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United States v. Harrington

decided: January 17, 1968.


Lumbard, Chief Judge, and Moore and Friendly, Circuit Judges.

Author: Lumbard

LUMBARD, Chief Judge:

John B. Harrington, a lawyer in Burlington, Vermont, appeals from an order of Judge Leddy of the District Court for Vermont enforcing two summonses which the Internal Revenue Service caused to be served on the appellant on February 16, 1967. The summonses were issued under Section 7602*fn1 of the Internal Revenue Code and required Harrington to appear before a Special Agent of the I.R.S. on February 28, 1967, "to give testimony relating to the tax liability and/or the collection of the tax liability of [Merle W. Wood, as to one summons, and The Country Store, Inc. as to the other] * * * and to bring with you and produce for examination the following books, records, and papers * *" The summonses then recited a list of papers including journals, cards and other records pertaining to money received by Harrington from Merle W. Wood in connection with his divorce from Mary L. Wood, a client of the appellant's firm.*fn2 In particular, this appeal involves questions concerning the propriety of enforcing the clause of the summonses requiring Harrington to produce:

Cash disbursement journals, ledger cards, and/or other such records in your possession, detailing dates, check numbers and amounts of money paid out by you or your office in connection with the Wood divorce and settlement actions.

The summonses concluded with the explanation that the documents demanded "bear upon the correctness of the tax liabilities, or lack thereof, of Merle W. Wood and/or The Country Store, Inc." Harrington appeared before the Special Agent, but refused to produce the records which indicate his disposition of funds received from the taxpayer under investigation, and accordingly this petition to enforce was filed under Section 7604,*fn3 with an affidavit stating that the I.R.S. was investigating the tax liability of Merle W. Wood and The Country Store, Inc. for the years 1961 through 1966, that the records were necessary to evaluation of that tax position, and that Harrington had refused to comply with the summonses.

At a brief hearing before the District Court the appellant indicated his position that the line should be drawn between records of his receipt of funds pursuant to the court decree of divorce and settlement, which he was willing to produce, and records tracing the course of those moneys after they came into his hands, which he was unwilling to produce. He did state that the funds received by his office were used solely for the benefit of Mary Wood and that none had been returned to her former husband.

In response, the Government argued that it could not accept appellant's characterization of the payments without examination. Judge Leddy agreed, and ordered that the summonses be enforced, and that the records be turned over to the Revenue Service. Subsequently, Harrington brought this appeal, and the records including checks, ledger pages and cards and other material involving the Wood divorce, and the trust account into which settlement payments came, were delivered into the custody of the District Court. We have jurisdiction since the Supreme Court has held that an order directing compliance with an administrative summons is appealable. Reisman v. Caplin, 375 U.S. 440, 84 S. Ct. 508, 11 L. Ed. 2d 459 (1964).*fn4

Some points are clear from these facts: there is no doubt that the onus on the appellant is slight -- he has been able to segregate the requested records without difficulty and place them with the court; second, there is no merit in a contention here that the Government proposed a rambling exploration through the appellant's files. The dispute is more narrowly drawn, and it may be put this way: whether the Government indicated sufficient relevancy to the tax liability under investigation to warrant the order directing production of third-party records of disbursements of money received from the taxpayer on behalf of taxpayer's former wife pursuant to a state court decree of divorce and settlement. Since the District Court required no more of the Government to show relevance to the investigation than appeared from the face of the summonses, we must restrict our inquiry to the documents themselves. We have done so, and we conclude that the summonses were drawn with adequate precision, that it appears from their face that the records requested were sufficiently relevant to the investigation, and therefore we affirm the order enforcing their production.

