U.S. v. Lask, 82-1526

• Decision Date: 30 March 1983
• Docket Number: No. 82-1526,82-1526
• Citation: 703 F.2d 293
• Parties: 83-1 USTC P 9271 UNITED STATES of America, and Mark W. Lawler, Special Agent of the Internal Revenue Service, Appellees, v. James E. LASK and Ruth L. Lask, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 293

703 F.2d 293

83-1 USTC P 9271

UNITED STATES of America, and Mark W. Lawler, Special Agent

of the Internal Revenue Service, Appellees, v. James E. LASK and Ruth L. Lask, Appellants.

No. 82-1526.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 12, 1982.

Decided March 30, 1983.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Charles E. Brookhart, William P. Wang, Attys., Tax Div., Dept. of Justice, Washington, D.C., for appellees; Thomas E. Dittmeier, U.S. Atty., St. Louis, Mo., of counsel.

Lashly, Caruthers, Baer & Hamel, P.C., Michael G. Goldstein, James J. Hennelly, Alan D. Pratzel, St. Louis, Mo., for appellants.

Before LAY, Chief Judge, and McMILLIAN and JOHN R. GIBSON, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

Taxpayers James E. Lask and Ruth L. Lask appeal from the district court ^* order directing enforcement of Internal Revenue Service summonses issued to various third-party recordkeepers. Taxpayers contend (1) that the IRS acted in bad faith in carrying out the investigation, (2) that a portion of the time period covered by the IRS summonses is barred by the statute of limitations contained in 26 U.S.C. Sec. 6501(a) (1976), and (3) that the district court erred in denying taxpayers' discovery requests and in quashing their trial subpoenas duces tecum. We affirm.

In July 1980, Revenue Agent John Barrett, acting on information given to the IRS by an unidentified informant, began an investigation into the federal tax liability of taxpayers for 1978 and 1979. Using information which the taxpayers provided, Barrett found significant discrepancies between the amount of tax liability he calculated for 1978 and 1979 and the amount of tax liability taxpayers reported for those two years. Barrett provided taxpayers' tax representative, Albert Grabel, with copies of his work papers and attached a memorandum requesting comments and an explanation for the discrepancies.

Barrett held a series of discussions with his Group Manager and in February 1981 referred the case to the Criminal Investigation Division of the IRS. In early 1981, Special Agent Mark Lawler, who had been assigned to the investigation, issued a summons to the taxpayers requesting production of various records and documents in their possession. Taxpayers complied with this summons and brought in the requested records. Based on its examination of these records, the IRS decided to expand its investigation to include taxpayers' 1977 tax returns.

Between May 21, 1981 and June 23, 1981, Special Agent Lawler issued an IRS summons, pursuant to 26 U.S.C. Sec. 7602 (1976), to eight third-party recordkeepers ¹ seeking various records and documents in their possession relating to taxpayers' financial activities. Taxpayers directed these recordkeepers not to comply with the summonses.

On January 26, 1982, the Government filed petitions with the district court for enforcement of these eight summonses. Taxpayers moved to intervene pursuant to 26 U.S.C. Sec. 7609(b)(1) (1976), and filed answers to the Government's petitions. Taxpayers also filed a deposition notice and a Rule 34 Request for Production of Documents, and, in preparation for the show cause hearing, served subpoenas duces tecum upon several IRS employees who participated in the investigation.

The district court consolidated the eight summons enforcement proceedings, and on April 30, 1982, ordered that the IRS summonses be enforced. The court quashed taxpayers' deposition notice and subpoenas duces tecum and issued a protective order covering the Rule 34 document request. This appeal followed.

