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United States v. Chase Manhattan Bank

decided: April 20, 1979.

UNITED STATES OF AMERICA, AND WILLIAM SWEERUS, SPECIAL AGENT, INTERNAL REVENUE SERVICE, PETITIONERS-APPELLEES,
v.
CHASE MANHATTAN BANK, RESPONDENT, AND JOEL M. WHITE, INTERVENOR-APPELLANT



Appeal by taxpayer-intervenor from an order entered in the United States District Court for the Southern District of New York, Constance Baker Motley, Judge, granting an application by the Internal Revenue Service for enforcement of a third-party administrative summons. The Court of Appeals vacated the order and remanded to the district court for further proceedings.

Before Feinberg and Meskill, Circuit Judges, and Edelstein, District Judge.*fn*

Author: Meskill

This is an appeal by Joel M. White ("taxpayer") from an order by Judge Constance Baker Motley of the United States District Court for the Southern District of New York granting an application by the Internal Revenue Service ("IRS") for enforcement of an administrative summons served on the Chase Manhattan Bank in connection with an IRS investigation of the taxpayer.*fn1 We find the order of the district court premature and remand for further proceedings.

On May 1, 1978, an administrative summons issued by the IRS pursuant to 26 U.S.C. §§ 7602 and 7609 was served on the Chase Manhattan Bank directing the production of certain records of the taxpayer's account. The summons was issued by IRS Special Agent William Sweerus, purportedly in conjunction with a joint criminal and civil investigation into the taxpayer's liabilities for the years 1972, 1973 and 1974. The IRS sent notice of the summons to the taxpayer the next day, 26 U.S.C. § 7609(a), and he promptly directed the bank not to comply with the summons, 26 U.S.C. § 7609(b)(2). On September 11, 1978, the IRS sought judicial enforcement of the summons in the Southern District, 26 U.S.C. §§ 7402, 7604. The taxpayer then intervened in opposition to the petition for enforcement, 26 U.S.C. § 7609(b)(1), by filing an answer, certain attorneys' affidavits, and a motion for an order directing discovery.

The taxpayer argued in his answer that enforcement of the summons should be denied because it (1) was not issued in good faith but solely in aid of a criminal investigation of the taxpayer, (2) was overly broad and sought information not relevant to a tax investigation, (3) was sought by the IRS as a substitute for grand jury subpoenas and search warrants in a criminal investigation, (4) was issued after an institutional decision by the Department of Justice to seek an indictment of the taxpayer, and (5) was issued in aid of an investigation initiated and requested by the FBI and Department of Justice and not in aid of a civil tax audit or investigation. In his request for discovery, taxpayer asked that depositions be taken from William Sweerus, Special Agent in the Criminal Investigation Division of the IRS (formerly the Intelligence Division); Shawn Harris, another IRS agent; and George Wilson, Assistant or former Assistant United States Attorney. He also sought an order requiring the government and the deponents to produce for inspection and copying all records of communications between the FBI or the Department of Justice, including the United States Attorney's Office, and the IRS relating to the taxpayer which took place prior to the issuance of the administrative summons here in question. He asked as well for all records reflecting institutional decisions concerning prosecution of the taxpayer by the Department of Justice, the United States Attorney's Office and the IRS prior to the issuance of the summons, and for "any requests, suggestions or directives by the F.B.I., Department of Justice, or any other department or agency to the Internal Revenue Service to conduct an investigation of Joel M. White." In the alternative, the taxpayer asked for an evidentiary hearing during which he would be permitted to question the two IRS agents and the Assistant United States Attorney. The government denied the taxpayer's allegations attacking the issuance of the summons, and opposed the motion for discovery or a hearing.

