United States v. Berkowitz, Civ. A. No. 72-207.

• Decision Date: 07 March 1973
• Docket Number: Civ. A. No. 72-207.
• Citation: 355 F. Supp. 897
• Parties: UNITED STATES of America and Lawrence H. Pennington, Special Agent, Internal Revenue Service v. Arnold BERKOWITZ and A&M Berk Tax Service, Inc.
• Court: U.S. District Court — Eastern District of Pennsylvania

355 F. Supp. 897

UNITED STATES of America and Lawrence H. Pennington, Special Agent, Internal Revenue Service v. Arnold BERKOWITZ and A&M Berk Tax Service, Inc.

Civ. A. No. 72-207.

United States District Court, E. D. Pennsylvania.

March 7, 1973.

Arthur L. Gutkin, Philadelphia, Pa., for plaintiffs.

Richard A. Scully, Trial Atty., Tax Div., Dept. Justice, Washington, D. C., for defendants.

MEMORANDUM AND ORDER

TROUTMAN, District Judge.

Before the Court is the Government's petition to enforce a summons issued by the Internal Revenue Service IRS. The summons, issued by Special Agent Pennington, pursuant to 26 U.S.C. § 7602,¹ directed respondents, A&M Berk Tax Service Berk and Arnold Berkowitz to appear and produce the names, addresses and Social Security numbers of all clients and customers for whom they prepared 1971 Federal Income Tax Returns. Respondents filed a motion to quash the summons alleging that such summons was illegal and unconstitutional. This motion was denied on the ground that the proper time to challenge an internal revenue summons was at an enforcement proceeding. Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L. Ed.2d 459 (1964). Respondent Berkowitz appeared on August 14, 1972, pursuant to the summons, but refused to testify or to produce the required documents. The Government thereby commenced this proceeding under 26 U.S.C. §§ 7402(b)² and 7604(a).³ An order to show cause was signed, after which a hearing was held on November 28, 1972, wherein testimony was taken and arguments were heard. Upon motion, further hearing was held on February 14, 1973.⁴

Briefly stated, the facts leading to the issuance of the summons are as follows: Section 7601 of the Internal Revenue Code of 1954, 26 U.S.C. § 7601,⁵ directs the Secretary or his delegate "to the extent he deems it practicable" to cause Treasury Department officers or employees "to proceed * * * and inquire after and concerning" all persons "who may be liable to pay any internal revenue tax". Pursuant to this section, the IRS initiated its Tax Preparers Project, whereby certain tax preparers are selected at random and are visited by undercover agents with assumed information to be submitted to the preparer for the preparation of a tax return. The project is designed to identify tax returns that have been inaccurately prepared by commercial tax preparers. In the instant case, an IRS agent submitted assumed information to respondents, who prepared and filed the return. It was subsequently determined that the return was inaccurately prepared and, consequently, the instant summons was issued.

As previously mentioned, Section 7601 flatly imposes the duty upon the Secretary to canvass and to inquire concerning all persons who may be liable to pay any internal revenue tax. Donaldson v. United States, 400 U.S. 517, 523, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971). A taxpayer may challenge a summons issued pursuant to Section 7602 at an enforcement proceeding brought by the IRS. Reisman v. Coplin, supra. At such a proceeding, the IRS need show only "that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed * * *." United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964). The Court further held that a summons issued under Section 7602 in aid of an IRS investigation is for a legitimate purpose "if it is issued in good faith and prior to a recommendation for criminal prosecution." Donaldson v. United States, supra, 400 U.S. at 536, 91 S.Ct. at 545, or stated otherwise, the taxpayer must negative the existence of a proper purpose of the summons. United States v. Egenberg, 443 F.2d 512 (3rd Cir. 1971); United States v. Erdner, 422 F.2d 835 (3rd Cir. 1970); United States v. DeGrosa, 405 F.2d 926 (3rd Cir. 1969). The IRS, through Special Agent Pennington and Thomas Martin, Chief of the IRS Intelligence Division, testified that the purpose of the investigation was to determine the correct federal tax liabilities of all taxpayers for whom respondents prepared 1971 federal income tax returns.

