Petition — Arthur Andersen & Co. v. United States

Supreme Court brief1980

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IN THE MICHAEL RODAK, JR., CLERK

Supreme Court of the United States

OcTOBER TERM, 1980

ARTHUR ANDERSEN & CO.,

Petitioner,

UNITED STATES OF AMERICA, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT

OF APPEALS FOR THE FIRST CIRCUIT

FREDERIC W. HICKMAN

MICHAEL M. CONWAY

WM. CARLISLE HERBERT

Hopkins, Sutter, Mulroy,

Davis & Cromartie

One First National Plaza

Suite 5200

Chicago, Illinois 60603

(312) 558-6600

Attorneys for Petitioner

J. READ MURPHY

Murtha, Cullina, Richter,

and Pinney

101 Pear! Street

Hartford, Connecticut 06103

DONALD DREYFUS

Arthur Andersen & Co.

69 W. Washington Street

Chicago, Illinois 60602

Of Counsel

QUESTIONS PRESENTED

1. Whether, in order to obtain appellate review of a

district court order enforcing an IRS summons for production of

sensitive accounting workpapers, Arthur Andersen & Co. must

flaunt the court’s order and stand in contempt of court.

Andersen complied with a final district court order to produce

its “tax accrual workpapers” and, as a result, its appeal of the

order was dismissed as moot. A case is not moot if it involves

an issue which is “capable of repetition yet evading review.”

The Court of Appeals held that this case does not fall in the

“evading review” category because Andersen could have ob-

tained review by defying the district court order and appealing

the resulting contempt cita.ion.

2. Whether the Internal Revenue Service must make a

particularized showing of relevance to obtain the tax accrual

workpapers prepared by a public accounting firm engaged to

examine and report on a corporation’s financial statements.

Tax accrual workpapers are “opinion” documents, reflecting

the accountant’s subjective assessment of its client’s potential

tax exposures and prepared in order to test the reasonableness

of the client’s estimates, appearing in its financial statements, of

its unpaid tax liabilities.

PARTIES

Parties in the Court of Appeals were

The United States of America and Francis W. Murphy,

Special Agent, Internal Revenue Service, Petitioners-

Appellees;

Arthur Andersen & Co. (“Andersen”), Respondent-

Appellant;

Good Hope Industries, Inc. (“Good Hope”’), Intervenor-

Appellee (the taxpayer under investigation and the client

of Andersen ).

TABLE OF CONTENTS

Page

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REASONS FOR GRANTING THE WRIT.................... 7

I. SEES 7

Andersen’s Appeal Should Not Have Been Dis-

OSE 7

The Court Below Denied Decision of an Impor-

tant Public Issue In a Case Where None of the

Reasons for the Mootness Prohibition Is Present... 7

The Decision Below Conflicts With Principles of

Judicial Administration Enunciated by this Court. 9

The Decision Below Conflicts With the Specific

Holding of the Seventh Circuit that a Litigant

Need Not Stand in Contempt ..............:ccccseeeeeeeeeees 13

The Decision of the Court Below Is Plainly

Wrong and Will Unsettle a Hitherto Settled Rule

of Judicial Administration .................:cccccseeseeseeeeees 14

The “Familiar Procedure” Argument Is

ee ikinitibibnakecsnabbsbbinernsccenceceseoseecccooosep 14

The Attempt to Distinguish the Seventh Cir-

cuit Opinion Lacks Substance...................:00 16

As a Means of Ensuring Concrete Adversity,

Contempt Is a Very Undesirable Procedure

Where Alternative Procedures Are Available........ 17

Failure to Clarify the Conflict Between Circuits

SER 18

The Opinion Below Renders Illusory This Court’s

Promise of Appellate Review for Summons

sick cn sccsswenenmscescconevensecbess 19

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Page

Il. AS TO THE SUBSTANTIVE ISSUE: DIS-

CLOSURE OF TAX ACCRUAL PAPER............ 20

The Ability of the Accounting Profession to Func-

tion Effectively In the Public Interest Is At Stake... 20

The Court Below Confirms the Importance of the

OOD ccicinsidncilbatcscchninncchaseadne a tacddladaaiaasbiranithies 22

This Appeal ( Unlike Good Hope’s Appeal) Is an

Ideal Matrix for a Precedent ..................ccccccccsssesooes 22

Andersen Seeks a Construction of “Relevance’

That Would Protect the Interests of the IRS, the

FORD GOT COG CO FUE sip cccecencessovisdetnaninedesstsnrcizies 24

The Issues In This Case Are Closely Related to

Those in the Upjohn Case, for Which This Court

Has Just Granted Certioratl ........ccccccccssssssessessoseseses 26

The Decision of the First Circuit Creates a Con-

SRE III SR iv sieciscicassierthatiptheiitlidinton ste dvoctns 27

CR INS cthesrnetdinseineheeiiassacliapdadicecsdadaniesbanessetsiatanbigen 29

APPENDIX A: Court of Appeals Opinion in

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APPENDIX B: District Court Opinion...............::cc:cceeee A-10

APPENDIX C: Court of Appeals Opinion in

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APPENDIX D: Judgment of Court of Appeals in

RIE, FUME © -nnscssnsdichasdsconasaidageenbeabesgibeenieis aabedssaibls A-38

APPENDIX E: Mr. Justice Brennan’s Order Extending

Time for Filing Petition for Writ of Certiorari.............. A-39

APPENDIX F: Statutes 26 U.S.C. § 7602 and 7604........ A-40

APPENDIX G: Denial of Stay in District Court and

CREE OE FI vstsctscrecedictnsiecnidiainciombabilincimamialigagice A-42

APPENDIX H: Mr. Justice Brennan’s Denial of Stay on

ROG TE, TGP wissisiinainterihssiniteniiidietiabenamameied A-46

APPENDIX I: Internal Revenue Service Manual............ A-47

TABLE OF AUTHORITIES

Application of United States, 610 F.2d

Te Ce es eh es diceediipainschensstenaseion

Application of United States, 616 F.2d

DR a 0 UN Mills FOIE? P cccscncnsoasbaceecccninnesect

Arthur Andersen & Co., United States v.,

474 F. Supp. 322 (D. Mass. 1979)

dismissed as moot, 45 AFTR 2d 80-

Re a, IONE scccieestscspstcearsittighenks

Arthur Andersen & Co., United States v.,

474 F. Supp. 322 (D. Mass. 1979)

aff'd., 46 AFTR 2d 80-5285 (Ist Cir.

SID P aisacictnincindenssiososesepsipnecaisiataicancheciions

Baldridge v. United States, 406 F.2d 526

CE ey. WII Bickethnsseccisecndiaitinsacusnsendecitlh

Barney v. United States, 568 F.2d 116

Ce Sets PPD ckcciasemssAicinicinPllesimesaevecsninas

Cobbledick vy. United States, 309 U.S. 323

2, PEERS PREMERA Cire bo

Coopers & Lybrand, United States v., 550

F.2d 615 (10th Cir. 1977), aff’g. 413

F. Supp. 942 (D. Colo. 1975) ...............

Deak-Perera, United States v., _. F.2d

__. No. 79-6035 (2d Cir., Oct. 26,

PE ciiscdacctininthe Acie chessdnkaudthdsiniltipesicnamss

Doe v. Bolton, 410 U.S. 179 (1973)..........

Harvey v. Rosenthal & Co., —_— F.2d

—___, No. 79-1803 (7th Cir., July 14,

Hickman v. Taylor, 329 U.S. 495 (1947)..

In re Special April 1977 Grand Jury, 581

F.2d 589 (7th Cir. 1978), cert. denied

sub nom. Scott v. United States, 439

Re PE CFI cactsadesithigevavecssinsenssnibnes

Kurshan v. Riley, 484 F.2d 952 (4th Cir.

FP EEn hasesacenaneniucdeceestischeadeaieinindpesianiis

—_

1-2

1-2,

22, 26

4-5, 28

Lyons, United States v., 442 F.2d 1144

fl OW 6) ) ee

Nebraska Press Assn. v. Stuart, 427 U.S.

Se EE ID sicsencintcttecnaltasncmniaterse

New York Telephone Co., United States

v., 434 U.S. 159, 165 n.6 (1977)...........

Powell, United States v., 379 U.S. 48

ON | RENATO SN a Ne

CRI D cainncsesnrccinntnensenslinneinintabsesenmmapatones

Roe v. Wade, 410 US. 113, 124-25

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FEW Distierivirstnseicnnecasvicdtesiinashtthananpintin

CRIN P céclsesissitsdapicicaiiesegneentnininiinantibiinmesiaahs

Southern Pacific Terminal Co. v. Inter-

state Commerce Commission, 219 US.

BES Ce i ckciidienasciedaitelnssnninininie

United Mine Workers, United States v.,

See Se es BO FEE PD cick

United States Parole Commission v. Ge-

raghty, No. 78-572, 48 U.S.L.W. 4296,

4298-99 ( March 19, 1980) ......0.. ee.

Upjohn Co. v. United States, No. 79-886,

48 U.S.L.W. 3481, 3602 (1980)............

STATUTES

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Page

10, 13

15, 19

No.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

ARTHUR ANDERSEN & CO.,

Petitioner,

UNITED STATES OF AMERICA, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT

OF APPEALS FOR THE FIRST CIRCUIT

OPINIONS BELOW

This case is a proceeding to enforce an IRS summons

against Andersen and was heard in the United States District

Court for the District of Massachusetts. The summons called

for accounting papers prepared and owned by Andersen but

relating to the business of Good Hope. Good Hope intervened

in the proceeding. The opinion of the district court (Appendix

B, infra at A-10) is reported at 474 F. Supp. 322, and

unofficially at 79-2 U.S.T.C. 9506 and 44 AFTR 2d 79-5401.

Andersen and Good Hope filed separate notices of appeal

to the Court of Appeals for the First Circuit, which were

assigned separate docket numbers by that court. Both appeals

involved the same court order and raised, in substantial part,

identical issues. However, because of a delay by Good Hope in

processing its appeal, the two dockets were not consolidated but

were considered separately by the Court of Appeals.

The court’s opinion in Dkt. No. 79-1411 (Andersen’s

appeal) is attached as Appendix A, infra at A-l, and is

unofficially reported at 45 AFTR 2d 80-1590. The court’s

opinion in Dkt. 79-1405 (Good Hope’s appeal) is attached as

Appendix C, infra at A-29, and is unofficially reported at 46

AFTR 2d 80-5285.

The second opinion (Good Hope’s appeal) decided only

issues and arguments not decided in the first opinion ( Ander-

sen’s appeal). While only issues involved in the first opinion

are presented in this petition, the case was decided by the two

opinions in combination.

JURISDICTION

The judgment of the Court of Appeals in Dkt. 79-1411 was

entered on March 31, 1980 and in Dkt. 79-1405 on June 16,

1980. By order dated June 16, 1980 (Appendix E, infra at A-

39), Mr. Justice Brennan extended the time for filing this

petition with respect to Dkt. 79-1411 to and including August

28, 1980. (No. A-1102) The jurisdiction of this Court is

invoked under 28 U.S.C. 1254(1).

STATUTES INVOLVED

Sections 7602 and 7604 of the Internal Revenue Code, 26

U.S.C. 7602 and 7604, are the applicable statutes and are set

forth in Appendix F, infra at A-40. The key provision is:

Section 7602. Examination of books and witnesses.

For the purpose of ascertaining the correctness of any

return, ... determining the liability of any person for any

internal revenue tax ..., or collecting any such liability,

the Secretary is authorized

(1) To examine any book, papers, records or other data

which may be relevant or material to such inquiry; .. .

STATEMENT OF THE CASE

On November 14, 1977, the Internal Revenue Service

issued a summons directing Andersen to produce and to testify

about various records and workpapers related to its auditing

and tax planning work for Good Hope.

Andersen resisted the production of certain documents.

The district court ordered the production of all of Andersen’s

workpapers. Andersen appealed from the order only with

respect to the production of “tax accrual workpapers.”

Tax accrual workpapers are prepared in connection with |

the independent accounting firm’s auditing function (as dis-

tinguished from its tax advisory and tax return preparation

function, which the firm may or may not perform for the

client). The financial statements of a company reflect an

income tax expense and a related accrued liability. The income

Statement reflects the tax liability accrued during the period

covered by the statement, and the balance sheet reflects the

total accrued liability (both known and estimated) which

remains unpaid as of the balance sheet date. These numbers

are to a significant degree estimates, and no one number is

“correct.”

In auditing the financial statements of a client, the inde-

pendent accounting firm must form a judgment as to whether

the accrued tax liabilities are shown in amounts which are

reasonable, in order to express its opinion as to whether the

company’s financial statements fairly present the company’s

financial position. Many positions taken by a taxpayer are not

clear-cut under the law. The accountant must evaluate each

uncertain tax position in order to determine whether the

company has established, in the aggregate, a reasonable accrual

to cover the possible tax liability.

The tax accrual workpapers are the workpapers prepared

by the accounting firm in arriving at this judgment. These

workpapers ordinarily are of two diffe ‘ent types. The first type

are mechanical in nature, and represent analyses of factual

material drawn from the books and records of the company,

organized in a manner that is convenient for the accountant.

Generally speaking, these are arithmetical analyses which

Andersen would make available for examination by the Inter-

nal Revenue Service. In addition, such information is fre-

quently supplemented by the accountant upon request, to assist

its client in furnishing relevant information to the IRS.

The second type are workpapers assembled to allow the

accountant to form the subjective judgment mentioned pre-

viously. Such workpapers do not typically include factual

information from the client’s books and records. This subjec-

tive information identifies potential issues of adjustment, ana-

lyzes the applicability of the tax law to the issues, evaluates the

uncertainties involved and estimates the accrued feveral income

tax reserves appropriate to protect the company. This analysis

is necessary so that, in the event such uncertainties materialize,

adjustments to the company’s federal income tax liabilities will

not arise in amounts which would impair its financial position.

It is these subjective workpapers, involving opinion and judg-

mental matters, that Andersen seeks to protect.

The IRS sought enforcement of the summons in the district

court pursuant to Section 7604 of the Internal Revenue Code,

26 U.S.C. 7604. Andersen asserted in the district court that its

tax accrual workpapers were not “relevant” to the IRS’ in-

vestigation of Good Hope’s tax liabilities within the meaning of

Section 7602.

Andersen relied on United States v. Coopers & Lybrand,

550 F.2d 615 (10th Cir. 1977), aff’g. 413 F. Supp. 942 (D.

Colo. 1975), the only prior case which had squarely addressed

the status of tax accrual workpapers. In Coopers & Lybrand the

Tenth Circuit held that tax accrual workpapers were not

ordinarily “relevani”™ to an IRS investigation of the client’s tax

liabilities within the meaning of Section 7602.

The district court below rejected Coopers & Lybrand. 474

F. Supp. at 329. It declined to require the IRS to show that the

tax accrual workpapers were or were likely to be relevant to its

investigation. Although the IRS Special Agent who had issued

the summons admitted that he did not even know what tax

accrual workpapers were, the district court found that the

“collective familiarity” of the agents involved in the in-

vestigation was sufficient to establish the requisite “expectation”

of relevance. Jd. at 329-30. The district court ordered

Andersen to comply with all aspects of the summons.

Andersen and the intervenor, Good Hope, moved for a

stay pending appeal in the district court and in the Court of

Appeals, but each court denied the motion (Appendix G, infra

at A-42). Good Hope went further and asked this Court for a

stay (No. A-158), but that, too, was denied by Mr. Justice

Brennan on August 20, 1979. (Appendix H, infra at A-46).

When the stays were denied, Andersen was faced with the

alternative of complying with the order of the district court and

producing the documents or defying the order and standing in

contempt. It elected to obey the law. The documents were

produced.

