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JOURNAL OF POLITICAL ECONOMY sentence; a seller jailed may simply mean fresh opportunity for a hopeful

entrant.

Empirical evidence on the effects upon consumption of buyer harassment versus seller harassment is extremely difficult to obtain, but the neager evidence available seems to indicate that decreases in the effective penalty on buyers does lead to marked increases in consumption. Wheat (1972) found that in Boston the expected costs of arrest to a user (defined as probability of arrest times probability of being sentenced to prison times average prison sentence) declined sharply between 1961 and 1970, while the estimated number of addicts in Boston increased by a factor of about 10. During the British experiment with decriminalizing heroin use and allowing physicians to prescribe heroin as they wished, addiction increased so greatly that the practice was abandoned in 1968.

A second point to consider in choosing a drug-law enforcement strategy is the effect upon the pecuniary drug price. Clearly, reducing supply will raise the price; reducing demand will lower it. In effect, reducing supply imposes an income tax upon those with highly inelastic demand ("addicts"?). Simon Rottenberg (1968, p. 87 n.) claims that the price of a grain of heroin rises from $0.05 in Turkey to $295 retal in Chicago. Since much of this price increase is due to enforcement of drug laws, the implicit income tax upon addicts resulting from seller harassment is substantial. Adding to the troubles of these unfortunates is a perhaps regrettable concomitant of reducing drug consumption. However, much of the income tax imposed upon addicts by current enforcement strategy seems to be shifted onto others by theft and other addict crimes. Estimates of the proportion of property crimes committed by addicts range from about one-fourth to two-thirds (Erickson 1969, p. 485; Wilson, Moore, and Wheat 1972, p. 12). This heavy tax upon innocent bystanders has no obvious social function and could be largely avoided by concentrating enforcement effort upon users, reducing demand and the pecuniary price of drugs. In effect, by shifting to such a policy we would be exchanging the current pecuniary tax upon addicts, which they easily shift onto innocent bystanders, for a largely nonpecuniary tax, which they could not easily shift onto anyone except drug sellers.

Becker (1968, pp. 193-98) has argued convincingly in favor of fines for criminal offenses whenever feasible. Indeed, given the current strategy of concentrating on sellers, it would seem that a given amount of enforce.ment cost would have more effect upon drug traffic if expenditure currently used to maintain in prison those already arrested and convicted were diverted to making more frequent arrests or obtaining more convictions once arrests are made. However, fines for drug users would seem as likely to increase property crime rates as the current seller-harassment strategy, since they result in an increase in the pecuniary price of drugs to addicts. Nonpecuniary punishment of users is not so easy to shift onto others and

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also has the advantage of giving the community a mechanism for encouraging users to seek rehabilitation. Some authorities have claimed that many addicts will not seek rehabilitation without some measure of compulsion (Wilson et al. 1972, pp. 20, 25, 27; see also statements by Dr. Herbert D. Kleber of the Connecticut Mental Health Center reported by the New York Times, April 27, 1973, p. 39).

Perhaps the most serious flaw of a policy of harassing drug sellers is that it lays the basis for a cooperative relationship between drug sellers and the police. The gains from collusion in an industry are known to be greater the smaller the elasticity of demand, the greater the elasticity of marginal costs, and the smaller the costs of enforcing the collusion (Becker 1968, pp. 205–7). It is widely believed that the elasticity of demand for hard drugs is very small (at least in the short run). The elasticity of marginal costs is presumably very large. Thus, the gains from collusion would be large if colluding sellers could obtain cheap means of enforcing collusion and of preventing entry into the industry. Enforcement policies directed against sellers furnish just that. Schelling (1967, pp. 119, 124-25) cited evidence that the Miami wire service syndicate “relied heavily upon the police as their favorite instrument of intimidation." Drug laws directed against sellers make this instrument available to colluding sellers for use against price cutters and potential entrants. One way to view police policies of harassing sellers is as establishing a nonpecuniary "license fee." Those who are relatively efficient in converting arrest and other harassment into pecuniary terms will "pay the fee" and sell; others will be barred from the trade. The sellers who succeed have an interest in enforcement of the law to prevent entry by others. Both sellers and enforcement officials, however, have an interest in converting the license fee into terms other than harassment and arrest. One possibility is to convert it into pecuniary (and illegal) bribes for police inaction, which raises ominous possibilities as to the types of people who will seek police work in the long run. But colluding sellers may purchase police inaction by furnishing information on other criminal activity or by rendering other quite legal services to the police. In this way, the police could avoid illegal and antisocial behavior. Indeed, they could simultaneously serve their social mandate of reducing drug consumption and serve the interests of the colluding sellers by preventing individual members of the collusion from increasing their sales at the expense of other members and preventing new entrants from competing with established sellers.

