Disclosure of
Returns
7206- Fraud and
False Statements: Disclosure of Returns
[79-2 USTC ¶9695]
United States of America
v. Robert S. Bacheler and Rocco Cipparone, Appellants
(CA-3),
U. S. Court of Appeals, 3rd Circuit, Nos. 79-1402, 79-1403, 611 F2d 443,
11/8/79
, Affirming an unreported District Court decision
[Code Secs. 6103(h)(3)(A) and 7206(1)]
Crimes: False returns: Return disclosure: Federal officials: Other
defenses.--The defendants were properly convicted of filing false
returns and other federal crimes. Their returns had been properly
disclosed to the Department of Justice. The case had been properly
referred to that department even though the investigation had begun
there rather than the IRS. An Assistant Regional Counsel of the IRS had
been delegated authority to make the referral. Other defenses were also
rejected since the trial court properly refused to immunize a
prospective defense witness even though the prosecution had presented
immunized testimony, and the defendants were not severely sentenced
because of their failure to cooperate with the government.
Louis J. Ruch,
Assistant United States Attorney,
Philadelphia
,
Pa.
19106
, for appellee. Nicholas J. Nastasi, 2700
Two
Girard
Plaza
,
Philadelphia
,
Pa.
19102
, for appellants.
Before SEITZ,
Chief Judge, and GIBBONS and SLOVITER, Circuit Judges.
Opinion
of the Court
SLOVITER,
Circuit Judge:
Appellants
Bacheler and Cipparone were convicted of two counts (counts 1 and 2) of
violating the Racketeering and Corrupt Organizations Act (RICO), 18 U.
S. C. §§ 1962(c) and (d) 1,
by engaging in a pattern of racketeering activity (bribery) and
conspiracy to so engage while they were employees of Philadelphia
Traffic Court. Bacheler also was convicted of two counts (counts 3 and
4) of filing false tax returns for the year 1975 and 1976 in violation
of 26 U. S. C. §7206(1). 2
Both
appellants claim that they were deprived of a fair trial when the court
refused to confer judicial immunity upon a defense witness, that they
were severely sentenced as punishment for their failure to cooperate
with the government, and that the
Philadelphia Traffic Court
is not an "enterprise" within the meaning of the RICO statute.
In addition, appellant Cipparone claims that the evidence was
insufficient to sustain his conviction. Bacheler contends that his
conviction on counts 3 and 4 should be reversed on the ground that the
disclosure and use of his 1975 and 1976 tax returns violated the
relevant provisions of the Tax Reform Act of 1976, Pub. L. No. 94-455,
90 Stat. 1667. It is this latter contention that will be addressed
first.
[Return
Disclosure]
Bacheler's
statutory argument relies in part on the purpose behind the 1976 Tax
Reform Act to protect an individual's privacy in tax returns and return
information. In connection with that claim it may be useful to discuss
briefly the history of the provisions of that statute dealing with
disclosure and confidentiality.
Before the
enactment of the Tax Reform Act of 1976, the then existing section 6103
made tax returns a matter of "public record" but authorized
inspection only upon order of the President and under regulations based
upon his Executive orders; authorized disclosure of income tax returns
to state and local tax authorities upon request of the governor for
purposes of state or local tax administration; authorized inspection of
returns or return information by the tax writing committees of Congress,
by any select committee if authorized by resolution of the appropriate
body, and by standing and select committees when authorized by the
President and approved by the full committee; and, under a 1974
Amendment, Pub. L. No. 93-406, 88 Stat. 941 (1974), authorized
disclosure to various federal departments and agencies for purposes of
administering the Employee Retirement Income Security Act. 26
U. S.
C. §§ 6103(a), (b), (d) and (g) (1970) (amended 1976); Reg. §301.6103(a)-101.
The preamendment section 6103(f) also required the IRS to furnish any
inquirer information as to whether a person has or has not filed an
income tax return. See United States v. Liebert [75-2 USTC ¶9576],
519 F. 2d 542 (3d Cir.), cert. denied, 423
U. S.
985 (1975).
Executive
orders issued pursuant to section 6103(a) authorized the IRS to make raw
tax data available to a variety of federal departments and agencies on
the representation that such data was needed for statistical or federal
law enforcement purposes. See, e.g., Exec. Order No. 11697, 38
Fed. Reg. 1723 (1973). Information submitted to Congress indicated the
extent of disclosure that had been taking place. In calendar year 1975,
nearly 30,000 tax returns were furnished to 18 federal departments and
agencies, mostly to the Justice Department, for law enforcement purposes
unrelated to tax administration; 66,000,000 magnetic tape records of
selected data from individual tax returns were furnished to 39 States
plus the District of Columbia and Puerto Rico; and selected data on tape
from approximately 138,000,000 tax returns was furnished to the Census
Bureau. Confidentiality of Tax Return Information: Hearing Before the
House Committee on Ways and Means, 94th Cong., 1st Sess. 15 (1976)
(hereinafter Hearing) (statement of Donald C. Alexander, then
Commissioner of the Internal Revenue Service).
The Chairman
of the Oversight Subcommittee of the
House Ways
and Means Committee stated "there is cause for alarm that tax
returns are not being accorded the protection and care that taxpayers
expect or that common sense warrants."
Id.
at 4. In addition to concern about the extent of disclosure and the
failure to adopt procedures designed to prevent unauthorized inspection,
there was concern expressed that income tax information was being used
extensively in federal courts just to attack the credibility of
witnesses on unrelated facts, id. at 63, or was being used for
political purposes in connection with "enemies lists and groups
targeted for harrassment through the Internal Revenue Service . .
."
Id.
at 90.
As a result
provisions relating to confidentiality and disclosure of tax returns and
information were included as part of a comprehensive substantive
revision of the tax laws in the Tax Reform Act of 1976. The amendment to
section 6103 represents a legislative attempt to balance the basic
rights of taxpayers to privacy with respect to their tax affairs and the
legitimate need of federal and state agencies for access to tax
information for a purpose useful, often essential, in carrying out their
government function. S. Rep. 938, 94th Cong., 2nd Sess. 318 (Pt. I), reprinted
in [1976] U. S. Code Cong. & Ad. News 3439, 3747.
Under the
revised section 6103, the general rule has been established that returns
and return information are to be confidential and not subject to
disclosure except as authorized by statute (§6103(a)). The prior
practices have been circumscribed by provisions such as those requiring
that disclosure to the President can be made only upon written request
personally signed by him which specifies the reason for the inquiry (§6103(g));
that disclosure to Congressional committees is generally limited to
those with responsibility in the tax area under safeguards to protect
the identity of the taxpayer and can be made to other committees only
upon congressional resolution which specifies the purposes of the
inspection and the unavailability of alternative sources for such
information (§6103(f)); that the Census Bureau can use tax returns and
return information for research and statistical purpose but that the
Bureau of Economic Analysis and the Federal Trade Commission may receive
only corporate tax information (§6103(j)); and that limited disclosure
is permitted to the Social Security Administration, Railroad Retirement
Board, Department of Labor, etc. only when the tax information is
directly related to programs administered by the requesting agency (§6103(1)).
