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United States v. Cortese

decided: February 8, 1980.

UNITED STATES OF AMERICA AND JOSEPH A. DOLLARD, SPECIAL AGENT, INTERNAL REVENUE SERVICE, PLAINTIFF-APPELLANTS
v.
CORTESE, AMERICO V., PROTHONOTARY, COURT OF COMMON PLEAS, PHILADELPHIA COUNTY, PB, JB, JJD, LK, SK, MK, SLL, ML-1, ML-2, INTERVENOR-DEFENDANTS V . UNITED STATES OF AMERICA, APPELLANT



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA D.C. Civil No. 76-3941

Before Hunter, Weis and Garth, Circuit Judges.

Author: Hunter

Opinion OF THE COURT

This case requires us once again to examine the requirement that Internal Revenue Service (IRS) summonses be issued in good faith pursuit of the congressionally authorized purposes of 26 U.S.C. § 7602.*fn1 United States v. LaSalle National Bank, 437 U.S. 298, 318, 98 S. Ct. 2357, 2368, 57 L. Ed. 2d 221 (1978); see United States v. Powell, 379 U.S. 48, 58, 85 S. Ct. 248, 255, 13 L. Ed. 2d 112 (1964). It differs from prior cases involving IRS summonses in that the district court, in deciding that the summonses were not issued in good faith, focused on the effect that an informant's motive had on the Service's purpose of issuing the summonses rather than on the Service's interest in civil, as opposed to criminal remedies.*fn2 We conclude that the facts found and reasons given by the district court were legally insufficient to support a finding of bad faith, and we remand to the district court for further proceedings on the issue.*fn3

I

The Internal Revenue Service brought this action seeking judicial enforcement of summonses issued pursuant to § 7602. The summonses, issued by Special Agent Joseph Dollard on information provided by a confidential informant, were addressed to Americo V. Cortese, Prothonotary of the Court of Common Pleas of Philadelphia County. The summonses directed Cortese to produce "contingent fee agreements" and "statements of distribution" filed by a number of named negligence attorneys with the Prothonotary's office pursuant to Rule 202 of the Philadelphia Local Rules of Civil Procedure.*fn4 The documents involved were required to be filed under Rule 202 and contained details of contingent fees earned by the named attorneys.

Cortese responded to the complaint with a statement representing that he was prepared to produce the documents, but requesting that the affected attorneys be permitted to intervene. Nine of the attorneys did intervene and move to dismiss the complaint and quash the summonses on numerous grounds, including that the summonses were being used solely for the purpose of obtaining evidence for criminal proceedings and that there was no bona fide civil tax investigation of the intervenors.

The district court held a preliminary hearing on the motion at which special agent Dollard testified. See United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975). The Court decided that further investigation into the good faith of the Service was warranted. At intervenors' request, an ex parte, in camera hearing was held with the government attorneys to review the documents provided by the informant.

Intervenors then moved to compel discovery from Dollard and the Assistant United States Attorney who was simultaneously conducting a grand jury investigation involving the same negligence attorneys. On October 28, 1977, the district court granted intervenors' motion in part, but specifically rejected the contention that "the summonses were issued for criminal purposes" on the ground that "intervenors have not alleged that a recommendation for criminal prosecution was made prior to the issuance of the summonses." Discovery was limited to the issues of "a) whether the IRS is conducting a legitimate investigation, for proper purposes, in good faith; and b) whether the summonses in this case pose "second inspection' problems, under § 7605(b) of the Internal Revenue Code."*fn5

After further discovery, a hearing was held by the district court on these issues. On April 28, 1978, the court ruled that the investigation was conducted in bad faith, refused to enforce the summonses and ordered the complaint dismissed. The reasoning in support of that order is the subject matter of this appeal.

The district court found

"that the IRS investigation was not pursued in good faith. The improper purpose on the part of the informant is inextricably intertwined with the IRS investigation. . . . It is our conclusion that certain interests (centered in the insurance industry), which are adverse to the class of intervenors, have used the IRS with its knowledge, as a "cat's-paw' to accomplish its purpose of retribution against the class of negligence attorneys."

The court relied on "the unusual facts and circumstances of this case" to support its finding of bad faith. First, the court observed that there was no evidence that either the IRS or the informant had knowledge of any violations of the Internal Revenue Code. Second, the information supplied by the informant did not concern a limited number of individuals, but was "wholesale in nature and concerned virtually the entire Philadelphia negligence bar." Third, only the negligence bar was targeted for investigation, despite the fact that Rule 202 applied to attorneys in other areas of the law. Finally, the court stated that

"(t)he IRS had to realize that the informant, who was instrumental in furnishing thousands of documents designed to get within an IRS net all of the members of the personal injury bar who customarily handle cases for plaintiffs in Philadelphia, ...


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