UNITED STATES OF AMERICA, PETITIONER V. PHILIP GEORGE STUART, SR., AND MONS KAPOOR No. 87-1064 In the Supreme Court of the United States October Term, 1987 The Solicitor General, on behalf of the United States of America, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Ninth Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit TABLE OF CONTENTS Questions Presented Opinions below Jurisdiction Statute and treaty involved Statement Reasons for granting the petition Conclusion OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-21a) is reported at 813 F.2d 243. The enforcement orders of the district court (App., infra, 25a-26a, 34a-35a) and the opinions of the magistrate (App., infra, 27a-33a, 36a-42a) are unreported. JURISDICTION The judgment of the court of appeals (App., infra, 22a-23a) was entered on March 23, 1987. A timely petition for rehearing was denied on August 27, 1987 (App., infra, 24a). On November 18, 1987, Justice O'Connor extended the time to petition for a writ of certiorari to and including December 24, 1987. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTE AND TREATY INVOLVED Articles XIX and XXI of the Convention Respecting Double Taxation, Mar. 4, 1942, United States-Canada, 56 Stat. 1405-1406, and Section 7602 of the Internal Revenue Code (26 U.S.C.) are set out in a statutory appendix (App., infra, 42a-46a). QUESTION PRESENTED Whether, in issuing an administrative summons pursuant to a request for information made by a tax treaty partner, the Commissioner of Internal Revenue is required to state that the foreign tax investigation has not reached a stage analogous to a domestic tax investigation's referral to the Justice Department for criminal prosecution. STATEMENT 1. Section 7602(a) of the Internal Revenue Code /1/ gives the Commissioner the authority to summon papers and witnesses for examination for the purpose of ascertaining tax liabilities. The district courts are empowered to enforce summonses upon a prima facie showing by the Commissioner that the summons was issued in good faith. I.R.C. Section 7604; United States v. Powell, 379 U.S. 48, 57-59 (1964). Section 7602(c) of the Code, added by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, Section 333(a), 96 Stat. 622, provides that a summons may not be issued when there is in effect a referral to the Justice Department for criminal prosecution. /2/ Such a referral is defined by the statute as being in effect if (1) the IRS has recommended a grand jury investigation or prosecution to the Justice Department or (2) the Justice Department has requested otherwise confidential return information from the IRS for use in a criminal tax investigation. The United States has entered into tax treaties with other nations that provide, among other things, for the exchange of information to assist each other in administration of the tax laws. In accordance with these treaties, the IRS may issue a summons to obtain information at the request of a treaty partner. The information exchange agreement between the United States and Canada that is applicable to this case is found in Articles XIX and XXI of the Convention Respecting Double Taxation, Mar. 4, 1942, United States-Canada, 56 Stat. 1405, 1406 (hereinafter 1942 Convention). Article XIX provides that each country undertakes to furnish to the other "information which its competent authorities have at their disposal or are in a position to obtain under its revenue laws" and that may be of use in the assessment of tax liabilities. Article XXI provides that the Canadian Minister may seek the cooperation of the Commissioner of Internal Revenue who "may furnish the Minister such information bearing upon the matter as the Commissioner is entitled to obtain under the revenue laws of the United States." /3/ 2. Respondents are citizens and residents of Canada who have bank accounts with the Northwest Commercial Bank in Bellingham, Washington. The Canadian Department of National Revenue (Revenue Canada) -- the Canadian equivalent to the Internal Revenue Service (IRS) -- is attempting to determine respondents' income tax liabilities under Canadian law for tax years 1980, 1981, and 1982. Revenue Canada, acting pursuant to the 1942 Convention, requested in January 1984 that the IRS obtain and provide bank records necessary to the determination of responents' Canadian tax liabilities for the tax years in question. App., infra, 2a. Thomas J. Clancy, IRS Director of Foreign Operations, was at that time the "competent authority" (see Art. XIX) for the United States with respect to such tax treaty information requests. Director Clancy determined that the Canadian request for information were within the scope of the treaty and that it was appropriate for the United States to honor the requests. Accordingly on April 2, 1984, the IRS served administrative summonses for the requested information on the Northwest Commercial Bank. App., infra, 2a-3a. 3. Respondents received notice of the summonses and directed the bank not to comply. Pursuant to Section 7609 of the Interal Revenue Code, they then petitioned the district court to quash the