UNITED STATES v. GENSER, 582 F.2d 292 (3rd Cir. 1978)
UNITED STATES OF AMERICA, APPELLEE, v. LESTER GENSER AND LAWRENCE FORMAN, APPELLANTS.
Nos. 76-2623 and 76-2624.
United States Court of Appeals, Third Circuit.
Argued October 4, 1977.
Decided August 29, 1978.
[1] OPINION OF THE COURT – BIGGS, Circuit Judge. 2
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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN
OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]
Page 294
Irving R. Segal, Herbert S. Mednick, James D. Fornari,
Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for
appellants; Zuckerman & Aronson, Newark, N. J., of counsel.
John J. Barry, Asst. U.S. Atty., Jonathan L. Goldstein, U.S.
Atty., Maryanne T. Desmond, Asst. U.S. Atty., Appeals Div.,
Newark, N. J., for appellee.
Appeal from the United States District Court for the District
of New Jersey.
Before SEITZ, Chief Judge, and BIGGS and HUNTER, Circuit
Judges.
[2] The appellants, defendants below, Genser and Forman, appeal
from their convictions by a jury for violations of 18 U.S.C. §§
2, 371, and 26 U.S.C. §§ 7201, 7206(1). The indictment charged
both appellants with conspiracy to evade personal and corporate
income taxes, and with the substantive crimes of evading
corporate and personal income taxes, and subscribing to corporate
tax returns which understated their adjusted gross income. The
appeals were consolidated pursuant to the rules of this court and
are properly before us pursuant to 28 U.S.C. § 1291.
[3] The appellants assert (1) that there is insufficient evidence
to support their convictions on the personal income tax charges;
(2) that the trial court erred in permitting an agent of the
Internal Revenue Service to testify as to the results of an audit
of their corporation's books, which audit the agent did not
conduct or supervise and which was not introduced into evidence;
and (3) that the United States procured some of its evidence
illegally by administrative summonses
Page 295
pursuant to 26 U.S.C. § 7602, and that the district court
erred in not granting an evidentiary hearing. They contend that
such a hearing would have demonstrated that the administrative
summonses were issued after the United States had formed an
intention to prosecute the appellants for income tax evasion and
fraud, and that therefore the evidence procured by the summonses
was tainted and should have been suppressed, and a new trial
granted.
[4] Lawrence Forman and Lester Genser were, respectively, the
president and vice president of Genser-Forman, Inc. (Corporation)
from 1957 until early 1973. The Corporation was the sole
distributor in the northeastern United States of Triumph cars and
parts for British Leyland Motors, Inc. (British Leyland) until
the Corporation was dissolved in 1973. The Corporation bought
cars and parts from British Leyland and resold them to a network
of automobile dealers located in its exclusive area of
distribution. From 1969 to 1973, the years encompassed by the
indictment, the Corporation purchased and imported approximately
6000 cars per year from British Leyland.
[5] By contractual agreement between the Corporation and British
Leyland, British Leyland bore all of the expenses of repair to
"marine damage" to the cars occurring during their transportation
from England to the United States. Although initially British
Leyland reimbursed the Corporation for its actual repair expenses
in accordance with an appraiser's estimate, after 1966 it
followed a policy of paying the Corporation a fixed marine damage
reimbursement of $36.00 for every Triumph delivered to the
Corporation. In addition, British Leyland reimbursed the
Corporation for repairs done by the Corporation under warranty,
for obsolete parts returned to British Leyland by the
Corporation, for discontinued models of automobiles remaining in
inventory, for one-third of the Corporation's advertising costs,
and for part of the rental expenses of a New York City showroom.
Dealers to whom the Corporation distributed Triumph cars
reimbursed the Corporation for its transportation expenses.
[6] The charges brought against appellants stem from their handling
of these funds. From 1967 until early 1973, the moneys received
from British Leyland and the Triumph dealers were deposited,
pursuant to the directions of Genser and Forman, in a corporate
account maintained in the name of Genser-Forman, Inc., in the
City National Bank of Hackensack (Hackensack Account). These
funds were kept separately from other funds of the Corporation,
which were kept in the First National State Bank, Millburn-Short
Hills Branch. Genser and Forman were the only signatories on the
Hackensack Account.
[7] From 1969 to 1973, the period encompassed by the indictment,
nearly $2,200,000, representing sums paid to the Corporation from
British Leyland and the dealers, was diverted to the Hackensack
Account. None of the Corporation's books and records, and none of
its tax returns, reflected any of these funds. Nor were the
Corporation's accountants aware that the Corporation had such
funds, either as income or as offsets to deducted expenses; the
accountants did not perform audits of the Corporation's expense
accounts and ledgers, but merely assembled books and records
prepared by the Corporation from which the Corporation's tax
returns were prepared. Had the accountants been aware of the
funds and the sources thereof, the funds would have either
increased the Corporation's cash account or decreased an expense
account, with the result that the Corporation's profits would
have been greater and its federal income tax liability larger.
The government calculated that for the years 1970 to 1973,
inclusive, the Corporation had an additional tax liability of
$884,487.02 and additional gross profits of $1,830,267.76.[fn1]
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[8] The funds deposited in the Hackensack Account were used by the
appellants to purchase a variety of tax-exempt municipal bearer
bonds through third party nominees. From 1969 to 1973, a total of
$2,084,975.34 — representing more than 100 bond transactions —
was withdrawn from the Hackensack Account to effectuate the
purchase of the bonds, which were kept in corporate safe deposit
boxes in the Millburn-Short Hills branch of the First National
State Bank. The books, records, and tax returns of the
Corporation never reflected the acquisition of the bonds, and the
Corporation's accountants were never informed that the bonds were
purchased. On the theory that the appellants had appropriated the
corporate moneys in the Hackensack account to their own use by
purchasing bonds for their own benefit, and that these moneys
thus represented unreported income to the appellants, the
government calculated that from 1969 to 1972, inclusive, Genser
had additional personal taxable income of $1,108,438.81 and
additional tax liability of $777,777.64, while Forman had
additional personal taxable income of $914,107.36 and additional
tax liability of $645,355.69.[fn2]
[9] In early 1973 British Leyland abandoned its distributorship
arrangement and bought out the Corporation. Following the
acquisition, the Corporation, pursuant to § 337 of the Internal
Revenue Code, liquidated and distributed all of its assets. As a
result of the liquidation all assets of the Corporation became
the sole and exclusive property of Genser and Forman and came
under their personal dominion and control between October 1972
and October 1973.
[10] Appellants argue that the evidence was insufficient to support
their convictions on personal income tax evasion in that the
government failed to prove beyond a reasonable doubt that they
exercised personal dominion and control over the funds in the
Hackensack Account and the proceeds thereof (the bonds) prior to
the liquidation of the Corporation. Specifically, they contend
that the bulk of the government's proofs establish only that
appellants exercised personal dominion and control over the bonds
after the Corporation was liquidated (at which point, they
stress, the Corporation's assets were rightfully theirs),[fn3]
and that the government on the whole failed to show by
documentary evidence any exercise of personal dominion and
control prior to the Corporation's liquidation.
[11] Viewing the evidence, as we must, in the light most favorable
to the government, Glasser v. United States, 315 U.S. 60, 80,
62 S.Ct. 457, 86 L.Ed. 680 (1942), we think that the evidence is
sufficient to secure appellants' convictions. Rather than detail
all the evidence presented on this issue, we think it sufficient
to cite the following in support of our conclusion:
[12] (1) More than 100 bond purchase transactions were paid for with
funds from the
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Hackensack Account. Virtually all these purchases were tied back
to the Hackensack bank statements by the amount appearing on the
bond purchase documentations, which also indicated the types of
bonds acquired and the serial numbers. The government also
introduced coupon collection letters (Exhibit G-26), which
recorded bond coupon negotiations by the appellants prior to
liquidation of the Corporation. More than one-half of the
transactions were further linked to appellants by interest
coupons cashed or otherwise used by them or their relatives
bearing the same serial numbers as the bonds purchased with the
Hackensack moneys. Although, as appellants stress, the coupons
actually introduced at trial by the government were dated and
cashed at various times after liquidation, testimony
established that within one year after coupons have been
negotiated, they are destroyed by the paying agent, bank, or
issuing authority. We think that, considering the other evidence
of appellants' preliquidation dominion and control, reviewed
infra, the trial court did not abuse its discretion in
admitting coupons cashed after 1973, the only coupons which the
government could physically produce.
