United States v. Arthur Andersen & Co.

• Decision Date: 23 July 1979
• Docket Number: Civ. A. No. 78-3227-F.
• Citation: 474 F. Supp. 322
• Court: U.S. District Court — District of Massachusetts
• Parties: UNITED STATES of America and Francis W. Murphy, Special Agent, Internal Revenue Service, Petitioners, v. ARTHUR ANDERSEN & COMPANY, Respondent, and Good Hope Industries, Inc., Intervenor.

474 F. Supp. 322

UNITED STATES of America and Francis W. Murphy, Special Agent, Internal Revenue Service, Petitioners, v. ARTHUR ANDERSEN & COMPANY, Respondent and Good Hope Industries, Inc., Intervenor.

Civ. A. No. 78-3227-F.

United States District Court, Massachusetts.

July 23, 1979.

Mary M. Brennan, Asst. U. S. Atty., Boston, Mass., Steven Z. Kaplan, Tax Div., Dept. of Justice, Washington, D. C., for petitioners.

J. Read Murphy, Murtha, Cullina, Richter & Pinney, Hartford, Conn., for respondent.

Chester M. Howe, Gaston E. Snow and Ely B. Bartlett, Boston, Mass., for intervenor.

MEMORANDUM

FREEDMAN, District Judge.

FACTS

This action is brought pursuant to Sections 7402(b) and 7604(a) of the Internal Revenue Code of 1954, 26 U.S.C. §§ 7402(b), 7604(a), seeking judicial enforcement of an Internal Revenue summons. Petitioner Francis V. Murphy is a Special Agent of the Internal Revenue Service (IRS), who is empowered to issue summons under authority granted to IRS by Section 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602. See also Treasury Regulation § 301.7602-1, 26 C.F.R. § 301.7602-1; and IRS Delegation Order No. 4 (Rev. 4, August 22, 1977), 42 Fed.Reg. 42915 (1977). Respondent Arthur Andersen & Company (Arthur Andersen) is a nationally-known accounting firm with offices in both Boston, Massachusetts and Hartford, Connecticut.

Petitioner is investigating the tax liability of Good Hope Industries, Inc. (Good Hope), intervenor herein, and its subsidiaries, which was heretofore the subject of a two-year audit by Revenue agents covering the fiscal years ending July 31, 1973, July 31, 1974, July 31, 1975 and July 31, 1976. Respondent has provided various professional services to Good Hope for the years in question, including auditing and preparation of financial statements, and tax preparation for the years ending July 31, 1973, 1974, and 1975.

On November 14, 1977, Special Agent Murphy issued a summons under 26 U.S.C. § 7602¹ directing respondent Arthur Andersen to appear on November 30, 1977 to testify and to produce for examination certain statements, records, and papers allegedly relating to tax liabilities of Good Hope.² Respondent was personally served by in-hand delivery to the managing partner of its Hartford, Connecticut office, where the bulk of the records sought are located. On that same day, Special Agent Murphy mailed notice of service of summons upon a third party record-keeper to the taxpayer, Good Hope, as required by 26 U.S.C. § 7609(b). Neither Arthur Andersen nor Good Hope have questioned service. In a timely and proper manner, Good Hope directed Arthur Andersen not to comply with the summons, temporarily staying compliance under the terms of 26 U.S.C. § 7609(b)(2). At all relevant times, Good Hope has been debtor-in-possession under a Chapter XI Bankruptcy proceeding.

After intermittent attempts to negotiate mutually agreeable conditions for production of the requested material, an enforcement action was brought against Arthur Andersen in the District of Connecticut (Misc. Civil Action H-78-37) on November 3, 1978. Good Hope exercised its right to intervene. 26 U.S.C. § 7609(b)(1). After a hearing on December 11, 1978, and over the objection of the government, the District Court, Clarie, C. J., granted Respondent's motion for change of venue under 28 U.S.C. § 1404. The Court noted that

the corporation is a Massachusetts corporation and its principal place of business is in Massachusetts, its main conduct of that business is Massachusetts, it is in bankruptcy in Massachusetts, the original subpoena was issued to Springfield, Massachusetts; but notwithstanding the records, the records are temporarily, presently in Hartford, they have been ordered to be produced in Boston by the Bankruptcy Court; and the Court is of the opinion that that order is subject to review pursuant to this Court's order by the District Court itself at Boston.

The case came before me for hearing on March 22, 1979. After hearing testimony and argument, I allowed the parties extra time to file memoranda and affidavits, whereupon I took the case under advisement.