summonses, raising three claims: (1) the summonses were not issued for lawful purposes; (2) the summonses did not seek information relevant to any inquiry concerning an internal revenue tax of the United States; and (3) the information sought could be obtained directly by Revenue Canada under Canadian law. The United States filed oppositions to the petitions to quash, together with motions for summary enforcement, and supported those filings with affidavits from Director Clancy. He stated therein that he had decided to honor the Canadian requests and to issue the summonses because: (1) the requested information may be relevant in determining respondents' tax liability; (2) the same type of information can be obtained by Canadian tax authorities under Canadian law; and (3) the information requested was not already in the possession of the IRS. Director Clancy also declared that Revenue Canada had requested the information to determine the correct tax liabilities of respondents pursuant to a "criminal investigation, preliminary stage" and that he had determined that Revenue Canada's requests were within the scope of the treaty. App., infra, 2a-3a. A magistrate held a consolidated hearing on the petitions to quash and recommended that the district court enforce both of the summonses (App., infra, 27a-33a, 36a-42a). Over respondents' objections to the magistrate's recommendations, the district court ordered the bank to comply with the summonses (id. at 25a-26a, 34a-35a). 4. The enforcement orders were stayed pending appeal, and the court of appeals reversed by a 2-1 vote (App., infra, 1a-21a). The court held that the affidavits submitted did not sufficiently demonstrate that the summonses were issued in "good faith" as required under United States law (see United States v. Powell, 379 U.S. 48, 57-58 (1964); App., infra, 8a-14a). Accordingly, the court ruled that the treaty did not require that the summonses be enforced because of a failure to satisfy the condition that the information sought be information that "the Commissioner is entitled to obtain under the revenue laws of the United States of America" (Art. XXI). Specifically, the court stated that one of the elements of good faith for domestic summonses is the requirement that there has been no referral to the Justice Department for criminal prosecution. See I.R.C. Section 7602(c). The court then rejected the government's argument that this requirement did not apply to summonses issued at the request of a treaty partner, an argument that the court acknowledged had been accepted by the Second Circuit in United States v. Manufactureres & Traders Trust Co., 703 F.2d 47, 49-53 (1983). See App., infra, 9a-11a. The Second Circuit had held that, in light of the significant differences between the U.S. and foreign legal systems, the legitimate purpose inquiry for treaty summonses should not necessarily incoprorate all of the features of that standard developed for domestic cases. In particular, the Second Circuit explained that the policy considerations that underlie the prohibition against post-referral summonses -- namely, concern about infringing on the role of grand juries and about expanding discovery powers in criminal prosecutions -- simply have no relevance to a Canadian investigation of a Canadian citizen with respect to his Canadian tax liabilities. 703 F.2d at 52. The court below did not address these points. It simply stated that it "decline(d) * * * to adopt Manufacturers and Traders Trust Co.(,)" noting that the statutory codification of the prohibition on post-referral summonses had eliminated the need to delve into the "institutional good faith" of a foreign government (App., infra, 11a). /4/ Instead, the court below ruled that the good faith doctrine applies to treaty summonses to the same extent that it applies to domestic summonses. The court then held that "in order to establish its prima facie case by affidavit, the IRS must make an affirmative statement that the investigation has not reached a stage analogous to a Justice Department referral" (App., infra, 13a). The court stated that such a rule is preferable to placing the burden of proof on the taxpayer because the IRS is in the best position to "consult with Canada's competent authority" and "to have greater familiarity with Canadian administrative procedures" (ibid.). The court concluded that "it was clear error to find that the affidavits made a prima facie showing of legitimate purpose" (id. at 14a). Judge Wright dissented (App., infra, 17a-21a). He stated that Director Clancy's affidavit had made a prima facie showing of good faith that was not refuted by respondents. The dissent criticized the majority for creat(ing) an additional requirement for the good faith showing," namely, the requirement that the IRS affirmatively state that the foreign criminal investigation has not reached a stage analogous to a Justice Department referral (id. at 18a-20a). The dissent also concluded that the majority did not offer "sound bases" for rejecting Manufacturers (id. at 19a) and thus that the decision below "creates an unnecessary intercircuit split, imposes