Ryan v. United States

PETITIONER:Ryan
RESPONDENT:United States
LOCATION:Criminal District Court, Parish of New Orleans

DOCKET NO.: 12
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 379 US 61 (1964)
ARGUED: Oct 14, 1964
DECIDED: Nov 23, 1964

Facts of the case

Question

Audio Transcription for Oral Argument – October 14, 1964 in Ryan v. United States

Earl Warren:

Number 12, Bayard Edward Ryan, Petitioner, versus United States.

Mr. Bagby.

William R. Bagby:

Mr. Chief Justice and Associate Justice of the Court, this case involves an interpretation of an act of Congress which relates to examinations and investigations of taxpayers by the Commissioner and his agents.

The particular part of the act of Congress with which we are concerned states restrictions on examination of taxpayers.

No taxpayer shall be subjected to unnecessary examination or investigation.

And only one inspection of the taxpayer’s books or accounts shall be made for each taxable year, unless the Secretary or his delegate after investigation notifies the taxpayer in writing that an additional inspection is necessary.

The precise question concerned here is whether this act of Congress, this section of the statute, requires that an internal revenue agent should establish to the satisfaction of the District Court that a reasonable basis suggest for a suspicion of fraud or probable cause exist to believe the taxpayer was guilty of fraud in order to justify the enforcement of a summons issued by the agent to the taxpayer to produce his books and records and testify for years which are barred by all statutes of limitations and open only in the event of fraud.

The facts in this case are that the taxpayer, Bayard Edward Ryan of Maysville, Kentucky filed timely his federal income tax returns for the years 1942 to 1953 inclusive, and reported a sizable amount of income for those years.

An examination began by a revenue agent of the Commissioner sometime in 1960 of the returns for 1954 to 1958.

At the time I believe of the hearing in the Sixth Circuit in Cincinnati, the case for the years 1954 to 1958 had been settled.

The agent thereupon began investigation of the years 1942 to 1953 and issued a summons requiring the taxpayer to produce the records for those years and to appear and testify.

Earl Warren:

We’ll recess now Mr. —

William R. Bagby:

Yes sir.

Earl Warren:

Mr. Bagby, you may continue.

William R. Bagby:

Mr. Chief Justice, Associate Justices, when we stopped I had stated that the taxpayer had received the summons from the revenue agent and he appeared — but did not produce his books on the advice of counsel on the basis that the assessment of the taxes had been barred by all statutes of limitations except by fraud and he requested on the advice of counsel that some indication be made of the existence of fraud.

Thereupon a complaint was filed in the District Court, in the Eastern District of Kentucky, and the agent alleged that the taxpayer had the books and records for the years 1942 to 1953 in his possession and that the agent had made an estimate of the network assets of the taxpayer and therefore there was a strong suspicion of fraud.

The basis apparently of the complaint was that the examination was relevant and material through his examinations for the years involved, 1942 to 1953.

The taxpayer filed an answer alleging that the books and records for all the years involved were not in existence and that neither were the filed income tax returns in view of the fact that the Congress itself ever so often orders the destruction of individual income tax returns.

The trial was held in the District Court and the District Court took the position and made the ruling that there was an automatic and arbitrary right of the agent to have the books and records of the taxpayer for the years 1942 to 1953 irrespective of fraud.

He held that fraud was not a matter of concern because the statute 7602, gave the agent the automatic right to any books and records.

At the trial of the case however, it was showed that — it was proved that the books and records for the years 1942 to 1946 were not in existence and part of the books for 1947 and 1948 were not in existence.

And that — it was further revealed that the income tax returns themselves for the years 1942 through 1950 were no longer in existence and that the only returns in existence were those for 1951, 1952, and 1953.

Hugo L. Black:

Had it been checked before?

William R. Bagby:

The year 1945 had been checked and the report filed in 1948, none of the other years apparently had ever been examined.

The holding of the District Court —

Potter Stewart:

(Voice Overlap) the Court do with respect to the books which were shown were not in existence and with respect to the years in which it was shown that the income tax returns were not in existence.

Did the Court give that any consideration at all?

William R. Bagby:

The Court gave that there are no consideration, Mr. Justice Stewart.

It was the order as rendered by the Court, and the ruling during the trial was that irrespective of the fact the returns were not in existence and irrespective of the books the order should be that it would cover all books and records.

The Court apparently did not give any consideration at all to Section 7605 (a) or (b), (b) being the requirement that the examination be necessary or putting it the other way that an examination, an unnecessary examination should not be made.

William R. Bagby:

They gave no consideration whatsoever to that part of the statute, but followed strictly Section 7602 which said that an examination could be made.

The books could be had if the examination were relevant to the books and records.

And it goes — it appears to go without saying that any examination for an in — for a year of taxes that the books would be relevant to that examination.

Actually that leads in to the —

John M. Harlan:

(Inaudible)

William R. Bagby:

No.

Your Honor, there is not in this case involved a — any criminal offense of any kind as a matter of fact.

The only question involved is whether the agent has the right to these books and records for the years involved where the statute of limitations have expired.

Now you have two statutes of limitations, a three-year statute of limitations which is ordinary expiration.

You also have the six-year statute.

During the six-year period after return is filed, the Government may set up additional income if the taxpayer has omitted 25% of his income shown in his return.

The — there’s also the six-year statute for criminal prosecution and we don’t have that here involved, but it appears that the Government has argued in its brief that by not allowing the agent to have these books and records for these years that we are restricting him unnecessarily because that’s when he needs the greatest ability to get to the facts about the taxpayer’s income.

However, they threw together the fact that they said in their brief that criminal and civil while the constitution itself or the Fifth Amendment gives the taxpayer the privilege if he feels a prosecution is eminent and he has committed a fraud, he has the privilege to keep his books and records and refuse to give them to the Government agent.

Arthur J. Goldberg:

They support the (Inaudible)?

William R. Bagby:

If you — the District Court in doing the trial stated that even though the books and records were not in existence that didn’t deter the agent from making a demand and bringing the taxpayer into court and receiving an order.

We objected to the order on the grounds that it should not have covered the years during which there were no books.

But the Court said that — at a later time when the agent made the request for the books then it — there was a chance — the opportunity to say, “Well, I don’t have those books and therefore I can’t comply.”

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

Well, I would say it would Your Honor.

Section 7602 is the one which gives the agent the power to secure the books and it was incorporated in the law prior to 7605.

7602 apparently created — a bit of a trouble because of the fact that at that time there were some agents who were apparently taking advantage of this great power which the agent had of bringing in the taxpayer and ordering him to bring in his books.

Thereupon Congress receiving a great many letter complaints from taxpayers throughout the country and must be realized that this is in the early stages of the income tax law and that 1921, the Court — the Congress passed this statute which said that the examinations should not be made of the taxpayers’ books unless there were some necessity.

The words of the Congress were that no taxpayer should be subjected to an unnecessary examination.

Now this Section was passed because of the complaints of taxpayers to the Congress.

And obviously the Congress had probably discussed the matter of protecting taxpayers with the Commissioner.

And normally under the 7602, the restriction of an agent would be by administrative treatment that is if the taxpayer had a complaint he would take it up or perhaps pay now to the district director or with the Commissioner himself.

But that’s a rather slow process and the Congress realized that the taxpayer wanted real protection.

He had to be protected right at the time that the agent knocked at the taxpayer’s front door.

So the Congress passed this, Section 7605 to give the taxpayer the protection that he needed.

Now if it doesn’t mean that, it’s absolutely superfluous, it’s unnecessary because the government agent already had the authority to demand the books through 7602.

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

Well, the —

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

The — there is the possibility, although I would not agree with that possibility because that is the position taken by the Government that this was designed to prevent and protect the taxpayer, suppose you say, from repetitious examinations.

I think that that was the main moving factor in causing the Congress to write this into law.

