Donaldson v. United States

• Decision Date: 25 January 1971
• Docket Number: No. 65,65
• Parties: Kevin L. DONALDSON, fka Merton H. Sweet v. UNITED STATES et al
• Court: U.S. Supreme Court

400 U.S. 517

91 S.Ct. 534

27 L.Ed.2d 580

Kevin L. DONALDSON, fka Merton H. Sweet

v UNITED STATES et al.

No. 65.

Argued Nov. 19, 1970.

Decided Jan. 25, 1971.

Syllabus

In furtherance of an investigation of petitioner's tax returns, respondent Grady, an Internal Revenue Service (IRS) Special Agent, issued summonses to petitioner's putative former employer (Acme) and its accountant for the production of Acme's records of petitioner's employment and compensation during the years under investigation. The summonses were issued under § 7602 of the Internal Revenue Code of 1954, which authorizes IRS examinations of records and witnesses for the purpose of determining tax liability. Thereafter respondents, pursuant to 26 U.S.C. §§ 7402(b) and 7604(a), filed in the District Court petitions for enforcement of the summonses. Petitioner filed motions to intervene in the enforcement proceeding, relying on Fed.Rule Civ.Proc. 24(a)(2), which inter alia, provides for intervention in an action 'when the applicant claims an interest relating to the property or transaction which is the subject of the action * * *.' Petitioner alleged that the IRS agents were investigating him solely to obtain evidence concerning criminal violations of the tax laws and that consequently the summonses were not issued for any purpose within the scope of § 7602 and could not be enforced. The court denied petitioner's motions and ordered that the records be produced. The Court of Appeals affirmed. Held:

1. Petitioner has no proprietary interest in the Acme records (his sole interest therein being that they presumably contain details of payments to him), and since he has no oher protectable interest by way of privilege or otherwise, he has no absolute right under Fed.Rule Civ.Proc. 24(a)(2) to intervene in the IRS summons enforcement proceeding. Pp. 527—531.

2. Under § 7602 an IRS summons may be used in connection with a tax investigation if (as in this case) it is issued in good faith and prior to a recommendation for prosecution. Pp. 531—536. United States v. Mercurio, 5 Cir., 418 F.2d 1213, affirmed.

Robert E. Meldman, Milwaukee, Wis., for petitioner.

Lawrence G. Wallace, Washington, D.C., for respondents.

Mr. Justice BLACKMUN delivered the opinion of the Court.

We are here concerned with problems arising in connection with the issuance and judicial enforcement of an internal revenue summons directed to someone other than the individual taxpayer.

Kevin L. Donaldson, formerly known as Merton H. Sweet, apparently was once employed by, or was a performer for, Acme Circus Operating Co., Inc., dba Clyde Beatty-Cole Bros. Circus.¹ Mr. Donaldson (sometimes referred to herein as the 'taxpayer') is an individual whose income tax returns for the calendar years 1964 1967, inclusive, are under investigation by the Internal Revenue Service.

On September 12 and 13, 1968, Special Agent John P. Grady, purportedly acting under the authority of § 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602,² issued and served separate summonses to Acme and to Joseph J. Mercurio, Acme's accountant, commanding their appearance before Grady on September 23 and 24 'to give testimony relating to the tax liability' of Donaldson and to produce certain of Acme's records having to do with the taxpayer. The records specified were 'applications for employment and/or any other records containing background data including Social Security number furnished you by' the taxpayer; all contracts between the taxpayer and Acme and between him 'and the various organizations sponsoring performances of the circus * * * during * * * 1964 through 1967, inclusive'; Forms 1099 and W—2 issued to the taxpayer; a schedule of the payments made to the taxpayer by the sponsoring organizations; checks and vouchers relating to payments to the taxpayer by Acme; expense vouchers submitted by the taxpayer; records containing information as to the identification of each sponsoring organization; and 'correspondence or other records relating to the foregoing or to any other financial transactions between Acme' and the taxpayer during 1964—1967, inclusive.

Shortly prior to the issuance of these summonses, the United States District Court for the Middle District of Florida, upon petitions filed by the taxpayer, issued tem- porary restraining orders, and then, as to Mercurio, a preliminary injunction, restraining Mercurio and Acme from complying with Grady's requests or with any subsequent summons directing the production of the records 'until such time as an order of a court of competent jurisdiction has been issued requiring such compliance.'

