U.S. v. First Bank
| Decision Date | 18 June 1984 |
| Docket Number | D,No. 962,962 |
| Citation | 737 F.2d 269 |
| Parties | 84-2 USTC P 9600 UNITED STATES of America and Vincent Mercugliano, Special Agent, Internal Revenue Service, Plaintiffs-Appellants, v. FIRST BANK, Defendant-Appellee. ocket 83-6350. |
| Court | U.S. Court of Appeals — Second Circuit |
William Whitledge, Tax Div., Appellate Section, Dept. of Justice, Washington, D.C. (Michael L. Paup, Charles E. Brookhart, Attys., Tax Div., Appellate Section, Dept. of Justice, Washington, D.C., Alan H. Nevas, U.S. Atty., D. Conn., New Haven, Conn., Glenn L. Archer, Jr., Asst. Atty. Gen., Washington, D.C., of counsel), for plaintiffs-appellants.
Richard G. Bell, New Haven, Conn. (Alice A. Bruno, Tyler, Cooper & Alcorn, New Haven, Conn., of counsel), for defendant-appellee.
Before KAUFMAN, KEARSE and PIERCE, Circuit Judges.
The United States of America and Vincent Mercugliano, Special Agent of the Internal Revenue Service (alternatively referred to collectively as the "Government"), appeal from an order of the United States District Court for the District of Connecticut, Ellen Bree Burns, Judge, entered September 27, 1983, denying a petition to enforce an Internal Revenue Service ("IRS") summons served upon First Bank, a third-party recordkeeper, because the co-owner of the records summoned had not been given notice.
For the reasons set forth below, we reverse.
The facts relevant to this appeal are not in dispute. The IRS is conducting an investigation to determine the accuracy of Aristotle Stamatien's financial income tax returns for taxable years 1979, 1980 and 1981. In furtherance of that investigation, on February 17, 1983, Special Agent Mercugliano issued an administrative summons to appellee First Bank ("Bank"), a Connecticut bank and trust company, pursuant to Sec. 7602 of the Internal Revenue Code ("Code"), 26 U.S.C. Sec. 7602(a) (1982). The summons ordered the Bank to produce "[a]ll records pertinent to all financial transactions of ARISTOTLE STAMATIEN at your institution" for the taxable years under investigation. The summons also stated that notice had been served on Stamatien, in accordance with 26 U.S.C. Sec. 7609(a). Although Stamatien elected not to exercise his right under Sec. 7609(b) 1 of the Code to institute suit to challenge the summons, the Bank, by letter dated March 15, 1983, informed the IRS that it was unable to comply with the summons because the account held by Stamatien was held jointly with another individual, and no notice had been given to the co-owner. 2
On July 29, 1983, the Government filed a petition in the United States District Court for the District of Connecticut, pursuant to Secs. 7402(b) and 7604 of the Code, seeking enforcement of the summons. In response to the district court's order to show cause why it should not be compelled to obey the summons, First Bank asserted that since there had been no notice to the co-owner of the subject account, it could not make the requested disclosure without violating Connecticut's Financial Privacy Act. Conn.Gen.Stat.Ann. Secs. 36-9j et seq. (West 1981 & Supp.1984). Under that statute, in the absence of (1) customer authorization, (2) service upon the customer of any disclosure request at least ten days prior to the date on which disclosure is to be made, or (3) a waiver of the prior notice requirement for good cause by a court of competent jurisdiction, a financial institution may not disclose its customers' financial records. Id. Secs. 36-9k & 36-9l. The Government, in response to First Bank's assertion, argued that under the Supremacy Clause, art. VI, cl. 2, of the United States Constitution, the Federal Right to Financial Privacy Act of 1978, 12 U.S.C. Secs. 3401 et seq., preempts the Connecticut statute. In addition, the Government argued that Sec. 7609(a) of the Code does not require that notice be given to the joint owner of the records summoned since the joint owner was not identified in the summons.
In an opinion filed on September 27, 1983, the district court agreed with the Government that the provisions of the state statute were preempted by 26 U.S.C. Sec. 7609(a). However, after reviewing Sec. 7609 and its legislative history, Judge Burns concluded that Congress did not intend to limit the notice requirement of that section to the taxpayer who is the immediate subject of the summons. Therefore, the district judge held that a co-owner who is not the target of an IRS investigation and who is not identified in the summons, must also receive notice of the summons, because that person's interest in the account is coextensive with the taxpayer's interest. Accordingly, the Government's petition to enforce the summons was denied without prejudice to reissuance with the requisite notice. This appeal followed.
