Opinion ID: 537733
Heading Depth: 1
Heading Rank: 3

Heading: propriety of the district court's enforcement of the summons

Text: 30 Turning to the merits of the district court's decision, we are faced with three questions: (1) whether the district court properly conditioned enforcement of the summons upon a determination of its relevance to the Chattanooga plant closing, (2) whether the district court properly delegated that determination to a private accounting firm, and (3) whether the district court erred in rejecting Rockwell's invocation of the work product doctrine and the attorney-client privilege. Although analysis of these issues necessarily involves some overlap, we shall attempt to discuss them discretely. 31
32 The general question of whether IRS summonses may be enforced conditionally has been debated in the courts of appeals, with divergent results. Compare United States v. Author Servs., 804 F.2d 1520 (9th Cir.1986), modified, 811 F.2d 1264 (1987) with United States v. Barrett, 837 F.2d 1341 (5th Cir.1988), (en banc) (per curiam), cert. denied, --- U.S. ----, 109 S.Ct. 3264, 106 L.Ed.2d 609 (1989). The Supreme Court recently faced the issue in United States v. Zolin, --- U.S. ----, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989), but was evenly divided over a Ninth Circuit ruling that such summonses could be enforced conditionally to protect against abuse of a court's process. See id. at 2625; Zolin, 809 F.2d 1411, 1417 (9th Cir.1987). 33 The decisions in Author Services, Barrett, and Zolin address conditional enforcement in the context of limitations placed on the government's freedom to disclose information after it has been gathered, rather than limitations on its ability to gather information in the first place. For our purposes, this is a distinction without a difference. Our concern, as stated in United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964), is simply that the court not permit its process to be abused. In cases where the government's action would be an abuse of process, in whatever context, the court's restrictions are not legal error; rather, they are a wise exercise of control. Author Servs., 804 F.2d at 1526. Therefore, although the decision in Zolin is not binding, we nevertheless think its end result (in affirming the Ninth Circuit's decision) is sound, and we find that IRS summonses may be enforced conditionally. However, this ruling does not preclude our finding that the district court erred in conditionally enforcing the summons sub judice. 34 When the IRS summoned Rockwell, it did so pursuant to 26 U.S.C. Sec. 7602, which provides, in relevant part, as follows: 35 (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 respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized-- 36 (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry; 37 (2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and 38 (3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry. 39 The jurisdiction to entertain actions to enforce such summonses is granted to the district courts by 26 U.S.C. Sec. 7402(b). Summons enforcement proceedings are designed to be summary in nature, and their sole purpose ... is to ensure that the IRS has issued the summons for a proper purpose and in good faith. Barrett, 837 F.2d at 1349. 40 The proper focus of such proceedings was described in Powell, which sets forth a four-step prima facie showing that the government must make before a summons can be enforced. Powell requires the government to 41 show that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the 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. 42 Powell, 379 U.S. at 57-58, 85 S.Ct. at 254-55. However, this showing does not automatically entitle the government to enforcement of the summons. The taxpayer retains the right to challenge the summons on any appropriate ground. Id. at 58, 85 S.Ct. at 255 (quoting Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459 (1964)). The teaching of subsequent decisions is that an appropriate ground for challenging the summons exists when the taxpayer disproves one of the four elements of the government's Powell showing, or otherwise demonstrates that enforcement of the summons will result in an abuse of the court's process. See Barrett, 837 F.2d at 1350; United States v. El Paso Co., 682 F.2d 530, 536-37 (5th Cir.1982). 