United States of America and Donald Jackson, Special Agent v. Charles H. Stuckey, and Morry Weinstein, Intervenor-Appellant

646 F.2d 1369, 48 A.F.T.R.2d (RIA) 5368, 1981 U.S. App. LEXIS 12751

• Court: Court of Appeals for the Ninth Circuit
• Decided: June 1, 1981
• Docket: 79-4691
• Status: Published

Opinions

SKOPIL, Circuit Judge:

INTRODUCTION

Weinstein appeals a district court’s order enforcing administrative tax summonses issued pursuant to 26 U.S.C. § 7602. Weinstein failed in district court to prove his contention that the summonses were issued in bad faith in aid of a criminal prosecution. On appeal he argues that he failed because the district court improperly denied his request for discovery and abused its discretion in limiting the evidentiary proceedings.

We affirm.

FACTS

Morry Weinstein is a tax attorney who was arrested along with others by agents of the Drug Enforcement Administration (DEA) for alleged possession of hashish. The agents seized drugs, cash and various bank receipts. The DEA immediately notified the Internal Revenue Service (IRS) of the arrests.

Weinstein was indicted and pleaded not guilty to the drug offense. Prior to trial certain evidence unrelated to Weinstein was ordered suppressed. Weinstein’s indictment was dismissed without prejudice. After dismissal of Weinstein’s indictment, the Assistant U. S. Attorney, acting pursuant to 26 U.S.C. § 6103(i), obtained an ex parte order that allowed him access to information gathered by the IRS in its investigations.

Weinstein was interviewed by an IRS revenue agent after his drug arrest. The revenue agent referred the case to the Criminal Investigation Division of the IRS because of certain allegedly false statements made by Weinstein. Weinstein claimed to have filed tax returns for 1975 and 1976 but the revenue agent found no record of those returns.

The investigation was assigned to Thomas Utaski, a special agent, who issued all but one of the summonses at issue in this appeal. A second special agent, Donald Jackson, later took over the investigation and issued the other summons. The summonses were directed to various individuals and banks and requested Weinstein’s financial records.

Weinstein exercised his right provided by 26 U.S.C. § 7609 by requesting that the third parties summoned not provide information. This action was commenced in district court when Jackson filed a petition to enforce the summonses. Weinstein was granted permission to intervene in the enforcement action.

Weinstein raised several affirmative defenses in opposition to enforcement. He argued that the IRS issued the summonses to harass him and to aid the DEA in its non-tax criminal investigation. He submitted declarations in support of his arguments. The government filed declarations of five agents and officers in support of enforcement. The district court concluded that Weinstein raised sufficiently serious questions to warrant an evidentiary hearing. The hearing was to “be limited to an examination of the persons who have offered affidavits [sic] in support of the petition.” The court stated that based on its observations at that hearing, it would determine if further inquiry would be conducted and whether Weinstein would be allowed limited discovery. Weinstein’s request for pre-hearing discovery was denied.

The hearing was held as scheduled. Weinstein’s witnesses were available to support his affirmative defenses. The district court limited the hearing by allowing testimony from only the two summoning agents. Weinstein was allowed to conduct full cross-examination of Jackson but was interrupted before completing cross-examination of Utaski. The district court at that point stated:

“I am going to cut the hearing off at this particular juncture. The purpose of the hearing is to sift out the evidence, if there is any, of harassment or improper purpose that can be substantiated to avoid dilatory or discovery matters and to see whether or not the purpose of the summons[es] were to assist the government. And we have had both the people on the stand that have issued the summons[es] and I find no bad faith on their part, nor any purpose to assist the government in the drug case. And, thereby the court orders the government’s Petition for Enforcement of Summons[es] is granted”.

Weinstein objected to the termination of the proceedings and requested that he be allowed to make an offer of proof. The court granted that request.

In his offer of proof Weinstein contended that he could have demonstrated certain “extraordinary aberrations from usual IRS administrative procedure” from which the court could have reasonably inferred institutional bad faith. Weinstein argued that to achieve that goal he should have been allowed to question persons who submitted declarations and to question two other IRS employees with knowledge of the investigation.

The court, in enforcing the summonses, stated that it considered all the declarations submitted as well as the testimony of the agents. The court concluded that the summonses were issued in good faith since the IRS was not acting to gather information for the Department of Justice.

A motion to stay enforcement of the order was denied by the district court. This court, however, stayed the enforcement pending appeal. Our jurisdiction is predicated on 28 U.S.C. § 1291.

