In the Matter of MAGNUS, MABEE & REYNARD, INC., Appellant. In the Matter of HURDMAN & CRANSTOUN, Percy C. Magnus, Appellant.
No. 172, Docket 27813.
United States Court of Appeals Second Circuit.
Decided Dec. 6, 1962.
311 F.2d 12
Argued Oct. 25, 1962.
Rock Island presents a new twist in the pseudo-legal doctrine of interposition: it seeks to interpose the Interstate Commerce Commission between railroads and any federal, state, or municipal body attempting to collect an unpaid tax by executing a lien levied on railroad property—even when the railroad concеdes the validity of the tax and the lien, and when payment will avoid a forced sale. There is nothing in the language of subsection 18 of the Interstate Commerce Act and nothing in the legislative history of the Act to lead us to believe that Congress intended any such exaltation of the Commission in this federal system of ours.
The judgment is reversed and remanded with instructions to dissolve the injunction.
Corcoran, Kostelanetz, Gladstone & Lowell, New York City (Boris Kostelanetz, Jules Ritholz, Jon H. Hammer, New York City, of counsel), for appellants.
Before LUMBARD, Chief Judge, and SWAN and MOORE, Circuit Judges.
LEONARD P. MOORE, Circuit Judge.
This is an appeal from an order denying the quashing of Internal Revenue Service summonses issued on June 19, 1961, under
The appellant corporation is not the taxpayer. The records specified in the summons are the corporation‘s, not the taxpayer‘s. From a procedural viewpoint, the petition to quash the summons directed to the corporation was made only by the corporation. The accountants to whom the other summons was directed made no motion to quash. The petition, in effect on behalf of the accountants, was made by the taxpayer himself. The appeals are taken by the corporation as to the summons directed to it and by Percy C. Magnus as to the summons directed to the accountants.
The background faсts reveal that the taxpayer Percy C. Magnus who owns 80% of the stock of the corporation did not file income tax returns for the years 1948 through 1957 or pay any income taxes during this period. After investigation had been commenced, Percy C. and Margaret A. Magnus, his wife, filed delinquent returns for these years which disclosed a gross income for these years in excess of $1,280,000. The primary source of this income was derived from the corporаtion; the accountants, using the corporation‘s books, prepared the delinquent returns. Through the issuance of the summons, the revenue agents sought to obtain access to the corporation‘s books to ascertain what taxes, if any, should have been reported by the taxpayers for the years in question and to relevant papers, records or documents used by the accountants in preparing the returns. The summоnses were issued some ten months before the indictment was returned. They were issued by a Special Agent just beginning his investigation of the taxpayers’ returns, at a time when no final conclusion had, or even could have, been made as to whether criminal action was indicated. However, due to delays resulting from appellant‘s efforts to prevent compliance, the government was forced to secure an indictment against the taxpayers before the summonses could be enforced in order to prevent the statute of limitations on criminal prosecutions from running. The question before us is whether the right to enforcement under those circumstances is thereby nullified and the government forced to resort solely to
“For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, * * *”
The taxpayer, Percy C. Magnus, claims that, since he has been indicted, albeit sоme ten months subsequent to
“To encourage the use of administrative subpoenas as a device for compulsory disclosure of testimony to be used in presentments of criminal cases would diminish one of the fundamental guarantees of liberty. Moreover, it would sanction the perversion of a statutory power. The power under § 3614 [now
Section 7602 ] was granted for one purpose, and is now sought to be used in a direction entirely uncontemplated by the lawgivers.” (118 F.Supp. 248, 251).
The Myers case, which involved a summons issued several days before the criminal prosecution was set for trial, is of a similar effect.
Under the Federal Rules, discovery by the governmеnt is quite limited.
As the Ninth Circuit in Boren v. Tucker, 239 F.2d 767 (1956) made clear, where there is a possibility of tax fraud, the taxpayer is faced with either a 50% penalty or a criminal prosecution or both. In investigating whether a fraudulent return changes the taxpayer‘s liability, the Internal Revenue Service must weigh the possibility of criminal prosecution.
To prevent enforcement of such summonses because compliance was resisted for such a lengthy period that the government was forced to return an indictment to prevent the criminal statute of limitations from running would encourage litigants to resist such summonses wholly for the purpose of delay. Without questioning the reasons for appellants’ tactical efforts in this case, the fact remains that to quash the summonses under thеse facts would lead to that result. The appellants here failed to file any returns until September, 1959, for the years 1947 through 1957, subsequent to the commencement of an examination into their affairs by the Internal Revenue Service. The summonses as originally issued came well within the purposes designated in the statute, and we deem the time of issuance to be the significant date on which to base a determination of the validity of a
The gоvernment argues that the corporation has standing only to raise objections directly affecting it and that the taxpayer, Percy C. Magnus, has no standing to quash summonses served upon third parties when the summonses do not require the production of the taxpayer‘s property. Here the corporation would have standing to object to the enforcement of a summons issued for a purpose outside of the scope of
The taxpayer has standing to object only if the use of the summons is an impermissible ruse to obtain the taxpayer‘s books and records or other material or information in violation of the taxpayer‘s constitutional rights. Again, however, no facts have been adduced by the taxpayer to show any such purpose. To the contrary, as previously mentioned, thе summonses were issued some ten months before the indictment.
