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United States v. Manufacturers and Traders Trust Co.

decided: March 18, 1983.

UNITED STATES OF AMERICA AND JOHN C. COPPOLA, SPECIAL AGENT INTERNAL REVENUE SERVICE, PLAINTIFFS-APPELLANTS,
v.
MANUFACTURERS AND TRADERS TRUST COMPANY, DEFENDANT, ROBERT JANE AND WILHEMINA JANE, INTERVENORS-APPELLEES



Appeal from a judgment of the United States District Court for the Western District of New York, John T. Elfvin, Judge, denying appellants' petition for enforcement of Internal Revenue Service summonses.

Feinberg, Chief Judge, Cardamone and Davis,*fn* Circuit Judges.

Author: Davis

DAVIS, Circuit Judge:

The refusal of the Western District of New York (Elfvin, J.) to enforce summonses issued by the Internal Revenue Service (IRS) at the request of and in aid of Canada raises questions under the United States-Canada Tax Convention of 1942. The prime problem is whether the IRS can obtain information needed by Canada to help determine a Canadian taxpayer's liability to it but also intended to be used by criminal investigators and prosecutors in Canada. We hold that all the requirements of the Convention have been satisfied and the summonses should have been enforced.

I

The United States-Canada Tax Convention of 1942, 56 Stat. 1399, provides in Article XIX:

With a view to the prevention of fiscal evasion, each of the contracting States undertakes to furnish to the other contracting State, as provided in the succeeding Articles of this Convention, the information which its competent authorities have at their disposal or are in a position to obtain under its revenue laws insofar as such information may be of use to the authorities of the other contracting State in the assessment of taxes to which this convention relates.

The information to be furnished under the first paragaraph of this Article, whether in the ordinary course or on request may be exchanged directly between the competent authorities of the two contracting States.

Article XXI then goes on to declare:

1. If the Minister in charge of the Canadian Department of National Revenue in the determination of the income tax liability of any person under any revenue laws of Canada deems it necessary to secure the cooperation of the Commissioner of Internal Revenue, the Commissioner may, upon request, furnish the Minister such information bearing upon the matter as the Commissioner is entitled to obtain under the revenue laws of the United States of America.

The "revenue laws of the United States of America" (see Article XXI, supra) under which the Commissioner normally obtains domestic civil tax information encompass the authority to summons persons, such as banks, in possession of "books of account containing entries relating to the business of the person liable for tax" to appear and produce such books and records (26 U.S.C. § 7602). If the summoned person refuses or fails to comply, the district courts have jurisdiction to enforce the summons. 26 U.S.C. §§ 7402(e); 7604. Summonses of that type were duly issued, at the request of the Canadian government, to the Manufacturers and Traders Trust Company of Buffalo to obtain bank statements, ledger cards and other documents reflecting (or related to) transactions of appellee Robert Jane -- all sought in connection with Jane's Canadian tax liability. The bank failed to appear or produce the materials, and this action was commenced in the lower court by the United States and the IRS to enforce the summonses. The Janes sought leave, and were granted the right, to intervene and they have defended the suit.*fn1

It is established, at least in this circuit, that the Tax Convention contemplates use of the statutory summons and summons-enforcement procedure even though no United States taxes are involved, and the United States is acting solely at the request of the Canadian tax authorities, and for the latter's own purposes. United States v. A.L. Burbank & Co., Ltd., 525 F.2d 9 (2nd Cir. 1975), cert. denied, 426 U.S. 934, 49 L. Ed. 2d 386, 96 S. Ct. 2647 (1976). But we have not as yet decided what standards govern such a Canadian request with no overtones for United States tax liability. The district court applied all the rules the Supreme Court has laid down for the enforcement of a summons for the purposes of domestic tax liability, and on the basis ruled the demands not to be enforceable. In particular, the court held the summonses vitiated by the fact that the Canadian tax authorities requesting the information intended to share the produced material with other Canadian officials interested in a pending criminal prosecution against Robert Jane.

It is unnecessary to detail the course of the proceedings in the district court, or the successive stages by which that tribunal reached its ultimate decision that the summonses should not be enforced. A summary of its final position will suffice. After an evidentiary hearing, the district court found these facts which are now undisputed: The intervenors, Robert Jane and his wife Wilhemina, were until 1978 residents of Canada (and at least he was a Canadian citizen). The Canadian Department of National Revenue (CDNR) was investigating their Canadian income tax liabilities for 1976-1978. In the course of that inquiry, the Canadian authorities made a jeopardy assessment against Robert Jane on the theory that he was transferring assets out of Canada. Jane then commenced bankruptcy proceedings in that country. The Royal Canadian Mounted Police (RCMP), charged with investigating criminal matters concerned with bankruptcy, shortly became involved. There was a continuing, close, working relationship between the officials of CDNR, responsible for inquiring into the Jane's tax liability, and the RCMP, responsible for criminal aspects of Robert Jane's bankruptcy. The CDNR's working papers were turned over to the RCMP, and the agent personally working on the civil tax case was ordered to respond to the RCMP agent's questions. Moreover, the district court found, there existed between CDNR and RCMP "an express or implied agreement that, if the CDNR obtained enforcement of the instant summons, the information procured would be made available to the RCMP for its criminal investigating purposes." The court concluded "as a fact, that the material seized by the CDNR [through the summonses before us] were and are sought at least in important part for the use of the RCMP".

As we have said, the court then applied the criteria established by the Supreme Court and this court for the enforcement of an Internal Revenue Service summons in wholly domestic cases -- including the requirements barring the Service from seeking information for the very purpose of criminal prosecution or inquiry into ...


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