Source: http://www.law.cornell.edu/supremecourt/text/400/517
Timestamp: 2013-05-24 21:43:27
Document Index: 645005141

Matched Legal Cases: ['§ 7602', '§ 7602', '§ 7602', '§ 7602', '§ 3172', '§ 7604', '§ 7801', '§ 1112', '§ 1118', '§ 1118', '§ 1114', '§ 1116', '§ 301', '§ 301', '§ 7602', '§ 3614', '§ 3615', '§ 3616', '§ 3654', '§ 7602', '§ 7602']

Kevin L. DONALDSON, fka Merton H. Sweet v. UNITED STATES et al. | Supreme Court | LII / Legal Information Institute
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400 U.S. 517 (91 S.Ct. 534, 27 L.Ed.2d 580)
Kevin L. DONALDSON, fka Merton H. Sweet v. UNITED STATES et al.
In furtherance of an investigation of petitioner's tax returns, respondent Grady, an Internal Revenue Service (IRS) Special Agent, issued summonses to petitioner's putative former employer (Acme) and its accountant for the production of Acme's records of petitioner's employment and compensation during the years under investigation. The summonses were issued under § 7602 of the Internal Revenue Code of 1954, which authorizes IRS examinations of records and witnesses for the purpose of determining tax liability. Thereafter respondents, pursuant to 26 U.S.C. 7402(b) and 7604(a), filed in the District Court petitions for enforcement of the summonses. Petitioner filed motions to intervene in the enforcement proceeding, relying on Fed.Rule Civ.Proc. 24(a)(2), which inter alia, provides for intervention in an action 'when the applicant claims an interest relating to the property or transaction which is the subject of the action * * *.' Petitioner alleged that the IRS agents were investigating him solely to obtain evidence concerning criminal violations of the tax laws and that consequently the summonses were not issued for any purpose within the scope of § 7602 and could not be enforced. The court denied petitioner's motions and ordered that the records be produced. The Court of Appeals affirmed. Held:
1. Petitioner has no proprietary interest in the Acme records (his sole interest therein being that they presumably contain details of payments to him), and since he has no oher protectable interest by way of privilege or otherwise, he has no absolute right under Fed.Rule Civ.Proc. 24(a)(2) to intervene in the IRS summons enforcement proceeding. Pp. 527531.
2. Under § 7602 an IRS summons may be used in connection with a tax investigation if (as in this case) it is issued in good faith and prior to a recommendation for prosecution. Pp. 531536. United States v. Mercurio, 5 Cir., 418 F.2d 1213, affirmed.
Mr. Donaldson (sometimes referred to herein as the 'taxpayer') is an individual whose income tax returns for the calendar years 1964 1967, inclusive, are under investigation by the Internal Revenue Service.
On September 12 and 13, 1968, Special Agent John P. Grady, purportedly acting under the authority of § 7602 of the Internal Revenue Code of 1954, 26 U.S.C. 7602,
issued and served separate summonses to Acme and to Joseph J. Mercurio, Acme's accountant, commanding their appearance before Grady on September 23 and 24 'to give testimony relating to the tax liability' of Donaldson and to produce certain of Acme's records having to do with the taxpayer. The records specified were 'applications for employment and/or any other records containing background data including Social Security number furnished you by' the taxpayer; all contracts between the taxpayer and Acme and between him 'and the various organizations sponsoring performances of the circus * * * during * * * 1964 through 1967, inclusive'; Forms 1099 and W2 issued to the taxpayer; a schedule of the payments made to the taxpayer by the sponsoring organizations; checks and vouchers relating to payments to the taxpayer by Acme; expense vouchers submitted by the taxpayer; records containing information as to the identification of each sponsoring organization; and 'correspondence or other records relating to the foregoing or to any other financial transactions between Acme' and the taxpayer during 19641967, inclusive.
On November 25, 1968, the United States and Agent Grady, pursuant to 26 U.S.C. 7402(b) and 7604(a),
Each affidavit was to the effect that the affiant was conducting or assisting in the conduct of 'an investigation for the purpose of ascertaining the correct income tax liability' of the taxpayer for the years 19641967, inclusive, and that it was 'necessary' to examine the records and to take the testimony requested in order to ascertain the taxpayer's correct income tax liability for those years.
Mercurio and Acme, on their part, also filed responses to the orders to show cause. Each alleged that 'were it not for' the preliminary injunction or temporary restraining order theretofore entered, 'the Respondent would have complied with the summons.'
