REVIEW OF TAXPAYER PRIVACY ISSUES

l/m'-W Shies. Co^vesS- ft,*je, C^^i'H"P cm AAw- ^ • </

t*>e*1.S. S\y<-o>»rr>litre <nn Ovc^sljll^'

HEARING Cr^^^x

BEFORE THE ,•y ./

SUBCOMMITTEE ON OVEKSIGHT^^-^

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

NINETY-SIXTH CONGRESS

SECOND SESSION

JULY 30, 1980

Serial 96-112

Printed for the use of the Committee on Ways and Means

U.S. GOVERNMENT l'RINTING OFFICE

67-046 O WASHINGTON : 1980
COMMITTEE ON WAYS AND MEANS

AL ITLLMAN,

DAN EOSTENKOWSKI, Illinois

CHARLES A. VANIK, Ohio

JAMES C. CORMAN, California

SAM M. GIBBONS, Florida

J. J. PICKLE, Texas

CHARLES B. RANGEL, New York

WILLIAM R. COTTER, Connecticut

FORTNEY H. (PETE) STARK, California

JAMES R. JONES, Oklahoma

ANDY JACOBS, JR., Indiana

JOSEPH L. FISHER, Virginia

HAROLD FORD, Tennessee

KEN HOLLAND, South Carolina

WILLIAM M. BRODHEAD, Michigan

ED JENKINS, Georgia

RICHARD A. GEPHARDT, Missouri

RAYMOND F. LEDERER, Pennsylvania

THOMAS J. DOWNEY, New York

CECIL (CEC) HEFTEL, Hawaii

WYCHE FOWLER, JB., Georgia

FRANK J. GUARINI, New Jersey

JAMES M. SHANNON, Massachusetts

MARTY RUSSO, Illinois

Oregon, Chairman

BARBER B. CONABLE, JB., New York

JOHN J. DUNCAN, Tennessee

BILL ARCHER, Texas

GUY VANDER JAGT, Michigan

PHILIP M. CRANE, Illinois

BILL FRENZEL, Minnesota

JAMES G. MARTIN, North Carolina

L. A. (SKIP) BAFALIS. Florida

RICHARD T. SCHULZE, Pennsylvania

BILL GRADISON, Ohio

JOHN H. ROUSSELOT, California

W. HENSON MOORE, Louisiana

JOHN M. MARTIN, Jr., Chief Counsel

J. P. BAKER, Assistant Chief Counsel

JOHN K. MKAOHER, Minority Counsel

SUBCOMMITTEE ON OVERSIGHT

SAM M. GIBBONS, Florida, Chairman

J. J. PICKLE, Texas BILL GRADISON, Ohio

HAROLD FORD, Tennessee W. HENSON MOORE, Louisiana

ANDY JACOBS, JR., Indiana JOHN J. DUNCAN, Tennessee

ED JENKINS, Georgia

CECIL (CEC) HEFTEL, Hawaii

<n>
>

i ^

g CONTENTS

<3>

Page

Press release of July 25, 1980, announcing hearing 1

WITNESSES

Department of Justice:

Irvin B. Nathan, Deputy Assistant Attorney General, Criminal

Division

Stephen J. Csontos, Legislative Counsel, Tax Division 114

Internal Revenue Service, Jerome Kurtz, Commissioner, and N. Jerold

Cohen, Chief Counsel 105

American Civil Liberties Union, John H. F. Shattuck 129

Nunn, Hon. Sam, a U.S. Senator from the State of Georgia 2, 84

Taxation With Representation Fund, Victor Thuronyi 140

Weicker, Hon. Lowell P., Jr., a U.S. Senator from the State of Connecticut. 91

MATERIAL SUBMITTED FOR THE RECORD

International Association of Trade Exchanges, statement 178

(Hi)

REVIEW OF TAXPAYER PRIVACY ISSUES

WEDNESDAY, JULY 30, 1980

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON OVERSIGHT,

Washington, D.C.

The subcommittee met at 6 p.m., pursuant to notice, in room

H-137, the Capitol, Hon. Sam M. Gibbons (chairman of the subcommittee) presiding.

[Press release announcing the hearing follows:]

[Press release of .Tuly 25, 1980]

WATS AND MEANS OVERSIGHT PANEL TO REVIEW TAXPAYER PRIVACY ISSUES

The House Ways and Means Oversight Subcommittee wants to know whether

Congress should now relax the safeguards it placed in the law four years ago to

insure the privacy of tax returns and taxpayer's bank records.

Chairman Sam M. Gibbons (D-Fla.) announced today that the Subcommittee

will consider this issue at a hearing to be held next Wedenesday, July 30, 1980,

beginning at 6:00 p.m., in Room H-137 of the Capitol.

Before Congress enacted the Tax Reform Act of 1976, the Internal Revenue

Code provided that tax returns were public records disclosable in accordance with

regulations approved by the President. In addition, the IRS could, prior to the

1976 Act, obtain information about a taxpayer from a third party, such as a banV,

by issuing an administrative summons, without giving the taxpayer notice that it

was seeking such information.

Now, under the 1976 Act, the IRS may disclose tax returns or certain related

information to another Federal agency only by court order. The Act also enables a

taxpayer to force the IRS to get a court order to enforce an admin strative summons for third-party information about the taxpayer's finances.

Earlier this year legislation was introduced in both houses of Congress to relax

these and other restrictions in the 1976 law. The sponsors claim that present rules

have hampered IRS cooperation with Federal law enforcement agencies in investigating and prosecuting narcotics traffickers and organized crime figures. Others

claim that taxpayer privacy would suffer if present safeguards are relaxed.

"We want to hear all viewpoints," Gibbons said concerning next Wednesday's

hearing. In addition to Congressional proponents and critics of the legislation

to relax restrictions, witnesses will include two panels: one consisting of Commissioner of Internal Revenue Jerome Kurtz, Assistant Attorney General (Tax

Division) M. Carr Ferguson and Deputy Assistant Attorney General (Criminal

Division) Irvin B. Nathan; and another panel consisting of representatives of the

American Bar Association and the American Civil Liberties Union.

Mr. GIBBONS. The subcommittee will be in order.

As a part of my opening statement, I want to state that we will not

make evening sessions a regular practice, but I am sure that all of

you know the reason for this hearing and late hour for it.

The reason for the late hour is, of course, that the Ways and Means

Committee is just clogged with hearings and we want to make sure

we get to this very important issue that Senator Nunn has raised

for us.

(l)
When the Tax Reform Act of 1976 was passed, Congress wrote in

several provisions designed to enhance the privacy of taxpayer

information.

One provision bars the Internal Revenue Service from turning

over a tax return or information supplied the IRS by a taypayer to

another Federal agency except by court order. Another provision

states that information gathered by the IRS without the aid of the

taxpayer could be turned over only by written request of the head of

a Federal agency.

These provisions are reinforced by others which subject IRS employees to criminal and civil penalties for unauthorized disclosures of

tax information.

Still another provision of the 1976 act dealt with what is known as

the IRS third-party administrative summons. Before the 1976 act the

IRS could issue an administrative summons to a third party, such as

a bank, and get a taxpayer's financial records without notifying the

taxpayer. Now not only must the IRS notify the taxpayer but also

the taxpayer can automatically stay the summons and make the IRS

get a court order to enforce it.

More than 3 years of experience under these provisions has given

rise to complaints•mainly from the Federal law enforcement community•that the 1976 pendulum swung too far. The critics claim

that the present rules inhibit Federal investigations and prosecutions

of narcotics traffickers and organized crime figures to such an extent

that all of American society suffers. Others contend, however, that

individual privacy would suffer more if these rules were relaxed.

And I understand the IRS and Justice have pinpointed other

problems which may require changes in the law to overcome. We

expect to hear about these in greater detail from our panel of administration witnesses later this evening.

Senator Nunn and others introduced legislation in the Senate and

I followed their lead in the House. Since that time, the IRS and the

Justice Department have gotten together in a series of meetings, I

understand, and have worked out some of their differences.

Well, we are going to hear from a number of different witnesses

today, representing various points of view, and we will start with

you, Senator Nunn, since you are the pioneer in this field.

STATEMENT OF HON. SAM NUNN, A U.S. SENATOR FROM THE STATE

OF GEORGIA

Senator NUNN. Thank you. I will spare you the ordeal of hearing

my entire statement, which I would like to submit for the record.

This statement goes into the background and historical role of the

Internal Revenue Service, some of the philosophical questions involved and a rather detailed description of the bill.

Mr. GIBBONS. Without objection, we will make it a part of the

record.

[The prepared statement follows:]

STATEMENT OF HON. SAM NUNN, A U.S. SENATOR FROM THE STATE OF GEORGIA

Mr. Chairman, thank you for scheduling these hearings on the issues raised by

the bills which you and I have introduced to amend the disclosure, summons,

criminal sanction and civil penalty provisions of the Tax Reform Act of 1976.
The legislative package I introduced in the Senate is the result of extensive

hearings held by the Permanent Subcommittee on Investigations last December

on illegal narcotics profits and the impediments faced by law enforcement authorities in eliminating those profits.

We heard testimony from 35 witnesses and received 34 exhibits. Our printed

hearings record, which I will supply for your information, totaled 507 pages.

A report on our investigation, will be filed in the Senate next Monday.

THE DECLINE OF IRS

Mr. Chairman, it has long been recognized that financial investigations, relying

on financial and tax records, are one of the most effective tools in piercing the

veil of secrecy that protect those at the top of any organized crime ring•be it a

drug smuggling operation or a traditional organized crime family.

Today, when organized crime and narcotics trafficking are becoming bigger and

more sophisticated than ever before, the one law enforcement agency that the

kingpin criminals fear most•the Internal Revenue Service•has withdrawn from

the battle.

The FBI testified at our December hearings that its cooperative efforts with

IRS are down over 95 percent since 1976.

IRS-initiated cases against organized criminals are down more than 50 per cent

during that same period.

During all of 1979, the IRS made just 10 or 12 cases against high-level narcotics

traffickers.

In 1974, IRS had 927 employees working on narcotics cases. In 1979 that

number had dropped to 163.

The untaxed profits from narcotics and organized crime run into the billions of

dollars every year and are growing all the time, yet since 1976 the IRS has made

only a minimum effort to tax these profits or help convict those who make them.

These untaxed dollars often leave our country, are laundered through overseas

banks or businesses, and come back to America in the form of hidden investments

which are having a tremendous inflationary impact. Consequently, honest businessmen and women have great difficulty competing against the criminal tax evader

in the market place.

Since 1976, IRS has concentrated its efforts on the ordinary taxpayer while the

criminal has gotten a relatively free ride. This has encouraged average citizens to

get into the "underground" economy in which they pay little or no taxes.

Mr. Chairman, these are some of the findings which are contained in our

Subcommittee's draft report. I point them out today to illustrate that the IRS

has withdrawn as an effective weapon against organized crime and narcotics

dealers.

I also point them out in order to emphasize that the beginning of this decline

coincided with enactment of the disclosure provisions of the Tax Reform Act

of 1976.

THE TAX REFORM ACT OF 1976

These disclosure provisions, which are found in 26 U.S.C. 6103, were passed in

the wake of certain abuses that came to light during the various Watergate and

intelligence gathering investigations.

For the most part, these abuses involved the loose dissemination outside IRS

of individual tax returns for various purposes, such as coercing campaign contributions or checking on groups which some agencies considered to be subversive.

To cure these abuses, Congress enacted section 6103, which makes tax returns

confidential and subject to disclosure by IRS only in accordance with very strict

procedures.

But the section goes much further and covers more than just tax returns. Also

included in its proscription is most other information that IRS gathers in connection with tax investigations.

Under section 6103, IRS agents are forbidden to disclose, on their own initiative, not only tax returns but "tax return information"•which is any information they gather in connection with a tax return•or "taxpayer return information"•which is any information they obtain from a taxpayer or his representative,

such as his attorney or accountant.

In other words, the prohibition now applies to information gathered from such

items a? books and records, bank accounts, taxpayer interviews, and so forth.

The other law enforcement agencies once relied on IRS to disclose to them evidence gained from these sources, but this is no longer true.
I

As a result, there is very little criminal information exchanged today between

IRS and the other federal law enforcement agencies. IRS has turned over an

average of just 32 pieces of criminal evidence per year over the past 3 years. DEA

officials testified at our hearings that they received no non-tax criminal evidence

over the same period.

What happens to the non-tax criminal evidence that IRS agents come across

during the course of their tax investigations? Apparantly, it is buried somewhere

in the IRS files.

For example, IRS agents told our Subcommittee that they found evidence of

massive embezzlements when they audited a labor union's records, but they could

not report this information to the Justice Department. Thus, Justice had no information upon which to begin a non-tax prosecution.

In another example, IRS agents found evidence in a taxpayer's business records

that he had bribed a policeman. That evidence was never disclosed, and the

policeman is still on the job.

These examples pale in comparison to an incident known as the "Case of the

Trash Can" in which DEA was investigating a chemist suspected of concocting

illegal drugs. DEA learned that an IRS agent had serached the chemist's trash

can and had discovered evidence that the chemist indeed was making illegal drugs.

However, IRS would not volunteer this evidence.

The prosecutor subpoenaed the IRS agent and the trash can documents, but

IRS cited the Tax Reform Act and refused to let the agent answer the subpoena.

IRS said the trash was gathered in connection with the chemist's tax return;

therefore, the prosecutor needed a court order under section 6103 to see the

documents.

In my mind, by keeping secret this evidence of criminal activity found in a

taxpayer's books and records, bank account statements and check stubs, we have

legislated an exemption for criminals.

Our investigation has convinced me that the disclosure provisions of section

6103, coupled with the way they have been interpreted and enforced by IRS.

have had a highly detrimental effect on our federal law enforcement system.

That system is complex and sophisticated. We do not have a federal police state.

Instead, we have a series of agencies broken down by criminal jurisdiction that

must operate with a high degree of coordination and cooperation. It is not unusual,

in fact it is quite common, to combine the skills and information of many agencies

to achieve any measure of success in criminal enforcement.

IRS has a fine tradition and history of being one of the most effective law enforcement agencies, especially in cases involving high echelon criminals. Obviously,

since the purpose of criminal ventures is to make money, very few substantive

crimes can be committed without some tax consequences. Therefore, IRS always

has been•and continues to be•a key agency both in terms of financial expertise

and in terms of financial information.

The language and interpretation of the Tax Reform Act, however, have caused

a severe breakdown in our delicate and complex federal law enforcement system. It

has taken up to 13 months simply to receive the assistance of IRS agents in joint

investigations because the Tax Reform Act and its interpretation by IRS has

caused a bureaucratic nightmare in cases where federal agencies should willingly

assist each other. Moreover, the Tax Reform Act and its interpretations by IRS

have made, in effect, common criminals out of IRS agents who must ignore the

dictates of justice for every other American, and refuse to turn over evidence of

serious crimes to the appropriate authorities.

THE "CATCH 22"

It is possible, of course, for other agencies to obtain tax returns and other IRSgathered information under section 6103. However, they must apply for a court

order in order to get tax returns, and they must make written requests to obtain

other IRS information about non-tax crimes such as forgery, bribery, or narcotics

violations that comes from sources other than tax returns.

In either situation, the requesting agency must describe the information it

seeks to obtain.

The court order and written request requirements have created a "Catch 22"

situation. Since IRS agents are forbidden to tell the other agencies of the criminal

evidence they gather, it is virtually impossible for these other agencies even to

know that such information exists, much less to describe that information with

such particularity that they can satisfy the requirement for a court order or

written request.
In other words, section 6103 requires federal investigative agencies to go through

elaborate request procedures to obtain information that they may not even know

that IRS has.

This "Catch 22" situation has made it all but impossible for the FBI, DEA,

and other agencies to receive the necessary information and cooperation from the

IRS.

IRS ATTITUDE

Section 6103 is only a part of the problem. The bulk of the problem lies with the

attitude of the top officials of the IRS and the policies and procedures they have

adopted in interpreting and applying section 6103.

For the past 6 years, a series of IRS commissioners and their top aides have

taken the view that IRS should stick to "tax administration"•by which they

mean tax collection and only tax collection•and out of the general law enforcement arena.

They say that paying attention to ordinary taxpayers is a better way of keeping

the voluntary tax collection system working than is cracking down on organized

criminals who pay no taxes on their tremendous ill-gotten gains.

I beg to differ with that view of tax administration.

Obviously, IRS must be aggressive in collecting the Nation's taxes, but I can

understand the skepticism of a small town waitress who is caught for underreporting her tips when organized crime millionaires escape withoiit reporting a

cent of their illegal income.

I believe that if the average taxpayer knows that IRS can successfully collect

taxes from the mob, he is a lot more likely to ante up his fair share•if for no

reason than the fear of being caught.

When he sees a drug pusher prosecuted for tax evasion, he is likely to have

confidence in our voluntary tax collection system and feel that his taxes are being

well spent, especially on law enforcement. On the other hand, if he sees criminals

getting away with tax evasion on top of murder and extortion, his natural skepticism toward our tax policy will increase.

IRS' recent emphasis on ordinary taxpayers has not increased voluntary

compliance with the tax laws. In fact, statistics compiled by both the IRS and the

General Accounting Office indicate that voluntary compliance with the tax laws

actually has decreased since passage of the Tax Reform Act of 1976 and the subsequent withdrawal of IRS from cooperative low enforcement efforts aimed at

big-time criminals.

Other statistics indicate the extent of IRS' withdrawal: Between 1974 and the

first 9 months of 1978, the number of organized crime cases which originated

from IRS developed tax information dropped from 620 to just 221.

I do not mean to imply that IRS is totally unaware of the effect of the Tax

Reform Act. Just last December, for example, the Deputy Commissioner of IRS

appointed a special study group to assess the impact of the disclosure provisions.

That group made a number of recommendations for admi nistrative action. A

copy of the group's report has been provided to our Subcommittee, and I submit

that for your consideration.

Despite some changes that have been made by IRS, legislative action is still

necessary.

DISCLOSURE AMENDMENTS

My colleagues and I do not advocate scrapping the privacy safeguards which

were written into the Tax Reform Act. However, 3 years' experience under the

act have convinced us that a balance needs to be struck between the privacy of

tax returns and the legitimate needs of law enforcement agencies.

We think that our amendments to the disclosure provisions strike that balance.

Under S. 2402, ordinary taxpayers may rest assured that a Federal judge will

have to approve any disclosure of their tax returns and all other information they

are required by law to provide the IRS.

In order for a law enforcement agency to see this information, it still will have

to get an ex parte order from a U.S. district court. It will have to convince the

court that there is reasonable cause to believe that the information in the return

is material and relevant to a lawful criminal investigation or proceeding.

On the other hand, drug traffickers and organized criminals may rest assured

that nonreturn records which show unusual cash desposits and transfers into and

out of their bank accounts will be called to the attention of the appropriate law

enforcement agency.
6

Under our proposal, the DEA could get this type of nonreturn information from

IRS by making a written request rather than being required to obtain a court

order.

Under this proposal we would separate IRS information into two simple and

distinct categories. The first category of "Returns" would cover tax returns and

all other information a taxpayer is required to give IRS. This category of privileged information would require a court order. The second category, called "Nonreturn" information, would cover all other information IRS obtains in the normal

course of its business. This category would require a specific written request

procedure which would be monitored by the Justice Department and IRS.

I realize that there are differing views with regard to how much information

should be afforded the protection of a court order prior to disclosure. For example,

I have read the GAO's critique of our bills on this issue, and I think GAO will

make some very good points before you today.

Let me emphasize that our bills were drafted to provide concrete pieces of

legislation which we can use to formulate solutions to the problems brought on

by the Tax Reform Act. Mr. Chairman, I stand ready to assist your committee

in refining these bills.

To eliminate the "Catch 22" snag, S. 2402 puts an affirmative burden on IRS

to notify the Justice Department whenever it uncovers evidence, other than from

a tax return, or crimes such as narcotics trafficking, bribery and extortion. IRS

will be required to reveal enough about that evidence so that the prosecutor can

make a written request to IRS for it.

Admittedly, it will be easier for prosecutors to get information that IRS

obtains from sources other than tax returns•sources such as banks and business

records, accountants and other taxpayer representatives.

But it will not be easy for prosecutors to see a person's tax returns.

Nor would any agency other than the Justice Department be able to request

access to tax returns. Every such request will have to be made by a Justice

Department lawyer, who would exercise his own legal judgment that the return

is material and relevant to a lawful investigation or proceeding.

And a U.S. district court will be the final arbiter of whether a tax return and

its supporting information•such as a list of contributions to Good Will•will be

disclosed outside the IRS.

Even when tax returns and other information are disclosed, they can be used

only in connection with lawful criminal proceedings and investigations, certain

types of civil litigation involving Federal Claims, and situations involving certified

State felony violations.

The proposal also contains a provision that allows IRS to immediately release

information in emergencies such as threats to life, property, and national security.

This change would cure the situation that now exists which requires IRS to

pursue elaborate and time-consuming disclosure procedures even in such emergencies as assassination attempts.

In summary, as it amends the disclosure provisions of the Tax Reform Act,

our proposal would•

First, require IRS to notify the appropriate law enforcement agency whenever

it uncovers evidence, other than from a tax return, of a non-tax crime.

Second, once certain requirements are met and a written request made, IRS

can release nonreturn criminal information directly to the Justice Department.

And third, Government attorneys can obtain tax returns and supporting

documentation only by showing a Federal district judge that there is reasonable

cause to believe that the returns are material and relevant to a lawful criminal

investigation.

SUMMONS PROVISIONS

While the disclosure provisions of the Tax Reform Act have caused problems,

the IRS admits that the administrative summons section of that act is an impediment to effective law enforcement.

Under that section, 26 U.S.C. 7609, IRS is required to notify a taxpayer

whenever it issues a summons to a third party•such as a bank•to get access

to the taxpayer's records. The taxpayer then has a right to automatically stay the

performance of that summons until IRS can take the issue to court. To obtain

this stay, the taxpayer does not have to establish any legal reason why IRS

should not see his records. It is all automatic.

Let us say a person reports a modest income on his tax return for 1979, but

it comes to the attention of IRS that he lives a very extravagant life style. Maybe
he has reported an income of $23,000•but during the year he bought a house

costing $230,000 and two cars costing $19,000 apiece.

Suspecting that he is not reporting all of his income, IRS issues a summons

to his bank to have a look at his account records, which may very well show that

he has made a number of large cash deposits•a telltale sign of drug pushing.

Under the existing summons provision, the suspected narcotics dealer can

automatically stay the enforcement of that summons, and the IRS is stymied

until it can go to court and establish why it needs to see those records. In the

meantime, the pusher keeps on dealing drugs.

This automatic stay provision has resulted in delays of more than a year. One

automatic stay lasted 33 months. The average length of such stays has been 9

months.

In addition, there is no limit to the number of automatic stays a tax evader

can initiate. All investigators know that one set of records often creates the need

for a second set. Consequently, after a year's delay, IRS may find from the originally-summoned records that additional documents must be obtained. IRS then

issues another summons, the tax evader invokes another automatic stay, and

another year goes by.

In the meantime, witnesses may die, evidence becomes stale, and the Government's case is weakened.

An IRS study of this problem revealed that in more than 2000 automatic stays,

over 80 percent of the time the protesting taxpayers failed to show up in court.

It is fair to conclude from this statistic that delay•and not a legal issue•was

the purpose of most automatic stays.

In another survey, the General Accounting Office found that over 75 percent

of all persons who took advantage of the automatic stay were known organized

crime members, narcotics dealers, or persons who habitually protest paying

their taxes.

We propose to change the automatic stay provision to make the summons

procedure similar to the one Congress applied to every Federal investigative

agency except the IRS through the Right to Financial Privacy Act of 1978.

Under our proposal, a taxpayer still will be given notice whenever his records

have been summoned by the IRS, and he will be able to contest the summons

in court before IRS can see his bank or other records held by a third party.

In keeping with the policy of the Right to Financial Privacy Act, however, the

taxpayer will have to assert a legal argument and convince the court that IRS

has no right to see his records. It will not be an automatic stay.

Ordinary taxpayers with good legal arguments will have no fear of indiscriminate access to their records by the IRS. But criminals and tax evaders will find

it much more difficult to delay, interrupt and impede a serious investigation

for years on end.

In addition, under our proposal, the Government can present to the court, for

in camera inspection, evidence indicating that a notice to the taxpayer could

result in the destruction of records, obstruction of justice, threats to witnesses,

or other similar acts. If the court agrees, an order can be issued postponing the

advance notice requirement.

We believe that by enacting our proposal and applying the same summons

procedure to the IRS that is applied to all other Federal agencies, Congress will

be improving law enforcement while continuing to provide adequate privacy

safeguards for everyone's records.

CIVIL DAMAGE PROVISIONS

As I pointed out earlier, the Tax Reform Act of 1976 contains severe criminal

and civil penalties for persons who disclose tax returns or related information

in violation of the act.

The civil damage provision, 26 U.S.C. 7217, makes any person who willfully

or negligently discloses a tax return or tax return information in violation of the

act personally liable for civil damages in a suit brought against him by the taxpayer.

There is no liability for disclosures which result from good faith, but wrong,

interpretations of the act.

Our proposed amendment to section 7217 provides that the Government will

be liable for damages awarded against a Federal official or employee so long as the

disclosure occurred within the scope of his employment and was not done corruptly,
8

maliciously, in return for anything of value, or willfully in violation of the dis -

closure provisions of the act.

We do not believe that IRS agents should be personally liable for damages

arising out of disclosures which are not done with wrongful intent, and S. 2405

spells this out.

CRIMINAL PENALTIES

The criminal penalties of the Tax Reform Act, 26 U.S.C. 7213, makes it a

felony to willfully disclose tax returns or tax return information in violation of

the act. Persons found guilty can be fined up to $5,000 or sentenced to jail for up

to 5 years, or both, and assessed the costs of prosecution.

Under existing law, there is no defense available for good faith but wrong

interpretations of the disclosure provisions. As a result, IRS agents testified

before our subcommittee, they will always stay on the safe side of the law and not

disclose any IRS information to other agencies except in the most serious situations. The disclosure provisions are not always easy to interpret in every situation

when an IRS agent comes across evidence of a nontax crime. In fact, even though

IRS has issued a number of "clarifying" interpretations and instructions, its

agents testified that they never could be sure if they were violating the act when

they disclosed information. In fact, IRS' own legal counsel had difficulty interpreting the provisions when asked questions at our hearings.

In order to ease the minds of IRS agents and to encourage them to report

nonreturn information to possible crimes, we propose in S. 2404 that an affirmative

defense provision be added to the criminal penalty section to relieve them of

criminal liability when they can establish that they made the disclosure based on

a good faith, though erroneous, interpretation of the disclosure provisions.

CONCLUSION

Mr. Chairman, for generations the Internal Revenue Service led the way in

this Nation's battle against organized crime and narcotics trafficking, but since

1977 it has hidden behind the disclosure provisions of the Tax Reform Act to

stay out of the fray.

As Fred Bonadonna, whose father was an identified member of the Kansas

City mob, testified at our recent hearings, organized criminals•who once feared

the IRS•now arrogantly display the wealth created by their criminal ventures,

knowing full well that the IRS will do nothing about their ill-gotten gains.

Only part of the SIR withdrawal can be blamed on the existing law. In passing

the disclosure provisions, Congress intended to provide greater protection for the

privacy of each citizen's tax returns, but we did not intend for IRS to withdraw

from this important fight.

It is now time for us to make a policy decision for the top-level administrators

of the IRS, rather than having them make it for us. That decision is that the IRS

should become once again the effective force for justice that it was in the days of

bootleggers and rumrunners.

My colleagues and I believe that .our proposals will send IRS a clear and

unmistakable signal that it should do just that.

We have spent many long hours in drafting what we feel is very well-reasoned

legislation. We will retain very important privacy safeguards that will prevent

any repetition of Watergate-type abuses. At the same time, we put a duty on

IRS to cooperate once again with the fight against the ever increasing organized

crime and narcotics problems facing the Nation.

Three years of inactivity by this once effective law enforcement agency is

enough. It is time to act.

Thank you very much.

Senator NUNN. I also have a comprehensive comparison of S. 2402

and the existing law, which might be helpful.

Mr. GIBBONS. I have seen that and I think we should make it a

part of the record also.

[The information follows:]
§ H

§

is

! 4-i cq

H i-l • - -^

ro tH m en +J

•H id -H K g

^ H em dj )-( E a

.p ... (I) 01 O M

a O S TO o c 4J

R & E 4J 4-1 C g

TJ -P O 01 S 4J C

SJ G -M s B~.£

g.Si.S t3 to 'o

0) ,-i 4J VJ C

|

o

60

C
10

c

§

2

•o w <u rt

a> at J2 u

n ^ Z» to

M

c

si

Q. S-i

28•H

•s §

1911

5. -H O

* I . -

O <u en J3

u S 53

o •6 c

at to -H 0
11

o

o

a

%

[4

i-S MOM

a> ] x)

UO&)

o O 0)

o.,o nJ

ij2T3 11

i T3 4-

_ 00 <U ^

&9

d...fi<

4J «H

T3 - 4-T R en

'•8 2i

tS.S.2-5
12

XJ ,Q ,Q nl xi

G o co y

CD U w 3

tu xJ

y in 'H -3 o

-tJ 4-1 -H "3

,c <y TO

5 jH , -H CO M-J V-i U

C-rl (O 4J Q (0 P

iSJ-J

s 11« 3

+J <U P dJ U fl A3 -So r5

Jafi •y v\ £ §2 o "w S J5

• _ J >ij H _ J -H •) 8

• O • -H S CO -"3 T3

as

! n o is 5 O

y JJ c o to

•HSJX-HSH+J X!kQi3>Mt:0)

I

M-; cj to O *o

gj5g.Hg.Hg.U

T4 cr O U • -

a o B S <f ,fls a- g^ g)

o -H <u ^ 5

u u u m b

O 3« OgU

u u bOU O nl •H ex « <1)

-a -u -u to ,e

o to co o) cu 4J

F B -^ H .

<5 <D n b ,-v O

O

"Subo

°.3.f

cu -u

s
13

-I

60 3

to

a

a, tfl ia w I-J a) 3d. >, emeu

5J n oi t)

&£ .Sin

•8 3

3

-3g>3

<fl Q) •rt'rtTi
14

s

ll

•s

h ffl fi

II si-a 1301

>>. ftU

OM i-i e>o-6 III en -H 3 <u

ft

1

ft a»

OE

Tjo

o a,,Q

a>

4J

3QJ"}

rHp

"•Si

u ft ill

s
15

§

2;

•J

so

c

I

•a > o -

oaj-HDcuinS

• « -H S G - nj

rH p o CM 35

^ B 3 o u ,-> B

•r< -i-( 4J W y 'f-J -H X3

to w

a* aj

0) .-

! O <u u

•S.S

II53

CU W iJ U 4J O

:-o -

O-H J. .

*'||EJL

•5 4J -U <U TJ

c .2 id <u fe

XJ H to o

SUM"'

iH OJ a)

O.T3 I _ P- QJ O X) '
16

*

J

1 Sg4H a *w §rti oi

n g. a

soo

" 8 * -S

H >*

•H tO H Hi ftj

•U T3 +J O

S § | 4-) QJ

3 0-

8 ui -P

^H-fl-o a

BQ.UH Q

03 fa U Q H

to 5 o

I* P 3 "

G O PtllH H £J v o a

.."si

p *i • sj

.If."

4-> ij CO

0-Jf to1 u

a)

O CD -H U >U M

U (fl tfl-rl

< ,2 o^

B
17

0)

t-A CO

fist

Btal to dj

«

fiSS

o S £

4J i-i -P

_ <u d

_ >H JS B

OJ 4-J <U

60
18

- i-l

T4 U U -P B

U-H-HUO

iP.
19

£i8

* 9

4J sw iti m § • K

8 « -P § -3 aj " a

_ aj s <D > •a

i 5 5 a) 3 81

la* nSfj'g

) § tj •+-! CD £ •§

I 01 -PC -H I -H CD C fti W H

i niiil « o

I G +3 E CO -H

o q 0 en £ o

I 0 w Q o en •

•H CD G H

I eg 3 CD 3

fShS=!

s

CD

•3
20

Senator NUNN. I appreciate the opportunity to testify before

this subcommittee. I want to thank you personally for taking the

lead on the House side in bringing this matter to the attention of the

House. I have done likewise on the Senate side with the help of Senator

Percy, Senator Chiles, and a good many other Senators on a bipartisan

basis, including Senators Long and Ribicoff who occupy positions

on the Senate Finance Committee.

I consider this to be the most important law enforcement issue

that we will face in this Congress.

In summary, the key parts of our proposal would amend the disclosure provisions of the Tax Reform Act, 26 United States Code

6103. When you try to summarize what this rather complicated

measure does, it is always with some degree of jeopardy, but I will

try to summarize very briefly.

First, the proposal would require the Internal Revenue Service

to notify the appropriate law enforcement agency whenever it uncovers

evidence other than from a tax return of a nontax crime.

Second, once certain requirements are met and a written request

made, IRS can release nonreturn criminal information directly to

the Justice Department, and we specifically define what "nonreturn

information" is.

And, third, Government attorneys can obtain tax returns and

supporting documentation only by showing a Federal district judge

that there is reasonable cause to believe that the returns are material

and relevant to a lawful criminal investigation.

Mr. Chairman, in the interest of the subcommittee's time, I will

just turn now to the questions that you have asked the witnesses

to address today, because I believe that would be the most meaningful

form of testimony I could give.

As to question No. 1 regarding changes in the standard for an

ex parte order, there are serious problems with the second and third

standards in the existing law.

These standards require, No. 1•and this is the existing law•that

there be reason to believe that such return or return information is

probative evidence of a matter in issue and, two, that the information

sought cannot reasonably be obtained from any other source unless

it constitutes the most prohibitive evidence of the matter in issue.

Mr. GIBBONS. If you want to make that vote and come back,

we can take some of these other witnesses.

Senator NUNN. If that will be more convenient to you.

Mr. GIBBONS. Whatever you want to do.

Senator NUNN. Let me go through this particular question and then

I think that would be a good place to break.

Mr. GIBBONS. All right. You may proceed.

Senator NUNN. The second provision, which I just read, under the

present law is that the information sought cannot be reasonably

obtained from any other source unless it constitutes the most probative

evidence of the matter in issue.

Frankly, this provision is worded such that it is hard to even tell

what it means because the "unless" should really not be there. I think

what was intended was "or" but nevertheless that is the provision that

the IRS is trying to live under now.
21

We are not talking about tax crimes here, in which the return or

return infromation certainly would be probative evidence. We are

talking about nontax crimes such as embezzlement, bribery, or narcotics trafficking. In these cases the actual tax return would never be the

most probative evidence and they may not even be probative. Very

seldom would they be the most probative, but they would be and have

been over the years useful to law enforcement authorities in solving

nontax crimes because they are relevant and material.

Accordingly, in S. 2402 and H.R. 6826 we have provided standards

which require that the application for a court order be made in conjunction with a lawful proceeding pertaining to the enforcement of a

specific Federal criminal statute, and that there be reasonable

cause to believe that the information contained in the tax return is

material and relevant to the proceeding.

I believe that the reasonable cause and material and relevant

standards provide adequate safeguards against unwarranted disclosure.

What we have, to make a long story short, is a Catch-22 situation.

There is no way that anyone who has never seen a tax return would be

able to show to a court's satisfaction that it is the most probative

evidence, and even if they could, it is very seldom that it would be.

So we just believe as a minimum, very minimum, this part of the

present law must be changed.

Mr. Chairman, I have a little more time, but I imagine the page was

going to notify me when I have 3 or 4 minutes left, but if you would

like to break here, I can come back in probably 10 minutes.

Mr. GIBBONS. We can start with the panel that consists of Commissioner Kurtz and Mr. Nathan and Mr. Csontos, both of the Justice

Department, and then when you come back we can interrupt them

and let you finish. Then we will work back and forth, but we might as

well get Mr. Kurtz and company started here.

If you see Senator Weicker, tell him we can work him in, too.

Senator NUNN. I will do that.

Mr. GIBBONS. Commissioner Kurtz, Mr. Nathan from the Criminal

Division, and Mr. Csontos from the Tax Division of the Department

of Justice•we regret that there may be some informality about the

the way this proceeds today, gentlemen.

Mr. MOORE. We have the Department of Justice and we are not

talking about Billygate, are we?

Mr. GIBBONS. There is no tax relevance to that.

Mr. MOORE. Have the taxes been paid on that?

Mr. GIBBONS. I think the taxes are not due yet.

Mr. Kurtz, you are first on the list.

Commissioner KURTZ. I think Mr. Nathan is going to start.

STATEMENT OF IRVIN B. NATHAN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT 01 JUSTICE

Mr. NATHAN. If I may, I will submit my prepared statement and

now I will address some of the variations between the administration's

proposal and the chairman's bills.
22

[The prepared statement follows:]

STATEMENT OF IRVIN B. NATHAN, DEPUTY ASSISTANT ATTORNEY GENERAL,

CRIMINAL DIVISION, DEPARTMENT OF JUSTICE

Mr. Chairman and members of the subcommittee, I appreciate this opportunity

to testify regarding proposed amendments to the tax disclosure provisions of the

Internal Revenue Code. As you know, the Administration•through the efforts

of the White House, the Internal Revenue Service and the Department of Justice•has developed a series of proposed amendments to the tax disclosure restrictions that were enacted in 1976. Although in the nature of technical and perfecting

amendments, we believe our proposals are critically important to remove serious

impediments to effective law enfoi cement, particularly in such priority areas as

the prosecution of narcotics trafficking, organized crime and white-collar offenses.

Moreover, it is our belief that these carefully developed amendments will achieve

their purpose without compromising taxpayer privacy or the administration of

our self-assessment income tax system.

In summary, we believe that the tax disclosure restrictions adopted in 1976

require fine tuning to correct several provisions, some of which are unnecessarily

severe, some ambiguous, and some needlessly cumbersome. The consequences of

these defects include excessive delay, reduced coordination and cooperation between the Department of Justice and the Internal Revenue Service, and too often

the inability of federal law enforcement agencies to obtain crucial data in the hands

of another federal agency. Based on their experiences under the 1976 law, many

federal prosecutors believe that enactment of tax disclosure amendments would be

the greatest single contribution that could be made to improved enforcement

of federal criminal laws.

The Administration proposals are similar in most respects to the bills introduced by Chairman Gibbons. I will address some of the variations between the

Administration proposal and the Chairman's bills today; others are noted in prior

testimony.

Because previous Congressional hearings have dealt at length with the need

for and anticipated effects of these amendments, I am submitting with my statement, for inclusion in the record, the testimony of the Department of Justice

before the Permanent Subcommittee on Investigations of the Senate Governmental Affairs Committee and the Subcommittee on Internal Revenue Service

Oversight of the Senate Finance Committee. Taken together, these statements

set forth the position of the Department in some detail. Having provided you

with this background material, I will proceed to respond to the specific questions

raised by the Chairman regarding tax disclosure amendments. The Legislative

Counsel of the Tax Division will then address summons provisions of the Internal

Revenue Code.

First, the Administration favors amendment of the present standards for

court-ordered disclosure under § 6103(i) (1). The existing court order requirements,

if strictly construed, create a Catch-22 situation; a prosecutor seeking access to

tax information cannot realistically make the showing required to obtain disclosure without having access to the tax information he is seeking. Virtually all

the courts which have considered applications for (i) (1) orders have interpreted

the law in a commonsense fashion, but the current language of the statute creates

the risk of inconsistent judicial determinations. Furthermore, the language of

§ 6103 (i) has a severe chilling effect on investigators and prosecutors.

Our amendment would replace the standards of (i)(l) with the standards

actually required by most courts, those which common sense indicates an applicant

can reasonably be expected to meet: that a specific criminal act has been committed

or is being committed; that the information is sought exclusively for use in a federal

criminal investigation or proceeding concerning such act; and that there is reasonable cause to believe that the information may be relevant to a matter relating

to the commission of such criminal act. This change will assist law enforcement

authorities with no practical adverse effect on taxpayer privacy or tax administration.

Second, the Administration proposes that § 6103(0(2) be modified to authorize

the attorney General to designate responsible officials, including Assistant United

States Attorneys and supervisory agents, to request third-party tax information.

This will permit prosecutors and regional investigative offices in the field to obtain

such information directly from regional IRS officials. Under existing law, all such

requests must be routed through Washington with attendant delay and paperwork.
23

Third, the Administration proposes creation of an affirmative duty to report

federal crimes reflected by information other than returns or taxpayer return

information. We believe the Administration proposal sets out a workable formula

for such disclosures. With respect to the proposal that IRS be authorized to seek

(i)(l) disclosure orders, we oppose this concept due to the disincentive it would

pose to honest and complete reporting of income; moreover, such a procedure

would raise fairness questions by forcing a taxpayer to choose between reporting

his income fully thereby risking criminal prosecution on the one hand or concealing income thereby risking criminal tax prosecution on the other.

Fourth, the Administration proposal would treat financial books and records

and other information submitted by or on behalf of corporate taxpayers•

excluding actual returns•as return information available pursuant to § 6103(i) (2).

We believe this approach is proper for four reasons. First, corporations are

chartered by government and owe their veiy existence to the state. As such,

they do not have the same privacy interests as individual citizens. Second, organizational books and records are already subject to intensive government inspection under other laws. Third, corp nations and other legal entities do not have a

Fifth Amendment privilege against self-incrimination. And fourth, organizational

books and records are normally maintained for purposes other than tax administration while the reverse is often true of books and records maintained by

individuals.

We would treat single-shareholder corporations as individuals for purposes of

this provision. The Administration distinguishes between single-shareholder corporations and other organizations because such one-person corporations are

normally simply the mechanism by which an individual transacts business.

Fifth, with respect to redisclosure of tax information, the Administration

proposal contains no specific redisclosure provisions. Rather, cur porposal is to

modify § 6103(i)(4) governing admission of tax information at trial. We believe

admission should be governed by the Federal Rules of Evidence and that tax

information should be admissible in civil forfeiture proceedings.

Finally, the Administration proposes some minor amendments to the civil

penalty provisions of the Internal Revenue Code. We propose that the civil

penalty be amended to conform with the Administration's proposed amendments

to the Federal Tort Claims Act and with the Right to Financial Privacy Act,

both of which would restrict civil damage actions to those against federal agencies

rather than individual employees.

Mr. Chairman, in summation, financial information is often important in

connection with investigation and prosecution of crimes involving large sums of

money such as narcotics trafficking, organized crime and white-collar offenses.

In many cases, tax information represents the best•and sometimes the only•

evidence of crucial financial transactions. And it is widely recognized that the

highly trained investigators of the Internal Revenue Service are the best in

the Federal Government at piecing together complex financial puzzles. Going

well beyond the intent of the sponsors of the Tax Reform Act, § 6103 has had a

significant adverse effect on coordination and cooperation between the Service

and the Department.

Despite the substantial administrative steps which have been taken in an

effort to mitigate the problems created by the 1976 law, the Administration is

persuaded that legislation is needed to achieve a proper balance between the

individual privacy interests of taxpayers and the public interest in the administration of justice. We believe the amendments we propose would achieve that

balance and are deeply grateful to you for turning from your many other pressing

duties to conduct these hearings. We stand ready to provide you and your staff

with any information and assistance you may need in connection with your

deliberations.

Thank you.

Mr. NATHAN. Before proceeding with the testimony, what I would

like to do, with the permission of the chairman, is to have included in

the record testimony that the Department of Justice has given in two

prior Senate hearings on this question, which contain a great deal of

the background information and our positions.

Mr. GIBBONS. Without objection, that will be made a part of the

record.

[The information follows:]
24

STATEMENT OF IBVIN B. NATHAN, DEPUTY ASSISTANT ATTORNEY GENERAL,

CRIMINAL DIVISION, DEPARTMENT OF JUSTICE

(Before the Senate Governmental Affairs Committee, December 7, 1979)

Mr. Chairman and distinguished members of this Committee:

I am pleased to have the opportunity today to discuss

with you the efforts of the Federal Government to address the

financial aspects of the illicit drug trade in this country

and some of the means by which we could improve our ability

to take the profits and incentives out of this extremely

lucrative criminal industry.

