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UNITED STATES v. RYAN

February 29, 1980

UNITED STATES OF AMERICA, Petitioner,
v.
JACK RYAN, as partner of Herzfeld & Stern, Respondent, and MELVIN SHENWEATHER, Intervenor.



The opinion of the court was delivered by: COOPER

In this summary judgment application, we are asked to determine the validity of summary enforcement (without discovery) of a third-party administrative summons issued by the Internal Revenue Service pursuant to a tax investigation.

The Facts

 Internal Revenue Service (IRS) Special Agent Charles Brock, Criminal Investigation Division, is conducting an investigation into the income tax records of Melvin Shenweather, a resident of Miami, Florida (hereinafter referred to as the taxpayer).

 The purposes of the investigation are: (a) to determine the correctness of taxpayer's 1974-75-76 tax returns, and (b) to determine taxpayer's possible liability in 1977, a year for which no return was filed.

 On May 29, 1979, an administrative summons was issued by Special Agent Brock, in accordance with Internal Revenue Code requirements, directing that Jack Ryan, a partner in the New York brokerage of Herzfeld & Stern, appear, testify and produce certain of taxpayer's records in his possession. Taxpayer, through his attorney, directed Ryan not to comply with the summons. Ryan did not appear, but has filed an affidavit that neither he nor his firm has any interest in the outcome of the case and that both will comply with any decision of the Court. See Affidavit of Jack Ryan, verified December 14, 1979, p. 2, PP 5-6.

 On September 19, 1979, the Government brought on an order to show cause directing Ryan to give reason why he should not comply with the summons. Attached to the order was a verified petition to Enforce Internal Revenue Summons as well as a supporting affidavit from Brock which disclosed that his investigation had been included in the IRS Manhattan District Strike Force Program (solely administered by the IRS), that the IRS did not presently have custody of the requisite records, and that no recommendation for criminal prosecution had yet been made to the Justice Department or any grand jury. Affidavit of Charles Brock, verified September 11, 1979, p. 4, P 10.

 Taxpayer responded by serving the IRS with a Notice of Taking Deposition which included a request for production of documents. He seeks to question Brock and an unnamed IRS representative on the nature of the investigation, and to have them produce all records dealing with the "strike force" program, including

 
all correspondence, memoranda, and communications establishing said strike force and all documentation, letters, memoranda, forms, communications or records relating to the selection of MELVIN (MELVYN) SHENWEATHER, as a target of such strike force and all letter (sic), communications, memoranda or documents assigning speical (sic) agent CHARLES C. BROCK of the Manhattan District to said investigation.

 Notice of Taking Deposition, p. 2.

 On October 19, 1979, taxpayer served Brock with a subpoena duces tecum to compel the agent's attendance (in the event a hearing was ordered) to testify on the documents requested in the notice of deposition. Brock did not testify at the hearing for none was ordered, nor were the documents produced by the IRS.

 By letter of October 25, 1979, taxpayer proposed discovery of the same documents previously sought as well as the submission of a supplemental affidavit from Brock concerning any contacts between the IRS and the Justice Department. The Government again refused to supply the documents but did agree to provide the additional affidavit.

 By stipulation, the petition to enforce the summons was made returnable on December 7, 1979.

 On that date, the Government moved the Court: (a) to grant summary judgment (under Fed.R.Civ.P. 56) directing that Ryan obey the summons; (b) to quash (under Fed.R.Civ.P. 45(b)) the subpoena served on Special Agent Brock; and (c) to issue a protective order, pursuant to Fed.R.Civ.P. 26(c), directing that taxpayer's requested discovery be denied. Annexed to the Notice of Motion was a statement of facts in issue as required by Rule 9(g) of the General Rules of this Court.

 Taxpayer contests the motion for summary judgment and asserts the desirability of additional discovery before the summons is enforced. He alleges that the purpose of the investigation by the "strike force" is solely to further criminal prosecution; that the summons was issued by the IRS in bad faith. He further asserts that the deposition of Special Agent Brock, as well as the requested discovery, is necessary before a determination is made that no genuine issue of fact exists as to the nature of the inquest. Petition to Intervene of Melvin Shenweather, pp. 1-2.

 For the reasons delineated below, we direct that summary judgment be granted, that the subpoena directed to special agent Brock be quashed, and that taxpayer's proposed discovery be denied.

 Statutory Background

 The IRS is given authority by I.R.C. § 7602 to issue a summons to ascertain the "correctness of any return" or to "make" a return "where none has been made" to determine a taxpayer's liability. Id. The IRS is empowered to "examine any books, papers, records, or other data which may be relevant or material to such inquiry" as well as "to summon the person liable for tax." Id.

 This grant of administrative power also extends to "any transferee or fiduciary" of the taxpayer. The IRS may require the appearance of "any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax . . . and to produce such books, papers, records, or other data." Id. (emphasis supplied)

 Although § 7602 has been applied to third parties (under the provision cited supra ), the Tax Reform Act of 1976 added § 7609 to deal specifically with a summons issued to a "third-party recordkeeper." This is a party, usually neutral with respect to the taxpayer, which is defined by inclusion in one of six listed categories: bank, consumer reporting agency, creditor, broker, attorney or accountant. § 7609(a)(3).

 Section 7609 also sets forth specific procedures to be followed on the issuance of summons. The summons itself must contain the identity of the taxpayer to whom it relates, § 7609(a)(5), and notice of the summons must be given to the taxpayer within three days of its service on the third party but no later than 14 days prior to the scheduled examination date, § 7609(a)(1).

 The reason for these notice requirements are the twin rights given to the taxpayer under § 7609(b)(1) and (2) to intervene in any proceeding to enforce the summons; and to stay third-party's compliance with the summons (by notice in writing). Id.

 To enforce the summons, the IRS, under § 7604 and § 7402, must apply to the judge of the district court "for the district within which the person so summoned resides," for an order directing compliance.

 In the case at bar, it is readily noted that both parties have exercised undisputed statutory rights. The summons was issued May 29, 1979 and served by hand upon broker Jack Ryan, who by definition is a third-party recordkeeper within the meaning of § 7609. Notice was given the same day by registered mail to taxpayer's attorney. ...


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