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United States v. Moll


decided: July 13, 1979.


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 78 C 3322, 78 C 3321 -- Frank J. McGarr, Judge.

Before Sprecher, Gewin*fn* and Tone, Circuit Judges.

Author: Gewin

The United States and Anthony Butzek appeal from the district court's orders denying enforcement of two Internal Revenue summonses. We reverse.

Butzek is a Special Agent of the Internal Revenue Service. In September 1976 he was assigned by the agency's Criminal Investigation Division to investigate the 1971-1975 income tax liabilities of Edwin A. and Natalie K. Moll. The Criminal Investigation Division initiated the inquiry after its probe of Moll's corporation, Professional Medical Guidance Corporation, became stymied. Butzek secured the assignment of a revenue agent to the investigation for the purpose of determining any potential civil tax liabilities.

During the investigation, Butzek contacted accountant Earl Epsteen, who had prepared the taxpayers' income tax returns for the years in question, and requested the records and documents relative to the preparation of the returns. Epsteen claimed that he had turned the records over to Moll. Butzek contacted Moll, advised him of his Fifth Amendment right not to answer questions, as required by agency policy, and requested him to produce the records. Moll refused and pursuant to § 7602 of the Internal Revenue Code the agent served a summons on him requiring production of all records, correspondence and documents of Earl Epsteen relating to preparation of appellee's returns for the years 1971-1975.

Upon receipt of the summons, Moll informed Butzek that he had turned the workpapers over to his attorney, George Collins. Accordingly, the agent served a similar summons on Collins demanding the documents. Collins refused to comply and the government initiated enforcement proceedings in the district court. Because it believed Moll still had possession of some of the records, the government requested enforcement of both summonses.

In denying enforcement, the district judge held that attorney Collins was protected from the summonses by the attorney-client privilege. As for Moll, the court found that he was the subject of a criminal investigation and hence was privileged under the Fifth Amendment to refuse to comply with the summonses.

Because the instant case is indistinguishable from Fisher v. United States, 425 U.S. 391, 96 S. Ct. 1569, 48 L. Ed. 2d 39 (1976), we must reverse the findings of the district court.*fn1 The factual setting involved here is virtually identical to those analyzed by the Supreme Court in Fisher.*fn2 In that case, a taxpayer upon learning of his investigation by an IRS agent obtained from his accountant those documents relating to the accountant's preparation of his returns and transferred them to his attorney for legal assistance. The Internal Revenue Service served a summons on the attorney who refused to comply. The Supreme Court held that the taxpayer's attorney was not protected from compelled production by the Fifth Amendment. 425 U.S. at 397, 96 S. Ct. 1569. The majority further decided that the Fifth Amendment would not have protected the taxpayer from forced disclosure of his accountant's workpapers had they been in his possession. Id. at 409-10, 96 S. Ct. 1569. It then concluded that since the taxpayer under the facts had no Fifth Amendment right to refuse to comply with the summons, the attorney-client privilege did not protect his attorney from compelled production. Id. at 404-05, 409-10, 96 S. Ct. 1569.

The Court reasoned that the self-incrimination privilege protects only the taxpayer under investigation from being forced to be a witness against himself. It does not extend to the taxpayer's attorney who is compelled to produce documents pertaining to his client.

The taxpayer's privilege under (the Fifth) Amendment is not violated by enforcement of the summonses involved in these cases because enforcement against a taxpayer's lawyer would not "compel" the taxpayer to do anything and certainly would not compel him to be a "witness" against himself. The Court has held repeatedly that the Fifth Amendment is limited to prohibiting the use of "physical or moral compulsion" exerted on the person asserting the privilege (citations omitted).

425 U.S. at 397, 96 S. Ct. at 1574.

The Court then examined the attorney-client privilege and resolved that it protects attorneys from compelled production in the limited circumstances where the taxpayer has transferred the papers to the attorney for the purpose of securing legal advice and " "The client himself would be privileged from production of the (documents), either as a party at common law . . . or as exempt from self-incrimination*fn3 . . .' " Id. at 404, 96 S. Ct. at 1578. To determine whether the attorney-client privilege was implicated, the Court addressed the prerequisite question of whether the documents could have been obtained by summons from the taxpayer while they were in his possession.

The question was answered in the affirmative, the majority holding that the Fifth Amendment did not protect the taxpayer from being compelled to yield those accountant's records in his possession. Reiterating the principle that the self-incrimination privilege proscribes only compelled and incriminating testimony by an accused, the court concluded that the compelled disclosure of an accountant's workpapers in the taxpayer's possession was not an act sufficiently testimonial in nature to implicate the Fifth Amendment.

