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UNITED STATES v. PROVIDENT NATL. BANK

February 9, 1981

UNITED STATES, and Stephen H. Gallon, IRS
v.
PROVIDENT NATIONAL BANK et al. UNITED STATES, and Stephen H. Gallon, IRS v. MEDIA FEDERAL SAVINGS & LOAN ASSOC. et al. UNITED STATES, and Stephen H. Gallon, IRS v. SOUTHEAST NATIONAL BANK et al. UNITED STATES, and Stephen H. Gallon, IRS v. ELKO, FISCHER, McCABE & RUDMAN, Certified Public Accountants



The opinion of the court was delivered by: GREEN

MEMORANDUM

By these four actions, I am now asked to determine whether or not certain third-party summonses, issued by the Internal Revenue Service (IRS) pursuant to 26 U.S.C. § 7602 to the three defendant banks, requiring the production of records concerning the financial affairs of the intervenors, Walter and Elizabeth Strine, should be enforced. For the reasons discussed below, I will order the enforcement of the summonses.

 In July of 1978, Agent Marc Klebanoff of the IRS began investigating the federal income tax return filed jointly by Mr. and Mrs. Strine for 1976. In carrying out this investigation, Mr. Klebanoff reviewed records provided him by the intervenors and their certified public accountant, Albert Elko, concerning the real estate business and the real property holdings of the intervenors. By November of 1978, Agent Klebanoff had extended his investigation to include the Strines' 1977 tax return. (Klebanoff deposition at 23) At that time, he also began to suspect that the intervenors had failed to report a substantial amount of income. (Klebanoff deposition at 23-27) Because he had come to believe that there was potential fraud involved in these tax returns, in March of 1979, Mr. Klebanoff suspended his audit of the Strines. Subsequently, in April of 1979, he prepared a Referral Report for Potential Fraud Cases so that the matter could be transferred to the Criminal Investigation Division (CID) of the IRS. (Klebanoff deposition at 67)

 On May 29, 1979, Stephen H. Gallon, a special agent with the IRS, was assigned to investigate possible criminal violations in connection with the 1976 and 1977 tax returns of the intervenors. (Gallon deposition at 4-5) Agents Klebanoff and Gallon met with the intervenor's accountant on June 26, 1979 to discuss the continuing investigation of the Strines' tax returns. (Affidavit of Albert Elko, intervenors' Exhibit B) As part of this investigation, in September of 1979, the IRS issued the third party summonses now in dispute; the intervenors stayed compliance with those summons. (Gallon deposition at 28-29) The initiation of enforcement proceedings concerning the summonses was delayed nearly a year because the Examination Division of the IRS had decided to issue a statutory notice of tax deficiency against the Strines for 1976. (Gallon deposition at 30-31) Mr. Gallon has not yet made a recommendation to his superiors on whether charges for criminal violations of the federal income tax laws should be brought against the Strines nor has the case been referred to the United States Justice Department. (Gallon deposition at 27-28)

 In August of 1980 the government filed the instant actions for enforcement of the summonses against the banks allegedly in possession of financial records belonging to the Strines. In January of 1981 the government filed a similar action against the Strines' accountant. The parties agreed to take trial depositions of the witnesses in lieu of a hearing. On the basis of those depositions as well as certain exhibits, affidavits and the memoranda submitted by the parties, I have determined that the summonses should be enforced.

 It is the contention of the intervenors that these summonses, and any future summons to be issued in this case, cannot be enforced because they were issued in bad faith. The bad faith alleged is that the summonses "were issued as a consequence of the evaluation of information obtained by the deception of the Intervenors." (Intervenors' Memorandum at 6) By affidavits both Walter Strine and his accountant, Albert Elko, have sworn that on at least two occasions, in September 1978 and in February of 1979, Agent Klebanoff told Mr. Elko that the IRS audit of the Strines' 1976 and 1977 tax returns was almost completed. (Exhibit B) During his deposition, however, Mr. Klebanoff denied ever making such representations. (Klebanoff deposition at 43-44) The intervenors assert that the third party summonses now in dispute should not be enforced because they are the product of a deliberate misleading of the intervenors by the IRS. According to the Strines, although Agent Klebanoff had questions as early as October of 1978 about whether their tax returns for 1976 and 1977 involved some fraud, he did not inform them of his suspicions but rather lulled them into believing that his investigation had not uncovered anything remarkable and would be completed shortly.

 Even if I were to accept the intervenors' account of events, and their version has been disputed at least as to certain statements allegedly made by Agent Klebanoff to Mr. Elko, the intervenors could not defeat enforcement of the summonses. Both the Supreme Court and the Third Circuit have set forth clearly the standards to be applied in evaluating the enforceability of a summons issued by the IRS pursuant to 26 U.S.C. § 7602. *fn1" In United States v. LaSalle National Bank, the Supreme Court described the requirements for the enforcement of an IRS summons as:

 
First, the summons must be issued before the Service recommends to the Department of Justice that a criminal prosecution, which reasonably would relate to the subject matter of the summons, be undertaken. Second, the Service at all times must use the summons authority in good-faith pursuit of the congressionally authorized purposes of § 7602. This second prerequisite requires the Service to meet the Powell standards of good faith. It also requires that the Service not abandon in an institutional sense ... the pursuit of civil tax determination or collection. 437 U.S. 298, 318, 98 S. Ct. 2357, 2368 (57 L. Ed. 2d 221) (1978)

 In the instant case, it is undisputed that there has not been a recommendation by the IRS to the Justice Department that a criminal prosecution be brought against Mr. and Mrs. Strine. Therefore, the question is whether the summonses were issued in good faith; that is, have the good faith requirements stated in United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964) been shown by the government and has the taxpayer failed to refute that the IRS has not abandoned pursuit of civil tax determination or collection. LaSalle, supra, 437 U.S. at 313-316, 98 S. Ct. at 2365-67. I believe that the record in this case discloses that the IRS acted with the requisite good faith.

 United States v. Powell sets forth a four prong standard which must be met in order to make a prima facie showing of good faith:

 1. the investigation is for a legitimate purpose;

 2. the material sought is relevant to the legitimate purpose of the investigation;

 3. the information is not yet in the possession of ...


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