U.S. v. Garrett

• Citation: 571 F.2d 1323
• Decision Date: 26 April 1978
• Docket Number: No. 76-2283,76-2283
• Parties: 78-1 USTC P 9407 UNITED STATES of America and Keith P. Powers and Caroll W. Butler, Revenue Agents, Internal Revenue Service, Petitioners-Appellees, v. George B. GARRETT, President of Gardav, Inc., and Gardav, Inc., Respondents-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1323

571 F.2d 1323

78-1 USTC P 9407

UNITED STATES of America and Keith P. Powers and Caroll W.

Butler, Revenue Agents, Internal Revenue Service, Petitioners-Appellees, v. George B. GARRETT, President of Gardav, Inc., and Gardav, Inc., Respondents-Appellants.

No. 76-2283.

United States Court of Appeals, Fifth Circuit.

April 26, 1978.

Rehearing Denied June 5, 1978.

Vincent F. Kilborn, Mobile, Ala., for respondents-appellants.

Robert E. Hauberg, U. S. Atty., Jackson, Miss., Scott P. Crampton, Asst. Atty. Gen., Tax Div., Gilbert E. Andrews, Acting Chief, App. Section, Gary R. Allen, Michael J. Roach, Attys., Tax Div., Dept. of Justice, Washington, D. C., for petitioners-appellees.

Appeal from the United States District Court for the Southern District of Mississippi.

Before WISDOM, GODBOLD and CLARK, Circuit Judges.

CHARLES CLARK, Circuit Judge:

The defendants, George B. Garrett and Gardav, Inc., appeal the final order of the district court ordering the enforcement of an Internal Revenue summons issued to Garrett as president of Gardav, Inc., for the production of corporate records relating to Gardav's corporate income tax liability for the taxable year 1973. Principally at issue in this case is whether the district court erred in entering a protective order which prevented Garrett from taking the depositions of two IRS agents and a tax auditor. Although we find that the district court erred in entering the protective order, the record produced at the enforcement hearing is adequate for us to determine that this error did not substantially prejudice the taxpayer's case. We therefore affirm the judgment of the district court ordering enforcement of the summons.

On December 19, 1974, the Internal Revenue Service notified George B. Garrett and his wife Margaret of an investigation of their 1973 tax returns. The IRS asked to see the Garrett's financial records for 1973. On December 24, 1974, Garrett gave Tax Auditor Elizabeth Wyatt, now Elizabeth Bostick, ¹ financial documents relating to his personal affairs and to the several businesses that he and his wife operate, including their wholly-owned corporation, Gardav. On this occasion, Bostick and Garrett spent over an hour reviewing the records and making notations on Gardav's bank statements and cancelled checks.

Bostick's preliminary assessment of Garrett's personal return using an indirect computing technique known as a T-Account indicated a $60,000 understatement of income on Garrett's 1973 tax return. Bostick asked Garrett to meet with her to explain this discrepancy. Stating that he had no explanations apart from the contents of the records, Garrett refused. The records for Gardav were returned to Garrett on February 27, 1976, after he told Bostick that he needed them in order to prepare his income tax return for the current year.

After Bostick's review, the IRS expanded the scope of its investigation to include Gardav and assigned the case to Revenue Agent Caroll Butler, who, unlike Bostick, had training in corporate taxation. When Butler asked Garrett for Gardav's records, Garrett refused on the grounds that the IRS already had made an inspection of such records and could not make a second inspection without Gardav's consent unless the Secretary gave the notice specified in 26 U.S.C.A. § 7605(b). ² On December 11, 1975, the IRS issued a summons to Garrett directing him to appear for examination and to bring with him Gardav's tax records. On December 29, 1975, the date appointed for compliance with the summons, Garrett appeared but did not produce the records on the grounds that the IRS had kept them in its physical possession from December 24, 1974, to February 27, 1975, that under Section 7605(b) the requested examination constituted a second inspection, and that since the Secretary or his delegate after investigation had not notified Gardav in writing that an additional inspection was necessary, no second inspection would be permitted. After Garrett refused to comply with the summons, Butler concluding that his examination had reached a roadblock referred Garrett's personal return to the Intelligence Division for a criminal investigation. The case was assigned to Special Agent George Bauwens.

