Source: http://openjurist.org/682/f2d/313/united-states-v-new-york-telephone-company
Timestamp: 2017-04-30 23:34:04
Document Index: 408334776

Matched Legal Cases: ['§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609', '§ 7609']

682 F2d 313 United States v. New York Telephone Company | OpenJurist
682 F. 2d 313 - United States v. New York Telephone Company HomeFederal Reporter, Second Series 682 F.2d.
682 F2d 313 United States v. New York Telephone Company 682 F.2d 313
82-2 USTC P 9438
UNITED STATES of America and John Kennedy, Special Agent,Internal Revenue Service, Petitioners-Appellees,v.NEW YORK TELEPHONE COMPANY and Howard Baskin, Respondents-Appellants,andMarilyn Sheldon, Taxpayer-Intervenor-Appellant.
Nos. 801, 802 and 746, Docket 81-6204, 81-6242 and 81-6244.
Argued Feb. 8, 1982.Decided June 11, 1982.
On October 8, 1980, in the course of an investigation of the income tax liabilities of Marilyn Sheldon, the Internal Revenue Service ("I.R.S.") served the New York Telephone Company ("telephone company") with a summons seeking the production of all billing records for three telephone numbers used by Sheldon.1 On October 10, 1980, the I.R.S. notified Sheldon of the service of the summons, and on October 21, 1980, Sheldon's attorney notified the telephone company not to comply with the summons. Subsequently, in August 1981, the I.R.S. filed a petition in the United States District Court, 528 F.Supp. 175, for the Southern District of New York, seeking to enforce the summons in a summary proceeding. The telephone company appeared in that proceeding and opposed enforcement, asserting that the taxpayer had notified it not to comply with the summons. On or about September 21, 1981, Sheldon moved to intervene in the enforcement proceeding. She opposed enforcement claiming that the demand for records was not made in good faith, was overbroad, and that the records sought were irrelevant to the investigation being conducted. She argued that she was entitled to intervene pursuant to 26 U.S.C. § 7609(a)(3) (C), a statute which provides that when a summons is served on a "third-party recordkeeper" and requires production of records of the business transactions or affairs of a person other than the recordkeeper, that person has a right to be notified of the service of the summons; to stay compliance with the summons by serving a notice not to comply within fourteen days after receiving notice of its service; and to intervene in any subsequent proceeding with respect to enforcement of the summons.
On this appeal, therefore, the Court is confronted with the issue of the meaning and breadth of coverage of the term "third-party recordkeeper" as defined in 26 U.S.C. § 7609(a)(3)(C). In resolving this question we must look at the context in which this section is found in the Internal Revenue Code, and the intent that lay behind its enactment.
Section 7602(2) of the Internal Revenue Code provides that the I.R.S. may require "any person having possession, custody, or care of books of account containing entries relating to the business of (a) person liable for tax" to produce those records and give testimony, provided the records and testimony are "relevant or material" to the I.R.S.'s inquiry into the correctness of a tax return. This statute imposes "a broad testimonial obligation" upon such persons. United States v. Euge, 444 U.S. 707, 714, 100 S.Ct. 874, 879, 63 L.Ed.2d 141 (1980).3
Section 7604 of the Internal Revenue Code provides, in turn, for the enforcement of an I.R.S. summons through a proceeding in the federal district court, which may use its contempt powers to compel compliance. A taxpayer does not have standing to intervene as a matter of right in such an enforcement proceeding against a party in possession of records of the taxpayer "simply because it is his tax liability that is the subject of the summons." Donaldson v. United States, 400 U.S. 517, 530, 91 S.Ct. 534, 542, 27 L.Ed.2d 580 (1971). Thus, prior to the tax code amendments adopted in 1976, only the recordkeeper, who generally had no stake in protecting the privacy rights of the taxpayer, had standing to challenge claimed intrusions into those rights by the I.R.S.