But the — like itself says that there shall not — the taxpayer shall not be subjected to unnecessary examination or investigation.

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

In any —

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

You’re right Your Honor, but then you go ahead, you’ll notice that the word inspection is used and shall not be — he shall be subjected only one inspection of his books.

Now the words examination and investigation in the ordinary parlance mean or the — of the whole millrun of this examination by an agent from the time he gets the return to make the examination.

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

If it were during —

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

No Your Honor it would not for this reason.

That under 7602, the agent and the Commissioner are authorized to examine the books for purposes of verification.

And I think that’s a very good point because it gets — we get to the — this position.

The backbone of the federal income tax laws is the self-assessment.

Each taxpayer assesses himself and the Congress wants to encourage and protect the taxpayer in this self-assessment.

You — to encourage this self-assessment the agent is authorized to go out and verify the returns, and that’s his purpose during the open years is to verify the return, to examine the return to see if it is in accordance with the taxpayer’s books.

Now after the open years it’s a different situation.

You have the statute of limitations which bars the collection of the tax, and unless there is fraud, unless there is suspicion of fraud that is, there could be no reason to make an examination.

During the open years they have the reason that under this self-assessment system, not only the taxpayer should welcome an examination because they often get an overpayment, get a refund.

And the Government of course gets — collects taxes where there are errors in the favor of the taxpayer, but after the years are barred when the years are only open by fraud, it seems that there’d be no reason to make an examination.

And I think the statute of limitations itself in this particular Act 7605 is to encourage and push the agents into making the examinations during the open years.

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

I — it has a — I don’t believe I understand the question sir.

Arthur J. Goldberg:

(Inaudible) open years, is that as I understand the (Inaudible)?

William R. Bagby:

Oh, I —

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

Indeed yes, indeed yes Your Honor.

He is authorized to make an examination in case of fraud.

And I think even the Government has in its brief said where fraud is present well he more or less assume that there’s a situation which requires an examination of fraud.

Now, it seems that in that line of thinking that why would the Commissioner or a District Director, send out an agent after the years are barred except by fraud to make an examination unless he had some indication that there was fraud.

Now this would not affect the examination or investigation by the Government at all because if there is any seed at all in the hands of the agent or the Commissioner it’s just simply not to go into court and show it.

Arthur J. Goldberg:

Assuming that the (Inaudible)?

William R. Bagby:

It would Your Honor, it would.

And I think that’s the purpose of the Congress in passing this Act and having the statute of limitations that after this statute has barred the years, the taxpayer should have some, as the Congress has said, some piece of mind.

He should have some rest from there on out.

And in that particular situation the Congress itself orders the destruction of the income tax returns periodically.

Now, if they had anticipated that they wanted a spot check as a routine thing, years would be barred except open by fraud and that — and one must not forget that we have the six-year statute put as open, but there’s a 25% omission.

This is beyond that where the years are barred except by fraud that the Congress itself has destroyed the returns, I believe up through 5th — 1955, well that’s eight years from this particular period now, not from this case involved.

Therefore, they themselves revealed an intent that there should not be spot checks because it’s a waste of the Government’s money to go out and make spot checks unless they have some in hand to show fraud.

Because there again, the Congress has placed upon the Government a burden, they have the burden of proof in the case of fraud penalty.

It’s the — and the taxpayer during the years that are open has the burden of proof to establish that the agent is wrong.

And there again, you have the purpose of encouraging and pushing agents into making an examination during the open years so that the taxpayer can after the six years, the honest taxpayer may sit down and not worry so much about his records that he might sleep in peace.

William O. Douglas:

You don’t seem to have printed the fraud section, where is that?

William R. Bagby:

The — you mean the statute itself?

I guess I did not Your Honor.

I believe the Government did in its brief.

Arthur J. Goldberg:

Included (Inaudible) of the Government —

William R. Bagby:

I think the Government has in its brief printed the section —

William O. Douglas:

(Inaudible)

William R. Bagby:

It’s in —

Arthur J. Goldberg:

— 54 with the (Inaudible).

Hugo L. Black:

May I?

What is practically the result of your — what would be the practical result if you should win your case as far as the Government getting to examine the records?

The practical result —

William R. Bagby:

They —

Hugo L. Black:

How do you raise it?

Hugo L. Black:

How would the Government have to raise it?

William R. Bagby:

The — a practical result of the Government is not getting these books would be that they would not — if they wanted the books they’ll probably have to have a hearing to reveal some —

Hugo L. Black:

A judicial hearing?

William R. Bagby:

A judicial hearing.

To reveal some fact, some reasonable basis to show that there was some indication of fraud for the years 1942 to 1953.

Hugo L. Black:

It’s in the District Court?

William R. Bagby:

Would be in the District Court Your Honor.

Hugo L. Black:

Then that could go to the Court of Appeals.

William R. Bagby:

Yes Your Honor.

Hugo L. Black:

And that each one could come up here if they could get them.

William R. Bagby:

Yes, if they could get — yes Your Honor.

Hugo L. Black:

How long has this one been pending?

William R. Bagby:

The examination — there is one examination began in 1960 and the years 1948 or 1954 to 1958 were examined first, and then after that examination was finished then a ten-day letter was issued by the agent.

He and another agent appeared at the doorway of the taxpayer to ask for the books for 1950 — for 1942 to 1953.

The years 1954 to 1958 had long ago been settled and we’re only involved with the barred years.

And this is —

Hugo L. Black:

In that, you mean — you say barred?

William R. Bagby:

For the — barred for the statute of limitations and open only by fraud.

Hugo L. Black:

But they’re not barred if there’s fraud.

William R. Bagby:

They’re not barred, that’s —

Hugo L. Black:

You agree that the Government has the right to — if there’s — it can show fraud to assess the taxes —

William R. Bagby:

You’re right Your Honor.

Hugo L. Black:

— the taxes.

William R. Bagby:

The Government can go back to —

Hugo L. Black:

Your argument is that although the Government has the right to assess the taxes that’s barred by fraud that the general autho — its general authority to investigate the books could not be had until you have a judicial hearing and determine finally once and for all that there’s a ground for the Government to do it.

William R. Bagby:

Precisely Your Honor.

Hugo L. Black:

Then after that it has to go back through that.

William R. Bagby:

Precisely.

Hugo L. Black:

And that would be — then they could go to Court again —

William R. Bagby:

The —

Hugo L. Black:

— in each case, couldn’t it?

William R. Bagby:

Yes Your Honor, they could.

Hugo L. Black:

And it would take — I’m just looking at the practical effect as it — that doesn’t govern it, but it might have some bearing as to what Congress intended to do.

William R. Bagby:

Of course if they had some seeds of thought, some reasonable basis, some fact in the Courts which have been hearing these cases are not been very demanding in their requirements as to how much proof there should be.

And I think leaving it up to the District Courts they will solve this problem where they (Voice Overlap) —

Hugo L. Black:

Well, the defendant — the defendant who is worried about his tax wouldn’t like to leave it up to the District Court, would he?

William R. Bagby:

No sir, Your Honor, but —

Hugo L. Black:

He would delay it as long as he could.

William R. Bagby:

Well —

Hugo L. Black:

Quite actually more — in most instances.

William R. Bagby:

He would.

If he were an honest taxpayer particularly, he wouldn’t want his books examined if he’s been honest.

And of course in this particular case the taxpayer —

Hugo L. Black:

Because he wouldn’t want to be examined if he had been honest?

William R. Bagby:

He should be free, that’s under this inter — (Inaudible) interpretation of the statute.

He’d be — should be free from further bothered — bothered by an agent after the years are barred.

Hugo L. Black:

That’s right.

That’s undoubtedly right, but if the Government has reasonable grounds to believe it, you agree that the Government has a right then to summon them and make them produce the books.

