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United States v. Kemper Money Market Fund Inc.

January 17, 1986

UNITED STATES OF AMERICA, ET AL., PETITIONERS-APPELLEES,
v.
KEMPER MONEY MARKET FUND, INC., ET AL., RESPONDENTS, AND ROBERT L. WENZ & MERRICK CONSULTANTS, LTD., INTERVENING RESPONDENTS-APPELLANTS



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 82 C 3466, 82 C 3467, 82 C 3468, 92 C 3469, John A. Nordberg, Judge.

Author: Eschbach

Before ESCHBACH and POSNER, Circuit Judges, and SWYGERT, Senior Circuit Judge.

ESCHBACH, Circuit Judge.

Taxpayers petitioned for attorneys' fees under the Equal Access to Justice Act, 28 U.S.C. § 2412,*fn1 and Federal Rule of Civil Procedure 37. They also submitted a bill of costs based upon the Equal Access to Justice Act. The district court denied taxpayers' petition for fees and bill of costs on the grounds that taxpayers were not "prevailing parties" under the Equal Access to Justice Act and that the government's position was substantially justified. Because we conclude that the position of the United States in its action to enforce four civil tax summonses was substantially justified, we affirm the district court's denial of attorneys' fees and costs.

I

The Internal Revenue Service ("IRS") has conducted an ongoing investigation of the federal income tax liabilities of Robert L. Wenz and Merrick Consultants, Ltd., ("taxpayers") for the years 1976 through 1979. Merrick is an Illinois corporation; Wenz is its president. In the course of its investigation the IRS learned that taxpayers maintained accounts at four Chicago financial institutions, namely, the Kemper Money Market Fund, Inc., the Continental Illinois National Bank, the Northern Trust Bank and the First National Bank of Highland Park. In February and March of 1982 it issued civil summonses to these institutions requiring the production of the records for taxpayers' accounts. Taxpayers, acting pursuant to 26 U.S.C. § 7609, directed the institutions not to comply with the summonses.

On June 3, 1982 the IRS petitioned for enforcement of the summonses. The district court on June 15, 1982 ordered each institution to show cause why the summons issued to it should not be enforced. The institutions did not oppose enforcement of the summonses and are no longer parties to this case. Taxpayers were served with the petitions and show cause orders on June 29, 1982. They moved to intervene in the enforcement action under 26 U.S.C. § 7609(b)(1) on July 23, 1982. The IRS opposed taxpayers' intervention on the grounds that he motions were untimely and were unsupported by affidavits. The district court denied taxpayers' motions to intervene on August 19, 1982. It, however, stayed enforcement of the summonses pending appeal.

The district court denied intervention on the ground that taxpayers had failed to prove that the IRS sought enforcement of the civil summonses solely for the purpose of gathering evidence for a criminal prosecution of taxpayers. Section 7602 of the Internal Revenue Code, as it read at the time the summonses were issued, authorized the IRS to issue a summons to determine and to collect a taxpayer's civil tax liability. The then-controlling caselaw under section 7602 held that the section authorized the IRS to issue a summons for a joint investigation of a taxpayer's civil and criminal liabilities, but did not permit the IRS to enforce a summons if it had made an institutional commitment to criminally prosecute the taxpayer. See United States v. LaSalle National Bank, 437 U.S. 298, 313-17, 57 L. Ed. 2d 221, 98 S. Ct. 2357 (1978). The district court concluded that taxpayers did not prove that the IRS had an improper purpose and denied their motions to intervene.

