Barquero v. United States

United States Court of Appeals,

Fifth Circuit.

No. 93-7447.

Julio Roberto Zarate BARQUERO, Plaintiff-Appellant,

v.

UNITED STATES of America, Defendant-Counter-Claimant-Appellee,

v.

INTERNATIONAL BANK OF COMMERCE, Counter-Defendant-Appellant.

April 20, 1994.

Appeal from the United States District Court for the Southern
District of Texas.

Before HENDERSON,* SMITH, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Plaintiff Julio Roberto Zarate Barquero ("Zarate") and

Counter-defendant International Bank of Commerce ("IBC") appeal the

district court's order denying their motion to quash an

administrative summons issued by the Internal Revenue Service

("IRS") and granting the government's motion to enforce the

summons. We affirm.

I

In 1989, the United States and Mexico signed a Tax Information

Exchange Agreement ("TIEA"). 1 In 1991, the "competent authority"

*
Circuit Judge of the 11th Circuit, sitting by designation.
1
As its name suggests, a TIEA is an agreement providing for
the exchange between two countries of tax or tax-related
information that may otherwise be subject to nondisclosure laws
of each country. 26 U.S.C. § 274(h)(6)(C)(i). A TIEA allows
both countries to obtain from each other information that "may be
necessary or appropriate to carry out and enforce the[ir] tax

1
of Mexico requested pursuant to the TIEA that the IRS2 provide

information regarding Zarate's tax liability under the laws of

Mexico. Pursuant to that request, the IRS served IBC with an

administrative summons requesting all records in IBC's possession

pertaining to bank accounts held or controlled by Zarate. Zarate

filed a petition with the district court to quash the summons,

which the government answered. The government also filed a

counterclaim seeking to enforce the summons and adding IBC as a

defendant. Both parties then sought summary judgment. After a

hearing, the district court denied the motion to quash and granted

the motion to enforce. Zarate and IBC now appeal, arguing that the

district court erred in several respects.

II

Zarate initially contends that the United States—Mexico TIEA

is unconstitutional because Congress has not authorized the

President to enter into such agreements. Section 274(h)(6)(C) of

the Internal Revenue Code authorizes the Secretary "to negotiate

and conclude an agreement for the exchange of information with any

beneficiary country." 26 U.S.C. § 274(h)(6)(C). It is undisputed

that Mexico is not a "beneficiary country" as that term is defined

by section 212(a)(1)(A) of the Caribbean Basin Economic Recovery

laws." Id.
2
Pursuant to a delegation from the Secretary of the
Treasury, the IRS is the "competent authority" of the United
States. The TIEA charges the competent authorities of each
country with carrying out all exchanges of information between
the two countries.

2
Act—19 U.S.C. § 2702.3 See 26 U.S.C. § 274(h)(6)(B). Zarate thus

concludes that the TIEA between the United States and Mexico is

unconstitutional because the President lacked the authority to

enter into it.

The government, on the other hand, argues that the 1986

amendments to the Code provided statutory authorization for the

U.S.—Mexico TIEA.4 Specifically, the government points to §

927(e)(3) of the Code, which provides that

the term ["foreign sales corporation" ("FSC") ] shall not
include any corporation which was created or organized under
the laws of any foreign country unless there is in effect
between such country and the United States—

(A) a bilateral or multilateral agreement described in section
274(h)(6)(C) (determined by treating any reference to a
beneficiary country as being a reference to any foreign
country and by applying such section without regard to clause
(ii) thereof)5....

