Petition — Young v. United States

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

ARTHUR YOUNG & COMPANY,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

CROSS PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT

CarR- D. LiGGcio*

General Counsel

JOHN E. MATSON

Associate General Counsel

RICHARD I. JANVEY

Associate General Counsel

Attorneys for Cross Petitioner

ARTHUR YOUNG & COMPANY

277 Park Avenue

New York, N.Y. 10172

(212) 407-2367

* Counsel of Record

(i)

QUESTIONS PRESENTED

WHETHER THE COURTS BELOW PROPERLY EXER-

CISED THEIR JUDICIAL OVERSIGHT ROLE IN ENFORC-

ING AN IRS SUMMONS DEMANDING’ EVERY

DOCUMENT IN A THIRD-PARTY RECORD KEEPER’S

FILE IN ANY WAY RELATING TO THE TAXPAYER WHEN

THE SOLE BASIS FOR THE FINDING OF RELEVANCY

WAS THE /PSE DIXIT OF THE IRS AGENTS AND WHERE

THE GOVERNMENT CONCEDED THE IRS DID NOT

KNOW WHAT IT WANTED.

WHETHER A SUMMONS FOR ALL NON-TRANSAC-

TIONAL DOCUMENTS OF A THIRD-PARTY RECORD

KEEPER IN ANY WAY RELATING TO THE TAXPAYER

WITHOUT REGARD TO THEIR RELEVANCY VIOLATES

THE FOURTH AMENDMENT.

(ii)

TABLE OF CONTENTS

QUESTIONS PRESENTED 222..2.20.:0cccecsecsccecsesenssssesceseseses

PARTIES TO THE PROCEEDING BELOW ................

SR IIIEET cxdheninstnnsnnccnssincccanesicannenpainesseontpeensectes

IIIT screlictintsctssiscnsiennitsethieetndniatibenaiapeeniocsenpneeenme

IID cctinienistevescesnnemanicesticnnadiieniemiennitins

ATCO e GU BOE CIE ci ccccccccccessescescseevsrsssusnesencoss

A.

B.

The Normal IRS Procedures 2.............ccccccccccscseeeseeeeeee

The Audit Function and Audit Workpapers ..............

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

A.

B.

..

The Material Sought Must Relate to the Correctness

_ & tS EST SET eae eee

Relevancy Cannot Be Presumed Merely Because the

Workpapers Relate to Financial Accounting ..........

Requests for Documents by Generic Description Can-

not Meet the Relevancy Test and Conflict with the

ee

The Courts Below Abdicated Their Judicial Oversight

- Function By Accepting the IRS Claim or Relevancy

IY TIIIIEET cttintnbacscsinttiintediininancsietenitnenteneiaminbindtions

An IRS Summons for Non- Transactional Documents

Setting Forth Nothing More Than Their Generic

Characteristics Fails to Comply with Constitutional

Requirements and Is Unenforceable .......................

SIT sctesstnesnscrssccesecmmmasosscsseseetecmmnannigeanisiniseneen

PAGE

TABLE OF AUTHORITIES

Cases

American Automobile Assn. v. United States, 367 U.S. 687

I ii alan chit arias 11

Brown v. Helvering, 291 U.S. 193 (1934) c.cccccccccccccceceeeees 12

C.A.B. v. United Airlines, Inc., 542 F.2d 394 (7th Cir.

a eeinbsnintinione 14

Commissioner v. Hansen, 360 U.S. 446 (1959) 2.0.0.0... 12

Commissioner v. Idaho Power Co., 418 U.S. 1 (1974) ... 11

Donaldson v. United States, 400 U.S. §!7 (1971) ........... 16

Fisher v. United States, 425 U.S. 391 (1976) ............... 16, 17

Frank Lyon Co. v. United States, 435 U.S. 561 (1978). 11

FTC v. American Tobacco Co., 264 U.S. 298 (1924) ..... 17

Hubner v. Tucker, 245 F.2d 35 (9th Cir. 1957) .............. 15

Lucas v. American Code Co., 280 U.S. 445 (1930) ......... 12

Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186

SSE ne en a 16

See v. City of Seattle, 387 U.S. 541 (1967) on. 16

Thor Power Tool Co. v. Commissioner, 439 U.S. 522

SUIIIIIE ‘Sanreiectatinditeabinatiindsihddienseeennetnahiaddaintscanaeminimnantintmenins 10, 11

United States v. Acker, 325 F. Supp. 857 (S.D.N.Y.1971) 12

United States v. Berkowitz, 355 F. Supp. 897 (E.D. Pa.

ie els ART a Arcee ee. Cane Oe OL Se TOC 15

United States v. Bisceglia, 420 U.S. 141 (1975) ........... 15,17

United States v. Blackwood, 582 F.2d 1244 (10th Cir.

