On the ground that the respondent corporate taxpayer's returns
had been examined for certain years and that, absent fraud, the
statute of limitations barred assessment of additional
deficiencies, respondent the taxpayer's president refused to
produce records summoned by the Internal Revenue Service (IRS)
unless it disclosed its basis for believing that fraud had been
committed. The Government brought an enforcement proceeding under §
7604(b) of the Internal Revenue Code in the District Court, which
held that the agent be allowed to reexamine the records. The Court
of Appeals reversed, holding that § 7605 (b) barred "unnecessary
examination" unless the IRS could show reasonable grounds or
probable cause to suspect fraud, a condition not satisfied by the
agent's affidavit filed with the enforcement petition that he
suspected that the taxpayer had fraudulently overstated
expenses.
Held:
1. Section 7604(b) does not apply to a non-contumacious refusal
like the individual respondent's to comply with a summons; but
recommencement of the proceeding will not be required, since the
Government sought no prehearing sanctions of arrest and attachment
under that statute, which is otherwise similar to §§ 7402(b) and
7604(a). The proceeding is therefore considered under those almost
identical sections, which give general power to enforce summonses
"by appropriate process." Pp.
379 U. S.
51-52.
2. In order to enforce a summons for records, the Commissioner,
either before or after the limitations period has expired, need not
show probable cause to suspect fraud. Unless the taxpayer raises a
substantial question that judicial enforcement of the summons would
abuse the court's process, the Commissioner must only show that the
investigation is pursuant and relevant to a legitimate purpose;
that the information is not already in the Commissioner's
possession; that the Secretary or his delegate has determined that
the further examination is necessary, and that the other
administrative steps required by the Code have been followed. Pp.
379 U. S.
52-58.
325 F.2d 914, reversed and remanded.
Page 379 U. S. 49
MR. JUSTICE HARLAN delivered the opinion of the Court.
In March, 1963, the Internal Revenue Service, pursuant to powers
afforded the Commissioner by § 7602(2) of the Internal Revenue Code
of 1954, summoned respondent Powell to appear before Special Agent
Tiberino to give testimony and produce records relating to the 1958
and 1959 returns of the William Penn Laundry (the taxpayer), of
which Powell was president. Powell appeared before the agent, but
refused to produce the records. Because the taxpayer's returns had
been once previously examined, and because the three-year statute
of limitations barred assessment of additional deficiencies for
those years [
Footnote 1] except
in cases of fraud (the asserted basis for this summons), [
Footnote 2] Powell contended that,
before he could be forced to produce the records, the Service had
to indicate some grounds for its belief that a fraud had been
committed. The agent declined to give any such indication, and the
meeting terminated.
Thereafter, the Service petitioned the District Court for the
Eastern District of Pennsylvania for enforcement of the
administrative summons. With this petition, the agent filed an
affidavit stating that he had been investigating the taxpayer's
returns for 1958 and 1959; that, based on this investigation, the
Regional Commissioner
Page 379 U. S. 50
of the Service had determined an additional examination of the
taxpayer's records for those years to be necessary, and had sent
Powell a letter to that effect; and that the agent had reason to
suspect that the taxpayer had fraudulently falsified its 1958 and
1959 returns by overstating expenses. At the court hearing, Powell
again stated his objections to producing the records, and asked the
Service to show some basis for its suspicion of fraud. The Service
chose to stand on the petition and the agent's affidavit, and,
after argument, the District Court ruled that the agent be given
one hour in which to reexamine the records. [
Footnote 3]
The Court of Appeals reversed, 325 F.2d 914. It reasoned that,
since the returns in question could only be reopened for fraud,
reexamination of the taxpayer's records must be barred by the
prohibition of § 7605(b) of the Code [
Footnote 4] against "unnecessary examination" unless the
Service possessed information "which might cause a reasonable man
to suspect that there has been fraud in the return for the
otherwise closed year," [
Footnote
5] and whether this standard has been met is to be decided "on
the basis of the showing made in the normal course of an adversary
proceeding. . . ." [
Footnote 6]
The court concluded that the affidavit in itself was not sufficient
to satisfy its test of probable cause. [
Footnote 7] Consequently, enforcement of the summons was
withheld.
