Source: https://m.openjurist.org/465/us/805
Timestamp: 2019-08-22 11:58:28
Document Index: 652464449

Matched Legal Cases: ['§ 7602', '§ 7602', '§ 7602', '§ 7602', '§ 7604', '§ 7609', '§ 7602', '§ 7602', '§ 7602', '§ 7602', '§ 7602', '§ 7602', '§ 7602', '§ 4024', '§ 7602', '§ 12', '§ 78', '§ 210', '§ 7604', '§ 7609', '§ 7609', '§ 77', '§ 12', '§ 78', '§ 13', '§ 78', '§ 249', '§ 14', '§ 78', '§ 240', '§ 7602', '§ 19', '§ 77', '§ 21', '§ 78']

465 US 805 United States v. Arthur Young & Company | OpenJurist
465 U.S. 805 - United States v. Arthur Young & Company
465 US 805 United States v. Arthur Young & Company
104 S.Ct. 1495
79 L.Ed.2d 826
ARTHUR YOUNG & COMPANY et al.
Respondent certified public accountant firm, as the independent auditor for respondent corporation, was responsible for reviewing the corporation's financial statements as required by the federal securities laws. In the course of reviewing these statements, the accounting firm verified the corporation's statement of its contingent tax liabilities, and, in so doing, prepared tax accrual workpapers relating to the evaluation of the corporation's reserves for such liabilities. When a routine audit by the Internal Revenue Service (IRS) to determine the corporation's income tax liability for certain years revealed that the corporation had made questionable payments from a "special disbursement account," the IRS instituted a criminal investigation of the corporation's tax returns. In that process, the IRS, pursuant to § 7602 of the Internal Revenue Code of 1954—which authorizes the Secretary of the Treasury to summon and "examine any books, papers, records, or other data which may be relevant or material" to a particular tax inquiry—issued a summons to the accounting firm requiring it to make available to the IRS all of its files relating to the corporation, including its tax accrual workpapers. When the corporation instructed the accounting firm not to comply with the summons, the IRS commenced an enforcement action in Federal District Court, which, upon finding that the tax accrual workpapers were relevant to the IRS investigation within the meaning of § 7602 and refusing to recognize an accountant-client privilege that would protect the workpapers, ordered the summons enforced. The Court of Appeals affirmed in part and reversed in part. While agreeing that the workpapers were relevant to the IRS investigation, the court held that the public interest in promoting full disclosure to public accountants, and in turn ensuring the integrity of the securities markets, required protection under a work-product immunity doctrine for the work that independent auditors perform for publicly owned corporations. Accordingly, because it found that the IRS had not made a sufficient showing of need to overcome the immunity and was not seeking to prove fraud on the corporation's part, the court refused to enforce the summons insofar as it sought the tax accrual workpapers.
Respondent Arthur Young & Co. is a firm of certified public accountants. As the independent auditor for respondent Amerada Hess Corp., Young is responsible for reviewing the financial statements prepared by Amerada as required by the federal securities laws.1 In the course of its review of these financial statements, Young verified Amerada's statement of its contingent tax liabilities, and, in so doing, prepared the tax accrual workpapers at issue in this case. Tax accrual workpapers are documents and memoranda relating to Young's evaluation of Amerada's reserves for contingent tax liabilities. Such workpapers sometimes contain information pertaining to Amerada's financial transactions, identify questionable positions Amerada may have taken on its tax returns, and reflect Young's opinions regarding the validity of such positions. See infra, at 810-813.
In 1975 the Internal Revenue Service began a routine audit to determine Amerada's corporate income tax liability for the tax years 1972 through 1974. When the audit revealed that Amerada had made questionable payments of $7830 from a "special disbursement account," the IRS instituted a criminal investigation of Amerada's tax returns as well. In that process, pursuant to Code § 7602, 26 U.S.C. § 7602,2 the IRS issued an administrative summons to Young, which required Young to make available to the IRS all its Amerada files, including its tax accrual workpapers. Amerada instructed Young not to comply with the summons.
The IRS then commenced this enforcement action against Young in the United States District Court for the Southern District of New York. See 26 U.S.C. § 7604.3 Amerada intervened, as permitted by 26 U.S.C. § 7609(b)(1).4 The District Court found that Young's tax accrual workpapers were relevant to the IRS investigation within the meaning of § 7602 and refused to recognize an accountant-client privilege that would protect the workpapers. 496 F.Supp. 1152, 1156-1157 (SDNY 1980). Accordingly, the District Court ordered the summons enforced.
