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UNITED STATES v. ISLAND TRADE EXCH.

March 3, 1982

UNITED STATES of America and Andrew Rosenblatt, Revenue Agent, Internal Revenue Service, Petitioners,
v.
ISLAND TRADE EXCHANGE, INC. and Mark Goldston, President of Island Trade Exchange, Inc., Respondents



The opinion of the court was delivered by: MCLAUGHLIN

This is an Internal Revenue Service ("IRS") summons enforcement proceeding brought pursuant to 26 U.S.C. § 7604(a).

BACKGROUND

 The IRS is conducting an investigation into the tax liability of certain unknown members of Island Trade Exchange, Inc. (the "Exchange"), a bartering exchange. It alleges that these members have omitted altogether or, at least, improperly reported income from their bartering transactions. *fn1"

 In April 1981, the IRS filed a petition for leave to serve a third party John Doe summons pursuant to sections 7609(f) *fn2" and (h) *fn3" of the Internal Revenue Code of 1954. 26 U.S.C. § 7609. Based upon this petition and a supporting affidavit, on April 7, 1981, Judge Thomas C. Platt of this Court determined, ex parte, that the statutory requirements of section 7609(f) had been met and he entered an order allowing the IRS to serve a John Doe summons on the respondents. *fn4"

 The summons was served, but the respondents have failed to comply. Accordingly, on December 3, 1981, the IRS filed an order to show cause why the summons should not be enforced. The respondents appeared and strenuously opposed the summons on the grounds that the IRS failed to meet its burden under section 7609(f) and that the summons was an improper research tool. The IRS countered that the Court had no power to review Judge Platt's ex parte order, and, even if it did, that the IRS had satisfied the statutory requirements.

 Briefs have been filed by the parties on both issues, as requested by the Court. In addition the IRS has submitted a Supplemental Affidavit, without obtaining the Court's permission. Respondents vehemently object to its consideration by the Court.

 DISCUSSION

 Three issues are involved in this proceeding: (1) whether this Court in an enforcement proceeding has the power to review Judge Platt's ex parte order; if it does (2) whether the Court may consider the Supplemental Affidavit filed by the IRS; and (3) whether the IRS has met its statutory burden under section 7609(f).

 1. The Court's Power to Review the Ex Parte Order.

 The Supreme Court has stated in no uncertain terms that any person summoned "may challenge the summons on any appropriate ground." United States v. Powell, 379 U.S. 48, 58, 85 S. Ct. 248, 255, 13 L. Ed. 2d 112 (1964). Indeed, a summoned party is entitled to a "full opportunity for judicial review before any coercive sanctions may be imposed." Reisman v. Caplin, 375 U.S. 440, 450, 84 S. Ct. 508, 514, 11 L. Ed. 2d 459 (1964). Nevertheless, the IRS seeks to deny that right to the recipients of a John Doe summons.

 Although it pays lip service to it, the IRS apparently ignores the dictates of United States v. Powell, 379 U.S. at 57-58, 85 S. Ct. at 254-255, which sets forth the standards for enforcement of an IRS summons. To obtain enforcement, the IRS must show four things: (1) that the summons was issued for a legitimate purpose: (2) that the summoned data are relevant to that purpose; (3) that the data are not already in the government's possession; and (4) that the administrative steps required by the Internal Revenue Code have been followed. Id.

 Thus, even if we accept the IRS argument that the Court cannot review the District Court's ex parte finding that the statutory criteria under section 7609(f) have been met, the IRS has made only the fourth showing that "the administrative steps required" for issuance and service of a section 7609(f) summons have been followed. A John Doe respondent is still free to challenge the IRS' showing on any of the other three grounds. The Exchange has done just that here, arguing that the summons was issued for an improper purpose, that is, as a research tool. The Court certainly has the power to review that claim.

 There is nothing in section 7609(f), nor its legislative history, to suggest that the Court's power in an enforcement proceeding is limited in any way. Indeed, section 7609(b) clearly contemplates enforcement proceedings. It provides a right to intervention "in any proceeding with respect to the enforcement of (a section 7609 summons) under section 7604." So does section 7609(h)(2) which provides that "a proceeding brought for the enforcement of any summons" under the section is to "take precedence on the docket."

 The Staff of the Joint Committee on Taxation responsible for drafting section 7609 explained that Congress intended that a third-party record keeper, like the respondents here, would have standing to assert "defenses to enforcement which witnesses are traditionally allowed to claim." Explanation of the Tax Reform Act of 1976 at 366-67. See also S.Rep.No.94-938 at 368-69, 94th Cong., 2d Sess. (1976), U.S.Code Cong. & Admin.News 1976, p. 2897. As a leading text observes, the "third-party recordkeeper has the right, as under prior ...


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