43 In the case at bar, the government satisfied its Powell burden by filing a petition to enforce the summons accompanied by the sworn affidavit of Special Agent Hackett. Rockwell defended against the summons by alleging bad faith investigation by the IRS and lack of relevancy, and by invoking the attorney-client privilege and the work product doctrine. Because Rockwell has not pursued the bad faith issue in its cross appeal, we turn to the question of relevance. 4 44 The district court ruled that the IRS is entitled to access to the portions of the free reserve file relating to the closing of the Chattanooga plant. App. at 206. Rockwell asserts that this ruling was correct. The IRS argues that it should be entitled to review the entire free reserve file for the tax years involved, and that the district court improperly restricted its access. In support of its position, the government argues that the district court erred by ignoring the institutional purpose of the IRS and by relying on the statements of a single IRS agent to determine that the IRS was conducting an investigation into the closing of the Chattanooga plant, not Rockwell's entire tax returns for the relevant period of time. The key to this issue is the IRS's legitimate purpose. Apparently, the district court determined that the IRS's purpose (under the Powell analysis) is an investigation of the Chattanooga plant closing only. This determination was legally incorrect. 45 The cases decided since Powell have shown that the requirement of legitimate purpose means nothing more than that the government's summons must be issued in good faith pursuant to one of the powers granted under 26 U.S.C. Sec. 7602. See, e.g., United States v. Bisceglia, 420 U.S. 141, 146-47, 95 S.Ct. 915, 919, 43 L.Ed.2d 88 (1975) (Once a summons is challenged it must be scrutinized by a court to determine whether it seeks information relevant to a legitimate investigative purpose and is not meant 'to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.'  (citation omitted)); United States v. Coopers & Lybrand, 550 F.2d 615, 620 (10th Cir.1977) (quoting Bisceglia); see also El Paso, 682 F.2d at 546-47 (Garwood, J., dissenting) (Accordingly, 'such inquiry' or 'such question' is properly understood as referring to the question of 'the correctness of any return' or 'the liability of any person for any internal revenue tax.'  (quoting 26 U.S.C. Sec. 7602(a))). We find no case requiring the government to delineate a specific and narrow purpose, and then holding that the summons will be enforced only insofar as it is relevant to that purpose. Indeed, the cases discuss not what the actual purpose is, but whether the summons was issued in good faith pursuant to a legitimate investigation--that is, an investigation authorized by section 7602. 46 In our view, to force the delineation of a purpose narrowly tailored to a specific suspected wrongdoing, and then to require a tight relevancy fit between the information sought and the purpose, would approach the kind of probable cause requirement expressly rejected in Powell. Consequently, we find that the district court erred by ignoring the general and overarching institutional purpose of the IRS, see United States v. LaSalle Nat'l Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), and by determining relevancy as against the specific suspected wrongdoing asserted by a single IRS agent. 47 In this case, the statements of Agent Hackett regarding the Vitullo memorandum and the Chattanooga plant closing are properly understood not as evidence of a specific purpose, but as evidence of the government's good faith and legitimacy in pursuing its institutional purpose--the investigation of the correctness of returns. Because the government's purpose is the investigation of the correctness of the 1983 return, we will remand to the district court with instructions to determine the relevance of material in the free reserve file to this purpose. In making this determination, the district court should be guided by the body of case law which has defined the rather liberal standard of relevance in section 7602. Under this section, the government is entitled even to information that has only potential relevance to the investigation, United States v. Arthur Young & Co., 465 U.S. 805, 814, 104 S.Ct. 1495, 1501, 79 L.Ed.2d 826 (1984) (emphasis in original), and the applicable standard is whether the information sought  'might throw light upon the correctness of the return.'  United States v. Egenberg, 443 F.2d 512, 515 (3d Cir.1971) (quoting United States v. Harrington, 388 F.2d 520, 524 (2d Cir.1968)); see also LaMura v. United States, 765 F.2d 974, 981 (11th Cir.1985); United States v. Southwestern Bank & Trust Co., 693 F.2d 994, 996 (10th Cir.1982).
