Petitioner special agent of the Internal Revenue Service (IRS),
in the process of investigating a taxpayer's tax liability, issued
summonses to respondent bank under authority of § 7602 of the
Internal Revenue Code of 1954 (which permits use of a summons
"[f]or the purpose of ascertaining the correctness of any return, .
. . determining the Liability of any person for any internal
revenue tax . . or collecting any such liability") to appear before
the agent and produce files of certain land trusts, created for the
benefit of the taxpayer. When respondent bank official appeared in
response to the summonses but refused to produce the files, the
United States and the agent petitioned the District Court for
enforcement of the summonses. That court denied enforcement,
finding that the summonses were not issued in good faith because
they were issued "solely for the purpose of unearthing evidence of
criminal conduct" by the taxpayer. The Court of Appeals
affirmed.
Held: The District Court erred in refusing to enforce
the summonses, since its finding that the agent was investigating
the taxpayer "solely for the purpose of unearthing evidence of
criminal conduct" does not necessarily lead to the conclusion that
the summonses were not issued in good faith pursuit of the
congressionally authorized purposes of § 7602. Pp.
437 U. S.
307-319.
(a) Congress has not categorized tax fraud investigation into
civil and criminal components, but has created a tax enforcement
system in which criminal and civil elements are inherently
intertwined, and any limitation on the good faith use of an IRS
summons must reflect this statutory premise. Pp.
437 U. S.
308-311.
(b) To enforce a summons under § 7602, the primary requirement
is that it be issued before the IRS recommends to the Department of
Justice the initiation of a criminal prosecution relating to the
subject matter of the summons. This is a prophylactic rule designed
to protect the standards of criminal litigation discovery and the
role of the grand jury as a principal tool of criminal accusation.
Pp.
437 U. S.
311-313.
(c) Enforcement of a summons is also conditioned upon the good
faith use of the summons authority by the IRS, which must not
abandon its
Page 437 U. S. 299
institutional responsibility to determine and to collect taxes
and civil fraud penalties. That a single special agent intends only
to gather evidence for a criminal investigation is not dispositive
of the good faith of the IRS as an institution. Those resisting
enforcement of a summons must disprove the actual existence of a
valid civil tax determination or collection purpose by the IRS. Pp.
313-317.
(d) On the record here, respondents have not shown sufficient
justification to preclude enforcement of the summonses in question,
absent any recommendation to the Justice Department for criminal
prosecution and absent any showing that the special agent already
possessed all of the evidence sought in the summonses or that the
IRS, in an institutional sense, had abandoned pursuit of the
taxpayer's civil tax liability. Pp.
437 U. S.
318-319.
554 F.2d 302, reversed with directions to remand.
BLACKMUN, J., delivered the opinion of the Court, in which
BRENNAN, WHITE, MARSHALL, and POWELL, JJ., joined. STEWART, J.,
filed a dissenting opinion, in which BURGER, C.J., and REHNQUIST
and STEVENS, JJ., joined,
post, p.
437 U. S.
319.
MR. JUSTICE BLACKMUN delivered the opinion of the Court.
This case is a supplement to our decision in
Donaldson v.
United States, 400 U. S. 517
(1971). It presents the issue whether the District Court correctly
refused to enforce Internal Revenue Service summonses when it
specifically found that the special agent who issued them "was
conducting his investigation solely for the purpose of unearthing
evidence of criminal conduct." 76-1 USTC � 9407, p. 84,073, 37
AFTR2d � 76-582, p. 76-1240 (ND Ill.1976).
Page 437 U. S. 300
I
In May, 1975, John F. Olivero, a special agent with the
Intelligence Division of the Chicago District of the Internal
Revenue Service (hereinafter IRS or Service), received an
assignment to investigate the tax liability of John Gattuso for his
taxable years 1970-1972. App. 227, 33. Olivero testified that he
had requested the assignment because of information he had received
from a confidential informant and from an unrelated investigation.
Id. at 3. The case was not referred to the IRS from
another law enforcement agency, but the nature of the assignment,
Olivero testified, was " [t]o investigate the possibility of any
criminal violations of the Internal Revenue Code."
Id. at
33. Olivero pursued the case on his own, without the assistance of
a revenue agent. [
Footnote 1]
He received information about Gattuso from the Federal Bureau of
Investigation as a result of the previous investigation.
Id. at 36. He solicited and received additional data from
the United States Attorney for the Northern District of Illinois,
the Secret Service, the Department of Housing and Urban
Development, the IRS Collection Division, and the Cosmopolitan
National Bank of Chicago.
Id. at 370.
Mr. Gattuso's tax returns for the years in question disclosed
rental income from real estate. That property was held in
Page 437 U. S. 301
Illinois land trusts [
Footnote
2] by respondent LaSalle National Bank, as trustee, a fact
revealed by land trust files collected by the IRS from banks.
Id. at 27, 45. In order to determine the accuracy of
Gattuso's income reports, Olivero proceeded to issue two summonses,
under the authority of § 7602 of the Internal Revenue Code of 1954,
26 U.S.C. § 7602, [
Footnote 3]
to respondent bank. Each summons related to a separate trust and
requested, among other things, that the bank. as trustee. appear
before Olivero at a designated time and place and produce its
"files relating to Trust No. 31544 [or No. 35396],
Page 437 U. S. 302
including the Trust Agreement" for the period 1970 through 1972,
and also
"all deeds, options, correspondence, closing statements and
sellers statements, escrows, and tax bills pertaining to all
property held in the trust at any time during"
that period. App. 9-16. Respondent Joseph W. Lang, a
vice-president of the bank, appeared in response to the summonses
but, on advice of counsel, refused to produce any of the materials
requested. Brief for Respondents 2.
