Application of Colton

• Decision Date: 21 June 1961
• Docket Number: Docket 26939.
• Citation: 291 F.2d 487
• Parties: Application of Edward E. COLTON and Lillian Kaltman, Appellants, To Quash a Summons to Appear to Testify and to Produce Books, etc., relating to the Tax Liability of Herbert Matter and Mercedes Matter. Internal Revenue Service of the United States Treasury Department, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

291 F.2d 487 (1961)

Application of Edward E. COLTON and Lillian Kaltman, Appellants To Quash a Summons to Appear to Testify and to Produce Books, etc., relating to the Tax Liability of Herbert Matter and Mercedes Matter Internal Revenue Service of the United States Treasury Department, Appellee.

Docket 26939.

United States Court of Appeals Second Circuit.

Argued June 5, 1961.

Decided June 21, 1961.

Corcoran, Kostelanetz, Gladstone & Lowell, New York City, for appellants, Boris Kostelanetz and Jules Ritholz, New York City, George G. Gallantz, New York City, of counsel.

Robert M. Morgenthau, U. S. Atty. for Southern Dist. of New York, New York City, for appellee, Morton L. Ginsberg, Asst. U. S. Atty., New York City, of counsel.

Before LUMBARD, Chief Judge, and GOODRICH^* and FRIENDLY, Circuit Judges.

FRIENDLY, Circuit Judge.

Edward E. Colton and Lillian Kaltman, members of the bar of the State of New York, obtained an order, in the District Court for the Southern District of New York, requiring the Internal Revenue Service to show cause why two summons dated July 29, 1960, requiring them to appear before a special agent to give testimony and produce "Retained copies of income tax returns, workpapers, correspondence file, memoranda and all other data relating to the preparation and the filing of Federal Income Tax Returns for or on the behalf of" their clients, Herbert and Mercedes Matter, from 1951 through 1958, should not be quashed or modified. There were several adjournments, during which movants appeared before the special agent without prejudice to their pending motion, and gave such testimony, relatively small in scope, as they considered not to violate the attorney-client privilege. On February 28, 1961, Judge Dawson denied the motion to quash or modify and vacated the stay previously issued. Colton was then served with another summons. On March 24, 1961, he appeared before the agent and again raised the attorney-client privilege. At the same time, an appeal from Judge Dawson's order of denial was taken to this Court. The Internal Revenue Service moves to dismiss the appeal for lack of appellate jurisdiction and mootness; it also challenges the jurisdiction of the District Court.

Section 7602(2) of the Internal Revenue Code of 1954 authorizes the Secretary of the Treasury or his delegate to summon either the person liable for tax or anyone else to appear 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 any pending inquiry as to non-compliance with the tax laws. Section 7603, 26 U.S.C.A. § 7603, tells how such a summons shall be served. Section 7604 (a), 26 U.S.C.A. § 7604(a), endows the United States district court for the district in which any person summoned resides or is found with "jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, records, or other data." Section 7604(b) provides that when any person so summoned "neglects or refuses to obey such summons, or to produce such 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 contempt"; after hearing, the judge or the 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 summons and to punish such person for his default or disobedience." Finally, Section 7210, 26 U.S.C.A. § 7210, provides that any person who, being duly summoned "as required under sections * * 7602, 7603, and 7604(b), neglects to appear or to produce such books, accounts, records, memoranda, or other papers, shall, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both, together with costs of prosecution."

These statutes appear to be much more drastic than the usual provisions as to subpoenas by administrative agencies. As we read them, resort by the Government to the district court under § 7604 (a), 26 U.S.C.A. § 7604(a), is permissive only; this is in no way a condition to any other action. It is not entirely clear whether, under § 7604(b), the judge or the commissioner might, if he so chose, punish for contempt without giving the witness an opportunity to answer or, as was intimated in Brody v. United States, 1 Cir., 1957, 243 F.2d 378, 381, certiorari denied 1957, 354 U.S. 923, 77 S.Ct. 1384, 1 L.Ed.2d 1438, the proceeding is only one "to obtain the assistance of the court in forcing the witness to give the desired information to the Internal Revenue Service by the device of having the court issue an order to that effect, disobedience of which would be a contempt punishable by the court." In any event it is plain that the criminal penalty of § 7210 is not contingent upon prior action under either § 7604(a) or § 7604(b); that is what the words say and we so applied them in United States v. Becker, 2 Cir., 1958, 259 F.2d 869, certiorari denied 1959, 358 U.S. 929, 79 S.Ct. 317, 3 L.Ed. 2d 303, as the record in that case shows, see also Chief Judge Magruder's statement in Brody v. United States, supra.

