In The Matter of Magnus, Mabee & Reynard, Inc., in The Matter of Hurdman & Cranstoun, Percy C. Magnus, 311 F.2d 12, 2d Cir. (1962)
In The Matter of Magnus, Mabee & Reynard, Inc., in The Matter of Hurdman & Cranstoun, Percy C. Magnus, 311 F.2d 12, 2d Cir. (1962)
In The Matter of Magnus, Mabee & Reynard, Inc., in The Matter of Hurdman & Cranstoun, Percy C. Magnus, 311 F.2d 12, 2d Cir. (1962)
2d 12
The taxpayers appealed. The decision below was affirmed in an opinion by this
Court on February 13, 1962. (2 Cir., 299 F.2d 335). Petitions for rehearing and
rehearing in banc were denied. A stay was granted on April 4, 1962, by Mr.
Justice Harlan pending application for a writ of certiorari. On April 10, 1962,
ten months after the summonses were originally issued, an indictment was filed
charging Percy Magnus with tax evasion and failure to file returns. Thereafter,
certiorari was denied by the Supreme Court on June 11, 1962 (370 U.S. 918, 82
S.Ct. 1556, 8 L.Ed.2d 499). The corporation then sought on July 17, 1962, to
stay enforcement and quash the summons directed to it, and the taxpayer Percy
C. Magnus sought similar relief against the summons directed to the
accountants. Both applications were denied in an opinion by Judge Dimock on
September 19, 1962, and it is this ruling that is the subject of this appeal.
2
The appellant corporation is not the taxpayer. The records specified in the
summons are the corporation's, not the taxpayer's. From a procedural
viewpoint, the petition to quash the summons directed to the corporation was
made only by the corporation. The accountants to whom the other summons
was directed made no motion to quash. The petition, in effect on behalf of the
accountants, was made by the taxpayer himself. The appeals are taken by the
corporation as to the summons directed to it and by Percy C. Magnus as to the
summons directed to the accountants.
The background facts reveal that the taxpayer Percy C. Magnus who owns 80%
of the stock of the corporation did not file income tax returns for the years 1948
through 1957 or pay any income taxes during this period. After investigation
had been commenced, Percy C. and Margaret A. Magnus, his wife, filed
delinquent returns for these years which disclosed a gross income for these
years in excess of $1,280,000. The primary source of this income was derived
from the corporation; the accountants, using the corporation's books, prepared
the delinquent returns. Through the issuance of the summons, the revenue
agents sought to obtain access to the corporation's books to ascertain what
taxes, if any, should have been reported by the taxpayers for the years in
question and to relevant papers, records or documents used by the accountants
in preparing the returns. The summonses were issued some ten months before
the indictment was returned. They were issued by a Special Agent just
beginning his investigation of the taxpayers' returns, at a time when no final
conclusion had, or even could have, been made as to whether criminal action
was indicated. However, due to delays resulting from appellant's efforts to
prevent compliance, the government was forced to secure an indictment against
the taxpayers before the summonses could be enforced in order to prevent the
statute of limitations on criminal prosecutions from running. The question
before us is whether the right to enforcement under those circumstances is
thereby nullified and the government forced to resort solely to Rule 17 of the
Federal Rules of Criminal Procedure.
4
Section 7602 authorizes the Secretary of the Treasury or his delegate to issue a
summons for the examination of books, papers and other documents and
records
"For the purpose of ascertaining the correctness of any return, making a return
where none has been made, determining the liability of any person for any
internal revenue tax or the liability at law or in equity of any transferee or
fiduciary of any person in respect of any internal revenue tax, or collecting any
such liability, * * *."
The taxpayer, Percy C. Magnus, claims that, since he has been indicted, albeit
some ten months subsequent to the issuance of the summonses, the
investigative power of the government must be limited exclusively to the
discovery and inspection provisions of Rule 17 of the Federal Rules of Criminal
Procedure and that once an indictment has been returned, service or
enforcement of such summonses is absolutely foreclosed. For this proposition
appellant relies heavily on United States v. O'Connor, 118 F.Supp. 248
(D.Mass.1953) and Application of Myers, 202 F.Supp. 212 (E.D.Pa.1962).
