U.S. v. Jose, 93-17028

• Decision Date: 19 December 1997
• Docket Number: No. 93-17028,93-17028
• Citation: 131 F.3d 1325
• Parties: -8384, 98-1 USTC P 50,119, 97 Cal. Daily Op. Serv. 9483, 97 Daily Journal D.A.R. 15,299 UNITED STATES of America; Leslie M. Nishimura, Revenue Agent of the Internal Revenue Service, Plaintiffs-Appellants, v. Laddie F. JOSE, Trustee of Jose Business Trust and Jose Family Trust, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1325

131 F.3d 1325

80 A.F.T.R.2d 97-8384, 98-1 USTC P 50,119,

97 Cal. Daily Op. Serv. 9483,

97 Daily Journal D.A.R. 15,299

UNITED STATES of America; Leslie M. Nishimura, Revenue Agent of the Internal Revenue Service, Plaintiffs-Appellants, v. Laddie F. JOSE, Trustee of Jose Business Trust and Jose Family Trust, Defendant-Appellee.

No. 93-17028.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 26, 1997.

Decided Dec. 19, 1997.

Gary R. Allen and Charles E. Brookhart, United States Department of Justice, Washington, DC, for plaintiffs-appellants.

Benjamin B. Cassiday, III, Honolulu, Hawaii, for defendant-appellee.

Appeal from the United States District Court for the District of Hawaii; David A. Ezra, District Judge, Presiding. D.C. No. MISC 92-00169-DAE.

Before: FLETCHER, PREGERSON, REINHARDT, HALL, BRUNETTI, KOZINSKI, TROTT, FERNANDEZ, RYMER, HAWKINS and THOMAS, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

The Internal Revenue Service (IRS) appeals from the district court's order conditionally enforcing two IRS summonses served on Laddie F. Jose (Respondent) as trustee of the Jose Business Trust and Jose Family Trust. The condition requires the IRS Examination Division to give Respondent five days notice prior to transferring the summoned documents to any other division within the IRS, including the Criminal Investigation Division. This court initially dismissed the appeal as not yet ripe. The Supreme Court reversed and remanded for this court to consider the merits. We decided sua sponte to consider the merits of this case en banc. We have jurisdiction pursuant to 21 U.S.C. § 1291 and we reverse.

I.

This case arose when Leslie M. Nishimura (Nishimura), Revenue Agent of the IRS, commenced a civil tax investigation of the Jose Business Trust and Jose Family Trust for the tax years 1990 and 1991. In furtherance of the investigation, Nishimura sought to review certain trust documents in the possession of the Respondent. Respondent submitted these documents to Nishimura but restricted him from photocopying or disclosing their contents to anyone else without his permission. Nishimura initially agreed to these restrictions but then returned the documents finding it impossible to complete the investigation under such restrictions.

Following the return of the documents to Respondent, IRS Revenue Officer Alan Ochiae served Respondent with two IRS summonses for testimony and the production of documents. When Respondent refused to comply, the IRS brought a summons enforcement action. At the enforcement hearing, the IRS represented to the magistrate judge that they sought the documents for the sole purpose of a civil investigation and established the four Powell criteria required to enforce a summons: (1) a legitimate purpose for the investigation; (2) an inquiry relevant to the purpose; (3) that the information sought was not already in the possession of the IRS; and (4) that the IRS had complied with the administrative steps required by the code. Respondent did not dispute the validity of the summonses for a civil tax investigation. However, Respondent did voice an unsubstantiated concern that these documents were going to be handed over to the United States Attorney's Office for criminal prosecution and requested an equitable order stating that the IRS could not turn the documents over to the United States Attorney's Office without prior notification. In response, the magistrate judge issued an even broader order requiring the IRS to notify Respondent five days prior to circulating, transferring, or copying the summoned documents to any other division of the IRS, including the Criminal Investigation Division. The district court adopted the magistrate judge's recommendation to enforce the summonses along with the five day notice requirement, rejecting the IRS' contention that the district court lacked the authority to impose the condition.

