Local 174, International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America and Nugent La Poma v. United States

240 F.2d 387, 50 A.F.T.R. (P-H) 1367, 1956 U.S. App. LEXIS 5237

• Court: Court of Appeals for the Ninth Circuit
• Decided: November 8, 1956
• Docket: 14746_1
• Status: Published

Opinions

JAMES ALGER FEE, Circuit Judge.

This is a proceeding to obtain discovery as to certain transactions between Local 174 and one Frank Brewster, which are claimed to be pertinent to an examination into the liability of Brewster and his wife for income tax during the years 1943 to 1953, inclusive. Since results obtained by administrative subpoena were unsatisfactory, this case was initiated in the District Court.

Frank Brewster has been for many years an employee and officer of Local 174, having acted as secretary-treasurer from 1947 through 1953 and subsequently as president. During the years 1943 to 1947, Brewster filed separate income tax returns. In 1948 he was married to Dorothy Brewster, and in the years 1948 through 1952 husband and wife filed joint income tax returns.

In January, 1954, a special agent of the Bureau of Internal Revenue was assigned to au,dit all such returns. A summons was issued by him to the Local and Nugent La Poma pursuant to § 7602 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 7602, directing them to bring all records and books of account of the Local “which in any way refer or relate to transactions between the said Local 174 and Frank W. Brewster, Dorothy Brewster or any other person acting for Frank W. Bewster and Dorothy Brewster or either of them.” At the time required in the summons, Bassett, attorney for Local 174, Nugent La Poma, alias George Cavano, secretary-treasurer, and Laurite Thayer Agapoff, bookkeeper and accountant for the Local, together with two other officials of the Local, appeared and pro-

duced what was claimed to be an abstract from the records together with certain original records of the Local. The Local, through its officials and employees, apparently claiming a right to be the judges of what was relevant to the inquiry then being made by the special agent, refused to produce any other records. No examination of individuals under oath as to materiality or relevancy of all the books in the possession of the Union was held either by the administrative agency or at the proceedings in the District Court. In any event, the results were not deemed to be in accordance with the subpoena, and thereupon on February 8, 1955, a complaint was filed in the United States District Court, alleging that the records were necessary to ascertain the correctness of the returns of Frank W. Brewster which were being examined. It was alleged there was reason to believe that certain disbursements by the Local to or for the benefit of Brewster were not reported on these returns and that, after examination of the books and records, additional taxes might be found to be owed by Brewster and his wife. This complaint was supported by an affidavit of the special agent, which showed that Brewster, during the years 1943 to 1950, had received $35,500.00 in addition to salary designated on the summary of account furnished by the Local as loans which were unsecured. Since the returns do not show any payments of interest on these returns, it is claimed that the records of the Local should be investigated. Another claim was that disbursements were made to Brewster by check for expenses in December, 1952, totalling $1,748.65, and $1,500.00 to Dorothy Brewster in November, 1952, for the purchase of an automobile. The tax returns and the financial report of the Union brought to the administrative officials do not reflect these transactions. From the salary records produced, Brewster apparently received from the Local “other comp” as follows:

1951 $780.00

1952 810.00

1953 780.00

These were not reflected in the tax returns. There are other items claimed by the petition as follows: On July 10, 1953, a 1948 GMC horse van was repaired by a Seattle garage and paid for by the Local. In 1951, a Chrysler automobile was repaired by a Seattle garage and paid for by the Local. Brewster purchased a home in California, on which $4,000.00 was paid from funds of the Local. Brewster’s personal bill at a club was paid for by the Local in 1952 and 1953. An affidavit shows that the records produced by the Union and the income tax returns do not reflect these transactions.

The District Court issued an order as follows:

“It is hereby ordered that the defendants shall produce for inspection and copying or photographing at Room 224, 905 Second Avenue Building, Seattle, Washington, on Wednesday, March 30, 1955, and for so long thereafter as may be necessary to afford full and complete inspection to the agents of the plaintiff, the following described books, records and papers which may now be in their possession or control for the years 1943-1953:

“(a) Any and all cash books.