O'Connor involved a summons directed to an accountant of the taxpayer under
investigation. A Special Agent had completed his investigation, turned his
report over to higher authorities and an indictment had already been returned
when the Special Agent issued a summons against the accountant. The Special
Agent there admitted that the summons was for the purpose of criminal
prosecution and that he had no matter involving the taxpayer presently pending
before him when the summons was issued. In denying a government petition to
enforce the summons, Judge Wyzanski was of the view that the pre-trial
discovery powers of the government in criminal cases was severely limited and
that the primary body for the compulsory disclosure of documents before trial
is the Grand Jury. He further stated that:
The Myers case, which involved a summons issued several days before the
Under the Federal Rules, discovery by the government is quite limited. Rule
16,1 the general discovery provision, applies only to defendants. Rule 17(c)2
was not intended to provide an additional means of discovery, but rather was
meant to establish a liberal policy for the production, inspection and use of
materials at the trial. Bowman Dairy Co. v. United States, 341 U.S. 214, 220221, 71 S.Ct. 675, 95 L.Ed. 879 (1951).
10
As the Ninth Circuit in Boren v. Tucker, 239 F.2d 767 (1956) made clear,
where there is a possibility of tax fraud, the taxpayer is faced with either a 50%
penalty or a criminal prosecution or both. In investigating whether a fraudulent
return changes the taxpayer's liability, the Internal Revenue Service must weigh
the possibility of criminal prosecution.
11
The mere securing of an indictment does not conclude the task of the
examining revenue agents. The Secretary or his delegate is charged with the
responsibility of "making a return where none has been made" and verifying
such returns as have been filed. The necessity of determining the correct tax
liability and whether a 50% penalty for fraud should be imposed does not cease
when an indictment is obtained because regardless of the outcome of any
criminal trial, the tax and the penalty may still be payable (Helvering v.
Mitchell, 303 U.S. 391, 58 S.Ct. 630, 82 L.Ed. 917). If a taxpayer were
permitted to challenge every summons issued to a third person who might have
books, records or information relating to the ascertainment of tax liability, the
government's search for data to establish the truth or falsity of returns or the
proper tax if no returns were filed would be completely blocked. 3 Adequate
protection against violation of taxpayers' constitutional rights is afforded by
safeguarding their own records against illegal search and seizure and by
enforcement of the law against self-incrimination. However, to hold that
information cannot be obtained under Section 7602 merely because it may be
used in criminal proceedings would virtually write that Section out of the
statute. Nor is there any conflict here between Rule 17 and Section 7602. They
are not mutually exclusive. Each was designed to serve its own purpose. If the
question of abuse of legal process arises, as the court may have believed to have
been present in the O'Connor case, the courts can deal with such situations.
Certainly such facts are not present here.
12
Without questioning the reasons for appellants' tactical efforts in this case, the
fact remains that to quash the summonses under these facts would lead to that
result. The appellants here failed to file any returns until September, 1959, for
the years 1947 through 1957, subsequent to the commencement of an
examination into their affairs by the Internal Revenue Service. The summonses
as originally issued came well within the purposes designated in the statute, and
we deem the time of issuance to be the significant date on which to base a
determination of the validity of a Section 7602 summons.
13
The government argues that the corporation has standing only to raise
objections directly affecting it and that the taxpayer, Percy C. Magnus, has no
standing to quash summonses served upon third parties when the summonses
do not require the production of the taxpayer's property. Here the corporation
would have standing to object to the enforcement of a summons issued for a
purpose outside of the scope of 7602, to enforcement which would constitute
an unreasonable search and seizure under the Fourth Amendment and to such
vagueness in description of papers and documents as would prevent
compliance. In addition, third parties "have the protection always accorded to
them by the courts which limit burdensome subpoenas, restrict them to relevant
material and refuse to permit unwarranted searches and seizures." Application
of Magnus, 299 F.2d 335, 337 (2 Cir., 1961), cert. denied 370 U.S. 918, 82 S.
Ct. 1556, 8 L.Ed.2d 499 (1962). However, the facts do not support objection on
any of these grounds.
14
The taxpayer has standing to object only if the use of the summons is an
impermissible ruse to obtain the taxpayer's books and records or other material
or information in violation of the taxpayer's constitutional rights. Again,
however, no facts have been adduced by the taxpayer to show any such
purpose. To the contrary, as previously mentioned, the summonses were issued
some ten months before the indictment.