The United States and Olivero, pursuant to §§ 7402(b) and
7604(a) of the Code, 26 U.S.C. §§ 7402(b) and 7604(a), [
Footnote 4] then petitioned the United
States District Court for the Northern District of Illinois for
enforcement of the summonses. App. 5. This was on November 11,
1975. Olivero testified that, when the petition was filed he had
not determined whether criminal charges were justified, and had not
made any report or recommendation about the case to his superiors.
Id. at 30. It was alleged in the petition and in an
incorporated exhibit that the requested materials were necessary
for the determination of the tax liability of Gattuso for the years
in question, and that the information contained in the documents
was not in the possession of the petitioners.
Id. at 7,
17-18. The District Court entered an order to show cause,
id. at 19, and respondents answered through counsel, who
also represented Gattuso.
Id. at 20-22.
Page 437 U. S. 303
At the ensuing hearing and in a post-hearing brief, respondents
argued that Olivero's investigation was "purely criminal" in
nature.
Id. at 82. Gregory J. Perry, a lawyer specializing
in federal taxation and employed by the same law firm that filed
the answer, testified that, in June, 1975, Olivero told him that
the Gattuso investigation "was strictly related to criminal
violations of the Internal Revenue Code."
Id. at 52.
Respondents conceded that they bore the burden of proving that
enforcement of the summonses would abuse the court's process, but
they contended that they did not have to show "that there is no
civil purpose to the Summons."
Id. at 87. Instead, they
urged that their burden was to show that the summonses were not
issued in good faith because "the investigation is solely for the
purpose of gathering evidence for use in a criminal prosecution."
Id. at 77.
The District Court agreed with respondents' contentions.
Although at the hearing the court seemed to recognize "that, in any
criminal investigation, there's always a probability of civil tax
liability,"
id. at 61, it focused its attention on the
purpose of Special Agent Olivero:
"I'll say now that I heard nothing in Agent Olivero's testimony
to suggest that the thought of a civil investigation ever crossed
his mind."
"
* * * *"
"Now, unless I find something in the
in camera
inspection [of the IRS case file] that gives more support to the
Government position than the Agent's testimony did, it would be my
conclusion that he was at all times involved in a criminal
investigation, at least in his own mind. [
Footnote 5]"
Id. at 62.
Page 437 U. S. 304
In its written memorandum, the District Court noted that
Donaldson permitted the use of an IRS summons issued in
good faith and prior to a recommendation for criminal prosecution.
Relying on dictum in
Reisman v. Caplin, 375 U.
S. 440,
375 U. S. 449
(1964), however, the court said that it was an improper use of the
summons "to serve it solely for the purpose of obtaining evidence
for use in a criminal prosecution." 76-1 USTC at 84,072, 37 AFTR2d
at 76-1240. If, at the time of its issuance, the summons served
this proscribed purpose, the court concluded, the absence of a
formal criminal recommendation was irrelevant, the summons was not
issued in good faith, and enforcement was precluded. The court then
held:
"It is apparent from the evidence that Special Agent John F.
Olivero, in his investigative activities, had focused upon the
possible criminal activities of John Gattuso, and was conducting
his investigation solely for the purpose of unearthing evidence of
criminal conduct by Mr. Gattuso."
Id. at 84,073, 37 AFTR2d at 76-1240.
The United States Court of Appeals for the Seventh Circuit
affirmed. 554 F.2d 302 (1977). It concluded that the District Court
correctly had included the issue of criminal purpose within the
good faith inquiry:
"[T]he use of an administrative summons solely for
Page 437 U. S. 305
criminal purposes is a quintessential example of bad faith. . .
."
"
* * * *"
"We note that the district court formulated its factual finding
by use of the expression 'sole criminal purpose' rather than by a
label such as 'bad faith.' We find no basis for reversible error in
that verbal formulation. The district court grasped the vital core
of
Donaldson and rendered its factual finding consistently
therewith."
Id. at 309. The Court of Appeals further decided that
the District Court had reached a factual, rather than a legal,
conclusion when it found the summonses to have been issued solely
for a criminal prosecution.
Id. at 305. Appellate review,
accordingly, was limited to application of the clearly erroneous
standard.
Id. at 306. Although the Court of Appeals noted
that Olivero had testified about the existence of a civil purpose
for the investigation, the court said that "the record establishes
that the district court did not believe him."
Id. at 309.
The appellate court could not reverse the trial court's judgment,
it said, because it was "not left with a firm and definite
conviction that a mistake [had] been made."
Id. at
306.
Because of the importance of the issue in the enforcement of the
internal revenue laws, and because of conflict among the Courts of
Appeals concerning the scope of IRS summons authority under 7602,
[
Footnote 6] we granted
certiorari. 434 U.S. 996 (1977).
Page 437 U. S. 306
II
In
Donaldson v. United States, 400 U.
S. 517 (1971), an IRS special agent issued summonses to
a taxpayer's putative former employer and its accountant for the
production of the employer's records of the taxpayer's employment
and compensation. When the records were not forthcoming, the IRS
petitioned for the enforcement of the summonses. The taxpayer
intervened and eventually appealed the enforcement order. This
Court addressed the taxpayer's contention that the summonses were
unenforceable because they were issued in aid of an investigation
that could have resulted in a criminal charge against the taxpayer.
