealed from this order, the enforcement of which was stayed pending this appeal on July 14, 1972, and contends first, that the summons and subsequent order enforcing the summons are not authorized by section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602 (1867), and second, that they violate the Fourth Amendment's prohibition of unreasonable searches and seizures. Because we find that the summons and the order enforcing the summons are not authorized by the Internal Revenue Code, we do not reach the constitutional question.

In enacting section 7602 of the Internal Revenue Code, Congress specified the purposes for which the Internal Revenue Service is authorized to issue a summons as follows:

for the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability. . . 26 U.S.C. § 7602 (1967).

In this section, Congress has not authorized the IRS to examine records pertaining to the financial affairs of an indefinite number of unspecified persons for the purpose of ascertaining the identity of one or some of those persons who may be taxpayers and liable for taxes. Instead, the section presupposes that the IRS has already identified the person in whom it is interested as a taxpayer before proceeding. Even the IRS summons form, Treasury Department Form 2039, acknowledges this presupposition because it begins with the words "In the matter of the tax liability of ____," and informs the recipient of the summons that he is required to appear and give testimony "relating to the tax liability or the collection of the tax liability of the above named person. . . ." In this case, the IRS has inserted the name "John Doe" into the space provided for the name of the taxpayer under investigation, and it admits that the name is fictitious and that no person of that name is under investigation.

Although courts are required to "liberally construe the powers given the governmental agency" by section 7602 of the Internal Revenue Code, here, the district court's sweeping interpretation of this section has gone beyond mere statutory construction. United States v. Giordano, 419 F.2d 564, 569-570 (5th Cir. 1969), cert. denied 397 U.S. 1037, 90 S.Ct. 1355, 25 L.Ed.2d 648 (1970). In the past, whenever the IRS has sought to use its summons power as an exploratory or identifying device to compel the production of records pertaining to a group of otherwise unidentified persons in the hope of discovering whether persons in this group may be taxpayers or, if so, may be liable for income taxes, courts have moved swiftly to arrest or curtail the attempt. When the IRS seeks to obtain records from persons not themselves under investigation for the purpose of investigating others whose identity is known, courts have been particularly careful to ensure that investigation of the taxpayer and not a sweeping exploratory search is its object.⁶

Thus, in Mays v. Davis, 7 F.Supp. 596 (W.D.Pa.1934), decided under the predecessor of section 7602, the court refused to require a trust officer of a trust company to produce for IRS examination all records disclosing the "names and addresses of the beneficiaries of trusts created by will where the widow, a beneficiary, has elected to take under the will . . . where the will provides for payment to her of income of the trust estate; and where income was paid to the widow" and all records showing "the name of each such trust." Id. at 596. The court properly characterized this summons as merely exploratory. The IRS, having no identifiable taxpayer under investigation, was seeking information about a group of persons having common characteristics in the hope of...