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UNITED STATES v. FIRST NATL. STATE BANK OF N. J.

April 17, 1979

UNITED STATES of America and John R. Cassie Jr., Plaintiffs,
v.
FIRST NATIONAL STATE BANK OF N. J., Defendant, v. P. L. (taxpayer), Intervenor



The opinion of the court was delivered by: BIUNNO

The combination of U. S. v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978), the amendments made by the Tax Reform Act of 1976 to 26 U.S.C. § 7609, and the "Right to Financial Privacy Act of 1978", Pub.L. 95-630, § 1100, Et seq., effective March 10, 1979, among other factors, has generated extremely complex judicial problems in considering and deciding a large number of IRS summons enforcement cases which, before these new factors arose, were quite few or rare, and involved little time or effort.

LaSalle is important because it is the newest ruling by the Supreme Court in a line of cases marked particularly by Reisman v. Caplin, 375 U.S. 440, 84 S. Ct. 508, 11 L. Ed. 2d 459 (1964); U. S. v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964) and Donaldson v. U. S., 400 U. S. 517, 91 S. Ct. 534, 27 L. Ed. 2d 580 (1971).

 In this Circuit, other pertinent decisions in the line or essentially parallel to it include In re Grand Jury Proceedings (Schofield), 486 F.2d 85 (CA-3, 1973), U. S. v. McCarthy, 514 F.2d 368 (CA-3, 1975), U. S. v. Genser, 582 F.2d 292 (CA-3, 1978), and after remand, 595 F.2d 146 (CA-3, 1979), (Nos. 76-262 3/4, decided March 9, 1979).

 Other pertinent decisions in various courts of other circuits include Trapp v. Baptist, (D-Ala., 1978) (CCH U.S. Tax Cases, 3/14/79, P 9241); U. S. v. Del Sandro, 465 F. Supp. 1009 (D-Pa., 1979); U. S. v. Bank of Monte Vista, 451 F. Supp. 945 (D-Colo., 1978); U. S. v. Shivlock, 459 F. Supp. 1383 (D-Colo., 1978); U. S. v. Chemical Bank, 593 F.2d 451 (CA-2, 1979).

 The facts briefly are that a series of IRS summonses were issued to a number of third-party record keepers in connection with an investigation of a specified taxpayer. As provided by the 1976 Act, notice of the summonses was given to the taxpayer who, as allowed by the Act, wrote the record keepers to instruct them not to comply, a step which serves as an automatic stay without formal steps either before IRS or a court.

 Thereafter, the United States and the special agent of IRS who had issued the summonses filed a series of "petitions" for enforcement, under 26 U.S.C. § 7604, one petition for each summons. With each one an order to show cause was submitted, which was issued with a return date. Taxpayer appeared and intervened in all the cases.

 By stipulations of record at the hearing, it was established that there had not at that point been any referral by IRS to the Attorney General, the event chosen by the LaSalle court as the line of demarcation at which the intertwined civil and criminal aspects of an IRS investigation diverge. *fn1" It was also established that, on the strength of comments made by this court in U. S. v. Garden State Nat'l Bank, 465 F. Supp. 437 (D.N.J., 1979), Taxpayer (through a representative) asked IRS to meet and confer in an effort to negotiate a compromise of the civil aspects; no request was made to negotiate and compromise criminal aspects as well, see 26 U.S.C. § 7122(a). IRS declined to meet, because its investigation was not complete.

 At this posture, the court continued the hearing to a new date by order conditioning the requested enforcement order on a good faith participation by IRS in negotiations aimed at arriving at a compromise. Claiming that the court lacked authority to specify that condition, IRS declined to comply. In so doing, it doubtless preserved the issue while discarding an opportunity to secure all the information it seeks via good faith negotiations which would in no way have restricted it in considering whether or not to refer the matter to the Attorney-General for criminal prosecution.

 So much of the court's effort having proven unproductive, the court then undertook an inspection in camera of the IRS intraoffice memos, with the participation of the Assistant U.S. Attorney and the Special Agent to explain the various documents. A sealed transcript was prepared.

 From that record, it appeared that the delay from when summonses were first issued to the time when the summons enforcement proceedings were filed was obviously attributable to uncertainties about the effect of the LaSalle decision, which came down about the time the first requests for enforcement were made. Draft boilerplate letters, evidently prepared locally and sent to IRS counsel for signature to authorize enforcement proceedings, did not mention LaSalle in the first group. The second group of drafts did.