The United States thereafter moved to dismiss the appeal

as moot. Andersen asserted in the Court of Appeals that its

appeal was not moot, because the issue involved is “capable of

repetition, yet evading review,” a doctrine enunciated by this

Court in Southern Pacific Terminal Co. v. Interstate Commerce

Commission, 219 U.S. 498, 515 (1911).

The Court of Appeals acknowledged that the issue was

capable of repetition, as there was a reasonable expectation that

Andersen would be subject to the same action again by the IRS.

Op at A-4. The court also found that Andersen could not

expect to obtain appellate review of the question prior to

enforcement of the IRS summons, in light of the strong policy

opposing delays in enforcement of such summonses. Op. at

A-5. The court nevertheless concluded that the question was

not one that “evaded review,” because Andersen could have

defied the district court’s order for enforcement and raised its

argument in the context of a contempt proceeding. Op. at A-S.

The court therefore dismissed the appeal as moot.

In reaching its decision, the First Circuit expressly refused

to follow the holding of the Seventh Circuit in Jn re Special

April 1977 Grand Jury, 581 F.2d 589 (7th Cir. 1978), cert.

denied sub. nom. Scott v. United States, 439 U.S. 1046 (1979).

In that case, the Seventh Circuit permitted appeal from an

order enforcing a grand jury subpoena directed to members of

the Illinois Attorney General’s staff, notwithstanding that the

staff had complied with the order prior to appeal. The court

found that the subpoena was not moot because it was part of a

continuing investigation and future subpoenas subject to the

same objections were likely. It noted that in applying the

“capable of repetition, yet evading review” doctrine:

the Supreme Court has not required litigants to subject

themselves to contempt or criminal sanctions.... Jd. at

591.

The First Circuit sought to distinguish Jn re Special April

1977 Grand Jury on the ground that the staff-members of the

Illinois Attorney General did not have as much incentive as

Andersen to commit contempt of court. Op. at A-6. The First

Circuit also reasoned that committing contempt to obtain

appellate review was a “familiar procedure” and that it did not

seem “too draconian” to require Andersen to resort to contempt

to preserve its objection for appeal. Op. at A-8.

REASONS FOR GRANTING THE WRIT

I. AS TO MOOTNESS

Andersen’s Appeal Should Not Have Been Dismissed as Moot

The Court should grant the writ to review the question of

mootness because the rule announced below Tejects established

precedent in this Court and in another circuit; and in doing so it

advances no good purpose or policy, but on the contrary,

contributes to disregard for law and the judicial process,

subverts the effective investigative procedures of the IRS and

imposes unjustifiable burdens on litigants.

The particular ground on which the court rests its con-

clusion was not developed in the briefs or at oral argument.

Petitioner respectfully submits that the court has failed to

appreciate the full implications of the rule it announces and the

pernicious effect it would have on the judicial process, on the

process of administrative investigations and on the resolution of

important public issues.

The Court Below Denied Decision of an Important Public

Issue In A Case Where None of the Reasons for the Mootness

Prohibition Is Present

The original notion behind the prohibition against deci-

ding moot cases was simple: that it is useless for courts to decide

a case if there is ro longer a subject matter on which the court's

decision can operate. Subsequently the courts developed these

additional reasons:

1. Cases in which the original controversy has been settled

may be left in a posture which is abstract or hypothetical. That

is antithetical to the common law process, which rests on

“concrete adversity,” i.e., on the proposition that decisions on

concrete facts with active adversaries will, in cumulation, best

delineate the contours of more general rules.

2. In cases in which the original controversy has been

settled, one or both parties are likely to lose interest and

commitment, with the result that the facts and arguments will

not be fully developed or carefully presented.

3. In deciding cases in which the original controversy has

been settled, courts may intrude on policy making by other

branches of government. If the courts’ role is to decide matters

in which there is “concrete adversity,” the corollary is that

courts intrude on the role of the legislative and executive

branches if they depart from cases with “concrete adversity”

and promulgate general laws and administrative policies.

4. Acase which is truly moot is not a “case or controversy”

in the constitutional sense and, therefore, may not be decided

by the federal courts.

None of these reasons is present in this case. The

substantive issue here could not be more specific or concrete. It

focuses on a specific sct of documents and there is a full

development of facts in the record and a full development of

the arguments in the briefs. No future case is likely to be more

concrete or specific.

The issue in controversy is extremely important to a large

affected class and remains live in every practical sense. The

decision confronts not on'y Andersen but all accounting firms

with continuing harm. Its mere existence diminishes the

willingness of Andersen’s clients to communicate freely and

thus renders the professional auditing function more difficult to

perform, more costly and less effective. The Internal Revenue

Service has already revised its operating Manual to cite che

Andersen opinion as supporting its view and to encourage its

examining Officers to intrude further into the area at issue.

( Appendix I, infra at A-47) The American Institute of Certified

Public Accountants (AICPA) regards the case with great

concern and filed amicus briefs in the court below. It intends to

do so again, we are advised, in connection with this petition.

The issue is prominent in the pages of accounting and legal

journals and at the meetings of the AICPA and the American

Bar Association.

The words of the Court in Sibron v. New York, 392 US.

40, 57 (1968), fit this case exactly:

None of the concededly imperative policies behind the

constitutional rule against entertaining moot controversies

would be served by a dismissal in this case. There is

nothing abstract, feigned, or hypothetical about Sibron’s

appeal. Nor is there any suggestion that either Sibron or

the State has been wanting in diligence or fervor in the

litigation. We have before us a fully developed record of

testimony about contested historical facts, which reflects

the “impact of actuality” to a far greater degree than many

controversies accepted for adjudication as a matter of

course under the Federal Declaratory Judgment Act, 28

U.S.C. §2201.

The Decision Below Conflicts With Principles of Judicial

Administration Enunciated by this Court

This Court, beginning in Southern Pacific Terminal Co. v.

Interstate Commerce Commission, 219 U.S. 498, 515 (1911),

has articulated the doctrine that the mootness prohibition does

not apply to prevent review in cases “capable of repetition, yet

evading review.” The court below eviscerates this doctrine by

finding it inapplicable if an appellant can obtain review by

defying the district court’s order and standing in contempt, even

though that contempt affronts the court and carries the possi-

bility of severe punishment for the appellant.

Review by an appellate court is usually available in theory

to one who is willing to defy the law. But this Court has never

required litigants to defy the law and subject themselves to

contempt or criminal sanctions to obtain appellate review under

the “capable of repetition, yet evading review” doctrine. The

First Circuit’s holding is directly in conflict with a number of

cases in which this Court and others held issues not to be moot

although appellants complied with laws or court orders they

could have defied.

In the original Southern Pacific Terminal case, it appears

that the appellant could have defied the Interstate Commerce

Commission and secured review when the Commission sought

enforcement or penalties in the courts.

This Court’s holding in United States v. New York Tele-

phone Co., 434 U.S. 159, 165 n.6 (1977) stands contrary to the

decision below on closely analogous facts. In that case, the

telephone company challenged an order of the district court

compelling the company to make equipment available for a

surveillance operation by the FBI. After unsuccessfully moving

in the district court and in the court of appeals for a stay

pending appeal, the telephone company complied with the

order. This Court held that the expiration of the order did not

render the case moot, because the controversy was capable of

repetition, yet evading review. The Court did not require the

telephone company to defy the district court’s order and raise

its objection in the context of a contempt proceeding.

This holding has been followed without question by both

the Court of Appeals for the Third Circuit and the Court of

Appeals for the Ninth Circuit in similar cases involving orders

for telephone company cooperation with government in-

vestigations. In Application of United States, 610 F.2d 1148

(3d Cir. 1979), the court of appeals expressly stated:

These cases might appear to be moot since the telephone

companies have fully complied with the orders. No

decision of this court could remedy any errors that the

district courts might have committed. However, we find

that the orders fit within the exception to mootness for

“short term orders, capable of repetition, yet evading

review.” 610 F.2d at 1153.

And in Application of the United States, 616 F.2d 1122 (9th

Cir. 1980), the court believed this conclusion so obvious that it

simply observed in a footnote:

We do not understand the government to argue, nor could

it, that because the surveillance authorized by the district

court has been completed, the case is therefore moot.

Under the principles set forth in Southern Pacific Terminal

Co. ... , the issue presented here is one “capable of

repetition, yet evading review.” United States v. New York

Telephone Co.,.... 616 F.2d at 1128 n. S.

The fact situations in those cases cannot be distinguished

from those in this case. In both, a private party, not itself the

subject of a government investigation, has been ordered to

provide assistance to the government in making its in-

vestigation. The order in question is not part of ongoing

litigation between the government and the private party. The

private party will not be party in any future litigation involving

the materials obtained as a result of the order. Consequently,

the private party will have no later opportunity to challenge the

order. Yet, because of the nature of the private party’s business

and the continued need for the kind of investigation involved,

the private party will continually be subject to similar orders.’

1 As the Court of Appeals below noted in its footnote 6 (Op. at

A-4), the fact that the private party is not itself under investigation

(and therefore will not participate in any proceedings resulting from

the investigation) and will be continually asked to assist in in-

vestigations, distinguishes this case from that involving resistance by a

taxpayer to a summons. A taxpayer will have an opportunity to

challenge the use of the fruits of such orders, and, in any event, cannot

reasonably claim that he will be subject to repeated orders in the

future. See United States v. Deak-Perera, F.2d. No. 79-

6035 (2d Cir., decided Oct. 26, 1979); Barney v. United States, 568

F.2d 116 (8th Cir. 1978); Kurshan v. Riley, 484 F.2d 952 (4th Cir.

1973); United States v. Lyons, 442 F.2d 1144 (Ist Cir. 1971);

Baldridge v. United States, 406 F.2d 526 (Sth Cir. 1969).

Similarly, the journalists in Nebraska Press Assn. Vv.

Stuart, 427 U.S. 539, 546-47 (1976), who challenged a state

court order temporarily restraining pretrial publicity, could

have violated the order and raised their objection in the context

of a contempt proceeding. And the women in Roe v. Wade,

410 U.S. 113, 124-25 (1973), and Doe v. Bolton, 410 U.S. 179

(1973), who challenged statutes forbidding abortion, could

have violated those statutes and raised their objections in the

context of a criminal prosecution.

If the “evading review” category excludes all cases in

which review can be obtained by taking unlawful steps, the

category does not cover most of the cases in which this Court

and other courts have applied the “capable of repetition, yet

evading review” doctrine. The doctrine would be reduced to a

meaningless thing, as it would cover virtually nothing.

The “capable of repetition, yet evading review” doctrine

assumes that the appellant has already complied with the law

or order — which is why the controversy has arguably become

“moot.” The doctrine holds that compliance does not result in

mootness if the appellant can expect the issue to recur, with the

likelihood that the challenged requirement will again evade

review. The concept is that, under these circumstances, the case

retains its character as a present, live controversy. The

appellant has a continuing personal stake in the requirement,

his vigorous advocacy can be expected, and the Article III

requirement that a case or controversy exists is met. United

States Parole Commission v. Geraghty, No. 78-572, 48

U.S.L.W. 4296, 4298-99 (March 19, 1980).

It is unnecessary — and an unwise public policy — to force

the appellant into civil disobedience.

The Decision Below Conflicts With the Specific Holding of the

Seventh Circuit That a Litigant Need Not Stand in Contempt

In Jn re Special April 1977 Grand Jury, the Seventh Circuit

specifically rejected the argument that a person who objects to a

subpoena enforcement order must stand in contempt of court to

obtain appellate review and thereby prevent the issue from

evading review on appeal. The Court said:

... the Supreme Court has not required litigants to subject

themselves to contempt or criminal sanctions to meet this

prong of the mootness test. 581 F.2d at 591.

That statement accurately reflects the holding of this Court

in New York Telephone and other cases discussed above.

The Seventh Circuit repeated its conclusions in an as yet

unreported decision in Harvey v. Rosenthal & Co., —— F.2d.

—___, No. 79-1803, decided July 14, 1980, involving an appeal

from a request for a preliminary injunction challenging the

location of a Commodities Future Trading Commission repara-

tions hearing. The court acknowledged the conflict between its

position and that of the First Circuit:

To be sure, this Court has in the past been reluctant to

require a party to risk serious judicial sanctions in order to

preserve a question that will otherwise become moot. See

In re Special April 1977 Grand Jury, 581 F.2d 589 (7th Cir.

1978), certiorari denied sub nom. Scott v. United States,

439 U.S. 1046, but see United States v. Arthur Andersen &

Co., (1st Cir. No. 79-1411, decided March 31, 1980).

The court refused to equate the risk of default in the reparations

hearing with being adjudged in contempt of court and held

that, in any event, review would be available in conjunction

with review of the substantive hearing.

The Decision of the Court Below is Plainly Wrong and Will

Unsettle a Hitherto Settled Rule of Judicial Administration

The decision of the court below rests on a narrow ground.

It holds that contempt is a “familiar procedure” for obtaining

judicial review and that appellants who fail to resort to that

familiar procedure cannot complain of their cases “evading

review.” It attempts to distinguish on a factual basis the

decision of the Seventh Circuit in Jn re Special April 1977

Grand Jury.

The “capable of repetition, yet evading review” doctrine

has never before been applied to require appellants to defy the

law, no matter how “familiar” the defiance procedure may be.

In adding that requirement, the court below unsettles seven

decades of practice and will, if it stands, give rise to unfairness

and inefficiency in judicial administration and to undesirable

changes in the behavior of litigants.

The decision below raises no fundamental issues that

would profit from re-examination or debate in the lower courts.

The narrow grounds relied on below are simply mistaken and

should be promptly reversed by this Court before they create

widespread trouble.

The “Familiar Procedure” Argument is Wrong

The court below characterizes contempt as a “familiar

procedure” which it is not unreasonable to require. But in the

cases applying the “capable of repetition, yet evading review”

doctrine contempt is not a “familiar procedure”. On the

contrary, it is virtually unknown. As explained earlier, if the

doctrine does not cover cases in which appellants could obtain

review by defying the law, it is a near-useless thing.

In support of its “familiar procedure” rationale, the Court

of Appeals cites decisions of this Court which require a citizen

who objects to a grand jury subpoena to make a choice between

(1) complying with the district court’s enforcement order prior

to appellate review and (2) resisting the order for the sake of

obtaining review with the possibility that he will incur contempt

penalties. United States v. Ryan, 402 U.S. 530 (1971);

Cobbledick v. United States, 309 U.S. 323 (1940). In these

cases, the Court held that orders denying motions to quash

grand jury subpoenas are not appealable. Such appeals, the

Court held, would result in undesirable delays in the enforce-

ment of subpoenas and are justified by “the necessity for

expedition in the administration of the criminal law.” 402 U.S.

at 533.

Here, on the other hand, there is a clear right to appeal.

Reisman v. Caplin, 375 U.S. 440 (1964). The issue involved,

whether compliance has rendered the case moot, was not

involved in Ryan and Cobbledick. They stand only for the

proposition that, in some cases, review before compliance can

be had only by standing in contempt.? Contempt, in such cases,

is the lesser of two evils. The evil of extended delay and the

need for prompt compliance outweigh the evils of forcing a

litigant to stand in contempt.

In contrast, mootness issues like that involved here arise

only after compliance. If the individual, having complied,

seeks appellate review, the appeal will be moot unless the case

meets the criteria of the “capable of repetition, yet evading

review” doctrine.

Application of the doctrine in these post-compliance situ-

ations also serves “the necessity for expedition.” If the doctrine

is not applied, a litigant for whom the issue is a recurring one

will be pushed into non-compliance and delay in order to

secure an appellate decision.

2 This is, in essence, the same issue decided by the District Court,

the Court of Appeals and Justice Brennan in denying a stay of the

district court orders in this case.

