The Honorable Nanette K. Laughrey, United States District Judge for the

1

Eastern and Western Districts of Missouri, sitting by designation.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 96-2792/2793

___________

United States of America, *

*

Appellee, *

*

v. *

*

Norwest Corporation, * Appeal from the United States District

* Court for the District of Minnesota.

Appellant; *

*

Arthur Andersen & Co., *

*

Intervenor-Appellant. *

___________

Submitted: March 10, 1997

Filed: June 26, 1997

___________

Before WOLLMAN and BEAM, Circuit Judges, and LAUGHREY, District Judge. 1

___________

BEAM, Circuit Judge.

In the course of an audit of Norwest Corporation, the Internal Revenue Service

sought to enforce a designated summons directing Norwest to produce tax preparation

software licensed to it by Arthur Andersen & Co., as well as related documents and
The Honorable Franklin L. Noel, United States Magistrate Judge for the District 2

of Minnesota.

The Honorable James M. Rosenbaum, United States District Judge for the

3

District of Minnesota.

-2-

data. Norwest and Andersen objected to the summons, claiming that the material was

not within the scope of the IRS's authority, and that in any event it was not relevant to

the audit. After a hearing, the magistrate judge issued an order enforcing the

2

summons. The district court, adopting most of the findings and conclusions of the

3

magistrate judge, affirmed the order. Norwest and Andersen appeal, and we affirm.

I. BACKGROUND

Norwest is a large bank holding corporation that has more than 300 subsidiaries

in the financial services industry. Norwest files consolidated corporate federal income

tax returns for all of its subsidiaries. Since at least 1983, Norwest has used tax

preparation software in preparing its tax returns. In 1990, Norwest entered into a threeyear licensing agreement with Andersen for use of Andersen's copyrighted "Tax

Director" tax preparation software. Norwest first used Tax Director in preparing its

1990 returns, and used the program again for its 1991 returns.

A. The Tax Director Program

Tax Director is a group of related programs developed by Andersen that a

corporation can use to calculate federal and state tax liability and prepare and print tax

returns. Andersen has licensed Tax Director to approximately 700 corporate

customers, including Norwest. The agreement between Norwest and Andersen states

that Tax Director contains trade secrets and prohibits Norwest from transferring Tax

Director to others or allowing others to use it.
-3-

According to Norwest and Andersen, Tax Director operates in the following

way. First, the company inputs year-end account balances from its books to be used

in calculating the tax, either by manually entering the applicable figures or exporting

this data from a previously compiled database. Next, the entered figures are assigned

certain codes that instruct the program how they are to be classified for tax purposes.

"Tax destination codes" (TDC codes) assign figures to particular lines on the return;

for example, figures to be identified as gross rents are assigned the number "052.0."

Similarly, "ALT codes" are used to identify figures with their proper destination on

schedules to be attached to the return. All TDC and ALT codes to be assigned to

particular entries are determined before the year-end balances are entered into Tax

Director. In other words, how certain figures are classified for tax purposes is

determined by the program's operator; Tax Director itself does not perform such

classifications.

The operator must also enter any adjustments needed to reconcile the difference

between the company's book income and its tax income. These adjustments between

a corporation's book income and the taxable income it reports on the return are

reflected by the IRS's Schedule M. These Schedule M adjustments are determined

before they are entered into Tax Director; the program itself does not determine

Schedule M adjustments. Finally, the operator enters certain background information

required by the return, such as the name and address of the taxpayer.

After the company's financial data is entered and the applicable codes and

adjustments assigned, Tax Director generates the return and appropriate schedules.

This process apparently involves simple arithmetical processes: Tax Director identifies

all the information with a particular code, adds it up, and enters it on the appropriate

line of the return. The program does, however, perform certain automatic adjustments

to the information it receives. For example, Tax Director caps the figure calculated for

reporting on the return as charitable deductions at ten percent of taxable income, as the

Tax Code requires. The program also automatically reports taxable income as zero on
-4-

the return if the data it receives would indicate a negative taxable income. Tax Director

stores all of the entered data, including the account balances, codes, and adjustments,

into data files which are segregated from the actual program. Tax Director thus does

not itself retain any direct information about the company's finances or tax liability.

