United States v. Powell

PETITIONER:United States
RESPONDENT:Powell
LOCATION:Heart of Atlanta Motel

DOCKET NO.: 54
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 379 US 48 (1964)
ARGUED: Oct 14, 1964 / Oct 15, 1964
DECIDED: Nov 23, 1964

Facts of the case

Question

  • Oral Argument – October 15, 1964
  • Audio Transcription for Oral Argument – October 15, 1964 in United States v. Powell

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

    Earl Warren:

    Number 54, United States et al, Petitioners, versus Max Powell et al.

    Mr. Terris.

    Bruce J. Terris:

    Mr. Chief Justice, may it please the Court.

    As has been indicated before, this case involves basically the same issues as are involved in the Ryan case.

    The only real difference being that here there were second examinations of the taxpayer’s records but notices under Section 7605 (b) had been sent.

    I’ll give the facts briefly.

    Respondent Powell is the president of respondent William Penn Laundry Company which is the taxpayer, which is involved.

    Mr. Powell received an Internal Revenue Service summons, give testimony, produced books and records of the company relating to its tax liability, the company’s tax liability for the years 1958 and 1959.

    The time the summons was issued, the statute of limitations, the three-year statute of limitations had elapsed although not the six-year.

    As I’ve indicated since they’re already been prior examination of the taxpayer’s books, the statutory notice was sent by the Regional Commissioner.

    At the administrative hearing, Mr. Powell refused to produce the books on the advice of counsel on the ground that the Government had made no showing of fraud.

    In proceeding to enforce the summons in the District Court, the Government introduced the affidavit, not the testimony, the affidavit of an agent stating that on the basis of investigation, he had reason to suspect that the taxpayer has filed false and fraudulent returns for the years 1958 and 1959 with intent to evade its taxes and that the taxpayer had attempted to evade these taxes and I quote, “By overstating the amount of purchases made which in turn were used as expenses, so as to fraudulently understate the amount of taxable income.”

    The District Court, while indicating doubt as to the legal rights of the respective parties, apparently compromised, and allowed the revenue agents one hour to examine the taxpayer’s books.

    The Third Circuit reversed.

    It held that the summons was invalid on the ground that after the running of three-year statute of limitations a reexamination of the taxpayer’s records is unnecessary under Section 7605 (b), unless the Commissioner shows that he has reasonable grounds to believe that the taxpayer has committed fraud.

    Therefore, the issue in this case is the same as the issue in the Ryan case.

    Whether the Government must show probable cause or reasonable grounds to believe which is the equivalent before it can obtain judicial enforcement of the summons which is as part of investigation after the three years statute of limitations has run.

    Now, as I’ve indicated the basic arguments of the government are the same as in the Ryan case and I will not repeat them.

    I would however, like to turn to the practical effect of the taxpayer’s argument or the respondent’s argument.

    Arthur J. Goldberg:

    (Inaudible)

    Bruce J. Terris:

    That’s right.

    The reason I say that this makes no difference is once you’ve satisfied that part assuming there are two parts to the statute of 7605 (b).

    Once you’ve satisfied the second part and then your back under the first part again.

    And so that is the issue, whether the first part of Section 7605 (b) can be read separately from the second part and if read separately, means that the Government must show probable cause after the three-year period has run.

    Can I ask you a question on that point, assuming that you take this narrow construction, certainly the first sentence of Section 7604 (b) do I understand meaning unnecessary is the equivalent of irrelevant?

    Bruce J. Terris:

    Yes, Your Honor.

    What’s the source of the taxpayer’s right under that kind of a reading where will inquire him of anything, of things that you inquire that you say it could be inquired in the good faith or not.

    Bruce J. Terris:

    Well, Your Honor, I think there are two possible sources.

    One is the Fourth Amendment, Oklahoma Press — the Oklahoma Press case indicates that when a subpoena is sufficiently burdensome, sufficiently broad, and I assume it doesn’t say this, is issued in bad faith, it would be considered unreasonable.

    It might be considered unreasonable under the Fourth Amendment.

    Bruce J. Terris:

    I think there’s another possible ground that is that the Government is asking the courts to enforce process and if indeed the process is based on bad faith, I think that there would be substantial argument that the courts need not enforce the summons.

    Well, it’s inherent from it.

