United States v. Powell (379 U.S. 48)/Opinion of the Court

In March 1963, the Internal Revenue Service, pursuant to powers afforded the Commissioner by § 7602(2) of the Internal Revenue Code of 1954, summoned respondent Powell to appear before Special Agent Tiberino to give testimony and produce records relating to the 1958 and 1959 returns of the William Penn Laundry (the taxpayer), of which Powell was president. Powell appeared before the agent but refused to produce the records. Because the taxpayer's returns had been once previously examined, and because the three-year statute of limitations barred assessment of additional deficiencies for those years except in cases of fraud (the asserted basis for this summons), Powell contended that before he could be forced to produce the records the Service had to indicate some grounds for its belief that a fraud had been committed. The agent declined to give any such indication and the meeting terminated.

Thereafter the Service petitioned the District Court for the Eastern District of Pennsylvania for enforcement of the administrative summons. With this petition the agent filed an affidavit stating that he had been investigating the taxpayer's returns for 1958 and 1959; that based on this investigation the Regional Commissioner of the Service had determined an additional examination of the taxpayer's records for those years to be necessary and had sent Powell a letter to that effect; and that the agent had reason to suspect that the taxpayer had fraudulently falsified its 1958 and 1959 returns by overstating expenses. At the court hearing Powell again stated his objections to producing the records and asked the Service to show some basis for its suspicion of fraud. The Service chose to stand on the petition and the agent's affidavit, and, after argument, the District Court ruled that the agent be given one hour in which to re-examine the records.

The Court of Appeals reversed, 325 F.2d 914. It reasoned that since the returns in question could only be reopened for fraud, re-examination of the taxpayer's records must be barred by the prohibition of § 7605(b) of the Code against 'unnecessary examination' unless the Service possessed information 'which might cause a reasonable man to suspect that there has been fraud in the return for the otherwise closed year'; and whether this standard has been met is to be decided 'on the basis of the showing made in the normal course of an adversary proceeding * *  * .' The court concluded that the affidavit in itself was not sufficient to satisfy its test of probable cause. Consequently, enforcement of the summons was withheld.

Because of the differing views in the circuits on the standards the Internal Revenue Service must meet to obtain judicial enforcement of its orders, we granted certiorari, 377 U.S. 929, 84 S.Ct. 1334, 12 L.Ed.2d 294.

We reverse, and hold that the Government need make no showing of probable cause to suspect fraud unless the taxpayer raises a substantial question that judicial enforcement of the administrative summons would be an abusive use of the court's process, predicated on more than the fact of re-examination and the running of the statute of limitations on ordinary tax liability.

This enforcement proceeding was brought by the Government pursuant to s 7604(b) of the Code. In Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459, decided last Term subsequent to the rendering of the decision below, this Court stated that § 7604(b) 'was intended only to cover persons who were summoned and wholly made default or contumaciously refused to comply.' 375 U.S., at 448, 84 S.Ct., at 513. There was no contumacious refusal in this case. Thus the Government's conceded error in bringing its enforcement proceeding under § 7604(b) instead of § 7402(b) or § 7604(a), each of which grants courts the general power to enforce the Commissioner's summonses 'by appropriate process,' raises a threshold question whether we must dismiss this case and force the Government to recommence enforcement proceedings under the appropriate sections. Since the Government did not apply for the prehearing sanctions of attachment and arrest peculiar to § 7604(b), and since these constitute the major substantive differences between the sections, we think it would be holding too strictly to the forms of pleading to require the suit to be recommenced, and therefore treat the enforcement proceeding as having been brought under §§ 7402(b) and 7604(a).

Respondent primarily relies on § 7605(b) to show that the Government must establish probable cause for suspecting fraud, and that the existence of probable cause is subject to challenge by the taxpayer at the hearing. That section provides:

'No taxpayer shall be subjected to unnecessary examination or     investigations, and only one inspection of a taxpayer's books of account shall be made for each      taxable year unless the taxpayer requests otherwise or unless      the Secretary or his delegate, after investigation, notifies      the taxpayer in writing that an additional inspection is      necessary.'

We do not equate necessity as contemplated by this provision with probable cause or any like notion. If a taxpayer has filed fraudulent returns, a tax liability exists without regard to any period of limitations. Section 7602 authorizes the Commissioner to investigate any such liability. If, in order to determine the existence or nonexistence of fraud in the taxpayer's returns, information in the taxpayer's records is needed which is not already in the Commissioner's possession, we think the examination is not 'unnecessary' within the meaning of § 7605(b). Although a more stringent interpretation is possible, one which would require some showing of cause for suspecting fraud, we reject such an interpretation because it might seriously hamper the Commissioner in carrying out investigations he thinks warranted, forcing him to litigate and prosecute appeals on the very subject which he desires to investigate, and because the legislative history of § 7605(b) indicates that no severe restriction was intended.