The Attempt to Distinguish the Seventh Circuit Opinion

Lacks Substance

The First Circuit’s attempt to distinguish Jn re Special April

1977 Grand Jury is invalid both in its reasoning and in its

treatment of the facts.

The First Circuit surmises that the subpoenaed government

employees did not have a strong personal stake in resisting

disclosure and could not be expected to stand in contempt to

protect the right to appellate review. The opinion implies that it

was proper under these circumstances for the Seventh Circuit to

consider the merits of the appeal under the “capable of

repetition, yet evading review” doctrine. The court surmises

that Andersen, on the other hand, had a strong personal stake

in resisting disclosure, giving it sufficient incentive to resort to

contempt to preserve its right to appeal.

The court does not make clear why it thinks separate rules

are desirable for different classes of litigants or why it is sensible

to make appeal easier for those with little incentive than for

those with a great incentive.

In any event, the court’s factual distinction is entirely

surmise, and experience suggests it is wrong. The distinction

implies that the commitment of government employees to their

convictions is less than that of employees of private concerns.

There is no basis for that assumption. If anything, state

employees would be more likely to risk contempt than private

employees because they know, as a practical matter, that they

are backed by the “majesty of the state” and are less likely to

be personally punished.

But even if one were to accept the First Circuit’s factual

surmise, it argues for the opposite conclusion. If, as alleged,

Andersen employees have a strong and continuing interest in

non-disclosure of the documents in issue, that affirms that

Andersen’s controversy continues to possess a high degree of

“concrete adversity” and is, therefore, not moot.

Moreover, the First Circuit’s conclusion that contempt

offers a satisfactory route to appellate review ignores the risks a

litigant faces in defying a court order. These include the threat

to his reputation as law-abiding and the direct threat of

contempt penalties. The First Circuit belittles, to the point of

ignoring, these factors.

Finally, whatever merit the First Circuit’s purported dis-

tinction may have in explaining the Seventh Circuit case, it does

not deal at all with the decisions of this and lower courts which

hold issues not to be moot although appellants complied with

laws or court orders they could have defied.

As a Means of Ensuring Concrete Adversity, Contempt Is a

Very Undesirable Procedure Where Alternative Procedures

Are Available

Whether or not contempt is a “familiar procedure,” it is

not a desirable procedure. It should be avoided where other

lawful procedures can be made to work. A principal virtue of

the “capable of repetition, yet avoiding review” doctrine is that

it avoids the necessity for litigants to defy court orders, without

sacrificing the need for “live controversy” and “‘concrete adver-

sity.”

Contempt is an undesirable procedure for several reasons:

First, because it encourages litigants, unnecessarily, to

flaunt orders of the courts. This Court has observed:

The interests of orderly government demand that respect

and compliance be given to orders issued by courts pos-

sessed of jurisdiction of persons and subject matter. United

States v. United Mine Workers, 330 U.S. 258, 303 (1947).

Those interests are undermined by requiring a citizen who

wishes to preserve his legal rights to defy a court order, when

no necessity exists for such a requirement.

Second, contempt is an undesirable procedure because it

imposes a heavy and unnecessary burden on the appellant. A

party faced with a summons enforcement order after a stay has

been denied confronts a harsh dilemma. If he obeys the order

he loses his ability to appeal. If he disobeys to preserve his

appeal, he must be prepared to accept heavy fines or personal

imprisonment. The burden of fines is obvious. Imprisonment,

apart from the inconvenience, carries an aura of disgrace which

is repugnant to citizens who wish to be law abiding.?

Where the “capable of repetition, yet evading review”

doctrine applies, it avoids both these undesirable effects of the

contempt procedure.

Failure to Clarify the Conflict Between Circuits Will Produce

Injustice

This Court should make the options clear for litigants.

Uncertainty will produce injustice.

If a litigant has no right to obtain review under the

“capable of repetition, yet evading review” doctrine, he may >

irretrievably lose the opportunity for review by mistakenly

counting on the doctrine and failing to defy the enforcement

order. This will have happened to Andersen if the First

Circuit’s holding is not reversed.

If, on the other hand, a litigant has the right to obtain

appellate review under the “capable of repetition, yet evading

review” doctrine, he may nevertheless be led by the First

Circuit’s holding to commit contempt and endure its penalties

in order to preserve his right to appeal.

3 Public accountants are licensed by statute in every state. Not

only criminal convictions, but also breaches of ethical standards and

other improper conduct, may be grounds for license revocation and

suspension. Contempt citations could adversely affect the accoun-

tants’ reputation, thereby inhibiting their ability to perform these

independent auditing functions.

Putting litigants in this unfair dilemma is unnecessary, but,

given the conflict between Circuits, will persist until this Court

decides the issue.

The Opinion Below Renders Illusory This Court’s Promise of

Appellate Review for Summons Enforcement

By denying a stay and then by dismissing the appeal as

moot, the First Circuit deprived Andersen of a lawful means of

appealing from the District Court’s order.

In Reisman vy. Caplin, 375 U.S. 440, 449-59 (1964), this

Court declared that the summons enforcement provisions of the

Internal Revenue Code provide “full opportunity for judicial

review before any coercive sanctions may be imposed” and

held that summons enforcement orders were appealable. The

Court noted that “with a stay order a witness would suffer no

injury while testing the summons.”

The ruling of the First Circuit would render illusory: the

Reisman promise of appellate review.

Summary

The First Circuit has interpreted the “capable of repetition,

yet evading review” doctrine in a manner inconsistent with the

decisions of this Court and on a ground specifically rejected by

the Seventh Circuit. The result is to render the doctrine largely

meaningless. The rule announced by the First Circuit not only

lacks justification, but would lead to affirmatively bad results.

It would undercut the authority of the courts, would impose

heavy and unjustifiable burdens on litigants, would promote

delay in investigations, and would renege on this Court’s prior

promise of full opportunity for judicial review of IRS summons.

If allowed to stand, the First Circuit decision will unsettle a

settled rule and lead to a new round of procedural uncertainty

and unfairness, which must ultimately be resolved by this

Court. There is no need for the issue to develop further in the

lower courts, as the doctrine in issue has been fully developed

over a period of seven decades. The First Circuit’s opinion is an

aberration, but the conflict it raises is clear, focused and ready

for resolution.

Il. AS TO THE SUBSTANTIVE ISSUE: DISCLO-

SURE OF ACCRUAL PAPERS

The Court should grant the writ to review the standard of

relevancy to be applied to requests by the IRS for tax accrual

workpapers for the following reasons:

The Ability of the Accounting Profession to Function Effec-

tively In the Public Interest Is At Stake

The question of IRS access to tax accrual workpapers

presents a critical conflict between administrative convenience

in the conduct of tax investigations and the ability of accoun-

tants to perform a significant and independent role.

On the one hand, the IRS has a great temptation to seek

tax accrual workpapers from the corporation’s independent

accounting firm, because the opinions and thought processes

revealed will, in the ordinary case, provide a roadmap for the

IRS audit. On the other hand, granting the IRS free access to

tax accrual workpapers will substantially impair the ability of

the accountant to determine whether the company’s financial

statements fairly present its financial position.

If the IRS can, at will, obtain the independent accountant’s

work in identifying and evaluating each uncertain tax position

of its client, the accounting profession will be perceived as and

will become an auxiliary enforcement arm of the IRS and will

lose its traditional free access to information from clients. The

channels of client-accountant communication, which are critical

to effective and efficient audits, will simply dry up.

Confronted with the unacceptable prospect of having

insufficient data, the accounting profession will search else-

where for the necessary data. Audit activities will be expanded,

resulting in excessive professional time commitments, increased

fees, client resistance and a further deterioration of the con-

fidential relationship between accountants and their clients.

Automatic access to the tax accrual workpapers will drive

the process “underground.” Good record keeping will be

avoided. Oral communication will supplant good records and

accountants will be pressured to do an increasing amount of

their work in their heads. If there is to be no privacy for

taxpayers or their professional advisors in thinking through

their positions, the thinking process will be inhibited, if not

suppressed. Positions will not be thought through for fear that

doing so will raise potential issues, which once noted, will not

go away regardless of their merits. Taxpayers will refrain from

seeking competent professional advice if any questions they

raise are to be routinely divulged to the IRS, and the quality of

reporting, both tax and financial, will inevitably decline.

The success of a voluntary tax system depends upon

charging taxpayers with responsibilities which they find gener-

ally reasonable. If the requirements are widely regarded as

unreasonable or cut against the grain of human nature, the

system will fail and no amount of penalties or coercion will

make up for the loss of voluntary compliance. For this reason,

a voluntary system which depends upon the taxpayer resolving

all questions, however doubtful, in favor of the Government

will not work. Nor will a system which requires the taxpayer to

identify all potential questions so that the Government may

then resolve them against the taxpayer.

There may be superficial appeal in the argument that

compliance can be improved by stripping taxpayers and their

professional advisors of privacy in their thought processes. But

the fact remains that to require the routine disclosure of the

kind of opinion material involved in these papers is to tamper

with the wellspring of the system.

For all these reasons, the issue presented is of fundamental

importance to the entire accounting profession, to the public

and to the tax system.

The Court Below Confirms the Importance of the Issue

The First Circuit has itself emphasized the importance of

the issue. It says generally of tax accrual workpapers:

While such papers are said to constitute no part of the tax

return or its workpapers, they would seem to indicate the

thinking of accounting analysts and policy makers about

tax decisions as to which the pros and cons may be in near

balance, and thus indicate soft spots where IRS could

profitably probe.

The importance of the interests of all concerned — tax-

payers, accountants and IRS — is clear. That a resolution

sensitively reflecting the legitimate interests of all and

faithful to applicable statutes would involve the most

delicate and demanding analysis of facts, research of law,

and reflection on policy is equally clear. Precisely because

we view the issue of “relevance” as so significant, we find

this case [i.e. the second appeal, by Good Hope] in a poor

posture to serve as the matrix for a precedent. Op. at A-36.

The Court made these remarks in the context of the second

appeal by Good Hope. But they deal with the general issue and

could not be more apt in describing its importance.

This Appeal (Unlike Good Hope’s Appeal) Is an Ideal Matrix

for a Precedent

The Good Hope appeal (Dkt. 79-1405) referred to in the

last sentence of the First Circuit statement quoted above,

involved questions which were hypothetical, unknown and

unasked. The kind of concreteness required for making

precedent was totally absent.

Andersen’s appeal, in contrast, involves facts which are

fully developed and concrete, and which present the issue of

document production in an ideally unambiguous form.

In Andersen’s appeal, the court addressed the production

of the tax accrual work papers, the issue raised here. It

dismissed the appeal as moot because Andersen had complied

with the order by producing the documents.

In Good Hope’s appeal, decided subsequently, the court

addressed a related, but different question, namely, the possi-

bility that the IRS might question Andersen employees about

the documents which had been produced. The district court

order required Andersen to answer questions about those

documents, if asked by the IRS. Good Hope argued, as

questions had been neither asked nor answered, that this part of

the order was not moot and should be reversed. The court

agreed that this issue escaped mootness, but declined to reverse

the order for another reason. The court pointed out that a

determination on concrete facts would not be possible until

specific questions were actually asked, which might never occur.

Accordingly, it held that a decision was premature as to that

part of the order.

We agree that the issue in the Good Hope appeal, dealing

with unknown and unasked questions, is too speculative and

abstract to provide “the matrix for a precedent.”

In contrast, the issue in this appeal, which concerns

production of the actual workpapers, has nothing abstract or

speculative about it. The trial before the district court dealt

with specific, known documents, and the facts were fully

developed with testimony from both parties.

A clearer, more concrete case than this is unlikely. The

issue is presented in bold relief. The Special Agent who issued

the IRS summons admitted that he did not even know what tax

accrual workpapers are. If, as the IRS contends, it has carte

blanche to obtain production of virtually anything, the Special

Agent’s testimony is irrelevant. But if, as Andersen contends,

the IRS must make some particularized showing of expected

relevance in order to obtain these sensitive, opinion documents,

the Special Agent’s testimony conclusively documents the fail-

ure to make that kind of showing.

In sum, the record is clear and factual and the facts are

unambiguous. The workpapers are opinion-type documents

and the IRS offers no reason to suppose that they supply any

facts believed to be missing. If the IRS is entitled to production

of the workpapers on this record, then the statutory require-

ment of “relevance” encompasses anything that micht conceiv-

ably relate to some issue that the IRS might be interested in

developing.

On the other hand, if the statutory “relevance” require-

ment requires some balancing of the interests in confidentiality

against the legitimate need for discovery, then this case pro-

vides the clearest case for “‘non-relevance.”

No better “matrix for precedent” can exist. A black-or-

white case is presented. Once decided, subsequent cases can fill

in any gray areas.

Andersen Seeks a Construction of “Relevance” That Would

Protect the Interests of the IRS, the Taxpayer and the Public

The tax accrual workpapers have very marginal relevance

to the IRS because they principally reflect after-the-fact opin-

ions of third parties, and any numbers and facts to which they

incidentally refer can ordinarily be obtained directly from

primary sources. Andersen seeks a ruling which recognizes that

there is a public interest in preserving the confidentiality of

these sensitive, opinion-type documents and that the nature of

the documents is such that the likelihood of their containing

anything relevant is too slight to justify production, absent

special circumstances. The factual record corroborates these

conclusions.

Andersen has suggested the kind of circumstances under

which examination of tax accrual workpapers would be justi-

fied and has proposed procedures for identifying such situations

and for producing any relevant facts.

In general, Andersen proposes that the workpapers be

found relevant only when the IRS shows a reasonable ex-

pectation that they are likely to contain factual data, excluding

materials that constitute the accountant’s mental processes and

opinions, for which the IRS has substantial need and which it

cannot reasonably obtain by other means. In the ordinary case,

tax accrual workpapers would not be relevant, because all data

contained in them are immediately available from primary

sources, i.e., the company’s records, books and accounts — the

same sources from which the workpapers take the facts they

rely on. On the other hand, the IRS investigators would be

granted access to the tax accrual workpapers to the extent they

contain needed factual information not available elsewhere —

for example, if they contain memoranda of factual statements

by an officer of the taxpayer who is no longer available.

The construction of “relevance” sought by Andersen is

designed to permit the accounting profession to serve the public

effectively, to be consistent with traditional standards of rele-

vance, to protect the legitimate interests of the IRS, and to

accomplish all those results without burdening the courts.4

4The public importance of the issue is demonstrated by the

attention of commentators. M. Caplin, “Should the Service Be

Permitted to Reach Accountants’ Tax Accrual Workpapers?” 51 J.

Tax. 194 (1979); P. Reckers and L. Beard, “IRS Seeks Auditors’

Working Papers,” 48 CPA Journal 35 (1978); R. Hanson and C.

Lees, “IRS Examination of Accountants’ Workpapers,” 143 J. Ac-

countancy 60 (1977); M. Saltzman, “Accountants and the IRS

Summons: Recent Developments,” 7 Tax Adviser 516 (1976).

The need is pressing, in the words of the First Circuit

quoted earlier, for

“*... a resolution sensitively reflecting the legitimate inter-

ests of all...” Op. at A-36.

The Issues In This Case Are Closely Related to Those in

the Upjohn Case, for Which This Court Has Just Granted

Certiorari

The rule which Andersen urges in this case is akin to the

rule applicable to attorney work product announced in Hick-

man v. Taylor, 329 U.S. 495 (1947).

In Hickman, this Court fashioned a rule which protected

attorneys’ work product papers from disclosure on demand, but

made them available on a limited basis where specific need was

shown. Andersen does not contend that the Hickman work

product rule, devised for attorneys’ papers, applies to these

accountants’ workpapers or that any privilege is involved. But

it does contend that the principles underlying the Hickman rule

are also present here and that a similar result is appropriate.

