U.S. v. Barter Systems, Inc., 81-2270

• Citation: 694 F.2d 163
• Decision Date: 03 December 1982
• Docket Number: No. 81-2270,81-2270
• Parties: 82-2 USTC P 9698 UNITED STATES of America and Joseph M. Bilunas, Revenue Agent of the Internal Revenue Service, Appellants, v. BARTER SYSTEMS, INC. and Harry Hayter as President of the Barter Systems, Inc., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 163

694 F.2d 163

82-2 USTC P 9698

UNITED STATES of America and Joseph M. Bilunas, Revenue

Agent of the Internal Revenue Service, Appellants, v. BARTER SYSTEMS, INC. and Harry Hayter as President of the

Barter Systems, Inc., Appellees.

No. 81-2270.

United States Court of Appeals,

Eighth Circuit.

Submitted June 14, 1982.

Decided Dec. 3, 1982.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Charles E. Brookhart, William A. Whitledge, Attys., Tax Div., Dept. of Justice, Washington, D.C., for appellants.

Clifton Peter Rose, Williams & Jensen, P.C., Washington, D.C., for appellees.

Before LAY, Chief Judge, JOHN R. GIBSON, Circuit Judge, and FAIRCHILD, Senior Circuit Judge ^*.

JOHN R. GIBSON, Circuit Judge.

The United States and Joseph M. Bilunas, Revenue Agent of the Internal Revenue Service (IRS), appeal a decision of the district court denying enforcement of an IRS summons issued to Barter Systems, Inc. (BSI) and Harry Hayter, President of BSI. 1982-1 U.S. Tax Cas. (CCH) p 9127 (D.Neb. Sept. 16, 1981). This case involves the question of whether an IRS summons that is issued to determine the correct tax liabilities of a named taxpayer, but that also would aid in investigating the tax liabilities of unnamed taxpayers, is enforceable only if the John Doe summons procedures of 26 U.S.C. Sec. 7609(f) (1976) are met. We hold that the IRS is not required to follow section 7609(f) in issuing this summons. We therefore reverse the order of the district court and remand with instructions to enforce the summons.

The facts in this case are not in dispute. BSI is a corporation that conducts business in Omaha, Nebraska as a barter exchange. A barter exchange acts as a clearinghouse for the purchase of goods and services by exchange members. Trading between exchange members is conducted in "barter units" with no cash changing hands. If an exchange member wishes to purchase certain goods or services, he obtains a referral by the exchange to a "providing member" who supplies the desired goods or services. When the purchasing and providing members have agreed on prices and terms, the providing member contacts the exchange. If the exchange ascertains that the purchasing member has sufficient barter units in his account, it authorizes the trade. For facilitating such barter exchanges, BSI charges its members a fee of ten percent of the value of each transaction, payable in barter units and credited to BSI's account. BSI also charges its members an initiation fee and annual dues, both paid in cash. These transactions result in tax consequences for BSI, as well as for exchange members engaging in them.

On September 19, 1979, the IRS issued a directive establishing the Barter Exchange Project Unreported Income Program. The purpose of the project was to "identify and select returns in need of examination that are associated with organized barter exchanges .... [including] the returns of bartering exchanges, owners and operators and members of such exchanges." The directive further provided that if the operator of the exchange declined to furnish information concerning its members, a John Doe summons pursuant to 26 U.S.C. Sec. 7609(f) (1976) "should be issued after consultation with District Counsel." The procedures described in the September 19, 1979 directive were formally incorporated into the IRS' Manual Supplement on March 11, 1980. ¹

The IRS selected BSI for audit from a list of barter exchanges in the Omaha telephone directory. Revenue Agent Bilunas, one of the appellants herein, was assigned to conduct the audit to determine the correct tax liabilities of BSI for the years 1978 and 1979. To further his investigation, Bilunas issued the summons in question to have the following records of BSI produced for the period from January 1, 1978, through December 31, 1979: ²

1. Books, papers, account cards or other records upon which the following information is recorded:

(A) All members' names and account numbers;

(B) Exchange member transactions including the price and/or trade units assigned to goods or services rendered or received;

(C) All initiation or membership fees, and other income, including commissions on members' transactions.

2. The disbursements journal and trade credit ledger.

3. All monthly account statements for each exchange member.

The summons was issued pursuant to 26 U.S.C. Sec. 7602 (1976), and did not utilize the John Doe summons procedures of section 7609(f).

