United States v. Kessler, Civ. No. 71-286.
| Decision Date | 16 February 1972 |
| Docket Number | Civ. No. 71-286. |
| Parties | UNITED STATES of America and Richard C. Pfeiffer, Special Agent, Internal Revenue Service, Petitioners, v. Berry L. KESSLER, Secretary, Brittany Builders, Inc., Respondent. |
| Court | U.S. District Court — Southern District of Ohio |
W. Robinson Watters, Asst. U. S. Atty., Columbus, Ohio, Ralph A. Romano, Tax Division, Dept. of Justice, Washington, D. C., for plaintiffs.
Joseph F. Dillon, Detroit, Mich., Robert A. Bell, Columbus, Ohio, for defendants.
This matter comes before the Court on the petition of the United States and Special Agent Richard C. Pfeiffer of the Internal Revenue Service (IRS) for the judicial enforcement of an IRS summons issued pursuant to § 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602.1 The summons, dated July 13, 1971, directed Berry Kessler, as Secretary of Brittany Builders, Inc. and custodian of its records, to appear before Pfeiffer on July 23, 1971, and produce various business records of the corporation for the years 1967 to 1969. The IRS asserts that these records are necessary to the investigation now pending into the tax liabilities of Dr. Carl and Sandra Neufeld. The Neufelds are not parties before the Court in this present action. When Kessler refused to produce the requested documents, the IRS sought judicial enforcement of its summons under the provisions of §§ 7402(b) and 7604 (a), IRC of 1954, 28 U.S.C. §§ 7402(b), 7604(a).2
Kessler opposed this Court's order to show cause why he should not obey the IRS summons on the ground that it violated his Fifth Amendment rights; that it was issued for an improper purpose under § 7602; and that the IRS was guilty of bad faith in the conduct of its investigation. To allow these contentions to be fully aired, the Court has held one hearing in open court and two in chambers. In addition, by Order of this Court dated December 3, 1971, respondent was allowed to depose Special Agent Pfeiffer. Able counsel for both sides have also submitted extensive and lengthy briefs to assist the Court in making its determination.
The facts of this matter as they have been developed before this Court can be briefly summarized as follows: During 1971 revenue agents of IRS's Cincinnati, Ohio, office began an audit of the Neufelds' 1967 and 1968 income tax returns. As the investigation developed, particular interest of the agents focused on a claimed $35,000.00 deduction in 1967, under § 1244 of the Code, arising out of a transaction with Brittany Builders, Inc. Other deductions were claimed for investments in other corporate entities including Mercury Builders, Inc., Esquire Builders, Inc. and Esquire Investments. Berry Kessler, an accountant by profession, was involved with each of these corporate entities. He was also the preparer of the Neufelds' income tax returns for the tax years in question. As the investigation unfolded the IRS requested various corporate records of Mercury Builders, Inc., Esquire Builders, Inc., and Esquire Investments and these were supplied either by Dr. Neufeld or by Kessler. On April 15, 1971, Special Agent Pfeiffer entered the case with particular interest in looking into the criminal fraud aspects of the transactions under investigation. When he requested corporate records of Brittany Builders which were in the possession of Kessler, its Secretary, Kessler refused to produce them. The § 7602 summons was issued and the petition herein filed soon thereafter.
There has been a good deal of confusion during the proceedings before the Court concerning the real parties to this case. It is now, however, abundantly clear that the IRS summons was directed to Kessler in his corporate capacity as Secretary of Brittany Builders and required him to produce the papers and records solely of the corporation.3 The summons did not require Kessler to produce his personal records, nor was it directed against him personally. Kessler is a respondent in the case at bar only in his capacity as Secretary of Brittany Builders, Inc. and as the individual who has continued to hold its records.
Although the parties have not done so, we believe that for the sake of clarity the voluminous matters here presented can be reframed and recast in the form of a simple precise question: Does Kessler have standing, in his individual capacity, to intervene in the summary proceedings now pending before this Court?
