U.S. v. Tiffany Fine Arts, Inc.

• Decision Date: 13 September 1983
• Docket Number: D,No. 1006,1006
• Parties: 83-2 USTC P 9596 UNITED STATES and Joel Lewis, Revenue Agent, Internal Revenue Service, Petitioners-Appellees, v. TIFFANY FINE ARTS, INC. and its subsidiaries, including World Medical Marketing Corporation and World Video Corp., Respondents-Appellants. ocket 82-6336.
• Court: U.S. Court of Appeals — Second Circuit

Page 7

718 F.2d 7

83-2 USTC P 9596

UNITED STATES and Joel Lewis, Revenue Agent, Internal

Revenue Service, Petitioners-Appellees, v. TIFFANY FINE ARTS, INC. and its subsidiaries, including

World Medical Marketing Corporation and World

Video Corp., Respondents-Appellants.

No. 1006, Docket 82-6336.

United States Court of Appeals, Second Circuit.

Argued March 28, 1983.

Decided Sept. 13, 1983.

David M. Rubin, New York City (Michael D. Savage, Gersten, Savage & Kaplowitz, New York City, of counsel), for respondents-appellants.

Jamie Vincent Gregg, New York City, Asst. U.S. Atty., S.D.N.Y. (John S. Martin, Jr., U.S. Atty., S.D.N.Y., David M. Jones, Asst. U.S. Atty., Thomas D. Warren, Asst. U.S. Atty., of counsel), for petitioners-appellees.

Before KEARSE, PIERCE and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

Tiffany Fine Arts, Inc. and two subsidiaries, World Medical Marketing Corp. and World Video Corp., (collectively referred to as Tiffany) appeal from an order of the District Court for the Southern District of New York (Vincent L. Broderick, Judge), enforcing four Internal Revenue Service administrative summonses. Tiffany's principal contention on appeal is that before issuing the summonses the IRS was required to comply with the "John Doe" provisions of 26 U.S.C. Sec. 7609(f)(1976). In addition, Tiffany argues that Judge Broderick abused his discretion by refusing to hold a hearing regarding the purpose underlying the summonses.

We affirm.

BACKGROUND

Tiffany Fine Arts, Inc. is a holding company for various subsidiaries engaged in promoting tax shelters. Sometime before August 28, 1981, IRS revenue agent Joel Lewis asked Tiffany for a list of names Each summons identified "Tiffany Fine Arts, Inc. and Subsidiaries" as the subjects of an IRS investigation. Two were addressed to Tiffany Fine Arts, Inc. in care of Steven Hofstein, President, and Janine Martinelli, Secretary and Treasurer, and directed them to appear before Lewis to give testimony and to produce the following documents:

addresses, and social security numbers of the licensees of a product known as the "Pedi-Pulsor", which World Medical was marketing. When Tiffany refused, Lewis issued four summonses on October 6, 1981.

(1) All books, papers, records and other data pertaining to the operation of Tiffany Fine Arts Inc. and subsidiaries (including World Medical Marketing Corp.) for the periods ending October 31, 1979 and October 31, 1980, including but not limited to the following specific records: general ledger, sales journal, purchase book, cash receipts book, cash disbursement book, cancelled checks and bank statements, workpapers, sales contracts, and purchase invoices for the above described periods.

(2) A list of the names, addresses, social security and employer identification numbers for all individuals, partnerships, estates, trusts and corporations who acquired: Pedi-Pulsor distributorships from World Medical Marketing Corporation Inc., World Medical Marketing Corporation, World Video Corporation or any other subsidiary corporation of Tiffany Fine Arts Inc.

(3) A list of the names, addresses, social security and employer identification numbers for all individuals, partnerships, estates, trusts and corporations who acquired lithographs from Tiffany Fine Arts Inc.

(4) A list of the names, addresses, social security and employer identification numbers for all individuals, partnerships, estates, trusts and corporations who acquired any asset, distributorship, etc. from Tiffany Fine Arts Inc., World Medical Marketing Corporation, World Video Corporation or any other subsidiary corporation of Tiffany Fine Arts Inc.

The remaining two summonses were addressed to World Medical Marketing Corp., in care of Peter Rosenthal, President, and Janine Martinelli, Secretary and Treasurer, and directed them to give testimony and to produce the following documents:

(1) All books, papers, and other data pertaining to the operation of World Medical Marketing Corporation (a subsidiary of Tiffany Fine Arts Inc.), for the periods ending October 31, 1979 and October 31, 1980, including but not limited to the following specific records: general ledger, sales journal, purchase book, cash receipts book, cash disbursement book, cancelled checks and bank statements, workpapers, sales contracts and purchase invoices for the above described periods.