[13] To take but one example, the evidence shows that on March 26,
1971, four bonds, The Board of Education of the Township of
Union, New Jersey, serial numbers 723 through 726, were purchased
from Hanauer, Stern & Co. for $15,793.44. The Hackensack bank
statement recorded a withdrawal on March 30, 1971, of $15,793.44.
Each of the four bonds bore numerous coupons, each worth $102.50,
payable every six months. According to the coupon collection
letters, every six months, from 1971 onward, $410.00 (4 x
$102.50) was charged to appellants' personal account. Although
the collection letters contain the name of the depositor, the
issuing authority, and the value of the coupons, they do not list
the serial numbers of the coupons or bonds being negotiated.
Because, as stated, coupons are destroyed within one year after
negotiation, the only coupons physically produced by the
government in connection with these particular bonds were dated
February 1976, long after liquidation. Appellants thus argue that
due to the lack of serial numbers on the coupon collection
letters, and due to the lack of coupons cashed prior to
liquidation, the government failed to prove that coupons
negotiated by them prior to liquidation came from the specific
bonds purchased with Hackensack funds in 1971. However, we think
that in light of all the evidence introduced, this was a matter
for the jury.
[14] (2) The Corporation's tax returns from 1969 to 1973 failed to
reflect the existence of the Hackensack Account or the bonds
purchased therewith either in the asset column of the balance
sheet under "Government obligations" or in Schedule M-1, 7,
"Tax-exempt interest."
[15] (3) the manner in which the bonds were purchased suggests that
appellants did not regard them as Corporate property even at the
time of their purchase. Appellants' orders for bonds were placed
by third parties for customer's accounts which did not indicate
the customer's name. With respect to certain bonds purchased for
Genser through an officer of the City National Bank in
Hackensack, normal banking procedures regarding purchase and
delivery of the bonds apparently were not followed; although the
bank maintained a bound volume in which all bond purchases were
listed along with the purchaser's signatures, information
relative to Genser's purchases were kept in a separate file
maintained only for him. Moreover, several purchases were
apparently designed to be divided equally between Genser and
Forman; on numerous occasions, where two purchases of bonds from
the same issuer had slightly different purchase prices, a check
for the exact difference made payable to cash and signed by
Genser or Forman would be issued on the Hackensack Account in
order to equalize appellants' holdings. One purchase executed for
Genser in 1967 included a change of order slip directing the
investment company to split the purchase equally in two;
thereafter, both appellants negotiated coupons from this bond.
Page 298
[16] (4) Appellants concede that in 1970 or 1971, Richard Genser,
appellant Genser's son, received several $5000 New Jersey
Turnpike Authority bonds as a gift from his father. The bonds,
which bore serial numbers 11499-11507, were admitted into
evidence. Other evidence established that these bonds were
purchased with funds from the Hackensack Account in 1970. On July
15, 1975, Richard Genser cashed six $130 coupons, number 14 in
the coupon series, from these same bonds. Furthermore, Richard
Genser testified that in 1972 or 1973 he borrowed New Jersey
Turnpike Authority bonds, in the face amount of $30,000 or
$35,000, from his father as collateral for a loan at First
National State Bank. He indicated that he believed the bonds to
be the same type as those he had received as a gift from his
father in 1970 or 1971.
[17] (5) John Genser, another of appellant Genser's sons, testified
that between 1968 and 1970, he received coupons, totaling $4035
annually, from New York Port Authority bonds held by his father,
and that he, John, cashed the coupons and received the proceeds.
In 1973 or 1974 he received from his father the same bonds (with
a face value of $120,000) from which those coupons had been
clipped. The record shows that New York Port Authority bonds were
among those purchased with money from the Hackensack Account.
John Genser testified that he accompanied his father to the First
National Bank in Millburn on one occasion, and that his father
may have gotten the bonds there and later given them to him at
home.
[18] (6) Samuel Albanese, a bank officer at the First National State
Bank, Millburn-Short Hills branch, testified that (at an
unspecified time) proceeds of coupons were deposited by Genser in
his personal account at that bank. Bank records demonstrate that
prior to 1973 at least some of the deposits took place shortly
after Genser had access to the safety deposit boxes which were
maintained by the Corporation at the bank and which appellants
concede were used to store the bonds. The government produced
numerous coupons from bonds purchased with money from the
Hackensack Account, which were negotiated by Genser at the First
National Bank during 1975 and 1976.
[19] The appellants argue that it was error for the trial judge to
allow Special Agent Dorgeval to testify as an expert witness
about his opinions concerning the results of an IRS audit of the
appellants' records, since Dorgeval did not participate in or
supervise the audit and the audit itself was not introduced into
evidence. Dorgeval testified, inter alia, that based upon his
own examination of the Corporation's books and records, the money
placed by the appellants into the Hackensack account constituted
unreported income. While the record is unclear as to whether
Dorgeval relied upon an audit conducted solely by other agents,
which audit was not admitted into evidence, assuming arguendo
that he had done so, his testimony would not have been rendered
inadmissible.
[20] Federal Rule of Evidence 703 states: "The facts or data in the
particular case upon which an expert bases an opinion or
inference may be those perceived by or made known to him at or
before the hearing. If of a type reasonably relied upon by
experts in the particular field in forming opinions or inferences
upon the subject, the facts or data need not be admissible in
evidence." Id. The testimony adduced from Dorgeval, even if
partially based upon hearsay, was in compliance with the rule.
The principal question is whether any out-of-court statements and
reports relied upon by the expert are such that he can reasonably
rely upon them and whether his reliance is reasonable under the
facts of the case. 3 Weinstein's Evidence, ¶ 703[03]; United
States v. Sims, 514 F.2d 147, 149 (9th Cir. 1975). We fail to
discern any abuse of discretion by the trial judge in allowing
Dorgeval to rely in part — if he did — upon the government audit
in reaching his conclusions, especially since the appellants
attack the reliability of the audit papers primarily on the
ground that IRS
Page 299
agents acted improperly in issuing administrative
summonses.[fn4]
[21] The appellants urge that because the audit papers were not
admitted into evidence and because the government did not use the
testimony of the agents who did prepare the audit, they were
denied the right to cross-examine the auditing agents'
conclusions and underlying documentation. However, the
confrontation clause does not by itself prohibit the use of
hearsay testimony. See California v. Green, 399 U.S. 149, 90
S.Ct. 1930, 26 L.Ed.2d 489 (1970). Rather, it focuses upon the
right of the accused to "`confront and probe each of his
accusers.'" United States v. Williams, 447 F.2d 1285, 1289 (5th
Cir. 1971) (footnote and citation omitted). Here, at the most,
Dorgeval was testifying to his own opinion, based upon the audit,
and the appellants had a full opportunity to confront his
opinions and reduce their impact in any manner available,
including questioning his reliance upon the audits without having
been involved in the auditing process himself. See Williams,
supra, at 1288-90.
[22] We conclude that no error was committed by the trial judge in
admitting Dorgeval's testimony.
[23] Appellants contend that portions of the evidence upon which
their convictions were based were obtained by means of illegally
issued Internal Revenue Service (IRS) administrative summonses
and thus should have been excluded by the trial court along with
the tainted fruits thereof. They also assign as error the trial
court's refusal to hold an evidentiary hearing to determine
whether the administrative summonses, served on third parties
pursuant to 26 U.S.C. § 7602, were issued in good faith and prior
to a recommendation of criminal prosecution.[fn5]
[24] Section 7602, 26 U.S.C. § 7602, permits the IRS to issue
summonses to persons to obtain testimony and documents for the
limited 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
collecting any such liability."[fn6] In Donaldson v. United
States,
Page 300
400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971), the
Supreme Court, interpreting its earlier decision in Reisman v.
Caplin, 375 U.S. 440, 446, 84 S.Ct. 508, 11 L.Ed.2d 459
(1964), held that "under § 7602 an internal revenue summons may
be issued in aid of an investigation if it is issued in good
faith and prior to a recommendation for criminal prosecution."
Id. 400 U.S. at 536, 91 S.Ct. at 545. Accordingly, at several
stages during the proceedings below, appellants sought an
evidentiary hearing to determine whether the IRS had complied
with these requirements.[fn7] They contended that if the
summonses failed to meet the standards set forth in Donaldson,
any evidence used at trial which was acquired by means of the
summoned information should be suppressed. In denying the
appellants' motions to suppress and to hold an evidentiary
hearing, the trial judge ruled, inter alia, that appellants had
failed on the record to demonstrate any abuse of process and that
even if their allegations could be fully substantiated at an
evidentiary hearing, appellants lacked standing to assert their
claims under the principles recently announced in United States
v. Miller, 425 U.S. 435, 96 S.Ct. 1619, 48 L.Ed.2d 71
(1976).
