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IN RE DANIELS

April 10, 1956

In the Matter of the Application of Donald DANIELS to vacate a certain summons, to appear, to testify and to produce books, etc


The opinion of the court was delivered by: KAUFMAN

On December 24, 1954, pursuant to Section 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602, a Commissioner's summons was served upon petitioner ordering him to appear before a Special Agent of the Internal Revenue Service to give testimony in the matter of his personal tax liability for the years 1948 and 1949, and requiring him to bring to that hearing certain books and records of the International Commodities Corporation (hereinafter the Corporation), a nonresident Panamanian corporation of which petitioner is president and sole stockholder. This proceeding marks the second attempt to procure an order vacating that summons, the first motion having been brought by the Corporation as petitioner in its own behalf. In the present motion, the individual petitioner urges that compelling him to produce the books of this foreign corporation will violate his rights under the Fourth and Fifth Amendments to the constitution since he is holding these books in a purely personal capacity and not as corporate custodian. He further contends that enforcing this summons will do violence to principles of international law and comity. The Fifth Amendment question presented by petitioner appears to be novel; hence I believe it useful to the consideration of the problem presented to set forth the prior history of these proceedings in detail.

The summons is directed to 'Donald Daniels, Pres. International Commodities Corporation residing at c/o Donald Daniels, 860-5th Ave., New York, N.Y.' On January 6, 1955, the Corporation moved to vacate the summons contending that the above-quoted language clearly showed that the summons was directed to Donald Daniels in his corporate capacity, and that the summons was, therefore, an invalid attempt to assert jurisdiction over a nonresident alien corporation which had never done business in the United States and was not amenable to process here. The government urged in reply to that motion that the summons was not directed to the Corporation, but was directed to Donald Daniels as an individual. In support of its contentions, the government pointed out that the summons was not in the corporate form used by the Treasury Department, and it urged that the words 'Pres. International Commodities Corp.' appearing after Daniels' name were merely descriptio personae. The District Court sustained the government's position and denied the Corporation's motion to vacate in a Memorandum dated March 8, 1955. This holding was affirmed by the Court of Appeals in International Commodities Corp. v. Internal Revenue Service, 2 Cir., 1955, 224 F.2d 882.

The petitioner thereupon brought the present motion in his own behalf. In the affidavit accompanying his moving papers, he avers that the Special Agent before whom he was ordered to appear is in the process of preparing a criminal case against him, *fn1" that criminal charges have been alleged against him by the Internal Revenue Service, and that his relations with the Corporation form part of those criminal allegations. He asserts that in these circumstances, the enforcement of this summons which requires him to produce the Corporation's records would violate his constitutional rights under the Fourth and Fifth Amendments since these records might tend to incriminate him. He contends that although the records are corporate, they are being held by him in his personal capacity and they are therefore within the scope of the constitutional protection.

 In its reply, the government does not deny that there is this strong likelihood of criminal prosecution, nor does it deny that the privilege against self-incrimination might properly be invoked to protect petitioner's personal papers. However, it contends that, by their nature, corporate books can never be held in a personal capacity, and since the privilege against self-incrimination applies only to the personal papers of the petitioner or those in his possession in a purely personal capacity, the Fifth Amendment cannot shield the petitioner.

 Thus, in essence, the government's position is that there is no problem of jurisdiction over the Corporation here as the summons is directed to petitioner in his individual not his corporate capacity; nevertheless, it asserts, petitioner cannot claim the protection of the Fifth Amendment here as the records sought are being held by him as corporate custodian. The petitioner urges, therefore, that the government is attempting to gain by indirection that which it is barred from obtaining by direct action. I concur in that contention.