On March 17, 1980, this Court granted certiorari in a case

which involves the role of the Hickman work product rule in

IRS summons enforcement cases under Section 7602. The

Upjohn Co. v. United States, No. 79-886, 48 U.S.L.W. 3481,

3602 (1980).

Upjohn raises in the context of attorneys the same kind of

issue raised here in the context of accountants. Both Upjohn

and this petition raise issues about:

1. The balancing of competing interests. The IRS’

administrative convenience in obtaining access to a profes-

sional’s work papers must be balanced against the policy

considerations which argue for granting qualified protec-

tion to communications between taxpayers and their pro-

fessional advisors.

2. The “relevance” under United States v. Powell, 379

U.S. 48 (1964), of opinion-type work products which are

based on facts taken from original source records equally }

available to the government.

3. The showing required to be made by the IRS to support

enforcement of the summons for third party papers con-

taining opinions and thought processes.

In addition to their similarities, Upjohn and Andersen’s case

have two significant differences, which would help flesh out the

Court’s consideration of this vital issue of IRS summons power:

1. Upjohn’s claim is broader than Andersen’s because the

petitioner in Upjohn claims “work product” protection for

all of an attorney’s papers evaluating contingencies in

anticipation of litigation. Andersen, on the other hand,

seeks to invoke a balancing test for only a limited class of

workpapers which discuss contingencies affecting the tax

accrual.

2. Andersen’s claim is broader than Upjohn in that it seeks

to apply the policy considerations involved to another class

of professional advisors, public accountants.

The substantive issue raised in this petition is related and

complementary to that raised in Upjohn. Resolving both these

cases will give the Court better perspective on the important

policy issue which is raised in slightly different contexts, and

will avoid the possibility of deciding the issue in one context

with language that unwittingly creates mischief in the other

context. The issue is of great importance to both professions

and to the publics which they respectively serve.

The Decision of the First Circuit Creates a Conflict Between

Circuits

In the Good Hope appeal, the Court of Appeals affirmed

the district court’s order enforcing the IRS summons to Ander-

sen.5 The district court held that the IRS can obtain tax accrual

5In Andersen’s appeal, the Court of Appeals simply dismissed

the appeal as moot without either affirming or reversing the District

Court’s order.

workpapers if some of the agents involved in the investigation

know what they are and ask for them. The district court

expressly rejected the holding of the Tenth Circuit that tax

accrual workpapers are not ordinarily relevant to tax in-

vestigations within the meaning of Section 7602. United States

v. Coopers & Lybrand, 550 F.2d 615 (10th Cir. 1977), aff’g. 413

F. Supp. 942 (D. Colo. 1975).

Insofar as the holding of the First Circuit here affirms the

order of the district court, it is in direct conflict with that of the

Tenth Circuit in Coopers & Lybrand.

Prior to the First Circuit decision, Coopers & Lybrand was

the only case involving IRS access to tax accrual workpapers.

Its helding was unequivocal and reassuring to taxpayers,

although the IRS has taken the view that it was wrong. The

present case has unsettled all that Coopers & Lybrand had

settled. After this case was decided, the IRS revised its

operating Manual (as noted) to reassert more strongly its right

to tax accrual workpapers.

Like a Gresham’s law, the bad drives out the good.

Taxpayers conduct their affairs on the basis that the worst may

happen and this Andersen decision has shown what the worst

may be. Already, taxpayers and their professional advisors are

discussing ways to rearrange traditional lawyer-accountant

roles in an effort to shelter this sensitive opinion-type material

with some privilege or greater protection. Already, taxpayers

are avoiding the participation of their accounting advisors in

certain activities and pushing them to reduce less and less to

paper. Already the channels of communication are perceived

as drying up. The First Circuit decision, by its mere existence, is

changing public behavior in ways which are detrimental to the

public interest, the accounting profession and the adminis-

tration of the tax system.

The conflict that has developed is substantial and the issue

is important. It is now focused and this case presents it clearly

and simply. Certiorari has been granted in the Upjohn case,

involving similar issues and facts as they relate to lawyers. This

Court should resolve the issue as it relates to the accounting

profession.

CONCLUSION

Petitioner respectfully requests that the petition for a writ

of certiorari be granted.

FREDERIC W. HICKMAN

J. READ MURPHY MICHAEL M. CONWAY

Murtha, Cullina, Richter, WM. CARLISLE HERBERT

and Pinney Hopkins, Sutter, Mulroy,

101 Pearl Street Davis & Cromartie

Hartford, Connecticut 06103 One First National Plaza

Suite 5200

DONALD DREYFUS Chicago, Illinois 60603

Arthur Andersen & Co. (312) 558-6600

69 W. Washington Street

Chicago, Illinois 60602 Attorneys for Petitioner

Of Counsel

A-1

APPENDIX A

United States Court of Appeals

For the First Circuit

No. 79-1411

UNITED STATES OF AMERICA and

FRANCIS W. MURPHY

Special Agent, Internal Revenue Service,

PETITIONERS, APPELLEES,

ARTHUR ANDERSEN & COMPANY,

RESPONDENT, APPELLANT,

and

GOOD HOPE INDUSTRIES, INC.,

INTERVENOR, APPELLEE.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Frank H. FreepMan, U.S. District Judge]

Before Corrin, Chief Judge,

CAMPBELL and Bownes, Circuit Judges.

Frederic W. Hickman. with whom John L. Conlon, Michael M.

Conway, Wm. Carlisle Herbert, Hopkins, Sutter, Mulroy, Davis &

Cromartie, J. Read Murphy, John T. DelNegro and Murtha,

Cullina, Richter & Pinney were on brief, for appellant.

Carleton D. Powell, Attorney, Tax Division, Department of

Justice, with whom M. Carr Ferguson, Assistant Attorney General,

Edward F. Harrington, United States Attorney, Gilbert E. Andrews

and Robert E. Lindsay, Attorneys, Tax Division, Department of

Justice, were on brief, for appellees.

Kenneth J. Bialkin, Louis A. Craco, Howard C, Buschman, II1.,

Michael P. Zweig and Willkie, Farr & Gallagher on brief for

American Institute of Certified Public Accountants, amicus curiae.

March 31, 1980

Corrin, Chief Judge. This is an appeal from an order of the

United States District Court for the District of Massachusetts

A-2

2 U.S. U. ARTHUR ANDERSEN & COMPANY

enforcing an Internal Revenue Service summons issued to the

appellant, Arthur Andersen & Co. (“Andersen”). Andersen's

appeal asserts that this summons did not meet the relevance re-

quirement of 26 U.S.C. §7602.' The IRS, in addition to argu-

ing the propriety of the district court's order enforcing its sum-

mons, filed a motion to dismiss Andersen's appeal as moot.

Because we find the question of mootness dispositive, we do

not reach the merits of Andersen's appeal.

The summons at issue in this case was served upon Andersen

in the course of an IRS investigation of Good Hope Industries,

Inc., (“Good Hope”), for whom Andersen had acted as

auditor and tax advisor for the fiscal years ending July 31, 1973

through 1976. The IRS directed Andersen to produce and to

testify about various records and workpapers related to its

auditing and tax planning work for Good Hope. Andersen

'Section 7602 defines the scope of the IRS's authority to obtain

documents and testimony:

“For the purpose of ascertaining the correctness of any

return, making a return where none has been made, determin-

ing the liability of any person for any internal revenue tax or

the liability at law or in equity of any transferee of fiduciary of

any person in respect of any internal revenue tax, or collecting

any such liability, the Secretary is authorized-

(1) To examine any books, papers, records, or other

data which may be relevant or material to such inquiry;

(2) To summon the person liable for tax or required to

perform the act, or any officer or employee of such per-

son, or any person having possession, custody, or care of

books of account containing entries relating to the

business of the person liable for tax or required to per-

form the act, or any other person the Secretary may deem

proper, to appear before the Secretary at a time and

place named in the summons and to produce such books,

papers, records, or other data, and to give such

testimony, under oath, as may be relevant or material to

such inquiry;

(3) To take such testimony of the person concerned,

under oath, as may be relevant or material to such in-

quiry.”

The burden of proof is on the IRS to show that a summons “may be

relevant” to a legitimate purpose for its investigation. United States

v. Powell, 379 U.S. 48, 57-58 (1964).

A-3

OPINION OF THE COURT 3

resisted producing its audit work programs, tax planning

papers, and tax accrual audit workpapers.? The district court,

after holding an evidentiary hearing, ordered Andersen to

comply with all aspects of the summons.’ Motions for a stay of

the court’s enforcement order were denied first by the district

court and then by this court.‘ After filing its notice of appeal

from the district court's order,5 Andersen complied with the

summons by producing all the documents requested by the

IRS. In this appeal, Andersen has challenged only that part of

the order requiring the production of the tax accrual

workpapers prepared in conjunction with its audit of Good

Hope.

Since Andersen has produced all of the documents forming

the subject matter of this appeal, the controversy presented

to this court appears, on its face, to be moot. See United

States v. Lyons, 442 F.2d 1144 (1st Cir. 1971) (dismissing as

moot an appeal by a taxpayer of an order enforcing an IRS sum-

mons that had been complied with). See also Barney v. United

States, 568 F.2d 116 (8th Cir. 1978); United States v.

Carpenter, 425 F.2d 264 (5th Cir. 1970). Andersen seeks to

avoid the preclusive effect of the mootness doctrine by invoking

the “capable of repetition yet evading review” exception recog-

*“Tax accrual workpapers” are produced by accountants such as

Andersen in conjunction with the auditing of financial statements

required for companies that file financial statements with the SEC.

Part of the auditing function is to evaluate the sufficiency of the

client's reserves to meet its potential tax liability. This evaluation is

based in part on the accountant’s analysis of corporate records and

in part on its assessment of opinions and projections communicated

in confidence by the client. In reaching its conclusion, the accoun-

tant considers all uncertain tax positions taken by the client and

determines the extent of reserves necessary to cover the liability that

would result assuming that all such questions were resolved against

the client.

926 U.S.C. § 7604 provides for judicial enforcement of summonses

issued pursuant to section 7602.

‘Justice Brennan, acting as circuit justice, denied a petition for a

stay submitted by Good Hope.

5Orders for enforcement of IRS summonses issued pursuant to 26

U.S.C. § 7604 are final orders appealable under 28 U.S.C. § 1291.

Reisman v. Caplan, 375 U.S. 440, 449 (1964).

A-4

4 U.S. 0. ARTHUR ANDERSEN & COMPANY

nized by the Supreme Court in Southern Pacific Terminal Co.

v. ICC, 219 U.S. 498, 515 (1911). An action falls within this

exception if “(1) the challenged action was in its duration too

short to be fully litigated prior to its cessation or expiration,

and (2) there [is] a reasonable expectation that the same com-

plaining party [will] be subjected to the same action again.”

Weinstein v. Bradford, 423 U.S. 147, 149 (1975).°®

We are satisfied that this case meets the latter prong of the

exception — that the controversy be sufficiently likely to be

repeated. In May of 1979, the Chief Counsel of the IRS stated

in an address to the Federal Tax Division of the American In-

stitute of Certified Public Accountants that the IRS would ac-

tively seek access to accountants’ workpapers in connection

with its investigations and that recurring litigation over sum-

monses of the type at issue in this case was likely. Andersen is

one of the nation’s largest accounting firms; one or more of its

clients is likely to be subjected to tax investigations in which

the IRS would demand from Andersen its tax accrual

workpapers for that client.’ The likelihood of recurrence here

is at least as great as in other cases in which the Supreme Court

has found the “capable of repetition yet evading review” ex-

ception applicable. See, e.g., Gannett v. DePasquale, 47

U.S.L.W. 4902, 4904-05 (U.S. June 26, 1979) (sufficient

*The government, in its motion to dismiss Andersen’s appeal,

argues that our decision in United States v. Lyons, 442 F.2d 1144

(1st Cir. 1971), precludes Andersen from relying on the “capable of

repetition yet evading review” exception. This reliance is misplaced.

In Lyons, we found that there was no likelihood of future similar

controversies between the taxpayer and the IRS. Moreover, we

noted that if and when a proceeding was initiated against the tax-

payer, he would have sufficient opportunity to contest the IRS sum-

mons at trial. Neither of these grounds for the Lyons decision is ap-

plicable in this case.

7An affidavit submitted by Andersen’s in-house counsel states that

since January 1, 1975, Andersen has received fifteen summonses and

two subpoenas from the IRS for production of documents including

tax accrual workpapers.

A-5

OPINION OF THE COURI 5

likelihood that new paper will again be enjoined from

publishing aspects of criminal proceeding); United States v.

New York Telephone Co., 434 U.S. 159, 165 (1977) (sufficient

likelihood that telephone company will again be ordered to

assist FBI in performing pen register surveillance).

The basic requirement of the exception — that the question

be one that will otherwise evade review — presents a more dif-

ficult problem. Andersen argues that the strong policy oppos-

ing delays in the enforcement of IRS summonses makes it

unlikely that a district court would set a compliance date that

would allow time for a prior appeal. Cf. United States v.

Salter, 432 F.2d 697, 700-01 (Ist Cir. 1970) (public policy

militates against permitting taxpaver to engage in discovery in

proceeding for enforcement of IRS summons since delay

would “jeopardize the integrity and effectiveness” of the in-

vestigation). Andersen argues further that the difficulty in

meeting the “likelihood of success” and “irreparable harm” re-

quirements for a stay pending appeal make this an equally

unavailable avenue for obtaining review of an enforcement

order prior to compliance. Finally, since Andersen is not likely

to be a party to any judicial proceeding arising out of Good

Hope's tax deficiency, it will have no future opportunity to

litigate the validity of the summons.

There is, however, one remaining means for a third party to

obtain appellate review of such an enforcement order: it can

refuse to comply and litigate the merits of the summons as a

defense to a contempt citation. In its brief opposing the

government's motion to dismiss this appeal as moot, Andersen

acknowledges this possibility, but argues that “a person should

not be required to stand in contempt of a court order to obtain

appellate review.” As support for this assertion, Andersen cites

the Seventh Circuit's recent decision in In re Special April 1977

Grand Jury. 581 F.2d 589 (7th Cir.), cert. denied, 439 U.S.

1046 (1979), which permitted a post-compliance appeal from

an order enforcing grand jury subpoenas. In that case the

A-6

6 U.S. U. ARTHUR ANDERSEN & COMPANY

court stated “the Supreme Court has not required litigants to

subject themselves to contempt or criminal sanctions in order

to meet this prong of the mootness test.” Id. at 591, citing

Nebraska Press Association v. Stuart, 427 U.S. 539 (1976):

First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978).

We see two difficulties with Andersen’s reliance on In re

Special Grand Jury. First, the case is distinguishable in one im-

portant aspect. The grand jury subpoenas at issue were

directed at members of the appellant’s staff, not the appellant

himself. It would be unreasonable to expect individuals with

no strong interest in resisting the subpoenas to expose

themselves to contempt by refusing to comply. Cf. Perlman v.

United States, 247 U.S. 7 (1918) (interlocutory appeal from

discovery order permitted when order directed to person other

than appellant who has insufficient incentive to risk

contempt). Here, in contrast, although Andersen is not the im-

mediate target of the IRS investigation, it has asserted

strenuously that it is damaged by the disclosure of these

workpapers to the IRS. According to Andersen, its ability to

obtain information from its clients necessary to perform its

auditing function properly will be seriously impaired. This

asserted interest provides sufficient incentive for Andersen to

take all available steps to avoid disclosure. See In re Oberkoet-

ter, No. 79-1580, slip op. at 6 (1st Cir. Jan. 4, 1980) (attorney

would have adequate incentive to risk contempt to avoid testi-

fying against his client).

