UNITED STATES v. LASALLE NATIONAL BANK
Legal provision: Internal Revenue Code
Argument of Lawrence G. Wallace
Chief Justice Warren E. Burger: We will hear arguments next in United States against LaSalle National Bank.
Mr. Wallace, you may proceed whenever you are ready.
Mr. Wallace: Mr. Chief Justice and may it please the Court.
This is an Internal Revenue summons enforcement proceeding in which the District Court denied enforcement and the Court of Appeals affirmed.
The case presents questions that many of us thought were settled by this Court’s decisions in United States v. Powell in 1964 and Donaldson v. the United States in 1971.
But, the questions have stubbornly persisted.
The special agent in this case served a summons on the respondents, a bank and its vice-president, seeking information involving real estate trust relating to the affairs of a particular taxpayer who was the subject of his investigation and incidentally, the record shows that the taxpayer’s attorney has been the counsel for the respondents throughout the case.
The special agent’s testimony, in response to the purpose of the issuance of the summons and in direct response to questions, said that the purpose of his investigation was to determine tax liabilities for the years under investigation and when asked what the focus of his own inquiry into the matter was, he said it was to investigate the possibility of criminal violations of the Internal Revenue Code.
The Court of Appeals characterized this testimony as indicating that the record establish that the special agent testified to the existence of a civil purpose, but that the District Court who observed the demeanor of the witness discredited that testimony.
Now, while it is not material to the position that we are taking in the case, I do think it is illustrative of the problems we are running into in these cases that with all respect, I find it hard myself to characterize the holding of the District Court this way, but there was no contradictory testimony of any kind.
The District Court was relying in its findings solely on the testimony of the agent with respect to the functions that he was carrying out.
The findings recited by the District Court, seem to me, to be wholly consistent with the agent’s testimony and that is in the Appendix to the petition referring to the District Court’s opinion at the bottom of page 2A of the Appendix to the petition and the top of page 3A, the District Court said it is apparent, however, that this focus and determination, namely that it is an investigation for a criminal purpose, maybe arrived at under certain circumstances before the actual recommendation for criminal prosecution has been made.
In such event, the focus and determination has been arrived at the time of the issuance of the Internal Revenue summons.
In the District Court’s view, that becomes a summons issued for an improper purpose that should not be enforced and that was reflected by the testimony where the agent said “While the purpose of his investigation was to determine tax liabilities, the focus of his inquiry all consistent with the language used by the District Court was to investigate whether there had been a criminal violation of the tax laws.”
The difficulty that we are finding in the summons enforcement proceedings --
Justice John Paul Stevens: Mr. Wallace, before you leave Judge McGarr’s opinion, he does say, in the next to the last paragraph, “it is apparent that the agent was conducting his investigation solely purpose of unearthing evidence of criminal conduct.”
Mr. Wallace: That is correct.
Justice John Paul Stevens: That is what the Court of Appeals say he found too, is it not?
What is the difference between Judge Powell and Judge McGarr?
Mr. Wallace: Well, there is no indication that there was any rejection of any of the witness’ testimony on the basis of credibility by Judge McGarr.
Justice John Paul Stevens: Well, to the extent that the witness said it was for some other purpose when the District Court says it is solely for the purpose of criminal proceedings --
Mr. Wallace: That is the test being used.
I recognize that one can characterize this is the way the Court of Appeals characterized it, but I find it difficult to find inconsistency between Judge McGarr’s holding and the testimony and he does not in any way reject the testimony, he seems to be saying that so long as the agent admits that the focus of his inquiry is on the criminal aspects of the investigation, that shows that there is a solely criminal purpose for purposes of applying the standard that he thinks should be applied under Donaldson.
This does not --
Justice John Paul Stevens: How do you expect us to decide the case?
Should we assume that the investigation was solely for criminal purposes or not?
Mr. Wallace: That is what I am trying to get to, if you will let me do it a little bit indirectly.
In the first place, I do not think it is the pertinent question and in the second place there is no such investigation when an assignment has been made to a special agent.
That is the short answer, but I will have to explain it a little bit indirectly.
The difficulty that we are running into in the summons enforcement proceedings in a number of Courts of Appeals that have departed from the line of demarcation that was at least one line clearly established in Donaldson whether a recommendation has been made to the Department of Justice and that, it instead adapted a standard of whether the sole purpose was a criminal purpose or whether the agent had a firm purpose to recommend prosecution or a fixed purpose to recommend prosecution is that the inquiry is focusing on the personal purpose of the agent and his subjective understanding of his assignment rather than the legal purpose of the authorized investigation that has been assigned to him.
An agent does not select the subject of his investigation.
In this case, he said he was assigned to investigate the tax liabilities of this particular taxpayer.
That assignment was duly made by who would have been the group manager in a large office such as this one, in a smaller office, it would be made by the chief of the unit.
Our position is that so long as that assignment is duly made as a tax investigation assignment and the agent is carrying out that investigation, there is no meaningful distinction in the agent’s functions between a civil and criminal purpose of his investigation.
The two are not separable and the delay that we are running into in summons enforcement proceedings is because the agents are being called to the stand and cross examined about their personal understanding of their function to see if, in some way, they will indicate sometimes through an appeal to their vanity about the kind of matters that call for bringing them into it, that, this was really an investigation of criminal conduct.
Justice William H. Rehnquist: Mr. Wallace, we do have a case here involving a particular agent and a particular investigation and Justice Stevens asked you awhile ago about whether in view of Judge McGarr’s finding that the investigation was solely for criminal purposes, which he suggested the Court of Appeals had upheld is not clearly erroneous, what hypothesis do we go ahead on this case?
The people of the Organization of the IRS, I do not think, are very helpful to answer that.
Mr. Wallace: I will have to differ with you, Mr. Justice.