[25] The question of whether or not a taxpayer has standing at trial
to attack the validity of a § 7602 summons issued to third
parties who voluntarily complied and to have the fruits of an
improper summons excluded from evidence has never been addressed
directly by this court or by the Supreme Court insofar as we are
aware. Previous decisions, of course, have established that the
person to whom a summons is issued, whether the taxpayer or a
third party, may refuse to comply with the summons, thereby
triggering judicial enforcement proceedings at which the legality
of the summons can be determined. Reisman v. Caplin, supra;
Donaldson v. United States, supra.[fn8] Where an administrative
summons is issued to a third party, such as the taxpayer's bank,
the taxpayer may attempt to restrain voluntary compliance by the
third party,[fn9] assuming that he is aware of the issuance of
the summons prior to compliance,[fn10] and he may challenge the
validity of the summons by attempting to
Page 301
intervene in the ensuing enforcement proceedings.[fn11]
[26] As for the grounds upon which the person summoned or the
intervenor may attack the summons in the enforcement proceeding,
Reisman held that one proper defense is "that the material is
sought for the improper purpose of obtaining evidence for use in
a criminal prosecution." 375 U.S. at 449, 84 S.Ct. at 513. This
statement was construed in Donaldson to mean that judicial
enforcement of a summons may be denied only where the sole
object of the investigation is to gather data for a criminal
prosecution, id. 400 U.S. at 553, 91 S.Ct. 534, and that a
summons would thus be enforced if issued in "good faith" and
"prior to a recommendation for criminal prosecution." Id. at
536, 91 S.Ct. at 545.
[27] Most recently, in United States v. LaSalle National Bank, ___
U.S. ___, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), the Supreme Court
explained the Donaldson test as follows:
In summary, then, several requirements emerge for
the enforcement of an internal revenue summons.
First, the summons must be issued before the Service
recommends to the Department of Justice that a
criminal prosecution, which reasonably would relate
to the subject matter of the summons, be undertaken.
Second, the Service at all times must use the summons
authority in good-faith pursuit of the
congressionally authorized purposes of § 7602. This
second prerequisite requires the Service to meet the
Powell standards of good faith.[fn12] It also
requires that the Service not abandon in an
institutional sense . . . the pursuit of civil tax
determination or collection.
[28] Id. at ___, 98 S.Ct. at 2368, (footnote omitted). Thus,
according to LaSalle, the IRS may not in good faith, by means
of § 7602 summonses, gather evidence solely for a criminal
investigation.[fn13] Whether an investigation has solely criminal
purposes is to be determined not merely by reference to the
intent of the agent issuing the summons, but by "an examination
of the institutional posture of the IRS." Id.[fn14]
Page 302
[29] In United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975),
this court carefully formulated procedural guidelines for use in
enforcement proceedings and provided that an evidentiary hearing
is an "integral part" of those proceedings. Under McCarthy, the
IRS must be prepared to make a preliminary showing that the
investigation has a legitimate purpose and that the inquiry may
be relevant to that purpose, that the information sought is not
already in the government's possession, and that the government
has followed the procedural steps required by the Internal
Revenue Code. The burden then shifts to the opposing party to
establish any defenses or to prove that enforcement would
constitute an abuse of the court's process.[fn15] If the district
court concludes that it cannot fairly decide the case on the
record before it, it may direct further proceedings, including
discovery, if requested. Id. at 372-73. See United States v.
Cortese, 540 F.2d 640 (3d Cir. 1976); United States v. First
National State Bank of New Jersey, 540 F.2d 619 (3d Cir. 1976),
cert. denied, 431 U.S. 954, 97 S.Ct. 2674, 53 L.Ed.2d 270
(1977); United States v. Lafko, 520 F.2d 622 (3d Cir.
1975).[fn16] Other courts have established similar procedures.
See United States v. Wright Motor Company, 536 F.2d 1090 (5th
Cir. 1976); United States v. Zack, 521 F.2d 1366 (9th Cir.
1975); United States v. Church of Scientology, 520 F.2d 818
(9th Cir. 1975); United States v. Turner, 480 F.2d 272 (7th
Cir. 1973); United States v. Salter, 432 F.2d 697 (1st Cir.
1970).
[30] In the instant case, however, none of the third parties upon
whom summonses were served contested their validity in court.
Because the third parties voluntarily complied with the
summonses, no enforcement proceedings were ever instituted by the
IRS. Moreover, since appellants, at least in most instances,
apparently had no knowledge that summonses had been issued until
after the third parties had complied,[fn17] they were unable to
stay compliance and thereby necessitate the institution of
enforcement proceedings in which they might have intervened.
[31] Nevertheless, appellants rely upon Donaldson v. United States
and United States v. Friedman for the proposition that even
where the third party voluntarily complies with a § 7602 summons,
the taxpayer's right to challenge the validity of the summons is
preserved at the trial level. In Donaldson, the IRS issued §
7602 summonses to Donaldson's former employers for the production
of the employers' business records relating to Donaldson's
employment. Donaldson obtained a court order staying compliance
by the third parties. The IRS sought judicial enforcement of the
summonses, and Donaldson moved to intervene, alleging in part
that the IRS investigation was criminal in nature. The Court
upheld the district court's denial of Donaldson's motion to
intervene on the grounds that intervention was a permissive, not
a mandatory right, and that Donaldson's interest, when balanced
against the need to facilitate
Page 303
IRS investigations, was of insufficient magnitude to warrant
intervention: "Donaldson's only interest — and of course it looms
large in his eyes — lies in the fact that those records
presumably contain details of Acme-to-Donaldson payments
possessing significance for federal income tax purposes. This
asserted interest, however, is nothing more than a desire by
Donaldson to counter and overcome Mercurio's and Acme's
willingness, under summons, to comply and to produce records. The
nature of the `interest' urged by the taxpayer is apparent from
the fact that the material in question (once we assume its
relevance) would not be subject to suppression if the government
obtained it by other routine means, such as by Acme's independent
and voluntary disclosure prior to summons, or by way of
identifiable deduction in Acme's own income tax returns, or
through Mercurio's appearance as a trial witness, or by subpoena
of the records for trial. This interest cannot be the kind
contemplated by [Federal Rule of Civil Procedure] Rule 24(a)(2)
when it speaks in general terms of `an interest relating to the
property or transaction which is the subject of the action.' What
is obviously meant there is a significantly protectable
interest." 400 U.S. at 531, 91 S.Ct. at 542. However, the Court
continued: "And the taxpayer, to the extent that he has such a
protectable interest, as, for example, by way of privilege, or
to the extent he may claim abuse of process, may always assert
that interest or that claim in due course at its proper place in
any subsequent trial. Cf. United States v. Blue,
384 U.S. 251, 86 S.Ct. 1416, 16 L.Ed.2d 510 (1966)." Id. at
531, 91 S.Ct. at 542 (emphasis added). Thus, the Donaldson
Court, in its effort to facilitate the investigatory mandate of
the IRS, merely postponed until trial the time at which a
taxpayer can demand adjudication of the propriety of a third
party summons.[fn18]
[32] In Friedman, the IRS brought an enforcement action to compel
compliance with summonses issued to third parties in connection
with an investigation into taxpayers' liability. The taxpayers
were permitted to intervene, and they attempted to resist
enforcement on the ground that the summonses sought evidence for
a criminal prosecution. The district court ordered the summonses
enforced and the taxpayers appealed. The taxpayers were unable to
obtain a stay of the enforcement orders pending appeal and the
third parties complied with the summonses. Because of this
compliance, the IRS moved to dismiss as moot the appeal from the
enforcement orders. In refusing to dismiss the appeal, this court
stated: "Although Friedman has complied with the court's order,
the legality of that order is still being challenged by the
taxpayer intervenors. If the taxpayers were to prevail in their
contention that all summonses were illegal because they were
issued
Page 304
solely to gather evidence for use in a criminal prosecution,
then the records acquired from Friedman would have been obtained
unlawfully. Such a ruling could affect the possible use of these
records in any subsequent criminal or civil proceeding brought
against the taxpayers. . . . We conclude that the motion to
dismiss the appeal . . . should be denied because the controversy
over these records is still very much alive." 532 F.2d at 931
(emphasis added).
