UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
argued: March 25, 1976.
UNITED STATES OF AMERICA AND CARL E. REICHELT, SPECIAL AGENT OF INTERNAL REVENUE SERVICE, PETITIONERS-APPELLEES
FIRST NATIONAL STATE BANK OF NEW JERSEY, RESPONDENT V. HERBERT M. GANNET, INTERVENOR-APPELLANT
ON APPEAL FROM ORDER OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 76-124).
Seitz, Chief Judge, Rosenn and Garth, Circuit Judges. Seitz, Chief Judge, dissenting.
Opinion OF THE COURT
GARTH, Circuit Judge.
This case presents us with the question of whether an intervening party in an administrative summons enforcement proceeding may be held in civil contempt for refusing to answer questions which range beyond the scope of the proceeding. We hold that the Internal Revenue Service (IRS), the administrative agency involved, lacked the statutory power to require answers to questions which were unrelated to the enforcement of the summons and that therefore the district court erred in imposing a civil contempt sanction.
In November, 1974 the Internal Revenue Service Center in Holtsville, New York received a cashier's check issued by the National Newark & Essex Bank from Herbert L. Zuckerman, an attorney. As the accompanying letter explained, Zuckerman forwarded this check in the amount of $142,497.81 to the Internal Revenue Service on behalf of a taxpayer whose name was unknown to him but who owed taxes and interest for prior years. Zuckerman wrote that the taxpayer was paying these moneys on the recommendation of counsel.
Upon receipt of this check and letter the IRS commenced an investigation to determine the identity of the unnamed taxpayer. See United States v. Bisceglia, 420 U.S. 141, 43 L. Ed. 2d 88, 95 S. Ct. 915 (1975). The first stage of the inquiry resulted in information that the source of the funds for the cashier's check was a check drawn on the Herbert M. Gannet Trust Account at First National State Bank of N.J. (Bank) payable to Zuckerman in the amount of $142,497.81. Thereafter, on October 3, 1975, pursuant to 26 U.S.C. § 7602,*fn1 the IRS served a summons on the Bank seeking information concerning the Herbert M. Gannet Trust Account. This summons sought all negotiable instruments and deposit slips relating to the source of funds used for the issuance of the $142,497.81 check as well as monthly bank statements for this trust account.
Apparently, appellant Gannet, an attorney, had been consulted by the unnamed taxpayer about a potential tax liability for past years. Legal advice had evidently been imparted to the taxpayer-client, and based upon that advice, a decision was made to pay the tax deficiencies plus interest in a manner which was designed to protect the taxpayer's identity. We can further assume that Zuckerman, who wrote to IRS and forwarded the cashier's check, was engaged to assist in this endeavor of shielding the taxpayer's identity from disclosure.
In response to the summons the Bank furnished the IRS with two cashier's checks that had been deposited in the Gannet Trust Account. These checks had been purchased at the Bank's Port Newark branch office on October 31, 1974 in the amounts of $65,182.66 and $77,315.15 (totalling $142,497.81).
The Bank then informed Gannet that it had furnished the above information to the IRS in compliance with the summons. Gannet served written notice on the Bank directing it not to provide any further information concerning his Trust Account.
As the IRS investigation continued a second IRS summons was served on the Bank on November 19, 1975. This summons required the Bank to:
Furnish information as set forth below which pertains to the purchase of cashier's checks numbered 39649 and 39651 in the respective amounts of $65,182.66 and $77,315.15 dated October 31, 1974 which were purchased at the Port Newark Office:
1. Name, address and social security number of the purchaser of the above-described cashier's checks.
2. All documentation relative to the source of funds used to purchase the above-described checks.
After the Bank notified Gannet of this second attempt to obtain information, Gannet commenced Civil Action No. 75-2028 in which he sought to enjoin the Bank from complying with the November 19, 1975 summons. This application for injunctive relief was denied by the district court.*fn2
The government then filed a complaint in the U.S. District Court for the District of New Jersey to enforce the summons which had issued on November 19, 1975. This latter complaint, based upon 26 U.S.C. §§ 7402(b),*fn3 7604(a),*fn4 alleged that the IRS was engaged in an investigation to determine the federal tax liabilities of an unknown taxpayer and that the Bank "is in possession and control of papers and documents concerning the above-described investigation." The IRS asserted that the information sought in the summons was not within its possession and that
it was and is now essential to the determination of the correct tax liability of John Doe, for the years 1968 through 1974, inclusive, that the defendant be required to appear and to produce the documents, records and other information sought in the summons and to give testimony regarding those documents and records. . . .
On January 22, 1976 the district court ordered that the Bank show cause why it should not be compelled to obey the IRS summons. This order to show cause stated:
All motions and issues raised by the pleadings will be considered on the return date of this order. Only those issues raised in motion or brought into controversy by the responsive pleadings and supported by Affidavit(s) will be considered at the return of this order. . .
Thereafter Gannet moved to intervene in the enforcement proceeding as a defendant in order to oppose enforcement of the IRS summons against the Bank. His proposed Answer to the government's complaint alleged that "the documents, records and other information sought in the summons are protected from being produced by the attorney-client privilege."