Tax information will be available only to state tax officials for use in
administering the state's tax laws (§6103(d)); the only provision
authorizing disclosure to local governments is in connection with child
support obligations (§6103(1)(6)). The statute now contains explicit
provision for safeguards including review and reporting and the
maintenance of appropriate records by the IRS (§6103(p)). Unauthorized
disclosure of tax information has now been made a felony (§7213).
Some of the
practices most disquieting to those who urged reform involved the
transmission of information between the Internal Revenue Service and the
Justice Department, including
United States
attorneys. Sections 6103(h) and 6103(i) of the revised statute were
designed to cover those situations.
Under section
6103(i) covering disclosure requested by federal officers or employees
for administration of federal laws "not relating to tax
administration", disclosure can only be made following an order by
a federal district court judge who must find that there is reasonable
cause to believe, based upon information believed to be reliable, that a
specific criminal act has been committed; that there is reason to
believe that such return or return information is probative evidence of
a matter in issue related to the commission of such criminal act; and
that the information sought to be disclosed cannot reasonably be
obtained from any other source, with certain exceptions. 26 U. S. C. §6103(i)(1)(B).
On the other
hand, when a matter deals with "tax administration", there are
two possible routes under which disclosure of tax returns and return
information can be made. Under one route, that covered by 26
U. S.
C. §6103(h)(3)(A), the statute provides:
(A) [I]f the
Secretary has referred the case to the Department of Justice, or if the
proceeding is authorized by subchapter B of chapter 76, the Secretary
may make such disclosure on his own motion. 3
Under
the second route, that covered by 26
U. S.
C. §6103(h)(3)(B), the statute provides:
(B)
[I]f the Secretary receives a written request from the Attorney General,
the Deputy Attorney General, or an Assistant Attorney General for a
return of, or return information relating to, a person named in such
request and setting forth the need for the disclosure, the Secretary
shall disclose return or return the information so requested.
It is conceded
that this case was one relating to "tax administration" and
hence section 6103(h) is applicable. It is further conceded by the
government that the procedure under section 6013(h)(3)(B) was not
followed in this case. Therefore, disclosure was authorized only if this
was a case in which the Secretary "referred the case to the
Department of Justice" under section 6103(h)(3)(A).
Bacheler
argues that this was not a case in which the Secretary
"referred" nor were the actors the appropriate delegates of
the "Secretary". We must be ever mindful that when Congress
enacts a statute designed to limit government intrusion in the private
affairs of its citizens, the statutory provisions must be followed
scrupulously.
United States
v. Giordano, 416
U. S.
505 (1974). To decide whether this was a "referral" situation
it is necessary to review the chain of events leading to the disclosure
of Bacheler's tax returns to the Department of Justice.
(1) On
April 20, 1978
, Alan Lieberman, an Assistant United States Attorney for the Eastern
District of Pennsylvania, wrote to Stanley Krysa, Chief of the Criminal
Section of the Tax Division, Department of Justice, stating that
Bacheler and others were under investigation for bribery. The letter
contained the following request:
In
light of the above, we believe that there are significant tax violations
that have been committed in connection with the activities of various
personnel of the
Philadelphia Traffic Court
, and that an Internal Revenue Service investigation could be of great
assistance to the investigation presently being conducted by the FBI. To
facilitate a joint investigation and to allow this office to pursue
violations of the criminal tax laws, it is requested that you seek, on
behalf of this office, the assistance of the Internal Revenue Service in
an open ended grand jury investigation of the above named individuals,
the Philadelphia Traffic Court, its writ servers, and other persons
involved in the activities described above.
(2) On
May 2, 1978
, Krysa wrote to Stuart E. Seigel, Chief Counsel of the Internal Revenue
Service:
In
connection with our determination as to whether or not a grand jury
investigation of potential criminal tax violations should be authorized,
we would appreciate your expert advice in connection with the
information developed by the U. S. Attorney, as well as your advice as
to whether or not you will be able to furnish us with the advice and
assistance of the Service if this office authorizes a grand jury
investigation of potential criminal tax violations.
(3) On
May 10, 1978
, David E. Gaston, Director of Internal Revenue Service's Criminal Tax
Division, by memorandum actually signed by Harold Z. Cook for Gaston,
forwarded the request to the Director of the Internal Revenue Service's
Intelligence Division. This memorandum stated, in part:
This
is being forwarded to you for consideration by the Service in view of
the request for advice as to whether Service personnel would be
available to assist the attorney for the government in the event a grand
jury investigation of Title 26 and Title 26-related offenses is
authorized. Please note that this Tax Division request does not meet the
provisions of I. R. C. §6103(h)(3)(B) inasmuch as it is signed by the
Chief, Criminal Section, and not by the Assistant Attorney General, Tax
Division.
This office
has no objection in principle to a Service referral of this matter for
grant jury investigation and commitment of personnel should the
Service's evaluation determine that such a referral and commitment is
appropriate. As this request appears to relate to a matter falling
principally within one region, we consider the proper referral procedure
to be from the Regional Commissioner, Mid-Atlantic Region, to the
Regional Counsel, Mid-Atlantic Region, for Regional Counsel
consideration in the event the Regional Commissioner recommends grand
jury investigation. (emphasis added).
(4) The matter
then proceeded from the Director of the IRS Intelligence Division to the
IRS Regional Commissioner of the Mid-Atlantic Region; from the Regional
Commissioner, Mid-Atlantic Region to the District Director,
Philadelphia; from the District Director, Philadelphia District to the
Regional Commissioner, Mid-Atlantic Region "request[ing] permission
for a Title 26 Grand Jury . . ."; from the Regional Commissioner,
Mid-Atlantic Region to the Regional Counsel, concurring in the
"district's request" and recommending approval, and then
eventually back to the Director, Criminal Tax Division from the
Assistant Regional Counsel, Criminal Tax, Philadelphia, Pa.
(5)
Thereafter, on
May 30, 1978
, the key document in this case was sent under the signature of Robert
L. Liken, Regional Counsel of Internal Revenue Service, but actually
signed by Assistant Regional Counsel, Richard Francis, to M. Carr
Ferguson, Assistant Attorney General, Tax Division, Department of
Justice, Washington, D. C., stating "We recommend that a Grand Jury
investigation be conducted to develop evidence of criminal violations of
the Internal Revenue Code arising from bribes and kickbacks allegedly
paid to . . . Robert S. Bacheler . . .." The letter continued:
The
referral of this matter is duly authorized, and the assistance of the
Internal Revenue Service personnel will be furnished upon request of the
attorneys for the Government . . . Please advise us of the action taken
by your office in this matter.