One additional problem is presented for disposition on this appeal. The summons issued against the corporation is extremely broad. It calls for the production at the office of the Internal Revenue Agent of the following books and records for the years 1947 to 1957: (1) General Ledger; (2) General Journal; (3) Cash Receipts Book; (4) Cash Disbursements Book; (5) Bank Statements and Cancelled Checks; (6) Stock Certificate Book; (7) Minute Book.
However, we cannot be certain of the exact direction of the agent‘s search at the present time. The judge below, in anticipating this problem, indicated that if satisfactory arrangements could not be made by the parties, “an application for directions can be made to the court.” We think this is the best way to deal with this situation. A considerable degree of discretion should be vested in the district courts to work out the appropriate limitations on which records are subject to investigation and the best location of such an inspection for all concerned. It may well be that the examinations can be conducted at the offices of the corporation and the accountants. If the parties are unable to agree, the district judge is empowered tо find that solution leading to the most efficient examination of such records consonant with the least possible interference with the everyday conduct of the corporation‘s business.
Affirmed.
LUMBARD, Chief Judge (concurring).
I concur with my brothers in affirming the ruling below and in their resolution of the substantive issues presented on this appeal. Because I am troubled by the growing practice of attempting to impede tax investigations by a series of oppositions to the government‘s subpoenas, I deem it advisable to state my views regarding the standing of these appellants to raise the objections which they assert.
The corporation objects to enforcement of the summons served on it on the following grounds:
“1. Enforcement of the summons is sought for a purpose outside the scope of the statute authorizing the use of the summons;
“2. Enforcement of the summonses [sic] would permit pre-trial discovery in violation of the Federal Rules of Criminal Procedure;
“3. Inspection of the corporation books would violate the provisions of the Internal Revenue Code regulating such inspections;
“4. The description of the documents in the summons lacks reasonable certainty and the documents described are not material and relevant to the inquiry.”
Brief for Appellants, pp. 3-4. The taxpayer objects to enforcement of the summons served on the accountants only on the first two grounds stated. Since each appellant has standing to assert only those objections which affect rights personal to it or him, I would hold that the corporation has standing to raise grounds (1), (3), and (4), above, and that the taxpayer has standing to raise only ground (2).
It is, of course, appropriate for a party served with a summons of the Internal Revenue Service pursuant to
The second ground for objection raises essentially the same issues as the first, inasmuch as it asserts in effect that the purpose for which enforcement is sought lies without the statutory authorization. But the right on which it focuses is the right of the taxpayer to be free of pre-trial discovery by the government beyond that allowed by
The taxpayer has no standing to object to enforcement of the summons served on the accountants on the first ground above. We have already held that a taxpayer may not assert the constitutional rights of another sought to be examined in conneсtion with the former‘s tax liability. Foster, supra, 265 F.2d at 187-188. That ruling is applicable here, where the taxpayer claims that a third-party summons is unauthorized by statute. He does, however, have the immediate, personal interest necessary for standing to raise the objection that enforcement of the summons against the accountants will constitute improper pre-trial discovery in the criminal action now pending against him. Compare my concurring opiniоn in Foster, supra, at 189.
Ordinarily, a summons “is personal to the person to whom it is directed and strangers have no standing either to substitute themselves for the person to whom it is directed, or to quash it.” Albachten v. Corbett, 156 F.Supp. 863, 864 (S.D.Cal.1957). And, as in this case with respect to the summons served on the corporation, the person summoned can, if he chooses, make an indicted taxpayer‘s objection for him in the form of the first objection above. This was the procedure used in Application of Myers, 202 F.Supp. 212 (E.D.Pa.1962), and United States v. O‘Connor, 118 F.Supp. 248 (D.Mass.1953). But if the person summoned chooses not to contest enforcement, a taxpayer‘s rights in a pending criminal action might go unprotected unless he is permitted to assert them in the enforcement proceedings. The rules of standing are not so rigid that a court whose authority is sought in aid of a summons must keep its doors closed to the taxpayer in such a situation. Neither the taxpayer nor the government would be well served by postponing until trial a hearing of the claim that pre-trial discovery violated the Federal Rules of Criminal Procedure; at that stage it might be very difficult to unravel properly obtained evidence from that which, di-
Since in my view one оr the other of the appellants has standing to raise each of the objections set out above, it is appropriate for me to record my concurrence on the merits.