Unpublished Disposition, 893 F.2d 1338 (9th Cir. 1987)

MEMORANDUM^** 

Appellants Glen and Myrtle Moering timely appeal the district court's order enforcing Internal Revenue Service (IRS) summonses. This court has jurisdiction under 28 U.S.C. § 1291. We affirm.

In August 1987, the IRS issued summonses to the Maritime Bank of California, Commonwealth Bank, and International City Bank pursuant to an investigation of the Moerings' federal income tax liabilities, the correctness of their returns, and any possible criminal violations. The IRS gave the Moerings timely notice of the summonses, which requested the Moerings' bank records.

On September 15, 1987, the Moerings filed a petition to quash the summonses. In response, the IRS filed a petition for summary enforcement. The IRS petition was supported by declarations of two special agents of the Criminal Investigation Division who were involved in the investigation. After two hearings, the district court issued an order enforcing the summonses from which the Moerings appeal. This court granted the Moerings' motion to stay enforcement on the summonses pending appeal.

We review the denial of a petition to quash an IRS summons under the clearly erroneous standard. Tornay v. United States, 840 F.2d 1424, 1426 (9th Cir. 1988). Whether enforcement of the summons violates constitutional rights is a question of law which we review de novo. Id. at 1429. The denial of a request for an evidentiary hearing is reviewed for abuse of discretion. United States v. Author Servs., Inc., 804 F.2d 1520, 1523 (9th Cir. 1986) (citation omitted), modified on other grounds, 811 F.2d 1264 (1987).

The Moerings contend that enforcement of the summonses violates their Fourth Amendment rights because it allows for the unreasonable search of private records. We find this contention to be meritless.

Governmental investigative activities do not implicate an interest legitimately protected by the Fourth Amendment "unless there is an intrusion into a zone of privacy, into 'the security a man relies upon when he places himself or his property within a constitutionally protected area.' " United States v. Miller, 425 U.S. 435 (1976) (quoting Hoffa v. United States, 385 U.S. 293 (1966)). In Miller, the Supreme Court held that the subpoena of bank records constitutes "no intrusion into any area in which ... a protected Fourth Amendment interest" exists. Miller, 425 U.S. at 440; see also id. at 442 (stating that a bank customer has "no legitimate 'expectation of privacy' in [the] contents" of bank records). Thus, IRS summonses of bank records cannot violate the fourth amendment.¹ 

The Moerings attempt to escape the Court's holding in Miller by arguing that the Right to Financial Privacy Act (the RFPA), 12 U.S.C. § 3402, reversed Miller for all purposes. We are not persuaded by this argument. Congress enacted the RFPA not to reverse, but as a "response" to, Miller. In passing the statute, Congress intended to effectuate a "compromise between a bank customer's right of financial privacy and the need of law enforcement agencies to obtain financial records pursuant to legitimate investigations." United States v. Frazin, 780 F.2d 1461, 1465 (9th Cir.) (emphasis added), cert. denied, 479 U.S. 839, cert. denied, 479 U.S. 844 (1986). The RFPA prohibits financial institutions from supplying the government with information about their customers' financial records unless the customer authorizes the disclosure of such information or the government obtains a valid subpoena or warrant. See 12 U.S.C. § 3402. But the RFPA specifically exempts IRS summonses from the provisions of Sec. 3402 in Sec. 3413(c), which reads " [nothing] ... prohibits the disclosure of financial records in accordance with procedures authorized by the Internal Revenue Code." See also McTaggart v. United States, 570 F. Supp. 547, 550 (E.D. Mich. 1983) (Sec. 3413(c) precludes a right of privacy in bank records).

The Moerings additionally argue that Sec. 7602(b) is unconstitutional because it allows for IRS investigations that are solely criminal in nature. But since the Moerings have no privacy interest in their bank records, whether Sec. 7602(b) provides for solely criminal investigations is irrelevant for purposes of fourth amendment analysis. Moreover, the prohibition on IRS summonses issued solely to aid criminal investigations, announced by the Supreme Court in United States v. LaSalle Nat'l Bank, 437 U.S. 298, 316-17 & n. 18 (1978), was found as a matter of statutory, not constitutional, construction. See id. The IRS in this case issued valid third party record-keeper summonses. See Harris v. United States, IRS, 758 F.2d 456, 457 (9th Cir. 1985) (citations omitted) (summonses issued to a third party record keeper pursuant to Sec. 7602 do not violate the Fourth Amendment).