I think it makes all of the difference because both the District Court and the Court of Appeals proceeded on the erroneous premise that the test here, and I am referring back to Judge McGarr’s opinion at page 2A of the Appendix to the petition, this was the next thing I was getting to, he said in the first full paragraph on that page, the court recognizes that civil and criminal investigations may go forward side-by-side before a determination of the ultimate focus of the investigation is made and that is quoted virtually word-for-word by the Court of Appeals on page 8A in a apparent agreement that that is the starting point of the legal analysis here, but it is not --
Justice John Paul Stevens: Mr. Wallace, he said that is what may happen and later on, he says what did happen in this case which is a criminal investigation.
Mr. Wallace: What I am trying to tell the Court is that there is no such thing as a civil and criminal investigation going on side-by-side in the way the Internal Revenue Service proceeds.
It really is a matter of nomenclature whether you say that the special agent’s assignment is to determine whether fraud penalties should be assessed against the taxpayer or whether there has been criminal violations of the Internal Revenue Code.
Chief Justice Warren E. Burger: Would this Court not be as free as the Court of Appeals’ would have been to say that absent contrary testimony or some affirmative testimony finding by District Judge, his finding on this subject was clearly erroneous.
Is that not one of the alternatives open?
Mr. Wallace: It is an alternative open, but I think this is not a matter of the clearly erroneous finding.
This is a matter of an improper legal standard being applied to the question of the enforceability of an Internal Revenue Summons.
I think that this is clarified, very helpfully, for us by a recent analysis by the Second Circuit Court of Appeals which have set out in the Appendix to our reply brief in an opinion written by Judge Friendly on behalf of that court in a case called United States v. Morgan Guaranty Trust.
As he points out at the bottom of page 12A of the Appendix to our reply brief we start and I think this is quite accurate, from the premise that investigations of taxpayers that would develop evidence of criminal, but not of civil tax liability must be rare.
Indeed, petitioners have pointed to none.
As we specify in our brief, when tax fraud is found, that is evidence that supports a determination that a 50% fraud penalty should be added to the liability otherwise due and the Internal Revenue Code is quite specific that that kind of a fraud penalty is a tax within the meaning of the Code, that is Section 6659 (a) (2) of the Code and that a determination that a fraud penalty is owing is part of what must be specified in the statutory notice of deficiency.
That is the effect of Section 6671 of the Code and it is the statutory notice of deficiency that culminates from a tax investigation undertaken by the special agent.
Justice Thurgood Marshall: How did Judge McGarr go wrong?
Mr. Wallace: By not understanding that there is no way to differentiate the civil and criminal aspects of the special agent’s work.
Justice Thurgood Marshall: Did the government lawyer explain it to him?
Mr. Wallace: He may not have sufficiently.
Justice Thurgood Marshall: If he did not, what are we going to do?
Are we going to say the judge is wrong?
Mr. Wallace: That is the question presented in the petition that was granted by this Court and that is the question that needs deciding because the Courts of Appeals are going in many disparate directions here and many tax investigations are being delayed.
Justice Thurgood Marshall: What are you going to give us to show that he was wrong?
Mr. Wallace: That is the purpose of my argument.
Justice William H. Rehnquist: Judge Friendly’s opinion would have no trouble with Judge McGarr’s finding, would it?
Justice Thurgood Marshall: That is right.
Justice William H. Rehnquist: It simply would have said I can accept it as not clearly erroneous and nonetheless, they are not entitled.
Mr. Wallace: That is correct.
The summons should have been enforced.
That is exactly what the Second Circuit would have held on the basis of Judge McGarr’s findings, which is why we are here.
The Circuits are not deciding these cases the same way and we are having lengthy inquiries of special agents that ultimately seem to us to have no legal purpose.
Justice Thurgood Marshall: It is not in this record, but I know what you say was not a rule in 1965 because in a case of the Second Circuit there were two agents sitting in the same office, one of them civil and one of them criminal on the same name, has that changed?
Mr. Wallace: There are revenue agents and special agents who specialize in different aspects of the investigation.
The revenue agent, all this was recognized in the court’s Donaldson opinion when it said that the mere bringing in of the special agent is not converted into an improper use of the summons.
The revenue agent is a specialist in determining liability other than the 50% addition to tax, that is the fraud penalty and a special agent is someone trained to investigate for fraud and to see whether a 50% addition to the tax liability should be made.
In other words, he has 1/3 of the responsibility for determining the possible deficiency in the tax payment and that is specifically what Section 7602 of the Code authorizes agents of the service to issue summons for, to determine tax liability, which I just explained to the Court, includes in the definitions of the Code, liability for a fraud penalty.
Justice John Paul Stevens: Mr. Wallace, let me see if I understand your position.
Is the government not arguing that even if Judge McGarr is 100% right, the investigation really could be characterized as 100% criminal, nevertheless, no recommendation for prosecution had been made, therefore, there is a pure simple rule that we can apply under the presumption, it is okay, that is your idea?
Mr. Wallace: That is our position.
That is correct, but I would not quite characterize it that way because there is no such thing as 100% criminal in this sense.
Justice John Paul Stevens: You can assume there is and you would make the same argument, would you not?
Mr. Wallace: I cannot assume that there is because it is unrealistic.
It is not the purpose for which the investigation is assigned to the agent
Justice John Paul Stevens: It is theoretically possible, is it not, that there could be an absolutely detailed determination of tax liability, but some lacking or some shortage of evidence on intent and you are looking for some corporate menage or something.
It could theoretically be such a case and you would say you could still enforce the summons if there is no recommendation, that is your position, is it not?
Mr. Wallace: Well, it is, but it has to be put in context.
The special agent conducting --
Justice John Paul Stevens: Every time you say it has to be put in context, you are going to say you got to have a factual hearing unless you got to --
Mr. Wallace: No, I agree with the position, but it has to be understood in the context of two points.
One is statistics that we have cited in our brief on page 20 that show that very substantial sums of fraud penalties are assessed as a result of these investigations in cases in which no recommendation for criminal prosecution is made.