Thus, enforcement strategy directed against drug sellers tends to enhance a natural accord between illegal business firms and the police based upon their common interest in civil order. After visiting Harlem in May 1968, Harry McPherson (1972, p. 371) reported hearing of a conversation between Rap Brown and a Harlem rackets boss. Brown

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JOURNAL OF POLITICAL ECONOMY had made a strong speech. The boss told him: "I agree with a lot of what you said. Except I don't want any riots. I've got to raise $60,000 to buy off some people downtown on a narcotics rap. I can't do that if there's a riot. You start a riot and I'll kill you." Brown is rumored to have left town the next day.

References

Becker, G. S. "Crime and Punishment: An Economic Approach." J.P.E. 76 (March-April 1968): 169-217.

Burroughs, W. S. Naked Lunch. New York: Grove, 1966.

Erickson, E. "The Social Costs of the Discovery and Suppression of the Clandestine Distribution of Heroin." J.P.E. 77 (July-August 1969): 484-86.

McPherson, H. A Political Education. Boston: Little, Brown, 1972.

Rottenberg, S."The Clandestine Distribution of Heroin, Its Discovery and Suppression." J.P.E. 76 (January-February 1969): 78-90.

Schelling, T. C. "Economic Analysis and Organized Crime." In President's Commission on Law Enforcement and Administration of Justice, Organized Crime. Task Force Reports. Washington: Government Printing Office, 1967. Wheat, I. D., Jr. “Heroin Abuse in Boston: The Dynamics of the Heroin Market and the Response of the Criminal Justice Systemn." Mimeographed. Harvard Univ., John F. Kennedy School of Government, Public Policy Program, 1972. Wilson, J. Q.; Moore, M. H.; and Wheat, I. D., Jr. “The Problem of Heroin." Public Interest 29 (Fall 1972): 3-28.

Mississippi State University

BILLY J. EATHERLY

NOTES

CRIMINAL TAX FRAUD INVESTIGATIONS: LIMITATIONS ON THE SCOPE OF THE SECTION 7602 SUMMONS*

Although every individual is subject to examination by the Internal Revenue Service concerning the correct payment of any federal tax, few realize the danger of criminal prosecution in such an investigation. By relinquishing his tax records to an Internal Revenue agent or assisting in a review of such records a taxpayer may reveal sufficient evidence to support a criminal prosecution. Although this threat of criminal sanction always exists, constitutional protections normally extended to an accused have generally been denied in tax investigations because the examination is deemed both "civil" and "criminal" in nature.

Since the examination is considered civil, the courts have consistently permitted use of an administrative summons to gather evidence in furtherance of the investigation.' The taxpayer who will not voluntarily produce records for examination may be compelled by the Service to relinquish records that may lead to criminal conviction. In recent years, however, the United States Supreme Court has emphasized that criminal investigations must be conducted with a sense of fair play, and the use of the administrative process to aid in criminal investigations will be closely scrutinized.3 Since the hybrid civil-criminal nature of tax examinations invites abuse of the administrative summons, commentators and some courts have urged tighter controls on the Service's inquisitorial investigations. However, the issuance of a summons has been used with increasing frequency by the Service to gather evidence for use in criminal prosecution, or to determine whether criminal action should be initiated against the taxpayer. This note will discuss the Internal Revenue Service's summons power and examine the grounds upon which the taxpayer may challenge the issuance and enforcement of a section 7602 summons.

INTERNAL REVenue Service SUMMONS POWER AND PROCEDURE

The Internal Revenue Service is empowered to summon any books, papers, records, or other relevant data in order to: (1) ascertain the correctness of any return, (2) make a return where none has been made, (3) determine the liability of any person for any Internal Revenue tax, and (4) collect any

*EDITOR'S NOTES This note received the Gertrude Brick Law Review Apprentice Prize for the best student note submitted in the spring 1972 quarter.