William R. Bagby:

Indeed they have, and Your Honor, this one’s a further factor I might add.

Let’s assume that the Government couldn’t get the books of a taxpayer who perhaps was dishonest.

They can send a statutory notice and have a trial in the United States tax court and issue him a subpoena and he has to then bring his books to court, and at that time the agent will have the opportunity to examine the books.

So that —

Hugo L. Black:

Oh, do you mean — you mean that the Government just by following that course would get the right which you say it cannot get under the other statute.

William R. Bagby:

They’d have the right to subpoena the books and —

Hugo L. Black:

And get them.

William R. Bagby:

— and get the books.

Hugo L. Black:

Without regard to — without requiring that it be proven they had reasonable ground to believe there’s fraud.

William R. Bagby:

Precisely.

Hugo L. Black:

So what’s the practical benefit then if you get out of this — if you win this?

William R. Bagby:

They —

Hugo L. Black:

Except a delay in this case?

William R. Bagby:

The Government has to have some reasonable basis.

If they have that they’d have — they’d be now — having the position to get the books before the District Court, there would be no delay anyway.

Of course if they —

Hugo L. Black:

— not at all, as I understand it, you say they can go into the tax court to get them —

William R. Bagby:

Well that —

Hugo L. Black:

— without going to this prior trial if you —

William R. Bagby:

Well, presuming that they had some basis and the Court didn’t recognize it, then they, thereupon send out a statutory notice.

If the Commission sends a statutory notice and the taxpayer filed a petition over the tax court and the case was set down for trial, of course the Government would have the burden of proof and would have the right to subpoena the books and bring them into court.

Hugo L. Black:

It has the burden of proof to establish —

William R. Bagby:

The fraud.

Hugo L. Black:

The fraud.

William R. Bagby:

In order to get —

Hugo L. Black:

But you’re not saying —

William R. Bagby:

— the tax.

Hugo L. Black:

— it would have the burden of proof to establish that the Government had reasonable grounds to think —

William R. Bagby:

— to make —

Hugo L. Black:

— there was fraud?

William R. Bagby:

No Your Honor, I wouldn’t.

John M. Harlan:

Then it has to start (Inaudible).

William R. Bagby:

Unless they have some basis sir.

John M. Harlan:

What about the — what — supposing the Government decided to take the case before the grand jury, subpoena and argue the books?

You couldn’t be heard to say could you that before a grand jury subpoena is to be honored, the Government had to prove that it had some reasonable basis to take in the case into a grand jury?

William R. Bagby:

You probably would have a privilege of a pleading of the Fifth Amendment but —

John M. Harlan:

(Inaudible)

William R. Bagby:

You have that here, that’s right, but you wouldn’t have it before the grand jury if they were —

John M. Harlan:

So the Government could, if under your view, you felt the delay whereas in filed too long on the hearings and appeals, whatnot, just as to United States couldn’t bring the case before the grand jury, that your books without anymore ado?

William O. Douglas:

I gather that the trouble is that without your books they don’t have enough evidence to determine the case before the grand jury.

William R. Bagby:

In some instance that’s true.

In most instances of this kind, this type of a case, the Government sets up a net worth and most of the proof is by reason of third party records.

William R. Bagby:

Now, we don’t have the problem of third party here which we find in some cases.

They can get the records of third parties to establish net worth and it’s obvious here that that’s the basis on which they were claiming that there was a case.

That they were seeking — they sought third party records.

Hugo L. Black:

Are you entitled to protect (Inaudible) as lawyer before the Commissioner for this — of this kind of a — ask him to bring into court — (Inaudible) this question?

William R. Bagby:

No.

The — he is not Your Honor.

He’s entitled to a lawyer yes, but it won’t necessary follow that he will have a lawyer because very often an agent will arrive at the door of the taxpayer and ask for the books, and of course he has a right to a lawyer.

But the agent —

Hugo L. Black:

That’s when the agent gets the man, gets his books.

Does he have a right to defend himself here against an examination by the Commissioner the same as though if it was on a court?

William R. Bagby:

He has the right to counsel, the Commissioner —

Hugo L. Black:

Yes, before the grand jury.

William R. Bagby:

The Commissioner in those — well, recognized agents will say, “You have the right to counsel particularly in a case of a fraud case”.

If a fraud’s involved they will say, “Well, you have the right to counsel.”

And they will usually forewarn the taxpayer that whatever he says will be used against him at a later time of the trial, and that’s particularly true in the criminal case.

Hugo L. Black:

Does that — does he also have the right to require a open hearing before the Commission or can they take him in private?

William R. Bagby:

Well, they can take him in private.

They don’t — there’s no reason to have a — there’s no — he has no right to an open hearing and he —

Hugo L. Black:

Are you sure about that?

William R. Bagby:

The only way he’d have a right to an open hearing would be to refuse his — to give the tax — the agent his books, and then the process is that the agent goes in, files a complaint asking the District Court for an order to require the taxpayer to bring in his books.

Hugo L. Black:

That would be an open hearing?

William R. Bagby:

That would be an open hearing.

Hugo L. Black:

So, if you do get an open hearing then, you would not be able to get one before the grand jury.

William R. Bagby:

He would not.

Byron R. White:

Counsel, you say that to get the post-statute examination there must have been an investigation in some suspicion of fraud.

For conceding that, you also say however that when you go — when you want — when the agent wants to enforce the order he must show not only that there was an investigation.

And if they do have a suspicion of fraud which has been confirmed by his superior but that he must reveal the facts upon which that judgment is based.

William R. Bagby:

I believe that the Courts have not required the Government to prove fraud but to —

Byron R. White:

I understand.

William R. Bagby:

— to prove some (Voice Overlap) —

Byron R. White:

I understand that, but you say that the mere assertion by the agent that — well we have investigated, we do suspect fraud therefore we want the books.

You say that isn’t enough?

William R. Bagby:

You’re right Your Honor.

I say that that’s enough — not enough.

In this particular case they agent said that he had a tentative net worth of assets.

Well, that really means nothing because —

Byron R. White:

But it’s clear from this record that the agent or someone had investigated it and that they did suspect fraud, and that one of his superiors had ordered him to get the books.

William R. Bagby:

I would say —

Byron R. White:

That much is clear, isn’t it?

William R. Bagby:

I would say that’s right that they had — someone had the opinion that there was a possibility of finding fraud and that I won’t say that they had a reasonable basis because there we never — I never had the opportunity to ask the agent any questions that would lead the Court to —

Byron R. White:

And what made you to believe that the (Inaudible) statute requires anymore than this assertion that we have investigated and we do suspect fraud?

William R. Bagby:

Congress in 7605 having passed it after 7602 had its run for two or three years and they said that no tax — this was entitled restrictions upon examination.

Byron R. White:

I understand that, but that — but the —

William R. Bagby:

Well —

Byron R. White:

It would be perfectly — it requires something other than what is required before the statute has run if you require the agent to assert that he’s investigated and he suspect fraud?

William R. Bagby:

Well, the —

Byron R. White:

I mean what ground is there to — in 7605, to show that something beyond that assertion is required?

Certainly the assertion may be required.

William R. Bagby:

I think the — that combined that you must put that in the whole sphere of the income tax law.

You have this 7605 which says the taxpayer shall not be subjected to an unnecessary examination.

Now, that must mean more than something just that the examination of these books of this taxpayer is relevant to the agent’s examination.

That must mean something more than that.

Byron R. White:

I think — my — I would assume that it does.

At least it assumes that at least that the Government must come in and say, “This isn’t just relevant but we’ve investigated and we suspect fraud.

We think there’s a reasonable grounds for fraud Your Honor.”

Now you say that is enough?

William R. Bagby:

Well that’s merely an expression, an opinion of the agent without any basis of facts for it.

Byron R. White:

That’s right.

