Foster v. United States

• Citation: 265 F.2d 183
• Decision Date: 16 March 1959
• Docket Number: No. 28,Docket 25073.,28
• Parties: Grant FOSTER and Foster Construction C. A., Intervenors-Appellants, v. UNITED STATES of America, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

265 F.2d 183 (1959)

Grant FOSTER and Foster Construction C. A., Intervenors-Appellants, v. UNITED STATES of America, Appellee.

No. 28, Docket 25073.

United States Court of Appeals Second Circuit.

Argued December 8, 1958.

Decided March 16, 1959.

Certiorari Denied June 15, 1959.

COPYRIGHT MATERIAL OMITTED

John K. Pickens, Washington, D. C. (M. Joseph Stoutenburgh, Robert J. Bird, Bird & Thompson, Thomas C. Thompson, Jr., and Dawson, Griffin & Pickens, Washington, D. C., on the brief), for intervenors-appellants.

Renee J. Ginberg, Asst. U. S. Atty. for S. D. N. Y., New York City (Arthur H. Christy, U. S. Atty., S. D. N. Y., New York City, on the brief), for appellee.

Before CLARK, Chief Judge, and HINCKS and LUMBARD, Circuit Judges.

Certiorari Denied June 15, 1959. See 79 S.Ct. 1297.

HINCKS, Circuit Judge.

On August 29, 1957, the Commissioner of Internal Revenue, under 26 U.S.C.A. § 7602, I.R.C.1954, caused a summons to be served upon the New York Agency of the Bank of London & South America, Ltd., directing it to appear before a Special Agent of the Service and produce for examination "books, papers, records and memoranda of whatsoever nature or kind, relating to the accounts of Foster Construction C. A., and Grant Foster, including the signature cards, ledger sheets and cancelled checks, for the period 1949 to 1956 inclusive." When the Bank failed to obey the summons, the Commissioner under 26 U.S.C.A. § 7604, I.R.C.1954, obtained an ex parte order from the District Court directing compliance. The Bank applied to have the order vacated, and Foster, the taxpayer whose tax liability was the subject matter of the investigation, and Foster Construction C. A., moved to intervene in support of the motion to vacate. On January 22, 1958 Judge Bicks entered an order allowing the intervention, the Government not opposing, and denying the motion to vacate. 159 F.Supp. 444. From this order the intervenors appeal.

We think Judge Bicks' decision was right. The motion to vacate was submitted below on affidavits. An agent of the Internal Revenue Service by affidavit asserted that he was investigating the tax liability of Grant Foster, a nonresident citizen of the United States, for the years 1949 to 1956, and that until 1949, Foster's income had been derived from the Foster Construction Company, his individually owned business. The affidavit further showed that Foster claimed to have been employed ever since April 30, 1949 by the Foster Construction Compania Anonima, a Venezuelan corporation, and since 1955 or 1956 by a Costa Rican company of the same name. In the affidavit was incorporated a letter from the respondent Agency of the Bank which showed as its only reason for noncompliance that Foster, the appellant, who had maintained no account with the Bank since August 2, 1949, objected to the examination by the Commissioner of Foster's records for the portion of 1949 preceding August 2, 1949 as barred by the statute of limitations; and that Foster Construction C. A. had not authorized disclosure of its corporate records. The Agent's affidavit concluded with a statement that "the books and records demanded in the summons are required to authenticate the exclusion of income claimed by the taxpayer to have been received as salary from the Foster Construction C. A. since its inception, and afford the only opportunity for the government to determine whether the income received by the taxpayer from the Foster Construction C. A. actually represents salary or the distribution of profits in the form of salary."¹