Certiorari was granted, 397 U.S. 933, 90 S.Ct. 942, 25 L.Ed.2d 114 (1970), because the case appeared to raise important questions relating to the administration and enforcement of the revenue laws, and because the courts of appeals have differed in their reading of Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964).
* Despite the contrary intimations in the motions to intervene, there is now no constitutional issue in the case. The taxpayer on oral argument so conceded.
In any event, that question appears to have been settled long ago when the Court upheld, against Fourth Amendment challenge, an internal revenue summons issued under the Revenue Act of 1921 and directed to a third-party bank. First Nat. Bank of Mobile, Ala. v. United States, 267 U.S. 576, 45 S.Ct. 231, 69 L.Ed. 796 (1925), aff'g 295 F. 142, 153 (SD Ala.1924). See also United States v. First Nat. Bank of Pikeville, 274 F.Supp. 283, 284 (ED Ky.1967), aff'd sub nom. Justice v. United States, 390 U.S. 199, 88 S.Ct. 901, 19 L.Ed.2d 1038 (1968), and United States v. Shlom, 420 F.2d 263, 266 (CA2 1969), cert. denied, 397 U.S. 1074, 90 S.Ct. 1521, 25 L.Ed.2d 809 (1970).
Mr. Justice Clark, in Part II of his opinion for a unanimous Court in Reisman, 375 U.S., at 445446, 84 S.Ct. at 511512, reviewed the statutory structure that Congress has provided for the issuance and enforcement of an internal revenue summons. It will perhaps be rewarding for us to outline that structure once again.
Section 7601 of the 1954 Code, 26 U.S.C. 7601, directs the Secretary or his delegate 'to the extent he deems it practicable' to cause Treasury Department officers or employees 'to proceed * * * and inquire after and concerning' all persons 'who may be liable to pay any internal revenue tax.' The section thus flatly imposes upon the Secretary the duty to canvass and to inquire. This is an old statute. It has roots in the first of the modern general income tax acts, namely, the Tariff Act of October 3, 1913, § II, I, 38 Stat. 178 and prior to that, in § 3172, as amended, of the Revised Statutes of 1874.
In his motion to intervene, and here (but apparently not at oral argument in the Court of Appeals, see 418 F.2d, at 1215), Donaldson would take comfort from the provisions of Fed.Rule Civ.Proc. 24(a)(2).
He asserts that, within the rule's literal language, he possesses 'an interest relating to the property or transaction which is the subject of the (enforcement) action and he is so situated that the disposition of the action may as a practical matter impair or impede his ability to protect that interest,' and that his interest is not adequately represented by the parties (Mercurio and Acme) to the enforcement proceedings. He would buttress this approach by reliance upon the reference to both § 7604(a) and the Civil Rules in n. 18 in Powell, 379 U.S., at 58, 85 S.Ct. at 255
and by reliance upon language appearing in Reisman, 375 U.S., at 445, 84 S.Ct. at 511.
In our view, however, the taxpayer's argument goes too far in its reading of Rule 24(a)(2) and of the quotations from Powell and from Reisman. The Civil Rules, of course, do have an application to a summons proceeding. Rule 81(a) (3) expressly so provides.
But the Civil Rules are not inflexible in this application. Rule 81(a)(3) goes on specifically to recognize that a district court, by local rule or by order, may limit the application of the rules in a summons proceeding. See 7 J. Moore, Federal Practice, 81.06(1), p. 4442 (2d ed. 1970). This feature was recognized as purposeful by the Advisory Committee when the pertinent language was added to Rule 81(a)(3) in 1946. Id., at 81.01(6), p. 4413 (2d ed. 1970). The post-Powell cases, too, are clearly and consistently to the effect that the footnote in Powell was not intended to impair a summary enforcement proceeding so long as the rights of the party summoned are protected and an adversary hearing, if requested, is made available. United States v. Gajewski, 419 F.2d 1088, 10901092 (CA8 1969), cert. denied, 397 U.S. 1040, 90 S.Ct. 1361, 25 L.Ed.2d 651 (1970); Venn v. United States, 400 F.2d 207, 212 n. 12 (CA5 1968); McGarry's, Inc. v. Rose, 344 F.2d 416, 418 (CA1 1965). We agree with that conclusion.
