U.S. v. Gottlieb, 82-5555

• Decision Date: 22 August 1983
• Docket Number: No. 82-5555,82-5555
• Parties: 83-2 USTC P 9547 UNITED STATES of America and Edward H. Jackson, Revenue Agent, Internal Revenue Service, Petitioners-Appellants, v. Herbert GOTTLIEB and the Florida Trade Exchange, Inc., Respondents-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1363

712 F.2d 1363

83-2 USTC P 9547

UNITED STATES of America and Edward H. Jackson, Revenue

Agent, Internal Revenue Service, Petitioners-Appellants, v. Herbert GOTTLIEB and the Florida Trade Exchange, Inc.,

Respondents-Appellees.

No. 82-5555.

United States Court of Appeals, Eleventh Circuit.

Aug. 22, 1983.

Glenn L. Archer, Michael L. Paup, Charles E. Brookhart, William A. Whitledge, Tax Div., Dept. of Justice, Washington, D.C., for petitioners-appellants.

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

Appeal from the United States District Court for the Middle District of Florida.

Before JOHNSON and ANDERSON, Circuit Judges, and COLEMAN ^*, Senior Circuit Judge.

R. LANIER ANDERSON, III, Circuit Judge:

This is another in a series of cases involving summonses issued by the Internal Revenue Service ("IRS") to obtain the names and addresses of the members of various barter exchanges during the course of audits of the exchanges. The district court refused to enforce the summons on the ground that the IRS had not complied with the special provisions for John Doe summonses set forth in 26 U.S.C.A. § 7609(f) (West Supp.1983). ¹ We reverse.

The facts are simple and undisputed. Appellee Gottlieb is the founder and former president of the Florida Trade Exchange, Inc. ("FTE"), a barter exchange located in Jacksonville, Florida. ² FTE, like other barter exchanges, acts as a clearinghouse for the exchange of goods and services. A member of the exchange who wants to obtain particular goods or services may call the exchange for referral to another member who provides those goods or services. When the "purchasing" member obtains the goods or services from the "selling" member, he or she presents an FTE membership card and signs an authorization form which is similar to a credit card purchase form. A copy of the authorization form is sent to FTE, which credits the selling member's account with the value of the goods or services provided and charges the same amount to the purchasing member's account. The selling member then can use his or her credits to obtain goods or services from other exchange members, while the purchasing member is obligated to provide goods or services to other members in an amount equal to the charges against his or her account. FTE keeps a record of all transactions and sends each exchange member a monthly statement. FTE derives its own income from the sale of memberships, annual dues, and a commission based on each member's trading volume.

Recently, the IRS concluded that the noncash nature of barter exchange transactions warranted investigation to determine whether income from such transactions was being reported correctly. Consequently, the IRS initiated a Barter Exchange Project in 1979 which was "to identify and select returns in need of examination that are associated with organized barter exchanges including returns of barter exchanges, owners and operators, and members of such exchanges." Internal Revenue Service, U.S. Dep't of Treasury, Manual Supplement No. 45G-324. Barter Exchange Project Unreported Income Program (1980).

Pursuant to the Barter Exchange Project, the IRS initiated an audit of FTE's 1978 and 1979 tax returns. During the course of this audit, Revenue Agent Edward H. Jackson attempted to obtain the names and addresses of FTE's members. When FTE declined to give Jackson this information, the IRS issued and served a summons requiring Gottlieb, as president of FTE, to produce certain records, including the names and transaction records of FTE's members. Gottlieb and FTE refused to comply with the summons, and the IRS, in accord with the provisions of 26 U.S.C.A. § 7604 (West 1967 & Supp.1983), brought this action to enforce the summons in the U.S. District Court for the Middle District of Florida.

At a hearing conducted by the district court, Agent Jackson testified that the purpose of his investigation was to determine the correct tax liabilities of FTE for the taxable years in question. Jackson also testified that the names of FTE's members were essential to his investigation because he needed to compare individual transaction records with FTE's totals for each year and because he might have to verify some of FTE's records by contacting individual members of the exchange. In addition, Jackson stated that he had been instructed to give the names and addresses of exchange members who had a substantial number of bartering transactions to Revenue Agent Kenneth Black, the coordinator of the Barter Exchange Project in the Jacksonville area. Subsequently, Black testified that after the IRS obtained the list of FTE's members, as a result of Jackson's audit of FTE, the IRS would audit some of FTE's members.

