Tiffany Fine Arts, Inc v. United States

• Decision Date: 09 January 1985
• Docket Number: No. 83-1007,83-1007
• Citation: 105 S.Ct. 725,469 U.S. 310,83 L.Ed.2d 678
• Parties: TIFFANY FINE ARTS, INC., et al. v. UNITED STATES et al
• Court: U.S. Supreme Court

469 U.S. 310

105 S.Ct. 725

83 L.Ed.2d 678

TIFFANY FINE ARTS, INC., et al.

v UNITED STATES et al.

No. 83-1007.

Argued Oct. 31, 1984.

Decided Jan. 9, 1985.

Syllabus

Petitioners are a holding company and its tax-shelter-promoting subsidiaries. The Internal Revenue Service (IRS) issued summonses to petitioners pursuant to § 7602(a) of the Internal Revenue Code, which empowers the IRS to serve summons on any person, without prior judicial approval, if the information sought is necessary to ascertain that person's tax liability. The summonses requested petitioners' financial statements for certain fiscal years, as well as the names of persons who had licenses from petitioners to distribute a certain medical device. When petitioners refused to comply with the summonses, the Government brought an enforcement action in Federal District Court. Petitioners opposed enforcement on the ground that the IRS's request for the licensees' names indicated that the IRS's "primary purpose" was to audit the licensees, not petitioners. Petitioners contended that if the IRS wanted the licensees' names, it could not proceed solely under § 7602(a) but would have to comply also with the "John Doe" summons procedures of § 7609(f), which requires the IRS to obtain prior judicial approval to serve a summons seeking information on the tax liability of unnamed taxpayers. The District Court found that the IRS had made a sufficient showing of its interest in auditing petitioners' returns and enforced the summonses. The Court of Appeals affirmed, holding that § 7609(f) applies only when the IRS issues a summons to an identifiable party with whom it has no interest in order to investigate the unnamed third parties' tax liabilities.

Held: Where, pursuant to § 7602(a), the IRS serves a summons on a known taxpayer with the dual purpose of investigating both that taxpayer's tax liability and unnamed parties' tax liabilities, it need not comply with § 7609(f), as long as all the information sought is relevant to a legitimate investigation of the summoned taxpayer. Where the summoned party is itself being investigated, that party's self-interest provides sufficient protection against the evils that Congress sought to remedy when it enacted § 7609(f), which serves as a restraint on the IRS's exercise of its summons power in the "John Doe" context. Here, on the record, the licensees' names "may be relevant" to the legitimate investiga- tion of petitioners, and thus the summonses were properly enforced. Pp. 314-324.

718 F.2d 7 (2 Cir. 1983), affirmed.

Michael D. Savage, Washington, D.C., for petitioners.

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

Justice MARSHALL delivered the opinion of the Court.

The question presented in this case is whether the Internal Revenue Service (IRS) must comply with the "John Doe" summons procedures of § 7609(f) of the Internal Revenue Code of 1954, 26 U.S.C. § 7609(f), when it serves a summons on a named taxpayer for the dual purpose of investigating both the tax liability of that taxpayer and the tax liabilities of other, unnamed parties.

I

Petitioner Tiffany Fine Arts, Inc., is a holding company for various subsidiaries that promote tax shelters.¹ On October 6, 1981, Revenue Agent Joel Lewis issued four summonses to Tiffany, pursuant to 26 U.S.C. § 7602(a). This provision empowers the IRS to serve a summons on any person, without prior judicial approval, if the information sought is necessary to ascertain that person's tax liability.² The summonses requested Tiffany's financial statements for the fiscal years ending October 31, 1979, and October 31, 1980, as well as a list of the names, addresses, Social Security numbers, and employer identification numbers of persons who had acquired from Tiffany licenses to distribute a medical device known as the "Pedi-Pulsor." ³ Tiffany refused to comply with the summonses, and the Government then brought an enforcement action in the United States District Court for the Southern District of New York, pursuant to 26 U.S.C. §§ 7402(b) and 7604(a).

Tiffany opposed enforcement, principally on the ground that the IRS's request for the names of the licensees indicated clearly that the IRS's "primary purpose" was to audit the Pedi-Pulsor licensees, not Tiffany itself. Tiffany offered to produce records in which the names of the licensees were redacted. It took the position that, if the IRS were truly interested in only Tiffany's liability, the redacted records would be sufficient for an adequate investigation.