new burdens on the competent authority and meddles unnecessarily in Canadian internal affairs" (id. at 17a). /5/ REASONS FOR GRANTING THE PETITION The court of appeals has erroneously decided an important question of law pertaining to our tax treaty obligations. The court has concluded that United States cooperation with foreign tax investigations is limited by all restrictions applicable to summonses issued in domestic investigations, and it has applied to tax treaty summonses the standards that are grounded entirely in internal policies that bear no relevance to practices in the treaty partner's jurisdiction. In so doing, the court of appeals has imposed upon government enforcement of IRS summonses a new condition that marks a departure form congressional intent and from well established law. The error committed by the court of appeals is of great importance because its practical effect would be to impair the reciprocal cooperation of our tax treaty partners and to impede the flow of information under the exchange of information provisions of tax treaties. Moreover, the decision below directly conflicts with the decision of another court of appeals, thus creating the likelihood that indistinguishable foreign requests for tax information will yield different results depending upon the circuit in which they arise, and perhaps giving the impression that the United States judicial system favors one foreign country over another. It is therefore appropriate for this Court to grant certiorari. 1. As the court of appeals candidly acknowledged (App., infra, 11a), it "decline(d) * * * to adopt" the Second Circuit's decision in United States v. Manufacturers & Traders Trust Co., 703 F.2d 47(1983), and its refusal to do so has created a square conflict in the circuits. That case, like this one, involved summonses issued by the IRS pursuant to an information request by Revenue Canada under Articles XIX and XXI of the 1942 Convention. In Manufacturers, the taxpayers under investigation by Revenue Canada were also under criminal investigation by the Royal Canadian Mounted Police, and the two agencies of the Canadian government freely exchanged information, as permitted by Canadian law. The district court refused to enforce the IRS summonses, concluding that they were issued in bad faith because the Canadian tax officials who had initiated the treaty request intended to share the information received with the Royal Mounted Police. The Second Circuit reversed and ordered the summonses enforced. The court observed that the summonses probably could not be enforced if the matter had been purely domestic because of the policy against utilization of an IRS summons to acquire evidence for a pending criminal prosecution (703 F.2d at 49-50). The court concluded, however, that, for "international purposes, the requirements for summons-enforcement are not in all respects precisely the same as for domestic cases and that here the Government has satisfied all the standards applicable under the Convention" (id. at 50). The court explained that the "dominant condition" for a request under the treaty is that Revenue Canada be considering the determination of a person's income tax liability under Canadian law, and that condition was clearly satisfied (ibid.). The court specifically discussed whether the fact that the information would be used partially for Canadian criminal investigatory purposes posed a bar to enforcement of the summons. The court noted that Canadian law imposed no restriction on such use, and it held that the United States prohibition on such use in domestic cases does not apply in the treaty context. 703 F.2d at 50-51. The court explained that the restriction on issuance of domestic summonses following a referral for criminal prosecution "stems from special provisions of United States law" -- namely those that center criminal prosecutions in the Department of Justice, rather than the IRS, and those that make the grand jury the focus of prosecution discovery (id. at 52). This policy is wholly internal * * * (and) is not applicable to Canada which does not have our marked separations and does not normally use the grand jury" (ibid.). The court continued (ibid.): "The United States has no interest in thrusting its policy (in this regard) into Canadian prosecutions, Canada has no interest in having that policy applied to its taxpayers, and * * * a Canadian taxpayer * * * has no right to expect that he will have the protection accorded by this country to its own taxpayers and potential defendants." The court added that "Canada might consider it a failure on this country's part to comply with the treaty's commitment if enforcement of the summonses were refused on grounds Canada does not recognize in its own territory or with respect to its own income taxes" (id. at 52-53). The decision below, which held that the criminal referral restriction in Section 7602(c) of the Code fully applies to IRS summonses issued prusuant to treaty requests, squarely conflicts with Manufacturers. The affidavits submitted by Director Clancy here manifestly would have satisfied the standards