Similarly, the Reisman language set forth in n. 10, supra, does not guarantee intervention for the taxpayer. Certainly it recites that the proposed witness 'or any interested party' may attack the summons before the hearing officer, as well as before the District Court in any ensuing enforcement proceeding, and certainly it recites that the party summoned and one 'affected by a disclosure may appear or intervene' before the court. But this language, as well as subsequent comments in Reisman,
is permissive only and is not mandatory. The language recognizes that the District Court, upon the customary showing, may allow the taxpayer to intervene. Two instances where intervention is appropriate were specified, namely, where 'the material is sought for the improper purpose of obtaining evidence for use in a criminal prosecution' or where 'it is protected by the attorney-client privilege.' Thus, the Court recognized that intervention by a taxpayer in an enforcement proceeding might well be allowed when the circumstances are proper. But the Court did not there pronounce, even when confronted with a situation concerning an attorney's work product, that the taxpayer possesses an absolute right to intervene in any internal revenue summons proceeding. The usual process of balancing opposing equities is called for.
We, thus, are not in agreement with the holdings or implications in United States v. Benford, 406 F.2d 1192, 1194 (CA7 1969); United States v. Bank of Commerce, 405 F.2d 931 (CA3 1969); and Justice v. United States, 365 F.2d 312, 314 (CA6 1966), to the effect that, under Reisman, a taxpayer may intervene as of right simply because it is his tax liability that is the subject of the summons. Instead, we agree with the opposing conclusion reached by the Fifth Circuit here, 418 F.2d at 1218, and in In re Cole, 342 F.2d 5, 78 (CA2), cert. denied, 381 U.S. 950, 85 S.Ct. 1803, 14 L.Ed.2d 723 (1965), and O'Donnell v. Sullivan, 364 F.2d 43, 44 (CA1), cert. denied, 385 U.S. 969, 87 S.Ct. 501, 17 L.Ed.2d 433 (1966).
We turn, then, to Donaldson's particular situation. The material sought, as has been noted, consists only of Acme's routine business records in which the taxpayer has no proprietary interest of any kind, which are not the work product of his attorney or accountant, and which enjoy no established attorney-client or other privilege. Donaldson's only interestand of course it looms large in his eyeslies in the fact that those records presumably contain details of Acme-to-Donaldson payments possessing significance for federal income tax purposes.
'(T)he witness may challenge the summons on any appropriate ground. This would include, as the circuits have held, the defenses that the material is sought for the improper purpose of obtaining evidence for use in a criminal prosecution, Boren v. Tucker, 9 Cir., 239 F.2d 767, 772773, as well as that it is protected by the attorney-client privilege, * * *'
The use of a summons also has been approved, even where it is alleged that its purpose is to uncover crime, if no criminal prosecution as yet has been instituted.
It is precisely the latter situationwhere the sole object of the investigation is to gather data for criminal prosecutionthat is the subject of the Reisman dictum. This is evident from the fact that the dictum itself embraces the citation of Boren v. Tucker, 239 F.2d 767, 772773 (CA9 1956), an opinion in which, at the pages cited, the Ninth Circuit very carefully distinguished United States v. O'Connor, 118 F.Supp. 248 (Mass.1953), a case where the taxpayer already was under indictment. The Reisman dictum is to be read in the light of its citation of Boren, and of Boren's own citation of O'Connor; when so read, the dictum comes into proper focus as applicable to the situation of a pending criminal charge or, at most, of an investigation solely for criminal purposes.
We bear in mind that the Internal Revenue Service is organized to carry out the broad responsibilities of the Secretary of the Treasury under § 7801(a) of the 1954 Code for the administration and enforcement of the internal revenue laws.
See Internal Revenue Service Organization and Functions, § 1112 et seq., 35 Fed.Reg. 2417 et seq. (1970). We further bear in mind that the Service has district offices, each with an audit division and a criminal division; that the Audit Division's program emphasizes the civil aspects of enforcement but embraces 'participation with special agents of the Intelligence Division in the conduct of tax fraud investigations,' § 1118.4; that the Intelligence Division enforces the criminal statutes affecting income and certain other taxes and develops information concerning alleged criminal violations, § 1118.6; that each assistant regional commissioner for intelligence develops programs for the investigation of alleged tax frauds and 'certain other civil and alleged criminal violations of tax laws' and 'approves or disapproves recommendations for prosecution,' § 1114(10); and that recommendations for prosecution are processed through the office of regional counsel and by that office to the Department of Justice, § 1116(3). This demonstrates that the special agent may well conduct his investigation jointly with an agent from the Audit Division; that their combined efforts are directed to both civil and criminal infractions; and that any decision to recommend prosecution comes only after the investigation is complete or is sufficiently far along to support appropriate conclusions. The fact that a full-scale tax fraud investigation is being made does not necessarily mean that prosecution ensues when tax liability becomes apparent.
