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United States v. McCarthy

decided: April 10, 1975.

UNITED STATES OF AMERICA AND BOYD W. HEMPHILL, SPECIAL AGENT OF THE INTERNAL REVENUE SERVICE, APPELLEES
v.
JACK MCCARTHY, VICE-PRESIDENT AND OFFICE MANAGER OF BAR MAR WAREHOUSING CORP., AND BAR MAR WAREHOUSING CORP., APPELLANTS



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (Civil Action No. 1593-73).

Seitz, Chief Judge, Aldisert and Garth, Circuit Judges.

Author: Seitz

Opinion OF THE COURT

SEITZ, Chief Judge.

This is an appeal from a final judgment of the district court, entered under 26 U.S.C. § 7604 (1970), ordering Jack McCarthy and Bar Mar Warehousing Corp., ("defendants") to produce certain books and records listed in an administrative summons issued pursuant to 26 U.S.C. § 7602 (1970) by Internal Revenue Service Special Agent Hemphill.*fn1

I. Factual Background

Defendants failed to comply with the Internal Revenue Service summons on August 14, 1973. Thereafter, the Internal Revenue Service and Agent Hemphill ("plaintiffs") initiated these proceedings to enforce the summons. Upon filing a complaint, plaintiffs obtained an Order to Show Cause. Defendants filed a motion to Vacate the Order to Show Cause and upon the return date of the Order filed an answer which contained several counterclaims (the answer was later amended to construe these counterclaims as affirmative defenses).

In essence, plaintiffs' complaint, and an affidavit of Agent Hemphill attached to it, contained the following allegations: that Agent Hemphill had issued a summons requesting an appearance by an officer or agent of defendant-corporation for testimony and production of certain documents, that the materials sought were in the possession of defendants, that they were necessary to ascertain the correct tax liability of defendant-corporation for the years 1969 through 1972, and that defendants had failed to comply with the summons on its return date.

Defendants' responsive pleadings alleged, in pertinent part, that the summons should be held unenforceable because: (1) the material sought in the summons had previously been made available to the Service and was presumptively in the Service's possession; (2) in view of the Service's prior examination of the years in question and its prior access to the material sought in the summons, any further access would constitute a "second inspection" which, under 26 U.S.C. § 7605(b) (1970), might only be had after the Secretary or his delegate had notified defendant-corporation that an additional inspection was necessary; (3) no such notice had been sent defendants; (4) Agent Hemphill had been engaged in harassment of persons related to defendant corporation by business or personal ties in an apparent attempt to coerce defendants to waive "their constitutional and statutory rights;" and (5) the investigation was criminal in nature since it was being conducted by an agent in the IRS intelligence division, it being the function of that division to provide evidence for criminal prosecutions and not to ascertain tax liability.

On the return date of the Order to Show Cause, the district court heard oral arguments on the Motion to Vacate. At that time counsel for defendants requested pretrial discovery. The court did not grant the request; moreover, despite the allegations by both parties which appear to have raised factual disputes, the court did not conduct an evidentiary hearing, ostensibly having concluded that the case could be decided as a matter of law.*fn2

On April 14, 1974, by Letter Opinion, the district court denied defendants' motion to vacate the order to Show Cause and granted final judgment to plaintiffs. An order enforcing the administrative summons was signed July 8, 1974. The order was stayed pending this appeal.

On appeal, defendants seek reversal of the district court's enforcement order on the grounds that the district court erred in denying them an evidentiary hearing and pretrial discovery since they had sufficiently brought into controversy the enforceability of the summons.

Plaintiffs' reply on appeal is basically that the district court correctly enforced the IRS summons where defendants "had made no showing that enforcement would constitute an abuse of the court's process."*fn3 Plaintiffs further contend that defendants failed to demonstrate the need for a hearing, that they had in fact waived any such hearing, and that they had failed to demonstrate criminal purpose, harassment, or that plaintiffs' access to defendant-corporation's books would constitute a "second inspection."

II. Supreme Court Precedent

By failing to comply with the summons on or before its return date, defendants compelled plaintiffs to seek enforcement in the district court under 26 U.S.C. § 7604 (1970). Both Reisman v. Caplin, 375 U.S. 440, 11 L. Ed. 2d 459, 84 S. Ct. 508 (1963) and United States v. Powell, 379 U.S. 48, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964), indicate that the taxpayer is entitled to a hearing prior to enforcement and contemplate that, in the course of this hearing, the taxpayer "may challenge the summons on any appropriate ground," Reisman at 449; Powell at 58. The purpose of the hearing, as was stated in Powell, is to prevent abuse of the court's process. The Court stated:

Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the ...


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