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691 F.2d
1281, 81-1 USTC P 9428 United States
Court of Appeals, Ninth Circuit. UNITED
STATES of America and Robert R. Handley, Special Agent of the Internal Revenue
Service, Petitioners-Appellees, v. VETCO INC.,
formerly Vetco Offshore Industries and Subsidiaries; Ronald G. Cullis,
Financial Vice President and/or Larry R. Langdon, Secretary,
Respondents-Appellants. UNITED
STATES of America and Robert R. Handley, Special Agent of the Internal Revenue
Service, Petitioners-Appellees, v. DELOITTE
HASKINS & SELLS, Certified Public Accountants, Respondent-Appellant. Nos. 79-3756
to 79-3758, 79-3786, 80-5276 and 80-5327. Argued and
Submitted Sept. 17, 1980. Decided May
11, 1981. Rehearing and
Rehearing En Banc Denied July
17, 1981. As Amended Oct. 22, 1981. [*1283]
Craig B. Jorgensen, Kindel & Anderson, Alfred I. Rothman, Loeb
& Loeb, Los Angeles, Cal., for respondents-appellants. Libero Marinelli, Jr., Tax Div., Washington, D.C., argued for
petitioners-appellees; M. Carr Ferguson, Asst. Atty. Gen., Washington, D.C., on
brief. Appeal from the United States District Court for the Central
District of California. Before SKOPIL and NELSON, Circuit Judges, and EAST, [FN*] District
Judge. FN* Honorable
William G. East, Senior United States District Judge for the District of
Oregon, sitting by designation. SKOPIL, Circuit Judge: INTRODUCTION In October 1977 the Internal Revenue Service
(“IRS”) issued summonses to Vetco, Inc.
(“Vetco”), its accountants, Deloitte Haskins & Sells
(“DH&S”), and its lawyers, Kindel & Anderson. The
summonses requested the books and records of Vetco and its overseas
subsidiaries for 1971-1976, and tax accounting reports prepared by DH&S. DH&S and Vetco resisted the summonses on the ground that
compliance would require them to violate Swiss law. The district court enforced
the summonses. When DH&S and Vetco did not comply, the district court
imposed contempt sanctions. DH&S and Vetco appeal from both the enforcement
and sanctions orders. We affirm. [*1284]
FACTS Vetco is an American corporation manufacturing offshore drilling
equipment. Vetco International, A.G. (“VIAG”), is a
wholly-owned Swiss subsidiary of Vetco. DH&S is an American firm of
certified public accountants, which was retained by Vetco to audit its
accounts. Deloitte Haskins & Sells, A.G. (“DH&S
Zurich”) is the Swiss affiliate of DH&S. In the early 1970’s VIAG became a wholly-owned subsidiary
of Vetco. This rendered Vetco subject to Subpart F of the Internal Revenue Code
(“the Code”) with respect to the reporting of VIAG’s
income. See I.R.C. §§ 951-64. [FN1] The IRS asserts
that Vetco attempted to avoid the application of Subpart F. Instead of shipping
its products to VIAG for sale, Vetco shipped them to two Swiss corporations,
Wiedex, A.G. and Zanora, A.G. Those companies transferred the goods to VIAG for
sale. Under this arrangement, Vetco avoided Subpart F income because
VIAG’s income was no longer derived from transactions with a related
corporation located outside Switzerland. The IRS alleges that Wiedex and Zanora
served no non-tax commercial function. FN1. During
the years relevant to this appeal, Subpart F provided that income of a
controlled foreign corporation was to be reported on the domestic parent
corporation’s federal income tax return if thirty percent of the
subsidiary’s income was derived from transactions with related
corporations located outside of the country of the subsidiary’s
incorporation. I.R.C. §§ 954(b)(3)(A) (1954)
(amended 1975), 954(d)(1). The thirty percent minimum was reduced to ten
percent by the Tax Reduction Act of 1975. I.R.C.
§ 954(b)(3)(A) (1975). DH&S conducted a comprehensive tax survey for Vetco in 1976.
It concluded that Vetco might have been required to report Subpart F income for
the tax years 1971-1976. It recommended voluntary disclosure to the IRS. Kindel
& Anderson provided certain information to the IRS in August and
September 1976. The information revealed led the IRS to bring its Criminal
Investigation Division into the case to investigate the possibility of fraud.
