U.S. v. Southeast First Nat. Bank of Miami Springs, 80-5024

• Decision Date: 11 September 1981
• Docket Number: No. 80-5024,80-5024
• Citation: 655 F.2d 661
• Parties: 81-2 USTC P 9666 UNITED STATES of America and Richard M. Kapouch, Special Agent of the Internal Revenue Service, Plaintiffs-Appellees, v. SOUTHEAST FIRST NATIONAL BANK OF MIAMI SPRINGS, Defendant, Clarence H. O'Donnell, Intervenor-Appellant. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 661

655 F.2d 661

81-2 USTC P 9666

UNITED STATES of America and Richard M. Kapouch, Special Agent of the Internal Revenue Service, Plaintiffs-Appellees, v. SOUTHEAST FIRST NATIONAL BANK OF MIAMI SPRINGS, Defendant Clarence H. O'Donnell, Intervenor-Appellant.

No. 80-5024.

United States Court of Appeals, Fifth Circuit.

Unit B

Sept. 11, 1981.

Michael G. Parham, East Point, Ga., for intervenor-appellant.

Charles E. Brookhart, Murray S. Horwitz, Attys., Tax Div., Dept. of Justice, Washington, D. C., M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Chief, Appellate Sect., Richard D. Buik, Atty., Tax Div., Dept. of Justice, Washington, D. C., for plaintiffs-appellees.

Jose I. Astigarraga, Miami, Fla., for other interested parties.

Appeal from the United States District Court for the Southern District of Florida.

Before MORGAN, RONEY and KRAVITCH, Circuit Judges.

LEWIS R. MORGAN, Circuit Judge:

This is an appeal by the taxpayer from a district court order enforcing a summons issued by the Internal Revenue Service to taxpayer's bank. The principal issue for review is whether the district court erred in denying taxpayer's request for an adversary hearing on the question of whether the IRS issued the summons for an improper purpose. We agree that the taxpayer was entitled to a hearing, and therefore we reverse the district court and remand for further proceedings.

I.

On June 21, 1979, IRS Special Agent Richard M. Kapouch issued a summons under the authority of 26 U.S.C. § 7602 to the First National Bank of Miami Springs ordering the bank to appear and produce records relating to the accounts maintained at the bank by the taxpayer and his wife. Following notice by the IRS of the issuance of the summons, 26 U.S.C. § 7609, the taxpayer instructed the bank not to produce the summoned documents, and the bank complied with this request.

On October 19, 1979, the IRS petitioned the district court to judicially enforce the third-party summons under the authority granted by 26 U.S.C. §§ 7402(b) and 7604(a). In the petition, and in the accompanying affidavit of Special Agent Kapouch, the IRS asserted that the investigation was being conducted for the purpose of ascertaining taxpayer's correct income tax liabilities, that the information sought was essential to the accomplishment of this purpose, and that the information was not already in the possession of the IRS. On October 26, 1979, the district court issued an order requiring the bank to appear on November 8, 1979, and show cause why the summons should not be enforced.

On November 5, 1979, the taxpayer filed a motion to intervene, an answer, and an affidavit. Taxpayer's answer denied the allegations in the IRS' petition and alleged, inter alia, that the IRS had acted in bad faith by issuing the summons for the sole purpose of gathering evidence for a criminal prosecution. In an affidavit and memorandum filed simultaneously with his answer, the taxpayer indicated that he wished to conduct discovery in order to substantiate his claims and requested that the scheduled hearing be continued to furnish him sufficient time to complete this task. Additionally, the taxpayer asserted that the court lacked jurisdiction to enforce the summons because it failed to observe the time requirements of Rule 12 of the Federal Rules of Civil Procedure.

There is no transcript of the hearing held on November 8. The taxpayer stated in his brief and the IRS did not disagree that at the hearing the court permitted the taxpayer to intervene in the proceedings but informed the parties that, because of time constraints, the hearing would have to be postponed to another day. The court directed the taxpayer to submit a letter setting forth a brief summary of his position and an estimate of the amount of time needed to present his argument. The court stated that, upon its review of the letter, a new hearing date would be set.

In his letter to the district judge the taxpayer briefly restated the allegations he had earlier raised in the documents filed with the court. The taxpayer again argued that the court lacked jurisdiction to enforce the summons. In the "remote event" that the court failed to grant taxpayer's motion to dismiss on this ground, the taxpayer requested additional time to conduct discovery on his claim that the IRS had engaged in institutional bad faith in issuing the summons. The taxpayer argued that, with discovery, he would be able to establish that the IRS had "proceeded along the criminal route from the beginning." He estimated that he could present his case in one to two hours.