[33] Although the trial judge in the instant case conceded that
appellants' claims may have been viable prior to the Supreme
Court's decision in United States v. Miller, 425 U.S. 435, 96
S.Ct. 1619, 48 L.Ed.2d 71 (1976), he held that Miller deprived
appellants of any standing which they might claim under
Donaldson and Friedman to assert at trial that administrative
summonses directed to third parties who voluntarily complied were
legally defective. In Miller, respondent made a pretrial motion
to suppress copies of bank records relating to his accounts at
two banks, both of which maintained the records pursuant to the
Bank Secrecy Act of 1970 (Act), on the grounds that the grand
jury subpoenas duces tecum used to obtain the records were
defective[fn19] and that the records had thus been seized in
violation of the Fourth Amendment. The district court denied the
motion to suppress, but the court of appeals reversed, holding
that a depositor's Fourth Amendment rights were violated when
bank records maintained under the Act are obtained by means of a
defective subpoena and that evidence so obtained must be
suppressed. The Supreme Court reversed on the ground that the Act
created no Fourth Amendment rights in the depositor and that
therefore respondent possessed no Fourth Amendment interest that
could be vindicated by a challenge to the subpoenas.[fn20] The
Court stated: "Since no Fourth Amendment interests of the
depositor are implicated here, this case is governed by the
general rule that the issuance of a subpoena to a third party to
obtain the records of that party does not violate the rights of a
defendant, even if a criminal prosecution is contemplated at the
time the subpoena is issued. California Bankers Assn. v.
Shultz, 416 U.S. 21 at 53, 94 S.Ct. 1494, 39 L.Ed.2d 812;
Donaldson v. United States, 400 U.S. 517, 537, 91 S.Ct. 534, 27
L.Ed.2d 580 (1971) (Douglas, J., concurring). Under these
principles, it was firmly settled, before the passage of the Bank
Secrecy Act, that an Internal Revenue Service summons directed to
a third-party bank does not violate the Fourth Amendment rights
of a depositor under investigation. See First National Bank v.
United States, 267 U.S. 576, 45 S.Ct. 231, 69 L.Ed. 796 (1925),
aff'g 295 F. 142 (S.D.Ala. 1924). See also, California Bankers
Assn. v. Shultz, supra, 416 U.S. at 53, 94 S.Ct. 1494;
Donaldson v. United States, 400 U.S., at 522, 91 S.Ct. 534."
425 U.S. at 444, 96 S.Ct. at 1624. In holding that respondent
lacked "the requisite Fourth Amendment interest" to contest the
validity of the subpoenas, the Court noted that there was "no
occasion for us to address whether the subpoenas complied with
the requirements outlined in Walling. The banks upon which they
were served did not contest their validity." Id. at 446 n.9, 96
S.Ct. at 1626.[fn21]
[34] The trial judge in the instant case characterized Miller as a
"standing" case and
Page 305
ruled that just as Miller, in the absence of a constitutionally
based interest, lacked standing to press his challenge to the
validity of the subpoenas, so defendants herein "simply lack
standing . . to assert a claim that an administrative summons
directed at a third party (who thereafter complied voluntarily)
was defective." According to the trial judge, any assertion of
standing based upon Donaldson and Friedman was "washed away"
in the wake of Miller. In so holding, the trial judge relied
upon the recent decision of United States v. Sand,
541 F.2d 1370 (9th Cir. 1976), in which the Court of Appeals
for the Ninth Circuit stated: "Both defendants sought to exclude
Sand's bank records which the government obtained from several
banks by using civil tax summonses. The crux of their objections
was that the IRS investigation was from its inception criminal
and that the use of IRC § 7602 summonses in aid of a solely
criminal investigation was improper, citing Donaldson v. United
States, 1971, 400 U.S. 517, 531-36, 91 S.Ct. 534, 27 L.Ed.2d
580. However, the Court held in United States v. Miller,
425 U.S. 435, 96 S.Ct. 1619, 48 L.Ed.2d 71 (1976), that a
depositor has no standing to challenge an IRS summons directed at
his bank. Id. at [444], 96 S.Ct. 1619. Hence, the district court
was correct in denying the motion to suppress." 541 F.2d at 1374
(emphasis added). Cf. United States v. Herndon,
536 F.2d 1027 (5th Cir. 1976).
[35] We decide, however, that Miller does not deprive the
appellants of standing in this case and that Sand erroneously
misconstrued the breadth of Miller's holding. The Miller
court was not faced with the question of whether or not a
taxpayer has standing to contest the legality of a § 7602
summons. Rather, Miller dealt only with a Fourth Amendment
challenge to an allegedly improper grand jury subpoena. It
appears that Miller's claim of defectiveness was intertwined with
his Fourth Amendment argument,[fn22] and the Court appropriately
framed its holding in constitutional terms.[fn23] Because "Fourth
Amendment rights are personal rights which . . . may not be
vicariously asserted," Alderman v. United States, 394 U.S. 165,
174, 89 S.Ct. 961, 966, 22 L.Ed.2d 176 (1969), the Court did not
have to reach the question of the validity of the subpoenas since
only the banks, under a traditional Fourth Amendment analysis,
had standing to raise it.[fn24]
[36] In the instant case, however, appellants' standing to challenge
administrative summonses derives not from the Fourth
Amendment,[fn25] but rather from a federal statute, § 7602, and
from the gloss placed upon that statute by the federal courts. We
think that in consistently holding that the IRS may not use
administrative summonses
Page 306
to gather evidence in an exclusively criminal investigation, the
courts from Reisman and Donaldson onward, up to and including
LaSalle, have identified a protectable interest in the taxpayer
not to be the target of an exclusively criminal investigation in
which government agents have acted beyond their statutory
authority. If the civil limitation placed upon § 7602 summonses
is not for the taxpayer's benefit, we have difficulty in
discerning the party for whose protection it was designed. While
the third party recipients of summonses may well be motivated to
refuse to comply on the grounds that the summonses are overbroad
or unreasonably burdensome, see e.g., United States v. Friedman,
supra, at 931, 933-34; United States v. Dauphin Deposit Trust
Co., 385 F.2d 129 (3d Cir. 1967), cert. denied,
390 U.S. 921, 88 S.Ct. 854, 19 L.Ed.2d 981 (1968), there is
little reason to expect them to raise the defense that the
summonses were issued to further a solely criminal investigation
of the taxpayer. Cf. United States v. Continental Bank & Trust
Co., 503 F.2d 45 (10th Cir. 1974). This is not a matter of
the third party bank's interest, but of the taxpayer's. Thus, the
courts have provided that the taxpayer may challenge the validity
of a summons issued to a third party either at the investigatory
stage or, if necessary, at the trial level. Reisman v. Caplin;
Donaldson v. United States; United States v. LaSalle National
Bank; United States v. Friedman; United States v. Lafko; United
States v. McCarthy, supra.
[37] As has frequently been noted, the rationale of these cases
derives from the distinct roles traditionally accorded the
investigatory functions of the grand jury, on the one hand, and
the IRS, on the other hand. Grand jury subpoenas, such as those
involved in Miller, are used to garner evidence to be presented
to a federal grand jury, whose sole purpose is to investigate
criminal activity. It is exclusively a criminal investigatory
tool. But an IRS administrative summons is a process essentially
civil in character. While a summons may result in obtaining
evidence which might ultimately find its way to a grand jury, the
statutory authority for its issuance is civil and the evidentiary
objective at the time of its issuance must be civil in nature.
Thus, the grand jury apparatus has traditionally been the means
by which evidence required to form the basis of a contemplated
criminal charge can be compulsorily produced, and the courts, in
construing § 7602, have identified a protectable interest,
assertable by the taxpayer, in preventing the IRS from
encroaching upon what has traditionally been the sole province of
the grand jury.[fn26]
Page 307
[38] Were Miller to be held dispositive of the present case,
serious doubt would be cast upon those decisions, including
Donaldson and LaSalle, which hold that IRS summonses are
improper if used in furtherance of an IRS investigation conducted
solely for criminal purposes, since, as stated above, that
limitation makes little sense if the taxpayer — the only party
properly motivated to challenge the summons on the ground of
illegality — is not permitted to do so. Miller, however, by its
very terms suggests that it was not intended to disturb the
vitality of Donaldson. The Miller Court referred to
Donaldson only for the proposition that "an IRS summons
directed to a third party bank does not violate the Fourth
Amendment rights of a depositor under investigation." 425 U.S.
at 444, 96 S.Ct. at 1624 (emphasis added). Even at the time
Donaldson was decided, as the Miller Court notes, it was well
established that the issuance of a summons to a third party does
not violate the taxpayer's Fourth Amendment rights. See
Donaldson, 400 U.S. at 522, 91 S.Ct. 534. Donaldson itself was
a case involving no Fourth Amendment claims whatsoever. Id.