Respondents make essentially five points in support of their contention that the summons is invalid, which are as follows: (1) the IRS has no right to issue a summons for records already in their possession; (2) the IRS may utilize Section 7602 summons only to secure information from the taxpayer under investigation himself, not from third persons other than the taxpayer; (3) only one inaccuracy has been found and the IRS is now engaging in a burdensome fishing expedition into all respondents' clients; (4) the fact that the IRS informed respondents that criminal charges could be brought against them if further inaccurate returns were found rendered the summons invalid, since it could be inferred that the sole purpose of the summons was for a criminal investigation; and (5) the information sought is protected by the accountant-client privilege. We will discuss each contention seriatim.

Initially, respondents argue that United States v. Powell, supra, and its progeny prohibit the IRS from issuing a summons for records already in their custody and possession. Donaldson v. United States, supra; United States v. Harrington, 388 F.2d 520 (2d Cir. 1968). The IRS concedes that the information sought is in its files, but argues that it cannot be readily identified or collected, since a tax preparer is under no obligation to identify his tax returns. In a similar case, the IRS sought a list of the taxpayers whose returns were prepared by a professional tax preparer. United States v. Theodore, 347 F.Supp. 1070 (D.S.C.1972). The tax preparer asserted the identical argument as respondents do here, which was flatly rejected by the Court, stating:

"At the hearing, respondents complained that the Commissioner already had the returns in his possession and therefore could not summon copies of the same from the respondents. 26 U.S.C. 7605(b). Practically, it would constitute an enormous and unjustifiably expensive undertaking for the Commissioner to search all of the returns in Chamblee, Georgia IRS Center to find those returns prepared by the respondents. This project will be facilitated by the production of the copies of the returns in the possession of the respondents. It is not an abuse of this court's process to require the respondents to assist the Commissioner by producing the returns. United States v. Powell, supra, 379 U.S. p. 58, 85 S.Ct. 248, 13 L.Ed.2d 112."

We agree with the Court in Theodore that the language of Powell is not so broad as to cover the instant situation where the information sought is already in the Commission's possession, but it is impossible or unjustifiably difficult and expensive to identify.

Respondents' second and third arguments are somewhat related and must be read together. Respondents argue initially that the IRS cannot obtain information through respondent that concerns third parties. To this contention, we note there is no absolute prohibition either in the Internal Revenue Code itself or in any cases construing it against issuing a summons to a third party seeking information regarding the person under investigation. Section 7601 imposes the duty on the Commissioner to make a canvass and Section 7602 states "* * * for the purpose of ascertaining the correctness of any return." (Emphasis ours) See Donaldson v. United States, supra, 400 U.S. at 523-524, 91 S.Ct. at 539 affirming the enforcement of a summons regarding third persons. The language of these sections is broad and has been construed to confer power upon the Commissioner to inquire and to obtain the names of the taxpayer from a tax preparer by use of the Section 7602 summons. United States v. Theodore, supra. As recently as January 9, 1973, the Supreme Court affirmed an enforcement of a Section 7602 summons used to obtain pertinent business records from the taxpayer's accountant. Couch v. United States, 409 U.S. 322, 93 S.Ct. 611, 34 L.Ed.2d 548 (1973). Thus, the mere fact that information is sought from a person other than the taxpayer under investigation is an insufficient ground upon which to decline to enforce a summons.

Respondents' related argument is that the summons is so broad as to constitute a fishing expedition and imposes an enormous burden upon them. In United States v. Harrington, 388 F. 2d 520 (2d Cir. 1968), the Court held that:

"* * * the Government may not exercise its investigative and inquisitorial power without limit—the examination is `unreasonable' and impermissible if it is overbroad, `out of proportion to the end sought,' or if it is `so unrelated to the matter properly under inquiry as to exceed the investigative power." (citations omitted) 388 F.2d at 523.

The above test is to be more stringently applied where the records sought are those of third persons rather than those of the taxpayer. United States v. Harrington, supra. In addition, it must be shown that there is a sufficient nexus between the records in question and the tax liability involved. United States v. Egenberg, 443 F.2d 512, 515 (3rd Cir. 1971). In the instant case, the summons is precise in what it seeks: the names, addresses and Social Security numbers of respondents' clients for the 1971 tax year. It is limited to the specific information directly related to the investigation of the tax liabilities of respondents' clients. In order to have a challenged summons enforced, it is not necessary that the IRS show probable cause to suspect fraud, but only that the...