This Court concludes that Section 7429 does not bar discovery and that a taxpayer who initiates a Section 7429 proceeding is entitled to limited discovery if he demonstrates that he requires discovery in order to participate meaningfully in the hearing on the reasonableness of the assessment. The fact that the proceedings are summary and a determination expedited requires the Court to exercise firm control over discovery and to allow only such discovery as may be necessary for the narrow question before the Court. The Court's initial supervision of discovery results from the need for the taxpayer to seek Court approval for discovery pursuant to Fed.R.Civ.P. 30(a). However, even in those cases where there has been an extension pursuant to 26 U.S.C. § 7429(c), which goes beyond 30 days of the filing of the summons and complaint, the Court must still exercise effective control over discovery, if and when the Government moves for a protective order.
Congress recognized when it enacted Section 7429 that quite often persons who are subjects of jeopardy or termination assessments are involved in alleged illegal activities and thus it can be inferred that Congress, while not foreclosing the opportunity for taxpayers to obtain discovery, did not contemplate wide reaching discovery which would go beyond the taxpayers' need to address the narrow issues raised in Section 7429 proceedings. In no event, is the taxpayer entitled for Section 7429 purposes to discovery of the Government's criminal investigation.
As the Court noted, the taxpayer is entitled to limited discovery so that he may meaningfully participate in the proceedings, but the extent of discovery, and indeed whether any discovery is necessary at all, must be determined based upon the facts of each case and depends upon whether the Secretary has furnished complete information in the letter provided to the taxpayer pursuant to 26 U.S.C. § 7429(a)(1). If that letter furnishes all the information the taxpayer requires in order to litigate the reasonableness of the assessment, then no discovery is required. Thus, it is the Secretary who ultimately determines the need for taxpayer discovery and the extent of such discovery.
Section 7429(a)(1) contemplates a letter which furnishes information as to the reasons for the making of a jeopardy assessment and which demonstrates the reasonableness of the amount of the assessment. For example, if IRS receives information that a taxpayer is about to remove his assets from the country, where possible, that information should be furnished in the letter to afford the taxpayer an opportunity to demonstrate that, while the information may suggest an attempt to secrete assets, the information is either not true or has been misinterpreted by IRS. The furnishing of such information would not prejudice IRS since, presumably, it will furnish that information within a few days of the filing of the summons and complaint in a Section 7429 proceeding in order to meet its burden of demonstrating that the making of the assessment was reasonable under the circumstances. In those rare cases where, for example, discovery would jeopardize an investigation or identify an informant, the submission at the hearing may be made in camera. Under these circumstances IRS would not include the information in its letter but should make its in camera submission once the Section 7429 action is filed, or at least no later than the taxpayer's initial request for discovery. However, in camera submissions should be the exception and not the rule. Where the Secretary does not furnish sufficient information for the taxpayer to prepare for the proceedings, then obviously the Court must give consideration to limited discovery.
The purpose of Section 7429 is to allow most questions on the reasonableness of the assessment to be disposed of at the administrative hearing without the necessity of a judicial proceeding or formal discovery, and it is for this reason that the Secretary is required to provide the taxpayer with information as to the grounds for the assessment within 5 days of the assessment. See id. S.Rep.No.74-938, 365-366, reprinted in, 1976 U.S.Code Cong. & Ad.News 3795. The letter must set out factual information and must not be stated in mere conclusory language or the language of the statute.
While the Court recognizes the desire of the Government to limit discovery at this stage of the proceedings and to prevent the taxpayer from discovery of the Government's investigation, it notes that when a jeopardy assessment is made, it brings into play Section 7429 and the requirement that the Government, within 20 days of the filing of the Section 7429 proceeding, submit sufficient evidence to support its claim that the assessment is reasonable. Thus, the 5-day letter should set forth a brief factual statement of the evidence the Government seeks to present at the hearing. Section 7429(a)(1) refers to the furnishing of information not a mere statement of the Government's conclusions. The more complete the factual statement, the less likely there will be a need for discovery. Therefore, a full statement of the underlying facts which led to the determination of the Secretary that a jeopardy assessment was warranted would benefit the Government by limiting discovery or perhaps making it unnecessary altogether, would benefit the taxpayer since he would have a sufficient statement with which to address the issue, and would benefit the Court since it is likely that most proceedings could be disposed of following the administrative proceeding.
In sum, the Court holds that discovery may be permitted in Section 7429 cases but that any discovery is circumscribed by the narrow issue before the Court. The Secretary, in furnishing the 5-day letter, should set forth a sufficient statement of the facts upon which he relies on in supporting the need for a jeopardy assessment so as to allow the taxpayer to challenge those allegations in the administrative proceedings under Section 7429(a). In advising the taxpayer of the information upon which he relies, the Secretary should set forth the information he will rely upon at the hearing. The question of discovery will be determined after consideration of the statement furnished in the 5-day letter and any other information furnished, formally or informally, to the taxpayer.
In viewing the 5-day letter in the instant case, the Court finds that the informational statement contained therein is woefully insufficient. The District Director merely states:
I have found you to be designing quickly to place your assets beyond the reach of the Government by concealing them and/or transferring them to other persons or by dissipating them, thereby tending to prejudice or render ineffectual collection of income tax for the period ended December 31, 1980. Accordingly, based on information available at this time, I have approved assessment of tax and additional amounts determined to be due as reflected in the attached computations.
Clearly, the District Director has furnished no information which led him to reach the above conclusion and the Government has set forth no representation that additional information was formally furnished to the taxpayers.
In view of the limited time remaining within which to complete these proceedings and make a determination, the Court concludes that the taxpayers are entitled to limited discovery. The Government has been requested to designate an agent who will be able to address the issue of the reasonableness of the assessment, in particular, the reasonableness of the making of the assessment. The Government has designated Agent Howard Bell for this purpose. With respect to the question of the reasonableness of the amount of the assessment, the burden is on the taxpayer to demonstrate that the amount is unreasonable, and the Court concludes that the Government, having been directed by the Court to furnish the taxpayer with all relevant material seized from the taxpayers, need furnish no additional discovery on the reasonableness of the amount of the assessment. Copies of that information, in the form of microfilm of the seized records, must be furnished to the taxpayers, five rolls of microfilm were to be furnished to the taxpayers on or before March 30, 1982, and the remaining rolls to be furnished to the taxpayer on or before April 2, 1982. The Government also represented that it would furnish equipment so that taxpayers' counsel may view the film.
An appropriate Order has issued.