On March 23, 1976, the IRS brought this action to enforce its summons. Three days later, the district court ordered Garrett to comply with the summons or to appear before the court on April 12, 1976, to show cause why he should not be ordered to comply. Prior to the show cause hearing, Garrett filed notice to depose Agent Butler Special Agent Bauwens, and Tax Auditor Bostick. The government moved for a protective order barring all prehearing discovery, without mentioning any facts or circumstances in the case which would justify such a broad prohibition. In response to the government's mere unsupported request, the district judge struck taxpayer's notice to depose and issued the protective order which the government sought. During the evidentiary hearing, counsel for Garrett was able to cross-examine Agent Butler and Auditor Bostick. The district court enforced the summons but stayed the judgment pending this appeal.

On appeal, Garrett asserts the procedural error of refusing to allow him to depose Agents Butler, Bostick, and Bauwens. He additionally contends that the district court should not have enforced the summons because (1) the purpose of the summons was to harass him for asserting a statutory right, (2) the summons issued for the purpose of obtaining information solely for a criminal investigation, (3) the government could not make a second inspection until the Secretary or his delegate issued a notice after investigation that a second inspection was necessary, and (4) the IRS already possessed the records that it sought through the summons.

We consider first whether the district judge erred in barring prehearing discovery. United States v. Roundtree, 420 F.2d 845, 852 (5th Cir. 1969), held that a taxpayer is entitled to investigate the IRS' purpose in issuing a summons where the purpose has been put in issue and may affect the legality of the summons. United States v. Wright Motor Co., 536 F.2d 1090, 1094 (5th Cir. 1976), reaffirmed that principle:

We understand Roundtree . . . to have established the principle that when a taxpayer alleges in a responsive pleading that the material sought by the IRS is to be used solely for a criminal prosecution, or that the IRS is engaged upon a course of personal harassment, the taxpayer is entitled to investigate the IRS' purposes through deposition of the special agent.

Under Roundtree and Wright Motor, taxpayers in IRS summary enforcement proceedings may claim the benefits of the discovery provisions of the Federal Rules of Civil Procedure. In the case at bar, the taxpayer adequately placed the purpose of the IRS in issue and alleged circumstances under which the purpose would bear upon the legality of the summons. Therefore, Garrett was entitled to discovery, which the district court could have limited in light of the circumstances of the case. When the district court, upon a bare request from the government and without further inquiry, issued a protective order barring all discovery without citing any reason, it departed from Roundtree and Wright Motor. ³

Determining that the district court erred when it entered the protective order does not end our inquiry. In reviewing a district court's curtailment of discovery under the Federal Rules of Civil Procedure, errors made with regard to the allowance of discovery do not require reversal unless they result in substantial prejudice to a party's case. See Bell v. Swift & Co., 283 F.2d 407, 409 (5th Cir. 1960); see also ISI Corp. v. United States, 503 F.2d 558 (9th Cir. 1974); Huff v. N. D. Cass Co. of Alabama,468 F.2d 172, 176-77 (5th Cir. 1972), aff'd in part, vacated and remanded in part on other grounds, 485 F.2d 710 (5th Cir. 1973) (en banc).

In considering whether the district court's refusal to permit discovery substantially prejudiced the taxpayer's case, we take into account that the latitude for discovery in a summons enforcement proceeding is more restricted than that generally permitted in other civil cases, for at least two reasons. First, the issues relevant to enforcement are few and the available sources of evidence are extremely limited. See United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964). Second, allowing unlimited discovery in a summons enforcement proceeding would place the IRS under a severe handicap in conducting a civil investigation, because it has the potential to cause delays which would jeopardize the integrity and effectiveness of the entire investigation. ⁴

To decide whether the denial of discovery substantially prejudiced the taxpayer's case, we must determine the extent of discovery contemplated in Wright Motor and then assess the record to determine whether the error of the district court prevented the taxpayer from developing significant facts with a direct bearing upon whether the IRS summons should have been enforced. The district court rendered its opinion in the case at bar prior to our opinion in Wright Motor. However, because an appellate court applies the law in effect when the appeal is heard, we take Wright Motor as our yardstick to measure the extent to which the refusal to allow discovery prejudiced Garrett's case. See Bradley v. School Board of the City of Richmond, 416 U.S. 696, 711-16, 94 S.Ct. 2006, 2016-18, 40 L.Ed.2d 476, 488-490 (1974); Thorpe v. Housing Authority of the City of Durham, 393 U.S. 268, 281-83 & n. 38, 89 S.Ct. 518, 526-27 & n. 38, 21 L.Ed.2d 474, 483 & n. 38 (1969).

In Wright Motor we agreed with the First Circuit that a general solution to the taxpayer's need for discovery in summons enforcement cases would be for

'the district court to proceed directly to a hearing at which, if desired, the summonee could examine the agent who issued the...