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U.S. v. SIDLEY AUSTIN BROWN & WOOD LLP

April 28, 2004.

UNITED STATES OF AMERICA, Petitioner
v.
SIDLEY AUSTIN BROWN & WOOD LLP, Respondent



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.

Analysis

  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 ...


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