(6) Bacheler's
tax information was then supplied to the Department of Justice.
It is apparent
from the foregoing that this was a "referral" from the
Secretary to the Department of Justice. Since both the fact and the time
of referral determine various consequences in tax investigation and
prosecution, see United States v. LaSalle National Bank [78-2
USTC ¶9501], 437 U. S. 298 (1978), the Secretary has developed internal
procedures in connection with referrals which were followed in this
case. We do not think the characterization of the
May 30, 1978
letter as a "referral" letter changes because the
investigation originated with the Department of Justice rather than with
the Secretary. "It is a quite natural development for the resources
of several federal agencies to combine in the task of investigating
organized crime and its venture into legitimate business." United
States v. Chemical Bank [79-2 USTC ¶9162], 593 F. 2d 451, 454 (2d
Cir. 1979).
Bacheler's
other claim is that the chain of delegation of the power to refer did
not descend to an Assistant Regional Counsel. The evidence presented
showed the following: By order dated
July 26, 19
61, and reaffirmed on
March 16, 1978
, the Secretary of the Treasury authorized, inter alia, the
General Counsel to perform any functions the Secretary is entitled to
perform. Treasury Department Order No. 190 and No. 190 (Revision 15). 43
Fed. Reg. 11884-85 (March 22, 1978). The General Counsel, in 1964, had
delegated to the Chief Counsel, IRS, the authority to determine which
income tax cases should be referred to the Department of Justice.
General Counsel Order No. 34. (Appendix at 186a-190a). The Chief
Counsel, IRS, delegated the authority to refer to Regional Counsel,
Philadelphia
. 1030.1A CHG 15,
April 7, 1977
. (Appendix at 241a). Finally, Regional Counsel,
Philadelphia
, delegated the referral authority to Assistant Regional Counsel Richard
Francis. Order of
April 28, 1975
. (Appendix at 256a).
The statute
expressly provides that "Secretary" means the Treasury
Secretary or his delegate (§7701(a)(11)(B)) and defines delegate to
include any Treasury Department employee "duly authorized by the
Secretary of the Treasury directly, or indirectly, by one or more
redelegations of authority . . ." (§7701(a)(12)(A)(i)). The
statute in no way restricts the number of redelegations nor provides
that all of such delegations must have taken place or have been
reaffirmed following the enactment of its provisions.
Bacheler's
reliance on the footnote in United States v. Mangan [78-2 USTC ¶9349],
575 F. 2d 32, 38, n. 5. (2d Cir.), cert. denied, 439
U. S.
931 (1978), is misplaced. In that case the court referred to a line of
delegation under section 6103(h) which is found in the Commissioner's
Delegation Order No. 156, paragraph 2, 1976 CCH Federal Tax Rep. §6666,
listing those persons to whom the Commissioner of Internal Revenue
delegated authority. Bacheler points to the absence of an Assistant
Regional Counsel as one of those designated persons. However, the
authority delegated by the Commissioner is not relevant here for
purposes of referral. Even were the Commissioner someone authorized by
the Secretary to make referrals under subsection (h)(3), a fact which we
need not decide here, 4
this would not preclude existence of another line of delegation directly
from the Secretary through the various Counsel. We find that the
government established the appropriate chain of delegation from the
Secretary to the Assistant Regional Counsel to make the delegation
involved in this case.
Despite the
concern previously discussed with respect to disclosure of tax return
and return information, it was uniformly recognized that in tax cases
the Department of Justice must have access to tax returns and return
information, at least concerning those persons who are the immediate
object of a tax enforcement action. In such cases the Department of
Justice acts as the attorney for the Internal Revenue Service. Hearings,
supra at 45-46. The Senate Committee which drafted the provision
later encompassed in Section 1603 recognized the need of the Justice
Department for continued access to tax returns and return information in
carrying out its statutory responsibility in the civil and criminal tax
areas and did not seek to change the rules pertaining to the disclosure
of returns and return information of the taxpayer whose civil and
criminal tax liability is at issue. S. Rep. No. 94-938, at 324-325. For
the above reasons, we reject Bacheler's contention that his tax returns
were improperly disclosed.
[Other
Contentions]
We have
carefully considered the other contentions raised by appellants and
affirm the action of the trial court as to each. Appellants claim that
their right to a fair trial was violated because the trial court refused
to immunize a prospective defense witness. This court has held that a
trial court has no statutory authority to immunize a defense witness. United
States v. Rocco, 587 F. 2d 144, 147 (3d Cir.), cert. denied,
99 S. Ct. 1537 (1979); United States v. Niederberger, 580 F. 2d
63, 67 (3d Cir.) cert. denied, 439
U. S.
980 (1978). This case does not present prosecutorial threats or
intimidation of the prospective witness such as was present in United
States v. Morrison, 535 F. 2d 223 (3d Cir. 1976), where the
government action was responsible for the witness' choice not to
testify. Nor have the defendants established that this was a case in
which it would be appropriate to consider the application of a
judicially fashioned immunity within the parameters advanced by this
court in United States v. Herman, 589 F. 2d 1191, 1203-1204 (3d
Cir. 1978), cert. denied, --
U. S.
--, 99
S. Ct.
2014 (1979), for circumstances in which the "government's decisions
[regarding immunity grants] were made with the deliberate intention of
distorting the judicial fact finding process" or when "clearly
exculpatory testimony" will be excluded because of a witness's
assertion of the fifth amendment privilege.
Id.
at 1204. Defendants argue that it is "simply unfair" to permit
the prosecutor to prove guilt with immunized evidence and deny the same
to defendants. This claim does not rise to the level of constitutional
deprivation encompassed in the Herman discussion.
We also reject
the appellants' contention that they were more severely sentenced
because of their failure to cooperate with the government. The facts
here are not comparable to those presented in United States v.
Garcia, 544 F. 2d 681 (3d Cir. 1976), on which the appellants rely,
where the sentencing judge strongly emphasized to the defendants that
leniency would be conditioned upon cooperation. No such comments were
made in this case. In addition, the trial court's failure to state
reasons for the sentence imposed does not require a remand for new
sentencing, because this Circuit has ruled that there is no requirement
that the district judge give an explanation for each sentence imposed. United
States v. Del Piano, 593 F. 2d 539 (3d Cir.), cert. denied,
99
S. Ct.
2289 (1979). Appellants contend that the Philadelphia Traffic Court is
not an "enterprise" within the meaning of 18 U. S. C. A. §1961(4)
which appellants urge should be confined to businesses and not extended
to state governmental units. This contention has already been rejected
in this Circuit. See United States v. Frumento, 563 F. 2d 1083
(3d Cir. 1977), cert. denied, 434 U. S. 1072 (1978) (Pennsylvania
Bureau of Cigarette and Beverage Taxes, a division of the Department of
Revenue, held to be an enterprise); United States v. Herman, 589
F. 2d 1191 (3d Cir.), cert. denied, 99 S. Ct. 2889 (1978)
(applying RICO to Pittsburgh magistrates without discussing the
enterprise issue); United States v. Vignola, 464 F. Supp. 1091
(E. D. Pa. 1979), aff'd mem., No. 79-1132 (3d Cir.
