United States v. New England Tel. and Tel. Co., Misc. No. 83-026 P.

• Decision Date: 10 November 1983
• Docket Number: Misc. No. 83-026 P.
• Citation: 575 F. Supp. 138
• Parties: UNITED STATES of America, and John L. Toti, Jr., Special Agent Internal Revenue Service v. NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY and Joan Carrigan.
• Court: U.S. District Court — District of Rhode Island

575 F. Supp. 138

UNITED STATES of America, and John L. Toti, Jr., Special Agent Internal Revenue Service v. NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY and Joan Carrigan.

Misc. No. 83-026 P.

United States District Court, D. Rhode Island.

November 10, 1983.

Lincoln C. Almond, U.S. Atty., R.I., Providence, R.I., Steven Toscher, Tax Div., U.S. Dept. of Justice, Washington, D.C., for petitioners.

OPINION

PETTINE, Senior District Judge.

The central issue here is whether or not the respondent, New England Telephone and Telegraph Company (New England Telephone) is a "third-party recordkeeper" within the meaning of Section 7609 of the Internal Revenue Code of 1954 (26 U.S.C.). For reasons which follow, I answer in the affirmative; the respondents need not comply with the summonses served upon them on October 18, 1982 because there was a failure to comply with the notice requirements set forth in 26 U.S.C. § 7609(a).

The summonses in question were issued in connection with the investigation of the federal income tax liabilities of Stephen Saccocia, his wife Donna Saccocia and the Northeastern Metals and Refining Co., Inc. (hereinafter referred to as "taxpayers"); and requested New England Telephone to produce for examination a variety of documents, all as listed in the margin hereof.¹

Notice of the issuance of the summonses was not given to the taxpayers pursuant to 26 U.S.C. § 7609 because the Internal Revenue Service (IRS) claims that New England Telephone is not a third-party record keeper under § 7609(a)(3) and the summonses do not seek "credit card" data.

New England Telephone, having refused to comply with the IRS summonses, is now before the Court to show cause why it should not be compelled to obey.

Section 7609(a)(1) provides as follows:

If:

(A) any summons described in Subsection (c) (which includes summonses issued pursuant to Section 7602) is served on any person who is a third-party recordkeeper, and

(B) the summons requires the production of any portion of records made or kept of the business transactions or affairs of any person (other than the person summoned) who is identified in the description of the records contained in the summons,

then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made, but no later than the 14th day before the day fixed in the summons as the day upon which such records are to be examined. Such notice shall be accompanied by a copy of the summons which has been served and shall contain directions for staying compliance with the summons under Subsection (b)(2).²

Section 7602 provides that for the purpose of ascertaining the correctness of any return or the liability of any person for any Federal tax, any authorized employee of the IRS may examine any books, papers, records or other data which may be relevant or material.

Section 7609(a)(3)(C) defines "third party" record keepers as—

(A) any mutual savings bank, cooperative bank, domestic building and loan association, or other savings institution chartered and supervised as a savings and loan or similar association under Federal or State law, any bank (as defined in Section 581), or any credit union (within the meaning of section 501(c)(14)(A));

(B) any consumer reporting agency (as defined under section 603(d) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f));

(C) any person extending credit through the use of credit cards or similar devices;

(D) any broker (as defined in section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)));

(E) any attorney;

(F) any accountant; and

(Code Sec. 7609(a)(3)(G), below, as added by P.L. 97-248, applies to summonses served after 1982)

(G) any barter exchange (as defined in section 6045(c)(3)).

(4) EXCEPTIONS.—Paragraph (1) shall not apply to any summons—

(A) served on the person with respect to whose liability the summons is issued, or any officer or employee of such person.

(B) to determine whether or not records of the business transactions or affairs of an identified person have been made or kept, or

(C) described in subsection (f). (Emphasis added)

The relevant section to this case is (3)(C).