It is very difficult to anticipate which of these investigations will fall into that category.
The second point, and a point I think is very well-made, again in Judge Friendly’s opinion for the Second Circuit, again on Page 12A, is that it is not up to the special agent to decide whether a case will be referred for criminal prosecution to the Department of Justice.
He does not have the authority to decide.
He is not the responsible official to decide that.
We are cross-examining these special agents about whether they have a firm purpose to recommend criminal prosecution, but that is not the same thing as a determination that in all but form a recommendation of criminal prosecution will be transmitted to the Department of Justice.
The agent in determining, after his investigation is concluded, whether to recommend prosecution consults with his group manager whose recommendation will go along with his, either agreeing or disagreeing with it and I am told that in a substantial percentage of the cases, the group manager’s greater experience in discussing the case with the special agent will change the special agent’s mind about whether to recommend criminal prosecution in the particular case.
We do not have figures on that.
The Internal Revenue Service does not have figures on that.
After that takes place, if the agent’s conclusion to recommend criminal prosecution survives that, it then goes to the Chief of the Intelligence Division’s District Office who has the authority to put an end to it right there if he disagrees with it.
That is a relatively small percentage of cases that get that far and then he puts an end to it, but there are cases where he puts an end to it.
If he decides to carry it forward, he does not have the authority to transmit it to the Department of Justice.
His only authority is to send it to the Regional Counsel with a recommendation that it be transmitted to the Department of Justice with the recommendation for criminal prosecution.
The Regional Counsel, we do have figures on and those figures show that in Fiscal Year 1976, the Regional Counsel declined to refer 14.6% of the cases that reach that far over to the Department of Justice, 349 he declined and 2,037 he did refer.
In 1977, the percentage was 10.9%.
Now, the question necessarily arises what of the cases in which the agent had a firm purpose to recommend criminal prosecution, but the evidence that he had at that time that his purpose became fixed was not sufficient to persuade his superiors to recommend criminal prosecution to the Department of Justice.
What investigatory tool is available under the statutory scheme for such cases under the holdings of the Courts of Appeals that say that the agent’s purpose is what is controlling as to whether the summons is available?
The summons is the only investigatory tool that the agent has.
Other than that, all he can do is present his credentials and ask for voluntary disclosures of information which banks and other employers and other institutions are increasingly reluctant to make because they are afraid of being sued if they do not have compulsory process.
There is no compulsory process available to the agent except the Internal Revenue summons.
If the agent has a firm purpose in mind, several Circuits have held he cannot use that process.
That leaves nothing available but a grand jury subpoena.
Justice Potter Stewart: In Reisman v. Caplin, Mr. Wallace, had there been a recommendation for a criminal prosecution?
Mr. Wallace: There had not.
There was, in that case, a dictum which I will be happy to refer to because the dictum did not refer to whether there was a criminal purpose as being something improper.
What the dictum in fact set on page 449 of Volume 375 US, the witness may challenge the summons at any appropriate ground.
This would include, as the Circuits have held, the defense is that the material is sought for the improper purpose of obtaining evidence for use in a criminal prosecution.
That is a more careful formulation of what is loosely called for a criminal purpose.
It reminds me a little of --
Justice Potter Stewart: It is not called for a criminal purpose.
It is called for purpose of a criminal prosecution.
Mr. Wallace: Yes, well for use in a criminal prosecution.
Justice Potter Stewart: Not for criminal purpose because that is not the test.
Mr. Wallace: Obtaining evidence for use in a criminal prosecution, but the point is the special agent not only does not have authority to determine whether the recommendation will be made to the Department of Justice, he also does not have the authority to determine what will be included in the notice of tax deficiency that has to, under the statute, be sent to the taxpayer 90 days before the tax can be assessed and the taxpayer has an opportunity to contest it during those 90 days in the Tax Court.
That again, it is up to his superiors to determine whether that notice of deficiency should include a 50% addition to tax because of fraud penalties.
Anything that the special agent can find out in the course of his investigation that indicates criminal violations of the Tax Code of a fraudulent nature is supporting evidence by which his superiors can make the determination more accurately whether that deficiency notice should include the 50% fraud penalty.
There is no way of differentiating the special agent’s functions in getting that evidence between evidence that is needed in order to carry out his civil assignment and evidence that would show criminal violation of the Code.
The purpose of the Reisman dictum and its preservation in Donaldson, I think is quite accurately stated by the Second Circuit and by Judge Friendly, is to assure that the summons is not being used to trench on the authority of the grand jury or to broaden the government’s right to discovery in criminal proceedings.
In other words, that the summons is not being used after its civil purposes are spent.
Justice John Paul Stevens: Mr. Wallace, the dictum in Reisman really could be read to refer to criminal prosecution other than for violation of the Revenue Code, it is clearly improper?
Mr. Wallace: Of course, if it is used for some collateral purpose.
That is what the Powell case was about, what they called abuse of process, using it for something other than an investigation of tax liability and of course, that would be improper, but there is nothing of that kind in this case.
Justice John Paul Stevens: I realize that.
Why is it improper even after recommendation for prosecution has been made, if the agent is really trying to check up on a violation of revenue?
Mr. Wallace: It might not.
We have a footnote in our brief suggesting that it might not be improper in that circumstance if the information so received is insulated from the Department of Justice and from use bu department in its prosecution, but we do not, as a matter of fact do that.
As a matter of Internal Revenue practice, summonses are not issued once the notice of deficiency has been sent.
The Summonses are used to investigate up to the point of determining what should be in the notice of deficiency.
Now, it happens that increasingly the returns of many of the summons are not made until after the notice of deficiency is issued because of all these proceedings about whether the summons is enforceable or not, but we came to the Court in the hope of restoring the situation, to getting returns of the summonses prior to the issuance of the notice of deficiency.
I would like to reserve the balance of my time, if I may.
