The opinion of the court was delivered by: MATHEW KENNELLY, District Judge
MEMORANDUM OPINION AND ORDER
This case arises from an Internal Revenue Service investigation into
the organization and sale of tax shelters by a former partner of Sidley
Austin Brown & Wood (hereinafter "SAB&W") during his tenure at Brown
& Wood, one of the predecessor firms to SAB& W. The United States has
sought enforcement of a summons served on SAB& W to obtain the names of
former clients of the firm. We allowed more than forty former clients
(referred to as the "Does" or "Intervenors") to intervene under Rule
24(b) to challenge the summons on the ground that it is ambiguous. For
the reasons stated below, the Court grants the Government's motion to
enforce the summons and denies the Government's motion to reconsider the
decision to allow intervention.
Before determining whether the summons should be enforced, the
Government urges, the Court should reconsider its decision to allow
SAB&W's former clients to intervene in these proceedings. Specifically,
the Government argues that the Does do not meet the jurisdictional prerequisites for intervention. Because the Court did not fully discuss
the issue of jurisdiction in its opinion permitting the Does to intervene
under Rule 24(b), the Court will do so briefly now.
The Government reasons as follows: in finding the Does do not have a
right to intervene under Rule 24(a)(2), the Court concluded that the Does
did not have a "protectable interest"; "absent a `protectable interest,'
the Does do not have a legally redressable injury"; and "absent a legally
redressable injury, the Court lacks jurisdiction" to consider the Does'
objections to enforcement." U.S. Mot. for Reconsideration at 5. There are
two significant flaws in the Government's logic. First of all, it is an
"open question" in the Seventh Circuit as to "whether Article III
standing is required for permissive intervention under Rule 24(b)."
Transamerica Insurance Co. v. South, 125 F.3d 392, 396 n.4 (7th Cir.
1997). In fact, "it appears that the intervenor-by-permission does not
even have to be a person who would have been a proper party at the
beginning of the suit, since of the two tests for permissive joinder of
parties, a common question of law or fact and some right to relief arising
from the same transaction, only the first is stated as a limitation on
intervention." C. Wright & A. Miller, Federal Practice and Procedure
(Civil) § 1911 (2d ed. 1986). Second, "[t]he standing doctrine, which is
derived from the Article III case or controversy requirements of the
Constitution, applies only to plaintiffs." Wynn v. Carey, 599 F.2d 193,
196 (7th Cir. 1979). Under normal circumstances, a defendant need not
show an injury to be a party to a case and the Intervenors are
effectively defendants in this case, raising defenses to the enforcement
of the summons.
Even if the Does had to demonstrate an injury in fact to intervene,
they have done so. The Government argues that "[t]he law does not
recognize an IRS examination as an injury." U.S. Mot. for Reconsideration
at 5-6. But it is undeniable that "the burden on a taxpayer of being tied up in an audit that may continue for months, if not years, and
may or may not culminate in further civil or criminal proceedings, should
not be underestimated." United States v. Beacon Federal Savings & Loan,
718 F.2d 49, 54 (2d Cir. 1983) (quoting United States v. Schipani,
289 F. Supp. 43, 63 (E.D.N.Y. 1968), aff'd, 414 F.2d 1262 (2d Cir.
1969)). In addition, SAB&W has information about the Does that will be
communicated to the Government if the summons is enforced; the Government
will obtain information about them that it does not now have. Whether or
not the Does have a protectible interest sufficient to establish a right
to intervene under Rule 24(a)(2), they risk a prospective injury
sufficient to create Article III standing, assuming that is a
prerequisite for permissive intervention as a defendant. The Government's
contrary argument amounts to a contention we have already rejected,
namely that if a person cannot intervene as of right in a summons
enforcement action, he cannot intervene at all. The Government has cited
no authority supporting the proposition that Rule 24(b) is wiped from the
books in summons enforcement cases. For these reasons, the Court denies
the Government's motion for reconsideration. We now therefore consider
whether the summons should be enforced.
