U.S. v. Michaud

• Decision Date: 24 July 1990
• Docket Number: Nos. 89-1684,89-1986,s. 89-1684
• Citation: 907 F.2d 750
• Parties: -5442, 59 USLW 2097, 90-2 USTC P 50,425 UNITED STATES of America and James A. Hill, Special Agent, Internal Revenue Service, Petitioners-Appellants, v. James E. MICHAUD and Mary L. Michaud, Respondents-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 750

907 F.2d 750

66 A.F.T.R.2d 90-5442, 59 USLW 2097, 90-2

USTC P 50,425

UNITED STATES of America and James A. Hill, Special Agent Internal Revenue Service, Petitioners-Appellants, v. James E. MICHAUD and Mary L. Michaud, Respondents-Appellees.

Nos. 89-1684, 89-1986.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 30, 1989.

Reargued En Banc May 30, 1990.

Decided July 24, 1990.

Gary R. Allen, Charles E. Brookhart, Michael Roach, William A. Whitledge, James A. Bruton, Shirley D. Peterson, Mary E. Bielefeld, U.S. Department of Justice, Tax Div., Appellate Section, Washington, D.C., for petitioners-appellants.

F. Patrick Matthews, Weiss, Berzowski, Brady & Donahue, Milwaukee, Wis., for respondents-appellees.

Before BAUER, Chief Judge, CUMMINGS, WOOD, Jr., CUDAHY, POSNER, COFFEY, FLAUM, EASTERBROOK, RIPPLE, MANION and KANNE, Circuit Judges.

BAUER, Chief Judge, joined by CUMMINGS, HARLINGTON WOOD, Jr., CUDAHY, COFFEY, FLAUM and KANNE, Circuit Judges.

In this case we reconsider United States v. Michaud, Nos. 89-1684 & 89-1986, 1990 WL 25073 (7th Cir. March 8, 1990) (attached as an appendix to the dissent hereto) ("Michaud I "), in which a panel of this court reversed an order by District Judge Terence T. Evans. Judge Evans quashed several summonses issued by the Internal Revenue Service ("the Service") which directed the Michauds to submit to fingerprinting and to provide handwriting exemplars. The Service claimed (and still claims) that this information is relevant to its civil investigation into the employment and unemployment tax liabilities of Superior Engineering, Inc., a Green Bay corporation of which the Michauds were shareholders and officers. In the order at issue here, Judge Evans appeared to reject this claim and denied enforcement based in some part on that reason. The panel in Michaud I found reversible error in that decision, holding that Judge Evans had no basis for quashing the summonses. Because Judge Evans' order is ambiguous on several potentially dispositive points, we depart from the tack taken by the panel and remand to Judge Evans for additional findings.

At the heart of this controversy lie important questions of when and how the Service can, in the course of a civil investigation, bring to bear against a taxpayer the full weight of federal enforcement mechanisms. Primary responsibility over these questions has been entrusted to the federal district courts, which have the power and duty to monitor these investigations through the enforcement (and non-enforcement) of the Service's demands on taxpayers. 26 U.S.C. Secs. 7402, 7604 & 7605. See also United States v. Bisceglia, 420 U.S. 141, 146-47, 95 S.Ct. 915, 918-19, 43 L.Ed.2d 88 (1974) and the cases cited there. "Congress has provided protection from arbitrary or capricious action by placing the federal courts between the Government and the person summoned." Id. at 151, 95 S.Ct. at 921.

The above-cited sections of the Internal Revenue Code give district courts the authority to "render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws," Sec. 7402(a), and to "make such order[s] as [they] deem proper, not inconsistent with the law for the punishment of contempts, to enforce obedience to the requirements of the [Service's] summons...." Sec. 7604(b). ¹ Under this authority, district courts deny enforcement of the Service's demands when they find that the Service is acting in bad faith or attempting to abuse the court's process. "Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or put pressure on him to settle a collateral dispute, or for any purpose reflecting on the good faith of the particular investigation." United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964).

Along with this power and duty to check for abuse, district courts hold the Service to the burden of making a prima facie showing of "good faith." As established in Powell, the prima facie case must include the following elements:

[The Service] 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 [Service's] possession, and that the administrative steps required by the Code have been followed....

