United States v. Zack

• Decision Date: 30 April 1974
• Docket Number: Civ. No. LV-2162 RDF.
• Citation: 375 F. Supp. 825
• Parties: UNITED STATES of America and Hubert J. Goodrich, Special Agent, Internal Revenue Service, Petitioners, v. Thomas F. ZACK, as President, et al., Respondents.
• Court: U.S. District Court — District of Nevada

375 F. Supp. 825

UNITED STATES of America and Hubert J. Goodrich, Special Agent, Internal Revenue Service, Petitioners, v. Thomas F. ZACK, as President, et al., Respondents.

Civ. No. LV-2162 RDF.

United States District Court, D. Nevada.

April 30, 1974.

V. DeVoe Heaton, U. S. Atty., Las Vegas, Nev., for petitioners.

Goodman, Snyder & Gang, Las Vegas, Nev., for respondents.

ORDER DENYING PETITION TO ENFORCE INTERNAL REVENUE SUMMONS

FACTS

ROGER D. FOLEY, Chief Judge.

This is a proceeding under the Internal Revenue Code of 1954, sections 7402(b) and 7604(a) (26 U.S.C. §§ 7402(b) and 7604(a)), to judicially enforce an Internal Revenue Service (IRS) administrative summons of books, records and documents for IRS examination (26 U.S.C. § 7602).

On March 7, 1973, an administrative summons, Treasury Form 2039, was served on Thomas F. Zack, DDS Chartered, and Thomas F. Zack, an individual, as President of the corporation. Both entities are named as respondents in the instant petition. Respondents appeared pursuant to the summons on March 23, 1973, but refused to produce the books or records demanded or to testify fully. The IRS seeks an order directing respondents to testify and produce the data as is required and called for by the terms of the summons. The IRS petition alleges that Special Agent Hubert J. Goodrich, the officer issuing the summons, is participating in an investigation for the purpose of ascertaining the correct federal tax liabilities of the respondent corporation for the years 1970 and 1971.

This alleged civil investigation began after an informant contacted the IRS and conveyed information which was immediately relayed to Special Agent Goodrich, who in turn immediately began an investigation into possible criminal violations of the tax laws by Dr. Zack. After corroborating the fact that a double set of books was maintained in Dr. Zack's office, one for cash payments by patients and one for payments by check, and the possibility that only the check records were used to report taxable income, Special Agent Goodrich obtained a search warrant on March 1, 1973, on the basis that there was probable cause to believe that a violation of 26 U.S.C. § 7201 (attempt to evade or defeat the tax laws) was and had been occurring. On that same day, the records identified in the warrant were seized during a search of Dr. Zack's office by three IRS agents.

Exactly one week after the search warrant had been carried out, Special Agent Goodrich issued the administrative summons. This summons specified that:

"3. Records previously seized on the search warrant on March 1, 1973 need not be produced."

The factual circumstances thus clearly show that the administrative summons is part of, and merely a continuation of, the investigation for which the search warrant was issued.

ISSUE

Under the particular facts of this case, should this Court refuse to enforce the IRS administrative summons?

CONCLUSION

Yes. As discussed below, this Court finds that the facts of this case, and the sequence in which they occurred, indicate that the civil investigative tool of an administrative summons is here sought to be improperly used for the sole purpose of obtaining information in a criminal investigation. It will not, therefore, be judicially enforced.

DISCUSSION

The area of administrative summonses, as utilized by the IRS, has seen extensive litigation and appellant discussion, but this Court has been unable to find, and has not been referred to, any case law dealing with the enforceability of such a summons when it is issued on the heels of a prior search pursuant to a search warrant. To ascertain whether the IRS summons presented should be civilly enforced, then, the Court must delineate not only any relevant considerations that have heretofore been judicially expressed, but also the manner in which the accommodation of concerns for administrative effectiveness of the tax laws and protection of legal safeguards for the individual can most soundly be achieved under the unusual circumstances of this case.

The relatively recent history of the law of administrative summonses or subpoenas embodies a significant shift in judicial approaches to enforcement of such process. Prior to the 1940's, the Supreme Court was firmly against the use of subpoenas for investigations not related to law enforcement. See, e. g., Harriman v. ICC, 211 U.S. 407, 29 S.Ct. 115, 53 L.Ed. 253 (1908); FTC v. Baltimore Grain Co., 267 U.S. 586, 45 S.Ct. 461, 69 L.Ed. 800 (1924); Jones v. SEC, 298 U.S. 1, 56 S.Ct. 654, 80 L.Ed. 1015 (1936). The shift which then occurred is perhaps best seen in a dictum found in Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 208-209, 66 S.Ct. 494, 505, 90 L.Ed. 614 (1946):

". . . It is not necessary, as in the case of a warrant, that a specific charge or complaint of violation of law be pending or that the order be made pursuant to one. It is enough that the investigation be for a lawfully authorized purpose, within the power of Congress to command."