Aug. 8, 1979
) (Philadelphia Traffic Court held to be an enterprise). We have also
considered and reject Cipparone's separate contention that the evidence
was insufficient as to him to sustain his conviction under RICO and the
conspiracy count.
Accordingly,
the judgment of the district court will be affirmed.
1
18
U. S.
C. §1962(c) provides:
It shall be
unlawful for any person employed by or associated with any enterprise
engaged in, or the activities of which affect, interstate or foreign
commerce, to conduct or participate, directly or indirectly, in the
conduct of such enterprise's affairs through a pattern of racketeering
activity or collection of unlawful debt.
18
U. S.
C. §1962(d) provides:
It shall be
unlawful for any person to conspire to violate any of the provisions of
subsections (a), (b), or (c) of this section.
18
U. S.
C. §1961(1)(A) defines "racketeering activity" to mean, in
pertinent part, any act involving bribery which is chargeable under
state law and punishable by imprisonment for more than one year. The
underlying state bribery offense referred to in the indictment is a
violation of 18
Pa.
Cons. Stat. Ann. §§ 4701(a)(1) and (3) (Purdon) (Bribery in Official
and Political Matters).
2
26
U. S.
C. §7206(1) reads as follows:
Any person who
. . . willfully makes and subscribes any return statement, or other
document, which contains or is verified by a written declaration that it
is made under the penalties of perjury, and which he does not believe to
be true and correct as to every material matter . . . shall be guilty of
a felony.
3
The provisions of subchapter B of chapter 76, not at issue here, deal
with judicial proceedings involving tax collection brought by taxpayers
and third parties.
4
It is likely that paragraph 2 of the Commissioner's Delegation Order No.
156 establishes only the line of delegated authority to those IRS
officials who may actually furnish the needed tax return to the
Department of Justice in cases which the Secretary has referred to that
Department, and does not apply in any way to authority to make the
referral.
[82-1 USTC ¶9227]
United States of America
and Margaret M. Box, Special Agent, Internal Revenue Service, Plaintiffs
v. Commonwealth Federal Savings and Loan, et al., Defendants. Thomas
McNulty, Intervenor
U.
S. District Court, East. Dist. Pa., Civil Action Nos. 79-540, 79-541,
79-542, 79-543, 79-544, 79-545, 529 FSupp 1246, 1/5/82
[Code Sec. 7609]
Summonses to nontaxpayers: Third-party recordkeepers v.
non-third-party recordkeepers: Intervention: Exercise of judicial
discretion.--Over the IRS's objection that union administrators were
not third-party recordkeepers within the meaning of section 7609, the
taxpayer was allowed to intervene in summons enforcement proceedings
when the IRS had issued summonses to the taxpayer's banks as well as to
the union administrators. The litigation involved the same set of
operative facts and the intervention would not undermine the
Congressional policy of according the IRS broad and unfettered
investigatory powers.
[Code Secs. 7602 and 7604]
Enforcement of summonses: Exchange of information between IRS and
Justice Department: Joint civil and criminal investigation.--Although
the IRS's investigation of the taxpayer had its genesis in a grand jury
inquiry, and although the IRS's investigation was supervised by a
Special Agent who had made contacts with the U. S. Attorney prior to her
issuance of the summonses in question, the court determined that the
summonses issued by the IRS's Criminal Investigation Division were
enforceable. The contacts were made to clarify whether the grand jury
inquiry might have adverse implications on the Special Agent's ability
to conduct the IRS investigation by means of summonses and not to
encourage, induce, or pursue the investigation via a grand jury. In
addition, the Special Agent was assisted by a Revenue Agent and, thus,
the evidence established that the IRS had not abandoned its civil
investigation.
[Code Sec. 6103]
Returns and return information: Disclosure to Justice Department:
Protective order denied.--Where the IRS properly issued
administrative summonses in order to investigate the taxpayer's civil
and criminal liabilities, a request for a protective order to preclude
the IRS from turning over the information obtained to the Department of
Justice was denied. So long as the relevant provisions of section 6103
are adhered to and the agency's own internal operating procedures are
followed, the anticipated disclosure will not be improper.
Peter F.
Vaira, Jr., United States Attorney, Joseph Gontram, Assistant United
States Attorney,
Philadelphia
,
Pa.
19106
, Marc E. Albert, Thomas M. Lawler, Department of Justice,
Washington
, D. C. 20530, for plaintiff. Patrick T. Ryan, 1100 Philadephia Nat'l
Bank Building, Phildelphia, Pa. 19107, for Commonwealth Federal Savings
& Loan, Robert G. Kelly, Jr., Kelly, Harrington, McLaughlin &
Foster, Lewis Tower Building, Philadelphia, Pa. 19102, John Rogers
Carroll, Carroll & Carroll, 615 Chestnut Street, Philadelphia, Pa.
19106, for Plumbers Union Local 690, John Rogers Carroll, Carroll &
Carroll, 615 Chestnut Street, Philadephia, Pa. 19106, for Fidelity Bank.
Thomas Colas Carroll, Carroll & Carroll,
615 Chestnut Street
,
Philadelphia
,
Pa.
19106
, for Frankford Trust & Girard Bank. John Rogers Carroll, Thomas
Colas Carroll, Carroll & Carroll, 615 Chestnut Street, Philadelphia,
Pa. 19106, for Thomas McNulty, Intervenor.
Adjudication
DITTER,
District Judge:
In these
consolidated proceedings brought pursuant to 26
U. S.
C. §§ 7402(b) and 7604(a), the Internal Revenue Service (IRS) seeks
enforcement of six summonses to produce certain records which are
currently in the possession of the defendants. The records are sought
pursuant to an ongoing civil and criminal investigation of the tax
liability of the intervenor, Thomas McNulty. After careful consideration
of the pleadings, the evidentiary record, and the submissions of the
parties, I conclude that the defendants must be ordered to comply with
the summonses. The conclusion is based upon the following.
Findings
of Fact
[Criminal Investigation]
1. The
plaintiff, Margaret M. Box, is a special agent with the Criminal
Investigation Division of the IRS and is authorized to issue Internal
Revenue summonses under the authority of 26 U. S. C. §7602. (Complaints
¶¶ xx, Tr. 11).