Second, the Supreme Court decisions cited by the Seventh

Circuit in In re Special Grand Jury do not lead inevitably to

the conclusion that a litigant need not incur a contempt cita-

tion before meeting the “evading review” test. It is true that in

Nebraska Press Association the court applied the mootness ex-

ception even though the newspaper publishers who were en-

joined from reporting certain facts regarding an ongoing trial

could have tested the court’s order by violating it and con-

testing the resulting contempt sanction. Similarly, in First

A-7

OPINION OF THE COURT

National Bank of Boston the Court noted that the criminal

penalties imposed by a Massachusetts statute prohibiting cer-

tain political expenditures by banks “discourage challenge by

violation”. Both of these cases, however, involved prior

restraints on arguably protected speech. We believe the

Court's unwillingness to require the parties in these cases to in-

vite criminal sanctions in order to obtain appellate review

more probably reflected the Court's traditionally disapproving

view of prior restraints on speech than a broadly applicable

statement on the scope of the capable of repetition yet evading

review exception.

Well established doctrine regarding the appealability of in-

terlocutory orders suggests that the burden of incurring a con-

tempt citation is not an unreasonable one to impose on a party

seeking review of a question that will otherwise become moot.

In United States v. Ryan, 402 U.S. 530, 533 (1971), the

Supreme Court stated that interlocutory review of grand jury

subpoenas was available only when denial wou!a render “any

review whatsoever’, including defense to contempt, impossi-

ble. See also Cobbledick v. United States. 309 U.S. 323 (1940):

In re Oberkoetter, supra. Similarly, in the context of sub-

poenas issued for discovery pursuant to rule 45 of the Federal

Rules of Civil Procedure, the general rule is that interlocutory

review of orders with regard to such subpoenas may be ob-

tained only as a defense to a contempt citation. See Grinnell

Corp. v. Hackett, 519 F.2d 595, 596-98 (Ist Cir. 1975): Ryan

v. Commissioner, 517 F.2d 13, 18-20 (7th Cir. 1975): United

States v. Fried, 386 F.2d 691, 694-95 (2d Cir. 1967): C.

Wright & A. Miller, Federal Practice & Procedure § 2463

(1971). But see Covey Oil Co. v. Continental Oil Co.. 340

F.2d 993 (10th Cir.). cert. denied, 380 U.S. 964 (1965). In

Grinnell Corp. we dismissed an interlocutory appeal, holding

that a discovery order did not meet the requirements of an ap-

pealable collateral order in part because it was not a question

that would otherwise evade review. In reaching this conclu-

A-8

8 U.S. U. ARTHUR ANDERSEN & COMPANY

sion We notcd that appellants could have availed themselves of

the “familiar procedure” of risking a contempt citation in

order to obtain appellate review. 519 F.2d at 598 (citing

Maness v. Meyers, 419 U.S. 449 (1975): United States v. Ryan,

supra),

In the case at bar, Andersen seeks review because it faces the

prospect of repeated orders to produce its tax accrual

workpapers for other clients. In addition, the American In-

stitute of Certified Public Accountants, as amicus curiae.

argues that the continued use of IRS summonses for such

workpapers would have a broad detrimental impact on the ac-

counting industry. We are aware that this case differs from the

appealability cases noted above because the consequence of

our denial of jurisdiction here is final foreclosure of Andersen's

opportunity to appeal, rather than merely delay of an appeal

until a final judgment has been obtained. But to the extent

that the issue sought to be reviewed is of such assertedly vital

importance to both Andersen and the industry, it does not

seem too draconian to insist on resort to contempt in order to

preserve the issue for appeal.

Finally, while it is tempting to base a decision to review the

merits of this case on the significance of the issue presented, as

Andersen urges, neither precedent nor sound judicial policy

favor such a course. See Richardson v. Ramirez, 418 U.S. 24,

36 (1974). Contrary to Andersen’s assertion, the Supreme

Court's decision in Super Tire Engineering Co. v. McCorkle.

416 U.S. 115 (1974), is not applicable here. In Super Tire, the

Court did note that the judiciary “must not close the door to

the resolution of the important questions” presented in that

case. Id. at 127. But the issue raised by appellants in Super

Tire. who sought a declaratory judgment that public

assistance was not available to workers engaged in an already-

terminated economic strike, could not have been saved from

mootness by any reasonable action on the part of the ap-

pellants. Moreover, we can conceive of no principled basis for

adjudicating claims that particular issues or controversies fall

A-9

OPINION OF THE COURT 3)

within an “importance exception” to the mootness doctrine.

In conclusion, we hold that in the absence of some compell-

ing circumstances that militate in favor of our deciding an

otherwise moot case, the “capable of repetition yet evading

review” exception is not available to a litigant aggrieved by a

summons or subpoena who could have avoided mootness by

refusing to comply. Because we find no such compelling cir-

cumstances in this case and because we conclude that

Andersen had sufficient incentive to risk contempt in order to

avoid compliance with this summons, the appeal is dismissed

as moot.

Appeal dismissed.

Adm Office CS) Courts Blanchard Press, Inc, Boston, Mas:

A-10

APPENDIX B

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

UNITED STATES OF AMERICA \

and FRANCIS W. MURPHY, Spe-

cial Agent, Internal Revenue Service,

Petitioners,

ARTHUR ANDERSEN & oe ¥:

COMPANY, ivil Action No. 78-3227-F

Respondent,

and

GOOD HOPE INDUSTRIES, INC.,

Intervenor. J

MEMORANDUM

July 23, 1979

FREEDMAN, D.J.

FACTS

This action is brought pursuant to Sections 7402(b) and

7604(a) of the Internal Revenue Code of 1954, 26 U.S.C. %§

7602(b), 7604(a), seeking judicial enforcement of an Internal

Revenue summons. Petitioner Francis V. Murphy is a Special

Agent of the Internal Revenue Service (IRS), who is empower-

ed to issue summons under authority granted to IRS by Section

A-11

7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602.

See also Treasury Regulation § 301.7602-1, 26 C.F.R.

§301.7602-1; and IRS Delegation Order No. 4 (Rev. 4, August

22, 1977), 42 Fed. Reg. 42915 (1977). Respondent Arthur

Andersen & Company (Arthur Andersen) is a nationally-

known accounting firm with offices in both Boston, Massachu-

setts and Hartford, Connecticut.

Petitioner is investigating the tax liability of Good Hope

Industries, Inc. (Good Hope ), intervenor herein, and its subsi-

diaries, which was heretofore the subject of a two-year audit by

Revenue agents covering the fiscal years ending July 31, 1973,

July 31, 1974, July 31, 1975 and July 31, 1976. Respondent has

provided various professional services to Good Hope for the

years in question, including auditing and preparation of finan-

cial statements, and tax preparation for the years ending July

31, 1973, 1974, and 1975.

On November 14, 1977, Special Agent Murphy issued a

summons under 26 U.S.C. § 76021 directing respondent Arthur

126 U.S.C. § 7602 provides:

For the purpose of ascertaining the correctness of any return,

making a return where none has been made, determining the liability

of any person for any internal revenue tax ... or collecting any such

liability, the Secretary or his delegate is authorized —

(1) To examine any books, papers, records, or other data which

may be relevant or material to such inquiry;

(2) to summon the person liable for tax or required to perform

the act, or any officer or employee of such person, or any person

having possession, custody, or care of books of account contain-

ing entries relating to the business of the person liable for tax or

required to perform the act, or any other person the Secretary or

his delegate may deem proper, to appear before the Secretary or

his delegate at a time and place named in the summons and to

produce such books, papers, records, or other data, and to give

Footnote continued on next page.

A-12

Andersen to appear on November 30, 1977 to testify and to

produce for examination certain statements, records, and pa-

pers allegedly relating to tax liabilities of Good Hope.? Re-

Footnote continued from previous page.

such testimony, under oath, as may be relevant or material to

such inquiry; and

(3) To take such testimony of the person concerned, under oath,

as may be relevant or material to such inquiry.

2 The summons sought:

(1) Opinions, consolidated financial statements, and accom-

panying notes to the consolidated financial statements of GOOD

HOPE INDUSTRIES, INC. and SUBSIDIARIES, 622 State

Street, Springfield, Massachusetts for the fiscal years ending

7/31/73, 7/31/74, 7/31/75, and 7/31/76. Also, any consoli-

dated financial statements with accompanying notes for any

interim periods during the fiscal years ending 7/31/73, 7/31/74,

7/31/75, and 7/31/76.

(2) All workpapers, analyses and/or summaries relative to the

preparation and/or audit of the consolidated financial statements

and accompanying notes to the consolidated financial statements

of GOOD HOPE INDUSTRIES, INC. and SUBSIDIARIES for

the fiscal years ending 7/31/73, 7/31/74, 7/31/75, and 7/31/76.

Also, any workpapers, analyses, and/or summaries relative to

any consolidated financial statements with accompanying notes

for any interim periods during the fiscal years ending 7/31/73,

7/31/74, 7/31/75, and 7/31/76.

(3) All workpapers, analyses, and/or summaries relative to the

preparation of the Federal Consolidated Corporate Income Tax

Returns of GOOD HOPE INDUSTRIES, INC. and SUBSID-

IARIES, 622 State Street, Springfield, Massachusetts for the fiscal

years ending 7/31/73, 7/31/74, 7/31/75, and 7/31/76.

(4) Financial statements, accompanying notes to the financial

statements, all workpapers, analyses, and/or summaries relative

to the preparation and/or audit of the financial statements and

all workpapers, analyses, and/or summaries relative to the

preparation of the Federal Corporate Income Tax Returns for the

fiscal years ending 7/31/73, 7/31/74, 7/31/75, and 7/31/76

pertaining to GOOD HOPE INDUSTRIES, INC. and ten subsid-

iaries. Also, any financial statements with accompanying notes

for any interim periods during the fiscal years ending 7/31/73,

Footnote continued on next page.

A-13

spondent was personally served by in-hand delivery to the

managing partner of its Hartford, Connecticut office, where the

bulk of the records sought are located. On that same day,

Special Agent Murphy mailed notice of service of summons

upon a third party record-keeper to the taxpayer, Good Hope,

as required by 26 U.S.C. § 7609(b). Neither Arthur Andersen

nor Good Hope have questioned service. In a timely and

proper manner, Good Hope directed Arthur Andersen not to

comply with the summons, temporarily staying compliance

under the terms of 26 U.S.C. § 7609(b)(2). At all relevant

times, Good Hope has been debtor-in-possession under a

Chapter XI Bankruptcy proceeding.

After intermittent attempts to negotiate mutually agreeable

conditions for production of the requested material, an enforce-

ment action was brought against Arthur Andersen in the

District of Connecticut (Misc. Civil Action H-78-37) on

November 3, 1978. Good Hope exercised its right to intervene.

26 U.S.C. § 7609(b)(1). After a hearing on December 11,

1978, and over the objection of the government, the District

Court, Clarie, C.J., granted Respondent’s motion for change of

venue under 28 U.S.C. § 1404. The Court noted that

the corporation is a Massachusetts corporation and its

principal place of business is in Massachusetts, its main

conduct of that business is Massachusetts, it is in bank-

ruptcy in Massachusetts, the original subpoena was issued

to Springfield, Massachusetts; but notwithstanding the

Footnote continued from previous page.

7/31/74, 7/31/75, and 7/31/76 and any workpapers, analyses,

and/or summaries relative to the preparation of any interim

financial statements with accompanying notes for the above-

named corporations.

(5) All correspondence including intercompany memorandums

and consultation and/or management letters or memorandums

relative to the GOOD HOPE INDUSTRIES, INC. or any of its

subsidiaries.

A-14

records, the records are temporarily, presently in Hartford,

they have been ordered to be produced in Boston by the

Bankruptcy Court; and the Court is of the opinion that that

order is subject to review pursuant to this Court’s order by

The case came before me for hearing on March 22, 1979.

After hearing testimony and argument, I allowed the parties

extra time to file memoranda and affidavits, whereupon I took

the case under advisement.

QUESTIONS PRESENTED

As an initial matter, Arthur Andersen concedes its obliga-

tion to produce documents in many of the requested categories,

under certain circumstances. Petitioner’s Brief at 3.3 As a

matter of law this is correct, for extraction of possibly in-

criminating information from third party record-keepers “‘is a

necessary part of the process of law enforcement and tax

investigation.”” Couch v. United States, 409 U.S. 322, 329

(1972).

3 Unfortunately, the parties do not share a common terminology.

Arthur Andersen categorizes its Good Hope files in this manner:

1. Audit Workpapers including:

Audit Engagement Letters

b. Audit Work Programs

c. Financial Statements

d. Audit Schedules

. Tax Accrual Workpapers

Audit Reports

g. Miscellaneous correspondence

2. Tax Return Workpapers in-luding:

a. Tax Arrangement Letters

b. Tax Schedules

_¢. Tax Returns (copies )

d. Correspondence

3. Tax Planning and Consultation Papers

4. Administrative Services

5. Billing and Time Sheets

Petitioner’s Brief at 3. It objects to production of its Audit Work

Programs, Tax Accrual Workpapers, and Tax Planning and Con-

ultation papers.

A-15

Good Hope and Arthur Andersen focus their objection to

compliance on two grounds:

1) That existence of a bankruptcy proceeding in-

volving the taxpayer makes the Bankruptcy Court the

appropriate forum for determination of any tax liability;

2) That IRS is not entitled to production of all the

particular documents sought on two theories:

a) an accountant/client privilege, akin to the

lawyer/client privilege

b) relevancy, in that the challenged documents

were not used in preparation of tax returns.

BANKRUPTCY

Intervenor Good Hope has urged that, after com-

mencement of bankruptcy proceedings, jurisdiction to deter-

mine tax liability passes to the Bankruptcy Court by virtue of its

authority to:

Hear and determine any question arising as to the amount

or legality of any unpaid tax, whether or not previously

assessed, which has not prior to bankruptcy been contested

before and adjudicated by a judicial or administrative

tribunal of competent jurisdiction. . .

11 U.S.C. § 11(a)(2A).

I am not called upon to address this contention today, for

the District Court’s jurisdiction is based on quite different

grounds. The summons in question was issued under 9 grant of

authority:

{[fjor the purpose of ascertaining the correctness of any

return, making a return where none has been made,

determining the liability of any person for any internal

revenue tax, ... or collecting any such liability. . .

26 U.S.C. § 7602.

This investigative power has been repeatedly characterized

as an inquisitorial power, analogous to that of a grand jury. See

United States v. Matras, 487 F.2d 1271, 1274 (8th Cir. 1973) and

cases cited therein. As such, IRS does not depend on a case or

A-16

controversy for power to get evidence, “but can investigate

merely on suspicion that the law is being violated, or even just

because it wants assurance that it is not.” United States v.

Powell, 379 U.S. 48, 57 (1964); see also United States v.

Bisceglia, 420 U.S. 141, 146 (1974).

It therefore seems clear that exercise of jurisdiction to

enforce IRS summonses, under 26 U.S.C. §§ 7402(b) and

7604(a) does not necessarily intrude upon the jurisdiction of

the Bankruptcy Court. The scope of allowable purposes for

issuance of summonses encompasses a number of situations in

which no assessment will result, as where IRS determines from

the summoned materials that tax liability was correctly report-

ed. Likewise, the result may be purely prospective, as where

IRS seeks to determine the correctness of depreciation taken in

prior years as it bears on the amount available currently. |

conclude that the fact that material obtained by exercise of

summons power may at some point be used in a proceeding

properly before the Bankruptcy Court does not deprive this

Court of jurisdiction over the issuance of such summonses.4

Intervenor next argues that Rule Il-44 of the Bankruptcy

Rules of Procedure automatically stays all action against a

debtor who files a Chapter XI petition.5 Courts have construed

4In an analogous situation, tolling of the statute of limitations

has not been held to bar investigation for time barred years, where the

information sought might be relevant to open years. United States v.