William R. Bagby:

And the —

Byron R. White:

(Inaudible)

William R. Bagby:

We feel that the statute of limitations and the — these other factors the Govt — the Congress ordering the destruction of the income tax returns.

And this whole system of self-assessment is based upon the honesty of the ordinary taxpayer.

And I think the statistics show that the average taxpayer wants to be honest and he is honest.

And the purpose of this interpretation is fitted into the picture of the statute of limitation is to give the taxpayer some protection from a personal motive on the part of the agent.

And in this particular case, we didn’t have the opportunity to show the personal motive.

We made an offer of certain indictments with respect to a man the name of Kimble.

Mr. Kimble had been indicted.

Mr. Kimble’s brother lived next to the examining agent in Louisville.

Louisville and Maysville are fairly far apart.

We didn’t have the opportunity to show a personal motive.

I think the reason you have here you say an unnecessary examination.

It’s almost impossible to show a personal motive on the part of an agent.

And unless you say that the agents must show some reasonable basis, you make it impossible to show that there is a personal motive.

John M. Harlan:

(Inaudible) is that right, to try out the issue of good faith of determination (Inaudible)?

William R. Bagby:

To that extent Your Honor that’s correct that if —

John M. Harlan:

At a trial, wouldn’t?

William R. Bagby:

Sir?

John M. Harlan:

It would be quite a trial.

William R. Bagby:

Well, the limiting — the trial solely to the fact of — that there’s no reasonable basis to make the examination.

That in itself would eliminate any prolonged trial if we file this —

William J. Brennan, Jr.:

Tell me again, can these revenue agents issue the subpoenas as — just at their own (Voice Overlap) —

William R. Bagby:

At their — all they had to do is take the form and sign their name.

John M. Harlan:

And they won’t have to check —

(Inaudible)

John M. Harlan:

Does they check with any superior or —

William R. Bagby:

Not necessarily.

They can issue a summons on their own without —

John M. Harlan:

What?

William R. Bagby:

— taking it up —

John M. Harlan:

You mean according to the statute?

William R. Bagby:

In accordance with the statute.

John M. Harlan:

Well, what — is there an administrative factor of some kind that prevents that?

William R. Bagby:

I don’t think there is if — during the examination they have the authority to go out and in this particular case, they issued the summons, I think the next day after they made the demand for the books.

Byron R. White:

Well, an agent isn’t an authorized representative of the Commissioner for this purpose, does he?

William R. Bagby:

Yes, he is as far as the summons is concerned.

Byron R. White:

A particular agent?

William R. Bagby:

Any agent may issue a summons.

(Inaudible)

William R. Bagby:

Not in the 76 — oh!

Yes, under 7602, he may issue the summons.

Under 7605 —

Ask you to hire — issue on it, didn’t he?

William R. Bagby:

If he’s asking for an inspection of the books for the second time then he has to get the Commissioner’s authorization to request those books.

And then the Commissioner as an ordinary practice writes a letter to the taxpayer requesting a second inspection of the books.

Here you had a second inspection on 1945.

William R. Bagby:

On 1945 and as a matter of fact the Government itself didn’t realize that there haven’t been that in the (Voice Overlap) —

Coming back to some of Justice White’s questions, the agent as I understand from what you say, inform the Court that he had conducted a net worth computation on the 1954 to 1958 taxes.

William R. Bagby:

And then —

From that computation that he suspected fraud in the previous years, is that true?

William R. Bagby:

He didn’t say he’s made a net worth computation Your Honor.

He said that he had — I believe his words were that he had —

Made it of those years after all.

William R. Bagby:

For these years he had made a tentative net worth of the assets.

So —

Tom C. Clark:

Yes.

William R. Bagby:

— relative only to the net worth assets.

Now, the assets without liabilities doesn’t mean anything at all.

But if those were so large and untoward — might not play — might not he then go to the returns which he evidently did, that it were filed for the previous years and he saw that they were small perhaps and this large accumulation of net worth during 1954 to 1958 might lead to suspicion of some either error, defalcation or some fraud or something in the previous returns.

William R. Bagby:

Well, that’s very possible that he would see in 1954 to 1958.

However the years 1954 to 1958 were settled irrespective of any claim of fraud for the prior years then were —

You say a net comp– in a net worth, you’d have to go back to a period which you could prove exactly how much money you had or you had nothing on the other, then you deal forward.

Do you remember in a case I happen to write in Colorado, I forgot the name of it now —

William R. Bagby:

Precisely.

Now you also, as I say had the liabilities and you — as you have said, you’d have returns to compare this increase in net worth.

An increase in net worth is the important item.

It’s simple enough for an agent to come in and set forth a net worth, but for an agent to say this has a net worth assets means nothing, because you have to show a net worth — an increase in the net worth during the years over and beyond what has been reported in the returns for the respective years.

In this particular case the agent didn’t even have the returns.

The returns for the years 1942 to 1950 are not in existence.

The years for 1951, two and three were in existence but the prior years were not.

Therefore, it would appear that he couldn’t have had any reasonable basis to suspect fraud.

Here, he didn’t have to retained returns.

He didn’t had the file returns, that is —

Had been there but destroyed.

William R. Bagby:

Been destroyed.

Arthur J. Goldberg:

(Inaudible)

But here you’re about to (Inaudible).

William R. Bagby:

Yes.

Arthur J. Goldberg:

And maybe (Inaudible) Justice Clark, the judges dispute (Inaudible) discussion for a fraud.

That is still (Inaudible) —

William R. Bagby:

Right.

Arthur J. Goldberg:

(Inaudible)

William R. Bagby:

I think it is Your Honor, and I don’t think the District Courts are going to go off the leading path too far in demanding that the Government proved there were cases of fraud.

They will hear the case and receive as a minimum amount of facts to satisfy them that there’s not any personal motive involved.

That there is some small basis for a belief that this taxpayer has committed fraud and that is for the purpose of protecting honest taxpayers from a personal grudge and to let this thing rest after so many years that Congress itself destroying the returns.

John M. Harlan:

Of course, in the sentence of your — your view of the matter require more than it would be required by the Government (Inaudible) would satisfy your review.

William R. Bagby:

I would say that —

John M. Harlan:

Is that issue have an adversary hearing with the counsel, hear the appeals up to this Court possibly?

William R. Bagby:

I would say that that’s — you’re very right.

This of course, you’re dealing here with a problem which involves every person practically in the United States.

You have a problem here that concerns every taxpayer and that’s most of us in the country and in the other you’re not dealing with very many people.

William R. Bagby:

It’s a limited number of people applying from year to year.

Income taxes are something that we have with us constantly every minute.

Here, we have the current year then we have the next year and it’s a matter of applying to a great millions of people who you find do worry about whether or not they made some small error in their returns which someone may feel destroyed.

I think this broad application to millions of people would justify requiring that some showing be made and perhaps a little more of a showing than there is in the case as you suggested about a search warrant.

Earl Warren:

Mr. Bagby, if you want three or four minutes for rebuttal, you may have it.

William R. Bagby:

Thank you sir.

Earl Warren:

Mr. Terris.

Bruce J. Terris:

Mr. Chief Justice, may it please the Court.

That I could just point to you a couple of the relevant facts which may have been a little clouded.

One is that none of the years which are involved here was there a prior inspection of the taxpayer’s records.

We originally asked for 1945, we do not press that any longer.

There was a prior inspection.

We have not filed a necessary notice under Section 7605 (b) and we are not now entitled those records unless such a notice is filed, and has not yet been filed.

Tom C. Clark:

Who had the authority to issue the screening?

Bruce J. Terris:

The order — a summons may be issued by ordinary agents and the purpose of Section 7605 (b) was that the Congress thought that ordinary agent shouldn’t have the authority to issue summonses when there’d already been a prior inspection of the records.

