UNITED STATES v. STUART
Legal provision: Treaty
ORAL ARGUMENT OF LAWRENCE G, WALLACE ON BEHALF OF THE PETITIONER
Chief Justice William H. Rehnquist: We'll hear argument first this morning in number 87-1064, United States versus Philip George Stuart.
Mr. Wallace, you may proceed whenever you are ready.
Mr. Wallace: Thank you, Mr. Chief Justice, and may it please the Court:
This is a proceeding to enforce Internal Revenue summonses for bank records in a bank in Bellingham, Washington, that reflect accounts of two Canadian nationals.
The summonses were issued pursuant to a request by Canada under a tax treaty between Canada and the United States that provides, among other things, for exchanges of information to assist each other in the administration of their tax laws.
The United States has such treaties in force currently with 34 countries.
They're collected in Footnote 17 on page [= 41] of our brief.
And these treaties play an important role in the Internal Revenue Service's broad authority to investigate compliance with our Internal Revenue laws by providing the IRS, through reciprocal exchanges with foreign source information that would not otherwise be available to the IRS.
The two most pertinent articles of the treaty are set forth at the beginning of the appendix to our brief on, on page 1A of the appendix following page 48 of our brief, and the Court will note that Article XIX provides that the competent authorities, the executive branch officials designated to administer the treaties, will exchange information that is at their disposal or that they are in a position to obtain, and information may be exchanged directly between the competent authorities of the two contracting states.
And Article XXI says that the Commissioner may upon request furnish our treaty partner with information that the Commissioner is entitled to obtain under the revenue laws of the United States.
These are fairly typical, and they obviously contemplate in appropriate cases, the use of process to obtain records that are not already in the possession of the tax authorities in each state and, indeed, the legislative history of the particular treaty involved here, as we set forth on page 29 of our brief, shows that during the confirmation process, and that's in footnote 11 and the accompanying text, it was contemplated in the Senate that a process such as an Internal Revenue summons would be used to secure information for each treaty partner.
And the specific reference that was made there was to the obtaining of bank records.
And in 1975--
Unidentified Justice: Mr. Wallace, excuse me.
May, may I interrupt for a moment.
Maybe, maybe I'm not seeing something here, but the, the treaty says
"information which its competent authorities are in a position to obtain under its revenue laws. "
right, and, and you rely--
Mr. Wallace: --That is correct.
Unidentified Justice: --on Section 7602.
But as I read 7602, it only authorizes summons for purposes of determining United States tax liability.
Mr. Wallace: Well, that is a--
Unidentified Justice: So, how can you say that you're in a position to obtain it under our revenue laws when you're not seeking to ascertain United States tax liability?
Mr. Wallace: --That is a... certainly a possible reading of 7602, and that very question was debated and decided in the 1975 Second Circuit case that we have cited in our brief, United States against A. L. Burbank Company, in which this court denied certiorari.
The contention was made there that the summons authority conferred by Congress was not sufficiently broad to obtain information of, of... regarding compliance with the treaty partner's revenue laws, notwithstanding the broader perspective that I tried to give the court that this... looked at overall becomes a means of getting reciprocal information that the IRS could not otherwise get about compliance with the American tax laws.
And the Second Circuit held in that case that 7602 should not be interpreted more narrowly.
Not only old this Court deny certiorari, but Congress since has amended 7602 without disturbing that provision, and a large number of these treaties have since been entered into in presumed reliance on this interpretation.
At the time of the Burbank decision, the Second Circuit stated that there were 19 such treaties then in effect.
There are now 34 such treaties in effect.
So, the Burbank decision, we submit, was not only a correct interpretation at the time, but it has built into the fabric of the law and as, in many other instances, if possible, a statute should be interpreted in a way that helps to effectuate the purposes of a treaty, which is also the supreme law of the land.
Unidentified Justice: You don't have any language that would allow that, though, do you?
I mean, the language seems quite clear.
Mr. Wallace: --We have no language.
Unidentified Justice: What's the closest phrase you have that would allow it to be read this way?
Mr. Wallace: I, I don't have a phrase that looks specifically to investigation of compliance with Canadian or other countries' revenue laws, but I, I do think the broader perspective that I have mentioned, that these reciprocal obligations are a method by which the Internal Revenue Service is enabled more successfully to conduct its own investigations is highly pertinent, along with what we submit is congressional acquiescence in this interpretation, not only reflected in amendments of 7602, but in the confirmation of these numerous treaties that look toward the use of compulsory process.
Unidentified Justice: If you did not have the summons authority, the treaty wouldn't necessarily be a nullity, would it?
Mr. Wallace: Not necessarily.
Unidentified Justice: Because the government still has information that it can furnish.
Mr. Wallace: It has information, although a similar argument could be made about the Service's authority to conduct any investigation or engage in any operations.
It's all part of Chapter 78 of the Internal Revenue Code, which includes Chapter 7602.
And, of course, all authority that the Service has to investigate is replete with references to our revenue laws.
So, I'd have to say that a similar argument could be made about furnishing any information under the treaty.
That a question could be raised about the Service's statutory authority.
So, the summons question is not unique in that respect.
Unidentified Justice: Did the Ninth Circuit expressly consider the summons question in its opinion in this case?
Mr. Wallace: It did not expressly discuss this question, but it accepted the holding in the Burbank case.
Its, its holding is that a summons can be used for this purpose if the Service complies with the requirement that it added with respect to a... an analog to a referral to the U.S. Department of Justice.
