Burlington Northern Railroad v. Office of Inspector General, Railroad Retirement Board , 983 F.2d 631 ( 1993 )

United States Court of Appeals,
Fifth Circuit.
No. 91-7006.
BURLINGTON NORTHERN RAILROAD CO., Plaintiff-Appellee,
v.
OFFICE OF INSPECTOR GENERAL, RAILROAD RETIREMENT BOARD, Attorney General
of the United States, and the United States of America, Defendants-Appellants.
Feb. 16, 1993.
Appeal from the United States District Court for the Northern District of Texas.
Before VAN GRAAFEILAND,** KING, and EMIO M. GARZA, Circuit Judges.
KING, Circuit Judge:
This appeal concerns the enforceability of a subpoena duces tecum issued by the Inspector
General of the Railroad Retirement Board to Burlington Northern Railroad Company. The district
court refused to summarily enforce the subpoena, concluding that the Inspector General issued it in
aid of an ultra vires regulatory compliance audit. Because (i) the district court did not clearly err in
determining that the Inspector General in fact issued the subpoena in aid of a regularly scheduled, tax
compliance audit, and (ii) the Inspector General lacks statutory authority to conduct such tax
compliance audits, we affirm the district court's decision denying summary enforcement of the
subpoena.
I. BACKGROUND
A. The Administrative Structure: The Functions of the Railroad Retirement Board and the Office of
Inspector General
Before describing the events surrounding the Inspector General's decision to issue a subpoena
to Burlington Northern, we outline the administrative functions of the Railroad Retirement Board
(RRB) and the Office of Inspector General (OIG). An understanding of their administrative functions
is important to the disposition of this appeal because of the potential for their functions to overlap.
That is, under the existing administrative structure, the Inspector General, in attempting to perform
*
Senior Circuit Judge for the Second Circuit, sitting by designation.
his statutory oversight duties, could effectively assume the RRB's tax enforcement duties.
1. The Railroad Retirement Board's Mission
The RRB is responsible, under separate federal statutes, for distributing two types of benefits.
First, the RRB administers retirement and survivor benefits to railroad workers and their families
pursuant to the Railroad Retirement Act, 45 U.S.C. § 231, et seq. These retirement-survivor benefits
are paid from the Railroad Retirement Account, which is in turn funded by taxes paid by railroad
employers under the Railroad Retirement Tax Act, 26 U.S.C. § 3201, et seq. Second, the RRB
administers unemployment and sickness benefits to railroad workers under the Railroad
Unemployment Insurance Act, 45 U.S.C. § 351, et seq. The unemployment-sickness benefits are paid
from the Railroad Unemployment Insurance Account, an account which, again, is funded by taxes
collected from railroad employers. The taxes that railroad employers must pay under the Railroad
Retirement Tax Act and the Railroad Unemployment Insurance Act are calculated, in part, on the
basis of creditable compensation the railroad pays to its employees.
The RRB is also responsible, to some extent, for ensuring that railroad employers are properly
paying the taxes that fund the retirement-survivor and unemployment-sickness benefit programs.
With respect to the retirement-survivor benefit program, the Internal Revenue Service (IRS) is the
agency assigned the responsibility of collecting revenues under the Railroad Retirement Tax Act;
however, the RRB, under the Railroad Retirement Act, has the "power to require all employers ...
to furnish such information and records as shall be necessary for the administration of this [Act]."
45 U.S.C. § 231f(b)(6). In addition, the RRB may require employers to file compensation reports
under the Railroad Retirement Act. See 45 U.S.C. § 231h. With respect to the
unemployment-sickness benefit program, the RRB is more directly responsible for enforcing railroad
employer tax contributions. Specifically, under the Railroad Unemployment Insurance Act, it is the
RRB, not the IRS, which has the responsibility for collecting railroad employer contributions to the
Railroad Unemployment Insurance Account. Among other things, the RRB may assess deficiencies
with respect to employer contributions, may assess interest and penalties for deficiencies, and may
impose liens for unpaid amounts. See 45 U.S.C. §§ 358, 359; see also 20 C.F.R. §§ 345.14-345.19
(1992).
Thus, it is undisputed that, at least under the Railroad Unemployment Insurance Act, the RRB
has the power to investigate or audit railroad employers to determine if they are accurately reporting
creditable compensation and properly paying taxes. See 45 U.S.C. § 362. The problem, at least as
far as the Office of Inspector General is concerned, is that the RRB has never exercised this power.
Instead, the RRB has historically relied on the IRS's auditing of railroad employers' reports under the
Railroad Retirement Tax Act. In other words, the RRB, rather than independently inspecting railroad
employers' payroll and accounting records to ascertain whether they are filing accurate compensation
reports and paying the correct amount of taxes under the Railroad Unemployment Insurance Act,
uses a summary reconciliation procedure. Under this procedure, the RRB compares the
compensation reported to it with the compensation reported to the IRS under the Railroad Retirement
Tax Act.
