Appeal from the United States District Court for the District of Columbia (No. 02ms00144)
Before: Ginsburg, Chief Judge, and Edwards and Tatel,
The opinion of the court was delivered by: Ginsburg, Chief Judge
The district court enforced a summons issued by the Internal Revenue Service that requires Judicial Watch to produce certain documents for an audit. Judicial Watch appeals, arguing the district court should have either quashed the summons or afforded Judicial Watch discovery and an evidentiary hearing on its claim the audit was politically motivated. Judicial Watch also argues the summons violates the First, Fourth, and Fifth Amendments to the Constitution of the United States. For the reasons set forth below, we affirm the order of the district court.
Judicial Watch, a self-described "non-partisan, public interest law firm that uses the courts to fight corruption in the government and legal profession," was founded by attorney Larry Klayman in 1994. It is exempt from the income tax as an educational organization pursuant to § 501(c)(3) of the Internal Revenue Code, which applies to (among others):
Corporations, and any ... foundation, organized and operated exclusively for ... educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation ... and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
In 1997 the attention of the IRS was drawn to Judicial Watch by a letter from a recipient of a Judicial Watch fundraising solicitation who questioned whether the organization is entitled to its tax exemption. In December 1997 a committee of three IRS bureau chiefs reviewed information and documents regarding Judicial Watch's tax-exempt status and approved an audit of its 1996 tax return. The IRS did not notify Judicial Watch that it had been selected for an audit until October 1998.
Judicial Watch's principals immediately objected, both in writing and in meetings with IRS officials, that the audit was an attempt by the Clinton Administration and IRS Commissioner Charles Rossotti to retaliate against the organization for having sued the IRS on behalf of the Western Journalism Center in mid-1998. Judicial Watch also claimed the Clinton Administration and congressional Democrats had pressured the IRS to audit Judicial Watch in retaliation for its having alleged, in a report it sent to the Congress in September 1998, that President Clinton had committed a host of impeachable offenses.
The IRS brought Judicial Watch's claims to the attention of the Treasury Inspector General for Tax Administration (TIGTA), an independent investigative office within the Department of the Treasury. The TIGTA twice investigated whether the IRS pursued the audit for political reasons. The first report (September 1999) found the IRS "recommended ... select[ing Judicial Watch] for audit" in December 1997, that is, before it had sued the IRS or filed its impeachment report, and concluded "[n]o information was developed" to support Judicial Watch's claims. The second report (October 2000) found "no evidence" to support Judicial Watch's "allegation of political intervention" during the audit process. A report by the Staff of the Joint Congressional Committee on Taxation covering the same period likewise found "no credible evidence" that the IRS selected taxpayers for audits "based on the views espoused by [an] organization[ ] or individuals related to the organization." Joint Committee on Taxation, Report of Investigation of Allegations Relating to Internal Revenue Service Handling of Tax-exempt Organization Matters (JCS-3-00), at 6-11, 17-18 (March 2000).
In April 2000 the IRS notified Judicial Watch it was proceeding with the audit, and over the next two years expanded the audit to cover tax years 1996-2000 and to require additional documents. According to the IRS, the audit now addresses whether Judicial Watch: (1) provides a private benefit either to Larry Klayman or to his law firm, Larry Klayman and Associates; (2) is entitled to tax-exempt status either as a private foundation or as a public interest law firm; and (3) earns unrelated business income for which it must pay taxes.
Late in 2000 the IRS agreed to delay the audit until President Clinton left office, in exchange for which Judicial Watch waived any potential statute of limitations defense. In January 2001 the IRS informed Judicial Watch "the audit is now continuing" and asked Judicial Watch to produce certain documents. Judicial Watch again protested, however, and the IRS again delayed the audit. In August 2001 the IRS notified Judicial Watch it was examining the corporation's tax returns and again requested documents.
In September Judicial Watch sued the IRS in the United States District Court for the District of Maryland, seeking damages for constitutional violations allegedly committed by the IRS in pursuing the audit and an injunction barring the IRS from conducting the audit. See Judicial Watch, Inc. v. Rossotti, 217 F. Supp. 2d 618 (D. Md. 2002), aff'd, 317 F.3d 401 (4th Cir. 2003). The IRS then served Judicial Watch with a summons pursuant to 26 U.S.C. § 7602(a)(2), which authorizes the Service "to summon the person liable for tax ... 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." Judicial Watch moved to enjoin or to stay enforcement of the summons, but the ...