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UNITED STATES v. BASIL INV. CORP.
November 19, 1981
UNITED STATES of America and James R. Hilferty, Special Agent, Internal Revenue Service
BASIL INVESTMENT CORPORATION, and Robert B. Graham, Sr. UNITED STATES of America and James R. Hilferty, Special Agent, Internal Revenue Service v. BASIL INSURANCE AGENCY, INC. and Robert B. Graham, Sr.
The opinion of the court was delivered by: SHAPIRO
In these third-party summons proceedings, the government has petitioned to hold defendants in contempt for failure to produce and give testimony concerning records of two corporations of which the individual defendant is the principal officer. Following a hearing on the petition on September 17, 1981, defendant filed a motion to dismiss. Upon consideration of the record of the hearing, the government's post-hearing memorandum, taxpayer's motion to dismiss, memorandum in support thereof, and the government's memorandum in opposition thereto, the court finds the defendants in contempt of the court's Orders of March 16, 1981 and denies defendants' motion to dismiss both proceedings.
The Internal Revenue Service ("IRS") seeks to enforce third-party summonses against Robert B. Graham, Sr. ("Graham"), the President of Basil Investment Corporation and Basil Insurance Agency, Inc. to investigate the tax liability of Graham for the years of 1976 through 1978. The summonses were properly served by the IRS on February 8, 1980, pursuant to § 7602 of the Internal Revenue Code. Upon Graham's non-compliance with the summonses, the IRS petitioned this court for enforcement pursuant to §§ 7604 and 7602 of the Code. After a hearing on March 13, 1981, this court, by Orders of March 16, 1981, compelled Graham as President of Basil Investment Corporation and Basil Insurance Agency, Inc. to,
... appear before Special Agent James R. Hilferty, or his designated representative, at the time and place to be designated by Special Agent Hilferty in writing to the defendant ... then and there to be sworn, to give testimony, and to produce for examination and copying the books and records demanded by the summons served upon the defendants on March 13, 1980, the examination to continue from day to day until completed....
On June 15, 1981, Graham came with three "witnesses" to Special Agent Hilferty's office in Philadelphia. Present on behalf of the government were Neal F. Halbe, Special Agent, and Robert P. Brennan, Revenue Agent. Graham alleges that he came prepared to comply with the March 16, 1981 Orders by responding to questions concerning the records he had with him; he was unwilling at that time to allow Hilferty to examine or photocopy the documents.
Graham's appearance before Special Agent Hilferty was deliberately designed by Graham to frustrate the purpose of the proceeding. Much of the time was spent in discussions between Graham and the government personnel on, inter alia, whether photographs could be taken in the Federal Building (N.T. 1-2, 11), whether the government employees were really who they said they were (N.T. 2-5), and whether the March 16, 1981 Orders required that the documents be available for copying (N.T. 5, 19-29). The interview was ended without any substantive response by Graham to questions concerning the documents and the tax matters involved.
Subsequent to this interview the IRS filed a petition for an order to show cause why Graham should not be held in contempt. This petition was based on Graham's refusal to allow photocopying of his records and on his failure to produce specific records rather than summaries of them. A show cause hearing, ordered for September 4, 1981, was continued to September 17, 1981 after Graham delivered to this court on July 27, 1981 some of the documents requested by the government. Graham later testified at the show cause hearing that he did not then intend that the records he delivered would be photocopied by the IRS (N.T. 134); his signed statement and an affidavit he filed on August 14, 1981 state that the papers are made available to the government "for examination and copying." Pursuant to this authorization, Deputy Clerk Ellen Starr made copies for the IRS on August 28, 1981 with Special Agent Hilferty present.
Graham represented on August 19, 1981, that these were "all the records required to be produced by the Order to show cause...." At the show cause hearing the government submitted Special Agent Hilferty's affidavit detailing the records that were allegedly covered by this summons but not provided by Graham. The government asks for a coercive indeterminate term of confinement or daily fine until Graham produces the remaining records covered by the summonses and testifies as to the contents of those records. Graham contends, inter alia, that he does not possess the records requested by the government, so that his compliance with the summonses in this respect is impossible.
A. Graham's Objection to Criminal Proceedings
Graham argues that this entire investigation is impermissible because its purpose is to convict him of crime. The government may eventually institute criminal proceedings against Graham but its present proper purpose is to determine his civil tax liabilities for the years 1976 through 1978. The civil nature of this proceeding was determined after hearing by the court's Orders of March 16, 1981 and is again found as a fact on the present record. United States v. Erdner, 422 F.2d 835, 836 (3d Cir. 1970), reiterated the rule in this Circuit that "even if the investigation by a special agent of the Internal Revenue Service is principally criminal, a summons under § 7602 is valid where the party resisting the summons "does not negative the existence of proper civil purpose.' United States v. DeGrosa, 405 F.2d (926) at 928." This rule controls here.