And so what the Congress did is pick out this one group where there’d been a prior inspection and said for that purpose you’ve got to have — there’s got to be a finding by either the Commissioner or his delegate and —

That’s not here though.

Bruce J. Terris:

That’s not this case.

That is not here.

Bruce J. Terris:

That is the Powell case.

And the delegate and — as under the present regulations as the Regional Commissioner, there are eight Regional Commissioners and then there’s an additional person in charge of —

Can I (Voice Overlap) —

Bruce J. Terris:

— overseas operations, so there are nine people that can issue that kind of a notice.

John M. Harlan:

Can I get one thing clear on this, perhaps as I understand it.

Take the period after the statute of limitations such as we have here.

Now, can an agent without anything more suddenly decide the issue in summons or does he have to get a prior authority to start investigating a fraud finding before you can issue as fraud?

Bruce J. Terris:

Well, he has a supervisor that assigns in the case, but it can be started.

My understanding is on that level, that’s right Your Honor.

John M. Harlan:

By the agent?

Bruce J. Terris:

That’s right.

John M. Harlan:

Well, does the agent —

Bruce J. Terris:

Well, a supervisor.

Between him and his immediate supervisor who, I am told, covers fraud investigations in a given area.

It’s not done alone by the very low assertion and it is one step above that, that’s right Your Honor.

Potter Stewart:

But under his general authority, his agent, one of his functions is to (Voice Overlap) —

Bruce J. Terris:

That’s where the issue comes.

Potter Stewart:

— is to investigate fraud and to do that, he issues summon.

Bruce J. Terris:

That’s right.

And —

But he has the issue in a case —

Potter Stewart:

He does them all the time.

Tom C. Clark:

Assigned to him.

Potter Stewart:

That’s right.

That’s right, its done.

If assigned to him it’s going to be assigned to another agent and he’ll do it.

Bruce J. Terris:

That’s right, but it — all I’m trying to say —

Potter Stewart:

The agents do it and they do it all the time.

Bruce J. Terris:

The agents do it all the time.

Potter Stewart:

(Voice Overlap)

Bruce J. Terris:

All we’re trying to say that the case is not completely his case.

He’s got — it’s done in conjunction with some —

William J. Brennan, Jr.:

Well Mr. Terris, as to a time barred case, I would suppose this gets into the category of a revived case only if for some reason rather it’s been in the category of cases where perhaps there’s fraud which permits — they open the time bar, wouldn’t it be?

Bruce J. Terris:

The only way that after six years has ran, the only way that the Government can assess taxes is on the basis of fraud that’s right when they all limit assessment counts.

William J. Brennan, Jr.:

Well, I’m just finding to get the administrative procedure.

If it’s a time barred case how would the agent get it, unless somehow it had the — that year had been picked up for some reason —

Bruce J. Terris:

Oh, yes.

That’s right it is picked up for some reason.

William J. Brennan, Jr.:

And the reason would be suspected fraud, would it?

Bruce J. Terris:

That’s right.

William J. Brennan, Jr.:

And this would be something as to which the agent assigned the case would have no policy decision to make, would he?

Bruce J. Terris:

Well, between the two of them they would decide whether the information they got was worthless, they didn’t have anything or to make it worth their time and effort or if it was worth pursuant.

William J. Brennan, Jr.:

What I’m trying to get to, I find it hard to understand how the agent assigned to work on the case would have anything to do with his getting the case assigned to him.

Bruce J. Terris:

Well what happens is, there are all kinds of ways.

There maybe an informant.

There maybe reading the newspapers that suddenly somebody has come up with an awful lot of money that’s been filing returns that don’t show he had very much income.

There maybe another — some other taxpayer’s return may be being audited and something occurs in that return which shun — it sheds light out this particular taxpayer.

Some large payments.

Bruce J. Terris:

That’s correct.

That’s right.

William J. Brennan, Jr.:

And in that circumstance, may the agent then without consulting anyone?

Bruce J. Terris:

No, what I’m saying is the supervisor and the agent —

William J. Brennan, Jr.:

That’s what I’ve been saying.

Bruce J. Terris:

— between the two of them — well, the supervisor assigns it to the agent.

The agent then goes out and pursues an investigation.

One of the crucial powers that he has and duties is to issue summonses both to taxpayers and to third parties, to see records to see whether fraud has been committed.

He doesn’t know at that point whether there has been any fraud.

An agent couldn’t just indiscriminately run around issuing subpoenas on cases that had not been assigned to him.

Bruce J. Terris:

That’s right Your Honor.

And I’m told that the Internal Revenue Service does not do random sampling after the three years has run.

Now this makes perfect sense.

It’s a bit — it would be really a waste of time and effort.

You have a limited number of agents and if you’re going to do random sampling, you would do it prior to the three-year period because virtually any error you pick up during that period you can do something about it and after the three-year period most of the things that you find you can’t do anything about.

So they don’t do random sampling and I don’t think that they would make any sense for them to do so.

Hugo L. Black:

I seem to recall having read that rather detailed regulations on the subject to the issuance of these — is that wrong, in your book of regulation?

Bruce J. Terris:

I don’t — I think that’s (Inaudible) — is that so?

There are regulations on it but they don’t have very detailed — in my understanding is they’re not very detailed in what the precise standards are.

There is —

Hugo L. Black:

I wrote something on it several years ago, I don’t recall which case, but I read them then.

Bruce J. Terris:

Oh, I’ve —

Hugo L. Black:

Or rather detailed in the way you have to conduct these investiga — examinations, how they’re issued and so forth.

Bruce J. Terris:

Well there are, Your Honor.

All I’m trying to say is that they’re not — I don’t think it goes into tremendous detail of what kind of information that you have to have in order to justify a summons, but you — that they — it has to be that there — there has to be a reason, a suspicion that there’s been fraud.

Hugo L. Black:

I mean to —

John M. Harlan:

Under your view — in your view of the statute in terms, what the — what would the situation be if the taxpayer comes in and says, “Well, this agent tried to shake me down in a claim of fraud and asked me to give him a bribe.

I declined to do it and that was followed by a subpoena for all my books.”

Could he prove that to the Court?

Bruce J. Terris:

I think he could Your Honor.

John M. Harlan:

Before in court?

Bruce J. Terris:

And I think the — yes, I think he could.

And I think the Sixth Circuit in this case recognize that.

John M. Harlan:

(Inaudible)

Potter Stewart:

Page 70 it’s very clear.

Bruce J. Terris:

That’s right.

That the — that — if that’s really the allegation, now, there seems to be that allega — petitioner’s counsel seems to be making that allegation here.

It’s not too clear what the allegation is but he seems to be making it.

However, he had — that certainly wasn’t his argument when the case was brought to this Court and it’s not clear on his brief exactly what the allegations.

He seems to say well, there might’ve been something wrong on that side that there may have been bad faith.

Therefore, we ought to have the right to have a probable cause standard.

I don’t think those two things follow.

Our contention is, if he can chose — show us a shakedown that’s quite a different thing than requiring the Government to show probable cause.

We presume in the ordinary case there has to be a shakedown.

Potter Stewart:

There is some talk to the — some talk in the hearing about the — Mr. Kimble and his brother Mr. Chester Kimble?

That’s the matter to which you were referring?

Bruce J. Terris:

That’s right and there’s another man too that I gather from reading it, what he’s aiming at is that —

Potter Stewart:

Some indication of a bad faith on the part of (Inaudible) —

Bruce J. Terris:

Yes.

That’s right.

It doesn’t seem to be spelled out in the record.

He never states what his theory is.

Potter Stewart:

Was he prevented from exploring that before the District Court?

Potter Stewart:

He was —

Bruce J. Terris:

He —

Potter Stewart:

(Voice Overlap)

Bruce J. Terris:

He would — he was Your Honor.

He doesn’t seem to state his theory.

I don’t know.

He was prevented.

