United States of America and James M. Bittman, Petitioners-appellees-cross Appellant, v. Roger Newman, As President of Imperial Hotel, Inc., and Imperial Hotel, Respondents-appellants-cross Appellees, v. Donald A. Pollack, Intervenor-appellant-cross Appellee.united States of America and James M. Bittman, Petitioners-appellees-cross Appellants, v. Gene Snyder, Individually, Etc., et al., Respondents, v. Donald A. Pollack, Intervenor-appellant-cross Appellee.united States of America and Ronald L. Pomerantz, Petitioners-appellees-cross Appellants, v. Ruth Rothman, Respondent, v. Donald A. Pollack, Intervenor-appellant-cross Appellee, 441 F.2d 165 (5th Cir. 1971)

This case presents aspects of the procedures used to enforce an internal revenue summons. It involves not only the rights of the nontaxpayer witnesses summoned but those of the intervenor taxpayer as well. To wipe out an already worn out cliche, the slate is clean, but not because of a lack of learning earlier recorded. Rather the slate has been wiped clean of a good deal — including, undoubtedly, some of our own declarations in this prolific field. What brings this all about is the decision we have been waiting for in Donaldson,¹  which affirmed our Mercurio decision.² 

In August 1968, the IRS was conducting an investigation into the tax liability of Taxpayer Donald Pollack for the years 1963-65. It served summonses under the authority of 26 U.S.C.A. § 7602³  to compel the production of records in the possession of Ruth Rothman,⁴  Ethel and Gene Snyder,⁵  and Roger Newman as president and on behalf of the Imperial Hotel, Inc.⁶ 

In December 1968 the IRS sought judicial enforcement of the summonses under 26 U.S.C.A. § 7402(b) and § 7604 (a).⁷  To each petition was appended an affidavit that Special Agent Bittman (Agent) was conducting an investigation to determine the correctness of Taxpayer's returns, the failure of the summoned parties to respond, and the necessity of these records to ascertain the tax liability of Taxpayer.

The District Court issued an order directing the respondents to show cause why the summonses should not be enforced.⁸  Newman for himself and for Imperial Hotel contested enforcement.⁹  Following the traditional pattern under the Civil Rules, Newman responded paragraph by paragraph. He admitted each allegation except that he expressly disclaimed knowledge sufficient to permit him to affirm or deny the allegations that this

(i) "* * * is a proceeding brought under authority of Sections 7402(b) and 7604(a) of the Internal Revenue Code of 1954, to judicially enforce an Internal Revenue Service summons"

and that

(ii) "* * * petitioner, [Agent] Bittman, is conducting an investigation for the purpose of ascertaining the correctness of income tax returns filed by Donald A. Pollack for the years 1963 through 1966."

To this, perhaps out of a nostalgic hope that a federal court would heed state pleading practices, he threw in for good measure a blunderbuss denial of all that he had not expressly admitted or qualified.

Taxpayer sought leave to intervene. In the proposed answer to the petition for enforcement, Taxpayer alleged that Agent was in bad faith in issuing summonses, that he was simply looking for evidence to use in a criminal proceeding, that the summons to Newman was overly broad and lacking in relevance to Taxpayer's liability, that Agent lacked personal knowledge of the records requested in the summons, and that the summons would violate the Fourth and Fifth Amendment rights of Taxpayer.

The District Court granted each petition to enforce the summonses. As for the intervention of Taxpayer, the Court allowed intervention and then prescribed what was described as a limited appearance in the proceedings before Agent, although this appearance turned out to be one giving Taxpayer a ringside seat, in which Taxpayer could not only see, look, and listen, but also could speak though no one was bound to listen and certainly not to act.¹⁰ 

Taxpayer and Newman — this always includes the hotel — appeal from the decree of enforcement,¹¹  and the Government cross appeals from the Judge-imposed surveillance rights under Paragraph 2 (see note 10, supra).