Kessler, of course, argues that he does and asserts two grounds in support of his intervention. He first argues that Brittany Builders, Inc. was never a lawful corporation under Ohio law. Consequently, any attempt to require production of purported corporate records in his possession, through summary proceedings, can only be a sham and a subterfuge designed to obtain his personal records in violation of the Fifth Amendment. Secondly, Kessler argues that under the facts of this case the IRS summons was issued for an improper purpose and in bad faith.
The government naturally contests both of Kessler's contentions. They argue that Brittany Builders, Inc. was a lawfully constituted corporation, with corporate records distinct from Kessler's personal files and is a proper recipient of a § 7602 summons. The government further argues that under the recent case law and especially in light of Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971), the summons was properly issued and is entitled to judicial enforcement.
Kessler's first contention must be answered by reference to Ohio law and specifically to the general corporations statute of Ohio. Ohio Revised Code, Section 1701.04, provides in part as follows:
The articles of incorporation of Brittany Builders, Inc. were filed in the customary form on May 26, 1967, and were recorded by Ted Brown, Secretary of State of Ohio, on Roll B507, Frame 110 of the Records of Incorporation. An examination of the articles of incorporation by this Court indicates that Brittany Builders fully complied with the requirements set forth in Section 1701.04 O.R.C.
Respondent Kessler acknowledges the filing of articles pursuant to Section 1701.04 O.R.C. but notes that Brittany Builders, Inc. failed to comply with Chapter 1707: Securities of the Ohio Revised Code, and that therefore the corporation never commenced an actual existence. Chapter 1707, O.R.C., is intended for the standard "Blue Sky" protection of innocent purchasers of stock. The remedies for a violation of this Chapter are to be found in Sections 1707.39, .40, .41, .42 and .43 which deal with procedures for correcting a failure to register and file, as required, with the Ohio Division of Securities; with issuer liabilities; and with the remedies of a good faith purchaser in the event of an unlawful sale. There is no suggestion to be found anywhere in Chapter 1707 that a corporation which fails to proceed in accordance with its terms thereby terminates or forfeits its corporate existence. While it may very well be that the incorporators or the officers of Brittany Builders, Inc. have violated one or more of the provisions of Chapter 1707, O.R.C., such violations are curable in civil damages and are perhaps punishable criminally but they most surely do not cause a corporation to forfeit or lose its corporate nature. Kessler's argument on this ground is totally lacking in merit and therefore Brittany Builders, Inc. did not lose its corporate status through its alleged violations of Ohio's Blue Sky law, Chapter 1707, O.R.C.
The Court also takes note of the following matters of corporate and public record: Following the filing of the articles and incorporation, the shareholders and officers of Brittany Builders, Inc., including Berry Kessler, conducted themselves in a fashion consistent with corporate existence. They obtained a line of credit and opened a checking account at the Huntington National Bank, Columbus, Ohio; they held directors' meetings and executed corporate resolutions; they bought and sold property and obtained loans on real estate.
Of utmost significance attesting to the corporate existence of Brittany Builders, Inc. is a warranty deed from Brittany Builders, Inc. to Willie D. and Elizabeth S. Ziegler which is recorded in Deed Book 2955, page 288, of the records of Franklin County, Ohio. This warranty deed is signed by Berry L. Kessler, Secretary, and acknowledged as follows:
Before me, a Notary Public in and for said County, personally came the above named Grantor, and sic Ohio corporation, by Berry L. Kessler, its Secretary, and acknowledged the execution of the foregoing deed to be its and his voluntary act and deed emphasis supplied.
In view of these facts, the Court must give due weight to the plain and simple words of Section 1701.04(D). Accordingly, we hold that the legal existence of Brittany Builders, Inc., an Ohio corporation, began on May 26, 1967, when the requisite articles of incorporation were filed with the Secretary of State of Ohio. We further hold that the corporate records and papers of Brittany Builders, Inc. for the years 1967 through 1969, now in possession of Berry L. Kessler, its Secretary, are legally distinct from Kessler's personal papers and can be properly made the subject of a § 7602 summons. Kessler's contentions to the contrary are baseless and without persuasive legal foundation.
This then brings us to the merits of this case which must be analyzed in light of Donaldson v. United States, 400 U.S. 517, 91...
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