On November 6, 1978, Judge Motley heard oral argument by counsel for the government and the taxpayer, denied the motion to permit discovery or an evidentiary hearing, and entered an order enforcing the IRS summons with the notation: "The within petition to enforce IRS Summons is granted after hearing on 11/6/78, no facts from which bad faith can be concluded having been shown." The district judge also denied the motion for a stay pending appeal on the ground that taxpayer had "shown no likelihood of success on appeal."*fn2

The IRS is authorized to summon any person having possession, custody or care of books, records, papers or other data as may be relevant or material to 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 collecting any such liability," 26 U.S.C. § 7602, and the district courts have jurisdiction to enforce such summonses, 26 U.S.C. §§ 7402, 7604. Here, it is our judgment that the records sought by Special Agent Sweerus by means of the summons served on the Chase Manhattan Bank are relevant and material to the investigation of the taxpayer's tax liabilities. The taxpayer does not seriously argue to the contrary. Thus, the government has satisfactorily met its initial burden of showing "that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed . . . ." United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 255, 13 L. Ed. 2d 112 (1964). It follows that the burden is on the taxpayer here to show why the summons should not be enforced. United States v. Davey, 543 F.2d 996, 1000 (2d Cir. 1976) ("Once the IRS has made a minimal showing of relevancy . . . the burden shifts to the taxpayer to show why the summons might represent "an abuse of the court's process' which should not be enforced."). The question on this appeal, then, is whether the taxpayer was afforded sufficient opportunity to make this showing. For the reasons that follow, we believe that he was not and that the order granting enforcement of the summons was premature. Accordingly, we vacate that order and remand to the district court for further proceedings.

In the district court the taxpayer maintained most strenuously that the IRS had issued the summons in question for a purpose not authorized by 26 U.S.C. § 7602, namely, in aid of a criminal investigation and prosecution by the Department of Justice. In support of that argument he filed with his answer affidavits by three attorneys who had personal knowledge of events bearing on the circumstances giving rise to this allegation. The affidavit of Attorney John M. Bray stated:

(Taxpayer) was the subject of an F.B.I. and federal grand jury investigation which, in March 1976, resulted in his being subpoenaed before a federal grand jury in the Southern District of New York. The subpoena referred to investigation of violations of the Interstate Travel Act, 18 U.S.C. § 1952. (Taxpayer) was informed, through counsel, Robert I. Ansell . . . by Assistant United States Attorney George E. Wilson, Southern District of New York, that he was a target of the investigation and an indictment was anticipated against (him pertaining to allegations that he had received money and goods during his employment as insurance manager for W. T. Grant Co.).

On or about March 25, 1976, a federal search warrant was executed by F.B.I. agents on Mr. White's home . . ..

During the Spring of 1977, after (taxpayer) had moved to Arizona, an Internal Revenue Service income tax investigation of his federal joint income tax returns was commenced. The revenue agent conducting the investigation was Agent Shawn Harris. Mr. Harris has acknowledged, on information and belief, that his investigation was begun as a result of information provided by the F.B.I. in New Jersey to the Internal Revenue Service in New Jersey. Mr. Harris has . . . indicated to Arizona counsel representing (taxpayer), Giora Ben-Horin, . . . that the agent was attempting to work up a net worth statement and a statement of sources and application of funds with respect to (taxpayer) and to build a tax fraud case against (taxpayer) through third party contacts. Agent Harris also indicated . . . that many of the third parties were located in New York and New Jersey. Agent Harris said . . . that he had in mind documenting a criminal tax evasion case against (taxpayer).

The affidavit of Attorney Giora Ben-Horin of Phoenix, Arizona, stated:

On May 16, 1977, I met with Internal Revenue Service agent B. Shawn Harris at his request in connection with my representation of (the taxpayer). During my discussion with agent Harris on that date, he advised me that the Internal Revenue Service investigation of (taxpayer) had been commenced on the basis of information received by the Internal Revenue Service office in New Jersey from the Federal Bureau of Investigation. Agent Harris stated that (taxpayer) was under investigation by the FBI for possible involvement in commercial bribery, interstate transportation of stolen property and mail or wire fraud.

Agent Harris further advised me that he was attempting to "work up" a net worth statement and a statement of sources and application of funds in respect to (taxpayer) in an endeavor to build a tax fraud case against him. Agent Harris said that he intended to obtain necessary financial information from third party sources, many of which were located in New York and New ...


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