So, implicit in its holding is acceptance of the Burbank decision.
And, indeed, one could argue that in the absence of a cross-petition, that question is not open because it would change the relief in a manner more favorable to the Respondents here, because the Ninth Circuit ordered a remand that does not preclude enforcement of the summons if that condition can be compiled with by the Revenue Service.
So, as a technical matter, the question really is not open before the court in this case, but we do submit that the Burbank decision is part of the fabric of the law now that should not be repudiated by this court, and, and it it plays an important role in our foreign relations.
What the Court of Appeals did do in this case was put itself in conflict with a later 1983 Second Circuit decision called United States against Manufacturers & Traders Trust Company by holding; that is, the Ninth Circuit's holding, that the supporting affidavits in this case did not make a prima facie showing that the summonses were issued for a legitimate purpose because they failed to state that the Canadian investigation had not reached a stage analogous to referral to the U.S. Justice Department for a, a, a grand jury investigation or for criminal prosecution.
And Section 7602(c) prohibits the issuance of a summons by the IRS when such a referral to the U.S. Justice Department is in effect.
Now, in adding this requirement, we think that the Court of Appeals here erred on two principal grounds.
The first is that the treaty clearly contemplates that the question whether the treaty partner has made a proper request is to be, be determined by the executive branch official designated to administer the treaty, referred to in the treaty as the "competent authority".
As we have explained in our brief, most of the information that is actually exchanged under these treaties is provided directly by the competent authority without any other entity, judicial or otherwise, of the government being involved.
A typical example is compilations of dividend payments by various American corporations to foreign nationals and reciprocal information from the foreign country.
In many instances, the rate of withholding is lower for dividend payments to foreign nationals than it would be under the Internal Revenue Law for a dividend payment to an American.
And the corporations will provide the IRS with a list of the foreign nationals for whom the lower withholding rate provided for by treaty has been utilized, and the IRS without any particular request, even, from our treaty partner will provide compilations of that information to the treaty partner.
Much of the information that is exchanged is exchanged without any particular request and without any use of process.
Now, in those instances where a summons is used to secure information not already in the hands of the IRS, the summons enforcement proceeding, we submit, which is summary in nature this Court has emphasized many times, should not inject the courts into this aspect of treaty administration in making or second-guessing the determination ordinarily made by the competent authority and by the executive branch about whether the request by the treaty partner is a proper request under the treaty.
This is the kind of question that involves sensitive foreign policy considerations.
There quite obviously would be sensitivity to having a court inquiry focusing on the good faith of the treaty partner in making a request for information under the treaty in which the courts would be reexamining and perhaps second-guessing the determination made by the executive branch official charged with that.
Unidentified Justice: Mr. Wallace, I don't know whether--
--May I interrupt you, Mr. Wallace?
I don't really understand that argument because if you have an, an objective test, whether there's been a reference to prosecution or not, why does that involve any inquiry into good faith?
Mr. Wallace: Well, it, it, it, it... this Court starting with United States against Powell has characterized the inquiry to be made in the summons enforcement proceedings as an inquiry into the IRS' good faith in issuing the summons, and good faith is largely translated into whether it's for a legitimate statutory purpose, whether the proper procedures have been followed, whether the information may be relevant as the court said to compliance with the Internal Revenue laws, whether there is a collateral purpose, such as harassing the taxpayer or trying to put pressure on the taxpayer to settle a collateral dispute.
Those are elements of good faith which arguably could arise in, in inquiring into the legitimacy of the treaty partner's request.
Unidentified Justice: Why couldn't you just presume that there was good faith in all matters of that kind and still say you've got to follow the American rule that there has been no reference for criminal purposes yet?
Just have a simple black letter rule to that effect.
That wouldn't question the motives of the foreign treaty partner, would it?
Mr. Wallace: Well, it would question the legitimacy of their normal investigative process.
Unidentified Justice: No, it would just say that's our rule on subpoena enforcement.
We have this rule, and it doesn't.
Therefore, the treaty isn't compiled with.
Mr. Wallace: If the treaty or statute had specified that... you know, I can't argue that that would be an open-ended invitation for the courts to examine good faith.
But what this court's line of decisions has indicated is that it is the good faith of the IRS in asking that a summons be enforced that is the proper subject of investigation in a summons enforcement proceeding, not the merits of the investigation.
The Powell decision, which is the seminal decision in 379 U.S. made that very clear with respect to two issues that the taxpayer sought to have reexamined that went to the merits of the investigation, two rather discrete issues.
One, because the statute of limitations had expired except for fraud, whether there was a sufficient basis to conduct the investigation because there was a sufficient basis to suspect fraud, and the other was whether the Commissioner had properly certified that a, a, a... an additional inspection of records was necessary which had to be certified under the statute when there had already been one inspection of records.
And the Court held that neither of those aspects of the merits of the investigation is something to be raised in the summons enforcement proceeding; that instead, it has to be limited to the kinds of issues that I had averted to a bit earlier and as recently as the Court's unanimous decision in the Tiffany Fine Arts case in Volume 469 U.S., the Court again reemphasized when the taxpayer complained that the IRS was unnecessarily investigating too many licensees under the scheme that was at issue there, and I may quote the Court,
"The decision of how many and which licensees to contact is one for the the IRS, not Tiffany to make. "
And one might add, not the court in the course of a summons enforcement proceeding.
Unidentified Justice: Mr. Wallace, you're, you're really... you're suggesting that this statute would apply against a United States citizen as well; it's not just a citizen of a foreign country, right?