Because of the differing views in the circuits on the standards
the Internal Revenue Service must meet to
Page 379 U. S. 51
obtain judicial enforcement of its orders, [
Footnote 8] we granted certiorari, 377 U.S.
929.
We reverse, and hold that the Government need make no showing of
probable cause to suspect fraud unless the taxpayer raises a
substantial question that judicial enforcement of the
administrative summons would be an abusive use of the court's
process, predicated on more than the fact of reexamination and the
running of the statute of limitations on ordinary tax
liability.
I
This enforcement proceeding was brought by the Government
pursuant to s 7604(b) of the Code. [
Footnote 9] In
Reisman v. Caplin, 375 U.
S. 440, decided last Term subsequent to the rendering of
the decision below, this Court
Page 379 U. S. 52
stated that § 7604(b) "was intended only to cover persons who
were summoned and wholly made default or contumaciously refused to
comply." 375 U.S. at
375 U. S. 448.
There was no contumacious refusal in this case. Thus, the
Government's conceded error in bringing its enforcement proceeding
under § 7604(b), instead of § 7402(b) or § 7604(a), [
Footnote 10] each of which grants courts
the general power to enforce the Commissioner's summonses "by
appropriate process," raises a threshold question whether we must
dismiss this case and force the Government to recommence
enforcement proceedings under the appropriate sections. Since the
Government did not apply for the prehearing sanctions of attachment
and arrest peculiar to § 7604(b), and since these constitute the
major substantive differences between the sections, we think it
would be holding too strictly to the forms of pleading to require
the suit to be recommenced, and therefore treat the enforcement
proceeding as having been brought under §§ 7402(b) and 7604(a).
II
Respondent primarily relies on § 7605(b) to show that the
Government must establish probable cause for suspecting fraud, and
that the existence of probable cause is subject to challenge by the
taxpayer at the hearing. [
Footnote 11] That section provides:
"No taxpayer shall be subjected to unnecessary examination or
investigations, and only one inspection
Page 379 U. S. 53
of a taxpayer's books of account shall be made for each taxable
year unless the taxpayer requests otherwise or unless the Secretary
or his delegate, after investigation, notifies the taxpayer in
writing that an additional inspection is necessary."
We do not equate necessity as contemplated by this provision
with probable cause or any like notion. If a taxpayer has filed
fraudulent returns, a tax liability exists without regard to any
period of limitations. Section 7602 authorizes the Commissioner to
investigate any such liability. [
Footnote 12] If, in order to determine the existence or
nonexistence of fraud in the taxpayer's returns, information in the
taxpayer's records is needed which is not already in the
Commissioner's possession, we think the examination is not
"unnecessary" within the meaning of § 7605(b). Although a more
stringent interpretation is possible, one which would require some
showing of cause for suspecting fraud, we reject such an
interpretation
Page 379 U. S. 54
because it might seriously hamper the Commissioner in carrying
out investigations he thinks warranted, forcing him to litigate and
prosecute appeals on the very subject which he desires to
investigate, and because the legislative history of § 7605(b)
indicates that no severe restriction was intended.
Section 7605(b) first appeared as § 1309 of the Revenue Act of
1921, 42 Stat. 310. Its purpose and operation were explained by the
manager of the bill, Senator Penrose, on the Senate floor:
"Mr. PENROSE. Mr. President, the provision is entirely in the
interest of the taxpayer and for his relief from unnecessary
annoyance. Since these income taxes and direct taxes have been in
force, very general complaint has been made, especially in the
large centers of wealth and accumulation of money at the repeated
visits of tax examiners, who perhaps are overzealous or do not use
the best of judgment in the exercise of their functions. I know
that, from many of the cities of the country, very bitter
complaints have reached me and have reached the department of
unnecessary visits and inquisitions after a thorough examination is
supposed to have been had. This section is purely in the interest
of quieting all this trouble, and in the interest of the peace of
mind of the honest taxpayer."
"Mr. WALSH. . . . So that, up to the present time, an inspector
could visit the office of an individual or corporation and inspect
the books as many times as he chose?"
"Mr. PENROSE. And he often did so."
"Mr. WALSH. . . . And this provision of the Senate committee
seeks to limit the inspection to one visit unless the commissioner
indicates that there is necessity for further examination?"
