Scotty's Contracting and Stone, Inc. v. U.S.

• Decision Date: 24 April 2003
• Docket Number: No. 01-6587.,01-6587.
• Citation: 326 F.3d 785
• Parties: SCOTTY'S CONTRACTING AND STONE, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

326 F.3d 785

SCOTTY'S CONTRACTING AND STONE, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 01-6587.

United States Court of Appeals, Sixth Circuit.

Argued March 14, 2003.

Decided and Filed April 24, 2003.

Robert C. Webb (argued and briefed), Theresa A. Canaday (briefed), Frost, Brown, Todd LLC, Louisville, KY, for Plaintiff-Appellant.

Stuart D. Gibson, U.S. Dept. of Justice, Tax Div., Frank P. Cihlar (briefed), U.S. Dept. of Justice, Appellate Section Tax Division, Washington, DC, Judith A. Hagley (argued and briefed), Tax Div., Dept. of Justice, Washington, DC, for Defendant-Appellee.

Before MOORE and GIBBONS, Circuit Judges; COHN, Senior District Judge.^*

OPINION

GIBBONS, Circuit Judge.

The appellant, Scotty's Contracting & Stone Company (Scotty's), filed this action seeking to quash two third-party summonses issued by the Internal Revenue Service to Scotty's accountants. The district court denied Scotty's petition to quash and granted the government's motion for summary enforcement of the summonses. Scotty's appeals. For the following reasons, we affirm.

In 1998, the IRS initiated an investigation into the federal tax liabilities of James Scott for the years 1994, 1995 and 1996. Scott, a resident of Kentucky, is the owner and operator of appellant Scotty's. On June 12, 2001, Douglas McEwen, a Special Agent with the IRS Criminal Investigation Division, issued summonses to Richard Callahan and Kent Kirby, who were accountants for both Scott and Scotty's during the relevant years. According to his declaration, Agent McEwen issued these summonses in furtherance of his investigation "to determine whether James D. Scott has unreported federal income tax liabilities for the 1994 through 1996 tax years, and whether James D. Scott has committed any offense under the internal revenue laws." Among other things, the summonses requested testimony regarding Scotty's tax records.

On July 2, 2001, Scotty's filed this action seeking to quash the summonses. In response, the government moved for summary enforcement of the summonses. Scotty's contended that the IRS issued the summonses in bad faith because the IRS issued them for the sole purpose of a criminal investigation. Furthermore, Scotty's argued that enforcement of the summonses would violate Kentucky's accountant-client privilege.

The district court denied Scotty's petition to quash and granted the government's motion for summary enforcement. Although it found that this court had not yet decided the issue, the district court relied upon opinions from other circuits in concluding that the IRS may properly issue summonses for the sole purpose of a criminal investigation. In addition, the district court found that Kentucky's accountant-client privilege does not prevent enforcement of validly issued summonses.

This appeal presents a novel legal issue for this court: Whether the IRS may validly issue a summons pursuant to 26 U.S.C. § 7602, as amended in 1982, for the sole purpose of a criminal investigation. Before addressing this question of statutory interpretation, however, we must confront two preliminary arguments made by the government.

First, in an argument not raised below, the government asserts that Scotty's does not have standing to challenge the summonses on the basis that they were issued for the sole purpose of a criminal investigation because Scott, not Scotty's, was the subject of the criminal investigation. While issues of standing, which are jurisdictional in nature, may be considered for the first time on appeal, United States v. Van, 931 F.2d 384, 387 (6th Cir.1991), the government's argument nevertheless fails. Under 26 U.S.C. § 7609(b)(2)(A), any entity that is entitled to notice of a summons has the right to bring a proceeding to quash the summons. Under 26 U.S.C. § 7609(a)(1), Scotty's was entitled to notice of the summonses at issue because the summonses requested testimony relating to Scotty's records. Moreover, Scotty's is not asserting a right personal to Scott when it claims that the IRS exceeded its authority under 26 U.S.C. § 7602 by issuing the subject summonses, and the two cases cited by the government on this issue do not hold otherwise. United States v. Equitable Trust Co., 611 F.2d 492, 495 (4th Cir.1979) (holding that one cannot assert someone else's Fifth Amendment rights under 26 U.S.C. § 7609); Wright v. United States, 964 F.Supp. 336, 338 (M.D.Fla.1997) (holding that one cannot assert "issues that are of meaningful concern only to the third-party record-keeper because they involve its burden to produce information").