    Bruce J. Terris:

    That’s right.

    (Inaudible) the courts wouldn’t have (Inaudible) of grand jury.

    Bruce J. Terris:

    I assume that —

    Potter Stewart:

    The statute — the statute that is 7604 (a) makes this something quite different from a grand jury proceeding.

    It gives jurisdiction to the federal district courts to issue appropriate process, it didn’t say they shall do it automatically —

    Bruce J. Terris:

    That’s right.

    Potter Stewart:

    — according to court and that’s the point your making (Voice Overlap).

    Bruce J. Terris:

    I think that’s where the — they said the one possible source, the others the Fourth Amendment.

    Potter Stewart:

    But the court presumably before it issues something is going to have a hearing.

    Bruce J. Terris:

    That’s right and Reisman and Caplin states that there should be a hearing under this section.

    I think the Government agreed Reisman and Caplin that that was so and we don’t contest that.

    The question is whether the substantive rights of the hearing —

    Potter Stewart:

    Are the issues to be heard.

    Bruce J. Terris:

    That’s right.

    There’s no question about whether there’s a hearing because as a hearing doesn’t mean any conceivable standard or right automatically comes into play.

    William J. Brennan, Jr.:

    Mr. Terris, turning to this case and Mr. Tiberino or whatever his name is, affidavit, do I get your position to be something like this?

    What you said is he has reason to suspect that this was done by overstating the amount of purchase.

    They’re not claiming that in fact he did that to get confirmation of the suspicion you have to look at the books that may develop.

    Bruce J. Terris:

    That’s right.

    William J. Brennan, Jr.:

    And that really did not overstate the amount of purchases and therefore, that you have no case, is that it?

    What you’re saying is that the Government ought not be required to indicate that indeed he had overstated the amount of purchase, is that it?

    Bruce J. Terris:

    That’s right, we don’t know that he did.

    In fact, depending on what the underlying facts are, we may only have this – an inkling that this is what occur.

    And putting into words of Oklahoma Press, we need this information not to prove that a violation of the law has occurred but to find out whether there has been any kind of violation.

    We turn into the practical consequences of what respondent’s argument in this case.

    If it’s the First Circuit holds and respondents apparently agree with this, the standard of probable cause under the Fourth Amendment applies, I think it doesn’t require much stretch of imagination to see how seriously this would interfere with investigations for fraud.

    It would mean that the service we have far toward proving fraud before it could investigate fraud.

    That even if a lesser standard were imposed, the service would be prevented from pursuing investigations where they had some reason to suspect that fraud had been committed but they had no more.

    Bruce J. Terris:

    We think that under a self assessment system of — for the tax laws that it’s essential that the Government, and apparently, Congress agreed, should have broad powers to investigate.

    And when fraud has been committed, the investigation of course, is particularly difficult because it’s been covered up in most instances.

    Now, another practical consequence is the petitioner’s argument, as I’ve indicated before, is really asking for miniature trial.

    This isn’t like a search or an arrest warrant, he wants a trial, he’s got counsel there, he wants to cross-examine witness, he wants to put on his own witnesses.

    So we’re going to have a trial before we can investigate.

    Not only we’re going to have a trial but we’re going to have an appeal and presumably then the Court of Appeals is going to look at the Government’s evidence.

    In fact of course, that’s what — that’s what happened in this case and has happened in the First Circuit cases.

    And ultimately, there could be a petition to this Court.

    All this time, investigation will then stop because usually the crux of the investigation, before you hardly get off the ground is a look at the taxpayer’s records.

    And as I’ve indicated before, it’s virtually certain that if this is allowed, there’s going to be a great increase in amount of litigation as everybody is going to be able to block investigations for two or three years as these have been stopped.

    Merely, I’m putting the Government to its proof and that litigating whether this proof is sufficient.

    And we submit that this is a heavy burden on the surface and also on the courts.

    I like you to turn quite briefly to an argument which is made in this case and was not made in the Ryan case.

    Respondents argue that four early cases required proof of probable cause for enforcement of the surface summons after the statute of limitation had run and that the reenactment by Congress of Section 7605 (b) constitute a congressional adoption of the interpretation of these cases.

    However, it’s interesting that there was at least one other case that even if there was — at approximately the same time as these early cases which held to the contrary, so there was some split of authority even then.

