UNITED STATES v. GENSER, 595 F.2d 146 (3rd Cir. 1979)
UNITED STATES OF AMERICA, APPELLEE, v. LESTER GENSER AND LAWRENCE FORMAN,
APPELLANTS.
Nos. 76-2623, 76-2624.
United States Court of Appeals, Third Circuit.
Submitted Under Third Circuit Rule 12(6) December 22, 1978.
Decided March 9, 1979.
[1] OPINION OF THE COURT – SEITZ, Chief Judge. 2
[36] BIGGS, Circuit Judge, dissenting. 11
Page 147
Robert J. Del Tufo, U.S. Atty., Maryanne T. Desmond, Asst. U.S.
Atty., Newark, N. J., for appellee.
Irving R. Segal, James D. Fornari, Susan K. Herschel, Schnader,
Harrison, Segal & Lewis, Philadelphia, Pa., for appellants;
Zuckerman & Aronson, Newark, N. J., of counsel.
Appeal from the United States District Court for the District
of New Jersey.
Before SEITZ, Chief Judge, and BIGGS and HUNTER, Circuit
Judges.
[2] In this aspect of these appeals we must examine the substantive
and procedural implications of the Supreme Court's decision in
United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct.
2357, 57 L.Ed.2d 221 (1978), which described the limits of the
Internal Revenue Service's authority to issue civil summonses
under 26 U.S.C. § 7602. Defendants Lester Genser and Lawrence
Forman appealed from their convictions for tax evasion. In an
earlier opinion we rejected various challenges to those
convictions but retained jurisdiction and remanded the case to
the district court for an evidentiary hearing on the defendants'
contention that summonses issued during the
Page 148
investigation exceeded the IRS's authority. United States v.
Genser, 582 F.2d 292 (3d Cir. 1978).
[3] On remand, the district court conducted an evidentiary hearing
and concluded that none of the summonses employed during the
investigation were issued "solely for a criminal purpose," as
defined in LaSalle. In challenging that ruling, defendants
argue that the district court erred in two respects: first, in
denying them adequate discovery, and second, in misconstruing the
substantive requirements of LaSalle itself.
[4] The IRS conducted an initial audit of defendants' books and
records in 1971 but discovered no deficiencies. In 1974 the IRS
reopened the investigation that eventually led to defendants'
convictions. Our earlier opinion adequately set forth the factual
predicate of those convictions. See 582 F.2d at 295-96. Before
the recent evidentiary hearing, however, the details of the
investigation itself were veiled. The testimony and documents
presented at that hearing provide the necessary vehicle to
explore the reaches of LaSalle.
[5] According to uncontested testimony, Frank Parisi, a special
agent of the IRS, began in August 1974 to investigate defendants'
corporate dealings during the taxable years 1969 to 1974. Almost
immediately upon assignment to the case, he began to summon
records and witnesses under 26 U.S.C. § 7602. That provision
empowers agents of the IRS to issue summonses
[f]or 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 . . . .
[6] On November 12, 1974, after issuing nineteen summonses, Parisi
requested permission to reopen a formal investigation in light of
new evidence from a confidential source. In the memorandum
accompanying his request Parisi asserted that "[t]he
investigation to date has disclosed a conspiracy between Genser
Forman, Inc. owners and employees and various vendors, to
generate currency by the use of fictitious invoices." Parisi's
request to reopen was approved sequentially by his group
supervisor, the chief of the audit branch of his field office,
his district director, and, on November 22, 1974, the chief of
the IRS's Intelligence Division, now called the Criminal
Investigation Division. See 43 Fed.Reg. 53030 (Nov. 15, 1978).