I. The Good Faith Requirements of United States v. Powell

Section 7602 of the Internal Revenue Code, 26 U.S.C. Sec. 7602 (1976), provides that the IRS, through the use of an administrative summons, may examine any books, papers, records, or persons in determining the tax liability of any person or ascertaining the correctness of any return. ² The IRS, however, has no power of its own to enforce the summons but must apply to the district court in order to compel production of the requested materials. See 26 U.S.C. Secs. 7402(b), 7604(a) (1976). To obtain enforcement of a section 7602 summons, the IRS must fulfill certain requirements. First, the summons must be issued before the IRS recommends to the United States Department of Justice that a criminal prosecution be undertaken. United States v. LaSalle National Bank, 437 U.S. 298, 318, 98 S.Ct. 2357, 2368, 57 L.Ed.2d 221 (1978). Second, the IRS must show that it has satisfied certain standards of good faith developed by the Supreme Court in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). These standards are fourfold: (1) the investigation is being conducted pursuant to a legitimate purpose; (2) the inquiry is relevant to that purpose; (3) the IRS does not already possess the information sought; and (4) the administrative steps required by the Internal Revenue Code have been followed. Id. at 57-58, 85 S.Ct. at 254. Once the IRS establishes a prima facie case, the burden shifts to the summonee to disprove one of these elements or to demonstrate that judicial enforcement of the summons would otherwise constitute an abuse of the court's process; that burden is a heavy one. See United States v. LaSalle National Bank, 437 U.S. at 316, 98 S.Ct. at 2367; United States v. Barter Systems, Inc., 694 F.2d 163, 167 (8th Cir.1982); United States v. First National Bank of Mitchell, 691 F.2d 386, 388 (8th Cir.1982) (per curiam).

In the present case, the record establishes that the IRS made a prima facie case for enforcement of these summonses. Appellants nonetheless contend that the IRS acted in bad faith by violating various provisions of the Internal Revenue Code and of the IRS' Internal Revenue Manual.

Taxpayers' first argument is that the current summons enforcement proceedings are part of a "second inspection" in violation of 26 U.S.C. Sec. 7605(b) (1976). Section 7605(b) provides that "only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary." The short answer to taxpayers' argument is that the quoted portion of section 7605(b) has no application to third-party records. Although the records being sought by the IRS may document taxpayers' financial activities during 1977-79, they do not belong to the taxpayers, but to the respective third-party recordkeepers. Thus, we do not consider such third-party records as falling within the statutory phrase, "a taxpayer's books of account." See United States v. MacKay, 608 F.2d 830, 834 (10th Cir.1979); United States v. Chemical Bank, 593 F.2d 451, 458 (2d Cir.1979); De Masters v. Arend, 313 F.2d 79, 85-86 & n. 12 (9th Cir.), cert. dismissed, 375 U.S. 936, 84 S.Ct. 341, 11 L.Ed.2d 269 (1963). Accordingly, taxpayers' contention that they have received no written notice that an "additional inspection is necessary" must be rejected. ³

Taxpayers' second argument is that the IRS had abandoned all civil collection purposes at the time of the issuance of the summonses and that the summonses were therefore issued as part of a purely criminal investigation. If this were the case, the summonses would have been issued for an improper purpose and thus in bad faith. See United States v. LaSalle National Bank, 437 U.S. at 316-18 & n. 18, 98 S.Ct. at 2367 & n. 18. Taxpayers concede they have no direct evidence of abandonment but rely instead on circumstantial evidence which they argue is sufficient to satisfy their admittedly heavy burden of proof. ⁴

Taxpayers point to Revenue Agent Barrett's work papers for 1978 and 1979, and argue that because "[n]othing in his work papers indicate [sic] that Barrett considered his calculations of civil liability to be estimates or that they were subject to adjustment upon subsequent examination by a CID Special Agent," no valid civil tax determination or collection purpose existed after Barrett completed his examination in December 1980.

In effect, taxpayers would have us ignore the testimony of Special Agent Lawler and Revenue Agent Barrett that the IRS is presently engaged in a joint civil/criminal investigation, and that the summonses in question were issued pursuant to this joint investigation. Additional testimony shows that the provision of work papers "could be on-going through the audit" and thus would not necessarily be the final step of an investigation. It is evident that the work papers here were given to taxpayers' representative in order for him to explain the discrepancies between the amount of tax the revenue agent determined taxpayers owed and the amount of tax actually reported. As clearly noted in a memorandum attached to Barrett's work papers, the calculations included therein were "tentative" and "subject to decrease by a satisfactory explanation" of various items and amounts. Although the record shows that Barrett had discussions with taxpayers' representative, it does not appear that taxpayers have ever provided the IRS with a satisfactory explanation. Nor is there any evidence to suggest that the IRS has made any civil assessment against taxpayers based on the calculations the revenue agent derived from his initial examination. Thus, we cannot construe the revenue agent's provision of work papers to taxpayers' representative as demonstrating a completion of the IRS' civil investigation.

Taxpayers emphasize two other circumstantial factors to show the abandonment of a civil purpose: the IRS' use of an informant, and the special agent's substantial role in this investigation. Neither of these requires detailed discussion. As for the first factor, the use of an informant, we do not view the source of the IRS' information to be of any consequence here. See United States v. LaSalle National Bank, 437 U.S. at 300, 318, ...