Court Opinion

ID: 9445450
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:29:12.960523+00
Date Added: 2024-06-11T17:30:16.153761
License: Public Domain

POPE, Circuit Judge
(dissenting).
I dissent. In my view the majority opinion indicates a misapprehension of the nature and character of this proceeding and it arrives at a conclusion which disregards all of the recent decisions both of the Supreme Court and of this court upon this subject. In United States v. Morton Salt Co., 338 U.S. 632, 642, 70 S.Ct. 357, 363, 94 L.Ed. 401, the Supreme Court frankly recognized that it had turned a corner in dealing with cases of this kind and that in adjudging of the propriety of a court order enforcing an administrative subpoena, many of the old concepts had fallen by the wayside. The Court said:
“We must not disguise the fact that sometimes, especially early in the history of the federal administrative tribunal, the courts were persuaded to engraft judicial limitations upon the administrative process. The courts could not go fishing, and so it followed neither could anyone else. Administrative investigations fell before the colorful and nostalgic slogan ‘no fishing expeditions’. It must not be forgotten that the administrative process and its agencies are relative newcomers in the field of law and that it has taken and will continue to take experience and trial and error to fit this process into our system of judicature. More recent views have been more tolerant of it than those which underlay many older decisions. Compare Jones v. Securities & Exchange Comm., 298 U.S. 1, 56 S.Ct. 654, 80 L.Ed. 1015; with United *394States v. Morgan, 307 U.S. 183, 191, 59 S.Ct. 795, 799, 83 L.Ed. 1211.
“The only power that is involved here is the power to get information from those who best can give.it and who are most interested in not doing so. Because judicial power is reluctant if not unable to summon evidence until it is shown to be relevant to issues in litigation, it does not follow that an administrative agency charged with seeing that the laws are enforced may not have and exercise powers of original inquiry. It has a power of inquisition, if one chooses to call it that, which is not derived from the judicial function. It is more analogous to the Grand Jury, which does not depend .on a case or controversy for power to get evidence but can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not. When investigative and accusatory duties are delegated by statute to an administrative body, it, too, may take steps to inform itself as to whether there is probable violation of the law." (Emphasis mine.)
In my view the. majority have completely missed this point which is that the right to issue the subpoena and to have it enforced stems from the right of the tax officials to carry on an investigation “merely on suspicion that the law is being violated, or even just because [they] want assurance that it is not.” Good evidence that the court’s opinion belongs to the past is furnished by the circumstance that its main reliance is upon Martin v. Chandis Securities Co., 9 Cir., 128 F.2d 731, and upon First Nat. Bank of Mobile v. United States, 5 Cir., 160 F.2d 532, which itself relies on the Chandis case. (On its facts a very different case than the one now before us.)
Further demonstration of the court’s error here is furnished by its apparent insistence upon treating the administrative action as though it were an adversary proceeding to which there were named parties. Proceeding along this line, they make it plain that they are treating the union as though it were some third party in no manner affected by the main case. Thus the opinion says: “The union was not itself subject to this investigation. It was not here a taxpayer whose books and records were within the jurisdiction of the agency”; and, in footnote 4, in referring to the Morton case, they say: “The defendant company was not a third party to the main inquiry, as was Local 174, here, but was itself the principal party.”
It is readily demonstrable that this concept which runs through the majority opinion not only flies in the face of what was said in the Morton Salt case, supra, but fails to take account of what was said in Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 209, 66 S.Ct. 494, 506, 90 L.Ed. 614, to the effect that all that is required to be demonstrated to the court in a case of this character is “that the investigation is authorized by Congress, is for a purpose Congress can order, and the documents sought are relevant to the inquiry.”
Even if the union were, as the majority mistakenly assume, in the position of a disinterested bystander, yet it is perfectly well settled that a third person may be required, in connection with administrative proceedings of this character, to produce books and records even though such person is not charged with any improper conduct, or, if it be a tax case, is not under investigation for nonpayment of taxes.