3
The Caribbean Basin Economic Recovery Act is also known as
the Caribbean Basin Initiative ("CBI"). Beneficiary countries
that enter into TIEAs with the United States gain several
benefits, the most notable being that they become eligible for
project financing under § 936 of the Code.
4
The government did not argue in its brief that the
President, pursuant to his own constitutional authority, could
lawfully enter into the TIEA.
5
Clause (ii) of § 274(h)(6)(C) provides:

An exchange of information agreement need not provide
for the exchange of qualified confidential information
which is sought only for civil tax purposes if—

(I) the Secretary of the Treasury, after making
all reasonable efforts to negotiate an agreement which
includes the exchange of such information, determines
that such an agreement cannot be negotiated but that
the agreement which was negotiated will significantly
assist in the administration and enforcement of the tax
laws of the United States, and

3
26 U.S.C. § 927(e)(3) (emphasis added). While acknowledging that

Congress did not explicitly amend § 274(h)(6)(C) by amending §

927(e)(3), the government nonetheless contends that § 927(e)(3)

authorizes the President to enter into TIEAs with non-beneficiary

countries. We agree.

Prior to 1986, only beneficiary countries that had entered

into TIEAs with the United States could serve as host countries for

FSCs.6 However, Congress, through the 1986 amendments, opted to

allow any foreign country to enter into a TIEA and become eligible

to be a host country:

The 1986 [Tax Reform] Act provided that a country may qualify
as a host country for foreign sales corporations (FSCs) by
entering into an exchange of information agreement of the type
provided for in the Caribbean Basin Economic Recovery Act,
whether or not that country is eligible to be a CBI
beneficiary country.... [W]here a country other than a CBI
beneficiary country enters into a bilateral information
exchange agreement of the type that qualifies it as a FSC host
country ..., the bill provides express protection to
individuals who make disclosures in accordance with the terms
of the agreement from Code sanctions for unauthorized
disclosures.

S.Rep. No. 445, 100th Cong., 2d Sess. 332 (1988), U.S.Code Cong. &

Admin.News 1988, pp. 4515, 4843-4844 (emphasis added).7 If the

Executive lacked the power to enter into TIEAs with non-beneficiary

countries, the 1986 amendment to § 927(e)(3) would serve no

(II) the President determines that the agreement
as negotiated is in the national security interest of
the United States.

26 U.S.C. § 274(h)(6)(C)(ii).
6
See 26 U.S.C. § 927(e)(3) (1982).
7
The report was promulgated in 1988 when Congress corrected
technical errors in the 1986 Tax Reform Act.

4
apparent purpose—an absurd result.8 Thus, we believe that §§

274(h)(6)(C) and 927(e)(3), when read together, provide specific

congressional authorization for the President's decision to enter

into the challenged TIEA.9 Consequently, the TIEA "is "supported

by the strongest of presumptions and the widest latitude of

judicial interpretation, and the burden of persuasion would rest

heavily upon any who might attack it.' " Dames & Moore v. Regan,

453 U.S. 654, 101 S.Ct. 2972, 69 L.Ed.2d 918 (1981) (quoting

Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579, 637, 72 S.Ct.

863, 871, 96 L.Ed.2d 1153 (1952) (Jackson, J., concurring)).

"Under the circumstances of this case, we cannot say that [Zarate]

has sustained that heavy burden." Id. Accordingly, we find that

the U.S.—Mexico TIEA is both constitutional and valid.10

Although we conclude that §§ 274(h)(6)(C) and 927(e)(3)

constitute specific congressional authorization to the President to

8
Zarate argues that the 1986 amendment to § 927(e)(3)
"merely provides that if the Secretary did enter into [TIEAs with
non-beneficiary countries], the foreign countries who are party
to those agreements could qualify as a host country [sic] for
FSCs." In Zarate's opinion, before the Secretary actually could
enter into a TIEA with a non-beneficiary country, Congress would
need to pass a statute specifically authorizing the proposed
TIEA. We disagree. Section 927(e)(3)'s cross-reference to and
incorporation of § 274(h)(6)(C) and redefinition of the term
"beneficiary country" demonstrates Congress's intent to authorize
the Secretary to negotiate and conclude a TIEA with "any foreign
country." 26 U.S.C. § 927(e)(3)(A).
9
See State Dept. Rel. No. 90-85 (noting that the TIEA at
issue "was concluded pursuant to section 274(h)(6)(C) of the
Code, which is incorporated by reference and implication in
section 936(d) of the Code, as amended by ... the Tax Reform Act
of 1986").
10
This, of course, does not mean that every cross-reference
in the Code incorporates and amends the referenced provision.

