U.S. v. Morgan Guar. Trust Co.

• Decision Date: 06 February 1978
• Docket Number: No. 622,D,622
• Citation: 572 F.2d 36
• Parties: 78-1 USTC P 9235 UNITED STATES of America, Petitioner-Appellee, v. MORGAN GUARANTY TRUST COMPANY, Respondent, and Roger L. Keech and Sandra J. Keech, Intervenors-Appellants. ocket 77-6191.
• Court: U.S. Court of Appeals — Second Circuit

Page 36

572 F.2d 36

78-1 USTC P 9235

UNITED STATES of America, Petitioner-Appellee, v. MORGAN GUARANTY TRUST COMPANY, Respondent, and Roger L. Keech and Sandra J. Keech, Intervenors-Appellants.

No. 622, Docket 77-6191.

United States Court of Appeals,

Second Circuit.

Argued Jan. 11, 1978.

Decided Feb. 6, 1978.

Louis Bender, New York City (Sandor Frankel and Bender & Frankel, New York City, of counsel), for intervenors-appellants.

Gaines Gwathmey, III, Asst. U. S. Atty., New York City (Robert B. Fiske, Jr., U. S. Atty., for the Southern District of New York, and William G. Ballaine, Asst. U. S. Atty., New York City, of counsel), for petitioner-appellee.

Before FRIENDLY and VAN GRAAFEILAND, Circuit Judges, and DOOLING, Senior District Judge. ^*

FRIENDLY, Circuit Judge:

The United States filed a petition in the District Court for the Southern District of New York under I.R.C. §§ 7402(b) and 7604(a), to enforce a summons issued under the authority of the Secretary of the Treasury pursuant to I.R.C. § 7602. ¹ The petition was supported by an affidavit of I.R.S. Special Agent Alexander Dombroski, who had issued the summons. The summons had directed Morgan Guaranty Trust Company

to appear before Special Agent A. Dombroski, an officer of the Internal Revenue Service, to give testimony relating to the tax liability or the collection of the tax liability of the person identified above for the periods shown and to bring with you and produce for examination the following books, records, papers and other data:

Signature card, ledger sheets, or transcripts of accounts for any and all savings, or checking accounts and Certificates of Deposits in the names of Roger L. and/or Sandra J. Keech covering the period 1972 through 1975. Also, any records, to include application and record of repayments relating to loans, mortgages and letters of credit.

Mr. and Mrs. Keech (the taxpayers) were notified of the issuance of the summons and directed the bank not to comply. Exercising the right given them by I.R.C. § 7609(b), added by the Tax Reform Act of 1976, they intervened and stayed compliance with the summons. ²

Taxpayers submitted an opposing affidavit of counsel, alleging that the summons was not issued "in good faith, in that said summons was issued solely in aid of a criminal investigation of the taxpayers." They contended that such a summons is "improper, unauthorized and unenforceable."

This claim is rested on three factual bases:

(1) The summons was issued by a Special Agent assigned to the Intelligence Division of the IRS, the function of which is the enforcement of criminal statutes relating to taxes; the Special Agent had issued eleven other summonses during the course of his investigation.

(2) The Special Agent had allegedly stated that he was conducting a "criminal investigation of Roger Keech."

(3) The summons stated that the investigation related to the four-year period 1972-75 but the taxpayers had been previously audited for 1972 and 1974 and these audits had been completed with a determination of no additional tax due.

For proof of the statement mentioned in (2), taxpayers relied on an affidavit of William G. Woolridge, a tax accountant in the employ of Chromalloy American Corporation (Chromalloy). Woolridge stated that on August 15, 1971, he had been present at the office of Arrow Group Industries, Inc. (Arrow), a Chromalloy subsidiary of which Roger Keech was president, and met with IRS agents including Special Agent Dombroski, who were conducting an audit of Arrow. As Dombroski left the Arrow premises with Arrow records he had previously requested in connection with his investigation of Keech, an unnamed Arrow employee asked whether production of the records cleared up everything as between Dombroski and Arrow. Allegedly Dombroski "responded in the affirmative and further stated, in substance, that his only remaining interest was in his criminal investigation of Roger Keech." Taxpayers asked that the Government's enforcement petition should be dismissed or, in the alternative, that an evidentiary hearing be held to determine whether the summons was issued solely in aid of a criminal investigation, with discovery to precede this.

