Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-02623/USCOURTS-ca8-04-02623-0/pdf.json

Parties Involved:
Danny L. Norwood
Appellant
United States of America
Appellee

Document Text:

1

The Honorable Ralph R. Erickson, United States District Judge for the District

of North Dakota.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 04-2623

___________

United States of America, *

*

Appellee, *

* Appeal from the United States

v. * District Court for the 

* District of North Dakota. 

Danny L. Norwood, * 

*

Appellant. * 

___________

Submitted: March 18, 2005

Filed: August 26, 2005

___________

Before WOLLMAN, JOHN R. GIBSON, and COLLOTON, Circuit Judges.

___________

COLLOTON, Circuit Judge.

Danny L. Norwood appeals from an order enforcing an Internal Revenue

Service (“IRS”) summons pursuant to 26 U.S.C. §§ 7602 and 7604. The district

court1

 determined that the summons, which sought various financial records in

connection with the IRS’s investigation of Norwood’s possible underreporting of

income, was properly issued and did not violate Norwood’s Fourth or Fifth

Amendment rights. We affirm.

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I.

On December 9, 2002, the IRS summoned Norwood in connection with an

audit of his 1999 and 2000 federal income tax returns. In paragraphs 1, 3, 5, and a

final unnumbered paragraph, the summons requested bank records for accounts over

which Norwood had authority during 1999 and 2000, records reflecting his purchase

or redemption of certificates of deposit during 1999 and 2000, documents relating to

credit, debit, or charge card accounts that Norwood controlled from 1999 and 2000,

and documents evincing Norwood’s ownership interest in any foreign entities.

(Appellant’s App. at 39-40).

Norwood appeared before an IRS agent in response to the summons on January

8, 2003, but refused to produce the information requested by the summons. Norwood

invoked his Fifth Amendment privilege against self-incrimination in response to the

portions of the summons in question.

On January 13, 2003, the IRS announced the Offshore Voluntary Compliance

Initiative (“OVCI”). The program was designed to bring taxpayers who had used

offshore accounts to hide income into compliance with federal tax law while

gathering information about the promoters of such offshore schemes. Taxpayers who

voluntarily disclosed their use of offshore accounts prior to April 15, 2003, would be

exempted from civil fraud and information return penalties, but would still be

required to pay back taxes, interest, and certain accuracy and delinquency penalties.

Rev. Proc. 2003-11, 2003-1 C.B. 311, § 2.01. Taxpayers already under audit when

OVCI began were ineligible for participation in the program. Id. § 4.01(1)(a).

On March 12, 2003, the government petitioned the district court for

enforcement of its summons to Norwood and an order instructing him to execute a

consent directive authorizing any financial institution at which Norwood had an

account to release information relating to the account. The government’s petition was

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accompanied by two affidavits, one from Revenue Agent Mark Ensrud and one from

Revenue Agent Joseph West. Agent Ensrud declared that his investigation of

Norwood’s tax returns was prompted by information garnered through OVCI. He

stated that the OVCI information revealed that Norwood had two MasterCard

payment cards issued by Leadenhall Bank & Trust Company (“Leadenhall”), located

in Nassau, The Bahamas. Ensrud disclosed the account numbers corresponding to the

cards, and claimed that Norwood had “checked ‘no’ in response to the question

whether he had an interest in or a signature or other authority over a financial account

in a foreign country” on his 1999 and 2000 federal income tax returns. Ensrud also

declared that he had obtained receipts and information from a furniture company in

Fargo, North Dakota, indicating that Norwood had used his Leadenhall cards there

in 2000 to purchase furniture that was delivered to his home address. 

Agent West’s declaration described how the IRS obtained account information

on the Leadenhall payment cards by means of a “John Doe” summons served on

MasterCard International and American Express Travel Related Services Company.

West described a “typical offshore scheme” and concluded that taxpayers having

signature authority over offshore credit cards such as those issued by Leadenhall

“may be evading the payment of federal taxes by concealing unreported taxable

income or claiming improper deductions as a result of maintaining diverted funds in

offshore accounts.” 

After a hearing on an order to show cause on May 11, 2003, the district court

issued a memorandum opinion and order on March 31, 2004, which it amended in an

order issued August 16, 2004. The district court ruled that the IRS had made a prima

facie case for enforcement of the summons, and that Norwood had not shown that the

summons was issued for an improper purpose. The court also determined that the

summons did not violate Norwood’s Fourth or Fifth Amendment rights, and denied

Norwood’s request for discovery. The court ordered Norwood to comply with

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paragraphs 1, 3, 5, and the final paragraph of the summons. The court also ordered

Norwood to execute a consent directive for the years 1999 and 2000.

II.