5
enter into the TIEA at issue, we alternatively find that these

sections of the Code provide "implicit approval" for the

President's actions.11 The Supreme Court has noted that a "failure

of Congress specifically to delegate authority does not,

"especially ... in the area[ ] of foreign policy ...,' imply

"congressional disapproval' of the action taken by the Executive."

Dames & Moore, 453 U.S. at 678, 101 S.Ct. at 2986 (quoting Haig v.

Agee, 453 U.S. 280, 291, 101 S.Ct. 2766, 2774, 69 L.Ed.2d 640

(1981)) (some alterations in original). Instead,

the enactment of legislation closely related to the question
of the President's authority in a particular case which
evinces legislative intent to accord the President broad
discretion may be considered to "invite" "measures on
independent presidential responsibility." At least this is so
where there is no contrary indication of legislative intent
and when ... there is a history of congressional acquiescence
in conduct of the sort engaged in by the President.

Id. at 678-79, 101 S.Ct. at 2986 (quoting Youngstown, 343 U.S. at

637, 72 S.Ct. 871 (Jackson, J., concurring)). Here, the 1986

amendment to § 927(e)(3) constitutes an "invitation" for the

President to enter into TIEAs with non-beneficiary countries.12 Cf.

id. at 680, 101 S.Ct. at 2987 ("By creating a procedure to

implement future settlement agreements, Congress placed its stamp

of approval on such agreements."). Moreover, there exists a

11
See Restatement (Third) of Foreign Relations Law of the
United States § 303 cmt. e (stating that "Congress may enact
legislation that requires, or fairly implies, the need for an
agreement") (emphasis added).
12
See also 26 U.S.C. § 6103(k) ("A return or return
information may be disclosed to a competent authority of a
foreign government which has ... [a] convention or bilateral
agreement relating to the exchange of tax information[ ] with the
United States....").

6
history, albeit a short one, of congressional acquiescence in the

President's concluding TIEAs with non-beneficiary countries, and

Congress has not questioned the power of the President to conclude

such agreements.13 Indeed, the Senate appears to have given its

explicit approval to the TIEA at issue when it ratified the United

States—Mexico comprehensive income tax convention in November

1993.14 Consequently, we believe that the Executive did not exceed

its power by entering into the TIEA with Mexico.

III

Zarate next argues that even if the TIEA is valid, the IRS

lacks the authority to issue a summons on behalf of a request by

13
In addition to the U.S.—Mexico agreement, the President
has signed TIEAs with Columbia and Peru, both non-beneficiary
countries, without any indication of congressional disapproval.
See Financial Times, Oct. 1993, available in LEXIS, Nexis Library
(IRS announces the signing of a TIEA with Columbia); U.S. Signs
Anti-Drug Pacts with Bolivia and Peru, Reuters, February 1990,
available in LEXIS, Nexis Library. At one time, the President
also was actively negotiating with Bolivia regarding the
possibility of entering into a TIEA. See Treasury Department
Announcement of Status of Negotiations of Income Tax Treaties and
Tax Information Exchange Agreements, Daily Report for Executives,
April 5, 1993, available in LEXIS, Nexis Library.
14
In September 1992, the United States and Mexico signed a
comprehensive income tax convention. Article 27 of the
convention states that "[t]he competent authorities [of both
countries] shall exchange information as provided in the
Agreement Between the United States of America and the United
Mexican States for the Exchange of Information with Respect to
Taxes signed on November 9, 1989." Convention Between the
Government of the United States of America and the Government of
the United Mexican States for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on
Income, September 18, 1992, U.S.—Mex., art. 27, S. Treaty Doc.
No. 7, 103d Cong., 1st Sess. 52 (1993). The President
transmitted the convention to the Senate in May 1993, and the
Senate advised and consented to the ratification of the
convention on November 20, 1993. See 139 Cong.Rec. S16857-01
(daily ed. Nov. 20, 1993).