In First National Bank of Mobile v. United States 267 U.S. 576, 45 S.Ct. 231, 69 L.Ed. 796, the court summarily affirmed the decision in United States v. First Nat. Bank, D.C., 295 F. 142, 143, in which a bank was required to produce the registers and other books of the bank containing the accounts of certain taxpayers who were under investigation in respect to their income tax returns, and in which the court said: “This is not a question of a search and seizure of a party’s books and papers, but of whether a witness who has information *395as to a party’s dealings may be required to testify to those facts, and produce book entries as to such entries in connection with and supporting such testimony.” That case was followed by Falsone v. United States, 5 Cir., 205 F.2d 734, where the summons was addressed not to the taxpayer but to a certified public accountant. In accord are United States v. Peoples Deposit Bank & Trust Co., D.C.Ky., 112 F.Supp. 720, affirmed, 6 Cir., 212 F.2d 86; and In re Albert Lindley Lee Memorial Hospital, 2 Cir., 209 F.2d 122. § 7602 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 7602, which expressly authorizes the issuance of summons to produce books, is not limited to the taxpayer but extends to “any person having possession, custody, or care of books * * * relating to the business of the person liable for tax”.
It is obvious, however, that the union here is just as much the subject of investigation and potentially as liable to penalties as is its officer taxpayer. The union was the employer, and under the familiar provisions relating to the withholding of a portion of wages or salary and the payment of the amount deducted from salary, (Title 26 §§ 1621 to 1626 added to the Code in 1943), the union is in this investigation almost as deeply as Brewster himself. § 1623 makes the union liable for the payment of the tax required to be deducted. Title 26 § 145, as amended in 1944, would make the union or its officials liable for criminal penalties, and § 291 provides for civil penalties. So do §§ 147, 1625 and 1626. In short, the proceedings are just as apt to turn up claims and penalties against the union. That is only one reason why I must protest against the use of such loose expressions to the effect that “such a proceeding is in the nature of a search and seizure which has constitutional overtones, especially when directed to a third person”.1 Here we have neither third person, in that sense, nor any “constitutional overtones.” Such a reference ignores United States v. White, 322 U.S. 694, 64 S.Ct. 1248, 88 L.Ed. 1542.
Not only does the majority opinion overlook the presently recognized view which the Supreme Court takes of these proceedings, a view which throws into the discard the antiquated views which my brethren distill out of the language of Martin, Internal Revenue Agent v. Chan-dis, supra, which with other earlier decisions went down the drain after United States v. Morton Salt Co., supra, and Oklahoma Press Pub. Co. v. Walling, supra, but they overlook the special and particular facts presented by this case. No decision, whether among the old discarded opinions, or lining up with more recent decisions of the Supreme Court, is worth anything here unless it fits the facts of this case.
The circumstance which is present here is that in order to verify the taxpayer’s claim of income and the union’s claim that it has withheld and paid over an appropriate deduction from Brewster’s compensation, the Bureau investigator was required to rule out and negative the possibility of there being book entries somewhere in the union’s books making disclosure of repayments of loans and of numerous other transactions which were proper subjects of the investigation.
*396Thé .showing made before the district court was that Brewster, an officer of Local 174, had numerous financial dealings with the Union, indicating many .transactions which were not reflected in his income tax returns. Loans of approximately $35,000 had been made by the Local to Brewster, but his returns .showed.-no payments of interest or deductions for interest expense on such loans, and the annual financial report of the Local showed no such loans. The investigating officers found notes to the Local signed by Brewster in -the name of Ulearbrook Stock Farm which provided for no payment of interest, and the records available to the investigating of-ficers indicated that these substantial so-called'“loans” from the Local to Brewster were never paid. The evidence abundantly indicated probable caüse for a- belief that the so-called “loans” to Brewster wdi’ec-payments of income to 'him disguised as loans. Under those circumstances it was clearly the duty of the investigating officers to find out whether the loans were ever paid, and to verify their suspicions that they were neVer paid. -In the event of an action to collect the taxes or of a proceeding for redeterminatipn of,, an asserted deficiency, ft-would be material and relevant to furnish testimony that the books of the Union Jailed to disclose, anywhere, the receipt of any repayment. The investigative officer should be able to testify that he ted examined the books of the Local and ascertained that they disclosed no such ' repayments. He cannot give this testimony without having access ~to the books lifted in’ the court’s order.2 That all these books were necessary for this and other purposes indicated by the showing, was a determination - of fact which was primarily and peculiarly for the determination of the'trial judge.1 As stated in United, States v. United Distillers Product Corp., 2 Cir., 156 F.2d ,872, 875, “In matters so largely of administrative detail, our function should -only be to correct abuses of discretion and of power by the trial judge.”