It will come as no news to this Committee that illegal

drug trafficking is big business, and that the flow of money

in this subterranean economy is torrential. Last year alone,

the Federal Government seized heroin, cocaine and marijuana

which would have retailed on the streets of our country at

approximately S3.2 billion. This, of course, represents

only a small fraction of the undetected cash flow. The

Internal Revenue Service conservatively estimates that the

untaxed profits from illegal drug trafficking approaches

$25 billion each year. The National Narcotics Intelligence

Consumers' Committee estimates that in 1978 retail sales of

illegal drugs were about $58 billion, and are rising annually.

While we in the Department of Justice have no independent

basis for making overall estimates of the dollars involved

in the industry, we have and are presently prosecuting large

trafficking organizations which we can prove have grossed

hundreds of millions of dollars over relatively short periods.
25

One of the hardest hit areas of drug trafficking is

south Florida, which is the principal entry point in this

country for cocaine and marijuana shipped from Latin America.

The financial figures from Florida banks speak for themselves.

Earlier this year the Federal Reserve banks in Florida reported

a currency surplus of over $3.2 billion. This represented

approximately 77% of the entire Federal Reserve currency

surplus at that time. In most other regions, more cash flows

out of Federal Reserve banks than into them. Clearly, the

major factor for the Florida surplus is the deposit of "narco

dollars" • cash derived from drug sales • in the banks of

south Florida. Also illustrative of the financial picture

is the fact that the foreign exchange account of Colombia •

the major transhipment center for cocaine and marijuana destined

for this country • had as of last month a favorable balance of

$3.5 billion, up from $405 million in 1975. At least part of

this must be a reflection of the amount of American dollars

recently received for drugs exported from the country. Indeed,

I was recently informed by a Colombian official that marijuana

may now have exceeded coffee as that nation's largest export.

Apart from the health risks which this influx of

drugs presents to our nation (which I leave to others to

assess and describe), the enormous sums of money generated

by the sales of these drugs pose grave dangers for our

economy in general and for the criminal justice system in
26

particular. First, of course, the money is almost entirely

unreported and untaxed, creating a loss of federal tax

revenues estimated by the IRS at between four and six

billion dollars each year. Second, the drug trade has an

adverse impact on our foreign balance of payments. Third,

the normal economy of an area is disrupted when there are

such large financial resources in the illegal sector.

Drug trafficking is now estimated by some to be south

Florida's single largest industry. The work ethic of

those citizens who are struggling to make an honest living

can only be undermined by the general awareness and

ostentatious display of ill-gotten gains. Sound economic

planning and development are impossible under such obviously

unstable conditions. As recent financial reports from

Florida attest, the ready cash available to drug dealers

has a direct inflationary impact on the local economy.

Moreover, drug dealers, in search of ways to launder their

funds, may choose to invest in legitimate businesses, with

potentially adverse impact on either those businesses or

their competitors. Even worse, money not invested in

legitimate businesses is available to finance other, and

potentially more dangerous, criminal activities.

The devastating impact on the criminal justice system

from this excess cash hoard is direct and immediate. The
27

large accumulation of money in criminal hands is a readily

tapped source to corrupt government authority in order to

perpetuate and further the smuggling enterprises. Even

if they are identified, captured and charged, drug dealers

too often possess the resources to make even the highest

bail and flee. They may simply write off the cost of

bond as a necessary business expense. Finally, those

who are brought to trial • at tremendous expense to

the Government • may use their vast resources to offer

bribes to juries or otherwise finance efforts to impede

the proper functioning of the judicial system.

Because of our concern about these disruptive consequences and because we simply must take the financial

incentives out of this industry to deter potential entrants,

federal narcotics law enforcement is placing increasing

emphasis upon cash flow investigations and the forfeiture

of illegal profits and the fruits of those profits. Those

persons in the highest echelons of the distribution networks

who are in a position to accumulate and control millions

of dollars may never have actual, direct contact with the

drugs themselves. Consequently, the usual tools of interdiction and "buy-bust" investigation are often ineffective

against them. We have to be able to trace the flow of

money, prosecute and convict the leaders and financiers

and obtain forfeiture of their fortunes.
28

Fortunately, within the last decade Congress has

provided some effective legal tools to attack the financial

assets of sophisticated drug trafficking organizations,

and we are beginning to develop expertise to use them

successfully. The Continuing Criminal Enterprise statute

(21 U.S.C. S848) is proving one of our most useful weapons,

permitting the imposition of a life sentence on a person

convicted of being the manager or organizer of a large

drug organization and permitting the forfeiture of drug

profits. At least 35 such indictments were authorized by

the Narcotic and Dangerous Drug Section in the last year.

The Racketeer Influenced and Corrupt Organization statute

(18 U.S.C. 5S1961-64), which has not yet been employed to

maximum advantage in the drug area, also represents a

potent tool for prosecuting narcotics conspirators and

depriving them of their illicit income and assets. In

addition to the criminal forfeiture provisions of the

Continuing Criminal Enterprise and RICO statutes, the

Controlled Substance laws permit the civil seizure and

forfeiture of drug-related money and property. Since an

amendment last November, the Federal Government is now

authorized to seize and forfeit to the general treasury

the proceeds of drug dealing as well as the vehicles

and other property used in trafficking.
29

The provisions of the Bank Secrecy Act (12 U.S.C.

S1829, 1951 et sea. and 31 U.S.C. §1051 et seg.) could

also prove increasingly important in assisting financial

investigations and prosecutions, assuming that there is

cooperation and compliance from banks and individuals and

that there is effective and prompt coordination among

federal agencies. These statutes and implementing

regulations require banks to maintain written records and

file reports of major cash transactions and require individuals

to file reports of international currency transportation and

details of their foreign bank accounts. These required

filings are essential for narcotics investigators to follow

a paper trail to the upper levels of trafficking networks.

Especially significant is the fact that a violation of the

Bank Secrecy Act combined with a narcotics violation subjects the violator to lengthy imprisonment and extremely

heavy fines. This was the result in a recent case in

Minneapolis, where an Indian hashish smuggling ring was

fined over $1.5 million dollars and $750,000 worth of

assets were seized. Frankly, the law enforcement potential

of the Bank Secrecy Act has not yet been realized, primarily

because of compliance delays and lack of an adequate data

base. However, we believe the situation is improving. The

use of the recently implemented Treasury Enforcement

67-0U6 0-80-3
30

Communication System (TECS) computer and permanent liaison

between the Treasury and other agencies needing the information are important developments.

We are striving to educate prosecutors and investigators concerning the techniques and potential advantages

of these tools. Large narcotics trafficking organizations

are sophisticated, the nature of financial investigations

and prosecutions is technical, and the statutes I have

discussed are relatively new and complex. This demands

continual educational efforts to upgrade the training of

all federal prosecutors and investigators in the drug field.

We are carrying on this effort vigorously. Next week in

Los Angeles, for example, we will conduct the 11th Major

Drug Trafficker Prosecution Conference. Sponsored by the

Narcotic and Dangerous Drug Section, the Executive Office

for United States Attorneys and DEA, the conference presents

lectures and workshops based on actual cases to instruct

agents and Assistant United States Attorneys in the use of

financial investigation techniques, the Continuing Criminal

Enterprise and RICO statutes, lawful electronic surveillance

and other technical subjects. Recently, DEA held its Third

Financial Investigation Seminar. These seminars are for

senior agents who spend a week learning from members of the

Department of Justice, the Internal Revenue Service, the
31

Customs Service, Securities and Exchange Commission and others

knowledgeable in the field of financial investigations. The

Narcotic and Dangerous Drug Section is now publishing a

monthly newsletter as a means of educating all drug prosecutors and other enforcement officials of legal developments

and strategies which may improve their performance.

A key to the successful implementation of these

statutes is the close coordination of the information,

expertise and efforts among a number of federal agencies.

In those cases where we have attained success, such coordination has been critical. For example, the recent Minnesota

case, which was premised on a combination of Bank Secrecy

Act and narcotics violations, resulted from close cooperation

between DEA and Customs. In the recently concluded Araujo

case • involving a heroin and cocaine smuggling ring which

had funnelled more than $33 million dollars to Mexico • the

investigation coordinated the information and activities of

DEA, Customs and the Internal Revenue Service, working closely

with an Assistant United States Attorney. The main defendant

in that case was convicted of a Continuing Criminal Enterprise

violation, sentenced to 35 years' imprisonment and fined more

than a million dollars. In another major case recently concluded in Los Angeles, an individual was convicted of a RICO

violation and the investments from his drug sales approximating $800,000 have been seized and are awaiting forfeiture.
32

It is ironic that while Congress has given us the

tools to attack the financial dangers posed by drug

trafficking, a confidentiality provision in the Tax Reform

Act of 1976 has impeded our success in this area somewhat.

The Act was enacted in response to concern about access to

tax return information. When the Act was passed in 1976,

it is noteworthy that there were few, if any, complaints

about abuses by prosecutors of tax information which they

obtained and used in developing criminal cases. The

statute, as enacted and interpreted by the Service, given

the penalties to which IRS personnel are subjected for

improper disclosure, has made it extremely difficult for

law enforcement officials working in such high financial

crime areas as narcotics, organized crime, white collar

crime and public corruption.

The Administration has recognized the need to

achieve greater coordination between law enforcement

agencies and the IRS, and has initiated under the auspices

of the White House Domestic Policy Staff a process of

meetings and communications between the Criminal Division,

DEA, Treasury, and IRS to identify specific impediments

to cooperation and agree upon necessary legislative and

administrative improvements. This process has been

facilitated by the March report of the General Accounting

Office on the Tax Reform Act and by the interest of this
33

Committee. As a result of these meetings, the Administration

hopes to develop a policy position within six to eight weeks.

In the meantime, I can set forth for the Committee the

Department of Justice's perspective of the situation.

Under the Tax Reform Act of 1976, the Federal

Government's ability to identify and prosecute narcotics

financiers and to trace and seek forfeiture of their

assets has been severely restricted. Federal prosecutors

and investigators from other agencies have been deprived

of the opportunity to work closely with the Service and

readily to obtain critically important information which

it has in its files. This is extremely unfortunate

because the Service agents are by training, experience and

temperment among the best qualified of any in the Federal

Government to assist in conducting financial investigations,

and the information available to the Service is among the

most important to assist in developing financial cases.

The Tax Reform Act and its implementation by the

Service have essentially had four major negative effects

on our enforcement efforts in the narcotics area as well

as in other large-scale financial crimes:

1. The Service is usually unable to advise us

adequately of the cases on which it is working, which

precludes us from close coordination with it and leads

in some instances to needless duplication of effort.
34

2. It is unduly difficult for prosecutors and

investigators from other agencies to obtain financial

information in the hands of the Service which would

materially assist in developing prosecutions against

major criminals.

3. It is extremely difficult for the Service to

provide to prosecutors or other federal investigative

agencies evidence concerning non-tax criminal violations which the Service obtains in the normal course

of its investigations.

4. In those limited circumstances where prosecutors

and other investigative agencies can work with the Service,

the time delays involved tend to thwart the benefits that

might otherwise by obtained.

The March GAO report, while claiming that the

adverse effects had not been fully documented, found that

IRS coordination with the Department of Justice and in

particular with the Drug Enforcement Administration had

been adversely affected and that the IRS was precluded

from disclosing, or even alerting agencies to seek,

relevant criminal information. The report concluded that

"these types of coordination...point up the need for

Congress to consider whether the adverse impact on

federal law enforcement activities warrants revision of

the legislation and whether any revision can be made
35

without disrupting the balance between criminal law enforcement and individuals' rights." We believe that some

documentation is now available and we are conducting a

survey to compile additional information.

I will explore below in some detail the precise

impediments created by the Tax Reform Act and cite specific

examples of the enforcement difficulties these provisions

have caused. However, I believe that the major problem

with the statute is the signal it has sent to the Service.

This message appears to be that the Service is to minimize

its role in non-tax law enforcement and devote itself to

enhancing the voluntary tax-collection system. From our

perspective, we believe this is a critical loss to the

Federal Government's law enforcement capacity. The

statute unfortunately has also sent a signal to prosecutors.

Rather than complying with the elaborate procedures set

forth in the statute, prosecutors have frequently gone

without obtaining needed financial information already

in possession of the IRS. The decline in the number of

requests for tax information by Department prosecutors

has been precipitious since passage of the Act. In 1975,

there were 1,816 such requests; for a six-month period

in fiscal 1979, there were only 124.
36

It is, of course, difficult to quantify a negative •

i.e., the number of cases which would have been made or

improved or the amount of fines or forfeitures which we

would have obtained if we had the full benefit of the

Service, its expertise and information. However, two

figures do dramatize the point. First, according to an

IRS report, DEA provided IRS with the identity of the

868 alleged Class I (major narcotics) violators to be

evaluated for criminal tax potential under a special IRS

project. Of this 868, as of a few months ago, 128 investigations had been initiated, 125 investigations completed,

31 prosecutions recommended, nine indictments obtained and

only six, or less than 1% of the Class I violators had been

convicted of a tax offense. Further graphic evidence of

the impact of the statute is provided by the fact that

since its effective date in 1977, the Organized Crime

Strike Force inventory of joint IRS cases has been cut

in half, from well over 600 investigations to slightly

more than 300. As we calculate information provided by

the Service to a House Committee earlier this year, IRS

now devotes less than 5% of its criminal investigative

resources to narcotics matters and only 25% of its

criminal resources to pursuing illicitly derived unreported

income as opposed to unreported income from lawful activities.
37

I will now turn to the specific problems under the

statute. As you know, under Section 6103 (i) the only way

in which federal law enforcement officials can obtain tax

returns or "taxpayer return information" for non-tax cases,

such as narcotics violations, is by obtaining a court

order. The application for an order must show (1) reasonable cause to believe that a specific crime has been

committed; (2) reasonable cause to believe that the

information sought constitutes probative evidence of

the crime; and (3) the information sought cannot be

obtained from any other source or at least that it is

the most probative evidence available. The statute

•defines "taxpayer return information" as that "filed

with or furnished to the Secretary by or on behalf of

the taxpayer."

Let me give you a few particularly dramatic examples

of what has occurred under this provision. Recently, in

Philadelphia, DEA and IRS were conducting independent,

parallel investigations on a suspected illegal drug

chemist. Under the statute IRS could not (and did not)

disclose that it was investigating this individual, and

hence there could be no coordination with DEA's efforts.
38

However, DEA became aware that during the course of its

investigation, the IRS had obtained information from the

chemist's trash can • including drug precursor formulae,

hotel bills and other evidence corroborative of drug dealing.

The prosecutor in the drug trial subpoenaed the IRS agent,

but the IRS took the position that the agent could not

testify about why he was going through the defendant's

trash unless the prosecutor obtained a court order, which

could not be done prior to conclusion of the trial The

prosecutors' inability to present testimony regarding what

was found in the defendant's trash by someone unwilling to

explain why he was searching the trash made it impossible

to use the evidence. Fortunately, the prosecutors managed

to secure a conviction without IRS assistance, but were

left with serious doubts about the Tax Reform Act.

Another example cited by GAO occurred when IRS*

analysis of records submitted by a taxpayer during a

criminal tax investigation showed that a union official

had accepted gratuities from company officials. IRS could

not disclose this apparent violation of the Taft-Hartley

Act.

These and other similar stories illustrate the three

major problems which prosecutors have had with the court

order requirement. First, because IRS cannot provide

advance notice that it has useful information, another

agency has no reason to request disclosure of taxpayer
39

information on a particular individual that might be useful

to it. Second, even if the agency suspected IRS possessed

useful information, the other agency may be in the Catch-22

position of being unable to justify its need for the information • as required by the disclosure provisions • before

it has the information. Unless the requesting agency has

actually seen the material, it is often difficult to certify

that it is probative of a material fact or that it is the

best possible source of that evidence. In some ways this

is a more difficult standard than we impose upon seeking a

search warrant to enter the private premises of a suspect

to seize personal property. Finally, the requirement of

going to court for the interdepartmental transfer of

information in the possession of the Government seems

unnecessary and inappropriate. The preparation and

processing of these court papers not only consume judicial

and prosecutorial resources but also often produce delays

which can in certain kinds of investigation prove fatal.

A case illustrating the importance of tax information and the danger posed by delays in its disclosure to

prosecutors involved the prosecution two years ago of the

Nicky Barnes organization in New York City, believed at

that time to be one of the largest heroin trafficking networks in the United States. Barnes was charged with a

violation of the Continuing Criminal Enterprise statute
40

which requires proof of substantial amounts of income from

narcotics. Six months before trial the prosecutors sought

disclosure under 26 O.S.C. S6103(i)(l) of the tax returns

of the main defendants. The trial began in October, 1977,

without the tax returns. For a number of reasons, most of

the returns were not received until midway through the

two-month trial; some of the returns were never produced

at all. Despite the late date of receipt, the returns

we were able to obtain proved extremely valuable to the

Government in proving that Barnes and his associates had

no legitimate sources for the excessive income they

reported (Barnes reported over $250,000 in miscellaneous

income in one year alone) and helped prove the substantial

income requirement of the Continuing Criminal Enterprise

statute. Barnes was convicted and is now serving a life

sentence. If the tax returns had been delayed any longer,

we might not have been able to secure this conviction.

Under Section 6103(i)(2), a federal agency can obtain

information in the possession of the Service other than

"taxpayer return information" if the head of the agency

certifies that the information sought is material to and

will be used solely in connection with an investigation or

proceeding. This is in essence information supplied to

IRS by a person other than a taxpayer.
41

Because of the sanctions imposed by the Act, the

Service is extraordinarily cautious about making improper

disclosures under Section 6103(i)(2). I am advised that

on one occasion a DEA agent provided an IRS agent with

a list of individuals in whom he thought IRS might be

interested. Several days later the DEA agent misplaced

the list and called the IRS agent to obtain the names.

Because of the Tax Reform Act, the IRS agent refused to

disclose the names. Apparently, since the information

was provided by a third party, the IRS agent believed that

a written request from the Assistant Attorney General was

required.

I am also informed of an investigation in Cleveland

in which the FBI asked IRS to examine film of documents it

had photographed to assist in identifying the material and

to join them in the investigation. Upon receipt of the

film, IRS advised that because it had become a tax-related

matter, IRS could not discuss the case or even return the

film.

In an effort to move beyond anecdotal evidence, the

Department has recently distributed a questionnaire concerning the impact of the Tax Reform Act to all United

States Attorneys' and Strike Force offices throughout the

country. After we have obtained and processed the answers

to these questionnaires, we will be pleased to supply the
42

results to this or any other appropriate Congressional

committee.

The extreme examples which I have cited today do

point up the difficulties which the statute creates for the

coordination of IRS with other agencies. It is a fact of

life that agencies will not work harmoniously when the

information flow is a one-way street. The problem is

not confined to narcotics investigations or even to the

Organized Crime Strike Forces which are predicated in

part on the synergism of several agencies sharing information and working cooperatively. As an example, the

United States Attorney in Arizona has recently formed a

special investigative task force to focus on white collar

fraud. Ideally, such a task force should include IRS

participation. However, because of difficulties it has

encountered in providing tax information to other participating agencies, the IRS has not even been included in

the multi-agency task force.

The statute and IRS procedures have also had an

adverse impact on grand jury investigations in which we

have attempted to combine both tax and non-tax violations.

The principal problem here is delay. In order to obtain

approval for a joint grand jury investigation (which would

include charges of tax violations as well as other criminal

allegations), the Department of Justice must provide justification and seek IRS approval for each specific taxpayer

to be investigated by the grand jury. As I understand

the procedure, the Department of Justice request must first
43

be approved by an IRS Special Agent, who passes it on to

his manager, who sends it to the Chief of the Criminal

Investigation Division, who transmits it to the Chief

Counsel of IRS for decision on whether to refer the matter

to the Tax Division of the Department of Justice, where

the final decision is to be made. As you can imagine,

the delays under this kind of multi-layered procedures

can be staggering. I am aware of one case in Buffalo,

in which approval was obtained 13 months after it was

first sought. In the Araujo case, which I mentioned

earlier as an example of a successful joint IRS-DEA case,

it took 8 months for the Department of Justice to obtain

IRS concurrence to conduct the joint investigation. I

am aware of another case in which the request was submitted last March and as of this date, it has not yet

gotten past the first level of review.

As I noted, even when approval is obtained, it is

limited to the individuals then identified as tax violators.

As others are identified during the course of the joint

investigation, the same involved • procedure must be

negotiated to secure approval to investigate them. In a

fast-breaking investigation, it can be extremely harmful

to have to go back to square one of the procedures.

As you may imagine, prosecutors often conclude that the

attempt to secure approval for joint investigations is
44

simply not worth the effort.

We recognize that legitimate privacy interests

of taxpayers are furthered by the Tax Reform Act. At

the same time we question how American society as a

whole is benefitted by significantly reducing the

ability of the IRS to lend its financial expertise

and store of information to the investigation and

prosecution of persons engaged in multi-billion dollar

criminal conduct. The forthcoming Administration study

which I mentioned earlier will address these problems

and suggest what legislative changes, if any, should

be made to correct the problems which I have identified

without unduly disrupting the delicate balance contained

in the statute between preserving the legitimate privacy

interests of law-abiding taxpayers and permitting the

Government to enforce the criminal laws against.major

offenders.

I should also like to touch briefly on a number of

other issues affecting our ability to deal with the financial

aspects of large-scale drug trafficking. Foremost among

these is the difficulty in tracing funds generated by drug
45

trafficking after they have left the United States. Money

has been traced from drug dealers into and out of U.S. bank

accounts, but the trial often disappears when the money is

transferred into banks in foreign countries with strict

bank secrecy laws. We are trying to address this problem

through negotiations with the countries involved, but the

prospects are not promising at this time. We believe it

essential to have a mutual assistance treaty with each

affected country by which we will be able to obtain

financial information from that countrv concerninci oersons

treaty with Switzerland; and a similar treaty with Turkey

has just been ratified by the Senate and awaits implementation. We are also hopeful that we will be able to

consummate, and send to the Senate for ratification,

a similar treaty with Colombia.

I should note that under the Tax Reform Act the

IRS will not provide to any foreign country any information except for tax prosecutions. As a consequence,

certain countries, such as the Netherlands, which would

otherwise provide us financial information for any

prosecutorial use are insisting that as a matter of

reciprocity they will not produce the financial infor67-0U6 0 - 80 - X
46

mation to us except for tax prosecutions here. However,

the real stumbling block in this area is that those jurisdictions which serve as bank havens • such as the Bahamas

and the Grand Cayman Islands • have shown no disposition

to provide the needed information. We hope to resume discussions with these governments and to demonstrate to them,

as we demonstrated to the Swiss Government, that the legitimate economies of all nations are adversely affected by

large-scale illegal drug trafficking and that the international community has a responsibility to avoid shielding

these bandits. We believe that it can be demonstrated that

it is not in the long term interest of any nation to establish

havens, financial or otherwise, for these criminals.

At the same time, we should take a closer look at

our own banking laws and the compliance with them by our

banks. At present, the Bank Secrecy Act requires banks to

report cash transactions of $10,000 or more. While there

have been a few prosecutions for non-compliance, the

Department of Justice cannot solve the problems acting

alone. We need more vigorous compliance by the banks

and closer supervision by the bank regulatory agencies.

Further, it may be that there should be reporting requirements with respect to certain types of wire transfers,

which we suspect the narcotics financiers are using.
47

Congress should also give consideration to proposed

amendments to the Currency and Foreign Transaction Reporting

Act (31 U.S.C. §1051) which are designed to strengthen the

Government's ability to monitor and interdict the movement

of illicitly obtained money into and out of the country.

For example, H.R. 4071 would provide a reward for information leading to seizures of currency. H.R. 4072 would

make it a crime to attempt to violate the requirement to

report the movement of currency of $5,000 into or out of

the United States. At present while it is a crime to take

$5,000 out of the country without reporting it, at least

one court has held that under the statute there can be no

arrest or prosecution until after the person has left the

country without reporting. We believe that once a person

is on board an aircraft with more than $5,000 in his

possession and has not filed the appropriate report despite

notice of the requirement to do so, he should at that point

be subject to arrest and prosecution.

Finally, I should note that the Biaggi Bill, or the

High Seas Bill, has been passed by the House and is awaiting

action by the Senate. The bill would make it a crime for

any American or person on an American ship or ship subject

to United States jurisdiction to commit on the high seas any
48

violation of the Controlled Substance Act. At present, it

is difficult to prove that a boatload of drugs on the high

seas is destined for the United States and hence that its

occupants have the intent to distribute those drugs here.

This bill would obviate the problem by making it an offense

for the covered person to be in possession of the controlled

substances on the high seas. We urge enactment of this bill.

These legislative provisions should enhance the tools

we presently have to investigate and prosecute major drug

trafficking networks. They should improve our ability to

ferret out and convict the major offenders and to deprive

them of their illicit gains. However, in our view, law

enforcement techniques and resources alone will not halt

illicit drug traffic and its attendant high profits. As

long as there remains a strong demand and a ready market

for illicit drugs, there will be individuals willing to

run the risks to supply them. To deal rationally with

this increasingly serious problem, we must also focus

attention on the nature of the demand for these substances

and sensible approaches to respond to, and hopefully,

minimize the demand. This would require a commitment

by all affected segments of society, not just law enforcement officials. We believe that this Committee is an

appropriate vehicle for focusing attention on all facets

of the problem and suggesting ways in which we can deal
49

comprehensively with them. We look forward to working with

this Committee as it pursues these issues, and we welcome

any assistance you can provide us as we strive to stem the

flow of illicit drugs and the enormous profits which

criminals are reaping from this traffic.

Thank you. I will be happy to respond to any

questions you may have.
50

STATEMENT OF IRVIN B. NATHAN, DEPUTY ASSISTANT ATTORNEY GENEBAI.,

CRIMINAL DIVISION. DEPARTMENT OF JUSTICE

(Before the Senate Finance Committee, June 20, 1980)

Mr. Chairman and Members of the Subcommittee:

I appreciate this opportunity to provide you with the

views of the Department of Justice regarding proposed modifications in the nondiscloure provisions of the Internal Revenue

Code. These proposals, although in the nature of technical and

perfecting amendments, are critically important to remove serious

impediments to effective federal law enforcement, particularly In

such priority areas as the prosecution of narcotics trafficking,

organized crime and white-collar offenses.

At the outset, I emphasize that we share the commitment of

this Committee and the Congress to proper safeguards for the

privacy interests of taxpayers. I am pleased to report that

the disclosure amendments supported by this Administration

have been developed after close consultation between the Internal

Revenue Service and the Department of Justice and are endorsed by

both of those agencies. We are confident that the proposals will

enhance our law enforcement capacity without adversely affecting

privacy interests or the administration of our voluntary federal

income tax system.

THE PROBLEM

Prior to 1976, the Internal Revenue Service was an integral

part of federal law enforcement, coordinating its efforts with

other agencies, such as the Federal Bureau of Investigation, the

Drug Enforcement Administration and the Organized Crime Strike

Forces. Trained criminal investigators from the Service provided
51

leads and assistance to Investigators from other agencies who

were not as well trained in sophisticated accounting matters.

When information developed during the course of IRS investigations showed serious violations of non-tax federal criminal

statutes, the IRS agents routinely provided this information

to the appropriate law enforcement agency. Such information

often formed the cornerstone of successful prosecutions of

serious white-collar or other sophisticated crimes.

This coordination and assistance were badly disrupted when

Congress enacted the non-disclosure provisions of the Tax

Reform Act of 1976. A thorough review of the legislative

history of those provisions reveals that they were passed to

prevent the kind of political misuse of tax returns that had

been perpetrated by White House aides working for President

Nixon. You will recall that it was widely reported in the

press that in the early 1970's.some White House aides had

obtained the tax returns of political enemies of the Nixon

Administration whom they desired to embarrass. There is no

question that such abuses were improper and this Administration

shares the sentiment of the Congress that legislation should

prohibit access to tax returns for political purposes.
52

Unfortunately, the statute passed went far beyond that

salutary purpose. The Act's complex web of substantive and

procedural restrictions on the disclosure of any information

in the possession of the Internal Revenue Service has severely

limited access to essential information for perfectly legitimate

law enforcement purposes. At a time when our society uniformly

seeks to combat and bring to justice high-rolling narcotics

traffickers, entrenched organized crime kingpins and sophisticated corporate swindlers, the front line federal agencies must

fight without the benefit of crucial data in the hands of another

federal agency. It must be emphasized that nowhere in the

legislative history of the 1976 statute were there any reported

instances of abuse by federal prosecutors of information theretofore provided by the Service. The information provided to

federal prosecutors prior to 1976 was used exclusively in a

lawful manner to investigate and prosecute serious federal crimes.

However, as enacted in 1976, subsection 6103(i) of the

Internal Revenue Code established needlessly severe, ambiguous,

and cumbersome restrictions upon law enforcement access to tax

information necessary in non-tax criminal investigations.

Generally, the statute provides that all tax information is

confidential and cannot be disclosed to law enforcement agencies
53

unless one of the express -- and highly complicated • exceptions

applies, and then only pursuant to complex procedures. Moreover,

the 1976 law establishes civil and criminal sanctions for

violations of its provisions. An IRS employee who in discloses

Information to the Department of Justice in violation of the

statute risks up to five years 1n prison, a criminal fine of up

to $5,000, and civil damages by the aggrieved taxpayer of at

least $1,000, or more if any actual damages can be established.

Of course, these sanctions are all in addition to any administrative sanctions, including dismissal, which may be imposed

by IRS.

The effect of these new provisions was immediate and

dramatic. Recognizing the consequences of mistaken disclosure

of Information, IRS took prompt steps to Implement the statute

and adopted internal procedures, definitions and regulations

to protect taxpayers and IRS employees. A 1979 General

Accounting Office Report concluded that as a result of the

1976 law, "coordination between IRS and the Department

of Justice has suffered."
54

We have now had the experience of three and a half years

of operating under the non-disclosure provisions, and I can

state unequivocally that federal prosecutors and criminal

investigators are convinced that no legislation is a

greater handicap on our ability to contain serious

financial crimes than the non-disclosure provisions of the

Tax Reform Act.

MANIFESTATIONS OF THE PROBLEM

With sharply limited access to tax information and the

expertise of highly trained IRS personnel upon whom we had

long relied for assistance in unraveling complex financial

transactions, we have found it extremely difficult to investigate and prosecute complex financial crimes. This loss has

been felt in many areas of criminal law enforcement, but is

particularly severe in the investigation of narcotics

trafficking, organized crime syndicates, fraud against the

government, foreign corrupt payments, corporate bribery,

illegal currency transactions, and public corruption.

In many of these cases, our investigations require us to

follow a complex and purposely circuitous paper trail of

financial transactions. Tracking down all of the key transactions to establish a complete picture of what occurred is

like piecing together a puzzle. Not only are IRS personnel

among the world's best at assembling such puzzles, IRS often

has the missing pieces among its records.
55

Generally, the 1976 law creates four major problems: (1) IRS

is unable to advise us of the cases on which it is working with

the result that there is sometimes duplication of effort; (2) it

is unduly difficult to obtain IRS information which would

materially assist in development of important criminal cases;

(3) the statute makes it difficult for IRS to provide other

law enforcement agencies even with evidence developed based on

sources independent of tax returns; and (4) in those few circumstances where prosecutors are permitted to work with the Service,

the delays caused by the intricate and cumbersome mechanisms of

the Act often stall investigations interminably.

The statute has caused a number of concrete problems which

are frustrating to prosecutors and criminal investigators.

In its 1979 Report, the GAO found that the IRS Disclosure

Office literally has a file drawer full of evidence of serious

federal non-tax crimes which the Service has uncovered in the

last three years but which the statute prevents from being
56

transmitted across the street to the Department of Justice for

investigation and prosecution. Included in this material

revealed by the GAO Report were evidence that a corporation

had paid bribes to a federal official, evidence that an

Individual had defrauded the Customs Service of hundreds of

thousands of dollars, and evidence that corporations had made

substantial payments to union officials and politicians which

violated the Taft-Hartley and Corrupt Practices Acts. In the

last two months alone, we have been informed that such serious

non-tax crimes as wire and mail fraud, perjury, embezzlement,

concealment of a large government overpayment and illegal

political contributions, as well as the location of a homicide

suspect, have been reported by IRS agents to headquarters,

which has been barred by the Tax Reform Act from doing anything

but adding them to these file drawers.

In my testimony before the Senate Permanent Investigation

Subcommittee last December, I described several specific cases

in which prosecutors had been denied access, as a result of

the statute, to important Incriminating information in the

possession of the Service. I will not rehearse those examples

here.
57

Those examples were anecdotal in nature and were offered

merely to serve as Illustrations of the problems caused by

the Act. In an effort to provide the Congress with comprehensive documentation of the impact of the Act on law enforcement,

we developed and distributed a detailed questionnaire to all

federal prosecutors late last year seeking to assess their

experience under the Tax Reform Act. The questionnaire consisted

of 60 specific questions and sought information on virtually

every case in which Department attorneys have attempted to obtain

information or assistance from the IRS in connection with non-tax

cases and joint tax/non-tax grand jury investigations, as well

as on the use of tax information in criminal tax cases.

A total of 355 responses to the survey were received,

representing the experience of 105 different offices. These

responses were carefully reviewed and analyzed, and the results

compiled into a report of over 50 pages. For your ready

reference, the summary section of the report is appended to

my statement. We will, of course, provide the entire report

to the Subcommittee upon request and can arrange for your

staff's review of the individual responses to the questionnaire

if you desire. Additional examples of the unfortunate

consequences of the statute were contained in the report.
58

This report represents the first comprehensive effort to

document the problems arising from the Tax Reform Act. Its 50

pages are filled with examples of serious difficulties with

obtaining access to information, confusion over complex and

ambiguous statutory standards, and • the factor most readily

quantified -the enormous delays in obtaining either tax information, technical assistance, or the participation of the Service

in joint tax/non-tax grand jury investigations.

Perhaps the most revealing finding is that more than 50% of

those surveyed sought information from the Service on only one

of two occasions in the last three and a half years because

they claimed their experiences and those of other prosecutors

indicated that the statutory procedures were too cumbersome, too

time-consuming and too restrictive. Even those offices which

have continued to struggle with the disclosure procedures have

sought tax records relatively infrequently. Total requests for

tax information by federal prosecutors have plummeted from 1,816

in the year before the Act took effect to 255 in the most recent

12-month period for which statistics are available. It is, of

course, impossible to quantify precisely the effects of this

reduced access to tax information, but we believe that many

investigations and prosecutions of complex financial criminal

cases have been jeopardized or frustrated for want of information

known only to IRS.
59

The report's statistics on delay point up why so many

prosecutors have given up on seeking to obtain information

from the Service under the Tax Reform Act. In one case it

took over two years to obtain a defendant's tax returns. In

1979-80 an average of 65.8 days elapsed before tax information

sought pursuant to court order -- and which we were entitled

to obtain under the statute -- was received by prosecutors.

A significant part of this delay resulted from the requirement that the prosecutors in the field seek permission from

the Assistant Attorney General in Washington before they can

even file their papers with the court. Unlike delays within

the Service, which have recently been addressed by administrative charges, this aspect of the delay must be corrected

by legislation. The cumulative effect of these delays In

major investigations can be disastrous. Faced with Speedy

Trial Act deadlines, statutes of limitations, and the demands

of fast-moving investigations, delays produced by the 1976 law

often foreclose the opportunity to obtain neded information

under the disclosure provisions of the Internal Revenue Code.

Internally, the Administration has addressed these problems and

the serious effect of these difficulties on federal law enforcement activities. For the past six months, IRS has worked

closely with the Department in an effort to narrow the gap

between us created by the statute. After a series of high
60

level meetings, we have created a permanent IRS-DOJ Coordinating

Committee which convenes every other week. These meetings have

been productive and have resulted in administrative measures

which should lessen some of the problems caused by the Act.

These administrative changes are detailed in Commissioner Kurtz's

testimony.

In addition to these administrative changes, the Administration is convinced that there must be legislative amendments

in order to achieve an acceptable level of coordination and

effectiveness on the part of federal law enforcement.

THE EMERGING CONSENSUS FOR REFORMS

With the documentation of Tax Reform Act problems developed

by the Department of Justice, and through hearings by Senator

Nunn's Permanent Investigation Subcommittee, Senator DeConcini's

Subcommittee on Judicial Machinery, and Senator Chiles'

Appropriations Subcommittee, support for corrective legislation

has emerged. Chairman Long has joined Senator Nunn and six

other Senators in co-sponsoring proposed amendments, which are

now before this Subcommitee. Similar legislation has been introduced in the House of Representatives.
61

The General Accounting Office, which in 1979 concluded that

adverse effects of the Act on law enforcement had not been

sufficiently documented, now endorses corrective legislation.

The Administration supports amendments to the Tax Reform

Act developed by the Department of Justice,, the IRS and the

Oomestic Policy Staff of the White House. Major national

and local news organizations have reported on the problems

created by the Act and advocated fine-tuning of the 1976 law.

In short, support has developed in the Congress, the

Administration and among the public generally for legislation

to establish a proper balance between taxpayer privacy Interests

and the need for the proper administration of justice.

THE REMEDY TO THE PROBLEM: SUMMARY AND ANALYSIS

Our proposed revisions of the disclosure provisions would

(1) redefine with precision those materials in the hands of the

Service which are to be accorded confidential protection;

(2) simplify and expedite the processes for obtaining the

available Information; (3) mandate the disclosure of evidence

of serious non-tax crimes coming to the Service from nonprotected sources; and (4) facilitate closer cooperation

between the Service and other agencies for legitimate law

enforcement purposes. As I have noted and will explain further

as we proceed, we believe that all of these revisions can be

accomplished without invading the legitimate privacy Interests

of taxpayers or impairing our voluntary tax collection system.

67-046 0 - 80
62

We believe that the information which should be protected

are the tax returns themselves and the financial books and

records which an individual keeps and submits to the Service

to support the accuracy of his or her return. Me do not

believe that the Service should be required by law to withhold

from any appropriate federal law enforcement agency (1) incriminating information provided about the taxpayer by third parties;

or (2) evidence obtained by the Service from corporate records

which are maintained for non-tax purposes.

Tax returns which are required by law to be prepared

and filed should clearly be given confidential protection.

The Administration believes taxpayers will report their

income more fully and honestly if they are confident that

the information they report will not be used to incriminate

them. Further, the Administration believes that in order to

encourage an individual to maintain and retain accurate underlying financial records, these too should be accorded confidential treatment when they come into the possession of the

Service. Accordingly, under the revisions we propose, no tax

return and no individual's financial books and records in IRS

possession could be disclosed to a federal law enforcement

agency except upon a properly obtained court order.
63

Consistent with this policy, our proposed revisions provide

that if a taxpayer engages in fraud upon the Service by wilfully

filing false returns, then the confidential protection for his

return and underlying books and records 1s lost. Thus, we

propose that once it becomes clear that a taxpayer has engaged

In tax evasion, all of the information developed by the Service

1n that case involving non-tax offenses committed by that

individual would be turned over at the same time to the

appropriate federal law enforcement agency. We believe 1t

makes no sense to continue to provide to a tax evader the

benefits of a policy of confidentiality which was designed

to encourage honest compliance in the first place. We would

also provide that information 1n the possession of the Service,

regardless of Its derivation, which reveals the imminent

commission of a crime involving bodily harm, could be disclosed.

We believe that society's Interest in preventing the harm is

greater than any theoretical damage to the voluntary tax assessment system which could result from such a narrow exception.

Under present law, the Service may provide to appropriate

law enforcement agencies evidence about non-tax crimes which

comes to the Service's attention from third parties. Thus,

if an Informant tells an IRS agent that a taxpayer is engaging

in tax fraud by deducting bribes paid to a federal official,

the Service may Inform the Department of Justice about the

allegation of bribery.
64

There are other kinds of information about individuals which

do not derive from third parties but which we believe should

also be turned over by the IRS to criminal investigators.

This would include, for example, contraband obtained in a

lawful manner by the Service. We are confident that the

present statute does not mean to give protection to this

category of Information but some doubts appear to have

arisen because of field-level interpretations of the statute.

We believe that either in the revised definitional section

of the statute or by administrative regulations, we should

make clear that materials, such as contraband, are not

protected by the disclosure provisions of the statute.

In a similar vein, we believe that evidence of non-tax

crimes in the possession of the Service which comes from

the books and records of corporations should be reported to

the appropriate federal authorities. To reach this conclusion,

we start from the premise that evidence of crime in the

possession of a federal agency should be made available to the

agency responsible for investigating and prosecuting that offense,

unless there is a clear overriding policy reason for maintaining

the confidentiality of that material. As we have seen, there

1s such an overriding policy reason for tax returns and for

protection of an individual's underlying financial records.
65

However, the reasons which support providing confidenti1ity

to tax returns and individuals' financial records do not obtain

with respect to a corporation's books and records. In the

first place, corporations and other commercial entities are

required by many non-tax federal and local laws to maintain

accurate books and records. Second, these records are

available for production and inspection by federal and

local agencies other than tax authorities. Third, corporations and commercial entitles, unlike individuals, have no

Fifth Amendment privilege against self-incrimination. Thus,

there is no overriding reason which justifies giving

confidential protection to evidence of non-tax crimes which

the Service finds in the books and records of corporations

Under our proposed revision of the disclosure provisions, 1f

the Service finds evidence of non-tax federal crimes in the

books and records of a corporation, it will be required to

report such information to the appropriate law enforcement

agency, much as we would expect any citizen to report evidence

of crime coming to his or her attention.

By requiring the Service to turn over incriminating

Information from all sources -- other than tax returns and an

individual's underlying financial records -- we will eliminate

an important source of problems under existing law. Presently,
66

if third-party information alone does not constitute evidence

of a crime, but must be added to corporate financial data in

the hands of the Service to make out the offense, the Service

cannot turn over any information, including the "tip" of the

third party. Under our proposed revision, experienced Service

personnel can combine the third-party information and the

corporate financial data, and if they add up to a non-tax

offense, the Service will be free to transmit it to the proper

authorities.

Having now explained our views concerning which categories

of information should be protected and which should not, I

would like to proceed sequentially through the statute and

explain the nature of each of our proposed revisions and

the reasons for them.

SPECIFIC AMENDMENTS NEEDED

Section 6103(i)(l) establishes the mechanism and standards

by which we can seek a court order to obtain from the Service

tax returns and other protected information which may be

necessary in a criminal investigation. We support the principle

that an sx parte court order should be necessary for seeking access

to this type of protected information, but believe that the

standards and procedures can be substantially refined.
67

Under the present statute, the application for such an order

must show (1) reasonable cause to believe that a specific crime

has been committed; (2) reason to believe the Information

sought -- which the applicant hasn't yet seen -- constitutes

probative evidence of a matter 1n Issue related to the

commission of the crime, and (3) reason to believe the

information sought cannot be obtained from any other source

or that It 1s the most probative evidence available. This

standard is a Catch-22 test; normally an applicant cannot

attest that the tax Information Is the most probative

evidence of a matter in issue without access to the

information Itself. Yet he cannot see the Information

until he obtains the order. Further, It is often difficult

to predict at the early stages of an Investigation what

matters will be "1n Issue" by the time of trial. Such a

standard does not protect privacy. It merely confuses

applicants and courts, creates grave uncertainty over

permissible disclosures, and in the end deters most

prosecutors from seeking tax Information.

Because federal judges are familiar with the realities

of criminal Investigation and prosecution, most federal

courts interpret the statutory standard of §6103(1)(1)

1n the light of reason and experience and accept a factual

showing limited to the information that common sense
68

indicates a prosecutor can reasonably be expected to

develop through investigation: that a specific crime

has been committed and that independent reasons exist to

support a belief that the tax returns or financial data

sought are relevant to the criminal investigation or

prosecution. We believe this logical standard should

be codified to eliminate the confusion and deterrent

effect of the current statute and to insure uniform

determination of disclosure applications by the courts.

As this standard 1s in fact the one now followed by most

courts, we believe codification would have no practical

adverse effect on taxpayer privacy interests or tax

administration.