7
Mexico pursuant to the TIEA. The IRS contends that it may use the

powers and authority granted to it under chapter 78 of the Code, 26

U.S.C. § 7601 et seq., to obtain information and documents

requested by the competent authority of a country that has a TIEA

with the United States. See United States v. Stuart, 489 U.S. 353,

109 S.Ct. 1183, 103 L.Ed.2d 388 (1989) (upholding administrative

summons issued by IRS pursuant to a request by Canada, which had a

tax convention with the United States providing for the exchange of

tax information between the countries).

Section 274(h)(6)(D) of the Code provides that the Secretary

"may exercise his authority under subchapter A of chapter 78 to

carry out any obligation of the United States under an [exchange of

information] agreement referred to in [§ 274(h)(6)(C) ]." 26

U.S.C. § 274(h)(6)(D). Here, the TIEA with Mexico states:

If information is requested by a Contracting State pursuant to
paragraph 4, the requested State shall obtain the information
requested in the same manner, and provide it in the same form,
as if the tax of the applicant State were the tax of the
requested State and were being imposed by the requested State.

Thus, the TIEA obliges the IRS to seek documents from IBC as if the

IRS was determining Zarate's American tax liability. Moreover, the

TIEA is, pursuant to the cross-reference found in § 927(e)(3)(A),

negotiated under § 274(h)(6)(C). Thus, the TIEA obliges the IRS to

use its authority under chapter 78 of the Code to obtain the

information and documents sought by the Mexican tax authorities.

Chapter 78 authorizes the IRS to summon any person the Secretary

deems proper "to produce such books, papers, records, or other data

... as may be relevant to" "ascertaining the correctness of any

8
return, making a return where none has been made, determining the

liability of any person for any internal revenue tax ..., or

collecting any such liability." 26 U.S.C. § 7602(a)(2).

Accordingly, the IRS possessed the authority to issue the summons

on behalf of the competent authority of Mexico.

IV

Zarate next complains that the district court erred in

enforcing the summons because the IRS issued it in bad faith. To

obtain enforcement of an administrative summons, the IRS must

demonstrate that it issued the summons in good faith—i.e.,

that the investigation will be conducted pursuant to a
legitimate purpose, that the inquiry may be relevant to the
purpose, that the information sought is not already within the
Commissioner's possession, and that the administrative steps
required by the Code have been followed—in particular, that
the [IRS], after investigation, has determined the further
examination to be necessary and has notified the taxpayer in
writing to that effect.

United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-55,

13 L.Ed.2d 112 (1964). Once the IRS has made such a showing, "it

is entitled to an enforcement order unless the taxpayer can show

that the IRS is attempting to abuse the court's process." Stuart,

489 U.S. at 360, 109 S.Ct. at 1188.

The affidavits the IRS submitted in this case "plainly

satisfied the requirements of good faith [the Supreme Court] set

forth in Powell." Id., 489 U.S. at 360, 109 S.Ct. at 1188; see

also id. at 370, 109 S.Ct. at 1193 (noting that the summons will be

enforced "[s]o long as the IRS itself acts in good faith")

(emphasis added). The IRS Assistant Commissioner (International)

stated under oath that the information sought was not within the

9
possession of American or Mexican tax authorities, that it might be

relevant to the determination of Zarate's Mexican tax liabilities,

that the same type of information could be obtained by Mexican tax

authorities under Mexican law, and that Mexican tax authorities had

requested that the IRS seek such information. She further noted

that any exchanged information could be disclosed only "as required

in the normal administrative or judicial process operative in the

administration of the tax system" in Mexico and that improper use

of exchanged information would be protested. Moreover, the IRS

issued the summons in conformity with applicable statutes15 and duly

informed Zarate by certified or registered mail of its issuance.