48 The district court's power to entertain summons enforcement actions arises from 26 U.S.C. Sec. 7402(b), which reads as follows: 49 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. 50 It is clear that  'an Internal Revenue Service summons can be enforced only by the courts.'  Coopers & Lybrand, 550 F.2d at 620 (quoting Bisceglia, 420 U.S. at 146, 95 S.Ct. 915, 43 L.Ed.2d 88). Nevertheless, courts often farm out decision-making. Complicated factual disputes are routinely submitted to court-appointed experts under Fed.R.Evid. 706, to special masters under Fed.R.Civ.P. 53, to magistrates under 28 U.S.C. Sec. 636(b)(1)(B), and to court-annexed arbitrators under 28 U.S.C. Secs. 651-58. However, in such cases the court retains the ultimate decision-making authority. By leaving the relevancy determination solely up to the independent auditor, the district court's actions amounted to complete delegation, hence violating the mandate that courts enforce IRS summonses. 51 Even if the delegation were of a lesser order, there appears no ground to support it. The task delegated to the independent auditors is surely outside the scope of Fed.R.Evid. 706, which allows experts to render an opinion on the facts of a case, but does not allow experts actually to decide the case. Alternatively, Rule 53 (pertaining to Masters) may be employed only upon a showing that some exceptional circumstance requires it, Fed.R.Civ.P. 53(b), and the Master's report must be reviewed by the court, Fed.R.Civ.P. 53(e)(2). Nor to our knowledge would the independent auditors be certified as court-annexed arbitrators under 28 U.S.C. Secs. 651-58. We note generally that [e]ven in complex litigation, use of these procedures is the exception and not the rule. Manual for Complex Litigation Second Sec. 21.5 (1985). 52 We conclude that the delegation of the determination of relevance to an independent outside auditor was unauthorized. Cf. Gomez v. United States, --- U.S. ----, 109 S.Ct. 2237, 2247, 104 L.Ed.2d 923 (1989) (suggesting the Court's general reluctance to allow courts to delegate in the absence of specific statutory authority by holding that [t]he absence of a specific reference to jury selection in the [Federal Magistrates Act], ... or indeed, in the legislative history, persuades us that Congress did not intend the additional duties clause [of the Act] to embrace th[e] function [of presiding at voir dire in a felony trial].). Policy considerations support this view. Summons enforcement proceedings are designed to be summary in nature. See Donaldson v. United States, 400 U.S. 517, 529, 91 S.Ct. 534, 541, 27 L.Ed.2d 580 (1971). The determination of whether the summons was a valid exercise of IRS authority was not intended to be complex or involved. As explained supra, the role of the judiciary, in guarding against IRS abuse of the summons authority, is limited to a simple determination of general relevance, and the notion of relevance in this context is a loose one. Hence, the determination to be made by the district court is not a particularly rigorous task. In light of the intended summary nature of the proceedings, and the loose relevancy examination intended by Congress, we think delegation of this matter would be contrary to public policy. 53
54 It is well-settled that the IRS's summons power is not absolute and is limited by the traditional privileges, including the attorney-client privilege. Upjohn Co. v. United States, 449 U.S. 383, 398, 101 S.Ct. 677, 686, 66 L.Ed.2d 584 (1981). The burden of proving the defense falls upon the party resisting enforcement of the summons. See Powell, 379 U.S. at 58, 85 S.Ct. at 255; El Paso, 682 F.2d at 538. The privilege will apply as follows: 55 (1) Where legal advice of any kind is sought; (2) from a professional legal advisor in his capacity as such; (3) the communications relating to that purpose; (4) made in confidence; (5) by the client; (6) are at his instance permanently protected; (7) from disclosure by himself or by the legal advisor; (8) except the protection be waived. 56 El Paso, 682 F.2d at 538 n. 9 (quoting 8 J. Wigmore, Evidence Sec. 2292, at 554 (J. McNaughton rev. 1961)). However, most  'vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.'  Id. at 538 (quoting United States v. Kovel, 296 F.2d 918, 922 (2d Cir.1961) (emphasis in original)). 57 The district court did not make factual findings supporting its disposition of the attorney-client privilege issue. Rather, it stated only that, in light of the Fifth Circuit's finding in El Paso [that similar information was not shielded by the attorney-client privilege], we find that the IRS is entitled to relevant portions of the free reserve file. The flaw in the district court's approach is that it did not find facts to support its ultimate legal determination. 