Moreover, the validity of the court's Orders enforcing the third-party summonses is not at issue in the present proceeding against Graham. These Orders have been appealed and their validity will be determined by the Court of Appeals. All that is now at issue is whether Graham was and is in contempt of the March 16, 1980 Orders which the Court of Appeals has refused to stay and permitted this court to enforce pending disposition of the appeals.
Graham has repeatedly asserted, both in his pleadings and at the show cause hearing, that the government's purpose in obtaining the summoned documents is to institute criminal charges against him and that the summonses and court orders resulting from them are therefore unconstitutional. While Graham may not and will not be forced to testify to anything that could implicate him criminally,
his objections have no merit as they relate to the production of documents. The summonses at issue are third-party summonses. They request documents not from Graham personally but from his corporations and from him only in his capacity as president.
The law in this Circuit is quite clear that the Constitution does not bar compelling the production of documents in such circumstances. In United States v. Brobeck, 363 F. Supp. 1035 (W.D.Pa.1973), aff'd, 491 F.2d 751 (3d Cir.), cert. denied, 416 U.S. 984, 94 S. Ct. 2387, 40 L. Ed. 2d 761 (1974), the president of a Volkswagen dealership sought to raise Fifth Amendment objections to a summons of his corporation's records. Although the IRS was pursuing Brobeck's civil tax liability at the time of the show cause hearing, the documents being sought might tend to incriminate the defendant. That factor was held irrelevant, however, because:
The Fifth Amendment privilege against self-incrimination is a purely personal one extending protection to the private papers and effects of the person claiming the privilege. (Citations omitted). Further, as the court observed in Caro v. Bingler, 242 F. Supp. 418, 420 (W.D.Pa.1965), "(any) claim to personal privilege is relinquished as to corporate records by the choice of the corporate form for an individual's business even if the corporation is a mere alter ego of its owner and the records would tend to incriminate said owner. Hair Industry, Ltd. v. United States, 340 F.2d 510 (C.A.2, 1965).'
Brobeck, 363 F. Supp. at 1037.
B. The Civil Nature of the Contempt Proceedings
Contempt proceedings are either civil or criminal. Criminal contempt is to punish for a contemnor's past actions; its penalty is a fine of a specified amount or a term of confinement for a specific period and trial by jury is required upon the demand of the accused. Latrobe Steel Co. v. United Steelworkers, et al., 545 F.2d 1336, 1343 (3rd Cir. 1976). These actions are for civil contempt. Two forms of civil contempt sanctions exist. Coercive contempt sanctions "look to the future and are designed to aid the plaintiff by bringing a defiant party into compliance with the court order," while compensatory sanctions seek to "compensate the complainant through the payment of money for damages caused by past acts of disobedience." Latrobe Steel, 545 F.2d at 1344. Depending on the circumstances, either form of contempt sanction may be appropriate in an IRS summons enforcement action. United States v. Asay, 614 F.2d 655, 659 (9th Cir. 1980). The government presently seeks only coercive contempt sanctions.
The March 16, 1980 Orders compelled Graham to turn over two corporations' records relating to his tax liabilities for the years 1976-1978, and to testify regarding the contents of those records. Section 7604 of the Internal Revenue Code confers upon district courts the power to make such orders to enforce summonses as deemed proper, "not inconsistent with the law for the punishment of contempt ...." The "methods that may be employed to coerce a recalcitrant party" in a contempt situation are "many and varied," Latrobe Steel, 545 F.2d at 1344; they include indeterminate periods of confinement and day-to-day fines until there has been compliance. Thus, for example, in United States v. Brobeck, supra, an action to enforce compliance with an IRS summons, the court found indeterminate confinement for the contemnor appropriate because of failure to produce corporate records in accordance with court Order.
Graham argues that he cannot be held in contempt because he does not have possession of the records that the government is seeking. Impossibility is, of course, a bar to the imposition of coercive contempt sanctions, but "when the person charged is responsible for the inability to comply," it is not a complete defense to civil contempt proceedings. Asay, 614 F.2d at 660. So if Graham did at one time possess such records but has disposed of or transferred possession of them in anticipation of the government's summons, Graham would not avoid sanctions for his actions; the government would still be entitled to petition the court for compensatory contempt sanctions in place of the coercive sanctions it is now seeking. Id. However, on the present record Graham has not proved that the records do not exist nor has he admitted that he destroyed them.
The government is seeking coercive contempt sanctions not only for Graham's alleged failure to deliver all the records summoned but also for his failure to answer in good faith questions the IRS has concerning the records Graham was ordered to produce. The government is entitled to such testimony under § 7602(3) of the Internal Revenue Code, provided that Graham may not be compelled to testify as to matters which might tend to incriminate him. Graham's Fifth Amendment privilege against self-incrimination is as applicable here as it is to any other questioning of a citizen; the court has the authority to order Graham to testify subject to his right to assert objections as to ...
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