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United States v. Noall

decided: November 17, 1978.

UNITED STATES OF AMERICA, AND FELIX KARUL, REVENUE AGENT OF THE INTERNAL REVENUE SERVICE, PETITIONERS-APPELLEES,
v.
ROGER NOALL, AS EXECUTIVE VICE-PRESIDENT OF BUNGE CORPORATION, RESPONDENT-APPELLANT.



Appeal from an order of the District Court for the Southern District of New York, John M. Cannella, Judge, enforcing an IRS summons for the production of a taxpayer's internal audit reports and related work papers. Affirmed.

Before Friendly, Mulligan and Gurfein, Circuit Judges.

Author: Friendly

The United States and Felix Karul, an IRS agent, brought this proceeding in the District Court for the Southern District of New York under IRC §§ 7402(b) and 7604(a) to enforce an IRS summons directed to Roger Noall, Executive Vice-President of the taxpayer, Bunge Corporation (Bunge). The petition recited that Karul was conducting an investigation for the purpose of ascertaining the correctness of Bunge's income tax returns for the fiscal years ending March 31, 1972, 1973 and 1974. The summons required Noall to appear before the agent and produce for examination:

All Internal audit reports and related work papers for the periods ended 3-31-72, 3-31-73, 3-31-74.

An order to show cause having issued, Noall submitted opposing affidavits of counsel, of himself, and of William A. Merritt, Jr., a Vice-President and former Controller of Bunge, who had instituted the internal audit program; these recited various objections to production with which we will deal hereafter. After considering these affidavits and memoranda of law*fn1 and hearing argument, Judge Cannella entered an order enforcing the summons and denying a request for an evidentiary hearing, from which this appeal has been taken.

The Government does not dispute that the internal audit reports and related work papers are not accounting records of Bunge. This, however, is in no way dispositive since IRC § 7602(2) is not so limited but authorizes the Secretary or his delegate, see IRC § 7701(a)(11)(B), to summon any officer or employee of a taxpayer "to produce such books, papers, records, or other data . . . as may be relevant or material" to his inquiry into the correctness of income tax returns.

The affidavit of Bunge's counsel described the audit reports as consisting

primarily of the analyses by Bunge's internal auditors of the books and records by various divisions and related corporations as part of Bunge's program to monitor and supervise the accounting, financial planning, and established operational plans and procedures of those divisions.

He also stated that

(t)he internal audit reports represent an attempt by Bunge to insure uniform bookkeeping practices, compliance with management directives and with internal control and operational procedures by those divisions.

and that

the internal audit reports may include hearsay, rumors, opinions and other evidence gathered from the examination of certain bookkeeping practices by Bunge's employees.

The Noall and Merritt affidavits added nothing significant except for Merritt's statement that the work papers, documents and other materials used in preparing the tax returns "did not include, nor were they derived from, the internal audit reports or their related work papers prepared by Bunge during those years." Relying particularly on United States v. Coopers & Lybrand, 413 F. Supp. 942 (D.Col.1975), Aff'd, 550 F.2d 615 (10 Cir. 1977), Noall contends that the Government has not established the relevance of the documents sought and that public policy considerations dictate against their compelled production.*fn2 If we do not accept this position, Noall requests that we remand for an evidentiary hearing.

The statutory language is "may be relevant or material". Congress acted advisedly in using the verb "may be" rather than "is", since the Commissioner cannot be certain that the documents are relevant or material until he sees them. This court has consistently held that the threshold the Commissioner must surmount is very low, namely, "whether the inspection sought "might have thrown light upon' the correctness of the taxpayer's returns". See Foster v. United States, 265 F.2d 183, 187 (2 Cir.), Cert. denied, 360 U.S. 912, 79 S. Ct. 1297, 3 L. Ed. 2d 1261 (1959). The threshold is particularly low when, as here, the papers at issue are the ...


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