U.S. v. Barth

Decision Date01 October 1984
Docket NumberNo. 1443,D,1443
Citation745 F.2d 184
Parties84-2 USTC P 9828 UNITED STATES of America and Philip J. Kennedy, Special Agent, Internal Revenue Service, Petitioners-Appellees, v. Leslie R. BARTH; Leslie R. Barth Associates, P.C., a/k/a Barth & Richheimer, P.C., Leslie R. Barth Organization, Inc., Southeastern Realty Associates, Inc., North American Investment Resources, Inc., and Bismark Realty Consultants, Inc., Respondents-Appellants. ocket 84-6131.
CourtU.S. Court of Appeals — Second Circuit

Sheldon H. Elsen, New York City (Lisa Feiner, Lawrence Solan, Orans, Elsen & Lupert, New York City, of counsel), for respondents-appellants.

William A. Whitledge, Atty., Tax Div., Dept. of Justice, Washington, D.C. (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, David I. Pincus, Attys., Tax Div., Dept. of Justice, Washington, D.C., Alan H. Nevas, U.S. Atty., Bridgeport, Conn., of counsel), for petitioners-appellees.

Before VAN GRAAFEILAND, WINTER and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge.

Respondents, Leslie R. Barth and five corporations of which he is president, appeal from an order of the United States District Court for the District of Connecticut, Jose A. Cabranes, Judge, enforcing five Internal Revenue Service (IRS) summonses pursuant to 26 U.S.C. Sec. 7604(b) (1982). We reverse in part and affirm in part.

I.

During the course of an investigation of Barth's alleged failure to file corporate and personal federal income tax returns for the years 1976 through 1980, the IRS served five administrative summonses on Barth individually and in his capacity as president of the five respondent corporations. The summonses directed Barth and the corporations to turn over described corporate records, as well as copies of each corporation's state and federal income tax returns. Although Barth gave many of the corporate records to the IRS, the government considered Barth's compliance incomplete and petitioned the district court in August 1982 for an order enforcing the summonses pursuant to 26 U.S.C. Sec. 7604(b).

Barth's partial compliance left two unresolved issues which were the subject of several proceedings before the district court, and which ultimately were addressed in the enforcement order appealed from. Those issues were: (1) whether the court should order Barth to turn over copies of the corporate income tax returns; and (2) whether the court should order the corporations to provide a witness who could testify about the corporate records.

As to Barth, the district court ordered:

Barth shall either produce the summoned corporate tax returns or testify under oath before this court that he did not possess them on the date of the summons, or at any time thereafter, * * * *. (Emphasis added).

As to the corporations, the district court ordered:

[R]espondent corporations shall designate, and if necessary, shall appoint, an agent or agents who shall, having made such inquiry as is necessary in the circumstances, appear in person * * * to testify for the corporations in response to the summonses, without invoking their personal privileges against self-incrimination, and shall furnish such information as is available to the corporations. (Emphasis added).

Judge Cabranes denied a motion to stay the enforcement order, but we stayed the district court's order pending argument and resolution of this appeal.

II.

Section 7602 of the Internal Revenue Code authorizes the IRS to examine records, to issue summonses, and to take testimony for the purpose of "determining the liability of any person for any internal revenue tax." 26 U.S.C. Sec. 7602(a); United States v. Euge, 444 U.S. 707, 710-11, 100 S.Ct. 874, 878-79, 63 L.Ed.2d 141 (1980). Before the district court may enforce an IRS summons the government must demonstrate: (1) that the summons was issued for a proper purpose; (2) that the material sought is relevant to that purpose; (3) that the information sought is not already within the commissioner's possession; and (4) that all administrative steps have been followed. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-55, 13 L.Ed.2d 112 (1964). Once the government establishes these four factors the burden in an enforcement proceeding shifts to the party challenging the summons to show why it should not be enforced. United States v. Davey, 543 F.2d 996, 1000 (2d Cir.1976).