His argument there,
see id. at
400 U. S. 532,
was based on the following dictum in
Reisman v. Caplin,
375 U.S. at
375 U. S.
449:
"[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, 239 F.2d 767, 772-773. . . ."
In the light of the citation to
Boren, [
Footnote 7] the Court in
Donaldson
concluded that the dictum referred and was applicable to "the
situation of a pending criminal charge or, at most, of an
investigation solely for criminal purposes." 400 U.S. at
400 U. S.
533.
Page 437 U. S. 307
Discerning the meaning of the brief
Reisman dictum,
however, did not resolve for the Court the question posed by
Donaldson. The validity of the summonses depended
ultimately on whether they were among those authorized by Congress.
[
Footnote 8] Having reviewed
the statutory scheme, 400 U.S. at
400 U. S.
523-525, the Court concluded that Congress had
authorized the use of summonses in investigating potentially
criminal conduct. The statutory history, particularly the use of
summonses under the Internal Revenue Code of 193, [
Footnote 9] supported this conclusion, as did
consistent IRS practice and decisions concerning effective
enforcement of other comparable federal statutes. [
Footnote 10] The Court saw no reason to
force the Service to choose either to forgo the use of
congressionally authorized summonses or to abandon the option of
recommending criminal prosecutions to the Department of Justice.
[
Footnote 11] As long as the
summonses were issued in good faith pursuit of the congressionally
authorized purposes, and prior to any recommendation to the
Department for prosecution, they were enforceable.
Id. at
536.
III
The present case requires us to examine the limits of the good
faith use of an Internal Revenue summons issued under § 7602. As
the preceding discussion demonstrates,
Donaldson does not
control the facts now before us. There, the taxpayer had argued
that the mere potentiality of criminal prosecution should have
precluded enforcement of the summons. 400 U.S. at
400 U. S. 532.
Here, on the other hand, the District Court
Page 437 U. S. 308
found that Special Agent Olivero was investigating Gattuso
"solely for the purpose of unearthing evidence of criminal
conduct." 76-1 USTC at 84,073, 37 AFTR2d at 76-1240. The question
then becomes whether this finding necessarily leads to the
conclusion that the summonses were not issued in good faith pursuit
of the congressionally authorized purposes of § 7602.
A
The Secretary of the Treasury and the Commissioner of Internal
Revenue are charged with the responsibility of administering and
enforcing the Internal Revenue Code. 26 U.S.C. §§ 7801 and 7802.
Congress, by § 7601(a), has required the Secretary to canvass
revenue districts to "inquire after and concerning all persons
therein who may be liable to pay any internal revenue tax." With
regard to suspected fraud, these duties encompass enforcement of
both civil and criminal statutes. The willful submission of a false
or fraudulent tax return may subject a taxpayer not only to
criminal penalties under §§ 7206 and 7207 of the Code, but, as
well, to a civil penalty, under § 6653(b), of 50% of the
underpayment. And § 6659(a) provides that the civil penalty shall
be considered as part of the tax liability of the taxpayer. Hence,
when § 7602 permits the use of a summons
"[f]or the purpose of ascertaining the correctness of any
return, . . . determining the liability of any person for any
internal revenue tax . . . . or collecting any such liability,"
it necessarily permits the use of the summons for examination of
suspected tax fraud and for the calculation of the 50% civil
penalty. In
Donaldson, 400 U.S. at
400 U. S. 535,
we clearly noted that § 7602 drew no distinction between the civil
and the criminal aspects; that it "contains no restriction"; that
the corresponding regulations were "positive"; and that there was
no significance, "for civil, as compared with criminal, purposes,
at the point of a special agent's appearance." The Court then
upheld the use of the summonses even though fraudulent conduct
carried the potential
Page 437 U. S. 309
of criminal liability. The Court repeated this emphasis in
Couch v. United States, 409 U. S. 322,
409 U. S. 326
(1973):
"It is now undisputed that a special agent is authorized,
pursuant to 26 U.S.C. § 7602, to issue an Internal Revenue summons
in aid of a tax investigation with civil and possible criminal
consequences."
This result is inevitable, because Congress has created a law
enforcement system in which criminal and civil elements are
inherently intertwined. When an investigation examines the
possibility of criminal misconduct, it also necessarily inquires
about the appropriateness of assessing the 50% civil tax penalty.
[
Footnote 12]
Page 437 U. S. 310
The legislative history of the Code supports the conclusion that
Congress intended to design a system with interrelated criminal and
civil elements. Section 7602 derives, assertedly without change in
meaning, [
Footnote 13] from
corresponding and similar provisions in §§ 3614, 3615, and 3654 of
the 1939 Code. By § 3614(a), the Commissioner received the summons
authority "for the purpose of ascertaining the correctness of any
return or for the purpose of making a return where none has been
made." Section 3615(b)(3) authorized the issuance of a summons
"[w]henever any person who is required to deliver a monthly or
other return of objects subject to tax delivers any return which,
in the opinion of the collector, is erroneous, false, or
fraudulent, or contains any undervaluation or understatement."
Section 3654(a) stated the powers and duties of the
collector:
"Every collector within his collection district shall see that
all laws and regulations relating to the collection of internal
revenue taxes are faithfully executed and complied with, and shall
aid in the prevention, detection, and punishment of any frauds in
relation thereto. For such purposes, he shall have power to examine
all persons, books, papers, accounts, and premises . . . and to
summon any person to produce books and papers . . . and to compel
compliance with such summons in the same manner as provided in
section 3615."