I mean, the treaty would cover the United States citizen who was asserted to be liable for foreign taxes, correct?
Mr. Wallace: Yes, it would.
Unidentified Justice: So, a United States citizen who is being harassed by a by a foreign government, that foreign government can enlist our government in that harassment without any possibility of our courts stopping it?
Mr. Wallace: With respect to the summons enforcement proceeding, what could be shown is that the IRS was not acting in good faith because the IRS did not consider this a proper request under the treaty, but was lending itself to a scheme of harassment concerning information that has no possible relevance to tax information.
Unidentified Justice: But you're taking a position the IRS doesn't have to, have to inquire into that.
That's, that's part of your whole point, that you don't want our IRS to have to inquire into whether there is harassment going on or the good faith of the foreign government.
Do you want the IRS to have to do that?
Mr. Wallace: I, I, I, I would not want to mislead the court into thinking that the IRS rubber-stamps every treaty request for information, even information that is on hand.
But under the treaty, it's the competent authority at the IRS who makes the determination of whether that is a proper request.
Unidentified Justice: I think that's an extraordinary... I think that's extraordinary to have the United States courts engaging in that, and I think it's a hard question.
Maybe if Congress had passed a statute covering this matter, it might have given some thought to that question.
Mr. Wallace: --Well--
Unidentified Justice: But since it hasn't, you're really sort of asking us to make it up.
Mr. Wallace: --If I, if I may say so, Mr. Justice, what makes it seem less extraordinary to us, is that the summons enforcement proceeding, the, the attempt to interfere with the investigation is not the ordinary place in which the merits of summonses for third-party records is debated.
It's usually debated not in that summary context, but later on when there's an effort to use the information against an individual.
And here if there is something that does not comply with the rights of Canadian taxpayers, the defense would ordinarily be raised in the Canadian courts.
That's where Canadian law would ordinarily be debated.
In, in, in Donaldson against the United States in Volume 400, the court held that the taxpayer did not even have standing to intervene in a summons enforcement proceeding in which the IRS was trying to get third-party records relating to the taxpayer's liability, in that case records of his former employer.
It is sometimes mistakenly thought that Congress overruled the Donaldson case.
Congress has left that holding in Donaldson entirely untouched for the category of third-party records that was involved there, employer records or records of a former employer.
There is... that is still good law.
The taxpayer cannot even be heard during the summons enforcement proceeding.
Unidentified Justice: And I'm somewhat puzzled, however, because in your answer to Justice Scalia's question, you said well, the IRS does make... give itself some assurance that the other country is acting in good faith, yet I thought that's exactly what you're telling us we can't require you to do.
Mr. Wallace: You can... in the summons enforcement proceeding, the question is the IRS' good faith rather than the--
Unidentified Justice: I understand that that's your position.
Mr. Wallace: --Yes.
Unidentified Justice: But the question was put to you suppose a country is harassing someone, say, for his political views, and the IRS is in good faith.
It knows that the country wants the material, but you say the IRS does make some investigation on the merits of the request?
Mr. Wallace: It, it does consider whether the request is a proper one under the treaty, that is correct.
But in most instances--
Unidentified Justice: Well, is it a proper request under the treaty if the country is harassing someone for their political views?
Mr. Wallace: --That would... that would depend on whether there is also a legitimate basis for the request that complies with the terms of the treaty.
Not every country with which we have a treaty has our system of government.
You'll notice that among the 34 countries, there are several communist states, and the political branches of our government have determined they will exchange information.
Unidentified Justice: Well, it's still not clear to me when you examine into the motives of another country and when you don't.
And if you indicate that you do, I thought that's exactly what you're... what the Ninth Circuit held that you should do and that you're arguing against.
Mr. Wallace: Well, the Ninth Circuit held that the enforcement court should examine those motives.
In determining whether to honor a request under a treaty, we're dealing with a sensitive area of foreign relations that is ordinarily a, a matter for the executive branch, and those conducting our foreign relations and not a matter to be debated courtroom by courtroom.
And in most instances, this determination whether to furnish the information or not is dispositively made by the executive branch officials.
There is no mechanism whereby the courts could ordinarily interfere with the furnishing of that information, regardless of whether some people might think that the particular government might be harassing particular people,--
That has been something taken into account in negotiating and determining to comply with these treaties.
I just want to advert very briefly to our second major point, which is that neither the treaty nor the statute contains the substantive restriction that the Court of Appeals here added, this search for an analog to reference to the United States Justice Department, and we submit that it is a wholly inappropriate addition because that search reflects considerations entirely of domestic law that do not fit very well, if at all, to any of the foreign systems of law enforcement that we're involved with here.
And a little... in a way, this is a little like arguing to the court that the sun does not revolve around the earth.
Foreign systems are quite different, and what was reflected in the series of cases in which this was developed was an effort by the court and then by Congress to reconcile the IRS's broad investigative authority with the normal rules governing criminal discovery and grand jury subpoenas so as to not have a different rule in criminal cases applying for criminal tax cases and the normal rule applying for other prosecutions.
I would like--
Unidentified Justice: Mr. Wallace, you, you remember what the earliest treaty like this was?
Mr. Wallace: --I, I, I could not say, Mr. Justice.
I'd like to reserve the balance of my time, if I may.
Unidentified Justice: Very well, Mr. Wallace.
Mr. Peery, we'll hear now from you.
