U.S. v. Davis

• Decision Date: 12 February 1981
• Docket Number: 80-1015,Nos. 79-2630,s. 79-2630
• Citation: 636 F.2d 1028
• Parties: 81-1 USTC P 9193 UNITED STATES of America and Edmond J. Martin, Special Agent, Internal Revenue Service, Plaintiffs-Appellees, v. Craig E. DAVIS, Defendant-Appellant. UNITED STATES of America and Edmond Martin, Special Agent, Plaintiffs- Appellees, v. Stephen M. ORR, Defendant-Appellant. . Unit A
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1028

636 F.2d 1028

81-1 USTC P 9193

UNITED STATES of America and Edmond J. Martin, Special

Agent, Internal Revenue Service, Plaintiffs-Appellees, v. Craig E. DAVIS, Defendant-Appellant.

UNITED STATES of America and Edmond Martin, Special Agent, Plaintiffs- Appellees, v. Stephen M. ORR, Defendant-Appellant.

Nos. 79-2630, 80-1015.

United States Court of Appeals, Fifth Circuit.

Unit A

Feb. 12, 1981.

Charles O. Grigson, Austin, Tex., for defendants-appellants.

Harold O. Atkinson, Asst. U. S. Atty., San Antonio, Tex., Gilbert E. Andrews, Chief, Appellate Section, Charles E. Brookhart, William A. Whitledge, Attys., Tax Div., M. Carr Ferguson, Asst. Atty. Gen., U. S. Dept. of Justice, Washington, D.C., for plaintiffs-appellees.

Appeals from the United States District Court for the Western District of Texas.

Before WISDOM, AINSWORTH and GEE, Circuit Judges.

WISDOM, Circuit Judge:

These two cases involve the validity of two civil investigative summonses issued by the Internal Revenue Service (IRS) under 26 U.S.C. § 7602. Craig Davis and Stephen Orr, the summonees, appeal from separate judgments enforcing summonses that require each to produce documents and give testimony relating to the income tax liability of their client, Robert M. Howard, for the years 1974 through 1977. We agree with the result the district court reached in most of its rulings but we disagree with the court's analysis of the attorney-client privilege as applied to Davis and Orr. We affirm in part, reverse in part, and vacate and remand in part.

I.

The events leading up to these appeals are not seriously disputed. On April 12, 1978, IRS Special Agent Edmond Martin began gathering information about narcotics traffic in Austin, Texas, to determine whether those engaged in such illicit commerce had a least paid their just tax on income derived from that activity. From the beginning, Robert Howard figured prominently in the investigation. Parallel investigations into Texas drug traffic were simultaneously being conducted by the Federal Drug Enforcement Administration and the Attorney General of the State of Texas. From William Fargo, a member of the Texas Attorney General's office, Martin obtained information tending to implicate Howard in marijuana smuggling, and in August 1978, Fargo corroborated earlier reports that Howard controlled a corporation which owned a 79-foot yacht. Because Howard reported little or no income on his income tax returns for the years 1972 through 1976, Martin not surprisingly surmised that if those rumors had a factual basis, Howard might have had substantial unreported income in those years. The IRS therefore began a formal tax investigation of Howard on August 23.

On September 1 Fargo informed Martin that Howard had just been arrested on a drug charge and that contraband and documents had been seized in a search of Howard's residence under a search warrant. Martin accepted Fargo's invitation to inspect the documents, and made photographic and microfilm copies of some of them. Following standard IRS procedure, ¹ Martin delivered the copies to his supervisor, who sealed them pending internal review of the validity of the search. Because the search warrant, by oversight, had not been signed by the issuing magistrate, the copies have remained sealed.

Agent Martin next tried to further the investigation by what has become a familiar IRS tactic: issuing summonses to the taxpayer's attorneys and accountants. On September 5, a summons was issued to Davis, an attorney and certified public accountant who had prepared Howard's tax returns for several of the years in question. The summons required Davis to produce and testify as to two categories of documents. ² First, he was to bring all records in his possession of financial transactions by Howard or corporations in which Howard had participated for the years 1974 through 1978. Second, he was to produce the workpapers he had generated in the course of preparing Howard's tax returns for those years. At Howard's request, Davis refused to comply with any part of the summons, citing the attorney-client privilege as justification. The government filed a petition under 26 U.S.C. § 7604 to enforce the summons. After an evidentiary hearing at which Davis's counsel had an opportunity to cross-examine Martin and Fargo extensively, the district court issued an order granting the government's petition in full.