REESE SD, iE Rene meee 13 n.17

United States v. Coopers & Lybrand, 413 F. Supp. 942 (D.

Colo. 1975) aff'd. 550 F.2d 615 (10th Cir. 1977) ....... 13

United States v. Coopers & Lybrand, 550 F.2d 615 (10th

RR PE ee 14

United States v. Coson, 515 F.2d 906 (9th Cir.), cert. de-

ne 17

United States v. Harrington, 388 F.2d 520 (2d Cir. 1968) 15

United States v. LaSalle Nat'l Bank, 437 U.S. 298 (1978) 10

Unites States v. Life Science Church of America, 636 F.2d

ee I CEI -bnteeersssnresiaternbiceenepsseresninctennsnnigvitennon 13

United States v. Luther, 481 F.2d 429 (9th Cir. 1973)... 13

iv

PAGE

United States v. Morton Salt Co., 338 U.S. 632 (1950) 17

United States v. Powell, 379 U.S. 48 (1964) oo... 14, 16

United States v. Theodore 479 F.2d 749 (4th Cir. 1973) 15

Venn v. United States, 40) F.2d 207 (Sth Cir. 1968) ... 13, 15

Statutes and Rules

Internal Revenue Code of 1954

Se Es seueenmnebeeie 2,9

Judiciary and Judicial Procedure

UP Ce ae OR 2

Rule 19.5 of the Supreme Court of the United States ..... 2

Other Authorities

Brief for the Government in Thor Power Tool Co. v.

Commissioner (August, 1978) ............ccccccccccceeceeeeees 10 n.14

1 K.C. Davis, ADMINISTRATIVE LAW TREATISE, (1958) 17

Internal Revenue Manual-Audits § 403(23) .............00...... 7

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

ARTHUR YOUNG & COMPANY,

Petitioner,

V.

UNITED STATES OF AMERICA,

Respondent.

CROSS PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT

PARTIES TO THE PROCEEDING BELOW

Arthur Young & Company (“AY”) is a partnership of Certi-

fied Public Accountants with over 600 partners and offices at 70

locations in the United States. Intervenor Amerada Hess Corpo-

ration (“Amerada”) is a public corporation whose shares are

traded on the New York Stock Exchange.

OPINIONS BELOW

The order of the district court (App. A, la-15a)' is reported at

496 F. Supp. 1152. The opinion of the court of appeals (App. B,

16a-39a) is reported at 677 F.2d 211.

1. The appendix references are to the appendix to the Petition for

Writ of Certiorari of the Unites States of America in No. 82-687.

2

JURISDICTION

The judgment of the court of appeals was entered on April 13,

1982 (App. C, 40a). The order denying the government's peti-

tion for rehearing was entered on June 22, 1982 (App. D, 41a).

By order dated September 13, 1982, Justice Marshall extended

the time within which the United States could file a petition for a

writ of certiorari through October 20, 1982. On October 20,

1982 the United States filed a timely petition for a writ of certio-

rari. The jurisdiction of this Court is invoked under 28 U.S.C.

1254(1). This petition is being filed pursuant to Rule 19.5 of the

Rules of the Supreme Court of the United States.

STATUTE INVOLVED

The pertinent provision of Section 7602 of the Internal Reve-

nue Code of 1954 (26 U.S.C. § 7602) is set forth in App. E, 42a.

STATEMENT OF THE CASE

At issue are workpapers created by certified public accountants

in the course of an audit of a client's financial statements and the

relationship these audit workpapers have to a client’s federal

income tax return.

As part of the Internal Revenue Service (“IRS”) audit of

Amerada’'s tax returns for 1972, 1973, and 1974, the IRS issued a

3

summons’ to AY’ which demanded every piece of paper in AY’s

Amerada file—more than a quarter of a million pages. Rather

than seeking documents by subject matter, the summons defined

2. The summons requested:

The following Document Relating to Amerada Hess Corpora-

tion All For the Years 1972 Through 1974:

eonavr wn =

Engagement letter(s)

Management letters(s)

Representation letter(s)

History file(s)

Standard workpaper index(s)

Administrative file(s)

Workpaper review files(s)

Engagement planning file(s)

Confirmation control file(s)

Significant event file(s)

. Audit program file(s)

. Audit workpaper’s file(s)

. Tax pool analysis file(s)

. File(s) red during the course of work per

formed for the “special committee”, including anne

procedures, selection process, reports. schedules and

other workpapers

_ The name of the partner in cha , engagement part-

iocctad the oulis of

- and/or senior auditor who

. Any other information pertinent to the audit of

Amerada covering the years 1972, 1973 and 1974.

