Opinion ID: 425268
Heading Depth: 2
Heading Rank: 1

Heading: Whether tax accrual workpapers are relevant.

Text: 14 The Internal Revenue Service has broad authority under Section 7602. The Service may examine any books, papers, records or other data which may be relevant or material to its investigation of the correctness of any tax return. 26 U.S.C.A. Sec. 7602(a). The Supreme Court in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), defined the minimal showing that the IRS must make when seeking an order to enforce its summons. Id. at 57-58, 85 S.Ct. at 255. It must show that 15 the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to that purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed.... 16 Id. 17 The Service can satisfy its burden merely by presenting the sworn affidavit of the agent who issued the summons. United States v. Southeast First National Bank of Miami Springs, 655 F.2d 661, 664 (5th Cir.1981). 5 Once the government makes this minimal showing, the burden shifts to the taxpayer to disprove one of the elements of the government's case or to show that enforcement of the summons would be an abuse of the court's process. Id.; United States v. Davis, 636 F.2d 1028, 1034 (5th Cir.1981). 18 Taxpayer here argues that the Service carries the ultimate burden in a summons enforcement proceeding. If the taxpayer presents some evidence that the government has not satisfied the Powell requirements or that enforcement otherwise would be an abuse of process, then the government must come forward with ultimately persuasive evidence. Trio argues that, after it presented evidence challenging the relevancy of the tax accrual workpapers to the IRS tax investigation, the government was required to persuade the court that the workpapers were relevant to its investigation. 19 Because we determine that the IRS here made the minimal showing as required by Powell and that tax accrual workpapers are relevant as a matter of law to a legitimate investigation of a corporation's correct tax liability, we find it unnecessary to discuss further the burdens of proof required in a summons enforcement proceeding. 20 Due to the complexity of the federal tax structure, the return filed by a corporate taxpayer often is not the final statement of the amount of taxes owed. Taxpayers often are required to pay more in taxes than their returns indicated. Many corporations, therefore, set aside a reserve on their balance sheets to cover this potential additional liability. Corporate financial statements that do not include a reserve for contingent tax liability may give an inaccurate picture of the firm's financial position. Consequently, as Trio itself noted, generally accepted auditing principles require auditors to assess a corporation's contingent tax liability and determine whether it is great enough to require the corporation to reveal the potential liability on its balance sheet. In addition, federal securities laws require regulated corporations to file with the Securities and Exchange Commission financial statements that have been audited by independent accountants in accordance with generally accepted auditing principles. 6 The documents generated by that tax accrual analysis disclose the weak spots in the corporation's assessment of its own tax liability. 21 In United States v. Wyatt, 637 F.2d 293 (5th Cir.1981), the former Fifth Circuit, in a decision that is binding on this Court, articulated the test for relevancy under Powell. The test is whether the summons seeks information which 'might throw light upon the correctness of the taxpayer's return'  and, more narrowly, whether there is an indication of a 'realistic expectation rather than an idle hope that something might be discovered.'  Id. at 300-01 (citations omitted). 22 The Fifth Circuit, applying this test in a nonbinding decision, recently held that tax accrual workpapers are relevant to a determination of a corporation's tax liability. United States v. El Paso Company, 682 F.2d 530, 537 (5th Cir.1982). The court there rejected the suggestion that tax accrual workpapers are not relevant because they are neither tools used to prepare tax returns nor source documents representative of actual transactions. Id. The court thus squarely rejected the reasoning of United States v. Coopers & Lybrand, 550 F.2d 615 (10th Cir.1977), which denied the relevancy of tax accrual workpapers to an IRS investigation. Id. at 621. 23 Applying the Wyatt definition, we agree that tax accrual workpapers are relevant. The workpapers highlight and assess questionable tax interpretations that the taxpayer has given to its transactions. As the Arthur Young court itself noted in holding tax accrual workpapers relevant to a legitimate IRS investigation, [d]ifferent tax positions lead to different amounts of liability. It is difficult to say that the assessment by the independent auditor of the correctness of the positions taken by the taxpayer in his return would not throw 'light upon' the correctness of the return. 677 F.2d 211, 219 (2d Cir.1982), cert. granted, --- U.S. ----, 103 S.Ct. 1180, 75 L.Ed.2d 429 (1983). 7 Moreover, the controlling precedent of this Circuit does not require that information relevant to a tax investigation be limited to source documents or materials used in preparing returns. See, e.g., United States v. Wyatt, 637 F.2d 293 (5th Cir.1981) (summons sought corporate officials' answers to specific questions regarding their knowledge of bribes, kickbacks and other illegal transactions); United States v. Newman, 441 F.2d 165 (5th Cir.1971) (summons sought records of taxpayer's business associates). We thus join the Second and Fifth Circuits in rejecting the Tenth Circuit's holding in Coopers & Lybrand. 24