Before reaching the merits of the Intervenors' opposition to
enforcement, the Court will consider two arguments by the Government that
are in essence procedural. The Government argues that the Intervenors'
ambiguity claim cannot be raised in these proceedings because it is just
an attempt to challenge the issuance of the summons, and such challenges
cannot be raised in enforcement proceedings. A John Doe IRS summons
cannot be issued until a court has determined that
(1) the summons relates to the investigation of
a particular person or ascertainable group or
class of persons, (2) there is a reasonable basis for believing that
such person or group or class of persons may fail or
may have failed to comply with any provision of any
internal revenue law, and
(3) the information sought to be obtained from
the examination of the records or testimony (and
the identity of the person or persons with respect
to whose liability the summons is issued) is not
readily available from other sources.
26 U.S.C. § 7609(f). The Supreme Court has explained that "[w]hat §
7609(f) does is to provide some guarantee that the information that the
IRS seeks through a summons is relevant to a legitimate investigation,
albeit that of an unknown taxpayer." Tiffany Fine Arts, Inc., v. United
States,
469 U.S. 310, 321 (1985). It puts the court in "the place of the
affected taxpayer under §§ 7609(a) and (b) and exerts a restraining
influence on the IRS." Id. In this case, Judge Suzanne Conlon approved
the issuance of the John Doe summons.
The Government argues that the Court cannot revisit Judge Conlon's
determination that the § 7609(f) criteria have been met. The Government
points out that three courts of appeals have held that "the criteria for
the service of a third-party, John Doe summons under section 7609(f)
cannot be collaterally challenged during proceedings to enforce the
summons." United States v. John G. Mutschler & Associates, Inc.,
734 F.2d 363, 366 (8th Cir. 1984); United States v. Samuels, Kramer &
Co., 712 F.2d 1342, 1346 (9th Cir. 1983) ("Notwithstanding the added
protection sections 7609(f) and (h) provide against improper issuance of
John Doe summonses, then, the sections do not expand beyond the Powell
criteria the substantive grounds on which a record-keeping taxpayer can
resist enforcement of a summons once it has been served." (emphasis in
original; citation omitted)); Agricultural Asset Management Co. v. United
States, 688 F.2d 144, 145-46 (2d Cir. 1982) ("[T]he criteria in
26 U.S.C. § 7609(f) governing ex parte issuance of a John Doe summons
pursuant to 26 U.S.C. § 7609(h)(1) are not appropriate grounds to
challenge enforcement of the summons."). If the Intervenors were challenging the summons on the ground that it
failed to "relate[] to the investigation of a[n] . . . ascertainable
group or class of persons," the Government would be correct that the
Intervenors are pursuing an invalid argument against enforcement. But
that is not the Intervenors' claim. This is best illustrated by comparing
the Intervenors' claim of ambiguity to the arguments against enforcement
in the cases cited by the Government. In John G. Mutschler &
Associates, the party opposing enforcement argued that the affidavit
supporting issuance of the summons had been misleading and that the
Government had alternative means of learning the Does' names. In
Samuels, Kramer, the party opposing enforcement attempted to challenge
the factual findings made at the time the summons was issued. And in
Agricultural Asset Management Co., Ag Asset opposed enforcement of the
summons on the ground that investigations of known participants in the
program had not resulted in findings of liability; the Government had
failed to show it had a reasonable basis for doubting the veracity of the
Does' tax returns; and the Government had failed to show it did not
already have the information it sought. In re Agricultural Asset
Management Co., 541 F. Supp. 213, 216 (N.D.N.Y. 1982). In contrast, the
Intervenors argue that the summons is ambiguous. There is no indication
that Judge Conlon addressed that point when she authorized issuance of
the summons.
As we previously noted in our decision permitting intervention,
ambiguity is generally an appropriate defense against enforcement of a
summons. Beacon Federal Savings & Loan, 718 at 54 (quoting S. Rep. No.