Under § 3616, punishment for any fraud included both fine and
imprisonment. The 1939 Code, therefore, contemplated the use of the
summons in an investigation involving suspected
Page 437 U. S. 311
criminal conduct as well as behavior that could have been
disciplined with a civil penalty. [
Footnote 14]
In short, Congress has not categorized tax fraud investigations
into civil and criminal components. Any limitation on the good
faith use of an Internal Revenue summons must reflect this
statutory premise.
B
The preceding discussion suggests why the primary limitation on
the use of a summons occurs upon the recommendation of criminal
prosecution to the Department of Justice. Only at that point do the
criminal and civil aspects of a tax fraud case begin to diverge.
See United States v. Hodge & Zweig, 548 F.2d 1347,
1351 (CA9 1977);
United States v. Billingsley, 469 F.2d
1208, 1210 (CA10 1972). We recognize, of course, that even upon
recommendation to the Justice Department, the civil and criminal
elements do not separate completely. The Government does not
sacrifice its interest in unpaid taxes
Page 437 U. S. 312
just because.a criminal prosecution begins. Logically, then, the
IRS could use its summons authority under § 7602 to uncover
information about the tax liability created by a fraud regardless
of the status of the criminal case. But the rule forbidding such is
a prophylactic intended to safeguard the following policy
interests.
A referral to the Justice Department permits criminal litigation
to proceed. The IRS cannot try its own prosecutions. Such authority
is reserved to the Department of Justice and, more particularly, to
the United States Attorneys. 28 U.S.C. § 547(1). Nothing in § 7602
or its legislative history suggests that Congress intended the
summons authority to broaden the Justice Department's right of
criminal litigation discovery or to infringe on the role of the
grand jury as a principal tool of criminal accusation.
Accord,
United States v. Morgan Guaranty Trust Co., 572 F.2d 36 (CA2
1978);
United States v. Weingarden, 473 F.2d 454, 458-459
(CA6 1973);
United States v. O'Connor, 118 F.
Supp. 248, 250251 (Mass.1953);
see Donaldson v. United
States, 400 U.S. at
400 U. S. 536;
cf. Abel v. United States, 362 U.
S. 217,
362 U. S. 226
(1960). The likelihood that discovery would be broadened or the
role of the grand jury infringed is substantial if post-referral
use of the summons authority were permitted. For example, the IRS,
upon referral, loses its ability to compromise both the criminal
and the civil aspects of a fraud case. 26 U.S.C. § 7122(a). After
the referral, the authority to settle rests with the Department of
Justice. Interagency cooperation on the calculation of the civil
liability is then to be expected, and probably encourages efficient
settlement of the dispute. But such cooperation, when combined with
the inherently intertwined nature of the criminal and civil
elements of the case, suggests that it is unrealistic to attempt to
build a partial information barrier between the two branches of the
executive. Effective use of information to determine civil
liability would inevitably result in criminal discovery.
Page 437 U. S. 313
The prophylactic restraint on the use of the summons effectively
safeguards the two policy interests while encouraging maximum
interagency cooperation. [
Footnote 15]
C
Prior to a recommendation for prosecution to the Department of
Justice, the IRS must use its summons authority in good faith.
Donaldson v. United States, 400 U.S. at
400 U. S. 536;
United States v. Powell, 379 U. S. 48,
379 U. S. 57-58
(1964). In
Powell, the Court announced several elements of
a good faith exercise:
"[The Service] must 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
Page 437 U. S. 314
possession, and that the administrative steps required by the
Code have been followed. . . . [A] court may not permit its process
to be abused. Such an abuse would take place if the summons had
been issued for an improper purpose, such as 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."
Ibid. (footnote omitted).
A number of the Courts of Appeals, including the Seventh Circuit
in this case, 554 F.2d at 309, have said that another improper
purpose, which the Service may not pursue in good faith with a
summons, is to gather evidence solely for a criminal investigation.
[
Footnote 16] The courts
have based their conclusions in part on
Donaldson's
explanation of the
Reisman dictum. The language of
Donaldson, however, must be read in the light of the
recognition of the interrelated criminal/civil nature of a tax
fraud inquiry. For a fraud investigation to be solely criminal in
nature would require an extraordinary departure from the normally
inseparable goals of examining whether the basis exists for
criminal charges and for the assessment of civil penalties.
In this case, respondents submit that such a departure did
indeed occur, because Special Agent Olivero was interested only in
gathering evidence for a criminal prosecution. We disagree. The
institutional responsibility of the Service to calculate and to
collect civil fraud penalties and fraudulently reported or
unreported taxes is not necessarily overturned by a single agent
who attempts to build a criminal case. The
Page 437 U. S. 315
review process over and above his conclusions is multi-layered
and thorough. Apart from the control of his immediate supervisor,
the agent's final recommendation is reviewed by the district chief
of the Intelligence Division, 26 CFR §§ 601.107(b) and (c) (1977);
Internal Revenue Manual, ch. 9600, §§ 9621.1, 9622.1, 9623 (CCH
1977);
see Donaldson v. United States, 400 U.S. at
400 U. S. 534.
The Office of Regional Counsel also reviews the case before it is
forwarded to the National Office of the Service or to the Justice
Department. 26 CFR § 601.107(c) (1977); Internal Revenue Service
Organization and Functions § 1116(3), 39 Fed.Reg. 11602 (1974);
Internal Revenue Manual, ch. 9600, §§ 9624, 9631.2, 9631.4 (CCH
1977). If the Regional Counsel and the Assistant Regional
Commissioner for Intelligence disagree about the disposition of a
case, another complete review occurs at the national level centered
in the Criminal Tax Division of the Office of General Counsel.
