Matter of Does
| Decision Date | 19 April 1982 |
| Docket Number | Misc. No. 646. |
| Citation | 541 F. Supp. 213 |
| Parties | In the Matter of the Tax Liabilities of John DOES, Unidentified Clients and Customers Who Invested or Participated in Dairy Cattle Programs Promoted by Agricultural Asset Management Co., Inc., in the years 1978, 1979, and 1980. |
| Court | U.S. District Court — Northern District of New York |
Hinman, Straub, Pigors & Manning, P. C., Albany, for Ag. Asset, Inc.; Leslie M. Apple, Albany, N. Y., of counsel.
George H. Lowe, U. S. Atty., Syracuse, N. Y., Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., U. S. Dept. of Justice, Washington, D. C., for the U. S., William P. Fanciullo, Asst. U. S. Atty., Albany, N. Y., Matthew Yackshaw, Trial Atty., Tax Div., Washington, D. C., of counsel.
On January 19, 1982, the United States filed a petition for leave to serve a third party John Doe summons upon Agricultural Asset Management Co., Inc. (hereinafter "Ag Asset") and Mr. Jeffrey Adler, Ag Asset's treasurer. The petition was filed pursuant to 26 U.S.C. §§ 74021 and 7609(f)2 and was properly supported with a memorandum and affidavit. The Summons would require Ag Asset to produce the names and addresses of all investors or participants in the Ag Asset program, the social security or employer identification numbers of these investors or participants, and any books, records, or documents containing the above information.
Thereafter, this Court signed an Order, after an ex parte proceeding pursuant to 26 U.S.C. § 7609(h)(1),3 authorizing the Internal Revenue Service (hereinafter "IRS") to serve the John Doe summons upon Ag Asset and Mr. Adler. The Order provided that if Ag Asset and Adler objected to compliance with the Summons, they should appear before this Court on February 26, 1982 to show cause why the Summons should not be enforced.4 Before this Court are Ag Asset's objections to the enforcement of the John Doe Summons, Ag Assets's motion for an Order of discovery directed to IRS officials pursuant to Fed.R. Civ.P. 26(a) and (b), and the Government's motion for a protective order prohibiting such discovery pursuant to Fed.R.Civ.P. 26(c).
The pertinent facts here are not seriously in dispute. Ag Asset, located in Salem, New York, is in the business of promoting and managing tax shelter programs involving the financing of purchases of dairy cattle herds. Essentially, an investor, either an individual or a partnership, in one of Ag Asset's programs provides a portion of the amount necessary to purchase the herd. Ag Asset then obtains the remainder from certain lending institutions using recourse, nonrecourse or partially nonrecourse notes5 secured by the herd.
Once the herd is purchased, it is leased to a farmer, originally recruited by Ag Asset, who is responsible for the care and maintenance of the herd and who, under contract, must maintain the quantity and quality of the herd. If a cow dies or is culled,6 the farmer must replace it, unless the loss is covered by insurance. During the term of the contract, each investor is entitled to a certain percentage of the milk receipts, which are paid to Ag Asset as managing agent for the investor. Ag Asset uses these funds to make the payments called for by the notes and to pay any other expenses that are incurred. Upon completion of the contract, the parties may renew the contract, the farmer may purchase the herd at a specified price, or he may relinquish the herd to the investor. In this intricate tax scheme every party seems to prosper. Ag Asset collects large fees, ostensibly as a "middleman" for bringing the farmer and the investor together, the farmer obtains income from milk sales and may eventually obtain a herd without the large downpayment usually required in herd purchase financing agreements, and the investor, since he is considered to be the owner of the herd, may deduct "business" expenses, take investment credits and a depreciation allowance.