A subpoena served on a taxpayer requiring him to produce an accountant's workpapers in his possession without doubt involves substantial compulsion. But it does not compel oral testimony; nor would it ordinarily compel the taxpayer to restate, repeat or affirm the truth of the contents of the documents sought. Therefore the Fifth Amendment would not be violated by the fact alone that the papers on their face might incriminate the taxpayer, for the privilege protects a person only against being incriminated by his own compelled testimonial communications. (citations omitted)

425 U.S. at 409, 96 S. Ct. at 1580. Since the taxpayer while in possession of the records was not protected from compelled production by the Fifth Amendment, his attorney could not assert the attorney-client privilege to defeat the summons. Id. at 405, 409-10, 96 S. Ct. 1569.

Likewise in the case at bar Moll and Collins may not avail themselves of the self-incrimination or attorney-client privileges to prevent enforcement of the government summonses. The documents sought are very similar to those subpoenaed in Fisher*fn4 and Moll's compelled transfer of his accountant's records is not sufficiently testimonial in character to bring the Fifth Amendment into play.*fn5 Excluded from the ambit of the Fifth Amendment, the papers are not protected in attorney Collins' hands by the attorney-client privilege.

Notwithstanding Fisher's explicit holding, appellees maintain that the court properly denied enforcement of the summonses because they were issued solely for a criminal purpose. The premise of this argument is that the Internal Revenue Service had effectively abandoned that portion of the investigation devoted to detecting possible civil liabilities. Therefore, it is argued that the workpapers were sought exclusively for the criminal investigation, an abuse of process proscribed by United States v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978).

In order to obtain enforcement of a § 7602 summons, the Internal Revenue Service must fulfill certain specific requirements. First, the summons must be issued before the Service recommends to the Department of Justice that a criminal prosecution be undertaken. Donaldson v. United States, 400 U.S. 517, 536, 91 S. Ct. 534, 27 L. Ed. 2d 580 (1971). Second, the Service must show that it has satisfied certain standards of good faith developed by the Supreme Court in United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964). Among these are that the investigation is being conducted pursuant to a legitimate purpose, that the information sought may be relevant to that purpose, that the information is not already in the Service's possession and that statutorily required administrative procedures have been followed. Id. at 57-58, 85 L.Ct. 248.

Once this showing is made, the burden rests upon the taxpayer opposed to enforcement of the summons to prove a lack of good faith, that the government has abandoned in the institutional sense its pursuit of possible civil penalties. United States v. La Salle National Bank, 437 U.S. 298, 315, 98 S. Ct. 2357, 2366, 57 L. Ed. 2d 221, 235 (1978). Defining this burden of proof as a "heavy one", the Supreme Court in LaSalle reasoned that its allocation to the taxpayer was necessary because until a formal recommendation for criminal prosecution is made by the Service to the Justice Department, the criminal and civil elements of an investigation are "inherently intertwined," with "coterminous," criminal and civil fraud liabilities. Id. 437 U.S. at 308, 315, 98 S. Ct. at 2363, 2366, at 231, 235. For willful submission of a fraudulent tax return, a taxpayer under § 6653(b) of the Internal Revenue Code may be subjected to a civil penalty equal to 50% Of the underpayment as well as criminal penalties under §§ 7206 and 7207. Thus when the Service seeks by way of summons records relative to tax liabilities, it presumably inquires about both "the possibility of criminal misconduct" and the "appropriateness of assessing the 50% Civil tax penalty." Id. 437 U.S. at 309, 98 S. Ct. at 2363, at 231. It is for the party opposing the summons to establish that the inquiry has no civil purpose and thus the summons was the product of bad faith.

We are satisfied that agent Butzek, by his petition, affidavit and testimony at the hearing made the required showing of good faith under Powell to warrant issuance of the summonses. On the other hand, appellees Moll and Collins did not carry their heavy burden of disproving that the Service had a concomitant civil purpose for the information. Indeed, the record reveals that appellees did not raise the issue at the enforcement proceeding below and the court made no factual findings on it.*fn6 They presented no witnesses or direct evidence at the hearing. Submitting the issue initially on this appeal, appellees point to certain testimony by Butzek on cross-examination which they claim conclusively shows abandonment of the civil investigation. We are unpersuaded. This evidence establishes only that agent Butzek was primarily concerned in the inquiry with Moll's potential criminal liability.*fn7 This was his function as a special agent.

Having failed to show an institutional abandonment of the pursuit of potential civil liabilities, appellees are fully subject to the commands of the summonses. To ensure that the Service obtains all of the pertinent documents, the district court is to grant enforcement as to both Moll and Collins. The case is reversed and remanded for proceedings consistent with this opinion.

Reversed and Remanded.

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