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UNITED STATES v. NELSEN STEEL & WIRE CO.

February 29, 1980

UNITED STATES OF AMERICA AND RICHARD E. ZAGOTTA, SPECIAL AGENT, INTERNAL REVENUE SERVICE, PETITIONERS,
v.
NELSEN STEEL & WIRE COMPANY, INC., AN ILLINOIS CORPORATION; D. NELSEN & SONS, INC., AN ILLINOIS CORPORATION; AND ETHON HYMAN, RYDELL & CO., AN ILLINOIS PARTNERSHIP, RESPONDENTS.



The opinion of the court was delivered by: Will, District Judge.

MEMORANDUM OPINION

Petitioners in this case seek judicial enforcement of various Internal Revenue Service summonses issued pursuant to 26 U.S.C. § 7402(b) and 7604(a). Respondents resist enforcement on the ground that the IRS was acting in bad faith when it issued the summonses. The case is now before us on respondents' motions to compel testimony and to compel production of certain IRS documents. We deny these motions for the reasons set forth below.

BACKGROUND

The present case is one of sixteen cases stemming from an IRS investigation of the respondents. Taxpayers Daniel B. Nelsen, Sr., Estelle Nelsen, Daniel B. Nelsen, Jr., Clifford D. Nelsen, and Cleon D. Nelsen sought and were granted leave to intervene as respondents in these cases. United States v. Nelsen Steel & Wire Co., No. 77 C 4505 (N.D.Ill. January 13, 1978). Their primary ground for resisting enforcement of the summonses is the IRS' alleged bad faith in issuing them. Respondents claim essentially that Revenue Agent Donald L. Carpino, who was assigned to investigate their affairs, was a "stalking horse" for the IRS' Intelligence Division, now called the Criminal Investigation Division. The summonses involved in this suit, they say, were issued to secure evidence for a prospective criminal prosecution.

Respondents also resist enforcement of the summonses on the ground that the IRS, in reopening certain tax years, is subjecting them to an unnecessary, harassing investigation in violation of 26 U.S.C. § 7605(b). Section 7605(b) provides that the IRS may inspect a taxpayer's books only once for a particular tax year unless the District Director of the IRS, after investigation, notifies the taxpayer in writing that an additional inspection is necessary. Respondents contend that § 7605(b) also implicitly requires that the District Director have good cause to reopen an investigation, something which respondents claim is missing in this case.

We agreed to respondents' earlier request for limited discovery concerning whether the IRS acted in good faith in issuing its summonses and whether it had good cause to reopen its investigation of certain tax years. In particular, we directed the government to produce the reopening memorandum prepared by Agent Carpino at the start of his investigation and to submit Charles Miriani, the District Director of the IRS, for deposition. The government complied and also submitted Agent Carpino and Revenue Agent Thomas Culumber, who had previously audited respondents, for deposition.

Not satisfied with the information they obtained, respondents thereafter filed two motions to compel additional discovery. In their first motion, respondents ask us to compel Agent Carpino to appear for a further deposition to answer questions regarding the documents he examined in preparation for his audit, and whether he or any other IRS agent has audited any of Nelsen Steel & Wire's employees.*fn1 In their second motion, respondents seek to depose Special Agent Worker, a member of the Intelligence Division who apparently spoke with Agent Carpino before the latter began his investigation of respondents. Additionally, respondents seek production of all documents Agent Carpino examined prior to commencing his audit, all documents and work papers generated by Agent Carpino in the course of his audit, and all books or records in the IRS' possession which are purported to be those of Nelsen Steel & Wire.

Because United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), was at the time under advisement in the United States Supreme Court, we deferred ruling on these motions. Now that the Court has decided LaSalle National Bank we proceed to consider the motions. We shall discuss, first, the scope of discovery in IRS summons enforcement cases and, second, whether, in light of this, respondents are entitled to the additional discovery they seek.

THE SCOPE OF DISCOVERY IN SUMMONS ENFORCEMENT CASES

Congress, in § 7602 of the Internal Revenue Code, authorized the IRS to use the civil summons process "for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been made." United States v. LaSalle National Bank, supra at 310, 98 S.Ct. at 2364. Section 7602 permits the use of the summons process not only to ascertain a taxpayer's civil liability but to investigate fraudulent, and possibly criminal, conduct as well. Id. at 310-11, 98 S.Ct. at 2364-2365. At the same time, however, there are limitations on the use of the summons process. Congress did not intend the civil summons process to become a tool for criminal investigations or to broaden discovery in criminal cases. Id. at 312, 98 S.Ct. at 2365.

Until recently, the question of under what circumstances the IRS could use the summons enforcement power to investigate a taxpayer's affairs where the investigation might lead to criminal prosecution was unresolved. It is now clearly established, however, that the IRS may use the summons process to investigate possible criminal conduct so long as the summons is issued before the IRS recommends criminal prosecution to the Department of Justice, and so long as it acts in a good faith pursuit of the taxpayer's civil tax liability. Id. at 318, 98 S.Ct. at 2368. "Good faith" in this context requires not only that the inquiry into the taxpayer's affairs be conducted pursuant to an investigation of civil tax liability, but also that the information sought be relevant to that investigation, that the information is not already within the IRS' possession, and that the IRS follow the proper administrative steps. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-255, 13 L.Ed.2d 112 (1964).

As might be expected, LaSalle National Bank's resolution of the question as to what circumstances permit the IRS to use the civil summons process raises another question, the answer to which is not yet entirely clear: to what extent is a taxpayer entitled to discovery regarding the IRS' good faith, or lack of it, in a summons enforcement proceeding.*fn2 Discovery in such cases obviously must be limited if the enforcement process is to retain its summary character. See United States v. Interstate Tool & Engineering Corp., 526 F.2d 59, 62 (7th Cir. 1975); United States v. Church of Scientology, 520 F.2d 818, 824 (9th Cir. 1975). At the same time, the taxpayer must be permitted some discovery if his right to challenge the IRS' good faith in issuing a summons is to have any meaning. The burden rests with the taxpayer, once the IRS has made a prima facie showing that it acted in good faith in issuing a summons, to disprove the IRS' assertions. United States v. Powell, supra, 379 U.S. at 58, 85 S.Ct. at 255. Without some discovery, however, the taxpayer will rarely if ever be able to prove that the IRS is engaged in a primarily criminal investigation.

The answers to these questions should reveal whether the IRS has already made the decision to prosecute the taxpayer and is using the civil summons process primarily to gather evidence in furtherance of the prosecution. If this basic information casts suspicion on the IRS' purpose in issuing a summons — for example, issuance of summonses after the investigating agents have recommended prosecution, inordinate and unexplained delays in the investigation, or contacts between the investigating agents and the Department of Justice — the taxpayer is entitled to further discovery.*fn3 United States v. Garden State National Bank, supra at 71; United States v. ...


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