Giordano, 419 F.2d 564, 568 (8th Cir. 1969), cert. denied 397 US.

1037 (1970); Dunn v. Ross, 356 F.2d 664, 666 (Sth Cir. 1966); see

also United States v. Powell, 379 U.S. 48, 57 £ 1964).

5 Rule 11-44(a) provides:

A petition filed under Rule 11-6 or 11-7 shall operate as a stay of

the commencement or the continuation of any court or other proceed-

ing against the debtor, or the enforcement of any judgment against

him, or of any act or the commencement or continuation of any court

proceeding to enforce any lien against his property, or of any court

proceeding, except a case pending under Chapter 10 of this title, for

the purpose of the rehabilitation of the debtor or the liquidation of his

estate.

A-17

the purpose behind Rule Il-44, and the underlying ll U.S.C. §

714, as being “to prevent possible frustration of the rehabilita-

tion effort through prejudicial dismembership or the adverse

disposition of assets.”” Bohack Corp. v. Borden, Inc., 450

F.Supp. 367, 374 (E.D. N.Y., 1978); see also 14, Collier on

Bankruptcy, 4 11-44.02. To compel production of documents

will neither interfere with, nor diminish the debtors’ property

during the pendancy of the Chapter XI proceedings, Teledyne

Industries Inc. v. Eon Corp., 373 F.Supp. 191, 203 (S.D. N.Y.

1974), where, as here, the documents are not in the hands of the

debtor-in-possession, and will be returned to their custodian.

I thus find that neither the pendancy of bankruptcy action,

nor the provisions of Rule Il-44, operate to deprive this Court of

jurisdiction to enforce an IRS summons.

ACCESS TO PARTICULAR DOCUMENTS

Good Hope and Arthur Andersen next raise objections to

production of the particular documents sought. The argument

is in two parts: a claim of privilege as to three classes of

documents, and a claim based on United States v. Powell, 379

U.S. 48 (1964) as to all documents.

Accountant/Client Privilege

Good Hope takes this opportunity to urge that the Court

recognize a privilege between accountant and client, akin to the

privilege recognized between attorney and client. _ See Inter-

venor’s Brief at 14. In support of this proposition, both Good

Hope and Arthur Andersen have submitted numerous affidavits

addressing the need for confidentiality between accountant and

client in order that frank disclosure might be fostered, the

similarity of function between accountant and lawyer in the tax

field, and the similar manner in which both professions are

A-18

regarded by the public. They argue that such privilege is

particularly appropriate as to Audit Work Programs, Tax

Accrual Workpapers and Tax Planning and Consultative Pa-

pers.© While I appreciate that valid policy questions are raised

by the issues presented in this case, I am not inclined to

recognize an accountant/client privilege on these facts. The

expansive language of Section 7602, authorizing the summo-

6 Witnesses for Arthur Andersen offered, and the government did

not object to the following definitions:

Audit Work Program: An audit work program is a document

prepared for every audit engagement, which outlines the audit

procedures that are to be applied to each of the accounts during the

course of the audit.

* * *

Each person performing one of those audit procedures is supposed to

sign the program with his initials that they have completed it.

Transcript at 100.

Tax Accrual Workpapers: The tax accrual workpapers would

consist of two or three basic documents. One would be a summary

analysis of the transactions requested in the company’s general ledger

with respect to its income tax accounts. This analysis would show the

amounts provided in the financial statements for the taxes for that

year. It would show dates of payments and any other miscellaneous

adjustments which might affect the balance of the accrual at the end

of the year.

It would also include a computation of the tax provision for the

current year, whether or not the tax is payable in that year.

A third major category of papers would be a memorandum

discussing any items reflected in the financial statements as an income

or any expense where the ultimate tax treatment is unclear.

The memorandum would discuss each of these items with the

objective of making a determination as to whether a tax provision

should be made to cover the tax on that item either at the date of

filing the return or the date of examination. Transcript at 101-102.

Tax Planning Memorandum: It would contain essentially the

observations and conclusions that the tax partner or tax personnel

might have regarding the tax posture of the client. It would contain

suggestions, let’s say, for programs of tax minimization. It might

contain observations about transactions that had already been com-

pleted with ideas as to what the exposures might be and as to what

alternative positions might be taken. Transcript at 115.

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ning of “any person” for the taking of testimony and exam-

ination of ‘books, papers, records, or other data,” invites liberal

construction. Settled principles of statutory construction teach

that we should be very hesitant to exempt a significant group

from the broad sweep of § 7602, absent unambiguous direc-

tions from Congress. United States v. Bisceglia, 420 U.S. 141,

150 (1974). Applying this principle to the case at hand, and

noting that the Supreme Court has explicitly stated “that no

confidential accountant/client privilege exists under federal

law...,"” Couch v. United States, 409 U.S. 322, 335 (1972), I see

no grounds for establishing an accountant/client privilege as to

the Audit Work Programs, Tax Accrual Workpapers, and Tax

Planning and Consultation Papers, or any other documents

enumerated in the summons.

Right to Documents Requested

Arthur Andersen and Good Hope also argue that even if

the material summoned is not inherently privileged, it is

nonetheless unavailable to the government on the facts of this

case. I note initially that IRS lacks inherent authority to

summon production of private papers, being limited to the

exercise of authority granted to it by Congress. United States v.

LaSalle National Bank, 437 U.S. 298, 317 (fn. 18) (1978). I

note further than an IRS summons can be enforced only by the

courts. 26 U.S.C. §§ 7402(b), 7604(b); see United States v.

Bisceglia, 420 U.S. 141, 146 (1975). When a summons is

challenged, the court is required to scrutinize it “to determine

whether it seeks information relevant to a legitimate in-

vestigative purpose.”’ United States v. Bisceglia, supra at 146.

In conducting such scrutiny, the touchstone is a set of

standards first enunciated by the Supreme Court in United

States v. Powell, 379 U.S. 48 (1964). The Court there identified

four conditions to be satisfied before a § 7602 summons would

be enforced:

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(1) That the investigation will be conducted pursuant to a

legitimate purpose,

(2) that the inquiry may be relevant to the purpose,

(3) that the information sought is not alieady within the

Commissioner’s possession, and

(4) that the administrative steps required by the Code

have been followed

Powell, supra at 57-58.

(1) A “legitimate purpose,” as used in Powell, requires

that the production not be sought in furtherance of a purely

criminal investigation. See e.g. Donaldson v. United States, 400

U.S. 517, 533 (1970); accord United States v. LaSalle National

Bank, supra at 306-07. The summons power of § 7602 is not

available to broaden the scope of criminal discovery. United

States v. LaSalle National Bank, supra at 312.

Respondent has sought to establish a general intent on the

part of IRS to conduct such a criminal investigation. Transcript

at 50-52. By its very nature, a tax investigation may raise

questions of both criminal and civil liability. See e.g. United

States v. LaSalle National Bank, supra at 309; United States v.

Crespo, 280 F.Supp. 928, 935 (D.Md. 1968). Recognizing this,

the Supreme Court has refused to draw a line barring the use of

summons power merely because a Special Agent has entered

the case. Donaldson vy. United States, supra at 535.

The Supreme Court has formulated a two-pronged test to

determine the legitimacy of the summons, and has placed the

burden on those opposing the enforcement of the summons “to

disprove to the actual existence of a valid civil tax determina-

tion or collection purpose by the Service.”” United States v.

LaSalle National Bank, supra at 316.

The Court in LaSalle established, first, that “the summons

must be issued before the Service recommends to the Depart-

ment of Justice that a criminal prosecution which would

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reasonably relate to the subject matter of the summons, but

undertaken.” Id. at 318. Through affidavit in support of the

Petition for Enforcement, and through testimony before me,

(Transcript at 45), Special Agent Murphy has represented that

from the time of issuance of the summons to the time of the

hearing, no recommendation for criminal prosecution has been

made to the Department of Justice. Arthur Andersen and

Good Hope do not deny these representations.

The second element of the LaSalle test requires that “the

Service at all time must use the summons authority in good-

faith pursuit of the Congressionally authorized purposes of

§7602....‘ Id. at 318. This determination is to be made by

reference to the institutional posture of the Service. Id. at 316.

Arthur Andersen and Good Hope have sought to establish bad

faith by pointing again to the Chapter XI Bankruptcy proceed-

ings.

They argue that filing of proof of claim in the Chapter XI

Bankruptcy proceeding in April 1978, after issuance of the

summons, terminated the civil element of the proceedings.

They therefore suggest that enforcement could only be in

furtherance of solely criminal proceedings. However, as noted

above, I find that the jurisdiction of the Bankruptcy Court to

determine “any question arising as to the amount or legality of

any unpaid tax” 11 U.S.C. §11(a)(2A) neither necessary

conflicts with, nor bars, the power of IRS to summon for “the

purpose of ascertaining the correctness of any return, making a

return where none has been made, [and] determining the

liability of any person for any internal revenue tax... .” 26

U.S.C. §7602. Consequently, I hold that the summoned

document may be pertinent with respect to adjustment of the

claims already filed, and with respect to new claims for the year

1976.7

7The government asserts that the proofs of claim filed in

bankruptcy for the years 1973, 1974 and 1975, and subsequent to the

Footnote continued on next page.

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Therefore, on the basis of Special Agent Murphy’s affida-

vit that the material sought is necessary for the determination of

the federal tax liabilities of Good Hope for the years in

question, I hold that there has been a sufficient showing that the

subpoena was issued pursuant to a legitimate purpose. See e.g.

United States v. Marine Midland Bank, 585 F.2d 36, 38 (2d

Cir. 1978).

(2) Respondent’s strongest argument rests upon the sec-

ond prong of Powel/—the requirement of relevancy. As an

initial matter, I do not understand the respondent to resist on

relevancy grounds production of material actually employed in

determination of income and in tax preparation. Respondent’s

Brief at 9. However, they strenuously urge that Audit Work

Programs, Tax Accrual Workpapers, and Tax Planning and

Consulting Papers fall into a different category and are not

relevant. Respondent’s Brief at 10. The gist of their argument

is that such materials are not “factual,” in that they do not form

a basis for preparation of tax returns. Respondent’s Brief at 6-

29.

In reliance upon United States v. Coopers & Lybrand, 413

F.Supp. 942 (D. Colo.), aff'd 550 F.2d 615 (10th Cir. 1977),

respondents consequently argue that the government has failed

to establish the relevance of the contested documents to its

investigation. I am not inclined to adopt the reasoning of

Coopers & Lybrand.

I rely upon a close reading of §7602 to determine that the

summoned documents are both relevant and reachable. In

furtherance of a legitimate purpose, there is authority to

summon “any... person... to produce such books, papers,

records and other data as may be relevant or material to such

inquiry.” 26 U.S.C. §7602(2). This expansive language invites,

Footnote continued from previous page.

issuance of the summons, were intended to permit the commissioner

to make timely assessments before the running of the statute of

limitations for assessments. Petitioner’s Post-Hearing Memorandum

at 3. With respect to this, I note that the Supreme Court has

recognized that “the right to and obligation of the parties became

fixed when the summons was issued... . ” Couch v. United States, 409

U.S. 322, 329 n.9.

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and has generally been accorded, a liberal construction. United

States v. Bisceglia, supra at 149; see also United States v.

Continental Bank & Trust, 503 F.2d 45, 50 (10th Cir. 1974);

United States v. Humble Oil & Refining Co., 488 F.2d 953, 958,

and cases cited at 958, n. 11 therein (Sth Cir. 1974) vacated

421 U.S. 943 (1975).

It is true that some of the cases cited to me by respondents

have made use in tax preparation the touchstone of relevancy.

See United States v. Smith, 373 F. Supp. 14 (1974); United

States v. Coopers & Lybrand, supra. Nevertheless, I do not find

that such a result is compelled by the statutory language.

The commonly articulated interpretation of “may be rele-

vant” turns upon “whether the inspection sought might have

thrown light upon the correctness of the taxpayer’s return.”

Foster v. United States, 265 F.2d 183, 187 (2d Cir. 1959), cert.

denied, 360 U.S. 912 (1960); see also United States v. Harring-

ton, 388 F.2d 520, 523 (2d Cir. 1968); United States v. Matras,

487 F.2d 1271, 1274 (8th Cir. 1973); United States v. Noall,

587 F.2d 123, 125 (2d Cir. 1978) (appeal pending).

Subsequent cases have reflected a refinement of “might” ex-

pressed in terms of whether there is, in the particular circum-

stance, ‘an indication of a realistic expectation rather than an

idle hope that something may be discovered” United States v.

Harrington, supra, at 524; accord United States v. Matras,

supra at 1274. The summons was prepared by Special Agent

Murphy in cooperation with another Special Agent and two

Revenue agents. The Revenue agents had been conducting an

examination of Good Hope books and records for some time

before Special Agent Murphy entered the case. Transcript at

39, 65-66. I find that the collective familiarity of the agents

involved in the joint investigation as to Good Hope records will

suffice to establish a “realistic expectation” of relevancy. It is

clear that expection need not rise to the level of probable cause

in order to justify examination. United States v. Powell, supra

at 51; United States v. Acker, 325 F.Supp. 857, 862 (S.D.N.Y.

A-24

1971). Special Agent Murphy does not, nor does he need to

guarantee relevance in fact in order to satisfy the requirement

that the summoned documents “may be relevant.” See United

States v. Acker, supra.

Respondents have urged, on the authority of United States

v. Matras, supra, that relevancy “connotes and encompasses

more than ‘convenience’.” Jd. at 1275. While this may be true,

Matras is readily distinguished from the case at hand. In

Matras, IRS sought budget proposals as a “roadmap”’ for their

investigation; the court properly noted that it was not the

proposals but the actual budgets as implemented that had tax

consequences. Where, as here, procedures and systems of

analysis were applied directly to actual transactions, they are

clearly more than “convenient” or a “roadmap” for the joint

investigation. Indeed, such evidence of knowledge or potential

discrepancies appears to go directly to the heart of determining

whether there has been civil or criminal fraud.®

There is, in fact, broad support for the position that

relevancy does not turn on whether the summoned material was

used in preparing tax returns. See e.g. United States v. Noall,

supra (audit reports and related workpapers) United States v.

Shlom, 420 F.2d 263 (2d Cir. 1969 cert. denied 397 U.S. 1074

(1970) (record of receipts, kept for sales monitoring purposes );

United States v. Acker, supra (full minutes of board meetings ).

I am of the opinion that the results in this set of cases better

reflect a liberal interpretation of §7602. The decision in Noall is

instructive on this point. The Court there initially emphasized

that the statutory language is “may be relevant,” denoting a

law threshold of relevancy. United States v. Noall, supra at

125. In the final analysis, the determination of relevancy in fact

8In the course of testimony, a witness for Arthur Andersen

conceded that the three contested categories of documents might

indeed contain factual discussion of the taxpayer’s status. Transcript

at 112. Inasmuch as the witness was not personally familiar with the

Good Hope files, I do not rely upon this admission in reaching my

decision.

A-25

must be deferred until the documents are produced and

analyzed. While the audit reports found relevant in Noall/ are

not at issue here, the underlying rationale for ordering produc-

tion is particularly persuasive. As expressed by that Court, the

“Commissioner’s interest lies in whether the tax returns cor-

rectly reflected ... . income, not simply whether there were

correctly prepared from the books of accounts and other

records used.”

United States v. Noall, supra at 126. On the facts of this case I

am satisfied that the information sought ‘“‘may be” relevant to

the investigation, and that Powell is satisfied.

