United States v. Spezzano, MISC. CIV-82-119T to MISC. CIV-82-121T.
| Decision Date | 12 August 1982 |
| Docket Number | No. MISC. CIV-82-119T to MISC. CIV-82-121T.,MISC. CIV-82-119T to MISC. CIV-82-121T. |
| Citation | 559 F. Supp. 631 |
| Parties | UNITED STATES of America and Anthony Trezza, Special Agent, Internal Revenue Service, Petitioners, v. Gerald W. SPEZZANO, Respondent. UNITED STATES of America and Anthony Trezza, Special Agent, Internal Revenue Service, Petitioners, v. William J. NEILD, Respondent. UNITED STATES of America and Anthony Trezza, Special Agent, Internal Revenue Service, Petitioners, v. Frank V. AVERY, Respondent. |
| Court | U.S. District Court — Western District of New York |
David Rothenberg, Asst. U.S. Atty., Rochester, N.Y., for petitioners.
William J. Neild, Petralia, Neild & Webb, Rochester, N.Y., for respondent.
In this proceeding brought pursuant to 26 U.S.C. 7402(b) and 7604(a), the Internal Revenue Service (IRS) seeks judicial enforcement of three summonses requiring the production of certain records which are currently in the possession of the respondents. The three summonses were served upon the taxpayer, Frank Avery; the taxpayer's accountant, Gerald Spezzano; and the taxpayer's attorney, William Neild, Esq. All three summonses seek the production of the same documents: the accountant's original workpapers along with the accountant's original working drafts of several tax returns prepared by him for the taxpayer. The records are sought pursuant to an ongoing civil and criminal investigation of the tax liability of Avery.
Section 7602 of the Internal Revenue Code of 1954 authorizes the IRS to issue summonses to compel the production of records and the examination of witnesses for the purpose of determining civil tax liability. However, to insure that the IRS uses its summonses power within its authorized limitations, Congress did not confer upon the IRS the power to enforce its own summonses. Rather, Congress found it necessary to "provide protection from arbitrary and capricious action by placing the federal courts between the government and the persons summoned". United States v. Bisceglia, 420 U.S. 141, 151, 95 S.Ct. 915, 921, 43 L.Ed.2d 88 (1975). Consequently, in order to enforce a taxpayer summons, the IRS must, as it has done here, file an enforcement petition with the federal district court. 26 U.S.C. § 7402(b).
To be enforced by the court, the IRS summons must be issued in good faith and prior to an IRS recommendation to the Department of Justice for criminal prosecution. Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971); United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978). Initially the government bears the burden of proving a prima facie case of good faith enforcement. Once the government has established its prima facie case, the burden shifts to the taxpayer who can prevail only by showing that enforcement of the summons would be an abuse of the court's process. United States v. Powell, 379 U.S. 48, 51, 85 S.Ct. 248, 251, 13 L.Ed.2d 112 (1964).
In challenging the enforcement of the instant summonses, the respondents have raised two distinct objections. First, they claim that all the documents required to be produced under the terms of the summonses are already in the possession of the IRS. Second, respondents allege the summonses were issued by the IRS solely to facilitate a criminal investigation of the taxpayer. These two objections will be discussed separately below.
In United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), the Supreme Court set forth the elements the IRS must establish to carry their burden of demonstrating a prima facie case of good faith enforcement of the taxpayer summons. One of the elements is that "the information sought is not already in the possession of the Internal Revenue Service". Id. at 85 S.Ct. at 254.
In the instant enforcement actions, the taxpayer and the IRS are in disagreement over what documents, if any, have already been supplied to the government. Both sides agree that on or about October 20, 1982 the taxpayer's attorney, Mr. Neild, met with IRS special agent Anthony Trezza. At the meeting Trezza was allowed by Neild to examine and make copies of at least some of the workpapers the taxpayer's accountant generated in computing the taxpayer's tax liability. The respondents argue that because the IRS has copies of certain documents, there is no need for the taxpayer to supply the original documents themselves.
In United States v. Davey however, the Second Circuit held the IRS is entitled to inspect original books and records pursuant to its summons powers.
Section 7602 does not speak in terms of duplicates, but of the records themselves —and for good reason. Where the accuracy of a taxpayer's return is being checked, the government is entitled to use the original records for purposes of verification rather than be forced to accept purported copies, which present the risk of error or tampering. The IRS should not be put in the position of having to prove such error or tampering before it may use the originals.
