United States v. Stuart, 489 U.S. 353 (1989)

United States v. Stuart

No. 87-1064

Argued December 5, 1988
Decided February 28, 1989
489 U.S. 353

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

Syllabus

Articles XIX and XXI of the 1942 Convention Respecting Double Taxation (1942 Convention) between the United States and Canada require the United States, upon request and consistent with United States revenue laws, to obtain and convey information to Canadian authorities to assist them in determining a Canadian taxpayer’s income tax liability. Respondent Canadian citizens and residents maintained accounts in a bank in the United States. In attempting to ascertain their Canadian income tax liability for certain years, the Canadian Department of National Revenue (Revenue Canada), pursuant to Articles XIX and XXI, requested the Internal Revenue Service (IRS) to provide pertinent bank records. After the IRS Director of Foreign Operations concluded that the requests fell within the 1942 Convention’s scope and that it would be appropriate for the United States to honor them, the IRS served on the bank administrative summonses for the requested information, but, at respondents’ request, the bank refused to comply. Respondents then petitioned the Federal District Court to quash the summonses, contending that, because, under 26 U.S.C. § 7602(c), the IRS may not issue a summons to further its investigation of a United States taxpayer when a Justice Department referral for possible criminal prosecution is in effect, and because Revenue Canada’s investigation of respondents was "a criminal investigation, preliminary stage," United States law proscribed the use of a summons to obtain information for Canadian authorities regarding respondents’ American bank accounts. This argument was rejected, and the District Court ordered the bank to comply with the summonses. The Court of Appeals reversed, holding that, before the IRS may honor a request for information under the 1942 Convention, it must determine that Revenue Canada’s investigation has not reached a stage analogous to a Justice Department referral by the IRS, and that here the affidavit submitted by the IRS failed to state that such a determination had been made with respect to Revenue Canada’s investigation of respondents.

Held: Neither the 1942 Convention nor domestic legislation requires the IRS to attest that a Canadian tax investigation has not reached a stage analogous to a Justice Department referral by the IRS in order to obtain enforcement of a summons issued pursuant to a request by Canadian authorities under the 1942 Convention. So long as the IRS satisfies the requirements of good faith set forth in United States v. Powell, 379 U.S. 48, 57-58 -- that the investigation be conducted for and relevant to a legitimate purpose, that the information sought not be already in the IRS’ possession, and that the statutorily required administrative steps have been followed -- and complies with applicable statutes, it is entitled to enforcement of its summons, whether or not the Canadian tax investigation is directed towards criminal prosecution under Canadian law. Pp. 359-370.

(a) Aside from whether the 1942 Convention, in conjunction with 26 U.S.C. § 7602(c), narrows the class of legitimate purposes for which the IRS may issue an administrative summons, the IRS’ affidavits plainly satisfied the requirements of good faith set forth in United States v. Powell, supra. Pp. 359-361.

(b) Section 7602(c) does not, by its terms, apply to the summonses challenged in this case, for its speaks only to investigation into possible violations of United States revenue laws, forbidding the issuance of a summons "if a Justice Department referral is in effect." Therefore, § 7602(c) does not itself appear to bar enforcement of the summonses in question. This conclusion is supported by § 7602(c)’s legislative history indicating that Congress did not intend to make enforcement of a treaty summons contingent upon the foreign tax investigation’s not having reached a stage analogous to a Justice Department referral. The concerns that prompted Congress to enact § 7602(c) -- particularly that of preventing the IRS from encroaching upon the rights of potential criminal defendants -- are not present when the IRS issues summonses at the request of most foreign governments conducting investigations into possible violations of their own tax laws. This is especially so where none of the countries, including Canada, with whom the United States has tax treaties providing for exchanges of information employs grand juries, and criminal discovery procedures differ considerably among those countries. Pp. 361-365.

(c) Articles XIX and XXI of the 1942 Convention, on their face, do not support respondents’ argument that, because the IRS would not be able, under American law, to issue an administrative summons to gather information for use by the Government once a Justice Department referral was in effect, the IRS is not in a position to obtain such information once Canadian authorities have reached a corresponding stage in their investigation. Those Articles both refer to information that the IRS may obtain under American law, but that law does not contain the restriction respondents claim. Section 7602(c) only limits the issuance of a summons when a Justice Department referral is in effect, and says nothing about foreign officials’ decisions to investigate possible violations of their countries’ laws with a view to criminal prosecution outside the United States. The elements of good faith outlined in United States v. Powell,supra, do not constitute such a restriction, nor does the reasoning in United States v. LaSalle National Bank, 437 U.S. 298, whose principal holding was codified in § 7602(c), favor respondents’ position, since the provision of information to Canadian authorities could not curtail the rights of potential criminal defendants in this country by undermining American discovery rules or diminishing the grand jury’s role. Moreover, the purpose behind Articles XIX and XXI -- the reduction of tax evasion by allowing signatories to demand information from each other -- counsels against interpreting those provisions to limit inquiry in the manner respondents desire; the Government’s regular compliance with Canadian authorities’ requests for information without inquiring whether they intend to use the information for criminal prosecution weighs in favor of its reading of Articles XIX and XXI; and the result urged by respondents would contravene Congress’ main reason for laying down an easily administrable test in § 7602(c). Pp. 365-370.

813 F.2d 243, reversed and remanded.

BRENNAN, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, MARSHALL, BLACKMUN, and STEVENS, JJ., joined, and in all but Part II-C of which O’CONNOR and KENNEDY, JJ., joined. KENNEDY, J., filed an opinion concurring in part and concurring in the judgment, in which O’CONNOR, J., joined, post, p. 370. SCALIA, J., filed an opinion concurring in the judgment, post, p. 371.