United States v. Exxon Co., USA

• Decision Date: 14 April 1978
• Docket Number: Civ. No. HM 78-157.
• Parties: UNITED STATES of America and Donald Bell, Special Agent, Internal Revenue Service v. EXXON COMPANY, U.S.A.
• Court: U.S. District Court — District of Maryland

450 F. Supp. 472

UNITED STATES of America and Donald Bell, Special Agent, Internal Revenue Service v. EXXON COMPANY, U.S.A.

Civ. No. HM 78-157.

United States District Court, D. Maryland.

April 14, 1978.

Russell T. Baker, U. S. Atty., Daniel M. Clements, Asst. U. S. Atty., Baltimore, Md., Edward J. Snyder and Thomas M. Lawler, Jr., Attys., Dept. of Justice, Washington, D. C., for petitioner.

David M. Kohen, Baltimore, Md., for respondent.

Allen L. Schwait and Kenneth A. Reich, Baltimore, Md., for movants.

HERBERT F. MURRAY, District Judge.

The United States and W. Donald Bell, a Special Agent of the Internal Revenue Service (sometimes referred to as IRS) have filed a Petition under Section 7402(b) and 7604(a) of the Internal Revenue Code of 1954 to enforce an Internal Revenue Service summons served on October 27, 1977 on the respondent, Exxon Company, U.S.A. (Exxon) which maintains offices in Maryland. The summons directed that the respondent appear before Special Agent Bell on November 10, 1977 to testify and produce certain documents. Respondent failed to comply with the summons and this petition was filed, resulting in the issuance to the respondent of an Order to Show Cause why it should not be compelled to obey the Internal Revenue Service summons.

The petition and supporting affidavit of Special Agent Bell state that he is conducting an investigation of the federal income tax liabilities of Maryland Lumber Company, Fabian Kolker and M. Budd Kolker for the taxable years 1972 through 1974, inclusive, and that the documents requested relate to this investigation. The taxpayers filed a Joint Motion to Intervene as Parties Respondent on March 8, 1978. The court, having heard oral argument on the motion on April 5, 1978 and having considered all papers filed, will now render a decision on this motion.

The motion to intervene is based on two asserted grounds: (1) that under Section 7609(b)(1) of the Internal Revenue Code of 1954, as amended, 26 U.S.C. § 7609(b)(1) movants, as persons entitled to notice of the summons at issue in this case, are entitled to intervene as a matter of right in this summons enforcement proceeding; and (2) that movants are entitled to intervene in this action pursuant to Rule 24(a) and (b) of the Federal Rules of Civil Procedure.

I.

The court first will consider movants' first ground for intervention under Section 7609(b)(1). Subsection (b)(1) of this section provides:

Notwithstanding any other law or rule of law, any person who is entitled to notice of a summons under subsection (a) shall have the right to intervene in any proceeding with respect to the enforcement of such summons under section 7604.

Thus, the right to intervene under this section exists only if movants are persons who were entitled to notice of the summons¹ issued to Exxon by the Internal Revenue Service.

At this point, the court notes that respondent Exxon in its answer to the Order to Show Cause contends that its failure to comply with the summons is warranted because Maryland Lumber Company, Fabian Kolker and M. Budd Kolker, persons entitled to notice of the summons under 26 U.S.C. § 7609(a)(1), did not receive such notice from the Internal Revenue Service. Petitioners, both in response to the answer to the Order to Show Cause and in response to the motion to intervene, strongly urge upon the court the proposition that, in this case, no notice to Maryland Lumber Company, Fabian Kolker or M. Budd Kolker was required under 26 U.S.C. § 7609 and that all other administrative requirements were met in the issuance of this summons. It appears to the court that in making a determination on the instant motion to intervene, the court will likewise be making a determination as to the issue raised by Exxon in its answer to the Order to Show Cause. To the extent that this issue overlaps with those in the motion to intervene, the court has heard oral argument of counsel for Exxon and has considered Exxon's written submissions on this issue.

The determination of whether, in fact, movants were entitled to notice of the summons to Exxon requires that the court examine the summons at issue in this case. The summons is a third-party summons under 26 U.S.C. § 7602(2) requiring Exxon to produce:

Copies of all agreements, contracts and correspondence between you and the Maryland Lumber Company and/or Fabian Kolker and/or M. Budd Kolker which pertains sic to the rental of 2501 W. Franklin Street and all checks and record of payments made by you during the period from January 1, 1972 thru Dec. 31, 1974, to Maryland Lumber Co. and/or Fabian Kolker and/or M. Budd Kolker under said agreements, contracts and correspondence.