[7] By December 6, 1974, Parisi had begun to encounter what he
believed to be recalcitrance on the part of some of the summonsed
witnesses. On that date he filed a "Request for Reluctant Witness
Grand Jury Authorization" pursuant to a now-revoked provision in
the IRS Manual. Under that provision an IRS agent could request
the assistance of a permanent grand jury in securing the
testimony of reluctant witnesses. Parisi had discussed resort to
this procedure with David Gaston, the IRS's Regional Counsel. As
required by the Manual, the chief of the Intelligence Division
approved the authorization on December 9, 1974, and forwarded the
request to the United States Attorney, who approved on December
18, 1974. Although Parisi had requested grand jury subpoenas for
only three persons, a total of six witnesses eventually were
served. Only one witness ever had to appear before the grand
jury. During this process Parisi was in almost daily contact with
the United States Attorney.
[8] Parisi substantially completed his investigation in March 1975.
By that time he had issued a total of 106 summonses under section
7602. During the next six months, while writing his final report,
he issued nine more summonses.
[9] On October 31, 1975, approximately one month after Parisi filed
his final report recommending prosecution, another agent assigned
to the case issued the 116th and final summons. Although the
record is unclear,
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Parisi's recommendation must have been reviewed by the district
chief of the Intelligence Division sometime between September and
November 1975, because it reached the Office of Regional Counsel
in November or December of that year. See 26 C.F.R. §
601.107(b) and (c). The Office of Regional Counsel formally
referred the case to the Justice Department for prosecution on
December 12, 1975. The IRS issued no summonses after that
referral.
[10] In considering this chain of events in light of LaSalle, the
district court held that all the summonses were valid:
[T]he Court finds that the defendants have failed to
demonstrate by a preponderance of the evidence that
the Internal Revenue Service at the time any of the
summonses were issued had either already referred the
matter to the United States Department of Justice or
had itself determined that it was interested solely
in the criminal tax aspects of the matter.
I further find by a preponderance of the evidence
that the United States has demonstrated that
throughout the course of the investigation the
Internal Revenue Service was at all times interested
[in] and actively pursuing substantial amounts of tax
penalties and interest owed by the defendant Genser
and the defendant Forman to the Treasury of the
United States.
[11] As we requested, the district court certified its findings and
the record of the proceeding to this court.
[12] In our earlier opinion in this case we focused on defendants'
contentions that they had standing to challenge the summonses and
that evidence secured through invalid summonses must be
suppressed. We did not attempt to examine LaSalle's substantive
implications, leaving that task to the district court in the
first instance. We therefore turn to the Supreme Court's opinion
in LaSalle before considering defendants' substantive and
procedural challenges to the disposition below.
[13] In LaSalle the Supreme Court elaborated upon its earlier
indications that a summons could not issue under section 7602
solely to advance a criminal investigation. See Donaldson v.
United States, 400 U.S. 517, 533, 91 S.Ct. 534, 27 L.Ed.2d 580
(1971). See also Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct.
508, 11 L.Ed.2d 459 (1964). Justice Blackmun, writing for the
majority, explained that Congress, in authorizing such summonses,
had intended to aid the IRS in the civil collection of delinquent
taxes. Congress did not intend to usurp the traditional role of
the grand jury as the primary investigator of criminal activity.
"[S]ummons authority does not exist to aid criminal
investigations solely." 437 U.S. at 317 n. 18, 98 S.Ct. at 2367
n. 18.
[14] The conundrum, as both the majority and the dissent recognized,
is identifying those summonses that are issued "solely" to aid
the criminal aspects of the investigation; criminal liability for
tax evasion automatically spawns civil liability for tax
delinquencies. In LaSalle the investigating agent had stated
that his inquiry was "`strictly related to criminal violations of
the Internal Revenue Code.'" 437 U.S. at 303, 98 S.Ct. at 2360.
Nevertheless, the Supreme Court rejected the taxpayer's
contention that the summonses necessarily lacked a civil purpose
and should not be enforced. The entire Court agreed that the
agent could not commit the IRS to a criminal prosecution and
therefore his subjective intent was not dispositive.
[15] The dissenting justices would have applied an objective test.
If the summons issued before the IRS officially referred the case
to the Department of Justice for prosecution, then it would be
deemed to serve a civil purpose. If it issued after referral, it
would be invalid.
