United States v. Ladd

• Decision Date: 03 April 1979
• Docket Number: No. CA 3-78-1272-F.,CA 3-78-1272-F.
• Citation: 471 F. Supp. 1150
• Parties: UNITED STATES of America and Richard D. Kaiser v. Patsy A. LADD, Dobson Floors, Inc., Intervenor.
• Court: U.S. District Court — Northern District of Texas

471 F. Supp. 1150

UNITED STATES of America and Richard D. Kaiser v. Patsy A. LADD Dobson Floors, Inc., Intervenor.

No. CA 3-78-1272-F.

United States District Court, N. D. Texas, Dallas Division.

April 3, 1979.

COPYRIGHT MATERIAL OMITTED

Kenneth J. Mighell, U.S. Atty., Dallas, Tex., for plaintiff.

John D. Copeland, Dallas, Tex., for Patsy A. Ladd.

Ronald L. Goranson, Dallas, Tex., for intervenor Dobson Floors, Inc.

MEMORANDUM OPINION

ROBERT W. PORTER, District Judge.

On April 25 and again on May 25, 1978, Special Agent Richard Kaiser issued Internal Revenue civil summonses to Patsy A. Ladd as Secretary/Treasurer of Dobson Floors, Inc. (DFI). The summonses sought various records of DFI for the years ending 1974, 1975, and 1976.

The Internal Revenue Service's (IRS) investigation was initiated by an informant's tip that had been received by the Criminal Investigation Division (CID). The informant had suggested that DFI had not fully reported its sales for the taxable year ending July, 1976, and had tendered documents in support of the allegation. The case was referred to the Audit Division, where Revenue Agent Bill Owens was assigned responsibility for its investigation. Owens undertook his examination of DFI approximately two months later. Physical examination of DFI records was conducted at the home of Joe and Patsy Ladd, and was addressed to the taxable year ending 1976. Mr. Owens' investigation uncovered apparent discrepancies in cash sales, and by his last meeting with the Ladds on March 24, 1978, Owens had expanded his examination to include the taxable year ending July 1975. His suspicion of possible fraud led Owens to refer the case to CID on March 29, 1978, where it was assigned to Special Agent Richard Kaiser. On April 25, 1978, Kaiser caused to be issued the first of the summonses contested here. He issued a second summons on May 25, 1978, adding documents relating to an earlier year. The April and May 1978 summonses were the first issued to any parties involved in this case. Compliance with requested documents theretofore had been voluntary and complete.

Upon Mrs. Ladd's refusal to comply with the summonses, the IRS initiated an enforcement action in this court, pursuant to 26 U.S.C. § 7604(b). Mrs. Ladd answered, and DFI entered the action as intervenor.¹ In response to the IRS petition filed in this proceeding, Mrs. Ladd and DFI filed their motions to dismiss and to quash the order to show cause. Various grounds are set forth in the motions, each of which is considered separately below as it relates to the enforceability of the summonses. I preface my findings and conclusions relating to these grounds, however, with general observations to focus upon the distinctive nature of a summons proceeding.

I. Nature of Summons Enforcement Proceedings

Section 7602 of the Internal Revenue Code of 1954 (IRC) serves as statutory authorization for the IRS' examination of books and records

"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 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 . . ."

26 U.S.C. § 7602.

Enforcement of the summons may be effected only upon application to the appropriate federal district court, which must examine the summons and consider the merits of the application for enforcement. 26 U.S.C. § 7604. See generally, Constraints on the Administrative Summons Power of the Internal Revenue Service, 63 Iowa L.Rev. 526 (1977). The action in the district court is an adversary proceeding, Reisman v. Caplin, 375 U.S. 440, 446, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964), to which the Federal Rules of Civil Procedure apply, subject to appropriate limitation by the district court. Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1970). Nevertheless, taxpayers contesting such summonses² are neither provided the level of due process protection accorded criminal defendants, nor are they permitted the usual scope of pretrial discovery.³See, e. g., United States v. Turner, 480 F.2d 272, 275-276 (7th Cir. 1973). The policies reflected in these limitations are dual: (1) that a civil summons is regarded as essentially non-punitive and therefore inquisitorial rather than accusatorial, United States v. Bisceglia, 420 U.S. 141, 95 S.Ct. 915, 43 L.Ed.2d 88 (1975);⁴ and (2) that the proceeding in the district court may not be used by the taxpayer to delay or avoid payment of a deficiency. The latter consideration is itself part and parcel of a general public goal of prompt collection of tax revenue.⁵See 26 U.S.C. § 7609(h)(2).