2. Pursuant to
this authority, she issued six summonses which form the basis of these
proceedings and which were served upon the defendants as follows:
a. Commonwealth Federal
Savings and Loan
("Commonwealth")
June 22, 1978
b. Frankford Trust
("Frankford")
June 23, 1978
c. Girard Bank ("Girard")
June 27, 1978
d. Fidelity Bank
("Fidelity")
July 13, 1978
e. Administrator, Plumbers
Union
, Local 690, Apprenticeship
Training Fund
("Apprenticeship Fund")
August 22, 1978
f. Plumbers
Union
, Local
690 ("Local 690")
August 22, 1978
3. At the time
each summons was issued, Special Agent Box and Revenue Agent Thomas
Hunsberger were conducting a joint criminal and civil investigation of
the federal income tax liabilities, if any, of Thomas McNulty for the
years 1974 through 1977. (Tr. 11-12). Special Agent Box was in charge of
the investigation and Revenue Agent Hunsberger was the cooperating agent
whose duties included assisting the special agent as required. (Tr. 12,
15-16).
4. Pursuant to
26 U. S. C. §7609(b)(2), McNulty notified each of the banks not to
comply thus staying enforcement of the summonses issued to Commonwealth,
Frankford, Girard, and Fidelity.
5. By order
dated
September 22, 1978
, the Honorable Charles R. Weiner, of this Court, granted McNulty's
motion for a temporary restraining order and, later, preliminarily
enjoined compliance with the union summonses until an order of
compliance in enforcement proceedings was entered by a court of
competent jurisdiction.
[Initial
Grand Jury Investigation]
6. In 1976, a
grand jury investigation began in the Eastern District of Pennsylvania.
The targets of the grand jury investigation were James O'Neill, Thomas
McMulty, and the Apprenticeship Fund. (Tr. 31).
[Request
for Assistance]
7. The
Department of Justice requested the assistance of IRS personnel in
conducting the grand jury investigation. (Sweeney Dep. 4). Pursuant to
this request, in late 1976, Revenue Agent Hunsberger and Special Agent
James Kamienicki were assigned to assist in the grand jury
investigation. (Hunsberger Dep. 5-6; Kamienicki Dep. 6). In 1977,
Special Agent Augustine Matson was also assigned. (Matson Dep. 4).
8. Only
O'Neill was the subject of a tax investigation by the IRS in 1976 and
1977 and an open file was maintained as to only his tax liabilities.
(Hunsberger Dep. 6-7; Sweeney Dep. 7-8; Kamienicki Dep. 7).
9. On
May 11, 1977
, pursuant to the government's motion, the Honorable John P. Fullam
entered the following order under Rule 6(e) of the Federal Rules of
Criminal Procedure:
Now,
this 11th day of May, 1977, upon consideration of the government's ex
parte motion pursuant to Rule 6(e) for authorization to disclose
matters appearing before the grand jury, it is hereby ordered that the
United States Attorney and Special Attorneys of the United States
Department of Justice are authorized to utilize the assistance of
special agents and employees of the Internal Revenue Service in this
Grand Jury investigation, and may give access to books, records,
documents and transcripts of testimony of witnesses subpoenaed before
the Grand Jury in this investigation to the said employees of the
Internal Revenue Service; the said employees of the Internal Revenue
Service shall not be prohibited from utilizing such material in the
course of their official duties for criminal and/or civil purposes,
provided that the subpoenaed material shall remain at all times under
the aegis of the attorneys for the Government. (Tr. 32-33).
[Taxpayer's
Returns Disclosed to Grand Jury]
In addition, in July of 1977, the Justice Department obtained a
disclosure order under 26
U. S.
C. §6103 authorizing the IRS to turn over McNulty's tax returns to the
grand jury. (Matson Dep. 13-15; Hunsberger Dep. 11-12). Pursuant to this
order, McNulty's tax returns were turned over to the grand jury.
(Kamienicki Dep. 12-14).
10. O'Neill
was indicted at the end of August, 1977. No indictment was sought or
returned against McNulty and the IRS made no recommendation that he be
indicted. (Tr. 31-32; Matson Dep. 17-18).
[Suspected
Fraud After Grand Jury Disclosure]
11. However,
after correlating the grand jury materials made available pursuant to
Judge Fullam's Rule 6(e) order with McNulty's tax returns, Revenue Agent
Hunsberger began to suspect that McNulty may have failed to report
certain items of income in violation of the Internal Revenue Code.
(Hunsberger Dep. 24). Accordingly, at the end of August, 1977, he
referred the matter of McNulty's tax returns to the criminal
investigation division of IRS. (Tr. 33; Hunsberger Dep. 22).
12. In
December, 1977, the Criminal Investigation Division accepted the
referral from Revenue Agent Hunsberger to investigate possible tax fraud
by McNulty (Tr. 23) and the case against McNulty was
"numbered", which means the IRS formally began its
investigation. (Tr. 27).
13. The
investigation was commenced as a joint investigation, that is an
investigation pursued jointly by the criminal investigation division and
the civil examination division. (Tr. 12.)
14. On
December 14, 1977
, the matter was assigned to the plaintiff, Special Agent Box, and to
Revenue Agent Hunsberger. (Tr. 11, 23, 27; Sweeney Dep. 9.) The purposes
of the investigation are to determine if McNulty has violated the
Internal Revenue Code and to ascertain his correct tax liability for the
years under investigation. (Tr. 12.)
15. Special
Agent Box did not know of the prior grand jury investigation of McNulty
until she began this investigation in December, 1977. (Tr. 28.)
[Contacts
with Justice Department]
16. During
January and February, 1978, Special Agent Box and Revenue Agent
Hunsberger had several conversations with Assistant United States
Attorney Greg Magarity and FBI Agent John Tamm, the principals involved
in the prior grand jury investigation, and inquired whether McNulty was
still the subject of a grand jury inquiry. (Tr. 40-43; Hunsberger Dep.
28-29.) On
February 13, 1978
, Agent Tamm advised that the F. B. I. was not investigating McNulty.
(Box Dep. II, 5; Tr. 42-43.)
17. During the
course of these conversations, Magarity suggested that Box research the
correct procedure whereby the IRS could request the Department of
Justice to commence a grand jury investigation of possible title 26
violations. (Tr. 42-45; Box Dep. I 9.) At this point, neither Box nor
Magarity had made a decision on whether a grand jury would be utilized.
(Box Dep. I 9.)
18. On
March 1, 1978
, Special Agent Box contacted the Office of District Counsel and made a
pre-referral request for legal advice as to how to proceed in the
McNulty investigation. (Tr. 43; Box Dep. II 3, 4; Foster Dep. I 22;
Foster Dep. II 3.) The matter was assigned to a staff attorney, Edward
Foster.
19. Generally,
the purpose of such a pre-referral conference is not to decide whether
to refer a matter for criminal prosecution but, rather, to address any
unusual legal problems which have arisen during the investigation and to
evaluate whether the evidence which is being developed fits within the
required elements of proof for a criminal offense. (Foster Affidavit ¶A2;
Foster Dep. I 5-6, 8-10; Box Dep. II 24.)
