U.S. v. Will

Decision Date24 February 1982
Docket NumberNo. 80-3680,80-3680
Citation671 F.2d 963
Parties82-1 USTC P 9216 UNITED STATES of America and Dennis J. Hanzel, Special Agent, Internal Revenue Service, Plaintiffs-Appellees, v. Jay T. WILL, Defendant-Appellant.
CourtU.S. Court of Appeals — Sixth Circuit

Eugene Matan, Columbus, Ohio, for defendant-appellant.

Albert Ritcher, Asst. U. S. Atty., Columbus, Ohio, John F. Murray, Acting Asst. Atty. Gen., Michael L. Paup, William A. Whitledge, Philip I. Brennan, Dept. of Justice, Tax Div., Washington, D. C., for plaintiffs-appellees.

Before BROWN and JONES, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

NATHANIEL R. JONES, Circuit Judge.

Appellant Jay T. Will appeals from the district court's order granting enforcement of an Internal Revenue Service (IRS) summons. Appellant contends that the summons was issued in bad faith and for purposes of harassment. He also urges that the district court erred in limiting his attempt to prove this fact. For the reasons stated below, we affirm the district court's decision.

During the spring of 1978, Dennis J. Hanzel, a special agent of the IRS, learned that Jay T. Will (hereinafter taxpayer) was accumulating numerous assets. After examining a number of the taxpayer's returns for several previous years, and after acquiring additional information, Special Agent Hanzel concluded that the taxpayer had no likely source of income which would permit him to acquire the assets he allegedly owned. Accordingly, in October 1979, a formal investigation into taxpayer's tax liability for the 1975-78 tax years was commenced with Special Agent Hanzel assigned to conduct this probe. The investigation was a joint one; that is, an investigation conducted by both the Examination and Criminal Investigation Divisions of the IRS with Revenue Agent Marilyn J. Brannam assigned to assist Agent Hanzel.

On October 25, 1979, Special Agent Hanzel personally served the taxpayer with an IRS summons. This summons directed the taxpayer, as president of Jay T. Will Karate Studio, Inc., to produce certain books and other records of that corporation. Subsequently, on November 1, 1979, Agent Hanzel met with taxpayer and his counsel. At this meeting, the taxpayer produced a few of the requested records but also indicated that he had not decided whether to comply fully and voluntarily with the summons. Later that same day, Agents Hanzel and Brannam visited the office of Paul Knouff, a Certified Public Accountant (CPA) who had prepared the taxpayer's returns since 1968. On a subsequent visit, Special Agent Hanzel was permitted to microfilm portions of Knouff's file on the taxpayer.

Upon taxpayer's failure to comply with the summons, Special Agent Hanzel petitioned the District Court for the Southern District of Ohio to enforce the summons. After examining the pleadings, Judge Robert M. Duncan ordered the taxpayer to show cause why the summons should not be enforced and scheduled a hearing for September 25, 1980. Prior to that date, on September 9, 1980, taxpayer subpoenaed Special Agent Hanzel to appear at the September 25th hearing and bring with him any records obtained in the course of his investigation. Hanzel responded by serving the taxpayer with a motion to quash this subpoena. Judge Duncan reserved ruling upon this motion until after he had heard the parties' preliminary arguments on the merits of the enforcement petition.

Special Agent Hanzel was the only person to testify at the hearing. On direct examination, Hanzel recited that: (1) the purpose of his investigation was to determine the correct tax liability of taxpayer for the years in question; (2) he was authorized as a special agent to issue the summons; (3) at the time of its issuance, none of the records sought by the summons were in his possession; and (4) the requested information was relevant to his inquiry. Hanzel also stated that, as of the date of the hearing, no conclusion had been formed to recommend a criminal prosecution of the taxpayer nor had any recommendation been made to the Justice Department. On cross-examination, Special Agent Hanzel admitted that he had contacted the United States Postal Service for the purpose of monitoring the taxpayer's mail for a period of sixty days in January and February, 1980. 1 In addition, Special Agent Hanzel also testified that the taxpayer had been the subject of surveillance.

