Newton, Matter of

Decision Date03 November 1983
Docket NumberNos. 82-8586,83-8056,s. 82-8586
Citation718 F.2d 1015
Parties83-2 USTC P 9663 In the Matter of The Tax Liability of Willis H. NEWTON, Lee M. Newton and Trio Manufacturing Company, Intervenors-Appellants, UNITED STATES of America, and Douglas P. McCallum, special agent, Internal Revenue Service, Plaintiffs-Appellees, v. George B. PENNINGTON, CPA, Defendant. UNITED STATES of America and Douglas P. McCallum, Special Agent, IRS, Plaintiffs-Appellants, v. George B. PENNINGTON, CPA, Defendant-Appellee.
CourtU.S. Court of Appeals — Eleventh Circuit

Ralph H. Greil, Atlanta, Ga., for Pennington.

Jere W. Morehead, Asst. U.S. Atty., Atlanta, Ga., Glen L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Carleton D. Powell, William A. Whitledge, Tax Div., Dept. of Justice, Washington, D.C., for U.S. and Mc Callum.

Robert H. Hishon, Atlanta, Ga., John D. Comer, Macon, Ga., for Newton, et al.

Appeals from the United States District Court for the Northern District of Georgia.

Before JOHNSON and HENDERSON, Circuit Judges, and ALLGOOD, * District Judge.

JOHNSON, Circuit Judge:

These consolidated appeals present the question whether tax accrual workpapers prepared by an independent auditor of a closely held corporation may be subject to summons by the Internal Revenue Service ("IRS") without a special showing of particularized need for the material sought. We hold that tax accrual workpapers are subject to IRS summons without any special showing and, accordingly, we affirm the order enforcing the summons in this case. We also affirm the denial of the government's motion to hold respondent Pennington in contempt for his refusal to comply with that part of the district court order that this Court stayed pending appeal.

The facts of this case are undisputed. The IRS commenced an audit of the 1977-79 federal income tax returns of the closely held Trio Manufacturing Company ("Trio" or "Taxpayer") and of Willis H. Newton, a major shareholder of the family-owned company, and his wife. During the course of its investigation, the IRS, acting under the authority of 26 U.S.C.A. Sec. 7602, 1 issued two summonses to George B. Pennington, the certified public accountant retained by the Newtons to prepare their personal income tax returns and the corporate income tax returns of Trio, and to conduct audits of Trio for the years 1977, 1978 and 1979. 2 The summons here in dispute sought information regarding Trio's tax liability, including any and all workpapers, analyses and computations prepared in the course of Pennington's annual audits of Trio.

In accordance with Taxpayer's directions, Pennington refused to comply with the summons, and the IRS petitioned the district court for an order enforcing its summons. 3 Pennington informed the court that he would comply with any order that it might enter and that his refusal to produce the summoned documents was only in deference to Taxpayer's directions. Taxpayer successfully moved to intervene in the enforcement action. 4

The district court referred the case to a magistrate. After an evidentiary hearing and briefing by the parties, the magistrate recommended that the summons be enforced in its entirety. The district court adopted the magistrate's report and recommendation.

Taxpayer appealed, and this Court, after initially denying Taxpayer's motion for a stay of the enforcement order, granted a partial stay of the order with respect to the tax accrual workpapers sought by the IRS. Pennington then produced all of the summoned materials except those that Taxpayer asserted fell within this Court's stay, which after negotiations included some twenty-one pages of documents.

The government, disputing that tax accrual workpapers are beyond the scope of IRS summons authority and disputing that the documents withheld even constitute tax accrual workpapers, filed a motion in district court seeking to have Pennington held in contempt. The district court, considering this Court's partial stay, conducted an in camera review of the disputed documents, determined that they were tax accrual workpapers and denied the government's contempt motion.

Trio appeals the district court's order enforcing the IRS summons as to tax accrual workpapers. The government appeals the district court's denial of its contempt motion. We will consider these consolidated appeals in turn.