Thus,

"(f)ormer law that subpoenas were unenforceable unless they related to adjudication or to probable violations of law is now completely superseded; all that is now required is that the investigation be for a lawfully authorized purpose . . ."

(1 Davis, Administrative Law Treatise, § 3.14, p. 230 (West 1958).)

This latter approach is applicable to cases involving an IRS administrative summons. In Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459 (1964), the Supreme Court stated in dictum that:

". . . the witness may challenge the summons on any appropriate ground. This would include, as the circuits have held, the defenses that the material is sought for the improper purpose of obtaining evidence for use in a criminal prosecution, Boren v. Tucker, 9 Cir., 239 F.2d 767, 772-773 . . . ."

It is interesting to note the full reversal that is evidenced by the above dictum: not only is exercise of the summons power no longer required to be in furtherance of a criminal investigation, but a criminal investigative purpose is considered improper. The broad language of Reisman, however, was quickly narrowed by the interpretations given it in the circuit courts. For example, in Wild v. United States, 362 F.2d 206, 208-209 (9th Cir. 1966), the Ninth Circuit stated:

". . . If the sole objective of an (IRS) investigation is to obtain evidence for use in a criminal prosecution, the purpose is not legitimate and enforcement should be denied. (Citation omitted.)

"If, however, the objective of the investigation is to obtain information which may be utilized in determining whether there is civil liability for a tax or a tax plus penalty, then the summons may be enforced notwithstanding the fact that the information might also be used in a criminal prosecution."

A narrow reading of Reisman was specifically approved by the Supreme Court in Donaldson v. United States, 400 U.S. 517, 533, 91 S.Ct. 534, 545, 27 L.Ed.2d 580 (1971):

"(The Reisman dictum is applicable to the situation) where the sole object of the investigation is to gather data for criminal prosecution . . . This is evident from the fact that the dictum itself embraces the citation of Boren v. Tucker, 239 F.2d 767, 772-773 (CA 9 1956), an opinion in which, at the pages cited, the Ninth Circuit very carefully distinguished United States v. O'Connor, 118 F.Supp. 248 (Mass.1953), a case where the taxpayer already was under indictment. The Reisman dictum is to be read in the light of its citation of Boren, and of Boren's own citation of O'Connor; when so read, the dictum comes into proper focus as applicable to the situation of a pending criminal charge or, at most, of an investigation solely for criminal purposes."

To successfully challenge an IRS summons on the ground that it was issued for an improper purpose, then, a Court must be satisfied that the only purpose of the summons is to further a criminal tax investigation; for it is no defense to an enforcement proceeding that a duality of purposes exists, only one of which is improper. United States v. Bell, 448 F.2d 40, 41-42 (9th Cir. 1971); United States v. Egenberg, 443 F.2d 512, 516 (3rd Cir. 1971); United States v. Held, 435 F.2d 1361, 1364 (6th Cir. 1970); United States v. Stamp, 147 U.S.App.D. C. 340, 458 F.2d 759 (1971), cert. denied, 406 U.S. 975, 92 S.Ct. 2424, 32 L. Ed.2d 675 (1971).

The burden is upon a challenger to prove that there is no proper civil purpose for the summons. See United States v. Ferrone, 438 F.2d 381 (3rd Cir. 1971), cert. denied, 402 U.S. 1008, 91 S.Ct. 2188, 29 L.Ed.2d 430 (1971); United States v. Salter, 432 F.2d 697, 700-701 (1st Cir. 1970); United States v. Vey, 324 F.Supp. 552 (D.Pa.1971); contra, United States v. Rabinovitz, 305 F.Supp. 1218 (D.Wis.1969); United States v. Mothe, 303 F.Supp. 1366 (D. La.1969). This may well be an impossible burden to meet. The IRS is initially aided by the presumption that it is complying with its public duty, "and it cannot be assumed that (IRS agents) will abuse their authority in carrying out the examination (pursuant to an administrative summons)." United States v. First Nat. Bank of Mobile, 67 F.Supp. 616 (D.Ala.1946). And there is a general policy against judicial intervention in the investigative stage of tax matters because of the danger of undue delay in the collection of the revenues. DeMasters v. Arend, 313 F.2d 79, 87 (9th Cir. 1963), cert. denied, 375 U.S. 936, 84 S.Ct. 341, 11 L.Ed.2d 269 (1963). The IRS need give no assurance that records demanded in an administrative summons are unconnected with any criminal investigation, since the IRS may use such a summons if its investigation has both civil and criminal ramifications. United States v. Michigan Bell Telephone Co., 415 F.2d 1284 (6th Cir. 1969). Further, if the summons is issued by an IRS Special Agent, and it is conceded that such an agent principally—if not totally—is assigned to investigate possible criminal...