ORAL ARGUMENT OF CHARLES E. PEERY ON BEHALF OF THE RESPONDENTS
Mr. Peery: Mr. Chief Justice, and may it please the Court:
The issue here, Respondents submit, is whether domestic law limits upon IRS summons authority are expanded by the treaty with Canada, which is the subject of these cases.
Should the IRS be required to comply with domestic revenue laws of the United States when it asks the courts to lend their process and their authority to enforce an IRS summons for the purpose of obtaining information for a foreign government?
Under a specific treaty which incorporates and... by reference... and defers to the revenue laws of the United States of America, Respondents submit that the answer properly is the one given by the Ninth Circuit in these consolidated cases below.
Unidentified Justice: Mr. Peery, the subsections, I guess, you're talking about, 7602(c) and so forth, speak of the Justice Department which surely refers to the United States Justice Department, doesn't it?
Mr. Peery: Yes.
There are cross-references in Articles XIX and XXI to the departments of the two governments.
Revenue Canada is referred to specifically, and the Commissioner of the Internal Revenue in the United States is, is referred to specifically.
But, both of them... both of those sections, XIX and XXI of the treaty, refer to the domestic laws, revenue laws of each of the countries, and that's what gets us to Section 7602.
Unidentified Justice: Yes.
But how do you get from Section 7602's reference to the Justice Department to kind of a renvoi-type reference to Canadian procedure.
We don't know that the Canadian justice department plays the same role in collection of Canadian taxes that our Justice Department does.
Mr. Peery: Actually, in these cases I believe we do now know something about the method and approach of the Canadian tax authority and their interrelationship with the Canadian Department of Justice, and it is very much like the system in the United States, so that the burdensome inquiry that the government has raised I submit really does not apply to this case.
In the, the supplemental brief that we filed, we refer to an, an International tax article which appeared just last month which quotes from a section of the operations manual of Revenue Canada instructing its agents specifically how to act with respect to requests for information from the IRS in the United States.
And in that instruction it specifically says that the summons authority of the IRS in the United States may not be used after a referral to the Department of Justice for prosecution, and further instructs its revenue agents that if they want information from the United States, they must ask for it under summons prior to their own referral to their own justice department.
Unidentified Justice: And you think our interpretation of our law should be governed by Revenue Canada?
Mr. Peery: No, sir, I was just saying--
Unidentified Justice: I mean, why... why?
I'd much rather have it governed by our Justice Department than Revenue Canada, if it comes to that.
Mr. Peery: --It ought to be governed by the totality of the revenue laws of the United States, which is what the treaty requires and which incorporates, certainly, 7602 and its procedures and the other treaties.
Unidentified Justice: You bring before us one, one case out of however many treaties Mr. Wallace said there were in which it may be easy to analogize the, the, the revenue system of the country in question with that of the United States, but I, I doubt whether, whether it's possible with a lot of the other countries.
And, and certainly in determining whether the rule you're urging upon us is, is a rule that can possibly have been intended, it's relevant whether we know anything about the internal revenue systems of these other countries.
Just because you pick one country that we might doesn't, doesn't justify us in adopting the rule you're, you're suggesting.
Mr. Peery: Well, Your Honor, we have a specific factual situation in this case, and I, I intend to address the broader rule that this Court is certainly interested in.
But we have a specific treaty with Canada.
Unidentified Justice: The Philippines, for example.
Do we have a, a treaty with the Philippines?
Mr. Peery: I don't know that.
Unidentified Justice: Oh, I see.
They're all listed in the book.
Let's pick the most exotic country that's, that's listed in Mr. Wallace's footnote.
Mr. Peery: Probably a Communist country as counsel--
Unidentified Justice: Right.
Now, how are we supposed to behalf with respect to a referral requirement from such a country?
Mr. Peery: --We point to the treaty with that country which refers specifically to the domestic tax revenue law of the United States, and we tell that country or have the IRS to tell that country that when you make a request of the IRS for information which may require our summons power, then tell us, certify to us that you do not presently have a criminal prosecution matter pending in this instance for which you, you are asking for this information.
I think we can reduce it to, if we need to, to one question.
The Ninth Circuit below posed two questions because they were dealing with a specific treaty and a specific country, Canada, and the government had said and admitted before the Ninth Circuit below that it had that information and could have supplied and would have--
Unidentified Justice: What... but, but, you see, you, you have two different organizations in this country.
One does the IRS investigation and the other does the criminal investigation.
What if you're dealing with a country where there's just one unit that does all investigations?
If it, it, it conducts the investigation and if it digs up enough stuff to prosecute criminally, it prosecutes criminally.
It's meaningless to have this, this referral distinction.
In such a country you could never say there's no criminal investigation pending because there's, there's no distinction between a criminal investigation and an IRS investigation.
Mr. Peery: --Perhaps I misspoke, Your Honor.
I believe I said criminal prosecution.
I make that distinction as a very important one.
The functions of criminal investigation and civil investigation are mixed in our system, and they are abroad.
They certainly are in Canada.
But the, the distinction really should be between investigation and prosecutorial function, and the test, the question that the Ninth Circuit has posed, the two questions which I've reduced perhaps to one, is certification of whether or not there's a pending criminal prosecution matter.
Unidentified Justice: But what, what does that mean when, when you come to apply?
Does it mean that a, a complaint or whatever... indictment, whatever, might be filed in the Philippines has been filed in court?
Mr. Peery: Well, I'm not asking the court system or the IRS to investigate, although they say that they do look into the motivations of the requesting country.