The simple uncontroverted allegations of fact in the agent's affidavit, as summarized in the foregoing text of this opinion, were enough, we hold, to support the order below. They showed that the inspection sought was in aid of an investigation properly authorized by Congress by § 7602 of the Internal Revenue Code of 1954. Not even the respondent itself suggested that compliance with the order would be unreasonably onerous. And surely the records sought were material and relevant to the investigation. That the foregoing considerations constitute the criteria for judicial enforcement of subpoenas issued by various administrative agencies is well established: an affirmative showing of probable cause for the administrative inquiry is not required. Civil Aeronautics Board v. Hermann, 353 U.S. 322, 77 S.Ct. 804, 1 L.Ed.2d 852; United States v. Morton Salt Co., 338 U.S. 632, 652, 70 S.Ct. 357, 94 L.Ed. 401; Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 208, 66 S.Ct. 494, 90 L.Ed. 614; Endicott Johnson Corp. v. Perkins, 317 U.S. 501, 63 S.Ct. 339, 87 L.Ed. 424; Hagen v. Porter, 9 Cir., 156 F.2d 362, certiorari denied 329 U.S. 729, 67 S.Ct. 85, 91 L.Ed. 631; Wilson v. United States, 221 U.S. 361, 31 S.Ct. 538, 55 L.Ed. 771. The same principles and the same criteria are applicable to the enforcement of Internal Revenue subpoenas. Application of Carrol, 2 Cir., 246 F.2d 762, certiorari denied Carroll v. United States, 355 U.S. 857, 78 S.Ct. 85, 2 L.Ed.2d 64; Application of Levine, D.C.S.D.N.Y., 149 F. Supp. 642, affirmed 2 Cir., 243 F.2d 175; United States v. United Distillers Products Corp., 2 Cir., 156 F.2d 872; Zimmermann v. Wilson, 3 Cir., 105 F.2d 583; In re Keegan, D.C.S.D.N.Y., 18 F.Supp. 746; Globe Construction Co. v. Humphrey, 5 Cir., 229 F.2d 148; United States v. Peoples Deposit Bank & Trust Co., D.C.E.D.Ky., 112 F.Supp. 720, affirmed 6 Cir., 212 F.2d 86. And the test of materiality and relevance in this context is, of course, not whether the records sought, when disclosed, will or will not contradict the taxpayer's tax returns. The test, we think, is essentially the same as that for materiality with respect to grand jury investigations. Wilson v. United States, supra; United States v. Morton Salt Co., supra, 338 U.S. at page 642, 70 S.Ct. at page 363; Oklahoma Press Publishing Co. v. Walling, supra, 327 U.S. at page 216, 66 S.Ct. at page 509; Falsone v. United States, 5 Cir., 205 F.2d 734, certiorari denied 346 U.S. 864, 74 S.Ct. 103, 98 L.Ed. 375. It is whether the inspection sought "might have thrown light upon" the correctness of the taxpayer's returns. See United States v. Siegel, 2 Cir., 263 F.2d 530.² In this case, the Foster Construction C. A. records plainly "might have thrown light" on the question, crucial under I.R.C. 1954, § 911(a), 26 U.S.C.A. § 911 (a), whether or not the taxpayer, during the years under investigation received, directly or indirectly, from the foreign corporation salary constituting "earned income" or distributions of profits.

The appellants, in objecting to enforcement, assert that the examination sought was unnecessary and unreasonable because the three year statute of Limitations, I.R.C.1939, § 275(a), 26 U.S.C.A. § 275(a), had run so that assessments on the years under investigation had already been barred. The summons and order under §§ 7602 and 7604, they insist, may issue only on a showing of probable cause to believe that the years of which investigation is sought are "open" years as to which the statute of limitations has not run. As we pointed out in United States v. United Distillers Products Corp., supra, the general three year statute of limitations was extended to five years by I.R.C.1939, § 275(c) (I.R.C.1954, § 6501(e), 26 U.S. C.A. § 6501(e)), in cases in which the understatement of gross income in the return exceeded 25%, and no time limitation whatever is applicable in cases of fraudulent returns, I.R.C.1939, § 276 (I.R.C.1954, § 6501(c)). We adhere to the position which we took in the United Distillers case and hold that an examination, whether of a taxpayer or a third party, is not unnecessary or unreasonable (within the meaning of the Fourth Amendment) merely because three years, or five years, or any longer specified period of time has elapsed since the tax return under investigation was filed. The examination provided by § 7602 is for the expressly stated purpose not only "of ascertaining the correctness of any return" but also for "determining the liability of any person for any internal revenue tax." The Commissioner is therefore entitled to the examination if it may shed light on whether a liability still exists or whether it has been time-barred. As we stated in the United Distillers case 156 F.2d 875 the Commissioner, as a condition to the issuance of a summons and order under §§ 7602 and 7604, should not be required to prove grounds for belief that the liability was not time-barred "prior to examination of the only records which provide the ultimate proof." Zimmermann v. Wilson, supra; In re Upham's Income Tax, D.C.S.D.N.Y., 18 F.Supp. 737; In re Keegan, supra. Cf. Application of Carroll, supra.

The appellants, citing Hubner v. Tucker, 9 Cir., 245 F.2d 35, and Local 174, etc. v. United States, 9 Cir., 240 F. 2d 387, insist that the enforcement order instituted a search or seizure forbidden by the Fourth Amendment. But the appellants lack standing to raise that objection: the records sought were owned and possessed by the Agency of the Bank. Zimmermann v. Wilson, supra; United States v. Peoples Deposit Bank & Trust Co., supra; In re Upham's Income Tax, supra; In re Andrews' Tax Liability, D.C.D.Md., 18 F.Supp. 804. See also Wilson v. United States, supra, and McMann v. Securities and Exchange Commission, 2 Cir., 87 F.2d 377, 109 A.L.R. 1445, certiorari denied McMann v. Engle, 301 U.S. 684, 57 S.Ct. 785, 81 L.Ed. 1342.

Quite apart from the appellants' lack of standing, we think it inadmissible to equate the enforcement order here under consideration with an unreasonable search and seizure. See Oklahoma Press Publishing Co. v. Walling, supra, 327 U.S. at page 195, 66 S.Ct. at page 498. And in Civil Aeronautics Board v. Hermann, supra, it was held that a district court order enforcing a subpoena of the Board under 49 U.S.C.A. § 644(d), was valid although, as appears from the opinion below, 9 Cir., 237 F.2d 359, 362, there had been no...