United States v. Crespo

• Decision Date: 22 March 1968
• Docket Number: Misc. No. 559.
• Citation: 281 F. Supp. 928
• Parties: UNITED STATES of America and William N. Jackson, Special Agent, Internal Revenue Service, v. Gustav J. CRESPO, as president and George J. Smith, Jr., as vice president, of Remington Sales Bureau, Incorporated.
• Court: U.S. District Court — District of Maryland

281 F. Supp. 928

UNITED STATES of America and William N. Jackson, Special Agent, Internal Revenue Service, v. Gustav J. CRESPO, as president and George J. Smith, Jr., as vice president, of Remington Sales Bureau, Incorporated.

Misc. No. 559.

United States District Court D. Maryland.

March 22, 1968.

James Jeffries, III, Attorney, Tax Division, Department of Justice, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Tax Division, and Fred B. Ugast, Chief, General Litigation Section, Department of Justice, Washington, D. C., and Stephen H. Sachs, U. S. Atty., and Clarence E. Goetz, Asst. U. S. Atty., Baltimore, Md., on brief), for petitioners.

C. Gordon Haines, Michael J. Abromaitis and Wright, Robertson & Dowell, Baltimore, Md., for respondents.

THOMSEN, Chief Judge.

This is a proceeding brought by the United States and a Special Agent of the Internal Revenue Service (IRS) under sections 7402(b) and 7604(a), IRC, 1954,¹ to compel compliance with two administrative summonses issued to Gustav J. Crespo, as president, and George J. Smith, Jr., as vice president, of Remington Sales Bureau, Incorporated, the taxpayer, demanding their testimony and the production of certain corporate books and records for the period April 1, 1963 through March 31, 1965, alleged to be necessary for a determination of its income tax liabilities for the years ending March 31, 1964 and March 31, 1965.

Crespo owns 60% of the stock of taxpayer, Smith the remaining 40%; there were no other stockholders during the years in question.

A hearing has been held to permit respondents to show cause why they should not be compelled to obey the summonses. During the hearing petitioners entered into a stipulation with Smith, which resulted in the dismissal of the action against him. Crespo has raised the following questions: 1. Whether the IRS has already conducted "one inspection" of the books and records of the corporate taxpayer for the tax years in question, as the quoted term is used in section 7605 (b)? 2. Whether the summons was issued for a legitimate purpose? 3. Whether enforcement of the summons would constitute an unreasonable search and seizure in violation of the Fourth Amendment? 4. Whether enforcement of the summons would violate respondent Crespo's Fifth Amendment privilege against self-incrimination?

Statutes

Section 7602, dealing with the examination of books and witnesses, provides:

"For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary or his delegate is authorized —

"(1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;

"(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary or his delegate may deem proper, to appear before the Secretary or his delegate at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and

"(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry."

Section 7604(a) and section 7402(b) contain almost identical language. Section 7604(a), dealing with the enforcement of summons and the jurisdiction of district courts, provides:

"If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, records, or other data, the United States district court for the district in which such person resides or is found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, records, or other data."

Section 7605(b) provides:

"(b) Restrictions on examination of taxpayer. — No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary."

Findings of Fact from Evidence

The tax returns of the corporate taxpayer for the fiscal years ending March 31, 1963, and March 31, 1964, were assigned in regular course to Henry Weider, a revenue agent, in September 1964. Between that time and March 1967, Weider examined the general ledger and adjusting accounts, cash receipts and disbursements books, bank statements, cancelled checks and check stubs, and the minute book of the corporation. He did not see the purchase invoices or correspondence between the corporation and M. C. Ramos, Commercial Envelope Co. or Standard Register Co., except the purchase invoices of M. C. Ramos. The corporate return for the year ending March 31, 1965, was also assigned to Weider, as were the individual returns of Crespo, to which Weider gave some attention in February 1966, when he had several conversations with Crespo. Extensions of the statute of limitations were obtained from the corporation and from Crespo, so that Weider could complete his examination of the early years. In March 1967 Weider completed his examination for the year ending March 31, 1963, and wrote up reports on that year for the corporation and on the calendar years 1962 and 1963 for Crespo. On April 11, 1967, notices of deficiency were sent to the corporate taxpayer for the fiscal year ending March 31, 1963, and to Crespo et ux. for the calendar years 1962 and 1963. Petitions challenging those deficiencies were filed in the Tax Court by those taxpayers in July 1967; the cases are still pending in that Court.

While working on the aforesaid reports, in March 1967, Weider became aware of the possibility of fraud in connection with the returns of the corporate taxpayer and, in accordance with established practice, suspended his work and referred the matter to the Intelligence Division of the IRS.

A revenue agent, such as Weider, examines income tax returns and determines correct tax liabilities. He is not empowered to investigate criminal tax fraud, and when his examination reveals the possibility of fraud he must suspend his examination and refer the matter to the Intelligence Division for resolution of the fraud question.

When a referral is made to the Intelligence Division, a special agent is assigned to make a preliminary investigation. The primary duties of a special agent are the investigation of possible criminal violations of the income, estate, gift, employment and excise tax statutes, the development of information concerning possible criminal violations of those statutes, the evaluation of such information, and the recommendation of prosecution when warranted.²

After a case is referred to a special agent, he may determine that further investigation by the Intelligence Division is not warranted. If, however, he believes that further investigation is warranted, the case becomes a joint investigation with the revenue agent. The special agent, however, is in charge of that investigation. If the investigation develops the probability of criminal fraud, the special agent submits a report recommending prosecution.³

The function of the revenue agent in such an investigation is to assist the special agent by advising him of what the revenue agent has previously learned, and by participating in such further examination of the books and records of the taxpayer and others as may be necessary to determine the correct tax liability. The determination of the correct tax liability is an essential part both of the determination by the special agent whether there has been any criminal fraud, and of the determination by the revenue agent of the tax deficiency, if any, and the propriety of assessing civil fraud penalties. The special agent's report of the results of his investigation are made available to the revenue agent to assist him in computing the civil tax liability of the taxpayer under investigation. This information is transmitted to the revenue agent whether or not fraud is found, whether or not prosecution is recommended, and whether or not a conviction is ever obtained. The results of the special agent's investigation will always affect the revenue agent's computation by raising, lowering or verifying the revenue agent's computation.

The Intelligence Division referred this corporate taxpayer's case to Special Agent William N. Jackson.⁴ During the course of his investigation, Jackson determined that it was necessary to examine certain corporate books and records of corporate taxpayer pertaining to the tax years involved. On April 19, 1967, in accordance with sections 7602 and 7603, Jackson issued and personally served summonses upon respondent Crespo, as president of corporate taxpayer, and upon Smith, as vice president of the corporation,⁵ calling on them to produce certain books and records of corporate taxpayer. Crespo and Smith appeared before Special Agent Jackson pursuant to the summonses issued to them but refused to testify or produce the records demanded. None of the books, records or documents demanded by the summonses are in the possession of the United States or of Special Agent Jackson. Nor, with the exception of two or three cancelled checks, are any copies of the demanded documents in the possession of the government. Special Agent Jackson has not seen any of the books or records demanded.

Discussion

1. Respondents contend that the IRS has already conducted one inspection for the...