    But even decided from that, this rule of congressional adoption, the judicial decisions is premised on the theory that Congress either knew of the decisions or at least could be assumed to know of them such as decisions of this Court.

    I don’t think we can realistically assume without any indication of legislative history that four lower court decisions were known to the Congress when it embodied the predecessor of Section 7605 (b) in the 1939 and 1954 Code among the thousands of sections which were enacted.

    Now, I like to turn to the Government’s alternative theory which I’ve indicated before in the Ryan case and it also exists in this case, and that is even if the Government does have to say something about what its suspicion, that it has suspicion or even it has to go beyond that and has to make some kind of a statement of what its suspicion is grounded upon, that there was sufficient indication in this case to satisfy that kind of a test.

    Here, as I’ve indicated, the affidavit of the agent says it upon investigation, he suspects that there was fraud and he gives inconclusive returns that it’s true, that he gives conclusory terms the basis for a suspicion.

    Your Honor, I’d like to save the remainder of my time for rebuttal.

    Byron R. White:

    Mr. Terris, let me ask this one brief question.

    If petitioner — with — if the position urged by Ryan or Powell were accepted, will the practical effect be that he Government would get the books only if the taxpayer who himself was suspected of fraud.

    If he — if he came into Court and asked for books, the taxpayer said, “Well, the statute barred.”

    The judge says overrule it.

    “You must tell me that you suspect fraud or tell me a reasonable cause of fraud is I take that means fraud in connection with fact factor.

    Bruce J. Terris:

    Well, that’s — that’s somewhat complicated Your Honor.

    One problem is that there seems to be a split on authority and whether Section 7605 (b) applies to third parties at all.

    If it doesn’t apply to third parties at all, Second Circuit seems to indicate it doesn’t apply to third parties at all.

    That would mean that we could presumably go to the bank or anything like that with just the showing the relevancy and materiality and that would be sufficient.

    Byron R. White:

    7602 gives you authority to get the taxpayer’s books where you can look for gift tax than somebody else could.

    Bruce J. Terris:

    That’s right, 7602 allows us to get a third party.

    That is held and it seems to be accepted.

    Now, if Section 7605 doesn’t — doesn’t apply to third parties then as I say 7602 applies alone in and only relevancy and materiality be shown.

    If 7605 (b) does apply to third parties, then presumably we have to make the same kind of showing about our suspicion of fraud with relation to the taxpayer before we can get those records.

    I think that the First Circuit’s view, there’s no indication that’s restricted just to the taxpayer and that I would assume that it’s view is that we’re similarly limited as to third parties.

    Earl Warren:

    Mr. Segal.

    Bernard G. Segal:

    May it please the Court.

    It seems to me that the question that Mr. Justice Black has asked about what would be the practical result, the question Mr. Justice Harlan asked in the form of an exclamation that would be quite a trial and the questions Mr. Justice White asked called for the application here of Mr. Justice Holmes’ classic comment that a page of history is worth a volume of logic.

    Because history shows that none of these theories would be realized indeed none of them has been realized.

    This is not the first time that this issue has been litigated in the courts nor is it the first time that the governments have been called upon to take a position.

    History records that the Government has had a remarkable amount of success without taking the position that it takes here.

    The Government today argues what it calls an alternative theory.

    Well, first I say Your Honors that that alternative theory is not available to it, under the rules of this Court.

    It is not the question presented in the petition for certiorari.

    In the lower court when the judge insisted on the witness appearing, the Government refuse to permit them on the ground of testimony could mean nothing.

    They were taking the flock position that once the Regional Commissioner made a determination that they should be an examination, no testimony, no showing of any kind was required.

    That if it please the Court, is the issue in this Court and that is the issue to which I intend to address myself unless the Court requests otherwise.

    Now, as to the history, first let me note that these are as has been indicated old statutes.

    The particular section has been so much in discussion here with the last of the four that have been under questioning and answer.

    7605 (b) was adopted in 1921 the others are all earlier and I need not labor the point that fraud cases have arisen since 1921 many, many times.

    Now, during most of those years that the statutes have been effective, if it please the Court, the Government took the precise position in court that we are taking today.

    Namely, that if it wishes to lift the bar of 6501, if a taxpayer says, you have no right to assess therefore there’s no statutory purpose to be served that the Government has then put to what, to a burden of showing some reasonable basis not a proof of fraud, that was early rejected by the courts.

