United States v. Coopers & Lybrand

• Decision Date: 03 November 1975
• Docket Number: Civ. A. No. 75-F-420.
• Citation: 413 F. Supp. 942
• Parties: UNITED STATES of America and John G. Shea, Special Agent, Internal Revenue Service, Petitioners, v. COOPERS & LYBRAND et al., Respondents, and Johns-Manville Corporation, Respondent in Intervention.
• Court: U.S. District Court — District of Colorado

413 F. Supp. 942

UNITED STATES of America and John G. Shea, Special Agent, Internal Revenue Service, Petitioners, v. COOPERS & LYBRAND et al., Respondents and Johns-Manville Corporation, Respondent in Intervention.

Civ. A. No. 75-F-420.

United States District Court, D. Colorado.

November 3, 1975.

James L. Treece, U. S. Atty., Denver, Colo., S. Martin Teel, Jr., Tax Div., U. S. Dept. of Justice, Washington, D.C., for petitioners.

William E. Murane, Paul T. Ruttum, Holland & Hart, Denver, Colo., for respondents.

Peter H. Holme, Jr., James E. Bye, Charles J. Kall, Holme, Roberts & Owen, Denver, Colo., for respondent in intervention.

MEMORANDUM OPINION AND ORDER

FINESILVER, District Judge.

THIS ACTION is brought for judicial enforcement of two Internal Revenue Service IRS summonses issued pursuant to Section 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602, in furtherance of an IRS investigation into the correct income tax liabilities of Johns-Manville Corporation J-M for the years 1971 and 1972. J-M is a major national corporation having subsidiaries and affiliates throughout the United States and abroad; a principal office is south of Denver, Colorado. Both summonses are directed to Coopers & Lybrand C & L, a national firm of independent certified public accountants with offices in Denver, who examined and reported on the consolidated financial statements of J-M for the years 1971 and 1972.

The first summons, issued December 6, 1974, directed the respondents, C & L, and Edward E. Bolle, managing partner, to appear before IRS Special Agent John G. Shea to testify and to produce for inspection certain books, records and other papers generated by C & L in connection with the examination and audit of J-M financial statements. Specifically, the summons sought testimony relating to and production of:

All workpapers, correspondence, memoranda, and other documentation contained within or attendant to, such files as are maintained by Coopers & Lybrand relative to the certified audit of Johns-Manville Corporation for the calendar years 1971 and 1972, including, but not limited to the following:

Engagement Letter Representation Letter Management Letter History file Audit Program Audit Workpapers Correspondence file, internal and external Memoranda, internal and external

Bolle appeared in response to the summons, produced voluminous workpapers and documents, but declined to provide or testify concerning (1) the Audit Program; and (2) a Tax Pool Analysis file and related papers.

A second summons, issued January 23, 1975, directed the respondent, Ed Kerans, an employee of C & L, to appear and testify with regard to the items previously summoned. Kerans appeared, produced all remaining documents sought, except the Tax Pool Analysis file and related papers and the Audit Program. Likewise, Kerans declined to testify concerning these materials.

On April 21, 1975, the United States filed this petition, with the supporting affidavit of Special Agent Shea, for judicial enforcement of the summonses under the authority of Sections 7402(b)¹ and 7604(a)² of the Code. A show cause order was issued by this Court on April 22, 1975.

Subsequently, over objections of the IRS, J-M was granted leave to intervene. We are satisfied that J-M has raised a justifiable expectation of privacy as to the Tax Pool Analysis file and has therefore asserted a sufficiently protectable interest to warrant its intervention here. Katz v. United States, 389 U.S. 347, 88 S.Ct. 507, 19 L.Ed.2d 576 (1967); United States v. Continental Bank & Trust Co., 503 F.2d 45, 49 (10th Cir. 1974). Also, due to the very nature of the underlying documents, projections, and opinions of J-M tax personnel which contributed to the development of the Tax Pool Analysis, persuasive reasons are present for the intervention of J-M. See Donaldson v. United States, 400 U.S. 517, 531, 91 S.Ct. 534, 542, 27 L.Ed.2d 580, 589 (1971); Couch v. United States, 409 U.S. 322, 93 S.Ct. 611, 34 L.Ed.2d 548 (1973).

