United States v. Theodore, Civ. A. No. 72-950.

• Decision Date: 14 September 1972
• Docket Number: Civ. A. No. 72-950.
• Citation: 347 F. Supp. 1070
• Court: U.S. District Court — District of South Carolina
• Parties: UNITED STATES of America and Tobe H. Todd, Jr., Revenue Agent, Internal Revenue Service, Petitioners, v. Charles THEODORE, as Vice-President of Theodore Accounting Service, P.A. and Theodore Accounting Service, a Professional Association, Respondents.

347 F. Supp. 1070

UNITED STATES of America and Tobe H. Todd, Jr., Revenue Agent, Internal Revenue Service, Petitioners, v. Charles THEODORE, as Vice-President of Theodore Accounting Service, P.A. and Theodore Accounting Service, a Professional Association, Respondents.

Civ. A. No. 72-950.

United States District Court, D. South Carolina, Greenville Division.

September 14, 1972.

J. D. McCoy, Asst. U. S. Atty., Greenville, S. C., John M. Dowd, Tax Division, Dept. of Justice, Washington, D. C., for the Government.

Robert A. Dobson, III, of Dobson & Dobson, Greenville, S. C., for defendants.

ORDER TO ENFORCE INTERNAL REVENUE SERVICE SUMMONS

HEMPHILL, District Judge.

This compliance motion came on to be heard at 10:00 a. m. on August 14, 1972, pursuant to an order entered by this court on July 31, 1972, directing the respondents, Charles Theodore as Vice-President of Theodore Accounting Service, P.A. and Theodore Accounting Service, a Professional Association to show cause why they should not be compelled to comply with the terms of an Internal Revenue Service summons admittedly served upon them on May 8, 1972, requiring the production of the corporate records used by respondents in the preparation of tax returns of their clients and customers. The hearing originally set for August 7, 1972, was reset for August 14, 1972, at the request of the petitioners.

Respondents moved to dismiss the petition on the ground that they could not be pursued in their corporate capacity (which they denied) because no articles of incorporation had been filed as required by state statute.¹ Respondents' contention is two-fold pronged. They maintain that South Carolina has adopted the principle of the Model Business Corporation Act which sets the filing of articles of incorporation as the decisive factors in determining the existence or nonexistence of the corporation. They also contend that the concepts of de jure corporation, de facto corporation and corporation by estoppel do not apply when the filing of the articles of incorporation is the determining factor of corporate existence. Respondents argue that they are a partnership and as such cannot be sued in a corporate capacity and are thus justified in refusing to produce the records based upon the Fifth Amendment privilege against self-incrimination.

The claim of the respondents is without merit. Initially, assuming arguendo the facts in the motion are true, Rule 17(b)(1)² of the Federal Rules of Civil Procedure provides: "* * * that a partnership or other unincorporated association, * * * may * * * be sued in its common name for the purpose of enforcing * * * against it a substantive right existing under the * * * laws of the United States * * *." See Petrol Shipping Corporation v. Kingdom of Greece, Ministry of Commerce, Purchase Directorate (CCA 2 1966), 360 F.2d 103; 6 Wright and Miller Federal Practice and Procedure (1971) pp. 743-747; 3A Moore's Federal Practice (2d Ed.), pp. 851-856. In addition, the evidence introduced and admitted into evidence for the petitioners clearly shows that the respondents held themselves out to be a corporation to the general public and to both the governments of South Carolina and the United States. They filed corporation tax returns, state and federal. No partnership return was filed on state or federal level. None of the individuals involved reported any income from a partnership. The respondents are therefore estopped to deny the existence and the viability of this corporation. This court will not permit the respondents to change their proverbial hats because a tax investigation is now under way to determine whether their customers have correctly reported income on their tax returns. Nor does this court find any merit in the argument that the law of South Carolina no longer recognizes a de facto corporation or a corporation by estoppel. See Bethea v. Allen, 177 S.C. 534, 181 S.E. 893 (1935); Dargan v. Graves, 252 S.C. 641, 168 S.E.2d 306 (1969).³