In 1976, section 7609 of the Internal Revenue Code was enacted by Congress to provide limited protection against unreasonable infringements upon the civil rights of taxpayers through the I.R.S.'s use of thirdparty summonses. See (1976) U.S.Code Cong. & Ad.News at 3797. This limited protection took the form of the amendment granting the taxpayer standing to intervene and contest the enforcement of such a summons, and reflected the recognition that the taxpayer is the true interested person in an enforcement proceeding involving a third-party recordkeeper. See United States v. Desert Palace, Inc., 79-1 U.S.T.C. P 9296 (D.Nev.1979); (1976) U.S.Code Cong. & Ad.News at 3798-3800. The amendment was designed, however, to give the taxpayer only a procedural right to intervene; it did not in any way expand either the taxpayer's substantive rights or the grounds on which enforcement of an I.R.S. summons might be resisted.
Section 7609(a)(3) lists six categories of persons which it designates as "third-party recordkeepers". Included among these is the category which the appellants here argue includes the telephone company: persons "extending credit through the use of credit cards or similar devices." 26 U.S.C. § 7609(a)(3)(C). However, as the Court pointed out in United States v. New York Telephone Company, 644 F.2d 953, 957 (2d Cir. 1981), the statute does not provide any definition of either "credit cards" or "similar devices". We do, however, at this juncture, have the benefit of this Court's ruling in that case. Therein, the Court concluded that "the Telephone Company extends credit by means of credit cards, and is thus a 'third-party recordkeeper' within the plain meaning of § 7609(a)(3)(C)." Id. at 958. The Court also held that the taxpayer-intervenor in that case, who was a telephone company credit cardholder, was entitled to intervene in the proceeding brought by the I.R.S. to enforce its summons. The Court stated that "(i)n light of the credit card operations of the Telephone Company ..., the fact that Tuccio is a credit cardholder, and the fact that the summons is broad enough to include records relating to Tuccio's credit card transactions, we conclude that § 7609 was applicable and that Tuccio should have been allowed to intervene in the compliance proceeding." Id. at 960.
In New York Telephone, supra, the telephone company argued that it should be considered a "third-party recordkeeper", as that term is defined in 26 U.S.C. § 7609(a)(3)(C), for three reasons: first, because it extends credit through the use of credit cards; second, because certain of its policies, such as "third number billing" (that is, permitting customers to use one telephone to call a party at a second number, and bill the charges to a third number) constitute the extension of credit through a device similar to a credit card; and third, because its policy of billing its customers one month in arrears is an extension of credit through a device "similar" to a credit card. Since the New York Telephone Court found merit in the first argument, and since the taxpayer in that case had a telephone company credit card, the Court found that it did not need to rule on the merits of the second and third arguments in order to reach its decision. Nevertheless, it indicated that it "reject(ed)" the third argument and was "skeptical" about the second. In this case, the taxpayer-intervenor does not have a telephone company credit card. Therefore, we must now decide whether a taxpayer's right to intervene in a proceeding to enforce an I.R.S. summons served upon the telephone company and seeking the production of the taxpayer's billing records is dependent upon the taxpayer's status as a telephone company credit cardholder.
