In the early 1980s, James E. Michaud was a vice president, director and stockholder of Superior Engineers Inc., a Green Bay, Wis., company that supplies engineering talent to industrial clients with a temporary need.
His wife Mary was the corporate secretary and also a director and stockholder. When the company got into deep trouble with the Internal Revenue Service -- the tax collectors say that Superior owes more than $1 million in payroll taxes -- the Michauds got dragged into the investigation.
They resisted, and their case just might lead the U.S. Supreme Court to write new rules for similar probes in the future.
Certainly, the guidelines are confusing. The IRS has broad power to issue its own summonses to collect information from corporations and people suspected of underpaying their taxes. But if a person is the target of a criminal tax prosecution, a different, more stringent set of rules come into play, and investigators must go through grand juries to collect evidence.
The big question is just when that line is crossed. All sides agree that once the Justice Department lawyers recommend criminal prosecution of a suspected tax evader, investigators can no longer use simple administrative procedures.
In 1978, the U.S. Supreme Court went further, and said that once the tax collectors have an "institutional commitment" to bringing criminal charges, they can no longer use their own summonses to gather information.
Four years later, Congress rewrote the Tax Code, and the current argument is over whether after that revision the 1978 high court ruling is still valid. Federal appellate courts in Philadelphia and Atlanta have ruled that it is not, but those in Boston and Richmond suggest that the old bar to administrative process is still in effect.
If the bar is in effect, there's the related question: What investigations does it cover? The Michauds are arguing that if corporate returns are suspected of containing criminal violations, then there can be no civil investigations of the corporate officials who may have been connected with the corporate wrongdoing. They say the officials can only be examined through a grand jury.
So far the Michauds have run up an impressive record of convincing others that the IRS picked on them unfairly in an investigation that government papers say is into the liabilities of Superior.
After they refused to give investigators fingerprints and handwriting samples, U.S. District Court Judge Terence T. Evans early last year threw out the summons.
The IRS approach "appears to be a little heavy-handed," he explained. "I do not think the handwriting or the fingerprints of the Michauds are necessary to establish the tax liabilities of Superior Engineering."
In fact, Evans noted, the IRS had already billed Superior for more taxes. He said, "Implicit in this action is the assumption that the IRS knows the tax liabilities of Superior Engineering. Therefore, the reason, if there ever was a good one, for wanting the Michauds handwriting and fingerprints seems to have evaporated."
Less than three months after Evans's order, Superior's president, Robert W. Pasternack, pleaded guilty to using his position to cause the company to keep Social Security and income taxes deducted from employees paychecks from the Treasury and converting the money to his own personal use.
A three-judge panel of the U.S. Court of Appeals in Chicago in March said that Evans was wrong, and ordered the Michauds to obey the IRS.
But then the entire complement of 11 judges on the Chicago court decided to take another look at the case -- an unusual move when all the original judges are in agreement.
The 11-member contingent decided, by a 7-to-4 vote, that Evans had not explained his conclusion precisely enough, and that he should review the matter. The majority opinion, however, gives a lot of support to the Michauds.
Chief Judge William J. Bauer suggested that if Evans finds that the IRS was investigation was really "limited to the corporation's tax liabilities" that it could well follow that the probe of the Michauds was not undertaken in good faith.
Judge John L. Coffey, who at first voted to overturn Evans but then changed his mind, said that if the Justice Department is looking into Superior's tax returns, "that is the end of the matter" and the individual summonses must be quashed.
The four Chicago judges who dissented in the Michaud case insist that there is no bar on the IRS using its own powers to probe what it thinks are criminal violations, essentially agreeing with the precedents from the Philadelphia and Atlanta appellate courts.
But Judge Richard A. Posner, the leader of the dissenters, agrees that the matter is unsettled. He says, "It is time the Supreme Court made all this crystal clear." Daniel B. Moskowitz is a Washington editor for Business Week newsletters.