Relations between the IRS and Vetco deteriorated. In the absence of voluntary
disclosure, the IRS issued summonses to Vetco, DH&S, and Kindel &
Anderson. Pursuant to I.R.C. § 7609(b)(2), Vetco ordered
DH&S and Kindel & Anderson not to comply with the summonses. PROCEEDINGS
BELOW The IRS moved to enforce the summonses. The district court ruled
that the summonses had been issued for proper purposes and ordered DH&S to
produce its tax accrual records. It held that Kindel & Anderson was not
required to produce the DH&S tax survey. [FN2] In November 1979, following
special briefing and hearings on the effect of Swiss law, the district court
ordered Vetco and DH&S to produce their Swiss records. The court did not
enter findings of fact or conclusions of law. Vetco and DH&S filed notices
of appeal. The district court refused to stay its order pending appeal. FN2. The IRS
moved in the district court for reconsideration of the decision that Kindel
& Anderson would not be required to produce the DH&S tax survey.
The summons issued to Kindel & Anderson is therefore not before this
court. Vetco and DH&S did not comply with the district
court’s order. In December 1979 the IRS moved to have them held in
contempt and to have sanctions imposed. The district court issued a show cause
order. After hearings, in March 1980 the district court ordered Vetco and
DH&S to produce the Swiss records in Los Angeles by April 11, 1980, or be
fined $500 per day as a sanction. This court consolidated the appeals of Vetco
and DH&S from both the enforcement and sanctions orders and granted a stay
pending appeal. [FN3] FN3. Because
the appeals from both orders have been consolidated, there is no question that
we have a final order, and that the foreign illegality defense has been
properly preserved. By way of guidance, we note that the defense must be raised
at the enforcement proceeding, where the summonee is entitled to
“challenge the summons on any appropriate ground.” Reisman
v. Caplin, 375 U.S. 440,
449, 84 S.Ct. 508, 513-514, 11 L.Ed.2d 459 (1964). See also United States v.
Freedom Church, 613 F.2d 316, 319 (1st Cir. 1979). The decision
as to the defense is ordinarily res judicata. See, e. g., United States v.
Ofe, 572 F.2d 656, 657 (8th Cir. 1978); United States v. Peter,
479 F.2d 147, 150 (6th Cir. 1973); United States v. Secor,
476 F.2d 766, 770 (2d Cir. 1973). See also United States v. Asay,
614 F.2d 655, 660 (9th Cir. 1980). [*1285]
ISSUES 1. Did the district court err in failing to enter findings of fact
and conclusions of law? 2. Does the Swiss-U. S. tax treaty preclude the use of IRS
summonses to obtain records of Swiss subsidiaries? 3. Does possible criminal liability in Switzerland preclude
enforcement of the summonses and imposition of contempt sanctions? 4. Does the
district court’s production order deny DH&S due process? DISCUSSION I. Findings of Fact and Conclusions of Law. DH&S contends that the district court erred in failing to make
findings of fact and conclusions of law supporting its order enforcing the
summonses. We disagree. Even if rule 52(a) of the Federal Rules of Civil Procedure
requires findings and conclusions in summons enforcement and contempt
proceedings, the district court could have modified that requirement by issuing
an order. Fed.R.Civ.P. 81(a)(3). See United States v. Church of Scientology
of California, 520 F.2d 818, 821 (9th Cir. 1975). We find no
reason in this case for requiring the district court to carry out the formality
of issuing an order. See Brunswick Corp. v. Doff, 638 F.2d
108, at 110- 111 (9th Cir. 1981). The function of findings and conclusions is to permit informed
appellate review. 5A Moore’s Federal Practice, ¶ 52.06[1] at 2706 (2d
ed. 1980). There is virtually no factual dispute in this case. The question of
whether the use of summonses is prohibited by treaty is a question of law.
Swiss law is also determined as a question of law. Fed.R.Civ.P. 44.1; Kalmich
v. Bruno, 553 F.2d 549, 552 (7th Cir.), cert. denied,
434 U.S. 940, 98 S.Ct. 432, 54 L.Ed.2d 300 (1977). The few factual inquiries in
the case are either immaterial or adequately addressed by the district
court’s on-the-record statements. Compare South-Western Publishing
Co. v. Simons, 651 F.2d 653 at 656 n.2 (9th Cir. 1981) and Richmond
Elks Hall Ass’n v. Richmond Redevelopment Agency,
609 F.2d 383, 385-86 (9th Cir. 1979) and Swanson v. Levy,
509 F.2d 859, 861 (9th Cir. 1975) with Lumbermen’s Underwriting
Alliance v. Can-Car, Inc., 645 F.2d 17, 18 (9th Cir. 1980).