Tax Director can also generate and print certain "audit trail reports" based on the

financial data it is given. These include the "Detail Spreadsheet Report" (R2 report)

and the "Adjusting Entry Edit Report" (E3 report). The R2 report organizes and

tabulates the year-end summary information for book balances and indicates for each

account the TDC and ALT codes assigned, the Schedule M adjustments made, and the

resulting adjusted tax balance. The E3 report likewise indicates the classifications and

Schedule M adjustments assigned to each account. According to Norwest and

Andersen, when Tax Director creates audit trail reports, it is not designed to save the

data so that it may be viewed or manipulated by other commercially available software

such as a spreadsheet program, nor is Tax Director itself designed to further view or

edit this data. The program does, however, save this information as "print files."

According to Norwest and Andersen, skilled computer technicians can convert these

print files to spreadsheet-accessible files, and Norwest did in fact create such files for

use in preparing its state income tax returns.

B. The Audit of Norwest

In April of 1992, the IRS began an audit of Norwest for the 1990 tax year. This

audit later was expanded to included Norwest's 1991 tax liability. In the course of the

audit, the IRS issued to Norwest numerous "Information Document Requests" (IDRs)

requesting production of certain documents and records deemed relevant to the audit.

On September 11, 1992, the agency issued IDR 26, requesting "a copy of the 'mapping'

that takes place to translate the account totals on the [general ledger] report into line

items on the tax return [including] Schedule M adjustments." Appellants' App. at 410.

IDR 26 also indicated that "[w]e anticipate that this process includes the use of
-5-

Personal Computer based software of either an 'in-house' nature or a commercial

package. Please provide a copy of these files in computer readable form." Id. In

response to IDR 26, Norwest provided the IRS with a copy of an R2 report from the

1991 return. 

In October of 1993, John Kuchera, the IRS computer audit specialist assigned

to the Norwest project, orally requested that Norwest provide a copy of Tax Director.

Norwest refused to produce Tax Director, but did provide the agency with two sets of

computer diskettes. One set contained the unadjusted book balances entered into the

program in completing the returns. The agency was able to easily access these files.

The second set of diskettes were the adjusted tax balance files created by a Norwest

employee from Tax Director's audit trail print files. These files presented the agency

with some difficulty. Kuchera was eventually able to access the files, but testified that

he was unable to verify whether they were accurate or complete.

The agency made no further requests for Tax Director until May 19, 1994, when

it issued the designated summons at issue in this appeal. The summons directed

Norwest to produce, among other things, the complete Tax Director program and all

manuals and similar documents relating to the program. Norwest again refused to

produce the software and its documentation. Instead, Norwest and Andersen met with

agency auditors for several hours to demonstrate the program and its operation. This

demonstration used generic data, and did not involve any Norwest-specific information.

Paragraph 2 of the summons requested "[a]ll data files, in machine sensible form,

used by Tax Director to prepare the tax returns, or supporting computations, or upon

which the Tax Director programs performed their functions." Appellants' App. at 16.

In response to Paragraph 2, Norwest produced the original data files created by the

program in creating the 1990 and 1991 returns. When the agency was initially unable

to view these files, an Andersen employee explained that Tax Director itself had no

capacity to manage the files, but instructed the agency computer specialists on how to
IRC § 7602 provides in relevant part: 4

(A) Authority to summon, etc.--For the purpose of ascertaining the

correctness of any return, making a return where none has been made,

determining the liability of any person for any internal revenue tax or the

liability at law or in equity of any transferee or fiduciary of any person in

-6-

convert these files into a readable format. When the agency was still unsatisfied with

its access to the Paragraph 2 files, Andersen offered to construct a "bridge program" that

would allow the agency to download and view the files. Andersen created such a

program, but the agency refused to accept the program when Andersen and Norwest

offered the bridge program on the condition that the agency accept it in lieu of Tax

Director and that the agency agree not to pursue the summons. 