On December 11, 1979, the district court entered an order allowing taxpayer to intervene pursuant to 26 U.S.C. § 7609, but granting enforcement of the summons. The court dispensed with the arguments raised by the taxpayer with the single sentence that it "did not agree that the underlying claims of O'Donnell entitle him to relief." Taxpayer filed motions requesting that the court vacate its judgment, allow a rehearing so that the taxpayer could orally examine the IRS agent, and stay the execution of the judgment. The court denied these motions, and the taxpayer appealed.

II.

We will first address the taxpayer's contention that the district court lacked jurisdiction to enforce the IRS summons because it failed to provide the taxpayer with 20 days in which to answer the IRS' petition as required under Rule 12 of the Federal Rules of Civil Procedure. We see no merit to this argument.

In Donaldson v. United States, 400 U.S. 517, 528, 91 S.Ct. 534, 541, 27 L.Ed.2d 580 (1971), the Supreme Court recognized that although the civil rules "do have an application to a summons proceeding ... (they) are not inflexible in this application." The basis for the Court's conclusion was the language of Rule 81(a)(3), which provides in pertinent part:

These rules apply to proceedings to compel the giving of testimony or production of documents in accordance with a subpoena issued by an officer or agency of the United States under any statute of the United States except as otherwise provided by statute or by rules of the district court or by order of the court in the proceedings.

Fed.R.Civ.P. 81(a)(3) (emphasis added). The effect of this language is to make application of the rules of civil procedure in subpoena enforcement proceedings discretionary with the district court. Although the court may resort to the rules whenever it deems them "helpful," it need not apply the rules when to do so "may conflict with the summary determination desired." Advisory Committee Notes of 1946.

In the present case the taxpayer had 14 days from the date he was served with the show cause order until the scheduled hearing. During this interim the taxpayer filed not only an answer to the IRS' petition but an affidavit, a motion to intervene, and a memorandum of law. Furthermore, the taxpayer was given additional time to draft a letter setting forth his position. Clearly, under these circumstances the failure to provide taxpayer with 20 days to file an answer did not prevent the taxpayer from responding to IRS' petition. Because the taxpayer has failed to demonstrate any prejudice, we find that the district court acted within its discretion in modifying the time requirements of the Rule 12. See United States v. Zimmerman, 415 F.Supp. 1380 (W.D.Tex.1976).

III.

The taxpayer challenges the district court's enforcement of the IRS summons on two grounds. First, the taxpayer argues that the IRS never made a prima facie showing that it issued the summons in good-faith pursuit of a congressionally authorized purpose of § 7602, a preliminary showing required by United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). Second, the taxpayer asserts that by refusing to grant a hearing on the IRS' motive for issuing the summons, the district court deprived taxpayer of a fair opportunity to substantiate his claim that the IRS was using its subpoena power solely to gather evidence for a criminal prosecution. Although we see no merit to the argument that the IRS failed to carry its initial Powell burden, we agree that the district court erred in denying taxpayer a hearing on the question of the IRS' purpose in issuing the summons.

A.

Section 7602 of the Internal Revenue Code authorizes the IRS to summon the taxpayer or a third party to testify and to produce documents which are relevant to an inquiry concerning tax liability. Should the taxpayer refuse to produce the summoned material, the IRS must petition the district court for judicial enforcement of its summons. 26 U.S.C. §§ 7402(b), 7604(a). In its petition for enforcement the IRS need not meet any standard of probable cause but need only make a preliminary showing

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 Commissioner's possession, and that the administrative steps required by the Code have been followed ....

United States v. Powell, supra, 379 U.S. at 57-58, 85 S.Ct. at 254-255. Once the IRS meets its initial burden of showing good faith issuance of the summons, the burden shifts to the taxpayer to establish that the IRS failed to meet its Powell burden or that enforcement of the summons would constitute an abuse of the court's process. Id. at 58, 85 S.Ct. at 255.

In its petition for enforcement and in the supporting affidavit the IRS stated that it had complied with all the Powell requirements in issuing the summons. The taxpayer concedes that the IRS made these allegations but points out that in his answer he denied that any of the Powell elements had been satisfied. The taxpayer argues that at this point the IRS had to come forward with evidence to support its allegations and that, because it neglected to produce such evidence, the summons should not have been enforced. This argument misperceives the burden of proof...