Estate of Myers v. US, CS-92-244-JBH.

Decision Date25 June 1993
Docket NumberNo. CS-92-244-JBH.,CS-92-244-JBH.
Citation842 F. Supp. 1297
PartiesESTATE OF Charles Vernon MYERS, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — District of Washington

Leslie R. Weatherhead, Witherspoon, Kelley, Davenport & Toole, Spokane, WA, for plaintiffs.

Carroll D. Gray, Asst. U.S. Atty., Spokane, WA, Robert P. Brouillard, Tax Div., U.S. Dept. of Justice, Washington, DC, for defendant.

ORDER DENYING PLAINTIFFS' MOTION FOR DEFAULT AND GRANTING DEFENDANT'S MOTION TO DISMISS

McDONALD, District Judge.

On April 29, 1993, Magistrate Judge Hovis filed a report and recommendation (Ct.Rec. 24) in which he recommended that the plaintiffs' motion for default be denied and that defendant's motion to dismiss be granted.

Plaintiffs have filed an objection to the report and recommendation (Ct.Rec. 25). Plaintiffs contend that the government is in default and has not shown justification for its default. Magistrate Judge Hovis' report contains persuasive reasoning why default judgment should not be granted. The court believes no further elaboration of that reasoning is warranted.

Plaintiffs also object to the finding of the magistrate judge that 26 U.S.C. § 7852(e) divests the court of subject matter jurisdiction to entertain their Privacy Act claim. According to plaintiffs, because a Canadian tax liability is at issue, section 7852(e) is inapplicable because it applies to "any tax ... to which the provisions of this title apply." Plaintiffs contend that case law (including United States v. Stuart, 489 U.S. 353, 109 S.Ct. 1183, 103 L.Ed.2d 388 (1989)) establishes that it is the treaty which incorporates the Internal Revenue Code provisions, as opposed to the Internal Revenue Code incorporating the treaty provisions. Thus, plaintiffs argue, the limitation of section 7852(e) is "intrinsic" to the Internal Revenue Code and does not apply to "treaty investigations which are "extrinsic" to the Code."

The court has no difficulty with plaintiffs' proposition that it is the treaty which incorporates the Internal Revenue Code. The report and recommendation of the magistrate judge is consistent with that proposition. As the Stuart case notes, the treaty obliges the United States upon request and "consistent with United States revenue laws," to obtain and convey information to Canadian authorities to assist them in determining a Canadian taxpayer's income tax liability. 489 U.S. at 355, 109 S.Ct. at 1185.

26 U.S.C. § 7852(e) is part of the "United States revenue laws." The section refers to "any tax ... to which the provisions of this title apply." The section does not refer to either domestic or foreign tax liability. The word "title" clearly means the Internal Revenue Code. However, the court finds that inconsequential. The Internal Revenue Code applies to the Canadian tax liability via the treaty.

As the Supreme Court noted in Stuart, 26 U.S.C. § 7602(c) is an exception to the rule. It does not apply to Canadian tax liabilities because: 1) by its specific terms, it speaks only to criminal violations of United States revenue law; 2) its legislative history shows that Congress did not intend to make the enforcement of a treaty summons contingent upon the foreign tax investigation having reached a stage analogous to a Justice Department referral; and 3) because Canada has ceased using grand juries and has considerably different criminal discovery procedures, the concerns that motivated Congress to enact section 7602(c) (i.e. not wanting to broaden the Justice Department's right of criminal litigation discovery or to infringe on the role of the grand jury) are not present when the IRS issues a summons at the request of Canadian authorities conducting investigations into violations of their own tax laws. 489 U.S. at 362-64, 109 S.Ct. at 1189-90.

It is significant that the Supreme Court did not restrict its analysis to the "terms" of the statute (section 7602(c)). Rather, the Court probed into the legislative history of the section and determined whether there was a compelling rationale for extending the restriction to a foreign tax liability situation. If by its "terms" alone, the section is not applicable to foreign tax liabilities, the Court's extended analysis appears to be either an unnecessary effort or an acknowledgement that the restriction might very well apply to foreign tax liabilities in the absence of some compelling rationale indicating otherwise. This court believes the latter is true.

By its terms, section 7852(e) applies to "any tax." The court has not been cited any legislative history nor have plaintiffs advanced any compelling rationale why the IRS should not have the protection of the statute when it is collecting a foreign tax liability as opposed to a domestic tax liability. In that respect, section 7852(e) is distinct from section 7602(c).

The court ADOPTS the report and recommendation of Magistrate Judge Hovis in its entirety.