Norwood challenges two aspects of the district court’s decision. First, he

contends that the district court erred in enforcing the summons. He asserts this was

error because the IRS had no legitimate purpose in seeking the information requested

by the summons, enforcement of the summons would violate his Fifth Amendment

right against self-incrimination, and the summons was unreasonably broad in

violation of the Fourth Amendment. Second, he contends that the district court

should have granted him discovery regarding the IRS’s institutional posture in the

investigation, that is, whether the IRS issued the summons for the purpose of

developing criminal charges against Norwood.

A.

1.

The district court’s finding that the IRS had a legitimate purpose for

summoning Norwood is not clearly erroneous. See United States v. Kaiser, 397 F.3d

641, 643 (8th Cir. 2005) (standard of review). Section 7602 of Title 26 authorizes the

IRS to summon certain persons and data “[f]or the purpose of . . . determining the

liability of any person for any internal revenue tax.” Federal district courts have

jurisdiction to enforce such a summons pursuant to 26 U.S.C. § 7604. Enforcement

of a summons under § 7604 is appropriate where the record shows that “the

investigation will be conducted pursuant to a legitimate purpose, that the inquiry may

be relevant to the 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.” United States v. Powell, 379 U.S. 48, 57-58 (1964). The

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Commissioner may establish a prima facie case for enforcement of a summons by a

“minimal showing of good faith compliance with summons requirements.” United

States v. Moon, 616 F.2d 1043, 1046 (8th Cir. 1980). Such good faith can be

demonstrated by the affidavit of an IRS agent. Id. 

Here, Agent Ensrud’s declaration stated that the materials requested in the

summons were necessary to “properly investigate Mr. Norwood’s federal tax

liabilities for the 1999 and 2000 tax years,” (Ensrud Decl. ¶ 15), and that the “IRS

is seeking to determine the correctness” of Norwood’s tax returns from those years.

(Id. ¶ 3). The declaration also noted Norwood’s maintenance of two Leadenhallissued payment cards, (id. ¶¶ 5-6), and stated that “[n]o Department of Justice

referral, as defined in Code Section 7602(d), is in effect to Mr. Norwood for the years

under investigation.” (Id. ¶ 16). Agent West’s declaration asserted that taxpayers

having signature authority over offshore credit cards such as those issued by

Leadenhall “may be evading the payment of federal taxes by concealing unreported

taxable income or claiming improper deductions as a result of maintaining diverted

funds in offshore accounts.” (Id. ¶ 4). In light of these affidavits, we agree with the

district court that the government established a proper purpose for the summons under

the Powell standard.

The taxpayer can rebut a prima facie case for enforcement under Powell by

demonstrating that the Powell requirements have not been satisfied, or by showing

that enforcement of the summons would represent an abuse of the court’s

enforcement powers. Moon, 616 F.2d at 1046. The burden of proof on the taxpayer

necessary to overcome a prima facie showing of proper purpose is a heavy one,

Kaiser, 397 F.3d at 643, because only “substantial countervailing policies” or express

statutory prohibition should stand in the way of effective performance of

“congressionally imposed responsibilities to enforce the tax Code.” United States v.

Euge, 444 U.S. 707, 711 (1980); accord Robert v. United States, 364 F.3d 988, 996

(8th Cir. 2004). Norwood points to the IRS’s policy of criminally prosecuting

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taxpayers who have used offshore accounts to conceal income, and suggests that the

summons was issued in an attempt to gather information for a criminal prosecution.

Such a purpose for issuing the summons, Norwood argues, would be an improper

purpose under Powell.

In contending that the policy of the IRS is relevant in determining the propriety

of the agency’s purpose in issuing a summons, Norwood relies on United States v.

LaSalle National Bank, 437 U.S. 298 (1978). LaSalle announced a rule that bad faith

under § 7602 was shown when the IRS’s purpose in issuing a summons was solely

to investigate criminal activity. Id. at 316. Five years after LaSalle was decided,

Congress amended § 7602 by adding two new provisions. The first amendment

addressed the purposes for which a summons may be issued: 

Purpose May Include Inquiry Into Offense. The purposes for which the

Secretary may [issue a summons] include the purpose of inquiring into

any offense connected with the administration or enforcement of the

internal revenue laws.

Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 333, 96

Stat. 324 (codified at 26 U.S.C. § 7602(b)). Our court has interpreted this amendment

as “expand[ing] the purpose for which a summons may be issued,” and as

“eliminat[ing] the need to inquire into the institutional posture of the IRS.” United

States v. Claes, 747 F.2d 491, 496 (8th Cir. 1984). The second amendment imposed

a limitation on the summons power:

Limitation of Authority. No summons may be issued under this title,

and the Secretary may not begin any action under section 7604 to

enforce any summons, with respect to any person if a Justice Department

referral is in effect with respect to such person.