. All workpa reports, records, ee,

reconcilia iE ieoeend information relative to the United

States C te Income Tax ™.ecturns ( Forms | 120)

dy ER ain aden O72

t ‘or the ca

1973 and 1974.

ites cantiam, 2 Cad tae

4

what was to be produced by the generic characteristics of the

documents—e.g., history file, significant events file, administra-

tive file, etc.‘

Because of the use of a request which defined the documents

sought by the generic characteristics of the document (e.g., letter,

memo, etc.) as opposed to substantive content (e.g., inventory), it

was impossible to test the relevancy of the demand from the face

of the summons. Accordingly, AY advised the IRS it would not

give carte blanche access’ to AY’s files unless the IRS specified

the subject matter* of its inquiry so the relevancy of its request

could then be tested.

The IRS refused to do so and, eighteen months after service of

the summons, moved by order to show cause to compel produc-

tion. In support of its motion, the IRS submitted an affidavit

which merely repeated the language of the summons and con-

cluded that the IRS needed this material “to ascertain the cor-

rectness of the tax returns”. The only attempt to point to any

specific subject matter in what was sought was in 110 of that

affidavit:

10. The taxpayer has disclosed that it maintained a fund

called a “special disbursements account.” From this

fund, it made political contributions, some of which were

reimbursed to the actual contributors, and charged to

legal fees, gave gifts to foreign government employees and

+ Even if it is assumed that the generic descriptions in the first few

pangs Se een Cee ae “specificity,” they were ren-

by 11 12 and 16 which requested that AY all

workpapers (t including everything in AY'’s files and ting

wr ae 13 and Aak b on ane O sine

5S. AY has never either the propriety or scope l

the summons—the only paragraph which was drawn and rele-

vant on the face of the summons and has always ready to produce

documents.

6. AY does not suggest by this that the IRS must cast its summons

in terms of specific documents—i.e. memo from Jones to Smith—but

5

deducted the same as “other deductions;” gave sums to

members of local police and fire departments and

deducted the same as “cleaning services,” made payments,

which were deducted, to a foreign “expeditor,” and

engaged in other possibly illegal activity... .

Yet the documents demanded far exceeded this limited showing

of relevancy.”

After AY noted that the IRS submission had failed to make

any showing of relevancy, the IRS submitted three short reply

affidavits which merely repeated the bald statement that the IRS

needed the summoned records “to ascertain the correctness of the

1972, 1973, and 1974 returns.”

In contrast to the self-serving statements of the IRS agents, the

Assistant U.S. Attorney conceded to the district court in a reply

affidavit “that at this stage of the investigation the agents did not

have sufficient information to further specify the documents

summoned.™

At the hearing before the district court, counsel for AY again

repeated its offer that if the IRS defined its request by subject

matter—not document characteristic—AY would produce those

documents.” The IRS refused this offer too.

7. This is the type of subject matter description which AY believes is

proper and satisfies due process requirements. To the extent AY had any

documents in its files (other than those generated for the attorneys as

part of their investigation and which the trial court found protected

the attorney work product privilege) AY was red to make avail-

able all of its documents which related to the subject matter identified in

* 10 of the affidavit.

8. See also Liggio affidavit, dated December 28, 1979 4 12 (Record

below A.37):

| advised Ms. Trager that Arthur Young was red to make a

ion of relevant materials . . . if the IRS was prepared to

wey yap — bey my pe

coe poten ppm Po apm Hy mag’ -y- LE

special agents to see could be done. subsequently

advised me . ‘Gin eee

SO Sh ee. i

9. At the district court hearing, the following colloquy occurred:

MR. LIGGIO: . .. when Mr. Kalemba first served [AY] with a

subpoena, | said... “Look, you are overly broad, but if you tell us

what you want by subject matter, and I think you are in a

6

Following the hearing, and probably in response to the court's

comments, the IRS submitted still another affidavit— its

fifth—on the subject of relevancy. This affidavit provided no bet-

ter evidence of relevancy than anything the IRS had submitted

before; in fact, it demonstrated that certain of the material sought

could not be relevant, that the summons was too broad, and that

the IRS summoned materials not in any way relevant to “ascer-

taining the correctness” of Amerada’s return.’ The district

court nevertheless enforced the summons for all documents in

AY’s Amerada file.