A second problem with §6103(i)(l) is that federal

prosecutors cannot now file applications for disclosure

orders without approval from Washington. The statute

requires all applications for (i)(l) orders to be signed

by an Assistant Attorney General. Thus, federal

prosecutors must mark time while their applications are

sent to Washington for the required signature and then

returned for filing with the court. This is a timeconsuming and pro forma process; rarely, if ever, does

an Assistant Attorney General refuse to permit an

application for return information to be filed with the

courts. The requirement of approval In Washington

significantly delays the process and makes the procedure

more cumbersome for federal prosecutors. Its contribu-
69

tlon to privacy or tax policy Is unclear because a

neutral and detached magistrate must review the application.

We believe §6103(i)(l) should be modified to authorize

United States Attorneys, who are appointed by the President

with the advice and consent of the Senate, to approve applications in the field.

We also believe that the order should be obtainable from

United States Magistrates as well as district court judges.

Magistrates are authorized to enter analogous orders, such

as search and arrest warrants, and it would expedite the

process if the application could be filed with and ruled

on by them as well as by busy district court judges.

Section 6103(f)(2) applies to Information relating

to a taxpayer obtained by IRS from third parties rather

than from the taxpayer or tax returns. The law permits

this information to be disclosed pursuant to a formal

written request to IRS specifying Identifying information

and "the specific reason or reasons why such disclosure

Is or may be material to the proceeding or investigation".

As with (1)(1), we believe 1t 1s unreasonable to require

a showing of materiality when the applicant has not yet

seen the information which IRS has in Its possession.

Moreover, any expectation of privacy In such information

gleaned from third parties is"far less than exists as to

Information which the taxpayer himself has furnished to

IRS. We believe, therefore, that (1)(2) should be revised

to permit disclosure of such third-party information upon
70

a certification that the material is sought exclusively

for use in the investigation of a specified crime. This

procedure effectively protects against abuse by creating

a paper trial in connection with such disclosures; all (1)(2)

disclosures would be documented and Individual accountability

established. As with (1)(1) applications for court orders,

the (i)(2) request letters must now be signed by an

Assistant Attorney General necessitating that every disclosure

be routed through Washington. We recommend, therefore, that

(1)(2) requests be permitted by field prosecutors and investigators designated by the Attorney General. Finally, (i)(2)

should authorize disclosure of whether a tax payer filed a

return for a particular year and whether there is or has been

a criminal investigation of a taxpayer.

Section 8103(1}(3) governs situations in which IRS

agents come across evidence of non-tax crimes in the course

of their tax investigations. We are often unaware of the

existence of this information and have no reason to request

1t under (i)(l) or (i)(2). The Service cannot pursue the

matter itself because Its Investigative jurisdiction is

limited to tax offenses. Section 6103(1)(3) permits, but

does not require, the Service to disclose the Information

to us if it was obtained from third parties. The limited

disclosure mechanism established by (1)(3) has not worked

well. The flow of (i)(3) information has been a mere

trickle -- about two referrals per month.
71

We believe that there should be two fundamental changes

made to 6103(i)(3). First, the Service should be required

to transmit to appropriate federal law enforcement agencies

the unprotected information which reveals evidence of serious

non-tax crimes. Second, as I have explained earlier, the

unprotected information should include all information in

the possession of the Service, except tax returns themselves

and an individual's financial records which were retained

and submitted to the Service to support the return. These

changes are necessary to eliminate the anomalous and unhealthy

present situation in which one federal agency is prohibited

from Initiating disclosure of evidence of serious crimes

to other agencies responsible for investigating and

prosecuting those offenses. Finally, in addition to

making (1)(3) disclosures mandatory and establishing a

broader category of information which may be disclosed,

we believe the law should be amended to require (1}(3)

disclosures to be made to the appropriate official in the

district involved rather than to the agency head 1n Washington

as is now the case.

Along with the changes to (1)(1), (2), and (3) I have

suggested, the other major revision to the statute should be

the modification of the penalty provisions. The sanctions of

present law chill disclosures under the statute. The minor

revisions to the penalty provisions made in November of 1978

have proven inadequate to reverse the prevailing attitude,

and extreme caution persists.
72

We recommend that where a disclosure is made inappropriately by

an IRS employee, any civil action for damages must be brought

against the Service rather than the individual employee. This

approach is consistent with the Right to Financial Privacy Act

of 1978, 12 U.S.C. 3417, and the Administration's proposed

amendments to the Federal Tort Claims Act. If the court hearing

the civil damage action finds that the violation was wilful, the

Office of Personnel Management would be required to initiate

administrative disciplinary proceedings against the responsible

employee.

With respect to criminal sanctions, the Nunn bill would

establish, as an affirmative defense to criminal prosecution,

that the unauthorized disclosure resulted from a good faith,

but erroneous, interpretation of the law. We are not certain

that this would make any significant change in existing law

as interpreted by the courts. We would note that §1525 of

S. 1722, the proposed Federal Criminal Code Revision, makes

it an affirmative defense to criminal prosecution for disclosure of private information submitted for a governmental

purpose that the disclosure was made to report a potential

violation of law and was make to a law enforcement officer

charged with investigating or prosecuting such a violation.

The Administration supports that provision of the proposed

Criminal Code bill. Of course, we are prepared to discuss

with the Committee or other interested parties whether

there are reasons why this proposed general principle is

not appropriate in the area of tax disclosure.
73

The Administration also proposes minor amendments to

§6103(i ) (4) governing admissibi1ity of tax information into

evidence in trials. We propose that admissibi1ity of tax

Information be governed expressly by the Federal Rules of

Evidence and that admission should be authorized in connection with civil forfeiture and other proceedings related to

criminal cases. Furthermore, (1)(4) should make clear that

tax Information used in criminal cases 1s available to

defendants under the Jencks Act and discovery provisions

of the Federal Rules of Criminal Procedure. This is necessary

to protect the due process rights of criminal defendants.

Finally, we favor an amendment to §6103(k)(4) to clarify

that federal tax information can be obtained for use by law

enforcement authorities of foreign governments who provide

United States authorities with similar information pursuant

to mutual assistance treaties. Such international exchanges

are presently authorized in connection with tax Investigations and proceedings and should, we believe, be authorized

pursuant to court order 1n connection with non-tax criminal

matters as well. Of course, reciprocity is essential In

dealing with foreign governments and any inability to furnish

tax information to foreign governments in connection with their

legitimate non-tax investigations will make It impossible for

us to obtain foreign tax Information 1n connection with our

Investigations. Because many complex criminal cases

do require access to foreign tax Information, this issue

should be addressed 1n any disclosure amendments.
74

We believe the revisions I have outlined to §6103(i),

§6103(k) and the penalty provisions will not undermine taxpayer

privacy or our tax system and, they would substantially reduce

the impediments to effective law enforcement created by

the 1976 law.

COMPARISON OF ADMINISTRATION AND SENATE PROPOSALS

The proposals we endorse, after months of careful

analysis and consultation between IRS and Justice, are

remarkably similar to the proposals co-sponsored by

Senators Nunn, Long and six others. Their proposals,

based on the extensive hearings held in the last six

months by Senators Nunn and Chiles and others, help

resolve the major problems we have experienced with

current law. The major differences between our proposals

and those of the Senate bills relate to the protection

of an individual's financial records which underlie the

tax return. The Nunn bill would permit access to this

information without a court order and would require the

Service to report evidence of non-tax crimes revealed in

those records. We recognize that the Nunn proposal would

greatly assist law enforcement, but we believe that this

involves an area where the taxpayer has a legitimate expectation of privacy and could adversely impact on the tax

collection system. Accordingly, we do not endorse that

aspect of the Nunn bill.
75

I should also add that the Senate proposals for reforming

the penalty provisions are somewhat at odds with my suggestions.

We believe our proposals more effectively address the problem.

Finally, the Senate bills do not contain provisions with

respect to admissibi11ty of tax information or mutual assistance

treaties. The Senate bills do, however, provide for limited

access to federal tax information by State law enforcement

authorities. It 1s our view that the Senate proposal for State

access should be deleted as one which unjustifiably compromises

taxpayer privacy interests.

CONCLUSION

In conclusion, let me emphasize that legislation to amend

the Tax Reform Act will have an impact much more important

than mere resolution of the specific disclosure problems I

have discussed. We believe that such legislation will enable

the Internal Revenue Service, the Department of Justice and

other federal law enforcement agencies to work more closely

as cooperating partners 1n the enforcement of federal law.

After three and one-half years of experience, we believe that

our fully documented legislative proposals will significantly

reduce the Impediments to such cooperation without jeopardizing

privacy protection or our self-assessment tax system. On

behalf of federal prosecutors, I deeply appreciate your prompt

consideration of these proposals and assure you that they are

Imperative to effective federal law enforcement efforts.

Thank You.
76

VII. SUMMARY OF RESPONSES TO

PART V OF THE

QUESTIONNAIRE

This section summarizes the responses of the replying

offices to the open-ended request in Part V of the questionnaire

for comments and additional information regarding the impact

of Section 6103 on the Department's law enforcement activities.

Fifty-six of the 105 responding offices provided additional

information or general comments in response to Part V of the

survey.

A. Tax Cases - Section 6103(h)

The following additional information was provided by the

responding offices regarding the impact of Section 6103(h)

on tax cases. This information was furnished in the form of

specific examples of problems encountered in the utilization

of Section 6103. The following summaries are based solely

upon the information provided by the responding offices,

and should be considered together with the data set forth

in Section III of this report. Nine offices provided additional

information in Part V of the survey regarding the impact of

Section 6103 on tax cases.

•Two offices noted that IRS's fear of violating

Section 6103 frequently causes that agency to

fail to provide to the Government attorney all

the tax information needed to prepare adequately

for the trial of a civil tax case.

•One office noted that in 26 U.S.C. 6672 cases,

where all the parties are not before the court (the

ordinary situation in the Court of Claims), a problem

exists in learning what, if anything, has been

collected by IRS from the other assessed persons.

Although payments by these other persons have no

effect on the liabilities of the parties in the

suit, the Government's policy is to collect 100%

only once in such cases. Thus tax information regarding collection activity with respect to assessed

nonparties is very useful to the Government attorney,

but difficult to obtain under Section 6103.

--One office raised the question of whether Section 6103

permits the disclosure of tax information to outside

experts specially hired by the Government in civil

tax litigation to handle special issues such as

valuation.
77

-One office pointed out that, after the passage of

the 1976 amendments to Section 6103, tax protesters

have attempted to "trap" Government attorneys into

making allegedly unlawful disclosures of tax information relating to them by submitting fictitious

powers of attorney or revoking existing powers of

attorney, and then challenging the attorney's

disclosure to the lawyers that the attorney

believed were actually representing the protesters.

-One office noted that in summons enforcement cases,

IRS agents, fearful of violating Section 6103, have

neglected to tell the Government attorney handling

the proceeding that Section 6103(i)(1) orders had

been obtained by offices seeking tax information

regarding the taxpayer for nontax purposes. In

other cases agents have neglected to report that,

by the time of trial, they had already recommended

to their superiors at IRS that a grand jury investigation of the taxpayer be conducted. In some

cases the Government attorney has learned this

information from opposing counsel. Information

regarding both is extremely important on the

issue of improper criminal purpose (see United

States v. LaSalle National Bank, 437 U.S. 298

(1978)) .

-One office noted the need for better coordination

with FOIA units within the Department, which make

determinations whether requested information may

be disclosed consistent with the restrictions of

Section 6103. This office reported that, in a

civil tax case, the Government attorney disclosed

information which she believed was disclosable

under Section 6103(h)(4). However, the attorney

subsequently learned that plaintiff's counsel had

made an FOIA request before instituting the tax

suit, and that some of the information which

the plaintiff was requesting•information which

the Government attorney disclosed under S6103(h)(4)•

had not been disclosed by the individual handling

the FOIA request, on the ground that disclosure

would violate Section 6103.

-Two offices stated that Chief Counsel of IRS directs

disclosure of wagering tax information to the

Department of Justice under 26 U.S.C. 4424(b), but

is very reluctant to disclose information under

Section 6103(h)(2), although the language of the

two statutory provisions is essentially the same.
78

B. Nontax Cases - Section 6103(i)

Twenty-five offices provided additional information in

Part V of the survey regarding the impact of Section 6103

on nontax cases. The following summaries are based solely upon

the information provided by the responding offices, and should

be considered together with the data set forth in Section IV

of this report.

Thirteen offices commented that the procedures for obtaining

tax information under Section 6103(i) for nontax criminal

purposes are simply too cumbersome and too time-consuming,

especially, as some offices noted, in view of the requirements

of the Speedy Trial Act. These offices offered the following

proposals for improving the procedures for obtaining disclosure:

--"Return information" should be redefined so as to

include only the information which is contained

on a tax return, and should not be interpreted to

encompass information obtained through an investigation. (One office)

•The distinction between "return information" and

"taxpayer return information" should be abolished.

(One office)

•Authorization to seek disclosure from IRS under

S6103(i)(l) and S6103(i)(2) should lie with the

United States Attorney. (One office)

•Department procedures should be amended so as to

eliminate the need for the second "request letter"

to IRS which accompanies the signed ex parte order

obtained pursuant to $6103(i)(l). This ofrice

noted that there is no need to again set forth

"probable cause" for obtaining the information,

when the grounds justifying disclosure are already

set forth in the application and the court

order. (One office)

•Procedures under S6103(i)(l) should be amended

so that returns, taxpayer return information, and

return information can all be obtained using the

ex parte order procedure•then IRS would not be

required to separate out return information -when

responding to a disclosure request under Section

6103(i)(l). (One office)
79

•The Government attorney should not be required

to utilize S6103(i)(l) simply to learn that

the taxpayer in question has not filed tax

returns. (Two offices)

One of these offices also noted that, in nontax cases, the

restrictions of Section 6103 conflict with the requirements'

of the Jencks Act, where the Government attorney is aware

that IRS has interviewed an individual who is a Government

witness in a nontax case.

Two offices reported having disagreements with IRS over

which documents or information is covered by an order under

16103(1)(1), or a request under §6103(i)(2). In one case an

additional order had to be obtained in order to get the

remainder of the needed information from IRS. One office

reported that IRS frequently requires separate orders when

information is sought regarding more than one taxpayer.

Another office stated that if a typing error or misspelling

of a name appears in either the court order or the authorization letter from the Assistant Attorney General, Criminal

Division, IRS refuses to produce the returns, even though

the addresses, social security numbers, and other identifying

information on the documents clearly indicate that the error

is clerical and not substantive. One office reported that

after the court had issued a S6103(i)(l) order, IRS stated

that it did not believe that the order was adequately supported

by the reasonable cause showing required in S6103(i)(1)(B),

"and even went so far as to 'request' that additional 'probable

cause' be added to the order and the application." One other

office also had problems when it learned that IRS was not

satisfied with the language of the order issued by the court.

Two offices complained of internal delays at IRS in the

processing of court orders authorizing disclosure; one of these

offices cited IRS's requirement that the orders be sent to

its National Office in Washington, D.C. before being served

on the appropriate Service Center as one cause for the delays.

One office reported that it was required to get a S6103(i)(l)

order before IRS would permit an agent to testify in a civil habeas

corpus proceeding (28 D.S.C. 2255), where the agent had investigated the defendant for potential criminal tax violations, and

was asked to testify as to defendant-petitioner's use of

pseudonyms in conducting his real estate transactions. Delays

encountered in obtaining the order in turn delayed the habeas

corpus proceeding. - •

One office reported that, after a court requested an in

camera inspection of a return that was the subject of an

application for a S6103(i)(l) order, the IRS disclosure officer

refused to let the tax returns out of her presence when being

reviewed by the judge, and forbid any discussion of the returns

with the judge's law clerk•a procedure which disturbed the court.
80

Finally, three offices reported that they have not encountered

any difficulties thus far in the utilization of Section 6103(i),

and another office stated that while the procedures under

S6103(i) are time-consuming, "[m]ost Assistants probably

exaggerate the difficulty and amount of work that is required

to secure disclosure."

C. General Comments

Regarding Section 6103

Twenty-two offices provided additional information in

Part V of the survey regarding the impact of Section 6103

generally on their law enforcement activities. The following

summaries are based solely upon the information provided by

the responding offices.

Fourteen offices expressed the view that Section 6103

has had a "chilling effect" on law enforcement, in that it

makes IRS investigating agents apprehensive of making

disclosures, and restricts information sharing between

federal investigatory agencies. Four offices noted that

the procedures under Section 6103 for obtaining needed

tax information are so complex and/or time-consuming that

frequently Government attorneys do not view the information

as worth the effort of attempting to obtain it.

One office reported that it has had no difficulty utilizing

Section 6103, and has found both IRS and the Department of

Justice quite cooperative in processing its requests for tax

information.

One office suggested that uniform instructions should be

given to IRS agents, and made available to courts and Government

attorneys, regarding the scope of permissible disclosures under

Section 6103, so as to minimize possible contempt problems that

might arise if a court, in either a federal or state case, should

insist on the agent appearing and testifying regarding certain

tax information. In this regard, this office noted that in 1979,

a subpoena duces tecum was served on an IRS special agent to

appear in state chancery court and bring the joint tax return

of a husband and wife for use in a divorce proceeding. After

much debate between IRS Regional Counsel and the attorney representing the wife involved in the divorce proceeding, the attorney

was persuaded to withdraw or cancel his subpoena.

• Another office complained that IRS does not take uniform

positions regarding disclosure requests: in one case, this

office sought tax information regarding 3 defendants from IRS,

the requests being submitted at various times. One request was

granted, but an identical form request as to another defendant

was rejected.

One office has noted what appears to be a problem regarding
81

what types of information come within the scope of Section 6103.

Specifically, this office reported that during the course of

executing search warrants for evidence of wagering tax violations, IRS agents discovered certain weapons in the possession

of a convicted felon then on probation. An attempt was made

to revoke the felon's probation, but an attorney in the office

of IRS Regional Counsel prohibited the agents from discussing

the discovery of the weapons with the United States Attorney's

office on the ground that this would violate Section 6103.

This attorney was also reluctant to permit the agents to

discuss anything that was included in the affidavit for the

search warrant. The probationer eventually pled guilty to

the probation violation charge.

One office reported that IRS takes an unduly restrictive

view of the information that it may disclose to the Department

of Justice under Section 6103(i)(3).

One office reported the following situation: In a prosecution

of X for bribery of an FBI employee, the employee testified for

the Government that X had asked if she could obtain information

relating to the criminal tax investigation that was being conducted regarding X by the Criminal Investigation Division of

IRS. (It was generally known that IRS had issued a large

number of summonses throughout the city seeking evidence of

X's tax liability.) To corroborate the testimony of the

employee, the prosecuting Government attorney wanted an IRS

special agent to testify that X had been the subject of a

criminal tax investigation during the period in question.

IRS prohibited the agent from testifying on the ground that

this would violate Section 6103, even though the IRS agents,

when conducting witness interviews, had already disclosed

to third parties that X was under investigation.

Finally, one office stated that most Assistant United

States Attorneys are unfamiliar with Section 6103 and its

procedures, and therefore usually do not make use of the

statute to obtain tax information. This office stated that

the Department of Justice can and should take steps to

educate Government attorneys regarding Section 6103, either

through the Attorney General's Advocacy Institute or through

a separate seminar.
82

Mr. NATHAN. I would essentially address the questions which the

staff has sent to us in terms of what the position of the administration

is with respect to certain key issues in this area.

First, with respect to the amendment of the present standard, for

court ordered disclosure under 6103(i) (1), Senator Nunn has accurately

described the problems that prosecutors and the courts have with

(i)(l), and that is, that the second and third prongs of the present

test are virtually impossible tests to meet, particularly when the

prosecutors have not, in advance of their application to the court,

seen the material that they have to make representations about.

I should make it very clear that with respect to tax returns from all

sources and with respect to the underlying financial records of the

individual, the administration believes that we should continue to have

the court proceeding, that is, the intervention of a neutral court to

determine whether or not we are entitled to access to the tax returns.

But we would make some adjustments in that procedure; the adjustments relate both to the standards to be applied, who is entitled to

make the application, and what procedures have to be followed internally to do that.

With respect to the standards, what we suggest is that, first, there

be a representation to the court that there is a legitimate investigation

of a specific criminal offense, describing what that offense is; and, second, that the information would be used only for that legitimate law

enforcement purpose; and, third, a representation with some documentation that there is reasonable cause to believe that the information may be relevant to a matter relating to the commission of that

criminal act.

We think that those relatively modest changes will not have any

adverse effect on taxpayer privacy or tax administration but will

significantly improve our ability when we go to court to obtain the

tax returns and will also encourage prosecutors•when it is appropriate•to make their applications.

Now, another problem we have with the present statute is that it

reauires authorization from the Assistant Attorney General in Washington even to make the application to the court.

This is a needlessly protracted procedure which means that any

U.S. attorney out in the 94 districts, when he has a criminal case

which, of course, we in Washington are not fully aware of, and wants

to make an application to his district court•to the judge in that

district•he can't even make the application without filing papers in

Washington, having it all come to one Assistant Attorney General, and

having him approve the application.

This has needlessly bogged us down and we propose•the administration proposes•that the application can be made upon the representation of the U.S. attorney, who, as you know, is appointed by the

President and confirmed by the Senate, and that he could then make

that application to a judge or magistrate in his district.

I think this would speed up the process considerably.

As an example, we have conducted a detailed study of the situation

and find that over the past year, for example, the delay between seeking court-ordered disclosure of tax returns and finally obtaining it is

well over 2 months. These are matters, of course, where the court

has decided we were entitled to it, but all of the delay in coming to
83

Washington, and delays in the IRS as well, combined, have provided

a delay of over 2 months.

Second, with respect to the (i)(2) area•this is the area where the

information comes from third parties; it does not come from the taxpayer, it doesn't come from the tax return and it is not furnished by

the taxpayer•presently we need the same kind of procedure, that is,

that any U.S. attorney out in his district who wants to get this kind

of information, in which clearly there is very little privacy interest

Mr. GIBBONS. Let me invite those who are standing, if you like,

to come up here and have a seat. We don't want anyone to be uncomfortable.

Mr. NATHAN [continuing]. In this kind of information. Of course,

the taxpayer has very little expectation of privacy because he has not

furnished it to the tax service; it has been furnished by third parties

and informants and other entities.

Presently, that, too, requires a letter from an assistant attorney

general to the Commissioner of Internal Revenue here in Washington,

and then has to go through various levels in the IRS and within the

Department of Justice.

We think it would be a lot simpler and would not adversely affect

privacy interests if the assistant U.S. attorney and supervisory agents

were entitled to make this request at their regional district level to

the IRS. It would eliminate a great deal of delay and paperwork and

give us much prompter access to this information.

Third, the administration proposes creation of an affirmative

obligation by the Internal Revenue Service to report Federal crimes

reflected in the third-party information. Again, this is not information

that comes from any tax returns and it is not information that comes

from individual taxpayer's return information. The administration

suggests that when the IRS receives from third parties information

that there has been a nontax crime committed that the IRS submit

that evidence or that information to the appropriate law enforcement

agency.

When the GAO did a study of this area, it found that as a result of

the 1976 statute, the Internal Revenue Service has received in its

Washington office a file cabinet full of information about serious

criminal offenses, nontax offenses, which because of the statute they

were not permitted to send to the Department of Justice. This information came from books and records and third-party information•

I am not talking about information from the tax return•and we have

been unable to obtain that information.

We think this does not make good sense and there should be an

obligation to turn over that kind of information.

Next, the administration would treat financial books and records

and other information submitted by or on behalf of corporate taxpayers in a different manner from an individual's underlying books and

records.

Again, we make clear that with respect to tax returns submitted by

corporations, we think it is entitled to the same protections. We need

a court order to get the tax returns of corporations. Also, we need a

court order to get the tax returns of individuals or the underlying

books and records; but the books and records of a corporation are

different from the books and records of the individual which are often

maintained primarily for tax returns.
84

The tax service requires individuals to keep books and records and

it seems unfair to use them against individuals, but in the case of

corporations, they are chartered by the States and they owe their

existence to the State. They don't have the same degree of privacy

interests as individuals.

Second, organizational books and records are already subject to

intensive Government inspection under other laws. That is to say

that the State which charters them is entitled to see the books and

records, the shareholders are entitled to see the books and records, the

SEC is entitled to look at the books and records, and the Environmental Protection Agency and a number of agencies are entitled to

look at these books and records.

Therefore, it is different, we think, from an individual's papers.

Third, corporations and other legal entities do not have a fifth

amendment privilege against self-incrimination as individuals do.

We think that one of the reasons we have the provisions of the

Tax Disclosure Act is to balance the fifth amendment privilege an

individual has of not incriminating himself and his obligation to pay

taxes.

So, what we have said in that case is that if you make full and fair

disclosure to the Internal Revenue Service, then the information you

have provided will not be turned over by the Internal Revenue Service

to the nontax authorities to prosecute you. That is fair as far as individuals are concerned, but where a corporation doesn't have such a

privilege it seems that a distinction would be appropriate.

Mr. GIBBONS. Let me interrupt here.

We have Senator Nunn back and he may have to leave again, so

why don't you sit here and let him come up and work off the end of the

table over there, and let him present the rest of his testimony.

We are privileged to have him here and we know how valuable his

time is. He may be running his legs off here.

STATEMENT OF HON. SAM NUNN, A U.S. SENATOR

FROM THE STATE OF GEORGIA (RESUMED)

Senator NUNN. I think I left off on question No. 2, regarding the

level of officials who should be allowed to request disclosure under

existing law.

Under existing law the head of any Federal agency may make

application for an ex parte court order so long as the tax information

will be used in the preparation of any administrative or judicial proceeding or investigation pertaining to the enforcement of any Federal

criminal statute.

In the case of the Justice Department, the Attorney General or

Deputy Attorney General may make the application. This requirement

that all applications be made at the Washington headquarters level

has caused lengthy delays in obtaining disclosure.

For the most part, the U.S. attorney or strike force chief in the

field is the one who needs the information, but by the time they have

obtained the necessary action on the part of Washington, the timeliness of the information may well have vanished.

Accordingly, in our proposal we would allow only Justice Department attorneys to make the application. This includes the Attorney
85

General, division heads, U.S. attorneys, attorneys in charge of the

strike forces, the heads of local or regional offices of the Justice Department or supervisory attorneys designated by the Attorney General.

All requests would have to be made by Justice Department attorneys who would exercise their own independent legal judgment as

to the materiality and relevance of the information sought.

I would urge strongly that the committee leave the provision as we

have drafted it, but in any event that U.S. attorneys and strike force

chiefs who are the attorneys most familiar with the case, be allowed

to make application for a court order. We think that is very important.

Question No. 3 pertains to an affirmative duty on the Internal

Revenue Service to disclose certain types of return information to

law enforcement agencies.

In S. 2402 and H.R. 2628 we have provided an affirmative burden,

on IRS to notify the Justice Department whenever it uncovers criminal

evidence from sources other than tax returns and other information the

taxpayers are required by law to provide to IRS.

Under present law it is permissive for IRS to disclose this thirdparty information, but the record of such disclosure is so minimal

that I believe the agency should be affirmatively required to disclose

this type of information.

The General Accounting Office has a report they have issued on

this overall bill, and I know you have that.

One of the things they suggested was that there be an affirmative

duty placed on iRS to seek a court order to disclose information of

criminal activity even when the information comes from a tax return.

That goes beyond what we have recommended. Such a provision

would certainly strengthen the IRS' role in law enforcement and I

have no objection to that provided that the Federal judicial officials

still stand between the Federal IRS and other agencies.

I think that is the key to it.

Question No. 4 deals with the distinction between individual and

corporate return information.

In S. 2402 and H.R. 6826 we define two types of information. The

returns are the actual tax returns and all other items the taxpayer is

required by law to give to the Government, and nonreturn information

is any other type of information. We make no distinction between

individual and corporate returns, for two reasons:

First, an individual has an absolute fifth amendment right not to

disclose to IRS information which may tend to incriminate him; but

as the Supreme Court held in U.S. v. Sullivan, once the taxpayer

has filed that incriminating information, his privilege is waived.

That means the tax return of whatever he is filing.

Second, there is no fifth amendment privilege for corporate or any

other entity's business records. Therefore, I see little reason to give

statutory protection to this type of record. I would not object to

records provided by an individual or individually owned businesses

such as sole proprietorships being included within the return definition of S. 2402 requiring a court order.

I believe that that is one of the things that the administration has

proposed. I would not object to that, and I see some rationale for

that; but I do not believe that nonreturn information contained in

corporate or multiowner businesses should receive a statutory privilege

that does not otherwise exist in law.
86

There is just not the same privacy expectation in these types of

business records. There is not that kind of expectation.

Question No. 5 asks about redisclosure of tax information to such

authorities as State law enforcement agencies and foreign governments.

The existing section 6103 permits disclosure of tax information to

such officers or employees of a Federal agency who are personally

and directly engaged in and solely for their use in Federal criminal

proceedings. Our proposals would allow the attorney for the Government to further disclose information to such government personnel

as he deems necessary to assist him in or during the preparation for

such proceedings.

I don't believe that our proposal would change the actual practice

under existing law and its provisions or are analagous to the applicable

sections of rule 6 of Federal Rules of Criminal Procedure which cover

among other things further disclosure of grand jury material.

Our proposals also permit the attorney for the Government to go

back to court to seek further disclosure to State officials for use in

State felony prosecutions.

I believe, again, as I understand it, there have been some objections

by the administration to the Federal civil litigation, and I think the

suggestion has been made that only that Federal civil litigation which

flows directly out of the criminal proceeding be covered. I see some

logic to that restriction.

Suestion No. 6 deals with criminal and civil penalties for unauthordisclosure.

We propose in our bills that the criminal and civil penalty provisions

of the Tax Reform Act be changed to protect Federal employees from

liability for innocent disclosures. In the criminal area, we would

Erovide an affirmative good faith defense. In the civil penalty area, we

elieve that the Government should be liable for damages stemming

from innocent disclosures by Federal employees who are acting within

the scope of their employment.

Several IRS officials told our subcommittee that the severe criminal

penalties in existing law•which contain no good faith defense•make

the agents reluctant even to disclose a plot to assassinate the President

because they would be in jeopardy of violating the existing criminal and

civil sanctions if they did so.

As to civil penalties, I believe we should tread very carefully in this

and all other areas before saddling Federal employees with personal

liability for their on-the-job activities. A frivolous lawsuit can be

devastating to a Federal employee just in terms of attorneys fees

alone.

Our proposal would remove the chilling effect on IRS disclosures

while at the same time maintaining strong civil and criminal penalties

for intentional, corrupt or malicious disclosures.

Question No. 7 addresses the administrative summons provisions.

S. 2403 would change the IRS summons provisions to make them

analogous to those that apply to all other Federal agencies through the

Right to Financial Privacy Act. The automatic stays of the IRS

summons process have resulted in delays averaging 9 months•and

some have lasted up to 3 years. The stay is obtained by the taxpayer

without his having to advance any legal or factual basis for the delay.

Obviously, such a technique is disruptive of any investigation and is

extremely costly to the Government.
87

Under our bill a taxpayer would be notified when his financial

records are summoned, but he would have to go to court and present a

legal or factual reason why the summons should be stayed; thus the

taxpayer still will have a right and opportunity to challenge the

summons, but would not be entitled to an automatic stay.

With respect to the appeal provisions suggested by the administration, I think these are suggestions that warrant the careful attention

of the committees on both sides.

Mr. Chairman, this responds to the questions. As I said, I have a

statement that goes into a great deal of detail, and I hope the members

of the staff will have reason to study that; but I don't believe the

committee should be burdened with that lengthy discussion now.

Mr. GIBBONS. Your statement will be in the record.

Let me commend you for the skill and interest you have in this area.

It is a very touchy area and your leadership is welcome.

Does the gentleman from Georgia wish to interrogate the Senator

from Georgia?

Mr. JENKINS. I want to commend my colleague from Georgia for

all of his work in this area. As a cosponsor of your bill over here in the

House, I am aware of the problems that you are attempting to address,

and I think you do a good job in addressing those problem areas.

As a former prosecuting attorney with the Justice Department and

as a defense attorney after that, I see both sides of the issue. I know

you have attempted in this legislation to protect the right of privacy

that all of us want.

At the same time, you are opening the possibility for our law enforcement agencies to properly use every legitimate avenue in reaching

decisions and prosecutions on many cases.

I commend you for it. I can think back on information that I

received as a prosecuting attorney before the 1976 act, of course,

which came from IRS. Many times that was extremely valuable and

stopped fraud and bankruptcy fraud and a host of other criminal

activities.

So, I commend you for your interest in this field.

I have no questions. I am very familiar with your proposal and I

thank you for your testimony.

Senator NUNN. I appreciate very much your kind words and also

your cosponsorship and your leadership in this area.

I think the area that is most in need of IRS expertise and assistance

is in the narcotics/cash flow area. That is an area that I happen to

think is important. I know the chairman is from Florida and you have

tremendous problems there, but I believe that we could make the most

significant improvement in narcotics enforcement by passing this

legislation or something similar to it, particularly in the cash flow

area, because the kingpins of narcotics normally don't touch the drugs

and very seldom are caught with them, but they always touch the

money.

The IRS has the most expertise and experience in the money area

of any Federal agency. So I do hope we have struck a balance here. I

am very respectful of those who are worrying about the privacy

aspect, and I am not locked in concrete on those provisions.

I think the General Accounting Office report has made some constructive suggestions. I think the administration has made some
88

constructive suggestions, and we hope we can come out in this Congress with a bill that does strike that appropriate balance.

Mr. JENKINS. Thank you, Mr. Chairman.

Mr. MOORE. I certainly appreciate your coming and testifying and

you have delved into something that is quite technical and quite

difficult.

There is something you said in your testimony and what Mr. Nathan

said, at which point he stopped, both of which concern me and the

concern is basically a lack of knowledge of this area and I am trying

to spend some time educating myself on it.

But I am concerned about the treatment of the corporate records as

being something you don't have to worry about.

I have read both statements closely and you are telling me the law

is already that way with the exception of the statute which needs to

be amended, but I know, Mr. Nathan, this is not a point to question

you on, but the Senator came to the same conclusion. You make a

point that organization books and records are normally maintained

for purposes other than tax administration. I am not certain that that

is a true statement. Very often, there is not much difference between

a sole proprietorship and a sole proprietorship who incorporates for

the purpose of escaping liability. You are still talking about a small,

one-man proposition and you are talking about the possibility of him

incriminating himself or the possibility of him divulging information

for which he will be liable for a criminal fine or penalty, and prosecuting

people for white-collar crimes and whatever.

I am not defending them. I am a little concerned that we don't

seem to be concerned about those records. We are talking about a

corporation where the Justice Department has been reaching officials

within those corporations to penalize them for whatever the action of

the corporation may have been that is wrong, and that is probably

right to do that.

Mr. NATHAN. With the Senator's permission, I would like to respond

briefly to your observations.

In the first place, the administration would make an exception for

a single shareholder corporation, which I think you are quite right is

like a sole proprietorship, except the person has incorporated to limit

his liability or for whatever reason.

Further, we are not suggesting that the corporate books and records

which are provided to the Internal Revenue Service to support its

tax returns be made available willy-nilly to the Department of Justice

or any other entity beyond the Internal Revenue Service.

All we are suggesting is that when the corporate books and records

contain within them evidence of nontax crimes on their face•for

example as the GAO report shows, corporate books and records which

have shown payments, illegal payments, going to labor leaders, going

to political figures and others, they would be violations of Federal

law and not the tax law, but the criminal code•in those limited circumstances the Internal Revenue Service would turn that information

over to the Department of Justice or an appropriate enforcement

agency without a court order and without having the Department of

Justice request disclosure. Of course, the Department doesn't know

what is in those returns or what is in those books and records.
89

So, what we are saying is that where the individual books and records

show that that individual has been involved in nontax crime, that

would remain involate in the hands of the Service and they would have

no obligation and would not turn that over to law enforcement

officials because the individual has complied with his tax obligations

and been forthcoming with the Service. But where a corporation has

in its books and records evidence of a nontax crime, then in that case

the Service will turn over that information.

We think that makes a great deal of sense for the reasons I have

suggested, and the distinction must be made between an individual

and a corporation.

Mr. MOOKE. In the case of a small family-owned corporation you

are willing to make an exception to that?

Mr. NATHAN. A single shareholder corporation.

Mr. MOORE. There are not many of those. In my State you have

to have three shareholders, which is usually the husband and wife

and the oldest child.

Mr. NATHAN. This is the point that Senator Nunn made.

Senator NUNN. We require three incorporators but you don't have

have to have three shareholders.

Mr. NATHAN. I don't think any of these things are cast in concrete

if there is some amendment that is satisfactory. When it is an alter

ego of an individual or a small group, we would afford the same

protection, but we are talking about large corporations, major commercial entities.

Mr. MOORE. I was never a prosecutor. I did defense work and I

am not a prosecutor and maybe that is the wrong side to be talking

about today; but the thing that concerns me about this is if you are

willing to concede that maybe there is something here where we

should take care of a single shareholder proposition, then where do

you begin to draw the line between a family corporation that has two

brothers and two shareholders? Am I not right that when you formally find evidence of what you just elicited, which is a crime, it

is usually an individual you prosecute and the corporation may want

to pay a fine.

Don't you also go after the corporation official who authorized

that?

Mr. NATHAN. We often go after the corporation and the individuals

involved in the corporation, but I don't think that should make any

difference.

Mr. MOORE. It is just your dealing with people?

Mr. NATHAN. You are dealing with people, of course, who are

acting for the corporation.

Mr. MOORE. We exempt the sole proprietor but we are probably

going to wind up getting the president of a two-man corporation,

and I don't see much distinction there, except the corporate structure.

The thing I am concerned about is where do we begin to draw the

line? One shareholder is OK and sole proprietorship is OK, but what

about a two-person corporation, and what about Exxon?

Senator NUNN. You make a good point of where you draw the

line, and I don't think there is any real answer to that. I think the

committee's decision will be just as good as any judgment I might
90

offer here. It seems to me the reason for the distinction is based on

the fifth amendment distinction. The fifth amendment on selfincrimination does not apply to corporations and the legislation is

trying to follow that example.

Of course, you could make the same argument that you are presenting ably here on the fifth amendment decision by the court, that

why does it not apply to a corporation when they do turn over records

and there are individuals who may be prosecuted.

If that decision is valid, then this distinction is valid. But that

is the legal end of it. It is a question of legislative judgment here.

It seems to me the most important thing here is not so much where

you draw the line, or whether you even have a line. It might be that

you don't want a line between business records and entity records,

but you put an affirmative burden on IRS when they do find evidence

of a crime to make that information available either through the

court or through the written request procedure. So we will still nave a

procedure they have to go by.

The question here would be whether you treat a corporation the

same as you would treat an individual. That is to say whether they

would have the protection of a court between IRS and the Justice

Department, and I do not consider that to be the crucial part of this

legislation, if the committee decides it does not want a distinction.

Mr. MOORE. Up to this point everything sounds reasonable, and I

appreciate your answers, and I will do some more study on it.

Mr. Chairman, I thank you.

Mr. HEFTEL. I think both sides of the aisle are concerned over the

distinction. I am thinking of the corporation that isn't the single

individual and yet it is what you are talking about. It is 3 or 10

individuals, and I don't think that it has to be prolonged, but I still

wonder whether that distinction should be there if it is real. It is

something that should be pursued in the legislative history of this

proposal.

Senator NUNN. There is not a lot of difference between an individual

proprietorship and an individual.

Mr. HEFTEL. Someone should demonstrate along the line why it

should be there. The real issue is the issue that has been raised in

cases of both cash flow and drug trafficking. There is the fact that we

don't seem to recognize, and I think the Senator is properly trying to

address it, that the people we are dealing with are so far removed

from conventional activity that they are almost unreachable. There

is a question in Florida about whether or not some of the banks and

other financial institutions are instrumentalities of drug traffickers.

If we don't do something to protect ourselves, then I think a lot of

people will be hurt in the name of what seems to be the understandable

concern for the civil rights of perhaps a few.

I think you should be commended for what has transpired and the

IRS should be commended. I think the 1976 act just simply has to

be changed, because of the changing conditions we now recognize

about what is occurring in the legal/financial circles as it relates to

drug trafficking.

I again commend the chairman and yourself and my colleague for

the initiative that has been taken.

Senator NUNN. Thank you very much.

I just want to leave one point with you.
91

If we adopted everything in here without any changes, we would still

have far more protection for the taxpayer than we did prior to 1976.

Mr. GIBBONS. Thank you. We will not hold you any further.

I see Senator Weicker has come in.

Would you come up Senator and you can testify from up here. We

have all of this panel of experts sitting up here by you. They started

their testimony when the bells rang for your vote in the Senate.

STATEMENT OF HON. LOWELL P. WEICKEK, JR., A U.S. SENATOR

FROM THE STATE OF CONNECTICUT

Senator WEICKER. Mr. Chairman, I want to thank you for the opportunity to appear before the subcommittee to discuss the tax

Erivacy rights of individuals. In the interest of time I am going to

ighlight my prepared statement, which I will submit for inclusion

in the record.

Mr. GIBBONS. Without objection, we will put the entire statement

in the record.

[The prepared statement follows:]

STATEMENT OP HON. LOWELL P. WEICKER, A U.S. SENATOR FROM THE STATE

OF CONNECTICUT

Mr. Chairman, thank you for the opportunity to appear before this Subcommittee today to discuss the tax privacy rights of Americans.

In 1976, Congress reviewed the statutory rules governing the disclosure of tax

information for the first time in 40 years. Prior to then, income tax returns and

information were deemed to be "public records". Federal law enforcement officials

were able to obtain tax information simply by stating that, in their descretion,

it was "necessary in the performance of . . . official duties". The Internal Revenue Service, for all intents and purposes, operated a lending library.

Congress enacted tax privacy safeguards in the Tax Reform Act of 1976 as a

result of:

1. Abuses uncovered during the Watergate investigations which documented

use of the IRS as an intelligence body to derive information harmful to enemies

of the Nixon Administration and helpful to its friends. These abuses were summarized by the House Judiciary Committee in Article II, subparagraph 2 of the

Articles of Impeachment of President Nixon: "He has, acting personally and

through his subordinates and agents, endeavored to obtain from the Internal

Revenue Service, in violation of the constitutional rights of citizens, confidential

information contained in income tax returns for purposes not authorized by law,

and to cause, in violation of the constitutional rights of citizens, income tax

audits or other income tax investigations to be initiated or conducted in a discriminatory manner."

2. Violations of Americans' Constitutional rights discovered by the Church

Committee. In its 1976 Report, the Committee concluded that: ". . . The FBI

used as a weapon against the taxpayer the very information the taxpayer provided pursuant to his legal obligation to assist in tax cases and, in many cases,

on the assumption that access to the information would be restricted to those

concerned with revenue collection and used only for tax purposes."

3. Disclosures that special powers of the IRS were being misused to collect

information for purposes well beyond tax administration but related to other law

enforcement activities which led to a series of Congressional hearings on the

propriety of various uses of tax information. In the 93rd Congress the Senate

Judiciary Committee held hearings and numerous hearings were conducted by the

Senate Finance Committee and House Ways and Means Committee in the 94th

Congress. Law enforcement officials testified at length concerning the need for

efficient enforcement procedures, raising a spectre similar to that being raised

today.

4. Recommendations made by the Privacy Protection Study Commission for

more stringent safeguards with respect to disclosures of records made by the IRS.

The Commission stated that the taxpayer's disclosures to the IRS ". . . can
92

not be considered voluntary because the threat of criminal penalties for failure

to disclose always exists. The fact that tax collection is essential to government

justifies an extraordinary intrusion of personal privacy by the IRS, but it is also

the reason why extraordinary precautions must be taken against misuse of the

information the Service collects from and about taxpayers."

Mr. Chairman, I have taken the time to review this history because it is important to remember the events surrounding, and consideration given, the formulation of the existing standards governing disclosure of tax information. Based

upon this substantial record, Congress carefully drafted legislation which balanced

the rights of Americans to certain privacy standards with the needs of government

in enforcing the law.