Chief Justice Warren E. Burger: That is a bright line that all of the Courts of Appeals would readily understand, would it not be?
Mr. Wallace: Yes, I believe so, Mr. Chief Justice.
Chief Justice Warren E. Burger: Mr. Cushner?
Argument of Matt P. Cushner
Mr. Matt P. Cushner: Mr. Chief Justice and May I please the Court.
First, I would like to respond to counsel’s arguments before I make my presentation.
Counsel indicated in his opening that the finding of Judge McGarr was suspect in view of the fact there seem to be no contradiction in the testimony.
I think viewing the appendix that has been filed with the Court in this case, particularly page 52, we find Mr. Perry testifying exactly opposite to the testimony of Special Agent Olivero concerning his purpose with respect to the issuance of the summons.
Special Agent Olivero met with Mr. Perry and at the time testified that he had no civil purpose.
Mr. Perry testified to that conversation.
It seems anomalous that we would be in front of the Supreme Court arguing an evidentiary question that has been cited by the District Court after hearing witnesses, viewing their demeanor, being reviewed by the Court of Appeals for the Seventh Circuit, the Seventh Circuit finding in the unanimous decision that there was more than adequate support in the record for the findings of the court below.
Justice William H. Rehnquist: But if Judge Friendly is right, you are not here arguing an evidentiary question because in his view even if the evidentiary question is in your client’s favor, you still lose?
Mr. Matt P. Cushner: I think that is correct.
I think that if an Internal Revenue summons may be issued solely in aid of a criminal investigation and that is authorized not only by the statute, but is constitutionally permissible then the evidentiary question would not make any difference.
Chief Justice Warren E. Burger: To put it in another way, if the line that you later decide whether that is a bright line is when the recommendation is made with the Department of Justice for prosecution, if that is the line then that is the end of the case, is it not?
Mr. Matt P. Cushner: Yes, if that is the line.
Chief Justice Warren E. Burger: It make no difference what was in the mind of the agent?
Mr. Matt P. Cushner: I would agree, if that is the line.
The problem is that if that is the line, what is the reason for judicial review and what is the distinction between the investigation before the recommendation or after the recommendation?
If the summons is proper before a recommendation, why is not proper afterwards?
No criminal prosecution is necessarily an essay after the issuance of a recommendation to the Department of Justice.
Chief Justice Warren E. Burger: You are assuming that there is a bright line in fact at all times in the mind of the inquiring agent as there is a bright line if we draw the line there?
Mr. Matt P. Cushner: No, I suggest in this case there was such a line.
I think we are not talking about generally.
All the summonses that are issued all over the United States in every case, I think this is the most peculiar case with the most peculiar set of facts that has been found that way.
Chief Justice Warren E. Burger: What if you had a situation where some people involved with knowledge of the inquiry, had as their objective, the prospect of the criminal prosecution and others did not?
What about that?
Would that taint the whole summons because someone in the Internal Revenue Service thought there was a criminal liability here?
Mr. Matt P. Cushner: Well, Mr. Chief Justice, I do not think it is because someone in the Internal Revenue Service thought there was a possibility or thought there was equivocal violation.
I think it is the agent who is conducting the investigation and it is the agent who is issuing the summons as here in question.
It is that agent who we must look to, to determine the type of investigation that is being conducted.
It is the agent who issues the summons and it is the agent who conducts the investigation.
The fact that the Internal Revenue manuals may prohibit him from doing certain things that may otherwise be in access of the statutory powers or for that matter unconstitutional does not necessarily mean that all government employees or for that matter all special agents follow those.
I think the testimony is uncontradicted when the special agent was asked on the stand whether he had even read in totality his manual of procedures, the special agent said that he did not and when questioned as to particular procedures that were mandated in that manual, said that he did not follow them and would not follow them with what he called home ground rules were to the contrary.
I think what we have in this particular case was a special agent running an investigation for purposes far in excess of whatever the statutory grant may be and certainly in an unconstitutional manner.
Justice Thurgood Marshall: How can that injure your client, if he did not have any authority?
Mr. Matt P. Cushner: I think that this is a most peculiar type of case also because the nature of the record sought.
We have here records sought that are part of an Illinois Land Trust, a very peculiar way to hold title.
The identity of the trustee and the beneficiaries is very closely knit.
For instance, if the legal and equitable title holder being the bank were sued or if a tort was committed on that land, the bank would be sued.
The beneficiaries are required to bear the cost of the defense of the suit and ultimately bear whatever tort liability there is.
We have a most difficult problem in that whose privacy, whose records, who is the right person to object to this?
They have sought records from the bank.
Justice Thurgood Marshall: Let me give a hypothetical case.
A man forges documents and promotes himself from Forth Assistant Janitor to a Regional Counsel of Internal Revenue and served you with a subpoena, how are you injured?
Mr. Matt P. Cushner: I think, Justice Marshall, anytime I am served with legal process I have a right to inquire as to whether that legal process is, in fact, legal.
Justice Thurgood Marshall: Yes you require, but If he gets them, how are you hurt?
Mr. Matt P. Cushner: I think anybody who is required to comply with legal process which is in fact not legal is hurt.
I think it is our liberty.
Justice Thurgood Marshall: As I understand, if a man in government gets as much as he can get legally, but is prevented from doing anything with it, there is no way, as I understand it, that an investigator on the civil side can participate on the criminal side in Internal Revenue?
Mr. Matt P. Cushner: I am not sure I understand your question, Justice Marshall.
Justice Thurgood Marshall: Was the agent here on the civil side?
Mr. Matt P. Cushner: No, this was a special agent from the Intelligence Division which is now known as the Criminal Enforcement Division.
There was not cooperating agent from the Audit Division in this particular case.
I think Judge McGarr recognized that the mere fact that there was no audit agent did not preordain the result that, in fact, was reached.
Justice Thurgood Marshall: That could be the reason for that sentence about him going side by side.