Internal Revenue Service Organization and Functions § 1113.(11) 22,
39 Fed.Reg. 11599 (1974); Internal Revenue Manual, ch. 9600, §
9651(1) (CCH 1977). Only after the officials of at least two layers
of review have concurred in the conclusion of the special agent
does the referral to the Department of Justice take place. At any
of the various stages, the Service can abandon the criminal
prosecution, can decide instead to assert a civil penalty, or can
pursue both goals. While the special agent is an important actor in
the process, his motivation is hardly dispositive.
It should also be noted that the layers of review provide the
taxpayer with substantial protection against the hasty or
overzealous judgment of the special agent. The taxpayer may obtain
a conference with the district Intelligence Division officials upon
request or whenever the chief of the Division determines that a
conference would be in the best interests of the Government. 26 CFR
§ 601.107(b)(2) (1977); Internal Revenue Manual, ch. 9300, § 9356.1
(CCH 1977). If prosecution has been recommended, the chief notifies
the taxpayer of
Page 437 U. S. 316
the referral to the Regional Counsel. 26 CFR § 601.107(c)
(1977); Internal Revenue Manual, ch. 9300, § 9356 (CCH 1977).
As in
Donaldson, then, where we refused to draw the
line between permissible civil and impermissible criminal purposes
at the entrance of the special agent into the investigation, 400
U.S. at
400 U. S. 536,
we cannot draw it on the basis of the agent's personal intent. To
do so would unnecessarily frustrate the enforcement of the tax laws
by restricting the use of the summons according to the motivation
of a single agent without regard to the enforcement policy of the
Service as an institution. Furthermore, the inquiry into the
criminal enforcement objectives of the agent would delay summons
enforcement proceedings while parties clash over, and judges
grapple with, the thought processes of each investigator. [
Footnote 17]
See United States
v. Morgan Guaranty Trust Co., 572 F.2d 36 (CA2 1978). This
obviously is undesirable and unrewarding. As a result, the question
whether an investigation has solely criminal purposes must be
answered only by an examination of the institutional posture of the
IRS. Contrary to the assertion of respondents, this means that
those opposing enforcement of a summons do bear the burden to
disprove the actual existence of a valid civil tax determination or
collection purpose by the Service. After all, the purpose of the
good faith inquiry is to determine whether the agency is honestly
pursuing the goals of § 7602 by issuing the summons.
Without doubt, this burden is a heavy one. Because criminal and
civil fraud liabilities are coterminous, the Service rarely will be
found to have acted in bad faith by pursuing the former. On the
other hand, we cannot abandon this aspect of the good faith inquiry
altogether. [
Footnote 18] We
shall not countenance
Page 437 U. S. 317
delay in submitting a recommendation to the Justice Department
when there is an institutional commitment to make the referral and
the Service merely would like to gather additional evidence for the
prosecution. Such a delay would be tantamount to the use of the
summons authority after the recommendation, and would permit the
Government to expand its criminal discovery rights. Similarly, the
good faith standard will not permit the IRS to become an
information gathering agency for other departments, including the
Department of Justice, regardless of the status of criminal cases.
[
Footnote 19]
Page 437 U. S. 318
D
In summary, then, several requirements emerge for the
enforcement of an IRS summons. [
Footnote 20] First, the summons must be issued before the
Service recommends to the Department of Justice that a criminal
prosecution, which reasonably would relate to the subject matter of
the summons, be undertaken. Second, the Service at all times must
use the summons authority in good faith pursuit of the
congressionally authorized purposes of § 7602. This second
prerequisite requires the Service to meet the
Powell
standards of good faith. It also requires that the Service not
abandon in an institutional sense, as explained in Parts
437 U. S. S.
313|>III-C above, the pursuit of civil tax determination or
collection.
IV
On the record before us, respondents have not demonstrated
sufficient justification to preclude enforcement of the IRS
summonses. No recommendation to the Justice Department for criminal
prosecution has been made. Of the
Powell criteria,
respondents challenge only one aspect of the Service's showing:
they suggest that Olivero already may possess the evidence
requested in the summonses. Brief for Respondents 119. Although the
record shows that Olivero had uncovered the names and identities of
the LaSalle National Bank land trusts, it does not show that the
Service knows the value of the trusts or their income or the
allocation of interests therein. Because production of the bank's
complete records on the trusts reasonably could be expected to
reveal part or all of this information, which would be material to
the computation
Page 437 U. S. 319
of Gattuso's tax liability, the
Powell criteria do not
preclude enforcement. Finally, the District Court refused
enforcement because it found that Olivero's personal motivation was
to gather evidence solely for a criminal prosecution. The court,
however, failed to consider whether the Service, in an
institutional sense, had abandoned its pursuit of Gattuso's civil
tax liability. [
Footnote 21]
The Court of Appeals did not require that inquiry. On the record
presently developed, we cannot conclude that such an abandonment
has occurred.
The judgment of the Court of Appeals is therefore reversed with
instructions to that court to remand the case to the District Court
for further proceedings consistent with this opinion.
It is so ordered.
[
Footnote 1]
Frequently, a revenue agent of the IRS Audit Division will refer
a case on which he is working to the Intelligence Division for
investigation of possible fraud. After such a referral, and at
other times, the special agent and the revenue agent work together.