Conclusions of Law

The first inquiry is whether or not the petitioners have made their prima facie case for enforcement of the summonses. In this controversy it is not relevant to New England Telephone's position to raise this point: I will assume the purpose for which the summonses were issued is legitimate; that the summoned data may be relevant to that purpose; that the data are not already in the government's possession; and that the administrative steps required for issuance and service of the summons have been followed. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-55, 13 L.Ed.2d 112 (1964); United States v. Freedom Church, 613 F.2d 316 (1st Cir. 1979); United States v. Kis, 658 F.2d 526 (7th Cir.1981); United States v. Chase Manhattan Bank, 598 F.2d 321, 323 (2d Cir.1979). As the government rightfully argues,

the showing may be made by the affidavit of the agent who issued the summons and who seeks enforcement of it. United States v. Garden State National Bank, 607 F.2d 61, 68 (3d Cir.1979); United States v. Chase Manhattan Bank, supra. The burden then shifts to the party opposing enforcement to demonstrate a legally sufficient defense by specific, sworn facts. United States v. Powell, supra; United States v. Freedom Church, supra; United States v. Kis, supra; United States v. Morgan Guaranty Trust Co., 572 F.2d 36, 42-43, n. 9 (2d Cir.1978); United States v. Garden State National Bank, supra.

The petitioners have established each element of their prima facie case by the affidavit of Special Agent Toti. The burden is now upon the respondents to demonstrate, by specific, sworn facts, that they have a legally recognized defense to enforcement of the summonses.

Petitioner's Memorandum of law, P. 4.

Is New England Telephone a Third Party Recordkeeper?

Petitioners in arguing that New England Telephone is not a third-party recordkeeper state that records of transactions between the "third-party recordkeeper" and the taxpayer, i.e., "two-party records" are not within the scope of Section 7609: they further state that though New England does issue "credit cards" and arguably can be termed a "person extending credit through the use of credit cards or similar devices" they do not believe this category of "third-party recordkeeper" could have been intended by Congress to include telephone companies; in support they point to legislative history.

The salient features of the legislative history argument is that the legislators purposefully limited the types of summonses to seven specific categories of third-party recordkeepers (S.Conf.Rep. No. 94-1236, 94th Cong., 2nd Sess. at 486); that these categories were intended to be persons engaged in making or keeping the records involving transaction of others (S.Rep. No. 94-938 at 369). They further assert that an expansive reading of the statute is impermissible; it applies only to persons who issue credit cards (or similar devices)

which may be used by the holder of the card or device to obtain credit from the issuer by utilizing the card to procure goods or services from others such as Visa, Mastercharge, or American Express. The statute was not intended to cover telephone companies merely because it issues credit cards any more than it was intended to apply to a Sears or any other national retailer who issues credit cards.

Petitioners Memorandum, p. 10.

United States v. New York Telephone Co., 644 F.2d 953 (2d Cir.1981) (New York Telephone I) and United States v. New York Telephone Co., 682 F.2d 313 (2d Cir. 1983) (New York Telephone II) held that since credit was extended by means of credit cards the telephone company was a "third-party recordkeeper" within the meaning of Section 7609(a)(3)(C) when the taxpayer involved held the credit card and the information sought was credit card data. New York Telephone I. In New York Telephone II it extended its holding and ruled that the statute applied to all customers whether or not credit card data is sought.

The petitioners feel the Second Circuit "strayed far from the statute", principally relying on Judge Newman's separate opinion in New York Telephone II, and on the following authorities: United States v. Exxon Company U.S.A., 450 F.Supp. 472 (D.Md.1978) (records of transactions between Exxon and lessor of property are records of Exxon's own transactions and not within the scope of Section 7609). United States v. Shivlock, 459 F.Supp. 1383 (D.Colo.1978), aff'd sub nom United States v. Income Realty & Mortgage, Inc., 612 F.2d 1224 (10th Cir.1979), cert. denied, 446 U.S. 952, 100 S.Ct. 2918, 64 L.Ed.2d 809 (1980) (taxpayer's employment records with alleged "broker" not within the scope of Section 7609); United States v. Connecticut Motor Club, 79-1 U.S.T.C., ¶ 9141 (D.Conn.1978) ("Section 7609(a)(3)(C) was intended to apply to credit card companies summoned to produce records of the credit card holder under investigation, not to credit card companies summoned to give up their own business records."); United States v. White Agency, 79-1 U.S.T.C. ¶ 9300 (W.D.Mich.1979), aff'g Magistrate's recommended decision at 79-1 U.S.T.C. ¶ 9265 (summoned person must not only fall facially within the named classes but must also be summoned in capacity as custodian or stakeholder of records summoned.)

The government also argues that a liberal construction of Section 7609 will give to persons subject to investigation a "potent" delaying device.

To begin with, it seems to me this IRS bureaucratic concern fails to appreciate the very purpose for which the statute was enacted. As counsel for New England Telephone points out, the House Committee on Ways and Means stated the reasons for changing existing law. The Committee declared:

The use of the administrative summons, including the third-party summons

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