[16] The majority, while agreeing with the dissenters that all
summonses issued after official referral would be invalid, held
that in some cases the "institutional posture" of the IRS would
preclude the issuance of a civil summons even before referral to
the Department of Justice:
Page 150
We shall not countenance delay in submitting a
recommendation to the Justice Department when there
is an institutional commitment to make the referral
and the Service merely would like to gather
additional evidence for the prosecution.
[17] 437 U.S. at 316-317, 98 S.Ct. at 2367-68. Justice Blackmun noted
that use of a civil summons in such circumstances would expand
impermissibly the government's right to criminal discovery.
Furthermore, in some cases the IRS might become "an
information-gathering agency for other departments, including the
Department of Justice . . . ." Id. at 317, 98 S.Ct. at 2368.
[18] In summarizing the Court's holding, Justice Blackmun stressed
"several requirements . . . for the enforcement of an internal
revenue summons." One requirement was that "the Service not
abandon in an institutional sense . . . the pursuit of civil tax
determination or collection." 437 U.S. at 318, 98 S.Ct. at 2368.
According to the majority, however, "those opposing enforcement
of a summons . . . bear the burden to disprove the actual
existence of a valid civil tax determination or collection
purpose by the Service." Id. at 316, 98 S.Ct. at 2367.
[19] In this case the government argues that LaSalle permits the
IRS, at any time before official referral, to issue summonses as
long as that agency continues to pursue civil aspects of the
investigation. The district court seemed to be persuaded by this
interpretation, which draws some support from a decision of the
Second Circuit. See United States v. Marine Midland Bank of New
York, 585 F.2d 36, 39 (2d Cir. 1978) (per curiam) (the "only"
inquiry under LaSalle is "whether the IRS `in an institutional
sense had abandoned its pursuit of . . . civil tax liability.'").
In support of its position on this issue, the government cites
considerable evidence that the IRS was attempting throughout its
investigation to ascertain the exact amount of tax owed by
defendants. That attempt finally resulted in a jeopardy
assessment against the defendants.
[20] We recognize that Justice Blackmun wrote in LaSalle of the
necessity for the taxpayer to prove that the IRS had "abandoned"
a civil purpose. We do not believe, however, that the existence
of a general civil purpose for the investigation terminates
judicial inquiry. The government has failed to recognize that,
under LaSalle, we must focus on the purposes of individual
summonses and not on the purpose of the investigation as a whole.
In this case, for example, the IRS issued 116 summonses under
section 7602. If any one of those summonses were issued solely
for a criminal purpose, the fruits of that summons would have to
be suppressed, even in the face of an overwhelmingly civil
purpose of the investigation as a whole. The IRS simply would
lack statutory authority to issue that particular summons.
[21] Several factors make the government's reading of LaSalle
unreasonable. First, if the district court limits its inquiry to
the existence vel non of a general civil purpose for the
investigation, the abuses delineated by the LaSalle majority
would go undetected and unremedied. For example, Justice Blackmun
expressed a fear that the IRS might delay official referral to
the Justice Department "merely . . . to gather additional
evidence for the prosecution." 437 U.S. at 317, 98 S.Ct. at 2368.
Under the government's reading of LaSalle, such a delay would
be perfectly permissible, regardless of the purpose of the
individual summonses, as long as the IRS had not yet determined
the full scope of civil liability. Similarly, the government
presumably would allow the Justice Department to use the IRS as
an "information gathering agency" as long as the IRS had not
closed its civil investigation. LaSalle, of course, prohibits
such subterfuge. Id.
[22] Second, by making the existence of a continuing civil purpose
for the investigation dispositive, we would impose an impossible
burden of proof upon the taxpayer. Not only would he be required
to prove a negative, the nonexistence of a general civil purpose
for the investigation, but he also would be required to disprove
what already
Page 151
has been postulated, the congruence of criminal and civil
liability. See 437 U.S. at 315, 98 S.Ct. at 2367. As the
district court noted in this case, "it is almost impossible to
conceive of a case where there can be a criminal violation . . .
without civil tax consequences."