(3) The third prong of Powell requires that the material

sought not already be in the possession of IRS. As to the Audit

Work Programs, Tax Accrual Workpapers, and Tax Planning

and Consulting Papers, IRS clearly does not already have

possession. As to the balance of the summoned materials,

Good Hope argues that over the course of the two-year IRS

audit, the Service acquired possession of “the information

contained in the summonsed documents’ Intervenor’s Brief at

17. However, I am persuaded that Good Hope misstates the

relevant standard. Section 7602 refers in clear terms to “books,

papers, records or other data,” and not to copies thereof. The

Service is entitled to verify the accuracy of the questioned

returns by reference to the original material, and does not have

to prove error or tampering before it may have the originals.

See United States v. Davey, 543 F.2d 996, 1001 (2d Cir. 1976).

I do not understand Arthur Andersen and Good Hope to

argue that IRS holds any significant part of the 55 linear feet of

Good Hope records in Arthur Andersen’s Hartford office alone.

Special Agent Murphy estimates that IRS holds only three or

four file binders containing copies of original records—many of

which are illegible. Transcript at 68. Consequently, I hold that

®In support of their position, Good Hope notes that IRS

prepared a 557-page report summarizing the results of the audit.

A-26

production of the summoned documents will not violate the

third prong of Powell.

(4) Arthur Andersen and Good Hope do not seriously

argue that IRS has violated the fourth prong of Powell. Good

Hope does not argue that IRS has gone beyond the usual

procedure suggested by §§4024 et. seg. of the IRS manual,

(Intervenor’s Brief at 15), but the test is clearly whether the

IRS has followed the administrative steps required by the Code.

United States v. Powell, supra at 57.

MISCELLANEOUS ISSUES

Good Hope alleges that the breadth of the summons

constitutes an unreasonable search and seizure within the

meaning of the Fourth Amendment. Intervenor’s Brief at 17.

The mere fact that the summons encompasses a large volume of

relevant materials does not render it unreasonable. The

applicable files are clearly identified. I will not bar discovery on

these grounds.

Both Arthur Andersen and Good Hope offer what seems to

be a Fifth Amendment objection to the taking of their property

by summons. Good Hope’s claim that the government should

share part of the original cost of preparing the documents

(some $2,000,000) before it may examine them is patently

frivolous, and I reject it. Arthur Andersen additionally claims,

through counsel, that the estimated cost of compliance is in

excess of $125,000. Transcript at 31. While that sum is large,

there is no evidence that it is unreasonable in the course of

Arthur Andersen’s business. Moreover, as an incident of Arthur

Andersen’s duty to cooperate with a lawful summons there is a

concommitant duty to “shoulder the financial burden of cooper-

ation.”” United States v. Dauphin Deposit Trust Co., 385 F.2d

129, 130 (3d Cir. 1967) cert. denied 390 U.S. 921 (1968); see

also United States v. Continental Bank & Trust Co., 503 F.2d

45, 48 and cases cited therein (10th Cir. 1974). On the facts, I

do not find that the cost to Arthur Andersen “exceeds that

A-27

which respondent may reasonably be expected to bear as a cost

of doing business,” see United States v. Freidman, 532 F.2d

928, 938 (3d Cir. 1976), absent a showing that the same

material could be produced in a significantly less expensive

manner. See United States v. Friedman, supra; United States v.

Dauphin Deposit Trust Co., supra.

Arthur Andersen further argues that some of the files are

the subject of continuing work, ( Respondent’s Brief at 30), and

that those ordered to be produced should be examined in

Hartford. Absent a showing of what percentage of files are

currently active, respondent has not established that it would be

unduly onerous to copy such files and make the originals

available to IRS. Similarly, there has been no showing that

production of the docufnents will work a hardship on the

bankruptcy proceedings. I, therefore, reject this argument.

During the course of this litigaton, Good Hope secured an

order directing certain IRS agents involved in this investigation

to appear for depositions with certain documents. The govern-

ment seeks an order enjoining such discovery. Had Good Hope

initially sought discovery in the course of this enforcement

proceeding, it would have first been required to present evi-

dence showing that enforcement of the summons would con-

stitute an abuse of the District Court’s process. On the basis of

the evidence presented, and of Special Agent Murphy’s testi-

mony, I would have found no such showing. Consequently, on

the authority of United States v. Salter, 432 F.2d 697 (1st Cir.

1970), I would have denied Good Hope discovery as against

IRS. The government alleges that Good Hope has sought to

circumvent this Court to improperly secure a discovery order

from the Bankruptcy Court. On the facts presently before me, I

am unable to conclude that the discovery order is irrelevant to

any legitimate purpose of the Bankruptcy Court, and so I

decline to interfere with that Court’s jurisdiction. Petitioner’s

motion for an Order enjoining Discovery is denied.

A-28

CONCLUSION

For the above stated reasons, the Petition to Enforce

Internal Revenue Summons is allowed, and the summons shall

be enforced according to its original terms. Petitioner’s Motion

for Order Enjoining Discovery is denied without prejudice.

An appropriate order will issue.

United States District Judge

A-29

APPENDIX C

United States Court of Appeals

For the First Circuit

No. 79-1405

UNITED STATES OF AMERICA, et al.,

PETITIONERS, APPELLEES,

ARTHUR ANDERSEN & CO.,

RESPONDENT, APPELLEE,

' and

GOOD HOPE INDUSTRIES, INC.,

INTERVENOR, APPELLANT.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Frank H. Freepman, U.S. District Judge]

Before Corrin, Chief Judge,

CAMPBELL and Bownes, Circuit Judges.

Chester M. Howe, John M. Conley, and Gaston Snow & Ely

Bartlett on brief for appellant.

M. Carr Ferguson, Assistant Attorney General. Edward F. Harr-

ington, United States Attorney, Gilbert E. Andrews, Robert E.

Lindsay, and Carlton D. Powell, Attorneys, Tax Division, Depart-

ment of Justice, on brief for The United States of America and Fran-

cis V. Murphy, appellees.

June 16, 1980

Corrin, Chief Judge. This is an appeal arising out of an ef-

fort by petitioner Internal Revenue Service to enforce a sum-

mons under 26 U.S.C. § 7602. The summons, issued in the

course of a tax investigation of intervenor Good Hope In-

dustries, Inc., ordered Good Hope's accounting firm, respon-

dent Arthur Andersen & Co., to produce certain “tax accrual

workpapers™' and to testify concerning them. Both intervenor

' For discussion of the nature of tax accrual workpapers, see

3 n. 2 (Ist Cir. Mar. 31, 1980).

A-30

2 U.S. U. ARTHUR ANDERSEN & CO.

and respondent appealed from a district court judgment

allowing the petition to enforce summons. After failing to ob-

tain a stay of enforcement pending appeal from the district

court, ourselves, and the Circuit Justice, Andersen complied

with the summons. Because all of the contested workpapers

had been produced, we dismissed Andersen's appeal as moot.

United States v. Arthur Andersen & Co., No. 79-1411 (1st Cir.

Mar. 31, 1980). This appeal by Good Hope escaped mootness

by reason of preserving the question whether that part of the

summons as yet unexecuted, commanding Andersen’s

testimony concerning the tax accrual workpapers, should have

been enforced.

Good Hope raises four issues. The first, and most intricately

woven, contention requires that one additional set of facts be

noted. At the time the summons was issued, November 14,

1977, Good Hope was operating as a debtor-in-possession

under Chapter XI of the Bankruptcy Act. Subsequently, in the

spring of 1978, the IRS assessed taxes, penalties and interest

against Good Hope and its subsidiaries and filed a proof of

claim for the taxes (excluding penalties and interest) in the

district court. The adjudication of these taxes is now before the

bankruptcy court.

Good Hope argues that IRS, at the time the summons

was issued, had lost all its section 7602 summonsing

power and that the government, now capable of acting only

through the Department of Justice, is confined in_ its

discovery efforts to procedures under the Bankruptcy Rules.

IRS may remain, according to Good Hope, only “an in-

terested observer in the Bankruptcy proceeding”. The fabric

of the argument consists of the following strands: (1) Under

11 U.S.C. § 1l(a)(2A), the bankruptcy court had the

power to “determine any question arising as to the amount or

legality of any unpaid tax, whether or not previously as-

sessed”. (2) Under 26 U.S.C. § 7122, when a matter is refer-

red to the Department of Justice for prosecution or defense,

A-31

OPINION OF THE COURT 3

as were the claims for Good Hope’s taxes here, only the At-

torney General or his delegate may compromise any such case.

(3) 26 U.S.C. § 6871(a), providing for immediat» assessment

upon adjudication of bankruptcy, entirely supercedes normal

IRS assessment procedures; IRS, having exercised its assess-

ment authority,? has lost any power to make further

assessments. (4) Since the Department of Justice has available

all the discovery procedures of Part VII of the Rules of

Bankruptcy Procedure, it may not supplement them by using

§ 7602, since to do so would subject Good Hope to “un-

necessary examination” in violation of 26 U.S.C. § 7605(b).

Interestingly enough, perhaps significantly, Good Hope has

been unable to locate any cases dealing with the authority or

lack of authority of IRS to enforce a section 7602 summons

after the taxpayer is within bankruptcy court jurisdiction. We

note the comprehensive scope and unambiguous tone of sec-

tion 7602° and conclude that its reach and strength are not

2 The fact that an assessment has been made does not, of course,

bar a supplemental assessment if a prior one is “imperfect or in-

complete”. 26 U.S.C. § 6204.

> 26 U.S.C. § 7602 provides:

“For the purpose of ascertaining the corectness of any return,

making a return where none has been made, determining the liabili-

ty of any person for any internal revenue tax or the liability of law or

in equity of any transferee if fiduciary at any person in respect of

any internal revenue tax, or collecting any such liability, the

Secretary or his delegate is authorized-

(1) To examine any books, papers, records, or other data

which may be relevent or material to such inquiry;

(2) Tosummon the person liable for tax or required to perform

the act, or any officer or employee of such person, or any per-

son having possession, custody, or care of books of account

containing entries relating to the business of the person liable

for tax or required to perform the act, or any other person the

Secretary or his delegate may deem proper, to appear before

the Secretary or his delegate at a time and place named in the

summons and to produce such books, papers, records, or other

data, and to give such testimony, under oath, as may be rele-

vent or material to such inquiry; and

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4 U.S. U. ARTHUR ANDERSEN & CO.

lightly to be reduced. In the absence of any direct limitation

in the statutory language, we look for such an obvious conflict

between the exercise of authority under section 7602 by IRS,

under 11 U.S.C. § (11)(a)(2A) and 26 U.S.C. § 6871(a) by the

bankruptcy court, and under 26 U.S.C. § 7122 by the Depart-

ment of Justice as to compel a limiting interpretation of section

7602. .

As far as the authority of the bankruptcy court to “deter-

mine” tax questions is concerned, the authorities cited by

Good Hope, such as Sharpe v. Commissioner, 69 T.C. 19

(1977), and Tatum v. Commissioner, 69 T.C. 81 (1977), mere-

ly recognize a lack of jurisdiction in the Tax Court to decide

tax questions when a petition in bankruptcy preceded the fil-

ing of a petition for redetermination of deficiencies in the Tax

Court. Such jurisdictional: holdings say nothing about the

power of the IRS to continue an investigation preparatory to

the making of an assessment by the Commissioner of Internal

Revenue. In fact, assessments were made in both Sharpe and

Tatum after the filing of petitions in the bankruptcy court.‘

Similarly, we find no basis for inferring that because only

the Attorney General may compromise a case that has been

referred to the Department of Justice, such as referral ter-

(3) To take such testimony of the person concerned, under

oath, as may be relevent or material to such inquiry.”

For further indicia of the sweep of authority given the Secretary

of the Treasury, see 26 U.S.C. §§ 6201, 6204, 7601, 7801.

* Good Hope, as we have noted, has made the argument that nor-

mal IRS assessment procedures are “entirely superceded” by 26

U.S.C. § 6871(a), providing for immediate assessments of deficien-

cies upon adjudication in bankruptcy. Good Hope, for some reason

beyond our ken, would have us overlook the qualifving clause,

“despite the restrictions imposed by section 6213(a) upon

assessments”. The latter section establishes a time period following

notice of deficiency that must elapse before an assessment may be

made. Section 687l(a) simply removes this requirement in

bankruptcy cases, and instead mandates immediate assessment of

any deficiency that has been determined but has not been assessed at

the time of adjudication of bankruptcy. Cohen v. Gross, 316 F.2d

521, 522-23 (3d Cir. 1963).

A-33

OPINION OF THE COURT 5

minates IRS investigating authority. Indeed, the Court in

United States v. LaSalle National Bank, 437 U.S. 298, 312

(1978), addressing an IRS referral to the Department of Justice

for criminal prosecution, recognized that “[i]nteragency

cooperation on the calculation of the civil liability is then to be

expected and probably encourages efficient settlement of the

dispute”. In such a circumstance, however, the Court found

that policies against judicial broadening of criminal discovery

and infringement of the role of the grand jury mandated a

“prophylactic restraint on the use of the summons”. Id. at 313.

In the context of proceedings before the bankruptcy court, on

the other hand, there is no policy consideration that suggests

any need for curtailment of the interagency cooperation bet-

ween IRS and the Department of Justice.

Good Hope has advanced the proposition that because the

Department of Justice will have recourse to available

bankruptcy discovery procedures, IRS resort to section 7602

should be barred. Its citation of United States v. Kulukundis,

329 F.2d 197 (2d Cir. 1964), is inapposite. A district court in a

civil action had barred a summons inquiry into tax liability on

the ground that it circumvented normal discovery under the

federal rules of civil procedure. Although this issue was not

before the court of appeals, the government not having ap-

pealed, Judge Friendly noted that the court did not wish to be

associated with the view of the district judge. Id. at 199.5 Good

Hope’s parallel invocation of 26 U.S.C. § 7605(b), barring

“unnecessary examination”, is not helpful. That section simply

requires notification to the taxpayer before an additional

5 Indeed, the court went further and, after noting the possible

reasonableness of barring summary methods of discovery in the

preparation of criminal cases, said,“[{I]t would be a quite different

matter for the courts to construct a condition whereby the Govern-

ment’s bringing a civil suit rather than relying solely on summary

methods of tax collection would deprive it of a remedy which the let-

ter of the Code assuredly gives — particularly when Congress, in §

7605(b), prescribed such provisions for the protection of taxpay ers as

it wished to make.” 329 F.2d at 199.

A-34

6 U.S. U. ARTHUR ANDERSEN & CO.

inspection for a taxable year is undertaken. Here, there has not

yet been any inspection of the sort requested, i.e., testimony,

and even this is addressed not to the taxpayer but to a third

party.

Not only do we see no statutory or case authority supporting

the proposition that IRS loses its authority to investigate under

a summons simply because an investigatee has come within the

jurisdiction of a bankruptcy court, but we discern no suppor-

ting reasons of policy. In this case, for instance, we would see

deep-seated administrative problems were IRS to be stopped

in its tracks. The assessments for the years in question were

made apparently to forestall the running of the limitations

period; reassessments, down or up, may yet be called for;* no

determination of deficiency has been made for 1976; the

possibility of civil penalties’ and criminal prosecution remains;

some, but not all, of Good Hope’s subsidiaries being examined

are before the bankruptcy court. We cannot see anything but

confusion, delay, and inefficiency resulting from such an en-

forced bifurcation of investigatory activities. Indeed, were the

proposition to be valid, we could envisage asylum sorties into

bankruptcy whenever the IRS chase became too hot.