The district court did not err in failing to make findings of fact and
conclusions of law. II. Effect of the Swiss-U.S. Tax Treaty and IRS Regulations. Vetco argues that the Swiss-U.S. Tax Treaty precludes the use of
IRS summonses to obtain records held in Switzerland. It further contends that
IRS regulations provide that treaty information-exchange provisions are the
exclusive means of obtaining such records. A. The Swiss-U.S. Tax Treaty. Article XVI of the Swiss-United States Tax Treaty provides in
pertinent part: “(1) The competent authorities of the contracting States
shall exchange such information (being information available under the
respective taxation laws of the contracting States) as is necessary for
carrying out the provisions of the present Convention or for the prevention of
fraud or the like in relation to the taxes which are the subject of the present
Convention …. No information shall be exchanged which would disclose
any trade, business, industrial or professional secret or any trade process.
…. (3) In no case shall the provisions of this Article be construed
so as to impose on either of the contracting States the obligation to carry out
administrative measures at variance with the regulations [*1286] and practice of
either contracting State or which would be contrary to its sovereignty,
security or public policy or to supply particulars which are not procurable
under its own legislation or that of the State making application.” Convention on Double Taxation of Income, September 27, 1951,
United States-Switzerland, 2 U.S.T. 1751, 1760-61, T.I.A.S. No. 2316. I.R.C. § 7852(d) renders Code provisions
inapplicable where their application “would be contrary to any treaty
obligation of the United States in effect on the date of enactment of this title.”
See Samann v. Commissioner, 313 F.2d 461, 463 (4th Cir. 1963).
[FN4] FN4. The
summons power may be enlarged where “to do otherwise would negate the
very purpose of the Treaty.” United States v. A. L. Burbank
& Co., 525 F.2d 9, 13 (2d Cir. 1975), cert. denied,
426 U.S. 934, 96 S.Ct. 2647, 49 L.Ed.2d 386 (1976). It does not appear in this
case that it is necessary to limit the summons power to avoid negating the
purpose of the Swiss-U.S. tax treaty. One of the purposes of that treaty is to
prevent tax fraud. 2 U.S.T. at 1760. Issuance of the summons in this case will
further that purpose, not negate it. See Bacardi Corp. v. Domenech, 311 U.S. 150, 163, 61 S.Ct.
219, 226, 85 L.Ed. 98 (1940); Cucuzzella v. Keliikoa,
638 F.2d 105, at 107 n.3 (9th Cir. 1981). There is nothing in the treaty barring the use of summonses by the
IRS to gather information. The treaty does not state that its procedures for
the exchange of information are intended to be exclusive. There is no such
indication in the treaty’s legislative history. A statute and a treaty
are to be read to be consistent to the greatest possible extent. United
States v. Lee Yen Tai, 185 U.S. 213, 221-22, 22
S.Ct. 629, 632-633, 46 L.Ed. 878 (1902). See also Washington v. Washington
State Commercial Passenger Fishing Vessel Assoc., 443 U.S.