Post trial the Government brought to the Court's attention the opinion in the case of United States v. Arthur Andersen & Co., Miscellaneous No. 75-162 (E.D.Pa., Aug. 8, 1975) where the Court found that a corporate taxpayer did not have a significant protectable interest in a file relating to its auditor, Arthur Andersen & Co. We have reviewed the opinion in this case and have the pleadings and briefs filed therein in hand. That holding is not persuasive here. Although other grounds were argued, the principal contention of the corporate taxpayer in the Arthur Andersen case, supra, was that "the information requested in an invalid summons would constitute a violation of the corporation's accountant-client privilege." That contention is not involved in this litigation.

A full evidentiary hearing was held on the issues joined, and all legal points were extensively briefed. Upon the briefs submitted and the testimony and oral argument presented, we deny the petition for enforcement of the summonses.

I. ISSUES

In our view, the character of the materials and documents summoned is the pivotal element in our consideration. Accordingly, the relevant features of the Audit Program and the Tax Pool Analysis File are highlighted.

The Audit Program is a detailed master plan prepared by C & L for and prior to its examination of the consolidated financial statements of J-M. The program consists of (1) a listing of procedures to be followed by C & L personnel throughout the United States in examining the books and records of J-M; (2) records confirming that such procedures were followed; and (3) suggestions for future modifications of such procedures.

The Tax Pool Analysis File and related papers Tax Pool contain estimates of J-M's contingent liability for future income taxes based upon the opinions and projections of J-M tax personnel. Inherent in the Tax Pool Analysis is the clear recognition by J-M personnel that the tax treatment and projections of J-M may be interpreted differently by the IRS. These opinions of J-M personnel are communicated either orally or in written form by J-M tax personnel to C & L to assist C & L in their evaluation of J-M's overall consolidated tax provision. Consideration is given to such contingent liability for income taxes by J-M (a) in determining its consolidated tax provision for financial reporting purposes and (b) by C & L in its evaluation of the adequacy of such provision in the context of an examination of financial statements in accordance with generally accepted auditing standards.

C & L, with the acquiescence of its client, J-M, and under the instructions of its client, has refused to give the IRS the Tax Pool and certain pages from other files that are related to the Tax Pool. C & L, of its own volition, has refused to give the IRS the C & L Audit Program. In the presentation of testimony and oral argument J-M has been primarily concerned with the Tax Pool Analysis File and C & L with its Audit Program.

All parties have relied upon the standards for judicial enforcement of an IRS summons as set out in United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112, 119 (1964). There the Court held that before an IRS summons requesting the records, papers, and other data of a taxpayer will be enforced four criteria must be met: (1) the investigation must be conducted pursuant to a legitimate purpose; (2) the inquiry must be relevant to that purpose; (3) the information sought must not already be within the possession of the IRS; and (4) the required administrative steps must have been followed.

The purpose of the investigation undertaken here was to determine the correct income tax liabilities of Johns-Manville Corporation for the years 1971 through 1972.³ The legitimacy of the Government's investigation into the accuracy of J-M's tax liability has not been a point of contention in these proceedings. Under Section 7602, 26 U.S.C. § 7602:

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 the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary or his delegate is authorized —

(1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;

(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary or his delegate may deem proper, to appear before the Secretary or his delegate at a time and place named in the summons and 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; and

(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.

We regard the thrust of the instant investigation to be in harmony with the authorized statutory purposes outlined in Section 7602 and consequently, we find the first element of the Powell criteria to be satisfied. Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971).

Further, neither the respondents, nor the taxpayer-intervenor, have challenged the propriety of the administrative procedures utilized and we conclude that the Government has complied with the fourth Powell criteria as well. Beyond these two settled areas lies the dispute which gives rise to this litigation.

In its response to the show cause order the respondent, Coopers & Lybrand, contends that the Audit Program contains no factual data related to Johns-Manville's income tax liability and that any...