"Mr. PENROSE. That is the purpose of the amendment. "
Page 379 U. S. 55
"Mr. WALSH. . . . I heartily agree with the beneficial results
that the amendment will produce to the taxpayer."
"Mr. PENROSE. I knew the Senator would agree to the amendment,
and it will go a long way toward relieving petty annoyances on the
part of honest taxpayers."
61 Cong.Rec. 5855 (Sept. 28, 1921). [
Footnote 13]
Congress recognized a need for a curb on the investigating
powers of low echelon revenue agents, and considered
Page 379 U. S. 56
that it met this need simply and fully by requiring such agents
to clear any repetitive examination with a superior. For us to
import a probable cause standard to be enforced by the courts would
substantially overshoot the goal which the legislators sought to
attain. There is no intimation in the legislative history that
Congress intended the courts to oversee the Commissioner's
determinations to investigate. No mention was made of the statute
of limitations [
Footnote 14]
and the exception for fraud.
We are asked to read § 7605(b) together with the limitations
sections in such a way as to impose a probable cause standard upon
the Commissioner from the expiration date of the ordinary
limitations period forward. Without some solid indication in the
legislative history that such a gloss was intended, we find it
unacceptable. [
Footnote 15]
Our reading of the statute is said to render the first clause of §
7605(b) surplusage to a large extent, for, as interpreted, the
clause adds little beyond the relevance and materiality
requirements of § 7602. That clause does appear to require that the
information sought is not already within the Commissioner's
possession, but we think its primary purpose was no more than to
emphasize the responsibility of agents to exercise prudent judgment
in wielding the extensive powers granted to them by the Internal
Revenue Code. [
Footnote
16]
Page 379 U. S. 57
This view of the statute is reinforced by the general rejection
of probable cause requirements in like circumstances involving
other agencies. In
Oklahoma Press Pub. Co. v. Walling,
327 U. S. 186,
327 U. S. 216,
in reference to the Administrator's subpoena power under the Fair
Labor Standards Act, the Court said
"his investigative function, in searching out violations with a
view to securing enforcement of the Act, is essentially the same as
the grand jury's, or the court's in issuing other pretrial orders
for the discovery of evidence, and is governed by the same
limitations,"
and accordingly applied the view that inquiry must not be
"limited . . . by . . . forecasts of the probable result of the
investigation." In
United States v. Morton Salt Co.,
338 U. S. 632,
338 U. S.
642-643, the Court said of the Federal Trade
Commission,
"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."
While the power of the Commissioner of Internal Revenue derives
from a different body of statutes, we do not think the analogies to
other agency situations are without force when the scope of the
Commissioner's power is called in question. [
Footnote 17]
III
Reading the statutes as we do, the Commissioner need not meet
any standard of probable cause to obtain enforcement of his
summons, either before or after the three-year statute of
limitations on ordinary tax liabilities has expired. He must show
that the investigation will be conducted pursuant to a legitimate
purpose, that the inquiry may be relevant to the purpose, that
the
Page 379 U. S. 58
information sought is not already within the Commissioner's
possession, and that the administrative steps required by the Code
have been followed -- in particular, that the "Secretary or his
delegate," after investigation, has determined the further
examination to be necessary and has notified the taxpayer in
writing to that effect. This does not make meaningless the
adversary hearing to which the taxpayer is entitled before
enforcement is ordered. [
Footnote 18] At the hearing, he "may challenge the
summons on any appropriate ground,"
Reisman v. Caplin,
375 U. S. 440 at
375 U. S. 449.
[
Footnote 19] Nor does our
reading of the statutes mean that under no circumstances may the
court inquire into the underlying reasons for the examination. It
is the court's process which is invoked to enforce the
administrative summons, and a court may not permit its process to
be abused. [
Footnote 20]
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. The burden of showing an abuse of the court's
process is on the taxpayer, and it is not met by a mere showing, as
was made in this case, that the statute of limitations for ordinary
deficiencies has run or that the records in question have already
been once examined.
Page 379 U. S. 59
The judgment of the Court of Appeals is reversed, and the case
is remanded for further proceedings consistent with this
opinion.
It is so ordered.
[
Footnote 1]
I.R.C., § 6501(a).
