United States v. Arthur Young Company
| Decision Date | 21 March 1984 |
| Docket Number | No. 82-687,82-687 |
| Citation | 104 S.Ct. 1495,79 L.Ed.2d 826,465 U.S. 805 |
| Parties | UNITED STATES, Petitioner, v. ARTHUR YOUNG & COMPANY et al |
| Court | U.S. Supreme Court |
Respondent certified public accountant firm, as the independent auditor for respondent corporation, was responsible for reviewing the corporation's financial statements as required by the federal securities laws. In the course of reviewing these statements, the accounting firm verified the corporation's statement of its contingent tax liabilities, and, in so doing, prepared tax accrual workpapers relating to the evaluation of the corporation's reserves for such liabilities. When a routine audit by the Internal Revenue Service (IRS) to determine the corporation's income tax liability for certain years revealed that the corporation had made questionable payments from a "special disbursement account," the IRS instituted a criminal investigation of the corporation's tax returns. In that process, the IRS, pursuant to § 7602 of the Internal Revenue Code of 1954—which authorizes the Secretary of the Treasury to summon and "examine any books, papers, records, or other data which may be relevant or material" to a particular tax inquiry—issued a summons to the accounting firm requiring it to make available to the IRS all of its files relating to the corporation, including its tax accrual workpapers. When the corporation instructed the accounting firm not to comply with the summons, the IRS commenced an enforcement action in Federal District Court, which, upon finding that the tax accrual workpapers were relevant to the IRS investigation within the meaning of § 7602 and refusing to recognize an accountant-client privilege that would protect the workpapers, ordered the summons enforced. The Court of Appeals affirmed in part and reversed in part. While agreeing that the workpapers were relevant to the IRS investigation, the court held that the public interest in promoting full disclosure to public accountants, and in turn ensuring the integrity of the securities markets, required protection under a work-product immunity doctrine for the work that independent auditors perform for publicly owned corporations. Accordingly, because it found that the IRS had not made a sufficient showing of need to overcome the immunity and was not seeking to prove fraud on the corporation's part, the court refused to enforce the summons insofar as it sought the tax accrual workpapers.
Held:
1. The tax accrual workpapers are relevant within the meaning of § 7602. As § 7602's language indicates, an IRS summons is not to be judged by the relevance standards used in deciding whether to admit evidence in court. The language "may be" reflects Congress' intention to allow the IRS to obtain items of even potential relevance to the ongoing investigation, without reference to its admissibility. As a discovery tool, a § 7602 summons is critical to the IRS's investigative and enforcement functions. That the tax accrual workpapers are not actually used in the preparation of tax returns by the taxpayer or its accountants does not bar a finding of relevance within the meaning of § 7602. Pp. 813-815.
2. The tax accrual workpapers are not protected from disclosure under § 7602. Pp. 815-821.
(a) While § 7602 is subject to traditional privileges and limitations, any other restrictions upon the IRS summons power should be avoided "absent unambiguous directions from Congress." United States v. Bisceglia, 420 U.S. 141, 150, 95 S.Ct. 915, 921, 43 L.Ed.2d 88. There are no such unambiguous directions that would justify a judicially created work-product immunity doctrine for tax accrual workpapers summoned under § 7602. Indeed, § 7602 reflects a congressional policy favoring disclosure of all information relevant to a legitimate IRS inquiry. Pp. 815-817.
(b) In light of Couch v. United States, 409 U.S. 322, 93 S.Ct. 611, 34 L.Ed.2d 548, which held that no confidential accountant-client privilege exists, the Court of Appeals' creation of a work-product privilege was misplaced and conflicts with Congress' clear intent. P. 817.
(c) Nor is a work-product immunity for accountants' tax accrual workpapers a fitting analogue to the attorney work-product doctrine. An independent certified public accountant performs a different role from an attorney whose duty, as his client's confidential adviser and advocate, is to present the client's case in the most favorable possible light. In certifying the public reports that depict a corporation's financial status, the accountant performs a public responsibility transcending any employment relationship with the client, and owes allegiance to the corporation's creditors and stockholders, as well as to the investing public. Pp. 817-818.
(d) The integrity of the securities markets will not suffer absent some protection for accountants' tax accrual workpapers. The independent auditor's obligation to serve the public interest assures that that integrity will be preserved, without the need for a work-product immunity for such workpapers. Pp. 818-819.
