Zimmermann v. Wilson

• Decision Date: 19 June 1939
• Docket Number: No. 6934.,6934.
• Citation: 105 F.2d 583
• Parties: ZIMMERMANN et al. v. WILSON, Internal Revenue Agent, et al.
• Court: U.S. Court of Appeals — Third Circuit

105 F.2d 583 (1939)

ZIMMERMANN et al. v. WILSON, Internal Revenue Agent, et al.

No. 6934.

Circuit Court of Appeals, Third Circuit.

June 19, 1939.

Henry S. Drinker, of Philadelphia, Pa., for appellants.

James J. Morris, Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, and James E. Murphy, Sp. Assts. to Atty. Gen. (J. Cullen Ganey, Jr., U. S. Atty., of Bethlehem, Pa., and Thomas J. Curtin, Asst. U. S. Atty., of Philadelphia, Pa., of counsel), for appellees.

Before MARIS, BIDDLE, and BUFFINGTON, Circuit Judges.

BIDDLE, Circuit Judge.

Appellants, John E. Zimmermann and his wife, brought a bill in equity in the District Court of the United States for the Eastern District of Pennsylvania, in May, 1935, against two Internal Revenue agents and the partners of Drexel & Company, to restrain the agents from proceeding with an investigation of the Complainants' income tax returns for the years 1929 and 1930. The agents had issued a summons requiring the other defendants to produce their accounts relating to the complainants' transactions during 1929, 1930 and 1932. Judge Kirkpatrick granted a temporary restraining order; dismissed the bill on the Government's motion, and filed an opinion¹ pointing out that the question of the Government's power to examine books after the running of the statute without showing fraud was not involved, since no compulsory process was being attempted; that the brokers were making no objection; and that the transactions in question did not involve the kind of secrecy protected by the law.

On appeal this Court reversed with directions to enter the injunction prayed for, holding the Zimmermanns, and not Drexel, the brokers, to be "the real and aggrieved parties"; and that they might therefore object to what the Court held to be an unreasonable search, protected by the Fourth Amendment, U.S.C.A.Const., — a "property right" of the taxpayers. 3 Cir., 81 F.2d 847. The search was regarded by the court as "a violation of the natural law of privacy". The defendant revenue agents filed an answer to the bill in which fraud on the part of the taxpayers was alleged. Drexel & Company did not file any answer. After evidence was offered by both parties, Judge Kirkpatrick entered findings of fact, and dismissed the bill on the ground that the Government had shown sufficient reason to justify the investigation. 25 F.Supp. 75. From this decision complainants appeal to us.

Complainants, who are husband and wife, filed separate income tax returns for the years 1929 and 1930, which were approved by the agents, who had full access to complainants' books. In 1933, after ordinary assessment was barred by the two year limitation, the agents discovered upon a check of the books of Glendinning & Company, one of the brokers involved, that certain sales of stock, on which large losses had been taken, appeared to be between husband and wife. At that time there was no requirement that a taxpayer should disclose this fact, and the Zimmermanns did not do so. The agents sought further information from Drexel & Company, were refused access to the information by Drexel, acting under complainants' directions; issued a summons to Drexel², but were stopped by the restraining order and preliminary injunction.

From the evidence it appears that Mr. Zimmermann exercised unlimited control over his wife's stock transactions, and conducted them without her knowledge or participation.³ If he never actually relinquished this dominion, as the learned trial judge pointed out, the sales were not genuine. Only a full examination can determine the question.

In his income tax return for 1929 Mr. Zimmermann reported a net loss of $146,119.07 on sales of securities. Of his gross losses $417,870.31 related to sales of securities in transactions involving his wife. If these losses were eliminated the Government estimates his net gain at $271,751.24, and the tax adjustment at approximately $86,753.96. For 1930 Mr. Zimmermann used losses of $123,759.63 on similar transactions. Mrs. Zimmermann in computing a net loss of $54,634.53 on sales of securities used losses aggregating $143,401.63 in transactions involving her husband. If these losses were not allowed an additional tax of $29,846.76 is claimed.

The gross losses of $417,870.31 resulted from sales of sixteen securities in December, 1929. Similar purchases in kind and quantity were made for Mrs. Zimmermann's account by her husband acting as her agent. In December 1930 four of these sixteen items were sold by Mrs. Zimmermann through her husband's agency for losses, and we find similar reacquisitions by Mr. Zimmermann on his own account on the same day. These sales made up the $53,476.56 loss claimed by Mrs. Zimmermann. Six of the twelve stocks sold by Mr. Zimmermann in November and December 1930, for the loss of $123,759.63 were acquired for Mrs. Zimmermann's account on the same day. In 1930 Mrs. Zimmermann claimed losses on sales of six stocks, including the four referred to above, which were reacquired on the same day by Mr. Zimmermann.

Complainants argue that on their face these transactions are legitimate. That may be; but the Government wishes to dig under the surface; a device used to avoid taxes is subject to careful scrutiny⁴; transactions between husband and wife look suspicious⁵. The examination, as the trial judge says, "must cover a wide field and may involve many apparently unrelated portions of the taxpayer's private affairs." It is not unreasonable to allow the Government to obtain all available information. The running of the statute does not alter the reasonableness of such a course.

Moreover, it is impossible to determine in this proceeding whether examination of any particular records by the agents would or would not be reasonable. The Fourth Amendment protects against unreasonable searches; and "the search is `unreasonable' only because it is out of proportion to the end sought"; McMann v. Securities and Exchange Comm., 2 Cir., 87 F.2d 377, 379, 109 A.L.R. 1445⁶ involving similar facts. Agents may not "under official pretext but in fact officiously, extend their powers beyond those provided by the law. * * *" Newfield v. Ryan, 5 Cir., 91 F.2d 700, 703, certiorari denied 302 U.S. 729, 58 S.Ct. 54, 82 L.Ed. 563. If they attempt to examine unrelated transactions, or to engage in an irrelevant "fishing expedition", as complainants suggest, they may be restrained by the court to whom application is made to enforce compliance. There a precise rule can be formulated from a definition supplied by the facts. But this is not such a proceeding.

Appellants cite cases which formulate principles to determine the bona fides or fraud of sales of securities between husband and wife to establish tax losses. But these are not applicable to the simpler question before us. That the burden is on the government to establish fraud beyond a mere suspicion, and the presumption of innocence is a strong one, that motive is unessential and the financial ability of the purchaser, whether the sales were at market values, the absence of any agreement — all these considerations go to the question of whether fraud is established. That is not before us. The Government is merely seeking further information.

Since our former decision the Circuit Court of Appeals for the Second Circuit in McMann v. Securities and Exchange Comm., supra, has held, on an application involving a similar situation, that immunity under the Fourth Amendment is a personal right, not evocable by the customer who cannot object to the production of papers belonging to his broker. No protection was afforded him by the relationship, which was not confidential, such as that of client, penitent, patient or spouse. There the Securities and Exchange Commission was seeking information to determine whether practices existed which the Securities Act of 1933, 15 U.S.C.A. § 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C.A. § 78a et seq., had made unlawful; here...