U.S. v. Stuckey

• Decision Date: 01 June 1981
• Docket Number: No. 79-4691,79-4691
• Citation: 646 F.2d 1369
• Parties: 81-1 USTC P 9476 UNITED STATES of America and Donald Jackson, Special Agent, Petitioners/Appellees, v. Charles H. STUCKEY et al., Respondents, and Morry Weinstein, Intervenor-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1369

646 F.2d 1369

81-1 USTC P 9476

UNITED STATES of America and Donald Jackson, Special Agent Petitioners/Appellees, v. Charles H. STUCKEY et al., Respondents and Morry Weinstein, Intervenor-Appellant.

No. 79-4691.

United States Court of Appeals Ninth Circuit.

Argued and Submitted April 16, 1980.

Decided June 1, 1981.

John M. Youngquist, San Francisco, Cal., for petitioners/appellees.

Daniel Ross, Washington, D. C., argued, for respondents; Gilbert E. Andrews, Washington, D. C., on brief.

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

Before MERRILL and SKOPIL, Circuit Judges, and WYATT, ^* District Judge.

SKOPIL, Circuit Judge:

INTRODUCTION

Weinstein appeals a district court's order enforcing administrative tax summonses issued pursuant to 26 U.S.C. § 7602. Weinstein failed in district court to prove his contention that the summonses were issued in bad faith in aid of a criminal prosecution. On appeal he argues that he failed because the district court improperly denied his request for discovery and abused its discretion in limiting the evidentiary proceedings.

We affirm.

FACTS

Morry Weinstein is a tax attorney who was arrested along with others by agents of the Drug Enforcement Administration (DEA) for alleged possession of hashish. The agents seized drugs, cash and various bank receipts. The DEA immediately notified the Internal Revenue Service (IRS) of the arrests.

Weinstein was indicted and pleaded not guilty to the drug offense. Prior to trial certain evidence unrelated to Weinstein was ordered suppressed. Weinstein's indictment was dismissed without prejudice. After dismissal of Weinstein's indictment, the Assistant U. S. Attorney, acting pursuant to 26 U.S.C. § 6103(i), obtained an ex parte order that allowed him access to information gathered by the IRS in its investigations.

Weinstein was interviewed by an IRS revenue agent after his drug arrest. The revenue agent referred the case to the Criminal Investigation Division of the IRS because of certain allegedly false statements made by Weinstein. Weinstein claimed to have filed tax returns for 1975 and 1976 but the revenue agent found no record of those returns.

The investigation was assigned to Thomas Utaski, a special agent, who issued all but one of the summonses at issue in this appeal. A second special agent, Donald Jackson, later took over the investigation and issued the other summons. The summonses were directed to various individuals and banks and requested Weinstein's financial records.

Weinstein exercised his right provided by 26 U.S.C. § 7609 by requesting that the third parties summoned not provide information. This action was commenced in district court when Jackson filed a petition to enforce the summonses. Weinstein was granted permission to intervene in the enforcement action.

Weinstein raised several affirmative defenses in opposition to enforcement. He argued that the IRS issued the summonses to harass him and to aid the DEA in its non-tax criminal investigation. He submitted declarations in support of his arguments. The government filed declarations of five agents and officers in support of enforcement. The district court concluded that Weinstein raised sufficiently serious questions to warrant an evidentiary hearing. The hearing was to "be limited to an examination of the persons who have offered affidavits (sic) in support of the petition." The court stated that based on its observations at that hearing, it would determine if further inquiry would be conducted and whether Weinstein would be allowed limited discovery. Weinstein's request for pre-hearing discovery was denied.

The hearing was held as scheduled. Weinstein's witnesses were available to support his affirmative defenses. The district court limited the hearing by allowing testimony from only the two summoning agents. Weinstein was allowed to conduct full cross-examination of Jackson but was interrupted before completing cross-examination of Utaski. The district court at that point stated:

"I am going to cut the hearing off at this particular juncture. The purpose of the hearing is to sift out the evidence, if there is any, of harassment or improper purpose that can be substantiated to avoid dilatory or discovery matters and to see whether or not the purpose of the summons(es) were to assist the government. And we have had both the people on the stand that have issued the summons(es) and I find no bad faith on their part, nor any purpose to assist the government in the drug case. And, thereby the court orders the government's Petition for Enforcement of Summons(es) is granted".

Weinstein objected to the termination of the proceedings and requested that he be allowed to make an offer of proof. The court granted that request.