Corporate financial statements are one of the primary sources of information available to guide the decisions of the investing public. In an effort to control the accuracy of the financial data available to investors in the securities markets, various provisions of the federal securities laws require publicly held corporations to file their financial statements with the Securities and Exchange Commission.5 Commission regulations stipulate that these financial reports must be audited by an independent certified public accountant in accordance with generally accepted auditing standards.6 By examining the corporation's books and records, the independent auditor determines whether the financial reports of the corporation have been prepared in accordance with generally accepted accounting principles.7 The auditor then issues an opinion as to whether the financial statements, taken as a whole, fairly present the financial position and operations of the corporation for the relevant period.8 See n. 13, infra. An important aspect of the auditor's function is to evaluate the adequacy and reasonableness of the corporation's reserve account for contingent tax liabilities. This reserve account, known as the tax accrual account, the noncurrent tax account, or the tax pool, represents the amount set aside by the corporation to cover adjustments and additions to the corporation's actual tax liability. Additional corporate tax liability may arise from a wide variety of transactions.9 The presence of a reserve account for such contingent tax liabilities reflects the corporation's awareness of, and preparedness for, the possibility of an assessment of additional taxes.
In seeking access to Young's tax accrual workpapers, the IRS exercised the summons power conferred by Code § 7602, 26 U.S.C. § 7602, which authorizes the Secretary of the Treasury to summon and "examine any books, papers, records, or other data which may be relevant or material" to a particular tax inquiry.10 The District Court and the Court of Appeals determined that the tax accrual workpapers at issue in this case satisfied the relevance requirement of § 7602, because they "might have thrown light upon" the correctness of Amerada's tax return.11 Because the relevance of tax accrual workpapers is a logical predicate to the question whether such workpapers should be protected by some form of work-product immunity, we turn first to an evaluation of the relevance issue.12 We agree that such workpapers are relevant within the meaning of § 7602.
That tax accrual workpapers are not actually used in the preparation of tax returns by the taxpayer or its own accountants does not bar a finding of relevance within the meaning of § 7602. The filing of a corporate tax return entails much more than filling in the blanks on an IRS form in accordance with undisputed tax principles; more likely than not, the return is a composite interpretation of corporate transactions made by corporate officers in the light most favorable to the taxpayer. It is the responsibility of the IRS to determine whether the corporate taxpayer in completing its return has stretched a particular tax concept beyond what is allowed. Records that illuminate any aspect of the return—such as the tax accrual workpapers at issue in this case—are therefore highly relevant to legitimate IRS inquiry. The Court of Appeals acknowledged this: "It is difficult to say that the assessment by the independent auditor of the correctness of positions taken by the taxpayer in his return would not throw 'light upon' the correctness of the return." 677 F.2d, at 219. We accordingly affirm the Court of Appeals' holding that Young's tax accrual workpapers are relevant to the IRS investigation of Amerada's tax liability.
"[T]his Court has consistently construed congressional intent to require that if the summons authority claimed is necessary for the effective performance of congressionally imposed responsibilities to enforce the tax Code, that authority should be upheld absent express statutory prohibition or substantial countervailing policies."
We cannot accept the view that the integrity of the securities markets will suffer absent some protection for accountants' tax accrual workpapers. The Court of Appeals apparently feared that, were the IRS to have access to tax accrual workpapers, a corporation might be tempted to withhold from its auditor certain information relevant and material to a proper evaluation of its financial statements. But the independent certified public accountant cannot be content with the corporation's representations that its tax accrual reserves are adequate; the auditor is ethically and professionally obligated to ascertain for himself as far as possible whether the corporation's contingent tax liabilities have been accurately stated. If the auditor were convinced that the scope of the examination had been limited by management's reluctance to disclose matters relating to the tax accrual reserves, the auditor would be unable to issue an unqualified opinion as to the accuracy of the corporation's financial statements. Instead, the auditor would be required to issue a qualified opinion, an adverse opinion, or a disclaimer of opinion, thereby notifying the investing public of possible potential problems inherent in the corporation's financial reports.13 Responsible corporate management would not risk a qualified evaluation of a corporate taxpayer's financial posture to afford cover for questionable positions reflected in a prior tax return.14 Thus, the independent auditor's obligation to serve the public interest assures that the integrity of the securities markets will be preserved, without the need for a work-product immunity for accountants' tax accrual workpapers.15
We also reject respondents' position that fundamental fairness precludes IRS access to accountants' tax accrual workpapers. Respondents urge that the enforcement of an IRS summons for accountants' tax accrual workpapers permits the Government to probe the thought processes of its taxpayer citizens, thereby giving the IRS an unfair advantage in negotiating and litigating tax controversies. But if the SEC itself, or a private plaintiff in securities litigation, sought to obtain the tax accrual workpapers at issue in this case, they would surely be entitled to do so.16 In light of the broad congressional command of § 7602, no sound reason exists for conferring lesser authority upon the IRS than upon a private litigant suing with regard to transactions concerning which the public has no interest.
