80-1 USTC ¶9108]United States of America and Nelson H. Patnaude, Special Agent of the Internal Revenue Service, Petitioners v. Smith, Barney, Harris, Upham & Company, Respondent

U. S. District Court, So. Dist. N. Y., M-18-304, 5/11/79

[Code Sec. 7602]

Summonses: Examination of books and witnesses: Scope of authority: Good faith issuance: Civil purpose.--A summons was enforceable when issued for a good faith civil tax purpose. The IRS 's refusal to discuss settlement of the taxpayer's civil tax liability was not evidence of institutional abandonment of the pursuit of a civil tax liability.

Robert B. Fiske, Jr., United States Attorney, New York , N. Y. 10007, for petitioners. Zuckerman, Aronson & Horn, 60 Park Place , Newark , N. J. 07102, for respondent.

Memorandum and Order

OWEN, District Judge:

The Government has petitioner for enforcement of an Internal Revenue Service summons in connection with an investigation of the correctness of tax returns filed by George Filippatos for the 1974, 1975, and 1976 tax years. The respondent, a brokerage firm which is in possession of relevant books, records, and other papers pertaining to this investigation, does not contest enforcement of the summons; but the taxpayer has instructed respondent not to comply and has formally opposed enforcement of the summons.

A two-pronged test is to be applied in determining whether to enforce an IRS summons. First, it must be issued before the IRS recommends criminal prosecution to the Department of Justice. Second, the summons must be undertaken in good faith pursuit of a civil prosecution, i. e., the IRS must not have abandoned, in an institutional sense, the pursuit of civil tax determination or collection. United States v. LaSalle National Bank [78-2 USTC ¶9501], 437 U. S. 298 (1978).

The taxpayer-intervenor's position here is that the fact that the IRS refused to discuss settlement of his civil tax liability shows it lacked a good faith civil tax purpose. He relies entirely on dictum in a New Jersey District Court case, now on appeal, to the effect that such refusal to negotiate or explore the possibility of compromise would be sufficient evidence of institutional bad faith to deny enforcement of the summons. See United States v. Garden State National Bank [79-1 USTC ¶9262], 465 F. Supp. 437 (D. N. J. 1979). The court in Garden State observed that this would show that the civil summons was being used solely as a means for deciding whether or not to refer the case for criminal prosecution. Id. at 440.

The Government observes that Garden State is not binding on a court in this district and, in addition, is logically, practically, and legally unsound. First, the IRS is not in a position to discuss settlement without an opportunity to examine the relevant material. Needless to say, it should not have to rely on the taxpayer's own analysis or representations as to the correctness of his tax returns. Second, the IRS 's broad investigative power would be totally circumscribed if it were required to participate in settlement discussions with every taxpayer under investigation before it could demand compliance with its summonses. Third, the decision whether to discuss settlement and whether to issue a summons is a discretionary one that cannot be compelled by the court. See Leonhard v. Mitchell, 473 F. 2d 709, 713 (2d Cir. 1973) (Mandamus cannot force a discretionary act). To require the IRS to discuss settlement before it can enforce the summons would undermine this discretionary power. Finally, there is serious question in this case whether the taxpayer's expressed desire to negotiate a settlement was sincere. He did not request a conference with the IRS investigator until the day after he was served with the Order to Show Cause. It is suggested, therefore, that the sole purpose of the request was to fall within the reasoning of Garden State .

In conclusion, I find the Government's arguments compelling, and I do not accept the taxpayer-intervenor's position that the refusal of the IRS to discuss settlement of his civil tax liability shows it had abandoned the pursuit of a civil tax determination or collection. I decline to follow Garden State , supra.

The Government's petition is granted. Respondent is, accordingly, directed to produce the records called for by the summons and to appear for the purpose of giving testimony as to the correctness of the taxpayer's tax returns for the years under investigation.