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United States v. First Family Mortgage Corp.

July 27, 1984

UNITED STATES OF AMERICA AND FRANK C. LAVIA, JR., SPECIAL AGENT OF THE INTERNAL REVENUE SERVICE, PETITIONERS-APPELLEES,
v.
FIRST FAMILY MORTGAGE CORP., AND JOAN ZIRZOW, CUSTOMER SERVICE OFFICER, RESPONDENTS. DAN KRAUTH, INTERVENING APPELLANT



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 82 C 6250 -- John J. Grady, Judge

Cummings, Chief Judge, Bauer, Circuit Judge, and Reynolds, District Judge.*fn*

Author: Bauer

BAUER, Circuit Judge.

Taxpayer Dan Krauth (taxpayer) sought to reinstate the government's summons enforcement proceeding in the district court against First Family Mortgage Corporation (First Family) after the district court granted the government's motion to dismiss the proceeding. The district court denied the taxpayer's motion and he appealed. We dismiss this appeal as moot.

I

On August 25, 1982, the Internal Revenue Service issued a summons to First Family in connection with an IRS investigation of the taxpayer's tax liability. The summons requested information concerning the taxpayer's transactions with First Family for December 1977 through January 1982. Because the IRS initially determined that First Family was a third-party recordkeeper as defined in 26 U.S.C. § 7609(a)(3) (1976), the IRS served notice of the summons on the taxpayer as required by that statute. On August 30, 1982, the taxpayer sent written notice to First Family not to comply with the summons. That notice automatically stayed compliance with the summons. 26 U.S.C. § 7609(b)(2) (1976). On September 7, 1982, First Family submitted the requested documents to the IRS under seal.

On October 13, 1982, the IRS filed a petition to enforce the summons in the district court. The court issued to First Family on October 20, 1982, a Rule to Show Cause why First Family should not comply with the summons and set November 24, 1982, as the return date for the Rule. On October 21, 1982, the IRS determined that First Family was not a third-party recordkeeper and that the summons thus no longer required judicial enforcement. On November 2, 1982, Assistant United States Attorney Edward Moran advised the taxpayer's counsel by telephone that the petition had been filed, a Rule to Show Cause had been issued, the IRS had determined that First Family was not a third-party recordkeeper, and the government would move to dismiss the enforcement petition when written instructions were received from the IRS.*fn1 On November 8, 1982, the government filed a notice of dismissal in the district court. On November 9, 1982, the district court dismissed the enforcement petition.

Although 26 U.S.C. § 7609(b)(1) (1976) grants the taxpayer "the right to intervene in any proceeding with respect to the enforcement of such summons under section 7604,"*fn2 the taxpayer never filed a motion to intervene under Rule 24, Fed. R. Civ. P. After the November 9 dismissal, however, the taxpayer did file a Rule 41 motion to reinstate the petition and a request for a preliminary injunction. The district court denied the taxpayer's preliminary injunction motion on November 24, 1982, and denied taxpayer's motion to reinstate on April 22, 1983.

In its ruling on the motion for reinstatement, the district court held that because the government had filed its notice of dismissal before any pleadings had been filed by an adverse party, Rule 41 prohibited reinstatement of the case. The court noted that the taxpayer could have avoided the effects of Rule 41 by filing an answer or a motion for summary judgment.

II

The taxpayer contends that the IRS's unilateral action in determining that First Family was not a third-party recordkeeper as defined in Section 7609 deprived the taxpayer of his right to intervene in the enforcement proceeding. The taxpayer thus urges us to reinstate the enforcement proceeding so that he can challenge the propriety of the summons. The government contends on the other hand that the case is moot because the IRS already has the documents targeted by the summons.

Many courts have held that once the IRS obtains summoned documents, enforcement proceedings become moot. United States v. Silva & Silva Accountancy Corp., 641 F.2d 710, 711 (9th Cir. 1981); United States v. Arthur Andersen & Co., 623 F.2d 720 (1980); United States v. Deak-Perera International Banking Corp., 610 F.2d 89, 89 (2nd Cir. 1979); United States v. Olson, 604 F.2d 29, 31 (8th Cir. 1979); Barney v. United States, 568 F.2d 116, 117 (8th Cir. 1978). Accord United States v. Kis, 658 F.2d 526, 532-35 (7th Cir. 1981), cert. denied, 455 U.S. 1018, 72 L. Ed. 2d 135, 102 S. Ct. 1712 (1982) (compliance with handwriting exemplars moots appeal).

In Arthur Andersen & Co., 623 F.2d 720, for example, the IRS served summons on Arthur Andersen, as tax advisor, during an IRS investigation of the taxpayer. Arthur Andersen resisted producing the summoned documents. The district court ordered Arthur Andersen to comply. In addition, the district court and the First Circuit denied Arthur Andersen's motions to stay enforcement of the summons pending appeal. After filing a notice of appeal from the district court order, Arthur Andersen released the summoned documents. The First Circuit thereafter dismissed the case as moot, ruling that compliance with an IRS summons, even in the face of contempt citations, moots an appeal of the enforcement order. 623 F.2d at 725. .

Similarly, in United States v. Kis, 658 F.2d 526, the taxpayer himself complied with an IRS summons and a district court order to produce handwriting exemplars, but then appealed the district court decision. This court held that it had no power to grant the taxpayer relief and dismissed the appeal. We recognized that although there still may have been a dispute between the IRS and the taxpayer regarding tax liability, the controversy surrounding the enforceability of the summons no longer existed. 658 F.2d at 533..Any relief this court could have granted at that point "would ignore the ...


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