Monday, May 11, 2015

Seventh Circuit Ducks On Use of IRS Summons for Criminal Investigation (5/11/15)

Section 7602(a), here, provides that the IRS may issue administrative 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."  The stated purposes seem to be civil in nature.  But, § 7602(b) says that the purposes may include "inquiring into any offense connected with the administration or enforcement of the internal revenue laws.  Section 7602(d) provides that the IRS summons or summons enforcement action may not be issued if the IRS has made a "Justice Department referral."

Subsections (b) and (d) were enacted in 1982 to provide a bright line test to determine when the IRS should not use the IRS summons.  Congress felt the bright line test was needed because of the decision in United States v. LaSalle Nat’l Bank, 437 US 298 (1978), here, which held that even prior to the DOJ referral, the IRS could not enforce the summons after it had institutionally abandoned its civil purpose and was pursuing enforcement solely for criminal purposes.  One would have thought that the 1982 additions of subsections (b) and (d) would have put to rest the issue of whether the IRS could use the IRS summons and seek judicial enforcement for criminal purposes, so long as there was no DOJ referral in effect.

But, in United States v. Michaud, 907 F.2d 750 (7th Cir. 1990) (en banc), here, the Seventh Circuit seemed to say the LaSalle still had life after the 1982 additions (bold face supplied by JAT):
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, 27 L. Ed. 2d 580, 91 S. Ct. 534 (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: HN5 "The 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. (The Court reversed our decision on the outcome, however, because it found insufficient evidence of such an institutional commitment. Id. at 318-19.) 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. 
In United States v. Procknow, ___ F.3d ___, 2015 U.S. App. LEXIS 6942 (7th Cir. 2015), here, the Seventh Circuit again addressed the issue in an identity theft case.  In Procknow, the facts are skimpy.  A local police officer acting at the request of a probation officer had arrested Procknow and, after what was determined to be a consensual initial search of a hotel room Procknow was using, obtained a search warrant to search the room.  Pursuant to the search warrant, the local police officer seized various items and turned them over to an IRS criminal investigation agent.  The IRS criminal investigation agent then obtained a search warrant for a UPS box.  Some months thereafter, the IRS CI special agent "sent administrative summonses to several financial institutions requesting information about accounts held by Procknow and suspected victims and aliases."  Then, in the following month:

a grand jury in the Western District of Wisconsin issued a subpoena to Procknow's bank requesting all account information for Procknow; n3 Kuntsman retracted the administrative summonses, returned all documents he had received pursuant to the summonses, and destroyed all copies made of that evidence; and the U.S. Attorney's Office for the Western District of Wisconsin sent a letter to the IRS informing the agency that the office was conducting an investigation against Procknow and requesting that an IRS agent be assigned to the investigation.   On July 23, 2012, the IRS agreed to the request, and on February 1, 2013, the IRS sent a letter to the U.S. Attorney's Office, transmitting the case and officially recommending prosecution.
The Seventh Circuit then ducked the issue it had left open in Michaud as follows:
In 1978, the Supreme Court decided that the IRS may not validly issue an administrative summons (also known as a "civil summons") for the sole purpose of a criminal investigation, even if the criminal investigation had not yet been referred to the Department of Justice for prosecution. United States v. LaSalle Nat'l Bank, 437 U.S. 298, 317, 98 S. Ct. 2357, 57 L. Ed. 2d 221 (1978). In 1982, Congress amended the statute governing administrative summonses in two ways. First, Congress added a section providing that the IRS may issue summonses for "the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws." 26 U.S.C. § 7602(b). Second, Congress dictated when the IRS's administrative-summons authority ends: "No summons may be issued under this title ... with respect to any person if a Justice Department referral is in effect with respect to such person." Id. § 7602(d)(1). 
A majority of circuits have held "that the IRS may validly issue a summons pursuant to 26 U.S.C. § 7602, as amended in 1982, for the sole purpose of a criminal investigation," and the 1982 amendment to § 7602 established a bright-line rule that "the IRS's authority to issue summonses for the purpose of investigating any offense relating to the tax code is extinguished only when the investigation is referred to the Department of Justice." Scotty's Contracting & Stone, Inc. v. United States, 326 F.3d 785, 788-89 (6th Cir. 2003) (collecting cases). In 1990, prior to consideration of the issue by many other circuits, we noted: "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). ... [W]e need not, and do not, resolve this debate here." United States v. Michaud, 907 F.2d 750, 752 n.2 (7th Cir. 1990) (en banc); compare id. at 754 n.1 (Coffey, J., concurring) (stating that the holding in LaSalle was [20]  unaffected by the 1982 amendment to § 7602), with id. at 757 (Posner, J., dissenting, joined by three other judges) (stating that the court should find that the 1982 amendment to § 7602 established a bright-line rule that "[b]efore referral, the IRS is free to use the summons procedure to investigate potential criminal liability"). Later, we cited Michaud in support of the statement that the IRS "cannot use its summons authority if its only purpose is to gather evidence for a criminal investigation." United States v. Berg, 20 F.3d 304, 309 n.6 (7th Cir. 1994). 
Procknow relies upon Michaud and Berg to argue that "whether or not the civil summonses were issued prior to the DOJ referral is not the only relevant inquiry—a more important inquiry is whether the civil summonses were issued for the sole purpose of a criminal investigation or prosecution." Meanwhile, the government contends that "[t]he best reading of Section 7602 is the one adopted by the majority of circuits and urged by the dissenters in Michaud," which is to say, "[a]s long as no Justice Department referral is in effect, the use of administrative summons power for criminal investigation is proper." But before we wade further into this murky issue, we pause to consider what might await us on the other side—i.e., what remedy is [21]  available to Procknow if we were to find that the administrative summonses were improperly issued.
So, it appears that LaSalle may have some continuing force in the Seventh Circuit.

I won't address this important issue further, but I do provide here the parties' briefs:

  • Procknow appellant brief, here.
  • United States Appellee brief, here:

I do note that there is an issue lurking in the facts.  In the facts, it appears that the grand jury investigation had been started by the local U.S. Attorney's office without a DOJ referral in effect.  The facts say that, and that is the logical inference from the IRS CI Special Agent's use of the IRS summons.  Apparently, when the IRS CI Special Agent learned of the grand jury investigation, he destroyed the fruits of the summons.  It is not clear how the U.S. attorney would have commenced the investigation of a tax crime without a referral from the IRS or at least some communication from and with the IRS.  Such communications could be problematic under Section 6103(h), here, without a DOJ referral.  Still the facts are so cryptically stated that further development of this issue would be speculation.  I do note that, assuming no violation of § 6103, it would appear that the U.S. Attorney may have been conducting a criminal tax investigation sufficient at least to obtain authorization for a grand jury investigation.  I have been concerned and have written before about the DOJ's authority to conduct such investigations independent of the IRS outside of and before the grand jury investigation is started.  See DOJ Tax Division Criminal Tax Investigation Authority (Federal Tax Crimes Blog 6/5/09; 12/29/14), here; and Even More on DOJ Authority to Investigate Tax Crimes (Federal Tax Crimes Blog 7/20/10), here.  Just this past weekend, I heard an official of IRS CI repeat the mantra that the IRS is the only agency that can investigate tax crimes.  Well, either DOJ / DOJ Tax has that authority or it doesn't.  I don't think that issue has been definitely decided, but until it is, as I note in the blog, some in the public may believe the IRS claim that it is the only agency authorized to investigate tax crimes.  In any event, I suppose, identity theft also probably involves non-tax crimes that the U.S. Attorney could investigate, so that may be the answer in Procknow, but would not be the answer in other cases where DOJ Tax has done such investigations outside the grand jury.

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