Because of the importance and sensitivity of the criminal aspects
of the joint investigation, the special agent assumes control of
the inquiry.
See, e.g., Internal Revenue Manual, ch. 4500,
§§ 4563.431-4565.44 (CCH 1976 and 1978).
As part of a planned reorganization, the IRS has announced its
intention to redesignate the Audit Division and the Intelligence
Division as the Examinations Division and the Criminal Enforcement
Division, respectively. IRS News Release, Feb. 6, 1978.
[
Footnote 2]
Respondents describe an Illinois land trust as follows:
"An Illinois land trust is a contract by which a trustee is
vested with both legal and equitable title to real property and the
interest of the beneficiary is considered personal property. Under
this trust, the beneficiary or any person designated in writing by
the beneficiary has the exclusive power to direct or control the
trustee in dealing with the title and the exclusive control of the
management, operation, renting and selling of the trust property,
together with the exclusive right to the earnings, avails and
proceeds of said property. Ill.Rev.Stat. ch. 29, § 8.31
(1971)."
Brief for Respondents 1-2, n. 1.
[
Footnote 3]
Section 7602 reads:
"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 or his delegate is authorized -- "
"(1) To examine any books, papers, records, or other data which
may be relevant or material to such inquiry;"
"(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 or
his delegate may deem proper, to appear before the Secretary or his
delegate 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"
"(3) To take such testimony of the person concerned, under oath,
as may be relevant or material to such inquiry."
[
Footnote 4]
Section 7402(b) states:
"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."
Section 7604(a) reads:
"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."
[
Footnote 5]
The District Court was aware of and recognized the Government's
contention that the individual agent's motive in the investigation
was not dispositive:
"The COURT: . . . [U]nder your theory, any criminal
investigation would not really be one until they closed it because
there was always a possibility of a civil liability."
"
* * * *"
"If that's the law, you're in trouble, Mr. Cushner [counsel for
respondents] ."
"
* * * *"
"I think it boils down to an issue of law, so it's the cases,
really, that I'm interested in, plus any further clues I may find
in the
in camera inspection of the investigative
file."
App. 61-62. The court agreed to inspect the IRS investigative
file
in camera after it refused to permit respondents to
inspect the file.
Id. at 551, 612.
[
Footnote 6]
Compare United States v. Hodge & Zweig, 548 F.2d
1347, 1351351 (CA9 1977);
United States v. Zack, 521 F.2d
1366, 1368 (CA9 1975);
United States v. McCarthy, 514 F.2d
368, 374-375 (CA3 1975);
United States v. Weingarden, 473
F.2d 454, 460 (CA6 1973);
United States v. Wall Corp., 154
U.S.App.D.C. 309, 311, 475 F.2d 893, 895 (1972); and
United
States v. Billingsley, 469 F.2d 1208, 1210 (CA10 1972),
with United States . Morgan Guaranty Trust Co., 572 F.2d
36, 412 (CA2 1978);
and United States v. Troupe, 438 F.2d
117, 119 (CA8 1971), regarding the conflict about whether the
recommendation for criminal prosecution is dispositive of the
so-called criminal purpose issue.
Compare United States v. Hodge & Zweig, 548 F.2d at
1351;
and United States v. Billingsley, 469 F.2d at 1210,
with United States v. Lafko, 520 F.2d 622, 625 (CA3 1975),
regarding the conflict about whether the criminal recommendation
from the IRS to the Department of Justice or the recommendation
from the special agent to his superiors is important in the
enforcement inquiry.
[
Footnote 7]
In
Boren v. Tucker, 239 F.2d 767, 772-773 (1956), the
Ninth Circuit distinguished
United States v.
O'Connor, 118 F.
Supp. 248 (Mass.1953), which involved an investigation of a
taxpayer already under indictment.
[
Footnote 8]
The Court had concluded earlier that the summoning of the
employer's and the accountant's records for an investigation of the
taxpayer did not violate the constitutional rights of any of them.
400 U.S. at
400 U. S.
522.
[
Footnote 9]
See §§ 3614, 3615, 3616, and 3654 of the 1939 Code, 53
Stat. 438 440, 446.
[
Footnote 10]
See United States v. Kordel, 397 U. S.
1,
397 U. S. 11
(1970) (Federal Food, Drug, and Cosmetic Act enforcement), citing
Standard Sanitary Mfg. Co. v. United States, 226 U. S.
20,
226 U. S. 51-52
(1912) (Sherman Act enforcement).
[
Footnote 11]
See 437 U. S.
infra.
[
Footnote 12]
The interrelated nature of the civil and criminal investigative
functions is further demonstrated by the organization and
functioning of the IRS. Pursuant to 26 CFR § 601.107 (1977), each
revenue district has an Intelligence Division, "whose mission is to
encourage and achieve the highest possible degree of voluntary
compliance with the internal revenue laws." This purpose is
implemented by
"the investigation of possible criminal violations of such laws
and the recommendation (when warranted) of prosecution and/or
assertion of the 50 percent
ad valorem addition to the
tax."
Ibid. See generally Internal Revenue Service
Organization and Functions §§ 1113.663, 1114.8, and 1118.6, 39
Fed.Reg. 11572, 11581, 11601, and 11607 (1974).
In its Manual for employees, the IRS instructs that the
jurisdiction of the Intelligence Division includes all civil
penalties except those related to the estimated income tax.