I must say that it is irrelevant on the phase of it what —

I mean, (Voice Overlap) —

Bruce J. Terris:

— where there is other information is about.

He never actually states, you know, that this is what I’m driving at.

This is why I’m offering this evidence.

Perhaps if he had clearly stated that he was attempting to prove bad faith that the District Court would’ve said, “Well, then we’ll hear this evidence.”

As I understand the petitioner’s basic argument, isn’t — it isn’t this bad faith being other than maybe as it colors the case a little bit.

He’s arguing that the Government has to show probable cause.

And I take it that the standard is probable cause under the Fourth Amendment.

The First Circuit which is the circuit other than the third which most clearly agrees with him, it does use Fourth Amendment cases.

And I take it, what he’s doing and his combining this Fourth Amendment standard then with much more loose procedures, he’s going to get, you know, and he’s going to end up — this has been suggested here by Your Honors with fairly quite a strict standard of proof by the Government and then a full adversary trial, and he — as he wants it, he wants to cross-examine the Government witnesses.

I take it, if he wants to put on witnesses of his own, get an appeal and ultimately come to this Court before the Government can continue with its investigation.

Potter Stewart:

Well, now Mr. Terris, I thought that the Government conceded that under 7604 (a), if I have the right Section, providing that in the event of a refusal to comply with the summons the Government goes into the District Court.

I thought you conceded —

Bruce J. Terris:

Oh, we do.

Potter Stewart:

— that he is entitled to a hearing.

Bruce J. Terris:

Oh, we do Your Honor, the —

Potter Stewart:

So this is not ex parte like a search warrant.

Bruce J. Terris:

No, no.

We fully admit he’s entitled to a hearing.

The question is what is he entitled to a hearing on?Is he entitled to a miniature trial before —

Potter Stewart:

Well, a hearing normally implies the right to cross-examine, does it?

Bruce J. Terris:

Well, cross-examine on issues which may be brought up at the hearing —

Potter Stewart:

And you say the permissible issues are what?

Bruce J. Terris:

Well, Your Honor in our reply brief in the Powell case, we go through a long list of permissible issues based on lower court decisions whether the constitutional rights of the person have been violated, example the Fifth Amendment.

Whether the attorney-client privilege is involved, whether the — under Section 7602, the materials are relevant, immaterial to the inquiry.

Where the req —

William O. Douglas:

Is this a substantial group of cases each year?

They have — are they in the tens of thousands or are they in the thousands or the hundreds or the dozen?

Bruce J. Terris:

It depends a little bit on what — on the — on what you consider the category.

William O. Douglas:

The category is half the cases that we have then 12 and 54 where the Government is asking for an order directing the production of books.

Bruce J. Terris:

Well, the — as far —

William O. Douglas:

(Voice Overlap)

Bruce J. Terris:

— as we can — as far — not —

William O. Douglas:

Over a close period, cover a close period.

Bruce J. Terris:

(Inaudible) and in a closed period then.

The best we can estimate and it is just an estimate, is approximately a hundred cases.

However, the significant thing is and this is very important, is that the numbers have been steadily growing and it’s been largely growing because of the litigation on this issue.

The issue of whether the Government is going to have to prove part of its case before it can continue investigation.If this Court holds that, I think it’s not —

Well, that’s not here — without remedy because we’re not getting this with the problem of the constitutional level, are we?

Bruce J. Terris:

No we’re not dealing with the constitutional problem at all Your Honor.

Neither this case nor the Powell case raises that question.

I only alluded to the Fourth Amendment because it appears that the standard that’s being argued for under Section 7605 (b) or the statute of limitations or whatever.

It is apparently the probable cause standard in the Fourth Amendment, but if they are successful in that, going back to Your Honor’s question, I think it’s a very good guess that that amount of litigation in this field is going to expand very, very greatly.

People are not going to be very willing to obey summonses.

Now, these other category of —

Potter Stewart:

You say you have estimated that there are probably more or less a hundred cases a year.

Bruce J. Terris:

Yes.

Potter Stewart:

Where people have resisted summons.

Bruce J. Terris:

These are fraud cases.

Potter Stewart:

And I supposed there was thousands if not hundred of thousands of cases where people have —

Bruce J. Terris:

Well, —

Potter Stewart:

— just obeyed the summons, is that —

Bruce J. Terris:

— it appears that the number of summons is issued in a year, it’s around 40,000.

Approximately — and these are really all estimates —

William J. Brennan, Jr.:

Is that a part of (Inaudible)?

Bruce J. Terris:

No, no.

In toto, I’m saying that about a thousand of them, of those are resisted.

Hugo L. Black:

A thousand of the 40?

Bruce J. Terris:

A thousand out of the 40,000, that’s right, somewhere around that.

About a hundred of these thousand are in time barred.

Potter Stewart:

Yes.

And you don’t know how many of the 39,000 which are not resisted are time barred, is that right?

Bruce J. Terris:

That’s right, I don’t — perhaps — maybe it’s the — roughly the same percentage, I’m not sure.

Maybe more people that are — in a fraud investigation resist.

What I’m — the point I’m trying to make though —

(Inaudible)

Bruce J. Terris:

— is does — it does.

The point I’m tying to make is these other defenses which we admit can be made at the hearing are defenses which are largely legal in which the — in most instances there are just isn’t any decent claim by the taxpayer.

Arthur J. Goldberg:

Mr. Terris it depends (Inaudible).

The Government have to see the books (Inaudible) have the end of it (Voice Overlap) —

Bruce J. Terris:

That’s pretty much the end of the matter, that’s right.

Most of these defenses are now ones that would arise in the ordinary case.

Now sometimes they do.

If we asked for — I suppose if we have one particular indication of fraud about General Motors and we asked to have all of General Motors’ books brought in I think there would be a very substantial question whether we would be able to get them.

And that could be litigated at the hearing there’s no doubt about that.

Arthur J. Goldberg:

Nevertheless, (Inaudible).

Bruce J. Terris:

That’s right.

Arthur J. Goldberg:

(Inaudible)

Bruce J. Terris:

That’s right, it isn’t done.

It isn’t done, but that — the fact that it isn’t done only shows that the service uses prudence in deciding the breadth of its summonses.

Byron R. White:

But you wouldn’t have to do — show, I suppose, that you had made an investigation that had arrived to at least a suspicion of fraud, it may not have to go to farther but wouldn’t you think that —

Bruce J. Terris:

Well, Your Honor our initial position is we wouldn’t, however if — and when I go through the section by section of the code I think we can establish that.

Byron R. White:

Isn’t that the routine though that your agent — the agent does (Inaudible) —

Bruce J. Terris:

Normally yes.

Yes Your Honor, yes.

Byron R. White:

(Inaudible) against fraud.

Bruce J. Terris:

Yes Your Honor it would —

Byron R. White:

I mean, that (Inaudible).

Bruce J. Terris:

That’s right.

He was done — It was done in this case.

It was done in the Powell case.

The complaint here says that on the basis of net worth computations, reasonable grounds exist for strong suspicion.

Byron R. White:

And then he would decline to testify as to what the grounds for suspicions.

Bruce J. Terris:

Well here he did testify a little bit.

Byron R. White:

Could he —

Bruce J. Terris:

It’s pretty general.

Byron R. White:

You think he could be able to?

Bruce J. Terris:

He should be able to — that’s right.

In Powell he didn’t.

In other cases which we’ve won in the Courts of Appeals he has not testified, the Foster case in the Second Circuit.

I’d like to emphasize that the position that the Government takes in this case, we don’t believe it’s a noble one in the area of administrative subpoenas.

And I’d like to point to several decisions of this Court which have dealt with administrative subpoenas issued by other agencies.

One is United States versus Martin Salt Company and that’s in 338 United States and involved the Federal Trade Commission.

Arthur J. Goldberg:

Do you have to have that here (Inaudible)?