Finally, Zarate has failed to adduce any facts indicating that the

IRS was trying to use the district court's process for some

improper purpose, "such as harassment or the acquisition of

bargaining power in connection with some collateral dispute." Id.

at 360-61, 109 S.Ct. at 1188. Accordingly, the IRS was entitled to

15
Zarate, without citing any authority, complains that the
IRS did not issue the summons in conformity with applicable
statutes because the TIEA was not published in "a compilation
entitled "United States Treaties and Other International
Agreements,' " 1 U.S.C. § 112a, and was not transmitted to
Congress within sixty days after the TIEA "entered into force," 1
U.S.C. § 112b. However, Zarate did not contend before the
district court that these facts demonstrated that the IRS issued
the summons in bad faith. Accordingly, we need not address these
issues. See Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161,
1163 (5th Cir.1992) (noting that we need not consider issues
raised on appeal if they were not raised before the district
court). While Zarate did raise these issues below regarding the
validity of the TIEA, he does not argue on appeal that the TIEA
is unconstitutional or invalid for these reasons. See United
States v. Valdiosera-Godinez, 932 F.2d 1093, 1099 (5th Cir.1991)
("Any issues not raised or argued in the appellant's brief are
considered waived and will not be entertained on appeal."), cert.
denied, --- U.S. ----, 113 S.Ct. 2369, 124 L.Ed.2d 275 (1993).

10
an enforcement order. See id. (where the Supreme Court upheld IRS

summonses issued on behalf of Canada where the supporting

affidavits were virtually identical to the supporting affidavits

supplied here); United States v. Linsteadt, 724 F.2d 480, 482 (5th

Cir.1984) (noting that "the requisite showing [of relevance] may be

made by a simple affidavit filed with the petition to enforce by

the agent who issued the summons").

V

Zarate next argues that because the IRS failed to comply with

the Right to Financial Privacy Act ("RFPA") when issuing the

summons to IBC, the summons is unenforceable. Zarate points out

that Article 4(4)(b) of the TIEA specifically imposes upon the IRS

the duty to comply with the RFPA when seeking information on behalf

of the Mexican government:

If the United States is requested to obtain the types of
information covered by section 3402 of the Right to Financial
Privacy Act of 1978 [12 U.S.C. § 3402] as in effect at the
time of signing this agreement, it shall obtain the requested
information pursuant to that provision.

Thus, the plain language of the TIEA requires the IRS to comply

with § 3402 of RFPA. See Stuart, 489 U.S. at 365, 109 S.Ct. at

1191 (noting that the clear import of treaty language controls).

Section 3402 provides that the government may not obtain from any

financial institution the financial records of any person, "except

as provided by section ... 3413" of the RFPA. Section 3413, in

turn, provides that "[n]othing in [the RFPA] prohibits the

disclosure of financial records in accordance with procedures

authorized by Title 26." Because Zarate does not argue that the

11
summons failed to comply with the examination and inspection

procedures set out in Title 26, see 26 U.S.C. § 7601 et seq., we

find that the IRS issued the summons in compliance with both § 3402

of the RFPA and Article 4 of the TIEA.

VI

Zarate, again without citing any authority, contends that the

summons is unenforceable to the extent the IRS seeks to obtain

documents created before the TIEA took effect. The government, on

the other hand, argues that "information may be requested and

provided for tax periods prior to the effective date of the TIEA."

