488 F.2d 953 (5th Cir. 1974), 72-3029, United States v. Humble Oil & Refining Co.

Docket Nº:72-3029.
Citation:488 F.2d 953
Party Name:UNITED STATES of America and Albert J. Valentas, Internal Revenue Agent, Plaintiffs-Appellants, v. HUMBLE OIL & REFINING COMPANY, Defendant-Appellee.
Case Date:January 18, 1974
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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488 F.2d 953 (5th Cir. 1974)

UNITED STATES of America and Albert J. Valentas, Internal Revenue Agent, Plaintiffs-Appellants,



No. 72-3029.

United States Court of Appeals, Fifth Circuit.

January 18, 1974

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Anthony J. P. Farris, U. S. Atty., James R. Gough, Asst. U. S. Atty., Houston, Tex., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Mary J. McGinn, Attys., Charles E. Anderson, Tax. Div., Dept. of Justice, Washington, D. C., for plaintiffs-appellants.

Walter B. Morgan, Lee Hill, Houston, Tex., for defendant-appellee.

Before GEWIN and MORGAN, Circuit Judges, and GORDON, District Judge.

GEWIN, Circuit Judge:

This appeal emanates from an order denying enforcement of an Internal Revenue Service (IRS) summons issued to Humble Oil Company seeking information concerning oil leases it had executed with certain unidentified lessors. Unlike the great majority of cases in which the propriety of enforcing a summons is questioned, the IRS here attempted to employ a summons to obtain information merely as part of its research concerning noncompliance with certain provisions of the Internal Revenue Code. Neither Humble nor those about whom information was sought were the object of any investigation for noncompliance with the tax laws. 1 Because enforcement of the summons would result in an unprecedented expansion of the IRS summons power, we affirm.


On November 2, 1972, Internal Revenue Agent Albert Valentas issued a "John Doe" summons to Humble Oil & Refining Company, ordering it to produce the following:

[R]ecords of Humble . . . for the calendar year 1970 concerning mineral leases surrendered during the year without production obtained on the leasehold, such records to show the following facts:

Name, address and social security number of lessor.

Amount of lease bonus.

Month and year lease executed.

Legal description of property leased.

The above information is requested only for leases where the lease bonus exceeded $10,000.

The interest of the IRS in this information was spawned by the availability of tax advantages and a concomitant potential for tax abuse attendant upon the use of lease bonuses. An outgrowth of the competition between oil companies for access to oil and gas, 2 these bonuses are

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paid by the companies to the owners of mineral rights in exchange for favorable lease agreements. Where the agreement providing for a bonus possesses the attributes of a lease and where the bonus is tied to production of the mineral, the owner of mineral rights may claim a depletion allowance against the bonus. However, if he elects to do so and the lease is subsequently surrendered by the lessee without production of the mineral, he must restore the amount of depletion to his taxable income in the year the lease is surrendered. 3 The IRS was prompted to conduct its research project by the prospect of noncompliance with these restoration requirements. Humble's lessors became a subject of its inquiry.

After having been apprised of Humble's refusal to furnish the information requested, the IRS filed a petition with the district court to enforce the summons under § 7604(b) of the Internal Revenue Code. 4 At the hearing on the petition to enforce, Valentas, the only witness called by either party, testified that he was one of six agents performing research in local industry and business practices to measure tax compliance and take corrective action if necessary. He stated further that his research indicated the possibility of lessor noncompliance with the Code requirements concerning restoration of income. The summons was issued merely to expedite the research process. Humble's lessors were not reputed to be more likely to evade the restoration requirements than those of other oil companies. 5

In response to the petition for enforcement, Humble admitted that some leases for which bonuses had been paid were surrendered in the year in question (1970) without having been utilized for oil and gas production. Humble estimated that between one hundred and two hundred lessors were in the group of interest to the IRS and that their leases were for bonuses of approximately $5,500,000 out of a total of $74,000,000 worth of leases written off in 1970. Its objection to the enforcement of the summons was upheld by the district court. 6


The IRS based its right to issue the summons and to have it enforced upon

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the provisions of 26 U.S.C. §§ 7601 and 7602. 7

Section 7601 reads as follows:

§ 7601. Canvass of districts for taxable persons and objects

(a) General rule.-The Secretary or his delegate shall, to the extent he deems it practicable, cause officers or employees of the Treasury Department to proceed, from time to time, through each internal revenue district and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care and management of any objects with respect to which any tax is imposed.

It is pursuant to this section, which imposes a duty on the IRS "to canvass and to inquire", Donaldson v. United States, 400 U.S. 517, 523, 91 S.Ct. 534, 27 L.Ed.2d 580, 585 (1971), that Valentas was conducting the research project. He sought to facilitate his inquiry by utilizing the summons power set forth in section 7602:

§ 7602. Examination of books and witnesses

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.

We reiterate that Valentas concedes that at the time he issued the summons, the IRS had not initiated an investigation of any of Humble's lessors. Rather, it was merely in the process of accumulating data concerning compliance with restoration requirements. In essence, the IRS maintains that it is empowered to conscript citizens into its service to perform the function of accumulating data for its research projects.

A. Basis For the Decision

We begin our consideration of whether sections 7601 and 7602 support this contemplated use of the summons power by endeavoring to delimit the grounds upon which this case shall be decided. Humble contends both that the IRS exceeded its statutory authority when issuing the summons and that the compass of the summons was too broad to warrant enforcement. We address only the first contention.

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Our self-imposed restraint requires us to consider an area of the law which is not commonplace. Admittedly, a court is ill-advised to voluntarily enter relatively obscure areas of the law when settled legal concepts may be available in resolving the issue presented. Our seeming temerity is justified, however, because such settled legal concepts-the compass of the summons-may not be availing or satisfactory. Although the bifurcated attack that Humble makes has been proffered frequently with some justification, the two defensive grounds asserted are distinguishable and do have a varying impact upon the enforceability of a summons. It is hence instructive to highlight the ramifications of the two objections interposed to enforceability and to underscore the importance of the statutory authority issue in this case.

Although a summons may be "so unrelated to the matter properly under inquiry as to exceed the investigatory power", United States v. Morton Salt Co., 338 U.S. 632, 652, 70 S.Ct. 357, 369, 94 L.Ed. 401, 416 (1950); Cf. United States v. Harrington, 388 F.2d 520, 523 (2d Cir. 1968); United States v. Theodore, 479 F.2d 749, 754-755 (4th Cir. 1973); United States v. Williams, 337 F.Supp. 1114, 1116 (S.D.N.Y.1971), a decision bottomed upon the second ground asserted, the scope and breadth of the summons, would have a different impact upon the petition to enforce than would one predicated upon the statutory authority ground, as we conceive it. The Fourth Circuit's decision in United States v. Theodore, supra, illustrates both the manner by which these two grounds converge, and their differential effect on a petition to enforce.

In Theodore, the court countenanced that part of a summons which required a tax preparer to produce a list of names of his clients if not otherwise available to the IRS, but refused to sanction the attempt to obtain copies of the returns the tax preparer had filed. Its reasoning was both that the language in section 7602 "only allows [the] IRS to summon information relating to the correctness of a particular return or to a particular person and does not authorize the use of open-ended Joe Doe summonses" and that the summons, as it related to copies of the return was "too broad and too vague to be enforced." United...

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