United States v. Schwartz, 72-1222.

• Decision Date: 13 November 1972
• Docket Number: No. 72-1222.,72-1222.
• Parties: UNITED STATES of America and Hillary E. Goode, Special Agent, Internal Revenue Service, Plaintiffs-Appellants, v. Seymour SCHWARTZ, as President of Carson's of Atlanta, Inc., and Carson's of Fort Lauderdale, Inc., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

469 F.2d 977 (1972)

UNITED STATES of America and Hillary E. Goode, Special Agent, Internal Revenue Service, Plaintiffs-Appellants, v. Seymour SCHWARTZ, as President of Carson's of Atlanta, Inc., and Carson's of Fort Lauderdale, Inc., et al., Defendants-Appellees.

No. 72-1222.

United States Court of Appeals, Fifth Circuit.

November 13, 1972.

Scott P. Crampton, Meyer Rothwacks, Asst. Attys. Gen., Tax Div., Dept. of Justice, Washington, D. C., John W. Stokes, Jr., U. S. Atty., Julian M. Longley, Jr., Asst. U. S. Atty., Atlanta, Ga., Charles E. Anderson, Atty., Tax Div., Dept. of Justice, Washington, D. C., for plaintiffs-appellants.

Samuel Appel, Atlanta, Ga., for defendants-appellees.

Before TUTTLE, BELL and AINSWORTH, Circuit Judges.

TUTTLE, Circuit Judge:

The United States and Hillary E. Goode, Special Agent, Internal Revenue Service, appealed from the order of the trial court dismissing their petition to enforce an Internal Revenue summons against Patricia Long, bookkeeper, and Seymour Schwartz, president, for the production of certain described books and records of Carson's of Atlanta, Inc. and Carson's of Fort Lauderdale, Inc. The trial court dismissed the petition on the ground that "the Government seeks a second inspection of the documents listed in its summons but declines to comply with Sections 7605(b) of the Internal Revenue Code of 1954 and with the requirements of United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L. Ed.2d 112 (1964).

Section 7605(b) of the Internal Revenue Code of 1954, dealing with the requirements imposed upon the Internal Revenue Service when it seeks a second inspection of a taxpayer's books of account provides as follows:

"Restrictions on examinations 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."

The requirements of United States v. Powell, supra, as they relate to the present case, will be discussed below. Essentially, they deal with the requirement of a showing that the information sought by the summons was not within the Government's possession.

The factual setting before the trial court at the time of its dismissal of the petition was formed by affidavit and counter-affidavit by Special Agent Goode for the United States and Mrs. Long and Mr. Appel, Counsel for Appellees, for the appellees, together with oral testimony given by the Special Agent at the hearing for motion to dismiss. Although some of the affidavits are ambiguous, it is clear that the following facts are undisputed on the record. During the latter part of 1969 an examination of the corporate records of the two Carson corporations was being conducted by Special Agent Goode and other agents of the Internal Revenue Service. During that time the agents had been given "free access to all of its records" which continued until counsel was employed at which time counsel demanded that Special Agent Goode "list the documents he wished to examine". Special Agent Goode refused to do this and thereupon counsel advised the Special Agent that respondent's records would not be furnished him.

Thereupon, the special agent issued a summons which covered only the following items:

"(1) All Paid Invoices

(2) Cash Disbursement Journals

(3) All Cancelled Checks and Bank Statements."

Upon refusal of appellees to comply with the said summons it was judicially enforced by an order of the district court on June 17, 1970. This order provided:

"Such examination shall continue from day to day until completed."

Subsequently, Carson's bookkeeper, Mrs. Long, was ill for several months. But on March 4, 1971, she testified with regard to the tax liabilities of Carson's of Fort Lauderdale, Inc., and on March 11, 1971, she gave testimony with regard to the tax liability of Carson's of Atlanta, Inc. Then, according to the affidavit of Mr. Goode, which was not disputed, the following transpired:

"Your affiant asked her to review an invoice and advise if Carson\'s, Inc. had paid the invoice. She replied that the corporation had paid the invoice. The invoice represented a payment for the personal benefit of the corporation president. Your affiant next asked Patricia Long if the corporation president had reimbursed the corporation for the expenditure. She replied that she could not answer the question without an examination of the daily proof journals, in addition to the sales journal she had in front of her. She explained that some cash sales had not been entered on the corporation records as sales but were entered on the records as recoveries of bad debts and she would have to check those entries back to the daily proof sheet to answer the question."

