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BARNHART v. UNITED PENN BANK

June 3, 1981

William BARNHART, George Barnhart, Robert J. Warner, and B & F Associates, Inc., t/a Valley Wood Products, Plaintiffs
v.
UNITED PENN BANK, Defendant. UNITED STATES of America and Joseph C. Macaravage, Revenue Officer, Internal Revenue Service, Plaintiffs, v. UNITED PENN BANK, Defendant



The opinion of the court was delivered by: NEALON

MEMORANDUM AND ORDER

I. BACKGROUND

 The matter presently before the court has a complicated procedural history which must be understood at the outset. During the spring of 1978, the Internal Revenue Service ("IRS") assessed B & F Associates, Inc. ("B & F"), for a total of $ 34,915.40 in unpaid social security and income tax liability. *fn1" This obligation was never satisfied. The IRS eventually considered the possibility that certain officers of B & F might be held responsible for the assessment under 26 U.S.C. § 6672(a) which, among other things, imposes personal liability on an individual who intentionally violates an obligation to collect a corporate tax. *fn2" Revenue Officer John Koloski recommended that the Government invoke the latter statute against three individuals: George Barnhart, William Barnhart, and Robert J. Warner. The proposal was investigated.

 On June 27, 1979, the IRS issued a summons which required a representative of the United Penn Bank to appear before Revenue Officer Joseph C. Macaravage on the subsequent July 20th in order to answer questions and produce certain B & F records. *fn3" The Government gave no notice of this action to the targets of the investigation. B & F, however, learned of the summons and attempted to prevent the disclosure. In a suit docketed under Civil Action No. 79-0914, the corporation sought to prevent compliance with the IRS order on a variety of constitutional and statutory grounds. *fn4" On July 19, 1979, this court entered a temporary restraining order prohibiting the disclosure. The parties then submitted additional briefs. In a Memorandum and Order signed on January 31, 1980, this court enjoined United Penn from acceding to the Government's request "until such time as a valid summons has been issued with appropriate notice to the concerned persons." B & F Associates, Inc. t/a Valley Wood Products v. United Penn Bank, 493 F. Supp. 282, 286 (M.D.Pa.1980). *fn5" The Government appealed and, on October 10, 1980, the suit was remanded to this court by stipulation of the parties.

 The record does not clearly explain the reason for the remand. According to the stipulation, the parties felt that the Court of Appeals was "not disposed to affirm the order of the District Court." *fn6" Any objections to the injunction, however, seem to have been procedural. Nothing in either the stipulation of the litigants or the order issued by the Court of Appeals addressed the merits of the case. The stipulation, moreover, expressly refused to:

 
prejudice the right of B & F Associates, Inc. or ... any other person, to bring a subsequent suit against the United Penn Bank (without, however, seeking to bring the Commissioner of Internal Revenue in as a party-defendant) for an injunction restraining said Bank from complying with the aforesaid summons in the absence of a judicial order compelling it to do so ...

 In any event, Civil No. 79-0914 was reopened pursuant to the remand. B & F and its former officers filed an amended complaint seeking relief along the procedural lines allowed by the stipulation.

 At this point, the litigation became further complicated by the initiation of another suit. On January 7, 1981, the IRS brought an action to compel United Penn Bank to comply with the summons to appear before Revenue Officer Macaravage. See United States v. United Penn Bank, Civil No. 81-0029 (M.D.Pa., filed January 7, 1981). *fn7" The case was originally assigned to the Honorable Richard P. Conaboy. Civil Nos. 79-0914 and 81-0029 were subsequently consolidated and Judge Conaboy agreed to transfer the latter to the author of this Memorandum and Order. B & F, Warner, and the Barnharts *fn8" received permission to intervene in Civil No. 81-0029. The two cases, which have been placed under the single designation of Civil No. 79-0914, are now ready for disposition. After a careful review of the applicable law, the court concludes that the Macaravage summons shall not be enforced, at least until the intervenors have had an opportunity to address the merits of the proposed disclosure.