On appeal to the Ninth Circuit, the IRS again asserted that the district court lacked the authority to impose this condition on the summonses. The Ninth Circuit dismissed the case as not yet ripe because no attempt had been made to transfer the summoned documents to another division. United States v. Jose, 71 F.3d 1484 (9th Cir.1995) (Silver, J. dissenting). The Supreme Court reversed and remanded for us to consider the merits of the appeal. United States v. Jose, 519 U.S. 54, 117 S.Ct. 463, 136 L.Ed.2d 364 (1996) (per curiam). Additionally, the Supreme Court pointed out that "[t]he matter ... is one that implicates an inter circuit conflict" between the Fifth Circuit, forbidding conditional enforcement by limiting the district court to enforcing or denying summonses, and the Ninth Circuit, allowing for conditional enforcement. Id. at ----, 117 S.Ct. at 465. In light of this inter circuit conflict, we decided sua sponte to consider the merits of this case en banc.

II.

The determination of whether the district court may conditionally enforce IRS summonses under the Internal Revenue Code is a question of statutory interpretation subject to de novo review. Spicer Accounting, Inc. v. United States, 918 F.2d 90, 92 (9th Cir.1990).

III.

The summons power is an investigative tool provided by Congress to enable the IRS to determine and assess all taxes due under the Internal Revenue Code. Section 7602 grants the Secretary or his delegate wide latitude to summons information necessary for investigative purposes. ¹

If the summoned party refuses to produce the requested information, the government may seek judicial enforcement of the summons under § 7604. At the enforcement hearing, the IRS "must show 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." United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964). "To establish a need for judicial enforcement, this showing need only be minimal.... [T]he statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted." Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir.1985).

The taxpayer "may challenge the summons on any appropriate grounds," including failure to satisfy the Powell requirements or abuse of the court's process. Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459 (1964). However, once the Government has established the Powell requirements, "those opposing enforcement of a summons ... bear the burden to disprove the actual existence of a valid civil tax determination or collection purpose by the Service.... Without a doubt, this burden is a heavy one." United States v. LaSalle Nat'l Bank, 437 U.S. 298, 316, 98 S.Ct. 2357, 2367, 57 L.Ed.2d 221 (1978). "The taxpayer must allege specific facts and evidence to support his allegations" of bad faith or improper purpose. Liberty, 778 F.2d at 1392.

In this case, there is no doubt that the IRS established the Powell requirements for a valid civil tax investigation. Neither party disputes this fact. The "heavy" burden was thus on the Respondent to "allege specific facts and evidence to support his allegations" that the IRS was proceeding in bad faith with the improper purpose of gathering information for criminal prosecution. It is well established that the IRS is acting in bad faith if it pursues a summons enforcement after having already decided to make a recommendation for prosecution to the United States Attorney's Office. LaSalle, 437 U.S. at 317, 98 S.Ct. at 2367; United States v. Stuart, 489 U.S. 353, 362, 109 S.Ct. 1183, 1188, 103 L.Ed.2d 388 (1989). However, Respondent made only a bald assertion that he "feel[s] that the underlying reason for this motion is criminal--a pending criminal prosecution." He provided no facts or evidence to support this allegation and thus did not come close to meeting his burden. Therefore, judicial enforcement of the summons was proper.

IV.

Because the IRS satisfied the Powell requirements and Respondent failed to meet his burden of establishing bad faith or an improper purpose, the magistrate judge appropriately recommended enforcement of the summonses. However, in response to Respondent's concerns, the magistrate judge took the enforcement proceeding one step further. He recommended, and the district court adopted, a conditional enforcement scheme requiring the IRS to notify Respondent five days prior to transferring the summoned documents to any other division within the IRS. The imposition of this condition brings us to the primary issue in this case: May the district court conditionally enforce IRS summonses, or is it limited to enforcing or denying summonses?

Previous decisions by this court have held that the district court may conditionally enforce IRS summonses:

The terms of an enforcement order rest within the discretion of the district court, and its discretion is 'considerable.' Courts routinely modify summonses to protect taxpayers' interests. This power has been construed to give a court the authority to condition enforcement of a summons on an IRS agreement to cease improper disclosures.

United States v. Author Services, 804 F.2d 1520, 1525 (9th Cir.1986) (citations omitted) (upholding a conditional summons enforcement forbidding disclosure of summoned documents to outside agencies or individuals without a court order). Author Services does not explain its rationale for upholding the district court's authority to conditionally enforce summonses. Instead, the opinion relies on two Fifth Circuit cases, Dunn v. Ross, 356 F.2d 664, 667 (5th Cir.1966), and United States v. Texas Heart Institute, 755 F.2d 469, 481 (5th Cir.1985), both of which were expressly overruled by the Fifth Circuit in United States v. Barrett, 837 F.2d 1341, 1350-51 (5th...