[23] By requiring a link between each summons and the proffered
civil purpose, we are not requiring a district court to examine
every summons issued in every investigation. LaSalle itself
suggests clear limitations on the necessary inquiry. First, under
LaSalle, the subjective intent of the agent issuing the summons
does not bind the IRS as an institution. Drawing from this axiom,
we believe that summonses issued by an investigating agent before
that agent recommended prosecution would be virtually
unassailable. Cf. United States v. Schutterle, 586 F.2d 1201
(8th Cir. 1978) (issuance of summons one year before agent
recommended prosecution "precludes any inference" that summons
violates LaSalle). We say "virtually" only because we can
envision circumstances where, for example, an agent issued
summonses at the request of the United States Attorney or delayed
his recommendation at the request of his superiors solely to
further a criminal investigation. Such abuses would go to the
heart of the protections afforded taxpayers by LaSalle.
[24] More suspect, of course, would be those summonses issued after
an agent has recommended prosecution. Even in the case of such a
summons, however, the taxpayer would bear the burden of proving
both a pre-existing institutional commitment to prosecute and a
failure of the summons to advance any civil purpose. The IRS, on
the other hand, could deflect such a challenge simply by
demonstrating that each summons issued after the agent's
recommendation did, in fact, have a civil purpose.
[25] We believe that our interpretation of LaSalle has several
salutary effects. It encourages agents to complete their
investigations before recommending prosecution. It discourages,
but does not preclude, the issuance of summonses after such a
recommendation, when the potential for abusive institutional
delay is greatest. Finally, it recognizes that each and every
summons issued under section 7602 must contribute in some way to
a civil inquiry.
[26] In this case, we note that the district court specifically
rejected defendants' contention that Agent Parisi was influenced
in his investigation by the Department of Justice. The district
court found that "the defendants have failed to establish that
Agent Parisi was, in fact, acting under the auspices of the
United States Attorney prior to the time [of] the criminal
reference letter of December 12, 1975." We believe that this
finding is supported by substantial evidence. Cf. United States
v. Chemical Bank, 593 F.2d 451, (2d Cir., 1979) (IRS agent's
participation in Justice Department Strike Force did not violate
LaSalle).
[27] The district court failed, however, to confront defendants'
claim that the IRS, as an institution, had committed itself
before December 12, 1975, to refer the case for prosecution and
that summonses issued after that commitment served no civil
purpose. Although Agent Parisi asserted that all 116 summonses
were issued for a civil purpose, the district court did not make
such a finding. Instead, it was content to find that the IRS
maintained a continuing civil interest in the outcome of the
investigation. As we have demonstrated, such a general civil
purpose could not ratify an otherwise illegal summons.
[28] In support of the existence of institutional commitment to
prosecute, defendants cite Agent Parisi's suspicion of criminal
activity as recorded in his reopening memorandum and his use of
the grand jury to compel testimony. Although both these phases of
the investigation required the approval of Parisi's superiors, we
doubt that these factors, by themselves, could support a finding
of institutional commitment to prosecute. We feel compelled,
however, to remand this case to the district court for a specific
finding on defendants' contention, especially in light of
Parisi's testimony that he did not file his final report until
five months after the investigation was substantially
Page 152
complete. Inordinate and unexplained delays in the investigatory
process are one factor that might lead a court to infer that an
agent was acting at the behest of his superiors solely to pursue
criminal aspects of the investigation. Summonses issued during
such a delay merit a court's special attention. Furthermore, we
note that one summons was issued after Parisi had filed his final
report.
[29] Under these circumstances, we believe that the district court
is in a better position than are we to weigh the evidence and to
draw conclusions about possible institutional commitment.