Internal Revenue Manual, ch. 4500, § 4561 (CCH 1976). The Manual
adds:
"
Intelligence features are those activities of
developing and presenting admissible evidence required to prove
criminal violations and the
ad valorem penalties for civil
fraud, negligence and delinquency (except those concerning tax
estimations) for all years involved in cases jointly investigated
to completion."
Id. § 4565.31(4). The Manual also contains detailed
instructions for coordination between special agents and revenue
agents during investigations of tax fraud.
E.g., id., §
4563.431 (1978), and §§ 4566.2, 4565.32, 4566.41-4565.44
(1976).
Statistics for the fiscal year 1976 show that the Intelligence
Division has a substantially greater involvement with civil fraud
than with criminal fraud. Of 8,797 full-scale tax fraud
investigations in that year, only 2,037 resulted in recommendations
for prosecution. The 6,760 cases not recommended involved
approximately $11 million in deficiencies and penalties.
See 1976 Annual Report of the Commissioner of Internal
Revenue 33, 61, 152.
[
Footnote 13]
See H.R.Rep. No. 1337, 83d Cong., 2d Sess., A436
(1954); S.Rep. No. 1622, 83d Cong., 2d Sess., 617 (1954).
[
Footnote 14]
Internal Revenue officials received similar summons authority in
Revenue Acts prior to the 1939 Code.
See, e.g., Revenue
Act of 1918, § 1305, 40 Stat. 1142; Tariff Act of Oct. 3, 1913, §
II � I, 38 Stat. 178-179; Act of June 30, 1864, § 14, 13 Stat.
226.
The interrelated nature of fraud investigations thus was
apparent as early as 1864. Section 14 of the 1864 Act permitted the
issuance of a summons to investigate a suspected fraudulent return.
It also prescribed a 100% increase in valuation as a civil penalty
for falsehood. Section 15 established the criminal penalties for
such conduct. Four years later, when Congress created the position
of district supervisor, that official received similar summons
authority. Act of July 20, 1868, § 49, 15 Stat. 144-145;
see Cong.Globe, 40th Cong., 2d Sess., 3450 (1868). The
federal courts enforced these summonses when they were issued in
good faith and in compliance with instructions from the
Commissioner.
See In re Meador, 16 F. Cas. 1294, 1296 (No.
9,375) (ND Ga. 1869);
Stanwood v. Green, 22 F. Cas. 1077,
1079 (No. 13,301) (SD Miss. 1870) ("it being understood that this
right upon the part of the supervisor extends only to such books
and papers as relate to their banking operations, and are connected
with the internal revenue of the United States").
[
Footnote 15]
The Third Circuit has suggested that our reference in
Donaldson to the recommendation for criminal prosecution
("We hold that, under § 7602, an internal revenue summons may be
issued in aid of an investigation if it is issued in good faith and
prior to a recommendation for criminal prosecution," 400 U.S. at
400 U. S. 536)
intended to draw a line at the recommendation to the Service's
district office from the special agent, rather than at the
recommendation from the Service to the Justice Department.
United States v. Lafko, 520 F.2d at 625. This misread our
intent. Given the interrelated criminal/civil nature of tax fraud
investigation whenever it remains within the jurisdiction of the
Service, and given the utility of the summons to investigate civil
tax liability, we decline to impose the prophylactic restraint on
the summons authority any earlier than at the recommendation to the
Department of Justice. We cannot deny that the potential for
expanding the criminal discovery rights of the Justice Department
or for usurping the role of the grand jury exists at the point of
the recommendation by the special agent. But we think the
possibilities for abuse of these policies are remote before the
recommendation to Justice takes place, and do not justify imposing
an absolute ban on the use of the summons before that point.
Earlier imposition of the ban, given the balance of policies and
civil law enforcement interests, would unnecessarily hamstring the
performance of the tax determination and collection functions by
the Service.
[
Footnote 16]
See, e.g., United States v. Hodge & Zweig, 548 F.2d
at 1350, 1351;
United States v. Zack, 521 F.2d at 1368;
United States v. Lafko, 520 F.2d at 625;
United States
v. McCarthy, 514 F.2d at 374-375; United States v. Theodore,
479 F.2d 749, 753 (CA4 1973);
United States v. Weingarden,
473 F.2d at 459;
United States v. Wall Corp., 154
U.S.App.D.C. at 311, 475 F.2d at 895.
[
Footnote 17]
We recognize, of course, that examination of agent motive may be
necessary to evaluate the good faith factors of
Powell,
for example, to consider whether a summons was issued to harass a
taxpayer.
[
Footnote 18]
The dissent would abandon this aspect of the good faith inquiry.
It would permit the IRS to use the summons authority solely for
criminal investigation. It reaches this conclusion because it says
the Code contains no limitation to prevent such use. Its argument
reveals a fundamental misunderstanding about the authority of the
IRS. The Service does not enjoy inherent authority to summon
production of the private papers of citizens. It may exercise only
that authority granted by Congress. In § 7602, Congress has
bestowed upon the Service the authority to summon production for
four purposes only: for
"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."
Congress therefore intended the summons authority to be used to
aid the determination and collection of taxes. These purposes do
not include the goal of filing criminal charges against citizens.
Consequently, summons authority does not exist to aid criminal
investigations solely. The error of the dissent is that it seeks a
limit on the face of the statute when it should seek an affirmative
grant of summons authority for purely criminal investigations. We
have made that search and could uncover nothing in the Code or its
legislative history to suggest that Congress intended to permit
exclusively criminal use of summonses. As a result, the IRS employs
its authority in good faith when it pursues the four purposes of §
7602, which do not include aiding criminal investigations
solely.