Perhaps that's a question for another case.
Unidentified Justice: But what, what I meant to ask you was you say is there a criminal prosecution.
You put that, it seems to me, as if that's a very definite type of standard.
But, really, what does it mean?
Does it mean are authorities investigating with the possibility of, of filing, filing what would correspond to an indictment or is there an indictment already filed?
Which of those?
Mr. Peery: Well, we... we not only have problems of differences in countries' approach to these matters, but differences in language, and what... I think that a treaty partner asking us for information in this country ought to educate themselves about the difference between prosecution and investigation and should be able to comply with that request.
Unidentified Justice: Well, what... in this country it's one function is in one division and another function is in another division.
But as Justice Scalia points out, in a country where they don't have that separation of functions, the, the question really would be very difficult to answer, I would think.
Mr. Peery: Well, I believe it is.
There are difficulties in administering treaties, but the focus here, as these cases arise procedurally and come before this Court is that the courts of this country, the federal district court in this case is being asked to lend its process and its authority to the enforcement of a summons to get information from another country under a treaty which specifically refers to the domestic revenue laws of the United States.
And I think the answer is that we tell our treaty partners that these are the requirements under the domestic revenue laws of the United States; that there not be a pending criminal prosecution matter for which this information is requested.
And they should comply.
We must do the same with respect to asking for information from Canada.
The briefing indicates that we, we defer to Canada's interpretation of their own procedural requirements and comply with it when we... when the IRS asks for information from Revenue Canada.
Unidentified Justice: What, what would the Canadians or the Philippine government... say, the Philippine government do if they have a single unit that investigates both civil and criminal matters and they are simply studying the file?
Is that a pending prosecution?
Mr. Peery: It doesn't sound like it to me.
But, again, I would require the treaty partner to comply--
Unidentified Justice: But it's... but it's your test, and if you can't even explain to us how the government should answer under its test, then it's not a very strong test.
Mr. Peery: --Well, it is because the entire body of United States law makes a very important distinction between civil and criminal, criminal matters.
There are protections available to the individuals in our country in criminal matters that don't exist in civil.
It's an important concept in, in the law of the United States, and the law of the United States is incorporated into the treaty.
I think we have a right because the language is there in the treaty to require the treaty partner to understand enough about our system to be able to use that distinction in its request for information.
I admit, it's not an easy test.
But I think the way to do it is to refer to the domestic revenue law of the United States, as the treaty does.
Unidentified Justice: Mr. Peery, I guess you are not arguing to us here that under this treaty that the only information sought can be information relevant to an inquiry concerning an Internal Revenue tax of the United States?
You're not making that argument?
Mr. Peery: Well, I think there was, was support at the time the Burbank case was, was argued for the position that absent a specific authorization to the IRS to acquire information for a foreign government, none exists.
I think that restriction was made--
Unidentified Justice: But you are not making that argument to us?
Mr. Peery: --I'm not.
I'm not, because of... my understanding was that a certiorari was denied in the Burbank case, and we've not raised that specific argument, although I believe, I believe there's merit to it.
Unidentified Justice: --And the court below did not, of course, rest its holding on that matter?
Mr. Peery: No.
It assumed, as Mr. Wallace has pointed out, that under the Burbank case and others that the summons authority of the IRS could be used to meet its obligations under the... under the treaty.
Unidentified Justice: Of course certiorari denied doesn't mean we agree with it, necessarily.
Mr. Peery: That's true, Your Honor.
Again, I, I feel there are substantial arguments in support of the proposition that absent a specific authority to use the summons for this purpose, none exists.
But certainly where... that gets us into the interpretation of treaties to effectuate their purpose.
Unidentified Justice: You're, you're not raising the argument... you're just, just in case I might disagree with Burbank, you're asking me to imagine what kind of authority I think the United States would have if the United States had authority.
That's what you want me to tell you?
Mr. Peery: Well, the question was asked earlier by the Court of Mr. Wallace, would the treaty be a nullity without the summons authority of the IRS, and I believe Mr. Wallace answered no.
So, the issue is, is raised in, in questioning by the Court.
Respondents submit that the Ninth Circuit's opinion below in these consolidated cases is supported by the language of the treaty contract, the actual practice of the treaty partners and the language and purposes of the subsequent tax treaties between the United States and Canada; that is, the 1980 treaty and the 1985 treaty specifically for the purpose of aid in criminal tax matters.
All of them require the application of the domestic United States revenue laws.
Secondly, a legitimate purpose showing is required under United States revenue laws and, thirdly, use of an IRS summons for the specific purpose of criminal prosecution is specifically rejected by the courts in, in the cases and by Congress in the TEFRA amendments, making that, that use not a legitimate purpose.
The fourth point that I would like to make is that the IRS has admitted that it is its customary practice in domestic cases in applying to the courts for enforcement of their summons to state that there has been no referral for criminal prosecution.
So, it's a matter of customary practice in domestic cases and, again, the treaty refers to the domestic law and practice in the United States.
Fifth, I submit that, that the results of the Ninth Circuit's holding is fair with respect to the balancing of the interests between the individuals and the IRS, it's practical in application, it's efficient and it promotes uniformity between domestic practice and the tax treaty case information requirements.
I submit that the--
Unidentified Justice: May I ask on your view of the matter, do you think it requires an inquiry into the good faith of the Canadian taxing authorities?
Mr. Peery: --No, sir, not at... at this stage, although this Court in LaSalle certainly for domestic purposes has left open the area of institutional good faith.
