United States v. Bisceglia

420 U.S. 141, 95 S. Ct. 915, 43 L. Ed. 2d 88, 1975 U.S. LEXIS 135, 35 A.F.T.R.2d (RIA) 702

• Court: Supreme Court of the United States
• Decided: February 19, 1975
• Docket: 73-1245
• Status: Published

Opinions

Mr. Chief Justice Burger

delivered the opinion of the Court.

We granted certiorari to resolve the question whether the Internal Revenue Service has statutory authority to issue a “John Doe" summons to a bank or other depository to discover the identity of a person who has had bank transactions suggesting the possibility of liability for unpaid taxes.

I

On November 6 and 16, 1970, the Commercial Bank of Middlesboro, Ky., made two separate deposits with the Cincinnati Branch of the Federal Reserve Bank of Cleveland, each of which included $20,000 in $100 bills. The evidence is undisputed that the $100 bills were “paper thin” and showed signs of severe disintegration which could have been caused by a long period of storage under abnormal conditions. As a result the bills were no longer suitable for circulation and they were destroyed by the Federal Reserve in accord with established procedures. Also in accord with regular Federal Reserve procedures, the Cincinnati Branch reported these facts to the Internal Revenue Service.

It is not disputed that a deposit of such a large amount of high denomination currency was out of the ordinary for the Commercial Bank of Middlesboro; for example, in the 11 months preceding the two $20,000 deposits in $100 bills, the Federal Reserve had received only 218 $100 bills from that bank. This fact, together with the uniformly unusual state of deterioration of the $40,000 in $100 bills, caused the Internal Revenue Service to suspect that the transactions relating to those deposits may not have been reported for tax purposes. An agent was therefore assigned to investigate the matter.

After interviewing some of the bank’s employees, none of whom could provide him with information regarding the two $20,000 deposits, the agent issued a “John Doe” summons directed to respondent, an executive vice president of the Commercial Bank of Middlesboro. The summons called for production of “[t]hose books and records which will provide information as to the person(s) or firm(s) which deposited, redeemed or otherwise gave to the Commercial Bank $100 bills U. S. Currency which the Commercial Bank sent in two shipments of (200) two hundred each $100 bills to the Cincinnati Branch of the Federal Reserve Bank on or about November 6, 1970 and November 16, 1970.” This, of course, was simply the initial step in an investigation which might lead to nothing or might have revealed that there had been a failure to report money on which federal estate, gift, or income taxes were due.¹ Respondent, however, refused to comply with the summons even though he has not seriously argued that compliance would be unduly burdensome.

In due course, proceedings were commenced in the United States District Court for the Eastern District of Kentucky to enforce the summons. That court narrowed its scope to require production only of deposit slips showing cash deposits in the amount of $20,000 and deposit slips showing cash deposits of $5,000 or more which involved $100 bills, and restricted it to the period between October 16, 1970, and November 16, 1970. Respondent was ordered to comply with the summons as modified.

The Court of Appeals reversed, holding that § 7602 of the Internal Revenue Code of 1954, 26 U. S. C. § 7602, pursuant to which the summons had been issued, “presupposes that the [Internal Revenue Service] has already identified the person in whom it is interested as a taxpayer before proceeding.” 486 F. 2d 706, 710. We disagree, and reverse the judgment of the Court of Appeals.

II

The statutory framework for this case consists of §§ 7601 and 7602 of the Internal Revenue Code of 1954, which provide:

“Section 7601. Canvass of districts for taxable persons and objects.

“(a) General rule.

“The Secretary or his delegate shall, to the extent he deems it practicable, cause officers or employees of the Treasury Department to proceed, from time to time, through each internal revenue district and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care and management of any objects with respect to which any tax is imposed.

“Section 7602. Examination of books and witnesses.

“For the purpose of ascertaining the correctness of any return, making a return where none has been made, 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; and

“(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.”

We begin examination of these sections against the familiar background that our tax structure is based on a system of self-reporting. There is legal compulsion, to be sure, but basically the Government depends upon the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability. Nonetheless, it would be naive to ignore the reality that some persons attempt to outwit the system, and tax evaders are not readily identifiable. Thus, § 7601 gives the Internal Revenue Service a broad mandate to investigate and audit “persons who may be liable” for taxes and § 7602 provides the power to “examine any books, papers, records, or other data which may be relevant . . . [and to summon] any person having possession ... of books of account . . . relevant or material to such inquiry.” Of necessity, the investigative authority so provided is not limited to situations in which there is probable cause, in the traditional sense, to believe that a violation of the tax laws exists. United States v. Powell, 379 U. S. 48 (1964). The purpose of the statutes is not to accuse, but to inquire. Although such investigations unquestionably involve some invasion of privacy, they are essential to our self-reporting system, and the alternatives could well involve far less agreeable invasions of house, business, and records.

We recognize that the authority vested in tax collectors may be abused, as all power is subject to abuse. However, the solution is not to restrict that authority so as to undermine the efficacy of the federal tax system, which seeks to assure that taxpayers pay what Congress has mandated and to prevent dishonest persons from escaping taxation thus shifting heavier burdens to honest taxpayers. Substantial protection is afforded by the provision that an Internal Revenue Service summons can be enforced only by the courts. 26 U. S. C. § 7604 (b); Reisman v. Caplin, 375 U. S. 440 (1964). Once a summons is challenged it must be scrutinized by a court to determine whether it seeks information relevant to a legitimate investigative purpose and is not meant “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.” United States v. Powell, supra, at 58. The cases show that the federal courts have taken seriously their obligation to apply this standard to fit particular situations, either by refusing enforcement or narrowing the scope of the summons. See, e. g., United States v. Matras, 487 F. 2d 1271 (CA8 1973); United States v. Theodore, 479 F. 2d 749, 755 (CA4 1973); United States v. Pritchard, 438 F. 2d 969 (CA5 1971); United States v. Dauphin Deposit Trust Co., 385 F. 2d 129 (CA3 1967). Indeed, the District Judge in this case viewed the demands of the summons as too broad and carefully narrowed them.

Finally, we note that the power to summon and inquire in cases such as the instant one is not unprecedented. For example, had respondent been brought before a grand jury under identical circumstances there can be little doubt that he would have been required to testify and produce records or be held in contempt. In Blair v. United States, 250 U. S. 273 (1919), petitioners were summoned to appear before a grand jury. They refused to testify on the ground that the investigation exceeded the authority of the court and grand jury, despite the fact that it was not directed at them. Their subsequent contempt convictions were affirmed by this Court:

“[The witness] is not entitled to set limits to the investigation that the grand jury may conduct. . . . It is a grand inquest, a body with powers of investigation and inquisition, the scope of whose inquiries is not to be limited narrowly by questions of propriety or forecasts of the probable result of the investigation, or by doubts whether any particular individual will be found properly subject to an accusation of crime. As has been said before, the identity of the offender, and the precise nature of the offense, if there be one, normally are developed at the conclusion of the grand jury’s labors, not at the beginning.” Id., at 282.

The holding of Blair is not insignificant for our resolution of this case. In United States v. Powell, supra, Mr. Justice Harlan reviewed this Court’s cases dealing with the subpoena power of federal enforcement agencies, and observed:

“[T]he Federal Trade Commission . . . ‘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.” 379 U. S., at 57, quoting United States v. Morton Salt Co., 338 U. S. 632, 642-643 (1950).

Ill

Against this background, we turn to the question whether the summons issued to respondent, as modified by the District Court, was authorized by the Internal Revenue Code of 1954.² Of course, the mere fact that the summons was styled “In the matter of the tax liability of John Doe” is not sufficient ground for denying enforcement. The use of such fictitious names is common in indictments, see, e. g., Baker v. United States, 115 F. 2d 533 (CA8 1940), cert. denied, 312 U. S. 692 (1941), and other types of compulsory process. Indeed, the Courts of Appeals have regularly enforced Internal Revenue Service summonses which did not name a specific taxpayer who was under investigation. E. g., United States v. Carter, 489 F. 2d 413 (CA5 1973); United States v. Turner, 480 F. 2d 272, 279 (CA7 1973); Tillotson v. Boughner, 333 F. 2d 515 (CA7), cert. denied, 379 U. S. 913 (1964). Respondent undertakes to distinguish these cases on the ground that they involved situations in which either a taxpayer was identified or a tax liability was known to exist as to an unidentified taxpayer. However, while they serve to suggest the almost infinite variety of factual situations in which a “John Doe” summons may be necessary, it does not follow that these cases define the limits of the Internal Revenue Service’s power to inquire concerning tax liability.

The first question is whether the words of the statute require the restrictive reading given them by the Court of Appeals. Section 7601 permits the Internal Revenue Service to investigate and inquire after “all persons . . . who may be liable to pay any internal revenue tax . . . .” To aid in this investigative function, § 7602 authorizes the summoning of “any . . . person” for the taking of testimony and examination of books which may be relevant for “ascertaining the correctness of any return, . . . determining the liability of any person ... or collecting any such liability . . . .” Plainly, this language is inconsistent with an interpretation that would limit the issuance of summonses to investigations which have already focused upon a particular return, a particular named person, or a particular potential tax liability.

Moreover, such a reading of the Internal Revenue Service’s summons power ignores the fact that it has a legitimate interest in large or unusual financial transactions, especially those involving cash. The reasons for that interest are too numerous and too obvious to catalog. Indeed, Congress has recently determined that information regarding transactions with foreign financial institutions and transactions which involve large amounts of money is so likely to be useful to persons responsible for enforcing the tax laws that it must be reported by banks. See generally California Bankers Assn. v. Shultz, 416 U. S. 21, 26-40 (1974).

It would seem elementary that no meaningful investigation of such events could be conducted if the identity of the persons involved must first be ascertained, and that is not always an easy task. Fiduciaries and other agents are understandably reluctant to disclose information regarding their principals, as respondent was in this case. Moreover, if criminal activity is afoot the persons involved may well have used aliases or taken other measures to cover their tracks. Thus, if the Internal Revenue Service is unable to issue a summons to determine the identity of such persons, the broad inquiry authorized by § 7601 will be frustrated in this class of cases. Settled principles of statutory interpretation require that we avoid such a result absent unambiguous directions from Congress. See NLRB v. Lion Oil Co., 352 U. S. 282, 288 (1957); United States v. American Trucking Assns., 310 U. S. 534, 542-544 (1940). No such congressional purpose is discernible in this case.

We hold that the Internal Revenue Service was acting within its statutory authority in issuing a summons to respondent for the purpose of identifying the person or persons who deposited 400 decrepit $100 bills with the Commercial Bank of Middlesboro within the space of a*’ few weeks. Further investigation may well reveal that such person or persons have a perfectly innocent explanation for the transactions. It is not unknown for taxpayers to hide large amounts of currency in odd places out of a fear of banks. But on this record the deposits were extraordinary, and no meaningful inquiry can be made until respondent complies with the summons as modified by the District Court.

We do not mean to suggest by this holding that respondent’s fears that the § 7602 summons power could be used to conduct “fishing expeditions” into the private affairs of bank depositors are trivial. However, as we have observed in a similar context:

“ ‘That the power may be abused, is no ground for denying its existence. It is a limited power, and should be kept within its proper bounds; and, when these are exceeded, a jurisdictional question is presented which is cognizable in the courts.’ ” McGrain v. Daugherty, 273 U. S. 135, 166 (1927), quoting People ex rel. McDonald v. Keeler, 99 N. Y. 463, 482 (1885).

So here, Congress has provided protection from arbitrary or capricious action by placing the federal courts between the Government and the person summoned. The District Court in this case conscientiously discharged its duty to see that a legitimate investigation was being conducted and that the summons was no broader than necessary to achieve its purpose.

The judgment of the Court of Appeals is reversed and the cause is remanded to it with directions to affirm the order of the District Court.

It is so ordered.

1 The Internal Revenue Service agent testified:

“Q. What possible tax effect could this have on the taxpayer if he is determined?

“A. Well, it could be anything from nothing at all, a simple explanation, or it could be that this is money that has been secreted away for a period of time as a means of avoiding the tax.

“Q. Then you really have not reached first base yet, is that correct?

“A. That’s correct.”

2 Respondent also argues that, even if the summons issued in this case was authorized by statute, it violates the Fourth Amendment. This contention was not passed upon by the Court of Appeals. In any event, as narrowed by the District Court the summons is at least as specific as the reporting requirements which were upheld against a Fourth Amendment challenge by banks in California Bankers Assn. v. Shultz, 416 U. S. 21, 63-70 (1974).