 II. THE CONTENDING ARGUMENTS

 The Government states that the authority for the summons issued to United Penn is derived from 26 U.S.C. § 7602, which permits the IRS to examine books and documents in connection with administration of the tax laws. The intervenors' burden in opposing this procedure "is a heavy one." United States v. First American Bank, 504 F. Supp. 90, 91 (M.D.Fla.1980). To resist such a summons successfully, a complaining litigant must demonstrate that the IRS has not acted in "good faith." United States v. LaSalle National Bank, 437 U.S. 298, 317-18 & n.19, 98 S. Ct. 2357, 2367 & n.19, 57 L. Ed. 2d 221 (1978). At the outset, the Government must make a prima facie showing that it has satisfied the four elements required by United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 254, 13 L. Ed. 2d 112 (1964), i. e., that: (1) "the investigation will be conducted pursuant to a legitimate purpose," (2) "the inquiry may be relevant to the purpose," (3) "the information sought is not already within the (IRS's) possession," and (4) "the administrative steps required by the (Internal Revenue) Code have been followed." Once this demonstration is made by affidavit, the burden shifts to the taxpayer to prove that one of these requirements has not been met or that the Government has otherwise acted in bad faith. *fn9" United States v. Cortese, 614 F.2d 914, 919 (3d Cir. 1980); United States v. Garden State National Bank, 607 F.2d 61, 70-71 (3d Cir. 1979). See also United States v. Berg, 636 F.2d 203, 205 (8th Cir. 1980); United States v. Horton, 452 F. Supp. 472, 474-76 (C.D.Cal.1978), aff'd, 629 F.2d 577 (9th Cir. 1980). At this stage in the litigation, the intervenors contend that enforcement of the summons is inappropriate, because the IRS has failed to satisfy the fourth requirement established by Powell : compliance with the procedural prerequisites for summonses established by the Internal Revenue Code.

 In essence, B & F and the targeted individuals maintain that they were denied their statutory right to notice of the United Penn inquiry. According to 26 U.S.C. § 7609(a)(1):

 
(A) any summons described in subsection (c) (e.g., a § 7602 summons) is served on any person who is a third-party recordkeeper, and
 
(B) the summons requires the production of any portion of records made or kept of the business transactions or affairs of any person (other than the person summoned) who is identified in the description of the records contained in the summons,
 
then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made, but no later than the 14th day before the day fixed in the summons as the day upon which such records are to be examined. Such notice shall be accompanied by a copy of the summons which has been served and shall contain directions for staying compliance with the summons under subsection (b)(2).

 This provision establishes a two-pronged test which if, satisfied, entitles a taxpayer to notice before its records in the custody of a third-party may be examined pursuant to § 7602. First, the third-party has to be a "recordkeeper" within the meaning of the statute. Second, the summons must actually seek records of the taxpayer's business transactions. Once these factors are present, the notice requirement of § 7609(a) comes into play. United States v. Exxon Company, U.S.A., 450 F. Supp. 472, 475 (D.Md.1978). See also United States v. Manchel, Lundy and Lessin, 477 F. Supp. 326, 328-29 (E.D.Pa.1979); United States v. Shivlock, 459 F. Supp. 1383, 1385-87 (D.Col.1978), aff'd sub nom. United States v. Income Realty and Mortgage, Inc., 612 F.2d 1224 (10th Cir. 1979); United States v. J. Joseph Gartland, Inc., 79 F.R.D. 148, 149-50 (D.Md.1978). Furthermore, 26 U.S.C. § 7609(b) grants parties entitled to notice under subsection (a) a right to intervene in any summons enforcement proceedings in order to challenge the IRS's right to the records in question. B & F and the targeted individuals insist that they have been denied their procedural rights under this statutory scheme. *fn10"

 The IRS does not deny that the intervenors have satisfied the threshold requirements to qualify for notice under § 7609(a). As a bank, United Penn automatically falls with the definition of "third-party recordkeeper." 26 U.S.C. § 7609(a)(3)(A). *fn11" There is, moreover, no question that the Government is seeking records of the intervenors. *fn12" Indeed, the IRS's argument ...


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