DISCUSSION

The proceeding to enforce an IRS summons is an adversary proceeding. United States v. Asay, 614 F.2d 655, 661 (9th Cir. 1980). The taxpayer is entitled to challenge the summonses on any appropriate ground. United States v. Freedom Church, 613 F.2d 316, 319 (1st Cir. 1979). The taxpayer, however, carries a heavy burden of convincing the district court to deny enforcement. The taxpayer must, in fact, be able to provide a minimal amount of evidence just to entitle him or her to an evidentiary hearing. E. g., United States v. Popkin, 623 F.2d 108 (9th Cir. 1980).

We are asked on this appeal to determine if the trial court erred in denying pre-hearing discovery and in limiting the scope of the evidentiary proceeding. We must also review the district court’s decision to enforce the IRS summonses.

Our task is one of balancing competing interests.¹ On one hand is the government’s interest in summary proceedings designed to expedite tax collection. On the other hand is the taxpayer’s right to protection from the improper use of the Internal Revenue Service’s summons powers. We are aided in our task by an abundance of recently decided appellate cases² and by several excellent district court opinions.³

I. Standard of Review

The district court has discretionary authority to limit the scope of an evidentiary hearing and to deny discovery in a summons enforcement proceeding. E. g., United States v. National Bank of South Dakota, 622 F.2d 365, 367 (8th Cir. 1980). The Federal Rules of Civil Procedure apply to such proceedings and rule 81(a)(3) allows for such flexibility, particularly in proceedings which are intended to be summary in nature. United States v. Church of Scientology of California, 520 F.2d 818, 821 (9th Cir. 1975). Our review of the district court’s procedural rulings is limited to determining if the court abused its discretion.

We are less clearly guided as to our review of the district court’s conclusion in this case that the summonses were not issued in bad faith. See United States v. LaSalle National Bank, 437 U.S. 298, 319, n.21, 98 S.Ct. 2357, 2368, n.21, 57 L.Ed.2d 221 (1978) (noting the discussion by several circuit courts of the factual and legal issues involved in enforcement proceedings but declining to resolve the standard of review question). This circuit has recently adopted the clearly erroneous standard for review of the district court’s decision to deny enforcement of an IRS summons. United States v. Goldman, 637 F.2d 664, 666 (9th Cir. 1980). See also United States v. Asay, 614 F.2d 655, 661 (9th Cir. 1980); United States v. Coopers & Lybrand, 550 F.2d 615 (10th Cir. 1978). Cf. United States v. Cortese, 614 F.2d 914 (3d Cir. 1980) (rejecting the clearly erroneous and adopting a de novo review). We will not disturb the trial court’s decision to enforce the summonses in this case unless the finding of good faith was clearly erroneous or if the district court applied an incorrect legal standard in reaching its decision. LaSalle, supra, 437 U.S. at 319, n.21, 98 S.Ct. at 2368, n.21; United States v. Zack, 521 F.2d 1366, 1369 (9th Cir. 1975).

II. Pre-Hearing Discovery

Weinstein may have failed in his burden of proof because the district court denied his request for pre-hearing discovery. We recognize the anomaly of placing a burden of proof upon the taxpayer and then denying access to what may be the very information needed to meet that burden. See United States v. Serubo, 604 F.2d 807, 812 (3d Cir. 1979). Should we determine that discovery was improperly denied in this case, a proper remedy would be to remand for discovery and an evidentiary hearing at which Weinstein could present the fruits of that discovery.

In Church of Scientology, we held that the district court has great discretion to restrict or deny discovery. See also United States v. Southern Tanks, Inc., 619 F.2d 54 (10th Cir. 1980); and United States v. Ladd, 471 F.Supp. 1150 (N.D.Tex.1979). Discovery in a summary enforcement proceeding is the exception rather than the rule. Church of Scientology, supra, at 824.

The Supreme Court in LaSalle did not address the taxpayer’s right to discovery. Nevertheless, the Third Circuit has interpreted LaSalle to suggest guidelines for discovery. E. g., United States v. Serubo, 604 F.2d 807, 812-13 (3d Cir. 1979); United States v. Genser (Genser II), 595 F.2d 146, 152 (3d Cir. 1979), later appeal, 602 F.2d 69 (3d Cir.), cert. denied, 444 U.S. 928, 100 S.Ct. 269, 62 L.Ed.2d 185 (1979). At a minimum, the taxpayer is entitled to discover the identities of the investigating agents, the date the investigation began, the dates of all summonses issued, and the nature of any contacts between the investigating agents and the Department of Justice. Genser II, supra at 152. Further discovery, carefully tailored to meet the purpose of the inquiry, may be permitted at the court’s discretion. Id.