IT IS HEREBY ORDERED that plaintiffs' motion for default is DENIED and that defendant's motion to dismiss is GRANTED. The Clerk of the Court will enter judgment accordingly and forward copies of this order and the judgment to counsel.

REPORT AND RECOMMENDATION

HOVIS, United States Magistrate Judge.

BEFORE THE COURT is the defendant's motion to dismiss (Ct.Rec. 13) and the plaintiffs' motion for default (Ct.Rec. 18). Defendant's motion to dismiss is premised on Fed. R.Civ.P. 12(b)(1), lack of jurisdiction over the subject matter, and 12(b)(6), failure to state a claim upon which relief can be granted. These motions are before the undersigned for the preparation of a report and recommendation pursuant to an order of reference entered by the Honorable Alan A. McDonald (Ct.Rec. 23).

FACTUAL AND PROCEDURAL BACKGROUND

On June 4, 1992, the Internal Revenue Service issued a 26 U.S.C. § 7602 summons to Robert Magnuson, Esq., attorney for the Estate of Charles Vernon Myers (hereinafter "the estate"), seeking the production of records "relative to the disposition of any and all assets" of the estate on or following February 23, 1990. The summons was issued pursuant to a request under certain articles of the United States-Canada Income Tax Convention. The summons is titled as "the matter of the Canadian tax liability" of the estate. (See exhibit attached to Ct.Rec. 1).

The summons was withdrawn by the Internal Revenue Service (hereinafter "IRS") on October 16, 1992. Accordingly, on December 9, 1992, plaintiffs' counsel filed a notice voluntarily dismissing the first cause of action set forth in the complaint. That cause of action, entitled "Quashal," alleged that the summons was not issued for an identifiable or proper purpose and that it sought documents which are either irrelevant, already in the possession of the IRS, protected by attorney-client privilege or related to non-existent, bad faith or time-barred claims.

The defendant's motion to dismiss pertains to the second and third causes of action alleged in the complaint. The second cause of action alleges that the summons fails to comply with 5 U.S.C. § 552a(e), that the failure to comply is willful and that the plaintiffs have been "adversely affected" and are entitled to statutory damages.

Plaintiffs' third cause of action seeks an award of attorney fees under 28 U.S.C. § 2412 and 5 U.S.C. § 552a(g)(4) on the basis that defendant was not "substantially justified" in issuing the summons.

Following the filing of the complaint, defendant moved for an extension of time to respond and Judge McDonald granted an extension to September 21, 1992 (Ct.Rec. 5). Defendant moved for a second extension of time. Judge McDonald granted an additional extension to November 20, 1992 (Ct.Rec. 10). On January 19, 1993, defendant's motion to dismiss was filed with this court.

MOTION FOR DEFAULT

Plaintiffs argue that entry of default judgment is appropriate because the defendant did not file a response on or before November 20, 1992 as ordered by the court.

Fed.R.Civ.P. 55(b)(2) requires that a party must apply to the court for default judgment. Furthermore, if the party against whom default judgment is sought has appeared in the action, that party must be served with written notice of the application for judgment at least three days prior to the hearing on such application. Plaintiffs did not apply for default judgment prior to the defendant's filing of its motion to dismiss.1 Accordingly, plaintiffs' motion for default judgment is untimely and moot.

Plaintiffs seem to suggest that default judgment should be granted as a sanction for defendant's failure to abide by the November 20, 1992 deadline. Even were it within the court's discretion to impose such a sanction, the circumstances convince the court that such a sanction is inappropriate.

Defendant's counsel represents that once the IRS withdrew its summons, he anticipated that plaintiffs would dismiss the complaint in its entirety, therefore making a response unnecessary. In the absence of a specific agreement with plaintiffs' counsel to that effect, this presumption on the part of defendant's counsel seems a bit hasty. On the other hand, subsequent to the expiration of the November 20 deadline, plaintiffs' counsel voluntarily dismissed the first cause of action for "quashal" of the summons. Accordingly, the failure of defendant's counsel to file a responsive pleading before November 20 does not seem entirely unreasonable. The willingness of defendant's counsel to assume personal responsibility for any monetary sanction indicates that the court's deadline was not violated with impunity. Particularly since the summons has been withdrawn, the court fails to see how plaintiffs have been prejudiced by defendant's delay in filing the motion to dismiss. Indeed, if plaintiffs thought they were entitled to default judgment following expiration of the November 20 deadline, the court questions why they filed a notice of partial dismissal rather than a motion for...

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