U.S. v. University Sav. Ass'n, 81-2019

• Decision Date: 28 January 1982
• Docket Number: No. 81-2019,81-2019
• Parties: 82-1 USTC P 9178 UNITED STATES of America and Internal Revenue Service Officer, David L. Ackley, Plaintiffs-Appellees Cross-Appellants, v. UNIVERSITY SAVINGS ASSOCIATION and Emily Clark, Collection Supervisor, Defendants, Paul V. Watson, et al., Intervenors-Appellants Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 312

666 F.2d 312

82-1 USTC P 9178

UNITED STATES of America and Internal Revenue Service Officer, David L. Ackley, Plaintiffs-Appellees Cross-Appellants, v. UNIVERSITY SAVINGS ASSOCIATION and Emily Clark, Collection

Supervisor, Defendants,

Paul V. Watson, et al., Intervenors-Appellants Cross-Appellees.

No. 81-2019.

United States Court of Appeals, Fifth Circuit.

Jan. 28, 1982.

Jeffrey H. Hubbard, Houston, Tex., for Paul V. Watson, et al.

Jim Ezer, Asst. U. S. Atty., Houston, Tex., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Charles E. Brookhart, William A. Whitledge, Attys., Dept. of Justice, Washington, D. C., for intervenors-appellants cross appellees.

Appeals from the United States District Court for the Southern District of Texas.

Before GEE, GARZA and SAM D. JOHNSON, Circuit Judges.

GEE, Circuit Judge:

The United States of America and Internal Revenue Service Agent David L. Ackley brought a consolidated action to enforce seven Internal Revenue Service summonses against six financial institutions and one accounting firm to obtain records pertaining to Paul V. and Sharon E. Watson ("Watsons") in connection with an investigation of the tax liability of Paul V. Watson for the years 1976 through 1978. The trial court denied enforcement of the summonses and awarded attorneys' fees to the Watsons. We believe that the district court erred in refusing to enforce the summonses, and, therefore, we reverse the judgment of the court and remand the case for proceedings consistent with this opinion.

During an audit of a related partnership tax return, the Examination Division of the Internal Revenue Service was unable to find any record indicating that the Watsons had filed tax returns for the years 1976-78. Accordingly, the Examination Division referred the case to the Criminal Investigation Division to investigate possible tax fraud, and Special Agent Ackley was assigned to conduct the investigation. Ackley determined that the case should be investigated jointly with the participation of the Examination Division and then requested the assignment of a revenue agent to investigate the Watsons' civil tax liabilities. In September 1979, Ackley received documents indicating that the Watsons were tax protestors, and he began to follow the IRS procedures for investigating tax protestors, as set out in the manual supplement entitled "Examination and Investigation of Illegal Protest-Type Activities." ¹ Although these procedures relate only to a criminal investigation, a revenue agent was still assigned to investigate the civil liabilities of the Watsons. Unable to obtain information from the Watsons necessary to determine their correct tax liabilities, Ackley issued the summonses here in question.

The Watsons, citing United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), contested the enforcement of the summonses on the ground that the summonses authorized under 26 U.S.C. § 7602 ² may not be used for a solely criminal investigation. Because Special Agent Ackley, himself, was pursuing a criminal investigation only, the Watsons believed that he could not use the summonses to aid his investigation. However, this is not a proper reading of the holding in LaSalle. In LaSalle the Seventh Circuit had affirmed the district court's refusal to enforce a summons because a special agent testified that his investigation had no civil purpose and was concerned only with obtaining information with which to recommend that the taxpayer be prosecuted. The Supreme Court, however, concluded that the improper purpose of one special agent was not dispositive of the institutional commitment by the IRS to collect taxes and that enforcement of the summons should be denied only if the Service, in an institutional sense, had abandoned its pursuit of the taxpayer's civil liability. 437 U.S. at 319, 98 S.Ct. at 2368.

In Donaldson v. United States, 400 U.S. 517, 535, 91 S.Ct. 534, 544, 27 L.Ed.2d 580 (1971), the Supreme Court noted that Congress has authorized use of the summons for criminal investigations under 26 U.S.C. § 7602 and the corresponding regulations. Congress has created a law enforcement system in which the criminal and civil elements of tax liability are inherently intertwined. LaSalle, 437 U.S. at 309, 98 S.Ct. at 2363. When an investigation examines the possibility of criminal misconduct, it also necessarily inquires about the appropriateness of assessing the 50 percent tax liability. ³ The legislative history of the Internal Revenue Code supports the conclusion that Congress intended to design a system with inter-related criminal and civil elements. Id. at 310, 98 S.Ct. at 2364. "For fraud investigation to be solely criminal in nature would require an extraordinary departure from the normally inseparable goals of examining whether the basis exists for criminal charges and for the assessment of civil liabilities." Id. at 314, 98 S.Ct. at 2366. Such a departure did not occur in this case. The uncontroverted evidence on this issue was the testimony of the special agent that he was conducting a joint investigation with...