The district court ruled against the IRS and refused to enforce the summons. The district court found that one of the purposes of the summons was to conduct a legitimate audit of the corporate taxpayer, FTE, ³ but the court also found that the institutional purpose of the IRS was "to obtain the names and addresses of the members of FTE so that [it] could select a sample of them for audit." The district court concluded that in light of the dual purpose for the summons the IRS could not merely proceed under the normal summons provisions of § 7602, ⁴ but rather that the IRS also had to comply with the John Doe summons procedures contained in 26 U.S.C.A. § 7609(f) (West Supp.1983) in order to protect the privacy interests of unknown taxpayers whose records were being summoned from a third-party recordkeeper. Accordingly, the court held that the summons could not be enforced unless the IRS served written notice abandoning its present intention to use records obtained while auditing FTE in contemporaneous audits of unidentified members of FTE. ⁵ The court stated that if the IRS did not abandon its present intention to use the information obtained from the audit of FTE in contemporaneous audits of unidentified FTE members, then the court would require the IRS to comply with § 7609(f). The IRS appeals from the district court's order.

The IRS has broad powers to obtain information which is relevant to determining whether a taxpayer has complied with the internal revenue laws. Under 26 U.S.C.A. § 7602 (West Supp.1983), the IRS is authorized, inter alia, to summon the taxpayer or "any other person" to appear at a time and place designated by the IRS and to produce any "books, papers, records, or other data" which are relevant to determining the correct tax liability of any person.

When the IRS seeks to examine the records of a person which are in the hands of certain third parties, known as third-party recordkeepers, ⁶ the IRS must comply with the special procedures outlined in § 7609. ⁷ If the summons identifies the person whose tax liability is being investigated, then § 7609 requires the IRS to give notice to that person and sets forth a procedure by which the person may attempt to quash the summons. If the summons does not identify the person or persons whose tax liability is being investigated, then § 7609(f) provides that the summons may be served only after a court proceeding in which the IRS establishes that the summons relates to the investigation of a particular person or ascertainable group of persons, that there is a reasonable basis for believing that such person or persons may have failed to comply with an internal revenue law and that the information sought by the IRS is not readily available from other sources. ⁸

The question presented in this case is whether the IRS must comply with the John Doe summons procedures of § 7609(f) when it issues a summons which has the dual institutional purpose ⁹ of investigating the tax liabilities of a third-party recordkeeper and investigating the tax liabilities of unidentified taxpayers whose records are in the third-party recordkeeper's possession. ¹⁰ Although this question is one of first impression in this circuit, two other U.S. Courts of Appeal recently have considered this precise issue in cases involving barter exchanges.

In United States v. Barter Systems, Inc., 694 F.2d 163 (8th Cir.1982), the Eighth Circuit held that the IRS was not required to follow the § 7609(f) procedures when the IRS issued a summons to determine the correct liabilities of a barter exchange and also to investigate the tax liabilities of unidentified members of the exchange. The court noted that § 7609(f) applies only when the summons "does not identify the person with respect to whose liability the summons is issued," 26 U.S.C.A. § 7609(f), and that the summons in question did identify the person whose tax liability was in question, namely, the barter exchange. Further, the court found nothing in the statute or the legislative history that would "limit any fallout or ancillary benefit the IRS might receive in conducting an investigation of a named taxpayer that also discloses information relating to third parties whom the IRS might wish to audit." 694 F.2d at 168. Thus, in light of the "deferential standard of review to be applied in construing the IRS' summons authority," id. at 167 (citing United States v. Euge, 444 U.S. 707, 100 S.Ct. 874, 63 L.Ed.2d 141 (1980)), the Eighth Circuit held that the § 7609 procedures "do not apply to the issuance of a summons which has the purpose of determining a known taxpayer's liabilities and produces the fallout or further effect of discovering information that would aid in identifying unnamed taxpayers and investigating their liabilities." Id. at 169.

The Sixth Circuit subsequently reached the opposite result in United States v. Thompson, 701 F.2d 1175 (6th Cir.1983). The Sixth Circuit assumed that the IRS was conducting a legitimate audit of the barter exchange's own tax liability, but concluded that the IRS had to follow the John Doe summons procedures "when the undisputed facts show that at the time of issuance it is also an intent of the IRS to discover...