Neither the Internal Revenue Code nor any other statute contains specific provision for a motion by a person receiving a summons under § 7602, 26 U.S.C.A. § 7602, to vacate or modify it. Petitioners have cited a number of instances where motions to that end have been entertained in this Circuit, apparently without objection from the Government, some of which have reached this Court: International Commodities Corp. v. Internal Revenue Service, 2 Cir., 1955, 224 F.2d 882; First National City Bank of New York v. Internal Revenue Service, 2 Cir., 1959, 271 F.2d 616, certiorari denied 1960, 361 U.S. 948, 80 S.Ct. 402, 4 L.Ed. 2d 381; Application of Daniels, D.C.S.D. N.Y.1956, 140 F.Supp. 322; Application of Burr, D.C.S.D.N.Y.1959, 171 F.Supp. 448. Despite this the Service now says that the District Court lacks jurisdiction over such a motion, which the Service claims to be a suit against the Government without its consent; appellants, sustaining jurisdiction under 28 U.S.C. § 1340, and relying on Arend v. DeMasters, D.C.D.Or.1960, 181 F.Supp. 761, suggest we postpone determination of that issue to the argument of the appeal. We think the question so closely related to that of our appellate jurisdiction that we had best decide it now.

If the statutory scheme were like that for enforcement of subpoenas of such agencies as the Interstate Commerce Commission, 49 U.S.C.A. § 12, or the Civil Aeronautics Board, 49 U.S.C.A. § 1484, there would be merit in the Government's position that courts ought not intervene at so early a stage; since disobedience to a subpoena under those statutes has no penal consequences until a judge has ordered its enforcement, there is no occasion for any preliminary resort to the courts. Here, however, at least the criminal penalty of § 7210 is incurred by disobedience, and it is not altogether plain that a contempt citation under § 7604(b) may not be. Under such circumstances the principle of Ex parte Young, 1908, 209 U.S. 123, 147, 28 S.Ct. 441, 52 L.Ed. 714 and Oklahoma Operating Co. v. Love, 1920, 252 U.S. 331, 336-337, 40 S.Ct. 338, 64 L.Ed. 596, comes into play; we see no reason why that principle should not be applicable to a summons, disobedience of which carries criminal penalties. We note that the dismissal of the bill in F. T. C. v. Claire Furnace Co., 1927, 274 U.S. 160, 47 S.Ct. 553, 71 L.Ed. 978, was for supposed lack of equity rather than because of sovereign immunity, and that the Supreme Court, more recently, has expressly declined to rule that reporting orders under § 6 of the Federal Trade Commission Act, 15 U.S.C.A. § 46, are "exempt from judicial examination," United States v. Morton Salt Co., 1950, 338 U.S. 632, 654, 70 S.Ct. 357, 370, 94 L.Ed. 401, although no method for such examination save a suit against government officers would seem available. See United States v. St. Regis Paper Co., 2 Cir., 1960, 285 F.2d 607, 615-616, certiorari granted 1961, 365 U.S. 857, 81 S.Ct. 825, 5 L.Ed.2d 822. We are not unmindful of the potentialities of delay inherent in such an extra round — potentialities sufficiently serious without one, as illustrated, for example, by Penfield Co. of Cal. v. S. E. C., 1947, 330 U.S. 585, 67 S.Ct. 918, 91 L.Ed. 1117; but the Government seems to be a victim of its own Draconianism. We hold the District Court had jurisdiction of the motion and thus reach the question of our appellate jurisdiction to review its denial.

In support of its contention that the order denying the motion to quash or modify the summons was interlocutory and not appealable, appellee places primary reliance on Cobbledick v. United States, 1940, 309 U.S. 323, 60 S.Ct. 540, 84 L.Ed. 783, which held that an order denying a motion to quash a subpoena duces tecum to appear before a grand jury was not a final judgment within the predecessor of 28 U.S.C. § 1291. However, the Supreme Court there reaffirmed I. C. C. v. Brimson, 1894, 154 U.S. 447, 14 S.Ct. 1125, 38 L.Ed. 1047, Harriman v. I. C. C., 1908, 211 U.S. 407, 29 S.Ct. 115, 53 L.Ed. 253, and Ellis v. I. C. C., 1911, 237 U.S. 434, 35 S.Ct. 645, 59 L.Ed. 1036, upholding the appealability of orders of district courts directing witnesses to answer in proceedings to compel testimony under § 12 of the Interstate Commerce Act,¹ and distinguished those decisions both from the case before it and from Alexander v. United States, 1908, 201 U.S. 117, 26 S.Ct. 356, 50 L.Ed. 686, which had held that an order requiring a witness, not a party, to appear in a pending action was not final and appealable, on the ground, 309 U.S. at...