658, 690, 99 S.Ct. 3055, 3077, 61 L.Ed.2d 823 (1979); Kimball v. Callahan,
590 F.2d 768, 775 (9th Cir.), cert. denied, 444 U.S.
826, 100 S.Ct. 49, 62 L.Ed.2d 33 (1979). B. IRS Regulations. IRS Regulations contemplate use of summonses in international tax
investigations. I Audit, Internal Revenue Manual (CCH) ¶
4022.(10)3(2) provides, in pertinent part: “(c) Before any contact with a foreign organization or
before any summons or presummons letter is issued to obtain information from a
foreign organization which is not doing business in the United States
… the matter must be referred to the Office of International
Operations (CP:IO) for advice and assistance in accordance with IRM
42(10)(10).” See also ¶ 4233.63(12); II Audit, Internal Revenue Manual (CCH)
¶ 42(10)(10). 2(6); 5 Administrative, Internal Revenue Manual (CCH) ¶
9265.1(1). Vetco relies on II Audit, Internal Revenue Manual (CCH)
¶ 42(10)(10). 1(4), which provides, in part: “The
articles of the respective tax conventions determine the extent of information
obtainable in treaty countries.” That section of the manual explains to IRS employees one of
several means by which the Office of International Operations can obtain
records from a foreign entity. Treaty procedures are the exclusive method where
the treaty so provides or where the foreign entity has no American point of
contact. It is not the exclusive means of obtaining information where the
treaty does not so provide and where the foreign source is a subsidiary of an
American corporation. There has been no violation of IRS regulations. [FN5] FN5. Since we
conclude that there was no violation of IRS regulations, we need not decide
whether a violation would require that the summonses not be enforced. See
United States v. Caceres, 440 U.S. 741, 754 &
n.18, 99 S.Ct. 1465, 1473 & n.18, 59 L.Ed.2d 733 (1979); United
States v. Wilson, 614 F.2d 1224, 1227 (9th Cir. 1980); United
States v. Equitable Trust Co., 611 F.2d 492, 500 (4th Cir.
1979), cert. denied, 445 U.S. 950, 100 S.Ct. 1599, 63
L.Ed.2d 785 (1980). III. Foreign Illegality and Summons Enforcement. Appellants contend that compliance with the summonses would
require them to violate Article 273 of the Swiss Penal Code. That article
provides, in pertinent part: [*1287] “Whoever makes available a manufacturing or business secret to a foreign governmental agency or a foreign organization or private enterprise or to an agent of any of them; shall be subject to imprisonment and in grave cases to imprisonment in a penitentiary. StGB Art. 273. The term “business secret” has been defined to include “all facts of business life to the extent that there are interests worthy of protection in keeping them confidential.” Swiss Federal Attorney v. A., 98 BGE IV 209 (September 7, 1972). Appellants contend that Societe Internationale Pour Participations Industrielles v. Rogers, 357 U.S. 197, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958) requires that the summonses not be enforced, or that contempt sanctions not be imposed, where compliance requires a violation of foreign law. We disagree. A. No Absolute Bar to Enforcement and Sanctions. In Societe Internationale, a Swiss company sued to recover property seized by the United States pursuant to the Trading With the Enemy Act. The United States requested discovery of records of a Swiss banking firm that it alleged had conspired with the plaintiff. The Swiss government enjoined the plaintiff from producing the requested documents. The district court dismissed the action when plaintiff failed to produce. The Supreme Court reversed. The Court stated that “fear of criminal prosecution constitutes a weighty excuse for non-production, and this excuse is not weakened because the laws preventing compliance are those of a foreign sovereign.” Id. at 211, 78 S.Ct. at 1095. Societe Internationale did not erect an absolute bar to summons enforcement and contempt sanctions whenever compliance is prohibited by foreign law. The Court specifically stated that its ruling would not apply “to every situation where a party is restricted by law from producing documents over which it is otherwise shown to have control.” Id.; at 205-06, 78 S.Ct. at 1092-1093. The determination depends “upon the circumstances of a given case.” Id. at 206, 78 S.Ct. at 1092-1093. Societe Internationale held only that the district court could not dismiss a plaintiff’s complaint for failure to comply with a discovery request where the plaintiff had made extensive good faith efforts to comply. The Court left the district court “wide discretion” to use other means of obtaining compliance, to award lesser sanctions against the plaintiff, and to draw inferences unfavorable to the plaintiff in the absence of complete disclosure. Id. at 213, 78 S.Ct. at 1096. This case is not controlled by Societe Internationale. We have no finding that appellants have made good faith efforts to comply with the summonses. [FN6] Compare Societe Internationale, 357 U.S. at 201, 78 S.Ct. at 1090 (explicit finding by Special Master of good faith confirmed by district court). In Societe Internationale, the Swiss government enjoined the plaintiff from complying with the summons. Id. at 200, 78 S.Ct. at 1090. There has been no comparable action taken by the Swiss government in this case, even though the letters and affidavits filed reveal that the Swiss are not unaware of these proceedings. There was a finding in Societe Internationale that production would violate Swiss law. Id. at 204, 78 S.Ct. at 1092. We have no comparable finding in this case. [FN7] The Court found [*1288] that in Societe Internationale the plaintiff’s inability to produce the requested documents might “prove a serious handicap” to it in attempting to make its case. Id. at 212-13, 78 S.Ct. at 1096. In the instant case, Vetco will gain by its inability to produce. FN6. By
