U.S. v. Wyatt

Decision Date17 February 1981
Docket NumberNo. 78-2536,78-2536
Citation637 F.2d 293
Parties81-1 USTC P 9211 UNITED STATES of America, Plaintiffs-Appellants, v. Oscar S. WYATT, Jr. et al., Defendants-Appellees, Coastal States Gas Corp., Intervenor-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

Helen M. Eversberg, Asst. U. S. Atty., M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Acting Chief, Charles E. Bookhart, William A. Whitledge, Attys., U. S. Dept. of Justice, Tax Div., Washington, D. C., for plaintiffs-appellants.

C. Leland Hamel, J. Robert Dickerson, Houston, Tex., for Oscar Wyatt.

Fulbright & Jaworski, Charles W. Hall, Kenneth W. Gideon, Lee H. Henkel, III, Houston, Tex., for Coastal States Gas Corp.

Appeal from the United States District Court for the Southern District of Texas.

Before BROWN, RUBIN and FRANK M. JOHNSON, Jr., Circuit Judges.

JOHN R. BROWN, Circuit Judge:

The Internal Revenue Service (IRS) appeals from a May 12, 1978 dismissal of a petition to enforce a summons which normally sought information regarding the income tax liabilities of Coastal States Gas Corporation but which essentially was a part of a government-wide inquiry on corporate slush funds. The District Court dismissed the petition after a show cause hearing on the grounds that the 11 questions which the IRS sought to be answered were overbroad and, therefore, qualifications placed on the answers by Coastal officials were not unreasonable. The Court did not reach the question of relevancy or the defense of attorney client privilege asserted by in-house counsel for Coastal. 1

We find that the Court's ruling of overbreadth was erroneous as a matter of law. In keeping with the purpose of a show cause hearing, the Court should have ruled on whether or not the questions were relevant to Coastal States' tax liability as required by United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964).

We are satisfied that the IRS did make a proper showing of relevancy as required under Powell and that the summonses should be enforced. For this reason, we reverse and remand with instructions to the District Court to retain jurisdiction until the completion of further IRS administrative proceedings.

Auditing the Facts

The facts on appeal are undisputed and easily summarized. The Internal Revenue Service (IRS) routinely initiated income tax audits of Coastal States Gas Corporation for the fiscal years ending June 30, 1970 through 1972, and for the calendar years 1972 and 1973. 2 In connection with this income tax audit, a series of 11 standardized questions 3 were propounded to the five In any event, at the subsequent District Court's show cause hearing, the IRS's only witness, the case manager in charge of Coastal States' audit, testified to the relevancy of the 11 questions probing Coastal States' tax liability and to the unacceptability of Coastal States' "qualified" answers. After hearing the IRS's case, the Court held that the questions were overbroad and denied enforcement of the summons. The IRS now seeks resolution of two issues whether or not: (i) the Court erred in ruling that the 11 questions were overbroad, and (ii) the attorney-client privilege was properly asserted by Coastal States' in-house counsel.

                Coastal States officials who are the appellees.  Coastal States' first set of written responses to these 11 questions were rejected by the IRS as being so qualified as to leave the question virtually unanswered.  Coastal States then submitted a second set of modified answers which were likewise rejected on the basis of their evasive qualifications.  A third set of answers was in progress when Coastal States officials were served with IRS summonses which sought to compel more responsive answers to the 11 questions.  Coastal States officials appeared pursuant to the summonses.  With the exception of in-house counsel for Coastal States who declined to answer any questions on the grounds of the attorney-client privilege, each official read into the record the identical qualified responses when asked the 11 questions that had been previously  
                submitted in written form.  4 IRS agents questioned several of the officials on matters relating to the audit, but not a single probing question was specifically put to explore or test the answers given to the 11 questions.  For reasons not disclosed the tax examiners failed to avail themselves of this opportunity to press and exclude from the qualifications those categories of events which would be irrelevant or unrelated to a correct determination of Coastal States' tax liability
                

Actually, the basic question is relevancy. How the judge got diverted from this focal issue to a concern on overbroadness is not too clear. As is so often the case, the responsibility must rest on counsel. The Government's approach was an effort to review the appropriateness of the qualified answers. 5

The Respondent joined issue, and the Court apparently agreed, that the sole purpose of the hearing was to allow the Government to make a record on its contention that the answers to the eleven questions were not sufficient or adequate. 6

Neither party addressed relevancy or, for that matter, overbreadth.