On November 25, 1968, the United States and Agent Grady, pursuant to 26 U.S.C. §§ 7402(b) and 7604(a),³ filed petitions with the same federal court for the judicial enforcement of the summonses directed to Mercurio and to Acme. The petitions were supported by affidavits of Grady and of Special Agent Bruce B. Miller.⁴ Each affidavit was to the effect that the affiant was conducting or assisting in the conduct of 'an investigation for the purpose of ascertaining the correct income tax liability' of the taxpayer for the years 1964—1967, inclusive, and that it was 'necessary' to examine the records and to take the testimony requested in order to ascertain the taxpayer's correct income tax liability for those years.

In response to the ensuing orders to show cause, the taxpayer, purportedly pursuant to Fed.Rules Civ.Proc. 24(a)(2), filed motions to intervene in the enforcement proceedings. He accompanied each motion with a proposed answer. In the answer he alleged that Special Agents Grady and Miller were guilty of bad faith in asserting that they were conducting an investigation to ascertain the taxpayer's correct income tax liability for the years in question; that the two agents were assigned to Intelligence Divisions of the Service; that they were investigating the taxpayer 'for the express and sole purpose of obtaining evidence concerning any violations of the criminal statutes applicable to the tax laws of the United States'; and that, as a consequence the summonses were not issued for any purpose within the scope of § 7602. It was also asserted, although apparently it is not now urged here, that the requests in the summonses were overly broad and 'without a showing of particularized relevancy,' and that the taxpayer, under the Constitution, 'is entitled to be secure in his personal papers and personal effects from unreasonable searches and seizures.'

Mercurio and Acme, on their part, also filed responses to the orders to show cause. Each alleged that 'were it not for' the preliminary injunction or temporary restraining order theretofore entered, 'the Respondent would have complied with the summons.'⁵

The orders to show cause were returnable before Judge Lieb. After the submission of memoranda and argument, but without the introduction of testimony, the court denied the motions to intervene and ordered Mercurio and Acme to appear before Grady and to produce the records requested. The court the consolidated the two cases for purposes of appeal and granted stays pending appeal. The Fifth Circuit affirmed. United States v. Mercurio, 418 F.2d 1213 (CA5 1969).

Certiorari was granted, 397 U.S. 933, 90 S.Ct. 942, 25 L.Ed.2d 114 (1970), because the case appeared to raise important questions relating to the administration and enforcement of the revenue laws, and because the courts of appeals have differed in their reading of Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964).⁶

I

Despite the contrary intimations in the motions to intervene, there is now no constitutional issue in the case. The taxpayer on oral argument so conceded. ⁷ In any event, that question appears to have been settled long ago when the Court upheld, against Fourth Amendment challenge, an internal revenue summons issued under the Revenue Act of 1921 and directed to a third-party bank. First Nat. Bank of Mobile, Ala. v. United States, 267 U.S. 576, 45 S.Ct. 231, 69 L.Ed. 796 (1925), aff'g 295 F. 142, 153 (SD Ala.1924). See also United States v. First Nat. Bank of Pikeville, 274 F.Supp. 283, 284 (ED Ky.1967), aff'd sub nom. Justice v. United States, 390 U.S. 199, 88 S.Ct. 901, 19 L.Ed.2d 1038 (1968), and United States v. Shlom, 420 F.2d 263, 266 (CA2 1969), cert. denied, 397 U.S. 1074, 90 S.Ct. 1521, 25 L.Ed.2d 809 (1970).

II

We emphasize initially, as did Judge Tuttle in his opinion for the Court of Appeals, 418 F.2d at 1214, that what is sought here by the Internal Revenue Service from Mercurio and from Acme is the production of Acme's records and not the records of the taxpayer. Further, as Judge Tuttle also emphasized, this is not a case where a summons has been issued to the taxpayer himself seeking access to his books and information from his mouth. Neither is it a case where the summons is directed at the taxpayer's records in the hands of his attorney or his accountant, with the attendant questions of privilege, or even in the hands of anyone with whom the taxpayer has a confidential relationship of any kind. Each of the summonses here, we repeat, was directed to a third person with respect to whom no established legal privilege, such as that of attorney and client, exists, and had to do with records in which the taxpayer has no proprietary interest of any kind, which are owned by the third person, which are in his hands, and which relate to the third person's business transactions with the taxpayer.

III

Mr. Justice Clark, in Part II of his opinion for a unanimous Court in Reisman, 375 U.S., at 445—446, 84 S.Ct. at 511—512, reviewed the statutory structure that Congress has provided for the issuance and enforcement of an internal revenue summons. It will perhaps be rewarding for us to outline that structure once again.

Section 7601 of the 1954 Code, 26 U.S.C. § 7601, directs the Secretary or his delegate 'to the extent he deems it practicable' to cause Treasury...