contrast, the district court stated at a hearing on April 1, 1980 that the
appellants were conducting “one of the greatest delaying actions of my
recent memory.” FN7. In the
instant case, by contrast, the district court stated at a hearing on November
15, 1979: “I
have a very serious question in my mind now whether or not the records you are
talking about are indeed the sort of records that the Swiss statute was
designed to protect against improper revelation. And up to this point, insofar
as I am concerned, we have talked a lot of generalities, and kind of records en
masse without specificity, that gives us an opportunity to test those. We have spent
I don’t know how many months now going into this question of Swiss
law, and this threat of penal sanctions. Based on what I have before me at this
point, I am now of the view that the threat of criminal sanctions by
Switzerland is not as real as it was initially suggested to me to be.” The document request at issue in Societe Internationale
was a civil discovery order. The instant case turns upon an IRS summons issued
pursuant to an investigation of potentially criminal conduct. Such summonses
appear to serve a more pressing national function than civil discovery. Such
summonses are also more widely recognized in the international community than
the broad civil discovery permitted in American courts. See In re Grand Jury
Proceedings (United States v. Field), 532 F.2d
404, 408 (5th Cir.), cert. denied, 429 U.S. 940, 97 S.Ct. 354, 50 L.Ed.2d 292
(1976) (citing authority); Note, Foreign Non-Disclosure Laws and Domestic
Discovery Orders in Antitrust Litigation, 88 Yale L.J. 612, 627-28 (1979). B. Balancing Competing Interests—Factors to Consider. Courts must balance competing interests in determining whether
foreign illegality ought to preclude enforcement of an IRS summons. The result
in each case will turn on the particular circumstances. In re Westinghouse
Electric Corp. Uranium Contracts Litigation, 563 F.2d
992, 997 (10th Cir. 1977); In re Grand Jury Proceedings,
532 F.2d at 407; Trade Development Bank v. Continental Insurance Co.,
469 F.2d 35, 41 (2d Cir. 1972); In re Uranium Antitrust Litigation, 480 F.Supp.
1138, 1145 (N.D.Ill.1979); Restatement (Second) of Foreign Relations Law of the
United States § 39 (1965). See also Timberlane Lumber Co.
v. Bank of America, 549 F.2d 597, 613- 15 (9th Cir.
1976); Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d
1287, 1297 (3d Cir. 1979). [FN8] FN8. There is
a line of cases in the Second Circuit stating that “upon fundamental
principles of international comity, our courts dedicated to the enforcement of
our laws should not take such action as may cause a violation of the laws of a
friendly neighbor or, at the least, an unnecessary circumvention of its
procedures.” In re Chase Manhattan Bank, 297 F.2d
611, 613 (2d Cir. 1962), quoting from Ings v. Ferguson,
282 F.2d 149, 152 (2d Cir. 1960). These cases
are distinguishable. In both Ings, 282 F.2d at 152-53, and Chase Manhattan
Bank, 297 F.2d at 612-13, the summonee was not a party to the action, and there
appeared to be a feasible alternative means of obtaining the documents.
Moreover, the Second Circuit itself has receded from their strong language. See
Trade Development Bank, 469 F.2d at 40-42; United States
v. First National City Bank, 396 F.2d 897, 901-05 (2d Cir. 1968).
Commentators have done likewise. See, e. g., Restatement
(Second) of Foreign Relations Law §§ 39-40; Note,
Discovery of Documents Abroad in U. S. Antitrust Litigation: Recent
Developments in the Foreign Illegality Excuse, 14 Va.J.Int’l L. 747,
752- 56 & n.30 (1974). The factors to be considered in this balancing process are
essentially those set forth in the Restatement (Second) of Foreign Relations
Law § 40. That section provides: “Where two states have jurisdiction to prescribe and enforce rules of law and the rules they may prescribe require inconsistent conduct upon the part of a person, each state is required by international law to consider, in good faith, moderating the exercise of its enforcement jurisdiction, in the light of such factors as [*1289] Westinghouse Electric Corp.,
563 F.2d at 997-99; In re Grand Jury Proceedings, 532 F.2d at
407-09 & n.5; United States v. First National City Bank, 396 F.2d 897,
902-05 (2d Cir. 1968). See also Timberlane Lumber Co.,
549 F.2d at 614-15 & nn.31-34; Mannington Mills,
595 F.2d at 1297-98. 1. Vital national interests. In assessing the vital national interests of each of the states, a
court ought to consider the degree of difference in law or policy, and the
nationality of the parties affected. Timberlane Lumber Co.,
549 F.2d at 614 & nn.32-33. [FN9] FN9. It is
important to distinguish between actions brought by the government, such as
this one, and private suits. In the latter situation, “there is no
opportunity for the executive branch to weigh the foreign relations impact, nor
any statement implicit in the filing of the suit that that consideration has
been outweighed.” Timberlane Lumber Co., 549 F.2d at
613 (footnote omitted). See also
Arthur
Andersen & Co. v. Finesilver, 546 F.2d
338, 342 (10th Cir. 1976), cert. denied, 429 U.S.
