U.S. v. Norwest Corp.
| Decision Date | 26 June 1997 |
| Docket Number | 96-2793,Nos. 96-2792,s. 96-2792 |
| Citation | 116 F.3d 1227 |
| Parties | -5094, 97-2 USTC P 50,510, 1997 Copr.L.Dec. P 27,670 UNITED STATES of America, Appellee, v. NORWEST CORPORATION, Appellant; Arthur Andersen & Co., Intervenor-Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
James A. Bruton, III, Washington, DC, argued (James P. Holden, Susan H. Serling and J. William Koegel, Jr., on the brief), for Arthur Andersen & Co.
Walter A. Pickhardt, Minneapolis, MN, argued (Nathan P. Zietlow and Mark Alan Hagar, on the brief), for Norwest Corp.
John A. Dudeck, Jr., Dept. of Justice, Washington, DC, argued (Loretta C. Argrett and Charles E. Brookhart, on the brief), for U.S.
Before WOLLMAN and BEAM, Circuit Judges, and LAUGHREY, 1 District Judge.
In the course of an audit of Norwest Corporation, the Internal Revenue Service sought to enforce a designated summons directing Norwest to produce tax preparation software licensed to it by Arthur Andersen & Co., as well as related documents and data. Norwest and Andersen objected to the summons, claiming that the material was not within the scope of the IRS's authority, and that in any event it was not relevant to the audit. After a hearing, the magistrate judge 2 issued an order enforcing the summons. The district court, 3 adopting most of the findings and conclusions of the magistrate judge, affirmed the order. Norwest and Andersen appeal, and we affirm.
Norwest is a large bank holding corporation that has more than 300 subsidiaries in the financial services industry. Norwest files consolidated corporate federal income tax returns for all of its subsidiaries. Since at least 1983, Norwest has used tax preparation software in preparing its tax returns. In 1990, Norwest entered into a three-year licensing agreement with Andersen for use of Andersen's copyrighted "Tax Director" tax preparation software. Norwest first used Tax Director in preparing its 1990 returns, and used the program again for its 1991 returns.
Tax Director is a group of related programs developed by Andersen that a corporation can use to calculate federal and state tax liability and prepare and print tax returns. Andersen has licensed Tax Director to approximately 700 corporate customers, including Norwest. The agreement between Norwest and Andersen states that Tax Director contains trade secrets and prohibits Norwest from transferring Tax Director to others or allowing others to use it.
According to Norwest and Andersen, Tax Director operates in the following way. First, the company inputs year-end account balances from its books to be used in calculating the tax, either by manually entering the applicable figures or exporting this data from a previously compiled database. Next, the entered figures are assigned certain codes that instruct the program how they are to be classified for tax purposes. "Tax destination codes" (TDC codes) assign figures to particular lines on the return; for example, figures to be identified as gross rents are assigned the number "052.0." Similarly, "ALT codes" are used to identify figures with their proper destination on schedules to be attached to the return. All TDC and ALT codes to be assigned to particular entries are determined before the year-end balances are entered into Tax Director. In other words, how certain figures are classified for tax purposes is determined by the program's operator; Tax Director itself does not perform such classifications.
The operator must also enter any adjustments needed to reconcile the difference between the company's book income and its tax income. These adjustments between a corporation's book income and the taxable income it reports on the return are reflected by the IRS's Schedule M. These Schedule M adjustments are determined before they are entered into Tax Director; the program itself does not determine Schedule M adjustments. Finally, the operator enters certain background information required by the return, such as the name and address of the taxpayer.
After the company's financial data is entered and the applicable codes and adjustments assigned, Tax Director generates the return and appropriate schedules. This process apparently involves simple arithmetical processes: Tax Director identifies all the information with a particular code, adds it up, and enters it on the appropriate line of the return. The program does, however, perform certain automatic adjustments to the information it receives. For example, Tax Director caps the figure calculated for reporting on the return as charitable deductions at ten percent of taxable income, as the Tax Code requires. The program also automatically reports taxable income as zero on the return if the data it receives would indicate a negative taxable income. Tax Director stores all of the entered data, including the account balances, codes, and adjustments, into data files which are segregated from the actual program. Tax Director thus does not itself retain any direct information about the company's finances or tax liability.
