United States v. Wood, C 76-0416 L(B).

Decision Date15 August 1977
Docket NumberNo. C 76-0416 L(B).,C 76-0416 L(B).
Citation435 F. Supp. 870
PartiesUNITED STATES of America and Joseph D. Henry, Jr., and Kenneth G. Myers, Special Agents Internal Revenue Service, Petitioners, v. Charles F. WOOD, Respondent.
CourtU.S. District Court — Western District of Kentucky

COPYRIGHT MATERIAL OMITTED

George J. Long, U. S. Atty., Louisville, Ky., for petitioners.

William T. Warner, Kenneth J. Sorensen, Louisville, Ky., for respondent.

MEMORANDUM OPINION

ALLEN, District Judge.

This matter is before this Court upon petition of the United States pursuant to 26 U.S.C. Sec. 7402(b) and Sec. 7604 to judicially enforce an Internal Revenue Summons directing respondent (the attorney for the taxpayers) to appear to testify and to produce for examination certain books, records and papers presently in his possession. Motion by taxpayers, Albert Ray Neely and James Giles to intervene as individuals pursuant to Rule 24(a)(2) of the Federal Rules of Civil Procedure, is also pending.

In accordance with 26 U.S.C. Sec. 7602, the IRS is authorized to issue administrative summonses during a tax investigation. Under this section of the Internal Revenue Code, "For the purpose of ascertaining the correctness of any return", a summons may be issued to "examine any books, papers, records or other data which may be relevant or material . . ..", regardless of whether the records are in possession of the taxpayer himself or any other person having possession of the records.

The IRS has no direct power to enforce a summons whenever a party objects. The method by which the IRS must seek enforcement against such objections is by court enforcement of the summons pursuant to 26 U.S.C. § 7604(a). Jurisdiction of this Court is further established by 26 U.S.C. § 7402(b).

It is important to note that this summons, being issued February 13, 1976, and this petition to enforce, being filed September 22, 1976, are not subject to the new provisions of the 1976 Tax Reform Act pertaining to issuance of IRS summons. The new provisions apply to summons issued after February 28, 1977 (See Public Law 94-528, Oct. 17, 1976).

This particular summons seeks all records of, and work papers relating to, the 1970 operations of the business partnership of Ray Neely and James Giles presently held by the respondent, Mr. Wood. The material is sought to assist the IRS in its investigation of these individuals' correct tax liabilities for the year 1970.

Mr. Neely and Mr. Giles are seeking intervention to protect an alleged interest in the documents. Mr. Wood, as their attorney, is in possession of the material for use relating to the filing and prosecution of a tax refund suit against the United States entitled Giles Industries Inc. v. United States, Ct.Cl. No. 287-75.

The events leading to the filing of this action began on February 13, 1976, when petitioners, special agents Joseph D. Henry, Jr. and Kenneth G. Myers of the IRS office in Knoxville, Tennessee, caused summons to be issued to Mr. Wood following a determination by the Kentucky District Office that $20,000.00 in deteriorating currency had been deposited in a partnership bank account of Mr. Neely and Mr. Giles.

Special Agent Myers stated at a hearing by deposition that the $20,000 was not shown on the 1970 partnership return as an income item and that he was in need of the documents held by the respondent to determine why this sum of money was not reported. He further stated that no criminal prosecution had been recommended. (Myers Tr. pp. 18-45).

On February 24, 1976, the respondent made an appearance as specified by the summons, but he did not provide any of the records or work papers listed. Consequently, on September 22, 1976, this action was filed seeking judicial enforcement of the summons.