1096, 97 S.Ct. 1113, 51 L.Ed.2d 543 (1977). There is a strong American interest in collecting taxes from and
prosecuting tax fraud by its own nationals operating through foreign
subsidiaries. Switzerland has a similar interest. See Convention on Double
Taxation of Income, 2 U.S.T. at 1760. Yet Switzerland also has an interest in
preserving the secrecy of business records. Its interest is diminished in this
case, where the parties are subsidiaries of American corporations. See
Timberlane Lumber Co., supra. The Swiss Attorney General has distinguished between cases where
there is a public interest in keeping information secret, and cases where only
private interests are involved. In the latter type of case, Article 273
prohibits disclosure only if the party whose business secret is being divulged
does not consent. Gerber, Einige Probleme Des Wirtschaftlichen
Nachrichtendienstes, Zeitschrift Fur Schweiz 257 (1977). A representative of
the Swiss Federal Attorney stated that the instant case “apparently
does not concern a totally Swiss interest in confidentiality.” Record,
vol. 1, at 106. Thus, Switzerland’s only interest is in protecting the
privacy of its non-consenting domiciliaries. This interest is further
diminished where the party seeking the records is the IRS, which is required by
law to keep the information confidential. I.R.C. § 6103(a). 2. Extent of hardship. We are not persuaded that Article 273 poses a great danger to the
appellants. The party relying on foreign law has the burden of showing that
such law bars production. Ohio v. Arthur Andersen & Co., 570 F.2d 1370,
1374 (10th Cir.), cert. denied, 439 U.S. 832, 99 S.Ct. 114, 58 L.Ed.2d 129
(1978); First National City Bank of New York v. Internal Revenue Service, 271
F.2d 616, 619-20 (2d Cir. 1959), cert. denied, 361 U.S. 948, 80 S.Ct. 402, 4
L.Ed.2d 381 (1960). There is no evidence that unrelated third parties with an interest
in the confidentiality of the summoned records would object to production.
[FN10] An affidavit from a representative of the Swiss Federal Attorney, states
that where production is pursuant to an order of a United States Court
enforcing an IRS summons there may be a defense to a charge of violating
Article 273. Article 34 of the Swiss Penal Code provides a defense to criminal
charges based upon duress. No case has been cited in which a person has been
prosecuted for complying with a court order enforcing an IRS summons. FN10.
Vetco’s Swiss counsel stated that he had contacted “the
previous owner of Zanora A.G. and I was told that he would not consent to a
full divulgement [sic] of all the transactions to the U. S.
authorities.” (emphasis in original). Even if this hearsay statement
were admissible, it would only be legally significant if the previous owner had
a personal interest in the records’ confidentiality, or if Zanora were
independent from VIAG. The Government has alleged that it is not independent.
Vetco has not produced any evidence to the contrary. To the extent that some hardship is imposed on appellants, it was
avoidable. I.R.C. § 964(c) requires an American corporation
to keep records pertaining to its controlled foreign corporations sufficient to
enable a determination as to whether Subpart F tax is due. Had Vetco kept a
copy of such records at its offices in this country, [*1290] the instant dispute
would never have arisen. There would be no violation of Swiss law, and no Swiss
party would have occasion to object to the disclosure. 3. Location, nationality, expectation of compliance. Consideration of the other factors set forth by the Restatement
does not alter our conclusion that the district court properly enforced the
summonses and imposed contempt sanctions. The required conduct is to take place
both in this country and in Switzerland. The records must be shipped out of
Switzerland. Production to the IRS will take place in this country. DH&S
Zurich and VIAG are Swiss corporations, but both are controlled subsidiaries of
American firms. 4. Importance of the documents. The importance of the documents to the requesting party is also a
factor to be considered. Courts have refused to require production where the
documents sought are largely cumulative of records already produced.