It appears to the court from the arguments of counsel and the pleadings filed in this case that Special Agent Bell is attempting to have Exxon produce its lease with movants for the service station property noted in the summons, its checks paid to movants pursuant to the lease agreement, and certain other of its financial records pertaining to its lease of the Franklin Street property.

Section 7609 outlines the procedures to be followed by the IRS in the issuance of certain third-party summonses, which procedures are made applicable to those summonses issued after February 28, 1977, Section 1205(c) of Pub.L. 94-455, as amended by Pub.L. 94-528, § 2(b), Oct. 17, 1976, 90 Stat. 2483. If the summons is one issued under Section 7602(2), as is the case with the summons here at issue, notice is required to be given if the summons is served on a third-party recordkeeper and if the summons requires the production of records of business transactions of a person identified in the description of the records in the summons. Section 7609(a)(1). Maryland Lumber Company, Fabian Kolker and M. Budd Kolker were identified in the request for production in the summons and the summons does request records of certain business transactions in which the movants were involved. However, what is really at issue here is whether Exxon qualifies as a third-party recordkeeper so that this provision would be applicable to the instant summons. Movants assert that Exxon comes within the definition of a third-party recordkeeper under Section 7609(a)(3)(C) in that it extends credit through the use of credit cards. If Exxon is in fact a third-party recordkeeper under the above definition of the term, then the IRS would have been required to give written notice of the summons to movants on October 27, 1977, fourteen days prior to the date for compliance with the summons by Exxon. Further, if movants are entitled to notice under this section, they are entitled to intervene in the proceedings to enforce the summons under subsection (b) of this section and they also were entitled to stay compliance by Exxon with the summons by giving written notice to Exxon not to comply and by sending a copy of this notice to the IRS under conditions which would have been contained in the original notice of IRS to movants. In this case, the IRS did not provide notice to movants and notice of the issuance of the summons was received informally by means of a letter dated November 2, 1977 from Exxon to the movants. In turn, movants, by letter to Exxon dated November 4, 1977, sent notice not to comply, and sent a copy of this notice to Special Agent Bell. Exxon notified the IRS by letter dated November 7, 1977 of its position that it was a third-party recordkeeper under Section 7609, that it had been requested not to comply with the summons by the movants and that it would not, therefore, comply. As a result of this non-compliance by Exxon with the summons, the instant action was commenced.

The court must determine whether Exxon is a third-party recordkeeper within the meaning of Section 7609, as the notice issue turns on the outcome of that question. More broadly, the issue presented is whether, when a summons is issued for records which pertain to the taxpayer, the taxpayer has a statutory right to intervene in the enforcement proceedings against the third party on whom the summons was served when that third party is a third-party recordkeeper by reason of issuance of credit cards in an aspect of its business which is unrelated to the records sought in the summons.

The court has sought in vain to locate a case which has interpreted the Section 7609 notice requirements or the meaning to be given to the term "third-party recordkeeper." This lack of reported case law most probably is due to the fact that the notice requirement was not made to apply to IRS summonses until after February 28, 1977, a relatively short time ago. Counsel for the parties in this case have informed the court that they, likewise, have been unable to locate a reported case dealing with the question here presented and counsel for the IRS has further informed the court that, currently, two other cases involving this question are pending in other federal district courts but that those cases have not progressed to a point where a decision has been rendered on this question. Although there is no decided case interpreting the Tax Reform Act of 1976, P.L. 94-455, which amended Section 7609 particularly with regard to the procedural requirements for third-party summonses, the legislative history of the Act does cast some light on its meaning.

The House Report mentions as one of the general reasons for the change in the law the need to balance the IRS's investigative tools with the concern for the privacy of individuals:

The use of the administrative summons, including the third-party summons, is a necessary tool for the IRS in conducting many legitimate investigations concerning the proper determination of tax. The administration of the tax laws requires that the Service be entitled to obtain records, etc., without an advance showing of probable cause or other standards which usually are involved in the issuance of a search warrant. On the other hand, the use of this important investigative

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