    Some reasonable basis were singling out this taxpayer not as before the three years just for a routine examination but for the owners, the owners to his employees, the owners to his neighbors, the owners to his business associates, the owners to his bankers of being under the suspicion of fraud.

    And very early, the Commissioner took the position, “Sure we recognize that we’ve got to show a reasonable basis.”

    And so, if the Court please, in 1942 in Martin against Chandis, the Court expressly said that, “We have here two viewpoints, we have the viewpoint of the taxpayer who says the bar cannot be lifted unless and until the Government shows fraud” and said the Court, “We now have the viewpoint of the Government” who says, “No, we merely have to show a reasonable basis for suspecting that fraud exists.”

    I may say to Your Honor that they have not faired badly.

    There are eight cases in which they produce testimony and seven of them in which they produce even live witnesses, in seven of them the Court of Appeals have granted the request and then the one which was not granted O’Connor against O’Connell, the man appeared simply to say, “I won’t give testimony.”

    So that in seven out of the seven cases, in which the Internal Revenue Service took the position I’ve enunciated in the Courts of Appeals, it has met with success.

    Now, what about these early cases that my friend referred to?

    Well, first was the Andrews case in 1937.

    Bernard G. Segal:

    In that case Judge Chesnut in the District of Maryland rejected the taxpayer’s assertion that all that had to be — that he had to prove fraud, and accepted the requirement that the Government had to prove a reasonable ground for suspecting fraud.

    The — Judge Chesnut felt he was satisfied what the Government was requested of that day.

    I’ve already told Your Honors about Martin in the Fourth Circuit where the Court expressly said we’re not going to pass even on whether Government’s contention is correct.

    We accept its contention and we find it has here met the burden and it met the burden by simply demonstrating that there was some reasonable ground to ask that the bar of the statute be lifted.

    Potter Stewart:

    But what case is that Mr. Segal?

    Bernard G. Segal:

    That’s Martin against Chandis, C-H-A-N-D-I-S.

    And so the law stood, if it please the Court, Brooklyn Pawnbrokers and so on for many years.

    More laterally, the Internal Revenue Service has begun to suggest, as it did in the Second Circuit, and met a sympathetic response that it now has to show nothing.

    No change in the statute to explain that but that no longer does it have to show anything.

    It merely has to say the Regional Commissioner has determined that an examination should be made, period and then the man is subjected to a fraud examination, make no mistake about it, it’s labeled a fraud examination and it is a fraud examination and everybody so understands it, was told about it.

    Now, what have the circuits done about that?

    Well, the First and Third Circuit has said, “No, we’re going to hold you to test you yourself established of just showing a reasonable basis.

    In this case Your Honor, my friend is not correct in saying that we ask for probable cause.

    We said to the tax examiner, “Look, you’ll have a thorough examination here.

    You’ve had a thorough one.

    You’ve had an assessment.

    You’ve been through all these books with a taxpayer who owned the business and who was the president.

    Now, he is dead and we want to know with him not here.

    And with no one alive knowing anything about this, give us some indication” and those were the exact words, “some indication of what you have in mind” and the answer to that was the hearing is closed.

    Now, I submit to Your Honor that this young man who happen to be a ward of mine and died within five minutes after he seem to be perfectly well, we were interested in protecting his honor against the fraud examination.

    And if the Commissioner had shown us “some indication” he have had 100% cooperation and I’m here today because not that he wanted to show anything, he wanted to show nothing.

    The affidavit as Judge Hastie found is just a broad generality that means nothing.

    It isn’t even consistent with itself because purchases can’t be an expense by any system of accounting, but I don’t address myself to that because that’s not in this Court.

    Now going to the Ninth Circuit, there we have a somewhat different standard but on very much the same line.

    In that case, that the former clerk of this Court, Judge Browning said, “I don’t quite understand what probable cause means?”

    He said, “I want to be shown that the Commissioner had some basis for a rational judgment that fraud might exist in this case, a rational judgment.”

    I’d accept that test, Your Honors.

    I’d accept any showing that would persuade a reasonable man that it wasn’t just a completely arbitrary thing that they desired to do”

    Byron R. White:

    What case is that in there?