Now, less than four years after the striking of this balance, legislation is introduced which tips the scales in favor of law inforcement, at the expense of the taxpayer's privacy rights.

What is the rationale for this new encroachment upon the rights of Americans?

It is done under the banner•which all good citizens willingly carry•of the fight

against organized crime, mobsters and narcotics traffickers. Why? Because one

is best able to obfuscate the true issues by arguing in an inflammatory way that

a change in the law is the only solution to these evils.

One must look behind the rhetoric to ascertain the reason for this legislation.

The reason is expediency. It is not that the Justice Department does not have the

means of obtaining evidence other than from tax return information in its fight

against crime. The Justice Department, as evidenced by the great number of its

successful prosecutions, does. But it is far quicker•and more expedient•to go

directly to the tax return and related information than to the other sources.

Jerry Litton, the late Congressman from Missouri who coauthored the disclosure protections in 26 U.S.C. § 6103, succinctly rebutted the expediency rationale. In testimony before the House Ways and Means Committee in January

of 1976 he said that "if we are only looking for expediency, let's wiretap every

one thousand homes, open the mail of every one thousand citizens, if we are

only looking for expediency." But this country does not look just for expediency

when dealing with the rights of citizens. Our heritage is otherwise.

Two hundred years ago our founding fathers authored a Constitution premised

on the principle that individuals•as human beings•are more important than

the conveniences of society. A greater importance was placed on individual liberties than on governmental efficiency. That was the philosophy underlying the

Bill of Rights.

The existing tax information disclosure provisions reflect the fact that Americans are compelled to surrender the Constitutional rights guaranteed by the

Fourth and Fifth Amendments•the right to "be secure in their . . . papers,

and effects, against unreasonable searches and seizures" and the right against

self-incrimination In order to facilitate the effective administration of our tax

laws, each American voluntarily surrenders certain rights and assumes the duty

of self-investigation, fact-finding and reporting. This baring of private papers

and matters is an accommodation by citizens for their government for tax purposes•not for non-tax law enforcement purposes, not for scientific purposes, not

for sociological purposes, not for political purposes, not for statistical purposes.

The method in which taxpayers voluntarily comply with our tax laws and, in

most cases, fully report their earnings is the envy of most other nations where

dishonesty is often the rule rather than the exception. If taxpayers become convinced that confidential data they submit each year is being used for other than

tax purposes, how long will it be before cheating is commonplace? Widespread

cheating would be beyond the capacity of the IRS to control and our entire system

of voluntary self-assessment would collapse.

The few years that have transpired since enactment of the Tax Reform Act

have not shown that Congress erred in enacting needed tax reform legislation or

that provisions of the law have unfairly or unduly burdened law enforcement

efforts.

What time and experience have shown is not that the law is burdensome, or

wrong, or unfairly restrictive, but that those who have interpreted the law have

done so incorrectly. For example, in testimony in December before the Senate

Permanent Subcommittee on Investigations, Peter B. Bensinger, the Administrator of the Drug Enforcement Administration, commented with respect to the

authority given IRS under 26 U.S.C. § 6103(i)(3) to disclose to other law enforcement agencies information it has regarding violations of criminal law. Astonishingly, his testimony revealed that DEA records do not show ever having received
93

such disclosures from IRS. This indicates not a problem with the law, but a

problem with the agency empowered to act pursuant to the law. How can one

profess that the provisions of the Tax Reform Act prohibit effective law enforcement when a provision of the Act designed to assist law enforcement is not properly utilized?

What the record justifies is a fine tuning of the provisions of the Act, to ensure

that law enforcement officials properly utilize the tools that are already available.

Thus, the provisions in the proposed legislation which place time limits on court

action and the IRS's response, that allow magistrates to act upon ex parte applications, which limit those empowered to make applications, and that send a signal

to the IRS, are justified.

However, those provisions which would expand the material available to the

Justice Department without affording Americans the protection of a court order

are simply not justified•nor tolerable. And, cutting through the rhetoric, that is

the thrust of the proposal.

Section 6103 of Title 26 of the United States Code presently requires that a

court order be obtained by law enforcement officials before the IRS can turn over

a taxpayer's return or any information supplied in support of the return. H.R. 6826

would grant court protection only to the tax return and information filed with

it•nothing else. Therefore, any information produced to substantiate the

return•such as correspondence, sources of income, investments, any check ever

written by the taxpayer, any bill ever paid, and the reasons for doing so•would

be routinely available to the Justice Department, who in turn could turn the information over to anyone they want. This proposal constitutes an unwarranted

invasion of the taxpayer's privacy rights, and is unacceptable.

The taxpayer's privacy rights would be further eroded by relaxing the standards

necessary for the Justice Department to prove in order to obtain an ex parte

order. Under the proposal, a tax return could be obtained by a court order provided that application for the order is made in connection with a "proceeding"

that pertains to the "enforcement" of a Federal criminal statute, or for an investigation which "may result in such a proceeding". This substantially cuts back on

the present standard which requires that there must be "reasonable cause to

believe . . . that a specific criminal act has been committed". I might add that

the law as it now stands does not afford the taxpayer his Fourth Amendment

rights, which require proof of "probably cause".

In addition, H.R. 6826 eliminates the requirement that the Justice Department

must exhaust all other sources before it can turn to the IRS to obtain information.

This provision, which was suggested by then IRS Commissioner Donald Alexander, is similar to the requirement deemed necessary by Congress in 18 U.S.C.

§ 2518(1) (C) that investigative procedures be attempted before a court may order

a wire tap or other form of electronic surveillance.

I might also add that the provision in H.R. 6826 which would require the IRS

to disclose to "the appropriate" agency any information under "exigent circumstances", including "a possible threat ... to national security", contains insufficient safeguards to ensure that the taxpayer is not stripped of his privacy

rights in the name of "national security". The vague standards of this provision

could give the IRS the unbriddled discretion to turn over any information in

their files to anyone in the government, and, if improperly used, would mark the

return of the days of the lending library" which IRS formerly operated. This

proposal does not even afford the taxpayer the protections contained in 18 U.S.C.

$2518(7), which require notification to and approval of a court within 48 hours

after a wire or oral communication has been intercepted in an "emergency

situation".

The loosely drafted provision in H.R. 6826 which would permit disclosure to

state law enforcement officials concerns me. The abuses which I enumerated earlier

in my testimony were not confined to high level Federal employees. There is

ample documentation that State and local officials were responsible for equally

appalling abuse.

Finally, I am worried about the provision which would authorize disclosure of

information on American citizens to foreign countries. The thought that personal

information on Americans can be disclosed to other countries which do not have

the guarantees of individual rights which are contained in our Constitution is

simply repugnant to the principles upon which our nation was founded.

Mr. Chairman, I am in complete agreement with those who desire to vigorously

enforce our laws. The purpose in offering this legislation is unquestionably beneficent. However, too many Constitutional safeguards aie sacrificed here. I am
94

reminded of the observation of Justice Brandeis that: ". . . experience should

teach us to be most on our guard to protect liberty when the Government's purposes are beneficent. . . . The greatest dangers to liberty lurk in the insidious

encroachment by men of zeal, well meaning, but without understanding."

Senator WEICKEE. In 1976, Congress reviewed the statutory rules

governing the disclosure of tax information for the first time in 40

years. Prior to then the Internal Revenue Service, for all intents and

purposes, had operated a lending library.

Congress enacted tax privacy safeguards in the Tax Reform Act of

1976 as a result of:

One, abuses uncovered during the Watergate investigations which

documented the use of the IRS as an intelligence body to derive information harmful to enemies of the Nixon administration and helpful

to its friends.

Two, violations of Americans' constitutional rights discovered by

the Church committee.

Three, disclosures that special powers of the IRS were being misused to collect information for purposes well beyond the tax administration but related to other law enforcement activities which led to a

series of congressional hearings on the propriety of various uses of

tax information, including numerous hearings which were conducted

by the House Ways and Means Committee.

And, four, recommendations made by the Privacy Protection Commission for more stringent safeguards with respect to disclosures of

records made by the iRS.

Based upon the substantial record before it, Congress carefully

drafted legislation which balanced the rights of Americans to certain

privacy standards with the needs of Government in enforcing the law.

I want to make it clear that one of your colleagues, whom you knew,

waged this fight with me and it was a long one. I am talking about

Jerry Litton.

Mr. GIBBONS. I remember Jerry.

Senator WEICKER. And I might add, Jerry got the Republican

nomination for the U.S. Senate and was killed in a plane crash. The

privacy protection provisions in the Tax Reform Act of 1976 are as

much his work as anyone else.

Now, less than 4 years after the striking of this balance, legislation

is introduced which tips the scales in favor of law enforcement at the

expense of the taxpayer's privacy right.

What is the rationale for this new encroachment upon the rights of

Americans? It is done under the banner of the fight against organized

crime, mobsters, and narcotics traffickers. Why? Because one is best

able to obfuscate the true issues by arguing in an inflammatory way

that a change in the law is the only solution to these evils.

I know on the floor of the Senate I keep on hearing from my good

friend, Senator Nunn, and others that Al Capone would be laughing

in his grave if he saw the Tax Reform Act of 1976. I would like to

point out to you and every member of this subcommittee that Al

Capone was sent up the river on tax evasion charges and nothing else:

tax evasion charges. And, the disclosure provisions added in the Tax

Reform Act of 1976, do not in any way affect the powers of the IRS

and the Justice Department to investigate and enforce tax-related

offenses.
95

One must look behind the rhetoric to ascertain the reason for this

legislation. The reason is expediency. The Justice Department, as

evidenced by the great number of its successful prosecutions, has other

means of obtaining evidence in its fight against crime. But it is far

quicker and more expedient to go directly to the tax return and related information than to the other sources.

Jerry Litton, the late Congressman from Missouri who coauthored

the disclosure protections, succinctly rebutted the expediency rationale. In testimony before the "Ways and Means Committee in 1976

he said that "if we are only looking for expediency, let's wiretap every

1,000 homes, open the mail of every 1,000 citizens, if we are only

looking for expediency." But this country does not look just for

expediency when dealing with the rights of citizens. Our heritage is

otherwise.

I might add that Litton's interest in the legislation was not inspired

by any particular Watergate measures but the fact that the Internal

Revenue Service was turning over to the Department of Agruculture

the returns of farmers in his district. That is how Litton got interested

in this.

Two hundred years ago our Founding Fathers authored a Constitution premised on the principle that individuals as human beings

are more important than the conveniences of society. A greater importance was placed on individual liberties than on governmental

efficiency. That was the philosophy underlying the bill of rights.

The existing tax information disclosure provisions reflect the fact

that Americans are compelled to surrender the constitutional rights

guaranteed by the fourth and fifth amendments. In order to facilitate the effective administration of our tax laws each American

voluntarily surrenders certain rights and assumes the duty of selfinvestigation, factfinding and reporting.

This baring of private papers and matters is an accommodation by

citizens for their government for tax purposes, not for nontax law

enforcement purposes or any other purposes.

The level of compliance with our tax laws makes the United States

the wonder and the envy of other nations. If taxpayers conclude that

their compliance is being used to violate their rights, how long will it

be before cheating is commonplace?

As numerous former IRS commissioners have testified, the IRS well

realizes that if American taxpayers cheated on a scale anywhere

approaching what is commonplace in most other nations, our entire

revenue collecting system would collapse.

Indeed in testimony before the Senate Finance Committee back in

April 1975, every single commissioner of Internal Revenue testified

that the degree of compliance is directly related to the degree of

confidentiality. That was their testimony.

I think first of all we should lay the basis for the program of the

IRS because there is a tendency to look upon it as a law enforcement

agency. It is not. It is a revenue collecting agency and that alone is

their job. The testimony of every commissioner testified that the

degree of compliance is directly related to the degree of confidentiality.

There is one other remark I would like to make in passing, becaues

I remember getting into this with my old law professor from the University of Virginia, Mortimer Caplin. He indicated to me that foreign
96

country after foreign country come over here thinking that the degree

of success that we enjoy in tax collection is due to some management

system or some particular type of computer system.

They are all amazed to leave here finding out that the reason for

its success is the willingness of every American citizen to take a duty

on his or her own shoulders to voluntarily comply. It is as simple as

that. That implies that there has to be credibility in the system. What

the system promises the system must deliver.

Indeed all of the fallout of Watergate, what was one of the worst?

It was when the chief law enforcement officer of the Nation fraudulently filled out his tax returns. Then the dam breaks at that point.

Indeed it will break even further if when persons fill out their returns

they find out thatindeed this is being used not to collect taxes but for a

multitude of reasons.

Mr. Chairman, the few years that have transpired since enactment

of the Tax Reform Act have not shown that Congress erred in enacting

needed tax reform legislation or that provisions of the law have

unfairly or unduly burdened law enforcement efforts.

What time and experience have shown is not that the law is burdensome or wrong or unfairly restrictive but that those who have interpreted the law have done so correctly.

Congressional hearings have revealed that even those provisions of

the act which permit the IRS to assist enforcement agencies are not

being effectively utilized. If the agencies do not use the authority at

their disposal to proper effect, why should that authority be further

expanded at the further expense of constitutional rights?

What the record does justify is a fine tuning of the provisions of the

act, to insure that law enforcement officials properly utilize the tools

that are already available. Thus, the provisions in the proposed legislation which place time limits on court action and the IRS's response,

that allow magistrates to act upon ex parte applications, which limit

those empowered to request disclosure from the IRS to high-level

Justice Department officials, and that requires the IRS to disclose

information of nontax violations obtained from third parties, are

justified.

However, those provisions which would expand the material available to the Justice Department without affording Americans the protection of a court order are simply not justified nor tolerable. And

cutting through the rhetoric that is the thrust of the proposal.

The law presently requires that a court order be obtained by law

enforcement officials before the IRS can turn over a taxpayer's return

or any information supplied in support of the return. H.R. 6826 would

grant court protection only to the tax return and information filed

with it, nothing else.

Therefore, any information produced to substantiate the return,

such as correspondence, sources of income, investments, any check

ever written by the taxpayer, any bill ever paid, and the reasons for

doing so, would be routinely available to the Justice Department who

in turn could tun the information over to anyone they want.

This proposal constitutes an unwarranted invasion of the taxpayer's privacy rights and is unacceptable.
97

The taxpayer's privacy rights would be further eroded by relaxing

the standards necessary for the Justice Department to prove in order

to obtain an ex parte order. Under the proposal a tax return could be

obtained by a court order provided that application for the order is

made in connection with a "proceeding" that pertains to the "enforcement" of a Federal criminal statute or for an investigation which

"may result in such a proceeding."

This substantially cuts back on the present standard which requires that there must be "reasonable cause to believe * * * that a

specific criminal act has been committed."

In addition, H.R. 6826 eliminates the requirement that the Justice

Department must exhaust all other sources before it can turn to the

IRS to obtain information. This provision is similar to the requirement

deemed necessary by Congress in 18 U.S.C. section 2518(1) (C) that

investigative procedures be attempted before a court may order a

wire tap or other forms of electronic surveillance.

Furthermore, the provision in H.R. 6826 which would require the

IRS to disclose to the appropriate agency any information under

"exigent circumstances," including "a possible threat * * * to

national security," contains insufficient safeguards to ensure that the

taxpayer is not stripped of his privacy rights in the name of "national

security."

The vague standards of this provision could give the IRS the unbridled discretion to turn over any information in their files to anyone

in the Government and threatens to mark the return of the days of the

IRS "lending library."

This proposal does not even afford the taxpayer the protections

contained in 18 U.S.C. section 2518(7), which require notification to

and approval of a court within 48 hours after a wire or oral communication has been intercepted in an "emergency situation."

The loosely drafted provisions in H.R. 6826 which would permit

disclosure to State law enforcement officials concerns me. The abuses

which I enumerated earlier in my testimony were not confined to

high-level Federal employees. There is ample documentation that

State and local officials were responsible for equally appalling abuses.

Finally, I am worried about the provision which would authorize

disclosure of information on American citizens for foreign countries.

The thought that personal information on Americans can be disclosed to other countries which do not have the guarantees of individual rights which are contained in our Constitution is simply

repugnant to the principles upon which our Nation was founded.

I will repeat, in closing, that it took us 40 years before the first

change in the law governing disclosue of tax information took place.

It was 40 years for the first change, yet when certain people were

inconvenienced, they pushed to get back to the old standard. I can

quote Justice Brandeis, who I always find to be good for supporting

many of the things in which I believe, "* * * experience should teach

us to be most on our guard to protect liberty when the Government's

purposes are beneficent * * * The greatest dangers to liberty lurk

in the insidious encroachment by men of zeal, well meaning, but without understanding."

You talk about organized crime all you want but there is no differentiation in the coverage of the law. The same law is going to apply
98

to Congressmen and Senators and artists and bankers and businessmen

and labor leaders, as well as to criminals. There is no differentiation.

So let us understand that whatever it is your subcommittee does or

is done on the floor of the House or of the Senate is going to apply to

all Americans. I think we learned our lesson well in 1976. It was 3

years before we got the necessary change passed by both Houses, so

it wasn't done as a matter of the particular aberrations of the Nixon

administration.

The changes were enacted after a long careful look, and I would

hope that we would give the system a chance to work, which does not

mean to say there cannot be certain administrative improvements or

improvements in the administration of the laws.

Mr. GIBBONS. We have a vote on now and this would be a good time

for us to take a recess.

Senator WEICKER. I have to get away shortly.

Mr. GIBBONS. Are there any parts of the Nunn proprosal that you

support?

Senator WEICKER. I have detailed those in my testimony and prepared responses, but they do not include the areas involving constitutional rights. They are the administrative area.

Mr. JENKINS. DO you think the main problem is with the administration of the existing law?

Senator WEICKER. I do.

Mr. JENKINS. And the fault lies either with the other Federal agencies or IRS in the construction of it?

Senator WEICKER. IRS to the extent I think they have been a

little super-cautious in their interpretation of the law as it was written

in handing over nontax crime information received from third parties

to the other agencies. Maybe that is not bad at the outset, if you will,

considering what the situation was prior to that time.

Mr. JENKINS. YOU have read or heard Senator Nunn on his Catch

22 situation, with the ex parte order now. Do you have any comment on

that?

Senator WEICKER. I will say this to you, Congressman: About 8

months ago there was an amendment to the windfall profits tax bill,

and I had to go out on the floor of the U.S. Senate and beat down an

effort to revive the disclosure provisions under a time limitation. You

are used to that and we are not over there.

That was to eliminate the ex parte order requirement entirely, to

eliminate the judicial system entirely in this process. It was an amendment offered by Senator DeConcini and supported by Senator Nunn.

I understand where he is trying to go with this legislation and it is

to do away with the nuisances, if you will, that protect your rights

and mine and the man on the street.

So I am saying that I cite this because I think I understand exactly

where this legislation is coming from. The DeConcini approach has

been modified in what Senator Nunn has offered, but I understand

that given their druthers, Senator Nunn and the Justice Department

would like to do away entirely with that filter which is so important

to all of us, which is the judicial system.

Mr. JENKINS. Thank you.

Senator WEICKER. If there are any further questions I would be

glad to respond to them.
99

Mr. GIBBONS. I think because of the time pressure we had better

release you now, Senator, and thank you for coming. Your testimony

is interesting and informative.

Senator WEICKER. Mr. Chairman, I have prepared responses to

the seven questions which you submitted to me, and I would like to

submit them for inclusion in the record.

Mr. GIBBONS. Without objection, the responses will be included in

the record.

Senator WEICKEB. It is good to be back and I am sorry that all

of you saw fit to demote me to the U.S. Senate. I had a better time

here.

Mr. GIBBONS. It is interesting to me that your locker and my

locker are next to each other in the gym. However, I don't get a

chance to see you.

Senator WEICKER. It is nice to see you, Mr. Chairman.

Mr. GIBBONS. We will take a short recess.

[The responses of Senator Weicker follow:]

PREPARED RESPONSES OF SENATOR LOWELL WEICKER, JR., TO QUESTIONS

SUBMITTED BY THE SUBCOMMITTEE ON OVERSIGHT

1. How should the standards for an ex parte order be changed?

As indicated in the testimony, the thrust of the proposed change is to expand

the material available to the Justice Department without the protection of a

court order. Under present law, a court order must be obtained before IRS can

turn over a taxpayer's return or any information supplied in support of the return. The proposed change would grant court protection only to the tax return•

nothing else. This is unacceptable.

However, assuming that court protection were to extend to "return" and "taxpayer return information", as defined under present law, some modification of the

existing standards for an ex parte order would be appropriate.

Issuance of an ex parte order should be predicated upon a showing of each of

the following:

(i) There is reasonable cause to believe, based on information believed to be

reliable, that a specific criminal act has been committed or is being committed

(from present law, with addition of italic phrase).

(ii) There is reasonable cause to believe that the information sought to be disclosed is material and relevant to the commission of such criminal act (based on

language in the Nunn bill).

(iii) There is a full and complete statement as to whether or not other investigative procedures have been tried and failed or why they reasonably appear to be

unlikely to succeed if tried or to be too dangerous (this is similar to a provision in

present law which requires exhaustion of all other sources before disclosure. The

language cited tracks that contained in the electronic surveillance law, 18 U.S.C.

2518(1) (O).

These are minimum standards. It should be noted that these standards, like

existing law, do not afford the taxpayer his Fourth Amendment rights, which

require proof of "probable cause". Accommodations of privacy rights have

already been made in existing law, and no further ones beyond the above should

be made.

2. What level of Administration official should be allowed to request disclosure

from the IRS under Section 6103(i)(2) of the Internal Revenue Code?

The thrust of the proposal in the Nunn bill to restrict authority to seek access

to tax information to Justice Department attorneys is commendable. This would

substantially decrease the number of persons who, under present law, may

request and receive IRS material. No longer would heads of other agencies be

able to make such applications.

However, as suggested by GAO in testimony before the Senate Finance Committee, the authority to request tax information should be limited to fewer

Justice attorneys than in the Nunn bill. These would be the Attorney General,

the Deputy Attorney General, the Assistant Attorneys General, and, when

designated on an individual basis by the Attorney General, U.S. attorneys and
100

attorneys in charge of Organized Crime Strike Forces. This would eliminate

heads of regional offices or supervisory attorneys designated by the Attorney

General, who would be allowed to request disclosure under the Nunn bill.

3. Should there be an affirmative duty on the IRS to disclose certain types of

return information to law enforcement agencies? If so, how should this duty be

defined and under what conditions should it apply? Should the IRS be authorized

to seek an ex parte order to disclose tax returns and, if so, when and under what

conditions?

As indicated in the testimony, the record discloses not that the Tax Reform

Act is burdensome, or wrong, or unfairly restrictive, but that the IRS has incorrectly interpreted the law. The provision contained in the Nunn bill obligating

the IRS to dislcose information obtained from third parties (but not from taxpayers) which may constitute evidence of a Federal crime will help eliminate

this problem. However, the scope of the IRS's responsibilities must be clarified

to ensure that the IRS is not required to regularly search its files for evidence

of crimes. Only evidence incovered during the normal course of IRS' business

and activities should be subjected to this provision. Absent this clarification,

the IRS could become too deeply involved in crime fighting•at the expense

of its basic duty to collect revenues.

The IRS, however, should not be allowed to unilaterally disclose information

of any sort obtained from a taxpayer. Before any such information may be disclosed, the IRS should be required to obtain an ex parte court order, under

the same standards which are applicable to requests made by Justice. IRS could

seek such an order when, in the normal couse of business, it discovers evidence

that a specific criminal act has been committed or is being committed. The court

order standard should not be relaxed under any circumstances.

4. Should corporate taxpayer return information and corporate return information be treated differently from individual taxpayer return information and

individual return information insofar as disclosure restrictions are concerned?

Among corporations, should different standards apply as between corporations

required to register with the Securities and Exchange Commission and those

which are not•that is, as between publicly held (large) corporations and others?

Privacy hearings held by the Senate Small Business Committee in November,

1979, show that businesses are quite concerned about their privacy rights. Tax

return information on small businesses invariably contain personal information

concerning the principals of the firm. This information shouldn't be treated

differently than information obtained from the individuals involved in the

business.

There is no reason to relax the burden on the govenmrnet when it comes to

access to records of larger corporations. For example, there is no lesser standard

for search warrant orders for corporate records than for individuals records. The

standard is the same because of the interest of the public as a whole to protect

privacy rights by preventing "unreasonable searches and seizures" under the

Fourth Amendment. Similarly, the Supreme Court has established that speech

does not lose its protection under the First Amendment because it has a corporate

rather than an individual origin.

5. Is there a need to change present law to allow the recipient to whom tax information has been disclosed•by court order, by written request or by IRS initiative•to redisclose to others and, if so, when and under what conditions?

No. Redisclosure increases the chances that the taxpayer's privacy rights will

be violated. A taxpayer discloses information to the IRS for tax purposes•not

for the use of state law enforcement agencies or foreign countries.

The potential for abuse by these subsequent recipients is great. For example,

the Watergate investigations documented scores of abuses by state officials. As

Jerry Litton noted in April 1975 testimony before the Senate Finance Committee:

"However, I think it should not be concluded from the Watergate-related abuses

that recent misuse of tax information was confined to the Nixon administration.

State and local officials . . . have been responsible for equally appalling abuses•

utilizing tax returns as weapons in State political campaigns and aiding in the

theft of such information for use by private detectives, insurance companies, and

credit firms in order to gain information on citizens which, in many cases, was

used to an individual's detriment."

6. What changes, if any, should be made to present law concerning civil and

criminal penalties for unlawful disclosure?
101

There does not appear to be any compelling reason requiring a change in these

provisions. These penalties serve as an important deterrent to willful violations

of taxpayer's privacy rights by government employees.

However, the proposal which would make it clear that criminal sanctions for

unathorized disclosure of tax information are to be applied only when there is an

intentional violation of the disclosure provisions is acceptable. Likewise, there

would not seem to be any great objection to the proposal which would hold the

United States•and not the Federal official-civilly liable for negligent violations of

the act. The official would still be personally liable for willful violation of disclosure

provisions.

7. Are there any objections to the proposals in pending legislation and by the

Administration for amending the administrative summons provisions in present

law? If so, please explain.

The proposal to shift the burden from the government to the taxpayer to show

why there should not be compliance with the summons conforms to the procedure

in the Right to Financial Privacy Act, and is not objectionable.

However, under the proposal, only individuals and partnerships of not more than

five persons would be entitled to notice of a third party summons. Corporations•no

matter how small•would not be entitled to notice. This would not be acceptable.

Small corporations are generally nothing more than legal shells for individuals,

whose rights would be infringed upon by this proposal. Notice of a third party

summons to the party whose documents are being examined•no matter how

large or small•comports with the American notions of fair play and due process.

Mr. GIBSON. Gentlemen, I want to thank you for allowing us to be

so informal and to go back and forth among the witnesses.

Mr. NATHAN. If I could continue, if I could make one observation

following Senator Weicker, notwithstanding the vigor and eloquence

of his presentation, I find it hard to discern exactly where he differs

from the bill that has been put forth by the chairman in the House and

by Senator Nunn and certainly from the administration proposal.

As I understand it he is in favor of some fine tuning of the legislation

and in essence that is all we are seeking. We are not seeking any kind

of wholesale access to books and records or to tax returns or any other

kind of information that we could not get under the present statute.

We are seeking to make some amendments in the procedures that

have to be followed to get that information in order to make it more

readily accessible to the prosecutors so that we can pursue the organized criminals and narcotics dealers more effectively.

I should add, too, that I do not want to mislead this committee into

thinking that if these adjustments are made or really any adjustments

are made that that is going to be a panacea in our pursuit of those

sophisticated criminals. It is going to be a difficult match.

But with the law as it is now we are severely handicapped and we

are asking for modest adjustments to ease those handicaps to make

our job a little bit easier and to make the benefits to law abiding society

better.

Senator Weicker is exactly right. It will apply to all taxpayers and

we will be obliged if we want to get the tax returns to go to court and

show that we are conducting a criminal investigation of that individual

and what specific crime we allege has been committed and precisely

how we think those tax returns would be relevant to that investigation.

It would be a neutral magistrate or judge who would say, "Yes,

you are entitled to it" and the service should turn over those tax

returns.

Mr. GIBBONS. Under your proposal, wouldn't the taxpayer have

the right to be informed?
102

Mr. NATHAN. NO, it would be an ex parte proceeding. We wouldn't

make a change in that regard. But we would have to show ex parte,

to the judge, what the investigation is about, what the specific crime

is we allege, how far we are along in it•that kind of thing•and why we

think the tax information would be pertinent to that investigation of

the commission of that offense.

It would not be for collateral matters. It would be solely for trying

to prove that offense was committed by this individual.

I will give you an example of it in terms of the narcotics dealers.

If we have information that an individual has been making large

amounts of money from narcotics trafficking and we can get access to

his tax return which shows that he is declaring large amounts of income from miscellaneous sources, refusing to reveal what that source

is, that income tax return would be highly probative evidence in a

trial of his narcotics trafficking to show that he has an unexplained

source of large amounts of revenue.

It is that kind of information which we seek to use in these proceedings. We have used this information in some cases, but the difficulty has reduced our ability to secure this information and the number

of tax returns we have received is dramatically down as a result of the

Tax Reform Act.

Now, if I could continue in response to the specific questions

that the subcommittee posed, with respect to redisclosure of tax

information, the administration proposal contains no specific redisclosure provisions. We are satisfied both with present law and the

Nunn bill which relates to use at the Federal level•it would be used by

those people at the Federal level for investigating and prosecuting the

commission of Federal crimes•those people who are necessary to that.

We do not support the provisions that relate to access by State

and local law enforcement officials. We think that is an area where

there has been abuse in the past and I would point out that so far as we

are aware there has not been any abuse in the past, prior to the 1976

statute, by Federal prosecutors who obtained information on tax

returns.

The legislative history of the 1976 statute pointed to potential

abuses within the White House where they were seeking tax returns

of political enemies, aides of President Nixon who sought the information, but no instance where the Department of Justice had

sought the tax returns or obtained tax returns for use in criminal

proceedings. In no case was information then used for political or

any other improper purpose.

With respect to State and local officials, we think that they are

so numerous that it would be hard to monitor how that information

would be used; we do not support that part of the proposed bill.

We do propose certain changes, and these are really quite minor,

with respect to the admissibility of tax information at trial or in

other proceedings. We simply say that once the information has been

Erovided to the prosecutor of the Department of Justice, its admissiility in any proceeding should be governed by the Federal Rules of

Evidence like any other information which is in our hands.

We also do not support the use of this information in civil proceedings generally, The administration proposal is that in forfeiture
103

proceedings, which are civil proceedings related to criminal enforcement proceedings, the tax information could be utilized.

With respect to the civil penalty provisions of the Tax Reform Act,

as you know the present statute subjects individual IRS employees

to civil liability, which means that any individual can bring a lawsuit

against the individual IRS agent. He is required to get an attorney

and depending on his conduct, to have all of his assets subject to

attack and be placed in jeopardy by some irate individual who may

not be a very reliable person.

We propose that the civil penalty be amended to conform with

the administration's proposed amendments to the Federal Torts

Claims Act and the Right to Privacy Act which would restrict civil

damage actions to those against the Federal agency.

So what would happen is if a claim was made against an individual,

the agency would be substituted for that individual and the agency

would be required to bear the cost of the litigation and furnish government attorneys and to defend the lawsuit.

Of course, if it is found that the individual acted improperly, he

would be subject to administrative actions. He could be fired by the

Service and further there are criminal penalties that could be considered.

With respect to the summons provision, I will leave that to Mr.

Csontos from the Tax Division.

But I would like to say, in summary, that financial information

is often important with respect to the investigation and prosecution

of crimes involving large amounts of money such as we have in

narcotics trafficking and organized crime.

Many times the tax information represents the best and sometimes

the only information•the only evidence of crucial financial transactions. Further it is widely recognized that the highly trained investigators of the Internal Revenue Service are the best in the Federal

Government at piecing together complex financial puzzles.

We think that the statute has gone well beyond the intent of

sponsors of the 1976 act and has had a significant adverse effect on

coordination and cooperation between the Service and the Department.

Commissioner Kurtz and the Department have met over a substantial period of time and a number of substantial administrative steps

have been taken to mitigate the problems. We are very hopeful that

they will cure a large number of the problems that we have faced in

the last 3}£ years, particular with respect to delay.

But beyond those administrative changes the administration believes

that legislation is needed to achieve a little better balance between

privacy interests and the public interest in the administration of

justice.

We believe the amendments that we have described today would

achieve that balance and we are deeply grateful to this subcommittee

for turning from your many other pressing duties to conduct these

hearings. We stand ready to help your staff and you in any information

or assistance we can provide you.

Mr. GIBBONS. What is the status of the administration's suggestions? Have they been reduced to a written proposal yet? If so, I am

not aware of it.
104

Mr. NATHAN. We have described in great detail in the Senate

Finance Committee and here as well exactly what we propose. Essentially what we are doing is working off the Nunn bill. In large measure

we support the Nunn bill. There are differences which we have described.

Mr. GIBBONS. DO you have a set of amendments prepared?

Mr. NATHAN. Yes, we have a set of amendments prepared and further I should tell you that Senator Nunn has suggested that his

proposals are not cast in concrete and he is prepared to compromise

and we are working with him to try and develop one proposal that

both he and the administration can fully support. We are not far

apart.

Mr. GIBBONS. IS there any kind of markup going on in the Senate?

I hate to ask you that question because I should know.

Mr. NATHAN. I am not aware that there has been. There has been

a hearing before the Senate Finance Committee and extensive hearings

have been held, but beyond that I am not aware of what that subcommittee is doing.

Mr. GIBBONS. Sometimes there is a slip between the amendment and

its enactment. You know the reason we are having these hearings, it

is getting near the end of the session and we are used to the fact that

some important legislation comes floating over here from the Senate

without a lot of prior work on the House's part, and we want to be in

shape for this one. But you do have a specific set of amendments?

Mr. NATHAN. Yes.

Mr. GIBBONS. Does our staff have these amendments? I wonder if

you could let us have them so that we can examine them because eventually we are going to have to operate in this area. Out of an abundance

of caution I want to make sure we do not foul up something.

Mr. NATHAN. I wanted to make this clarification. While we do

have in legislative form the administration proposals, we at the same

time have been trying to work with Senator Nunn and his staff and

the Senate Finance Committee to compromise whatever differences

there are between Senator Nunn's bill and the administration's

position.

We are hopeful that we will be able to complete that process within

a matter of days. So while we can give you the administration position

in bill form, within a matter of days we will be able to provide slight

adjustments to that which, as I understand it, Senator Nunn may

find acceptable.

Mr. GIBBONS. We are going to need a lot more coordination on our

side on that because the 1976 act•were you here when that was

passed?

Mr. NATHAN. NO, I was not. I take no blame for it.

Mr. GIBBONS. It was a delightful experience. Most of us found out

what had happened a few months after it happened even though we

had sat there and unraveled the pieces of it. It was very confusing

about what happened. We would like not to repeat the same act twice.

Mr. NATHAN. We will work very closely with the staff, sir.

Mr. GIBBONS. All right. Mr. Jenkins, would you like to inquire?

Mr. JENKINS. I have no questions.

Mr. GIBBONS. We will have Mr. Kurtz next.
105

STATEMENT OF JEROME KURTZ, COMMISSIONER, INTERNAL

REVENUE SERVICE, ACCOMPANIED BY N. JEROLD COHEN,

CHIEF COUNSEL

Commissioner KURTZ. Mr. Chairman and members of the committee, I am pleased to appear before you to discuss the disclosure

and third-party summons provisions of the code. I am accompanied

by N. Jerold Cohen, Chief Counsel of the Internal Revenue Service.

I would like if I may to highlight some portions of my statement

and submit the whole thing for the record.

As you know, ours is a self-assessment tax system that depends

substantially on voluntary compliance by taxpayers. The Secretary

of the Treasury has broad authority to require all taxpayers to file

tax returns and keep records necessary to a determination of their

tax liability.1

In addition, the Secretary is authorized to examine books, papers,

records, or other data relevant or material to the determination of tax

liability.2 These powers are essential to enable the Internal Revenue

Service to obtain by administrative action information necessary for

tax administration.

The scope and complexity of the tax laws require the Internal

Revenue Service to make a broad range of inquiries of taxpayers, both

on the returns they file and during examinations and investigations.

Last year we received more than 136 million returns from taxpayers and audited more than 1,800,000 individuals. We also initiated

nearly 9,800 criminal investigations. As a consequence, the Service

probably has more information concerning the lives and affairs of

individuals than any other agency of the Federal Government.

The needs of law enforcement and the needs of tax administration

are in some respects difficult to reconcile. The balancing of these

considerations is a delicate process. We acknowledge that it is difficult

to strike a precise balance between the competing policy considerations, but believe that the balance struck by the administration is

appropriate and preferable to the other proposals before the

subcommittee.

The administration believes that H.R. 6826 fails sufficiently to

protect the legitimate privacy interests of individuals in that it would

require evidence of criminal activities contained in individual taxpayers' books and records to be given to law enforcement agencies by

the Internal Revenue Service.

We believe that individuals are entitled to a high degree of privacy

protection in these records which they are required to maintain to

meet their tax obligations and, therefore, that this information should

be available only under a court order proceeding initiated by the

Justice Department.

Corporations generally do not have privacy interests equal to those of

individuals. Accordingly, the administration's proposal, as would

H.R. 6826, requires such disclosure of criminal activities to be made

in the case of certain corporations.

1 Sec. 6001 of the Internal Revenue Code. (Unless otherwise specified, all references are to

the Internal Revnue Code of 1954, as amended.)

* Sec. 7602.
106

Furthermore, the administration would propose amendments to

section 6103 which would have the effect of decentralizing from the

Washington offices of the Department of Justice to responsible law

enforcement officials in the field the authority to request information,

thus significantly improving the timeliness and responsiveness of

such requests.

Another significant improvement proposed by the administration

is to correct a problem in the existing statute which could be interpreted to require law enforcement officials to know in advance the

contents of taxpayer return information before making a request for

disclosure.

We also believe that the administration's position to improve the

summons legislation by requiring taxpayers who oppose process

against third-party recordkeepers to contest those summonses in

courts will alleviate unwarranted delays in tax examinations and

investigations. The administration's proposal would alleviate a

substantial burden on Government with no impact on legitimate

taxpayer interests.

CURRENT LAW

Section 6103 permits disclosures of tax information for Federal

nontax criminal enforcement purposes subject to certain safeguards,

but generally does not permit such disclosures for Federal nontax

civil enforcement purposes and permits no disclosures for State nontax criminal or civil enforcement purposes.

Section 6103 creates a distinction between returns filed by taxpayers, "returns," and information furnished to the IRS by the

taxpayer or his representative, "taxpayer return information," on

the one hand, and information from sources other than the taxpayer,

"return information," on the other.

In the case of returns and taxpayer return information, the Department of Justice and other Federal agencies must obtain a court order

to obtain this information for nontax criminal enforcement purposes.

To obtain the order the Department or other Federal agency must

show that there is reason to believe that a specific criminal act has

been committed, that there is reason to believe that the information

sought is probative evidence of the matter in issue and that the information sought cannot be reasonably obtained elsewhere unless

such information constitutes the most probative evidence.

In the case of return information other than taxpayer return information, disclosure is permitted to the head of a Federal agency, or to

the Attorney General, the Deputy Attorney General, or an Assistant

Attorney General in response to a written request setting forth certain

specific information, including the specific reasons why the disclosure

is or may be material to the nontax criminal proceeding or

investigation.

In addition, in the case of return information other than taxpayer

return information, the Secretary is authorized to volunteer evidence

of a possible violation of a Federal criminal law to the head of the

agency charged with enforcing that law.

SUGGESTED REVISIONS TO EXISTING LAW

In the remainder of my testimony I would like to mention two

differences between H.R. 6826 and the administration's position that
107

are of particular importance to tax administration, discuss further

the change proposed to the third-party summons provision, summarize

certain changes in our administrative procedures and program emphasis, and respond to the seven questions which accompanied your

letter of invitation.

SECTION 6103

One: Disclosure of returns and return information to the States for

nontax purposes: The administration proposal continues the existing

prohibitions on disclosures of returns or return information to the

States for nontax criminal and civil enforcement purposes.

Under present law returns and return information may be disclosed

to the States only in connection with the administration of State tax

laws.1Similar restrictions were contained in the law before 1976.

To assure that tax information given to the States for tax administration purposes was not used for other purposes Congress required

States to adopt safeguards to protect the tax information they received

and to permit a review of the safeguards they established.2

The administration opposes the provision of R.H. 6826 that would

permit redisclosure of returns and return information to State law

enforcement agencies for investigations and proceedings involving

State felonies. There are more than 19,000 State and local police

agencies in this country. Such a widespread dissemination of tax information for nontax purposes would be extremely unwise, particularly

since most police agencies are very small•more than 50 percent have

10 or fewer employees•and would be ill-equipped to provide even

minimal protection for the information they secure.

Accordingly, we believe the longstanding prohibition on disclosures

to State agencies for nontax purposes should be maintained.

Two: Disclosures for Federal nontax civil purposes: With certain

specific exceptions section 6103 now prohibits the disclosure of returns

and return information for Federal nontax civil enforcement purposes.

The administration's proposal would continue the general prohibition of disclosure of tax information for Federal civil purposes but

would make clear that such disclosures could be made to provide

evidence in any administrative or judicial proceeding involving a civil

forfeiture related to the enforcement of a Federal criminal statute.

There has been no showing that any broader change is necessary.

SECTION 7609

Section 7609 requires the Internal Revenue Service to provide the

taxpayer with notice in connection with service of summons on certain

specified "third-party recordkeepers." Following receipt of this notice

the taxpayer has 14 days to notify the summoned party not to comply

with the summons and to furnish a copy of that notification to the

Service. If the taxpayer does so, the Seivice must then obtain a court

order to obtain the summoned records.

At the time of its enactment, both the Service and the Department

of Justice seriously questioned whether section 7609 should be enacted

because we believe that the provision extended no additional substantive rights to taxpayers and offered opportunities to those who wished

to delay or defeat tax investigations and examinations.

i Sec. 6103(d).

•Sec. 6103(p)(4).
108

While acknowledging the validity of these arguments, Congress

enacted section 7609 in the belief that the taxpayer himself would be

more likely to assert whatever defenses to summons enforcement were

available under existing law than would the third-party recordkeeper.

Whatever procedural or substantive protections may be accorded

taxpayers by the third-party summons procedures, it is clear that

permitting taxpayeis to stay compliance by simply sending a written

notification to the summoned party imposes a substantial burden on

the Federal Government that is not justified to protect the legitimate

interests of taxpayers.

There have been very few instances in our 3H years of administration of this statute where taxpayers have raised valid defenses to

summons enforcement. Legitimate taxpayer interest would be equally

protected if the taxpayer were required to file a motion to quash with

the Federal District Court.

RECENT ADMINISTRATIVE CHANGES

In its testimony on April 22, 1980, before the Treasury, Postal

Service and General Government Subcommittee of the Senate Committee on Appropriations, GAO noted that IRS could reduce the time

required to process requests for returns and return information

pursuant to court orders issued under section 6103(i)(l) by decentralizing our disclosure approval authority.

GAO made a similar suggestion regarding decisions to disclose

evidence of possible nontax crimes obtained from third parties pursuant to section 6103(i) (3).

Under the then-existing procedures, all such disclosures required

review and approval by the Disclosure Operations Division in our

national office. Although GAO had found that the Service was generally as timely as possible in its response to court orders and requests

for disclosures under sections 6103(i) (1) and (2),1it found this national

office review needlessly delayed the dissemination of requested information.

I would like to summarize certain changes in our administrative

procedures and program emphasis and respond to the seven questions

which accompanied your letter of invitation.

On June 1, 1980, we revised Delegation Order 156 to permit district

directors and assistant district directors to make direct disclosures

of returns and return information to the Department of Justice and

other Federal law enforcement agencies without national office

approval.

In the same delegation order we authorized regional commissioners

to make disclosures of possible violations of Federal nontax criminal

statutes under section 6103 (i) (3).