The Government countered with a supplemental affidavit of Dombroski and an affidavit of Charles Lazarus, an IRS agent in the Audit Division, which handles civil enforcement. Dombroski stated that in February, 1977, he had been assigned to the investigation of the 1973, 1974 and 1975 returns of the taxpayers jointly with the Audit Division; that the investigation had not yet progressed sufficiently to warrant a decision whether or not to recommend criminal prosecution; and that if he determined not to recommend this, the Audit Division would decide whether there were liabilities for additional taxes and civil fraud penalties. He admitted he had told an Arrow employee, Theodore Beindorf, that he regarded Arrow as having satisfied the summons a) no determination of whether there exists unreported income attributable to the taxpayer for the years in question; b) no determination to recommend criminal prosecution of either Sandra J. Keech or Roger L. Keech and c) no determination of whether grounds exist to institute a civil action seeking to recover additional taxes and/or fraud penalties under the Internal Revenue Code.

issued to it but that his investigation of Mr. Keech was ongoing. He denied having used the word "criminal" although conceding that "in point of fact the joint investigation is criminal as well as civil in nature." With respect to the third point in counsel's affidavit, he noted that he was only investigating the Keech's 1973, 1974 and 1975 returns, ³ and that, in accordance with I.R.C. § 7605(b), the IRS had notified taxpayers that further information made it necessary to reexamine their books and records for 1974. He thus failed to understand the relevance of counsel's reference to the previous audit. Lazarus affirmed the Audit Division's participation in the joint investigation. He then stated that he was familiar with the file and that it contained

and that

The bank records sought by the IRS summons issued to respondent may be necessary to determine all these issues.

His affidavit concluded with a paragraph which we quote in the margin. ⁴

The taxpayers submitted no further affidavits. After hearing argument Judge Carter granted the Government's petition and taxpayers appealed. Meanwhile enforcement has been stayed.

DISCUSSION

The question how far a summons issued under I.R.C. § 7602 is open to attack because of its relation to a criminal prosecution has been much litigated in recent years. Since we hopefully will receive further enlightenment on the subject as a result of the grant of certiorari, 434 U.S. 996, 98 S.Ct. 632, 54 L.Ed.2d 489 (1977), to review United States v. LaSalle National Bank, 554 F.2d 302 (7 Cir. 1977), a summary of the doctrinal history will suffice.

There is nothing on the face of the statute, see note 1 supra, which prevents its utilization in aid of an investigation with a potential for criminal rather than merely civil prosecution of a taxpayer. Indeed, in its latest decision on the subject, the Supreme Court seems to us to have so declared, Donaldson v. United States, 400 U.S. 517, 535, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971). Current dubieties have their origin in a dictum in Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459 (1964), where, in upholding the denial of injunctive and declaratory relief to a taxpayer's attorneys in a suit against the Commissioner of Internal Revenue and an accounting firm with respect to reports produced by the latter at the attorneys' request for use in civil and criminal litigation against the taxpayer, the Court said:

Furthermore, we hold that in any of these procedures before either the district judge or United States Commissioner, the witness may challenge the summons on any appropriate ground. This would include, as the circuits have held, the defenses that the material is sought for the improper purpose of obtaining evidence for use in a criminal prosecution, Boren v. Tucker, 9 Cir., 239 F.2d 767, 772-773, as well as that it is protected by the attorney-client privilege, Sale v. United States, 8 Cir., 228 F.2d 682.

If Boren v. Tucker constituted the limit of what the Court had in mind, the restriction placed on I.R.C. § 7602 would not be very great. There the court of appeals, after having propounded the question whether use of the word "correctness" in § 7602 would "prevent examination (of a taxpayer's records) for purpose(s) of securing evidence for a criminal prosecution?", answered in the negative. Referring to what the court characterized as the taxpayer's "only authority on this aspect of his position," United States v. O'Connor, 118 F.Supp. 248, 250 (D.Mass.1953), the opinion correctly characterized Judge Wyzanski's opinion in that case as holding only that the predecessor to § 7602 "did not authorize an agent to issue a subpoena, merely to aid the prosecution of a pending criminal action by the Department of Justice." Boren v. Tucker, supra, 239 F.2d at 772 (emphasis in original). ⁵

The argument for a restrictive reading of § 7602 was not advanced by United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964). Although Mr. Justice Harlan declared that a court may not permit its process in enforcing a summons to be abused, his examples of "abuse" were:

Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.

Nothing was said to indicate that an intention by the Commissioner to uncover criminal tax liability would reflect "on the good faith" of the inquiry, and the rule of ejusdem generis would dictate the contrary.

This was the...