position to do that, you have audited Amerada Hess for years

and you have the records available for ‘72, °73 and part of ‘74, . ..

tell us what you want and we don't vo you can't have the

documents. We are prepared to work with you and make docu-

ments available to you and we are perfectly willing, if the govern-

ment says they need something relating to drilling costs for the

domestic production, you know, subject matter categories, we

will go into our papers and find them.

| offered to the government, to Mr. Kalemba and Ms. Trager, to

tell us what they want and we will make our personnel

available—

THE COURT: Well they wouldn't tell me, either, so don't feel

put out.

Counsel for Amerada then noted:

The IRS, since the inception of this audit in 1975, has given us

some 400 civil document rc> and we have given them docu-

ments in to 398 of them. While the government con-

tends that t have no ability to get any information from

Amerada Hess, that is simply totally inaccurate.

THE COURT: They can't figure out what is relevant; that is

their problem.

Notwithstanding the uncontradicted record that the ment was

unable to demonstrate the relevancy of what they t, the summons

was enforced.

10. This affidavit stated:

9. The engagement planning questionnaire (item 8), when read

in — ss with the letter, would indicate the

scope of the y. if the audit was not involved with

Sra as a an ata

unnecessary to examine the records further. (Emphasis

Added.)

Implicit in this is the ition that the areas of IRS examination and

the AY audit of were not co-extensive and therefore all

workpapers were not relevant.

>

The court of appeals summarily affirmed the district court's

order enforcing the summons without any critical review of the

record with respect to the audit workpaper issue.

A. The Normal IRS Procedures

The procedure used to obtain documents from AY, a third-

party record keeper, stands in stark contrast to the procedures

used with respect to the corporate taxpayer in general, and Amer-

ada in particular, as mandated by the IRS’ own manual. In

accordance with the procedures set out in Internal Revenue Man-

ual-Audit § 403(23)"', the IRS issued to Amerada 400 detailed

civil document requests which defined the request by subject

matter—not by generic document characteristic. In response to

these demands Amerada produced in excess of 40,000 pages to

the IRS.

Had the IRS observed the same procedures with AY, the rele-

vancy of its request would have been clearly determinable on its

face.

B. The Audit Function and Audit Workpapers

Financial statements of a company are audited in accordance

with “Generally Accepted Auditing Standards” (“GAAS”) to

determine whether they have been prepared in accordance with

Generally Accepted Accounting Principles (“GAAP”).

An audit does not involve the verification of every item in the

books and records of a client; rather it is an examination of

selected items and records to determine whether the financial’

statements appear to be free of material misstatements. The audi-

tor develops an audit plan and audit programs which are guide-

lines (methodology) for the conduct of the audit and which

determines the areas to be examined.

11. te Sy, = = ong Spevepation of Cosemenns Sam Parana

(1) Form 4564 (Information Document Request) a

information or documents from taxpayers when are

vl nos records to be examined, of when ts desirable a document

am pe Sel as Sn otal as Gas eee

a

Audit workpapers are prepared during the audit to (i) docy-

ment compliance with GAAS, (ii) facilitate supervision and

review of the work, and (iii) provide a record of the work. They

contain a myriad of facts and opinions many of which, however,

have absolut ly no conceivable relevance to a corporation's tax

return, let alone to its correctness'* because, as this court has

repeatedly noted, financial and tax accounting are not the same.

See infra, 16-12. Similarly, where the IRS is examining only

certain issues on the taxpayer's return, the full panoply of

workpapers relating to every aspect of a client's financial state-

ments cannot be relevant to the IRS investigation.

REASONS FOR GRANTING THE WRIT

Without any critical analysis of the issue, both the district

court and court of appeals summarily rejected AY's position that

a request for documents based on their generic characteristics

cannot establish relevancy without a further definition of the

subject matter sought. In so doing both courts applied an

improper standard in determining relevancy and abdicated their

judicial oversight function of the IRS. Moreover, the opinions of

both courts are in direct conflict with the opinions of this Court

and with the decisions of other circuit courts of appeal. Finally, a

summons, such as the instant one, violates the Fourth

Amendment.