These changes in procedure are also reflected in revisions to the

Internal Revenue Manual published on June 16, 1980. Among other

things, these revisions establish specific timeframes for responding to

both routine and emergency requests for returns and return information, and require district, regional and national office officials to become personally involved when those time frames are not met.

1 See "Disclosure and Summons Provisions of 1976 Tax Reform Act•Privacy Gains With

Unknown Law Enforcement Effects" (G.G.D. 78-110) (Mar. 12. 1979) and "Disclosure and

Summons Provisions of 1976 Tax Reform Act•An Analysis of Proposed Legislative

Changes" (G.G.D. 80-•) (June 18, 1980).
109

I have attached to my statement a chartlwhich compares the

procedures now in place with those that were used before June 1,

1980. To facilitate the transition to the new procedures, we have

trained our regional and district disclosure personnel, coordinated our

planning efforts with the Department of Justice and established a

"hotline" between the Department of Justice and our Disclosure

Operations Division to handle any problems that may arise.

In addition, we have established an IRS/Department of Justice

Coordinating Committee to assure active and ongoing cooperation

between the agencies, and instructed our field officials to contact

their U.S. attorney and offer to brief them on the new procedures.

Finally, we are establishing procedures to identify all requests for

returns and return information under sections 6103(i) (1) and (2) as

priority items in requests to Federal Records Centers where much of

the information requested is stored.

To improve the efficiency of our cooperation with other law enforcement agencies in joint criminal investigations, we also revised our

grand jury approval procedures. Timeframes have been established

for each level of managerial approval of the request: 10 workdays for

the Chief of the District's Criminal Investigation Division, 5 workdays for the District Director, 5 workdays for the Regional Commissioner and 10 workdays for the Regional Counsel.

Approval authority for grand jury requests has been delegated to

our regional commissioners, who may redelegate that authority to the

assistant regional commissioners•Criminal Investigation. These approvals must receive the concurrence of the Regional Counsel. Expansions of existing grand jury authorizations now may be approved

by District Directors with the concurrence of the Deputy Regional

Counsel•Criminal Tax.

In addition, we believe that recent and anticipated changes in our

criminal enforcement program will result in increased Service participation in the prosecution of those whose criminal activity involves

both tax and nontax laws.

Our limited criminal enforcement resources are allocated, like other

Service enforcement resources, to all segments of our society in an

attempt to assure compliance by all types of taxpayers. In the past,

25 to 30 percent of our total criminal enforcement effort has been

devoted to our special enforcement program.

This program includes investigations of organized crime figures,

strike force targets, and narcotics traffickers. In the next fiscal year

we are considering increasing the special enforcement program allocation to between 35 and 45 percent of the total program, with particular emphasis on the narcotic program and an increased utilization,

in appropriate cases, of interagency grand jury investigations.

Moreover, we have recently revised our memorandum of understanding with the Drug Enforcement Administration to increase the

volume and quality of DEA referrals to our Criminal Investigation

Division. Under the revised agreement, DEA is to furnish the Service

quarterly listings of all high-level drug traffickers and financiers that

are identified as DEA "class I" or "class II" violators.

On June 5, 1980, DEA furnished a list of approximately 14,000

leads, which have been distributed to our field offices for association

i Exhibit A.

67-046 0 - 80 -
no

with available information and evaluation as to their tax potential.

These leads will be tracked under established procedures to permit

us to assess the value of these expanded referrals. We are also working

with DEA to improve the liaison between our respective field offices.

In the aggregate, we believe these changes will result in a substantial

increase in thelevel and quality of assistance and cooperation between

the Internal Revenue Service and other Federal law enforcement

agencies. We also believe that the administration's legislative proposals

will enhance cooperative law enforcement efforts.

SPECIFIC SUBCOMMITTEE INQUIRIES

As you requested in your letter of invitation we address the seven

specific questions proposed in the appendix to your letter as follows:

One: How should the standards of an ex parte order be changed?

Under present law, the court order can be obtained only upon a

showing that (1) reasonable cause exists to believe that a specific

criminal act has been committed, (2) there is reason to believe that

the return or return information is probative evidence of the matter

in issue related to the commission of the criminal act, and (3) the

information sought either cannot reasonably be obtained from another

source or constitutes the most probative evidence of the matter in

issue.

The third of these requirements could be interpreted to require law

enforcement officials to know in advance the content of the taxpayer

return information before seeking a court order.

The administration's proposal would require a showing that (1)

there is reasonable cause to believe that a specific criminal act has

been or is being committed, (2) the information sought is sought

exclusively for use in a Federal criminal investigational proceeding

concerning that criminal act, and (3) there is reasonable cause to

believe the information may be relevant to a matter relating to the

commission of the criminal act.

Two: What level of administration official should be allowed to

request disclosure from the IRS under section 6103 (i) (2) of the

Internal Revenue Code?

Under existing law, such a request can be made only by the head of

a Federal agency for use in enforcement of a specifically designated

Federal criminal statute, by the Attorney General, the Deputy

Attorney General, or an Assistant Attorney General.

The administration's proposal would continue to permit heads of

agencies to make requests in connection with enforcement of a specific

Federal criminal statute. The administration's proposal would also

permit such requests by the Inspector General of any such agency.

Moreover, the administration's proposal would permit the Attorney

General or his designee to request information pursuant to section

6103(i)(2). This change would have the effect of decentralizing the

authority to request such information from the Washington offices of

the Department of Justice to responsible law enforcement officials in

the field who are not a part of the investigating team.

Together with our own administrative action decentralizing the

disclosure authority to our field offices, we believe this change would

improve the timeliness of requests and responses while assuring
Ill

appropriate levels of review within both the Department and the

Service.

Three: Should there be an affirmative duty on the IKS to disclose

certain types of return information to law enforcement agencies? If so,

how should this duty be defined and under what conditions should

it apply? Should the IRS be authorized to seek an ex parte order to

disclose tax returns and, if so, when and under what conditions?

The administration believes there should be an affirmative duty on

the IRS to disclose return information, other than taxpayer return

information, evidencing a possible violation of a Federal criminal law

to the head of the agency charged with enforcing that law.

The administration does not believe that there should be any

affirmative duty on the IRS to initiate a court order procedure to

disclosure returns or taxpayer return information to law enforcement

agencies.

With respect to this information, the administration believes that

the taxpayer is entitled to essentially the same protections that would

exist il the taxpayer himself continued to hold the information.

We believe that these protections are appropriate both because ours

is a self-assessment tax system that depends substantially on voluntary

compliance by taxpayers and because individual taxpayers are entitled

to a high degree of privacy protection in the records which they are

required to maintain to meet their tax obligations.

The administration believes that these interests are best protected

by requiring any court order proceeding to be initiated by the Department of Justice under the disclosure standards I described earlier.

A provision allowing the Service to initiate a court order procedure

to disclose taxpayer return information for nontax criminal investigations would leave taxpayers in the dilemma of complying with

the tax laws nt the risk of prosecution for nontax criminal violations.

Four: Should corporate taxpayer return information and corporate

return information be treated differently from individual taxpayer

return information and individual return information insofar as

disclosure restrictions are concerned? Among corporations, should

different standards apply as between corporations required to register

with the Securities and Exchange Commission and those which are

not, that is, as between publicly held large corporations and others?

The needs of law enforcement and the needs of tax administration

are in some respects difficult to reconcile. Although we believe there

is a value to the tax system in protecting the returns and return

information of both individuals and corporations, corporations generally do not have privacy interests equal to those of individuals,

and therefore, the administration's proposal requires that disclosure

of criminal activity be made in the case of certain corporations.

Five: Is there a need to change present law to allow the recipient

to whom tax information has been disclosed, by court order, by

written request or by IRS initiative, to redisclose to others and, if so,

when and under what conditions?

Necessary redisclosures are permitted under existing law. Accordingly, the administration sees no need for change in this area.

Six: What changes, if any, should be made to present law concerning

civil and criminal penalties for unlawful disclosure?
112

The administration believes that the civil penalty should be

amended to provide that the Internal Revenue Service, rather than

individual employees, be liable in cases where the employee knowingly,

or by reason of negligence, discloses a return or return information

in violation of section 6103.

Seven: Are there any objections to the proposals in pending legislation and by the administration for amending the administrative

summons provisions in present law? If so, please explain.

We support proposals to amend the administrative summons

provisions in present law with the modifications suggested by Assistant

Attorney General Ferguson in his testimony before the Finance

Committee's Oversight Subcommittee.

Mr. Chairman, that concludes my testimony. We would be pleased

to respond to your questions.

[An attachment to the statement follows:]
113

EXHIBIT A
114

STATEMENT OF STEPHEN J. CSONTOS, LEGISLATIVE COUNSEL,

TAX DIVISION, DEPARTMENT OP JUSTICE

Mr. CSONTOS. I also welcome the opportunity to discuss with the

subcommittee the summons provisions of the Internal Revenue Code

as amended in 1976. I have a prepared statement and I don't propose

to read that to you this evening.

Mr. GIBBONS. It will be made a part of the record.

[The prepared statement follows:]

STATEMENT OF STEPHEN J. CSONTOS, LEGISLATIVE COUNSEL, TAX DIVISION,

DEPARTMENT OF JUSTICE

Mr. Chairman and members of the subcommittee, thank you for the opportunity to discuss tax summonses issued by the Internal Revenue Service to

financial institutions and other third-party recordkeepers. I know we all share

the common goal of lessening the enormous delays which now exist in obtaining

financial records necessary for tax audits and investigations. At the same time,

all of us are eager to maintain taxpayers' interests to the maximum extent

possible.

As you no doubt know, the current Section 7609 was enacted by Congress in

1976. Its purpose was to give each taxpayer a notice that records pertaining to

him had been summoned from a bank or other recordkeeper, and an opportunity

to challenge the summons in court.

Shortly after the enactment of Section 7609, it became apparent that these

statutory procedures were causing unnecessary delays. Indeed, when the Right

to Financial Privacy Act•which governs similar summonses issued by non-tax

agencies•was proposed in 1978, Congress recognized the infirmities in Section

7609 and established new procedures which were designed to minimize delays

in enforcing nontax summonses.

It is clear that the current Section 7609 procedures excessively delay the activities of the Internal Revenue Service in obtaining records and proceeding with

the tax investigation. These needless delays occur in litigating and obtaining

court enforcement of the summons•the activity in which the Tax Division is

directly involved•and also in obtaining the records and proceeding with the tax

investigation•which of course are the responsibilities of the Internal Revenue

Service.

Our aim is to find the proper balance between the interests of taxpayers with

respect to their financial records, and the legitimate law enforcement needs of

the Internal Revenue Service. We believe that the current Section 7609 provisions unnecessarily delay the Service's access to financial records which are

necessary for tax audits and investigations. At the same time, it is apparent

that procedures could be drafted which allow taxpayers to protect their interests

without delaying tax law enforcement.

The principal cause of delay under the present statute stems from the provision which allows a taxpayer merely to send a letter of objection in order to

stay summons compliance, when records pertaining to him are summoned from

a recordkeeper. This procedure encourages taxpayers to obtain letter-stays in

all cases because the letter procedure is so informal, and no specific grounds for

objection need be stated in the letter. The letter has the same effect as a judicial

restraining order, and the Service is then faced with the task of reviewing the

entire file and forwarding the case to Justice for the filing of an enforcement

action in district court. In the meantime the revenue or special agent's investigation has been impeded if not halted.

Most of the letter objections are sent solely to obtain the stay (and the resulting

investigation delay), as is demonstrated by statistics set forth in a recent GAO

Report.1 GAO estimated that taxpayers stayed 2,313 summonses by letter in the

13-month period immediately following enactment of Section 7609. Yet taxpayers

only exercised their rights to intervene in 217 summonses enforcement proceedings

filed in court by the Government in that period. Thus an enormous number of

1 Report by the Comptroller General on "Disclosure and Summons Provisions of 1976 Tax

Reform Act•Privacy Oalns with Unknown Law Enforcement Effects," p. 32 (Mar. 12,

1979).
115

investigations are halted by letter-stays, even though only a small proportion of

the summonses are actually contested in court. This situation is aggravated because

under present law, the statutes of limitations for criminal and civil tax purposes

keep running during the letter-stay, and the running of the limitations period is

not suspended until the Government formally files in court its enforcement

petition.

The motion-to-quash procedure, which is used in H.R. 6764 and is derived from

the Right to Financial Privacy Act, is the key to eliminating these stays by letter

and the attendant unnecessary delays. Under the motion-to-quash procedure, a

taxpayer would be notified as at present when records pertaining to him are summoned from a recordkeeper. But the summons would only be stayed initially for

14 days. During this time, the taxpayer would have to file in federal district court

a motion to quash in order to obtain any further stay of compliance. H.R. 6764

also contains piovisions designed to expedite the motion-to-quash proceedings,

and thus cut delays in summons compliance to a minimum.

For the reasons which we shall set forth, we enthusiastically welcome the

introduction of H.R. 6764 and support it. However, we believe several refinements of H.R. 6764 may enable it to better accomplish its objectives. With the

Chairman's permission, I would like to submit for inclusion in the record a draft

statute which formally incorporates these suggested refinements.

First, we agree with the H.R. 6764 requirement that the taxpayer's motion to

quash contain sworn facts demonstrating his basis for objecting to the summons,

but would add a provision allowing the court to deny the motion forthwith if the

taxpayer's affidavits do not make out a prima facie case that the summons is

unenforceable for any reason. This requirement would deter a great many taxpayers with frivolous or totally groundless objections from even filing a motion

to quash. The result would be a speedier resolution of tax issues to the mutual

benefit ot taxpayers and the Government.

Second, H.R. 6764 should contain a provision specifically authorizing the

district court to summarily deny those motions to quash which fail to establish a

prima facie case•such as in most tax protester cases. This provision would cut

dealys considerably by eliminating the need for time-consuming hearings, briefs

from the parties, and the like. H.R. 6764 does not specifically address this point.

Third, under current law a bank or other recordkeeper must often appear in

court when the taxpayer challenges a recordkeeper summons, even though the

recordkeeper has no objection to the summons. H.R. 6764 properly relieves

recordkeepers of the burden by requiring the taxpayer to initiate and litigate the

motion to quash. We suggest that a provision be added which would relieve

recordkeepers of all liability to any person when they produce customer records in

good faith compliance with judicial or admiuistrative orders issued under the

statute. Further, we would like to have an additional provision which would

require the recordkeeper to intervene in the motion-to-quash proceeding if it

wished to assert its own objection to the summons•for example, the alleged

burdensomeness of the summons. Under H.R. 6764, it would be possible for the

recordkeeper to sit out the taxpayer's motion-to-quash proceedings, and then

delay the summons later by litigating its own objection in a separate proceeding.

Of course, this suggested procedure would not require the recordkeeper to appear

in any proceeding if it wished to comply with the summons.

Fourth, we would suggest adding a provision to make it clear that federal

magistrates may conduct all proceedings in recordkeeper summons cases, thus

relieving the crowded dockets of the district courts and expediting the proceedings. With the consent of the parties, the magistrate would be allowed to enter the

final decision without any review by the district court. In general, such a provision

would apply the jurisdictional provisions of the Federal Magistrate Act of 1979

Public Law 96-82, to tax recordkeeper summonses.

We believe that H.R. 6764, with these proposed refinements, would drastically

decrease the number of recordkeeper summonses which are stayed and the number

which are litigated. As a result of the enactment of Section 7609 in 1976. the

number of summons cases brought by the Justice Department tripled. While it is

difficult to make anything more than rough estimates, we believe that adoption of

these motion-to-quash procedures would dramatically decrease the number of

recordkeeper summonses which are stayed, and would expedite the remainder.

Figures appearing in a GAO Report indicate that the Government obtained

enforcement in 765 out of 771 recordkeeper summons cases in the first 16 months

after Section 7609 went into effect.2 Manifestly, the only benefit of forcing the

• Id., p. 46.
116

Government to court in most of these cases was to impede and delay the Government's tax investigation. Few taxpayers will likely be willing to burden the courts

with groundless cases if they could be disposed of quickly by a judge or magistrate,

with little delay in summons compliance. Under a similar motion-to-quash

procedure, only 15 motions to quash were filed under the Right to Financial

Privacy Act in the first eight months it was in effect.3

I would like now to discuss the H.R. 6764 appeal procedures. The GAO statistics

make it apparent that the appeal procedures would affect only relatively few

cases. However, when appeals do occur, they can have considerable importance

because of their potential for delaying the investigation for years, and because of

the important substantive rights that may be involved. The appeals provisions

must also be carefully considered because they raise other important issues

respecting the administration of the revenue laws.

Under H.R. 6764, if a taxpayer is denied a motion to quash in a final decision

of the district court, the recordkeeper is obligated to turn over forthwith the

summoned records to the Government. The taxpayer may not immediately appeal

the denial of his motion to quash. Instead, in order to appeal he must wait until

either he or the Government files a substantive tax action•viz, a criminal proceeding or collection action filed by the Government; a refund suit or Tax Court

action filed by the taxpayer; or bankruptcy proceedings. The taxpayer may then

press the allegedly improper denial of his motion to quash as a basis for appealing

the substantive tax action. If he prevails on the appeal, the taxpayer is entitled

to damages and attoryens' fees. If no substantive tax action is brought, the taxpayer would lose his right to appeal the summons question.

We submit for your consideration a somewhat different approach, which would

allow every taxpayer an opportunity for immediate appeallte review of the final

denial of his motion to quash. After the district court denied the motion to

quash, the taxpayer would be required to obtain a stay of the order from the

court of appeals within 10 days in order to stop the recordkeeper from complying.

The court of appeals would apply the usual stay requirements, which include a

demonstration of the taxpayer's irreparable injury plus a showing that the taxpayer is likely to prevail. Only if the stay were granted could the taxpayer proceed

with his appeal, because in the Government's view the turnover of the records

moots the appeal. The appellate stay•and thus the time period for deciding the

appeal•would be limited to six months.

The appeal procedure we suggest would contain a valuable provision for expediting district court proceedings. H.R. 6764 has provisions requiring the court to

enter its decision 10 days after the Government's response is filed. Similar deadlines in the Right to Financial Privacy Act and Code Section 7429 have consistently been ignored, however. Accordingly, we suggest that, if the district court

or magistrate does not issue a final decision within 30 days of the filing of the

Government's response to the motion to quash, the Government should be able

to issue an administrative order•a so-called certificate of compliance. If the

taxpayer did not obtain an appellate stay of such certificate within 10 days, the

recordkeeper would have to turn over the records to the Government. This procedure would be somewhat similar to that in Section 3310 of the Internal Revenue

Code, which provides for prompt enforcement by the Internal Revenue Service

of certain orders of the Secretary of Labor, unless a stay is obtained from the

court of appeals. This provision would provide extra assurance that the district

court or magistrate would quickly adjudicate motions to quash.

We believe that the immediate appeal procedure which we suggest is preferable

to the delayed appeal procedure in H.R. 6764 for several reasons.

First, we would like to see a continuation of the current procedure of allowing

taxpayers an opportunity to have an immediate appellate review before any turnover of records to the Government, with certain expediting refinements. By

contrast H.R. 6764 follows the Right to Financial Privacy Act model, which

requires deferred appeals in recordkeeper summons cases, even though immediate

appeals would still be allowed in all other tax summons cases. We submit that it

may be preferable to allow immediate appeals in all summons cases, and think it is

possible to do so.

Second, we would prefer to have provisions which would give all taxpayers who

lose in the district court an opportunity to obtain appellate review of the summons

' Administrative Office of the United States Court, "Report on the Applications for Delays of Notice and Customer Challenges under Provisions of the Right to Financial Privacy Act

of 1978."
117

issue in recordkeeper cases, as they can in all other summons cases. We recognize

that H.R. 6764 has departed from the Right to Financial Privacy Act in this

regard, presumably in recognition of the difficulties in drafting and administering

analogous appeal provisions because of the multiplicity of types of tax litigation.

Nonetheless, the immediate appellate review which we suggest, which is somewhat

more limited than that under the current Section 7609, which seem to be workable

while allowing all taxpayers and intervenors the right of appeal, and yet avoiding

the difficulties which H.R. 6764 properly anticipates.

Third, we think that there is much merit in the current summons procedure of

allowing taxpayers an opportunity to obtain appellate review in virtually all cases

before the records have to be turned over to the Government, and suggest that

this procedure be continued if possible in the appeals provisions. H.R. 6764 defers

the taxpayer's appeal until after the records are turned over to the Government,

which of course has the obvious effect of assuring the delays end when the trial

court issues its decision. Nonetheless, we think that appellate stay provisions can

be drafted which would dispose of groundless taxpayer appeals within a few days,

but which would assure that taxpayers, financial institutions, and the Government

would have the benefit of a prompt appellate decision in taxpayer or intervenor

appeals raising important and substantial issues.

Fourth, we think that it would considerably expedite summons litigation if the

statute contained a provision allowing the Government to issue the administrative

certificate of compliance requiring turnover of records within 10 days, if the

district court unduly delayed its decision and the taxpayer or intervenor was

denied an appellate stay of the certificate. We think that some such procedure is

necessary, because experience under the Right to Financial Privacy Act and other

statutes indicates that trial courts frequently do not heed time limitations on

decisions, such as the 10-day limit in H.R. 6764. Such a certificate of compliance

would probably only be practicable if the statute contained immediate appeal

provisions along the lines which we recommend.

Two other points should be mentioned. Under current law, the statutes of

limitations for tax purposes are suspended from the time the Government brings

the summons enforcement action until the litigation has been concluded. H.R.

6764 would continue this pattern, suspending the limitations period for the period

from the time the taxpayer files the motion to quash until such litigation has been

concluded. Because frequently a significant amount of time elapses after conclusion of litigation before the records are turned over to the Service, we suggest that

the suspension period be extended until such turnover is complete. Moreover, we

urge that the H.R. 6764 statute of limitations period be applied to Section 7602

nonrecordkeeper summonses as well. We fear that if H.R. 6764 eliminates delays

from recordkeeper cases, taxpayers might try to delay investigations by protracting nonrecordkeeper summonses, absent a limitations suspension provision.

We also wish to note that H.R. 6764 defines the persons who are entitled to

receive the notice and file a motion to quash somewhat differently from current

law. H.R. 6764•like the Right to Financial Privacy Act•excludes from the terms

of the statute corporations, and partnerships containing more than five persons.

We agree with this exclusion, because such corporations and partnerships are

normally more commercial in character, and have less basis for protecting their

financial records from disclosure.

In conclusion, we believe that H.R. 6764•particularly if it can embody some

or all of the refinements we suggest•will go a long way toward eliminating major

delays in the tax investigation process, thereby enabling the Internal Revenue

Service to make better use of its investigative resources. These changes should

also reduce court congestion and expedite trial and appeal of cases challenging

recordkeeper summonses.

S. 2403 WITH PROPOSED REFINEMENTS

(a)(1):

(a) Notice.•

(1) In General.•If•

(A) any summons described in subsection (c) is served on any person who is a third-party recordkeeper, and

(B) the summons requires the production of any portion of records

made or kept of the business transactions or affairs of any person (other

than the person summoned) who is identified in the description of the

records contained in the summons.
118

then notice of the summons shall be given to any person so identified within 3

days of the day on which such service is made, but no later than the 14th day

before the day fixed in the summons as the day upon which such records are

to be examined. Such notice shall be accompanied by a copy of the summons

which has been served and shall contain directions for staying compliance

with the summons under subsection (b)(2). Such notice shall be accompanied

by a copy of the summons which has been served and shall contain directions

for filing a motion to quash the summons under subsection (b)(2). [Current

law with last sentence as added by S. 2403.]

(a)(2):

(2) Sufficiency of Nohce.•Such notice shall be sufficient if, on or before

such third day, such notice is served in the manner provided in section

7603 (relating to service of summons) upon the person entitled to notice,

or is mailed by certified or registered mail to the last known address of

such person, or, in the absence of a last known address, is left with the

person summoned. If such notice is mailed, it shall be sufficient if mailed

to the last known address of the person entitled to notice or, in the case

of notice to the Secretary under section 6903 of the existence of a fiduciary relationship, to the last known address of the fiduciary of such

person, even if such person or fiduciary is then deceased, under a legal

disability, or no longer in existence. [Current law.]

(a)(3):

(3) Definitions.

(A) "Third-party recordkeeper means•

(i) any mutual savings bank, cooperative bank, domestic

building and loan association, or other savings institution

chartered and supervised as a savings and loan or similar

association under Federal or State law, any bank (as defined in

section 581), or any credit union (within the meaning of

section 501(c) (14) (A));

(ii) any consumer reporting agency (as defined under section

603(d) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f));

(iii) any person extending credit through the use of credit

cards or similar devices;

(iv) any broker (as defined in section 3(a)(4) of the Securities

Exchange Act of 1934 (15 U.S.C. 78c(a)(4));

(v) any attorney; and

(vi) any accountant.

(B) "Persons entitled to notice" means any individual or partnership of not more than five individuals. [As amended by S. 2403.]

(a)(4):

(4) Exceptions.•Paragraph (1) shall not apply to any summons•

(A) served on the person with respect to whose liability the

summons is issued, or any officer or employee of such person,

(B) to determine whether or not records of the business transactions or affairs of an identified person have been made or kept, or

(C) described in subsection (f). [Current law.]

(a)(5):

(5) Nature of Summons.•Any summons to which this subsection

applies (and any summons in aid of collection described in subsection

(c)(2)(B)) shall identify the taxpayer to whom the summons relates

or the other person to whom the records pertain and shall provide

such other information as will enable the person summoned to locate

the records required under the summons. [Current law.]

(b)(1):

(1) Challenge to Summons.•

Within fourteen days after the day notice is given in the manner

provided in subsection (a)(2), a person entitled to notice of a summons

under subsection (a) may file a motion to quash the summons with

copies served upon the person summoned, upon the Attorney General

and the United States Attorney for the district where the motion

is filed, and upon such person and to such office as the Secretary may

direct in the notice referred to in subsection (a)(1). Service shall be

made under this subsection by delivering or mailing by registered

or certified mail. A motion to quash a summons shall be filed in the

United States district court for the district in which the person en-
119

titled to notice resides. Such motion shall contain an affidavit or

sworn statement stating•

(A) that the movant is the person to whom the records sought by

the summons relate; and

(B) the reasons that the records sought are not relevant to a

legitimate tax inquiry or any other legal basis for quashing the

summons. [Subsection (b) (2), paragraph one, of S. 2403, as modified.]

(b)(2):

(2) If the court finds that a person entitled to notice under subsection

(a) has complied with subsection (b)(1), it shall order the United States

to file a response within 20 days. The United States may file a response

whether or not it is ordered to do so. [Subsection (b)(2), paragraph two

of S. 2403, as modified.]

(b)(3):

(3) Within ten days after the motion to quash is served, the person

summoned may file a motion to intervene containing an affidavit or

. sworn statement setting forth the specific grounds therefor, with service

upon the United States as prescribed in subsection (b)(1). Failure to

intervene in the motion-to-quash proceeding shall be deemed a waiver

of the objections of the person summoned to enforcement. The person

summoned may object to the summons on any legal basis. The court

may order the United States to file a response to the motion to intervene.

The response shall be due within 20 days. The United States may file a

response whether or not it is ordered to do so. [New.]

(b)(4):

(4) If the court is unable to determine the motion to quash or the

motion to intervene on the basis of the parties' initial allegations and

response, the court may conduct such additional proceedings as it deems

appropriate. All such proceedings shall be completed and the motion or

application decided within ten days after the filing of the response of the

United States to the motion to quash, or the response of the United

States to the motion to intervene, whichever is later. [Subsection (b) (2).

paragraph two, of S. 2403, as modified.]

(b)(5):

(5) The challenge procedures of this section constitute the sole

judicial remedy available to a person entitled to notice under subsection

(a) to oppose disclosure of records summoned pursuant to this section.

[Subsection (b)(2), paragraph four, of S. 2403, as renumbered.]

(b)(6):

(6) Nothing in this section shall entitle a person entitled to notice

under subsection (a) to assert the rights of a third-party. [Subsection

(b)(2), last paragraph of S. 2403, as renumbered.]

(c):

(c) Summons to Which Section Applies.•

(1) In General.•Except as provided in paragraph (2), a summons

is described in this subsection if it is issued under paragraph (2) of

section 7602 or under section 6420(e)(2), 6421(f)(2), 6424(d)(2), or

6427(g)(2) and requires the production of records.

(2) Exceptions.•A summons shall not be treated as described in

this subsection if•

(A) it is solely to determine the identity of any person having a

numbered account (or similar arrangement) with a bank or other

institution described in subsection (a)(3)(A), or

(B) it is in aid of the collection of•

(i) the liability of any person against whom an assessment

has been made or judgment rendered; or

(ii) the liability at law or in equity of any transferee or

fiduciary of any person referred to in clause (i).

(3) Records; Certain Related Testimony.•For purposes of this section•

(A) the term "records" includes books, papers, or other data, and

(B) a summons requiring the giving of testimony relating to

records shall be treated as a summons requiring the production of

such records. [Current law.]
120

(d):

(d) Restriction on Examination of Records.•No examination of any records

required to be produced under a summons as to which notice is required

under subsection (a) may be made•

(1) before the expiration of the 14-day period allowed for the motion

to quash under subsection (b)(2), or

(2) upon the filing of a motion to quash pursuant to subsection (b) (2)

except in accordance with an order of the court, or a certificate of

compliance issued pursuant to subsection (j). [S. 2403, as modified.]

(e):

(e) Suspension of Statute of Limitations.•If any person is a party to a

summons enforcement action brought under section 7602 or a motion to

quash proceeding brought under subsection 7609(b), and such person is the

person with respect to whose liability the summons is issued (or is the agent,

nominee, or other person acting under the direction or control of such person,

or the attorney, accountant, or partner of such person, or a corporation

of which such person is a controlling shareholder), then the running of any

period of limitations under section 6501 relating to the assessment and collection of tax) or under 6531 (relating to criminal prosecutions) with respect to

such person shall be suspended for the period consisting of (1) the time when

there is pending a proceeding, and appeals therein, with respect to any litigation relating to the summons, plus (2) the additional time until all production

orders of the court, and any certificate of compliance issued pursuant to subsection (j), are satisfied. [S. 2403, as modified.]

(f):

(f) Additional Requirement in the Case of a John Doe Summons.•Any

summons described in subsection (c) which does not identify the person with

respect to whose liability the summons is issued may be served only after a

court proceeding in which the Secretary establishes that•

(1) the summons relates to the investigation of a particular person or

ascertainable group or class of persons,

(2) there is a reasonable basis for believing that such person or group

or class of persons may fail or may have failed to comply with any

provision of any internal revenue law, and

(3) the information sought to be obtained from the examination of

the records (and the identity of the person or persons with respect to

whose liability the summons is issued) is not readily available from other

sources. [Current law.]

(g)(1):

(g) Special Exception for Certain Summonses.•

(1) In the case of any summons described in subsection (c), the

provisions of subsections (a)(1) and (b) shall not apply if, upon petition

by the Secretary, the court determines, on the basis of the facts and

circumstances alleged, that there is reasonable cause to believe the

giving of notice may lead to attempts to conceal, destroy, or alter records

relevant to the examination, to prevent the communication of information from other persons through intimidation, bribery, or collusion, or

to flee to avoid prosecution, testifying, or production of records. [Current

subsection (g), as renumbered.]

(

e

)(2):

(2) If the court or magistrate issues an order under subsection (g) 1),

it shall have jurisdiction to enter an ex parte order prohibiting the

rccordkeeper from disclosing that records have been obtained or that a

request for records has been made. [New.]

(h):

(h) Jurisdiction of District Court.•

(1) The United States district court for the district within which the

person to lie summoned resides or is found shall have jurisdiction to

hear and determine proceedings brought under subsections (f) or (g).

The determinations required to be made under subsections (f) and (g)

shall be made ex parte and shall be made solely upon the petition and

supporting affidavits. An order denying the petition shall be deemed a

final order which may be appealed.

(2) Except as to cases the court considers of greater importance, a

proceeding brought for the enforcement of any summons, or a proceeding
121

under this section, and appeals, take precedence on the docket over all

cases and shall be assigned for hearing and decided at the earliest

practicable date. [Current law.]

(i):

(i) Duly of Third Party.•Upon receipt of a summons described in subsection (c), the third-party recordkeeper shall, unless otherwise provided by

law, proceed to assemble the records requested and must be prepared to

produce the records pursuant to the summons on the day upon which the

records are to be examined, or in the event a motion to quash has been filed,

within ten days after entry of (1) the final order of the district court or

magistrate, or (2) the issuance of the certificate described in subsection (j).

Any third-party recordkeeper, or agent or employee thereof, making a disclosure of financial records pursuant to this section in good-faith reliance upon

a certificate described in subsection (j), or an order of a court requiring production of records, shall not lie liable to any customer or other person for

such disclosure. [S. 2403, as modified.]

(j):

(j) If a final order of the district court or magistrate has not been filed within

30 days after the last response of the United States described in subsection

(b)(4), the United States may certify in writing to the recordkeeper described in subsection (c) that it has complied with the applicable provisions

of this section. The recordkeeper shall produce the summoned books or other

data ten days thereafter, unless prior to that time the district court or

magistrate quashes the summons or a stay is obtained pursuant to subsection

(k). [New.]

(k):

(k) Denials of Motion to Quash; Jurisdiction of Courts of Appeals.•The

courts of appeals, or a judge thereof, shall have jurisdiction, pending a hearing

by the court:

(1) to stay an order of the district court or magistrate under this section

ordering or staying compliance with a summons;

(2) to stay a certificate of compliance issued pursuant to subsection

(j); or

(3) to modify or dissolve an order staying a certificate of compliance

issued pursuant to subsection (j).

Such order of the court of appeals shall be filed within ten days after there has

been filed in the court of appeals either (i) an application for stay, or (ii) an

application for modification or dissolution of a district court stay.

The total period during which the court of appeals may stay an order

requiring compliance, or a certificate of compliance, shall not exceed 6 months.

(1):

(1) Jurisdiction of Magistrates.•

(1) A United States magistrate, when designated or requested pursuant to section 636(b) (3) and (c) (1) of Title 28, may exercise jurisdiction

over all proceedings under this section, and submit a recommended final

decision or final order to the district court.

(2) A United States magistrate, when designated or requested pursuant to section 636(b) (3) and (c) (1) of Title 28, may exercise jurisdiction

over all proceedings under this section, and issue a final decision or final

order, where the parties to the litigation consent to jurisdiction pursuant

to the procedures in section 636(c)(1) and (2) of Title 28. [New.]

Mr. CSONTOS. I would like to briefly discuss the issues involved.

In 1976 when the legislation was enacted, the committee was concerned about the use of the administrative summonses by the Internal

Revenue Service and their effect on the civil rights of taxpayers including the right to privacy. The committee realized IRS could not

do its job in investigating the civil and criminal provisions of the

Internal Revenue Code without this necessary tool.

The objective was to provide taxpayers with a reasonable and speedy

means to challenge summonses when appropriate, and the mechanism

that the Congress adopted was to provide a taxpayer with notice

that a summons would be issued to a bank or other third-party record-
122

keeper. He didn't have that right before. You gave him the right to

stay compliance with that summons. He didn't have that right before.

You gave him the right of standing. In other words his arguments

could be heard by the court in the enforcement proceeding. This was

also a right that he did not previously have.

No we are not here to suggest to you that you take away any of

these three rights that you gave in 1976. What we are telling you is

that the procedure is too informal; it is too easy; and too many people

are taking advantage of it when they don't desire to participate in a

court proceeding. You gave taxpayer these rights so that they could

get court protection and you didn't give it to them so they could solely

be used for delay. The letter objection procedure•by that I mean the

taxpayer merely has to send a letter to the bank saying "I want you

to not comply with the summons"•is just too informal. There are no

grounds that must be stated and yet it has the effect of a judicial

injunction because the bank cannot turn the records over and the IKS

cannot accept them.

What happens at that point is that the investigation is stymied,

blocked, and impeded. The investigator turns the matter over to the

lawyers at the IRS who then turn the matter over to the lawyers of

Justice for the preparation of a suit to enforce the summons. We prepare a petition for enforcement of a summons. We prepare an affidavit

of the investigator describing the investigation and the need for the

records. We prepare a proposed show cause order which the judge

would then review and sign. Typically, the order would direct the

bank to appear at a hearing to present its objections or otherwise to

notify the court if it had no objections.

Of course at that proceeding the taxpayer under the 1976 legislation

has the right to intervene to assert his rights. What we have found is

that in most cases taxpayers who stay compliance by sending a letter

to the bank don't have any interest in showing up in court and defending their rights. What we are suggesting is that the subcommittee and

the full committee consider changing these procedures without modifying the basic rights that you gave taxpayers in 1976. The administration's position is that the Congress found a better way to solve the

problem in the Right to Financial Privacy Act enacted in 1978. The

taxpayer would still get notice, would still be able to keep the IRS

from getting the records or the bank from turning them over, and

would have standing in a court proceeding to raise his arguments.

But he would have to start the court proceeding.

Now the benefit of this approach is twofold. First, the customer

would have to demonstrate that he intended to participate in the

court proceeding because he would be the one that started the proceeding. We would not have to go through the process of preparing

the legal papers, having them reviewed by a district court judge, and

then finding that our time and his time was wasted because the taxpayer stayed at home. Second, the taxpayer would have to set out his

objections.

I am sorry that representatives of the American Bar Association

Tax Section are unavailable this week and weren't able to testify

before you, because over on the Senate side they fully supported our

suggestion for enactment of the motion of quash procedure. The ABA,
123

of course, represents the attorneys on the other side of the fence•

when we seek to enforce a summons, they try to protect the taxpayer

and keep the IRS from getting the information.

The ABA along with us believes that present procedure needs

technical change that will not take away these rights that you gave

the taxpayer in 1976.

There have been some concerns voiced about the question of whether

the taxpayer should be allowed an immediate appeal where the court

denies a motion to quash. The legislation that Senator Nunn introduced and H.R. 6764, the bill pending in the Ways and Means Committee, would provide that there would not be any immediate right of

appeal. Those provisions are patterned after the Right to Privacy Act.

Over on the Senate side some of the witnesses voiced objections to

that proposal and argued that there should be an immediate appeal.

Mr. JENKINS. Could I interrupt right there. You could always raise

that question, I assume, in a motion to suppress?

Mr. CSONTOS. Under the present law you can to the extent that the

taxpayer has standing. That would also depend upon how the bill was

drafted. A provision of the Right to Privacy Act suggests that you

would not be able to raise the matter simply in a motion to suppress,

but would have to raise it under the procedures of the act. Under

present law relating to IRS summonses, you are correct to the extent

that standing exists.

However, if you appeared in a summons proceeding and you lost at

that stage, there is some court precedent for the proposition that you

cannot relitigate that matter in the criminal proceeding.

But that is under present law where there is a right of appeal to the

circuit courts. There is no total answer on this right of appeal. I find

it interesting that the Privacy Commission, when it issued its report

on privacy matters in general, agreed that there should not be an

immediate right of appeal. The idea is clearly not that far fetched in

view of the Privacy Commission's recommendation that there should

not be an immediate right of appeal.

The administration's proposal does allow an immediate right of

appeal, but has a limitation on the time in which the court could

consider the matter. That proposal is not carved in stone and there

may be other acceptable approaches.

There are some problems of delay in the courts of appeal. In the

fifth, sixth, and ninth circuits, it can sometimes take 2 to 3 years to

get a decision. On the other hand in the summons enforcement area

now, we have been fairly successful in convincing district courts or

courts of appeal that they should not stay the effect of a court order

enforcing a summons, and as a result, there is no hearing in the court

of appeals.

At the district court level I might add, the courts are also quite

overburdened and it does take some time under present law to get

those cases heard. The time varies greatly from district to district.

It could be 3 months in some districts and it could be 9 months in

others. I think that problem may become exacerbated when the full

impact of the Speedy Trial Act is felt in the courts, with the courts

having to give priority to criminal cases.

In conclusion, I would like to reiterate that we are not proposing

to take away the right of notice, and we are not proposing to allow
124

the IRS go get access to records and banks to turn them over before

the court has had the opportunity to hear the matter. We are not

proposing that the taxpayer should not have the right to be heard.

We are suggesting that if the taxpayer wants to be heard, he should

start that proceeding, he should participate in it, and he should not

have the opportunity to simply delay the investigation by sending a

letter telling the bank not to comply.

Mr. GIBBONS. HOW much time would you give the taxpayer?

Somebody has to notify him. How much time after you notify him

would he have?

Mr. CSONTOS. The proposal pending before the committee and our

own proposal would give 14 days. That is taken from the provisions

of the law that enacted in 1976, section 7609, under which the taxpayer

must send a letter to the bank within that period of time. The time

period is also identical to the time provisions of the Right to Privacy

Act, which apply when any other Federal agencies besides the IRS,

until a few months from now the SEC, tries to get financial information. Thus, there is precedent for the 14-day period.

Mr. GIBBONS. HOW would any of those proposals affect the little

session that you and I participated in during an oversight hearing on

May 20? Do you remember, Mr. Commissioner, we had a taxpayer

from Alaska, I think it was, who came to the hearings and said he

wanted you to testify about his tax return. 1 told the subcommittee

that he wanted you to testify about his tax return and in fact he put

his waiver of disclosure in writing. We put this waiver in the record

that he wanted you to testify about his tax return and the tax return

information. Then you said you couldn't.

Commissioner KURTZ. I think that there is nothing that would

change that. Perhaps it would be useful if I take just a minute to point

out that there are a number of differences between Senator Nunn's

bill and your bill and the administration's bill. Some of them are a

little hard to see because they start from somewhat different places.

But I think there is one overwhelming essential difference which I

think really goes to the heart of the matter. That is the question of

what rights a taxpayer has, an individual taxpayer has in his books

and iecords, has under existing law as well as under the administration's suggested revisions to existing law, as to information or evidence

of a nontax crime. That is, we find in an individual's books and records,

or whatever we may look at during the course of that examination

provided by him, and not third parties, we get from him in examining

those documents and whatever else we examine in connection with

the audit of his tax return, if we find evidence of a nontax crime, that

resides with us.

That does not go to the Justice Department on our own. The

Justice Department can get that information if it has some reason

to believe that there is a crime that it is investigating and a reason to

believe that that can be relevant. They can apply for a court order and

get that information. But during the course of an examination, we do

not spontaneously volunteer whatever evidence of a nontax crime

we may find. In Senator Nunn's bill that protection extends only to

the tax return and the supporting schedules that may be filed with it.

So that if we were to examine an individual's return and in the course

of that examination find from his own records evidence of a nontax
125

crime, we would be obligated under that bill to turn it over to the

Justice Department. That really is the central issue, it seems to me,

that differentiates the two bills. There are issues and there are a

number of them that are really peripheral to that central issue.

Mr. NATHAN. If I could add a footnote to that, I understand from

Senator Nunn's testimony here and also his response to questions in

the Senate Finance Committee that he would be willing to reexamine

that question and provide judicial protection to those kinds of underlying financial records submitted by a taxpayer to support the tax

return. So I don't think that that is a fundamental difference.

Mr. GIBBONS. We are talking about an individual taxpayer?

Mr. NATHAN. Yes.

Mr. GIBBONS. HOW about a corporation?

Commissioner KUKTZ. Under existing law corporations and individuals are treated the same.

Mr. GIBBONS. That is under the 1976 law?

Commissioner KURTZ. Yes, and corporations have the same level of

protection that individuals have. The administration's proposal would

change that as to certain corporations and as you heard there is some

flexibility as to which corporations, but we will change that and provide that information evidencing a nontax crime that is developed

from a corporation's books and records in the course of an examination

would be turned over to the Department of Justice.

Mr. NATHAN. It would not be all of the books and records of the

corporation that would be submitted in support of the tax return. It

would be only when the Internal Revenue Service found evidence of a

significant Federal nontax crime. That information, not all of the

books and records, but only that information constituting evidence

of the crime, would be turned over.

Mr. GIBBONS. Would it apply to a labor union?

Commissioner KURTZ. AS the administration policy now stands,

it will apply only to corporations other than one person corporations.

That is one shareholder corporations. Other entities would have the

same protection as individuals.

Mr. GIBBONS. What is a labor union? Is it a corporation or what is

it?

