decided as amended april 6 1981.: March 27, 1981.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA
Before Gibbons and Van Dusen, Circuit Judges, and Ackerman,*fn* District Judge.
Pittsburgh Trade Exchange, Inc. and Vincent E. Manella, its sole stockholder (collectively hereafter The Exchange) appeal from an order of the district court enforcing a "John Doe" summons served by the Internal Revenue Service. The appeal requires that we consider for the first time the appropriate standards for enforcement of "John Doe" summonses issued on the authority of section 1205(a) of the Tax Reform Act of 1976, Pub.L.94-455, 90 Stat. 1520, 26 U.S.C. § 7609(f). The Exchange contends that the court erred in several respects when it enforced the summons. We affirm.
The Exchange is what is commonly known as a "barter exchange" which operates as a clearing house for the exchange of goods and services between its members, other than for cash. A member of a barter exchange wishing to purchase particular goods or services can obtain from it a referral to another member which supplies the goods or services desired. The selling member is provided with trade credits equal to the selling price, which can be used, then or in the future, to acquire goods or services from other members. The purchasing member's account, accumulated from sales it has previously made, is debited for the purchase price. For facilitating such barter exchanges The Exchange charges a fee equal to ten percent of the value of each transaction, which compensates it for its referral and record keeping services. Those transactions result, obviously in tax consequences for members engaging in them. The Exchange has been in business since April 1977. All but one of its members are located in Pennsylvania.
In March of 1980 the Internal Revenue Service filed in the district court a petition requesting an order permitting it to serve a John Doe summons on The Exchange. The petition was supported by the affidavit of revenue agent Gerald R. Potocnak. That petition was not served on anyone, and the court, acting ex parte, on March 27, 1980 entered an order granting the requested authority. The court acted pursuant to a subsection of the provision in the Internal Revenue Code dealing with special procedures for third-party summonses:
Any summons described in subsection (c) which does not identify the person with respect to whose liability the summons is issued may be served only after a court proceeding in which the Secretary establishes that
(1) the summons relates to the investigation of a particular person or ascertainable class of persons,
(2) there is a reasonable basis for believing that such person or group of persons may fail or may have failed to comply with the provisions of any internal revenue law, and
(3) the information sought to be obtained from the examination of the records (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.
26 U.S.C. § 7609(f). The subsection is a qualification to the general rules of 26 U.S.C. § 7609(a) & (b) that when a third-party subpoena is served in connection with the investigation of a taxpayer's liability, the taxpayer must be notified and afforded an opportunity to resist compliance and enforcement. Obviously such notice is not possible if the identity of the taxpayer is unknown; hence the special treatment of John Doe summonses.
The summons authorized by the March 27 order was served on The Exchange on April 2, 1980, demanding the production of records reflecting the names and addresses of Exchange members for the calendar years 1978 and 1979, together with
"(corporate) books of account, ledger, or other records of (The Exchange) which identify for each member every bartering transaction, the date, the participants, ...