12. For example, work rs —s with FINANCIAL

ACCOUNTING STANDARDS BOARD STATEMENT (“FASB”)

No. 8 issues (Foreign currency translation) are totally irrelevant to

Amerada’s U.S. tax liability. Yet the generic document requests of

Paragraphs 3, 7, 8, 10, 12, and 16 of the summons call for uction of

these papers. Similarly, all workpapers dealing with FASB 19 (the

pronouncement relating to oil and gas accounting) can have absolutely

no bearing on the correctness of Amerada’s tax return.

Other workpapers which have no relevance to the correctness of a tax

return include (i oy) 1 per share calculations, (ii) compliance work

with debt agreements, (iii) accounting for good will, (iv) accounting for

foreign earnings, and (v) accounting for subsidiaries on the equity

method, to name but a few examples. a document request ng

audit workpapers, on its face, lacks relevance to any legitimate |

Durpose.

9

Lest there be any confusion, AY is NOT suggesting that mater-

ials contained in its workpapers are not subject to IRS scrutiny.”

AY readily concedes that the workpapers may contain informa-

tion which is relevant to an IRS inquiry and to which the IRS is

entitled. AY’s position is simply that this is the only material to

which the IRS is entitled, and it may not and should not be able to

conduct a fishing expedition through a third-party’s papers based

on an unsupported claim of relevancy.

Consistent with the substantial precedent established by this

Court, as a predicate to enforcement of an IRS summons—at

least to a third-party—the summons must describe its demands in

terms of subject matter so that the issue of relevancy of the

materials sought can be tested on the face of the summons. Sim-

ply put, a summons which requests, for example, all correspon-

dence without more cannot on its face be tested for relevancy and

is per se improper. However, a request defined as all correspon-

dence relating to inventory can be easily tested for relevancy

against the subject matter of the investigation.

Moreover, the :..ucs raised by this petition are not sui generis

to this case, bul repeatedly arise with respect’to the many

thousands of summons the accounting profession receives on an

annual basis from the IRS, other government agencies, and pri-

vate litigants. A resolution of the proper standards for determin-

ing relevancy and the appropriate level of judicial review will

foster judicial economy and serve to defuse a growing problem for

the accounting profession in responding to the continually over-

broad demands for documents in their possession.

A. The Material Sought Must Relate to the Correctness of the

Tax Return

Section 7602 limits the purposes for which a summons may be

issued to four situations:

In § 7602 Congress has bestowed upon the Service the

authority to summon production for four purposes only:

13. Nor do we argue that there must be an in camera inspection to

determine what is relevant. AY's proposed approach would in all but the

rarest of instances obviate the need for an in camera inspection.

10

for “ascertaining the correctness of any return, making a

return where none has been made, determining the liabil-

ity of eny person for any internal revenue tax .. . or

collecting any such liability.”

United States v. LaSalle Nat'l Bank, 437 U.S. 298, 317 n.18

(1978).

The validity of a summons must be tested against these four

grants of power only the first of which—“ascertaining the correct-

ness of” Amerada’s return—is applicable here.

B. Relevancy Cannot Be Presumed Merely Because the

Workpapers Relate to Financial Accounting

Implicit in both the IRS's position below and the opinions of

both courts below is the assumption—indeed almost presump-

tion —that because AY conducted an audit for purposes of expres-

Sing an opinion on Amerada’s financial statements, the relevancy

of all of its workpapers is therefore a fortiori established. Put

another way, any document relating to financial accounting is

presumptively relevant to “ascertaining the correctness” of the

tax return. This logic is erroneous and runs counter to previous

positions consistently taken by the IRS" and the pronouncements

of this Court.

In Thor Power Tool Co. v. Commissioner, 439 U.S. 522

(1979) the taxpayer had written down obsolete inventory in com-

pliance with GAAP for financial reporting purposes and then

attempted to take a corresponding tax deduction in the amount of

the write down. The IRS disallowed the deduction.

14. Inits brief before this Court in Thor Power Tool Co. v. Commis-

sioner of Internal Revenue, 439 U.S. 522 (1979) the IRS took the exact

opposite tact from that which it takes here:

... generally accepted commercial omer practices do not

govern the computation of federal income tax liability. .. What

constitutes a fair and accurate statement of a taxpayer's income

in a report to creditors or stockholders, or even for purposes of

complying with some other statute, does not necessarily coincide

with what must be reported as income under the taxing statute;

each report is designed to serve discrete needs and objectives.

Brief for the Government in Thor Power Tool Co. v. Commissioner,

August 1978 at 21-22.