for treaty summonses set forth in Manufacturers, but the court here held that it was "clear error to find that the affidavits made a prima facie showing of legitimate purpose" (App., infra, 14a). To the extent the decision below may be read to suggest that Manufacturers might be decided differently today in light of TEFRA (see id. at 11a), that suggestion is wholly without merit. TEFRA explicitly reaffirmed that the purposes for which a summons may be used "include the purpose of inquiring into any offense" in connection with the tax laws (26 U.S.C. 7602(b)), while adopting the "bright line" standard of the dissent in United States v. LaSalle Nat'l Bank, 437 U.S. 298 (1978) -- i.e., the standard that a summons may not be issued after the IRS has made a criminal referral to the U.S. Department of Justice, but that there is not to be an additional open-ended inquiry into the "institutional good faith" of the IRS (see note 2, supra). Accordingly, the TEFRA amendments in no way would have affected the analysis in Manufacturers, which focused entirely upon the criminal referral restrictions. /6/ Indeed, in enacting TEFRA Congress specifically identified the concerns underlying the referral restriction as the same ones discussed by the Second Circuit in Manufacturers -- noting that it did not intend "to broaden the Justice Department's right of criminal discovery or to infringe on the role of the grand jury as a principal tool of criminal prosecution" (1 S. Rep. 97-494, 97th Cong., 2d Sess. 286 (1982)). /7/ Hence, there can be no doubt that the Manufacturers decision remains fully viable today in the wake of TEFRA, and thus, as Judge Wright correctly stated, the decision below "creates an intercircuit conflict" (App., infra, 19a). 2. The decision of the court of appeals in this case is erroneous in several respects. It misinterprets the standards governing the enforcement of treaty summonses by mistakenly importing domestic policy concerns into an international context in which they should play no role. More generally, the court's opinion fails to follow recognized principles of treaty interpretation in construing the language of the Convention. Finally, the unprecedented requirement imposed by the court that the IRS affirmatively show that the treaty partner's criminal investigation has not reached a stage analogous to a Justice Department referral is at odds with well-settled principles governing burden of proof in summons enforcement proceedings. a. An administrative summons issued by the IRS will not be enforced unless it is issued in "good faith." The basic requirements for establishing good faith were set forth by this Court in United States v. Powell, 379 U.S. 48 (1964). The IRS "must show that the investigation will be conducted pursuant to a legitmate purpose, that the inquiry may be relevant to that purpose, that the information sought is not already in the Commissioner's possession, and that the administrative steps required by the Code have been followed" (id. at 57-58). In United States v. LaSalle Nat'l Bank, supra, the Court considered whether there was an additional requirement that would limit the use of administrative summonses as a criminal investigative tool. The Court concluded that Section 7602, as in effect at that time, did not authorize the use of a summons for the sole purpose of advancing a criminal investigation (see 437 U.S. at 316 n.18). The Court held that "the primary limitation on the use of a summons occurs upon the recommendation of criminal prosecution to the Department of Justice" (id. at 311); it also held that a summons cannot issue if the IRS as an institution has abandoned the pursuit of civil tax determination or collection (id. at 318). This latter restriction was eliminated by Congress in TEFRA in 1982 when it authorized in Section 7602(b) the use of a summons for investigating tax offenses, while it codified in Section 7602(c) the prohibition on issuance of a summons after a Justice Department referral. The Court in LaSalle Nat'l Bank explained that the rationale for the criminal referral restriction derived from the division of authority in our system for the conduct of criminal investigations and prosecutions. Specifically, the Court found that Congress did not intend that the summons power be used "to broaden the Justice Department's right of criminal litigation discovery or to infringe on the role of the grand jury as a principal tool of criminal accusation" (437 U.S. at 312; see also id. at 313 n.15). The Court pointed to the fact that a referral to the Justice Department is necessary to allow a criminal prosecution to proceed and that such a referral deprives the IRS of its ability to compromise both the criminal and civil aspects of a fraud case. At that point, the Court concluded, the degree of necessary information exchange between the two agencies would be such that IRS use of information to determine civil liability "would inevitably result in criminal discovery" (id. at 312). Moreover, in enacting TEFRA, Congress adverted to these same concerns identified by the Court in LaSalle -- resisting the expansion of