Appeal from a final judgment of the United States District Court for the Eastern District of New York, denying motion to intervene pursuant to 26 U.S.C. § 7609, and granting petition for enforcement of Internal Revenue Service summons. Vacated and remanded for further proceedings.
Before Feinberg, Chief Judge, Kearse, Circuit Judge, and Edelstein, District Judge.*fn*
These appeals arise from an action commenced by appellees United States of America and Monroe Hollander, a Special Agent of the Internal Revenue Service ("IRS") (collectively the "government"), in the United States District Court for the Eastern District of New York, to obtain an order requiring appellant New York Telephone Company ("Telephone Company") to comply with an IRS summons served on it pursuant to § 7602 of the Internal Revenue Code, 26 U.S.C. § 7602(a) (1976), for the production of records kept by the Telephone Company with respect to appellant Patsy Tuccio. The Telephone Company opposed the government's petition, and Tuccio sought to intervene and stay enforcement, on the ground that the Telephone Company is a third-party recordkeeper within the meaning of I.R.C. § 7609, 26 U.S.C. § 7609 (1976). The district court, Jacob Mishler, then-Chief Judge, ruled that the Telephone Company is not a third-party recordkeeper within the meaning of that section, and accordingly denied Tuccio's motion to intervene and ordered compliance with the summons. 80-1 U.S.Tax Cas. P 9460 (E.D.N.Y. Apr. 9, 1980). For the reasons below, we vacate and remand for further proceedings.
The facts relevant to the present appeal are not in dispute. The IRS is conducting an investigation with respect to Tuccio's tax liabilities for the years 1976 and 1977. As part of that investigation, on May 1, 1979, IRS issued an administrative summons to the Telephone Company pursuant to § 7602, ordering its business office supervisor to appear on May 18, 1979, and to bring with him "(a)ll records of billing and payments regarding all telephones in the name of Patsy (Pat) Tuccio and/or Shanda Tuccio ... for the years 1976 & 1977." The summons stated that "all records (are) to include unlisted or non-published telephone numbers." On May 2, IRS notified Tuccio of the summons, pursuant to I.R.C. § 7609. That section requires the IRS to give such notice when it serves a summons on a "third-party recordkeeper" a term defined to include persons who extend credit through devices such as credit cards, § 7609(a)(3)(C) if the summons requires the production of records concerning transactions of a person other than the recordkeeper; such other person is then allowed to stay compliance by the recordkeeper and to intervene in any enforcement proceedings. On May 9, 1979, Tuccio instructed the Telephone Company, pursuant to § 7609, not to comply with the summons. The Telephone Company has followed Tuccio's instructions.
The present proceeding to enforce the summons was instituted by the government in January 1980. The petition stated that
(t)he testimony, books, records, papers and other data demanded by the summons relate to the liabilities under investigation, and might shed light on the correctness of the taxpayer's federal income tax returns, his correct tax liability, or his liability for the 50% fraud penalty of 26 U.S.C. § 6653(b).
The Telephone Company opposed the petition on the ground that the Company extends credit by means of credit cards and other billing practices, and is thus a third-party recordkeeper within the meaning of § 7609(a)(3)(C), and that it had been duly notified by Tuccio not to permit examination of records concerning him. Tuccio shortly sought to intervene, contending that the records sought were not relevant to his tax liability for the years in question, since he had not claimed any deduction for telephone expenses.*fn1
The threshold issue before the district court was whether the Telephone Company qualified as a third-party recordkeeper under § 7609(a)(3)(C). The government sought to repudiate the § 7609 notice it had given Tuccio, claiming that notice had been "incorrectly given." It argued that the Telephone Company "is in fact not a third-party recordkeeper," and that Tuccio therefore was not entitled to receive notice, to intervene, or to stay compliance. The district court agreed, holding that § 7609(a)(3)(C) contemplates only "true credit transactions," and therefore includes "only those who finance the taxpayer's transactions with others." 80-1 U.S.Tax Cas. P 9460 at 84,255. Ruling that the Telephone Company's dealings with its customers are not true credit transactions, the district court denied Tuccio's motion to intervene and ordered enforcement of the summons. Both Tuccio and the Telephone Company have appealed.
The IRS has long had broad power, pursuant to I.R.C. § 7602 and its predecessors, to issue administrative summonses to examine any books, papers, records or other data that may be relevant or material to an inquiry into compliance with the internal revenue laws.*fn2 It has not only the right to obtain records held by the taxpayer, but also the power to summon, question, and require production from "any person" who holds records "relating to the business of the person liable for the tax." I.R.C. § 7602.*fn3 Section 7602 has been construed to codify a broad testimonial obligation to provide most relevant, nonprivileged evidence. See United States v. Euge, 444 U.S. 707, 100 S. Ct. 874, 63 L. Ed. 2d 141 (1980) (section gives IRS authority to compel execution of handwriting exemplars). The issuance of a summons pursuant to the section is permitted without any advance showing of probable cause, United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964), and is circumscribed principally by concepts of relevance and materiality. A summons believed to demand records not relevant or material to the particular inquiry may be challenged on that ground by the holder of the records. Reisman v. Caplin, 375 U.S. 440, 84 S. Ct. 508, 11 L. Ed. 2d 459 (1964). Until 1976, however, a person whose tax liability was under investigation, but who was not the recordkeeper, had no power to prevent compliance with a summons that called for irrelevant or immaterial records, since he was not allowed to intervene in a compliance proceeding. See Donaldson v. United States, 400 U.S. 517, 528-30, 91 S. Ct. 534, 541-42, 27 L. Ed. 2d 580 (1971) (upholding discretionary denial of intervention under F.R.Civ.P. 24(a)(2)). Indeed, the taxpayer often was not even aware of the summons in time to attempt to intervene.
In 1976, Congress enacted § 7609 as part of the Tax Reform Act of 1976, Pub.L.No.94-455, 90 Stat. 1520 (1976), to provide certain checks on IRS's use of third-party summonses. While explicitly recognizing the importance of the third-party summons as an IRS investigative device, the congressional committees responsible for drafting § 7609 were concerned that "the use of this important investigative tool should not unreasonably infringe on the civil rights of taxpayers, including the right to privacy." H.R.Rep.No.94-658, 94th Cong., 2d Sess. 307, reprinted in (1976) U.S.Code Cong. & Ad.News 2897, 3203; S.Rep.No.94-938, 94th Cong. 2d Sess. 368, reprinted in (1976) U.S.Code Cong. & Ad.News 3439, 3797. Recognizing that the third-party could raise questions as to relevance and other issues bearing on the privacy rights of the person to whom the records pertained, the legislators nonetheless concluded that those issues often would be less vigorously pursued by the third-party than by the person whose interests were at stake:
While the third-party witness also has this right of challenge, even under present law, the interest of the third-party witness in protecting the privacy of the records in question is frequently far less ...