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Pub. L. No. 97-248, § 333 (codified at 26 U.S.C. § 7602(c)). We have interpreted

these amendments together as clarifying that “[t]he IRS may issue a summons for a

solely criminal purpose as long as the case has not been referred to the Department

of Justice for criminal prosecution or grand jury investigation.” Claes, 747 F.2d at

496. In this case, Agent Ensrud’s declaration states, and Norwood does not dispute,

that a referral to the Department of Justice has not occurred. The summons, therefore,

complies with the amended version of § 7602 regardless whether its purpose is solely

criminal. 

Even under the rule of LaSalle that an IRS summons may not issue for “solely”

a criminal investigative purpose, the summons in this case would not represent an

abuse of the court’s process, because the IRS had a non-criminal purpose in

summoning Norwood. The requirement of good faith under § 7602 has never barred

the IRS’s use of summonses in aid of possible criminal prosecution where the agency

also has a civil purpose. See LaSalle, 437 U.S. at 307-09. Documents in the record

demonstrate that while the IRS reserves the right to prosecute persons found to have

concealed income through the use of offshore accounts, the agency also intends to

pursue civil measures against those who do not participate in OVCI. (J.A. at 65).

The IRS states on its OVCI website that “taxpayers who choose not to [participate in

the OVCI] will face the full range of penalties,” including civil fraud penalties,

interest, and penalties for failure to file relevant information returns, in addition to

potential criminal penalties. (Id.)

It is not clear at this point, moreover, that Norwood would be subject to

criminal penalties even if he had engaged in the conduct alleged by the IRS.

Although the district court inferred that Norwood was “hiding taxable income by

transferring funds to offshore jurisdictions,” (Add. at 4), neither the IRS’s petition

nor the declarations of the agents allege that Norwood engaged in such activity.

Norwood argues that the district court’s conclusion that Norwood inaccurately

checked “no” on his 1999 and 2000 tax returns when asked whether he had an interest

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in or authority over a financial account in a foreign country was a finding that he had

committed a “criminal offense.” (Br. of Appellant at 25). Of course, it may be an

offense knowingly to file a materially false tax return, but as the government points

out, Norwood’s non-disclosure of his interest in the Leadenhall accounts could be

“due to mistake, reliance on professional advice, negligence or carelessness.” (Br.

of Appellee at 19). 

Norwood argues that the IRS’s noncompliance with its internal procedures is

indicative of the agency’s improper purpose. He notes that the Internal Revenue

Manual (“IRM”) requires that delinquent returns be referred to the criminal

investigation division “if it is determined that there are firm indications of fraud,”

IRM § 4.19.1.9.1.3(6), and argues that his case presents such firm indications.

According to the IRM, however, firm indications of fraud are present only where the

IRS discovers “affirmative acts” of fraud, id. § 25.1.2.1(1), and an intent to defraud

on the part of the taxpayer. See id. § 25.1.2.1(5). While Norwood’s use of offshore

credit card accounts and his refusal to provide requested records may be initial

indicators of fraud, see id. § 25.1.2.2(6)(b), such indicators do not necessarily rise to

the level of a firm indication of fraud. Id. § 25.1.2.1(1). The government has not

alleged fraudulent intent on the part of Norwood, and Norwood has not shown that

the IRS has failed to comply with its internal regulations. In sum, the district court’s

conclusion that the IRS issued the summons with a proper purpose is not clearly

erroneous.

2.

Norwood argues that his Fifth Amendment privilege against self-incrimination

would be violated by enforcement of the IRS summons. The Fifth Amendment

provides that “[n]o person . . . shall be compelled in any criminal case to be a witness

against himself.” U.S. Const. Amend. V. This language has been interpreted to

prohibit compelled production of evidence where the communicative aspects of such

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production are testimonial and incriminating. Fisher v. United States, 425 U.S. 391,

408 (1976); United States v. Teeple, 286 F.3d 1047, 1049 (8th Cir. 2002). 

The district court found that because the IRS already knew of the existence of

the two Leadenhall cards and a corresponding account, the existence of the

documents associated with the cards and account was a “foregone conclusion.” The

production of documents the existence of which is a foregone conclusion is not

testimony for purposes of the Fifth Amendment. Fisher, 425 U.S. at 411. When the

existence of documents is a foregone conclusion, the taxpayer’s concession that he

has the documents would add “little or nothing” to the government’s information, and

the “[t]he question is not of testimony but of surrender.” Id. (internal quotation

omitted). Whether the existence of documents is a foregone conclusion is a question

of fact, subject to review for clear error. United States v. Doe, 465 U.S. 605, 613-14

(1984). 