2. The Office of Inspector General's Mission
According to legislative history, the Inspector General Act of 1978, 5 U.S.C.App. 3, was
enacted "to consolidate existing auditing and investigative resources to more effectively combat fraud,
abuse, waste and mismanagement in the programs and operations of [various executive] departments
and agencies." S.REP. No. 1071, 95th Cong., 2d Sess. 1 (1978), reprinted in 1978 U.S.C.C.A.N.
2676, 2676. Congress was particularly concerned, it seems, with evidence indicating that fraud,
waste, and abuse in federal departments and agencies were "reaching epidemic proportions." S.REP.
No. 1071 at 4. Acco rdingly, Congress established fifteen "independent and objective"1 Offices of
Inspector General:
(1) to conduct and supervise audits and investigations relating to the programs and operations of the
[specified departments and agencies];
1
To accomplish its purpose of making the OIG an independent and objective office, Congress
provided that Inspectors General "shall be appointed by the President, by and with the advice and
consent of the Senate, without regard to political affiliation and solely on the basis of integrity and
demonstrated ability in accounting, auditing, financial analysis, law, management analysis, public
administration, or investigations." 5 U.S.C.App. 3 § 3(a). To further ensure the independence of
Inspectors General, Congress provided that "[e]ach Inspector General shall report to and be under
the general supervision of the head of the [department or agency] involved...." Id.
(2) to provide leadership and coordination and recommend policies for activities designed (A) to
promote economy, efficiency, and effectiveness in the administration of, and (B) to prevent
and detect fraud and abuse in, such programs and operations; and
(3) to provide a means for keeping the head of the establishment and the Congress fully and currently
informed about problems and deficiencies relating to the administration of such programs and
operations and the necessity for and progress of corrective action.
5 U.S.C.App. 3 § 2.
In order that the Inspectors General could carry out their oversight mission, Congress gave
them audit and investigative authority. Under the terms of the Act, Inspectors General are specifically
authorized, among other things,
(2) to make such investigations and reports relating to the administration of the programs and
operations of the applicable [department or agency] as are, in the judgment of the Inspector
General, necessary or desirable; [and]
(4) to require by subpena the production of all information, documents, reports, answers, records,
accounts, papers, and other data and documentary evidence necessary in the performance of
the functions assigned by this Act, which subpena, in the case of contumacy or refusal to
obey, shall be enforceable by order of any appropriate United States district court: Provided,
That procedures other than subpenas shall be used by the Inspector General to obtain
documents from Federal agencies.
5 U.S.C.App. 3 § 6(a). The Act also authorizes the head of the federal department or agency to
transfer to its Inspector General other powers or duties that the department or agency head
determines "are properly related to the functions of the Office and would, if so transferred, further
the purposes of this Act." 5 U.S.C.App. 3 § 9(a)(2). The only limit in this regard is the command
that no "program operating responsibilities" of the department or agency shall be transferred to an
Inspector General. Id.
Although the Inspector General Act of 1978 did not create a separate OIG for the RRB,
Congress created such an office in 1983. See Pub.L. No. 98-76, Title IV, § 418, 97 Stat. 437
(codified at 45 U.S.C. § 231v). And, the Inspector General for the RRB has all the investigatory and
auditing powers originally provided for in the Inspector General Act of 1978. See 5 U.S.C.App. 3
§ 9(a)(1)(S). Thus, the Inspector General of the RRB has the authority (a) "to make such
investigations and reports relating to the administration of the programs and operations of the [RRB]
as are, in the judgment of the Inspector General, necessary or desirable," and (b) "to require by
subpena the production of all information, documents, reports, answers, records, accounts, papers,
and other data and documentary evidence necessary in the performance of the functions assigned by
[the Inspector General] Act." 5 U.S.C.App. 3 § 6(a)(2), 6(a)(4).
B. The Inspector General's Railroad Audit Program
Sometime in 1988 or 1989, the Inspector General of the RRB became concerned about the
RRB's procedures for determining the accuracy of railroad employers' contributions to the Railroad
Retirement Account and the Railroad Unemployment Insurance Account. The Inspector General
apparently believed that the IRS's periodic audits of railroad employers—which checked the accuracy
of their repo rting under the Railroad Retirement Tax Act—even when coupled with the RRB's
summary reconciliation procedures, were not adequate for detecting the underpayment of taxes.
Accordingly, in September 1988, the Inspector General began auditing the railroad companies
himself.
The results of the Inspector General's initial audits disclosed that each of the railroads audited
"had incorrectly reported compensation and had underpaid their taxes and contributions for the
covered period." The Inspector General understandably became more concerned. Thus, he decided
to conduct additional railroad audits.