“(b) Any and all day books.

“(c) Any and all bank deposit slips.

“(d) Any and all cancelled checks.

“(e) Any and all check stubs.

“(f) Any and all loan ledger-cards.

“(g) Any and all individual payroll records.

“(h) Any and all retained copies-of financial statements filed annually with the Secretary of Labor pursuant to the Labor Management Relations Act of 1947.

“(i) Any and all retained copies-of tax returns or reports rendered annually to the Collector or Director of Internal Rervenue.

“(j) Any and all bookkeeper’s work sheets used in the preparation of the above-mentioned financial statements and tax returns.” (Emphasis supplied.)

In order that jurisdiction of a.United States court to hear and decide a. particular proceeding be established, there must be a “case or controversy.” In attempting to gain access to papers and documents by judicial process, the secretary or his delegate must first summon a person “having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax.”¹ The purpose of this section of the statute was to confer authority upon' the tax officials to summon such persons and to conduct such an inquiry. The impact of the enactment is specifically on the taxpayer and not on an independent third party such as the Local. Only through the taxpayer can the Local or its employees be summoned. Access to Local depended upon proof of the factors set up therein connecting it with the taxpayer.

Since such a proceeding is in the nature of a search and seizure which has constitutional overtones, especially when directed to a third person, enforcement is not placed in the hands of the executive. It is obvious that the third person has rights of his own. Here a union which has aspects of a secret order may have economic secrets or plans which it does not wish to disclose to agents of the federal government. Such a demand, to be constitutional, must constitute a reasonable exercise of the power granted. A third party is within his rights to refuse such a demand and test the matter in court.

Where the response to the administrative officials is unsatisfactory, then the federal court “shall have jurisdiction by appropriate process- to compel such attendance, testimony, or production of books, papers, records, or other data.”² The Internal Revenue agent, as delegate of the Secretary, is required to file a case in the federal court. In this manner, in the course of a justiciable controversy, issues are presented as to whether the demand is reasonable and within the scope of the authority granted by Congress to the executive agent and whether there is a violation of the fundamental right of a third party to privacy.

The burden is upon the revenue agents in the first instance at such a judicial hearing to show that the demand is reasonable under all the circumstances and to prove that the books and records which they demand are relevant or material to the tax liability of the person liable therefor and the third party is possessed of books or records which contain items relating to the business of the person liable to the tax.

“Neither the revenue agent nor the Court has authority under the statute to require the production of memoranda, books, etc., of third parties unless they have a bearing upon the return or returns under investigation.

“In Martin, Internal Revenue Agent v. Chandis Securities Co., D. C., 33 F.Supp. 478, 480, the Court, in discussing § 3614, I.R.C., said:

“ ‘The agents are not the sole judges as to the scope of the examination.

“ ‘They must- satisfy the Court that what they seek may be actually needed. Otherwise, they would be assuming inquisitorial powers beyond the scope of the statute.’

“The foregoing case was affirmed by the 9th Circuit in Martin, Internal Revenue Agent, v. Chandis Securities Co., 128 F.2d 731. The sixth and ninth headnotes of the decision are as follows, respectively:

“ ‘The rights of an internal revenue agent to require production of papers and records for examination are statutory, and in order to obtain the relief granted by statute, he must bring himself within the terms thereof. 26 U.S.C.A.Int.Rev.Code, §§ 3614(a), 3615(a), 3631, 3633.’

“ ‘Under statute providing that no taxpayer shall be subjected to unnecessary examination or investigation, Bureau of Internal Revenue has no power to make an unnecessary examination or investigation of the books of a third person. 26 U.S.C.A.Int.Rev.Code, § 3631.’ ” First National Bank of Mobile v. United States, 5 Cir., 160 F.2d 532, 534-535,³ on petition for rehearing.