In view of the foregoing, it is clear that the respondents can be sued as corporate entity and that the records sought by the summons are corporate in nature and subject to production. No showing has been made before this court that the records are other than corporate records. It is well-settled that the privilege against self-incrimination is a purely personal one which cannot be invoked by or on behalf of a corporation, United States v. White (1944), 322 U.S. 694, 64 S.Ct. 1248, 88 L.Ed. 1542; Hale v. Henkel (1906), 201 U.S. 43, 26 S.Ct. 370, 50 L.Ed. 652; Wilson v. United States (1911), 221 U.S. 361, 31 S.Ct. 538, 55 L.Ed. 771; Essgee Co. of China v. United States (1923), 262 U.S. 151, 43 S.Ct. 514, 67 L.Ed. 917, and the records held by Charles Theodore as Vice-President of Theodore Accounting Service, P.A. cannot be the subject of the privilege against self-incrimination, even though production of the papers might tend to incriminate him personally. Wilson v. United States, supra; United States v. White, supra; Grant and Burlingame v. United States (1913), 227 U.S. 74, 33 S.Ct. 190, 57 L.Ed. 423; Wheeler v. United States (1913), 226 U. S. 478, 33 S.Ct. 158, 57 L.Ed. 309; Essgee Co. v. United States, supra. Accordingly, the motion to dismiss should be denied and the Fifth Amendment privilege of Charles Theodore is no bar to production of the summoned records.

In the afternoon of August 14, 1972, the respondents were permitted to file an answer to the petition and were granted an additional hearing to state their objections to the enforcement of the instant summons. Rule 81(a)(3)⁴, Federal Rules of Civil Procedure; Donaldson v. United States (1971), 400 U.S. 517, 528-529, 91 S.Ct. 534, 27 L.Ed.2d 580; United States v. Newman (CCA 5 1971), 441 F.2d 165, 168-169.

At the hearing respondents claimed: (a) that the summons was issued for the alleged sole purpose of gaining information for a purported criminal prosecution of Charles Theodore; (b) that Theodore Accounting Service, P.A. is not a legal entity and the summoned records are the individual property of John Theodore, Charles Theodore and Louis Manios; (c) the production of the records would violate the Fourth and Fifth Amendment privileges of Charles Theodore; (d) the records are not relevant to any taxpayer's return or the collection of any tax from any taxpayer under examination and (e) that the summons is so broad in scope as to constitute an unreasonable search and seizure.

In response, counsel for the petitioners made an undisputed offer of proof which substantially refuted the facts set out in the affidavit of Charles Theodore attached to the answer. Respondents did not present any evidence in support of their objections, except an affidavit of Mr. Theodore pertaining to the criminal purpose argument, even though Mr. Manios and Mr. Theodore were present in the courtroom. Moreover, counsel for the respondents declined the court's invitation to hear the testimony of the agents of the Government who were also present and prepared to testify. United States v. Powell (1964), 379 U.S. 48, 58, 85 S.Ct. 248, 13 L.Ed.2d 112.

The Government, in its offer of proof which is undisputed, advised the court that the instant summons was issued as part of the Tax Preparers Project instituted by the Commissioner of Internal Revenue as authorized by 26 U.S.C. § 7601.⁵ Apparently agents from all three branches (Intelligence, Collection and Audit) of the Internal Revenue Service were utilized by the District Director to canvass the District and determine if tax preparers were correctly preparing tax returns. This project was effectuated by selecting preparers and sending an undercover agent with assumed information to the preparers for the preparation of a tax return. In the instant case, this was done and it was found that Charles Theodore improperly prepared the return using the assumed information. At that point, a decision was made, either to arrest the subject and refer the matter to the United States Attorney for presentation to a grand jury and subsequent prosecution, or to issue a cease and desist letter to the preparer and asked him to turn over his records or a list of the taxpayers for whom returns were prepared so that an audit could be conducted of those returns to determine their correctness. In this case, a Special Agent assigned to the project and Revenue Agent Todd delivered the cease and desist letter to the respondents and asked that the records or a list be produced. Respondents declined to produce the same which precipitated the issuance and service of the instant summons by Revenue Agent Todd.

The court is informed that the Intelligence Division is not presently conducting an investigation of the respondents in either their corporate or individual capacities. No criminal prosecution is in esse nor has one been recommended against the respondents in any capacity. The intelligence agents participating in the instant case were a part of the team of agents assigned to conduct the project.

When the summoned records are produced, the Audit Division will conduct audits to ascertain the correctness of all the returns prepared by the respondents during the years 1969 through 1971. If fraud on the part of the respondents or the taxpayer appears in the audit, the matter may then be referred to the Intelligence Division for further investigation and the activities of any Government agents will be governed accordingly.

In any event, counsel for the respondent erroneously assumes that a Section 7602⁶ summons can be utilized only to investigate civil tax liability. The Supreme Court of the United States has held otherwise in the case of Donaldson v. United States, supra. There the Court held, 400 U.S. at page 536, 91 S.Ct. at page 545:

* * * an internal revenue summons may be issued in aid of an investigation if it is issued in good faith and prior to a recommendation for criminal prosecution.

In the instant case, there has been no...