U.S. v. Cortese, ML-1

Citation614 F.2d 914
Decision Date08 February 1980
Docket NumberNo. 78-2005,ML-1,I,ML-2,78-2005
Parties80-1 USTC P 9197 UNITED STATES of America and Joseph A. Dollard, Special Agent, Internal Revenue Service, Plaintiffs-Appellants, v. Americo V. CORTESE, Prothonotary, Court of Common Pleas, Philadelphia County, PB, JB, JJD, LK, SK, MK, SLL,ntervenors-Defendants. Appeal of UNITED STATES of America.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Daniel F. Ross (argued), M. Carr Ferguson, Gilbert E. Andrews, Joseph M. Gontram, Robert E. Lindsay, Washington, D. C., Peter F. Vaira, Jr., U.S. Atty., Philadelphia, Pa., for plaintiffs-appellants.

Robert C. Daniels (argued), Philip L. Blackman, Adler, Barish, Daniels, Levin, & Creskoff, Philadelphia, Pa., for intervenors-defendants.

Jonathan Vipond, III, Philadelphia, Pa., for Americo V. Cortese.

Before HUNTER, WEIS and GARTH, Circuit Judges.

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge.

This case requires us once again to examine the requirement that Internal Revenue Service (IRS) summonses be issued in good faith pursuit of the congressionally authorized purposes of 26 U.S.C. § 7602. 1 United States v. LaSalle National Bank, 437 U.S. 298, 318, 98 S.Ct. 2357, 2368, 57 L.Ed.2d 221 (1978); see United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964). It differs from prior cases involving IRS summonses in that the district court, in deciding that the summonses were not issued in good faith, focused on the effect that an informant's motive had on the Service's purpose of issuing the summonses rather than on the Service's interest in civil, as opposed to criminal remedies. 2 We conclude that the facts found and reasons given by the district court were legally insufficient to support a finding of bad faith, and we remand to the district court for further proceedings on the issue. 3

I

The Internal Revenue Service brought this action seeking judicial enforcement of summonses issued pursuant to § 7602. The summonses, issued by Special Agent Joseph Dollard on information provided by a confidential informant, were addressed to Americo V. Cortese, Prothonotary of the Court of Common Pleas of Philadelphia County. The summonses directed Cortese to produce "contingent fee agreements" and "statements of distribution" filed by a number of named negligence attorneys with the Prothonotary's office pursuant to Rule 202 of the Philadelphia Local Rules of Civil Procedure. 4 The documents involved were required to be filed under Rule 202 and contained details of contingent fees earned by the named attorneys.

Cortese responded to the complaint with a statement representing that he was prepared to produce the documents, but requesting that the affected attorneys be permitted to intervene. Nine of the attorneys did intervene and move to dismiss the complaint and quash the summonses on numerous grounds, including that the summonses were being used solely for the purpose of obtaining evidence for criminal proceedings and that there was no bona fide civil tax investigation of the intervenors.

The district court held a preliminary hearing on the motion at which special agent Dollard testified. See United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975). The Court decided that further investigation into the good faith of the Service was warranted. At intervenors' request, an ex parte, in camera hearing was held with the government attorneys to review the documents provided by the informant.

Intervenors then moved to compel discovery from Dollard and the Assistant United States Attorney who was simultaneously conducting a grand jury investigation involving the same negligence attorneys. On October 28, 1977, the district court granted intervenors' motion in part, but specifically rejected the contention that "the summonses were issued for criminal purposes" on the ground that "intervenors have not alleged that a recommendation for criminal prosecution was made prior to the issuance of the summonses." Discovery was limited to the issues of "a) whether the IRS is conducting a legitimate investigation, for proper purposes, in good faith; and b) whether the summonses in this case pose 'second inspection' problems, under § 7605(b) of the Internal Revenue Code." 5

After further discovery, a hearing was held by the district court on these issues. On April 28, 1978, the court ruled that the investigation was conducted in bad faith, refused to enforce the summonses and ordered the complaint dismissed. The reasoning in support of that order is the subject matter of this appeal.