543 F.2d 996, 1001 (2d Cir.1976). Thus, even assuming that the taxpayer has already supplied copies of all the documents requested by the IRS, the government is nevertheless entitled to inspect the original documents, and such a request does not indicate bad faith. See United States v. Nelsen Steel and Wire Co., 485 F.Supp. 949 (N.D.Ill.1980).
The taxpayer has also argued that the accountant's original pencil drafts of his individual income tax return, his sales tax return and his payroll tax return need not be provided to the IRS because the government already has the information in the form of the actual returns filed with the IRS. Such an argument however, simply begs the real issue in this case. Section 7602 of the Internal Revenue Code allows the IRS to examine any books, papers, records, or other data which "may be relevant" in ascertaining the accuracy of any tax return. (emphasis added). The IRS need not guarantee that every document or item subpoenaed will in fact be relevant to their investigation of the tax liability of Mr. Avery. Rather, the scope of their statutory power is broad enough to include the right to compel the production of documents which "might throw light upon subjects under legitimate inquiry". United States v. Acker, 325 F.Supp. 857, 862 (S.D.N.Y.1971).
Applying these principles to the case at hand, it is clear that the arguments of the taxpayer must be rejected. The fact that the IRS already possesses the tax returns that were ultimately filed by the taxpayer does not necessarily mean that the accountant's pencil drafts of those returns are not relevant in ascertaining the accuracy of the taxpayer's returns. To the contrary, as the government has pointed out, if the entries on the tax returns which were ultimately filed with the IRS differ from the entries on the accountant's original pencil drafts of those returns, the accuracy of the filed returns are clearly drawn into question. Thus, the accountant's pencil drafts and work papers "may be relevant" in ascertaining the correct tax liability of Mr. Avery, and consequently must be produced for inspection. See United States v. Daffin, 653 F.2d 121, 124 (4th Cir.1981).
The taxpayer has also argued that enforcement of the summons should be denied because the IRS has made an institutional commitment to prosecute him for tax fraud. There is no dispute that an IRS summons issued solely for the purpose of unearthing evidence of criminal conduct is invalid and unenforceable because such use is outside the scope of Section 7602. United States v. Morgan Guaranty Trust Company, 524 F.Supp. 24, 26 (S.D.N.Y.1981). "Nothing in Section 7602 or its legislative history suggests that Congress intended the summons authority to broaden the Justice Department's right of criminal litigation discovery or to infringe on the role of the Grand Jury as a principal tool of criminal accusation". United States v. LaSalle National Bank, 437 U.S. 298, 312, 98 S.Ct. 2357, 2365, 57 L.Ed.2d 221 (1977).
The Supreme Court has recognized that there exists no magic formula for ascertaining the moment at which the civil and criminal aspects of a tax fraud investigation begin to diverge. The tax code may impose civil penalties on taxpayer conduct which also amounts to criminal tax fraud. For example, a taxpayer who willfully files a false tax return is not only subject to the criminal fraud penalties of Section 7202 of the Code, but also may be liable for a civil penalty of 50% of any tax underpayment under Section 6653 of the Code. Thus, in drafting the tax law, "Congress has created a law enforcement system in which the criminal and civil elements are inherently intertwined". LaSalle, supra at 309, 98 S.Ct. at 2363.
Under the standards articulated by the Supreme Court in LaSalle, the taxpayer bears the burden of disproving the existence of a valid civil tax determination purpose in challenging the enforcement of an IRS summons. Abandonment of a civil tax purpose is conclusively presumed to have occurred when the IRS recommends criminal prosecution to the Department of Justice. In the instant enforcement actions there is no dispute that the IRS has not recommended to the Justice Department that Mr. Avery be criminally prosecuted.
The taxpayer may also demonstrate abandonment of a civil tax purpose prior to a Justice Department referral by proving that the "institutional posture" of the IRS is one of total abandonment of any interest in civil tax determination or collection. LaSalle, supra at 316, 98 S.Ct. at 2367; United States v. Marine Midland Bank of New York, 585 F.2d 36, 38 (2d Cir.1978). The Supreme Court has described the taxpayer's burden in this situation as a "heavy one".1 LaSalle, supra 437 U.S. at 316, 98 S.Ct. at 2367. It is this precise burden which the taxpayer in the instant action bears, and in order to succeed in preventing...
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