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United States v. Lafko

July 31, 1975



Forman, Van Dusen, and Garth, Circuit Judges.

Author: Forman


FORMAN, Circuit Judge

This appeal is from a final order of the District Court of New Jersey enforcing an administrative summons issued by Internal Revenue Service Special Agent Steven L. Bell. The summons, authorized by 26 U.S.C.A. § 7602(2),*fn1 calls upon Mr. Harry Lafko, an accountant, to produce his copies of the 1968 through 1970 federal income tax returns of Frederick J. and Barbara Rolle along with the original work papers attached thereto. For reasons discussed herein, the District Court's order enforcing the summons will be reversed and the case will be remanded for reconsideration.

The factual background is uncontroverted. In June 1971, Revenue Agent Paul Signer, assigned to the Internal Revenue Service's Audit Division, began an audit of the Rolles' 1969 tax return. Upon completion of the audit two months later, Agent Signer forwarded his report to Internal Revenue's Intelligence Division as a case potentially involving fraud. Thereafter, a joint investigation was conducted by the Audit and Intelligence Divisions during which time the scope of the investigation was apparently expanded to include the Rolles' tax returns for 1968 through 1971. As a result of this joint investigation, in September 1973 Intelligence Division agents formally recommended that Mr. Rolle be prosecuted under 26 U.S.C.A. § 7206(1) for filing false income tax returns for the years 1968 through 1971 and that the civil fraud penalty be applied to the Rolles' tax deficiencies. This recommendation was forwarded to Mr. Kevin Reilly, an attorney in Internal Revenue's Regional Counsel's Office, whose function it is to evaluate the available evidence and decide, subject to review by his supervisor, whether to proceed criminally and/or civilly against the taxpayer. Internal Revenue, of course, has no authority to conduct a prosecution. Authority to prosecute is lodged in the Justice Department, so that once the Regional Counsel's Office decides to recommend prosecution, the case is transferred from Internal Revenue to the Justice Department.

According to the taxpayer, but disputed by the Government, Mr. Reilly improperly used Internal Revenue's summons power to gather evidence for prosecution. Before making his decision on whether or not the Rolle case should be prosecuted, Mr. Reilly decided to seek an analysis of handwriting appearing on certain adding machine tapes attached to the taxpayer's copies of his returns. These tapes were obtainable by Internal Revenue under its § 7602(2) summons authority. Thus, on December 7, 1973, and at Mr. Reilly's request, Internal Revenue's Special Agent Steven L. Bell served a § 7602(2) summons on Mr. Harry Lafko, the custodian of Mr. Rolle's financial records, seeking "Accountant's copies of Form 1040, for the years 1968, 1969, and 1970 in the names of Frederick J. and Barbara Rolle, and original workpapers attached thereto." Mr. Rolle reacted to the summons by obtaining a temporary restraining order and preliminary injunction in the United States District Court for the District of New Jersey restraining Mr. Lafko from delivering the requested records.*fn2 The United States then brought the instant action against Mr. Lafko to compel compliance with the summons*fn3 and Mr. Rolle intervened on his own behalf.*fn4

A hearing was held on July 2, 1974. In opposition to the Government's attempt to enforce the summons, intervenor Rolle asserted that Internal Revenue was improperly using its summons power to obtain incriminating evidence for use in Mr. Rolle's prosecution - a purpose not authorized by 26 U.S.C.A. § 7602. The Supreme Court has recognized this "improper purpose" defense as a ground for refusing to enforce an Internal Revenue summons. See Reisman v. Caplin, 375 U.S. 440, 449, 11 L. Ed. 2d 459, 84 S. Ct. 508 (1964). Section 7602 permits the Internal Revenue Service to summon a taxpayer's records for the limited purpose "of ascertaining the correctness of any return." Internal Revenue has no authority to conduct a criminal investigation through the use of its summons power. Reisman v. Caplin, 375 U.S. 440, 449, 11 L. Ed. 2d 459, 84 S. Ct. 508 (1964); United States v. Fisher, 500 F.2d 683, 686-87 (3d Cir. 1974).

In his letter opinion of August 6, 1974, the District Judge rejected Mr. Rolle's contention that Internal Revenue issued the summons for an unauthorized purpose, citing as his sole reason:

". . . this court is satisfied that although Rolle is under investigation for possible civil and criminal proceedings, the matter has not reached a stage where any decision has been made by the Justice Department to proceed.

"Under these circumstances, it is clear that the defendant Lafko should be directed to comply with the summons issued by the Internal Revenue Service. Donaldson v. United States, 400 U.S. 517, [27 L. Ed. 2d 580, 91 S. Ct. 534] (1971)." (emphasis supplied).

This application of the Donaldson standard is patently erroneous. A preceding Justice Department recommendation to prosecute is not the sine qua non for proving that an Internal Revenue summons was issued for an improper purpose. The District Judge apparently relied on the statement in the Donaldson opinion that an Internal Revenue summons is enforceable if issued "in good faith and prior to a recommendation for criminal prosecution."*fn5 400 U.S. at 536. At a minimum, the District Judge's letter opinion ignores the question of good faith, a question entirely separate from whether or not a formal recommendation to prosecute had been made. As stated in United States v. Wall Corp., 154 U.S. App. D.C. 309, 475 F.2d 893 (1972):

"Our inquiry is not ended upon a determination that prosecution has neither been instigated nor recommended, since Donaldson also requires that a summons be issued 'in good faith.' Thus, if it can be shown that the investigating agent had already formed a firm purpose to recommend criminal prosecution even though he had not as yet made a formal recommendation, issuance of the summons would presumably be in bad faith. Similarly, if the civil liability were already determined, the summons would appear to be solely for a criminal purpose." Id. at 895.

Moreover, the District Judge incorrectly applied Donaldson's "prior to a recommendation for criminal prosecution" language. A full reading of the Donaldson opinion indicates that the recommendation under discussion was not one emanating from the Justice Department. Instead, the Court was discussing a recommendation for prosecution ...

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