In late 1989, after several railroad audits had already taken place, the Inspector General of
the RRB entered into a memorandum of understanding with the IRS. The stated purpose of the
memorandum was "to establish policy for the IRS and the OIG [of the] RRB, with regard to referral
and audit of matters of mutual interest." The memorandum specifically recognized that "the
cooperative efforts of both the IRS and the OIG will be directed at examining/reviewing employment
taxes of railroad employers." Further, under the terms of the memorandum of understanding, the
Inspector General of the RRB agreed to conduct reviews relating to railroad employers' compensation
reports, to furnish the IRS with copies of each final repo rt resulting from such reviews, and to
"annually" provide the IRS with a copy of its "work plan including the name and addresses of the
railroad employers to be reviewed." Finally, in this memorandum of understanding, the IRS and
Inspector General of the RRB agreed that the two agencies could "enter into joint
examination/reviews in appropriate circumstances."
Soon after entering the memorandum of understanding with the IRS, in March 1990, the
Inspector General of the RRB notified Burlington Northern of its intent to audit the company. The
audit, according to the Inspector General's not ification letter, was part of "a program to audit tax
contributions and compensation reported under the Railroad Unemployment Insurance and Railroad
Retirement Acts." The letter to Burlington Northern further stated that "[i]t is important that each
railroad know the others are properly paying their share."
After having an entry conference with the Inspector General concerning the nature and
purpose of the audit, Burlington Northern sought clarification "as to the authority, scope, objectives
and procedures in regard to the current Inspector General audit." In response to Burlington
Northern's request, the Inspector General explained that (1) it had entered into an agreement with the
IRS to conduct reviews relating to railroad employers' compensation reports and tax returns; (2) its
primary objectives were to determine proper and timely payment of tax contributions and the
accuracy of compensation and service reports; and (3) its final report would be distributed to the
RRB and the IRS for tax assessments or adjustments.
C. The Subpoena Duces Tecum Issued to Burlington Northern
Burlington Northern was not satisfied with the Inspector General's response to its request for
clarification. In June 1990, Burlington Northern sent a letter to the Inspector General disputing his
authority to conduct the audit. Specifically, Burlington Northern expressed its concern that the audit
program being conducted by the Inspector General was "a classic exercise of regulatory authority
rather than oversight authority" and was "not within the statutory authority of the Office of Inspector
General." Burlington Northern therefore declined "to entertain the proposed audit."
In an effort to proceed with the proposed audit of Burlington Northern, the Inspector General
issued a subpoena duces tecum to the railroad company. The subpoena directed the "Keeper of
Records" of Burlington Northern to appear before the Inspector General on August 14, 1990 and
bring with him numerous records—including various payroll records. The face of the subpoena
indicates that it was issued in aid of an audit "[t]o determine the accuracy of compensation and
creditable service reports for coverage under t he Railroad Retirement Tax Act and the Railroad
Unemployment Insurance Act."
D. The Subpoena Enforcement Proceeding
Still disputing the Inspector General's authority to conduct the proposed audit, Burlington
Northern filed an action in federal district court in September 1990, seeking declaratory and injunctive
relief against the enforcement of the subpoena duces tecum. In response to Burlington Northern's
suit, the Inspector General filed a petition for summary enforcement of its subpoena. The district
court thereafter consolidated the two cases, and both sides filed motions for summary judgment with
respect to the Inspector General's action to enforce the subpoena.
While the motions for summary judgment were pending, Burlington Northern served
interrogatories, requests for production of documents, and notices of deposition on the Inspector
General's office. The Inspector General, in turn, filed a motion for a protective order prohibiting all
discovery in the action, arguing that Burlington Northern had not made the required showing for such
discovery. The Inspector General specifically contended that Burlington Northern had not made a
substantial showing—as required for obtaining discovery from the agency in a subpoena enforcement
proceeding—that the court's process would be abused by the enforcement of the subpoena. The
district court disagreed and, on April 2, 1991, directed the Inspector General to comply with
Burlington Northern's broad discovery requests.
The Inspector General sought and obtained a writ of mandamus from this court directing the
district court to vacate the discovery order and promptly address the enforceability of the subpoena.
See In re Office of Inspector General, 933 F.2d 276 (5th Cir.1991). In granting the Inspector
General's petition for writ of mandamus, we stated:
In the case at bar Burlington Northern asserts that the administrative subpoena should
not be enforced because the Inspector General lacks the statutory authority to conduct the
planned audit of the railroad. Such a defense to the enforcement action requires that the court
interpret the relevant statutes; little if any discovery should be required in that endeavor.
Id. at 278. We recognized the possibility, however, that on ret urn to the district court a "limited,
measured amount of discovery" might be appropriate.
Instead of allowing any measure of discovery on our return of the case, the district court
promptly addressed the enforceability of the Inspector General's subpoena. See Burlington Northern
Railroad Co. v. Office of Inspector General, 767 F. Supp. 1379 (N.D.Tex.1991). After reviewing
the events leading up to the Inspector General's decision to issue the subpoena to Burlington
Northern, the stated reasons for the audit, and other statements made by the Inspector General
himself, the district court found that the proposed audit of Burlington Northern was of a regulatory,
rather than an oversight, nature. See id. at 1381-87. And, further concluding that the Inspector
General lacks the statutory authority to conduct a regulatory tax compliance audit, the district court
denied enforcement of the subpoena. See id. at 1387-91. The Inspector General now appeals the
decision denying enforcement of its subpoena.
