Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

United States v. Garden State National Bank Ben Shafer and Boot Strap

decided: October 10, 1979.

UNITED STATES OF AMERICA AND ROBERT H. MCCORRY, SPECIAL AGENT OF THE INTERNAL REVENUE SERVICE, APPELLEES
v.
GARDEN STATE NATIONAL BANK BEN SHAFER AND BOOT STRAP, LTD., APPELLANTS UNITED STATES OF AMERICA AND ROBERT H. MCCORRY, SPECIAL AGENT OF THE INTERNAL REVENUE SERVICE, APPELLEES V. PALISADES SAVINGS AND LOAN ASSOCIATION BEN SHAFER AND BOOT STRAP, LTD., APPELLANTS UNITED STATES OF AMERICA AND ROBERT H. MCCORRY, SPECIAL AGENT OF THE INTERNAL REVENUE SERVICE, APPELLEES V. CITIZENS FIRST NATIONAL BANK OF NEW JERSEY, FORMERLY KNOWN AS OAKLAND STATE BANK BEN SHAFER AND BOOT STRAP, LTD., APPELLANTS UNITED STATES OF AMERICA AND ROBERT H. MCCORRY, SPECIAL AGENT OF THE INTERNAL REVENUE SERVICE V. FIRST JERSEY SAVINGS AND LOAN ASSOCIATION BEN SHAFER AND BOOT STRAP, LTD., APPELLANTS UNITED STATES OF AMERICA AND ROBERT H. MCCORRY, SPECIAL AGENT OF THE INTERNAL REVENUE SERVICE, APPELLEES V. UNITED JERSEY BANK BEN SHAFER, MARILEE SHAFER, AND BOOT STRAP, LTD., APPELLANTS UNITED STATES OF AMERICAN AND ALEXANDER DOMBROSKI, SPECIAL AGENT, INTERNAL REVENUE SERVICE, APPELLEES V. ORANGE SAVINGS BANK UNITED STATES OF AMERICA AND ALEXANDER DOMBROSKI, SPECIAL AGENT, INTERNAL REVENUE SERVICE V. THE HERITAGE BANK, AND DOROTHY MILLER, ROGER L. KEECH, SANDRA J. KEECH, AND LAKEVILLE FASTENERS, INC., APPELLANTS.



Before Aldisert, Rosenn and Garth, Circuit Judges.

Author: Garth

Opinion OF THE COURT

These appeals call upon us once again to review the enforcement procedures pertaining to Internal Revenue summonses. In Nos. 79-1425 through 79-1428, taxpayers Shafer and Boot Strap, Ltd. appeal from the district court's order enforcing summonses issued to banks for the production of records relating to taxpayers' liability. In No. 79-1681, Marilee Shafer, in addition to Shafer and Boot Strap, Ltd., appeals. A similar appeal is presented by taxpayers Roger and Sandra Keech and Lakeville Fasteners, Inc. at No. 79-1682.*fn1

Benefiting from the instruction of United States v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978); United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975); United States v. Genser, 595 F.2d 146 (3d Cir. 1979) (Genser II ); and our recently published opinions in United States v. Genser, 602 F.2d 69 (3d Cir. 1979) (per curiam) (Genser III ), and United States v. Serubo, 604 F.2d 807 (3d Cir. 1979), we affirm the district court's enforcement of all summonses in both appeals, but we do so upon different grounds than the grounds upon which the district court relied.*fn2

I.

A. Shafer and Boot Strap (Shafer)

In September, 1977, the Internal Revenue Service began investigating Shafer's tax liability for the years 1974, 1975, and 1976. Appellee Special Agent Robert McCorry was assigned to the case at the outset and has since been in charge of the investigation. A revenue agent was also assigned to the investigation in June 1978.*fn3 In July 1978, pursuant to I.R.C. §§ 7602, 7604,*fn4 McCorry issued four summonses which are subjects of this appeal, one to each of four respondent banks. On January 19, 1979, an additional summons was issued to United Jersey Bank. The record does not reveal the issuance date of the last summons issued to the Columbia Savings and Loan Association, however, inasmuch as these last two summonses were treated as a unit by all parties and the district court, we will assume that the Columbia summons issued no later than January 19, 1979. Each summons sought production of testimony, books, records, papers, and other data relating to Shafer. Notice was given Shafer under I.R.C. § 7609(a), and Shafer immediately caused the summonses to be stayed under I.R.C. § 7609(b)(2).