Tax Director can also generate and print certain "audit trail reports" based on the financial data it is given. These include the "Detail Spreadsheet Report" (R2 report) and the "Adjusting Entry Edit Report" (E3 report). The R2 report organizes and tabulates the year-end summary information for book balances and indicates for each account the TDC and ALT codes assigned, the Schedule M adjustments made, and the resulting adjusted tax balance. The E3 report likewise indicates the classifications and Schedule M adjustments assigned to each account. According to Norwest and Andersen, when Tax Director creates audit trail reports, it is not designed to save the data so that it may be viewed or manipulated by other commercially available software such as a spreadsheet program, nor is Tax Director itself designed to further view or edit this data. The program does, however, save this information as "print files." According to Norwest and Andersen, skilled computer technicians can convert these print files to spreadsheet-accessible files, and Norwest did in fact create such files for use in preparing its state income tax returns.
In April of 1992, the IRS began an audit of Norwest for the 1990 tax year. This audit later was expanded to included Norwest's 1991 tax liability. In the course of the audit, the IRS issued to Norwest numerous "Information Document Requests" (IDRs) requesting production of certain documents and records deemed relevant to the audit. On September 11, 1992, the agency issued IDR 26, requesting "a copy of the 'mapping' that takes place to translate the account totals on the [general ledger] report into line items on the tax return [including] Schedule M adjustments." Appellants' App. at 410. IDR 26 also indicated that Id. In response to IDR 26, Norwest provided the IRS with a copy of an R2 report from the 1991 return.
In October of 1993, John Kuchera, the IRS computer audit specialist assigned to the Norwest project, orally requested that Norwest provide a copy of Tax Director. Norwest refused to produce Tax Director, but did provide the agency with two sets of computer diskettes. One set contained the unadjusted book balances entered into the program in completing the returns. The agency was able to easily access these files. The second set of diskettes were the adjusted tax balance files created by a Norwest employee from Tax Director's audit trail print files. These files presented the agency with some difficulty. Kuchera was eventually able to access the files, but testified that he was unable to verify whether they were accurate or complete.
The agency made no further requests for Tax Director until May 19, 1994, when it issued the designated summons at issue in this appeal. The summons directed Norwest to produce, among other things, the complete Tax Director program and all manuals and similar documents relating to the program. Norwest again refused to produce the software and its documentation. Instead, Norwest and Andersen met with agency auditors for several hours to demonstrate the program and its operation. This demonstration used generic data, and did not involve any Norwest-specific information.
Paragraph 2 of the summons requested "[a]ll data files, in machine sensible form, used by Tax Director to prepare the tax returns, or supporting computations, or upon which the Tax Director programs performed their functions." Appellants' App. at 16. In response to Paragraph 2, Norwest produced the original data files created by the program in creating the 1990 and 1991 returns. When the agency was initially unable to view these files, an Andersen employee explained that Tax Director itself had no capacity to manage the files, but instructed the agency computer specialists on how to convert these files into a readable format. When the agency was still unsatisfied with its access to the Paragraph 2 files, Andersen offered to construct a "bridge program" that would allow the agency to download and view the files. Andersen created such a program, but the agency refused to accept the program when Andersen and Norwest offered the bridge program on the condition that the agency accept it in lieu of Tax Director and that the agency agree not to pursue the summons.
With the statute of limitations for the 1990 audit on the verge of expiration, the agency initiated this enforcement action, which suspended the statute. Andersen intervened in the proceedings. Following a hearing, the magistrate judge concluded that the summons should be enforced, with certain limitations intended to protect...
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