Neece v. I.R.S. of U.S.

• Decision Date: 19 December 1990
• Docket Number: No. 89-5125,89-5125
• Citation: 922 F.2d 573
• Parties: -400, 59 USLW 2389, 91-1 USTC P 50,007 Peggy J. NEECE; Buel H. Neece, Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE of the UNITED STATES of America; United States of America; First National Bank of Turley, N.A., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 573

922 F.2d 573

67 A.F.T.R.2d 91-400, 59 USLW 2389, 91-1

USTC P 50,007

Peggy J. NEECE; Buel H. Neece, Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE of the UNITED STATES of America United States of America; First National Bank of Turley, N.A., Defendants-Appellees.

No. 89-5125.

United States Court of Appeals Tenth Circuit.

Dec. 19, 1990.

James R. Eagleton, E. John Eagleton, Thomas G. Potts, Charles D. Harrison of Houston & Klein, Inc., Tulsa, Okl., for plaintiffs-appellants.

Stuart E. Schiffer, Acting Asst. Atty. Gen., Tony M. Graham, U.S. Atty., Philip E. Pinnell, Asst. U.S. Atty., Tulsa, Okl., Rodney R. Parker, Lisa S. Farringer, Attys., U.S. Dept. of Justice, Washington, D.C., for defendants-appellees I.R.S. and U.S.

Joseph R. Farris, Jody R. Nathan of Feldman, Hall, Franden, Woodard & Farris, Jerry Reed, Atty., Tulsa, Okl., for defendant-appellee First Nat. Bank of Turley, N.A.

Before McKAY, McWILLIAMS and EBEL, Circuit Judges.

EBEL, Circuit Judge.

The issue presented by this appeal is whether a bank can voluntarily turn over documents to the Internal Revenue Service (IRS) absent notification to the bank customer involved without violating the Right to Financial Privacy Act (RFPA), 12 U.S.C. Secs. 3401-3422. The RFPA generally prohibits financial institutions from producing bank records for the IRS except under closely regulated procedures providing for notice to the bank customer and an opportunity for the bank customer to challenge production of the bank records prior to their release to the IRS. ¹

Section 3413 of the RFPA, however, provides a number of exceptions to these disclosure procedures. In particular, section 3413(c) permits "disclosure of financial records in accordance with procedures authorized by Title 26," the Internal Revenue Code, without compliance with RFPA disclosure requirements. Defendants argue that 26 U.S.C. Sec. 7602(a)(1) of the Internal Revenue Code authorizes the IRS to review bank documents informally if the bank voluntarily agrees to cooperate with the IRS. Defendants further argue that because this informal review is authorized by the Internal Revenue Code, the IRS's informal access to bank records based upon the voluntary cooperation of the bank is exempt from the disclosure requirements of the RFPA. We disagree.

I. FACTS

In June, 1987, plaintiffs, long-time customers of defendant First National Bank of Turley, N.A. (Bank), mortgaged their homestead to secure further an existing loan with the Bank. In April, 1988, plaintiffs applied for another loan with the Bank, submitting to the Bank a financial statement along with their loan application. The president of the Bank, suspecting plaintiffs of attempting to violate federal tax laws, contacted the IRS. In response, an IRS agent met with the Bank's president, who voluntarily turned over copies of plaintiffs' mortgage, financial statement, and loan application, as well as a copy of a letter from the Bank to plaintiffs denying their loan application. ²

Plaintiffs asserted that defendants violated the RFPA, in light of the Bank's voluntary relinquishment of plaintiffs' financial records to the IRS. Plaintiffs commenced this action under the RFPA, seeking actual and punitive damages pursuant to 12 U.S.C. Sec. 3417(a). The parties filed cross-motions for summary judgment. The district court denied plaintiffs' motion and granted defendants' motions for summary judgment, determining that the Bank's voluntary cooperation with the IRS was a "procedure" authorized by Title 26 and, therefore, the RFPA excepted the IRS's informal access to the Bank's records from its requirements. Plaintiffs appeal. We review an order granting summary judgment using the same standards employed by the district court under Fed.R.Civ.P. 56(c). Osgood v. State Farm Mut. Auto. Ins. Co., 848 F.2d 141, 143 (10th Cir.1988).