20. In this
case, Box's primary concern was whether or not information obtained by
the grand jury and made available to the Internal Revenue Service by the
Rule 6(e) order could be used in the investigation of McNulty. A
secondary question was raised concerning whether or not an IRS summons
could be used as an investigative tool in light of the preceding grand
jury investigation. (Foster Affidavit ¶A4; Foster Dep. II 6; Box
Affidavit ¶2A.)
21. Foster
gave Special Agent Box legal advice which was later incorporated into a
written pre-referral report dated
April 8, 1978
. (Box Dep. II 23; Foster Dep. II 7.) Foster advised Box that the
information previously made available to the IRS pursuant to the Rule
6(e) order could probably be used in the investigation. (Foster Dep. II
7, 10-11.) He did, however, caution that the prior grand jury
investigation might taint an administrative summons by suggesting to a
finder of fact that it had been issued for an exclusively criminal
purpose. (Foster Dep. II 7, 11, 14.) Accordingly, he recommended that,
although the investigation could proceed by way of summons, if
necessary, the surest way to investigate McNulty would be to utilize
another grand jury. (Foster Dep. II 11; Box Dep II 28; 32, 37.)
22. At the
time Box consulted with Foster, she had made no decision as to whether
the investigation should be referred to the Justice Department for
criminal prosecution. (Box Dep. II 24, 31-32; Foster Dep. II 13-14). She
sought the prereferral session solely to ascertain the legally proper
and most expeditious manner in which to conduct her investigation. (Box
Dep. II 7-8, 28.)
23. In
recommending the investigation be pursued by means of a grand jury
inquiry, Foster was not advising criminal prosecution on the basis of
the evidence presented. (Foster Dep. II 5, 13.) Rather, he was offering
what he perceived to be the most expeditious and legally unobjectionable
way to proceed in view of potential problems presented by the earlier
grand jury investigation. (Foster Dep. II 14).
[Insufficient
Information for Criminal Prosecution]
24. After
receiving this legal advice from Foster, Special Agent Box contacted
Assistant United States Attorney Magarity and asked whether he had any
interest in pursuing a grand jury investigation of McNulty's tax
liabilities. (Tr. 44; Box Dep. I 8; Box Dep. II 33-34.) On
June 5, 1978
, Magarity advised Box that there was no interest in pursuing such a
grand jury investigation and that a grand jury investigation of
McNulty's correct tax liabilities would not be approved by the
Department of Justice because there was not enough information to
indicate McNulty had committed a tax crime. (Tr. 44-45.)
25. After
receiving this information, Box and Hunsberger decided to pursue the
investigation by means of administrative summonses. (Tr. 44-45, 50; Box
Dep. I 6-8; Box Dep. II 12, 16.)
26. It was not
until after this decision was made that Box obtained the grand jury
materials covered by the Rule 6(e) order. (Box Dep. I-14-15, 20; Box
Dep. II 16-18.)
27. At no time
during any of her discussions with Magarity did Box make available to
the U. S. Attorney or to any other government agency, information
obtained by the IRS in the McNulty investigation. (Box Dep. I 13.)
28. Each
summons was issued pursuant to the IRS joint civil and criminal
investigation of McNulty's tax liability for the years in question.
29. The
records which are sought by each of the summonses may be relevant to a
determination of McNulty's correct tax liability for the years in
question and to whether he has violated the provisions of the Internal
Revenue Code. (Tr. 13.)
30. The
information which is sought is not already in the possession of the IRS.
31. At the
time the summonses were issued, the IRS had not referred the McNulty
investigation to the Justice Department for criminal prosecution.
[No
Institutional Decision]
32. At the
time the summonses were issued, the IRS had made no institutional
decision to refer this investigation to the Justice Department for
criminal prosecution. (Tr. 14.)
33. At the
time the summonses were issued, Special Agent Box had made no decision
to recommend that the investigation be referred for criminal
prosecution. (Tr. 15; Box Dep. II 32).
34. The
summonses were not issued by the IRS solely to obtain information for
criminal prosecution.
Discussion
1
Section 7602
of the Internal Revenue Code, 26 U. S. C. §7602, empowers the IRS to
issue summonses to obtain testimony and documents for the purpose of
"ascertaining the correctness of any return, making the return
where none has been made, determining the liability of any person for
any internal revenue tax . . . or collecting any such liability . .
.." Although the statute contains no such limitation, it has long
been settled that in exercising its summons power, the IRS may not
obtain information for the sole purpose of pursuing a criminal
investigation. Donaldson v. United States [71-1 USTC ¶9173], 400
U. S.
517, 533, 91 S. Ct. 534, 543, 27 L. Ed. 2d 580 (1971). In resisting
enforcement of the summonses in question here, McNulty contends that
they were issued for the sole purpose of uncovering information which
will eventually be used in a criminal prosecution. The disposition of
this contention requires a brief discussion of the standards governing
the enforceability of an IRS summons.
[No
Institutional Abandonment of Civil Remedies]
The crucial
inquiry in a case of this nature is to determine the institutional
posture of the IRS at the time the summons is issued. In United
States v. LaSalle National Bank [78-2 USTC ¶9501], 437
U. S.
298, 98
S. Ct.
2357, 57 L. Ed. 2d 221 (1978), the Supreme Court determined that the
primary limitation upon the use of the summons power occurs when the IRS
refers an investigation to the Justice Department for criminal
prosecution. Once such a referral has been made, the IRS is conclusively
precluded from issuing summonses for taxpayer-related records pertaining
to the matter under investigation.
Id.
at 311, 98
S. Ct.
at 2365. See also United States v. Garden State National Bank
[79-2 USTC ¶9632], 607 F. 2d 61, 67 (3rd Cir. 1979). Where an
investigation has not yet been referred to the Justice Department, a
summons is presumptively valid and subject to challenge by the taxpayer
only if it has not been issued in good faith. United States v.
LaSalle National Bank, supra, 437
U. S.
at 313, 98
S. Ct.
at 2366. At the threshold, it is the government's burden to prove a prima
facie case of good faith as defined in United States v. Powell
[64-2 USTC ¶9858], 379 U. S. 48, 35 S. Ct. 248, 13 L. Ed. 2d 112
(1964). The elements of such a showing are that:
1.
the investigation is being conducted for a legitimate purpose;
2.
the material sought is relevant to that purpose;
3.
the information sought is not yet in the possession of the IRS; and
4.
the proper administrative steps have been followed.
Id.
at 57-58; 85
S. Ct.
at 255.
Once this burden has been met, the taxpayer must establish that,
although no formal referral has occurred, the IRS has made an
institutional commitment to refer the case for criminal prosecution and
that the summonses issued after that commitment has been made serve no
civil purpose. United States v. Genser [79-2 USTC ¶9482], 602 F.
2d 69, 71 (3d Cir.) (per curiam), cert. denied, 444
U. S.
928, 100 S. Ct. 269, 62 L. Ed 2d 185 (1979) (Genser III). In
short, there must be an institutional abandonment of the pursuit of
civil tax determination or collection. United States v. Serubo
[79-2 USTC ¶9563], 604 F. 2d 807, 811 (3d Cir. 1979).