Westinghouse Electric Corp., 563 F.2d at 999; Trade Development Bank, 469 F.2d
at 40- 41. The IRS has shown that the documents sought are the type of records
relevant to an investigation of Subpart F tax liability. Appellants have made
no showing that the documents are cumulative of records already produced. 5. Availability of alternate means of compliance. We also consider whether substantially equivalent alternate means
for obtaining the requested information are available. See SEC v. Minas de
Artemisa, 150 F.2d 215, 218-19 (9th Cir. 1945); Westinghouse Electric Corp.,
563 F.2d at 997; United States v. First National City Bank, 396 F.2d at 902.
Appellants contend that there are six such alternatives: obtaining consents to
the disclosure, issuance of letters rogatory, use of treaty procedures, masking
the names of third parties, use of an independent expert on Swiss law, and
having the IRS examine the records in Switzerland. None of the proposals
constitutes a substantially equivalent alternative. Attempting to obtain consents from affected third parties is not
an alternate means of production. It may limit the information obtainable by
the IRS. It is not substantially equivalent because of the cost in time and
money of attempting to obtain those consents. Appellants concede that letters rogatory will not be honored in
Switzerland where they seek records for litigation involving fiscal matters.
The Swiss Federal Attorney has stated that tax investigations are fiscal
matters, and that it would be unable to respond favorably to a letter rogatory. In the Swiss-U.S. Tax Treaty, Switzerland reserved the right not
to transmit business secrets pursuant to the treaty’s information
exchange provisions. There is also precedent indicating that the Swiss will not
provide legal assistance in cases of tax fraud. X & Y Bank v. The Swiss
Federal Tax Administration, 76-1 U.S.T.C. ¶ 9452 at 84,213 (Swiss Fed.Sup.Ct.
May 16, 1975). Masking the names of third parties is not a substantially
equivalent alternative since the identities of the third parties is relevant to
Subpart F taxation. See I.R.C. § 954. Use of an independent expert on Swiss law is also not an
alternative means of production. An expert could only give an opinion as to
what documents could legally be produced and what documents could not. Use of
an expert might not be permissible under Articles 271 and 273 of the Swiss
Penal Code. Court appointment of the expert might make that person an agent of
the United States government and therefore prohibited from examining the
documents. Examination in Switzerland is not a substantially equivalent
alternative. The IRS is prohibited by Article 271 of the Swiss Penal Code from
examining records in Switzerland. The very act of examining the records is
criminal under Article 271. This contrasts with Article 273, which makes
production criminal only if independent third parties object, and only if there
is no defense based on duress. We conclude that the United States has a powerful interest in
obtaining the summoned [*1291] documents, and that Switzerland has a small
interest in insisting that they not be produced. Appellants have not shown that
production pursuant to a court order enforcing an IRS summons would impose a
significant hardship on them. IV. The Enforcement Order. A. Due Process DH&S contends that it has been denied due process because the
district court’s production order directed it to produce
“all” records described in the summons. The show cause order
had only specified the documents held in Switzerland. The IRS concedes that the
district court’s order encompassed only those documents located in
Switzerland. We interpret the district court’s order to include only
those documents located in Switzerland. When so interpreted, it does not
deprive DH&S due process of law. B. Production in Los Angeles Vetco contends that the district court erred in requiring it to
produce its Swiss records in Los Angeles. The terms of an enforcement order
rest within the discretion of the district court. United States v. United Mine
Workers, 330 U.S. 258, 304, 67 S.Ct. 677, 701, 91 L.Ed. 884 (1947). Given the
previous difficulties of securing production voluntarily, and the infeasibility
of on-site inspection, the district court did not abuse its discretion by
ordering Vetco to produce documents in Los Angeles. CONCLUSION The district court did not err in failing to enter findings of
fact and conclusions of law. The Swiss-U.S. tax treaty does not preclude use of
IRS summonses to obtain records of Swiss subsidiaries of American firms.
Possible criminal liability in Switzerland does not preclude enforcement and
sanctions. Application of a balancing approach in this case favors enforcement
and sanctions. The interest of the United States in enforcement of the summons
outweighs the contrary Swiss interest, and appellants have not shown a
substantial likelihood of a successful Swiss prosecution. The orders appealed from are AFFIRMED.
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