    Bernard G. Segal:

    That’s De Masters against Arend, Mr. Justice White, decided just last year by unanimous court, opinion written by Judge Browning.

    Bernard G. Segal:

    Judge Browning said in that case —

    Hugo L. Black:

    Is it cited in your brief?

    Bernard G. Segal:

    Yes, it is.

    Hugo L. Black:

    What — how do you spell it?

    Bernard G. Segal:

    De Masters, capital D-E, capital M-A-S-T-E-R-S.

    Hugo L. Black:

    Okay, I see.

    Bernard G. Segal:

    In that case, Judge Browning said, “That once a statute was pleaded, the burden shifted to the Government and he pointed out it wasn’t a very serious shift.”

    It simply said to the Government if you want to come in and connote fraud or suspicion of fraud to this man, we won’t let you do it until you tell us something about it.

    Now, if they have nothing at all Your Honors, they ought not to be in there.

    If they have anything at all history records that the district judges have been more than sympathetic with the problems of the taxpayer — of the tax collector but they haven’t been completely disregardful of the rights of the taxpayer.

    In the Brooklyn Pawnbroker’s case, the judge there said that the bribe that the taxpayer of that freedom from unreasonable harassment which he has the right to exist under a democratic form of government is not something to which courts should lend their aid.

    Now, all we have here Your Honors are cases that come to court.

    These are only cases in which judicial enforcement is sought.

    My friend says there are about a hundred fraud cases a year.

    Well, of that hundred fraud cases a year, I would hope that the Commissioner would haven’t the slightest degree of trouble.

    My friend says that in the Fourth and Seventh Circuits, the judges have not addressed themselves to the test.

    Well, I’ll tell you why Your Honors.

    Because in the Fourth and the Seventh Circuit the cases are cited in our brief, the testimony that the Government offered was so overwhelming.

    That the Court said, “Oh, go on with your examination” and granted them in both cases and by the way that was just in 1961.

    That was just this past two years ago, three years ago that the Government was still appearing and not taking the position it did.

    In our case, the judge begged the Government just to give them a witness and a remarkable sequence of events happened.

    The judge said, “Well, I agree with the taxpayer.

    But after all an hour is not going to hurt anybody, I’ll ask them to be gentlemanly and kind and sweet and if you — will you promise to be sweet?”

    And they said, “We’ll promise to be sweet.”

    Well he said, “I’ll give you an hour.”

    And we just didn’t think the principle involved.

    We didn’t think frankly they could get anything in an hour even if there were anything there.

    But the principle was too big to give into that kind of expediency.

    My friend says that the Fifth Circuit permits examination under the theory he wishes.

    Well, that intrigued me when it was said in the lower court.

    Bernard G. Segal:

    It amazes me when it said in this Court because the same records I dug out of the cage in Louisiana were available to my friends on the other side.

    I sent down to Louisiana and I got two extensive affidavits and I’m willing to submit them to Your Honors and to say that any time the Commissioner gives that kind of proof of a suspicion of fraud, he’s certainly entitled to go on with this examination.

    The Fifth Circuit is a clear circuit that has applied the test to which the Government requested and only in the Second Circuit, the Foster case has the Court in line which given the Government what it is now seeking.

    And in fact, the Government gave the Court what we are seeking, because in the Foster case, the Government went much farther than it did in our case.

    So that I suggest to Your Honors that far from being so onerous as to render tax collection difficult, impossible, the fact is that simple fairness would dictate that Congress should, if it didn’t as I hope I can demonstrate it did, have provided this reasonable safeguard against the onus of a fraud investigation on innocent people.

    And I may say to Your Honors that even the innocent must stand the onus if there’s a reasonable ground for suspicion of fraud.

    It may be under that circumstance assumed that fraud will not be proof but obviously administratively, we have to allow the tax collector a very considerable leeway.

    Now, I dispose of Oklahoma Press and Morton Salt very quickly.

    Those cases simply have no relevancy here.

    What was involved there was the simple question of whether Fourth and Fifth Amendment objections to the statutory power was valid and the Court held they weren’t valid, they’re very broad statutes and I say categorically here that if Congress wanted to say broad or no broad, statute or no statute, all the Commissioner has to do is send an agent out without so much as a letter.

    Congress has the right to do it.

    We just don’t think it did that here.