With the statute of limitations for the 1990 audit on the verge of expiration, the

agency initiated this enforcement action, which suspended the statute. Andersen

intervened in the proceedings. Following a hearing, the magistrate judge concluded that

the summons should be enforced, with certain limitations intended to protect Andersen's

proprietary interest in Tax Director. The district court modified certain aspects of the

magistrate judge's order, but affirmed enforcement. On appeal, Norwest and Andersen

reiterate their position that this kind of software is not within the IRS's summons

authority, that it is not material to the audit, and that the agency has acted in bad faith.

Norwest and Andersen also argue that production of Tax Director will require that

Norwest violate Andersen's copyright, and that this vitiates the agency's summons

authority.

II. DISCUSSION

Under section 7602 of the Internal Revenue Code, the IRS has the authority to

issue summonses requiring taxpayers to produce records, documents, or other material

relevant to an audit or to give testimony. As it has done in this case, the agency may 4
respect of any internal revenue tax, or collecting any such liability, the

Secretary is authorized--

(1) To examine any books, papers, records, or other data which

may be relevant or material to such inquiry.

IRS agent Gary Petersen testified that, to his knowledge, the agency had never 5

before sought enforcement of a summons for tax preparation software.

-7-

also issue a "designated summons" under IRC § 6503(j). During the enforcement period

of a designated summons, the statute of limitations for issuing a notice of deficiency is

suspended. IRC § 6503(j)(1). The IRS is entitled to summon material if it satisfies a

deferential standard for relevancy. United States v. Powell, 379 U.S. 48, 57-58 (1964).

No court has addressed whether the agency's summons authority encompasses tax

preparation software that itself contains no direct information about a particular

taxpayer. Therefore, we face two important questions of first impression: whether the 5

section 7602 summons power applies to this situation, and, if so, whether the agency has

shown that its summons for this material is enforceable under Powell. 

A. The Applicability of Section 7602

Section 7602 authorizes the IRS to summon "any books, papers, records, or other

data which may be relevant or material" to an IRS investigation. Given the agency's

"broad mandate to investigate and audit 'persons who may be liable' for taxes," courts

should be wary of "restrict[ing] that authority so as to undermine the efficacy of the

federal tax system." United States v. Bisceglia, 420 U.S. 141, 145-46 (1975). The

Supreme Court has stated that "'the administration of the statute may well be taken to

embrace all appropriate measures for its enforcement, [unless] there is . . . substantial

reason for assigning to the phrase[s] . . . a narrower interpretation.'" United States v.

Euge, 444 U.S. 707, 715 (1980) (quoting United States v. Chamberlin, 219 U.S. 250,
The manuals, documents, and other written information related to Tax Director 6

demanded in Paragraph 1 of the summons are obviously "books" or "papers." Thus,

the only issue with regard to that material is whether it is relevant to the IRS's audit.

We agree with Norwest and Andersen that two cases the IRS relies on are not 7

entirely apposite. See United States v. Arthur Young & Co., 465 U.S. 805, 813-17

(1984) (upholding a summons for tax accrual workpapers retained by the taxpayer's

accountant); United States v. Davey, 543 F.2d 996, 999-1000 (2d Cir. 1976) (enforcing

a summons for magnetic tapes containing taxpayer-specific data) . Arthur Young and

Davey do, however, indicate the broad summons authority section 7602 gives the

agency.

-8-

269 (1911)). With these principles in mind, we must determine whether "books, papers,

records, or other data" includes Tax Director.6

Norwest and Andersen argue that Tax Director is not a "record" or "other data"

because the program itself does not contain or save any financial information particular

to Norwest. Like any other computer program, it is a series of coded instructions that

enable a computer to perform certain operations on data entered into it. The financial

information that Tax Director used to generate Norwest's tax returns is not stored within

the program, but is saved into completely segregated data files which have been

provided to the agency. The copy of Tax Director the agency would receive from

Norwest is no different from the software that Anderson licenses to hundreds of other

corporate clients. Norwest and Andersen liken Tax Director to a calculator an individual

taxpayer might use to complete a return, and argue that this kind of tool or asset is not

within the agency's summons power.