The case of First National Bank of Mobile v. United States, supra, upon Which the majority rely, and which in turn relied upon Martin, Internal Revenue Agent v. Chandis Securities Co., supra, one of those cases “early in the history of federal administrative tribubals” whose authority was undercut in Morton Salt Company, supra, is so dif'ferent upon its facts that it cannot with propriety be cited here. The order there related to a bank which was, differing from the case here, a truly third person. As the opinion of the district court points out, it called for the production by the bank of more than 6,000,000 items covering a five year period, all commingled and relating to all of its customers. Such a case has no resemblance to this.
The record before the district court showed the existence of many other details of dealings between Brewster and the Local union which also made an inspection of the records in question necessary to a determination of Brewster’s tax liability. Large sums were paid by the Local for car and transportation expenses, and the affidavits showed that the Government had cause to believe that. Brewster received amounts in the form of expense allowances. Whether these were supplementary income to him could Only be ascertained through an exanimation of the books. Brewster’s wife was shown to have been paid $1500 for the purchase of an automobile. In connection with Brewster’s substantial financial investments in race horses and race horse enterprises, it was shown that repair bills bn a 1948 GMC horse van were paid by union check; automobile *397repairs were likewise paid; payments on a home purchased by Brewster and his wife were also paid with union checks; and numerous personal bills to the Horsebreeders Club were paid in the same manner. On the whole the facts shown in the affidavits filed on behalf of the Government bristled with suggestions of irregularities and the trial judge was warranted in holding that there was probable cause to believe that further investigation of the books in question was reasonable and necessary.
As stated in United States v. Morton Salt Co., supra, the administrative agency “has a power of inquisition, if one chooses to call it that, which is not derived from the judicial function. It is more analogous to the Grand Jury, which does not depend on a case or controversy for power to get evidence but can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not. When investigative and accusatory duties are delegated by statute to an administrative body, it, too, may take steps to inform itself as to whether there is probable violation of the law.” 388 U.S. at page 642, 70 S.Ct. at page 364. All that the trial court was authorized to do was to make the same sort of determination mentioned in Endicott Johnson Corp. v. Perkins, 317 U.S. 501, at page 509, 63 S.Ct. 339, 343, 87 L.Ed. 424: “The evidence sought by the subpoena was not plainly incompetent or irrelevant to any lawful purpose of the Secretary in the discharge of her duties under the Act, and it was the duty of the District Court to order its production for the Secretary’s consideration.”3
What I have said here sufficiently shows that access to the books listed in the court’s order was necessary and that those books and records were relevant and material for the purpose of permitting an investigator to demonstrate, if he could, that entries such as those disclosing repayment of a loan, were missing and not to be found anywhere within the books or records of the union. No further showing of necessity and relevancy than that made here should be required. As stated in United States v. United Distillers Products Corp., supra, 156 F.2d at page 874: “Nor should it be required to prove the grounds of its belief prior to examination of the only records which provide the ultimate proof.” All that need be established, as stated in the Endicott Johnson case, supra, is that the records sought are not plainly incompetent.