Thus the Miller Court compared its ruling to Donaldson only
in the sense that neither § 7602 summonses nor grand jury
subpoenas issued to third parties are vulnerable to Fourth
Amendment challenges by taxpayers. But Miller did not purport
to cast doubt on Donaldson's conclusion that even where there
is no Fourth Amendment challenge to a summons involved, "the
taxpayer . . . to the extent he may claim abuse of process, may
always assert . . . that claim in due course at its proper place
in any subsequent trial."
[39] Having concluded that Miller does not bar appellants'
standing to assert at trial the illegality of § 7602 summons, we
must next examine appellants' contentions that if, on remand, a
hearing is granted and abuse of the summons process is found, the
proper remedy is the suppression of any evidence and the fruits
thereof obtained by virtue of the illegal summonses. The trial
judge ruled, and the government contends on appeal, that the
drastic remedy of suppression, controversial enough where
constitutional violations are urged, is improper where the
violations complained of are merely statutory in character. We
think, however, that Donaldson and Friedman, cited by
appellants, clearly envision such a remedy. In Friedman, this
court stated that proof that a § 7602 summons had been invalidly
issued "could affect the possible use [of the summoned records]
in any subsequent criminal or civil proceeding brought against
the taxpayers." 532 F.2d at 936. Moreover, Donaldson cited
United States v. Blue, 384 U.S. 251, 86 S.Ct. 1416, 16 L.Ed.2d
510 (1966), as support for the proposition that the taxpayer
could always assert a claim of abuse of process in any subsequent
trial. 400 U.S. at 517, 91 S.Ct. 534. In Blue, the Court
stated: "Even if we assume that the Government did acquire
incriminating evidence in violation of the Fifth Amendment, Blue
would at most be entitled to suppress the evidence and its fruits
if they were sought to be used against him at trial. While the
general common-law practice is to admit evidence despite its
illegal origins, this Court in a number of areas has recognized
or developed exclusionary rules where evidence has been gained in
violation of the accused's rights under the Constitution,
federal statutes, or federal rules of procedure." 384 U.S. at
255, 86 S.Ct. at 1419 (citations omitted) (emphasis added).[fn27]
Page 308
[40] Other courts, as well, have found suppression to be a
theoretically proper remedy to cure governmental violations of
the Internal Revenue Code. In United States v. Oaks, 360
F. Supp. 855 (C.D.Cal. 1973), defendant taxpayer moved to suppress
information acquired pursuant to § 7602 summonses on the ground
that the summonses were employed for the improper purpose of
furthering a solely criminal investigation. The court, without
questioning the propriety of the remedy of suppression, denied
the taxpayer's motion only because it found on the facts before
it that the summonses complied with the Donaldson standards.
See United States v. Fruchtman, 421 F.2d 1019 (6th Cir.),
cert. denied, 400 U.S. 849, 91 S.Ct. 39, 27 L.Ed.2d 86 (1970).
In Application of Leonardo, 208 F. Supp. 124 (N.D.Cal. 1962),
which involved a claim by taxpayers that the IRS had violated
26 U.S.C. § 7605(b), the court, in ordering suppression, held that
"apart from the claim of violation of constitutional rights, it
is our view that this court can and should grant relief through
an adequate and appropriate remedy to safeguard these petitioners
from what we deem to be an abuse of the statutory process." Id.
at 126-27.[fn28] A similar view was espoused by the court in
United States v. Avila, 227 F. Supp. 3 (N.D.Cal. 1963), which
stressed that "[a]lthough the so-called `fruit of the poisonous
tree' doctrine has generally been applied in cases involving
searches in violation of the Fourth Amendment . . ., the doctrine
can be applied to searches in violation of a statutory right."
Id. at 6, citing Nardone v. United States, 308 U.S. 338, 60
S.Ct. 266, 84 L.Ed. 307 (1939). In an analogous context, the
court in Moloney v. United States, 375 F. Supp. 737 (N.D.Ohio
1974), stated: "The Government also argues that [26 U.S.C. § 3631]
does not contain any sanctions for such a violation as
occurred here. The Court is not inclined to render the section
nugatory because it does not state explicitly that no assessment
of deficiency can be made on the basis of an inspection forbidden
by the section. Such a result is implicit in the statute.
Otherwise it would be completely meaningless." Id. at 741.
[41] To make available the remedy of suppression to taxpayers in
cases such as the present is merely to ensure governmental
compliance with the principles enunciated in Reisman, Donaldson,
LaSalle, and the decisions of this circuit: the IRS, in issuing
administrative summonses under § 7602, may not act outside its
statutory authority by garnering evidence in furtherance of a
solely criminal investigation. If a court determines in the
context of enforcement proceedings that a summons was illegally
issued, it will deny enforcement of the summons. 400 U.S. at 533,
91 S.Ct. 534. That summons is no less illegal merely because it
escapes detection at the investigatory stage. The prophylactic
principles which operate at the enforcement level are equally
appropriate to the trial stage, and suppression is the only
practical remedy at that point to cure the statutory abuse.[fn29]
Page 309
[42] In an analogous situation, the Supreme Court stressed that the
preliminary stages of criminal prosecutions must be pursued in
strict obedience to both the Constitution and the laws of the
United States. In Abel v. United States, 362 U.S. 217, 80 S.Ct.
683, 4 L.Ed.2d 668 (1960), the Court was called upon by the
defendant to adjudicate the claim that the government had used an
administrative warrant, which could be used only to detain a
person who was to be deported, for an entirely illegitimate
purpose. The defendant asserted that the purpose was to place him
in custody so that pressure might be brought to bear on him and
to permit the government to search through his belongings for
evidence of alleged espionage. The defendant argued that the
articles seized as a consequence of the use of this illegal
administrative warrant should have been suppressed. The Court
stated: "Were this claim justified by the record, it would indeed
reveal a serious misconduct by law-enforcing officers. The
deliberate use by the government of an administrative warrant for
the purpose of gathering evidence in a criminal case must meet
stern resistance by the courts. The preliminary stages of a
criminal prosecution must be pursued in strict obedience to the
safeguards and restrictions of the Constitution and laws of the
United States." 362 U.S. at 226, 80 S.Ct. at 690. The Court
stressed that the issues were fully explored by the court below
and crucial facts were found against defendant. Accordingly, it
was precluded from making a finding of bad faith on that record.
However, the Court again noted: "We emphasize again that our view
of the matter would be totally different had the evidence
established, or were the courts below not justified in not
finding, that the administrative warrant was here employed as an
instrument of criminal law enforcement to circumvent the latter's
legal restrictions, rather than as a bona fide preliminary step
in a deportation proceeding." Id. at 230, 80 S.Ct. at 692.
[43] In sum, although § 7602 does not expressly restrict the power
to issue a summons thereunder as long as the purpose is to
ascertain the correctness of any return and the material sought
is relevant to such inquiry, LaSalle, Donaldson, Friedman, and
the other cited decisions have promulgated a judicial policy,
binding on the IRS, to protect a taxpayer from any attempt on the
part of the IRS to obtain evidence by use of § 7602 summonses
after the IRS recommends prosecution to the Department of Justice
or after the IRS has abandoned, in an institutional sense, the
pursuit of civil tax determination or collection. The only
effective remedy for violation of that policy is to require
suppression of the evidence obtained as the evidentiary fruits of
an illegal summons.
[44] The government, however, contends that even if the remedy of
suppression is theoretically available to taxpayers, it is an
inappropriate remedy under the circumstances of this particular
case. First, the government implies that appellants have "waived"
any opportunity to seek suppression of evidence at trial because
they knew of the issuance of at least some of the summonses prior
to the third parties' compliance and failed to request the court
to stay such compliance or to seek other judicial relief at that
earlier stage. In United States v. House, supra, this court,
considering a claim that evidence obtained in alleged violation
of 26 U.S.C. § 7605(b) should be suppressed, stated: "Moreover,
if the taxpayers had felt aggrieved by the proposed visits to
Spuler's office or their own, they could have resisted them and
forced
Page 310
the Internal Revenue Service to resort to a subpoena. If they
had, they would have obtained judicial review of both the
necessity for a notice and the propriety of a second examination.
We can hardly countenance as a ground for suppression an
examination to which the taxpayer, having available alternatives,
consented." 524 F.2d at 1043-44.
[45] The record in the present case is unclear as to the precise
extent of appellants' knowledge of the issuance of the
summons.[fn30] However, assuming arguendo that appellants were
aware, prior to compliance, that summonses had been issued to
third parties, and that they failed, intentionally or otherwise,
to institute judicial proceedings at that point in time, we do
not think this would necessarily bar them from asserting a claim
of abuse, of process at trial. Donaldson indicated that the
taxpayer can attack the validity of the summons at trial even
though he has sought and been denied intervention, and it nowhere
suggests that the taxpayer must exhaust his pre-indictment
remedies before proceeding at the trial level. See Garrett v.
