U.S. v. Harris

• Decision Date: 23 October 1980
• Docket Number: Nos. 78-2958,s. 78-2958
• Citation: 628 F.2d 875
• Parties: 80-2 USTC P 9748 UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. E. L. HARRIS, Sr., President Fresno Manufacturing Co., Defendant-Appellant. UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. FRESNO FARMS, INC., E. L. Harris, President, Defendant-Appellant. UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. FRESNO STRUCTURAL and Hangar Fabricators, Inc., E. L. Harris, Sr., President, Defendant-Appellant. UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. E. L. HARRIS, Sr., President, Patty's Ranch, Inc., Defendant-Appellant. to 78-2961.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 875

628 F.2d 875

80-2 USTC P 9748

UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. E. L. HARRIS, Sr., President Fresno Manufacturing Co.,

Defendant-Appellant.

UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. FRESNO FARMS, INC., E. L. Harris, President, Defendant-Appellant.

UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. FRESNO STRUCTURAL and Hangar Fabricators, Inc., E. L.

Harris, Sr., President, Defendant-Appellant.

UNITED STATES of America and Internal Revenue Service Officer Jay M. Wendell, Plaintiffs-Appellees, v. E. L. HARRIS, Sr., President, Patty's Ranch, Inc.,

Defendant-Appellant.

Nos. 78-2958 to 78-2961.

United States Court of Appeals Fifth Circuit.

Oct. 23, 1980.

Robert L. Rolnick, Andrew G. Shebay, III, Houston, Tex., for defendants-appellants.

M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Tax Div., Dept. of Justice, Chief, Appellate Sec., Washington, D. C., Carleton D. Powell, Aaron P. Rosenfeld, Tax Div., Dept. of Justice, Washington, D. C., for plaintiffs-appellees.

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

Before SIMPSON, HILL and HATCHETT, Circuit Judges.

SIMPSON, Circuit Judge:

In these consolidated appeals the taxpayer, E. L. Harris, Sr., seeks to overturn a district court order enforcing four summonses issued by an Internal Revenue Service (IRS) special agent pursuant to § 7602 ¹ of the Internal Revenue Code. Harris argues (1) that the district judge abused his discretion by denying taxpayer pretrial discovery; and (2) that the district judge's curtailment of the scope of witness interrogation at the summons enforcement hearing denied the taxpayer his right to an adversary hearing. Applying the principles set forth in United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), we find the district judge acted within his discretion, and affirm.

FACTS

In late August of 1977 an IRS special agent served four summonses on Harris in his capacity as president of the four corporate parties. The substantially identical summonses directed Harris to appear before the agent at which time he was to give testimony and produce the books and records of the corporations. Harris refused by mailing a document entitled "Notice of Protest" to the IRS. The protest alleged the summonses to be unenforceable because they were issued solely for the purpose of gathering evidence for the criminal prosecution of Harris, his wife, and/or his corporations.

Upon the government's request the district court ordered the taxpayer to appear before the court to show cause why the summons should not be enforced. See I.R.C. §§ 7402(b), 7604(a). ² Harris immediately The government responded to Harris' discovery attempts by filing a motion for a protective order prohibiting the discovery. Fed.R.Civ.P. 26(c)(1). The accompanying memorandum of law argued that the attendant delay and likely compromise of confidential sources would prejudice the investigation. The memorandum pointed out that the taxpayer had not pled a specific reason why the summonses should not be enforced. However, the government assumed in its memorandum that the discovery was aimed at evidence that the summonses were issued solely to obtain evidence for a criminal prosecution as alleged in the taxpayer's "Notice of Protest".

began a massive discovery effort, including notices to depose three IRS agents and notices to produce at the deposition hearings every IRS document or paper that might be remotely related to the tax liability of Harris or his corporations. Five days later Harris filed answers to the government petitions. Each answer admitted every allegation in the petition to enforce the summonses, but stated that the taxpayer had protested the production of the records and denied that the records were subject to a § 7602 summons. Record vol. 1 at 39-40.