[
Footnote 19]
To the limited extent that the institutional good faith of the
Service with regard to criminal purpose may be questioned before
any recommendation to the Department of Justice, our position on
this issue necessarily rejects the Government's argument that
pre-recommendation enforcement of summonses must meet only the
Powell elements of good faith. We have concluded that the
Government's contention fails to recognize the essence of the good
faith inquiry. The
Powell elements were not intended as an
exclusive statement about the meaning of good faith. They were
examples of agency action not in good faith pursuit of the
congressionally authorized purposes of § 7602. The dispositive
question in each case, then, is whether the Service is pursuing the
authorized purposes in good faith.
[
Footnote 20]
These requirements are not intended to be exclusive. Future
cases may well reveal the need to prevent other forms of agency
abuse of congressional authority and judicial process.
[
Footnote 21]
Respondents argue that the District Court made a factual finding
when it concluded that the summonses were issued solely to gather
evidence for a criminal prosecution. They then submit that the
District Court's decision may be overturned only if this Court
holds this finding to be clearly erroneous. Several Courts of
Appeals have discussed the factual and legal issues that lurk in
summons enforcement proceedings.
Compare United States v.
Zack, 521 F.2d at 1367-1368;
United States v. National
State Bank, 454 F.2d 1249, 1252 (CA7 1972);
Boren v.
Tucker, 239 F.2d at 773,
with United States v.
Weingarden, 473 F.2d at 460. Whether the issue of the
Service's good faith generally poses a factual question, or a legal
and factual one, or a legal question, is not necessarily presented
in the case now before the Court, and we do not reach it. The lower
courts employed an incorrect legal standard to measure good faith
when they limited their consideration to the personal motivation of
Special Agent Olivero. In this case, then, a legal error compels
reversal.
MR. JUSTICE STEWART, with whom THE CHIEF JUSTICE, MR. JUSTICE
REHNQUIST, and MR. JUSTICE STEVENS join, dissenting.
This case is here only because of judicial misreadings of a
passage in the Court's opinion in
Donaldson v. United
States, 400 U. S. 517,
400 U. S. 533.
That passage has been read by the federal courts, in this case and
in others, to mean that a summons
Page 437 U. S. 320
under § 7602 of the Internal Revenue Code, 26 U.S.C. § 7602, is
improper if issued in aid of an investigation solely for criminal
purposes. [
Footnote 2/1] Yet the
statute itself contains no such limitation, and the
Donaldson opinion in fact clearly stated that there are
but two limits upon enforcement of such a summons: it must be
"issued in good faith and prior to a recommendation for criminal
prosecution." 400 U.S. at
400 U. S. 536.
I adhere to that view.
The Court concedes that the task of establishing the "purpose"
of an individual agent is "undesirable and unrewarding."
Ante at
437 U. S. 316.
Yet the burden it imposes today -- to discover the "institutional
good faith" of the entire Internal Revenue Service -- is, in my
view, even less desirable and less rewarding. The elusiveness of
"institutional good faith" as described by the Court can produce
little but endless discovery proceedings and ultimate frustration
of the fair administration of the Internal Revenue Code. In short,
I fear that the Court's new criteria will prove wholly
unworkable.
Earlier this year, the Court of Appeals for the Second Circuit
had occasion to deal with the issue now before us in the case of
United States v. Morgan Guaranty Trust Co., 572 F.2d 36.
Judge Friendly's perceptive opinion for his court in that case read
the
Donaldson opinion correctly: this Court was there
"laying down an objective test, 'prior to a recommendation for
criminal prosecution,' that would avoid a need for determining the
thought processes of special agents; and . . . the 'good faith'
requirement of the holding related to such wholly different matters
as those mentioned in"
the case of
United States v. Powell, 379 U.S. at
379 U. S. 48.
[
Footnote 2/2]
Such a view would . . . be
Page 437 U. S. 321
consistent with the only rationale that has ever been offered
for preventing an otherwise legitimate use of an Internal Revenue
Service third party summons, namely, that Congress could not have
intended the statute to trench on the power of the grand jury or to
broaden the Government's right to discovery in a criminal case. . .
.
572 F.2d at 41-42.
Instead of standing by the objective and comparatively
bright-line test of
Donaldson, as now clarified, the Court
today further muddies the waters. It does not even attempt to
identify the source of the requirements it now adds to enforcement
proceedings under §§ 7402(b) and 7604(a) of the Code. These
requirements are not suggested by anything in the statutes
themselves, and nobody suggests that they derive from the
Constitution. They are simply imposed by the Court from out of
nowhere, and they seem to me unjustified, unworkable, and
unwise.
I would reverse the judgment, not for further hearings in the
District Court, but with instructions to order enforcement of the
summons.
[
Footnote 2/1]
See ante at
437 U. S.
305-306, n. 6.
[
Footnote 2/2]
As Judge Friendly pointed out, this Court's
Powell
opinion simply declared that a court may not permit its process in
enforcing a summons to be abused, and its examples of "abuse"
were:
"such an abuse would take place if the summons had been issued
for an improper purpose, such as 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."
"[379 U.S. at
379 U. S. 58.] Nothing was
said to indicate that an intention by the Commissioner to uncover
criminal tax liability would reflect 'on the good faith' of the
inquiry, and the rule of
ejusdem generis would dictate the
contrary."
572 F.2d at 40.