813 F.2d 243 (9th Cir. 1987), 85-4421, Stuart v. United States

Docket Nº:85-4421, 86-3791.
Citation:813 F.2d 243
Party Name:USTC P 9239 Philip George STUART, Sr., Petitioner/Appellant, v. UNITED STATES of America, Respondent/Appellee. Mons KAPOOR, Petitioner/Appellant, v. UNITED STATES of America, Respondent/Appellee.
Case Date:March 24, 1987
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 243

813 F.2d 243 (9th Cir. 1987)

USTC P 9239

Philip George STUART, Sr., Petitioner/Appellant,


UNITED STATES of America, Respondent/Appellee.

Mons KAPOOR, Petitioner/Appellant,


UNITED STATES of America, Respondent/Appellee.

Nos. 85-4421, 86-3791.

United States Court of Appeals, Ninth Circuit

March 24, 1987

Argued and Submitted Dec. 4, 1986.

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Brian L. McEachron, Seattle, Wash., for the petitioner/appellant.

John A. Dudeck, Washington, D.C., for the respondent/appellee.

Appeal from the United States District Court for the Western District of Washington.

Before BROWNING, WRIGHT, and BOOCHEVER, Circuit Judges.

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BOOCHEVER, Circuit Judge:

Stuart and Kapoor, citizens and residents of Canada, appeal the district court's denial of their petitions to quash summonses of records held by their bank in Bellingham, Washington. The Internal Revenue Service issued the summonses at the request of the Canadian Department of National Revenue, pursuant to Articles XIX and XXI of the 1942 Income Tax Convention with Canada.


Philip Stuart and Mons Kapoor (taxpayers) are citizens and residents of Canada. Both have accounts with the Northwestern Commercial Bank in Bellingham, Washington. In an attempt to determine their income tax liability for tax years 1980, 1981, and 1982, the Canadian Department of National Revenue (Revenue Canada or the department) seeks to examine all records in the bank's possession pertaining to accounts in taxpayers' names. Pursuant to Articles XIX and XXI of the Convention between the United States of America and Canada respecting Double Taxation, Mar. 4, 1942, United States-Canada, 56 Stat. 1399, T.S. No. 983 (as amended) (the treaty), Revenue Canada requested by letters dated January 3, 1984, that the Internal Revenue Service (IRS or the service) obtain these records through the issuance of summonses to the bank. Under the treaty, the competent authority for the country receiving the requests determines whether to honor them. Thomas J. Clancy, Director of Foreign Operations District, is the United States' competent authority. He stated in affidavits that the IRS had decided to honor these requests and to issue the summonses because: (1) the requested information may be relevant in determining the tax liability of Kapoor and Stuart; (2) the same type of information can be obtained by Canadian tax authorities under Canadian law; and (3) the information requested was not already in the possession of the IRS. His affidavits also declared that Revenue Canada had requested the information to determine the correct tax liabilities of Stuart and Kapoor pursuant to a "criminal investigation, preliminary stage" and that he had determined Revenue Canada's requests were within the scope of the treaty. The service issued the summonses on April 2, 1984.

The IRS must give notice to any person whose records it seeks from a third party. I.R.C. Sec. 7609(a)(1) (1982). When the taxpayers received notice of the summonses they directed the bank not to comply and petitioned the district court to quash the summonses pursuant to I.R.C. Sec. 7609(b)(2). They claimed that the summonses were (1) not issued for lawful purposes, (2) did not seek information relevant to any inquiry concerning an internal revenue tax of the United States, and (3) that the information sought could be obtained directly by Revenue Canada under Canadian law. The taxpayers served interrogatories on the IRS requesting information regarding the purpose of Revenue Canada's investigation. The IRS refused to respond, claiming that discovery is not warranted where the taxpayers fail to demonstrate that triable issues exist.

A magistrate held a consolidated hearing on the petitions and recommended that the district court enforce the summonses. Over the taxpayers' objections to the magistrate's recommendations, the district court ordered the bank to comply with the summonses. This court granted a stay of enforcement pending appeal on July 14, 1986.