Mr. Matt P. Cushner: It could be.
Justice Byron R. White: I take it all we have got is a question of statutory construction here, is it not?
There is no constitutional issue involved.
Mr. Matt P. Cushner: I think there is a constitutional issue involved.
I think that if the Court reaches the statutory question and says that the statute does in fact authorize the issuance of a summon such as the instant summonses solely in aid of a criminal investigation, we run into the problem of Abel v. the United States.
I think Justice Frankfurter succinctly stated the issue in that case where the question before the Court was use of administrative warrant for the purpose of gathering evidence or the alleged purpose of --
Justice Byron R. White: Well I know, but you might have a constitutional objection to a summons in a criminal investigation, but that has not got anything to do with how the statute is to be construed, is it?
Mr. Matt P. Cushner: It is not a matter of construing the statute.
Justice Byron R. White: Well, suppose somebody has a Fifth Amendment objection to complying with the summons, could he make it?
Mr. Matt P. Cushner: Of course, he could.
Justice Byron R. White: Well, you are not losing your constitutional protection just because of what the statute is?
Mr. Matt P. Cushner: I think we lose our constitutional protection if the Supreme Court orders the compliance with summonses issued solely in aid of a criminal investigation.
I do not think that the statute authorizes that, but if the Court should find that the statute authorizes the issuance of summonses solely in aid of a criminal investigation, forcing people to comply with such summonses, I feel is unconstitutional, obviously if the Court finds it to be constitutionally the argument is mooted.
Unknown Speaker: What provision of the constitution would be violated?
Mr. Matt P. Cushner: To be frank with the Court, I cannot point to a specific provision.
Justice Frankfurter did not point to a specific provision.
I do not think any of the courts have.
Justice Byron R. White: A lot of people in criminal cases are served with subpoenas to produce evidence and you do not think you are violating the constitution just because you are subpoenaing evidence in a criminal case and if somebody has an some objection to the subpoena that he can find on some constitutional basis he can make it?
Mr. Matt P. Cushner: I agree.
If a warrant of search and seizure is issued in order to get --
Justice Byron R. White: Or if you subpoena somebody to produce records that he think will incriminate him.
Mr. Matt P. Cushner: Either grand jury or the warrant of search and seizure.
Justice John Paul Stevens: So what would be so strange about construing the statute?
Suppose Congress had said in plain black-and-white that these summonses are available in criminal investigations as well as any other?
Mr. Matt P. Cushner: Well, I think then we would have a very clear-cut question of whether or not it is constitutional to authorize a special agent.
Justice Byron R. White: What would your argument be?
You say you cannot think of some constitutional provision.
You just cite Abel?
Mr. Matt P. Cushner: No, I would cite Abel and my argument would be that the special agent is being authorized by the statute to conduct a grand jury without the protection that is afforded by a grand jury.
The grand jury is made up of citizens when they vote to determine whether or not a true bill shall issue.
They sit there alone and they deliberate.
It is not a man charged with the prosecution.
Justice Byron R. White: We cannot indict anybody.
It would still have to go to the grand jury.
Mr. Matt P. Cushner: Speaking of the grand jury, the counsel has cited to the Court statistics as to how much the way fraud penalties are gotten.
I think the more interesting statistic, if it were available, would be how many grand jury subpoenas are actually issued in tax fraud prosecutions.
Almost none are ever issued.
There are no statistics on it, but factually there are none almost issued.
The fact of the matter is that by the time the special agents finish developing these cases, turn them over to the Department of Justice and the Department of Justice then referring them down to local US Attorney’s Office for present it to a grand jury, the grand jury has almost no work to do.
They do not issue grand jury subpoenas.
Warrants of search and seizure do not issue.
These summonses are in fact being used as substitutes for warrants of search and seizure and substitutes for grand jury subpoenas.
Justice William H. Rehnquist: But if Congress has authorized it, what difference does it make?
Mr. Matt P. Cushner: Congress can authorize something that can be unconstitutional.
I do not think they have authorized it.
Justice William H. Rehnquist: But if congress has authorized it, this is just a question, I guess Justice White asked you moreover, what is the constitutional objection to it so long as you retain your right to object on Fifth Amendment grounds to particular request and that sort of thing?
Justice Potter Stewart: A third party would not have many constitutional rights to assert.
These are third party summonses and --
Mr. Matt P. Cushner: Exactly.
Justice Potter Stewart: The decisions are that when the bank gives up a lot of stuff, it might incriminate the bank’s customer.
Nobody can erase that.
The bank cannot because it is not its constitutional rights that are being invaded and the customer cannot because it is not his material that is being summoned?
Mr. Matt P. Cushner: I think you are correct, Justice Stewart.
I think that is the problem that was faced by the people in Miller.
Justice William H. Rehnquist: But does Donaldson not say that the real party of interest can intervene in a proceeding with bank records or summons that really are not the bank’s?
Mr. Matt P. Cushner: I think you are right.
I think intervention becomes a meaningless right if the defenses both constitutional and statutory, are taken away.
I fail to see the purpose of judicial review.
If the summons power of the Internal Revenue Service is unfettered, I fail to see the purpose of the Congress when enacting the statute in enacting judicial review.
Justice William H. Rehnquist: Well, supposing that the summon is served on the bank, your client comes in under Donaldson and intervenes and is permitted to raise any Fifth Amendment of self-incriminating objections that he has, what more is he entitled to under the constitution?
Mr. Matt P. Cushner: He is entitled to, if he is going to be prosecuted under laws of the United States, to be prosecuted in conformance with those systems of justices that have grown up in this country, the grand jury and the warrant of search and seizure.
I do not think that Congress has ever authorized the agencies of the United States to conduct this type of criminal investigation.
The purpose of enacting the statute of which we are dealing here is to determine the really correct tax liability.
There has been no finding in this case that the investigation being conducted by the special agent, even relates to tax.
