United States v. Particle Data, Inc., 85 C 10428.

• Decision Date: 02 May 1986
• Docket Number: No. 85 C 10428.,85 C 10428.
• Citation: 634 F. Supp. 272
• Parties: UNITED STATES of America, and Gordon D. Meyer, Petitioners, v. PARTICLE DATA, INC. and Particle Data Laboratories, Ltd., Respondents.
• Court: U.S. District Court — Northern District of Illinois

634 F. Supp. 272

UNITED STATES of America, and Gordon D. Meyer, Petitioners, v. PARTICLE DATA, INC. and Particle Data Laboratories, Ltd., Respondents.

No. 85 C 10428.

United States District Court, N.D. Illinois, E.D.

May 2, 1986.

Anton R. Valukas, U.S. Atty., Eileen Marutzky, Asst. U.S. Atty., Chicago, Ill., Gerald C. Miller, Tax Div., Dept. of Justice, Washington, D.C., for petitioners.

Andrew B. Spiegel, Chicago, Ill., for respondents.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

On December 17, 1985 the United States and Internal Revenue Service ("IRS") Special Agent Gordon Meyer ("Meyer")¹ filed a petition for enforcement of two June 27, 1984 IRS summonses (the "Summonses"). Both Summonses seek information from Particle Data, Inc. and Particle Data Laboratories, Ltd. (collectively "Particle Data," treated as a singular noun) concerning the potential tax liability of Robert Berg ("Berg"), president of both Particle Data companies. On December 27 this Court ordered Particle Data to show cause why it should not be compelled to obey the Summonses. Both sides have now briefed their respective positions, and this Court orders enforcement of the Summonses.

Facts

Meyer was initially assigned to investigate Berg's federal tax liability for 1980-82. That investigation has been expanded to include 1983 and 1984 (Meyer Decl. ¶¶ 1-2). According to id. ¶ 3:

The purposes of the investigation are, for the five years under investigation, to determine the taxpayer's correct tax liabilities, to prepare federal income tax returns for the taxpayer for those years, if the filings of such returns were required by law, and to ascertain whether the taxpayer has committed any offense connected with the administration or enforcement of the internal revenue laws.

Having determined Berg was president of Particle Data, Meyer issued the two Summonses (Pl.Ex. 1-2, each on IRS Form 2039) whose enforcement is now sought, calling for Particle Data to appear and produce "any and all records, books, documents, correspondence and things" pertaining to Particle Data's taxable income and financial transactions for the period December 1, 1978 to January 31, 1984. Each Summons said the records demanded "included but were not limited to" specific types of documents and records listed in the Summons (id.). That same day Meyer also caused summonses to be issued to ten banking and commercial institutions thought to have information about Berg's finances (Particle Data Mem. 3 and Exs. 2-3).²

Particle Data did not respond to the Summonses. Instead Berg petitioned this District Court to quash all 12 summonses. That petition was summarily denied by Judge Charles Kocoras (Berg v. United States, No. 84 C 6068 (N.D.Ill. Jan. 22, 1985)). Particle Data nevertheless continues its nonresponsive posture as to the Summonses,³ and this petition ensued.

Particle Data's Contentions

Particle Data's response to this Court's show-cause order advances several arguments in defense of its noncompliance:

1. Form 2039 does not carry an Office of Management and Budget ("OMB") control number and thus may be ignored pursuant to the Paperwork Reduction Act ("PRA"), 44 U.S.C. §§ 3507(f) and 3512.⁴

2. IRS cannot use its summons power as a criminal discovery device because:

(a) Congress has not authorized such use and

(b) if Congress has authorized such use, that authorization is unconstitutional.

On those predicates Particle Data is entitled (1) to have the Summonses quashed or (2) in the alternative to obtain discovery as to whether IRS has abandoned any civil purpose in its Berg investigation.

3. IRS' use of its summons power to obtain information already in its possession demonstrates bad faith, and its petition is therefore an abuse of process.

None of those arguments has any merit.

Form 2039

Concerned that the federal government was overburdening individuals, small businesses and others with paperwork, Congress enacted the 1980 PRA in part to help cut down that burden (PRA § 3501(1)). One means Congress prescribed was review by OMB's Director of all "information collection requests" proposed by federal agencies, to determine whether or not the information sought was both necessary to the proposing agency's functions and not already obtainable from a source within the federal government (PRA §§ 3504(c)(2)-(3) and 3507(a)(1)(A)). Requests satisfying that OMB review receive a control number, which must be displayed on the request (id. § 3504(c)(3)(A)). PRA § 3507(f) provides:

An agency shall not engage in a collection of information without obtaining from the Director a control number to be displayed upon the information collection request.