II. ANALYSIS
This court has consistently recognized the summary nature of administrative subpoena
enforcement proceedings. See, e.g., In re Office of Inspector General, 933 F.2d at 277; In re
E.E.O.C., 709 F.2d 392, 397-400 (5th Cir.1983). Although the test for enforcement has been
phrased in various ways,2 it is settled that the requirements for judicial enforcement of an
2
The Supreme Court has set forth various tests for determining the enforceability of
administrative subpoenas. In Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 209, 66
S. Ct. 494, 505, 90 L. Ed. 614 (1946), the Court indicated that an administrative subpoena issued
in aid of an investigation would be enforced if (1) the investigation is authorized by Congress and
(2) the documents sought are relevant to the inquiry. In United States v. Powell, 379 U.S. 48, 85
S. Ct. 248, 13 L. Ed. 2d 112 (1964), however, the Court phrased the enforceability test in a slightly
different way. There, the Court held that, to obtain enforcement of a subpoena, the administrative
agency must show that: (1) the investigation is being conducted pursuant to a legitimate purpose;
(2) the information sought is relevant to the inquiry; (3) the information sought is not already
within the agency's possession; and (4) the required administrative steps have been followed. Id.
at 57-58, 85 S.Ct. at 255. The Court further recognized in Powell that an administrative agency
cannot, in seeking enforcement of a subpoena, abuse the court's process by issuing the subpoena
for an improper purpose like harassment. Id. at 58, 85 S.Ct. at 255. Finally, in United States v.
La Salle, 437 U.S. 298, 307, 98 S. Ct. 2357, 2362, 57 L. Ed. 2d 221 (1978), the Court stated that
as long as an administrative subpoena or summons is "issued in good-faith pursuit of [a]
congressionally authorized purpose[ ]," it is enforceable.
The Courts of Appeals have also phrased the requirements for enforcing an
administrative subpoena in varying ways. The Ninth Circuit, for example, has indicated
that, in an administrative subpoena enforcement proceeding, the agency must first show
that (1) Congress has granted the authority to investigate; (2) procedural requirements
have been followed; and (3) the evidence sought is relevant and material to the
investigation. "If these factors are shown by the agency, the subpoena should be enforced
unless the party being investigated proves the inquiry is unreasonable because it is
overbroad or unduly burdensome." E.E.O.C. v. Children's Hosp. Medical Center, 719
F.2d 1426, 1428 (9th Cir.1983) (en banc); accord E.E.O.C. v. Maryland Cup Corp., 785
F.2d 471, 475-76 (4th Cir.), cert. denied, 479 U.S. 815, 107 S. Ct. 68, 93 L. Ed. 2d 26
administrative subpoena are minimal. See, e.g., Oklahoma Press Publishing Co. v. Walling, 327 U.S.
186, 216, 66 S. Ct. 494, 509, 90 L. Ed. 614 (1945) (when administrator of agency issues subpoena
in connection with his investigative function, the only limits "are that he shall not act arbitrarily or in
excess of his statutory authority"); United States v. Security State Bank & Trust, 473 F.2d 638, 641
(5th Cir.1973) (holding that administrative subpoena is enforceable if issued in aid of a lawful
investigation and if the materials sought are relevant to that investigation). As a general rule, courts
will enforce an administrative subpoena if: (1) the subpoena is within the statutory authority of the
agency; (2) the information sought is reasonably relevant to the inquiry; and (3) the demand is not
unreasonably broad or burdensome. See United States v. Morton Salt Co., 338 U.S. 632, 652, 70
S. Ct. 357, 368, 94 L. Ed. 401 (1950); United States v. Westinghouse Elec. Corp., 788 F.2d 164, 166
(3d Cir.1986); Federal Election Comm'n v. Florida for Kennedy Comm., 681 F.2d 1281, 1284 (11th
Cir.1982). Courts will not enforce an administrative subpoena, however, if the above requirements
are not met or if the subpoena was issued for an improper purpose, such as harassment. See United
States v. Powell, 379 U.S. 48, 58, 85 S. Ct. 248, 255, 13 L. Ed. 2d 112 (1964); Westinghouse, 788
F.2d at 166-67.
This appeal concerns only the first requirement for enforcement—namely, whether the
subpoena issued to Burlington Northern is within the statutory authority of the Inspector General of
the RRB. The district court concluded that the subpoena in question was not within the Inspector
General's power. In reaching this conclusion however, the district court made certain fact findings
about the nature of the audit for which the subpoena was issued. Thus, in reviewing the district
court's ultimate determination that the Inspector General lacked statutory authority to issue the
subpoena to Burlington Northern, we must review: (a) the district court's factual findings concerning
(1986). The Eighth Circuit, by contrast, has determined that an administrative subpoena
will be enforced if: (1) the subpoena was issued pursuant to lawful authority; (2) the
subpoena was issued for a lawful purpose; (3) the subpoena requests information which is
relevant to the lawful purpose; and (4) the disclosure sought is not unreasonable. Finally,
this court has stated that the inquiry regarding the enforceability of a subpoena "is limited
to two questions: (1) whether the investigation is for a proper statutory purpose and (2)
whether the documents the agency seeks are relevant to the investigation." Sandsend Fin.