In McMann v. Securities and Exchange Commission, 2 Cir., 87 F.2d 377, 379, 109 A.L.R. 1445, it was said: “Unless such subpoenas are valid, it is impossible to see how the statutes can be enforced at all, or how any wrongdoer can be brought to book.” Until the inspection of the books is ordered and has been completed it is obviously impossible finally to determine whether the material thus uncovered would be relevant or material. This problem was dealt with at length in Westside Ford v. United States, 9 Cir., 206 F.2d 627, at page 632, where we affirmed an order of the same judge. We said: “ ‘The standards of materiality or relevancy are far less rigid in an ex parte inquiry to determine the existence of a violation of a statute, than those applied in a trial or adversary proceedings.’ ” The reason for this was discussed by Mr. Justice Jackson for the Court in the Morton Salt case, supra. If the investigation produces something which the Government later undertakes to offer in evidence in a proceeding to collect the taxes, it will then be appropriate for the court to rule upon the admissibility of the offered evidence and in that connection determine its materiality and relevancy. As said in Re Albert Bindley Lee Memorial Hos*398pital, 2 Cir., 209 F.2d 123, “ ‘It is strictly inquisitorial, justifiable because all the facts are in the taxpayer’s hands.’ ”
What convinces me of the majority’s complete misapprehension of the scope of the proposed investigation here involved is the comment, apparently by way of- an aside, that “there was no examination of 'the books and documents by the trial judge”, and the remark— “by scrutiny, the pertinent, relevant and material 'part could have been segregated” ; and again, “Inspection could have been made by the trial judge of any document brought into court for these purposes.” I respectfully suggest that none of these comments have any relation to this case where the legitimate and proper purpose of the Bureau included its preparation to make proof of a negative, namely, that nowhere in any book of the union is there any entry showing that Brewster ever repaid, these loans which the Government properly suspects. were not loans but disguised modes of compensation.
Do my associates suggest that these books must be brought into Judge Bowen’s court and that Judge Bowen should read them all for the purpose of satisfying himself that they contained no entry showing repayment of these loans? My associates’ opinion now rejects most of the principles cited by this court in Westside Ford v. United States, supra. If I were a member of the legal staff of the Bureau. I would now have to conclude that Westside Ford has been overruled, and that whatever validity the principles laid down in United States v. Morton Salt, supra, Oklahoma Press Co. v. Walling, supra, United States v. White, supra, and Endicott Johnson Corp. v. Perkins, supra, may have elsewhere, they can no longer be counted upon in the Ninth Circuit. I believe that before any such thing as that is permitted to happen, this case should be reargued and submitted to the court sitting en banc.
'This is the" second opinion to be filed in this case. Tim first one, in which I originally concurred,, reversed mainly on the ground that the hearing in the court below was based upon proof furnished by affidavits. This reversal was ordered notwithstanding no party had objected to that method of procedure. Thereafter a petition for rehearing was filed which so clearly demonstrated that the former opinion was wrong in the respect mentioned, that it had to be withdrawn. This was because such cases as Endicott Johnson Corp. v. Perkins, supra, Oklahoma Press Co. v. Walling, supra, and Westside Ford v. United States, supra, demonstrated that hearings upon affidavits in such cases, are the almost universal rule.
I think that the present effort of the majority to reach the same result by a different route is untenable. . The majority ignore the public interest which lies behind the statute here sought to be enforced. Cf. In re Albert Lindley Lee Memorial Hospital, supra.
There is one respect in which I think it would be appropriate to modify the trial court’s order. It has placed no definite time limitation upon the ordered examination. I would agree to a modification to provide for an appropriate time limit.

. That the majority opinion is not really facing the facts of this case, is manifest from the numerous references to the Local as a “third party”. The opinion says: “The impact of the enactment is specifically on the taxpayer and not on an independent third party such as the Local. Only through the taxpayer can the Local or its employees be summoned.” Again the opinion refers to the “fundamental right of a third party to privacy.” To my mind, all this is as lacking in reason as would he the assertion that when a grand jury’s investigation of the conduct of a supposed thief turns up evidence that stolen property had been disposed of to a receiver who knew it was stolen, the receiver was a “third person” with rights of privacy, and that the grand jury’s pursuit of information of his affairs had “constitutional overtones”!

. One purpose, for an inspection of this ■ kind is to permit the investigative officer ■ to ascertain the condition of the books . at an early date.before they can be altered to meet a later claim of deficiency. If the inspection were limited to some'.of those books there would be nothing to prevent an evading taxpayer or his controlled union from inserting a notation of payment or of some off-setting item in some other book. The law does pot contemplate that the Government should have to take this chance.

. Cf. Oklahoma Press Pub. Co. v. Walling, supra, 327 U.S. at page 201, 06 S.Ct. at page 501: “The very purpose of the subpoena and of the order, as of the authorized investigation, is to discover and procure evidence, not to prove a pending charge .or complaint, but upon which to make one if, in the Adininistrator’s judgment, the facts thus discovered should justify doing so.”