There is always the temptation to strike out on the "big issue" but we resist this importunity, not because we would lessen the words for posterity, but rather because the little issues shrink the big ones to like size.

Newman¹²  asserts that before the summons can be enforced, he must be afforded an evidentiary hearing conducted under the Federal Rules of Civil Procedure at which he must be allowed discovery. We reject these contentions and hold that the show cause procedures used to enforce the summonses were adequate, proper, and reveal nothing requiring judicial exploration.

Of course Powell¹³  requires the Government¹⁴  to "show that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and 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." 379 U.S. at 57-58, 85 S. Ct. at 255, 13 L. Ed. 2d at 119. But that is a long way from saying as did the discredited Local 174¹⁵  momentarily¹⁶  that the summoned witness (or taxpayer) can grind it all to a halt if he simply challenges the summons in the enforcement proceeding.

Before the Government is called upon to make this showing, the summoned party must raise in a substantial way the existence of substantial deficiencies¹⁷  in the summons proceedings. Only when so raised is there any need for an evidentiary hearing or — in anticipation of it — the traditional pretrial discovery mechanisms which Roundtree¹⁸  recognizes with appropriate limitations.

To ascertain whether there is any basis for questioning the summons, the traditional show cause order is an effective and appropriate procedural tool. Indeed, it harmonizes procedure with the substantive principle that puts the burden on the summoned party "of showing an abuse of the court's process," Powell (note 17, supra). In no way does its use extinguish the adversary proceeding which the decisions call for. Rather it is a principal means by which the enforcing Court can determine whether there is anything to "hear" and if so to give proper scope and direction to an orderly, but expeditious, adjudication of the points in controversy. And contrary to the contention of both Newman and Taxpayer, that its use somehow destroys the jurisdiction of the enforcing Court,¹⁹  the show cause device is proper and in keeping with the Federal Rules of Civil Procedure since F.R.Civ.P. 81(a) (3) expressly recognizes that in enforcement proceedings the rules apply "except as otherwise provided by statute or by rules of the district court or by order of the court in the proceedings" (emphasis added). And Donaldson spells out that the District Court "may limit the application of the [Federal] rules in a summons proceeding." 400 U.S. at 528-529, 91 S. Ct. at 541, 27 L. Ed. 2d at 588.

Here the response to the show cause order was a juridical blank. The answer admitted all save the inconsequential "lack of knowledge" allegations. Not even in the most conclusory terms did Newman attack the summons proceedings along the Powell lines (see note 17, supra) by charging that there was an improper purpose behind the summons, that there was any harassment, that there was any lack of good faith, or that the summons was overreaching or vague.²⁰  Nor was there even any claim that the summons to supply the documents (see note 6, supra) was overreaching, imposed unreasonable burdens on the producer, or would be difficult or impossible to comply with.

Newman did not raise a single issue. If the objection of the witness is to be helpful to the taxpayer the witness must bear the dual burden of raising and establishing the claimed deficiencies. Otherwise it is the hand of Esau but the voice of Jacob.

The District Court's order enforcing the summons as to Newman is correct and affirmed.

Taxpayer appeals from the order enforcing the summons as to each of the named witnesses. Basic to this is the question of Taxpayer's right to be in the case at all as an intervenor. The Government urges on cross appeal (i) that the District Court erred in permitting intervention in the judicial enforcement proceeding and (ii) Taxpayer should not have granted Paragraph 2 surveillance rights in the agency proceedings. We uphold the Government expressly on (i) and by so doing extinguish Paragraph 2 of the order.

In the hearing to determine intervention in the enforcement proceedings, Taxpayer disclaimed any doctor-patient, attorney-client, or accountant-client relationship with the respondents. His only alleged interest in the records owned and possessed by the respondents is that the records related to his tax liability and that the investigation has the potential of the recommendation of a criminal prosecution of Taxpayer.