Again, domestic cases and I'm not--
Unidentified Justice: If we're talking about a domestic matter and we were persuaded there was bad faith on the part of the IRS even though the matter had not yet been referred for prosecution--
Mr. Peery: --Some other kind of bad faith.
Unidentified Justice: --that would defeat the summons enforcement, would it not?
Mr. Peery: Yes, and it should, and that's a proper area of inquiry.
Unidentified Justice: Well, then, why should it not also defeat it in the Canadian context?
Mr. Peery: Well, I, I believe that--
Unidentified Justice: If you're saying the same law applies to both.
Mr. Peery: --Sure.
And I believe that's true.
Unidentified Justice: So, therefore--
Mr. Peery: I think it's a proper area of inquiry if there's, there's a showing which fairly raises the issue of, of bad faith.
Unidentified Justice: --You'd require... I see.
But if there were, you--
Mr. Peery: I'm saying--
Unidentified Justice: --if the burden is on the taxpayer or the, the, the person resisting the summons, why has that burden been discharged in this case, then?
Mr. Peery: --Because I think there's a difference.
The clearly prohibited purpose of using IRS summons for... in support of criminal prosecution is a different matter.
I mean, it has been discussed by Congress, it's been discussed by this court and other courts repeatedly, and everybody agrees.
It's unanimous, that use of the IRS summons for criminal prosecution purposes is prohibited.
Unidentified Justice: Then why shouldn't it be on the taxpayer's burden, or the, the person raising the issue's burden to say it is being used for such a purpose in Canada?
There's no showing either way, as I understand it?
Mr. Peery: That's right.
We have no information, and the Ninth Circuit, I think, pointed out the real problem.
It's a dilemma.
It's a Catch-22 for the taxpayer at that point because there's no discovery available to get the kinds of information which would be necessary to meet that burden of proof on the taxpayer, whereas the IRS said below that it had that information.
It was given an opportunity to amend its, its summons, its affidavit in support of summons application, and, and it chose not to do that.
This case would have been long over had the IRS gone back, amended its affidavit to show the answer to those two, two questions that the Ninth Circuit posed.
Has it been referred in Canada to the Department of Justice in Canada or is Revenue Canada asking for this information on behalf of the Department of Justice, the criminal prosecution arm?
Unidentified Justice: Mr. Peery, does the record show why these Canadian citizens have the American bank accounts?
Mr. Peery: No, sir, and I have no idea.
I was not involved at that point.
Unidentified Justice: There is--
Mr. Peery: And there's no record.
There is no record to show why.
But, of course, American--
Unidentified Justice: --They're your clients, aren't they?
Mr. Peery: --Yes, sir.
Unidentified Justice: But you have no idea?
Mr. Peery: No.
Of course, there is no prohibition against Americans having bank accounts in Canada, either.
It happens frequently and, of course, there's a great deal of commerce between the two countries.
Corporations have accounts in, in both countries.
Unidentified Justice: Well, they might have been doing business in this country at one time, set up an account, and just kept it.
Mr. Peery: That's what I would assume.
Unidentified Justice: Nothing like that in the record?
Mr. Peery: No, but there's a lot of commerce between Washington State and British Columbia, which is where this, this factual situation arises, and I would assume that these were commercial matters at one time and may still be.
Unidentified Justice: But you don't know?
Mr. Peery: I do not know that, sir.
I submit that the Ninth Circuit's rating of the language of the specific tax treaty, 1942 treaty, which it found applies here, is the correct one; that Article XIX refers specifically to the revenue laws of the two contracting states, the United States and Canada.
It does not refer to the criminal tax laws or the criminal case law of either country.
It's specifically aimed at the revenue laws of the two nations.
Article XXI specifically describes the procedures for requests by the Canadian Minister of the Department of Natural... National Revenue and specifically talks about the kind of information which may be furnished by the Commissioner of the Internal Revenue Service of the United States in the following language:
"Such information as the Commissioner is entitled to obtain under the revenue laws of the United States of America. "
I submit that that language could not be plainer; that the intent when Department of Revenue or Revenue Canada asks the IRS for information is controlled by what is available to the IRS Commissioner under the revenue laws of the United States of America.
They include Section 7602, which was the basis for the IRS petition below for summons enforcement in these consolidated cases.
And 7602 sub (c) prohibits issuance of a summons and the beginning of any action to enforce any summons if a Justice Department referral is underway.
This is a codification by Congress in the TEFRA amendments in 1982 of that bright line test that the minority suggested in the LaSalle National Bank case from this court in 1978.
It was intended, I submit, to distinguish between the civil revenue purposes which are proper areas for investigation by the IRS, a legitimate purpose, and criminal prosecution, which is not a legitimate purpose.
Unidentified Justice: Why is it the United States is concerned as to how Canada goes about investigating tax delinquencies there?
Mr. Peery: Well, I, I think it need not be concerned at this point, certainly, in these cases.
It only is appropriate to apply the domestic revenue laws of the United States when the treaty partner, Canada, asks for Information.
And it's been very important in the development of the case law and the, and the code by Congress for guidance of the Internal Revenue Service that there be a clear dichotomy in the Revenue Service's activities between criminal prosecution, which is not authorized, and civil investigation.
Unidentified Justice: Well, that dichotomy has obviously been enacted in the TEFRA amendments.
But why should it carry over to our concern for the relationship between a Canadian... the Canadian government and a Canadian taxpayer?