We reversed the district court's denial of taxpayers' motions to intervene. United States v. Kemper Money Market Fund, inc., 704 F.2d 389 (7th Cir. 1983). We held that taxpayers' motions were timely. We therefore ordered that taxpayers be permitted to intervene and to serve interrogatories to determine whether the IRS in fact sought enforcement of the summonses solely for the purpose of criminal prosecution of taxpayers. See United States v. Kis, 658 F.2d 526 (7th Cir. 1981), cert. denied, 455 U.S. 1018, 102 S. Ct. 1712, 72 L. Ed. 2d 135 (1982). In United States v. Kis, we set forth the proper procedure for enforcement of a civil tax summons. First, the IRS must prove a prima facie case for enforcement. It does so by submitting affidavits showing that (1) the investigation has a legitimate purpose, (2) that the summonses are relevant to the investigation, (3) that the IRS does not already possess the information sought, and (4) that the IRS has followed certain administrative steps. Second, the taxpayer must allege specific facts either to rebut the government's prima facie case or to support an affirmative defense. To meet this burden, the taxpayer is entitled to discovery of (1) the identities of the investigating agents, (2) the date the investigation began, (3) the dates the agents filed reports recommending prosecution, (4) the date the district chief of the Criminal Investigation Division recommended prosecution, (5) the date the Office of Regional Counsel referred the case for prosecution, (6) the date of all summonses and (7) the nature of any contacts between the investigating agents and the Department of Justice concerning the investigation. The district court may order additional discovery it believes appropriate. Third, the district court must order a hearing if the taxpayer has alleged "specific facts that permit an inference of a possibility of some improper purpose on the part of the Government." 658 F.2d at 544. The taxpayer bears a heavy burden at this hearing to prove that the summons was issued for an improper purpose.

On remand, the district court granted taxpayers leave to intervene. Taxpayers opposed enforcement of the summonses for three reasons. They argued that (1) the IRS sought enforcement of the summonses solely for the purpose of criminal prosecution that (2) the summonses were overbroad, and that (3) the IRS already possessed some of the information sought. In support of their contention that the IRS had an improper purpose, taxpayers made five allegations: first, IRS Special Agent David Swire advised Wenz of his fifth amendment rights at the start of the meeting between Wenz and Swire; second, the U.S. Postal Service conducted a mail cover surveillance of taxpayers' mail for the IRS; third, taxpayers' telephone lines, according to Wenz's affidavit, were tapped; fourth, taxpayers were among 163 tax shelter promoters described in an IRS press release as being under criminal investigation; and finally, the IRS was delaying its civil investigation in favor of its criminal investigation. These facts, taxpayers argued, raised a "possibility of an inference" of an improper motive on the part of the government sufficient to require a hearing under United States v. Kis, 658 F.2d at 544. The IRS filed responses to the so-called Kis interrogatories on June 10, 1983. It disclosed that David Swire and Irving Feinglass were the investigating agents, that the investigation began on March 5, 1980 and that the four summonses were issued in February and March of 1982. It stated that no reports were filed recommending prosecution by any agent."

The district court concluded on July 15, 1983 that taxpayers had alleged specific facts that raised a possibility of an inference of an improper criminal purpose on the part of the IRS. It ordered a hearing to determine whether the IRS sought enforcement of the summonses solely for the purpose of criminal prosecution of taxpayers. In preparation for the hearing, taxpayers sought additional discovery beyond that required by United States. v Kis, 658 F.2d at 544. The government resisted such discovery on the ground that its files contained privileged information. The district court ordered the government to submit all possibly relevant documents to the court for an in camera review.

On August 19, 1985 the district court conducted the first of three ex parte meetings with the government concerning the documents submitted under seal. A court reporter transcribed the meeting. The district court informed taxpayers that it had held the meeting and had ordered a transcript to be available for appellant review. One document discussed in the ex parte meeting was the supplemental affidavit of Francis J. Emmons, an attorney employed by the IRS Chief Counsel's Office in Chicago. Emmons reviewed Swire's files to determine whether the IRS had recommended or had delayed recommending criminal prosecution of taxpayers. Emmons's supplemental affidavit states:

[M]y review of Special Agent Swire's files revealed that he had attempted to have his investigations of Mr. Wenz and Merrick Consultants, Ltd., transferred to a Federal investigative grand jury on two separate occasions . . . .

On August 20, 1981, Special Agent Swire made his original request to have an investigation of Mr. Wenz, Merrick Consultants, Ltd., and others conducted through a Federal Grand Jury. This request was approved by the Assistant Regional Commissioner, Criminal Investigation Division, Midwest Region, Internal Revenue Service, but was declined by the Office of Chief Counsel, Internal Revenue Service, prior to referral to the Department of Justice. The declination memorandum dated October 15, 1981, cites a variety of reasons for not approving the request . . . . On December 4, 1981, the Criminal Investigation Division in Chicago prepared ...


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