According to Tiffany, if the IRS wanted to go further and obtain the names of all the licensees, it could not proceed solely under § 7602, but would have to comply also with the requirements of § 7609(f), which applies to John Doe summonses.⁴ Under § 7609(f), the IRS cannot serve a summons seeking information on the tax liabilities of unnamed taxpayers without obtaining prior judicial approval at an ex parte proceeding.

The IRS rejected Tiffany's offer of redacted documents. In an affidavit filed in support of the Government's enforcement petition, Revenue Agent Lewis asserted:

"I am conducting an investigation, one purpose of which is to ascertain the correctness of the consolidated income tax returns filed by [Tiffany] for the fiscal years ending October 31, 1979, and October 31, 1980. One aspect of my investigation into the correctness of Tiffany's consolidated corporate income tax returns concerns possible underreporting of income received and questionable business deductions claimed by Tiffany and its subsidiaries." App. 14a.

In a supplemental affidavit, Agent Lewis conceded that "[i]t is certainly possible that once the individual [Pedi-Pulsor] licensees are identified further inquiry will be made into whether they correctly reported their income tax liabilities." Id., at 24a. He reasserted, however, that one purpose of his investigation was to audit Tiffany; in particular, he sought to ascertain whether Tiffany had failed to report recourse and nonrecourse notes provided to Tiffany by the Pedi-Pulsor licensees. According to Lewis, the investigation of Tiffany could not be performed properly with redacted documents.

The District Court found that the IRS had made a sufficient showing of its interest in auditing Tiffany's returns and enforced the summonses. The United States Court of Appeals for the Second Circuit affirmed. 718 F.2d 7 (1983). It held that the John Doe provisions of § 7609(f) apply only when "the IRS issue[s] a summons to an identifiable party in whom it ha[s] no interest in order to investigate the potential tax liabilities of unnamed third parties." Id., at 13. Given the District Court's finding that one purpose of the summonses was to investigate Tiffany, § 7609(f) was not relevant here "even assuming that the summonses . . . were issued to Tiffany partly for the purpose of investigating Tiffany's customers." Id., at 13-14.

The Federal Courts of Appeals are divided on the scope of § 7609(f). The Eighth and Eleventh Circuits, like the Second Circuit in this case, have held that the IRS need not comply with § 7609(f) when it seeks information on unnamed third parties as long as one purpose of the summons is to carry out a legitimate investigation of the named summoned party. See United States v. Barter Systems, Inc., 694 F.2d 163 (CA8 1982); United States v. Gottlieb, 712 F.2d 1363 (CA11 1983). In contrast, the Sixth Circuit has taken the opposite position, holding that the IRS must comply with § 7609(f) whenever it seeks information on unnamed third parties—even in cases in which one of the purposes of the IRS is to investigate the named recipient of the summons. United States v. Thompson, 701 F.2d 1175 (1983). We granted certiorari to resolve this conflict. 466 U.S. 925, 104 S.Ct. 1705, 80 L.Ed.2d 179 (1984). We affirm.

II

Congress enacted § 7609 in response to two decisions in which we gave a broad construction to the IRS's general summons power under § 7602(a). It is therefore useful to review those cases before embarking on an analysis of the statutory provision.

In Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971), the IRS issued to an employer a § 7602 summons seeking records prepared by the employer that would be relevant to an investigation of the tax liability of one of its employees. The employee obtained a preliminary injunction restraining his employer from complying with the summons. The Government then moved for enforcement. In response, the employer stated that it would have complied with the summons " 'were it not for' the preliminary injunction." Id., at 521, 91 S.Ct., at 537. The employee, however, filed motions to intervene in the proceedings, under Federal Rule of Civil Procedure 24(a)(2), in order to oppose enforcement. He stated that he had an interest in the outcome of the enforcement action and that this interest would not be adequately represented by his employer. We held that the employee's interest was not legally protectible and affirmed the denial of the employee's motions for intervention.

Four years later, we decided United States v. Bisceglia, 420 U.S. 141, 95 S.Ct. 915, 43 L.Ed.2d 88 (1975). In Bisceglia, the IRS issued to a bank a § 7602 summons for the purpose of identifying an unnamed individual who had deposited a large amount of money in severely deteriorated bills. The bills appeared to have been stored for a long period of time under abnormal conditions, and the IRS suspected that they had been hidden to avoid taxes. Although we recognized the danger that the IRS might use its § 7602 summons power to "conduct 'fishing expeditions' into the private affairs of bank depositors," id., at 150-151, 95 S.Ct., at 921, we concluded that, on the facts of the case, the IRS had not abused its power. Thus, we held that the summons was enforceable.

Section 7609, the provision at issue in this case, was clearly a response to these decisions. Both the Senate and the House...