Mr. Peery: I'm not urging that we be concerned except insofar as Canada might be harassing a, a United States citizen with respect to the use of its revenue department in asking the IRS to lend its weight to that.
I'm not... that is not the focus of the Respondents' argument and point here.
The focus is that the domestic revenue laws of the United States apply, and if a treaty partner asks for something within the United States and the IRS to get it with its summons authority, it has to comply with domestic United States revenue law.
Unidentified Justice: So you say that that language can be only read in one way?
I, I think that my point is that if the language isn't quite as clear as you think, it doesn't make much policy sense to, to adopt your suggestion if the other one is equally plausible under the language.
Mr. Peery: Well, I think we certainly ought to be reluctant to make an inquiry into the domestic affairs of a, of a foreign government, a treaty partner.
I agree with Mr. Wallace about that.
But, I'm saying that the test and approach applied by the, by the Ninth Circuit does not require that, and that's not this case.
The Revenue Service admitted below that it had information from Revenue Canada that they had not referred the matter to the Department of Justice in Canada and that they were not asking for the information on behalf of the Department of Justice.
So, it would not, in these cases, have required any kind of investigation into the internal workings of Revenue Canada or its Department of Justice.
I submit that the 1980 treaty, which was ratified somewhat after the LaSalle case, actually served to apply the judicial gloss... that is, the entire body of the revenue laws of the United States, and referred to it quite specifically.
The government concedes in its brief on page 4, footnote 3, that the language and purpose of the 1980 treaty are essentially identical to the language and purpose of the 1942 treaty, and its purpose is to obtain information for each of the parties in the same way as if its own taxation were involved.
So, there's another referral specifically in the 1980 treaty to the domestic revenue law of the country who is being requested to provide the information.
Subsection 3 of Article XXVII provides with respect to the, the process that... of construction of that treaty that the preceding paragraphs are to be construed so as to impose an obligation... they're not to be construed, I'm sorry, so as to impose an obligation to supply information not obtainable under the laws or in the normal course of administration of either of the contracting states.
Unidentified Justice: Mr. Peery, can I interrupt you there for just a second?
Mr. Peery: Surely.
Unidentified Justice: These banks that have the information, the one bank I guess, isn't it, somewhere in Washington, is an American bank.
Mr. Peery: Yes, sir.
Unidentified Justice: And the Canadian citizens have an account in the American bank?
Mr. Peery: Yes, sir.
Unidentified Justice: Now, isn't it possible that those Canadian citizens would have an income tax obligation in the United States by reason of interest earned on that account or something like that?
Mr. Peery: It is possible, but there was no domestic revenue purpose indicated.
Unidentified Justice: Well, but at least it would be permissible, would it not, for IRS to say I'd like to check the bank records there to see if these foreign citizens might owe some federal taxes.
Mr. Peery: Certainly.
Unidentified Justice: And if so, that information would be obtainable purely for domestic purposes pursuant to the, to the United States statute.
Mr. Peery: Cerainly, and it can even be a mixed purpose.
Unidentified Justice: Why isn't that the whole answer to the case?
Mr. Peery: Well, it's not, because of the court's concerns and the Congress' concerns about that important dichotomy between civil and criminal.
Unidentified Justice: But there's no criminal... if they're just looking at the American purposes, there is not even a suggestion that there has been any American referral for... to the Department of Justice.
Mr. Peery: That's true.
And if that had been the basis for the inquiry, looking at--
Unidentified Justice: Well, it hadn't been the basis, but it was... it could be done pursuant to American law is what I'm saying.
Mr. Peery: --Yes, it could.
Unidentified Justice: For just that limited purpose.
Mr. Peery: The problem arose because the information was furnished indicated clearly that the authority for the inquiry that the IRS was using was the tax treaty with Canada and Section 7602, and there was an indication that Revenue... that Canada was investigating for criminal purposes creating, certainly, an ambiguity that needed to be explored.
And we, we only asked for the information that the Ninth Circuit required the IRS to provide on remand.
I submit that another reason for the interpretation... in support of the approach of the Ninth Circuit is that... and against the Manufacturers Trust holding by the Second Circuit... is that, that there's no justification in the body of the law or the treaty or in reason to create a separate set of entitlements for, for the IRS commissioner to use... a legal fiction, I submit, in order to get information from a... for a foreign country in the United States in a manner which exceeds the authority for domestic purposes.
In our supplemental brief we've referred to the 1985 Treaty on Mutual Legal Assistance in Criminal Matters, and I submit that that evidences the acknowledgment by the treaty partners, Canada and the United States, of the important distinction between criminal prosecution matters and civil tax revenue matters, and that treaty is now before the United States Senate for, for ratification.
It sets up a separate system and approach for the sharing of information in those matters which are, are criminal tax matters, and I submit quite appropriately.
It uses the Departments of Justice to exchange information, and it is within the context and framework of the criminal law protections that exist for the citizens of this country.
And I think I would urge... what we see from that is that the executive, at least on one hand, agreeing with Congress and with the opinions of the courts is now saying that if it's a criminal prosecution matter, we ought to call it that, have a separate procedure for handling it as a criminal prosecution and proceed that way.
The Ninth Circuit's approach and the requirement on the IRS to make a prima facie showing of a legitimate purpose including the absence of the prohibited purpose of criminal prosecution I submit is fair, and it's to... in the allocation of the responsibilities and information available to the two parties.
It's practical because it, it complies with the practice of the parties, the Revenue Service and Revenue Canada.