Although the Fourth Amendment prohibition against unreasonable searches and seizures does not require of judicially enforceable summonses so stiff a standard as probable cause, United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964); Civil Aeronautics Board v. Hermann, 353 U.S. 322, 77 S. Ct. 804, 1 L. Ed. 2d 852 (1957); United States v. Morton Salt Co., 338 U. S. 632, 70 S. Ct. 357, 94 L. Ed. 401 (1950), the Government may not exercise its investigative and inquisitorial power without limit -- the examination is "unreasonable" and impermissible if it is overbroad, "out of proportion to the end sought," McMann v. SEC, 87 F.2d 377, 109 A.L.R. 1445 (2d Cir.), cert. denied, McMann v. Engle, 301 U.S. 684, 57 S. Ct. 785, 81 L. Ed. 1342 (1937), or if it is "so unrelated to the matter properly under inquiry as to exceed the investigatory power." United States v. Morton Salt Co., 338 U.S. at 652, 70 S. Ct. at 369.

The importance of judicial scrutiny of such orders before any punitive action is taken was recognized by the Supreme Court in holding that a person directed to produce records before an Internal Revenue Agent be given the opportunity to test the summons in court before being subjected to contempt penalties for disobeying the order. Reisman v. Caplin, 375 U.S. 440, 84 S. Ct. 508, 11 L. Ed. 2d 459 (1964). This judicial protection against the sweeping or irrelevant order is particularly appropriate in matters where the demand for records is directed not to the taxpayer but to a third-party who may have had some dealing with the person under investigation. And so this court has held that a District Court asked to enforce such a summons must determine not only whether this burden imposed is unreasonably onerous, but also whether the records sought were relevant to the investigation, not in the sense of an affirmative showing of probable cause, but "whether the inspection sought might have thrown light upon the correctness of the taxpayer's returns." Foster v. United States, 265 F.2d 183 (2d Cir., 1959), cert. denied, 360 U.S. 912, 79 S. Ct. 1297, 3 L. Ed. 2d 1261 (1960).

That this is the appropriate standard is clear from Justice Harlan's opinion for the Court in United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964) where it was held that the statutory prohibition against "unnecessary examination," I.R.C. § 7605(b), did not impose a requirement that the Government show probable cause to suspect fraud before it could reexamine the taxpayer's records. The Supreme Court granted certiorari "because of the differing views in the circuits on the standards the Internal Revenue Service must meet to obtain judicial enforcement of its orders," 379 U.S. at 50-51, 85 S. Ct. at 251, and held that:

379 U.S. at 57-58, 85 S. Ct. at 255.*fn5

Thus appellant's suggestion that the question we must ask is whether the Government has shown through clear and unequivocal evidence that the records are relevant to the investigation cannot be accepted -- such proof would in the ordinary case be impossible, and such a requirement would unduly interfere with the essential task of the I.R.S. to evaluate the tax liability of taxpayers. At the same time, the Government may not defend a failure to indicate sufficient relationship of records to the investigation solely on the basis that some chance of relevance exists or some possibility of relation remains, and no one can discern more until after examination. The personal interest cannot be so blithely brushed aside. The question, and it is not always one that lends itself easily to solution, is whether from what the Government already knows there exists the requisite nexus between taxpayer and records of another's affairs to make the investigation reasonable -- in short, whether the "might" in the articulated standard, "might throw light upon the correctness of the return," is in the particular circumstances an indication of a realistic expectation rather than an idle hope that something may be discovered.

In this case, as in Foster, that test is not difficult to apply. In Foster the records of a taxpayer's bank were obviously pertinent to the question under investigation, whether the taxpayer had received salary or dividends from a foreign corporation, 265 F.2d 183, 187, an issue made crucial to the determination of tax liability by I.R.C. 1954, § 911(a). Here, the connection between the records sought and the investigation of Merle Wood and The Country Store, Inc. is no less evident. Under I.R.C. § 71 and I. R.C. § 215 certain payments of alimony are taxable to the wife and deductible by the husband. The tax treatment of payments between former spouses depends not merely on the characterization offered by one or the other, but on the determination which is made by the I.R. S. from evaluation of all the circumstances, and subject to review and correction by the courts. For example, the I.R.S. has taken the position that the payment of the wife's legal fees is not deductible while medical expenses paid until death or remarriage may be deducted by the husband. Rev. Rul. 62-106, 1962-2 C.B. 21. Here, the disbursement records are relevant to determine first whether Mary Wood actually received the moneys taken in by appellant ...

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