The parties are in disagreement as to what then transpired.

Mr. Goode's affidavit says:

"An agreement was reached between all persons present that Internal Revenue Agent Hudson and your affiant would go to the office of Carson\'s of Atlanta, Inc., on Friday, March 12, 1971 and extract only the pages from the daily proof journal that Mrs. Long would need to answer the question, and that Mrs. Long would come back to the Internal Revenue office on Monday, March 15th and complete her testimony."

On the other hand, Mr. Appel, counsel for appellee, by his affidavit, states:

"Mrs. Long informed Special Agent Goode that the daily proof journals would have to be examined to determine the answer to such questions the question as to whether the corporation president had repaid the amount to the corporation. After discussion concerning the best method for accomplishing such an examination, Mr. Goode insisted that Mrs. Long review the daily proof sheets and furnish him with answers to a list of questions which he would submit concerning receipt of payments by respondent corporations. At that point, deponent states that respondents were advised that such request was unreasonable and unduly burdensome in its demand and would cause undue interference with the conduct of respondent\'s business.

The enforcement proceedings, Civil Action # 15230 resulted because of such refusal."

The trial court did not resolve the question whether a mutual agreement had been made by Mr. Goode and Mrs. Long and her counsel to reconvene on March 15th, as stated in Mr. Goode's affidavit. Although this is not directly rebutted in any affidavit on behalf of appellees, Mr. Appel's affidavit having been executed on the 17th of August, 1971, and Mr. Goode's having thereafter been executed on the 23rd of August, Mr. Appel implies that there was no agreement about any further production of documents. Nevertheless, it is not disputed that, as stated by Special Agent Goode in his affidavit:

"On Friday, March 12, 1971, at 8:20 a. m. Attorney Appel called your affiant and stated that he would advise Patricia Long not to testify to facts that required her to go to the daily proof journal since that journal was not included in the court order of June 16, 1970." (Emphasis supplied.)

Thereafter, Special Agent Goode issued a summons to Mrs. Long and Mr. Schwartz, requiring them to appear and produce the following documents: (1) daily proof journals used by the above corporations for recording cash sales, credit sales, cash receipts and bad debt recoveries. (2) All subsidiary and source documents necessary to support and explain the aforementioned documents in connection with determining the tax liability of this taxpayer. (3) Certain payroll checks (not relevant to this inquiry).

On March 29, 1971, Mrs. Long and Mr. Schwartz appeared, but each refused to testify or to produce any of the books, records or other documents described above. Thereupon the United States and Special Agent Goode filed the proceedings with which we are here concerned.

Additional facts which developed upon the hearing are that Special Agent Goode, who was in charge of the investigation, testified that he did not examine or inspect the "daily proof journals," but that on several occasions Mrs. Long had traced certain cash sales to certain daily journals.¹ Agent Goode was not able to testify of his own knowledge that none of the other agents made any other or further examination of the daily proof journals, although Mrs. Long's affidavit does contain the following statement, which conflicts with any idea that all 4,000 sheets² were readily available or spread out for the inspection of the agents in the offices of the corporation:

"Upon later investigation, I found that the daily proof journals for Carson\'s of Atlanta were all located in the basement of the corporation\'s office in Atlanta, Georgia. The proof journals for Carson\'s of Fort Lauderdale are located in Fort Lauderdale with the exceptions of the journals for the year 1967, which cannot be located."

Thus, the sum of it all is that the special agent was engaged in his original investigation, which had once been terminated by counsel for the company's president and bookkeeper; a court order was obtained requiring the bookkeeper, Mrs. Long, to appear and produce certain records other than the "daily proof journals"; after the investigation showed certain payments by the corporations on behalf of the president and other officials of the companies, the agents were faced with a prima facie case of irregularity or distortion of the companies' income; in order to give the companies an opportunity to rebut this inference, Mrs. Long was asked whether Mr. Schwartz and the other officers had reimbursed the companies.³ She replied that she could not answer without referring to the daily proof journals, because such reimbursements were sometimes treated as "Cash Sales" (no explanation having been given why they were so treated) and they appeared on the daily proof journals but then were carried...