Initially, we note that "the Supreme Court has consistently

declined to circumscribe the breadth of the summons authority that

Congress intended to grant the IRS, absent unambiguous directions

from Congress." United States v. Barrett, 837 F.2d 1341, 1349 (5th

Cir.1988) (en banc), cert. denied, 492 U.S. 926, 109 S.Ct. 3264,

106 L.Ed.2d 609 (1989). For example, the Court has refused to read

into the Code requirements that summons, to be enforceable, be

founded upon probable cause, Powell, 379 U.S. at 53-54, 85 S.Ct. at

253, that the summons authority be limited to case where no

criminal prosecution was pending, Donaldson v. United States, 400

U.S. 517, 533, 91 S.Ct. 534, 544, 27 L.Ed.2d 580 (1971), and that

the IRS did not have the authority to issue "John Doe" summonses to

determine the identity of unknown individuals who might be liable

for unpaid taxes, United States v. Bisceglia, 420 U.S. 141, 150, 95

S.Ct. 915, 921, 43 L.Ed.2d 88 (1975). Moreover, it is clear that

an IRS summons can require the production of records for years that

12
are time-barred from investigation so long as the material from

those years is relevant for the years under investigation that are

not time-barred. Dunn v. Ross, 356 F.2d 664, 666 (5th Cir.1966).

Furthermore, "the evident purpose behind [the TIEA]—the reduction

of tax evasion by allowing signatories to demand information from

each other—counsels against interpreting [the agreement] to limit

inquiry in the manner [Zarate] desire[s]." Stuart, 489 U.S. at

368, 109 S.Ct. at 1192. Accordingly, because neither the TIEA nor

Congress circumscribes the breadth of the summons authority that

Congress granted the IRS, we find that the IRS may use that

authority to obtain documents generated before the TIEA went into

effect.

VII

Zarate's final contention is that the summons—by requesting

"[a]ll records in [IBC's] possession, custody, or control relative

to all accounts ... held or controlled by or on behalf of Julio

Roberto Zarate Barquero"—is overbroad because it does not identify

with "reasonable particularity" the documents that IBC is to

produce. "An overbreadth summons ... is simply a summons which

does not advise the summoned party what is required of him with

sufficient specificity to permit him to respond adequately to the

summons." United States v. Wyatt, 637 F.2d 293, 302 n. 16 (5th

Cir.1981). Because the summons identified with sufficient

specificity the actions required of IBC in responding to the

summons—IBC had to produce all records in its possession that

pertained to IBC accounts held by Zarate—we uphold the district

13
court's finding that the summons was not overbroad. See Linsteadt,

724 F.2d at 483.

In arguing that the summons was overbroad, Zarate appears to

argue that the summons seeks information and documents irrelevant

to the determination of his Mexican tax liability, although he

confuses the concept of overbreadth with that of relevance. See

Wyatt, 637 F.2d at 301 (noting that "overbreadth and relevance are

two separate inquiries").16 As we already have determined that the

information sought is relevant to the determination of Zarate's

Mexican tax liabilities, see part IV supra, we reject Zarate's

argument that it is not.17

VIII

For the foregoing reasons, we AFFIRM the judgment of the

district court.

16
We note that neither Zarate nor IBC argued that the
summons was overly burdensome. See Wyatt, 637 F.2d at 302 n. 16
(noting that the concept of burdensome is distinct from the
concept of overbreadth).
17
Zarate further argues that the district court erred both
by examining in camera the Mexican competent authority's request
that the IRS obtain the information at issue and a letter from
Mexican authorities demonstrating that their investigation into
Zarate's tax liability was not barred by any Mexican statute of
limitations and by denying Zarate the opportunity to conduct
discovery. However, "the method and scope of discovery allowed
in summons enforcement proceedings are committed in large part to
the discretion of the district court." United States v. Johnson,
652 F.2d 475, 476 (5th Cir.1981). Here, the challenged actions
do not constitute an abuse its discretion by the district court.
See id.; cf. Barrett, 837 F.2d at 1349 (noting that summons
enforcement "proceedings are intended to be summary in nature").

14