Opinion ID: 484309
Heading Depth: 3
Heading Rank: 1

Heading: Application of Good Faith to Treaty Summonses

Text: 28 According to the taxpayers, the summonses were not issued in good faith because their purpose was improper: to aid Revenue Canada in its criminal investigation, preliminary stage. The legitimate purpose element of good faith has changed since Powell. It originated in the Supreme Court's concern that the IRS might use its power to issue administrative summonses in order to harass taxpayers, to pressure them into settling collateral disputes, or, as Stuart and Kapoor assert is occurring in this instance, to obtain evidence for use in a criminal prosecution. Powell, 379 U.S. at 58, 85 S.Ct. at 255; Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459 (1964). But as criminal and civil liability for violation of the tax laws are inherently intertwined, there has been some difficulty in deciding how far a criminal investigation can progress before the IRS must relinquish its power to issue summonses. See Donaldson v. United States, 400 U.S. 517, 531-36, 91 S.Ct. 534, 542-45, 27 L.Ed.2d 580 (1971); United States v. LaSalle Nat'l Bank, 437 U.S. 298, 306-21, 98 S.Ct. 2357, 2362-70, 57 L.Ed.2d 221 (1978). A majority of five justices held in LaSalle that the IRS may issue summonses as long as it has not made a recommendation of criminal prosecution to the Department of Justice and has not abandon[ed] in an institutional sense ... the pursuit of civil tax determination or collection. Id. at 318, 98 S.Ct. at 2368. Justice Stewart, in a dissent joined by three other justices, predicted that determining institutional good faith would be unworkable and argued for a bright-line test: summonses in criminal investigations must be issued prior to a recommendation for criminal prosecution. Id. at 320-21, 98 S.Ct. at 2369-70. 29 Congress adopted the minority's view when it passed the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. Pub.L. No. 97-248, 96 Stat. 324 (1982); see Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, 97th Cong., 2d Sess. 234-36 (Comm. Print 1982); see also S.Rep. No. 494, 97th Cong., 2d Sess. 285-87 (1982), reprinted in 1982 U.S.Code Cong. & Admin.News 781, 1030-32. TEFRA allows the IRS to use its summonsing authority in investigations into any offense connected with the administration or enforcement of the internal revenue laws until the service refers the matter to the Justice Department. I.R.C. Sec. 7602(b)-(c); see Pickel v. United States, 746 F.2d 176, 183-84 (3rd Cir.1984). 30 The government argues that the good faith doctrine's requirement of a legitimate purpose should not apply to summonses issued at the request of a treaty partner. It urges this circuit to adopt the holding of Manufacturers & Traders Trust Co., 703 F.2d at 49-53, a case involving the same treaty. The Second Circuit held that the legitimate purpose standard for summonses issued pursuant to treaty requests is less stringent than the standard developed in the decisions involving domestic cases. Id. It concluded that the phrase in Article XXI, as the Commissioner is entitled to obtain under the revenue laws of the United States of America does not necessarily mean that the judicial gloss of the Supreme Court's decisions in LaSalle and Powell should apply to treaty summonses. After discussing the policy considerations upon which LaSalle rests, the Second Circuit held that there is no purpose to applying the limitations that prohibit the use of summonses to obtain information that will also be used for criminal-investigatory-prosecutory purposes or to obtain information that Revenue Canada will share with other officials concerned with criminal prosecution. Id. at 50-52. The court believed that the policies that led the Supreme Court to impose these limitations--concerns about infringing on the role of grand juries and about expanding discovery powers in criminal prosecutions--simply had no relevance to Canada, which does not employ grand juries and does not share our position on pre-trial discovery in ... criminal cases or to Canadian citizens, who ha[ve] no right to expect that [they] will have the protection accorded by this country to its own taxpayers and potential defendants. Id. at 52. 31 We decline the government's request to adopt Manufacturers & Traders Trust Co. That case involved a summons issued prior to Congress's imposition, via the TEFRA amendments, of the dissenters' position in LaSalle. Faced with the majority decision in LaSalle, the Second Circuit was understandably reluctant to delve into the institutional good faith of Revenue Canada, an agency of a foreign country. 703 F.2d at 52-53. After TEFRA, no such inquiry is necessary. Now the requirement is only that there has been no referral for criminal prosecution. 32 We hold that the good faith doctrine applies to summonses issued under the treaty. Accordingly, the next question we must address is whether the Canadian investigation has progressed to a stage analogous to a Justice Department referral: (1) has Revenue Canada recommended that the Canadian Department of Justice criminally prosecute Kapoor and Stuart or (2) has Revenue Canada requested the summonses at the behest of the Canadian Department of Justice? See I.R.C. Sec. 7602(c)(2)(A)(i)-(ii).