Bruce J. Terris:

No.

Now, let me say what the purpose of citing these cases is.

It’s not — these cases are not dispositive of the entire litigation.

What they do show is that this basic power given in Section 7602 to issue summonses that that power does not require any showing of probable cause.

That all we have to show is as the statute says that the records sought are relevant and material, but that — that that’s the basic scheme for administrative agencies in this country.

That’s why I would cite Martin Salt Company for, Oklahoma Press Publishing Company, Andy Card Johnson & Perkins, Civil Aeronautics Board and Herman, and all these cases are quite clear that the basic understanding for administrative agencies is that all they have to do is show relevancy and materiality.

And I may say what — there is significant in Martin Salt Company, the administrative power is analogized to the power of the grand jury.

Now, passing that and starting from the point of view that Section 7602 does give this general power to investigate on the basis merely of relevancy and materiality no showing whatsoever by the Government is necessary.

Bruce J. Terris:

Then we get to the two sections of the code which are argued by the taxpayer to limit this power.

And it seems to me here that theses decisions of this Court established that the taxpayer then has the burden of showing that in this field, Congress has done something different.

It is more narrowly limited the Commissioner than it has limited other administrative agencies.

The taxpayer has this burden.

I think that he has to show therefore that these statutes on which he relies were clearly intended to limit the power.

So let’s go first to Section 7605 (b) and that’s on — set forth on page 27 of the Government’s brief in Powell and it’s also in the last page of petitioner’s brief here on the Ryan case.

And I think it’s important enough and short enough to be worth reading.

It says no (Inaudible) — it starts out, “Restrictions on examination of taxpayer.

No taxpayer shall be subjected to unnecessary examination or investigations and only one inspection of the taxpayer’s books of account shall be made for each taxable year, unless the taxpayer request otherwise or unless the secretary or his delegate parenthetically the Regional Commissioner after investigation notifies the taxpayer in writing that an additional inspection is necessary.”

Now the taxpayer reads this section as having two separate provisions.

One is that an examination can’t be unnecessary.

The second there can’t be a second investigation except for under certain conditions.

Now the second part of the statute merely doesn’t apply to him at all.

There hasn’t been a second inspection.

Therefore what he is arguing is that the provision about investigations not being unnecessary incorporates the standard of probable cause.

Now our first argument is that there are — there is not.

This section can not be divided into two pieces.

Now looking just in its language I think you could reasonably argue either way.

You could say that the conjunction then separates out two separate sections or there is one.

However, we think that even looking to the language alone that what Congress was apparently intending to do was to prevent second investigations.

We think this is partic —

Potter Stewart:

If that’s all they’re intending to do then they wouldn’t have put in the first clause before the “and” they would —

Bruce J. Terris:

Well —

Potter Stewart:

— begun with only one inspection.

Bruce J. Terris:

They very well could’ve done that Your Honor.

Potter Stewart:

Well, they would’ve done it the minute that (Inaudible) —

Bruce J. Terris:

Well, Congress always used —

John M. Harlan:

How about (Inaudible)

Bruce J. Terris:

— the narrowest language, I suppose that’s right.

I think though — the reason I say that I’d — that even from the wording — that even from the wording that that’s only one section with one purpose is that in the second portion, Congress again used the term necessary which suggests that what it was doing is saying there shouldn’t be unnecessary examinations and that it considered unnecessary examinations second investigations unless a high official in the service said they were necessary.

Arthur J. Goldberg:

You mean that (Inaudible)?

Bruce J. Terris:

That’s right Your Honor.

Now let me take the — except the taxpayers premise however that there’re two sections to it, and that the first part this applies to any investigation whether it’s a first or second one.

Webster defines unnecessary as needless or useless.

In our view this is no different than what Section 7602 requires, because it requires that the record sought to be relevant and material.

If records — if the records are relevant and material they certainly are not needless or useless.

And therefore, we believe that even accepting the taxpayer’s premise that still all that we have to show, all that the service has to show is relevancy and materiality —

Byron R. White:

I take it that (Voice Overlap) —

Bruce J. Terris:

— not probable cause.

Byron R. White:

— the effect of the time bar?

Bruce J. Terris:

Yes I am, Your Honor.

Byron R. White:

Well, is that the date (Inaudible)?

Bruce J. Terris:

Relevancy and materiality?

Well I hope to show Your Honor that it would suffice.

Byron R. White:

You mean if he — having the court to answer the summons on the tax or the — you ask the taxpayer for his books and he says, “No, you’re going to court.”

And say this books are relevant and material.

Is that fair —

Bruce J. Terris:

— to something.

Byron R. White:

Yes.

Well, the taxpayer says (Inaudible) — suggest that the — there’s a — four years is barred so therefore the Government is not entitled to it.

Bruce J. Terris:

Well, Your Honor there is no — this phrase that the year is barred is a shorthand and slightly misleading phrase.

There is no completely barred year.

The Government can always investigate and asses for fraud.

So there — if it was totally barred then of course we’d be in quite a different situation.

Byron R. White:

Well, I know, but do you think that — do think that (Inaudible) — you’re going to get to the time bar (Voice Overlap) —

Bruce J. Terris:

I am going to Your Honor.

Let me deal just for a moment with the legislative history of this section because even if the wording of Section 7605 were less clear than we think it is that the legislative history which is set out in full in the Government’s brief in the Powell case and it’s quite briefed but it’s — we think it’s sufficient because both the committee reports, the sponsors and the House and the Senate, and individual congressmen in both Houses stated in its purpose was to prevent the embarrassment of taxpayers by repeated investigations unless there was a good reason for further examination of their records.

And Congress was willing to allow this determination of whether there was good reason to be left to the Commissioner or to his deputy, but not to ordinary agents.

There’s not a single word in the legislative history to indicate that Congress was even considering the problem of initial examinations, and there’s certainly not a word to indicate the probable cause or any other judicially enforced standard was being imposed for the first time on the service.

And we think it’s very strange to assume that this was the intent of the Congress in the absence of any discussion whatsoever when there was considerable discussion of —

Potter Stewart:

This was enacted —

Bruce J. Terris:

— in another —

Potter Stewart:

— in 1921?

Bruce J. Terris:

This is in 1921, just know the (Inaudible) —

Potter Stewart:

(Inaudible)

Bruce J. Terris:

Notice the (Voice Overlap) —

Potter Stewart:

Nobody here is after the enactment of the Internal Revenues Code.

Bruce J. Terris:

That’s right.

Potter Stewart:

Was — were the relevant statutes of limitation the same back there as they are now?

Bruce J. Terris:

I think that there was a —

Potter Stewart:

In other words that what you’re thinking —

Bruce J. Terris:

There certainly would —

Potter Stewart:

— would be valid only if that were true I should think.

Bruce J. Terris:

If we — if there would have to be a statute of limitations a number of years would not have to be identical.

That the number of years is purely fortuitous to the —

Potter Stewart:

There would have to be no statute at all as you call it?

Bruce J. Terris:

That’s right, to make it — to make the situation different.

Let me turn now to the (Voice Overlap) —

Potter Stewart:

Well, I understand — you don’t know the answer to my question or?

Bruce J. Terris:

I’m not certain of it Your Honor, I —

Potter Stewart:

I don’t know the answer, I gather.

Bruce J. Terris:

I am almost certain that there was a three-year statute of limitations because my recollection is that the first cases in this field which were prior to the 1939 code talked about the statute of limitations and I think it was three years.

I may say that the cases that — I may say the cases that do deal with the earlier statutes are cited in the Powell — in our reply brief in Powell and in the respondent’s brief in Powell, In re Keagan, Brooklyn Pawn Brokers, the Andrews case, and I — and they discussed the statue of limitations.

And I’m almost certain that there was a statute and that it was three years.