United States, 511 F.2d 1037 (9th Cir. 1975); United States v.
Newman, 441 F.2d 165 (5th Cir. 1971). We note, in addition, that
the Senate Report accompanying 26 U.S.C. § 7609, added by the Tax
Reform Act of 1976, which gives taxpayers the statutory right to
stay voluntary compliance and intervene in enforcement
proceedings, states that where the taxpayer "does not request
the third party witness not to comply at this stage, he would
still be permitted to assert such defenses as may be available
to him with respect to any evidence obtained pursuant to the
summons in any later court action in which the [taxpayer] was
directly involved (i. e., affecting his tax liability or any
criminal charges which might be brought) to the same extent as
may be permitted under present law." Senate Report No. 94-938,
94th Cong., 2d Sess. 370 (1976) (emphasis added).[fn31]
[46] Finally, the government asserts that as a practical matter
suppression would gain the appellants nothing in the case.
According to the government, grand jury subpoenas were issued to
many, if not all, of the same parties who received administrative
summonses. The only "taint" which the appellants can claim, urges
the government, is that the "identities" of the subpoenaed third
parties were learned by way of the summonses and that the
subpoenas were therefore fatally infected. The government
stresses that this claim is without merit because the fact that
the summonses themselves were served on the third parties
demonstrates that their identities were already known prior to
the issuance of the summonses. However, the present record
contains no complete accounting of the dates of
Page 311
the subpoenas or the summonses or of the parties on whom they
were served. While the government may well be able to establish
an independent, "taint-free" basis for its evidence, see Wong
Sun v. United States, 371 U.S. 471, 83 S.Ct. 407, 9 L.Ed.2d
441 (1963), we are unable to so conclude on the record before us
"Statements made by counsel in their briefs are not evidence."
United States v. Howard, 360 F.2d 373 (3d Cir. 1966).
[47] We thus conclude that the trial judge erred in ruling that as a
matter of law appellants lacked standing to attack the validity
of the summonses and to suppress the illegally obtained
evidentiary fruits thereof. Accordingly, in light of the
allegations of governmental impropriety raised by appellants, we
shall remand this case to the district court with instructions to
conduct an evidentiary hearing[fn32] and to certify to this court
its findings of fact and conclusions of law as to whether the
government fully complied with the requirements of 26 U.S.C. § 7602,
as judicially interpreted, and if not, whether suppression
is required. We note that the trial judge did not have the
benefit of the Supreme Court's opinion in United States v.
LaSalle National Bank at the time he rendered his decision, and
the present record is insufficient to permit as to determine
conclusively whether or not the IRS summonses were issued in good
faith and prior to a recommendation for prosecution, as those
standards are defined in LaSalle. Although the government has
submitted evidence which allegedly obviates the need for an
evidentiary hearing, this evidence apparently was not presented
to the district court in the first instance and therefore cannot
be considered by this court on appeal. See Stotter & Co., Inc.
v. Amstar Corp., 579 F.2d 13 (3d Cir. 1978) and the authorities
cited in n.4 of Rose Marie Drexel v. Union Prescription Centers,
Inc., 582 F.2d 781 (3d Cir. 1978).
[48] The case will be remanded for prompt proceedings consistent
with this opinion. We retain jurisdiction over this appeal.[fn33]
[fn1] Although appellants do not contest the sufficiency of the
evidence relating to their convictions on the corporate tax
evasion counts, they do suggest, but only in their statement of
facts, that the government offered no proof that the Corporation
had deducted on its books and records expenses for which it later
received reimbursement. In fact, the only deductions taken by the
Corporation for repair of marine damage during the relevant
period was the salary of two body shop employees, totaling
$22,500 per year. The government, however, argues that it was
trying not a net worth method of proof case, but rather a
specific items method of proof case, under which it is sufficient
to show that contrary to usual practices a defendant received
certain payments in cash which were not in turn reported on
income tax returns. See, e. g., United States v. Bray, 546 F.2d 851
(10th Cir. 1976); United States v. Stein, 437 F.2d 775 (7th
Cir.), cert. denied, 403 U.S. 905, 91 S.Ct. 2205, 29 L.Ed.2d
680 (1971).
[fn2] The government introduced Exhibit G-59, which attributed in
summary fashion the various bonds purchased with funds from the
Hackensack Account to either Genser or Forman, or to both. The
exhibit was based upon bank statements reflecting withdrawals
from the Hackensack Account, bond purchase documentations
obtained from the various brokerage houses, coupon collection
letters of the First National State Bank in Millburn which
recorded bond coupon negotiations by the appellants (Exhibit
G-26), and the testimony of witnesses who had received bonds or
coupons from the appellants.
[fn3] The government, however, contends that the liquidation
itself was improper because none of the bonds were reflected on
the closing tax returns in 1973.
[fn4] It is unclear whether appellants are suggesting that, in
general, IRS conduct in this case is not to be trusted, or that
the allegedly illegal summonses were used to obtain documents
upon which the audit was based.
[fn5] Although no evidentiary hearing was ever held, appellants
contended in the district court, and allege on appeal, that in
1971 the IRS began an audit of the books and records of the
corporation for the taxable years 1969 and 1970. The audit
resulted in a finding of no deficiency for both years. On
November 14, 1974, the IRS began a second investigation, pursuant
to 26 U.S.C. § 7605(b), into taxable years 1969 and 1970 as well
as into taxable years 1971-1974. Throughout the second
investigation, in 1974 and 1975, Special Agents of the IRS served
administrative summonses, issued under the authority of 26 U.S.C. § 7602,
to the following persons and corporations: (1) several
summonses were served on the corporation's accountant between
August 1974 and January 1975 to produce the corporation's work
papers; (2) the First National State Bank of New Jersey received
at least eight summonses between November 1974 and January 1975,
as well as one summons not bearing a date; (3) summonses of
unknown number and date were served on the City National Bank in
Hackensack; (4) a summons was issued to one Stan Kramer on
October 30, 1975, to testify on November 18, 1975. Appellants
allege that additional summonses were issued to other persons and
entities, but stress that there is no record to establish the
identities of the parties and the dates of issuance.
[fn6] Section 7602 provides in pertinent part: "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
Secretary or his delegate is authorized — * * * (2) To summon the
person liable for tax or required to perform the act, or any
officer or employee of such person, or any person having
possession, custody, or care of books of account containing
entries relating to the business of the person liable for tax or
required to perform the act, or any other purpose the Secretary
or his delegate may deem proper, to appear before the Secretary
or his delegate at a time and place named in the summons and to
produce such books, papers, records, or other data, and to give
such testimony, under oath, as may be relevant or material to
such inquiry. . . ."
[fn7] Subsequent to pleading not guilty, appellants filed a
motion, argued before the district court on July 26, 1976, to
suppress all evidence gained by the government through the use of
any illegally issued summonses. Appellants also requested an
evidentiary hearing to determine conclusively the facts
surrounding the issuance of the summonses. The district court
denied the motion to suppress and refused to grant an evidentiary
hearing. The request for a hearing was renewed by letter dated
August 16, 1976. Following their convictions, appellants, on
January 5, 1977, again petitioned for a hearing. On February 4,
1977, the trial judge filed a letter opinion denying appellants'
request on the grounds, inter alia, that the district court no
longer had jurisdiction over the matter. United States v.
Ellenbogen, 390 F.2d 537, 542-43 (2d Cir. 1968), cert. denied,
393 U.S. 918, 89 S.Ct. 241, 21 L.Ed.2d 206 (1969), and that in
any event appellants lacked standing to attack the validity of
the summons.
[fn8] Section 7602 does not provide the IRS with the power to
enforce its own summonses. To compel compliance with a summons,
the IRS must bring an enforcement proceeding in a federal
district court. 26 U.S.C. §§ 7402(b), 7604(a). Such an
enforcement action is "an adversary proceeding affording a
judicial determination of the challenges to the summonses and
giving complete protection to the witness." Reisman v. Caplin,
supra, 375 U.S. at 446, 84 S.Ct. at 512.
[fn9] This procedure was suggested by the Reisman court, which
held that "third parties might intervene [in enforcement
proceedings] to protect their interests, or in the event the
taxpayer is not a party to the summons before the hearing
officer, he too may intervene. . . . Nor would there be a
difference should the witness indicate . . . that he would
voluntarily turn the papers over to the Commissioner. If this be
true, either the taxpayer or any affected party might restrain
compliance . . . until compliance is ordered by a court of
competent jurisdiction." 375 U.S. at 449-50, 84 S.Ct. at 514
(citations omitted); see Donaldson v. United States, supra, 400
U.S. at 519-20, 91 S.Ct. 534; Callahan v. First Pennsylvania
Bank, 422 F. Supp. 1098 (E.D.Pa. 1976).
