U.S. v. MacKay

• Decision Date: 30 October 1979
• Docket Number: No. 79-1243,79-1243
• Citation: 608 F.2d 830
• Parties: 79-2 USTC P 9679 UNITED STATES of America and Larry D. Thompson, Special Agent of the Internal Revenue Service, Petitioners, v. Marshall MacKAY, Assistant Vice President, First National Bank of Gillette, Respondent, v. Jimmie D. and Cheryl RODGERS, Intervenors-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 830

608 F.2d 830

79-2 USTC P 9679

UNITED STATES of America and Larry D. Thompson, Special

Agent of the Internal Revenue Service, Petitioners, v. Marshall MacKAY, Assistant Vice President, First National

Bank of Gillette, Respondent, v. Jimmie D. and Cheryl RODGERS, Intervenors-Appellants.

No. 79-1243.

United States Court of Appeals, Tenth Circuit.

Submitted Sept. 20, 1979.

Decided Oct. 30, 1979.

M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Charles E. Brookhart and Aaron Philip Rosenfeld, Tax Div., Dept. of Justice, Washington, D. C., for petitioners; Charles E. Graves, U. S. Atty., and Lawrence A. Bobbitt, III, Asst. U. S. Atty., Cheyenne, Wyo., of counsel.

Joseph H. Thibodeau, Denver, Colo., for intervenors-appellants.

Before McWILLIAMS, BARRETT and DOYLE, Circuit Judges.

WILLIAM E. DOYLE, Circuit Judge.

The respondent, Marshall MacKay, is assistant vice president of the First National Bank of Gillette, Wyoming. As such, he was served with a summons issued by the Internal Revenue Service pursuant to § 7602 of the Internal Revenue Code. This summons directed MacKay to produce all of the bank records of Jimmie D. and Cheryl Rodgers for 1975, 1976 and 1977, whose tax liability for those years was under investigation. Larry D. Thompson, a special agent for the IRS who served the summons, notified the taxpayers that the summons had been issued. The Rodgers instructed the bank not to comply with the summons. After that, the IRS brought this action seeking to enforce the summons under I.R.C. §§ 7402(b) and 7604(a). The Rodgers, whose interests were primarily involved, intervened in the enforcement proceedings.

The district court found that the IRS had not commenced or recommended the commencement of a criminal prosecution; that the IRS had not exceeded the scope of its summons authority; and found, in addition, that the witnesses requested to be called by the Rodgers' counsel had not been summoned and that it was doubtful that their testimony would have been materially relevant. The trial court's order requiring enforcement was entered on February 6, 1979. Thereafter, this court denied the motion of the taxpayers for stay of the district court's order.

ISSUES

The cause is before us for consideration of validity of the summons. The central issue is whether the IRS has in this case abused its civil summons power granted to it under I.R.C. § 7602 in that it is being used, according to the Rodgers' contention, to pursue an investigation which is strictly criminal. The other issues are less central than the one mentioned and include whether the IRS failed to comply with required administrative procedures such as the notice provision of I.R.C. § 7605(b) plus a procedure specified in the Internal Revenue Manual. There is a further general argument that the summons is overbroad, is burdensome and harassing, and that it is essentially a fishing expedition. The argument is made also that it is an improper extension of a criminal investigation. This, however, is a duplication of the first issue which is cited above. Other than what we have already mentioned, there are certain alleged errors which might be classified as trial or hearing errors such as the judge's refusal to allow certain witnesses to be called, contentions that the judge was prejudiced, and that the court's order is defective in that there are mistakes in citations and a failure to utilize findings as required by United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964).

For the first time appellants raise in their reply brief two issues: first, by analogy from Title II of the Civil Rights Act of 1964, 42 U.S.C. § 2000a et seq. (1976), they

argue that the burden of proof should be on the government to disprove a criminal purpose. Finally, another reply brief contention is that the documents are protected from disclosure by Title XI of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, Pub.L. No. 95-630, 92 Stat. 3697 (12 U.S.C.A. §§ 3401-3422 (Supp.1979)).

SUMMARY OF THE FACTS

This investigation was instituted in April 1978, following receipt of information from the Campbell County, Wyoming Sheriff's Office and the FBI that the taxpayers were allegedly receiving and selling stolen oil and that there was a possibility of unreported income in these activities. The criminal investigation was initiated by the Criminal Investigation Division, which then notified the Audit Division that the investigation would, from that point on, be conducted jointly with it.

Dwight J. Sparlin, who was assigned to the case, testified that he had examined the Rodgers' tax returns and their county land records, had computed net worth and had determined that there was a possibility of unreported income. Following this, in August 1978, the case was transferred to another agent, Larry D. Thompson, who testified that at the time that he commenced the investigation he had little information which would indicate that the tax returns were incorrect.

The testimony was that Thompson and the others sought to ascertain the correctness of the tax returns of appellants. At the time the summons was issued the investigation was at a preliminary stage, and the purpose of the investigation was to ascertain the correctness of the tax returns for the years 1975, 1976 and 1977, and to determine whether there were any returns due but unfiled. Thompson and a revenue agent interviewed Rodgers in the presence of his attorney and his accountant in 1978 and sought to examine the taxpayers' books and records. It was only after his having been denied access to the records that Thompson went about issuing the summons.

I.R.C. § 7602 is relatively broad. It authorizes the summoning of taxpayer's books and records to ascertain the correctness of any return, making a return (where none has been made), determining the liability of any person for any internal revenue tax, or collecting any such liability. It does not require the existence of probable cause that the law has been violated. Rather, it has been compared to the power and authority of the grand jury. See United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964).

The Supreme Court in Powell refused to read § 7605 in such a way as to impose a probable cause standard upon the Commissioner from the expiration date of the ordinary limitations period forward. The Court said that the agents under the statute were required to exercise prudent judgment in wielding the extensive power granted to them under the I.R.C. The Supreme Court concluded by saying that the Commissioner need merely show that the investigation be conducted pursuant to a legitimate purpose; that the inquiry may be relevant to the purpose; that the information sought is not within the Commissioner's possession; and that administrative steps required by the code have been followed. The Court said that as to the hearing provided it was not meaningless since the taxpayer at the hearing could challenge the summons on any appropriate ground. Also, the Court was free to inquire into the underlying reasons for the examination. The Court added that the burden of showing abuse of the court's process was on the taxpayer; that this was not satisfied by a mere showing that the statute of limitations relating to ordinary deficiencies had run or that the records had been once examined.

A more pointed and relevant decision of the Supreme Court is United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978). Here the Supreme Court reviewed the scope of the IRS' authority under § 7602 and recognized that the civil aspects of tax investigations are necessarily intertwined in the criminal system. See 437 U.S. at 309, 98 S.Ct. 2357. The essence of the decision was that if the inquiry is solely to satisfy the criminal requirement, it can then be considered illegal. In judging this, it must appear that the summons has issued before there has been a recommendation by the IRS to the Justice Department for a criminal prosecution. Id. at 311, 318, 98 S.Ct. 2357. Prior to the recommendation of the Justice Department it must appear that the summons authority is exercised in good faith and in accordance with United States v. Powell, 379 U.S. at 57-58, 85 S.Ct. 248, which requires that the investigation have a legitimate purpose; that the inquiry is relevant to the purpose; that the information sought is not possessed by the Service. It must also have been in accordance with the administrative steps required by the code.

The LaSalle decision added a requirement that the civil aspect of the investigation was not to have been abandoned. See 437 U.S. at 318, 98 S.Ct. 2357. Also, the taxpayer has the burden of proving that the IRS is acting in bad faith. Id. at 316, 98 S.Ct. 2357.

Counsel...