United States of America and James A. Hill, Special Agent, Internal Revenue Service v. James E. Michaud and Mary L. Michaud , 907 F.2d 750 ( 1990 )

BAUER, Chief Judge, joined by CUMMINGS, HARLINGTON WOOD, Jr., CUDAHY, COFFEY, FLAUM and KANNE, Circuit Judges.

In this case we reconsider United States v. Michaud, Nos. 89-1684 & 89-1986, 1990 WL 25073 (7th Cir. March 8, 1990) (attached as an appendix to the dissent hereto) (“Michaud I”), in which a panel of this court reversed an order by District Judge Terence T. Evans. Judge Evans quashed several summonses issued by the Internal Revenue Service (“the Service”) which directed the Michauds to submit to fingerprinting and to provide handwriting exemplars. The Service claimed (and still claims) that this information is relevant to its civil investigation into the employment and unemployment tax liabilities of Superior Engineering, Inc., a Green Bay corporation of which the Michauds were shareholders and officers. In the order at issue here, Judge Evans appeared to reject this claim and denied enforcement based in some part on that reason. The panel in Michaud I found reversible error in that decision, holding that Judge Evans had no basis for quashing the summonses. Because Judge Evans’ order is ambiguous on several potentially dispositive points, we depart from the tack taken by the panel and remand to Judge Evans for additional findings.

At the heart of this controversy lie important questions of when and how the Service can, in the course of a civil investigation, bring to bear against a taxpayer the full weight of federal enforcement mechanisms. Primary responsibility over these questions has been entrusted to the federal district courts, which have the power and duty to monitor these investigations through the enforcement (and non-enforcement) of the Service’s demands on taxpayers. 26 U.S.C. §§ 7402, 7604 & 7605. See also United States v. Bisceglia, 420 U.S. 141, 146-47, 95 S.Ct. 915, 918-19, 43 L.Ed.2d 88 (1974) and the cases cited there. “Congress has provided protection from arbitrary or capricious action by placing the federal courts between the Government and the person summoned.” Id. at 151, 95 S.Ct. at 921.

The above-cited sections of the Internal Revenue Code give district courts the authority to “render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws,” § 7402(a), and to “make such order[s] as [they] deem proper, not inconsistent with the law for the punishment of contempts, to enforce obedience to the requirements of the [Service’s] summons_” § 7604(b).¹ Under this authority, district courts deny enforcement of the Service’s demands when they find that the Service is acting in bad faith or attempting to abuse the court’s process. “Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or put pressure on him to settle a collateral dispute, or for any purpose reflecting on the good faith of the particular investigation.” United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964).

Along with this power and duty to check for abuse, district courts hold the Service to the burden of making a prima facie showing of “good faith.” As established in Powell, the prima facie case must include the following elements:

[The Service] must show [1] that the investigation will be conducted pursuant to a legitimate purpose, [2] that the inquiry may be relevant to the purpose, [3] that the information sought is not already within the [Service’s] possession, and [4] that the administrative steps required by the Code have been followed ....

379 U.S. at 57-58, 85 S.Ct. at 255. Thus, a district court can deny the Service’s demands on a taxpayer if it finds that the Service has fallen short of establishing these four elements, or if the taxpayer otherwise establishes that the Service’s request is in bad faith. Cf. United States v. White, 853 F.2d 107 (2nd Cir.1988); United States v. Texas Heart Institute, 755 F.2d 469 (5th Cir.1985); United States v. John G. Mutschler & Assoc., Inc., 734 F.2d 363, 367 (8th Cir.1984).

Beyond this “good faith” requirement, the Code has long prohibited enforcement of a Service summons after the matter has been referred to the Justice Department for criminal prosecution. See 26 U.S.C. § 7602(c) and its predecessors. See also Donaldson v. United States, 400 U.S. 517, 532-36, 91 S.Ct. 534, 543-45, 27 L.Ed.2d 580 (1971). The Supreme Court, in United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), read § 7602 to include a prohibition against the Service’s use of an administrative summonses solely for criminal investigatory purposes. In LaSalle, the Court reviewed a decision of this court in which we held that enforcement can also be denied in certain cases short of a formal referral to the Justice Department: “[T]he use of an administrative summons solely for criminal purposes is a quintessential example of bad faith.” United States v. LaSalle National Bank, 554 F.2d 302, 309 (7th Cir.1977). The Supreme Court agreed that enforcement can and should be denied when the Service is attempting to exploit its civil investigatory powers as a de facto grand jury: “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.” LaSalle, 437 U.S. at 316-17, 98 S.Ct. at 2367-68. (The Court reversed our decision on the outcome, however, because it found insufficient evidence of such an institutional commitment. Id., at 318-19, 98 S.Ct. at 2368.) Thus, under § 7602 and LaSalle, a summons issued by the Service after it has referred the matter to the Justice Department, or after it, in an institutional sense, has abandoned any proper civil purpose, should not be enforced.²