With these considerations in mind, one may better view the posture of the IRS in seeking enforcement of its summonses. The IRS is not required to show probable cause, United States v. Powell, 379 U.S. 48, 52-57, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964); rather, it has the initial and lesser burden of proving that the requested documents "may be relevant or material to" a civil investigation. 26 U.S.C. § 7602(1); 379 U.S. at 57-58, 85 S.Ct. 248. Upon a government's establishing relevancy, the burden then shifts to the taxpayer to prove that the summons was issued in bad faith or for an improper purpose, or that the information is privileged.

In order to forestall abuse of its process, the district court ordinarily grants a hearing prior to enforcement of the summons. At that time the taxpayer may issue any appropriate challenge. 26 U.S.C. § 7604.⁶ Such a hearing was held before me on January 23, and was continued and concluded on January 29, 1979.

II. Showing by the Government: Relevancy, Materiality of Documents

The power of the IRS to investigate records and affairs of taxpayers is greater than that of a party in civil litigation; accordingly this circuit has urged that it be liberally construed. United States v. McKay, 372 F.2d 174, 176 (5th Cir. 1967). In such a context, moreover, "the criteria of relevancy and materiality has broader connotations than in the context of trial evidence." Id.

Revenue Agent Owens testified extensively regarding his conduct of the civil investigation of this case. As a revenue agent, his duty is to analyze the filed return for support documentation and to review the return to determine tax liability. The procedure he employed in this case did not differ from his general practice, in that Owens reviewed only samples of types of documents. His routine method, therefore, does not favor reconciliation of every check deposit or business document because of the cost and effort. Up until the dates of the summonses' issuance, he had primarily sampled purchase and sale slips. He had examined some items of expense of cost of goods sold, but had not completed what he considered to be a thorough or diligent examination of those expenses "below" the cost of goods sold stage. Owens testified he lacked sufficient information to conclude whether further adjustments would result in the unexamined areas.

Owens addressed each item that had been requested in the summonses. He indicated how each would bear on the investigation as it stood at the date of the summonses' issuance, and concluded that each was necessary to ascertain civil tax liability. Owens further stated that no control regarding the civil audit had been exercised by other departments of the government. His communications with other IRS personnel about the case do not support any finding of impropriety. Owens had discussed the case with his supervisor, as was normally required in cases over six months old. Owens queried Regional Counsel regarding a matter collateral to this inquiry in the case.

The government has the burden to obtain enforcement of its summonses by showing that they were administratively regular and that the information sought was relevant, material, and not in the hands of the Commissioner. Powell, supra; United States v. Hankins, 565 F.2d 1344, 1351 (5th Cir. 1978). I find, subject to exceptions noted in the following sections, that the government has made the requisite showing.

III. Burden of Taxpayers: Claims Asserted to Defeat Enforcement

A. Failure of the petition to state a claim. Although Section 7604(a) does not specify the procedure to be followed to invoke jurisdiction, the Supreme Court has concluded that proceedings are instituted by filing a complaint, followed by answer and hearing. Powell, supra, 379 U.S. 58 at n. 18, 85 S.Ct. 248, n. 18.

The petition is challenged as failing to allege the enforcement requisites of Powell. Contended to be missing are claims (1) that the documents sought are not already in the possession of the government; (2) that the summonses were issued for a legitimate purpose under section 7602 of the Internal Revenue Code and (3) that the government took all procedural steps required by the IRC to effect enforcement. The petition does not track this language. The legal issue offered, therefore, is whether the Powell conditions must be present as allegations in the petition or face dismissal of the claim for enforcement.

Taxpayers cite United States v. Powell, supra, and United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975), as approving their position. Neither case squarely supports this argument. The Supreme Court's opinion in Powell does state that the conditions noted above must be met before judicial enforcement will obtain. It does not, however, demand their presence in the petition as a condition to enforcement. Instead, the Court explained that the IRS

"must show 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,

...