In his offer of proof Weinstein contended that he could have demonstrated certain "extraordinary aberrations from usual IRS administrative procedure" from which the court could have reasonably inferred institutional bad faith. Weinstein argued that to achieve that goal he should have been allowed to question persons who submitted declarations and to question two other IRS employees with knowledge of the investigation.

The court, in enforcing the summonses, stated that it considered all the declarations submitted as well as the testimony of the agents. The court concluded that the summonses were issued in good faith since the IRS was not acting to gather information for the Department of Justice.

A motion to stay enforcement of the order was denied by the district court. This court, however, stayed the enforcement pending appeal. Our jurisdiction is predicated on 28 U.S.C. § 1291.

DISCUSSION

The proceeding to enforce an IRS summons is an adversary proceeding. United States v. Asay, 614 F.2d 655, 661 (9th Cir. 1980). The taxpayer is entitled to challenge the summonses on any appropriate ground. United States v. Freedom Church, 613 F.2d 316, 319 (1st Cir. 1979). The taxpayer, however, carries a heavy burden of convincing the district court to deny enforcement. The taxpayer must, in fact, be able to provide a minimal amount of evidence just to entitle him or her to an evidentiary hearing. E. g., United States v. Popkin, 623 F.2d 108 (9th Cir. 1980).

We are asked on this appeal to determine if the trial court erred in denying pre-hearing discovery and in limiting the scope of the evidentiary proceeding. We must also review the district court's decision to enforce the IRS summonses.

Our task is one of balancing competing interests. ¹ On one hand is the government's interest in summary proceedings designed to expedite tax collection. On the other hand is the taxpayer's right to protection from the improper use of the Internal Revenue Service's summons powers. We are aided in our task by an abundance of recently decided appellate cases ² and by several excellent district court opinions. ³

I. Standard of Review

The district court has discretionary authority to limit the scope of an evidentiary hearing and to deny discovery in a summons enforcement proceeding. E. g., United States v. National Bank of South Dakota, 622 F.2d 365, 367 (8th Cir. 1980). The Federal Rules of Civil Procedure apply to such proceedings and rule 81(a)(3) allows for such flexibility, particularly in proceedings which are intended to be summary in nature. United States v. Church of Scientology of California, 520 F.2d 818, 821 (9th Cir. 1975). Our review of the district court's procedural rulings is limited to determining if the court abused its discretion.

We are less clearly guided as to our review of the district court's conclusion in this case that the summonses were not issued in bad faith. See United States v. LaSalle National Bank, 437 U.S. 298, 319, n.21, 98 S.Ct. 2357, 2368, n.21, 57 L.Ed.2d 221 (1978) (noting the discussion by several circuit courts of the factual and legal issues involved in enforcement proceedings but declining to resolve the standard of review question). This circuit has recently adopted the clearly erroneous standard for review of the district court's decision to deny enforcement of an IRS summons. United States v. Goldman, 637 F.2d 664, 666 (9th Cir. 1980). See also United States v. Asay, 614 F.2d 655, 661 (9th Cir. 1980); United States v. Coopers & Lybrand, 550 F.2d 615 (10th Cir. 1978). Cf. United States v. Cortese, 614 F.2d 914 (3d Cir. 1980) (rejecting the clearly erroneous and adopting a de novo review). We will not disturb the trial court's decision to enforce the summonses in this case unless the finding of good faith was clearly erroneous or if the district court applied an incorrect legal standard in reaching its decision. LaSalle, supra, 437 U.S. at 319, n.21, 98 S.Ct. at 2368, n.21; United States v. Zack, 521 F.2d 1366, 1369 (9th Cir. 1975).

II. Pre-Hearing Discovery

Weinstein may have failed in his burden of proof because the district court denied his request for pre-hearing discovery. We recognize the anomaly of placing a burden of proof upon the taxpayer and then denying access to what may be the very information needed to meet that burden. See United States v. Serubo, 604 F.2d 807, 812 (3d Cir. 1979). Should we determine that discovery was improperly denied in this case, a proper remedy would be to remand for discovery and an evidentiary hearing at which Weinstein could present the fruits of that discovery.

In Church of Scientology, we held that the district court has great discretion to restrict or deny discovery. See also United States v. Southern Tanks, Inc., 619 F.2d 54 (10th Cir. 1980); and United States v. Ladd, 471 F.Supp. 1150 (N.D.Tex.1979). Discovery in a summary enforcement proceeding is the exception rather than the rule. Church of Scientology, supra, at 824.

The Supreme Court in LaSalle did not address the taxpayer's right to discovery. Nevertheless, the Third Circuit has interpreted LaSalle to suggest guidelines for discovery. E. g., United States...