    Now, as to this legislation I want to say this to Your Honors, we do think that there is significance that in the face of all these cases, the Court — the Congress never changed the rule.

    And we think that it is not correct to say as the Government says in its brief that only when this Court has acted will the rule apply that Congress will be regarded when it reenacts a code and reenacts it again as having adopted the interpretation of the courts.

    Only when this Court acts will that happen and I cite to Your Honors Missouri against Ross where this Court had not spoken, except admittedly by way of dictum and the reliance of this Court in imposing that view on the interpretation of the Congressional Act was based on lower court decisions.

    Arthur J. Goldberg:

    (Inaudible)

    Bernard G. Segal:

    No, there’s no showing, in fact, Your Honor and I may say that I’ve read the cases and in most of them, there’s not really fact showing.

    It’s just, the court seems to assume that in a matter so vital as this and more important — and I’ll place — I’m willing to waive that point, more important to me is the fact that although we know that the guardian of the legislative process insofar the prime actors and so far as tax laws are concerned are my friends on the other side and some 1921 with all these cases.

    They have never seen fit once the State of Congress give us some relief and I read last night the report of the Commissioner of Internal Revenue for 1962.

    He says he made 130 legislative suggestions in 1962, 1963 the last year he made 74, not one of them was, give me relief here.

    And I suggest that you ought not ask this Court to give them the relief.

    He ought to ask Congress and I suspect, indeed I feel confident the reason he doesn’t go to Congress is, that Congress is not going to take away this protection from the taxpayer.

    Arthur J. Goldberg:

    May I ask —

    Bernard G. Segal:

    Surely.

    Arthur J. Goldberg:

    The Government did (Inaudible)

    Bernard G. Segal:

    Well, I want to get to that statute and I’m just about to discuss.

    No, I want to say just in the legislative history, if it please Your Honor, that actually you can read that either way as so often happened in the legislative history.

    For example the sponsor of the bill in introducing that said, “it ought to be settled once for all when a man pays his tax”, which we of course have done, “unless there should be good cause for reexamination”, that’s what I think congressmen, when it put in the provision that there should be no reexamination, unless it shall be necessary.

    And I think particularly it meant that because when it wrote it, the statute that was on the books incidentally, I believe, Mr. Justice Goldberg was a five-year statute at the time.

    But there was a statute of limitations and they knew there was a statute of limitations and I’ll come back for that in a moment.

    William J. Brennan, Jr.:

    May I ask one question, Mr. Segal.

    Bernard G. Segal:

    Yes, Mr. Justice Brennan.

    William J. Brennan, Jr.:

    Would the standard that you suggest has been applied and not continue to be applied, also be applicable on situation like the Ryan case, previous case, are you arguing this solely as regard the reexamination of records already?

    Bernard G. Segal:

    I’m arguing a reexamination but I believe that the Ryan case would call for the same rule.

    I would have to say that very frankly, Your Honor, because the first part of that section which to my mind is as clearly separate from the rest as any statute I’ve ever read, simply says that no taxpayer shall be subjected to an unreasonable examination.

    The only thing they did as to reexaminations was to put in a kind of intradepartmental rule, which the Commissioner could have done on his own.

    All the excitement, Your Honor wasn’t about that intradepartmental rule have the Regional Commissioner because we know very well that the Regional Commissioner is entirely subject with his vast amount of work to what this agent says.

    If in the Ryan case it is true that the agent had a personal grudge because his brother was arrested, that wouldn’t come to the Regional Commissioner, all he would do is he would say; go ahead.

    So, it becomes pretty formal, and that’s apparent in our case.

    For example, inadvertently, the cat was right out of the bag because he wrote his letter in February and then the affidavit of the agent quite inadvertent and I’m sure said that he has been conducting an investigation since February.

    I don’t think they caught up with that yet, because frankly I didn’t catch up with it until three minutes ago.

    Sitting there — or ten minutes ago sitting here in the courtroom.

    Well now, Your Honors, I want to make clear that under Section 7602, before the three years run, the Commissioner has almost plenary power.

    Just think of what he’s got to do.

    He’s got the cover 16 million taxpayers with an obligation to do something, so there it’s plenary in the absence of oppressiveness than the usual routine matters.

    Under Section 6501, I think there’s a prima facie presumption necessarily aroused.