Perhaps because it will usually be apparent whether a particular item is a "record"

or "other data" under section 7602, there is a dearth of relevant case law. Euge,

7

however, suggests that "books, records, papers, or other data" under section 7602 cannot

be defined as narrowly as Norwest and Andersen urge. In Euge, the Court considered

"whether [the] power to compel a witness to 'appear,' to produce 'other data,' and to 'give

testimony,' [pursuant to a section 7602 summons] includes the power 
-9-

to compel the execution of handwriting exemplars." 444 U.S. at 711. The Court held

that this exercise of the summons power was "necessary for the effective exercise of the

Service's enforcement responsibilities [and] entirely consistent with the statutory

language." Id. 

Norwest's and Andersen's arguments are reasonable, but they basically urge us to

adopt a narrow interpretation of the types of information section 7602 encompasses.

This is inconsistent with the approach in Euge and with our obligation "to liberally

construe the powers given" the agency under the statute. United States v. Giordano, 419

F.2d 564, 569-70 (8th Cir. 1969). As Norwest itself states in its brief, "Tax Director

consists of a set of instructions to the computer (i.e., algorithms) on how to sort and

arrange financial data entered by a licensee, how to do simple arithmetic, and how to

cause the data entered by the licensee to be printed on the lines of a federal income tax

return." Appellant's Br. at 22. In light of the broad effect we are to give section 7602,

a coded set of algorithms that sorts and arranges a taxpayer's financial information and

then uses that information to generate the audited return can certainly be considered a

"record" or "other data." 

Norwest's and Andersen's argument that Tax Director is merely a "tool" such as

a calculator is unpersuasive. First, simply labeling Tax Director a "tool" and pointing

out that, in the end, numbers on the return are generated by arithmetical processes does

not mean that the program is not also a "record" or "other data." Second, as the

magistrate judge found, Tax Director is clearly much more sophisticated than a mere

adding machine. It recognizes significant codes assigned to certain information based

upon its intended tax treatment, organizes information based on those assignments,

contains built-in limitations on the assignments a taxpayer can make, generates a return,

creates files containing taxpayer financial data, and can generate detailed reports. We

hold that the magistrate judge and district court correctly concluded that Tax Director

was a "record" or "other data" under section 7602.
Norwest and Andersen argue that because Tax Director contains trade secrets 8

of Andersen, we should apply a stricter test, and require the agency to show a "clear

nexus" between the summoned material and Norwest's tax liability or that the material

is necessary to complete the audit. Neither the statute nor the case law provides any

basis for a higher standard of relevancy in this case, and we therefore reject this

argument.

-10-

B. Powell Test

 Under United States v. Powell, 379 U.S. 48, 57-58 (1964), a court must enforce

a section 7602 summons if the IRS shows: (1) that the investigation is for a legitimate

purpose; (2) that the requested material is relevant to the investigation; (3) that the

material is not already in the agency's possession; and (4) that the proper administrative

steps have been followed. Norwest and Andersen argue on appeal that the agency has 8

not shown that the summoned material may be relevant, and that the summons was

issued for an improper purpose.

1. Relevance

The agency points to a number of ways Tax Director may be relevant to the audit.

For the returns at issue, Tax Director was the final step in translating the company's

summary book income into the information reported on the returns. The agency thus

contends that Tax Director is a critical link in the "audit trail," that is, the steps and

processes that Norwest took in preparing its tax returns based on particular financial

information. According to the agency, access to Tax Director may assist the audit team

in gaining a "big picture" view of Norwest's returns and in identifying areas for more

detailed investigation.

The agency also points out that Norwest's consolidated returns represent financial

information from more than 300 subsidiaries and affiliates, and that the company's use

of Tax Director was the most important step in organizing this vast 
-11-

amount of information. Tax Director itself contains algorithms that generate return

information based upon interpretations of the Tax Code and that affect how the return

is generated. While some of these functions, such as the automatic cap on charitable

deductions, are clearly reflected on the return, others may not be; an Andersen employee

testified that Tax Director contains other such automatic functions, but could not recall

what they were. Finally, while Norwest did produce data files and audit trail reports

created by Tax Director, the agency maintains that without Tax Director it is unable to

verify whether this information is complete or accurate.

Norwest and Andersen offer a number of arguments for why they believe the

agency's access to Tax Director will be unfruitful. "Relevance" under the Powell test

does not depend, however, on whether the information sought would be relevant in an

evidentiary sense, but merely whether that information might shed some light on the tax

return. Arthur Young, 465 U.S. at 813-14 & n.11. The IRS need not state with certainty

how useful, if at all, the summoned material will in fact turn out to be. Id. at 814.

