Opinion ID: 442990
Heading Depth: 2
Heading Rank: 3

Heading: The Government's Alleged Bad Faith

Text: 43 26 U.S.C. Sec. 7602 empowers the IRS to summon taxpayers for inquiry into their tax liability, to examine any books, papers, records, or other data relevant to the inquiry, and to take the testimony of the taxpayer. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) Pub.L. No. 97-248, 96 Stat. 324 (1982), amended Sec. 7602 in two ways. First it expanded the purposes for which the summons power could be used, to include criminal as well as civil tax investigations. Moutevelis v. United States, 727 F.2d 313 (3d Cir.1984). Second, it drew a bright line delineating where the summons power ended: at the point where an investigation was referred to the Justice Department for prosecution. 10 By this change, Congress intended to establish a mechanical test for determining the validity of the summons. See Joint Committee on Taxation, Annual Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act, 97th Cong. 2d Sess. at 234-36 (1982). 44 The sections of TEFRA that deal with administrative summonses were, in part, a response to United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978). Joint Committee on Taxation, supra, at 235. See also Senate Report No. 494, 97th Cong. 2d Sess. 285-87 (1982), reprinted in 1982 U.S.Code Cong. & Admin.News 781, 1030-32. LaSalle National Bank dealt with the application of the good faith requirement for the enforcement of administrative summonses to cases in which a summons was being used to investigate a criminal violation of the tax laws. 11 Prior to TEFRA, the good faith requirement limited the use of summonses to civil investigations; a summons issued as part of a criminal investigation was considered to be improper, because it fell beyond the scope of congressional authorization and thus was held to be unenforceable. In LaSalle National Bank, the agent who issued the summons was found to be conducting his investigation solely for the purpose of unearthing evidence of criminal conduct. 437 U.S. 299, 98 S.Ct. 2359. Nevertheless, the summonses were ordered enforced. The court determined that the criminal and civil elements of tax enforcement were inherently intertwined. When an investigation examines the possibility of criminal misconduct, it also necessarily inquires about the appropriateness of the 50% civil tax penalty. Id. at 309, 98 S.Ct. 2363. 45 The Court believed that the criminal and civil aspects of an investigation diverged only when the IRS had finally determined to recommend a case to the Justice Department for a criminal prosecution. The Court therefore ruled invalid a summons issued after the formation of an institutional commitment to recommend to the Department of Justice that a criminal prosecution be undertaken. 437 U.S. at 318, 98 S.Ct. at 2368. If the summons was issued before any recommendation, it was the institutional posture of the IRS that determined whether the summons was valid: if the IRS had not institutionally abandoned the pursuit of a civil tax determination or collection, the summons was valid. The purpose of the good faith inquiry, said the Court, was to determine whether the agency is honestly pursuing the goals of Sec. 7602 by issuing the summons. 437 U.S. at 316, 98 S.Ct. at 2367. The Court cautioned that where the IRS acted merely as an information gathering agency for another department, or inappropriately delayed recommending prosecution to the Justice Department, enforcement of the summons would be prohibited. 437 U.S. at 317, 98 S.Ct. at 2367. 46 The four dissenters, in an opinion by Justice Stewart, argued against an examination of the institutional good faith of the IRS as the yardstick for summons enforcement. They preferred a bright line test: to enforce a summons it must be issued in good faith and prior to a recommendation for criminal prosecution. 437 U.S. at 320, 98 S.Ct. at 2369, quoting Donaldson v. United States, 400 U.S. 517 at 536, 91 S.Ct. at 545. Section 7602, according to the dissenters, did not prohibit the issuance of a summons for a purely criminal investigation, and the civil/criminal distinction embodied in the good faith requirement was unjustified, unworkable and unwise. 437 U.S. at 321, 98 S.Ct. at 2369. Congress codified the position of the dissenters in LaSalle National Bank by enacting the TEFRA amendments to section 7602. Moutevelis v. United States, 727 F.2d at 315. A summons is now enforceable if it is issued in good faith, i.e., if it is for the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws, and if it is issued before there is a Justice Department referral. 47 The IRS advanced uncontradicted evidence that the summonses in controversy here were issued because Pickel had admitted to the revenue agent that he had borrowed funds from one of the corporate pension funds, and because the revenue agent discovered other indications of fraud in the tax returns of Pickel and his wife, in possible violation of 26 U.S.C. Sec. 7206(1). 12 The Pickels, as the parties opposing the summonses, bore the burden of showing either (1) that the summonses were not issued for a congressionally authorized purpose under Sec. 7602, i.e., were not issued as part of a legitimate investigation into a violation of the tax laws, but were instead issued to gather evidence for another agency or to harass or pressure taxpayers in connection with another matter, or (2) that a Justice Department referral had taken place. This burden has been characterized as a heavy one, LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, and as almost insurmountable. United States v. Garden State National Bank, 607 F.2d 61, 69 (3d Cir.1979). 48 The district court based its decision to quash the summons in part on the fact that the IRS was using its civil arm in order to develop a criminal case against the taxpayer. Investigation of criminal violations of the Internal Revenue Code, however, is a valid purpose for issuance of a summons under Sec. 7602. Moutevelis, 727 F.2d at 315. We do not doubt that portions of the Powell and LaSalle discussions of bad faith retain vitality and that where the taxpayer can prove that the summons is issued solely to harass him, or to force him to settle a collateral dispute, Powell, 379 U.S. at 58, 85 S.Ct. at 255, or that the IRS is acting solely as an information-gathering agency for other departments, such as the Department of Justice, LaSalle, 437 U.S. at 317, 98 S.Ct. at 2367, or the FBI, the summons will be unenforceable because of the IRS's bad faith. Congress has not authorized the IRS to pursue these ends. 13 But the Pickels have not come forward with any evidence that would justify such a conclusion.