That provision is not merely precatory. PRA § 3512 says:

Notwithstanding any other provision of law, no person shall be subject to any penalty for failing to maintain or provide any information to any agency if the information collection request involved ... does not display a current control number assigned by the Director or fails to state that such request is not subject to this chapter.

Form 2039 is an "information collection request" within the PRA § 3502(11) definition. Concededly it carries no OMB control number. But Particle Data's counsel chooses to cite only part of the statute, ignoring a flat exclusion from its coverage, and his myopia dooms the Particle Data argument.⁵

PRA § 3518(c)(1) provides the entire PRA (Chapter 35 of Title 44 of the United States Code) is not applicable to the collection of information:

(A) during the conduct of a Federal criminal investigation or prosecution, or during the disposition of a particular criminal matter; or

(B) during the conduct of (i) a civil action to which the United States or any official or agency thereof is a party or (ii) an administrative action or investigation involving an agency against specific individuals or entities....

IRS issued the Summonses pursuant to its investigation of Berg, a "specific individual." No OMB control number was required. See Cameron v. IRS, 593 F.Supp. 1540, 1556 (N.D.Ind.1984), aff'd, 773 F.2d 126 (7th Cir.1985) (process of assessment and collection of taxes falls under PRA § 3518(c)(1)(B)(ii) exception to OMB control number requirement); Snyder v. IRS, 596 F.Supp. 240, 250 (N.D.Ind.1984) (reaffirming Cameron).⁶

Particle Data presses the further argument that even if Form 2039 is not required to carry an OMB control number, PRA § 3512 requires it so to state. That is an equally warped statutory reading. As the preceding paragraph reflects, all of PRA— and that includes PRA § 3512—simply "does not apply to the collection of information" described in PRA § 3518(c)(1). And that is made crystal clear not only by the plain statutory language but by the relevant PRA legislative history Particle Data (with typical selectivity) does not cite. See S.Rep. No. 930, 96th Cong., 2d Sess. 52, reprinted in 1980 U.S.Code Cong. & Ad. News 6241, 6292:

The only collections of information by a Federal agency which are exempted, and for which a person or persons could not claim protection under section 3512, are collections of information which this chapter does not apply to and which are exempted by section 3518....

In short, Particle Data's challenge to Form 2039 is without merit. While it may be every taxpayer's privilege to hold the government to the precise statutory language governing tax liability, it is equally every taxpayer's duty to observe the statutes' obvious directions.

"Criminal Discovery"

Particle Data invokes United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978) to urge IRS' summons authority under 26 U.S.C. § 7602 ("Section 7602") cannot be used as a discovery mechanism in a purely criminal investigation. LaSalle, however, really said something more subtle. First the Court recognized Section 7602 and the tax-law enforcement system draw no distinction between the civil and criminal elements of the tax laws, which are "inherently intertwined" (437 U.S. at 309). IRS investigations look into both criminal conduct and behavior forming a predicate for civil penalties (id. at 310-11, 98 S.Ct. at 2365). But IRS is of course not a prosecutorial agency: Only when IRS recommends prosecution to the Department of Justice ("DOJ") "do the criminal and civil aspects of a tax fraud case begin to diverge" (id. at 311, 98 S.Ct. at 2365).

Thus LaSalle recognized the "prophylactic restraint" prohibiting use of Section 7602 summonses once IRS refers a case to DOJ. It went further: Even earlier than such reference, Section 7602 summonses must be used "in good-faith pursuit of the congressionally authorized purposes" (id. at 307, 98 S.Ct. at 2363). Because Congress authorized IRS to pursue "normally inseparable" criminal and civil tax fraud investigations, use of the Section 7602 summons power solely to gather evidence for a criminal prosecution would constitute bad-faith pursuit of congressional ends (id. at 314, 98 S.Ct. at 2366).

But LaSalle was at pains to observe that an individual IRS agent's singleminded interest in the criminal aspects of a tax fraud investigation was not evidence of agency bad faith: "Layers of review" of an agent's conclusions may result in a decision to seek civil penalties notwithstanding the agent's purpose (id. at 314-15, 98 S.Ct. at 2366-67). Thus to show bad faith a summonsed party bears the "heavy" burden of showing IRS itself has an "institutional posture" of having abandoned pursuit of civil remedies in the taxpayer's case (id. at 316, 318, 98 S.Ct. at 2367-68).

Our Court of Appeals has recognized the obvious difficulty of meeting that burden. United States v. Kis, 658 F.2d 526, 539-42 (7th Cir.1981), cert. denied, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982) held a summonsed party was entitled to a limited amount of discovery as to whether or not IRS had institutionally abandoned the pursuit of civil remedies and was committed solely to developing a criminal...