[30] Having outlined the substantive implications of LaSalle, we
now must consider defendants' contention that the district court
improperly limited their discovery before and during the
evidentiary hearing. Prior to the hearing the district court
denied defendants' motions to discover the contents of the IRS's
investigatory files on the case, except insofar as the government
consented. Defendants responded by subpoenaing the appearance of
twenty witnesses at the hearing, including the Commissioner of
Internal Revenue, the United States Attorney for the District of
New Jersey, and various high-ranking officials of the Criminal
Tax Section of the Department of Justice. Each subpoena directed
the witness to produce all documents relating to the case. The
district court refused to enforce any of the subpoenas. Agent
Parisi testified at the hearing, but the district court refused
to order him to open his files. Instead, the district court
granted defendants limited discovery of documents relating to
phases of the investigation brought out during Parisi's
testimony.
[31] Our reading of LaSalle suggests several guidelines for
discovery. At a minimum, the taxpayer should be entitled to
discover the identities of the investigating agents, the date the
investigation began, the dates the agent or agents filed reports
recommending prosecution, the date the district chief of the
Intelligence Division or Criminal Investigation Division reviewed
the recommendation, the date the Office of Regional Counsel
referred the matter for prosecution, and the dates of all
summonses issued under 26 U.S.C. § 7602. Furthermore, the
taxpayer should be entitled to discover the nature of any
contacts, relating to and during the investigation, between the
investigating agents and officials of the Department of Justice.
[32] Where this information or other evidence introduced by the
taxpayer reveals (1) that the IRS issued summonses after the
investigating agents recommended prosecution, (2) that inordinate
and unexplained delays in the investigation transpired, or (3)
that the investigating agents were in contact with the Department
of Justice, the district court must allow the taxpayer to
investigate further. In proper cases, this investigation could
include the opportunity to examine the IRS agents or officials
involved, or to discover documents. Such examination/discovery,
however, should be carefully tailored to meet the purpose of the
inquiry. On the other hand, where this information indicates that
none of these three conditions are present, the district court
need inquire no further.
[33] In this case the district court's rulings conformed very
closely to these guidelines. During Parisi's testimony the
district court allowed defendants to discover the available
documents relating to the reopening of the investigation and the
use of the grand jury. Furthermore, defendants learned virtually
all the dates listed above, except perhaps the date of review by
the district chief of the Intelligence Division. Although
defendants had the opportunity to press Parisi on the five-month
delay in the filing of his report and on the issuance of a
summons after that filing, they did not pursue those matters. In
considering these issues on remand, the district court should
determine whether to afford defendants additional discovery and
whether to conduct further proceedings.
[34] Although we share the government's concern that defendants
accused of tax evasion
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may employ the outlined procedures to delay or frustrate justice,
we feel obligated to provide a procedural mechanism to vindicate
LaSalle's substantive guarantees. In the absence of
congressional action defining the scope of the IRS's power to
issue summonses, courts must continue to search for the vague
boundary between civil and criminal investigation.
[35] We will retain jurisdiction over this appeal and will remand to
the district court for appropriate proceedings and findings and
for prompt certification of the supplemental record to this
court.
[37] 116 section 7602 summonses were issued during the following
periods: 1 through 19: August 28 to November 12, 1974; 20 through
99: November 12, 1974 to January 31, 1975; and 100 through 116:
January 31 to October 31, 1975. Further, there is evidence in the
record establishing the fact that each of these summonses was
issued as part of simultaneous civil and criminal investigations.
[38] Agent Parisi testified on re-direct examination by Mr.
Mendelson, an Assistant United States Attorney, as follows:
"Q. [By Mr. Mendelson] We indicated earlier this
morning [that] 116 [Section 7602] summonses were
served during your investigation, is that correct?
A. I believe that's true. [Emphasis added].
Q. Were any of those summons issued solely for the
purpose of acquiring criminal evidence?
A. No, sir.
Q. What was your purpose in issuing each and every
one of these summonses generally?
A. There was a two-fold purpose; to determine any
income tax liability of the taxpayers, and to gather
evidence to assist the Internal Revenue Service to
determine whether or not there has been a criminal
violation of the Internal Revenue laws. [Emphasis
added].