The testimony further provides that the Neely-Giles partnership is conducted on an informal basis with Mr. Neely and Mr. Giles as its sole partners. There has been no formal written partnership agreement, nor has the partnership ever maintained an office. The partners have never held themselves out as doing business as a partnership, nor have they ever maintained a set of books of accounts. The partnership maintains its own bank account and files partnership returns. All costs and profits are split on a fifty-fifty basis. The record further indicates that Mr. Giles and Mr. Neely are in the business of selling mobile homes through a corporation known as Giles Industries of Middlesboro, Kentucky. There is no property formally listed in the partnership name; however, Mr. Giles and Mr. Neely buy and sell cattle, and own and supply a 150-acre farm titled in their names and in their wives' names. The parties have also engaged in real estate transactions through the sale of homes which they built upon land they purchased.

The sole issues presented for determination by this Court are: (1) whether or not Mr. Giles and Mr. Neely should be permitted to intervene; and (2) whether or not the IRS summons should be enforced.

Speaking to this first issue, Mr. Giles and Mr. Neely contend that the partnership records are their personal property and, as such, they have a sufficient proprietary interest in the material enabling them to intervene so that they may protect their Fifth Amendment Constitutional rights which may be violated by forced disclosure. The basis for their contention is founded upon the parties application of language contained in Bellis v. United States, 417 U.S. 85, 94 S.Ct. 2179, 40 L.Ed.2d 678 (1974), and Donaldson v. U. S., 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971). Upon review of these cases, this Court is not able to accept the parties application of the language contained therein to the facts of this case. The reasoning of the intervening parties for their motion to intervene has clearly failed to hit its mark.

Donaldson v. U.S., supra, is generally regarded as the leading authority concerning a taxpayer's right to intervene in an IRS summons enforcement proceeding directed against a third party. The Court determined that a taxpayer may not intervene as of right simply because it is his tax liability that is the subject of the summons. One must establish that he has a "significantly protectable interest" before he can intervene as a matter of right within the meaning of Rule 24(a)(2) F.R.Civ.P.

Mr. Giles and Mr. Neely, relying on dictum contained in the Bellis case, contend that their interest in these partnership records is a significantly protectable interest. The opinion in Bellis v. U.S., supra, provides that partners in a partnership which possess an "organized institutional identity" do not have a personal interest in partnership records sufficient to be protected from forced disclosure by the Fifth Amendment. The Court concluded in dictum that a different ruling might result if a small family partnership was involved. Looking to several of the indicators used in the Bellis decision to establish that a partnership has an organized institutional identity, it is apparent that Mr. Neely and Mr. Giles do not have the type of small family partnership which the dictum in Bellis may have envisioned. Though this partnership is small, their association has not been a temporary arrangement set up to engage in a few short-lived projects. Rather, they have been partners for over 12 years involved in a variety of business adventures; selling mobile homes, buying and selling cattle, maintaining a large farm and, in the past, they have built and sold homes. The existence of a separate bank account for the partnership, the fact that separate partnership records were maintained, along with the fact that cost and profits of the partnership were split on a fifty-fifty basis and that partnership returns were filed, all indicate that this partnership had an established institutional identity. On the basis of these considerations, this Court will not accept the argument that Mr. Giles and Mr. Neely have established their right to intervene on the premise that theirs is a small family partnership, granting them a significantly protectable Fifth Amendment interest in these records to be protected against the forced disclosure of an IRS summons enforcement proceeding.

Furthermore, under Internal Revenue Code Section 7601, 26 U.S.C. Sec. 7601, the IRS may proceed to inquire into and concerning all persons, "who may be liable to pay any internal revenue tax". This, it has been said, "flatly imposes upon the Secretary the duty to canvass and to inquire", Donaldson v. U.S., supra at p. 539, 91 S.Ct. at p. 539.

In the case of United States v. White, 322 U.S. 694, 64 S.Ct. 1248, 88 L.Ed. 1542, Mr. Justice Murphy believed that:

". . . individuals, when acting as representatives of a collective group, cannot be said to be exercising their personal rights and duties nor to be entitled to their purely personal privileges. Rather, they assume the rights, duties and privileges of the artificial entity or association of which they are agents or officers and they are bound by its obligations".

In the same opinion Justice Murphy went on to say that, "the framers of the constitutional guarantee against compulsory self-disclosure, who were interested...

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