Let me now turn to the effect of the statute of limitation, Section 6501.

I may say that there is no three years.

There’s a — there are three periods.

There’s a three years and then there’s three to six which has a different effect and then there’s the period after six years.

Before three all tax liability is open, three to six years, fraud and under statement of income by more than 25% is open, after six years just fraud is open, or failure to file a return at all.

Now on its phase, Section 6501 doesn’t seem to have anything to do with investigations.

Bruce J. Terris:

It doesn’t limit the Commissioner’s power.

It doesn’t limit the Commissioner’s power to make his assessments.

When we submit the absence of any congressional intent shown, either in legislative history on the phase of the statute that the basic rule of Section 7602, which as I’ve indicated, is unmodified by Section 7605 should mean.

Byron R. White:

So you — that’s your first — that’s your first point on that (Inaudible) that it makes no difference whatsoever with the statute of limitations (Inaudible).

Bruce J. Terris:

That’s right Your Honor.

Byron R. White:

(Inaudible)

You’re investigating — your — if you want to see my book not because you think I am fraudulent, because it’ll help you prove that Justice Brennan is fraudulent, you can get my book without saying anything other than give me your book.

Bruce J. Terris:

And that we make a showing of relevancy and materiality because we’ve got to do that under Section 7602.

Byron R. White:

But you don’t have to do anything about it from my book and satisfy the justices about the material helping in the investigation.

Bruce J. Terris:

That’s right and that’s just the ordinary rules I’ve indicated for administrative subpoenas.Now there are creations of — how far you can lead from that.

You can say, well, we have to state that they’re relevant and material to investigation for fraud.

We’ll actually — the particular summons my not actually go to fraud.

For example, we — they have other evidence of fraud.If the summons goes to a tax deficiency that tax deficiency is opened up by the fraud and we can collect 50% of the total tax deficiency not just to the fraud part.

That’s what the statute says.

So that the particular summons does not even have to go to fraud.

It can go to ordinary tax liability but the investigation as a whole we can only make an assessment on the basis of fraud.

On the other hand, we may be just starting the investigation and starting with tax liability.

The Oklahoma Press Publishing Company case says that the Government need not show coverage of a statute before it looks to whether there’s been a violation.

It can do that both at the same time.

So we could — or even separately, so we could be issuing a summons in order to show tax liability.

Later on then look to see whether there had been fraud.

But alternatively, even if we’re wrong about the statute of limitations our alternative argument is as been suggested by Your Honors that the complaint in testimony in this case were sufficient that it’s enough to say that we have a basis for suspecting the fraud that’s been committed, and here of course we went beyond that.

We gave it at least to some extent in conclusory terms the basis for the statement.

William J. Brennan, Jr.:

Does it say it — we have a basis, would you have also to say, “We’ve conducted an investigation or have been conducting an investigation around three or four months.

We — that the a smell of something here that we think requires further examination because if the smell continues it looks like fraud.

Bruce J. Terris:

That’s without colorful language Your Honor that’s about what the complaint says.

William J. Brennan, Jr.:

No, what I’m trying to get at is if something like that, you come in to Brennan and certainly would summons, and you drag me in the Court and I say that, “Your Honor this was barred back in 1950, why do they want my books?”

Now what do you have to show?

Bruce J. Terris:

Well, our initial position is all we have to show it’s relevant and material to a valid investigation that’s it.

Alternatively, we argue that it’s enough to state by affidavit or testimony that we have reason to believe, that we have reason to suspect, that we have this suspicion that fraud has been committed.

William J. Brennan, Jr.:

You don’t you have to go beyond that to say, “We’ve been conducting the investigation.”

Bruce J. Terris:

Well, here we did Your Honor.

William J. Brennan, Jr.:

(Inaudible) Brennan’s return to someone else?

Bruce J. Terris:

Then you can move up one more step and say that we have to give a little more information.

The trouble is that if these are imperceptible gradations, the next step that the taxpayer argues that we have to then present the evidence to show in detail.

William J. Brennan, Jr.:

But the Government’s position is as much as you have to say really is, “We have reason to suspect”, period, is that it?

Bruce J. Terris:

That’s right.

Byron R. White:

This is all — this is the line you —

Bruce J. Terris:

Justice —

Byron R. White:

This is the line you’ve drawn on a lot of cases.

Bruce J. Terris:

That’s right Your Honor.

Byron R. White:

You’ve been willing to say that but (Inaudible) —

Bruce J. Terris:

That’s right, now so, — what happens is in some cases we give the evidence.

If we think we’re going to lose —

Byron R. White:

Like this one.

Bruce J. Terris:

Pardon me?

Byron R. White:

Like this one.

Bruce J. Terris:

We give — that’s right, we didn’t give the evidence at all in Powell.

We rely entirely on an affidavit, but here we gave the evidence.

John M. Harlan:

You have argued a position (Inaudible) carry you on the second case.

Bruce J. Terris:

Well Your Honor, I think everything I’ve argued in this —

John M. Harlan:

Oh, I think it does so far.

Bruce J. Terris:

— it would carry me on the second one.

Thank Your Honor.

Earl Warren:

Very well.

Mr. Bagby did you have anything in rebuttal?

William R. Bagby:

Your Honor, I’d like to add a word or two.

I’d like to point out that in connection with the complaint which was filed by the agent to which he subscribed.

He said there was a basis for fraud, but in this complaint he also said that the taxpayer had all of his books and records.

And yet during the hearing, he acknowledged that he had never asked the taxpayer for his books and records and apparently did not know whether or not they all existed.

William R. Bagby:

Another point to which I’d like to point out is — reveal is that the first part of 7605 states that an examination shall be at a reasonable time and place.

This is for the protection of the taxpayer and is a part of the whole picture in which this unreasonable examination and investigation must be placed.

Hugo L. Black:

Is the only basis for charging it in an unreasonable investigation or examination, the one you have stated that they did not show sufficiently that there was reasonable cause to believe he was guilty of fraud?

William R. Bagby:

Not only that Your Honor but the fact that the interpretation of — under — of this clause, 7605 (b) requires that the Government reveal at the hearing in the District Court some facts revealing a reasonable basis, and the opinion of the District Court that there is a suspicion of fraud.

We —

Hugo L. Black:

Was the only attack?

William R. Bagby:

Sir?

Hugo L. Black:

Those are the only grounds upon which you attack, the reasonableness of the procedure.

William R. Bagby:

I would say that fairly well covers it Your Honor.

Potter Stewart:

How about this suggestion or may be less than a suggestion, innuendo of bad faith.

Were you prevented from developing any such claim as that in the District Court?

William R. Bagby:

Yes, during the trial we were Your Honor, because the Court believed that all the agent need to do is to show that he was making an examination for these years.

And therefore, everything was relevant and material to that examination.

And he said fraud or no fraud irrespective of that that we must show.

He said that we must show that the agent was wrongful.

However, we didn’t have the opportunity to present evidence because he felt that the agent, as he in his words said, an agent has the right to stop the first person that he sees on the street and demand and get his books and records.

Potter Stewart:

Well, now the Court of Appeals didn’t agree with that though.

The Court of Appeals said, “This is not to say that the Court is without power to determine whether the investigation is being made in good faith.”

And are you — I want to know if you’re suggesting here that you are making a claim that this investigation was not being made in good faith and that you were prevented from pursuing that claim in the District Court?

William R. Bagby:

That is one of our positions, it’s correct.

Although we haven’t developed that as much as we could’ve if we’d had more evidence to show further bad faith, and then pointing it out here the fact that the agent had said in his complaint that all of the books and records existed.

And during the trial, a very meager colleague we had he said that he did not — he had not asked the taxpayer.

I — perhaps I’m missing the — we do not feel that we had a reasonable hearing on the basis that the Court believed that all the agent had to do is ask for the books and records.

Thank Your Honor.