The fundamental error here affected both parties. Neither seems to have conceived that this proceeding is just another lawsuit. The tax officials assumed that all that was required upon their part was to show that they did not have sufficient data to satisfy them of the correctness of the tax returns of the Brewsters, to suggest the probability that there must be some items or papers relating thereto in the possession of the Local, and to show that possession of all of the books and documents assumed to be under control of the Local was denied them. This demand was simply that a court place the imprimatur of approval as a rubber stamp upon the administrative subpoena without further investigation. This approval would constitute the administrative enforcement officials the judges of relevance and in the meantime deprive the Local of its right of privacy.

The subpoena on its face asked for a general search of the papers and documents of the Local. There was obviously no attempt to confine the demand to items which might be relevant or maferial to the taxes of the Brewsters. The Union was not itself subject to this investigation. It was not here a taxpayer whose books and records were within the jurisdiction of the agency. The distinction often drawn between the rights of a corporation and an individual as to the extent of protection of privacy is not valid here.⁴ The Local was in the position of a third party and consisted of an association of individuals. Of course, any of these individuals, as officers of the Local or custodians of its records, were subject to such a subpoena. But, as third parties, none was required to produce any item or document unless it was (1) in his possession, (2) relevant to the tax liability of the Brewsters or either of them, or (3) material to the inquiry.⁵

As the record before us indicates, there was a hearing on affidavits and an oral argument. It is not intended to hold that any civil case cannot be submitted in such a manner or in any other way to which the parties can agree with the consent of the trial judge. But here, because of the breadth of the demand of the administrative subpoena and the misconception of the government agents as to scope of the trial, there was no examination of the books and documents by the trial judge. The affidavits submitted were inadequate to support propositions which the agency was required to prove, such as the materiality and relevancy of any document or item specifically described to the tax liability of either of the Brewsters. It was not proved by affidavit or otherwise that Local or any individual had possession, care or custody of any books, documents or papers of any kind containing entries relative to the business of the Brewsters. The propositions here suggested were by-passed. The government agents failed to sustain the burden upon the issues.

The defense that the private papers belonging to Local or in custody of some individual were thus subjected to unlawful search, in that many books and papers which were not pertinent to the tax inquiry of the Brewsters but were entirely private, was not passed upon. Neither Local nor any other individual was charged with a crime. Furthermore, the tax liability of neither Local nor any individual except the Brewsters was subject to examination. If it be claimed this defense was considered and adjudicated, the answer is that the final order contains no limitation designed for such protection and therefore is erroneous as matter of law.

While this Court does not attempt to dictate procedure, the trial court unquestionably had the right to subpoena the papers of Local, if they were properly designated and proved to be in its possession. By scrutiny, the pertinent, relevant and material part could have been segregated. An appropriate order could then have been made. It is not intended to intimate that the Internal Revenue Bureau would have any right to inspect any book or paper so produced until after hearing and adjudication as to the matters above suggested by the trial judge. . But witnesses could have been examined as to all these points under the usual guaranty and, if necessary, inspection could have been made by the trial judge of any document brought into court for these purposes.

Although the judge was confronted with an administrative subpoena of unlimited breadth addressed to third parties to the controversy over which the Special Agent had jurisdiction, there was no discrimination in the final order. The trial court apparently assumed it could not do otherwise than to accept the determination of the Special Agent as to relevancy and materiality, and enforce the subpoena.

On the other hand, the Local was apparently under the impression that a refusal was all that was necessary. The reliance upon technicalities and its evasive conduct apparently convinced the trial court that there was an attempt to conceal. There was a strong suspicion created that there were relevant records to which the government was entitled. The conduct of the Local with respect to the accountant who was produced on the administrative summons and then had conveniently departed from its employ at the time of the trial seems to indicate an attempt at concealment.

It is often stated that the revenue agents cannot be the “sole judges as to the scope of the examination.” Equally, it is obvious the third party cannot be the unquestioned arbiter of relevancy. Illustrative of the evil which would arise from such a rule is the position of the Union here where there is grave doubt whether the attempt is to guard its own privacy or to throw a veil of protection about its president. And, of course, the third party cannot set up defenses peculiar to the person liable to the tax. These are of no concern to him. However, it may be demonstrated by appropriate proof that there are items or documents in the possession of the Local or some individual of the association which had a real bearing upon the matter under investigation. It is undeniably a matter of the utmost importance that collection of the revenue be not frustrated.

These questions are not for arbitrary resolvement by either party, but are justiciable by the Court in the case here presented. Nor is the Court performing an unaccustomed function. The courts determine under the Federal Rules of Civil Procedure, 28 U.S.C.A., what testimony must be given on deposition, whether oral or by interrogatory, and what documents must be produced in response to a judicial subpoena duces tecum. A party summoned before a grand jury has the right to the ruling of the court as to what testimony may be compelled and as to what records may be required to be produced.

But, unfortunately, the final order tendered to the court and entered in the proceeding does not show that the court passed upon any of the cardinal questions. It is not found that any specific item or document is relevant to an investigation of the tax liability of the Brewsters. It is not found that any such item or document is material to the inquiry. There is no finding that any specific document or record is in possession of Local or any individual. With exceptions in the record as it stands, any such finding would be clearly erroneous.

There was no finding as to the defense of the right of privacy as to items or documents not relevant or material to the tax liability of the Brewsters or either of them. Unless such findings were made, it could not be concluded the demand was reasonable. The direction of the order that all of these records be turned over to the Special Agent for an unlimited time is arbitrary and unreasonable.

“He is not entitled in this case to have the Bank produce all its records merely in order for him to go through them for the purpose of ascertaining whether or not the Bank possesses any records which may or may not be relevant to the tax returns under investigation.” First National Bank of Mobile v. United States, 5 Cir., 160 F.2d 532, 534.

If the order had required production in court so that testimony could be heard and the judge could exercise an independent judgment as to what documents or entries were relevant, it might have been upheld. The judge could have also determined whether the rights of the Local to privacy were protected and whether it could not be shielded from absurd inconveniences arising from lengthy withholding of its essential records, and other possible unreasonable consequences.

It is not the purpose to circumscribe the discretion of the court or attempt to lay down rigid rules of procedure.⁶ It is only pointed out that the order was not the result of a hearing where judgment was exercised; there was no specification of the items and documents which were relevant and could be examined; and finally there was a blanket turnover to the government agents for an unlimited time.

Bemanded for further proceedings.

1 . Internal Revenue Code of 1954, § 7602 (2), 26 U.S.C.A. § 7602(2).

2 . Internal Revenue Code of 1954, § 7604 (a), 26 U.S.C.A. § 7604(a).

3 . The language of this Court in Martin v. Chandis Securities Co., 128 F.2d 731, as it appears in the body of the opinion is as follows: “The [Commissioner’s] rights, if any, are statutory, and to obtain the relief granted by the statute he must bring himself within the terms thereof.” At page 735. “ * * * such statutes, however, authorize only a ‘necessary’ examination or investigation. Therefore [Commissioner] appellant has no right to make the examination or investigation here involved, and unless lie can show he has a right he is not entitled to relief.” At pages 735-736.

4 . Such a distinction was drawn in United States v. Morton Salt Co., 338 U.S. 632, 651-652, 70 S.Ct. 357, 94 L.Ed. 401, where, however, the defendant company was not a third party to the main inquiry, as was Local 174 here, but was itself the principal party.

5 . Internal Revenue Code of 1954, § 7602, 26 U.S.C.A. § 7602.

6 . Compare with the situation reflected in Chapman v. Goodman, 9 Cir., 219 F.2d 802.