This is a very peculiar case based on the peculiar facts within this case and I do not think it really presents a question other than the way it has been presented to the Court that lends itself to these arguments.
The special agent has been conducting an investigation.
It is unclear as to whether or not his conducting a special investigation even of tax liability.
They say and they quote various cases saying that there had not been tax prosecutions which do not involve the payment of a penalty or a tax.
Well, such is not the case.
The recent case in the Seventh Circuit of Devarko which did not deal with the underpayment of the tax or the overpayment of the tax, but merely the misstating of where income comes from.
There are many cases in which the Internal Revenue Service can investigate taxpayers that has nothing to do with the collection of the tax and I think Devarko is just one example of it.
I think that the personal purpose of the agent is really not the issue.
It is not the personal purpose generally.
The purpose of this agent, initially in the summons, was solely in aid of a criminal investigation, not a criminal tax investigation, not a criminal tax investigation with the possibility of a civil tax penalty, but a criminal investigation and that is the problem that we face.
I think even the Donaldson case gives us some guidance.
I think Donaldson very clearly stated that the issuance of a summon solely in aid of a criminal investigation is not a proper purpose.
In Donaldson, the real issue before the Court was intervention, whether Mr. Donaldson had sufficient interest in the records to intervene.
The Court decided against him, but Mr. Donaldson also raised going through the manual, going through the Code of the Federal Regulations, the general duties of the Intelligence Division to prosecute and to advance criminal cases.
The Court I think correctly stated that the mere fact that these may be the duties does not inextricably lead to a criminal prosecution and the Court did not want to deny the Internal Revenue Service because of these provisions the right to issue summonses.
Neither did the District Court or the Court of Appeals in this case, the finding is wholly consistent with the finding in Donaldson.
The finding in this case is not merely that the agent was going ahead with a legitimate investigation.
The point of the findings below was that this was not a legitimate investigation in furtherance of any statutory duty or any statutory right that this agent may have had pursuant to the statute.
If judicial review is to have any viability in the summons cases, the mere fact that the tax payers or people summonsed may exercise their right to judicial review does not mean that judicial review somehow becomes something disrespectful of the processes or something that a taxpayer or a person summoned should not avail themselves of.
It was provided for just to prevent just this type of abuse.
The mechanical application that the petitioners urge upon the Court will do nothing to stop these abuses.
If the only rule is merely that an agent has not recommend it to his superiors and his superiors to the Department of Justice, that criminal prosecution be recommended and instituted, the only thing that a special agent need do is hold off on that recommendation as they do now until the criminal case is completed then turn it over, once again have it reviewed by Regional Counsel to determine whether there is sufficient evidence to support a prosecution and turn it over to the Department of Justice.
There is nothing magical about that recommendation.
The only think about that recommendation is that it is clear to all.
Once that recommendation is made, the obvious focus, the obvious purpose, the obvious end of that investigation is solely criminal in nature.
Justice John Paul Stevens: Mr. Cushner, maybe I am awfully dense on this, but why is it an abuse for the agent to take the statute as it reads and just say, “I can go and get some information.
It may help me prosecute this man.”
What in the statute makes that an abuse?
You assume that, I know Donaldson seems to, but I am not quite sure I understand why?
Mr. Matt P. Cushner: I think it is an abuse because the statute was passed for a specific purpose.
I do not think the purpose of the statute is to allow the agent to conduct a grand jury.
I think the agent is permitted under the statute to issue summonses in aid of determining correct tax liability, in aid of determining whether or not incorrect tax liability may lead to criminal prosecution under the Internal Revenue Code.
Justice John Paul Stevens: How do you respond to Mr. Wallace’s argument that tax liability is a broad enough concept to include fraud penalty and all these things may end up in fraud penalties?
Mr. Matt P. Cushner: I agree they may end up in fraud penalties.
Justice John Paul Stevens: Is that a tax liability?
Mr. Matt P. Cushner: That is tax liability.
Justice John Paul Stevens: Then why does it not come right within the language of the statute?
Mr. Matt P. Cushner: It does come within the language of the statute, but that is not the facts that are before the Court.
That was not the finding of the District Court, nor was that the findings of the Court of Appeals below.
They said that the special agent had nothing more than focus his inquiry on the criminal activities of the taxpayer, not the criminal tax activities of the taxpayer, but the criminal activities of the taxpayer.
When the special agent was questioned as to whether or not he was using the summons to investigate possible 18 United States Code 1001 violation, that is false statements to the government, he said he was not, but now that we had mentioned it, he would not make such inquiry.
It is clear that a summons cannot be issued in order to determine whether or not violations of the criminal statutes under 18 United States Code exist, but the agent stated on the stand under oath that now we had suggested it to him, that is what he would in fact do.
Chief Justice Warren E. Burger: You seem to be assuming all the way through your argument, Mr. Cushner, that there is a bright and clear line when an inquiry moves from a civil into a criminal, but is it not a realistic fact that many, many inquiries start out both in the tax field and other areas, fraud against the government, start out on a purely civil liability basis and move on and become criminal prosecutions?
Mr. Matt P. Cushner: I think you are correct, Mr. Chief Justice.
Chief Justice Warren E. Burger: You suggested three times now, I think, that the agent is in fact given the powers to the grand jury.
He has such no powers.
His recommendations do not have to be accepted.
The grand jury’s recommendations do.
They become an indictment.
Mr. Matt P. Cushner: And the indictment can be withdrawn and has been withdrawn in many cases.
Chief Justice Warren E. Burger: They become an indictment, but the agent’s recommendations may be accepted or rejected by his superiors?
Mr. Matt P. Cushner: I think that is correct.
I do not think though that Mr. Wallace or anyone else can ever point to a case in which a special agent has developed an adequate criminal case in which that recommendation has been declined nor should it be.
The point is whether or not the special agent may conduct solely a criminal investigation.