criminal discovery by the Justice Department and intrusion into the role of the grand jury (1 S. Rep. 97-494, supra, at 286). These domestic policy considerations plainly are of no relevance to the enforcement of treaty summonses. When a summons issued at the request of a treaty partner is enforced, there can be no encroachment upon the function of the institution of the grand jury in this country nor is there an expansion of the Justice Department's discovery power. In accordance with our treaty obligations, the information is simply provided to a foreign government, which uses it for its own domestic purposes in accordance with its own laws. In the case of Canada, for example, the institution of the grand jury has been abolished (except in limited circumstances in Nova Scotia), and all crimes are charged by information. See 2 Can. Rev. Stat. ch. 34, Section 507 (1970). And the Canadian system permits information sharing between agencies in criminal investigations; Section 241(4) of the Canadian Income Tax Act, 5 Can. Tax Rep. (CCH) Paragraph 27,742 (1987), provides that for any purpose related to the revenue, the Minister may disclose to any authorized person of the Canadian Government any materials obtained by him in the course of his investigation. See also Manufacturers, 703 F.2d at 51. Thus, the rule adopted by the court below advances no discernible policy interest, either of the United States or of Canada. Canadian taxpayers who use banks in this country have no right to expect that the restrictions afforded against criminal discovery by this country for purposes of its own law enforcement activities will apply to them in connection with a Canadian investigation of their Canadian tax liabilities. As the Second Circuit said in Manufacturers, "(t)he United States has no interest in thrusting its policy (in this regard) into Canadian prosecutions, (and) Canada has no interest in having that policy applied to its taxpayers" (703 F.2d at 52). On the other hand, while the decision below advances no legitmate policy interest, it does have the deleterious effect of inhibiting the exchange of tax information provided for in the Income Tax Convention with Canada. In sum, the decision below is erroneous because it requires a treaty partner's tax investigation to meet standards grounded in domestic policies that have no application in the treaty partner's jurisdiction, and because it unnecessarily hinders investigations that the United States has pledged by treaty to assist and that are entirely proper under the laws of the treaty partner. /8/ b. The decision below also contravenes established principles of treaty interpretation. The holding of the court of appeals seems to rest implicitly upon the conclusion that the treaty phrase "such information * * * as the Commissioner is entitled to obtain under the revenue laws of the United States" (Art. XXI) does not cover situations where the foreign country's criminal investigation has reached a stage analogous to a Justice Department referral (see App., infra, 7a, 11a). It has long been settled, however, that the construction placed upon a treaty by the Executive Branch is entitled to great deference by the courts. See, e.g., Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176, 180-185 (1982); Factor v. Laubenheimer, 290 U.S. 276, 294-295 (1933). It is likewise well established that treaties are to be construed liberally to effectuate the treaty partners' intentions. See, e.g., Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. at 185; Bacardi Corp. of America v. Domenech, 311 U.S. 150, 161, 163 (1940). And domestice law should be interpreted, if possible, to avoid restricting the scope of a preexisting treaty provision. See United States v. Lee Yen Tai, 185 U.S. 213, 222 (1902); I.R.C. Section 7852(d). The court of appeals' interpretation does not adhere to these principles. The court paid no deference to the Executive Branch's contrary interpretation, and the court read the treaty and Section 7602 narrowly to defeat the treaty's overriding purposes. The manifest purpose of the treaty provision involved here is to provide for the exchange of information between nations in order to assist the treaty partner's tax investigations. This cooperation is designed to serve the more general goal of "prevent(ing) fiscal evasion." United States v. A.L. Burbank & Co., 525 F.2d 9, 13 (2d Cir. 1975), cert. denied, 426 U.S. 934 (1976). The summons at issue here undeniably was issued in furtherance of those goals at Canada's request. The court of appeals' action in this case and its more general imposition of a new "foreign equivalent of referral" restriction on the use of treaty summonses can only serve to retard the accomplishment of these goals. This restriction is not compelled by the treaty language itself, and the court of appeals certainly cannot be regarded as having read that language liberally to advance the treaty's goals. As the Second Circuit suggested in Manufacturers (703 F.2d at 51), the treaty provision (Art. XXI) gives the partner the right to obtain "information the Commissioner is entitled to obtain