I. TAXPAYER'S APPEAL.

Trio argues that this Circuit should follow the decision of the Second Circuit in United States v. Arthur Young & Company, 677 F.2d 211 (2d Cir.1982), cert. granted, --- U.S. ----, 103 S.Ct. 1180, 75 L.Ed.2d 429 (1983), and hold that an accountant work product privilege protects tax accrual workpapers from IRS summons power absent a showing of particularized need and inability to obtain the substantial equivalent from other sources. Trio further argues that no such showing has been made here.

Trio also argues that the district court erred as a matter of law in concluding that Pennington's tax accrual workpapers are relevant to the amount of Taxpayer's federal income tax liability. Trio argues that tax accrual workpapers are not relevant per se to an IRS investigation of Taxpayer's correct tax liability. Trio further argues that the relevancy of the documents to the IRS investigation cannot be determined simply from the description of the documents in the IRS summons, but that the Service must make a further showing of relevancy after the Taxpayer presents some contrary evidence. Trio contends that the IRS failed to make this showing.

Preliminarily, we must address the government's contention that the question whether tax accrual workpapers are protected from IRS summons power is not properly before this Court because it was not adequately raised below. This contention is without merit. As we have recently noted, "[t]he law is clear that, absent special circumstances, defenses not presented and for which proof is not offered in the trial court cannot be raised for the first time on appeal." Johnson v. Smith, 696 F.2d 1334, 1338 (11th Cir.1983). The record in this case clearly indicates that Trio raised the tax accrual issue in the district court, even if it did not concentrate on that issue in its defense. Moreover, it appears that the reason Taxpayer did not emphasize the issue is that the government never specified that it was seeking "tax accrual" documents.

The broad language of the summons sought any and all workpapers, analyses and computations prepared in the course of Pennington's audits of Trio. Taxpayer sought to clarify the scope of the summons through subpoenas of IRS agents and documents and supported its position with the argument that the government must make a showing of particularized need for workpapers and analyses prepared during a financial audit. The government successfully moved to quash Taxpayer's subpoenas. At the evidentiary hearing, Taxpayer attempted to discover whether the Service sought tax accrual workpapers by directly asking the agent who drafted the summons. The agent responded that he was unfamiliar with such documents. Finally, in the Taxpayer's proposed findings of fact and conclusions of law submitted to the magistrate and in its objections to the magistrate's report, Taxpayer cited Arthur Young and argued that tax accrual workpapers could not be subject to IRS summons merely on a showing of their relevancy to a tax investigation. In view of these facts, we hold that Taxpayer adequately presented this defense to the trial court, and this Court may consider the issue on appeal.

A. Whether tax accrual workpapers are relevant.

The Internal Revenue Service has broad authority under Section 7602. The Service may examine "any books, papers, records or other data which may be relevant or material" to its investigation of the correctness of any tax return. 26 U.S.C.A. Sec. 7602(a). The Supreme Court in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), defined the minimal showing that the IRS must make when seeking an order to enforce its summons. Id. at 57-58, 85 S.Ct. at 255. It must show that

the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to that purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed....

Id.

The Service can satisfy its burden merely by presenting the sworn affidavit of the agent who issued the summons. United States v. Southeast First National Bank of Miami Springs, 655 F.2d 661, 664 (5th Cir.1981). 5 Once the government makes this minimal showing, the burden shifts to the taxpayer to disprove one of the elements of the government's case or to show that enforcement of the summons would be an abuse of the court's process. Id.; United States v. Davis, 636 F.2d 1028, 1034 (5th Cir.1981).

Taxpayer here argues that the Service carries the ultimate burden in a summons enforcement proceeding. If the taxpayer presents some evidence that the government has not satisfied the Powell requirements or that enforcement otherwise would be an abuse of process, then the government must come forward with ultimately persuasive evidence. Trio argues that, after it presented evidence challenging the relevancy of the tax accrual workpapers to the IRS tax investigation, the government was required to persuade the court that the workpapers were relevant to its investigation.

Because we determine that the IRS here made the minimal showing as required by Powell and that tax accrual workpapers are relevant as a matter of law to a legitimate investigation of a corporation's correct tax liability, we find it unnecessary to discuss further the burdens of proof required in a summons enforcement proceeding.

Due to the complexity of the federal tax structure, the return filed by a corporate taxpayer often is not the final statement of the amount of taxes owed. Taxpayers...

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