Congress clearly has authorized the use of the summons in investigating what may prove to be criminal conduct. The regulations are positive. Treas.Regs. § 301.76021(c)(4), 26 CFR § 301.76021(c)(4). The underlying statutes are just as authoritative. Section 6659(a)(2) of the Code defines the term 'tax,' as used in the Code and, hence, in the authorizing § 7602, to include any addition or penalty. Section 7602 contains no restriction; further, it has its ascertainable roots in the 1939 Code's § 3614 and, also, § 3615(a)(c), which, by its very language and by its proximity to § 3616 and § 3654, appears to authorize the use of the summons for investigation into criminal conduct. There is no statutory suggestion for any meaningful line of distinction, for civil as compared with criminal purposes, at the point of a special agent's appearance. See Mathis v. United States, 391 U.S. 1, 4, 88 S.Ct. 1503, 1504, 20 L.Ed.2d 381 (1968). To draw a line where a special agent appears would require the Service, in a situation of suspected but undetermined fraud, to forgo either the use of the summons or the potentiality of an ultimate recommendation for prosecution. We refuse to draw that line and thus to stultify enforcement of federal law. See United States v. Kordel, 397 U.S. 1, 11, 90 S.Ct. 763, 769, 25 L.Ed.2d 1 (1970).
On these facts, I concur with the Court's decision. There is nothing in the language of § 7602 to limit the issuance of summonses to civil investigations. Therefore, even though petitioner is the subject of a criminal investigation, that is no bar to the issuance of the summonses. It is true that a person who is summoned may object that the production of records or testifying would violate his rights under the Fourth or Fifth Amendments. And a taxpayer would clearly have standing to raise a claim of violation of his constitutional rights if a third party were ordered to produce records belonging to the taxpayer. United States v. Kordel, 397 U.S. 1, 7, 90 S.Ct. 763, 766767, 25 L.Ed.2d 1; Reisman v. Caplin, 375 U.S. 440, 445, 84 S.Ct. 508, 511514, 11 L.Ed.2d 459. But it is difficult to see how the summoning of a third party, and the records of a third party, can violate the rights of the taxpayer, even if a criminal prosecution is contemplated or in progress. There is no right to be free from incrimination by the records or testimony of others.
The taxpayer may, however, protect his interests in any hearings held pursuant to § 7602. The Internal Revenue Service is clearly conducting a criminal investigation of the petitioner. That is the function of special agents.
The purpose of the summonses is to gather evidence for a criminal prosecution. At such 'investigations' the summoned party may or may not be put under oath, at the discretion of the agent. He does have the right to be accompanied by counsel or an accountant. But the Internal Revenue Service has taken the position that the taxpayer who is being investigated is not entitled to be present at such 'ex parte investigations.'
'(The grand jury is) the only accusatory body in the Federal Government that is recognized by the Constitution. I would allow no other engine of government, either executive, or legislative, to take (its) placeat least when the right of confrontation and cross-examination are denied the accused as is done in these cases.' Id., at 499, 80 S.Ct. at 1549.
In Jenkins v. McKeithen, 395 U.S. 411, 89 S.Ct. 1843, 23 L.Ed.2d 404, the Court dealt with another state investigative commission. There, however, the authority of the commission was limited to ascertaining facts regarding violations of criminal law and reporting its findings for criminal prosecution. There was no right to cross-examination for nonwitnesses and the right was limited for witnesses. The Court held that the commission exercised an accusatory function and was empowered to brand people as criminals. Id., at 427428, 89 S.Ct., at 18511852. Therefore, due process required the commission to afford a person being investigated the right to confront and cross-examine the witnesses against him.
'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 collecting any such liability, the Secretary or his delegate is authorized
'(b) To enforce summons.If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, or other data, the district court of the United States for the district in which such person resides or may be found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data.'
'(a) Jurisdiction of district court.If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, records, or other data, the United States district court for the district in which such person resides or is found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, records, or other data.'
Tr. of Oral Arg. 910.
Wild v. United States, 362 F.2d, at 208209; Venn v. United States, 400 F.2d, at 210; United States v. Roundtree, 420 F.2d 845, 851 (CA5 1969). See United States v. O'Connor, 118 F.Supp. 248 (Mass.1953).
'(a) Powers and duties of Secretary.Except as otherwise expressly provided by law, the administration and enforcement of this title shall be performed by or under the supervision of the Secretary of the Treasury.'
In 1969, 2,080 full-scale tax fraud investigations were undertaken by the intelligence divisions. On ly 1,049, or approximately half, of these resulted in recommendations for prosecution. In the 1,031 cases not recommended for prosecution, some $20,000,000 in deficiencies and penalties resulted and were earmarked for collection civilly. 1969 Annual Report of the Commissioner of Internal Revenue 2831.