The district court found

"that the IRS investigation was not pursued in good faith. The improper purpose on the part of the informant is inextricably intertwined with the IRS investigation. . . . It is our conclusion that certain interests (centered in the insurance industry), which are adverse to the class of intervenors, have used the IRS with its knowledge, as a 'cat's-paw' to accomplish its purpose of retribution against the class of negligence attorneys."

The court relied on "the unusual facts and circumstances of this case" to support its finding of bad faith. First, the court observed that there was no evidence that either the IRS or the informant had knowledge of any violations of the Internal Revenue Code. Second, the information supplied by the informant did not concern a limited number of individuals, but was "wholesale in nature and concerned virtually the entire Philadelphia negligence bar." Third, only the negligence bar was targeted for investigation, despite the fact that Rule 202 applied to attorneys in other areas of the law. Finally, the court stated that

"(t)he IRS had to realize that the informant, who was instrumental in furnishing thousands of documents designed to get within an IRS net all of the members of the personal injury bar who customarily handle cases for plaintiffs in Philadelphia, was pursuing its own business purpose by giving the IRS the data."

The court concluded

"A different result would obtain if the informant gave information which linked a finite number of individuals with actual violations of the Internal Revenue Code. It suffices to say we are convinced, and so find, that certain interests centered in the insurance industry used the IRS for a wrongful purpose; unfortunately, the IRS permitted itself to be so used."

The Order and Memorandum Opinion was signed by the district judge on April 28 and filed on May 2, 1978. The judge resigned his judgeship effective May 1, 1978.

The Government appeals the dismissal of its enforcement action. They contend that the reasons given by the district court are legally insufficient to constitute bad faith. Appellees, the intervenors below, respond that the determination of bad faith is a question of fact and that the record contains sufficient evidence to support such a finding.

Additionally, there have been several motions before this court. The appellants have moved to vacate the decision of the district court on the ground that the opinion was not filed by a sitting federal judge. Appellees have moved to gain access to the notes of testimony of the in camera hearings, claiming that without them, they are incapable of defending this appeal.

We agree with appellants that the reasons stated by the district court are legally insufficient to support a finding of bad faith on the part of the government, and we remand for further development of the record in light of the proper standard of bad faith. Because of this disposition, we need not reach the appellants' claim that the opinion filed after the resignation of the district judge was invalid. Finally, we conclude that it is unnecessary to release the in camera transcripts to appellees at this time.

II

In United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), the Supreme Court once again examined the requirement that the IRS not abuse the process of the courts in seeking enforcement of administrative summonses issued pursuant to § 7602. See, e. g., United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). The Court specifically established a two-step inquiry. "First, the summons must be issued before the Service recommends to the Department of Justice that a criminal prosecution, which reasonably would relate to the subject matter of the summons, be undertaken." 6 LaSalle National Bank, 437 U.S. at 318, 98 S.Ct. at 2368.

The second step of the inquiry, relevant where the Service had not recommended prosecution to the Justice Department prior to the issuance of the summons, requires consideration of whether the Service, as an institution, at all times used the summons authority in good faith pursuit of the congressionally authorized purposes of § 7602, specifically, the civil determination or collection of taxes. Id. The Court further explained that this second step requires consideration of the standards of good faith set forth in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). LaSalle National Bank, 437 U.S. at 318, 98 S.Ct. at 2368.

Powell requires the Commissioner to show that the investigation has been conducted pursuant to a legitimate purpose, that the information sought may be relevant to that purpose, that the information was not already within the Commissioner's possession and that the administrative procedures of the Code have been followed. United States v. Powell, 379 U.S. at 57-58, 85 S.Ct. at 255. 7 Once the IRS has met its burden, the taxpayer bears a heavy burden of establishing an abuse of the court's process. See LaSalle National Bank, 437 U.S. at 317, 98 S.Ct. at 2368; United States v. Genser, 595 F.2d 146, 151 (3d Cir.), cert. denied, --- U.S. ----, 100 S.Ct. 269, 62 L.Ed.2d 185 (1979). Specifically, "(s)uch an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to...

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