[fn10] Prior to the recent enactment of 26 U.S.C. § 7609 (see
note 11 infra), the IRS was not required to give notice to the
taxpayer under investigation that a summons had been served on a
third party. United States v. Continental Bank & Trust Co.,
503 F.2d 45 (10th Cir. 1974); Application of Cole, 342 F.2d 5 (2d
Cir. 1965).
[fn11] The taxpayer's right to intervene in enforcement
proceedings is permissive only and not mandatory. Donaldson v.
United States, supra, 400 U.S. at 529-31, 91 S.Ct. 534. However,
under 26 U.S.C. § 7609, added by the Tax Reform Act of 1976
(Pub.L. 94-455, 90 Stat. 1699-1702), taxpayers must be notified
by the IRS that a summons has been issued to a third party and
they are entitled as of right to stay voluntary compliance and to
intervene in enforcement proceedings. Section 7609 applies only
to summonses issued after February 28, 1977, and is thus
inapplicable to the instant case. Pub.L. 94-455, § 1205(c), as
amended by Pub.L. 94-528, § 2(b), 90 Stat. 2483.
[fn12] In United States v. Powell, 379 U.S. 48, 85 S.Ct. 248,
13 L.Ed.2d 112 (1964), the Court stated that the IRS "must show
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." Id. at 57-58, 85 S.Ct. at 255.
[fn13] Although it emphasized the interrelated criminal and civil
nature of IRS investigations, the Court stated: "The Service does
not enjoy inherent authority to summon production of the private
papers of citizens. It may exercise only that authority granted
by Congress. In § 7602 Congress has bestowed upon the Service the
authority to summon production for four purposes only: for
`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 collecting any such
liability.' Congress therefore intended the summons authority to
be used to aid the determination and collection of taxes. These
purposes do not include the goal of filing criminal charges
against citizens. Consequently, summons authority does not exist
to aid criminal investigations solely. . . We . . . could uncover
nothing in the Code or its legislative history to suggest that
Congress intended to permit exclusively criminal use of
summonses. As a result, the IRS employs its authority in good
faith when it pursues the four purposes of § 7602 which do not
include aiding criminal investigations solely." ___ U.S. at ___
n. 18, 98 S.Ct. at 2367.
[fn14] Determining that "[n]othing in § 7602 or its legislative
history suggests that Congress intended the summons authority to
broaden the Justice Department's right of criminal litigation
discovery or to infringe on the role of the grand jury as a
principal tool of criminal accusation," id. at ___, 98 S.Ct. at
2365, the Court stressed that the IRS would not be proceeding in
good faith if it delayed in submitting a recommendation to the
Justice Department when there was an institutional commitment to
make the referral and the IRS merely desired to gather additional
evidence for the prosecution, or if the IRS became "an
information gathering agency for other departments including the
Department of Justice, regardless of the status of criminal
cases." Id. at ___, 98 S.Ct. at 2367.
[fn15] The burden is on the taxpayer to negate the existence of a
proper civil purpose. United States v. Fisher, 500 F.2d 683 (3d
Cir. 1974), aff'd 425 U.S. 391, 96 S.Ct. 1569, 48 L.Ed.2d 39
(1976); United States v. Bowman, 435 F.2d 467 (3d Cir. 1970);
United States v. DeGrosa, 405 F.2d 926 (3d Cir.), cert.
denied, 394 U.S. 973, 89 S.Ct. 1465, 22 L.Ed.2d 753 (1969). The
Supreme Court has characterized this burden as "heavy." United
States v. LaSalle National Bank, supra, ___ U.S. at ___, 98
S.Ct. 2357.
[fn16] The McCarthy court stated: "Although our proposed
procedure for summons enforcement contemplates that provision for
an evidentiary hearing be an integral part of the proceedings,
implicit in our design is the realization that not every summons
enforcement proceeding will require an evidentiary hearing. Thus,
if the person summoned neither puts in issue allegations of the
complaint nor raises proper affirmative defenses, no evidentiary
hearing will be required; the matter can be decided on the
pleadings." 514 F.2d at 373.
[fn17] See note 30 and accompanying text infra.
[fn18] Several courts have perceived that the Donaldson Court's
recognition that the taxpayer can raise his claims of abuse of
process at trial was a significant factor in its decision to
limit his opportunity to raise those claims during the
investigatory stage. In Garrett v. United States, 511 F.2d 1037
(9th Cir. 1975), the district court denied the taxpayers
permission to intervene in an enforcement action brought by the
IRS to compel compliance with a summons served on the taxpayers'
bank. In affirming, the Court of Appeals for the Ninth Circuit
stated that the district court "was not required to allow
intervention, and the attendant discovery procedures necessary to
support the allegations, to delay the investigation into
taxpayers' tax liabilities, because, as the Court pointed out
in Donaldson, `the taxpayer, to the extent . . that he may
claim abuse of process, may always assert . . . that claim in due
course at its proper place in any subsequent trial.'" Id. at
1038 (emphasis added). Moreover, the court in United States v.
Newman, 441 F.2d 165 (5th Cir. 1971), in denying the taxpayer's
motion to intervene in enforcement proceedings, noted that in
United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d
112 (1964), the Court analogized an investigation by the IRS to
one conducted by a grand jury or the Federal Trade Commission in
that a person can be denied certain adjudicatory rights in light
of the government's need to investigate and inquire. But the
Newman court continued: "An important factor back of this
approach is of course the fact that if accusatory proceedings are
begun the person concerned `will be accorded all the traditional
judicial safeguards at a subsequent adjudicative proceeding
. . . .' And this applies in the context of an IRS summons
situation as Donaldson makes clear." Id. at 174 (citations
omitted).
[fn19] Respondent argued that the subpoenas were defective
because they were issued by a United States Attorney rather than
a court, no return was made to a court, and the subpoenas were
returnable on a date when the grand jury was not in session. 425
U.S. at 439, 96 S.Ct. 1619.
[fn20] The Court declined to consider the government's
contentions that the appeals court erred in holding that the
subpoenas were defective and that suppression was the appropriate
remedy if a constitutional violation did occur. 425 U.S. at 440,
96 S.Ct. 1619.
[fn21] In Oklahoma Press Publishing Company v. Walling,
327 U.S. 186, 66 S.Ct. 494, 90 L.Ed. 614 (1946), the Court stated
that "the Fourth [Amendment], if applicable [to subpoenas for the
production of business records and papers], at the most guards
against abuse only by way of too much indefiniteness or breadth
in the things required to be `particularly described,' if also
the inquiry is one the demanding agency is authorized by law to
make and the materials specified are relevant." Id. at 208, 66
S.Ct. at 505.
[fn22] As the Miller Court stated: "Respondent appears to
contend that a depositor's Fourth Amendment interest comes into
play only when a defective subpoena is used to obtain records
kept pursuant to the Act. We see no reason why the existence of a
Fourth Amendment interest turns on whether the subpoena is
defective. Therefore, we do not limit our consideration to the
situation in which there is an alleged defect in the subpoena
served on the bank." 425 U.S. at 441 n.2, 96 S.Ct. at 1623.
[fn23] Indeed, this court has described Miller as follows:
"Miller urged that he had a Fourth Amendment interest in the
records kept by the banks, as copies of personal records made
available to the banks for a limited purpose. However, the
Supreme Court, after considering the standards enunciated in
Katz v. United States, 389 U.S. 347, 88 S.Ct. 507, 19 L.Ed.2d
576 . . . and Couch v. United States, 409 U.S. 322, 93 S.Ct.
611, 34 L.Ed.2d 548 . . . found no legitimate expectation of
privacy in the contents of records maintained by the banks under
the mandate of the Act. . . ." Gannet v. First National State
Bank of New Jersey, 546 F.2d 1072 (3d Cir. 1976), cert.
denied, 431 U.S. 954, 97 S.Ct. 2674, 53 L.Ed.2d 270 (1977)
(emphasis added).
[fn24] In Alderman v. United States, supra, the Court stated
that the "established principle is that suppression of the
product of a Fourth Amendment violation can be successfully urged
only by those whose rights were violated by the search itself,
not by those who are aggrieved solely by the introduction of
damaging evidence." 394 U.S. at 171-72, 89 S.Ct. at 965. See
United States v. Miller, supra, 425 U.S. at 456, 96 S.Ct. 1619
(Marshall, J., dissenting).