In granting intervention we are clear from the language of the motion²¹  and from the terms of the order²²  that the District Judge treated and allowed it as an intervention of right under F.R.Civ. P. 24(a) (2).²³ 

As did the answer of Newman, Taxpayer's proposed (and later filed) answer admitted all allegations save the two insufficient to deny or affirm replies. But it then went on affirmatively to assert bad faith by Agent and that the purpose of the summons proceeding was solely to obtain evidence for criminal prosecution and consequently the summons was not issued for any purposes permitted by §§ 7602, 7402(b), 7604(a).

Decision on intervention of right is easy. If — and the if is a very big one — there is anything left for such intervention as a "protectable interest" beyond a summons for evidence in a case previously recommended for criminal prosecution,²⁴  we are positive that the allegations of this answer, treated with all of the indulgence permitted, cf. Barber v. Motor Vessel "Blue Cat", 5 Cir., 1967, 372 F.2d 626, 1969 A.M.C. 211, are insufficient. We say positive because the allegations found insufficient in Donaldson are not just similar — they are identical — with those stated in Taxpayer's answer with respect to the critical issues here.²⁵  This is, of course, no accident.²⁶ 

Since the Supreme Court said that there could be no mandatory intervention for Donaldson, we must conclude that there can be none for Taxpayer here.

Fleeing before Donaldson's rejection of intervention of right, Taxpayer falls back on permissive intervention under F.R.Civ.P. 24(b) (2).²⁷  The argument has three aspects. First, Donaldson deals with a denial of intervention, not the grant of it. Second, conceding, as we have held, the Judge treated this one as a mandatory intervention, the granting of it with the consequent surveillance privileges indicates that he would have allowed it as a permissive one. And third, in any event, Taxpayer should be allowed an opportunity on remand to persuade the Judge to grant intervention in the exercise of his discretion.

We need not explore these separately because Donaldson — upholding a denial of intervention — compels rejection of intervention on discretionary grounds. In the course of its analysis of the Reisman dictum and the limitation of it to "the situation of a pending criminal charge or, at most, of an investigation solely for criminal purposes," (see Note 24, supra), the Court makes this decisive declaration:

"Any other holding, of course, would thwart and defeat the appropriate investigatory powers which the Congress has placed in `the Secretary or his delegate.'"

400 U.S. at 533, 91 S. Ct. at 544, 27 L. Ed. 2d at 591.

Bearing in mind that the allegations here are the identical ones there, this is a flat holding that on charges of this kind intervention by a taxpayer in a summons proceeding against a third party witness would thwart and defeat the policies and mechanisms ordained by Congress. It is the intervention in such situation, not the technical basis — as of right or permissive — for permitting it which thwarts and defeats. Clearly the Court did not mean to allow a single District Judge in the exercise of a wide and often undefinable discretion to ignore if not judicially repeal policies prescribed by the Congress.

Intervention in these circumstances is to be rejected, not by retrenching from the liberal application of the Federal Rules which the amendments reflected, see Atlantis Development Corp. v. United States, 5 Cir., 1967, 379 F.2d 818. Rather it is because valid Congressional policies would be adversely affected if this "outsider" were permitted to take over the controversy significantly. To permit this "would unwarrantedly cast doubt upon and stultify the Service's every investigatory move." Donaldson, 400 U.S. at 531, 91 S. Ct. at 543, 27 L. Ed. 2d at 589-590.

Since we hold that neither mandatory nor permissive intervention could be allowed in this case it means that Taxpayer ceases to be a party of any kind to the Court enforcement proceedings. With this falls the Paragraph 2 surveillance privileges. This is especially so since none of the summoned witnesses — the sole respondent parties — raised any litigatable objections or sought or showed any need for any other person, counsel or otherwise, to be present.

Additionally we think it appropriate to take notice of the concurring opinion of Mr. Justice Douglas in Donaldson which asserts that in the summons hearing before the agent, Supreme Court "decisions, however, make clear that the taxpayer has the right to be present at the hearing and to confront and cross-examine witnesses and inspect evidence against him," 400 U.S. at 538, 91 S. Ct. at 546, 27 L. Ed. 2d at 593. But from our position as a subordinate appellate Court it is, at best, a prediction as witness the concurring opinion's reliance on dissenting opinions save for Jenkins v. McKeithen, 1969, 395 U.S. 411, 89 S. Ct. 1843, 23 L. Ed. 2d 404.