Commissioner KURTZ. It is a nonprofit association or corporation.

Mr. GIBBONS. SO it would include the unions' records?

Commissioner KURTZ. They are not shareholder corporations. The

proposal as it now stands is directed to shareholders, to commercial

corporations.

Mr. JENKINS. Under existing law, if a Senator, let us say, lists on

his income tax return that he has received a $200,000 bribe and listed

it as a bribe, you cannot reveal that?

Commissioner KURTZ. Not spontaneously, but if the Justice Department were to say "We are investigating whether Senator X received

a bribe; we would like to see his tax return," and applies for a court

order, then it would be turned over.

Mr. JENKINS. Under the administration's proposal, you still could

not reveal thatinformation?

Commissioner KURTZ. It would be the same.

Mr. JENKINS. Under Senator Nunn's proposal, it would be an affirmative action.
126

Commissioner KURTZ. Under Senator Nunn's proposal you still

could not if it is on the return. But let us assume the return says

"miscellaneous income $200,000" and we happen to examine Senator

X and discovered in the course of the examination that the $200,000

miscellaneous income was a bribe, under Senator Nunn's proposal we

would then be obligated to turn that information over. Under existing

law we would not.

Mr. NATHAN. Under the administration's proposal you would be

able to get that information if it came from something other than the

Senator's own books and records.

Mr. JENKINS. If in fact he listed it on the return?

Mr. NATHAN. We would not have it unless we had an ex parte court

order.

Commissioner KURTZ. And the theory behind that is that he is

obligated as a matter of law to in fact report that income. To have a

rule otherwise, you then put the individual in the dilemma of either

committing a second crime, namely tax fraud, or confessing to the

first crime.

Mr. JENKINS. And by the same token, of course, if that narcotics

trafficker listed on his individual return X number of dollars for narcotics from an individual, you could not reveal that.

Commissioner KURTZ. Not spontaneously.

Mr. JENKINS. When you say "spontaneously," whatis that?

Commissioner KURTZ. That is without a request, that is at our own

initiative we could not, that is correct.

Mr. JENKINS. Or disclose that some IRS employee after examining

a return had orally told the Department of Justice or provided the

information really without a request, when could that defendant

contest that? In other words, you have an agent who picks up the

phone and calls the Department of Justice.

Commissioner KURTZ. Well, the employee himself would have violated section 6103 and therefore might be liable for civil and criminal

sanctions.

Mr. JENKINS. But under the administration's proposal you are

going to take that away?

Commissioner KURTZ. Civil liability.

Mr. NATHAN. The taxpayer who was aggrieved would still have a

right to file a lawsuit against the Government and to recover his

actual damages or the statutory damages. It just would not be the

individual who would be a defendant. It would be the Internal Revenue Service or the executive branch.

In addition, that individual, if the tax information were to be

utilized in a criminal prosecution, could make a motion, I think, to

suppress that information. That is because it was improperly obtained

by the Department of Justice.

Mr. JENKINS. The only thing I want to make sure in my own mind

is that a taxpayer, a defendant, at some point has the right of appeal,

whether it be in a motion to suppress, or at some point in the criminal

{>roceedings. I think it is important that his right of appeal be absoutely protected.

Mr. NATHAN. He would have the right to bring that matter to the

district court's attention to suppress the tax information. Of course
127

if he were convicted, if he lost the motion in the district court, if he

were convicted, he would have the right to appeal that.

Commissioner KURTZ. The answer to that question is not all clear,

though, that is whether the evidence would actually be excluded.

Mr. COHEN. There is not a constitutional right. This is a statutory

right. I have some real question as to whether that evidence would be

excluded at the subsequent criminal trial.

Mr. JENKINS. I would think he ought to have the right of appeal to

bring this question up.

Mr. GIBBONS. TO have the evidence suppressed as being illegally

obtained?

Mr. JENKINS. I know the hour is running late but you indicated

that a lot of taxpayers simply write a letter of objection. Do you have

any figures on that that you could give us? Do you have any statistics

which bear that out?

Mr. CSONTOS. I do not have any at the Justice Department. I

notice in Senator Nunn's statement refers to a study in which 80 percent of the taxpayers did not show up in court.

Mr. JENKINS- When you notify the taxpayer I assume that you

advise him that he has the right to object to this by informing the

bank?

Mr. CSONTOS. Yes.

Mr. JENKINS. And as a result of that advice most of the taxpayers

write the letter?

Mr. CSONTOS. I think that I would if I were in that position as

well. The taxpayer has nothing to lose at that point in my judgment.

Mr. JENKINS. That is what I would advise my client.

Mr. GIBBONS. For a 15-cent stamp you can get a lot of protection.

In fact, I would tell him to hand deliver it over there.

Mr. PARNELL. I have one question that goes to the differentiation

between the corporations. Has any thought been given by any of

the administration witnesses to distinguishing between corporations

that are required to register with the SEC and those that are not•

drawing the line there, by saying that return information or tax

returns of those corporations registering with the SEC are public?

You would avoid the problem that was discussed earlier about one,

two, and three shareholder corporations and the rest.

Mr. NATHAN. I think some consideration has been given to that.

The problem is it does not relate to getting access to this information.

For example, if we are looking at narcotics dealings and we have,

and this is a fact, we have some situations where you have small

corporations which sell boats and airplanes or lease boats and airplanes or otherwise are involved in the periphery of narcotics trafficking and the books and records of those small corporations, which

are not listed on the public exchanges and are not subject to the

SEC, contain the information about large cash transactions with

individuals and also contain perhaps indications of large cash payments to certain kinds of public officials who look the other way in

terms of narcotics trafficking.

That kind of information which is on corporate books and records

and could be in the hands of another Federal agency, namely the

Internal Revenue Service, should be provided to the appropriate
128

Federal law enforcement agency for pursuit as to whether or not this

is evidence of nontax crimes committed either by that corporation, by

its officers or by customers of that corporation.

Mr. PARNELL. Commissioner Kurtz, do you have any comments?

Commissioner KURTZ. Yes, but I am here to support the administration's position.

Mr. GIBBONS. That is a good answer. Let me ask you a question.

Under existing law, if an officer of a publicly held corporation came

to me or anybody else and said, "I want to disclose to you some

information on my corporation's tax return," could he disclose that

to me?

Commissioner KURTZ. Yes. That applies to Government employees and others who get information through those channels.

Mr. GIBBONS. But under the present law, an officer could disclose

the corporate tax return to me.

Commissioner KURTZ. It would not be a violation of 6103, and

whether it would be any other violation I do not know.

Mr. JENKINS. There is another problem, in response to the corporate

situation. There have been a lot of bankruptcy fraud cases or mail

fraud cases where there were 50 or 60 corporations that were nothing

more than conduits. Even under the prior law, often by the time the

Justice Department times traced all of this through the series of

corporations that were set up just for a criminal purpose, the defendant had died.

It took them so long, under the best of circumstances, to unravel all

of the maze of corporate records. Under the present law I would say

the job would be 10 times more difficult.

Mr. NATHAN. It doesn't make much sense to us, where information

from corporate books and records in the hands of the Internal Revenue

Service shows on its face that there is mail fraud or bankruptcy fraud

or that these corporations are simply shells and are not legitimate

enterprises and are essentially set up to cover up criminal activities,

that that kind of information cannot be passed along to law enforcement officials.

There is no policy served by permitting that kind of information to

go undisclosed. There is a policy when we are talking about individuals

because you are asking those individuals to essentially forego their

fifth amendment privilege and to talk honestly to the Internal Revenue

Service and come forward with their tax liability.

But the corporation which does not have this right has not given

anything up by showing these books and records to the Internal

Revenue Service.

It seems on its face, if is shows evidence of serious Federal crimes,

that ought to be turned over to appropriate officials.

Mr. PARNELL. I have just one question about that. It is true, I

believe, that small businesses have the lowest rate of voluntary compliance with the tax laws, as shown in studies by the Internal Revenue

Service, and if it is also true that the confidential status of tax returns

and taxpayer information is to encourage honest and accurate reporting, it would seem that to remove confidentiality for small corporations

would make a poor compliance record even worse.

Mr. NATHAN. I look at it from the opposite perspective. If what you

say is true
129

Mr. PARNELL. Assuming you are a law enforcement officer?

Mr. NATHAN. I am assuming that your facts are true, and I don't

know that they are, but assuming that you have low compliance

among small business and they presently have the complete coverage

in terms of confidentiality, and that the Internal Revenue today,

even if it found serious tax crimes on the books and records of small

corporations, could not on its own initiative turn that over, then it

seems that confidentiality has not enhanced the tax collection system

for the small businesses. I would say, further, in respect to the point

that Senator Weicker made, it if were true that there is a direct correlation between confidentiality, and compliance under our selfassessment system, there should be evidence of tremendous growth

in the last 4 or 5 years•in the light of that statement•in tax

compliance.

I don't think it has been suggested that there has been that outpouring. I think the evidence of any correlation between confidentiality•which we all support in terms of the privacy of taxpayers•

there is little distinct or direct correlation between confidentiality

and compliance.

Mr. GIBBONS. I have always felt that "voluntary compliance" was

sort of like the volunteers we used to get in 1943. If a 21-year-old

fellow told you he was a volunteer, he meant that he was a volunteer

when the Draft Board breathed down his neck so hard.

Mr. Kurtz, I know you put a lot of emphasis on voluntary compliance, but if you didn't have a few criminal prosecutions that weren't

well advertised now and then, I think voluntary compliance would

slip something horrible. That would be my offhand guess; it would

be like 1943 all over again as far as volunteers are concerned.

Mr. GIBBONS. I had some more questions but it would take a long

time to go into them tonight. If we have to get into this field, we are

going to need your active cooperation because it is a very technical

field and one where we will need all of the help we can get.

Mr. NATHAN. We pledge all of our assistance to you.

Mr. GIBBONS. I hope you will be as candid as you can. I realize the

administration does not always come forward united on an issue, and

if you don't really thoroughly agree with us, we will try to work it

out without causing embarrassment to you.

I am not sure we are going to get into this field, but we want to be

prepared if we do. We will have some questions for you from our

minority counsel.

Thank you very much.

The next panel of witnesses to help usu nderstand this problem a

little better is from the American Civil Liberties Union and from the

Taxation With Representation Fund.

We will take you in the order in which you are listed on the agenda

here. Mr. Shattuck, you may proceed first.

STATEMENT OF JOHN H. F. SHATTUCK, DIRECTOR, AMERICAN

CIVIL LIBERTIES UNION, WASHINGTON OFFICE

Mr. SHATTUCK. It is a pleasure to appear here, despite the lateness

of the hour, and to have the good fortune to appear before your subcommittee again. In fact, in 1977 when you were also considering
130

amendments to the Tax Reform Act I was pleased at that stage to

appear.

Mr. GIBBONS. We had Attorney General Bell with us at that time,

too, as I recall.

Mr. SHATTTJCK. Mr. Chairman, my organization has long taken an

interest in the matter of privacy and particularly taxpayer privacy.

Mr. GIBBONS. We are glad you have, and we think you have done

a fine job.

Mr. SHATTTJCK. Thank you very much.

I have submitted a lengthy statement for the record which I will

summarize.

Mr. GIBBONS. We will put all of that in the record.

Mr. SHATTTJCK. To jump right to the major point, I would respectfully submit that the case has not been made for many of the proposals

that are under consideration by the subcommittee. That is not to say

all of them. There are some that I think are reasonable, but there is

little evidence that information about nontax crimes cannot be made

available to the Justice Department under the Tax Reform Act,

and there is also little evidence, in our view, that applications for

court orders cannot be obtained by the Department for access to

information that it is now entitled to under the Tax Reform Act of

1976.

In short, we think there is no reason for Congress to substantially

cut back on the minimal privacy protections, and I stress the fact

that they are minimal from a privacy standpoint, for tax information

that were erected 4 years ago after very careful consideration by

Congress.

The Tax Reform Act, as Senator Weicker pointed out to you, was

the subject of extensive evidence that tax records over the years had,

in fact, been generally made available and rather loosely made available to other agencies of Government that were putting pressure on

the IRS.

This has been extensively documented in congressional testimony.

I have summarized some of that in my statement, but I would simply

state one point of contention with the Department of Justice witness

who appeared just before me, that there were instances, and quite a

number of them, in which tax returns were made available not just

to the White House but also to other agencies of Government.

I think the FBI's use of tax returns with respect to its investigation

of activists and antiwar and civil rights workers is a well-documented

instance of abuse, something that we all deplore. It is behind us but

it is by no means a matter that was limited to the White House. That

is the record on which the Tax Reform Act was built.

The act was designed to remedy this, and although it is by no means

stringent, it provides a minimum amount of protection for tax records;

it requires the Government to meet a reasonable standard of proof to

justify disclosure, and disclosures may be made following the independent judgment of a Federal judge, although the legislation would

also allow magistrates to rule on disclosure applications and we would

support that.

The IRS, as you are aware, has been given enormous unparalleled

power by Congress over the years. There is really no investigative

agency of Government that has the power that the IRS has to compel
131

information from all citizens about virtually every aspect of their

lives. It is a very important power and we don't denigrate it by any

means. It is a central power for the enforcement of the tax laws but

because it is so broad it has been necessary to try to conform that

power to constitutional guarantees, particularly the privilege against

self-incrimination.

The way the Supreme Court has done that is by enunciating the

so-called "required records doctrine" that allows the IRS to compel

information from taxpayers under the assumption that that information is not going to be further disseminated and disclosed within the

Government. Without that required records, exemption, the whole

voluntary compliance scheme of our tax laws would be in serious

jeopardy. This is a point made by Senator Weicker and it is a point

on which the IRS itself agrees.

The cornerstone of that required records doctrine is the belief on

the part of taxpayers that information that they have provided to

the IRS is going to be confidential and not generally disseminated.

Senator Nunn in introducing his legislation, and in testifying on

it this evening, stated the central premise of his proposal, which is

that the IRS should become more actively involved in the war on

illegal drugs and organized crime. I would respectfully submit and

agree with Senator Weicker, that that is not the purpose of IRS.

The IRS was set up to collect the taxes. It was not set up to enforce

the criminal laws of the United States. There is no other agency of

Government that is charged with enforcing the tax laws, and if IRS

loses some of its power as a result of sharing information with other

agencies of Government there is not going to be anybody to pick up

the pieces.

You have heard from the Department of Justice and from IRS

itself that it is not at all clear that many of the proposals before you

would, in fact, facilitate investigations of organized crime and illegal

drugs, but 1 think we are very clear that they would have a substantial

impact on the privacy of taxpayers. These are the broad considerations, Mr. Chairman, and I wanted to stress them at the outset,

because I know it is often difficult in hearings like this to get through

all of the details of the legislation and then remember what the major

issues are.

I think that is the most important thing that we can bring to bear

on your considerations.

We have six areas of major concern with respect to the proposals

that are before you. Let me just very quickly summarize them and

then give an opportunity for the other witness to speak.

In doing so, I hope I will also answer the questions that you submitted with the invitation.

First: The bill, H.R. 6767, collapses the three-tier classification

of IRS information into two categories. This change would substantially diminish the protection afforded in IRS records. Under the

existing system any taxpayer information or documents that are

submitted with a taxpayer return which were provided by the taxpayer

at some later stage are considered tax records within the meaning of

the Tax Reform Act.

What the proposal would do would limit the protection solely to

information on the return and all of the other information that might
132

be provided by the taxpayer would not be covered by the procedures

of the ex parte court order procedure that would provide some protection.

We strongly oppose this weakening of the Tax Reform Act.

Second: The bill•and this is H.R. 6767•would substantially

lower the standards of proof that an agency or the Department of

Justice must meet in order to obtain access to taxpayers' information.

With respect to nonreturn information there would be no standard

of proof whatsoever. As I have stated, the information would simply

be available upon request and not subject to corut order.

With respect to return information, the standard would be somewhat

lower than it is under current law.

I should point out, Mr. Chairman, that the standard in current

law, the Tax Reform Act of 1976, is significantly lower than the

standard proposed by the Privacy Protection Study Commission

which was the Commission that looked most closely at this and whose

work underlies the Tax Reform Act. So we are not dealing with a

terribly tough standard uuder current law.

Under current law the act requires a showing that (a) there is

reasonable cause to believe that a specific crime has been committed

and (b) the information sought is probitive evidence of the matter

related to that specific crime; and (c) the information cannot be

obtained elsewhere.

Now, under H.R. 6767 the specific crime standard is eliminated.

I am pleased that the Department of Justice and the IRS and the

administration appear to be moving away from that position, and

that is important, but if that standard were adopted the Department

could be engaged in an ongoing investigation and it would be allowed

to gain access to any tax records that might in any way be relevant

to that investigation. No specific crime would have to be alleged

nor any demonstration that the information is probitive of a specific

crime, nor does it appear that the taxpayer would have to be a suspect

or even an associate of those who are suspect? If an ongoning investigation is underway into a criminal enterprise of some sort, the taxpayer

would caught up in the access provisions.

We think that is a major erosion of the minimal protections of

the act.

The third major problem area in H.R. 6767 is that it contains no

check on the chain of dissemination of taxpayer information within

the Government. The Government should have to meet, we think, a

high burden of proof in order to justify disseminating information from

one agency to another and from one enforcement purpose to another.

This was a central provision of the Privacy Commission report, and

a central feature of the Tax Reform Act, and it is something that

should be maintained.

Fourth: The bill provides for disclosure of tax information to State

law enforcement officials if the information is relevant to a prosecution

or investigation of a State felony. Again, it is a major departure from

the Privacy Commission, which recommended that disclosure of information to States be limited to the enforcement of the tax laws of the

States.

Of course, that is an important purpose and it is central to the whole

theory surrounding the enforcement of the tax laws, but disclosure of
133

tax information to the States for nontax investigations raises the

same constitutional problems that we see with respect to disclosure of

that information for nontax enforcement purposes of the Federal

Government.

We strongly oppose that change.

I think I detect in the administration's position an evolution toward

opposing that as well, although we haven't yet seen anything on paper

in that regard.

The fifth area of major concern for us is that the bill would allow a

government attorney to disclose taxpayer information if he believes

that the information is relevant to any Federal civil litigation. Civil

litigation, again, is not enforcement of the tax laws.

Now, if the whole purpose of the Tax Reform Act is to maintain

the protection of information with respect to a tax enforcement, then

disclosure for civil litigation, as,opposed to even criminal litigation, in

our view, has no place in the proposal. We have not seen any evidence

to support the proposal to allow disclosure for civil litigation.

We would strongly oppose that.

Mr. JENKINS. Would that be primarily in civil forfeiture cases? Is

that the purpose of that?

Mr. SHATTTJCK. That is my understanding, Mr. Jenkins, but there

has not been evidence or testimony on the subject and I think perhaps

Senator Nunn might provide some further information about that.

The sixth problem is that the bill authorizes•and we see this as a

major problem•disclosure of information to foreign governments

with respect to whom the United States has mutual assistance treaties.

On the surface, that might seem very reasonable in terms of enforcing the drug laws, but if you think about it, the constitutional problems involved in that become enormous. Foreign governments or

foreign countries may not have the same standards of evidence as the

United States, and they may not even have the same criminal laws.

There may be things that are crimes in Mexico that are not crimes in

the United States. If Mexico can compel disclosure of tax information

from IRS to enforce their laws simply because they have a mutual

assistance agreement, it seems to us to raise major questions of due

process with respect to citizens of the United States where the Federal

Government is assisting a foreign country to enforce a law which is

not a criminal law in the United States.

I also think the IRS seems to be moving toward opposition on this

point.

Well, lest you think that we oppose everything, and I know that

was your question to Senator Weicker as well, we do support some of

the expediting procedures in the bills. We think it would be possible

to streamline the procedures that are now in the Tax Reform Act to

require much more rapid disposition of applications for court orders,

to allow magistrates to rule on government applications and not simply

Federal judges, and to allow the attorneys for the government, rather

than the heads of agencies, to apply for disclosure.

In our view, that may even be a protection of civil liberties in the

sense it would limit the disclosure to the Justice Department and not

allow IRS records to go to all of the various agencies, which now appear

to be able to get them under the Tax Reform Act.
134

But we are strongly opposed to any changes in the standards and

any overturning of the minimal privacy protections that Congress set

up in the 1976 act.

I would be happy to answer any questions that might arise from

my statement after the other witness has had an opportunity to speak.

[The prepared statement follows:]

STATEMENT OF THE AMERICAN CIVIL LIBERTIES UNION, WASHINGTON OFFICE

I am pleased to testify this morning on the privacy of taxpayer information,

an issue of much importance to the American Civil Liberties Union. I am the

Legislative and Washington Officer Director of the ACLU, a nationwide, nonpartisan organization of more than 200,000 members devoted to the protection

of individual rights and liberties. I am also the author of a textbook, Rights of

Privacy (National Textbook Co. 1977).

For many years the ACLU has played an active role in the effort to safeguard

individual privacy from broad intrusion by government and private recordkeeping practices. Through a project on privacy and data collection which we

sponsored from 1973 through 1978, the ACLU provided advice•and in some

instances legal representation•to individuals whose rights and interests were

adversely affected by the recordkeeping and dissemination practices of governmental and private institutions. We also sought to publicize in a monthly Privacy

Report the many ways in which privacy has been eroded in a society where personal

information is increasingly recorded by third parties and used for a wide variety

of purposes, without the consent or even the knowledge of the person involved.

The ACLU is particularly concerned about the issue of taxpayer privacy, and

has testified frequently in congressional and other hearings on this subject, including hearings of this committee when it was considering the Tax Reform Act

of 1976. We were strong opponents of the Justice Department's earlier effort to

amend the Act in 1977, and we oppose many of the proposed amendments before

the Committee today.

PRIVACY OF TAX RECORDS

The disclosure and summons provisions of the Tax Reform Act of 1976 are the

product of a grave concern for the privacy of tax records held by the IRS. The

provisions were generated by revelations, over a period of several years, of a widespread pattern of abuse of IRS records by government agencies for non-tax

purposes. Among the many improprieties that were revelaed by various investigations of governmental intelligence operations were a number of projects initiated

within the IRS as a result of pressure brought to bear on that agency by governmental law enforcement agencies. These projects included the Ideological Organizations Audit Project and the Spedial Service Staff (1969-73) which targeted more

than 8,000 individuals and 3,000 groups for extensive investigation specifically

because of their political activities. The SSS operated in secrecy and was abolished

in 1973 when IRS Commissioner Donald Alexander learned of its existence. These

internal IRS projects seriously threatened the contitutional rights of all taxpayers. The projects were the product of external pressures exerted by Congress,

the White House and government law enforcement agencies who claimed that the

IRS was not participating sufficiently in the governmental battle against crime.

More central to the origins of the disclosure provisions of the 1976 Act were the

extensive revelations of abuse of IRS information by other agencies of the government which had solicited the information from the IRS. See Final Report, Book

III, Senate Select Committee on Study of Governmental Operations with Respect

to Intelligence Activities, 94th Cong., 2d Sess. [Church Committee] (1976).

Between 1966 and 1974, the FBI, either directly or through the Justice Department made approximately 200 requests to the IRS for tax returns. Sixty-five

percent of these requests were for two counter-intelligence (Cointelpro) programs

conducted by the FBI•the Key Activist program aimed at leaders of the antiVietnam War movement, and the Key Black Activist program, aimed at leaders

of the so-called Black Nationalist movement. In addition, the FBI made numerous

ongoing requests to the IRS for lists of contributors to ideological organizations

under investigation by the Bureau. In this manner, the FBI obtained information

offered voluntarily to the IRS by groups to assist in enforcement of the tax laws.

Botween 1957 and 1972, the Central Intelligence Agency made a number of

unofficial requests to the IRS for tax return information on persons the CIA was
135

investigating. Finally, the Senate Committee that investigated the Watergate

burglary revealed extensive use of IRS records by the White House against political opponents of the Nixon Administration. Indeed, abuse of tax information was

one of the central components of the Nixon Administration's broad pattern of

intelligence operations aimed at harassing and intimidating political enemies."

Before the Tax Reform Act of 1976, the IRS lacked any meaningful standards

by which to judge the numerous requests for information it received from other

government agencies. Though a procedure for determining the legitimacy of

requests did exist, it was so vague, and so widely ignored as to be useless. Indeed,

in 1968 when the Chief of Disclosure of IRS learned of the procedure, he termed it

"illegal." The Church Committee found that in the absence of any meaningful

guidelines, the IRS could not judge whether the request was legitimate. Consequently, the Committee noted, the "IRS had delegated the determination of the

propriety of the request to the requesting agency." Final Report, Senate Select

Committee to Study Government Operations. With respect to Intelligence

Activities, Book III, p. 840.

The Tax Reform Act was designed to remedy this legacy of abuse of IRS information. Although the Act is by no means stringent, it provides a degree of protection of IRS records. It requires the government to meet a reasonable standard

of proof to justify disclosure. Furthermore, such disclosure may only be made

following the independent judgment of a federal judge. These safeguards were all

designed with specific reference to known abuses of IRS information by government agencies.

SENSITIVE NATURE OF TAXPAYER INFORMATION

A person's tax returns, and the records of his financial transactions with a bank

or another private entity, are a reflection of that person's life. Those records

mirror, often in great detail, the personal habits and associations of individuals.

The beginning of a tax return gives name, address, social security number, identity

and dependents and the taxpayer's gross income. Various schedules may indicate

political and religious affiliations and activities, medical or psychiatric treatment,

union membership, creditors, investments and holdings. Additional documents

compiled by the taxpayer and pertaining to statements made on a tax return but

not filed with the return contain a similar wealth of sensitive personal information.

In 1975, the then IRS Commissioner Donald Alexander noted that the IRS has

"a gold mine of information about more people than any other agency in this

country." Committee Print, Confidentiality of Tax Returns, House Committee

on Ways and Means, September 25, 1975, at 3.

Apart from information related to tax returns, documentary materials routinely

obtained by IRS for the enforcement of the tax laws also contain vast quantities

of private information. Bank records, or similar records, reveal the political causes

one supports, the books and magazines one buys, the organizations one joins, as

well as one's style of life, tastes and habits. People assume that these matters are

confidential, and that they do not sacrifice that confidentiality when they conduct

financial transactions with the assistance of a bank. This assumption has been

acknowledged and embraced by courts across the country. As one state court has

noted:

"[I]t is impossible to participate in the economic life of contemporary society

without maintaining a bank account. In the course of such dealings, a depositor

reveals many aspects of his personal affairs, opinions, habits and associations.

Indeed, the totality of bank records provides a virtual current biography * * *

Burrows v. Superior Court, 13 Cal. 3d 238, 529 P. 2d 590 (1974)."

I make these opening observations so that it is clear that the privacy interest

an individual has in his or her tax return and bank records is formidable, and must

be taken fully into account. When he introduced the Senate equivalents of the bills

now under discussion, Senator Nunn noted that "a balance must be struck between

the privacy of tax returns and the legitimate needs of law enforcement agencies."

Congressional Record, March 11, 1980, p. S2375. The hearings that generated

these bills contained testimony principally from law enforcement officials concerning the asserted needs of law enforcement agencies. If the balance to which

Senator Nunn referred is to be struck fairly and accurately, it is essential that the

privacy interests of individuals be given equal weight.

THE EXTRAORDINARY POWERS OF IRS

The IRS is accorded enormous, unparalleled coercive power to obtain information from individuals concerning every aspect of their private lives. The IRS may,
136

without a subpoena or a warrant or any showing of probable cause, require an

individual to divulge information. Because of the clear threat such broad powers

hold to an individual's constitutional rights to be free from government coercion,

the Supreme Court has carved a narrow "required records" exception to the

Fifth Amendment, principally for the benefit of IRS. See United Stales v. Sullivan,

274 U.S. 259 (1927). This exception and the extraordinary authority which

Congress has bestowed on IRS create a powerful presumption against any attempt

to transfer that authority to other agencies of government.

The statutory authority of IRS to obtain information must not be viewed as

creating some form of governmental asset which may then be transferred to other

arms of the government pursuing legitimate governmental objectives. The information gained by the IRS does not in any sense "belong" to the Government.

Rather, it is held in special trust by the IRS for its unique, important purpose of

collecting taxes. Indeed, it is only the unique nature of the IRS function that

justifies the extraordinary degree of intrusion that that agency is allowed to make

into the lives of individuals. Dissemination of IRS information to other governmental agencies for non-tax purposes, however meritorious, is a violation of the

IRS' special trust.

The central concern of the supposedly insufficient level of participation by the

IRS in the government battle against organized crime and large drug trafficking.

In our view, casting the question in that light fundamentally distorts the realities

of the situation. The IRS is not designed to participate in that battle. Its extraordinary powers were granted for quite another purpose•the collection of revenue

and enforcement of tax laws•and are limited to that purpose. To the extent

that the IRS has, in the past, strayed from that purpose, it has operated outside

its charter. Measures taken to remedy that impropriety are to be lauded; to

portray the Tax Privacy Act of 1976 as withdrawing the IRS from the battle

against crime is misleading and harmful.

Governmental agencies such as the Department of Justice, the Drug Enforcement Administration and the Federal Bureau of Investigation are not•and should

not be•empowered to exercise the same authority as the IRS to compel and use

personal records and other information about virtually the entire public. As the

Privacy Protection Study Commission noted in its 1977 report:

"It is understandable that other agencies with important responsibilities want

to use information the IRS has authority to collect, but they have not, in fact,

been vested with the IRS' authority to compel such information." [Report at

p. 540.]

We believe that dissemination of taxpayer information and records by IRS

to other government agencies, and the summoning of financial records by IRS

threaten the constitutional policy underlying the Fifth Amendment right to be

free from compulsion of self-incriminating statements.

The Fifth Amendment protects an individual from government coercion in a

criminal prosecution. In most instances, the government may not compel an

individual to divulge information that might tend to incriminate him. The "required records" exception of the Fifth Amendment was created in part to allow the

IRS to require individuals to divulge information that might otherwise be protected by the privilege against self-incrimination. Failure to provide information

sought by the IRS is a felony punishable by statute (26 U.S.C. 7602). Alternatively, the government may issue a summons to the taxpayer or to third parties

that will yield information to the IRS. In either case, the information is effectively

obtained by IRS through compulsion. The use of that information in a non-tax

criminal proceeding, therefore, is sharply at odds with the constitutional policy

underlying the Fifth Amendment.

In order to promote fair and efficient administration of the revenue laws and

collection of taxes, it is essential not to burden the filing of taxpayer returns with

Fifth Amendment problems. If a taxpayer believed that the information he or she

was providing the IRS might be routinely made available to other law enforcement

agencies, he or she might be disposed to be less cooperative with IRS. The taxpayer

would be put in the position of having to scrutinize all of the revelations on the

return and determine their relevance to any possible criminal investigation. If as

a result of this guesswork, the taxpayer determined the possibility of selfincrimination, he would, at that time, claim a Fifth Amendment privilege, for

fear of losing it otherwise at a later stage. See Garner v. United States, 424 U.S. 628

(1976). This process would make the tax collecting process so conplex and so

cumbersome as to render it fundamentally ineffective. The Privacy Commission

expressed concern for this result in noting that "widespread use of the information
137

a taxpayer provides to the IRS for purposes wholly unrelated to tax administration cannot help but diminish the taxpayer's disposition to cooperate with the

IRS voluntarily .... Such a tendency in itself creates a potentially serious

threat to the effectiveness of the federal tax system." Report of the Privacy Protection Study Commission, p. 540.

These impediments are unjustified. Moreover, they are unnecessary. The number of potentially valid Fifth Amendment claims would be small in comparison

with the total number of people filing returns. The more practical solution is to

allow the tax return process to go unimpeded by Fifth Amendment considerations•and that is precisely why the "required records" exception to the Fifth

Amendment was created, and why it was limited to circumstances such as revenue

collection.

These broad questions of constitutional policy concerning the disclosure and

dissemination of tax information provide the background against which the

specific amendments under discussion today must be viewed. Because the IRS

has been accorded special and extraordinary powers, we are fundamentally opposed

to any dissemination of tax information within the government. If, in some extraordinary case, such dissemination is authorized by statute, we believe it is essential

that in order to justify it, the government must meet a high burden of proof. From

this perspective, we are not satisfied with § 6103 as currently written, but we

strongly oppose any attempt to further dilute its protections of taxpayer privacy

We unequivocally oppose the placing of any affirmative duty on the IRS to disclose tax information to law enforcement agencies.

I will now highlight the specific objections we have to the proposed amendments.

Most of them involve changes embodied in H.R. 6767.

NARROWING OF THE DEFINITION OF PROTECTED TAXPAYER INFORMATION

The bill collapses the current three-tier classification of IRS information into

two categories. This change would substantially diminish the protection afforded

the information in IRS records. Under existing law, the government must obtain

a court order to gain access both to taxpayer returns and to what is called "return

information." The latter category includes any information the IRS collects or

obtains from the taxpayer with reference to the return. Such information might

include documents substantiating claims for deductions, contributions or related

expenditures. Current law protects this information with the court order requirement precisely because it is at least as sensitive as the information on the face

of a return.

Under the proposed two-tier classification scheme of H.R. 6767, any taxpayer

information or documents which are not taxpayer returns would be available to

the government upon receipt of a written request by an attorney for the government. No independent judicial check on these disclosures is required. Moreover,

the bill places on the IRS an affirmative duty to disclose any such information to

the government which may be pertinent to a federal criminal investigation.

We submit that this change in definitions eliminates much of the protection of

section 6103. The comment to the proposed change explains that the bill "enables

us to separate those items which deserve a higher degree of privacy and hence a

court order for disclosure, from those items that IRS, like any other investigative

agency, uncovers in a typical investigation." This is misleading. It is by no

moans clear that the information on the return is the information deserving of a

higher degree of privacy. Indeed, there is good reason to believe that other

information compiled and maintained by IRS is of an even more private nature.

The proposed new definition of protected taxpayer information draws a distinction between an individual's tax returns and a corporation's tax returns,

apparently on the assumption that a corporation's returns do not contain sensitive

information concerning individuals. Such a premise is unjustifiable. A corporation's tax return can reflect a person's stock holdings, how he or she voted on

internal matters and confidential communication between the corporation and an

individual.

STANDARDS OF PROOF

H.R. 6767 would substantially lower the standards of proof that a government

agency must meet in order to obtain access to taxpayer information.

Prior to the enactment of the Tax Reform Act, the Privacy Commission

recommended that when another government agency requests taxpayer information from IRS, the taxpayer be given notice, and an opportunity to contest

the disclosure. Disclosure could then be authorized by a court only if it found:
138

(a) probable cause to believe that a violation of civil or criminal law has occurred;

(b) probable cause to believe that the tax information requested from the IRS

provides probative evidence that the violation of civil or criminal law has occurred; and (c) that no legal impediment to the applicant agency acquiring that

information sought directly from the taxpayer exists.

Report of the Privacy Protection Study Commission, pp. 553-4.

The Tax Reform Act clearly fell short of these proposed safeguards. An ex parte

proceeding requiring a demonstration of reasonalble cause is considerably less

rigorous than an adversary proceeding demanding probable cause. Further, the

third consideration, that no legal impediment exist to direct solicitation from the

individual, was overlooked althogether.

The proposal in H.R. 6767 would further undermine taxpayer privacy by

eliminating altogether the requirement of a court proceeding, or demonstration

of reasonable cause with respect to the disclosure of non-return information.

Substituted for these safeguards would be the word of the government attorney

that the information sought is material to an ongoing investigation. In short, the

proposed legislation eliminates any protection of tax information held by the IRS,

other than the tax return itself.

H.R. 6767 also reduces the standard of proof required to justify issuance of an

ex parte order for dissemination by the IRS of the actual tax return. We oppose

this further erosion of taxpayer privacy protection.

Section 6103 of the Tax Reform Act now requires a showing that there is

reasonable cause to believe that: (a) A specific crime has been committed; (b)

the information sought is probative evidence of a matter related to that criminal

act; and (c) the information cannot be obtained elsewhere.

Again, these statutory standards fall short of the Privacy Commission recommendations. However, H.R. 6767 would further reduce the safeguards. Under

H.R. 6767, the government need show only that: (a) The application is made

in connection with a lawful judicial or administrative proceeding or an investigation that may result in such a proceeding; and (b) there is reasonable cause to

believe that the information sought is material and relevant to such a proceeding

or investigation.

While the "reasonable cause" language is retained, the bill affects several

changes damaging to taxpayer privacy. There is no requirement of a specific

criminal act; there is no requirement that the evidence be probative; there is no

requirement that the information be otherwise unobtainable. Materiality to an

ongoing investigation is considerably less than probative of a specific crime.

For example, if the Department of Justice were engaged in an ongoing investigation of a suspected criminal enterprise, the proposed standard would allow the

Department to gain access to tax records of any individuals associated in any

way with that enterprise. No specific crime need be alleged, nor any demonstration that the information is itself probative of a suspected crime. While it may be

argued that the focus of the amendment is on drug trafficking and organized

crime, it is too easy to forget that similarly loose standards created the enormous

record of abuses of IRS disclosures prior to the enactment of the Tax Reform Act.

There is little factual documentation of the need for these changes in the

standard of proof in the Tax Reform Act. When asked to supply such information,

the General Accounting Office was unable to do so. In fact, in March 1979 the

GAO issued a study of the disclosure and summons provisions of the Tax Reform

Act, which concluded that "the adverse impact on coordination between IRS

and other members of the law enforcement community as a result of the disclosure provisions has not been sufficiently demonstrated to justify revising the

law." Report by the Comptroller General, Disclosure and Summons Provisions of

1976 Tax Reform Act•Privacy Gains and Unknown Law Enforcement Effect,

March 12, 1979. Not only are the good intentions of the sponsors inadequate to

justify legislation of such potentially harmful consequences, but there is no clear

evidence that the proposals would achieve their intended goal.

REDISSEMINATION

H.R. 6767 contains no check on the chain of dissemination of taxpayer information within the government. Indeed, the bill explicitly provides that:

"The attorney for the Government may further disclose non-return information

to such government personnel as he deems necessary to assist him * * *"

The comment to the bill notes that this provision is almost identical to the

grand jury secrecy rules. This comment overlooks the crucial fact that in grand
139

jury proceedings, the government cannot compel self-incriminating testimony, at

least without a grant of immunity. Since the fundamental issue here is the use of

information that is coerced without a grant of immunity, the analogy the comment draws is inappropriate.

The government must meet an extraordinarily high burden to justify dissemination. Once that burden is met at the outset, the removal of all barriers to further

dissemination is not justifiable. We suggest that in effect, walls be placed at

every step of the process so that highly sensitive information not be disseminated

throughout the government on the judgment of the government attorney.

DISSEMINATION TO STATE AGENCIES

The bill provides for disclosure of IRS information to state law enforcement

officials if the information is relevant to investigation or prosecution of a state

felony. This proposal is flatly at odds with a Piivacy Commission recommendation that disclosure of tax information to the states be limited to tax related

prosecutions. Indeed, the Commission was sufficiently concerned about the potential for abuse that exists in inter-governmental disclosure that it suggested limitations even on tax related disclosure. Commission Report, pp. 546-47. Dissemination

of taxpayer information is an extraordinary invasion of the privacy of individuals,

justified only in extraordinary circumstances. The provision allowing dissemination

to state agencies is not justified by such circumstances. Rather, it treats intergovernmental disclosure as a routine matter of coordinating law enforcement, so

as to make it more effective. Tax returns should not be treated as a common

resource for criminal investigations at all levels of government.

DISCLOSURE FOR FEDERAL CIVIL LIQITATION

H.R. 6767 would allow a government attorney further to disclose information

if the attorney believes that the information is relevant to any federal civil

litigation. Again, the basic threat inherent in this provision is that disclosure of

information that is sensitive, and has been divulged under governmental coercion,

is treated not as the extraordinary matter that it is, but as a commonplace component of federal investigation.

The sponsors of these measures have touted them as essential to the federal

government's fight against organized crime and large-scale drug trafficking.

Even assuming the validity of that claim, it certainly does not justify this extraordinary additional measure of permitting disclosure for civil litigation. Furthermore, the proposal does not even require that the attorney seeking disclosure

establish any connection between the criminal investigation for which the original

IRS disclosure was justified, and the civil investigation for which disclosure is

sought. The official comment to H.R. 6767 claims that GAO found that the government had "lost" federal civil cases of substantial size because of the disclosure

provisions of section 6103. In fact, the GAO reported only one such case, and in

that one case, it appears that the disclosure provision had nothing to do with the

investigating agency's inability to obtain the information sought. GAO Report,

p. 17.

DISCLOSURE TO FOREIGN GOVERNMENTS

H.R. 6767 also authorizes disclosure of information to foreign government8

with whom the United States has mutual assistance treaties. Apart from the

objection we noted to disclosure to state officials, which applies with equal or

greater force to this provision, such disclosure is problematic for another reason.

A nation with whom the United States has a mutual assistance treaty could

seek access to taxpayer records for use in a criminal investigation for which the

standards of proof are dissimilar from those in the United States. Moreover,

what is a crime in a foreign country may not be criminal in the United States.

The extraordinary coercive powers of the IRS should not be used to gain information about individuals which would then be used for purposes not only different

from those for which the information was obtained, but also unsupported by

any legitimate United States interest.

SUMMONS PROCEDURES

As for H.R.6764, which changes the administrative summons procedures under

existing law (26 U.S.C. 7609), we have two objections. First, the bill would shift

the burden in a summons enforcement proceeding from the government to the
140

taxpayer. This change reverses the basic presumption of our legal system, which

is that the party seeking disclosure of information must bear the burden of going to

court in order to justify that disclosure. Proponents of this change argue that

H.R. 6764 simply brings the summons procedure into accord with procedures

established by the Right to Financial Privacy Act of 1978 for all other agencies

of the federal government. However, since IRS routine access to information

about the financial dealings of individuals is vastly greater than any other agency,

that analogy makes little sense. The special powers of IRS create a presumption

against additional compulsory disclosure.

We also oppose the part of H.R. 6764 which would abolish the automatic stay

provision of section 7609. Proponents cite the excessive delays which allegedly

are created by existing law. However, the problem of time delays exists separately

from the question of issuance of a stay to disclosure proceedings. Current law

provides for automatic stays precisely because of the presumption against disclosure that exists as a basic component of the process. The question of time delays

is properly dealt with by imposing time limits, which are provided for elsewhere

in H.R. 6764, and not by altering a provision which enacts an important policy

of privacy protection.

EXPEDITING PROCEDURES

We do support some of the proposed changes that would facilitate the use of

judicial process, provided adequate standards of privacy protection are met. We

endorse the imposition of time limits; the extension to magistrates of the authority

to rule on government applications; the provision allowing attorneys for the

government, rather than heads of agencies, to apply for disclosure; and the

proposed changes in civil and criminal liability, allowing for a good faith defense

to criminal prosecution, and governmental rather than individual liability for

civil actions against unauthorized disclosures. In short, we endorse changes in

the Tax Reform Act that will allow a constitutionally sound process, which

respects individual rights, to proceed more expeditiously.

CONCLUSION

The claim that the proposed amendments put the IRS back into the fight

against organized crime and drug traffic is a distortion. The IRS does not belong

in that fight. Its special powers are not granted to facilitate law enforcement. To

the extent that iRS in the past has been used as an investigative resource for

other government agencies, its special authority was abused. The Tax Reform

Act of 1976 was passed to correct those abuses. The current amendments threaten

to undermine the Act by redefining the information that deserves protection,

lowering the standard of proof necessary to justify disclosure and opening broader

channels of dissemination. These changes carry with them an enormous potential

for abuse and should not be adopted.

Mr. GIBBONS. We will get to you now, Mr. Thuronyi.

STATEMENT OP VICTOR THURONYI, LEGISLATIVE DIRECTOR,

TAXATION WITH REPRESENTATION FUND

Mr. THURONYI. I appear here in line with the concern you exf)ressed earlier in the evening about enacting badly or hastily drafted

egislation.

I just have a couple of somewhat technical points that I would like

to make clear before you get bogged down in the drafting.

