United States v. Stuart - 489 U.S. 353, 109 S. Ct. 1183 (1989)

Rule:

The Internal Revenue Service (IRS) need not show probable cause to obtain enforcement of an administrative summons issued in connection with a domestic tax investigation. The IRS need only demonstrate good faith in issuing the summons, which the United States Supreme Court defined as the IRS Commissioner must 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. Once the IRS has made such a showing, it is entitled to an enforcement order unless the taxpayer can show that the IRS is attempting to abuse the court's process. Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation. The taxpayer carries the burden of proving an abuse of the court's process.

Facts:

Articles XIX and XXI of the Convention Respecting Double Taxation, March 4, 1942, United States-Canada (56 Stat 1405-1406, TS No. 983) obliged the United States, upon request and consistent with United States revenue laws, to obtain and convey information to Canadian authorities to assist the authorities in determining a Canadian taxpayer's income tax liability. The Canadian Department of National Revenue asked the United States Internal Revenue Service (IRS) to secure and provide pertinent bank records to help determine the Canadian income tax liability of some Canadian citizens who maintained accounts in a bank in the state of Washington. The IRS Director of Foreign Operations determined that the Canadian requests should be honored, and served the bank with administrative summonses for the records, but (1) at the citizens' request, the bank refused to honor the summonses, and (2) the citizens, petitioning the United States District Court for the Western District of Washington to quash the summonses, claimed that, under the circumstances, United States law proscribed the use of the summonses, because 26 USCS 7602(c) prohibited the IRS from issuing such a summons in order to further an IRS investigation of a United States taxpayer when a United States Justice Department referral for criminal prosecution was in effect, and Canada, with respect to each citizen, was in the preliminary stage of a criminal investigation. However, the United States Magistrate who held a consolidated hearing on the citizens' claims expressed the view that, even if the citizens' legal arguments were correct, the citizens had failed to carry their burden of showing that the Canadian investigation had reached a stage equivalent to a Justice Department referral for criminal prosecution. After considering the Magistrate's report and the citizens' objections to it, the District Court ordered the bank to comply with the summonses. On appeal, the United States Court of Appeals for the Ninth Circuit, having previously stayed the enforcement orders pending appeal, then reversed the District Court's orders, and expressed the view that the good-faith requirement for the enforcement of IRS administrative summonses included a legitimate-purpose provision--that there had been no referral for criminal prosecution--which applied to summonses issued under the Convention. Moreover, the appellate court held that the IRS had to make an affirmative statement that the Canadian investigation had not reached a stage analogous to a Justice Department referral for criminal prosecution. The appellate court held that the District Court, on remand, ought to allow the IRS the opportunity to amend its affidavits so as to include the required statement.  The Court granted certiorari for review of the decision of the Ninth Circuit. 

Issue:

Could the IRS issue administrative summons only if it first determined that the Canadian tax investigation had not reached a stage analogous Justice Department referral by the IRS? 

Answer:

No.

Conclusion:

The Court held that, where no Justice Department referral for criminal prosecution was in effect and no domestic tax investigation of any kind was pending with regard to the Canadian citizens, 7602(c) did not impose a requirement for the enforcement of the IRS summonses that the Canadian tax investigation had not reached a stage analogous to a Justice Department referral for criminal prosecution. Moreover, the Court held that Articles XIX and XXI did not of their own force impose such an analogous-stage requirement. So long as the summons met statutory requirements and was issued in good faith, compliance was required, whether or not the Canadian tax investigation was directed toward criminal prosecution under Canadian law. As the information sought in the present case was not within the possession of the American or Canadian tax authorities, was possibly relevant to the computation of respondents' Canadian tax liabilities, and was of the type that could have been obtained by the Canadian authorities under Canadian law, the summons was enforceable.