In this case, it is impossible to tell from Judge Evans’ order whether and to what extent his decision to quash the summonses rested on any one of (or perhaps all of) these grounds. The operative passage from his brief order merits quotation in full. Judge Evans begins with a discussion of an omission made by the Service’s case agent in his affidavit to the court. Judge Evans indicates that this omission (failing to mention that the Michauds did appear at the requested location and partially comply with the Service’s demands) led him to an “improper conclusion” regarding the nature of the Michauds’ actions, but he continues:

Although I believe the failure to provide me with the full story of what occurred ... in and of itself justifies denying enforcement to the summonses, a more fundamental reason for denying enforcement exists. The purppse of the investigation by the [Service] is “to investigate the federal employment and unemployment tax liabilities of Superior Engineering ... for the taxable years 1983 through 1986” [quoting government submissions]. I do not think the handwriting or the fingerprints of the Mi-chauds are necessary to establish the tax liabilities of Superior Engineering. Furthermore, requiring them to appear at a police station to be fingerprinted appears to be a little heavy-handed and perhaps violative of 26 U.S.C. § 7605(b)_

Also, it should be noted that assessments have been issued against Superior Engineering alleging that its taxes were not properly stated and that the correct amount (higher, of course) has been determined by the [Service]. Implicit in this action is the assumption that the [Service] knows the tax liabilities of Superior Engineering. Therefore, the reason, if there ever was a good one, for wanting the Michauds’ handwriting and fingerprints seems to have evaporated. And lastly, it appears that the aroma of a criminal proceeding is emanating from this investigation, and the government should not be allowed to use these civil proceedings to arm itself for that fight should it eventually occur.

Unfortunately, this passage raises at least as many questions as it answers. First, does the court’s decision actually rely on the omission in the agent’s affidavit, and/or the “heavy-handedness” of requiring the Michauds to appear at a police station to be fingerprinted? As the panel in Michaud I noted, infra (appendix) at 758-759, these factors, at least as they are currently developed in the record, do not qualify as the kind of “abuse of process” or harassment that trigger the court’s power under either Powell or § 7604(b), nor do they appear to make the Service’s demand “unnecessary” as described in § 7605(b). The misleading statement was found by Judge Evans to be unintentional, and merely choosing a police station for the fingerprinting, assuming it was reasonably convenient and was not chosen for some improper purpose, does not appear to constitute harassment. Because the record is inadequate to confirm or deny such disposi-tive assumptions, however, this issue must be remanded to Judge Evans, who has dealt first-hand with these parties and is in a much better position to assess their conduct, before it can be resolved by this court.

Second, how are we to interpret the court’s discussion of the purpose(s) of the investigation and the relevance of the requested information thereto? Judge Evans states that “I do not think the handwriting or the fingerprints of the Michauds are necessary ...,” and that “the reason, if there ever was a good one, for wanting the Michauds’ handwriting and fingerprints seems to have evaporated” (emphasis added). He also speaks of an “assumption” that is “implicit” in the fact that assessments have issued against Superior Engineering. By these statements, does Judge Evans mean to say that, from his review of the facts and the testimony and behavior of the parties, the purpose of the investigation was limited to the corporation’s tax liabilities, and that, because this purpose has been exhausted, the requested information is no longer relevant? Or is it that the requested information was never relevant to the sole, legitimate purpose of the investigation, making the government’s request unenforceable ab initio ? Explicit findings along these lines could result in the conclusion that the government has not met the four-part “good faith” predicate established in Powell, 379 U.S. 48, 85 S.Ct. 248, that the sole remaining purpose is to harass the Michauds, or that enforcement of the summonses would otherwise be an abuse of process. The statements in Judge Evans’ order, however, though sufficient to raise these troubling concerns, do not constitute the findings necessary to resolve them.