58 The sine qua non of any claim of privilege is that the information sought to be shielded is legal advice. Upon remand, if the relevancy test is met, the district court must first determine whether the information in the free reserve file is legal advice. The Fifth Circuit noted in El Paso that the preparation of tax returns is generally not legal advice within the scope of the privilege. El Paso, 682 F.2d at 539 (collecting cases). However, the El Paso court expressly declined to rule on whether certain material collected in a free reserve file could constitute legal advice, stating: [W]e would be reluctant to hold that a lawyer's analysis of the soft spots in a tax return and his judgments on the outcome of litigation on it are not legal advice. Id. 59 Faced with the testimony of Mr. Stoops that Rockwell's free reserve file contained exactly the kind of material referred to in the El Paso decision, we hold that the district court must make specific factual findings as to the nature of the material in the free reserve file in order to determine whether it constituted legal advice for purposes of the privilege. Additionally, the district court must determine who had control of the file, as well as who was involved in its preparation. It is clear that the attorney-client privilege applies only to communications between attorney and client; the Supreme Court has held that there is no accountant-client privilege. See Arthur Young, 465 U.S. at 817-20, 104 S.Ct. at 1502-03. 60 Another consideration crucial to determining the applicability of the privilege is confidentiality. The attorney-client privilege does not apply to communications that are intended to be disclosed to third parties or that in fact are so disclosed. See United States v. Bump, 605 F.2d 548, 551 (10th Cir.1979). It has been held that the disclosure of any meaningful part of a purportedly privileged communication  'waives the privilege as to the whole.'  El Paso, 682 F.2d at 538 (quoting United States v. Davis, 636 F.2d 1028, 1043 n. 18 (5th Cir.), cert. denied, 454 U.S. 862, 102 S.Ct. 320, 70 L.Ed.2d 162 (1981)). But see United States v. Upjohn Co., 600 F.2d 1223, 1227 n. 12 (6th Cir.1979) ([T]he corporation's voluntary disclosure to the SEC amounts to a waiver of the privilege only with respect to the facts actually disclosed.), rev'd on other grounds, 449 U.S. 383, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). As these cases indicate, there is some disagreement as to what effect disclosure to independent auditors (or the SEC) of information derived from a free reserve file will have in determining whether the attorney-client privilege has been waived. Indeed, there is factual disagreement in the case at bar as to what and how much of the free reserve file was revealed by Rockwell to its independent auditors and the SEC. If the district court reaches the issue upon remand, it will need to make specific factfindings in this area to facilitate our review of a difficult question. 5 61 A final issue regarding the attorney-client privilege involves the manner in which it was asserted. Specifically, claims of attorney-client privilege must be asserted document by document, rather than as a single, blanket assertion. See United States v. First State Bank, 691 F.2d 332, 335 (7th Cir.1982); El Paso, 682 F.2d at 541. It is clear that Rockwell did not do this in the district court. However, it may well be that the hybrid nature of the district court proceedings precluded Rockwell from knowing when to assert the privilege. See United States v. Davis, 636 F.2d 1028, 1044 n. 20 (5th Cir.), cert. denied, 454 U.S. 862, 102 S.Ct. 320, 70 L.Ed.2d 162 (1981). Rockwell will have to raise the privilege on a document-by-document basis should the issue be reached upon remand. 62 The work product doctrine also may be asserted to defend against an IRS summons. See Upjohn, 449 U.S. at 397, 101 S.Ct. at 686; El Paso, 682 F.2d at 542; United States v. Amerada Hess Corp., 619 F.2d 980, 987 (3d Cir.1980). 6 The doctrine is designed to protect material prepared by an attorney acting for his client in anticipation of litigation. See, e.g., In re Grand Jury Proceedings, 604 F.2d 798, 801 (3d Cir.1979). Federal Rule of Civil Procedure 26(b)(3) makes clear, however, the necessity that the materials be prepared in anticipation of litigation, and not  'in the ordinary course of business, or pursuant to public requirements unrelated to litigation.'  El Paso, 682 F.2d at 542 (citation omitted). 63 The question whether a document was prepared in anticipation of litigation is often a difficult factual matter. See id.; In re Grand Jury Investigation, 599 F.2d 1224, 1229 (3d Cir.1979). The test, as set forth in El Paso, is as follows:  '[L]itigation need not be imminent ... as long as the primary motivating purpose behind the creation of the document was to aid in possible future litigation.'  El Paso, 682 F.2d at 542-43 (quoting Davis, 636 F.2d at 1040). The Third Circuit's analogous standard, formulated in the grand jury context rather than in response to an IRS summons, asks whether in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation. In re Grand Jury Proceedings, 604 F.2d at 803. Rockwell argues that the free reserve file is maintained to aid Rockwell in future negotiations and litigation with the IRS. The government, on the other hand, contends that the file is maintained so that Rockwell may comply with generally accepted accounting principles and SEC reporting requirements. It will be necessary upon remand for the district court to determine with specificity Rockwell's motivation in creating and maintaining the free reserve file. 64 The district court must consider the other elements of the work product doctrine as well. In this case, the most obvious question to arise is whether the documents in the free reserve file were created by attorneys. Rockwell's tax counsel, Charles Stoops, testified that he is solely responsible for the maintenance of the file, and that the documents are prepared by him and by accountants acting under his direct supervision. However, the district court made no factual findings in this regard, and it must do so upon remand.