United States v. Deak-Perera & Co.

Citation: 566 F. Supp. 1398Docket: Misc. 82-0256

Court: District Court, District of Columbia; August 11, 1983; Federal District Court

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The United States District Court in the District of Columbia addressed a petition by the IRS to enforce a third-party recordkeeping summons issued to Deak-Perera Washington, Inc. in May 1982, seeking documents related to its transactions in precious metals with customer Edward O. Uhrig. Both the IRS and Deak-Perera moved for summary disposition while indicating that factual issues remained. The court noted that Deak-Perera is a non-bank financial institution under the Currency and Foreign Transactions Reporting Act, which mandates it to maintain records and file reports regarding significant currency transactions. Specifically, institutions must report physical currency transfers exceeding $10,000 and international shipments over $5,000, among other recordkeeping requirements. The Secretary of the Treasury has delegated enforcement authority under the Act to various agencies, with the IRS overseeing non-bank financial institutions like Deak-Perera. In May 1980, IRS Revenue Agent Robert G. Heilig conducted a compliance inspection of Deak-Perera to verify adherence to these reporting obligations, reviewing records of transactions and noting details of every transaction over $10,000, irrespective of their reportability under the Act.

Deak-Perera raised concerns about customer privacy during an IRS inspection, which was clarified by the IRS District Director to be a legitimate investigation aimed at identifying potentially disguised reportable transactions. Heilig, the IRS agent, was noted to be gathering customer data solely for this purpose and not conducting any unjustified fishing expeditions. Following the inspection, Heilig generated Audit Information Reports (AIRs) for 83 transactions involving sales of precious metals over $25,000, detailing customer information and sending these reports to local IRS offices to assist in auditing customers' tax returns, with no link to any reporting obligations under the Currency Act. One AIR initiated an investigation into Edward O. Uhrig, leading to a summons for records related to his transactions. The document outlines the limited role of federal courts in enforcing administrative subpoenas, emphasizing their responsibility to ensure the investigation is legitimate, relevant, and that the information sought is not already available to the agency. The IRS argued that its audit of Deak-Perera served a significant federal interest, justifying minimal expectations of privacy for regulated businesses.

In G.M. Leasing Corp. v. United States, the IRS contended that Deak-Perera could not contest the information collected during a compliance audit because it had voluntarily allowed the inspection, which was justified under the Currency Act. The IRS argued that the information obtained was relevant to its broad mandate under 26 U.S.C. 7602 to investigate potential tax liabilities. Deak-Perera countered that it had been misled, asserting that, while the IRS might have had the right to audit its compliance records, this did not extend to customer records related to tax liabilities. Deak-Perera claimed it would have provided redacted records had it known the full extent of the IRS's inquiry. 

The document outlines that while regulatory inspections do not generally require warrants or probable cause, they must still adhere to the reasonableness standards of the Fourth Amendment. Congress's authorization for inspections does not exempt them from these constitutional protections. The Currency Act and its regulations do not allow for the sharing of incidental information obtained during audits if it violates privacy expectations. The IRS's ability to access information not pertinent to the stated purpose of the inspection relied on Deak-Perera's consent, which was based on the IRS's representations. However, consent obtained under a false claim of authority or through deception is not valid. Ultimately, Deak-Perera disclosed information it could have withheld, trusting the IRS to respect its privacy, which the IRS failed to uphold.

Knowledge obtained by the government through misleading means cannot be used to compel the production of records from private individuals. While the government may need to operate with some discretion in criminal law enforcement, it is expected to maintain a higher standard of honesty during regulatory inspections. A case cited emphasizes that individuals should trust government agents acting in their official capacity, and using deception to gain access to records undermines that trust, constituting an abuse of process. 

On July 6, 1983, the court denied the Internal Revenue Service's (IRS) request to enforce a summons issued to Deak-Perera of Washington, Inc., citing these principles. The IRS later sought reconsideration based on the United States v. Calandra decision, claiming it undermined the precedent set in Silverthorne Lumber Co. v. United States, which held that evidence obtained through a Fourth Amendment violation cannot be reacquired through legal process. Calandra clarified that the exclusionary rule does not apply to grand jury proceedings, allowing a witness to be compelled to answer questions even if based on unlawfully obtained evidence, while still preserving Fifth Amendment protections. The distinction made by Calandra indicates that the IRS's subpoena may have been issued to retrieve original documents for a criminal prosecution, which aligns with the concerns raised in Silverthorne regarding the government's use of prior unlawful seizures.

A single IRS special agent, acting as a "grand inquest," is deemed to have the authority to issue subpoenas; however, the court believes that not enforcing such a subpoena will deter inappropriate regulatory inspections. Consequently, the court denies the petitioner's motion for reconsideration. Uhrig, a self-identified non-taxpayer, received notice of the summons from Deak-Perera but is not a party to the case. He utilized his right to stay compliance under former 26 U.S.C. 7609(b)(2), although the law has changed to require affected individuals to quash summonses for post-1982 transactions. The applicable regulations permit inspections solely for compliance with recordkeeping and reporting requirements. Deak-Perera, as a financial institution under the Act, claims Fourth Amendment rights regarding its records, which were found compliant during an audit. The IRS has not disputed Deak-Perera's standing, which the court assumes without a formal finding. The resolution of whether banks can assert claims on behalf of depositors or only their own rights remains unresolved, pending the issuance of lawful process involving depositor records.