Section 7605(b) first appeared as § 1309 of the Revenue Act of 1921, 42 Stat. 310. Its purpose and operation were explained by the manager of the bill, Senator Penrose, on the Senate floor:

'Mr. PENROSE. Mr. President, the provision is entirely in the     interest of the taxpayer and for his relief from unnecessary      annoyance. Since these income taxes and direct taxes have     been in force very general complaint has been made,      especially in the large centers of wealth and accumulation of      money, at the repeated visits of tax examiners, who perhaps      are overzealous or do not use the best of judgment in the      exercise of their functions. I know that from many of the     cities of the country very bitter complaints have reached me      and have reached the department of unnecessary visits and      inquisitions after a thorough examination is supposed to have      been had. This section is purely in the interest of quieting     all this trouble and in the interest of the peace of mind of      the honest taxpayer.

'Mr. WALSH. * *  * So that up to the present time an inspector      could visit the office of an individual or corporation and      inspect the books as many times as he chose?

'Mr. PENROSE. And he often did so.

'Mr. WALSH. * *  * And this provision of the Senate committee      seeks to limit the inspection to one visit unless the      commissioner indicates that there is necessity for further      examination?

'Mr. PENROSE. That is the purpose of the amendment.

'Mr. WALSH. * *  * I heartily agree with the beneficial   results that the amendment will produce to the taxpayer.

'Mr. PENROSE. I knew the Senator would agree to the     amendment, and it will go a long way toward relieving petty      annoyances on the part of honest taxpayers.' 61 Cong.Rec. 5855 (Sept. 28, 1921).

Congress recognized a need for a curb on the investigating powers of low-echelon revenue agents, and considered that it met this need simply and fully by requiring such agents to clear any repetitive examination with a superior. For us to import a probable cause standard to be enforced by the courts would substantially overshoot the goal which the legislators sought to attain. There is no intimation in the legislative history that Congress intended the courts to oversee the Commissioner's determinations to investigate. No mention was made of the statute of limitations and the exception for fraud.

We are asked to read § 7605(b) together with the limitations sections in such a way as to impose a probable cause standard upon the Commissioner from the expiration date of the ordinary limitations period forward. Without some solid indication in the legislative history that such a gloss was intended, we find it unacceptable. Our reading of the statute is said to render the first clause of § 7605(b) surplusage to a large extent, for, as interpreted, the clause adds little beyond the relevance and materiality requirements of § 7602. That clause does appear to require that the information sought is not already within the Commissioner's possession, but we think its primary purpose was no more than to emphasize the responsibility of agents to exercise prudent judgment in wielding the extensive powers granted to them by the Internal Revenue Code.

This view of the statute is reinforced by the general rejection of probable cause requirements in like circumstances involving other agencies. In Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 216, 66 S.Ct. 494, 509, 90 L.Ed. 614, in reference to the Administrator's subpoena power under the Fair Labor Standards Act, the Court said 'his investigative function, in searching out violations with a view to securing enforcement of the Act, is essentially the same as the grand jury's, or the court's in issuing other pretrial orders for the discovery of evidence, and is governed by the same limitations,' and accordingly applied the view that inquiry must not be "limited * *  * by *  *  * forecasts of the probable result of the investigation." In United States v. Morton Salt Co., 338 U.S. 632, 642-643, 70 S.Ct. 357, 364, 94 L.Ed. 401, the Court said of the Federal Trade Commission, 'It has a power of inquisition, if one chooses to call it that, which is not derived from the judicial function. It is more analogous to the Grand Jury, which 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.' While the power of the Commissioner of Internal Revenue derives from a different body of statutes, we do not think the analogies to other agency situations are without force when the scope of the Commissioner's power is called in question.

Reading the statutes as we do, the Commissioner need not meet any standard of probable cause to obtain enforcement of his summons, either before or after the three-year statute of limitations on ordinary tax liabilities has expired. He must 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 possession, and that the administrative steps required by the Code have been followed-in particular, that the 'Secretary or his delegate,' after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect. This does not make meaningless the adversary hearing to which the taxpayer is entitled before enforcement is ordered. At the hearing he 'may challenge the summons on any appropriate ground,' Reisman v. Caplin, 375 U.S. 440, at 449, 84 S.Ct. at 513. Nor does our reading of the statutes mean that under no circumstances may the court inquire into the underlying reasons for the examination. It is the court's process which is invoked to enforce the administrative summons and a court may not permit its process to be abused. Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation. The burden of showing an abuse of the court's process is on the taxpayer, and it is not met by a mere showing, as was made in this case, that the statute of limitations for ordinary deficiencies has run or that the records in question have already been once examined.

The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

Reversed and remanded.

Mr. Justice DOUGLAS, with whom Mr. Justice STEWART and Mr. Justice GOLDBERG concur, dissenting.