Congress has granted to the IRS "broad latitude to adopt enforcement techniques helpful in the performance of [its] tax collection and assessment responsibilities." United States v. Euge, supra, 444 U.S., at 716, n. 9, 100 S.Ct., at 880, n. 9. Recognizing the intrusiveness of demands for the production of tax accrual workpapers, the IRS has demonstrated administrative sensitivity to the concerns expressed by the accounting profession by tightening its internal requirements for the issuance of such summonses. See Int. Rev. Manual—Audit (CCH) § 4024.4 (May 14, 1981).17 Although these IRS guidelines were not applicable during the years at issue in this case, their promulgation further refutes respondents' fairness argument and reflects an administrative flexibility that reinforces our decision not to reduce irrevocably the § 7602 summons power.
See, e.g., Securities Exchange Act of 1934, § 12(b)(1)(J)-(L), 48 Stat. 892, 15 U.S.C. § 78l (b)(1)(J)-(L); Regulation S-X, 17 CFR § 210 et seq. (1983). See also n. 5, infra.
"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 respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized—
Section 7604 of the Code, 26 U.S.C. § 7604, provides that:
The IRS summons served upon Young sought the production of records concerning the business transactions and affairs of Young's client, Amerada. Accordingly, under Code § 7609(a)(1), 26 U.S.C. § 7609(a)(1), Amerada was entitled to notice of the IRS summons. Section 7609(b)(1) provides that "any person who is entitled to notice of a summons under subsection (a) shall have the right to intervene in any proceeding with respect to the enforcement of such summons under section 7604."
See Securities Act of 1933, Schedule A (25)-(27), 48 Stat. 88, 15 U.S.C. § 77aa (filing of audited financial statement prior to registration of new stock issue); Securities Exchange Act of 1934, §§ 12(b)(1)(J)-(L), 12(g)(1), 48 Stat. 892, 15 U.S.C. §§ 78l (b)(1)(J)-(L), 78l (g)(1) (filing of audited financial statement prior to listing securities on an exchange); Securities Act of 1934, §§ 13(a)(2), 13(b), 48 Stat. 894, 15 U.S.C. §§ 78m(a)(2); 17 CFR §§ 249.310, 249.460 (1983) (filing of annual reports); Securities Exchange Act of 1934, § 14, 48 Stat. 895, 15 U.S.C. § 78n; Schedule 14A, Item 15, 17 CFR § 240.14a-101 (1983) (filing of audited financial statement in connection with proxy and information statements).
The relevance standard employed by the Second Circuit whether the documents at issue "might have thrown light upon the correctness of the return"—appears to be widely accepted among the Courts of Appeals. See, e.g., United States v. Wyatt, 637 F.2d 293, 300 (CA5 1981); United States v. Turner, 480 F.2d 272, 279 (CA7 1973); United States v. Ryan, 455 F.2d 728, 733 (CA9 1972); United States v. Egenberg, 443 F.2d 512, 515-516 (CA3 1971); Foster v. United States, 265 F.2d 183, 187 (CA2), cert. denied, 360 U.S. 912, 79 S.Ct. 1297, 3 L.Ed.2d 1261 (1959). In United States v. Harrington, 388 F.2d 520, 524 (1968), the Second Circuit amplified this test by stating that "the 'might' in the articulated standard, 'might throw light upon the correctness of the return,' is . . . an indication of a realistic expectation rather than an idle hope that something may be discovered." But in United States v. Coopers & Lybrand, 550 F.2d 615 (1977), the Court of Appeals for the Tenth Circuit held that tax accrual workpapers not prepared in connection with the filing of a corporate tax return were not relevant within the meaning of § 7602.
See, e.g., Securities Act of 1933, § 19, 48 Stat. 85, 15 U.S.C. § 77s(b) (for purposes of all "necessary and proper" investigations, SEC is empowered to "require the production of any books, papers, or other documents which the Commission deems relevant or material to the inquiry"); Securities Act of 1934, § 21, 48 Stat. 899, 15 U.S.C. § 78u(b) (same); Fed.Rule Civ.Proc. 26(b)(1) (parties may obtain discovery of "any matter, not privileged, which is relevant to the subject matter involved in the pending action").