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UNITED STATES v. OMT SUPERMARKET

December 5, 1997

UNITED STATES OF AMERICA
v.
OMT SUPERMARKET, INC.; UNITED STATES OF AMERICA v. MIDDLETOWN SUPERMARKET, INC.



The opinion of the court was delivered by: NEWCOMER

 Presently before this Court are the United States' Complaints to Enforce Internal Revenue Summonses in United States v. OMT Supermarket, Inc., Civil Action No. 97-6535 and United States v. Middletown Supermarket, Inc., Civil Action No. 97-6536, defendants OMT Supermarket, Inc.'s ("OMT") and Middletown Supermarket, Inc.'s ("MSI") Answer and Motion to Dismiss Complaints to Enforce Internal Revenue Summonses, and the United States' response thereto. For the following reasons, this Court will deny defendants' Motion to Dismiss and enforce the summonses at issue.

 I. Introduction

 Pursuant to the examination of the taxpayers and in accordance with §§ 7602 and 7603 of the Internal Revenue Code ("IRC"), on July 16, 1997, Revenue Agent Kelly issued four IRS summonses to OMT, MSI and Eric and Joan Steinberg. (Kelly Decls. P 6; Compls. P 11). Two of the summonses, one issued in connection with OMT and the other issued in connection with Eric and Joan Steinberg, seek the same information and documents from OMT. The two other summonses, one issued in connection with MSI and the other issued in connection with Eric and Joan Steinberg, seek the same information and documents from MSI. (Kelly Decls. PP 6; Compls. P 11). *fn3" Revenue Agent Kelly avers that the information, and books, papers, records, and data sought by the summonses are not already in the possession of the IRS; Kelly also asserts that all administrative procedural steps required by the IRC have been followed. (Kelly Decls. PP 9, 10). The summonses were personally served on each corporation on July 17, 1997. (Kelly Decls. P 6; Compls. P 11).

 On August 12, 1997, OMT and MSI, by letter from their counsel, declined to comply with the summonses, claiming that Federal Rule of Criminal Procedure 6(e) prohibited disclosure of the information sought and that 26 U.S.C. § 7602 prohibits use of administrative summonses when a Department of Justice referral is in effect. Thus, on August 13, 1997, OMT and MSI failed to comply with the IRS summonses and that failure continues to date. (Kelly Decls. P 7; Compls. P 12).

 On October 22, 1997, the United States filed a Complaint against OMT (Civil Action No. 97-6535) and a separate Complaint against MSI (Civil Action No. 97-6536) in this Court seeking orders enforcing the four IRS summonses. In these Complaints, the United States prays for the following relief: (1) an order directing defendants to show cause, if any, why it should not comply with the IRS summonses; (2) an order directing OMT and MSI to obey the summonses served upon it and each and every requirement therefore, including allowing the books and records identified in the summonses to be copied, at such time and place as may be fixed by Revenue Agent Kelly or any other office of the IRS; (3) that the United States recover its costs in bringing and maintaining this proceeding; and (4) any other relief that this Court deems just and proper.

 On October 28, 1997, this Court entered Orders in both Civil Action No. 97-6535 and Civil Action No. 97-6536, directing OMT and MSI to show cause, if any, why it should not comply with and obey the summonses served upon it. On this same day, the Court ordered these actions consolidated for the purposes of the Order to Show Cause Hearing.

 On November 21, 1997, OMT and MSI served a document entitled "Answer and Motion to Dismiss Complaints to Enforce Internal Revenue Summonses." *fn4" However, OMT and MSI failed to submit an affidavit in response to the Complaints and Declarations of Revenue Agent Kelly as ordered by this Court and as required by the case law. As will be explained below, this failure is a fatal defect inasmuch as there is no proper evidentiary basis to support the opposition to enforcement of the summonses or to support the motion to dismiss.

 In their Answer and Motion, defendants contend that, on May 6, 1996, a federal grand jury in this District caused subpoenas duces tecum to issue to the Custodian of Records for OMT and MSI. *fn5" Also on May 6, 1996, a grand jury subpoena calling for "any and all accountant work papers, files, correspondence and tax returns for the years 1990 through 1995 for Eric Steinberg, Raymond McDowell, [OMT] and [MSU]" were served on defendants' accountant; the documents requested under this subpoena were the same as the documents currently being requested by the IRS summonses.

 Defendants claim that they complied with the grand jury subpoenas, providing more than two dozen boxes of documents to an IRS Special Agent on behalf of the grand jury in May and June 1996. Defendants further contend that, save for approximately five boxes of documents, the IRS Special Agent has retained these documents.

 Defendants also allege that, on December 2, 1996, the Assistant United States Attorney, directing the grand jury, requested OMT's authorization to give the Examination Division of the IRS access to any and all records in the government's possession. On January 31, 1997, OMT, through counsel, declined to authorize the access requested by the Assistant United States Attorney.

 On April 24, 1997, the IRS directed administrative summonses to Joan Steinberg for certain records. On or about April 25-28, 1997, the IRS directed identical summonses to defendants' counsel, to the Assistant United States Attorney directing the grand jury, and to defendants' minority shareholder.

 In response to these summonses, on May 21, 1997, defendants, as well as Joan Steinberg, filed an action to quash the grand jury subpoenas served upon them. This action was styled In the Matter of OMT Supermarket, Inc. and Middletown Supermarket, Inc., 97-MC-101 (E.D. Pa.). In this action, defendants and Mrs. Steinberg assigned as grounds for their motion: (1) that the IRS summonses sought disclosure of matters before the grand jury in violation of Federal Rule of Civil Procedure 6(e) and (2) that the IRS summonses were improper under 26 U.S.C. § 7602 (c). On July 8, 1997, the IRS, through Revenue Agent Kelly, served notice that it was withdrawing all the summonses. On July 28, 1997, a stipulation of dismissal was entered in that case.

 Based on this foregoing information with respect to the previous grand jury proceeding and civil action, defendants claim that this Court should dismiss the United States' instant Complaints. The defendants advance three arguments in support of its motion. First, defendants argue that the instant IRS summonses seek disclosure of matters currently before a grand jury in violation of Federal Rule of Criminal Procedure 6(e). Second, the defendants contend that instant summonses are improper because such administrative summonses cannot be issued when there has been a Department of Justice "referral" by the IRS. See 26 U.S.C. § 7602(c). Finally, defendants contend that this Court should not enforce the ...


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