Although section 7609(a)(3)(C) of the Internal Revenue Code provides that "any person extending credit through the use of credit cards or similar devices" is a third-party recordkeeper, it is clear that an entity's status as a third-party recordkeeper in relation to some or all of its retail customers does not make it a third-party recordkeeper with regard to records in its possession which are created and kept in a quite different capacity and in the course of entirely different types of transactions. Thus, the court in United States v. Exxon Co., 450 F.Supp. 472 (D.Md.1978), held, correctly we believe, that Exxon's lessor had no right to notice and no standing to intervene in an action brought to enforce an I.R.S. summons for the production of records relating to payments made by Exxon as the lessee of land on which it operated a gasoline service station. In so holding, the court rejected the argument that, because Exxon issued credit cards to its retail customers, it was a "third-party recordkeeper" with regard to any records in its possession, regardless of their type, which reflected transactions with anyone other than itself. Thus, the court in Exxon stated:
The holdings in United States v. Manchel, Lundy & Lessin, 477 F.Supp. 326, 329 (E.D.Pa.1979), United States v. Ohio Bell Telephone Co., 475 F.Supp. 697 (N.D.Ohio 1978), United States v. Connecticut Motor Club, 79-1 U.S.T.C. P 9141 (D.Conn.1978), and United States v. J. Joseph Gartland, Inc., 79 F.R.D. 148 (D.Md.1978) are predicated on the same ground. In each of these cases the court held that the taxpayer-intervenor was not entitled to notice of a summons, and was not permitted to intervene in an enforcement proceeding, when the types of transactions reflected in the records sought by the I.R.S. were of a type completely different from those which the statute was intended to protect. Here, however, the credit records sought by the I.R.S., and the transactions which they reflect, are of exactly the same type as those which are protected under § 7609 when the taxpayer happens to be a credit cardholder.
We agree with this Court's observation in New York Telephone that third-number billing practices alone constitute a questionable basis for a finding that the credit practices of the telephone company fall within the "similar devices" language of § 7609(a)(3)(C). However, in that case the Court was not directly confronted with that issue, and grounded its decision on the credit card issuing practices of the telephone company in conjunction with the intervenor's status as a credit cardholder. Since we are directly confronted here with the question whether the telephone company should be considered a third-party recordkeeper with regard to the billing records of its non-credit card customers, we must reassess the New York Telephone Court's characterization, which was not essential to the outcome of that case. In so doing, we now find that it is not necessary to focus on whether third party billing, standing alone, constitutes a "similar device" under the statute. The telephone company's third-party billing practices must be viewed in conjunction with the credit card issuing and the arrears billing practices of the telephone company, and with the types of transactions that are reflected in the records sought by the summons which the I.R.S. seeks to enforce.
The Court does not understand it to be contested that all customer billing records created and kept by the telephone company are virtually identical in both form and content, and reveal essentially the same type of private information about a customer, whether or not that customer holds a telephone company credit card. Therefore, we believe, it follows that the telephone company should be considered a third-party recordkeeper under § 7609(a)(3)(C) in cases involving customers' billing records of the type sought in both New York Telephone and in this case. Any other rule would make the question of standing to assert available defenses to the production of records turn upon the fortuitous possession of a piece of plastic, and the possibility that it was used at some point during the time period for which the records are sought. Such a rule, we think, would elevate the technical form of a transaction over its substance.
It might be argued that all records of two-party transactions should be excluded from the coverage of a statute which, on its face, deals with "third-party recordkeepers." Further, it might be argued along these lines, that in drafting § 7609(a)(3)(C) Congress meant only to include transactions involving records held by credit card companies such as MasterCard, Visa, and American Express, which extend credit in conjunction with transactions in which they are not themselves directly involved in the sale of goods or services, and whose credit records reflect transactions involving two parties separate and distinct from themselves. Such a rule would exclude from the coverage of the statute not only all telephone company records, but also department store credit records of purchases made using a credit card issued by the store, records of gasoline company credit card purchases, and, presumably, even records of purchases made directly from a credit card issuing company such as Visa or MasterCard.7 Records of such transactions, it could be argued, are the recordkeeper's own records of its own transactions, rather than those of the taxpayer. However, this Court (as well as others, see Exxon, supra; Desert Palace, supra ) has already gone beyond that point and held that records of two-party transactions, effected by use of a credit card, are within the intent of the statute. United States v. New York Telephone, supra at 958. Once the line between two-party and three-party transactions has been crossed it makes little sense to hold that the taxpayer's possession of a credit card is pivotal in deciding which customers of a single credit card issuing entity will, and which will not, have standing to intervene in a proceeding in which the I.R.S. seeks enforcement of a summons for the production of virtually identical types of records. This conclusion finds further support in the fact that the statute speaks solely in terms of the credit card issuers involved and makes no mention whatsoever of the credit cardholders.