Q. When you say `taxpayers' who do you mean?
A. Corporate taxpayer Genser-Forman, Incorporated,
Lester Genser and Lawrence Forman." (Evidentiary
Hearing at 176).
[39] It is clear from the foregoing portion of the record of the
evidentiary hearing that the 116th section 7602 summons was
brought to the attention of the court and counsel at the
evidentiary hearing, and it is also clear from that portion of
the evidentiary hearing quoted above that Parisi testified that
the purpose of the 116th summons was to gain evidence for the
civil recovery of unpaid taxes and also to determine whether or
not there was criminal liability.
[40] I do not doubt that United States v. LaSalle National Bank,
437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), governs the
case at bar. The teaching of the Supreme Court in LaSalle is
exactly expressed, in my view, by Nuzum, LaSalle National Bank
and the Judicial Defenses to the Enforcement of an Administrative
Summons, 32 The Tax Lawyer 383, 391 (1979), as follows:
[41] "B. Supreme Court Opinion. In a 5-4 decision authored by
Justice Blackmun, the Supreme Court reversed the Seventh
Circuit's opinion and held (1) that a summons must be issued
before the Service recommends prosecution to the Department of
Justice;[[fn1]] (2) that a summons issued prior to such
recommendation must be issued in good faith and that a summons
issued solely for a criminal investigation is not in good faith;
and (3) that the Service is not using its summons authority in
good faith if it has abandoned, in an institutional sense, the
pursuit of civil tax determination or collection."
Page 154
[42] To the above I add the following by way of further
interpretation of LaSalle. To enforce a section 7602 summons,
the IRS must have issued it in good faith use of the authority of
section 7602. The IRS must not abandon its institutional
authority to determine and collect taxes and civil fraud
penalties. The IRS also must not abandon its institutional
authority to determine the existence of violation of criminal
laws relating to taxation. The two functions are intertwined.
That a single agent has in mind gathering evidence for a criminal
investigation does not prove institutional bad faith on the part
of the IRS. A taxpayer in order to escape the effect of a section
7602 summons must disprove the existence of a valid civil tax
determination or collection purpose by the IRS. This the
appellants cannot do, for there was, and apparently still is, a
valid civil tax investigation resulting in tax liens against the
appellants which were in fact ameliorated to some extent by the
agreement to release some of the appellants' assets. See Exhibit
G-6 (Evidentiary Hearing at 227).
[43] For the reasons stated, I must respectfully dissent. I deem
another evidentiary hearing, which the majority opinion requires,
as unnecessary and I would grant the motion of the United States
and immediately send down the certified judgment in lieu of the
formal mandate.[fn2]
[fn1] The referral letter of the Internal Revenue Service to the
Department of Justice was dated December 12, 1975.
Parisi's final report was forwarded to the Regional Counsel in
September 1975 (Evidentiary Hearing at 62), and the evidentiary
hearing upon our remand, when Parisi made the statements quoted
above, was October 31, 1978.
[fn2] The majority lays emphasis on what it regards as
"inordinate and unexplained delays in the investigation"
(Majority Opinion at 152). The time factor is not relevant in
view of the fact that there was investigation by the IRS as to
civil as well as criminal liability during the critical period.
The following dates are relevant:
The last summons, No. 116 (by Gary Neuberger), was
issued October 31, 1975 (Evidentiary Hearing at 61).
Agent Parisi started to write his report in March of
1975 (Evidentiary Hearing at 61). Agent Parisi's
final report was sent to the Regional Counsel in
September of 1975 (Evidentiary Hearing at 62).
Referral to the Department of Justice for prosecution
was December 12, 1975 (Evidentiary Hearing at
143-44).
I believe the majority refers to the lapse of time between the
date when Parisi started his report and the date he sent it to
the Regional Counsel. This lapse was less than six months.
I believe this delay and any others have little significance,
if, in fact, delays they be. Judicial notice may be taken of the
fact that the IRS does not move with startling speed. To my mind,
the delay or delays not only seem short, but to me Parisi seems
to have acted with reasonable promptness.