It's efficient because it requires the information to be supplied by the, the party which has best access to the that information, and that's the IRS, and it's uniform in that it promotes an identity of approach for the courts to use when they're considering petitions for enforcement of IRS summons, whether they arise in the domestic setting or by means of a, of a request under a treaty.
Unidentified Justice: Mr. Peery, do you know what the... what would happen if the situation were reversed and our government was asking Revenue Canada to investigate American accounts up in British Columbia?
Would they look at this dichotomy prevalent in the United States between a civil investigation and a criminal one, a criminal referral?
Mr. Peery: They look at their own, Your Honor.
Unidentified Justice: They look at their own?
Mr. Peery: I believe the government's brief has pointed that out.
That is the actual procedure, and certainly it's, it's reflected in the, in the recent law review article that I--
Unidentified Justice: And does it parallel ours entirely?
Mr. Peery: --Not entirely, but there is that dichotomy and distinction between prosecution and investigation, and so there's no problem in compliance in Canada with, with that distinction.
Unidentified Justice: Is it true in Pakistan or the Philippines?
Mr. Peery: I would just have to say they have to understand enough about our domestic revenue laws which, which control their rights to information under the treaty, Your Honor.
Chief Justice William H. Rehnquist: Thank you, Mr. Peery.
Mr. Wallace, you have two minutes remaining.
REBUTTAL ARGUMENT OF LAWRENCE G. WALLACE ON BEHALF OF THE PETITIONER
Mr. Wallace: If I may refer the court to the pertinent statutes at the end of our brief, pages 2a and 3a, first of all, Section 7602(b) at the bottom of 2a says that a permissible purpose for the issuance of a summons is to get information about a criminal offense.
That is not the limitation that Congress has placed.
The limitation is in subsection (c) about Justice Department referrals being in effect, and the line drawn there is not a line about whether a prosecution is pending.
It is the question whether Treasury has recommended to Justice that it undertake a grand jury investigation or a prosecution or whether Justice has requested information from Treasury regardless of whether a prosecution is actually pending.
And the reason for this limitation on the summons enforcement authority was explained by the Senate report in language set forth on page 17 of our brief.
It was so as to not to broaden the Justice Department's right of criminal discovery or to infringe on the role of the grand jury.
It was a reason that had to do with the division of functions between domestic institutions in this country and reflected the language of this Court's LaSalle decision.
Unidentified Justice: Well, but if we adopted that, Mr. Wallace, I assume we would have to adopt (b) as well; I mean, that is to say we would not... if we adopted your opponent's argument, we would have to say you also can't use the IRS' power if the foreign country is conducting a criminal investigation, even though there's no criminal prosecution pending.
You can't use if for the purpose of inquiring into a criminal offense.
Mr. Wallace: Well, (b) says you can use it for the purpose of inquiring into a criminal offense, Mr. Justice.
Congress specifically authorized the use of an IRS summons for that purpose and put an end to inquiry about whether the [= IRS] had--
Unidentified Justice: I see.
Mr. Wallace: --had the purpose of inquiring into a criminal defense, and instead drew the bright line about whether a referral is in effect.
Chief Justice William H. Rehnquist: Thank you Mr. Wallace.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinion of the Court in number 87-1064, United States against Stuart will be announced by Justice Brennan.
Argument of Justice Brennan
Mr. Brennan: This case is here on certiorari to the Court of Appeals for the Ninth Circuit.
Articles 19 and 21 of the 1942 Convention respecting double taxation between the United States and Canada require the United States on request and consistent with the United States revenue laws to obtain and convey information to Canadian authorities to assist them in determining a Canadian taxpayer's income tax liability.
The respondents, Canadian citizens and residents maintained accounts in the bank in the United States.
In attempting to ascertain their Canadian income tax liability for certain years, the Canadian Department of National Revenue, pursuant to Articles 19 and 21 of the treaty, requested our Internal Revenue Service to provide pertinent bank records.
After the IRS Director of Foreign Operations concluded that the request fell within the 1942 Convention's scope and that it would be appropriate for the United States to honor them, the IRS served in the bank administrative summonses for the requested information, but, at respondents' request, the bank refused to comply.
The respondents then petitioned the Federal District Court to quash the summonses contending that because under 26 USC 7602(c), the IRS may not issue a summons to further its investigation of a United States taxpayer when a justice department referral for possible criminal prosecution is in effect and because Revenue Canada's investigation of respondents was a criminal investigation in its preliminary stage, United States law proscribed the use of a summons to obtain the information for Canadian authorities regarding respondents' American bank accounts.
That argument was rejected, and the District Court ordered the bank to comply with a summonses.
The Court of Appeals reversed holding that before the IRS may honorary request for information under the 1942 Convention.
It must determine that Revenue Canada's investigation has not reached the stage analogous to a justice department referral by the IRS that here, the affidavit submitted by the IRS failed to state that such a determination had been made with respect to revenue Canada's investigation of respondents.
We reverse the judgment of the Court of Appeals.
We hold that neither the 1942 Convention nor domestic legislation requires the IRS to attest that the Canadian tax investigation has not reached the stage analogous to a Justice Department referral by the IRS in order to obtain enforcement of a summons issued pursuant to a request by Canadian authorities under the convention.
Justice Kennedy, joined by Justice O'Connor, joins all but part 2c of the Court's opinion and has filed an opinion concurring in part and concurring in the judgment.
Justice Scalia has filed an opinion concurring in the judgment.