In the case at bar, respondents do not challenge the Powell showing made by the government. Instead, respondents attack the scope of the enforcement order, claiming that it went beyond mere enforcement of the IRS summonses. Under the order, Barth's only alternative to producing the corporate income tax returns was to testify, under oath, that he did not possess the returns. Barth contends this violates his fifth amendment privilege against self-incrimination. Similarly, the order required more of the corporations than production of documents; it directed them to designate or appoint an agent, who would not invoke a fifth amendment privilege, to testify about the corporate records.

A. BARTH

Reversing the position it took in the district court, the government has acknowledged on appeal that we must vacate that part of the enforcement order that requires Barth to testify. Barth is being investigated for failure to file individual and corporate federal income tax returns. An admission that he did not possess these returns would "furnish a link in the chain of evidence needed to prosecute [Barth] for a federal crime", Hoffman v. United States, 341 U.S. 479, 486, 71 S.Ct. 814, 818, 95 L.Ed. 1118 (1951), and therefore, would be potentially self-incriminating. Accordingly, under Curcio v. United States, 354 U.S. 118, 123-28, 77 S.Ct. 1145, 1149-51, 1 L.Ed.2d 1225 (1957), Barth's testimony that he did not possess the returns could not constitutionally be compelled, and we must vacate that portion of the order that directs him to testify. See United States v. Rylander, 460 U.S. 752, 760-61, 103 S.Ct. 1548, 1554, 75 L.Ed.2d 521 (1983); see also United States v. Edgerton, 734 F.2d 913, 920-21 (2d Cir.1984).

Barth further argues that we must vacate that portion of the order directing him to produce the corporate tax returns since he does not possess them and is therefore unable to comply. The government responds that after striking the alternative direction to testify we should affirm the district court's order as modified, because Barth failed to establish his nonpossession defense below. According to Barth, the corporations have admitted through answers to interrogatories that no returns of the corporations were filed, and the government's records show that no such returns were received. This circumstantial evidence, he urges, establishes that no returns existed and, therefore, that he could not possibly possess them.

If properly established, nonpossession of summoned documents is a valid defense to an IRS application for an enforcement order. United States v. Rylander, 460 U.S. at 757, 103 S.Ct. at 1552. Issuance of an enforcement order constitutes an adjudication that the respondent possesses and is able to produce the summoned documents at the time the order is issued. Thereafter, the respondent must produce the documents or face contempt proceedings in which he is foreclosed from claiming nonpossession at the time of the enforcement order. Id. at 1554. Because of its potentially drastic consequences, however, an enforcement order in a contested proceeding should not rest on a determination of possession that is merely implicit. Before ordering production on penalty of contempt, the district court should expressly determine that the respondent possesses the summoned documents.

Here, the district court made no finding of possession. Instead, it issued an alternative order--produce the documents or testify that you do not possess them--that was apparently designed to defer determination of the critical contested issue of possession. Such an alternative procedure is not contemplated by the statute as interpreted in Rylander. Moreover, to merely delete the direction to testify, as the government urges, and thereby leave standing an order to produce containing an implicit finding of possession, would in effect deprive Barth of a proper ruling on the possession issue. On the other hand, the issue of possession, on which Barth bears the burden of proof, is too complex and fact-sensitive for resolution by an appellate court on the simplistic analysis tendered by Barth.

We therefore vacate that part of the enforcement order directed to Barth and remand the proceeding to enable Judge Cabranes to rule explicitly on Barth's defense of nonpossession based on the present record and on any additional relevant evidence the parties may wish to present. If Judge Cabranes finds that Barth possesses the returns, then enforcement may be granted; if he determines that Barth does not possess them, then enforcement should be denied.

B. THE CORPORATIONS

After the government filed its petition for enforcement, Barth, who was president of each corporation, refused on self-incrimination grounds to testify about what corporate books were kept or who was responsible for keeping them. Barth's attorney did agree, however, to furnish the government with a list of employees who had knowledge about the records.

Nevertheless, after that list was furnished, the listed employees appeared by counsel who informed the government and the court that each employee intended to invoke his personal privilege against self-incrimination in response to any question asked about the corporate records. At the court's suggestion, government counsel agreed that it would accept an affidavit supplied by the employees' counsel showing: (1) that he had interviewed each employee; (2) that each had a reasonable fear of incrimination; and (3) that each employee intended to assert the privilege.

But when counsel for the...

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