On October 6, 1978 the Government applied for orders directing the banks to show cause why the first four summonses which had issued in July, should not be enforced. Shafer intervened to oppose enforcement on the ground that the summonses were issued solely for purposes of a criminal investigation and were therefore unenforceable under United States v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1977). The banks, which had been subpoenaed, took no position on enforcement. An evidentiary hearing was held over the objection of the Government on January 11, 1979. The Government contended that the issue of enforcement should have been disposed of on the pleadings.*fn5 On January 22, 1979 the district court, by memorandum opinion and order, directed compliance with these four summonses. United States v. Garden State National Bank, 465 F. Supp. 437 (D.N.J.1979).*fn6 In its opinion, the district court stated that the I.R.S.'s procedures were characterized by the "bad faith" condemned by LaSalle. The district court based this characterization on testimony of I.R.S. witnesses. That testimony purportedly established that the Service would not agree to negotiate a compromise on the civil aspects of a case until the issue of referral (to the Department of Justice) had been resolved. In essence, the district court determined that once a special agent of the Criminal Investigation Division has been assigned, no compromise can be effected by I.R.S. even though I.R.S. has not decided to refer the investigation to the Justice Department for criminal prosecution. Accordingly, the district court declared that, measured against its newly evolved "conference for compromise" standard, a taxpayer can show "institutional bad faith" on the part of I.R.S. if a conference looking toward a possible compromise is sought, and I.R.S. refuses to engage in such compromise negotiations. In such a situation, the district court would have held that "bad faith" had been established "in that the civil summons was being used solely as a means for deciding whether or not to refer for criminal prosecution, meanwhile (enabling the I.R.S. to gather) evidence in support," Id. at 440. Despite this dictum, the district court enforced all four bank summonses on the ground that:

since taxpayer has stated on the hearing record that no request for conference was made, the court finds that the problems which concern it are abstract, and concludes that taxpayer has not met the burden established by LaSalle.

Id. at 441.

Shafer appealed, and the Government consented to a stay pending determination of the appeal as to these four summonses.*fn7 This court ordered a stay as to the summonses appealed at No. 79-1681, See note 5 Supra.

B. Keech and Lakeville (Keech)

The Keech investigation by I.R.S. began sometime prior to February 1977. Appellee Special Agent Alexander Dombroski issued summonses similar to those in the Shafer matter to two banks. One summons was issued in July 1977 and the other in September 1977. Compliance with both summonses was stayed pursuant to I.R.C. § 7609(b)(2). In February 1979, the Government obtained orders to show cause why the summonses should not be enforced, and Keech intervened. On April 23, 1979, oral argument, but no testimony, was heard before the district court. At its conclusion, Keech was denied an evidentiary hearing and discovery. An order was entered on May 8, 1979 enforcing the summonses. The district court's stated ground for these actions differed from the grounds upon which it relied in granting enforcement of the Shafer summonses. Here the district court held that inasmuch as I.R.S. always retains an ultimate residual interest in collecting tax money even after a taxpayer's criminal conviction for tax fraud, I. e. I.R.S. never abandons its civil interest, a taxpayer in Keech's position could Never satisfy the LaSalle requirement of showing that the summons had been institutionally issued solely for purposes of a criminal investigation.

Keech moved for a stay of enforcement in this court, which we granted on June 1, 1979.*fn8

II.

The central question in these appeals is whether the I.R.S. summonses were properly issued. The I.R.S. has power to issue summonses in the course of its investigation of civil tax liability even if evidence thereby uncovered might subsequently serve as the basis for a criminal prosecution of the taxpayer. The I.R.S. may not, however, use its power to issue administrative summonses for the Sole purpose of conducting or furthering a criminal investigation on its own behalf, or on the behalf of the Justice Department. Both Shafer and Keech contend that the summonses issued for their bank records were issued in bad faith for the sole purpose of furthering a criminal investigation and prosecution.

United States v. LaSalle National Bank, supra; Genser II and III, supra ; and United States v. Serubo, supra, make clear that in a situation such as is presented here, where the I.R.S. has Not recommended criminal prosecution to the Justice Department and the investigating agent has Not recommended prosecution to his superiors within the Service, the taxpayer bears an almost impossible burden to resist enforcement of the summons. However, because of the importance of this issue, and the frequency with which it arises both here and in the district courts, we feel impelled to restate for the guidance of the bar and the district courts the various considerations bearing on the enforcement of I.R.S. summonses.

In LaSalle, the Supreme Court established a prophylactic cutoff rule: after a particular investigation has been referred to the Justice Department for criminal prosecution, the Service may not issue summonses for taxpayer-related records pertaining to that matter. That event, referral, was chosen by the Court because of the nature of tax enforcement. Tax fraud leads to both civil and criminal liability, and the I.R.S. issues summonses in investigations that lead to both types of liability under the scheme established by Congress in the 1939 Internal Revenue Code. See 437 U.S. at 308-11, 98 S. Ct. 2357. Once the Service refers the case to the Justice Department for prosecution of criminal tax fraud, however, the civil and criminal aspects of the case begin to diverge. The Justice Department at that juncture assumes full control over the case, and the Service loses its legal authority to settle any civil or criminal liability. Although the Service undoubtedly reserves an interest in civil collection of withheld tax money, LaSalle barred use of I.R.S. summonses after a recommendation of prosecution to the Justice Department. This prohibition was designed to avoid the possibility that the summonses would be used as an adjunct to the Justice Department's sources of criminal discovery. See id. at 311-13, 98 S. Ct. 2357.