938, 94th Cong., 2d Sess. 370 (1976), reprinted in 1976 U.S. Code Cong.
& Ad. News at 3799-800). The Government argues, however, that the
Intervenors cannot challenge enforcement of the summons on the basis of
ambiguity in this case because SAB&W has already compiled a list of
names that they believe to be responsive to the summons. The Intervenors' claim cannot be dismissed so easily.
The Government bases its argument on United States v. Berg, 20 F.3d 304
(7th Cir. 1994), in which the court considered an appeal from a contempt
citation by an individual who refused to comply with a summons directing
him to appear to turn over documents regarding two of his companies,
Particle Data Inc. ("PDF) and Particle Data Laboratories, Ltd. ("PDL").
Berg had assembled the documents he believed were responsive to the
summons, but he refused to turn them over to the Government. On appeal he
argued that he should not have been held in contempt because the
summonses and orders were vague. Berg, 20 F.3d at 310. The court stated
that it would
not entertain an argument concerning the clarity of
the orders as they pertain to PDI and PDL because Berg
had in fact assembled those documents but simply
refused to turn them over to the Service. The fact
that he actually compiled the required materials
renders moot any argument that an ambiguity in the
order prevented him from complying.
Id. at 311. The Government urges the Court to extrapolate from these two
sentences a general rule that arguments of ambiguity are moot if the
summonsed party has assembled documents it believes are responsive to the
summons.
This case exemplifies why such a rule would be untenable in some
situations. The Intervenors do not deny that SAB&W has assembled a list
of names in response to the summons. But they argue that the list is
overinclusive because the summons is ambiguous and SAB&W has an
incentive to read any ambiguities in favor of disclosure in hopes of
pacifying the IRS. The fact that SAB&W has compiled a list of names does
not show that the summons is not vague or ambiguous it may just show
SAB&W's desire to cooperate. Berg does not render moot the Intervenors'
claim of ambiguity. Thus we must address the claim of ambiguity on the merits. In a summary
enforcement proceeding, the initial burden is on the Government to show
(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 already within the Commissioner's
possession, and (4) that the administrative steps
required by the Code have been followed in
particular, that the "Secretary or his delegate,"
after investigation, has determined the further
examination to be necessary and has notified the
taxpayer in writing to that effect.
United States v. Kis,
658 F.2d 526, 536 (7th Cir. 1981) (quoting United
States v. Powell,
379 U.S. 48, 57-58 (1964)). The Government has met this
"slight" burden. Id. Thus the "heavy" burdens of production and of proof
shift to the Intervenors to show that the summons should not be
enforced. Id. at 538 (citation omitted). "The taxpayer must `establish
any defenses or . . . prove that enforcement would constitute an abuse of
the court's process.'" Id. (citation omitted). And "[t]he taxpayer must
do more than just produce evidence that would call into question the
Government's prima facie case. The burden of proof in these contested
areas rests squarely on the taxpayer." Id. at 538-39. The Court sees two
ways of analyzing the Intervenors' claim of ambiguity: as an attempt to
rebut the Government's prima facie case on the issue of relevance or as a
facial challenge to the sufficiency of the summons. But we conclude that
the Intervenors have failed to meet their burden of proof under either
theory.
The Government suggests that the Intervenors' claim of ambiguity is
really a claim that their identities are not relevant to the Government's
investigation a challenge to the Government's prima facie case
for enforcement. Although the Intervenors do not explicitly raise the
issue of relevancy, the Government's interpretation of the Intervenors'
argument is not entirely off the mark. As we mentioned earlier, the
Intervenors' primary concern with the summons as written is that
SAB&W will read the summons overinclusively and provide more names than are necessary. The issue of overinclusiveness is closely
related to the issue of relevance. See United States v. Turner,
480 F.2d 272, 278-79 (7th Cir. 1973) (discussing whether a summons was
too broad in terms of ...