II. ANALYSIS

In 1970, Congress enacted the Bank Secrecy Act, which required banking institutions to maintain records of their customers' financial transactions. See California Bankers Ass'n v. Shultz, 416 U.S. 21, 26, 94 S.Ct. 1494, 1500, 39 L.Ed.2d 812 (1974). Congress enacted these recordkeeping requirements because it recognized that records of the financial transactions of bank customers "have a high degree of usefulness in criminal, tax, or regulatory investigations and proceedings." See id. (quoting the Bank Secrecy Act, 12 U.S.C. Secs. 1829b(a)(2), 1951; 31 U.S.C. Sec. 1051). In 1976, the United States Supreme Court determined that a bank customer did not have a constitutionally protected privacy interest in these bank records. United States v. Miller, 425 U.S. 435, 436, 440-43, 96 S.Ct. 1619, 1620, 1622-24, 48 L.Ed.2d 71 (1976).

Congress responded to the Supreme Court's determination in Miller by enacting the RFPA in 1978. See H.R.Rep. No. 1383, 95th Cong., 2d Sess. 34, reprinted in 1978 U.S.Code Cong. & Admin.News 9273, 9306; see also Pleasant v. Lovell, 876 F.2d 787, 806 (10th Cir.1989). Congress intended the RFPA "to protect the customers of financial institutions from unwarranted intrusion into their records while at the same time permitting legitimate law enforcement activity" by requiring federal agencies "to follow the procedures established by this title when they seek an individual's records...." H.R.Rep. No. 1383, 95th Cong., 2d Sess. 33, 6 reprinted in 1978 U.S.Code Cong. & Admin.News 9273, 9305, 9278; see also Pleasant, 876 F.2d at 806.

[T]he [RFPA] seeks to strike a balance between customers' right of privacy and the need of law enforcement agencies to obtain financial records pursuant to legitimate investigations.

The title is a congressional response to the Supreme Court decision in United States v. Miller which held that a customer of a financial institution has no standing under the Constitution to contest Government access to financial records. The Court did not acknowledge the sensitive nature of these records, and instead decided that since the records are the "property" of the financial institution, the customer has no constitutionally recognizable privacy interest in them.

Nevertheless, while the Supreme Court found no constitutional right of privacy in financial records, it is clear that Congress may provide protection of individual rights beyond that afforded in the Constitution.

H.R.Rep. No. 1383, 95th Cong., 2d Sess. 33-34 reprinted in 1978 U.S.Code Cong. & Admin.News 9273, 9305-06.

12 U.S.C. Sec. 3402 of the RFPA specifies the only means by which federal agencies can obtain an individual's records in the possession of third-party recordkeepers such as financial institutions. ³ See also 12 U.S.C. Sec. 3403(a) and (b). Section 3402, in conjunction with sections 3404-08, requires notice to be given the individual when a federal agency seeks access to that individual's records, and an opportunity is required to be provided for that individual to challenge the requested disclosure.

Congress, however, included a number of exceptions to these requirements of the RFPA. See 12 U.S.C. Sec. 3413. Many of these exceptions pertain to situations where other procedures are already in place to protect an individual's right to privacy in the requested records. See H.R.Rep. No. 1383, 95th Cong., 2d Sess. 225-28, reprinted in 1978 U.S.Code Cong. & Admin.News 9273, 9356-58. Section 3413(c) follows this pattern. That provision provides that "[n]othing in this chapter prohibits the disclosure of financial records in accordance with procedures authorized by Title 26." (Emphasis added.) The legislative history of section 3413(c) confirms that such records are exempt from the RFPA where they are already covered by privacy provisions in the Internal Revenue Code, and particularly, provisions of the Tax Reform Act of 1976: "Administrative summonses issued by the Internal Revenue Service are already subject to privacy safeguards under section 1205 of the Tax Reform Act of 1976 (26 U.S.C. Sec. 7609). Accordingly, they are exempted from the procedures of this bill." H.R.Rep. No. 1383, 95th Cong., 2d Sess. 226, reprinted in 1978 U.S.Code Cong. & Admin.News 9273, 9356.

Defendants, however, look to another provision of the Internal Revenue Code, arguing that 26 U.S.C. Sec. 7602(a)(1) authorizes the IRS's informal access to the bank records at issue in this appeal, thus exempting this informal review from the requirements of the RFPA. Section 7602(a) of the Internal Revenue Code provides

(a) Authority to summon, etc.--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 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 may deem proper, to appear before the Secretary 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.

Although this section authorizes the IRS to do several things, it does not establish the "procedures" by which those things may be accomplished. For example, section 7602(a)(2) authorizes the IRS to issue summonses to a third-party recordkeeper in order to obtain books and records concerning a taxpayer which are in the possession of that third party. The procedure...