The government's petition was heard on August 23, 1977. At the beginning of the hearing the taxpayer's counsel requested the court to "formally rule on the government's motion for protection that was heard yesterday in chambers." Tr. at 4. The court granted the motion. The government introduced testimony that the investigation was still in the fact finding stages; that no referral had been made to the Department of Justice recommending criminal prosecution; ³ and that the requirements established in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), were satisfied. ⁴

During the course of the hearing four IRS special agents were examined in depth by counsel for both sides, as indicated by the 127 page transcript of the hearing. A major portion of the taxpayer's inquiry concerned the government's purpose in issuing the summonses. Harris claims that the district judge denied his right to an adversary hearing ⁵ by sustaining government objections to seventeen questions. After examination of all witnesses Harris moved to continue the hearing so that he could have discovery on the sole criminal purpose issue. The motion was denied and the court entered an order enforcing the summonses.

BACKGROUND

The IRS is duty bound to inquire after persons who may be liable for the payment of taxes. I.R.C. § 7601; Donaldson v. United States, supra, 400 U.S. at 523, 91 S.Ct. at 539, 27 L.Ed.2d at 585. Section 7602 of the Internal Revenue Code gives the IRS broad investigatory authority to examine relevant materials and to summon persons to appear for the purpose of producing relevant records or giving testimony under oath. Although a § 7602 summons need not be supported by probable cause, the summons must be issued in good faith, for a purpose authorized by the statute and before the case is referred to the Department of Justice with a recommendation for criminal prosecution. See notes 3 and 4, supra. A taxpayer who receives a summons is required to attend but may refuse in good faith, if he intends to challenge the summons for lack of good faith on the part of the IRS. See United States v. Roundtree, 420 F.2d 845 (5th Cir. 1970). The IRS does not have direct authority to enforce a challenged summons; that authority is vested in the district courts. I.R.C. §§ 7402(b), 7604(a).

Before the district court may enforce a § 7602 summons the taxpayer is generally entitled to an adversary hearing (summons enforcement hearing) where "he 'may challenge the summons on any appropriate ground' . . . ." United States v. Powell, supra, 379 U.S. at 58, 85 S.Ct. at 255, 13 L.Ed.2d at 119, quoting Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459, 466 (1964). An appropriate ground for challenge is that the summons was issued in bad faith. A summons is issued in bad faith if it is issued for an improper purpose such as to harass the taxpayer, to force the taxpayer to settle a collateral suit or for the sole purpose of gathering evidence for a criminal prosecution. United States v. Powell, supra, 379 U.S. at 58, 85 S.Ct. at 255, 13 L.Ed.2d at 120; United States v. LaSalle, supra, 437 U.S. at 314, 98 S.Ct. at 2368, 57 L.Ed.2d at 234.

A taxpayer's right to an adversary hearing on the good faith issue is not absolute. In United States v. Roundtree, supra, we held that when a § 7602 summons issues "the taxpayer is entitled to investigate the IRS's purpose where such purpose has been put in issue and may affect the legality of the summons." Id. at 852 (emphasis added). This court expanded upon the acceptable method for placing in issue the purpose behind the summons in United States v. Newman, 441 F.2d 165 (5th Cir. 1971). Newman held that before a taxpayer is entitled to the adversary summons enforcement hearing, he "must raise in a substantial way the existence of substantial deficiencies in the summons proceedings." Id. at 169 (footnote omitted). Newman did not decide whether the mere allegation that the summons was issued solely for criminal prosecution is sufficient to justify a district court allowing the deposition of the IRS agent (and the attendant adversary hearing). That issue was directly addressed by the court in United States v. Wright Motor Co., Inc., 536 F.2d 1090 (5th Cir. 1976), rehearing denied, 542 F.2d 576. There we approved a district court order requiring the agent to answer questions at a deposition even though the taxpayer had simply alleged, without alleging a factual background or providing a supporting affidavit, that the summons was issued solely to gather evidence for a criminal prosecution. Wright reviewed the Roundtree decision:

We understand Roundtree, supra, 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.

Wright, supra, 536 F.2d at 1094.

In the instant case the taxpayer's responsive pleading merely admitted all the allegations in the government's petition and stated that the taxpayer had previously protested the summons and that the taxpayer denied the records were subject to the summons. Record vol. 1 at 39-40.

Only in the notice of protest did the taxpayer allege that the sole purpose of the summons was in aid of criminal prosecution. The protest was not before the district judge until sometime after the court, at taxpayer's explicit request for a ruling granted the government's motion for a protective order denying discovery. Under these circumstances the district judge would have properly exercised his discretion under Roundtree, Newman, and Wright by denying the adversary hearing and deciding the summons enforcement issue on the pleadings. However, the judge also was within his discretion when he decided to proceed...