Some courts routinely allow limited pre-hearing discovery in enforcement proceedings. E. g., United States v. Garden State National Bank, 607 F.2d 61 (3d Cir. 1979); Genser II, supra at 152. Other courts allow limited discovery only if the taxpayer can make a substantial preliminary showing of abuse or wrongdoing. E. g., United States v. Southern Tanks, Inc., 619 F.2d 54 (10th Cir. 1980); United States v. Chase Manhattan Bank, 598 F.2d 321 (2d Cir. 1979); United States v. Marine Midland Bank of New York, 585 F.2d 36 (2d Cir. 1979). This circuit has adopted the latter procedure. Church of Scientology, supra. Pre-hearing discovery is not generally mandated. If taxpayer’s allegations are sufficient, a limited evidentiary hearing is conducted. Discovery is then warranted if the trial court is not convinced that the summonses were issued for a proper purpose. See also United States v. Salter, 432 F.2d 697 (1st Cir. 1970) and United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975). Therefore the district court did not abuse its discretion in denying Weinstein’s request for prehearing discovery.

III. The Evidentiary Hearing

Weinstein was able to make a sufficient showing to persuade the district court to conduct a limited evidentiary hearing. The purpose of the evidentiary hearing is to sift out those rare cases where an improper purpose can be substantiated to determine if the taxpayer should be permitted discovery. United States v. Sherman, 627 F.2d 189, 192 (9th Cir. 1980).

The government bears an initial burden of showing at the evidentiary hearing that the summonses were issued for a proper civil purpose. E. g., United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964); United States v. Garden State National Bank, 607 F.2d 61, 71 (3d Cir. 1979). In this case the government was able to make that prima facie showing. The burden then shifted to the taxpayer to offer proof to rebut the government’s case. We must determine what the taxpayer must prove.

This circuit addressed this issue in United States v. Church of Scientology, 520 F.2d 818 (9th Cir. 1975). In that case, we determined that a taxpayer had been improperly denied an evidentiary hearing. The case was remanded and the trial court ordered to conduct a “limited evidentiary hearing to determine whether further inquiry into the Service’s purposes by way of discovery [was] warranted”. Id. at 825. The scope of the hearing was left to the discretion of the district court although it was conceived to include at least cross-examination of the summoning agents.

In United States v. Zack, 521 F.2d 1366 (9th Cir. 1975), this circuit decided that a taxpayer seeking to defeat enforcement must show that the summonses were not issued for any legitimate purpose. We recognized that this burden, as a practical matter, was quite hard to sustain. Id. at 1368. Even the co-existence of an improper purpose would not prevent enforcement of the summons if the existence of a legitimate purpose was not rebutted by the taxpayer.⁴

Since our decisions in Church of Scientology and Zack, the Supreme Court decided United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978). LaSalle reaffirmed two important limitations on the enforceability of IRS summonses. First, the summonses must be issued before the IRS recommends to the Department of Justice that a criminal prosecution be undertaken. Second, prior to such a recommendation, the IRS “at all times must use the summons authority in good-faith pursuit of the congressionally authorized purposes of § 7602.” LaSalle, 437 U.S. at 318, 98 S.Ct. at 2368.

This second prerequisite requires the IRS to maintain two standards. First, “the Service must [not] abandon in an institutional sense ... the pursuit of civil tax determination or collection.” 437 U.S. at 318, 98 S.Ct. at 2368. This standard focuses on the institutional posture of the Service instead of on the motivation of individual agents.

Second, the IRS must meet the standards of good faith enunciated in United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964). LaSalle specified that the IRS violates the Powell good faith standard if it is shown that the IRS became “an information-gathering agency for other departments, including the Department of Justice. ...” 437 U.S. at 317, 98 S.Ct. 2368. See also United States v. First National Bank of Atlanta, 628 F.2d 871, 874 (5th Cir. 1980).

Weinstein sought to show an “extraordinary set of facts and circumstances” that would demonstrate that the IRS institutionally did not have a valid civil tax collection purpose and that the IRS was acting as an information gathering agency for the Department of Justice. Weinstein argues that he was denied an opportunity to meet his burden of proof by the trial judge’s premature termination of the evidentiary hearing.

[¶] Our review of the transcript of the evidentiary hearing satisfies us that the trial court’s decision to limit the evidentiary hearing was not an .abuse of discretion. There was ample testimony from the two summonsing agents that the procedures followed in the investigation were not unusual and were directed toward determining Weinstein’s tax liabilities. The good faith of the IRS was irrebuttably demonstrated by Agent Utaski’s testimony that he found no record of the filing of Weinstein’s 1975 and 1976 tax returns. Although there was some communication between the IRS and the DEA, the information given to the DEA was pursuant to a proper court order. Both agents testified that DEA did not instruct them to issue summonses or gather information. Even if Weinstein was able to show an improper purpose, it would not be enough to conclude that the IRS had “become an information-gathering agency for ... the Department of Justice.” LaSalle, supra 437 U.S. at 317, 98 S.Ct. at 2368.