Consultants, Ltd., v. Federal Home Loan Bank Bd., 878 F.2d 875, 879 (5th Cir.1989).
the nature of the proposed audit of Burlington Northern and (b) the district court's legal conclusion
which was based on those findings.
A. The District Court's Fact Findings Concerning the Nature of the Inspector General's Proposed
Audit
As noted above, before the district court concluded that the Inspector General was without
authority to issue the subpoena to Burlington Northern, it made certain fact findings concerning the
nature of the proposed audit. The district court first found that, at its inception, the proposed audit
of Burlington Northern was regulatory in nature. The district court stated that the Inspector
General's initial explanations for the audit "did not include any oversight element but, rather, made
quite clear that the audit was a regulatory audit that had as its goal the carrying out of program
responsibilities of the [RRB] and IRS." 767 F. Supp. at 1383. The district court then found that the
Inspector General's oversight justifications for the audit, which were offered only after the dispute
with Burlington Northern arose, were "not credible" based on the entire evidentiary record. Id. at
1385. The district court further determined that the detection of fraud and abuse in the RRB's
programs would have o nly been a by-product of the proposed regulatory audit. See id. at 1386.
Ultimately, the district court determined that the proposed audit of Burlington Northern was in the
nature of a regulatory tax compliance audit.
On appeal, the Inspector General challenges the district court's findings about the nature of
the proposed audit of Burlington Northern. The Inspector General argues specifically that the
proposed audit was part of a plan to evaluate the effectiveness of the RRB's summary reconciliation
procedures. The Inspector General also contends that the proposed audit would have furthered the
goal of detecting fraud and abuse in the RRB's programs. For the following reasons, we reject the
Inspect or General's challenges to the district courts fact findings concerning the nature of the
proposed audit.
We review the district court's fact findings concerning the nature of the proposed audit under
the clearly erroneous standard of review.3 Under this standard, we will not set aside the district
3
The district court apparently made the challenged fact findings concerning the nature of the
proposed audit while cross-motions for summary judgment were still pending. Thus, it is at least
court's fact findings unless, based upon the entire record, we are "left with the definite and firm
conviction that a mistake has been committed." Anderson v. City of Bessemer City, 470 U.S. 564,
573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518 (1985) (quoting United States v. Gypsum Co., 333 U.S.
364, 395, 68 S. Ct. 525, 542, 92 L. Ed. 746 (1948)). "If the district court's account of the evidence
is plausible in light of the record viewed in its entirety," we will not set it aside as clearly
erroneous—even if convinced that, had we "been sitting as trier of fact, [we] would have weighed
the evidence differently." Anderson, 470 U.S. at 573-74, 105 S.Ct. at 1511.
We first review the district court's finding that, at its inception, the proposed audit of
Burlington Northern was in the nature of a tax compliance audit. This finding is amply supported by
the record. The Inspector General initially informed Burlington Northern that (1) the audit was being
conducted as part of "a program to audit tax cont ributions and compensation reported under the
Railroad Unemployment Insurance and Railroad Retirement Acts"; (2) the primary objectives of the
audit were the "proper and timely payment of tax contributions" and "the accuracy of compensation
and service reports"; and (3) the goal of the audit was to identify "tax non-compliance as it relates
to t he RRTA and the RUIA." Moreover, when the Inspector General testified at a congressional
hearing that was held only two weeks after Burlington Northern was notified about the proposed
audit, he made the following statements:
arguable that the district court's decision denying summary enforcement of the subpoena
amounted to an entry of summary judgment in favor of Burlington Northern. If the district court's
decision is viewed as a summary judgment, then it is clear that, in order to make its decision, the
district court resolved what were disputed fact issues concerning the nature of the audit.
However, on appeal, the Inspector General—for reasons best known to him—has
not chosen to attack the district court's decision as an improperly-granted summary
judgment. At no point in his brief does the Inspector General cite the summary judgment
standard set forth in Federal Rule of Civil Procedure 56(c). Nor does the Inspector
General argue that the district court improperly resolved disputed fact issues. Rather, the
Inspector General expressly attacks the district court's findings regarding the nature of the
proposed audit under the clearly erroneous standard of review. Accordingly, we review
the district court's fact findings on this issue under the clearly erroneous standard. See
Matter of HECI Exploration Co., 862 F.2d 513, 518-20 (5th Cir.1988) (recognizing, in
context of preemption case, that standard of review may be waived); Atwood v. Union
Carbide Corp., 847 F.2d 278, 280 (5th Cir.1988) ("[I]ssues not briefed, or set forth in the
issues presented, are waived."), cert. denied, 489 U.S. 1079, 109 S. Ct. 1531, 103 L. Ed. 2d
836 (1989).