The Court has found, these are the facts that determine the thrust of this case, the Court has found that this agent was not looking for, attempting to find, investigating anything other than the criminal activities of the taxpayer and whether the agent may be authorized to do that or not is not the question.
Is the agent authorized to issue a summons in furtherance of those activities and that is what is impermissible.
I do not think any Court has ever held it.
Chief Justice Warren E. Burger: Do you mean impermissible under the statute or under constitutionally?
Mr. Matt P. Cushner: I do not think that any Court has ever held that it is permissible under either and I think it is impermissible under either the statutory construction of 7206 or the constitution.
Justice Byron R. White: Suppose I am a US Attorney and the grand jury is investigating a particular person and I have not filed a charge against him, but he is certainly my target, so I issue a subpoena to him to come and testify and to bring some records.
Mr. Matt P. Cushner: He shows up and I tell him that you are a target, give him a warning, is there anything unconstitutional about that?
Just so I understand your question Mr. Justice, the US Attorney has caused a grand jury subpoena to issue.
I do not think there is any constitutional infirmity in that.
Justice Byron R. White: And summons them to come and testify?
Mr. Matt P. Cushner: I think that is the proper use of the grand jury subpoena.
Justice Byron R. White: Yes, so there is nothing wrong with using the subpoena in connection with the criminal investigation.
Mr. Matt P. Cushner: Absolutely not.
Grand jury subpoena is the proper tool to be used.
Justice Byron R. White: Now, suppose the statute in this case has said on its face that up until the time a reference for a criminal prosecution has been made, summonses may issue as that statute says.
Mr. Matt P. Cushner: Then I think that it would not be unconstitutional on its face.
It would be unconstitutional as applied if you allow the special agent to conduct a solely criminal investigation and issue a summons in furtherance of it.
I think there is nothing wrong with making a --
Justice Byron R. White: But only because you think it is running in and run around the grand jury?
Mr. Matt P. Cushner: I think it is not only running in and run around the grand jury, I think by using a summon sole in aid of --
Justice Byron R. White: I know but you could certainly make the same objections to the agent as you could do a grand jury, hence furthermore your lawyer is with you.
Mr. Matt P. Cushner: First of all, you can always make the same objections.
The grand juries are empanelled for specific purposes.
The grand jury is subject to abuse and at times, you can get minutes of the grand jury.
When a special agent interviews especially third party, often that it is lost for all times.
Those notes of interview go into his investigative file, almost never discoverable by any defendant.
A criminal defendant is almost never aware of which --
Justice Byron R. White: How about a taxpayer?
Can he take his lawyer with him?
Mr. Matt P. Cushner: Yes, he can.
Justice Byron R. White: And if he would be worried at all, he does, does he not?
Mr. Matt P. Cushner: Sometimes.
Justice Byron R. White: He does not have to go alone anyway like he does to the grand jury.
Mr. Matt P. Cushner: He does not have to.
There are instances when they do go alone.
There are instances when they do go alone and not adequately warned.
Justice Byron R. White: Not by his lawyer?
Mr. Matt P. Cushner: Always warned by the lawyer.
I think that even the citation of the Court to Judge Friendly’s opinion really begs the issue.
Judge Friendly first, on page 10A of the Appendix, cites right out of Donaldson and states “when so read, the dictum comes into proper focus as applicable to the situation of a pending criminal charge or at most of an investigation solely for criminal purposes.”
Then, after quoting that language from Donaldson which distinctly disapproves an investigation solely for criminal purposes, analyses the holding in Donaldson and which to seem to indicate that you can issue a summon solely for criminal purposes.
I do not think Donaldson ever approved that.
Justice Byron R. White: You said 10A.
You do not mean 10A, do you?
Mr. Matt P. Cushner: I mean 10A of the Appendix.
Justice Potter Stewart: The reply brief.
Mr. Matt P. Cushner: In the reply brief.
Justice Byron R. White: I cannot find what you are talking about.
Mr. Matt P. Cushner: On the top of the page there is the end of the quotation from Donaldson which has a semi-colon in the second line and then starts “when so read --”
Justice Byron R. White: Yes, thank you.
Justice Potter Stewart: Of course, it is the government’s position that there is no such thing in 7602, an investigation solely for criminal purposes and that the Court in Reisman perhaps and Donaldson misapprehended the facts of life when it assumed there was such a thing?
Mr. Matt P. Cushner: I think as Mr. Justice Rehnquist pointed out during the initial argument in this case that the citation to the manual of procedures, the general makeup of the Internal Revenue Service is very little help in deciding any individual case and particularly this individual case.
Even Judge Friendly found, before he made his analysis of Donaldson, that the case at issue before Judge Friendly did not involve an investigation solely for criminal purposes, but found exactly to the contrary, that in fact there was a joint investigation going on that was concerned with in fact of the civil violation as well.
Justice Thurgood Marshall: When you get to the criminal prosecution, you use the grand jury subpoena.
Mr. Matt P. Cushner: That is correct, Justice Marshall.
Justice Thurgood Marshall: Which is the same thing, the US Attorney has got them right in his desk drawer.
Mr. Matt P. Cushner: I agree.
Justice Thurgood Marshall: And you are not brought into the grand jury, you are brought into the US Attorney’s office and questioned.
Mr. Matt P. Cushner: That is not always the case.
That is sometimes the case.
Justice Thurgood Marshall: It is sometimes the case, yes, but defense counsel does.
Mr. Matt P. Cushner: Well, defense counsel often does not have the subpoenas.
But defense counsel may, at times, reach the minutes to the grand jury and may at times attack the abuse of the grand jury and I do not think that is present.
Also, the grand jury historically has been setup to protect to stand between the power of the government and the citizens with respect to the accusatory process.
I do not think that such guarantees or assurances rest with the special agent conducting a criminal investigation.
I think that is wherein the constitutional abuse lies even assuming we can get past of what I feel to be the statutory infirmities of the conduct of the special agent in this case.