 All the drafts make reference to the requirement, in Powell and McCarthy, for a showing that IRS did not already have what it sought. In this group of cases, all of the third-party recordkeepers were of a kind which were required to file Form 1099 (information return) with IRS, and send a copy to the taxpayer. The in camera hearing established that for all third-party recordkeepers, IRS already had the Form 1099 information. For that reason, the court ruled that the enforcement order was not to reach retained copies of Form 1099.

 The reasons for this limitation are obvious. As is well and widely known, IRS simply receives the millions of Form 1099 filed with it and stores them. It has established no arrangement or system to match the filed Forms 1099 with the corresponding tax returns. Without disclosing details mentioned in the sealed record, it appears that some Form 1099 information is picked up and checked against taxpayer returns, and if the item is not reported on the schedules, an investigation may ensue.

 When Form 1099 information is at hand, IRS knows the name of the taxpayer, the amount of the interest or dividend reported, and the name of the payor. Given this information, IRS is entitled to issue summons to the payor, a third-party recordkeeper, for its own books and records in respect to taxpayer, without having any need for the retained copy of Form 1099.

 Conceivably, IRS may want the payor's retained copy as proof that the taxpayer received his copy, a factor which could go to the issue of knowing failure to report the item. If so, the basis is irrational since tangible evidence of the retained copy is not proof that taxpayer received it. No bank or dividend-paying corporation of any size is likely to be able to produce any witness able to testify that taxpayer X's Form 1099 was mailed to him. The most that can be expected is that some witness will be able to testify about the business system used to prepare these forms and to mail them out, and no more. No such witness could be expected to testify that X's form was mailed to him. As with any large mailing X's form may have wound up in Y's envelope. Thus, the only evidence of any value would be evidence of the system, a subject that can be inquired into outside of 26 U.S.C. § 7609 since it does not involve the production of records duces tecum. And, since IRS possesses the Form 1099, and could only have it if it was sent to it by the payor, it already has all the proof it needs on that score.

 The fact that IRS possesses Form 1099 information, either on paper forms or on magnetic tape, is enough to preclude summons enforcement to the payor for retained copies. If IRS has not arranged to look up the filed information it has, no doubt because of cost considerations, it can hardly put that burden on payors. To do so would impose on payors the very burden of cost and expense avoided by IRS in failing to provide itself with means for access to its own records. The cost of arranging all Forms 1099 alphabetically by taxpayer name, or numerically by ID Number, is just as great for all payors as it would be for IRS. *fn2" If IRS is free to store Forms 1099 in warehouses without means of access, there is no reason why a payor cannot do the same, and when served with an IRS summons merely say: "We have all our retained copies of Form 1099 but they are merely stored, any which way, and we can't locate any particular one without going through all of them".

 To suggest that the payors must make an outlay to organize all their retained copies for easy location and retrieval, when only a small number will ever be called for, would impose on them the kind of expense to perform a governmental function that would make Vivian Kellems chortle, "I told you so,". For those who do not recall her, see Kellems v. U. S., 97 F. Supp. 681 (D-Conn., 1951) and Kellems v. California C. I. O. C., 68 F. Supp. 277 (D-Cal., 1946). See, also, Neal v. U. S., 402 F. Supp. 678 (D-N.J., 1975).

 The decision in U. S. v. Theodore, 479 F.2d 749 (CA-4, 1973) relied on by the United States is not to the contrary. In that case, the summons was directed to a tax preparer, himself the target of an investigation as the result of field tests indicating that returns were not properly prepared. The summons was for retained copies of all returns prepared for the years 1969-1971. Necessarily, IRS had the original returns if they were filed at all, and the summons was resisted on that ground. IRS replied that there was no way to locate those returns made out by the preparer without examining all filed returns to find out who prepared them. Despite this argument, the District Court enforcement order was reversed as too broad and too vague, and enforcement was limited to providing a list of the names, social security numbers and addresses of taxpayers for whom returns had been prepared. With such a list, rather than the retained copies, it was indicated that IRS could locate and examine its own filed returns.

 Rather than support the United States, the rationale of that ruling supports the objection. If any general principle is to be inferred from the ruling, it is that IRS may not use the court's process to place on another a burden it can, or should be able to, carry itself. See, also, U. S. v. Bank of Monte ...


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