The Government argues that the district court erred by interpreting Sec. 7609(a) to require the IRS, when it serves an administrative summons on a third-party recordkeeper, to notify the co-owner of the records summoned, when the co-owner is not under investigation and is not identified in the summons. First Bank, on the other hand, urges us to adhere to the district court's interpretation of Sec. 7609(a) and, in addition, contends that Judge Burns erred in holding that the Connecticut Financial Privacy Act is preempted by the notice provisions of the Code. While we agree with Judge Burns that the state privacy statute is preempted by the provisions of the Code, we hold that a co-owner of a joint bank account who is not identified in the summons is not entitled to notice when an administrative summons is served on a third-party recordkeeper.
Pursuant to Sec. 7602 of the Code, the IRS has broad powers to summon information which is relevant to determining whether a taxpayer has complied with the federal tax laws. The IRS may obtain records held by the taxpayer under investigation, or, it may summon, question, and require production from "any person" who holds records "relating to the business of the person liable for [the] tax." 26 U.S.C. Sec. 7602. However, when the IRS seeks to examine a person's records which are in the possession of a third-party recordkeeper, 3 such as First Bank, it must comply with the special procedures outlined in Sec. 7609, including the notice provisions of Sec. 7609(a). According to Sec. 7609(a)(1):
(1) In general.--If--
(A) any summons described in subsection (c)[e.g., a Sec. 7602 summons] is served on any person who is a third-party recordkeeper, and
(B) the summons requires the production of any portion of records made or kept of the business transactions or affairs of any person (other than the person summoned) who is identified in the description of the records contained in the summons then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined. Such notice shall be accompanied by a copy of the summons which has been served and shall contain an explanation of the right under subsection (b)(2) to bring a proceeding to quash the summons.
26 U.S.C. Sec. 7609(a)(1) (1982) (emphasis added).
The Government argues that the plain meaning of Sec. 7609(a) requires that notice be given only to the person or persons "identified" in the summons, and since Stamatien was the only person identified therein, it was not required to give notice to any co-owner of Stamatien's account as a pre-condition to obtaining the records summoned. We agree. Paying "strict adherence" to Congress' chosen words, see Mohasco Corp. v. Silver, 447 U.S. 807, 826, 100 S.Ct. 2486, 2497, 65 L.Ed.2d 532 (1980), there is nothing in the statute's language that supports a contrary reading.
While the district court herein recognized that a literal interpretation of Sec. 7609(a) requires that notice be given only to persons identified in the summons, it interpreted the legislative history as compelling a different reading. Upon careful consideration of the variegated legislative history of Sec. 7609(a), we are convinced that Congress intended the literal dictates of the statute to be controlling. Indeed, our reading of the legislative history indicates that Congress did not explicitly address the issue of notice to a joint bank account owner, and that the legislative history provides little guidance on the issue.
Prior to 1976, the IRS had the authority to issue a summons to any person having custody of records relating to the business of a person liable for taxes without notifying the taxpayer or any other person to whose business transactions the summoned records related. S.Rep. No. 938, 94th Cong., 2d Sess. 367-68, reprinted in 1976 U.S.Code Cong. & Ad.News 3439, 3796-97; H.R.Rep. No. 658, 94th Cong., 2d Sess. 306-07, reprinted in 1976 U.S.Code Cong. & Ad.News 2897, 3202-03. The person whose tax liability was under investigation, but who was not the recordkeeper, had no opportunity to prevent compliance with the summons by asserting possible deficiencies in its issuance. See S.Rep. No. 938 at 367-68; H.R.Rep. No. 658 at 306-07. Because Congress believed that the procedures which existed at that time did not protect adequately the civil rights of taxpayers, including their right to privacy, see S.Rep. No. 938 at 368; H.R.Rep. No. 658 at 307, it enacted Sec. 7609 as part of the Tax Reform Act of 1976, Pub.L. No. 94-455, 90 Stat. 1520 (1976). The legislative history accompanying that section demonstrates that Congress was aware that while the third-party recordkeeper could challenge the summons, its interest "in protecting the privacy of the records in question is frequently far less intense than that of the person to whom the records pertain." S.Rep. No. 938 at 369; H.R.Rep. No. 658 at 307. U.S.Code Cong. & Admin.News 1976, pp. 3203, 3798. Therefore, Congress, through Sec....
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