This Court noted that although GAAP may have some bearing

on taxes in some circumstances, it expressly rejected any pre-

sumption that “generally accepted accounting practices will pass

muster for tax purposes.” /d. at 540.

... the presumption [Thor] postulates is insupportable in

light of the vastly different objectives that financial and

tax accounting have. The primary goal of financial

accounting is to provide useful information to manage-

ment, shareholders, creditors, and others properly inter-

ested; the major responsibility of the accountant is to

protect these parties from being misled. The primary goal

of the income tax system, in contrast, is the equitable

collection of revenue; the major responsibility of the Inter-

nal Revenue Service is to protect the public fisc. Consist-

ently with its goals and responsibilities, financial

accounting has as its foundation the principle of conserva-

tism, with its corollary that “possible errors in measure-

ment should be in the direction of understatement rather

than overstatement of net income and net assets.” In view

of the Treasury’s marked ly different goals and responsi-

bilities, understatement of income is not destined to be its

guiding light. Given this diversity, even contrariety, of

objectives,any presumption of equivalency between tax

and financial accounting would be unacceptable. . .

Financial accounting, in short, is hospii~ble to estimates,

probabilities, and reasonable certaintie: the tax law,

with its mandate to preserve the revenue, can give no

quarter to uncertainty. This is as it should be. (Empha-

sis Added).

Id. at 542-543.

Finally, a presumptive equivalency between tax and

financial accounting would create insurmountable difficul-

ties of tax administration.

Id. at 544."

Accord: Frank Lyon Co. v. United States, 435 U.S. 561, 577

(1978); Commissioner v. Idaho Power Co., 418 US. 1, 15

(1974); See also American Automobile Assn. v. United States,

15S. AY izes that financial and tax accounting are notwithout

connection. But the fact that they may in some circumstances be interre-

lated to each other does not ipso facto establish relevancy.

12

367 US. 687, 690 (1961); Commissioner v. Hansen, 360 US.

446 (1959); Brown v. Helvering, 291 U.S. 193 (1934); Lucas v.

American Code Co., 280 U.S. 445, 449 (1930).

Since there is no presumptive nexus between financial account-

ing and tax accounting, more than ipse dixit must be shown by

the IRS to establish relevancy. The nature of the IRS request

must be “carefully scrutinized” and the relevancy of what is

sought tested against the subjects of the investigation. No

attempt was made to do that here. Mere generalized assertions of

need and relevance of audit workpapers do not meet the relevance

standard established by this Court. See, infra 14-16.

C. Requests for Documents by Generic Description Cannot Meet

the Relevancy Test and Conflict with the Decisions of Other

Circuits

The district court summarily rejected AY’s position that broad

generic document requests are impermissible, 496 F. Supp. at

1155,"* based upon a misreading of United States v. Acker, 325 F.

Supp. 857 (S.D.N.Y. 1971). Although there the court enforced a

limited, generic request to the taxpayer for all Board minutes,

which request included both relevant and not relevant material, it

nevertheless noted that a generic request for virtually all docu-

ments would not pass muster even if made to the taxpayer. /d. at

861, n.3. The court of appeals’ affirmance of the district court on

this issue squarely conflicts with the holdings of other circuits.

Thus where broad generic requests have been made to third

parties, the courts have modified them unless the request dealt

with the transactional records themselves—i.e., the documents

16. The district court misperceived AY’s argument when it said

“The end result of [AY’s] a —— about generic document demands

would be that a reviewing Court must test each of paper for

relevance.” 496 F. Supp. at 1155. This is not AY’s argument or the

result that would follow f from it. AY’s position is that an IRS summons

- a — rty must identify the subject matter sought (not document

bears no relationship to subject matter—i.e., a “letter” can

Hy to > iventory or ge getting tickets to a baseball game): and it is the

subject matter of the inquiry against which the demand must then be

tested for relevancy.

13

evidencing the transactions." Accordingly, in United States v.

Luther, 481 F.2d 429, 433 (9th Cir. 1973) the Ninth Circuit

modified a broad, generic request (¢.g., “correspondence, books,

other records”) by limiting it to those portions of the documents

showing the receipts and disbursement of money or relating to

financial or property transactions. See also United States v.

Blackwood, 582 F.2d 1244, 1246 (10th Cir. 1978) (“business

records . . . pertaining to savings and checking accounts held

therein by the taxpayer”™.)

More specifically, it has been recognized that a summons for all

of a third party's records dealing with a particular taxpayer i too

broad when the matter as to which the correctness of the tax

return is being examined is much narrower. Venn v. United

States, 400 F.2d 207 (Sth Cir. 1968).

