U.S. v. White

• Decision Date: 02 August 1988
• Docket Number: D,No. 83,83
• Citation: 853 F.2d 107
• Parties: -5972, 57 USLW 2111, 88-2 USTC P 13,777 UNITED STATES of America, and James M. Serling, Estate Tax Attorney, Internal Revenue Service, Petitioners-Appellants, v. James M. WHITE, as attorney for and as executor of the Estate of Helen P. Smith, deceased, Respondent-Appellee. ocket 87-6046.
• Court: U.S. Court of Appeals — Second Circuit

Page 107

853 F.2d 107

62 A.F.T.R.2d 88-5972, 57 USLW 2111, 88-2

USTC P 13,777

UNITED STATES of America, and James M. Serling, Estate Tax Attorney, Internal Revenue Service, Petitioners-Appellants, v. James M. WHITE, as attorney for and as executor of the

Estate of Helen P. Smith, deceased, Respondent-Appellee.

No. 83, Docket 87-6046.

United States Court of Appeals,

Second Circuit.

Argued Sept. 3, 1987.

Decided Aug. 2, 1988.

Joan I. Oppenheimer, Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C. (Roger P. Williams, U.S. Atty., W.D.N.Y., Buffalo, N.Y., Roger M. Olsen, Asst. Atty. Gen., U.S. Dept. of Justice, Washington, D.C., Michael L. Paup, Charles E. Brookhart, Attys., Tax Div., U.S. Dept. of Justice, Washington, D.C., of counsel), for petitioners-appellants.

James M. White, Rochester, N.Y. (Kenneth A. Payment, A. Paul Britton, Harter, Secrest & Emery, Rochester, N.Y., of counsel), for respondent-appellee.

Charles E. Heming, New York City, Maryann S. Freedman, Buffalo, N.Y. (Arthur M. Sherwood, Buffalo, N.Y., Jonathan G. Blattmachr, Sanford J. Schlesinger, New York City, Jules J. Haskel, Garden City, N.Y., John W. Tarbox, Rochester, N.Y., of counsel), for the New York State Bar Ass'n.

Robert M. Kaufman, New York City (George DeSipio, Albert Kalter, New York City, of counsel), for the Ass'n of the Bar of the City of New York, submitted briefs as amici curiae.

Edward D. Bloom, Esq., Harris, Beach, Wilcox, Rubin & Levey, Michael F. Buckley, Harter, Secrest & Emery, John L. Garrett, Nixon, Hargrave, Devans & Doyle, Rochester, N.Y., for the Monroe County Bar Ass'n submitted a brief as amicus curiae.

Before FEINBERG, Chief Judge, and PIERCE and ALTIMARI, Circuit Judges.

PIERCE, Circuit Judge:

The United States of America and James M. Serling, an estate tax attorney in the Internal Revenue Service ("IRS" or the "government"), appeal from a judgment of the United States District Court for the Western District of New York, Michael A. Telesca, Judge, which denied appellants' petition for an order enforcing two IRS summonses issued to the respondent, James M. White, an attorney. United States v. White, 650 F.Supp. 904 (W.D.N.Y.1987). The district court found that the IRS had failed to show that the summonses were issued pursuant to a legitimate tax purpose, as is required for summons enforcement under United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). According to the court, the IRS was foreclosed from investigating the deductibility of White's attorney's fees, as claimed on a federal estate tax return, because We believe that the district court erred in concluding that the Surrogate's decree precludes the IRS from investigating the deductibility of White's attorney's fees. Because the objective of the investigation was to obtain information that may be used in determining whether there is federal tax liability, the IRS had a legitimate purpose for issuing its summonses under Powell. Moreover, we find the district court's summons enforcement requirement that the IRS must make a prima facie showing of "fraud, overreaching, or excessiveness by the attorney or the Surrogate" to be inconsistent with Powell 's holding that only a showing of a legitimate purpose, and not a showing of probable cause, is required for summons enforcement of its summonses and we therefore reverse.

                of a prior New York State Surrogate's Court decree that had approved White's attorney's fees under New York law.  The district court held that, because (1) "the Surrogate ... passed on the facts upon which deductibility depends," 650 F.Supp. at 909;  and (2) the IRS did not make a prima facie showing that the Surrogate's decision was motivated by impermissible factors "such as fraud, overreaching, or excessiveness by the attorney or the Surrogate," the IRS was therefore bound by the Surrogate's decision.   Id. at 911
                

BACKGROUND

The facts of this case are set forth in full in the district court's opinion, reported at 650 F.Supp. 904. We refer herein only to those facts necessary to address the issues presented on appeal. In July 1984, the Surrogate's Court of Monroe County, New York, granted a decree of judicial settlement of the Estate of Helen P. Smith. Under New York law, see N.Y.Surr.Ct.Proc.Act Sec. 2307 (McKinney 1967 & Supp.1988), this decree had the effect, inter alia, of approving attorney's fees of $16,800 and an executor's commission of $17,548.13. James M. White, the respondent-appellee, was both the executor and the attorney for the estate. He filed a federal estate tax return which claimed deductions of $16,530 for his attorney's fees and $17,450 as the executor's commission.