Upon BSI's refusal to produce the requested names and member numbers, the United States and Revenue Agent Bilunas initiated an enforcement action under 26 U.S.C. Secs. 7402(b) and 7604(a) in the United States District Court for the District of Nebraska. In a Memorandum Opinion dated September 16, 1981, the district court found that the unidentified member names were relevant and necessary to the audit of BSI, and that the conduct of that audit was one purpose for which the summons was issued. The district court also found that another purpose of the summons was to aid in the investigation of unidentified members of the exchange as part of the IRS' barter exchange project. Noting that section 7609(f) provides restrictions on the use of summonses to ascertain the names of unidentified taxpayers and that the IRS did not follow these restrictions in this instance, the district court held that the summons was not issued for a legitimate purpose under United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). ³ The district court thereupon entered an order denying enforcement of the summons. This appeal followed.

Appellants' principal contention on appeal is that the district court erred in its interpretation of section 7609(f) by holding that it requires the John Doe summons procedures to be followed in issuing a summons which has a dual purpose of determining a known taxpayer's liabilities and discovering information that would aid in investigating the tax liabilities of unnamed taxpayers. After carefully reviewing the record, we agree with appellants' contention and accordingly reverse. ⁴

I. Statutory Background

The relevant statutory framework for this case consists of section 7602 and section 7609(f) of the Internal Revenue Code. 26 U.S.C. Secs. 7602, 7609(f) (1976).

Under section 7602, the IRS has broad powers "to examine any books, papers, records, or other data which may be relevant" to investigating a person's compliance with the internal revenue laws. 26 U.S.C. Sec. 7602 (1976). ⁵ Section 7602 authorizes the IRS not only to obtain records held by the taxpayer, but also to summon, question, and require production from "any person" who holds records "relating to the business of the person liable for tax." Id.

If the IRS wishes to examine the tax liabilities of unnamed or unknown taxpayers, it may issue a "John Doe" summons to a third party who possesses the information necessary to identify the unnamed taxpayers. In United States v. Bisceglia, 420 U.S. 141, 95 S.Ct. 915, 43 L.Ed.2d 88 (1975), the Supreme Court held that sections 7601 ⁶ and 7602 authorize the issuance of such summons, subject to those limitations on the use of any summons which the Court laid down in Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964), and United States v. Powell, supra. ⁷ In so holding, the court reasoned that in the absence of such construction "no meaningful investigation ... could be conducted" and thus "[s]ettled principles of statutory construction require that we avoid such a result absent unambiguous directions from Congress." 420 U.S. at 150, 95 S.Ct. at 921.

The Bisceglia decision produced some concern in Congress that the use of the John Doe summons might become widespread and uncontrolled. To provide a check on its use, Congress enacted section 7609(f) as part of the Tax Reform Act of 1976, Pub.L. No. 94-455, Sec. 1205(a), 90 Stat. 1520, 1701-02. Section 7609(f) provides:

(f) Additional requirement in the case of a John Doe summons

Any summons described in subsection (c) which does not identify the person with respect to whose liability the summons is issued may be served only after a court proceeding in which the Secretary establishes that--

(1) the summons relates to the investigation of a particular person or ascertainable group or class of persons,

(2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and

(3) the information sought to be obtained from the examination of the records (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

Subsection (h) grants jurisdiction to the appropriate district court to determine proceedings brought under section 7609(f), and mandates that such determinations "shall be made ex parte and shall be made solely upon the petition and supporting affidavits." 26 U.S.C. Sec. 7609(h) (1976).

II. The Good Faith Requirements of United States v. Powell

A prerequisite to judicial enforcement of an IRS summons is that it meet the good faith requirements of United States v. Powell, supra. ⁸ These requirements are fourfold: (1) the investigation is being conducted pursuant to a legitimate purpose; (2) the inquiry is relevant to that purpose; (3) the IRS does not already possess the information sought; and (4) the administrative steps required by the Internal Revenue Code have been followed. Id. 379 U.S. at 57-58, 85 S.Ct. at 254-255; see 26 U.S.C. Sec. 7605(b) (1976). Once the IRS establishes a prima facie case, the burden shifts to the taxpayer to disprove one of these elements; that burden is a heavy one. United States v. LaSalle National Bank, 437 U.S. 298, 316, 98 S.Ct. 2357, 2367, 57 L.Ed.2d 221 (1978); United States v. First National Bank of Mitchell, 691 F.2d 386 at 388 (8th Cir.1982) (per curiam).

In the instant case, the IRS made a prima facie...