We therefore hold that IRS did have authority to seek en-

forcement of the summons. This holding also goes far toward

resolving Good Hope’s second claim — that the summons is

unenforceable because it was issued solely in aid of an ongoing

criminal investigation. Special Agent Murphy testified before

the district court that at no time had there been a recommen-

dation for criminal prosecution by IRS to the Department of

Justice. The investigation was a joint one, potentially leading

to both civil! and criminal sanctions. Nor had the civil portion

® Although IRS may not seek redetermination in the Tax Court, it

may petition the bankruptcy court to redetermine any deficiency

already assessed. See Cohen vy. Gross, supra, 316 F.2d at 522.

7 Such a matter, though civil, might well not have been within

bankruptcy court jurisdiction under the applicable law. Sotwers v.

State Bd. of Equalization, 600 F.2d 1254 (9th Cir. 1979).

A-35

OPINION OF THE COURT 7

of the investigation come to an end: not all years had been

completely investigated; those assessments which had been

made to protect against the running of the limitations period

might : reopened; and proofs of claim could be modified. As

the court said in United States v. LaSalle National Bank,

supra, 437 U.S. at 316, “[T]hose opposing enforcement of a

summons do bear the burden to disprove the actual existence

of a valid civil tax determination or collection purpose by the

Service. . . .Without doubt, this burden is a heavy one.”

As one commentator has summarized the law after LaSalle,

“It seems that the institutional good faith requirement can be

failed only where the decision to proceed criminally has been

made at the final layer of review with the agency.” Note,

Developments in the Law — Corporate Crime: Regulating

Corporate Behavior Through Criminal Sanctions, 92 Harv. L.

Rev. 1227, 1326 (1979). Here, so far as the record shows, no

decision to proceed criminally has been made at any level. The

only basis for Good Hope's bad faith argument is that IRS “has

ceded all of its authority to compromise, litigate or otherwise

determine Good Hope’s civil tax liability to the Department of

Justice.” That this argument is groundless was the effect of our

earlier holding.

A third argument, quickly disposed of, is that despite Couch

v. United States, 409 U.S. 322 (1972), we ought to accord a

limited privilege to tax accrual workpapers since they are ex-

changed with the expectation of confidential treatment much

as are disclosures to an attorney. In Couch, the Court observed

that no federal court has recognized an accountant-client

privilege. The Court declined to create such a privilege

“where records are handed to an accountant, knowing that

mandatory disclosure of much of the information therein is re-

quired by an income tax return.” Id. at 355. Good Hope,

citing Justice Brennan's concurrence stating that the Court

was not expressing a per se rule, argues that unlike the tax-

payer in Couch, it had an expectation in this case that its

A-36

8 U.S. U. ARTHUR ANDERSEN & CO.

disclosure to Andersen would be kept inviolate. Despite this

proferred distinction, our reading of the Court's opinion in

Couch reveals nothing that mandates departing from the

general rule to apply a privilege in this case.

This brings us to Good Hope's last claim, that the summons

does not meet the requirement of section 7602(3) that the re-

quested testimony relating to tax accrual workpapers “may be

relevant” to ascertaining the correctness of its return or deter-

mining its liability for any internal revenue tax. See United

States v. Powell, 379 U.S. 48, 57-58 (1964). Tax accrual

workpapers are used by accountants in attempting to deter-

mine whether financial statements give a fair picture of the

company’s financial position. The specific objective is to ob-

tain a figure representing the income tax properly attributable

to all items of income and expense for a given year and an ac-

crued balance to cover the estimated tax liabilities as of the

balance sheet date. To arrive at this objective requires accoun-

tant and client to review tax-impacting facts, assumptions,

and decisions to see what is the maximum or “worst-case” ex-

posure to tax liability, what is a realistic reserve figure to ac-

crue, and whether any tax contingency is so significant as to

warrant disclosure to the public. While such papers are said to

constitute no part of the tax return or its workpapers, they

would seem to indicate the thinking of accounting analysts

and policy makers about tax decisions as to which the pros and

cons may be in near balance, and thus indicate soft spots

where IRS could profitably probe.

The importance of the interests of all concerned — tax-

payers, accountants, and IRS — is clear. That a resolution sen-

sitively reflecting the legitimate interests of all and faithful to

applicable statutes would involve the most delicate and

demanding analysis of facts, research of law, and reflection on

policy is equally clear. Precisely because we view the issue of

“relevance” as so significant, we find this case in a poor

posture to serve as the matrix for a precedent. The tax accrual

A-37

OPINION OF THE COURT g

workpapers have been produced. All confidential exchanges

contained therein are public property. While no specific re-

quest for testimony has been made and no questions framed, it

seems to us that there are three possibilities. First, the govern-

ment, having obtained the workpapers in this case, may have

received enough information for its purposes or may conclude

that the prospect of obtaining any additional information

through questioning is not worth the trouble. Second, any

questioning in this case might well be confined to explaining or

clarifying information already revealed, and, since the basic

documents are known to counsel, the relevance (or ir-

relevance) of the proposed questioning may be obvious.

Finally, it is possible that the government may want to follow

leads suggested by the workpapers by questioning Andersen

employees on sensitive areas, deeming the risk of further delay

worth taking. In such a case, were the questioning to be

resisted and the issue brought before us, we would then have a

concrete record to deal with.

We therefore hold as to this issue that because of the produc-

tion of the records to which any questioning under the sum-

mons would relate, any decision regarding the possible

relevance of such questioning under 26 U.S.C. § 7602 would

be premature.

The district court’s order enforcing the summons is affirmed.

Adm Oftiwe, US. Courts — Blanchard Press, Inc., Boston, Mass.

A-38

APPENDIX D

No.79-1411.

UNITED STATES OF AMERICA, ET AL.,

Petitioners, Appellees,

Vv.

ARTHUR ANDERSEN & CO.,

Respondent, Appellant,

and

GOOD HOPE INDUSTRIES,

Intervenor, Appellee.

JUDGMENT

Entered: March 31, 1980

This cause came on to be heard on appeal from the United States District Court

for the District of Massachusetts , and was argued

by counsel.

Upon consideration whereof, It is now here ordered, adjudged and decreed as

follows: The appeal is dismissed as moot.

By the Court:

vot, GALLUP

{[cc: Messrs. Hickman, Powell, and Bialkin]

A-39

APPENDIX E

Suyreme Court of the niin Etates

No. A-1102

ARTHUR ANDERSEN & CO.,

Petitioner,

UNITED STATES, ET AL.

CRDER EXTENCING TiMS TO FILE FET:TION FCR

WRIT OF CERTIORAFI

Upon ConsmzratTion cf the application of counsel fer petitioner(#),

It Is Croenzp that the time for filing a petition for writ of certiorari in

the 2zbove-entitled cause be, and the seme is hereby, extended to and including

August 28, ,19_80

/s/ William J. Brennan, Jr.

Assoa.*s Justice of the Supreme

Cour of the United States

Dated this __16

day of June ,19_80.

A-40

APPENDIX F

Section 7602. Examination of books and witnesses

For the purpose of ascertaining the correctness of any

return, . . . determining the liability of any person for any

internal revenue tax . . ., or collecting any such liability, the

Secretary is authorized

(1) To examine any book, papers, records or other

data which may be relevant or material to such inquiry;

(2) To summon the person liable for tax .. ., or any

officer or employee of such person, or any person having

possession, custody, or care of books of account containing

entries relating to the business of the person liable for tax

..., Or any other person the Secretary may deem proper, to

appear before the Secretary . . . and to produce such books,

papers, records or other data, and to give such testimony,

under oath, as may be relevant or material to such inquiry;

and

(3) To take such testimony of the person concerned,

under oath, as may be relevant or material to such inquiry.

Section 7604. Enforcement of summons

(a) Jurisdiction of the district court.

If any person is summoned under the internal revenue

laws to appear, to testify or to produce books, papers,

records, or other data, the United States district court for

the district in which such person resides or is found shall

have jurisdiction by appropriate process to compel such

attendance, testimony, or production of books, papers,

records or other data.

(b) Enforcement.

Whenever any person summoned under section. . .

7602 neglects or refuses to obey such summons or to

A-41

produce books, papers, records, or other data, or to give

testimony, as required, the Secretary may apply to the

judge of the district court... for the district within which

the person so summoned resides or is found for an

attachment against him as for a contempt. It shall be the

duty of the judge .. . to hear the application and, if

satisfactory proof is made, to issue an attachment... for

the arrest of such person, and upon his being brought

before him to proceed to a hearing of the case; and upon

such hearing the judge ... shall have power to make such

order as he shall deem proper, not inconsistent with the

law for the punishment of contempts, to enforce obedience

to the requirements of the summons and to punish such

person for his default or disobedience.

8-8-29

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A-42

APPENTIX G

UNITED STATES DISTRICT C

OURT

DISTPICT OF MASSACELSETT

UNITED STATES OF AMFSIZA ane

AGENT

FRALSCIS W. MURPHY, SF5tcaz

INTERNAL REVENUE SERVICE,

Petitioners,

Vv.

ARTHUR ANDERSEN & COMPANY

Respondent,

AND

GOOD HOPE INDUSTRIES, 4 a

Intervenor

CIVIL ACTION

NO. 76-32327-F

APPLICATION FOR STAY PENOLSS APPEAL

Persuert to Pele 62 (¢) of the Feseral Rules of

Civil Procedure, intervenor Gooa Hope Industries, Inc.,

respecifully reguests that the Cour: Stay en

forcerent of

its Orger of July 23, 1979 pending appeal to the Coust

of Appea:s for the First Circuit. In Support of its

rezsest, intervencr submits that its right of a

ppea

would be effectively denied if « stay were nct granted,

anc that Rule 62 (4) appears to contemrlate the a

of such a Stay as a matter

slewanrce

bond. Intervenor further represents that Stever 2.

Kaplan, Esquire, counsel for the Unites States, has

Stipulated that no bond need be filed by the intervenor-

@ppellant.

any

to Mrvk

i AE

A-43

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

No. 79-1411

UNITED STATES OF AMERICA, ET AL.,

Petitioners, Appellees,

ARTHUR ANDERSEN & COMPANY,

Respondent, Appellant,

and

GOOD HOPE INDUSTRIES, INC.,

‘ Intervenor, Appellee.

MEMORANDUM AND ORDER

Entered August 17, 1979

P This matter is before us on respondent's motion for

a stay pending its appeal of the district court's order

enforcing an administrative summons issued by the Internal

Revenue Service.

Upon consideration of respondent's filings and the

district court's extensive Memorandum of July 23, 1979,

_the motion for stay pending appeal is denied.

By the Court:

(Sf wana... salsbwe

Clerk.

(Cert. c., Clerk, U.S.D.C., Mass. cc: Messrs. Howe, Xaplan,

and Murphy and Ms. Brennan.)

A-44

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

No. 79-1405

UNITED STATES OF AMERICA, ET AL., U

Petitioners, Appellees . >

Vv.

ARTHUR ANDERSEN & COMPANY,

Respondent, Appellee,

\ Z

Oh Te rest ecu

GOOD HOPE INDUSTRIES, INC.,

Intervenor, Appellant.

MEMORANDUM AND ORDER

Entered August 17, 1979

Intervenor seeks to stay pending appeal the July 23,

1979 Order of the district court enforcing an Internal

Revenue Service administrative summons on alternative

theories: (1) that the district court erred in not grant-

ing an automatic stay under Rule 62(d), Federal Rules of

Civil Procedure, and (2) that “[t)his Court should rectify

the district court's arbitrary and unjustifiable nullifi-

cation of Rule 62(d)" by staying the enforcement order

pursuant to Rule 8(a), Federal Rules of Appellate Procedure.

Upon consideration of intervenor's motion’ for stay and

its supporting memorandum, the petitioners’ opposition and

the extensive Memorancum of the district court, we deny

the motion for stay pending appeal. Intervenor has

failed to convince us that Rule §2(d) applies to a district

A-45

e2e

court's order in a summons enforcement proceeding. Nor

has intervenor demonstrated a sufficient likelihood of

success on appeal or explained the irreparable injury

it will suffer by enforcement of the summons. See United

States v. Lyons 442 F.2d 1144, 1145, (lst Cir. 1971).

By the Court:

Clerk.

[Cert. c., Clerk, U.S.D.C., Mass.; cc: Messrs. Howe, Kaplan and Murphy

and Ms. Brennan.) ‘

A-46

APPENDIX H

OFFICE OF THE CLERK

SUPREME COURT OF THE UNITED STATES

WASHINGTON. DO. C., 20543

August 21, 1979

Chester M. Howe, Esquire

Gaston Snow & Ely Bartlett

One Federal Street

Boston, Massachusetts 02110

Re: Arthur Andersen & Co., et al. v.

United States, et al., A-158

Dear Mr. Howe:

Your application for stay in the above-

entitled case has been presented to Mr. Justice Brennan, who

has endorsed thereon the following:

"Denied

8/20/79

Wm. J. Brennan, Jr."

Very truly yours,

MICHAEL RODAK, JR., Clerk

Patricia A. Dean

Assistant Clerk

cc: Hon. Wade H. McCree, Jr.

Solicitor General of the United States

J. Read Murphy, Esquire

Murtaha, Cullina, Richter & Pinney

101 Pearl Street, P.O. Box 3197

Hartford, Connecticut 06103

A-47

Appendix I

Internal Revenue Manual

Accountants’ Workpapers

4024.1 (6-12-80)

Definitions and Scope

(1) The term “audit workpapers,” as used in this subsec-

tion, means workpapers kept by the independent accountant of

the procedures followed, the tests performed, the information

obtained, and the conclusions reached pertinent to his/her

examination. Workpapers may include work programs, analy-

ses, memoranda, letters of confirmation and representation,

abstracts of company documents, and schedules or com-

mentaries prepared or obtained by the auditor. These work-

papers provide an important support for the independent

certified public accountant’s opinion on the fairness of the

presentation of the financial statements, including the repre-

sentation as to compliance with the generally accepted auditing

standards. (See Sections 338.02 and .03 of the Statements on

Auditing Standards, as issued by the American Institute of

Certified Public Accountants ).

(2) The term “tax workpapers,” as used in this subsection,

means workpapers used in assembling and compiling financial

data preparatory to placing it on a tax return. They include

information used to trace financial information to the tax

return.

(3) The provisions of this subsection do not apply to in

cases under joint investigation with the Criminal Investigation

Division.

A-48

4024.3 (6-12-80)

Guidelines for Requesting Tax

Accrual Workpapers in Corporate

Examinations

(1) The term tax accrual workpapers, as used in this

subsection, sometimes is also referred to as the Tax Pool

Analysis or the Tax Liability Contingency Analysis.

(a) Tax accrual workpapers could consist of two or

three basic documents.

! A summary analysis of the transactions re-

corded in the taxpayer’s general ledger with respect to

income tax accounts;

2 A computation of the tax provisions for the

current year, whether or not the tax is payable in that

year; and

3 A memorandum discussing items reflected in

the financial statements as income or expense where

the ultimate tax treatment is unclear. (See footnote 6,

U.S. v. Arthur Andersen and Company, 79-2 USTC

9506 (D. Mass.) ).

(b) Guidelines for the reconciliation of the Tax

Accrual are contained in 520.47 of IRM 4233, Tax Audit

Guidelines, Individuals, Partnerships, Estates and Trusts

and Corporations. :

(2) As stated in IRM 4024.2:(2), “the taxpayer’s records

are the primary source of information.” When requesting

information pertaining to the tax accrual, the examiner should

first exhaust all reasonable means to secure this information

from the corporate officer before looking to the independent

auditor to provide the information. In many instances this will

require the examiner to question or summons a financial officer

or the tax manager of the corporation concerning the knowl-

edge of the items that make up the corporation’s contingent

reserve accounts. This also includes the issuance of a summons

to the corporate officer under IRC 7602(3).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.