Posting the Positions

The IRS asserts that it demonstrated relevancy at the show cause hearing the only issue properly before the Court at that time and that the Court erred in holding at that stage of the proceedings that the summons was overbroad and in allowing the claim of attorney-client privilege. The IRS contends that the questions by their very nature are directed to the types of transactions which may not be reflected at all on the corporate books or may be entered in those books in a disguised manner, 7 and thus, remain hidden from the standard IRS audit procedures. Such transactions are designated by the IRS as slush fund, kickbacks or other illegal payments that could conceivably affect corporate tax liability. In addition, the questions are designed to measure the personal knowledge of specific officers of the corporation, a factor in determining whether or not a civil fraud penalty may be assessed.

Coastal States contends, on the other hand, that it has complied with the summons and should not be expected to give unqualified responses to questions which are not only burdensome and vague but overbroad insofar as they seek information not reflected directly or indirectly on its return. With respect to the assertion of the attorney-client privilege, Coastal States claims in-house counsel should not be required to disclose the very data protected by the privilege simply to demonstrate the validity of his claim.

Summoning the Light
A. The Statutory Requirements:

We approach our review of the Court's refusal to enforce the IRS summons in light of the applicable IRS Code sections and judicially developed standards for summons enforcement proceedings. We also examine the Court's decision within the context of the parties' understanding as to the nature of the show cause hearing. The I.R.C. § 7602 authorizes the Secretary of Treasury for "... the purpose of ascertaining the correctness of any return ..., determining the liability of any person for any internal revenue tax ..., or collecting any such liability ... to summons ... any person having possession, custody or care of books of accounts containing entries relating to the business of the person liable for tax This section, which grants the IRS the authority to investigate "merely on suspicion that the law is being violated or even just because it wants assurance that it is not," U. S. v. Powell, 379 U.S. 48, 57, 85 S.Ct. 248, 254, 13 L.Ed.2d 112, 119, 9 has long been characterized as an inquisitorial, rather than an accusatorial power, somewhat analogous to a grand jury investigation. United States v. Schwartz, 469 F.2d 977 (5th Cir. 1972); United States v. Widelski, 452 F.2d 1 (6th Cir. 1971), cert. denied, 406 U.S. 918, 92 S.Ct. 1769, 32 L.Ed.2d 117 (1972); United States v. Giordano, 419 F.2d 564 (8th Cir. 1969), cert. denied, 397 U.S. 1037, 90 S.Ct. 1355, 25 L.Ed.2d 648 (1970); United States v. McKay, 372 F.2d 174 (5th Cir. 1967); Demasters v. Arend, 313 F.2d 79 (9th Cir. 1963); Falsone v. United States, 205 F.2d 734, 742 (5th Cir. 1953), cert. denied, 346 U.S. 846, 74 S.Ct. 103, 98 L.Ed. 375; Brownson v. United States, 32 F.2d 844 (8th Cir. 1929). Such inquisitorial powers giving an upper hand to the IRS, have been justified and liberally construed, "because all the facts are in the taxpayer's hands." Bolich v. Rubel, 67 F.2d 894, 895 (2nd Cir. 1933).

..., to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry...." I.R.C. § 7602. 8

B. The Summons Requirements The IRS Burden:

However, this broad statutory power is not limitless. 10 I.R.C. § 7605(b) On this appeal, we are primarily concerned with the relevancy portion of the Powell criteria whether the 11 questions are relevant to Coastal States' tax liability. We declare that the test of relevancy is whether the summons seeks information which "might throw light upon the correctness of the taxpayer's return." Foster v. United States, 265 F.2d 183 (2nd Cir. 1959), cert. denied, 360 U.S. 912, 79 S.Ct. 1297, 3 L.Ed.2d 1261 (1960). Accord, United States v. Davey, 543 F.2d 996 (2nd Cir. 1976); United States v. Shlom, 420 F.2d 263, cert. denied, 397 U.S. 1074, 90 S.Ct. 1521, 25 L.Ed.2d 809 (2nd Cir. 1969); U. S. v. Matras, 487 F.2d 1271 (8th Cir. 1973); United States v. Ryan, 455 F.2d 728 (9th Cir. 1971). This definition has been narrowed further to require an indication of a "realistic expectation In the present case, the IRS elected to establish the Powell prong of relevancy by the testimony of the audit case manager. The record clearly establishes that a prima facie showing of relevancy was made. Not only did the agent give examples of the types of transactions to which the questions were directed and...

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