The Court sought to prevent the widening of the scope of criminal discovery and the usurpation by the Service of the traditional grand jury role as the primary criminal investigatory tool. See id. at 313 n.15, 98 S. Ct. 2357. Where, however, the case had not yet been referred to the Justice Department, the Court held I.R.S. summonses to be presumptively valid, balancing the need for discovery of information in civil tax investigations against the attenuated possibility of abuse. As long as no referral has been made, this presumption of validity obtains, even when the investigating agent decides that criminal prosecution would be feasible or when he recommends to his Service superiors that they in turn refer the matter to the Justice Department. See id.*fn9

While the LaSalle Court was unanimous in imposing an absolute ban on enforcement of I.R.S. summonses issued after the case had been referred to the Justice Department, it divided on the question of validity of summonses which were issued Before that referral. Four Justices would have held any summons issued before the cutoff to be conclusively valid. See 437 U.S. at 319-21, 98 S. Ct. 2357 (Stewart, J., dissenting). The majority, however, left open the possibility that such a pre-referral summons could be challenged by the taxpayer if the Service as an institution had not issued the summons in "good faith." See 437 U.S. at 313-18, 98 S. Ct. 2357.

LaSalle defined "good faith" in this context both affirmatively and negatively. In its affirmative definition, LaSalle referred to the four prongs of the Prima facie showing of "good faith" as explicated in United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964), namely:

(1) that the investigation is being conducted for a legitimate purpose (I. e., that the I.R.S. retains an interest in civil tax collection);

(2) that the material sought is relevant to the legitimate purpose of the investigation;

(3) that the information is not yet in the possession of the I.R.S.; and

(4) that the proper administrative steps have been followed.

It is the Government's burden to satisfy all four prongs of the Powell test. Id. at 57, 85 S. Ct. 248. The requisite showing is generally made by affidavit of the agent who issued the summons and who is seeking enforcement. United States v. McCarthy, 514 F.2d 368, 372 (3d Cir. 1975). "(T)he purpose of the good-faith inquiry is to determine whether the agency is honestly pursuing the goals of § 7602 by issuing the summons." LaSalle, 437 U.S. at 316, 98 S. Ct. at 2367. Those goals may be summarized as (1) ascertaining the correctness of a return, (2) making a return where none has been made, (3) determining tax liability, and (4) collecting taxes. LaSalle cautions that the I.R.S. "at all times must use the summons authority in good-faith pursuit of (these) congressionally authorized purposes," Id. at 318, 98 S. Ct. at 2368.

Genser III Thereafter made clear that an institutional commitment to recommend for prosecution without more did not necessarily demonstrate "bad faith":

It is not just an institutional commitment to recommend prosecution that renders a summons issued under § 7602 invalid; rather, it is the absence of a civil purpose for that summons that triggers the LaSalle rule.

602 F.2d at 71. Genser III implemented its holding by explaining the remand of Genser II to the district court:

Likewise, in remanding the case to the district court, we noted, "The district court failed, however, to confront defendants' claim that the IRS, as an institution, had committed itself before December 12, 1975, to refer the case for prosecution And that summonses issued after that commitment served no civil purpose." 595 F.2d at 151 (emphasis supplied).

602 F.2d at 71.

Serubo, the most recent of this Circuit's enforcement discussions, in restating this aspect of the LaSalle holdings, said: "(B)ad faith abuse of the powers granted by § 7602 occurs when the Service . . . abandon(s) in an institutional sense . . . the pursuit of civil tax determination or collection," 604 F.2d at 811. It is this concept of "bad faith" that gives rise to what we have characterized as a negative definition of "good faith." Essentially, once the Government has carried its Powell burden of proof of "good faith," the burden shifts to the taxpayer to show that the institutional "good faith" required by LaSalle does not exist.*fn10 LaSalle explained this latter "good faith" inquiry as follows:

Without doubt, this burden is a heavy one. Because criminal and civil fraud liabilities are coterminous, the Service rarely will be found to have acted in bad faith by pursuing the former. On the other hand, we cannot abandon this aspect of the good faith inquiry altogether. We shall not countenance delay in submitting a recommendation to the Justice Department when there is an institutional commitment to make the referral and the Service merely would like to gather additional evidence for the prosecution. Such a delay would be tantamount to the use of the summons authority after the recommendation and would permit the Government to expand its criminal discovery rights. Similarly, the good-faith standard will not permit the IRS to become an information-gathering agency for other departments, including the Department of Justice, regardless of the status of criminal cases.

437 U.S. at 316-17, 98 S. Ct. at 2368 (footnotes omitted). Thus, for enforcement of a summons, LaSalle requires (1) that no recommendation for prosecution shall have been made to the Justice Department; (2) that the Powell "good faith" requirements have been met; and (3) that the taxpayer has failed to refute the existence of institutional "good faith." LaSalle, however, foresaw that future cases might add further definition to these standards:

These requirements are not intended to be exclusive. Future cases may well reveal the need to prevent other forms of agency abuse of ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.