(2) A list of the names, addresses, social security and employer identification numbers for all individuals, partnerships, estates, trusts and corporations who acquired Pedi-Pulsor distributorships from World Medical Marketing Corporation. Also copies of the application for license fact sheets signed by each licensee.

When Tiffany refused to comply with the summonses, the IRS initiated this enforcement proceeding under 26 U.S.C. Secs. 7402(b) and 7604 with an order to show cause and petition, supported by an affidavit of agent Lewis which briefly explained:

* * * I am conducting an investigation, one purpose of which is to ascertain the correctness of the consolidated corporate income tax returns filed by [Tiffany] for the fiscal years ending October 31, 1979, and October 31, 1980. One aspect of my investigation into the correctness of Tiffany's consolidated corporate income tax returns concerns possible underreporting of income received and questionable business deductions claimed by [Tiffany].

In opposition, Tiffany's president, Steven R. Hofstein, asserted, among other things, that the "true motive" of the IRS was "to ascertain and audit the tax returns of [Tiffany's] clients, not [Tiffany]". He emphasized that the IRS was unwilling to accept By a supplemental affidavit agent Lewis elaborated on the reasons underlying his investigation of Tiffany. He suspected that Tiffany "may have underreported its gross receipts because certain recourse and non-recourse notes provided by the licensees of a product distributed by World Medical did not appear to be included in World Medical's income." To verify the accuracy of Tiffany's returns, he "would have to examine the original books of entry and the underlying licensing agreements to match the income reflected by those agreements to the income reported by World Medical." Thus, asserted Lewis, Tiffany's offer to produce only certain redacted records was unacceptable.

                redacted records or to limit its examination to a random check of Tiffany's clients.  He also noted that the summonses requested information concerning purchasers of lithographs, whom the IRS had singled out for special audit.  Since Tiffany had never engaged in the sale of lithographs, Hofstein argued that this confirmed that the IRS was "on a blatant fishing expedition which cannot be condoned pursuant to I.R.C. Sec. 7602."    In an accompanying memorandum of law, Tiffany argued that the IRS could obtain the third party information it desired only by satisfying the requirements for a "John Doe" summons set forth in Sec. 7609(f)
                

As to the lithograph issue, Lewis explained that "I had information from another source that a company called 'Tiffany,' which did business in Florida, was in the business of selling lithographs." When he initially inquired whether the two companies were one and the same, Tiffany's attorney "would neither confirm nor deny that the Tiffany herein sold lithographs." Thus, he requested records relating to lithographs "out of an abundance of caution".

With respect to Tiffany's charges concerning the motivation of the IRS, however, Lewis conceded:

That by examining the licensing agreements, I would also be able to identify individuals who have participated in what appears to be an abusive tax shelter. It is certainly possible that once the individuals are identified further inquiry will be made into whether they have correctly reported their income tax liabilities.

After oral argument, Judge Broderick held that the IRS had made a sufficient showing that its "interest is in an audit of the consolidated returns of Tiffany." He therefore ruled that the IRS was authorized to issue the four summonses under 26 U.S.C. Sec. 7602, without additionally having to satisfy the requirements of Sec. 7609(f). He also ruled that no evidentiary hearing was necessary since Tiffany's "hypothesis" that the IRS's real motivation was solely to audit Tiffany's clients was rebutted by a "clear factual statement" that the IRS was legitimately interested in Tiffany's own tax liabilities.

On appeal, the parties repeat essentially the same arguments they advanced below. Based on the broad sweep of the four summonses, which followed the IRS's initial request for third party information, Tiffany argues that the summonses were, at best, issued for the dual purpose of investigating both it and its clients and, at worst, purely pretextual. In either event, it contends, the IRS was required to comply with Sec. 7609(f) since a "substantial objective" of the summonses was the identification of unnamed taxpayers. At the very least, Tiffany claims, the district judge should have ordered a hearing to determine whether the IRS was proceeding in good faith.

The IRS, on the other hand, maintains that it is conducting an ongoing, particularized investigation of Tiffany. While it does not concede that the summonses were issued for a dual purpose, it argues that its legitimate concerns with Tiffany make compliance with Sec. 7609(f) unnecessary, regardless of whether it may also be concerned with Tiffany's customers. Finally, the IRS contends that no hearing was required in the district court.

DISCUSSION

To place these competing claims about the IRS's administrative summonses in context, we begin by briefly surveying the backdrop of statutory and case law against which Sec. 7609(f) was enacted in 1976. Section 7601 of the 1954 Code generally authorizes the IRS to "inquire after and concerning all persons * * * who may be liable to pay any internal revenue tax, and all persons owning or having the care and...