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UNITED STATES v. CRITELLI

July 26, 1983

United States of America and Eugene R. Govern, Jr., Revenue Agent, Petitioners
v.
Frank Critelli, President of Melbourne Concept, Inc., Respondent


Elfvin, District Judge.


The opinion of the court was delivered by: ELFVIN

Memorandum and Order

ELFVIN, District Judge:

 Petitioners seek enforcement under 26 U.S.C. § 7402(b) and 7604(a) of an Internal Revenue Service ("IRS") summons issued in the course of an investigation into the income tax liabilities of Melbourne Concept, Inc. ("Melbourne") for tax years ended 1977 through 1980. Respondent Frank Critelli, Melbourne's President, is in possession of the summonsed items. In support of the Petition, Agent Govern submitted his declaration under penalty of perjury that he is conducting the aforesaid investigation and that Critelli did not respond to the summons as required. On June 12, 1981 attorneys representing Melbourne telephoned Govern, offering to supply some of the summonsed items on the condition that Govern abandon any interest in the remaining summonsed items or, alternatively, to furnish the summonsed items with the names and addresses of Melbourne's clients redacted therefrom. These alternative conditions were unacceptable to Govern and were rejected.

 Govern declared further that the summonsed items are not already in the IRS's possession, except for an incomplete list of Melbourne's clients' names and addresses. By a separate affidavit replying to Critelli's opposition, Govern affirms among other things that the summonsed items are sought solely in connection with his investigation of Melbourne's civil tax liabilities and that he has not referred any part of the matter to the IRS's Criminal Investigation Division. I note at the outset that this assertion satisfies respondent's objection that it may be that the summonsed items are impermissibly being sought in connection with a criminal investigation (see, United States v. Marine Midland Bank of New York [78-2 USTC P 9769], 585 F.2d 36, 39 (2d Cir. 1978). Respondent has not seriously drawn into question the good faith civil investigative purpose of the IRS.

 In response to an Order to Show Cause why the IRS summons should not be enforced, oral argument was had and both sides have submitted affidavits and memoranda in support of their positions.

 Petitioners argue that the investigation of Melbourne's tax liability has focused upon Melbourne's gross receipts, abandonment losses and deductions for pension plan contributions as reported in its tax returns for the years involved. Melbourne's business enterprise is described as a "tax shelter" operation, in the course of which Melbourne handles investments in the Department of the Interior's Bureau of Land Management's oil and gas lease sale program. Petitioners assert that the summonsed items, particularly those containing information regarding Melbourne's customers, are necessary to check the accuracy of Melbourne's returns by enabling petitioner

 
"to follow transactions through Melbourne's records, to trace actual receipts and verify that they were properly recorded, to trace checks issued and ascertain their purposes and whether the items they represent are properly capitalized or expensed, and to determine which transactions must be verified by actually contacting third parties [, without which information Govern will be unable] to determine the correctness and even the fact of Melbourne's treatment on its returns of innumerable transactions." Petitioner's Memorandum of Law 7.

 In opposition to enforcement Critelli urges that petitioners seek the summonsed items, not solely for the purpose of investigating Melbourne's tax liability, but also to aid investigation of Melbourne's clients. Hence, it is urged, the summons must be regarded as a "John Doe" summons, obligating petitioners to proceed as required by 26 U.S.C. § 7609(f). *fn1" Critelli contends that Govern's attendance at the trial in Nicolazzi v. Commissioner of Internal Revenue, 79 T.C. 109, 79 T.C. No. 7 (1982), a proceeding brought by two of Melbourne's clients to determine the deductibility of the fee paid to Melbourne for investment advice and clerical services, plus the existence of IRS investigations into the tax liabilities of certain of Melbourne's clients, support Critelli's view that one aspect of the IRS summons at issue is a John Doe summons. Further support for this position is found in Govern's declaration in his reply affidavit that he has been involved in investigations of investors who participated in an oil and gas lease lottery shelter program and, in the course of his investigation of Melbourne, has forwarded to his supervisor information regarding the identities of Melbourne's clients which he learned "on the basis of an assumption that they may have treated their transactions with Melbourne in a manner which was not consistent with" the IRS's position that Melbourne's clients' fee payments are not deductible on their tax returns. Govern Reply Affidavit paras. 14, 16. Govern maintains, however, that his investigation of Melbourne is not conducted wholly or partly for the purpose of discovering Melbourne's clients' names and that the instant summons is sought to be enforced in good faith solely for the purpose of investigating Melbourne's tax liabilities. Critelli does not deny that there exists a current civil tax liability investigation of Melbourne and that the instant summons is related to such investigation.