The Moerings further contend that the district court erred in denying their motion for an evidentiary hearing because the facts allegedly show the IRS issued the summonses in bad faith.

To obtain enforcement, the IRS must demonstrate good faith in issuing the summonses. The IRS must make a prima facie showing 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". United States v. Powell, 379 U.S. 48, 57-58 (1964). The IRS submitted the affidavit of Kenneth Bethke indicating that the summonses were issued in compliance with these four Powell factors. Accordingly, we find that the district court was not clearly erroneous in finding that the government has set forth a prima facie case. See Ponsford v. United States, 771 F.2d 1305, 1308 (9th Cir. 1985) (affidavits are the normal method by which the IRS makes a prima facie showing).

Since the IRS has met its burden, the Moerings now have the burden of proving an abuse of process by showing that the IRS has acted in bad faith for an improper purpose. See Liberty Fin. Servs. v. United States, 778 F.2d 1390, 1392 (9th Cir. 1985) (per curiam). An abuse would take place if the IRS issues the summons " 'for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.' " United States v. Stuart, 109 S. Ct. 1183, 1188 (1989) (quoting Powell, 379 U.S. at 58). The district court found that the Moerings had made "only bald allegations" of bad faith that were insufficient to meet the burden necessary to warrant an evidentiary hearing. We find that the district court did not abuse its discretion.

In order to trigger a limited evidentiary hearing, the Moerings must " 'do more than allege an improper purpose'; 'some evidence ' must be introduced to support the allegations made.' " United States v. Samuels, Kramer & Co., 712 F.2d 1342, 1347 (9th Cir. 1983) (quoting United States v. Church of Scientology, 520 F.2d 818, 824 (9th Cir. 1975)). This burden is a "heavy" one. Liberty Fin. Servs., 778 F.2d at 1392. The Moerings must answer the IRS's prima facie case " 'through responsive pleadings, supported by affidavits, that allege specific facts in rebuttal.' " Samuels, 712 F.2d at 1348 (quoting United States v. Kis, 658 F.2d 526 (7th Cir. 1981), cert. denied, 455 U.S. 1018 (1982)). The facts, however, need only raise "sufficient doubt" about the government's purposes. Id.

We find that the Moerings have alleged no specific facts from which to infer a possibility of some wrongful conduct on the IRS's part. In attempting to show bad faith on the agency's part in conducting this particular investigation, they state only that the IRS's investigation of them must be "solely" criminal because (1) they received a refund for one of the relevant years and (2) there is only a criminal agent of the IRS on the case.

Preliminarily, we note that whether taxpayers can even attack the bad faith of the IRS by showing that a summons is being issued solely to aid a criminal investigation is now dubious. Admittedly, the Supreme Court in 1978 interpreted Sec. 7602 as preventing the issuance of a summons solely for a criminal investigation, see LaSalle, 437 U.S. at 316-17 & n. 18. This standard not only prohibited the use of an IRS summons once the agency refers a case to the Department of Justice for prosecution, id. at 311; it prohibited the issuance of a summons "when there is an institutional commitment to make the referral and the Service merely would like to gather additional evidence for the prosecution," id. at 317. But Congress, in passing The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324 (1982), appears to have amended Sec. 7602 in a manner that eliminated the second prong of the LaSalle holding, in effect allowing the IRS to issue a summons even solely for a criminal investigation so long as the agency has not referred the case to the Justice Department or has not received a written request from the Justice Department for a return or return information on the taxpayer. See 26 U.S.C. § 7602(b) (authorizing IRS to use its summoning authority to investigate "any offense connected with the administration or enforcement of internal revenue laws") (emphasis added); id. Sec. 7602(c) (prohibiting IRS from issuing any summons when Justice Department referral is in effect). Congress advocated a "clear definition of whenthe power to issue an administrative summons exists" so as to avoid "wasteful litigation" on the question whether the IRS "has made an institutional decision to abandon pursuit of a civil tax determination or collection, or has made an institutional commitment to refer a case to the Justice Department." S.Rep. No. 494, 97th Cong., 2d Sess., vol. 1, pt. 2, at 285, reprinted in 1982 U.S.Code Cong. & Admin.News 781, 1031. This is the position of the dissent in LaSalle, 439 U.S. at 320-21 (Stewart, J., dissenting). See Moutevelis v. United States, 727 F.2d 313, 314-15 (in adopting the "bright line" test urged by the dissenters in LaSalle, Congress "eliminated from consideration the question whether the Internal Revenue Service was motivated by a criminal investigative purpose, so long as no Justice Department referral has occurred"); see also United States v. Morgan, 761 F.2d 1009, 1012 (4th Cir. 1985) (Congress drew a " 'bright line' " by which it "intended to establish a mechanical test for determining the validity of the summons").

