IP v. USA

Decision Date07 March 2000
Docket NumberNo. 98-17035,98-17035
Citation205 F.3d 1168
Parties(9th Cir. 2000) SHEILA ANN IP, Petitioner-Appellant, v. UNITED STATES OF AMERICA; MARTIN LUM, Respondents-Appellees
CourtU.S. Court of Appeals — Ninth Circuit

COUNSEL: Karen L. Hawkins, Taggert & Hawkins, San Francisco, California, for the petitioner-appellant.

Ellen P. DelSole, United States Department of Justice, Tax Division, Washington, D.C., for the respondent-appellant.

Appeal from the United States District Court for the Northern District of California; Phyllis J. Hamilton, Magistrate Judge, Presiding. D.C. No. CV-98-01460-PJH

Before: Ruggero J. Aldisert,* Diarmuid F. O'Scannlain and Michael Daly Hawkins, Circuit Judges.

Opinion by Judge Aldisert; Concurrence by Judge O'Scannlain

ALDISERT, Circuit Judge:

The issue on appeal is whether notice is required under 26 U.S.C. S 7609(a) when the Internal Revenue Service summons a third-party record-keeper to produce financial records of a person who has no outstanding tax liability and who has no legal relationship with any person against whom a tax assessment has been made. Appellant Sheila Ann Ip had bank accounts in her own name at Cathay Bank and the Bank of America. Under the authority of 26 U.S.C. S 7602(a),1 the IRS summonsed her banks, without notice to her, to produce her accounts to aid in its investigation of Diamond Trade Ltd., a Hong Kong corporation for which Ip's fiance was an agent. Ip appeals from the magistrate judge's dismissal of her petition to quash these summonses.

Under S 7609(a)(1), a party is entitled to notice if:

(A) any summons described in subsection (c) is served on any person who is a third-party recordkeeper, and

(B) the summons requires the production of any portion of records made or kept of the business transactions or affairs of any person (other than the person summoned) who is identified in the description of the records contained in the summons . . . .

26 U.S.C. S 7609(a)(1)(A)-(B).2

The district court, magistrate judge presiding, concluded that Ip was not entitled to notice of the summonses and therefore dismissed her petition for lack of subject matter jurisdiction under S 7609(b)(2)(A).3 Ip appeals and contends that her petition should not have been dismissed, because she was entitled to notice of the summonses under S 7609(a)(1). The IRS urges us to affirm the dismissal, relying on S 7609(c)(2)(B), which suspends the normal requirements of S 7609(a)(1) if the summons:

(B) . . . is in aid of the collection of

(i) the liability of any person against whom an assessment has been made or judgment rendered, or

(ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).4

The IRS argues that inasmuch as an assessment had been levied against Diamond Trade, clause (i) permits a summons to be issued against any third party without notice.

We must decide which statute should apply--S 7609(a), the general rule entitling affected persons to notice of third-party summonses, or S 7609(c)(2)(B), an exception to the third party notice rule. We hold that Ip was entitled to notice under S 7609(a) and reverse the district court's judgment determining that she lacked standing to challenge the IRS summonses.

Jurisdiction in the district court is disputed. Ip contends that the court had jurisdiction pursuant to 28 U.S.C.S 1331 and 26 U.S.C. S 7609(b). The parties executed written consents for entry of final judgment by a magistrate judge pursuant to 28 U.S.C. S 636(c). This court has jurisdiction under 28 U.S.C. SS 636(c)(3), 1291. The appeal was timely filed under Rule 4(a), Federal Rules of Appellate Procedure.

The district court's conclusion that it lacks subject matter jurisdiction is subject to de novo review. Central Green Co. v. United States, 177 F.3d 834, 835 (9th Cir. 1999).

I.

Sheila Ip was living with and engaged to marry Chun Lung Siu, a resident of the United States and citizen of the People's Republic of China. Chun Lung Siu and two of his family members were wholesale jewelry agents in the United States for the Hong Kong corporation Diamond Trade Limited. Although Diamond Trade did not have an office or place of business in the United States, the corporation, Ip and several of members of the Siu family maintained U.S. bank accounts at Bank of America and Cathay Bank.