After hearing this testimony, the district court ordered that the summons be enforced. This decision was entered by Memorandum and Order on October 2, 1980. 2 As part of this order, Judge Duncan granted the agent's motion to quash taxpayer's subpoena. Taxpayer then moved for a new trial. The district court denied this motion and, thereafter, taxpayer filed a timely notice of appeal and obtained a stay of the order.

On appeal, taxpayer offers a plethora of arguments to buttress his belief that the summons should not be enforced. Some of these arguments were addressed by the district court below; others were raised in taxpayer's motion for a new trial and summarily rejected.

At the outset, taxpayer asserts that the summons was not issued in good faith, but rather was part of a pattern of harassment. To substantiate this claim, taxpayer asks this Court to consider Special Agent Hanzel's use of clandestine methods of investigation (i.e., monitoring of mail and surveillance) and the fact that the IRS has summoned materials for the taxable year 1975, a year for which the general statute of limitations has run, 3 as evidence of this harassment. Additionally, taxpayer asserts that the agent's inducement, by deception, of his accountant to permit a microfilming of the accountant's records and the agent's failure to follow normal IRS procedures are indicative of bad faith.

Section 7602 4 of the Internal Revenue Code, 26 U.S.C. § 7602, provides that the IRS, through the use of an administrative summons, may examine any books, papers, records, or persons in determining the tax liability of any person or ascertaining the correctness of any return. The IRS, however, has no power of its own to enforce the summons but must apply to the district court in order to compel production of the requested materials. 26 U.S.C. § 7604. A prima facie case for enforcement is established by demonstrating that: (1) the investigation has a legitimate purpose; (2) the summoned materials are relevant to that investigation; (3) the information sought is not already within the IRS's possession; and (4) the IRS has followed the procedural steps outlined in 26 U.S.C. § 7603. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964). The requisite showing is generally made by the submission of the affidavit of the agent who issued the summons and who is seeking enforcement. United States v. Garden State National Bank, 607 F.2d 61, 68 (3rd Cir. 1979). Once this showing is made, the burden shifts to the taxpayer to demonstrate that enforcement of the summons would be an abuse of the court's process. As articulated by the Supreme Court in United States v. Powell, supra Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.

379 U.S. at 58, 85 S.Ct. at 255. Moreover, if criminal prosecution has been recommended by the IRS agent before issuance of the summons, or if the summons is being issued in aid of a solely criminal investigation, determined by looking at the institutional posture of the IRS, the summons will not be enforced. United States v. LaSalle National Bank, 437 U.S. 298, 318, 98 S.Ct. 2357, 2368, 57 L.Ed.2d 221 (1978). See also Note, The Institutional Bad Faith Defense to the Enforcement of IRS Summonses, 80 Colum.L.Rev. 621 (1980).

There is no dispute that the government met its burden of establishing a prima facie case, and our review of the record indicates that the taxpayer has failed to demonstrate that enforcement of the summons would be an abuse of the court's process. The district court considered the taxpayer's contention that the summons was issued in bad faith and for harassment purposes, and found this argument to be without merit. It similarly rejected taxpayer's argument that the government was precluded from obtaining information relating to the 1975 tax year. We agree with these conclusions and expressly rely on the reasoning of Judge Duncan as set forth in his Memorandum Opinion.

Moreover, taxpayer's claim that Special Agent Hanzel, without notice, approached his accountant and, by trickery, induced this person to permit a copying of his file on taxpayer is likewise without merit. The CPA's affidavit, submitted in conjunction with taxpayer's motion for a new trial, clearly reflects that he was informed that the agent was there concerning the tax liability of Mr. Will and that the CPA voluntarily permitted a review and filming of the files. Further, there is no authority to support the taxpayer's contention that he must be informed before an agent may contact third parties in a continuing investigation. The taxpayer points to P 442.2(2), Volume I, of the Internal Revenue Manual-Audit (CCH) which provides:

(2) If records are not produced, or it is claimed that they do not exist, the agent, after apprising the subject or the subject's representative of the agent's intention, should proceed with the indirect method of determining income; namely, net worth, source and application of funds, bank deposits, etc. This will be principally accomplished by third party ...

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