See also United States v. Life Science Church of America, 636

F.2d 221, 223-4 (Sth Cir. 1980) where the court, in applying the

same rule to the taxpayer, stated:

The Fifth Circuit has rejected as overly broad a summons

virtually identical to the one issued by the IRS in this case.

That court stated:

The documents sought include a// documents relating

to the organizational structure of the church since its

inception; all correspondence files for the period

between April of 1975 and January of 1978; the min-

utes of all meetings of the officers, directors, trustees

or ministers, during this same is.terval; and a sample

of every piece of literature pertaining to the Church.

17. Where the Courts have sustained generic document requests,

they have involved summonses to the taxpayer itself. Moreover, these

summons also have invariably involved a summons for transactional

records. As the district court noted in United States v. Coopers &

Lybrand, 413 F. Supp. 942, 950 (D. Colo. 1975) aff'd, 550 F.2d 615

(10th Cir. 1977):

As a threshold matter, we are of the view that actual records of

transactions should be distinguished from other data which may

ada touch upon past or future transactions. (Emphasis

Here, no transactional records are at issue as AY had none. Indeed,

the IRS has already obtained the transactional records from Amerada.

14

This sample from the summons amply demonstrates

that it sweeps too wide. It should not have been

enforced in its present scope.

United States v. Holmes, 614 F.2d 985, 988 (Sth Cir.

1980) (emphasis in original) (footnote omitted).

Similarly, the Tenth Circuit noted in United States v. Coopers &

Lybrand, 550 F.2d 615, 619 (10th Cir. 1977) in response to the

IRS statement that it was entitled to everything in a company’s

files:

However, extending IRS contentions herein to their logi-

cal conclusion, it is hard to determine what corporate

records would not fall under a §7602 summonses if the

standard endorsed the production of any records which

might show tax fraud or tax liability. IRS does not, as it

appears to assume on this appeal, have carte blanche

discovery.

Compare C.A.B. v. United Airlines, Inc., 542 F.2d 394 (7th Cir.

1976) (request for reading files, expense reports, memoranda is

tantamount to a general search warrant and improper).

Here, the IRS has never specifically defined its areas of inquiry,

and to the extent it has intimated as much, it is clearly much

narrower than the items summoned. To the extent the court of

appeals validated a summons for all records of a third-party

record keeper, its decision is in direct conflict with those of other

circuits.

D. The Courts Below Abdicated Their Judicial Oversight Func-

tion By Accepting The IRS Claim Of Relevancy Without More

Although it is unquestioned that Congress granted the IRS

broad investigatory powers, it is equally clear that those powers

are neither unbounded nor self-enforcing. Yet the approach

adopted by the courts below has effectively made them so. The

power of the IRS is circumscribed by statute with the burden of

proof being on the IRS to show that it is entitled to enforcemeni

of a summons. United States v. Powell, 379 U.S. 48 (1964).

15

The decisions below allowed unfettered access to every piece of

paper in a third-party’s files, which contain no independent trans-

actional data, based solely on the unsupported claim of the IRS

that this material is relevant. Because both the district court and

court of appeals ordered production on nothing more than this,

this petition raises an issue as to continued viability of the rele-

vance standard in judicial enforcement of an IRS summons.

Once a summons is challenged it must be scrutinized by a

court to determine whether it seeks information relevant

to a legitimate investigative purpose. ... The cases show

that the federal courts have taken seriously their obliga-

tion to apply this standard to fit particular situations,

either by refusing enforcement or narrowing the scope of

the summons.

United States v. Bisceglia, 420 U.S. 141, 146-147 (1975).

Care must be taken to prohibit the summons power from

becoming a fishing expedition:

We do not mean to suggest by this holding that respon-

dent’s fears that the 7602 summons power could be used to

conduct “fishing expeditions” into the private affairs of

bank depositors are trivial.

Id. at 150-151.

The importance of judicial scrutiny of such orders before

any punitive action is taken was recognized by the

Supreme Court. . . . This judicial protection against the

sweeping or irrelevant order is particularly appropriate in

matters where the demand for records is directed not to

the taxpayer but to a third-party who may have had some

dealing with the person under investigation.

United States v. Harrington, 388 F.2d 520, 523 (2d Cir. 1968).

Accord, United States v. Berkowitz, 355 F. Supp. 897, 901

(E.D. Pa. 1973); Venn v. United States, 400 F.2d 207 (Sth Cir.