While the proceeding to enforce the summons issued to Davis was pending, the government issued two more summonses. One was issued to Howard himself. Howard appeared at Agent Martin's office in compliance with that summons on December 26, 1978, with his counsel, Orr, but did not produce any documents or answer any questions, asserting his fifth amendment privilege against self-incrimination. The government has not sought judicial enforcement of that summons, and it is not in issue in this appeal. The other summons, however, was issued to Orr, one of Davis's law partners. Orr has represented and continues to represent Howard in several criminal proceedings; Orr had represented Howard in the two earlier summons proceedings until Orr was himself summoned. The summons to Orr, issued on February 23, 1979, required him to produce fourteen categories of documents, falling into three broad classes: ³ (1) Orr's records of financial transactions between Orr and Howard, including loans, gifts, and compensation to Orr; (2) Orr's records of financial transactions between Howard and third parties, including records of the disbursement of funds to others by Orr's law firm on Howard's behalf, and records of activities in which the law firm had assisted Howard in acquiring or disposing of money and property; (3) business records created by Howard or by corporations controlled by Howard in Orr's possession. Orr, like Davis, made a blanket assertion of privilege and refused to comply with any part of the summons. The government petitioned for enforcement and after a second evidentiary hearing the district court granted the petition.

Davis and Orr separately obtained stays and each appealed. They advance overlapping arguments against enforcement of their summonses.

II.

Both Davis and Orr assert that the government failed to meet the standards laid down in United States v. Powell, 1964, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112, for enforceability of IRS summonses under 26 U.S.C. §§ 7602(b), 7604. Under Powell, the government need not meet any standard of probable cause to obtain enforcement, but need make merely a preliminary showing 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 254. This showing may be made by a simple affidavit filed with the petition to enforce by the agent who issued the summons, as was done in this case. United States v. McCarthy, 3 Cir. 1975, 514 F.2d 368, 372; United States v. Garden State National Bank, 3 Cir. 1979, 607 F.2d 61. Once the government has satisfied this minimal requirement, the burden shifts to the summonee either to disprove one of the four elements of the government's prima facie showing or to demonstrate that judicial enforcement of the summons would otherwise constitute an abuse of the court's process. United States v. Powell, 379 U.S. at 58, 85 S.Ct. at 255. See generally Kenerdine, The Internal Revenue Service Summons to Produce Documents: Powers, Procedures, and Taxpayer Defenses, 64 Minn.L.Rev. 73 (1979); Note, The Institutional Bad Faith Defense to the Enforcement of IRS Summonses, 80 Colum.L.Rev. 621 (1980).

A.

Several of the appellants' arguments may be dismissed with a minimum of discussion. Davis argues both that the summons issued to him was based on information obtained in the search of Howard's residence and, more generally, that the entire IRS investigation resulted from information obtained in that search. Since the search was made under an unsigned warrant, he argues that his summons is a tainted fruit of an unlawful search. We need not consider the merits of this argument as a matter of law. ⁴ The district court specifically found that Davis did not meet his burden of demonstrating that the investigation or the summons was based on the fruits of the search. That finding is not clearly erroneous. Since the documents obtained by the IRS from that search were sealed and never used, they cannot be a source of taint. Martin admitted that while he was making copies of the seized documents he noticed the names of certain corporations presumably owned or controlled by Howard, but the evidence is that long before then those names and relationships were known to the IRS.

Nor is there merit to Davis's contention that the summons issued to him was unenforceably vague. Because he did not raise this contention before the trial court, it need not be considered on appeal in the absence of exceptional circumstances resulting in a miscarriage of justice. D. H. Overmyer Co. v. Loflin, 5 Cir. 1971, 440 F.2d 1213, 1215-16, cert. denied, 1971, 404 U.S. 851, 92 S.Ct. 87, 30 L.Ed.2d 90. In any case, we find that the summons issued here described the documents with sufficient particularity to inform Davis which ones should be produced. In re Grand Jury Proceedings (McCloy and Sussman), 5 Cir. 1979, 601 F.2d 162, 168; United States v. Malnik, 5 Cir. 1974, 489 F.2d 682, 686 n.4, cert. denied, 1974, 419 U.S. 826, 95 S.Ct. 44, 42 L.Ed.2d 50. ⁵

B.

Both Davis and Orr contend that the sole institutional purpose of the IRS in issuing the summonses was to aid future criminal prosecutions against Howard. Notwithstanding that the IRS has not made a recommendation for criminal prosecution to the Department of Justice and that agent Martin has not recommended criminal proceedings to his...