U.S. v. Samuels, Kramer and Co.

• Decision Date: 12 August 1983
• Docket Number: No. 82-4537,82-4537
• Citation: 712 F.2d 1342
• Parties: 83-2 USTC P 9525 UNITED STATES of America and Robert Merlo, Revenue Agent, Petitioners- Appellees, v. SAMUELS, KRAMER AND COMPANY; First Western Government Securities, Inc.; and the individuals, partnerships, joint ventures, associations, or corporations, for whom Samuels, Kramer and Company and First Western Government Securities, Inc., acting as principal, agent and/or broker purchased and/or sold any financial instruments or securities including those of or guaranteed by the United States or United States Government corporations or agencies, et al., Respondents-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1342

712 F.2d 1342

83-2 USTC P 9525

UNITED STATES of America and Robert Merlo, Revenue Agent, Petitioners- Appellees, v. SAMUELS, KRAMER AND COMPANY; First Western Government

Securities, Inc.; and the individuals, partnerships, joint

ventures, associations, or corporations, for whom Samuels,

Kramer and Company and First Western Government Securities,

Inc., acting as principal, agent and/or broker purchased

and/or sold any financial instruments or securities

including those of or guaranteed by the United States or

United States Government corporations or agencies, et al.,

Respondents-Appellants.

No. 82-4537.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 17, 1983.

Decided Aug. 12, 1983.

William A. Whitledge, Dept. of Justice, Washington, D.C., for petitioners-appellees.

Richard J. Sideman, Sideman & Bancroft, San Francisco, Cal., for respondents-appellants.

Appeal from the United States District Court for the Northern District of California.

Before HUG and FARRIS, Circuit Judges, and IRVING ^*, District Judge.

HUG, Circuit Judge:

Samuels, Kramer and Co. and First Western Government Securities, Inc., challenge an order compelling them to comply with four IRS summonses, two of which are "John Doe" summonses. They primarily contend that the district court, in ordering the enforcement of the summonses, abused its discretion by denying their motions for (1) a de novo review of factual determinations underlying another district judge's authorization of the two John Doe summonses, and (2) a limited evidentiary hearing as to whether the Government was acting in good faith in seeking enforcement of all four summonses. They also argue that the John Doe summonses, if found to have been served in good faith, may be enforced only to discover the names and addresses of unknown taxpayers, and that the IRS may thereafter obtain the records pertaining to these taxpayers only after it has complied with the notice requirements applicable to all other third-party summonses. Because we reverse the order enforcing the four summonses, we need not address this argument. We agree that the appellants may not challenge the ex parte factual determination underlying the authorization of the

two John Doe summonses, but we hold that the district court abused its discretion in denying the appellants' motion for a limited evidentiary hearing.

I BACKGROUND

The appellants are related corporations with offices in San Francisco. Sidney J. Samuels serves as president of the two corporations, both of which have been identified by the IRS as promoters of abusive tax shelters. The two corporations, which allegedly arrange "straddle" transactions through the use of contracts to both purchase and sell mortgage participation certificates, deal exclusively with each other. Neither is a registered securities dealer with any federal or state agency.

After an initial investigation of 25 of the appellants' known customers, the IRS in 1982 began to audit the appellants to determine both their tax liabilities for the years 1978 through 1981 and the correct tax liabilities of the taxpayers who had invested in their programs during those years. Samuels refused to produce the records the IRS needed to conduct the audit of the two corporations. Consequently, the IRS issued summonses to each corporation requiring them to produce the necessary records. At that time, the IRS also determined that it would be necessary to serve a John Doe summons on each corporation in order to obtain information concerning each corporation's unknown investors. Pursuant to 26 U.S.C. § 7609, the IRS filed an ex parte petition for leave to serve the John Doe summonses. Judge Thelton Henderson, having determined that the IRS had met the requirements of section 7609(f), entered an order allowing the John Doe summonses to be served.

The IRS served all four summonses on March 10, 1982. When the appellants refused to comply, the IRS petitioned the district court for enforcement of the summonses. Judge Robert Schnacke issued an order directing the appellants to show cause why the summonses should not be enforced. The appellants responded in three ways. First, they requested a de novo hearing to review Judge Henderson's authorization of the John Doe summonses. Second, they requested a "limited evidentiary hearing," hoping that prehearing discovery--if allowed as a result of the evidentiary hearing--would enable them to uncover evidence which would bolster their defenses to the enforcement of all four summonses, including their claim that the IRS was acting in bad faith in seeking enforcement. Finally, they claimed that if the court enforced the two John Doe summonses, the IRS was entitled only to learn the identities of the appellants' customers, not to obtain the records pertaining to the customers without first giving them proper notice of the summonses. Judge Schnacke rejected each of these responses and ordered that all four summonses be enforced. Six days later, the appellants filed their timely notice of appeal.