[Pre-recommendation Investigation]
The LaSalle
standards have been further refined by the Third Circuit. The period
before the IRS refers an investigation to the Justice Department from
criminal prosecution is divided into two parts. See United States v.
Genser [79-1 USTC ¶9275] 595 F. 2d 146 (3d Cir.) (Genser II),
cert. denied, 444
U. S.
928, 100 S. Ct. 269, 62 L. Ed. 2d 185 (1979). A summons issued prior to
the time that the investigating agent has recommended prosecution to his
superiors, is "virtually unassailable."
Id.
at 151. After the agent makes such a recommendation, but before the IRS
formally refers the matter to the Justice Department for criminal
prosecution, the taxpayer bears the "heavy" burden of proving
a pre-existing institutional commitment to refer for prosecution as well
as the absence of any civil purpose underlying the summons. Id;
United States v. Garden State National Bank, supra, 607 F. 2d at 70.
However, a summons issued before the investigating agent has made a
recommendation to his superiors to prosecute criminally may be subject
to challenge if, for example, it was issued at the request of a United
States Attorney or if the agent was instructed by his superiors to delay
recommendation for the sole purpose of allowing information to be
gathered by way of summons. Genser II, supra, 595 F. 2d at 151.
It remains to
apply these general principles to the facts of this case. It is
undisputed on this record that the IRS had not formally referred this
matter to the Justice Department for criminal prosecution at the time
the summonses were issued. Moreover, I have determined that the IRS has
made no institutional commitment to refer the matter for prosecution and
that Special Agent Box has not recommended to her superiors that McNulty
be criminally prosecuted. Findings of Fact Nos. 32, 33. Finally,
it is clear that the IRS has sustained its burden of satisfying the Powell
standards for good faith by virtue of the sworn affidavits of Special
Agent Box which were filed with the complaints. See United States v.
McCarthy [75-1 USTC ¶9402], 514 F. 2d 368, 372-373 (3d Cir. 1975).
The only question remaining for my determination is whether McNulty has
sustained his burden of demonstrating that the U. S. Attorney's
tangential involvement in this investigation establishes that the
summonses were issued by the IRS solely for the purpose of obtaining
information for criminal prosecution. I conclude that he has not.
[Genesis
of Investigation not Controlling]
At the outset,
I reject McNulty's contention that because the IRS investigation had its
genesis in an exclusively criminal inquiry, specifically the grand jury
materials obtained pursuant to Judge Fullam's Rule 6(e) order, it must
be inferred that the IRS is likewise pursuing a purely criminal
investigation. In United States v. Cleveland Trust Co. [73-1 USTC
¶9280], 474 F. 2d 1234 (6th Cir.), cert. denied, 414 U. S. 866, 94 S.
Ct. 48, 38 L. Ed. 2d 118 (1973), the court determined that an in-depth
audit did not lose its character as a civil tax examination merely
because it was commenced by the IRS at the suggestion of the Justice
Department's Organized Crime Strike Force. Accord United States v.
Chemical Bank [79-1 USTC ¶9162], 593 F. 2d 451, 455-56 (2d Cir.
1979); United States v. Chase Manhattan Bank [79-2 USTC ¶9658],
486 F. Supp. 317, 319 (S. D. N. Y. 1979), aff'd mem., [80-1 USTC ¶9355],
620 F. 2d 286 (2d Cir. 1980). These decisions are premised upon a
recognition that in the exercise of its broad investigatory powers, the
IRS obtains information about possible tax violations from a wide
variety of sources. This information, regardless of its source, may
generate an interest in civil tax recovery as well as in potential
criminal prosecution and will necessarily spawn an investigation in
which the civil and criminal elements are coterminous. Thus, the good
faith of a summons is not contingent upon the source or nature of the
information prompting the investigation but upon the IRS' motivation in
conducting the inquiry. 2
NcNulty's more
troublesome contention is that the IRS involvement with the grand jury
investigation and, subsequently Special Agent Box's contacts with the U.
S. Attorney raise the inference that the IRS is merely acting as
"an information-gathering agency" for the Department of
Justice. See United States v. LaSalle National Bank, supra, 437
U. S.
at 317, 98 S. Ct. at 2368;
United States
v. Serubo, supra, 604 F. 2d at 813. Clearly, when an IRS agent
works hand in hand with the U. S. Attorney in pursuing an investigation,
the bond fides of utilizing the summons procedure may be seriously
compromised. See
United States
v. Serubo, supra; United States v. Chase Manhattan Bank [79-2
USTC ¶9658], 598 F. 2d 321 (2d Cir. 1979). 3
Indeed, one of the principal exceptions to the "virtually
unassailable" presumption in favor of a summons issued prior to an
agent's recommendation to prosecute is a situation where the agent acts
as a "conduit" to channel information to the U. S. Attorney.
See
United States
v. First National State Bank of New Jersey [80-1 USTC ¶9217],
616 F. 2d 668, 671 (3d Cir.), cert. denied, 447
U. S.
905, 100
S. Ct.
2987, 64 L. Ed. 2d 854 (1980); United States v. Garden State National
Bank, supra, 607 F. 2d at 70. I have carefully examined the record
in this matter and conclude that nothing transpired during Special Agent
Box's contacts with Assistant U. S. Attorney Magarity which would
undermine the validity of these summonses.
[Purpose
of the Contacts]
The record
clearly reveals that the grand jury investigation concluded with
O'Neill's indictment in August of 1977, approximately four months before
the IRS investigation was opened and assigned to Box. After hearing that
MuNulty had been the target of a grand jury, Ms. Box initiated contact
with the U. S. Attorney because of her concern that the prior grand jury
inquiry might have adverse implications for her ability to conduct the
IRS investigation by means of summonses. She communicated with Agent
Tamm and with Assistant U. S. Attorney Magarity in order to ascertain if
they were still pursuing or intended to pursue an investigation of
McNulty via the grand jury. In addition, she consulted with attorney
Foster to solicit his advice as to the best way to proceed. There is no
evidence that Box sought to encourage or induce Magarity to initiate
another grand jury investigation nor is there anything to indicate that
she turned over materials gathered by the IRS to Magarity. 4
Moreover, Box testified unequivocally that she had made no determination
as to the likelihood of either a civil penalty assessment or criminal
prosecution because the investigation was then in its incipiency and she
lacked a sufficient amount of information to make a reasoned decision in
this regard. In view of all this, I cannot conclude that Box's sporadic
contacts with the U. S. Attorney at the outset of the investigation
fatally compromised the propriety of the summons. Rather, the evidence
clearly establishes that in conducting this investigation the IRS has
not abandoned its civil enforcement purposes and has not engaged in
actions which belie the good faith of the summonses.