 Barring questions of privilege and unreasonableness, a subpoena or order for the production of documentary evidence generally reaches all documents under the control of the person required to produce, and this rule applies even where the documents sought are physically beyond the jurisdiction of the ordering court. Securities and Exchange Commission v. Minas De Artemisa, S.A., 9 Cir., 1945, 150 F.2d 215; Hopson v. United States, 2 Cir., 1935, 79 F.2d 302; In re Rivera, D.C.S.D.N.Y.1948, 79 F.Supp. 510; In re Harris, D.C.S.D.N.Y.1939, 27 F.Supp. 480. In the De Artemisa case, the court pointed out that even the documents of a foreign corporation are thus available for inspection, or, if the foreign law forbids the removal of the corporate records from the chartering country, then copies of such documents can be ordered produced. Thus clearly there is no problem of international law in this case as petitioner has the books in his control in this country. Furthermore, he has not made any showing of contrary foreign law as was the case in De Artemisa. These cases, however, and the rule for which they stand do not resolve the problem of the applicability of the Fifth Amendment privilege.

 The government contends that the constitutional question raised by petitioner here was decided adversely in United States v. White, 1944, 322 U.S. 694, 64 S. Ct. 1248, 88 L. Ed. 1542; Wilson v. United States, 1911, 221 U.S. 361, 31 S. Ct. 538, 55 L. Ed. 771; and Hale v. Henkel, 1906, 201 U.S. 43, 26 S. Ct. 370, 50 L. Ed. 652. These three cases provide the basis for all later decisions upholding the right of the government to compel the production of corporate and organizational documents as against an official custodian who claims the privilege of self-incrimination.

 Their underlying rationale was first spelled out in Hale v. Henkel where the Supreme Court set forth the principle that the state creating the corporate entity reserves a visitorial power over it which is not qualified by any right on the part of the corporation to plead the privilege against self-incrimination. The Court said:

 'The individual * * * is entitled to carry on his private business in his own way. His power to contract is unlimited. He owes no duty to the state or to his neighbors to divulge his business, or to open his doors to an investigation, so far as it may tend to criminate him. He owes no such duty to the state, since he receives nothing therefrom, beyond the protection of his life and property. His rights are such as existed by the law of the land long antecedent to the organization of the state * * *.

 'Upon the other hand, the corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. * * * Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserved right in the legislature to investigate its contracts and find out whether it has exceeded its powers.' Id., 201 U.S. at pages 74-75, 26 S. Ct. at page 379.

 Moreover, the Court pointed out that although the corporation ordinarily receives its franchise from a specific state, it is subject to a dual sovereignty by virtue of our federal system, and, therefore, the corporation is subject to a visitorial and regulatory power on the part of the federal government when it transacts business within that government's sphere of control.

 In United States v. White, supra, the Court extended this rule to unincorporated associations. It said that although the idea of a reserved power in the charter-granting sovereign was a convenient justification for permitting the inspection of records, absence of a state charter 'as to a particular type of organization does not lessen the public necessity for making reasonable regulations of its activities effective.' Id., 322 U.S. at page 700, 64 S. Ct. at page 1252. The Court asserted that the basic reason for this power of the government to compel the production of organizational records was the inherent and necessary power of federal and state governments to enforce their laws. The Court held that the privilege against self-incrimination was to be limited to its historic function of protecting only natural persons from compulsory incrimination through their own testimony or personal records. It could not protect an organization.

 Since the books of a domestic corporation or one doing business here are thus always subject to inspection by the state, the logical extension of this rule, first applied in the Wilson case, was that the corporate custodian of these records cannot plead the privilege even if the documents tend to incriminate him personally. The Court stressed the fact that the official custodian held these books in an impersonal, representative capacity and said that when a corporate officer assumes official custody of its books, he accepts the incident obligation of permitting inspection. A contrary rule would clearly deprive the state of its visitorial power since a corporation must, by its nature, act through its officers, and the power of a court to compel the production of corporate records cannot be made to depend upon which particular officer has them in custody.

 Although courts have since spoken in broad language of the 'general rule' that corporate documents are not protected by the privilege, an extensive search of such decisions has failed to reveal a single case which did not cite one of the three above-mentioned decisions as authority for this proposition and then apply it to corporations or other organizations transacting business within the jurisdiction. Thus it seems that this rule has been applied exclusively in situations where the corporation is subject to the visitorial or regulatory power of the demanding sovereign. Clearly, this rationale cannot support the government's demand in the instant case, as the International Commodities Corporation has never been subject to the jurisdiction of the ...


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