Nonetheless, the Supreme Court has recently stated, somewhat cryptically, that Congress codified "the essence" of its LaSalle holding in TEFRA. Stuart, 109 S. Ct. at 1189. Additionally, one case in this circuit has noted the existence of the IRS's institutional responsibility subsequent to the enactment of the TEFRA amendments. See Author Servs., 804 F.2d at 1524. But even if these cases signal that the institutional responsibility claim still has some vitality in proving bad faith on the part of the IRS, we find that the Moerings have failed to show that the IRS has abandoned its "institutional responsibility" to "calculate and to collect civil fraud penalties and fraudulently reported or unreported taxes." LaSalle, 437 U.S. at 314. Whether an investigation has "solely criminal purposes must be answered only by an examination of the institutional posture of the IRS" in each case. Id. at 315. A good-faith inquiry serves to determine whether the IRS in issuing the summons is "honestly pursuing the goals of Sec. 7602." Id. It does not focus on the personal intent of the special agent. Id. at 316. "Because criminal and civil fraud liabilities are coterminous, the [IRS] rarely will be found to have acted in bad faith by pursing the former." Id.

The fact that the Moerings have received a refund for 1985 does not preclude the IRS from investigating their civil tax liability for that year. See United States v. Wurts, 303 U.S. 414, 416 (1938); see also Woods v. United States, 724 F.2d 1444, 1448 (9th Cir. 1984) (government has authority to recover funds which its agents have wrongfully, erroneously, or illegally paid). Further, because the IRS did not make a recommendation to the Justice Department prior to issuing the summonses, we will not consider the summonses to be in bad faith "merely because the IRS is considering criminal prosecution." Kerr v. United States, 801 F.2d 1162, 1164 (9th Cir. 1986). Finally, the fact that only special agents have appeared in the investigation prior to the filing of the petition for enforcement is not enough to carry the Moerings' burden of showing that the investigation was wholly criminal in purpose. See United States v. Doney, 559 F.2d 544, 545 (9th Cir. 1977) (per curiam) (citing Donaldson v. United States, 400 U.S. 517 (1971)). Because the Moerings have failed to raise sufficient doubts about the government's purpose in seeking enforcement of the summonses, we find that the district court did not err in denying their request for an evidentiary hearing.

Finally, the Moerings contend that the summonses are unenforceable because they are overbroad, general, oppressive, and burdensome. The district court ordered that the summonses be enforced, apparently finding that this contention lacked merit.

Congress has given the IRS "broad" investigative powers for enforcing the tax laws. Tornay, 840 F.2d at 1431 (citing 26 U.S.C. § 7601). The IRS has the power to issue summonses for any material that is relevant or material to a tax investigation. 26 U.S.C. § 7602(a) (1). To satisfy its burden, the IRS need only show that the materials " 'would throw light upon the correctness of the [Moerings'] returns.' " Stuart v. United States, 813 F.2d 243, 251 (9th Cir. 1987) (quoting United States v. Ryan, 455 F.2d 728, 733 (9th Cir. 1972)), rev'd on other grounds, 109 S. Ct. 1183 (1989). Since relevancy is an element of good faith, it may be established by affidavit. Id. When the IRS seeks information relevant to a legitimate investigation, it is not engaged in a "fishing expedition". Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 321 (1985).

The IRS is not engaged in a fishing expedition in the instant case. The summonses requested records "maintained for or on behalf of" the Moerings and several specified businesses. In addition, the summonses requested records of "any other known nominees or any accounts" on which the Moerings had signature authority, including but not limited to certain types of accounts, safety deposit boxes, and time certificates of deposit. The businesses named in the summonses are ones in which the Moerings are financially involved. All the requested information appears to relate to the Moerings' receipt or disbursement of money, or to their financial or property transactions, which may be properly inspected by the IRS. See United States v. Popkin, 623 F.2d 108, 110 (9th Cir. 1980) (per curiam). Further, the information requested was limited to the period under investigation, from December 1, 1982 to January 31, 1986. Given the text of the summonses and the affidavit of Kenneth Bethke, we find that the materials will throw some light on the correctness of the Moerings' returns. Therefore, we find that the summonses are enforceable. Accordingly, the district court's order is

AFFIRMED.