United States v. Matras, 73-1108.

• Decision Date: 29 November 1973
• Docket Number: No. 73-1108.,73-1108.
• Parties: UNITED STATES of America et al., Appellants, v. Edmond MATRAS, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

487 F.2d 1271 (1973)

UNITED STATES of America et al., Appellants, v. Edmond MATRAS, Appellee.

No. 73-1108.

United States Court of Appeals, Eighth Circuit.

Submitted September 14, 1973.

Decided November 29, 1973.

Jane M. Edmisten, Atty., Tax Division, Dept. of Justice, Washington, D. C., for appellants.

Lyle E. Strom, Omaha, Neb., for appellee.

Before MATTHES, Senior Circuit Judge, and LAY and ROSS, Circuit Judges.

MATTHES, Senior Circuit Judge.

This is an appeal from an order of the district court denying a petition by the United States to secure enforcement of a summons issued by the Internal Revenue Service (IRS) under § 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602. The summons, dated June 9, 1972, directed Edmond Matras, manager of the tax division of Northern Natural Gas Company, to appear before a designated IRS agent at a fixed time and place and produce all 1969 and 1970 company-wide budgets of Northern and its subsidiary and affiliated companies as an aid to the IRS routine biennial investigation of the company's consolidated income tax returns. Matras duly appeared before the agent but by letter "respectfully declined" to produce the budgets on the ground "that the information requested * * * is neither relevant nor material to a determination of the tax liability of the companies or the correctness of any of their tax returns * * *."

Thereafter the IRS petitioned the United States District Court for the District of Nebraska under §§ 7402(b) and 7604(a) of the Internal Revenue Code of 1954, 26 U.S.C. §§ 7402(b), 7604(a), for enforcement of the summons.¹

Following a full hearing and submission of briefs, the district judge, in a memorandum opinion, found:

The budgets are only a projection of what the actual transactions would be. Once the transactions have occurred, it is the actual records of those transactions, not proposed budgets, that are relevant to a determination of the tax liability that flowed from the transactions. Moreover, the evidence indicates that the I.R.S. has been or will on request be furnished with the Work Order Budget Comparison ledger sheets, which compare the information in the budget with the actual transactions. The I.R.S. has failed to sustain its burden of showing relevancy and that it does not already have possession of the information as required by United States v. Powell 379 U.S. 48, 57-58 85 S.Ct. 248, 13 L.Ed.2d 112 (1964).

The government contends that 1) the district court applied a more restrictive standard of relevancy to the budgets than required by § 7602 and that 2) in any event the government sustained its burden of showing that the budgets might be relevant and that the information contained in the budgets was not already available to the IRS.

Section 7602 reads in pertinent part:

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, 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 * * *.

The government in disputing the district court's finding that the budgets were not in fact relevant argues that the court erroneously applied an absolute standard of relevancy as opposed to the statutory "may be relevant" standard. The argument is unrealistic. The district court, in its memorandum opinion, plainly sets forth the government's burden of proof for enforcement of a summons issued under § 7602, as defined by the United States Supreme Court in United States v. Powell, supra. That burden of proof included a showing that "the inquiry may be relevant to the purpose of the investigation." Confronted with materials that were, in his opinion, plainly irrelevant, the district judge implicitly found that the budgets lacked the potential relevancy required by the statute.

Whether the district court erred in so finding poses a harder question.

Alfred W. Peterson, Jr., Supervisory Internal Revenue Agent Case Manager, explained his reasons for wanting the budgets as follows:

My feeling * * * on the budget is that * * * it will give us a road map as to where we want to go. It\'s where all the department plans are brought into one department. That is, you are talking about 87 or 90 different plant operations bringing their requests into one department, namely the Budget Department, where it would be made available for us and the taxpayer to determine what actually has gone on or what at least was planned for the year. Most of which is planned, I am sure, is accomplished.

Northern, on the other hand, asserts, and the district court agreed, that it is the records of the actual transactions, not proposed budgets, that are relevant to a determination of tax liability. All Northern records of actual transactions have been made available to the IRS. In fact, all information requested by the IRS has been furnished by Northern except for the subject budgets.²

The power of the IRS to investigate the records and affairs of taxpayers has long been characterized as an inquisitorial power, analogous to that of a grand jury, and one which should be liberally construed. 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); Brownson v. United States, 32 F.2d 844 (8th Cir. 1929).

On the other hand, § 7605(b) of the Internal Revenue Code of 1954, 26 U.S.C. § 7605(b), prohibits "unnecessary examination or investigations * * *."

The United States Supreme Court has interpreted § 7605(b) and its companion statutes as requiring the IRS, in order to obtain judicial enforcement of an administrative summons, to show "that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's...