 Critelli urges that an evidentiary hearing is required to determine whether the summons at issue is a John Doe summons and, if so, whether the section 7609 standards for such summonses are satisfied here. He urges further that, should the summons be found enforceable as a John Doe summons, its enforcement should be stayed pending the outcome of the Nicolazzi litigation because the Tax Court's decision in that case might "moot" the IRS's supposed purpose of obtaining information regarding Melbourne's clients. This last request by Critelli was itself mooted, however, by a decision in Nicolazzi July 21, 1982, holding that the fee paid to Melbourne by the Nicolazzis is a nondeductible capital expenditure.

 Critelli's principal reliance is upon U.S. v. Barter Systems, Inc., 49 A.F.T.R. 2d 82-621 (D. Neb. 1981), holding that, where an IRS summons has an expressly acknowledged dual purpose of uncovering information regarding the tax liability of a barter exchange, *fn2" and the identities and transactions of its clients, the subsection 7609(f) summons requirements must be satisfied. Correctly noting that decisions of the United States Supreme Court impose the requirements that an IRS section 7602 summons be enforced only when issued in good faith and relevant to a congressionally authorized purpose (United States v. LaSalle National Bank, 437 U.S. 298, 317-318, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978); United States v. Powell, 379 U.S. 48, 57-58, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964)) and that "the mere fact that the summons may have a dual purpose is not * * * grounds for objection" (49 A.F.T.R. 2d 82-624), the Barter Systems court concluded that effectuation of the congressional intent "to preserve the IRS's use of the John Doe summons as an investigative tool, but within the specific limitations enumerated [by section 7609(f)]" required "that the special limitations contained in Section 7609(f) may not be avoided even though the tax liability of an exchange may also be at issue" (49 A.F.T.R. 2d at 82-624-625). The court repeatedly emphasized that the IRS had expressly announced an intention "to determine the correctness of returns filed by unidentified members of barter exchanges" (49 A.F.T.R. 2d at 82-625) and distinguished the factually similar case of United States v. Constantinides, 47 A.F.T.R. 2d 81-321 (D. Md. 1980), on the grounds that the Constantinides court "specifically found that the summons was not issued for the purpose of investigating the tax liability of members of the exchange." (49 A.F.T.R. 2d at 82-624). The Barter Systems court found "indirect support" for its holding in United States v. LaSalle National Bank, supra, in which "the Court recognized that even upon recommendation to the Justice Department for prosecution, the civil and criminal elements of an investigation do not separate completely yet found it necessary to prohibit use of a Section 7602 summons after recommendation to the Justice Department [for criminal prosecution] in order to safeguard important policy interests." 49 A.F.T.R. 2d at 82-625.

 Subsection 7609(f) was enacted as part of the Tax Reform Act of 1976, Pub.L. No. 94-455, 90 Stat. 1520 (1976). The entire section 7609 was intended "to provide certain checks on the IRS's use of third-party summonses." United States v. New York Tel. Co., 644 F.2d 953, 956 (2d Cir. 1981). The legislative history illuminates the treatment of John Doe summonses in the section 7609 scheme:

 
"In the case of a 'John Doe' situation, where the Service has knowledge of a particular transaction or transactions which may affect tax liability, but does not know the identity of the person involved, it is obviously not possible to comply with the notice rules outlined above. Typically, when cases like this have arisen in the past, the Service has issued a 'John Doe' summons to the third-party record keeper, in which the record keeper is requested to supply all information in its possession relating to such transactions (including any information which the third party may have concerning the identity of the taxpayer).
 
"Recognizing that issues of privacy are involved in connection with the John Doe summons, the Service has made sparing use of this investigative tool. Nonetheless, there are cases where the facts of a particular case are so suggestive of possible tax liability that the Service could be remiss in its duty of collection and enforcement of the Internal Revenue laws if it did not investigate. In some such circumstances, the John Doe summons is the only practical investigative tool which is available.
 
"While the committee believes it is important to preserve the John Doe summons as an investigative tool which may be used in appropriate circumstances, at the same time, the committee does not intend that the John Doe summons is to be available for purposes of enabling the Service to engage in a possible 'fishing expedition.' For this reason, the committee intends that when the Service does seek court authorization to ...

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