I. The Applicable Treaty

The taxpayers argue that the treaty of 1942 does not apply to these summonses. They point out that the Convention with Respect to Taxes on Income and on Capital, Sept. 26, 1980, United States-Canada, reprinted in 1 Tax Treaties (CCH) p 1301 (1984) (1980 treaty), became effective on August 16, 1984, after the tax years in question and after the issuance of the summonses, but before the district court entered enforcement orders in either case. Article XXX of the 1980 treaty determines when its provisions enter into force:

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2. The Convention shall enter into force upon the exchange of instruments of ratification and, subject to the provisions of paragraph 3, its provisions shall have effect:

(a) For tax withheld at the source on income referred to in Articles X (Dividends), XI (Interest), XII (Royalties) and XVIII (Pensions and Annuities), with respect to amounts paid or credited on or after the first day of the second month next following the date on which the Convention enters into force;

(b) For other taxes, with respect to taxable years beginning on or after the first day of January next following the date on which the Convention enters into force; and

(c) Notwithstanding the provisions of subparagraph (b), for the taxes covered by paragraph 4 of Article XXIX (Miscellaneous Rules) with respect to all taxable years referred to in that paragraph.


4. Subject to the provisions of paragraph 5, the 1942 Convention shall cease to have effect for taxes for which this Convention has effect in accordance with the provisions of paragraph 2.

The government offers two arguments for application of the 1942 treaty. First, it contends that because the summonses address tax liability for 1980-82, subsection 2(b) controls when Article XXVII, the exchange of information provision, enters into force. This subsection states that, "for other taxes," the convention goes into effect on the first of January immediately following the exchange of the instruments of ratification. They were exchanged on August 16, 1984. Because Article XXVII is not explicitly mentioned in subsections 2(a) or 2(c), the government asserts that it falls into the category of "other taxes." Accordingly, the 1980 treaty only applies to summonses investigating tax liability for years commencing on or after January 1, 1985.

Alternatively, if the effective date of Article XXVII is determined by section 2 and not subsection 2(b) (i.e., if the 1980 treaty applies to any request for information made after August 16, 1984, regardless of the tax year to which the information pertains), the government notes that these requests were made on January 3, 1984, the summonses were issued on April 2, 1984, and the petitions to quash filed on April 20, 1984; all of these events preceded the exchange of instruments. The taxpayers argue that the determinative dates should be those on which the enforcement orders were issued, March 25, 1985, and December 11, 1985, respectively.

We review this question of treaty interpretation, one of first impression, de novo. We find the government's second argument persuasive and therefore need not address its first. The information exchange provisions of both treaties set out when the United States or Canada may honor the other's requests for information. The date of the request or, at the latest, the date of the decision to honor it should determine which treaty applies. Because these dates are prior to August 16, 1984, we look to the 1942 treaty in reviewing the district court's order granting enforcement of these summonses.

II. Political Question

The 1942 treaty has two articles dealing with information exchange, Article XIX and Article XXI, whose relevant parts follow:

Article XIX

With a view to the prevention of fiscal evasion, each of the contracting States undertakes to furnish to the other contracting State, as provided in the succeeding Articles of this Convention, the information which its competent authorities have at their disposal or are in a position to obtain under its revenue laws in so far as such information may be of use to the authorities of the other contracting State in the assessment of the taxes to which this Convention relates.

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Article XXI

1. If the Minister [of the Department of National Revenue] in the determination of the income tax liability of any person under any of the revenue laws of Canada deems it necessary to secure the cooperation of the Commissioner [of the IRS], the Commissioner may, upon request, furnish the Minister such information bearing upon the matter as the Commissioner is entitled to obtain under the revenue laws of the United States of America.

1942 Treaty, art. XIX, para. 1 and art. XXI, para. 1 (emphasis added).

The government argues that the determination of the competent authority to honor a request conclusively establishes that Revenue Canada's request was made for a legitimate purpose under the treaty. Courts should not review this determination as it impinges on the executive branch's conduct of foreign affairs. In essence, the government argues that the IRS's decision on whether to honor a request is a political question and therefore not justiciable. The application of the political question doctrine is a legal issue, which we review de novo.

In Baker v. Carr, 369 U.S. 186, 82 S.Ct. 691, 7 L.Ed.2d 663 (1962), the Supreme Court examined three factors to determine whether a question was political and therefore not justiciable: (1) does the text of the Constitution commit the issue "to a coordinate political department;" (2) does the judiciary lack "discoverable and manageable standards for resolving it;"...

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