under the revenue laws of the United States"; the fact that the IRS is "entitled to obtain" bank records for use in tax investigations is sufficient to justify enforcement of a treaty request like the one in this case. Indeed, even a narrow, literal reading of the treaty and the statute does not support the court of appeals' holding. Section 7602(c) prohibits the issuance of a summons only when there has been a referral to the U.S. Justice Department, which indisputably has not occurred here; the statute gives no hint that an inquiry should be made into whether a foreign investigation has reached a point analogous to a referral. In sum, the court of appeals' holding casts a shadow over the Income Tax Convention with Canada and other similar treaties. It undermines the information exchange purpose of the treaty provision and may well impede the flow of reciprocal tax information and assistance necessary to our own internal tax investigations. More generally, the decision may weaken the position of the United States in dealing with its treaty partners and otherwise harm our international relations. As the Second Circuit noted in Manufacturers (703 F.2d at 53), "our international relations with Canada might be damaged and the executives in both countries might be embarrassed if an organ in this country were to characterize a Canadian request as made in 'bad faith' where the request was perfectly appropriate under the law of the requesting country." The court of appeals seriously erred in interpreting the treaty and Section 7602 to yield these undesirable consequences in the absence of any relevant policy or other justification for its interpretation. c. Apart from its erroneous holding that the equivalent of a Justice Department referral in the foreign tax investigation prevents a treaty summons from being enforced, the court of appeals also erred in placing upon the government the burden of showing the absence of such a referral equivalent. The court of appeals held that "the IRS must make an affirmative statement that the investigation has not reached a stage analogous to a Justice Department referral" (App., infra, 13a). This unprecedented conclusion appears to be based on the court's assumption that the IRS would be required in a domestic summons case to establish, as part of its prima facie case for enforcement, that a Justice Department referral is not in effect (see ibid.). This premise is erroneous. To obtain enforcement of a domestic summons, the government bears the burden of showing that the requirements of United States v. Powell, supra, are met -- essentially that the summons authority is being invoked in good faith for purposes authorized by the Code. This is ordinarily accomplished by means of an affidavit of the agent issuing the summons. See, e.g., United States v. Balanced Financial Mgmt., Inc., 769 F.2d 1440, 1443 (10th Cir. 1985). It has never been held, however, that the government must, in addition, show the absence of a criminal referral as part of its prima facie case. In LaSalle Nat'l Bank, the Court affirmed the validity of a dual purpose summons -- one seeking evidence for both criminal and civil investigation -- but it held that a summons would not be enforceable if the IRS had abandoned its purpose of civil tax determination. The Court explicitly stated, however, that the person opposing enforcement bore the "heavy" burden "to disprove the actual existence of a valid civil tax determination or collection purpose" (437 U.S. at 316). The lower courts accordingly recognized that the government established its prima facie case by the submission of an affidavit stating that the Powell factors were satisfied, and it was left to the person opposing enforcement to disprove the existence of a valid civil tax purpose at the "rebuttal stage" of the enforcement proceedings. See, e.g., United States v. Kis, 658 F.2d 526, 530, 538-543 (7th Cir. 1981), cert. denied, 455 U.S. 1018 (1982); United States v. Garden State Nat'l Bank, 607 F.2d 61, 68 (3rd Cir. 1979) (footnote omitted) ("once the Government has carried its Powell burden of proof of 'good faith,' the burden shifts to taxpayer to show that the institutional 'good faith' required by LaSalle does not exist"). The enactment of TEFRA did nothing to change this procedural burden allocation. The legislative history specifically addressed the question of the burden of proof that would apply to the new statutory requirement that no criminal referral be in effect. The Senate Report explained (1 S. Rep. 97-494, supra, at 283 (emphasis added)): (T)he Secretary will have to meet all the requirements of United States v. Powell, 379 U.S. 48 (1964), including a showing that the individual investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to that purpose, that the information sought is not already within the Commissioner's possession, and that all the administrative steps required by the Code have been followed. As a defense to the enforcement of the summons, the taxpayer may show that the taxpayer's case has been referred to the Department of Justice. Thus, it is apparent that Congress intended