Justice William H. Rehnquist: Well, your client still has his guarantee of the right to be indicted before a grand jury before he can be held to answer?
Mr. Matt P. Cushner: If the grand jury is left with nothing to do, I think the guarantee of indictment by a grand jury is rendered rather meaningless.
I think the indictment by a grand jury after the special agent with abuse of his process, gathers evidence that a grand jury would historically gather, but the grand jury has nothing to do but vote a true bill.
Justice William H. Rehnquist: Does it really make any difference whether the US Attorney comes in with the evidence all there before them and presents it to the grand jury or summons witnesses and they present the same evidence to the grand jury as to whether the grand jury is going to indict?
Mr. Matt P. Cushner: I think that would have to be decided on a case-by-case basis, but if there was no difference, we could dispense with the grand jury and turn all the government agencies loose with the subpoena power that is now resting with the grand jury, but that is not the case.
The grand jury historically has a place in our criminal system of justice.
Justice William H. Rehnquist: Its protection for the defendant is not that it has the power to subpoena him, I would think, but it is required that he be indicted before he can be held to stand trial.
Mr. Matt P. Cushner: Before he is indicted, the grand jury also historically has performed a function of gathering the evidence through a subpoena.
Justice William H. Rehnquist: But this is not necessarily a help to him.
Mr. Matt P. Cushner: It may not be a help, but at least it is in conformance with the constitutional guarantees.
Justice Potter Stewart: The constitutional guarantee is that you cannot be tried criminally in the Federal Courts except by indictment of a grand jury.
That is the constitutional guarantee.
Mr. Matt P. Cushner: That is correct, but prior to indictment the constitution I think, comprehend or at least anticipates that the grand jury performs a function and hopefully that function would be a meaningful one and I think that if the special agent is allowed use of that --
Justice Potter Stewart: It is not a function generally welcomed by a person who is subsequently indicted by a grand jury.
Mr. Matt P. Cushner: I do not think anybody who receives grand jury subpoenas welcomes them.
Chief Justice Warren E. Burger: Well, if a man shoots a police official or someone else in the presence of 12 Bishops, the grand jury inquiry is not very meaningful either, is it?
Mr. Matt P. Cushner: No, it is not very meaningful.
Chief Justice Warren E. Burger: The grand jury is not a universal absolute protection against being charged, is it?
Mr. Matt P. Cushner: No, but the facts here are not one where some tax offense occurred in the presence of 12 Bishops.
Chief Justice Warren E. Burger: The offense may have occurred in the presence of the LaSalle National Bank.
Mr. Matt P. Cushner: I think, in addition, the type of records that are being summonsed here would contraindicate any tax purpose to the summons.
The records that are peculiar to an Illinois Land Trust are not necessarily those which would be relevant to an inquiry of a person’s tax return or whether a person who has committed a crime with respect to that tax return.
As we point out in our brief, the records of an Illinois Land Trust basically consist of the trust agreement which is a standard form and is standard in all banks in Illinois and the letters of direction either to take title, issue or sign a mortgage and those kinds of things, not necessarily relevant.
Chief Justice Warren E. Burger: You have three minutes left, Mr. Wallace.
Rebuttal of Lawrence G. Wallace
Mr. Wallace: There is no basis in this case for counsel’s suggestion that the finding was that there was a criminal investigation here that may be unrelated to tax liabilities.
The Court of Appeals specifically says on page 5A of the Appendix to the petition, Special Agent Olivero was conducting an investigation of the federal tax liabilities of John Gattuso and the District Court says respondents contend that Special Agent Olivero was in fact conducting an investigation of criminal violations of the Internal Revenue Code by John Gattuso.
The Miller case, which has been referred to, involved an attempt to challenge a grand jury subpoena rather than an Internal Revenue summons.
It may be rare, but it was an instance of the use of a grand jury subpoena in a tax investigation.
As it has been pointed out, the procedural protections available to the taxpayer in an Internal Revenue summons situation in many ways compare favorably to those available in the grand jury subpoena situation, especially with the enactment of Section 7609 of the Code which allows intervention in the third-party summons proceedings.
Obviously the indictment, if there is to be one, has to be returned by the grand jury and evidence developed in civil investigations as the Court indicated in United States v. Kordel in the course of a Food and Drug Administration question raising the same issue, evidence developed in civil investigations legitimately can later be presented to a grand jury and is pertinent to a grand jury.
The one suggestion made on page 12A of the Appendix to the reply brief by Judge Friendly of the possibility of the willfully false statement having nothing to do with liability is not something that ordinarily could be anticipated at the time the special agent commences his investigation.
Ordinarily, the willfully false statement that a tax investigation would be concerned with is concealment of the source of income which is a common way of concealing deficiencies and whether a prosecution should later be brought even though it turns out that no additional liability is involved, it is not something that can be determined at the outset in deciding whether to follow up an investigation to see whether the source of income has been concealed.
It cannot be known at that point whether that will indicate in the particular case that there is additional tax liability.
Finally, I wanted to say that what we are faced with here is a situation in which the cases that suggest the most serious problems of fraud where the special agent may think this is likely to be a case, where a criminal recommendation will eventuate, are the cases where there are difficulties in getting the summonses enforced in pursuing the investigations.
Whereas, the more marginal cases that the special agents are involved in where they may not have much of a notion at the beginning that this is likely to show a serious fraud are the ones where there is no basis for saying that they have a firm purpose that they are going to recommend a criminal prosecution.
We are finding that the sole investigatory tool of the Internal Revenue Service is being denied early on in the investigations in the more serious cases leaving us with only the alternative of presenting unright investigatory files to the US Attorneys and to clutter up grand jury proceedings where many of them would be weeded out in the normal course of the Internal Revenue investigations after the evidence is developed and reviewed by superiors is made.
Chief Justice Warren E. Burger: Your time has expired now, Mr. Wallace.
Thank you, Gentlemen.
The case is submitted.