In August 1984, petitioner-appellant James M. Serling, a tax attorney for the IRS, met with White to review the estate tax return. White informed Serling that the Surrogate had signed a judicial decree of settlement for the estate. In January 1985, Serling wrote to White requesting his time records or other documentation of legal work undertaken for the estate, stating that White was required to provide justification for his attorney's fees notwithstanding the Surrogate's decree. In February 1985, White responded by forwarding a letter he had obtained from the Surrogate which stated that White's attorney's fees were valid under New York law.

Pursuant to the IRS's summons authority under Sec. 7602 of the Internal Revenue Code of 1954 ("I.R.C." or the "Code"), 26 U.S.C. Sec. 7602 (1982), Serling then sent two summonses to White, one in May 1985 and one in February 1986. The May 1985 summons sought all records and documents relating to the administration of the estate, including records of White's activities as attorney and as executor. The February 1986 summons sought all records relating to White's performance of his duties as executor of the estate. White refused to comply with the summonses, relying on the Surrogate's prior approval of his attorney's fees under New York law. Based on this refusal, the IRS issued a deficiency notice to White on behalf of the estate in July 1986 which disallowed the claimed attorney's fees and reduced the executor's commission from $17,450 to $16,804. Apparently, White does not contest the reduction in the executor's commission. White paid the deficiency in the amount of $5,754.19 and filed a notice of claim for a refund; that claim in not presently before this Court.

Appellants commenced this summons enforcement proceeding in August 1986. In January 1987, the district court, in a thorough opinion, denied the petition for enforcement of the two summonses principally on the ground that the IRS did not show that the investigation would be conducted

                for a legitimate purpose as required by Powell.    The Code permits a deduction to be taken for estate administrative expenses allowable under state law, see I.R.C. Sec. 2053(a)(2), and an associated regulation ordinarily makes state court decrees related to the allowability of such expenses binding on the IRS if the court "passed upon the facts upon which deductibility depends," see Treas.Reg. Sec. 20.2053-1(b)(2).  The district court concluded that "the IRS cannot second-guess the Surrogate" when the Surrogate has found such expenses to be valid under state law unless the IRS makes "a prima facie showing that the Surrogate's decision was motivated by factors other than those on which deductibility depends, such as fraud, overreaching, or excessiveness by the attorney or the Surrogate."    650 F.Supp. at 911.  Without such a standard to support enforcement of these summonses, the district court stated, IRS investigations of amounts approved by state courts " 'would be destructive ... of the proper relationship between State and Federal law.' "   Id. at 909 (quoting Commissioner v. Estate of Bosch, 387 U.S. 456, 480, 87 S.Ct. 1776, 1790, 18 L.Ed.2d 886 (1967) (Harlan, J., dissenting)).  Finding that the IRS failed to meet this standard, the district court held that "the decision of the Surrogate should be accepted [by the IRS]." Id.    Concluding therefore that the IRS had no legitimate purpose in investigating the deductibility of fees previously approved by the Surrogate, the district court denied the government's petition for summons enforcement and the government appealed
                

DISCUSSION

I

The issue presented to us is whether the IRS may investigate expenses claimed as a deduction on a federal estate tax return, and obtain enforcement of summonses issued to carry out such an investigation, where the subject expenses previously had been approved under state law by a state trial court. The government argues that the district court erred in denying its petition for summons enforcement because the summonses were validly issued under the authority of Sec. 7602 of the Internal Revenue Code of 1954 and because the IRS had met its burden of showing that they were issued for a legitimate investigative purpose, in accordance with the requirements of United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), for judicial enforcement of summonses.

The IRS is authorized to issue summonses, inter alia, "to examine any books, papers, records, or other data which may be relevant or material" to an inquiry " [f]or the purpose of ascertaining the correctness of any return." I.R.C. Sec. 7602. In enacting Sec. 7602 of the Code, Congress endowed the IRS with "expansive information-gathering authority" in order to encourage effective tax investigations. United States v. Arthur Young & Co., 465 U.S. 805, 816, 104 S.Ct. 1495, 1502, 79 L.Ed.2d 826 (1984). Because this summons authority is "necessary for the effective performance of congressionally imposed responsibilities to enforce the tax Code," United States v. Euge, 444 U.S. 707, 711, 100 S.Ct. 874, 878, 63 L.Ed.2d 141 (1980), the Supreme Court has consistently held that restrictions on the IRS's summons power should be avoided "absent unambiguous directions from Congress." United States v....