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"PSEUDONYM TAXPAYER" v. MILLER

April 1, 1980

"PSEUDONYM TAXPAYER", Plaintiff,
v.
William MILLER, Secretary of the Treasury et als., Defendants



The opinion of the court was delivered by: BIUNNO

Taxpayer filed a complaint seeking to restrain I.R.S. from making a recommendation to refer his tax case (for the years 1974 through 1977) to the Attorney General for prosecution as a criminal case. See the discussion in U. S. v. LaSalle National Bank, 437 U.S. 298, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978) for the statutory basis underlying this inter-agency procedure. See, also, U. S. v. Garden State National Bank, 465 F. Supp. 437 (D.N.J.1979), aff'd 607 F.2d 61 (CA3, 1979); and U. S. v. First National State Bank of N. J., 469 F. Supp. 612 (D.N.J., 1979), aff'd and rev'd 616 F.2d 668 (CA3, 1980).

 The Garden State and First National State cases were civil actions to enforce an administrative I.R.S. summons (subpoena) to a third-party recordkeeper, under the provisions of the Tax Reform Act of 1976, i. e., under a law not involved in the LaSalle case. What was said by this court in Garden State and First National State was by way of hope or expectation that since I.R.S. has complete jurisdiction to compromise and settle all aspects of a "tax case", both civil and criminal, before referral to the Attorney General (as noted in LaSalle), the comments might induce both taxpayers and I.R.S. to undertake good faith negotiations for resolution of any disagreement without generating avoidable litigation.

 Whether those comments have had a constructive effect or not the court cannot say. It has observed a sharp decline in the number of I.R.S. enforcement actions, but this may be due to the lack of success of taxpayers challenging them as much or more than to the court's comments.

 In any event, no such issue is involved here. There is no administrative summons sought to be enforced against a third-party recordkeeper. Instead, the tax case has been processed to the point where the I.R.S. is contemplating a recommendation to refer the case to the Attorney General. It is this step which taxpayer seeks to enjoin.

 The order to show cause was presented late in the afternoon, and although defendants had counsel present, the papers had been received too late in the day to find out where the matter stood. The United States represented that, if a recommendation had not gone out from the District office, none would go out until the order to show cause had been heard. This obviated the need for any temporary restraint.

 Taxpayer argues that I.R.S. has failed, and should be compelled, to comply with the provisions of 26 C.F.R. § 601.107(b)(2). It appears that taxpayer was aware that an investigation was being conducted in respect to his income taxes, and requested a conference under the regulation. At the time of the request, it appears that the investigation had not reached a stage where the probability of a recommendation to refer for criminal prosecution was known. In due course, Taxpayer was so informed, a conference was scheduled and held February 26, 1980, with Taxpayer's attorney present, but not Taxpayer himself.

 The attorney was informed that the Criminal Investigation Division (C.I.D.) intended to forward the case to District Counsel with a recommendation for prosecution in violation of I.R.C. § 7201 and 7206(1), for the years 1974 through 1977. He was told that the case was based on specific items of omitted income, and that the tax and penalties (50%) aggregated $ 20,578.

 The attorney then asked for a year to year breakdown, and this information was provided, with a further subdivision between tax and 50% civil fraud penalty. The attorney then claimed that taxpayer was entitled to more information: the alleged criminal features, the fraudulent features of the case, and the specific items not reported. He was told that the criminal features consisted of unreported interest and dividend income for all 4 years, and unreported patients' receipts in 1974 and 1975 only.

 It is argued that this information does not satisfy the regulation, and the United States responds that it does. What the regulation speaks of, at a conference, is that:

 
"... the I.R.S. representative will inform the taxpayer by general oral statement of the alleged fraudulent features of the case, to the extent consistent with protecting the Government's interests, and, at the same time, making available to the taxpayer sufficient facts and figures to acquaint him with the basis, nature and other essential elements of the proposed criminal charges against him."

 Insofar as Taxpayer seeks a preliminary injunction, the court finds that he has failed to show a reasonable likelihood of success on the merits. Nothing in the regulation suggests that the conference is intended to provide pre-referral discovery in what may or may not become a criminal case. There can be no "criminal case" until after referral, and then only if a Grand Jury returns an indictment. In that event, an accused taxpayer would not be entitled to have discovery with the detail sought here.

 It is not necessary to decide whether the regulation is mandatory or not. In this case, the information provided appears to have been sufficient. Taxpayer is responsible for keeping records of dividend, interest and patient fee income. Most payers do file and supply Form 1099 to report interest and dividends paid. Taxpayer can easily check the amounts reported as well as sources by examining ...


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