Congress could have enacted a taxpayer notification statute covering any records of a summoned person that concern a taxpayer. It did not do so. Instead it passed a statute covering a summons issued to only designated categories of entities for only a designated category of records. Among the categories of covered entities is "any person extending credit through the use of credit cards or similar devices." 26 U.S.C. § 7609(a)(3)(C) (1976). Since the telephone company issues credit cards, it is plainly eligible to be included in this category. Whether it is actually within the statute's coverage, however, cannot be decided before determining whether the company's records fall within the category of records to which the statute applies: "records made or kept of the business transactions or affairs of any person (other than the person summoned)." § 7609(a)(1)(B).
By covering only records that reflect the taxpayer's transactions and not the recordkeeper's transactions, Congress must have had in mind transactions different from typical two-party vendor-buyer dealings. That this is so becomes evident when one examines the types of entities within the categories of covered recordkeepers, which the statute significantly calls "third-party" recordkeepers. Though anxious to assure some added procedural protection against unwarranted invasions of privacy, Congress covered lawyers, § 7609(a) (3)(E), but not doctors, banks, § 7609(a)(3)(A), but not insurance companies. Though all of these entities maintain records with significant privacy interests, only the entities covered by the statute keep records of transactions that can realistically be thought of as transactions of the taxpayer and not of the recordkeeper. The Senate Report underscores this point by noting that "a third party recordkeeper is generally to be a person engaged in making or keeping the records involving transactions of other persons." S.Rep.No.94-938, 94th Cong., 2d Sess. 369, reprinted in (1976) U.S.Code Cong. & Ad.News 3439, 3798.
The entities covered by the statute are those that can be expected to have records of third-party transactions. The attorney has a record of the taxpayer's legal transactions with a third party; the bank has a record of the taxpayer's payments to or receipts from a third party. Some entities that extend credit through the use of credit cards also have records of third-party transactions that can be said to be transactions of a person other than the person summoned. This occurs when the credit card issuer is an entity like Visa or Mastercharge, which has records of the taxpayer's transactions with third parties. In my view the statute has no application to records of two-party transactions between a credit card issuer like the telephone company and its own customers. Though the telephone company is an issuer of credit cards, and therefore eligible to be within the terms of § 7609(a)(3), it is not subject to the statute because in fact it is not a third-party recordkeeper, i.e., it does not maintain records of third-party transactions.
(D) any broker (as defined in section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)));
Generally no traditional privilege or privacy interest is implicated by a demand for telephone billing records, since a person has no legitimate expectation of privacy in the telephone numbers dialed on his telephone. Smith v. Maryland, 442 U.S. 735, 742-46, 99 S.Ct. 2577, 2581-83, 61 L.Ed.2d 220 (1979)
Courts have expressed their concern that the statute is ambiguous and that difficulties involved in its interpretation may lead, at times, to anomalous results. See, e.g., United States v. Shivlock, 459 F.Supp. 1383, 1384 (D.Colo.1978), aff'd sub nom. United States v. Income Realty and Mortgage, 612 F.2d 1224 (10th Cir. 1979), cert. denied sub nom. West v. United States, 446 U.S. 952, 100 S.Ct. 2918, 64 L.Ed.2d 809 (1980). ("These three consolidated cases are a part of the continuing saga of the headaches stemming from the enactment of the so-called third party recordkeepers statute, 26 U.S.C. § 7609.")
In United States v. Desert Palace, Inc., 79-1 U.S.T.C. P 9296 (D.Nev.1979), the court went even further. In that case Caesar's Palace casino issued plastic embossed cards to persons approved for credit, and, upon presentation of those cards, both extended credit, and cashed personal checks for those individuals. The I.R.S. served Caesar's Palace with a summons for all financial records pertaining to all checks cashed and other transactions with the taxpayers who then sought to intervene. In Desert Palace the court stated: