United States v. New York Telephone Co.

682 F.2d 313

• Court: Court of Appeals for the Second Circuit
• Decided: June 11, 1982
• Docket: Nos. 801, 802 and 746, Docket 81-6204, 81-6242 and 81-6244
• Status: Published

Opinions

PIERCE, Circuit Judge:

On October 8, 1980, in the course of an investigation of the income tax liabilities of Marilyn Sheldon, the Internal Revenue Service (“I.R.S.”) served the New York Telephone Company (“telephone company”) with a summons seeking the production of all billing records for three telephone numbers used by Sheldon.¹ On October 10, 1980, the I.R.S. notified Sheldon of the service of the summons, and on October 21, 1980, Sheldon’s attorney notified the telephone company not to comply with the summons. Subsequently, in August 1981, the I.R.S. filed a petition in the United States District Court, 528 F.Supp. 175, for the Southern District of New York, seeking to enforce the summons in a summary proceeding. The telephone company appeared in that proceeding and opposed enforcement, asserting that the taxpayer had notified it not to comply with the summons. On or about September 21, 1981, Sheldon moved to intervene in the enforcement proceeding. She opposed enforcement claiming that the demand for records was not made in good faith, was overbroad, and that the records sought were irrelevant to the investigation being conducted. She argued that she was entitled to intervene pursuant to 26 U.S.C. § 7609(a)(3)(C), a statute which provides that when a summons is served on a “third-party recordkeeper” and requires production of records of the business transactions or affairs of a person other than the recordkeeper, that person has a right to be notified of the service of the summons; to stay compliance with the summons by serving a notice not to comply within fourteen days after receiving notice of its service; and to intervene in any subsequent proceeding with respect to enforcement of the summons.

The statute includes within the definition of a “third-party recordkeeper” “any person extending credit through the use of credit cards or similar devices.”² Sheldon argued that she had standing to intervene because the telephone company is a “third-party recordkeeper” which extends credit “through the use of credit cards or similar devices.” She made this claim although she conceded that she was not the holder of a telephone company credit card, and that none of the billing records requested included records of telephone calls charged with a credit card.

On October 23, 1980, Judge Palmieri issued a memorandum decision and order denying Sheldon’s motion to intervene and granting enforcement of the summons. Both Sheldon and the telephone company have appealed.

On this appeal, therefore, the Court is confronted with the issue of the meaning and breadth of coverage of the term “third-party recordkeeper” as defined in 26 U.S.C. § 7609(a)(3)(C). In resolving this question we must look at the context in which this section is found in the Internal Revenue Code, and the intent that lay behind its enactment.

Section 7602(2) of the Internal Revenue Code provides that the I.R.S. may require “any person having possession, custody, or care of books of account containing entries relating to the business of [a] person liable for tax” to produce those records and give testimony, provided the records and testimony are “relevant or material” to the I.R. S.’s inquiry into the correctness of a tax return. This statute imposes “a broad testimonial obligation” upon such persons. United States v. Euge, 444 U.S. 707, 714, 100 S.Ct. 874, 879, 63 L.Ed.2d 141 (1980).³

Section 7604 of the Internal Revenue Code provides, in turn, for the enforcement of an I.R.S. summons through a proceeding in the federal district court, which may use its contempt powers to compel compliance. A taxpayer does not have standing to intervene as a matter of right in such an enforcement proceeding against a party in possession of records of the taxpayer “simply because it is his tax liability that is the subject of the summons.” Donaldson v. United States, 400 U.S. 517, 530, 91 S.Ct. 534, 542, 27 L.Ed.2d 580 (1971). Thus, prior to the tax code amendments adopted in 1976, only the recordkeeper, who generally had no stake in protecting the privacy rights of the taxpayer, had standing to challenge claimed intrusions into those rights by the I.R.S.

In 1976, section 7609 of the Internal Revenue Code was enacted by Congress to provide limited protection against unreasonable infringements upon the civil rights of taxpayers through the I.R.S.’s use of third-party summonses. See [1976] U.S.Code Cong. & Ad.News at 3797. This limited protection took the form of the amendment granting the taxpayer standing to intervene and contest the enforcement of such a summons, and reflected the recognition that the taxpayer is the true interested person in an enforcement proceeding involving a third-party recordkeeper. See United States v. Desert Palace, Inc., 79-1 U.S.T.C. 19296 (D.Nev.1979); [1976] U.S.Code Cong. & Ad.News at 3798-3800. The amendment was designed, however, to give the taxpayer only a procedural right to intervene; it did not in any way expand either the taxpayer’s substantive rights or the grounds on which enforcement of an I.R.S. summons might be resisted.

Section 7609(a)(3) lists six categories of persons which it designates as “third-party recordkeepers”. Included among these is the category which the appellants here argue includes the telephone company: persons “extending credit through the use of credit cards or similar devices.” 26 U.S.C. § 7609(a)(3)(C). However, as the Court pointed out in United States v. New York Telephone Company, 644 F.2d 953, 957 (2d Cir. 1981), the statute does not provide any definition of either “credit cards” or “similar devices”. We do, however, at this juncture, have the benefit of this Court’s ruling in that case. Therein, the Court concluded that “the Telephone Company extends credit by means of credit cards, and is thus a ‘third-party recordkeeper’ within the plain meaning of § 7609(a)(3)(C).” Id. at 958. The Court also held that the taxpayer-intervenor in that case, who was a telephone company credit cardholder, was entitled to intervene in the proceeding brought by the I.R.S. to enforce its summons. The Court stated that “[i]n light of the credit card operations of the Telephone Company .. ., the fact that Tuccio is a credit cardholder, and the fact that the summons is broad enough to include records relating to Tuccio’s credit card transactions, we conclude that § 7609 was applicable and that Tuccio should have been allowed to intervene in the compliance proceeding.” Id. at 960.

In New York Telephone, supra, the telephone company argued that it should be considered a “third-party recordkeeper”, as that term is defined in 26 U.S.C. § 7609(a)(3)(C), for three reasons: first, because it extends credit through the use of credit cards; second, because certain of its policies such as “third number billing” (that is, permitting customers to use one telephone to call a party at a second number, and bill the charges to a third number) constitute the extension of credit through a device similar to a credit card; and third, because its policy of billing its customers one month in arrears is an extension of credit through a device “similar” to a credit card. Since the New York Telephone Court found merit in the first argument, and since the taxpayer in that case had a telephone company credit card, the Court found that it did not need to rule on the merits of the second and third arguments in order to reach its decision. Nevertheless, it indicated that it “rejected]” the third argument and was “skeptical” about the second. In this case, the taxpayer-intervenor does not have a telephone company credit card. Therefore, we must now decide whether a taxpayer’s right to intervene in a proceeding to enforce an I.R.S. summons served upon the telephone company and seeking the production of the taxpayer’s billing records is dependent upon the taxpayer’s status as a telephone company credit cardholder.

We believe that both the statute’s remedial purpose: to “improve the administration of the tax laws, particularly in the [sic] terms of protecting the taxpayers’ rights vis a vis the government,” [1976] U.S.Code Cong. & Ad.News at 2898, and the fact that the statute does not give the taxpayer any new substantive rights—but merely provides the taxpayer with a procedural right to intervene to assert claims of irrelevance, immateriality, or privilege, which otherwise only the recordkeeper would have standing to assert—dictate that the statute, where ambiguous in its coverage, should be broadly construed.⁴

Although section 7609(a)(3)(C) of the Internal Revenue Code provides that “any person extending credit through the use of credit cards or similar devices” is a third-party recordkeeper, it is clear that an entity’s status as a third-party recordkeeper in relation to some or all of its retail customers does not make it a third-party record-keeper with regard to records in its possession which are created and kept in a quite different capacity and in the course of entirely different types of transactions. Thus, the court in United States v. Exxon Co., 450 F.Supp. 472 (D.Md.1978), held, correctly we believe, that Exxon’s lessor had no right to notice and no standing to intervene in an action brought to enforce an I.R.S. summons for the production of records relating to payments made by Exxon as the lessee of land on which it operated a gasoline service station. In so holding, the court rejected the argument that, because Exxon issued credit cards to its retail customers, it was a “third-party recordkeeper” with regard to any records in its possession, regardless of their type, which reflected transactions with anyone other than itself. Thus, the court in Exxon stated:

“[T]he records sought by the instant summons are not the credit records of mov-ants and do not appear to involve directly the type of business transactions contemplated in the statute. The records sought more directly involve the business transactions of Exxon — its lease of a property from movants and its payments of rent on the same property. Although Exxon does make and keep the records of the transactions of other persons in carrying out its functions as an issuer of credit cards, the records at issue here more properly involve Exxon’s own transactions and would not be subject to the notice rule. For the court to hold otherwise would necessitate a determination on the part of this court that the fact that a person or company issues credit cards to some persons automatically places all records of any transactions of any nature of that person or company within the notice requirement of Section 7609.” Id. at 477.

The holdings in United States v. Manchel, Lundy & Lessin, 477 F.Supp. 326, 329 (E.D.Pa.1979), United States v. Ohio Bell Telephone Co., 475 F.Supp. 697 (N.D.Ohio 1978), United States v. Connecticut Motor Club, 79-1 U.S.T.C. 19141 (D.Conn.1978), and United States v. J. Joseph Gartland, Inc., 79 F.R.D. 148 (D.Md.1978) are predicated on the same ground. In each of these cases the court held that the taxpayer-intervenor was not entitled to notice of a summons, and was not permitted to intervene in an enforcement proceeding, when the types of transactions reflected in the records sought by the I.R.S. were of a type completely different from those which the statute was intended to protect. Here, however, the credit records sought by the I.R.S., and the transactions which they reflect, are of exactly the same type as those which are protected under § 7609 when the taxpayer happens to be a credit cardholder.

We agree with this Court’s observation in New York Telephone that third-number billing practices alone constitute a questionable basis for a finding that the credit practices of the telephone company fall within the “similar devices” language of § 7609(a)(3)(C). However, in that case the Court was not directly confronted with that issue, and grounded its decision on the credit card issuing practices of the telephone company in conjunction with the interve-nor’s status as a credit cardholder. Since we are directly confronted here with the question of whether the telephone company should be considered a third-party record-keeper with regard to the billing records of its non-credit card customers, we must reassess the New York Telephone Court’s characterization, which was not essential to the outcome of that case. In so doing, we now find that it is not necessary to focus on whether third party billing, standing alone, constitutes a “similar device” under the statute. The telephone company’s third-party billing practices must be viewed in conjunction with the credit card issuing and the arrears billing practices of the telephone company, and with the types of transactions that are reflected in the records sought by the summons which the I.R.S. seeks to enforce.

The Court understands it not to be contested that all customer billing records created and kept by the telephone company are virtually identical in both form and content, and reveal essentially the same type of private information about a customer, whether or not that customer holds a telephone company credit card. Therefore, we believe, it follows that the telephone company should be considered a third-party recordkeeper under § 7609(a)(3)(C) in cases involving customers’ billing records of the type sought in both New York Telephone and in this case. Any other rule would make the question of standing to assert available defenses to the production of records turn upon the fortuitous possession of a piece of plastic, and the possibility that it was used at some point during the time period for which the records are sought. Such a rule, we think, would elevate the technical form of a transaction over its substance.

We therefore hold that where, as here, the telephone company extends credit to customers through the use of credit cards and, additionally, extends similar credit by other means to both its credit cardholders⁵ and non-credit cardholders, the records of all such similar credit transactions with its customers, whether or not they were effected through the use of a credit card, are ones as to which a taxpayer has standing to intervene in an action to enforce a third-party summons.⁶

It might be argued that all records of two-party transactions should be excluded from the coverage of a statute which, on its face, deals with “third-party recordkeep-ers.” Further, it might be argued along these lines, that in drafting § 7609(a)(3)(C) Congress meant only to include transactions involving records held by credit card companies such as MasterCard, Visa, and American Express, which extend credit in conjunction with transactions in which they are not themselves directly involved in the sale of goods or services, and whose credit records reflect transactions involving two parties separate and distinct from themselves. Such a rule would exclude from the coverage of the statute not only all telephone company records, but also department store credit records of purchases made using a credit card issued by the store, records of gasoline company credit card purchases, and, presumably, even records of purchases made directly from a credit card issuing company such as Visa or MasterCard.⁷ Records of such transactions, it could be argued, are the recordkeeper’s own records of its own transactions, rather than those of the taxpayer. However, this Court (as well as others, see Exxon, supra; Desert Palace, supra) has already gone beyond that point and held that records of two-party transactions, effected by use of a credit card, are within the intent of the statute. United States v. New York Telephone, supra at 958. Once the line between two-party and three-party transactions has been crossed it makes little sense to hold that the taxpayer’s possession of a credit card is pivotal in deciding which customers of a single credit card issuing entity will, and which will not, have standing to intervene in a proceeding in which the I.R.S. seeks enforcement of a summons for the production of virtually identical types of records. This conclusion finds further support in the fact that the statute speaks solely in terms of the credit card issuers involved and makes no mention whatsoever of the credit cardholders.

Further, any records kept by recordkeep-ers, even companies that are clearly “third-party recordkeepers” (like Visa and MasterCard), are to some extent kept for the recordkeeper’s own purposes. For example, Visa obviously keeps a record of the stores from which its cardholders have made purchases in order to document payments due to those stores, and to assure accurate billings of, and payment by, its cardholders.⁸ Nevertheless, the statute protects these records from summary production without notice to the taxpayer, because they contain personal and business information which the taxpayer, rather than the recordkeeper, might have an interest in protecting. It is also clear that when personal customer transactions are involved, department store credit records will reflect the types of items a customer has purchased; gasoline company credit card records will reveal purchases of goods as well as patterns of travel around the country; and telephone company records indicate the telephone numbers a customer has called and also the frequency and length of such calls. Thus, including records of these kinds of transactions within the coverage of the statute is consonant with the intent to treat the taxpayer-intervenor as the true defendant in an enforcement proceeding involving a third-party recordkeeper. See Desert Palace, supra at 86, 673; [1976] U.S.Code Cong. & Ad.News at 3798-3800.

Therefore, upon consideration of the telephone company’s credit card operations, viewed in conjunction with its practice of extending similar credit to all of its customers as well as the type of credit billing records sought by the summons here, we conclude that section 7609 was applicable to the summons herein and that Sheldon should have been permitted to intervene in the enforcement proceeding.

The order of enforcement is vacated and the matter is remanded to the district court for proceedings consistent with this opinion.

1 . The summons requested:

“1. Statement of billings (toll and local usage) and payments received for the period January 01, 1974 through December 31, 1978 for any and all telephone numbers assigned to 120 Mimosa Drive, Roslyn, New York including but not limited to: (516) 621-9238;

2. Statement of billings (toll and local usage) and payments received for the period January 01, 1974 through December 31, 1978 for any and all telephone numbers assigned to 1 Jefferson Court, Roslyn Heights, New York including but not limited to: (516) 484-5660;

3. The identity of subscribers to whom the above telephone numbers have been assigned during the period 1974 through 1978;

4. A record of any and all toll calls emanating from the above numbers for all months for which records have been maintained to date of summons; and

5. A record of any and all toll calls emanating from any and all telephone numbers assigned to 271-19D Grand Central Parkway, Floral Park, New York, including but not limited to (212) 488-0950 for all months for which records have been maintained to date of summons.”

2 . 26 U.S.C. § 7609 provides, in pertinent part, that:

§ 7609. Special procedures for third-party-summonses

(a) Notice.—

(1) In general. — If—

(A) any summons described in subsection (c) 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).

(3) Third-party recordkeeper defined. — For purposes of this subsection, the term “third-party recordkeeper” means—

(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; and

(F) any accountant.

(b) Right to intervene; right to stay compliance.—

(1) Intervention. — Notwithstanding any other law or rule of law, any person who is entitled to notice of a summons under subsection (a) shall have the right to intervene in any proceeding with respect to the enforcement of such summons under section 7604.

(2) Right to stay compliance. — Notwithstanding any other law or rule of law, any person who is entitled to notice of a summons under subsection (a) shall have the right to stay compliance with the summons if, not later than the 14th day after the day such notice is given in the manner provided in subsection (a)(2)—

(A) notice in writing is given to the person summoned not to comply with the summons, and

(B) a copy of such notice not to comply with the summons is mailed by registered or certified mail to such person and to such office as the Secretary may direct in the notice referred to in subsection (a)(1).

3 . Generally no traditional privilege or privacy interest is implicated by a demand for telephone billing records, since a person has no legitimate expectation of privacy in the telephone numbers dialed on his telephone. Smith v. Maryland, 442 U.S. 735, 742-46, 99 S.Ct. 2577, 2581-83, 61 L.Ed.2d 220 (1979).

4 . Courts have expressed their concern that the statute is ambiguous and that difficulties involved in its interpretation may lead, at times, to anomalous results. See, e.g., United States v. Shivlock, 459 F.Supp. 1383, 1384 (D.Colo.1978), aff’d sub nom. United States v. Income Realty and Mortgage, 612 F.2d 1224 (10th Cir. 1979), cert. denied sub nom. West v. United States, 446 U.S. 952, 100 S.Ct. 2918, 64 L.Ed.2d 809 (1980). (“These three consolidated cases are a part of the continuing saga of the headaches stemming from the enactment of the so-called third party recordkeepers statute, 26 U.S.C. § 7609.”)

5 . We note that the Court in New York Telephone, supra, did not limit its holding to allow intervention only as to records relating to credit card calls.

6 . In United States v. Desert Palace, Inc., 79-1 U.S.T.C. ¶ 9296 (D.Nev.1979), the court went even further. In that case Caesar’s Palace casino issued plastic embossed cards to persons approved for credit, and, upon presentation of those cards, both extended credit, and cashed personal checks for those individuals. The I.R.S. served Caesar’s Palace with a summons for all financial records pertaining to all checks cashed and other transactions with the taxpayers who then sought to intervene. In Desert Palace the court stated:

“In the case at bar, the Government in fact seeks records of any transaction whereby Caesars Palace advanced money to either or both of the Taxpayers. It is true that the Government is primarily interested in transactions involving an exchange of money for a negotiable instrument — i.e., non-credit transactions. And, if this was all that the Government was looking for by way of this summons, I would agree that the Exxon case would be controlling. However, the summons is so broadly worded that a reasonable person would conclude that the Government also was looking for records of credit transactions between Caesars Palace and the Taxpayers. Accordingly, Exxon is distinguishable on that basis.” Id. at 86,672. (Footnote omitted) (emphasis in original).

7 . We note the apparently increasing activities by credit card issuers such as MasterCard and American Express themselves in marketing goods and services, which run the gamut from life insurance policies to down jackets and luggage, by sending advertisements for those items to their credit card customers along with regular billings for credit card purchases from others.

8 . It could also be argued that when a Visa credit cardholder makes a purchase at a store that accepts his card and his signature in lieu of cash, he draws directly upon a service from Visa — an extension of credit which makes the credit transaction possible, in the same way that a telephone company customer directly draws upon credit from the telephone company when he makes a telephone call (other than from a coin-operated telephone), whether by use of a credit card, third-party billing, or arrears billing.