15
16
directions can be made to the court." We think this is the best way to deal with
this situation. A considerable degree of discretion should be vested in the
district courts to work out the appropriate limitations on which records are
subject to investigation and the best location of such an inspection for all
concerned. It may well be that the examinations can be conducted at the offices
of the corporation and the accountants. If the parties are unable to agree, the
district judge is empowered to find that solution leading to the most efficient
examination of such records consonant with the least possible interference with
the everyday conduct of the corporation's business.
17
Affirmed.
Notes:
1
"A taxpayer may refuse to file any return whatever and take his chances; in that
case he can stand upon his constitutional privileges against producing any
evidence against himself. But, when he files a return, he subjects his affairs to
the scrutiny of the Treasury, which cannot otherwise check his statements. That
repeated scrutiny may become very irksome nearly everybody knows from
experience; but no constitutional difficulties arise, none at least unless the abuse
is far more crying than here." (Bolich v. Rubel, 2 Cir., 1933, 67 F.2d 894 at p.
895)
18
19
I concur with my brothers in affirming the ruling below and in their resolution
of the substantive issues presented on this appeal. Because I am troubled by the
growing practice of attempting to impede tax investigations by a series of
oppositions to the government's subpoenas, I deem it advisable to state my
views regarding the standing of these appellants to raise the objections which
they assert.
20
21
"1. Enforcement of the summons is sought for a purpose outside the scope of
the statute authorizing the use of the summons;
22
23
"3. Inspection of the corporation books would violate the provisions of the
Internal Revenue Code regulating such inspections;
24
"4. The description of the documents in the summons lacks reasonable certainty
and the documents described are not material and relevant to the inquiry."
25
Brief for Appellants, pp. 3-4. The taxpayer objects to enforcement of the
summons served on the accountants only on the first two grounds stated. Since
each appellant has standing to assert only those objections which affect rights
personal to it or him, I would hold that the corporation has standing to raise
grounds (1), (3), and (4), above, and that the taxpayer has standing to raise only
ground (2).
26
It is, of course, appropriate for a party served with a summons of the Internal
Revenue Service pursuant to 7602 of the Internal Revenue Code to object to
its enforcement on the ground that the Service has exceeded its statutory
authority; the Service has only that power which the statute confers. See Foster
v. United States, 265 F.2d 183, 187 (2 Cir.), cert. denied, 360 U.S. 912, 79
S.Ct. 1297, 3 L.Ed.2d 1261 (1959); Hubner v. Tucker, 245 F.2d 35, 39 (9 Cir.
1957). Since the first objection asserts that the summons served on the
corporation exceeds the authority conferred by 7602, and the third asserts that
the summons disregards the limitation on that authority expressed in 7605(b)
of the Code, the corporation has standing to raise both of those objections. It is
also proper for the corporation to raise the fourth objection, which pertains to
claimed rights of the corporation itself. As we said at an earlier stage of this
protracted litigation, third parties who become involved in tax investigations of
another "have the protection always accorded to them by the courts which limit
burdensome subpoenas, restrict them to relevant material and refuse to permit
unwarranted searches and seizures." Application of Magnus, 299 F.2d 335, 337
(2 Cir.), cert. denied, 370 U.S. 918, 82 S.Ct. 1556, 8 L.Ed.2d 499 (1962).1
27
The second ground for objection raises essentially the same issues as the first,
inasmuch as it asserts in effect that the purpose for which enforcement is
sought lies without the statutory authorization. But the right on which it focuses
is the right of the taxpayer to be free of pre-trial discovery by the government
beyond that allowed by Rule 17 of the Federal Rules of Criminal Procedure.
The corporation has no stake in the conduct of the criminal prosecution against
the taxpayer, and lacks standing to protest against a violation of his rights.
Compare cases in which the taxpayer has been denied standing to assert the
rights of a third person. Eg., Application of Magnus, supra; Foster v. United
States, supra.
28
29
Since in my view one or the other of the appellants has standing to raise each of
the objections set out above, it is appropriate for me to record my concurrence
on the merits.
Notes:
1
Cases in which the taxpayer was not permitted to object on such grounds to the
enforcement of a summons served on a third person, e. g., Foster v. United
States, supra, are inapposite
In United States v. O'Connor, supra, the third person did raise the objection.
Judge Wyzanski denied the taxpayer the right to intervene but allowed him to
present his views by counsel as amicus curiae