One of these has to do with the definition in code section 6103 of

the three categories of returns, return information and taxpayer

return information. These categories were set up in 1976 and they are

fairly clear. "Return" is obviously a return, and "return information"

is anything that relates to the determination of the taxpayer's liability; and "taxpayer return information" is simply return information

which was provided by the taxpayer himself to the Service.

The various procedural rules are applied to these three categories.
141

There is an exception to the category of "return information" and

"taxpayer return information" and that is information that cannot

be identified with a particular taxpayer.

The relevance of this exception is that for purposes of disclosing

IRS information to the public. The IRS has various documents

which are of great public interest but which cannot be associated

with a particular taxpayer.

For example, the IRS issues private letter rulings. When a taxpayer wishes to engage in a transaction he asks the IRS whether it

is OK, and these are very important in setting the precedent of the

Service and lawyers would wish to consult these; and there are various other documents of this sort that the IRS is making available

to the public.

For example, with your permission I would like to include* the

brief opinion in a suit which is now pending between us and the

IRS, which discloses some of these documents general counsel's

memoranda and actions on decision. It is an opinion by Judge Richey

of the U.S. District Court in the District of Columbia. This decision

would be overturned by the bills as they are now drafted.

Mr. GIBBONS. We will place that in the record.

Mr. THTJRONTI. There is another case, Long v. Internal Revenue

Service (596 F. 2d 362 (9th Cir. 1979)), which would be overturned

by the Nunn bill as it is now drafted because the Nunn bill for some

reason does not include the exception for information that cannot

be associated with a particular taxpayer.

What that means is that privacy protection would be given to

virtually all documents in the Treasury Department and that documents like private letter rulings could no longer be disclosed. That

would be very unfortunate and the GAO draft attempts to correct

that, but it does so incorrectly, as far as I can see, as I point out in

my prepared statement.

The basic message of this is that whatever is decided about what

the IRS can disclose to the Justice Department, there is no reason

not to operate with the existing categories. There is no showing that

these categories are inadequate.

We ask if you submit a written question to the Commissioner

that you ask them to specifically say what is the problem with this

definition, because it is a definition that the courts have now had a

chance to interpret and the IRS is familiar with and there doesn't

seem to be any problem with it, and now there are various drafts

floating around with different wording changes.

It would be much simpler to keep the present law and just operate

with those categories. That is just a very simple point I would like

to make.

The other point has to do with summons enforcement procedure.

Generally, the approach of the administration in the redrafting

of the Nunn bill help a lot because the right of appeal is very important and that is helped in the administration version.

I think the other essential matter is that in a summons enforcement proceeding the district judge or magistrate hearing the case

should be given discretion to hold an evidentiary hearing and grant

discovery as under current law, and in that context I am a little uneasy about the time limit that is imposed. I don't see any problem
142

with the time limit in a case you can just decide on the pleadings

but I think it would be important that the district judge have that

discretion to order discovery.

I would like to make a point that hasn't been brought up in these

hearings thus far. One of the reasons why people might see a problem

in these summons proceedings, and one of the reasons that there are

frivolous litigations is that the substantive law that applies is, I think,

incorrect, in the sense that there is a doctrine most recently embodied

in United States v. LaSalle National Bank (437 U.S. 298 (1978)), that

denies the IRS the authority to use the summons for criminal

investigations.

However, LaSalle turns around and applies a standard that is very

liberal, so that the IRS can virtually always use the summons for a

criminal investigation. There is nothing wrong with the IRS using a

summons to investigate tax crimes. The IRS conducts criminal

investigations which are closely bound up with the civil tax investigation. There is nothing wrong with that. Therefore, I propose in my

written statement that it would take just a couple of words to give the

IRS the authority to use the summons for criminal tax investigations.

I would also suggest if you submit questions to the Commissioner

that you ask them, "Would you like us to do that?" Because I think

the IRS would answer that they would like that. It would clear up

the law and in doing so would eliminate a lot of frivolous complaints

from these summons enforcement proceedings. But the thing is that

under LaSalle, if you bring up the criminal purpose defense, under the

LaSalle standard a taxpayer always loses, but the taxpayer has the

benefit of delay and appeal and so on.

So the whole thing is ridiculous. The law should be made very clear so

that at least this issue is just removed from the summons enforcement

proceedings. That will help because it will reduce the number of cases

and simplify them. That means that we won't have to be as draconian

in cutting down the procedural rights of the taxpayer which are very

important.

I think a statement by M. Carr Ferguson of the Justice Department

made on April 22, 1980, before the Senate Committee on Appropriations, points out the danger of not amending the law in the way I

suggest because what Mr. Ferguson says is that because of LaSalle

the IRS and the Justice Department are now considering expanding

the use of the grand jury in a combined nontax and tax investigation.

Because the IRS can often not get, or is reluctant to get, information

relating to tax matters when there is another grand jury investigation

pending, what Justice and IRS now want to do is use the grand jury to

do the work of the IRS and investigate taxpayer matters.

My point is that that should not be the function of the grand jury,

that should be done through the administrative summons.

If we make it clear that the IRS has the authority to use the summons in these cases, we won't get the grand jury mixed up in a lot of

cases that it shouldn't be in. It should be made clear that the IRS

can use the summons in all tax investigations whether civil or criminal.

It is that simple. In this way we don't get the problem of having people

respond to grand jury subpenas in tax investigations. That would be

very inappropriate and cumbersome. It provides less protection to the
143

defendant because it is much more onerous to go before the grand

jury than it is to answer an administrative summons.

So, I suggest that as one possibility, just to make really a clarifying

change in the substantive law, to give the IRS that authority. I think

that would help out a lot and simplify these summons cases.

Mr. JENKINS. Does Justice oppose that? Does it extend some protection or give some rights that are not now present? What is the

problem? Do you know whether or not Justice has taken a position

on that?

Mr. THURONYI. I think if you ask the Justice Department or IRS,

they would favor it. I think they haven't wanted to get into the area

but I don't understand why not, because it seems to me this is a good

way to clean up a matter and settle an issue.

It is really a clarifying matter and I have a detailed article at the

end of my statement explaining all of this, and why this is not really

a big change from current law.

Mr. GIBBONS. It is a little difficult to ask questions after the many

hours I have been sitting today, but I realize that this is very delicate

pendulum that we are working with here and if you push too hard it

can swing way out of the proper arc. I am glad that you don't oppose

all of the proposed changes and I am glad that the Justice Department

and the IRS are talking now better than we found them talking 4

years ago when we first discussed this.

When my mind is sharper and my other end is not as dull, I will

read over your statements and try to propound some intelligent questions, but don't hesitate to let us know when we are getting to any

markup what your suggestions are about this.

I would ask the staffto work with you two gentlemen, to make sure

that your views are thoroughly considered in anything we come up

with. The legislation I introduced, of course, was offered so we could

get a debate started on it, and I must state that I am glad that I have

someone like Mr. Jenkins here on the committee with me. It has been

so many years since I either prosecuted or defended a criminal case, it

would be a crime if I tried right now. I don't want to do that; but I

recognize the delicacy of the matter and I do not want to trample on

any of these rights.

[The prepared statement follows:]
144

TAXATION WITH REPRESENTATION FUND

6830 North Fairfax Drive, Arlington, Virginia 22213 (703) 532-1850

WASHINGTON OFFICE

Suite 204. 1523 L SI.. N.W.

Washington, DC 20005

Statement

by

Victor Thuronyi, Legislative Director

and

Thomas F. Field, Executive Director

Taxation with Representation Fund

regarding

S. 2402 and S. 2403, relating to

DISCLOSURE OF TAX RETURNS AND RETURN INFORMATION

AND IRS SUMMONS ENFORCEMENT PROCEDURE

I. Disclosure of Returns and Return Information

The principal purpose of S. 2402 is to facilitate the

disclosure of IRS information to other government personnel.

We leave it to others to comment on the wisdom of this

measure. Our concern is that this bill is being used as a

means of restricting legitimate public access to IRS records.

This restriction is being accomplished by changing the

present law definitions of "return information" and "taxpayer return information."

As the following analysis will show, it is entirely

unnecessary and inappropriate to change the definitions of

these categories to accomplish the purposes of the bill.

We therefore recommend that the definitions in section

6103(b) be retained, and that any changes in the procedure

for disclosing these categories of information be made in

terms of these existing categories.
145

A. The IRS and the Freedom of Information Act

The Internal Revenue Service has traditionally been among

the most secretive of federal agencies. This secretiveness

results from ingrained tradition, which has only been curbed

by protracted litigation. Our own group (along with our

predecessor organization, Tax Analysts and Advocates) has

been a leader in this effort. Other notable contributions

have been made by Public Citizen's Tax Reform Research Group,

and by Philip and Susan Long of Seattle, Washington.

As a result of the combined efforts of these groups

and individuals, the Internal Revenue Service has been forced,

during the past decade, to make public its letter rulings and

technical advice memos, the comments received from the public

regarding its regulations, the Internal Revenue Manual,

general counsel's memoranda, actions on decision, technical

memoranda underlying regulations, and its taxpayer compliance

measurement program documents.

None of these documents, in the form disclosed, contains

information that can be associated with a particular taxpayer.

In each of these cases, the courts have determined, first,

that the public had a right under the Freedom of Information

Act to the information contained in these documents, and,

second, that release of this data would not jeopardize the

work of the Internal Revenue Service. Our experience, and

that of other groups, has confirmed the correctness of both

these judgments by the courts.

Secrecy Legislation

However, the struggle with the Internal Revenue Service

has not been confined to the courts. The Service has periodically tried to obtain from Congress more-or-less blanket

exemptions from the Freedom of Information Act. The most

recent instance of an effort along these lines came during

the 1976 Tax Reform Act consideration of amendments to

sections 6103 and 6110 of the Internal Revenue Code. The

upshot of this legislative struggle was a compromise provision, under which modified definitions of the terms

"return" and "return information" were incorporated into

section 6103 of the Code, at the same time that detailed

rules for the disclosure of IRS rulings and technical

advice memoranda were enacted as section 6110 of the Code.

The language of S. 2402 suggests that the IRS wants to

reopen the information disclosure question once again. One

reason appears to be the Service's concern regarding our

recent victory in the courts in our suit to obtain disclosure

of general counsel's memoranda, actions on decision, and
146

technical memoranda; and the recent decision by the Ninth

Circuit Court of Appeals that the Service must disclose the

data underlying its taxpayer compliance measurement program,

in response to a suit by Philip and Susan Long.

We have read the recent remarks of the Commissioner of

Internal Revenue in an interview, expressing concern about

both these decisions. While we have great respect for the

Commissioner, we believe that his comments misconstrue the

scope of our victory in our GCM, AOD, and Tech Memo suit.

The Commissioner fears that this suit may inhibit internal

decision-making in the IRS, and the free flow of advice from

subordinate to superior. But the courts have repeatedly

made it clear in Freedom of Information Act cases that the

mandate of the Act does not apply to predecisional memoranda

of advice, unless and until the agency begins to use those

memoranda as the basis for subsequent decisions affecting

the public. At that point, as the courts have repeatedly

declared, the memoranda must be made available for public

scrutiny, since, in the words of one of our Freedom of

Information Act decisions, "secret law is an abomination."

Clearly, general counsel's memoranda, actions on

decision, and technical memoranda • which are carefully

retained, classified, indexed, and consulted by the IRS •

constitute a body of secret law. Nothing should be done

by this Committee that will jeopardize their prompt disclosure to the public in accordance with court order and

with any deletions that may be necessary to preserve privacy.

Similarly, the data underlying the Service's Taxpayer

Compliance Measurement Program is an appropriate subject

for disclosure. In our view, the IRS kept secret for too

long the data showing the rapid growth of the underground

economy, thus slowing public consideration and debate

regarding this serious problem.

In addition, secrecy regarding this data has made it

difficult to analyze and critique discrepancies in IRS

administrative handling of taxpayer audits and returns.

Susan Long's work makes it very clear that some IRS districts

are "tough" while others are "lenient" in their dealings with

taxpayers. This critique, leading as it should to more equal

inter-district treatment of similarly situated taxpayers,

could not have taken place without the information that

Ms. Long obtained under the Freedom of Information Act.

Information Restrictions Are Premature

This is not the time, in our view, to reopen the question

of IRS compliance with the Freedom of Information Act. The

ink is hardly dry on the 1976 amendments to section 6103, and

the courts have only just begun to construe the new legislative

language. There is no indication that their decisions, properly
147

read and interpreted, are likely to jeopardize IRS administration of the tax law. Speculation about possible future

problems, from an agency that has determinedly refused to

comply with the Freedom of Information Act in the past, is

hardly a sound basis for overturning a statutory compromise

that is less than four years old.

Accordingly, we recommend that the proposed provisions

of S. 2402 which would establish a new, protected category

of "nonreturn information," be dropped from the bill.

Those provisions are a threat to court-ordered public disclosure and are non-germane to the main purposes of S. 2402.

At a later date, after we have more experience regarding

the scope and meaning of the 1976 information disclosure

provisions, changes in the Code may be in order. But

changes now are certainly premature.

B. The Proposed Redefinition Is Not Necessary to Accomplish the

Bill's Objectives.

Current law divides confidential IRS information into

three categories: returns, return information, and taxpayer

return information. Return information is defined by a list

of items including such things as taxpayer identity, receipts,

and deductions collected with respect to a return or with

respect to a determination of liability. However, return

information does not include "data in a form which cannot be

associated with...a particular taxpayer." Finally, taxpayer

return information means return information which is furnished

to the IRS by a taxpayer.

S. 24 02 does not substantially change the definition of

returns, except for a wording change. However, instead of

retaining the categories of current law, the bill amalgamates

the categories of "return information" and "taxpayer return

information," and rewords their definition. In two respects,

the definition is broadened. First, nonreturn information

includes "information...which the Secretary collects...with

respect to a taxpayer." Since we are all taxpayers, presumably

any information pertaining to anyone is collected with respect

to a taxpayer. It is not clear why this phrase is needed, since

the current definition includes information collected "with

respect to a return or with respect to the determination of the

existence, or possible existence, of liability (or the amount

thereof) of any person." This seems to be a broad and adequate

definition and should not be changed unless the IRS makes out

a case for change.

Second, and more important, the new category of nonreturn

information leaves out the provision of current law that

return information and taxpayer return information do not

include "data in a form which cannot be associated with...a

particular taxpayer." The purpose of this provision is to
148

make publicly disclosable information to which the public is

entitled and which will not violate the privacy of a particular

taxpayer. As noted in our argument in the preceding section,

we strongly object to the deletion of the current exception.

Further, the change is not necessary to accomplish the

bill's purposes. Since the category of "nonreturn information" is meant to subsume the existing categories of return

information and taxpayer return information, the bill could be redrafted to accomplish the same disclosure to governmental

personnel by just substituting the term "return information

or taxpayer return information" wherever the term "nonreturn

information" occurs in the bill. Thus, the bill's objectives

can be accomplished without upsetting the existing delicate

balance in the area of disclosure to the public.

C. The GAO Draft

The GAO Draft (See Disclosure and Summons Provisions of

1976 Tax Reform Act, GAO Report No. GGD-80-76, June 17, 1980,

Appendix II) also amalgamates two categories of existing law,

but it consolidates returns and taxpayer return information

and renames return information as non-return information.

Under the draft, the same protection is extended to taxpayer

return information as to returns. Again, it is difficult to

see why the draft could not just keep the categories as they

are, referring to returns and taxpayer return information in

conjunction.

The GAO definition of non-return information is even

broader than that contained in S. 2402. It includes "any

information which the Secretary collects, obtains, or receives. . .which is not a return." This would make secret

any information coming into the Treasury Department and is

hence extremely overbroad. The GAO draftsperson attempts

to meet our concern about the omission of the qualification

that return information should not include data that cannot

be associated with a particular taxpayer. However, this

qualification is grafted onto the definition of returns,

but is omitted from the definition of nonreturn information.

Since nonreturn information is defined as anything the

Secretary receives that is not a return, anything that is •

excepted by the qualifying clause becomes nonreturn information, which may not be disclosed to the public.

The moral of the GAO exercise seems to be that the

rather technical definitions that have been worked out in

the 197 6 law should be left as they are, absent a good

reason for change. The GAO report (page II-2) asserts

that the current definitions are unclear but gives only

one example of an ambiguity: "It is not clear, however,

whether information qualifies as taxpayer return information

when, for example, the taxpayer's witness decides to testify
149

against the taxpayer and supplies information harmful to the

taxpayer's case." If the only problem with the definitions

of the three existing categories is the rather obscure

possibility cited by the GAO report, then the definitions

seem to be more airtight than many in the law. There are

ambiguities in any definition, and there will be as many

in the proposed changes as under existing law. To the

extent that existing law is ambiguous, the courts should

be given time to perform their traditional role of eliminating

ambiguity through judicial construction • but they cannot

perform this role if the statute is subject to constant

change. In the absence of a rather stronger showing of

problems than that furnished by the GAO report, the definition should be left alone.

II. S. 24 03: IRS Summons Enforcement Procedure

S. 2403 deals with the procedure for enforcing thirdparty summonses. These are summonses issued to a party not

under investigation, such as a bank, to obtain records relating

to a taxpayer under investigation. Section 7609 currently requires the IRS to give notice to the taxpayer at least two

weeks before the day on which the third party's records relating to the taxpayer are to be examined. The taxpayer then

has two weeks to stay compliance with the summons simply by

writing the third party recordkeeper and sending a copy to

the IRS. If the IRS wants to enforce the summons, it then

has to go into court under section 7604 and initiate a civil

action. Apparently, at this stage many taxpayers don't even

show up in court, with the result that they have obtained a

delay of at least several weeks. If the investigatee does

show up, he does not have as broad rights of discovery as

in the usual civil action. Rather, under Rule 81(a)(3) of

the Federal Rules of Civil Procedure, the district court

has discretion to grant limited discovery, and usually even

limited discovery is granted only if a colorable claim is

made out at an evidentiary hearing at which the IRS agent

in charge of the investigation is deposed. After the district

court issues an order enforcing the summons, the taxpayer may

appeal, and can often have the court stay compliance with the

summons pending appeal.

The problem with summons enforcement proceedings which

the Nunn bill seeks to address is that most of them are not

meritorious and are used as a technique for delay. In addressing this problem, the Nunn bill goes too far, and

removes virtually all the procedural rights open to a taxpayer. By requiring the district court to enter an order

within ten days of the filing of the government's response

to the taxpayer's motion, the bill seems to contemplate the
150

abolition of any possibility of an evidentiary hearing in a

context in which such a hearing, and in an appropriate case

discovery from the IRS, is necesssary in order to sort out

the few cases that may have some merit from the many that

are initiated solely for delay. In addition, the Nunn bill

cuts off a taxpayer's right to appeal the district court's

order. It is true that it leaves open the possibility of

challenging the summons in a later proceeding in which information obtained through the summons is used. This challenge

is unlikely to be of much use, however, unless the application

of the exclusionary rule is to be greatly broadened.

It may be appropriate to streamline the procedures for

enforcing a summons. But such streamlining should not

eliminate the taxpayer's rights to an evidentiary hearing, to

limited discovery, and to appeal from the order enforcing the

summons. The denial of an appeal seems particularly offensive,

since it seems under S. 2403 that while an order enforcing a

summons is not appealable, an order refusing to enforce a

summons is appealable by the government. This creates a

"Heads I win, tails you lose" situation for the government

that overcorrects for the problems that are now experienced

in obtaining timely compliance with valid summonses.

We would like to suggest that one way of ameliorating these

problems would be to redefine the substantive standards of

what summonses are considered valid by means of a bright line

test that would simplify enforcement proceedings and eliminate

those proceedings that deal only with the criminal purpose

issue.

The criminal purpose defense to an IRS summons grew out

of court cases misconstruing the statute authorizing the

issuance of IRS summonses. The enclosed excerpt from Developments in the Law • Corporate Crime, 92 Harv. L. Rev. 1227,

1320-33 (1979) develops the argument in greater detail.

The basic point of that article is that under current law,

the IRS does have the authority to conduct criminal tax investigations, and it uses the summons for this purpose up

to the point that the case is turned over to the Justice

Department for prosecution. This authority has been upheld

by the courts, but in a way that still enables taxpayers to

challenge summonses under the criminal purpose defense as a

means of delay. There is no good reason not to give the IRS

the authority it has already, but to do so in objective language

that leaves open no possibility for taxpayer challenge on this

ground.

If this is done, then persons challenging summonses on

other grounds, such as harassment or overbroadness, will be

able to proceed in the context of a docket that has been
151

cleared of the worthless criminal purpose issue. Judges

will then be able to concentrate on the grounds for challenge

that may actually be of some merit, and cases will be able to

proceed more expeditiously, without any abridgment of procedural rights. If this change is insufficient to move cases

along with the requisite speed, then some procedural streamlining may also be appropriate, but it will not have to be

as draconian as proposed in S. 2403.We would note also that

the suggested change would be applicable to ordinary summonses

(where the taxpayer is summoned directly) as well as third

party cases, and so would have a beneficial effect on and

treat equally all IRS summons cases.

Draft of Suggested Substantive Amendment

The substantive amendment to the IRS's investigatory

authority suggested in the accompanying article is very

easily drafted. Section 7602 of the Internal Revenue Code

should be amended by inserting after the words "for any

internal revenue tax" the words "or the guilt of any person

of a crime or offense defined in Chapter 75 of this Title."

This clarifies the IRS's authority to use the summons to

develop a criminal tax case.
152

B. Use of Administrative Summonses for Criminal Investigation

Agencies empowered to investigate violations of economic

regulatory legislation may issue summonses to obtain testimony

and documents.58 When the result of the agency's investigation

is a criminal prosecution (whether or not in addition to separate

civil proceedings), responsibility for the criminal prosecution is

vested in the Justice Department. Such criminal cases commence

formally with the convening of a grand jury and, after an indictment is returned, are governed exclusively by the Federal Rules

of Criminal Procedure.

This Section addresses problems which arise from the division

of responsibility sketched above. Courts have supervised agency

investigations implicating a potential or pending criminal prosecution by attempting to fix the point at which the criminal element

of an investigation predominated, so that only the Justice Department, and not the agency, might proceed. Bound up with this

determination are procedural issues of intervention and discovery

at proceedings to enforce summonses, and standing to suppress

evidence at trial.

"See p. 13is & note 53 supra.

''The statement in text refers only to antitrust matters enforced by the

Department of Justice. See generally 2 P. AREEDA & D. TURNER, ANTITRUST LAW

H 305c (1978).

"See-is U.S.C. §§ 1311-1314 (1976).

"See is U.S.C. §§ 46, 49, 5° (1076) (FTC); 47 U.S.C. 5 409(e) <i976)

(FCC); 49 U.S.C. f 1484 (1976) (CAB); 29 U.S.C. 5 «S7(b) (1976) (OSHA);

IS U.S.C. §§ 77s(b), 77uuu(a), 78U, 79r, 8oa-4i, 8ob-9 (1976) (SEC); IS

U.S.C. § 1714 (1976) (Office of Interstate Land Sales Registration, HUD).
153

/. The Improper f'nrpose Doctrine.•In the leading case

of United Stales v. O'Connor,• Judge Wyzanski refused to enforce an IRS summonsr

'

8

issued after indictment and at the informal request of the Justice Department. He noted (hat the

criminal process contemplated only one "agency of compulsory

disclosure" •the grand jury •so that after indictment the government possessed no power to obtain compulsory discovery/'9

Thus, where issuance of a summons was not justified by a bona

fide independent investigation,00 the court would not allow the

government to obtain discovery by this means.

In subsequent cases, some circuits began to develop a doctrine

that an IRS summons issued before indictment would not be enforced if issued for the "improper purpose" of solely criminal

investigation.81 The Supreme Court first gave full consideration

" 118 F. Supp. 248 (D. Mass. 1953).

58 Because most litigation has arisen in connection with enforcement of IRS

summonses, the analysis will focus on these. See generally Gilbert, Emanations

of the "Skift-of-Emphasis" Theory • The "Improper Purposes" Doctrine Revisited, 5 SUFFOLK U.L. REV. 35 (1970); Lyon, Government Power and Citizen

Rights in a Tax Investigation, 25 TAX LAW. 79, 79-85 (1971); Nuzum, LaSalle

National Bank and the Judicial Defenses to the Enforcement of an Administrative

Summons, 32 TAX LAW. 383 (1979); Saltzman, Supreme Court's LaSalle decision vo

makes it harder to successfully challenge a summons, 49 J. TAX. 130 (1978) ; .

Stroud, The Criminal Prosecution Defense: A Defense to a Section 7602 Summons?, 4 AM. J. CRIM. L. 152 (1975-1976); Wilson & Matz, supra note 13, at

653-83; Symposium on Federal Civil and Criminal Income Tax Fraud Investigations, 2 HOFSTRA L. REV. 129, 135-52 (1974); Comment, Constraints on the

Administrative Summons Power of the Internal Revenue Service, 63 IOWA L.

REV. 526 (1977); Comment, Taxpayer Intervention at Summary Proceedings to

Enforce an Internal Revenue Service Summons, 32 MD. L. REV. 143, 150-55

(1972); Comment, The Improper Purpose Challenge to the Section 7602 Summons, 31 TAX LAW. 226 (1977); 54 TEX. L. REV. 1147 (1976).

Any IRS agent may issue a summons. See I.R.C. §§ 7602, 7701(a) (11) (B);

Delegation Order No. 4 (Rev.), 22 Fed. Reg. 3894 (1957). A summons is not

self-executing, so that if the person summoned refuses to comply, which he may

do without penalty, see Rcisman v. Caplin, 375 U.S. 440, 446-49 (1964) (as long

as he does so in good faith, see United States v. Murdock, 290 U.S. 389, 397-98

(1933)) 1 the agency must petition a district court for enforcement under I.R.C.

I 7604.

50 118 F. Supp. at 250-51.

00 The court argued that since the IRS agent did not have "any specific

matter involving [the taxpayer1" pending before him, he could not claim

authority to issue the summons under a statute which authorized issuance only

for the purpose of investigation. See 118 F. Supp. at 250.

01 See United States v. Morgan Guaranty Trust Co., 572 F.2d 36, 39-41 (jd

Cir.), cert, denied, 99 S. Ct. 89 (1978). In Borcn v. Tucker, 239 F.2d 767, 772-73

(9th Cir. 1956), an IRS summons was challenged on the ground that it was

being employed for criminal investigation. In rejecting the challenge, the court

distinguished O'Connor as involving a summons issued after indictment. See

also In re Magnus, Mabce & Reynard, Inc., 311 F.2d 12, 14-15 (2d Cir. 1962),

cert, denied, 373 U.S. 902 (1963). Later, confusion was engendered by dictum
154

to this issue in Donaldson v. Ihiiln/ Slotrs.11" There fl taxpayer

had sought t<i intervene in a proceeding lo enforce a third-parly

summons, arguing that the summons should not be enforced because it was issued "in aid of an investigation (hat ha[d| the potentiality of resulting in" a criminal prosecution.'" After denying

intervention, the Court nevertheless went on to consider the merits

of the challenge to the summons. Reviewing the statutory grant

of investigatory authority, it concluded that "Congress clearly

has authorized the use of the summons in investigating what may

prove to be criminal conduct." °

4 The Court adopted, however,

the developing improper purpose doctrine, which it indicated was

"applicable to the situation of a pending criminal charge" and

perhaps to "an investigation solely for criminal purposes." 05 A

summons would be upheld if "issued in good faith and prior to a

recommendation for criminal prosecution." 00 Lower courts were

left to decide, first, when the "recommendation for criminal prosecution" took place; and second, whether a prerecommendation

summons issued "solely" for the purpose of criminal investigation would necessarily fail the good faith requirement.

Most courts which addressed the first issue decided that the

relevant recommendation was referral from the IRS to the Justice

Department,07 rather than any recommendation within the IRS

in Reisman v. Caplin, 375 U.S. 440 (1964), a case not involving the criminal

purpose issue, in which the Court said that a summons could be challenged "on

any appropriate ground . . . including] . . . the defense' that the material is

sought for the improper purpose of obtaining evidence for use in a criminal

prosecution," id. at 449 (citation omitted). Lower courts after Reisman assumed

that this "improper purpose" defense applied to summonses issued before indictment, despite the citation of Boren, a case refusing to apply the doctrine before

indictment. See United States v. Erdner, 422 F.2d 835 (3d Cir. 1970); United

States v. Roundtree, 420 F.2d S45, 851 (5th Cir. 1969); United States v. Michigan

Bell Tel. Co., 415 F.2d 1284 (6th Cir. 1969); DiPiazza v. United States, 41s

F.2d 99, 102-03 (6th Cir. 1969), cert, denied, 402 U.S. 949 (1971); Wild v.

United States, 362 F.2d 206 (9th Cir. 1966). But see Howfield, Inc. v. United

States, 409 F.2d 694, 697 (9th Cir. 1969).

02400 U.S. 517 (1971).

03 Id. at 332. This is the argument to which the Court responded. In the

district court, the taxpayer made the stronger argument that the summons was

issued "for the express and sole purpose of obtaining evidence concerning any

violations of the criminal statutes," id. at 521.

"Id. at 535-

85/rf. at 533-

60 Id. at 536.

"See United States v. Hodge & Zweig, 548 F.2d 1347, 1331 (9th Cir. 1977).

In United-States v. Billingsley, 331 F. Supp. 1091 (N.D. Okla. 1971), rev'd and

remanded, 469 F.ad 1208 (10th Cir. 1972), the district court denied enforcement

where the local special agent had in writing made a recommendation for

prosecution, but the IRS regional office had taken "no action on the recommendation other than to request that the Special Agent in charge of the case make a
155

hierarchy.*1 On the .second issue, llie Second Circuit in United

Stairs v. Morgan (.iiiaranly Trust ('<;."" suHUcsted that Ihc good

faith requirement be limited to prevent abuses such as harassment,7

" and that the improper purpose inquiry therefore be restricted to an "objective test," under which a summons would

generally be enforced if issued prior to referral for prosecution.71

Most courts, however, chose to read the ambiguous Donaldson

opinion broadly to preclude enforcement of summonses issued

prior to recommendation if "the sole purpose of the summons

was to obtain evidence for a criminal prosecution," 72 or even if

the investigating agent had formed a firm purpose to recommend

prosecution.73

The "objective test" can be justified by the practicalities of

summons enforcement proceedings. Most challengers lose on the

merits, but the delay involved in discovery and appeal can be of

great advantage •it makes it less likely that an indictment will

be brought within the statutory limitations period, and in general

allows time for the occurrence of events which cause abandonment of the prosecution, such as loss of interest and changes in

policy or personnel on the part of the prosecution. The "objective

test," in cutting off many claims without discovery procedures,

largely eliminates the advantage of opposing a summons solely ,

for the purpose of delay. Motivated by the same concern to pre-,_,

vent abuse of litigation, courts rejecting an objective test have o

i

supplemental investigation," 331 F. Supp. at 1092 n.2. The Tenth Circuit reversed, holding that "the 'recommendation' referred to in Donaldson occurs, at

the earliest, when the Internal Revenue Service forwards a case to the Department of Justice for criminal prosecution," 469 F.2d at 1210.

""But see United States v. Oaks, 360 F. Supp. 855 (CD. Cal. 1973), remanded

on other grounds, 508 F.2d 1403 {9th Cir. 1974). Oaks held that prosecution is

recommended when "the local special agent in charge of the case" recommends

prosecution, "even if [the recommendation is] not final or reduced to writing."

360 F. Supp. at 858. There, a written recommendation for prosecution was not

made until nine days after the defendant's arrest.

00 572 F.2d 36 (2d Cir.) (Friendly, J.), cert, denied, 99 S. Ct. S9 (197S).

,0 See 572 F.2d at 40-41 (discussing United States v. Powell, 379 U.S. 48, 58

(1064)).

" See id. at 41. See also United States v. Troupe, 43S F.2d 117 (8th Cir.

WO73 United States v. Wcingarden, 473 F.2d 454, 461 (6th Cir. 1973); see, e.g.,

United States v. Zack, 521 F.2d 1366, 1368 (9th Cir. 1975); United States v.

McCarthy, 514 F.2d 368, 374-75 (3d Cir. 1975).

73 See United States v. Friedman, 532 F.2d 928, 932 (3d Cir. 1976); United

States v. Wall Corp., 475 F.2d S93, 895 (D.C. Cir. 1972); United States v.

Oaks, 360 F. Supp. 855, 858-59 (CD. Cal. 1973), remanded on other grounds,

508 F.2d 1403 (9th Cir. 1974).
156

shortened enforcement proceedings by limiting the availability

of discovery.'-1

Last Term, in United Stales v. LaSalle National Bank• the

Supreme Court was faced with a conflict between the "objective

lest" and the decision of the court below, which determined "good

faith" by looking to the state of mind of the IRS agent at the time

he issued the summons. Steering a middle course, the five-to-four

decision by the Court laid down a test which will fail to resolve

confusion in the lower courts.70 The opinion by Justice Blackmun,

the author of Donaldson, retained but redefined the two-part test

requiring that a summons be issued in good faith and prior to

recommendation for criminal prosecution.

The Court first reviewed the statutory scheme authorizing

investigations and affirmed the validity of civil investigations with

criminal potential: "Congress has not categorized tax fraud investigations into civil and criminal components." 7T But as a

matter of statutory construction, the Court held that since the

statute contained no "affirmative grant of summons authority

for purely criminal investigations," 7S these were not authorized.

The Court relied on two policy concerns in restricting the

availability of summonses even where seemingly authorized because of an ongoing civil investigation. Summonses were not

meant "to broaden the Justice Department's right of criminal

litigation discovery or to infringe on the role of the grand jury as

a principal tool of criminal accusation." "

9

These policy interests

justified a "prophylactic" rule precluding enforcement of any

summons issued after referral. The Court acknowledged that

a line drawn at referral did not offer absolute protection against

infringement of these interests. The potential for infringement

exists earlier, when the investigating agent recommends prosecution, but the Court argued that such a possibility was "remote." 80

The point at which the prophylactic rule would apply was decided

through a candid effort to balance the interest in civil IRS investi74 See United States v. Church of Scientology, 520 F.2d 818, 824-23 (9th

Cir. 1975); United States v. Salter, 432 F.2d 697, 700-01 (1st Cir. 1970); pp.

1330-31 infra.

"437U.S. 29S (197S).

'"Compare United States v. Serubo, 460 F. Supp. 689, 693-99 (E.D. Pa.

1978) (prercferral summons in course of joint civil and criminal investigation

invalid because information shared with Justice Department) (dictum), with

United States v. Chemical Bank, 43 A.F.T.R.2d 70-4S6 (2d Cir. 1979) (cooperation

between IRS and Justice Department in a "strike force" investigation does not

invalidate-the IRS summons). Both cases relied on LaSalle.

"437 U.S. at 311.

78 Id. at 316 n.iS.

'"/</. at 312.

80 Id. at 313 n.15.
157

gation KI against the competing policy interests identified by the

Court.

While ruling that a summons issued after referral would not

be enforced, the Court declined to accept the proposition that all

summonses issued before referral were valid."" The district court

in LaSallc had found that the IRS agent who had issued the summons was solely interested in "unearthing evidence of criminal

conduct," 83 and had refused enforcement on this ground. The

Supreme Court, however, felt that examination of the agent was

insufficient to establish what it perceived to be the relevant consideration • "the institutional posture of the IRS." 84 The Court

noted that an agent's recommendation to prosecute is reviewed at

several layers within the IRS, and that "[a]t any of the various

stages, the Service can abandon the criminal prosecution, can decide instead to assert a civil penalty, or can pursue both goals." s3

Thus, even though the agent issuing the summons intends to use

it only for criminal purposes, the possibility that the Service would

change its mind and decide to use the evidence for civil purposes

after all allows the summons to conform to the requirement that

it be issued for civil investigatory purposes.80 In order to block enforcement, the taxpayer must show that the IRS as an institution

has abandoned the determination of civil tax liability. The Court's

ruling also serves to block out the boundaries of appropriate discovery. Arguing that inquiry into the agent's motives leads to

fruitless delay, the Court said that discovery must be limited to

"an examination of the institutional posture of the IRS." 87

The LaSalle rule is an unsatisfactory solution to the problems

raised by the overlap of agency summons and criminal prosecution. The Court argued that a summons is validated by the possibility of a decision at a later step in the review process to seek

81 In most cases, action on the civil aspects of a case will be suspended after

referral "until the criminal aspects are closed," PoLicns or THE IRS HANDBOOK,

P-4-84, reprinted in 1 CCH INTERNAL REVENUE MANUAL 1305-10 (1978), so that

the IRS's interest in immediate summons enforcement is minimal. See also

Office of the Chief Counsel, IRS, Civil Considerations in Pending Criminal

Matters, Order No. 3050.1 (March 23, 1978).

82 See 437 U.S. at 316-17.

83 Id. at 308.

84 Id. at 316.

"Id. a.t 31s.

"But cj. United States v. Procter & Gamble Co., 187 F. Supp. 55, 58 (D.N.J.

i960) (intent at time grand jury was called, not possibility of indictment in

future, relevant factor in determining abuse of grand jury for civil purposes).

87 437 U.S. at 316. The Court did not make clear whether such an examination should involve inquiry into the particular agent's motives. The agent's

motives may be more significant, the Court noted, in proving other sorts of

lack of good faith, such as harassment, see id. at 316 n.17.

I
158

ii civil penally. It si-cms that the institutional good faith requirement can be failed only where ihe decision (<> pruned criminally

has been made at the final layer of review within the agency.""

As Ihe Court acknowledged, only an "extraordinary departure" "*

from normal procedure could lead the IRS to fail the good faith

test. Thus the practical effect of LaSallc is likely to be the same

as if the Morgan rule had been accepted, in that all summonses

issued before referral will be enforced, except that the investigatee

will be given the chance to obtain some discovery. Such discovery,

however, will be quite circumscribed,00 since the only relevant

concern is the final institutional recommendation.

As an exercise in statutory construction, LaSalle is unconvincing. While, as the Court noted, there is no explicit grant of

authority for solely criminal investigation, there is also nothing

in tiie legislative history to suggest that Congress intended to prohibit such use of the summons power.01 The Court should have

more closely examined the policy interests it invoked. If the articulated interest of preventing destruction of the limits on criminal discovery or infringement of the role of the grand jury is

nothing more than a desire to keep things separate out of a sense

of judicial propriety or concern for appearances, it is inconsistent

with the Court's own observation that Congress did not intend

such a compartmentalization.02 The Court's concern to prevent

infringement of the grand jury is also misplaced. Any differences

between summons and subpena in substantive scope or procedural

protection operate in the direction of making the subpena the

more powerful tool for the government.03 Thus, in terms of the

protections provided by law, a defendant has nothing to complain

of when investigated by summons rather than subpena. True, a

defendant may prefer that process be issued by a United States

attorney rather than an agency employee, since the latter may be

motivated by prior involvement to issue a summons in order to

harass. Such motivation could be entirely vindictive or could

arise from the desire to press settlement of a collateral civil matter.

However, the danger of such abuse can best be dealt with under

"See id. at 315.

80 Id. at 314.

00 See United States v. Marine Midland Bank, 58s F-2d 36, 39 (2d Cir. 1978).

Bui see 437 U.S. at 320 (Stewart, ]., dissenting).

,

0

' I.R.C. § 7602 authorizes issuance of a summons "[f]or the purpose of

ascertaining the correctness of any return." Since filing an incorrect return (with

the requisite mens rea) may subject the filer to criminal sanctions, see I.R.C.

§§ 7201-7207, the statute can fairly be read to authorize an investigation solely

designed to determine criminal liability, as such a determination involves "ascertaining the correctness" of the return.

01 See 437 U.S. at 311; p. 1324 supra.

"See pp. 1312-13 supra.
159

tht* rubric of harassment, an independent ground for refusal to

i'Hforce a summons.1"

The argument that administrative summonses should not he

allowed to subvert limitations on criminal discovery, which apply

after indictment, is more persuasive.""' Discovery from the defendant is limited to items which the defendant intends to introduce

in evidence.00 Normally this excludes key evidence, since the defendant usually does not plan to introduce evidence which the government seeks in order to establish guilt. Further, discovery from

the defendant is conditioned on the defendant's seeking discovery

from the prosecution. As for discovery of evidence from third

parties, the criminal rules provide for issuance of subpenas,07 but

these are meant specifically to provide for evidence at trial.98

Neither are depositions general discovery devices •they can

only be used under limited circumstances to preserve evidence.90

Thus the present limits on discovery in the criminal rules provide

significant protection to the defendant, protection which should

not be circumvented by the fortuity of agency investigation.100

If the important consideration is limits on criminal discovery

and not encroachment on the role of the grand jury, then the LaSalle rule is overinclusive, because it mandates an inquiry into

good faith as to summonses issued before indictment, when the |

government's ability to investigate is meant to be nearly unlimited, as shown by the broad powers of the grand jury. It is under- to

84 See United States v. Powell, 379 U.S. 48, 58 (1964). '

95 Any such argument assumes that an agency will in fact turn over to criminal

prosecutors the fruits of its investigation.

"°5eeFED. R. CRIM. P. 16(b)(1)(A).

" See FED. R. CRIM. P. 17.

"See United States v. Keen, 509 F.2d 1273, 1274-75 (6th Cir. 1975); United

States v. Hedge, 462 F.2d 220,222-23 (5th Cir. 1972).

89 See FED. R. CRIM. P. 15, Notes of Advisory Comm. on 1974 amendment

(the rule "is not to provide a method of pretrial discovery").

100 See Application of Myers, 202 F. Supp. 212 (E.D. Pa. 1962) (focusing

on discovery limits and not the grand jury in refusing to enforce administrative

summons); Note, Concurrent Civil and Criminal Proceedings, 67 COLUM. L.

REV. 1277, "77-78, 1280-81 (1967).

Preventing unilateral prosecution discovery is, however, a limited concern.

The practical effect of a rule preventing use of an agency summons to obtain

discovery may just be to make prosecutors more careful to obtain all the

evidence they need from the grand jury, and may even redound to the disadvantage of defendants if this leads to more extensive use of the grand jury.

In addition, although it should not do so, the government can evade limitations on discovery by using a grand jury to gather evidence after indictment.

Under present law, based on judicial reluctance to interfere in the grand jury

process, there is little a court can do to stop such abuse. See United States v.

Doc, 4SS F.2d 1270 (1st Cir. 1972); Rodis, A Lawyer's Guide to Grand Jury

Abuse, 14 CRIM. L. BULL. 123 (1978). Thus a prophylactic rule to deter abuse

in the summons area may simply shift abuses to the grand jury area.
160

inclusive liccau-.r it dues nol fully piulrcl I lit' interest in limited

\l\wttwry when ;in agciM'y issues u siinunous before referral and

in conformity with Hit* LaSallv good faith test, but the person

under investigation is under indictment for a separate offense.101

Even though the material sought might be of use to the government in the criminal case, a court following LaSalle would presumably grant enforcement.

Even after indictment a court should exercise discretion,102

weighing the danger that the government is employing the summons to obtain discovery for the criminal case against the legitimate government interest in the particular civil investigation. In

assessing the likelihood that the information will find its way from

the agency to the Justice Department, the court should inquire,

for example, whether there are any statutory limits on such information sharing.103 The government should have the burden

of convincing the court to enforce the summons, since it possesses

the evidence necessary to inform the court's exercise of its discretion.

It has been argued above that the criterion for automatic enforcement of a summons should be whether it was issued before indictment. Current law, which makes referral rather than indictment the cutoff point for automatic enforcement may be justified on the grounds that this decreases the chance that a summons

will be returned after indictment. The defendant is in effect given

a grace period between referral and indictment to challenge the

summons and perhaps to appeal from a grant-of enforcement.

Whether indictment or referral is chosen as the cutoff point, the

rights of the parties should be fixed at the time of the enforcement hearing in district court instead of issuance.104 This is be101 See United States v. Hodge & Zweig, 548 F-'d 1347 (9'h Cir. 1977);

United States v. Henry, 491 F.2d 702 (6th Cir. 1974) ; Venn v. United States,

400 F.2d 207 (5th Cir. 1968).

102 This exercise of discretion is the only distinction between the test proposed

here and the Morgan court's approach. See p. 1323 supra.