1. See United States v. Mothe, 303 F. Supp. 1366 (E.D. La. 1969) and cases cited therein. 2. INT. REV. CODE OF 1954, §7602 (1); see note 5 infra.

3. See, e.g., Camara v. Municipal Court, 387 U.S. 323 (1967); Abel v. United States, 362 U.S. 217 (1960).

4. E.g., United States v. Ruggeiro, 300 F. Supp. 968, 974-75 (C.D. Cal. 1969); see, e.g., Andres, The Right To Counsel in Criminal Tax Investigations Under Escobedo and

1972]

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such liability. Although the Service possesses this seemingly pervasive power to summon an individual's records, the power is seldom utilized during a routine audit." When a taxpayer is selected for audit he is first contacted by a revenue agent whose duty is merely to determine the taxpayer's correct tax liability. The taxpayer is usually willing to cooperate because he feels such cooperation will lead to a favorable settlement. Since less than threetenths of one per cent of all audited returns advance beyond the civil deficiency state, he may be correct in his assumption. If the taxpayer were aware of the potential criminal prosecutions that may result from this examination, however, he might not relinquish his private records so willingly. In addition to this unawareness of potential criminal prosecution, few taxpayers realize the distinction between a revenue agent and a special agent, or the change that has occurred in the nature of an investigation in which a special agent is participating. A revenue agent is not empowered to investigate criminal tax fraud. If his examination reveals evidence of fraud, he must suspend the examination and refer the matter to the Service's Intelligence Division. Upon referral a special agent is assigned to make a preliminary investigation, which in most cases results in a determination that further action is not justified.10 However, if a full-scale investigation is deemed necessary it is conducted jointly by a special agent and a revenue agent. The revenue agent is responsible for determining the correct civil liability and the special agent coordinates the investigation and development of evidence to Miranda: The "Critical Stage," 53 Iowa L. REV. 1074 (1968); Duke, Prosecutions for Attempts To Evade Income Tax: A Discordant View of a Procedural Hybrid, 76 YALE L.J. 1 (1966); Hewitt, The Constitutional Rights of the Taxpayer in a Fraud Investigation, 44 TAXES 660 (1966); Note, Extending Miranda to Administrative Investigations, 56 Va. L. Rev. 690 (1970).

5. INT. REV. CODE OF 1954, §7602 (1).

6. See B. GEORGE, Defending TAX FRAUD PROSECUTIONS 42 (1970). "The policy of the Service respecting the issuance of a summons by special agents is very specific. First, all testimony, records, etc. should be obtained on a voluntary basis, if possible. Secondly, a summons should be used very sparingly-only when absolutely necessary and only when enforcement action will be taken in the event the summons is not honored."

7. Duke, supra note 4, at 35.

8. See United States v. Ruggeiro, 300 F. Supp. 968 (C.D. Cal. 1969); United States v. Crespo, 281 F. Supp. 928 (D. Md. 1968); Lipton, Constitutional Protection for Books and Records in Tax Fraud Investigations, N.Y.U. 29TH INST. ON FED. TAX 948, 972 n.96 (1971); "If during an investigation the agent discovers what he believes to be an indication of fraud, he will immediately suspend his investigation . . . and report his findings in writing to the Chief of the Audit Division through his group supervisor. . . ."

9. See Statement of Organization and Functions, 30 Fed. Reg. 9399-9400 (July 28, 1965) promulgated by the Internal Revenue Service: "1118.6 Intelligence Division. The Intelligence Division enforces the criminal statutes applicable to income, estate, gift, employment, and excise tax laws. . . by developing information concerning alleged criminal violations thereof, evaluating allegations and indications of such violations to determine investigations to be undertaken, investigating suspected criminal violations of such laws, recommending prosecution when warranted, and measuring effectiveness of the investigation and prosecution processes."

10. In 1968 the Intelligence Division evaluated 123,000 information items and conducted 10,000 preliminary investigations; 2,900 full scale investigations resulted from the 10,000 preliminary investigations. B. GEORGE, supra note 6, at 65.

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