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UNITED STATES v. KEY OIL CO.

September 14, 1978

UNITED STATES of America et al., Plaintiffs,
v.
KEY OIL COMPANY, INC., et al., Defendants



The opinion of the court was delivered by: FISHER

AMENDED MEMORANDUM

Defendants have moved for a stay pending appeal of an order directing compliance with Internal Revenue Service Summonses. A stay pending appeal will be granted where the moving party can show:

 
(1) A likelihood that the petitioner will prevail on the merits of the appeal;
 
(2) Irreparable injury to the petitioner unless the stay is granted;
 
(3) No substantial harm to other interested persons; and
 
(4) No harm to the public interest.

 Pitcher v. Laird, 415 F.2d 743, 744-45 (5th Cir. 1969).

 The government contends, in light of the Supreme Court's recent decision in United States et al. v. La Salle National Bank et al., 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978), that defendants have little chance of prevailing on the merits of the appeal. The government asserts, with respect to the injury to be sustained by defendants if the stay is denied, that defendants can move to suppress evidence obtained through the summonses if they prevail on appeal. The government also notes that Congress and the judiciary have recognized that the interests of the Internal Revenue Service and the public favor expeditious resolution of questions concerning the validity of IRS summonses. See Section 7609(h)(2) of the Internal Revenue Code of 1954, as amended by the Tax Reform Act of 1976, 26 U.S.C. § 7609(h)(2); United States v. Davey, 426 F.2d 842, 845 (2d Cir. 1970). The delay in enforcement caused by a stay would adversely affect these interests, especially since statutes of limitation for potential civil and criminal liability might expire.

 In response, defendants note that another provision of the Tax Reform Act of 1976 tolls the statutes of limitation for criminal and civil penalties during the pendency of enforcement proceedings. Section 7609(b)(2) of the Internal Revenue Code of 1954, as amended by the Tax Reform Act of 1976, 26 U.S.C. § 7609(b)(2). Defendants assert that they should not be subjected to the burden of complying with the summonses and exposed to other proceedings until the merits of the appeal are resolved. Defendants also point to this Court's opinion in ordering enforcement of the summonses as evidence that their appeal is not frivolous and has a possibility of success on the merits.

 The Court acknowledges the countervailing interests of the government in prompt enforcement and of defendants in avoiding the burden and risks of compliance prior to appellate review of their challenge to enforcement. However, the Court holds that defendants' request for a stay pending appeal must be denied because defendants have failed to demonstrate a substantial possibility of success on the merits of the appeal. Greene v. United States, 296 F.2d 841 (2d Cir.), Vacated and remanded with instructions to dismiss appeal, 369 U.S. 403, 82 S. Ct. 852, 7 L. Ed. 2d 841 (1962).

 An Internal Revenue summons will be enforced if issued in good faith and prior to a recommendation for criminal prosecution by the IRS to the Department of Justice. United States v. La Salle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978). To demonstrate good faith issuance, the IRS must show:

 
(t)hat the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to that 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.

 La Salle, supra at 313, 98 S. Ct. at 2366; United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964). The Supreme Court noted that issuance of a summons to harass a taxpayer or to pressure settlement of a collateral dispute would constitute an improper purpose. Id.

 In contesting enforcement, defendants contended that the summonses were defective because issued for an improper purpose and because the IRS already possessed the information sought. The allegation of improper purpose was based upon defendants' contention that the IRS Special Agent who issued the summonses had a firm purpose to recommend criminal prosecution prior to issuance. Defendants also allege that the IRS ...


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