[O]ur audit plan includes continuing reviews of the nation's 18 largest railroads.... To date,
we have reported on widespread non-compliance of payroll taxes....
With the resources we have right now in the last year, utilizing all of the auditors we have on
the auditing of railroads, we have audited 13 railroads out of that universe. We would hope
that we would be able to get—especially the Class I railroads down to a cycle of six years,
best guess, five years on a routine basis, we would be able to do that....
One of the things that we are recommending that would maybe give the record [sic] more
control over taxes and not losing money is that we collect taxes ourselves. We already do it.
We have some experience.
Office of Inspector General efforts will be heightened in the [area of].... [r]ailroad tax
compliance audits.
Appropriations for 1991 (Part 7): Hearings Before the Subcomm. on Labor, Health, and Human
Services, House Comm. on Appropriations, 101st Cong., 1st Sess. 1242, 1249, 1263, 1268 (1990)
(testimony of William J. Do yle III) (emphasis added). This testimony indicates that the Inspector
General's plan was not to conduct "spot checks" of railroads like Burlington Northern, but rather, to
assume a regular auditing function to detect tax non-compliance and to perhaps assume a tax
collecting function. Based on this testimony and the explanations initially given to Burlington
Northern by the Inspector General, we conclude that the district court did not clearly err in
determining that the proposed audit of Burlington Northern was, as originally conceived, a tax
compliance audit.
We next review the district court's finding that the "oversight justifications" proffered by the
Inspector General were not credible. Again, this finding is plausible in light of the record. The record
reveals that the Inspector General did not attempt to justify the audit as being a "spot check"
necessary to evaluate the RRB's summary reconciliation procedures until being prompted to do so
by the Department of Justice. In particular, the record reveals that: (1) when Burlington Northern
first questioned the Inspector General's authority to conduct the proposed audit, the Inspector
General sought advice from the Department of Justice; (2) the Department of Justice advised the
Inspector General that the proposed audit would be authorized "as an oversight audit of the [RRB's]
operations and as an evaluation of specific instances in which the efficacy of those operations is being
assessed"; and (3) although the Inspector General began arguing—in letters to Burlington Northern
and in court documents—that the proposed audit was only a "spot check" of the RRB's summary
reconciliation procedures, the Inspector General also continued to maintain that "the purpose of the
audit is to determine if compensation reports are accurate and determine if taxes have been properly
paid." Based on the evidence in the record, then, there is some quest ion regarding the Inspector
General's sudden adoption of the suggested oversight justification. Accordingly, we will not set aside
the district court's finding that the oversight justification was a post-hoc rationalization as clearly
erroneous.
We also conclude, based on our review of the record, that the district court did not clearly
err in finding that the detection of fraud and abuse would have only been a by-product of the
proposed tax compliance audit. The Inspector General never suggested that he had any reason to
suspect that Burlington Northern was engaged in fraudulent or abusive reporting. Moreover, the only
evidence even mentioning the detection of fraud and abuse is the Inspector General's Audit Guide,
which states:
Although the primary purpose of this audit is not the detection of fraud and abuse, the auditor
should constantly be on the alert for indications of fraud and abuse and should undertake tests
of transactions with this in mind. Any instances of potential fraud should be brought to the
attention of the Assistant Inspector General for Audit and no further work should be initiated
until so instructed.
Based o n this statement, the district court could reasonably determine that the proposed audit of
Burlington Northern was not designed to detect fraud and abuse, but rather, was designed to ensure
tax compliance, with the detection of fraud and abuse being only a by-product. In any event, we are
not left with a definite and firm conviction that the district court was mistaken in this finding.4
Finally, we review the district court's ultimate finding regarding the regulatory nature of the
proposed audit of Burlington Northern. This finding, in our view, is also plausible in light of the
record. There is evidence that, at its inception, the audit was designed to detect tax non-compliance.
4
By determining that the detection of fraud and abuse would only be a by-product of the
proposed audit and that the only credible explanations for the audit were those initially given by
the Inspector General, the district court effectively determined that the sole purpose of the audit
was to ensure tax compliance. Because we have concluded that these findings are not clearly
erroneous, we reject the Inspector General's argument that, under Lynn v. Biderman, 536 F.2d
820 (9th Cir.), cert. denied, 429 U.S. 920, 97 S. Ct. 316, 50 L. Ed. 2d 287 (1976), the subpoena is
enforceable. This is not a case in which the district court found that there were two purposes for
the proposed audit—one statutorily authorized and one not. Thus, Biderman has no application
to this case.
There is also evidence that the proffered oversight justifications were merely post-hoc rationalizations
designed to save the proposed audit. And, there is little, if any, evidence suggesting that the audit
was designed to detect fraud or abuse by Burlington Northern. Accordingly, we hold that the district
court did not clearly err in finding that the proposed audit of Burlington Northern was essentially a
tax compliance audit to be conducted pursuant to a long-term, regulatory plan.
