shown what may be fairly stated to be reasonable grounds of suspicion or probable cause for the examination to ascertain if there has been fraud. It follows that the examination * * * is not unreasonable or oppressive and the defendant administrators should be required to submit thereto." This may be taken as a statement of the law applicable, and it is not necessary to discuss the much argued question whether the facts in the Andrews Case were in all respects exactly the same as those now before the Court. "Reasonable grounds of suspicion" and "probable cause for the examination to ascertain if there has been fraud" are terms which embrace a wide range of situations, and there will be all manner of gradations within their limits. I shall not attempt to formulate a more precise rule, but I hold that under the facts in this case it is not unreasonable for the Government to make the re-examination proposed.
The evidence here shows that the losses claimed were based upon certain sales of stock which now appear to have been between a husband and his wife, though not disclosed by the taxpayers as such; that the husband exercised practically unlimited control of his wife's property and affairs; and that many, if not all, of the transactions as to which loss was claimed were conducted entirely by the husband without his wife's knowledge and without any personal participation by her. The question whether the husband ever actually relinquished control or dominion over such of his securities as were ostensibly sold to his wife is a vital one and goes directly to the issue of fraud. If he did not, those transactions regardless of form were not genuine sales. Obviously the question cannot be properly resolved without a full examination.
Under the circumstances I do not think that the fact that the agents were not sufficiently alert to discover the situation upon the first examination makes this request for a re-examination unreasonable. The ascertainment and enforcement of tax obligations is not a game in which a false move is to be penalized by a procedural bar of some kind. The only question is whether, under the circumstances, more than one examination is an unreasonable encroachment upon the right to be let alone which the constitution protects.
I think it will be agreed that the extent to which any individual may assert that right against his government will depend somewhat upon the position in which he has chosen to place himself. When a taxpayer adopts a tax avoidance device the legitimacy of which depends upon its genuineness -- a device which has been in countless cases used as a means of fraudulent evasion -- I think he has somewhat narrowed his right to be let alone. Where, as here, his exemption from tax liability depends upon whether a transaction is in fact what it appears to be, he must expect that the real transaction underneath the surface appearance of regularity will be subjected to a searching examination -- an examination which, if it is to be of the slightest value, must cover a wide field and may involve many apparently unrelated portions of the taxpayer's private affairs.
Much testimony was produced by the plaintiffs to support the genuineness of the stock sales, and it undoubtedly did show that the forms observed were all in order. But the plaintiffs' argument that, because the evidence which they elected to produce shows apparently legitimate and regular sales, a re-examination is unreasonable, merely begs the question. What the Government asks is an opportunity to determine upon adequate information whether or not the transactions are what they appear to be. It cannot possibly do so without the investigation which it wishes to make. The fact that the taxpayer can make a showing of perfect regularity upon evidence and documents which the Government has no real opportunity to check up and correlate does not, in a case of this kind, touch the real issue.
This decision is limited to a ruling that a re-examination for the purpose of determining whether or not the husband and wife stock sales were or were not fraudulent, is reasonable. If wholly unrelated transactions should be brought in question, as the plaintiff argues they may be, and facts bearing upon a different tax liability discovered, the question whether such evidence was obtained by an unreasonable exercise of the right of examination and search might arise in a subsequent proceeding to collect additional tax. It is not now before the Court.
The bill may be dismissed with costs.
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