Norwood asserts that the summons did not specifically identify documents the

existence of which was a foregone conclusion, and that it therefore fell short of the

specificity required by United States v. Hubbell, 530 U.S. 27, 44-45 (2000). In

Hubbell, the Court held that the existence of “general business and tax records”

possessed by the defendant was not a foregone conclusion for Fifth Amendment

purposes where the government could not show that “it had any prior knowledge of

either the existence or the whereabouts” of the documents in question. Id. at 45.

Here, Norwood does not dispute that the IRS has prior knowledge of two Leadenhall

payment cards and one Leadenhall account controlled by him. He contends that the

summons includes documents outside the IRS’s prior knowledge, however, because

the language of the summons is not restricted to Leadenhall cards and account. It is

true that the summons as written is not restricted to records associated with

Norwood’s Leadenhall cards and account, but the government seeks enforcement of

the summons only to the extent that the documents requested are a foregone

conclusion. (Br. of Appellee at 10 n.2). The district court’s memorandum, moreover,

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relied on the government’s knowledge of the Leadenhall cards and account as the

basis for its decision that complying with the summons would not implicate the Fifth

Amendment. We therefore interpret the district court’s order to enforce the summons

only to the extent the summoned records pertain to Norwood’s Leadenhall cards and

account.

The existence of the requested records relating to Norwood’s Leadenhall cards

and account is a foregone conclusion. The summons seeks records such as account

applications, periodic account statements, and charge receipts, all of which are

possessed by the owners of financial accounts as a matter of course. Norwood does

not contend that he does not possess any of these documents, and the government

knows far more about the documents associated with Norwood’s Leadenhall cards

and account than it did about the defendant’s business records in Hubbell. 530 U.S.

at 44. In Hubbell, the government could not show “any prior knowledge of either the

existence or whereabouts” of the documents sought. Id. (emphasis added). Here, by

contrast, the government knows the name and location of the bank that created the

records sought, Norwood’s payment card numbers, and even the details of a number

of discrete transactions involving the cards and his Leadenhall account. Accordingly,

the district court’s conclusion that “Norwood’s production of the records has no

testimonial significance,” (Add. at 4), is not clearly erroneous.

3.

Norwood also challenges the district court’s enforcement of the summons as

a violation of the Fourth Amendment’s guarantee against unreasonable searches and

seizures. He maintains that the summons constitutes an unreasonable search because

it is overly broad. The Fourth Amendment’s requirement of reasonableness in the

context of the compelled production of documents is satisfied where the documents

sought are relevant to a properly authorized inquiry, and where the “specification of

the documents” is “adequate, but not excessive, for the purposes of the relevant

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inquiry.” Okla. Press Pub. Co. v. Walling, 327 U.S. 186, 209 (1946); see Wayne R.

LaFave, Search & Seizure, § 4.13 (3d ed. 1996). Whether a summons is reasonable

is a fact-specific inquiry, and “cannot be reduced to formula.” Walling, 327 U.S. at

209.

Norwood argues that the IRS’s summons requires him to “produce essentially

every scrap of paper ever compiled in his business or personal affairs.” (Br. of

Appellant at 34). Norwood’s characterization of the documents sought exaggerates

the scope of the summons as enforced. As noted above, the district court enforced

the summons only to the extent it requested records relating to the Leadenhall cards

and account. (Add. at 4). These items are unlikely to be “every scrap of paper ever

compiled” by Norwood in his business or personal affairs. In any case, “broadness

alone is not sufficient justification to refuse enforcement of a subpoena so long as the

material sought is relevant.” Adams v. FTC, 296 F.2d 861, 867 (8th Cir. 1961). The

same is true of a summons. The documents sought are relevant to the IRS’s inquiry,

and the summons therefore satisfies the requirements of the Fourth Amendment in

this case.

B.

We also conclude that the district court did not abuse its discretion by

determining that Norwood had not made the “substantial preliminary showing that

enforcement of a summons would result in an abuse of the court’s process” required

to permit discovery. Robert, 364 F.3d at 999. An abuse of the court’s process would

occur “if the summons had been issued for an improper purpose, such as to harass the

taxpayer or to put pressure on him to settle a collateral dispute, or for any other

purpose reflecting on the good faith of the particular investigation.” Powell, 379 U.S.

at 58. As discussed above, Norwood has shown no improper purpose on the part of

the IRS. He does not contend that the summons was issued to harass or pressure him,

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or assert any other sort of bad faith. Because Norwood failed to make the required

showing, the district court’s denial of discovery was not an abuse of discretion.

* * *

The district court’s order is affirmed.

 ______________________________

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