[
Footnote 2]
I.R.C., § 6501(c)(1), which in relevant part provides:
"In the case of a false or fraudulent return with the intent to
evade tax, the tax may be assessed, or a proceeding in court for
collection of such tax may be begun without assessment, at any
time."
[
Footnote 3]
The parties subsequently agreed that, if the Government was
upheld in its claim of right to examine without showing probable
cause, the one-hour time limitation would be removed.
[
Footnote 4]
See page
379 U. S. 52,
infra.
[
Footnote 5]
325 F.2d 914, 915-916.
[
Footnote 6]
Id. at 916.
[
Footnote 7]
"Probable cause," as used in this opinion, is meant to include
the full range of formulations offered by lower courts.
[
Footnote 8]
Compare Foster v. United States, 265 F.2d 183 (C.A.2d
Cir. 1959);
United States v. Ryan, 320 F.2d 500 (C.A.6th
Cir. 1963), affirmed today,
post, p.
379 U. S. 61,
with O'Connor v. O'Connell, 253 F.2d 365 (C.A.1st Cir.
1958),
followed in Lash v. Nighosian, 273 F.2d 185
(C.A.1st Cir. 1959);
Globe Construction Co. v. Humphrey,
229 F.2d 148 (C.A.5th Cir. 1956);
De Masters v. Arend, 313
F.2d 79 (C.A.9th Cir. 1963).
[
Footnote 9]
Section 7604(b) provides:
"Whenever any person summoned under section 6420(e)(2),
6421(f)(2), or 7602 neglects or refuses to obey such summons, or to
produce books, papers, records, or other data, or to give
testimony, as required, the Secretary or his delegate may apply to
the judge of the district court or to a United States commissioner
for the district within which the person so summoned resides or is
found for an attachment against him as for a contempt. It shall be
the duty of the judge or commissioner to hear the application, and,
if satisfactory proof is made, to issue an attachment, directed to
some proper officer, for the arrest of such person, and upon his
being brought before him to proceed to a hearing of the case; and
upon such hearing the judge or the United States commissioner shall
have power to make such order as he shall deem proper, not
inconsistent with the law for the punishment of contempts, to
enforce obedience to the requirements of the summons and to punish
such person for his default or disobedience."
[
Footnote 10]
The two sections are virtually identical. Section 7402(b)
provides:
"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."
[
Footnote 11]
See n 18,
infra.
[
Footnote 12]
Section 7602 provides:
"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 13]
Other relevant legislative history to like effect may be found
in H.R.Rep. No. 350, 67th Cong., 1st Sess., 16 (1921); S.Rep. No.
275, 67th Cong., 1st Sess., 31 (1921); 61 Cong.Rec. 5202 (Aug. 18,
1921), remarks of Mr. Hawley. The provision was reenacted in 1926.
In the Senate, a substitute measure was adopted which would have
limited the Commissioner to two examinations appertaining to
returns of any one year. Senator Reed's objection to the original
provision was:
"By merely claiming fraud, the Government at any time can make
examination after examination, subject only to one limitation, that
it must give notice that it is going to make the examination. That,
in ordinary course, is done by the mere writing of a letter,"
67 Cong.Rec. 3856 (Feb. 12, 1926). There is no indication in the
discussion that the courts were thought to play any significant
limiting role. The Senate substitute was ultimately deleted by the
Conference Committee, and the original provision resubstituted.
H.R.Rep. No. 356, 69th Cong., 1st Sess., 55. The section was
re-enacted in 1939 and 1954 without substantial change, and without
further elaboration of the congressional intent. Respondent
contends that, in reenacting the provision, Congress must have been
aware of, and acquiesced in, decisions of lower courts that a
showing of probable cause is required.
In re Andrews' Tax
Liability, 18 F. Supp.
804 (1937);
Zimmermann v. Wilson, 105 F.2d 583 (C.A.3d
Cir. 1939);
In re Brooklyn Pawnbrokers, 39 F. Supp.
304 (1941);
Martin v. Chandis Securities Co., 128 F.2d
731 (C.A.9th Cir. 1942). These cases represent neither a settled
judicial construction,
see In re Keegan, 18 F. Supp.