On February 23, 1976, the parties appeared before the district court for the enforcement hearing. The district court first granted Gannet's motion for intervention and then ordered the enforcement proceeding consolidated with Gannet's earlier suit for injunctive relief (Civil Action No. 75-2028). Next the court had the parties address Gannet's claim of attorney-client privilege set forth in his Answer. Gannet argued that the records of his Trust Account at the Bank, the subject of the first IRS summons of October 3, 1975, were shielded from disclosure with respect to the unnamed taxpayer. He also contended that since the November 19, 1975 summons before the court was based upon privileged information that had been improperly taken from the records of his Trust Account, the district court should deny enforcement of this latter summons. In response, the government argued that the materials sought by the summons were bank records which were not privileged from disclosure.
Following the arguments of counsel the government called Gannet to testify at the enforcement hearing. Gannet was asked the following questions:
"Mr. Gannet, will you please tell the court whether or not -- or if you purchased cashier's checks number 39649 and 39651 in the respective amounts of $65,182.66 and $77,315.15 on October 31st, 1974 from the Port Newark Office of the First National State Bank."
"Mr. Gannet, what was used to purchase the two cashier's checks in question, and I may amplify my question -- . . . Currency, Treasury bills, Certificate of Deposit, whatever?"
"Mr. Gannet, can you tell whether you know what medium of exchange was used to purchase these checks?"
"Mr. Gannet, I must ask you, since you have intervened in this case you obviously did not intervene on your own behalf, but you intervened on behalf of some other party, and for that reason I ask you who you represent, who is the real party in interest on whose behalf you have intervened?"
Gannet objected to these questions on two grounds: (1) that the line of questioning was "entirely irrelevant to the proceedings on the summons now in question" and (2) that the questions sought to evoke answers protected by the attorney-client privilege. The district court overruled both objections and ordered Gannet to answer. Gannet refused.
Immediately thereafter, on February 23, 1976, the district court granted enforcement of the summons against the Bank. Gannet appealed from this order at No. 76-1234.
On February 27, 1976 the district court summarily ordered Gannet confined pursuant to 28 U.S.C. § 1826(a)*fn5 until such time as he answered the government's questions. This confinement order was stayed pending an application to this Court for a stay of the enforcement order of February 23, 1976. Gannet also filed a notice of appeal from the confinement order at No. 76-1261, which is the appeal with which we are here concerned.
On March 8, 1976 this Court denied Gannet's motion for a stay pending appeal of the district court's February 23, 1976 order which enforced compliance with the IRS summons. Subsequently, the Bank's records required by the summons were delivered to IRS.*fn6 On March 11, 1976, this Court granted Gannet's motion for a stay pending appeal of the confinement order of February 27, 1976. Thus Gannet has not yet commenced serving the civil contempt sentence which had been imposed on February 27, 1976. It is only the appeal from the order of confinement that is now before us.*fn7
The parties initially joined issue on the question of whether Gannet, asserting an attorney-client privilege, properly refused to answer the four questions which the government asked during the enforcement proceeding. In its opinion the district court focused exclusively upon that issue.*fn8 However, Gannet had also objected to the questions asserting their irrelevancy to the proceedings then under way. In an addendum to his brief in this Court, Gannet argued that the questions posed were not relevant to the enforcement of the IRS summons. In reply the government urged that a witness has no right to object to questions on the ground of relevancy, but that in any case the particular questions here were relevant to the enforcement proceeding.*fn9
Gannet's objection to relevancy brought into issue the power and authority of the IRS in this enforcement proceeding to question him on matters unrelated to the enforcement of the Bank summons. Since this objection raised a threshold question as to the power of the IRS, it must necessarily be resolved before we can reach any subordinate issue including that of an asserted attorney-client privilege. We therefore turn to a consideration of the authority under which the IRS can compel discovery and whether that authority was exceeded in this case.
Congress has provided the Internal Revenue Service with elaborate investigative powers to determine the tax liability of any taxpayer. Under § 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602, the IRS is authorized
for the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax . . . to summon . . . any other person the Secretary or his delegate may deem proper, to appear before the Secretary or his delegate . . . to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry.
Where there has been noncompliance with a summons seeking testimony or the production of evidence, the IRS may seek judicial enforcement. The Internal Revenue Code provides that a federal district court "shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data." See notes 3, 4, supra.
The judicial proceeding provided for the enforcement of an IRS summons is no mere rubber stamp approval. See In re Grand Jury Proceedings, 486 F.2d 85, 90 (3d Cir. 1973) (Schofield I). An enforcement action is "an adversary proceeding affording a judicial determination of the challenges to the summons and giving complete protection to the witness." Reisman v. Caplin, 375 U.S. 440, 446, 11 L. Ed. 2d 459, 84 S. Ct. 508 (1964); Donaldson v. United States, 400 U.S. 517, 27 L. Ed. 2d 580, 91 S. Ct. 534 (1971). At such a judicial hearing, United States v. McCarthy, 514 F.2d 368, 372 (3d Cir. 1975) requires that the IRS must be prepared to make a preliminary showing in support of its summons --
(1) That the investigation has a legitimate purpose and that the inquiry may be relevant to that purpose, (2) that the information sought is not already within the government's possession and (3) that the steps required by the Internal Revenue Code have been followed . . . .