Third, and finally, by expressing concern that “the aroma of a criminal proceeding is emanating from this investigation, and the government should not be allowed to use these civil proceedings to arm itself for that fight,” was the court’s intent to invoke the de facto grand jury concerns discussed in LaSalle, 437 U.S. 298, 98 S.Ct. 2357? By its terms, LaSalle requires the court to find evidence that the Service has made an “institutional commitment” to refer the matter to the Justice Department, id. at 316-17, 98 S.Ct. at 2367, and this court has held that, to successfully raise the “sole criminal purpose” defense, a taxpayer must come forward with specific facts that establish that the summons has “no civil purpose whatsoever,” and that the Service “has abandoned any institutional pursuit of a civil tax determination.” United States v. Kis, 658 F.2d 526, 538-42 (7th Cir.1981) (emphasis in original), cert. denied sub nom. Salkin v. United States, 455 U.S. 1018, 102 S.Ct. 1712, 72 L.Ed.2d 135 (1982). Judge Evans’ one-sentence statement showing concern over an “aroma,” without more, does not constitute a sufficient finding to raise the LaSalle issue.

Because of these ambiguities, we remand this case to Judge Evans for additional findings. Specifically, the court should develop further whether the Service is harassing the Michauds for some improper purpose; whether it is attempting to abuse the court’s process; whether it has failed to establish its Powell good faith predicate; whether it has made an “institutional commitment” to refer the Michauds to the Justice Department for criminal prosecution; and, importantly, which of these grounds (if any) it finds dispositive. On remand, the court should also undertake whatever further proceedings are necessary and appropriate — mindful of the rules and procedures for summons enforcement proceedings we established in United States v. Kis, 658 F.2d 526 — to obtain the evidence necessary to make these findings. Only then can this court assess and resolve the issues discussed in this opinion; issues that a majority of this court found sufficient to merit this en banc rehearing.

1 . See also 26 U.S.C. § 7402(b):

If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, or other data, the district court of the United States for the district in which the person resides or may be found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data.

The district courts also enforce the Code's restrictions on the time, place and manner of the Service’s examinations of taxpayers contained in § 7605:

No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the [Service], after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

26 U.S.C. § 7605(b).

2 . There is some debate as to whether this "solely criminal purpose” ground discussed in LaSalle .survived the 1982 amendments to § 7602, and specifically the addition of § 7602(b). Compare United States v. Stuart, 489 U.S. 353, 109 S.Ct. 1183, 1189, 103 L.Ed.2d 388 (1989) ("When Congress codified the essence of our holding [in LaSalle ] in § 7602(c), it apparently shared our concern about permitting the IRS to encroach upon the rights of potential criminal defendants.”); Hintze v. I.R.S., 879 F.2d 121, 127 (4th Cir.1989) ("The taxpayers here might well have prevailed, moreover, had they succeeded in showing that the IRS was pursuing its investigation for the sole purpose of building a case on anticipated criminal charges,” citing LaSalle); and United States v. Lawn Builders of New England, Inc., 856 F.2d 388, 391-92 (1st Cir.1988) ("[T]he IRS must not have abandoned the pursuit of civil tax determination or collection,” citing LaSalle) with La Mura v. United States, 765 F.2d 974, 980 n. 9 (11th Cir.1985) (suggesting that the 1982 amendments limited the grounds for non-enforcement to actual referral and eliminated LaSalle's "institutional commitment” ground); Pickel v. United States, 746 F.2d 176, 183-84 (3d Cir.1984) (holding that "Congress codified the position of the dissenters in [LaSalle ] by enacting the [1982] amendments to section 7602") and Segmond v. United States, 589 F.Supp. 568, 573 (S.D.N.Y.1984) (“Although prior to September 4, 1982, a summons could not issue solely for a ‘criminal purpose' (i.e. to inquire into possible criminal conduct), [the 1982 amendments] abolished that ‘criminal purpose’ defense.”). We also note that, in United States v. Kemper Money Market Fund, Inc., 781 F.2d 1268 (7th Cir.1986), a panel of this court was critical of LaSalle and hinted that the 1982 amendments may have limited it, but did not reach the issue because the case arose under the pre-amendment version of § 7602. Id. at 1276-77. See also United States v. Particle Data, Inc., 634 F.Supp. 272, 276-77 (N.D.Ill.1986).

For the reasons discussed below, however, we need not, and do not, resolve this debate here.