Furthermore, it is for the agency, and not the taxpayer, to determine the course and

conduct of an audit, and "the judiciary should not go beyond the requirements of the

statute and force IRS to litigate the reasonableness of its investigative procedures."

United States v. Clement, 668 F.2d 1010, 1013 (8th Cir. 1982).

Norwest and Andersen also contend that the agency has never before felt a need

to examine Norwest's tax preparation software in prior audits, and that the IRS can

adequately "tie up" Norwest's returns to the book financial data by way of the data files

and audit trail reports already provided. The issue, however, is not whether the IRS

needs the software and supporting material in order to tie the final entries on the return

to the detailed or summary financial data. There is, indeed, little question that it would

be possible for the agency to tie the return information back to the input (that is,

reconcile Norwest's tax income with its book income) without the software. But the

agency's summons authority does not depend on whether the lack of certain information

would make such reconciliation impossible, but whether the summoned material might
-12-

"illuminate any aspect of the return." Arthur Young, 465 U.S. at 815. Under this broad

standard, the agency has sufficiently shown that the material it seeks may assist the audit

team in understanding the return and in focusing the investigation.

2. Legitimate Purpose

Norwest and Andersen contend that the agency's actual purpose in issuing the

designated summons was to suspend the statute of limitations, which otherwise would

likely have expired before the audit was completed. This, they maintain, was not a

legitimate tax collection or determination purpose under the Powell test.

The appellants' arguments, however, basically boil down to repeating their

position that the agency's stated purposes for seeking Tax Director are inadequate, and

concluding from this that the IRS's real purpose could only be to extend the statute of

limitations. Because we conclude that the agency's explanations for how Tax Director

may be relevant to the audit are legitimate, we cannot accept appellants' premise.

Because the audit was conducted in order to verify Norwest's tax liability for 1990 and

1991 and the IRS has demonstrated how Tax Director may be relevant to the audit, we

hold that the summons was issued for a legitimate purpose. The IRS has therefore met

its minimal burden under Powell, and is entitled to enforcement of the designated

summons.

C. Summons of Copyrighted Material

Norwest and Andersen argue that because the summons forces Norwest to copy

and produce to the IRS Andersen's copyrighted products, the summons will require

Norwest to violate Andersen's copyright. Appellants maintain that this puts section 7602

in conflict with the Copyright Act, and that the district court thus should not have

enforced the summons.
The district court concluded that the IRS must identify those agents to whom

9

Tax Director would be provided, notify the court of any additional persons who would

receive the program, use the program only in connection with the audit, and return all

copies of the program and destroy any documents or notes related to the program upon

the audit's completion. The agency maintains that section 7602 does not give the

district court authority to impose such conditions, but does not challenge them on

appeal. Accordingly, we express no opinion on this question.

-13-

The district court noted that appellants' argument is "essentially . . . that, when in

conflict, the Copyright Act trumps the IRS's statutory authority to issue summonses."

United States v. Norwest Corp., No. 4-94-MC-36, slip op. at 2-3 (D. Minn. Dec. 12,

1995). We agree with the district court that there is no authority for this proposition.

Section 7602 does not indicate that a properly issued summons for relevant material is

limited to uncopyrighted material. Nor does the Copyright Act indicate that copyright

protection insulates either the copyright owner or the possessor of the particular item

from producing that item in response to an IRS summons. To the extent that Andersen's

proprietary interest in Tax Director may be threatened by enforcement of the summons,

the restrictions imposed by the district court on the IRS's use of Tax Director adequately

protect that interest.9

Finally, Norwest and Andersen maintain that the agency waived any right to issue

a summons for Tax Director when it entered into a records retention Letter Agreement

with Norwest shortly after the audit began. Appellants also argue that the summons was

not a "designated summons" because it was not issued to determine Norwest's tax

liability. We have considered these and other arguments and find them without merit.
-14-

III. CONCLUSION

For the reasons discussed above, we affirm the order of the district court in all

respects.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.