The burden then shifts to the party named in the summons to establish any defenses or to prove that enforcement would constitute "an abuse of the court's process."*fn10 United States v. Powell, 379 U.S. 48, 58, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964). Thus the entire enforcement proceeding from its inception through hearing is strictly limited to the narrow issue of whether the summons is to be enforced.
Here the IRS summons to the Bank sought information concerning the cashier's checks purchased at its Port Newark branch office. In support of the summons enforcement complaint, which was directed only against the Bank and not Gannet, Special Agent Reichelt submitted an affidavit which satisfied the McCarthy requirements (see p. 624, supra), averring among other facts that the contents of the Bank records in question were not in the possession of IRS and that they were "essential to the investigation." Thus, IRS carried its initial burden with respect to enforcement of the summons against the Bank. United States v. McCarthy, supra.
In response the Bank and Gannet asserted various defenses, all of which opposed judicial enforcement of the IRS summons to the Bank. Thus the only issue before the district court was whether or not the November 19, 1975 Bank summons seeking certain Bank records was to be enforced.
However, during the enforcement hearing the government called Gannet as a witness and commenced a line of questioning that neither supported enforcement of the summons nor rebutted any defenses raised against enforcement. While these questions were undoubtedly relevant to the overall IRS investigation of the unknown taxpayer, they were completely irrelevant to the single issue before the court -- whether the November 19, 1975 summons to the Bank should be judicially enforced. In effect, the government, by this means, sought to convert a narrow and limited enforcement proceeding into a general investigative proceeding. We know of no authority which grants the IRS an unlimited commission to interrogate witnesses under oath on matters unrelated to enforcement of the summons then before the court.
As previously discussed, Congress has empowered IRS to carry on its investigative functions through the issuance of administrative summonses. Judicial involvement only arises where there has been noncompliance with a summons. The judicial enforcement proceeding that follows is strictly limited to granting or denying enforcement of the terms of the specific summons. To permit inquiry into areas unrelated to the enforcement of the summons, as was the situation with respect to the questions asked of Gannet here, violates this Congressionally mandated procedure.
As we have observed, no summons has ever been issued to Gannet. Consequently, Gannet has not had the opportunity to comply with or to contest a summons seeking information of his own knowledge and of his own actions. Furthermore, the government has not been obliged to satisfy the McCarthy requirements in a summons enforcement proceeding as they may relate to information sought to be elicited from Gannet. Finally, and most importantly here, only after a summons had issued to Gannet and had been judicially enforced against him would Gannet's refusal to comply or testify subject him to the possibility of civil contempt. In our view, the government exceeded its statutory powers under §§ 7602, 7402(b), and 7604(a) by utilizing the summons enforcement proceeding with respect to the Bank as an investigative tool to pry information from Gannet.
Having concluded that the government was without statutory authority in the Bank summons enforcement proceeding to ask Gannet the four questions at issue here (see p. 622, supra), we must reverse the district court's order which adjudged Gannet in contempt for refusing to answer these questions. In disposing of this appeal on the threshold issue of statutory power, we do not reach and hence express no opinion concerning Gannet's claim of attorney-client privilege.
We will reverse and remand to the district court with the direction that the contempt and confinement order of February 27, 1976 be vacated, at which time our stay pending appeal will terminate.
vacated & remanded
SEITZ, Chief Judge (dissenting).
It is important to keep in mind that the confinement order presently before us arose during statutory proceedings initiated by the I.R.S. to secure judicial enforcement of a summons directed solely to the Bank. At the court hearing, the intervenor-appellant, as a witness, refused to answer certain questions and his refusal resulted in a contempt order which finally eventuated in the confinement order now on appeal.
Given the setting in which they were asked, I must presume that the questions posed to the intervenor-appellant sought to elicit evidence which would aid the court in determining whether to enforce the summons against the Bank. However, despite the intervenor-appellant's refusal to answer, the court proceeded to enter a final order directing the Bank to comply with the summons. Since the relief sought against the Bank, i.e., enforcement of the summons, has been obtained, the underlying contempt order is, in my view, no longer viable.
The purpose of civil contempt is wholly remedial. It is designed to coerce compliance with the lawful orders of the court, rather than vindicate the court's authority. Universal Athletic Sales Co. v. Salkeld, 511 F.2d 904 (3d Cir. 1975), cert. denied 423 U.S. 863, 46 L. Ed. 2d 92, 96 S. Ct. 122 (1975). However, once enforcement of the summons had been obtained, the testimony of the intervenor-appellant became unnecessary. Consequently, the contempt order and its implementing confinement order can now serve no proper remedial purpose. I would therefore dismiss this appeal as moot.