1968) denying IRS access to third party’s papers on basis of

higher burden; Hubner v. Tucker, 245 F.2d 35 (9th Cir. 1957);

United States v. Theodore, 479 F.2d 749 (4th Cir. 1973). As

Justice Stewart noted in dissenting in United States v. Bisceglia,

16

420 U.S. at 157 “[t]}he federal courts have always scrutinized

with particular care any IRS summons directed to a party, i.e., to

a party other than the taxpayer under investigation.”

The need for careful scrutiny is particularly essential when, as

here, documents are summoned from other than the taxpayer.

AY challenged the breadth of the summons, yet the courts failed

to scrutinize it at all. By accepting the IRS claim of relevancy

without more, especially in light of the concession by the Assis-

tant U.S. Attorney that the IRS agents could not identify the

subject matter of what they wanted, the courts below placed form

over substance and abdicated their judicial oversight function.

E. An IRS Summons For Non-Transactional Documents Setting

Forth Nothing More Than Their Generic Characteristics

Fails To Comply With Constitutional Requirements And Is

Unenforceable

Although the IRS may have broad summons powers, an overly

broad summons violates the Fourth Amendment's protection

against unreasonable searches and seizures. United States v.

Powell, 379 U.S. 48 (1964); Donaldson v. United States, 400

U.S. 517 (1971); Cf Oklahoma Press Publishing Co. v. Walling,

327 US. 186 (1946); See v. City of Seattle, 387 U.S. 541, 544

(1967); Compare: Fisher v. United States, 425 U.S. 391, 401 0.7

(1976). (“The taxpayers .. . have not raised arguments of a

Fourth Amendment nature before this Court and could not be

successful if they had. The summonses are narrowly drawn and

seek only documents of unquestionable relevance to the tax inves-

tigation.” ] As Justice Holmes put it:

Anyone who respects the spirit as well as the letter of the

Fourth Amendment would be loath to believe that Con-

gress intended to authorize one of its subordinate agencies

to sweep all our traditions into the fire . . . and to direct

fishing expeditions into private papers on the possibility

that they may disclose evidence of crime. . . . /t is contrary

to the first principles of justice to allow a search through

all the respondents’ records, relevant or irrelevant, in the

hope that something will turn up.

17

FTC v. American Tobacco Co., 264 U.S. 298, 305-06 (1924)

(emphasis added) (citations omitted). This decision was cited

with approval by this Court in United States v. Morton Salt Co.,

338 U.S. 632, 652 (1950).

In each of the prior decisions of this Court dealing with the

scope of the IRS summons power, the Court has carefully noted

that the summons in question was narrowly drawn. See, e.g.,

Fisher v. United States, supra; United States v. Bisceglia, 420

U.S. at 146, 150-1.

It is now settled that, when an administrative agency sub-

poenas corporate books or records, the Fourth Amend-

ment requires that the subpoena be sufficiently limited in

scope, relevant in purpose, and specific in directive so that

compliance will not be unreasonably burdensome.

1 K. C. DAVIS, ADMINISTRATIVE LAW TREATISE,

§§ 3.05 at 181, 3.06 at 188-89, 3.12 at 216 (1958).

It has been recognized that the IRS has on occasion proceeded

“with the gracefulness of an elephant in seeking documents from

private parties.” United States v. Coson, 515 F.2d 906 (9th

Cir.) cert. denied, 423 U.S. 927 (1975). Here, the elephant seeks

to stampede with a summons that is not narrowly drawn and seeks

every piece of paper in AY's Amerada file in contravention of the

Fourth Amendment.

CONCLUSION

Based on nothing more than the bald claim that the IRS

needed every piece of paper in AY’s Amerada file, the courts

below enforced a summons requiring production of virtually every

piece of paper in an independent auditor's files relating to its

client. This was done in the face of an express concession by the

government that it did not know what it wanted. Not only did the

IRS fail to meet its burden of establishing relevancy, but its

demand violated the Fourth Amendment.

Accordingly, AY respectfully requests that this Court grant

certiorari to review the conflict between the circuits and to define

the proper standard of judicial review of an IRS summons to a

third-party.

Cart D. Liccio

General Counsel

JOHN E. MATSON

Associate General Counsel

RICHARD I. JANVEY

Associate General Counsel

Attorneys for Cross Petitioner

ARTHUR YOUNG & COMPANY

277 Park Avenue

New York, New York 10172

(212) 407-2367

Dated: November 19, 1982