103 See, e.g., I.R.C. § 6103.

104 The problem of when to fix the rights of the parties has arisen in the

context of a postindictment appeal from a decision to enforce a preindictment

summons. Courts have usually resolved the question against the defendant,

holding that the rights of the parties are fixed at time of issuance, thus making

the subsequent indictment legally irrelevant. Set In re Magnus, Mabee &

Reynard, Inc., 311 F.2d 12, 16 (2d Cir. 1962), cert, denied, 373 U.S. 902 (1963)

(summons enforced where government forced to return indictment by running

of statute of limitations); United States v. Moore, 485 F.2d 1165, 1168 n.4

(5th Cir. 1973); United States v. Cromer, 483 F.2d 99, 7.01 (9th Cir. 1973); cf.

Couch v. United States, 409 U.S. 322, 329 n.9 (1973) (rights of parties fixed at

time summons is served, so that transfer of documents after service is legally

irrelevant). But cf. United States v. Monsey, 429 F.2d 1348 (7th Cir. 1970)

(appeal taken by Government). Under an objective test (such as Morgan or
161

cause l lie ri'k'vnnl roiuvni should itol l>e wheihei (In- stumnous

was issued for It proper purpose, but rather whether I lit' effect of

enforcement will be to obtain criminal discovery at a lime when it

would be improper.

LaSallc, like the "improper purpose" cases preceding it, was

an IRS case. There is less litigation involving other agencies,

probably because these issue fewer summonses,10"' and no cases

could be found refusing enforcement on improper purpose grounds

outside the tax area. LaSalle's applicability to summonses issued

by agencies other than the IRS is uncertain. An important consideration under LaSallc is the extent to which the legislative

grant of investigative authority can be interpreted to permit solely

criminal investigation. In contrast to the vague provision in the

Internal Revenue Code,106 statutes authorizing investigation by

Offices of the Inspector General107 and by the SEC 10S seem to contemplate solely criminal investigation, although LaSallc has been

held applicable to the SEC.109 The test proposed here applies

uniformly to all agencies,110 since it rests not on exegesis of varythc test proposed here) the appellate court's dilemma is eased, since any appeal

based on improper purpose grounds will almost certainly be frivolous. In such

a case, therefore, the desirability of discouraging frivolous appeals outweighs

the concern about the integrity of criminal discovery.

108 In 1976 the IRS issued approximately 3000 third-party summonses per

month. See Wilson & Matz, supra note 13, at 679 n.138 (1977). '

,00I.R.C. 5 7602. |_.

107 The Inspector General Act of 1978, Pub. L. No. 95-452, 92 Stat. :IOI W

(1978) (to be codified at 5 U.S.C. app.) created Offices of the Inspector Genera] |

in 12 executive agencies. Under §§ 4(a)(1) and 6(a)(2) of the Act, OIG's

enjoy broad investigative power, and may issue subpenas in connection with

these investigations under § 6(a)(4) which are enforceable by a district

court. Investigations of criminal conduct•fraud and bribery • were clearly

contemplated. See S. REP. No. 95-1071, 95th Cong., 2d Sess. (1978), reprinted in

[1978] U.S. CODE CONG. & AD. NEWS 4406. As proposed by the Senate Committee, the Bill defined "investigation" as including investigation of "criminal

activity," see 124 CONC. REC. S15S69-70 (daily ed. Sept. 22, 197S), but the entire

definition was deleted prior to passage on the grounds that "'[[Investigation' is a

term with a generally well-understood meaning," id. at S15873 (remarks of Sen.

Eaglcton).

108 The SEC has the power to issue summonses in aid of "all investigations

which, in the opinion of the Commission, are necessary and proper for the enforcement of [the Act]," 15 U.S.C. § 77s(b) (1976), and may transmit evidence

of criminal violations to the Attorney General, see 15 U.S.C. § 77t(b) (1976).

109 See SEC v. Dresser Indus., Inc., 453 F. Supp. 573, 575-76 (D.D.C. 1978).

See also United States v. Handler, [1978 Transfer Binder] FED. SEC. L. REI\

(CCH) I 96,519, at 94,025-26 (CD. Cal. 1978) (SEC Special Counsel investigation); United States v. Bloom, 450 F. Supp. 323, 330-31 (E.D. Pa. 1978) (informal SEC investigation).

110 The improper purpose problem has not arisen in the antitrust area, where

the Justice Department has responsibility for both civil and criminal investig.--

tion. Information obtained by Civil Investigative Demand (CID) may be used
162

inj» statutory authority to issue, a summons, hut rather nil llti' duly

of com Is to oversee activity which threatens to interfere will) Ihc

safeguards erected around criminal trials, 'l'his duty is grounded

on common agency statutes requiring a court order to enforce a

summons."' Applying LaSallc to agencies which do not have a

procedure for formal referral to the Justice Department "- would

require that courts search for a "recommendation" analogue. Lack

of a definite point of referral poses no problems for the analysis

advocated here, as the cutoff point for automatic enforcement in

such cases could be indictment.113

2. Summons Enforcement Proceedings and Suppression at

Trial.•Consideration of the procedural aspects of summons

enforcement proceedings114 must start with rule 81(a)(3) °f

the Federal Rules of Civil Procedure, which provides that such

proceedings are summary and that applicability of the rules •

including the discovery and intervention provisions •may be

limited at the trial judge's discretion.115 Under guidelines laid

down by appellate courts, discovery (usually deposition of agency

employees and production of investigative files) is allowed only if

evidence substantiating allegations of criminal purpose has been

before a grand jury or otherwise lor criminal cases. See 15 U.S.C. I 1313(d)

(1976). Limitation of this tool to civil purposes would prove a minimal constraint on the Department, since it would simply require moving to the grand

jury at the appropriate stage in the investigation. Indeed, a litigant would be

foolish to challenge a CID on improper purpose grounds before indictment,

because he would simply be laced wilh a grand jury investigation if he won

the challenge. Such a shift is much less burdensome when it takes place within

the Justice Department, rather than across agency boundaries.

'" See statutes cited notes 56, 58 supra.

112 For example, § 4(d) of the Inspector General Act of 1978, Pub. L.

No, 95-452, 92 Stat. 1101 (1978), provides that the OIG "shall report expcditiously to the Attorney Genera! whenever the Inspector General has reasonable grounds to believe there has been a violation of Federal criminal law."

This requirement of expeditious reporting suggests a model of cooperative investigation at an early stage. See Legislation to Establish Offices oj Inspector

General: Hearings on H.R. 85S8 Before the Subcomm. on Governmental Efficiency and the District oj Columbia oj the Senate Comm. on Governmental

Affairs, 95th Cong., 2d Sess. 12, 28, 48-49, 65-66 (1978).

'"Indictment is in fact the point suggested by the analysis here, and referral is used as an easily ascertainablc point prior to indictment in order to

protect the defendant's opportunity to challenge a summons.

114 See generally Symposium on Federal Civil and Criminal Income Tax

Fraud Investigations, 1 HOFSTRA L. REV. 129, 152-58 (1974) ; Comment, Taxpayer Intervention at Summary Proceedings to Enjorce an Internal Revenue

Semite Summons, 32 MD. L. REV. 143 (1972).

115 Sec Advisory Comm. Notes on Rule 81 (1946) (Rule 81(a)(3) "pcrmit[s]

application of any of the rules in the proceedings whenever the district court

deems them helpful").
163

prt'sciiiril iH iin rvnlnilinry lii-.-irinj'.-''" 'Hii' iirliiuliilrd riuuvrh

lias bctll ID pievenl. abuse of lili^aliou llinuiuli delay.'"

Rule 81 has also been used lo deny intervention to the potential defendant in proceedings to enforce summonses issued to

third parties. A taxpayer who alleges that a summons is being

used for an improper purpose has an interest in not being prosecuted or convicted on the basis of evidence obtained in an improper manner."" The question is whether this interest is substantial enough to justify giving the taxpayer the opportunity to

intervene in the summons enforcement proceeding against a third

party. Before Donaldson, several circuits allowed the taxpayer to

intervene as of right under rule 24(a)(2).110 In Donaldson,

however, the Court qualified this reading-of rule 24 with reference

to rule 81, which makes the application of all the Civil Rules to

summons enforcement proceedings discretionary. The Court recognized that a taxpayer had some interest in suppressing documents obtained for an improper purpose, but reasoned that such

an interest was sufficiently protected by the taxpayer's ability

to seek exclusion of such evidence at trial.120

The subsequent decision in United States v. Miller,1-

1

however, casts doubt on the availability of this protection. The defendant in Miller sought at trial to suppress evidence obtained

from grand jury subpenas which he claimed were technically de1,8See United States v. Saltcr, 432 F.2d 697 (1st Cir. 1970). SaUer has been

generally followed, see United States v. Interstate Tool & Eng'r Corp., 526 F.2d

59, 62 (7th Cir. 1975); United States v. Church of Scientology, 520 F.2d 818,

824 (gth Cir. 1975); United States, v. McCarthy, 514 F.2d 368, 373 (3d Cir.

197S). In United States v. Newman, 441 F.2d 165 (5th Cir. 1971), even an

evidentiary hearing was denied the summoned party where the allegations he

made were not sufficiently substantial. See id. at 169. The Fifth Circuit has

since moved to a position similar to that of SaUer. See United States v. Garrctt.

571 F.2d 1323, 1327 (5th Cir. 1978) ; United States v. Wright Motor Co., 536

F.2d 1090, 1095 (5th Cir. 1976) ; cf. Lynn v. Bidcrman, 536 F.2d S20 (9th Cir.

1976) (no evidentiary hearing required in proceeding to enforce HUD subpenn

when investigation initiated at request of aggrieved purchaser rather than agency

due to small possibility of agency oppression in such a case).

'"See United States v. Church of Scientology, 520 F.2d 818, 824-25 (9th

Cir. 1975); United States v. Salter, 432 F.2d 697, 700-01 (1st Cir. 1970).

'"The third party may itself argue the improper purpose point, as was the

case in LaSalie.

'"See cases cited 400 U.S. at 530. Rule 24(a)(2) allows intervention to an

applicant who

claims an interest relating to the property or transaction which is the

subject of the action and [whol is so situated that the disposition of the

action may as a practical matter impair or impede his ability to protect

that interest, unless the applicant's interest is adequately represented by

existing parties.

""See 400 U.S. .it 531. Sec also United States v. Censer, 58: F.;d 292, 303

n.18 (3d Cir. 1978).

181 425 U.S. 435 (1976).

I
164

iVitive. Thr Court (iciiiril slamlinu to tIn* defendant umlrr tlic

fourth amendment, reasoning thai Iw luwl no expectation of privacy in the pertinent documents.1

" The Ninth Circuit has relied

on Millrr to hold that evidence obtained by a third-party summons

cannot be excluded on improper purpose grounds when the defendant lacks any fourth amendment interest.'-':1

The Third Circuit arrived at the opposite conclusion in United

States V. Censer,124 reasoning that Miller involved only fourth

amendment objections to enforcement while civil summonses implicate the statutory limits of section 7602 of the Internal Revenue

Code, and that to deny standing at trial would undermine the balance struck by Donaldson. Genser's reasoning is persuasive because the improper purpose doctrine rests on considerations which

deserve protection independent of fourth amendment grounds.

Congress partially overruled the denial of intervention in

Donaldson • and rendered largely moot the emerging split in

the circuits •in the Tax Reform Act of 1976, which granted taxpayers the right to receive notice of certain third-party summonses

and to intervene in the enforcement proceedings.123 But this right

extends only to summonses issued to "third-party recordkeeper[sj," 12c a category which includes most financial institutions but

not all professionals. Because of Supreme Court decisions restricting fourth and fifth amendment protection in this area,127 however,

an intervenor's only successful arguments are likely to be based

not on privacy, but rather on statutory grounds such as improper

purpose. There thus seems to be little principled distinction between third-party recordkeepers and others from whom evidence

is sought. With a view toward evenhandedness, courts exercising

discretion under Donaldson should generally permit intervention.

Complicating this situation, however, is the risk that the taxpayer will be able to exploit a permissive attitude toward intervention for purposes of delay. Where the taxpayer intervenes under

122 See id. at 440-43.

123 See United States v. Sand, 541 F.sd 1370, 1374 (9th Cir. 1976).

12458J F.2d 291, 299-311 (3d Cir. 1978). The Eighth Circuit, in United

States v. Schutterle, 42 A.F.T.R.2d 78-6077 (8th Cir. 1978), noted the problem

but did not reach the issue.

125 See I.R.C. § 7609.

120 I.R.C. I 7609(a). Third-party recordkeepers include savings and loan

institutions, banks, credit unions, brokers, attorneys, accountants, and "any

person extending credit through (he use of credit cards or similar devices," id.

See generally United States v. Exxon Co., 450 F. Supp. 472 (D. Md. 197S) (defendant not a third-party recordkecper where business records sought were

unrelated to issuance of credit cards).

117 See Fisher v. United States, 425 U.S. 391 (1976); United States v. Miller,

425 U.S. 435 (1976); California Bankers Ass'n v. Shultz, 416 U.S. 21 (1974);

Couch v. United States, 409 U.S. 322 (1973); p. 1289 & note 78 supra.
165

the 1976 amendment, (lie running of (he statute of limitations for

criminal tax violations is UJIUHK'**" Such is apparently not the

case where intervention is granted under Donaldson, and putting

such a premium on delaying tactics would be inconsistent with

Donaldson's emphasis on the preservation of the summary nature

of summons enforcement proceedings. The potential for delay

would be a less significant problem under the analysis proposed

here, since in most situations an improper purpose claim could be

disposed of simply by determining whether the case had been referred to the Justice Department.
166

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

TAXATION WITH REPRESENTATION FUND,

Plaintiff,

Civil Action No. 78-2304

FILED

INTERNAL REVENUE SERVICE, :

••.•••. Defendant. . JAN 2 21990

JAMES F. DAVEY, fl'

Appearances: For the Plaintiff: William A. Dobrovir, Esq.

For the Defendant: John J. McCarthy, Esq.

Donald J. Gavin, Esq.

Michael J. Salem, Esq.

Tax Division, Dep't of Justice

MEMORANDUM OPINION OF UNITED STATES DISTRICT JUDGE

CHARLES R. RICHEY

The complaint in this action was filed by the Taxation With

Representation Fund under the Freedom of Information Act, 5 U.S.C

S 552, for access to records of the defendant Internal Revenue

Service [hereinafter, "IRS"]. The records the plaintiff seeks are

IRS General Counr * *s Memoranda [hereinafter, "GCM's], IRS Technical Memoranda [hereinafter, "TM's], and IRS Actions on Decisions

1

[hereinaffer, "AOD's], issued after July 4, 1967, and IRS indices

to these records. The plaintiff has exhausted its administrative

remedies, and the Court has jurisdiction of this action pursuant

to 5 U.S.C. S 552(a) (4) (B).

I. THE STATUTORY FRAMEWORK

Cases such as this one in which a party seeks what arguably

can be called systems of interpretative law involve the interplay

between three subsections of the Freedom of Information Act. First,

2

there is section 552(a) (2) which requires each federal agency to

1. July 4, 1967 is the effective date of the 1967 amendment to the

Act. See Pub.L. 93-502 §4.

2.(2) Each agency, in accordance with published rules, shall make

available for public inspection and copying •

(A) final opinions, including concurring and dissenting opinions,

as well as orders, made in the adjudication of cases;

(B) those statements of policy and interpretations which have

been adopted by the agency and are not published in the Federal Register;

»ff»JC) admi

nist"tive staff manuals and instructions to staff that

affect a member of the public; [and)

. . . also . . . indexes [to such material].
167

make certain information available to the public. Furthermore,

section 552(a)(2) requires the agency to maintain indices and make

them available to the public. Thus, if records qualify under

section 552(a)(2), not only are they subject to mandatory disclosure,

the agency must create an indexing system and make that system available to the public.

As opposed to the limited language of section 552(a)(2),

3

section 552(a)(3) is virtually all inclusive. This latter section

requires agencies to promptly make available all reasonably described records which have been requested pursuant to the procedures

set down by the agency. There is no requirement in section 552(a)(3)

for the agency to create indices as there is under section 552(a)(2).

Finally, section 552(b) sets out nine exemptions from mandatory

disclosure under the Act. Therefore, if records are encompassed

wihtin sections 552(a)(2) or (3), they are exempt from disclosure

if described in section 552(b)(1) througli (9). See National Labor

Relations Board v. Sear s. Roebuck s, Co. , 121 U.S. 132, 154 n.21

(1975).

In this case, all the parties agree'that indices are already

-n existence with respect to the records at issue. Thus, the

plairtiff need not invoke the authority of section 552(a)(2) to

forci the defendant to create indices. It is clear that all of the

requested records as well as the indices to these records constitute

records within the meaning of section 552(a)(3). Accordingly, there

is nc need to examine the question whether the records at issue fall

within section 552(a)(2). Instead, this case turns on whether the

records are exempt from mar \itory disclosure under section 552(b).

II. GCM'S, AOn'S, AND TM'S ARE NOT EXEMPT FROM DISCLOSURE BY THE

DELIBERATIVE PROCESS PRIVILEGE.

The defendant contends that the records at issue in this case

are exempt from disclosure pursuant to exemption (5) of the Freedom

of Information Act which protects "inter-agency or intra-agency

3. (3) Except with respect to the records ma^e available under paratraphs (1) and (2) of this subsection, each agency, upon any request

•or records which (A) reasonably describes such records and (B) is

made in accordance with published rules stating the time, place,

fees (if any), and procedures to be followed, shall make the records

promptly available to any person.
168

memorandums or letters which would not be available by law to a

party other than an agency in litigation with the agency." It

has long been recognized that exemption (5)"was created to protect

the deliberative process of government, by ensuring that persons

in an advisory role would be able to express their opinions freely

to agency decision-makers without fear of publicity." Ryan v.

Department of Justice, Case No. 79-1777 (D.C. Cir. January 7, 1980)at 1

C ."tentimes, exemption (5) cases turn on whether the government

action at issue is final. Exemption {5) does not apply to final

actions of agencies. Thus, statements of policy and final opinions

which have the force of law or which explain actions an agency 1ms

already taken are not within the scope of exemption (5). Ryan v.

Department of Justice, supra at 16.

The most important case on this issue is National Labor Relations

T'-oard v. Sears, Roebuck I Co., supra. In the Soars case, the company

sought certain memoranda known as "Advice Memoranda" and "Appeals

Memoranda," and related documents ,generated by the Office of the

General Counsel in the course of deciding whether or not to permit

the filing with the National Labor Relations Board [hereinafter,

"the Board") of unfair labor practice complaints. Id at 135-3fi.

The Court noted that "[clrucial to the decision of this case is an

understanding of the function of the documents in issue in the context of the administrative process which generated them." Id. at 138.

The memoranda in issue in the Sears case pertained to the General

Counsel's decision whether a unfair labor practice complaint would

issue. Id. If the General Counsel decided to issue a complaint,

adjudication then occurs before the Board, and the General Counsel

becomes an advocate in support of the complaint before the Board.

':_ at 138-39. If the General Counsel decides not to issue a complaint, the statutory scheme completely precludes any proceeding

before the Board, ia^ at 139. The supreme Court held that Advice

and Appeals Memoranda which explain decisions by the General Counsel

not to file complaintsare "final opinions" made in the adjudication

of casesand fall outside the scope of exemption (5), but that Ad-
169

vice and Appeal Memoranda which explain decisions by the General

Counsel to file complaints and commence litigation before the Board

are not "final opinions" made in the adjudication of cases and fall

within the scope of exemption (5). Id. at 148.

The Court in Sears points out that the timing of the communications received by the decision-maker is crucial. Communications

received by the decision-maker prior to the time the decision is

made are protected because damage to the quality of the agency's

decisions will result, an(j the public has little interest in

communications which have not been accepted by the agency. Id. at

151-53. On the other hand, communications made after the decision

is made by the agency and which are designed to explain it have

little effect on the decision-making process and high public interest. Id. at 152. However, the Court noted that the public is

"vitally concerned with the reasons which did supply the basis for

an agency policy actually adopted " id., and these reasons constitute the "working law" of the agency which is not protected by

exemption (5). Id. at 162-63. The Court indicated that there is

embodied in the Act a strong congressional aversion to secret

agency law and an affirmative congressional purpose to require

disclosure of documents which have the force and effect of law.

Id. at 153. Accordingly, pursuant to the Supreme Court's decision

in the Sears case, the task before the Court is to determine

whether GCH's, AOD's, and TM's contain the reasons behind policy

actually adopted by the IRS.

A. GCM'S

In support of the defendant's motion for summary judgment wit*

respect to GCM's, the affidavit of Jerome D. Sebastian, the Director

of the Interpretative Division, Office of Chief Counsel, of the

Internal Revenue Service was filed. According to this affidavit,

GCM's are legal memoranda from the Office of Chief Counsel to the

Internal Revenue Service prepared in response to a formal request

for legal advice from the Assistant Commissioner (Technical). Mr.

Sebastian states in his affidavit that GSM'c are primerily prepared

by attorneys in the Interpretative Division of the Office of Chief
170

Coonsel ami usually addressed -to -the Office of -the Assistant C»m*»ssconer (Technical) In connection with tne reuiev of proposed privateletter rulings, proposed technical advice memoranda, and proposed

revenue rulings of the IRS- Accordmq to Mr. Sebastian, -the GCH's

set forth the issues presented by whichever of these proposed det •

errninations is under review, tne conclusions reached and a brief

factual summary. The body of the GCM's, according to Mr. Sebastian,

contains a lengthy legui analysis of the substantive issues, and

the 1ecommondations and opinions of the Office of Chief Counsel.

The Sebastian affidavit states that GCM's are often accompanied by

a draft of the proposed determination that reflects the changes and

modifications recommended in the GCM. According to this affidavit,

GCM's are maintained by the Office of Chief Counsel and frequently

cited in subsequent GCM's to insure consistency, avoid duplication

of research, provide a reference source, and update earlier memoranda when a position on an issue is sustained, modified, or changed

within the Office of Chief Counsel.

The defendant's answers to the plaintiff's interrogatories

provide material and relevant information. In response to the

plaintiff's Interrogatory No. 11, the defendant points out that

IRS personnel who confer or negotiate on tax liability matters

with taxpayers or taxpayer representatives may refer to GCM's for

guidance as to the positions to take in such negotiations. Furthermore, the defendant states that the interpretation of law contained in prior GCM's are knowingly applied, distinguished, or

rejected of application, as the case may be, in subsequent GCM's

to insure consistency of position in the Office of Chief Counsel.

This admission is made in the defendant's response to plaintiff's

Interrogatory No. 7a.

Finally, the depositions of IRS personnel contain material

and relevant information. Once a GCM is completed by the Office

of the Chief Counsel, it is forwarded to the Office of Assistant

Commissioner (Technical). The Office of Assistant Commissioner

(Technical) will use the GCM as a guide as to what positions will

be taken in the proposed revenue ruling, proposed private letter

riling, or proposed technical advice memorandum. According to

tne defendant, on occaslon< differences may arise between the

positions of the Office of Assistant Commissioner (Technical) and
171

the Interpretative Division of the Office of Chief Counsel,

hese differences are generally reconciled on an informal basis

'•fore the adoj>»ion of the revenue rulinq, privale letter niliu<i,

or technical advice memorandum in question. Then a copy of the

completed GCM is distributed and placed in the digest system to

enable future reference. Defendant's Statement Of Material Facts

As To Which There Is No Genuine Issue at 111115-20 (July 27, 1979).

Thus, the government admits that differences between the GCM and

ruling are resolved before the GCM is considered complete and before it becomes available for future reference.

The Court finds that GCM's are not encompassed within exemption (5) of section 552(b). GCM's contain the reasons behind

the adoption of revenue rulings, private letter rulings, and

technical advice memoranda. As the Supreme Court made clear

in L

eJL£l< it is just mien records that D . vital concern

are oi to

the public and their release offers little chance of interferinq

••ith the decision-making process of the agency. Furthermore,

GCM's are indexed and have important precedential value in

determining future tax questions. Accordingly, the Court concludes that completed GCM's are not protected by the governmenta

l

privilege.

B. AOD'S

In support of its motion for summary judgment with respect to AOD's, the defendant has filed the affidavit of Edward

Everett Pigg who is the Executive Assistant to the Director of

the rax Litigation Division, Office of Chief Counsel in IRS.

According to this affidavit, AOD'n are IPM.,1 •,,•10r.,•dJ prop.ued

bv a Chief Counsel, National Office Attorney, approved by n

supervisor, and directed to the Chief Counsel. AOD's are prepared, according to Mr. Pigg, in general, whenever the government

>ses an issue in a tax case either in Tax Court or in a federal

'Ustrict court. They are prepared' by the attorney responsible

for review of the case at the same time he or she prepares a formal

recommendation to the Department of Justice as to whether th

ticular case should be appealed. The affidavit states that th

is pare AOD
172

sets forth the issue which was decided against the government,

a brief discussion of the facts and the reasoning of the attorney

behind his or her recommendation that the Commissioner either

acquiesce or nonacquiesce in a decision of the Tax Court or of the

federal district court. According to Mr. Pigg, the AOD is reviewed

within the Tax Litigation Division and after approval it is sent to

the Office of the Assistant Commissioner (Technical). Finally,

if the Assistant Commissioner! (Technical) is not in disagreement

with the recommendation to acquiesce or nonacquiesce, the AOD is

printed and distributed. The IRS does not release or publish for

public disemmination any opinion behind its decision to acquiesce

or nonacquiesce.

AOD's are made available to IRS personnel and are cited and

applied by IRS personnel in later AOD's, and TM's to promote the

consistent application of the tax laws. Defendant's Answers to

Interrogatories I111 6, 7C.

The Court finds that AOD's are not exempt from disclosure

^by section 552(b)(5). AOD's contain the reasons behind the

acquiescence or nonacquiescence of the IRS in court decisions.

These reasons are of vital concern to the public and their

release will not harm the decision-making process of the agency.

C. TM'S

In support of its motion for summary judgment with respect

to TM's, the defendant has filed the affidavit of Robert A. Bley,

the Director of the Office of the Chief Counsel, Internal Revenue

••Tvice. According to Mr. Bley, TM's are memoranda from the

C.i omissioner of the Internal Revenue Service to the Assistant

Secretary of the Treasury (Tax Policy). The Brey affidavit states

that TM's are prepared by attorneys in the Legislation and Regulations Division or the Employee Plans and Exempt Organizations

Division of the Office of Chief Counsel in connection with the

preparation of a proposed Treasury'decision. According to the

affidavit, TM's are attahced to a draft of a proposed Treasury

Decision. After consideration at several levels within the Office

of Chief Counsel, a final draft of a notice of proposed rulemaking

and the TM is fowarded to the Assistant Commissioner (Technical,

the Chief counsel, and the Commissioner for final approval. The
173

approved notice of proposed rulemaking is then published in the

Federal Register and written comments are solicited. After consideration of the written comments and testimony at a public

hearing if one is requested, an attorney in the Legislation and

Regulations Division prepares a preliminary draft of a Treasury

decision and accompanying TM. Then the proposed Treasury decision

and the TM are approved in the same manner as to notice of proposed

rulemaking and its accompanying TM. According to the Brey affidavit,

generally, a TM summarizes or explains the proposed rules, provides

background information, states the issues involved, identifies any

controversial legal or policy questions, discusses the approach

taken by the draftsperson, and gives the reasons for the approach.

TM's are indexed, digested, and made available to IRS

personnel in order to assure consistent treatment of taxpayers.

Defendant's Answer to Interrogatory 116.

The Court finds that TM's are not encompassed by exemption

(5). TM's explain the reasons behind the adoption of the Treasury

Decision. They are used by IRS personnel in determining the tax

status of taxpayers. Accordingly, they are not deliberative material.

D. These Conclusions Are Supported By Two Recent District Court

Decisions.

The conclusions of this Court with respect to the applicability

of exemption (5) to GCM's, AOD's, and TM's are supported by two

recent district court cases. In Pies v. Internal Revenue Service,

79-2 U.S.T.C. 11 9571 (D.D.C. Aug. 31, 1979), Judge Parker ruled that

a TM was not protected from mandatory disclosure by section 552(b)(5),

The Court found that the facts indicate that the IRS had adopted the

reasoning of the TM. Id^ at 8R,082. Furthermore, the Court hold

that "[w]here the agency has by its own actions, left the status

of deliberative material ambiguous, but clearly has used that material in some final formal way, the Court must strike the balance

in favor of public disclosure rather than recognize an exemption

under FOIA." Id^ In this case, there is no dispute that the final

TM which is placed within the IRS retrieval system is used by the

agency as the formal statement of the rationale behind the adoption

of the Treasury decision

67-01)6 0-80-12
174

In Falcone v. Internal Revenue Service, 79-2 U.S.T.C. 1! 9683

(E.D. Mich. Oct. 30, 1979), the Court held that a GCM was not within

the protection of exemption (5). Accordinq to the Court in Falcone,

"CM's are not protected by the deliberative privilege because they

state current agency interpretations and note where the proposed

ruling may differ." Id. at 88,514.

Finally, the Court finds that the material at issue in this

suit is not protected by the attorney-client privilege and docs not

constitute protected attorney work product. See id.

An order in accordance with this Memorandum Opinion shall be

issued of even date herewith.

Charles R. Rich

United States District Judge
175

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

TAXATION WITH REPRESENTATION FUND, :

Plaintiff, :

v.

INTERNAL REVENUE SERVICE

Defendant.

Civil Action No. 78-2104

FILED

.'".': 2 21930

QRDErc JAMES F. DAVEY, Clerk

In accordance with the Memorandum Opinion issued of even

date herewith, it is, by the Court, this -*> day of January,

1980,

ORDERED, that the motion of the defendant for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure

bsf and the same hereby is denied; and it is

FURTHER ORDERED, that the motion of the plaintiff for summary judgment pursuant to Rule 56 be, and »-.he same hereby is,

granted in that there are no issues of material fact genuinely

in dispute, and the plaintiff is entitled to judgment as a matter

of law.

Charles R. Richey^

United States District Judg
176

UNITED STATES DISTRICT COURT T I L L L)

FOR THE DISTRICT OF COLUMBIA

APR 231980

JAMES F. DAVEY, Clerk

Civil Action No. 78-2304

TAXATION WITH REPRESENTATION FUND,

Plaintiff,

v.

INTERNAL REVENUE SERVICE,

Defendant.

ORDER

This action is before the Court on the motion of the

defendant, the Internal Revenue Service, of the Court's

Order of January 22, 1980. Essentially, the defendant contends that the records at issue may have portions exempt

pursuant *-o other statutes. Nothing in the Court's Order

of January 2,2, 1980 requires the defendant to release tax

return information protected by section 6103 of the Internal Revenue Code of 1954. The defendant is hereby authorized

to redact portions of documents which contain such information.

In addition, the defendant contends that the Court's failure

to pass on the applicability of 5 U.S.C. 5552(a)(2) enables

the defendant to withhold records created in the future which

are identical to those involved in the current ]itigation.

In order to prevent any such rigid reading of the Court's

opinion, the Court shall take this opportunity to hold that

the documents at issue also fall within section 552(a)(2).

The analysis presented in the Court's opinion dated January

22, 1980 sufficiently supports this conclusion. Accordingly,

the defendant will be assured of its continuing duty to make

the records and indices to the records available.

Accordingly, it is, by the Court, this ^.i%>/day of

April, 1980,

ORDERED, that the motion of the defendant for reconsideration be, and the same hereby is denied except to

the extent that the Court's holding is clarified in this

Order.

Charles R. Richey /

United Staes District Judge/
177

Mr. SHATTUCK. If I could add a word to what I previously said, it

is a cry of despair that the American Bar Association and the American

Bankers Association were not able to attend this hearing, for various

reasons, but I know that they feel quite strongly about the subject. I

have had the privilege 01 appearing together with them on issues of

taxpayer privacy before your subcommittee, and elsewhere, and 1

would hope that you would solicit their views on this.

Mr. GIBBONS. If we have another chance to have a hearing, we may

hear them. It is kind of hard to get them not to go to Hawaii, you

know.

Thank you very much, we appreciate your testimony so much. We

appreciate the interest of all 01 the audience who was here tonight.

The meeting is adjourned.

[Whereupon, at 8:45 p.m., the hearing was adjourned.]

[The following was submitted for the record:]
178

International Association of Trade Exchanges

5001 Seminary Road, Suite 310

Alexandria, VA 22311

(703) 379-2838

Paul Suplizio, Executive Director

Joseph Weiss, Deputy Executive Director

STATEMENT OF THE

INTERNATIONAL ASSOCIATION OF TRADE EXCHANGES

ON S.2403 & H.R. 6764

(REGARDING THE ADMINISTRATIVE

SUMMONS PROVISIONS OF THE CODE)

SUBMITTED TO THE

SUBCOMMITTEE ON OVERSIGHT OF THE

HOUSE COMMITTEE ON WAYS AND MEANS

This Is in response to a request for written comments on S.2403 which

proposes to amend provisions of 26 U.S.C. Section 7609 dealing with the

administrative summons provisions of the Internal Revenue Code.

The International Association of Trade Exchanges (IATE) wishes to express

its opposition to S.2403. We believe the bill goes too far in the direction of

revising third-party summons procedures at the expense of taxpayers' rights.

Although S.2403 leaves intact the notice provisions of section 7609, the

bill proposes to (a) eliminate the automatic stay of compliance enjoyed by the

noticee, and (b) remove the burden of enforcing summonses from the IRS. The

effect of S.2403 would be to place the burden of proof on the taxpayer by having

the noticee initiate a challenge to the summons through a motion to quash procedure.

It' is this proposed revision of section 7609 which we consider unfair.

Our interest in section 7609 provisions steins from IRS1selection of our
179

Industry for a special examination project wherein section 7609 issues have been

prominently raised. This special examination project, directed by Internal

Revenue Manual Supplement 45G-324, dated March 11, 1980, is underway at the

present time and has as its object obtaining records of financial transactions

of every taxpayer who does business with a barter exchange.

The IATE represents the leading members of the over 200 organized trade or

barter exchanges in the United States. The exchanges serve around 40,000 - 50,000

business owners and professionals who trade their products and services through

the facility of organized barter exchanges. Our member exchanges record all

transactions and modern accounting techniques and equipment are employed in the

recordkeeping functions. A unit of account, commonly called a trade credit,

is used to facilitate barter transactions. The gross annual volume of the

barter exchange industry is estimated to be in the range of $250 million.

Last year, as an outgrowth of interest in the underground economy, the IRS

initiated an unreported income program. One of the projects, indeed the first

project undertaken in this program, was the Barter Exchange Project. Procedural

guidelines and instructions for carrying out the project are contained in the

above referenced Manual Supplement. The instructions state that "during each

examination of a barter or trade exchange, members of the exchange should be

identified along with the amount of transactions for each member" [underlining

added]. As this excerpt indicates, itis IRS' stated objective that members of

barter exchanges are targets for examination along with the exchanges themselves,

la other words, it is possible that a universe of approximately 40,000 - 50,000

Individuals are subject to having their records examined simply because they

barter goods and services through barter exchanges.
180

In carrying out this project, IRS has authorized the use of both

administrative and John Doe summonses as investigative tools. As an example

of the use of both types of summonses, we have enclosed as attachments 1 and 2

copies of two summonses served on one of our members. The first attachment is a

copy of an administrative summons served on the Pittsburgh Trade Exchange in

December 19 79 and the second attachment is a copy of a John Doe summons served

in April 1980 on the same Exchange in the tax liabilities of "John Does, Members

of the Pittsburgh Trade Exchange". What these summonses demonstrate is that

large numbers of taxpayers are being singled out for special examination.

These summonses are being resisted in the courts with respect to their use to

obtain the records of financial transactions of members of a barter exchange, and

this matter is currently in process of litigation.

In addition, it is our belief that barter exchanges are third-party

recordkeepers within the meaning and legislative history of section 7609. The

IRS does not at the present time share this view, and we believe this point

requires clarification. The fact is that barter exchanges do act as thirdpart recordkeepers. *

Our concerns about S.2403 are real. If S.2403 becomes law, there is a

strong likelihood that taxpaying small businessmen and women who belong to a

barter exchange, and who have been notified that their records are being sought

by the IRS from the exchange, will be effectively precluded from defending

against such intrusion and requiring the IRS to demonstrate a proper grounds

for requesting the records.

In the final analysis, when faced with the choice of retaining counsel,

the inconvenience of the time expended, and the money spent and time invovled in
181

mounting a successful motion to quash proceeding against a summons, the

choice not to resist becomes an inevitable one for this small business person.

Based upon our experience with the IRS* barter exchange project, the

small businessman who barters and whose records are held by an exchange would

be

not only/exposed to an enforcement effort of questionable legality, but would

be required also, according to S.2403, to shoulder the burden to quash the

summons for his records in order to block IRS access to them.

The IATE is concerned about reports of abuses and tactics of delay on the

part of taxpayers in the summons enforcement process. But abuses, mistakes,

and misjudgments are not limited and attributable solely to taxpayers. There

must also be protections against these same manifestations on the part of tax

compliance, collection and enforcement agencies of government. Our concerns,

stemming from our direct experience with IRS' nationwide examination project,

are for the majority of law-abiding taxpayers who would no longer be effectively

safeguarded from misguided IRS summons requests. The protections of section

7609, we believe, are needed. Furthermore, as long as the burden of proof

remains on the IRS to initiate a motion to enforce proceeding there is the likelihood that the IRS would more carefully consider the wisdom of going forward

with a summons action. Being relieved of this burden opens the door to the IRS*

becoming lax in reviewing the merits of particular summonses.

Speed and efficiency in summons enforcement actions are goals everyone

shares, but certainly not at the expense of the rights of individual taxpayers

whose records are held by third parties. We believe the provisions of S.2403 go

too far. It is essential that the basic protections and procedures contained in

section 7609 be retained. We are therefore opposed to S.2403.
1S2

Ov,i;,.i.ui.o

In e»e •"•a-e' o* ?•« ta* ' %o' y o*

PlttsVjrgh Trade Exchange, lac.

1105 ---.-'•-•-•: Soalevard

MtttWoh. PA 157ns

••:• i ' ... .h ;::• :' _ _pjMtSiiarS.il

p^^vwfttr the Tear ended Jane 30. 1978

The Coownrss*oner of Internal Revenue

! - - --

/P

_ -- ... -*--- .-<-! .3

-» -• * %r-- »3M

/- . -

-ft

• «r • lid**

.-.

,-.r

^ m"

To Hi*. Vincent P. Hannelll as President of Pittsburgh Trade Exchasge, Ioe.

and the P1tts*.uron Trade Exchange, Inc. y" -/Vyr-*.

_u 1105 Washing toe Coalevard. Pittsburgh. PA 15206 f>X.~.-

You »'« ncfeby wmnoned and *q.p»id to appear tmof_ We l o^efc^ o(

InMtnaJ P*V«TH* Serve*, to c/<* lest-mcny 'eai^g lomeai "*&•".*»- or r-« cc'tr* o* ?-« ta» ^&-*ty of v»c person dtafiiM above tar

V* ptwods tnown and to fci-f-a # v< you and p/oduce l<x e*ar fBEaM T* ton<>»ng boots, records papers, and GCve* ciata: *^

SEE ATTACHMENT.

.•:-*

Business address and telephone number of Internal Reven-je Service officer named above:

1000 Liberty Avenue.•Pittsburgh. PA 15222 (412) 644-5630

Place and time for appearance:

etIIOS Washington Bou1e»ard.•Pittsburgh. PA•15206

on the 3rd 1 day of .l»n.nry 19 _2D at o-nn

Issued under authority of the internal Revenue Code

this litll day of _ [lecRmbpr

n[ruu^~ 7( Mf^-^r,

Signalura o! issutOg GfOcei

.i9aa_

-<-ta-JL -5L^-a::fy.-xI Part A•To b» qi»«n to perion summoned Form 2039-A (Rev. 3-77)
183

ATTACHMENT

Pittsburgh Trade Exchange, Inc.

All Books. Records. Invoices. Statements, or other records

or data 1n your possession or control reflecting income,

expenses, assets and liabilities for the above year. Including, but not limited to the following:

1} All contracts entered Into.

2) All Accounts Receivable and detailed listings for subsidiary ledger and or cards to reconcile such Accounts

Receivable.

3) All Accounts Payable and detailed listings for subsidiary ledger and or cards to reconcile such Accounts

Payable.

4) Credits due customers and or clients with each customer

and or client identified and respective amount identified.

5) Oate of each barter transaction arranged or completed,

amount Involved 1n each such transaction, and names of

the person, corporation or other entitles involved In

each such transaction.

6) Names of all persons, corporations, or other entities

from whom you received or accrued income or otherwise

have done business with.
184

Firm 2033-A

(Hov. 3-77) Summons

In Ihe matter ol the tax liability ol

Members of the Pittsburgh Trade Exchange Inc.,

during the calendar years ending December 31,

1979 or December 31, 1979.

Internal Revenue District of Pittsburgh, Pennsylvania

pofinHg for rh*» ypjr

q

**n^*»fi npfPinhpy n ,•1978 & December 31, 1979

The Commissioner of Internal Revenue

TO P< t-t-«fhnrqh Tt-arlp Ev^hjtnq**,•Tf^^

1105 Washington Boulevard

At Pitt-sburgh, Pennsylvania•15206

You «rt hereby summoned and required 10 appear before

lnierr.il Revenue Service,

Gerald RT Potoonak an 0,(icor °' m#

testimony relating to ihe tan liability or me collection a* Ihe lax liability ol me petson identified above tor

the periods shown and lo bimg with you and produce lor e*ammanor> ihe lolloping books, records, papers, and oiher dala:

A) Rosters, membership lists, or other records which reflect the names

and addresses of all persons who were members of the Pittsburgh

Trade Exchange during the calendar years ending December 31, 1978

or December 31, 1979. • '

B) Corporate books of account, ledgers, or other records of the Pittsburgh Trade Exchange which identify for each member every bartering

transaction, the date, the participants, and the amount during the

calendar years ending December 31, 1978 or December 31, 1979.

Business address and telephone number of internal Revenue Service officer named above:

l ")

I.R.S., federal Qffiica Building, Room 1001/ Pittsburgh, PA•413-644-5630

Place and lime for appearance:

at I,R.S. • n c 1,

l

fefcroa 1001, 1000 Lit&rly Avenue, Pittsburgh', Pennsylvania•XS222

on the .

IssueaWider authority ol the Int,

this

. day of .

evenue Code

:<*aya

April

Chief, Exam1nat1onlulv>

Signature ol Issuing Officer Till*

Y •

Signature Of Approving Officer

(if applicable)

L

Part A•To bo given to person summoned Form 2039-A (Rev. 3-77)
185

IN THE UNITED STATES DISTRICT COURT FOR THE

WESTERN DISTRICT OF PENNSYLVANIA

In the Matter of the Tax

Liabilities of:

JOHN DOES, Members of the

Pittsburgh Trade Exchange,

Inc., during the years

1978 or 1979

I-1ISC. NO. m±.

ORDER

Upon the petition, the exhibits attached thereto, and the

motion of the United States Attorney for the Western District of

Pennsylvania, for leave to serve a John Doe summons, the Court

has determined that the summons relates to the investigation of

an ascertainable group or class of persons, that is, the members

of the Pittsburgh Trade Exchange, Inc., during the years 1978

and 1979, that there is a reasonable basis for believing that

such group or class of persons may fail or may have failed to

comply with various provisions of the Internal Revenue Code of

1954 (26 U.S.C.); and that the information sought to be obtained

from the examination of the records (and the identity of the persons

with respect to whose liability the summons relates) is not readily

available from other sources. It is therefore

ORDERED, ADJUDGED and DECREED that the Internal Revenue

Service, through an authorized officer or agent, may serve the

summons, attached to the petition, upon the Pittsburgh Trade

Exchange, Inc. And it is further

ORDERED, ADJUDGED and DECREED that a copy of this Order

be served with the summons.

DATED this 2-lnr- day of /^.i^c/\ , 1980, at

Pittsburgh, Pennsylvania.

Certified fre.; ttw Rstcr3

tat..M^R 2.8 iapo

#. ••'. ... Clerk

/

O