QUESTIONS PRESENTED

As an initial matter, Arthur Andersen concedes its obligation to produce documents in many of the requested categories, under certain circumstances. Petitioner's Brief at 3.³ As a matter of law this is correct, for extraction of possibly incriminating information from third party record-keepers "is a necessary part of the process of law enforcement and tax investigation." Couch v. United States, 409 U.S. 322, 329, 93 S.Ct. 611, 616, 34 L.Ed.2d 548 (1972).

Good Hope and Arthur Andersen focus their objection to compliance on two grounds:

1) That existence of a bankruptcy proceeding involving the taxpayer makes the Bankruptcy Court the appropriate forum for determination of any tax liability;

2) That IRS is not entitled to production of all the particular documents sought on two theories:

a) an accountant/client privilege, akin to the lawyer/client privilege

b) relevancy, in that the challenged documents were not used in preparation of tax returns.

BANKRUPTCY

Intervenor Good Hope has urged that, after commencement of bankruptcy proceedings, jurisdiction to determine tax liability passes to the Bankruptcy Court by virtue of its authority to:

Hear and determine any question arising as to the amount or legality of any unpaid tax, whether or not previously assessed, which has not prior to bankruptcy been contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction . . .

11 U.S.C. § 11(a)(2A).

I am not called upon to address this contention today, for the District Court's jurisdiction is based on quite different grounds. The summons in question was issued under a grant of authority:

for the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax, . . . or collecting any such liability . . .

26 U.S.C. § 7602.

This investigative power has been repeatedly characterized as an inquisitorial power, analogous to that of a grand jury. See United States v. Matras, 487 F.2d 1271, 1274 (8th Cir. 1973) and cases cited therein. As such, IRS does not depend on a case or controversy for power to get evidence, "but can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." United States v. Powell, 379 U.S. 48, 57, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964); see also United States v. Bisceglia, 420 U.S. 141, 146, 95 S.Ct. 915, 43 L.Ed.2d 88 (1974).

It therefore seems clear that exercise of jurisdiction to enforce IRS summonses, under 26 U.S.C. §§ 7402(b) and 7604(a) does not necessarily intrude upon the jurisdiction of the Bankruptcy Court. The scope of allowable purposes for issuance of summonses encompasses a number of situations in which no assessment will result, as where IRS determines from the summoned materials that tax liability was correctly reported. Likewise, the result may be purely prospective, as where IRS seeks to determine the correctness of depreciation taken in prior years as it bears on the amount available currently. I conclude that the fact that material obtained by exercise of summons power may at some point be used in a proceeding properly before the Bankruptcy Court does not deprive this Court of jurisdiction over the issuance of such summonses.⁴

Intervenor next argues that Rule 11-44 of the Bankruptcy Rules of Procedure automatically stays all action against a debtor who files a Chapter XI petition.⁵ Courts have construed the purpose behind Rule 11-44, and the underlying 11 U.S.C. § 714, as being "to prevent possible frustration of the rehabilitation effort through prejudicial dismembership or the adverse disposition of assets." Bohack Corp. v. Borden, Inc., 450 F.Supp. 367, 374 (E.D.N.Y. 1978); see also 14, Collier on Bankruptcy, ¶ 11-44.02. To compel production of documents will neither interfere with, nor diminish the debtors' property during the pendency of the Chapter XI proceedings, Teledyne Industries, Inc. v. Eon Corp., 373 F.Supp. 191, 203 (S.D.N.Y.1974), where, as here, the documents are not in the hands of the debtor-in-possession, and will be returned to their custodian.

I thus find that neither the pendency of bankruptcy action, nor the provisions of Rule 11-44, operate to deprive this Court of jurisdiction to enforce an IRS summons.

ACCESS TO PARTICULAR DOCUMENTS

Good Hope and Arthur Andersen next raise objections to production of the particular documents sought. The argument is in two parts: a claim of privilege as to three classes of documents, and a claim based on United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964) as to all documents.

Accountant/Client Privilege

Good Hope takes this opportunity to urge that the Court recognize a privilege between accountant and client, akin to the privilege recognized between attorney and client. See Intervenor's Brief at 14. In support of this proposition, both Good Hope and Arthur Andersen have submitted numerous affidavits addressing the need for confidentiality between accountant and client in order that frank disclosure might be fostered, the similarity of function between accountant and lawyer in the tax field, and the similar manner in which both professions are regarded by the public. They argue that such privilege is particularly appropriate as to Audit Work Programs, Tax Accrual Workpapers and Tax Planning and Consultation Papers.⁶ While I appreciate that valid policy questions are raised by the issues presented in this case, I am not inclined to recognize an accountant/client privilege on these facts. The expansive language of Section 7602, authorizing the summoning of "any person" for the taking of testimony and examination of "books, papers, records, or other data," invites liberal construction....