    The — under 6501, a real change occurs, it isn’t routine.

    There can no longer be an assessment made by the collector, unless he proves an affirmative fact, it’s no longer routine.

    Now, he’s got to prove something.

    And what is that fact?

    That fact is that there is fraud.

    Now, 7605 (b) comes along and I suggest to Your Honors that what the Government is endeavoring to do is to sterilize 7605 (b) which was held as a kind of declaration of independence for the taxpayer.

    He’s got to say as Mr. Justice Stewart observed, he’s got to say that that first sentence, is surplusage.

    He’s got to say the first sentence that no taxpayers shall be subjected to an unreasonable examination and surplusage and then he’s got to say, that what Your Honors said in Reisman, you didn’t really mean because if it is true that Section 6501 has meaning when interlaced and intertwined with 7602 and 7605 (b) and against the background of the judicatory adversary hearing permitted and required under 7604.

    If that is true, then the function of the court has got to be to hear and determine and that’s what the word unreasonable was.

    It’s the word like the word negligence.

    It’s a word of flexibility.

    What is reasonable before the three years statute becomes unreasonable after the three years statute and what is unreasonable after the three-year statute might very well be entirely reasonable before that.

    But, you can’t read these provisions, if it please Your Honors, in isolation.

    It’s only —

    Byron R. White:

    Is unnecessary mean unreasonable?

    Bernard G. Segal:

    No, I say Your Honors that unnecessary I would say you could take the meaning of unreasonable.

    Unnecessary is something which is not pursuant to the particular needs, which is not fair, which is not statutorily approved.

    Now, when the statute has run, when the statute has run, I suggest, Your Honor, that from that moment on, the power becomes a different power and unreasonable has a different meaning and it’s for the court to apply, just as the court has applied it in permitting the examination on every occasion where the government came forward and gave the test, because it found in each of those cases is not fraud.

    I think the Court was at it should be, very liberal.

    But I don’t think the Court is barred in this adversary hearing from determining whether it is “unreasonable.”

    My friend say that because of a summary provision later in that section, which says, if you want a second examination, then you got to have the regional, you’ve got to have a secretary or his delegate to do it and he’s got to say, I’ve done it.

    That’s nothing but intradepartmental rule, as I said a moment ago, if it please the Court.

    Now, in conclusion —

    Hugo L. Black:

    Are you relying on any word unreasonable some other part of it or you’re just relying on the word “unnecessary”?

    Bernard G. Segal:

    Unnecessary, unnecessary

    William J. Brennan, Jr.:

    As I understood you, given the — well, at least, I think what you’ve been arguing isn’t that Mr. Segal is the department itself had given that word, the connotation of acquiring it to show a reasonable something like this, is that it?

    Bernard G. Segal:

    It certainly, no what they have said is that they have agreed, they’ve expressed it in two ways in the cases.

    One that they have to show a reasonable basis for suspecting fraud.

    Two, they have to show probable cause for suspecting fraud.

    I think the first is the lesser test and Judge Hastie used the language both ways, I think Judge Browning’s language may very well be just as good, I don’t know why he thought it necessary to introduce still another term, a rational judgment, that’s to show a rational — that he reached a rational judgment in his suspicion from fraud (Voice Overlap).

    William J. Brennan, Jr.:

    Did I hear you correctly as saying the department itself has at least adopted the first thing —

    Bernard G. Segal:

    Well Your Honor —

    William J. Brennan, Jr.:

    — namely the reasonable basis for suspecting fraud?

    Bernard G. Segal:

    Yes, if Your Honor will, you see it throughout the cases.

    You will find it in Martin against Chandis where they said in that but they have to prove probable cause which I think is probably a little more stringent than a reasonable basis.

    And in a word, our feeling is that courts have got to recognize the realities of life which are that in our society a fraud examination does carry an implication and I suggest to Your Honors that someone unfriendly to a taxpayer, unfriendly to a justice of this Court ought to have no right to cast the suspicion.

    Just think of what happens if word got around with full deference to Mr. Chief Justice Warren that an unfriendly administration was getting his bank account, so I’d asked him for all his records, why you could never undo that in the lifetime of our distinguished Chief Justice and I suggest that every taxpayer is entitled of same protection.

    Earl Warren:

    We’ll adjourn.