B. The District Court's Legal Conclusion Concerning the Inspector General's Lack of Statutory
Authority
Having accepted the district court finding concerning the nature of the proposed audit of
Burlington Northern, we must now address the district court's legal conclusion. That is, we must
determine whether, as a matter of law, the Inspector General is statutorily authorized to issue a
subpoena in aid of a regularly scheduled, tax compliance audit of a railroad company. See Peters v.
United States, 853 F.2d 692, 695 (9th Cir.1988) (scope of an agency's subpoena power is question
of law which is reviewed de novo). We conclude, for the following reasons, that the Inspector
General is not authorized to conduct such an audit and that, therefore, the Inspector General lacked
statutory authority to issue the subpoena duces tecum to Burlington Northern.
Initially, we note that, contrary to the district court's suggestions, the Inspector General Act
of 1978 gives Inspectors General broad—not limited—investigatory and subpoena powers. See
generally Kurt W. Muellenberg & Harvey J. Volzer, Inspector General Act of 1978, 53 TEMP.L.Q.
473 (1985); Herbert L. Fenster & Darryl J. Lee, The Expanding Audit and Investigative Powers of
the Federal Government, 12 PUB.CONT. L.J. 193, 199-200, 208-11 (1982). With respect to
investigatory powers, Congress specifically authorized Inspectors General "to make such
investigations and reports relating to the administration of the programs and operations of the
applicable [department or agency] as are, in the judgment of the Inspector General, necessary or
desirable." 5 U.S.C.App. 3 § 6(a)(2) (emphasis added); see also United States v. Newport News
Shipbuilding & Dry Dock Co., 837 F.2d 162, 170 (4th Cir.1988) ("[W]here the interests of the
government require broad investigations into the efficiency and honesty of a defense contractor, the
Inspector General is equipped for this task.") (emphasis added); United States v. Blue Cross & Blue
Shield of Michigan, 726 F. Supp. 1523, 1525 (E.D.Mich.1989) (recognizing that Inspectors General
are given broad statutory powers to conduct audits and investigations of the programs and operations
of their respective agencies). And, with respect to the authority to subpoena information, Congress
empowered Inspectors General "to require by subpena the production of all information, documents,
reports, answers, records, accounts, papers, and other data and documentary evidence necessary in
the performance of the functions assigned by this Act...." 5 U.S.C.App. 3 § 6(a)(4) (emphasis
added). Thus, we agree with Third Circuit's conclusion that "Congress gave the Inspector General
broad subpoena power." United States v. Westinghouse Electric Corp., 788 F.2d 164, 165 (3d
Cir.1986) (emphasis added); see also United States v. Medic House, Inc., 736 F. Supp. 1531, 1535
(W.D.Mo.1989) (recognizing Inspector General's power to issue subpoena to party suspected of
fraud in connection with criminal investigation).
The Inspector General's investigatory and subpoena powers are not, however, without limits.
See S.REP. No. 1071, supra, at 28, 1978 U.S.Code Cong. & Ad.News at 2703 ("Broad as it is, the
Inspector and Auditor General's mandate is not unlimited."). For example, an Inspector General's
subpoena powers do not encompass the authority to compel the attendance of a witness. See United
States v. Iannone, 610 F.2d 943, 946 (D.C.Cir.1979). Nor do an Inspector General's investigatory
powers generally extend to matters that do not concern fraud, inefficiency, or waste within a federal
agency. See United States v. Montgomery County Crisis Center, 676 F. Supp. 98, 99 (D.Md.1987)
(refusing to enforce subpoena issued by Inspector General where the underlying investigation
concerned a national security matter).
Today we recognize an additional, narrow limit on the Inspector General's broad
investigatory and subpoena powers. In particular, we hold that an Inspector General lacks statutory
authority to conduct, as part of a long-term, continuing plan, regulatory compliance investigations
or audits. By "regulatory compliance investigations or audits," we mean those investigations or audits
which are most appropriately viewed as being within the authority of the agency itself. Thus, as a
general rule, when a regulatory statute makes a federal agency responsible for ensuring compliance
with its provisions, the Inspector General of that agency will lack the authority to make investigations
or conduct audits which are designed to carry out that function directly.
Our holding recognizing this limit to the authority of Inspectors General is supported by the
language and purpose of the Inspector General Act of 1978. The purpose of the Act, as we have
already stated, see supra Part I.A.2., was to create independent and objective units that would be
responsible for combatting fraud, abuse, waste, and mismanagement in federal agencies and
departments. If an Inspector General were to assume an agency's regulatory compliance function,
his independence and objectiveness—qualities that Congress has expressly recognized are essential
to the function of combatting fraud, abuse, waste, and mismanagement—would, in our view, be
compromised. In addition, although Congress granted Inspectors General broad investigative and
subpoena authority, Congress also expressed its intent that Inspectors General should not be allowed
to conduct "program operating responsibilities" of an agency. See 5 U.S.C.App. 3 § 9(a)(2) (head
of an agency may transfer to an Inspector General other functions, powers, and duties that he
determines "are properly related to the functions of the [OIG] and would, if so transferred, further
the purposes of this Act, except that there shall not be transferred to an Inspector General ...
program operating responsibilities") (emphasis added).