[fn25] Appellants expressly deny any Fourth Amendment interest in
the summoned materials.
[fn26] In United States v. Friedman, this court, noting that
the IRS has no authority to conduct a criminal investigation
through the use of a § 7602 civil summons, explained as follows:
"No court has given a thorough or persuasive justification for
this construction of 26 U.S.C. § 7602 which appears to have
originated in an opinion by Judge Wyzanski in United States v.
O'Connor, 118 F. Supp. 248 (D.Mass. 1953), and to have been
assumed, rather than explained, ever since. Judge Wyzanski
reasoned: `The Constitution of the United States, the statutes,
the traditions of our law, the deep rooted preferences of our
people speak clearly. They recognize the primary and nearly
exclusive role of the Grand Jury as the agency of compulsory
disclosure. That is the inquisitorial body provided by our
fundamental law to subpoena documents required in advance of a
criminal trial, and in the preparation of an indictment or its
particularization. . . .' 118 F. Supp. at 250-51. The paragraph
has a nice ring, but it ignores the reality that grand jury
subpoenas are issued as a matter of course by the Department of
Justice, not by the grand jury. See In re Grand Jury
Proceedings, 486 F.2d 85 (3d Cir. 1973). It is hard to imagine
why Congress could not entrust criminal law enforcement of the
Internal Revenue Code to an executive branch department rather
than or in addition to the Justice Department. The difference
between a summons returnable before an IRS agent and a subpoena
returnable before a grand jury is in the real world slight.
"The critical question, however, is what Congress intended in §
7602 and its predecessors, as well as in 26 U.S.C. § 7801(a)
which authorizes the Secretary of the Treasury to administer and
enforce the provisions of the Internal Revenue Code. The
Intelligence Division of the IRS is organized to carry out the
broad enforcement responsibilities of the Treasury Secretary
under § 7801(a). Since Judge Wyzanski's opinion in 1953, no case
which has addressed the issue of the scope of a § 7602 summons
has explored the legislative intention in any depth. Nor do we,
since the United States v. O'Connor construction has been
accepted by the Supreme Court. See, e. g., Donaldson v. United
States, supra, 400 U.S. at 533, 91 S.Ct. 534." 532 F.2d at 932
n.9.
In United States v. LaSalle National Bank, supra, the Court
emphasized that "[n]othing in § 7602 or its legislative history
suggests that Congress intended the summons authority to broaden
the Justice Department's right of criminal litigation discovery
or to infringe on the role of the grand jury as a principal tool
of criminal accusation." ___ U.S. at ___, 98 S.Ct. at 2365.
[fn27] In one of the cases cited by Blue for this proposition,
Nardone v. United States, 308 U.S. 338, 60 S.Ct. 266, 84 L.Ed.
307 (1939), evidence procured by wiretapping in violation of the
Communications Act of 1934 was held inadmissible at trial. The
Nardone Court stated: "Any claim for the exclusion of evidence
logically relevant in criminal prosecutions is heavily
handicapped. It must be justified by an overriding public policy
expressed in the Constitution or the law of the land. . . . [T]wo
opposing concerns must be harmonized: on the one hand, the stern
enforcement of the criminal law; on the other, protection of that
realm of privacy left free by Constitution and laws but capable
of infringement either through zeal or design. In accommodating
both these concerns, meaning must be given to what Congress has
written, even if not in explicit language, so as to effectuate
the policy which Congress has formulated." Id. at 340, 60 S.Ct.
at 267.
[fn28] In United States v. House, 524 F.2d 1035 (3d Cir. 1975),
this court declined to decide whether a violation by the
government of § 7605(b) is a ground for a suppression motion in a
criminal case because it found on the record that no § 7605(b)
violation had occurred. Id. at 1043; see United States v.
Dawson, 400 F.2d 194 (2d Cir. 1968), cert. denied, 393 U.S. 1023,
89 S.Ct. 632, 21 L.Ed.2d 567 (1969).
[fn29] On several occasions the Supreme Court has stressed that a
primary justification for the exclusionary rule, at least in the
context of the Fourth Amendment, is the deterrence of illegal
government conduct. See, e. g., Stone v. Powell, 428 U.S. 465,
96 S.Ct. 3037, 49 L.Ed.2d 1067 (1976); United States v.
Calandra, 414 U.S. 338, 94 S.Ct. 613, 38 L.Ed.2d 561 (1974);
Elkins v. United States, 364 U.S. 206, 80 S.Ct. 1437, 4 L.Ed.2d
1669 (1960). Suppression in cases such as the present furthers
this policy even though 26 U.S.C. § 7609, added by the Tax Reform
Act of 1976, now statutorily provides an opportunity for targets
of IRS investigations to intervene at enforcement proceedings and
to have notice of summonses issued in connection with an
investigation of his activities. Section 7609 does not explicitly
speak to the taxpayer's rights at the trial level, but the
legislative history suggests that even if a taxpayer chooses not
to intervene he may still raise his claims in a subsequent trial.
See text accompanying note 31 infra. Thus, assuming that a
taxpayer did not intervene at the investigatory stage,
suppression at trial would be the only remedy capable of ensuring
governmental compliance with § 7602.
[fn30] On January 17, 1975, prior to indictment, trial counsel
for Forman wrote to the IRS Special Agent investigating their
activities and requested that defendants be notified by the IRS
of any summonses it intended to serve so that he could challenge
them, if appropriate. On May 8, 1975, the Special Agent replied
by letter that he would not advise appellants of any summonses
issued to third parties. Nevertheless, the record of the
pre-trial proceedings suggests that appellants were aware of some
summonses prior to compliance and in time to attempt to institute
the stay and intervention procedures outlined in Reisman and
Donaldson. In the January 17, 1975, letter to the IRS, trial
counsel for Forman stated that he had advised one of the third
party banks not to comply with a summons dated January 13, 1975.
It appears that no judicial action was ever initiated to restrain
compliance. Moreover, on one occasion, counsel for Forman
attempted to attend physically an IRS interview of the
Corporation's accountant, who had been summoned to appear, but he
was asked to leave. On the whole, however, appellants maintain
that they had no knowledge of most of the summonses until after
compliance and stress that even at this late date they have no
precise indication as to whom and when all the summonses were
served.
[fn31] Similarly, one 1975 Congressional report, summarizing the
administrative procedures of the IRS prior to the 1976 Tax Reform
Act, states that "a taxpayer who either does not attempt to
intervene or restrain or who fails in his attempt may assert his
rights when the government subsequently attempts to use the
material against him." Report on Administrative Procedures of the
Internal Revenue Service to the Administrative Conference of the
United States (October 1975), 94th Cong., 2d Sess. 755 (emphasis
added).
[fn32] The government suggests that appellants may have waived
their right to an evidentiary hearing by failing to object to the
trial court's refusal of their request. The following colloquy
occurred at the hearing on defendants' motion to suppress.
"Mr. Zuckerman: Your honor, I don't know whether it is
appropriate or not, but in the event that there is error in any
of your Honor's ruling, would it be appropriate to have
evidential findings or to have a hearing before the trial in this
case as to what the facts were, what was secured after the 6(e)
order and what evidence was secured under the summonses after a
certain date? Because I think — I can see an Appellate Court
speculating as to what we are talking about?
"The Court: I know, I want to be fair. That is why I asked you
whether you wanted anything more on the record. But you see I am
in this position. It is very hard for me to make that kind of
record pre-trial without conducting a pretrial trial:
"Mr. Zuckerman: That's correct, sir.
"The Court: That would be a monumental waste of time in the
event of an acquittal.
"Mr. Zuckerman: I recognize that. It would be a monumental
waste of time for the Third Circuit to agree with you in the
event of a conviction.
"The Court: That's correct. If the Third Circuit disagrees with
me, they would have the option of remanding it back for an
evidential hearing on that limited question.
"Mr. Zuckerman: All right.
"The Court: I don't want to preclude you Does that make sense
to you?
"Mr. Zuckerman: It makes sense to me. I'm content for the
record to state that."
166a-168a (emphasis added).
However, in a letter to the trial judge dated August 16, 1976,
prior to entry of the order of September 9, 1976, denying
defendants' motion to suppress, Mr. Zuckerman explicitly renewed
his request for an evidentiary hearing. 198a. We think that under
the circumstances defendants properly voiced their objection and
preserved their right to appeal the trial judge's denial of an
evidentiary hearing.
[fn33] See Internal Operating Procedures for the United States
Court of Appeals for the Third Circuit, § L.
Page 706