II ANALYSIS

IRS summonses are not self-enforcing, so the Government must seek enforcement from a federal district court if the person on whom a summons has been served refuses to comply. To obtain enforcement of either a direct or a John Doe summons, the Government must establish that its use of the summons is "in good-faith pursuit" of the purposes authorized by Congress. United States v. LaSalle National Bank, 437 U.S. 298, 318, 98 S.Ct. 2357, 2368, 57 L.Ed.2d 221 (1978). To establish its good faith, the Government must show "(1) that the investigation will be conducted pursuant to a legitimate purpose; (2) that the inquiry may be relevant to the purpose; (3) that the information sought is not already within the Service's possession; and (4) that the administrative steps required by the Internal Revenue Code have been followed." United States v. Church of Scientology, 520 F.2d 818, 821 (9th Cir.1975); see also United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964). A prima facie case for the Government's need for judicial enforcement is established by a "minimal" showing that the good-faith requirement has been met, United States v. Moon, 616 F.2d 1043, 1046 (8th Cir.1980), and is typically made--as it was in this case--through the introduction of the sworn declaration of the IRS agent who issued the summons, see, e.g., United States v. Kis, 658 F.2d 526, 536 (7th Cir.1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982).

Once the Government has established its prima facie case, the district court issues an order requiring the party on whom the summons has been served to show cause, at an enforcement hearing, why compliance with the summons should not be required. See id.; Church of Scientology, 520 F.2d at 820. In this case, the appellants responded by filing motions for (a) a de novo review of factual determinations underlying Judge Henderson's authorization of the two John Doe summonses, and (b) a limited evidentiary hearing as to whether the Government was, in fact, acting in good faith in seeking enforcement of all four summonses. Judge Schnacke denied both motions. Applying the abuse of discretion standard, United States v. Stuckey, 646 F.2d 1369, 1373 (9th Cir.1981), cert. denied, 455 U.S. 942, 102 S.Ct. 1436, 71 L.Ed.2d 653 (1982), we review each ruling in turn.

A

A John Doe summons is a direction to a third party--in this case, the appellants--to surrender information concerning taxpayers whose identity is unknown to the IRS. See In re Tax Liabilities of John Does, 671 F.2d 977, 978 (6th Cir.1982). The IRS may serve such a summons only if it can establish in a court proceeding (1) that the summons relates to the investigation of a particular person or an ascertainable group or class; (2) that there is a reasonable basis for believing that the person or group may fail or has failed to comply with a tax law; and (3) that the information sought, as well as the identity of the person or persons to which the information relates, is not readily available from other sources. 26 U.S.C. § 7609(f). The IRS must seek such court approval by filing an ex parte petition in federal district court. 26 U.S.C. § 7609(h)(1) and (2).

The IRS followed this procedure in seeking judicial authorization of the two John Doe summonses involved in this case. After examining the IRS's ex parte petition and supporting affidavits, Judge Henderson, satisfied that the IRS's factual assertions met section 7609(f)'s three requirements, authorized the summonses. The IRS thereafter served the summonses. When the appellants refused to comply, Judge Schnacke, having reviewed the IRS's prima facie case for enforcement, issued a show cause order. The appellants' motion for a de novo evidentiary hearing, filed in response to the order, constitutes an attempt to discover facts that they hope will undermine the statements the IRS made in the affidavits it submitted to support its ex parte petition. Judge Schnacke's denial of this motion thus raises the question whether a party, in resisting enforcement of a John Doe summons, may obtain a hearing to challenge the section 7609(f) factual determinations underlying the judicial authorization of the summons.

In analyzing this issue, it is necessary to distinguish the requirements the IRS must meet before it may serve a summons from those it must satisfy to obtain enforcement of the summons against a non-complying party. The rules regarding the service of summonses are divided into three categories. The IRS is free to serve, without prior judicial approval, a direct summons on any person if the summons is necessary to facilitate the investigation of that person's tax liability. See 26 U.S.C. § 7602. If a summons is to be served on a third-party record keeper, however, the IRS must provide notice to all third parties whose tax records will be affected by the...