379 U.S. at 57-58, 85 S.Ct. at 255. Thus, a district court can deny the Service's demands on a taxpayer if it finds that the Service has fallen short of establishing these four elements, or if the taxpayer otherwise establishes that the Service's request is in bad faith. Cf. United States v. White, 853 F.2d 107 (2nd Cir.1988); United States v. Texas Heart Institute, 755 F.2d 469 (5th Cir.1985); United States v. John G. Mutschler & Assoc., Inc., 734 F.2d 363, 367 (8th Cir.1984).

Beyond this "good faith" requirement, the Code has long prohibited enforcement of a Service summons after the matter has been referred to the Justice Department for criminal prosecution. See 26 U.S.C. Sec. 7602(c) and its predecessors. See also Donaldson v. United States, 400 U.S. 517, 532-36, 91 S.Ct. 534, 543-45, 27 L.Ed.2d 580 (1971). The Supreme Court, in United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), read Sec. 7602 to include a prohibition against the Service's use of an administrative summonses solely for criminal investigatory purposes. In LaSalle, the Court reviewed a decision of this court in which we held that enforcement can also be denied in certain cases short of a formal referral to the Justice Department: "[T]he use of an administrative summons solely for criminal purposes is a quintessential example of bad faith." United States v. LaSalle National Bank, 554 F.2d 302, 309 (7th Cir.1977). The Supreme Court agreed that enforcement can and should be denied when the Service is attempting to exploit its civil investigatory powers as a de facto grand jury: "We shall not countenance delay in submitting a recommendation to the Justice Department when there is an institutional commitment to make the referral and the Service merely would like to gather additional evidence for the prosecution." LaSalle, 437 U.S. at 316-17, 98 S.Ct. at 2367-68. (The Court reversed our decision on the outcome, however, because it found insufficient evidence of such an institutional commitment. Id., at 318-19, 98 S.Ct. at 2368.) Thus, under Sec. 7602 and LaSalle, a summons issued by the Service after it has referred the matter to the Justice Department, or after it, in an institutional sense, has abandoned any proper civil purpose, should not be enforced. ² In this case, it is impossible to tell from Judge Evans' order whether and to what extent his decision to quash the summonses rested on any one of (or perhaps all of) these grounds. The operative passage from his brief order merits quotation in full. Judge Evans begins with a discussion of an omission made by the Service's case agent in his affidavit to the court. Judge Evans indicates that this omission (failing to mention that the Michauds did appear at the requested location and partially comply with the Service's demands) led him to an "improper conclusion" regarding the nature of the Michauds' actions, but he continues:

Although I believe the failure to provide me with the full story of what occurred ... in and of itself justifies denying enforcement to the summonses, a more fundamental reason for denying enforcement exists. The purpose of the investigation by the [Service] is "to investigate the federal employment and unemployment tax liabilities of Superior Engineering ... for the taxable years 1983 through 1986" [quoting government submissions]. I do not think the handwriting or the fingerprints of the Michauds are necessary to establish the tax liabilities of Superior Engineering. Furthermore, requiring them to appear at a police station to be fingerprinted appears to be a little heavy-handed and perhaps violative of 26 U.S.C. Sec. 7605(b)....

Also, it should be noted that assessments have been issued against Superior Engineering alleging that its taxes were not properly stated and that the correct amount (higher, of course) has been determined by the [Service]. Implicit in this action is the assumption that the [Service] knows the tax liabilities of Superior Engineering. Therefore, the reason, if there ever was a good one, for wanting the Michauds' handwriting and fingerprints seems to have evaporated. And lastly, it appears that the aroma of a criminal proceeding is emanating from this investigation, and the government should not be allowed to use these civil proceedings to arm itself for that fight should it eventually occur.

Unfortunately, this passage raises at least as many questions as it answers. First, does the court's decision actually rely on the omission in the agent's affidavit, and/or the "heavy-handedness" of requiring the Michauds to appear at a police station to be fingerprinted? As the panel in Michaud I noted, infra (appendix) at 758-759, these factors, at least as they are currently developed in the record, do not qualify as the kind of "abuse of process" or harassment that trigger the court's power under either Powell or Sec. 7604(b), nor do they appear to make the Service's demand "unnecessary" as described in Sec. 7605(b). The misleading statement was found by Judge Evans to be unintentional, and merely choosing a police station for the fingerprinting, assuming it was reasonably convenient and was not chosen for some improper purpose, does not appear to constitute harassment. Because the record is inadequate to confirm or deny such dispositive assumptions, however, this issue must be remanded to Judge Evans, who has dealt first-hand with these parties and is in a much better position to assess their conduct, before it can be resolved by this court.

Second, how are we to interpret...