Weinstein argues that the trial court incorrectly viewed the motivation of the agents as determinative of the good faith of the IRS. We disagree. There is no indication that the trial court examined only the motivation of the agents in reaching its conclusion.⁵ There was sufficient evidence in the testimony of the agents for the trial court to conclude that the IRS had followed its procedures, and that the IRS as an institution was properly pursuing civil tax collection.

IV. Enforcement of the Summonses

We must now determine if there exists a sufficient basis for the trial court’s conclusion that the summonses were issued for a proper purpose. Our review is limited to determining if the trial court’s decision was clearly erroneous. United States v. Goldman, 637 F.2d 664 (9th Cir. 1980).

We hold that the trial court’s decision to enforce the summonses was not clearly erroneous. There was sufficient evidence to support a finding that a valid civil purpose existed for the issuance of the summons.

CONCLUSION

The district court did not abuse its discretion by denying discovery or by limiting the scope of the evidentiary hearing. The trial court did not misapply the directives of the Supreme Court in LaSalle. Although the hearing was limited to the examination of the summonsing agents, the trial judge determined that the IRS issued the summonses in pursuit of a legitimate purpose. The decision to enforce the summonses was not clearly erroneous.

The judgment of the district court is affirmed.

1 . See Note, The Institutional Bad Faith Defense to the Enforcement of IRS Summons, 80 Columbia L.R. 621 (1980) and Note, Discovery in the IRS Summons Enforcement Proceedings: Less Certain than Death and Taxes, 31 U.Fla.R. 321 (1979).

2 , E. g., United States v. Harris, 628 F.2d 875 (5th Cir. 1980); United States v. Sherman, 627 F.2d 189 (9th Cir. 1980); United States v. Pop-kin, 623 F.2d 108 (9th Cir. 1980); United States v. National Bank of South Dakota, 622 F.2d 365 (8th Cir. 1980); United States v. Southern Tanks, Inc., 619 F.2d 54 (10th Cir. 1980); United States v. Omohundro, 619 F.2d 51 (10th Cir. 1980); United States v. Cortese, 614 F.2d 914 (3d Cir. 1980); United States v. Asay, 614 F.2d 655 (9th Cir. 1980); United States v. Freedom Church, 613 F.2d 316 (1st Cir. 1979); United States v. Equitable Trust Co., 611 F.2d 492 (4th Cir. 1979); United States v. Garden State National Bank, 607 F.2d 61 (3d Cir. 1979); United States v. Serubo, 604 F.2d 807 (3d Cir. 1979); United States v. Genser (Genser III), 602 F.2d 69 (3d Cir.), cert. denied, 444 U.S. 928, 100 S.Ct. 269, 62 L.Ed.2d 185 (1979); United States v. Chase Manhattan Bank, 598 F.2d 321 (2d Cir. 1979); United States v. Genser (Genser II), 595 F.2d 146 (3d Cir. 1979); United States v. Chemical Bank, 593 F.2d 451 (2d Cir. 1979); United States v. Noall, 587 F.2d 123 (2d Cir. 1978), cert. denied, 441 U.S. 923, 99 S.Ct. 2031, 60 L.Ed.2d 396 (1979); United States v. Marine Midland Bank of New York, 585 F.2d 36 (2d Cir. 1978).

3 . E. g., United States v. Dahlstrum, 493 F.Supp. 966 (C.D.Cal.1980); United States v. Ryan, 485 F.Supp. 1285 (S.D.N.Y.1980); United States v. Ladd, 471 F.Supp. 1150 (N.D.Tex.1979).

4 . The existence of a general civil purpose for the tax investigation as a whole does not end a judicial inquiry. United States v. Genser (Genser II), 595 F.2d 146 (3d Cir. 1979). If such a finding were dispositive, the taxpayer would face the impossible burden of disproving what has already been postulated by LaSalle, the congruency of criminal and civil liability. Genser II, supra at 150-51. A district court may, if it chooses, examine each summons. If any one summons was issued solely for an improper purpose, it will not be enforced “even in the face of an overwhelming civil purpose for the investigation as a whole.” Id. at 150. Cf. United States v. Omohundro, 619 F.2d 51 (10th Cir. 1980) (evidence that summonses were issued for proper purpose was sufficient to warrant enforcement even though IRS admitted that the information may be used in a criminal context).

5 . The agents’ motive may be relevant, however, when harassment is alleged. E. g., United States v. Cortese, 614 F.2d 914, 921, n.11 (3d Cir. 1980). Harassment was alleged in this case. We are satisfied, however, with the government’s explanation that multiple summonses were issued to correct defects in the original summonses.