746 (1937), nor one which we should be justified in presuming
Congress, by its silence, impliedly approved.
Compare Shapiro
v. United States, 335 U. S. 1.
[
Footnote 14]
Revenue Act of 1921, § 250(d), 42 Stat. 265, provided a
four-year period of limitation on ordinary tax liability.
[
Footnote 15]
The contrary view derives no support from the characterization
of the limitations provision as a "statute of response." The
present three-year limitation on assessment of ordinary
deficiencies relieves the taxpayer of concern for further
assessments of that type, but it by no means follows that it limits
the right of the Government to investigate with respect to
deficiencies for which no statute of limitations is imposed.
[
Footnote 16]
The Court of Appeals appears to have been led astray by the fact
that the Government argued its case on the premise that § 7604(b)
was the governing statute.
[
Footnote 17]
See 1 Davis, Administrative Law, § 3.12 (1958).
[
Footnote 18]
Because § 7604(a) contains no provision specifying the procedure
to be followed in invoking the court's jurisdiction, the Federal
Rules of Civil Procedure apply,
Martin v. Chandis Securities
Co., 128 F.2d 731. The proceedings are instituted by filing a
complaint, followed by answer and hearing. If the taxpayer has
contumaciously refused to comply with the administrative summons
and the Service fears he may flee the jurisdiction, application for
the sanctions available under § 7604(b) might be made
simultaneously with the filing of the complaint.
[
Footnote 19]
See 1 Davis, Administrative Law, § 3.12 (1958).
[
Footnote 20]
See Jaffe, The Judicial Enforcement of Administrative
Orders, 76 Harv.L.Rev. 865 (1963).
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE STEWART and MR.
JUSTICE GOLDBERG concur, dissenting.
Congress, by the three-year statute of limitations that bars
assessments of tax deficiencies except (so far as relevant here) in
case of fraud, 26 U.S.C. §§ 6501(a) and (c), has brought into being
a "statute of repose" [
Footnote
2/1] that I would respect more highly than my Brethren. I would
respect it by requiring the District Court to be satisfied that the
Service is not acting capriciously in reopening the closed tax
period. Since the agency must go to the court for process to compel
the production of the records for the closed tax period, I would
insist that the District Court act in a judicial capacity, free to
disagree with the administrative decision unless that minimum
standard is met. [
Footnote 2/2]
Oklahoma Press Pub. Co. v. Walling, 327 U.
S. 186, does not seem to me to be relevant. It dealt
with the usual investigative powers of administrative agencies,
and, as the Court said in that case, Congress set no standards for
administrative action which the judiciary first had to weigh and
appraise. [
Footnote 2/3]
Id., 327 U. S.
215-216. Here
Page 379 U. S. 60
we have a congressional "statute of repose" embodied in the
three-year statute of limitations. I would make it meaningful by
protecting it from invasion by mere administrative fiat. Where the
limitations period has expired, an examination is presumptively
"unnecessary" within the meaning of § 7605(b) -- a presumption the
Service must overcome. That is to say, a reexamination of the
taxpayer's records after the three-year period is "unnecessary"
within the meaning of § 7605(b) unless the District Court is shown
something more than mere caprice for believing fraud was practiced
on the revenue. Without that minimum safeguard, the statutory
status of repose becomes rather meaningless.
[
Footnote 2/1]
See the remarks of Senators Smith, Ashurst, and Reed in
67 Cong.Rec. 3852-3853.
[
Footnote 2/2]
The First Circuit requires the Commissioner to show that "a
reasonable basis exists for a suspicion of fraud,"
O'Connor v.
O'Connell, 253 F.2d 365, 370; the Ninth Circuit requires that
the decision to investigate for fraud appear as "a matter of
rational judgment based on the circumstances of the particular
case,"
De Masters v. Arend, 313 F.2d 79, 90; the Third
Circuit requires that the agent's suspicion of fraud be
"reasonable" in the eyes of the District Court. 325 F.2d 914,
916.
[
Footnote 2/3]
The case is more like
United States v. Morton Salt Co.,
338 U. S. 632,
where, as respects the power of the Federal Trade Commission to
require issuance of "special" reports, the Court reserved the right
to prevent the "arbitrary" exercise of that administrative power.
Id. at
338 U. S.
654.