In Powell, supra, the Supreme Court observed that an internal revenue investigation is analogous to one conducted by a grand jury or by the Federal Trade Commission. Both are primarily investigatory and inquisatorial unlike the Supreme Court ruled the administrative body to be in Jenkins, supra. Like the grand jury, the Internal Revenue Service "merely investigates and reports. It does not try." Hannah v. Larche, 1960, 363 U.S. 420, 449, 80 S. Ct. 1502, 1518, 4 L. Ed. 2d 1307, 1325. And of that institution the Court went on to state:

"it would be profitable at this point to discuss the oldest and, perhaps, the best known of all investigative bodies, the grand jury. It has never been considered necessary to grant a witness summoned before the grand jury the right to refuse to testify merely because he did not have access to the identity and testimony of prior witnesses. Nor has it ever been considered essential that a person being investigated by the grand jury be permitted to come before that body and cross-examine witnesses who may have accused him of wrongdoing. Undoubtedly, the procedural rights claimed by the respondents have not been extended to grand jury hearings because of the disruptive influence their injection would have on the proceedings * * *."

363 U.S. at 449, 80 S. Ct. at 1518, 4 L. Ed. 2d at 1325.

For similar practical considerations the Court has had no difficulty in accommodating the need for effective exploitation of Congressional directives with the demands of the Constitution. Thus, for example, with the Federal Trade Commission whose function was characterized as the "power of inquisition"²⁸  it has squarely held:

"The Federal Trade Commission could not conduct an efficient investigation if persons being investigated were permitted to convert the investigation into a trial. We have found no authorities suggesting that the rules governing Federal Trade Commission investigations violate the Constitution * * *."

363 U.S. at 446, 80 S. Ct. at 1517, 4 L. Ed. 2d at 1324.

See also In re Groban, 1957, 352 U.S. 330, 77 S. Ct. 510, 1 L. Ed. 2d 376, dealing with an investigation before a fire commissioner.

An important factor back of this approach is of course the fact that if accusatory proceedings are begun the person concerned "will be accorded all the traditional judicial safeguards at a subsequent adjudicative proceeding * * *." 363 U.S. at 446, 80 S. Ct. at 1517, 4 L. Ed. 2d at 1324. And this applies in the context of an IRS summons situation as Donaldson makes clear.

"What is obviously meant there is a significantly protectable interest. And the taxpayer, to the extent that he has such a protectable interest, as, for example, by way of privilege, or to the extent he may claim abuse of process, may always assert that interest or that claim in due course at its proper place in any subsequent trial. Cf. United States v. Blue, 384 U.S. 251, 86 S. Ct. 1416, 16 L. Ed. 2d 510 (1966)."

400 U.S. at 531, 91 S. Ct. at 542, 27 L. Ed. 2d at 589.

In today's complex social and governmental structure in which Congressional policies are effectuated through agencies having investigatory functions the results of which most often lead to quasi civil sanctions but which not infrequently lead to criminal prosecutions, this essential role would be frustrated by requiring those persons not parties who might be later affected to be allowed to take an active part through private counsel in such proceedings. Often such proceedings involve a nationwide industry or industry practice and can start out with no fixed goal since many such agencies "can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." Morton Salt, 338 U.S. at 642-643, 70 S. Ct. at 364, 94 L. Ed. at 411.

It would be doctrinaire to single out IRS summons proceedings.²⁹ 

We hold:

(i) The orders enforcing all of the summonses and denying discovery are affirmed.

(ii) Paragraph 2 of the orders granting verbal, visual and audible surveillance appearance privileges to Taxpayer is reversed.

(iii) The orders allowing Taxpayer to intervene are reversed.

Affirmed in part; reversed in part.