The IRS believed that Ip deposited sale proceeds into her bank accounts on behalf of Diamond Trade and then wired the money to Hong Kong without paying taxes. Consequently, the IRS made an assessment against Diamond Trade on November 11, 1997, and issued summonses to Bank of America and Cathay Bank, third-party record-keepers under 26 U.S.C. S 7609(a)(3)(A), in which the Service requested the financial records of Diamond Trade, Ip, Chun Lung Siu and several others believed to be involved in Diamond Trade's operations in the United States. The IRS served the summonses on Cathay Bank on March 7, 1998, and on Bank of America on March 4, 1998, but did not give notice to the bank account holders. On March 24, 1998, Ip and several other affected bank account holders individually filed petitions in district court to quash the summonses because of improper service and lack of notice.

Because the first set of summonses contained typographical errors, the IRS served a second set on the two banks from March 30-31, 1998. Again, none of the individual bank account holders received notice of the summonses.

On April 9, 1998, Ip and several other bank account holders filed another petition to quash the second set of summonses. The government argued that the petitioners lacked standing to quash the summonses and thereby moved to dismiss the petitions for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), Federal Rules of Civil Procedure. The district court determined that the petitioners were not entitled to notice under 26 U.S.C. S 7609(c)(2)(B), because the summonses were issued "in the aid of the collection of" Diamond Trade's tax liability, and thus granted the United States' motion to dismiss.

Prior to this action, Sheila Ip had no outstanding tax liability and has never been under investigation by the IRS. Furthermore, she has never been an employee, owner, officer or director of Diamond Trade. On appeal, she contends that the district court erred by dismissing her petition for want of subject matter jurisdiction, arguing she had standing to petition the court to quash the summonses because she was entitled to notice of the third-party summonses pursuant to 26 U.S.C. S 7609(a). The IRS contends that Ip was not entitled to notice because the summonses were issued "in aid of the collection" of Diamond Trade's tax liability under S 7609(c)(2)(B), and therefore exempt from S 7609(a)'s general notice requirement for third-party summonses.

II.

To decide whether the general rule requiring notice or the exception thereto should apply, we turn to the legislative history of the relevant statutes for assistance. We deem this necessary because as aptly and euphemistically stated by Chief Judge Nealon, "[c]oncededly, this language[S 7609(c)(2)(B)] could have been expressed in a more concise manner" Barnhart v. United Penn Bank, 515 F. Supp. 1198, 1204-1205 (M.D. Pa. 1981).

Congress originally established a statutory system for the IRS to issue summonses to third parties, such as banks, to acquire information regarding taxpayers, but amended the summons process in the Tax Reform Act of 1976 to include a right of notice to parties whose records were being summonsed. See Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520 (codified as amended in scattered sections of 26 U.S.C.); see Barnhart, 515 F. Supp. at 1203-1204 (examining events leading up to the adoption of the Tax Reform Act).

In Donaldson v. United States, 400 U.S. 517 (1971), the Court held that taxpayers could only intervene in a third-party summons case where they could demonstrate a "significantly protectable interest" barring disclosure, e.g., a legal privilege such as an evidentiary privilege. Id. at 530-531. The Court's holding was widely criticized as placing too great a restriction on the procedural rights of taxpayers. See, e.g., United States v. Shivlock, 459 F. Supp. 1383, 1386 (D. Colo. 1978).

Reacting to the Donaldson opinion, Congress enacted a major overhaul of the Internal Revenue Code in 1976. The reforms included important changes in the issuance of summonses under S 7602. To a large extent, these procedural modifications sprang from a conviction that taxpayers deserved greater safeguards against improper disclosure of records held by third parties. See Barnhart, 515 F. Supp. at 1203. The House Ways and Means Committee explained the impetus for the Act:

The use of the administrative summons, including the third-party summons, is a necessary tool for the IRS in conducting many legitimate investigations concerning the proper determination of tax. The administration of the tax laws requires that the Service be entitled to obtain records, etc., without an advance showing of probable cause or other standards which usually are involved in the issuance of a search warrant. On the other hand, the use of this important investigative tool should not unreasonably infringe on the civil rights of taxpayers, including the right to privacy.

. . . .

The committee believes that many of the problems in this area would be cured if the parties to whom the records pertain were advised of the service of a third-party summons, and were afforded a reasonable and speedy means to challenge the summons where appropriate. While the third-party witness also has this right of challenge, even under present law, the interest of the third-party witness in protecting the privacy of the records in question is frequently far less intense than that of the person to whom the records pertain.

H.R. Rep. No. 94-658, at 307 (1975), ...

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