(e) Nor does enforcement of an IRS summons for accountants' tax accrual workpapers give the IRS an unfair advantage in negotiating and litigating tax controversies. Since the Securities and Exchange Commission or a private plaintiff in securities litigation would be entitled to obtain the tax accrual workpapers at issue, there is no good reason, in light of § 7602's broad congressional command, for conferring lesser authority upon the IRS. Pp. 820-821.
677 F.2d 211 (CA2 1982) affirmed in part, reversed in part, and remanded.
Mark I. Levy, Washington, D.C., for petitioner.
Carl D. Liggio, New York City, for respondent, Arthur Young & Co.
William E. Jackson, New York City, for respondent, Amerada Hess Corp.
We granted certiorari to consider whether tax accrual workpapers prepared by a corporation's independent certified public accountant in the course of regular financial audits are protected from disclosure in response to an Internal Revenue Service summons issued under § 7602 of the Internal Revenue Code of 1954 (Code), 26 U.S.C. § 7602.
Respondent Arthur Young & Co. is a firm of certified public accountants. As the independent auditor for respondent Amerada Hess Corp., Young is responsible for reviewing the financial statements prepared by Amerada as required by the federal securities laws.1 In the course of its review of these financial statements, Young verified Amerada's statement of its contingent tax liabilities, and, in so doing, prepared the tax accrual workpapers at issue in this case. Tax accrual workpapers are documents and memoranda relating to Young's evaluation of Amerada's reserves for contingent tax liabilities. Such workpapers sometimes contain information pertaining to Amerada's financial transactions, identify questionable positions Amerada may have taken on its tax returns, and reflect Young's opinions regarding the validity of such positions. See infra, at 810-813.
In 1975 the Internal Revenue Service began a routine audit to determine Amerada's corporate income tax liability for the tax years 1972 through 1974. When the audit revealed that Amerada had made questionable payments of $7830 from a "special disbursement account," the IRS instituted a criminal investigation of Amerada's tax returns as well. In that process, pursuant to Code § 7602, 26 U.S.C. § 7602,2 the IRS issued an administrative summons to Young, which required Young to make available to the IRS all its Amerada files, including its tax accrual workpapers. Amerada instructed Young not to comply with the summons.
The IRS then commenced this enforcement action against Young in the United States District Court for the Southern District of New York. See 26 U.S.C. § 7604.3 Amerada intervened, as permitted by 26 U.S.C. § 7609(b)(1).4 The District Court found that Young's tax accrual workpapers were relevant to the IRS investigation within the meaning of § 7602 and refused to recognize an accountant-client privilege that would protect the workpapers. 496 F.Supp. 1152, 1156-1157 (SDNY 1980). Accordingly, the District Court ordered the summons enforced.
A divided United States Court of Appeals for the Second Circuit affirmed in part and reversed in part. 677 F.2d 211 (CA2 1982). The Court of Appeals majority agreed with the District Court that the tax accrual workpapers were relevant to the IRS investigation of Amerada, but held that the public interest in promoting full disclosure to public accountants, and in turn ensuring the integrity of the securities markets, required protection for the work that such independent auditors perform for publicly owned companies. Drawing upon Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947), and Fed.Rule Civ.Proc. 26(b)(3), the Court of Appeals fashioned a work-product immunity doctrine for tax accrual workpapers prepared by independent auditors in the course of compliance with the federal securities laws. Because the IRS had not demonstrated a sufficient showing of need to overcome the immunity and was not seeking to prove fraud on Amerada's part, the Court of Appeals refused to enforce the summons insofar as it sought Young's tax accrual workpapers.
One judge dissented from that portion of the majority opinion creating a work-product immunity for accountants' tax accrual workpapers. The dissent viewed the statutory summons authority, 26 U.S.C. § 7602, as reflecting a congressional decision in favor of the disclosure of such workpapers. The dissent also rejected the policy justifications asserted by the majority for an accountant work-product immunity, reasoning that such protection was not necessary to ensure the integrity of the independent auditor's certification of a corporation's financial statements.
We granted certiorari, --- U.S. ----, 103 S.Ct. 1180, 75 L.Ed.2d 429 (1983). We affirm in part and...
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