It is the tax consequences of the Ag Asset program that are in serious contention. The IRS takes the position, based upon Revenue Ruling 78-411,7 that the investor in programs such as Ag Asset's is not, in actuality, the owner of the dairy herd, but simply finances its purchase. It therefore contends that the investor is not entitled to take the deductions and tax credits normally available to the owner of a dairy herd. Moreover, the IRS takes an alternative position that the investment credits and deductions for depreciation and management fees are not permitted to the investors even if the investors can be considered the owners of the herds.8
The IRS purportedly has examined the 1979 and 1980 income tax returns of 19 partnerships and 10 individuals who invested in the dairy cattle investment program promoted by Ag Asset and asserts that, in each case, investors improperly took deductions for depreciation and management fees and also took investment tax credits relating to investments in the dairy herd program. In addition, the IRS maintains that a prospectus prepared by Ag Asset indicates that the investor will take deductions for depreciation and management fees and take investment tax credits. The tax deductions and investment credits described in the prospectus assertedly are identical to the deductions and credits examined in the 29 tax returns. Therefore, the IRS maintains it has a reasonable basis to believe that a significant number of the clients of Ag Asset9 have failed to comply with the Internal Revenue laws, and, thus, the Summons should now be enforced. (Affidavit of Arthur McDonald, ¶¶ 5-9).10
In contrast, Ag Asset maintains that since the IRS has not satisfied the criteria set forth in 26 U.S.C. § 7609(f)(1), (2) and (3) the Summons should not be enforced. More specifically, Ag Asset asserts that, since the IRS has examined the tax returns of various investors in the program and has not made a determination with respect to any proposed deficiency, the IRS is involved in a "fishing expedition." It therefore contends that the Summons does not relate to the investigation of a particular person or ascertainable group or class of persons as required by § 7609(f)(1).
In addition, Ag Asset alleges that the IRS has not established a reasonable basis to believe that any of Ag Asset's clients or customers have not complied, or may not comply, with any Internal Revenue law. It alleges further that the Government has not offered any specific facts supporting the IRS contentions, and, more significantly, that Revenue Ruling 78-411, the legal basis for the IRS' position, is factually inapplicable. Finally, Ag Asset claims that the IRS has not demonstrated that the information it seeks is not already within its possession, as required by § 7609(f)(3), and that the Summons was not issued for a legitimate or authorized purpose, is burdensome and overbroad, constitutes an unreasonable search and seizure, and represents an unwarranted intrusion into the privacy of Ag Asset, its clients and customers.
Generally, the authority of the IRS to conduct investigations regarding tax liability and to issue summonses in conjunction with such investigations is derived from 26 U.S.C. § 7602.11 The standards for the enforcement of a summons have been enunciated by the Supreme Court in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964):
Reading the statutes as we do, the Commissioner need not meet any standard of probable cause to obtain enforcement of his summons, either before or after the three-year statute of limitations on ordinary tax liabilities has expired. He must show that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed .... 379 U.S. at 57, 58, 85 S.Ct. at 255.
Thus, to obtain enforcement, the Government need only establish all of the above Powell standards, and, once having met this burden, a prima facie case for enforcement has been made. The burden then falls upon the contestant to show that enforcement of the summons would be an abuse of the Court's process or otherwise would be improper under the Powell criteria. United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964); United States v. Davey, 543 F.2d 996, 1000 (2d Cir. 1976).
However, in addition to the issuance and enforcement of "taxpayer" summonses, the IRS has frequently issued summonses to third parties to identify and obtain the names of certain unknown taxpayers. Prior to 1976, the only restraint on the use of these "John Doe" summonses was self-imposed by the Commissioner of the Internal Revenue Service. With the approval of John Doe summonses by the Supreme Court in United States v. Bisceglia, 420 U.S. 141, 95 S.Ct. 915, 43 L.Ed.2d 88 (1975), Congress became concerned that the use of John Doe summonses might be widespread and uncontrolled. In an effort to place some restraint on the issuance of these third party summonses, while at the same time preserving the John Doe summons as an investigative tool, Congress passed Section 7609(f) and (h) of the Internal Revenue Code in 1976. S.Rep.No.94-938, 94th Cong., 2d Sess., reprinted in 1976 U.S.Code Cong. & Ad.News at 2897, 3798.
Section 7609(f) provides that a John Doe summons may not be issued unless a District Court is satisfied that (1) the summons is issued as part of an investigation of an ascertainable person or class of persons; (2) that there exists a reasonable basis for belief that some or all of that class may not have complied with some Internal Revenue provision; and (3) that the information cannot be readily obtained elsewhere. Section 7609(h) grants jurisdiction to the appropriate District Court to determine proceedings brought under subsection (f), and mandates that such determinations be made ex parte and solely...
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