For all of the
foregoing reasons, defendants will be ordered to produce the records
summoned within twenty days. 5
Order
AND NOW, this
5th day of January, 1982, defendants are hereby ordered to comply with
the summonses previously served upon them by the Internal Revenue
Service and to appear with all of the books, records, documents and
other information summoned within twenty days of the date of this order
at such time and place as is designated by the Internal Revenue Service.
1
I note at the outset that there exists a dispute as to whether McNulty
is entitled to intervene in the enforcement actions against Local 690
and the Apprenticeship Fund. The IRS concedes that the banks named as
defendants in civil action numbers 79-542 through 545 are third party
record keepers within the meaning of 26 U. S. C. §7609 thus giving
McNulty the statutory right to intervene in those proceedings. However,
it contends that he may not properly intervene in the actions against
the Apprenticeship Fund and Local 609. Although he admits that he has no
statutory right to intervene in these proceedings, McNulty contends that
he should be permitted to intervene under Fed. R. Civ. P. 24(a)(2).
Specifically, he argues that he has a protectable interest in not having
his tax liability investigated by the use of unlawfully issued process
and that this interest will not be adequately represented by the parties
to the enforcement actions.
In view of the
Supreme Court's decision in Donaldson v. United States [71-1 USTC
¶9173], 400 U. S. 517, 91 S. Ct. 534, 27 L. Ed. 2d 580 (1971) and my
own opinion in United States v. Manchel, Lundy and Lessin [81-2
USTC ¶9197], 477 F. Supp. 326 (E. D. Pa. 1979), it is doubtful that
McNulty could properly intervene under Fed. R. Civ. P. 24 if the union
summonses were the only ones at issue. However, he did intervene as of
right in the summons enforcement proceedings against the banks and took
extensive discovery to ascertain the circumstances surrounding the
issuance of the summonses. The factual bases for the bank summonses are
identical to those leading to the issuance of the union summonses. Thus,
it would be anomalous to hold that McNulty has no right to intervene in
the enforcement actions against Local 609 and the Apprenticeship Fund
when he has already intervened and actively opposed a set of summonses
issued by the same IRS agent, as part of the same investigation and
which spring from the same set of operative facts. I therefore conclude
that permitting McNulty to intervene at this juncture will in no way
undermine the Congressional policy of according the IRS broad and
unfettered investigatory powers which prompted the restrictive holdings
in Donaldson and Manchel, Lundy and Lessin. Accordingly, I
will grant his motion to intervene in the summons enforcement
proceedings against Local 690 and the Apprenticeship Fund.
2
This holding finds direct support in United States v. Cortese
[80-1 USTC ¶9197], 614 F. 2d 914 (3d Cir. 1980). In Cortese, the
IRS summoned contingency fee agreements filed by certain negligence
lawyers with the Prothonotary of the Court of Common Pleas of
Philadelphia county. One of the lawyers challenged the summonses on the
ground that the IRS investigation originated when an informant from the
insurance industry turned over information for the express purpose of
prompting an investigation of the negligence bar. The District Court
refused to enforce the summonses. In reversing this holding, the Court
of Appeals determined that the motive of an informant is not a relevant
consideration in determing the good faith of an IRS investigation. It is
only when the investigating agent or the IRS as an institution is
motivated by the same animus that compelled the informant to give the
IRS the information that the good faith of the investigation is properly
called into question.
Id.
at 921.
3
Although McNulty relies heavily upon Chase Manhattan, an
examination of the Second Circuit's decision in that case reveals that
his reliance is misplaced. In Chase Manhattan, a taxpayer opposed
the enforcement of an administrative summons issued in connection with
an IRS investigation of his tax liabilities. In his moving papers, the
taxpayer presented some evidence that he had been the subject of an FBI
investigation into alleged violations of the Interstate Travel Act. The
IRS investigation originated when the FBI turned over materials that it
had gathered during its own inquiry. In addition, there was some
indication that the taxpayer's "imminent" indictment on
Interstate Travel Act charges was delayed while the IRS issued and
sought enforcement of its summonses. The District Court determined that
the taxpayer had introduced no facts which would justify a finding of
bad faith. It therefore denied his motion to permit discovery or an
evidentiary hearing and ordered the summonses enforced. The Second
Circuit reversed, holding that the taxpayer had produced sufficient
circumstantial evidence of bad faith by the IRS to warrant the taking of
additional evidence by means of discovery or evidentiary hearing. Thus,
although Chase Manhattan involved a fact pattern quite similar to
that presented here, it does not support McNulty's ultimate position
that contacts between the Justice Department and the IRS necessarily
invalidate the good faith underpinning of an administrative summons.
Rather, the decision concerned the circumstances under which a party
should be permitted to take discovery to substantiate a claim of bad
faith. See Note, The Institutional Bad Faith Defense to the
Enforcement of IRS Summonses, 80
Columbia
L. Rev. 621, 628-37 (1980). I note that on remand the District Court did
hold an evidentiary hearing and concluded that although the IRS
investigation began with FBI assistance, the IRS had not channeled
information to the Justice Department and had not otherwise acted as
"an information gathering agency" for the FBI. It therefore
ordered the summonses enforced. See United States v. Chase Manhattan
Bank [79-2 USTC ¶9658], 486 F. Supp. 317 (S. D. N. Y. 1979) aff'd
mem., [80-1 USTC ¶9355] 620 F. 2d 286 (2d Cir. 1980).
4
McNulty argues that Box's discussions with Magarity should be treated as
an informal referral to the Justice Department thus invalidating these
summonses under the prophylactic rule of LaSalle National Bank.
This contention has no support in the record or in the law. As I have
previously stated, there is nothing to indicate that Box was attempting
to induce Magarity to commence a grand jury investigation or to
prosecute McNulty. More fundamentally, even if she had, her actions
would not be dispositive. It is not the motivation of the individual
agent but rather the institutional posture of the IRS which determines
the propriety of a summons. As the Supreme Court noted in LaSalle
National Bank, "[t]he review process over and above [the
decisions of a special agent] is multilayered and thorough." 437
U. S.
at 314-15, 98
S. Ct.
at 2366. Thus, Box could not have referred this matter for prosecution
even if she had been inclined to do so. Rather, a referral within the
meaning of LaSalle National Bank can only occur after the IRS'
internal procedures have been exhausted and there is a referral by the
institution.
5
In the alternative, McNulty moves for a protective order to preclude the
IRS from turning over information obtained through these summonses to
the Justice Department for use in a criminal prosecution. I must deny
this request The IRS has the authority to issue summonses during the
course of its investigation "even if evidence thereby uncovered
might subsequently serve as the basis for a criminal prosecution . .
.." United States v. Garden State National Bank, supra, 607
F. 2d 66. Thus, as long as the relevant provisions of 26 U. S. C. §6103
are adhered to and the agency's own internal operating procedures are
followed, there would be nothing improper in the IRS' disclosing to the
Justice Department material obtained through the use of these summonses.