the referral restriction of Section 7602(c) to be a taxpayer defense rather than part of the prima facie showing to be made by the IRS. This interpretation of the burden of proof with respect to the criminal referral restriction has been adopted by the Third Circuit in Pickel v. United States, 746 F.2d 176 (1984). The court there rejected the taxpayers' efforts to quash two IRS summonses where the agent's affidavit had not asserted that no Justice Department referral was in effect. The court stated that the taxpayers had not come forward with evidence to meet their burden, noting that "(t)he Pickels, as the parties opposing the summonses, bore the burden of showing * * * that a Justice Department referral had taken place" (id. at 184). /9/ See also United States v. Naden, 57 A.F.T.R.2D (P-H) Paragraph 86-632 (E.D. Cal 1986) (IRS "not required to make an affirmative showing of the absence of a Justice Department referral as part of * * * (its) prima facie case for enforement"). These domestic summons cases are flatly inconsistent with the rationale of the decision below and with its premise that the government generally must show the absence of a referral as part of its prima facie case. Moreover, fundamental principles of summons enforcement law strongly militate against the additional requirement imposed by the court below of demonstrating that the foreign proceedings have not reached a stage analogous to a Justice Department referral. Summons enforcement proceedings are intended to be summary in nature. See Donaldson v. United States, 400 U.S. 517 (1971). The court's role is limited to guarding against abuses of the summons power. See, e.g., United States v. Bisceglia, 420 U.S. 141, 150 (1975); United States v. Powell, 379 U.S. at 57-58. Restrictions on that authority should not imposed "'absent unambiguous directions from Congress.'" United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984) (citation omitted). Here, however, the court has imposed an additional requirement on the IRS summons power -- one that, contrary to the court's suggestion (App., infra, 13a), will impede the enforcement of tax treaty summonses. Each summons issued at the request of a treaty partner will require the U.S. "competent authority" to undertake an inquiry into the vagaries and detailed administration of various foreign legal systems, which may prove to be quite burdensome. This type of inquiry goes well beyond what has heretofore been viewed as necessary or appropriate for the enforcement of treaty summonses. See, e.g., United States v. Bache Halsey Stuart, Inc., 563 F. Supp. 898, 900-901 (S.D.N.Y. 1982). /10/ 3. The issue presented here is one of great importance. The United States currently has in effect 31 tax treaties that include exchange of information provisions of the type contained in the Income Tax Convention with Canada. It also has several exchange of information executive agreements that are in effect with designated Carribean Basin countries. See I.R.C. Section 274(h)(6)(C). These treaties and agreements are with the major trading and economic partners of the United States and represent an important mechanism by which the United States and its treaty partners seek to prevent tax avoidance and evasion on an international level. The IRS informs us that, during the period between January 1984 and July 1987 more that 1600 specific requests for information were made or received by the U.S. competent authority under the exchange of information provisions of our tax treaties. The success of the exchange of information program depends upon the cooperation of our treaty partners. Indeed, the United States depends to a great extent on foreign nations' willingness to honor our requests for information, both in the tax area and in other enforcement areas. That cooperation might well be impaired, and the position of the United States in dealing with its treaty partners weakened, if the unnecessary obstacle to information exchange erected by the court of appeals in this case were allowed to stand. Moreover, if the conflict in the circuits on this issue were allowed to persist, identical treaty requests would meet with differing fates depending upon the circuit in which they arise, perhaps giving the appearance that the U.S. courts favor one country over another. Accordingly, the Court should act to resolve the conflict in the circuits. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. CHARLES FRIED Solicitor General WILLIAM S. ROSE, JR. Assistant Attorney General ALAN I. HOROWITZ Assistant to the Solicitor General CHARLES E. BROOKHARD JOHN A. DUDECK, JR. Attorneys DECEMBER 1987 /1/ Unless otherwise noted, all statutory references are to the Internal Revenue Code (26 U.S.C.), as amended (the Code or I.R.C.). /2/ This requirement first arose out of this Court's decision in United States v. LaSalle Nat'l Bank, 437 U.S. 298 (1978). The Court there held (5-4) that the IRS may issue a summons as long as it has not made a Justice Department referral and has "not abandon(ed) in an institutional sense * * * the pursuit of civil tax determination or collection" (id. at 318). The dissenting Justices argued for a bright-line test turning entirely upon whether a recommendation for prosecution has already been made to the Justice Department (id. at 320-321 (Stewart, J., dissenting)). The TEFRA amendments essentially adopted the dissenting position. TEFRA also added Section 7602(b), which made explicit that a inquiry into the possibility that a criminal offense has been committed is a legitimate purpose for the issuance of a summons. /3/ These treaty provisions have been held to contemplate use of domestic summons enforcement procedures by the Commissioner of Internal Revenue to assist a treaty partner in a foreign tax investigation even though no United States taxes are involved. See, e.g., United States v. A.L. Burbank & Co., 525 F.2d 9 (2d Cir. 1975), cert. denied, 426 U.S. 934 (1976). We note that a new Income Tax Convention between the United States and Canada became effective after the issuance of the summonses involved in this case (see 1 Tax Treaties (CCH) Paragraph 1301 (1984)). Article XXVII of the new Convention (Paragraph 1317k), effective with respect to taxes for taxable years beginning on or after January 1, 1985, contains language relating to exchange of information that is essentially indistinguishable from the language contained in Articles XIX and XXI of the 1942 Convention. /4/ The summons at issue in Manufacturers had been issued prior to the effective date of the TEFRA amendments, and therefore the majority opinion in LaSalle Nat'l Bank was still the law. /5/ The dissent also criticized (App., infra, 20a-21a) the majority's refusal to consider certain supplemental legal materials submitted by the government. In response to questions raised for the first time at oral argument concerning the burden of proof on the referral issue, the government had submitted supplemental case law showing that the taxpayer bears the burden of proof on this issue. The government also had submitted certain foreign law materials showing that Revenue Canada had not yet made the equivalent of a Justice Cepartment referral in this case. The majority refused to consider these materials because the government had failed to seek leave of the court before filing the domestic law materials (see Fed. R. App. P. 28(c) and (j)) and because the court believed that, in fairness to respondents, the foreign law materials should have been submitted no later than in the appellate brief (App., infra, 14-15a). /6/ The court of appeals' suggestion that the Second Circuit's decision in Manufacturers was premised on its "reluctan(ce) to delve into the institutional good faith of Revenue Canada" (App., infra, 11a) is entirely without foundation. There is no hint in the Second Circuit's opinion of any consideration of a possible "institutional good faith" inquiry; rather, the opinion focuses exclusively on the appropriateness of importing the criminal referral restriction into the treaty summons context -- a restriction that is common to both the majority and dissenting opinions in LaSalle Nat'l Bank and to the TEFRA ammendments. /7/ Congress took this language directly from this Court's opinion in LaSalle Nat'l Bank (see 437 U.S. at 312), which was the focus of the analysis in Manufacturers. /8/ Moreover, the rule adopted by the court of appeals injects a new and complex issue into summons proceedings -- the comparison of the various stages of a foreign tax investigation with our own very different system. It was precisely the desire to prevent this type of amorphous inquiry that prompted Congress in TEFRA to adopt the bright-line test of the LaSalle Nat'l Bank dissent and eliminate the inquiry into "institutional good faith." Thus, the decision below runs counter to Congress's expressed desire to elimate "protracted litigation" and "to simplify administration of the (tax) laws" (1 S.Rep. 97-494, supra, at 285-286). /9/ Of course, the government regularly furnishes the pertinent information to a taxpayer seeking, through informal inquiry or a discovery request, the evidence to discharge this burden. It remains, however, the taxpayer's burden to raise and establish such a defense in the domestic summons context. /10/ To the extent the decision below should be read as imposing in domestic summons cases as well the requirement that the affidavit assert the absence of a Justice Department referral, that requirement would also impede summons enforcement. It is true, as the court of appeals observed (App., infra, 13a), that government affidavits sometimes disclose referral status, but the government is under no legal obligation to do so. While it is ordinarily not difficult for the IRS to ascertain whether it has initiated a Justice Department referral (see I.R.C. Section 7602(c)(2)(A)(ii), the statute also provides that a "Justice Department referral" is in effect when there has been a request by Justice for return information from the IRS pursuant to I.R.C. Section 6103(h)(3)(B). See I.R.C. Section 7602(c)(2)(A)(ii). It is quite difficult for the agent issuing the summons to determine whether there has been such a "reverse referral" in a given case. APPENDIX