The second preliminary argument asserted by the government is that the subject summonses are valid no matter how the statutory-interpretation question is resolved because the summonses were issued for civil, as well as criminal, investigatory purposes. The district court, however, did not reach this factual question and instead held that the IRS may issue summonses for purely criminal investigatory purposes under § 7602. We decline the government's invitation to make initial findings of fact regarding whether the summonses were issued for partly civil investigatory purposes. We instead review the district court's legal determination that under § 7602, as amended in 1982, the IRS may validly issue summonses solely for criminal investigatory purposes.

In 1978, the Supreme Court decided that the IRS may not validly issue a summons pursuant to § 7602 for the sole purpose of a criminal investigation, even if the criminal investigation has not yet been referred to the Department of Justice for prosecution. United States v. LaSalle Nat'l Bank, 437 U.S. 298, 317, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978). The Court examined the text of § 7602 as it existed in 1978 and found that Congress had explicitly limited the purposes for which the IRS had the authority to issue summonses. The Court stated:

In § 7602 Congress has bestowed upon the Service the authority to summon production for four purposes only: for "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 collecting any such liability." Congress therefore intended the summons authority to be used to aid the determination and collection of taxes. These purposes do not include the goal of filing criminal charges against citizens. Consequently, summons authority does not exist to aid criminal investigations solely.

Id. at 317 n. 18, 98 S.Ct. 2357. Justice Stewart, joined by three other justices, dissented in LaSalle National Bank, concluding that under § 7602 the IRS could validly issue summonses solely for the purpose of a criminal investigation, so long as the investigation had not been referred to the Department of Justice for criminal prosecution. Id. at 319-21, 98 S.Ct. 2357.

In 1982, Congress amended § 7602 in two ways significant to this appeal. First, Congress added a fifth purpose for which the IRS could issue summonses. The statute now provides that the IRS may issue summonses for "the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws." 26 U.S.C. § 7602(b). Second, Congress explicitly dictated when the IRS's summonsing authority ends: when the IRS refers a criminal investigation to the Department of Justice. 26 U.S.C. § 7602(d)(1) ("No summons may be issued under this title ... with respect to any person if a Justice Department referral is in effect with respect to such person."). The statute defines the point at which "[a] Justice Department referral is in effect" as the time when the IRS "recommend[s] to the Attorney General a grand jury investigation of, or the criminal prosecution of, such person" or when "any request is made under section 6103(h)(3)(B) for the disclosure of any return or return information... relating to such person." 26 U.S.C. § 7602(d)(2).

Because § 7602 now grants the IRS the authority to issue summonses for the purpose of investigating "any offense" relating to the tax code, we conclude that the IRS may validly issue summonses for the purpose of investigating a criminal offense, even if that is the sole purpose for the summonses. According to the plain language of the statute, the IRS's authority to issue summonses for the purpose of investigating any offense relating to the tax code is extinguished only when the investigation is referred to the Department of Justice. The statute does not say that the IRS may issue summonses for the purpose of investigating any offense, unless the sole purpose is to investigate a criminal offense. Cf. United States v. Arthur Young & Co., 465 U.S. 805, 817, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984) ("If the broad latitude granted to the IRS by § 7602 is to be circumscribed, that is a choice for Congress, and not this Court, to make.").

In reaching this conclusion, we join several other circuits. The Second, Third, Eighth, Tenth, and Eleventh Circuits have all concluded that the IRS may validly issue a summons pursuant to 26 U.S.C. § 7602, as amended in 1982, for the sole purpose of a criminal investigation. United States v. Millman, 822 F.2d 305, 308 (2d Cir.1987) (relying on the language of § 7602, as amended, without further analysis); Pickel v. United States, 746 F.2d 176, 183-84 (3d Cir.1984) (relying on legislative history to conclude that Congress, by amending § 7602 in 1982, intended to codify the position of the dissenters in LaSalle National Bank); United States v. G & G Adver. Co., 762 F.2d 632, 634 n. 1 (8th Cir.1985) ("The requirement that the summons not issue for a solely criminal investigation, LaSalle, 437 U.S. at 313-17, 98 S.Ct. at 2365-68, has been negated by the 1982 amendment to § 7602(b) which allows inquiry into `any offense,' so long as the case has not been turned over to the Justice Department."); United States v. Schmidt, 816 F.2d 1477, 1481 n. 4 (10th Cir.1987) (...