Our holding is also supported by the legislative history of the Inspector General Act of 1978.
It finds direct support in the House Report accompanying the Act, which states:
While Inspectors General would have direct responsibility for conducting audits and
investigations relating to the efficiency and economy of program operations and the
prevention and detection of fraud and abuse in such programs, they would not have such
responsibility for audits and investigations constituting an integral part of the programs
involved.
H.R.REP. No. 584, 95th Cong., 1st Sess. 12-13 (1978) (emphasis added). And, our holding finds
indirect support in certain statements made by Congressman Levitas, one of the co-sponsors of the
1978 Act. He explained:
The Inspectors General to be appointed by the President with the advice and consent of the
Senate will first of all be independent and have no program responsibilities to divide
allegiances. The Inspectors General will be responsible for audits and investigations only....
Moreover, the offices of Inspector General would not be a new "layer of bureaucracy' to
plague the public. They would deal exclusively w ith the internal operations of the
departments and agencies. Their public contact would only be for the beneficial and needed
purpose of receiving complaints about problems with agency administration and in the
investigation of fraud and abuse by those persons who are misusing or stealing taxpayer
dollars.
124 CONG.REC. 10,405 (1978) (emphasis added); see also S.REP. No. 1071, supra, at 27-28
(discussing duties and responsibilities of Inspectors General in terms suggesting that they would have
only an "oversight" role).
Finally, our holding finds support in the March 9, 1989 memorandum prepared by the
Department of Justice's Office of Legal Counsel. In this memorandum, the Office of Legal Counsel
addressed the specific question of "whether the authority granted the Inspector General includes the
authority to conduct investigations pursuant to statutes that provide the Department [of Labor] with
regulatory jurisdiction over private individuals and entities that do not receive federal funds." Based
on its review of the language, structure, purpose, and legislative history of the Inspector General Act
of 1978, the Office of Legal Counsel concluded that the Act does not generally vest authority in the
Inspector General to conduct regulatory investigations, which it defined as investigations that "have
as their objective regulatory compliance by private parties." The Office of Legal Counsel stated:
"Thus, the Inspector General has an oversight rather than a direct role in investigations conducted
pursuant to regulatory statutes: he may investigate the Department's conduct of regulatory
investigations but may not conduct such investigations himself." But see also 136 CONG.REC. E2551-
01 (daily ed. July 30, 1990) (statement of Rep. Conte) (questioning the Office of Legal Counsel's
interpretation of Inspector General's investigative authority); James R. Richards & William S. Fields,
The Inspector General Act: Are Its Investigative Provisions Adequate to Meet Current Needs, 12
GEO. MASON U.L.REV. 227, 242-48 (while recognizing that Office of Legal Counsel's conclusion may
be "legally defensible," nonetheless pointing out its potential for confusion and questioning the
premises on which the conclusion is based).
Accordingly, we conclude that the Inspector General of the RRB is without statutory
authority to conduct the proposed tax compliance audit of Burlington Northern. As we already
outlined, see supra Part I.A.1., under the terms of the Railroad Unemployment Insurance Act, the
RRB it self is charged with ensuring that railroad employers are accurately reporting taxable
compensation and properly paying taxes. And, under the Railroad Retirement Tax Act, it is the IRS
who has the responsibility for ensuring tax compliance. The Inspector General of the RRB, when it
attempted to assume the regulatory compliance functions of the RRB and the IRS, exceeded its
statutory "oversight" authority. If the Inspector General were allowed to conduct
regularly-scheduled, tax-compliance audits, there would be no one, so to speak, to "watch the
watchdog." The district court, therefore, correctly denied enforcement of the subpoena.
III. CONCLUSION
We emphasize the limited nature of our decision in this case: We are not holding that, under
all circumstances, the Inspector General of the RRB lacks statutory authority to investigate or audit
railroad employers' compensation reporting. The Inspector General of the RRB may well be able to
do so as part of a plan to test the effectiveness of the RRB's summary reconciliation procedures or
where he suspects fraud and abuse on the part of such employers. We hold only that, based on the
district court's findings concerning the nature of this particular audit of Burlington Northern, the
Inspector General exceeded his statutory authority. Moreover, we again note that the RRB clearly
has the authority to conduct regularly scheduled, tax-compliance audits of railroad employers. Thus,
while Burlington Northern has prevailed in this skirmish, the Inspector General, the RRB, and the IRS
have a decided advantage in the war against tax non-compliance, waste, and fraud.
The district court's decision denying enforcement of the subpoena duces tecum is
AFFIRMED.